Star Group, L.P. — 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 six months ended March 31, 2023, corresponding to the second fiscal quarter and first half of fiscal 2023. Results are highly seasonal, with the December and March quarters representing the peak heating season. The company served approximately 412,100 full-service residential and commercial heating-oil and propane customers and 77,500 delivery-only customers at March 31, 2023.
Financial Performance and Key Metrics
| Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Six Months Ended March 31, 2023 | Six Months Ended March 31, 2022 |
|---|---|---|---|---|
| Total sales | $737.6 million | $782.5 million | $1,385.8 million | $1,270.8 million |
| Operating income | $91.5 million | $117.2 million | $115.1 million | $139.9 million |
| Net income | $62.0 million | $81.4 million | $75.6 million | $95.9 million |
| Limited partners’ net income | $61.5 million | $80.7 million | $74.9 million | $95.0 million |
| Income per limited partner unit | $1.42 | $1.75 | $1.74 | $2.05 |
| Adjusted EBITDA | $102.2 million | $107.7 million | $151.2 million | $152.2 million |
| Net cash used in operating activities | Not separately reported | Not separately reported | $(13.8) million | $(105.4) million |
Second-quarter sales declined 5.7% year over year, while net income declined 23.8%. Six-month sales increased 9.0%, primarily because higher product prices more than offset lower volumes; six-month net income declined 21.1%. Approximate operating margins were 12.4% for the quarter versus 15.0% in the prior year and 8.3% for the six months versus 11.0%.
- Second-quarter product sales decreased 6.1% to $669.2 million. Installation and service revenue decreased 2.4% to $68.4 million.
- Six-month product sales increased 10.3% to $1.24 billion, while installation and service revenue was essentially flat at $146.7 million.
- Home heating oil and propane volume declined 18.7% in the quarter and 10.8% for the six months. Second-quarter volume was 121.1 million gallons; six-month volume was 210.3 million gallons.
- Home heating oil and propane gross margin increased to $1.5929 per gallon in the quarter from $1.4042 and to $1.5727 per gallon for the six months from $1.4191.
- Commodity derivative fair-value changes produced a $3.0 million expense in the quarter and a $20.7 million expense for the six months, compared with credits of $17.6 million and $4.2 million, respectively, in the prior-year periods.
- Interest expense increased 81.9% in the quarter and 93.0% for the six months, reflecting higher interest rates. The quarter’s average borrowing rate increased to 6.3% from 2.9%; the six-month average increased to 6.2% from 3.2%.
Liquidity, Cash Flow and Capital Structure
- Cash and cash equivalents were $22.1 million at March 31, 2023, compared with $14.6 million at September 30, 2022. Cash, cash equivalents and restricted cash totaled $22.3 million.
- Operating activities used $13.8 million during the six months, an improvement from $105.4 million used in the prior-year period. Working capital remained a significant cash use, including a $124.8 million increase in receivables.
- Capital expenditures were $5.2 million, acquisitions used $1.2 million, and investing activities used $4.1 million during the six months.
- Total debt was $225.9 million at March 31, 2023, consisting of $69.9 million of revolving borrowings and $156.0 million carrying value of the term loan. Including fair value adjustments, total debt was $226.7 million.
- The credit agreement provides for a $400 million revolving facility, expandable to $550 million during the December-through-April heating season, and a $165 million term loan. Both mature July 6, 2027.
- Reported availability under the revolving facility was $223.6 million. The company was in compliance with its fixed-charge coverage and senior secured leverage covenants.
- Interest-rate swaps covered approximately 54% of long-term debt subject to variable rates. A 100-basis-point increase in applicable interest rates would reduce annual after-tax cash flow by approximately $1.0 million, according to the filing.
Material Changes Versus the Prior Comparable Period
- Unusually warm weather reduced second-quarter heating-oil and propane volume by 18.7%; temperatures in the New York City metropolitan area were described as the warmest in the last 123 years and 21.6% warmer than normal.
- Customer attrition improved: the company lost 1,800 heating-oil and propane accounts, or 0.4% of the customer base, during the six-month period, compared with 3,300 accounts, or 0.8%, in the prior-year period.
- The weather hedge generated a $12.9 million second-quarter benefit and a $12.5 million six-month benefit, compared with a $1.1 million charge and benefit, respectively, in the prior-year periods.
- Higher realized per-gallon margins partially offset lower volumes, but the filing states that current margins may not be sustainable amid commodity-price volatility.
- The company completed two heating-oil dealer acquisitions for approximately $1.2 million and sold certain assets for $2.2 million of cash proceeds.
- Common unit repurchases totaled approximately 0.5 million units for $4.5 million during the six months. The company declared a $0.1625 quarterly distribution per common unit, payable May 2, 2023.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal revenue or earnings guidance. Management expects maintenance capital expenditures of approximately $6.5 million to $7.5 million for the remainder of fiscal 2023, excluding leased-fleet requirements, plus approximately $1.0 million for propane operations. Management also expects approximately $8.3 million of remaining fiscal 2023 term-loan payments.
- Fiscal 2024 weather hedging provides for a maximum annual receipt of $12.5 million and no obligation to pay the counterparty if degree days exceed the applicable threshold.
- Key risks include wholesale fuel-price volatility, geopolitical conditions, inflation, customer conservation and credit losses, weather variability, customer attrition, natural-gas conversions, labor shortages, supply-chain constraints, interest-rate increases, cyberattacks, environmental and climate regulation, counterparty risk and litigation.
- Accounts receivable rose to $259.1 million, including $204.9 million from residential customers. Management cautions that collections could slow as customers respond to higher fuel prices, potentially reducing borrowing availability.
- Commodity derivatives are not designated as accounting hedges, so changes in their fair value can create significant earnings volatility before the underlying customer sales occur.
- The company maintains self-insurance liabilities for workers’ compensation, automobile, general liability and medical claims; management disclosed approximately $79.9 million of self-insurance liabilities at September 30, 2022 and noted that ultimate claims could differ materially from estimates.
- The company adopted a unitholder rights plan in March 2023. Rights become exercisable upon certain unapproved acquisitions of 15% or more of the outstanding common units and expire March 24, 2028 unless earlier modified or redeemed.
- Management stated that pending litigation is not expected to have a material adverse effect, but insurance may not cover all claims or losses above policy limits.
Important Facts for Investors to Verify
- Whether heating-oil and propane volumes recover after the unusually warm 2023 heating season and whether current per-gallon margins persist.
- The collectibility and aging of the $259.1 million receivables balance and the resulting impact on borrowing-base availability.
- Future cash requirements for debt amortization, distributions, unit repurchases and planned capital expenditures.
- Exposure to higher interest rates despite the company’s interest-rate swaps and the effect of the July 2027 debt maturity.
- The sensitivity of reported earnings to commodity-derivative fair-value changes and the sustainability of weather-hedge benefits.
- Customer renewals for price-protected contracts, customer attrition, natural-gas conversions and credit-related cancellations.
- Potential changes in self-insurance, pension, multiemployer pension, environmental and litigation liabilities.