Star Group, L.P. 2021 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, 2021. The business is highly seasonal: approximately 80% of home heating oil and propane volume is sold during the first and second fiscal quarters, and the company generally reports losses in the third and fourth quarters.
- Served approximately 422,200 full-service home heating oil and propane customers, 71,100 delivery-only customers and 26,700 gasoline and diesel customers at September 30, 2021.
- Fiscal 2021 volume consisted of 305.9 million gallons of home heating oil and propane and 154.1 million gallons of motor fuel and other petroleum products.
- Completed five acquisitions—two propane dealers and three heating oil dealers—for approximately $42.5 million.
- Sold propane assets, including approximately 12,300 customer accounts, for $7.0 million in October 2020.
Financial performance and key metrics
| Metric | Fiscal 2021 | Fiscal 2020 | Change |
|---|---|---|---|
| Total sales | $1,497.1 million | $1,467.5 million | +2.0% |
| Product sales | $1,204.3 million | $1,186.0 million | +1.5% |
| Installations and services | $292.8 million | $281.4 million | +4.0% |
| Operating income | $130.2 million | $93.0 million | +40.0% |
| Net income | $87.7 million | $55.9 million | +56.9% |
| Limited partner interest in net income | $87.0 million | $55.5 million | +56.7% |
| Income per limited partner unit | $1.82 | $1.07 | +$0.75 |
| Adjusted EBITDA | $127.5 million | $130.3 million | -2.1% |
| Cash provided by operating activities | $68.9 million | $175.7 million | -60.8% |
Reported gross profit from products, installations and services was $477.7 million, implying an approximate 31.9% gross margin. Operating margin was approximately 8.7% and net margin was approximately 5.9%. These margins include a $36.1 million favorable change in the fair value of derivative instruments, primarily a non-cash gain on unexpired hedges.
- Home heating oil and propane volume declined 2.4% to 305.9 million gallons, reflecting warmer weather, customer attrition and the propane asset sale; acquisitions partially offset the decline.
- Home heating oil and propane gross margin increased to $1.3366 per gallon from $1.2956 per gallon.
- Installation and service gross profit increased modestly to $28.0 million from $27.7 million. Service expense rose as activity recovered from COVID-19 disruptions.
- Adjusted EBITDA declined despite improved product margins because of lower volume and a $6.7 million reduction in the weather-hedge benefit.
- Interest expense declined to $7.8 million from $9.7 million as average borrowings and the weighted-average interest rate decreased.
- Fiscal 2020 included a $5.7 million impairment charge on propane assets held for sale; no comparable charge occurred in fiscal 2021.
Fourth-quarter results
| Three months ended September 30 | 2021 | 2020 |
|---|---|---|
| Sales | $236.6 million | $183.3 million |
| Operating income (loss) | $(30.5) million | $(36.1) million |
| Net income (loss) | $(23.2) million | $(30.2) million |
| Limited partner loss per unit | $(0.58) | $(0.68) |
Fourth-quarter losses improved year over year, consistent with the company’s normal seasonal pattern. The filing does not provide a separate fourth-quarter Adjusted EBITDA figure.
Cash flow, debt and liquidity
- Operating cash flow was $68.9 million, down from $175.7 million, primarily because of unfavorable changes in receivables, inventory, collateral posted with derivative counterparties, payroll timing and deferred payroll taxes.
- Capital expenditures were $15.1 million. Acquisition spending was $40.7 million in cash, and proceeds from the propane asset sale were $6.1 million.
- Financing cash outflows were $70.7 million, including $13.0 million of term-loan repayments, $23.4 million of distributions and $42.8 million of unit repurchases.
- Cash and cash equivalents fell to $4.8 million from $56.9 million. Cash, cash equivalents and restricted cash totaled $5.0 million at year-end.
- Total debt was $118.6 million at September 30, 2021, consisting of $110.0 million of term debt and $8.6 million drawn on the revolver. Letters of credit totaled $3.1 million.
- The credit agreement provides a $130 million senior secured term loan and a $300 million revolving facility, expandable to $450 million during December through April, both maturing December 4, 2024.
- Reported availability was $171.5 million, and the company was in compliance with its fixed-charge coverage and senior secured leverage covenants.
- Operating lease obligations totaled $100.5 million on the balance sheet; undiscounted future operating lease payments were $119.6 million.
Material changes versus the prior comparable period
- Sales increased modestly despite lower heating oil and propane volume, primarily because wholesale petroleum prices were higher and service activity recovered.
- Net customer attrition worsened to 3.9% from 3.4%; net losses were 17,000 accounts versus 15,500 in fiscal 2020.
- Customer losses to natural-gas conversion remained approximately 1.1% of the home heating oil and propane base.
- Net income benefited substantially from a $38.9 million year-over-year swing in derivative fair-value results and the absence of the prior-year asset impairment.
- Cash generation weakened materially because higher product prices increased receivables and inventory and because of other working-capital uses.
- Distributions declared per common unit increased to $0.550 for fiscal 2021 from $0.515, including a fourth-quarter distribution of $0.1425 per unit.
- The company repurchased and retired 4.3 million common units for $42.8 million during fiscal 2021.
Guidance, outlook, risks and unusual items
- Fiscal 2022 maintenance capital expenditures are estimated at approximately $15.8 million, excluding approximately $10.9 million for leased fleet requirements; the company also plans approximately $4.0 million of propane investment.
- At the then-current distribution rate of $0.1425 per quarter, fiscal 2022 distributions were estimated at approximately $22.0 million to common unitholders, $1.1 million to the general partner and $1.0 million to management.
- Approximately 74% of expected fiscal 2022 home heating oil and propane requirements and 29% of expected diesel and gasoline requirements were covered by market-price-based supply contracts. Approximately 60% of contracted home heating oil volume included a biofuel component, versus 7% in fiscal 2021.
- A fiscal 2022 weather hedge could provide up to $12.5 million if heating degree days are below specified thresholds, but could require payments of up to $5.0 million if degree days exceed the thresholds.
- Management expects higher renewal prices for price-protected customers because November 30, 2021 wholesale heating oil prices were approximately $0.69 per gallon above the prior year; renewal acceptance and customer attrition are key uncertainties.
- COVID-19 continued to create staffing, wage, supply-chain and HVAC equipment procurement pressures. The company estimated approximately $2.0 million of annual COVID-related operating costs.
- A July 2021 cybersecurity incident encrypted certain systems and may have involved unauthorized access to employee personal and health information. The company restored operations and did not expect a material financial impact, but its investigation and security evaluation were ongoing.
- Climate regulation, natural-gas conversions, energy efficiency, labor shortages, union negotiations, inflation, product-price volatility, weather and supply-chain disruptions could materially affect demand, margins, liquidity and distributions.
- The company self-insured certain risks and reported $80.6 million of self-insurance liabilities. Its multiemployer pension exposure included a remaining $16.5 million NETTI Fund withdrawal liability on the balance sheet and participation in several underfunded red-zone plans.
- The company had no material pending litigation identified in the filing and stated that known environmental and legal matters were not expected to have a material effect, although remediation and insurance exposures remain.
Most important facts for an investor to verify
- Whether operating cash flow can recover from the fiscal 2021 decline while cash on hand remains low and seasonal working-capital needs rise.
- Compliance with the credit agreement, including the $3.25 million quarterly term-loan amortization, the approximately $4.6 million excess-cash-flow repayment and the December 2024 maturity.
- The sustainability of the $1.3366-per-gallon heating oil and propane margin and the extent to which reported earnings depend on derivative mark-to-market gains.
- Renewal rates for price-protected customers and the trend in 3.9% net customer attrition.
- Effects of warmer weather, natural-gas conversion, climate regulation, biofuel requirements and energy-efficiency adoption on long-term demand.
- Potential cash requirements from self-insurance claims, multiemployer pension plans, environmental remediation, leases and union agreements.
- Whether the July 2021 cybersecurity incident or future incidents create liabilities, remediation costs or operational disruption.
- The company’s ability to fund acquisitions, unit repurchases and distributions while maintaining required liquidity and debt covenants.