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 2020 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 2020 Form 10-K. 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. Public health and governmental authorities nationally and in affected regions have taken and continue to take extraordinary and wide-ranging actions to contain and combat the outbreak and spread of COVID-19, including restrictions on travel and business operations, 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 and continue to be 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 disruptions in the procurement of certain home generators. SinceMarch 2020 , we have implemented various measures in response to the COVID-19 pandemic, such as a majority of our office personnel working remotely. While these measures have not significantly impacted our ability to serve our customers to date, these measures may become strained or result in service delays, especially during the peak heating season. 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, providing personal protective equipment for our employees and providing IT infrastructure to allow many office, clerical, sales and customer service employees to work from home. At this time, we expect the annual cost of these undertakings to be approximately$1.0 million . The decline in economic activity has continued to impact our motor fuels business, which delivered 9.1% less volume in the quarter endedDecember 31, 2020 compared to the quarter endedDecember 31, 2019 . Also, while it has not yet materially impacted our ability to serve our customers, a combination of higher than normal unemployment benefits and an increased desire of prospective 20 -------------------------------------------------------------------------------- employees to work from home has impacted our ability to fully staff our customer service and sales functions. We cannot predict how long this staffing issue will continue, but the shortage in conjunction with any kind of spike in customer activity could cause unacceptable delays in response times and increase customer losses. As ofDecember 31, 2020 , we had accounts receivable of$147.0 million , of which$112.3 million was due from residential customers and$34.7 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 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. While our liquidity is impacted by initial margin requirements for new future positions used to hedge our inventory, it can also be adversely impacted by sudden and sharp changes in wholesale product costs. Likewise, our liquidity and collateral requirements are impacted by the fluctuating cost of options and swaps used to manage the market risks associated with our inventory and protected price customers.
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, 2017 , through 2021, on a quarterly basis, is illustrated in the following chart (price per gallon): Fiscal 2021 (a) Fiscal 2020 Fiscal 2019 Fiscal 2018 Fiscal 2017 Quarter Ended Low High Low High Low High Low High Low High December 31$ 1.08 $ 1.51 $ 1.86 $ 2.05 $ 1.66 $ 2.44 $ 1.74 $ 2.08 $ 1.39 $ 1.70 March 31 - - 0.95 2.06 1.70 2.04 1.84 2.14 1.49 1.70 June 30 - - 0.61 1.22 1.78 2.12 1.96 2.29 1.37 1.65 September 30 - - 1.08 1.28 1.75 2.08 2.05 2.35 1.45 1.86
(a) On
three months of Fiscal 2021.
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. 21
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Estimated Depreciation and Amortization Expense
(In thousands) Fiscal Year Book Tax 2021$ 32,872 $ 27,044 2022 28,113 22,053 2023 24,856 20,474 2024 20,614 19,821 2025 16,544 18,527 2026 12,713 17,793 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 "Payment Thresholds," or strikes. In fiscal 2021, we are obligated to make a payment capped at$5.0 million if degree days exceed the Payment Threshold. The hedge period runs fromNovember 1 through March 31 , taken as a whole, for each respective fiscal year. In accordance with ASC 815-45, we recorded a$4.0 million benefit to delivery and branch expenses for the first quarter of fiscal 2021 as compared to a$3.0 million charge for the first quarter of fiscal 2020. The final credit (if any) for fiscal 2021 may be higher or lower than this amount depending on the actual heating degree-days recorded in the periodJanuary 1, 2021 throughMarch 31, 2021 . If the heating degree-days in this period approximate the expected degree days in the contracts, the benefit will be reduced to approximately$1.7 million . If temperatures in this period are colder than expected in the contracts, then the additional heating degree-days could reduce the benefit further, possibly even to zero and potentially the Company may owe up to$5.0 million under the weather hedge contracts. Temperatures recorded forJanuary 2021 , were warmer than expected.
Per Gallon Gross Profit Margins
We believe home heating oil and propane margins should be evaluated on a cents
per gallon basis (before the effects of increases or decreases in the fair value
of derivative instruments), as we believe that such per gallon margins are best
at showing profit trends in the underlying business, without the impact of
non-cash changes in the market value of hedges before the settlement of the
underlying transaction.
A significant portion of our home heating oil volume is sold to individual
customers under an arrangement pre-establishing a ceiling price or fixed price
for home heating oil over a set period of time, generally twelve to twenty-four
months ("price-protected" customers). When these price-protected customers agree
to purchase home heating oil from us for the next heating season, we purchase
option contracts, swaps and futures contracts for a substantial majority of the
heating oil that we expect to sell to these customers. The amount of home
heating oil volume that we hedge per price-protected customer is based upon the
estimated fuel consumption per average customer per month. In the event that the
actual usage exceeds the amount of the hedged volume on a monthly basis, we may
be required to obtain additional volume at unfavorable costs. In addition,
should actual usage in any month be less than the hedged volume, our hedging
costs and losses could be greater, thus reducing expected margins.
Derivatives
FASB ASC 815-10-05 Derivatives and Hedging requires that derivative instruments be recorded at fair value and included in the consolidated balance sheet as assets or liabilities. To the extent our interest rate derivative instruments designated as cash flow hedges are effective, as defined under this guidance, changes in fair value are recognized in other comprehensive income 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
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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
2021 2020 2019
Net Net Net
Gross Customer Gains / Gross Customer Gains / Gross Customer Gains /
Gains Losses (Attrition) Gains Losses (Attrition) Gains Losses (Attrition)
First Quarter 19,100 19,900 (800 ) 23,900 23,100 800 26,200 25,400 800
Second Quarter - - - 12,600 18,200 (5,600 ) 12,600 22,300 (9,700 )
Third Quarter - - - 8,000 13,600 (5,600 ) 7,100 15,900 (8,800 )
Fourth Quarter - - - 10,700 15,800 (5,100 ) 13,200 20,600 (7,400 )
Total 19,100 19,900 (800 ) 55,200 70,700 (15,500 ) 59,100 84,200 (25,100 )
Customer gains (attrition) as a percentage of home heating oil and propane
customer base
Fiscal Year Ended
2021 2020 2019
Net Net Net
Gross Customer Gains / Gross Customer Gains / Gross Customer Gains /
Gains Losses (Attrition) Gains Losses (Attrition) Gains Losses (Attrition)
First Quarter 4.4 % 4.6 % (0.2 %) 5.3 % 5.1 % 0.2 % 5.8 % 5.6 % 0.2 %
Second Quarter - - - 2.8 % 4.0 % (1.2 %) 2.8 % 5.0 % (2.2 %)
Third Quarter - - - 1.8 % 3.0 % (1.2 %) 1.6 % 3.5 % (1.9 %)
Fourth Quarter - - - 2.3 % 3.5 % (1.2 %) 2.7 % 4.2 % (1.5 %)
Total 4.4 % 4.6 % (0.2 %) 12.2 % 15.6 % (3.4 %) 12.9 % 18.3 % (5.4 %)
For the three months ended December 31, 2020 , the Company lost 800 accounts
(net), or 0.2% of its home heating oil and propane customer base, compared to
800 accounts gained (net), or 0.2% of its home heating oil and propane customer
base, during the three months ended December 31, 2019 . Gross customer gains were
4,800 less than the prior year's comparable period, and gross customer losses
were 3,200 accounts less.
During the three months ended December 31, 2020 , we estimate that we lost 0.3%
of our home heating oil and propane accounts to natural gas conversions versus
0.4% for the three months ended December 31, 2019 and 0.4% three months ended
December 31, 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.
Acquisitions
The timing of acquisitions and the types of products sold by acquired companies impact year-over-year comparisons. During fiscal 2021 the Company acquired two propane dealers onDecember 31, 2020 . During fiscal 2020 the Company acquired two heating oil dealers. 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 2021 Acquisitions Acquisition Month of Acquisition Home Heating Oil and Other Petroleum Total Number Propane Products 1 December 5,452 - 5,452 2 December 1,318 - 1,318 6,770 - 6,770 23
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(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
Sale of Propane Assets
In
Years Ended September 30,
(in thousands) 2020 2019 2018
Volume:
Propane 2,741 2,765 2,885
Sales:
Petroleum Products
Total Sales$ 7,130 $ 7,917 $ 8,662 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.
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Three Months Ended December 31, 2020
Compared to the Three Months Ended December 31, 2019
Volume
For the three months ended December 31, 2020 , retail volume of home heating oil
and propane sold decreased by 17.6 million gallons, or 16.4%, to 89.5 million
gallons, compared to 107.1 million gallons for the three months ended December
31, 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 December 31, 2020 were 13.5% warmer than the three months
ended December 31, 2019 . Temperatures during the three months ended December 31,
2020 were 15.5% warmer than normal, as reported by NOAA . For the twelve months
ended December 31, 2020 , net customer attrition for the base business was 3.8%.
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 December 31, 2019 107.1
Net customer attrition (5.0 )
Impact of warmer temperatures (14.3 )
Acquisitions 0.6
Sale of certain propane assets (0.8 )
Other 1.9
Change (17.6 )
Volume - Three months ended December 31, 2020 89.5
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
December 31, 2020 , compared to the three months ended December 31, 2019 :
Three Months Ended
December 31, December 31,
Customers 2020 2019
Residential Variable 42.6 % 42.2 %
Residential Price-Protected (Ceiling and Fixed Price) 45.4 % 45.6 %
Commercial/Industrial 12.0 % 12.2 %
Total 100.0 % 100.0 %
Volume of motor fuel and other petroleum products sold decreased by 3.7 million
gallons, or 9.1%, to 37.7 million gallons for the three months ended December
31, 2020 , compared to 41.4 million gallons for the three months ended December
31, 2019 due to lower volume sales of motor fuels (3.2 million gallons)
resulting from COVID-19's impact on economic activity and the loss of certain
accounts and lower wholesale volume sales (0.5 million gallons) due to the
warmer weather. We believe that the decline in motor fuel sales may continue in
the near term.
Product Sales
For the three months ended December 31, 2020 , product sales decreased by
$132.4 million , or 30.6%, to $300.3 million , compared to $432.7 million for the
three months ended December 31, 2019 , reflecting a decrease in in wholesale
product cost of $0.5830 per gallon, or 30.1%, and a decrease in total volume
sold of 14.4%.
Installations and Services
For the three months ended December 31, 2020 , installation and service revenue
decreased by $3.3 million , or 4.3%, to $73.0 million , compared to $76.3 million
for the three months ended December 31, 2019 . Service and installation sales
declined largely due to net customer attrition.
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Cost of Product
For the three months endedDecember 31, 2020 , cost of product decreased$115.6 million , or 40.2%, to$172.1 million , compared to$287.7 million for the three months endedDecember 31, 2019 due to the impact of a decrease in total volume sold of 14.4% and a$0.5830 per gallon, or 30.1%, 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 motor fuel and other petroleum products. We believe the change in home heating oil and propane margins should be evaluated before the effects of increases or decreases in the fair value of derivative instruments, as we believe that realized per gallon margins should not include the impact of non-cash changes in the market value of hedges before the settlement of the underlying transaction. On that basis, home heating oil and propane margins for the three months endedDecember 31, 2020 increased by$0.0624 per gallon, to$1.3188 per gallon, from$1.2564 per gallon during the three months endedDecember 31, 2019 . We cannot assume that the per gallon margins realized during fiscal 2020 are sustainable for future periods. Product sales and cost of product include home heating oil, propane, motor fuel, other petroleum products and liquidated damages billings. Three Months Ended December 31, 2020 December 31, 2019 Amount Per Amount Per Home Heating Oil and Propane (in millions) Gallon (in millions) Gallon Volume 89.5 107.1 Sales $ 240.8$ 2.6899 $ 343.4 $ 3.2048 Cost $ 122.7$ 1.3711 $ 208.8$ 1.9484 Gross Profit $ 118.1$ 1.3188 $ 134.6$ 1.2564 Amount Per Amount Per
Motor Fuel and Other Petroleum Products (in millions) Gallon
(in millions) Gallon Volume 37.7 41.4 Sales $ 59.5$ 1.5796 $ 89.3$ 2.1562 Cost $ 49.4$ 1.3112 $ 78.9$ 1.9049 Gross Profit $ 10.1$ 0.2684 $ 10.4$ 0.2513 Amount Amount Total Product (in millions) (in millions) Sales $ 300.3 $ 432.7 Cost $ 172.1 $ 287.7 Gross Profit $ 128.2 $ 145.0 For the three months endedDecember 31, 2020 , total product gross profit was$128.2 million , which was$16.8 million , or 11.6%, less than the three months endedDecember 31, 2019 , as a decrease in home heating oil and propane volume ($22.1 million ) and in gross profit from motor fuel and other petroleum products ($0.3 million ) was slightly offset by higher margins ($5.6 million ).
Cost of Installations and Services
Total installation costs for the three months endedDecember 31, 2020 decreased by$1.3 million or 5.0%, to$23.5 million , compared to$24.8 million of installation costs for the three months endedDecember 31, 2019 . Installation costs as a percentage of installation sales were 78.3% for the three months endedDecember 31, 2020 and 81.1% for the three months endedDecember 31, 2019 . Service expense decreased by$3.1 million , or 6.4%, to$45.8 million for the three months endedDecember 31, 2020 , representing 106.6% of service sales, versus$48.9 million , or 107.0% of service sales, for the three months endedDecember 31, 2019 . We realized a combined gross profit from service and installation of$3.7 million for the three months endedDecember 31, 2020 compared to a gross profit of$2.6 million for the three months endedDecember 31, 2019 , a$1.1 million improvement in profitability. 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. 26
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(Increase) Decrease in the Fair Value of Derivative Instruments
During the three months endedDecember 31, 2020 , the change in the fair value of derivative instruments resulted in a$17.4 million credit due to an increase in the market value for unexpired hedges (an$11.1 million credit) and a$6.3 million credit due to the expiration of certain hedged positions. During the three months endedDecember 31, 2019 , the change in the fair value of derivative instruments resulted in a$6.4 million credit due to an increase in the market value for unexpired hedges (a$2.5 million credit) and a$3.9 million credit due to the expiration of certain hedged positions.
Delivery and Branch Expenses
For the three months endedDecember 31, 2020 , delivery and branch expenses decreased$16.0 million , or 16.6%, to$80.7 million , compared to$96.7 million for the three months endedDecember 31, 2019 . The decline was attributable to a$2.9 million , or 9.9%, reduction in direct delivery costs due to lower volume, lower insurance expense of$1.6 million , lower bad debt expense and credit card processing fees of$1.5 million , lower medical cost of$0.5 million , and other reductions in operating costs totaling$2.5 million , or 2.6%. Bad debt expense was lower due to the decline in sales dollars and lower write offs, and insurance expense was lower due to improved claims experience. Operating expenses were also reduced by$7.0 million due to the impact of our weather hedging program. As ofDecember 31, 2019 we recorded a charge of$3.0 million that increased delivery and branch expenses, versus a benefit of$4.0 million as ofDecember 31, 2020 that reduced delivery and branch expenses. The final credit (if any) for fiscal 2021 may be lower or higher depending on the accumulation of actual heating degree-days recorded in the periodJanuary 1, 2021 throughMarch 31, 2021 . If the heating degree-days in this period approximate the expected degrees days in the contracts, the credit will be reduced to approximately$1.7 million . If temperatures in this period are colder than expected in the contracts, then the additional heating degree-days could reduce the credit further, possibly even to zero and potentially the Company may owe up to$5.0 million under the weather hedge contracts. Temperatures recorded forJanuary 2021 were warmer than expected.
Depreciation and Amortization Expenses
For the three months ended
General and Administrative Expenses
For the three months endedDecember 31, 2020 , general and administrative expenses decreased by$0.3 million or 4.0%, to$6.2 million , from$6.5 million for the three months endedDecember 31, 2019 , primarily due to lower salary and benefit expenses. Finance Charge Income For the three months endedDecember 31, 2020 , finance charge income decreased to$0.4 million from$0.7 million for the three months endedDecember 31, 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 endedDecember 31, 2020 , net interest expense decreased by$0.8 million , or 30.9%, to$1.9 million compared to$2.7 million for the three months endedDecember 31, 2019 . The change year-over-year reflects a decrease in average borrowings of$53.3 million from$184.1 million for the three months endedDecember 31, 2019 to$130.8 million for the three months endedDecember 31, 2020 , and a decrease in the weighted average interest rate from 5.1% for the three months endedDecember 31, 2019 to 4.4% for the three months endedDecember 31, 2020 . To hedge against rising interest rates, the Company utilizes interest rate swaps. AtDecember 31, 2020 ,$62.8 million , or 52%, of our long term debt, was fixed. Interest income remained fairly consistent compared to the three months endedDecember 31, 2019 .
Amortization of Debt Issuance Costs
For the three months endedDecember 31, 2020 , amortization of debt issuance cost was$0.2 million , essentially unchanged from the three months endedDecember 31, 2019 . 27
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Income Tax Expense
For the three months endedDecember 31, 2020 , the Company's income tax expense increased by$3.0 million to$14.8 million , from$11.8 million for the three months endedDecember 31, 2019 , due primarily to an increase in income before income taxes of$13.2 million that was driven by an$11.0 million non-cash favorable change in the fair market value of derivative instruments.
Net Income
For the three months endedDecember 31, 2020 , Star's net income increased$10.1 million , to$37.9 million , primarily due to a favorable change in the fair value of derivative instruments of$11.0 million , lower depreciation and amortization expense of$1.1 million , partially offset by an increase in income tax expense of$3.0 million . Adjusted EBITDA For the three months endedDecember 31, 2020 , Adjusted EBITDA increased by$0.3 million , to$45.3 million compared to the three months endedDecember 31, 2019 . The impact of higher per gallon home heating oil and propane margins of6.2 cents per gallon, lower operating expenses of$16.3 million (including a favorable change in the impact from the Company's weather hedge of$7.0 million ), and a$1.1 million improvement in net service and installation profitability more than offset the impact from a decrease in volume of home heating oil and propane sold and the decline in Star's motor fuel business. As ofDecember 31, 2020 the Company recorded a credit of$4.0 million under their weather hedging contracts that reduced delivery and branch expenses. The final credit (if any) for fiscal 2021 may be lower or higher depending on the accumulation of actual heating degree-days recorded in the periodJanuary 1, 2021 throughMarch 31, 2021 . If the heating degree-days in this period approximate the expected degrees days in the contracts, the credit will be reduced to approximately$1.7 million . If temperatures in this period are colder than expected in the contracts, then the additional heating degree-days could reduce the credit further, possibly even to zero and potentially the Company may owe up to$5.0 million under the weather hedge contracts. Temperatures recorded forJanuary 2021 , were warmer than expected. EBITDA and Adjusted EBITDA should not be considered as an alternative to net income (as an indicator of operating performance) or as an alternative to cash flow (as a measure of liquidity or ability to service debt obligations) but provide additional information for evaluating the Company's ability to make the Minimum Quarterly Distribution. EBITDA and Adjusted EBITDA are calculated as follows: Three Months Ended December 31, (in thousands) 2020 2019 Net income$ 37,860 $ 27,755 Plus: Income tax expense 14,828 11,782 Amortization of debt issuance costs 247
235
Interest expense, net 1,851
2,679
Depreciation and amortization 7,957
9,050
EBITDA (a) 62,743
51,501
(Increase) / decrease in the fair value of derivative
instruments (17,395 ) (6,417 ) Adjusted EBITDA (a) 45,348 45,084 Add / (subtract) Income tax expense (14,828 ) (11,782 ) Interest expense, net (1,851 ) (2,679 ) (Recovery) provision for losses on accounts receivable (476 ) 1,010 Decrease in accounts receivables (62,989 ) (85,745 ) Decrease in inventories (7,177 ) (15,427 ) Increase in customer credit balances (8,987 ) (15,898 ) Change in deferred taxes 3,601
1,336
Change in other operating assets and liabilities 20,358
32,510
Net cash used in operating activities$ (27,001 ) $ (51,591 ) Net cash used in investing activities$ (35,903 ) $ (7,663 ) Net cash provided by financing activities$ 24,840 $ 68,897 28
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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, other income (loss), net, multiemployer pension plan withdrawal
charge, gain or loss on debt redemption, goodwill impairment, and other
non-cash and non-operating charges) are non-GAAP financial measures that are
used as supplemental financial measures by management and external users of
our financial statements, such as investors, commercial banks and research
analysts, to assess:
• our compliance with certain financial covenants included in our debt
agreements;
• our financial performance without regard to financing methods, capital
structure, income taxes or historical cost basis;
• our operating performance and return on invested capital compared to those
of other companies in the retail distribution of refined petroleum
products, without regard to financing methods and capital structure;
• our ability to generate cash sufficient to pay interest on our
indebtedness and to make distributions to our partners; and
• the viability of acquisitions and capital expenditure projects and the
overall rates of return of alternative investment opportunities.
The method of calculating Adjusted EBITDA may not be consistent with that of other companies, and EBITDA and Adjusted EBITDA both have limitations as analytical tools and so should not be viewed in isolation but in conjunction with measurements that are computed in accordance with GAAP. Some of the limitations of EBITDA and Adjusted EBITDA are:
• EBITDA and Adjusted EBITDA do not reflect our cash used for capital
expenditures.
• Although depreciation and amortization are non-cash charges, the assets
being depreciated or amortized often will have to be replaced and EBITDA
and Adjusted EBITDA do not reflect the cash requirements for such
replacements;
• EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements
for, our working capital requirements;
• EBITDA and Adjusted EBITDA do not reflect the cash necessary to make
payments of interest or principal on our indebtedness; and EBITDA and
Adjusted EBITDA do not reflect the cash required to pay taxes.
DISCUSSION OF CASH FLOWS
We use the indirect method to prepare our Consolidated Statements of Cash Flows. Under this method, we reconcile net income to cash flows provided by operating activities by adjusting net income for those items that impact net income but do not result in actual cash receipts or payment during the period.
Operating Activities
Due to the seasonal nature of our business, cash is generally used in operations during the winter (our first and second fiscal quarters) as we require additional working capital to support the high volume of sales during this period, and cash is generally provided by operating activities during the spring and summer (our third and fourth fiscal quarters) when customer payments exceed the cost of deliveries. During the three months endedDecember 31, 2020 , cash used in operating activities decreased$24.6 million to$27.0 million , compared to$51.6 million of cash used in operating activities during the three months endedDecember 31, 2019 . The decrease was driven by a$29.7 million favorable change in accounts receivable (including customer credit balances) due to improved collections and lower sales volume at lower selling prices, and an$8.3 million favorable change in inventory due primarily to the lower cost of liquid product on hand as ofDecember 31, 2020 as compared toDecember 31, 2019 , that was partially offset by an$8.2 million decrease in cash flows from operations, a$2.1 million unfavorable change in accounts payable due to the timing of inventory purchases and$3.1 million of other changes in working capital.
Investing Activities
Our capital expenditures for the three months endedDecember 31, 2020 totaled$4.7 million , as we invested in computer hardware and software ($0.8 million ), refurbished certain physical plants ($1.0 million ), expanded our propane operations ($0.6 million ) and made additions to our fleet and other equipment ($2.3 million ). During the three months endedDecember 31, 2020 ,$0.3 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. OnOctober 27, 2020 , the Company sold certain propane assets for cash proceeds of$6.1 million . OnDecember 31, 2020 , the Company acquired two propane dealers for approximately$37.9 million ;$37.1 million in cash and$0.8 million of deferred liabilities. 29
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The gross purchase price was allocated
During the three months endedDecember 31, 2019 our capital expenditures totaled$3.0 million , as we invested in computer hardware and software ($1.0 million ), refurbished certain physical plants ($0.8 million ), expanded our propane operations ($0.4 million ) and made additions to our fleet and other equipment ($0.8 million ). We also deposited$3.9 million into an irrevocable trust to secure certain liabilities for our captive insurance company and another$0.3 million of earnings were reinvested into the irrevocable trust. Further, the Company acquired the customer list and the assets of a heating oil dealer for an aggregate purchase price of approximately$0.5 million .
Financing Activities
During the three months endedDecember 31, 2020 , we repaid$3.3 million of our term loan, borrowed$59.3 million under our revolving credit facility, repurchased 2.6 million Common Units for$25.3 million in connection with our unit repurchase plan, and paid distributions of$5.7 million to our Common Unit holders and$0.2 million to ourGeneral Partner unit holders (including$0.2 million of incentive distributions as provided in our Partnership Agreement). During the three months endedDecember 31, 2019 , 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$0.3 million of debt issuance costs, borrowed$90.2 million under our revolving credit facility to finance our working capital, repaid$2.5 million of our tem loan, repurchased 1.3 million Common Units for$12.1 million in connection with our unit repurchase plan, and paid distributions of$5.9 million to our Common Unit holders and$0.2 million to ourGeneral Partner unit holders (including$0.2 million of incentive distributions as provided in our Partnership Agreement).
FINANCING AND SOURCES OF LIQUIDITY
Liquidity and Capital Resources Comparatives
Our primary uses of liquidity are to provide funds for our working capital, capital expenditures, distributions on our units, acquisitions and unit repurchases. Our ability to provide funds for such uses depends on our future performance, which will be subject to prevailing economic, financial, 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 ofDecember 31, 2020 ($18.8 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 ofDecember 31, 2020 , we had accounts receivable of$147.0 million of which$112.3 million is due from residential customers and$34.7 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 ofDecember 31, 2020 , we had$59.3 million in borrowings under our revolving credit facility,$120.3 million outstanding under our term loan, and$3.5 million in letters of credit outstanding, and our ability to borrow was reduced by$1.8 million to secure hedges with the bank group. Under the terms of the fifth amended and restated 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 ofSeptember 30, 2020 , Availability, as defined in the fifth amended and restated revolving credit facility agreement, was$160.3 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 2021 are estimated to be approximately$9.6 million to$10.6 million , excluding the capital requirements for leased fleet. In addition, we plan to invest approximately$0.9 million to$1.3 million in our propane operations. Distributions for the balance of fiscal 2021, at the current quarterly level of$0.1325 per unit, would result in aggregate payments of approximately$16.1 million to Common Unit holders,$0.7 million to ourGeneral Partner (including$0.6 million of incentive distribution as provided for in our Partnership Agreement) and$0.6 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 . Over the last two fiscal years, the Company was required to deposit on average$9.2 million into our captive insurance company as collateral. For fiscal 2021, we are not required to make any additional deposits. Further, subject to any additional liquidity issues or concerns resulting from the current COVID-19 pandemic, we intend to continue to repurchase Common 30 -------------------------------------------------------------------------------- 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.
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