Star Group LP (SGU) 2006 Q1 法說會逐字稿

Welcome to the Star Gas Partners first-quarter results conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, you'll be invited to participate in a question-and-answer session. (Operator Instructions). As a reminder, today's conference is being recorded Monday, February 6, 2006. (Operator Instructions).

I would now like to turn the conference over to Mr. Joe Cavanaugh, Chief Executive Officer at Star Gas Partners.

Good afternoon, everybody. Thanks for joining us on the call. Before we begin, I'd like to have Rob Rinderman read our Safe Harbor provision.

Thank you, Joe. Good afternoon, everybody. This conference call will include forward-looking statements which represent the partnership's expectations and beliefs concerning future events that involve risks and uncertainties, including those associated with the approval of the recapitalization; the effect of weather conditions on our financial performance; anticipated proceeds from weather insurance; the price and supply of home heating oil; the consumption patterns of our customers; our ability to obtain satisfactory gross profit margins; our ability to obtain new customers and retain existing customers; our ability to effect strategic acquisitions or redeploy underperforming assets; the ultimate disposition of excess proceeds from the sale of the propane segment should the recapitalization not be consummated; the impact of litigation; the ongoing impact of the business process; redesign project of the home heating oil segment and our ability to address issues related to that project; natural gas conversions; future union relations and the outcome of current and future union negotiations; the impact of current and future environmental, health, and safety regulations; customer creditworthiness; and marketing plans.

All statements other than statements of historical facts included in this conference call are forward-looking statements. Although the partnership believes that the expectations reflected in such forward-looking statements are reasonable, we can give no insurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the partnership's expectations [and] 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 and its quarterly report on Form 10-Q for the fiscal quarter ended December 31st, 2005. 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, or otherwise after the date of this conference call.

And I'd like to turn back to Joe Cavanaugh for his opening remarks.

Thanks, Rob. With me this morning are Dan Donovan, our Chief Operating Officer and President, and Rich Ambury, our Chief Financial Officer.

In many respects, we've had a very successful fourth quarter. Our heating oil margins increased by $0.21 per gallon over the same period last year, and our service and installation results improved by $2.6 million to $0.017 per gallon as we continue to reduce the loss from that part of our business.

Marketing expenses decreased by $2.7 million, reducing the cost to bring in a new account dramatically. And our other operating expenses continue to be tightly controlled. The operating income comparison with the prior year results was also favorably impacted as the first quarter of 2005 results reflected $10.4 million in bridge financing and other financing charges which were not repeated this year.

As a result of these improvements, our operating income for the three months ended December 31st, 2005 increased by $41 million to $20.4 million compared to a loss of $21 million for the quarter ended December 31st, 2004.

The increase in heating oil margin is the result of several factors -- the higher margins realized on our fixed-price business, which is primarily the result of our disciplined pricing approach; margins on our variable price business benefited from a decline in wholesale heating oil prices after they spiked immediately following the hurricanes experienced last summer. This is in contrast to the first quarter of fiscal 2005, when the cost of heating oil increased and we had margin compression. We were also disciplined in our pricing of new accounts, and did not renew accounts at unrealistically low prices, which also led to higher margins.

In addition, the first fiscal quarter 2005 margins were unfavorably impacted by about $0.038 per gallon due to hedging issues and delay in passing on wholesale cost increases to certain price categories. I must point out that while we will continue our pricing disciplines and pay close attention to market conditions, we do not expect to see such a favorable margin comparison for the remainder of the fiscal year.

During the quarter, we also announced that the Board has approved a strategic recapitalization which, if approved by our unitholders, will result in a reduction of up to $100 million of our outstanding senior note; the entry of a new general partner, Kestrel Heat, LLC, a subsidiary of Kestrel Energy Partners, LLC; and the receipt of $50 million in new equity and the conversion of about $27 million in senior notes into equity.

We've begun mailing proxies to our unitholders, with the unitholder meeting scheduled for March 17th. In addition, we have filed a registration statement with the SEC that a rights offering for common unitholders, which is part of the recapitalization. We will announce the record date for the rights offering once we've completed the SEC review process.

While all that is very positive, we still have issues to contend with, most notably net attrition. Heat oil buying was down 11 million gallons during the period, or 7.7%, primarily due to net customer attrition. Net customer attrition for the quarter was about 1.6% compared to last years 0.4%. And for the 12 months ended December 31st, the net customer loss was 8.3% compared to 7.1 for all of fiscal 2005. The increase in net attrition is partly due to our previously announced strategic decision to stop adding customers at low margins, but we also continue to feel the negative effects of the centralization of a major portion of our business in 2004.

We continue to believe that localization of customer contacts is key to reducing attrition. Our move to more local management is progressing, and we are continuing to put more customer contacts at the local branch, but this process is taking time. We are now or will soon be answering a large portion of customer calls during normal business hours locally in Maryland, Rhode Island, New Jersey, and one branch office in New York state, and we expect to be doing so in Pennsylvania within the next two months. Our employees are very supportive and excited about these changes.

There is still much to do before the project is completed. Telephone equipment has to be redeployed; offices have to be reconfigured; and above all, we have to find and train more people who can do this most important job properly. This has been a difficult task, and we're moving slowly to avoid disrupting our customers. We expect the entire process could take about two years.

January, which is normally our highest volume month, had temperatures that were approximately 25% warmer than normal, 29% warmer than last January. This has resulted in a $29 million gallon reduction in volume for the month. [But this] will be impossible to make up. We estimate that the impact of the decline in volume will result in a reduction of operating income of about $[14] million as compared to January 2005.

That's before any weather insurance proceeds. We do have weather insurance covering the November 1st, 2005 through February 28, 2006 time period. Based on our estimates of the weather for that period through January, and assuming normal weather in February, we could receive approximately $5.5 million on that insurance. Should February be colder than normal, the amount of insurance proceeds would be reduced.

Earlier this quarter we received offers for the purchase of two of our heating oil operations located in Holden, Massachusetts and Boston, Massachusetts. As these locations were considered to be underperforming, we followed our strategic plan and decided to pursue the offers.

The sale of the Holden business was closed on January 18th, 2006. We expect the other sale to close at the end of February subject to the buyer's completion of its due diligence review and the negotiation and execution of contacts satisfactory to both parties. We realized a gain of approximately $1 million on the Holden sale, and expect to realize a gain on the Boston sale as well.

This has been a very eventful quarter for the Company. I'm very pleased with our performance. I believe that it demonstrates that we have an extremely capable organization, one that can meet the operating challenges it faces every day.

What we are lacking is a more stable financial base that will allow us to meet external challenges such as the volatility of fuel oil prices and a heavy debt burden over the longer-term. This would be provided by the proposed recapitalization. Also, the recapitalization would eliminate the threat of legal action relating to our use of proceeds from the sale of the propane division, which could have a material adverse effect on the Company is such action were decided adversely to us.

In short, I believe that the proposed recapitalization is crucial to the continued success of Star Gas. Our employees cannot be expected to continue to carry out their jobs successfully unless the organization has a sound capital structure with the potential for growth both internally and through lower customer losses and externally through a well-executed acquisition program.

To accomplish that, we need a general partner who fully understands our business. I firmly believe that the Kestrel proposal provides what we need to be successful. And for that reason, I strongly support the recapitalization proposal.

Thank you, and we are now happy to take your questions.

(Operator Instructions) [John Wegman], [Speedwell Securities].

During this quarter were there any weather insurance proceeds?

The weather insurance only comes into play for the whole period from November through February. So there are no proceeds at all until the end of this period.

Temperatures did basically approximate normal, so there was no proceeds from November and December.

All right. Usually you break out the change in volume into three categories -- attrition, weather, conservation and so forth. Could you break those out for me?

Sure -- one second. Weather was about 10.8 million gallons, which was the total variance from this year to last year. We really didn't see any additional conservation for the quarter ending December '05 versus the quarter ending December '04.

So the majority of the variance is basically attrition. I'm sorry (multiple speakers)

The weather was 10.8 million gallons; how much was attrition?

That was attrition. 10.8 million is the attrition.

10.8 was attrition. How much was weather in the first fiscal quarter '06?

Weather added -- actually hurt us by about 900,000 gallons.

900,000 favorable or unfavorable?

Unfavorable.

Unfavorable. And so just those two numbers?

Basically. There's another $700,000 positive unaccounted for.

Unaccounted for -- (multiple speakers) is there anything you can do to change January numbers, as January came out pretty bad?

How do you mean to change January numbers? I guess I don't quite understand the question.

To make up for the bad weather?

If February and March are very cold, that will help us make up for it. But once the month is gone, it's gone. But if February and March, and we have a cold spring, it could make up for some of it. But that volume is very difficult because it's your biggest month during the heating season.

Gary Stromberg, Bear Stearns.

Number one -- you mentioned two pending asset sales. Can you give us a sense of how big they are, both in terms of volume and potential proceeds?

I can't give potential proceeds, but the volume -- Holden was about 4 million gallons, and that actually was completed. And the Boston operation is about 24, 25 million gallons.

Okay. And then I'm just trying to zero in on potential volumes in this coming second fiscal quarter. What is your typical -- or what did you see last year in terms of volumes in the months of February and March just to help us connect the dots?

We've got about 140 million gallons February and March.

And can you give some more break out in terms of -- I assumed February you sold more. Do you think it was skewed something like 75% February, 25% March? (multiple speakers)

I would say more like 60-40.

60-40?

Right.

Okay. And then the insurance proceeds, you're up to 5.5 million. Where will that show up in the financial statements in the second quarter? Will that be a revenue line item?

No, it's a reduction in operating expenses, because that's where the insurance expense is recorded.

Got it. And what is the term of that policy, and how much does it cost per year?

Well, we basically have one policy that covers about $12.5 million of insurance, and I believe that still goes to 2009. And that covers roughly -- that costs around roughly $3 million. And every year, we've added an additional layer of about $7.5 million. And that costs around $350,000.

And that's renewed annually?

That's renewed annually -- at least we have in the past.

So presumably that piece could come up in terms of costs after this year?

Yes -- some years it goes up, some years it goes down, depending on the weighted average of the last ten years.

Okay. And then finally, then I'll get off -- can you just give us some color on how the proxy process is going? And maybe you can't say anything about it, which is fine. But just a sense on what shareholders are thinking and what the timing is from here?

I think it's too early to tell. We don't have a good feel just yet.

Okay. Is there a date in the proxy statement in terms of a vote?

March 17th.

Eric Kalamaras, Wachovia Securities.

A couple of questions around the margin issue. The margin was -- if I heard you correctly, you said it was impaired by roughly $0.039 to give you what would be a notional margin of $0.78 a gallon?

The [$0.068] is last year's impairment. We're comparing it for this year. We didn't have the impairment last year. Last year we had an impairment of $0.038.

Okay. So the $0.74 is the right number. And then the question is -- I'm trying to get a handle on -- if I go back and look at 2004, 2005 margins -- 2004 was $0.58 a gallon throughout the year; 2005 -- $0.54, so that was clearly lower. I'm curious, the big differential -- how much of that is going to be recurring? Because this is just a huge swing from even a year and a half, two years ago.

Well, the last year's margin in the first quarter was abnormal (multiple speakers).

Agreed.

[Granted], it was about $0.50. Now, where we saw the big bump is in our fixed-price business. But we've increased our fixed-price margin to our [captive] and fixed-price customers.

How much of the margin is fixed?

It varies between 45 and 55% of our volume -- floats, if you will, between being priced protected or capped.

Okay. And that's not much different than it was back in '04, right?

Not too much different, although we have had more variable volume this quarter the last year -- again, it kind of floats within a range of 10 or 15%.

Okay. If the fixed is generally the same, I'm still having trouble figuring out what are you doing differently on the fixed side? I mean, I understand the variable part, but the fixed is what I'm more curious about.

In the fixed-price business, we've made it a point that we are not taking lower-margin business. We've lost some business because of it, but were being very, very strict in our pricing procedures with our branches that I get the margins that we need -- they're higher margins than we were getting last year.

Okay. And do you have a sense for how far you can go in that, how much you can push the customer -- I mean, [from the] sense of attrition?

Well, we are pretty well there, I think. We have pushed it pretty much where we can push it at this point, I think.

Joe, if I just might add to that -- one of the biggest challenges we have is managing that balance between margin and attrition. And we are really making sure that we do get that right margin, but we are not doing it from a topside down. Our general managers in the field are making those decisions, because they know a lot more about it now. And they also know the impact of not making margins on their bottom line. And they also know the impact of -- trying to get too much margin hurts attrition. So we do try to work that balance very closely.

Okay. And one last question is the FICO impact -- what was that this quarter, on the margin?

It was $344,000 -- not meaningful at all.

(Operator Instructions) [Milan Gupta], [Southpoint Capital].

My question has been answered. Thank you.

[Martin Perlman], [Perlman & Associates].

As you may recall, when the propane division was sold off, it was a very large, taxable item for unitholders. It wasn't clear from the proxy materials whether the rights offering is a taxable event at all for holders.

We'll have to get back to you on that one.

Okay. I mean, I've tried to call the Company a couple of times and ask the question, and I never get an answer.

We will get you an answer.

Okay. Thank you.

[Lenore Sofia], [Shane LP].

The question is in the statement book that I have here on the March 17 minutes, it shows that there's going to be approximately [42 thousand, 171 thousand] and [few] new common units issued. Another 7,500 are going to be issued, another 25,000 issued at $2.00 per unit. How does that affect the units that are existing -- the stockholders that now hold the stock? In other words, what (multiple speakers) is diluting the stock that we own?

With those units, you also get a right to buy another unit or half a unit for each unit you hold.

[Did] you say buy?

You do get the opportunity to buy at the $2.00 a share.

In other words -- will that be in writing? In other words, will we get a notification of that?

Yes. It should be in the proxy statement. It is in the proxy statement -- but there is a separate rights offering that you would get that.

Well, I couldn't find it.

It hasn't been mailed yet.

How much does that dilute the overall -- in other words, how many shares are outstanding now against all this additional amount of shares that are going to be distributed?

(multiple speakers) Well, there's about 36 million units outstanding now, and there's going to be about 72 million after the recapitalization. (multiple speakers)

In other words (multiple speakers) like a 50-50 split if you don't buy an equivalent amount?

Yes, I think that's correct, yes.

So in other words you'll be diluted by 50%?

Yes.

Okay. But I don't see anything -- do you know what page that's on, where it is in the --

I'm sorry, the rights offering has not been sent out, but on page 12 of the proxy statement, you'll see that.

The existing common unitholders are holding 89% of the units, and they are going down to 43%.

Well, that's in the summary. That's in the summary, it's not there. I don't know where it is.

He said in the proxy.

Oh, in the proxy statement. Yes, I haven't seen the proxy statement yet. In other words, that hasn't been sent out yet?

No, the proxy has been sent out, sir.

Is that the one that refers to the March 17th meeting?

Yes, sir.

It was mailed out towards the end of last week. You should be getting it shortly.

Well, no, I've got this statement where it shows the meeting for March 17 --

And if you look on page 12 of that statement --

I'm looking at it, and I don't find it. (multiple speakers) Page 12 is still in the summary.

[Talks about] financial information. [When it's] the first page is the notice to special unitholders, so we got March 17th. And if you go back to page 12, it shows you see approximate number of units outstanding before and after the proposed recapitalization.

Oh, here it is; 36, yes. Yes, but what document do we have -- or will we get a document if this goes through giving us the opportunity to either buy or not buy the additional stock?

That is the rights offering, and that is going to be mailed. It has not been mailed yet.

Okay, that's what I wanted to know.

[Steven Vogel], [Vogel Partners].

After the sale of the propane division, does the partnership still qualify to be an MLP when it only has heating oil distribution?

Yes, it does.

And how was that determined?

It all has to do with the characteristic of income that comes up from the heating oil subsidiary. And for the most part, the cash that does come up is in the form of a dividend. And dividends are separately allocated items. And that's how a unitholder will be taxed -- on the dividend income coming up from the heating oil division.

But a heating oil company has not been qualified as an MLP.

That's correct, but our structure still works.

And what happens if it doesn't?

Our structure does work, and it always has worked. There's no reason to think that it does not work.

I believe it always has worked because you had a propane company, and that's what qualified the business.

Dividend income is qualified income for master limited partnerships. If you like, I can get you the regs and I can send that to you.

I would appreciate that.

[Mike Anghai], [IBIS Management].

Your forecast for 2006 assumes I believe an attrition rate of 4.6%. Given that your current attrition is at 7%, do you have a plan to make up for that, or is that 4% a more normalized estimate? I mean, if you could just give me some color in how you come up with the 4.6%, that would be great.

Okay. The 4.6% is a number that we talked about, and what we presented to Kestrel. It is really not our forecast for the year. We never have issued a public forecast for the year. This was a document that we shared with Kestrel in the negotiation.

Okay. I was just reading off the memorandum.

And that was the document that we gave to Kestrel. It wasn't a projection that we issued to the public.

So the $0.27 income that you talk about distribution -- is that [based] on 4.6%?

In the first year, yes. And we had additional attrition going subsequent to that, yes.

(Operator Instructions) [Milan Gupta], [Southpoint Capital].

I'm going to try and come at this margin thing a different way. What should we sort of, as financial analysts, model as sort of a normalized gross margin for this business on a per gallon basis?

Well, we share with Kestrel at least on the heating oil side. And there are some other components in that gross profit margin.

And what was that number?

It was about $0.59. If you look on page 43 of this proxy statement that we did send out, you can probably look at some margins like that as the heating oil margin. There are some other components -- there's other petroleum products that give off a couple of cents, and our net service loss is almost breakeven.

So the benefit that you're getting from your fixed-price customers and the decline in heating oil prices this quarter may represent $0.15 over and above what you may view as the normalized level?

Well, the actual heating oil margin that we got was around $0.71 (multiple speakers) is quite over $0.15.

Mr. Cavanaugh, I'll turn the conference back over to you. Please continue with your presentation or closing remarks.

Thank you very much for your calls, your questions. We appreciate your interest in the Company. Again, we think we've had a good quarter, but we've got a long way to go yet. And we really would urge everyone to support the recapitalization. And thank you very much.

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