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 theU.S. and global economies, the timing, scope and effectiveness of federal, state and local governmental responses to the pandemic, the effect of weather conditions on our financial performance, the price and supply of the products that we sell, the consumption patterns of our customers, our ability to obtain satisfactory gross profit margins, our ability to obtain new customers and retain existing customers, our ability to make strategic acquisitions, the impact of litigation, our ability to contract for our current and future supply needs, natural gas conversions, future union relations and the outcome of current and future union negotiations, the impact of current and future governmental regulations, including climate change, environmental, health, and safety regulations, the ability to attract and retain employees, customer credit worthiness, counterparty credit worthiness, marketing plans, potential cyber-attacks, general economic conditions and new technology. All statements other than statements of historical facts included in this Report including, without limitation, the statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere herein, are forward-looking statements. Without limiting the foregoing, the words "believe," "anticipate," "plan," "expect," "seek," "estimate," and similar expressions are intended to identify forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct and actual results may differ materially from those projected as a result of certain risks and uncertainties. These risks and uncertainties include, but are not limited to, those set forth in this Report under the 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
InDecember 2019 , there was an outbreak of a new strain of coronavirus ("COVID-19"). OnMarch 11, 2020 , theWorld Health Organization characterized the outbreak of COVID-19 as a global pandemic and recommended containment and mitigation measures.The United States has declared a national emergency concerning the outbreak, which has adversely impacted global activity and contributed to significant declines and volatility in financial markets. Public health and governmental authorities nationally and in affected regions have taken and continue to take extraordinary and wide-ranging actions to contain and combat the outbreak and spread of COVID-19, including restrictions on travel and business operations, quarantines, and orders and similar mandates for many individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations. Our business is concentrated in the Northeast and Mid-Atlantic sections ofthe United States . These areas have been and continue to be significantly impacted by the virus. We have been designated by state and local governmental officials in the markets we serve as providing essential services during the COVID-19 pandemic. Therefore, we have continued to make fuel deliveries and provide emergency services to all areas in which we operate. We are closely monitoring all official pronouncements and executive orders concerning our status as an essential business. To date, we have not experienced any supply chain issues impacting our ability to deliver petroleum products to our customers. However, we are experiencing disruptions in the procurement of certain HVAC equipment and home generators. SinceMarch 2020 , we have implemented various measures in response to the COVID-19 pandemic, such as a majority of our office personnel 31
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working remotely. While these measures have not significantly impacted our ability to serve our customers to date, these measures may become strained or result in service delays, especially as we enter the peak heating season.
As a result of the COVID-19 pandemic, and in order to protect the safety and health of our workforce and our customers, we have expanded certain employee benefit programs and will incur additional operating costs such as sanitizing our facilities, providing personal protective equipment for our employees and providing IT infrastructure to allow many office, clerical, sales and customer service employees to work from home. At this time, we expect the annual cost of these undertakings to be at least$2.0 million . In certain markets more heavily impacted by the pandemic, we ceased making non-emergency service calls that would have been performed in the third quarter of fiscal 2020 under normal conditions. To a certain extent, our service activity in the fourth quarter of fiscal 2020 reflected a return to somewhat normal conditions. At this time, we expect to experience a modest increase in service costs in future quarters as a result of non-emergency service calls being pushed to the peak heating oil season. In the third quarter of fiscal 2020, we believe that some of our customers deferred non-emergency services, including the installation of new equipment, which caused a decline in equipment installation sales of$2.8 million , or 11.5%, versus the prior-year period. However, in the fourth quarter of fiscal 2020, our installation sales rebounded and increased by$2.4 million , or 9.0%, versus the fourth quarter of fiscal 2019. Also, in the third quarter of fiscal 2020, we experienced a decline in motor fuel sales volume of 10.1 million gallons, or 23.7% versus the prior year's period due to a significant reduction in economic activity. This trend continued into the fourth quarter of fiscal 2020, albeit not as great as the third quarter of fiscal 2020 as motor fuel sales decreased by 4.7 million gallons, or 10.6 %. If we continue to see declines in equipment and motor fuel sales, our financial results may suffer accordingly. As ofSeptember 30, 2020 , we had accounts receivable of$83.6 million , of which$57.0 million was due from residential customers and$26.6 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 itsApril 2020 andJune 2020 Federal and State income tax payments toJuly 2020 and to defer certain payroll tax withholdings relating to calendar 2020 to calendar 2021 and 2022. We believe COVID-19's impact on our business, operating results, cash flows (including the collection of current and future accounts receivable) and/or financial condition primarily will be driven by the severity and duration of the pandemic, the pandemic's impact on theU.S. and global economies, the price of petroleum products, and the timing, scope and effectiveness of federal, state and local governmental responses to the pandemic. We continue to monitor the effects of the pandemic on our business; however, the primary drivers are beyond our knowledge and control and, as a result, at this time we cannot reasonably estimate the ultimate adverse impact COVID-19 will have on our business, operating results, cash flows and/or financial condition going forward.
Impact on Liquidity of Increases and Decreases in Wholesale Product Cost
Our liquidity is adversely impacted in times of increasing wholesale product costs, as we must use more cash to fund our hedging requirements as well as the increased levels of accounts receivable and inventory. This may result in higher interest expense as a result of increased working capital borrowing to finance higher receivables and/or inventory balances. We may also incur higher bad debt expense and credit card processing costs as a result of higher selling prices as well as higher vehicle fuel costs due to the increase in energy costs. While our liquidity is impacted by initial margin requirements for new future positions used to hedge our inventory, it can also be adversely impacted by sudden and sharp 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. 32
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Liquid Product Price Volatility
Volatility, which is reflected in the wholesale price of liquid products, including home heating oil, propane and motor fuels, has a larger impact on our business when prices rise. Consumers are price sensitive to heating cost increases, which can lead to increased gross customer losses. As a commodity, the price of home heating oil is generally impacted by many factors, including economic and geopolitical forces, and, most recently, the COVID-19 pandemic, and is closely linked to the price of diesel fuel. The volatility in the wholesale cost of diesel fuel as measured by theNew York Mercantile Exchange ("NYMEX"), for the fiscal years endingSeptember 30, 2016 , through 2020, on a quarterly basis, is illustrated in the following chart (price per gallon): Fiscal 2020 (a) Fiscal 2019 Fiscal 2018 Fiscal 2017 Fiscal 2016 Quarter Ended Low High Low High Low High Low High Low High December 31$ 1.86 $ 2.05 $ 1.66 $ 2.44 $ 1.74 $ 2.08 $ 1.39 $ 1.70 $ 1.08 $ 1.61 March 31 0.95 2.06 1.70 2.04 1.84 2.14 1.49 1.70 0.87 1.26 June 30 0.61 1.22 1.78 2.12 1.96 2.29 1.37 1.65 1.08 1.57 September 30 1.08 1.28 1.75 2.08 2.05 2.35 1.45 1.86 1.26 1.53 a) OnNovember 30, 2020 , the NYMEX ultra low sulfur diesel contract closed at$1.37 per gallon or$0.02 per gallon lower than the average of$1.39 in Fiscal 2020. Income Taxes Book versus Tax Deductions The amount of cash flow generated in any given year depends upon a variety of factors including the amount of cash income taxes required, which will increase as depreciation and amortization decreases. The amount of depreciation and amortization that we deduct for book (i.e., financial reporting) purposes will differ from the amount that the Company can deduct for Federal tax purposes. The table below compares the estimated depreciation and amortization for book purposes to the amount that we expect to deduct for Federal tax purposes, based on currently owned assets. While we file our tax returns based on a calendar year, the amounts below are based on ourSeptember 30 fiscal year, and the tax amounts include any 100% bonus depreciation available for fixed assets purchased. However, this table does not include any forecast of future annual capital purchases.
Estimated Depreciation and Amortization Expense
(in thousands) Fiscal Year Book Tax 2020$ 35,608 $ 36,127 2021 31,011 24,484 2022 25,851 20,188 2023 22,674 18,566 2024 18,441 17,847 2025 14,406 16,689 Weather Hedge Contracts Weather conditions have a significant impact on the demand for home heating oil and propane because certain customers depend on these products principally for space heating purposes. Actual weather conditions may vary substantially from year to year, significantly affecting the Company's financial performance. To partially mitigate the adverse effect of warm weather on cash flow, we have used weather hedging contracts for a number of years with several providers. Under these contracts, we are entitled to a payment if the total number of degree days within the hedge period is less than the ten-year average. The "Payment Thresholds," or strikes, are set at various levels. In fiscal 2021, we are obligated to make a payment capped at$5.0 million if degree days exceed the ten year average. The hedge period runs fromNovember 1 through March 31 , taken as a whole, for each respective fiscal year. For fiscal 2020 we recorded a$10.1 million benefit, and for fiscal 2019 we recorded a charge of$2.1 million . 33
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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 2020 2019 2018 Net Net Net Gross Customer Gains / Gross Customer Gains / Gross Customer Gains / Gains Losses (Attrition) Gains Losses (Attrition) Gains Losses (Attrition) First Quarter 23,900 23,100 800 26,200 25,400 800 24,700 19,900 4,800 Second Quarter 12,600 18,200 (5,600 ) 12,600 22,300 (9,700 ) 14,100 18,900 (4,800 ) Third Quarter 8,000 13,600 (5,600 ) 7,100 15,900 (8,800 ) 7,900 16,200 (8,300 ) Fourth Quarter 10,700 15,800 (5,100 ) 13,200 20,600 (7,400 ) 13,100 19,400 (6,300 ) Total 55,200 70,700 (15,500 ) 59,100 84,200 (25,100 ) 59,800 74,400 (14,600 ) 34
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Customer gains (attrition) as a percentage of home heating oil and propane customer base Fiscal Year Ended 2020 2019 2018 Gross Customer Net Gross Customer Net Gross Customer Net Gains / Gains / Gains / Gains Losses (Attrition) Gains Losses (Attrition) Gains Losses (Attrition) First Quarter 5.3 % 5.1 % 0.2 % 5.8 % 5.6 % 0.2 % 5.4 % 4.3 % 1.1 % Second Quarter 2.8 % 4.0 % (1.2 )% 2.8 % 5.0 % (2.2 )% 3.0 % 4.1 % (1.1 )% Third Quarter 1.8 % 3.0 % (1.2 )% 1.6 % 3.5 % (1.9 )% 1.7 % 3.5 % (1.8 )% Fourth Quarter 2.3 % 3.5 % (1.2 )% 2.7 % 4.2 % (1.5 )% 2.9 % 4.3 % (1.4 )% Total 12.2 % 15.6 % (3.4 )% 12.9 % 18.3 % (5.4 )% 13.0 % 16.2 % (3.2 )% 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. For fiscal 2019, the Company lost 25,100 accounts (net), or 5.4%, of its home heating oil and propane customer base, compared to 14,600 accounts lost (net), or 3.2%, of its home heating oil and propane customer base, during fiscal 2018. Gross customer gains were 700 less than the prior year's comparable period, and gross customer losses were 9,800 accounts higher. Gross customer losses exceeded the prior year primarily due to the Company's decision not to renew certain low margin accounts, along with increased losses due to credit and the price of home heating oil and propane. During fiscal 2020, we estimate that we lost (1.1%) of our home heating oil and propane accounts to natural gas conversions versus (1.4%) for fiscal 2019 and (1.3%) for fiscal 2018. Losses to natural gas in our footprint for the heating oil and propane industry could be greater or less than the Company's estimates.
Acquisitions
The timing of acquisitions and the types of products sold by acquired companies impact year-over-year comparisons. During fiscal 2020 the Company acquired two heating oil dealers. During fiscal 2019 the Company completed three acquisitions. 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 2020 Acquisitions
Acquisition Month of Acquisition Home Heating Oil and Motor Fuel and Other
Total Number Propane Petroleum Products 1 October 1,085 - 1,085 2 July 2,400 - 2,400 3,485 - 3,485 (in thousands of gallons) Fiscal 2019 Acquisitions Acquisition Month of Acquisition Home Heating Oil and Motor Fuel and Other Total Number Propane Petroleum Products 1 November 130 - 130 2 January (a) - - - 3 May 13,200 6,772 19,972 13,330 6,772 20,102
(a) The business acquired in
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Sale of Propane Assets
In
Years Ended September 30, (in thousands) 2020 2019 2018 Volume: Propane 2,741 2,765 2,885 Sales: Petroleum Products$ 5,906 $ 6,377 $ 6,478 Installations and Services 1,224 1,540 2,184 Total Sales$ 7,130 $ 7,917 $ 8,662 Seasonality The following matters should be considered in analyzing our financial results. The Company's fiscal year ends onSeptember 30 . All references to quarters and years, respectively, in this document are to the fiscal quarters and fiscal years unless otherwise noted. The seasonal nature of our business has resulted, on average, during the last five years, in the sale of approximately 30% of the volume of home heating oil and propane in the first fiscal quarter and 50% of the volume in the second fiscal quarter, the peak heating season. Approximately 25% of the volume of motor fuel and other petroleum products is sold in each of the four fiscal quarters. We generally realize net income during the quarters ending December and March and net losses during the quarters ending June and September. In addition, sales volume typically fluctuates from year to year in response to variations in weather, wholesale energy prices and other factors.
Degree Day
A "degree day" is an industry measurement of temperature designed to evaluate energy demand and consumption. Degree days are based on how far the average daily temperature departs from 65°F. Each degree of temperature above 65°F is counted as one cooling degree day, and each degree of temperature below 65°F is counted as one heating degree day. Degree days are accumulated each day over the course of a year and can be compared to a monthly or a long-term (multi-year) average to see if a month or a year was warmer or cooler than usual. Degree days are officially observed by theNational Weather Service . Every ten years, theNational Oceanic and Atmospheric Administration ("NOAA") computes and publishes average meteorological quantities, including the average temperature for the last 30 years by geographical location, and the corresponding degree days. The latest and most widely used data covers the years from 1981 to 2010. Our calculations of "normal" weather are based on these published 30-year averages for heating degree days, weighted by volume for the locations where we have existing operations.
Consolidated Results of Operations
The following is a discussion of the consolidated results of operations of the Company and its subsidiaries and should be read in conjunction with the historical financial and operating data and Notes thereto included elsewhere in this Annual Report. Fiscal Year EndedSeptember 30, 2020 Compared to Fiscal Year EndedSeptember 30, 2019 Volume
For fiscal 2020, the retail volume of home heating oil and propane sold decreased by 31.9 million gallons, or 9.2%, to 313.6 million gallons, compared to 345.5 million gallons for fiscal 2019. For those locations where we had existing operations during both periods, which we sometimes refer to as the "base business" (i.e., excluding
36 -------------------------------------------------------------------------------- acquisitions), temperatures (measured on a heating degree day basis) for fiscal 2020 were 6.0% warmer than fiscal 2019 and 10.2% warmer than normal, as reported byNOAA . For fiscal 2020, net customer attrition for the base business was 3.4%. The impact of fuel conservation, along with any period-to-period differences in delivery scheduling, the timing of accounts added or lost during the fiscal years, equipment efficiency, and other volume variances not otherwise described, are included in the chart below under the heading "Other." An analysis of the change in the retail volume of home heating oil and propane, which is based on management's estimates, sampling, and other mathematical calculations and certain assumptions, is found below: Heating Oil (in millions of gallons) and Propane Volume - Fiscal 2019 345.5 Net customer attrition (16.6 ) Impact of warmer temperatures (20.0 ) Acquisitions 11.4 Other (a) (6.7 ) Change (31.9 ) Volume - Fiscal 2020 313.6
(a) Of the 6.7 million gallons, 4.0 million gallons is a decline in lower
margin commercial and bid volume. 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 2020 compared to fiscal 2019: Twelve Months Ended September 30, September 30, Customers 2020 2019 Residential Variable 41.5 % 40.6 % Residential Price-Protected (Ceiling and Fixed Price) 46.1 % 46.7 % Commercial/Industrial/Other 12.4 % 12.7 % Total 100.0 % 100.0 % Volume of motor fuel and other petroleum products sold decreased by 15.6 million gallons, or 9.3%, to 151.8 million gallons for fiscal 2020, compared to 167.4 million gallons for fiscal 2019, as the additional volume provided by acquisitions of 9.2 million gallons was reduced by lower wholesale volume sales (2.1 million gallons) due to the warmer weather and lower volume sales of motor fuels (22.7 million gallons) resulting from COVID-19's impact on economic activity and the loss of certain accounts. We believe that the decline in motor fuel sales may continue in the near term.
Product Sales
For fiscal 2020, product sales decreased$0.3 billion , or 19.1%, to$1.2 billion , compared to$1.5 billion in fiscal 2019, reflecting a decrease in in wholesale product cost of$0.3597 per gallon, or 18.5%, and a decrease in total volume sold of 9.3%.
Installations and Services Sales
For fiscal 2020, installation and service sales decreased$6.4 million , or 2.2%, to$281.4 million , compared to$287.8 million for fiscal 2019 as the additional revenue provided from acquisitions of$10.3 million was reduced by lower revenue in the base business of$16.7 million . In the base business, service and installation sales declined due to net customer attrition and the impact of warmer weather experienced during 2019-2020 heating season, which reduced billable service revenue and the need for the installation of new equipment. During the third quarter of fiscal 2020 we ceased making non-emergency service calls that would have been performed under normal 37 -------------------------------------------------------------------------------- conditions due to COVID-19 and a portion of these service calls were completed in the fourth quarter of fiscal 2020. In addition, we believe that some of our customers have deferred non-emergency services, including the installation of new equipment due to COVID-19, which has caused a decline in equipment installation sales and reactive service calls and may continue to reduce future service and installation income.
Cost of Product
For fiscal 2020, cost of product decreased$259.9 million , or 26.0%, to$738.7 million , compared to$998.6 million for fiscal 2019, due to a decrease in wholesale product costs of$0.3597 per gallon, or 18.5% and a decrease in total volume sold of 9.3%. 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 2020 increased by$0.0655 per gallon, or 5.3%, to$1.2956 per gallon, from$1.2301 per gallon during fiscal 2019. We cannot assume that the per gallon margins realized during fiscal 2020 are sustainable for future periods. Product sales and cost of product include home heating oil, propane, motor fuel, other petroleum products and liquidated damages billings. Twelve Months Ended September 30, 2020 September 30, 2019 Amount Per Amount Per Home Heating Oil and Propane (in millions) Gallon (in millions) Gallon Volume 313.6 345.5 Sales $ 924.4$ 2.9479 $ 1,100.0 $ 3.1836 Cost $ 518.1$ 1.6523 $ 675.0$ 1.9535 Gross Profit $ 406.3$ 1.2956 $ 425.0$ 1.2301 Amount Per Amount Per
Motor Fuel and Other Petroleum Products (in millions) Gallon
(in millions) Gallon Volume 151.8 167.4 Sales $ 261.6$ 1.7238 $ 366.1$ 2.1881 Cost $ 220.6$ 1.4534 $ 323.6$ 1.9340 Gross Profit $ 41.0$ 0.2704 $ 42.5$ 0.2541 Amount Amount Total Product (in millions) (in millions) Sales$ 1,186.0 $ 1,466.1 Cost $ 738.7 $ 998.6 Gross Profit $ 447.3 $ 467.5 For fiscal 2020, total product gross profit was$447.3 million , which was$20.2 million , or 4.3%, less than fiscal 2019, as a decrease in home heating oil and propane volume ($39.2 million ) and in gross profit from motor fuel and other petroleum products ($1.5 million ) was slightly offset by higher margins ($20.5 million ).
Cost of Installations and Services
Total installation costs for fiscal 2020 decreased to
38 -------------------------------------------------------------------------------- Service expense decreased by$13.5 million , or 7.4%, to$169.9 million for fiscal 2020, representing 94.5% of service sales, versus$183.4 million , or 98.5% of service sales, for fiscal 2019. We realized a combined gross profit from services and installations of$27.7 million for fiscal 2020 compared to a combined gross profit of$20.2 million for fiscal 2019, a$7.5 million improvement in profitability. Acquisitions positively impacted the comparison by$2.2 million and in the base business, service gross profit improved by$5.3 million due to warmer temperatures of 6.0% which reduced the demand for service, and certain measures undertaken by the company to improve operating efficiency. In the base business, both service revenue and expenses declined due to the impact of COVID-19 during the third quarter of fiscal 2020; however, the decline in service expense was greater than the decline in revenue. A portion of the expense decline related to service work that would normally have been performed during the third quarter of fiscal 2020, but was performed in the fourth quarter of fiscal 2020. We believe such service work may be performed in future periods and related expenses will be incurred in those periods. 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 2020, the change in the fair value of derivative instruments
resulted in a
During fiscal 2019, the change in the fair value of derivative instruments
resulted in a
Delivery and Branch Expenses
For fiscal 2020, delivery and branch expenses decreased$45.6 million , or 12.4%, to$323.4 million , compared to$369.0 million for fiscal 2019, as additional costs from acquisitions of$9.7 million were more than offset by a$55.3 million , or 15.0%, decrease in expenses within the base business. The decline in the base business was attributable to a$10.5 million , or 9.9%, reduction in direct delivery costs due to lower volume, lower insurance expense of$9.5 million , lower bad debt expense and credit card processing fees of$6.2 million , lower medical cost of$3.9 million , a$3.8 million decrease in expenses related to the Company's concierge level of service program (which was greatly curtailed inJanuary 2019 ), and other reductions in operating costs totaling$9.2 million , or 2.5%, as we continue to improve Star's operating efficiency. Operating expenses were also reduced by$12.2 million due to the impact of our weather hedging program. As ofSeptember 30, 2019 we recorded a charge of$2.1 million , versus a benefit of$10.1 million as ofSeptember 30, 2020 . Bad debt expense was lower due to the decline in sales dollars, and insurance expense was lower due in part to the warm weather for fiscal 2020 and its impact on claim experience. We believe that medical claims were lower due to COVID-19 "sheltering in place" and "stay at home" orders, which curtailed plan members seeking medical attention.
Depreciation and Amortization Expenses
For fiscal 2020, depreciation and amortization expense increased$1.7 million , or 5.2%, to$34.6 million , compared to$32.9 million for fiscal 2019, largely due to acquisitions.
General and Administrative Expenses
For fiscal 2020, general and administrative expenses decreased by$3.3 million or 11.8%, to$25.1 million , from$28.4 million for fiscal 2019, primarily due to lower legal and professional expenses of$4.6 million , a$1.5 million charge related to the discontinued use of a tank monitoring system that occurred during fiscal 2019 (and did not recur in the current fiscal year), and other savings of$0.1 million , partially offset by a$2.9 million increase in profit sharing expense. The Company accrues approximately 6.0% of Adjusted EBITDA as defined in its profit sharing plan for distribution to its employees, and this amount is payable when the Company achieves Adjusted EBITDA of at least 70% of the amount budgeted. The dollar amount of the profit sharing pool is subject to increases and decreases corresponding to increases and decreases in Adjusted EBITDA. 39
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Finance Charge Income
For fiscal 2020, finance charge income decreased by$1.3 million , or 26.1%, to$3.8 million compared to$5.1 million for fiscal 2019, primarily due to lower customer late payment charges due to improved collections and lower sales volume at lower selling prices. Interest Expense, Net For fiscal 2020, net interest expense decreased by$1.5 million , or 13.1%, to$9.7 million compared to$11.2 million for fiscal 2019. The change year-over-year reflects a decrease in average borrowings of$13.1 million from$175.8 million for fiscal 2019 to$162.7 million for fiscal 2020, and a decrease in the weighted average interest rate from 5.3% for 2019 to 4.9% for fiscal 2020. To hedge against rising interest rates, the Company utilizes interest rate swaps. AtSeptember 30, 2020 ,$64.0 million , or 52%, of our long term debt, was fixed. Interest income remained unchanged.
Amortization of Debt Issuance Costs
For fiscal 2020, amortization of debt issuance costs was
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 inOctober 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.
Income Tax Expense
For fiscal 2020, the Company's income tax expense increased by$13.1 million to$20.6 million , from$7.5 million for fiscal 2019, due primarily to an increase in income before income taxes of$ 51.4 million , primarily due an increase in Adjusted EBITDA of$35.0 million and a$22.4 million non-cash favorable change in the fair market value of derivative instruments.
Net Income
For fiscal 2020, net income increased$38.3 million , or 217.1%, to$55.9 million due primarily to a$35.0 million increase in Adjusted EBITDA, described below, and a favorable change in the fair value of derivative instruments of$22.4 million , partially offset by a$13.1 million increase in income tax expense, and a$5.7 million loss on certain propane assets held for sale.
Adjusted EBITDA
For fiscal 2020, Adjusted EBITDA increased by$35.0 million , or 36.7%, to$130.3 million compared to fiscal 2019. Acquisitions provided$9.3 million of Adjusted EBITDA, while Adjusted EBITDA in the base business increased by$25.7 million . In the base business, the impact of higher per gallon home heating oil and propane margins of6.6 cents per gallon, lower operating expenses of$46.4 million , a favorable change in the impact from the Company's weather hedge of$12.2 million , and an improvement in net service and installation profitability of$5.3 million more than offset the impact from a decrease in volume of home heating oil and propane sold and the decline in Star's motor fuel business. With regard to the Company's weather hedge, warmer temperatures during the fiscal 2020 winter hedge period resulted in lower degree days and, per the terms of Star's weather hedge contracts, the collection of$10.1 million . By contrast, the third quarter of fiscal 2020 was colder than normal and resulted in the Company selling more volume than anticipated. If the additional degree days in the third quarter had occurred during the period covered by the weather hedge (i.e., November through March) the payout would have been less than$2.0 million . 40 -------------------------------------------------------------------------------- EBITDA and Adjusted EBITDA should not be considered as an alternative to net income (as an indicator of operating performance) or as an alternative to cash flow (as a measure of liquidity or ability to service debt obligations), but provide additional information for evaluating the Company's ability to make the Minimum Quarterly Distribution.
EBITDA and Adjusted EBITDA are calculated as follows:
Twelve Months Ended September 30, (in thousands) 2020 2019 Net income$ 55,918 $ 17,637 Plus: Income tax expense 20,625 7,517 Amortization of debt issuance cost 999
1,032
Interest expense, net 9,702
11,164
Depreciation and amortization 34,623
32,901
EBITDA (a) 121,867
70,251
(Increase) / decrease in the fair value of derivative instruments 2,755 25,113 Other income, net 5,724 - Adjusted EBITDA (a) 130,346 95,364 Add / (subtract) Income tax expense (20,625 ) (7,517 ) Interest expense, net (9,702 ) (11,164 ) Provision for losses on accounts receivable 3,441
9,541
Decrease in receivables 34,366
10,137
Decrease (increase) in inventories 14,588 (6,306 ) Increase in customer credit balances 14,775
3,615
Change in deferred taxes (3,544 ) (5,126 ) Change in other operating assets and liabilities 12,023
8,838
Net cash provided by operating activities$ 175,668 $
97,382
Net cash used in investing activities$ (28,141 ) $ (82,166 ) Net cash used in financing activities$ (95,515 ) $ (24,848 )
(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. 41
-------------------------------------------------------------------------------- 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 EndedSeptember 30, 2019 Compared to Fiscal Year EndedSeptember 30, 2018
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
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 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 ofSeptember 30, 2020 as compared toSeptember 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. During fiscal 2019, cash provided by operating activities increased$39.9 million to$97.4 million , compared to$57.5 million during fiscal 2018. This reflects a$9.8 million decrease in cash generated from operations primarily due to the non-recurrence in fiscal 2019 of the impact in fiscal 2018 of certain tax planning initiatives and the Tax Reform Act on current income taxes;$57.5 million higher collections of accounts receivables (net of customer credit balances);$22.0 million of decreases in other current and long term assets, the majority related to a reduction in 2019 of a current income receivable established in 2018. These were partially offset by a$12.6 million unfavorable change in accounts payable due primarily to the timing of inventory purchases, a$10.5 million unfavorable change in inventory (mostly due to a build in product inventory to a level similar to that as ofSeptember 30, 2017 ), and a$6.7 million unfavorable change in current and long term liabilities due in part to a 42
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smaller increase in general insurance liabilities in fiscal 2019 compared to the
increase in fiscal 2018, and a
Investing Activities
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. 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 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 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 . Our capital expenditures for fiscal 2019 totaled$11.3 million , as we invested in computer hardware and software ($4.4 million ), refurbished certain physical plants ($1.8 million ), expanded our propane operations ($2.4 million ) and made additions to our fleet and other equipment ($2.7 million ).
During fiscal 2019, we deposited
During fiscal 2019, the Company acquired one of its subcontractors, a liquid product dealer and the assets of a propane dealer for an aggregate purchase price of approximately$60.9 million . The gross purchase price was allocated$44.7 million to intangible assets and$13.7 million to fixed assets, leaving$2.5 million for working capital.
Financing Activities
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 ourGeneral Partner unit holders (including$0.8 million of incentive distributions as provided in our Partnership Agreement). During fiscal 2019, we paid distributions of$24.8 million to our Common Unit holders and$0.8 million to our General Partner Unit holders (including$0.7 million of incentive distributions as provided in our Partnership Agreement). We borrowed$139.3 million under our revolving credit facility and subsequently repaid$79.3 million . We also repaid$7.5 million of our term loan and repurchased 5.4 million common units for$51.4 million in connection with our unit repurchase plan. 43
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FINANCING AND SOURCES OF LIQUIDITY
Liquidity and Capital Resources Comparatives
Our primary uses of liquidity are to provide funds for our working capital, capital expenditures, distributions on our units, acquisitions and unit repurchases. Our ability to provide funds for such uses depends on our future performance, which will be subject to prevailing economic, financial, 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 ofSeptember 30, 2020 ($56.9 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 ofSeptember 30, 2020 , we had accounts receivable of$83.6 million of which$57.0 million is due from residential customers and$26.6 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 ofSeptember 30, 2020 , we had no borrowings under our revolving credit facility,$123.5 million outstanding under our term loan, and$3.5 million in letters of credit outstanding, and our ability to borrow was reduced by$11.1 million to secure hedges with the bank group. Under the terms of the fifth amended and restated credit agreement, we must maintain at all times Availability (borrowing base less amounts borrowed and letters of credit issued) of 15% of the maximum facility size and a fixed charge coverage ratio of not less than 1.15. We must also maintain a senior secured leverage ratio that cannot be more than 3.0 as ofJune 30th orSeptember 30th , and no more than 4.5 as ofDecember 31st orMarch 31st . As ofSeptember 30, 2020 , Availability, as defined in the fifth amended and restated revolving credit facility agreement, was$203.4 million and we were in compliance with the fixed charge coverage ratio and senior secured leverage ratio. Maintenance capital expenditures for fiscal 2021 are estimated to be approximately$14.0 million , excluding the capital requirements for leased fleet which we currently estimate to be$10.3 million . In addition, we plan to invest approximately$1.3 million in our propane operations. Distributions for fiscal 2021, at the current quarterly level of$0.1325 per unit, would result in aggregate payments of approximately$22.2 million to Common Unit holders,$0.9 million to ourGeneral Partner (including$0.8 million of incentive distribution as provided for in our Partnership Agreement) and$0.8 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 . OnNovember 5, 2020 we obtained a waiver from our bank group which waived a$13.0 million payment under the Excess Cash Flow provision and increased the Company's liquidity by an equal amount (see Note 13 -Long-Term Debt and Bank Facility Borrowings). Over the last two fiscal years, the Company was required to deposit on average$9.2 million into our captive insurance company as collateral. For fiscal 2021, we are not required to make any additional deposits. In addition, onOctober 27, 2020 , we completed a sale of certain propane assets and received cash proceeds of$6.1 million . Further, subject to any additional liquidity issues or concerns resulting from the current COVID-19 pandemic, we intend to continue to repurchase Common Units pursuant to our unit repurchase plan, as amended from time to time, and seek attractive acquisition opportunities within the Availability constraints of our revolving credit facility and funding resources.
Contractual Obligations and Off-Balance Sheet Arrangements
We have no special purpose entities or off balance sheet debt.
Long-term contractual obligations, except for our long-term debt andNew England Teamsters andTrucking Industry Pension Fund withdrawal obligations and operating leases liabilities, are not recorded in our consolidated balance sheet. Non-cancelable purchase obligations are obligations we incur during the normal course of business, based on projected needs. The Company had no capital lease obligations as ofSeptember 30, 2020 . 44
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The table below summarizes the payment schedule of our contractual obligations
at
Payments Due by Fiscal Year 2022 2024 Total 2021 and 2023 and 2025 Thereafter Debt obligations (a)$ 123,500 $ 13,000 $ 26,000 $ 84,500 $ - Operating lease obligations (b) 125,576 23,743 36,294 27,525 38,014
Purchase obligations and other (c) 70,632 12,091 13,339
10,823 34,379 Interest obligations (d) 24,266 8,826 10,695 4,745 - Long-term liabilities reflected on the balance sheet 846 350 496 - -$ 344,820 $ 58,010 $ 86,824 $ 127,593 $ 72,393
(a) Reflects payments due of debt existing as of
the terms of our fifth amended and restated credit agreement. Excludes potential prepayments resulting from Excess Cash Flow as defined in the aforementioned agreement.
(b) Represents various operating leases for office space, trucks, vans and other
equipment with third parties. Maturities of operating leases are presented
undiscounted. (c) Represents non-cancelable commitments as ofSeptember 30, 2020 for operations such as weather hedge premiums, 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
theNew England Teamsters andTrucking Industry Pension Fund . (d) Reflects interest obligations on our term loan dueDecember 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 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 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 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:
We calculate amortization using the straight-line method over periods ranging from five to twenty years for intangible assets with finite useful lives based on historical statistics. We use amortization methods and determine asset values based on our best estimates using reasonable and supportable assumptions and projections. Key assumptions used to determine the value of these intangibles include projections of future customer attrition or growth rates, product margin increases, operating expenses, our cost of capital, and corporate income tax rates. For significant acquisitions we may engage a third party valuation firm to assist in the valuation of intangible assets of that acquisition. We assess the useful lives of intangible assets based on the estimated period over which we will receive benefit from such intangible assets such as historical evidence regarding customer churn rate. In some cases, the estimated useful lives are based on contractual terms. AtSeptember 30, 2020 , we had$90.3 million of net intangible assets subject to amortization. If lives were shortened by one year, we estimate that amortization for these assets for fiscal 2020 would have increased by approximately$4.9 million . 45 -------------------------------------------------------------------------------- FASB ASC 350-10-05, Intangibles-Goodwill and Other, requires goodwill to be assessed at least annually for impairment. The Company has one reporting unit and performs its annual assessment at the end of August. As provided for by the standard, we performed qualitative assessments (commonly referred to as Step 0) to evaluate whether it is more-likely-than-not (a likelihood that is more than 50%) that goodwill has been impaired, as a basis to determine whether it is necessary to perform the two-step quantitative impairment test. The Company's qualitative assessment included a review of factors such as our reporting unit's market value compared to its carrying value, our short-term and long-term unit price performance, our planned overall business strategy compared to recent financial results, as well as macroeconomic conditions, industry and market considerations, cost factors, and other relevant Company-specific events. In considering the totality of the qualitative factors assessed, based on the weight of evidence it was determined that it was not more-likely-than-not that goodwill was impaired as ofAugust 31, 2020 , and as such it was determined that further goodwill testing was not necessary. Intangible assets with finite lives must be assessed for impairment whenever changes in circumstances indicate that the assets may be impaired. The assessment for impairment requires estimates of future cash flows related to the intangible asset. To the extent the carrying value of the assets exceeds its future undiscounted cash flows, an impairment loss is recorded based on the fair value of the asset. 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.
Insurance Reserves
We currently self-insure a portion of workers' compensation, auto, general liability and medical claims. We establish reserves based upon expectations as to what our ultimate liability may be for outstanding claims using developmental factors based upon historical claim experience, supplemented by a third-party actuary. We periodically evaluate the potential for changes in loss estimates with the support of qualified actuaries. As ofSeptember 30, 2020 , we had approximately$74.4 million of net insurance reserves. The ultimate resolution of these claims could differ materially from the assumptions used to calculate the reserves, which could have a material adverse effect on results of operations.
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