Star Group, L.P. — Fiscal 2020 First-Quarter Form 10-Q
Business context and reporting period
Star Group is a Northeast, Central and Southeast U.S. distributor of home heating oil, propane and other petroleum products, with installation, maintenance and repair services. The filing covers the three months ended December 31, 2019, compared with the three months ended December 31, 2018. Results are highly seasonal, with the December and March quarters generally generating income and the June and September quarters generally generating losses. The Company served approximately 454,000 full-service residential and commercial heating customers and 59,000 delivery-only customers at December 31, 2019.
Key financial metrics
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Total sales | $508.9 million | $535.0 million | Down 4.9% |
| Operating income | $42.5 million | $6.1 million | Up $36.4 million |
| Income before taxes | $39.5 million | $3.3 million | Up $36.2 million |
| Net income | $27.8 million | $2.3 million | Up $25.4 million |
| Limited partners’ interest in net income | $27.6 million | $2.3 million | Up $25.3 million |
| Income per limited partner unit | $0.49 | $0.04 | Up $0.45 |
| Adjusted EBITDA | $45.1 million | $44.8 million | Up 0.5% |
| Cash used in operating activities | $51.6 million | $62.9 million | Improved $11.3 million |
Total sales declined primarily because home heating oil and propane volume fell 5.5% to 107.1 million gallons and other petroleum volume fell 1.2% to 41.4 million gallons. Installations and services revenue was essentially flat at $76.3 million.
Operating margin increased to approximately 8.3% from 1.1%, and net margin increased to approximately 5.5% from 0.4%. The comparison was heavily affected by derivative valuation: the Company recorded a $6.4 million favorable change in derivative fair value in Q1 FY2020 versus a $31.0 million unfavorable change in Q1 FY2019. Excluding this mark-to-market effect, Adjusted EBITDA was broadly stable.
At December 31, 2019, cash and cash equivalents were $14.5 million, or $14.8 million including restricted cash. Receivables were $205.0 million and inventories were $80.3 million. Total assets were $969.1 million.
Total debt was $242.0 million carrying value, consisting of $112.7 million of revolving borrowings and $129.3 million carrying value of the senior secured term loan. Operating lease liabilities totaled $108.9 million, including $20.2 million current and $88.7 million long term. Credit-facility availability was $162.4 million, and the Company reported compliance with its financial covenants.
Material changes versus the prior comparable period
- Product sales decreased $26.0 million, or 5.7%, to $432.7 million, driven by lower heating-product volume and lower motor-fuel selling prices.
- Home heating oil and propane gross margin increased modestly to $1.2564 per gallon from $1.2515 per gallon, but total product gross profit declined $7.5 million to $145.0 million because of lower volume.
- Service and installation gross profit improved to $2.6 million from $2.0 million. Installation costs as a percentage of installation sales improved to 81.1% from 82.9%, while service activity remained loss-making before broader overhead considerations.
- Delivery and branch expenses declined $6.0 million, reflecting lower base-business costs and operating efficiencies, partly offset by acquisition costs and a higher weather-hedge charge.
- Net customer gains were approximately 800, or 0.2% of the heating-oil and propane customer base, unchanged from the prior-year quarter. Gross gains and gross losses were each 2,300 lower than the prior year.
- On December 4, 2019, the Company refinanced its credit facilities with a $130 million five-year term loan and a $300 million revolving facility, expandable to $450 million during the December-through-April heating season. Both mature December 4, 2024.
- The Company adopted ASC Topic 842 on October 1, 2019, recognizing $103.5 million of operating lease right-of-use assets at December 31, 2019 and $108.9 million of operating lease liabilities. The adoption materially affected the balance sheet but not reported operating results or cash flows.
- The Company repurchased and retired approximately 1.3 million common units for $12.1 million during the quarter. Approximately 0.3 million units remained available under the repurchase authorization at December 31, 2019.
Guidance, outlook, management commentary, risks and unusual items
Management estimated maintenance capital expenditures of approximately $8.8 million to $9.8 million for the remainder of fiscal 2020, excluding leased fleet requirements, plus approximately $0.8 million to $1.0 million for propane operations. At the then-current quarterly distribution of $0.125 per unit, remaining fiscal 2020 distributions were estimated at approximately $17.4 million to common unitholders, $0.6 million to the general partner and $0.6 million to management.
The term loan requires quarterly principal payments of $3.25 million beginning March 31, 2020, plus a potential annual excess-cash-flow payment subject to the credit agreement. Management expects seasonal working-capital needs to be funded through operating cash flow, cash on hand and the revolving facility.
The first-quarter weather hedge generated a $3.0 million charge because November and December were colder than the hedge threshold; management stated that warmer January 2020 temperatures subsequently resulted in a complete reversal of this charge under the contract terms. Weather, fuel-price volatility, customer attrition, natural-gas conversions, supply availability, interest rates, counterparty credit, litigation, regulation, labor relations, cybersecurity and general economic conditions remain significant risks.
Cash flow was negative despite reported net income because of seasonal working-capital investment, including increases in receivables and inventories. A 100-basis-point increase in variable borrowing rates was estimated to reduce annual after-tax cash flow by approximately $1.7 million. A hypothetical 10% increase in product costs would increase the fair value of outstanding derivatives by approximately $13.7 million; a 10% decrease would reduce fair value by approximately $8.7 million.
Petro is party to a proposed class-action settlement concerning protected-price-plan benefits. The court granted preliminary approval on December 4, 2019. The Company states that the settlement is not an admission of liability; if it is not finalized, the Company cannot assess the potential outcome or materiality.
A quarterly distribution of $0.125 per common unit was declared in January 2020 and paid February 4, 2020. The Company also repurchased and retired approximately 0.2 million additional units from January 1 through January 31, 2020 at an average price of $9.48 per unit.
Most important facts for investors to verify
- Whether the large year-over-year earnings improvement is sustained after the favorable derivative mark-to-market benefit reverses or settles.
- Seasonal liquidity needs, including the ability to fund receivables and inventory while meeting term-loan amortization, distributions and unit repurchases.
- Compliance with availability, fixed-charge coverage and senior secured leverage covenants under the new credit agreement.
- The effect of weather, heating-product volumes, customer attrition and fuel-price volatility on margins and cash flow.
- The final approval, cost and scope of the proposed protected-price-plan class-action settlement.
- The sustainability of the $0.125 quarterly distribution and the Company’s continued unit-repurchase activity.
- The impact of operating lease obligations, captive-insurance collateral requirements and the remaining NETTI Fund withdrawal liability.