Star Group, L.P. FY2017 Form 10-K Summary
Business context and reporting period
Star Group, L.P. is a single-segment distributor of home heating oil and propane and a provider of heating, air-conditioning, plumbing, security and related services. It served approximately 455,000 full-service residential and commercial customers and approximately 74,000 delivery-only customers across the Northeast, Central and Southeast United States. The filing covers the fiscal year ended September 30, 2017; fourth-quarter results refer to the three months ended September 30, 2017.
After fiscal year-end, unitholders approved a federal tax election effective November 1, 2017, treating the company as a corporation rather than a partnership for federal income tax purposes. The company also changed its name from Star Gas Partners, L.P. to Star Group, L.P.; the legal partnership structure and distribution provisions remained unchanged.
Financial and operating metrics
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Sales | $1,323.6 million | $1,161.3 million | +14.0% |
| Operating income | $55.3 million | $87.4 million | -36.7% |
| Net income | $26.9 million | $44.9 million | -40.1% |
| Net income per limited partner unit | $0.46 | $0.70 | -34.3% |
| EBITDA | $83.2 million | $113.9 million | -26.9% |
| Adjusted EBITDA | $81.0 million | $95.7 million | -15.4% |
| Operating cash flow | $21.1 million | $102.0 million | -79.3% |
| Retail heating oil and propane volume | 316.9 million gallons | 302.5 million gallons | +4.8% |
| Cash distributions declared per unit | $0.425 | $0.395 | +7.6% |
FY2017 sales consisted approximately 64.4% of home heating oil and propane, 19.6% of installations and services, and 16.0% of other petroleum products. Product gross profit increased to $389.7 million from $371.2 million, while home heating oil and propane realized margin increased modestly to $1.1308 per gallon from $1.1222.
Approximate FY2017 margins were 4.2% operating, 2.0% net, 6.3% EBITDA and 6.1% Adjusted EBITDA. Service and installation gross profit declined to $18.8 million from $21.3 million, primarily because service expenses increased faster than service revenue.
At September 30, 2017, cash and cash equivalents were $52.5 million, current assets were $241.2 million and total assets were $673.9 million. Total debt was $75.7 million carrying value, consisting of a term loan; there were no revolving-credit borrowings. The company had $48.0 million of letters of credit and $166.1 million of borrowing availability.
Capital expenditures were $12.2 million and acquisition cash spending was $43.3 million. The company completed seven acquisitions for an aggregate purchase price of approximately $44.8 million, adding approximately 28,300 heating oil and propane accounts. Financing cash outflows included $24.3 million of distributions and $16.2 million of term-loan repayments.
Fourth-quarter results
| Metric | Q4 FY2017 | Q4 FY2016 |
|---|---|---|
| Sales | $181.6 million | $162.1 million |
| Operating income (loss) | $(27.1) million | $(29.6) million |
| Net income (loss) | $(17.7) million | $(19.1) million |
| Net income (loss) per unit | $(0.32) | $(0.34) |
The fourth quarter remained seasonally loss-making, consistent with management’s expectation that the third and fourth quarters generally produce net losses outside the peak heating season.
Material changes versus the prior comparable period
- Sales increased primarily because wholesale product costs rose 20.2% per gallon and total volume increased. Retail heating oil and propane volume benefited from temperatures that were 7.0% colder than FY2016, although FY2017 remained 12.4% warmer than normal.
- Net customer attrition improved materially to 1.5%, or 6,800 accounts, from 5.1%, or 23,500 accounts, reflecting lower gross losses, marketing incentives, customer-experience initiatives and competitive margin management.
- Profitability declined despite higher volume and slightly higher heating-oil and propane margins. FY2016 included a $12.5 million weather-hedge credit that did not recur in FY2017. Higher staffing, technology, customer-service, marketing and operating costs also reduced results.
- Operating cash flow fell sharply because higher product prices and colder weather increased accounts receivable and inventory requirements, while customer credit balances declined.
- Debt declined by approximately $16.2 million, and interest expense fell to $6.8 million from $7.5 million.
- Cash distributions declared per common unit increased to $0.425 from $0.395. The fourth-quarter distribution was $0.11 per unit, paid October 31, 2017.
Guidance, outlook, risks and unusual items
- Management estimated FY2018 maintenance capital expenditures of approximately $9.0 million, leased-fleet capital requirements of $10.3 million and additional propane investments of $3.4 million. It expected $10.0 million of term-loan repayments, a $2.0 million pension contribution and $1.6 million of annual payments under the NETTI pension agreement.
- Management planned to maintain the $0.11 quarterly distribution level, which would imply approximately $24.6 million of common-unit distributions in FY2018, subject to cash generation and credit-agreement restrictions.
- Approximately 83% of expected FY2018 heating-oil and propane requirements and 43% of expected diesel and gasoline requirements were covered by market-price-based supply contracts.
- Price-protected customers represented a significant exposure: approximately 37% of residential customers were on ceiling pricing and 10% on fixed pricing at year-end. Derivatives are not designated as accounting hedges, causing potentially significant non-cash earnings volatility from mark-to-market changes.
- Weather remains a major risk. FY2018 weather hedges could provide up to $17.5 million or require payments of up to $5.0 million; FY2019 contracts could provide up to $12.5 million or require payments of up to $5.0 million.
- The company faces structural demand risks from natural-gas conversions, conservation, alternative energy, competition, customer attrition, commodity-price volatility, working-capital needs, counterparty exposure, environmental liabilities, labor negotiations and cybersecurity incidents.
- Forty-three percent of employees were represented by unions, and 21 collective bargaining agreements covering approximately 381 employees were scheduled for renewal in FY2018.
- A proposed customer class action alleges breach of contract, fraud and New York General Business Law violations related to protected-price plans. No class had been certified, and the company stated that it could not assess the outcome or materiality.
- Subsequent to year-end, the company deposited $34.2 million into an irrevocable trust for captive-insurance liabilities, allowing $36.6 million of letters of credit to be cancelled and increasing borrowing capacity by approximately $2.4 million.
Most important facts for investors to verify
- Whether FY2018 weather, customer attrition and heating-oil and propane volumes support the planned distribution level.
- The sustainability of FY2017 per-gallon margins as wholesale prices increased after year-end and the proportion of customers moved into lower-margin price-protected plans.
- Compliance with the credit agreement’s availability, fixed-charge coverage and senior secured leverage covenants, particularly during the winter working-capital cycle.
- Cash conversion, including the effect of receivables, inventory, customer credit balances, acquisitions and insurance-trust funding.
- Progress and returns from the seven FY2017 acquisitions and the propane expansion program.
- Potential costs from the pending protected-price litigation, environmental remediation, self-insurance reserves of approximately $63.9 million and underfunded multiemployer pension plans.
- The effect of the November 2017 federal tax-classification change on corporate taxes, distributions and unitholder tax reporting.