Star Group, L.P. Fiscal 2022 Third-Quarter Form 10-Q Summary
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 filing covers the three and nine months ended June 30, 2022; results are seasonal, with the company generally reporting losses in the June and September quarters. Star served approximately 421,000 full-service heating-oil and propane customers and 73,200 delivery-only customers at June 30, 2022.
Financial performance and key metrics
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Total sales | $439.1 million, up 55.1% | $1.710 billion, up 35.7% |
| Product sales | $358.2 million, up 74.7% | $1.482 billion, up 41.8% |
| Installations and services | $80.9 million, up 3.6% | $228.0 million, up 5.6% |
| Operating income (loss) | $(11.5) million | $128.4 million |
| Net income (loss) | $(10.6) million, or $(0.29) per unit | $85.3 million, or $1.88 per unit |
| Adjusted EBITDA | $(11.1) million | $141.1 million |
| Cash flow from operations | Not separately presented for the quarter | $(31.4) million |
Product gross profit increased to $67.0 million in the quarter and $423.8 million year to date, although nine-month heating-oil and propane volume declined 2.9% to 276.7 million gallons. Heating-oil and propane gross margin before derivative fair-value effects increased to $1.3203 per gallon in the quarter and $1.4046 year to date, compared with $1.2704 and $1.3419, respectively, in the prior-year periods. Service and installation gross profit declined by $0.9 million in the quarter and $2.0 million year to date.
At June 30, 2022, cash and cash equivalents were $9.0 million, compared with $4.8 million at September 30, 2021. Receivables were $187.4 million and inventories were $82.4 million. Total debt was $225.0 million, consisting of $129.5 million of revolver borrowings and $95.5 million of term debt. Revolver availability was $124.4 million under the then-existing facility, and the company reported compliance with its financial covenants.
Material changes versus the prior comparable periods
- Sales growth was driven primarily by substantially higher petroleum prices rather than volume growth. Wholesale product cost increased 99.0% in the quarter and 71.3% year to date.
- Operating expenses increased materially, including bad-debt and credit-card costs, vehicle fuel, insurance, wages and benefits. Nine-month delivery and branch expenses rose 9.3% to $280.4 million.
- Nine-month Adjusted EBITDA declined $14.1 million to $141.1 million, and net income declined $25.7 million to $85.3 million.
- Cash used in operating activities changed from $59.5 million provided in the prior-year nine-month period to $31.4 million used, primarily because higher product prices increased receivables, inventories and hedging-related cash needs.
- Net customer attrition in the third quarter was 7,900 accounts, or 1.9%, versus 5,600 accounts, or 1.3%, in the prior-year quarter. Management attributed the increase primarily to higher product prices, credit cancellations and fuel conversions.
- The company acquired five heating-oil dealers during fiscal 2022 through June 30 for approximately $15.6 million, including $13.1 million in cash.
- The company repurchased and retired 2.6 million common units for $27.3 million during the first nine months, reducing outstanding common units to approximately 36.5 million at June 30.
Guidance, outlook, risks and unusual items
Management did not provide formal earnings guidance. It cautioned that recent per-gallon margins may not be sustainable because of elevated and volatile heating-oil and propane costs. NYMEX heating oil reached $5.14 per gallon on April 28, 2022 and closed at $3.90 on June 30; the company reported paying up to $5.32 per gallon after quarter-end, including supplier premiums.
Higher product costs increased working-capital requirements by more than $100 million, reduced credit availability and increased borrowing and interest expense. Management expects borrowings may increase further and warned of potential slower customer collections, reduced consumption, additional customer attrition and pressure on price-protected contract renewals.
On July 6, 2022, after quarter-end, Star refinanced its debt with a new facility maturing July 6, 2027. The facility includes a $165 million senior secured term loan and a $400 million revolver, expandable to $550 million during the December-April heating season, plus up to $25 million of letters of credit. Proceeds refinanced the existing $95.9 million term loan and repaid $69.1 million of revolver borrowings. Distributions and unit repurchases are subject to minimum availability and fixed-charge-coverage requirements.
Other key risks include weather variability, commodity-price volatility, derivative fair-value fluctuations, inflation, supply-chain and labor constraints, COVID-19-related disruptions, geopolitical events including the Ukraine crisis, customer creditworthiness, interest-rate increases, natural-gas conversions, environmental and regulatory requirements, cyberattacks, litigation and uninsured self-insurance claims. The company reported no litigation expected to have a material adverse effect and stated that disclosure controls were effective.
Important facts for investors to verify
- Reconcile the effects of petroleum-price inflation versus actual volume and margin performance, particularly for price-protected customers.
- Monitor receivables aging, customer collections, bad-debt expense and borrowing-base availability.
- Review the post-quarter-end refinancing terms, interest-rate exposure, covenant requirements and required term-loan amortization.
- Assess whether customer attrition and price-protected contract renewal rates worsen as fuel prices remain elevated.
- Evaluate operating cash flow after seasonal working-capital movements, capital expenditures, distributions and unit repurchases.
- Review commodity and interest-rate derivative positions, including the potential earnings volatility from marking commodity derivatives to market.
- Consider the sustainability of distributions and unit repurchases given liquidity constraints and the new credit agreement.