Star Gas Partners, L.P. — Form 10-Q Summary
Business context and reporting period
The filing is for Star Gas Partners, L.P., a Northeast and Mid-Atlantic distributor of home heating oil and propane and provider of installation, repair, security and plumbing services. The report covers the three months ended December 31, 2013, the first quarter of fiscal 2014. Results are highly seasonal, with peak activity generally occurring in the first and second fiscal quarters.
At December 31, 2013, the Partnership served approximately 407,000 full-service residential and commercial heating customers, approximately 58,000 delivery-only customers and approximately 16,000 ancillary home-service customers.
Key financial metrics
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Total sales | $520.6 million | $516.5 million | Up $4.1 million, or 0.8% |
| Operating income | $36.9 million | $18.6 million | Up $18.3 million |
| Income before taxes | $32.8 million | $14.7 million | Up $18.2 million |
| Net income | $19.3 million | $9.8 million | Up $9.5 million, or approximately 98% |
| Limited partners’ net income | $19.2 million | $9.7 million | Up $9.5 million |
| Basic and diluted income per unit | $0.29 | $0.15 | Up $0.14 |
| Adjusted EBITDA | $35.8 million | $30.9 million | Up $4.9 million, or 15.8% |
| Net cash used in operating activities | $93.1 million | $120.6 million | Improved by $27.4 million |
Product sales increased 2.0% to $463.4 million, while installations and service sales declined 7.8% to $57.2 million. Total product gross profit increased to $104.8 million from $97.9 million. Home heating oil and propane gross margin increased to $0.9729 per gallon from $0.9517 per gallon; other petroleum product margin declined to $0.2586 per gallon from $0.3239 per gallon.
Operating margin was approximately 7.1% in Q1 FY2014 versus 3.6% in the prior-year quarter. Net margin was approximately 3.7% versus 1.9%. The comparison was materially affected by a $5.5 million derivative fair-value credit in Q1 FY2014 versus a $8.0 million charge in Q1 FY2013.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $83.2 million at December 31, 2013, compared with $85.1 million at September 30, 2013.
- Total assets were $747.6 million, compared with $632.5 million at September 30, 2013, primarily reflecting higher receivables, inventories and derivative assets.
- Total debt was $224.8 million, consisting of $124.5 million of 8.875% Senior Notes due 2017 and $100.3 million drawn under the revolving credit facility. The facility had no borrowings at September 30, 2013.
- Letters of credit outstanding totaled $46.5 million, and reported availability was $148.0 million. The Partnership was in compliance with the applicable fixed-charge coverage covenant.
- In January 2014, the Partnership replaced its revolving facility with a $300 million facility, expandable to $450 million during the December-April heating season, with maturity in June 2017 or potentially January 2019 subject to specified conditions.
- Partners’ capital increased to $272.8 million from $259.3 million at September 30, 2013.
Cash flow and capital allocation
Operating cash usage remained substantial because winter demand requires investment in receivables and inventory. Cash used in operations improved year over year as inventory-related cash usage declined and accounts payable timing was more favorable. Investing cash usage was $2.9 million, including $3.0 million of capital expenditures. Financing activities provided $94.2 million, principally from revolving-credit borrowings.
- The Partnership paid approximately $4.8 million in distributions and repurchased and retired 250,000 common units for $1.3 million.
- Maintenance capital expenditures for the remainder of fiscal 2014 were estimated at $4.0 million to $5.0 million, plus approximately $1.0 million for propane operations.
- Management expected approximately $14.2 million of additional common-unit distributions for the balance of fiscal 2014 at the then-current quarterly rate of $0.0825 per unit, subject to available cash and Board approval.
Material changes versus the prior comparable period
- Heating oil and propane retail volume increased 6.8% to 103.7 million gallons, partly because Q1 FY2013 deliveries were reduced by the effects of Hurricane Sandy and Q1 FY2014 temperatures were 5.5% colder.
- Net customer gains were 3,100 in Q1 FY2014, versus net gains of 1,700 in Q1 FY2013. Natural-gas conversions accounted for approximately 0.7% of the heating customer base in both periods.
- Service and installation profit declined to $3.8 million from $4.8 million, reflecting the absence of Sandy-related demand benefits in the prior-year period.
- General and administrative expense increased 20.4% to $5.4 million, primarily due to higher legal and professional costs and profit-sharing expense.
- Income tax expense increased to $13.6 million from $4.9 million, and the effective tax rate increased to 41.3% from 33.5%, partly because Q1 FY2013 included a $1.0 million deferred-tax benefit.
- Average limited-partner units outstanding declined to 57.5 million from 60.6 million, reflecting unit repurchases and retirements.
Guidance, outlook, risks and unusual items
- In January 2014, the Partnership agreed to acquire Griffith Energy Services for $69.9 million plus working capital. Griffith serves approximately 50,000 customers across six states and the District of Columbia. Closing was expected in the second fiscal quarter of 2014, subject to customary conditions and regulatory approval, funded with cash and revolving-credit borrowings.
- Management identified weather, wholesale energy prices, customer consumption, gross margins, customer attrition, natural-gas conversions, supply availability, counterparty credit, regulation, litigation, labor relations and general economic conditions as material risks.
- Derivative positions are accounted for as economic hedges rather than designated accounting hedges, causing potentially significant non-cash earnings volatility before the related commodity transactions settle.
- The Partnership reported a $5.5 million derivative fair-value credit in the quarter. It also reported a $5.5 million year-to-date scheduled interest payment obligation on the Senior Notes for the remainder of fiscal 2014 and expected approximately $1.2 million of additional pension contributions.
- The business does not carry business interruption insurance. Management stated that existing litigation was not expected to have a material adverse effect, although insurance may not cover all potential environmental, personal-injury or property-damage claims.
- The filing states that the quarter’s results and cash flows are not necessarily indicative of full-year performance because of seasonality.
Important facts for investors to verify
- Confirm the closing, financing and integration results of the Griffith acquisition and the effect on leverage and covenant availability.
- Monitor winter weather, customer volumes, natural-gas conversion rates and customer attrition, including the reported 3,100 first-quarter net customer gains.
- Reconcile Adjusted EBITDA to GAAP results and assess the effect of derivative mark-to-market gains and losses on reported earnings.
- Review seasonal working-capital requirements, revolving-credit borrowings, letters of credit and availability under the amended facility.
- Verify the Partnership’s ability to fund distributions, planned capital expenditures, pension contributions and acquisition-related obligations from operating cash flow and borrowing capacity.
- Assess exposure to heating-oil price volatility, hedging basis risk following the NYMEX contract change to ultra-low-sulfur diesel, and variable-rate debt.