Star Group, L.P. — Fiscal 2022 Form 10-K Summary
Reporting period: Fiscal year ended September 30, 2022, with quarterly data for the quarter ended September 30, 2022. Star is a Northeast and Mid-Atlantic distributor of home heating oil, propane, diesel and gasoline, and provider of heating, air-conditioning and related services. It served approximately 415,900 full-service customers, 75,900 delivery-only customers and 26,600 motor-fuel customers at September 30, 2022.
Financial performance and key metrics
| Metric | Fiscal 2022 | Fiscal 2021 | Change |
|---|---|---|---|
| Total sales | $2.007 billion | $1.497 billion | +34.0% |
| Product sales | $1.698 billion | $1.204 billion | +41.0% |
| Installations and services sales | $308.3 million | $292.8 million | +5.3% |
| Operating income | $60.5 million | $130.2 million | -53.6% |
| Net income | $35.3 million | $87.7 million | -59.8% |
| Net income per limited partner unit | $0.85 | $1.82 | -53.3% |
| Adjusted EBITDA | $110.3 million | $127.5 million | -13.5% |
| Cash flow from operations | $33.9 million | $68.9 million | -$35.0 million |
| Capital expenditures | $18.7 million | $15.1 million | +$3.6 million |
Reported sales growth primarily reflected higher selling prices: wholesale product cost increased approximately $1.1379 per gallon, or 69.4%, while total volumes declined. Home heating oil and propane volume fell 3.2% to 296.1 million gallons, and motor fuel and other petroleum volume fell 2.6% to 150.1 million gallons. Home heating oil and propane gross margin increased to $1.3935 per gallon from $1.3366.
Gross profit from products, installations and services was approximately $484.2 million, compared with $477.7 million in fiscal 2021. Product gross profit increased $9.0 million to $458.7 million, but service and installation profitability declined $2.4 million to $25.6 million. The change in fair value of commodity derivatives was a $17.3 million expense in fiscal 2022 versus a $36.1 million benefit in fiscal 2021, reducing operating income and net income.
Fiscal 2022 net income also reflected higher delivery and branch expenses, increased bad-debt and credit-card costs, higher vehicle fuel and labor costs, and increased interest expense. The effective income tax rate was approximately 28.0%, compared with 27.7% in fiscal 2021.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $14.6 million at September 30, 2022, compared with $4.8 million a year earlier.
- Accounts receivable increased to $138.3 million from $99.7 million, and inventories increased to $83.6 million from $61.2 million, primarily reflecting higher product costs and seasonal working-capital needs.
- Total debt was $185.3 million at fair value, including $165.0 million of term debt and $20.3 million drawn on the revolving facility. Letters of credit totaled $5.1 million.
- Availability under the new credit agreement was $189.4 million at September 30, 2022. The Company was in compliance with its fixed-charge coverage and senior secured leverage covenants.
- On July 6, 2022, Star refinanced its facilities with a $165 million senior secured term loan and a $400 million revolving facility, expandable to $550 million during the December-through-April heating season. Both mature July 6, 2027.
- Approximately $131.3 million of debt was subject to variable interest rates at year-end. A 100-basis-point increase in applicable rates would reduce annual after-tax cash flow by approximately $0.9 million.
- Operating cash flow was reduced by higher receivables, inventory and hedging requirements. Star stated that seasonal working-capital cash needs increased by more than $100 million during fiscal 2022.
- Fiscal 2022 distributions declared were $0.590 per common unit. The quarterly distribution was increased to $0.1525 per unit, or $0.61 annualized, and the fourth-quarter distribution was paid in November 2022.
- Star repurchased approximately 2.95 million common units for $30.8 million during fiscal 2022 and acquired five heating-oil dealers for approximately $15.6 million.
Material changes versus the prior comparable period
- Wholesale energy prices and supply premiums rose sharply, with NYMEX heating oil reaching $5.14 per gallon during fiscal 2022 and prompt-delivery purchases sometimes requiring premiums above the published index.
- Net customer attrition improved modestly to 3.7%, or 15,600 accounts, from 3.9%, or 17,000 accounts. Estimated losses from natural-gas conversions increased to 1.5% from 1.1%.
- Higher prices and inflation increased operating expenses, customer credit exposure, working-capital requirements, hedging costs and interest expense.
- Derivative accounting created significant earnings volatility: fiscal 2022 included a $17.3 million charge compared with a $36.1 million credit in fiscal 2021.
- Fiscal 2022 quarterly results remained highly seasonal. Net income was $81.4 million in the second quarter, followed by net losses of $10.6 million and $50.0 million in the third and fourth quarters, respectively.
- The Company sold certain assets, including a customer list of approximately 6,500 customers, for $2.7 million in October 2022. It subsequently acquired two heating-oil dealer customer lists and assets for approximately $1.2 million.
Outlook, risks and unusual items
Management did not provide formal earnings guidance. For fiscal 2023, it expected maintenance capital expenditures of approximately $10.6 million, leased-fleet capital requirements of approximately $10.7 million and propane investments of approximately $2.2 million. At the then-current distribution rate, fiscal 2023 distributions were estimated at approximately $21.8 million to common unitholders, subject to debt-covenant and liquidity restrictions.
- Commodity and supply risk: Approximately 80% of expected fiscal 2023 heating-oil and propane requirements for full-service customers were covered by physical contracts and beginning inventory; the remainder was expected to be purchased in the spot market. Supply shortages or premiums could reduce margins and liquidity.
- Customer and weather risk: High prices may cause conservation, credit losses and attrition. Warm winters reduce heating demand, while colder weather can increase supply and working-capital requirements. Fiscal 2023 weather hedges provided for a potential receipt capped at $12.5 million or a payment capped at $5.0 million, depending on degree days.
- Interest-rate and covenant risk: Higher rates increase costs on variable-rate borrowings. The credit agreement restricts distributions, repurchases, acquisitions, additional debt, liens and other activities, and requires minimum availability and financial ratios.
- Structural and regulatory risk: Natural-gas and electric conversions, energy efficiency, heat pumps, climate legislation and New York State and New York City emissions rules could reduce demand for the Company’s fossil-fuel products, particularly because approximately 49% of customers are in the New York City metropolitan area.
- Labor and pension risk: Approximately 45% of employees were unionized, with 25 collective bargaining agreements covering approximately 743 employees up for renewal in fiscal 2023. Several multiemployer pension plans were in the red zone, and the Company had a remaining NETTI Fund withdrawal liability of approximately $16.5 million.
- Insurance and litigation: Self-insurance liabilities were approximately $79.9 million. The Company was not party to any material lawsuit, but environmental remediation, spills, accidents and uninsured claims could create additional liabilities.
- Cybersecurity: A July 2021 cyber incident encrypted certain systems and may have exposed employee personal and health information. The Company restored operations and did not believe the incident materially affected results, but future attacks remain a risk.
Important facts for investors to verify
- Whether heating-oil and propane supply availability, spot premiums and customer pricing in fiscal 2023 preserve the reported per-gallon margins.
- Current borrowing levels, borrowing-base availability, fixed-charge coverage and senior secured leverage covenant compliance during the peak heating season.
- The effect of variable interest rates, commodity derivative mark-to-market changes and hedge collateral requirements on cash flow and reported earnings.
- Trends in customer attrition, natural-gas and electricity conversions, bad-debt expense and renewal rates for price-protected customers.
- The actual impact and implementation timing of New York, New York City and other climate-related regulations on the Company’s customer base and operations.
- Future union negotiations, multiemployer pension obligations and the adequacy of self-insurance reserves and environmental accruals.
- The sustainability of distributions and unit repurchases given seasonal working-capital needs, debt amortization and credit-agreement restrictions.