Star Group, L.P. — Fiscal 2019 Third-Quarter Form 10-Q
Reporting period: Fiscal quarter and nine months ended June 30, 2019, compared with the corresponding periods ended June 30, 2018. Star is a Northeast-focused distributor of home heating oil, propane and other petroleum products, with installation, maintenance, repair and plumbing services. The business is highly seasonal, with typical losses in the quarters ending June and September.
Financial Performance and Position
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Total sales | $283.4 million, down 13.4% | $1.518 billion, up 4.8% |
| Net income (loss) | $(23.1) million vs. $(8.0) million | $51.5 million vs. $77.0 million |
| Limited partner earnings per unit | $(0.46) vs. $(0.15) | $0.86 vs. $1.18 |
| Operating income (loss) | $(29.9) million vs. $(8.8) million | $81.1 million vs. $107.7 million |
| Adjusted EBITDA | $(20.1) million vs. $(8.4) million | $124.2 million vs. $123.8 million |
| Cash flow from operations | Not separately provided | $62.3 million vs. $30.0 million |
- Revenue mix: Nine-month product sales increased to $1.307 billion from $1.246 billion, while installations and services increased to $211.2 million from $202.1 million. Third-quarter product sales declined to $210.7 million from $256.4 million, while installations and services rose to $72.7 million from $70.9 million.
- Gross profit: Third-quarter product gross profit was $55.6 million, down from $70.2 million, primarily because heating-oil and propane volume fell sharply. Nine-month product gross profit increased to $429.9 million from $413.9 million. Combined service and installation gross profit increased to $10.6 million in the quarter and $9.4 million year to date, compared with $9.1 million and $6.1 million, respectively.
- Margins and volume: Heating-oil and propane gross margin before derivative fair-value effects increased to $1.2171 per gallon from $1.1150 in the quarter and to $1.2314 from $1.1477 year to date. However, third-quarter heating-oil and propane volume declined 32.2% to 36.9 million gallons; nine-month volume declined 4.3% to 323.6 million gallons.
- Derivative impact: Fair-value derivative expense was $1.6 million in the quarter and $19.3 million year to date, compared with a $7.5 million credit and a $7.3 million credit in the comparable periods. These non-cash commodity hedge adjustments materially reduced reported earnings.
- Liquidity: June 30 cash and cash equivalents were $5.7 million, down from $14.5 million at September 30, 2018. Cash, cash equivalents and restricted cash declined by $8.8 million during the nine months to $6.0 million.
- Debt: Total debt was $164.9 million, including $70.5 million drawn on the revolving facility and $94.4 million of term debt. The company reported $147.4 million of availability, $7.0 million of letters of credit and compliance with its fixed-charge coverage and senior secured leverage covenants. Effective rates were approximately 4.5% on revolver borrowings and 5.9% on the term loan.
- Capital allocation: Year-to-date investing cash use was $80.6 million, including $62.8 million for acquisitions and $8.2 million of capital expenditures. Financing cash flow was positive $9.4 million, reflecting net revolver borrowings, $5.0 million of term-loan repayments, $19.2 million of distributions and $34.9 million of unit repurchases.
Material Changes Versus the Prior Comparable Period
- Third-quarter results weakened because April was more than 35% warmer than April 2018, reducing heating demand; base-business heating degree days were 21.5% lower year over year. Net customer attrition for the nine months increased to 17,700 accounts, or 3.9%, from 8,300 accounts, or 1.8%.
- Nine-month sales growth was driven primarily by acquisitions and higher other petroleum-product volumes, while heating-oil and propane volume declined. The company completed two liquid-product dealer acquisitions and acquired a subcontractor’s assets for an aggregate $62.8 million, producing $18.9 million of provisional goodwill.
- Adjusted EBITDA was broadly stable year to date, but reported net income declined because of unfavorable derivative movements, higher interest expense and the absence of the prior year’s $11.2 million discrete tax benefit.
- The company adopted ASC 606 effective October 1, 2018. The filing states that adoption was not material overall, but it changed the classification and timing of revenue, deferred commissions and customer credits. For the nine months, reported net income was $2.4 million lower than it would have been without adoption.
- General and administrative expense increased 23.3% year to date, partly because of $3.0 million of higher legal and professional costs, a $1.5 million charge for discontinuing a tank-monitoring system and higher acquisition expenses.
Outlook, Risks and Unusual Items
- Management did not provide formal earnings guidance. It estimated remaining fiscal 2019 maintenance capital expenditures of approximately $1.5 million to $2.0 million, plus $0.5 million to $1.0 million for propane operations, excluding leased-fleet requirements.
- Management expected quarterly distributions to remain at $0.125 per common unit, subject to the partnership agreement and debt covenants. A $0.125 distribution was declared in July 2019 for payment on August 6, 2019.
- The company expects to adopt the new lease standard on October 1, 2019. Undiscounted future operating-lease payments through 2033 were approximately $125.5 million, but the filing did not provide a clear estimate of the resulting balance-sheet liabilities.
- Key operating risks include weather variability, wholesale fuel prices, customer credit losses, customer attrition, natural-gas conversions, supply and counterparty risk, interest rates, labor matters, environmental and safety regulation, and the ability to fund working capital, acquisitions, distributions and repurchases.
- The company’s commodity derivatives can create significant reported earnings volatility. A hypothetical 100-basis-point increase in interest rates would reduce annual after-tax cash flow by approximately $1.2 million, according to the filing.
- A proposed settlement remains pending in a putative class action involving Petro protected-price-plan customers. No class had been certified, court approval was pending, and the company stated that it could not assess the potential outcome or materiality if the settlement is not finalized.
Facts Investors Should Verify
- Whether customer attrition improves from the reported 3.9% year-to-date net decline and whether natural-gas conversions continue.
- Whether heating demand, product volumes and margins normalize after the unusually warm third quarter.
- The future cash impact of commodity derivatives, including the $19.3 million year-to-date fair-value charge.
- Debt repayment requirements, revolver availability and continued compliance with financial covenants during the next heating season.
- The performance and integration of the $62.8 million of fiscal 2019 acquisitions and the final purchase-price allocation.
- The effect of ASC 606 and the October 2019 lease-standard adoption on reported revenue, earnings, assets and liabilities.
- The status and ultimate cost of the Petro protected-price-plan litigation settlement.