MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Statement Regarding Forward-Looking Disclosure
This Quarterly Report on Form 10-Q (this “Report”) includes “forward-looking statements” which represent our expectations or beliefs concerning future events that involve risks and uncertainties, including the impact of geopolitical events, such as the war in the Ukraine, and its impact on wholesale product cost volatility, the price and supply of the products that we sell, our ability to purchase sufficient quantities of product to meet our customer’s needs, rapid increases in levels of inflation approaching 40-year highs, uncertain economic conditions, the consumption patterns of our customers, our ability to obtain satisfactory gross profit margins, the effect of weather conditions on our financial performance, our ability to obtain new customers and retain existing customers, our ability to make strategic acquisitions, the impact of litigation, natural gas conversions, the impact of the novel coronavirus, or COVID-19, pandemic and future global health pandemics, on US and global economies, future union relations and the outcome of current and future union negotiations, the impact of current and future governmental regulations, including climate change, environmental, health, and safety regulations, the ability to attract and retain employees, customer credit worthiness, counterparty credit worthiness, marketing plans, cyber-attacks, increases in interest rates, global supply chain issues, labor shortages and new technology. All statements other than statements of historical facts included in this Report including, without limitation, the statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere herein, are forward-looking statements. Without limiting the foregoing, the words “believe,” “anticipate,” “plan,” “expect,” “seek,” “estimate,” and similar expressions are intended to identify forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct, and actual results may differ materially from those projected as a result of certain risks and uncertainties. These risks and uncertainties include, but are not limited to, those set forth in this Report under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in our Fiscal 2022 Form 10-K under Part I Item 1A “Risk Factors.” Important factors that could cause actual results to differ materially from our expectations (“Cautionary Statements”) are disclosed in this Report and in our Fiscal 2022 Form 10-K. 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.
Liquid Product Price Volatility
Volatility, which is reflected in the wholesale price of liquid products, including home heating oil, propane and motor fuels, has a larger impact on our business when prices rise. Home heating oil consumers are sensitive to heating cost increases, and this often leads to customer conservation and increased gross customer losses. As a commodity, the price of home heating oil is generally impacted by many factors, including economic and geopolitical forces, and the war in the Ukraine, and is closely linked to the price of diesel fuel. The volatility in the wholesale cost of diesel fuel as measured by the New York Mercantile Exchange (“NYMEX”), for the fiscal years ending September 30, 2019, through 2023, on a quarterly basis, is illustrated in the following chart (price per gallon):
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Fiscal 2023 (a) |
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Fiscal 2022 |
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Fiscal 2021 |
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Fiscal 2020 |
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Fiscal 2019 |
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Quarter Ended |
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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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December 31 |
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$ |
2.78 |
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$ |
4.55 |
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$ |
2.06 |
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$ |
2.59 |
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$ |
1.08 |
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$ |
1.51 |
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$ |
1.86 |
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$ |
2.05 |
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$ |
1.66 |
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$ |
2.44 |
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March 31 |
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2.61 |
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3.55 |
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2.36 |
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4.44 |
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1.46 |
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1.97 |
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0.95 |
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2.06 |
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1.70 |
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2.04 |
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June 30 |
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— |
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— |
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3.27 |
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5.14 |
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1.77 |
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2.16 |
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0.61 |
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1.22 |
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1.78 |
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2.12 |
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September 30 |
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— |
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— |
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3.13 |
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4.01 |
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1.91 |
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2.34 |
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1.08 |
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1.28 |
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1.75 |
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2.08 |
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(a)On April 30, 2023, the NYMEX ultra low sulfur diesel contract closed at $2.38 per gallon.
22
Through the second quarter of fiscal 2023 the wholesale price of home heating oil continued to be extremely volatile. We believe these circumstances were attributable to supply and demand imbalances, exacerbated by the war in the Ukraine. From time-to-time, the Company (as well as our competition) paid a premium over the NYMEX-published price for product purchased to ensure prompt delivery.
Income Taxes
Book versus Tax Deductions
The amount of cash flow generated in any given year depends upon a variety of factors including the amount of cash income taxes required, which will increase as depreciation and amortization decreases. The amount of depreciation and amortization that we deduct for book (i.e., financial reporting) purposes will differ from the amount that the Company can deduct for Federal tax purposes. The table below compares the estimated depreciation and amortization for book purposes to the amount that we expect to deduct for Federal tax purposes, based on currently owned assets. While we file our tax returns based on a calendar year, the amounts below are based on our September 30 fiscal year, and the tax amounts include any 100% bonus depreciation available for fixed assets purchased. However, this table does not include any forecast of future annual capital purchases.
Estimated Depreciation and Amortization Expense
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(In thousands) Fiscal Year |
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Book |
|
Tax |
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2023 |
|
$ |
31,410 |
|
$ |
26,326 |
|
2024 |
|
|
26,163 |
|
|
21,226 |
|
2025 |
|
|
21,918 |
|
|
20,670 |
|
2026 |
|
|
17,635 |
|
|
20,020 |
|
2027 |
|
|
15,724 |
|
|
18,190 |
|
2028 |
|
|
12,250 |
|
|
16,967 |
|
Weather Hedge Contracts
Weather conditions have a significant impact on the demand for home heating oil and propane because certain customers depend on these products principally for space heating purposes. Actual weather conditions may vary substantially from year to year, significantly affecting the Company’s financial performance. To partially mitigate the adverse effect of warm weather on cash flow, we have used weather hedging contracts for a number of years with several providers.
Under these contracts, we are entitled to a payment if the total number of degree days within the hedge period is less than the applicable “Payment Thresholds,” or strikes. For fiscal 2022 and 2023 we entered into weather hedging contracts under which we were entitled to a payment capped at $12.5 million if degree days were less than the Payment Threshold and we were obligated to make an annual payment capped at $5.0 million if degree days exceed the Payment Threshold. The hedge period ran from November 1 through March 31, taken as a whole, for each respective fiscal year. The temperatures experienced during the hedge period through March 31, 2023 and March 31, 2022 were warmer than the strikes in the weather hedge contracts. As a result at March 31, 2023 and March 31, 2022, the Company reduced delivery and branch expenses and recorded receivable under those contracts of $12.5 million and $1.1 million, respectively. The amounts were received in full in April 2023 and April 2022, respectively.
For fiscal 2024, the Company entered into a weather hedge contract with the similar hedge period described above. The maximum that the Company can receive is $12.5 million annually and the Company has no obligation to pay the counterparty should degree days exceed the Payment Threshold.
Per Gallon Gross Profit Margins
We believe home heating oil and propane margins should be evaluated on a cents per gallon basis before the effects of increases or decreases in the fair value of derivative instruments, as we believe that such per gallon margins are best at showing profit trends in the underlying business without the impact of non-cash changes in the market value of hedges before the settlement of the underlying transaction.
A significant portion of our home heating oil volume is sold to individual customers under an arrangement pre-establishing a ceiling price or fixed price for home heating oil over a set period of time, generally twelve to twenty-four months (“price-protected” customers). When these price-protected customers agree to purchase home heating oil from us for the next heating season, we purchase option contracts, swaps and futures contracts for a substantial majority of the heating oil that we expect to sell to these customers. The amount of home heating oil volume that we hedge per price-protected customer is based upon the estimated fuel consumption per average customer per month. In the event that the actual usage exceeds the amount of the hedged volume on a monthly basis, we may be required to obtain additional volume at unfavorable costs. In addition, should actual usage in any month be less than the hedged volume, our hedging costs and losses could be greater, thus reducing expected margins.
23
Derivatives
FASB ASC 815-10-05 Derivatives and Hedging requires that derivative instruments be recorded at fair value and included in the consolidated balance sheet as assets or liabilities. To the extent our interest rate derivative instruments designated as cash flow hedges are effective, as defined under this guidance, changes in fair value are recognized in other comprehensive income (loss) until the forecasted hedged item is recognized in earnings. We have elected not to designate our commodity derivative instruments as hedging instruments under this guidance and, as a result, the changes in fair value of the derivative instruments are recognized in our statement of operations. Therefore, we experience volatility in earnings as outstanding derivative instruments are marked to market and non-cash gains and losses are recorded prior to the sale of the commodity to the customer. The volatility in any given period related to unrealized non-cash gains or losses on derivative instruments can be significant to our overall results. However, we ultimately expect those gains and losses to be offset by the cost of product when purchased.
Customer Attrition
We measure net customer attrition on an ongoing basis for our full service residential and commercial home heating oil and propane customers. Net customer attrition is the difference between gross customer losses and customers added through marketing efforts. Customers added through acquisitions are not included in the calculation of gross customer gains. However, additional customers that are obtained through marketing efforts or lost at newly acquired businesses are included in these calculations from the point of closing going forward. Customer attrition percentage calculations include customers added through acquisitions in the denominators of the calculations on a weighted average basis from the closing date. Gross customer losses are the result of a number of factors, including price competition, move-outs, credit losses, conversions to natural gas and service disruptions. When a customer moves out of an existing home, we count the “move out” as a loss, and, if we are successful in signing up the new homeowner, the “move in” is treated as a gain. The impact of certain geopolitical forces, particularly the war in the Ukraine, on liquid product prices could increase future attrition due to higher losses from credit related issues.
Customer gains and losses of home heating oil and propane customers
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Fiscal Year Ended |
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2023 |
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2022 |
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2021 |
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Net |
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Net |
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Net |
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Gross Customer |
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Gains / |
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Gross Customer |
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Gains / |
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Gross Customer |
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Gains / |
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Gains |
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Losses |
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(Attrition) |
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Gains |
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Losses |
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(Attrition) |
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Gains |
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Losses |
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|
(Attrition) |
|
First Quarter |
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26,500 |
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|
19,500 |
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|
7,000 |
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|
19,800 |
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18,500 |
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|
1,300 |
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|
|
19,100 |
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|
19,900 |
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|
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(800 |
) |
Second Quarter |
|
|
9,300 |
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|
18,100 |
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|
(8,800 |
) |
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|
12,700 |
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|
17,300 |
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(4,600 |
) |
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|
12,600 |
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|
17,800 |
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|
|
(5,200 |
) |
Third Quarter |
|
|
— |
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|
|
— |
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|
|
— |
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|
|
6,400 |
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|
|
14,300 |
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|
|
(7,900 |
) |
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|
6,700 |
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|
|
12,300 |
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|
|
(5,600 |
) |
Fourth Quarter |
|
|
— |
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|
|
— |
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|
|
— |
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|
|
11,400 |
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|
|
15,800 |
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|
|
(4,400 |
) |
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|
9,500 |
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14,900 |
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|
(5,400 |
) |
Total |
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|
35,800 |
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|
|
37,600 |
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(1,800 |
) |
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50,300 |
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|
65,900 |
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|
|
(15,600 |
) |
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|
47,900 |
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|
64,900 |
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(17,000 |
) |
Customer gains (attrition) as a percentage of home heating oil and propane customer base
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Fiscal Year Ended |
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2023 |
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2022 |
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2021 |
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Net |
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Net |
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Net |
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|
Gross Customer |
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|
Gains / |
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|
Gross Customer |
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Gains / |
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Gross Customer |
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Gains / |
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Gains |
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Losses |
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(Attrition) |
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Gains |
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Losses |
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|
(Attrition) |
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|
Gains |
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Losses |
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|
(Attrition) |
|
First Quarter |
|
|
6.4 |
% |
|
|
4.7 |
% |
|
|
1.7 |
% |
|
|
4.7 |
% |
|
|
4.4 |
% |
|
|
0.3 |
% |
|
|
4.4 |
% |
|
|
4.6 |
% |
|
|
(0.2 |
%) |
Second Quarter |
|
|
2.2 |
% |
|
|
4.3 |
% |
|
|
(2.1 |
%) |
|
|
3.0 |
% |
|
|
4.1 |
% |
|
|
(1.1 |
%) |
|
|
2.9 |
% |
|
|
4.1 |
% |
|
|
(1.2 |
%) |
Third Quarter |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1.5 |
% |
|
|
3.4 |
% |
|
|
(1.9 |
%) |
|
|
1.3 |
% |
|
|
2.6 |
% |
|
|
(1.3 |
%) |
Fourth Quarter |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2.7 |
% |
|
|
3.7 |
% |
|
|
(1.0 |
%) |
|
|
2.1 |
% |
|
|
3.3 |
% |
|
|
(1.2 |
%) |
Total |
|
|
8.6 |
% |
|
|
9.0 |
% |
|
|
(0.4 |
%) |
|
|
11.9 |
% |
|
|
15.6 |
% |
|
|
(3.7 |
%) |
|
|
10.7 |
% |
|
|
14.6 |
% |
|
|
(3.9 |
%) |
For the six months ended March 31, 2023, the Company lost 1,800 accounts (net), or 0.4% of its home heating oil and propane customer base, compared to 3,300 accounts lost (net), or 0.8% of its home heating and oil propane customer base in the prior year comparable period. Gross customer gains were 3,300 more than the prior year's comparable period because we were able to take advantage of certain market conditions with regard to physical supply. Gross customer losses were 1,800 more primarily due to product prices, customer credit cancellations and fuel conversions.
During the six months ended March 31, 2023, we estimate that we lost 0.9% of our home heating oil and propane accounts to natural gas conversions versus 0.8% for the six months ended March 31, 2022 and 0.7% for the six months ended March 31, 2021. Losses to natural gas in our footprint for the heating oil and propane industry could be greater or less than the Company’s estimates.
24
Acquisitions
The timing of acquisitions and the types of products sold by acquired companies impact year-over-year comparisons. During fiscal year 2023 through March 31, 2023, the Company acquired two heating oil dealers. During fiscal 2022 the Company acquired five heating oil dealers. The following tables detail the Company’s acquisition activity and the associated volume sold during the 12-month period prior to the date of acquisition.
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(in thousands of gallons) |
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Fiscal 2023 Acquisitions |
|
Acquisition Number |
|
Month of Acquisition |
|
Home Heating Oil and Propane |
|
|
Other Petroleum Products |
|
|
Total |
|
1 |
|
October |
|
|
556 |
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|
|
403 |
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|
959 |
|
2 |
|
November |
|
|
494 |
|
|
|
— |
|
|
|
494 |
|
|
|
|
|
|
1,050 |
|
|
|
403 |
|
|
|
1,453 |
|
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|
(in thousands of gallons) |
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|
Fiscal 2022 Acquisitions |
|
Acquisition Number |
|
Month of Acquisition |
|
Home Heating Oil and Propane |
|
|
Other Petroleum Products |
|
|
Total |
|
1 |
|
October |
|
|
437 |
|
|
|
48 |
|
|
|
485 |
|
2 |
|
December |
|
|
741 |
|
|
|
— |
|
|
|
741 |
|
3 |
|
December |
|
|
1,768 |
|
|
|
— |
|
|
|
1,768 |
|
4 |
|
March |
|
|
1,225 |
|
|
|
446 |
|
|
|
1,671 |
|
5 |
|
April |
|
|
3,678 |
|
|
|
166 |
|
|
|
3,844 |
|
|
|
|
|
|
7,849 |
|
|
|
660 |
|
|
|
8,509 |
|
Sale of Certain Assets
In October 2022 we sold certain assets, which included a customer list of approximately 6,500 customers, for $2.7 million (including a deferred purchase price of $0.5 million). The following table details sales generated from the assets sold:
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|
|
Years Ended September 30, |
|
(in thousands) |
2022 |
|
|
2021 |
|
|
2020 |
|
Volume: |
|
|
|
|
|
|
|
|
Home heating oil and propane |
|
2,147 |
|
|
|
2,163 |
|
|
|
2,345 |
|
Motor fuel and other petroleum products |
|
27 |
|
|
|
37 |
|
|
|
38 |
|
Sales: |
|
|
|
|
|
|
|
|
Petroleum products |
$ |
9,355 |
|
|
$ |
6,102 |
|
|
$ |
6,524 |
|
Installations and services |
|
1,323 |
|
|
|
1,384 |
|
|
|
1,292 |
|
Total Sales |
$ |
10,678 |
|
|
$ |
7,486 |
|
|
$ |
7,816 |
|
Protected Price Account Renewals
A substantial majority of the Company’s price-protected customers have agreements with us that are subject to annual renewal in the period between April and November of each fiscal year. If a significant number of these customers elect not to renew their price-protected agreements with us and do not continue as our customers under a variable price-plan, the Company’s near term profitability, liquidity and cash flow will be adversely impacted.
Seasonality
The Company’s fiscal year ends on September 30. All references to quarters and years, respectively, in this document are to the fiscal quarters and fiscal years unless otherwise noted. The seasonal nature of our business has resulted, on average, during the last five years, in the sale of approximately 30% of the volume of home heating oil and propane in the first fiscal quarter and 50% of the volume in the second fiscal quarter, the peak heating season. Approximately 25% of the volume of motor fuel and other petroleum products is sold in each of the four fiscal quarters. We generally realize net income during the quarters ending December and March and net losses during the quarters ending June and September. In addition, sales volume typically fluctuates from year to year in response to variations in weather, wholesale energy prices and other factors.
25
Degree Day
A “degree day” is an industry measurement of temperature designed to evaluate energy demand and consumption. Degree days are based on how far the average daily temperature departs from 65°F. Each degree of temperature above 65°F is counted as one cooling degree day, and each degree of temperature below 65°F is counted as one heating degree day. Degree days are accumulated each day over the course of a year and can be compared to a monthly or a long-term (multi-year) average to see if a month or a year was warmer or cooler than usual. Degree days are officially observed by 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 1991 to 2020. Our calculations of “normal” weather are based on these published 30 year averages for heating degree days, weighted by volume for the locations where we have existing operations.
Consolidated Results of Operations
The following is a discussion of the consolidated results of operations of the Company and its subsidiaries and should be read in conjunction with the historical financial and operating data and Notes thereto included elsewhere in this Quarterly Report.
26
Three Months Ended March 31, 2023
Compared to the Three Months Ended March 31, 2022
Volume
For the three months ended March 31, 2023, retail volume of home heating oil and propane sold decreased by 27.8 million gallons, or 18.7%, to 121.1 million gallons, compared to 148.9 million gallons for the three months ended March 31, 2022. For those locations where we had existing operations during both periods, which we sometimes refer to as the “base business” (i.e., excluding acquisitions), temperatures (measured on a heating degree day basis) for the three months ended March 31, 2023 were the warmest in the last 123 years in the New York City metropolitan area. For the three months ended March 31, 2023 temperatures were 18.7% warmer than the three months ended March 31, 2022 and 21.6% warmer than normal, as reported by NOAA. For the twelve months ended March 31, 2023, net customer attrition for the base business was 3.2%. The impact of fuel conservation, along with any period-to-period differences in delivery scheduling, the timing of accounts added or lost during the fiscal years, equipment efficiency, and other volume variances not otherwise described, are included in the chart below under the heading “Other.” An analysis of the change in the retail volume of home heating oil and propane, which is based on management’s estimates, sampling, and other mathematical calculations and certain assumptions, is found below:
|
|
|
|
|
(in millions of gallons) |
|
Heating Oil and Propane |
|
Volume - Three months ended March 31, 2022 |
|
|
148.9 |
|
Net customer attrition |
|
|
(5.8 |
) |
Impact of warmer temperatures |
|
|
(27.1 |
) |
Acquisitions |
|
|
2.0 |
|
Sale of certain assets |
|
|
(1.1 |
) |
Other |
|
|
4.2 |
|
Change |
|
|
(27.8 |
) |
Volume - Three months ended March 31, 2023 |
|
|
121.1 |
|
The following chart sets forth the percentage by volume of total home heating oil sold to residential variable-price customers, residential price-protected customers and commercial/industrial/other customers for the three months ended March 31, 2023, compared to the three months ended March 31, 2022:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Customers |
|
March 31, 2023 |
|
|
March 31, 2022 |
|
Residential Variable |
|
|
42.8 |
% |
|
|
44.9 |
% |
Residential Price-Protected (Ceiling and Fixed Price) |
|
|
45.0 |
% |
|
|
42.7 |
% |
Commercial/Industrial |
|
|
12.2 |
% |
|
|
12.4 |
% |
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
Volume of motor fuel and other petroleum products sold decreased by 3.1 million gallons, or 8.5%, to 33.2 million gallons for the three months ended March 31, 2023, compared to 36.3 million gallons for the three months ended March 31, 2022.
Product Sales
For the three months ended March 31, 2023, product sales decreased by $43.3 million, or 6.1%, to $669.2 million, compared to $712.5 million for the three months ended March 31, 2022, as a decrease in total volume sales of 16.7% was reduced by an increase in average selling prices. Selling prices rose largely due to an increase in wholesale product cost of $0.3627 per gallon, or 13.6%.
Installations and Service
For the three months ended March 31, 2023, installation and service revenue decreased by $1.7 million, or 2.4%, to $68.4 million, compared to $70.1 million for the three months ended March 31, 2022 driven by a decrease in installation sales.
27
Cost of Product
For the three months ended March 31, 2023, cost of product decreased $26.0 million, or 5.3%, to $466.3 million, compared to $492.3 million for the three months ended March 31, 2022, as a decrease in total volume of 16.7 % was reduced by an increase in wholesale product cost of $0.3627 per gallon, or 13.6%.
Gross Profit — Product
The table below calculates our per gallon margins and reconciles product gross profit for home heating oil and propane and motor fuel and other petroleum products. We believe the change in home heating oil and propane margins should be evaluated before the effects of increases or decreases in the fair value of derivative instruments, as we believe that realized per gallon margins should not include the impact of non-cash changes in the market value of hedges before the settlement of the underlying transaction. On that basis, home heating oil and propane margins for the three months ended March 31, 2023 increased by $0.1887 per gallon, or 13.4%, to $1.5929 per gallon, from $1.4042 per gallon during the three months ended March 31, 2022. Going forward, we cannot assume that per gallon margins realized during the three months ended March 31, 2023 are sustainable especially with the volatility in heating oil and propane costs. Product sales and cost of product include home heating oil, propane, other petroleum products and liquidated damages billings.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, 2023 |
|
|
March 31, 2022 |
|
Home Heating Oil and Propane |
|
Amount (in millions) |
|
|
Per Gallon |
|
|
Amount (in millions) |
|
|
Per Gallon |
|
Volume |
|
|
121.1 |
|
|
|
|
|
|
148.9 |
|
|
|
|
Sales |
|
$ |
566.5 |
|
|
$ |
4.6767 |
|
|
$ |
593.5 |
|
|
$ |
3.9853 |
|
Cost |
|
$ |
373.5 |
|
|
$ |
3.0838 |
|
|
$ |
384.4 |
|
|
$ |
2.5811 |
|
Gross Profit |
|
$ |
193.0 |
|
|
$ |
1.5929 |
|
|
$ |
209.1 |
|
|
$ |
1.4042 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Motor Fuel and Other Petroleum Products |
|
Amount (in millions) |
|
|
Per Gallon |
|
|
Amount (in millions) |
|
|
Per Gallon |
|
Volume |
|
|
33.2 |
|
|
|
|
|
|
36.3 |
|
|
|
|
Sales |
|
$ |
102.7 |
|
|
$ |
3.0949 |
|
|
$ |
119.0 |
|
|
$ |
3.2806 |
|
Cost |
|
$ |
92.8 |
|
|
$ |
2.7935 |
|
|
$ |
108.0 |
|
|
$ |
2.9768 |
|
Gross Profit |
|
$ |
9.9 |
|
|
$ |
0.3014 |
|
|
$ |
11.0 |
|
|
$ |
0.3038 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Product |
|
Amount (in millions) |
|
|
|
|
Amount (in millions) |
|
|
|
Sales |
|
$ |
669.2 |
|
|
|
|
$ |
712.5 |
|
|
|
Cost |
|
$ |
466.3 |
|
|
|
|
$ |
492.4 |
|
|
|
Gross Profit |
|
$ |
202.9 |
|
|
|
|
$ |
220.1 |
|
|
|
For the three months ended March 31, 2023, total product gross profit was $202.9 million, which was $17.2 million, or 7.8%, lower than the three months ended March 31, 2022, due to a decrease in home heating oil and propane volume ($39.0 million) and a decrease in gross profit from other petroleum products ($1.1 million) that was partially offset by an increase in home heating oil and propane margins ($22.9 million).
Cost of Installations and Service
Total installation costs for the three months ended March 31, 2023 decreased by $1.2 million or 5.3%, to $21.4 million, compared to $22.6 million of installation costs for the three months ended March 31, 2022. This decrease was largely due to lower installation sales. Installation costs as a percentage of installation sales were 84.8% for the three months ended March 31, 2023 and 83.7% for the three months ended March 31, 2022.
Service expense decreased by $0.7 million, or 1.3%, to $46.9 million for the three months ended March 31, 2023, representing 108.6% of service sales, versus $47.6 million, or 110.3% of service sales, for the three months ended March 31, 2022. The warmer temperatures drove a decrease in service calls and related expenses. In addition, a large proportion of our service expenses are incurred under fixed-fee prepaid service contract arrangements, therefore trends in service expenses may not directly correlate to trends in the related revenues. Gross loss from service decreased by $0.7 million.
We realized a combined gross profit from service and installation of $0.1 million for the three months ended March 31, 2023 compared to a gross loss of $0.1 million for the three months ended March 31, 2022, a $0.2 million increase.
28
(Increase) Decrease in the Fair Value of Derivative Instruments
During the three months ended March 31, 2023, the change in the fair value of derivative instruments resulted in a $3.0 million charge due to a decrease in the market value for unexpired hedges (an $11.5 million charge), partially offset by an $8.5 million credit due to the expiration of certain hedged positions.
During the three months ended March 31, 2022, the change in the fair value of derivative instruments resulted in a $17.6 million credit due to an increase in the market value for unexpired hedges (a $24.5 million credit), partially offset by a $6.9 million charge due to the expiration of certain hedged positions.
Delivery and Branch Expenses
For the three months ended March 31, 2023, delivery and branch expense decreased $11.6 million, or 10.7%, to $95.9 million, compared to $107.5 million for the three months ended March 31, 2022, reflecting a $1.5 million, or 1.4%, increase in expense within the base business and additional costs from acquisitions of $0.9 million that were more than offset by a $14.0 million higher benefit recorded from the Company’s weather hedge. In the base business, a $1.7 million increase in vehicle fuels expenses due to higher diesel and gasoline costs and a $1.5 million increase in bad debts and credit card fees that were partially offset by a $1.7 million decrease in wage, benefit and other expenses. Temperatures for the three months ended March 31, 2023 were 18.7% warmer than three months ended March 31, 2022 and 21.6% warmer than normal, as reported by NOAA. For the three months ended March 31, 2023 we recorded a benefit of $12.9 million under our weather hedge program that decreased delivery and branch expenses, versus a charge of $1.1 million for the three months ended March 31, 2022.
Depreciation and Amortization Expenses
For the three months ended March 31, 2023, depreciation and amortization expenses decreased $0.5 million, or 5.6%, to $7.6 million, compared to $8.1 million for the three months ended March 31, 2022, primarily due to intangible assets that fully amortized in the prior fiscal year.
General and Administrative Expenses
For the three months ended March 31, 2023, general and administrative expenses increased by $0.8 million or 13.5%, to $6.7 million, from $5.9 million for the three months ended March 31, 2022, due to a $0.4 million increase in the Company's frozen pension expense and a $0.5 million increase in salaries and benefits expenses that were partially offset by $0.1 million of other net expense decreases.
Finance Charge Income
For the three months ended March 31, 2023, finance charge income increased to $1.8 million from $1.0 million for the three months ended March 31, 2022, primarily due to higher customer late payment charges.
Interest Expense, Net
For the three months ended March 31, 2023, net interest expense increased by $2.3 million, or 81.9%, to $5.0 million compared to $2.7 million for the three months ended March 31, 2022. The year-over-year change was driven by an increase in the weighted average interest rate from 2.9% for the three months ended March 31, 2022 to 6.3% for the three months ended March 31, 2023, that was partially offset by a decrease in average borrowings of $7.3 million from $283.8 million for the three months ended March 31, 2022 to $276.5 million for the three months ended March 31, 2023. To hedge against rising interest rates, the Company utilizes interest rate swaps, which sheltered 54% of the borrowings from the interest rate increases during the quarter.
Amortization of Debt Issuance Costs
For the three months ended March 31, 2023, amortization of debt issuance cost increased to $0.3 million from $0.2 million for the three months ended March 31, 2022.
Income Tax Expense
For the three months ended March 31, 2023, the Company’s income tax expense decreased by $8.6 million to $24.3 million, from $32.9 million for the three months ended March 31, 2022. The decrease in the income tax expense was driven by a $28.0 million decline in income before income taxes and a decrease in the effective income tax rate from 28.8% for the three months ended March 31, 2022 to 28.1% for the three months ended March 31, 2023 due primarily to a decrease in state income taxes.
29
Net Income
For the three months ended March 31, 2023, Star’s net income decreased $19.3 million, to $62.0 million, compared to the three months ended March 31, 2022, primarily due to an unfavorable change in the fair value of derivative instruments of $20.6 million, a $2.3 million increase in interest expense and a decrease in Adjusted EBITDA of $5.5 million partially offset by an $8.6 million decrease in income tax expense.
Adjusted EBITDA
For the three months ended March 31, 2023, Adjusted EBITDA decreased by $5.5 million, to $102.2 million, compared to the three months ended March 31, 2022, as an increase in per gallon margins and a $14.0 million higher benefit recorded from the Company’s weather hedge was more than offset by a decrease in home heating oil and propane volume of 27.8 million gallons. Temperatures for the three months ended March 31, 2023 were the warmest in the last 123 years in the New York City metropolitan area. Temperatures for the three months ended March 31, 2023 were 18.7% warmer than three months ended March 31, 2022 and 21.6% warmer than normal, as reported by NOAA. For the three months ended March 31, 2023, the Company recorded a benefit of $12.9 million under its weather hedge program that decreased delivery and branch expenses, versus a charge of $1.1 million for the three months ended March 31, 2022.
EBITDA and Adjusted EBITDA should not be considered as an alternative to net income, as an indicator of operating performance, or as an alternative to cash flow, as a measure of liquidity or ability to service debt obligations, but provides additional information for evaluating the Company’s ability to make the Minimum Quarterly Distribution. EBITDA and Adjusted EBITDA are calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
(in thousands) |
|
2023 |
|
|
2022 |
|
Net income |
|
$ |
62,041 |
|
|
$ |
81,379 |
|
Plus: |
|
|
|
|
|
|
Income tax expense |
|
|
24,253 |
|
|
|
32,900 |
|
Amortization of debt issuance costs |
|
|
258 |
|
|
|
237 |
|
Interest expense, net |
|
|
4,963 |
|
|
|
2,729 |
|
Depreciation and amortization |
|
|
7,626 |
|
|
|
8,081 |
|
EBITDA (a) |
|
|
99,141 |
|
|
|
125,326 |
|
(Increase) / decrease in the fair value of derivative instruments |
|
|
3,022 |
|
|
|
(17,615 |
) |
Adjusted EBITDA (a) |
|
|
102,163 |
|
|
|
107,711 |
|
Add / (subtract) |
|
|
|
|
|
|
Income tax expense |
|
|
(24,253 |
) |
|
|
(32,900 |
) |
Interest expense, net |
|
|
(4,963 |
) |
|
|
(2,729 |
) |
Provision for losses on accounts receivable |
|
|
3,722 |
|
|
|
2,455 |
|
Increase in accounts receivables |
|
|
(9,600 |
) |
|
|
(86,269 |
) |
Decrease (increase) in inventories |
|
|
40,326 |
|
|
|
(1,660 |
) |
Decrease in customer credit balances |
|
|
(27,068 |
) |
|
|
(36,409 |
) |
Change in deferred taxes |
|
|
(11,155 |
) |
|
|
5,229 |
|
Change in other operating assets and liabilities |
|
|
9,736 |
|
|
|
4,996 |
|
Net cash provided by (used in) operating activities |
|
$ |
78,908 |
|
|
$ |
(39,576 |
) |
Net cash used in investing activities |
|
$ |
(2,013 |
) |
|
$ |
(6,469 |
) |
Net cash (used in) provided by financing activities |
|
$ |
(77,401 |
) |
|
$ |
42,488 |
|
(a)EBITDA (Earnings from continuing operations before net interest expense, income taxes, depreciation and amortization) and Adjusted EBITDA (Earnings from continuing operations before net interest expense, income taxes, depreciation and amortization, (increase) decrease in the fair value of derivatives, other income (loss), net, multiemployer pension plan withdrawal charge, gain or loss on debt redemption, goodwill impairment, and other non-cash and non-operating charges) are non-GAAP financial measures that are used as supplemental financial measures by management and external users of our financial statements, such as investors, commercial banks and research analysts, to assess:
our compliance with certain financial covenants included in our debt agreements;
our financial performance without regard to financing methods, capital structure, income taxes or historical cost basis;
our operating performance and return on invested capital compared to those of other companies in the retail distribution of refined petroleum products, without regard to financing methods and capital structure;
our ability to generate cash sufficient to pay interest on our indebtedness and to make distributions to our partners; and
30
the viability of acquisitions and capital expenditure projects and the overall rates of return of alternative investment opportunities.
The method of calculating Adjusted EBITDA may not be consistent with that of other companies, and EBITDA and Adjusted EBITDA both have limitations as analytical tools and so should not be viewed in isolation but in conjunction with measurements that are computed in accordance with GAAP. Some of the limitations of EBITDA and Adjusted EBITDA are:
EBITDA and Adjusted EBITDA do not reflect our cash used for capital expenditures.
Although depreciation and amortization are non-cash charges, the assets being depreciated or amortized often will have to be replaced and EBITDA and Adjusted EBITDA do not reflect the cash requirements for such replacements;
EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital requirements;
EBITDA and Adjusted EBITDA do not reflect the cash necessary to make payments of interest or principal on our indebtedness; and EBITDA and Adjusted EBITDA do not reflect the cash required to pay taxes.
31
Six Months Ended March 31, 2023
Compared to the Six Months Ended March 31, 2022
Volume
For the six months ended March 31, 2023, retail volume of home heating oil and propane sold decreased by 25.6 million gallons, or 10.8%, to 210.3 million gallons, compared to 235.9 million gallons for the six months ended March 31, 2022. For those locations where we had existing operations during both periods, which we sometimes refer to as the “base business” (i.e., excluding acquisitions), temperatures (measured on a heating degree day basis) for the six months ended March 31, 2023 were the fourth warmest in the last 123 years in the New York City metropolitan area. For the six months ended March 31, 2023 temperatures were 6.9% warmer than the six months ended March 31, 2022 and 15.7% warmer than normal, as reported by NOAA. For the twelve months ended March 31, 2023, net customer attrition for the base business was 3.2%. The impact of fuel conservation, along with any period-to-period differences in delivery scheduling, the timing of accounts added or lost during the fiscal years, equipment efficiency, and other volume variances not otherwise described, are included in the chart below under the heading “Other.” An analysis of the change in the retail volume of home heating oil and propane, which is based on management’s estimates, sampling, and other mathematical calculations and certain assumptions, is found below:
|
|
|
|
|
(in millions of gallons) |
|
Heating Oil and Propane |
|
Volume - Six months ended March 31, 2022 |
|
|
235.9 |
|
Net customer attrition |
|
|
(9.1 |
) |
Impact of warmer temperatures |
|
|
(15.5 |
) |
Acquisitions |
|
|
3.3 |
|
Sale of certain assets |
|
|
(1.6 |
) |
Other |
|
|
(2.7 |
) |
Change |
|
|
(25.6 |
) |
Volume - Six months ended March 31, 2023 |
|
|
210.3 |
|
The following chart sets forth the percentage by volume of total home heating oil sold to residential variable-price customers, residential price-protected customers and commercial/industrial/other customers for the six months ended March 31, 2023, compared to the six months ended March 31, 2022:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
Customers |
|
March 31, 2023 |
|
|
March 31, 2022 |
|
Residential Variable |
|
|
42.8 |
% |
|
|
44.7 |
% |
Residential Price-Protected (Ceiling and Fixed Price) |
|
|
44.5 |
% |
|
|
42.7 |
% |
Commercial/Industrial |
|
|
12.7 |
% |
|
|
12.6 |
% |
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
Volume of motor fuel and other petroleum products sold decreased by 6.8 million gallons, or 8.9%, to 68.8 million gallons for the six months ended March 31, 2023, compared to 75.6 million gallons for the six months ended March 31, 2022.
Product Sales
For the six months ended March 31, 2023, product sales increased by $0.1 billion, or 10.3%, to $1.2 billion, compared to $1.1 billion for the six months ended March 31, 2022, as a decrease in total volume of 10.4% was reduced by an increase in wholesale product cost of $0.7095 per gallon, or 28.8%.
Installations and Service
For the six months ended March 31, 2023, installation and service revenue decreased by $0.4 million, or 0.3%, to $146.7 million, compared to $147.1 million for the six months ended March 31, 2022, as a decrease in installation sales of $2.0 million was reduced by an increase in service revenue of $1.6 million.
32
Cost of Product
For the six months ended March 31, 2023, cost of product increased $118.5 million, or 15.4%, to $885.4 million, compared to $766.9 million for the six months ended March 31, 2022 due to the impact of a $0.7095 per gallon, or 28.8%, increase in wholesale product cost.
Gross Profit — Product
The table below calculates our per gallon margins and reconciles product gross profit for home heating oil and propane and motor fuel and other petroleum products. We believe the change in home heating oil and propane margins should be evaluated before the effects of increases or decreases in the fair value of derivative instruments, as we believe that realized per gallon margins should not include the impact of non-cash changes in the market value of hedges before the settlement of the underlying transaction. On that basis, home heating oil and propane margins for the six months ended March 31, 2023 increased by $0.1536 per gallon, or 10.8%, to $1.5727 per gallon, from $1.4191 per gallon during the six months ended March 31, 2022. Going forward, we cannot assume that per gallon margins realized during the six months ended March 31, 2023 are sustainable especially with the volatility in heating oil and propane costs. Product sales and cost of product include home heating oil, propane, other petroleum products and liquidated damages billings.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
March 31, 2023 |
|
|
March 31, 2022 |
|
Home Heating Oil and Propane |
|
Amount (in millions) |
|
|
Per Gallon |
|
|
Amount (in millions) |
|
|
Per Gallon |
|
Volume |
|
|
210.3 |
|
|
|
|
|
|
235.9 |
|
|
|
|
Sales |
|
$ |
1,002.0 |
|
|
$ |
4.7637 |
|
|
$ |
899.2 |
|
|
$ |
3.8114 |
|
Cost |
|
$ |
671.2 |
|
|
$ |
3.1910 |
|
|
$ |
564.4 |
|
|
$ |
2.3923 |
|
Gross Profit |
|
$ |
330.8 |
|
|
$ |
1.5727 |
|
|
$ |
334.8 |
|
|
$ |
1.4191 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Motor Fuel and Other Petroleum Products |
|
Amount (in millions) |
|
|
Per Gallon |
|
|
Amount (in millions) |
|
|
Per Gallon |
|
Volume |
|
|
68.8 |
|
|
|
|
|
|
75.6 |
|
|
|
|
Sales |
|
$ |
237.2 |
|
|
$ |
3.4446 |
|
|
$ |
224.5 |
|
|
$ |
2.9693 |
|
Cost |
|
$ |
214.2 |
|
|
$ |
3.1107 |
|
|
$ |
202.5 |
|
|
$ |
2.6785 |
|
Gross Profit |
|
$ |
23.0 |
|
|
$ |
0.3339 |
|
|
$ |
22.0 |
|
|
$ |
0.2908 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Product |
|
Amount (in millions) |
|
|
|
|
Amount (in millions) |
|
|
|
Sales |
|
$ |
1,239.2 |
|
|
|
|
$ |
1,123.7 |
|
|
|
Cost |
|
$ |
885.4 |
|
|
|
|
$ |
766.9 |
|
|
|
Gross Profit |
|
$ |
353.8 |
|
|
|
|
$ |
356.8 |
|
|
|
For the six months ended March 31, 2023, total product gross profit was $353.8 million, which was $3.0 million, or 0.8%, lower than the six months ended March 31, 2022, due to a decrease in home heating oil and propane volume ($36.3 million) that was partially offset by an increase in home heating oil and propane margins ($32.3 million) and an increase in gross profit from other petroleum products ($1.0 million largely due to an increase in per gallon margins).
Cost of Installations and Service
Total installation costs for the six months ended March 31, 2023 decreased by $1.2 million or 2.5%, to $48.1 million, compared to $49.3 million of installation costs for the six months ended March 31, 2022. Installation costs as a percentage of installation sales were 83.0% for the six months ended March 31, 2023 and 82.2% for the six months ended March 31, 2022.
Service expense increased by $1.9 million, or 2.0%, to $96.7 million for the six months ended March 31, 2023, representing 109.1% of service sales, versus $94.8 million, or 108.9% of service sales, for the six months ended March 31, 2022. A large proportion of our service expenses are incurred under fixed-fee prepaid service contract arrangements, therefore trends in service expenses may not directly correlate to trends in the related revenues. Gross loss from service increased by $0.3 million.
We realized a combined gross profit from service and installation of $1.8 million for the six months ended March 31, 2023 compared to a gross profit of $2.9 million for the six months ended March 31, 2022, a $1.1 million decrease largely due to a decline in installation gross profit.
33
(Increase) Decrease in the Fair Value of Derivative Instruments
During the six months ended March 31, 2023, the change in the fair value of derivative instruments resulted in a $20.7 million charge due to a decrease in the market value for unexpired hedges (a $13.5 million charge) and a $7.2 million charge due to the expiration of certain hedged positions.
During the six months ended March 31, 2022, the change in the fair value of derivative instruments resulted in a $4.2 million credit due to an increase in the market value for unexpired hedges (a $24.7 million credit), partially offset by a $20.5 million charge due to the expiration of certain hedged positions.
Delivery and Branch Expenses
For the six months ended March 31, 2023, delivery and branch expense decreased $2.6 million, or 1.3%, to $193.9 million, compared to $196.5 million for the six months ended March 31, 2022, reflecting a $6.8 million, or 6.4%, increase in expense within the base business, and additional costs from acquisitions of $2.0 million, that was more than offset by an $11.4 million higher benefit recorded from the Company’s weather hedge. In the base business, a $2.3 million decrease in insurance claims expense was more than offset by a $3.8 million increase in bad debts and credit card fees that was driven by higher sales as a result of higher product cost, and a $2.9 million increase in vehicle fuel expenses due to higher diesel and gasoline costs. The remaining expense increase in the base business of $2.4 million, or 2.2%, was due to wage, benefit and other expense increases. Temperatures for the six months ended March 31, 2023 were 6.9% warmer than six months ended March 31, 2022 and 15.7% warmer than normal, as reported by NOAA. As of March 31, 2023 we recorded a benefit of $12.5 million under our weather hedge program that decreased delivery and branch expenses, versus a benefit of $1.1 million as of March 31, 2022.
Depreciation and Amortization Expenses
For the six months ended March 31, 2023, depreciation and amortization expenses decreased $1.0 million, or 6.4%, to $15.5 million, compared to $16.5 million for the six months ended March 31, 2022, primarily due to intangible assets that fully amortized in the prior fiscal year.
General and Administrative Expenses
For the six months ended March 31, 2023, general and administrative expenses increased by $1.0 million or 7.8%, to $13.6 million, from $12.6 million for the six months ended March 31, 2022, due to a $0.8 million increase in the Company's frozen pension expense and a $0.4 million of increases in salaries and benefits expenses that were partially offset by a $0.2 million decrease in legal and professional expenses.
Finance Charge Income
For the six months ended March 31, 2023, finance charge income increased to $3.1 million from $1.5 million for the six months ended March 31, 2022, primarily due to higher customer late payment charges.
Interest Expense, Net
For the six months ended March 31, 2023, net interest expense increased by $4.4 million, or 93.0%, to $9.2 million compared to $4.8 million for the six months ended March 31, 2022. The year-over-year change was driven by an increase in the weighted average interest rate from 3.2% for the six months ended March 31, 2022 to 6.2% for the six months ended March 31, 2023 and an increase in average borrowings of $40.6 million from $219.6 million for the six months ended March 31, 2022 to $260.2 million for the six months ended March 31, 2023. The increase in average borrowings was largely due to increased financing to fund working capital as a result of increases in accounts receivable and inventory due to the increase in the cost of product. To hedge against rising interest rates, the Company utilizes interest rate swaps, which sheltered 54% of the borrowings from the interest rate increases during the quarter.
Amortization of Debt Issuance Costs
For the six months ended March 31, 2023, amortization of debt issuance cost increased to $0.6 million from $0.5 million for the six months ended March 31, 2022.
34
Income Tax Expense
For the six months ended March 31, 2023, the Company’s income tax expense decreased by $9.0 million to $29.7 million, from $38.7 million for the six months ended March 31, 2022. The decrease in the income tax expense was driven by a $29.3 million decline in income before income taxes and a decrease in the effective income tax rate from 28.8% for the six months ended March 31, 2022 to 28.2% for the six months ended March 31, 2023 due primarily to a decrease in state income taxes.
Net Income
For the six months ended March 31, 2023, Star’s net income decreased $20.3 million, to $75.6 million, compared to the six months ended March 31, 2022, primarily due to an unfavorable change in the fair value of derivative instruments of $24.9 million, a $4.4 million increase in interest expense and a decrease in Adjusted EBITDA of $0.9 million that was partially offset by an $9.0 million decrease in income tax expense.
Adjusted EBITDA
For the six months ended March 31, 2023, Adjusted EBITDA decreased by $0.9 million, to $151.2 million, compared to the six months ended March 31, 2022, as a decrease in home heating oil and propane volume of 25.6 million gallons more than offset an increase in per gallon margins and an $11.4 million higher benefit recorded from the Company’s weather hedge. Temperatures for the six months ended March 31, 2023 were the fourth warmest in the last 123 years in the New York City metropolitan area. Temperatures were 6.9% warmer than the six months ended March 31, 2022 and 15.7% warmer than normal, as reported by NOAA. As of March 31, 2023, the Company recorded a benefit of $12.5 million under its weather hedge program that decreased delivery and branch expenses, versus a benefit of $1.1 million as of March 31, 2022.
EBITDA and Adjusted EBITDA should not be considered as an alternative to net income, as an indicator of operating performance, or as an alternative to cash flow, as a measure of liquidity or ability to service debt obligations, but provides additional information for evaluating the Company’s ability to make the Minimum Quarterly Distribution. EBITDA and Adjusted EBITDA are calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended March 31, |
|
(in thousands) |
|
2023 |
|
|
2022 |
|
Net income |
|
$ |
75,580 |
|
|
$ |
95,868 |
|
Plus: |
|
|
|
|
|
|
Income tax expense |
|
|
29,716 |
|
|
|
38,738 |
|
Amortization of debt issuance costs |
|
|
587 |
|
|
|
476 |
|
Interest expense, net |
|
|
9,237 |
|
|
|
4,787 |
|
Depreciation and amortization |
|
|
15,463 |
|
|
|
16,529 |
|
EBITDA (a) |
|
|
130,583 |
|
|
|
156,398 |
|
(Increase) / decrease in the fair value of derivative instruments |
|
|
20,658 |
|
|
|
(4,212 |
) |
Adjusted EBITDA (a) |
|
|
151,241 |
|
|
|
152,186 |
|
Add / (subtract) |
|
|
|
|
|
|
Income tax expense |
|
|
(29,716 |
) |
|
|
(38,738 |
) |
Interest expense, net |
|
|
(9,237 |
) |
|
|
(4,787 |
) |
Provision for losses on accounts receivable |
|
|
4,768 |
|
|
|
2,167 |
|
Increase in accounts receivables |
|
|
(124,764 |
) |
|
|
(165,063 |
) |
Decrease (increase) in inventories |
|
|
11,609 |
|
|
|
(18,048 |
) |
Decrease in customer credit balances |
|
|
(41,768 |
) |
|
|
(50,913 |
) |
Change in deferred taxes |
|
|
(12,379 |
) |
|
|
4,545 |
|
Change in other operating assets and liabilities |
|
|
36,413 |
|
|
|
13,210 |
|
Net cash used in operating activities |
|
$ |
(13,833 |
) |
|
$ |
(105,441 |
) |
Net cash used in investing activities |
|
$ |
(4,099 |
) |
|
$ |
(13,503 |
) |
Net cash provided by financing activities |
|
$ |
25,397 |
|
|
$ |
131,859 |
|
35
(a)EBITDA (Earnings from continuing operations before net interest expense, income taxes, depreciation and amortization) and Adjusted EBITDA (Earnings from continuing operations before net interest expense, income taxes, depreciation and amortization, (increase) decrease in the fair value of derivatives, other income (loss), net, multiemployer pension plan withdrawal charge, gain or loss on debt redemption, goodwill impairment, and other non-cash and non-operating charges) are non-GAAP financial measures that are used as supplemental financial measures by management and external users of our financial statements, such as investors, commercial banks and research analysts, to assess:
our compliance with certain financial covenants included in our debt agreements;
our financial performance without regard to financing methods, capital structure, income taxes or historical cost basis;
our operating performance and return on invested capital compared to those of other companies in the retail distribution of refined petroleum products, without regard to financing methods and capital structure;
our ability to generate cash sufficient to pay interest on our indebtedness and to make distributions to our partners; and
the viability of acquisitions and capital expenditure projects and the overall rates of return of alternative investment opportunities.
The method of calculating Adjusted EBITDA may not be consistent with that of other companies, and EBITDA and Adjusted EBITDA both have limitations as analytical tools and so should not be viewed in isolation but in conjunction with measurements that are computed in accordance with GAAP. Some of the limitations of EBITDA and Adjusted EBITDA are:
EBITDA and Adjusted EBITDA do not reflect our cash used for capital expenditures.
Although depreciation and amortization are non-cash charges, the assets being depreciated or amortized often will have to be replaced and EBITDA and Adjusted EBITDA do not reflect the cash requirements for such replacements;
EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital requirements;
EBITDA and Adjusted EBITDA do not reflect the cash necessary to make payments of interest or principal on our indebtedness; and EBITDA and Adjusted EBITDA do not reflect the cash required to pay taxes.
DISCUSSION OF CASH FLOWS
We use the indirect method to prepare our Consolidated Statements of Cash Flows. Under this method, we reconcile net income to cash flows provided by operating activities by adjusting net income for those items that impact net income but do not result in actual cash receipts or payment during the period.
Operating Activities
Due to the seasonal nature of our business, cash is generally used in operations during the winter (our first and second fiscal quarters) as we require additional working capital to support the high volume of sales during this period, and cash is generally provided by operating activities during the spring and summer (our third and fourth fiscal quarters) when customer payments exceed the cost of deliveries.
During the six months ended March 31, 2023, cash used in operating activities decreased $91.6 million, to $13.8 million, compared to $105.4 million in cash used in operating activities during the six months ended March 31, 2022. The decrease was driven by an increase in collection of trade receivables on a comparable basis (including accounts receivable and customer credit balance accounts) of $49.4 million due primarily to higher average sales prices resulting from higher average product costs and a $33.9 million increase in collection of derivative settlement receivables on a comparative basis. Further contributing to the increase was a $29.7 million decrease in cash required to purchase liquid product inventory, a $22.0 million decrease in net cash paid for certain hedge positions, a $7.6 million reduction in income tax payables on a comparative basis and $0.3 million of other net changes in working capital. The decrease was partially offset by a $24.0 million unfavorable change in accounts payable due to the pricing and timing of inventory purchases, an $22.1 million decrease in cash flows from operations and $5.2 million more in payroll taxes paid in the first fiscal quarter of 2023 versus the first fiscal quarter of 2022 as the result of deferring payment of certain payroll tax withholdings in first quarter of fiscal 2021 to the first fiscal quarter of fiscal 2023.
Investing Activities
During the six months ended March 31, 2023, the Company acquired two heating oil dealers for an aggregate price of approximately $1.2 million (using $1.2 million in cash). The gross purchase price was allocated $1.7 million to intangible assets, $0.2 million to goodwill, $0.2 million to fixed assets and reduced by $0.9 million of negative working capital. On October 25, 2022, the Company sold certain assets for cash proceeds of $2.2 million.
36
Our capital expenditures for the six months ended March 31, 2023 totaled $5.2 million, as we invested in computer hardware and software ($0.4 million), refurbished certain physical plants ($0.5 million), expanded our propane operations ($0.9 million) and made additions to our fleet and other equipment ($3.4 million).
During the six months ended March 31, 2023, $0.5 million of earnings were reinvested into an irrevocable trust established in connection with our captive insurance company. The cash deposited into the trust is shown on our balance sheet as captive insurance collateral and, correspondingly, reduced cash on our balance sheet. We believe that investments into the irrevocable trust lower our letter of credit fees, increase interest income on invested cash balances, and provide us with certain tax advantages attributable to a captive insurance company.
During the six months ended March 31, 2022, the Company acquired four heating oil dealers for an aggregate price of approximately $7.4 million (using $6.5 million in cash and assuming $0.9 million of liabilities). The gross purchase price was allocated $4.9 million to intangible assets, $3.2 million to fixed assets and reduced by $0.7 million in working capital credits.
Our capital expenditures for the six months ended March 31, 2022 totaled $7.1 million, as we invested in computer hardware and software ($0.7 million), refurbished certain physical plants ($1.5 million), expanded our propane operations ($2.4 million) and made additions to our fleet and other equipment ($2.5 million).
During the six months ended March 31, 2022, $0.4 million of earnings were reinvested into the irrevocable trust.
Financing Activities
During the six months ended March 31, 2023, we repaid $8.3 million of our term loan, borrowed $125.6 million under our revolving credit facility and subsequently repaid $75.9 million, repurchased 0.5 million Common Units for $4.5 million, in connection with our unit repurchase plan, and paid distributions of $10.9 million to our Common Unit holders and $0.6 million to our General Partner unit holders (including $0.5 million of incentive distributions as provided in our Partnership Agreement).
During the six months ended March 31, 2022, we repaid $11.4 million of our term loan, borrowed $200.2 million under our revolving credit facility and subsequently repaid $23.1 million, repurchased 2.1 million Common Units for $22.2 million primarily in connection with our unit repurchase plan, and paid distributions of $10.9 million to our Common Unit holders and $0.5 million to our General Partner unit holders (including $0.5 million of incentive distributions as provided in our Partnership Agreement)
FINANCING AND SOURCES OF LIQUIDITY
Liquidity and Capital Resources Comparatives
Our primary uses of liquidity are to provide funds for our working capital, capital expenditures, distributions on our units, acquisitions and unit repurchases. Our ability to provide funds for such uses depends on our future performance, which will be subject to prevailing economic, financial, geopolitical and business conditions, especially in light of the war in the Ukraine, weather, the ability to collect current and future accounts receivable, the ability to pass on the full impact of high product costs to customers, the effects of high net customer attrition, conservation, inflation and other factors. Our liquidity was impacted by the volatility in wholesale price of home heating oil and a significant increase in the cost of our product. The significant increase in product costs resulted in higher operating expenses, such as credit card fees, bad debt expense, vehicle fuels, interest expense and also led to higher hedging costs for certain of our hedging instruments. Our working capital needs increased to fund these higher product costs and the operating expenses. Further, our credit availability (as defined in our Credit Agreement) was reduced as the Company used a portion of its cash flow to finance these higher working capital needs and to satisfy margin requirements on our hedged inventory positions. The Company believes that it may experience a slowing of collection of our accounts receivable over the next few months as our customers respond to higher product prices.
Capital requirements, at least in the near term, are expected to be provided by cash flows from operating activities, cash on hand as of March 31, 2023 ($22.1 million) or a combination thereof. We believe that these cash sources will also be sufficient to satisfy our capital requirements in the longer-term. However, if they are not sufficient, we anticipate that working capital will be financed by our revolving credit facility, as discussed below, and from subsequent seasonal reductions in inventory and accounts receivable. As of March 31, 2023, we had accounts receivable of $259.1 million of which $204.9 million is due from residential customers and $54.2 million is due from commercial customers. Our ability to borrow from our bank group is based in part on the aging of these accounts receivable. If these balances do not meet the eligibility tests as defined in our sixth amended and restated credit agreement, our ability to borrow will be reduced and our anticipated cash flow from operating activities will also be reduced. As of March 31, 2023, we had $69.9 million of borrowings under our revolving credit facility, $156.8 million outstanding under our term loan, $5.1 million in letters of credit outstanding and $13.5 million hedge positions were secured under the credit agreement.
37
Under the terms of the sixth amended and restated credit agreement, we are required to maintain at all times a fixed charge coverage ratio of not less than 1.1 if Availability (borrowing base less amounts borrowed and letters of credit issued) is less than 12.5% of the maximum facility size. We are also required to maintain a senior secured leverage ratio that cannot be more than 3.0 as of June 30th or September 30th, and no more than 5.5 as of December 31st or March 31st. As of March 31, 2023, Availability, as defined in the sixth amended and restated revolving credit facility agreement, was $223.6 million and we were in compliance with the fixed charge coverage ratio and senior secured leverage ratio.
Maintenance capital expenditures for the remainder of fiscal 2023 are estimated to be approximately $6.5 million to $7.5 million, excluding the capital requirements for leased fleet. In addition, we plan to invest approximately $1.0 million in our propane operations. If, and only to the extent that, cash distributions to our unitholders remain at the current quarterly level of $0.1625 per unit for the balance of fiscal 2023, the Company would make aggregate payments of approximately $11.6 million to Common Unit holders, $0.7 million to our General Partner (including $0.6 million of incentive distribution as provided for in our Partnership Agreement) and $0.6 million to management pursuant to the management incentive compensation plan which provides for certain members of management to receive incentive distributions that would otherwise be payable to the General Partner. The amount of cash distributions payable to our unitholders, if any, depends on the amount of cash flow generated by the Company and our compliance with certain financial covenants under our sixth amended and restated revolving credit facility agreement. Under the terms of our sixth amended and restated revolving credit facility agreement, our term loan is repayable in quarterly payments of $4.1 million and we expect to pay $8.3 million for the remainder of fiscal 2023. Further, subject to any additional liquidity issues or concerns resulting from wholesale price volatility and our compliance with the financial covenants under our sixth amended and restated revolving credit facility agreement, we may repurchase Common Units pursuant to our unit repurchase plan, as amended from time to time, and seek attractive acquisition opportunities within the Availability constraints of our revolving credit facility and funding resources.
Contractual Obligations and Off-Balance Sheet Arrangements
There has been no material change to Contractual Obligations and Off-Balance Sheet Arrangements since our September 30, 2022 Form 10-K disclosure and therefore, the table has not been included in this Form 10-Q.
Recent Accounting Pronouncements
Refer to Note 2 – Summary of Significant Accounting Policies for discussion regarding the impact of accounting standards that were recently adopted and issued but not yet effective, on our consolidated financial statements.
Critical Accounting Policy and Critical Accounting Estimates
We believe that there have been no significant changes to our critical accounting policy and critical accounting estimates during the six months ended March 31, 2023 as compared to those we disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our annual report on Form 10-K for the fiscal year ended September 30, 2022. While our critical accounting policies and estimates have not changed in any significant way during the six months ended March 31, 2023, the following provides disclosures about our critical accounting policy and critical accounting estimates.
Critical Accounting Policy
Fair Values of Derivatives
FASB ASC 815-10-05, Derivatives and Hedging, requires that derivative instruments be recorded at fair value and included in the consolidated balance sheet as assets or liabilities. The Company has elected not to designate its commodity derivative instruments as hedging instruments under this guidance, and therefore the change in fair value of those derivative instruments are recognized in our statement of operations.
We have established the fair value of our derivative instruments using estimates determined by our counterparties and subsequently evaluated them internally using established index prices and other sources. These values are based upon, among other things, futures prices, volatility, time-to-maturity value and credit risk. The estimate of fair value we report in our financial statements changes as these estimates are revised to reflect actual results, changes in market conditions, or other factors, many of which are beyond our control.
38
Critical Accounting Estimates
Self-Insurance Liabilities
We currently self-insure a portion of workers’ compensation, auto, general liability and medical claims. We establish and periodically evaluate self-insurance liabilities 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 the support of a qualified third-party actuary. As of September 30, 2022, we had approximately $79.9 million of self-insurance liabilities. The ultimate resolution of these claims could differ materially from the assumptions used to calculate the self-insurance liabilities, which could have a material adverse effect on results of operations.
39
Item 3.