Star Group LP (SGU) 2007 Q4 法說會逐字稿

(technical difficulty) 2007 fourth quarter results conference call. (Operator Instructions). Thank you, I will now turn the call over to Mr. Dan Donovan, CEO of Star Gas.

Good morning and thank you for joining our call and Web-cast. With me today is Star's Chief Financial Officer, Rich Ambury; and our Senior Vice President of operations, Steve Goldman. Before we begin I would like to ask Rob Rinderman of our investor relations firm Tony & Collins to read the Safe Harbor statement.

Thank you Dan. Good morning everyone. This conference call will include forward-looking statements that represent the partnership's expectations and beliefs concerning future events and involve risks and uncertainties, including those associated with the effect of weather conditions on our financial performance, 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 accounts and retain existing accounts, our ability to affect strategic acquisitions or redeploy assets, the impact of litigation, the continuing residual impact of the business process redesign project and our ability to address issues related to that project, our ability to contract for our future supply needs, natural gas convergence, future union relations and the outcome of current and future union negotiations, the impact of current and future environmental health and safety regulations, the ability to attract and retain employees, customer credit worthiness, counterparty credit worthiness, and marketing plans. All statements, other than statements of historical facts included in this conference call are forward-looking statements.

Although Partnership believes that the expectations reflected 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 Partnership's expectations are disclosed in this conference call and in Partnership's annual report on Form 10-K for the fiscal year ended September 30, 2007.

All subsequent written and oral forward-looking statements attributable to Partnership or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements. Unless otherwise required by law, 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. I would like to turn it back to Dan.

Thanks Rob. Following my introductory remarks, I will turn it back to Rich Ambury who will walk you through a financial overview of the fiscal fourth quarter and the 12 months ended September 30 and then of course we will be happy to take your questions.

I'm pleased to report that our results for the fiscal year ended September 30, 2007 compare favorably to the previous year. Adjusted EBITDA increased $13.6 million to $68.4 million versus 2006 $54.9 million. When adjusting for the nonheating season summertime losses of approximately $0.7 million as a result of our recent acquisitions, this is a 26% increase or $14.3 million compared to fiscal 2006. Most of the increase can be attributed to effective margin management, improved service profitability, and reduced operating expenses.

While our fourth quarter adjusted EBITDA loss increased to $21.6 million, the quarter's results matched our expectations since last year's margins were considerably higher due to a strong discount in the heating oil spot or cash market, something that was not experienced in the fourth quarter of fiscal 2007. Also the expected summertime losses related to our seven acquisitions major in this fiscal year were a contributing factor to this quarter's results. Obviously, having less volume than 2006 also affected our fourth quarter results. This shortfall was due to attrition, a very long September and what we suspect is conservation spurred by record heating oil prices.

As always, reducing customer attrition remains one of our main goals. We continue to achieve improvement in this area. Over the past three fiscal years we have succeeded in cutting net customer attrition from 7.1% to 6.6% to 5% this year. While showing improvement, we are far from satisfied with these attrition figures. We strongly believe our strategy of localizing Star's operations and empowering regional management teams to be responsible for their respective customer gains and losses will enable Star to further lower our attrition percentage in the future. Our longer-term goal to ultimately reduce attrition and eventually grow organically is being complemented by our revitalized acquisition program.

In fiscal 2007 we added 19,400 home heating oil customers and several thousand plumbing and HVAC customers via seven acquisitions. We have maintained our discipline when evaluating potential purchases to consider only those that we feel will be a profitable fit with Star's existing operations. Our team continues to evaluate numerous potential acquisitions and we feel that the challenging market conditions created by the high price of oil may present increased opportunities for further industry consolidation.

The all-time high -- the all-time record high price of home heating oil in October through early December 2007 has compounded the difficulties in battling attrition. It has further heightened customer awareness and price sensitivity. Despite this competitive environment, we're well prepared to handle these challenges and to continue delivering excellence in all phases of customer service while simultaneously improving our operating cost structure.

We are also pleased that Star's strong balance sheet and cash position will enable us to better handle the working capital requirements of higher oil prices and the extreme volatility in the current market conditions. At the same time, it will also allow us to continue to make offers to suitable acquisition candidates. We will continue to evaluate all of our options with regards to Partnership's cash position. With that, I will turn the call over to Rich for his comments and additional color on Star's financial results.

Thanks Dan and good morning everyone and thank you for joining us to discuss Star's results for the quarter and the year. Overall, our financial performance was in line with our expectations during this summertime quarter when losses are normally generated. We sold 25 million gallons compared to 30 million gallons last year. The decrease of 5 million gallons was largely due to warmer temperatures in September and other factors.

Our per gallon margins decreased by about $0.10 to $0.68 per gallon. As you might recall, margins in the fourth quarter of fiscal 2006 were favorably impacted by several factors including a strong discount in the cash or spot market for home heating oil and we also enjoyed the benefit of a falling heating oil market. That said, were happy with the margins that we achieved in the fourth quarter and we beat our own internal expectations. We continue to make strides in our service line and actually generated a gross profit of $1.7 million for the quarter.

In looking a little closer at our operating expenses, they decreased by $2.8 million and as Dan mentioned, we completed seven acquisitions this year after the heating season without really any additional volume from those acquisitions. But the acquisitions increased our operating expenses by $1.5 million in the quarter. So if you look at the base business, excluding the impact of acquisitions, our operating expenses actually declined in excess of $4 million.

You'll notice that we are reporting adjusted EBITDA which excludes the impact of certain other non-cash transactions such as the impact of unrealized gains and losses on derivatives. The adjusted EBITDA loss for the quarter was $21.6 million or $5 million greater than the prior period. This was due to the expected loss for acquisitions, lower per gallon gross profit margins and other factors.

We posted a net loss of $33 million which represents a decrease in the loss of $12.7 million and that was largely due to a $17.7 million favorable change in the fair value of derivatives. In looking at the year, for fiscal 2007 we sold 377 million gallons, about 3.4% less as the impact of colder temperatures was reduced by net customer attrition.

That said, or per gallon margins were up and increased by $0.028 per gallon, an increase of approximately 4% to $0.72 per gallon. Our service line continues to improve and improved year-over-year by $3.7 million and yielded a gross profit of $1.6 million.

Total operating expenses -- we continue to reduce expenses. They were down by about $10 million. But when you bear back the impact of acquisitions which drove an increase in operating costs of $2.2 million, our operating expenses actually declined by $12 million and on a per gallon basis, our operating cost reduced by 1.4%.

Adjusted EBITDA increased by $13.6 million to $68.4 million as we were able to increase adjusted EBITDA in the base business which more than offset a small loss from the summertime loss from acquisitions. While volume was lower we were able to increase our adjusted EBITDA through the expansion of our home heating oil margins, controlling operating costs and improving our service department profitability.

When you look at our net interest expense line, it declined by $9.7 million due to a lower average debt outstanding and higher invested cash balances. On the net income line we posted net income of $38 million which represented an increase of $92.5 million due to the increase in adjusted EBITDA of $13.5 million, a reduction in net interest expense of $9.7 million and a favorable change in the fair value of derivatives of $61.3 million. In addition, in fiscal 2006, we recorded a loss of $6.6 million on debt redemption.

A quick snapshot of the balance sheet, we have about $172 million of debt and $113 million in cash and working capital of $123 million, all at the end of September 2007. We recently amended our bank agreement and increased our facilities size to $360 million in season which is from December through April to ensure that we have sufficient liquidity with the current cost of home heating oil. With that, I would like to turn it back to Dan.

Thanks Rich. Luann, can you please open it up for questions?

(Operator Instructions). Bill Gibbons, Locust Wood Capital.

It's actually Steve Errico. How are you guys today? I just want clarification. So these acquisitions that you made, I heard two numbers. Did they add $7 million of extra costs over the summer months which if I kind of wanted to normalize EBITDA or was it actually -- then I heard a number of 1.2 and 2.2.

Sure. They added $1.5 million of costs in this quarter, the September quarter. And they added $2.2 million of costs for the year. They were all done after the heating season. Some of them we got done in the third fiscal quarter.

One other question. Any thought given to cash flow you generated this year, any thought, any thought to dividend payout sooner rather than later?

Well, our use of cash right now -- we're focusing on two things which is still to do these mom-and-pop acquisitions and possibly a bigger one will come along. But with heating oil prices being where they are today and they are up about $0.80, $0.90 from last year, we're going to hold onto the cash for our liquidity, for our working capital at least through the next heating season.

[Matthew Barnett, Jet Capital].

Just a follow-up on the dividend. When is it actually scheduled to start?

The dividends start to accrue October 1, 2008 and the first actual cash payment would be in February 2009. The dividend accrues for that quarter from October 1, 2008 to December 31, 2008 and the cash payment will be made in February of 2009.

And that's at $0.27 minimum?

That's $0.27 annually or $0.0625 per quarter.

$0.0675 per quarter.

Given if you guys keep on going at this track, kind of a trend that you'd laid out your free cash flow far exceeds that and your acquisitions aren't eating up that cash. What is the long-term plan on capital allocation? There seems to be a slight disconnect. You're kind of building a lot of cash, even if you were paying the dividend.

Well, with the high price of oil right now, we need that cash as working capital. We also are very much out in the acquisition market and we need that cash to be able to make offers to suitable acquisitions. Right now, those are our two main concerns.

If you looked out on an ongoing basis, how much would you look to spend on acquisitions kind of on a run rate basis if things were going well?

It really depends upon the acquisitions. Right now, we are preparing to probably hopefully close on two very small acquisitions within the next month or so. But it's a very hard question to answer because you don't know what type of acquisition is going to becoming out. It could be a $2 million or $3 million acquisition. It could be a $20 million or more acquisition. It all depends. But, we'll wait and see what happens. We're hoping that there will be further consolidation and we will have that opportunity in this next quarter.

I guess my only comment to that would be -- you know I've asked the same question probably the last three or four calls and kind of got the same answer. So I'm trying to figure out what's different. What's different today than it was a year ago?

Well, I'm glad we're consistent in that answer because as I said that's the truthful answer is that we're very glad we had that cash because we need it when you are talking about close to I guess we got as high as $2.70 a gallon for oil. It's backed off a little bit now but we have no idea where that's going and we're going into the heating season so it's a good thing to have. And of course we're still looking at the acquisition.

So, it's something that is too early for us to make a prediction as to what we're going to be doing six months from now or a year from now. Let's see what happens with this winter. Let's see what happens in the acquisitions.

Okay and just on the acquisitions you made, of the kind of 19,400 customers you added, how many gallons does that translate to plus or minus?

It's about 18 million -- 18 or 19 million gallons.

So, have you experienced a high churn among those customers?

No, as a matter-of-fact, on our acquisitions, we have a growth. We have a net ahead position on our acquisitions.

Then just a final question on that, in the release it kind of talked about a plumbing component. What is that and does that fit with your strategy as it relates to those acquisitions you made?

Yes, we're looking at HVAC we call it but it's plumbing also. We just happened to come across a company that besides having a heating oil component had an excellent HVAC plumbing component that is tops in its area and we just felt that it's something that fits in very well with our retail heating oil. And if we see similar companies like that we would probably be very interested in taking a look at them.

And is that -- you are out there actively looking for those or you are actively looking at heating oil acquisitions?

We're actively looking at heating oil but we also have -- we've looked at several other smaller HVAC and plumbing operations, some of which we're still looking at and some of which we passed on because they didn't fit us too well.

[Colin Moran, Advio].

I may have missed this but did you say what the net number for attrition in the fourth quarter was?

The net number for attrition? No, I don't believe we did say that but I believe it was similar to last year's 1.4.

Okay, and what was the total amount spent on acquisitions in the quarter?

In the quarter -- I didn't have it for the quarter but, let me just see. For the quarter, it was probably $11 million -- excuse me, no. The quarter would be just (multiple speakers)

About 13.7 (multiple speakers)

13.7.

For the year it was a little over 26 and the quarter was 13.7.

$26 million for the year and $13.7 million for the quarter.

Yes.

Okay. And what kind of multiple are you or -- do we think of these as a multiple of cash flow? Is it better to think of them on a per subscriber basis? What metrics are you guys using and what did you pay in the quarter?

Well we do use a multiple to determine that. I'd really rather not just say what multiple I'm using for obvious reasons. I go head-to-head with a lot of people on these acquisitions. But the multiple is well within what we consider reasonable, fair, and competitive.

And then you mentioned potentially moving from attrition to an -- actual organic growth over the long-term the number of subs. But could you just sort of give me a sense -- and you also mentioned that acquisitions would help in that. I wanted to just make sure when you said organic you meant not including acquisitions but just your core base would grow. And then just a sense of what it is that would -- or maybe just the time frame for achieving that.

Well, first of all, acquisitions are never included in our attrition numbers. Attrition numbers always exclude acquisitions. What I mean by turning into organic growth, it's that our gains will be equal to or greater than our losses and that's the direction we're heading in. As I mentioned, our attrition numbers have come down from greater than 7% down to 5%.

We're hoping to continue that trend and we do that by having a very strong sales program that we operate and that's something that's starting to do a lot better now. And of course, on the loss side, which is our main thrust, we do that by having decentralized our operations and having our local general managers responsible for the gains and losses at each individual district.

It just takes time to do it and we've just become 100% decentralized as we announced in our last call. We've been out of Canada now since March. Everybody answers their own phones. We have local operations and it's starting to click but it does take time.

Tom Koch, Turnaround Capital.

One is, regarding the weather, last year in the first quarter, you guys had it looks like the weather was something like 24, 25% below normal. What are you guys seeing so far? It seems -- I'm in California but it seems like October and November were also pretty warm and what effects are you seeing on the first quarter?

I could give you a little bit of flavor for that, starting with September which was really the last month of the fourth quarter. September, the degree days of September were about 50% of the 10-year normal. In reality, they were 0% because nobody turn on the heat in September. In October, the official degree days were about 50% of that 10-year normal and again, I don't think anybody turned on their heat probably until the third week, maybe the fourth week in October.

In November, our degree days are about 116% of normal so they are starting to come back. December looks like it's going to be about normal, maybe a little bit more. And of course, the big unknown is what's going to happen in January and February and March.

So, would it be fair to say that so far, it's really not significant?

I would say that November helped us bring back a lot of volume that we lost in the first month and we're hoping that December continues that trend.

My second question was in the first quarter of last year you guys had an insurance gain that you booked. You also had a derivative loss. I'm trying to understand how we normalize this and if we were to look forward into this year's first quarter, what effects may there be from similar either hedging or purchasing of weather insurance during the fourth quarter.

Well, we purchased weather insurance. We have in the past and we have two more years on our policy for fiscal 2008 and fiscal 2009 and the weather insurance policy goes from -- it covers December 1 through February 28 looking at it as one period. Now, you look at our first quarter of last year, we've reported a receivable for a gain under the weather insurance policy because we were in the money. Now, that was a non-cash -- that was a non-cash adjustment. By the time the year actually closed with the weather insurance, we only recorded and actually received $4.3 million. So, we had a little bit of a reversal.

The derivatives, they can go either way. That's going to be an increase or decrease. And it's really just a change in the market value of derivatives that we buy for our price protected customers. So, we have to mark-to-market our derivatives, run it through as a non-cash gain or loss through the income statement. But that really is for future deliveries.

Okay. Was there something that you -- I remember last year there was something where you guys purchased during the fourth quarter that ended up I thought being some sort of a benefit for your first quarter.

Yes, we actually did. We entered into a storage transaction where we were able to buy product in the summer and lock in the spread between the summer and the winter differential and that did impact the -- our first fiscal quarter of last year by several million dollars we suggested.

And is that something you did again this year or not?

Yes we did but the benefit wasn't as great as it was last year but we did do that, yes.

Then my last question was in your talk about acquisitions, I know you don't want to give out multiples and all that good stuff but is it accretive to your current multiple? I mean, I'm just looking at your -- you guys are trading at about five times your $68 million of cash flow you just reported. So, is it fair to say that these are accretive?

What I can say about it is they fit in very well with the current operations we have. All of them are well within our operating area and the EBITDA that we expect from them is definitely accretive to the EBITDA that we had.

[Brad Gold, CAU Consulting].

Obviously -- not obviously but your performance has been great and as the gentleman before me just said, you're basically trading at a five times multiple and if you sort of look at any other company that does what you do, their multiples are between seven and nine. You're selling at 0.3% of sales. Other publicly traded limited partnerships are trading far in excess of one.

So, sort of nowhere in your presentation have you spoken about the price of the unit which is below four, sort of at a multiple which is sort of unheard of even for you before you had your problems and obviously you had your propane company. So, I guess my number one question is, how do you envision sort of getting the unit to reflect the value I guess is number one.

And then, number two, sort of in October it seems as though you put out a case saying that you were going to remunerate management as some percentage of EBITDA when we seem to be holding off on using the cash that we have. Isn't that a little premature in the context of a stockprice that is under $4.00? I would like to understand the context of that. So, I guess my first question is, how are we going to get the unit price up and number two is why are we paying management an additional bonus when we have a stockprice underneath $4.00?

Let me try to take a shot that. I think -- let me just talk about the second question first. If you look at the historical data in our 10-K, page 18 (inaudible) and you look at the volume that was sold going back to 2003 versus 2007, and you look at the adjusted EBITDA for those same periods, there have been tremendous improvements, tremendous changes in the Company. How the company is operated as a retail operation has changed totally. And, there are a lot of management plays that put a lot of work and effort into that.

If I want to retain those managers, if I want to keep the same team that I have that is concentrating on effective margin management, reducing operating expenses and at the same time bringing in acquisitions, I better pay them the right way. I think that anything that we've done is well in line with not only what we have done in the past but is also well in line with the industry.

I appreciate that answer and that's a great answer and I think you've done a great job operationally, but there is another part of the equation which that was my original question which has been mentioned. We have a unit price which is basically trading well below $4.00. You know that the price -- and again this has nothing to do with you -- at one point was in excess of $20.

So, while I appreciate what management has done, the unit holders who are sitting here, they don't seem to be sharing in that sort of increase in volume or whatever and I think that as part of what you are trying to accomplish, we need to try to get the story sort of out to other people or we need to do something because you have your units trading at five times cash flow. You're kicking off cash. You are sitting on a lot of cash, and a couple of people sort of asked the question earlier, it's sort of like the people who sort of supported this, i.e., the unit holders, they are sort of wondering when they get remunerated as well.

Well, that was all of spelled out in the recapitalization when we recapitalized in April of 2006 and our plan all along has been and it's been disclosed very clearly that we would start paying distributions for the end of fiscal year 2008 which would start in February of 2009. So, we have said that. It's not like that should be a surprise.

That's not what I'm saying. I know that. I can read the materials, which I do. But what I'm saying is that that is the minimum distribution as the gentleman said earlier, that doesn't preclude you from paying out more to the shareholders. Everyone knows what the rules are but what I'm saying is that the stockprice, part of the rules were that we were obviously -- the unit holders were also going to benefit and all that I'm saying is that I understand the rules. You've done such a great job. We're paying management money to keep them. I think that we should think about maybe paying some of the unit holders something additional so that we share in the good things that have happened at the Company. That's all.

And I understand how it's premature but all that I'm saying is in the context of your presentation today, nowhere has it been mentioned the fact that we have these units trading underneath $4.00, we've had a lot of good things happen and I think that it seems to me anyway that sometimes the unit holders might be forgotten in this equation. I just want to make sure that you know that we're out here and I think it's great that the performance is better. A lot of people have sort of edged around but I think that it's time that you all know that if we're doing better and obviously we are, we should also potentially prosper as well.

I totally agree with everything you said and that's obviously our goal because as you know I believe the incentive program you are referring to too may have been the incentive program that's paid really by the GP to management, the management incentive compensation plan. So, it's paid from what the GP normally gets from any distributions that are made which of course is a tremendous incentive for us to make sure that we get distributions increased and out there on a regular basis.

So, obviously that's what we would be striving to do. But I think you've got to take a look at the whole thing from the point of view of where we were when these units -- where we were from 2004 when these units took the big drop and to how we're trying to build it up. I'm not so sure that I think we have to be a little more patient which is why we wanted the time to try to turn the Company around in looking at distributions by the end of the fiscal year that ends September of 2008.

I understand what you are saying but, again, without belaboring the point all that I'm trying to say is that I think that it's important that we realize that we do have -- patience included -- we have a unit that is trading at five times when other comparable MLPs are trading at eight times. Again, they have some different businesses. And we are trading at a level which is sort of I'm not going to say absurd, but it's kind of unusual.

And, the question that was asked earlier, it's hard to envision doing deals that are accretive at the kind of multiple that we have here. And you can do -- there's a certain amount of financial engineering you can do here to increase this price rather dramatically. And I just want you to sort of be thinking about that because we shareholders -- I appreciate what you've done but we shouldn't be under $4.00 given what's going on.

[Bill Surdind, US Trust Company].

Could you talk a little bit more about the customer attrition as to what the dynamics of that are, why are they leaving? Is it to other vendors? Is it to natural gas? What are the factors that are influencing them and what is it that you can do to improve that?

The one thing I can tell you about attrition, I will give you the different components. On the gain side, our gains probably if you look at attrition, our gains are less than they were in the previous years, mainly because we've raised our credit standards. We've raised our margin standards for new accounts coming in. But, we feel confident that the way we're doing it is right because we're bringing in accounts that ultimately will be profitable in the long-term.

On the loss side we have a lot less losses as the 10-K points out with 13,000 less lost accounts this year versus last year and that's due to the efforts that we're making in customer service and in decentralizing that to the local level. But being decentralized at the local level is just part of the job. The other part of the job is to make sure that we really mean it when we say we want to give excellent customer service or that customer satisfaction is our number one goal and a lot of people like me say that all the time and it's just lip service.

At Star Gas, it's not going to be lip service. It's going to be what we actually do and that's what we're working on. It just takes time to do that and it's takes repetition and we're in the process about a year now of a special program that we've introduced to the field which every employee that we have is being run through which obviously talks about that. I participate in every one of those sessions and those are the types of things that we'll continue doing to make sure that people realize that what we say we mean.

Lou Holtz has a saying that we like to repeat around here that says that after all is said and done more is usually said than done. And, we can't let that happen here. We have to do what we say. And when it comes to customer service, we're doing it and we will continue doing it.

So far as where the losses are coming from, most of the losses as you would imagine in this type of environment are coming from price. Lower prices are being offered but, also we're experiencing an increase in losses on the credit side. We are also being affected by people who can't pay their bills. A lot of people can't pay their mortgages. They can't pay their oil bill too. I would say those two categories -- there's always the moveout category where we have a natural built-in loss by customers who move out of their homes and obviously we try to retain the majority of those.

But, the two biggest areas would be price and credit. Natural gas is pretty steady to what it has been over most of the years and it's those two categories of price and credit that would be the two big factors right now.

[Michael Prouding, 10K Capital].

Popular call this morning. I had a couple of questions. Firstly as far as the weather insurance is concerned, I know in previous quarters you've had various gains and losses from weather insurance included in the delivery and branch expense line. Did you -- were there any gains or losses in the September quarter either of this year or last year associated with that weather insurance?

No. The weather insurance policy covers the period from December through February (multiple speakers) I'm sorry -- November through February. So, it wouldn't be in the September quarter either this year or last year.

So, that's a completely clean number then?

Completely clean.

Along the lines of what one of the other gentlemen was saying, it may be worth thinking about adjusting your numbers for those weather insurance related items going forward just to the extent that obviously in the December quarter you are comping a $7.2 million gain that you enjoyed last year.

But if the weather did hold up in the -- if February and January were not colder than what we expected, we would've received that gain.

What I'm trying to say is that when you look at your margins, those can be somewhat distorted by quarter-to-quarter gains or losses on the weather insurance.

What margins? An EBITDA margin or per gallon gross profit margin?

All of the above.

Gross profit margin would not be impacted by the recording of a credit to operating expenses for weather issues.

The operating margin and the EBITDA margin would, right?

The adjusted EBITDA margin would be, yes.

Right. Okay. And then as far as the attrition is concerned, you had attrition in fiscal 2007 of about 6%. What is your goal for 2008?

Fiscal 2007 was 5%

I thought it was 5.9%.

No, it was 5%.

I'm using the numbers from the K which was 23,000 over 389,900 from the prior year. Am I doing the math wrong there?

We've published the numbers and the numbers are all throughout the K. Last year's attrition is 5%.

Okay, so what's the goal for this coming year then?

To be less than 5%. Hopefully we're looking at somewhere between 3% to 3.5%.

Okay so, pretty significant improvement then?

Our goal last year was pretty significant too and we're hopeful that we're heading in the right direction.

That's nice to see. So we should begin to see that in the December quarter, then?

The December quarter so far is not running along -- it's running a little bit worse than last year. And it's mainly because of the credit losses that we were hit with in November and into the beginning of December and also, price losses. But the one good thing about this quarter so far is that obviously it's not finished is that our gains have picked up.

Your customer gains?

Yes.

So that's starting to offset some of the attrition losses then?

Some of that, yes.

That's nice to hear. Just two other questions. Your DSOs were up somewhat at the end of September. Do you have a target there or is that nothing to be concerned about?

Well we -- (multiple speakers)

Our DSOs might have been up at the end of September but what we really look at is our accounts that are past due and over 60 and 90 days. And if you look at our reserve against those receivables this year versus last year it's actually down. So, receivables, bad debt -- bad debt has historically run about 7/10 of sales around here. I can't predict where it's going to go in the future with an increase in the cost of product of almost $1.00 but we really haven't been overly concerned about bad debt rate.

And then finally, on the inventory side, last year, you did some -- you did some opportunistic buying and you closed September with $76 million in inventories. This year you've actually got an additional $10 million in inventory on top of that. Does that indicate increased buying at opportunistic prices?

I believe the gallons are roughly the same this year versus last year. It's just that the price is up.

I see; okay. That does make sense. Forgive my stupidity. That's all I had, thanks.

[Dennis Sandman, AIGT Royal Alliance].

I had just a general question I wanted to ask. With the uncertainty of temperatures and with the uncertainty of oil prices, Kestrel Energy pumped a lot of money into the Company. Generally, why do you guys think that this is a good business to be in?

Because we think that there's a very good future in home heating oil in the Northeast and we feel that there's still a lot of consolidation to be done, that we will eventually be a growing Company. And obviously, we look at it maybe from a buyer's point of view but everybody talks about conversions to gas and more conversions to gas have always been there. Oil heat is still the better by in the long run, always has and probably always will be. And it's the type of business that to us is something that can do quite well going forward.

Where do you guys see this Company five years from now? Since people basically bought it for growth, originally of course was paying a dividend when it was $25. Then it came down and the dividend is going to be there starting next year but, generally speaking, people bought it as a growth situation. So, where do you guys see this thing, this Company five years from now?

We look at look at it the same way, as a growth situation. We're trying to stem what happened from 2004. It takes a little bit of time to do that and do it the right way. It wasn't something that should've been rushed or was going to be rushed only because we wanted to do it right because basically what we are is a service company. We are a not an oil company. We are a service company. We provide a service to homeowners. We protect their largest asset, their homes.

We feel that with industry consolidations with acquisitions, and with the way we have set up our retail operations to be more decentralized to more mimic what a lot of our competitors might have right now we will be close to growth hopefully on the organic side. But we'll be a growing concern on the acquisition side. So we see ourselves as a larger operation and a much more profitable operation going down the road.

[Tom Donatelli, Marion Group].

Not to beat a dead horse with respect to your acquisitions and I understand that for competitive reasons you may not want to release say a multiple that or an average multiple that you typically pay for some of these mom-and-pop type concerns. But would you share with us maybe your thinking with respect to a return on investment hurdle? Is there a minimum hurdle that you look for post any synergies that you might be able to derive from the acquisitions say high teens, low 20s? It looks to me as you go back that that's kind of where you've been. Is that -- am I defining this correctly or am I too (multiple speakers) --?

Well, we have suggested in our public documents that the multiple that we are buying these smaller heating oil companies is anywhere between four or five times.

Okay so that would imply something around a 20% return.

Cash-on-cash return, yes.

(Operator Instructions). [John Wang, Plainfield].

(inaudible) it's a great quarter. I just have a question, regarding the sort of financing strategy and the dividend distribution to unitholders. As I recall, there's some debt covenants in the senior note that sort of prevent the distribution to unitholders until certain covenants are met. You know, my question is that, given the current credit market, even though your EBITDA has grown quite a bit, would you be able to come back to the credit market and refinance the debt and pay out the distribution to the unitholders?

Well, our current covenants will allow us to pay dividends. That's in the high yield indenture that we have and we're always going to be thinking about whether it's going to be opportunistic to refinance the debt or refinance the capital structure of the Company. We do have a bank agreement that is -- handcuffs us a little bit in some ways with our liquidity so we're going to constantly be evolving and looking at our capital structure as we move closer to paying distributions.

So, basically what you're saying is, there's no covenants over there that prevent you guys from paying dividends?

There are covenants that prevent us from paying dividends. I believe we are in compliance with those covenants.

Tom Koch, Turnaround Capital.

Insurance again, can you just give a kind of big picture overview? You guys pay a certain amount for insurance for three or four months out of the year. I'm just trying to get some ballpark numbers as to kind what you pay and what are you insuring against on the kind of most aggressive and conservative cases. How much would that cost you as far as a loss by paying the insurance or how much would you stand to benefit if things went the other way?

Sure. Our insurance covers the period from November 1 through the February 28 taken as a whole. In that period, there's roughly 3300 degree days based on a basket of degree days over our footprint. There is a 3% deductible that we have against those 3300 degree days which is about 104 degree days or so. If that basket of degree days less the 3% deductible for every degree day less than that number, we get paid $35,000 per degree day up to $12.5 million. So, we could collect on a worst-case basis $12.5 million. We pay approximately $3 million each year for the cost of that policy.

So I might not have followed every number you said. So, how much would degree days have to be below normal for you to incur a loss beyond the 12.5 you would recover from the insurance?

Give me a second.

Has that ever happened with you guys in the last couple of years?

Now you're asking me too many questions. Give me one second. That's roughly a payout of 357 degree days and 100 deductible over 3400 or so. Roughly 12, 13% and it did happen in 2002. 2002 was a very warm year. It was about 20% warmer in that period.

What was the 12% you just said?

That's what temperatures would have to be warmer than what we would expect it to get the full payout.

So, then you would receive the 12.5 but you would actually start to have losses in your operation because it's so warm that would offset (multiple speakers) more than offset the 12.5?

We would have losses in our operations. Hopefully this payback will diminish the impact of that loss. It probably will not cover it 100%. And after that, there will be additional losses.

Right but it would cover it at about a 12% below normal is kind of where your insurance is breakeven.

Lee Canaan, Braeburn Capital Partners, LLC.

Let's step back and take a -- I've got a big picture strategy question here. With all due respect to people who are waiting for the cash distributions, isn't the strategy here to take the payout holiday, fix the Company and then really go out on an acquisition strategy such that -- I kind of think about it as a snowball and if we can get the snowball as big as possible before payouts then that allows you to be a stronger, better diversified Company and to support a higher payout strategy. So, is that really the focus right now and we should be all behind you in generating cash and continuing this acquisition strategy?

That was the original plan that we set out with and if you look at some of the public documents that we put out as far as the EBITDA of the Company originally this thing was recapitalized at $43 million of EBITDA. We generated 65. But, yes that is the plan was to take a holiday for several years, fix the Company, and then start paying distributions.

Well does the unit price being under $4.00 help or hurt you in your acquisition strategy, just out of curiosity?

I don't really think it does either. I think you laid out exactly what our plan is and was and the only thing that might be different -- the only thing that might have been a lot different than we anticipated would be this high price. The high price of oil, the high cost of oil is probably the biggest glitch that we would run into but everybody else is running into that too.

If you look at the closing price of heating oil for the last thousand weeks, that's almost 20 years prices were higher than this past week only four times and those were the four prior weeks. So, we're looking at some really high costs of oil which affects our working capital, which affects our ability to retain customers, to get customers. So it's just a little glitch in our plan. We feel that we are in a pretty good shape to handle that, to continue to get better operationally and we feel very confident that we are still in the right direction, high price and all.

But that actually in the long run can play to your favor because, the larger you are, the more you're able to withstand, the higher prices and spread the fixed cost as opposed to your competition. So, really, the higher prices in the long run means that you're potentially weakening competition that can make acquisitions a little bit more attractively. Can I think about it that way?

Yes, I think you can, long-term. Short-term, though, unfortunately what happens is, a lot of our smaller competitors when they see these high prices and they start losing customers, they start doing things that don't really make much economic sense and it might take them a while to figure it out. They wind up putting some pretty low prices out on the street which are impossible to compete against and that hurts our attrition. Long-term, I think you are right, though.

Are you seeing more of that this year than -- because I know you were facing that last year too. Are you seeing a continuation or more of or less of or --?

Less of what?

Less of your basically wounded competitors strategy. Your competitors putting out (multiple speakers)?

You know, this time last year we were not as fully obviously into the -- we didn't do our first acquisition really until January of 2007. We were just getting started and we are starting to -- we talk to a lot of dealers now and there are a lot of dealers who are obviously not happy with the environment that we're in and working capital is a problem for them too, a big problem for them. But we don't know exactly how that's going to pan out but we will find out more I think as we come out of this heating season.

Good okay. Basically as long as there is attractive acquisition potentials out there, we should be actually pretty glad that you are hoarding cash and waiting to make those accretive acquisitions?

I think so.

There are no further questions at this time. Do you have any closing remarks?

Yes. I would just like to thank everybody for really joining us today and their ongoing interest in Star Gas and we look forward to speaking with you again with our fiscal first quarter results. Thank you.

Thank you for participating in today's conference call. You may now disconnect.