Star Group, L.P. 10-Q Summary
Business Context and Reporting Period
Star Group, L.P. is a Northeast, Central and Southeast U.S. distributor of home heating oil, propane and other petroleum products, with installation, service, security and plumbing operations. The filing covers the fiscal quarter ended December 31, 2017. The business is highly seasonal, with approximately 30% of annual heating-oil and propane volume typically sold in the first fiscal quarter and 50% in the second quarter.
At December 31, 2017, the company served approximately 461,000 full-service residential and commercial home-heating-oil and propane customers, 76,000 delivery-only customers, 14,000 service-contract customers and 31,000 home-security and plumbing customers.
Financial Performance and Key Metrics
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Total sales | $436.8 million | $384.1 million | 13.7% increase |
| Product sales | $366.7 million | $316.3 million | 15.9% increase |
| Installations and services | $70.1 million | $67.8 million | 3.4% increase |
| Operating income | $31.1 million | $33.2 million | 6.5% decrease |
| Net income | $30.2 million | $18.3 million | 65.2% increase |
| Limited-partner earnings per unit | $0.45 | $0.28 | Increase |
| Adjusted EBITDA | $27.4 million | $31.2 million | 12.3% decrease |
| Cash used in operating activities | $63.2 million | $65.5 million | $2.3 million improvement |
Reported operating margin was approximately 7.1%, compared with 8.7% in the prior-year quarter. Net margin was approximately 6.9%, compared with 4.8%. Adjusted EBITDA margin declined to approximately 6.3% from 8.1%.
- Heating-oil and propane volume increased 3.9% to 103.4 million gallons. Other petroleum-product volume increased 4.3% to 30.7 million gallons.
- Heating-oil and propane gross margin increased to $1.1193 per gallon from $1.0928 per gallon. Total product gross profit increased 6.2% to $123.9 million.
- Installation and service gross profit declined to approximately $0.5 million from $1.3 million, primarily due to the cost structure of acquired operations.
- Cash, cash equivalents and restricted cash totaled $21.4 million at December 31, 2017, down from $52.7 million at September 30, 2017.
- Receivables increased to $192.6 million from $96.6 million and inventories increased to $71.5 million from $59.6 million, reflecting seasonal working-capital requirements and higher sales and product costs.
- Total debt was $152.4 million, consisting of $79.1 million of revolving borrowings and $73.3 million of term debt. The company reported $185.8 million of borrowing availability and compliance with its financial covenants.
Material Changes Versus the Prior Comparable Period
- Sales benefited from a 4.0% increase in total volume and a 16.9% increase in wholesale product cost, which increased reported product revenue.
- Operating income and Adjusted EBITDA declined despite higher sales because of increased base-business operating costs, a $3.1 million weather-hedge charge, lower base-business volume and weaker installation and service profitability.
- The company recorded an $11.5 million provisional tax benefit from the Tax Cuts and Jobs Act, which reduced the reported effective tax rate to negative 5.3% and was the principal reason net income increased.
- Delivery and branch expenses increased 12.4% to $91.2 million, including the $3.1 million weather-hedge charge and higher acquisition-related, insurance, customer-service, operations and technology costs.
- Cash used in investing activities increased to $37.9 million from $21.8 million, principally because of a $34.2 million deposit into an irrevocable captive-insurance collateral trust, partially offset by lower acquisition spending.
- The company borrowed $79.1 million under its revolving facility, compared with no revolver borrowings in the prior-year quarter, and repaid $2.5 million of term debt versus $8.7 million in the prior year.
- Net customer gains were 4,800, or 1.0% of the home-heating-oil and propane customer base, compared with 5,200, or 1.2%, in the prior-year quarter.
Outlook, Commentary, Risks and Unusual Items
- Management expects the unusually cold final week of December, which was more than 40% colder than normal, to benefit deliveries in the second fiscal quarter. The filing does not provide formal annual revenue or earnings guidance.
- Maintenance capital expenditures for the remainder of fiscal 2018 are estimated at approximately $7.0 million to $8.0 million, excluding leased-fleet requirements, plus approximately $1.4 million of planned propane investment.
- At the current quarterly distribution of $0.11 per unit, remaining fiscal 2018 distributions are estimated at approximately $18.4 million to common unitholders, $0.5 million to the general partner and $0.4 million to management. Quarterly term-loan payments are $2.5 million, with a possible additional excess-cash-flow payment.
- Fiscal 2018 weather contracts provide for a maximum receipt of $17.5 million and a maximum payment of $5.0 million. A $3.1 million liability was recorded at December 31, 2017 for an expected payment; the amount may change with second-quarter weather.
- More than 98% of heating-oil hedges for price-protected customers were at their strike price. A greater proportion of price-protected customers may constrain future per-gallon margin expansion relative to variable-price customers.
- The company changed its federal tax classification from partnership to corporation effective November 1, 2017. It expects unitholders to receive Form 1099-DIV rather than Schedule K-1 for tax years after December 31, 2017.
- Operating leases had undiscounted future minimum payments of approximately $131.1 million through 2032. The company expects the future lease-accounting standard to materially change its balance sheet, but cannot yet estimate the discounted assets and liabilities.
- A putative class-action lawsuit alleges that customers did not receive expected benefits under protected-price contracts. No class had been certified, the company had moved to dismiss, and the potential outcome or materiality could not be assessed.
- Key risks include weather variability, commodity-price volatility, customer credit and attrition, natural-gas conversions, working-capital needs, variable-rate debt, derivative valuation volatility, litigation, environmental and safety matters, labor relations and counterparty risk.
Most Important Facts for Investors to Verify
- Whether reported earnings growth is sustainable without the $11.5 million provisional tax benefit.
- Whether Adjusted EBITDA and operating margins recover after the weather-hedge charge and higher base-business costs.
- Seasonal cash generation, revolver utilization and compliance with fixed-charge and leverage covenants during the remaining heating season.
- The final tax accounting impact of the Tax Cuts and Jobs Act and the effect of the new corporate tax structure on distributions and cash taxes.
- The outcome and potential exposure from the protected-price customer litigation.
- Weather-hedge settlement amounts, actual heating demand and the effect of the growing price-protected customer mix on future margins.