Star Group, L.P. — Form 10-Q Summary
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, and a provider of heating, air-conditioning installation, maintenance and repair services. The filing covers the three and six months ended March 31, 2024, the Company’s fiscal second quarter and first half of fiscal 2024. Results are seasonal, with the December and March quarters generally generating income and the June and September quarters generally generating losses.
At March 31, 2024, the Company served approximately 403,700 full-service residential and commercial heating oil and propane customers, 60,800 delivery-only customers, approximately 26,700 gasoline and diesel customers, and approximately 20,700 natural gas and other heating service-contract customers.
Key Financial Metrics
| Metric | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Six Months Ended March 31, 2024 | Six Months Ended March 31, 2023 |
|---|---|---|---|---|
| Total sales | $666.0 million | $737.6 million | $1,194.1 million | $1,385.8 million |
| Operating income | $100.3 million | $91.5 million | $122.0 million | $115.1 million |
| Net income | $68.4 million | $62.0 million | $81.4 million | $75.6 million |
| Net income per limited partner unit | $1.56 | $1.42 | $1.88 | $1.74 |
| Adjusted EBITDA | $96.3 million | $102.2 million | $145.4 million | $151.2 million |
| Net cash provided by operating activities | Not separately presented | Not separately presented | $(5.2) million | $(13.8) million |
Three-month operating margin was approximately 15.1%, compared with 12.4% in the prior-year quarter. Six-month operating margin was approximately 10.2%, compared with 8.3%. Net margin was approximately 10.3% for the quarter and 6.8% for the six-month period.
- Product sales declined 11.0% in the quarter and 15.8% year to date, primarily from lower wholesale prices and lower volume.
- Installation and service revenue increased 3.4% in the quarter and 2.5% year to date.
- Home heating oil and propane volume declined 3.3% in the quarter to 117.1 million gallons and 6.2% year to date to 197.3 million gallons.
- Underlying home heating oil and propane gross margin increased to $1.6768 per gallon in the quarter and $1.6764 per gallon year to date, compared with $1.5929 and $1.5727, respectively.
- Six-month cash used in investing activities was $29.2 million, including $22.6 million for acquisitions and $6.0 million of capital expenditures.
- Cash, cash equivalents and restricted cash declined to $12.3 million at March 31, 2024 from $45.4 million at September 30, 2023.
Debt, Liquidity and Capital Allocation
- Total debt was $164.9 million at March 31, 2024, consisting of $135.7 million under the senior secured term loan and $29.2 million under the revolving credit facility.
- The term loan and revolving facility mature July 6, 2027. The revolving facility provides borrowing capacity of $400 million, increasing to $550 million during the December-through-April heating season, subject to borrowing-base and covenant limitations.
- Reported availability was $221.8 million, and the Company was in compliance with its financial covenants at March 31, 2024.
- Six-month financing activities included $12.3 million of term-loan repayments, $2.5 million of unit repurchases and $12.2 million of distributions. Net financing cash flow was $1.3 million.
- The Company expects approximately $7.0 million to $8.0 million of maintenance capital expenditures and $1.0 million to $2.0 million of propane-operation investment during the remainder of fiscal 2024. It expects $8.3 million of additional term-loan repayments during that period.
- In April 2024, the Company declared a quarterly distribution of $0.1725 per unit, paid May 8, 2024, and repurchased approximately 0.1 million units at an average price of $10.58 per unit.
Material Changes Versus the Prior Comparable Period
- Net income increased 10.2% in the quarter and 7.6% for the six-month period, despite lower sales and lower Adjusted EBITDA.
- The quarterly improvement in net income was driven substantially by a favorable $14.8 million year-over-year change in the fair value of commodity derivatives and lower interest expense.
- Six-month Adjusted EBITDA decreased $5.9 million, primarily because of lower heating oil and propane volume and a $5.0 million reduction in the weather-hedge benefit.
- Customer attrition worsened: the Company lost 5,800 heating oil and propane accounts, or 1.5% of the customer base, in the six-month period, compared with net attrition of 1,800 accounts, or 0.4%, in the prior-year period.
- Receivables increased to $198.3 million from $114.1 million at September 30, 2023, while customer credit balances declined to $51.3 million from $111.5 million.
- The Company acquired one propane and three heating oil businesses for approximately $22.6 million, compared with approximately $1.2 million spent on acquisitions in the prior-year period.
Outlook, Risks and Unusual Items
The Company does not provide formal revenue or earnings guidance in the filing. Management expects liquidity to be supported by operating cash flows, cash on hand and, if necessary, the revolving credit facility, with seasonal reductions in receivables and inventory expected to support cash generation later in the fiscal year.
- Warm weather remains a material risk to heating oil and propane demand. Fiscal 2024 temperatures through March 31 were 14.7% warmer than normal on a six-month basis. The fiscal 2024 weather hedge generated a $7.5 million benefit, compared with $12.5 million in the prior-year period.
- Commodity prices and derivative mark-to-market changes can materially affect reported earnings. Commodity derivative results produced an $11.8 million quarterly credit but a $7.3 million six-month charge.
- Other risks include wholesale price volatility, customer credit losses, customer attrition, natural gas and electricity conversions, inflation, labor shortages, union relations, insurance costs, environmental and climate regulation, cyberattacks, supply-chain disruptions and counterparty risk.
- Approximately 39% of variable-rate long-term debt was protected by interest-rate swaps at March 31, 2024. A hypothetical 100-basis-point increase in applicable interest rates would reduce annual after-tax cash flow by approximately $0.8 million.
- The Company self-insures portions of workers’ compensation, automobile, general liability and medical claims. Management disclosed approximately $77.5 million of self-insurance liabilities at September 30, 2023; ultimate claims could differ from estimates.
- The Company stated that existing legal proceedings are not expected to have a material adverse effect, although insurance may not cover all potential claims or losses.
- The filing states that disclosure controls and procedures were effective as of March 31, 2024 and that no material change occurred in internal control over financial reporting during the quarter.
Investor Verification Items
- Verify whether seasonal spring and summer operating cash flows reduce working-capital borrowings and rebuild liquidity after the $5.2 million six-month operating cash outflow.
- Monitor customer attrition, price-protected account renewals and conversions to natural gas or electricity.
- Assess sustainability of the $1.6764 per-gallon year-to-date heating oil and propane margin amid commodity-price volatility.
- Reconcile reported net income with lower Adjusted EBITDA and evaluate the effect of derivative mark-to-market and weather-hedge items.
- Track compliance with leverage and fixed-charge coverage covenants as acquisitions, distributions and unit repurchases continue.
- Review acquisition integration, goodwill and intangible-asset balances following the $22.6 million of fiscal 2024 acquisitions.
- Confirm the Company’s ability to fund planned capital expenditures, term-loan repayments and distributions with limited cash on hand and variable-rate debt exposure.