sgu-10q_20191231.htm

8

 

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, 2019

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 Registrant as Specified in its Charter)

 

 

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)

 

 

Registrant’s telephone number, including area code: (203) 328-7310

 

N/A

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

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Unit

 

SGU

 

New York Stock Exchange

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 (§ 232.405 of this chapter) 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, an accelerated filer, a non-accelerated filer, a 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 Exchange Act).    Yes      No  

 

At January 31, 2020, the registrant had 46,243,707 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, 2019 (unaudited) and September 30, 2019

 

3

Condensed Consolidated Statements of Operations (unaudited) for the three months ended December 31, 2019 and December 31, 2018

 

4

Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three months ended December 31, 2019 and December 31, 2018

 

5

Condensed Consolidated Statement of Partners’ Capital (unaudited) for the three months ended December 31, 2019 and December 31, 2018

 

6

Condensed Consolidated Statements of Cash Flows (unaudited) for the three months ended December 31, 2019 and December 31, 2018

 

7

Notes to Condensed Consolidated Financial Statements (unaudited)

 

8-21

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

 

22-32

Item 3 - Quantitative and Qualitative Disclosures About Market Risk

 

33

Item 4 - Controls and Procedures

 

33

Part II Other Information:

 

34

Item 1 - Legal Proceedings

 

34

Item 1A - Risk Factors

 

34

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

 

34

Item 6 - Exhibits

 

35

Signatures

 

36

 

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,

 

 

 

2019

 

 

2019

 

(in thousands)

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

14,542

 

 

$

4,899

 

Receivables, net of allowance of $8,499 and $8,378, respectively

 

 

205,038

 

 

 

120,245

 

Inventories

 

 

80,261

 

 

 

64,788

 

Fair asset value of derivative instruments

 

 

1,247

 

 

 

 

Prepaid expenses and other current assets

 

 

38,909

 

 

 

36,898

 

Total current assets

 

 

339,997

 

 

 

226,830

 

Property and equipment, net

 

 

96,512

 

 

 

98,239

 

Operating lease right-of-use assets

 

 

103,492

 

 

 

 

Goodwill

 

 

244,574

 

 

 

244,574

 

Intangibles, net

 

 

103,537

 

 

 

107,688

 

Restricted cash

 

 

250

 

 

 

250

 

Captive insurance collateral

 

 

62,703

 

 

 

58,490

 

Deferred charges and other assets, net

 

 

18,083

 

 

 

16,635

 

Total assets

 

$

969,148

 

 

$

752,706

 

LIABILITIES AND PARTNERS’ CAPITAL

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

47,302

 

 

$

33,973

 

Revolving credit facility borrowings

 

 

112,688

 

 

 

24,000

 

Fair liability value of derivative instruments

 

 

1,893

 

 

 

8,262

 

Current maturities of long-term debt

 

 

9,750

 

 

 

9,000

 

Current portion of operating lease liabilities

 

 

20,202

 

 

 

 

Accrued expenses and other current liabilities

 

 

132,837

 

 

 

120,839

 

Unearned service contract revenue

 

 

70,087

 

 

 

61,213

 

Customer credit balances

 

 

52,766

 

 

 

68,270

 

Total current liabilities

 

 

447,525

 

 

 

325,557

 

Long-term debt

 

 

119,525

 

 

 

120,447

 

Long-term operating lease liabilities

 

 

88,707

 

 

 

 

Deferred tax liabilities, net

 

 

21,655

 

 

 

20,116

 

Other long-term liabilities

 

 

20,838

 

 

 

25,746

 

Partners’ capital

 

 

 

 

 

 

 

 

Common unitholders

 

 

289,268

 

 

 

279,709

 

General partner

 

 

(1,991

)

 

 

(1,968

)

Accumulated other comprehensive loss, net of taxes

 

 

(16,379

)

 

 

(16,901

)

Total partners’ capital

 

 

270,898

 

 

 

260,840

 

Total liabilities and partners’ capital

 

$

969,148

 

 

$

752,706

 

 

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)

 

2019

 

 

2018

 

Sales:

 

 

 

 

 

 

 

 

Product

 

$

432,688

 

 

$

458,707

 

Installations and services

 

 

76,257

 

 

 

76,320

 

Total sales

 

 

508,945

 

 

 

535,027

 

Cost and expenses:

 

 

 

 

 

 

 

 

Cost of product

 

 

287,673

 

 

 

306,226

 

Cost of installations and services

 

 

73,669

 

 

 

74,317

 

(Increase) decrease in the fair value of derivative instruments

 

 

(6,417

)

 

 

31,039

 

Delivery and branch expenses

 

 

96,726

 

 

 

102,673

 

Depreciation and amortization expenses

 

 

9,050

 

 

 

7,745

 

General and administrative expenses

 

 

6,506

 

 

 

7,815

 

Finance charge income

 

 

(713

)

 

 

(851

)

Operating income

 

 

42,451

 

 

 

6,063

 

Interest expense, net

 

 

(2,679

)

 

 

(2,516

)

Amortization of debt issuance costs

 

 

(235

)

 

 

(259

)

Income before income taxes

 

 

39,537

 

 

 

3,288

 

Income tax expense

 

 

11,782

 

 

 

973

 

Net income

 

$

27,755

 

 

$

2,315

 

General Partner’s interest in net income

 

 

192

 

 

 

15

 

Limited Partners’ interest in net income

 

$

27,563

 

 

$

2,300

 

 

 

 

 

 

 

 

 

 

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

 

$

0.49

 

 

$

0.04

 

Weighted average number of Limited Partner units outstanding:

 

 

 

 

 

 

 

 

Basic and Diluted

 

 

47,266

 

 

 

52,905

 

 

(1)

See Note 16 - 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 December 31,

 

(in thousands - unaudited)

 

2019

 

 

2018

 

Net income

 

$

27,755

 

 

$

2,315

 

Other comprehensive income:

 

 

 

 

 

 

 

 

Unrealized gain on pension plan obligation (1)

 

 

455

 

 

 

454

 

Tax effect of unrealized gain on pension plan obligation

 

 

(125

)

 

 

(124

)

Unrealized gain (loss) on captive insurance collateral

 

 

(64

)

 

 

389

 

Tax effect of unrealized gain (loss) on captive insurance collateral

 

 

8

 

 

 

(82

)

Unrealized gain (loss) on interest rate hedges

 

 

334

 

 

 

(745

)

Tax effect of unrealized gain (loss) on interest rate hedges

 

 

(86

)

 

 

197

 

Total other comprehensive income

 

 

522

 

 

 

89

 

Total comprehensive income

 

$

28,277

 

 

$

2,404

 

 

(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

 

 

 

Three Months Ended December 31, 2019

 

 

 

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, 2019

 

 

47,685

 

 

 

326

 

 

$

279,709

 

 

$

(1,968

)

 

$

(16,901

)

 

$

260,840

 

Net income

 

 

 

 

 

 

 

 

27,563

 

 

 

192

 

 

 

 

 

 

27,755

 

Unrealized gain on pension plan obligation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

455

 

 

 

455

 

Tax effect of unrealized gain on pension plan obligation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(125

)

 

 

(125

)

Unrealized loss on captive insurance collateral

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(64

)

 

 

(64

)

Tax effect of unrealized loss on captive insurance collateral

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8

 

 

 

8

 

Unrealized gain on interest rate hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

334

 

 

 

334

 

Tax effect of unrealized gain on interest rate hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(86

)

 

 

(86

)

Distributions

 

 

 

 

 

 

 

 

(5,940

)

 

 

(215

)

 

 

 

 

 

(6,155

)

Retirement of units (1)

 

 

(1,281

)

 

 

 

 

 

(12,064

)

 

 

 

 

 

 

 

 

(12,064

)

Balance as of December 31, 2019 (unaudited)

 

 

46,404

 

 

 

326

 

 

$

289,268

 

 

$

(1,991

)

 

$

(16,379

)

 

$

270,898

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended December 31, 2018

 

 

 

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 of 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 obligation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(124

)

 

 

(124

)

Unrealized gain on captive insurance collateral

 

 

 

 

 

 

 

 

 

 

 

 

 

 

389

 

 

 

389

 

Tax effect of unrealized gain on captive insurance collateral

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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)

 

2019

 

 

2018

 

Cash flows provided by (used in) operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

27,755

 

 

$

2,315

 

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

   operating activities:

 

 

 

 

 

 

 

 

(Increase) decrease in fair value of derivative instruments

 

 

(6,417

)

 

 

31,039

 

Depreciation and amortization

 

 

9,285

 

 

 

8,004

 

Provision for losses on accounts receivable

 

 

1,010

 

 

 

1,529

 

Change in deferred taxes

 

 

1,336

 

 

 

(616

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Increase in receivables

 

 

(85,745

)

 

 

(95,743

)

Increase in inventories

 

 

(15,427

)

 

 

(20,187

)

Increase in other assets

 

 

(2,394

)

 

 

(3,235

)

Increase in accounts payable

 

 

14,375

 

 

 

8,206

 

Decrease in customer credit balances

 

 

(15,898

)

 

 

(14,120

)

Increase in other current and long-term liabilities

 

 

20,529

 

 

 

19,917

 

Net cash used in operating activities

 

 

(51,591

)

 

 

(62,891

)

Cash flows provided by (used in) investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(3,024

)

 

 

(4,025

)

Proceeds from sales of fixed assets

 

 

63

 

 

 

644

 

Purchase of investments

 

 

(4,206

)

 

 

(4,456

)

Acquisitions

 

 

(496

)

 

 

(275

)

Net cash used in investing activities

 

 

(7,663

)

 

 

(8,112

)

Cash flows provided by (used in) financing activities:

 

 

 

 

 

 

 

 

Revolving credit facility borrowings

 

 

90,202

 

 

 

92,500

 

Revolving credit facility repayments

 

 

(39,014

)

 

 

 

Loan issuance

 

 

130,000

 

 

 

 

Term loan repayments

 

 

(92,500

)

 

 

 

Distributions

 

 

(6,155

)

 

 

(6,413

)

Unit repurchases

 

 

(12,064

)

 

 

(5,735

)

Customer retainage payments

 

 

(299

)

 

 

(57

)

Payments of debt issue costs

 

 

(1,273

)

 

 

(34

)

Net cash provided by financing activities

 

 

68,897

 

 

 

80,261

 

Net increase in cash, cash equivalents, and restricted cash

 

 

9,643

 

 

 

9,258

 

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

 

 

5,149

 

 

 

14,781

 

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

 

$

14,792

 

 

$

24,039

 

 

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, 2019, had outstanding 46.4 million Common Units (NYSE: “SGU”), representing a 99.3% limited partner interest in Star, and 0.3 million general partner units, representing a 0.7% 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 elected to be treated as a corporation for Federal income tax purposes, so both Star and its subsidiaries (that were already taxable entities) are now subject to Federal and state corporate income taxes. As a result of this election, the Company issued its last Schedule K-1’s for the 2017 calendar year, and now issues Forms 1099-DIV to unitholders.

 

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 U.S. region retail distributor of home heating oil and propane that at December 31, 2019 served approximately 454,000 full service residential and commercial home heating oil and propane customers and 59,000 customers on a delivery only basis. We also sell gasoline and diesel fuel to approximately 26,000 customers. We install, maintain, and repair heating and air conditioning equipment and to a lesser extent provide these services outside our heating oil and propane customer base including approximately 18,000 service contracts for natural gas and other heating systems.

 

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 fifth amended and restated credit agreement’s $130 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 December 4, 2024. (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 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, 2019 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 (the “SEC”) 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, 2019.

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 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, 2019, the $14.8 million of cash, cash equivalents, and restricted cash on the Condensed Consolidated Statements of Cash Flows is composed of $14.5 million of cash and cash equivalents and $0.3 million of restricted cash. At September 30, 2019, the $5.1 million of cash, cash equivalents, and restricted cash on the Condensed Consolidated Statements of Cash Flows is composed of $4.9 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

The captive insurance collateral is held by our captive insurance company in an irrevocable trust as collateral for certain workers’ compensation 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 December 31, 2019, captive insurance collateral is comprised of $61.2 million of Level 1 debt securities measured at fair value and $1.5 million of mutual funds measured at net asset value.  At September 30, 2019, the balance was comprised of $58.0 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 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.

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 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 Payment Threshold which approximates 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 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, 2019, the Company recorded a charge of $3.0 million under this contract that increased delivery and branch expenses. As of December 31, 2018, the Company recorded a charge of $2.0 million under its contract and ultimately paid $2.1 million in April 2019 after the fiscal 2019 heating season.

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

As of December 31, 2019, we had $0.2 million and $16.9 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, 2019 was $22.1 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 February 2016, the FASB issued ASU No. 2016-02, Leases (“ASC Topic 842”).  The update requires all leases with a term greater than twelve months to be recognized on the balance sheet by recording (i) a lease liability that represents a lessee’s obligation to make lease payments arising from a lease, measured at the present value of the remaining lease payments; and (2) a right-of-use (“ROU”) asset that represents the lessee’s right to use a specified asset for the lease term, measured in an amount equal to the lease liability adjusted for accrued lease payments.  The standard also requires the disclosure of key information pertaining to leasing arrangements.  

9


As of October 1, 2019, the Company adopted ASC Topic 842 using the modified retrospective transition approach as of the effective date as permitted by the amendments in ASU 2018-11.  As a result, the Company was not required to adjust its comparative period financial information for effects of the standard or make the new required lease disclosures for periods before the date of adoption (i.e. October 1, 2019).  The Company has elected to adopt the package of transition practical expedients and, therefore, has not reassessed (1) whether existing or expired contracts contain a lease, (2) lease classification for existing or expired leases or (3) the accounting for initial direct costs that were previously capitalized.  We also elected a practical expedient to not separate non-lease components from the lease components and excluded short term leases from the calculation of right of use asset and operating lease liability.  For certain leases relating to vehicles and equipment we elected to apply portfolio approach guidance and accounted for leases with similar characteristics as a single lease. The Company did not elect the practical expedient to use hindsight for leases existing at the adoption date.

The adoption of ASC Topic 842 had a material impact to the Company’s Condensed Consolidated Balance Sheet, but did not impact the Condensed Consolidated Statement of Operations or Condensed Consolidated Statement of Partners’ Capital. The most significant changes to the Condensed Consolidated Balance Sheet relate to the recognition of the following as of October 1, 2019:  “Operating lease right-of-use assets” in the amount of $104.7 million, “Current portion of operating lease liabilities” in the amount of $20.1 million and “Long-term operating lease liabilities” in the amount of $89.9 million. The adoption of ASC Topic 842 also had no impact on operating, investing, or financing cash flows in the Condensed Consolidated Statement of Cash Flows. However, ASC Topic has significantly affected the Company’s disclosures about noncash investing activities. Additionally, the Company’s lease-related disclosures have significantly increased as of and for the three months ended December 31, 2019 as compared to prior years. See Note 13 – Leases for further details on the adoption of ASC Topic 842.

Recently Issued Accounting Pronouncements

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. The Company is evaluating the effect that ASU No. 2016-13 will have 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 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, and 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, and has not determined the timing of adoption.

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3) Revenue Recognition

The following disaggregates our revenue by major sources for the three months ended December 31, 2019 and December 31, 2018:

 

 

Three Months

Ended December 31,

 

(in thousands)

2019

 

 

2018

 

Petroleum Products:

 

 

 

 

 

 

 

Home heating oil and propane

$

343,346

 

 

$

364,202

 

Other petroleum products

 

89,342

 

 

 

94,505

 

   Total petroleum products

 

432,688

 

 

 

458,707

 

Installations and Services:

 

 

 

 

 

 

 

Equipment installations

 

30,565

 

 

 

29,983

 

Equipment maintenance service contracts

 

27,908

 

 

 

28,319

 

Billable call services

 

17,784

 

 

 

18,018

 

   Total installations and services

 

76,257

 

 

 

76,320

 

   Total Sales

$

508,945

 

 

$

535,027

 

 

Deferred Contract Costs 

 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 defer these costs only 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 of approximately 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, 2019 the amount of deferred contract costs included in “Prepaid expenses and other current assets” and “Deferred charges and other assets, net” was $3.5 million and $6.4 million, respectively.  For the quarter ended December 31, 2019 we recognized expense of $1.0 million associated with the amortization of deferred contract costs within “Delivery and branch expenses” in the Condensed Consolidated Statement of Operations.    

 

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.  Contract liabilities are recognized straight-line over the service contract period, generally one year or less.  As of December 31, 2019 and September 30, 2019 the Company had contract liabilities of $120.5 million and $127.0 million, respectively.  During the quarter ended December 31, 2019 the Company recognized $71.5 million of revenue that was included in the September 30, 2019 contract liability balance.  During the quarter 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”).  Through August 2019, the Company had repurchased approximately 9.5 million Common Units under the Repurchase Plan. In August 2019, the Board authorized an increase of the number of Common Units that remained available for the Company to repurchase from 1.3 million to a total of 2.3 million, of which 1.0 million were available for repurchase in open market transactions and 1.3 million were available for repurchase in privately-negotiated transactions.  During the first fiscal quarter of 2020, the Company repurchased approximately 0.7 million Common Units in open market transactions under the Repurchase Plan and 0.3 million Common Units remained available for repurchase at the end of the first fiscal quarter of 2020.  There is no guarantee of the exact number of units that will be purchased under the Repurchase Plan and the Company may discontinue purchases at any time. The Repurchase Plan 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 Plan will be retired.

Under the Company’s fifth amended and restated credit agreement dated December 4, 2019, in order to repurchase Common Units we must maintain Availability (as defined in the fifth 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-

11


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, 2019.

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 2019 total

 

 

13,340

 

 

$

8.08

 

 

 

10,896

 

 

 

956

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

October 2019

 

 

223

 

 

$

9.44

 

 

 

223

 

 

 

733

 

 

November 2019

 

 

261

 

 

$

9.39

 

 

 

261

 

 

 

472

 

 

December 2019

 

 

797

 

 

$

9.42

 

 

 

166

 

 

 

306

 

(b)

First quarter fiscal year 2020 total

 

 

1,281

 

 

$

9.42

 

 

 

650

 

 

 

306

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 2020

 

 

160

 

 

$

9.48

 

 

 

160

 

 

 

146

 

(c)

 

(a)

Amount includes repurchase costs.

(b)

First quarter of fiscal year 2020 Common Units repurchased include 0.6 million Common Units acquired in a private transaction.

(c)

Of the total available for repurchase, less than 0.1 million are available for repurchase in open market transactions and 0.1 million are available for repurchase in privately-negotiated transactions.

 

 

5) Captive Insurance Collateral

The Company considers all of its captive insurance collateral to be available-for-sale investments. Investments at December 31, 2019 consist of the following (in thousands):

 

 

 

Amortized Cost

 

 

Gross Unrealized Gain

 

 

Gross Unrealized (Loss)

 

 

Fair Value

 

Cash and Receivables

 

$

1,502

 

 

$

 

 

$

 

 

$

1,502

 

U.S. Government Sponsored Agencies

 

 

32,397

 

 

 

144

 

 

 

(1

)

 

 

32,540

 

Corporate Debt Securities

 

 

23,787

 

 

 

753

 

 

 

 

 

 

24,540

 

Foreign Bonds and Notes

 

 

4,052

 

 

 

69

 

 

 

 

 

 

4,121

 

Total

 

$

61,738

 

 

$

966

 

 

$

(1

)

 

$

62,703

 

 

Investments at September 30, 2019 consist of the following (in thousands):

 

 

 

Amortized Cost

 

 

Gross Unrealized Gain

 

 

Gross Unrealized (Loss)

 

 

Fair Value

 

Cash and Receivables

 

$

509

 

 

$

 

 

$

 

 

$

509

 

U.S. Government Sponsored Agencies

 

 

29,055

 

 

 

198

 

 

 

(3

)

 

 

29,250

 

Corporate Debt Securities

 

 

23,831

 

 

 

773

 

 

 

 

 

 

24,604

 

Foreign Bonds and Notes

 

 

4,066

 

 

 

61

 

 

 

 

 

 

4,127

 

Total

 

$

57,461

 

 

$

1,032

 

 

$

(3

)

 

$

58,490

 

 

Maturities of investments were as follows at December 31, 2019 (in thousands):

 

 

 

Net Carrying Amount

 

Due within one year

 

$

9,946

 

Due after one year through five years

 

 

41,173

 

Due after five years through ten years

 

 

11,584

 

Total

 

$

62,703

 

 

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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 caption “(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, 2019, 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: 17.2 million gallons of swap contracts, 7.4 million gallons of call options, 7.2 million gallons of put options, and 85.8 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, 2019, 18.2 million gallons of long future contracts, and 42.1 million gallons of short future contracts that settle in future months.  To hedge its internal fuel usage and other activities for fiscal 2020, the Company, as of December 31, 2019, had 4.0 million gallons of swap contracts and 0.2 million gallons of short swap contracts that settle in future months.

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.

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 its 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, 2019, the notional value of the swap contracts was $43.8 million and the fair value of the swap contracts was $(1.6 million). As of September 30, 2019, the notional value of the swap contracts was $45.0 million and the fair value of the swap contracts was $(2.0) million. 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, 2019, the aggregate cash posted as collateral in the normal course of business at counterparties was $2.8 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, 2019, $1.2 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

13


Company are based on a combination of the NYMEX published market prices and other inputs, including such factors as present value, volatility and duration.

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, 2019

 

Commodity contracts

 

Fair asset and liability value of derivative instruments

 

$

7,106

 

 

$

 

 

$

7,106

 

Commodity contracts

 

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

 

 

895

 

 

 

 

 

 

895

 

Commodity contract assets at December 31, 2019

 

$

8,001

 

 

$

 

 

$

8,001

 

Liability Derivatives at December 31, 2019

 

Commodity contracts

 

Fair asset and liability value of derivative instruments

 

$

(7,752

)

 

$

 

 

$

(7,752

)

Commodity contracts

 

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

 

 

(1,025

)

 

 

 

 

 

(1,025

)

Commodity contract liabilities at December 31, 2019

 

$

(8,777

)

 

$