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, with installation, maintenance and repair services. The company served approximately 403,900 full-service residential and commercial heating customers, 77,200 delivery-only customers and 26,900 gasoline and diesel customers at June 30, 2023. The filing covers the fiscal quarter and nine months ended June 30, 2023; results are unaudited and highly seasonal.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Nine Months Ended June 30 |
|---|---|---|
| Total sales | $300.1 million | $1,685.9 million |
| Operating income (loss) | $(29.6) million | $85.5 million |
| Net income (loss) | $(23.9) million | $51.7 million |
| Limited partners’ income (loss) per unit | $(0.67) | $1.23 |
| Adjusted EBITDA | $(22.9) million | $128.3 million |
| Cash provided by operating activities | Not separately provided for the quarter | $102.7 million |
- Quarterly product sales were $223.6 million and installations and services revenue was $76.6 million. Year-to-date amounts were $1,462.7 million and $223.2 million, respectively.
- Reported total sales decreased 31.7% in the quarter and 1.4% year to date versus the prior comparable periods.
- Quarterly net loss increased from $10.6 million to $23.9 million. Year-to-date net income decreased from $85.3 million to $51.7 million.
- Year-to-date operating margin was approximately 5.1%; the quarterly operating margin was approximately negative 9.9%. The filing does not present a consolidated gross margin percentage.
- Heating oil and propane volume declined 26.2% in the quarter to 30.1 million gallons and 13.1% year to date to 240.4 million gallons. Reported heating oil and propane margins increased to $1.4454 per gallon in the quarter and $1.5567 per gallon year to date, before derivative fair-value effects.
- Cash, cash equivalents and restricted cash totaled $57.4 million at June 30, 2023, including $57.1 million of unrestricted cash and cash equivalents.
- Total debt was $152.1 million, consisting primarily of $151.9 million of senior secured term-loan debt and $0.2 million of revolver borrowings. Debt carrying value declined from $184.4 million at September 30, 2022.
- Revolver availability was $218.0 million, with $3.1 million of letters of credit outstanding and $9.8 million of hedge positions secured under the credit agreement. The company reported compliance with its financial covenants.
Material Changes Versus Prior Comparable Period
- Quarterly product sales fell $134.6 million, primarily because total volume declined 16.4% and average selling prices decreased as wholesale product costs fell.
- Year-to-date product sales decreased $19.3 million despite higher wholesale product costs, as total volume declined 11.6%.
- Warmer weather materially reduced demand. Nine-month temperatures were 7.7% warmer than the prior year and 16.3% warmer than normal; management described the period as the third warmest in 123 years in the New York City metropolitan area.
- Year-to-date Adjusted EBITDA declined $12.8 million to $128.3 million. The volume reduction more than offset higher per-gallon margins and an $11.4 million increase in the weather-hedge benefit.
- Derivative fair-value accounting shifted from an $11.9 million benefit in the prior-year nine-month period to a $19.6 million expense in 2023, a $31.5 million unfavorable change.
- Net interest expense increased 69.8% year to date to $12.6 million as the weighted-average interest rate rose from 3.2% to 6.3%, partially offset by lower borrowings.
- Operating cash flow improved by $134.1 million, from $31.4 million used in operations to $102.7 million provided. The improvement primarily reflected collections of receivables and lower cash required for liquid-product inventory.
- The company acquired two heating-oil dealers for approximately $1.2 million in cash and sold certain assets for $2.2 million. In the prior-year comparable period, it acquired five dealers for approximately $13.1 million in cash.
- The company repurchased approximately 0.5 million common units for $4.5 million year to date, versus 2.6 million units for $27.3 million in the prior-year period.
Outlook, Risks, Contingencies and Unusual Items
- Management expects near-term capital requirements to be funded by operating cash flow and the $57.1 million of cash on hand; the revolver is available to finance seasonal working-capital needs if required.
- Maintenance capital expenditures for the remainder of fiscal 2023 were estimated at approximately $3.0 million to $5.0 million, excluding leased-fleet requirements, plus approximately $0.5 million for propane operations.
- The term loan requires quarterly payments of approximately $4.1 million; management expected to make one such payment during the remainder of fiscal 2023.
- A quarterly distribution of $0.1625 per common unit was declared in July 2023 and paid July 31, 2023. Future distributions and unit repurchases remain subject to cash generation and credit-agreement covenants.
- The fiscal 2024 weather hedge has a maximum potential annual receipt of $12.5 million and no obligation beyond the initial premium if degree days exceed the applicable threshold. Fiscal 2023 weather-hedge benefits totaled $12.5 million.
- Key risks include weather variability, wholesale fuel-price volatility, customer conservation and attrition, credit losses, interest-rate increases, labor shortages, supply-chain disruption, environmental and regulatory requirements, cyberattacks, litigation, insurance adequacy and the transition to natural gas or alternative heating technologies.
- Commodity derivatives are not designated as accounting hedges, so changes in their fair value can create substantial earnings volatility before the related physical sales occur. At June 30, 2023, net derivative liabilities were approximately $10.5 million on the balance sheet.
- The company reported $16.3 million of remaining NETTI Fund withdrawal liability, including $0.3 million current and $16.0 million long term. Management does not expect existing litigation to have a material adverse effect, but insurance may not cover all potential claims.
Investor Verification Items
- Verify whether unusually warm weather and the $12.5 million weather-hedge benefit are distorting current operating trends and how margins perform without that benefit.
- Assess the sustainability of the reported $1.5567 per-gallon year-to-date heating-oil and propane margin amid fuel-price volatility and lower volumes.
- Review revolver availability, borrowing-base eligibility, leverage and fixed-charge coverage requirements before relying on planned distributions, repurchases or acquisitions.
- Reconcile the improvement in operating cash flow with the decline in earnings and monitor receivable collections, customer credit balances and inventory levels.
- Track customer attrition, protected-price contract renewals and natural-gas conversions; management reported a 2.2% net loss of heating-oil and propane accounts for the nine-month period.
- Evaluate exposure to variable interest rates: $96.4 million of outstanding borrowings were subject to variable rates, and a 100-basis-point increase was estimated to reduce annual after-tax cash flow by $0.7 million.