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, repair, HVAC and plumbing services. The filing is the fiscal 2018 Form 10-K for the year ended September 30, 2018; the fourth fiscal quarter ended September 30, 2018.
- Served approximately 454,000 full-service residential and commercial heating-oil and propane customers and approximately 76,000 delivery-only customers.
- Fiscal 2018 revenue mix was approximately 65% home heating oil and propane, 19% other petroleum products and 16% installation, repair and ancillary services.
- The Company elected corporate tax treatment effective November 1, 2017, while retaining its Delaware limited partnership legal structure and existing distribution provisions.
Financial Performance and Key Metrics
| Metric | Fiscal 2018 | Fiscal 2017 | Change |
|---|---|---|---|
| Sales | $1.678 billion | $1.324 billion | Up 26.8% |
| Operating income | $66.1 million | $55.3 million | Up 19.4% |
| Net income | $55.5 million | $26.9 million | Up 106.3% |
| Adjusted EBITDA | $86.2 million | $81.0 million | Up 6.4% |
| Net cash from operating activities | $57.5 million | $21.1 million | Up $36.4 million |
| Capital expenditures | $13.6 million | $12.2 million | Up $1.4 million |
| Home heating oil and propane volume | 357.2 million gallons | 316.9 million gallons | Up 12.7% |
| Cash distributions declared per common unit | $0.455 | $0.425 | Up 7.1% |
Total gross profit for products, installations and services was $463.3 million, or approximately 27.6% of sales. Operating margin was approximately 3.9%, net margin approximately 3.3%, and Adjusted EBITDA margin approximately 5.1%.
- Home heating oil and propane gross margin increased to $1.1497 per gallon from $1.1308. Other petroleum product gross margin declined to $0.2594 per gallon from $0.2797.
- Installation and service gross profit declined to $16.8 million from $18.8 million, primarily because extreme cold weather increased service costs, including premium labor.
- Year-end cash and cash equivalents were $14.5 million, compared with $52.5 million in 2017. Investments, principally captive-insurance collateral, were $45.4 million.
- Total debt was approximately $100.8 million, consisting of $99.3 million of term debt, net of issuance costs, and $1.5 million of revolving borrowings. Letters of credit outstanding were $7.1 million.
- Revolving availability was $189.0 million at September 30, 2018, and the Company stated that it was in compliance with its financial covenants.
Material Changes Versus the Prior Comparable Period
- Sales growth reflected higher wholesale product costs, a 15.5% increase in total gallons sold and acquisitions. Home heating oil and propane volume benefited from weather that was 9.0% colder than fiscal 2017, although still 4.7% warmer than normal.
- Net customer attrition worsened to 3.2%, or 14,600 accounts, from 1.5%, or 6,800 accounts. Higher product prices, credit issues and service disruptions were cited as primary factors.
- Delivery and branch expenses increased 16.7% to $357.6 million. Management cited extreme December 2017 and January 2018 weather, higher labor, insurance, credit-card and bad-debt costs, customer-service investments, concierge-program costs and rebranding expenses.
- Net income benefited from an $11.1 million discrete tax benefit from the Tax Cuts and Jobs Act, a $7.0 million gain on the sale of the security business and a favorable $9.2 million year-over-year change in derivative fair values. These items make reported earnings growth materially higher than underlying Adjusted EBITDA growth.
- The Company completed six acquisitions for approximately $25.2 million, adding approximately 16,950 home heating oil and propane accounts. It also repurchased 2.8 million common units for $26.7 million.
- Average borrowings increased to $134.9 million from $81.7 million, and average interest rates increased to 4.6% from 4.1%, contributing to higher interest expense.
Outlook, Guidance, Risks and Unusual Items
- Fiscal 2019 maintenance capital expenditures are estimated at approximately $10.6 million, excluding approximately $13.7 million for leased fleet requirements. The Company also expects to invest approximately $2.3 million in propane operations.
- At the then-current quarterly distribution of $0.1175 per unit, fiscal 2019 common-unit distributions were estimated at approximately $24.8 million, subject to cash availability and debt-covenant restrictions.
- The Company expected to repay approximately $7.5 million of term debt in fiscal 2019 and intended to continue unit repurchases and pursue acquisitions within credit-agreement limits.
- Management anticipated an additional $3.0 million to $4.0 million of fiscal 2019 operating expense for the concierge program and was evaluating whether related revenues justify the costs.
- Weather hedges for fiscal 2019 through fiscal 2021 provided for a maximum receipt of $12.5 million and a maximum payment obligation of $5.0 million per year. Fiscal 2018 included a $1.9 million weather-hedge charge because temperatures exceeded the payment threshold.
- The Company had market-price-based supply contracts covering approximately 80% of expected fiscal 2019 home heating oil and propane requirements and approximately 29% of expected diesel and gasoline requirements.
- Key risks include warm weather, energy-price volatility, customer attrition and natural-gas conversions, working-capital and collateral requirements, variable-rate debt, acquisition integration, environmental liabilities, union negotiations, multiemployer pension obligations, insurance claims, cyberattacks and litigation.
- A putative class-action lawsuit concerning protected-price-plan benefits remained unresolved. No class had been certified, and the Company stated that it could not assess the potential outcome or materiality.
- The Company self-insured certain risks and reported approximately $72.1 million of net insurance reserves. It also had a remaining New England Teamsters pension withdrawal liability of approximately $17.3 million on the balance sheet.
Most Important Facts for Investors to Verify
- Whether the 3.2% customer attrition rate improves, particularly as product prices and natural-gas conversions continue to affect retention.
- Underlying earnings excluding the $11.1 million tax benefit, $7.0 million security-business gain and derivative fair-value effects.
- Availability under the revolving facility and compliance with fixed-charge-coverage and senior-secured-leverage covenants during the peak heating season.
- Cash conversion after distributions, unit repurchases, acquisitions, captive-insurance funding and required term-loan amortization.
- Whether the concierge program and other service initiatives generate sufficient revenue to offset expected fiscal 2019 expense increases.
- Exposure to weather, commodity-price movements, hedge collateral requirements and changes in per-gallon margins.
- Potential costs from the unresolved protected-price-plan litigation, environmental remediation, self-insurance reserves and multiemployer pension obligations.