Star Group, L.P. Form 10-Q Summary
Business Context and Reporting Period
Star Group, L.P. is a Northeast, Mid-Atlantic and Southeast U.S. distributor of home heating oil, propane, gasoline and diesel fuel, and provides heating, air-conditioning, plumbing and related services. At June 30, 2021, it served approximately 430,800 full-service residential and commercial heating-oil and propane customers, 68,900 delivery-only customers and approximately 26,900 gasoline and diesel customers.
This unaudited report covers the three and nine months ended June 30, 2021, the third quarter and first nine months of fiscal 2021. Results are highly seasonal, with typical net losses in the June and September quarters.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Nine Months Ended June 30 |
|---|---|---|
| Total sales | $283.1 million, up 21.9% | $1,260.5 million, down 1.8% |
| Net income (loss) | $(12.1) million, versus $(0.05) million | $111.0 million, up 28.8% |
| Limited partners’ income (loss) | $(12.0) million; $(0.30) per unit | $110.1 million; $2.24 per unit |
| Operating income (loss) | $(13.8) million | $160.7 million |
| Adjusted EBITDA | $(9.9) million, versus $5.7 million | $155.2 million, versus $157.6 million |
| Cash flow from operations | Not separately reported for the quarter | $59.5 million, versus $156.3 million |
Quarterly product sales rose to $205.0 million from $165.2 million, primarily because higher selling prices more than offset lower heating-oil and propane volume. Installation and service revenue increased 16.5% to $78.1 million. Nine-month product sales declined 3.2% to $1.045 billion, while installation and service revenue increased 5.3% to $215.8 million.
For the quarter, home heating oil and propane volume declined 25.9% to 38.0 million gallons because temperatures were 24.1% warmer than the prior-year quarter and 5.2% warmer than normal. Motor fuel and other petroleum volume increased 19.1% to 40.8 million gallons. For the nine-month period, heating-oil and propane volume declined 3.2% to 285.1 million gallons, while motor fuel and other petroleum volume increased 1.7% to 114.1 million gallons.
Home heating oil and propane gross margin increased to $1.2704 per gallon from $1.2174 in the quarter and to $1.3419 from $1.2984 for the nine-month period. Total product gross profit was $58.9 million for the quarter, down 18.0%, and $412.9 million for the nine-month period, essentially unchanged. Service and installation gross profit was $11.2 million for the quarter and $15.2 million for the nine-month period, modestly below the comparable periods.
Cash Flow, Debt and Liquidity
- Cash, cash equivalents and restricted cash declined to $5.8 million at June 30, 2021 from $57.2 million at September 30, 2020; cash and cash equivalents alone were $5.5 million.
- Operating cash flow was $59.5 million, including unfavorable working-capital effects from receivables, inventories and customer credit balances.
- Investing cash outflow was $46.9 million, including $40.7 million of acquisition spending and $11.7 million of capital expenditures, partly offset by $6.1 million of proceeds from sold propane assets.
- Financing cash outflow was $64.0 million, including $9.8 million of term-loan repayments, $36.7 million of unit repurchases and $17.5 million of distributions.
- Total debt was $113.2 million, consisting of a $130 million senior secured term loan with $13.0 million classified as current. There were no revolving-credit borrowings.
- Revolving-credit availability was $195.7 million, with $3.1 million of letters of credit outstanding. The credit facilities mature December 4, 2024.
- The Company reported compliance with its fixed-charge coverage and senior secured leverage covenants. Approximately $60.3 million, or 53%, of long-term debt was fixed through interest-rate swaps.
Material Changes Versus the Prior Comparable Period
- Third-quarter profitability deteriorated substantially as warmer weather reduced heating volume and prior-year COVID-19 restrictions had depressed the comparison base for service and operating expenses.
- Nine-month net income improved by $24.9 million, primarily because derivative fair values produced a $30.3 million favorable operating adjustment versus a $2.0 million unfavorable adjustment in the prior year.
- Adjusted EBITDA declined modestly for the nine-month period because higher heating-oil and propane margins and base-business cost savings were offset by lower volume and a $6.7 million reduction in the weather-hedge benefit.
- Customer attrition increased: the Company reported a net loss of 11,600 heating-oil and propane accounts, or 2.7% of the customer base, versus a net loss of 10,400 accounts, or 2.2%, in the prior-year period.
- The Company acquired two propane and three heating-oil dealers for approximately $42.5 million and sold certain propane assets, including approximately 12,300 customers, for approximately $7.0 million.
- Common units outstanding declined through repurchases and retirement. The Company repurchased 3.7 million units for $36.7 million during the nine-month period.
Guidance, Outlook, Risks and Unusual Items
- Management expects approximately $2.5 million to $3.5 million of maintenance capital expenditures for the remainder of fiscal 2021, excluding leased-fleet requirements, plus less than $1.0 million for propane operations.
- At the then-current quarterly distribution of $0.1425 per unit, remaining fiscal 2021 distributions were expected to total approximately $5.6 million to common unitholders, $0.3 million to general-partner unitholders and $0.2 million to management. A July 2021 distribution of $0.1425 per unit was declared and paid August 3, 2021.
- Management expected to continue unit repurchases and pursue acquisitions, subject to liquidity, covenant and credit-facility constraints.
- COVID-19 continued to create staffing pressure, higher wage requirements and procurement disruptions for certain home generators. The Company estimated annual COVID-related operating costs of less than $1.0 million but could not estimate the pandemic’s ultimate financial impact.
- Higher wholesale product costs can increase receivables, inventory, hedging collateral and borrowing needs. Price volatility can also increase customer attrition and bad-debt risk.
- Weather remains a major earnings and cash-flow driver. A fiscal 2022 weather hedge provided potential payments capped at $7.5 million, with no payment obligation beyond the contract cost.
- Derivative fair-value changes create significant non-cash earnings volatility. The nine-month 2021 benefit was $30.3 million. A hypothetical 10% increase in product costs would have increased derivative fair value by approximately $9.8 million, while a 10% decrease would have reduced it by approximately $8.5 million.
- As of July 31, 2021, home heating-oil prices were materially higher than the prior year, potentially making price-protected customer renewals less attractive and affecting renewal rates, profitability and liquidity.
- Management stated that ordinary-course litigation and contingencies were not expected to have a material adverse effect, although insurance may not cover all future claims or losses.
Important Facts for Investors to Verify
- Whether warmer weather, customer attrition and higher renewal prices affect fiscal 2022 heating volume and margins.
- Whether the large nine-month derivative gain is reversed or offset as hedged product is sold and settled.
- Whether operating cash flow recovers after the significant working-capital use and cash balance decline.
- Compliance with debt covenants and availability under the borrowing-base revolver during the next heating season.
- Integration results and returns from the five fiscal 2021 acquisitions, and the effect of the propane-asset divestiture.
- The sustainability of distributions and unit repurchases given low cash balances, scheduled term-loan repayments and seasonal liquidity needs.