Business Context and Reporting Period
Star Group, L.P. is a Northeast, Central and Southeast U.S. distributor of home heating oil, propane, diesel, gasoline and related products, with installation, service, plumbing and security offerings. At June 30, 2018, it served approximately 459,000 heating oil and propane customers, 76,000 delivery-only customers and 31,000 home security and plumbing customers. The filing covers the unaudited three and nine months ended June 30, 2018, the company’s fiscal third quarter and year-to-date period.
Results are highly seasonal: the company generally earns income during the winter heating season and reports losses during the quarters ending June and September.
Financial Results and Key Metrics
| Metric | Three months ended June 30, 2018 | Three months ended June 30, 2017 | Nine months ended June 30, 2018 | Nine months ended June 30, 2017 |
|---|---|---|---|---|
| Total sales | $327.4 million | $225.8 million | $1.448 billion | $1.142 billion |
| Operating income (loss) | $(8.8) million | $(19.8) million | $107.7 million | $82.5 million |
| Net income (loss) | $(8.0) million | $(13.3) million | $77.0 million | $44.6 million |
| Limited partner income (loss) per unit | $(0.15) | $(0.24) | $1.18 | $0.70 |
| Adjusted EBITDA | $(8.4) million | $(9.3) million | $123.8 million | $110.2 million |
| Cash provided by operating activities | Not separately presented | Not separately presented | $30.0 million | $23.2 million |
Third-quarter sales increased 45.0%, driven primarily by higher product prices, acquisitions and greater volumes. Product sales rose 61.8% to $256.4 million, while installations and services increased 5.4% to $70.9 million. Nine-month sales increased 26.8%.
Nine-month product gross profit increased to $413.9 million from $357.5 million. Home heating oil and propane realized gross profit increased to $1.1477 per gallon from $1.1360 per gallon; however, third-quarter margin declined to $1.1150 per gallon from $1.1455 per gallon. Combined installation and service gross profit declined to $6.1 million for the nine-month period from $8.5 million.
The third-quarter operating loss narrowed primarily because the fair value of derivatives produced a $7.5 million gain versus a $3.1 million loss in the prior-year quarter. Year-to-date derivative valuation changes produced a $7.3 million gain versus a $7.0 million loss in the prior-year period.
The nine-month effective tax rate was 23.1%, including an $11.2 million provisional benefit from the Tax Cuts and Jobs Act. Excluding that benefit, management reported an effective rate of 34.3%, compared with 41.5% in the prior-year period.
Balance Sheet, Cash Flow, Debt and Liquidity
- Cash and cash equivalents were $9.4 million at June 30, 2018, down from $52.5 million at September 30, 2017. Cash, cash equivalents and restricted cash totaled $9.7 million.
- Receivables increased to $182.6 million from $96.6 million, reflecting higher product costs, volumes and customer balances. Inventories declined to $48.1 million from $59.6 million.
- Total debt was $109.9 million at June 30, 2018, consisting of $41.5 million of revolving borrowings and $68.4 million of term debt, compared with $75.7 million at September 30, 2017.
- Credit-facility availability was $180.6 million, and the company reported compliance with its fixed-charge coverage and senior secured leverage covenants.
- Nine-month cash flow from operations was $30.0 million. Investing cash use was $64.5 million, including $8.7 million of capital expenditures, $21.3 million for acquisitions and $34.8 million of investment purchases, primarily captive insurance collateral.
- Financing cash use was $8.6 million, including $19.1 million of distributions, $22.5 million of unit repurchases and $7.5 million of term-loan repayments, partly offset by net revolving-facility borrowings.
- Captive insurance collateral increased to $45.2 million from $11.8 million, including a $34.2 million cash deposit into an irrevocable trust during the first quarter.
Material Changes Versus the Prior Comparable Period
- Home heating oil and propane volume increased 34.4% in the third quarter and 14.9% year to date. Colder weather and acquisitions increased volumes, while net customer attrition reduced them.
- Wholesale product costs increased 34.3% in the third quarter and 22.0% year to date, contributing to higher revenue but also higher receivables, credit-card costs and bad-debt expense.
- Nine-month net customer attrition was 8,300 accounts, or 1.8% of the customer base, compared with 2,700 accounts, or 0.6%, in the prior-year period. Management attributed the deterioration to higher fuel prices, credit issues and service disruptions during severe winter weather.
- Delivery and branch expenses increased 23.2% in the quarter and 16.7% year to date. Management cited acquisitions, severe winter weather, higher insurance claims, increased staffing and customer-service investments.
- Four acquisitions were completed during fiscal 2018 for an aggregate purchase price of approximately $22.8 million, including $21.3 million paid in cash.
- The company repurchased and retired approximately 2.4 million common units for $22.5 million during the nine months ended June 30, 2018; approximately 3.1 million units remained available under the repurchase authorization at quarter-end.
- In July 2018, the company refinanced its debt. The new facility retained a $300 million revolving commitment, expandable to $450 million during the heating season, added a $100 million term loan and extended maturity to July 2, 2023. Reported availability would have increased to $214.3 million based on June 30 balances.
Guidance, Outlook, Risks and Unusual Items
Management did not provide formal full-year earnings guidance in the filing. It estimated approximately $3.5 million of maintenance capital expenditures and $0.5 million of additional propane investment for the remainder of fiscal 2018. At the then-current distribution rate of $0.1175 per unit per quarter, remaining fiscal 2018 distributions were expected to total approximately $6.3 million to common unitholders, plus amounts payable to the general partner and management.
- More than 92% of price-protected customer hedges were at their strike price at June 30, 2018, limiting potential margin expansion unless heating oil prices decline. Management stated that a higher proportion of price-protected customers could pressure margins in the remainder of fiscal 2018 and fiscal 2019.
- Customer renewal rates for price-protected contracts may be adversely affected by higher offered renewal prices. Failure to renew could reduce profitability, liquidity and cash flow.
- Weather is a major operating risk. Severe winter weather increased volumes but also caused service disruptions, premium labor costs, insurance claims and other expenses. A weather hedge generated a $1.9 million charge for fiscal 2018; future contracts provide for a maximum receipt of $12.5 million and a maximum payment of $5.0 million for each applicable year.
- Commodity-price volatility can increase working-capital borrowing, hedge-margin requirements, collateral requirements, bad-debt expense and credit-card processing costs. A hypothetical 100-basis-point increase in variable interest rates would reduce annual after-tax cash flow by approximately $0.8 million.
- The company faces a putative class-action claim involving protected-price customer contracts. No class had been certified, the damages sought were unspecified, and the company stated that it could not assess the outcome or materiality.
- Operating leases had undiscounted future minimum payments of approximately $130.3 million through 2032. The company expects the lease accounting standard to materially change its balance sheet upon adoption, but had not estimated the discounted assets and liabilities.
- The company’s net loss in the third quarter and year-to-date cash-flow trends should be evaluated in light of the business’s seasonal pattern and the significant non-cash volatility from derivative remeasurement.
Most Important Facts to Verify
- Whether price-protected customer renewals and customer attrition continue to pressure volumes and margins.
- The effect of the July 2018 refinancing on borrowing costs, covenant headroom, availability and required amortization.
- Whether receivables, bad-debt expense and working-capital borrowings normalize as seasonal collections occur.
- The final accounting impact of the provisional Tax Cuts and Jobs Act deferred-tax remeasurement.
- The outcome and potential exposure from the Petro protected-price litigation.
- The sustainability of distributions and unit repurchases relative to operating cash flow, acquisitions and debt obligations.