sgu-10q_20181231.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 December 31, 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 every Interactive Data File required to be submitted 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 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.

 

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 January 31, 2019, the registrant had 51,973,004 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 December 31, 2018 (unaudited) and September 30, 2018

 

3

Condensed Consolidated Statements of Operations (unaudited) for the three months ended December 31, 2018 and December 31, 2017

 

4

Condensed Consolidated Statements of Comprehensive Income (unaudited) for the three months ended December 31, 2018 and December 31, 2017

 

5

Condensed Consolidated Statement of Partners’ Capital (unaudited) for the three months ended December 31, 2018

 

6

Condensed Consolidated Statements of Cash Flows (unaudited) for the three months ended December 31, 2018 and December 31, 2017

 

7

Notes to Condensed Consolidated Financial Statements (unaudited)

 

8-22

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

 

23-33

Item 3 - Quantitative and Qualitative Disclosures About Market Risk

 

34

Item 4 - Controls and Procedures

 

34

Part II Other Information:

 

35

Item 1 - Legal Proceedings

 

35

Item 1A - Risk Factors

 

35

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

 

35

Item 6 - Exhibits

 

36

Signatures

 

37

 

2


Part I. FINANCIAL INFORMATION

Item 1.

Condensed Consolidated Financial Statements

STAR GROUP, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

December 31,

 

 

September 30,

 

 

 

2018

 

 

2018

 

(in thousands)

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

23,789

 

 

$

14,531

 

Receivables, net of allowance of $8,253 and $8,002, respectively

 

 

226,692

 

 

 

132,668

 

Inventories

 

 

76,565

 

 

 

56,377

 

Fair asset value of derivative instruments

 

 

-

 

 

 

17,710

 

Prepaid expenses and other current assets

 

 

48,657

 

 

 

35,451

 

Total current assets

 

 

375,703

 

 

 

256,737

 

Property and equipment, net

 

 

88,742

 

 

 

87,618

 

Goodwill

 

 

228,436

 

 

 

228,436

 

Intangibles, net

 

 

94,119

 

 

 

98,444

 

Restricted cash

 

 

250

 

 

 

250

 

Investments (1)

 

 

50,253

 

 

 

45,419

 

Deferred charges and other assets, net

 

 

18,774

 

 

 

13,067

 

Total assets

 

$

856,277

 

 

$

729,971

 

LIABILITIES AND PARTNERS’ CAPITAL

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

44,585

 

 

$

35,796

 

Revolving credit facility borrowings

 

 

92,500

 

 

 

1,500

 

Fair liability value of derivative instruments

 

 

18,065

 

 

 

-

 

Current maturities of long-term debt

 

 

10,000

 

 

 

7,500

 

Accrued expenses and other current liabilities

 

 

127,610

 

 

 

116,436

 

Unearned service contract revenue

 

 

68,832

 

 

 

60,700

 

Customer credit balances

 

 

47,137

 

 

 

61,256

 

Total current liabilities

 

 

408,729

 

 

 

283,188

 

Long-term debt

 

 

89,331

 

 

 

91,780

 

Deferred tax liabilities, net

 

 

24,367

 

 

 

21,206

 

Other long-term liabilities

 

 

24,585

 

 

 

24,012

 

Partners’ capital

 

 

 

 

 

 

 

 

Common unitholders

 

 

328,633

 

 

 

329,129

 

General partner

 

 

(1,416

)

 

 

(1,303

)

Accumulated other comprehensive loss, net of taxes

 

 

(17,952

)

 

 

(18,041

)

Total partners’ capital

 

 

309,265

 

 

 

309,785

 

Total liabilities and partners’ capital

 

$

856,277

 

 

$

729,971

 

 

 

(1)

See Note 2 – Investments  

 

See accompanying notes to condensed consolidated financial statements.

 

3


STAR GROUP, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

Three Months

Ended December 31,

 

(in thousands, except per unit data - unaudited)

 

2018

 

 

2017

 

Sales:

 

 

 

 

 

 

 

 

Product

 

$

458,707

 

 

$

366,734

 

Installations and services

 

 

76,320

 

 

 

70,100

 

Total sales

 

 

535,027

 

 

 

436,834

 

Cost and expenses:

 

 

 

 

 

 

 

 

Cost of product

 

 

306,226

 

 

 

242,780

 

Cost of installations and services

 

 

74,317

 

 

 

69,555

 

(Increase) decrease in the fair value of derivative instruments

 

 

31,039

 

 

 

(11,400

)

Delivery and branch expenses

 

 

102,673

 

 

 

91,204

 

Depreciation and amortization expenses

 

 

7,745

 

 

 

7,741

 

General and administrative expenses

 

 

7,815

 

 

 

6,651

 

Finance charge income

 

 

(851

)

 

 

(763

)

Operating income

 

 

6,063

 

 

 

31,066

 

Interest expense, net

 

 

(2,516

)

 

 

(2,087

)

Amortization of debt issuance costs

 

 

(259

)

 

 

(309

)

Income before income taxes

 

 

3,288

 

 

 

28,670

 

Income tax expense (benefit)

 

 

973

 

 

 

(1,512

)

Net income

 

$

2,315

 

 

$

30,182

 

General Partner’s interest in net income

 

 

15

 

 

 

175

 

Limited Partners’ interest in net income

 

$

2,300

 

 

$

30,007

 

 

 

 

 

 

 

 

 

 

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

 

$

0.04

 

 

$

0.45

 

Weighted average number of Limited Partner units outstanding:

 

 

 

 

 

 

 

 

Basic and Diluted

 

 

52,905

 

 

 

55,888

 

 

(1)

See Note 15 - 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

 

 

 

Three Months

Ended December 31,

 

(in thousands - unaudited)

 

2018

 

 

2017

 

Net income

 

$

2,315

 

 

$

30,182

 

Other comprehensive income:

 

 

 

 

 

 

 

 

Unrealized gain on pension plan obligation (1)

 

 

454

 

 

 

448

 

Tax effect of unrealized gain on pension plan obligation

 

 

(124

)

 

 

(135

)

Unrealized gain on investments

 

 

389

 

 

 

 

Tax effect of unrealized gain on investments

 

 

(82

)

 

 

 

Unrealized loss on interest rate hedges

 

 

(745

)

 

 

 

Tax effect of unrealized loss on interest rate hedges

 

 

197

 

 

 

 

Total other comprehensive income

 

 

89

 

 

 

313

 

Total comprehensive income

 

$

2,404

 

 

$

30,495

 

 

(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, 2018

 

 

53,088

 

 

 

326

 

 

$

329,129

 

 

$

(1,303

)

 

$

(18,041

)

 

$

309,785

 

Impact from adoption of ASU No. 2014-09

 

 

 

 

 

 

 

 

9,164

 

 

 

60

 

 

 

 

 

 

9,224

 

Net income

 

 

 

 

 

 

 

 

2,300

 

 

 

15

 

 

 

 

 

 

2,315

 

Unrealized gain on pension plan obligation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

454

 

 

 

454

 

Tax effect of unrealized gain on pension plan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(124

)

 

 

(124

)

Unrealized gain on investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

389

 

 

 

389

 

Tax effect of unrealized gain on investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(82

)

 

 

(82

)

Unrealized loss on interest rate hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(745

)

 

 

(745

)

Tax effect of unrealized loss on interest rate hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

197

 

 

 

197

 

Distributions

 

 

 

 

 

 

 

 

(6,225

)

 

 

(188

)

 

 

 

 

 

(6,413

)

Retirement of units (1)

 

 

(599

)

 

 

 

 

 

(5,735

)

 

 

 

 

 

 

 

 

(5,735

)

Balance as of December 31, 2018 (unaudited)

 

 

52,489

 

 

 

326

 

 

$

328,633

 

 

$

(1,416

)

 

$

(17,952

)

 

$

309,265

 

 

(1)

See Note 4 – 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

 

 

 

Three Months

Ended December 31,

 

(in thousands - unaudited)

 

2018

 

 

2017

 

Cash flows provided by (used in) operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

2,315

 

 

$

30,182

 

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

   operating activities:

 

 

 

 

 

 

 

 

(Increase) decrease in fair value of derivative instruments

 

 

31,039

 

 

 

(11,400

)

Depreciation and amortization

 

 

8,004

 

 

 

8,050

 

Provision for losses on accounts receivable

 

 

1,529

 

 

 

311

 

Change in deferred taxes

 

 

(616

)

 

 

(2,740

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Increase in receivables

 

 

(95,743

)

 

 

(96,193

)

Increase in inventories

 

 

(20,187

)

 

 

(11,886

)

Increase in other assets

 

 

(3,235

)

 

 

(12,411

)

Increase in accounts payable

 

 

8,206

 

 

 

27,158

 

Decrease in customer credit balances

 

 

(14,120

)

 

 

(14,294

)

Increase in other current and long-term liabilities

 

 

19,917

 

 

 

19,987

 

Net cash used in operating activities

 

 

(62,891

)

 

 

(63,236

)

Cash flows provided by (used in) investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(4,025

)

 

 

(3,604

)

Proceeds from sales of fixed assets

 

 

644

 

 

 

88

 

Purchase of investments (1)

 

 

(4,456

)

 

 

(34,151

)

Acquisitions

 

 

(275

)

 

 

(224

)

Net cash used in investing activities

 

 

(8,112

)

 

 

(37,891

)

Cash flows provided by (used in) financing activities:

 

 

 

 

 

 

 

 

Revolving credit facility borrowings

 

 

92,500

 

 

 

79,149

 

Term loan repayments

 

 

-

 

 

 

(2,500

)

Distributions

 

 

(6,413

)

 

 

(6,302

)

Unit repurchases

 

 

(5,735

)

 

 

-

 

Customer retainage payments

 

 

(57

)

 

 

(539

)

Payments of debt issue costs

 

 

(34

)

 

 

-

 

Net cash provided by financing activities

 

 

80,261

 

 

 

69,808

 

Net increase (decrease) in cash, cash equivalents, and restricted cash

 

 

9,258

 

 

 

(31,319

)

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

 

 

14,781

 

 

 

52,708

 

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

 

$

24,039

 

 

$

21,389

 

 

(1)

See Note 2 – Investments.

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 December 31, 2018, had outstanding 52.5 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”).  Since November 1, 2017, Star Group elected to be treated as a corporation for Federal income tax purposes, so Star Group and its subsidiaries are subject to Federal and state corporate income taxes.

 

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 December 31, 2018 served approximately 458,000 residential and commercial home heating oil and propane customers. Petro also sells diesel, gasoline and home heating oil to approximately 80,000 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 17,000 service contracts for natural gas and other heating systems. In addition, we provided home plumbing services to approximately 21,000 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 fourth 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 2, 2023. (See Note 11—Long-Term Debt and Bank Facility Borrowings)

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 three month period ended December 31, 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, 2018.

Comprehensive Income

Comprehensive income is comprised of Net income and Other comprehensive income. Other comprehensive income consists of the unrealized gain amortization on the Company’s pension plan obligation for its two frozen defined benefit pension plans, unrealized gain (loss) on available-for-sale investments, unrealized gain (loss) on interest rate hedge and the corresponding tax effects.

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 December 31, 2018, the $24.0 million of cash, cash equivalents, and restricted cash on the condensed consolidated statement of cash flows is composed of $23.8 million of cash and cash equivalents and $0.3 million of restricted cash. At September 30, 2018, the $14.8 million of cash, cash equivalents, and restricted cash on the condensed consolidated statements of cash flow is composed of $14.5 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.

Investments

At December 31, 2018, captive insurance collateral is comprised of $49.7 million of Level 1 debt securities measured at fair value and $0.6 million of mutual funds measured at net asset value.  At September 30, 2018, the balance was comprised of $44.8 million of Level 1 debt securities measured at fair value and $0.6 million of mutual funds measured at net asset value. Unrealized gains and losses, net of related income taxes, are reported as accumulated other comprehensive gain (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.   

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 entered into 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 annually is $12.5 million and the maximum that the Company would be obligated to pay annually is $5.0 million.  As of December 31, 2018, the Company recorded a charge of $2.0 million under this contract that increased delivery and branch expenses. As of December 31, 2017, the Company recorded a charge of $3.1 million under its contract which was later reduced. The Company ultimately paid $1.9 million in April 2018.  

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

As of December 31, 2018, we had $0.2 million and $17.1 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 December 31, 2018 was $17.8 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 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 No. 2014-09. The Company adopted the ASU effective October 1, 2018 by using the modified retrospective method and recognized the cumulative effect of initially applying ASU No. 2014-09 as an adjustment to the opening balance of Partners’ Capital at October 1, 2018. The historical periods have not been adjusted and continue to be reported under ASC No. 605, Revenue Recognition.  We have applied the guidance in ASU No. 2014-09 retrospectively to all contracts and have elected not to account for significant financing components if the period between revenue recognition and when the customer pays for product, service, or equipment installation will be one year or less.  See further detail on the impact of the adoption on our

9


condensed consolidated statement of operations and the balance sheet as of and for the three months ended December 31, 2018 at Note 3 – Revenue Recognition.

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. The Company adopted the ASU effective October 1, 2018.  The adoption of ASU No. 2016-15 did not have an impact on the Company’s 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 adopted the ASU effective October 1, 2018.  The adoption of ASU No. 2017-01 did not have an impact on the Company’s consolidated financial statements and related disclosures.  

Recently Issued Accounting Pronouncements

 

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 December 31, 2018, the undiscounted future minimum lease payments through 2033 for such operating leases are approximately $131.3 million, but the amount of leasing activity expected between December 31, 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 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 August 2018, the FASB issued ASU No. 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General: Changes to the Disclosure Requirements for Defined Benefit Plans, which modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans by removing and adding certain disclosures for these plans. The new guidance is effective for our annual reporting period beginning in the first quarter of fiscal 2021, with early adoption permitted. The Company is evaluating the effect that ASU No. 2018-14 will have on its consolidated financial statements and related disclosures, but has not determined the timing of adoption.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software: Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract, which will align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The new guidance is effective for our annual reporting period beginning in the first quarter of fiscal 2022, with early adoption permitted. The Company is evaluating the effect that ASU No. 2018-15 will have on its consolidated financial statements and related disclosures, but has not determined the timing of adoption.

10


 

3) Revenue Recognition

Effective October 1, 2018 we adopted the requirements of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The adoption was not material to the financial statements presented. In accordance with the new revenue standard requirements, our condensed consolidated statement of operations and the consolidated balance sheet were impacted due to the deferment of commissions provided to Company employees that were previously expensed as incurred, the deferment of certain upfront credits provided to customers upon entering into a new annual product or service contract as contra-revenue that were previously expensed as incurred and recorded as delivery and branch expense, and the allocation of transaction price of certain combination of contracts that were previously accounted for as separate contracts.  The impact of adoption on our condensed consolidated statement of operations and balance sheet, as of and for the three months ended December 31, 2018 was as follows (in thousands):

 

 

Three months ended December 31, 2018

 

Statement of Operations

As Reported

 

 

Balances without Adoption of ASC 606

 

 

Effect of

Change

Higher/(Lower)

 

Sales:

 

 

 

 

 

 

 

 

 

 

 

     Product

$

458,707

 

 

$

462,153

 

 

$

(3,446

)

      Installations and services

 

76,320

 

 

 

74,794

 

 

 

1,526

 

           Total Sales

 

535,027

 

 

 

536,947

 

 

 

(1,920

)

Cost and Expenses:

 

 

 

 

 

 

 

 

 

 

 

      Delivery and branch expenses

 

102,673

 

 

 

105,209

 

 

 

(2,536

)

      Operating income

 

6,063

 

 

 

5,447

 

 

 

616

 

     Income before income taxes

 

3,288

 

 

 

2,672

 

 

 

616

 

Income tax expense

 

973

 

 

 

791

 

 

 

182

 

     Net income

$

2,315

 

 

$

1,881

 

 

$

434

 

          General Partner's interest in net income

 

15

 

 

 

13

 

 

 

2

 

Limited Partner's interest in net income

$

2,300

 

 

$

1,868

 

 

$

432

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted income per Limited Partner Unit

$

0.04

 

 

$

0.04

 

 

$

-

 

 

 

December 31, 2018

 

Balance Sheet

As Reported

 

 

Balances without Adoption of ASC 606

 

 

Effect of

Change

Higher/(Lower)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

$

48,657

 

 

$

41,823

 

 

$

6,834

 

      Deferred charges and other assets, net

$

18,774

 

 

$

12,182

 

 

$

6,592

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

Deferred tax liabilities, net

$

24,367

 

 

$

20,599

 

 

$

3,768

 

 

 

 

 

 

 

 

 

 

 

 

 

Partners' capital

 

 

 

 

 

 

 

 

 

 

 

Common unitholders

$

328,633

 

 

$

319,037

 

 

$

9,596

 

General partner

$

(1,416

)

 

$

(1,478

)

 

$

62

 

 

 

 

 

 

 

11


The following disaggregates our revenue by major sources for the three months ended December 31, 2018:

 

 

Three Months

Ended December 31,

 

(in thousands)

2018

 

 

2017

 

Petroleum Products:

 

 

 

 

 

 

 

Home heating oil and propane

$

364,202

 

 

$

301,468

 

Other petroleum products

 

94,505

 

 

 

65,266

 

   Total petroleum products

 

458,707

 

 

 

366,734

 

Installations and Services:

 

 

 

 

 

 

 

Equipment installations

 

29,983

 

 

 

27,344

 

Equipment maintenance service contracts

 

28,319

 

 

 

25,397

 

Billable call services

 

18,018

 

 

 

17,359

 

   Total installations and services

 

76,320

 

 

 

70,100

 

   Total Sales

$

535,027

 

 

$

436,834

 

Performance Obligations

Petroleum product revenues primarily consist of home heating oil and propane as well as diesel fuel and gasoline.  Revenue from petroleum products are recognized at the time of delivery to the customer when control is passed from the Company to the customer.  Revenue is measured as the amount of consideration we expect to receive in exchange for transferring control of the petroleum products.  Approximately 96% of our full service residential and commercial home heating oil customers automatically receive deliveries based on prevailing weather conditions.  We offer several pricing alternatives to our residential home heating oil customers, including a variable price (market based) option and a price-protected option, the latter of which either sets the maximum price or a fixed price that a customer will pay.  

Equipment maintenance service contracts primarily cover heating, air conditioning, and natural gas equipment.  We generally do not sell equipment maintenance service contracts to heating oil customers that do not take delivery of product from us.  The service contract period of our equipment maintenance service contracts is generally one year or less.  Revenues from equipment maintenance service contracts are recognized into income over the terms of the respective service contracts, on a straight-line basis.  Our obligation to perform service is consistent through the duration of the contracts, and the straight-line basis of recognition is a faithful depiction of the transfer of our services.  To the extent that the Company anticipates that future costs for fulfilling its contractual obligations under its equipment service contracts will exceed the amount of deferred revenue currently attributable to these contracts, the Company recognizes a loss in current period earnings equal to the amount that anticipated future costs exceed related deferred revenues.

Revenue from billable call services (repairs, maintenance and other services including plumbing) and equipment installations (heating, air conditioning, and natural gas equipment) are recognized at the time that the work is performed.

Our standard payment terms are generally 30 days.  In addition, approximately 33% of our residential customers take advantage of our “smart pay” budget payment plan under which their estimated annual oil and propane deliveries and service contract billings are paid for in a series of equal monthly installments. Sales reported for product, installations and services exclude taxes assessed by various governmental authorities.

Contract Costs

We have elected to recognize incremental costs of obtaining a contract, other than new residential product and equipment maintenance service contracts, as an expense when incurred when the amortization period of the asset that we otherwise would have recognized is one year or less.  We recognize an asset for incremental commission expenses paid to sales personnel in conjunction with obtaining new residential customer product and equipment maintenance service contracts. We only defer these costs when we have determined the commissions are, in fact, incremental and would not have been incurred absent the customer contract. Costs to obtain a contract are amortized and recorded ratably as Delivery and branch expenses over the period representing the transfer of goods or services to which the assets relate.  Costs to obtain new residential product and equipment maintenance service contracts are amortized as expense over the estimated customer relationship period, or five years.  Deferred contract costs are classified as current or non-current within Prepaid expenses and other current assets and Deferred charges and other assets, net, respectively.  At December 31, 2018 the amount of deferred contract costs included in Prepaid expenses and other current assets and Deferred charges and other assets, net was $3.7 million and $6.6 million, respectively.  We recognize an impairment charge to the extent the carrying amount of a deferred cost exceeds the remaining amount of consideration we expect to receive in exchange for the petroleum products and services related to the cost, less the expected costs related directly to providing those petroleum products and services that have not yet been recognized as expenses. There have been no impairment charges recognized for the three months ended December 31, 2018.

 

Significant Judgements – Allocation of Transaction Price to Separate Performance Obligations

12


Our contracts with customers often include distinct performance obligations to transfer products and perform equipment maintenance services to a customer that should be accounted for separately.  Judgement is required to determine the stand-alone selling price for each distinct performance obligation.  We determine the stand-alone selling price using information that may include market conditions and other observable inputs and typically have more than one stand-alone selling price for petroleum products and equipment maintenance services due to the stratification of those products and services by geography and customer characteristics.

 

Contract Liability Balances

The Company has contract liabilities for advanced payments received from customers for future oil deliveries (primarily amounts received from customers on “smart pay” budget payment plans in advance of oil deliveries) and obligations to service customers with equipment maintenance service contracts.  Our “smart pay” budget payment plans are annual and generally begin outside of the heating season.  We generally have received advanced amounts from customers on “smart pay” budget payment plans prior to the heating season, which are reduced as oil deliveries are made.  For customers that are not on “smart pay” budget payment plans, we generally receive the full contract amount for equipment service contracts with customers at the outset of the contracts.  Contract liabilities are recognized straight-line over the service contract period, generally one-year or less.  As of December 31, 2018 and September 30, 2018 the Company had contract liabilities of $118.6 million and $113.8 million, respectively.  During the three months ended December 31, 2018 the Company recognized $67.1 million of revenue that was included in the September 30, 2018 contract liability balance.   

 

4) Common Unit Repurchase and Retirement

In July 2012, the Board adopted a plan to repurchase certain of the Company’s Common Units that was amended in fiscal 2018 (the “Repurchase Plan”).  Under the Repurchase Plan, as amended, the Board authorized the repurchase of 10.9 million Common Units, of which, 8.4 million were available for the Company to repurchase in open market transactions, and 2.5 million were available for repurchase in privately-negotiated transactions.  As of the end of the first fiscal quarter of 2019, the Company repurchased approximately 6.1 million Common Units in open market transactions under the Repurchase Plan and 4.8 million total Common Units remain available for repurchase.  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 fourth amended and restated credit agreement dated July 2, 2018, 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 outstanding) 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.  The Company was in compliance with this covenant as of December 31, 2018.

The following table shows repurchases under the Repurchase Plan.

 

(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

 

 

Fiscal year 2012 to 2018 total

 

 

7,937

 

 

$

7.11

 

 

 

5,493

 

 

 

5,359

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

October 2018

 

 

151

 

 

$

9.70

 

 

 

151

 

 

 

5,208

 

 

November 2018

 

 

182

 

 

$

9.71

 

 

 

182

 

 

 

5,026

 

 

December 2018

 

 

266

 

 

$

9.41

 

 

 

266

 

 

 

4,760

 

 

First quarter fiscal year 2019 total

 

 

599

 

 

$

9.57

 

 

 

599

 

 

 

4,760

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 2019

 

 

516

 

 

$

9.39

 

 

 

516

 

 

 

4,244

 

(b)

 

(a)

Amount includes repurchase costs.

(b)

Of the total available for repurchase, approximately 1.7 million are available for repurchase in open market transactions and 2.5 million are available for repurchase in privately-negotiated transactions.

 

 

13


5) Investments

The Company considers all of its investments to be available-for-sale. Investments at December 31, 2018 consist of the following (in thousands):

 

 

 

Amortized Cost

 

 

Gross Unrealized Gain

 

 

Gross Unrealized (Loss)

 

 

Fair Value

 

Cash and Receivables

 

$

416

 

 

$

 

 

$

 

 

$

416

 

U.S. Government Sponsored Agencies

 

 

16,208

 

 

 

 

 

 

(55

)

 

 

16,153

 

Corporate Debt Securities

 

 

29,344

 

 

 

 

 

 

(701

)

 

 

28,643

 

Foreign Bonds and Notes

 

 

5,100

 

 

 

 

 

 

(59

)

 

 

5,041

 

Total

 

$

51,068

 

 

$

 

 

$

(815

)

 

$

50,253

 

 

Investments at September 30, 2018 consist of the following (in thousands):

 

 

 

Amortized Cost

 

 

Gross Unrealized Gain

 

 

Gross Unrealized (Loss)

 

 

Fair Value

 

Cash and Receivables

 

$

350

 

 

$

 

 

$

 

 

$

350

 

U.S. Government Sponsored Agencies

 

 

10,735

 

 

 

 

 

 

(192

)

 

 

10,543

 

Corporate Debt Securities

 

 

30,427

 

 

 

 

 

 

(928

)

 

 

29,499

 

Foreign Bonds and Notes

 

 

5,111

 

 

 

 

 

 

(84

)

 

 

5,027

 

Total

 

$

46,623

 

 

$

 

 

$

(1,204

)

 

$

45,419

 

 

Maturities of investments were as follows at December 31, 2018 (in thousands):

 

 

 

Net Carrying Amount

 

Due within one year

 

$

4,455

 

Due after one year through five years

 

 

28,902

 

Due after five years through ten years

 

 

16,896

 

Total

 

$

50,253

 

 

6) Derivatives and Hedging—Disclosures and Fair Value Measurements

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. 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 has elected not to designate its commodity 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 December 31, 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: 14.0 million gallons of swap contracts, 7.9 million gallons of call options, 6.4 million gallons of put options, and 92.4 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 December 31, 2018, had 18.3 million gallons of long future contracts, and 41.2 million gallons of short future contracts that settle in future months.  To hedge its internal fuel usage and other related activities for fiscal 2019, the Company, as of December 31, 2018, had 4.3 million gallons of swap contracts and 2.0 million gallons of short swap contracts that settle in future months.

14


As of December 31, 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: 17.9 million gallons of swap contracts, 7.3 million gallons of call options, 8.7 million gallons of put options, and 83.9 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 December 31, 2017, had 27.8 million gallons of long future contracts, and 55.1 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 December 31, 2017, had 2.3 million gallons of swap contracts that settle in future months.

In August 2018, the Company entered into interest rate swap agreements in order to mitigate exposure to market risk associated with variable rate interest on $50.0 million, or 50%, of our long term debt.  The Company has designated its interest rate swap agreements as cash flow hedging derivatives.  To the extent these derivative instruments are effective and the standard’s documentation requirements have been met, changes in fair value are recognized in other comprehensive income until the underlying hedged item is recognized in earnings.  As of December 31, 2018, the fair value of the swap contracts was ($0.7) million. As of September 30, 2018, the fair value of the swap contracts was $39 thousand. We utilized Level 2 inputs in the fair value hierarchy of valuation techniques to determine the fair value of the swap contracts.

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., Regions Financial Corporation, Toronto-Dominion Bank 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 December 31, 2018, the aggregate cash posted as collateral in the normal course of business at counterparties was $3.0 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 December 31, 2018, $20.2 million of 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 and interest rate 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.

15


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 December 31, 2018

 

Commodity contracts

 

Fair liability value of derivative

instruments

 

$

38,247

 

 

$

 

 

$

38,247

 

Commodity contracts

 

Long-term derivative assets included in the deferred charges and other assets, net and  other long-term liabilities, net balance

 

 

2,193

 

 

 

 

 

 

2,193

 

Commodity contract assets at December 31, 2018

 

$

40,440

 

 

$

 

 

$

40,440

 

Liability Derivatives at December 31, 2018

 

Commodity contracts

 

Fair liability value of derivative

instruments

 

$

(56,312

)

 

$

 

 

$

(56,312

)

Commodity contracts

 

Long-term derivative liabilities included in the deferred charges and other assets, net and  other long-term liabilities, net balance

 

 

(2,445

)

 

 

 

 

 

(2,445

)

Commodity contract liabilities at December 31, 2018

 

$

(58,757

)

 

$

 

 

$

(58,757

)

Asset Derivatives at September 30, 2018

 

Commodity contracts

 

Fair asset value

of derivative instruments

 

$

17,710

 

 

$

 

 

$

17,710

 

Commodity contracts

 

Long-term derivative assets included in the deferred charges and other assets, net balance

 

 

906

 

 

 

 

 

 

906

 

Commodity contract assets September 30, 2018

 

$

18,616

 

 

$

 

 

$

18,616

 

Liability Derivatives at September 30, 2018

 

Commodity contracts

 

Fair liability and fair asset value

of derivative instruments

 

$

 

 

$

 

 

$

 

Commodity contracts

 

Long-term derivative liabilities included in the deferred charges and other assets, net balance

 

 

(103

)

 

 

 

 

 

(103

)

Commodity contract liabilities September 30, 2018

 

$

(103

)

 

$