STAR Group, L.P. — Form 10-Q Summary
Business Context and Reporting Period
Star Group, L.P. is a Northeast, Central and Southeast U.S. distributor of home heating oil and propane, with related HVAC installation, maintenance, plumbing and fuel-delivery operations. The filing covers the three and nine months ended June 30, 2020, the third quarter and year-to-date periods of fiscal 2020. Results are highly seasonal, with approximately 80% of annual home heating oil and propane volume historically sold during the first two fiscal quarters.
Key Financial Metrics
| Metric | Q3 FY2020 | Q3 FY2019 | 9M FY2020 | 9M FY2019 |
|---|---|---|---|---|
| Total sales | $232.2 million | $283.4 million | $1.284 billion | $1.518 billion |
| Operating income (loss) | $0.5 million | $(29.9) million | $129.1 million | $81.1 million |
| Net income (loss) | $(0.05) million | $(23.1) million | $86.1 million | $51.5 million |
| Limited partner income (loss) per unit | Approximately $0.00 | $(0.46) | $1.55 | $0.86 |
| Adjusted EBITDA | $5.7 million | $(20.1) million | $157.6 million | $124.2 million |
| Cash flow from operating activities | Not separately reported | Not separately reported | $156.3 million | $62.3 million |
- Q3 sales declined 18.1%, primarily because lower petroleum prices and reduced motor-fuel activity more than offset higher home heating oil and propane volume.
- Nine-month sales declined 15.4%; product sales fell 17.4% and installations and services revenue fell 2.9%.
- Nine-month home heating oil and propane volume decreased 9.0% to 294.6 million gallons, reflecting warmer weather, customer attrition and other factors. Q3 volume increased 38.8% to 51.2 million gallons because temperatures were 46.4% colder than the prior-year quarter.
- Q3 total product gross profit increased 29.3% to $71.9 million. Nine-month product gross profit decreased 4.0% to $412.9 million.
- Home heating oil and propane gross margin before derivative fair-value effects was $1.2174 per gallon in Q3 versus $1.2171 in the prior-year quarter, and $1.2984 per gallon for nine months versus $1.2314.
- Q3 operating income was approximately break-even, compared with a $29.9 million operating loss in the prior-year quarter. The improvement primarily reflected higher heating-oil and propane volume, lower operating expenses and favorable derivative effects.
- The company reported a $3.3 million Q3 credit from changes in derivative fair values, versus a $1.6 million charge in the prior-year quarter. For nine months, derivative changes produced a $2.0 million charge, compared with a $19.3 million charge in the prior year.
Liquidity, Cash Flow and Capital Structure
- Cash and cash equivalents were $66.7 million at June 30, 2020, compared with $4.9 million at September 30, 2019. Cash, cash equivalents and restricted cash totaled $67.0 million.
- Operating cash flow for the nine months was $156.3 million, up from $62.3 million, aided by improved collections, lower product costs and lower inventory balances.
- Capital expenditures were $8.6 million; investing cash outflow was $18.7 million, including investment purchases and a small acquisition.
- Total debt was $126.0 million at carrying value, consisting of $126.0 million of term debt and no revolving-credit borrowings, compared with $153.4 million at September 30, 2019.
- The December 2019 refinancing provides a $130 million senior secured term loan and a $300 million revolving facility, expandable to $450 million during the December-April heating season; both mature December 4, 2024.
- Availability under the revolving facility was $226.4 million, and the company reported compliance with its fixed-charge coverage and senior secured leverage covenants. Letters of credit outstanding were $4.4 million.
- Operating lease right-of-use assets of $100.8 million and operating lease liabilities of $106.1 million were recognized following adoption of ASC Topic 842 on October 1, 2019.
- The company repurchased and retired approximately 3.2 million common units for $28.0 million during the first nine months. A further 0.7 million units were repurchased in July 2020.
Material Changes, Outlook and Risks
- COVID-19: Star remained classified as an essential service provider and continued fuel deliveries and emergency service. It experienced delays in HVAC equipment procurement, reduced equipment installations, deferred non-emergency service calls and a 23.7% Q3 decline in motor-fuel volume. Management reported a modest July recovery in installations and motor-fuel sales but could not estimate the pandemic’s ultimate financial impact.
- Weather: The nine-month period was 6.0% warmer than the prior year and 10.2% warmer than normal, reducing heating volume. The Q3 period was substantially colder and increased heating volume. The fiscal 2020 weather hedge generated a $10.1 million benefit, compared with a $2.1 million charge in the prior year.
- Margins and product costs: Management cautioned that current per-gallon margins may not be sustainable. Weighted-average costing can delay the effect of changes in wholesale product prices, and sudden price movements can increase working-capital, hedging and borrowing requirements.
- Receivables and borrowing base: Accounts receivable were $111.9 million, including $85.3 million from residential customers and $26.6 million from commercial customers. Deterioration in receivable aging could reduce borrowing availability and operating cash flow.
- Interest-rate exposure: Interest-rate swaps covered $65.3 million, or 51.5%, of long-term debt. A hypothetical 100-basis-point increase in interest rates would reduce annual after-tax cash flow by approximately $0.9 million.
- Legal matters: A class-action settlement involving Petro’s protected-price-plan customers received final court approval on March 26, 2020, and the action was dismissed with prejudice. The company stated that it continues to believe the allegations lacked merit and does not expect the matter to have a material adverse effect.
- Distributions and future spending: A quarterly distribution of $0.1325 per unit was declared in July 2020. Remaining fiscal 2020 maintenance capital expenditures were estimated at $4.0 million to $5.0 million, excluding leased-fleet requirements, with an additional $0.2 million to $0.3 million planned for propane operations.
Important Facts for Investors to Verify
- Whether COVID-19-related reductions in motor-fuel sales, installations and deferred service work persist into the next heating season.
- Whether heating-oil and propane margins remain near the reported nine-month level after the effects of product-price changes and hedge settlements.
- Receivable aging, customer credit losses and their effect on borrowing-base availability.
- Compliance with fixed-charge coverage, senior secured leverage and unit-repurchase covenants under the 2024 credit agreement.
- The sustainability of distributions and unit repurchases relative to operating cash flow, required term-loan amortization and seasonal working-capital needs.
- The effect of weather, commodity-price volatility, derivative fair-value changes and future weather-hedge settlements on earnings and liquidity.
- The impact of lease obligations, pension and multiemployer withdrawal liabilities, and other insurance-related contingencies.