STAR GROUP, L.P. FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Statement Regarding Forward-Looking Disclosure
This Quarterly Report on Form 10-Q (this "Report") includes "forward-looking statements" which represent our expectations or beliefs concerning future events that involve risks and uncertainties, including those associated with the severity and duration of the novel coronavirus, or COVID-19, pandemic, the pandemic's impact on theU.S. and global economies, the timing, scope and effectiveness of federal, state and local governmental responses to the pandemic, the effect of weather conditions on our financial performance, the price and supply of the products that we sell, the consumption patterns of our customers, our ability to obtain satisfactory gross profit margins, our ability to obtain new customers and retain existing customers, our ability to make strategic acquisitions, the impact of litigation, our ability to contract for our current and future supply needs, natural gas conversions, future union relations and the outcome of current and future union negotiations, the impact of current and future governmental regulations, including climate change, environmental, health, and safety regulations, the ability to attract and retain employees, customer credit worthiness, counterparty credit worthiness, marketing plans, potential cyber-attacks, general economic conditions and new technology. All statements other than statements of historical facts included in this Report including, without limitation, the statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere herein, are forward-looking statements. Without limiting the foregoing, the words "believe," "anticipate," "plan," "expect," "seek," "estimate," and similar expressions are intended to identify forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct, and actual results may differ materially from those projected as a result of certain risks and uncertainties. These risks and uncertainties include, but are not limited to, those set forth in this Report under the headings "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in our Fiscal 2019 Form 10-K under Part I Item 1A "Risk Factors." Important factors that could cause actual results to differ materially from our expectations ("Cautionary Statements") are disclosed in this Report and in our Fiscal 2019 Form 10-K and in our Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2020 . Currently, one of the most significant factors, however, is the potential adverse effect of the current pandemic of the novel coronavirus, or COVID-19, on the financial condition, results of operations, cash flows and performance of the Company, its customers and counterparties, and the global economy and financial markets. The extent to which COVID-19 impacts us and our customers will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, the direct and indirect economic effects of the pandemic and containment measures, among others. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the Cautionary Statements. Unless otherwise required by law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this Report.
Impact of COVID 19 - A Global Pandemic on our Operations and Outlook
InDecember 2019 , there was an outbreak of a new strain of coronavirus ("COVID-19"). OnMarch 11, 2020 , theWorld Health Organization characterized the outbreak of COVID-19 as a global pandemic and recommended containment and mitigation measures.The United States has declared a national emergency concerning the outbreak, which has adversely impacted global activity and contributed to significant declines and volatility in financial markets. There have been extraordinary and wide-ranging actions taken by international, federal, state and local public health and governmental authorities to contain and combat the outbreak and spread of COVID-19 in regions acrossthe United States and the world, including quarantines, and orders and similar mandates for many individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations. Our business is concentrated in the Northeast and Mid-Atlantic sections ofthe United States . These areas have been significantly impacted by the virus. We have been designated by state and local governmental officials in the markets we serve as providing essential services during the COVID-19 pandemic. Therefore, we have continued to make fuel deliveries and provide emergency services to all areas in which we operate. We are closely monitoring all official pronouncements and executive orders concerning our status as an essential business. To date, we have not experienced any supply chain issues impacting our ability to deliver petroleum products to our customers. However, we are experiencing delays in the procurement of certain HVAC equipment. We believe the various initiatives we have implemented in response to the COVID-19 pandemic, such as certain staff working remotely, have not significantly impacted our ability to serve our customers. The 2019-2020 peak heating season coincides with our first and second fiscal quarters, which historically represent approximately 80% of our annual volume of home heating oil and propane sold. As a result of the COVID-19 pandemic, and in order to protect the safety and health of our workforce and our customers, we have expanded certain employee benefit programs and will incur additional operating costs such as sanitizing our facilities and providing IT infrastructure to allow many office, clerical, sales and customer service employees to work from home. At this time, we do not expect the cost of these undertakings to be significant. In certain markets more heavily impacted by the pandemic, we ceased making non-emergency service calls that would have been performed in the third quarter of fiscal 2020 under normal conditions. These service calls may be deferred to subsequent periods 23
-------------------------------------------------------------------------------- and may increase our future service costs. At this time, we do not expect that the increased costs associated with non-emergency service calls will be material to our annual service costs. We believe that some of our customers have deferred non-emergency services, including the installation of new equipment, which has caused a decline in equipment installation sales. In the third quarter of fiscal 2020, we experienced a decline in installation sales of$2.8 million , or 11.5%, versus the prior-year period. We have also experienced a decline in motor fuel sales volume of 10.1 million gallons, or 23.7% versus the prior year's period due to a significant reduction in economic activity. If these trends continue, our financial results may suffer accordingly. However, inJuly 2020 , we are experiencing a modest increase in installation activity and motor fuels sales volume as certain states have modified their "stay-at-home" orders. As ofJune 30, 2020 , we had accounts receivable of$111.9 million , of which$85.3 million was due from residential customers and$26.6 million due from commercial customers. Our ability to borrow from our bank group is based in part on the aging of these accounts receivable. If past due balances that do not meet the eligibility tests as found in our fifth amended and restated credit agreement increase from historic levels, our future ability to borrow would be reduced. The Company has taken advantage of certain tax and legislative actions which permitted the Company to defer itsApril 2020 andJune 2020 Federal and State income tax payments toJuly 2020 and to defer certain payroll tax withholdings relating to calendar 2020 to calendar 2021 and 2022. We believe COVID-19's impact on our business, operating results, cash flows (including the collection of current and future accounts receivable) and/or financial condition primarily will be driven by the severity and duration of the pandemic, the pandemic's impact on theU.S. and global economies, the price of petroleum products, and the timing, scope and effectiveness of federal, state and local governmental responses to the pandemic. We continue to monitor the effects of the pandemic on our business; however, the primary drivers are beyond our knowledge and control and, as a result, at this time we cannot reasonably estimate the ultimate adverse impact COVID-19 will have on our business, operating results, cash flows and/or financial condition going forward.
Impact on Liquidity of Increases and Decreases in Wholesale Product Cost
Our liquidity is adversely impacted in times of increasing wholesale product costs, as we must use more cash to fund our hedging requirements as well as the increased levels of accounts receivable and inventory. This may result in higher interest expense as a result of increased working capital borrowing to finance higher receivables and/or inventory balances. We may also incur higher bad debt expense and credit card processing costs as a result of higher selling prices as well as higher vehicle fuel costs due to the increase in energy costs. In addition, our liquidity can be adversely impacted by sudden and sharp decreases in wholesale product costs, due to the increased margin requirements for futures contracts and collateral requirements for options and swaps that we use to manage market risks.
Liquid Product Price Volatility
Volatility, which is reflected in the wholesale price of liquid products, including home heating oil, propane and motor fuels, has a larger impact on our business when prices rise. Consumers are price sensitive to heating cost increases, which can lead to increased gross customer losses. As a commodity, the price of home heating oil is generally impacted by many factors, including economic and geopolitical forces, and, most recently, the COVID-19 pandemic, and is closely linked to the price of diesel fuel. The volatility in the wholesale cost of diesel fuel as measured by theNew York Mercantile Exchange ("NYMEX"), for the fiscal years endingSeptember 30, 2016 , through 2020, on a quarterly basis, is illustrated in the following chart (price per gallon): Fiscal 2020 (a) Fiscal 2019 Fiscal 2018 Fiscal 2017 Fiscal 2016 Quarter Ended Low High Low High Low High Low High Low High December 31$ 1.86 $ 2.05 $ 1.66 $ 2.44 $ 1.74 $ 2.08 $ 1.39 $ 1.70 $ 1.08 $ 1.61 March 31 0.95 2.06 1.70 2.04 1.84 2.14 1.49 1.70 0.87 1.26 June 30 0.61 1.22 1.78 2.12 1.96 2.29 1.37 1.65 1.08 1.57 September 30 - - 1.75 2.08 2.05 2.35 1.45 1.86 1.26 1.53
(a) On
per gallon or
months of Fiscal 2020.
Execution of Fifth Amended and Restated Revolving Asset-based Credit Agreement
OnDecember 4, 2019 , the Company refinanced its credit facility and entered into the fifth amended and restated revolving credit facility agreement with a bank syndicate of eleven participants, which enables the Company to borrow up to$300 million ($450 million during the heating season of December through April of each year) on a revolving line of credit for working capital purposes (subject to certain borrowing base limitations and coverage ratios), provides for a$130 million five-year senior secured term loan, allows for the issuance of up to$25 million in letters of credit, and extends the maturity date of the previous agreement to 24 --------------------------------------------------------------------------------December 4, 2024 . Proceeds from the new term loan were used to repay the$90.0 million outstanding balance of the term loan and$40.0 million of the revolving credit facility borrowings under the old credit facility. Availability as a result of the new credit agreement increased$40.0 million . Consistent with the fourth amended and restated revolving credit facility, under the Company's fifth amended and restated credit agreement, in order to repurchase Common Units we must maintain availability of$45 million , equivalent to 15.0% of the facility size of$300 million (assuming the non-seasonal aggregate commitment is outstanding) on a historical pro forma and forward-looking basis, and a fixed charge coverage ratio of not less than 1.15 measured as of the date of repurchase.
Income Taxes
Book versus Tax Deductions
The amount of cash flow generated in any given year depends upon a variety of factors including the amount of cash income taxes required, which will increase as depreciation and amortization decreases. The amount of depreciation and amortization that we deduct for book (i.e., financial reporting) purposes will differ from the amount that the Company can deduct for Federal tax purposes. The table below compares the estimated depreciation and amortization for book purposes to the amount that we expect to deduct for Federal tax purposes, based on currently owned assets. While we file our tax returns based on a calendar year, the amounts below are based on ourSeptember 30 fiscal year, and the tax amounts include any 100% bonus depreciation available for fixed assets purchased. However, this table does not include any forecast of future annual capital purchases.
Estimated Depreciation and Amortization Expense
(In thousands) Fiscal Year Book Tax 2020$ 35,344 $ 30,734 2021 29,966 22,292 2022 24,913 19,602 2023 21,548 17,821 2024 17,103 16,777 2025 13,821 16,280 Weather Hedge Contracts Weather conditions have a significant impact on the demand for home heating oil and propane because certain customers depend on these products principally for space heating purposes. Actual weather conditions may vary substantially from year to year, significantly affecting the Company's financial performance. To partially mitigate the adverse effect of warm weather on cash flow, we have used weather hedging contracts for a number of years with several providers. Under these contracts, we are entitled to a payment if the total number of degree days within the hedge period is less than the ten-year average. The "Payment Thresholds," or strikes, are set at various levels. Conversely, we are obligated to make a payment, capped at$5.0 million , if degree days exceed the ten-year average. The hedge period runs fromNovember 1 through March 31 , taken as a whole, for each respective fiscal year. For the nine months endedJune 30, 2020 we recorded a$10.1 million benefit and, for the nine months endedJune 30, 2019 , we recorded a charge of$2.1 million .
Per Gallon Gross Profit Margins
We believe home heating oil and propane margins should be evaluated on a cents
per gallon basis (before the effects of increases or decreases in the fair value
of derivative instruments), as we believe that such per gallon margins are best
at showing profit trends in the underlying business, without the impact of
non-cash changes in the market value of hedges before the settlement of the
underlying transaction.
A significant portion of our home heating oil volume is sold to individual
customers under an arrangement pre-establishing a ceiling price or fixed price
for home heating oil over a set period of time, generally twelve to twenty-four
months ("price-protected" customers). When these price-protected customers agree
to purchase home heating oil from us for the next heating season, we purchase
option contracts, swaps and futures contracts for a substantial majority of the
heating oil that we expect to sell to these customers. The amount of home
heating oil volume that we hedge per price-protected customer is based upon the
estimated fuel consumption per average customer per month. In the event that the
actual usage exceeds the amount of the hedged volume on a monthly basis, we may
be required to obtain additional volume at unfavorable costs. In addition,
should actual usage in any month be less than the hedged volume, our hedging
costs and losses could be greater, thus reducing expected margins.
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Derivatives
FASB ASC 815-10-05 Derivatives and Hedging requires that derivative instruments be recorded at fair value and included in the consolidated balance sheet as assets or liabilities. To the extent our interest rate derivative instruments designated as cash flow hedges are effective, as defined under this guidance, changes in fair value are recognized in other comprehensive income until the forecasted hedged item is recognized in earnings. We have elected not to designate our commodity derivative instruments as hedging instruments under this guidance and, as a result, the changes in fair value of the derivative instruments are recognized in our statement of operations. Therefore, we experience volatility in earnings as outstanding derivative instruments are marked to market and non-cash gains and losses are recorded prior to the sale of the commodity to the customer. The volatility in any given period related to unrealized non-cash gains or losses on derivative instruments can be significant to our overall results. However, we ultimately expect those gains and losses to be offset by the cost of product when purchased.
Customer Attrition
We measure net customer attrition on an ongoing basis for our full service residential and commercial home heating oil and propane customers. Net customer attrition is the difference between gross customer losses and customers added through marketing efforts. Customers added through acquisitions are not included in the calculation of gross customer gains. However, additional customers that are obtained through marketing efforts or lost at newly acquired businesses are included in these calculations. Customer attrition percentage calculations include customers added through acquisitions in the denominators of the calculations on a weighted average basis. Gross customer losses are the result of a number of factors, including price competition, move-outs, credit losses, conversions to natural gas and service disruptions. When a customer moves out of an existing home, we count the "move out" as a loss, and if we are successful in signing up the new homeowner, the "move in" is treated as a gain. The economic impact of COVID-19 could increase future attrition due to higher losses from credit related issues.
Customer gains and losses of home heating oil and propane customers
Fiscal Year Ended
2020 2019 2018
Net Net Net
Gross Customer Gains / Gross Customer Gains / Gross Customer Gains /
Gains Losses (Attrition) Gains Losses (Attrition) Gains Losses (Attrition)
First Quarter 23,900 23,100 800 26,200 25,400 800 24,700 19,900 4,800
Second Quarter 12,600 18,200 (5,600 ) 12,600 22,300 (9,700 ) 14,100 18,900 (4,800 )
Third Quarter 8,000 13,600 (5,600 ) 7,100 15,900 (8,800 ) 7,900 16,200 (8,300 )
Fourth Quarter - - - 13,200 20,600 (7,400 ) 13,100 19,400 (6,300 )
Total 44,500 54,900 (10,400 ) 59,100 84,200 (25,100 ) 59,800 74,400 (14,600 )
Customer gains (attrition) as a percentage of home heating oil and propane
customer base
Fiscal Year Ended
2020 2019 2018
Net Net Net
Gross Customer Gains / Gross Customer Gains / Gross Customer Gains /
Gains Losses (Attrition) Gains Losses (Attrition) Gains Losses (Attrition)
First Quarter 5.3 % 5.1 % 0.2 % 5.8 % 5.6 % 0.2 % 5.4 % 4.3 % 1.1 %
Second Quarter 2.8 % 4.0 % (1.2 %) 2.8 % 5.0 % (2.2 %) 3.0 % 4.1 % (1.1 %)
Third Quarter 1.8 % 3.0 % (1.2 %) 1.6 % 3.5 % (1.9 %) 1.7 % 3.5 % (1.8 %)
Fourth Quarter - - - 2.7 % 4.2 % (1.5 %) 2.9 % 4.3 % (1.4 %)
Total 9.9 % 12.1 % (2.2 %) 12.9 % 18.3 % (5.4 %) 13.0 % 16.2 % (3.2 %)
For the nine months ended June 30, 2020 , the Company lost 10,400 accounts (net),
or 2.2% of its home heating oil and propane customer base, compared to
17,700 accounts lost (net), or 3.9% of its home heating oil and propane customer
base, during the nine months ended June 30, 2019 . Gross customer gains were
1,400 less than the prior year's comparable period, and gross customer losses
were 8,700 accounts less.
During the nine months ended June 30, 2020 , we estimate that we lost 0.9% of our
home heating oil and propane accounts to natural gas conversions versus 1.1% for
the nine months ended June 30, 2019 and 1.0% nine months ended June 30,
2018 . Losses to natural gas in our footprint for the heating oil and propane
industry could be greater or less than the Company's estimates.
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Acquisitions
The timing of acquisitions and the types of products sold by acquired companies impact year-over-year comparisons. During the nine months endedJune 30, 2020 , the Company acquired one heating oil dealer. The Company also acquired the customer list and assets of a heating oil dealer inJuly 2020 . During fiscal 2019 the Company completed three acquisitions. The following tables detail the Company's acquisition activity and the associated volume sold during the 12-month period prior to the date of acquisition. (in thousands of gallons) Fiscal 2020 Acquisitions Acquisition Month of Acquisition Home Heating Oil and Other Petroleum Total Number Propane Products 1 October 1,085 - 1,085 2 July 2,400 - 2,400 3,485 - 3,485 (in thousands of gallons) Fiscal 2019 Acquisitions Acquisition Month of Acquisition Home Heating Oil Other Petroleum Total Number and Propane Products 1 November 130 - 130 2 January (a) - - - 3 May 13,200 6,772 19,972 13,330 6,772 20,102
(a) The business acquired in
This acquisition was of a subcontractor that installed above ground oil
tanks for residential use which had revenue of approximately
during the 12 month period prior to the date of acquisition, and Star
accounted for approximately 60% of its revenue; any such revenue is
eliminated in consolidation, but the Company benefits from lower costs
related to such revenue.
Seasonality
The Company's fiscal year ends onSeptember 30 . All references to quarters and years, respectively, in this document are to the fiscal quarters and fiscal years unless otherwise noted. The seasonal nature of our business has resulted, on average, during the last five years, in the sale of approximately 30% of the volume of home heating oil and propane in the first fiscal quarter and 50% of the volume in the second fiscal quarter, the peak heating season. Approximately 25% of the volume of motor fuel and other petroleum products is sold in each of the four fiscal quarters. We generally realize net income during the quarters ending December and March and net losses during the quarters ending June and September. In addition, sales volume typically fluctuates from year to year in response to variations in weather, wholesale energy prices and other factors.
Degree Day
A "degree day" is an industry measurement of temperature designed to evaluate energy demand and consumption. Degree days are based on how far the average daily temperature departs from 65°F. Each degree of temperature above 65°F is counted as one cooling degree day, and each degree of temperature below 65°F is counted as one heating degree day. Degree days are accumulated each day over the course of a year and can be compared to a monthly or a long-term (multi-year) average to see if a month or a year was warmer or cooler than usual. Degree days are officially observed by theNational Weather Service . Every ten years, theNational Oceanic and Atmospheric Administration ("NOAA") computes and publishes average meteorological quantities, including the average temperature for the last 30 years by geographical location, and the corresponding degree days. The latest and most widely used data covers the years from 1981 to 2010. Our calculations of "normal" weather are based on these published 30 year averages for heating degree days, weighted by volume for the locations where we have existing operations.
Consolidated Results of Operations
The following is a discussion of the consolidated results of operations of the
Company and its subsidiaries and should be read in conjunction with the
historical financial and operating data and Notes thereto included elsewhere in
this Quarterly Report.
27
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Three Months Ended June 30, 2020
Compared to the Three Months Ended June 30, 2019
Volume
For the three months ended June 30, 2020 , retail volume of home heating oil and
propane sold increased by 14.3 million gallons, or 38.8%, to 51.2 million
gallons, compared to 36.9 million gallons for the three months ended June 30,
2019 . For those locations where we had existing operations during both periods,
which we sometimes refer to as the "base business" (i.e., excluding
acquisitions), temperatures (measured on a heating degree day basis) for the
three months ended June 30, 2020 were 46.4% colder than the three months ended
June 30, 2019 . Temperatures during the three months ended June 30, 2020 were
17.9% colder than normal, as reported by NOAA . For the twelve months ended June
30, 2020 , net customer attrition for the base business was 4.0%. The impact of
fuel conservation, along with any period-to-period differences in delivery
scheduling, the timing of accounts added or lost during the fiscal years,
equipment efficiency, and other volume variances not otherwise described, are
included in the chart below under the heading "Other." An analysis of the change
in the retail volume of home heating oil and propane, which is based on
management's estimates, sampling, and other mathematical calculations and
certain assumptions, is found below:
Heating Oil
(in millions of gallons) and Propane
Volume - Three months ended June 30, 2019 36.9
Net customer attrition (1.8 )
Impact of colder temperatures 14.3
Acquisitions 1.5
Other (a) 0.3
Change 14.3
Volume - Three months ended June 30, 2020 51.2
(a) This amount includes a 1.4 million gallon decline in lower margin
commercial and bid volume.
The following chart sets forth the percentage by volume of total home heating
oil sold to residential variable-price customers, residential price-protected
customers and commercial/industrial/other customers for the three months ended
June 30, 2020 , compared to the three months ended June 30, 2019 :
Three Months Ended
June 30, June 30,
Customers 2020 2019
Residential Variable 39.4 % 38.0 %
Residential Price-Protected (Ceiling and Fixed Price) 48.3 % 48.4 %
Commercial/Industrial 12.3 % 13.6 %
Total 100.0 % 100.0 %
Volume of other petroleum products sold decreased by 8.1 million gallons, or
19.0%, to 34.2 million gallons for the three months ended June 30, 2020 ,
compared to 42.3 million gallons for the three months ended June 30, 2019 , as
the additional volume provided by acquisitions of 2.0 million gallons was more
than offset by a decline in motor fuel sales of 10.1 million gallons, or 23.7%,
resulting in part from COVID-19's impact on economic activity as well as the
loss of certain accounts. We believe that the decline in motor fuel sales may
continue in the near term.
Product Sales
For the three months ended June 30, 2020 , product sales decreased by
$45.5 million , or 21.6%, to $165.2 million , compared to $210.7 million for the
three months ended June 30, 2019 as the impact of the additional volume sold was
more than offset by a decline in selling prices. The decline in selling prices
was largely attributable to a decrease in product cost of $0.8669 per gallon or
44.3%.
Installations and Services
For the three months endedJune 30, 2020 , installation and service revenue decreased by$5.7 million , or 7.9%, to$67.0 million , compared to$72.7 million for the three months endedJune 30, 2019 as the additional revenue provided from acquisitions of$1.8 million was reduced by lower revenue in the base business of$7.5 million . As a result of COVID-19, we ceased making non-emergency service calls that would have been performed under normal conditions during the third quarter of fiscal 2020. These service calls may be deferred to subsequent periods and may increase our future service costs. In addition, we believe that some of 28
-------------------------------------------------------------------------------- our customers have deferred non-emergency services, including the installation of new equipment, which has caused a decline in equipment installation sales and reactive service calls and may continue to reduce future service and installation income.
Cost of Product
For the three months endedJune 30, 2020 , cost of product decreased$61.8 million , or 39.9%, to$93.3 million , compared to$155.1 million for the three months endedJune 30, 2019 , as the impact of an increase in total volume sold of 8.0% was more than offset by a$0.8669 per gallon, or 44.3%, decrease in wholesale product cost. Gross Profit - Product The table below calculates our per gallon margins and reconciles product gross profit for home heating oil and propane and other petroleum products. We believe the change in home heating oil and propane margins should be evaluated before the effects of increases or decreases in the fair value of derivative instruments, as we believe that realized per gallon margins should not include the impact of non-cash changes in the market value of hedges before the settlement of the underlying transaction. On that basis, home heating oil and propane margins for the three months endedJune 30, 2020 increased by$0.0003 per gallon, to $1.2174 per gallon, from $1.2171 per gallon during the three months endedJune 30, 2019 . The Company utilizes weighted average costing for computing cost of goods sold, which can delay the timing in which the effects of market changes in product costs are reflected in costs of goods because price changes are weighted into the average costing calculation rather than immediately realized. As reported in our Quarterly Report on Form 10-Q for the three months endedMarch 31, 2020 , we anticipated that product gross profit would be reduced in future periods by$6.9 million until recent declines in product costs were reflected in the weighted average costing calculations. Going forward, we cannot assume that per gallon margins realized during the three months endedJune 30, 2020 are sustainable for future periods.
Product sales and cost of product include home heating oil, propane, other petroleum products and liquidated damages billings.
Three Months Ended
June 30, 2020 June 30, 2019
Amount Per Amount Per
Home Heating Oil and Propane (in millions) Gallon (in millions) Gallon
Volume 51.2 36.9
Sales $ 121.0 $ 2.3603 $ 116.0 $ 3.1421
Cost $ 58.6 $ 1.1429 $ 71.1 $ 1.9250
Gross Profit $ 62.4 $ 1.2174 $ 44.9 $ 1.2171
Amount Per Amount PerMotor Fuel and Other Petroleum Products (in millions) Gallon
(in millions) Gallon Volume 34.2 42.3 Sales $ 44.2$ 1.2922 $ 94.7$ 2.2395 Cost $ 34.7$ 1.0137 $ 84.0$ 1.9870 Gross Profit $ 9.5$ 0.2785 $ 10.7$ 0.2525 Amount Amount Total Product (in millions) (in millions) Sales $ 165.2 $ 210.7 Cost $ 93.3 $ 155.1 Gross Profit $ 71.9 $ 55.6 For the three months endedJune 30, 2020 , total product gross profit was$71.9 million , which was$16.3 million , or 29.3%, more than the three months endedJune 30, 2019 , as the impact of an increase in home heating oil and propane volume ($17.4 million ) was only partially offset by a decrease in gross profit from other petroleum products ($1.1 million ).
Cost of Installations and Services
Total installation costs for the three months endedJune 30, 2020 decreased by$1.9 million or 9.5%, to$17.8 million , compared to$19.7 million of installation costs for the three months endedJune 30, 2019 . Installation costs as a percentage of installation sales were 82.7% for the three months endedJune 30, 2020 and 80.9% for the three months endedJune 30, 2019 . 29 -------------------------------------------------------------------------------- Service expense decreased by$5.5 million , or 13.0%, to$36.9 million for the three months endedJune 30, 2020 , representing 81.3% of service sales, versus$42.4 million , or 87.7% of service sales, for the three months endedJune 30, 2019 . We realized a combined gross profit from service and installation of$12.2 million for the three months endedJune 30, 2020 compared to a gross profit of$10.6 million for the three months endedJune 30, 2019 , or an improvement of$1.6 million . Acquisitions positively impacted the comparison by$0.7 million and, in the base business, service and installation gross profit improved by$0.9 million . In the base business, both service revenue and expenses declined due to the impact of COVID-19. However, the decline in service expense was greater than the decline in revenue. A portion of the expense decline related to service work that would normally have been performed during the third quarter of fiscal 2020. We believe such service work may be performed in future periods and related expenses will be incurred in those periods. Management views the service and installation department on a combined basis because many overhead functions cannot be separated or precisely allocated to either service or installation billings.
(Increase) Decrease in the Fair Value of Derivative Instruments
During the three months endedJune 30, 2020 , the change in the fair value of derivative instruments resulted in a$3.3 million credit due to a decrease in the market value for unexpired hedges (a$1.4 million charge) more than offset by a$4.7 million credit due to the expiration of certain hedged positions. During the three months endedJune 30, 2019 , the change in the fair value of derivative instruments resulted in a$1.6 million charge due to a decrease in the market value for unexpired hedges (a$2.3 million charge), partially offset by a$0.7 million credit due to the expiration of certain hedged positions.
Delivery and Branch Expenses
For the three months endedJune 30, 2020 , delivery and branch expenses decreased$9.9 million , or 12.0%, to$72.8 million , compared to$82.7 million for the three months endedJune 30, 2019 , as additional costs from acquisitions of$1.8 million were more than offset by an$11.7 million , or 14.1%, decrease in expense within the base business. The decline in the base business was attributable to lower insurance expense of$4.7 million , lower bad debt expense and credit card processing fees of$2.2 million , lower medical cost of$1.9 million and other reductions in operating costs totaling$2.9 million , or 3.5%, as we continue to improve Star's operating efficiency. Bad debt expense was lower due to the decline in sales dollars and insurance expense was lower due in part to the warm weather for fiscal 2020 and its impact on claim experience. We believe that medical claims were lower due to COVID-19 "sheltering in place" and "stay at home" orders, which may have curtailed plan members seeking medical attention.
Depreciation and Amortization Expenses
For the three months endedJune 30, 2020 , depreciation and amortization expense increased$0.2 million , or 2.7% to$8.4 million , compared to$8.2 million for the three months endedJune 30, 2019 , largely due to acquisitions.
General and Administrative Expenses
For the three months endedJune 30, 2020 , general and administrative expenses increased by$1.5 million or 27.0%, to$7.0 million , from$5.5 million for the three months endedJune 30, 2019 , primarily due to an increase in profit sharing expense. The Company accrues approximately 6.0% of Adjusted EBITDA as defined in its profit sharing plan for distribution to its employees, and this amount is payable when the Company achieves Adjusted EBITDA of at least 70% of the amount budgeted. The dollar amount of the profit sharing pool is subject to increases and decreases corresponding to increases and decreases in Adjusted EBITDA.
Finance Charge Income
For the three months endedJune 30, 2020 , finance charge income decreased to$1.2 million from$1.9 million for the three months endedJune 30, 2019 , primarily due to lower customer late payment charges due to improved collections and lower sales volume at lower selling prices.
Interest Expense, Net
For the three months endedJune 30, 2020 , net interest expense decreased by$0.7 million , or 22.2%, to$2.3 million compared to$3.0 million for the three months endedJune 30, 2019 , primarily due to a decrease in average borrowings of$55.0 million from$194.5 million during the three months endedJune 30, 2019 to$139.5 million during the three months endedJune 30, 2020 . To hedge against rising interest rates, the Company utilizes interest rate swaps. AtJune 30, 2020 $65.3 million , or 51.5%, of our long term debt, was fixed. 30
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Amortization of Debt Issuance Costs
For the three months ended
Income Tax Benefit
For the three months endedJune 30, 2020 , the Company's income tax benefit decreased by$8.1 million to$2.0 million , from$10.1 million for the three months endedJune 30, 2019 , due to an increase in income before income taxes of$31.1 million , primarily reflecting an increase in Adjusted EBITDA of$25.7 million and a$4.9 million non-cash favorable change in the fair market value of derivative instruments. The Company's effective income tax rate decreased from 29.7% for the six months endedMarch 31, 2020 to 28.6% for the nine months endedJune 30, 2020 primarily due to lower state taxes. Since the net loss before income taxes for the three months endedJune 30, 2020 was$2.1 million , the impact of this year to date rate decrease from the second to third quarter of fiscal 2020 caused the effective income tax rate for the three months to be 97.8%.
Net Loss
For the three months ended
Adjusted EBITDA
For the three months endedJune 30, 2020 , Adjusted EBITDA increased by$25.7 million , to$5.7 million compared to the three months endedJune 30, 2019 . Acquisitions provided$1.2 million of Adjusted EBITDA, while Adjusted EBITDA in the base business increased by$24.5 million as the impact of higher home heating oil and propane volume sold, due to colder temperatures, lower operating expenses in the base business of$10.2 million , and an improvement in the net service and installation profitability of$0.9 million was only partially reduced by a decline in the Company's motor fuels business. EBITDA and Adjusted EBITDA should not be considered as an alternative to net income (as an indicator of operating performance) or as an alternative to cash flow (as a measure of liquidity or ability to service debt obligations) but provide additional information for evaluating our ability to make the Minimum Quarterly Distribution. EBITDA and Adjusted EBITDA are calculated as follows: Three Months Ended June 30, (in thousands) 2020 2019 Net loss$ (46 ) $ (23,098 ) Plus: Income tax benefit (2,005 ) (10,055 ) Amortization of debt issuance costs 241
253
Interest expense, net 2,308
2,967
Depreciation and amortization 8,447
8,225
EBITDA (a) 8,945 (21,708 ) (Increase) / decrease in the fair value of derivative instruments (3,279 ) 1,630 Adjusted EBITDA (a) 5,666 (20,078 ) Add / (subtract) Income tax benefit 2,005 10,055 Interest expense, net (2,308 ) (2,967 ) Provision for losses on accounts receivable 1,353
3,532
Decrease in accounts receivables 74,307
124,456
Decrease in inventories 9,127
5,699
Increase in customer credit balances 13,925
12,299
Change in deferred taxes (1,376 ) (1,871 ) Change in other operating assets and liabilities 2,723 (26,442 ) Net cash provided by operating activities$ 105,422 $
104,683
Net cash used in investing activities$ (5,521 ) $ (53,268 ) Net cash used in financing activities$ (43,484 ) $ (62,070 ) 31
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(a) EBITDA (Earnings from continuing operations before net interest expense,
income taxes, depreciation and amortization) and Adjusted EBITDA (Earnings
from continuing operations before net interest expense, income taxes,
depreciation and amortization, (increase) decrease in the fair value of
derivatives, net other income, multiemployer pension plan withdrawal charge,
gain or loss on debt redemption, goodwill impairment, and other non-cash and
non-operating charges) are non-GAAP financial measures that are used as
supplemental financial measures by management and external users of our
financial statements, such as investors, commercial banks and research
analysts, to assess:
• our compliance with certain financial covenants included in our debt
agreements;
• our financial performance without regard to financing methods, capital
structure, income taxes or historical cost basis;
• our operating performance and return on invested capital compared to those
of other companies in the retail distribution of refined petroleum
products, without regard to financing methods and capital structure;
• our ability to generate cash sufficient to pay interest on our
indebtedness and to make distributions to our partners; and
• the viability of acquisitions and capital expenditure projects and the
overall rates of return of alternative investment opportunities.
The method of calculating Adjusted EBITDA may not be consistent with that of other companies, and EBITDA and Adjusted EBITDA both have limitations as analytical tools and so should not be viewed in isolation but in conjunction with measurements that are computed in accordance with GAAP. Some of the limitations of EBITDA and Adjusted EBITDA are:
• EBITDA and Adjusted EBITDA do not reflect our cash used for capital
expenditures.
• Although depreciation and amortization are non-cash charges, the assets
being depreciated or amortized often will have to be replaced and EBITDA
and Adjusted EBITDA do not reflect the cash requirements for such
replacements;
• EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements
for, our working capital requirements;
• EBITDA and Adjusted EBITDA do not reflect the cash necessary to make
payments of interest or principal on our indebtedness; and EBITDA and
Adjusted EBITDA do not reflect the cash required to pay taxes.
32
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Nine Months Ended June 30, 2020
Compared to the Nine Months Ended June 30, 2019
Volume
For the nine months ended June 30, 2020 , the retail volume of home heating oil
and propane sold decreased by 29.0 million gallons, or 9.0%, to 294.6 million
gallons, compared to 323.6 million gallons for the nine months ended June 30,
2019 . For those locations where we had existing operations during both periods,
which we sometimes refer to as the "base business" (i.e., excluding
acquisitions), temperatures (measured on a heating degree day basis) for the
nine months ended June 30, 2020 were 6.0% warmer than the nine months ended June
30, 2019 and 10.2% warmer than normal, as reported by NOAA . For the twelve
months ended June 30, 2020 , net customer attrition for the base business was
4.0%. The impact of fuel conservation, along with any period-to-period
differences in delivery scheduling, the timing of accounts added or lost during
the fiscal years, equipment efficiency, and other volume variances not otherwise
described, are included in the chart below under the heading "Other." An
analysis of the change in the retail volume of home heating oil and propane,
which is based on management's estimates, sampling, and other mathematical
calculations and certain assumptions, is found below:
Heating Oil
(in millions of gallons) and Propane
Volume - Nine months ended June 30, 2019 323.6
Net customer attrition (16.6 )
Impact of warmer temperatures (18.2 )
Acquisitions 11.3
Other (a) (5.5 )
Change (29.0 )
Volume - Nine months ended June 30, 2020 294.6
(a) Of the 5.5 million gallons, 3.9 million gallons is a decline in lower
margin commercial and bid volume.
The following chart sets forth the percentage by volume of total home heating oil sold to residential variable-price customers, residential price-protected customers and commercial/industrial/other customers for the nine months endedJune 30, 2020 compared to the nine months endedJune 30, 2019 : Nine Months Ended June 30, June 30, Customers 2020 2019 Residential Variable 41.6 % 40.9 % Residential Price-Protected (Ceiling and Fixed Price) 46.0 % 46.5 % Commercial/Industrial 12.4 % 12.6 % Total 100.0 % 100.0 % Volume of other petroleum products sold decreased by 11.0 million gallons, or 8.9%, to 112.2 million gallons for the nine months endedJune 30, 2020 , compared to 123.2 million gallons for the nine months endedJune 30, 2019 as the additional volume provided by acquisitions of 9.2 million gallons was reduced by lower wholesale volume sales (2.1 million gallons) due to the warmer weather and lower volume sales of motor fuels (18.1 million gallons) resulting from COVID-19's impact on economic activity and the loss of certain accounts. We believe that the decline in motor fuel sales may continue in the near term.
Product Sales
For the nine months endedJune 30, 2020 , product sales decreased$0.2 billion , or 17.4%, to$1.1 billion , compared to$1.3 billion for the nine months endedJune 30, 2019 , reflecting a decrease in wholesale product cost of$0.3252 per gallon, or 16.6%, and a decrease in total volume sold of 8.9%.
Installations and Services
For the nine months endedJune 30, 2020 , installations and services revenue decreased$6.2 million , or 2.9%, to$205.0 million , compared to$211.2 million for the nine months endedJune 30, 2019 as the additional revenue provided from acquisitions of$10.3 million was reduced by lower revenue in the base business of$16.5 million . In the base business, service and installation sales declined due to net customer attrition and the impact of warmer weather experienced during 2019-2020 heating season, which reduced billable service revenue and the need for the installation of new equipment. During the third quarter of fiscal 2020 we ceased making non-emergency service calls that would have been performed under normal conditions due to COVID-19. These service calls may be deferred to subsequent periods and may increase our future service costs. In addition, we believe that some of our customers have 33
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deferred non-emergency services, including the installation of new equipment due to COVID-19, which has caused a decline in equipment installation sales and reactive service calls and may continue to reduce future service and installation income.
Cost of Product
For the nine months endedJune 30, 2020 , cost of product decreased$210.6 million , or 24.0%, to$666.3 million , compared to$876.9 million for the nine months endedJune 30, 2019 , due largely to a decrease in total volume sold of 8.9%, and a$0.3252 per gallon, or 16.6%, decrease in wholesale product cost.
Gross Profit - Product
The table below calculates our per gallon margins and reconciles product gross profit for home heating oil and propane and other petroleum products. We believe the change in home heating oil and propane margins should be evaluated before the effects of increases or decreases in the fair value of derivative instruments, as we believe that realized per gallon margins should not include the impact of non-cash changes in the market value of hedges before the settlement of the underlying transaction. On that basis, home heating oil and propane margins for the nine months endedJune 30, 2020 increased by$0.0670 per gallon, or 5.4%, to$1.2984 per gallon, from$1.2314 per gallon during the nine months endedJune 30, 2019 . We cannot assume that the per gallon margins realized during the nine months endedJune 30, 2020 are sustainable for future periods.
Product sales and cost of product include home heating oil, propane, other petroleum products and liquidated damages billings.
Nine Months Ended
June 30, 2020 June 30, 2019
Amount Per Amount Per
Home Heating Oil and Propane (in millions) Gallon (in millions) Gallon
Volume 294.6 323.6
Sales $ 877.8 $ 2.9797 $ 1,034.6 $ 3.1975
Cost $ 495.3 $ 1.6813 $ 636.1 $ 1.9661
Gross Profit $ 382.5 $ 1.2984 $ 398.5 $ 1.2314
Amount Per Amount PerMotor Fuel and Other Petroleum Products (in millions) Gallon
(in millions) Gallon Volume 112.2 123.2 Sales $ 201.4$ 1.7941 $ 272.2 $ 2.2100 Cost $ 171.0$ 1.5234 $ 240.8$ 1.9549 Gross Profit $ 30.4$ 0.2707 $ 31.4$ 0.2551 Amount Amount Total Product (in millions) (in millions) Sales$ 1,079.2 $ 1,306.8 Cost $ 666.3 $ 876.9 Gross Profit $ 412.9 $ 429.9 For the nine months endedJune 30, 2020 , total product gross profit was$412.9 million , which was$17.0 million , or 4.0%, less than the nine months endedJune 30, 2019 , as a decrease in home heating oil and propane volume sold ($35.7 million ) and gross profit from other petroleum products ($1.0 million ) was slightly offset by higher margins ($19.7 million ).
Cost of Installations and Services
Total installation costs for the nine months endedJune 30, 2020 decreased to$60.2 million , compared to$62.2 million in installation costs for the nine months endedJune 30, 2019 . Installation costs as a percentage of installation sales were 83.3% for the nine months endedJune 30, 2020 and 83.2% for the nine months endedJune 30, 2019 . Service expense decreased by$10.2 million , or 7.3%, to$129.5 million for the nine months endedJune 30, 2020 , representing 97.6% of service sales, versus$139.7 million , or 102.3% of service sales, for the nine months endedJune 30, 2019 . We realized a combined gross profit from service and installation of$15.3 million for the nine months endedJune 30, 2020 compared to a gross profit of$9.4 million for the nine months endedJune 30, 2019 , an improvement of$5.9 million in profitability. Acquisitions positively impacted the comparison by$2.2 million and in the base business, service gross profit improved by$3.7 million due to warmer temperatures of 6.0% which reduced the demand for service, and certain measures undertaken by the company to improve operating efficiency. In the base business, both service revenue and expenses declined due to the impact of COVID-19 during the 34 -------------------------------------------------------------------------------- third quarter of fiscal 2020; however, the decline in service expense was greater than the decline in revenue. A portion of the expense decline related to service work that would normally have been performed during the third quarter of fiscal 2020. We believe such service work may be performed in future periods and related expenses will be incurred in those periods. Management views the service and installation department on a combined basis because many overhead functions cannot be separated or precisely allocated to either service or installation billings.
(Increase) Decrease in the Fair Value of Derivative Instruments
During the nine months endedJune 30, 2020 , the change in the fair value of derivative instruments resulted in a$2.0 million charge due to a decrease in the market value for unexpired hedges (an$11.3 million charge) partially offset by a$9.3 million credit due to the expiration of certain hedged positions.
During the nine months ended
Delivery and Branch Expenses
For the nine months endedJune 30, 2020 , delivery and branch expenses decreased$41.1 million , or 13.9%, to$254.9 million , compared to$296.0 million for the nine months endedJune 30, 2019 , as additional costs from acquisitions of$9.4 million were more than offset by a$50.5 million , or 17.1%, decrease in expenses within the base business. The decline in the base business was attributable to a$10.0 million , or 11.1%, reduction in direct delivery costs due to lower volume, lower insurance expense of$6.1 million , a$4.0 million decrease in expenses related to the Company's concierge level of service program (which was greatly curtailed inJanuary 2019 ), lower bad debt expense and credit card processing fees of$4.1 million , lower medical cost of$3.3 million and other reductions in operating costs totaling$10.8 million , or 3.6%, as we continue to improve Star's operating efficiency. Bad debt expense was lower due to the decline in sales dollars, and insurance expense was lower due in part to the warm weather for fiscal 2020 and its impact on claim experience. We believe that medical claims were lower due to COVID-19 "sheltering in place" and "stay at home" orders, which curtailed plan members seeking medical attention. Operating expenses were also reduced by$12.2 million due to the impact of our weather hedging program. As ofJune 30, 2019 we recorded a charge of$2.1 million , versus a benefit of$10.1 million as ofJune 30, 2020 .
Depreciation and Amortization Expenses
For the nine months endedJune 30, 2020 , depreciation and amortization expense increased$2.8 million , or 11.6%, to$26.6 million , compared to$23.8 million for the nine months endedJune 30, 2019 largely due to acquisitions.
General and Administrative Expenses
For the nine months endedJune 30, 2020 , general and administrative expenses decreased by$4.3 million , or 18.4%, to$18.9 million from$23.1 million for the nine months endedJune 30, 2019 , primarily due to lower legal and professional expenses of$4.4 million , a$1.5 million charge related to the discontinued use of a tank monitoring system that occurred during the nine months endedJune 30, 2019 (and did not recur in the current fiscal year), and other savings of$1.1 million , partially offset by a$2.7 million increase in profit sharing expense. The Company accrues approximately 6.0% of Adjusted EBITDA as defined in its profit sharing plan for distribution to its employees, and this amount is payable when the Company achieves Adjusted EBITDA of at least 70% of the amount budgeted. The dollar amount of the profit sharing pool is subject to increases and decreases corresponding to increases and decreases in Adjusted EBITDA.
Finance Charge Income
For the nine months endedJune 30, 2020 , finance charge income decreased to$3.3 million from$4.2 million for the nine months endedJune 30, 2019 , primarily due to lower customer late payment charges due to improved collections and lower sales volume at lower selling prices.
Interest Expense, Net
For the nine months endedJune 30, 2020 , net interest expense decreased by$0.9 million , or 10.8%, to$7.7 million compared to$8.7 million for the nine months endedJune 30, 2019 . The change year-over-year reflects a decrease in average borrowings of$7.0 million from$182.9 million during the nine months endedJune 30, 2019 to$175.9 million during the nine months endedJune 30, 2020 , and a decrease in the weighted average interest rate from 5.2% during the nine months endedJune 30, 2019 to 5.0% during the nine months endedJune 30, 2020 . To hedge against rising interest rates, the Company utilizes interest rate swaps. AtJune 30, 2020 , 35
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Amortization of Debt Issuance Costs
For the nine months ended
Income Tax Expense
For the nine months endedJune 30, 2020 , the Company's income tax expense increased by$14.3 million , to$34.5 million , from$20.2 million for the nine months endedJune 30, 2019 , due primarily to an increase in income before income taxes of$48.9 million , primarily due an increase in Adjusted EBITDA of$33.4 million and a$17.3 million non-cash favorable change in the fair market value of derivative instruments. Net Income For the nine months endedJune 30, 2020 , net income increased$34.6 million , or 67.1%, to$86.1 million due primarily to a$33.4 million increase in Adjusted EBITDA, described below, and a favorable change in the fair value of derivative instruments of$17.3 million , partially offset by a$14.3 million increase in income tax expense. Adjusted EBITDA For the nine months endedJune 30, 2020 , Adjusted EBITDA increased by$33.4 million , or 26.9%, to$157.6 million compared to the nine months endedJune 30, 2019 . Acquisitions provided$9.2 million of Adjusted EBITDA, while Adjusted EBITDA in the base business increased by$24.2 million . In the base business, the impact of higher per gallon home heating oil and propane margins of6.3 cents per gallon, lower operating expenses in the base business of$54.8 million , a favorable change in the amount due under the Company's weather hedge of$12.2 million , and an improvement in the net service and installation profitability of$3.7 million was only partially offset by the impact of lower volume sold (due to 6.0% warmer weather, net customer attrition and other factors) and the decline in our motor fuels business. With regard to our weather hedge, we benefited by lower degree days in fiscal 2020 due to warmer weather during the winter hedge period - resulting in us collecting$10.1 million . The third quarter of fiscal 2020, by contrast, was colder than normal and resulted in us selling more volume than anticipated. If the additional degree days in the third quarter had occurred in the period covered by the weather hedge (November to March) the payout under our weather hedge would have been less than$2.0 million . 36 -------------------------------------------------------------------------------- EBITDA and Adjusted EBITDA should not be considered as an alternative to net income (as an indicator of operating performance) or as an alternative to cash flow (as a measure of liquidity or ability to service debt obligations), but provide additional information to us for evaluating our ability to make the Minimum Quarterly Distribution. EBITDA and Adjusted EBITDA are calculated as follows: Nine Months Ended June 30, (in thousands) 2020 2019 Net income$ 86,117 $ 51,542 Plus: Income tax expense 34,477 20,157 Amortization of debt issuance costs 729
756
Interest expense, net 7,743
8,677
Depreciation and amortization 26,586
23,828
EBITDA (a) 155,652
104,960
(Increase) / decrease in the fair value of derivative instruments 1,974 19,268 Adjusted EBITDA (a) 157,626 124,228 Add / (subtract) Income tax expense (34,477 ) (20,157 ) Interest expense, net (7,743 ) (8,677 ) Provision for losses on accounts receivable 4,556
8,500
Decrease (increase) in accounts receivables 4,745 (34,793 ) Decrease in inventories 21,135
1,958
Decrease in customer credit balances (18,537 ) (26,177 ) Change in deferred taxes (1,154 ) (11,206 ) Change in other operating assets and liabilities 30,146
28,646
Net cash provided by operating activities$ 156,297 $
62,322
Net cash used in investing activities$ (18,718 ) $ (80,578 ) Net cash (used in) provided by financing activities$ (75,760 ) $
9,442
(a) EBITDA (Earnings from continuing operations before net interest expense,
income taxes, depreciation and amortization) and Adjusted EBITDA (Earnings
from continuing operations before net interest expense, income taxes,
depreciation and amortization, (increase) decrease in the fair value of
derivatives, net other income, multiemployer pension plan withdrawal charge,
gain or loss on debt redemption, goodwill impairment, and other non-cash and
non-operating charges) are non-GAAP financial measures that are used as
supplemental financial measures by management and external users of our
financial statements, such as investors, commercial banks and research
analysts, to assess:
• our compliance with certain financial covenants included in our debt
agreements;
• our financial performance without regard to financing methods, capital
structure, income taxes or historical cost basis;
• our operating performance and return on invested capital compared to those
of other companies in the retail distribution of refined petroleum
products, without regard to financing methods and capital structure;
• our ability to generate cash sufficient to pay interest on our
indebtedness and to make distributions to our partners; and
• the viability of acquisitions and capital expenditure projects and the
overall rates of return of alternative investment opportunities.
The method of calculating Adjusted EBITDA may not be consistent with that of other companies, and EBITDA and Adjusted EBITDA both have limitations as analytical tools and so should not be viewed in isolation but in conjunction with measurements that are computed in accordance with GAAP. Some of the limitations of EBITDA and Adjusted EBITDA are:
• EBITDA and Adjusted EBITDA do not reflect our cash used for capital
expenditures.
• Although depreciation and amortization are non-cash charges, the assets
being depreciated or amortized often will have to be replaced and EBITDA
and Adjusted EBITDA do not reflect the cash requirements for such
replacements;
• EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements
for, our working capital requirements;
• EBITDA and Adjusted EBITDA do not reflect the cash necessary to make
payments of interest or principal on our indebtedness; and
• EBITDA and Adjusted EBITDA do not reflect the cash required to pay taxes.
37
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DISCUSSION OF CASH FLOWS
We use the indirect method to prepare our Consolidated Statements of Cash Flows. Under this method, we reconcile net income to cash flows provided by operating activities by adjusting net income for those items that impact net income but do not result in actual cash receipts or payment during the period.
Operating Activities
Due to the seasonal nature of our business, cash is generally used in operations during the winter (our first and second fiscal quarters) as we require additional working capital to support the high volume of sales during this period, and cash is generally provided by operating activities during the spring and summer (our third and fourth fiscal quarters) when customer payments exceed the cost of deliveries. During the nine months endedJune 30, 2020 , cash provided by operating activities increased$94.0 million to$156.3 million , compared to$62.3 million of cash used in operating activities during the nine months endedJune 30, 2019 . The increase was driven by a$47.2 million favorable change in accounts receivable (including customer credit balances) due to improved collections and lower sales volume at lower selling prices,$26.1 million increase in cash flows from operations, a$19.2 million favorable change in inventory due primarily to lower cost of liquid product on hand as ofJune 30, 2020 as compared toJune 30, 2019 , and$1.8 million lower escheatment payments to state authorities, and partially offset by$0.3 million of other changes in working capital.
Investing Activities
Our capital expenditures for the nine months endedJune 30, 2020 totaled$8.6 million , as we invested in computer hardware and software ($1.9 million ), refurbished certain physical plants ($2.0 million ), expanded our propane operations ($1.1 million ) and made additions to our fleet and other equipment ($3.6 million ). During the nine months endedJune 30, 2020 , we deposited$8.9 million into an irrevocable trust to secure certain liabilities for our captive insurance company and another$1.1 million of earnings were reinvested into the irrevocable trust. The cash deposited into the trust is shown on our balance sheet as captive insurance collateral and, correspondingly, reduced cash on our balance sheet. We believe that investments into the irrevocable trust will lower our letter of credit fees, increase interest income on invested cash balances, and provide us with certain tax advantages attributable to a captive insurance company. During the nine months endedJune 30, 2020 , the Company acquired the customer list and the assets of a heating oil dealer for an aggregate purchase price of approximately$0.5 million . Our capital expenditures for the nine months endedJune 30, 2019 totaled$8.2 million , as we invested in computer hardware and software ($3.5 million ), refurbished certain physical plants ($1.0 million ), expanded our propane operations ($2.1 million ) and made additions to our fleet and other equipment ($1.6 million ).
During the nine months ended
During the nine months endedJune 30, 2019 the Company acquired two liquid product dealers and the assets of one of its subcontractors for an aggregate purchase price of approximately$62.8 million . The gross purchase price was allocated$44.9 million to intangible assets,$13.1 million to fixed assets,$0.1 million to other long-term assets and$4.7 million for working capital.
Financing Activities
During the nine months endedJune 30, 2020 , we refinanced our five-year term loan and the revolving credit facility with the execution of the fifth amended and restated revolving credit facility agreement. The$130 million of proceeds from the new term loan were used to repay the$90.0 million outstanding balance of the term loan,$39.0 million of the revolving credit facility borrowings under the old credit facility, and$1.0 million of debt issuance costs. We also paid an additional$0.6 million of debt issuance costs, repaid an additional net balance of$22.5 million under our revolving credit facility, repaid$5.8 million of our term loan, repurchased 3.2 million Common Units for$28.0 million in connection with our unit repurchase plan, and paid distributions of$17.7 million to our Common Unit holders and$0.7 million to ourGeneral Partner unit holders (including$0.6 million of incentive distributions as provided in our Partnership Agreement). During the nine months endedJune 30, 2019 we paid distributions of$18.6 million to our Common Unit holders and$0.6 million to ourGeneral Partner unit holders (including$0.5 million of incentive distributions as provided in our Partnership Agreement). We borrowed$139.3 million under our revolving credit facility and subsequently repaid$70.3 million . We also repaid$5.0 million of our term loan and repurchased 3.7 million common units for$34.9 million in connection with our unit repurchase plan. 38
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FINANCING AND SOURCES OF LIQUIDITY
Liquidity and Capital Resources Comparatives
Our primary uses of liquidity are to provide funds for our working capital, capital expenditures, distributions on our units, acquisitions and unit repurchases. Our ability to provide funds for such uses depends on our future performance, which will be subject to prevailing economic, financial, and business conditions, especially in light of the impact of COVID-19, weather, the ability to collect current and future accounts receivable, the ability to pass on the full impact of high product costs to customers, the effects of high net customer attrition, conservation and other factors. Capital requirements, at least in the near term, are expected to be provided by cash flows from operating activities, cash on hand as ofJune 30, 2020 ($66.7 million ) or a combination thereof. To the extent future capital requirements exceed cash on hand plus cash flows from operating activities, we anticipate that working capital will be financed by our revolving credit facility, as discussed below, and from subsequent seasonal reductions in inventory and accounts receivable. As ofJune 30, 2020 , we had accounts receivable of$111.9 million of which$85.3 million is due from residential customers and$26.6 million is due from commercial customers. Our ability to borrow from our bank group is based in part on the aging of these accounts receivable. If these balances do not meet the eligibility tests as found in our fifth amended and restated credit agreement, our ability to borrow will be reduced and our anticipated cash flow from operating activities will also be reduced. As ofJune 30, 2020 , we had no borrowings under our revolving credit facility,$126.8 million under our term loan and$4.4 million in letters of credit outstanding. Under the terms of our credit agreement, we must maintain at all times Availability (borrowing base less amounts borrowed and letters of credit issued) of 15% of the maximum facility size and a fixed charge coverage ratio of not less than 1.15. We must also maintain a senior secured leverage ratio that cannot be more than 3.0 as ofJune 30th orSeptember 30th , and no more than 4.5 as ofDecember 31st orMarch 31st . As ofJune 30, 2020 , Availability, as defined in the credit agreement, was$226.4 million , and we were in compliance with the fixed charge coverage ratio and senior secured leverage ratio. Maintenance capital expenditures for the remainder of fiscal 2020 are estimated to be approximately$4.0 million to$5.0 million , excluding the capital requirements for leased fleet. In addition, we plan to invest approximately$0.2 million to$0.3 million in our propane operations. Distributions for the balance of fiscal 2020, at the current quarterly level of$0.1325 per unit, would result in an aggregate of approximately$5.8 million to Common Unit holders,$0.2 million to the General Partner (including$0.2 million of incentive distribution as provided for in our Partnership Agreement) and$0.2 million to management pursuant to the management incentive compensation plan which provides for certain members of management to receive incentive distributions that would otherwise be payable to the General Partner. Under the terms of our credit facility, our term loan is repayable in quarterly payments of$3.25 million (the first of which was made onApril 1, 2020 ) and, depending on our fiscal 2020 results, we may be required to make an additional annual payment (See Note 11 - Long-Term Debt and Bank Facility Borrowings). In addition, subject to any additional liquidity issues or concerns resulting from the current COVID-19 pandemic, we intend to continue to repurchase Common Units pursuant to our unit repurchase plan, as amended from time to time, and seek attractive acquisition opportunities within the Availability constraints of our revolving credit facility and funding resources.
Contractual Obligations and Off-Balance Sheet Arrangements
There has been no material change to Contractual Obligations and Off-Balance
Sheet Arrangements since our
Recent Accounting Pronouncements
Refer to Note 2 - Summary of Significant Accounting Policies for discussion regarding the impact of accounting standards that were recently adopted and issued but not yet effective, on our consolidated financial statements.
39
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