sgu-10q_20180630.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number: 001-14129

 

STAR GROUP, L.P.

(Exact name of registrants as specified in its charters)

 

 

Delaware

06-1437793

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

9 West Broad Street

Stamford, Connecticut

06902

(Address of principal executive office)

 

(203) 328-7310

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non- accelerated filer

Smaller reporting company

 

 

 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes      No  

At July 31, 2018, the registrant had 53,392,840 Common Units outstanding.

 

 

 

 


STAR GROUP, L.P. AND SUBSIDIARIES

INDEX TO FORM 10-Q

 

 

 

Page

Part I Financial Information

 

 

Item 1 - Condensed Consolidated Financial Statements

 

3

Condensed Consolidated Balance Sheets as of June 30, 2018 (unaudited) and September 30, 2017

 

3

Condensed Consolidated Statements of Operations (unaudited) for the three and nine months ended June 30, 2018 and June 30, 2017

 

4

Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three and nine months ended June 30, 2018 and June 30, 2017

 

5

Condensed Consolidated Statement of Partners’ Capital (unaudited) for the nine months ended June 30, 2018

 

6

Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended June 30, 2018 and June 30, 2017

 

7

Notes to Condensed Consolidated Financial Statements (unaudited)

 

8-19

Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

20-36

Item 3 - Quantitative and Qualitative Disclosures About Market Risk

 

37

Item 4 - Controls and Procedures

 

37

Part II Other Information:

 

38

Item 1 - Legal Proceedings

 

38

Item 1A - Risk Factors

 

38

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds

 

38

Item 6 - Exhibits

 

39

Signatures

 

40

 

2


Part I. FINANCIAL INFORMATION

Item 1.

Condensed Consolidated Financial Statements

STAR GROUP, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

June 30,

 

 

September 30,

 

 

 

2018

 

 

2017

 

(in thousands)

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

9,423

 

 

$

52,458

 

Receivables, net of allowance of $9,366 and $5,540, respectively

 

 

182,573

 

 

 

96,603

 

Inventories

 

 

48,093

 

 

 

59,596

 

Fair asset value of derivative instruments

 

 

11,906

 

 

 

5,932

 

Prepaid expenses and other current assets

 

 

29,256

 

 

 

26,652

 

Total current assets

 

 

281,251

 

 

 

241,241

 

Property and equipment, net

 

 

85,746

 

 

 

79,673

 

Goodwill

 

 

228,331

 

 

 

225,915

 

Intangibles, net

 

 

100,859

 

 

 

105,218

 

Restricted cash

 

 

250

 

 

 

250

 

Captive insurance collateral (1)

 

 

45,195

 

 

 

11,777

 

Deferred charges and other assets, net

 

 

10,397

 

 

 

9,843

 

Total assets

 

$

752,029

 

 

$

673,917

 

LIABILITIES AND PARTNERS’ CAPITAL

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

31,469

 

 

$

26,739

 

Revolving credit facility borrowings

 

 

7,800

 

 

 

-

 

Fair liability value of derivative instruments

 

 

-

 

 

 

289

 

Current maturities of long-term debt

 

 

7,500

 

 

 

10,000

 

Accrued expenses and other current liabilities

 

 

119,815

 

 

 

108,449

 

Unearned service contract revenue

 

 

58,355

 

 

 

60,133

 

Customer credit balances

 

 

31,111

 

 

 

66,723

 

Total current liabilities

 

 

256,050

 

 

 

272,333

 

Long-term debt (2)

 

 

94,612

 

 

 

65,717

 

Deferred tax liabilities, net

 

 

35,961

 

 

 

6,140

 

Other long-term liabilities

 

 

24,047

 

 

 

23,659

 

Partners’ capital

 

 

 

 

 

 

 

 

Common unitholders

 

 

361,094

 

 

 

325,762

 

General partner

 

 

(983

)

 

 

(929

)

Accumulated other comprehensive loss, net of taxes

 

 

(18,752

)

 

 

(18,765

)

Total partners’ capital

 

 

341,359

 

 

 

306,068

 

Total liabilities and partners’ capital

 

$

752,029

 

 

$

673,917

 

 

 

(1)

See Note 2 – Captive insurance collateral

 

(2)

See Note 14 – Subsequent events

 

See accompanying notes to condensed consolidated financial statements.

 

3


STAR GROUP, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

Three Months

Ended June 30,

 

 

Nine Months

Ended June 30,

 

(in thousands, except per unit data - unaudited)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

$

256,447

 

 

$

158,531

 

 

$

1,246,143

 

 

$

950,307

 

Installations and services

 

 

70,907

 

 

 

67,270

 

 

 

202,076

 

 

 

191,664

 

Total sales

 

 

327,354

 

 

 

225,801

 

 

 

1,448,219

 

 

 

1,141,971

 

Cost and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of product

 

 

186,207

 

 

 

104,268

 

 

 

832,280

 

 

 

592,802

 

Cost of installations and services

 

 

61,770

 

 

 

58,224

 

 

 

195,984

 

 

 

183,137

 

(Increase) decrease in the fair value of derivative instruments

 

 

(7,515

)

 

 

3,135

 

 

 

(7,306

)

 

 

7,026

 

Delivery and branch expenses

 

 

83,312

 

 

 

67,640

 

 

 

281,121

 

 

 

240,987

 

Depreciation and amortization expenses

 

 

7,941

 

 

 

7,418

 

 

 

23,385

 

 

 

20,705

 

General and administrative expenses

 

 

5,894

 

 

 

6,235

 

 

 

18,766

 

 

 

18,144

 

Finance charge income

 

 

(1,438

)

 

 

(1,308

)

 

 

(3,733

)

 

 

(3,288

)

Operating income (loss)

 

 

(8,817

)

 

 

(19,811

)

 

 

107,722

 

 

 

82,458

 

Interest expense, net

 

 

(2,186

)

 

 

(1,619

)

 

 

(6,656

)

 

 

(5,118

)

Amortization of debt issuance costs

 

 

(418

)

 

 

(336

)

 

 

(1,034

)

 

 

(972

)

Income (loss) before income taxes

 

 

(11,421

)

 

 

(21,766

)

 

 

100,032

 

 

 

76,368

 

Income tax expense (benefit)

 

 

(3,416

)

 

 

(8,434

)

 

 

23,077

 

 

 

31,721

 

Net income (loss)

 

$

(8,005

)

 

$

(13,332

)

 

$

76,955

 

 

$

44,647

 

General Partner’s interest in net income (loss)

 

 

(49

)

 

 

(79

)

 

 

445

 

 

 

259

 

Limited Partners’ interest in net income (loss)

 

$

(7,956

)

 

$

(13,253

)

 

$

76,510

 

 

$

44,388

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted income (loss) per Limited Partner Unit (1):

 

$

(0.15

)

 

$

(0.24

)

 

$

1.18

 

 

$

0.70

 

Weighted average number of Limited Partner units outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted

 

 

53,938

 

 

 

55,888

 

 

 

55,157

 

 

 

55,888

 

 

(1)

See Note 13 - Earnings Per Limited Partner Unit.

See accompanying notes to condensed consolidated financial statements.

 

4


STAR GROUP, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 

 

 

Three Months

Ended June 30,

 

 

Nine Months

Ended June 30,

 

(in thousands - unaudited)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net income (loss)

 

$

(8,005

)

 

$

(13,332

)

 

$

76,955

 

 

$

44,647

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on pension plan obligation (1)

 

 

448

 

 

 

532

 

 

 

1,344

 

 

 

1,598

 

Tax effect of unrealized gain on pension plan

 

 

(120

)

 

 

(215

)

 

 

(422

)

 

 

(647

)

Unrealized loss on captive insurance collateral

 

 

(220

)

 

 

-

 

 

 

(1,151

)

 

 

-

 

Tax effect of unrealized loss on captive insurance collateral

 

 

46

 

 

 

-

 

 

 

242

 

 

 

-

 

Total other comprehensive income

 

 

154

 

 

 

317

 

 

 

13

 

 

 

951

 

Total comprehensive income (loss)

 

$

(7,851

)

 

$

(13,015

)

 

$

76,968

 

 

$

45,598

 

 

(1)

This item is included in the computation of net periodic pension cost.    

See accompanying notes to condensed consolidated financial statements.

 

5


STAR GROUP, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF PARTNERS’ CAPITAL

 

 

 

Number of Units

 

 

 

 

 

 

 

 

 

 

Accum. Other

 

 

Total

 

(in thousands - unaudited)

 

Common

 

 

General

Partner

 

 

Common

 

 

General

Partner

 

 

Comprehensive

Income (Loss)

 

 

Partners’

Capital

 

Balance as of September 30, 2017

 

 

55,888

 

 

 

326

 

 

$

325,762

 

 

$

(929

)

 

$

(18,765

)

 

$

306,068

 

Net income

 

 

-

 

 

 

-

 

 

 

76,510

 

 

445

 

 

 

-

 

 

 

76,955

 

Unrealized gain on pension plan obligation

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,344

 

 

 

1,344

 

Tax effect of unrealized gain on pension plan

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(422

)

 

 

(422

)

Unrealized loss on captive insurance collateral

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,151

)

 

 

(1,151

)

Tax effect of unrealized loss on captive insurance collateral

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

242

 

 

 

242

 

Distributions

 

 

-

 

 

 

-

 

 

 

(18,640

)

 

 

(499

)

 

 

-

 

 

 

(19,139

)

Retirement of units (1)

 

 

(2,370

)

 

 

-

 

 

 

(22,538

)

 

 

-

 

 

 

-

 

 

 

(22,538

)

Balance as of June 30, 2018 (unaudited)

 

 

53,518

 

 

 

326

 

 

$

361,094

 

 

$

(983

)

 

$

(18,752

)

 

$

341,359

 

 

(1)

See Note 3 – Common Unit Repurchase and Retirement.

 

See accompanying notes to condensed consolidated financial statements.

 

6


STAR GROUP, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

Nine Months

Ended June 30,

 

(in thousands - unaudited)

 

2018

 

 

2017

 

Cash flows provided by (used in) operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

76,955

 

 

$

44,647

 

Adjustment to reconcile net income to net cash provided by (used in)

   operating activities:

 

 

 

 

 

 

 

 

(Increase) decrease in fair value of derivative instruments

 

 

(7,306

)

 

 

7,026

 

Depreciation and amortization

 

 

24,419

 

 

 

21,677

 

Provision for losses on accounts receivable

 

 

5,687

 

 

 

2,261

 

Change in deferred taxes

 

 

29,641

 

 

 

4,451

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Increase in receivables

 

 

(86,504

)

 

 

(40,524

)

Decrease in inventories

 

 

12,390

 

 

 

3,761

 

(Increase) decrease in other assets

 

 

(2,938

)

 

 

3,443

 

Increase (decrease) in accounts payable

 

 

5,078

 

 

 

(3,468

)

Decrease in customer credit balances

 

 

(36,503

)

 

 

(45,757

)

Increase in other current and long-term liabilities

 

 

9,100

 

 

 

25,693

 

Net cash provided by operating activities

 

 

30,019

 

 

 

23,210

 

Cash flows provided by (used in) investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(8,682

)

 

 

(9,348

)

Proceeds from sales of fixed assets

 

 

325

 

 

 

171

 

Purchase of investments (1)

 

 

(34,840

)

 

 

(11,538

)

Acquisitions

 

 

(21,262

)

 

 

(14,504

)

Net cash used in investing activities

 

 

(64,459

)

 

 

(35,219

)

Cash flows provided by (used in) financing activities:

 

 

 

 

 

 

 

 

Revolving credit facility borrowings

 

 

160,104

 

 

 

-

 

Revolving credit facility repayments

 

 

(118,604

)

 

 

-

 

Term loan repayments

 

 

(7,500

)

 

 

(13,700

)

Distributions

 

 

(19,139

)

 

 

(18,020

)

Unit repurchases

 

 

(22,538

)

 

 

-

 

Customer retainage payments

 

 

(918

)

 

 

(575

)

Payments of debt issue costs

 

 

-

 

 

 

(60

)

Net cash used in financing activities

 

 

(8,595

)

 

 

(32,355

)

Net decrease in cash, cash equivalents, and restricted cash

 

 

(43,035

)

 

 

(44,364

)

Cash, cash equivalents, and restricted cash at beginning of period

 

 

52,708

 

 

 

139,188

 

Cash, cash equivalents, and restricted cash at end of period

 

$

9,673

 

 

$

94,824

 

 

(1)

See Note 2 – Captive insurance collateral

See accompanying notes to condensed consolidated financial statements.

 

7


STAR GROUP, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1) Organization

Star Group, L.P. (“Star” the “Company,” “we,” “us,” or “our”) is a full service provider specializing in the sale of home heating and air conditioning products and services to residential and commercial home heating oil and propane customers. The Company has one reportable segment for accounting purposes.  We also sell diesel fuel, gasoline and home heating oil on a delivery only basis, and in certain of our marketing areas, we provide plumbing services primarily to our home heating oil and propane customer base. We believe we are the nation’s largest retail distributor of home heating oil based upon sales volume. Including our propane locations, we serve customers in the more northern and eastern states within the Northeast, Central and Southeast U.S. regions.

The Company is organized as follows:

 

Star is a limited partnership, which at June 30, 2018, had outstanding 53.5 million Common Units (NYSE: “SGU”), representing a 99.4% limited partner interest in Star, and 0.3 million general partner units, representing a 0.6% general partner interest in Star. Our general partner is Kestrel Heat, LLC, a Delaware limited liability company (“Kestrel Heat” or the “general partner”). The Board of Directors of Kestrel Heat (the “Board”) is appointed by its sole member, Kestrel Energy Partners, LLC, a Delaware limited liability company (“Kestrel”).

 

Star owns 100% of Star Acquisitions, Inc. (“SA”), a Minnesota corporation that owns 100% of Petro Holdings, Inc. (“Petro”). SA and its subsidiaries are subject to Federal and state corporate income taxes. Star’s operations are conducted through Petro and its subsidiaries. Petro is primarily a Northeast, Central and Southeast region retail distributor of home heating oil and propane that at June 30, 2018 served approximately 459,000 residential and commercial home heating oil and propane customers. Petro also sells diesel fuel, gasoline and home heating oil to approximately 76,000 customers on a delivery only basis. We installed, maintained, and repaired heating and air conditioning equipment and to a lesser extent provided these services outside our heating oil and propane customer base including approximately 16,000 service contracts for natural gas and other heating systems. In addition, we provided home security and plumbing to approximately 31,000 customers.

 

Petroleum Heat and Power Co., Inc. (“PH&P”) is a 100% owned subsidiary of Star. PH&P is the borrower and Star is the guarantor of the third amended and restated credit agreement’s $100 million five-year senior secured term loan and the $300 million ($450 million during the heating season of December through April of each year) revolving credit facility, both due July 30, 2020. In July 2018, the Company refinanced its five-year term loan and the revolving credit facility with the execution of the Fourth Amended and Restated Revolving Credit Facility Agreement. (See Note 9—Long-Term Debt and Bank Facility Borrowings and Note 14—Subsequent Events)

2) Summary of Significant Accounting Policies

Basis of Presentation

The Consolidated Financial Statements include the accounts of Star Group, L.P. and its subsidiaries. All material intercompany items and transactions have been eliminated in consolidation.

The financial information included herein is unaudited; however, such information reflects all adjustments (consisting solely of normal recurring adjustments), which are, in the opinion of management, necessary for the fair statement of financial condition and results for the interim periods. Due to the seasonal nature of the Company’s business, the results of operations and cash flows for the nine month period ended June 30, 2018 are not necessarily indicative of the results to be expected for the full year.

These interim financial statements of the Company have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) for interim financial information and Rule 10-01 of Regulation S-X of the U.S. Securities and Exchange Commission and should be read in conjunction with the financial statements included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2017.

Comprehensive Income (Loss)

Comprehensive income (loss) is comprised of Net income (loss) and Other comprehensive income (loss). Other comprehensive income (loss) consists of the unrealized gain amortization on the Company’s pension plan obligation for its two frozen defined benefit pension plans, unrealized loss on captive insurance collateral, and the corresponding tax effect.

8


Cash, Cash Equivalents, and Restricted Cash

The Company considers all highly liquid investments with an original maturity of three months or less, when purchased, to be cash equivalents. At June 30, 2018, the $9.7 million of cash, cash equivalents, and restricted cash on the condensed consolidated statement of cash flows is composed of $9.4 million of cash and cash equivalents and $0.3 million of restricted cash. At September 30, 2017, the $52.7 million of cash, cash equivalents, and restricted cash on the condensed consolidated statements of cash flow is composed of $52.5 million of cash and cash equivalents and $0.3 million of restricted cash. Restricted cash represents deposits held by our captive insurance company that are required by state insurance regulations to remain in the captive insurance company as cash.

Captive Insurance Collateral

At June 30, 2018, captive insurance collateral is comprised of $44.5 million of Level 1 debt securities measured at fair value and $0.7 million of mutual funds measured at net asset value.  At September 30, 2017, the balance was comprised of $11.3 million of Level 1 debt securities measured at fair value and $0.5 million of mutual funds measured at net asset value. Unrealized gains and losses, net of related income taxes, are reported as accumulated other comprehensive loss, except for losses from impairments which are determined to be other-than-temporary. Realized gains and losses, and declines in value judged to be other-than-temporary on available-for-sale securities are included in the determination of net income and are included in Interest expense, net, at which time the average cost basis of these securities are adjusted to fair value.

The investments are held by our captive insurance company in an irrevocable trust as collateral for certain workers’ compensation, general and automobile liability claims.  The collateral is required by a third party insurance carrier that insures per claim amounts above a set deductible. Due to the expected timing of claim payments, the nature of the collateral agreement with the carrier, and our captive insurance company’s source of other operating cash, the collateral is not expected to be used to pay obligations within the next twelve months.  

At September 30, 2017, the investments were held for workers’ compensation, general and automobile liability claims incurred and expected to be incurred in fiscal 2017.  In the first quarter of fiscal 2018 we deposited $34.2 million of cash into the irrevocable trust to secure certain workers’ compensation, general and automobile liability claims incurred and expected to be incurred from fiscal 2004 to fiscal 2016 and fiscal 2018.

Weather Hedge Contract

To partially mitigate the adverse effect of warm weather on cash flows, the Company has used weather hedge contracts for a number of years. Weather hedge contracts are recorded in accordance with the intrinsic value method defined by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 815-45-15 Derivatives and Hedging, Weather Derivatives (EITF 99-2). The premium paid is included in the caption Prepaid expenses and other current assets in the accompanying balance sheets and amortized over the life of the contract, with the intrinsic value method applied at each interim period.

The Company has weather hedge contracts for fiscal years 2018, 2019, 2020 and 2021.  Under these contracts, we are entitled to receive a payment if the total number of degree days within the hedge period is less than the prior ten year average. The “Payment Thresholds,” or strikes, are set at various levels. In addition, we will be obligated to make a payment capped at $5.0 million if degree days exceed the prior ten year average. The hedge period runs from November 1 through March 31, taken as a whole, for each respective fiscal year.  For fiscal 2019, 2020 and 2021 the maximum that the Company can receive is $12.5 million and the maximum that the Company would be obligated to pay is $5.0 million.  As of June 30, 2018, the Company recorded a charge of $1.9 million under this contract that increased delivery and branch expenses. The amount was paid in April 2018.  No charge or benefit was recorded as of June 30, 2017.

New England Teamsters and Trucking Industry Pension Fund (“the NETTI Fund”) Liability

As of June 30, 2018, we had $0.2 million and $17.2 million balances included in the captions Accrued expenses and other current liabilities and Other long-term liabilities, respectively, on our condensed consolidated balance sheet representing the remaining balance of the NETTI Fund withdrawal liability. Based on the borrowing rates currently available to the Company for long-term financing of a similar maturity, the fair value of the NETTI Fund withdrawal liability as of June 30, 2018 was $21.1 million. We utilized Level 2 inputs in the fair value hierarchy of valuation techniques to determine the fair value of this liability.

Recently Adopted Accounting Pronouncements

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory. The update changes the measurement principle for inventory from the lower of cost or market to the lower of cost and net realizable value. The Company adopted the ASU effective December 31, 2017.  The adoption of ASU No. 2015-11 did not have an impact on the Company’s consolidated financial statements and related disclosures.

9


Recently Issued Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The FASB has also issued several updates to ASU 2014-09. This ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. This new guidance is effective for our annual reporting period beginning in the first quarter of fiscal 2019, with early adoption permitted beginning in the first quarter of fiscal 2018. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is in the process of evaluating the effect that ASU 2014-09 will have on its revenue streams, consolidated financial statements and related disclosures. The Company has not yet selected a transition method, nor does it intend to early adopt.

In February 2016, the FASB issued ASU No. 2016-02, Leases. The update requires all leases with a term greater than twelve months to be recognized on the balance sheet by calculating the discounted present value of such leases and accounting for them through a right-of-use asset and an offsetting lease liability, and the disclosure of key information pertaining to leasing arrangements. This new guidance is effective for our annual reporting period beginning in the first quarter of fiscal 2020, with early adoption permitted. The Company does not intend to early adopt. The Company is continuing to evaluate the effect that ASU No. 2016-02 could have on its consolidated financial statements and related disclosures, but has not yet selected a transition method. The new guidance will materially change how we account for operating leases for office space, trucks and other equipment. Upon adoption, we expect to recognize discounted right-of-use assets and offsetting lease liabilities related to our operating leases of office space, trucks and other equipment. As of June 30, 2018, the undiscounted future minimum lease payments through 2032 for such operating leases are approximately $130.3 million, but the amount of leasing activity expected between June 30, 2018, and the date of adoption, is currently unknown. For this reason we are unable to estimate the discounted right-of-use assets and lease liabilities as of the date of adoption.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses. The update broadens the information that an entity should consider in developing expected credit loss estimates, eliminates the probable initial recognition threshold, and allows for the immediate recognition of the full amount of expected credit losses. This new guidance is effective for our annual reporting period beginning in the first quarter of fiscal 2021, with early adoption permitted in the first quarter of fiscal 2020. The Company is evaluating the effect that ASU No. 2016-13 will have on its consolidated financial statements and related disclosures, but has not yet determined the timing of adoption.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flow (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The update addresses the issues of debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions, and separately identifiable cash flows and application of the predominance principle. This new guidance is effective for our annual reporting period beginning in the first quarter of fiscal 2019, with early adoption permitted. The Company has not determined the timing of adoption, but does not expect ASU 2016-15 to have a material impact on its consolidated financial statements and related disclosures.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the definition of a business. The update clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This new guidance is effective for our annual reporting period beginning in the first quarter of fiscal 2019, with early adoption permitted. The Company has not determined the timing of adoption, but does not expect ASU 2017-01 to have a material impact on its consolidated financial statements and related disclosures.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 230): Simplifying the test for goodwill impairment. The update simplifies how an entity is required to test goodwill for impairment. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, but not exceed the total amount of goodwill allocated to the reporting unit. This new guidance is effective for our annual reporting period beginning in the first quarter of fiscal 2021, with early adoption permitted. The Company has not determined the timing of adoption, but does not expect ASU 2017-04 to have a material impact on its consolidated financial statements and related disclosures.

 

In February 2018, the FASB issued ASU No. 2018-02, Income Statement – Reporting Comprehensive Income, which allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act.  This new guidance is effective for our annual reporting period beginning in the first quarter of fiscal 2020, with early adoption permitted.  The Company is evaluating the effect that ASU No. 2018-02 will have on its consolidated financial statements and related disclosures, but has not determined the timing of adoption.

 

10


3) Common Unit Repurchase and Retirement

In July 2012, the Board adopted a plan to repurchase certain of the Company’s Common Units (“Plan III”).  Prior to February 2018, the Company had repurchased approximately 2.7 million Common Units under Plan III.  In February 2018, the Board authorized an increase of the number of Common Units that remained available for the Company to repurchase from 2.2 million to a total of 5.5 million, of which, 3.0 million were available for repurchase in open market transactions and 2.5 million were available for repurchase in privately-negotiated transactions. The Company repurchased approximately 1.1 million Common Units in the third fiscal quarter of 2018, and 3.1 million total Common Units remain available for repurchase at the end of the quarter.  There is no guarantee of the exact number of units that will be purchased under the program and the Company may discontinue purchases at any time. The program does not have a time limit. The Board may also approve additional purchases of units from time to time in private transactions. The Company’s repurchase activities take into account SEC safe harbor rules and guidance for issuer repurchases. All of the Common Units purchased in the repurchase program will be retired.

Under the Company’s third amended and restated credit agreement dated July 30, 2015, in order to repurchase Common Units we must maintain Availability (as defined in the amended and restated credit agreement) of $45 million, 15.0% of the facility size of $300 million (assuming the non-seasonal aggregate commitment is in effect) on a historical pro forma and forward-looking basis, and a fixed charge coverage ratio of not less than 1.15 measured as of the date of repurchase. This covenant is consistent under the new credit agreement effective July 2, 2018 (see Footnote 14 – Subsequent Events).  The Company was in compliance with this covenant as of June 30, 2018.

The following table shows repurchases under Plan III.

 

(in thousands, except per unit amounts)

Period

 

Total Number of

Units Purchased

 

 

Average Price

Paid per Unit (a)

 

 

Total Number of

Units Purchased as Part of Publicly Announced Plans or Programs

 

 

Maximum Number

of Units that May

Yet Be Purchased

 

 

Plan III - Fiscal year 2017 total

 

 

-

 

 

$

-

 

 

 

-

 

 

 

2,207

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Plan III - First quarter fiscal year 2018 total

 

 

-

 

 

$

-

 

 

 

-

 

 

 

2,207

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Plan III - Second quarter fiscal year 2018 total

 

 

1,281

 

 

$

9.38

 

 

 

1,281

 

 

 

4,219

 

(b)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Plan III - April 2018

 

 

626

 

 

$

9.71

 

 

 

626

 

 

 

3,593

 

 

Plan III - May 2018

 

 

202

 

 

$

9.64

 

 

 

202

 

 

 

3,391

 

 

Plan III - June 2018

 

 

261

 

 

$

9.56

 

 

 

261

 

 

 

3,130

 

 

Plan III - Third quarter fiscal year 2018 total

 

 

1,089

 

 

$

9.66

 

 

 

1,089

 

 

 

3,130

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Plan III - July 2018 (c)

 

 

125

 

 

$

9.72

 

 

 

125

 

 

 

3,005

 

(d)

 

(a)

Amount includes repurchase costs.

(b)

In February 2018, the Board authorized an increase in the number of Common Units available for repurchase from 2.2 million to 5.5 million.

(c)

See Note 14 - Subsequent Events.

(d)

Of the total available for repurchase, $0.5 million are available for repurchase in open market transactions and $2.5 million are available for repurchase in privately-negotiated transactions.

 

 

11


4) Derivatives and Hedging—Disclosures and Fair Value Measurements

FASB ASC 815-10-05 Derivatives and Hedging, established accounting and reporting standards requiring that derivative instruments be recorded at fair value and included in the consolidated balance sheet as assets or liabilities, along with qualitative disclosures regarding the derivative activity. The Company uses derivative instruments such as futures, options and swap agreements in order to mitigate exposure to market risk associated with the purchase of home heating oil for price-protected customers, physical inventory on hand, inventory in transit, priced purchase commitments and internal fuel usage. The Company has elected not to designate its derivative instruments as hedging derivatives, but rather as economic hedges whose change in fair value is recognized in its statement of operations in the line item (increase) decrease in the fair value of derivative instruments. Depending on the risk being economically hedged, realized gains and losses are recorded in cost of product, cost of installations and services, or delivery and branch expenses.

As of June 30, 2018, to hedge a substantial majority of the purchase price associated with heating oil gallons anticipated to be sold to its price-protected customers, the Company held the following derivative instruments that settle in future months to match anticipated sales: 8.4 million gallons of swap contracts, 3.2 million gallons of call options, 3.8 million gallons of put options, and 60.4 million net gallons of synthetic call options. To hedge the inter-month differentials for its price-protected customers, its physical inventory on hand and inventory in transit, the Company, as of June 30, 2018, had 0.4 million gallons of long swap contracts, 53.6 million gallons of long future contracts, and 64.2 million gallons of short future contracts that settle in future months.  To hedge its internal fuel usage and other related activities for fiscal 2018, the Company, as of June 30, 2018, had 3.1 million gallons of swap contracts that settle in future months.

As of June 30, 2017, to hedge a substantial majority of the purchase price associated with heating oil gallons anticipated to be sold to its price-protected customers, the Company held the following derivative instruments that settle in future months to match anticipated sales: 9.0 million gallons of swap contracts, 3.6 million gallons of call options, 5.0 million gallons of put options, and 55.0 million net gallons of synthetic call options. To hedge the inter-month differentials for its price-protected customers, its physical inventory on hand and inventory in transit, the Company, as of June 30, 2017, had 1.3 million gallons of long swap contracts, 53.3 million gallons of long future contracts, and 67.7 million gallons of short future contracts that settle in future months. In addition to the previously described hedging instruments, the Company as of June 30, 2017, had 0.4 million gallons of spread contracts (simultaneous long and short positions) to lock-in the differential between high sulfur home heating oil and ultra low sulfur diesel. To hedge its internal fuel usage and other related activities for fiscal 2017, the Company, as of June 30, 2017, had 6.5 million gallons of swap contracts that settle in future months.

The Company’s derivative instruments are with the following counterparties: Bank of America, N.A., Bank of Montreal, Cargill, Inc., Citibank, N.A., JPMorgan Chase Bank, N.A., Key Bank, N.A., Munich Re Trading LLC, Regions Financial Corporation, Societe Generale, and Wells Fargo Bank, N.A. The Company assesses counterparty credit risk and considers it to be low. We maintain master netting arrangements that allow for the non-conditional offsetting of amounts receivable and payable with counterparties to help manage our risks and record derivative positions on a net basis. The Company generally does not receive cash collateral from its counterparties and does not restrict the use of cash collateral it maintains at counterparties. At June 30, 2018, the aggregate cash posted as collateral in the normal course of business at counterparties was $0.4 million and recorded in prepaid expense and other current assets. Positions with counterparties who are also parties to our credit agreement are collateralized under that facility. As of June 30, 2018, no hedge positions and payable amounts were secured under the credit facility.

FASB ASC 820-10 Fair Value Measurements and Disclosures, established a three-tier fair value hierarchy, which classified the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. The Company’s Level 1 derivative assets and liabilities represent the fair value of commodity contracts used in its hedging activities that are identical and traded in active markets. The Company’s Level 2 derivative assets and liabilities represent the fair value of commodity contracts used in its hedging activities that are valued using either directly or indirectly observable inputs, whose nature, risk and class are similar. No significant transfers of assets or liabilities have been made into and out of the Level 1 or Level 2 tiers. All derivative instruments were non-trading positions and were either a Level 1 or Level 2 instrument. The Company had no Level 3 derivative instruments. The fair market value of our Level 1 and Level 2 derivative assets and liabilities are calculated by our counter-parties and are independently validated by the Company. The Company’s calculations are, for Level 1 derivative assets and liabilities, based on the published New York Mercantile Exchange (“NYMEX”) market prices for the commodity contracts open at the end of the period. For Level 2 derivative assets and liabilities the calculations performed by the Company are based on a combination of the NYMEX published market prices and other inputs, including such factors as present value, volatility and duration.

12


The Company had no assets or liabilities that are measured at fair value on a nonrecurring basis subsequent to their initial recognition. The Company’s financial assets and liabilities measured at fair value on a recurring basis are listed on the following table.

 

(In thousands)

 

 

 

 

 

 

 

Fair Value Measurements at Reporting Date Using:

 

Derivatives Not Designated

   as Hedging Instruments

 

 

 

 

 

 

 

Quoted Prices in

Active Markets for

Identical Assets

 

 

Significant Other

Observable Inputs

 

Under FASB ASC 815-10

 

Balance Sheet Location

 

Total

 

 

Level 1

 

 

Level 2

 

Asset Derivatives at June 30, 2018

 

Commodity contracts

 

Fair asset value of derivative

   instruments

 

$

11,959

 

 

$

-

 

 

$

11,959

 

Commodity contracts

 

Long-term derivative assets

   included in the deferred

   charges and other assets, net

   balance

 

 

35

 

 

 

-

 

 

 

35

 

Commodity contract assets at June 30, 2018

 

$

11,994

 

 

$

-

 

 

$

11,994

 

Liability Derivatives at June 30, 2018

 

Commodity contracts

 

Fair asset value of derivative

   instruments

 

$

(53

)

 

$

-

 

 

$

(53

)

Commodity contracts

 

Long-term derivative liabilities

   included in the deferred

   charges and other assets, net

   balance

 

 

(5

)

 

 

-

 

 

 

(5

)

Commodity contract liabilities at June 30, 2018

 

$

(58

)

 

$

-

 

 

$

(58

)

Asset Derivatives at September 30, 2017

 

Commodity contracts

 

Fair asset and fair liability value

   of derivative instruments

 

$

7,729

 

 

$

-

 

 

$

7,729

 

Commodity contracts

 

Long-term derivative assets

   included in the deferred

   charges and other assets, net

   balance

 

 

996

 

 

 

-

 

 

 

996

 

Commodity contract assets September 30, 2017

 

$

8,725

 

 

$

-

 

 

$

8,725

 

Liability Derivatives at September 30, 2017

 

Commodity contracts

 

Fair liability and fair asset value

   of derivative instruments

 

$

(2,086

)

 

$

-

 

 

$

(2,086

)

Commodity contracts

 

Long-term derivative liabilities

   included in the deferred

   charges and other assets, net

   and other long-term liabilities

   balances

 

 

(731

)

 

 

-

 

 

 

(731

)

Commodity contract liabilities September 30, 2017

 

$

(2,817

)

 

$

-

 

 

$

(2,817

)

 

13


The Company’s derivative assets (liabilities) offset by counterparty and subject to an enforceable master netting arrangement are listed on the following table.

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Amounts Not Offset in the

Statement of Financial Position

 

Offsetting of Financial Assets (Liabilities)

   and Derivative Assets (Liabilities)

 

Gross

Assets

Recognized

 

 

Gross

Liabilities

Offset in the

Statement

of Financial

Position

 

 

Net Assets

(Liabilities)

Presented in the

Statement

of Financial

Position

 

 

Financial

Instruments

 

 

Cash

Collateral

Received

 

 

Net

Amount

 

Fair asset value of derivative instruments

 

$

11,959

 

 

$

(53

)

 

$

11,906

 

 

$

-

 

 

$

-

 

 

$

11,906

 

Long-term derivative assets included in

   deferred charges and other assets, net

 

 

35

 

 

 

-

 

 

 

35

 

 

 

-

 

 

 

-

 

 

 

35

 

Fair liability value of derivative instruments

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Long-term derivative liabilities included in

   other long-term liabilities, net

 

 

-

 

 

 

(5

)

 

 

(5

)

 

 

-

 

 

 

-

 

 

 

(5

)

Total at June 30, 2018

 

$

11,994

 

 

$

(58

)

 

$

11,936

 

 

$

-

 

 

$

-

 

 

$

11,936

 

Fair asset value of derivative instruments

 

$

6,023

 

 

$

(91

)

 

$

5,932

 

 

$

-

 

 

$

-

 

 

$

5,932

 

Long-term derivative assets included in

   other long-term assets, net

 

 

996

 

 

 

(730

)

 

 

266

 

 

 

-

 

 

 

-

 

 

 

266

 

Fair liability value of derivative instruments

 

 

1,706

 

 

 

(1,995

)

 

 

(289

)

 

 

-

 

 

 

-

 

 

 

(289

)

Long-term derivative liabilities included in

   other long-term liabilities, net

 

 

-

 

 

 

(1

)

 

 

(1

)

 

 

-

 

 

 

-

 

 

 

(1

)

Total at September 30, 2017

 

$

8,725

 

 

$

(2,817

)

 

$

5,908

 

 

$

-

 

 

$

-

 

 

$

5,908

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Effect of Derivative Instruments on the Statement of Operations

 

 

 

 

 

Amount of (Gain) or Loss Recognized

 

 

Amount of (Gain) or Loss Recognized

 

Derivatives Not Designated as Hedging

Instruments Under FASB ASC 815-10

 

Location of (Gain) or Loss

Recognized in Income on Derivative

 

Three Months Ended June 30,

2018

 

 

Three Months Ended June 30,

2017

 

 

Nine Months Ended June 30,

2018

 

 

Nine Months Ended June 30,

2017

 

Commodity contracts

 

Cost of product (a)

 

$

914

 

 

$

1,092

 

 

$

(8,463

)

 

$

4,073

 

Commodity contracts

 

Cost of installations and service (a)

 

$

(102

)

 

$

-

 

 

$

(673

)

 

$

(526

)

Commodity contracts

 

Delivery and branch expenses (a)

 

$

(61

)

 

$

27

 

 

$

(1,335