Star Group, L.P. — Fiscal 2023 First-Quarter 10-Q Summary
Business context and reporting period
Star Group, L.P. is a Northeast and Mid-Atlantic distributor of home heating oil, propane, gasoline and diesel fuel, and provides heating and air-conditioning installation, maintenance and repair services. The filing covers the three months ended December 31, 2022, the first quarter of fiscal 2023. Results are seasonal, with winter generally requiring substantial working-capital investment. At December 31, 2022, the Company served approximately 421,000 full-service heating oil and propane customers, 76,400 delivery-only customers and 26,900 gasoline and diesel customers.
Financial performance and key metrics
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Total sales | $648.2 million | $488.3 million | Up 32.8% |
| Product sales | $569.9 million | $411.3 million | Up 38.6% |
| Installations and services | $78.3 million | $77.0 million | Up 1.6% |
| Operating income | $23.6 million | $22.6 million | Up 4.3% |
| Net income | $13.5 million | $14.5 million | Down 6.6% |
| Limited partners’ interest in net income | $13.4 million | $14.4 million | Down 6.6% |
| Diluted income per limited partner unit | $0.33 | $0.32 | Up $0.01 |
| Adjusted EBITDA | $49.1 million | $44.5 million | Up 10.4% |
| Cash used in operating activities | $92.7 million | $65.9 million | Use increased $26.8 million |
Approximate margins were 3.6% operating and 2.1% net in Q1 FY2023, compared with 4.6% and 3.0%, respectively, in the prior-year quarter. Product gross profit increased to $150.8 million from $136.7 million. Home heating oil and propane margin increased to $1.5452 per gallon from $1.4447, while volume increased 2.5% to 89.2 million gallons. Motor fuel and other petroleum product volume declined 9.4% to 35.6 million gallons.
Net cash, cash equivalents and restricted cash totaled $22.8 million at December 31, 2022, including $22.6 million of cash and cash equivalents. Receivables were $253.0 million and inventories were $112.1 million, reflecting higher product prices and seasonal working-capital requirements. Total assets were $1.05 billion and partners’ capital was $262.4 million.
Debt, liquidity and capital allocation
- Total debt was $296.6 million, comprising $160.0 million of senior secured term debt and $136.6 million of revolving borrowings.
- Revolving borrowings increased from $20.3 million at September 30, 2022, primarily to fund higher receivables and inventory.
- Reported availability under the revolving credit facility was $188.5 million, and the Company stated that it was in compliance with its fixed-charge coverage and senior secured leverage covenants.
- The credit facilities mature July 6, 2027. The term loan requires quarterly principal payments of approximately $4.1 million and potential excess-cash-flow payments.
- Effective interest rates at December 31, 2022 were approximately 5.9% on the term loan and 6.5% on revolving borrowings. Interest-rate swaps covered $86.9 million, or 53%, of long-term debt.
- Financing activities provided $102.8 million of cash, including $116.3 million of revolving borrowings, partially offset by $4.1 million of term-loan repayments, $5.8 million of distributions and $3.6 million of unit repurchases.
- The Company repurchased 411,000 common units during the quarter at an average price of $8.77 per unit; approximately 1.146 million units remained available under the repurchase plan at December 31, 2022.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by higher selling prices resulting from a $1.1832-per-gallon, or 54.4%, increase in wholesale product cost, rather than by substantial volume growth.
- Product gross profit improved by $14.1 million, reflecting higher heating oil and propane volume, stronger per-gallon margins and higher other petroleum product margins.
- Service and installation gross profit declined $1.3 million to $1.7 million. Service expense increased due partly to colder weather and exceeded service revenue.
- The fair-value derivative charge increased to $17.6 million from $13.4 million, reducing reported earnings and creating earnings volatility.
- Delivery and branch expenses increased 10.1% to $97.9 million because of higher bad-debt expense, credit-card fees, vehicle fuel, wages and other costs, as well as an unfavorable weather-hedge result.
- Average borrowings increased $86.5 million to $244.3 million, while the weighted-average interest rate increased to 6.1% from 3.8%; net interest expense more than doubled to $4.3 million.
- Cash used in operations increased because of a $115.2 million investment in receivables and a $28.7 million investment in inventory. Days sales outstanding increased modestly to 36 days from 34 days.
- Net customer gains were 7,000, or 1.7% of the heating oil and propane customer base, versus net gains of 1,300, or 0.3%, in the prior-year quarter. Gross losses nevertheless increased by approximately 1,000, primarily due to higher prices, credit cancellations and fuel conversions.
Outlook, management commentary, risks and unusual items
The filing does not provide formal earnings or revenue guidance. Management expects remaining fiscal 2023 maintenance capital expenditures of approximately $8.0 million to $9.0 million, excluding leased-fleet requirements, plus approximately $2.0 million for propane operations. At the then-current quarterly distribution rate of $0.1525 per unit, expected remaining fiscal 2023 distributions were approximately $16.3 million to common unitholders, $0.9 million to the general partner and $0.8 million to management. Expected remaining fiscal 2023 term-loan payments were approximately $12.4 million.
Management cautioned that elevated and volatile wholesale prices, inflation, the war in Ukraine, supply-chain constraints, labor shortages and higher interest rates could increase operating and financing costs. High product prices may slow customer collections, increase credit losses and cause customers to conserve fuel, defer purchases or convert to natural gas. Price-protected customer renewals were expected to be offered at significantly higher prices, which could reduce renewal acceptance and affect future profitability, liquidity and cash flow.
Weather remains material: fiscal 2023 temperatures through December 31 were 14.9% colder than the prior-year period but 6.6% warmer than normal. The weather hedge generated a $0.4 million expense in Q1 FY2023 versus a $2.2 million benefit in the prior-year quarter. January 2023 was warmer than expected, and management expected to record a weather-hedge receivable; the final fiscal-year settlement remained uncertain.
Commodity derivatives are not designated as accounting hedges, so changes in their fair value flow through earnings before the related customer sales occur. A hypothetical 10% increase in product costs would have increased the fair value of outstanding hedges by $14.4 million to $13.2 million; a 10% decrease would have reduced fair value by $10.1 million to negative $11.3 million, according to the filing.
The Company acquired two heating oil dealers for approximately $1.2 million and sold certain assets for $2.2 million of cash proceeds. Management stated that ordinary-course litigation was not expected to have a material adverse effect, but insurance may not cover all potential claims or losses. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether elevated product prices continue to support per-gallon margins or instead increase conservation, credit losses and customer attrition.
- Receivables aging, collection trends and borrowing-base eligibility, particularly given the $253.0 million receivables balance and management’s warning of slower collections.
- Revolving-facility availability, covenant compliance and liquidity after seasonal working-capital needs, distributions, unit repurchases and required debt amortization.
- The impact of future interest-rate movements on variable-rate debt and the effectiveness and maturity profile of the interest-rate swaps.
- Final fiscal 2023 weather-hedge settlements and the effect of weather on heating oil and propane demand.
- Renewal rates and profitability for price-protected customers offered materially higher contract prices.
- The sustainability of Q1 FY2023 heating oil and propane margins and the reconciliation between Adjusted EBITDA and operating cash flow, since operating cash flow was negative $92.7 million.