STAR GROUP, L.P. quarterly report, Q2 FY2021

Star Group, L.P. — Form 10-Q Summary

Business Context and Reporting Period

Star Group, L.P. is a Northeast, Mid-Atlantic and Southeast U.S. distributor of home heating oil, propane and other petroleum products, and provides installation, maintenance, repair and related services. The filing covers the quarter and six months ended March 31, 2021, the second quarter of fiscal 2021. Results are seasonal, with the December and March quarters generally generating most annual earnings.

Approximately 431,200 full-service residential and commercial heating-oil and propane customers and 69,500 delivery-only customers at March 31, 2021.
Approximately 40.2 million common units outstanding at March 31, 2021.
Operations continued during COVID-19 as an essential service.

Financial Performance and Key Metrics

Metric	Three Months Ended March 31, 2021	Three Months Ended March 31, 2020	Six Months Ended March 31, 2021	Six Months Ended March 31, 2020
Total sales	$604.1 million	$543.1 million	$977.4 million	$1,052.0 million
Operating income	$119.7 million	$86.1 million	$174.5 million	$128.6 million
Net income	$85.2 million	$58.4 million	$123.0 million	$86.2 million
Limited partners’ net income	$84.5 million	$58.0 million	$122.0 million	$85.6 million
Income per limited partner unit	$1.71	$1.03	$2.43	$1.52
Adjusted EBITDA	$119.7 million	$106.9 million	$165.1 million	$152.0 million
Net cash provided by operating activities	Not separately provided	Not separately provided	$5.5 million	$50.9 million

Second-quarter sales increased 11.2%; operating margin was approximately 19.8% versus 15.9% in the prior-year quarter, and net margin was approximately 14.1% versus 10.8%.
Six-month sales declined 7.1%, principally because wholesale product costs were lower; operating income increased 35.7% and net income increased 42.8%.
Second-quarter heating-oil and propane volume increased 15.7% to 157.6 million gallons, helped by temperatures 16.2% colder than the prior-year quarter. Six-month volume increased 1.5% to 247.1 million gallons.
Second-quarter motor-fuel and other petroleum volume declined 2.4%; six-month volume declined 5.9%, reflecting reduced economic activity and COVID-19 effects.
Heating-oil and propane gross margin increased to $1.3723 per gallon from $1.3619 in the quarter and to $1.3529 from $1.3155 for the six-month period.
Unrealized derivative valuation produced an $8.2 million benefit in the quarter and a $25.6 million benefit for six months, compared with an $11.7 million charge and a $5.3 million charge, respectively, in the prior-year periods.
Weather hedge benefits were $3.4 million for the six months, versus $10.1 million in the prior-year period.

Cash Flow, Balance Sheet, Debt and Liquidity

Cash, cash equivalents and restricted cash were $9.1 million at March 31, 2021, compared with $57.2 million at September 30, 2020.
Receivables increased to $187.5 million from $83.6 million, while inventories increased to $59.1 million from $50.3 million, reflecting seasonal sales and higher product costs.
Total debt was $151.4 million, consisting of $116.4 million of term debt and $35.0 million of revolving borrowings. Total debt was $122.8 million at September 30, 2020.
The revolving facility permits borrowings of up to $300 million, or $450 million during the December-through-April heating season, and matures December 4, 2024.
Reported availability was $225.5 million; the Company was in compliance with its fixed-charge coverage and senior secured leverage covenants.
Six-month investing cash outflow was $40.0 million, including $38.4 million for acquisitions and $7.2 million of capital expenditures, partly offset by $6.1 million of proceeds from propane asset sales.
Six-month financing cash outflow was $13.5 million, including $6.5 million of term-loan repayments, $30.5 million of unit repurchases and $11.5 million of distributions, partially offset by net revolving-facility borrowings.
Approximately $61.5 million, or 53% of long-term debt, was covered by interest-rate swaps. A 100-basis-point increase in variable rates would reduce annual after-tax cash flow by approximately $1.1 million.

Material Changes Versus the Prior Comparable Period

Quarterly earnings benefited from colder weather, higher heating-oil and propane volume, improved heating-oil and propane margins, and favorable derivative valuation changes.
Six-month earnings increased despite lower sales because lower product costs, improved per-gallon margins, lower operating expenses and favorable derivative valuation more than offset lower motor-fuel volume and reduced weather hedge benefits.
Operating cash flow fell $45.4 million to $5.5 million, primarily because of increased receivables, inventories, settled derivative balances and lower customer credit balances.
The Company acquired two propane dealers and two heating-oil dealers for approximately $39.3 million during fiscal 2021. Goodwill increased by $12.9 million and intangible assets increased by $12.2 million from September 30, 2020.
The Company repurchased 3.1 million common units for $30.5 million during the six months, reducing common units outstanding to approximately 40.2 million.
Net customer attrition was 6,000 accounts, or 1.4% of the heating-oil and propane customer base, compared with 4,800 accounts, or 1.0%, in the prior-year six-month period.

Guidance, Outlook, Risks and Unusual Items

Management estimated remaining fiscal 2021 maintenance capital expenditures of approximately $10.0 million to $12.0 million, plus $0.5 million to $0.9 million for propane operations.
At the then-current quarterly distribution rate of $0.1425 per unit, remaining fiscal 2021 distributions were expected to total approximately $11.5 million to common unitholders, $0.5 million to the general partner and $0.5 million to management.
The Company expected to continue unit repurchases and pursue acquisitions, subject to liquidity, covenant and COVID-19 considerations.
Management could not reasonably estimate the ultimate financial effect of COVID-19. Risks included lower motor-fuel demand, staffing shortages, customer credit deterioration, collection delays, supply disruptions and higher operating costs. Estimated annual COVID-related costs were approximately $1.0 million.
Price-protected customer renewals occur primarily from April through November. Management warned that higher heating-oil prices could lead to higher renewal prices and lower acceptance rates, adversely affecting profitability, liquidity and cash flow.
Wholesale product-price volatility can increase working-capital, hedging, collateral, bad-debt, credit-card-processing and interest costs. Commodity derivatives create significant non-cash earnings volatility before the underlying sales occur.
For fiscal 2022, the Company entered into a weather hedge with a maximum potential receipt of $7.5 million and no potential payment obligation.
Legal proceedings and environmental, insurance, pension withdrawal, labor, regulatory and hazardous-material risks remain inherent in the business. Management did not believe disclosed matters were reasonably likely to have a material adverse effect, but insurance may not cover all claims or losses.
In April 2021, the Company acquired another heating-oil dealer for approximately $3.2 million. It also declared a quarterly distribution of $0.1425 per common unit payable May 11, 2021.

Important Facts for Investors to Verify

Whether operating cash flow improves after the seasonal receivable and inventory build and supports distributions, acquisitions and repurchases.
The sustainability of reported heating-oil and propane margins, particularly as wholesale prices rise and price-protected customer contracts renew.
Customer renewal rates, attrition, natural-gas conversions and the effect of staffing shortages on service levels and customer retention.
Revolving-facility availability, borrowing-base eligibility, covenant compliance and the impact of higher receivables on liquidity.
The portion of earnings attributable to non-cash derivative valuation changes and weather hedges versus recurring operating performance.
Integration performance and returns from the fiscal 2021 acquisitions, as well as the effect of the propane asset divestiture.
COVID-19 effects on motor-fuel demand, collections, labor availability, supply chains and operating expenses.