EDGAR 10-K Filing

Company CIK: 1002590
Filing Year: 2021
Filename: 1002590_10-K_2021_0001564590-21-059752.json

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ITEM 1. BUSINESS
ITEM 1.
BUSINESS
Structure
Star Group, L.P. (“Star” the “Company,” “we,” “us,” or “our”) is a home heating oil and propane distributor and services provider with one reportable operating segment that principally provides heating related services to residential and commercial customers. At a special meeting of unitholders held on October 25, 2017, our unitholders voted in favor of proposals to have the Company elect to be treated as a corporation, instead of a partnership, for federal income tax purposes (commonly referred to as a “check-the-box election”), along with amendments to our partnership agreement to effect such changes in income tax classification, in each case effective November 1, 2017. In addition, the Company changed its name, effective October 25, 2017, from “Star Gas Partners, L.P.” to “Star Group, L.P.” to more closely align our name with the scope of our product and service offerings. For tax years after December 31, 2017, unitholders will receive a Form 1099-DIV and will not receive a Schedule K-1 as in previous tax years. Our legal structure has remained a Delaware limited partnership and the distribution provisions under our limited partnership agreement, including the incentive distribution structure has remained unchanged. As of November 30, 2021, we had outstanding 38.6 million common partner units (NYSE: “SGU”) representing a 99.2% limited partner interest in Star, and 0.3 million general partner units, representing a 0.8% general partner interest in Star.
The following chart depicts the ownership of Star as of November 30, 2021:
Star Group, L.P.
Limited Partners
Common Units
99.2%
General Partner (Kestrel Heat)
General Partner Units
0.8%
Public Unitholders - Common Units
89.8%
Officers and Directors - Common Units
10.2%
Star is organized as follows:
•
Our general partner is Kestrel Heat, LLC, a Delaware limited liability company (“Kestrel Heat” or the “general partner”). The Board of Directors of Kestrel Heat (the “Board”) is appointed by its sole member, Kestrel Energy Partners, LLC, a Delaware limited liability company (“Kestrel”).
•
Our operations are conducted through Petro Holdings, Inc., a Minnesota corporation that is a wholly owned subsidiary of Star Acquisitions, Inc., and its subsidiaries.
•
Petroleum Heat and Power Co., Inc. (“PH&P”) is a wholly owned subsidiary of Star. PH&P is the borrower and Star is the guarantor of the fifth amended and restated credit agreement’s $130 million five-year senior secured term loan and the $300 million ($450 million during the heating season of December through April of each year) revolving credit facility, both due December 4, 2024. (See Note 13-Long-Term Debt and Bank Facility Borrowings).
We file annual, quarterly, current and other reports and information with the Securities and Exchange Commission, or SEC. These filings can be viewed and downloaded from the Internet at the SEC’s website at www.sec.gov. In addition, these SEC filings are available at no cost as soon as reasonably practicable after the filing thereof on our website at www.stargrouplp.com/sec.cfm. You may also obtain copies of these filings and other information at the offices of the New York Stock Exchange located at 11 Wall Street, New York, New York 10005. Please note that any Internet addresses provided in this Annual Report on Form 10-K are for informational purposes only and are not intended to be hyperlinks. Accordingly, no information found and/or provided at such Internet addresses is intended or deemed to be incorporated by reference herein.
Legal Structure
The following chart summarizes our structure as of September 30, 2021.
Business Overview
We are a home heating oil and propane distributor and service provider to residential and commercial customers who heat their homes and buildings primarily in the Northeast and Mid-Atlantic U.S. regions. As of September 30, 2021, we sold home heating oil and propane to approximately 422,200 full service residential and commercial customers and 71,100 customers on a delivery only basis. Approximately 247,700 of these customers, or 50%, are located in the New York City metropolitan area. We believe we are the largest retail distributor of home heating oil in the United States, based upon sales volume with a market share in excess of 5.5%. We also sell gasoline and diesel fuel to approximately 26,700 customers. We install, maintain, and repair heating and air conditioning equipment and to a lesser extent provide these services outside our heating oil and propane customer base including 18,300 service contracts for natural gas and other heating systems. During fiscal 2021, total sales were comprised approximately 59% from sales of home heating oil and propane, 22% from other petroleum products, the majority of which is diesel and gasoline, and 19% from the installation and repair of heating and air conditioning equipment and ancillary services. We provide home heating equipment repair service and natural gas service 24-hours-a-day, seven-days-a-week, 52 weeks a year. These services are an integral part of our business, and are intended to maximize customer satisfaction and loyalty.
We conduct our business through an operating subsidiary, Petro Holdings, Inc., utilizing multiple local brand names, such as Petro Home Services, Meenan, and Griffith Energy Services, Inc.
We also offer several pricing alternatives to our residential home heating oil customers, including a variable price (market based) option and a price-protected option, the latter of which either sets the maximum price or a fixed price that a customer will pay. Users choose the plan they feel best suits them which we believe increases customer satisfaction. Approximately 95% of our full service residential and commercial home heating oil customers automatically receive deliveries based on prevailing weather conditions. In addition, approximately 33% of our residential customers take advantage of our “smart pay” budget payment plan under which their estimated annual oil and propane deliveries and service billings are paid for in a series of equal monthly installments. We use derivative instruments as needed to mitigate our exposure to market risk associated with our price-protected offerings and the storing of our physical home heating oil inventory. Given our size, we believe we are able to realize certain benefits of scale and provide consistent, strong customer service.
Currently, we have heating oil and/or propane customers in the following states: Connecticut, Delaware, Maine, Maryland, Massachusetts, Michigan, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Vermont, Virginia, West Virginia and the District of Columbia.
Industry Characteristics
Home heating oil is primarily used as a source of fuel to heat residences and businesses in the Northeast and Mid-Atlantic regions. According to the U.S. Department of Energy-Energy Information Administration, Residential Energy Consumption Survey (released May 2018), these regions account for 83% (4.8 million of 5.8 million) of the households in the United States where heating oil is the main space-heating fuel and 23% (4.7 million of 20.4 million) of the homes in these regions use home heating oil as their main space-heating fuel. Our experience has been that customers have a tendency to increase their conservation efforts as the price of home heating oil increases, thereby reducing their consumption.
The retail home heating oil industry is mature, with total market demand expected to decline in the foreseeable future due to conversions to natural gas, availability of other alternative energy sources and the installations of more fuel efficient heating systems. Therefore, our ability to maintain our business or grow within the industry is dependent on the acquisition of other retail distributors, the success of our marketing programs, and the growth of our other service offerings. Based on our records, our customer conversions to natural gas have ranged between 1.1% and 1.4% per year over the last five years. We believe this may continue or even increase. In addition, there are legislative and regulatory efforts underway in several states seeking to encourage homeowners to reduce or even eliminate the consumption of carbon based fuels that we sell.
The retail home heating oil industry is highly fragmented, characterized by a large number of relatively small, independently owned and operated local distributors. Some dealers provide full service, as we do, and others offer delivery only on a cash-on-delivery basis, which we also do to a significantly lesser extent. In addition, the industry is complex and costly due to regulations, working capital requirements, and the costs and risks of hedging for price protected customers.
Propane is a by-product of natural gas processing and petroleum refining. Propane use falls into three broad categories: residential and commercial applications; industrial applications; and agricultural uses. In the residential and commercial markets, propane is used primarily for space heating, water heating, clothes drying and cooking. Industrial customers use propane generally as a motor fuel to power over-the-road vehicles, forklifts and stationary engines, to fire furnaces, as a cutting gas and in other process applications. In the agricultural market, propane is primarily used for tobacco curing, crop drying, poultry breeding and weed control.
The retail propane distribution industry is highly competitive and is generally serviced by large multi-state full-service distributors and small local independent distributors. Like the home heating oil industry, each retail propane distribution provider operates in its own competitive environment because propane distributors typically reside in close proximity to their customers. In most retail propane distribution markets, customers can choose from multiple distributors based on the quality of customer service, safety, reputation and price.
It is common practice in our business to price our liquid products to customers based on a per gallon margin over wholesale costs. As a result, we believe distributors such as ourselves generally seek to maintain their per gallon margins by passing wholesale price increases through to customers, thus insulating their margins from the volatility in wholesale prices. However, distributors may be unable or unwilling to pass the entire product cost increases through to customers. We believe this is especially true in the propane business. In these cases, significant decreases in per gallon margins may result. The timing of cost pass-throughs can also significantly affect margins. (See Customers and Pricing for a discussion on our offerings).
Business Strategy
Our business strategy is to increase Adjusted EBITDA (See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for a definition) and cash flow by effectively managing operations while growing and retaining our customer base as a retail distributor of home heating oil and propane and provider of related products and services. The key elements of this strategy include the following:
Pursue select acquisitions Our senior management team has developed expertise in identifying acquisition opportunities and integrating acquired customers into our operations. We focus on acquiring profitable companies within and outside our current footprint.
We actively pursue home heating oil only companies, propane companies, dual fuel (home heating oil and propane) companies and selectively target motor fuels acquisitions, especially where they are operating in the markets we currently serve.
Deliver superior customer service We are dedicated to consistently providing our customers with superior service and a positive customer experience to improve retention and drive additional revenue. We have established programs and conduct surveys to effectively measure customer satisfaction at certain brands.
We have deployed a customer relationship management solution at most of our larger brands. We believe this allows us to provide a more consistent customer experience as our employees will have a 360 degree-view of each customer with easy access to key customer information and customized dashboards to track individual employee performance.
We have resources dedicated to training employees to provide superior and consistent service and enhance the customer experience. This effort is supported, reinforced and monitored by our local management teams.
Provide complementary service offerings These offerings include, but are not limited to, the sales, service and installation of heating and air conditioning equipment, and standby home generators. In addition, we also repair and install natural gas heating systems.
Pursue environmental sustainability opportunities We are committed to pursuing initiatives that reduce greenhouse gas emissions across our product offerings, including blending biofuel (a carbon neutral renewable fuel produced from vegetable oils or animal fats) into our petroleum products and offering energy efficient heating and air conditioning equipment to our customers.
Seasonality
Our fiscal year ends on September 30. All references to quarters and years respectively in this document are to fiscal quarters and years unless otherwise noted. The seasonal nature of our business results in the sale of approximately 30% of our volume of home heating oil and propane in the first fiscal quarter and 50% of our volume in the second fiscal quarter of each fiscal year, the peak heating season. Approximately 25% of our volume of motor fuel and other petroleum products is sold in each of the four fiscal quarters. We generally realize net income in our first and second fiscal quarters and net losses during our third and fourth fiscal quarters and we expect that the negative impact of seasonality on our third and fourth fiscal quarter operating results will continue. In addition, sales volume typically fluctuates from year to year in response to variations in weather, wholesale energy prices and other factors.
Degree Day
A “degree day” is an industry measurement of temperature designed to evaluate energy demand and consumption. Degree days are based on how far the average daily temperature departs from 65°F. Each degree of temperature above 65°F is counted as one cooling degree day, and each degree of temperature below 65°F is counted as one heating degree day. Degree days are accumulated each day over the course of a year and can be compared to a monthly or a multi-year average to see if a month or a year was warmer or cooler than usual. Degree days are officially observed by the National Weather Service.
Every ten years, the National Oceanic and Atmospheric Administration (“NOAA”) computes and publishes average meteorological quantities, including the average temperature for the last 30 years by geographical location, and the corresponding degree days. The latest and most widely used data covers the years from 1991 to 2020. Our calculations of normal weather are based on these published 30 year averages for heating degree days, weighted by volume for the locations where we have existing operations.
Competition
Most of our operating locations compete with numerous distributors, primarily on the basis of price, reliability of service and response to customer needs. Each such location operates in its own competitive environment.
Customer Attrition
We measure net customer attrition for our full service residential and commercial home heating oil and propane customers. Net customer attrition is the difference between gross customer losses and customers added through marketing efforts. Customers added through acquisitions are not included in the calculation of gross customer gains. However, additional customers that are obtained through marketing efforts at newly acquired businesses are included in these calculations. Customer attrition percentage calculations include customers added through acquisitions in the denominators of the calculations on a weighted average basis. Gross customer losses are the result of a number of factors, including price competition, move outs, credit losses and conversions to natural gas. (See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Customer Attrition.)
Customers and Pricing
The number of home heating oil customers comprise 81% of our product customer base, with propane customers comprising another 14% and motor fuel and other petroleum product customers making up the remaining 5%. (During fiscal 2021 we sold 305.9 million gallons of home heating oil and propane and 154.1 million gallons of motor fuel and other petroleum products.)
Our full service home heating oil customer base is comprised of 97% residential customers and 3% commercial customers. Approximately 95% of our full service residential and commercial home heating oil customers have their deliveries scheduled automatically and 5% of our home heating oil customer base call from time to time to schedule a delivery. Automatic deliveries are scheduled based on each customer’s historical consumption pattern and prevailing weather conditions. Our practice is to bill customers promptly after delivery. We offer a balanced payment plan to residential customers in which a customer’s estimated annual oil purchases and service contract fees are paid for in a series of equal monthly payments. Approximately 33% of our residential home heating oil customers have selected this billing option.
We offer several pricing alternatives to our residential home heating oil customers. Our variable pricing program allows the price to float with the heating oil market and other factors. In addition, we offer price-protected programs, which establish either a ceiling or a fixed price per gallon that the customer pays over a defined period. The following chart depicts the percentage of the pricing plans selected by our residential home heating oil customers as of the end of the fiscal year.
September 30,
Variable
55.0
%
54.4
%
53.9
%
55.2
%
52.6
%
Ceiling
39.0
%
38.5
%
39.1
%
36.9
%
37.1
%
Fixed
6.0
%
7.1
%
7.0
%
7.9
%
10.3
%
100.0
%
100.0
%
100.0
%
100.0
%
100.0
%
Sales to residential customers ordinarily generate higher per gallon margins than sales to commercial customers. Due to greater price sensitivity, our own internal marketing efforts, and hedging costs of residential price-protected customers, the per gallon margins realized from price-protected customers generally are less than from variable priced residential customers.
The propane customer base has a similar profile to heating oil residential and commercial customers. Pricing plans chosen by propane customers are almost exclusively variable in nature where selling prices will float with the propane market and other commercial factors.
The motor fuel and other petroleum products customer group includes commercial and industrial customers of unbranded diesel, gasoline, kerosene and related distillate products. We sell products to these customers through contracts of various terms or through a competitive bidding process.
Derivatives
We use derivative instruments in order to mitigate our exposure to market risk associated with the purchase of home heating oil for our price-protected customers, physical inventory on hand, inventory in transit, priced purchase commitments, and the variable interest rate on a portion of our term loan. Currently, 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., Toronto-Dominion Bank and Wells Fargo Bank, N.A.
The Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 815-10-05, Derivatives and Hedging, requires that derivative instruments be recorded at fair value and included in the consolidated balance sheet as assets or liabilities. To the extent our interest rate derivative instruments designated as cash flow hedges are effective, as defined under this guidance, changes in fair value are recognized in other comprehensive income (loss) until the 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 during the holding period are recognized in our statement of operations. Therefore, we experience volatility in earnings as outstanding derivative instruments are marked to market and non-cash gains and losses are recorded prior to the sale of the commodity to the customer. The volatility in any given period related to unrealized non-cash gains or losses on derivative instruments can be significant to our overall results. However, we ultimately expect those gains and losses to be offset by the cost of product when purchased. Depending on the risk being hedged, realized gains and losses are recorded in cost of product, cost of installations and services, or delivery and branch expenses.
Suppliers and Supply Arrangements
We purchase our product for delivery in either barge, pipeline or truckload quantities, and as of September 30, 2021, had contracts with approximately 125 third-party terminal sites for the right to temporarily store petroleum products at their facilities. Home heating oil and propane purchases are made under supply contracts or on the spot market. We have entered into market price based contracts for approximately 74% of our expected home heating oil and propane requirements for the fiscal 2022 heating season. For the fiscal year 2022 heating season, approximately 60% of the Company’s contracted home heating oil volume with suppliers has a biofuel component (an increase from the 7% of the Company’s contracted home heating oil volume with a biofuel component in fiscal 2021). We also have market price based contracts for approximately 29% of our expected diesel and gasoline requirements for fiscal 2022.
During fiscal 2021, Motiva Enterprises LLC and Global Companies LLC provided approximately 12% each of our petroleum product purchases. During fiscal 2020, Shell Oil Company, Motiva Enterprises LLC and Global Companies LLC provided approximately 13%, 12% and 11% respectively, of our petroleum product purchases. Supply contracts typically have terms of 6 to 12 months. All of the supply contracts provide for minimum quantities and in most cases do not establish in advance the price of home heating oil or propane. This price is based upon a published market index price at the time of delivery or pricing date plus an agreed upon differential. We believe that our policy of contracting for the majority of our anticipated supply needs with diverse and reliable sources will enable us to obtain sufficient product should unforeseen shortages develop in worldwide supplies.
Liquid Product Price Volatility
Volatility, which is reflected in the wholesale price of liquid products, including home heating oil, propane and motor fuels, has a larger impact on our business when prices rise. Home heating oil consumers are price sensitive to heating cost increases, and this often leads 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. The price of home heating oil 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, 2017, through 2021, on a quarterly basis, is illustrated in the following chart (price per gallon):
Fiscal 2021 (a)
Fiscal 2020
Fiscal 2019
Fiscal 2018
Fiscal 2017
Quarter Ended
Low
High
Low
High
Low
High
Low
High
Low
High
December 31
$
1.08
$
1.51
$
1.86
$
2.05
$
1.66
$
2.44
$
1.74
$
2.08
$
1.39
$
1.70
March 31
1.46
1.97
0.95
2.06
1.70
2.04
1.84
2.14
1.49
1.70
June 30
1.77
2.16
0.61
1.22
1.78
2.12
1.96
2.29
1.37
1.65
September 30
1.91
2.34
1.08
1.28
1.75
2.08
2.05
2.35
1.45
1.86
(a)
On November 30, 2021, the NYMEX ultra low sulfur diesel contract closed at $2.06 per gallon or $0.27 per gallon higher than the average of $1.79 in Fiscal 2021.
Acquisitions
Part of our business strategy is to pursue select acquisitions. Each acquired company’s operating results are included in the Company’s consolidated financial statements starting on its acquisition date. Customer lists, other intangibles (excluding goodwill) and trade names are amortized on a straight-line basis over seven to twenty years.
During fiscal 2021, the Company acquired two propane and three heating oil dealers for approximately $42.5 million; $40.7 million in cash and $1.8 million of deferred liabilities. The gross purchase price was allocated $37.3 million to goodwill and intangible assets, $6.2 million to fixed assets and reduced by $1.0 million to working capital.
During fiscal 2020, the Company acquired two heating oil dealers for approximately $3.3 million; $3.0 million in cash and $0.3 million of deferred liabilities. The gross purchase price was allocated $3.2 million to goodwill and intangible assets, $0.6 million to fixed assets and $0.5 million to working capital. The Company also completed the purchase of assets related to our fiscal 2019 acquisition of a heating oil dealer for an aggregate purchase price of approximately $1.2 million.
During fiscal 2019, the Company acquired one of its subcontractors, a liquid product dealer and the assets of a propane dealer with a combined total of approximately 24,000 home heating oil and propane accounts for an aggregate purchase price of approximately $60.9 million in cash. The gross purchase price was allocated $44.7 million to goodwill and intangible assets, $13.7 million to fixed assets and $2.5 million to working capital.
Employees and Human Capital Management
We consider our employees a key factor to Star’s success and we are focused on attracting and retaining the best employees at all levels of our business. In particular, our dedication to providing superior customer service depends significantly on employee satisfaction and retention. We strive to create a productive and collaborative work environment for our employees. Our human capital measures and objectives focus on safety of our employees, employee benefits, and employee development and training.
The safety of our employees and customers is paramount. We strive to ensure that all employees feel safe in their respective work environment. Since March 2020, a majority of our office personnel are working remotely. Our field employees are following COVID-19 guidelines and we continue to make deliveries and provide service to our customers. As peak heating season begins, we have cautiously returned some of customer service, credit, service dispatch, and inside sales employees back into our facilities with our team’s health and well-being in mind. We believe that our employees have adapted well and continue to be flexible to the changing working conditions
To attract talent and meet the needs of our employees, we offer benefits packages for full-time employees. We offer a health and welfare and retirement program to all eligible employees. We also provide our employees with
resources for professional development including technical training, feedback and performance reviews from supervisors, and management training.
As of September 30, 2021, we had 3,121 employees, of whom 783 were office, clerical and customer service personnel; 898 were equipment technicians; 507 were fuel delivery drivers and mechanics; 613 were management and 320 were employed in sales. Of these employees 1,375 (44%) are represented by 58 different collective bargaining agreements with local chapters of labor unions. Due to the seasonal nature of our business and depending on the demands of the 2022 heating season, we anticipate that we will augment our current staffing levels during the heating season from among the 336 employees on temporary leave of absence as of September 30, 2021. There are 17 collective bargaining agreements up for renewal in fiscal 2022, covering approximately 295 employees (10%). We believe that our relations with both our union and non-union employees are generally satisfactory.
Government Regulations
We are subject to various federal, state and local environmental, health and safety laws and regulations. Generally, these laws impose limitations on the discharge or emission of pollutants and establish standards for the handling of solid and hazardous wastes. These laws include the Resource Conservation and Recovery Act, the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), the Clean Air Act, the Occupational Safety and Health Act, the Emergency Planning and Community Right to Know Act, the Clean Water Act, the Oil Pollution Act, and comparable state statutes. CERCLA, also known as the “Superfund” law, imposes joint and several liabilities without regard to fault or the legality of the original conduct on certain classes of persons that are considered to have contributed to the release or threatened release of a hazardous substance into the environment. Products stored and/or delivered by us and certain automotive waste products generated by our fleet are hazardous substances within the meaning of CERCLA or otherwise subject to investigation and cleanup under other environmental laws and regulations. While we are currently not involved with any material CERCLA claims, and we have implemented programs and policies designed to address potential liabilities and costs under applicable environmental laws and regulations, failure to comply with such laws and regulations could result in civil or criminal penalties or injunctive relief in cases of non-compliance or impose liability for remediation costs.
We have incurred and continue to incur costs to address soil and groundwater contamination at some of our locations, including legacy contamination at properties that we have acquired. A number of our properties are what is currently undergoing remediation, in some instances funded by prior owners or operators contractually obligated to do so. To date, no material issues have arisen with respect to such prior owners or operators addressing such remediation, although there is no assurance that this will continue to be the case. In addition, we have been subject to proceedings by regulatory authorities for alleged violations of environmental and safety laws and regulations. We do not expect any of these liabilities or proceedings of which we are aware to result in material costs to, or disruptions of, our business or operations.
Transportation of our products by truck is subject to regulations promulgated under the Federal Motor Carrier Safety Act. These regulations cover the transportation of hazardous materials and are administered by the United States Department of Transportation or similar state agencies. Several of our oil terminals are governed under the United States Coast Guard operations Oversite, Federal OPA 90 FRP programs and Federal Spill Prevention Control and Countermeasure programs. All of our propane bulk terminals are governed under Homeland Security Chemical Facility Anti-Terrorism Standards programs. We conduct ongoing training programs to help ensure that our operations are in compliance with applicable regulations. We maintain various permits that are necessary to operate some of our facilities, some of which may be material to our operations.
There is increasing attention in the United States and worldwide concerning the issue of climate change and the effect of emissions of greenhouse gases (“GHG”), in particular from the combustion of fossil fuels. Federal, regional and state regulatory authorities in many jurisdictions have begun taking steps to regulate GHG emissions including proposals that encourage homeowners to switch to alternate sources of energy than those we sell.

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ITEM 1A. RISK FACTORS
ITEM 1A.
RISK FACTORS
You should consider carefully the risk factors discussed below, as well as all other information, as an investment in the Company involves a high degree of risk. We are subject to certain risks and hazards due to the nature of the business activities we conduct. The risks discussed below, any of which could materially and adversely affect our business, financial condition, cash flows, and results of operations, could result in a partial or total loss of your investment, and are not the only risks we face. We may experience additional risks and uncertainties not currently known to us or, as a result of developments occurring in the future, conditions that we currently deem to be immaterial may also materially and adversely affect our business, financial condition, cash flows and results of operations.
Risk Factors Summary
Below is a summary of material factors that make an investment in our common units speculative or risky:
Risks Related to the COVID-19 Pandemic
•
The COVID-19 pandemic has and may continue to adversely impact our business and operations.
•
Mandatory COVID-19 vaccination of employees could impact our ability to hire and retain employees and may have a material adverse effect on our business.
Risks Related to Demand and Our Operations
•
Our operating results will be adversely affected if we experience significant net customer attrition in our home heating oil and propane customer base, such as from natural gas conversions.
•
Because of the highly competitive nature of our business, we may not be able to retain existing customers or acquire new customers.
•
If we do not make acquisitions on economically acceptable terms, our future growth will be limited.
•
Since weather conditions may adversely affect the demand for home heating oil and propane, our business, operating results and financial condition are vulnerable to warm winters as well as other seasonal fluctuations.
Risks Related to Product Pricing and Costs
•
High product prices can lead to customer attrition, resulting in reduced demand for our products and adversely affect our liability.
•
Our hedging strategy may adversely affect our liquidity.
•
Sudden and sharp oil price increases that cannot be passed on to customers may adversely affect our operating results.
•
Significant declines in the wholesale price of home heating oil may cause price-protected customers to renegotiate or terminate their arrangements which may adversely impact our operating results.
•
A significant portion of our home heating oil volume is sold to price-protected customers, and our results of operations could be adversely affected if we are not able to hedge against fluctuations in the volume and cost of product sold to those customers.
•
Our risk management policies cannot eliminate all commodity risk, basis risk, or the impact of adverse market conditions.
•
Our obligation to fund multi-employer pension plans may have an adverse impact on us.
Risks Related to Our Legal and Environmental Activities
•
We are subject to operating and litigation risks that could adversely affect our operating results whether or not we are covered by insurance.
•
Our results of operations and financial condition may be adversely affected by governmental regulation and associated environmental, tax and regulatory costs.
•
Greenhouse gas emissions or other legislation or regulations intended to address climate change could increase our operating costs, adversely affecting our financial results, growth, cash flows and results of operations.
•
Our operations would be adversely affected if service at our third-party terminals or on the common carrier pipelines used is interrupted.
•
We depend on the use of information technology systems that have been and may in the future be a target of cyber-attacks.
Risks Related to People and Competition
•
Conflicts of interest within our company have arisen and could arise again in the future.
•
Our inability to identify qualified individuals for our workforce could adversely impact our operations.
•
A substantial portion of our workforce is unionized, and, as a result, we may face labor actions that could disrupt our operations.
Risks Related to Ownership of Our Common Units
•
Cash distributions are not guaranteed and may fluctuate with performance and reserve requirements.
•
If we fail to maintain an effective system of internal controls, then we may not be able to accurately report our financial results or prevent fraud, causing unitholders to lose confidence in our financial reporting, which could harm our business.
Risks Related to Our Indebtedness
•
Our substantial debt, as well as a number of restrictive covenants in our Credit Agreement, including through if the indebtedness outstanding thereunder is accelerated, could impair our financial condition and ability to obtain additional financing.
•
We are not required to accumulate cash for the purpose of meeting our future debt obligations, which may limit the cash available to service the final payment due under our Credit Agreement.
General Risk Factors
•
Economic conditions, which include disruptions in our supply chain and other factors, affecting the delivery of our products and services as well as demand for our products could adversely impact our business.
•
Continuing inflation may hurt our sales margins and profitability.
•
Energy efficiency and new technology may reduce the demand for our products and adversely affect our operating results.
•
The risk of global terrorism and political unrest may adversely affect the economy and availability of the products that we sell and have a material adverse effect on our business.
Risks Related to the COVID-19 Pandemic
The COVID-19 pandemic has caused disruptions to our operations and has impacted our business and may continue to impact our business and operations in numerous ways that remain unpredictable.
Our business has been and may continue to be impacted by the effects of the ongoing COVID-19 pandemic. This pandemic and related measures taken to contain the spread of COVID-19, such as government-mandated business closures, office closures, state and local orders to “shelter in place,” and travel and transportation restrictions, have negatively affected the U.S. and global economies, disrupted U.S. and global supply chains and led to unprecedented levels of unemployment. There continues to be uncertainty around the COVID-19 pandemic, its duration, and its impact on U.S. and global economic activity and consumer behavior. The Delta variant of COVID-19, which appears to be the most transmissible and contagious variant to date, has caused a surge in COVID-19 cases globally. The impact of the Delta variant, or other variants that may emerge, cannot be predicted at this time, and could depend on numerous factors, including the availability of vaccines in different parts of the world, vaccination rates among the population, the effectiveness of COVID-19 vaccines against the Delta variant and other variants, and the response by governmental bodies to reinstate mandated business closures, orders to “shelter in place,” and travel and transportation restrictions. If workers at one or more of our offices or the offices of our suppliers become ill or are quarantined and in either or both events are therefore unable to work, or we experience other labor constraints resulting from employee turnover or departures due to resistance to vaccine mandates, our operations could be subject to disruption due to staffing shortages. Due to the surge in the Delta variant of the coronavirus, we extended the remote working arrangements implemented for the majority of our office personnel in response to the pandemic. Our remote working arrangements may become strained or result in service delays, especially as these arrangements extend into the peak heating oil season. Further, certain of our customers’ financial condition may continue to be adversely impacted as a result of the impacts of COVID-19, or another global public health pandemic, and efforts taken to prevent its spread, which could result in reduced demand or impact their ability to pay for our products and services. We are also experiencing disruptions in the procurement of certain HVAC equipment and home generators.
The extent of the impact of the COVID-19 pandemic on our operational and financial performance, including our ability to execute our business strategies and initiatives, will depend on future developments, including the duration and spread of COVID-19 and related restrictions on travel and general mobility, the price of petroleum products and the timing, scope and effectiveness of federal, state and local governmental responses, all of which are uncertain and cannot be predicted. An extended period of global supply chain and economic disruption caused by COVID-19 and its variants could materially affect our business, results of operations, access to sources of liquidity and financial condition, and we have experienced the negative impacts of such disruption since March 2020.
Mandatory COVID-19 vaccination of employees could impact our workforce and have a material adverse effect on our business and results of operations.
On September 9, 2021, President Biden announced a proposed new rule requiring all employers with at least 100 employees to require that their employees be fully vaccinated or tested weekly. The U.S. Department of Labor’s Occupational Safety and Health Administration (“OSHA”) issued emergency rules on November 5, 2021 to carry out this mandate. On November 18, 2021, the OSHA suspended enforcement of the vaccine mandate after a U.S. federal court of appeals panel reaffirmed an earlier temporary halt of the mandate. At this time, it is unclear, among other things, if the vaccine mandate will apply to all employees, including our commercial drivers and service technicians, or only to employees who work in the office and how compliance will be documented.
As a company with more than 100 employees, it is anticipated that we would be subject to the OSHA regulation mandating COVID-19 vaccinations for a portion of our workforce. OSHA’s vaccine requirement and the proposed new regulation, if implemented, may result in employee attrition, which could materially adversely affect future revenues and costs and have a material adverse effect on our business and results of operations. The vaccine mandate may also put us at a competitive disadvantage vis-à-vis many of our competitors, which have less than 100 employees and are not subject to the vaccine mandate. At this time, it is not possible to predict with certainty the exact impact that the proposed new regulation or the Company’s vaccine requirement will have on us or on our workforce.
Risks Related to Demand and Our Operations
Our operating results will be adversely affected if we continue to experience significant net customer attrition in our home heating oil and propane customer base.
The following table depicts our gross customer gains, gross customer losses and net customer attrition from fiscal year 2017 to fiscal year 2021. 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 customer gains that are obtained through marketing efforts and losses at newly acquired businesses are included in these calculations from the point of closing going forward. Customer attrition percentage calculations include customers added through acquisitions in the denominators of the calculations on a weighted average basis from the closing date.
Fiscal Year Ended September 30,
Gross customer gains
10.7
%
12.2
%
12.9
%
13.0
%
13.1
%
Gross customer losses
14.6
%
15.6
%
18.3
%
16.2
%
14.6
%
Net attrition
(3.9
%)
(3.4
%)
(5.4
%)
(3.2
%)
(1.5
%)
The gain of a new customer does not fully compensate for the loss of an existing customer because of the expenses incurred during the first year to add a new customer. Typically, the per gallon margin realized from a new account added is less than the margin of a customer that switches to another provider. Customer losses are the result of various factors, including but not limited to:
•
price competition;
•
customer relocations and home sales/foreclosures;
•
credit worthiness;
•
service disruptions; and
•
conversions to natural gas.
The continuing volatility in the energy markets can intensify price competition and add to our difficulty in reducing net customer attrition. Warmer than normal weather can also contribute to an increase in attrition as customers perceive less need for a full service provider like ourselves. Additionally, the continuing economic impact of COVID-19 and its variants could increase future attrition due to higher losses from credit related issues.
If we are not able to reduce the current level of net customer attrition or if such level should increase, attrition will have a material adverse effect on our business, operating results and cash available for distributions to unitholders. For additional information about customer attrition, see Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Customer Attrition.”
Because of the highly competitive nature of our business, we may not be able to retain existing customers or acquire new customers, which would have an adverse impact on our business, operating results and financial condition.
Our business is subject to substantial competition. Most of our operating locations compete with numerous distributors, primarily on the basis of price, reliability of service and responsiveness to customer service needs. Each operating location operates in its own competitive environment.
We compete with distributors offering a broad range of services and prices, from full-service distributors, such as ourselves, to those offering delivery only. As do many companies in our business, we provide home heating equipment repair service on a 24-hour-a-day, seven-day-a-week, 52 weeks a year basis. We believe that this tends to build customer loyalty. In some instances homeowners have formed buying cooperatives that seek to purchase home heating oil from distributors at a price lower than individual customers are otherwise able to obtain. We also compete for retail customers with suppliers of alternative energy products, principally natural gas, propane (in the case of our home heating oil operations) and electricity. If we are unable to compete effectively, we may lose
existing customers and/or fail to acquire new customers, which would have a material adverse effect on our business, operating results and financial condition.
Our operating results will be adversely affected if we experience significant net customer attrition from natural gas conversions.
The following table depicts our estimated customer losses to natural gas conversions for the last five fiscal years. Losses to natural gas in our footprint for the home heating oil industry could be greater or less than our estimates.
Fiscal Year Ended September 30,
Customer losses to natural gas conversion
(1.1
)%
(1.1
)%
(1.4
)%
(1.3
)%
(1.2
)%
In addition to our direct customer losses to natural gas competition, any conversion to natural gas by a heating oil consumer in our geographic footprint reduces the pool of available customers from which we can gain new heating oil customers, and could have a material adverse effect on our business, operating results and financial condition.
If we do not make acquisitions on economically acceptable terms, our future growth will be limited.
Generally, heating oil and propane are alternative energy sources to new housing construction, because natural gas is usually selected when natural gas infrastructure exists. In certain geographies, utilities are building out their natural gas infrastructure. As such, our industry is not a growth industry. Accordingly, future growth will depend on our ability to make acquisitions on economically acceptable terms. We cannot assure that we will be able to identify attractive acquisition candidates in our sector in the future or that we will be able to acquire businesses on economically acceptable terms. Adverse operating and financial results may limit our access to capital and adversely affect our ability to make acquisitions. Under the terms of our fifth amended and restated credit agreement (“Credit Agreement”), we are restricted from making any individual acquisition in excess of $25.0 million without the lenders’ approval. In addition, to make an acquisition, we are required to have Availability (as defined in our Credit Agreement) of at least $40.0 million, on a historical pro forma and forward-looking basis. Furthermore, as long as the bank term loan is outstanding, we must be in compliance with the senior secured leverage ratio (as defined in our Credit Agreement). These covenant restrictions may limit our ability to make acquisitions. Any acquisition may involve potential risks to us and ultimately to our unitholders, including:
•
an increase in our indebtedness;
•
an increase in our working capital requirements;
•
an inability to integrate the operations of the acquired business;
•
an inability to successfully expand our operations into new territories;
•
the diversion of management’s attention from other business concerns;
•
an excess of customer loss from the acquired business;
•
loss of key employees from the acquired business; and
•
the assumption of additional liabilities including environmental liabilities.
In addition, acquisitions may be dilutive to earnings and distributions to unitholders, and any additional debt incurred to finance acquisitions may, among other things, affect our ability to make distributions to our unitholders.
Since weather conditions may adversely affect the demand for home heating oil and propane, our business, operating results and financial condition are vulnerable to warm winters.
Weather conditions in regions in which we operate have a significant impact on the demand for home heating oil and propane because our customers depend on this product largely for space heating purposes. As a result, weather conditions may materially adversely impact our business, operating results and financial condition. During the peak-heating season of October through March, sales of home heating oil and propane historically have
represented approximately 80% of our annual volume sold. Actual weather conditions can vary substantially from year to year or from month to month, significantly affecting our financial performance. Climate change may result in increased weather volatility. Warmer than normal temperatures in one or more regions in which we operate can significantly decrease the total volume we sell and the gross profit realized and, consequently, our results of operations.
To partially mitigate the adverse effect of warm weather on cash flows, we have used weather hedge contracts for a number of years. In general, such weather hedge contracts provide that we are entitled to receive a specific payment per heating degree-day shortfall, when the total number of heating degree-days in the hedge period is less than the ten year average. The “payment thresholds,” or strikes, are set at various levels. The hedge period runs from November 1, through March 31, of a fiscal year taken as a whole.
For fiscal year 2022, we entered into a weather hedging contracts under which we are entitled to a payment capped at $12.5 million if degree days are less than the Payment Threshold and we are obligated to make an annual payment capped at $5.0 million if degree days exceed the Payment Threshold. However, there can be no assurance that such weather hedge contracts would fully or substantially offset the adverse effects of warmer weather on our business and operating results during such period or that colder weather will result in enough profit to offset a payment by the Company to its provider.
Our operating results are subject to seasonal fluctuations.
Our operating results are subject to seasonal fluctuations since the demand for home heating oil and propane is greater during the first and second fiscal quarter of our fiscal year, which is the peak heating season. The seasonal nature of our business has resulted on average in the last five years in the sale of approximately 30% of our volume of home heating oil and propane in the first fiscal quarter and 50% of our volume in the second fiscal quarter of each fiscal year. As a result, we generally realize net income in our first and second fiscal quarters and net losses during our third and fourth fiscal quarters and we expect that the negative impact of seasonality on our third and fourth fiscal quarter operating results will continue. Thus any material reduction in the profitability of the first and second quarters for any reason, including warmer than normal weather, generally cannot be made up by any significant profitability improvements in the results of the third and fourth quarters.
Risks Related to Product Pricing and Costs
High product prices can lead to customer conservation and attrition, resulting in reduced demand for our products.
Prices for our products are subject to volatile fluctuations in response to changes in supply and other market conditions. During periods of high product costs our prices generally increase. High prices can lead to customer conservation and attrition, resulting in reduced demand for our products.
Increases in wholesale product costs may have adverse effects on our business, financial condition, results of operations, or liquidity.
Increases in wholesale product costs may have adverse effects on our business, financial condition and results of operations, including the following:
•
customer conservation or attrition due to customers converting to lower cost heating products or suppliers;
•
reduced liquidity as a result of higher receivables, and/or inventory balances as we must fund a portion of any increase in receivables, inventory and hedging costs from our own resources, thereby tying up funds that would otherwise be available for other purposes;
•
higher bad debt expense and credit card processing costs as a result of higher selling prices;
•
higher interest expense as a result of increased working capital borrowing to finance higher receivables and/or inventory balances; and
•
higher vehicle fuel costs.
If increases in wholesale product costs cause our working capital requirements to exceed the amounts available under our revolving credit facility or should we fail to maintain the required availability or fixed charge coverage ratio, we would not have sufficient working capital to operate our business, which could have a material adverse effect on our financial condition and results of operations.
Our business requires a significant amount of working capital to finance inventory and accounts receivable generated during the heating season. Under our Credit Agreement, we may borrow up to $300 million, which increases to $450 million during the peak winter months from December through April of each fiscal year. We are obligated to meet certain financial covenants under our Credit Agreement, including the requirement to maintain at all times either excess availability (borrowing base less amounts borrowed and letters of credit issued) of 12.5% of the revolving credit commitment then in effect or a fixed charge coverage ratio (as defined in our Credit Agreement) of not less than 1.1. In addition, as long as our term loan is outstanding, our senior secured leverage ratio cannot be more than 3.0 as calculated as of the quarters ending June 30 or September 30, and no more than 4.5 as calculated as of the quarters ending December 31 or March 31.
At December 31, 2021, we expect to have approximately 22 million gallons of priced purchase commitments and physical inventory hedged with a futures contract or swap. If the wholesale price of heating oil increased $1 per gallon, our near term liquidity in December would be reduced by $22.0 million.
At September 30, 2021, we had approximately 111,500 customers, or 33% of our residential customer base, on the balanced payment plan in which a customer’s estimated annual oil purchases and service contract fees are paid for in a series of equal monthly payments. Increases in wholesale prices could reduce our liquidity if we failed to recalculate the balanced payments on a timely basis or if customers resist higher balanced payments. These customers could possibly owe us more in the future than we had budgeted. Generally, customer credit balances are at their low point after the end of the heating season and at their peak prior to the beginning of the heating season.
Our hedging strategy may adversely affect our liquidity.
We purchase derivatives, futures and swaps from members of our lending group in order to mitigate exposure to market risk associated with our inventory and the purchase of home heating oil for price-protected customers. Future positions require an initial cash margin deposit and daily mark to market maintenance margin, whereas options are generally paid for as they expire. Mark-to-market exposure reduces our borrowing base and as such can reduce the amount available to us under our Credit Agreement. The highest mark to market reserve against our borrowing base for these derivative instruments with our lending group was $13.2 million, $20.2 million, and $22.7, during fiscal years 2021, 2020, and 2019 respectively.
We also purchase call options from members of our lending group to hedge the price of the products to be sold to our price-protected customers which usually require us to pay an upfront cash payment. This reduces our liquidity, as we must pay for the option before any sales are made to the customer. We further purchase futures contracts with members of our lending group in order to mitigate exposure to market risk associated with physical inventory. Our futures contracts require an initial cash deposit and maintenance margin for changes in the market value of the contracts.
Sudden and sharp oil price increases that cannot be passed on to customers may adversely affect our operating results.
Our industry is a “margin-based” business in which gross profit depends on the excess of sales prices per gallon over supply costs per gallon. Consequently, our profitability is sensitive to changes in the wholesale product cost caused by changes in supply or other market conditions. These factors are beyond our control and thus, when there are sudden and sharp increases in the wholesale cost of home heating oil and propane, we may not be able to pass on these increases to customers through increased retail sales prices. In an effort to retain existing accounts and attract new customers we may offer discounts, which will impact the net per gallon gross margin realized.
Significant declines in the wholesale price of home heating oil may cause price-protected customers to renegotiate or terminate their arrangements which may adversely impact our gross profit and operating results.
When the wholesale price of home heating oil declines significantly after a customer enters into a price protection arrangement, some customers attempt to renegotiate their arrangement in order to enter into a lower cost pricing plan with us or terminate their arrangement and switch to a competitor. Under our current price-protected
programs, approximately 39.0% and 6.0% of our residential customers are respectively categorized as being either ceiling or fixed as of September 30, 2021.
A significant portion of our home heating oil volume is sold to price-protected customers (ceiling and fixed) and our gross margins could be adversely affected if we are not able to effectively hedge against fluctuations in the volume and cost of product sold to these customers.
A significant portion of our home heating oil volume is sold to individual customers under an arrangement pre-establishing the ceiling sales price or a fixed price of home heating oil over a fixed period. When the customer makes a purchase commitment for the next period we currently purchase option contracts, swaps and futures contracts for a substantial majority of the heating oil that we expect to sell to these price-protected customers. The amount of home heating oil volume that we hedge per price-protected customer is based upon the estimated fuel consumption per average customer, per month. If the actual usage exceeds the amount of the hedged volume on a monthly basis, we could be required to obtain additional volume at unfavorable margins. In addition, should actual usage in any month be less than the hedged volume (including, for example, as a result of early terminations by fixed price customers), our hedging losses could be greater. Currently, we have elected not to designate our derivative instruments as hedging instruments under FASB ASC 815-10-05 Derivatives and Hedging, and the change in fair value of the derivative instruments is recognized in our statement of operations. Therefore, we experience volatility in earnings as these currently outstanding derivative contracts are marked to market and non-cash gains or losses are recorded in the statement of operations.
Our risk management policies cannot eliminate all commodity risk, basis risk, or the impact of adverse market conditions which can adversely affect our financial condition, results of operations and cash available for distribution to our unitholders. In addition, any noncompliance with our risk management policies could result in significant financial losses.
While our hedging policies are designed to minimize commodity risk, some degree of exposure to unforeseen fluctuations in market conditions remains. For example, we change our hedged position daily in response to movements in our inventory. Any difference between the estimated future sales from inventory and actual sales will create a mismatch between the amount of inventory and the hedges against that inventory, and thus change the commodity risk position that we are trying to maintain. Also, significant increases in the costs of the products we sell can materially increase our costs to carry inventory. We use our revolving credit facility as our primary source of financing to carry inventory and may be limited on the amounts we can borrow to carry inventory. Basis risk describes the inherent market price risk created when a commodity of certain grade or location is purchased, sold or exchanged as compared to a purchase, sale or exchange of a like commodity at a different time or place. Transportation costs and timing differentials are components of basis risk. For example, we use the NYMEX to hedge our commodity risk with respect to pricing of energy products traded on the NYMEX. Physical deliveries under NYMEX contracts are made in New York Harbor. To the extent we take deliveries in other ports, such as Boston Harbor, we may have basis risk. In a backward market (when prices for future deliveries are lower than current prices), basis risk is created with respect to timing. In these instances, physical inventory generally loses value as basis declines over time. Basis risk cannot be entirely eliminated, and basis exposure, particularly in backward or other adverse market conditions, can adversely affect our financial condition, results of operations and cash available for distribution to our unitholders.
We monitor processes and procedures to reduce the risk of unauthorized trading and to maintain substantial balance between purchases and sales or future delivery obligations. We can provide no assurance, however, that these steps will detect and/or prevent all violations of such risk management policies and procedures, particularly if deception or other intentional misconduct is involved.
Our obligation to fund multi-employer pension plans to which we contribute may have an adverse impact on us.
We participate in a number of multi-employer pension plans for current and former union employees covered under collective bargaining agreements. The risks of participating in multi-employer plans are different from single-employer plans in that assets contributed are pooled and may be used to provide benefits to current and former employees of other participating employers. Several factors could require us to make significantly higher future contributions to these plans, including the funding status of the plan, unfavorable investment performance, insolvency or withdrawal of participating employers, changes in demographics and increased benefits to
participants. Several of these multi-employer plans to which we contribute are underfunded, meaning that the value of such plans’ assets are less than the actuarial value of the plans’ benefit obligations.
We may be subject to additional liabilities imposed by law as a result of our participation in multi-employer defined benefit pension plans. Various Federal laws impose certain liabilities upon an employer who is a contributor to a multi-employer pension plan if the employer withdraws from the plan or the plan is terminated or experiences a mass withdrawal, potentially including an allocable share of the unfunded vested benefits in the plan for all plan participants, not just our retirees. Accordingly, we could be assessed our share of unfunded liabilities should we terminate participation in these plans, or should there be a mass withdrawal from these plans, or if the plans become insolvent or otherwise terminate.
While we currently have no intention of permanently terminating our participation in or otherwise withdrawing from any underfunded multi-employer pension plan, there can be no assurance that we will not be required to record material withdrawal liabilities or be required to make material cash contributions in the future to one or more underfunded plans, whether as a result of withdrawing from a plan, or of agreeing to any alternate funding option, or due to any of the other risks associated with being a participating employer in an underfunded plan. Any of these events could negatively impact our liquidity and financial results.
We rely on the continued solvency of our derivatives, insurance and weather hedge counterparties.
If counterparties to the derivative instruments that we use to hedge the cost of home heating oil sold to price-protected customers, physical inventory and our vehicle fuel costs were to fail, our liquidity, operating results and financial condition could be materially adversely impacted, as we would be obligated to fulfill our operational requirement of purchasing, storing and selling home heating oil and vehicle fuel, while losing the mitigating benefits of economic hedges with a failed counterparty. If one of our insurance carriers were to fail, our liquidity, results of operations and financial condition could be materially adversely impacted, as we would have to fund any catastrophic loss. If our weather hedge counterparty were to fail, we would lose the protection of our weather hedge contract. Currently, we have outstanding derivative instruments with the following counterparties: Bank of America, N.A., Bank of Montreal, Cargill, Inc., Citibank, N.A., JPMorgan Chase Bank, N.A., Key Bank, N.A., Toronto-Dominion Bank and Wells Fargo Bank, N.A. Our primary insurance carriers are American International Group, Woodbury Insurance Co., Inc. (our captive insurance subsidiary), and Munich Re Trading LLC., which is our weather hedge counterparty.
Risks Related to Our Legal and Environmental Activities
We are subject to operating and litigation risks that could adversely affect our operating results whether or not covered by insurance.
Our operations are subject to all operating hazards and risks normally incidental to handling, storing, transporting and otherwise providing customers with our products such as natural disasters, adverse weather, accidents, fires, explosions, hazardous material releases, mechanical failures and other events beyond our control. If any of these events were to occur, we could incur substantial losses because of personal injury or loss of life, severe damage to and destruction of property and equipment, and pollution or other environmental damage resulting in curtailment or suspension of our related operations. As a result, we may be a defendant in legal proceedings and litigation arising in the ordinary course of business. The Company records a liability when it is probable that a loss has been incurred and the amount is reasonably estimable.
As we self-insure workers’ compensation, automobile and general liability claims up to pre-established limits, we establish liabilities based upon expectations as to what our ultimate liability will be for claims based on our historical factors. We evaluate on an annual basis the potential for changes in loss estimates with the support of qualified actuaries. As of September 30, 2021, we had approximately $80.6 million of insurance liabilities. Other than matters for which we self-insure, we maintain insurance policies with insurers in amounts and with coverage and deductibles that we believe are reasonable and prudent.
However, there can be no assurance that the ultimate settlement of these claims will not differ materially from the assumptions used to calculate the liabilities or that the insurance we maintain will be adequate to protect us from all material expenses related to potential future claims for remediation costs and personal and property damage or that these levels of insurance will be available in the future at economical prices, any of which could have a material effect on our results of operations. Further, certain types of claims may be excluded from our insurance coverage. If
we were to incur substantial liability and the damages are not covered by insurance or are in excess of policy limits, or if we incur liability at a time when we are not able to obtain liability insurance, then our business, results of operations and financial condition could be materially adversely affected.
Our captive insurance company may not bring the benefits we expect.
Beginning October 1, 2016, we have elected to insure through a wholly-owned captive insurance company, Woodbury Insurance Co., Inc., certain self-insured or deductible amounts. We also continue to maintain our normal, historical, insurance policies with third party insurers. In addition to certain business and operating benefits of having a captive insurance company, we expect to receive certain cash flow benefits related to the timing of the tax deduction related to these claims. Such expected cash tax timing benefits related to coverage provided by Woodbury Insurance Co., Inc. may not materialize, or any cash tax savings may not be as much as anticipated.
Recent New York legislation has the potential to significantly negatively impact the Company’s New York operations.
On July 18, 2019, the State of New York passed the Climate Leadership and Community Protection Act (“CLCPA”). Among other things, the CLCPA sets out a series of emissions reduction, renewable energy, and energy storage goals to significantly reduce the use of carbon-based fossil fuels and eventually achieve net zero greenhouse gas (“GHG”) emissions in the state. On August 14, 2020, the New York Department of Environmental Conservation released proposed regulations to limit statewide GHG emissions as a percentage of 1990 emissions to 60% by 2030 and to 15% by 2050. Within four years after the effective date (by July 2023), the New York Department of Environmental Conservation must adopt regulations that, in part, include measures to reduce GHG emissions from sources that have a cumulatively significant impact on statewide GHG emissions. Certain measures, such as reducing GHG emissions from fossil fuel-burning vehicles, boilers and furnaces, if adopted, could significantly negatively impact the Company’s New York State operations, which constitute a material portion of the Company’s business. Other states in which the Company operates and that are material to the Company’s operations have adopted similar GHG laws or have otherwise announced GHG reduction targets. However, whether and in what manner the CLCPA or other states’ GHG laws or targets could impact the Company remains uncertain at this time.
Our results of operations and financial condition may be adversely affected by governmental regulation and associated environmental and regulatory costs.
Our business is subject to a wide range of federal, state and local laws and regulations related to environmental and other matters. Such laws and regulations have become increasingly stringent over time. Some state and local governments have enacted or are attempting to enact regulations and incentive programs encouraging the phase-out of the products that we sell in favor of products using electricity or other types of fuels, such as natural gas. We may experience increased costs due to stricter pollution control requirements or liabilities resulting from noncompliance with operating or other regulatory permits. New regulations, such as those relating to underground storage, transportation, and delivery of the products that we sell, might adversely impact operations or make them more costly. In addition, there are environmental risks inherently associated with home heating oil operations, such as the risks of accidental releases or spills. We have incurred and continue to incur costs to remediate soil and groundwater contamination at some of our locations. We cannot be sure that we have identified all such contamination, that we know the full extent of our obligations with respect to contamination of which we are aware, or that we will not become responsible for additional contamination not yet discovered. It is possible that material costs and liabilities will be incurred, including those relating to claims for damages to property and persons and the environment.
There is increasing attention in the United States and worldwide concerning the issue of climate change and the effect of GHG emissions, in particular from the combustion of fossil fuels. Federal, regional and state regulatory authorities in many jurisdictions have begun taking steps to regulate GHG emissions. For example, as discussed above under “Risk Factor - Recent New York legislation has the potential to significantly negatively impact the Company’s New York operations,” the State of New York passed the CLCPA and other states have passed similar laws or have otherwise announced GHG reduction targets. Additionally, in October 2015, the United States Environmental Protection Agency (“EPA”) under President Obama published the Clean Power Plan for the regulation of GHG emissions associated with the energy sector. Under President Trump, the EPA repealed the Clean Power Plan and issued the Affordable Clean Energy (“ACE”) Rule which, if implemented, would have resulted in
significantly less GHG reductions than would have been the case under the Clean Power Plan. On January 19, 2021, the U.S. Court of Appeals for the District of Columbia vacated the ACE Rule. The repealed Clean Power Plan and vacated ACE Rule have not been replaced. It is likely, however, that any future regulatory program that caps emissions or imposes a carbon tax will increase costs for us and our customers, which could lead to increased conservation or customers seeking lower cost alternatives. We cannot yet estimate the compliance costs or business impact of potential national, regional or state GHG emissions reduction legislation, regulations or initiatives, since many such programs and proposals are still in development.
Our operations would be adversely affected if service at our third-party terminals or on the common carrier pipelines used is interrupted.
The products that we sell are transported in either barge, pipeline or in truckload quantities to third-party terminals where we have contracts to temporarily store our products. Any significant interruption in the service of these third-party terminals or on the common carrier pipelines used would adversely affect our ability to obtain product.
We depend on the use of information technology systems that have been and may in the future be a target of cyber-attacks.
We rely on multiple information technology systems and networks that are maintained internally and by third-party vendors, and their failure or breach could significantly impede operations. In addition, our systems and networks, as well as those of our vendors, banks and counterparties, may receive and store personal or proprietary information in connection with human resources operations, customer offerings, and other aspects of our business. A cyber-attack or material network breach in the security of these systems could include the exfiltration, or other unauthorized access or disclosure, of proprietary information or employee and customer information, as well as disrupt our operations or damage our information technology infrastructure or those of third parties.
For example, in July 2021, we detected a security incident that resulted in the encryption of certain of our information technology systems. Promptly upon discovery of the incident, we launched an investigation with the assistance of an outside cybersecurity firm, notified law enforcement, and took steps to address the incident and restore full operations. Although our investigation of the incident is ongoing, at this time we do not believe any personal information belonging to customers was involved. However, we believe that an unauthorized third party exfiltrated and/or accessed certain employee personal identifying information (“PII”) and/or protected health information (“PHI”) relating to employee health insurance plans and human resources information, residing on some of the affected systems. We have since restored full operational capacity and were able to continue to serve our customers without interruption. We are in the process of evaluating our existing information security measures and determining whether or where they can be strengthened. Currently, we do not anticipate that this incident will have a material adverse effect on our business, operations or financial results. However, we cannot be certain that that similar cyber-attacks will not occur in the future.
Cyber-attacks are increasing in their frequency, levels of persistence, and sophistication and intensity. Furthermore, because the techniques used to obtain unauthorized access to, or to disrupt, information technology systems change frequently, we may be unable to anticipate these techniques or implement security measures that would prevent them. We may also experience security breaches that may remain undetected for an extended period. If another cyber-attack were to occur and cause interruptions in our operations, it could have a material adverse effect on our revenues and increase our operating and capital costs, which could reduce the amount of cash otherwise available for distribution. To the extent that a future cyber-attack, security breach or other such disruption results in a loss or damage to the Company’s data, or the disclosure of PII, PHI or other personal or proprietary information, including customer or employee information, it could cause significant damage to the Company’s reputation, affect relationships with its customers, vendors and employees, lead to claims against the Company, and ultimately harm our business. In addition, we may be required to incur additional costs to mitigate, remediate and protect against damage caused by cyber-attacks, security breaches or other such disruptions in the future. We may pay significantly higher insurance premiums to maintain cyber insurance coverage, and even if we are able to maintain cyber insurance coverage, it may not be sufficient in amounts and scope to cover all harm sustained by the Company in any future cyber-attack or other data security incident.
Changes in tax laws or regulations may have a material adverse effect on our business, cash flow, financial condition or results of operations.
New income, sales, use or other tax laws, statutes, rules, regulations or ordinances could be enacted at any time, which could adversely affect our business operations and financial performance. Further, existing tax laws, statutes, rules, regulations or ordinances could be interpreted, changed, modified or applied adversely to us. For example, significant changes to the U.S. tax laws have been proposed, including, among others, an increase in the corporate tax rate and the imposition of an excise tax on the fair market value of stock that is repurchased by certain corporations. Changes to existing tax laws or the enactment of future reform legislation could have a material impact on our financial condition, results of operations and ability to pay distributions to our unitholders. It cannot be predicted whether or when tax laws, statutes, rules, regulations or ordinances may be enacted, issued, or amended that could materially and adversely impact our financial position, results of operations, or cash flows.
Risks Related to People and Competition
Conflicts of interest have arisen and could arise in the future.
Conflicts of interest have arisen and could arise in the future as a result of relationships between the general partner and its affiliates, on the one hand, and us or any of our limited partners, on the other hand. As a result of these conflicts the general partner may favor its own interests and those of its affiliates over the interests of the unitholders. The nature of these conflicts is ongoing and includes the following considerations:
•
The general partner’s affiliates are not prohibited from engaging in other business or activities, including direct competition with us.
•
The general partner determines the amount and timing of asset purchases and sales, capital expenditures, distributions to unitholders, unit repurchases, borrowings and reserves, each of which can impact the amount of cash, if any, available for distribution to unitholders, and available to pay principal and interest on debt and the amount of incentive distributions payable in respect of the general partner units.
•
The general partner controls the enforcement of obligations owed to us by the general partner.
•
The general partner decides whether to retain its counsel or engage separate counsel to perform services for us.
•
In some instances the general partner may borrow funds in order to permit the payment of distributions to unitholders.
•
The general partner may limit its liability and reduce its fiduciary duties, while also restricting the remedies available to unitholders for actions that might, without limitations, constitute breaches of fiduciary duty.
•
Unitholders are deemed to have consented to some actions and conflicts of interest that might otherwise be deemed a breach of fiduciary or other duties under applicable state law.
•
The general partner is allowed to take into account the interests of parties in addition to the Company in resolving conflicts of interest, thereby limiting its fiduciary duty to the unitholders.
•
The general partner determines whether to issue additional units or other of our securities.
•
The general partner determines which costs are reimbursable by us.
•
The general partner is not restricted from causing us to pay the general partner or its affiliates for any services rendered on terms that are fair and reasonable to us or entering into additional contractual arrangements with any of these entities on our behalf.
Our inability to identify qualified individuals for our workforce could slow our growth and adversely impact our ability to operate our business
Our success depends in part upon our ability to attract, motivate and retain a sufficient number of qualified employees to meet the needs of our business. A number of factors may adversely affect the workforce available to us or increase labor costs, including high employment levels, federal unemployment subsidies, including
unemployment benefits offered in response to the COVID-19 pandemic, and other government regulations. We have experienced and may continue to experience shortages of qualified individuals to fill these positions. Competition for qualified employees have caused us and may continue to cause us to pay higher wages and provide greater benefits. We place a heavy emphasis on the qualification and training of our personnel and spend a significant amount of time and money on training our team members. Any inability to recruit and retain qualified individuals may result in higher turnover and increased labor costs, and could compromise the quality of our service, could have a material adverse effect on our business, financial condition and results of operations. The COVID-19 pandemic has exacerbated staffing complexities for us. The COVID-19 pandemic has also resulted in aggressive competition for talent, wage inflation and pressure to improve benefits and workplace conditions to remain competitive. Maintaining adequate staffing in our customer-facing departments and hiring and training staff has been significantly complicated by the impacts of the COVID-19 pandemic on our business. Our existing wages and benefits programs, combined with the challenging conditions due to the COVID-19 pandemic and the highly competitive wage pressure resulting from the labor shortage, may be insufficient to attract and retain the best talent. Our failure to recruit and retain employees in a timely manner or higher team member turnover levels all could affect our ability to service our customers leading to customer attrition, and we may experience higher than projected labor costs. In addition, we deliver our products primarily by truck. We compete with other entities for drivers and service technicians’ labor, including entities that do not have seasonal businesses such as ours. The shortages of drivers, primarily as a result of the COVID-19 pandemic, has caused an increase in the cost of transportation for us. An overall labor shortage, lack of skilled labor, increased turnover or labor inflation, caused by COVID-19 or as a result of general macroeconomic factors, could have a material adverse impact on the company’s operations, results of operations, liquidity or cash flows.
A substantial portion of our workforce is unionized, and we may face labor actions that could disrupt our operations or lead to higher labor costs and adversely affect our business.
As of September 30, 2021, approximately 44% of our employees were covered under 58 different collective bargaining agreements. As a result, we are usually involved in union negotiations with several local bargaining units at any given time. There can be no assurance that we will be able to negotiate the terms of any expired or expiring agreement on terms satisfactory to us. Although we consider our relations with our employees to be generally satisfactory, we may experience strikes, work stoppages or slowdowns in the future. If our unionized workers were to engage in a strike, work stoppage or other slowdown, we could experience a significant disruption of our operations, which could have a material adverse effect on our business, results of operations and financial condition. Moreover, our non-union employees may become subject to labor organizing efforts. If any of our current non-union facilities were to unionize, we could incur increased risk of work stoppages and potentially higher labor costs.
Risks Related to Ownership of Our Common Units
Cash distributions (if any) are not guaranteed and may fluctuate with performance and reserve requirements.
Distributions of available cash by us to unitholders will depend on the amount of cash generated, and distributions may fluctuate based on our performance. The actual amount of cash that is available will depend upon numerous factors, including:
•
profitability of operations,
•
required principal and interest payments on debt or debt prepayments,
•
debt covenants,
•
margin account requirements,
•
cost of acquisitions,
•
issuance of debt and equity securities,
•
fluctuations in working capital,
•
capital expenditures,
•
units repurchased,
•
adjustments in reserves,
•
prevailing economic conditions,
•
financial, business and other factors,
•
increased pension funding requirements,
•
results of potential adverse litigation, and
•
the amount of cash taxes we have to pay in Federal, State and local corporate income and franchise taxes.
Our Credit Agreement imposes restrictions on our ability to pay distributions to unitholders, including the need to maintain certain covenants. (See the fifth amended and restated credit agreement and Note 13 of the Notes to the Consolidated Financial Statements-Long-Term Debt and Bank Facility Borrowings).
If we fail to maintain an effective system of internal controls, then we may not be able to accurately report our financial results or prevent fraud. As a result, current and potential unitholders could lose confidence in our financial reporting, which would harm our business and the trading price of our common units.
Effective internal controls are necessary for us to provide reliable financial reports, prevent fraud and operate successfully as a public company. We may experience difficulties in implementing effective internal controls as part of our integration of acquisitions from private companies, which are not subject to the internal control requirements imposed on public companies. If we are unable to maintain adequate controls over our financial processes and reporting in the future or if the businesses we acquire have ineffective internal controls, our operating results could be harmed or we may fail to meet our reporting obligations. Ineffective internal controls over financial reporting could cause our unitholders to lose confidence in our reported financial information, which would likely have a negative effect on the trading price of our common units.
Risks Related to Our Indebtedness
Our substantial debt and other financial obligations could impair our financial condition and our ability to obtain additional financing and have a material adverse effect on us if we fail to meet our financial and other obligations.
At September 30, 2021, we had outstanding under our fifth amended and restated revolving credit facility agreement a $110.5 million term loan, $8.6 million under the revolver portion of our fifth amended and restated revolving credit facility agreement, $3.1 million of letters of credit, no hedge positions, and our availability was $171.5 million. In December 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, which had the effect of increasing the amount due under our term loan to $130 million, correspondingly reduced the borrowings under the revolver portion of the fourth amended and restated revolving credit facility agreement and extended the term of the facility to December 2024. (See the fifth amended and restated credit agreement and Note 13 of the Notes to the Consolidated Financial Statements-Long-Term Debt and Bank Facility Borrowings). Exclusive of the term loan, during the last three fiscal years we have utilized as much as $147.4 million of our Credit Agreement in borrowings, letters of credit and hedging reserve. Our substantial indebtedness and other financial obligations could:
•
impair our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, unit repurchases or general partnership purposes;
•
have a material adverse effect on us if we fail to comply with financial and affirmative and restrictive covenants in our debt agreements and an event of default occurs that is not cured or waived;
•
require us to dedicate a substantial portion of our cash flow for principal and interest payments on our indebtedness and other financial obligations, thereby reducing the availability of our cash flow to fund working capital and capital expenditures;
•
expose us to interest rate risk because certain of our borrowings are at variable rates of interest;
•
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and
•
place us at a competitive disadvantage compared to our competitors that have proportionally less debt.
If we are unable to meet our debt service obligations and other financial obligations, we could be forced to restructure or refinance our indebtedness and other financial transactions, seek additional equity capital or sell our assets. We might then be unable to obtain such financing or capital or sell our assets on satisfactory terms, if at all.
We are not required to accumulate cash for the purpose of meeting our future obligations to our lenders, which may limit the cash available to service the final payment due on the term loan outstanding under our Credit Agreement.
Subject to the limitations on restricted payments that are contained in our Credit Agreement, we are not required to accumulate cash for the purpose of meeting our future obligations to our lenders. As a result, we may be required to refinance the final payment of our term loan. Our ability to refinance the term loan will depend upon our future results of operation and financial condition as well as developments in the capital markets. Our general partner will determine the future use of our cash resources and has broad discretion in determining such uses and in establishing reserves for such uses, which may include but are not limited to:
•
complying with the terms of any of our agreements or obligations;
•
providing for distributions of cash to our unitholders in accordance with the requirements of our Partnership Agreement;
•
providing for future capital expenditures and other payments deemed by our general partner to be necessary or advisable, including to make acquisitions; and
•
repurchasing common units.
Depending on the timing and amount of our use of cash, this could significantly reduce the cash available to us in subsequent periods to make payments on borrowings under our Credit Agreement.
Restrictive covenants in our Credit Agreement may reduce our operating flexibility.
Our Credit Agreement contains various covenants that limit our ability and the ability of our subsidiaries to, among other things:
•
incur indebtedness;
•
make distributions to our unitholders;
•
purchase or redeem our outstanding equity interests or subordinated indebtedness;
•
make investments;
•
create liens;
•
sell assets;
•
engage in transactions with affiliates;
•
restrict the ability of our subsidiaries to make payments, loans, guarantees and transfers of assets or interests in assets;
•
engage in sale-leaseback transactions;
•
effect a merger or consolidation with or into other companies, or a sale of all or substantially all of our properties or assets; and
•
engage in other lines of business.
These restrictions could limit our ability to obtain future financings, make capital expenditures, withstand a future downturn in our business or the economy in general, conduct operations or otherwise take advantage of
business opportunities that may arise. Our Credit Agreement also requires us to maintain specified financial ratios and satisfy other financial conditions. Our ability to meet those financial ratios and conditions can be affected by events beyond their control, such as weather conditions and general economic conditions. Accordingly, we may be unable to meet those ratios and conditions.
Any breach of any of these covenants, failure to meet any of these ratios or conditions, or occurrence of a change of control would result in a default under the terms of the relevant indebtedness or other financial obligations to become immediately due and payable. If we were unable to repay those amounts, the lenders could initiate a bankruptcy proceeding or liquidation proceeding or proceed against the collateral, if any. If the lenders of our indebtedness or other financial obligations accelerate the repayment of borrowings or other amounts owed, we may not have sufficient assets to repay our indebtedness or other financial obligations.
Under our Credit Agreement, the occurrence of a “change of control” is considered a default. We may be unable to repay borrowings under our Credit Agreement if the indebtedness outstanding thereunder is accelerated following a change of control.
In the event of a change in control, we may not have the financial resources to repay borrowings under our Credit Agreement and may be unable to satisfy our obligations unless we are able to refinance or obtain waivers under our other indebtedness.
General Risk Factors
Disruptions in our supply chain and other factors affecting the delivery of our products and services could adversely impact our business.
A disruption within our supply chain network could adversely affect our ability to deliver our products and services in a timely manner, cause an increase in wholesale prices and a decrease in supply, lost sales, customer attrition, increased supply chain costs, or damage to our reputation. Such disruptions may result from weather-related events; natural disasters; international trade disputes or trade policy changes or restrictions; tariffs or import-related taxes; third-party strikes, lock-outs, work stoppages or slowdowns; shortages of supply chain labor, including truck drivers; shipping capacity constraints, including shortages of related equipment; third-party contract disputes; supply or shipping interruptions or costs; military conflicts; acts of terrorism; public health issues, including pandemics or quarantines (such as the COVID-19 pandemic) and related shut-downs, re-openings, or other actions by the government; civil unrest; or other factors beyond our control. Recently, U.S. ports, including those located on the East coast where we receive shipments of products, have been impacted by capacity constraints, port congestion and delays, periodic labor disputes, security issues, weather-related events, and natural disasters, which have been further exacerbated by the pandemic. Disruptions to our supply chain due to any of the factors listed above could negatively impact our financial performance or financial condition.
Hurricanes and other natural disasters and extreme weather conditions could also cause disruptions in the power grid, which could prevent our customers from operating their home heating oil systems, thereby reducing our sales. For example, on October 29, 2012, storm Sandy made landfall in our service area, resulting in widespread power outages that affected a number of our customers. Deliveries of home heating oil and propane were less than expected for certain of our customers who were without power for several weeks subsequent to storm Sandy.
Continuing inflation may hurt our sales margins and profitability.
Cost inflation including significant increases in wholesale product costs, labor rates, and domestic transportation costs have and could continue to impact profitability. Continued imbalances between supply and demand for these resources may continue to exert upward pressure on costs. Our ability to recover these cost increases through price increases may continue to lag the cost increases, resulting in downward pressure on our sales margins.
Energy efficiency and new technology may reduce the demand for our products and adversely affect our operating results.
Increased conservation and technological advances, including installation of improved insulation and the development of more efficient furnaces and other heating devices, have adversely affected the demand for our
products by retail customers. Future conservation measures or technological advances in heating, conservation, energy generation or other devices might reduce demand and adversely affect our operating results.
Economic conditions could adversely affect our results of operations and financial condition.
Uncertainty about economic conditions poses a risk as our customers may reduce or postpone spending in response to tighter credit, negative financial news and/or declines in income or asset values, which could have a material negative effect on the demand for our equipment and services and could lead to increased conservation, as we have seen certain of our customers seek lower cost providers. Inflationary economic conditions generally affect us by increasing the cost of employee wages and benefits, transportation costs, product and service cost, credit card processing fees and bad debt from higher selling prices, and borrowings under our credit facility. Any increase in existing customers or potential new customers seeking lower cost providers and/or increase in our rejection rate of potential accounts because of credit considerations could increase our overall rate of net customer attrition. In addition, recessionary economic conditions could negatively impact the spending and financial viability of our customers; particularly our commercial motor fuel customers. As a result, we could experience an increase in bad debts from financially distressed customers, which would have a negative effect on our liquidity, results of operations and financial condition.
The risk of global terrorism and political unrest may adversely affect the economy and the price and availability of the products that we sell and have a material adverse effect on our business, financial condition and results of operations.
Terrorist attacks, political unrest and war may adversely impact the price and availability of the products that we sell, our results of operations, our ability to raise capital and our future growth. The impact that the foregoing may have on our industry in general, and on our business in particular, is not known at this time. An act of terror could result in disruptions of crude oil supplies, markets and facilities, and the source of the products that we sell could be direct or indirect targets. Terrorist activity may also hinder our ability to transport our products if our normal means of transportation become damaged as a result of an attack. Instability in the financial markets as a result of terrorism could also affect our ability to raise capital. Terrorist activity could likely lead to increased volatility in the prices of our products.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B.
UNRESOLVED STAFF COMMENTS
Not applicable.

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ITEM 2. PROPERTIES
ITEM 2.
PROPERTIES
We currently provide services to our customers in the United States in fourteen states and the District of Columbia, ranging from Maine to Maryland from 41 principal operating locations and 77 depots, 51 of which are owned and 67 of which are leased. As of September 30, 2021, we had a fleet of 1,201 truck and transport vehicles, the majority of which were owned, 1,246 service and 390 support vehicles, the majority of which were leased. Our obligations under our Credit Agreement are secured by liens and mortgages on substantially all of the Company’s and subsidiaries’ real and personal property.

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3.
LEGAL PROCEEDINGS-LITIGATION
We are involved from time to time in litigation incidental to the conduct of our business, but we are not currently a party to any material lawsuit or proceeding.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5.
MARKET FOR REGISTRANT’S UNITS AND RELATED MATTERS
The common units, representing limited partner interests in Star, are listed and traded on the New York Stock Exchange, Inc. (“NYSE”) under the symbol “SGU.”
The following tables set forth the range of the daily high and low sales prices per common unit and the cash distributions declared on each unit for the periods indicated.
SGU - Common Unit Price Range
Distributions Declared
High
Low
per Unit
Fiscal
Fiscal
Fiscal
Fiscal
Fiscal
Fiscal
Year
Year
Year
Year
Year
Year
Quarter Ended
December 31,
$
9.98
$
9.79
$
9.07
$
8.91
$
0.1325
$
0.1250
March 31,
$
10.80
$
9.61
$
9.31
$
6.11
$
0.1325
$
0.1250
June 30,
$
12.03
$
8.97
$
10.10
$
7.00
$
0.1425
$
0.1325
September 30,
$
11.89
$
9.95
$
9.58
$
8.38
$
0.1425
$
0.1325
As of November 30, 2021, there were approximately 204 holders of record of common units.
There is no established public trading market for the Company’s 0.3 million general partner units.
Distribution Provisions
We are required to make distributions in an amount equal to our Available Cash, as defined in our Partnership Agreement, no more than 45 days after the end of each fiscal quarter, to holders of record on the applicable record dates. Available Cash, as defined in our Partnership Agreement, generally means all cash on hand at the end of the relevant fiscal quarter less the amount of cash reserves established by the Board of Directors of our general partner in its reasonable discretion for future cash requirements. These reserves are established for the proper conduct of our business (including reserves for future capital expenditures) for minimum quarterly distributions during the next four quarters and to comply with applicable laws and the terms of any debt agreements or other agreement to which we are subject. The Board of Directors of our general partner reviews the level of Available Cash each quarter based upon information provided by management.
According to the terms of our Partnership Agreement, minimum quarterly distributions on the common units accrue at the rate of $0.0675 per quarter ($0.27 on an annual basis). The information concerning restrictions on distributions required by Item 5 of this Report is incorporated by reference to Note 4 to the Company’s Consolidated Financial Statements - Quarterly Distribution of Available Cash. The Credit Agreement imposes certain restrictions on our ability to pay distributions to unitholders. In order to pay any distributions to unitholders or repurchase Common Units, the Company must maintain Availability (as defined in the Credit Agreement) of $45 million, 15.0% of the facility size of $300 million (assuming the non-seasonal aggregate commitment is in effect), 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. (See Note 13 of the Notes to the Consolidated Financial Statements-Long-Term Debt and Bank Facility Borrowings).
On October 21, 2021, we declared a quarterly distribution of $0.1425 per unit, or $0.57 per unit on an annualized basis, on all Common Units with respect to the fourth quarter of fiscal 2021, paid on November 9, 2021, to holders of record on November 1, 2021. The amount of distributions in excess of the minimum quarterly distribution of $0.0675, were distributed in accordance with our Partnership Agreement, subject to management incentive compensation plan. As a result, $5.5 million was paid to the Common Unit holders, $0.3 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 Unit Repurchase Plans and Retirement
Note 5 to the Consolidated Financial Statements concerning the Company’s repurchase of Common Units during the fiscal year ended September 30, 2021 is incorporated into this Item 5 by reference.

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6.
(RESERVED)

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Statement Regarding Forward-Looking Disclosure
This Annual Report on Form 10-K (this “Report”) includes “forward-looking statements” which represent our expectations or beliefs concerning future events that involve risks and uncertainties, including those associated with the severity and duration of the novel coronavirus, or COVID-19, pandemic, the pandemic’s impact on the U.S. and global economies, the timing, scope and effectiveness of federal, state and local governmental responses to the pandemic, the effect of weather conditions on our financial performance, the price and supply of the products that we sell, the consumption patterns of our customers, our ability to obtain satisfactory gross profit margins, our ability to obtain new customers and retain existing customers, our ability to make strategic acquisitions, the impact of litigation, our ability to contract for our current and future supply needs, natural gas conversions, future union relations and the outcome of current and future union negotiations, the impact of current and future governmental regulations, including climate change, environmental, health, and safety regulations, the ability to attract and retain employees, customer credit worthiness, counterparty credit worthiness, marketing plans, cyber-attacks, inflation, global supply chain issues, labor shortages, 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 heading “Risk Factors” and “Business Strategy.” Important factors that could cause actual results to differ materially from our expectations (“Cautionary Statements”) are disclosed in this Report. Currently, one of the most significant factors, however, is the potential adverse effect of the current pandemic of the novel coronavirus, or COVID-19, on the financial condition, results of operations, cash flows and performance of the Company, its customers and counterparties, and the global economy and financial markets. The extent to which COVID-19 impacts us and our customers will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, the direct and indirect economic effects of the pandemic and containment measures, among others. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the Cautionary Statements. Unless otherwise required by law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this Report.
Impact of COVID 19 - A Global Pandemic on our Operations and Outlook
In December 2019, there was an outbreak of a new strain of coronavirus (“COVID-19”). On March 11, 2020, the World Health Organization characterized the outbreak of COVID-19 as a global pandemic and recommended containment and mitigation measures. The United States declared a national emergency concerning the outbreak, which adversely impacted global activity and contributed to significant declines and volatility in financial markets. Public health and governmental authorities nationally and in affected regions have taken and continue to take extraordinary and wide-ranging actions to contain and combat the outbreak and spread of COVID-19, including restrictions on travel and business operations, quarantines, and orders and similar mandates for many individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations.
To date, we have not experienced any supply chain issues impacting our ability to deliver petroleum products to our customers. However, we have experienced and may continue to see disruptions in the procurement of service and installation materials. Since March 2020, we have implemented various measures in response to the COVID-19 pandemic, such as a majority of our office personnel working remotely. While these measures have not significantly impacted our ability to serve our customers to date, these measures may become strained or result in service delays.
As a result of the COVID-19 pandemic, and in order to protect the safety and health of our workforce and our customers, we have expanded certain employee benefit programs and will incur additional operating costs such as sanitizing our facilities, providing personal protective equipment for our employees and providing IT infrastructure to allow many office, clerical, sales and customer service employees to work from home. At this time, we expect the annual cost of these undertakings to be approximately $2.0 million.
The decline in economic activity impacted our motor fuels business in the third and fourth quarters of fiscal 2020 as well as the first and second quarter of fiscal 2021. However, we did experience an increase in motor fuel volumes sold in the third and fourth quarter of fiscal 2021 compared to the third and fourth quarter of fiscal 2020. While it has not yet materially impacted our ability to serve our customers, a combination of continued higher than normal unemployment benefits and an increased desire of prospective employees to work from home has impacted our ability to fully staff our customer service, sales and other functions. In addition, we expect that we will experience an increase in wage rates to fill these positions and we might need to adjust the current wage rates of existing employees. We cannot predict how long this staffing issue will continue, but the shortage in conjunction with any kind of spike in customer activity could cause unacceptable delays in response times and increase customer losses.
As of September 30, 2021, we had accounts receivable of $99.7 million, of which $60.9 million was due from residential customers and $38.8 million due from commercial customers. Our ability to borrow from our bank group is based in part on the aging of these accounts receivable. If past due balances that do not meet the eligibility tests as found in our fifth amended and restated credit agreement increase from historic levels, our future ability to borrow would be reduced.
The Company has taken advantage of certain tax and legislative actions which permitted the Company to defer certain calendar 2020 payroll tax withholdings to calendar 2021 and 2022; approximately half of which were paid in fiscal 2021.
The extent of the impact of the COVID-19 pandemic on our operational and financial performance, including our ability to execute our business strategies and initiatives, will depend on future developments, including the duration and spread of COVID-19 and related restrictions on travel and general mobility, the price of petroleum products and the timing, scope and effectiveness of federal, state and local governmental responses, all of which are uncertain and cannot be predicted. An extended period of global supply chain and economic disruption caused by COVID-19 and its variants could materially affect our business, results of operations, access to sources of liquidity and financial condition.
Impact on Liquidity of Increases and Decreases in Wholesale Product Cost
Our liquidity is adversely impacted in times of increasing wholesale product costs, as we must use more cash to fund our hedging requirements as well as the increased levels of accounts receivable and inventory. This may result in higher interest expense as a result of increased working capital borrowing to finance higher receivables and/or inventory balances. We may also incur higher bad debt expense and credit card processing costs as a result of higher selling prices as well as higher vehicle fuel costs due to the increase in energy costs. While our liquidity is impacted by initial margin requirements for new future positions used to hedge our inventory, it can also be adversely impacted by sudden and sharp decreases in wholesale product costs, due to the increased margin requirements for futures contracts. Likewise, our liquidity and collateral requirements are impacted by the fluctuating cost of options and swaps used to manage the market risks associated with our inventory and protected price customers.
Liquid Product Price Volatility
Volatility, which is reflected in the wholesale price of liquid products, including home heating oil, propane and motor fuels, has a larger impact on our business when prices rise. Consumers are price sensitive to heating cost increases, which can lead to increased gross customer losses. As a commodity, the price of home heating oil is generally impacted by many factors, including economic and geopolitical forces, and, most recently, the COVID-19 pandemic, and is closely linked to the price of diesel fuel. The volatility in the wholesale cost of diesel fuel as measured by the New York Mercantile Exchange (“NYMEX”), for the fiscal years ending September 30, 2017, through 2021, on a quarterly basis, is illustrated in the following chart (price per gallon):
Fiscal 2021 (a)
Fiscal 2020
Fiscal 2019
Fiscal 2018
Fiscal 2017
Quarter Ended
Low
High
Low
High
Low
High
Low
High
Low
High
December 31
$
1.08
$
1.51
$
1.86
$
2.05
$
1.66
$
2.44
$
1.74
$
2.08
$
1.39
$
1.70
March 31
1.46
1.97
0.95
2.06
1.70
2.04
1.84
2.14
1.49
1.70
June 30
1.77
2.16
0.61
1.22
1.78
2.12
1.96
2.29
1.37
1.65
September 30
1.91
2.34
1.08
1.28
1.75
2.08
2.05
2.35
1.45
1.86
a)
On November 30, 2021, the NYMEX ultra low sulfur diesel contract closed at $2.06 per gallon or $0.27 per gallon higher than the average of $1.79 in Fiscal 2021.
Income Taxes
Book versus Tax Deductions
The amount of cash flow generated in any given year depends upon a variety of factors including the amount of cash income taxes required, which will increase as depreciation and amortization decreases. The amount of depreciation and amortization that we deduct for book (i.e., financial reporting) purposes will differ from the amount that the Company can deduct for Federal tax purposes. The table below compares the estimated depreciation and amortization for book purposes to the amount that we expect to deduct for Federal tax purposes, based on currently owned assets. While we file our tax returns based on a calendar year, the amounts below are based on 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
(in thousands) Fiscal Year
Book
Tax
$
34,457
$
39,473
31,246
22,606
27,198
20,820
22,632
20,111
17,998
18,967
14,086
18,142
Weather Hedge Contracts
Weather conditions have a significant impact on the demand for home heating oil and propane because certain customers depend on these products principally for space heating purposes. Actual weather conditions may vary substantially from year to year, significantly affecting the Company’s financial performance. To partially mitigate the adverse effect of warm weather on cash flow, we have used weather hedging contracts for a number of years with several providers.
Under these contracts, we are entitled to a payment if the total number of degree days within the hedge period is less than the applicable “Payment Thresholds,” or strikes. The hedge period runs from November 1 through March 31, taken as a whole, for each respective fiscal year. For fiscal 2021 we recorded a $3.4 million benefit, and for fiscal 2020 we recorded a benefit of $10.1 million.
For fiscal 2022, we entered into weather hedging contracts under which we are entitled to a payment capped at $12.5 million if degree days are less than the Payment Threshold and we are obligated to make an annual payment capped at $5.0 million if degree days exceed the Payment Threshold. The hedge period runs from November 1, 2021 through March 31, 2022 taken as a whole.
Per Gallon Gross Profit Margins
We believe home heating oil and propane margins should be evaluated on a cents per gallon basis (before the effects of increases or decreases in the fair value of derivative instruments), as we believe that such per gallon margins are best at showing profit trends in the underlying business, without the impact of non-cash changes in the market value of hedges before the settlement of the underlying transaction.
A significant portion of our home heating oil volume is sold to individual customers under an arrangement pre-establishing a ceiling price or fixed price for home heating oil over a set period of time, generally twelve to twenty-four months (“price-protected” customers). When these price-protected customers agree to purchase home heating oil from us for the next heating season, we purchase option contracts, swaps and futures contracts for a substantial majority of the heating oil that we expect to sell to these customers. The amount of home heating oil volume that we hedge per price-protected customer is based upon the estimated fuel consumption per average customer per month. In the event that the actual usage exceeds the amount of the hedged volume on a monthly basis, we may be required to obtain additional volume at unfavorable costs. In addition, should actual usage in any month be less than the hedged volume, our hedging costs and losses could be greater, thus reducing expected margins.
Derivatives
FASB ASC 815-10-05 Derivatives and Hedging requires that derivative instruments be recorded at fair value and included in the consolidated balance sheet as assets or liabilities. To the extent our interest rate derivative instruments designated as cash flow hedges are effective, as defined under this guidance, changes in fair value are recognized in other comprehensive income until the forecasted hedged item is recognized in earnings. We have elected not to designate our commodity derivative instruments as hedging instruments under this guidance and, as a result, the changes in fair value of the derivative instruments are recognized in our statement of operations. Therefore, we experience volatility in earnings as outstanding derivative instruments are marked to market and non-cash gains and losses are recorded prior to the sale of the commodity to the customer. The volatility in any given period related to unrealized non-cash gains or losses on derivative instruments can be significant to our overall results. However, we ultimately expect those gains and losses to be offset by the cost of product when purchased.
Customer Attrition
We measure net customer attrition on an ongoing basis for our full service residential and commercial home heating oil and propane customers. Net customer attrition is the difference between gross customer losses and customers added through marketing efforts. Customers added through acquisitions are not included in the calculation of gross customer gains. However, additional customers that are obtained through marketing efforts or lost at newly acquired businesses are included in these calculations. Customer attrition percentage calculations include customers added through acquisitions in the denominators of the calculations on a weighted average basis. Gross customer losses are the result of a number of factors, including price competition, move-outs, credit losses, conversions to natural gas and service disruptions. When a customer moves out of an existing home, we count the “move out” as a loss, and if we are successful in signing up the new homeowner, the “move in” is treated as a gain. The economic impact of COVID-19 could increase future attrition due to higher losses from credit related issues.
Customer gains and losses of home heating oil and propane customers
Fiscal Year Ended
Net
Net
Net
Gross Customer
Gains /
Gross Customer
Gains /
Gross Customer
Gains /
Gains
Losses
(Attrition)
Gains
Losses
(Attrition)
Gains
Losses
(Attrition)
First Quarter
19,100
19,900
(800
)
23,900
23,100
26,200
25,400
Second Quarter
12,600
17,800
(5,200
)
12,600
18,200
(5,600
)
12,600
22,300
(9,700
)
Third Quarter
6,700
12,300
(5,600
)
8,000
13,600
(5,600
)
7,100
15,900
(8,800
)
Fourth Quarter
9,500
14,900
(5,400
)
10,700
15,800
(5,100
)
13,200
20,600
(7,400
)
Total
47,900
64,900
(17,000
)
55,200
70,700
(15,500
)
59,100
84,200
(25,100
)
Customer gains (attrition) as a percentage of home heating oil and propane customer base
Fiscal Year Ended
Gross Customer
Net
Gross Customer
Net
Gross Customer
Net
Gains
Losses
Gains /
(Attrition)
Gains
Losses
Gains /
(Attrition)
Gains
Losses
Gains /
(Attrition)
First Quarter
4.4
%
4.6
%
(0.2
)%
5.3
%
5.1
%
0.2
%
5.8
%
5.6
%
0.2
%
Second Quarter
2.9
%
4.1
%
(1.2
)%
2.8
%
4.0
%
(1.2
)%
2.8
%
5.0
%
(2.2
)%
Third Quarter
1.3
%
2.6
%
(1.3
)%
1.8
%
3.0
%
(1.2
)%
1.6
%
3.5
%
(1.9
)%
Fourth Quarter
2.1
%
3.3
%
(1.2
)%
2.3
%
3.5
%
(1.2
)%
2.7
%
4.2
%
(1.5
)%
Total
10.7
%
14.6
%
(3.9
)%
12.2
%
15.6
%
(3.4
)%
12.9
%
18.3
%
(5.4
)%
For fiscal 2021, the Company lost 17,000 accounts (net), or 3.9%, of its home heating oil and propane customer base, compared to 15,500 accounts lost (net), or 3.4%, of its home heating oil and propane customer base, during fiscal 2020. Gross customer gains were 7,300 less than the prior year’s comparable period, and gross customer losses were 5,800 accounts lower. The 1,500 account increase in net customer attrition was negatively impacted by the sale of certain propane assets in October 2020, which generated approximately 1,100 accounts (net) through September 30, 2020 as compared to approximately 100 accounts (net) in October 2020.
For fiscal 2020, the Company lost 15,500 accounts (net), or 3.4%, of its home heating oil and propane customer base, compared to 25,100 accounts lost (net), or 5.4%, of its home heating oil and propane customer base, during fiscal 2019. The Company’s net customer attrition improved by 9,600 accounts. Gross customer gains were 3,900 less than the prior year’s comparable period, and gross customer losses were 13,500 accounts lower.
During fiscal 2021, we estimate that we lost (1.1%) of our home heating oil and propane accounts to natural gas conversions versus (1.1%) for fiscal 2020 and (1.4%) for fiscal 2019. Losses to natural gas in our footprint for the heating oil and propane industry could be greater or less than the Company’s estimates.
Acquisitions
The timing of acquisitions and the types of products sold by acquired companies impact year-over-year comparisons. During fiscal 2021 the Company acquired two propane and three heating oil dealers. During fiscal 2020 the Company acquired two heating oil dealers. The following tables detail the Company’s acquisition activity and the associated volume sold during the 12-month period prior to the date of acquisition.
(in thousands of gallons)
Fiscal 2021 Acquisitions
Acquisition Number
Month of Acquisition
Home Heating Oil and Propane
Motor Fuel and Other Petroleum Products
Total
December
5,452
-
5,452
December
1,318
-
1,318
February
-
March
1,163
-
1,163
April
4,509
4,675
12,747
12,913
(in thousands of gallons)
Fiscal 2020 Acquisitions
Acquisition Number
Month of Acquisition
Home Heating Oil and Propane
Motor Fuel and Other Petroleum Products
Total
October
1,085
-
1,085
July
2,400
-
2,400
3,485
-
3,485
Sale of Propane Assets
In October 2020 we sold propane assets, which included a customer list of approximately 12,300 customers for $7.0 million. The following table details sales generated from the propane assets sold:
Years Ended September 30,
(in thousands)
Volume:
Propane
2,741
2,765
Sales:
Petroleum Products
$
$
5,906
$
6,377
Installations and Services
1,224
1,540
Total Sales
$
$
7,130
$
7,917
Protected Price Account Renewals
A substantial majority of the Company’s price-protected customers have agreements with us that are subject to annual renewal in the period between April and November of each fiscal year. If a significant number of these customers elect not to renew their price-protected agreements with us and do not continue as our customers under a variable price-plan, the Company’s near term profitability, liquidity and cash flow will be adversely impacted. As of November 30, 2021, the wholesale cost of home heating oil as measured by the New York Mercantile Exchange was $2.06 per gallon, approximately $0.69 per gallon higher than at November 30, 2020. Based on these recent prices, our price-protected customers will be offered renewal contracts at significantly higher prices than last year which, may adversely impact the acceptance rate of these renewals.
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 Annual Report.
Fiscal Year Ended September 30, 2021
Compared to Fiscal Year Ended September 30, 2020
Volume
For fiscal 2021, the retail volume of home heating oil and propane sold decreased by 7.7 million gallons, or 2.4%, to 305.9 million gallons, compared to 313.6 million gallons for fiscal 2020. 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 fiscal 2021 were 1.1% warmer than fiscal 2020 and 10.7% warmer than normal, as reported by NOAA. For fiscal 2021, net customer attrition for the base business was 3.7%. The impact of fuel conservation, along with any period-to-period differences in delivery scheduling, the timing of accounts added or lost during the fiscal years, equipment efficiency, and other volume variances not otherwise described, are included in the chart below under the heading “Other.” An analysis of the change in the retail volume of home heating oil and propane, which is based on management’s estimates, sampling, and other mathematical calculations and certain assumptions, is found below:
Heating Oil
(in millions of gallons)
and Propane
Volume - Fiscal 2020
313.6
Net customer attrition
(15.1
)
Impact of warmer temperatures
(3.6
)
Acquisitions
8.1
Sale of certain propane assets
(2.6
)
Other
5.5
Change
(7.7
)
Volume - Fiscal 2021
305.9
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 fiscal 2021 compared to fiscal 2020:
Twelve Months Ended
Customers
September 30,
September 30,
Residential Variable
43.0
%
41.5
%
Residential Price-Protected (Ceiling and Fixed Price)
44.9
%
46.1
%
Commercial/Industrial/Other
12.1
%
12.4
%
Total
100.0
%
100.0
%
Volume of motor fuel and other petroleum products sold increased by 2.3 million gallons, or 1.5%, to 154.1 million gallons for fiscal 2021, compared to 151.8 million gallons for fiscal 2020.
Product Sales
For fiscal 2021, product sales increased 1.5%, to $1,204.3 million, compared to $1,186.0 million in fiscal 2020, largely due to an increase in wholesale product cost of $0.0530 per gallon, or 3.3%.
Installations and Services Sales
For fiscal 2021, installation and service sales increased $11.4 million, or 4.0%, to $292.8 million, compared to $281.4 million for fiscal 2020, as both installation and service sales rebounded from the negative impact of
COVID-19 on economic activity in fiscal 2020.
Cost of Product
For fiscal 2021, cost of product increased $15.9 million, or 2.2%, to $754.6 million, compared to $738.7 million for fiscal 2020, primarily due to the impact of a $0.0530 per gallon, or 3.3%, increase in wholesale product cost.
Gross Profit-Product
The table below calculates our per gallon margins and reconciles product gross profit for home heating oil and propane and motor fuel and other petroleum products. We believe the change in home heating oil and propane margins should be evaluated before the effects of increases or decreases in the fair value of derivative instruments, as we believe that realized per gallon margins should not include the impact of non-cash changes in the market value of hedges before the settlement of the underlying transaction. On that basis, home heating oil and propane margins for fiscal 2021 increased by $0.0410 per gallon, or 3.1%, to $1.3366 per gallon, from $1.2956 per gallon during fiscal 2020. We cannot assume that the per gallon margins realized during fiscal 2021 are sustainable for future periods. Product sales and cost of product include home heating oil, propane, motor fuel, other petroleum products and liquidated damages billings.
Twelve Months Ended
September 30, 2021
September 30, 2020
Home Heating Oil and Propane
Amount
(in millions)
Per
Gallon
Amount
(in millions)
Per
Gallon
Volume
305.9
313.6
Sales
$
881.5
$
2.8816
$
924.4
$
2.9479
Cost
$
472.6
$
1.5450
$
518.1
$
1.6523
Gross Profit
$
408.9
$
1.3366
$
406.3
$
1.2956
Motor Fuel and Other Petroleum Products
Amount
(in millions)
Per
Gallon
Amount
(in millions)
Per
Gallon
Volume
154.1
151.8
Sales
$
322.8
$
2.0951
$
261.6
$
1.7238
Cost
$
282.0
$
1.8304
$
220.6
$
1.4534
Gross Profit
$
40.8
$
0.2647
$
41.0
$
0.2704
Total Product
Amount
(in millions)
Amount
(in millions)
Sales
$
1,204.3
$
1,186.0
Cost
$
754.6
$
738.7
Gross Profit
$
449.7
$
447.3
For fiscal 2021, total product gross profit was $449.7 million, which was $2.4 million, or 0.5%, more than fiscal 2020, primarily due to an increase in home heating oil and propane margins ($12.4 million) that was partially offset by a $10.0 million decrease due to lower home heating oil and propane volume sold.
Cost of Installations and Services
Total installation costs for fiscal 2021 increased to $90.1 million, compared to $83.8 million for fiscal 2020, primarily due to increased installation revenues. Installation costs as a percentage of installation sales for fiscal 2021 and fiscal 2020, were 81.5% and 82.4%, respectively.
Service expense increased by $4.8 million, or 2.9%, to $174.7 million for fiscal 2021, representing 95.9% of service sales, versus $169.9 million, or 94.5% of service sales, for fiscal 2020. Service expense rose as the Company resumed normal service work and activity that was curtailed during fiscal 2020 due to COVID-19.
We realized a combined gross profit from services and installations of $28.0 million for fiscal 2021 compared to a combined gross profit of $27.7 million for fiscal 2020, a $0.3 million improvement in profitability.
Management views the service and installation department on a combined basis because many overhead functions cannot be separated or precisely allocated to either service or installation billings.
(Increase) Decrease in the Fair Value of Derivative Instruments
During fiscal 2021, the change in the fair value of derivative instruments resulted in a $36.1 million credit due to an increase in the market value for unexpired hedges (a $23.6 million credit) and a $12.5 million credit due to the expiration of certain hedged positions.
During fiscal 2020, the change in the fair value of derivative instruments resulted in a $2.8 million charge due to a decrease in the market value for unexpired hedges (a $12.2 million charge) and partially offset by a $9.4 million credit due to the expiration of certain hedged positions.
Delivery and Branch Expenses
For fiscal 2021, delivery and branch expenses increased $4.5 million, or 1.4%, to $327.9 million, compared to $323.4 million for fiscal 2020, as a $6.7 million lower benefit recorded from the Company’s weather hedge and $3.5 million of additional costs from acquisitions was offset by a decline in operating costs in the base business of $5.8 million, or 1.7%. In the base business, the decrease was driven by $3.5 million of lower bad debt and credit card processing fees and other net expense savings of $2.3 million. While temperatures were warmer for fiscal 2021 than the prior year’s comparable period, temperatures during the weather hedge period for fiscal 2021 were colder than fiscal 2020, resulting in a lower weather hedge benefit.
Depreciation and Amortization Expenses
For fiscal 2021, depreciation and amortization expense decreased $1.1 million, or 3.3%, to $33.5 million, compared to $34.6 million for fiscal 2020, primarily due to lower amortization expense related to intangible assets that fully amortized in the prior fiscal year.
General and Administrative Expenses
For fiscal 2021, general and administrative expenses were $25.1 million, essentially unchanged from fiscal 2020, as a $0.6 million decrease in pension expense was offset by a $0.3 million increase in acquisition related expenses and a $0.3 million increase in salaries and benefit expenses.
Finance Charge Income
For fiscal 2021, finance charge income decreased by $0.9 million, or 23.1%, to $2.9 million compared to $3.8 million for fiscal 2020, primarily due to lower customer late payment charges resulting from lower past due receivable balances.
Interest Expense, Net
For fiscal 2021, net interest expense decreased by $1.9 million, or 19.4%, to $7.8 million compared to $9.7 million for fiscal 2020. The year-over-year change reflects a decrease in average borrowings of $23.7 million from $162.7 million for fiscal 2020 to $139.0 million for fiscal 2021, and a decrease in the weighted average interest rate from 4.9% for fiscal 2020 to 4.0% for fiscal 2021. To hedge against rising interest rates, the Company utilizes interest rate swaps. At September 30, 2021, $59.0 million, or 53%, of Star’s long-term debt was fixed.
Amortization of Debt Issuance Costs
For fiscal 2021, amortization of debt issuance costs was $1.0 million, essentially unchanged from fiscal 2020.
Other Loss, Net
In the fourth quarter of fiscal year 2020, we reclassified certain propane assets to assets held for sale on our consolidated balance sheet that were sold in October 2020. As a result, we recorded an impairment charge of $5.7 million, which represents the difference between the fair value less cost to sell and the carrying value of the
assets. See Note 2 to our Consolidated Financial Statements of this Form 10-K for additional details. No similar activity occurred in fiscal 2021.
Income Tax Expense
For fiscal 2021, the Company’s income tax expense increased by $13.1 million to $33.7 million, from $20.6 million for fiscal 2020, due primarily to an increase in income before income taxes of $44.9 million that was driven by a $38.9 million non-cash favorable change in the fair market value of derivative instruments.
Net Income
For fiscal 2021, net income increased $31.8 million, or 56.9%, to $87.7 million, due to a favorable change in the fair value of derivative instruments of $38.9 million, the non-recurrence of the $5.7 million impairment charge recorded in fiscal 2020, lower interest expense of $1.9 million and lower depreciation and amortization expense of $1.1 million that was partially offset by an increase in income tax expense of $13.1 million and a $2.8 million decrease in Adjusted EBITDA, described below
Adjusted EBITDA
For fiscal 2021, Adjusted EBITDA decreased by $2.8 million, or 2.1%, to $127.5 million compared to fiscal 2020. An increase in home heating oil and propane margins ($0.0410 per gallon), lower total operating expenses in the base business ($5.8 million) and the Adjusted EBITDA from acquisitions ($2.8 million) were more than offset by a $6.7 million decline in the benefit recorded from the Company’s weather hedge and a decline in home heating oil and propane volume (7.7 million gallons). While temperatures were warmer for fiscal 2021 than the prior year’s comparable period, temperatures during the weather hedge period for fiscal 2021 were colder than fiscal 2020, hence the lower weather hedge benefit.
EBITDA and Adjusted EBITDA should not be considered as an alternative to net income (as an indicator of operating performance) or as an alternative to cash flow (as a measure of liquidity or ability to service debt obligations), but provide additional information for evaluating the Company’s ability to make the Minimum Quarterly Distribution.
EBITDA and Adjusted EBITDA are calculated as follows:
Twelve Months Ended
September 30,
(in thousands)
Net income
$
87,737
$
55,918
Plus:
Income tax expense
33,675
20,625
Amortization of debt issuance cost
Interest expense, net
7,816
9,702
Depreciation and amortization
33,485
34,623
EBITDA (a)
163,685
121,867
(Increase) / decrease in the fair value of derivative instruments
(36,138
)
2,755
Other loss, net
-
5,724
Adjusted EBITDA (a)
127,547
130,346
Add / (subtract)
Income tax expense
(33,675
)
(20,625
)
Interest expense, net
(7,816
)
(9,702
)
(Recovery) provision for losses on accounts receivable
(248
)
3,441
(Increase) decrease in receivables
(15,171
)
34,366
(Increase) decrease in inventories
(11,472
)
14,588
Increase in customer credit balances
3,054
14,775
Change in deferred taxes
11,361
(3,544
)
Change in other operating assets and liabilities
(4,703
)
12,023
Net cash provided by operating activities
$
68,877
$
175,668
Net cash used in investing activities
$
(50,326
)
$
(28,141
)
Net cash used in financing activities
$
(70,695
)
$
(95,515
)
(a)
EBITDA (Earnings from continuing operations before net interest expense, income taxes, depreciation and amortization) and Adjusted EBITDA (Earnings from continuing operations before net interest expense, income taxes, depreciation and amortization, (increase) decrease in the fair value of derivatives, other income (loss), net, multiemployer pension plan withdrawal charge, gain or loss on debt redemption, goodwill impairment, and other non-cash and non-operating charges) are non-GAAP financial measures that are used as supplemental financial measures by management and external users of our financial statements, such as investors, commercial banks and research analysts, to assess:
•
our compliance with certain financial covenants included in our debt agreements;
•
our financial performance without regard to financing methods, capital structure, income taxes or historical cost basis;
•
our operating performance and return on invested capital compared to those of other companies in the retail distribution of refined petroleum products, without regard to financing methods and capital structure;
•
our ability to generate cash sufficient to pay interest on our indebtedness and to make distributions to our partners; and
•
the viability of acquisitions and capital expenditure projects and the overall rates of return of alternative investment opportunities.
The method of calculating Adjusted EBITDA may not be consistent with that of other companies, and EBITDA and Adjusted EBITDA both have limitations as analytical tools and so should not be viewed in isolation 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:
•
EBITDA and Adjusted EBITDA do not reflect our cash used for capital expenditures;
•
Although depreciation and amortization are non-cash charges, the assets being depreciated or amortized often will have to be replaced and EBITDA and Adjusted EBITDA do not reflect the cash requirements for such replacements;
•
EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital requirements;
•
EBITDA and Adjusted EBITDA do not reflect the cash necessary to make payments of interest or principal on our indebtedness; and
•
EBITDA and Adjusted EBITDA do not reflect the cash required to pay taxes.
Fiscal Year Ended September 30, 2020
Compared to Fiscal Year Ended September 30, 2019
See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations within the Form 10-K for the fiscal year ended September 30, 2020 for the fiscal 2020 to fiscal 2019 comparative discussion.
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 quarters) when customer payments exceed the cost of deliveries.
During fiscal 2021, cash provided by operating activities decreased $106.8 million to $68.9 million, compared to $175.7 million of cash provided by operating activities during fiscal 2020. The decrease was driven by a $61.3 million unfavorable change in accounts receivable (including customer credit balances) due primarily to higher sales in the fourth quarter of fiscal 2021 as compared to the fourth quarter of fiscal 2020, a $26.1 million unfavorable change in inventory due primarily to the higher cost of liquid product on hand as of September 30, 2021 as compared to September 30, 2020, a $11.5 million unfavorable change in payroll accruals due to timing, a $9.1 million unfavorable change in cash posted as collateral at derivative counterparties due to higher NYMEX ultra low sulfur diesel contract pricing as of September 30, 2021 as compared to September 30, 2020, $7.8 million of net payroll taxes deferred from fiscal 2020 to fiscal 2021 as a result of certain tax and legislative actions, and a $2.7 million reduction in cash from operations that was partially offset by a $10.1 million favorable change in accounts payable due to the pricing and timing of inventory purchases, and $1.6 million of other changes in working capital.
During fiscal 2020, cash provided by operating activities increased $78.3 million to $175.7 million, compared to $97.4 million during fiscal 2019. This reflects a $35.4 million favorable change in accounts receivables (net of customer credit balances) due to improved collections and lower sales volume at lower selling prices, a $20.9 million favorable change in inventory primarily due to lower cost of liquid product on hand as of September 30, 2020 as compared to September 30, 2019, a $18.8 million increase in cash generated from operations, $6.5 million of certain payroll tax withholdings related to fiscal 2020 that are deferred to calendar 2021 and 2022 as a result of certain tax and legislative actions, and $3.3 million of other net changes in working capital.
Investing Activities
Our capital expenditures for fiscal 2021 totaled $15.1 million, as we invested in computer hardware and software ($3.2 million), refurbished certain physical plants ($2.8 million), expanded our propane operations ($2.3 million) and made additions to our fleet and other equipment ($6.8 million).
During fiscal 2021, we reinvested $1.1 million into an irrevocable trust to secure certain liabilities for our captive insurance company. The cash deposited into the trust is shown on our balance sheet as captive insurance collateral and, correspondingly, reduced cash on our balance sheet. We believe that investments into the irrevocable trust 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 fiscal 2021, the Company acquired two propane and three heating oil dealers for an aggregate purchase price of $42.5 million; $40.7 million in cash and $1.8 million of deferred liabilities. The gross purchase price was allocated $37.3 million to goodwill and intangible assets and $6.2 million to fixed assets, and reduced by $1.0 million in working capital credits.
On October 27, 2020, the Company sold certain propane assets for cash proceeds of $6.1 million.
Our capital expenditures for fiscal 2020 totaled $14.1 million, as we invested in computer hardware and software ($3.5 million), refurbished certain physical plants ($2.8 million), expanded our propane operations ($1.4 million) and made additions to our fleet and other equipment ($6.4 million).
During fiscal 2020, we deposited $8.9 million into an irrevocable trust to secure certain liabilities for our captive insurance company and another $1.5 million of earnings were reinvested into the irrevocable trust.
During fiscal 2020, the Company acquired two oil dealers for an aggregate purchase price of approximately $3.0 million in cash and $0.3 million of deferred liabilities. The gross purchase price was allocated $3.2 million to goodwill and intangible assets and $0.6 million to fixed assets, and reduced by $0.5 million in working capital credits. The Company also completed the purchase of assets related to our fiscal 2019 acquisition of a heating oil dealer for an aggregate purchase price of approximately $1.2 million.
Financing Activities
During fiscal 2021, we repaid $13.0 million of our term loan, borrowed $75.2 million and subsequently repaid $66.5 million under our revolving credit facility, repurchased 4.3 million Common Units for $42.8 million primarily in connection with our unit repurchase plan, and paid distributions of $22.4 million to our Common Unit holders and $1.0 million to our General Partner unit holders (including $0.9 million of incentive distributions as provided in our Partnership Agreement).
During fiscal 2020, we refinanced our five-year term loan and the revolving credit facility with the execution of the fifth amended and restated revolving credit facility agreement. The $130 million of proceeds from the new term loan were used to repay the $90.0 million outstanding balance of the term loan, $39.0 million of the revolving credit facility borrowings under the old credit facility, and $1.0 million of debt issuance costs. We also paid an additional $0.6 million of debt issuance costs, repaid an additional net balance of $22.5 million under our revolving credit facility, repaid an additional $9.0 million of our term loan, repurchased 4.4 million Common Units for $38.4 million in connection with our unit repurchase plan, and paid distributions of $23.5 million to our Common Unit holders and $0.9 million to our General Partner unit holders (including $0.8 million of incentive distributions as provided in our Partnership Agreement).
FINANCING AND SOURCES OF LIQUIDITY
Liquidity and Capital Resources Comparatives
Our primary uses of liquidity are to provide funds for our working capital, capital expenditures, distributions on our units, acquisitions and unit repurchases. Our ability to provide funds for such uses depends on our future performance, which will be subject to prevailing economic, financial, and business conditions, especially in light of the impact of COVID-19, weather, the ability to collect current and future accounts receivable, the ability to pass on the full impact of high product costs to customers, the effects of high net customer attrition, conservation and other factors. Capital requirements, at least in the near term, are expected to be provided by cash flows from operating activities, cash on hand as of September 30, 2021 ($4.8 million) or a combination thereof. To the extent future capital requirements exceed cash on hand plus cash flows from operating activities, we anticipate that working capital will be financed by our revolving credit facility, as discussed below, and from subsequent seasonal reductions in inventory and accounts receivable. As of September 30, 2021, we had accounts receivable of $99.7 million of which $60.9 million is due from residential customers and $38.8 million is due from commercial
customers. Our ability to borrow from our bank group is based in part on the aging of these accounts receivable. If these balances do not meet the eligibility tests as found in our fifth amended and restated credit agreement, our ability to borrow will be reduced and our anticipated cash flow from operating activities will also be reduced. As of September 30, 2021, we had $8.6 million borrowings under our revolving credit facility, $110.5 million outstanding under our term loan, $3.1 million in letters of credit outstanding, and no hedge positions were secured with the bank group.
Under the terms of the fifth amended and restated credit agreement, we must maintain at all times Availability (borrowing base less amounts borrowed and letters of credit issued) of 15% of the maximum facility size and a fixed charge coverage ratio of not less than 1.15. We must also maintain a senior secured leverage ratio that cannot be more than 3.0 as of June 30th or September 30th, and no more than 4.5 as of December 31st or March 31st. As of September 30, 2021, Availability, as defined in the fifth amended and restated revolving credit facility agreement, was $171.5 million and we were in compliance with the fixed charge coverage ratio and senior secured leverage ratio.
Maintenance capital expenditures for fiscal 2022 are estimated to be approximately $15.8 million, excluding the capital requirements for leased fleet which we currently estimate to be $10.9 million. In addition, we plan to invest approximately $4.0 million in our propane operations. Distributions for fiscal 2022, at the current quarterly level of $0.1425 per unit, would result in aggregate payments of approximately $22.0 million to Common Unit holders, $1.1 million to our General Partner (including $1.0 million of incentive distribution as provided for in our Partnership Agreement) and $1.0 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. We are also required to make an additional term loan repayments due to Excess Cash Flow of $4.6 million in December 2021 (see Note 13 - Long-Term Debt and Bank Facility Borrowings). Further, subject to any additional liquidity issues or concerns resulting from the current COVID-19 pandemic, we intend to continue to repurchase Common Units pursuant to our unit repurchase plan, as amended from time to time, and seek attractive acquisition opportunities within the Availability constraints of our revolving credit facility and funding resources.
Contractual Obligations and Off-Balance Sheet Arrangements
We have no special purpose entities or off balance sheet debt.
Long-term contractual obligations, except for our long-term debt and New England Teamsters and Trucking Industry Pension Fund withdrawal obligations and operating leases liabilities, are not recorded in our consolidated balance sheet. Non-cancelable purchase obligations are obligations we incur during the normal course of business, based on projected needs. The Company had no capital lease obligations as of September 30, 2021.
The table below summarizes the payment schedule of our contractual obligations at September 30, 2021 (in thousands):
Payments Due by Fiscal Year
Total
and 2024
and 2026
Thereafter
Debt obligations (a)
$
119,118
$
26,239
$
26,000
$
66,879
$
-
Operating lease obligations (b)
119,575
21,920
37,693
28,741
31,221
Purchase obligations and other (c)
62,742
12,486
10,826
6,808
32,622
Interest obligations (d)
18,402
8,811
8,969
-
Long-term liabilities reflected on the balance sheet
-
-
$
320,333
$
69,806
$
83,634
$
103,050
$
63,843
(a)
Reflects payments due of debt existing as of September 30, 2021, considering the terms of our fifth amended and restated credit agreement. (See Note 13 - Long-Term Debt and Bank Facility Borrowings)
(b)
Represents various operating leases for office space, trucks, vans and other equipment with third parties. Maturities of operating leases are presented undiscounted. (See Note 16 - Leases)
(c)
Represents non-cancelable commitments as of September 30, 2021 for operations such as customer related invoice and statement processing, voice and data phone/computer services, real estate taxes on leased property
and our undiscounted future payment obligations to the New England Teamsters and Trucking Industry Pension Fund.
(d)
Reflects interest obligations on our term loan due December 2024 and the unused commitment fee on the revolving credit facility.
Recent Accounting Pronouncements
Refer to Note 2 - Summary of Significant Accounting Policies for discussion regarding the impact of accounting standards that were recently issued but not yet effective, on our consolidated financial statements.
Critical Accounting Policy and Critical Accounting Estimates
The preparation of financial statements in conformity with Generally Accepted Accounting Principles requires management to establish accounting policies and make estimates and assumptions that affect reported amounts of assets and liabilities at the date of the Consolidated Financial Statements. The Company evaluates its policies and estimates on an on-going basis. A change in any of these critical accounting policies and estimates could have a material effect on the results of operations. The Company’s Consolidated Financial Statements may differ based upon different estimates and assumptions. The Company’s critical accounting policies and estimates have been reviewed with the Audit Committee of the Board of Directors.
Our significant accounting policies are discussed in Note 2 of the Notes to the Consolidated Financial Statements. We believe the following are our critical accounting policies and estimates:
Critical Accounting Policy
Fair Values of Derivatives
FASB ASC 815-10-05, Derivatives and Hedging, requires that derivative instruments be recorded at fair value and included in the consolidated balance sheet as assets or liabilities. The Company has elected not to designate its commodity derivative instruments as hedging instruments under this guidance, and therefore the change in fair value of those derivative instruments are recognized in our statement of operations.
We have established the fair value of our derivative instruments using estimates determined by our counterparties and subsequently evaluated them internally using established index prices and other sources. These values are based upon, among other things, future prices, volatility, time-to-maturity value and credit risk. The estimate of fair value we report in our financial statements changes as these estimates are revised to reflect actual results, changes in market conditions, or other factors, many of which are beyond our control.
Critical Accounting Estimates
Our significant accounting policies are discussed in Note 2 of the Notes to the Consolidated Financial Statements. We believe the following are our critical accounting policies and estimates:
Self-Insurance Liabilities
We currently self-insure a portion of workers’ compensation, auto, general liability and medical claims. We establish and periodically evaluate self-insurance liabilities based upon expectations as to what our ultimate liability may be for outstanding claims using developmental factors based upon historical claim experience, including frequency, severity, demographic factors and other actuarial assumptions, supplemented with the support of a qualified third-party actuary. As of September 30, 2021, we had approximately $80.6 million of self-insurance liabilities. The ultimate resolution of these claims could differ materially from the assumptions used to calculate the self-insurance liabilities, which could have a material adverse effect on results of operations.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A.
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 September 30, 2021, we had outstanding borrowings totaling $119.1 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 $0.9 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. 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 September 30, 2021, the potential impact on our hedging activity would be to increase the fair market value of these outstanding derivatives by $15.8 million to a fair market value of $43.6 million; and conversely a hypothetical ten percent decrease in the cost of product would decrease the fair market value of these outstanding derivatives by $13.8 million to a fair market value of $14.0 million.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and financial statement schedules referred to in the index contained on page of this Report are incorporated herein by reference.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

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ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A.
CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Our general partner’s chief executive officer and our 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 September 30, 2021. 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 September 30, 2021 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 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 our chief executive officer and chief financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
(b) Management’s Report on Internal Control over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) under the Securities Exchange Act of 1934, as amended. Under the supervision of management and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our evaluation of internal control over financial reporting, our management concluded that our internal control over financial reporting was effective as of September 30, 2021.
The effectiveness of our internal control over financial reporting as of September 30, 2021 has been audited by our independent registered public accounting firm, as stated in their report which is included at Item 8 - Financial Statements and Supplementary Data.
(c) Change in Internal Control over Financial Reporting.
There were no changes in our internal control over financial reporting during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
(d) Other
Our 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 the 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 our general partner have concluded, as of September 30, 2021, that our disclosure controls and procedures were effective in achieving that level of reasonable assurance.

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ITEM 9B. OTHER INFORMATION
ITEM 9B.
OTHER INFORMATION
Not applicable.
PART III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Partnership Management
Our general partner is Kestrel Heat. The Board of Directors of Kestrel Heat is appointed by its sole member, Kestrel, which is a private equity investment partnership formed by Yorktown Energy Partners VI, L.P., Paul A. Vermylen Jr. and other investors.
Kestrel Heat, as our general partner, oversees our activities. Unitholders do not directly or indirectly participate in our management or operation or elect the directors of the general partner. The Board of Directors (sometimes referred to as the “Board”) of Kestrel Heat has adopted a set of Partnership Governance Guidelines in accordance with the requirements of the New York Stock Exchange. A copy of these Guidelines is available on our website at www.stargrouplp.com or a copy may be obtained without charge by contacting Richard F. Ambury, (203) 328-7310.
As of November 30, 2021, Kestrel Heat owned 325,729 general partner units. In November 2021, Kestrel Heat made an in-kind distribution of 500,000 common units, representing approximately 1% of the issued and outstanding common units, to Kestrel, which, in turn, made an in-kind distribution of such units, pro rata, to its members.
The general partner owes a fiduciary duty to the unitholders. However, our Partnership Agreement contains provisions that allow the general partner to take into account the interests of parties other than the limited partners in resolving conflict of interest, thereby limiting such fiduciary duty. Notwithstanding any limitation on obligations or duties, the general partner will be liable, as our general partner, for all our debts (to the extent not paid by us), except to the extent that indebtedness or other obligations incurred by us are made specifically non-recourse to the general partner.
The general partner does not directly employ any of the persons responsible for managing or operating Star.
Directors and Executive Officers of the General Partner
Directors are appointed for an indefinite term, subject to the discretion of Kestrel. The following table shows certain information for directors and executive officers of the general partner as of November 30, 2021:
Name
Age
Position
Paul A. Vermylen, Jr.
Chairman, Director
Jeffrey M. Woosnam
President, Chief Executive Officer and Director
Richard F. Ambury
Chief Financial Officer, Executive Vice President, Treasurer and Secretary
Jeffrey S. Hammond
Chief Operating Officer
Joseph R. McDonald
Chief Customer Officer
Henry D. Babcock(1)
Director
C. Scott Baxter(1)
Director
David M. Bauer(1)
Director
Daniel P. Donovan
Director
Bryan H. Lawrence
Director
William P. Nicoletti (1)
Director
(1)
Audit Committee member
Paul A. Vermylen, Jr. Mr. Vermylen has been the Chairman and a director of Kestrel Heat since April 28, 2006. Mr. Vermylen is a founder of Kestrel and has served as its President and as a manager since July 2005. Mr. Vermylen had been employed since 1971, serving in various capacities, including as a Vice President of Citibank N.A. and Vice President-Finance of Commonwealth Oil Refining Co. Inc. Mr. Vermylen served as Chief Financial Officer of Meenan Oil Co., L.P. (“Meenan”) from 1982 until 1992 and as President of Meenan until 2001, when we acquired Meenan. Since 2001, Mr. Vermylen has pursued private investment opportunities.
Mr. Vermylen serves as a director of certain non-public companies in the energy industry in which Kestrel holds equity interests including Downeast LNG, Inc. Mr. Vermylen is a graduate of Georgetown University and has an M.B.A. from Columbia University.
Mr. Vermylen’s substantial experience in the home heating oil industry and his leadership skills and experience as an executive officer of Meenan, among other factors, led the Board to conclude that he should serve as the Chairman and a director of Kestrel Heat.
Jeffrey M. Woosnam. Mr. Woosnam has been President, Chief Executive Officer and a director of Kestrel Heat since March 18, 2019. From May 2014 to March 2019, Mr. Woosnam served as Senior Vice President, Southern Operations. From April 2007 to May 2014, Mr. Woosnam served as Vice President, Southern Operations. From 2006 to 2007, he served as the Director of Operations for Petroleum Heat and Power Company, a subsidiary of the Company. From 1994 to 2006, he held several General Management positions for Petro, Inc. with increasing levels of responsibility.
Mr. Woosnam’s in-depth knowledge of the Company’s business and his substantial experience in the home heating oil industry, among other factors, led the Board to conclude that he should serve as a director of Kestrel Heat.
Richard F. Ambury. Mr. Ambury has been Executive Vice President of Kestrel Heat since May 1, 2010 and has been Chief Financial Officer, Treasurer and Secretary of Kestrel Heat since April 28, 2006. Mr. Ambury was Chief Financial Officer, Treasurer and Secretary of Star Group from May 2005 until April 28, 2006. From November 2001 to May 2005, Mr. Ambury was Vice President and Treasurer of Star Group. From March 1999 to November 2001, Mr. Ambury was Vice President of Star Gas Propane, L.P. From February 1996 to March 1999, Mr. Ambury served as Vice President-Finance of Star Gas Corporation, a predecessor general partner. Mr. Ambury was employed by Petroleum Heat and Power Co., Inc. from June 1983 through February 1996, where he served in various accounting/finance capacities. From 1979 to 1983, Mr. Ambury was employed by a predecessor firm of KPMG, a public accounting firm. Mr. Ambury has been a Certified Public Accountant since 1981.
Jeffrey S. Hammond. Mr. Hammond has been Chief Operating Officer of Kestrel Heat since March 18, 2019. From October 2013 to March 2019, he served as Senior Vice President, Northern Operations. From April 2007 to October 2013, Mr. Hammond served as Vice President, Northern Operations. From 2006 to 2007, he served as the Director of Operations for Petro Holdings, Inc., a subsidiary of the Company. From 2004 to 2006, Mr. Hammond served as Director of Planning and Logistics for Petro Holdings, Inc. From 2003 to 2004, he held a General Manager position for Petro Holdings, Inc. Prior to joining the Company in January 2003, Mr. Hammond worked for United Parcel Service for 19 years. While at UPS, he held various management positions in Operations and Industrial Engineering.
Joseph R. McDonald. Mr. McDonald has been Chief Customer Officer of Kestrel Heat since March 18, 2019. From May 2014 to March 2019, he served as Senior Vice President of Sales, Marketing & Retention. From May 2005 to May 2014, Mr. McDonald served as Vice President, Sales and Marketing. From October 2004 to May 2005, he served as the Director of Sales for Petro Holdings, Inc., a subsidiary of the Company. From January 2003 to October 2004, was a Regional Sales Manager for Petro Holdings, Inc.
Henry D. Babcock. Mr. Babcock has been a director of Kestrel Heat since April 28, 2006. He retired at the end of 2019 as director and the former President of The Caumsett Foundation, Inc., a non-profit that supports Caumsett Historic State Park Preserve. Until his retirement in 2010, Mr. Babcock had worked with Train, Babcock Advisors LLC, a private registered investment advisor, since 1976, becoming a Member in 1980. Prior to this, he ran
an affiliated venture capital company active in the U.S. and abroad. Mr. Babcock received a BA from Yale University and an MBA from Columbia. He served in the U.S. Army for three years.
Mr. Babcock’s significant experience in capital markets, corporate finance and venture capital, among other factors, led the Board to conclude that he should serve as a director of Kestrel Heat.
C. Scott Baxter. Mr. Baxter has been a director of Kestrel Heat since April 28, 2006. Mr. Baxter is currently a Managing Director at Berkeley Research Group (“BRG”), a global investment banking advisory and consulting firm. Mr. Baxter has over 30 years of energy investment banking experience and has been a primary advisor in sourcing and executing over $200 billion in corporate M&A, restructuring and equity financing transactions in the energy industry. Mr. Baxter also has significant experience advising independent committees of boards including rendering over 40 independent fairness opinions spanning the upstream, downstream and midstream energy sectors including for many MLPs.
Mr. Baxter’s previous energy investment banking experience includes opening and running the Houston office for Petrie Partners, serving as Head of the Americas for J.P. Morgan’s global energy group, Managing Director in the global energy group at Citigroup (Salomon Brothers), and serving as head of the energy group for Houlihan Lokey.
Mr. Baxter holds a B.S. degree in Economics from Weber State University where he graduated cum laude, and received an MBA degree from the University of Chicago Graduate School of Business. Mr. Baxter also served as an adjunct professor of finance at Columbia University’s Graduate School of Business from 2002 to 2006 and has been on the President’s National Advisory Council for Weber State University since 1996.
Mr. Baxter’s significant experience in finance, accounting, as an investor and as a senior investment banker focused in the energy industry, among other factors, led the Board to conclude that he should serve as a director of Kestrel Heat.
David M. Bauer. Mr. Bauer has served as the Chief Investment Officer of Lubar & Co. since 2005. Mr. Bauer’s work experience includes five years with Facilitator Capital Fund, a Wisconsin-based Small Business Investment Company, and 10 years with the accounting firm of Arthur Andersen, where he led the Wisconsin transaction advisory team assisting private equity funds and large corporations with their acquisitions and divestitures. He currently serves on the board of several private companies.
Mr. Bauer earned a Master of Business Administration degree from Marquette University in 2005 and a Bachelor of Science degree in Accounting from Marquette University in 1991. He is a Certified Public Accountant and a member of the Wisconsin Institute of CPAs and the American Institute of CPAs.
Daniel P. Donovan. Mr. Donovan has been a director of Kestrel Heat since April 28, 2006. Mr Donovan served as President and Chief Executive Officer on an interim basis from December 23, 2018 to March 18, 2019, served as consultant from March 18, 2019 to April 30, 2019, and served as Chief Executive Officer of Kestrel Heat from May 31, 2007 to September 30, 2013 and had been President from April 28, 2006 to September 30, 2013. From April 28, 2006 to May 30, 2007 Mr. Donovan was also the Chief Operating Officer of Kestrel Heat. Mr. Donovan was the President and Chief Operating Officer of a predecessor general partner, Star Gas LLC (“Star Gas”), from March 2005 until April 28, 2006. From May 2004 to March 2005 he was President and Chief Operating Officer of the Company’s heating oil segment. Mr. Donovan held various management positions with Meenan Oil Co. LP, from January 1980 to May 2004, including Vice President and General Manager from 1998 to 2004. Mr. Donovan worked for Mobil Oil Corp. from 1971 to 1980. His last position with Mobil was President and General Manager of its heating oil subsidiary in New York City and Long Island. Mr. Donovan is a graduate of St. Francis College in Brooklyn, New York and received an M.B.A. from Iona College.
Mr. Donovan’s in-depth knowledge of the Company’s business, having been its president and chief executive officer, and his substantial experience in the home heating oil industry, among other factors, led the Board to conclude that he should serve as a director of Kestrel Heat.
Bryan H. Lawrence. Mr. Lawrence has been a director of Kestrel Heat since April 28, 2006 and a manager of Kestrel since July 2005. Mr. Lawrence is a founder and senior manager of Yorktown Partners LLC, the manager of the Yorktown group of investment partnerships, which make investments in companies engaged in the energy industry. The Yorktown partnerships were formerly affiliated with the investment firm of Dillon, Read & Co. Inc., where Mr. Lawrence was employed beginning in 1966, serving as a Managing Director until the merger of Dillon Read with SBC Warburg in September 1997. Mr. Lawrence also serves as a director of Hallador Petroleum Company, Ramaco Resources, Inc., Riley Exploration Permian, Inc. (each a United States publicly traded company), and certain non-public companies in the energy industry in which Yorktown partnerships hold equity interests. Mr. Lawrence is a graduate of Hamilton College and received an M.B.A. from Columbia University.
Mr. Lawrence’s significant financial and investment experience, and experience as a founder of Yorktown Energy Partners LLC, among other factors, led the Board to conclude that he should serve as a director of Kestrel Heat.
William P. Nicoletti. Mr. Nicoletti has been a director of Kestrel Heat since April 28, 2006. Mr. Nicoletti was the non-executive chairman of the board of Star Gas from March 2005 until April 28, 2006. Mr. Nicoletti was a director of Star Gas from March 1999 until April 28, 2006 and was a director of Star Gas Corporation from November 1995 until March 1999. Since February 1, 2009, he has been a Managing Director of Parkman Whaling LLC, a Houston, Texas based energy investment banking firm. Previously, he was Managing Director of Nicoletti & Company, Inc., a private investment banking firm. Mr. Nicoletti was formerly a senior officer and head of Energy Investment Banking for E. F. Hutton & Company, Inc., PaineWebber Incorporated and McDonald Investments, Inc. Mr. Nicoletti is a graduate of Seton Hall University and received an M.B.A. from Columbia University.
Mr. Nicoletti’s current and prior leadership experience in the energy investment banking industry and his significant experience in finance, accounting and corporate governance matters, among other factors, led the Board to conclude that he should serve as a director of Kestrel Heat.
Director Independence
Section 303A of the New York Stock Exchange listed company manual provides that limited partnerships are not required to have a majority of independent directors. It is the policy of the Board of Directors that the Board shall at all times have at least three independent directors or such higher number as may be necessary to comply with the applicable federal securities law requirements. For the purposes of this policy, “independent director” has the meaning set forth in Section 10A(m) of the Securities Exchange Act of 1934, as amended, any applicable stock exchange rules and the rules and regulations promulgated in the Partnership governance guidelines available on its website www.stargrouplp.com. The Board of Directors has determined that Messrs. Nicoletti, Babcock, Bauer and Baxter are independent directors.
Meetings of Directors
During fiscal 2021, the Board of Directors of Kestrel Heat met seven times. All directors attended each meeting.
Committees of the Board of Directors
Kestrel Heat’s Board of Directors has one standing committee, the Audit Committee. Its members are appointed by the Board of Directors for a one-year term and until their respective successors are elected. The NYSE corporate governance standards do not require limited partnerships to have a Nominating or Compensation Committee.
Audit Committee
William P. Nicoletti, Henry D. Babcock, David M. Bauer and C. Scott Baxter have been appointed to serve on the Audit Committee, which has adopted an Audit Committee Charter. Mr. Nicoletti serves as chairman of the Audit Committee. A copy of this charter is available on the Company’s website at www.stargrouplp.com or a copy may be obtained without charge by contacting Richard F. Ambury at (203) 328-7310. The Audit Committee reviews the external financial reporting of the Company, selects and engages the Company’s independent registered public accountants and approves all non-audit engagements of the independent registered public accountants.
Members of the Audit Committee may not be employees of Kestrel Heat or its affiliated companies and must otherwise meet the New York Stock Exchange and SEC independence requirements for service on the Audit Committee. The Board of Directors has determined that Messrs. Nicoletti, Babcock, Bauer and Baxter are independent directors in that they do not have any material relationships with the Company (either directly, or as a partner, shareholder or officer of an organization that has a relationship with the Company) and they otherwise meet the independence requirements of the NYSE and the SEC. The Company’s Board of Directors has also determined that at least one member of the Audit Committee, Mr. Nicoletti, meets the SEC criteria of an “audit committee financial expert.” Please see Mr. Nicoletti’s biography under “Directors and Officers of the General Partner” for his relevant experience regarding his qualifications as an “audit committee financial expert.”
During fiscal 2021, the Audit Committee of Kestrel Heat, LLC met five times. All directors attended each meeting.
Reimbursement of Expenses of the General Partner
The general partner does not receive any management fee or other compensation for its management of the Company. The general partner is reimbursed for all expenses incurred on behalf of the Company, including the cost of compensation that are properly allocable to the Company. The Partnership Agreement provides that the general partner shall determine the expenses that are allocable to the Company in any reasonable manner determined by the general partner in its sole discretion. In addition, the general partner and its affiliates may provide services to the Company for which a reasonable fee would be charged as determined by the general partner. There were no reimbursements of the General Partner in fiscal year 2021.
Adoption of Code of Business Conduct and Ethics
We have adopted a written Code of Business Conduct and Ethics that applies to our officers and employees and our directors. A copy of the Code of Business Conduct and Ethics is available on our website at www.stargrouplp.com or a copy may be obtained without charge, by contacting Investor Relations, (203) 328-7310.
We intend to post amendments to or waivers of our Code of Business Conduct and Ethics (to the extent applicable to any executive officer or director) on our website.
Section 16(a) Beneficial Ownership Reporting Compliance
Based on copies of reports furnished to us, we believe that during fiscal year 2021, all reporting persons complied with the Section 16(a) filing requirements applicable to them.
Non-Management Directors and Interested Party Communications
The non-management directors on the Board of Directors of the general partner are Messrs. Babcock, Bauer, Baxter, Donovan, Lawrence, Nicoletti and Vermylen. The non-management directors have selected Mr. Vermylen, the Chairman of the Board, to serve as lead director to chair executive sessions of the non-management directors. Interested parties who wish to contact the non-management directors as a group may do so by contacting Paul A. Vermylen, Jr. c/o Star Group, L.P., 9 West Broad Street, Suite 310, Stamford, CT 06902.

---

ITEM 11. EXECUTIVE COMPENSATION
ITEM 11.
EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
Our Third Amended and Restated Agreement of Limited Partnership, provides that our general partner, Kestrel Heat, shall conduct, direct and manage all activities of the Company. The limited liability company agreement of the general partner provides that the business of the general partner shall be managed by a Board of Directors. The responsibility of the Board is to supervise and direct the management of the Company in the interest and for the benefit of our unitholders. Among the Board’s responsibilities is to regularly evaluate the performance and to approve the compensation of the Chief Executive Officer and, with the advice of the Chief Executive Officer, regularly evaluate the performance and approve the compensation of key executives.
As a limited partnership that is listed on the New York Stock Exchange, we are not required to have a Compensation Committee. Since the Chairman of the general partner and the majority of the Board are not employees, the Board determined that it has adequate independence to act in the capacity of a Compensation Committee to establish and review the compensation our executive officers and directors. The Board is comprised of Paul A. Vermylen Jr. (Chairman), Jeffrey M. Woosnam (President and Chief Executive Officer), Daniel P. Donovan, Henry D. Babcock, David M. Bauer, C. Scott Baxter, Bryan H. Lawrence, and William P. Nicoletti.
Throughout this Report, each person who served as chief executive officer (“CEO”) during fiscal 2021, each person who served as chief financial officer (“CFO”) during fiscal 2021 and the two other most highly compensated executive officers serving at September 30, 2021 (there being no other executive officers) are referred to as the “named executive officers” and are included in the Executive Compensation Table.
In this Compensation Discussion and Analysis, we address the compensation paid or awarded to Messrs. Woosnam, Ambury, Hammond and McDonald. We refer to these executive officers as our “named executive officers.”
Compensation decisions for the above named executive officers were made by the Board of Directors of the Company.
Compensation Philosophy and Policies
The primary objectives of our compensation program, including compensation of the named executive officers, are to attract and retain highly qualified officers, employees and directors and to reward individual contributions to our success. The Board of Directors considers the following policies in determining the compensation of the named executive officers:
•
compensation should be related to the performance of the individual executive and the performance measured against both financial and non-financial achievements;
•
compensation levels should be competitive to ensure that we will be able to attract, motivate and retain highly qualified executive officers; and
•
compensation should be related to improving unitholder value over time.
Compensation Methodology
The elements of our compensation program for named executive officers are intended to provide a total incentive package designed to drive performance and reward contributions in support of business strategies at the Company. Subject to the terms of employment agreements that have been entered into with the named executive officers, all compensation determinations are discretionary and subject to the decision-making authority of the Board of Directors. We do not use benchmarking as a fixed criterion to determine compensation. Rather, after subjectively setting compensation based on the policies discussed above under “Compensation Philosophy and Policies”, we reviewed the compensation paid to officers holding similar positions at our peer group companies and certain information for privately held companies to obtain a general understanding of the reasonableness of base salaries and other compensation payable to our named executive officers. Our peer group of public companies was comprised of the following companies: Atmos Energy Corporation, Global Partners, L.P., New Jersey Resources Corporation, Sprague Resources, L.P. and Suburban Propane Partners, L.P. We chose these companies because they are engaged in the distribution of energy products like us.
Elements of Executive Compensation
For the fiscal year ended September 30, 2021, the principal components of compensation for the named executive officers were:
•
base salary;
•
annual discretionary profit sharing allocation;
•
management incentive compensation plan; and
•
retirement and health benefits.
Under our compensation structure, the mix of base salary, discretionary profit sharing allocation and long-term compensation provided to each executive officer varies depending on their position. The base salary for each executive officer is the only fixed component of compensation. All other compensation, including annual discretionary profit sharing allocation and long-term incentive compensation, is variable in nature.
The majority of the Company’s compensation allocation is weighted towards base salary and annual discretionary profit sharing allocation. In addition, during fiscal 2021, an aggregate of $386,857 was paid to the named executive officers under the terms of the management incentive compensation plan and represented a small portion of the executive compensation that was paid to these officers. If we are successful in increasing the overall level of distributions payable to unitholders, the amounts payable to the named executive officers under the management incentive compensation plan should increase.
We believe that together all of our compensation components provide a balanced mix of fixed compensation and compensation that is contingent upon each executive officer’s individual performance and our overall performance. A goal of the compensation program is to provide executive officers with a reasonable level of security through base salary and benefits, while rewarding them through incentive compensation to achieve business objectives and create unitholder value over time. We believe that each of our compensation components is important in achieving this goal. Base salaries provide executives with a base level of monthly income and security. Annual discretionary profit sharing allocations and long-term incentive awards provide an incentive to our executives to achieve business objectives that increase our financial performance, which creates unitholder value through continuity of, and increases in, distributions and increases in the market value of the units. In addition, we want to ensure that our compensation programs are appropriately designed to encourage executive officer retention, which is accomplished through all of our compensation elements.
Base Salary
The Board of Directors establishes base salaries for the named executive officers based on a number of factors, including:
•
the historical salaries for services rendered to the Company and responsibilities of the named executive officer;
•
the salaries of equivalent executive officers at our peer group companies and other data for our industry; and
•
the prevailing levels of compensation and cost of living in the location in which the named executive officer works.
In determining the initial base compensation payable to individual named executive officers when they are first hired by Star, our starting point is the historical compensation levels that we have paid to officers performing similar functions over the past few years. We also consider the level of experience and accomplishments of individual candidates and general labor market conditions, including the availability of candidates to fill a particular position. When we make adjustments to the base salaries of existing named executive officers, we review the individual’s performance, the value each named executive officer brings to us and general labor market conditions.
Elements of individual performance considered, among others, without any specific weight given to each element, include business-related accomplishments during the year, difficulty and scope of responsibilities, effective leadership, experience, expected future contributions to the Company and difficulty of replacement. While base salary provides a base level of compensation intended to be competitive with the external market, the base salary for each named executive officer is determined on a subjective basis after consideration of these factors and is not based on target percentiles or other formal criteria. Although we believe that base salaries for our named executive officers are generally competitive with the external market, we do not use benchmarking as a fixed criterion to determine base compensation. Rather, after subjectively setting base salaries based on the above factors, we review the compensation paid to officers holding similar positions at our peer group companies to obtain a general understanding of the reasonableness of base salaries and other compensation payable to our named executive officers. We also take into account geographic differences for similar positions in the New York Metropolitan area. While cost of living is considered in determining annual increases, we do not typically provide full cost of living adjustments as salary increases are constrained by budgetary restrictions and the ability to fund the Company’s current cash needs such as interest expense, maintenance capital, income taxes and distributions.
Profit Sharing Allocations
We maintain a profit sharing pool for certain employees, including named executive officers, which is equal to approximately 6% of our earnings before income taxes, depreciation and amortization, excluding items affecting comparability (“adjusted EBITDA”) for the given fiscal year. The annual discretionary profit sharing allocations paid to the named executive officers are payable from this pool. The size of the pool fluctuates based upon upward or downwards changes in adjusted EBITDA and the size of an individual award to a named executive officer fluctuates based on the size of the profit sharing pool and the number of participants in the plan. Depending upon the size of the profit sharing pool, and the number of participants in the plan, the amount paid to the named executive officers could be more or less.
There are no set formulas for determining the amount payable to our named executive officers from the profit sharing plan. Factors considered by our CEO and the Board in determining the level of profit sharing allocations generally include, without assigning a particular weight to any factor:
•
whether or not we achieved certain budgeted goals for the year and any material shortfalls or superior performances relative to expectations. Under the plan, no profit sharing was payable with respect to fiscal 2021 unless we achieved actual adjusted EBITDA for fiscal 2021 of at least 70% of the amount of budgeted adjusted EBITDA for fiscal 2021;
•
the level of difficulty associated with achieving such objectives based on the opportunities and challenges encountered during the year; and
•
significant transactions or accomplishments for the period not included in the goals for the year.
Our CEO takes these factors into consideration as well as the relative contributions of each of the named executive officers to the year’s performance in developing his recommendations for profit sharing amounts. Based on such assessment, our CEO submits recommendations to the Board of Directors for the annual profit sharing amounts to be paid to our named executive officers (other than the CEO), for the Board’s review and approval. Similarly, the Chairman assesses the CEO’s contribution toward meeting the Company’s goals based upon the above factors, and recommends to the Board of Directors a profit sharing allocation for the CEO it believes to be commensurate with such contribution.
The Board of Directors retains the ultimate discretion to determine whether the named executive officers will receive annual profit sharing allocations based upon the factors discussed above.
Management Incentive Compensation Plan
In fiscal 2007, following our recapitalization, the Board of Directors adopted the Management Incentive Compensation Plan (the “Plan”) for certain named employees. Under the Plan, employees who participate shall be entitled to receive a pro rata share (as determined in the manner described below) of an amount in cash equal to:
•
50% of the distributions (“Incentive Distributions”) of Available Cash in excess of the minimum quarterly distribution of $0.0675 per unit otherwise distributable to Kestrel Heat pursuant to the Partnership Agreement on account of its general partner units; and
•
50% of the cash proceeds (the “Gains Interest”) which Kestrel Heat shall receive from any sale of its general partner units (as defined in the Partnership Agreement), less expenses and applicable taxes.
We believe that the Plan provides a long-term incentive to its participants because it encourages Star’s management to increase available cash for distributions in order to trigger the incentive distributions that are only payable if distributions from available cash exceed certain target distribution levels, with higher amounts of incentive distributions triggered by higher levels of distributions. Such increases are not sustainable on a consistent basis without long-term improvements in our operations. In addition, under certain Plan amendments that were adopted in 2012, the participation points of existing plan participants will vest and become irrevocable over a four year period, provided that the participants continue to be employed by us during the vesting period. We believe that this will help ensure that the Plan participants, which include our named executive officers, will have a continuing personal interest in the success of Star.
The pro rata share payable to each participant under the Plan is based on the number of participation points as described under “Fiscal 2021 Compensation Decisions-Management Incentive Compensation Plan.” The amount paid in Incentive Distributions is governed by the Partnership Agreement and Available Cash (as defined in our Partnership Agreement) is distributed to the holders of our common units and general partner units in the following manner:
First, 100% to all common units, pro rata, until there has been distributed to each common unit an amount equal to the minimum quarterly distribution of $0.0675 for that quarter;
Second, 100% to all common units, pro rata, until there has been distributed to each common unit an amount equal to any arrearages in the payment of the minimum quarterly distribution for prior quarters;
Third, 100% to all general partner units, pro rata, until there has been distributed to each general partner unit an amount equal to the minimum quarterly distribution;
Fourth, 90% to all common units, pro rata, and 10% to all general partner units, pro rata, until each common unit has received the first target distribution of $0.1125; and
Finally, 80% to all common units, pro rata, and 20% to all general partner units, pro rata.
Available Cash, as defined in our Partnership Agreement, generally means all cash on hand at the end of the relevant fiscal quarter less the amount of cash reserves established by the Board of Directors of our general partner in its reasonable discretion for future cash requirements. These reserves are established for the proper conduct of our business, including acquisitions, the payment of debt principal and interest and for distributions during the next four quarters and to comply with applicable law and the terms of any debt agreements or other agreements to which we are subject. The Board of Directors of our general partner reviews the level of Available Cash each quarter based upon information provided by management.
To fund the benefits under the Plan, Kestrel Heat has agreed to permanently and irrevocably forego receipt of the amount of Incentive Distributions that are payable to plan participants. For accounting purposes, amounts payable to management under this Plan will be treated as compensation and will reduce both EBITDA and net income but not adjusted EBITDA. Kestrel Heat has also agreed to contribute to the Company, as a contribution to capital, an amount equal to the Gains Interest payable to participants in the Plan by the Company. The Company is not required to reimburse Kestrel Heat for amounts payable pursuant to the Plan.
The Plan is administered by our Chief Financial Officer under the direction of the Board or by such other officer as the Board may from time to time direct. In general, no payments will be made under the Plan if we are not distributing cash under the Incentive Distributions described above.
Effective as of July 19, 2012, the Board of Directors adopted certain amendments (the “Plan Amendments”) to the Plan. Under the Plan Amendments, the number and identity of the Plan participants and their participation interests in the Plan have been frozen at the current levels. In addition, under the Plan Amendments, the plan benefits (to the extent vested) may be transferred upon the death of a participant to his or her heirs. A participant’s vested percentage of his or her plan benefits will be 100% during the time a participant is an employee or consultant of the Company. Following the termination of such positions, a participant’s vested percentage shall be equal to 20% for each full or partial year of employment or consultation with us starting with the fiscal year ended September 30, 2012 (33 1/3% in the case of the Company’s chief executive officer at that time).
We distributed $916,568 in Incentive Distributions under the Plan during fiscal 2021, including payments to the named executive officers of approximately $386,857. With regard to the Gains Interest, Kestrel Heat has not given any indication that it will sell its general partner units within the next 12 months. Thus the Plan’s value attributable to the Gains Interest currently cannot be determined.
Retirement and Health Benefits
We offer a health and welfare and retirement program to all eligible employees. The named executive officers are generally eligible for the same programs on the same basis as other employees of Star. We maintain a tax-qualified 401(k) retirement plan that provides eligible employees with an opportunity to save for retirement on a tax advantaged basis. Under the 401(k) plan, subject to IRS limitations, each participant can contribute from 0% to 60% of compensation.
We make a 4% (or a maximum of 5.5% for participants who had 10 or more years of service at the time our defined benefit plans were frozen and who have reached the age 55) core contribution of a participant’s compensation and generally can match 2/3 (up to 3.0%) of a participant’s contributions, subject to IRS limitations.
In addition, we have two frozen defined benefit pension plans that were maintained for all eligible employees, including certain executive officers. The present value of accumulated benefits under these frozen defined benefit pension plans for certain executive officers is provided in the table labeled “Pension Plans Pursuant to Which Named Executive Officers Have an Accumulated Benefit But Are Not Currently Accruing Benefits.”
Fiscal 2021 Compensation Decisions
For fiscal 2021, the foregoing elements of compensation were applied as follows:
Base Salary
The following table sets forth each named executive officer’s base salary as of October 1, 2021 and the percentage increase in base salary over October 1, 2020. The current base salaries for our named executive officers were determined based upon the factors discussed under the caption “Base Salary.” The average percentage increase in base salary for executives in our peer group was approximately 8.2%.
Name
Salary
Percentage Change
From Prior Year
Jeffrey M. Woosnam
$
440,000
3.5
%
Richard F. Ambury
$
444,968
2.5
%
Jeffrey S. Hammond
$
329,676
3.5
%
Joseph R. McDonald
$
329,676
3.5
%
Annual Discretionary Profit Sharing Allocation
Based on the annual performance reviews for our CEO and named executive officers, the Board approved annual profit sharing allocations as reflected in the “Summary Compensation Table” and notes thereto. For fiscal 2021, the profit sharing amounts reflected in the Summary Compensation Table are 3% lower than fiscal 2020 for Messrs. Woosnam, Ambury, Hammond and McDonald.
One of our primary performance measures is Adjusted EBITDA, as defined under the Profit Sharing Plan. For fiscal 2021, Adjusted EBITDA (as calculated under the Profit Sharing Plan) decreased by $3.3 million, or 2.5%, to $126.7 million compared to fiscal 2020. For our peer group, the average percentage increase in Adjusted EBITDA was 15.3%, but the average total compensation increased by 8.2%.
Another performance measure is acquisitions. During fiscal 2021 the Company acquired two propane and three heating oil dealers that generate approximately 13 million gallons of home heating oil and propane annually. Messrs. Woosnam, Ambury, Hammond and McDonald were instrumental in the successful integration of these transactions.
Management Incentive Compensation Plan
In 2012, under the Plan Amendments adopted by the Board, the number and identity of the Plan participants and their participation points were frozen at the current levels in order to more closely align the interests of Plan participants and unitholders and to give Plan participants a continuing personal interest in our success. The number of participation points that were previously awarded to the named executive officers was based on the length of service and level of responsibility of the named executive and our desire to retain the named executive.
In fiscal 2021, $386,857 was paid to the named executive officers under the Plan as indicated in the following chart:
Name
Points
Percentage
Management
Incentive
Payments
Jeffrey M. Woosnam
5.5
%
49,917
Richard F. Ambury
21.4
%
195,508
Jeffrey S. Hammond
4.5
%
41,598
Joseph R. McDonald
10.9
%
99,834
Other Plan Participants (a)
57.7
%
529,711
Total
1,100
%
$
916,568
(a)
Includes 300 points (27.3%) that were awarded to Mr. Donovan prior to his retirement as the Company’s President and Chief Executive Officer effective September 30, 2013.
Retirement and Health Benefits
The named executive officers participate in our retirement and health benefit plans.
Employment Contracts and Severance Agreements
Agreement with Richard F. Ambury
We entered into an employment agreement with Mr. Ambury effective as of April 28, 2008. Mr. Ambury will serve as Chief Financial Officer and Treasurer on an at-will basis. The employment agreement provides for one year’s salary as severance if Mr. Ambury’s employment is terminated without cause or by Mr. Ambury for good reason.
Agreement with Jeffrey M. Woosnam
We entered into an employment agreement with Mr. Woosnam effective as of June 19, 2019. Mr. Woosnam will serve as President and Chief Executive Officer of Kestrel Heat on an at-will basis. The employment agreement provides for one year’s salary as severance if Mr. Woosnam’s employment is terminated without cause or by Mr. Woosnam for good reason.
Change in Control Agreements
Change in control arrangements are included in the employment agreement for Mr. Woosnam, Chief Executive Officer and we have entered into a Change in Control Agreement with Mr. Ambury, Chief Financial Officer. Under the terms of each agreement, if either of these executive officers is terminated within 180 days following a change in control (as defined in the agreement), he will be entitled to a payment equal to two times his base annual salary in the year of such termination plus two times the average amount paid as a bonus and/or as profit sharing during the three years preceding the year of such termination. The term change in control means the present equity owners of Kestrel Heat and their affiliates collectively cease to beneficially own equity interests having the voting power to elect at least a majority of the members of the Board of Directors or other governing board of the general partner or any successor entity. If a change in control were to have occurred and their employment was terminated as of the date of this Report, Mr. Woosnam would have received a payment of $2,155,333 and Mr. Ambury would have received a payment of $1,970,814.
Pay Ratio Disclosure
As required by Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 402(u) of Regulation S-K, we are providing the following information about the ratio of the annual total compensation, calculated in accordance with the requirements of Item 402(c)(2)(x) of Regulation S-K of our CEO, Jeffrey M. Woosnam and the annual total compensation of our median employee. For fiscal 2021, our last completed fiscal year, our CEO’s total compensation was $1,280,140, versus our median employee compensation of $69,028. This reflects a CEO pay ratio of 19:1. We identified our median compensation employee by examining total compensation paid for fiscal year 2021 to all individuals, excluding Mr. Woosnam, who were employed by us on September 30, 2021, the last day of our fiscal year based on payroll records. No assumptions, adjustments or estimates were made in respect of total compensation, except that we annualized the compensation of any employee that was not employed with us for all of fiscal year 2021, excluding seasonal and temporary employees.
Indemnification Agreements
We have entered into an indemnification agreement with each of our directors and senior executives. These agreements provide for us to, among other things, indemnify such persons against certain liabilities that may arise by reason of their status or service as directors or officers, to advance their expenses incurred as a result of a proceeding as to which they may be indemnified and to cover such person under any directors’ and officers’ liability insurance policy we choose, in our discretion, to maintain. These indemnification agreements are intended to provide indemnification rights to the fullest extent permitted under applicable indemnification rights statutes in the State of Delaware and are in addition to any other rights such person may have under our Partnership Agreement and the limited liability company agreement of our general partner, and applicable law. We believe these indemnification agreements enhance our ability to attract and retain knowledgeable and experienced executives and independent, non-management directors.
Board of Directors Report
The Board of Directors of the general partner of the Company does not have a separate compensation committee. Executive compensation is determined by the Board of Directors.
The Board of Directors reviewed and discussed with the Company’s management the Compensation Discussion and Analysis contained in this annual report on Form 10-K. Based on that review and discussion, the Board of Directors recommends that the Compensation Discussion and Analysis be included in the Company’s annual report on Form 10-K for the year ended September 30, 2021.
Paul A. Vermylen, Jr.
Jeffrey M. Woosnam
Henry D. Babcock
David M. Bauer
C. Scott Baxter
Daniel P. Donovan
Bryan H. Lawrence
William P. Nicoletti
Executive Compensation Table
The following table sets forth the annual salary compensation, bonus and all other compensation awards earned and accrued by the named executive officers in the fiscal year.
Summary Compensation Table
Name and
Principal Position
Fiscal
Year
Salary
Bonus
Unit
Awards
Option
Awards
Non-
Equity
Incentive
Plan
Comp.(1)
Change in
Pension
Value and
Nonqualified
Deferred
Comp.
Earnings (2)
All Other
Comp.(6)
Total
Jeffrey M. Woosnam
$
432,501
-
-
-
$
750,000
$
-
$
97,639
$
1,280,140
President and Chief
$
402,500
-
-
-
$
775,000
$
-
$
94,956
$
1,272,456
Executive Officer (3)
$
297,769
-
-
-
$
388,000
$
-
$
87,420
$
773,189
Richard F. Ambury
$
439,542
-
-
-
$
595,000
$
2,073
$
246,158
$
1,282,773
Chief Financial Officer,
$
428,821
-
-
-
$
615,000
$
32,355
$
226,701
$
1,302,877
Treasurer and Executive
$
417,872
-
-
-
$
411,317
$
58,858
$
206,786
$
1,094,833
Vice President
Jeffrey S. Hammond
$
324,103
-
-
-
$
556,000
$
-
$
89,618
$
969,721
Chief Operating
$
313,142
-
-
-
$
575,000
$
-
$
84,977
$
973,119
Officer (4)
$
292,384
-
-
-
$
288,000
$
-
$
80,727
$
661,111
Joseph R. McDonald
$
324,103
-
-
-
$
556,000
$
-
$
146,555
$
1,026,658
Chief Customer
$
313,142
-
-
-
$
575,000
$
-
$
136,947
$
1,025,089
Officer (5)
$
294,933
-
-
-
$
288,000
$
-
$
126,747
$
709,680
(1)
Payable pursuant to the Company’s profit sharing pool, which is described under “Compensation Discussion and Analysis. - Profit Sharing Allocation.”
(2)
We have two frozen defined benefit pension plans that we sometimes refer to in this Report as the Petro defined benefit pension plan and the Meenan defined benefit pension plan, where participants are not accruing additional benefits. Mr. Ambury also participated in a tax-qualified supplemental employee retirement plan which, prior to being frozen in 1997, represented contributions to an employee plan to compensate for a reduction in certain benefits prior to 1997. Included in Mr. Ambury’s amounts for the Change in Pension Value and Nonqualified Deferred Comp. Earnings are $333, $5,197, and $9,455 for fiscal years 2021, 2020, and 2019 respectively, for the actuarial changes in the value of his frozen supplemental employee retirement plan. The change in all the named executive’s pension values (including the supplemental employee retirement plan) are non-cash, and reflect normal adjustments resulting from changes in discount rates and government mandated mortality tables.
(3)
Mr. Woosnam was appointed President and Chief Executive Officer on March 18, 2019.
(4)
Mr. Hammond was appointed Chief Operating Officer on March 18, 2019.
(5)
Mr. McDonald was appointed Chief Customer Officer on March 18, 2019.
(6)
All other compensation is subdivided as follows:
Name
Management
Incentive
Compensation Plan
Company Match and
Core Contribution to
401(K) Plan
Car Allowance or Monetary
Value for Personal Use of
Company Owned Vehicle
Total
Jeffrey M. Woosnam
$
49,917
$
17,782
$
29,940
$
97,639
Richard F. Ambury
$
195,508
$
21,850
$
28,800
$
246,158
Jeffrey S. Hammond
$
41,598
$
17,762
$
30,258
$
89,618
Joseph R. McDonald
$
99,834
$
16,824
$
29,897
$
146,555
Grants of Plan-Based Awards
Estimated Future Payouts
Equity Incentive Plan Awards (1)
Estimated Future Payouts
Under Equity Incentive Plan
All Other
Stocks
Awards:
Number of
Shares of
All Other
Option
Awards:
Number of
Securities
Exercise or
Base Price of
Option
Grant Date
Fair Value
of Stock
and
Name
Grant
Date (1)
Threshold
($)
Target
($) (2)
Maximum
($)
Threshold
(#)
Target
(#)
Maximum
(#)
Stock or
Units (#)
Underlying
Options (#)
Awards
($/Sh)
Option
Awards
Jeffrey M.
Woosnam
7/21/09
-
$
750,000
-
-
-
-
-
-
-
-
Richard F.
Ambury
7/21/09
-
$
595,000
-
-
-
-
-
-
-
-
Jeffrey S.
Hammond
7/21/09
-
$
556,000
-
-
-
-
-
-
-
-
Joseph R.
McDonald
7/21/09
-
$
556,000
-
-
-
-
-
-
-
-
(1)
On July 21, 2009, the Board of Directors authorized the continuance of the annual profit sharing plan, subject to its power to terminate the plan at any time. Profit sharing allocations are described under “Compensation Philosophy and Policies-Profit Sharing Allocations.”
(2)
The annual profit sharing plan does not provide for thresholds or maximums; the amounts listed represent the actual awards to the named executive officers for fiscal 2021.
Outstanding Equity Awards at Fiscal Year-End
None.
Option Exercises and Stock Vested
None.
Pension Plans Pursuant to Which Named Executive Officers Have an Accumulated Benefit But Are Not Currently Accruing Benefits
Name
Plan Name
Number of Years
Credited Service
Present Value of
Accumulated Benefit
Payments During Last
Fiscal Year
Richard F. Ambury (1)
Retirement Plan
$
331,647
$
-
Supplemental Employee Retirement Plan
-
$
63,470
$
-
(1)
The named executive officer has accumulated benefits in the tax-qualified Petro defined benefit pension plan that was frozen in 1997. Mr. Ambury also participated in a tax-qualified supplemental employee retirement plan which, prior to being frozen in 1997, represented contributions to an employee plan to compensate for a reduction in certain benefits prior to 1997. No other named executives were participants in any of these plans. Each year, the named executive officer’s accumulated benefits are actuarially calculated generally based on the credited years of service and each employee’s compensation at the time the plan was frozen. The present value of these amounts are the present value of a single life annuity generally payable at later or normal retirement age, adjusted for changes in discount rates and government mandated mortality tables. See Note 14-Employee Benefit Plans, to Star’s Consolidated Financial Statements, for the material assumptions applied in quantifying the present value of the accumulated benefits of these frozen plans.
Nonqualified Defined Contribution and Other Nonqualified Deferred Compensation Plans
None.
Potential Payments Upon Termination
If Mr. Woosnam’s employment is terminated for reasons other than for cause or if Mr. Woosnam terminates his employment for good reason, he will be entitled to receive one-year’s salary as severance, except in the case of a termination following a change in control which is discussed above under “Change in Control Agreements.” For 12 months following the termination of his employment, Mr. Woosnam is prohibited from competing with the Company or from becoming involved either as an employee, as a consultant or in any other capacity, in the sale of heating oil or propane on a retail basis.
If Mr. Ambury’s employment is terminated for reasons other than cause or if Mr. Ambury terminates his employment for a good reason, he will be entitled to receive a severance payment of one year’s salary except in the case of a termination following a change in control which is discussed above under “Change in Control Agreements.” For 12 months following the termination of his employment, Mr. Ambury is prohibited from competing with the Company or from becoming involved either as an employee, as a consultant or in any other capacity, in the sale of heating oil or propane on a retail basis.
The amounts shown in the table below assume that the triggering event for each named executive officer’s termination or change in control payment was effective as of the date of this Report based upon their historical compensation arrangements as of such date. The actual amounts to be paid out can only be determined at the time of such named executive officer’s termination of employment or Star’s change of control.
The employment agreements of the foregoing officers also require that they not reveal confidential information of the Company within 12 months following the termination of their employment.
Name
Potential Payments
Upon Termination
Potential Payments
Following
a Change of Control
Jeffrey M. Woosnam
$
440,000
$
2,155,333
Richard F. Ambury
$
444,968
$
1,970,814
Compensation of Directors
Director Compensation Table - Fiscal Year 2021
Name
Fees
Earned
or Paid
in Cash
Unit
Awards
Option
Awards
Non-Equity
Incentive
Plan
Compensation
Change in
Pension
Value and
Nonqualified
Deferred
Compensation
Earnings (2)
All Other
Compensation
(3)
Total
Paul A. Vermylen, Jr. (1)
$
130,500
-
-
-
$
10,785
$
69,527
$
210,812
Daniel P. Donovan (4)
$
70,917
-
-
-
$
2,461
$
312,696
$
386,074
Henry D. Babcock (5)
$
90,500
-
-
-
$
-
$
-
$
90,500
David M. Bauer (5)
$
90,500
-
-
-
$
-
$
-
$
90,500
C. Scott Baxter (5)
$
90,500
-
-
-
$
-
$
-
$
90,500
Bryan H. Lawrence (6)
$
-
-
-
-
$
-
$
-
$
-
William P. Nicoletti (7)
$
102,583
-
-
-
$
-
$
-
$
102,583
(1)
Mr. Vermylen is non-executive Chairman of the Board.
(2)
Mr. Vermylen and Mr. Donovan participate in one of our frozen defined benefit pension plans. Participants are currently not accruing additional benefits under the frozen plan. The change in the pension value reflects normal non-cash adjustments resulting from changes in discount rates and government mandated mortality tables.
(3)
Mr. Vermylen and Mr. Donovan reached the frozen defined benefit pension plan full retirement age in fiscal year 2012 and 2011, respectively, and started receiving pension payments.
(4)
The amount included for Mr. Donovan in all other compensation represents $249,585 for amounts paid to him under the management incentive compensation plan, and $63,111 for pension payments.
(5)
Mr. Babcock, Mr. Bauer and Mr. Baxter are Audit Committee members.
(6)
Mr. Lawrence has chosen not to receive any fees as a director of the general partner of Star.
(7)
Mr. Nicoletti is Chairman of the Audit Committee.
Each non-management director receives an annual fee of $61,000 plus $1,500 for each regular and telephonic meeting attended. The Chairman of the Audit Committee receives an annual fee of $24,400 while other Audit Committee members receive an annual fee of $12,200. Each member of the Audit Committee receives $1,500 for every regular and telephonic meeting attended. The non-executive Chairman of the Board receives an annual fee of $120,000.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows the beneficial ownership as of November 30, 2021 of common units and general partner units by:
(1) Kestrel and certain beneficial owners;
(2) each of the named executive officers and directors of Kestrel Heat;
(3) all directors and executive officers of Kestrel Heat as a group; and
(4) each person the Company knows to hold 5% or more of the Company’s units.
Except as indicated, the address of each person is c/o Star Group, L.P. at 9 West Broad, Street, Suite 310, Stamford, Connecticut 06902.
Common Units
General Partner Units
Name
Number
Percentage
Number
Percentage
Kestrel (a)
-
*
325,729
100.00
%
Paul A. Vermylen, Jr. (b)
1,345,983
3.49
%
Henry D. Babcock (c)
104,121
*
William P. Nicoletti
35,506
*
Bryan H. Lawrence (d)
1,101,848
2.85
%
C. Scott Baxter
-
*
David M. Bauer (e)
1,254,662
3.25
%
Daniel P. Donovan
25,000
*
Richard F. Ambury (f)
38,390
*
Jeffrey M. Woosnam
10,000
*
Joseph R. McDonald
6,500
*
Jeffrey S. Hammond
5,000
*
All officers and directors and Kestrel Heat, LLC as a group (12 persons)
3,927,010
10.17
%
325,729
100.00
%
Bandera Partners, LLC (g)
3,314,115
8.58
%
(a)
Includes 325,729 general partner units owned by Kestrel Heat. In November 2021, Kestrel Heat made an in-kind distribution of 500,000 common units, representing approximately 1% of the issued and outstanding common units, to Kestrel, which, in turn, made an in-kind distribution of such units, pro rata, to its members.
(b)
Includes 218,520 Common Units held by The Robin C. Vermylen 2016 Irrevocable Trust, with respect to which Mr. Vermylen is a trustee of the trust and a beneficiary of the trust; and 852,619 Common Units held by
The Paul A. Vermylen, Jr. 2015 Irrevocable Trust, with respect to which Mr. Vermylen’s spouse is a beneficiary of the trust and Mr. Vermylen is the settlor of the trust.
(c)
Includes 94,121 Common Units owned by White Hill Trust, with respect to which Mr. Babcock’s stepson and son-in-law are the trustees and Mr. Babcock’s wife is the primary beneficiary.
(d)
Does not include 840,957 Common Units owned by Yorktown Energy Partners VI, L.P. (“Yorktown VI”). Mr. Lawrence is a member and manager of Yorktown VI Associates LLC. The general partner of Yorktown VI Company LP, the general partner of Yorktown VI. Mr. Lawrence does not have sole or shared voting or investment power within the meaning of Rule 13d-3 of the Securities Exchange Act of 1934 with respect to the Common Units held by Yorktown VI and disclaims beneficial ownership of such securities except to the extent of his pecuniary interest therein.
(e)
All Common Units are owned by Lubar Equity Fund, LLC. Mr. Bauer owns a minority interest in Lubar Equity Fund, LLC and is Chief Investment Officer of Lubar & Co. Incorporated, the sole manager of Lubar Equity Fund, LLC. While Mr. Bauer serves on the investment committee of Lubar & Co., Inc., he does not have sole or shared voting or investment power within the meaning of Rule 13d-3 of the Securities and Exchange Act of 1934 with respect to the Common Units held by Lubar Equity Fund, LLC and disclaims beneficial ownership of such securities except to the extent of his pecuniary interest therein.
(f)
Common Units are owned by the Richard F. Ambury 2013 Revocable Living Trust, with respect to which Mr. Ambury is the trustee.
(g)
According to a Form 13F filed by Bandera Partners, LLC with the SEC on November 12, 2021.
*
Amount represents less than 1%.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Star has a written conflict of interest policy and procedure that requires all officers, directors and employees to report to senior corporate management or the board of directors, all personal, financial or family interest in transactions that involve the individual and the Star. In addition, our Governance Guidelines provide that any monetary arrangement between a director and his or her affiliates (including any member of a director’s immediate family) and the Company or any of its affiliates for goods or services shall be subject to approval by the full Board of Directors.
The general partner does not receive any management fee or other compensation for its management of Star. The general partner is reimbursed for all expenses incurred on behalf of the Star, including the cost of compensation, that are properly allocable to Star. Our Partnership Agreement provides that the general partner shall determine the expenses that are allocable to Star in any reasonable manner determined by the general partner in its sole discretion. In addition, the general partner and its affiliates may provide services to the Star for which a reasonable fee would be charged as determined by the general partner.
Kestrel has the ability to elect the Board of Directors of Kestrel Heat, including Messrs. Vermylen, Bauer and Lawrence. Messrs. Vermylen, Bauer and Lawrence are also members of the board of managers of Kestrel and, either directly or through affiliated entities, own equity interests in Kestrel. Kestrel owns all of the issued and outstanding membership interests of Kestrel Heat.
Policies Regarding Transactions with Related Persons
Our Code of Business Conduct and Ethics, Partnership Governance Guidelines and Partnership Agreement set forth policies and procedures with respect to transactions with persons affiliated with the Company and the resolution of conflicts of interest, which taken together provide the Company with a framework for the review and approval of “transactions” with “related persons” as such terms are defined in Item 404 of Regulation S-K.
For the years ended September 30, 2021, 2020, and 2019, Star had no related party transactions or agreements pursuant to Item 404 of Regulation S-K.
Our Code of Business Conduct and Ethics applies to our directors, officers, employees and their affiliates. It deals with conflicts of interest (e.g., transactions with the Company), confidential information, use of Star assets, business dealings, and other similar topics. The Code requires officers, directors and employees to avoid even the appearance of a conflict of interest and to report potential conflicts of interest to the Company’s Senior Vice President Accounting or Director of Internal Audit.
Our Partnership Governance Guidelines provide that any monetary arrangement between a director and his or her affiliates (including any member of a director’s immediate family) and the Company or any of its affiliates for goods or services shall be subject to approval by the full Board of Directors. Although the Partnership Governance Guidelines by their terms only apply to directors the Board intends to apply this requirement to officers and employees and their affiliates.
To the extent that the Board determines that it would be in the best interests of the Company to enter into a transaction with a related person, the Board intends to utilize the procedures set forth in the Partnership Agreement for the review and approval of potential conflicts of interest. Our Partnership Agreement provides that whenever a potential conflict of interest exists or arises between the general partner or any of its Affiliates (including its directors, executive officers and controlling members), on the one hand, and the Company or any partner, on the other hand, any resolution or course of action in respect of such conflict of interest shall be permitted and deemed approved by all partners, and shall not constitute a breach of the Partnership Agreement, of any agreement contemplated therein, or of any duty stated or implied by law or equity, if the resolution or course of action is, or by operation of the Partnership Agreement is deemed to be, fair and reasonable to the Company.
Any conflict of interest and any resolution of such conflict of interest shall be conclusively deemed fair and reasonable to the Company if such conflict of interest or resolution is (i) approved by a committee of independent directors (the “Conflicts Committee”), (ii) on terms no less favorable to the Company than those generally being provided to or available from unrelated third parties or (iii) fair to the Company, taking into account the totality of the relationships between the parties involved (including other transactions that may be particularly favorable or advantageous to the Company).
The general partner (including the Conflicts Committee) is authorized in connection with its determination of what is “fair and reasonable” to the Company and in connection with its resolution of any conflict of interest to consider:
(A)
the relative interests of any party to such conflict, agreement, transaction or situation and the benefits and burdens relating to such interest;
(B)
any customary or accepted industry practices and any customary or historical dealings with a particular person;
(C)
any applicable generally accepted accounting practices or principles; and
(D)
such additional factors as the general partner (including the Conflicts Committee) determines in its sole discretion to be relevant, reasonable or appropriate under the circumstances.

---

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table represents the aggregate fees for professional audit services rendered by KPMG LLP including fees for the audit of our annual financial statements for the fiscal years 2021 and 2020, and for fees billed and accrued for other services rendered by KPMG LLP (in thousands).
Audit Fees (1)
$
2,425
$
2,208
Tax Fees (2)
Total Fees
$
2,818
$
2,498
(1)
Audit fees were for professional services rendered in connection with audits and quarterly reviews of the consolidated financial statements of the Company.
(2)
Tax fees related to services for tax consulting and tax compliance.
Audit Committee: Pre-Approval Policies and Procedures. At its regularly scheduled and special meetings, the Audit Committee of the Board of Directors considers and pre-approves any audit and non-audit services to be performed by the Company’s independent accountants. The Audit Committee has delegated to its chairman, an independent member of the Company’s Board of Directors, the authority to grant pre-approvals of non-audit services provided that the service(s) shall be reported to the Audit Committee at its next regularly scheduled meeting. On June 18, 2003, the Audit Committee adopted its pre-approval policies and procedures. Since that date, there have been no audit or non-audit services rendered by the Company’s principal accountants that were not pre-approved.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
1. Financial Statements-See “Index to Consolidated Financial Statements and Financial Statement Schedule” set forth on page.
2. Financial Statement Schedule-See “Index to Consolidated Financial Statements and Financial Statement Schedule” set forth on page.
3. Exhibits-See “Index to Exhibits” set forth on the following page.
INDEX TO EXHIBITS
Exhibit
Number
Description
3.1
Amended and Restated Certificate of Limited Partnership (Incorporated by reference to an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed with the Commission on May 9, 2006.)
3.2
Certificate of Amendment to Amended and Restated Certificate of Limited Partnership (Incorporated by reference to an exhibit to the Registrant’s Current Report on Form 8-K with the Commission on October 27, 2017.)
3.3
Third Amended and Restated Agreement of Limited Partnership (Incorporated by reference to an exhibit to the Registrant’s Current Report on Form 8-K with the Commission on November 6, 2017.)
10.1
Letter Agreement and general release dated March 7, 2005 between Star Gas Partners L.P. and Irik P. Sevin† (Incorporated by reference to an exhibit to the Registrant’s Current Report on Form 8-K filed with the Commission on March 8, 2005.)
10.2
Management Incentive Compensation Plan† (Incorporated by reference to an exhibit to the Registrant’s Current Report on Form 8-K with the Commission on July 21, 2006.)
10.3
Amended and Restated Management Incentive Compensation Plan† (Incorporated by reference to an exhibit to the Registrant’s Current Report on Form 8-K with the Commission on July 20, 2012.)
10.4
Form of Indemnification Agreement for Officers and Directors (Incorporated by reference to an exhibit to the Registrant’s Current Report on Form 8-K with the Commission on July 21, 2006.)
10.5
Form of Amendment No. 1 to Indemnification Agreement (Incorporated by reference to an exhibit to the Registrant’s Current Report on Form 8-K with the Commission on October 23, 2006.)
10.6
Modification of Profit Sharing Plan† (Incorporated by reference to an exhibit to the Registrant’s Annual Report on Form 10-K filed with the Commission on December 10, 2014.)
10.7
Change in Control Agreement dated December 4, 2007 between Star Gas Partners, L.P. and Daniel P. Donovan† (Incorporated by reference to an exhibit to the Registrant’s Annual Report on Form 10-K filed with the Commission on December 7, 2007.)
10.8
Change in Control Agreement dated December 4, 2007 between Star Gas Partners, L.P. and Richard F. Ambury† (Incorporated by reference to an exhibit to the Registrant’s Annual Report on Form 10-K filed with the Commission on December 7, 2007.)
10.9
Employment Agreement dated April 28, 2008 between Star Gas Partners, L.P. and Richard Ambury† (Incorporated by reference to an exhibit to the Registrant’s Annual Report on Form 10-K filed with the Commission on December 10, 2008.)
10.10
Agreement dated November 2, 2009 between Star Gas Partners, L.P. and Richard G. Oakley† (Incorporated by reference to an exhibit to the Registrant’s Current Report on Form 8-K dated November 3, 2009.)
10.11
Letter Agreement, dated as of July 22, 2013, between the Partnership and Steven Goldman regarding Change of Control† (Incorporated by reference to an exhibit to the Registrant’s Current Report on Form 8-K dated July 23, 2013.)
10.12
First Amendment to Letter Agreement, dated as of September 30, 2015, between the Partnership and Dan Donovan (Incorporated by reference to an exhibit to the Registrant’s Current Report on Form 8-K dated October 2, 2015.)
Exhibit
Number
Description
10.13
Letter Agreement, dated as of December 6, 2016, between the Partnership and Steven Goldman regarding employment† (Incorporated by reference to an exhibit to the Registrant’s Annual Report on Form 10-K filed with the Commission on December 7, 2016.)
10.14
Letter Agreement, dated as of June 19, 2019, between the Company and Jeffrey M. Woosnam regarding employment (Incorporated by reference to an exhibit to Registrant’s Current Report on Form 8-K dated June 21, 2019.)
10.15
Fifth Amended and Restated Credit Agreement, dated as of December 4, 2019 (Incorporated by reference to an exhibit to the Registrant’s Annual Report on Form 10-K filed with the Commission on December 5, 2019.)
10.16
Fifth Amended and Restated Pledge and Security Agreement, dated as of December 4, 2019 (Incorporated by reference to an exhibit to the Registrant’s Annual Report on Form 10-K filed with the Commission on December 5, 2019.)
10.17
Waiver to the Fifth Amended and Restated Credit Agreement, dated as of November 5, 2020. (Incorporated by reference to an exhibit to the Registrant’s Annual Report on Form 10-K filed with the Commission on December 7, 2020.)
10.18
Unit Purchase Agreement, dated as of December 9, 2020, between the Company and Moab Partners, L.P. (Incorporated by reference to an exhibit to the Registrant’s Quarterly Report on Form 10-Q dated February 3, 2021.)
10.19
Unit Purchase Agreement, dated as of January 27, 2021, between the Company and Moab Partners, L.P. (Incorporated by reference to an exhibit to the Registrant’s Quarterly Report on Form 10-Q dated February 3, 2021.)
Code of Business Conduct and Ethics (Incorporated by reference to an exhibit to the Registrant’s Current Report on Form 8-K dated November 14, 2014.)
21*
Subsidiaries of the Registrant (Filed herewith.)
31.1*
Certification of Chief Executive Officer, Star Group, L.P., pursuant to Rule 13a-14(a)/15d-14(a)
31.2*
Certification of Chief Financial Officer, Star Group, L.P., pursuant to Rule 13a-14(a)/15d-14(a)
32.1*
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*
Inline XBRL Instance Document
101.SCH*
Inline XBRL Taxonomy Extension Schema Document
101.CAL*
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB*
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
Inline XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF*
Inline XBRL Taxonomy Extension Definition Linkbase Document
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exibit 101)
*
Filed Herewith
†
Employee compensation plan.