Business Context and Reporting Period
Star Gas Partners, L.P. is a Northeast and Mid-Atlantic distributor of home heating oil, propane, gasoline and diesel fuel, and a provider of heating, air-conditioning and ancillary home services. At December 31, 2012, Petro served approximately 417,000 full-service residential and commercial heating customers, 53,000 delivery-only customers and 11,500 ancillary service customers.
This unaudited Form 10-Q covers the fiscal first quarter ended December 31, 2012, compared with the quarter ended December 31, 2011. The business is highly seasonal, with the first and second fiscal quarters representing the peak heating season.
Key Financial Metrics
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Total sales | $516.5 million | $461.5 million | +11.9% |
| Operating income | $17.5 million | $8.6 million | +103.8% |
| Income before taxes | $14.7 million | $5.6 million | +162.9% |
| Net income | $9.8 million | $2.9 million | +232.6% |
| Limited partners’ income per unit | $0.15 | $0.05 | + $0.10 |
| Adjusted EBITDA | $29.8 million | $19.3 million | +54.3% |
| Cash used in operating activities | $120.6 million | $74.8 million | Use increased $45.8 million |
| Capital expenditures | $0.8 million | $1.3 million | Down $0.4 million |
Operating margin improved to approximately 3.4% from 1.9%, while net margin improved to approximately 1.9% from 0.6%. Total product gross profit increased to $97.9 million from $90.0 million. Home heating oil and propane realized margin increased slightly to $0.9517 per gallon from $0.9504 per gallon.
At December 31, 2012, cash and cash equivalents were $14.3 million, compared with $108.1 million at September 30, 2012. Receivables were $192.7 million and inventories were $83.1 million. Total assets were $679.4 million and partners’ capital was $261.3 million.
Total debt was $161.1 million, consisting of $124.4 million of 8.875% Senior Notes due 2017 and $36.7 million outstanding under the revolving credit facility. The revolver had $45.6 million of letters of credit outstanding and reported availability of $154.2 million. The Partnership stated that it remained in compliance with its fixed charge coverage covenant.
Material Changes Versus the Prior Comparable Period
- Retail home heating oil and propane volume increased 6.6% to 97.1 million gallons. Colder weather contributed 13.6 million gallons, acquisitions contributed 5.2 million gallons, while customer attrition and other factors reduced volume.
- Other petroleum product volume increased 17.5% to 16.8 million gallons, partly because of higher motor-fuel demand following Storm Sandy.
- Product sales increased $47.8 million, primarily from higher volume and higher selling prices associated with a $0.1271-per-gallon increase in wholesale costs.
- Installation and service sales increased 13.2% to $62.1 million, supported by acquisitions and Sandy-related service and installation activity.
- The fair-value charge for derivative instruments increased to $8.0 million from $7.1 million. These non-cash mark-to-market amounts create earnings volatility and are expected to be offset over time by product costs when the underlying transactions occur.
- Delivery and branch expenses increased only 0.9% in total and declined on a per-gallon basis to $0.6197 from $0.6595, reflecting cost reductions and higher volume.
- Net customer performance improved to a gain of 1,700 accounts from a loss of 900 accounts in the prior-year quarter. Natural-gas conversions nevertheless increased to 0.7% of heating accounts from 0.6%.
- Cash used in operating activities increased substantially because receivables and inventories required more funding. Receivables consumed $106.4 million of cash and inventories consumed $35.7 million.
- The Partnership repurchased and retired approximately 1.015 million common units for $4.2 million, compared with 2.4 million units repurchased for $12.6 million in the prior-year quarter.
Guidance, Outlook, Risks and Unusual Items
- Management expects maintenance capital expenditures of approximately $3.5 million to $4.5 million for the remainder of fiscal 2013, plus approximately $1.5 million for propane operations.
- Management anticipated quarterly distributions at $0.0775 per common unit, subject to the Board’s determination of available cash. A quarterly distribution of $0.0775 per unit was declared in January 2013.
- Management estimated approximately $13.9 million of additional fiscal 2013 distributions to common unitholders, plus amounts payable to the General Partner and management under incentive arrangements.
- Management estimated $5.5 million of scheduled Senior Note interest payments and approximately $2.7 million of remaining fiscal 2013 pension contributions.
- The Partnership entered into a weather hedge for fiscal years 2013 through 2015, with a maximum annual payout of $12.5 million. No benefit was recorded in the first quarter of fiscal 2013.
- Storm Sandy temporarily disrupted customer deliveries and third-party terminals but did not meaningfully disrupt operations. Sandy reduced certain heating-product deliveries while increasing diesel sales and service and installation activity.
- New York’s ultra-low-sulfur heating-oil mandate created a mismatch between the products purchased and sold and the NYMEX contracts available for hedging through April 2013. Management expects greater complexity, cost and risk in hedging during the transition.
- Liquidity is sensitive to weather, wholesale product prices, customer credit, working-capital requirements, hedge collateral and margin requirements. The Partnership relies on seasonal revolver borrowings to fund winter receivables and inventories.
- Other significant risks include customer attrition and natural-gas conversions, product-price volatility, counterparty and credit risk, environmental and safety liabilities, labor relations, regulation, acquisition execution and the adequacy and cost of insurance. The Partnership does not carry business interruption insurance.
- Management reported no litigation expected to have a material adverse effect and no material change in contractual obligations or off-balance-sheet arrangements from the September 30, 2012 Form 10-K.
Important Facts for Investors to Verify
- Whether winter weather and seasonal working-capital needs will support repayment of the revolver after the heating season.
- Compliance with the revolver’s availability and fixed charge coverage covenants while continuing distributions, unit repurchases and acquisitions.
- The sustainability of the reported $29.8 million Adjusted EBITDA, particularly after excluding favorable weather, Sandy-related activity and non-cash derivative effects.
- The effect of New York ultra-low-sulfur fuel requirements and related hedging mismatches on future margins and cash collateral requirements.
- Trends in natural-gas conversions, customer attrition, conservation and customer credit losses.
- The availability of cash and borrowing capacity to fund receivables, inventories, distributions, pension contributions and planned capital expenditures.
- The filing text identifies the registrant as Star Gas Partners, L.P.; investors should verify the requested company name, “STAR GROUP, L.P.,” against the applicable filing and security identifier.