Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes ☐ No ☒
Indicate by check mark if the registrant is
not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days. Yes ☒ No ☐
Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T
(§232.405 of
this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K
is
not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K
or any
amendment to this Form
10-K. ☒
Indicate by check mark whether the registrant is a
large accelerated filer, an accelerated filer, a
non-accelerated
filer, or a smaller reporting company. See definitions of large accelerated filer, and accelerated filer and
smaller reporting company in Rule
12b-2
of the Act (check one).
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended
transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the
Exchange Act). Yes ☐ No ☒
As of
November 30, 2017, the registrant had 55,887,832 common units outstanding.
PART I
Statement Regarding Forward-Looking Disclosure
This Annual Report on Form
10-K
includes forward-looking statements which represent our
expectations or beliefs concerning future events that involve risks and uncertainties, including those associated with 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 environmental, health, and safety
regulations, the ability to attract and retain employees, customer credit worthiness, counterparty credit worthiness, marketing plans, general economic conditions and new technology. All statements other than statements of historical facts included
in this Report including, without limitation, the statements under Managements 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 heading Risk Factors and Business Strategy. Important factors that could cause actual results to differ
materially from our expectations (Cautionary Statements) are disclosed in this Report. 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.
2
Structure
Star Group, L.P. (Star the Company, we, us, or our) is a home heating oil and
propane distributor and services provider with one reportable operating segment that principally provides heating related services to residential and commercial customers. At a special meeting of unitholders held on October 25, 2017, our
unitholders voted in favor of proposals to have the Company elect to be treated as a corporation, instead of a partnership, for federal income tax purposes (commonly referred to as a
check-the-box
election), along with amendments to our partnership agreement to effect such changes in income tax classification, in each case effective
November 1, 2017. In addition, the Company changed its name, effective October 25, 2017, from Star Gas Partners, L.P. to Star Group, L.P. to more closely align our name with the scope of our product and service
offerings. For tax years after December 31, 2017, unitholders will receive a Form
1099-DIV
and will not receive a Schedule
K-1
as in previous tax years. Our legal
structure will remain a Delaware limited partnership and the distribution provisions under our limited partnership agreement, including the incentive distribution structure will remain unchanged. As of November 30, 2017, we had outstanding
55.9 million common partner units (NYSE: SGU) representing a 99.4% limited partner interest in Star, and 0.3 million general partner units, representing a 0.6% general partner interest in Star.
The following chart depicts the ownership of Star as of November 30, 2017:
Star is organized as follows:
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Our general partner is Kestrel Heat, LLC, a Delaware limited liability company (Kestrel Heat or the general partner). The Board of Directors of Kestrel Heat is appointed by its sole member,
Kestrel Energy Partners, LLC, a Delaware limited liability company (Kestrel).
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Our operations are conducted through Petro Holdings, Inc., a Minnesota corporation that is a wholly owned subsidiary of Star Acquisitions, Inc., and its subsidiaries.
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Petroleum Heat and Power Co., Inc. (PH&P) is a 100% owned subsidiary of Star. PH&P is the borrower and Star is a guarantor of the third amended and restated credit agreements five-year senior
secured term loan and the $300 million ($450 million during the heating season of December through April of each year) revolving credit facility, both due July 30, 2020. (See Note 11 of the Notes to the Consolidated Financial
Statements Long-Term Debt and Bank Facility Borrowings)
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We file annual, quarterly, current and other reports and
information with the Securities and Exchange Commission, or SEC. These filings can be viewed and downloaded from the Internet at the SECs website at www.sec.gov. In addition, these SEC filings are available at no cost as soon as reasonably
practicable after the filing thereof on our website at www.stargrouplp.com/sec.cfm. These reports are also available to be read and copied at the SECs public reference room located at Judiciary Plaza, 100 F Street, N.E., Washington, D.C.
20549. The public may obtain information on the operation of the public reference room by calling the SEC at
1-800-SEC-0330.
You
may also obtain copies of these filings and other information at the offices of the New York Stock Exchange located at 11 Wall Street, New York, New York 10005. Please note that any Internet addresses provided in this Annual Report on Form
10-K
are for informational purposes only and are not intended to be hyperlinks. Accordingly, no information found and/or provided at such Internet addresses is intended or deemed to be incorporated by reference
herein.
3
Legal Structure
The following chart summarizes our structure as of September 30, 2017.
Business Overview
We are a home heating oil and propane distributor and service provider to residential and commercial customers who heat their homes and
buildings in the Northeast, Central and Southeast U.S. regions. Our customers are concentrated in the northern and eastern states. As of September 30, 2017, we sold home heating oil and propane to approximately 455,000 full service residential
and commercial customers. We believe we are the largest retail distributor of home heating oil in the United States, based upon sales volume with a market share in excess of 5.5%. We also sell home heating oil, gasoline and diesel fuel to
approximately 74,000 customers on a delivery only basis. We install, maintain, and repair heating and air conditioning equipment and to a lesser extent provide these services outside our customer base including 15,300 service contracts for natural
gas and other heating systems. In addition, we provide home security and plumbing, to approximately 31,000 customers, many of whom are also existing home heating oil and propane customers. During fiscal 2017, total sales were comprised approximately
64.4% from sales of home heating oil and propane; 19.6 % from the installation and repair of heating and air conditioning equipment and ancillary services; and 16.0% from the sale of other petroleum products. We provide home heating equipment
repair service and natural gas service 24 hours a day, seven days a week, 52 weeks a year. These services are an integral part of our business, and are intended to maximize customer satisfaction and loyalty.
We conduct our business through an operating subsidiary, Petro Holdings, Inc., utilizing multiple local brand names, such as Petro Home
Services, Meenan, and Griffith Energy Services, Inc.
We also offer several pricing alternatives to our residential home heating oil
customers, including a variable price (market based) option and a price-protected option, the latter of which either sets the maximum price or a fixed price that a customer will pay. Users choose the plan they feel best suits them which we believe
increases customer satisfaction. Approximately 96% of our full service residential and commercial home heating oil customers automatically receive deliveries based on prevailing weather conditions. In addition, approximately 34% of our homeowners
take advantage of our smart pay budget payment plan under which their estimated annual oil and propane deliveries and service billings are paid for in a series of equal monthly installments. We use derivative instruments as needed to
mitigate our exposure to market risk associated with our price-protected offerings and the storing of our physical home heating oil inventory. Given our size, we are able to realize certain benefits of scale and provide consistent, strong customer
service.
4
Currently, we have heating oil and/or propane customers in the following states, regions and
counties:
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New Hampshire
Hillsborough
Merrimack
Rockingham
Strafford
Vermont
Bennington
Massachusetts
Barnstable
Bristol
Essex
Hampden
Middlesex
Norfolk
Plymouth
Suffolk
Worcester
Rhode Island
Bristol
Kent
Newport
Providence
Washington
Connecticut
Fairfield
Hartford
Litchfield
Middlesex
New Haven
New London
Tolland
Windham
Washington, D.C.
District of Columbia
Delaware
Kent
New Castle
Sussex
Michigan
Genesee
Lapeer
Macomb
Oakland
Sanilac
St. Clair
Tuscola
Wayne
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Maine
York
New York
Albany
Bronx
Columbia
Dutchess
Fulton
Greene
Kings
Montgomery
Nassau
New York
Orange
Putnam
Queens
Rensselaer
Richmond
Rockland
Saratoga
Schenectady
Schoharie
Suffolk
Sullivan
Ulster
Warren
Washington
Westchester
Maryland
Anne Arundel
Baltimore
Calvert
Caroline
Carroll
Cecil
Charles
Dorchester
Frederick
Harford
Howard
Kent
Montgomery
Prince Georges
Queen Anne
St. Marys
Talbot
Washington
Wicomico
Worcester
West Virginia
Berkeley
Jefferson
Morgan
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New Jersey
Atlantic
Bergen
Burlington
Camden
Cumberland
Essex
Gloucester
Hudson
Hunterdon
Mercer
Middlesex
Monmouth
Morris
Ocean
Passaic
Salem
Somerset
Sussex
Union
Warren
Pennsylvania
Adams
Berks
Bucks
Chester
Cumberland
Dauphin
Delaware
Franklin
Fulton
Lancaster
Lebanon
Lehigh
Monroe
Montgomery
Northampton
Perry
Philadelphia
Schuylkill
York
Virginia
Arlington
Clarke
Culpepper
Fairfax
Frederick
Fauquier
Loudoun
Prince William
Stafford
Warren
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Tennessee
Bradley
Hamilton
McMinn
Meigs
Polk
North Carolina
Anson
Caburras
Davidson
Forsyth
Gaston
Guilford
Lincoln
Mecklenburg
Montgomery
Randolph
Richmond
Rowan
Stanly
Union
South Carolina
Bamberg
Calhoun
Chester
Dorchester
Fairfield
Kershaw
Lexington
Newberry
Oconec
Orangeburg
Saluda
Sumter
York
Georgia
Banks
Cherokee
Dawson
Fannin
Franklin
Forsyth
Habersham
Hall
Jefferson
Lumpkin
Murray
Rabun
Stephens
Towns
White
Whitfield
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5
Industry Characteristics
Home heating oil is primarily used as a source of fuel to heat residences and businesses in the Northeast and
Mid-Atlantic
regions. According to the U.S. Department of EnergyEnergy Information Administration, 2015 Residential Energy Consumption Survey (the latest survey published), these regions account for 80%
(4.7 million of 5.9 million) of the households in the United States where heating oil is the main space-heating fuel and 23% (4.7 million of 20.4 million) of the homes in these regions use home heating oil as their main space-heating fuel.
Our experience has been that customers have a tendency to increase their conservation efforts as the price of home heating oil increases, thereby reducing their consumption.
The retail home heating oil industry is mature, with total market demand expected to decline in the foreseeable future due to conversions to
natural gas and other alternative energy sources. Therefore, our ability to maintain our business or grow within the industry is dependent on the acquisition of other retail distributors, the success of our marketing programs, and the growth of our
other service offerings. Based on our records, our customer conversions to natural gas have ranged between 1.2% and 2.4% per year over the last five years. We believe this may continue or increase as natural gas has become less expensive than home
heating oil on an equivalent BTU basis. In addition, there are legislative and regulatory efforts underway in several states seeking to encourage homeowners to expand the use of natural gas as a heating fuel.
The retail home heating oil industry is highly fragmented, characterized by a large number of relatively small, independently owned and
operated local distributors. Some dealers provide full service, as we do, and others offer delivery only on a
cash-on-delivery
basis, which we also do to a significantly
lesser extent. In addition, the industry is complex and costly due to regulations, working capital requirements, and the costs and risks of hedging for price protected customers.
Propane is a
by-product
of natural gas processing and petroleum refining. Propane use falls into three
broad categories: residential and commercial applications; industrial applications; and agricultural uses. In the residential and commercial markets, propane is used primarily for space heating, water heating, clothes drying and cooking. Industrial
customers use propane generally as a motor fuel to power
over-the-road
vehicles, forklifts and stationary engines, to fire furnaces, as a cutting gas and in other
process applications. In the agricultural market, propane is primarily used for tobacco curing, crop drying, poultry breeding and weed control.
The retail propane distribution industry is highly competitive, and is generally serviced by large multi-state full-service distributors and
small local independent distributors. Like the home heating oil industry, each retail propane distribution provider operates in its own competitive environment because propane distributors typically reside in close proximity to their customers. In
most retail propane distribution markets, customers can choose from multiple distributors based on the quality of customer service, safety, reputation and price.
It is common practice in our business to price our liquid products to customers based on a per gallon margin over wholesale costs. As a
result, we believe distributors such as ourselves generally seek to maintain their per gallon margins by passing wholesale price increases through to customers, thus insulating their margins from the volatility in wholesale prices. However,
distributors may be unable or unwilling to pass the entire product cost increases through to customers. In these cases, significant decreases in per gallon margins may result. The timing of cost pass-throughs can also significantly affect margins.
(See Customers and Pricing for a discussion on our offerings)
Business Strategy
Our business strategy is to increase Adjusted EBITDA (See Item 6. Selected Historical Financial and Operating Data for a definition and
history) and cash flow by effectively managing operations while growing and retaining our customer base as a retail distributor of home heating oil and propane and provider of related products and services. The key elements of this strategy include
the following:
Pursue select acquisitions
Our senior management team has developed expertise in identifying acquisition
opportunities and integrating acquired customers into our operations. We focus on acquiring profitable companies within and outside our current footprint.
We actively pursue home heating oil only companies, propane companies, dual fuel (home heating oil and propane) companies and selectively
target motor fuels acquisitions, especially where they are operating in the markets we currently serve. The focus for our acquisitions is both within our current footprint, as well as outside of such areas if the target company is of adequate size
to sustain profitability as a stand-alone operation. We have used this strategy to expand into several states over the past five years.
6
Deliver superior customer service
We are dedicated to consistently providing our
customers with superior service and a positive customer experience to improve retention and drive additional revenue. We have established a Customer Experience Department and Voice of the Customer (VOC) Program to effectively measure customer
satisfaction at certain brands.
VOC refers to a process (or program) designed to capture customers preferences and opinions of the
service we deliver. The heart of the VOC program is based on transactional surveys with real-time results. We analyze customer input to gain business insights and share this information internally to create meaningful change throughout the company
and improve overall customer satisfaction.
We are also deploying Salesforce.com, a customer relationship management solution, at most of
our larger brands. This will allow us to provide a more consistent customer experience as our employees will have a 360 degree-view of each customer with easy access to key customer information and customized dashboards to track individual
employee performance.
We have created a specific department dedicated to training employees to provide superior and consistent service
and enhance the customer experience. We also have a technical training committee to ensure that our field personnel are properly educated in using the latest technology in a safe and efficient manner. This effort is supported, reinforced and
monitored by our local management teams.
Diversification of product and service offerings
In addition to expanding our
propane operations, we are focused on expanding our suite of rationally related products and services. These offerings include, but are not limited to, the sales, service and installation of heating and air conditioning equipment, plumbing services,
and standby home generators. In addition, we also repair and install natural gas heating systems. We place significant emphasis on growing a solid, credit-worthy customer base with a focus on recurring revenue in the form of annual service
agreements.
Geographic expansion
We utilize census-based demographic data as well as local field expertise to target areas
contiguous to our geographic footprint for organic expansion in a strategic manner. We then operate in such areas using a combination of existing logistical resources and personnel and, if warranted by the business demands or opportunity, adding
locations.
We grow the business utilizing advertising and marketing initiatives to expand our presence while building an effective
marketing database of prospects and customers.
Seasonality
Our fiscal year ends on September 30. All references to quarters and years respectively in this document are to fiscal quarters and years
unless otherwise noted. The seasonal nature of our business results in the sale of approximately 30% of our volume of home heating oil and propane in the first fiscal quarter and 50% of our volume in the second fiscal quarter of each fiscal year,
the peak heating season. As a result, we generally realize net income in our first and second fiscal quarters and net losses during our third and fourth fiscal quarters and we expect that the negative impact of seasonality on our third and fourth
fiscal quarter operating results will continue. 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 multi-year average to see if a month or a
year was warmer or cooler than usual. Degree days are officially observed by the National Weather Service.
Every ten years, the National
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.
Competition
Most of our operating
locations compete with numerous distributors, primarily on the basis of price, reliability of service and response to customer needs. Each such location operates in its own competitive environment.
7
We compete with distributors offering a broad range of services and prices, from full-service
distributors, such as ourselves, to those offering delivery only. As do many companies in our business, we provide home heating and propane equipment repair service on a
24-hour-a-day,
seven-day-a-week,
52 weeks a year basis. We believe that this
level of service tends to help build customer loyalty. In some instances homeowners have formed buying cooperatives that seek a lower price than individual customers are otherwise able to obtain. Our business competes for retail customers with
suppliers of alternative energy products, principally natural gas, propane (in the case of our home heating oil operations) and electricity.
Customer
Attrition
We measure net customer attrition 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 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 and conversions to natural gas. (See Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations Customer Attrition.)
Customers and Pricing
Our full service home heating oil customer base is comprised of 97% residential customers and 3% commercial customers. Our residential
customer receives on average 164 gallons per delivery and our commercial accounts receive on average 322 gallons per delivery. Typically, we make four to six deliveries per customer per year. Approximately 96% of our full service residential and
commercial home heating oil customers have their deliveries scheduled automatically and 4% of our home heating oil customer base call from time to time to schedule a delivery. Automatic deliveries are scheduled based on each customers
historical consumption pattern and prevailing weather conditions. Our practice is to bill customers promptly after delivery. We also offer a balanced payment plan in which a customers estimated annual oil purchases and service contract fees
are paid for in a series of equal monthly payments. Approximately 34% of our residential home heating oil customers have selected this billing option.
We offer several pricing alternatives to our residential home heating oil customers. Our variable pricing program allows the price to float
with the home heating oil market and other factors. In addition, we offer price-protected programs, which establish either a ceiling or a fixed price per gallon that the customer pays over a defined period. The following chart depicts the percentage
of the pricing plans selected by our residential home heating oil customers as of the end of the fiscal year.
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September 30,
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2017
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2016
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2015
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2014
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2013
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Variable
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52.6
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%
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53.2
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%
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51.4
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%
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53.5
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%
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53.1
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%
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Ceiling
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37.1
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%
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40.8
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%
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43.9
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%
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40.8
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%
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42.3
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%
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Fixed
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10.3
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%(a)
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6.0
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%
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4.7
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%
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5.7
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%
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4.6
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%
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100.0
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%
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100.0
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%
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100.0
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%
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100.0
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%
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100.0
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%
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(a) Approximately 2% of the increase in the percentage of accounts under fixed contracts is attributable to fiscal 2017
acquisitions.
Sales to residential customers ordinarily generate higher per gallon margins than sales to commercial customers. Due to
greater price sensitivity, our own internal marketing efforts, and hedging costs of residential price-protected customers, the per gallon margins realized from price-protected customers generally are less than from variable priced residential
customers.
Derivatives
We use
derivative instruments in order to mitigate our exposure to market risk associated with the purchase of home heating oil for our price-protected customers, physical inventory on hand, inventory in transit and priced purchase commitments. Currently,
the Companys derivative instruments are with the following counterparties: Bank of America, N.A., Bank of Montreal, Cargill, Inc., Citibank, N.A., JPMorgan Chase Bank, N.A., Key Bank, N.A., Munich Re Trading LLC, Regions Financial Corporation,
Societe Generale, and Wells Fargo Bank, N.A.
8
The Financial Accounting Standards Board (FASB) Accounting Standards Codification
(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 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 derivative instruments as hedging instruments under this guidance, and as a result, the changes in fair value of the derivative instruments during the holding period 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. Depending on the risk being hedged, realized gains and losses are recorded in cost of product, cost of installations and services, or delivery and branch expenses.
Suppliers and Supply Arrangements
We
purchase our product for delivery in either barge, pipeline or truckload quantities, and as of September 30, 2017 had contracts with approximately 90 third-party terminal sites for the right to temporarily store petroleum products at their
facilities. Home heating oil and propane purchases are made under supply contracts or on the spot market. We have entered into market price based contracts for approximately 83% of our expected home heating oil and propane requirements for the
fiscal 2018 heating season. We also have market price based contracts for approximately 43% of our expected diesel and gasoline requirements for fiscal 2018.
During fiscal 2017, Global Companies LLC and NIC Holding Corp. provided approximately 13% and 8%, respectively, of our petroleum product
purchases. No other single supplier provided more than 8% of our product supply during fiscal 2017. For fiscal 2018, we generally have supply contracts for similar quantities with Global Companies LLC and NIC Holding Corp. Supply contracts typically
have terms of 6 to 12 months. All of the supply contracts provide for minimum quantities and in most cases do not establish in advance the price of home heating oil or propane. This price is based upon a published market index price at the time of
delivery or pricing date plus an agreed upon differential. We believe that our policy of contracting for the majority of our anticipated supply needs with diverse and reliable sources will enable us to obtain sufficient product should unforeseen
shortages develop in worldwide supplies.
Home Heating Oil Price Volatility
In recent years, the wholesale price of home heating oil has been extremely volatile, resulting in increased consumer sensitivity to heating
costs and possibly increased gross customer attrition. Like any other market commodity, the price of home heating oil is generally impacted by many factors, including economic and geopolitical forces. The price of home heating oil is closely linked
to the price refiners pay for crude oil, which is the principal cost component of home heating oil. The volatility in the wholesale cost of home heating oil, as measured by the New York Mercantile Exchange (NYMEX) price per gallon for
the fiscal years ended September 30, 2013 through 2017, on a quarterly basis, is illustrated by the following chart:
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Fiscal 2017 (2)
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Fiscal 2016
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Fiscal 2015
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Fiscal 2014
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Fiscal 2013 (1)
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Low
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High
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Low
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High
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Low
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High
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Low
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High
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Low
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High
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Quarter Ended
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December 31
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$
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1.39
|
|
|
$
|
1.70
|
|
|
$
|
1.08
|
|
|
$
|
1.61
|
|
|
$
|
1.85
|
|
|
$
|
2.66
|
|
|
$
|
2.84
|
|
|
$
|
3.12
|
|
|
$
|
2.90
|
|
|
$
|
3.26
|
|
March 31
|
|
|
1.49
|
|
|
|
1.70
|
|
|
|
0.87
|
|
|
|
1.26
|
|
|
|
1.62
|
|
|
|
2.30
|
|
|
|
2.89
|
|
|
|
3.28
|
|
|
|
2.86
|
|
|
|
3.24
|
|
June 30
|
|
|
1.37
|
|
|
|
1.65
|
|
|
|
1.08
|
|
|
|
1.57
|
|
|
|
1.68
|
|
|
|
2.02
|
|
|
|
2.85
|
|
|
|
3.05
|
|
|
|
2.74
|
|
|
|
3.09
|
|
September 30
|
|
|
1.45
|
|
|
|
1.86
|
|
|
|
1.26
|
|
|
|
1.53
|
|
|
|
1.38
|
|
|
|
1.84
|
|
|
|
2.65
|
|
|
|
2.98
|
|
|
|
2.87
|
|
|
|
3.21
|
|
(1)
|
Beginning April 1, 2013, the NYMEX contract specifications were changed from high sulfur home heating oil to ultra low sulfur diesel. Ultra low sulfur diesel is similar in composition to ultra low sulfur home
heating oil.
|
(2)
|
On November 30, 2017, the NYMEX ultra low sulfur diesel contract closed at $1.89 per gallon or $0.31 per gallon higher than the average of $1.58 in Fiscal 2017.
|
9
Acquisitions
Part of our business strategy is to pursue select acquisitions. During fiscal 2017, the Company acquired four home heating oil dealers, two
propane dealers and a plumbing service provider with a total of 28,300 home heating oil and propane accounts for an aggregate purchase price of approximately $44.8 million; comprised of $43.3 million in cash and $1.5 million of
deferred liabilities (including $0.6 million of contingent consideration). The gross purchase price was allocated $37.5 million to intangible assets, $10.2 million to fixed assets and reduced by $2.9 million in working capital
credits. Each acquired companys operating results are included in the Companys consolidated financial statements starting on its acquisition date. Customer lists, other intangibles and trade names are amortized on a straight-line basis
over seven to twenty years.
During fiscal 2016, we acquired a heating oil dealer, a motor fuel dealer, and two propane dealers with a
total of 3,300 home heating oil and propane accounts for an aggregate purchase price of approximately $9.8 million. The gross purchase price was allocated $7.4 million to intangible assets, $2.5 million to fixed assets and reduced by
$0.1 million for working capital credits.
During fiscal 2015, we acquired three heating oil and propane dealers (with one dealer
also having motor fuel accounts) with a total of 23,300 home heating oil and propane accounts for an aggregate purchase price of approximately $20.8 million. The gross purchase price was allocated $21.8 million to intangible assets,
$2.5 million to fixed assets and reduced by $3.5 million for working capital credits.
Employees
As of September 30, 2017, we had 3,362 employees, of whom 839 were office, clerical and customer service personnel; 947 were equipment
technicians; 563 were fuel delivery drivers and mechanics; 616 were management and 397 were employed in sales. Of these employees 1,451 (43%) are represented by 61 different collective bargaining agreements with local chapters of labor unions. Due
to the seasonal nature of our business and depending on the demands of the 2018 heating season, we anticipate that we will augment our current staffing levels during the heating season from among the 345 employees on temporary leave of absence as of
September 30, 2017. There are 21 collective bargaining agreements up for renewal in fiscal 2018, covering approximately 381 employees (11%). We believe that our relations with both our union and
non-union
employees are generally satisfactory.
Government Regulations
We are subject to various federal, state and local environmental, health and safety laws and regulations. Generally, these laws impose
limitations on the discharge or emission of pollutants and establish standards for the handling of solid and hazardous wastes. These laws include the Resource Conservation and Recovery Act, the Comprehensive Environmental Response, Compensation and
Liability Act (CERCLA), the Clean Air Act, the Occupational Safety and Health Act, the Emergency Planning and Community Right to Know Act, the Clean Water Act, the Oil Pollution Act, and comparable state statutes. CERCLA, also known as
the Superfund law, imposes joint and several liabilities without regard to fault or the legality of the original conduct on certain classes of persons that are considered to have contributed to the release or threatened release of a
hazardous substance into the environment. Products stored and/or delivered by us and certain automotive waste products generated by our fleet are hazardous substances within the meaning of CERCLA or otherwise subject to investigation and cleanup
under other environmental laws and regulations. While we are currently not involved with any material CERCLA claims, and we have implemented programs and policies designed to address potential liabilities and costs under applicable environmental
laws and regulations, failure to comply with such laws and regulations could result in civil or criminal penalties or injunctive relief in cases of
non-compliance
or impose liability for remediation costs.
We have incurred and continue to incur costs to address soil and groundwater contamination at some of our locations, including legacy
contamination at properties that we have acquired. A number of our properties are currently undergoing remediation, in some instances funded by prior owners or operators contractually obligated to do so. To date, no material issues have arisen with
respect to such prior owners or operators addressing such remediation, although there is no assurance that this will continue to be the case. In addition, we have been subject to proceedings by regulatory authorities for alleged violations of
environmental and safety laws and regulations. We do not expect any of these liabilities or proceedings of which we are aware to result in material costs to, or disruptions of, our business or operations.
10
Transportation of our products by truck are subject to regulations promulgated under the Federal
Motor Carrier Safety Act. These regulations cover the transportation of hazardous materials and are administered by the United States Department of Transportation or similar state agencies. Several of our oil terminals are governed under the United
States Coast Guard operations Oversite, Federal OPA 90 FRP programs and Federal Spill Prevention Control and Countermeasure programs. All of our propane bulk terminals are governed under Homeland Security Chemical Facility Anti-Terrorism Standards
programs. We conduct ongoing training programs to help ensure that our operations are in compliance with applicable regulations. We maintain various permits that are necessary to operate some of our facilities, some of which may be material to our
operations.
You should consider carefully the risk factors
discussed below, as well as all other information, as an investment in the Company involves a high degree of risk. We are subject to certain risks and hazards due to the nature of the business activities we conduct. The risks discussed below, any of
which could materially and adversely affect our business, financial condition, cash flows, and results of operations, could result in a partial or total loss of your investment, and are not the only risks we face. We may experience additional risks
and uncertainties not currently known to us or, as a result of developments occurring in the future, conditions that we currently deem to be immaterial may also materially and adversely affect our business, financial condition, cash flows and
results of operations.
Our operating results will be adversely affected if we continue to experience significant net customer attrition in our
home heating oil and propane customer base.
The following table depicts our gross customer gains, gross customer losses and net
customer attrition from fiscal year 2013 to fiscal year 2017. 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 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Gross customer gains
|
|
|
13.1
|
%
|
|
|
12.1
|
%
|
|
|
14.6
|
%
|
|
|
16.0
|
%
|
|
|
14.8
|
%
|
Gross customer losses
|
|
|
14.6
|
%
|
|
|
17.2
|
%
|
|
|
16.4
|
%
|
|
|
16.9
|
%
|
|
|
18.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net attrition
|
|
|
(1.5
|
%)
|
|
|
(5.1
|
%)
|
|
|
(1.8
|
%)
|
|
|
(0.9
|
%)
|
|
|
(3.3
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The gain of a new customer does not fully compensate for the loss of an existing customer because of the
expenses incurred during the first year to add a new customer. Typically, the per gallon margin realized from a new account added is less than the margin of a customer that switches to another provider. Customer losses are the result of various
factors, including but not limited to:
|
|
|
customer relocations and home sales/foreclosures;
|
|
|
|
conversions to natural gas; and
|
The continuing volatility in the energy markets can intensify price
competition and add to our difficulty in reducing net customer attrition. Warmer than normal weather can also contribute to an increase in attrition as customers perceive less need for a full service provider like ourselves.
11
If we are not able to reduce the current level of net customer attrition or if such level should
increase, attrition will have a material adverse effect on our business, operating results and cash available for distributions to unitholders. For additional information about customer attrition, see Item 7 Managements Discussion
and Analysis of Financial Condition and Results of Operations Customer Attrition.
Because of the highly competitive nature of our
business, we may not be able to retain existing customers or acquire new customers, which would have an adverse impact on our business, operating results and financial condition.
Our business is subject to substantial competition. Most of our operating locations compete with numerous distributors, primarily on the basis
of price, reliability of service and responsiveness to customer service needs. Each operating location operates in its own competitive environment.
We compete with distributors offering a broad range of services and prices, from full-service distributors, such as ourselves, to those
offering delivery only. As do many companies in our business, we provide home heating equipment repair service on a
24-hour-a-day,
seven-day-a-week,
52 weeks a year basis. We believe that this tends to build customer loyalty. In some instances homeowners have
formed buying cooperatives that seek to purchase home heating oil from distributors at a price lower than individual customers are otherwise able to obtain. We also compete for retail customers with suppliers of alternative energy products,
principally natural gas, propane (in the case of our home heating oil operations) and electricity. If we are unable to compete effectively, we may lose existing customers and/or fail to acquire new customers, which would have a material adverse
effect on our business, operating results and financial condition.
Based on data in the 2010 United States Census, from 2000 to 2010 it
appears that heating oil customer conversions to natural gas in the states where we do business averaged from under 1% to over 3% per year.
The following table depicts our estimated customer losses to natural gas conversions for the last five fiscal years. Losses to natural gas in
our footprint for the home heating oil industry could be greater or less than our estimates. We believe conversions will continue as natural gas has become less expensive than home heating oil on an equivalent BTU basis. In addition, certain states
encourage homeowners to expand the use of natural gas as a heating fuel through legislation and regulatory efforts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Customer losses to natural gas conversion
|
|
|
(1.2
|
)%
|
|
|
(1.3
|
)%
|
|
|
(1.6
|
)%
|
|
|
(2.2
|
)%
|
|
|
(2.4
|
)%
|
In addition to our direct customer losses to natural gas competition, any conversion to natural gas by a
heating oil consumer in our geographic footprint reduces the pool of available customers from which we can gain new heating oil customers, and could have a material adverse effect on our business, operating results and financial condition.
Energy efficiency and new technology may reduce the demand for our products and adversely affect our operating results.
Increased conservation and technological advances, including installation of improved insulation and the development of more efficient furnaces
and other heating devices, have adversely affected the demand for our products by retail customers. Future conservation measures or technological advances in heating, conservation, energy generation or other devices might reduce demand and adversely
affect our operating results.
12
If we do not make acquisitions on economically acceptable terms, our future growth will be limited.
Generally, heating oil and propane are alternative energy sources to new housing construction, because natural gas is usually selected when
natural gas infrastructure exists. In certain geographies, utilities are building out their natural gas infrastructure. As such, our industry is not a growth industry. Accordingly, future growth will depend on our ability to make acquisitions on
economically acceptable terms. We cannot assure that we will be able to identify attractive acquisition candidates in our sector in the future or that we will be able to acquire businesses on economically acceptable terms. Factors that may adversely
affect our operating and financial results may limit our access to capital and adversely affect our ability to make acquisitions. Under the terms of our third amended and restated credit agreement that we sometimes refer to in this Report as our
credit agreement, we are restricted from making any individual acquisition in excess of $25.0 million without the lenders approval. In addition, to make an acquisition, we are required to have Availability (as defined in our credit
agreement) of at least $40.0 million, on a historical pro forma and forward-looking basis. Furthermore, as long as the bank term loan is outstanding, we must be in compliance with the senior secured leverage ratio (as defined in our credit
agreement). These covenant restrictions may limit our ability to make acquisitions. Any acquisition may involve potential risks to us and ultimately to our unitholders, including:
|
|
|
an increase in our indebtedness;
|
|
|
|
an increase in our working capital requirements;
|
|
|
|
an inability to integrate the operations of the acquired business;
|
|
|
|
an inability to successfully expand our operations into new territories;
|
|
|
|
the diversion of managements attention from other business concerns;
|
|
|
|
an excess of customer loss from the acquired business;
|
|
|
|
loss of key employees from the acquired business; and
|
|
|
|
the assumption of additional liabilities including environmental liabilities.
|
In addition,
acquisitions may be dilutive to earnings and distributions to unitholders, and any additional debt incurred to finance acquisitions may, among other things, affect our ability to make distributions to our unitholders.
High product prices can lead to customer conservation and attrition, resulting in reduced demand for our products.
Prices for our products are subject to volatile fluctuations in response to changes in supply and other market conditions. During periods of
high product costs our prices generally increase. High prices can lead to customer conservation and attrition, resulting in reduced demand for our products.
A significant portion of our home heating oil volume is sold to price-protected customers (ceiling and fixed) and our gross margins could be adversely
affected if we are not able to effectively hedge against fluctuations in the volume and cost of product sold to these customers.
A
significant portion of our home heating oil volume is sold to individual customers under an arrangement
pre-establishing
the ceiling sales price or a fixed price of home heating oil over a fixed period. When
the customer makes a purchase commitment for the next period we currently purchase option contracts, swaps and futures contracts for a substantial majority of the heating oil that we expect to sell to these price-protected 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. If the actual usage exceeds the amount of the hedged volume on a monthly basis, we could be required to
obtain additional volume at unfavorable margins. In addition, should actual usage in any month be less than the hedged volume, (including, for example, as a result of early terminations by fixed price customers) our hedging losses could be greater.
Currently, we have elected not to designate our derivative instruments as hedging instruments under FASB ASC
815-10-05
Derivatives and Hedging, and the change in fair
value of the derivative instruments is recognized in our statement of operations. Therefore, we experience volatility in earnings as these currently outstanding derivative contracts are marked to market and
non-cash
gains or losses are recorded in the statement of operations.
13
Our risk management policies cannot eliminate all commodity risk, basis risk, or the impact of adverse market
conditions which can adversely affect our financial condition, results of operations and cash available for distribution to our unitholders. In addition, any noncompliance with our risk management policies could result in significant financial
losses.
While our hedging policies are designed to minimize commodity risk, some degree of exposure to unforeseen fluctuations in
market conditions remains. For example, we change our hedged position daily in response to movements in our inventory. Any difference between the estimated future sales from inventory and actual sales will create a mismatch between the amount of
inventory and the hedges against that inventory, and thus change the commodity risk position that we are trying to maintain. Also, significant increases in the costs of the products we sell can materially increase our costs to carry inventory. We
use our revolving credit facility as our primary source of financing to carry inventory and may be limited on the amounts we can borrow to carry inventory. Basis risk describes the inherent market price risk created when a commodity of certain grade
or location is purchased, sold or exchanged as compared to a purchase, sale or exchange of a like commodity at a different time or place. Transportation costs and timing differentials are components of basis risk. For example, we use the NYMEX to
hedge our commodity risk with respect to pricing of energy products traded on the NYMEX. Physical deliveries under NYMEX contracts are made in New York Harbor. To the extent we take deliveries in other ports, such as Boston Harbor, we may have basis
risk. In a backward market (when prices for future deliveries are lower than current prices), basis risk is created with respect to timing. In these instances, physical inventory generally loses value as basis declines over time. Basis risk cannot
be entirely eliminated, and basis exposure, particularly in backward or other adverse market conditions, can adversely affect our financial condition, results of operations and cash available for distribution to our unitholders.
We monitor processes and procedures to reduce the risk of unauthorized trading and to maintain substantial balance between purchases and sales
or future delivery obligations. We can provide no assurance, however, that these steps will detect and/or prevent all violations of such risk management policies and procedures, particularly if deception or other intentional misconduct is involved.
Since weather conditions may adversely affect the demand for home heating oil and propane, our business, operating results and financial condition are
vulnerable to warm winters.
Weather conditions in the Northeast and
Mid-Atlantic
regions in
which we operate have a significant impact on the demand for home heating oil and propane because our customers depend on this product principally for space heating purposes. As a result, weather conditions may materially adversely impact our
business, operating results and financial condition. During the peak-heating season of October through March, sales of home heating oil and propane historically have represented approximately 80% of our annual oil volume. Actual weather conditions
can vary substantially from year to year or from month to month, significantly affecting our financial performance. Warmer than normal temperatures in one or more regions in which we operate can significantly decrease the total volume we sell and
the gross profit realized and, consequently, our results of operations. In fiscal years 2017, 2016, 2012 and 2002 temperatures were significantly warmer than normal for the areas in which we sell our products, which adversely affected the amount of
net income, EBITDA and Adjusted EBITDA that we generated during these periods.
To partially mitigate the adverse effect of warm weather
on cash flows, we have used weather hedge contracts for a number of years. In general, such weather hedge contracts provide that we are entitled to receive a specific payment per heating
degree-day
shortfall,
when the total number of heating degree-days in the hedge period is less than the ten year average. The payment thresholds, or strikes, are set at various levels. The hedge period runs from November 1, through March 31, of a
fiscal year taken as a whole.
For fiscal year 2018 and 2019 we have weather hedge contracts with several providers. For fiscal year 2018
the maximum that the Company can receive is $17.5 million and the maximum the Company can pay is $5.0 million. For fiscal year 2019 the maximum that the Company can receive is $12.5 million and the maximum the Company can pay is $5.0 million.
However, there can be no assurance that such weather hedge contract would fully or substantially offset the adverse effects of warmer weather on our business and operating results during such period.
14
Failure to effectively estimate employer-sponsored health insurance premiums and incremental costs due to the
U.S. Patient Protection and Affordable Care Act (the ACA) or other healthcare reform laws could materially and adversely affect the Companys financial condition, results of operations, and cash flows.
In March 2010, the United States federal government enacted comprehensive health care reform legislation, which, among other things, includes
guaranteed coverage requirements, eliminates
pre-existing
condition exclusions and annual and lifetime maximum limits, restricts the extent to which policies can be rescinded, and imposes new taxes on health
insurers, self-insured companies, and health care benefits. The legislation imposes implementation effective dates that began in 2010 and extend through 2020 with many of the changes requiring additional guidance from federal agencies and
regulations. Possible adverse effects could include increased costs, exposure to expanded liability, and requirements for us to revise the ways in which healthcare and other benefits are provided to employees. Efforts to modify, repeal or otherwise
invalidate all, or certain provisions of, the ACA and/or adopt a replacement healthcare reform law may impact our employee healthcare costs. At this time, there is uncertainty concerning whether the ACA will be repealed or what requirements will be
included in a new law, if enacted. Increased health care and insurance costs as well as other changes in federal or state workplace regulations could have a material adverse effect on our business, financial condition, results of operations and cash
flows.
Our obligation to fund multi-employer pension plans to which we contribute may have an adverse impact on us.
We participate in a number of multi-employer pension plans for current and former union employees covered under collective bargaining
agreements. The risks of participating in multi-employer plans are different from single-employer plans in that assets contributed are pooled and may be used to provide benefits to current and former employees of other participating employers.
Several factors could require us to make significantly higher future contributions to these plans, including the funding status of the plan, unfavorable investment performance, insolvency or withdrawal of participating employers, changes in
demographics and increased benefits to participants. Several of these multi-employer plans to which we contribute are underfunded, meaning that the value of such plans assets are less than the actuarial value of the plans benefit
obligations.
We may be subject to additional liabilities imposed by law as a result of our participation in multi-employer defined
benefit pension plans. Various Federal laws impose certain liabilities upon an employer who is a contributor to a multi-employer pension plan if the employer withdraws from the plan or the plan is terminated or experiences a mass withdrawal,
potentially including an allocable share of the unfunded vested benefits in the plan for all plan participants, not just our retirees. Accordingly, we could be assessed our share of unfunded liabilities should we terminate participation in these
plans, or should there be a mass withdrawal from these plans, or if the plans become insolvent or otherwise terminate.
While we currently
have no intention of permanently terminating our participation in or otherwise withdrawing from any underfunded multi-employer pension plan, there can be no assurance that we will not be required to record material withdrawal liabilities or be
required to make material cash contributions in the future to one or more underfunded plans, whether as a result of withdrawing from a plan, or of agreeing to any alternate funding option, or due to any of the other risks associated with being a
participating employer in an underfunded plan. Any of these events could negatively impact our liquidity and financial results.
We rely on the
continued solvency of our derivatives, insurance and weather hedge counterparties.
If counterparties to the derivative instruments
that we use to hedge the cost of home heating oil sold to price-protected customers, physical inventory and our vehicle fuel costs were to fail, our liquidity, operating results and financial condition could be materially adversely impacted, as we
would be obligated to fulfill our operational requirement of purchasing, storing and selling home heating oil and vehicle fuel, while losing the mitigating benefits of economic hedges with a failed counterparty. If one of our insurance carriers were
to fail, our liquidity, results of operations and financial condition could be materially adversely impacted, as we would have to fund any catastrophic loss. If our weather hedge counterparty were to fail, we would lose the protection of our weather
hedge contract. Currently, we have outstanding derivative instruments with the following counterparties: Bank of America, N.A., Bank of Montreal, Cargill, Inc., Citibank, N.A., JPMorgan Chase Bank, N.A., Key Bank, N.A., Munich Re Trading LLC,
Regions Financial Corporation, Societe Generale, and Wells Fargo Bank, N.A. Our primary insurance carriers are American International Group, Federated Mutual Insurance Company, our captive insurance subsidiary, Woodbury Insurance Co., Inc., and our
weather hedge counterparties which are subsidiaries of Swiss Re and Endurance Specialty Insurance Ltd.
15
Our operating results are subject to seasonal fluctuations.
Our operating results are subject to seasonal fluctuations since the demand for home heating oil and propane is greater during the first and
second fiscal quarter of our fiscal year, which is the peak heating season. The seasonal nature of our business has resulted on average in the last five years in the sale of approximately 30% of our volume of home heating oil and propane in the
first fiscal quarter and 50% of our volume in the second fiscal quarter of each fiscal year. As a result, we generally realize net income in our first and second fiscal quarters and net losses during our third and fourth fiscal quarters and we
expect that the negative impact of seasonality on our third and fourth fiscal quarter operating results will continue. Thus any material reduction in the profitability of the first and second quarters for any reason, including warmer than normal
weather, generally cannot be made up by any significant profitability improvements in the results of the third and fourth quarters.
Increases in
wholesale product costs may have adverse effects on our business, financial condition and results of operations.
Increases in
wholesale product costs may have adverse effects on our business, financial condition and results of operations, including the following:
|
|
|
customer conservation or attrition due to customers converting to lower cost heating products or suppliers;
|
|
|
|
reduced liquidity as a result of higher receivables, and/or inventory balances as we must fund a portion of any increase in receivables, inventory and hedging costs from our own resources, thereby tying up funds that
would otherwise be available for other purposes;
|
|
|
|
higher bad debt expense and credit card processing costs as a result of higher selling prices;
|
|
|
|
higher interest expense as a result of increased working capital borrowing to finance higher receivables and/or inventory balances; and
|
|
|
|
higher vehicle fuel costs.
|
Volatility in wholesale energy costs may adversely affect our liquidity.
Our business requires a significant amount of working capital to finance accounts receivable and inventory during the heating season.
Under our revolving credit facility, we may borrow up to $300 million, which increases to $450 million during the peak winter months from December through April of each fiscal year. We are obligated to meet certain financial covenants
under our credit agreement, including the requirement to maintain at all times either excess availability (borrowing base less amounts borrowed and letters of credit issued) of 12.5% of the revolving credit commitment then in effect or a fixed
charge coverage ratio (as defined in our credit agreement) of not less than 1.1. In addition, as long as our term loan is outstanding, our senior secured leverage ratio cannot at any time be more than 3.0 as calculated during the quarters ending
June or September, and cannot at any time be more than 4.5 as calculated during the quarters ending December or March.
If increases in
wholesale product costs cause our working capital requirements to exceed the amounts available under our revolving credit facility or should we fail to maintain the required availability or fixed charge coverage ratio, we would not have sufficient
working capital to operate our business, which could have a material adverse effect on our financial condition and results of operations.
We purchase synthetic call options from and enter into forward swaps with members of our lending group to manage market risk associated with
our commitments to our customers, our physical inventory and fuel we use for our vehicles. These institutions have not required an initial cash margin deposit or any mark to market maintenance margin for these derivatives. Any mark to market
exposure reduces our borrowing base and can thus reduce the amount available to us under our credit agreement. The highest mark to market reserve against our borrowing base for these derivative instruments with our lending group was
$7.8 million, $25.2 million, and $28.9 million, during fiscal years 2017, 2016, and 2015, respectively.
We also purchase
call options to hedge the price of the products to be sold to our price-protected customers which usually require us to pay an upfront cash payment. This reduces our liquidity, as we must pay for the option before any sales are made to the customer.
We also purchase synthetic call options which require us to pay for these options as they expire.
16
For certain of our supply contracts, we are required to establish the purchase price in advance
of receiving the physical product. This occurs at the end of the month and is usually 20 days prior to receipt of the product. We use futures contracts or swaps to short the purchase commitment such that the commitment floats with the
market. As a result, any upward movement in the market for home heating oil would reduce our liquidity, as we would be required to post additional cash collateral for a futures contract or our availability to borrow under our credit agreement would
be reduced in the case of a swap.
At December 31, 2017, we expect to have approximately 30 million gallons of priced purchase
commitments and physical inventory hedged with a futures contract or swap. If the wholesale price of heating oil increased $1.00 per gallon, our near term liquidity in December would be reduced by $30 million.
At September 30, 2017, we had approximately 131,000 customers, or 34% of our residential customer base, on the balanced payment plan in
which a customers estimated annual oil purchases and service contract fees are paid for in a series of equal monthly payments. Volatility in wholesale prices could reduce our liquidity if we failed to recalculate the balanced payments on a
timely basis or if customers resist higher balanced payments. These customers could possibly owe us more in the future than we had budgeted. Generally, customer credit balances are at their low point after the end of the heating season and at their
peak prior to the beginning of the heating season.
Sudden and sharp oil price increases that cannot be passed on to customers may adversely affect our
operating results.
Our industry is a margin-based business in which gross profit depends on the excess of sales prices per
gallon over supply costs per gallon. Consequently, our profitability is sensitive to changes in the wholesale product cost caused by changes in supply or other market conditions. These factors are beyond our control and thus, when there are sudden
and sharp increases in the wholesale cost of home heating oil, we may not be able to pass on these increases to customers through increased retail sales prices. In an effort to retain existing accounts and attract new customers we may offer
discounts, which will impact the net per gallon gross margin realized.
Significant declines in the wholesale price of home heating oil may cause
price-protected customers to renegotiate or terminate their arrangements which may adversely impact our gross profit and operating results.
When the wholesale price of home heating oil declines significantly after a customer enters into a price protection arrangement, some customers
attempt to renegotiate their arrangement in order to enter into a lower cost pricing plan with us or terminate their arrangement and switch to a competitor. As a result of significant decreases in the price of home heating oil following the summer
of 2008, many price-protected customers attempted to renegotiate their agreements with us in fiscal 2009. It is our policy to bill a termination fee when customers terminate their arrangement with us. We believe that approximately 10,000 customers
terminated their relationship with us as a result of being billed the termination fee in fiscal 2009. Under our current price-protected programs, approximately 37% and 10% of our residential customers are respectively categorized as being either
ceiling or fixed.
Economic conditions could adversely affect our results of operations and financial condition.
Uncertainty about economic conditions poses a risk as our customers may reduce or postpone spending in response to tighter credit, negative
financial news and/or declines in income or asset values, which could have a material negative effect on the demand for our equipment and services and could lead to increased conservation, as we have seen certain of our customers seek lower cost
providers. Any increase in existing customers or potential new customers seeking lower cost providers and/or increase in our rejection rate of potential accounts because of credit considerations could increase our overall rate of net customer
attrition. In addition, we could experience an increase in bad debts from financially distressed customers, which would have a negative effect on our liquidity, results of operations and financial condition.
17
We are subject to operating and litigation risks that could adversely affect our operating results whether or
not covered by insurance.
Our operations are subject to all operating hazards and risks normally incidental to handling, storing,
transporting and otherwise providing customers with our products such as natural disasters, adverse weather, accidents, fires, explosions, hazardous materials releases, mechanical failures and other events beyond our control. If any of these events
were to occur, we could incur substantial losses because of personal injury or loss of life, severe damage to and destruction of property and equipment, and pollution or other environmental damage resulting in curtailment or suspension of our
related operations. As a result, we may be a defendant in legal proceedings and litigation arising in the ordinary course of business. The Company records a liability when it is probable that a loss has been incurred and the amount is reasonably
estimable.
As we self-insure workers compensation, automobile and general liability claims up to
pre-established
limits, we establish reserves based upon expectations as to what our ultimate liability will be for claims based on our historical factors. We evaluate on an annual basis the potential for
changes in loss estimates with the support of qualified actuaries. As of September 30, 2017, we had approximately $63.9 million of net insurance reserves. Other than matters for which we self-insure, we maintain insurance policies with
insurers in amounts and with coverage and deductibles that we believe are reasonable and prudent.
However, there can be no assurance that
the ultimate settlement of these claims will not differ materially from the assumptions used to calculate the reserves or that the insurance we maintain will be adequate to protect us from all material expenses related to potential future claims for
remediation costs and personal and property damage or that these levels of insurance will be available in the future at economical prices, either of which could have a material effect on our results of operations. Further, certain types of claims
may be excluded from our insurance coverage. If we were to incur substantial liability and the damages are not covered by insurance or are in excess of policy limits, or if we incur liability at a time when we are not able to obtain liability
insurance, then our business, results of operations and financial condition could be materially adversely affected.
Our captive insurance company may
not bring the benefits we expect.
Beginning October 1, 2016, we have elected to insure through a wholly-owned captive insurance
company, Woodbury Insurance Co., Inc., certain self insured or deductible amounts. We continue to maintain our normal, historical, insurance policies with third party insurers. In addition to certain business and operating benefits of having a
captive insurance company, we expect to receive certain cash flow benefits related to the timing of the tax deduction related to these claims. Such expected cash tax timing benefits related to coverage provided by Woodbury Insurance Co., Inc. may
not materialize, or any cash tax savings may not be as much as anticipated.
Our results of operations and financial condition may be adversely
affected by governmental regulation and associated environmental and regulatory costs.
Our business is subject to a wide range of
federal, state and local laws and regulations related to environmental and other matters. Such laws and regulations have become increasingly stringent over time. Some state and local governments have enacted or are attempting to enact regulations
and incentive programs encouraging the
phase-out
of the products that we sell in favor other types of fuels, such as natural gas. We may experience increased costs due to stricter pollution control
requirements or liabilities resulting from noncompliance with operating or other regulatory permits. New regulations might adversely impact operations, including those relating to underground storage, transportation and delivery of the products that
we sell. In addition, there are environmental risks inherently associated with home heating oil operations, such as the risks of accidental releases or spills. We have incurred and continue to incur costs to remediate soil and groundwater
contamination at some of our locations. We cannot be sure that we have identified all such contamination, that we know the full extent of our obligations with respect to contamination of which we are aware, or that we will not become responsible for
additional contamination not yet discovered. It is possible that material costs and liabilities will be incurred, including those relating to claims for damages to property and persons.
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In addition, our financial condition, results of operations and ability to pay distributions to
our unitholders may be negatively impacted by significant changes in federal and state tax law. For example, an increase in federal and state income tax rates will reduce the amount of cash to pay distributions.
There is increasing attention in the United States and worldwide concerning the issue of climate change and the effect of emissions of
greenhouse gases (GHG), in particular from the combustion of fossil fuels. Federal, regional and state regulatory authorities in many jurisdictions have begun taking steps to regulate GHG emissions. For example in October 2015, the
United States Environmental Protection Agency (EPA) issued its final Clean Power Plan for regulation of GHG emissions. Under the Clean Power Plan, the EPA will set state-specific goals for GHG emissions reductions, leaving
the states with flexibility to determine how to achieve such goals. The Clean Power Plan is currently the subject of multiple judicial challenges and it is unclear what, if any, effect the results of the 2016 elections will have on the Clean Power
Plan. But even if the Clean Power Plan is ultimately upheld by the courts, it is too early to predict how the states where we operate or from which we obtain our products will elect to control GHG emissions. Further, irrespective of federal
legislation and regulation, individual states or cities may enact laws and regulations controlling GHG emissions. It is likely that any regulatory program that caps emissions or imposes a carbon tax will increase costs for us and our customers,
which could lead to increased conservation or customers seeking lower cost alternatives. We cannot yet estimate the compliance costs or business impact of potential national, regional or state greenhouse gas emissions reduction legislation,
regulations or initiatives, since many such programs and proposals are still in development.
Our operations would be adversely affected if service at
our third-party terminals or on the common carrier pipelines used is interrupted.
The products that we sell are transported in either
barge, pipeline or in truckload quantities to third-party terminals where we have contracts to temporarily store our products. Any significant interruption in the service of these third-party terminals or on the common carrier pipelines used would
adversely affect our ability to obtain product.
The risk of global terrorism and political unrest may adversely affect the economy and the price and
availability of the products that we sell and have a material adverse effect on our business, financial condition and results of operations.
Terrorist attacks and political unrest may adversely impact the price and availability of the products that we sell, our results of operations,
our ability to raise capital and our future growth. The impact that the foregoing may have on our industry in general, and on our business in particular, is not known at this time. An act of terror could result in disruptions of crude oil supplies,
markets and facilities, and the source of the products that we sell could be direct or indirect targets. Terrorist activity may also hinder our ability to transport our products if our normal means of transportation become damaged as a result of an
attack. Instability in the financial markets as a result of terrorism could also affect our ability to raise capital. Terrorist activity could likely lead to increased volatility in the prices of our products.
The impact of hurricanes and other natural disasters could cause disruptions in supply and could also reduce the demand for the products that we sell,
which would have a material adverse effect on our business, financial condition and results of operations.
Hurricanes and other
natural disasters may cause disruptions in the supply chains for the products that we sell. Disruptions in supply could have a material adverse effect on our business, financial condition and results of operations, causing an increase in wholesale
prices and a decrease in supply. Hurricanes and other natural disasters could also cause disruptions in the power grid, which could prevent our customers from operating their home heating oil systems, thereby reducing our sales. For example, on
October 29, 2012, storm Sandy made landfall in our service area, resulting in widespread power outages that affected a number of our customers. Deliveries of home heating oil and propane were less than expected for certain of our customers who
were without power for several weeks subsequent to storm Sandy.
19
We depend on the use of information technology systems that could fail or be the target of cyber-attacks.
Our systems and networks are maintained internally and by third-party vendors, and their failure could significantly impede
operations. In addition, our systems and networks, as well as those of our vendors, banks and counterparties, may receive and store personal/business information in connection with human resources operations, customer offerings, and other aspects of
our business. A cyber-attack or material network breach in the security of these systems could include the theft of proprietary information or employee and customer information, as well as disrupt our operations or damage our facilities or those of
third parties. This could have a material adverse effect on our revenues and increase our operating and capital costs, which could reduce the amount of cash otherwise available for distribution. To the extent that any disruption or security breach
results in a loss or damage to the Companys data, or an inappropriate disclosure of confidential or customer or employee information, it could cause significant damage to the Companys reputation, affect relationships with its customers
and employees, lead to claims against the Company, and ultimately harm our business. In addition, we may be required to incur additional costs to modify, remediate and protect against damage caused by these disruptions or security breaches in the
future.
If we fail to maintain an effective system of internal controls, then we may not be able to accurately report our financial results or prevent
fraud. As a result, current and potential unitholders could lose confidence in our financial reporting, which would harm our business and the trading price of our common units.
Effective internal controls are necessary for us to provide reliable financial reports, prevent fraud and operate successfully as a public
company. We may experience difficulties in implementing effective internal controls as part of our integration of acquisitions from private companies, which are not subject to the internal control requirements imposed on public companies. If we are
unable to maintain adequate controls over our financial processes and reporting in the future or if the businesses we acquire have ineffective internal controls, our operating results could be harmed or we may fail to meet our reporting obligations.
Ineffective internal controls over financial reporting could cause our unitholders to lose confidence in our reported financial information, which would likely have a negative effect on the trading price of our common units.
Conflicts of interest have arisen and could arise in the future.
Conflicts of interest have arisen and could arise in the future as a result of relationships between the general partner and its affiliates, on
the one hand, and us or any of our limited partners, on the other hand. As a result of these conflicts the general partner may favor its own interests and those of its affiliates over the interests of the unitholders. The nature of these conflicts
is ongoing and includes the following considerations:
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The general partners affiliates are not prohibited from engaging in other business or activities, including direct competition with us.
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The general partner determines the amount and timing of asset purchases and sales, capital expenditures, borrowings and reserves, each of which can impact the amount of cash, if any, available for distribution to
unitholders, and available to pay principal and interest on debt and the amount of incentive distributions payable in respect of the general partner units.
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The general partner controls the enforcement of obligations owed to us by the general partner.
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The general partner decides whether to retain its counsel or engage separate counsel to perform services for us.
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In some instances the general partner may borrow funds in order to permit the payment of distributions to unitholders.
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The general partner may limit its liability and reduce its fiduciary duties, while also restricting the remedies available to unitholders for actions that might, without limitations, constitute breaches of fiduciary
duty.
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Unitholders are deemed to have consented to some actions and conflicts of interest that might otherwise be deemed a breach of fiduciary or other duties under applicable state law.
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The general partner is allowed to take into account the interests of parties in addition to the Company in resolving conflicts of interest, thereby limiting its fiduciary duty to the unitholders.
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The general partner determines whether to issue additional units or other of our securities.
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The general partner determines which costs are reimbursable by us.
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The general partner is not restricted from causing us to pay the general partner or its affiliates for any services rendered on terms that are fair and reasonable to us or entering into additional contractual
arrangements with any of these entities on our behalf.
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We could experience significant increases in operating costs and reduced
profitability due to competition for drivers and servicemen labor.
We compete with other entities for
drivers and servicemen labor, including entities that operate in different market sectors than us. Costs to recruit and retain adequate personnel, the loss of certain personnel, our inability to attract and retain other
qualified personnel or a labor shortage that reduces the pool of qualified candidates could adversely affect our results of operations.
A substantial portion of our workforce is unionized, and we may face labor actions that could disrupt our operations or lead to higher labor costs and
adversely affect our business.
As of September 30, 2017, approximately 43% of our employees were covered under 61 different
collective bargaining agreements. As a result, we are usually involved in union negotiations with several local bargaining units at any given time. There can be no assurance that we will be able to negotiate the terms of any expired or expiring
agreement on terms satisfactory to us. Although we consider our relations with our employees to be generally satisfactory, we may experience strikes, work stoppages or slowdowns in the future. If our unionized workers were to engage in a strike,
work stoppage or other slowdown, we could experience a significant disruption of our operations, which could have a material adverse effect on our business, results of operations and financial condition. Moreover, our
non-union
employees may become subject to labor organizing efforts. If any of our current
non-union
facilities were to unionize, we could incur increased risk of work
stoppages and potentially higher labor costs.
Cash distributions (if any) are not guaranteed and may fluctuate with performance and reserve
requirements.
Distributions of available cash by us to unitholders will depend on the amount of cash generated, and distributions may
fluctuate based on our performance. The actual amount of cash that is available will depend upon numerous factors, including:
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profitability of operations,
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required principal and interest payments on debt or debt prepayments,
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margin account requirements,
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issuance of debt and equity securities,
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fluctuations in working capital,
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adjustments in reserves,
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prevailing economic conditions,
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financial, business and other factors,
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increased pension funding requirements, and
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the amount of cash taxes we have to pay in Federal, State and local corporate income and franchise taxes.
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21
Our credit agreement imposes restrictions on our ability to pay distributions to unitholders,
including the need to maintain certain covenants. (See the third amended and restated credit agreement and Note 11 of the Notes to the Consolidated Financial StatementsLong-Term Debt and Bank Facility Borrowings)
Our substantial debt and other financial obligations could impair our financial condition and our ability to obtain additional financing and have a
material adverse effect on us if we fail to meet our financial and other obligations.
At September 30, 2017, we had outstanding
under our credit agreement a $76.3 million term loan due July 2020. In addition, under the revolver portion of our credit agreement which expires in July 2020, we had no borrowings, but $48 million of letters of credit were issued,
$0.1 million of hedge positions were secured, and availability was $166.1 million. Exclusive of the term loan, during the last three fiscal years we have utilized as much as $84.2 million of our credit agreement in borrowings, letters
of credit and hedging reserve. Our substantial indebtedness and other financial obligations could:
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impair our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, unit repurchases or general partnership purposes;
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have a material adverse effect on us if we fail to comply with financial and affirmative and restrictive covenants in our debt agreements and an event of default occurs that is not cured or waived;
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require us to dedicate a substantial portion of our cash flow for principal and interest payments on our indebtedness and other financial obligations, thereby reducing the availability of our cash flow to fund working
capital and capital expenditures;
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expose us to interest rate risk because certain of our borrowings are at variable rates of interest;
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limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and
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place us at a competitive disadvantage compared to our competitors that have proportionally less debt.
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If we are unable to meet our debt service obligations and other financial obligations, we could be forced to restructure or refinance our
indebtedness and other financial transactions, seek additional equity capital or sell our assets. We might then be unable to obtain such financing or capital or sell our assets on satisfactory terms, if at all.
We are not required to accumulate cash for the purpose of meeting our future obligations to our lenders, which may limit the cash available to service the
final payment due on the term loan outstanding under our credit agreement.
Subject to the limitations on restricted payments that are
contained in our credit agreement, we are not required to accumulate cash for the purpose of meeting our future obligations to our lenders. As a result, we may be required to refinance the final payment of our term loan. Our ability to refinance the
term loan will depend upon our future results of operation and financial condition as well as developments in the capital markets. Our general partner will determine the future use of our cash resources and has broad discretion in determining such
uses and in establishing reserves for such uses, which may include but are not limited to:
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complying with the terms of any of our agreements or obligations;
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providing for distributions of cash to our unitholders in accordance with the requirements of our Partnership Agreement;
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providing for future capital expenditures and other payments deemed by our general partner to be necessary or advisable, including to make acquisitions; and
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repurchasing common units.
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Depending on the timing and amount of our use of cash, this could
significantly reduce the cash available to us in subsequent periods to make payments on borrowings under our credit agreement.
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Restrictive covenants in our credit agreement may reduce our operating flexibility.
Our credit agreement contains various covenants that limit our ability and the ability of our subsidiaries to, among other things:
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make distributions to our unitholders;
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purchase or redeem our outstanding equity interests or subordinated indebtedness;
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engage in transactions with affiliates;
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restrict the ability of our subsidiaries to make payments, loans, guarantees and transfers of assets or interests in assets;
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engage in sale-leaseback transactions;
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effect a merger or consolidation with or into other companies, a sale of all or substantially all of our properties or assets; and
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engage in other lines of business.
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These restrictions could limit our ability to obtain
future financings, make capital expenditures, withstand a future downturn in our business or the economy in general, conduct operations or otherwise take advantage of business opportunities that may arise. Our credit agreement also requires us to
maintain specified financial ratios and satisfy other financial conditions. Our ability to meet those financial ratios and conditions can be affected by events beyond their control, such as weather conditions and general economic conditions.
Accordingly, we may be unable to meet those ratios and conditions.
Any breach of any of these covenants, failure to meet any of these
ratios or conditions, or occurrence of a change of control would result in a default under the terms of the relevant indebtedness or other financial obligations to become immediately due and payable. If we were unable to repay those amounts, the
lenders could initiate a bankruptcy proceeding or liquidation proceeding or proceed against the collateral, if any. If the lenders of our indebtedness or other financial obligations accelerate the repayment of borrowings or other amounts owed, we
may not have sufficient assets to repay our indebtedness or other financial obligations, including the notes.
Under our credit agreement, the
occurrence of a change of control is considered a default. We may be unable to repay borrowings under our credit agreement if the indebtedness outstanding thereunder is accelerated following a change of control.
We may be unable to satisfy our obligations under our credit agreement unless we are able to refinance or obtain waivers under our other
indebtedness. We may not have the financial resources to repay borrowings under our credit agreement.
ITEM 1B.
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UNRESOLVED STAFF COMMENTS
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Not applicable.
We provide services to our customers in the United States from eighteen
states and the District of Columbia, ranging from Maine to Georgia from 48 principal operating locations and 79 depots, 45 of which are owned and 82 of which are leased. As of September 30, 2017, we had a fleet of 1,205 truck and transport
vehicles, many of which were owned and 1,341 service vans, the majority of which were leased. We lease our corporate headquarters in Stamford, Connecticut. Our obligations under our credit agreement are secured by liens and mortgages on
substantially all of the Companys and subsidiaries real and personal property.
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ITEM 3.
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LEGAL PROCEEDINGSLITIGATION
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On April 18, 2017, a
civil action was filed in the United States District Court for the Eastern District of New York, entitled M. Norman Donnenfeld v. Petro, Inc., Civil Action Number
2:17-cv-2310-JFB-SIL,
against Petro, Inc. By amended complaint filed on August 15, 2017, the Plaintiff alleges he did not receive expected contractual
benefits under his protected price plan contract when oil prices fell and asserts various claims for relief including breach of contract, violation of the New York General Business Law and fraud. The Plaintiff also seeks to have a class certified of
similarly situated Petro customers who entered into protected price plan contracts and were denied the same contractual benefits. No class has yet been certified in this action. The Plaintiff seeks compensatory, punitive and other damages in
unspecified amounts. On September 15, 2017, Petro filed a motion to dismiss the amended complaint as time-barred and for failure to state a cause of action. The motion is fully briefed and awaiting oral argument. The Company believes the
allegations lack merit and intends to vigorously defend the action; at this time we cannot assess the potential outcome or materiality of this matter.
ITEM 4.
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MINE SAFETY DISCLOSURES
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Not applicable.
PART III
ITEM 10.
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DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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Partnership Management
Our general partner is Kestrel Heat. The Board of Directors of Kestrel Heat is appointed by its sole member, Kestrel, which is a
private equity investment partnership formed by Yorktown Energy Partners VI, L.P., Paul A. Vermylen Jr. and other investors.
Kestrel
Heat, as our general partner, oversees our activities. Unitholders do not directly or indirectly participate in our management or operation or elect the directors of the general partner. The Board of Directors (sometimes referred to as the
Board) of Kestrel Heat has adopted a set of Partnership Governance Guidelines in accordance with the requirements of the New York Stock Exchange. A copy of these Guidelines is available on our website at www.stargrouplp.com or a copy may
be obtained without charge by contacting Richard F. Ambury,
(203) 328-7310.
As of
November 30, 2017, Kestrel Heat and its affiliates owned an aggregate of 500,000 common units, representing 1% of the issued and outstanding common units, and Kestrel Heat owned 325,729 general partner units.
The general partner owes a fiduciary duty to the unitholders. However, our Partnership Agreement contains provisions that allow the general
partner to take into account the interests of parties other than the limited partners in resolving conflict of interest, thereby limiting such fiduciary duty. Notwithstanding any limitation on obligations or duties, the general partner will be
liable, as our general partner, for all our debts (to the extent not paid by us), except to the extent that indebtedness or other obligations incurred by us are made specifically
non-recourse
to the general
partner.
As is commonly the case with publicly traded limited partnerships, the general partner does not directly employ any of the
persons responsible for managing or operating Star.
Directors and Executive Officers of the General Partner
Directors are appointed for an indefinite term, subject to the discretion of Kestrel. The following table shows certain information for
directors and executive officers of the general partner as of November 30, 2017:
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Name
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Age
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Position
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Paul A. Vermylen, Jr.
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70
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Chairman, Director
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Steven J. Goldman
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57
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President, Chief Executive Officer and Director
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Richard F. Ambury
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60
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Chief Financial Officer, Executive Vice President, Treasurer and Secretary
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Richard G. Oakley
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57
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Senior Vice PresidentAccounting
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Henry D. Babcock(1)
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77
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Director
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C. Scott Baxter(1)
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56
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Director
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Daniel P. Donovan
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71
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Director
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Bryan H. Lawrence
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75
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Director
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Sheldon B. Lubar
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88
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Director
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William P. Nicoletti (1)
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72
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Director
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(1)
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Audit Committee member
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Paul A. Vermylen, Jr.
Mr. Vermylen has been the Chairman and a director of Kestrel Heat since
April 28, 2006. Mr. Vermylen is a founder of Kestrel and has served as its President and as a manager since July 2005. Mr. Vermylen had been employed since 1971, serving in various capacities, including as a Vice President of Citibank
N.A. and Vice President-Finance of Commonwealth Oil Refining Co. Inc. Mr. Vermylen served as Chief Financial Officer of Meenan Oil Co., L.P. (Meenan) from 1982 until 1992 and as President of Meenan until 2001, when we acquired
Meenan. Since 2001, Mr. Vermylen has pursued private investment opportunities.
Mr. Vermylen serves as a director of certain
non-public
companies in the energy industry in which Kestrel holds equity interests including Downeast LNG, Inc. Mr. Vermylen is a graduate of Georgetown University and has an M.B.A. from Columbia University.
Mr. Vermylens substantial experience in the home heating oil industry and his leadership skills and experience as an executive officer of
Meenan, among other factors, led the Board to conclude that he should serve as the Chairman and a director of Kestrel Heat.
Steven J.
Goldman.
Mr. Goldman has been President and Chief Executive Officer of Kestrel Heat since October 1, 2013. Mr. Goldman has been a director of Kestrel Heat since October 29, 2013. From May 1, 2010 to
September 30, 2013, Mr. Goldman was Executive Vice President and Chief Operating Officer of Kestrel Heat, and was Senior Vice President of Operations from April 1, 2007 until April 30, 2010. Mr. Goldman was Vice President of
Operations of Petro Holdings, Inc. from July 2004 until May 31, 2007. From February 2000 to June 2004, Mr. Goldman held various operating management positions with Petro. Prior to joining Petro Holdings, Inc. as a General Manager in 2000,
Mr. Goldman worked for United Parcel Service from 1982 to 2000. Mr. Goldman has also held various positions within the management of companies in industrial engineering and those with international operations. Mr. Goldman is a
graduate of the State University of New York at Stony Brook.
Mr. Goldmans
in-depth
knowledge of the
Companys business and his substantial experience in the home heating oil industry, among other factors, led the Board to conclude that he should serve as a director of Kestrel Heat.
Richard F. Ambury.
Mr. Ambury has been Executive Vice President of Kestrel Heat since May 1, 2010 and has been Chief Financial
Officer, Treasurer and Secretary of Kestrel Heat since April 28, 2006. Mr. Ambury was Chief Financial Officer, Treasurer and Secretary of Star Group from May 2005 until April 28, 2006. From November 2001 to May 2005, Mr. Ambury
was Vice President and Treasurer of Star Group. From March 1999 to November 2001, Mr. Ambury was Vice President of Star Gas Propane, L.P. From February 1996 to March 1999, Mr. Ambury served as Vice PresidentFinance of Star Gas
Corporation, a predecessor general partner. Mr. Ambury was employed by Petroleum Heat and Power Co., Inc. from June 1983 through February 1996, where he served in various accounting/finance capacities. From 1979 to 1983, Mr. Ambury was
employed by a predecessor firm of KPMG, a public accounting firm. Mr. Ambury has been a Certified Public Accountant since 1981 and is a graduate of Marist College.
Richard G. Oakley.
Mr. Oakley has been Senior Vice President of Kestrel Heat since May 1, 2014. From May 22, 2006 until
April 30, 2014, Mr. Oakley was Vice President and Controller of Kestrel Heat. From September 1982 until May 2006 he held various positions with Meenan Oil Co. LP, most recently that of Controller since 1993. Mr. Oakley is a graduate
of Long Island University.
Henry D. Babcock.
Mr. Babcock has been a director of Kestrel Heat since April 28, 2006. He is also
President of The Caumsett Foundation, Inc., a
non-profit
that supports Caumsett Historic State Park Preserve. Until his retirement in 2010, Mr. Babcock had worked with Train, Babcock Advisors LLC, a
private registered investment advisor, since 1976, becoming a Member in 1980. Prior to this, he ran an affiliated venture capital company active in the U.S. and abroad. Mr. Babcock received a BA from Yale University and an MBA from Columbia. He
served in the U.S. Army for three years.
Mr. Babcocks significant experience in capital markets, corporate finance and venture capital, among
other factors, led the Board to conclude that he should serve as a director of Kestrel Heat.
55
Scott Baxter.
Mr. Baxter has been a director of Kestrel Heat since April 28, 2006.
Mr. Baxter is currently Managing Director and Head of Energy for Sagent Advisors, headquartered in New York City. Mr. Baxter has over 25 years of energy investment banking experience and has been a primary advisor in
sourcing and executing over $150 billion in corporate M&A, restructuring and equity financing transactions in the energy industry. Mr. Baxter also has significant experience advising independent committees of boards
including rendering over 30 independent fairness opinions spanning the upstream, downstream and midstream energy sectors including for many MLPs.
Prior to Sagent, Mr. Baxter had opened and ran the Houston office for Petrie Partners, and prior to that, his career has included serving as Head of the
Americas for J.P. Morgans global energy group, Managing Director in the global energy group at Citigroup (Salomon Brothers), founding and running his own firm, Baxter Energy Partners, an upstream energy M&A advisory firm, and serving as
head of the energy group for Houlihan Lokey.
Mr. Baxter holds a B.S. degree in Economics from Weber State University where he graduated cum laude,
and received an MBA degree from the University of Chicago Graduate School of Business. Mr. Baxter has also served as an adjunct professor of finance at Columbia Universitys Graduate School of Business and has been on the Presidents
advisory board for Weber State University since 1996.
Mr. Baxters significant experience as an investor and a senior investment banker focused
on the energy field, among other factors, led the Board to conclude that he should serve as a director of Kestrel Heat.
Daniel P.
Donovan.
Mr. Donovan has been a director of Kestrel Heat since April 28, 2006. Mr. Donovan was Chief Executive Officer of Kestrel Heat from May 31, 2007 to September 30, 2013 and had been President from
April 28, 2006 to September 30, 2013. From April 28, 2006 to May 30, 2007 Mr. Donovan was also the Chief Operating Officer of Kestrel Heat. Mr. Donovan was the President and Chief Operating Officer of a predecessor
general partner, Star Gas LLC (Star Gas), from March 2005 until April 28, 2006. From May 2004 to March 2005 he was President and Chief Operating Officer of the Companys heating oil segment. Mr. Donovan held various
management positions with Meenan Oil Co. LP, from January 1980 to May 2004, including Vice President and General Manager from 1998 to 2004. Mr. Donovan worked for Mobil Oil Corp. from 1971 to 1980. His last position with Mobil was President and
General Manager of its heating oil subsidiary in New York City and Long Island. Mr. Donovan is a graduate of St. Francis College in Brooklyn, New York and received an M.B.A. from Iona College.
Mr. Donovans
in-depth
knowledge of the Companys business, having been its president and chief
executive officer, and his substantial experience in the home heating oil industry, among other factors, led the Board to conclude that he should serve as a director of Kestrel Heat.
Bryan H. Lawrence.
Mr. Lawrence has been a director of Kestrel Heat since April 28, 2006 and a manager of Kestrel since July 2005.
Mr. Lawrence is a founder and senior manager of Yorktown Partners LLC, the manager of the Yorktown group of investment partnerships, which make investments in companies engaged in the energy industry. The Yorktown partnerships were formerly
affiliated with the investment firm of Dillon, Read & Co. Inc., where Mr. Lawrence was employed beginning in 1966, serving as a Managing Director until the merger of Dillon Read with SBC Warburg in September 1997. Mr. Lawrence
also serves as a director of Carbon Natural Resources, Hallador Petroleum Company (each a United States publicly traded company), and certain
non-public
companies in the energy industry in which Yorktown
partnerships hold equity interests. Mr. Lawrence is a graduate of Hamilton College and received an M.B.A. from Columbia University.
56
Mr. Lawrences significant financial and investment experience, and experience as a founder of Yorktown
Energy Partners LLC, among other factors, led the Board to conclude that he should serve as a director of Kestrel Heat.
Sheldon B. Lubar.
Mr. Lubar has been a director of Kestrel Heat since April 28, 2006 and a manager of Kestrel since July 2005. Mr. Lubar has been Chairman of the board of Lubar & Co. Incorporated, a private investment and venture capital firm
he founded, since 1977. He was Chairman of the board of Christiana Companies, Inc., a logistics and manufacturing company, from 1987 until its merger with Weatherford International in 1995. Mr. Lubar had also been Chairman of Total Logistics,
Inc., a logistics and manufacturing company until its acquisition in 2005 by SuperValu Inc. He has served as a director of Approach Resources, Inc. since June 2007 and Hallador Energy Company since 2008. He is also a director of several private
companies. Mr. Lubar holds a bachelors degree in Business Administration and a Law degree from the University of Wisconsin-Madison. He was awarded honorary Doctor of Commercial Science degrees from the University of Wisconsin-Milwaukee,
Medical College of Wisconsin, and the University of Wisconsin-Madison.
Mr. Lubars significant experience as a senior executive officer and as
a director of other public companies, among other factors, led the Board to conclude that he should serve as a director of Kestrel Heat.
William P.
Nicoletti.
Mr. Nicoletti has been a director of Kestrel Heat since April 28, 2006. Mr. Nicoletti was the
non-executive
chairman of the board of Star Gas from March 2005 until
April 28, 2006. Mr. Nicoletti was a director of Star Gas from March 1999 until April 28, 2006 and was a director of Star Gas Corporation from November 1995 until March 1999. Since February 1, 2009, he has been a Managing Director
of Parkman Whaling LLC, a Houston, Texas based energy investment banking firm. Previously, he was Managing Director of Nicoletti & Company, Inc., a private investment banking firm. Mr. Nicoletti was formerly a senior officer and head
of Energy Investment Banking for E. F. Hutton & Company, Inc., PaineWebber Incorporated and McDonald Investments, Inc. Mr. Nicoletti is a graduate of Seton Hall University and received an M.B.A. from Columbia University.
Mr. Nicolettis current and prior leadership experience in the energy investment banking industry and his significant experience in finance,
accounting and corporate governance matters, among other factors, led the Board to conclude that he should serve as a director of Kestrel Heat.
Director Independence
Section 303A
of the New York Stock Exchange listed company manual provides that limited partnerships are not required to have a majority of independent directors. It is the policy of the Board of Directors that the Board shall at all times have at least three
independent directors or such higher number as may be necessary to comply with the applicable federal securities law requirements. For the purposes of this policy, independent director has the meaning set forth in Section 10A(m) of
the Securities Exchange Act of 1934, as amended, any applicable stock exchange rules and the rules and regulations promulgated in the Partnership governance guidelines available on its website
www.stargrouplp.com
. The Board of Directors has
determined that Messrs. Nicoletti, Babcock, and Baxter are independent directors.
Meetings of Directors
During fiscal 2017, the Board of Directors of Kestrel Heat met seven times. All directors attended each meeting except for three meetings in
which a director did not attend.
57
Committees of the Board of Directors
Kestrel Heats Board of Directors has one standing committee, the Audit Committee. Its members are appointed by the Board of Directors for
a
one-year
term and until their respective successors are elected. The NYSE corporate governance standards do not require limited partnerships to have a Nominating or Compensation Committee.
Audit Committee
William P. Nicoletti,
Henry D. Babcock and C. Scott Baxter have been appointed to serve on the Audit Committee, which has adopted an Audit Committee Charter. Mr. Nicoletti serves as chairman of the Audit Committee. A copy of this charter is available on the
Companys website at
www.stargrouplp.com
or a copy may be obtained without charge by contacting Richard F. Ambury at
(203) 328-7310.
The Audit Committee reviews the external financial
reporting of the Company, selects and engages the Companys independent registered public accountants and approves all
non-audit
engagements of the independent registered public accountants.
Members of the Audit Committee may not be employees of Kestrel Heats or its affiliated companies and must otherwise meet the New York
Stock Exchange and SEC independence requirements for service on the Audit Committee. The Board of Directors has determined that Messrs. Nicoletti, Babcock and Baxter are independent directors in that they do not have any material relationships with
the Company (either directly, or as a partner, shareholder or officer of an organization that has a relationship with the Company) and they otherwise meet the independence requirements of the NYSE and the SEC. The Companys Board of Directors
has also determined that at least one member of the Audit Committee, Mr. Nicoletti, meets the SEC criteria of an audit committee financial expert. Please see Mr. Nicolettis biography under Directors and Officers of
the General Partner for his relevant experience regarding his qualifications as an audit committee financial expert.
During fiscal 2017, the Audit Committee of Kestrel Heat, LLC met six times. All directors attended each meeting except for one meeting in
which a director did not attend.
Conflicts Committee
William P. Nicoletti, Henry D. Babcock and C. Scott Baxter were appointed to serve on the Conflicts Committee to review and to evaluate the
Companys election to be treated as a corporation, instead of a partnership, for federal income tax purposes (commonly referred to as a
check-the-box
election), along with amendments to our partnership agreement to effect such changes in income tax classification. Mr. Baxter served as chairman of the Conflicts Committee. The Conflicts Committee approved the Companys election to
be treated as a corporation, instead of a partnership, for federal income tax purposes and the amendments to our partnership agreement to effect such changes in income tax classification by unanimous written consent on August 14, 2017.
Reimbursement of Expenses of the General Partner
The general partner does not receive any management fee or other compensation for its management of the Company. The general partner is
reimbursed for all expenses incurred on behalf of the Company, including the cost of compensation that are properly allocable to the Company. The Partnership Agreement provides that the general partner shall determine the expenses that are allocable
to the Company in any reasonable manner determined by the general partner in its sole discretion. In addition, the general partner and its affiliates may provide services to the Company for which a reasonable fee would be charged as determined by
the general partner. There were no reimbursements of the General Partner in fiscal year 2017.
58
Adoption of Code of Business Conduct and Ethics
We have adopted a written Code of Business Conduct and Ethics that applies to our officers and employees and our directors. A copy of the Code
of Business Conduct and Ethics is available on our website at www.stargrouplp.com or a copy may be obtained without charge, by contacting Investor Relations,
(203) 328-7310.
We intend to post amendments to or waivers of our Code of Business Conduct and Ethics (to the extent applicable to any executive officer or
director) on our website.
Section 16(a) Beneficial Ownership Reporting Compliance
Based on copies of reports furnished to us, we believe that during fiscal year 2017, all reporting persons complied with the Section 16(a)
filing requirements applicable to them.
Non-Management
Directors and Interested Party Communications
The
non-management
directors on the Board of Directors of the general partner are Messrs. Babcock,
Baxter, Donovan, Lawrence, Lubar, Nicoletti and Vermylen. The
non-management
directors have selected Mr. Vermylen, the Chairman of the Board, to serve as lead director to chair executive sessions of the
non-management
directors. Interested parties who wish to contact the
non-management
directors as a group may do so by contacting Paul A. Vermylen, Jr. c/o Star Group, L.P., 9
West Broad Street, Suite 310, Stamford, CT 06902.
ITEM 11.
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EXECUTIVE COMPENSATION
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Compensation Discussion and Analysis
Our Third Amended and Restated Agreement of Limited Partnership, provides that our general partner, Kestrel Heat, shall conduct, direct and
manage all activities of the Company. The limited liability company agreement of the general partner provides that the business of the general partner shall be managed by a Board of Directors. The responsibility of the Board is to supervise and
direct the management of the Company in the interest and for the benefit of our unitholders. Among the Boards responsibilities is to regularly evaluate the performance and to approve the compensation of the Chief Executive Officer and, with
the advice of the Chief Executive Officer, regularly evaluate the performance and approve the compensation of key executives.
As a
limited partnership that is listed on the New York Stock Exchange, we are not required to have a Compensation Committee. Since the Chairman of the general partner and the majority of the Board are not employees, the Board determined that it has
adequate independence to act in the capacity of a Compensation Committee to establish and review the compensation our executive officers and directors. The Board is comprised of Paul A. Vermylen Jr. (Chairman), Steven J. Goldman (President and Chief
Executive Officer), Daniel P. Donovan, Henry D. Babcock, C. Scott Baxter, Bryan H. Lawrence, Sheldon B. Lubar, and William P. Nicoletti.
Throughout this Report, each person who served as chief executive officer (CEO) during fiscal 2017, each person who served as
chief financial officer (CFO) during fiscal 2017 and the one other most highly compensated executive officer serving at September 30, 2017 (there being no other executive officers who earned more than $100,000 during fiscal 2017)
are referred to as the named executive officers and are included in the Executive Compensation Table.
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In this Compensation Discussion and Analysis, we address the compensation paid or awarded to
Messrs. Goldman, Ambury and Oakley. We refer to these executive officers as our named executive officers.
Compensation
decisions for the above named executive officers were made by the Board of Directors of the Company.
Compensation Philosophy and Policies
The primary objectives of our compensation program, including compensation of the named executive officers, are to attract and retain highly
qualified officers, employees and directors and to reward individual contributions to our success. The Board of Directors considers the following policies in determining the compensation of the named executive officers:
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compensation should be related to the performance of the individual executive and the performance measured against both financial and
non-financial
achievements;
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compensation levels should be competitive to ensure that we will be able to attract, motivate and retain highly qualified executive officers; and
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compensation should be related to improving unitholder value over time.
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Compensation Methodology
The elements of our compensation program for named executive officers are intended to provide a total incentive package designed to drive
performance and reward contributions in support of business strategies at the Company. Subject to the terms of employment agreements that have been entered into with the named executive officers, all compensation determinations are discretionary and
subject to the decision-making authority of the Board of Directors. We do not use benchmarking as a fixed criterion to determine compensation. Rather, after subjectively setting compensation based on the policies discussed above under
Compensation Philosophy and Policies , we reviewed the compensation paid to officers holding similar positions at our peer group companies and certain information for privately held companies to obtain a general understanding of the
reasonableness of base salaries and other compensation payable to our named executive officers. Our peer group of public companies was comprised of the following companies: Amerigas Partners, L.P., Suburban Propane Partners, L.P., Ferrellgas
Partners, L.P. and Global Partners, L.P. We chose these companies because they are engaged in the distribution of energy products like us.
Elements of
Executive Compensation
For the fiscal year ended September 30, 2017, the principal components of compensation for the named
executive officers were:
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annual discretionary profit sharing allocation;
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management incentive compensation plan; and
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retirement and health benefits.
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Under our compensation structure, the mix of base salary,
discretionary profit sharing allocation and long-term compensation provided to each executive officer varies depending on their position. The base salary for each executive officer is the only fixed component of compensation. All other compensation,
including annual discretionary profit sharing allocation and long-term incentive compensation, is variable in nature.
60
The majority of the Companys compensation allocation is weighted towards base salary and
annual discretionary profit sharing allocation. In addition, during fiscal 2017, an aggregate of $214,378 was paid to the named executive officers under the terms of the management incentive compensation plan and represented a small portion of the
executive compensation that was paid to these officers. If we are successful in increasing the overall level of distributions payable to unitholders, the amounts payable to the named executive officers under the management incentive compensation
plan should increase.
We believe that together all of our compensation components provide a balanced mix of fixed compensation and
compensation that is contingent upon each executive officers individual performance and our overall performance. A goal of the compensation program is to provide executive officers with a reasonable level of security through base salary and
benefits, while rewarding them through incentive compensation to achieve business objectives and create unitholder value over time. We believe that each of our compensation components is important in achieving this goal. Base salaries provide
executives with a base level of monthly income and security. Annual discretionary profit sharing allocations and long-term incentive awards provide an incentive to our executives to achieve business objectives that increase our financial
performance, which creates unitholder value through continuity of, and increases in, distributions and increases in the market value of the units. In addition, we want to ensure that our compensation programs are appropriately designed to encourage
executive officer retention, which is accomplished through all of our compensation elements.
Base Salary
The Board of Directors establishes base salaries for the named executive officers based on a number of factors, including:
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The historical salaries for services rendered to the Company and responsibilities of the named executive officer.
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The salaries of equivalent executive officers at our peer group companies and other data for our industry.
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The prevailing levels of compensation and cost of living in the location in which the named executive officer works.
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In determining the initial base compensation payable to individual named executive officers when they are first hired by Star, our starting
point is the historical compensation levels that we have paid to officers performing similar functions over the past few years. We also consider the level of experience and accomplishments of individual candidates and general labor market
conditions, including the availability of candidates to fill a particular position. When we make adjustments to the base salaries of existing named executive officers, we review the individuals performance, the value each named executive
officer brings to us and general labor market conditions.
Elements of individual performance considered, among others, without any
specific weight given to each element, include business-related accomplishments during the year, difficulty and scope of responsibilities, effective leadership, experience, expected future contributions to the Company and difficulty of replacement.
While base salary provides a base level of compensation intended to be competitive with the external market, the base salary for each named executive officer is determined on a subjective basis after consideration of these factors and is not based
on target percentiles or other formal criteria. Although we believe that base salaries for our named executive officers are generally competitive with the external market, we do not use benchmarking as a fixed criterion to determine base
compensation. Rather, after subjectively setting base salaries based on the above factors, we review the compensation paid to officers holding similar positions at our peer group companies to obtain a general understanding of the reasonableness of
base salaries and other compensation payable to our named executive officers. We also take into account geographic differences for similar positions in the New York Metropolitan area. While cost of living is considered in determining annual
increases, we do not typically provide full cost of living adjustments as salary increases are constrained by budgetary restrictions and the ability to fund the Companys current cash needs such as interest expense, maintenance capital, income
taxes and distributions.
61
Profit Sharing Allocations
We maintain a profit sharing pool for certain employees, including named executive officers, which is equal to approximately 6% of our earnings
before income taxes, depreciation and amortization, excluding items affecting comparability (adjusted EBITDA) for the given fiscal year. The annual discretionary profit sharing allocations paid to the named executive officers are payable
from this pool. The size of the pool fluctuates based upon upward or downwards changes in adjusted EBITDA and the size of an individual award to a named executive officer fluctuates based on the size of the profit sharing pool and the number of
participants in the plan. Depending upon the size of the profit sharing pool, and the number of participants in the plan, the amount paid to the named executive officers could be more or less.
There are no set formulas for determining the amount payable to our named executive officers from the profit sharing plan. Factors considered
by our CEO and the Board in determining the level of profit sharing allocations generally include, without assigning a particular weight to any factor:
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whether or not we achieved certain budgeted goals for the year and any material shortfalls or superior performances relative to expectations. Under the plan, no profit sharing was payable with respect to fiscal 2017
unless we have achieved actual adjusted EBITDA for fiscal 2017 of at least 70% of the amount of budgeted adjusted EBITDA for fiscal 2017.
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the level of difficulty associated with achieving such objectives based on the opportunities and challenges encountered during the year; and
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significant transactions or accomplishments for the period not included in the goals for the year.
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Our CEO takes these factors into consideration as well as the relative contributions of each of the named executive officers to the
years performance in developing his recommendations for profit sharing amounts. Based on such assessment, our CEO submits recommendations to the Board of Directors for the annual profit sharing amounts to be paid to our named executive
officers (other than the CEO), for the Boards review and approval. Similarly, the Chairman assesses the CEOs contribution toward meeting the Companys goals based upon the above factors, and recommends to the Board of Directors a
profit sharing allocation for the CEO it believes to be commensurate with such contribution.
The Board of Directors retains the ultimate
discretion to determine whether the named executive officers will receive annual profit sharing allocations based upon the factors discussed above.
Management Incentive Compensation Plan
In fiscal 2007, following our recapitalization, the Board of Directors adopted the Management Incentive Compensation Plan (the
Plan) for certain named employees. Under the Plan, employees who participate shall be entitled to receive a pro rata share (as determined in the manner described below) of an amount in cash equal to:
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50% of the distributions (Incentive Distributions) of Available Cash in excess of the minimum quarterly distribution of $0.0675 per unit otherwise distributable to Kestrel Heat pursuant to the Partnership
Agreement on account of its general partner units; and
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50% of the cash proceeds (the Gains Interest) which Kestrel Heat shall receive from any sale of its general partner units (as defined in the Partnership Agreement), less expenses and applicable
taxes.
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62
We believe that the Plan provides a long-term incentive to its participants because it encourages
Stars management to increase available cash for distributions in order to trigger the incentive distributions that are only payable if distributions from available cash exceeds certain target distribution levels, with higher amounts of
incentive distributions triggered by higher levels of distributions. Such increases are not sustainable on a consistent basis without long-term improvements in our operations. In addition, under certain Plan amendments that were adopted in 2012, the
participation points of existing plan participants will vest and become irrevocable over a four year period, provided that the participants continue to be employed by us during the vesting period. We believe that this will help ensure that the Plan
participants, which include our named executive officers, will have a continuing personal interest in the success of Star.
The pro rata
share payable to each participant under the Plan is based on the number of participation points as described under Fiscal 2017 Compensation DecisionsManagement Incentive Compensation Plan. The amount paid in Incentive Distributions
is governed by the Partnership Agreement and the calculation of Available Cash (as defined in our Partnership Agreement) is distributed to the holders of our common units and general partner units in the following manner:
First, 100% to all common units, pro rata, until there has been distributed to each common unit an amount equal to the minimum quarterly
distribution of $0.0675 for that quarter;
Second, 100% to all common units, pro rata, until there has been distributed to each common
unit an amount equal to any arrearages in the payment of the minimum quarterly distribution for prior quarters;
Third, 100% to all
general partner units, pro rata, until there has been distributed to each general partner unit an amount equal to the minimum quarterly distribution;
Fourth, 90% to all common units, pro rata, and 10% to all general partner units, pro rata, until each common unit has received the first
target distribution of $0.1125; and
Finally, 80% to all common units, pro rata, and 20% to all general partner units, pro rata.
Available Cash, as defined in our Partnership Agreement, generally means all cash on hand at the end of the relevant fiscal quarter less the
amount of cash reserves established by the Board of Directors of our general partner in its reasonable discretion for future cash requirements. These reserves are established for the proper conduct of our business, including acquisitions, the
payment of debt principal and interest and for distributions during the next four quarters and to comply with applicable law and the terms of any debt agreements or other agreements to which we are subject. The Board of Directors of our general
partner reviews the level of Available Cash each quarter based upon information provided by management.
To fund the benefits under the
Plan, Kestrel Heat has agreed to permanently and irrevocably forego receipt of the amount of Incentive Distributions that are payable to plan participants. For accounting purposes, amounts payable to management under this Plan will be treated as
compensation and will reduce both EBITDA and net income but not adjusted EBITDA. Kestrel Heat has also agreed to contribute to the Company, as a contribution to capital, an amount equal to the Gains Interest payable to participants in the Plan by
the Company. The Company is not required to reimburse Kestrel Heat for amounts payable pursuant to the Plan.
The Plan is administered by
our Chief Financial Officer under the direction of the Board or by such other officer as the Board may from time to time direct. In general, no payments will be made under the Plan if we are not distributing cash under the Incentive Distributions
described above.
63
Effective as of July 19, 2012, the Board of Directors adopted certain amendments (the
Plan Amendments) to the Plan. Under the Plan Amendments, the number and identity of the Plan participants and their participation interests in the Plan have been frozen at the current levels. In addition, under the Plan Amendments, the
plan benefits (to the extent vested) may be transferred upon the death of a participant to his or her heirs. A participants vested percentage of his or her plan benefits will be 100% during the time a participant is an employee or consultant
of the Company. Following the termination of such positions, a participants vested percentage shall be equal to 20% for each full or partial year of employment or consultation with us starting with the fiscal year ended September 30, 2012
(33 1/3% in the case of the Companys chief executive officer at that time).
We distributed $481,256 in Incentive Distributions
under the Plan during fiscal 2017, including payments to the named executive officers of approximately $214,378. With regard to the Gains Interest, Kestrel Heat has not given any indication that it will sell its general partner units within the next
twelve months. Thus the Plans value attributable to the Gains Interest currently cannot be determined.
Retirement and Health Benefits
We offer a health and welfare and retirement program to all eligible employees. The named executive officers are generally eligible for the
same programs on the same basis as other employees of Star. We maintain a
tax-qualified
401(k) retirement plan that provides eligible employees with an opportunity to save for retirement on a tax advantaged
basis. Under the 401(k) plan, subject to IRS limitations, each participant can contribute from 0% to 60% of compensation.
We make a 4%
(or a maximum of 5.5% for participants who had 10 or more years of service at the time our defined benefit plans were frozen and who have reached the age 55) core contribution of a participants compensation and generally can match 2/3 (up to
3.0%) of a participants contributions, subject to IRS limitations.
In addition, we have two frozen defined benefit pension plans
that were maintained for all its eligible employees, including certain executive officers. The present value of accumulated benefits under these frozen defined benefit pension plans for certain executive officers is provided in the table labeled,
pension plans pursuant to which named executive officers have an accumulated benefit but are not currently accruing benefits.
Fiscal 2017 Compensation
Decisions
For fiscal 2017, the foregoing elements of compensation were applied as follows
Base Salary
The following table sets
forth each named executive officers base salary as of October 1, 2017 and the percentage increase in base salary over October 1, 2016. The current base salaries for our named executive officers were determined based upon the factors
discussed under the caption Base Salary. The average percentage increase in base salary for executives in our peer group was approximately 1.8%.
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Name
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Salary
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Percentage Change
From Prior Year
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Steven J. Goldman
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$
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465,000
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3.3
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%
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Richard F. Ambury
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$
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391,610
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4.0
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%
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Richard G. Oakley
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$
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256,250
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2.5
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%
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Annual Discretionary Profit Sharing Allocation
Based on the annual performance reviews for our CEO and named executive officers, the Board approved annual profit sharing allocations as
reflected in the Summary Compensation Table and notes thereto. For fiscal 2017 the profit sharing amounts reflected in the Summary Compensation Table are (2)%, 3%, and 4% higher (lower) than fiscal 2016 for Messrs. Goldman, Ambury, and
Oakley, respectively. One of our primary performance measures for profit sharing purpose is adjusted EBITDA. This adjusted EBITDA decreased by just $1.2 million, or 1.4 %, to $ 83.5 million for fiscal 2017. For our peer group, the
average percentage decrease in Adjusted EBITDA was 13.8%, but the average percentage increase in total compensation was 18.5%. Another performance measure is acquisitions and in fiscal 2017, we completed seven acquisitions with an aggregate purchase
price of approximately $44.8 million ($43.3 million in cash and $1.5 million of deferred liabilities) and added approximately 28,300 customers. Messrs. Goldman, Ambury, and Oakley were instrumental in the analysis that led to the
successful integration of these transactions. Mr. Goldman continued to focus on our initiatives to increase revenues other than through the sale of home heating oil and organically expanded our presence in the distribution of propane.
Messrs. Ambury and Oakley spear-headed the analysis for our unitholders vote to have the Company elect to be treated as a corporation, instead
of a partnership, for federal income tax purposes (commonly referred to as a
check-the-box
election.). Messrs. Ambury and Oakley also focused much of their
time on tax planning which in part led to an $18.1 million reduction in cash income taxes paid in fiscal 2017 versus fiscal 2016.
Management
Incentive Compensation Plan
In 2012 under the Plan Amendments adopted by the Board, the number and identity of the Plan participants
and their participation points were frozen at the current levels in order to more closely align the interests of Plan participants and unitholders and to give Plan participants a continuing personal interest in our success. The number of
participation points that were previously awarded to the named executive officers was based on the length of service and level of responsibility of the named executive and our desire to retain the named executive.
In fiscal 2017, $214,378 was paid to the named executive officers under the Plan as indicated in the following chart:
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Name
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Points
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Percentage
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Management
Incentive
Payments
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Steven J. Goldman
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215
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19.5
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%
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$
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94,064
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Richard F. Ambury
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235
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|
21.4
|
%
|
|
|
102,814
|
|
Richard G. Oakley
|
|
|
40
|
|
|
|
3.6
|
%
|
|
|
17,500
|
|
Other Plan Participants (a)
|
|
|
610
|
|
|
|
55.5
|
%
|
|
|
266,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,100
|
|
|
|
100.0
|
%
|
|
$
|
481,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Includes 300 points (27.3%) that were awarded to Mr. Donovan prior to his retirement as the Companys President and Chief Executive Officer effective September 30, 2013.
|
Retirement and Health Benefits
The named
executive officers participate in our retirement and health benefit plans.
65
Employment Contracts and Severance Agreements
Agreement with Steven J. Goldman
Effective October 1, 2013, Steven J. Goldman was appointed President and Chief Executive Officer. Mr. Goldman entered into a three
year employment agreement with us effective as of October 1, 2013. In December 2016 we entered into an employment agreement with Mr. Goldman effective as of October 1, 2016 where Mr. Goldman will continue to serve as President
and Chief Executive Officer on an
at-will
basis. Under his employment agreement, if Mr. Goldman is terminated for reasons other than cause or if he terminates his employment for good reason,
Mr. Goldman will be entitled to one years salary as severance.
Agreement with Richard F. Ambury
We entered into an employment agreement with Mr. Ambury effective as of April 28, 2008. Mr. Ambury will serve as Chief Financial
Officer and Treasurer on an
at-will
basis. The employment agreement provides for one years salary as severance if Mr. Amburys employment is terminated without cause or by Mr. Ambury for
good reason.
Agreement with Richard G. Oakley
Effective November 2, 2009, we entered into an agreement with Mr. Richard G. Oakley pursuant to which Mr. Oakley will
continue to be employed as Senior Vice President on an
at-will
basis, and provides for one years salary as severance if his employment is terminated for reasons other than cause.
Change In Control Agreements
We have
entered into a Change In Control Agreement with Mr. Goldman, Chief Executive Officer and Mr. Ambury, Chief Financial Officer. Under the terms of each agreement, if either of these executive officers is terminated as a result of a change in
control (as defined in the agreement) he will be entitled to a payment equal to two times his base annual salary in the year of such termination plus two times the average amount paid as a bonus and/or as profit sharing during the three years
preceding the year of such termination. The term change in control means the present equity owners of Kestrel and their affiliates collectively cease to beneficially own equity interests having the voting power to elect at least a majority of the
members of the Board of Directors or other governing board of the general partner or any successor entity. If a change in control were to have occurred and their employment was terminated as of the date of this report, Mr. Goldman would have
received a payment of $2,290,673 and Mr. Ambury would have received a payment of $1,877,733.
Indemnification Agreements
We have entered into an indemnification agreement with each of our directors and senior executives. These agreements provide for us to, among
other things, indemnify such persons against certain liabilities that may arise by reason of their status or service as directors or officers, to advance their expenses incurred as a result of a proceeding as to which they may be indemnified and to
cover such person under any directors and officers liability insurance policy we choose, in our discretion, to maintain. These indemnification agreements are intended to provide indemnification rights to the fullest extent permitted
under applicable indemnification rights statutes in the State of Delaware and are in addition to any other rights such person may have under our Partnership Agreement and the limited liability company agreement of our general partner, and applicable
law. We believe these indemnification agreements enhance our ability to attract and retain knowledgeable and experienced executives and independent,
non-management
directors.
66
Board of Directors Report
The Board of Directors of the general partner of the Company does not have a separate compensation committee. Executive compensation is
determined by the Board of Directors.
The Board of Directors reviewed and discussed with the Companys management the Compensation
Discussion and Analysis contained in this annual report on Form
10-K.
Based on that review and discussion, the Board of Directors recommends that the Compensation Discussion and Analysis be included in the
Companys annual report on Form
10-K
for the year ended September 30, 2017.
Paul A. Vermylen, Jr.
Steven J. Goldman
Henry D. Babcock
C. Scott Baxter
Daniel P. Donovan
Bryan H. Lawrence
Sheldon B. Lubar
William P. Nicoletti
Executive Compensation Table
The following table sets forth the annual salary compensation, bonus and all other compensation awards earned and accrued by the named
executive officers in the fiscal year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary Compensation Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
Value and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
Nonqualified
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive
|
|
|
Deferred
|
|
|
|
|
|
|
|
Name and
|
|
Fiscal
|
|
|
|
|
|
|
|
|
Unit
|
|
|
Option
|
|
|
Plan
|
|
|
Comp.
|
|
|
All Other
|
|
|
|
|
Principal Position
|
|
Year
|
|
|
Salary
|
|
|
Bonus
|
|
|
Awards
|
|
|
Awards
|
|
|
Comp.(1)
|
|
|
Earnings (2)
|
|
|
Comp.(3)
|
|
|
Total
|
|
Steven J. Goldman
|
|
|
2017
|
|
|
$
|
450,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
536,060
|
|
|
$
|
|
|
|
$
|
135,834
|
|
|
$
|
1,121,894
|
|
President and
|
|
|
2016
|
|
|
$
|
420,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
547,000
|
|
|
$
|
|
|
|
$
|
120,563
|
|
|
$
|
1,087,173
|
|
Chief Executive Officer
|
|
|
2015
|
|
|
$
|
390,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
957,950
|
|
|
$
|
|
|
|
$
|
102,563
|
|
|
$
|
1,450,513
|
|
Richard F. Ambury
|
|
|
2017
|
|
|
$
|
384,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
445,320
|
|
|
$
|
|
|
|
$
|
147,254
|
|
|
$
|
976,653
|
|
Chief Financial Officer,
|
|
|
2016
|
|
|
$
|
368,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
434,000
|
|
|
$
|
40,838
|
|
|
$
|
129,326
|
|
|
$
|
972,264
|
|
Treasurer and Executive
|
|
|
2015
|
|
|
$
|
353,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
762,450
|
|
|
$
|
6,942
|
|
|
$
|
110,522
|
|
|
$
|
1,233,861
|
|
Vice President
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard G. Oakley
|
|
|
2017
|
|
|
$
|
253,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
152,000
|
|
|
$
|
|
|
|
$
|
61,377
|
|
|
$
|
466,502
|
|
Senior Vice President -
|
|
|
2016
|
|
|
$
|
247,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
145,750
|
|
|
$
|
62,632
|
|
|
$
|
58,491
|
|
|
$
|
513,956
|
|
Accounting
|
|
|
2015
|
|
|
$
|
242,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
275,000
|
|
|
$
|
9,236
|
|
|
$
|
53,975
|
|
|
$
|
580,294
|
|
(1)
|
Payable pursuant to the Companys profit sharing pool, which is described under Compensation Discussion and Analysis. Profit Sharing Allocation.
|
67
(2)
|
We have two frozen defined benefit pension plans that we sometimes refer in this Report as the Petro defined benefit pension plan and the Meenan defined benefit pension plan, where participants are not accruing
additional benefits. Mr. Ambury also participated in a
tax-qualified
supplemental employee retirement plan which prior to being frozen in 1997, represented contributions to an employee plan to compensate
for a reduction in certain benefits prior to 1997. Included in Mr. Amburys amounts for the Change in Pension Value and Nonqualified Deferred Comp. Earnings are $0, $6,560 and $1,115 for fiscal years 2017, 2016, and 2015 respectively, for
the actuarial changes in the value of his frozen supplemental employee retirement plan. The change in all the named executives pension values (including the supplemental employee retirement plan) are
non-cash,
and reflect normal adjustments resulting from changes in discount rates and government mandated mortality tables.
|
(3)
|
All other compensation is subdivided as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Management
Incentive
Compensation Plan
|
|
|
Company Match and
Core Contribution to
401(K) Plan
|
|
|
Car Allowance or Monetary
Value for Personal Use of
Company Owned Vehicle
|
|
|
Total
|
|
Steven J. Goldman
|
|
$
|
94,064
|
|
|
$
|
16,346
|
|
|
$
|
25,424
|
|
|
$
|
135,834
|
|
Richard F. Ambury
|
|
$
|
102,814
|
|
|
$
|
20,440
|
|
|
$
|
24,000
|
|
|
$
|
147,254
|
|
Richard G. Oakley
|
|
$
|
17,500
|
|
|
$
|
19,877
|
|
|
$
|
24,000
|
|
|
$
|
61,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grants of Plan-Based Awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other
Stocks
Awards:
Number of
Shares of
|
|
|
All Other
Option
Awards:
Number of
Securities
|
|
|
Exercise or
Base Price of
Option
|
|
|
Grant Date
Fair Value
of Stock
and
|
|
|
|
|
|
|
Estimated Future Payouts
Equity Incentive Plan Awards (1)
|
|
|
Estimated Future Payouts
Under Equity Incentive Plan
|
|
|
|
|
|
Name
|
|
Grant
Date (1)
|
|
|
Threshold
($)
|
|
|
Target
($) (2)
|
|
|
Maximum
($)
|
|
|
Threshold
(#)
|
|
|
Target
(#)
|
|
|
Maximum
(#)
|
|
|
Stock or
Units (#)
|
|
|
Underlying
Options (#)
|
|
|
Awards
($/Sh)
|
|
|
Option
Awards
|
|
Steven J.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goldman
|
|
|
7/21/09
|
|
|
|
|
|
|
|
536,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard F.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ambury
|
|
|
7/21/09
|
|
|
|
|
|
|
|
445,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard G.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oakley
|
|
|
7/21/09
|
|
|
|
|
|
|
|
152,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
On July 21, 2009, the Board of Directors authorized the continuance of the annual profit sharing plan, subject to its power to terminate the plan at any time. Profit sharing allocations are described under
Compensation Philosophy and PoliciesProfit Sharing Allocations.
|
(2)
|
The annual profit sharing plan does not provide for thresholds or maximums; the amounts listed represent the actual awards to the named executive officers for fiscal 2017.
|
68
Outstanding Equity Awards at Fiscal
Year-End
None.
Option Exercises and
Stock Vested
None.
Pension Plans
Pursuant to Which Named Executive Officers Have an Accumulated Benefit But Are Not Currently Accruing Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Plan Name
|
|
Number of Years
Credited Service
|
|
|
Present Value of
Accumulated Benefit
|
|
|
Payments During Last
Fiscal Year
|
|
Richard F. Ambury (1)
|
|
Retirement Plan
|
|
|
13
|
|
|
$
|
263,683
|
|
|
$
|
|
|
|
|
Supplemental Employee Retirement Plan
|
|
|
|
|
|
$
|
50,463
|
|
|
$
|
|
|
Richard G. Oakley (1)
|
|
Retirement Plan
|
|
|
19
|
|
|
$
|
417,057
|
|
|
$
|
|
|
(1)
|
The named executive officers have accumulated benefits in the
tax-qualified
Petro defined benefit pension plan that was frozen in 1997 or in the
tax-qualified
Meenan defined benefit pension plan that was frozen in 2002, subsequent to its combination with Petro. Mr. Ambury also participated in a
tax-qualified
supplemental employee retirement plan which, prior to being frozen in 1997, represented contributions to an employee plan to compensate for a reduction in certain benefits prior to 1997. Mr. Goldman was not a participant in any of these plans.
Each year, the named executive officers accumulated benefits are actuarially calculated generally based on the credited years of service and each employees compensation at the time the plan was frozen. The present value of these amounts
are the present value of a single life annuity generally payable at later or normal retirement age, adjusted for changes in discount rates and government mandated mortality tables. See Note 12. Employee Benefit Plans, to Stars Consolidated
Financial Statements, for the material assumptions applied in quantifying the present value of the accumulated benefits of these frozen plans.
|
Nonqualified Defined Contribution and Other Nonqualified Deferred Compensation Plans
None.
Potential Payments upon Termination
If Mr. Goldmans employment is terminated by for reasons other than for cause or if Mr. Goldman terminates his
employment for good reason, he will be entitled to receive
one-years
salary as severance except in the case of a termination following a change in control which is discussed above under Change in
Control Agreements. For 12 months following the termination of his employment, Mr. Goldman is prohibited from competing with the Company or from becoming involved either as an employee, as a consultant or in any other capacity, in the
sale of heating oil or propane on a retail basis.
If Mr. Amburys employment is terminated for reasons other than cause or if
Mr. Ambury terminates his employment for a good reason, he will be entitled to receive a severance payment of one years salary except in the case of a termination following a change in control which is discussed above under Change
in Control Agreements. For 12 months following the termination of his employment, Mr. Ambury is prohibited from competing with the Company or from becoming involved either as an employee, as a consultant or in any other capacity, in the
sale of heating oil or propane on a retail basis.
If Mr. Oakleys employment is terminated by the Company without cause, he
will be entitled to receive one years salary as severance. For 12 months following the termination of his employment, Mr. Oakley is prohibited from competing with the Company or from becoming involved either as an employee, as a
consultant or in any other capacity, in the sale of heating oil or propane on a retail basis.
69
The amounts shown in the table below assume that the triggering event for each named executive
officers termination or change in control payment was effective as of the date of this report based upon their historical compensation arrangements as of such date. The actual amounts to be paid out can only be determined at the time of such
named executive officers termination of employment or Stars change of control.
The employment agreements of the foregoing
officers also require that they not reveal confidential information of the Company within twelve months following the termination of their employment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potential Payments
|
|
|
|
Potential Payments
|
|
|
Following
|
|
Name
|
|
Upon Termination
|
|
|
a Change of Control
|
|
Steven J. Goldman
|
|
$
|
465,000
|
|
|
$
|
2,290,673
|
|
Richard F. Ambury
|
|
$
|
391,610
|
|
|
$
|
1,877,733
|
|
Richard G. Oakley
|
|
$
|
256,250
|
|
|
$
|
|
|
Compensation of Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director Compensation Table
|
|
Name
|
|
Fees
Earned
or Paid
in Cash
|
|
|
Unit
Awards
|
|
|
Option
Awards
|
|
|
Non-Equity
Incentive
Plan
Compensation
|
|
|
Change in
Pension
Value and
Nonqualified
Deferred
Compensation
Earnings (2)
|
|
|
All Other
Compensation
(3)
|
|
|
Total
|
|
Paul A. Vermylen, Jr. (1)
|
|
$
|
130,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
69,527
|
|
|
$
|
200,027
|
|
Daniel P. Donovan (4)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
444,363
|
|
|
$
|
444,363
|
|
Henry D. Babcock (5, 8)
|
|
$
|
106,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
106,200
|
|
C. Scott Baxter (5, 8)
|
|
$
|
107,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
107,700
|
|
Bryan H. Lawrence (6)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Sheldon B. Lubar
|
|
$
|
65,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
65,417
|
|
William P. Nicoletti (7, 8)
|
|
$
|
117,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
117,483
|
|
(1)
|
Mr. Vermylen is
non-executive
Chairman of the Board.
|
(2)
|
Mr. Vermylen and Mr. Donovan participate in one of our frozen defined benefit pension plans. Participants are currently not accruing additional benefits under the frozen plan. The change in the pension value
reflects normal
non-cash
adjustments resulting from changes in discount rates and government mandated mortality tables.
|
(3)
|
Mr. Vermylen and Mr. Donovan reached the frozen defined benefit pension plan full retirement age in fiscal year 2012 and 2011, respectively, and started receiving pension payments.
|
(4)
|
Mr. Donovan was a management director until September 30, 2013. Mr. Donovan retired as the President and Chief Executive Officer of Star and its subsidiaries, effective as of September 30, 2013,
following which he continued to serve as a director of our general partner but did not receive fees for board or committee service. In addition, in accordance to the first amendment to the letter agreement effective as of September 30, 2015,
Mr. Donovan served as a consultant to us for an additional two year period for which he received consulting fees of $250,000 per annum. The amount included for Mr. Donovan in all other compensation represents $250,000 for consulting fees,
$131,252 for amounts paid to him under the management incentive compensation plan, and $63,111 for pension payments. Beginning October 1, 2017, Mr. Donovans consulting services under such side letter agreement expired, following
which he will receive the same fees as our other
non-management
directors.
|
(5)
|
Mr. Babcock and Mr. Baxter are Audit Committee members.
|
(6)
|
Mr. Lawrence has chosen not to receive any fees as a director of the general partner of Star.
|
70
(7)
|
Mr. Nicoletti is Chairman of the Audit Committee.
|
(8)
|
Messrs. Babcock, Baxter and Nicoletti were appointed to serve as members of the Conflicts Committee. Mr. Baxter received additional compensation of $22,000 as Chairman of the Conflicts Committee and Messrs. Babcock
and Nicoletti received additional compensation of $19,000 each as members of the Conflicts Committee.
|
Each
non-management
director receives an annual fee of $57,000 plus $1,500 for each regular and telephonic meeting attended. The Chairman of the Audit Committee receives an annual fee of $22,800 while other Audit
Committee members receive an annual fee of $11,400. Each member of the Audit Committee receives $1,500 for every regular and telephonic meeting attended. The
non-executive
chairman of the Board receives an
annual fee of $120,000.
ITEM 12.
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
|
The following table
shows the beneficial ownership as of November 30, 2017 of common units and general partner units by:
(1) Kestrel and certain
beneficial owners;
(2) each of the named executive officers and directors of Kestrel Heat;
(3) all directors and executive officers of Kestrel Heat as a group; and
(4) each person the Company knows to hold 5% or more of the Companys units.
Except as indicated, the address of each person is c/o Star Group, L.P. at 9 West Broad, Street, Suite 310, Stamford, Connecticut 06902.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Units
|
|
|
General Partner Units
|
|
Name
|
|
Number
|
|
|
Percentage
|
|
|
Number
|
|
|
Percentage
|
|
Kestrel (a)
|
|
|
500,000
|
*
|
|
|
|
|
|
|
325,729
|
|
|
|
100.00
|
%
|
Paul A. Vermylen, Jr. (b)
|
|
|
1,274,512
|
|
|
|
2.28
|
%
|
|
|
|
|
|
|
|
|
Sheldon B. Lubar (c)
|
|
|
1,254,662
|
|
|
|
2.24
|
%
|
|
|
|
|
|
|
|
|
Henry D. Babcock (d)
|
|
|
106,121
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
William P. Nicoletti
|
|
|
35,506
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
Bryan H. Lawrence (e)
|
|
|
8,134,925
|
|
|
|
14.56
|
%
|
|
|
|
|
|
|
|
|
C. Scott Baxter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daniel P. Donovan
|
|
|
15,900
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
Richard F. Ambury
|
|
|
23,890
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
Steven J. Goldman
|
|
|
24,900
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
Richard G. Oakley
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All officers and directors and Kestrel Heat, LLC as a group (11 persons)
|
|
|
11,370,416
|
|
|
|
20.35
|
%
|
|
|
325,729
|
|
|
|
100.00
|
%
|
Yorktown Energy Partners VI, L.P. (f)
|
|
|
7,546,567
|
|
|
|
13.50
|
%
|
|
|
|
|
|
|
|
|
Cat Rock Capital Management, L.P. (g)
|
|
|
2,993,460
|
|
|
|
5.36
|
%
|
|
|
|
|
|
|
|
|
(a)
|
Includes 500,000 Common Units and 325,729 general partner units owned by Kestrel Heat.
|
(b)
|
Includes 210,281 Common Units held by The Robin C. Vermylen 2016 Irrevocable Trust, with respect to which Mr. Vermylen is a trustee of the trust and Mr. Vermylens spouse is a beneficiary of the trust;
and 210,281 Common Units held by The Paul A. Vermylen, Jr. 2015 Irrevocable Trust, with respect to which Mr. Vermylen is a beneficiary of the trust and is the settlor of the trust.
|
(c)
|
All Common Units are owned by Lubar Equity Fund, LLC, with respect to which Mr. Lubar is a director and officer of Lubar & Co. Incorporated, which is the sole manager of Lubar Equity Fund, LLC, whose
owners include Mr. Lubar, members of his family and other legal entities that are associated with or controlled by Mr. Lubar and members of his family.
|
71
(d)
|
Includes 15,000 Common Units owned by White Hill Trust, with respect to which Mr. Babcocks
sister-in-law
and
step-son
are the trustees and Mr. Babcocks wife is the primary beneficiary.
|
(e)
|
Includes 7,546,567 Common Units owned by Yorktown Energy Partners VI, L.P. (Yorktown VI), with respect to which Mr. Lawrence is a member and manager of Yorktown VI Associates LLC (Yorktown VI
Associates), the general partner of Yorktown VI Company LP (Yorktown VI Company), the general partner of Yorktown VI.
|
(f)
|
According to a Schedule 13G filed by Yorktown Energy Partners VI, L.P. on February 21, 2017. The address of Yorktown Energy Partners VI, L.P. is 410 Park Avenue,
19
th
Floor, New York, New York 10022.
|
(g)
|
According to a Form 13F filed by Cat Rock Capital Management, L.P. with the SEC on November 14, 2017.
|
*
|
Amount represents less than 1%.
|
ITEM 13.
|
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
|
Star has a written conflict of interest
policy and procedure that requires all officers, directors and employees to report to senior corporate management or the board of directors, all personal, financial or family interest in transactions that involve the individual and the Star. In
addition, our Governance Guidelines provide that any monetary arrangement between a director and his or her affiliates (including any member of a directors immediate family) and the Company or any of its affiliates for goods or services shall
be subject to approval by the full Board of Directors.
The general partner does not receive any management fee or other compensation for
its management of Star. The general partner is reimbursed for all expenses incurred on behalf of the Star, including the cost of compensation, that are properly allocable to Star. Our Partnership Agreement provides that the general partner shall
determine the expenses that are allocable to Star in any reasonable manner determined by the general partner in its sole discretion. In addition, the general partner and its affiliates may provide services to the Star for which a reasonable fee
would be charged as determined by the general partner.
Kestrel has the ability to elect the Board of Directors of Kestrel Heat, including
Messrs. Vermylen, Lawrence and Lubar. Messrs. Vermylen, Lawrence and Lubar are also members of the board of managers of Kestrel and, either directly or through affiliated entities, own equity interests in Kestrel. Kestrel owns all of the issued and
outstanding membership interests of Kestrel Heat.
Policies Regarding Transactions with Related Persons
Our Code of Business Conduct and Ethics, Partnership Governance Guidelines and Partnership Agreement set forth policies and procedures with
respect to transactions with persons affiliated with the Company and the resolution of conflicts of interest, which taken together provide the Company with a framework for the review and approval of transactions with related
persons as such terms are defined in Item 404 of Regulation
S-K.
For the years ended
September 30, 2017, 2016, and 2015, Star had no related party transactions or agreements pursuant to Item 404 of Regulation
S-K.
Our Code of Business Conduct and Ethics applies to our directors, officers, employees and their affiliates. It deals with conflicts of
interest (e.g., transactions with the Company), confidential information, use of Star assets, business dealings, and other similar topics. The Code requires officers, directors and employees to avoid even the appearance of a conflict of interest and
to report potential conflicts of interest to the Companys Controller or Director of Internal Audit.
Our Partnership Governance
Guidelines provide that any monetary arrangement between a director and his or her affiliates (including any member of a directors immediate family) and the Company or any of its affiliates for goods or services shall be subject to approval by
the full Board of Directors. Although the Partnership Governance Guidelines by their terms only apply to directors the Board intends to apply this requirement to officers and employees and their affiliates.
72
To the extent that the Board determines that it would be in the best interests of the Company to
enter into a transaction with a related person, the Board intends to utilize the procedures set forth in the Partnership Agreement for the review and approval of potential conflicts of interest. Our Partnership Agreement provides that whenever a
potential conflict of interest exists or arises between the general partner or any of its Affiliates (including its directors, executive officers and controlling members), on the one hand, and the Company or any partner, on the other hand, any
resolution or course of action in respect of such conflict of interest shall be permitted and deemed approved by all partners, and shall not constitute a breach of the Partnership Agreement, of any agreement contemplated therein, or of any duty
stated or implied by law or equity, if the resolution or course of action is, or by operation of the Partnership Agreement is deemed to be, fair and reasonable to the Company.
Any conflict of interest and any resolution of such conflict of interest shall be conclusively deemed fair and reasonable to the Company if
such conflict of interest or resolution is (i) approved by a committee of independent directors (the Conflicts Committee), (ii) on terms no less favorable to the Company than those generally being provided to or available from
unrelated third parties or (iii) fair to the Company, taking into account the totality of the relationships between the parties involved (including other transactions that may be particularly favorable or advantageous to the Company).
The general partner (including the Conflicts Committee) is authorized in connection with its determination of what is fair and
reasonable to the Company and in connection with its resolution of any conflict of interest to consider:
|
(A)
|
the relative interests of any party to such conflict, agreement, transaction or situation and the benefits and burdens relating to such interest;
|
|
(B)
|
any customary or accepted industry practices and any customary or historical dealings with a particular person;
|
|
(C)
|
any applicable generally accepted accounting practices or principles; and
|
|
(D)
|
such additional factors as the general partner (including the Conflicts Committee) determines in its sole discretion to be relevant, reasonable or appropriate under the circumstances.
|
ITEM 14.
|
PRINCIPAL ACCOUNTING FEES AND SERVICES
|
The following table represents the aggregate
fees for professional audit services rendered by KPMG LLP including fees for the audit of our annual financial statements for the fiscal years 2017 and 2016, and for fees billed and accrued for other services rendered by KPMG LLP (in thousands).
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
Audit Fees(1)
|
|
$
|
1,900
|
|
|
$
|
1,900
|
|
Tax Fees(2)
|
|
|
491
|
|
|
|
339
|
|
|
|
|
|
|
|
|
|
|
Total Fees
|
|
$
|
2,391
|
|
|
$
|
2,239
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Audit fees were for professional services rendered in connection with audits and quarterly reviews of the consolidated financial statements of the Company.
|
(2)
|
Tax fees related to services for tax consultation and tax compliance.
|
Audit Committee:
Pre-Approval
Policies and Procedures.
At its regularly scheduled and special meetings, the Audit Committee of the Board of Directors considers and
pre-approves
any audit
and
non-audit
services to be performed by the Companys independent accountants. The Audit Committee has delegated to its chairman, an independent member of the Companys Board of Directors, the
authority to grant
pre-approvals
of
non-audit
services provided that the service(s) shall be reported to the Audit Committee at its next regularly scheduled meeting. On
June 18, 2003, the Audit Committee adopted its
pre-approval
policies and procedures. Since that date, there have been no audit or
non-audit
services rendered by the
Companys principal accountants that were not
pre-approved.
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) Organization
Star Group, L.P.
(Star the Company, we, us, or our) is a full service provider specializing in the sale of home heating products and services to residential and commercial customers. The Company also
services and sells heating and air conditioning equipment to its home heating oil and propane customers and to a lesser extent, provides these offerings to customers outside of our home heating oil and propane customer base. In certain of our
marketing areas, we provide home security and plumbing services primarily to our home heating oil and propane customer base. We also sell diesel fuel, gasoline and home heating oil on a delivery only basis. These products and services are offered
through our home heating oil and propane locations. The Company has one reportable segment for accounting purposes. We believe we are the nations largest retail distributor of home heating oil based upon sales volume. Including our propane
locations, we serve customers in the more northern and eastern states within the Northeast, Central and Southeast U.S. regions.
The
Company is organized as follows:
|
|
|
Star is limited partnership, which at September 30, 2017, had outstanding 55.9 million Common Units (NYSE: SGU), representing 99.4% limited partner interest in Star, and 0.3 million general
partner units, representing 0.6% general partner interest in Star. Our general partner is Kestrel Heat, LLC, a Delaware limited liability company (Kestrel Heat or the general partner). The Board of Directors of Kestrel Heat
(the Board) is appointed by its sole member, Kestrel Energy Partners, LLC, a Delaware limited liability company (Kestrel).
|
|
|
|
Star owns 100% of Star Acquisitions, Inc. (SA), a Minnesota corporation, that owns 100% of Petro Holdings, Inc. (Petro). SA and its subsidiaries are subject to Federal and state corporate income
taxes. Stars operations are conducted through Petro and its subsidiaries. Petro is primarily a Northeast, Central and Southeast region retail distributor of home heating oil and propane that at September 30, 2017 served approximately
455,000 full-service residential and commercial home heating oil and propane customers. Petro also sold diesel fuel, gasoline and home heating oil to approximately 74,000 customers on a delivery only basis. In addition, Petro installed, maintained,
and repaired heating and air conditioning equipment for its customers and provided ancillary home services, including home security and plumbing, to approximately 31,000 customers.
|
|
|
|
Petroleum Heat and Power Co., Inc. (PH&P) is a 100% owned subsidiary of Star. PH&P is the borrower and Star is the guarantor of the third amended and restated credit agreements five-year senior
secured term loan and the $300 million ($450 million during the heating season of December through April of each year) revolving credit facility, both due July 30, 2020. (See Note 11Long-Term Debt and Bank Facility Borrowings)
|
2) Summary of Significant Accounting Policies
Basis of Presentation
The Consolidated
Financial Statements include the accounts of Star Group, L.P. and its subsidiaries. All material intercompany items and transactions have been eliminated in consolidation.
Comprehensive Income
Comprehensive
income is comprised of net income and other comprehensive income. Other comprehensive income consists of the unrealized gain amortization on the Companys pension plan obligation for its two frozen defined benefit pension plans, and the
corresponding tax effect.
Use of Estimates
The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
F-8
Revenue Recognition
Sales of petroleum products are recognized at the time of delivery to the customer and sales of heating and air conditioning equipment are
recognized upon completion of installation. Revenue from repairs, maintenance and other services are recognized upon completion of the service. Payments received from customers for equipment service contracts are deferred and amortized into income
over the terms of the respective service contracts, on a straight-line basis, which generally do not exceed one year. To the extent that the Company anticipates that future costs for fulfilling its contractual obligations under its service
maintenance contracts will exceed the amount of deferred revenue currently attributable to these contracts, the Company recognizes a loss in current period earnings equal to the amount that anticipated future costs exceed related deferred revenues.
Cost of Product
Cost of product
includes the cost of home heating oil, diesel, propane, kerosene, heavy oil, gasoline, throughput costs, barging costs, option costs, and realized gains/losses on closed derivative positions for product sales.
Cost of Installations and Services
Cost
of installations and services includes equipment and material costs, wages and benefits for equipment technicians, dispatchers and other support personnel, subcontractor expenses, commissions and vehicle related costs.
Delivery and Branch Expenses
Delivery
and branch expenses include wages and benefits and department related costs for drivers, dispatchers, garage mechanics, customer service, sales and marketing, compliance, credit and branch accounting, information technology, vehicle and property
rental costs, insurance, weather hedge contract costs and recoveries, and operational management and support.
General and Administrative Expenses
General and administrative expenses include property rental costs, wages and benefits and department related costs for human
resources, finance and corporate accounting, internal audit, administrative support and supply.
Allocation of Net Income
Net income for partners capital and statement of operations is allocated to the general partner and the limited partners in accordance
with their respective ownership percentages, after giving effect to cash distributions paid to the general partner in excess of its ownership interest, if any.
Net Income per Limited Partner Unit
Income per limited partner unit is computed in accordance with the Financial Accounting Standards Board (FASB) Accounting Standards
Codification (ASC)
260-10-05
Earnings Per Share, Master Limited Partnerships (EITF
03-06),
by dividing the limited
partners interest in net income by the weighted average number of limited partner units outstanding. The pro forma nature of the allocation required by this standard provides that in any accounting period where the Companys aggregate net
income exceeds its aggregate distribution for such period, the Company is required to present net income per limited partner unit as if all of the earnings for the periods were distributed, regardless of whether those earnings would actually be
distributed during a particular period from an economic or practical perspective. This allocation does not impact the Companys overall net income or other financial results. However, for periods in which the Companys aggregate net income
exceeds its aggregate distributions for such period, it will have the impact of reducing the earnings per limited partner unit, as the calculation according to this standard results in a theoretical increased allocation of undistributed earnings to
the general partner. In accounting periods where aggregate net income does not exceed aggregate distributions for such period, this standard does not have any impact on the Companys net income per limited partner unit calculation. A separate
and independent calculation for each quarter and
year-to-date
period is performed, in which the Companys contractual participation rights are taken into account.
Cash Equivalents, Receivables, Revolving Credit Facility Borrowings, and Accounts Payable
The carrying amount of cash equivalents, receivables, revolving credit facility borrowings, and accounts payable approximates fair value
because of the short maturity of these instruments.
F-9
Cash, Cash Equivalents, and Restricted Cash
The Company considers all highly liquid investments with an original maturity of three months or less, when purchased, to be cash equivalents.
At September 30, 2017, the $52.7 million of cash, cash equivalents, and restricted cash on the condensed consolidated statement of cash flows is composed of $52.5 million of cash and cash equivalents and $0.3 million of
restricted cash. Restricted cash represents deposits held by our captive insurance company that are required by state insurance regulations to remain in the captive insurance company as cash.
Receivables and Allowance for Doubtful Accounts
Accounts receivables from customers are recorded at the invoiced amounts. Finance charges may be applied to trade receivables that are more
than 30 days past due, and are recorded as finance charge income.
The allowance for doubtful accounts is the Companys best estimate
of the amount of trade receivables that may not be collectible. The allowance is determined at an aggregate level by grouping accounts based on certain account criteria and its receivable aging. The allowance is based on both quantitative and
qualitative factors, including historical loss experience, historical collection patterns, overdue status, aging trends, and current economic conditions. The Company has an established process to periodically review current and past due trade
receivable balances to determine the adequacy of the allowance. No single statistic or measurement determines the adequacy of the allowance. The total allowance reflects managements estimate of losses inherent in its trade receivables at the
balance sheet date. Different assumptions or changes in economic conditions could result in material changes to the allowance for doubtful accounts.
Inventories
Liquid product inventories
are stated at the lower of cost or market using the weighted average cost method of accounting. All other inventories, representing parts and equipment are stated at the lower of cost or market using the FIFO method.
Property and Equipment
Property and
equipment are stated at cost. Depreciation is computed over the estimated useful lives of the depreciable assets using the straight-line method over three to thirty years.
Investments
The investments are held by
our captive insurance company in an irrevocable trust as collateral for workers compensation and automobile liability claims incurred and expected to be incurred in fiscal 2017. The collateral is required by a third party insurance carrier
that insures per claim amounts above a set deductible. Due to the expected timing of claim payments, the nature of the collateral agreement with the carrier, and our captive insurance companys source of other operating cash, the collateral is
not expected to be used to pay obligations within the next twelve months.
Investments are currently comprised of $11.3 million of
Level 1 debt securities measured at fair value and $0.5 million of mutual funds measured at net asset value. See Note 19 Subsequent Events for discussion of investment activity after September 30, 2017.
Goodwill and Intangible Assets
Goodwill
and intangible assets include goodwill, customer lists, trade names and covenants not to compete.
Goodwill is the excess of cost over the
fair value of net assets in the acquisition of a company. In accordance with FASB ASC
350-10-05
Intangibles-Goodwill and Other, goodwill and intangible assets with
indefinite useful lives are not amortized, but instead are annually tested for impairment. Also in accordance with this standard, intangible assets with finite useful lives are amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment. The Company performs its annual impairment review during its fiscal fourth quarter or more frequently if events or circumstances indicate that the value of goodwill might be impaired.
Customer lists are the names and addresses of an acquired companys customers. Based on historical retention experience, these lists are
amortized on a straight-line basis over seven to ten years.
F-10
Trade names are the names of acquired companies. Based on the economic benefit expected and
historical retention experience of customers, trade names are amortized on a straight-line basis over seven to twenty years.
Business Combinations
We use the acquisition method of accounting in accordance with FASB ASC 805 Business Combinations. The acquisition method of
accounting requires us to use significant estimates and assumptions, including fair value estimates, as of the business combination date, and to refine those estimates as necessary during the measurement period (defined as the period, not to exceed
one year, in which the amounts recognized for a business combination may be adjusted). Each acquired companys operating results are included in our consolidated financial statements starting on the date of acquisition. The purchase price is
equivalent to the fair value of consideration transferred. Tangible and identifiable intangible assets acquired and liabilities assumed as of the date of acquisition are recorded at the acquisition date fair value. The separately identifiable
intangible assets generally are comprised of customer lists, trade names and covenants not to compete. Goodwill is recognized for the excess of the purchase price over the net fair value of assets acquired and liabilities assumed.
Costs that are incurred to complete the business combination such as legal and other professional fees are not considered part of
consideration transferred, and are charged to general and administrative expense as they are incurred. For any given acquisition, certain contingent consideration may be identified. Estimates of the fair value of liability or asset classified
contingent consideration are included under the acquisition method as part of the assets acquired or liabilities assumed. At each reporting date, these estimates are remeasured to fair value, with changes recognized in earnings.
Impairment of Long-lived Assets
The
Company reviews intangible assets and other long-lived assets in accordance with FASB ASC
360-10-05-4
Property Plant and
Equipment, Impairment or Disposal of Long-Lived Assets subsection, for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The Company determines whether the carrying values
of such assets are recoverable over their remaining estimated lives through undiscounted future cash flow analysis. If such a review should indicate that the carrying amount of the assets is not recoverable, the Company will reduce the carrying
amount of such assets to fair value.
Deferred Charges
Deferred charges represent the costs associated with the issuance of the revolving credit facility and are amortized over the life of the
facility.
Advertising and Direct Mail Expenses
Advertising and direct mail costs are expensed as they are incurred. Advertising and direct mail expenses were $15.1 million,
$14.9 million, and $14.5 million, in 2017, 2016, and 2015, respectively and are recorded in delivery and branch expenses.
Customer Credit
Balances
Customer credit balances represent payments received in advance from customers pursuant to a balanced payment plan (whereby
customers pay on a fixed monthly basis) and the payments made have exceeded the charges for liquid product and other services.
Environmental Costs
Costs associated with managing hazardous substances and pollution are expensed on a current basis. Accruals are made for costs
associated with the remediation of environmental pollution when it becomes probable that a liability has been incurred and the amount can be reasonably estimated.
F-11
Insurance Reserves
The Company uses a combination of insurance, self-insured retention and self-insurance for a number of risks, including workers
compensation, general liability, vehicle liability, medical liability and property. Reserves are established and periodically evaluated, based upon expectations as to what our ultimate liability may be for outstanding claims using developmental
factors based upon historical claim experience, including frequency, severity, demographic factors and other actuarial assumptions, supplemented with support from qualified actuaries.
Income Taxes
Prior to November 1,
2017, Star was a master limited partnership and was not subject to tax at the entity level for Federal and State income tax purposes. While Star generated
non-qualifying
master limited partnership revenue
through its corporate subsidiaries, distributions from the corporate subsidiaries to Star are generally included in the determination of qualified master limited partnership income. All or a portion of the distributions received by the Company from
the corporate subsidiaries could be a dividend or capital gain to the partners. See Note
19-
Subsequent Events for discussion of Companys tax election effective November 1, 2017.
The accompanying financial statements are reported on a fiscal year, however, the Company and its Corporate subsidiaries file Federal and
State income tax returns on a calendar year.
As most of the Companys income is derived from its corporate subsidiaries, these
financial statements reflect significant Federal and State income taxes. For corporate subsidiaries of the Company, a consolidated Federal income tax return is filed. Deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amount of assets and liabilities and their respective tax bases and operating loss carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is recognized if, based on the weight of available evidence including historical tax losses, it is more
likely than not that some or all of deferred tax assets will not be realized.
Sales, Use and Value Added Taxes
Taxes are assessed by various governmental authorities on many different types of transactions. Sales reported for product, installations and
services exclude taxes.
Derivatives and Hedging
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. The Company has elected not to designate its derivative instruments as hedging instruments under this guidance, and the changes
in fair value of the derivative instruments are recognized in our statement of operations.
Weather Hedge Contract
To partially mitigate the effect of weather on cash flows, the Company has used weather hedge contracts for a number of years. Weather hedge
contracts are recorded in accordance with the intrinsic value method defined by the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC)
815-45-15
Derivatives and Hedging, Weather Derivatives (EITF
99-2).
The premium paid is included in the caption prepaid expenses and other current assets in the
accompanying balance sheets and amortized over the life of the contract, with the intrinsic value method applied at each interim period.
For fiscal years 2015, 2016 and 2017, the Company had weather hedge contracts that cover the five month period from November 1, through
March 31, taken as a whole, for each respective fiscal year. The ultimate amount due to the Company (if any) was based on the entire five month accumulated calculation for the hedge period and had a maximum payout of $12.5 million for each
respective fiscal year. During the first quarter of fiscal 2016, the Company recorded a credit of $12.5 million under this contract that reduced delivery and branch expenses. This amount was collected in April 2016. No credit was recorded
during the fiscal year ended September 30, 2017.
F-12
Recently Adopted Accounting Pronouncements
In April 2015, the FASB issued Accounting Standards Update (ASU)
No. 2015-03,
InterestImputation of Interest (Subtopic
835-30):
Simplifying the Presentation of Debt Issuance Costs. The update requires debt issuance costs related to a recognized debt liability be presented in the
balance sheet as a direct deduction from the carrying amount of the related debt liability instead of being presented as an asset. The Company retrospectively adopted the ASU effective December 31, 2016. As a result of the adoption, certain
prior year balances (September 30, 2016) changed to conform to the current year presentation as follows: deferred charges and other assets, net decreased from $11.9 million to $11.1 million and long-term debt decreased from
$76.3 million to $75.4 million.
In September 2015, the FASB issued ASU
No. 2015-16,
Simplifying the Accounting for Measurement-Period Adjustments, which requires an acquiring entity to recognize adjustments to provisional amounts that are identified during the measurement
period in the reporting period in which the adjustment amounts are determined. The acquiring entity is required to record, in the same periods financial statements, the effect on earnings of changes in depreciation, amortization, or other
income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. In addition, the acquiring entity is to present separately on the face of its income statement
or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods as if the adjustment to the provisional amounts had been recognized as of the acquisition
date. The Company adopted the ASU effective December 31, 2016. The adoption of ASU
No. 2015-16
did not have an impact on the Companys consolidated financial statements and related disclosures.
In November 2016, the FASB issued ASU
No. 2016-18,
Statement of Cash Flow (Topic 230):
Restricted cash. The update requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts
generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the
beginning-of-period
and
end-of-period
total amounts shown on the statement of cash flows. The Company adopted the ASU effective December 31, 2016. The adoption of ASU
No. 2016-18
did not have a material impact on the Companys consolidated financial statements and related disclosures.
Recently Issued Accounting Pronouncements
In May 2014, the FASB issued ASU
No. 2014-09,
Revenue from Contracts with Customers, which
requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The FASB has also issued several updates to ASU
2014-09.
This ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. This new guidance is effective for our annual reporting period beginning in the first quarter of fiscal 2019, with early adoption permitted beginning
in the first quarter of fiscal 2018. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is in the process of evaluating the effect that ASU
2014-09
will have on its revenue streams, consolidated financial statements and related disclosures. The Company has not yet selected a transition method, nor does it intend to early adopt.
In July 2015, the FASB issued ASU
No. 2015-11,
Simplifying the Measurement of Inventory. The
update changes the measurement principle for inventory from the lower of cost or market to the lower of cost and net realizable value. This new guidance is effective for our annual reporting period beginning in the first quarter of fiscal 2018, with
early adoption permitted. The Company does not expect ASU
No. 2015-11
to have a material impact on its consolidated financial statements and related disclosures.
F-13
In February 2016, the FASB issued ASU
No. 2016-02,
Leases. The update requires all leases with a term greater than twelve months to be recognized on the balance sheet by calculating the discounted present value of such leases and accounting for them through a
right-of-use
asset and an offsetting lease liability, and the disclosure of key information pertaining to leasing arrangements. This new guidance is effective for our annual reporting period beginning in
the first quarter of fiscal 2020, with early adoption permitted. The Company does not intend to early adopt. The Company is continuing to evaluate the effect that ASU
No. 2016-02
could have on its
consolidated financial statements and related disclosures, but has not yet selected a transition method. The new guidance will materially change how we account for operating leases for office space, trucks and other equipment. Upon adoption, we
expect to recognize discounted
right-of-use
assets and offsetting lease liabilities related to our operating leases of office space, trucks and other equipment. As of
September 30, 2017, the undiscounted future minimum lease payments through 2032 for such operating leases are approximately $134.3 million, but what amount of leasing activity is expected between September 30, 2017, and the date of
adoption, are currently unknown. For this reason we are unable to estimate the discounted
right-of-use
assets and lease liabilities as of the date of adoption.
In June 2016, the FASB issued ASU
No. 2016-13,
Financial Instruments Credit
Losses. The update broadens the information that an entity should consider in developing expected credit loss estimates, eliminates the probable initial recognition threshold, and allows for the immediate recognition of the full amount of
expected credit losses. This new guidance is effective for our annual reporting period beginning in the first quarter of fiscal 2021, with early adoption permitted in the first quarter of fiscal 2020. The Company is evaluating the effect that
ASU
No. 2016-13
will have on its consolidated financial statements and related disclosures, but has not yet determined the timing of adoption.
In August 2016, the FASB issued ASU
No. 2016-15,
Statement of Cash Flow (Topic 230):
Classification of Certain Cash Receipts and Cash Payments. The update addresses the issues of debt prepayment or debt extinguishment costs, settlement of
zero-coupon
debt instruments or other debt instruments
with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the
settlement of corporate owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions, and separately identifiable cash flows and application of the predominance principle.
This new guidance is effective for our annual reporting period beginning in the first quarter of fiscal 2019, with early adoption permitted. The Company has not determined the timing of adoption, but does not expect
ASU 2016-15
to have a material impact on its consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU
No. 2017-01,
Business Combinations (Topic 805): Clarifying
the definition of a business. The update clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or
businesses. This new guidance is effective for our annual reporting period beginning in the first quarter of fiscal 2019, with early adoption permitted. The Company has not determined the timing of adoption, but does not expect
ASU 2017-01
to have a material impact on its consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU
No. 2017-04,
Intangibles Goodwill and Other (Topic
230): Simplifying the test for goodwill impairment. The update simplifies how an entity is required to test goodwill for impairment. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting
units fair value, but not exceed the total amount of goodwill allocated to the reporting unit. This new guidance is effective for our annual reporting period beginning in the first quarter of fiscal 2021, with early adoption permitted. The
Company has not determined the timing of adoption, but does not expect
ASU 2017-04
to have a material impact on its consolidated financial statements and related disclosures.
F-14
3) Quarterly Distribution of Available Cash
The Company agreement provides that beginning October 1, 2008, minimum quarterly distributions on the common units will start accruing at
the rate of $0.0675 per quarter ($0.27 on an annual basis) in accordance with the Partnership Agreement. In general, the Company intends to distribute to its partners on a quarterly basis, all of its available cash, if any, in the manner described
below. Available cash generally means, for any of its fiscal quarters, all cash on hand at the end of that quarter, less the amount of cash reserves that are necessary or appropriate in the reasonable discretion of the general partners
to:
|
|
|
provide for the proper conduct of the Companys business including acquisitions and debt payments;
|
|
|
|
comply with applicable law, any of its debt instruments or other agreements; or
|
|
|
|
provide funds for distributions to the common unitholders during the next four quarters, in some circumstances.
|
Available cash will generally be distributed as follows:
|
|
|
first, 100% to the common units, pro rata, until the Company distributes to each common unit the minimum quarterly distribution of $0.0675;
|
|
|
|
second, 100% to the common units, pro rata, until the Company distributes to each common unit any arrearages in payment of the minimum quarterly distribution on the common units for prior quarters;
|
|
|
|
third, 100% to the general partner units, pro rata, until the Company distributes to each general partner unit the minimum quarterly distribution of $0.0675;
|
|
|
|
fourth, 90% to the common units, pro rata, and 10% to the general partner units, pro rata (subject to the Management Incentive Plan), until the Company distributes to each common unit the first target distribution of
$0.1125; and
|
|
|
|
thereafter, 80% to the common units, pro rata, and 20% to the general partner units, pro rata.
|
The Company is obligated to meet certain financial covenants under the third amended and restated credit agreement. The Company must maintain
excess availability of at least 15.0% of the revolving commitment then in effect and a fixed charge coverage ratio of 1.15 in order to make any distributions to unitholders.
For fiscal 2017, 2016, and 2015, cash distributions declared per common unit were $0.425, $0.395, and $0.365, respectively.
For fiscal 2017, 2016, and 2015, $0.5 million, $0.4 million, and $0.3 million, respectively, of incentive distributions were
paid to the general partner, exclusive of amounts paid subject to the Management Incentive Plan.
4) Common Unit Repurchase Plans and Retirement
In July 2012, the Board of Directors (the Board) of the general partner of the Company authorized the repurchase of up to
3.0 million of the Companys Common Units (Plan III). In July 2013, the Board authorized the repurchase of an additional 1.9 million Common Units under Plan III. The authorized Common Unit repurchases may be made from
time-to-time
in the open market, in privately negotiated transactions or in such other manner deemed appropriate by management. There is no guarantee of the exact number of
units that will be purchased under the program and the Company may discontinue purchases at any time. The program does not have a time limit. The Board may also approve additional purchases of units from time to time in private transactions. The
Companys repurchase activities take into account SEC safe harbor rules and guidance for issuer repurchases. All of the Common Units purchased in the repurchase program will be retired.
F-15
Under the Companys third amended and restated credit agreement dated July 30, 2015, in
order to repurchase Common Units we must maintain Availability (as defined in the amended and restated credit agreements) of $45 million, 15.0% of the facility size of $300 million (assuming the
non-seasonal
aggregate commitment is outstanding) on a historical pro forma and forward-looking basis, and a fixed charge coverage ratio of not less than 1.15 measured as of the date of repurchase.
The following table shows repurchases under Plan III.
(in thousands, except per unit amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
Total Number
of Units
Purchased (a)
|
|
|
Average Price
Paid per Unit
(b)
|
|
|
Maximum Number
of Units that May
Yet Be Purchased
|
|
Plan IIINumber of units authorized
|
|
|
|
|
|
|
|
|
|
|
4,894
|
|
Private transactionNumber of units authorized
|
|
|
|
|
|
|
|
2,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan IIIFiscal years 2012 to 2016 total (c)
|
|
|
5,137
|
|
|
$
|
5.78
|
|
|
|
2,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan IIIFiscal year 2017 total
|
|
|
|
|
|
$
|
|
|
|
|
2,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan IIIOctober and November 2017
|
|
|
|
|
|
$
|
|
|
|
|
2,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Units were repurchased as part of a publicly announced program, except as noted in a private transaction.
|
(b)
|
Amounts include repurchase costs.
|
(c)
|
Includes 2.45 million common units acquired in private transactions.
|
5) Derivatives and
HedgingDisclosures and Fair Value Measurements
The Company uses derivative instruments such as futures, options and swap
agreements in order to mitigate exposure to market risk associated with the purchase of home heating oil for price-protected customers, physical inventory on hand, inventory in transit, priced purchase commitments and internal fuel usage. The
Company has elected not to designate its derivative instruments as hedging derivatives, but rather as economic hedges whose change in fair value is recognized in its statement of operations in the line item (Increase) decrease in the fair value of
derivative instruments. Depending on the risk being economically hedged, realized gains and losses are recorded in cost of product, cost of installations and services, or delivery and branch expenses.
F-16
As of September 30, 2017, to hedge a substantial majority of the purchase price associated
with heating oil gallons anticipated to be sold to its price-protected customers, the Company held the following derivative instruments that settle in future months to match anticipated sales: 15.6 million gallons of swap contracts with a
notional value of $25.5 million and a fair value of $2.3 million, 6.1 million gallons of call options with a notional value of $13.6 million and a fair value of $0.1 million, 8.1 million gallons of put options with a
notional value of $8.8 million and a fair value of $2 thousand, and 79.0 million net gallons of synthetic call options with an average notional value of $134.3 million and a fair value of $4.1 million. To hedge the
inter-month differentials for its price-protected customers, its physical inventory on hand and inventory in transit, the Company, as of September 30, 2017, had 1.3 million gallons of purchased swap contracts with a notional value of
$2.2 million and a fair value of $0.2 million, and 16.8 million gallons of sold swap contracts with a notional value of $28.5 million and a fair value of $(1.9) million that settle in future months, 5.2 million gallons of
purchased future contracts that settle daily with a notional value of $8.5 million, and 11.3 million gallons of sold future contracts that settle daily with a notional value of $18.0 million. To hedge its internal fuel usage and other
related activities for fiscal 2018, the Company, as of September 30, 2017, had 6.3 million gallons of swap contracts with a notional value of $9.9 million and a fair value of $1.1 million that settle in future months.
As of September 30, 2016, to hedge a substantial majority of the purchase price associated with heating oil gallons anticipated to be
sold to its price-protected customers, the Company held the following derivative instruments that settle in future months to match anticipated sales: 9.9 million gallons of swap contracts with a notional value of $14.3 million and a fair
value of $1.2 million, 6.8 million gallons of call options with a notional value of $13.8 million and a fair value of $0.3 million, 6.2 million gallons of put options with a notional value of $6.5 million and a fair
value of $0.02 million, and 84.9 million net gallons of synthetic call options with an average notional value of $133.5 million and a fair value of $1.3 million. To hedge the inter-month differentials for its price-protected
customers, its physical inventory on hand and inventory in transit, the Company, as of September 30, 2016, had 1.2 million gallons of purchased swap contracts with a notional value of $1.7 million and a fair value of
$0.2 million, 4.4 million gallons of purchased future contracts with a notional value of $6.7 million and a fair value of $0.5 million, and 21.8 million gallons of sold future contracts with a notional value of
$32.2 million and a fair value of $(2.1) million that settle in future months. In addition to the previously described hedging instruments, to
lock-in
the differential between high sulfur home heating oil
and ultra low sulfur diesel, the Company as of September 30, 2016, had 7.9 million gallons of spread contracts (simultaneous long and short positions) with an average notional value of $10.8 million and a net fair value of $(0.04)
million. To hedge its internal fuel usage and other related activities for fiscal 2017, the Company, as of September 30, 2016, had 5.7 million gallons of swap contracts with a notional value of $7.7 million and a fair value of
$1.1 million that settle in future months.
The Companys derivative instruments are with the following counterparties: Bank of
America, N.A., Bank of Montreal, Cargill, Inc., Citibank, N.A., JPMorgan Chase Bank, N.A., Key Bank, N.A., Munich Re Trading LLC, Regions Financial Corporation, Societe Generale, and Wells Fargo Bank, N.A. The Company assesses counterparty credit
risk and considers it to be low. We maintain master netting arrangements that allow for the
non-conditional
offsetting of amounts receivable and payable with counterparties to help manage our risks and record
derivative positions on a net basis. The Company generally does not receive cash collateral from its counterparties and does not restrict the use of cash collateral it maintains at counterparties. At September 30, 2017, the aggregate cash
posted as collateral in the normal course of business at counterparties was $0.5 million. Positions with counterparties who are also parties to our credit agreement are collateralized under that facility. As of September 30, 2017,
$0.1 million of hedge positions and payable amounts were secured under the credit facility.
FASB ASC
815-10-05
Derivatives and Hedging, established accounting and reporting standards requiring that derivative instruments be recorded at fair value and included in the
consolidated balance sheet as assets or liabilities, along with qualitative disclosures regarding the derivative activity. To the extent derivative instruments designated as cash flow hedges are effective and the standards documentation
requirements have been met, changes in fair value are recognized in other comprehensive income until the underlying hedged item is recognized in earnings. The Company has elected not to designate its derivative instruments as hedging instruments
under this standard and the change in fair value of the derivative instruments is recognized in our statement of operations in the line item (Increase) decrease in the fair value of derivative instruments. Depending on the risk being hedged,
realized gains and losses are recorded in cost of product, cost of installations and services, or delivery and branch expenses.
F-17
FASB ASC
820-10
Fair Value Measurements and Disclosures,
established a three-tier fair value hierarchy, which classified the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets; Level 2,
defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its
own assumptions. The Companys Level 1 derivative assets and liabilities represent the fair value of commodity contracts used in its hedging activities that are identical and traded in active markets. The Companys Level 2
derivative assets and liabilities represent the fair value of commodity contracts used in its hedging activities that are valued using either directly or indirectly observable inputs, whose nature, risk and class are similar. No significant
transfers of assets or liabilities have been made into and out of the Level 1 or Level 2 tiers. All derivative instruments were
non-trading
positions and were either a Level 1 or Level 2
instrument. The Company had no Level 3 derivative instruments. The fair market value of our Level 1 and Level 2 derivative assets and liabilities are calculated by our counter-parties and are independently validated by the Company.
The Companys calculations are, for Level 1 derivative assets and liabilities, based on the published New York Mercantile Exchange (NYMEX) market prices for the commodity contracts open at the end of the period. For
Level 2 derivative assets and liabilities the calculations performed by the Company are based on a combination of the NYMEX published market prices and other inputs, including such factors as present value, volatility and duration.
F-18
The Company had no assets or liabilities that are measured at fair value on a nonrecurring basis
subsequent to their initial recognition. The Companys financial assets and liabilities measured at fair value on a recurring basis are listed on the following table.
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|
|
|
|
|
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|
|
(In thousands)
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using:
|
|
Derivatives Not Designated
as
Hedging Instruments
Under FASB ASC
815-10
|
|
Balance Sheet Location
|
|
Total
|
|
|
Quoted Prices in
Active Markets for
Identical Assets
Level 1
|
|
|
Significant Other
Observable Inputs
Level 2
|
|
Asset Derivatives at September 30, 2017
|
|
Commodity contracts
|
|
Fair asset and fair liability value of derivative instruments
|
|
$
|
7,729
|
|
|
$
|
|
|
|
$
|
7,729
|
|
Commodity contracts
|
|
Long-term derivative assets included in the deferred charges and other assets, net balance
|
|
|
996
|
|
|
|
|
|
|
|
996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contract assets at September 30, 2017
|
|
|
|
$
|
8,725
|
|
|
$
|
|
|
|
$
|
8,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability Derivatives at September 30, 2017
|
|
Commodity contracts
|
|
Fair liability and fair asset value of derivative instruments
|
|
$
|
(2,086
|
)
|
|
$
|
|
|
|
$
|
(2,086
|
)
|
Commodity contracts
|
|
Cash collateral
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
Long-term derivative liabilities included in the deferred charges and other assets, net and other long-term liabilities balances
|
|
|
(731
|
)
|
|
|
|
|
|
|
(731
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contract liabilities at September 30, 2017
|
|
|
|
$
|
(2,817
|
)
|
|
$
|
|
|
|
$
|
(2,817
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives at September 30, 2016
|
|
Commodity contracts
|
|
Fair asset and fair liability value
of derivative instruments
|
|
$
|
11,692
|
|
|
$
|
|
|
|
$
|
11,692
|
|
Commodity contracts
|
|
Long-term derivative assets included in the other long-term liabilities balance
|
|
|
1,369
|
|
|
|
481
|
|
|
|
888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contract assets at September 30, 2016
|
|
|
|
$
|
13,061
|
|
|
$
|
481
|
|
|
$
|
12,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability Derivatives at September 30, 2016
|
|
Commodity contracts
|
|
Fair liability and fair asset value
of derivative instruments
|
|
$
|
(9,990
|
)
|
|
$
|
(1,603
|
)
|
|
$
|
(8,387
|
)
|
Commodity contracts
|
|
Cash collateral
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
Long-term derivative liabilities included in the other long-term liabilities balance
|
|
|
(565
|
)
|
|
|
(484
|
)
|
|
|
(81
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contract liabilities at September 30, 2016
|
|
|
|
|
$(10,555)
|
|
|
|
$(2,087)
|
|
|
|
$(8,468)
|
|
F-19
The Companys derivative assets (liabilities) offset by counterparty and subject to an
enforceable master netting arrangement are listed on the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts Not Offset in the
Statement of Financial Position
|
|
Offsetting of Financial Assets (Liabilities)
and Derivative Assets (Liabilities)
|
|
Gross
Assets
Recognized
|
|
|
Gross
Liabilities
Offset in the
Statement
of Financial
Position
|
|
|
Net Assets
(Liabilities)
Presented in
the
Statement of
Financial
Position
|
|
|
Financial
Instruments
|
|
|
Cash
Collateral
Received
|
|
|
Net
Amount
|
|
Fair asset value of derivative instruments
|
|
$
|
6,023
|
|
|
$
|
(91
|
)
|
|
$
|
5,932
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
5,932
|
|
Long-term derivative assets included in other long-term assets, net
|
|
|
996
|
|
|
|
(730
|
)
|
|
|
266
|
|
|
|
|
|
|
|
|
|
|
|
266
|
|
Fair liability value of derivative instruments
|
|
|
1,706
|
|
|
|
(1,995
|
)
|
|
|
(289
|
)
|
|
|
|
|
|
|
|
|
|
|
(289
|
)
|
Long-term derivative liabilities included in other long-term liabilities, net
|
|
|
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total at September 30, 2017
|
|
$
|
8,725
|
|
|
$
|
(2,817
|
)
|
|
$
|
5,908
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
5,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair asset value of derivative instruments
|
|
$
|
7,716
|
|
|
$
|
(3,729
|
)
|
|
$
|
3,987
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,987
|
|
Long-term derivative assets included in other long-term assets, net
|
|
|
888
|
|
|
|
(81
|
)
|
|
|
807
|
|
|
|
|
|
|
|
|
|
|
|
807
|
|
Fair liability value of derivative instruments
|
|
|
3,976
|
|
|
|
(6,261
|
)
|
|
|
(2,285
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,285
|
)
|
Long-term derivative liabilities included in other long-term liabilities, net
|
|
|
481
|
|
|
|
(484
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total at September 30, 2016
|
|
$
|
13,061
|
|
|
$
|
(10,555
|
)
|
|
$
|
2,506
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
The Effect of Derivative Instruments on the
Statement of Operations
|
|
|
|
|
|
Amount of (Gain) or Loss Recognized
Years Ended September 30,
|
|
Derivatives Not
Designated as
Hedging
Instruments Under FASB ASC
815-10
|
|
Location of (Gain) or Loss Recognized in
Income on Derivative
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Commodity contracts
|
|
Cost of product (a)
|
|
$
|
6,386
|
|
|
$
|
16,977
|
|
|
$
|
13,368
|
|
Commodity contracts
|
|
Cost of installations and service (a)
|
|
$
|
(526
|
)
|
|
$
|
949
|
|
|
$
|
1,831
|
|
Commodity contracts
|
|
Delivery and branch expenses (a)
|
|
$
|
(422
|
)
|
|
$
|
2,405
|
|
|
$
|
2,098
|
|
Commodity contracts
|
|
(Increase) / decrease in the fair value of derivative instruments (b)
|
|
$
|
(2,193
|
)
|
|
$
|
(18,217
|
)
|
|
$
|
4,187
|
|
(a)
|
Represents realized closed positions and includes the cost of options as they expire.
|
(b)
|
Represents the change in value of unrealized open positions and expired options.
|
F-20
6) Inventories
The Companys product inventories are stated at the lower of cost or market computed on the weighted average cost method. All other
inventories, representing parts and equipment are stated at the lower of cost or market using the FIFO method. The components of inventory were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Product
|
|
$
|
37,941
|
|
|
$
|
25,419
|
|
Parts and equipment
|
|
|
21,655
|
|
|
|
20,475
|
|
|
|
|
|
|
|
|
|
|
Total inventory
|
|
$
|
59,596
|
|
|
$
|
45,894
|
|
|
|
|
|
|
|
|
|
|
Product inventories were comprised of 24.2 million gallons and 18.4 million gallons on
September 30, 2017 and September 30, 2016, respectively. The Company has market price based product supply contracts for approximately 292.3 million gallons of home heating oil and propane, and 47.0 million gallons of diesel and
gasoline, which it expects to fully utilize to meet its requirements over the next twelve months.
During fiscal 2017 and 2016, Global
Companies LLC and NIC Holding Corp. provided approximately 13% and 8%, respectively, of our petroleum product purchases. No other single supplier provided more than 8% of our product supply during fiscal 2017 and 2016.
7) Property and Equipment
The components
of property and equipment were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Land and land improvements
|
|
$
|
18,127
|
|
|
$
|
17,645
|
|
Buildings and leasehold improvements
|
|
|
34,175
|
|
|
|
32,203
|
|
Fleet and other equipment
|
|
|
62,500
|
|
|
|
57,601
|
|
Tanks and equipment
|
|
|
41,744
|
|
|
|
34,035
|
|
Furniture, fixtures and office equipment
|
|
|
44,766
|
|
|
|
42,595
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
201,312
|
|
|
|
184,079
|
|
Less accumulated depreciation and amortization
|
|
|
121,639
|
|
|
|
113,669
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
79,673
|
|
|
$
|
70,410
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense was $11.1 million, $11.1 million, and $11.4 million, for
the fiscal years ended September 30, 2017, 2016, and 2015, respectively.
8) Business Combinations
During fiscal 2017, the Company acquired four heating oil dealers, two propane dealers and a plumbing service provider for an aggregate
purchase price of approximately $44.8 million; $43.3 million in cash and $1.5 million of deferred liabilities (including $0.6 million of contingent consideration). The gross purchase price was allocated $37.5 million to
intangible assets, $10.2 million to fixed assets and reduced by $2.9 million in working capital credits. The acquired companies operating results are included in the Companys consolidated financial statements starting on
their respective acquisition date, and are not material to the Companys financial condition, results of operations, or cash flows.
F-21
During fiscal 2016, the Company acquired a heating oil dealer, a motor fuel dealer, and two
propane dealers for purchase prices aggregating approximately $9.8 million. The aggregate purchase price was allocated $5.7 million to intangible assets, $1.7 million to goodwill, $2.5 million to fixed assets, and reduced by
$0.1 million for working capital credits. The acquired companies operating results are included in the Companys consolidated financial statements starting on their respective acquisition date, and are not material to the
Companys financial condition, results of operations, or cash flows.
During fiscal 2015, the Company acquired two heating oil and
propane dealers (with one dealer also having motor fuel accounts) for an aggregate purchase price of approximately $21.1 million. The final gross allocation of the purchase price of both heating oil and propane dealers was $20.7 million to
intangible assets, $2.5 million to fixed assets and reduced by $2.1 million for working capital credits. Each acquired companys operating results are included in the Companys consolidated financial statements starting on its
acquisition date.
9) Goodwill and Other Intangible Assets
Goodwill
The Company performs a
qualitative, and when necessary quantitative, impairment test on its goodwill annually on August 31
st
. This qualitative assessment includes reviewing factors such as macroeconomic conditions,
industry and market considerations, cost factors, overall financial performance and other relevant entity-specific events. Under FASB ASC
350-10-05
Intangibles-Goodwill
and Other, goodwill impairment if any, needs to be determined if the net book value of a reporting unit exceeds its estimated fair value. If goodwill of a reporting unit is determined to be impaired, the amount of impairment is measured based on the
excess of the net book value of the goodwill over the implied fair value of the goodwill.
The Company performed its annual goodwill
impairment valuation in each of the periods ending August 31, 2017, 2016, and 2015, and it was determined based on each years analysis that there was no goodwill impairment.
A summary of changes in the Companys goodwill during the fiscal years ended September 30, 2017 and 2016 are as follows (in
thousands):
|
|
|
|
|
Balance as of September 30, 2015
|
|
$
|
211,045
|
|
Fiscal year 2016 business combinations
|
|
|
1,715
|
|
|
|
|
|
|
Balance as of September 30, 2016
|
|
|
212,760
|
|
Fiscal year 2017 business combinations
|
|
|
13,155
|
|
|
|
|
|
|
Balance as of September 30, 2017
|
|
$
|
225,915
|
|
|
|
|
|
|
Intangibles, net
Intangible assets subject to amortization consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2017
|
|
|
|
|
|
2016
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accum.
Amortization
|
|
|
Net
|
|
|
Gross
Carrying
Amount
|
|
|
Accum.
Amortization
|
|
|
Net
|
|
Customer lists
|
|
$
|
346,784
|
|
|
$
|
264,632
|
|
|
$
|
82,152
|
|
|
$
|
327,388
|
|
|
$
|
250,427
|
|
|
$
|
76,961
|
|
Trade names and other intangibles
|
|
|
32,047
|
|
|
|
8,981
|
|
|
|
23,066
|
|
|
|
27,134
|
|
|
|
6,439
|
|
|
|
20,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
378,831
|
|
|
$
|
273,613
|
|
|
$
|
105,218
|
|
|
$
|
354,522
|
|
|
$
|
256,866
|
|
|
$
|
97,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-22
Amortization expense for intangible assets was $16.7 million, $15.4 million, and
$13.5 million, for the fiscal years ended September 30, 2017, 2016, and 2015, respectively. Total estimated annual amortization expense related to intangible assets subject to amortization, for the year ended September 30, 2018 and
the four succeeding fiscal years ended September 30, is as follows (in thousands):
|
|
|
|
|
|
|
Amount
|
|
2018
|
|
$
|
18,483
|
|
2019
|
|
$
|
16,859
|
|
2020
|
|
$
|
15,095
|
|
2021
|
|
$
|
12,374
|
|
2022
|
|
$
|
10,349
|
|
10) Accrued Expenses and Other Current Liabilities
The components of accrued expenses and other current liabilities were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Accrued wages and benefits
|
|
$
|
24,425
|
|
|
$
|
22,237
|
|
Accrued insurance and environmental costs
|
|
|
68,760
|
|
|
|
70,037
|
|
Other accrued expenses and other current liabilities
|
|
|
15,264
|
|
|
|
11,581
|
|
|
|
|
|
|
|
|
|
|
Total accrued expenses and other current liabilities
|
|
$
|
108,449
|
|
|
$
|
103,855
|
|
|
|
|
|
|
|
|
|
|
11) Long-Term Debt and Bank Facility Borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
The Partnerships debt is as follows
|
|
2017
|
|
|
2016
|
|
(in thousands):
|
|
|
|
|
|
|
|
|
Carrying
Amount
|
|
|
Fair Value
|
|
|
Carrying
Amount
|
|
|
Fair Value
|
|
Revolving Credit Facility Borrowings
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Senior Secured Term Loan
|
|
|
75,717
|
|
|
|
76,300
|
|
|
|
91,641
|
|
|
|
92,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$
|
75,717
|
|
|
$
|
76,300
|
|
|
$
|
91,641
|
|
|
$
|
92,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term portion of debt
|
|
$
|
10,000
|
|
|
$
|
10,000
|
|
|
$
|
16,200
|
|
|
$
|
16,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term portion of debt
|
|
$
|
65,717
|
|
|
$
|
66,300
|
|
|
$
|
75,441
|
|
|
$
|
76,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The face amount of the Companys variable rate long-term debt approximates fair value.
On July 30, 2015, the Company entered into a third amended and restated asset based credit agreement with a bank syndicate comprised of
thirteen 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 credit facility for working capital purposes (subject to certain
borrowing base limitations and coverage ratios), provides for a $100 million five-year senior secured term loan (Term Loan), allows for the issuance of up to $100 million in letters of credit, and has a maturity date of
July 30, 2020.
F-23
The Company can increase the revolving credit facility size by $100 million without the
consent of the bank group. However, the bank group is not obligated to fund the $100 million increase. If the bank group elects not to fund the increase, the Company can add additional lenders to the group, with the consent of the Agent, which
shall not be unreasonably withheld. Obligations under the third amended and restated credit facility are guaranteed by the Company and its subsidiaries and are secured by liens on substantially all of the Companys assets including accounts
receivable, inventory, general intangibles, real property, fixtures and equipment.
All amounts outstanding under the third amended and
restated revolving credit facility become due and payable on the facility termination date of July 30, 2020. The Term Loan is repayable in quarterly payments of $2.5 million, plus an annual payment equal to 25% of the annual Excess Cash
Flow as defined in the agreement (an amount not to exceed $15 million annually), less certain voluntary prepayments made during the year, with final payment at maturity. The Company does not expect to make additional term loan repayments due to
Excess Cash Flow for the fiscal year ended September 30, 2017.
The interest rate on the third amended and restated revolving credit
facility and the term loan is based on a margin over LIBOR or a base rate. At September 30, 2017, the effective interest rate on the term loan was approximately 4.14%.
The Commitment Fee on the unused portion of the revolving credit facility is 0.30% from December through April, and 0.20% from May through
November.
The third amended and restated credit agreement requires the Company to meet certain financial covenants, including a fixed
charge coverage ratio (as defined in the credit agreement) of not less than 1.1 as long as the Term Loan is outstanding or revolving credit facility availability is less than 12.5% of the facility size. In addition, as long as the Term Loan is
outstanding, a senior secured leverage ratio at any time cannot be more than 3.0 as calculated during the quarters ending June or September, and at any time no more than 4.5 as calculated during the quarters ending December or March.
Certain restrictions are also imposed by the agreement, including restrictions on the Companys ability to incur additional indebtedness,
to pay distributions to unitholders, to pay certain inter-company dividends or distributions, make investments, grant liens, sell assets, make acquisitions and engage in certain other activities.
At September 30, 2017, $76.3 million of the term loan was outstanding, no amount was outstanding under the revolving credit
facility, $0.1 million of hedge positions were secured under the credit agreement, and $48.0 million of letters of credit were issued and outstanding. At September 30, 2016, $92.5 million of the term loan was outstanding, no
amount was outstanding under the revolving credit facility, $0.3 million of hedge positions were secured, and $50.6 million of letters of credit were issued and outstanding.
At September 30, 2017, availability was $166.1 million, the Company was in compliance with the fixed charge coverage ratio and the
senior secured leverage ratio, and the restricted net assets totaled approximately $296 million. Restricted net assets are assets in the Companys subsidiaries, the distribution or transfer of which to Star Group, L.P. are subject to
limitations under its credit agreement. At September 30, 2016, availability was $163.4 million, the Company was in compliance with the fixed charge coverage ratio and the senior secured leverage ratio, and the restricted net assets totaled
approximately $291 million.
As of September 30, 2017, the maturities (including working capital borrowings and expected
repayments due to Excess Cash Flow) during fiscal years ending September 30, are set forth in the following table (in thousands):
|
|
|
|
|
2018
|
|
$
|
10,000
|
|
2019
|
|
$
|
10,000
|
|
2020
|
|
$
|
56,300
|
|
Thereafter
|
|
$
|
|
|
F-24
12) Employee Benefit Plans
Defined Contribution Plans
The Company
has several 401(k) and other defined contribution plans that cover eligible
non-union
and union employees, and makes employer contributions to these plans, subject to IRS limitations. These plans provide for
each participant to contribute from 0% to 60% of compensation, subject to IRS limitations. The Companys aggregate contributions to the 401(k) plans during fiscal 2017, 2016, and 2015, were $6.3 million, $6.0 million, and
$5.7 million, respectively. The Companys aggregate contribution to the other defined contribution plans for fiscal years 2017, 2016, and 2015, were $0.7 million, $0.7 million and $0.6 million, respectively.
Management Incentive Compensation Plan
The Company has a Management Incentive Compensation Plan. The long-term compensation structure is intended to align the employees
performance with the long-term performance of our unitholders. Under the Plan, certain named employees who participate shall be entitled to receive a pro rata share of an amount in cash equal to:
|
|
|
50% of the distributions (Incentive Distributions) of Available Cash in excess of the minimum quarterly distribution of $0.0675 per unit otherwise distributable to Kestrel Heat pursuant to the Company
Agreement on account of its general partner units; and
|
|
|
|
50% of the cash proceeds (the Gains Interest) which Kestrel Heat shall receive from the sale of its general partner units (as defined in the Partnership Agreement), less expenses and applicable taxes.
|
The pro rata share payable to each participant under the Plan is based on the number of participation points as described
under Fiscal 2015 Compensation DecisionsManagement Incentive Compensation Plan. The amount paid in Incentive Distributions is governed by the Partnership Agreement and the calculation of Available Cash.
To fund the benefits under the Plan, Kestrel Heat has agreed to forego receipt of the amount of Incentive Distributions that are payable to
plan participants. For accounting purposes, amounts payable to management under this Plan will be treated as compensation and will reduce net income. Kestrel Heat has also agreed to contribute to the Company, as a contribution to capital, an amount
equal to the Gains Interest payable to participants in the Plan by the Company. The Company is not required to reimburse Kestrel Heat for amounts payable pursuant to the Plan.
The Plan is administered by the Companys Chief Financial Officer under the direction of the Board or by such other officer as the Board
may from time to time direct. In general, no payments will be made under the Plan if the Company is not distributing cash under the Incentive Distributions described above.
Effective as of July 19, 2012, the Board of Directors adopted certain amendments (the Plan Amendments) to the Plan. Under the
Plan Amendments, the number and identity of the Plan participants and their participation interests in the Plan have been frozen at the current levels. In addition, under the Plan Amendments, the plan benefits (to the extent vested) may be
transferred upon the death of a participant to his or her heirs. A participants vested percentage of his or her plan benefits will be 100% during the time a participant is an employee or consultant of the Company. Following the termination of
such positions, a participants vested percentage shall be equal to 20% for each full or partial year of employment or consultation with the Company starting with the fiscal year ended September 30, 2012 (33 1/3% in the case of the
Companys chief executive officer at that time).
The Company distributed to management and the general partner Incentive
Distributions of approximately $963,000 during fiscal 2017, $795,000 during fiscal 2016, and $605,000 during fiscal 2015. Included in these amounts for fiscal 2017, 2016, and 2015, were distributions under the management incentive compensation plan
of $481,000, $397,000, and $302,000, respectively, of which named executive officers received approximately $214,378 during fiscal 2017, $177,034 during fiscal 2016, and $135,000 during fiscal 2015. With regard to the Gains Interest, Kestrel Heat
has not given any indication that it will sell its general partner units within the next twelve months. Thus the Plans value attributable to the Gains Interest currently cannot be determined.
F-25
Multiemployer Pension Plans
At September 30, 2017, approximately 43% of our employees were covered by collective bargaining agreements and approximately 11% of our
employees are in collective bargaining agreements that are up for renewal within the next fiscal year. We contribute to various multiemployer union administered pension plans under the terms of collective bargaining agreements that provide for such
plans for covered union-represented employees. The risks of participating in these multiemployer plans are different from single-employer plans in that assets contributed are pooled and may be used to provide benefits to employees of other
participating employers. If a participating employer stops contributing to the plan, the remaining participating employers may be required to bear the unfunded obligations of the plan. If we choose to stop participating in a multiemployer plan, we
may be required to pay a withdrawal liability in part based on the underfunded status of the plan.
The following table outlines our
participation and contributions to multiemployer pension plans for the periods ended September 30, 2017, 2016 and 2015. The EIN/Pension Plan Number column provides the Employer Identification Number (EIN) and the three-digit plan
number. The most recent Pension Protection Act Zone Status for 2016 and 2015 relates to the plans two most recent fiscal year-ends, based on information received from the plans as reported on their Form 5500 Schedule MB. Among other factors,
plans in the red zone are generally less than 65 percent funded, plans in the yellow zone are less than 80 percent funded, and plans in the green zone are at least 80 percent funded. The FIP/RP Status Pending/Implemented column
indicates plans for which a financial improvement plan (FIP) or a rehabilitation plan (RP) is either pending or has been implemented. Certain plans have been aggregated in the All Other Multiemployer Pension Plans line of the
following table, as our participation in each of these individual plans is not significant.
For the Westchester Teamsters Pension Fund,
Local 553 Pension Fund and Local 463 Pension Fund, we provided more than 5 percent of the total plan contributions from all employers for 2017 and 2015, and for the Westchester Teamsters Pension Fund and Local 553 Pension Fund we provided more
than 5 percent of the total plan contributions from all employers for 2016, as disclosed in the respective plans Form 5500. The collective bargaining agreements of these plans require contributions based on the hours worked and there are
no minimum contributions required.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Protection
Act Zone
Status
|
|
|
FIP / RP Status
|
|
|
Partnership
Contributions
(in thousands)
|
|
|
|
|
|
|
|
Pension Fund
|
|
EIN /
Pension Plan
Number
|
|
|
2017
|
|
|
2016
|
|
|
Pending / Implemented
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
Surcharge
Imposed
|
|
|
Expiration Date
of Collective-
Bargaining
Agreements
|
|
New England Teamsters and Trucking Industry Pension Fund
|
|
|
04-6372430
/ 001
|
|
|
|
Red
|
|
|
|
Red
|
|
|
|
Yes / Implemented
|
|
|
$
|
2,621
|
|
|
$
|
2,507
|
|
|
$
|
3,183
|
|
|
|
No
|
|
|
|
04/30/18 to
09/30/2022
|
|
Westchester Teamsters Pension Fund
|
|
|
13-6123973
/ 001
|
|
|
|
Green
|
|
|
|
Green
|
|
|
|
N/A
|
|
|
|
924
|
|
|
|
865
|
|
|
|
877
|
|
|
|
No
|
|
|
|
01/31/19 to
12/31/19
|
|
Local 553 Pension Fund
|
|
|
13-6637826
/ 001
|
|
|
|
Green
|
|
|
|
Green
|
|
|
|
N/A
|
|
|
|
2,780
|
|
|
|
2,645
|
|
|
|
2,838
|
|
|
|
No
|
|
|
|
12/15/19 to
01/15/20
|
|
Local 463 Pension Fund
|
|
|
11-1800729
/ 001
|
|
|
|
Green
|
|
|
|
Green
|
|
|
|
N/A
|
|
|
|
150
|
|
|
|
148
|
|
|
|
171
|
|
|
|
No
|
|
|
|
06/30/19 to
02/28/20
|
|
All Other Multiemployer Pension Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,465
|
|
|
|
2,218
|
|
|
|
2,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contributions
|
|
|
$
|
8,940
|
|
|
$
|
8,383
|
|
|
$
|
9,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agreement with the New England Teamsters and Trucking Industry Pension Fund
In September 2015, the Teamsters ratified an agreement among certain subsidiaries of the Company and the New England Teamsters and Trucking
Industry Pension Fund (the NETTI Fund), a multiemployer pension plan in which such subsidiaries participate, providing for the Companys participating subsidiaries to withdraw from the NETTI Funds original employer pool and
enter the NETTI Funds new employer pool. The withdrawal from the original employer pool triggered an undiscounted withdrawal obligation of $48.0 million that is to be paid in equal monthly installments over 30 years, or $1.6 million
per year. The annual after tax cash impact of entering into this agreement is a reduction of approximately $0.9 million.
F-26
We recorded in the fourth quarter of fiscal 2015, a $17.8 million charge in order to
establish a withdrawal liability on our consolidated balance sheet, which represents the present value of the $48.0 million future payment obligation at a discount rate of 8.22%. In addition we recorded a
non-cash
deferred tax benefit of approximately $7.0 million. The net result of these two
non-cash
items reduced our net income for fiscal 2015 by
$10.8 million.
The NETTI Fund includes over two hundred of our current employees and has been classified as carrying red
zone status, meaning that the value of NETTI Funds assets are less than 65% of the actuarial value of the NETTI Funds benefit obligations.
As of September 30, 2017, we had $0.2 million and $17.3 million balances included in the captions accrued expenses and other
current liabilities and other long-term liabilities, respectively, on our consolidated balance sheet representing the remaining balance of the NETTI withdrawal liability. Based on the borrowing rates currently available to the Company for long-term
financing of a similar maturity, the fair value of the NETTI withdrawal liability as of September 30, 2017 was $22.7 million. We utilized Level 2 inputs in the fair value hierarchy of valuation techniques to determine the fair value
of this liability.
Our status in the newly-established pool of the NETTI Fund is accounted for as participation in a new multiemployer
pension plan, and therefore we recognize expense based on the contractually-required contribution for each period, and we recognize a liability for any contributions due and unpaid at the end of a reporting period.
Defined Benefit Plans
The Company
accounts for its two frozen defined benefit pension plans (the Plan) in accordance with FASB ASC
715-10-05
Compensation-Retirement Benefits. The Company has
no post-retirement benefit plans.
Effective September 30, 2017, the Company adopted the Society of Actuaries 2017 Mortality Tables
Report and Mortality Improvement Scale, which updated the mortality assumptions that private defined benefit retirement plans in the United States use in the actuarial valuations that determine a plan sponsors pension obligations. The updated
mortality data reflects higher mortality improvement than assumed in the Society of Actuaries 2016 Mortality Table Report and Improvement Scale, and affected plans generally expect the value of the actuarial obligations to decrease, depending on the
specific demographic characteristics of the plan participants and the types of benefits.
F-27
The following table provides the net periodic benefit cost for the period, a reconciliation of
the changes in the Plan assets, projected benefit obligations, and the amounts recognized in other comprehensive income and accumulated other comprehensive income at the dates indicated using a measurement date of September 30 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debit / (Credit)
|
|
Net Periodic
Pension
Cost in
Income
Statement
|
|
|
Cash
|
|
|
Fair
Value of
Pension
Plan
Assets
|
|
|
Projected
Benefit
Obligation
|
|
|
Other
Comprehensive
(Income) / Loss
|
|
|
Gross Pension
Related
Accumulated
Other
Comprehensive
Income
|
|
Fiscal Year 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
|
|
|
|
|
|
|
|
$
|
65,379
|
|
|
$
|
(70,482
|
)
|
|
|
|
|
|
$
|
26,598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost
|
|
|
2,762
|
|
|
|
|
|
|
|
|
|
|
|
(2,762
|
)
|
|
|
|
|
|
|
|
|
Actual return on plan assets
|
|
|
(679
|
)
|
|
|
|
|
|
|
679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employer contributions
|
|
|
|
|
|
|
(1,743
|
)
|
|
|
1,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit payments
|
|
|
|
|
|
|
|
|
|
|
(4,013
|
)
|
|
|
4,013
|
|
|
|
|
|
|
|
|
|
Investment and other expenses
|
|
|
(577
|
)
|
|
|
|
|
|
|
|
|
|
|
577
|
|
|
|
|
|
|
|
|
|
Difference between actual and expected return on plan assets
|
|
|
(2,259
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,259
|
|
|
|
|
|
Anticipated expenses
|
|
|
327
|
|
|
|
|
|
|
|
|
|
|
|
(327
|
)
|
|
|
|
|
|
|
|
|
Actuarial gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,860
|
|
|
|
(1,860
|
)
|
|
|
|
|
Amortization of unrecognized net actuarial loss
|
|
|
2,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,226
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual cost/change
|
|
$
|
1,800
|
|
|
$
|
(1,743
|
)
|
|
|
(1,591
|
)
|
|
|
3,361
|
|
|
$
|
(1,827
|
)
|
|
|
(1,827
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
|
|
|
|
|
|
|
|
$
|
63,788
|
|
|
$
|
(67,121
|
)
|
|
|
|
|
|
$
|
24,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status at the end of the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(3,333
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost
|
|
|
2,622
|
|
|
|
|
|
|
|
|
|
|
|
(2,622
|
)
|
|
|
|
|
|
|
|
|
Actual return on plan assets
|
|
|
(8,595
|
)
|
|
|
|
|
|
|
8,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employer contributions
|
|
|
|
|
|
|
(17
|
)
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit payments
|
|
|
|
|
|
|
|
|
|
|
(4,124
|
)
|
|
|
4,124
|
|
|
|
|
|
|
|
|
|
Investment and other expenses
|
|
|
(362
|
)
|
|
|
|
|
|
|
|
|
|
|
362
|
|
|
|
|
|
|
|
|
|
Difference between actual and expected return on plan assets
|
|
|
5,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,579
|
)
|
|
|
|
|
Anticipated expenses
|
|
|
319
|
|
|
|
|
|
|
|
|
|
|
|
(319
|
)
|
|
|
|
|
|
|
|
|
Actuarial loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,103
|
)
|
|
|
5,103
|
|
|
|
|
|
Amortization of unrecognized net actuarial loss
|
|
|
2,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,591
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual cost/change
|
|
$
|
2,154
|
|
|
$
|
(17
|
)
|
|
|
4,488
|
|
|
|
(3,558
|
)
|
|
$
|
(3,067
|
)
|
|
|
(3,067
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
|
|
|
|
|
|
|
|
$
|
68,276
|
|
|
$
|
(70,679
|
)
|
|
|
|
|
|
$
|
21,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status at the end of the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(2,403
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost
|
|
|
2,251
|
|
|
|
|
|
|
|
|
|
|
|
(2,251
|
)
|
|
|
|
|
|
|
|
|
Actual return on plan assets
|
|
|
(1,473
|
)
|
|
|
|
|
|
|
1,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employer contributions
|
|
|
|
|
|
|
(505
|
)
|
|
|
505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit payments
|
|
|
|
|
|
|
|
|
|
|
(4,578
|
)
|
|
|
4,578
|
|
|
|
|
|
|
|
|
|
Investment and other expenses
|
|
|
(455
|
)
|
|
|
|
|
|
|
|
|
|
|
455
|
|
|
|
|
|
|
|
|
|
Difference between actual and expected return on plan assets
|
|
|
(1,232
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,232
|
|
|
|
|
|
Anticipated expenses
|
|
|
341
|
|
|
|
|
|
|
|
|
|
|
|
(341
|
)
|
|
|
|
|
|
|
|
|
Actuarial gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,457
|
|
|
|
(2,457
|
)
|
|
|
|
|
Amortization of unrecognized net actuarial loss
|
|
|
2,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,131
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual cost/change
|
|
$
|
1,563
|
|
|
$
|
(505
|
)
|
|
|
(2,600
|
)
|
|
|
4,898
|
|
|
$
|
(3,356
|
)
|
|
|
(3,356
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
|
|
|
|
|
|
|
|
$
|
65,676
|
|
|
$
|
(65,781
|
)
|
|
|
|
|
|
$
|
18,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status at the end of the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(105
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-28
At September 30, 2017 and 2016, the amounts included on the balance sheet in other long-term
liabilities were $0.1 million and $2.4 million, respectively.
The $18.3 million net actuarial loss balance at
September 30, 2017 for the two frozen defined benefit pension plans in accumulated other comprehensive income will be recognized and amortized into net periodic pension costs as an actuarial loss in future years. The estimated amount that will
be amortized from accumulated other comprehensive income into net periodic pension cost over the next fiscal year is $1.8 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
Weighted-Average Assumptions Used in the Measurement of the Partnerships Benefit Obligation
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Discount rate at year end date
|
|
|
3.60
|
%
|
|
|
3.30
|
%
|
|
|
4.05
|
%
|
Expected return on plan assets for the year ended
|
|
|
4.80
|
%
|
|
|
5.50
|
%
|
|
|
5.50
|
%
|
Rate of compensation increase
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
The expected return on plan assets is determined based on the expected long-term rate of return on plan assets
and the market-related value of plan assets determined using fair value.
The Companys expected long-term rate of return on plan
assets is updated at least annually, taking into consideration our asset allocation, historical returns on the types of assets held, and the current economic environment. For fiscal year 2018, the Companys assumption for return on plan assets
will be 4.9% per annum.
The discount rate used to determine net periodic pension expense for fiscal year 2017, 2016, and 2015 was
3.60%, 3.30%, and 4.05%, respectively. The discount rate used by the Company in determining pension expense and pension obligations reflects the yield of high quality (AA or better rating by a recognized rating agency) corporate bonds whose cash
flows are expected to match the timing and amounts of projected future benefit payments.
The Plans objectives are to have the
ability to pay benefit and expense obligations when due, to maintain the funded ratio of the Plan, to maximize return within reasonable and prudent levels of risk in order to minimize contributions and charges to the profit and loss statement, and
to control costs of administering the Plan and managing the investments of the Plan. The target asset allocation of the Plan (currently 80% domestic fixed income, 15% domestic equities and 5% international equities) is based on a long-term
perspective, and as the Plan gets closer to being fully funded, the allocations have been adjusted to lower volatility from equity holdings.
The Company had no Level 2 or Level 3 pension plan assets during the two years ended September 30, 2017. The fair values and
percentage of the Companys pension plan assets by asset category are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
Concentration
|
|
|
|
|
|
Concentration
|
|
Asset Category
|
|
Level 1
|
|
|
Percentage
|
|
|
Level 1
|
|
|
Percentage
|
|
Corporate and U.S. government bond fund (1)
|
|
$
|
52,735
|
|
|
|
80
|
%
|
|
$
|
54,267
|
|
|
|
79
|
%
|
U.S.
large-cap
equity (1)
|
|
|
9,270
|
|
|
|
14
|
%
|
|
|
10,207
|
|
|
|
15
|
%
|
International equity (1)
|
|
|
3,063
|
|
|
|
5
|
%
|
|
|
3,118
|
|
|
|
5
|
%
|
Cash
|
|
|
608
|
|
|
|
1
|
%
|
|
|
684
|
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
65,676
|
|
|
|
100
|
%
|
|
$
|
68,276
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Represent investments in Vanguard funds that seek to replicate the asset category description.
F-29
The Company is not obligated to make a minimum required contribution in fiscal year 2018, but
expects to make a $2.0 million optional pension contribution.
Expected benefit payments over each of the next five years will total
approximately $4.5 million per year. Expected benefit payments for the five years thereafter will aggregate approximately $19.6 million.
13)
Income Taxes
Income tax expense is comprised of the following for the indicated periods (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
7,578
|
|
|
$
|
18,724
|
|
|
$
|
28,793
|
|
State
|
|
|
2,664
|
|
|
|
5,344
|
|
|
|
8,143
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
8,775
|
|
|
|
7,485
|
|
|
|
(3,719
|
)
|
State
|
|
|
1,359
|
|
|
|
2,185
|
|
|
|
(382
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,376
|
|
|
$
|
33,738
|
|
|
$
|
32,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision for income taxes differs from income taxes computed at the Federal statutory rate as a result of
the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Income from continuing operations before taxes
|
|
$
|
47,276
|
|
|
$
|
78,672
|
|
|
$
|
70,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax at Federal statutory rate
|
|
$
|
16,546
|
|
|
$
|
27,535
|
|
|
$
|
24,637
|
|
Impact of Partnership loss not subject to federal income taxes
|
|
|
741
|
|
|
|
477
|
|
|
|
3,228
|
|
State taxes net of federal benefit
|
|
|
3,170
|
|
|
|
5,672
|
|
|
|
4,922
|
|
Permanent differences
|
|
|
89
|
|
|
|
80
|
|
|
|
78
|
|
Deferred tax benefit
|
|
|
|
|
|
|
|
|
|
|
(3,179
|
)
|
Change in valuation allowance
|
|
|
115
|
|
|
|
26
|
|
|
|
3,027
|
|
Change in unrecognized tax benefit
|
|
|
|
|
|
|
|
|
|
|
81
|
|
Other
|
|
|
(285
|
)
|
|
|
(52
|
)
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,376
|
|
|
$
|
33,738
|
|
|
$
|
32,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-30
The components of the net deferred taxes for the years ended September 30, 2017 and
September 30, 2016 using current tax rates are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
5,374
|
|
|
$
|
5,791
|
|
Vacation accrual
|
|
|
3,542
|
|
|
|
3,367
|
|
Pension accrual
|
|
|
7,455
|
|
|
|
8,549
|
|
Allowance for bad debts
|
|
|
2,166
|
|
|
|
1,728
|
|
Insurance accrual
|
|
|
19,914
|
|
|
|
25,828
|
|
Inventory capitalization
|
|
|
895
|
|
|
|
1,128
|
|
Alternative minimum tax credit carryforward
|
|
|
|
|
|
|
266
|
|
Other, net
|
|
|
2,242
|
|
|
|
2,512
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
41,588
|
|
|
|
49,169
|
|
Valuation allowance
|
|
|
(3,168
|
)
|
|
|
(3,053
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
38,420
|
|
|
$
|
46,116
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
$
|
8,001
|
|
|
$
|
3,999
|
|
Fair value of derivative instruments
|
|
|
1,683
|
|
|
|
788
|
|
Intangibles
|
|
|
34,876
|
|
|
|
35,976
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
$
|
44,560
|
|
|
$
|
40,763
|
|
|
|
|
|
|
|
|
|
|
Net deferred taxes
|
|
$
|
(6,140
|
)
|
|
$
|
5,353
|
|
|
|
|
|
|
|
|
|
|
In order to fully realize the net deferred tax assets, the Companys corporate subsidiaries will need to
generate future taxable income. A valuation allowance is recognized if, based on the weight of available evidence including historical tax losses, it is more likely than not that some or all of deferred tax assets will not be realized. The net
change in the total valuation allowance for the fiscal year ended September 30, 2017 was an increase of $115 thousand. The net change in the total valuation allowance for the fiscal year ended September 30, 2016 was an increase of
$26 thousand. Based upon a review of a number of factors and all available evidence, including recent historical operating performance, the expectation of sustainable earnings, and the confidence that sufficient positive taxable income would
continue in all tax jurisdictions for the foreseeable future, management concludes for the year ended September 30, 2017, it is more likely than not that the Company will realize the full benefit of its deferred tax assets, net of existing
valuation allowance at September 30, 2017.
As of January 1, 2017, Star Acquisitions, a wholly-owned subsidiary of the Company,
had a Federal net operating loss carry forward (NOLs) of approximately $1.6 million. The Federal NOLs, which will expire between 2017 and 2030, are generally available to offset any future taxable income but are also subject to an
annual limitation of $1.0 million.
FASB ASC
740-10-05-6
Income Taxes, Uncertain Tax Position, provides financial statement accounting guidance for uncertainty in income taxes and tax positions taken or expected to be taken in a tax return. At
September 30, 2017, we did not have unrecognized income tax benefits.
Our continuing practice is to recognize interest and penalties
related to income tax matters as a component of income tax expense. We file U.S. Federal income tax returns and various state and local returns. A number of years may elapse before an uncertain tax position is audited and finally resolved. For our
Federal income tax returns we have four tax years subject to examination. In our major state tax jurisdictions of New York, Connecticut, and Pennsylvania we have four years that are subject to examination. In the state tax jurisdiction of New Jersey
we have five tax years that are subject to examination. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, based on our assessment of many factors including past experience
and interpretation of tax law, we believe that our provision for income taxes reflect the most probable outcome. This assessment relies on estimates and assumptions and may involve a series of complex judgments about future events.
F-31
14) Lease Commitments
The Company has entered into certain operating leases for office space, trucks and other equipment. The future minimum rental commitments at
September 30, 2017 under operating leases having an initial or remaining
non-cancelable
term of one year or more are as follows (in thousands):
|
|
|
|
|
2018
|
|
|
19,502
|
|
2019
|
|
|
19,315
|
|
2020
|
|
|
17,284
|
|
2021
|
|
|
14,859
|
|
2022
|
|
|
11,282
|
|
Thereafter
|
|
|
52,052
|
|
|
|
|
|
|
Total future minimum lease payments
|
|
$
|
134,294
|
|
|
|
|
|
|
Rent expense for the fiscal years ended September 30, 2017, 2016, and 2015, was $21.4 million,
$19.7 million, and $18.4 million, respectively.
15) Supplemental Disclosure of Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes, net
|
|
$
|
4,434
|
|
|
$
|
22,570
|
|
|
$
|
38,265
|
|
Interest
|
|
$
|
7,814
|
|
|
$
|
7,785
|
|
|
$
|
16,950
|
|
Non-cash
investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of NYC heating oil customer list
|
|
$
|
|
|
|
$
|
|
|
|
$
|
886
|
|
Non-cash
financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in interest expenseamortization of debt discount on 8.875% Senior Notes
|
|
$
|
|
|
|
$
|
|
|
|
$
|
112
|
|
16) Commitments and Contingencies
On April 18, 2017, a civil action was filed in the United States District Court for the Eastern District of New York, entitled M. Norman
Donnenfeld v. Petro, Inc., Civil Action Number
2:17-cv-2310-JFB-SIL,
against Petro, Inc.
By amended complaint filed on August 15, 2017, the Plaintiff alleges he did not receive expected contractual benefits under his protected price plan contract when oil prices fell and asserts various claims for relief including breach of
contract, violation of the New York General Business Law and fraud. The Plaintiff also seeks to have a class certified of similarly situated Petro customers who entered into protected price plan contracts and were denied the same contractual
benefits. No class has yet been certified in this action. The Plaintiff seeks compensatory, punitive and other damages in unspecified amounts. On September 15, 2017, Petro filed a motion to dismiss the amended complaint as time-barred and for
failure to state a cause of action. The motion is fully briefed and awaiting oral argument. The Company believes the allegations lack merit and intends to vigorously defend the action; at this time we cannot assess the potential outcome or
materiality of this matter. The Companys operations are subject to the operating hazards and risks normally incidental to handling, storing and transporting and otherwise providing for use by consumers hazardous liquids such as home heating
oil and propane. In the ordinary course of business, the Company is a defendant in various legal proceedings and litigation. The Company records a liability when it is probable that a loss has been incurred and the amount is reasonably
estimable. We do not believe these matters, when considered individually or in the aggregate, could reasonably be expected to have a material adverse effect on the Companys results of operations, financial position or liquidity.
F-32
The Company maintains insurance policies with insurers in amounts and with coverages and
deductibles we believe are reasonable and prudent. However, the Company cannot assure that this insurance will be adequate to protect it from all material expenses related to current and potential future claims, legal proceedings and litigation,
including the above mentioned action, as certain types of claims may be excluded from our insurance coverage. If we incur substantial liability and the damages are not covered by insurance, or are in excess of policy limits, or if we incur liability
at a time when we are not able to obtain liability insurance, then our business, results of operations and financial condition could be materially adversely affected.
17) Earnings Per Limited Partner Units
The following table presents the net income allocation and per unit data in accordance with FASB ASC
260-10-45-60
Earnings per Share, Master Limited Partnerships
(EITF 03-06):
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted Earnings Per Limited Partner:
|
|
Years Ended September 30,
|
|
(in thousands, except per unit data)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
26,900
|
|
|
$
|
44,934
|
|
|
$
|
37,556
|
|
Less General Partners interest in net income
|
|
|
156
|
|
|
|
252
|
|
|
|
212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to limited partners
|
|
|
26,744
|
|
|
|
44,682
|
|
|
|
37,344
|
|
Less dilutive impact of theoretical distribution of earnings under
FASB ASC
260-10-45-60
*
|
|
|
914
|
|
|
|
4,534
|
|
|
|
3,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited Partners interest in net income
under FASB ASC
260-10-45-60
|
|
$
|
25,830
|
|
|
$
|
40,148
|
|
|
$
|
34,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per unit data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income available to limited partners
|
|
$
|
0.48
|
|
|
$
|
0.78
|
|
|
$
|
0.65
|
|
Less dilutive impact of theoretical distribution of earnings under
FASB ASC
260-10-45-60
*
|
|
|
0.02
|
|
|
|
0.08
|
|
|
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited Partners interest in net income under
FASB ASC
260-10-45-60
|
|
$
|
0.46
|
|
|
$
|
0.70
|
|
|
$
|
0.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of Limited Partner units outstanding
|
|
|
55,888
|
|
|
|
57,022
|
|
|
|
57,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
In any accounting period where the Companys aggregate net income exceeds its aggregate distribution for such period, the Company is required as per FASB ASC
260-10-45-60
to present net income per limited partner unit as if all of the earnings for the period were distributed, based on the terms of the Partnership agreement,
regardless of whether those earnings would actually be distributed during a particular period from an economic or practical perspective. This allocation does not impact the Companys overall net income or other financial results.
|
F-33
18) Selected Quarterly Financial Data (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
(in thousandsexcept per unit data)
|
|
Dec. 31,
2016
|
|
|
Mar. 31,
2017
|
|
|
Jun. 30,
2017
|
|
|
Sep. 30,
2017
|
|
|
Total
|
|
Sales
|
|
$
|
384,118
|
|
|
$
|
532,052
|
|
|
$
|
225,801
|
|
|
$
|
181,584
|
|
|
$
|
1,323,555
|
|
Gross profit for product, installation and service
|
|
$
|
118,038
|
|
|
$
|
184,685
|
|
|
$
|
63,309
|
|
|
$
|
42,467
|
|
|
|
408,499
|
|
Operating income (loss)
|
|
$
|
33,237
|
|
|
$
|
69,032
|
|
|
$
|
(19,811
|
)
|
|
$
|
(27,126
|
)
|
|
|
55,332
|
|
Income (loss) before income taxes
|
|
$
|
31,138
|
|
|
$
|
66,996
|
|
|
$
|
(21,766
|
)
|
|
$
|
(29,092
|
)
|
|
|
47,276
|
|
Net income (loss)
|
|
$
|
18,275
|
|
|
$
|
39,704
|
|
|
$
|
(13,332
|
)
|
|
$
|
(17,747
|
)
|
|
|
26,900
|
|
Limited Partner interest in net income (loss)
|
|
$
|
18,170
|
|
|
$
|
39,471
|
|
|
$
|
(13,253
|
)
|
|
$
|
(17,644
|
)
|
|
|
26,744
|
|
Net income (loss) per Limited Partner unit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted (a)
|
|
$
|
0.28
|
|
|
$
|
0.59
|
|
|
$
|
(0.24
|
)
|
|
$
|
(0.32
|
)
|
|
$
|
0.46
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
(in thousandsexcept per unit data)
|
|
Dec. 31,
2015
|
|
|
Mar. 31,
2016
|
|
|
Jun. 30,
2016
|
|
|
Sep. 30,
2016
|
|
|
Total
|
|
Sales
|
|
$
|
319,055
|
|
|
$
|
462,025
|
|
|
$
|
218,194
|
|
|
$
|
162,064
|
|
|
$
|
1,161,338
|
|
Gross profit for product, installation and service
|
|
|
106,041
|
|
|
|
183,303
|
|
|
|
61,354
|
|
|
$
|
41,799
|
|
|
|
392,497
|
|
Operating income (loss)
|
|
|
23,646
|
|
|
|
96,319
|
|
|
|
(2,955
|
)
|
|
$
|
(29,606
|
)
|
|
|
87,404
|
|
Income (loss) before income taxes
|
|
|
21,475
|
|
|
|
94,113
|
|
|
|
(4,993
|
)
|
|
$
|
(31,923
|
)
|
|
|
78,672
|
|
Net income (loss)
|
|
|
12,058
|
|
|
|
55,209
|
|
|
|
(3,238
|
)
|
|
$
|
(19,095
|
)
|
|
|
44,934
|
|
Limited Partner interest in net income (loss)
|
|
|
11,990
|
|
|
|
54,896
|
|
|
|
(3,219
|
)
|
|
$
|
(18,985
|
)
|
|
|
44,682
|
|
Net income (loss) per Limited Partner unit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted (a)
|
|
$
|
0.19
|
|
|
$
|
0.79
|
|
|
$
|
(0.06
|
)
|
|
$
|
(0.34
|
)
|
|
$
|
0.70
|
|
(a) The sum of the quarters do not
add-up
to the total due to the weighting of Limited
Partner Units outstanding, rounding or the theoretical effects of FASB ASC
260-10-45-60
to Master Limited Partners earnings per
unit.
19) Subsequent Events
Quarterly
Distribution Declared
In October 2017, we declared a quarterly distribution of $0.11 per unit, or $0.44 per unit on an annualized
basis, on all Common Units with respect to the fourth quarter of fiscal 2017, payable on October 31, 2017, to holders of record on October 23, 2017. In accordance with our Partnership Agreement, the amount of distributions in excess of the
minimum quarterly distribution of $0.0675, are distributed 90% to Common Unit holders and 10% to the General Partner unit holders (until certain distribution levels are met), subject to the management incentive compensation plan. As a result,
$6.1 million will be paid to the Common Unit holders, $0.2 million to the General Partner unit holders (including $0.1 million of incentive distribution as provided in our Partnership Agreement) and $0.1 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.
Loss Portfolio Transfer to our Captive Insurance Company
On October 11, 2017, we deposited $34.2 million of cash into an irrevocable trust to secure certain workers compensation,
automobile and general liabilities for our captive insurance company. The cash was invested in Level 1 debt securities. Outstanding letters of credit issued to support these liabilities decreased by $36.6 million to $11.4 million as
compared to the $48.0 million as of September 30, 2017.
F-34
Company Tax Treatment and Name Change
At a special meeting of unitholders held on October 25, 2017, our unitholders voted in favor of proposals to have the Company elect to be
treated as a corporation, instead of a partnership, for federal income tax purposes (commonly referred to as a
check-the-box
election), along with amendments
to our partnership agreement to effect such changes in income tax classification, in each case effective November 1, 2017. In addition, the Company changed its name, effective October 25, 2017, from Star Gas Partners, L.P. to
Star Group, L.P. to more closely align our name with the scope of our product and service offerings. For tax years after December 31, 2017, unitholders will receive a Form
1099-DIV
and will
not receive a Schedule
K-1
as in previous tax years. We will remain a Delaware limited partnership and the distribution provisions under our limited partnership agreement, including the incentive
distributions, will not change.
F-35
Schedule I
STAR GROUP, L.P. (PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
Balance Sheets
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
54
|
|
|
$
|
324
|
|
Prepaid expenses and other current assets
|
|
|
207
|
|
|
|
199
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
261
|
|
|
|
523
|
|
|
|
|
|
|
|
|
|
|
Investment in subsidiaries (a)
|
|
|
306,016
|
|
|
|
301,368
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
306,277
|
|
|
$
|
301,891
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND PARTNERS CAPITAL
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
209
|
|
|
$
|
398
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
209
|
|
|
|
398
|
|
|
|
|
|
|
|
|
|
|
Partners capital
|
|
|
306,068
|
|
|
|
301,493
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Partners Capital
|
|
$
|
306,277
|
|
|
$
|
301,891
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Investments in Star Acquisitions, Inc. and subsidiaries are recorded in accordance with the equity method of accounting.
|
F-36
Schedule I
STAR GROUP, L.P. (PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
General and administrative expenses
|
|
|
2,116
|
|
|
|
1,363
|
|
|
|
1,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(2,116
|
)
|
|
|
(1,363
|
)
|
|
|
(1,314
|
)
|
Net interest expense
|
|
|
|
|
|
|
|
|
|
|
(10,342
|
)
|
Amortization of debt issuance costs
|
|
|
|
|
|
|
|
|
|
|
(521
|
)
|
Loss on redemption of debt
|
|
|
|
|
|
|
|
|
|
|
(7,345
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before equity income
|
|
|
(2,116
|
)
|
|
|
(1,363
|
)
|
|
|
(19,522
|
)
|
Equity income of Star Petro Inc. and subs
|
|
|
29,016
|
|
|
|
46,297
|
|
|
|
57,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
26,900
|
|
|
$
|
44,934
|
|
|
$
|
37,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-37
Schedule I
STAR GROUP, L.P. (PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities (a)
|
|
$
|
24,052
|
|
|
$
|
35,109
|
|
|
$
|
152,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows used in financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions
|
|
|
(24,322
|
)
|
|
|
(23,092
|
)
|
|
|
(21,298
|
)
|
Redemption of debt
|
|
|
|
|
|
|
|
|
|
|
(130,548
|
)
|
Unit repurchase
|
|
|
|
|
|
|
(12,017
|
)
|
|
|
(691
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(24,322
|
)
|
|
|
(35,109
|
)
|
|
|
(152,537
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash
|
|
|
(270
|
)
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
324
|
|
|
|
324
|
|
|
|
324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
54
|
|
|
$
|
324
|
|
|
$
|
324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Includes distributions from subsidiaries
|
|
$
|
24,052
|
|
|
$
|
35,109
|
|
|
$
|
152,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-38