STAR GROUP, L.P. annual report, FY2020

Star Group, L.P. 2020 Form 10-K Summary

Business Context and Reporting Period

Star Group, L.P. is a Northeast and Mid-Atlantic distributor of home heating oil, propane, diesel and gasoline, and a provider of heating, air-conditioning and related services. The filing covers the fiscal year ended September 30, 2020; the referenced “2020 Q4” corresponds to the quarter ended September 30, 2020 within the annual filing.

Served approximately 440,100 full-service residential and commercial heating-oil and propane customers, plus 64,400 delivery-only customers and approximately 26,400 motor-fuel customers at September 30, 2020.
Operations span 14 states and the District of Columbia through approximately 40 principal operating locations and 80 depots.
Fiscal 2020 sales mix was approximately 63% home heating oil and propane, 18% other petroleum products and 19% installations, repairs and ancillary services.
The business is highly seasonal, with approximately 80% of heating-oil and propane volume historically sold during the October-to-March heating season.

Financial Performance and Key Metrics

Metric	Fiscal 2020	Fiscal 2019	Change
Total sales	$1,467.5 million	$1,753.9 million	Down 16.3%
Operating income	$93.0 million	$37.4 million	Up $55.6 million
Net income	$55.9 million	$17.6 million	Up 217.1%
Net income per limited partner unit	$1.07	$0.35	Up $0.72
Adjusted EBITDA	$130.3 million	$95.4 million	Up 36.7%
Cash flow from operations	$175.7 million	$97.4 million	Up $78.3 million
Capital expenditures	$14.1 million	$11.3 million	Up $2.8 million
Cash distributions declared per common unit	$0.515	$0.485	Up $0.030

Reported operating margin was approximately 6.3% versus 2.1% in fiscal 2019, and reported net margin was approximately 3.8% versus 1.0%. Adjusted EBITDA is a non-GAAP measure and is not a substitute for net income or operating cash flow.

Home heating oil and propane volume declined 9.2% to 313.6 million gallons; motor fuel and other petroleum volume declined 9.3% to 151.8 million gallons.
Home heating oil and propane gross margin increased to $1.2956 per gallon from $1.2301 per gallon.
Installation and service sales decreased 2.2% to $281.4 million, but combined service and installation gross profit increased to $27.7 million from $20.2 million.
Cash and cash equivalents were $56.9 million at September 30, 2020, compared with $4.9 million a year earlier. Current assets were $226.3 million and total assets were $838.6 million.
Accounts receivable were $83.6 million, including $57.0 million from residential customers and $26.6 million from commercial customers. Inventory was $50.3 million.

Debt, Liquidity and Capital Allocation

At September 30, 2020, the Company had $123.5 million outstanding under its senior secured term loan, no revolving-credit borrowings, $3.5 million of letters of credit and $11.1 million of hedge positions secured under the credit facility.
Revolving capacity was $300 million, increasing to $450 million during December through April, with stated availability of $203.4 million at year-end.
The credit agreement matures December 4, 2024. The term loan requires quarterly payments of $3.25 million, subject to other provisions.
Total debt carrying value was $122.8 million, compared with $153.4 million at September 30, 2019. Operating lease liabilities totaled $105.0 million after adoption of ASC Topic 842.
The Company was in compliance with its fixed-charge coverage and senior secured leverage covenants at year-end.
Fiscal 2020 financing uses included $24.5 million of distributions and $38.4 million of unit repurchases. Approximately 4.4 million common units were repurchased during the year according to the cash-flow disclosure.

Material Changes Versus the Prior Comparable Period

Sales fell primarily because wholesale product costs and total volume declined. Product sales decreased 19.1%, while installation and service sales decreased 2.2%.
Profitability improved despite lower volume. Higher heating-oil and propane margins, lower operating expenses, improved service profitability and a favorable weather-hedge result more than offset volume declines.
Fiscal 2020 included a $10.1 million weather-hedge benefit, compared with a $2.1 million charge in fiscal 2019.
The fair-value impact of derivatives was a $2.8 million charge in fiscal 2020 versus a $25.1 million charge in fiscal 2019, contributing materially to the year-over-year improvement in net income.
Fiscal 2020 included a $5.7 million impairment loss related to propane assets held for sale. The assets were sold in October 2020 for $7.0 million.
Net customer attrition improved to 3.4%, or approximately 15,500 accounts, from 5.4%, or approximately 25,100 accounts, in fiscal 2019. Estimated losses from natural-gas conversions were 1.1% versus 1.4%.
The Company acquired two heating-oil dealers for approximately $3.3 million and completed approximately $1.2 million of additional acquisition-related asset purchases.
In fiscal 2020, the Company adopted ASC Topic 842, recognizing approximately $104.7 million of operating lease right-of-use assets and approximately $110.0 million of related lease liabilities at adoption. The adoption materially affected the balance sheet but not reported earnings or cash flows.

Fourth-Quarter Results and Subsequent Events

Fourth-quarter fiscal 2020 sales were $183.3 million, compared with $235.9 million in the prior-year quarter.
Fourth-quarter operating loss was $36.1 million, compared with a $43.8 million loss in the prior-year quarter; net loss was $30.2 million, compared with a $33.9 million loss.
COVID-19 reduced motor-fuel volume and temporarily deferred non-emergency service work. Fourth-quarter installation sales rebounded 9.0% year over year, while motor-fuel volume decreased 10.6%.
On November 5, 2020, lenders waived the $13.0 million excess-cash-flow payment due for fiscal 2020.
In October and November 2020, the Company repurchased and retired approximately 0.5 million common units. On November 16, 2020, it purchased approximately 1.4 million additional common units privately for approximately $13.8 million.
A quarterly distribution of $0.1325 per common unit was declared for the fourth quarter and paid November 10, 2020.

Outlook, Management Commentary and Risks

Management expects fiscal 2021 maintenance capital expenditures of approximately $14.0 million, leased-fleet capital requirements of approximately $10.3 million and approximately $1.3 million of propane-related investment.
At the then-current quarterly distribution rate of $0.1325 per unit, management estimated fiscal 2021 common-unit distributions of approximately $22.2 million, subject to liquidity and covenant restrictions.
Management intends to continue unit repurchases and pursue acquisitions, subject to available liquidity, credit-agreement constraints and COVID-19-related uncertainty.
Management identified COVID-19, warmer weather, petroleum-price volatility, customer attrition, natural-gas conversions, supply disruptions, credit losses, hedging and counterparty risk as significant uncertainties.
The Company expects at least $2.0 million of annual COVID-19-related costs for employee benefits, sanitization, protective equipment and information-technology infrastructure, although the ultimate impact cannot be reasonably estimated.
New York’s Climate Leadership and Community Protection Act and similar state initiatives could reduce demand for fossil-fuel products or increase compliance costs.
Approximately 44% of employees were covered by collective bargaining agreements, with 18 agreements covering approximately 253 employees scheduled for renewal in fiscal 2021.
The Company had approximately $74.4 million of net insurance reserves and participates in underfunded multiemployer pension plans. Its remaining New England Teamsters withdrawal liability had a $16.7 million balance-sheet amount and an estimated $29.0 million fair value at September 30, 2020.
Commodity derivatives are generally not designated as accounting hedges, creating earnings volatility from mark-to-market changes. Interest-rate swaps covered $64.0 million, or 52%, of long-term debt.

Most Important Facts to Verify

Reconcile the reported improvement in net income and Adjusted EBITDA with the $10.1 million weather-hedge benefit, derivative accounting effects and lower operating expenses.
Assess whether higher heating-oil and propane margins are sustainable after the unusually warm fiscal year and lower product volumes.
Monitor liquidity, covenant compliance, term-loan amortization and the impact of seasonal working-capital needs.
Evaluate the effect of COVID-19 on motor-fuel demand, service deferrals, receivable collections and HVAC-equipment availability.
Review the sustainability of distributions and unit repurchases given debt repayments, lease obligations, pension liabilities and required capital expenditures.
Track customer attrition, natural-gas conversions and state climate regulations, particularly in New York.
Verify the accounting and cash impact of the propane-asset sale, subsequent unit repurchases and the November 2020 credit-agreement waiver.