Star Group LP (SGU) 2004 Q3 法說會逐字稿

Welcome to the Star Gas Partners fiscal 2004 third-quarter results conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS). As reminder, this conference is being reported Thursday, July 29th, 2004.

I would now like to turn the conference over to Ms. Trudy Tran (ph), Investor Relations Representative.

Thank you, and good morning. If anyone wishes to access a copy of the press release, please do so at www.star-gas.com.

I would like to remind everyone that today's call contains certain forward-looking information and is subject to certain risks and certainties as indicated from time to time in the partnership's 10-K, 10-Q, 8-K and other filings with the Securities and Exchange Commission. Included risks and uncertainties are the effects of the weather on the partnership's financial results, competitive and propane and heating oil pricing pressures, and other factors impacting the propane and home heating oil distribution industry.

I would like to turn the call over to Mr. Irik P. Sevin, Chairman and CEO of Star Gas.

Good morning, everyone. Before I get into my more formal and normal flow of remarks concerning the detailed financial results of the quarter ended June and the 9 months, what I'd like to do is probably take a step back and discuss the background and the reasons for and the atmosphere in which we made the decision to not declare a distribution of all of our subordinated units -- that is, the senior subs, the junior subs and the GP.

The year has been a schizophrenic one for us. And when board members ask me how we are doing, and I tell them, we are ambivalent, or schizophrenic, what I mean by that -- and they say, what does that mean -- and I say, well, as you know, all year, the numbers ain't great. We're moving along with our program, but the numbers ain't great. More recently, the very rapid and significant move in energy prices -- and just so everybody puts it into perspective, -- just this last month, from the end of June till now, heating oil prices have gone up almost 25 percent, at least for this quarter; and in the last month alone, they have gone up 10 cents a gallon or 10 percent in a three-week period. The schizophrenia results from on the one hand, the very, very attractive results that we have gotten from the acquisition program that we undertook over the last year. We bought 16 companies. We have increased our revenue almost 11 percent. We've increased volume by 119 million gallons; and what that led to is a $16 million contribution to earnings, which largely offset a very significant differential that weather impacted us. Last year was a cold year. This year was a much warmer period, although relatively normal, significantly warmer than last year, and in fact, for the 9 months, we are impacted by almost $22 million, year-to-year comparison, due to weather. The very active, successful, productive acquisition program virtually offset that combined with continued -- at least for the 9 months -- an increase in a gross profit margins of about a penny 7, so that for the 9 months, interestingly, EBITDA was actually up $1 million over last year. Given the very significant differential in weather, we think that that was quite an accomplishment, and suggests that the program that we have had going for a number of years, in which a very successful acquisition program has driven the success of the Company, continued to allow us to offset a $22 million impact year-to-year of weather on our performance.

However, the year -- and while we are pleased with that, the year has been challenging. And by that, I don't mean a euphemism for "bad." It's been challenging in the sense of 2 things. Number one was the heating oil division's process improvement program. We have discussed that -- for those of you who have been unit holders for a long time. What we are trying to do there -- and I think we have done it, and we're starting to get traction in the June and July period from an operational and from a marketing point of view -- what we tried to do is to take advantage of the unique size of the heating oil business -- the heating oil division is 200 times the size of our average competitor, probably 2 to 3 times the size of our closest competitor -- providing us with a unique opportunity to not only rely on acquisitions, but to grow the business through a centralized format. The idea of the program was to take our size, centralize those activities that were most efficient and most effectively to be centralized, lowering our cost of operation, becoming the low-cost operator, and building a brand, and being able to deal with our customer in a much more sensitive manner. That was the concept. There's nothing wrong with that concept. And I will tell you, now, a year later, we are beginning to see -- very much so -- the operational and marketing benefits of that program.

However, during this year, as one could have expected, when you take a company that had been operating in a certain format for the last 40, 50 years, and you completely redesign how it operates, that first year is understandably going to require adjustments and modifications to get the new model right. Throughout the winter, beginning really in October, after we planned for this, we launched it last April, it's almost a year to the day that for that year, we did have to undertake a series of significant modifications and adjustments to get the new model right. That is not unusual, it should have been expected. As we disclosed everybody throughout the winter period, we were undertaking various modifications, adjustments, as is understandable, to get that new format to where it's operating the way that we originally designed it. That required about a year.

I hate using the word, but it really should have been understandable. And we are not, if I may, given that we've just not declared a dividend on the senior subs, I don't want to say that we are prideful. But we are pleased that after a year of some very, very hard work under very difficult conditions, we think we have got the model down, we think. We're starting to see that in June and July. I do want to point out that at the same time that we are going through, if you don't mind the metaphor, the maiden voyage, the shakedown crew, of this new model -- we were hit with the perfect storm. And the perfect storm is the second challenge -- unprecedented increase in energy prices.

We are no different than any other company. Our wholesale cost of product went up 45 percent this past year. It's as if you are a chair manufacturer and your wood costs go up 45 percent; if you're an automobile manufacturer, steel goes up 45 percent; in the last quarter alone, it went up 25 percent, with prices going in the last quarter alone up 23 cents a gallon, you all experience it at the pump. Well just during the same year that we were going through this reorganization, most recently in the last quarter, oil prices and home heating oil prices especially, have just skyrocketed. How to react to that is really what this distribution is about. The market, the retail market, the consumer reaction, the sticker shock, the cost that we incur to deal with our customers, at the same time that we went through the reorganization, we think we're dealing with it pretty well, but there are just uncertainties in the first -- at least the first quarter -- of experiencing these high energy prices. Interestingly, the third factor that led us to a decision was the opportunities, actually, that the first 2 factors create. Those opportunities are that we do have a new centralized model. We do have a much more facile way of communicating with our own customers and the general home heating oil consumers at-large. Secondly, knowing that our customers are impacted by the turbulence and the high energy prices, but our competitors' customers are. We think, as a result of the confluence of those 2 factors, which is our new centralized model combined with the uncertainty that consumers are having, the concern consumers are having over what are their heating oil bills going to be this next winter, that we've developed a new product that we're going to launch at the end of August or in September, when most home heating oil consumers are starting to become sensitized to next winter. We think that our competitors do not have the marketing sophistication, the consumer research that we do. And we have developed a new product that we will be launching in late August and September, to, quite frankly, take advantage of both our new format, which now, as I suggested, is working relatively well, and giving us the ability to communicate, as well as our marketing expertise in the consumer research to launch this product.

Those 3 factors, however, suggested to us, given the turbulence in the energy market, given that while we have gotten the business model down, we haven't yet seen the full benefit financially; and third, and very importantly, the opportunity to undertake the launch of a new consumer product, those three things combined suggest to us that in this environment, that it's prudent to conserve our capital, both given the uncertainty in the market and the opportunity we've got, to conserve our capital and to not declare a dividend on the junior securities at this time, this quarter.

The other factors that went into this decision are also that it's the nature of the junior securities, meaning the junior securities we look at as those securities that both participate to a greater extent in the prosperity of the Company and the prospects of the Company, and they also are the cushion when there are these uncertainties and there's a need for capital. That, to the extent in the long-term, the Company does well, the junior securities participate to a greater extent; but they are also designed that, to the extent the Company does need capital, is going through uncertain times, they are there as the subordinated securities, both the senior subordinated, the junior and the GP, to be the cushion.

Second factor that went into this is the results, meaning that while for the 9 months, we were about $1 million better than last year, these last 3 months, we were about $6 million off, just for this quarter, what we had expected. Now, when we got those results, we're not going to not pay a distribution because we are off in a quarter $6 million. You add that 6 million to the 8 million we were off in the first 6 months -- we knew we were off 8 -- and even possibly $14 million in any one year is not going to lead to a not paying the distribution. But it is within the context of the 3 factors that I mentioned. That when you are off in the quarter 6 million, it's the reasons why -- but more importantly, it's within the context. First of all, the reasons why was the weather was warm. I know this is a third quarter, and I know it's a June quarter, and I would imagine people are saying, "what are you talking about? Its warm!" Well, April and May have degree days. And April and May, degree days were off. And that impacted us by about 2, $2.5 million in this quarter due to the fact that it was warmer than we had expected and warmer than normal, in this quarter -- mostly April and May.

Secondly, this quarter was off about 5, $6 million, due to the costs that we incurred to deal with the uncertainty in the energy markets with our customers. Our central format allowed us to call our customers -- we must have called 70,000 customers to discuss with them what's going on in the energy market. That costs money. The full benefit of the redesign -- while we got some operating improvements, we are still trying to get the full financial impact, and as a result of those 2 things, the quarter was off. $6 million is not going to lead to a elimination of a distribution. However, it's within the context of combining those financial results with the uncertainty in the market and the opportunity we think we have to take advantage of the consumer sensitivities to high energy prices and the potential was very high heating oil bills this next winter that has led to this.

The other factor to be considered -- when you are thinking about this -- is that approximately 20 percent of the junior securities that have been affected by this decision are owned by senior management, Board of Directors, people involved with the Company. I am not suggesting that the impact on anybody who's not getting their distribution should be lessened because we are not getting ours. But I wanted to let everybody understand that one of the reasons we did this is that we believe in the Company. It is something that Rich Ambury said to us when we were laboring over this decision -- what is in the long-term health of this Company? What decision do you make in the long-term for this Company and deciding whether to make this -- and we understand it's only a $2 million distribution quarterly -- and not making it? Then in the long-term interests of the Company? And what we came down with -- very personal decisions -- is that we believe that we would like to reinvest in this Company; we believe that it is right for the long-term benefit of all our shareholders to preserve capital, given the energy markets, given our opportunities, to preserve the capital, for the Company, it is in its long-term interests. It's also quite curious the timing of this decision, in the sense that we are not at year-end. Why do it now?

And there was discussion that should we await year-end results, should we await results from the launch of the new product? And the decision was made that, given conditions, especially what's happened in the energy markets, given the opportunity that we see, given the results that we've had to date, and given that we are in a summer period, that we are better off preserving the capital now, and if we've got good news, if things work out, if energy prices drop to more normal historic normal levels, they drop 30 cents a gallon, if the launch of the product becomes self-funding, we then have an opportunity for good news. But rather than sit and pray that conditions change, we thought that it prudent in the long-term interests of the Company to undertake this exercise now, especially within the context, as I said, and I will get into, that it's very schizophrenic as a Company now, in the sense that all our operating people, all our new senior management people, are looking -- because they are so optimistic, they see the model working; they see the call center working; they see the morale within the field; and it's within the context of our optimism, quite counterintuitively, that we made the decision to preserve the capital, reinvest it in the business, and reinvest it in the people that have come onboard, who have put their careers here recently, that they believe that what we can do here is build a very significant company. And that's what is being done with this capital. One, addressing the issues confronting the industry, which, if I may take a step back, we get so involved in the quarter, we get so involved in the week and when you are watching the screen, get so involved in the daily gyrations of the heating oil wholesale prices -- looking forward, and it ain't that far, that one of two things are going to happen -- either heating oil prices are going to come back down, or you know what, they're going to stay at this new level. And consumers after initial sticker shock, are going to become used to this product and these prices.

So the prospects -- and when I use the word longer-term, I'm not talking a long time -- I'm talking until consumers become comfortable with, aware of, these energy prices. I have been in this business 25 years. And I remember that any anytime you dare go above 99.9 in your retail price, you'd lose your business. Well, consumers have no concept -- not that they are stupid -- there's some magic number that's the magic number for heating oil -- 99 cents a gallon? Is that the right number? Well, 15 years ago, you go above that, you thought that there would be a problem. And there probably was for about 3 weeks, 3 months; same thing here. We have unprecedented prices. I don't know where they are going to go. People are talking that there is a very significant war premium in there. But our prospects are that over the longer-term, we have got a model that works. Unusual markets like this really offer us an market opportunity, and that's why we made the decision.

In terms of the financial -- for the 3 months, interestingly, as we reported, volume was up 2 percent, notwithstanding, weather was warmer than last year by 28 percent. What that means -- and it's been indicative of how this Company is performing -- that we were able to, again, offset a 28 percent warmer than last year period with the effects of a very active, aggressive, successful acquisition program. And we really can't forget it, meaning we have bought 116 million gallons worth of companies. That is very significant, and those have been successful acquisitions, largely offsetting this period -- the impact on our volume, due to weather -- that was 28 percent warmer than last year. In terms of operating profit, we were off about $4 million. But of that 4 million, a million 1 was due to depreciation and amortization; about a million 9 is due to hedging activities and inventory management activities which zero out, as they have for the 9 months. And so what we are looking at is operating profit for the quarter versus last year being off about $1 million. And that's almost exclusively associated with the warmer temperatures this quarter than last year. That $4 million operating profit variance from last year is a $4 million net income variance, and it results in all of a 3-cent differential between last year and this year in terms of the net per unit operating loss last year of 1.15 versus this year of $1.18. So when you compare this year to last year, not such a bad quarter, and mostly due to weather.

However, from our point of view, more importantly, what we are looking at is how did we do versus what we expected? And in that regard, let me be clear that we re off about $6 million from what we expected. Again, due to the warmer -- not only than last year -- but warmer than normal quarter, but also due to the expenses, as I mentioned before, associated with the business process improvement program, and mostly up at our centralized call center, where we were undertaking additional expenses to deal with our customers.

In terms of the 9 months, interestingly, again, while weather was about -- I think it's 8 to 9 percent warmer than last year, which cost us, on a year-to-year comparison, almost $22 million -- we were able to offset that with the acquisition program which contributed almost $16 million of EBITDA over the last 9 months, as well as to a 1.7 cent per gallon improvement in our gross profit margins. Let me be clear that most of that improvement in gross profit margin was in the first 6 months before high energy costs really impacted our ability to get what has been normal 1 to 2 cent improvement in gross profit margin. Interestingly, operating profit for the 9 months was off about 3, $3.5 million, of which 4.4, 4.5 was due to D&A -- non-cash item -- actually, for the last 9 months, we were up almost $1 million versus the comparable prior year. Largely due to the acquisition program.

That is why I have been suggesting that we are schizophrenic here. That when you compare us to last year, probably pretty good results; when you look at the first 6 months, going through a transition period -- when you step back and you take a look at what happened, and you say to yourself, "where are we now?", what we see -- what I see -- is that we have really gone through a transition period. The transition has been -- just to change the way we are doing business. We think that after going through this first year, it's kind of like -- and when I speak to people about the call center, I think about the first year of anything like this, anything this cataclysmic -- I am sorry for saying this -- and for those of you who are impacted by not getting the distribution, I apologize -- but you know, not a bad job the first year that you completely reorganize a company. We now do have a model that we have hoped for, that we dreamed about, the last 3 years, we think we've got it. It's a very weird thing to say, and very counterintuitive -- I'm more optimistic this morning than I've ever been. And that's because we have a company under control.

Throughout the years, I hear from bankers -- oh, we don't to companies, we don't lend to industries, we lend to individuals. Well, I'm optimistic this morning because the individuals that are running this business that have come here, because they see and they put their careers on the line -- coming here anew, an opportunity to build a huge business. The heating oil business has the opportunities we've talked about. We are closer than ever to realizing them. This year, we built the model. That's why we have been able to attract people from -- Steve Goldman, from UPS; Jack Magruder (ph), trained at Wal-Mart; Chris Demadio (ph), trained at Perrier North America; Dave Schimager (ph), McKenzie; Jefferson Rogers, finest CRM, customer relationship management consultant firm in the world -- all being put together by Dan Donovan, President of the Heating Oil division, who probably ran the most successful heating oil company at Minan (ph).

I'm optimistic because this team has come here anew. They want to build a big business. They are optimistic. They believe in this Company, and they don't understand why, for the last 10 days to 2 weeks, I've had such angst. All they see -- and they are not immature people -- these are seasoned executives -- all they see is an opportunity for them to build a big business and have very successful careers here, much like Bill Corgin (ph) and Joe Cavanaugh have done in the propane division. So, this schizophrenia here today -- I certainly recognize that people are not excited about having a distribution not declared. I do want to give everybody some comfort that that money is being preserved, is being set aside, and is being reinvested in this company, because we all believe that the long-term prospects are there, and that that money can be reinvested on their behalf so that they, as senior sub, junior sub and GP holders, can take advantage of the future prosperity of the company. It also is being set aside, as I said, because we are going through uncharted territory, taking a step back, just like we did in the middle of this winter, when we were going through the modifications and the adjustments, we never thought we would get out at the end, but here we are a year later, and the model is there -- same thing with these energy prices. I don't know where they are going. I think it's an opportunity for us. I don't want to see them high, although the days that they drop and everybody calms down, I'm not sure I was a big ambivalent, because it did impact our new product. I hope they come down. But I'm just optimistic. Whether this new product works or not, I don't know. But I think with the team we've got, the marketing expertise, the consumer research, we will come up with things to realize our goal of building a category buster.

Sorry for haranguing you. But at this time, I'd like to take any questions. Are you there? Did anybody hear me? Hello?

Mr. Sevin, as a reminder, everyone is just in a listen-only mode.

Okay, can we open that up? Did everybody hear my discussion?

Yes, sir.

Okay. Can we open it up now for questions?

(OPERATOR INSTRUCTIONS) Ron Londe, AG Edwards.

Just curious -- from the standpoint you commented on customer losses -- was that just from the high price of heating oil, or is that more oriented toward competition between you and other, smaller heating oil companies that might be shaving the price a little bit to woo people away?

Yes, and it's a great question, and Ami just said to me -- look, we experienced it both in the propane and the heating oil division. Let me just be very clear. Both of them together -- each of them -- had almost the same sort of attrition run -- about 4 percent. That's very curious to us for 2 reasons. I think that -- I thought throughout the winter -- and especially this quarter -- that we are experiencing more at the heating oil because of the service levels associated with our call center and the new model. But what we found when we finally tabulated everything at the end of the quarter -- the propane division almost lost the same kind of 4 percent of customer base as heating oil. And I will get to your answer in a second, okay?

And so we experienced it not just at heating oil, but at propane, which kind of led us to believe that while we were very --- had an inferiority complex over the service level this winter at heating oil because of the new model, it probably was more the high energy prices than anything.

I think you are right on target -- which is that we think it is a much greater consumer awareness of both products -- home heating oil and propane -- as a result of the sticker shock, they are shopping around, they are going to the small, mom-and-pop low-priced dealers to try and avoid the $2 pump price. So I think that it is just that. It is much more that they are shopping more than they ever did. We are in a new environment. And that's what happens when prices go up 22 cents a gallon in one quarter. And I think that we all experienced it with gasoline.

We are developing a product that's going to insulate the customer from very high delivery bills this winter, recognizing as one of our Board members said to me, well, if you are losing customers, so are the other full-service dealers -- take advantage of it. And that's what we've developed. So today, it looks as though we are hearing that the small, one truck operator is buying another truck. The consumer is looking for the discount. How long that lasts, we don't know, but we are doing something about it. We want to cash in on that.

Can you give me an idea what your strategy for weather insurance is for next winter?

Yes, it's a good question. Look, we told you 5 years ago, 3 years ago, we bought weather insurance for a 5-year program. And we still believe in it. We believe that we are and MLP, we are here for stability, and that we are -- we have already bought the weather insurance for next year. We have got $20 million in place. We, as good Americans, always really look to what happened most recently, and we've had 2 years of -- well, this year was decent weather, kind of normal, last year was cold -- but we are staying the course. We just don't want to get caught next year in -- oh, well the model worked, the new product worked, prices came down, but it was warm. I don't want to have a conference call like that. So we bought the weather insurance. By the way, the weather insurance covers us for the period of November through March?

February.

November through February, which is why, when it was warmer this quarter, Ron, weather insurance didn't help us.

Right, I know that.

Okay.

Also, you know these 4 acquisitions you made since April -- are those going to hurt the fourth quarter from an overhead standpoint? And do they have any impact on the third quarter?

Yes -- I think it's a very good question. But they are small. They are all integratable, and there should be virtually no real impact as a result of them. I can stand corrected, and I'm going to have to talk about it. But I just can't see it. They are small. They're all integratable -- 7700 customers in 4 different locations -- I just don't see them having a meaningful impact at all on the fourth quarter.

Can you give us a better idea of this new product you are launching, and exactly what is, and how it's going to be successful?

Yes. You know, I am careful, because it's like launching any new product. We just don't want to telegraph it to the marketplace. Even the way we are going to market it, by the way, is through direct marketing, telemarketing, and it's not going to be a big splash at all. It's going to be rolled out in a measured format. It's already being consumer researched; it's being tested. And we are going to be able to just roll it out in a very, if you don't mind, quiet way so it doesn't get a lot of attention from competitors who can react.

What it's designed for is to make sure consumers never get a large heating oil bill from us. They know what they are going to pay us. They don't get a large heating oil bill from us. They get priority service. And we are able to capitalize upon the central call center, where we can give them priority service, guaranteed products, guaranteed bills, so that people can plan their life and avoid sticker shock with a high bill or high energy prices.

So I assume that it's similar to a budget billing type of pattern, with a pre-buy or a guaranteed amount?

I'm just going to leave it like this, I think that more important than you and I knowing the details of it today is to have a successful product that's going to get us all more money and make us all happy rather than knowing it today. What I would do is that -- it's a new product; like any new product, I really don't want to suggest to anybody that this is going to -- you know, the financial impact is just going to revolutionize the Company. I hope it does. Don't bank on it. Let's take a look -- (silence) -- let's take a look and see how it rolls out, but not start counting our chickens beforehand. But we are hopeful, or else we wouldn't launch it, and we are going to launch it in a measured way, and we hope to gain market share with it.

You know, what do you ascribe the success of the propane segment from a volume standpoint? I mean for the 3 months, volumes were up 23.4 percent -- and for the 9 months, they were up 18.3 percent.

Say it again. I'm sorry -- I was distracted (multiple speakers) say it one more time.

The propane segment volumes for the 3 months were up 23 percent; for the 9 months, they were up 18 percent. I don't know what is driving that?

The wholesale volume for the 9 months was the acquisitions. Huge acquisitions. This was the Ultramar acquisition; propane is up due to acquisitions, 28 percent alone due to acquisitions for the 9 months, and that was primarily the Ultramar acquisition we made last August. But your numbers are correct. Propane alone is up 28.7 percent due to the acquisitions, which is primarily the Ultramar. Heating oil -- just so you know, is up 6.8 percent due to the SICO, Leffler, and on a combined basis, we are up 11.6 percent due to acquisitions, which is the Ultramar, SICO, Leffler -- the 16 acquisitions we made.

From the standpoint of the subordinated units, well, you are not declaring the distribution, which means that will start the subordination period over again for 3 years when you reinstate the distribution to the full amount?

That is correct -- (multiple speakers).

Okay. So the common holders will continue to have first right to the distribution and arrearage rights for quite a while?

Is it 4 years, Rich -- 3 years.

3 years.

3 years. And just let me discuss that for a second. It is 3 years. And it does give the support to the common for the 3 years. For the senior subordinated holders and the other subordinated holders, let me do comment that what we noticed, interestingly, is that the performance of those units over the last few years that we did quite well -- I am not sure the impact of their subordination on them, in the sense that, if they are getting paid, and if the prospects for the Company are good, they are in the position of benefiting disproportionately when we do well. So it is 3 years, it gives the cushion to the common, but at least we've seen, at least historically, with the way those units have performed in good times is that the subordination may not have been as impactful as the potential for prosperity.

Okay. You know looking at the balance sheet, at the end of the quarter, you had $19 million in cash on the balance sheet. And you had current maturities of long-term debt of 24.5. When are you going to have to pay on that 24.5?

If you will notice on the balance sheet, the significant, significant increase in net working capital this year to last year.

Right.

We have bank facilities that are unused, of how much, Rich, combined, so we don't get into too much detail?

(inaudible) $80 million.

We have about $80 million of unused available acquisition and facilities, not only acquisition, as we always misnomer them, but those are available, also, for about 40 million of it's available for debt repayment. So our debt repayment is totally available from our bank facilities. As you know, we are in total compliance, and we have working capital facilities of how much, Rich?

174.

174, of which 19 million is borrowed, and about 80 million of unborrowed acquisition facilities, total facilities of around 100 million?

(indiscernible) acquisition.

Yes, and 40 million available for debt repayment.

Okay. Because you've got 19.3 million in cash on the balance sheet, and the distribution on the common is about 18.5 coming up (multiple speakers) in a couple of weeks --

I'm sorry?

The distribution on the common is 18.5 --?

Right. (multiple speakers). So we have 19 million of cash on the books, and we have 18 million of distribution, and we have got $170 million of working capital available, and 80 million of acquisition lines. But to deal with the maturities -- we have dealt with the maturities.

In mid-March, you had a prospectus that you put out for the exchange offer for your 10.25 senior notes; and in there, you describe, or it's laid out -- the ratios that you need to maintain to continue to distribute cash to the holders from Petro and from Star Gas Propane. And at that time, the ratio -- and I guess you were looking back at December 31st, '03 -- was 2.81 to 1 with you needing 1.75 to 1 for the Petro side of the business. And it was 5.15 to 1 versus 1.75 to 1 for the propane part of the business. Can you give us an idea of where that stands right now?

You know what? We are okay. To do that on the conference call -- Rich is going to get on the phone and give you the details on that. But obviously, we are in total compliance, and can make the distributions.

Okay. One more kind of interesting thought, I guess -- you know I followed your Company, you know, on active basis, since January of 1998. And at that time, you were a pure propane company, and you had about $111 million -- 111 million gallons of volume that year, and your distribution was $2.20. And in the ensuing period, you've made numerous acquisitions. And in fiscal -- for our estimate for fiscal 2004, is around 700 million gallons. So you have grown your gallonage of your company almost seven times in that period of time. And the distribution is $2.30. You talk about making successful acquisitions, but how are you going to translate those successful acquisitions into growth in the distribution, which is the ultimate way you add value to the unit holders?

Yes, I think it's really a good question, and I am not being disingenuous in terms of appreciating it. Where is the disconnect -- and that's a good question. Over the years, when we were looking back, because we had the same question -- it, one, quite frankly TG&E cost us some money. We don't have TG&E. We turned it around, we sold it. It ended up costing us some money. And the capital that we invested in that has impacted us.

Secondly, and more importantly, it has to do with the operating expenses that we incurred and the reorganization costs that we incurred and the investment we incurred to make Petro a category buster. That investment, also, impacted our ability to earn more money. We expect that investment to pay off. But interestingly, the model in terms of acquisitions -- they are accretive; the past year has been accretive. It's what's really driving this company now is its base business performance.

Acquisitions are good, but after the cost of capital to make them, they are good, but they probably give you about half of what you get in EBITDA drops to the bottom-line. At this stage, given the size of our company -- and I think it has to do with the other propane companies too -- that an acquisition is good; it's supplemental; it's the base business and how that's performing. An extra, internally generated customer -- internal operations, from call center, to bad debts to efficiency -- those all drop to the bottom-line. Acquisitions cost capital to buy. It doesn't mean they are not accretive; it doesn't mean it didn't give us an extra dime to 15 cents this year. But as important, if not more important is how is the base company operating? And the reason why we have not had as significant an increase as we would have hoped is that we have got to get the base company to start providing some growth internally -- not just rely on acquisitions.

Thanks. That's all I have.

Kevin McKenna, Piper Jaffray.

If I am oversimplifying this, let me know. But basically in the last 12 months, we had normal weather -- not warmer than normal weather -- and there's still not enough cushion as a unit-holder to cover both units? I mean as a senior holder, should this concern me if warm weather does come?

What we are looking at is you had normal weather, hence, you paid out $3.5 million of weather insurance to give you protection as a common unit-holder. If it's warm, that $3.5 million premium should give you the protection that you need as a common unit-holder, in case it is warm -- weather, as you are suggesting, was normal for the last twelve months. We are not trying to be disingenuous about it. It was colder during the winter; this quarter was warm. And as far as weather is concerned, it's not that we are not concerned about it. But it doesn't look like -- because the heart of the winter is November through February -- that that should have a major significant impact on the common unit distribution.

Where does the weather insurance kick in? How much warmer than normal?

Yes -- we have a deductible of what? 3 percent. So it kicks in after weather is 3 percent warmer than normal, and we've got $20 million worth of protection.

John Tysseland, Raymond James.

Quick question -- you know, given where your balance sheet is right now, do you have any plans and you know, possible acquisitions you mentioned going into -- further into the summer months -- do you plan on issuing any additional equity over the next I guess 6 months?

Yes, sitting here today, I do not. Those of you who have followed us know that we -- to the extent we have acquisitions, we think we have somewhat of a kind of traditional model -- which is that we use our bank facility, which we just told you; we accumulate acquisitions up to the 40, 50, $60 million level, and then fund that out with long-term capital on a 50-50 equity debt basis. Right now, there is no need for that. We have funded our acquisition program. That doesn't mean that if something comes along, we are not going to do it. But sitting here right now, we have no plans to issue equity, but sitting here right now.

And then one last question -- Ron hit most of my questions -- but if you look at -- in your Q, you go through your financing and sources of liquidity, and it goes through what your -- I guess, the availability on your facilities. But what it doesn't really describe is really what the covenants are on those facilities. I think Ron alluded to the fact that it was in a different document. But could you just go over those for each of those facilities? And also to that, was there any, I guess, drive from your creditors to cut the distribution to your senior and junior subordinated, or was that purely internally done?

There is absolutely no drive on our banks and -- not obviously. But what we've done over the last week is discuss with them what we are doing. And they were relatively indifferent. They just think, as we do, that the long-term health is what is important. And there was absolutely no pressure, no call from them. Rich, just tell me -- my bank facility -- excuse me, the bank facility of profane -- what is the debt-to-EBITDA coverage ratio?

Generally, at both facilities, propane and heating oil, it's a maintenance test of debt-to-EBITDA of 4 to 1.

And what is your ratio?

It's around 2.3-ish at both divisions.

Okay. So we have a 4 to 1 debt-to-EBITDA; and debt-to-EBITDA at the operating level is at 2.3. So --

Is that total, or is that just on the facility? Does that take into account your -- all your I guess notes?

Yes, it does. All the debt is debt (ph) at those operating divisions.

Okay. Well, I will give you guys a call later -- because my numbers aren't necessarily matching up with those.

Let me just be clear how we are structured.

I understand that. I just -- my numbers aren't matching up with that. And I guess it's maybe some indifference. But I will give you guys a call later.

We are just on a public call, so I will tell you that our coverage is debt-to-EBITDA, 2.3; covenants, 4.1; no pressure from the banks -- just so that everybody gets the flavor. And let me -- as you are suggesting, I think it's a great idea. You know Rich is just going to walk you through it so everybody's comfortable.

Well, I guess if you just take -- are you using your last 12 months of EBITDA?

Yes.

Yes.

Okay. The last 12 months of EBITDA accounted was approximately, what, 102, 103 million?

Yes, what we have to do is at each -- we borrow at the operating levels, if you don't mind?

Okay. That's where we are getting mixed up. That's why I said we will look at that later.

All the facilities are at -- propane and in heating oil -- you look at heating oil EBITDA, propane EBITDA, debt is at those levels. Test is 4.1, and we are at 2.3.

If you look at it on an aggregate basis, though, I mean you should sum those two up, and you should come somewhere out, somewhere relatively close, shouldn't you?

The answer is we are going to walk you through it so you have got it. And the two are different because all of the senior subs are up at the parent level, so they don't get accounted for at the bank facilities, because they are subordinate to the banks. They are not in the bank tests. And the bank test, the covenant, is 4 to 1, but it does not include debt at the parent company subordinated level.

Okay, okay. So it's not a total debt number.

No. (multiple speakers). That's not the test for our banks.

Got you. Thanks.

Robert Wegan (ph), New Salem (ph) Investment Corp.

Real quick -- just regarding the improvement program -- when can we expect to hear more color on when that's actually getting on the ground and more details about what the program actually involves?

I will give it to you now. I'm sorry for saying that. But the program -- and I apologize, because some of the people on the phone have been with us for a long time, and it's been laid out. And that's not to preclude or suggest the question isn't appropriate. It just has to do with taking a company that had operated under 92 different names out of 36 locations and centralizing all activities that dealt with the customer communication and dispatch -- centralizing that, and then taking what had been 36 branches and dividing them into 11 districts, so that district managers, then, became very involved with giving our customer a better product, which is the delivery of home heating oil, and the service, their heating equipment, centralizing all communications and dispatch. And that was done, planned for over the last 2 years, executed at the beginning of April of last year. The biggest hiccup was having to do with centralized call center, where we took 2.2 million calls versus answering those calls at 36 different locations. It took about 8, 9 months to get that down pat. And for those of you who have ever been involved in this now that I have, whoever you ask, it takes about a year to get that done. And the details are that we are answering the phones in a centralized call center, extremely well right now; we were answering them extremely poorly in November, December. So I think we said that to the marketplace. We undertook considerable money and time to get that straight. But right now, we have got a centralized call center that we answer all our phones, we have a centralized dispatch, that dispatches 600 service techs; and the districts now are operating very well in terms of providing customers with local service.

Thanks. And this new product that you -- or new service that you're supposed to be offering, when do we get more information regarding that?

That's a great question. That's a great question. Hope to launch it late August, early September; don't know what the results are going to be; it's a direct marketing launch so that we are going to be able to monitor it weekly, biweekly bimonthly -- invest more money if it works, cut back if it doesn't. And we'll just keep you abreast on how it is, and how it's going. And we are just preparing for it. And I hope it works -- no promises. Excited by it. But as I said, if it doesn't, we think we have got an excellent operating format, an excellent marketing division, some people doing great consumer research for us, and we will come up with some other products.

Okay. And then the other questions I have are regarding the subordinated units. At what point do you anticipate actually holding that down at no dividend and then potentially increasing the dividend back up to where it should be?

Yes, I think it's a very good question. Although I can't answer it, it's a good question in the sense that we've been very strict for the 15 years that we have been public that we do not discuss and cannot comment on future earnings or future dividends. We make our dividend policy just as we did this time at our quarterly board meetings. We decide, quarterly, what we are going to do. We don't give -- and I think it's appropriate not to give -- any projections, any expectations, and we make the decision, and everybody hears about it at the same time, and we are very strict about it. I cannot comment about future distributions. I never have. And what we do is we let everybody know at the same time when the Board makes a decision. This was a very difficult decision. It took us a lot of time; it took us a lot of thought; and until we made that decision, we did not know what we were going to do. As you can imagine, as I discussed, this is a $2 million distribution. And to not make a $2 million distribution is a very, very difficult decision, given that kind of magnitude. But it was -- within the context of preserving capital for the long-term health of the Company and given the conditions the way they are today, our prospects -- we made that decision, and we are going to make that decision every quarter.

And then lastly, there is no arrears on the subordinated unit. Am I correct with that?

That's correct.

There are no further questions at this time. I will now turn the call back to you. Please continue your presentation or closing remarks.

Well, I just appreciate your patience today, and thank you very much for your involvement with the Company.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation, and ask that you please disconnect your lines.