STAR GROUP, L.P. quarterly report, Q1 FY2024

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 provides heating, air-conditioning installation, maintenance and repair services. The company reports one operating segment and served approximately 404,800 full-service residential and commercial heating-oil and propane customers, 57,600 delivery-only customers and 26,900 gasoline and diesel customers at December 31, 2023.

This Form 10-Q covers the fiscal quarter ended December 31, 2023. Results are highly seasonal, with winter quarters generally generating positive earnings but consuming working capital. The interim financial statements are unaudited.

Financial Performance and Key Metrics

Metric	Q1 FY2024	Q1 FY2023	Change
Total sales	$528.1 million	$648.2 million	Down 18.5%
Product sales	$448.6 million	$569.9 million	Down 21.3%
Installation and service sales	$79.5 million	$78.3 million	Up 1.6%
Operating income	$21.6 million	$23.6 million	Down 8.4%
Net income	$13.0 million	$13.5 million	Down 4.1%
Net income per limited partner unit	$0.32	$0.33	Down $0.01
Adjusted EBITDA	$49.0 million	$49.1 million	Essentially flat
Cash used in operating activities	$(60.3) million	$(92.7) million	Improved by $32.4 million

Operating margin was approximately 4.1%, compared with 3.6% in the prior-year quarter. Net margin was approximately 2.5%, compared with 2.1%. Product gross profit declined to $145.2 million from $150.8 million, while heating-oil and propane gross profit per gallon increased to $1.6758 from $1.5452.

Heating-oil and propane volume declined 10.2% to 80.1 million gallons, primarily because temperatures were 9.6% warmer than the prior-year period and 13.8% warmer than normal.
Motor fuel and other petroleum-product volume declined 9.2% to 32.4 million gallons.
Installation and service gross profit increased to $4.4 million from $1.7 million, aided by higher installation sales and lower service-call costs.
The company recorded a $19.0 million charge from changes in the fair value of commodity derivatives, compared with a $17.6 million charge in the prior-year quarter.
Interest expense declined to $3.2 million from $4.3 million because average borrowings were lower, partly offset by higher interest rates.

Liquidity, Cash Flow and Capital Structure

Cash and cash equivalents were $19.9 million at December 31, 2023, compared with $45.2 million at September 30, 2023. Cash, cash equivalents and restricted cash totaled $20.2 million.
Accounts receivable increased to $187.1 million from $114.1 million, and inventories increased to $84.0 million from $56.5 million, reflecting seasonal working-capital needs.
Total debt was $195.8 million, consisting of $51.9 million of revolving borrowings and $143.9 million of term-loan debt, net of debt issuance costs. Total debt was $148.1 million at September 30, 2023.
Availability under the revolving credit facility was $189.2 million at December 31, 2023, versus $202.1 million at September 30, 2023. The facility permits borrowings of up to $400 million, or $550 million during the December-through-April heating season, subject to borrowing-base and covenant requirements, and matures July 6, 2027.
The company was in compliance with its financial covenants. Its fixed-charge coverage ratio was 1.39 to 1.00 at December 31, 2023.
Operating cash outflows were principally driven by increases in receivables and inventories. Investing cash outflows were $5.9 million, including $3.2 million of capital expenditures and $2.5 million for two heating-oil acquisitions.
Financing cash inflows included $51.6 million of revolving borrowings, partially offset by $4.0 million of term-loan repayments, $6.1 million of distributions and $0.2 million of unit repurchases.
The effective interest rates at quarter-end were approximately 7.4% on the term loan and 8.6% on revolving borrowings. Interest-rate swaps covered approximately 38% of long-term variable-rate debt.

Material Changes Versus the Prior Comparable Period

Revenue declined primarily because product prices and volumes were lower. Wholesale product cost decreased by $0.6605 per gallon, or 19.7%.
Despite lower volumes, heating-oil and propane per-gallon margins increased by 8.5%, and installation and service profitability improved.
Net customer attrition was 700 accounts, or 0.2% of the heating-oil and propane customer base, compared with net additions of 7,000 accounts, or 1.7%, in the prior-year quarter.
Derivative valuation losses were $1.4 million higher year over year, reducing reported earnings and operating income.
Operating cash usage improved by $32.4 million, primarily due to better collections and lower cash requirements for inventory and receivables, although seasonal working-capital consumption remained substantial.
The company acquired two heating-oil businesses for approximately $2.5 million during the quarter. Subsequent to quarter-end, it acquired one propane business and one heating-oil business for approximately $19.9 million.
The company repurchased approximately 13,000 common units during the quarter at an average price of $11.27 per unit. Approximately 2.555 million units remained available under the repurchase plan at December 31, 2023.

Guidance, Outlook, Risks and Unusual Items

Management estimated maintenance capital expenditures of approximately $9.0 million to $10.0 million for the remainder of fiscal 2024, excluding leased-fleet capital requirements, plus $1.0 million to $2.0 million for propane operations.
The company expects $16.5 million of remaining fiscal 2024 quarterly term-loan repayments. If the quarterly distribution remains $0.1625 per unit, management estimated remaining fiscal 2024 distributions and related incentive payments of approximately $19.2 million in aggregate.
The fiscal 2024 weather hedge generated a $1.0 million benefit in the quarter. Final settlement may differ based on degree days from January 1 through March 31, 2024. The weather contract has a maximum annual receipt of $12.5 million.
Management cautioned that the current per-gallon heating-oil and propane margins may not be sustainable because of wholesale-cost volatility.
Commodity derivatives are not designated as accounting hedges, so changes in their fair value create potentially significant non-cash earnings volatility. At December 31, 2023, commodity derivative liabilities exceeded assets by approximately $15.0 million on a net presented basis.
Key risks include warmer weather, product-price volatility, customer conservation and attrition, credit losses, supply constraints, interest rates, labor and union matters, insurance costs, environmental and climate regulation, natural-gas conversions and electrification, cyberattacks, litigation, counterparty risk and the company’s ability to renew price-protected customer contracts.
Management stated that legal proceedings are not expected to have a material adverse effect, but insurance may not cover all claims or may be insufficient. The company self-insures portions of workers’ compensation, automobile, general-liability and medical claims.
The company adopted ASU 2021-08 effective October 1, 2023 without a material impact. It is evaluating ASU 2023-09, which expands annual income-tax disclosures.
Disclosure controls and procedures were effective as of December 31, 2023, and no material change in internal control over financial reporting was reported.

Important Facts for Investors to Verify

Whether warmer weather and customer attrition continue to reduce heating-oil and propane volumes during the remainder of the heating season.
Whether higher reported per-gallon margins persist as wholesale prices and competitive conditions change.
The amount and timing of derivative settlements, including the final fiscal 2024 weather-hedge settlement and commodity-derivative mark-to-market effects.
Revolving-credit availability, borrowing-base eligibility of receivables, covenant compliance and the impact of higher variable interest rates.
Cash generation after seasonal working-capital needs, scheduled debt repayments, capital expenditures, distributions and the $19.9 million of post-quarter-end acquisitions.
Renewal rates for price-protected customers and trends in customer losses from natural-gas and electricity conversions.
The adequacy of allowances for doubtful accounts, self-insurance reserves and insurance coverage for environmental, liability and litigation exposures.