Star Group, L.P. 2023 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, 2023; the business is highly seasonal, with approximately 80% of heating-oil and propane volume sold in the first two fiscal quarters. Fiscal fourth-quarter results were a net loss due to normal seasonality.
- Approximately 402,200 full-service residential and commercial heating-oil and propane customers, 52,400 delivery-only customers and 26,600 motor-fuel customers at September 30, 2023.
- Fiscal 2023 revenue mix: approximately 62% home heating oil and propane, 23% other petroleum products, and 15% installations, repairs and ancillary services.
- Common units trade on the NYSE under SGU; approximately 35.6 million common units were outstanding at September 30, 2023.
Financial Performance and Key Metrics
| Metric | Fiscal 2023 | Fiscal 2022 | Change |
|---|---|---|---|
| Total sales | $1,952.9 million | $2,006.6 million | Down 2.7% |
| Product sales | $1,650.7 million | $1,698.3 million | Down 2.8% |
| Installations and services sales | $302.1 million | $308.3 million | Down 2.0% |
| Total gross profit | $470.8 million | $484.2 million | Down 2.8% |
| Gross margin | 24.1% | 24.1% | Approximately flat |
| Operating income | $62.5 million | $60.5 million | Up 3.5% |
| Net income | $31.9 million | $35.3 million | Down 9.5% |
| Net income per limited partner unit | $0.81 | $0.85 | Down $0.04 |
| Adjusted EBITDA | $96.9 million | $110.3 million | Down 12.2% |
| Cash flow from operating activities | $123.7 million | $33.9 million | Up $89.8 million |
- Home heating oil and propane volume declined 12.5% to 259.2 million gallons, primarily because fiscal 2023 temperatures were 7.7% warmer than fiscal 2022 and 16.3% warmer than normal in the New York City metropolitan area.
- Motor fuel and other petroleum-product volume declined 7.4% to 139.0 million gallons.
- Home heating oil and propane gross margin increased to $1.5496 per gallon from $1.3935 per gallon, but the margin improvement did not offset lower volume.
- Interest expense increased 48.3% to $15.5 million as the weighted-average interest rate increased from 3.7% to 6.5%.
- The fiscal 2023 effective income tax rate was 30.4%, compared with 28.0% in fiscal 2022.
- At September 30, 2023, cash and cash equivalents were $45.2 million; accounts receivable were $114.1 million and inventory was $56.5 million.
Liquidity, Debt and Distributions
- Total debt at September 30, 2023 was $148.1 million carrying value, consisting primarily of a $147.8 million senior secured term loan and $0.2 million of revolver borrowings. Fair-value debt was $148.7 million.
- The credit agreement provides a $400 million revolving facility, increasing to $550 million during the December-April heating season, and a $165 million term loan. Both mature July 6, 2027.
- Availability under the credit agreement was $202.1 million, with $3.2 million of letters of credit outstanding; the Company was in compliance with its financial covenants.
- Fiscal 2023 distributions totaled $23.7 million, including $22.5 million to common unitholders and $1.2 million to general partner unitholders. The quarterly common-unit distribution was $0.1625, or $0.65 annualized.
- The September 2023 credit agreement amendment temporarily reduced certain fixed-charge-coverage requirements for distributions and unit repurchases through February 27, 2024.
- The Company repurchased approximately 489,000 common units for $4.5 million during fiscal 2023.
Material Changes Versus the Prior Comparable Period
- Warmer weather sharply reduced heating-oil and propane volume, while net customer attrition improved modestly to 3.6% from 3.7%.
- Product gross profit declined $12.2 million despite higher heating-oil and propane per-gallon margins.
- Adjusted EBITDA declined $13.5 million, primarily because lower volume exceeded the benefit from improved margins and a larger weather-hedge recovery.
- Cash flow from operations improved substantially because of lower receivables and inventory balances and higher customer credit balances.
- The Company acquired one propane and two heating-oil businesses for approximately $19.8 million, compared with five heating-oil acquisitions for approximately $15.6 million in fiscal 2022.
- Fiscal 2023 included a $12.5 million weather-hedge benefit, compared with $1.1 million in fiscal 2022. Commodity derivatives produced a $2.0 million income-statement charge in fiscal 2023 versus a $17.3 million charge in fiscal 2022.
Guidance, Outlook, Commentary and Risks
- Management expects fiscal 2024 maintenance capital expenditures of approximately $11.5 million, leased-fleet capital requirements of approximately $11.7 million, and approximately $2.2 million of investment in propane operations.
- At the current quarterly distribution rate, fiscal 2024 distributions are estimated at approximately $23.1 million to common unitholders, $1.3 million to general partner unitholders and $1.2 million to management under the incentive plan.
- Quarterly term-loan amortization is approximately $4.1 million, with approximately $4.0 million of additional fiscal 2024 excess-cash-flow repayment expected.
- For fiscal 2024, the Company contracted for approximately 76% of expected heating-oil and propane requirements and approximately 43% of expected diesel and gasoline requirements. Approximately 76% of contracted heating-oil volume includes a biofuel component.
- Key risks include warm weather, declining heating-oil demand, conversions to natural gas and electricity, climate-related regulation, wholesale price volatility, supply disruptions, customer attrition, interest-rate increases, union negotiations, underfunded multiemployer pension plans, environmental liabilities, cyberattacks and counterparty risk.
- New York, New York City and Massachusetts climate initiatives could reduce demand for fossil-fuel heating products. A legal challenge to New York's fossil-fuel ban was pending and in its early stages at the filing date.
- Self-insurance liabilities were approximately $77.5 million at September 30, 2023. KPMG identified evaluation of these liabilities as a critical audit matter.
- Subsequent to year-end, the Company acquired two heating-oil businesses for approximately $2.5 million.
Important Facts for Investors to Verify
- Whether fiscal 2024 weather, heating degree days and customer consumption support recovery from the fiscal 2023 volume decline.
- Whether the fiscal 2023 heating-oil and propane margin of $1.5496 per gallon is sustainable.
- Compliance with fixed-charge-coverage and leverage covenants after the temporary relief period ends, particularly while distributions, repurchases and acquisitions continue.
- The effect of higher interest rates on cash flow and the ability to repay or refinance the term loan due in 2027.
- Customer attrition, including the estimated 1.6% fiscal 2023 loss from natural-gas and electricity conversions.
- The financial and operational impact of climate regulations, environmental remediation, union renewals and multiemployer pension obligations.
- The volatility of reported earnings from marking commodity derivatives to market and the difference between Adjusted EBITDA and cash available for debt service or distributions.