STAR GROUP, L.P. quarterly report, Q1 FY2022

Business Context and Reporting Period

Star Group, L.P. is a Northeast and Mid-Atlantic distributor of home heating oil, propane, motor fuels, heating and air-conditioning equipment, installation services, maintenance contracts, and plumbing services. The filing covers the unaudited fiscal first quarter ended December 31, 2021, compared with the three months ended December 31, 2020. Results are highly seasonal, with substantial working-capital needs during the winter heating season.

At December 31, 2021, the Company served approximately 428,200 full-service residential and commercial heating-oil and propane customers, 73,000 delivery-only customers, and 26,800 gasoline and diesel customers.
The Company reported approximately 37.9 million common units outstanding at December 31, 2021; 37,677,441 units were outstanding at January 31, 2022.

Financial Performance and Position

Metric	Q1 FY2022	Q1 FY2021	Change
Total sales	$488.3 million	$373.3 million	Up 30.8%
Operating income	$22.6 million	$54.8 million	Down 58.7%
Net income	$14.5 million	$37.9 million	Down 61.7%
Net income available to limited partners	$14.4 million	$37.6 million	Down 61.7%
Basic and diluted income per limited partner unit	$0.32	$0.74	Down $0.42
Adjusted EBITDA	$44.5 million	$45.3 million	Down 1.9%
Net cash used in operating activities	$65.9 million	$27.0 million	Use increased $38.9 million

Revenue growth was driven primarily by higher selling prices. Product sales increased 36.9% to $411.3 million, while installations and services increased 5.5% to $77.0 million.
Home heating oil and propane volume decreased 2.8% to 87.0 million gallons, reflecting temperatures 6.3% warmer than the prior-year period and 18.6% warmer than normal. Motor fuel and other petroleum volume increased 4.4% to 39.3 million gallons.
Product gross profit increased 6.6% to $136.7 million. Home heating oil and propane gross margin increased to $1.4447 per gallon from $1.3188 per gallon; management cautioned that the Q1 margin may not be sustainable.
Installation and service gross profit decreased to $3.0 million from $3.7 million. Service expense exceeded service revenue in both periods.
Operating margin declined to approximately 4.6% from 14.7%, and net margin declined to approximately 3.0% from 10.1%, primarily because of unfavorable derivative valuation changes and higher operating expenses.
The fair-value derivative line was a $13.4 million expense in Q1 FY2022 versus a $17.4 million benefit in Q1 FY2021, an unfavorable year-over-year swing of $30.8 million.
Cash, cash equivalents, and restricted cash totaled $21.5 million at December 31, 2021, compared with $5.0 million at September 30, 2021. Operating cash use was driven primarily by increases in receivables, inventories, other assets, and hedge-related requirements.
Accounts receivable increased to $178.8 million from $99.7 million at September 30, 2021, while inventories increased to $77.7 million from $61.2 million.
Capital expenditures were $3.8 million, acquisitions used $3.3 million of cash, and investing activities used $7.0 million.

Debt, Liquidity, and Capital Allocation

Total debt was $225.9 million at December 31, 2021, consisting of $123.7 million drawn on the revolving credit facility and $102.2 million on the senior secured term loan.
Debt increased from $118.6 million at September 30, 2021, primarily because the Company borrowed $115.1 million under the revolver to fund seasonal working capital.
Availability under the credit facility was $136.6 million at December 31, 2021. The Company reported compliance with its fixed-charge coverage and senior secured leverage covenants.
The credit facilities mature December 4, 2024. Effective January 25, 2022, the revolving facility was increased by $50 million to $350 million.
Variable-rate borrowings totaled $168.6 million. Management estimates that a 100-basis-point increase in interest rates would reduce annual after-tax cash flows by approximately $1.2 million.
The Company repurchased and retired 1.1 million common units for $11.8 million during the quarter and paid $5.8 million of distributions to common and general partner unitholders.
Remaining FY2022 maintenance capital expenditures were estimated at $12.5 million to $13.5 million, plus $2.5 million to $3.0 million for propane operations.

Material Changes Versus the Prior Comparable Period

Higher commodity prices increased revenue substantially but also increased receivables, inventory, borrowing needs, and cash requirements.
Heating-oil and propane volume declined despite three acquisitions, while customer retention improved: Q1 net customer gains were 1,300, compared with net losses of 800 in the prior-year quarter.
Delivery and branch expenses increased 10.3% to $89.0 million because of higher wages, fuel, transportation, maintenance, insurance, medical claims, bad debt, and credit-card costs, as well as acquisition-related costs.
The weather hedge benefit declined to $2.2 million from $4.0 million. January 2022 weather was colder than expected, and management indicated that the Company might owe under the weather hedge for fiscal 2022.
Average borrowings increased by $27.0 million year over year, while the weighted-average interest rate decreased to 3.8% from 4.4%.
The Company acquired three heating-oil dealers for approximately $4.2 million, compared with significantly larger acquisition activity in the prior-year period.

Guidance, Outlook, Risks, and Unusual Items

The filing does not provide formal revenue or earnings guidance. Management expects FY2022 liquidity needs to be funded through operating cash flow, cash on hand, and seasonal revolver borrowings.
Fiscal 2022 weather hedges provide for a maximum receipt of $12.5 million if degree days are below specified thresholds, but could require payments of up to $5.0 million if degree days exceed the thresholds. The ultimate outcome depends on weather through March 31, 2022.
Management expects higher customer renewal prices because of elevated heating-oil costs, which could reduce acceptance of price-protected customer renewals and adversely affect profitability, liquidity, and cash flow.
Key risks include commodity-price volatility, weather, customer credit and attrition, working-capital and collateral requirements, rising interest rates, supply-chain disruption, labor shortages, wage inflation, COVID-19 effects, environmental and regulatory obligations, cyber risks, litigation, and insurance adequacy.
COVID-19 had not materially impaired petroleum-product deliveries, but the Company experienced procurement delays for service and installation materials and staffing difficulties. The Company estimated annual COVID-related operating costs of approximately $2 million.
The Company uses commodity derivatives as economic hedges but does not designate them as accounting hedges; therefore, mark-to-market changes can create significant earnings volatility before the related physical transactions occur.
Legal proceedings and contingencies were not considered by management to be reasonably likely to have a material adverse effect, although insurance may not cover all potential claims or losses.

Important Facts for Investors to Verify

Whether seasonal operating cash flow reverses the $65.9 million first-quarter operating cash deficit and reduces revolver borrowings after the winter heating season.
The final fiscal 2022 weather hedge settlement and its effect on delivery expenses, adjusted EBITDA, and liquidity.
Whether elevated commodity prices pressure customer renewal rates, customer attrition, bad debts, and future heating-oil and propane volumes.
The sustainability of the $1.4447-per-gallon home heating-oil and propane margin achieved in Q1 FY2022.
Compliance with borrowing-base, fixed-charge coverage, leverage, and unit-repurchase covenants as receivables and commodity prices fluctuate.
The impact of the January 2022 $50 million revolver increase, subsequent unit repurchases, distributions, and required term-loan repayments on liquidity.