STAR GROUP, L.P. quarterly report, Q2 FY2020

Star Group, L.P. — Form 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, gasoline and diesel fuel, and provides heating, air-conditioning, plumbing and related services. At March 31, 2020, it served approximately 448,000 full-service residential and commercial heating customers, 63,000 delivery-only customers and approximately 26,000 gasoline and diesel customers.

This filing covers the quarter and six months ended March 31, 2020, the Company’s fiscal second quarter and first half. Results are highly seasonal, with approximately 80% of annual home heating oil and propane volume historically sold in the first two fiscal quarters. Financial statements are unaudited.

Key financial metrics

Metric	Three months ended March 31, 2020	Three months ended March 31, 2019	Six months ended March 31, 2020	Six months ended March 31, 2019
Total sales	$543.1 million	$699.6 million	$1,052.0 million	$1,234.6 million
Operating income	$86.1 million	$105.0 million	$128.6 million	$111.1 million
Net income	$58.4 million	$72.3 million	$86.2 million	$74.6 million
Net income per limited partner unit	$1.03	$1.15	$1.52	$1.19
Adjusted EBITDA	$106.9 million	$99.5 million	$152.0 million	$144.3 million
Net cash from operating activities	Not separately provided	Not separately provided	$50.9 million	$(42.4) million

Quarterly sales declined 22.4%, while six-month sales declined 14.8%. Quarterly operating margin was approximately 15.9%, compared with 15.0% in the prior-year quarter; six-month operating margin was approximately 12.2%, compared with 9.0%. Quarterly net margin was approximately 10.8%, compared with 10.3%; six-month net margin was approximately 8.2%, compared with 6.0%.

Quarterly product sales declined 24.5% to $481.3 million, primarily due to lower volumes and selling prices. Installations and services revenue declined 0.6% to $61.8 million.
Home heating oil and propane volume declined 21.4% in the quarter and 15.1% for the six months, primarily because temperatures were 18.2% and 11.6% warmer, respectively, than the comparable periods.
Home heating oil and propane gross margin increased to $1.3619 per gallon from $1.2213 in the quarter and to $1.3155 from $1.2332 for the six months.
The Company recorded a $10.1 million benefit from its weather hedge program for the six months, compared with a $2.1 million charge in the prior-year period; the receivable was collected in April 2020.
Changes in the fair value of commodity derivatives produced an $11.7 million quarterly charge and a $5.3 million six-month charge, compared with a $13.4 million quarterly credit and a $17.6 million six-month charge in the prior-year periods.

Liquidity, debt and cash flow

Cash and cash equivalents were $10.3 million at March 31, 2020, versus $4.9 million at September 30, 2019. Cash, cash equivalents and restricted cash totaled $10.6 million.
Total debt was $153.2 million, consisting of $129.2 million of senior secured term debt, net of issuance costs, and $24.0 million of revolving credit borrowings. Total debt was $153.4 million at September 30, 2019.
The December 2019 refinancing provides a $130 million term loan and a revolving facility of up to $300 million, or $450 million during the December-April heating season, with both facilities maturing December 4, 2024.
Availability under the revolving facility was $210.4 million at March 31, 2020. The Company was in compliance with its fixed-charge coverage and senior secured leverage covenants.
Six-month operating cash flow was $50.9 million, compared with cash used of $42.4 million in the prior-year period. Investing cash use was $13.2 million, including $5.7 million of capital expenditures. Financing cash use was $32.3 million, including debt repayments, distributions and unit repurchases.
Operating lease liabilities recognized after adoption of ASC Topic 842 totaled $108.9 million at March 31, 2020, including $19.6 million current and $89.4 million long term.

Material changes versus the prior comparable period

Net income decreased 19.2% in the quarter but increased 15.4% for the six months. The quarterly decline primarily reflected the unfavorable year-over-year derivative fair-value impact, partially offset by higher Adjusted EBITDA and lower taxes.
Adjusted EBITDA increased 7.5% in the quarter and 5.3% for the six months, supported by acquisitions, improved heating oil and propane margins, lower operating costs, weather hedge proceeds and better service and installation profitability.
Service and installation activities generated combined gross profit of $0.5 million in the quarter and $3.1 million for the six months, compared with losses in the respective prior-year periods.
The Company repurchased approximately 2.1 million common units for $18.6 million during the six months, reducing common units outstanding to approximately 45.6 million at March 31, 2020. It repurchased an additional 0.4 million units in April.
The Company adopted the new lease accounting standard on October 1, 2019, materially increasing reported assets and liabilities without affecting operating income or cash flows.

Outlook, risks and unusual items

COVID-19 was the principal emerging risk. Star remained designated an essential business and reported no significant supply-chain disruption through the filing date, but April 2020 motor fuel and other petroleum product volume declined approximately 35%, service revenue declined approximately 10% and installation revenue declined approximately 40% year over year.
Management could not reasonably estimate the future effect of COVID-19 on sales, collections, cash flow or financial condition. Risks include reduced customer demand and credit quality, employee or supplier disruptions, loss of essential-business status, higher operating costs and constrained access to financing.
Accounts receivable totaled $187.1 million at March 31, 2020. Borrowing capacity depends partly on receivable eligibility; deterioration in aging or collections could reduce liquidity.
Maintenance capital expenditures for the remainder of fiscal 2020 were estimated at approximately $4.0 million to $5.5 million, plus $0.5 million to $1.0 million for propane operations.
The Company declared a quarterly distribution of $0.1325 per unit, payable May 12, 2020, and indicated aggregate distributions for the balance of fiscal 2020 of approximately $12.0 million to common unitholders at the then-current rate, subject to liquidity and other conditions.
The term loan requires quarterly principal payments of $3.25 million beginning April 1, 2020, plus a potential annual excess-cash-flow payment capped at $12 million, subject to the credit agreement.
Management cautioned that unusually favorable per-gallon margins and a $6.9 million benefit from weighted-average inventory costing are not necessarily sustainable and may reverse in future periods.
A class-action matter involving protected-price-plan customers received final settlement approval on March 26, 2020, and was dismissed with prejudice. The Company stated that the settlement was not an admission of liability.

Investor verification checklist

Verify the pace and duration of COVID-19-related declines in motor fuel, service and installation activity after April 2020.
Monitor accounts receivable aging, customer collections and their effect on borrowing-base availability.
Reconcile GAAP cash flow with Adjusted EBITDA and assess the sustainability of weather hedge proceeds, derivative marks and elevated per-gallon margins.
Track compliance with fixed-charge coverage, leverage and unit-repurchase availability covenants.
Evaluate the ability to fund distributions, required term-loan amortization, capital expenditures and further unit repurchases under stressed operating conditions.
Review commodity and interest-rate derivative valuations, including the $66.5 million of interest-rate swaps and related mark-to-market volatility.