STAR GROUP, L.P. quarterly report, Q2 FY2022

Star Group, L.P. — Form 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 provider of installation, maintenance, repair and plumbing services. The filing covers the three and six months ended March 31, 2022, the second quarter and first six months of fiscal 2022. The business is highly seasonal, with peak heating-season activity in the December and March quarters.

At March 31, 2022, Star served approximately 424,600 full-service residential and commercial heating-oil and propane customers, 74,300 delivery-only customers, approximately 27,800 gasoline and diesel customers, and approximately 18,400 service-contract customers.
The filing is unaudited. Results for the six-month period are not necessarily indicative of full-year results.

Key financial metrics

Metric	Three months ended March 31, 2022	Three months ended March 31, 2021	Six months ended March 31, 2022	Six months ended March 31, 2021
Total sales	$782.5 million	$604.1 million	$1,270.8 million	$977.4 million
Operating income	$117.2 million	$119.7 million	$139.9 million	$174.5 million
Net income	$81.4 million	$85.2 million	$95.9 million	$123.0 million
Limited partners’ interest in net income	$80.7 million	$84.5 million	$95.0 million	$122.0 million
Limited partner income per unit	$1.75	$1.71	$2.05	$2.43
Adjusted EBITDA	$107.7 million	$119.7 million	$152.2 million	$165.1 million
Cash flow from operating activities	Not separately provided in the statements	Not separately provided in the statements	$(105.4) million	$5.5 million

Product sales increased sharply because higher selling prices more than offset lower heating-oil and propane volumes. Installation and service revenue increased 8.2% in the quarter and 6.8% for the six-month period.

Second-quarter product sales rose 32.1% to $712.5 million, while product cost rose 57.0% to $492.3 million. Product gross profit declined 2.5% to $220.1 million.
Six-month product sales rose 33.8% to $1.124 billion, while product cost rose 57.9% to $766.9 million. Product gross profit increased 0.8% to $356.8 million.
Heating-oil and propane volume declined 5.5% in the quarter and 4.5% for the six months. Motor-fuel and other petroleum-product volume increased 1.6% and 3.0%, respectively.
Heating-oil and propane gross margin before derivative fair-value effects increased to $1.4042 per gallon in the quarter from $1.3723 and to $1.4191 per gallon for the six months from $1.3529.
The filing does not provide a consolidated gross margin percentage; service and installation produced a combined gross loss of $0.1 million in the quarter and a combined gross profit of $2.9 million for the six months.
Derivative fair-value changes provided credits of $17.6 million in the quarter and $4.2 million for the six months, compared with credits of $8.2 million and $25.6 million, respectively, in the prior-year periods.

Balance sheet, debt and liquidity

Cash and cash equivalents were $17.7 million at March 31, 2022, versus $4.8 million at September 30, 2021. Cash, cash equivalents and restricted cash totaled $17.9 million.
Accounts receivable increased to $262.7 million from $99.7 million at September 30, 2021; inventories increased to $79.7 million from $61.2 million.
Total debt was $284.5 million, consisting of $185.7 million drawn on the revolving credit facility and $98.7 million under the senior secured term loan. Total debt was $118.6 million at September 30, 2021.
Revolving credit availability was $146.7 million, and $5.1 million of letters of credit were outstanding. The revolving facility was increased by $100 million during the quarter to $400 million; seasonal capacity can reach $450 million during December through April.
Star reported compliance with its fixed-charge coverage and senior secured leverage covenants at March 31, 2022. The credit facilities mature December 4, 2024.
Cash used in operating activities was $105.4 million for the six months, primarily reflecting increased receivables, inventories, hedge-related cash requirements and reduced customer credit balances. Capital expenditures were $7.1 million and acquisition cash expenditures were $6.5 million.

Material changes versus the prior comparable period

Revenue growth was driven principally by product-price inflation. Wholesale home heating-oil cost increased approximately 63.9% per gallon in the quarter and 62.4% for the six months.
Net income declined 4.4% in the quarter and 22.1% for the six months. Adjusted EBITDA declined approximately 10.0% in both periods.
Operating income declined 2.0% in the quarter and 19.8% for the six months, reflecting lower heating-oil and propane volume, higher operating costs and less favorable derivative results for the six-month period.
Higher product costs increased credit-card fees, bad-debt expense, vehicle-fuel costs, hedging cash requirements and working-capital financing needs.
Net customer attrition improved to a loss of approximately 3,300 heating-oil and propane accounts, or 0.8% of the customer base, for the six months, compared with a loss of approximately 6,000 accounts, or 1.4%, in the prior-year period.
Star acquired four heating-oil dealers during fiscal 2022 through March 31 for approximately $7.4 million. It acquired another heating-oil dealer in April 2022 for approximately $8.1 million.
Star repurchased and retired 2.1 million common units for $22.2 million during the six months. The weighted-average limited partner units outstanding declined to 38.2 million from 41.3 million.

Guidance, outlook, risks and unusual items

Management expects maintenance capital expenditures of approximately $11.0 million to $12.0 million for the remainder of fiscal 2022, excluding leased-fleet capital requirements, plus approximately $0.5 million to $1.0 million for propane operations.
At the then-current quarterly distribution of $0.1525 per unit, distributions for the balance of fiscal 2022 were expected to total approximately $11.2 million to common unitholders, $0.6 million to the general partner and $0.6 million to management under the incentive plan.
Management stated that it intends to continue unit repurchases and pursue acquisitions, subject to liquidity, covenant and revolving-credit availability constraints.
Home heating-oil prices were highly volatile, rising from $2.36 per gallon on January 1, 2022 to $4.44 on March 8 and closing at $3.69 on March 31. Management cited the Ukraine crisis and related geopolitical conditions as important contributors.
As of April 29, 2022, the NYMEX wholesale price was $4.78 per gallon. Management warned that elevated prices could slow receivable collections, increase customer attrition and make price-protected contract renewals less attractive.
More than 92% of the company’s price-protected ceiling-customer hedges were at the ceiling strike, limiting potential margin expansion unless heating-oil prices decline.
COVID-19 continued to contribute to staffing constraints, wage pressure and potential service delays. The company also cited supply-chain disruptions for service materials, trucks and service vehicles.
Weather materially affects demand. Six-month temperatures were 9.6% warmer than normal, and the company recorded a $1.1 million weather-hedge benefit, compared with $3.4 million in the prior-year period.
At March 31, 2022, $228.4 million of total borrowings were subject to variable rates. Management estimated that a 100-basis-point increase would reduce annual after-tax cash flow by approximately $1.6 million.
The company maintains insurance and self-insurance programs for workers’ compensation, auto, general liability and medical claims. Management believes disclosed litigation is not reasonably expected to have a material adverse effect, but uninsured or excess claims could be material.
In April 2022, Star declared a $0.1525-per-unit quarterly distribution, paid May 3, 2022, and repurchased an additional 0.2 million units at $11.10 per unit.

Facts investors should verify

Whether elevated wholesale fuel prices and price-protected contract renewals pressure future per-gallon margins, customer retention and receivable collections.
Whether seasonal cash generation is sufficient to reduce the $185.7 million revolving balance and fund required term-loan amortization, capital expenditures, distributions, repurchases and acquisitions.
Receivable aging and borrowing-base eligibility, because weaker collections could reduce availability under the revolving credit facility.
Actual derivative settlements versus mark-to-market gains, including the effect of commodity and interest-rate volatility on reported earnings and cash flow.
Compliance with credit-agreement covenants as seasonal availability changes and as the company continues repurchases, distributions and acquisitions.
Customer attrition, renewal rates for price-protected customers, staffing levels and service execution during the remainder of the heating season.