Star Group(US:SGU)2025-12-08 22:54Customer Base and Sales - As of September 30, 2025, Star Group sold home heating oil and propane to approximately 406,400 full-service residential and commercial customers, with 59% located in New York, New Jersey, and Connecticut[19]. - Total sales during fiscal 2025 were comprised of approximately 63% from home heating oil and propane, 18% from other petroleum products, and 19% from installation and repair services[19]. - Star Group is the largest retail distributor of home heating oil in the U.S., with a market share exceeding 5.5%[19]. - The company has approximately 93% of its full-service residential and commercial customers receiving automatic deliveries based on weather conditions[21]. - Approximately 25% of residential customers utilize the "smart pay" budget payment plan for their heating oil and propane deliveries[21]. - As of September 30, 2025, 67.7% of residential home heating oil and propane customers are on variable pricing programs, up from 62.5% in 2024[42]. - The company experienced net customer attrition of (4.7%) in fiscal year 2025, compared to (4.2%) in fiscal year 2024, indicating a trend of increasing customer losses[90]. - Gross customer gains decreased from 12.0% in fiscal year 2023 to 8.8% in fiscal year 2025, while gross customer losses increased from 15.6% to 13.5% in the same period[90]. - Customer losses to natural gas and electricity conversions were estimated at (1.3%) in fiscal year 2025, slightly improved from (1.4%) in fiscal year 2024[98]. - Approximately 80% of annual volume sold occurs during the peak heating season from October through March, making the company vulnerable to warm winters[102]. Financial Performance - Net income for fiscal 2025 increased by $38.3 million, or 108.7%, to $73.5 million, influenced by a favorable change in the fair value of derivative instruments and an increase in Adjusted EBITDA[207]. - For fiscal 2025, Adjusted EBITDA increased by $24.8 million, or 22.2%, to $136.4 million compared to fiscal 2024[208]. - The increase in Adjusted EBITDA in the base business was driven by an $18.5 million increase, attributed to higher home heating oil and propane per gallon margins[208]. - Recent acquisitions contributed an additional $16.9 million to Adjusted EBITDA, partially offset by a $10.6 million increase in expenses related to weather hedge contracts[208]. - Product sales decreased by $11.2 million, or 0.8%, to $1,437.6 million in fiscal 2025, primarily due to a decrease in average selling prices[188]. - Installation and service sales increased by $29.5 million, or 9.3%, to $346.8 million in fiscal 2025, driven by $22.6 million from recent acquisitions[190]. - Total product gross profit increased by $57.2 million, or 12.2%, to $525.2 million in fiscal 2025, due to higher home heating oil and propane volume sold and increased margins[193]. - The cost of product decreased by $68.4 million, or 7.0%, to $912.4 million in fiscal 2025, attributed to a decrease in wholesale product cost[191]. - Delivery and branch expenses increased by $34.4 million to $400.8 million in fiscal 2025, driven by colder temperatures and expenses from recent acquisitions[199]. - Net interest expense rose by $2.7 million, or 23.9%, to $14.3 million in fiscal 2025, due to an increase in average borrowings[203]. Acquisitions and Growth Strategy - The company acquired one heating oil business and three propane businesses for approximately $80.5 million in cash during fiscal 2025[52]. - During fiscal 2024, the company acquired one propane business and four heating oil businesses for approximately $49.4 million in cash[53]. - Star Group's business strategy includes pursuing select acquisitions to grow its customer base and enhance operations[29]. Regulatory and Environmental Challenges - The New York State Climate Leadership and Community Protection Act aims to reduce GHG emissions to 60% of 1990 levels by 2030[61]. - The Fossil Fuel Ban in New York will prohibit the installation of fossil-fuel equipment in new buildings starting December 31, 2025[63]. - The company is facing legal challenges regarding the Fossil Fuel Ban, with a lawsuit filed on October 12, 2023, seeking to declare it invalid based on federal preemption by the Energy Policy and Conservation Act[65]. - Proposed regulations in Massachusetts could require heating energy suppliers to convert approximately 3% of their customers to electric heat each year, potentially impacting the company's operations negatively[66]. - The Massachusetts Department of Environmental Protection finalized amendments to the Greenhouse Gas Emissions Regulation, extending registration deadlines for GHG emissions reporting to January 31, 2025, and June 2, 2025, respectively[68]. - Starting July 1, 2025, the minimum biodiesel blending requirement will increase from 5% to 10% in New York and Connecticut, and from 10% to 20% in Rhode Island, which may affect wholesale product costs[70]. - The company is subject to various environmental and safety regulations, including the Clean Air Act and the Resource Conservation and Recovery Act, which impose limitations on pollutant emissions[71]. - The company has incurred costs for soil and groundwater contamination remediation at some locations, although no material issues have arisen with prior owners regarding these obligations[72]. - The company is subject to various federal, state, and local environmental regulations that could increase operational costs due to stricter pollution control requirements[107]. Risks and Market Conditions - Fluctuations in wholesale product costs can adversely affect the company's financial condition, as profitability is sensitive to changes in supply costs and market conditions[75]. - High wholesale product prices can lead to customer conservation and attrition, impacting demand and potentially resulting in reduced profit margins[76]. - Constraints in physical product supplies could negatively impact the company's ability to deliver products, leading to increased costs and potential reputational damage[80]. - The company's hedging strategy may affect liquidity due to cash margin deposits and mark-to-market maintenance margins required for derivatives and futures contracts[84]. - The company faces risks related to customer attrition due to competition and demand for alternative energy products, which could materially affect operating results[94]. - The company’s risk management policies cannot eliminate all commodity price risks, leading to potential financial losses[86]. - Economic conditions, including inflation and recession, may adversely affect customer spending and demand for products[135]. - The company is monitoring the economic effects of a 10% baseline tariff on certain imported products, which could affect costs and availability of assets[171]. Employee and Labor Relations - The company had 3,024 employees as of September 30, 2025, with 40% represented by collective bargaining agreements[58]. - Approximately 40% of the company's employees are covered under 64 different collective bargaining agreements, which may lead to potential labor actions[113]. Cybersecurity and IT Risks - The company experienced a security incident in July 2021, resulting in the encryption of certain IT systems, but it did not materially affect business operations[110]. - The company faces risks related to cybersecurity, including potential future attacks that could disrupt operations and harm financial results[111]. - The company has implemented a cybersecurity program aligned with industry standards to manage risks[138]. - The Board of Directors oversees key risks, including cybersecurity, with quarterly updates from the IT department[144]. Financial Obligations and Credit Facilities - The company has a total of $210 million in senior secured term loans and a $400 million revolving credit facility, both due September 27, 2029[18]. - The company has a $189.0 million term loan outstanding under its revolving credit facility as of September 30, 2025, with availability of $165.0 million[123]. - During the fiscal 2025 heating season, borrowings under the revolver peaked at $75.4 million[123]. - The credit agreement requires maintaining availability of at least $25.7 million or $40 million on a historical pro forma basis[156]. - The company's credit agreement contains covenants that may limit operational flexibility and ability to incur additional debt[126]. Tax and Depreciation - The effective income tax rate increased from 27.5% in fiscal 2024 to 28.6% in fiscal 2025, contributing to a $16.1 million increase in income tax expense[206]. - The new federal income tax legislation reinstated 100% bonus depreciation on fixed assets acquired after January 19, 2025, which may impact cash flow[163]. - The estimated depreciation and amortization expense for fiscal 2025 is $36,420,000 for book purposes and $56,078,000 for tax purposes[165].