STAR GROUP, L.P. annual report, FY2019

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, and provides heating, air-conditioning, plumbing and related services. The filing is the fiscal 2019 Form 10-K for the year ended September 30, 2019; the fourth fiscal quarter ended September 30, 2019.

Served approximately 453,000 full-service heating-oil and propane customers, 56,000 delivery-only customers and 27,000 motor-fuel customers at year-end.
Fiscal 2019 revenue mix was approximately 63% home heating oil and propane, 21% other petroleum products and 16% installations, repairs and ancillary services.
The business is highly seasonal: approximately 80% of heating-oil and propane volume is sold during the October-March heating season.

Financial Results and Key Metrics

Metric	Fiscal 2019	Fiscal 2018	Change
Total sales	$1,753.9 million	$1,677.8 million	Up 4.5%
Operating income	$37.4 million	$66.1 million	Down 43.5%
Net income	$17.6 million	$55.5 million	Down 68.2%
Net income per limited partner unit	$0.35	$0.89	Down $0.54
Adjusted EBITDA	$95.4 million	$86.2 million	Up 10.6%
Cash flow from operations	$97.4 million	$57.5 million	Up $39.9 million
Capital expenditures	$11.3 million	$13.6 million	Down $2.3 million
Total debt at September 30	$153.4 million carrying value	$100.8 million carrying value	Higher by $52.7 million

Total product sales increased to $1,466.0 million from $1,404.4 million. Installations and services sales increased to $287.8 million from $273.5 million.
Total product gross profit was $467.5 million, or approximately 31.9% of product sales, compared with $446.5 million, or approximately 31.8%, in fiscal 2018.
Home heating oil and propane volume declined 3.3% to 345.5 million gallons, while motor fuel and other petroleum-products volume increased 21.0% to 167.4 million gallons, primarily from acquisitions.
Home heating oil and propane gross margin increased to $1.2301 per gallon from $1.1497. Management cautioned that the fiscal 2019 level may not be sustainable.
Operating results included a $25.1 million charge from changes in the fair value of derivative instruments, compared with an $11.4 million credit in fiscal 2018.
Fiscal fourth-quarter sales were $235.9 million, with an operating loss of $43.8 million and net loss of $33.9 million. The fourth quarter generated a loss per limited partner unit of $0.69.
Cash and cash equivalents were $4.9 million at September 30, 2019. Current assets were $226.8 million and current liabilities were $325.6 million.
Availability under the then-existing revolving facility was $126.1 million at year-end, and the Company reported compliance with its fixed-charge coverage and senior secured leverage covenants.

Material Changes Versus the Prior Comparable Period

Net customer attrition worsened to 5.4%, or 25,100 accounts, from 3.2%, or 14,600 accounts. Gross customer losses rose by 9,800 accounts, while gross gains declined by 700 accounts.
Management attributed increased losses to discontinuing certain low-margin accounts, credit issues and higher heating-oil and propane prices. Estimated losses from natural-gas conversions increased to 1.4% from 1.3%.
Adjusted EBITDA improved despite lower heating-oil and propane volume, primarily because of higher per-gallon margins and acquisitions.
Interest expense increased 28.1% to $11.2 million, reflecting higher average borrowings and a higher weighted-average interest rate.
Fiscal 2018 included a $7.0 million gain on the sale of the security business and an $11.1 million discrete tax benefit from the Tax Cuts and Jobs Act; neither recurred in fiscal 2019.
The Company acquired a subcontractor, a liquid-product dealer and propane-dealer assets for approximately $60.9 million, adding approximately 24,000 heating-oil and propane accounts. The acquisitions contributed $25.2 million of revenue and a $1.7 million pretax loss from acquisition dates through year-end.
The Company repurchased 5.4 million common units for $51.4 million, compared with 2.8 million units for $26.7 million in fiscal 2018.
Effective October 1, 2018, the Company adopted ASC 606. Fiscal 2019 reported sales were $4.9 million lower and net income was $1.1 million lower than they would have been without adoption; the adoption also shifted certain amounts between product revenue, service revenue and operating expenses.

Guidance, Outlook, Commentary, Risks and Unusual Items

Fiscal 2020 maintenance capital expenditures were estimated at approximately $11.1 million, excluding approximately $13.8 million for leased fleet requirements; approximately $1.7 million was planned for propane operations.
At the then-current quarterly distribution of $0.125 per unit, management estimated fiscal 2020 distributions of approximately $23.6 million to common unitholders, $0.9 million to general partner unitholders and $0.8 million to management, subject to available cash and debt covenants.
The Company had market-price-based contracts covering approximately 83% of expected fiscal 2020 home-heating-oil and propane requirements and approximately 27% of expected diesel and gasoline requirements.
Weather hedge contracts for fiscal 2020 and 2021 provided for a maximum annual receipt of $12.5 million and a maximum annual payment obligation of $5.0 million.
On December 4, 2019, after the reporting period, the Company refinanced its credit facilities. The new arrangement provides for a $300 million revolving facility, expandable to $450 million during December-April, a $130 million term loan and maturity on December 4, 2024. Availability increased by $40 million, according to management.
The New York Climate Leadership and Community Protection Act could materially affect the Company’s New York operations, but the filing states that the timing, form and impact of future regulations remain uncertain.
Key operating risks include warm weather, natural-gas conversions, customer attrition, commodity-price volatility, inability to pass through cost increases, derivative and counterparty exposure, working-capital needs, variable-rate debt, union negotiations, underfunded multi-employer pension plans, environmental liabilities, cyberattacks and litigation.
A proposed class-action settlement involving protected-price-plan customers received preliminary court approval on December 4, 2019. The Company did not state a clear potential loss amount or materiality assessment.
The Company reported approximately $74.7 million of net insurance reserves and a remaining New England Teamsters pension withdrawal liability of approximately $17.1 million on the balance sheet, with a stated fair value of $21.1 million.
Management and the independent auditor concluded that internal controls were effective as of September 30, 2019, but the assessment excluded the fiscal 2019 acquisitions, which represented approximately 8.5% of revenue and 1.4% of total assets.

Most Important Facts for Investors to Verify

Whether the deterioration in customer attrition continues and whether acquisition-driven additions can offset losses to competition, credit issues and natural-gas conversions.
Whether fiscal 2019’s $1.2301-per-gallon heating-oil and propane margin is repeatable without materially increasing customer attrition.
The sustainability of distributions and unit repurchases given low cash balances, seasonal working-capital requirements, debt amortization and covenant restrictions.
The effect of the December 2019 refinancing on interest expense, leverage, borrowing availability and required term-loan repayments.
The cash impact and accounting volatility from commodity derivatives, including the fiscal 2019 $25.1 million fair-value charge.
The final terms and financial exposure of the protected-price-plan class-action settlement.
The impact of New York climate regulations and other policies encouraging natural gas or electrification.
The future balance-sheet effect of adopting the lease standard; management expected recognition of approximately $100 million to $120 million of right-of-use assets and lease liabilities.