Business Context and Reporting Period
Star Group, L.P. is a Northeast-focused distributor of home heating oil, propane, diesel, gasoline and related installation, maintenance and plumbing services. The company served approximately 448,000 heating oil and propane customers and approximately 81,000 delivery-only customers at March 31, 2019. The fiscal second quarter and six-month period ended March 31, 2019 were seasonally significant; management states that approximately 50% of annual heating oil and propane volume is typically sold in the second fiscal quarter.
The filing is an unaudited Form 10-Q for the three and six months ended March 31, 2019, compared with the corresponding 2018 periods.
Key Financial Metrics
| Metric | Three months ended March 31, 2019 | Year-over-year change | Six months ended March 31, 2019 | Year-over-year change |
|---|---|---|---|---|
| Total sales | $699.6 million | Up 2.3% | $1,234.6 million | Up 10.1% |
| Operating income | $105.0 million | Up 22.8% | $111.1 million | Down 4.7% |
| Net income | $72.3 million | Up 32.0% | $74.6 million | Down 12.1% |
| Limited partners’ interest in net income | $71.9 million | Up 32.0% | $74.2 million | Down 12.2% |
| Basic and diluted income per unit | $1.15 | Up from $0.81 | $1.19 | Down from $1.26 |
| Adjusted EBITDA | $99.5 million | Down 5.1% | $144.3 million | Up 9.2% |
| Cash used in operating activities | Not separately reported | Not separately reported | $(42.4) million | Improved from $(60.3) million |
Three-month net margin was approximately 10.3%, compared with approximately 8.0% in the prior-year quarter. Six-month net margin was approximately 6.0%, compared with approximately 7.6% in the prior-year period.
- Three-month product sales increased to $637.4 million, while installations and services revenue increased to $62.2 million.
- Six-month product sales increased to $1.096 billion, and installations and services revenue increased to $138.5 million.
- Home heating oil and propane volume decreased 3.8% in the quarter to 173.3 million gallons but increased 1.1% year to date to 286.6 million gallons.
- Home heating oil and propane gross margin increased to $1.2213 per gallon in the quarter and $1.2332 per gallon year to date, from $1.1740 and $1.1540, respectively.
- Three-month results benefited from a $13.4 million favorable change in derivative fair values, versus an $11.6 million unfavorable change in the prior-year quarter. Six-month results included a $17.6 million unfavorable change, versus a $0.2 million unfavorable change in the prior-year period.
- Cash, cash equivalents and restricted cash totaled $16.6 million at March 31, 2019, compared with $14.8 million at September 30, 2018.
- Receivables increased to $287.0 million from $132.7 million at September 30, 2018, reflecting seasonal working-capital requirements and higher sales.
Debt, Liquidity and Capital Allocation
- Total debt was $211.9 million at March 31, 2019, consisting of $115.0 million of revolving borrowings and $96.9 million of term debt, net of debt issuance costs, compared with $100.8 million at September 30, 2018.
- The revolving facility permits borrowings of up to $300 million, or $450 million during the December-through-April heating season, and matures July 2, 2023. Reported availability was $174.4 million.
- The company was in compliance with its fixed-charge coverage and senior secured leverage covenants at March 31, 2019. Letters of credit outstanding totaled $7.1 million.
- Six-month investing cash outflows were $27.3 million, including $6.8 million of capital expenditures, $7.6 million of investments and $13.7 million for acquisitions.
- Six-month financing cash inflows were $71.5 million, including net revolving borrowings, partly offset by $2.5 million of term-loan repayments, $12.7 million of distributions and $26.4 million of unit repurchases.
- The company declared a $0.125 quarterly distribution per common unit for the second quarter, payable May 6, 2019.
Material Changes Versus the Prior Comparable Period
- Quarterly net income improved primarily because derivative fair-value results swung from an $11.6 million charge to a $13.4 million credit. Management cautions that these mark-to-market effects can create significant period-to-period volatility.
- Year-to-date net income declined despite higher sales and Adjusted EBITDA, primarily because derivative results were less favorable and the prior-year period included an $11.2 million discrete tax benefit related to the Tax Cuts and Jobs Act.
- Adjusted EBITDA increased year to date but declined in the quarter. Management attributed quarterly pressure to higher operating costs, legal and professional expenses, a $1.5 million tank-monitoring-system discontinuation charge, concierge-program losses and revenue-recognition adoption effects.
- Net customer attrition was 8,900 accounts, or 2.0%, during the six months ended March 31, 2019, compared with no net change in the prior-year period. Management cited nonrenewal of low-margin accounts, credit issues and product prices.
- The company completed two fiscal 2019 acquisitions for approximately $13.7 million, adding a propane dealer and the assets of a subcontractor.
- Effective October 1, 2018, the company adopted ASC 606 using the modified retrospective method. For the six months ended March 31, 2019, reported sales were $6.2 million lower and net income was $2.3 million lower than amounts that would have been reported without adoption.
Guidance, Outlook, Risks and Unusual Items
- Management expects remaining fiscal 2019 maintenance capital expenditures of approximately $4.0 million to $6.0 million, plus approximately $1.2 million to $1.4 million for propane operations.
- At the current $0.125 quarterly distribution, remaining fiscal 2019 distributions are estimated at approximately $12.6 million to common unitholders, $0.5 million to the general partner and $0.4 million to management under the incentive plan.
- Management intends to continue unit repurchases and pursue acquisitions, subject to credit-facility availability and funding resources.
- The business is exposed to weather, wholesale fuel prices, customer consumption, customer attrition, natural-gas conversions, bad debt, labor and union matters, environmental and operating hazards, counterparty credit risk and interest-rate changes.
- A 100-basis-point increase in variable borrowing rates would reduce annual after-tax cash flow by an estimated $1.5 million. The company had interest-rate swaps covering $50 million, or approximately half, of long-term debt.
- The company recorded a $2.1 million liability under its fiscal 2019 weather hedge contract due to colder-than-average weather. Annual potential receipts under the fiscal 2020 and 2021 contracts are capped at $12.5 million, while potential payments are capped at $5.0 million.
- A proposed settlement is pending in a customer protected-price-plan lawsuit against Petro, Inc. The settlement requires confirmatory discovery, a final agreement and court approval. No class has been certified, and the filing does not provide a clear estimate of potential settlement cost or materiality.
- Undiscounted future minimum operating-lease payments through 2033 totaled approximately $126.5 million. The company expects adoption of the new lease standard in fiscal 2020 to materially increase recognized right-of-use assets and lease liabilities, but had not estimated the discounted amounts.
Investor Verification Priorities
- Verify the sustainability of reported per-gallon margins, particularly the company’s warning that recent margins may not continue.
- Separate recurring operating performance from derivative mark-to-market gains and losses when assessing earnings quality.
- Monitor customer attrition, natural-gas conversions, credit losses and receivables as seasonal working capital reverses.
- Review debt availability, covenant compliance, variable-rate exposure and required term-loan repayments.
- Track the proposed Petro litigation settlement and any related cash or earnings impact.
- Assess the effect of ASC 606 and the forthcoming lease standard on reported revenue, profitability, assets, liabilities and comparability.
- Confirm the company’s ability to fund distributions, unit repurchases, acquisitions and capital expenditures while operating cash flow is seasonally negative.