Business Context and Reporting Period
Star Group, L.P. is a Northeast, Central and Southeast U.S. provider of home heating oil, propane, heating and air-conditioning installation and service, home security, plumbing, and other petroleum products. The company serves approximately 456,000 full-service residential and commercial heating customers and approximately 76,000 delivery-only customers. This unaudited Form 10-Q covers the three and six months ended March 31, 2018, the fiscal second quarter and first half of fiscal 2018. Results are highly seasonal, with the second fiscal quarter typically representing the peak heating season.
Financial Performance and Key Metrics
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Total sales | $684.0 million, up 28.6% | $1.121 billion, up 22.3% |
| Operating income | $85.5 million, up 23.8% | $116.5 million, up 14.0% |
| Net income | $54.8 million, up 38.0% | $85.0 million, up 46.5% |
| Limited partner earnings per unit | $0.81, versus $0.59 | $1.26, versus $0.87 |
| Adjusted EBITDA | $104.8 million, up 18.8% | $132.2 million, up 10.7% |
| Cash flow from operating activities | Not separately presented in the filing summary | $(60.3) million, versus $(35.9) million |
Six-month revenue growth was driven by higher product prices and volume. Home heating oil and propane volume increased 11.7% to 283.5 million gallons, while other petroleum product volume increased 8.6% to 60.7 million gallons. Product gross profit increased 13.3% to $343.6 million. Home heating oil and propane gross margin increased to $1.1540 per gallon from $1.1344, while service and installation produced a combined gross loss of $3.0 million versus a $0.6 million loss in the prior-year period.
For the quarter, product gross profit increased 17.8% to $219.7 million and home heating oil and propane margin increased to $1.1740 per gallon from $1.1613. However, service and installation costs rose faster than revenue, producing a combined gross loss of $3.6 million. Reported earnings also benefited from lower tax rates and a provisional tax benefit related to the Tax Cuts and Jobs Act.
Liquidity, Debt and Cash Flow
- Cash and cash equivalents were $35.4 million at March 31, 2018, compared with $52.5 million at September 30, 2017.
- Total debt was $185.8 million, comprising $115.0 million of revolving credit borrowings and $70.8 million of senior secured term debt. The effective rates were approximately 3.7% on revolver borrowings and 4.5% on the term loan.
- Credit facility availability was $177.9 million, and the company reported compliance with its fixed-charge coverage and senior secured leverage covenants. The facility matures July 30, 2020 and has a $300 million base commitment, increasing to $450 million during the heating season.
- Six-month operating cash use of $60.3 million reflected a $170.5 million increase in receivables, lower customer credit balances, and seasonal working-capital requirements.
- Investing cash use was $41.2 million, including $6.6 million of capital expenditures and $34.5 million for investments, primarily the captive insurance collateral deposit.
- Financing cash inflow was $84.5 million, including net revolver borrowings of $115.0 million, $5.0 million of term-loan repayments, $12.6 million of distributions, and $12.0 million of unit repurchases.
Material Changes Versus the Prior Comparable Period
- Colder weather increased heating oil and propane volume, but extreme cold in late December and early January also increased premium labor, delivery, service, truck maintenance, overtime, insurance and credit-related costs.
- Wholesale product costs increased approximately 19.0% for the six-month period, increasing sales and receivables but pressuring customers and liquidity.
- Net customer attrition was zero for the six months, compared with a net gain of approximately 2,000 accounts in the prior-year period. Gross customer losses increased due to higher prices, credit losses and service disruptions.
- The federal corporate tax rate reduction and the company’s change to corporate tax treatment produced an $11.2 million discrete tax benefit in the first six months. The provisional deferred-tax remeasurement remains subject to adjustment.
- The company repurchased and retired approximately 1.3 million common units for $12.0 million during the quarter and increased the authorized repurchase capacity to 5.5 million units, with 4.2 million units remaining available at quarter-end.
- Captive insurance collateral increased to $45.1 million from $11.8 million after a $34.2 million cash deposit into an irrevocable trust; this reduced cash but allowed cancellation of $36.6 million of letters of credit.
Guidance, Outlook, Risks and Unusual Items
Management did not provide formal annual revenue or earnings guidance in the filing. It expects the remainder of fiscal 2018 to be funded through operating cash flow, cash on hand and, if necessary, the revolving credit facility. Remaining fiscal 2018 maintenance capital expenditures are estimated at $4.0 million to $6.0 million, plus approximately $1.0 million for propane operations. Management expects current quarterly distributions to result in approximately $12.7 million of additional common-unit distributions for the balance of fiscal 2018.
- More than 88% of price-protected customer hedges were at their strike price at March 31, 2018, and more than 98% were at strike price during April. Management cautioned that increased price protection and lower variable-price volume may pressure margins in the remainder of fiscal 2018 and fiscal 2019.
- The fiscal 2018 weather hedge resulted in a $1.9 million charge. The fiscal 2019 contract permits a maximum receipt of $12.5 million and requires a maximum payment of $5.0 million.
- Commodity price volatility affects hedge values, working capital, customer credit balances and liquidity. A hypothetical 10% increase in product costs would have increased hedge fair value by $6.0 million; a 10% decrease would have reduced it by $9.9 million.
- A 100-basis-point increase in variable interest rates would reduce annual after-tax cash flow by approximately $1.3 million.
- The company faces a putative class-action lawsuit alleging improper treatment of protected-price contracts. No class has been certified, and management cannot assess the outcome or materiality.
- The company expects future lease accounting adoption to materially change the balance sheet; undiscounted operating lease payments through 2032 were approximately $128.2 million at March 31, 2018.
- In April 2018, the company acquired a heating oil dealer’s customer list and assets for approximately $16.5 million and repurchased an additional 0.6 million units for $6.1 million.
Important Facts for Investors to Verify
- Whether seasonal collections in the spring and summer will restore cash flow after the $60.3 million first-half operating cash use.
- Revolver utilization, borrowing-base availability and compliance with fixed-charge and leverage covenants as working capital normalizes.
- The sustainability of home heating oil and propane margins given higher wholesale costs, price-protected customers and hedge positions near strike prices.
- The final tax impact of the Tax Cuts and Jobs Act and any adjustment to the provisional $11.2 million benefit by September 30, 2018.
- Customer attrition, credit losses and service economics following the extreme winter weather and higher fuel prices.
- The potential financial and operational impact of the protected-price litigation and other environmental, liability and insurance claims.
- The cash requirements and returns associated with unit repurchases, distributions, acquisitions and captive insurance collateral.