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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

For the quarterly period ended December 31, 2019

OR

For the transition period from                      to                     

Commission File Number: 001-14129

 

STAR GROUP, L.P.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

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

 

N/A

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

 

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

 

At January 31, 2020, the registrant had 46,243,707 Common Units outstanding.

 

 

 

 

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STAR GROUP, L.P. AND SUBSIDIARIES

INDEX TO FORM 10-Q

 

 

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Part I. FINANCIAL INFORMATION

STAR GROUP, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

See accompanying notes to condensed consolidated financial statements.

 

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STAR GROUP, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

See accompanying notes to condensed consolidated financial statements.

 

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STAR GROUP, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 

 

See accompanying notes to condensed consolidated financial statements.

 

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STAR GROUP, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF PARTNERS’ CAPITAL

 

See accompanying notes to condensed consolidated financial statements.

 

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STAR GROUP, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

See accompanying notes to condensed consolidated financial statements.

 

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STAR GROUP, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1) Organization

Star Group, L.P. (“Star,” the “Company,” “we,” “us,” or “our”) is a full service provider specializing in the sale of home heating and air conditioning products and services to residential and commercial home heating oil and propane customers. The Company has one reportable segment for accounting purposes.  We also sell diesel fuel, gasoline and home heating oil on a delivery only basis, and in certain of our marketing areas, we provide plumbing services primarily to our home heating oil and propane customer base. We believe we are the nation’s largest retail distributor of home heating oil based upon sales volume. Including our propane locations, we serve customers in the more northern and eastern states within the Northeast, Central and Southeast U.S. regions.

The Company is organized as follows:

2) Summary of Significant Accounting Policies

 

Basis of Presentation

The Consolidated Financial Statements include the accounts of Star and its subsidiaries. All material intercompany items and transactions have been eliminated in consolidation.

The financial information included herein is unaudited; however, such information reflects all adjustments (consisting solely of normal recurring adjustments), which are, in the opinion of management, necessary for the fair statement of financial condition and results for the interim periods. Due to the seasonal nature of the Company’s business, the results of operations and cash flows for the three-month period ended December 31, 2019 are not necessarily indicative of the results to be expected for the full year.

These interim financial statements of the Company have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) for interim financial information and Rule 10-01 of Regulation S-X of the U.S. Securities and Exchange Commission (the “SEC”) and should be read in conjunction with the financial statements included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2019.

Comprehensive Income (Loss)

Comprehensive income (loss) is comprised of Net income (loss) and Other comprehensive income (loss). Other comprehensive income (loss) consists of the unrealized gain amortization on the Company’s pension plan obligation for its two frozen defined benefit pension plans, unrealized gain (loss) on available-for-sale investments, unrealized gain (loss) on interest rate hedge and the corresponding tax effects.

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Cash, Cash Equivalents, and Restricted Cash

The Company considers all highly liquid investments with an original maturity of three months or less, when purchased, to be cash equivalents. At December 31, 2019, the $14.8 million of cash, cash equivalents, and restricted cash on the Condensed Consolidated Statements of Cash Flows is composed of $14.5 million of cash and cash equivalents and $0.3 million of restricted cash. At September 30, 2019, the $5.1 million of cash, cash equivalents, and restricted cash on the Condensed Consolidated Statements of Cash Flows is composed of $4.9 million of cash and cash equivalents and $0.3 million of restricted cash. Restricted cash represents deposits held by our captive insurance company that are required by state insurance regulations to remain in the captive insurance company as cash.

Captive Insurance Collateral

The captive insurance collateral is held by our captive insurance company in an irrevocable trust as collateral for certain workers’ compensation and automobile liability claims.  The collateral is required by a third party insurance carrier that insures per claim amounts above a set deductible. Due to the expected timing of claim payments, the nature of the collateral agreement with the carrier, and our captive insurance company’s source of other operating cash, the collateral is not expected to be used to pay obligations within the next twelve months.

At December 31, 2019, captive insurance collateral is comprised of $61.2 million of Level 1 debt securities measured at fair value and $1.5 million of mutual funds measured at net asset value.  At September 30, 2019, the balance was comprised of $58.0 million of Level 1 debt securities measured at fair value and $0.5 million of mutual funds measured at net asset value. Unrealized gains and losses, net of related income taxes, are reported as accumulated other comprehensive gain (loss), except for losses from impairments which are determined to be other-than-temporary. Realized gains and losses, and declines in value judged to be other-than-temporary on available-for-sale securities are included in the determination of net income and are included in Interest expense, net, at which time the average cost basis of these securities are adjusted to fair value.

Weather Hedge Contract

To partially mitigate the adverse effect of warm weather on cash flows, the Company has used weather hedge contracts for a number of years. Weather hedge contracts are recorded in accordance with the intrinsic value method defined by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 815-45-15 Derivatives and Hedging, Weather Derivatives (EITF 99-2). The premium paid is included in the caption “Prepaid expenses and other current assets” in the accompanying balance sheets and amortized over the life of the contract, with the intrinsic value method applied at each interim period.

The Company entered into weather hedge contracts for fiscal years 2019, 2020 and 2021.  Under these contracts, we are entitled to receive a payment if the total number of degree days within the hedge period is less than the prior ten year average. The “Payment Thresholds,” or strikes, are set at various levels. In addition, we will be obligated to make a payment capped at $5.0 million if degree days exceed the Payment Threshold which approximates the prior ten year average. The hedge period runs from November 1 through March 31, taken as a whole, for each respective fiscal year.  For fiscal 2020 and 2021 the maximum that the Company can receive annually is $12.5 million and the maximum that the Company would be obligated to pay annually is $5.0 million.  As of December 31, 2019, the Company recorded a charge of $3.0 million under this contract that increased delivery and branch expenses. As of December 31, 2018, the Company recorded a charge of $2.0 million under its contract and ultimately paid $2.1 million in April 2019 after the fiscal 2019 heating season.

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

As of December 31, 2019, we had $0.2 million and $16.9 million balances included in the captions “Accrued expenses and other current liabilities” and “Other long-term liabilities,” respectively, on our Condensed Consolidated Balance Sheet representing the remaining balance of the NETTI Fund withdrawal liability. Based on the borrowing rates currently available to the Company for long-term financing of a similar maturity, the fair value of the NETTI Fund withdrawal liability as of December 31, 2019 was $22.1 million. We utilized Level 2 inputs in the fair value hierarchy of valuation techniques to determine the fair value of this liability.

Recently Adopted Accounting Pronouncements

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

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

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

Recently Issued Accounting Pronouncements

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses. The update broadens the information that an entity should consider in developing expected credit loss estimates, eliminates the probable initial recognition threshold, and allows for the immediate recognition of the full amount of expected credit losses. This new guidance is effective for our annual reporting period beginning in the first quarter of fiscal 2021. The Company is evaluating the effect that ASU No. 2016-13 will have on its consolidated financial statements and related disclosures.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 230): Simplifying the Test for Goodwill Impairment. The update simplifies how an entity is required to test goodwill for impairment. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, but not exceed the total amount of goodwill allocated to the reporting unit. This new guidance is effective for our annual reporting period beginning in the first quarter of fiscal 2021, with early adoption permitted. The Company has not determined the timing of adoption, but does not expect ASU 2017-04 to have a material impact on its consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU No. 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General: Changes to the Disclosure Requirements for Defined Benefit Plans, which modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans by removing and adding certain disclosures for these plans. The new guidance is effective for our annual reporting period beginning in the first quarter of fiscal 2021, with early adoption permitted. The Company is evaluating the effect that ASU No. 2018-14 will have on its consolidated financial statements and related disclosures, and has not determined the timing of adoption.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software: Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract, which will align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The new guidance is effective for our annual reporting period beginning in the first quarter of fiscal 2022, with early adoption permitted. The Company is evaluating the effect that ASU No. 2018-15 will have on its consolidated financial statements and related disclosures, and has not determined the timing of adoption.

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3) Revenue Recognition

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

 

 

Deferred Contract Costs 

 We recognize an asset for incremental commission expenses paid to sales personnel in conjunction with obtaining new residential customer product and equipment maintenance service contracts. We defer these costs only when we have determined the commissions are, in fact, incremental and would not have been incurred absent the customer contract. Costs to obtain a contract are amortized and recorded ratably as delivery and branch expenses over the period representing the transfer of goods or services to which the assets relate.  Costs to obtain new residential product and equipment maintenance service contracts are amortized as expense over the estimated customer relationship period of approximately five years.  Deferred contract costs are classified as current or non-current within “Prepaid expenses and other current assets” and “Deferred charges and other assets, net,” respectively.  At December 31, 2019 the amount of deferred contract costs included in “Prepaid expenses and other current assets” and “Deferred charges and other assets, net” was $3.5 million and $6.4 million, respectively.  For the quarter ended December 31, 2019 we recognized expense of $1.0 million associated with the amortization of deferred contract costs within “Delivery and branch expenses” in the Condensed Consolidated Statement of Operations.    

 

Contract Liability Balances

The Company has contract liabilities for advanced payments received from customers for future oil deliveries (primarily amounts received from customers on “smart pay” budget payment plans in advance of oil deliveries) and obligations to service customers with equipment maintenance service contracts.  Contract liabilities are recognized straight-line over the service contract period, generally one year or less.  As of December 31, 2019 and September 30, 2019 the Company had contract liabilities of $120.5 million and $127.0 million, respectively.  During the quarter ended December 31, 2019 the Company recognized $71.5 million of revenue that was included in the September 30, 2019 contract liability balance.  During the quarter ended December 31, 2018 the Company recognized $67.1 million of revenue that was included in the September 30, 2018 contract liability balance.

 

4) Common Unit Repurchase and Retirement

In July 2012, the Board adopted a plan to repurchase certain of the Company’s Common Units that was amended in fiscal 2018 (the “Repurchase Plan”).  Through August 2019, the Company had repurchased approximately 9.5 million Common Units under the Repurchase Plan. In August 2019, the Board authorized an increase of the number of Common Units that remained available for the Company to repurchase from 1.3 million to a total of 2.3 million, of which 1.0 million were available for repurchase in open market transactions and 1.3 million were available for repurchase in privately-negotiated transactions.  During the first fiscal quarter of 2020, the Company repurchased approximately 0.7 million Common Units in open market transactions under the Repurchase Plan and 0.3 million Common Units remained available for repurchase at the end of the first fiscal quarter of 2020.  There is no guarantee of the exact number of units that will be purchased under the Repurchase Plan and the Company may discontinue purchases at any time. The Repurchase Plan does not have a time limit. The Board may also approve additional purchases of units from time to time in private transactions. The Company’s repurchase activities take into account SEC safe harbor rules and guidance for issuer repurchases. All of the Common Units purchased in the Repurchase Plan will be retired.

Under the Company’s fifth amended and restated credit agreement dated December 4, 2019, in order to repurchase Common Units we must maintain Availability (as defined in the fifth amended and restated credit agreement) of $45 million, 15.0% of the facility size of $300 million (assuming the non-seasonal aggregate commitment is outstanding) on a historical pro forma and forward-

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looking basis, and a fixed charge coverage ratio of not less than 1.15 measured as of the date of repurchase.  The Company was in compliance with this covenant as of December 31, 2019.

The following table shows repurchases under the Repurchase Plan.

 

 

 

 

5) Captive Insurance Collateral

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

 

 

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

 

 

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

 

 

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6) Derivatives and Hedging—Disclosures and Fair Value Measurements

The Company uses derivative instruments such as futures, options and swap agreements in order to mitigate exposure to market risk associated with the purchase of home heating oil for price-protected customers, physical inventory on hand, inventory in transit, priced purchase commitments and internal fuel usage. FASB ASC 815-10-05 Derivatives and Hedging, established accounting and reporting standards requiring that derivative instruments be recorded at fair value and included in the consolidated balance sheet as assets or liabilities, along with qualitative disclosures regarding the derivative activity. The Company has elected not to designate its commodity derivative instruments as hedging derivatives, but rather as economic hedges whose change in fair value is recognized in its statement of operations in the caption “(Increase) decrease in the fair value of derivative instruments.” Depending on the risk being economically hedged, realized gains and losses are recorded in cost of product, cost of installations and services, or delivery and branch expenses.

As of December 31, 2019, to hedge a substantial majority of the purchase price associated with heating oil gallons anticipated to be sold to its price-protected customers, the Company held the following derivative instruments that settle in future months to match anticipated sales: 17.2 million gallons of swap contracts, 7.4 million gallons of call options, 7.2 million gallons of put options, and 85.8 million net gallons of synthetic call options. To hedge the inter-month differentials for its price-protected customers, its physical inventory on hand and inventory in transit, the Company, as of December 31, 2019, 18.2 million gallons of long future contracts, and 42.1 million gallons of short future contracts that settle in future months.  To hedge its internal fuel usage and other activities for fiscal 2020, the Company, as of December 31, 2019, had 4.0 million gallons of swap contracts and 0.2 million gallons of short swap contracts that settle in future months.

As of December 31, 2018, to hedge a substantial majority of the purchase price associated with heating oil gallons anticipated to be sold to its price-protected customers, the Company held the following derivative instruments that settle in future months to match anticipated sales: 14.0 million gallons of swap contracts, 7.9 million gallons of call options, 6.4 million gallons of put options, and 92.4 million net gallons of synthetic call options. To hedge the inter-month differentials for its price-protected customers, its physical inventory on hand and inventory in transit, the Company, as of December 31, 2018, had 18.3 million gallons of long future contracts, and 41.2 million gallons of short future contracts that settle in future months. To hedge its internal fuel usage and other related activities for fiscal 2019, the Company, as of December 31, 2018, had 4.3 million gallons of swap contracts and 2.0 million gallons of short swap contracts that settle in future months.

In August 2018, the Company entered into interest rate swap agreements in order to mitigate exposure to market risk associated with variable rate interest on $50.0 million, or 50%, of its long term debt.  The Company has designated its interest rate swap agreements as cash flow hedging derivatives.  To the extent these derivative instruments are effective and the standard’s documentation requirements have been met, changes in fair value are recognized in other comprehensive income until the underlying hedged item is recognized in earnings.  As of December 31, 2019, the notional value of the swap contracts was $43.8 million and the fair value of the swap contracts was $(1.6 million). As of September 30, 2019, the notional value of the swap contracts was $45.0 million and the fair value of the swap contracts was $(2.0) million. We utilized Level 2 inputs in the fair value hierarchy of valuation techniques to determine the fair value of the swap contracts.

The Company’s derivative instruments are with the following counterparties: Bank of America, N.A., Bank of Montreal, Cargill, Inc., Citibank, N.A., JPMorgan Chase Bank, N.A., Key Bank, N.A., Regions Financial Corporation, Toronto-Dominion Bank and Wells Fargo Bank, N.A. The Company assesses counterparty credit risk and considers it to be low. We maintain master netting arrangements that allow for the non-conditional offsetting of amounts receivable and payable with counterparties to help manage our risks and record derivative positions on a net basis. The Company generally does not receive cash collateral from its counterparties and does not restrict the use of cash collateral it maintains at counterparties. At December 31, 2019, the aggregate cash posted as collateral in the normal course of business at counterparties was $2.8 million and recorded in “Prepaid expense and other current assets.” Positions with counterparties who are also parties to our credit agreement are collateralized under that facility. As of December 31, 2019, $1.2 million of hedge positions and payable amounts were secured under the credit facility.

FASB ASC 820-10 Fair Value Measurements and Disclosures, established a three-tier fair value hierarchy, which classified the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. The Company’s Level 1 derivative assets and liabilities represent the fair value of commodity contracts used in its hedging activities that are identical and traded in active markets. The Company’s Level 2 derivative assets and liabilities represent the fair value of commodity and interest rate contracts used in its hedging activities that are valued using either directly or indirectly observable inputs, whose nature, risk and class are similar. No significant transfers of assets or liabilities have been made into and out of the Level 1 or Level 2 tiers. All derivative instruments were non-trading positions and were either a Level 1 or Level 2 instrument. The Company had no Level 3 derivative instruments. The fair market value of our Level 1 and Level 2 derivative assets and liabilities are calculated by our counter-parties and are independently validated by the Company. The Company’s calculations are, for Level 1 derivative assets and liabilities, based on the published New York Mercantile Exchange (“NYMEX”) market prices for the commodity contracts open at the end of the period. For Level 2 derivative assets and liabilities the calculations performed by the

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

The Company had no assets or liabilities that are measured at fair value on a nonrecurring basis subsequent to their initial recognition. The Company’s financial assets and liabilities measured at fair value on a recurring basis are listed on the following table.

 

 

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The Company’s derivative assets (liabilities) offset by counterparty and subject to an enforceable master netting arrangement are listed on the following table.

 

 

 

7) Inventories

The Company’s product inventories are stated at the lower of cost and net realizable value computed on the weighted average cost method. All other inventories, representing parts and equipment are stated at the lower of cost and net realizable value using the FIFO method. The components of inventory were as follows (in thousands):

 

 

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8) 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 (in thousands):

 

 

9) Business Combinations

During the first quarter of fiscal year 2020, the Company acquired the customer list and the assets of a heating oil dealer for an aggregate purchase price of approximately $0.5 million.

 

10) Intangibles, net

The gross carrying amount and accumulated amortization of intangible assets subject to amortization are as follows (in thousands):

 

 

Amortization expense for intangible assets was $5.3 million for the three months ended December 31, 2019, compared to $4.6 million for the three months ended December 31, 2018.

11) Long-Term Debt and Bank Facility Borrowings

The Company’s debt is as follows (in thousands):

 

 

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On December 4, 2019, the Company refinanced its five-year term loan and the revolving credit facility with the execution of the fifth amended and restated revolving credit facility agreement with a bank syndicate currently comprised of eleven participants, which enables the Company to borrow up to $300 million ($450 million during the heating season of December through April of each year) on a revolving credit facility for working capital purposes (subject to certain borrowing base limitations and coverage ratios), provides for a $130 million five-year senior secured term loan (the “Term Loan”), allows for the issuance of up to $25 million in letters of credit, and has a maturity date of December 4, 2024.

The Company can increase the revolving credit facility size by $200 million without the consent of the bank group. However, the bank group is not obligated to fund the $200 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 (as defined in the credit agreement), which shall not be unreasonably withheld. Obligations under the fifth amended and restated credit facility are guaranteed by the Company and its subsidiaries and are secured by liens on substantially all of the Company’s assets, including accounts receivable, inventory, general intangibles, real property, fixtures and equipment.

All amounts outstanding under the fifth amended and restated revolving credit facility become due and payable on the facility termination date of December 4, 2024. The Term Loan is repayable in quarterly payments of $3.25 million with the first payment due March 31, 2020, plus an annual payment equal to 25% of the annual Excess Cash Flow as defined in the credit agreement (an amount not to exceed $12 million annually), less certain voluntary prepayments made during the year, with final payment at maturity.

The interest rate on the fifth amended and restated revolving credit facility and the Term Loan is based on a margin over LIBOR or a base rate. At December 31, 2019, the effective interest rate on the Term Loan was approximately 5.6% and the effective interest rate on revolving credit facility borrowings was approximately 4.4%. At September 30, 2019, the effective interest rate on the term loan and revolving credit facility borrowings was approximately 5.9% and 4.6%, respectively.

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 fifth 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 cannot be more than 3.0 as calculated as of the quarters ending June or September, and no more than 4.5 as calculated as of the quarters ending December or March.

Certain restrictions are also imposed by the credit agreement, including restrictions on the Company’s ability to incur additional indebtedness, to pay distributions to unitholders, to pay certain inter-company dividends or distributions, repurchase units, make investments, grant liens, sell assets, make acquisitions and engage in certain other activities.

At December 31, 2019, $130.0 million of the Term Loan was outstanding, $112.7 million was outstanding under the revolving credit facility, $1.2 million of hedge positions were secured under the credit agreement, and $4.4 million of letters of credit were issued and outstanding. At September 30, 2019, $92.5 million of the Term Loan was outstanding, $61.5 million was outstanding under the revolving credit facility, $7.7 million of hedge positions were secured under the credit agreement, and $4.6 million of letters of credit were issued and outstanding.

At December 31, 2019, availability was $162.4 million, and the Company was in compliance with the fixed charge coverage ratio and the senior secured leverage ratio. At September 30, 2019, availability was $126.1 million, and the Company was in compliance with the fixed charge coverage ratio and the senior secured leverage ratio.

 

12) Income Taxes  

 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.

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The current and deferred income tax expense (benefit) for the three months ended December 31, 2019, and 2018 are as follows:

 

 

At December 31, 2019, 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.

13) Leases

The Company has entered into certain operating leases for office space, vehicles and other equipment with lease terms between one to twenty years, expiring between 2020 and 2039. Some of the Company’s real estate property lease agreements have options to extend the leases for up to five years.

The Company determines if an arrangement is a lease at inception.  Lease liabilities are measured at the lease commencement date in an amount equal to the present value of the lease payments over the lease term.  Right-of-use (“ROU”) assets are recognized based on the amount of the lease liability adjusted for any lease payments made to the lessor at or before the commencement date, minus any lease incentives received, plus any initial direct costs incurred.   Renewal options are included in the calculation of the ROU asset and lease liability when it is determined that they are reasonably certain of exercise.

 

Certain of our lease arrangements contain non-lease components such as common area maintenance.  We have elected to account for the lease component and its associated non-lease components as a single lease component.  Leases with an initial term of 12 months or less are not recognized on our balance sheet. The Company has leases that have variable payments, including lease payments where lease payment increases are based on the percentage change in the Consumer Price Index. For such leases payment at the lease commencement date is used to measure the ROU assets and operating lease liabilities. Changes in the index and other variable payments are expensed as incurred.  The interest rate used to determine the present value of the future lease payments is our incremental borrowing rate, because the interest rate implicit in our operating leases is not readily determinable. The basis for an incremental borrowing rate was our Term Loan, market-based yield curves and comparable debt securities.

 

 

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A summary of total lease costs and other information for the three months ended December 31, 2019 is as follows:

 

 

Maturities of operating lease liabilities as of December 31, 2019 are as follows:

 

 

Maturities of operating lease liabilities presented undiscounted under ASC Topic 840 as prescribed by ASC Topic 842 as of September 30, 2019 are as follows:

 

 

14) Supplemental Disclosure of Cash Flow Information

 

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15) 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 fraudulent inducement. 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.  On September 12, 2018, the district court granted in part and denied in part Petro's motion to dismiss.  The district court dismissed the Plaintiff's claims for breach of the covenant of good faith and fair dealing and fraudulent inducement, but declined to dismiss the Plaintiff's remaining claims.  The district court granted the Plaintiff leave to amend to attempt to replead his fraudulent inducement claim.  On October 10, 2018, the Plaintiff filed a second amended complaint.  The second amended complaint attempts to replead a fraudulent inducement claim and is otherwise substantially similar or identical to the prior complaint.  On November 13, 2018, Petro moved to dismiss the fraudulent inducement and unjust enrichment claims in the second amended complaint.  On January 31, 2019, the court granted the motion and dismissed the fraudulent inducement and unjust enrichment claims with prejudice.  On February 22, 2019, counsel for Petro and the Plaintiff participated in a mediation which, after arms-length negotiations, resulted in a memorandum of understanding to settle the litigation, subject to the completion of confirmatory discovery, negotiation of a final settlement agreement and court approval.  In an order dated March 27, 2019, the district court stayed all discovery deadlines in light of the pending settlement.  On May 6, 2019, the Plaintiff filed an Unopposed Motion for Preliminary Approval of Class Action Settlement which remains pending before the court.  On October 4, 2019, upon consent of all parties, Judge Roslynn R. Mauskopf assigned the action to Magistrate Judge Steve I. Locke for final disposition.  On December 4, 2019, the court granted preliminary approval of the class action settlement.  The anticipated settlement is not an admission of liability or breach to any customers by Petro and the Company continues to believe the allegations lack merit.  If the settlement is not approved or finalized for any reason, the Company will continue to vigorously defend the action; in that case, we cannot assess the potential outcome or materiality of this matter.  

The Company’s 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 Company’s results of operations, financial position or liquidity.

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.

16) Earnings Per Limited Partner Unit

Income per limited partner unit is computed in accordance with FASB 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 Company’s 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 Company’s overall net income or other financial results. However, for periods in which the Company’s 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 result 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 Company’s 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 Company’s contractual participation rights are taken into account.

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The following presents the net income allocation and per unit data using this method for the periods presented:

 

 

17) Subsequent Events

Quarterly Distribution Declared

In January 2020, we declared a quarterly distribution of $0.125 per unit, or $0.50 per unit on an annualized basis, on all Common Units with respect to the first quarter of fiscal 2020, payable on February 4, 2020, to holders of record on January 27, 2020. The amount of distributions in excess of the minimum quarterly distribution of $0.0675 are distributed in accordance with our Partnership Agreement, subject to the management incentive compensation plan. As a result, $5.8 million will be paid to the Common Unit holders, $0.2 million to the General Partner unit holders (including $0.2 million of incentive distribution as provided in our Partnership Agreement) and $0.2 million to management pursuant to the management incentive compensation plan which provides for certain members of management to receive incentive distributions that would otherwise be payable to the General Partner.

Common Units Repurchased and Retired

In accordance with the Repurchase Plan, from January 1, 2020 to January 31, 2020, the Company repurchased and retired 0.2 million Common Units at an average price paid of $9.48 per unit.

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ITEM 2.

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 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 climate change, environmental, health, and safety regulations, the ability to attract and retain employees, customer credit worthiness, counterparty credit worthiness, marketing plans, potential cyber-attacks, general economic conditions and new technology. All statements other than statements of historical facts included in this Report including, without limitation, the statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere herein, are forward-looking statements. Without limiting the foregoing, the words “believe,” “anticipate,” “plan,” “expect,” “seek,” “estimate,” and similar expressions are intended to identify forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct and actual results may differ materially from those projected as a result of certain risks and uncertainties. These risks and uncertainties include, but are not limited to, those set forth in this Report under the headings “Risk Factors” and “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.

Impact on Liquidity of Increases in Wholesale Product Cost

Our liquidity is adversely impacted in times of increasing wholesale product costs, as we must use more cash to fund our hedging requirements as well as the increased levels of accounts receivable and inventory. This may result in higher interest expense as a result of increased working capital borrowing to finance higher receivables and/or inventory balances. We may also incur higher bad debt expense and credit card processing costs as a result of higher selling prices as well as higher vehicle fuel costs due to the increase in energy costs.  In addition, our liquidity can be adversely impacted by sudden and sharp decreases in wholesale product costs, due to the increased margin requirements for futures contracts and collateral requirements for options and swaps that we use to manage market risks.

Liquid Product Price Volatility

Volatility, which is reflected in the wholesale price of liquid products, including home heating oil, propane and motor fuels, has a larger impact on our business when prices rise. Consumers are price sensitive to heating cost increases, which can lead to increased gross customer losses. As a commodity, the price of home heating oil is generally impacted by many factors, including economic and geopolitical forces, and 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, 2016, through 2020, on a quarterly basis, is illustrated in the following chart (price per gallon):

 

 

Execution of Fifth Amended and Restated Revolving Asset-based Credit Agreement

On December 4, 2019, the Company refinanced its credit facility and entered into the fifth amended and restated revolving credit facility agreement with a bank syndicate of eleven participants, which enables the Company to borrow up to $300 million ($450 million during the heating season of December through April of each year) on a revolving line of credit for working capital purposes (subject to certain borrowing base limitations and coverage ratios), provides for a $130 million five-year senior secured term loan,

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allows for the issuance of up to $25 million in letters of credit, and extends the maturity date of the previous agreement to December 4, 2024. Proceeds from the new term loan were used to repay the $90.0 million outstanding balance of the term loan and $40.0 million of the revolving credit facility borrowings under the old credit facility.  Availability as a result of the new credit agreement increased $40.0 million.

Consistent with the fourth amended and restated revolving credit facility, under the Company’s fifth amended and restated credit agreement, in order to repurchase Common Units we must maintain availability of $45 million, equivalent to 15.0% of the facility size of $300 million (assuming the non-seasonal aggregate commitment is outstanding) on a historical pro forma and forward-looking basis, and a fixed charge coverage ratio of not less than 1.15 measured as of the date of repurchase.

Income Taxes

Book versus Tax Deductions

The amount of cash flow generated in any given year depends upon a variety of factors including the amount of cash income taxes required, which will increase as depreciation and amortization decreases. The amount of depreciation and amortization that we deduct for book (i.e., financial reporting) purposes will differ from the amount that the Company can deduct for Federal tax purposes. The table below compares the estimated depreciation and amortization for book purposes to the amount that we expect to deduct for Federal tax purposes, based on currently owned assets. While we file our tax returns based on a calendar year, the amounts below are based on 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

 

Weather Hedge Contracts

Weather conditions have a significant impact on the demand for home heating oil and propane because certain customers depend on these products principally for space heating purposes. Actual weather conditions may vary substantially from year to year, significantly affecting the Company’s financial performance. To partially mitigate the adverse effect of warm weather on cash flow, we have used weather hedging contracts for a number of years with several providers.

Under these contracts, we are entitled to a payment if the total number of degree days within the hedge period is less than the ten year average. The “Payment Thresholds,” or strikes, are set at various levels. Conversely, we are obligated to make a payment capped at $5.0 million if degree days exceed the ten-year average. The hedge period runs from November 1 through March 31, taken as a whole, for each respective fiscal year. For the first quarter of fiscal 2020 and 2019, we recorded a charge of $3.0 million and $2.0 million, respectively, for amounts payable under our weather hedge contracts, reflecting colder weather than the ten year average. While the weather hedge period (November 1-December 31, 2019) was colder and resulted in a charge of $3.0 million, warmer temperatures in January 2020 resulted in a complete reversal of this charge (under the guidelines of the weather hedge). For fiscal 2020 and 2021, the maximum that the Company can receive annually is $12.5 million and the maximum that the Company would be obligated to pay annually is $5.0 million.

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

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monthly basis, we may be required to obtain additional volume at unfavorable costs. In addition, should actual usage in any month be less than the hedged volume, our hedging costs and losses could be greater, thus reducing expected margins.

 

Derivatives

FASB ASC 815-10-05 Derivatives and Hedging requires that derivative instruments be recorded at fair value and included in the consolidated balance sheet as assets or liabilities. To the extent our interest rate derivative instruments designated as cash flow hedges are effective, as defined under this guidance, changes in fair value are recognized in other comprehensive income until the forecasted hedged item is recognized in earnings. We have elected not to designate our commodity derivative instruments as hedging instruments under this guidance and, as a result, the changes in fair value of the derivative instruments are recognized in our statement of operations. Therefore, we experience volatility in earnings as outstanding derivative instruments are marked to market and non-cash gains and losses are recorded prior to the sale of the commodity to the customer. The volatility in any given period related to unrealized non-cash gains or losses on derivative instruments can be significant to our overall results. However, we ultimately expect those gains and losses to be offset by the cost of product when purchased.

Customer Attrition

We measure net customer attrition on an ongoing basis for our full service residential and commercial home heating oil and propane customers. Net customer attrition is the difference between gross customer losses and customers added through marketing efforts. Customers added through acquisitions are not included in the calculation of gross customer gains. However, additional customers that are obtained through marketing efforts or lost at newly acquired businesses are included in these calculations. Customer attrition percentage calculations include customers added through acquisitions in the denominators of the calculations on a weighted average basis. Gross customer losses are the result of a number of factors, including price competition, move-outs, credit losses, conversions to natural gas and service disruptions. When a customer moves out of an existing home, we count the “move out” as a loss, and if we are successful in signing up the new homeowner, the “move in” is treated as a gain. 

Customer gains and losses of home heating oil and propane customers

 

 

Customer gains (attrition) as a percentage of home heating oil and propane customer base

 

 

For the three months ended December 31, 2019, the Company gained 800 accounts (net), or 0.2%, of its home heating oil and propane customer base, compared to 800 accounts gained (net), or 0.2%, of its home heating oil and propane customer base, during the three months ended December 31, 2018. Gross customer gains were 2,300 less than the prior year’s comparable period, and gross customer losses were also 2,300 accounts less.

During the three months ended December 31, 2019, we estimate that we lost 0.4% of our home heating oil and propane accounts to natural gas conversions versus 0.4% for the three months ended December 31, 2018 and 0.3% three months ended December 31, 2017.  Losses to natural gas in our footprint for the heating oil and propane industry could be greater or less than the Company’s estimates.

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Acquisitions

The timing of acquisitions and the types of products sold by the acquired companies will impact year-over-year comparisons.  During the three months ended December 31, 2019, the Company acquired a product dealer.  During fiscal 2019 the Company completed three acquisitions. The following tables detail the Company’s acquisition activity and the volumes sold by the acquired company during the 12-month period prior to the date of acquisition.

 

 

 

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.

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 1981 to 2010. Our calculations of “normal” weather are based on these published 30 year averages for heating degree days, weighted by volume for the locations where we have existing operations.

Consolidated Results of Operations

The following is a discussion of the consolidated results of operations of the Company and its subsidiaries and should be read in conjunction with the historical financial and operating data and Notes thereto included elsewhere in this Quarterly Report.

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Three Months Ended December 31, 2019

Compared to the Three Months Ended December 31, 2018

Volume

For the three months ended December 31, 2019, retail volume of home heating oil and propane sold decreased by 6.2 million gallons, or 5.5%, to 107.1 million gallons, compared to 113.3 million gallons for the three months ended December 31, 2018. For those locations where we had existing operations during both periods, which we sometimes refer to as the “base business” (i.e., excluding acquisitions), temperatures (measured on a heating degree day basis) for the three months ended December 31, 2019 were 2.4% warmer than the three months ended December 31, 2018. Temperatures during the three months ended December 31, 2019 were 2.3% warmer than normal, as reported by NOAA. For the twelve months ended December 31, 2019, net customer attrition for the base business was 5.4%. 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: 

 

The following chart sets forth the percentage by volume of total home heating oil sold to residential variable-price customers, residential price-protected customers and commercial/industrial/other customers for the three months ended December 31, 2019, compared to the three months ended December 31, 2018:

 

 

Volume of other petroleum products sold decreased by 0.5 million gallons, or 1.2%, to 41.4 million gallons for the three months ended December 31, 2019, compared to 41.9 million gallons for the three months ended December 31, 2018.

Product Sales

For the three months ended December 31, 2019, product sales decreased by $26.0 million, or 5.7%, to $432.7 million, compared to $458.7 million for the three months ended December 31, 2018 due to the impact of lower home heating oil and propane volume and lower selling prices of motor fuel sales.

Installations and Services

For the three months ended December 31, 2019, installation and service revenue remained similar compared to the three months ended December 31, 2018 at $76.3 million. Service sales declined by $0.6 million as a decline in the base business of $3.8 million, largely due to net customer attrition, was partially offset by additional revenues from acquisitions of $3.2 million. Installation sales rose by $0.6 million as the additional revenue from acquisitions of $2.4 million was reduced by a decline in the base business of $1.8 million largely due to net customer attrition.

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Cost of Product

For the three months ended December 31, 2019, cost of product decreased $18.6 million, or 6.1%, to $287.7 million, compared to $306.2 million for the three months ended December 31, 2018, largely due to a decrease in total volume sold of 4.3%, and a $0.0358 per gallon, or 1.8%, decrease in wholesale product cost.

Gross Profit — Product

The table below calculates our per gallon margins and reconciles product gross profit for home heating oil and propane and other petroleum products. We believe the change in home heating oil and propane margins should be evaluated before the effects of increases or decreases in the fair value of derivative instruments, as we believe that realized per gallon margins should not include the impact of non-cash changes in the market value of hedges before the settlement of the underlying transaction. On that basis, home heating oil and propane margins for the three months ended December 31, 2019 increased by $0.0049 per gallon, or 0.4%, to $1.2564 per gallon, from $1.2515 per gallon during the three months ended December 31, 2018. The market conditions experienced during the three months ended December 31, 2018 created an opportunity for margin expansion and contributed to an increase in home heating oil and propane margins of $0.1322 per gallon versus the prior year’s comparable quarter. Similar market conditions did not exist during the three months ended December 31, 2019 which tempered per gallon margin expansion. Going forward, we cannot assume that the per gallon margins realized during the three months ending December 31, 2019 are sustainable.

Product sales and cost of product include home heating oil, propane, other petroleum products and liquidated damages billings.

 

 

 

 

For the three months ended December 31, 2019, total product gross profit was $145.0 million, which was $7.5 million, or 4.9% less than the three months ended December 31, 2018, as a decrease in home heating oil and propane volume ($7.8 million) and a slight decrease in gross profit from other petroleum products ($0.2 million) was partially offset by an increase in home heating oil and propane margins ($0.5 million).

Cost of Installations and Services

Total installation costs for the three months ended December 31, 2019 decreased slightly to $24.8 million or 0.3%, compared to $24.9 million in installation costs for the three months ended December 31, 2018. Installation costs as a percentage of installation sales were 81.1% for the three months ended December 31, 2019 and 82.9% for the three months ended December 31, 2018.

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Service expense decreased by $0.6 million, or 1.2%, to $48.9 million for the three months ended December 31, 2019, representing 107.0% of service sales, versus $49.5 million, or 106.7% of service sales, for the three months ended December 31, 2018.  We realized a combined gross profit from service and installation of $2.6 million for the three months ended December 31, 2019 compared to $2.0 million for the three months ended December 31, 2018. Management views the service and installation department on a combined basis because many overhead functions cannot be separated or precisely allocated to either service or installation billings.

(Increase) Decrease in the Fair Value of Derivative Instruments

During the three months ended December 31, 2019, the change in the fair value of derivative instruments resulted in a $6.4 million credit due to an increase in the market value for unexpired hedges ($2.5 million credit), and a $3.9 million credit due to the expiration of certain hedged positions.

During the three months ended December 31, 2018, the change in the fair value of derivative instruments resulted in a $31.0 million charge due to a decrease in the market value for unexpired hedges (a $26.6 million charge), and a $4.4 million charge due to the expiration of certain hedged positions.

Delivery and Branch Expenses

For the three months ended December 31, 2019, delivery and branch expenses decreased $6.0 million, or 5.8%, to $96.7 million, compared to $102.7 million for the three months ended December 31, 2018, as the additional costs from acquisitions of $3.9 million and an increase in the amount due under our weather hedge contract of $1.1 million was more than offset by an $11.0 million, or 10.9%, decrease in expenses within the base business.  The decrease in the base business was attributable to a $2.8 million, or 9.2%, decline in direct delivery costs due to lower volume, a $2.6 million decrease in expenses related to our concierge level of service program (which was greatly curtailed in January 2019), and other reductions in operating costs totaling $5.6 million, or 5.6%, as we continue to improve our operating efficiency. During the first quarter of fiscal 2020, we recorded a charge of $3.0 million under our weather hedge contract, or $1.1 million higher than the prior year’s comparable quarter, due to colder weather experienced during the weather hedge period. While the weather hedge period (November 1-December 31, 2019) was colder and resulted in a charge of $3.0 million, warmer temperatures in January 2020 resulted in a complete reversal of this charge (under the guidelines of the weather hedge). In addition, even as temperatures during November and December 2019 were colder than the corresponding months in 2018, temperatures for the entire first quarter were 2.4% warmer year-over-year due to October 2019 being over 30% warmer than October 2018.

Depreciation and Amortization Expenses

For the three months ended December 31, 2019, depreciation and amortization expense increased $1.4 million, or 16.9% to $9.1 million, compared to $7.7 million for the three months ended December 31, 2018, largely due to acquisitions.

General and Administrative Expenses

For the three months ended December 31, 2019, general and administrative expenses decreased by $1.3 million or 16.8%, to $6.5 million, from $7.8 million for the three months ended December 31, 2018, primarily due to lower legal and professional fees of $1.0 million, lower pension plan expense of $0.2 million, and other savings of $0.1 million.

Finance Charge Income

For the three months ended December 31, 2019, finance charge income decreased from $0.9 million at December 31, 2018 to $0.7 million at December 31, 2019, primarily due to lower customer late payment charges.

Interest Expense, Net

For the three months ended December 31, 2019, net interest expense increased by $0.2 million, or 6.5%, to $2.7 million compared to $2.5 million for the three months ended December 31, 2018. Interest expense rose by $0.3 million primarily due to an increase in average borrowings of $42.5 million from $141.6 million during the three months ended December 31, 2018 to $184.1 million during the three months ended December 31, 2019 that was partially offset by a decrease in the weighted average interest rate from 5.6% during the three months ended December 31, 2018 to 5.1% during the three months ended December 31, 2019. The increase in average borrowings of $42.5 million was largely used to fund acquisitions.  To hedge against rising interest rates, the Company entered into an interest rate swap in August 2018 that fixes the interest rate for $43.8 million, or 34%, of our long term debt as of December 31, 2019.  

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Amortization of Debt Issuance Costs

For the three months ended December 31, 2019, amortization of debt issuance cost decreased from at $0.3 million at December 31, 2018 to $0.2 million at December 31, 2019.

Income Tax Expense

For the three months ended December 31, 2019, the Company’s income tax expense increased by $10.8 million to $11.8 million, from $1.0 million for the three months ended December 31, 2018, due to an increase in income before income taxes of $36.2 million that was primarily due to a $37.5 million non-cash favorable change in the fair market value of derivative instruments.  

Net Income

For the three months ended December 31, 2019, net income increased $25.4 million to $27.8 million primarily due to a favorable change in the fair value of derivative instruments of $37.5 million and an increase in the Adjusted EBITDA of $0.2 million, described below, partially offset by an increase in income tax expense of $10.8 million due to the increase in income before income tax.

Adjusted EBITDA

For the three months ended December 31, 2019, Adjusted EBITDA increased by $0.2 million, or 0.5%, to $45.1 million. While acquisitions provided $2.8 million of Adjusted EBITDA, Adjusted EBITDA in the base business decreased by $2.6 million as the impact of lower volume sold, due to net customer attrition, and slightly warmer weather and the increase in the amount due under the Company’s weather hedge of $1.1 million more than offset a slight increase in home heating oil and propane per gallon margins and lower operating expenses of $12.3 million. While the weather hedge period (November 1-December 31, 2019) was colder and resulted in a charge of $3.0 million, warmer temperatures in January 2020 resulted in a complete reversal of this charge (under the guidelines of the weather hedge). In addition, even as temperatures during November and December, 2019 were colder than the corresponding months in 2018, temperatures for the entire first quarter were 2.4% warmer year-over-year due to October 2019 being over 30% warmer than October 2018.

 

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EBITDA and Adjusted EBITDA should not be considered as an alternative to net income (as an indicator of operating performance) or as an alternative to cash flow (as a measure of liquidity or ability to service debt obligations), but provide additional information for evaluating our ability to make the Minimum Quarterly Distribution. EBITDA and Adjusted EBITDA are calculated as follows:

 

 

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 and should be viewed in conjunction with measurements that are computed in accordance with GAAP. Some of the limitations of EBITDA and Adjusted EBITDA are:

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DISCUSSION OF CASH FLOWS

We use the indirect method to prepare our Consolidated Statements of Cash Flows. Under this method, we reconcile net income to cash flows provided by operating activities by adjusting net income for those items that impact net income but do not result in actual cash receipts or payment during the period.

Operating Activities

Due to the seasonal nature of our business, cash is generally used in operations during the winter (our first and second fiscal quarters) as we require additional working capital to support the high volume of sales during this period, and cash is generally provided by operating activities during the spring and summer (our third and fourth fiscal quarters) when customer payments exceed the cost of deliveries.

 

During the three months ended December 31, 2019, cash used in operating activities decreased $11.3 million to $51.6 million, compared to $62.9 million of cash used in operating activities during the three months ended December 31, 2018.  The decrease was driven by an $8.2 million favorable change in accounts receivable (including customer credit balances) due to improved collections, a $6.2 million favorable change in accounts payable due primarily to the timing of inventory purchases, a $4.8 million favorable change in inventory due primarily to 1.7 million more gallons of liquid product on hand as of December 31, 2019 as compared to December 31, 2018, $1.8 million lower escheatment payments to state authorities, and $1.1 million of other changes in working capital, which were partially offset by an increase in income tax expense of $10.8 million primarily due to a favorable non cash change in the fair market value of derivative instruments of $37.5 million.

Investing Activities

Our capital expenditures for the three months ended December 31, 2019 totaled $3.0 million, as we invested in computer hardware and software ($1.0 million), refurbished certain physical plants ($0.8 million), expanded our propane operations ($0.4 million) and made additions to our fleet and other equipment ($0.8 million).

During the three months ended December 31, 2019, we deposited $3.9 million into an irrevocable trust to secure certain liabilities for our captive insurance company and another $0.3 million of earnings were reinvested into the irrevocable trust. The cash deposited into the trust is shown on our balance sheet as captive insurance collateral and, correspondingly, reduced cash on our balance sheet.  We believe that investments into the irrevocable trust will lower our letter of credit fees, increase interest income on invested cash balances, and provide us with certain tax advantages attributable to a captive insurance company.

During the three months ended December 31, 2019, the Company acquired the customer list and the assets of a heating oil dealer for an aggregate purchase price of approximately $0.5 million. 

Our capital expenditures for the three months ended December 31, 2018 totaled $4.0 million, as we invested in computer hardware and software ($2.0 million), refurbished certain physical plants ($0.4 million), expanded our propane operations ($1.0 million) and made additions to our fleet and other equipment ($0.6 million).

During the three months ended December 31, 2018, we deposited $4.2 million into an irrevocable trust to secure certain liabilities for our captive insurance company and another $0.3 million of earnings were reinvested into the irrevocable trust.

Financing Activities

During the three months ended December 31, 2019, we refinanced our five-year term loan and the revolving credit facility with the execution of the fifth amended and restated revolving credit facility agreement.  The $130 million of proceeds from the new term loan were used to repay the $90.0 million outstanding balance of the term loan, $39.0 million of the revolving credit facility borrowings under the old credit facility, and $1.0 million of debt issuance costs.  We also paid an additional $0.3 million of debt issuance costs, borrowed $90.2 million under our revolving credit facility to finance our working capital, repaid $2.5 million of our tem loan, repurchased 1.3 million Common Units for $12.1 million in connection with our unit repurchase plan, and paid distributions of $5.9 million to our Common Unit holders and $0.2 million to our General Partner unit holders (including $0.2 million of incentive distributions as provided in our Partnership Agreement).

During the three months ended December 31, 2018 we paid distributions of $6.2 million to our Common Unit holders and $0.2 million to our General Partner unit holders (including $0.17 million of incentive distributions as provided in our Partnership Agreement). We borrowed $92.5 million under our revolving credit to finance our working capital. We also repurchased 0.6 million common units for $5.7 million in connection with our unit repurchase plan.

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FINANCING AND SOURCES OF LIQUIDITY

Liquidity and Capital Resources Comparatives

Our primary uses of liquidity are to provide funds for our working capital, capital expenditures, distributions on our units, acquisitions and unit repurchases. Our ability to provide funds for such uses depends on our future performance, which will be subject to prevailing economic, financial, business and weather conditions, the ability to pass on the full impact of high product costs to customers, the effects of high net customer attrition, conservation and other factors. Capital requirements, at least in the near term, are expected to be provided by cash flows from operating activities, cash on hand as of December 31, 2019 ($14.5 million) or a combination thereof. To the extent future capital requirements exceed cash on hand plus cash flows from operating activities, we anticipate that working capital will be financed by our revolving credit facility, as discussed below, and reduced from subsequent seasonal reductions in inventory and accounts receivable. As of December 31, 2019, we had $112.7 million in borrowings under our revolving credit facility, $130.0 million under our term loan and $4.4 million in letters of credit outstanding.

Under the terms of our credit agreement, we must maintain at all times Availability (borrowing base less amounts borrowed and letters of credit issued) of 15% of the maximum facility size and a fixed charge coverage ratio of not less than 1.15. We must also maintain a senior secured leverage ratio that cannot be more than 3.0 as of June 30^th or September 30^th, and no more than 4.5 as of December 31^st or March 31^st. As of December 31, 2019, Availability, as defined in the credit agreement, was $162.4 million, and we were in compliance with the fixed charge coverage ratio and senior secured leverage ratio.  

Maintenance capital expenditures for the remainder of fiscal 2020 are estimated to be approximately $8.8 million to $9.8 million, excluding the capital requirements for leased fleet. In addition, we plan to invest approximately $0.8 million to $1.0 million in our propane operations. Distributions for the balance of fiscal 2020, at the current quarterly level of $0.1250 per unit, would result in an aggregate of approximately $17.4 million to Common Unit holders, $0.6 million to the 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. Under the terms of our credit facility, our term loan is repayable in quarterly payments of $3.25 million with the first payment due March 31, 2020, and, depending on our fiscal 2020 results, we may be required to make an additional payment (See Note 11 - Long-Term Debt and Bank Facility Borrowings). In addition, we intend to continue to repurchase Common Units pursuant to our unit repurchase plan, as amended from time to time, and seek attractive acquisition opportunities within the Availability constraints of our revolving credit facility and funding resources.

Contractual Obligations and Off-Balance Sheet Arrangements

There has been no material change to Contractual Obligations and Off-Balance Sheet Arrangements since our September 30, 2019 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.

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Item 3.

Quantitative and Qualitative Disclosures About Market Risk

We are exposed to interest rate risk primarily through our bank credit facilities. We utilize these borrowings to meet our working capital needs.

At December 31, 2019, we had outstanding borrowings totaling $242.7 million, which are subject to variable interest rates under our credit agreement. In the event that interest rates associated with this facility were to increase 100 basis points, the after tax impact on annual future cash flows would be a decrease of $1.7 million.

We regularly use derivative financial instruments to manage our exposure to market risk related to changes in the current and future market price of home heating oil and vehicle fuels. The value of market sensitive derivative instruments is subject to change as a result of movements in market prices. Sensitivity analysis is a technique used to evaluate the impact of hypothetical market value changes. Based on a hypothetical ten percent increase in the cost of product at December 31, 2019, the potential impact on our hedging activity would be to increase the fair market value of these outstanding derivatives by $13.7 million to a fair market value of $12.9 million; and conversely a hypothetical ten percent decrease in the cost of product would decrease the fair market value of these outstanding derivatives by $8.7 million to a fair market value of $(9.5) million.

Item 4.

Controls and Procedures

a) Evaluation of disclosure controls and procedures

The General Partner’s chief executive officer and chief financial officer evaluated the effectiveness of the Company’s disclosure controls and procedures (as that term is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended) as of December 31, 2019. Based on that evaluation, such chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2019 at the reasonable level of assurance. For purposes of Rule 13a-15(e), the term disclosure controls and procedures means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the “Act”) (15 U.S.C. 78a et seq.) is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer’s management, including its chief executive officer and chief financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

b) Change in internal control over financial reporting

No changes in the Company’s internal control over financial reporting occurred during the Company’s most recent fiscal quarter that has materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting.

c) Other

The General Partner and the Company believe that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a Company have been detected. Therefore, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Our disclosure controls and procedures are designed to provide such reasonable assurances of achieving our desired control objectives, and the chief executive officer and chief financial officer of the General Partner have concluded, as of December 31, 2019, that our disclosure controls and procedures were effective in achieving that level of reasonable assurance.

 

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PART II OTHER INFORMATION

Item 1.

Legal Proceedings

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 fraudulent inducement. 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.  On September 12, 2018, the district court granted in part and denied in part Petro's motion to dismiss.  The district court dismissed the Plaintiff's claims for breach of the covenant of good faith and fair dealing and fraudulent inducement, but declined to dismiss the Plaintiff's remaining claims.  The district court granted the Plaintiff leave to amend to attempt to replead his fraudulent inducement claim.  On October 10, 2018, the Plaintiff filed a second amended complaint.  The second amended complaint attempts to replead a fraudulent inducement claim and is otherwise substantially similar or identical to the prior complaint.  On November 13, 2018, Petro moved to dismiss the fraudulent inducement and unjust enrichment claims in the second amended complaint.  On January 31, 2019, the court granted the motion and dismissed the fraudulent inducement and unjust enrichment claims with prejudice.  On February 22, 2019, counsel for Petro and the Plaintiff participated in a mediation which, after arms-length negotiations, resulted in a memorandum of understanding to settle the litigation, subject to the completion of confirmatory discovery, negotiation of a final settlement agreement and court approval.  In an order dated March 27, 2019, the district court stayed all discovery deadlines in light of the pending settlement.  On May 6, 2019, the Plaintiff filed an Unopposed Motion for Preliminary Approval of Class Action Settlement which remains pending before the court.  On October 4, 2019, upon consent of all parties, Judge Roslynn R. Mauskopf assigned the action to Magistrate Judge Steve I. Locke for final disposition.  On December 4, 2019, the court granted preliminary approval of the class action settlement.  The anticipated settlement is not an admission of liability or breach to any customers by Petro and the Company continues to believe the allegations lack merit.  If the settlement is not approved or finalized for any reason, the Company will continue to vigorously defend the action; in that case, we cannot assess the potential outcome or materiality of this matter.  

Item 1A.

Risk Factors

In addition to the other information set forth in this Report, investors should carefully review and consider the information regarding certain factors, which could materially affect our business, results of operations, financial condition and cash flows set forth in Part I Item 1A. “Risk Factors” in our Fiscal 2019 Form 10-K. We may disclose changes to such factors or disclose additional factors from time to time in our future filings with the SEC.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Note 4 to the Condensed Consolidated Financial Statements concerning the Company’s repurchase of Common Units during the three months ended December 31, 2019 is incorporated into this Item 2 by reference.

 

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Item 6.

Exhibits

 

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on its behalf of the undersigned thereunto duly authorized:

 

 

 

36

Exhibit 10.24

 

UNIT PURCHASE AGREEMENT

THIS AGREEMENT dated as of the 6^th day of December, 2019, by and between Star Group, L.P., a Delaware limited partnership (hereinafter referred to as “Purchaser”), and Cat Rock Capital Management LP, a Delaware limited partnership (hereinafter referred to as “Seller”).

Statement of Facts:

A.Seller is the beneficial owner of common units of limited partnership interest of Purchaser (the “Common Units”).

B.Purchaser desires to purchase 631,104 Common Units (the “Units) from Seller and Seller desires to sell the Units to Purchaser under the terms and conditions set forth herein below.

NOW, THEREFORE, in consideration of the mutual promises set forth herein, the parties agree and stipulate as follows:

1.Purchase and Sale.  Purchaser shall purchase (the “Purchase”) the Units from Seller and Seller shall sell the Units to Purchaser for the price and upon the other terms set forth herein.

2.Purchase Price.  Purchaser shall pay Seller $9.40 per Unit for a total purchase price for the Units of $5,932,377.60 (the “Purchase Price”).

3.Closing.  Closing shall occur on the 9th day of December 2019 (the “Closing Date”), at the offices of Star Group, L.P., (9 West Broad Street Street-Suite 310, Stamford, CT 06902.

4.Delivery and Payment for Units. On the Closing Date, Purchaser shall wire the Purchase Price to Seller in accordance with written wire transfer instructions provided to Purchaser by Seller on or before the Closing Date. Upon receipt of the Purchase Price, Seller shall deliver the Units to Purchaser electronically through DTC in accordance with written instructions provided by Purchaser to Seller on or before the Closing Date.

5.Representations and Warranties of Seller.  Seller hereby represents and warrants to Purchaser as follows: (i) upon receipt of the Purchase Price as provided in this Agreement, Seller will deliver good and valid title to the Units, free and clear from all liens, claims and encumbrances of any nature whatsoever, other than any liens, claims and encumbrances created by Purchaser, (ii) the execution, delivery and performance of this Agreement has been duly authorized by all necessary action on the part of Seller and this Agreement has been duly executed and delivered on behalf of Seller, and (iii) Seller has the power and authority to execute, deliver and perform this Agreement.

6.Representations and Warranties of Purchaser.  Purchaser hereby represents and warrants to Seller as follows:

(a)Power; Due Authorization; Binding Agreement.  Purchaser is a limited partnership duly organized, validly existing and in good standing under the laws of its

 

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jurisdiction of organization.  The execution, delivery and performance of this Agreement has been duly authorized by all necessary action on the part of Purchaser and Purchaser has the full power and authority to execute and deliver this Agreement, to perform its obligations under this Agreement and to consummate the transactions contemplated hereby.  This Agreement has been duly executed and delivered on behalf of Purchaser and constitutes a valid and binding agreement of Purchaser.

(b)No Conflicts.  The execution and delivery of this Agreement by Purchaser does not, and the performance of the terms of this Agreement by Purchaser will not, (i) contravene or conflict with any certificate of limited partnership, limited partnership agreement or any other similar organizational documents of Purchaser, (ii) require Purchaser to obtain the consent or approval of, or make any filing with or notification to, any governmental body, agency or official of any country or political subdivision of any country, including any federal, national, supranational, state, provincial, local or other government, governmental, regulatory or administrative authority, agency or commission or any court, tribunal, or judicial or arbitral body (“Governmental Authority”), other than any required filing under U.S. federal securities laws, (iii) require the consent or approval of any other person pursuant to any agreement, obligation or instrument binding on Purchaser or its properties and assets, (iv) conflict with or violate any law, rule, regulation, order, judgment or decree applicable to Purchaser or pursuant to which any of its assets are bound or (v) violate any other agreement to which Purchaser is a party.

(c)Material Non-Public Information.  To its knowledge, Purchaser has not provided any material non-public information regarding Purchaser to Seller that has not been disclosed to the public prior to the date hereof.

(d)Accredited Investor.  Purchaser is an “accredited investor” as that term is defined under Securities and Exchange Commission Regulation D.

(e)Acquisition of the Units for Own Account.  Purchaser is acquiring the Units for its own account and not with a view to, or for resale in connection with, any distribution or public offering thereof within the meaning of the Securities Act of 1933, as amended.

(f)Private, Negotiated Transaction.  Purchaser is aware and hereby acknowledges that the purchase and sale of the Units and the transactions contemplated by this Agreement are being made in a private, negotiated transaction between the parties.

(g)No Reliance.  Purchaser hereby acknowledges and agrees that Seller has not made any representation or warranty, express or implied, regarding any aspect of the transactions contemplated by this Agreement except as explicitly set forth in this Agreement, and Seller is not relying on any representation or warranty not contained in this Agreement.

7.Securities Law Representations, Warranties, Covenants, and Releases.  In connection with the Purchase, Seller hereby represents, warrants and agrees as follows:

(a)Purchaser has informed Seller that Purchaser possesses non-public information (the “Non-Public Information”) concerning Purchaser, including, without limitation, with respect to Purchaser’s results of operations and financial condition as of and for its first

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fiscal quarter ending December 31, 2019, and Purchaser is precluded from disclosing such information to Seller (the “Non-Disclosure”);

(b)the Non-Public Information may be indicative of a value of the Units that is higher than the purchase price reflected in the Purchase;

(c)Seller is an experienced and sophisticated investor that would qualify as an “accredited investor” as defined in Rule 501 of Regulation D and Seller is knowledgeable in trading equity securities and understands the disadvantage to which Seller is subject on account of the disparity of information as between Purchaser and Seller;

(d)Seller is not relying on any representations, warranties or disclosure from Purchaser or any person acting on Purchaser’s behalf in connection with the Purchase;

(e)Seller acknowledges that Purchaser is relying on this Agreement in purchasing the Units and would not purchase the Units in the absence of this Agreement; and

(f)Seller hereby waives, releases and forever discharges Purchaser from and against any and all claims, demands, causes of action and liabilities whatsoever, whether known or unknown, both at law and at equity, that it may have against Purchaser on account of the Non-Disclosure, including, without limitation, under Federal and state securities laws, including Section 10(b) or Rule 10b-5 of the Securities Exchange Act of 1934, as amended.

8.Further Assurances.  Purchaser and Seller shall execute and deliver any further documents of whatsoever nature which may be reasonably necessary to effectuate and consummate the transaction set forth in this Agreement.

9.Survival.  The representations and warranties contained in this Agreement shall survive indefinitely.

10.Applicable Law.  This Agreement shall be subject to and governed by the laws of the State of New York without regard to conflicts of law principles other than Section 5-1401 of the New York General Obligations Law.

11.Binding Effect.  This Agreement shall bind the parties hereto, their legal representatives, their successors and assigns.

12.Counterparts and Facsimiles.  This Agreement may be executed by facsimile and/or electronic signature and/or in multiple counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same document.

13.Entire Agreement.  This Agreement constitutes the entire Agreement among the parties with respect to the subject matter hereof and supersedes all other prior and contemporaneous agreements or representations and understandings.

14.Severability.  If any provision of this Agreement or the application of any such provision to any person or circumstance shall be held invalid, illegal or unenforceable in any respect by a court of competent jurisdiction, such invalidity, illegality or unenforceability shall

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not affect any other provision hereof and all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the essential economic or legal substance of the transactions contemplated hereby is not affected.  Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in a mutually acceptable manner in order that the transactions contemplated hereby be consummated as originally contemplated to the greatest extent possible.

15.Modification.  No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties.

16.Waiver.  No waiver of any of the provisions of this Agreement shall be deemed, or will constitute, a waiver of any other provision, whether or not similar, nor will any waiver constitute a continuing waiver. No waiver shall be binding unless executed in writing by the party making the waiver.

[Signature Page Follows]

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed on the day and year first above written.

PURCHASER:

STAR GROUP, L.P.

By Kestrel Heat, LLC, general partner

 

 

By: /s/ Richard F. Ambury

Name:Richard F. Ambury

Title:  Chief Financial Officer

 

 

 

SELLER:

CAT ROCK CAPITAL MANAGEMENT, LP

 

 

 

By: /s/ Andrew Flinn

Name:Andrew Flinn

Title: Chief Financial Officer

 

 

5

Exhibit 31.1

CERTIFICATIONS

I, Jeffrey M. Woosnam, certify that:

 

 

Exhibit 31.2

CERTIFICATIONS

I, Richard F. Ambury, certify that:

 

 

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Star Group, L.P. (the “Company”) on Form 10-Q for the quarterly period ended December 31, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jeffrey M. Woosnam, President and Chief Executive Officer of the Company, certify to my knowledge pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, following due inquiry, I believe that:

A signed original of this written statement required by Section 906 has been provided to Star Group, L.P. and will be retained by Star Group, L.P. and furnished to the Securities and Exchange Commission or its staff upon request.

 

 

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Star Group, L.P. (the “Company”) on Form 10-Q for the quarterly period ended December 31, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Richard F. Ambury, Chief Financial Officer of the Company, certify to my knowledge pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, following due inquiry, I believe that:

A signed original of this written statement required by Section 906 has been provided to Star Group, L.P. and will be retained by Star Group, L.P. and furnished to the Securities and Exchange Commission or its staff upon request.