Star Gas Partners, L.P. — Fiscal 2011 Form 10-K Summary
Reporting period: Fiscal year ended September 30, 2011; the filing also presents fourth-quarter results for the three months ended September 30, 2011. The registrant identified in the filing is Star Gas Partners, L.P., not “Star Group, L.P.”
Business Context
Star Gas is a Northeast and Mid-Atlantic distributor of home heating oil and propane, petroleum products, heating and air-conditioning installation and repair services, and ancillary services. At September 30, 2011, it served approximately 407,000 full-service residential and commercial heating customers and approximately 39,000 delivery-only customers. Home heating oil and propane represented approximately 79% of fiscal 2011 sales.
The business is highly seasonal: approximately 80% of annual heating oil volume is historically sold from October through March, with profitability concentrated in the first and second fiscal quarters. The third and fourth quarters typically produce operating and net losses.
Financial and Operating Metrics
| Metric | Fiscal 2011 | Fiscal 2010 | Change |
|---|---|---|---|
| Sales | $1.591 billion | $1.213 billion | +31.2% |
| Operating income | $62.0 million | $58.6 million | +5.9% |
| Income before taxes | $47.1 million | $44.0 million | +7.1% |
| Net income | $24.3 million | $28.3 million | -14.0% |
| Limited-partner income per unit | $0.35 | $0.38 | Declined |
| Adjusted EBITDA | $82.5 million | $68.7 million | +20.1% |
| Retail heating oil and propane volume | 355.6 million gallons | 310.3 million gallons | +14.6% |
| Net cash from operating activities | $39.4 million | $44.4 million | Declined $5.0 million |
| Capital expenditures | $6.4 million | $5.6 million | Increased |
| Acquisition spending | $9.7 million | $68.7 million | Materially lower |
Product sales increased 35.4% to $1.393 billion, while installation and service sales increased 7.6% to $198.4 million. Total product gross profit increased to $335.1 million from $293.8 million. However, heating oil and propane realized margin declined slightly to $0.9122 per gallon from $0.9164 per gallon because higher wholesale costs limited margin expansion.
Operating margin was approximately 3.9% in fiscal 2011 versus 4.8% in fiscal 2010. Net margin was approximately 1.5% versus 2.3%, primarily because income tax expense increased to $22.7 million from $15.6 million. The effective tax rate increased to 48.3% from 35.6% as prior-year valuation-allowance benefits did not recur and federal net operating losses were substantially utilized.
Fiscal 2011 fourth-quarter results reflected normal seasonality: sales were $153.2 million, operating loss was $41.3 million, and net loss was $26.7 million, compared with a $14.2 million net loss in the prior-year fourth quarter.
Liquidity, Debt and Capital Resources
- Cash and cash equivalents were $86.8 million at September 30, 2011, compared with $61.1 million at September 30, 2010.
- Long-term debt was $124.3 million, consisting primarily of 8.875% Senior Notes due December 2017. The notes require semiannual interest payments.
- The company redeemed its remaining $82.5 million of 10.25% Senior Notes due 2013 using proceeds from a $125.0 million 8.875% notes offering. The refinancing generated a $1.7 million loss on debt redemption but extended maturities and reduced the stated interest rate.
- The amended asset-based revolving credit facility was scheduled to mature in June 2016. At September 30, 2011, there were no revolving borrowings, $46.7 million of letters of credit, and reported availability of $162.4 million.
- Operating cash flow declined because higher accounts receivable and inventory absorbed cash. Days sales outstanding increased to 61 days from 50 days.
- Fiscal 2012 planned cash requirements included approximately $4 million to $6 million of maintenance capital expenditures, approximately $2 million for propane investments, approximately $3.4 million of pension contributions, and approximately $20 million of distributions.
Material Changes Versus the Prior Comparable Period
- Volume benefited from acquisitions and colder weather; operating regions were 8.6% colder than fiscal 2010 and 0.4% warmer than normal.
- Four fiscal 2011 acquisitions added approximately 8,800 heating oil and propane accounts for approximately $9.7 million. Two additional acquisitions in the first two months of fiscal 2012 added approximately 12,700 accounts for approximately $24.1 million.
- Net customer attrition improved to 3.5% from 5.0%; gross customer losses were 16.7% and gross gains were 13.2%. Natural-gas conversions accounted for 1.4% of home heating oil account losses.
- Delivery and branch expenses increased 14.7% to $250.8 million, driven by acquisitions, severe winter weather, higher bad debt and credit-card costs, and increased insurance claims.
- The fair value of derivatives produced a $2.6 million charge in fiscal 2011 versus a $5.6 million benefit in fiscal 2010. Because derivatives were not designated as accounting hedges, unrealized mark-to-market changes created earnings volatility.
- Cash distributions declared per common unit increased to $0.305 from $0.285. The fourth-quarter distribution was $0.0775 per unit.
- The partnership repurchased and retired 2.1 million common units for $10.9 million during fiscal 2011.
Outlook, Risks and Unusual Items
Management expects continued exposure to weather, wholesale energy prices, customer consumption, margin pass-through, customer credit, natural-gas conversions, acquisitions, labor negotiations, regulation, environmental liabilities, and derivative-counterparty performance. No formal earnings guidance is provided in the filing.
- A fiscal 2012 weather hedge covered November 1, 2011 through March 31, 2012, with a maximum potential payout of $12.5 million if heating degree-days were sufficiently below the historical average.
- Federal NOLs were estimated at $12.8 million as of December 31, 2011, subject to annual utilization limits. Management expects cash taxes to increase materially as these NOLs are exhausted, reducing cash available for distributions.
- The company had approximately $42.7 million of insurance reserves and $44.2 million of letters of credit for current and future claims. Actual claims could exceed recorded reserves.
- The frozen defined-benefit pension plans had a funded-status liability of approximately $15.4 million, with approximately $33.0 million of unrecognized actuarial losses and an estimated $2.8 million to be amortized into pension expense in the following year.
- Distributions are not guaranteed and are restricted by revolver availability and fixed-charge coverage requirements. The partnership is dependent on distributions from subsidiaries to service parent-level debt.
- Management reported no material litigation and concluded that disclosure controls and internal control over financial reporting were effective as of September 30, 2011. KPMG issued an unqualified audit opinion.
Investor Verification Checklist
- Verify the registrant identity and ticker: the filing is for Star Gas Partners, L.P. (NYSE: SGU).
- Reconcile reported Adjusted EBITDA of $82.5 million with operating cash flow of only $39.4 million, including working-capital and derivative effects.
- Assess the sustainability of margins if wholesale heating oil prices remain elevated or cannot be fully passed through to customers.
- Review revolver borrowing-base availability, letters of credit, distribution covenants, and subsidiary restrictions on upstreaming cash.
- Monitor the impact of declining federal NOLs and rising cash taxes on future distributions.
- Evaluate weather, customer attrition, natural-gas conversion, acquisition integration, pension funding, insurance reserves, environmental remediation, and derivative-counterparty risks.
- Confirm the effect of the December 2017 senior-note maturity and the company’s refinancing or repayment capacity.