Star Group LP (SGU) 2005 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Star Gas Partners fiscal fourth-quarter financial 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 a reminder, this conference is being recorded today, Tuesday, December 13, 2005. (OPERATOR INSTRUCTIONS). I would now like to turn the conference over to Mr. Joe Cavanaugh, Chief Executive Officer at Star Gas Partners. Please go ahead, Mr. Cavanaugh.

We are going to ask Rob Rinderman to read our Safe Harbor and then we'll begin the presentation.

Thank you, Joe. Good afternoon, everybody. This conference call will include 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 gross profit margins; the ability of the Partnership to obtain new accounts and retain existing accounts; the impact of the business process or design project of the heating oil segment; and the ability of the Partnership to address issues related to such projects.

All statements other than statements of historical facts included in this conference call are forward-looking statements. Although the Partnership believes that the expectations (indiscernible) in such forward-looking statements are reasonable it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the Partnership's expectations, cautionary statements, are disclosed in this conference call and in the Partnership's annual report on Form 10-K for the year ended September 30, 2005 which was filed earlier today.

All subsequent written and oral forward-looking statements attributable to the Partnership or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements. 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 are otherwise as of the date of this conference call.

This conference call is not a solicitation of a proxy from any security holder with the Partnership and does not constitute an offer of any securities for sale. Star expects to mail a proxy statement to its unit holders concerning the proposed recapitalization and to file with the Securities and Exchange Commission registration statement relating to the reg's offering. We urge investors and security holders to read the proxy statement and prospectus and any other relevant documents we filed with the SEC because they will contain important information. Now I'd like to turn it back over to Joe.

Thanks, Rob. And thanks, everybody, for calling in. We've got some very good things to talk about today. I think the first thing is that it's 17 degrees in New York's city and there's a cold north wind blowing. Our fourth-quarter results and our just announced proposed recapitalization and agreements with holders of 94% in principal amounts of our senior note holders.

Last week we announced that our Board had approved a strategic recapitalization which if approved by our unit holders would result in a reduction of between $87 and $100 million of our 10.25% Senior Notes outstanding. Kestrel Energy Partners and their affiliates have agreed to purchase $15 million in new equity and provide a standby commitment and a $35 million rights offering to Star's unit holders.

Certain of the Senior Note holders have agreed to tender their existing Notes for a pro rata portion of $60 million or at our option up to approximately $73.1 million cash and new Senior Notes under a new indenture. These note holders have also agreed to convert approximately $27 million of notes into common units with all the purchases and conversions being done at $2 per unit.

The proposed recapitalization will substantially strengthen our balance sheet and is a very welcome development for Star and its stakeholders. We currently expect the recapitalization to close toward the end of the first quarter of 2006, again subject to our unit holder approval.

Fiscal 2005 was an interesting and challenging year. I believe the Company is much improved from where it was at this time last year. And the results and the actions of the first nine months have been covered in great deal previously so I'm not going to repeat them here except to say that the information is fully disclosed in our 10-K which was filed this morning.

Our fourth-quarter results are mixed; they reflect both our improvements and our continuing problem which is net customer attrition. Customer attrition net increase but margins grew as well. Our service and installation operations continued to show improvement; our ongoing operating expenses are under control; and our previously announced decentralization initiative is continuing as planned with the involvement of local management being increased.

The rise in net customer attrition is largely due to our decision to no longer add or actively seek to retain customers at unattractive margin levels in order to retain market share in the face of very aggressive price cutting tactics by some of our competitors. We have determined that many of the customers that are attracted to such promotional pricing are quick to switch to other suppliers; they are not the full-service customers who are the heart of our business.

So yes, net customer attrition grew, but I believe we will be more profitable even with the loss of volume. But net customer attrition does remain a problem. There is still much that has to be done before it's back in line including continued emphasis on decentralization and moving more customer calls back to our district offices. This is going to take time as we work to find and train people with the talents we need.

We are also still feeling the lag effect of the past two seasons when the Company was not able to maintain the quality of service it had in the past. We did add about 13,000 new accounts during the quarter at our accepted margin levels, so there are customers out there who still want and appreciate the quality of service we are now providing.

Our heating oil margins grew by $0.07 a gallon in the quarter for a number of reasons including the loss of low margin accounts and an enhanced disciplined pricing including very close attention to inventory levels and hedging and a greater involvement of local managers in pricing decisions. In addition, comparable margins were lower in the same period in 2004 as the Company chose to not pass along the full increase in product cost to customers at that time for marketing reasons.

In this quarter we were also able to take advantage of a very unusual opportunity in the oil market as we were able to buy product for immediate transfer into our storage facilities at a lower price than we would have had to pay in the futures market.

Our service and installation operations achieved a gross profit of 1.1 million compared to a loss of $3 million in the fourth quarter of 2004 as we continue to operate and price this segment of our business as a generator of profits rather than just a marketing tool.

Operating expenses increased $3.7 million over 2004. 2004 was favorably impacted by an unusual credit of $4.1 million relating to unit appreciation rights. In 2005 savings due to lower volume in our continuing cost reduction program were offset by $2 million in legal and professional fees relating to our refinancing and restructuring initiative, $2.2 million in bad debt increased collection cost and credit card fees all related to the higher cost of product and increases in S-Ox compliance cost of $500,000. The operating loss for the quarter was $40 million, the same as in 2004 which again was favorably impacted by the $4.1 million credit.

We believe that our fourth-quarter results in combination with the proposed recapitalization and agreements with our Senior Note holders bode well for our future success. We were able to increase our margins and generate a profit in our service and installation operations. We've kept our ongoing operating costs under control. We have enhanced controls over our inventory and hedging for protective price customers. Net customer attrition remains a concern and our priority is to continue to aggressively address that problem.

We believe very strongly that localization is the key to reducing net customer attrition. To that end we are continuing our initiative of moving toward decentralization of our operations, putting the all-important direct contact with the customer where it belongs, at the local district level. We're continuing to assess the efficiency of certain other centralized operations.

The success of the proposed recapitalization is crucial to our ability to continue to put this Company on a sound and sustainable footing. Our employees, our customers, our suppliers, our investors and creditors need to see that the financial concerns of the past year are behind us and that we will be able to operate without the stresses brought about by the financial issues and that we will have the opportunity to grow through a well-planned and well executed acquisition program. Thank you for your interest in Star and we'll now open the line for questions.

(OPERATOR INSTRUCTIONS). Eric Kalamaras, Wachovia Securities.

Good afternoon, guys. A couple questions. One is a little more conceptual in nature. Given some of the attrition that's still going on, what makes Petro's services more attractive versus some of the competitors?

24-hour a day 7-day a week service.

And a number of the competitors don't have that?

The smaller competitors generally are not able to offer that to a large extent. They're usually a one or two person operation. We've got a very large staff of servicemen; if we have issues in one area we can move people around.

Okay. And additionally, given the increase in the product cost, can you give me a sense as to -- because you guys have FIFO accounting, how much of the margin increase is related to the actual change in product cost and lower pricing flowing through the COGS line?

Do you want to answer that, Rich?

Around $0.02 or so.

That was Rich Ambury.

$0.02?

Yes.

Okay, thanks. And then additionally, are you in a position to give any additional forward-looking guidance?

No, I'm not. We've not done that in the past and we (multiple speakers) right now.

Thanks, I appreciate it.

Joshua Horowitz (ph), Redwood Holdings.

What specifically is the Company doing to stop the attrition?

I'll let Dan Donovan, our COO, answer that question for you.

Joe touched upon it in his opening comments, but let me just give a little bit more detail as to what we're doing. I guess you could say going back to May and June we started to test our ability to migrate customer service from a purely outsourced configuration to more of a hybrid situation. We started with two districts, Rhode Island and New Jersey. And we used basically two different approaches to see what would serve the goal of having the customers or our employees get the sense that we were shifting away from customer service from a large disconnected operation to a more local situation. We refer to it as localization.

Simultaneous to this test we've also provided the current call center by district boundaries and this gave a better alignment to the district and, more importantly, it gave the general managers direct control of how customers are going to be handled. So far these changes are working very well. We have now begun to slowly staff every district. Basically what we want to get back to is to have all of our phone calls handled by the districts in the field.

Our greatest concern at this point is the proper training and assimilation of these people. It's not that easy to retrain as to hire first of all and then to retrain as many people as we're going to need in those local districts and that's why it's taken a little bit of time. We don't want to rush this and make any more mistakes regarding how we're going to handle our customer service. And while we continue to staff our Rhode Island and Bay, New Jersey, we're now beginning the same process in several of our other districts which we hope to have localized by the end of this heating season.

We also don't want to take a cookie cutter approach, meaning that we just don't want to say, okay, here's how we're going to set it up in each and every district. How you handle customer service and how we stopped losing customers is different in Arlington, Virginia versus how it is in Boston and we're recognizing that and we're letting the general managers and the people we have in the field tell us what they feel is the best way to hold onto these customers and we are starting to see some success with that approach.

We believe it's going to have a positive impact on customer retention due to just the nature of the community served. We may do things -- we may dispatch locally. We are communicating more with our customers via newsletters. But the bottom line is getting our general manager involved in the day-to-day interaction with customers which is something that did not happen over the past two to three years.

I appreciate that. I have a follow-up or two -- I'll jump back into the queue and let others have a turn.

(OPERATOR INSTRUCTIONS). Howard Bloom (ph), UBS Financial Services.

Good afternoon. I had a question about the recapitalization. I'm wondering whether the exchange of subordinated units to trade publicly for either newly created securities or into the regular units will be considered a taxable event. And in a general way how the holders of those subordinated units will find the treatment to affect them.

Rich, do you want to take that?

I don't believe that's going to be a taxable event, but all the details of that will be outlined in the proxy statement.

Okay, thank you.

Ron Londe, AG Edwards.

One of the items that you showed on your EBITDA for 2005 was a $42.4 million reduction in profit margins. Can you give us an idea of the starting point from the standpoint of gallons that you've sold and where you might feel that -- how much of that 42 million could improve upon this year given the implementation of your turnaround plan?

This is Rich. Of that $42 million, the majority of that was due to volume. As our per gallon margins on heating oil went down about 1.3 cents, so on a 487 million gallon at about a penny we were down around $4 or $5 million due to margin with the difference being due to volume. Our margins have been up for the past two to three quarters if you go back to the second fiscal quarter, third fiscal quarter and fourth fiscal quarter. But we had been on a trendline of being able to increase our margins (indiscernible) the fourth fiscal quarter is not a big volume quarter.

We really have no estimates of -- but what we can improve the margin by this coming year. And if you look at fiscal '05, we were impacted by about 1.6 cents or so per gallon by the pricing and several hedging issues that impacted us. Giving you kind of a feel for where we can go, I don't believe those -- by that 1.6 cents, I don't know if it's going to be reoccurring or non-recurring going forward. But we have shown signs of improving our margins the last three quarters.

Okay. Can you give us -- assuming that all of the debt and -- is converted, can you give us an idea of how many units you're going to have outstanding after the unit holders or if and after the unit holders approve the recapitalization?

It's going to be around 74.3 million units.

Okay. Also in your release you said you were having some problems with a few of the note holders that might challenge the use of the proceeds from the sale of the propane operation, the excess proceeds are part of the equation. Can you give us some background there and how you feel about where you are at this point in trying to renegotiate or negotiate with those holders? Is that principal amount around $15 million?

We have 94% of the note holders locked up to this agreement. I don't really know where the other 6% or so are.

94% of the dollars.

Right. So is it 6% of $15 million?

Yes. Ron, it's Joe. Yes, there's been no glitch (ph) or anything of that nature. These people haven't signed up and we all recognize that the other note holders that when this deal is consummated we're going to be taking those people out at 101 I think it is.

Do you need everyone to sign up for the recapitalization to work?

No.

No? Okay.

To answer your question, it's is about $15.9 million.

Okay, that's all I have for now.

Thanks, Ron.

David Marsh, Friedman Billings Ramsey.

First, one housekeeping item. Could you just break down the operating expense in the P&L in the quarter into delivering and branch expenses versus G&A so we have a better sense of what's going on there?

Yes, we can do that if you hold on one second. Delivery and branch is around 48.1 million and G&A is about 8.6. I'm sorry --.

That seems a little high.

Yes, delivery and branch is 48.1 and G&A is 6.9.

And then on the exchange and recap plan, what percentage of note holders are required to agree to the plan in order for it to be successful?

93%.

Just over the minimum amount. Is there any flexibility in -- I'm obviously not certain exactly what the agreement is you have, but do the note holders that have agreed to date have any ability to withdraw from that agreement before it's actually consummated? And any ability to revoke or withdraw their consent to the exchange and so forth?

There is a material adverse change in all these agreements. But it's -- you'd have to read the definition to see your opinion of it.

And is there a breakup fee if this thing is not completed by April 2006?

Yes, there's a $4 million breakup fee. And again, there's a few subject to as to how that really works.

All right, thanks.

Go on our 8-K which we filed last week or so.

All right, thanks.

Yves Siegel, Wachovia.

Good afternoon. A couple of questions. One is are you guys offering a cap (ph) type program to your customer and, if so, how much of that is hedged?

Dan will take that. The answer is yes we are and Dan will talk about it.

Yes, as a matter-of-fact that's one of the things that's helping us do pretty well on the new account side in that we're one of the few companies that are offering what I would call the traditional cat program. We call it a ceiling program and it's basically a variable price that can move up and down with the market but there's a ceiling price that we will never exceeding and we cover that 100% with calls.

What percentage of the customers elect to go into that program?

For instance, probably in the neighborhood of about 23 to 25% right now. It varies depending upon where customers assume the price of oil is going.

And what kind of costs do you incur? Is it just the cost of the call?

the cost of the call and it's built into both our variable price and to our ceiling price.

Okay. And then the second and the last question is what are your thoughts on acquisitions going forward? Are you able to consummate acquisitions now or do you still need to continue down the path that you're on in terms of the internal restructuring that you're doing?

We had some restrictions as to when we could do acquisitions, but your second comment applies equally as well. We want to be sure that we're able to -- anything that we would enter into we want to be sure that we're able to put it in and run it properly.

So it sounds like you have to wait a little bit before you can go down that path?

We don't intend to be doing any acquisitions before the -- well after the heating season of 2006.

Okay. Good luck, thank you.

Ken Schlummel (ph), Wolf Point Capital.

A couple questions. A follow-on to the call about the mac (ph) clauses, are they the same for the equity participants or the bond participants or are they different mac clauses.

They're the same.

Second question. When you say you've got 100% of the cap program covered with calls, are you making an assumption about volume when you say that you have 100% covered?

We have to make an assumption of what the average customer is going to consume for the upcoming heating season, yes.

And you're hedging to that average?

Yes, we are.

Okay. And then thirdly, the quarter that you're in right now or almost finished with, are you seeing any other trends in terms of loss of customers continuing at the pace you saw before, margins better or worse and competition better or worse than you had expected or what we were seeing in the --?

I really can't comment on that and -- I really can't answer that.

Okay, thank you.

Mariana Kushneer (ph), Nomura Asset Management.

I have three questions. First of all, that extraordinary opportunity that you had to take advantage of the commodity markets, could you quantify how much that was? Also, the sentence in the press release as of December 2, 2005, "All (indiscernible) proceeds have been applied toward permitted use." Could you elaborate on that a little bit? And lastly, operating cost per gallon continued to increase rather than stabilize and improve. Can you comment on how you can reverse that trend?

I think we can take those three. The inventory opportunity is, depending on how you estimate it, is somewhere between $1 to $1.5 million. I believe your second question was relating to --.

Permitted use -- that sentence that says as of December 2nd you applied all of the proceeds.

Yes, we have used all of the proceeds from the sale of the propane segment to -- we have used all of the proceeds. Now when you look at a per gallon basis during the quarter, this is a summertime quarter where you really do not deliver a whole heck of a lot of volume and you are going to get an increase in your per gallon operating cost. Are you looking at the quarter?

I was looking year-over-year.

If you look year-over-year you're going to have that same type of -- this type of increase where you have 7% attrition as well as this year we had 4.5% conservation and that 4.5% conservation is something that we really didn't plan on or think what would happen. But we have put in steps to reduce our operating cost and our last 10-Q and this 10-K we did put in a plan to reduce operating expenses on the base business by about $10 million. We got a portion of that in fiscal 2005 and we should be getting a portion of that in fiscal 2006.

And on the permitted use you're saying you applied it so you made cash payments to bondholders or you already invested it in working capital?

We invested it in working capital.

Okay, thank you.

Casey (indiscernible).

A couple of quick questions. Can you tell us what your current cash and revolver balance is as of today?

Current cash balance is several million dollars, I really didn't take a look at the report today, but it's been averaging somewhere between $5 and $8 million. And our revolver balance for working capital borrowings is zero but, we do have letters of credit against that balance which is around $55 million or so.

What is that yield in terms of availability on that line?

As of today I don't have that number in front of me, but I believe our availability at the end of September was around $74 million. It should be up from that because we've had the positive cash flow for the quarter. I could get that back to you if you'd like.

And do you anticipate that -- further draws? In other words, do you anticipate drawing down on the revolver as the season progresses?

Absolutely. Absolutely, we're right into the thick of it now where we're starting to get some good cold weather and the fact that we sell 15% of our volume in December, January is around the 19 or 20% of our volume. So yes, we should start to draw on that revolver.

When does it typically peak?

It typically peaks around February 12th as folks get that second delivery in a 30-day period somewhere between January 1st and February 12th, that's usually when it peaks.

And the second question is in terms of the recap, are there any operational or performance metrics embedded in the agreement that have to be met as a condition of closing the recap?

No, there are not.

Okay. And then my last question is I think you did specify that from October 1st to November 30th that customer attrition continued, losing 4300 accounts. So can you comment what has taken place in the first part of December?

We don't really have our statistics after the first part of December.

Fair enough. Okay, thank you very much.

You're welcome.

Martin Proman (ph) with Proman (ph) Associated.

Hi, thanks for taking my call. Two questions. One, you mentioned during the discussion that the Company added 13,000 new accounts. Can you discuss these large acquisitions, obviously? And secondly, Meenan was always the gold standard of Star Gas; at least that is how I have always understood it. I am wondering how it did during '04 and '05 versus the balance of the Company?

First of all, 13,000 new accounts were accounts that were added, and you understand that is not net. That is --.

Yes, I understand.

Those customers came from a wide variety of places, from advertising, we are on the Internet. People looking to secure their volumes.

Let me just say something, Joe. The addition of the ceiling plan that we mentioned before as a pricing option has had a tremendous effect in bringing in accounts because -- and it's one of the things that we do that other companies don't, to go back to an earlier question, is that very few companies are offering a ceiling plan like this, because we set the ceiling but the price can move or down with the market. And when we set the ceiling earlier in the year, the price has actually moved up and down with the market, whereas people who might be doing a cap program that is covered by (indiscernible), they might not be able to move their price when the market goes down. They may have to wait $0.20 or $0.30, big difference between us and them.

We've also had a much more disciplined marketing approach this year versus last year. We've had a much smaller budget, we stretched it over a longer period of time, and we've gotten improved results from it. We've expanded the use of the Internet as a marketing tool and the additional gains that we've gotten from the Internet which we categorize in our advertising category has really surprised us and it also happens to be our lowest cost for obtaining a lead.

We're reinstating a lot of accounts over what we thought we would. A lot of customers are coming back to us -- we have a win back program. And a lot of customers are seeing the changes that we've made on the operating side and are coming back to us. Also our referrals are up and that is a testament to our performance because the (indiscernible) of the business, delivering (indiscernible) service and delivering oil, has improved tremendously over the last two years and our customers are seeing that and they're referring people to us. So I'm very excited about what's happening on the gain side.

Okay, thank you. And Meenan -- the Meenan question?

We don't do the offering statement with all the allocations in it, so I can't really tell you how well one does with the other without doing all the allocations and we haven't done that. Meenan has had lower attrition in most areas.

From an operating point of view Meenan is operating in the way that Petro will hopefully be operating hopefully within the next year to two.

Okay. And one last question if I may. How many districts are there? You mentioned two that were converted, a couple more that are working towards decentralization. Meenan, to my understanding, always has been independent.

When I talk about that I'm really talking about Petro not Meenan. Meenan has always been independent and nothing has changed at Meenan since they were acquired by Star Gas, they continue to operate totally decentralized.

Well, how many districts are there? You mentioned two that were converted, two that --.

At Meenan there are nine --.

No, not Meenan; the non-Meenan.

We basically have two that are further along than anybody else, those would be in Rhode Island and New Jersey and we're working on localization in our Baltimore and in our Pennsylvania districts to hopefully complete before the beginning of the next heating season. And there are also other spots where we're pushing it along a little bit quicker than I thought we would, but it takes time.

If I had a magic want and I could come out and make the change immediately it would be great, but unfortunately that's not what we can do. We have to really take our time, hire the right people, train them correctly and then start operating in more of a localized basis.

Thank you.

Eleanor Benson (ph), private investor.

I'm a private investor, and my concern was whether or not the cause of attrition was due to outsourcing and whether or not you're continuing to do outsourcing?

We're continuing to bring the outsourcing back in, as Dan just mentioned. We've got two areas that are answering the majority of the calls right now and we're expanding that to two more areas this spring now and throughout the spring in trying to continue to bring back more. We believe that some of the attrition was due to the outsourcing, yes. Customers like to talk to people locally and that's the whole incentive behind our decentralization program.

But do you have any idea how long it's going to take to work out this process to bring it back to the United States I would presume?

The problem that we have, as you mentioned before, the problem we have is finding proper staffing -- filling the requirements that we have. That's probably our biggest problem is getting the people to be doing it. We could move faster if we could find the people and we're trying -- we've put a major effort out to do just that.

I understand that. My family has been in the propane business from 1948 to now -- different companies but the (multiple speakers) business.

Even our locations such as Meenan which are decentralized it's always difficult to maintain a staff that can answer your phones and do the job the way you know it should be done; it's always a challenge. So our challenge is a little bit more because we have to first of all find the people in all of those areas in order to do this right. And we said it's not cookie cutter, we're going to be doing this district by district.

That's right, the staffing is very important -- having the right person. That's all I had.

Jason Kroll, Bear Stearns.

Good afternoon, guys. Just wanted to ask if you could provide some perspective on how the Company is positioned operationally compared to this time last year? You guys were definitely in turmoil at that point and it seems like you're heading in the right direction, but if you could just give us a comparison.

Dan will give you the statistics.

Let me give you the -- starting probably in the summer of '04 we started making a big turnaround on operations. When I talk about operations I'm talking about customer service, delivery and service, and we do keep statistics on that, although the bottom line statistic is how happy our customers are and are we getting new customers because of the services that we offer?

But from the point of view of delivery, all of our statistics in the delivery and the service end have improved 2005 over 2004 even though the last quarter of 2004 and almost the last two quarters of 2004 we made a pretty big turnaround in how we operated our business and the service we provided to our customers. But in terms of how many stops we're doing -- how many customers run out of oil, how fast we do our emergency calls, how fast we do our normal calls, how fast we answer the phone -- have improved.

Although there was one additional challenge this last quarter and that was because of the unprecedented increase in the price of oil the number of phone calls that we got in just the last quarter alone increased by over 200,000. We feel that approximately 610,000 phone calls in the July, August, September period which is a lot more calls than we would normally experience at that time.

But so far as the services we're delivering, I believe that that has improved, it's continuing to improve and the challenge with that is to make sure it improves but also keep costs under control. And with that we have to always constantly be looking at right sizing our business which is something we do every day.

Can you also just talk about hedging and it sounds like you're doing a better job of matching that requirement this year compared to what might have been going on last year and, again, what type of opportunity that presents for the Company?

Our goal is to -- hello?

Mr. Cavanaugh, are you ready for the next question?

Hello?

We're not sure who's on the phone at this point.

We still have the line of Jason Kroll connected for a question.

Should we repeat the answer, could you hear that?

No, I didn't hear anything. You broke up completely.

We've got a lot of noise in the background, we don't know where that's coming from. We hedge daily. We know where we're hedged; we know what our product's cost is before we sell it. We're very much on top of it.

And would that contrast with how it was handled last year?

We really don't want to comment about things in the past. That's where our program is today.

Thanks.

Larry Kenney (ph), Raymond.

Just a follow-up on the question about the new equity investors and whether they are aware of the recent trends prior to signing the agreement including the attrition over the last couple months you talked about.

Yes, they're absolutely aware of everything.

Thank you.

Michael Reynolds (ph), Miller Tabak Roberts.

Can you talk a little bit about the churn in the two districts that you've had the organizational changes in Rhode Island and New Jersey? Is that trending lower than the other districts?

It's probably trending about the same except for some of the districts in the North only because most of our churn is not due to anything other than price. And it brings up a good point. If you'll notice in our 10-K where we talk about the reasons that we think we have attrition, we talk about a premium service, premium price strategy, and two things in there which stick out is our refusal to reduce our retail prices in fiscal 2005 to unreasonably low levels in spite of competitors' aggressive pricing tactics.

We're seeing a lot of that. And in the past you might say that Petro might have met those prices and taken on what I would call unprofitable customers. We're not doing that anymore. We're not looking at numbers; we're looking at bringing on profitable customers. So if we have deals thrown at us that are not profitable we are letting those customers go. One of the reasons that our attrition is up. And I would say that in some of our northern areas that pricing competition is even tougher than in some of our areas say to the South.

So it's hard to say whether the changes we've made in the customer service have made a difference, although the feedback we get from our customers and the feedback we're getting from our employees is that obviously this is making a difference.

Okay. What price of heating oil do you need where you would think you would see the smaller companies start to change some of their pricing behavior and maybe stop offering these incentives?

No way of knowing.

Are you still seeing the smaller companies drop out and putting themselves up for sale? I think you talked about that on the last call?

We've seen some of that. Yes, it's been kind of a -- nothing really going on in the market right now, but there are still some companies out there.

So not an increase from the last quarter?

No.

Thank you very much.

Eric Kalamaras, Wachovia Securities.

Can you tell me what the reserve floor looks like on the doubtful accounts issue?

Yes, the allowance for doubtful accounts is on the face of the balance sheet.

Let me ask it a different way. Specifically referring to how much has been flowing through the P&L this quarter?

This quarter that was about -- around $2 million.

I'm sorry, did you say 2 million?

Yes.

And what is the historical run rate to look at from a doubtful accounts --? Does that mean the portion that's not necessarily allocated in the balance sheet, but how much is truly not collected?

Our bad debt rate as a percentage of sales has grown probably between 3/10 and 4/10 of a percent of sales. Over the last couple years that's gone up a little bit to around 5/10 or 6/10 of a percent of sales. That's how it's been running.

Okay. And do you expect any change there? And/or are you reserving -- will you be reserving for an incremental amount?

We've tightened up our credit standards a little bit, actually a lot over the last couple of years. So I'm hoping that that rate will come down, but I can't really predict that it will or will not.

Okay.

With that said, with doubling of heating oil prices that, to a certain extent, drives up that bad debt rate.

Right, right. Okay, thank you.

Helen Coskey (ph), Bennett Management.

I'm trying to get a little bit more of a breakdown as to how much (indiscernible) in the quarter, in the fourth fiscal quarter impacted your gross margins. I think you've disclosed about a $0.07 increase, but I realize some of that could come from -- let me just go through three factors and if you'd give out more that would be helpful. You've eliminated a lot of customers I with at loss -- I would call it loss gross margin. I think you've used some of your capacity to store oil and you've also added new customers at higher price points. Is there anyway to comment or to quantify has that impacted the $0.07 increase in the first quarter?

It's hard to really break those down to a lot of those factors other than that we did enjoy the benefits of some storage transactions of between 1 to $1.5 million.

Can you talk about that a little bit more? I'm not really sure that I understand what that means?

We were able to make some advantageous purchases in the market that are not reoccurring for us.

Are you saying you went out and you bought oil in storage?

We went out and physically bought oil in storage and we got a good deal on that oil that we purchased.

I got you. And that was a onetime impact in essence?

That's correct.

Okay. What about accounts that have been running at lower than your targeted gross margin levels?

We've increased our selling prices and we are getting our targeted gross profit margins and those are some of the reasons that our margins have expanded during the quarter.

Is there any way to quantify that?

No, there's not. There's a lot of factors moving in the margin.

I guess what I'm trying to get to; I'm seeing now a high enough level of attrition to make me pose a question. Part of this attrition is obviously driven by the Company's strategy just of how you want to manage your gross margins. So I can't even want to worry about that attrition to a degree, but is there a level of accounts that you're targeting at which your business is going to be breakeven?

Our operating costs run with service anywhere between $0.55 a gallon, so we at least need around $0.55 a gallon to breakeven.

$0.55 a gallon product and service, gross profit in essence?

Yes, there are two groups of customers too. There would be our current customers that we renew and we make sure that we are making those margins or better. But also on the new accounts which is a big part of the positive side of net attrition and that is that the new account margins we are aiming higher and we're bringing in a better -- what we think is a better quality customer which hopefully will mean less attrition in the future. And also we tightened our credit standards so that we're accepting credit scores that we accept are at a much higher level than they have been.

So in essence you are driving this attrition lower -- or higher by managing your accounts in that way. You're encouraging some of the attrition that's happening right now.

We are encouraging some of the attrition, that's absolutely correct. We can't continue to service customers if we're going to lose money on them.

Is there a level of attrition at which you stop or (indiscernible) base level of number of accounts, would you stop and say well, this is where we want to be? Because you've got some overhead to cover and it's none variable overhead?

There probably is a level, but I couldn't pin point it.

I think we think that there are a lot of customers out there. We look at this pretty pragmatically. Our customers -- their largest investment is their home. They want a company that they can trust; they want a company that can deliver the proper services to them. We're charging a fair competitive price. What we might have been charging in the past with a price that was not a profitable price. We're going to charge the fair competitive price that's going to bring us profit and we feel that there are enough customers out there that are going to be able to let us run our business the way we're running it now. And we always right size our business based upon the number of accounts we have. There are some expenses that we can control in order to match our business needs with the number of customers we have.

The other thing about it is, too, when you start to take on customers at very, very low margins or marginally profitable margins, if you will, those customers are price shoppers. As soon as somebody comes along with a couple cent lower price they're going to jump and they're going to leave us. And we know that 45% or so of our customers leave us within the first two years; those are the price kind of people. They're very expensive to us, they cost us a lot of money. So when we eliminate those we're able to cut other costs correspondingly so that what's remaining -- the margins we make we're going to be doing better on, we're going to be making more money on them.

I agree with that. I think it just would have been helpful to see how much that drives the $0.07 increase in the quarter to get a little bit more of an inside looking out at the quarters would look like because those are going to be important for us to (indiscernible).

Yes, (indiscernible).

Fair enough. Thank you.

We have time for one more question from the line of Joshua Horowitz, Redwood Holdings.

A couple of questions. I'll go quickly. First of all, just a housekeeping item. We're seeing that pro forma for the restructuring will be around 74 million shares outstanding, the minimum amount of debt that's going to be repaid is going to be 87 and the maximum will be 100.

That is true.

Okay. Will you look then to refinance the debt that remains? Or is that not allowed under the indenture or what not?

The remaining debt would all be subject to the call premium. That would be the economics of that. We have to look at that at that time.

Okay. Quickly if you could just break out -- I think you had mentioned in terms of attrition how it breaks out conservation versus customer loss on a percent basis?

On a volume basis, we said our volume is down around 7% or so due to attrition because attrition was about 7.1%. And attrition -- I'm sorry, conservation this year was around 4.5, but we have 7.1 and 4.5 that's 11.6%. Our total volume was down 11.7 although it was a little bit colder than last year, about half a percent or so. So the majority of the decrease in volume -- and I'll point you to the volume reconciliation in the 10-K due to attrition and conservation.

Great. And I guess -- because this is the last question that you guys will take for the call, given that a lot of investors have been in this and been very patient in terms of support for a long time I guess -- I'm not asking you to give specific guidance, I'm glad you're not actually, but I think a nice gift for the holidays would certainly be if management was able to speak to a range on a cents per gallon basis of EBITDA that the Company, given its new customer base which is drastically different than it has been and its new gallon base, what should the business make on a gallon per EBITDA basis, a wide range if you will?

I'm just really not able to make that comment to answer onto that. I'm sorry.

That does conclude the Q&A session for today. Mr. Cavanaugh, we'll turn the conference back to you to continue with your presentation or closing remarks.

Thank you very much for your questions. Thank you very much for your support and we look forward to continuing a nice cold winter here. Thank you.

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