Star Group, L.P.: Form 10-Q for the period ended Jun 30, 2024

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Statement Regarding Forward-Looking Disclosure

This Quarterly Report on Form 10-Q (this “Report”) includes “forward-looking statements” which represent our expectations or beliefs concerning future events that involve risks and uncertainties, including the impact of geopolitical events on wholesale product cost volatility, the price and supply of the products that we sell, our ability to purchase sufficient quantities of product to meet our customer’s needs, rapid increases in levels of inflation, the consumption patterns of our customers, our ability to obtain satisfactory gross profit margins, the effect of weather conditions on our financial performance, our ability to obtain new customers and retain existing customers, our ability to make strategic acquisitions, the impact of litigation, natural gas conversions and electrification of heating systems, pandemic and future global health pandemics, recessionary economic conditions, future union relations and the outcome of current and future union negotiations, the impact of current and future governmental regulations, including climate change, environmental, health, and safety regulations, the ability to attract and retain employees, customer credit worthiness, counterparty credit worthiness, marketing plans, cyber-attacks, global supply chain issues, labor shortages and new technology, including alternative methods for heating and cooling residences. All statements other than statements of historical facts included in this Report including, without limitation, the statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere herein, are forward-looking statements. Without limiting the foregoing, the words “believe,” “anticipate,” “plan,” “expect,” “seek,” “estimate,” and similar expressions are intended to identify forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct, and actual results may differ materially from those projected as a result of certain risks and uncertainties. These risks and uncertainties include, but are not limited to, those set forth in this Report under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in our Fiscal 2023 Form 10-K under Part I Item 1A “Risk Factors.” Important factors that could cause actual results to differ materially from our expectations (“Cautionary Statements”) are disclosed in this Report and in our Fiscal 2023 Form 10-K. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the Cautionary Statements. Unless otherwise required by law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this Report.

Liquid Product Price Volatility

Volatility, which is reflected in the wholesale price of liquid products, including home heating oil, propane and motor fuels, has a larger impact on our business when prices rise. Home heating oil consumers are sensitive to heating cost increases, and this often leads to customer conservation and increased gross customer losses. As a commodity, the price of home heating oil is generally impacted by many factors, including economic and geopolitical forces and is closely linked to the price of diesel fuel. The volatility in the wholesale cost of diesel fuel as measured by the New York Mercantile Exchange (“NYMEX”), for the fiscal years ending September 30, 2020, through 2024, on a quarterly basis, is illustrated in the following chart (price per gallon):

(a) On July 30, 2024, the NYMEX ultra low sulfur diesel contract closed at $2.34 per gallon or $0.35 per gallon lower than the average of $2.69 through the first nine months of Fiscal 2024.

Income Taxes

Book versus Tax Deductions

The amount of cash flow generated in any given year depends upon a variety of factors including the amount of cash income taxes required, which will increase as depreciation and amortization decreases. The amount of depreciation and amortization that we deduct for book (i.e., financial reporting) purposes will differ from the amount that the Company can deduct for Federal tax purposes. The table below compares the estimated depreciation and amortization for book purposes to the amount that we expect to deduct for Federal tax purposes, based on currently owned assets. While we file our tax returns based on a calendar year, the amounts below are based on our September 30 fiscal year, and the tax amounts include any bonus depreciation available for fixed assets purchased. However, this table does not include any forecast of future annual capital purchases.

Estimated Depreciation and Amortization Expense

Weather Hedge Contracts

Weather conditions have a significant impact on the demand for home heating oil and propane because certain customers depend on these products principally for space heating purposes. Actual weather conditions may vary substantially from year to year, significantly affecting the Company’s financial performance. To partially mitigate the adverse effect of warm weather on cash flow, we have used weather hedging contracts for a number of years with several providers.

The Company entered into weather hedge contracts for fiscal years 2023 and 2024. The hedge period runs from November 1 through March 31, taken as a whole. The “Payment Thresholds,” or strikes, are set at various levels and are referenced against degree days for the prior ten year average. Under these contracts the maximum amount the Company can receive is $12.5 million annually. For the contracts applicable to fiscal 2023, we were additionally obligated to make an annual payment capped at $5.0 million if degree days exceeded the Payment Threshold. This obligation does not exist under the contract applicable to fiscal year 2024.

The temperatures experienced during the hedge period through March 31, 2024 and March 31, 2023 were warmer than the strikes in the weather hedge contracts. As a result at June 30, 2024 and June 30, 2023, the Company reduced delivery and branch expenses and recorded a receivable under those contracts of $7.5 million and $12.5 million, respectively. The amounts were received in full in April 2024 and April 2023.

For fiscal 2025, the Company entered into weather hedge contracts with the similar hedge period described above. The maximum that the Company can receive is $15.0 million annually and we are additionally obligated to make an annual payment capped at $5.0 million if degree days exceed the Payment Threshold. If we had this same amount of coverage in place during fiscal 2024 we would have received $7.5 million more in April 2024.

Per Gallon Gross Profit Margins

We believe home heating oil and propane margins should be evaluated on a cents per gallon basis before the effects of increases or decreases in the fair value of derivative instruments, as we believe that such per gallon margins are best at showing profit trends in the underlying business without the impact of non-cash changes in the market value of hedges before the settlement of the underlying transaction.

A significant portion of our home heating oil volume is sold to individual customers under an arrangement pre-establishing a ceiling price or fixed price for home heating oil over a set period of time, generally twelve to twenty-four months (“price-protected” customers). When these price-protected customers agree to purchase home heating oil from us for the next heating season, we purchase option contracts, swaps and futures contracts for a substantial majority of the heating oil that we expect to sell to these customers. The amount of home heating oil volume that we hedge per price-protected customer is based upon the estimated fuel consumption per average customer per month. In the event that the actual usage exceeds the amount of the hedged volume on a monthly basis, we may be required to obtain additional volume at unfavorable costs. In addition, should actual usage in any month be less than the hedged volume, our hedging costs and losses could be greater, thus reducing expected margins.

Derivatives

FASB ASC 815-10-05 Derivatives and Hedging requires that derivative instruments be recorded at fair value and included in the consolidated balance sheet as assets or liabilities. To the extent our interest rate derivative instruments designated as cash flow hedges are effective, as defined under this guidance, changes in fair value are recognized in other comprehensive income (loss) until the forecasted hedged item is recognized in earnings. We have elected not to designate our commodity derivative instruments as hedging instruments under this guidance and, as a result, the changes in fair value of the derivative instruments are recognized in our statement of operations. Therefore, we experience volatility in earnings as outstanding derivative instruments are marked to market and non-cash gains and losses are recorded prior to the sale of the commodity to the customer. The volatility in any given period related to unrealized non-cash gains or losses on derivative instruments can be significant to our overall results. However, we ultimately expect those gains and losses to be offset by the cost of product when purchased.

Customer Attrition

We measure net customer attrition on an ongoing basis for our full service residential and commercial home heating oil and propane customers. Net customer attrition is the difference between gross customer losses and customers added through marketing efforts. Customers added through acquisitions are not included in the calculation of gross customer gains. However, additional customers that are obtained through marketing efforts or lost at newly acquired businesses are included in these calculations from the point of closing going forward. Customer attrition percentage calculations include customers added through acquisitions in the denominators of the calculations on a weighted average basis from the closing date. Gross customer losses are the result of a number of factors, including price competition, move-outs, credit losses, conversions to natural gas and service disruptions. When a customer moves out of an existing home, we count the “move out” as a loss, and, if we are successful in signing up the new homeowner, the “move in” is treated as a gain. The impact of certain geopolitical forces on liquid product prices could increase future attrition due to higher losses from credit related issues.

Customer gains and losses of home heating oil and propane customers

Customer gains (attrition) as a percentage of home heating oil and propane customer base

For the nine months ended June 30, 2024, the Company lost 12,100 accounts (net), or 3.1% of its home heating oil and propane customer base, compared to 9,100 accounts lost (net), or 2.2% of its home heating and oil propane customer base in the prior year comparable period. Gross customer gains were 10,000 less than the prior year's comparable period primarily due to market conditions with regard to physical supply in the first quarter of fiscal 2023 that did not repeat in the current fiscal year and less customer move-ins. Gross customer losses were 7,000 less due to a reduction in the number of customer relocations and other factors.

During the nine months ended June 30, 2024, we estimate that we lost 1.1% of our home heating oil and propane accounts to natural gas and electricity conversions versus 1.3% for the nine months ended June 30, 2023 and 1.3% for the nine months ended June 30, 2022. Losses to natural gas and electricity in our footprint for the heating oil and propane industry could be greater or less than the Company’s estimates.

Acquisitions

The timing of acquisitions and the types of products sold by acquired companies impact year-over-year comparisons. During the nine months ended June 30, 2024, the Company acquired one propane and three heating oil businesses for approximately $22.6 million. During fiscal 2023 the Company acquired one propane and two heating oil businesses for approximately $19.8 million. The following tables detail the Company’s acquisition activity and the associated volume sold during the 12-month period prior to the date of acquisition.

(in thousands of gallons)

Fiscal 2024 Acquisitions

(in thousands of gallons)

Fiscal 2023 Acquisitions

Sale of Certain Assets

In October 2022 we sold certain assets, which included a customer list of approximately 6,500 customers, for $2.7 million (including a deferred purchase price of $0.5 million). The following table details sales generated from the assets sold:

(in thousands)

Protected Price Account Renewals

A substantial majority of the Company’s price-protected customers have agreements with us that are subject to annual renewal in the period between April and November of each fiscal year. If a significant number of these customers elect not to renew their price-protected agreements with us and do not continue as our customers under a variable price-plan, the Company’s near term profitability, liquidity and cash flow will be adversely impacted.

Seasonality

The Company’s fiscal year ends on September 30. All references to quarters and years, respectively, in this document are to the fiscal quarters and fiscal years unless otherwise noted. The seasonal nature of our business has resulted, on average, during the last five years, in the sale of approximately 30% of the volume of home heating oil and propane in the first fiscal quarter and 50% of the volume in the second fiscal quarter, the peak heating season. Approximately 25% of the volume of motor fuel and other petroleum products is sold in each of the four fiscal quarters. We generally realize net income during the quarters ending December and March and net losses during the quarters ending June and September. In addition, sales volume typically fluctuates from year to year in response to variations in weather, wholesale energy prices and other factors.

Degree Day

A “degree day” is an industry measurement of temperature designed to evaluate energy demand and consumption. Degree days are based on how far the average daily temperature departs from 65°F. Each degree of temperature above 65°F is counted as one cooling degree day, and each degree of temperature below 65°F is counted as one heating degree day. Degree days are accumulated each day over the course of a year and can be compared to a monthly or a long-term (multi-year) average to see if a month or a year was warmer or cooler than usual. Degree days are officially observed by the National Weather Service.

Every ten years, the National Oceanic and Atmospheric Administration (“NOAA”) computes and publishes average meteorological statistics, including the average temperature for the last 30 years by geographical location, and the corresponding degree days. The latest and most widely used data covers the years from 1991 to 2020. Our calculations of “normal” weather are based on these published 30 year averages for heating degree days, weighted by volume for the locations where we have existing operations.

Consolidated Results of Operations

The following is a discussion of the consolidated results of operations of the Company and its subsidiaries and should be read in conjunction with the historical financial and operating data and Notes thereto included elsewhere in this Quarterly Report.

Three Months Ended June 30, 2024

Compared to the Three Months Ended June 30, 2023

Volume

For the three months ended June 30, 2024, retail volume of home heating oil and propane sold increased by 7.6 million gallons, or 25.3%, to 37.7 million gallons, compared to 30.1 million gallons for the three months ended June 30, 2023. For those locations where we had existing operations during both periods, which we sometimes refer to as the “base business” (i.e., excluding acquisitions), temperatures (measured on a heating degree day basis) for the three months ended June 30, 2024 were 0.5% colder than the three months ended June 30, 2023 and 17.7% warmer than normal, as reported by NOAA. For the twelve months ended June 30, 2024, net customer attrition for the base business was 4.4%. The impact of fuel conservation, along with any period-to-period differences in delivery scheduling, the timing of accounts added or lost during the fiscal years, equipment efficiency, and other volume variances not otherwise described, are included in the chart below under the heading “Other.” An analysis of the change in the retail volume of home heating oil and propane, which is based on management’s estimates, sampling, and other mathematical calculations and certain assumptions, is found below:

(in millions of gallons)

(a) Primarily represents changes in delivery timing.

The following chart sets forth the percentage by volume of total home heating oil sold to residential variable-price customers, residential price-protected customers and commercial/industrial/other customers for the three months ended June 30, 2024, compared to the three months ended June 30, 2023

Volume of motor fuel and other petroleum products sold decreased by 3.0 million gallons, or 8.3%, to 32.9 million gallons for the three months ended June 30, 2024, compared to 35.9 million gallons for the three months ended June 30, 2023.

Product Sales

For the three months ended June 30, 2024, product sales increased by $25.4 million, or 11.4%, to $249.0 million, compared to $223.6 million for the three months ended June 30, 2023, due to an increase in total volume sold of 7.0% and an increase in average selling prices.

Installations and Service

For the three months ended June 30, 2024, installation and service revenue increased by $6.0 million, or 7.9%, to $82.6 million, compared to $76.6 million for the three months ended June 30, 2023 driven by an increase in service revenue.

Cost of Product

For the three months ended June 30, 2024, cost of product increased $5.2 million, or 3.1%, to $174.3 million, compared to $169.1 million for the three months ended June 30, 2023, due to an increase in total volume sold of 7.0%. Product volumes and wholesale product cost include heating oil, propane, motor fuels and other petroleum products.

Gross Profit — Product

The table below calculates our per gallon margins and reconciles product gross profit for home heating oil and propane and motor fuel and other petroleum products. We believe the change in home heating oil and propane margins should be evaluated before the effects of increases or decreases in the fair value of derivative instruments, as we believe that realized per gallon margins should not include the impact of non-cash changes in the market value of hedges before the settlement of the underlying transaction. On that basis, home heating oil and propane margins for the three months ended June 30, 2024 increased by $0.2506 per gallon, or 17.3%, to $1.6960 per gallon, from $1.4454 per gallon during the three months ended June 30, 2023. Going forward, we cannot assume that per gallon margins realized during the three months ended June 30, 2024 are sustainable especially with the volatility in heating oil and propane costs. Product sales and cost of product include home heating oil, propane, other petroleum products and liquidated damages billings.

For the three months ended June 30, 2024, total product gross profit was $74.7 million, which was $20.2 million, or 37.2%, higher than the three months ended June 30, 2023, due to an increase in home heating oil and propane volume sold ($11.0 million) and an increase in home heating oil and propane margins ($9.5 million), partially offset by a decrease in gross profit from other petroleum products ($0.3 million).

Cost of Installations and Service

Total installation costs for the three months ended June 30, 2024 increased by $1.9 million or 8.2%, to $24.8 million, compared to $22.9 million of installation costs for the three months ended June 30, 2023. This increase was largely due to higher installation sales. Installation costs as a percentage of installation sales were 82.2% for the three months ended June 30, 2024 and 83.4% for the three months ended June 30, 2023. Gross profit from installation increased by $0.8 million.

Service expense increased by $0.6 million, or 1.4%, to $44.3 million for the three months ended June 30, 2024, representing 84.4% of service sales, versus $43.7 million, or 89.0% of service sales, for the three months ended June 30, 2023. A large proportion of our service expenses are incurred under fixed-fee prepaid service contract arrangements, therefore trends in service expenses may not directly correlate to trends in the related revenues. Gross profit from service increased by $2.7 million.

We realized a combined gross profit from service and installation of $13.5 million for the three months ended June 30, 2024 compared to a gross profit of $10.0 million for the three months ended June 30, 2023.

(Increase) Decrease in the Fair Value of Derivative Instruments

During the three months ended June 30, 2024, the change in the fair value of derivative instruments resulted in a $1.0 million charge due to a decrease in the market value for unexpired hedges (a $3.0 million charge) that was partially offset by a $2.0 million credit due to the expiration of certain hedged positions.

During the three months ended June 30, 2023, the change in the fair value of derivative instruments resulted in a $1.0 million credit as a decrease in the market value for unexpired hedges (a $6.5 million charge) was more than offset by a $7.5 million credit due to the expiration of certain hedged positions.

Delivery and Branch Expenses

For the three months ended June 30, 2024, delivery and branch expense increased $3.4 million, or 4.2%, to $86.5 million, compared to $83.1 million for the three months ended June 30, 2023. The increase was driven by $1.6 million of acquisition related expenses, a $1.6 million increase in insurance expenses due to increasing premiums and expected claim costs and $0.2 million of other net expense increases.

Depreciation and Amortization Expenses

For the three months ended June 30, 2024, depreciation and amortization expenses decreased $0.5 million, or 5.7%, to $7.2 million, compared to $7.7 million for the three months ended June 30, 2023, primarily due to intangible assets that fully amortized in the prior fiscal year.

General and Administrative Expenses

For the three months ended June 30, 2024, general and administrative expenses increased by $1.3 million or 22.4%, to $7.4 million, from $6.1 million for the three months ended June 30, 2023, due to a $0.8 million increase in profit sharing expense, $0.3 million reduction in the gain on sale of fixed assets, and $0.2 million of other net expense increases. The Company accrues approximately 6.0% of Adjusted EBITDA as defined in its profit sharing plan for distribution to its employees. This amount is payable when the Company achieves Adjusted EBITDA of at least 70% of the amount budgeted. The dollar amount of the profit sharing pool adjusts accordingly based on Adjusted EBITDA levels achieved.

Finance Charge Income

For the three months ended June 30, 2024, finance charge income decreased by $0.1 million or 6.9% to $1.7 million, from $1.8 million for the three months ended June 30, 2023.

Interest Expense, Net

For the three months ended June 30, 2024, net interest expense decreased by $0.7 million, or 20.9%, to $2.7 million compared to $3.4 million for the three months ended June 30, 2023. The year-over-year change was driven by a decrease in average borrowings of $31.3 million from $174.5 million for the three months ended June 30, 2023 to $143.2 million for the three months ended June 30, 2024 that was partially offset by an increase in the weighted average interest rate from 6.7% for the three months ended June 30, 2023 to 7.2% for the three months ended June 30, 2024. To hedge against rising interest rates, the Company utilizes interest rate swaps. At June 30, 2024, approximately 40.0% of borrowings under Star's variable-rate long term debt were not subject to interest rate increases as a result of interest rate swaps.

Amortization of Debt Issuance Costs

For the three months ended June 30, 2024, amortization of debt issuance cost was $0.2 million, essentially unchanged from the three months ended June 30, 2023.

Income Tax Benefit

For the three months ended June 30, 2024, the Company’s income tax benefit decreased by $5.1 million to $4.2 million, from $9.3 million for the three months ended June 30, 2023. The decrease in the income tax benefit was driven by a $18.0 million increase in income before income taxes.

Net Loss

For the three months ended June 30, 2024, Star’s net loss decreased $12.9 million, to $11.0 million, compared to the three months ended June 30, 2023, primarily due to an$18.9 million decrease in Adjusted EBITDA loss and a $0.7 million decrease in interest expense that was partially offset by a $5.1 million decrease in income tax benefit and an unfavorable change in the fair value of derivative instruments of $2.0 million.

Adjusted EBITDA Loss

For the three months ended June 30, 2024, Adjusted EBITDA loss decreased $18.9 million, to $4.1 million, compared to the three months ended June 30, 2023, as an increase in home heating oil and propane volume sold, an increase in home heating oil and propane margins, an increase in service and installation profitability and the additional EBITDA from acquisitions more than offset an increase in operating expenses.

EBITDA and Adjusted EBITDA should not be considered as an alternative to net income, as an indicator of operating performance, or as an alternative to cash flow, as a measure of liquidity or ability to service debt obligations, but provides additional information for evaluating the Company’s ability to make the Minimum Quarterly Distribution. EBITDA and Adjusted EBITDA are calculated as follows:

(in thousands)

(a) EBITDA (Earnings from continuing operations before net interest expense, income taxes, depreciation and amortization) and Adjusted EBITDA (Earnings from continuing operations before net interest expense, income taxes, depreciation and amortization, (increase) decrease in the fair value of derivatives, other income (loss), net, multiemployer pension plan withdrawal charge, gain or loss on debt redemption, goodwill impairment, and other non-cash and non-operating charges) are non-GAAP financial measures that are used as supplemental financial measures by management and external users of our financial statements, such as investors, commercial banks and research analysts, to assess:

• our compliance with certain financial covenants included in our debt agreements;
• our financial performance without regard to financing methods, capital structure, income taxes or historical cost basis;
• our operating performance and return on invested capital compared to those of other companies in the retail distribution of refined petroleum products, without regard to financing methods and capital structure;
• our ability to generate cash sufficient to pay interest on our indebtedness and to make distributions to our partners; and
• the viability of acquisitions and capital expenditure projects and the overall rates of return of alternative investment opportunities.

The method of calculating Adjusted EBITDA may not be consistent with that of other companies, and EBITDA and Adjusted EBITDA both have limitations as analytical tools and so should not be viewed in isolation but in conjunction with measurements that are computed in accordance with GAAP. Some of the limitations of EBITDA and Adjusted EBITDA are:

• EBITDA and Adjusted EBITDA do not reflect our cash used for capital expenditures.
• Although depreciation and amortization are non-cash charges, the assets being depreciated or amortized often will have to be replaced and EBITDA and Adjusted EBITDA do not reflect the cash requirements for such replacements;
• EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital requirements;
• EBITDA and Adjusted EBITDA do not reflect the cash necessary to make payments of interest or principal on our indebtedness; and EBITDA and Adjusted EBITDA do not reflect the cash required to pay taxes.

Nine Months Ended June 30, 2024

Compared to the Nine Months Ended June 30, 2023

Volume

For the nine months ended June 30, 2024, retail volume of home heating oil and propane sold decreased by 5.5 million gallons, or 2.3%, to 234.9 million gallons, compared to 240.4 million gallons for the nine months ended June 30, 2023. For those locations where we had existing operations during both periods, which we sometimes refer to as the “base business” (i.e., excluding acquisitions), temperatures (measured on a heating degree day basis) for the nine months ended June 30, 2024 were less than 0.1% warmer than the nine months ended June 30, 2023 and 15.1% warmer than normal, as reported by NOAA. For the twelve months ended June 30, 2024, net customer attrition for the base business was 4.4%. The impact of fuel conservation, along with any period-to-period differences in delivery scheduling, the timing of accounts added or lost during the fiscal years, equipment efficiency, and other volume variances not otherwise described, are included in the chart below under the heading “Other.” An analysis of the change in the retail volume of home heating oil and propane, which is based on management’s estimates, sampling, and other mathematical calculations and certain assumptions, is found below:

(in millions of gallons)

(a) Primarily represents changes in delivery timing.

The following chart sets forth the percentage by volume of total home heating oil sold to residential variable-price customers, residential price-protected customers and commercial/industrial/other customers for the nine months ended June 30, 2024, compared to the nine months ended June 30, 2023:

Volume of motor fuel and other petroleum products sold decreased by 9.3 million gallons, or 8.9%, to 95.4 million gallons for the nine months ended June 30, 2024, compared to 104.7 million gallons for the nine months ended June 30, 2023.

Product Sales

For the nine months ended June 30, 2024, product sales decreased by $0.2 billion, or 11.6%, to $1.3 billion, compared to $1.5 billion for the nine months ended June 30, 2023, due to a decrease in average selling prices and a decrease in total volume sold of 4.3%. Selling prices decreased largely due to a decrease in wholesale product cost of $0.4308 per gallon, or 14.1%, compared to the nine months ended June 30, 2023. Product volumes and wholesale product cost include heating oil, propane, motor fuels and other petroleum products.

Installations and Service

For the nine months ended June 30, 2024, installation and service revenue increased by $9.7 million, or 4.3%, to $232.9 million, compared to $223.2 million for the nine months ended June 30, 2023 driven by an increase in installation sales.

Cost of Product

For the nine months ended June 30, 2024, cost of product decreased $187.5 million, or 17.8%, to $867.0 million, compared to $1,054.5 million for the nine months ended June 30, 2023, due to a decrease in wholesale product cost of $0.4308 per gallon, or 14.1% and a decrease in total volume sold of 4.3%. Product volumes and wholesale product cost include heating oil, propane, motor fuels and other petroleum products.

Gross Profit — Product

The table below calculates our per gallon margins and reconciles product gross profit for home heating oil and propane and motor fuel and other petroleum products. We believe the change in home heating oil and propane margins should be evaluated before the effects of increases or decreases in the fair value of derivative instruments, as we believe that realized per gallon margins should not include the impact of non-cash changes in the market value of hedges before the settlement of the underlying transaction. On that basis, home heating oil and propane margins for the nine months ended June 30, 2024 increased by $0.1229 per gallon, or 7.9%, to $1.6796 per gallon, from $1.5567 per gallon during the nine months ended June 30, 2023. Going forward, we cannot assume that per gallon margins realized during the nine months ended June 30, 2024 are sustainable especially with the volatility in heating oil and propane costs. Product sales and cost of product include home heating oil, propane, other petroleum products and liquidated damages billings.

For the nine months ended June 30, 2024, total product gross profit was $425.8 million, which was $17.6 million, or 4.3%, higher than the nine months ended June 30, 2023, due to an increase in home heating oil and propane margins ($28.8 million) that was partially offset by a decrease in home heating oil and propane volume sold ($8.5 million) and decrease in gross profit from other petroleum products ($2.7 million).

Cost of Installations and Service

Total installation costs for the nine months ended June 30, 2024 increased by $3.0 million or 4.2%, to $74.0 million, compared to $71.0 million of installation costs for the nine months ended June 30, 2023. This increase was largely due to higher installation sales. Installation costs as a percentage of installation sales were 81.6% for the nine months ended June 30, 2024 and 83.1% for the nine months ended June 30, 2023. Gross profit from installation increased by $2.2 million.

Service expense increased by $0.4 million, or 0.3%, to $140.8 million for the nine months ended June 30, 2024, representing 99.0% of service sales, versus $140.4 million, or 101.9% of service sales, for the nine months ended June 30, 2023. A large proportion of our service expenses are incurred under fixed-fee prepaid service contract arrangements, therefore trends in service expenses may not directly correlate to trends in the related revenues. Gross profit from service increased by $4.1 million.

We realized a combined gross profit from service and installation of $18.1 million for the nine months ended June 30, 2024 compared to a gross profit of $11.8 million for the nine months ended June 30, 2023, a $6.3 million increase.

(Increase) Decrease in the Fair Value of Derivative Instruments

During the nine months ended June 30, 2024, the change in the fair value of derivative instruments resulted in a $8.3 million charge due to a decrease in the market value for unexpired hedges (a $4.0 million charge) and a $4.3 million charge due to the expiration of certain hedged positions.

During the nine months ended June 30, 2023, the change in the fair value of derivative instruments resulted in a $19.6 million charge due to a decrease in the market value for unexpired hedges (a $13.5 million charge) and a $6.1 million charge due to the expiration of certain hedged positions.

Delivery and Branch Expenses

For the nine months ended June 30, 2024, delivery and branch expense increased $8.0 million, or 2.9%, to $285.0 million, compared to $277.0 million for the nine months ended June 30, 2023. During the nine months ended June 30, 2024, the company recorded a benefit under the weather hedge of $7.5 million compared to a benefit of $12.5 million during the nine months ended June 30, 2023 that accounts for a $5.0 million increase in expense. The increase was also driven by $4.3 million of acquisition related expenses and was partially offset by a $1.3 million, or 0.4% reduction in base business expenses. The decrease in the base business was driven by a $5.1 million, or 5.6% reduction in delivery expenses driven by the 2.3% decline in home heating oil and propane volume, and other expense reductions of $0.7 million. These decreases in the base business were partially offset by an increase in insurance expenses of $4.5 million due to increasing premiums and expected claim costs.

Depreciation and Amortization Expenses

For the nine months ended June 30, 2024, depreciation and amortization expenses increased $0.3 million, or 1.1%, to $23.4 million, compared to $23.1 million for the nine months ended June 30, 2023, primarily due to acquisitions.

General and Administrative Expenses

For the nine months ended June 30, 2024, general and administrative expenses increased by $1.7 million or 8.7%, to $21.3 million, from $19.6 million for the nine months ended June 30, 2023, due to a $0.6 million reduction in the gain on the sale of fixed assets, a $0.5 million increase in salaries and benefits expenses, a $0.4 million increase in profit sharing expense and $0.2 million of other net expense increases. The Company accrues approximately 6.0% of Adjusted EBITDA as defined in its profit sharing plan for distribution to its employees. This amount is payable when the Company achieves Adjusted EBITDA of at least 70% of the amount budgeted. The dollar amount of the profit sharing pool adjusts accordingly based on Adjusted EBITDA levels achieved.

Finance Charge Income

For the nine months ended June 30, 2024, finance charge income decreased by $1.2 million or 24.3% to $3.7 million, from $4.9 million for the nine months ended June 30, 2023, due to less late customer payment charges received on aged receivables that was partially driven by the reduction in sales.

Interest Expense, Net

For the nine months ended June 30, 2024, net interest expense decreased by $2.9 million, or 22.9%, to $9.7 million compared to $12.6 million for the nine months ended June 30, 2023. The year-over-year change was driven by a decrease in average borrowings of $66.1 million from $231.6 million for the nine months ended June 30, 2023 to $165.5 million for the nine months ended June 30, 2024 that was partially offset by an increase in the weighted average interest rate from 6.3% for the nine months ended June 30, 2023 to 7.3% for the nine months ended June 30, 2024. To hedge against rising interest rates, the Company utilizes interest rate swaps. At June 30, 2024, approximately 40.0% of borrowings under Star's variable-rate long term debt were not subject to interest rate increases as a result of interest rate swaps.

Amortization of Debt Issuance Costs

For the nine months ended June 30, 2024, amortization of debt issuance cost decreased to $0.7 million from $0.8 million for the nine months ended June 30, 2023.

Income Tax Expense

For the nine months ended June 30, 2024, the Company’s income tax expense increased by $8.5 million to $28.9 million, from $20.4 million for the nine months ended June 30, 2023. The increase in the income tax expense was driven by a $27.1 million increase in income before income taxes and increase in the effective income tax rate from 28.3% for the nine months ended June 30, 2023 to 29.1% for the nine months ended June 30, 2024 due primarily to an increase in state income taxes.

Net Income

For the nine months ended June 30, 2024, Star’s net income increased $18.6 million, to $70.3 million, compared to the nine months ended June 30, 2023, primarily due to a $13.0 million increase in Adjusted EBITDA, a favorable change in the fair value of derivative instruments of $11.4 million and a $2.9 million decrease in interest expense that was partially offset by an $8.5 million increase in income tax expense and a $0.3 million increase in depreciation and amortization expenses.

Adjusted EBITDA

For the nine months ended June 30, 2024, Adjusted EBITDA increased $13.0 million to $141.3 million, compared to the nine months ended June 30, 2023, as an increase in home heating oil and propane per gallon margins, an increase in service and installation profitability and the additional EBITDA from acquisitions more than offset a reduction in home heating oil and propane volume sold in the base business and a decrease in the weather hedge benefit of $5.0 million year-over-year.

EBITDA and Adjusted EBITDA should not be considered as an alternative to net income, as an indicator of operating performance, or as an alternative to cash flow, as a measure of liquidity or ability to service debt obligations, but provides additional information for evaluating the Company’s ability to make the Minimum Quarterly Distribution. EBITDA and Adjusted EBITDA are calculated as follows:

(in thousands)

(a) EBITDA (Earnings from continuing operations before net interest expense, income taxes, depreciation and amortization) and Adjusted EBITDA (Earnings from continuing operations before net interest expense, income taxes, depreciation and amortization, (increase) decrease in the fair value of derivatives, other income (loss), net, multiemployer pension plan withdrawal charge, gain or loss on debt redemption, goodwill impairment, and other non-cash and non-operating charges) are non-GAAP financial measures that are used as supplemental financial measures by management and external users of our financial statements, such as investors, commercial banks and research analysts, to assess:

• our compliance with certain financial covenants included in our debt agreements;
• our financial performance without regard to financing methods, capital structure, income taxes or historical cost basis;
• our operating performance and return on invested capital compared to those of other companies in the retail distribution of refined petroleum products, without regard to financing methods and capital structure;
• our ability to generate cash sufficient to pay interest on our indebtedness and to make distributions to our partners; and
• the viability of acquisitions and capital expenditure projects and the overall rates of return of alternative investment opportunities.

The method of calculating Adjusted EBITDA may not be consistent with that of other companies, and EBITDA and Adjusted EBITDA both have limitations as analytical tools and so should not be viewed in isolation but in conjunction with measurements that are computed in accordance with GAAP. Some of the limitations of EBITDA and Adjusted EBITDA are:

• EBITDA and Adjusted EBITDA do not reflect our cash used for capital expenditures.
• Although depreciation and amortization are non-cash charges, the assets being depreciated or amortized often will have to be replaced and EBITDA and Adjusted EBITDA do not reflect the cash requirements for such replacements;
• EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital requirements;
• EBITDA and Adjusted EBITDA do not reflect the cash necessary to make payments of interest or principal on our indebtedness; and EBITDA and Adjusted EBITDA do not reflect the cash required to pay taxes.

DISCUSSION OF CASH FLOWS

We use the indirect method to prepare our Consolidated Statements of Cash Flows. Under this method, we reconcile net income to cash flows provided by operating activities by adjusting net income for those items that impact net income but do not result in actual cash receipts or payment during the period.

Operating Activities

Due to the seasonal nature of our business, cash is generally used in operations during the winter (our first and second fiscal quarters) as we require additional working capital to support the high volume of sales during this period, and cash is generally provided by operating activities during the spring and summer (our third and fourth fiscal quarters) when customer payments exceed the cost of deliveries.

During the nine months ended June 30, 2024, cash provided by operating activities decreased $30.3 million, to $72.4 million, compared to $102.7 million during the nine months ended June 30, 2023. The decrease was driven by a decrease in collection of trade receivables on a comparable basis (including accounts receivable and customer credit balance accounts) of $47.7 million and a $2.9 million increase in cash required to purchase product inventory. These reductions in cash provided by operating activities were partially offset by a $13.6 million increase in cash flows from operations, $5.2 million less payroll taxes paid in the first fiscal quarter of 2024 versus the first fiscal quarter of 2023 as the result of deferring payment of certain payroll tax withholdings in first quarter of fiscal 2021 to the first fiscal quarter of fiscal 2023 and $1.5 million of other net changes in working capital.

Investing Activities

During the nine months ended June 30, 2024, the Company acquired one propane and three heating oil businesses for an aggregate price of approximately $22.6 million in cash. The gross purchase price was allocated $14.4 million to intangible assets, $6.3 million to goodwill, $2.8 million to fixed assets and reduced by $0.9 million of negative working capital.

Our capital expenditures for the nine months ended June 30, 2024 totaled $7.6 million, as we invested in computer hardware and software ($1.0 million), refurbished certain physical plants ($1.7 million), expanded our propane operations ($1.1 million) and made additions to our fleet and other equipment ($3.8 million).

During the nine months ended June 30, 2024, $1.4 million of earnings were reinvested into an irrevocable trust established in connection with our captive insurance company. The cash deposited into the trust is shown on our balance sheet as captive insurance collateral and, correspondingly, reduced cash on our balance sheet. We believe that investments into the irrevocable trust lower our letter of credit fees, increase interest income on invested cash balances, and provide us with certain tax advantages attributable to a captive insurance company.

During the nine months ended June 30, 2023, the Company sold certain assets for cash proceeds of $2.2 million and acquired two heating oil businesses for an aggregate price of approximately $1.2 million in cash. The gross purchase price was allocated $1.7 million to intangible assets, $0.2 million to goodwill, $0.2 million to fixed assets and reduced by $0.9 million of negative working capital.

Our capital expenditures for the nine months ended June 30, 2023 totaled $6.7 million, as we invested in computer hardware and software ($0.6 million), refurbished certain physical plants ($0.7 million), expanded our propane operations ($1.0 million) and made additions to our fleet and other equipment ($4.4 million).

During the nine months ended June 30, 2023, $0.7 million of earnings were reinvested into the irrevocable trust.

Financing Activities

During the nine months ended June 30, 2024, we repaid $12.3 million of our term loan, borrowed $79.6 million under our revolving credit facility and subsequently repaid $79.6 million, repurchased approximately 0.8 million Common Units, at an average price paid of $10.88 per unit, for $9.0 million, in connection with our unit repurchase plan, and paid distributions of $17.7 million to our Common Unit holders and $1.0 million to our General Partner unit holders (including $1.0 million of incentive distributions as provided in our Partnership Agreement).

During the nine months ended June 30, 2023, we repaid $12.4 million of our term loan, borrowed $125.6 million under our revolving credit facility and subsequently repaid $145.7 million, repurchased 0.5 million Common Units for $4.5 million, in connection with our unit repurchase plan, and paid distributions of $16.7 million to our Common Unit holders and $0.9 million to our General Partner unit holders (including $0.8 million of incentive distributions as provided in our Partnership Agreement).

FINANCING AND SOURCES OF LIQUIDITY

Liquidity and Capital Resources Comparatives

Our primary uses of liquidity are to provide funds for our working capital, capital expenditures, distributions on our units, acquisitions and unit repurchases. Our ability to provide funds for such uses depends on our future performance, which will be subject to prevailing economic, financial, geopolitical and business conditions, weather, the ability to collect current and future accounts receivable, the ability to pass on the full impact of high product costs to customers, the effects of high net customer attrition, conservation, inflation and other factors. Capital requirements, at least in the near term, are expected to be provided by cash flows from operating activities, cash on hand as of June 30, 2024 ($45.7 million) or a combination thereof. We believe that these cash sources will also be sufficient to satisfy our capital requirements in the longer-term. However, if they are not sufficient, we anticipate that working capital will be financed by our revolving credit facility, as discussed below, and from subsequent seasonal reductions in inventory and accounts receivable. As of June 30, 2024, we had accounts receivable of $128.6 million of which $89.7 million is due from residential customers and $38.9 million is due from commercial customers. Our ability to borrow from our bank group is based in part on the aging of these accounts receivable. If these balances do not meet the eligibility tests as defined in our sixth amended and restated credit agreement, our ability to borrow will be reduced and our anticipated cash flow from operating activities will also be reduced. As of June 30, 2024, we had $4.4 million of borrowings under our revolving credit facility, $132.1 million outstanding under our term loan, $5.7 million in letters of credit outstanding and $2.9 million hedge positions were secured under the credit agreement.

Under the terms of the sixth amended and restated credit agreement, as amended, we are required to maintain at all times a fixed charge coverage ratio of not less than 1.0 through February 27, 2024 and 1.15 thereafter if Availability (borrowing base less amounts borrowed and letters of credit issued) is less than 12.5% of the maximum facility size. We are also required to maintain a senior secured leverage ratio that cannot be more than 3.0 as of June 30th or September 30th, and no more than 5.5 as of December 31st or March 31st. As of June 30, 2024, Availability, as defined in the sixth amended and restated revolving credit facility agreement, as amended, was $201.0 million and we were in compliance with the financial covenants.

Maintenance capital expenditures for the remainder of fiscal 2024 are estimated to be approximately $2.0 million to $3.0 million, excluding the capital requirements for leased fleet. In addition, we plan to invest $0.5 million to $1.0 million in our propane operations. If, and only to the extent that, cash distributions to our unitholders remain at the current quarterly level of $0.1725 per unit for the balance of fiscal 2024, the Company would make aggregate payments of approximately $6.0 million to Common Unit holders, $0.4 million to our General Partner (including $0.3 million of incentive distribution as provided for in our Partnership Agreement) and $0.3 million to management pursuant to the management incentive compensation plan which provides for certain members of management to receive incentive distributions that would otherwise be payable to the General Partner. The amount of cash distributions payable to our unitholders, if any, depends on the amount of cash flow generated by the Company and our compliance with certain financial covenants under our sixth amended and restated revolving credit facility agreement. Under the terms of our sixth amended and restated revolving credit facility agreement, our term loan is repayable in quarterly payments of $4.1 million and we expect to pay $4.1 million for the remainder of fiscal 2024. Further, subject to any additional liquidity issues or concerns resulting from wholesale price volatility and our compliance with the financial covenants under our sixth amended and restated revolving credit facility agreement, we may repurchase Common Units pursuant to our unit repurchase plan, as amended from time to time, and we are in various stages of pursuing attractive acquisition opportunities within the Availability constraints of our revolving credit facility and funding resources, some of which may close in fiscal 2024.

Contractual Obligations and Off-Balance Sheet Arrangements

There has been no material change to Contractual Obligations and Off-Balance Sheet Arrangements since our September 30, 2023 Form 10-K disclosure and therefore, the table has not been included in this Form 10-Q.

Recent Accounting Pronouncements

Refer to Note 2 – Summary of Significant Accounting Policies for discussion regarding the impact of accounting standards that were recently adopted and issued but not yet effective, on our consolidated financial statements.

Critical Accounting Policy and Critical Accounting Estimates

We believe that there have been no significant changes to our critical accounting policy and critical accounting estimates during the nine months ended June 30, 2024 as compared to those we disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our annual report on Form 10-K for the fiscal year ended September 30, 2023. While our critical accounting policies and estimates have not changed in any significant way during the nine months ended June 30, 2024, the following provides disclosures about our critical accounting policy and critical accounting estimates.

Critical Accounting Policy

Fair Values of Derivatives

FASB ASC 815-10-05, Derivatives and Hedging, requires that derivative instruments be recorded at fair value and included in the consolidated balance sheet as assets or liabilities. The Company has elected not to designate its commodity derivative instruments as hedging instruments under this guidance, and therefore the change in fair value of those derivative instruments are recognized in our statement of operations.

We have established the fair value of our derivative instruments using estimates determined by our counterparties and subsequently evaluated them internally using established index prices and other sources. These values are based upon, among other things, futures prices, volatility, time-to-maturity value and credit risk. The estimate of fair value we report in our financial statements changes as these estimates are revised to reflect actual results, changes in market conditions, or other factors, many of which are beyond our control.

Critical Accounting Estimates

Self-Insurance Liabilities

We currently self-insure a portion of workers’ compensation, auto, general liability and medical claims. We establish and periodically evaluate self-insurance liabilities based upon expectations as to what our ultimate liability may be for outstanding claims using developmental factors based upon historical claim experience, including frequency, severity, demographic factors and other actuarial assumptions, supplemented with the support of a qualified third-party actuary. As of September 30, 2023, we had approximately $77.5 million of self-insurance liabilities. The ultimate resolution of these claims could differ materially from the assumptions used to calculate the self-insurance liabilities, which could have a material adverse effect on results of operations.

Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

We are exposed to interest rate risk primarily through our bank credit facilities. We utilize these borrowings to meet our working capital needs.

At June 30, 2024, we had outstanding borrowings totaling $136.5 million, of which $83.6 million are subject to variable interest rates under our credit agreement. In the event that interest rates associated with this facility were to increase 100 basis points, the after tax impact on annual future cash flows would be a decrease of $0.6 million.

Market Risk

We regularly use derivative financial instruments to manage our exposure to market risk related to changes in the current and future market price of home heating oil and vehicle fuels. The value of market sensitive derivative instruments is subject to change as a result of movements in market prices. Sensitivity analysis is a technique used to evaluate the impact of hypothetical market value changes. Based on a hypothetical ten percent increase in the cost of product at June 30, 2024, the potential impact on our hedging activity would be to increase the fair market value of these outstanding derivatives by $8.0 million to a fair market value of $4.9 million; and conversely a hypothetical ten percent decrease in the cost of product would decrease the fair market value of these outstanding derivatives by $5.8 million to a fair market value of $(8.9) million.

Controls and Procedures

a) Evaluation of disclosure controls and procedures

The General Partner’s chief executive officer and chief financial officer evaluated the effectiveness of the Company’s disclosure controls and procedures (as that term is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended) as of June 30, 2024. Based on that evaluation, such chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2024 at the reasonable level of assurance. For purposes of Rule 13a-15(e), the term disclosure controls and procedures means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the “Act”) (15 U.S.C. 78a et seq.) is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer’s management, including its chief executive officer and chief financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

b) Change in internal control over financial reporting

No changes in the Company’s internal control over financial reporting occurred during the Company’s most recent fiscal quarter that has materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting.

c) Other

The General Partner and the Company believe that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a Company have been detected. Therefore, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Our disclosure controls and procedures are designed to provide such reasonable assurances of achieving our desired control objectives, and the chief executive officer and chief financial officer of the General Partner have concluded, as of June 30, 2024, that our disclosure controls and procedures were effective in achieving that level of reasonable assurance.

Risk Factors

In addition to the other information set forth in this Report, investors should carefully review and consider the information regarding certain factors, which could materially affect our business, results of operations, financial condition and cash flows set forth in Part I Item 1A. “Risk Factors” in our Fiscal 2023 Form 10-K. We may disclose changes to such factors or disclose additional factors from time to time in our future filings with the SEC.