Star Group, L.P. — Fiscal 2021 First-Quarter 10-Q Summary
Business Context and Reporting Period
Star Group, L.P. is a Northeast, Mid-Atlantic and Central/Southeast U.S. distributor of home heating oil, propane, diesel, gasoline and related installation, maintenance and repair services. The company served approximately 434,800 full-service heating oil and propane customers, 66,800 delivery-only customers and 18,200 service-contract customers at December 31, 2020.
This unaudited filing covers the three months ended December 31, 2020, compared with the three months ended December 31, 2019. Results are highly seasonal, with the first and second fiscal quarters representing the peak heating season.
Financial Performance and Key Metrics
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Total sales | $373.3 million | $508.9 million | Down 26.6% |
| Product sales | $300.3 million | $432.7 million | Down 30.6% |
| Installations and services | $73.0 million | $76.3 million | Down 4.3% |
| Operating income | $54.8 million | $42.5 million | Up 29.1% |
| Operating margin | 14.7% | 8.3% | Up 6.4 percentage points |
| Net income | $37.9 million | $27.8 million | Up 36.4% |
| Net margin | 10.1% | 5.5% | Up 4.6 percentage points |
| Limited partner income per unit | $0.74 | $0.49 | Up 51.0% |
| Adjusted EBITDA | $45.3 million | $45.1 million | Up 0.6% |
| Net cash used in operating activities | $(27.0) million | $(51.6) million | Improved by $24.6 million |
Product gross profit decreased to $128.2 million from $145.0 million, but home heating oil and propane margin increased to $1.3188 per gallon from $1.2564. Combined service and installation gross profit improved to $3.7 million from $2.6 million.
- Home heating oil and propane volume decreased 16.4% to 89.5 million gallons. Temperatures were 13.5% warmer year over year and 15.5% warmer than normal.
- Motor fuel and other petroleum volume decreased 9.1% to 37.7 million gallons, primarily reflecting COVID-19-related reductions in economic activity.
- The company recorded a $17.4 million favorable change in derivative fair values, compared with a $6.4 million favorable change in the prior-year quarter. This added approximately $11.0 million to the year-over-year change in pretax income and was primarily non-cash.
- Delivery and branch expenses declined 16.6% to $80.7 million, including a $4.0 million weather-hedge benefit versus a $3.0 million charge in the prior-year period.
Liquidity, Cash Flow and Capital Structure
- Cash and cash equivalents were $18.8 million at December 31, 2020, compared with $56.9 million at September 30, 2020. Cash, cash equivalents and restricted cash totaled $19.1 million.
- Operating activities used $27.0 million of cash, while investing activities used $35.9 million, including $4.7 million of capital expenditures and $37.1 million paid for acquisitions. Financing activities provided $24.8 million, primarily from $59.3 million of revolving-credit borrowings.
- Total debt was $178.9 million, consisting of $119.6 million under the senior secured term loan and $59.3 million under the revolving facility. Current debt maturities totaled $72.3 million.
- The credit facility permits revolving borrowings of up to $300 million, or $450 million during the December-through-April heating season, and matures December 4, 2024. Availability was $160.3 million at December 31, 2020.
- The company was in compliance with its fixed-charge coverage and senior secured leverage covenants. It also had $3.5 million of outstanding letters of credit and $1.8 million of hedge positions secured under the credit agreement.
- Maintenance capital expenditures for the remainder of fiscal 2021 were estimated at approximately $9.6 million to $10.6 million, plus $0.9 million to $1.3 million for propane operations.
Material Changes Versus the Prior Comparable Period
- Revenue fell substantially because of lower petroleum prices, warmer weather, lower heating-oil and propane volumes, customer attrition and reduced motor-fuel demand.
- Profitability increased despite lower sales, supported by higher heating-oil and propane margins, lower operating expenses, lower depreciation and amortization, lower interest expense and favorable derivative revaluation.
- Net customer attrition was 800 accounts, or 0.2% of the heating-oil and propane customer base, versus net gains of 800 accounts, or 0.2%, in the prior-year quarter.
- The company repurchased and retired approximately 2.6 million common units for $25.3 million during the quarter, reducing common units outstanding to approximately 40.7 million at December 31, 2020.
- On December 31, 2020, the company acquired two propane dealers for approximately $37.9 million, including $37.1 million in cash. It also sold certain propane assets in October 2020 for $6.1 million of cash proceeds.
- Term-loan interest declined to approximately 4.4% from 5.2%, and revolving-facility interest declined to approximately 3.8% from 4.0%. Interest-rate swaps covered $62.8 million, or 52%, of long-term debt.
Guidance, Outlook, Risks and Unusual Items
- Management did not provide formal revenue or earnings guidance. It expects fiscal 2021 costs related to COVID-19 safety measures and expanded employee benefits to be approximately $1.0 million annually.
- The company remains designated as an essential service and reported no material petroleum supply-chain issues, but experienced disruption in procuring certain home generators and staffing challenges in customer service and sales.
- COVID-19 may affect demand, collections, customer attrition, staffing, cash flow and counterparty credit. Residential and commercial receivables totaled $147.0 million at December 31, 2020; borrowing capacity depends partly on receivable eligibility and aging.
- The fiscal 2021 weather hedge produced a $4.0 million benefit through December 31. Depending on January-through-March weather, the benefit could decline to approximately $1.7 million, fall to zero, or result in payments of up to $5.0 million.
- Commodity derivative accounting creates earnings volatility because unrealized changes are recognized before the related commodity sale. A hypothetical 10% increase in product cost would have increased derivative fair value by approximately $8.5 million; a 10% decrease would have reduced it by approximately $6.7 million.
- A 100-basis-point increase in variable interest rates would reduce annual after-tax cash flow by approximately $1.3 million.
- The company declared a quarterly distribution of $0.1325 per unit, or $0.53 annualized, payable February 2, 2021. It stated that it intended to continue unit repurchases and pursue acquisitions, subject to liquidity and credit-facility constraints.
- Legal proceedings and ordinary-course environmental, insurance, hazardous-materials and other operating risks were not considered reasonably likely to have a material adverse effect, although insurance may not cover all potential claims.
Important Facts for Investors to Verify
- Determine how much of the earnings improvement is attributable to non-cash derivative gains and the temporary weather-hedge benefit.
- Monitor heating degree days through March 31, 2021 and the resulting final weather-hedge settlement.
- Assess whether higher per-gallon margins can persist despite warmer weather, lower volumes, customer attrition and commodity-price volatility.
- Track receivable aging, seasonal revolver borrowings, borrowing-base availability and compliance with leverage and fixed-charge covenants.
- Evaluate integration and performance of the two propane acquisitions and the effect of the propane-asset divestiture on future volumes and revenue.
- Reconcile the reported $0.74 limited-partner-unit earnings figure with the filing’s additional earnings-per-unit allocation disclosures.
- Review COVID-19 effects on motor-fuel demand, staffing, customer collections, operating costs and potential customer losses.