Star Group LP (SGU) 2005 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Star Gas Partners fiscal 2005 second-quarter results conference call. During the presentation, all participants will be in a listen-only mode and afterwards you will be invited to participate in a question-and-answer session. (OPERATOR INSTRUCTIONS) As a reminder, today's conference is being recorded Friday, May 6, 2005. I would now like to turn the conference over to Mr. Joe Cavanaugh, Chief Executive Officer at Star Gas Partners.

Thank you. I want to welcome everyone to our second-quarter call. Joining me today are Dan Donovan, Star's President and COO; and Rich Ambury, our newly appointed CFO. Before we get started Purdy Tran, from our investor relations firm will read the Safe Harbor disclosure.

Thank you Joe and good morning. I would like to remind everyone that today's conference call includes forward-looking statements which represent the partnership's expectations or beliefs concerning future events that involve risks and uncertainties including those associated with the effect of weather conditions on the partnership's financial performance, the price and supply of home heating oil, the consumption patterns of the partnership's customers, the partnership's ability to obtain satisfactory growth profit margins, the ability of the partnership to obtain new accounts and retain existing accounts, the impact of the business process redesign project of the heating oil segment and the ability of the partnership to address issues related to such projects.

Factors that the cause actual results to differ material from the partnership's expectations are disclosed in the partnership's annual report on Form 10-K for the year ended September 30, 2004, including without limitation, and in conjunction with the forward-looking statements included on today's call. Unless otherwise required by law, the partnership undertakes no obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise after today's call.

I will now turn the call back to Joe.

Thanks Purdy. First I want to apologize for delaying the call from yesterday but there weren't any major issues involved. We just didn't have time to get all the documentation we needed to have for filing our 10-Q. So I just thought it hat was better to wait for a day rather than issue the press release and have the call without the filing.

We've got some very encouraging news regarding our second-quarter results and recent developments and I'm very happy to be able to share them with you today. When we had our first call about two months ago, we outlined some general thoughts that we thought about the direction of the business and there are still major challenges ahead of us especially in the high-priced environment we are all in. But I'm very confident we are very well-positioned to meet them. And we're going to talk today about the very positive steps we have taken and the promising results that we just have begun to be realized.

Our EBITDA for the quarter was a -8.3 million that is after the non-cash write-off for goodwill impairment of $67 million and a 3.1 million non-recurring charge for the separation agreement for a former CEO. As we discussed on a prior call, the local operations are the key to our success and the major change that has occurred is the transfer of the day-to-day control of the customer related activities down to the district level. Pricing and customer service as well as marketing have been returned to the closest point to the customer.

Corporate still has oversight and procedures are in place to insure that the overall standards are upheld and objectives are met but the districts are now running their own shows.

We've also realigned the call center by district so customers now have -- will be talking to the same group of customer service representatives all of the time and we have made each call center supervisor a member of our district's operating team with regular contact with most local personnel. Dan is going to elaborate on that a little bit in a minute. At the same time we began transferring additional calls back to the districts so that the customer's first contacts in many cases will be with a local representative.

In addition, we have servicemen now who are having direct contact with the customers on nights and weekends rather than dealing with a third party or a dispatch and that is going to ease the scheduling issues.

Results are turning in the right direction. The hedging problems we have experienced in the previous quarter also impacted this quarter but they are now simply behind us. Margins are $0.01.5 below the same quarter last year resulting primarily of some additional lower margin price protected business and the impact of the hedging. But they have improved over the first quarter of '05 when the year-to-year decline was $0.05.2.

Our service launch for the quarter has been reduced by over $4 million from the same period last year through a combination of increased billing and lower costs. Our operations have cut about $10 million from their expenses and we've cut another 1.3 million from our corporate overhead on an annual basis.

I think it's important to say that where we have had to replace position, they have been filled from within the organization with people who know and understand the business and who are very well known to our employees. And most importantly, I believe that our efforts to reverse attrition are on the right track. We have well-trained specialists dealing with customer renewals, customer saves and new accounts both locally and the call center and local managers are involved directly involved in the process. And the six-month percentage for attrition is the same as last year.

We have experienced reduced losses in February, March and April. From February through April, this year our net losses were 1.8% versus 2.3% last year at the same time. In my visits to many of our districts, I am very happy to see that our employees are more upbeat and ready to take on the challenges. There's a sense of renewed pride in the Company, a very tangible feeling that things are on the right track again. We're very, very encouraged.

With that, I want to turn the call over to Rich Ambury, our new CFO. Rich was with me as a CFO at our propane division for several years and he is now with the partnership and is our new CFO. His knowledge of the business is unsurpassed as well as his knowledge of the finances. Rich?

Thanks John. I would like to over the quarter briefly. For the quarter ending March 31, 2005, home heating oil volume was down 8% or 21 million gallons. During the quarter, we sold $245 million gallons versus the prior quarter March 31, 2004, in which we sold 266 million gallons.

Volumes decline due to the impact of 3% warmer temperatures, customer attrition of approximately 6.5%, and estimated conservation of 3.5%. In addition, the quarter ending March 31, 2005, was favorably impacted by the carryover of some volume from December 2004 as the last week of December was extremely cold.

Home heating oil margins for the quarter declined $0.01.5 I would like to point out that the magnitude of the decline narrowed when compared to the first quarter in which we saw a decline in margins of over $0.05. Home heating oil margins for the quarter were negatively impacted by $2.4 million due to a delay in hedging for a group of price protected customers which occurred prior to the beginning of fiscal 2005 and to a customer classification area. The impact of these issues is approximately $0.01 per gallon and we believe that all our hedging issues are behind us.

As Joe mentioned, our service loss is down $4.4 million or 8%. On a per gallon basis, the net service loss is $0.02.4 per gallon or an improvement of $0.01.5 per gallon. Delivery and branch expenses were also down. They were down $1.4 million as our expense control plans are starting to take hold. For example, marketing costs are down 2 million versus the prior year's quarter.

Our G&A costs which include costs at the parent level increased by $4.9 million. The increase was due to $3.1 million in expense relating to the separation agreement with the former CEO, which is going to be paid over an extended period of time and $1.1 million of Sarbanes-Oxley compliance costs.

In the quarter, the partnership recorded a $67 million non-cash goodwill impairment charge. The decline in the market value of the partnership's units, the impact of conservation, and customer attrition on earnings at the heating oil segment were significant events that triggered this adjustment. Also during the quarter, we settled up on both the TG&E and propane sale and recognized an additional gain of $2.5 million. In the quarter ending March 31, 2004, these segments contributed $27.1 million in net income.

As a result of these factors, net income declined by $104.8 million to a net loss of 21.4 million. EBITDA also declined to an EBITDA loss of 8.3 million from 73.9 million. During the quarter, both net income and EBITDA were impacted by the $67 million non-cash impairment charge, the additional Sarbanes-Oxley cost of 1.1 million, the separation arrangement with the former CEO of 3.1 million. In addition, the hedging issues also impacted these measures by $2.4 million.

For those of you are new to the Company, I would like to share with you the product margins realized in the summer quarters of fiscal 2004. For the quarter ending June 30, 2004, the product margin realized was $0.57.4 per gallon and for the quarter ending September 30, 2004, the product margin was $0.56.8 a gallon. With regard to volume, believe that going forward home heating oil volume will be impacted by delivery scheduling, customer losses and conservation.

In December of 2004, the partnership completed the sale of its propane segment. Under the terms of the indenture relating to its Senior Notes, the partnership will be obligated within 360 days of the sale to apply the net proceeds used to reduce indebtedness or to make an investment in assets or capital expenditures. To the extent net proceeds that are not so applied exceed $10 million, the indenture requires the partnership to make an offer to the holders of the MLP Notes to repurchase for cash the remaining notes.

After repayment of certain debt and transaction expenses, and estimated taxes, the net proceeds from the propane sale were approximately 156.3 constituting approximately 146.3 million of excess proceeds. At March 31, 2005, the heating oil segment had utilized 53.1 million of such excess proceeds to invest in working capital assets, purchased capital assets, and repay long-term debt. The amount of excess proceeds as of March 31, 2005, is 93.2 million and is classified as a current liability.

The partnership expects to utilize all or a portion of the remaining excess proceeds to invest in working capital assets in the future. I would like now to turn the call over to Dan who will discuss the operations of the Company.

Thank you. I would like to elaborate somewhat on Joe Cavanaugh's comments regarding how have we have given more control of the business local general managers and how do we empower them to make these critical decisions at the local level. We feel that doing this has and will enable us to reduce expenses, deal better and more effectively with attrition and ultimately add more to our bottom line.

Operationally, each general manager has developed a specific detailed business plan that addresses all of the areas of the operation; sales, marketing, expense control, revenue generation, safety, employee relations. We have also eliminated zone directors. This allows for more decision-making at the district level by the general managers. Each general manager has set up a management structure based on the individual district's needs and opportunities to both increase EBITDA and most importantly, satisfy customers.

We are no longer a top-down organization. We are more bottom-up. For example, general managers now deliver their own driver and service technician budgeted headcounts. They make decisions on delivery scheduling and drop sights made at the district and they base this on a broad range of corporate guidelines to provide improved service results to our customers.

Dispatch which is a very key component of our business was planned based upon these district involvements. There are daily conference calls to discuss work loads and scheduling, overtime control, setting up of specific work areas for technicians. Basically dispatch was tailored to meet the demands of each district as determined not by us and Stanford but by our general managers. These and a lot of other operational changes which I am not really going to going into because it would take much too long, have basically led us to a better product that we are delivering to our customer.

Let me just give you some statistics to show you what I mean. Our stops per day have increased. Our run outs per 100 customers have decreased over 50%. All calls to our customers within a four hour window have increased by over 20%. Our claims have decreased by almost 50%. And all areas of measured customer service performance levels have increased anywhere from 20% to over 65%. Those are quantitative type measures which are fine and I know they are necessary but what I am focusing on now and what my team is focusing on now and our general managers are focusing on now are more the qualitative aspects of how we speak with our customers and how we are perceived by our customers as a friendly local Company.

The general managers play a large role in accomplishing this. By the way, one of the other statistics that I find that its very important is our preventive maintenance to our customers. In the past our preventive maintenance to customers over a 12-month period was running anywhere from a low of 55 to maybe a high at 65 -- top 70%. As of today, we have over 88% of our customers have received their inspection within the last 12 months. To me that is very important because everything begins with customer satisfaction.

In the area of customer service, customer complaints are now all handled directly by the district. The accounts saved and the cancellation function are controlled by each district and they are the responsibility of the general manager. All save and complaint calls are rather to the district's customer retention specialist. This enables the district under the leadership of the general manager to establish clear communication with each customer especially those who demand local attention.

One other thing we will be doing at Petro this year is we will be testing the routing of specific call types that need a local touch to some of our districts this upcoming heating season. The call types to be transferred directly to the district will be decided upon by the district general manager. One size doesn't fit all. One of our districts may decide to take all the calls and have the overflow go to our customer care center. Another general manager may decide to pick and choose different types of calls or different types of customers whose calls we want go directly to the district and everything else goes to our customer care center.

Speaking of our customer care center, we have shown great improvement and the customer care center has improved tremendously over the last year. Under the direction of our Director of Customer Relations, Mike Turner, we have established a loyalty work group at call center. A loyalty work group is basically between 45 and 55 people who are trained to handle our most difficult customer contact tasks, mainly pricing calls. They are also broken out by district with a team captain assigned for each district group.

Each loyalty team was trained to know our major local competition's contracts, price plan, service availability, etc. In other words, we know the pluses and minuses of our competition. Reporting of the loyalty work group and the local customer retention results are now tracked at the district to better manage local save levels and margins.

Most importantly, we have established a new position at Petro. The position is general manager of customer retention. The person that we put into this position is a longtime petroleum person. His name is Bob Gussoni. He comes to us from the Meenan operation where he worked at Meenan Town. He also spent a lot of years in the petroleum business at Mobile Oil.

Bob's function is going to be to lead Petro's customer retention efforts via the telephone channel, managing the loyalty work group and working very closely with the general managers and making sure that this function is where it should be, satisfying our customers. There will be regular meetings and there are regular meetings that take place every day between the general managers and local district management and customer care teams, the call center supervisors, the loyalty work group captains and of course, the general manager of customer retention.

These meetings are to ensure that all news pertinent to the district is communicated to all and that the general managers are directing and managing the individual district's customer care network.

We have also taken our regular customer care queues (ph) and our customer care center that handles the more standard mundane calls and we have split them out into separate queues by district with customer care reps permanently assigned to each district queue. This allows for the reps to become very familiar with the local customer base and employees. Training programs and call handling guidelines are now tailored to the specific needs of each district as determined by the general manager.

A supervisor at the call center has been assigned to each district queue and this supervisor is now part of the general manager's management team. One other thing that we have done too which is making a big difference is we have revised our renewal process for protected price customers. In the past, we would send out a letter with a price in tell and tell the customer this is your price for the next 12 months. Basically we gave a price point and unfortunately people would just take that letter and shop it.

What we do now is we invite our customers to call us and talk about their next year's price. We engage the customer in conversation and talk about the value and the advantages of belonging to the best Company in the business. This will help us enhance margins, increase retention and increased customer satisfaction.

On the sale side of the sales and marketing side, the GMS are now totally involved in making all pricing decisions via a weekly pricing conference call that they have with me. We have developed district specific marketing plans that are based on the needs and initiatives as determined by the general manager and his or her people. We have enhanced and revised controls to ensure that we have proper pricing and sales commission procedures.

In the financing and the accounting end, we have improved interaction of the accounting department and field operations to provide a better understanding of the elements that impact profit and loss. In conjunction with this, we've implemented a formal P&L review process. This process prepared by the general manager with accounting input and its reviewed with the Vice President of Operations on a monthly basis. The P&L is also being retrofitted to ensure that our -- that we have an accurate accounting of each district's results.

A major focus of what we're doing here over the last several months has been extension abatement (ph) and control. This is something which I personally lead with my executive team. This is a companywide exercise with no stone unturned. We realize we are just a heating oil company now. We are revisiting every area of expense to ensure that we are sized correctly for a current staff and line operations. Our overall reduction in personnel since this same time last year is over 225 people.

These people have comes from all areas of our operation from operation side, marketing and sales, IT, HR, and of course we have greatly downsized our corporate structure here in Stanford. We also have studies underway to consolidate and reduce our operating facilities and we also are looking at selective sales of owned property being contemplated where warranted.

Another key area of concern is the reduction and control of legal and consulting expenses. Expense control and expense abatement is an ongoing exercise and this is going to be something that we will be doing now and forever.

In a nutshell, empowering our general managers to run their districts to achieve agreed-upon EBITDA goals and motivating and rewarding them based upon these same district objectives, will allow us to achieve our overall goals regarding customer satisfaction, attrition, margin, and expense control. General Managers are now an integral part of our management process. With that, Joe, I will turn it back to you.

Thanks Dan. Listening to Dan is one reason that we all feel very confident that we are on the right track here. At this point, I would open the lines for questions I guess, Purdy.

(OPERATOR INSTRUCTIONS) Adam Leight with CSFB.

Good morning. I guess I have probably three questions. One is in terms of the net attrition versus gross attrition, do you have sort of a sense or a breakdown of what the components of loss versus new adds were for the year-to-date?

Yes we do. Rich, do you have that? I'll get that for you in a second. What is your second question?

Second question is, in the attrition numbers, I don't know when your locked in price contracts expire and when you expect to hear back on next year's contracts. When would you get a sense of customer loss or gain relative to the fixed-price contract customers?

The answer to the first part of that question is that they are spread out over the period of time starting -- it’s been ongoing actually. I think we're getting a pretty good sense with the new renewal process is working very well for us. Dan?

The renewal process is something that goes on every month, and it is not like it used to be with at lot of companies is that you have a lot of people renew their fixed-price agreement, starting in April, May, June. We now have them spread out over a 12-month period. It makes it a lot easier to manage and that is why we can -- we have the ability to be able to manage that as a conversation with the customer rather than sending out a letter.

Thus far our renewal process in January, February, and March has yielded some pretty good results on the retention side. We have been able to retain a lot of people. And we have been getting better margins also.

Have you been locking in your costs as you've been getting those contracts?

(multiple speakers) Absolutely.

On your working capital requirements, what do you think is going to be sort of an appropriate cash level to carry given the volatility of oil prices for you at least through the next heating season and kind of long-term?

We can't predict the future as to what type of cash levels that we're going to have. We are able to borrow from the banks under our working capital agreement to finance receivables and inventory.

With regard to question as far as gains and losses. For the six months, 3/31/'04, the gains were 8.6%, the losses were 10.2, to give us a net of -- a net loss of 2.3%. The gains for 3/31/'05 six months are 8.5%, 10.9% were the losses to give us a net loss of 2.4%. And we have a lot of those details on page 18 and 19 of the 10-Q when you get an opportunity to look at the 10-Q 10.

Okay. Maybe I could rephrase the prior part of that question on working capital. Your working capital swings substantially seasonally and more so with oil prices. What kind of a working capital cushion or what kind of a sort of frost level of working capital do you think is the appropriate cushion?

We peak at around 160 or $170 million worth of working capital borrowings and probably during the summer as we have in the past, we go down to 25 to $30 million worth of seasonal working capital borrowings.

Okay, thanks.

Andy Jerrial (ph) at All State Investments (ph).

Can you break down that $53 million between working capital, CapEx and debt repayment?

Sure. It is real simple. The debt repayment was 1.1 million. The CapEx was 200,000, and the remainder is working capital or investment in working capital.

Okay. All right. In the past couple of years in the second half of the year it looks like you burned about 40 million or so in EBITDA. Is it your expectation that you will be able to find some areas of cost-cutting so the second half of the year won't be as much of a burn or is that 40 pretty much locked in?

I don't think I think I can comment on that, but I will tell you that as Dan said, we are continuing looking for ways to cut the costs and to operate the business more efficiently.

Okay. Regarding the asset sale covenant, is it your interpretation that as you run those proceeds through working capital, when they come back onto or back up into cash after you collect the receivables, that that cash is then free for your use in terms of general corporate purposes or does it fall back into the asset sale basket?

We disclose at our 10-Q how we have used the proceeds from the sale of this agreement, and that is what we have disclosed.

Yes, but in the second half of the year here, you get 222 million of receivables; those will come back as cash. I am just kind of looking for where you guys stand on the obvious question?

We don't know where we stand with the use of proceeds for the rest -- or the excess proceeds for the rest of the period. We haven't made a decision and we might use some or part of the excess proceeds.

Okay, thanks.

Ron Londe at A.G. Edwards.

Rich, could you give us an idea of the 93.9 million in current maturities long-term debt, when those actually come due?

What the majority of that represents with the exception of about $1 million is the remaining excess proceeds. Our accountants had us classify a portion of the subdebt at the parent of 265 million to current, which what that represents is the remaining excess proceeds as of March 31st. All but about $1 million or so.

I assume that of the 222 in receivables, generally speaking by the end of April, you probably have the vast majority of that converted to cash, right?

It really comes in April, May and June.

There was a statement in the 10-Q about transferring some volumes from one quarter to another because of a potential work stoppage. Can you give us some background into that?

There was a union operation formed in Rhode Island with our service techs, and we were in very intensive negotiations with them. There was potential of a strike any time you get into intense negotiations, and we just prepared for that just in case because we were concerned not only for Rhode Island, but also Massachusetts and Connecticut unions could have joined into that strike. The contract has been settled and, obviously, there was no strike, but we had to prepare for it to make sure our customers were kept in product.

Can you give us a feel for what you think the volumes are going to be in the June and September quarters?

I really can't predict the volumes for the June and September quarters, but take a look at what we sold last year. We did have attrition, and we did have some conservation, and apply your formulas to those volumes, as well as some delivery scheduling issues.

Okay. That's all I have for now.

Carl Blake (ph) at FBR.

A couple of quick questions. First with regard to your credit facility, could you tell me the exact availability on your credit facility and what the borrowings base is as of the quarter's end?

I don't have the borrowing base in front of me, but I believe the availability in the 10-Q was around $55 million.

55, okay. With regard to volumes, could you walk through the volumes for me a little bit and clarify what -- in last quarter you had a category called other petroleum product volumes. Is there any of that associated in this current quarter's numbers? And if so, could you just normalize that so I can separate the heating oil volumes from the other?

Well, the numbers that we do disclose in the press release is purely home heating oil volume. The other volumes that we refer to would be either diesel or gasoline. But what you see in the press release is just pure home heating oil, which is the majority of our business. We do mention on the 10-Q the volumes that we do sell in other petroleum products. For example, in the quarter we did sell around $25 million of -- 25 million gallons of other petroleum products this year, and last year we sold 27.5 million gallons of other petroleum products.

Okay. In terms of your customers, could you give us a sense of the mix between the variable price protected and commercial industrial?

I sure can. Just give me a second. For the quarter ending March, we sold to our variable customers -- I will tell you, the answer right about now is about 52% are protected price customers; 48% are variable price customers, of the residential customers.

In terms of, if you can get clarification, I appreciate this. Is it still about 16% of the commercial industrial? And also could you tell me how you've deployed the cash in working capital? Is this primarily inventory purchases?

Yes, primarily.

To what extent in the inventory level has it increased as a result of volumes, and what extent has it been price related?

Well, inventory goes up and down with either what we need to buy or where prices are.

Right. Have you purchased more volumes this year than you did for the comparable period last year, or has it been about the same volume? And the increase on a relative basis is primarily a price issue? I'm just trying to get a clarification of that.

We sold less volume this year versus last year, so we didn't purchase more because volumes were up. That was offset by a 30, 40% increase in cost of goods sold.

And your bad debt expense level, how do you anticipate that this year?

Bad debt expense on an absolute dollar basis, we think will go up, just due to the higher cost of product and the higher level of sales. But we believe our bad debt expense on a percent of the sales should stay about the same as last year.

Last questions here. Legal expenses in the quarter were about what?

Legal expenses were up this year versus last year about $1.6 million.

And in terms of the comparability in customer losses, you indicated February to April 30th, and maybe I missed this, but what is the quarter -- if we just looked at the comparable quarter customer losses, what would that look like?

For the quarter, last year we lost 1.7% net, then the quarter this year we lost 2% net with January being the swing vote if you will in that quarter -- with January being significantly worse than last January. But if you look at February, March and April, we're actually running a better net attrition rate for the quarter and for that three-month, February through April, our net loss was 1.8% versus last year it was 2.3%

Okay. January, is there a number like 8700 net? Can you give me a number like that for the January incorporated period?

Sure. All of the stuff is in the Q but this year in January we lost 3100 accounts and last year January we lost net 600 accounts.

Okay, great.

Just so you know, the reason for that is it is really the later months that the changes have been made -- the changes are going to affect the call centers and the branches. And in answer to the first part of that question, it's about 15% commercial business.

Great. Thank you very much.

To come back to your first question, because -- the quarter we sold 44% of our volume was residential variable; 44 was capped; 36 was residential variable; and 15 was commercial.

Okay, great. Thank you.

Carney Hawks (ph) at MacKay Shields (ph).

First of all, great quarter. In terms of your performance and turning things around but I do want to focus on the working capital issue. You just stated that most of investment so far was in inventory but you only have $55 million of inventories at the end of March. How have you invested $51 million in inventories if there are only at 55 versus 34 at the end of September?

All of our disclosures on this topic -- it's in our 10-Q, and just in our 10-Q.

Can you just explain how though -- the second half of the year tends to be a year where working capital gets paid down, how are you -- or could you use $90 million of working capital in a period where it is actually historically coming down quite a bit? Is that just letting receivables extent out or paying down all of your payables ahead of time?

We haven't made a decision on what we are going to do with that $90 million.

Okay. I'm just trying to understand why the Company seems to have such a desire to circumvent this asset sale proceeds clause and why for example instead of investing in working capital, the Company isn't in buying in their bonds which prior to the very good numbers you just reported, were trading in the mid-80s, yielding almost 14%. Is that something the Company has considered doing as a way to deal with the asset sale clause?

I don't think we can really comment on that. We really need to understand where we are with the working capital before we can make a decision on buying in the bonds. We are just considering a lot of different things but I really can't comment on it.

Okay. But just to clarify the point, at the end of the year your working capital -- net working capital would need to be 140 million higher than it was on December 12th in your mind under your interpretation which I strongly disagree with -- that that is how you would -- the asset sale proceeds. Is that correct? It is not just investing it and then getting the money back because that is clearly just cash management, right?

I just can't comment on that. I just can't tell you any more than what we already told and what is in the Q.

Do you have any intention of sitting down with bondholders to talk about this covenant and maybe a negotiated settlement to figure out a way to satisfy it or are we just going to wait until the December 12th and then see what happens?

I think I would like to say that we're willing to talk to anybody.

I look forward (multiple speakers).

Certainly are open to talking.

I look forward to that. I guess the last question -- if in the event a default was called on December 12th, would that cause a cross default in your working capital facility?

I believe so. Yes.

Thanks.

Erik Dybesland front Lehman Brothers.

Good morning. I know you are just dying for another question on your working capital here, but at the risk of beating a dead horse, the buildup and the investment that you're making in inventory, are you over investing in inventory? Or are these investments that you have made in the investments that you're alluding to in the press release that you will continue to make into working capital assets? Are these just normal course of action or are you overinvesting in inventory and other working capital assets at this point?

I am really sorry, but I really can't discuss any more than what we have already said and what we really disclosed about this issue. I just can't do it and I apologize but I am sorry. You will just have to refer to what we said in our documents.

Okay. This is simply an operational question. I am not asking about the bonds. I'm just trying to understand if you're investing in working capital just as -- this is -- I was hoping the answer was yes that you are just investing in working capital as part of your business on a seasonal basis. And I -- if you are over investing in inventory for instance, I would like to know what the operational thought behind that would be? It was really as much an operational question as a financial question.

I just cannot expand on what we have already said on that.

Okay. That is troublesome. Thank you.

(indiscernible) at Wolf Point Capital (ph).

I have two questions. If you have already answered, I apologize. What were your heating oil volumes in the quarters ended June and September of last year?

I can give you that. Hold on the second. Quarter ending June last year was 76.9 million and the quarter ending September was 41.1 million.

41.1 and 76.9 you said?

Yes sir.

And sorry to beat the horse -- the dead horse here -- I'm going to come at it from a different angle. If you look at your working capital, you can extend receivables which is extending free loans to your clients which isn't an investment in my book. You can buy more inventory which costs money to carry which costs money to hedge and the hedge may not work which could kill you which is an investment in my book. You could pay off all your payables which are actually free loans from your suppliers which is not an investment since you're paying off a free loan.

And then prepaying expenses for years in advanced is another possibility but that's not an investment so I'm just trying to understand your philosophy -- which one of those is an investment versus paying off debt? And it is not -- you don't have to answer any of the questions other than just please explain the philosophy of the management and the Board as to which one of those would be considered an investment?

We have been advised by lawyers to (multiple speakers).

I'm just asking for your philosophy -- which one of those do you consider an investment. I'm not asking you to tell me what you are going to do. I would just say which one of those do you consider to be an investment?

I just can't answer that. (multiple speakers)

It's just a philosophy question. I'm just asking-- do you consider any of those an investment versus paying down debt? You may think that -- you may yes I consider buying gobs of heating oil inventory an investment and here's what I think the return will be but otherwise -- (multiple speakers).

Heating oil is an investment. Gallons of heating oil (multiple speakers)

Do you consider buying -- because I'm just trying to understand, because if you look at this business it shrinks through time. You have attrition plus they're not making more heating oil customers as far as I can tell. At least not many. So for you to increase working capital in a business that shrinks over time doesn't make any sense. Most companies as they go through time and shrink reduce their working capital, not increase it. Unless you are assuming there is a big growth coming down the pike -- in my so called (multiple speakers).

We're getting into a discussion that we just really can't get into here and it is not as cut and dried as you think it is. I really prefer not to say any more about it.

Not even just describing your philosophy toward it?

To really can't. We really can't. We need to go to the next question please.

All right.

Eric Calamaras (ph) at Wachovia Securities.

Good morning Joe and Rich. I wanted to go back to a couple questions; one that Carney posed and that Ron Londe posed. Was it clear that you could not offer any guidance on what the volumes would be in the last six months?

We can't offer any guidance other than telling you what they were last year and we disclosed. We've had attrition, conservation and some delivery scheduling.

The reason why I ask is because you referenced us back to the historicals, but in the 10-K you say it will be substantially less than those historical periods. So I'm trying to get an understanding as to what the magnitude of that is, one? And two, what your definition is of substantial?

Well let's just say for the quarter and the six months we had about 6.5% or so attrition and we had 3.5% conservation. Those numbers -- the customer that we lost during the course of the year is going to impact volumes going forward.

Okay. Additionally, can you handicap what the -- if I look at the credit agreement, and the working capital facility, regarding the asset basis, cash part of the asset base?

Yes it is. Certain cash, yes.

What do mean by certain cash?

If it is in the control agreement with J.P. Morgan.

Okay. Lastly, if you are evaluating -- it sounds like you're willing to talk to bondholders, how do you rationalize the capital structure here? I'm assuming you would agree it is not right sized? So I struggle with where the complications arise as to how to handle this?

We're looking at the capital structure. We're going to be evaluating capital structure as well.

Okay, but you're not sure if you're going to pay down the debt? Or offer of a par or par offer -- so it's unclear as to -- can you expand what other options you may be looking at?

I cannot discuss any options that we're looking at currently.

Okay. Thanks.

John Freeman at Raymond James.

My question actually has to do with the price protection program you have for your customers that you all were negatively impacted by with your margins. I'm trying to get a sense of whether or not you are reevaluating that program? Just on the surface it would appear that with us having higher volatility on commodity prices, that it is becoming more costly to hedge that program and obviously eating away into your margins and whether or not when you do this program if you are now starting to build in I guess a cushion to compensate you for the more costly hedge on the other side of it?

That is exactly right. We basically offer a fixed-price or a variable price. More and more customers who are renewing are deciding because of the higher cost of oil to stay with the variable price because they feel the price of oil is going to come down. Anybody who wants to lock in for a twelve-month period, we do do that also. And we do it at whenever the current costs are for that particular date. We have a formula that we follow that is updated on a daily basis, based upon what happens to the future cost of oil, based upon the Mercantile exchange strip for twelve months and we also basically evaluate our -- post our variable prices on a daily basis also.

And the cost of the hedging is included in our cost.

The delay that you all had in hedging the current impact that you -- aside from this mistake with coating some of your customers as variable -- the delay in hedging had nothing to do with the fact that volatility went through the roof around that time frame and didn't give you all pause and that was the reason you all delayed hedging? It was just -- you just chose to delay? I'm trying to like connect the dots on why there was some delay? It would just seem logical that you would always hedge on the other side of it? I'm trying to understand why you would have left yourself exposed and delayed hedging?

It was basically a cash constraint that we had at the Company and it goes back to early on in fiscal 2004.

Okay. Fair enough. The last question I had, I believe you said that there was a -- I think the personal reduction number I heard was 225. Was that right?

Yes.

Was that just solely due to you all divesting getting out of the propane as a TG&E segments?

That has nothing to do with the propane or TG&E. Except in the corporate because we are a smaller sized business there were some reductions in corporate but the majority of them -- the propane and the TG&E employee accounts were all completely separate.

That number basically comes from trying to right size our business with the volume that we have and the level of customer satisfaction that we want to deliver and we just reevaluated what we had -- what was out in the field and what we could get by with and still deliver that premium product.

So that 225 personal reduction number was just a core number unaffected by the other divestiture segments? Because I guess on the surface it would appear that what you are doing in terms of now making your organization more bottom-up as opposed to consolidating marketing pricing delivery schedule at the corporate end, you are now doing on the local district level, it would appear that that would require I guess more personnel? You have at the district level now you've got people now having to deal with marketing, pricing, delivery schedules that they weren't doing previously. I am interested in how you're able to accomplish reducing personnel by that amount when on the surface it would appear that you would need increased personnel?

The premise that you are making is not really correct. Because we are doing that at the district level doesn't mean we have to hire more people. The people that we have at Petro and have had for years at Petro know this business and know how to run it. They just weren't doing those things which they very easily could have. As a matter fact, it lends itself more to customer satisfaction when we could let these people run the business at their level the way they think it should be run for their market. And that is what we weren't doing and that is what we are doing right now.

Basically, the overall tenant and the philosophy is this -- is that while we need to have the right number of employees to satisfy our customers, employee satisfaction and having our employees running the business for us and knowing what they are doing, understanding where we're going is very important. When we have employee satisfaction plus a great product, which we are now delivering, we get customer satisfaction. When I get customer satisfaction, I have the ability to maximize margins.

When I have the ability to maximize margins in addition to expense control and maximize EBITDA, that is basically the philosophy we're following and we can do that much better by running this business at district level.

Okay. That's all I had.

Aaron Bloom (ph) at Goldman Sachs.

Question, you can also go out and buy businesses and maybe you want to grow the business, which certainly I might consider a good thing to do. Where are multiples now as you guys look at businesses to potentially acquire?

We haven't looked at any businesses to potentially acquire this season and I really couldn't say where they are. I just haven't been involved in it.

So as we move forward between now and the next year, do we stay out of that market?

As we said at the previous conference call, we have certainly deemphasized acquisitions, but that doesn't say we will never do them again. But at this point we are really focusing on getting the core business moving properly which is what we are doing, but I wouldn't say that we wouldn't go do any. Its just there is nothing on the horizon right now. In fact, I really am restricted from doing any at least through June I think by our bank agreement.

After then June, from your standpoint, you can?

There are a couple of tasks or hurdles that we have to make under the bank agreement to execute some acquisitions.

So then -- could you elaborate that for the folks on the call, or is it fairly --?

Sure. We have to have availability of $40 million, that is one of the -- hurdle tasks on the bank agreement.

Availability on the revolver?

Yes.

And you've got 55 now right?

Right.

Another question. Is there a clean down on the revolver?

No there is not.

Last question. You said you had cash constraints because in the fall because you didn't hedge. Was that because you couldn't post cash collateral?

It was earlier on than in the fall.

Okay but was that the reason because you couldn't post cash collateral?

When you say couldn't post cash collateral, I am not so sure what you mean.

You had a hedge, so the counterparty may have wanted you to put cash against that hedge, or no?

At the time we were cash constrained and we didn't have the cash to enter into certain --.

Perfect. That's what I though. I just wanted to clarify that. Thanks a lot.

Adam Cecil (ph) at Gravity Partners (ph).

Good morning. Two questions. First, I think people are obviously happy with the operational improvements, but unhappy with the level of disclosure explanation on the whole working capital debt issue. You can't explain very clearly and simply to equity holders and bondholders what you are deciding not to pay down debt? Don't you think people deserve a simple clear explanation on that?

I don't think we said we can't pay down debt, I think what we said it is that we have not decided what we can do at this point.

You don't feel like you can tell people why that is? Because the obvious first explanation -- first thing to do is to pay down the debt and you haven't and people wonder why and you feel like you can't even explain why that is?

We are keeping our options open. We are just keeping everything open. We just don't know what is the best thing for the Company to do at this point.

Okay. More generally, do you have any sense -- I know you can't give guidance but with these operational improvements, do you have any general sense when you think you can reinstate the dividends?

We have no idea when we will be able to reinstate dividends.

Okay. Good luck.

(indiscernible) at Dalton Investments.

I'm new to your Company, and also after you sold your assets, it become a little more complicated with the kind of formalities involved. I was trying to think, what is happening on your competition? What type of actions you are seeing on your competitors and how are you are tracking that?

We don't have -- most of our competitors are non-public companies so we really don't have a lot of information. It is just not available to us. We understand that just from what we hear that many of our competitors are having the same kind of issues we have. Dealing with the high prices and working capital and accounts receivable. But I don't have any real details of what goes on in their businesses.

When you analyze your customer losses which is happening for quite some time now, what are the factors you see? Why you must have done a very exclusive research on this and why you are losing customers?

We lose customers for a great number of reasons. The large number of customers that we lost in the previous year were due to operational difficulties which have now been corrected. In the 10-Q, we discussed that, what the losses are.

Right. Could you elaborate on the informal (indiscernible) investigation on the Company, anything you can update us on?

There has really been no -- nothing to update. There is nothing going on that we're aware of at this point.

Okay. I see the growth -- the increase in trained (ph) and fixed-price customers, at the end of the first quarter '05, is it still around 50% or it is slightly higher than that?

It is actually a little bit higher.

Okay. As for the indenture of this (indiscernible) notes, can you borrow additional money and double these bonds if declared?

I am not following your question, sir?

What is the total amount of debt that you can -- what is the total amount debt you can have on top of these MLP (ph) notes?

As long as we have availability, we can borrow under our bank agreement.

Okay, thank you.

Mike Ongui (ph) at Ibis Management.

Hello. I have two questions. Can you cite examples of how morale has improved under the present system? That is my first question?

I am sorry just ask it again. I just turned my head for a minute.

My first question is can you cite examples of how the morale has improved under the present system -- present management?

I can and speaking to employees, they are very encouraged by what has happened. They like the idea that we are pushing the work back down to them, the control back down to the branch level. That is something they have always had problems with. We have -- they like the idea that we have been speaking to them and listening to what they are saying and the perfect example of that would be where we had one area that was very, very -- had very, big large problems with the call center. That is the first area that we have talked to them, we went to back to put it back to them, as much of the work going back down to them as possible. They are very, very happy about that. People had complained about something else. We offered to change it and they said no we like the way it is right now because we like what is happening. It is a very casual thing. You can feel it. People smiling, people talking to each other. And is just very --.

That's great.

It's hard to describe, but that is what it is.

That's great. My second question is, can you elaborate on the benefits of scale versus like the mom-and-pops? Basically how does your overhead offset the seemingly lower-cost structure of the mom-and-pops?

I'm glad you said seemingly lower-cost structure because they've got a lot of the same kind of expenses we do. And of course we do have other expenses being a publicly held company and such. Our advantage is our service provision. We have 24-hour a day, 365 days a year service coverage with very, very well-trained service people. We have also a wide variety of suppliers so that we can always get supply when it becomes a problem. That service issue is very, very important.

Our competition being a mom-and-pop, they can't afford to send their person to be trained. They can't spend the time and have their persons trained by outside schools. And our servicemen are trained both on heating bill and now on air-conditioning services as well so that we've got this combination of people. It's that contact and that makes people comfortable -- as Dan always says -- we're protecting their most important assets, their most valuable asset, their home. That gives us a big step up.

Thanks. Finally, one question. What is the natural attrition rate? I sort of know that as people build new houses, new construction, a lot of developers would default to natural gas unless the house owner requests for heating oil. I guess what would be a natural attrition rate for that?

Natural gas attrition has been 1% or less. But you are looking at a 1 to 2% attrition rate as a normal kind of rate.

All right, thanks a lot. Thanks a lot.

(indiscernible) at UBS Securities.

Congratulations on a better-than-expected quarter. Just had a couple of quick questions here. First and foremost with the new strategy where you're moving decision-making down to the level levels, do you anticipate that there would be any costs associated with transitioning to this strategy?

Actually, no. There may be very, very little but most of what we have done so far and what we have been able to do is cost neutral. For instance, where we have people answering the phones in the local areas, that these are people who are already in the branch, but in some cases where we've had to add more people, we have for instance reduced our costs at the call center by it looks like over $1 million a year. So everything we are doing is as cost neutral as possible.

Would you anticipate that you would need to open it to a few more branches at this point?

No, no, no. We have -- we are adequately -- we have adequate branches.

Okay. Another question -- I know there has been a lot of questions about accounts receivable and so forth, but based on historical trends, how is it tracking in terms of money coming in the door? Days outstanding and so forth? Is it on trend? Is it a little worse than usual, better than usual? So forth?

At the end of March, based on where our receivables were and our delta (ph) that we had in that period, our receivables are historically where they would need to be.

So they are pretty much tracking historical trends and so forth?

Pretty much tracking historical trends. Today we have collected cash and our working capital borrowings are down to $99 million. So we've gone from 133 down to 99 -- collecting around $34 million or so.

Okay. Another question just in terms of contract expirations. Do more of tem generally or the way you are structured right now -- do more of them to expire in the summer than in the winter months and so forth, or is really spread across every month?

Are you referring to protective price customers at 12-month contracts?

Exactly.

They expire mainly from the period of June right through November on a pretty even keel basis.

June through November? Okay.

We have certain smaller amounts that expire in May, January, or February and March. We're trying to get that spread out over a twelve-month basis because it is much easier then to deal with those renewals and do it in the right way.

Okay but it would be fair to say that the June through November territory would be the bulk of the expirations?

That is a fair statement.

I know you've gotten 1000 questions on working capital and so forth and I'm not trying to figure out if you're going to pay or not pay. What I'm more interested in is if you have done any sort of type of stress testing and said well what if did pay, would you have adequate working capital to continue on through the next -- through the '05 heating season?

Yes, we do do stress tests here every day as to where our working capital positions will go depending on where heating oil prices are. One of the issues that we have had this year is that we went from $0.80 cost of product to as high as $1.60 cost the product. And nobody can predict where the future is going to be.

I guess really more along the lines of my question is let's say take current prices or even take the high that you've seen of $1.60 and then say okay, what do I need to make it through next year's heating season?

I've looked at that, but I'm just not sure going to share those numbers with you right now.

Okay. I think that answers the bulk of my questions. Thank you.

Omar Jama (ph) at Merrill Lynch.

Just under the wire. First, I just unfortunately I'm the last person -- the first person should have congratulated you on the real turnaround on the operations side that you guys have been able to execute. And it does seem like you have really very quickly kind of gotten the business back on track. I hope you can continue to do that.

I had a couple of questions on the business. Somewhere in the Q, there was a mention of an $11 million cost savings, which was broken into two parts. Can you describe whether we are going -- is that going to benefit numbers going forward or is that already captured in the current quarter's results?

That is going to benefit numbers going forward. Some numbers that are in it, but the bulk of it is benefiting numbers going forward.

Is it SG&A related? Is it something that's going to appear in lower branch expense?

It is really across the board. The 1.3 is in corporate's level, but the $10 million is really spread out over every phase of the operation.

And it's principally overhead.

One of your competitors had a conference call the other day, and they mentioned that the policy of offering fixed-price contracts to customers at levels just above the market price was something that just wasn't a good idea, and something that had developed over time and has really gotten out of -- has no place in the market anymore. They're going to try to change that. Can you guys comment on whether you feel it's a good idea or whether it is possible in the market to try to deemphasize those kinds of free options that you're giving to the customer? Can you talk about that?

It is really the customer choice. This is customer driven, and we have a hard time diverting them. You try to offer other options for them to divide the product as we are talking to them about the variable price maybe it's better than a fixed-price contract but at this point because the prices may come down. The customer has to make that choice but I think we have to really be prepared to offer that.

(multiple speakers) I'm sorry?

I would just going to say so you don't anticipate trying to make any changes to the way the market is functioning?

It is really the customer. We try to do what we can do and make it easy and keep the customers happy, but (multiple speakers).

If I may just say here. Our focus has always been that we're not an oil Company, we are a service Company. We try to attract customers who are interested in having their homes protected by a Company that knows what they're doing. That is exactly what we try to do. We try to charge very competitive prices. We don't like charging give away prices. We're not one to sell to customers and lose money I can to you that, but we do try to attract customers in a very, very competitive market with prices which may be better for their first year. But the whole philosophy is once they have worked with us and once they see the type of service they are going to get from Petro, they are willing to pay what we charge and to stay as customers because we do a good job in protecting their homes.

Okay. Moving onto the summer kind of lost season, lost period, apart from the attrition and any customer losses that you have had, can you help -- is there anything you can help me understand what the EBITDA loss is going to look like year-over-year? Are there any things you're doing to help mitigate the traditional EBITDA summer loss period?

Certainly the continuation of the cost control efforts is part of it.

As well as we're trying to right size the business with volume whether it's in delivery or in service.

Okay. And then on the bad debt expense, I think you had -- with sales in conjunction you've had higher bad debt expense?

In dollar terms yes.

In dollar terms? You also mentioned in the Q that you had about a $10 million or so aged receivable, and I am just wondering how that is tracking, whether you think you're going to have -- you are going to have worse experience in terms of credit losses relative to what you have already accrued given what you have seen up through today?

That is hard to answer, Omar, but we're doing our best to try to collect our receivables. To a certain extent we have some budget customers who are -- they are actually ahead of us coming out of the season, but they still have another two or three budget payments to go which will help that number.

Rich, I might add to that too is that over the last several months we have basically rehauled how our credit operation functions. We have a much more effective way of collecting money. We look at dollars a little bit earlier than we did in the past, but we also know that our credit department's goal is to collect money and keep the customer. So we are definitely looking at that particular area as something that obviously is very important to us from both a collecting dollars point of view but also a retention of customer point of view.

Okay. Obviously everybody would like to know how much you’re -- if you are going to pay any money down on any of the bonds back. Obviously you have said that you're not going to say what you are going to do, but certainly it seems that given that the working capital borrowings are coming down, you are not going to do anything crazy like run out and buy a bunch of oil and hoard oil, that makes absolutely no sense. But would the Company consider is it within -- are you allowed to under your credit agreement to buy back bonds in the open market at a discount? Is that something that is even within consideration?

It's a little complicated. I would have to take a look at that and get back to you, Omar. I would have to take a look at that provision.

Thank you. That was our final question. I would like to turn the conference that over to Mr. Cavanaugh.

Thank you everybody. I appreciate your time in talking with us this morning. I am sorry we couldn't answer all of your questions, but sometimes we just can't. Thank you again and I will tell you that we make ourselves available if we can help people with any other information they may need. And I look forward to at least talking to you again in the next quarterly conference call.

Thank you.

Ladies and gentlemen, that does conclude the conference call for today. We thank you very much for your participation and ask that you please disconnect your lines. Thank you and have a good day.