Star Group LP (SGU) 2008 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Star Gas Partners fiscal 2008 fourth quarter results conference call.

(OPERATOR INSTRUCTIONS).

It is now my pleasure to introduce Dan Donovan, President and Chief Executive Officer. Please go ahead, sir.

Thanks France, Thank you. Good morning and thank you for joining our call and webcast today. With me is Star's Chief Financial Officer, Rich Ambury, and our Senior Vice President of Operations, Steve Goldman. Rich is going to give a brief financial review of the fiscal fourth quarter and the twelve months ended September 30, 2008. My remarks will follow, and then we'll be happy to take your questions. Before we turn it over to Rich, I would like to ask Rob Rinderman of our Investor Relations firm, Jaffoni & Collins, to read the Safe Harbor Statement.

Thank you, Dan. Good morning, everyone. Today's conference call may include forward-looking statements that represent the Partnership's expectations or beliefs concerning future events and involves risks and uncertainties. Including those associated with the effect of weather conditions and 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 customers, our ability to make strategic acquisitions, 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 a future current and future supply needs, natural gas conversions, future union relations, and the outcome of union negotiations, the impact of current and future environmental, health, and safety regulations, the ability to attract and retain employees, customer credit worthiness, counter party credit worthiness, marketing plans, and general economic conditions.

Most 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, it can give no assurance that such expectations will prove to be correct. Important factors that could cause actual results to differ materially from the Partnership's expectations are disclosed in this conference call and in the Partnership's annual report on form 10-K for the fiscal year ended September 30, 2008.

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. I would like to turn it over to our Chief Financial Officer, Rich Ambury. Please go ahead, Rich.

Thanks, Rob, and good morning, everyone, and thank you for joining us to discuss Star's results for the quarter and the year. Overall, we are pleased with our financial performance during the summertime quarter. For those of that you are new to our calls, we normally expect to post losses in this non-heating season period. For the quarter, we sold 22 million gallons compared to 25 million gallons last year.

This decrease of 3 million gallons was largely due to the elimination of some low margin unprofitable commercial accounts, conservation, and net customer attrition. Our total gross profit increased by $10 million due to higher home heating oil gross profit in an improvement in our service profitability. When you look at our net loss for the quarter, the net loss widened by $59 million to $92 million, largely due to a $70 million noncash change in the fair value of derivatives, as home heating oil prices declined for the quarter.

Our adjusted EBITDA loss for the quarter decreased by $9.5 million, so we improved to $12 million for the quarter, as the impact of additional home heating oil gross profit and improvement in our service profitability, more than offset the decline in home heating oil volume. In looking at the year for fiscal 2008, we sold 351 million gallons, 7% less as the additional volume provided by acquisitions was more than offset by the effects of customer attrition, conservation, and some slightly warmer temperatures.

Our per gallon home heating oil margins were up and increased by about $0.02 to $0.74 for the year. Our service results also improved, and they improved by $11 million, and yielded a gross profit of $12.6 million largely due to shedding some unprofitable business lines in our acquisitions. For the year our operating expenses rose by $13 million. This change was due to an increase in bad debt expense of about $6 million, the additional expenses associated with standalone acquisitions, and the absence of weather insurance benefit.

As you might recall, during fiscal 2007, we recorded a weather insurance benefit of $4.3 million under our weather insurance contract. In looking at our net income, net income drove declined I'm sorry, $52 million to a loss of $13 million largely again due to a noncash change in the fair value of derivatives of $41 million. Our adjusted EBITDA decreased $13 million to $55 million, as the additional EBITDA provided from acquisitions and higher per gallon margins, was more than offset by the impact of lower volume, higher bad debt expense, and the absence of any weather insurance benefit.

In looking at our balance sheet, during the quarter our cash balance increased by $88 million to $179 million, as we were able to collect a good portion of our accounts receivable. Our accounts receivable at September 30th aggregated $96 million, and while up $17 million from last year, represented 57 days of summertime day sales outstanding which was similar to the number at September 30, 2007. Dan.

Thanks, Rich. Fiscal 2008 present many significant challenges to the Partnership. Unprecedented petroleum price volatility, increased conservation, warmer than normal weather and weakening economy all contributed to a demanding difficult operating environment for everyone in our industry. The decentralized model we developed and fine tuned since 2005, has enabled us to respond well to both our financial goals and to the demands of continuing to provide a high level of quality service to our valued customers. The strength of our balance sheet and our significant cash position have also helped us succeed during these challenging times.

After a year of unprecedented price increases, we have experienced extraordinary decreases in the price of heating oil since mid-July. These decreases were as astounding as were the increases seen in the fiscal second and third quarters. The spot price of heating oil decreased over $1.20 during the fourth quarter of fiscal year 2008, and the decline has continued into the first quarter of fiscal 2009. Volume for the three-month period was adversely affected by conservation, which of course was driven by record heating oil prices early in the quarter and a weak economy. Of course as Rich mentioned the loss of unprofitable commercial volume.

In that regard, we strive to make each component of our business profitable on a stand alone basis. That is not subsidized by any other profit centers. Adding accounts and volume just for the sake of inflating customer counts and volume does not interest us. Obtaining and retaining profitable business, including commercial business is our goal. We consider commercial and big business to be an important component to our overall bottom line, and we will continue our efforts to search for and retain this class of business, as long as it positively contributes to the earnings with a realistic costing of expenses to revenues. All components of our business must be accountable for their contribution to Star's bottom line.

Net customer attrition for the quarter improved versus last year's fiscal fourth quarter by 1.2%. This translates to a favorable variance of 5,500 accounts versus the same period last year. For the full fiscal year net customer attrition declined to 4.4%, from 5% in 2007, and 6.6% in 2006. The net improvement in 2008 versus 2007 was 3,000 accounts. This is the net of 7,700 more gains and 4,700 more losses. The increase in losses was due mainly to price, credit issues, and by that I mean the failure to pay past due balances and conversions to natural gas. The increase in gains was the result of substantial increases in referrals, and the success of our targeted marketing and advertising. I might add that the gain in new accounts came in spite of an increase in prospective account rejections due to credit worthiness issues.

On the acquisition front, we completed three purchases in the fiscal fourth quarter and closed on an other acquisition in October. The acquisitions completed through November 30, 2008, total approximately 5.8 million-gallons. In aggregate we have completed 18 acquisitions since January of '07, and we're in various stages of evaluation on several others. We continue to maintain our discipline when evaluating potential purchases to consider only those that we feel will be a profitable fit to Star's operations. At this time we will be please to address any questions you may have. So France, please open the phone line for question.

(OPERATOR INSTRUCTIONS)

Our first question is coming from the line of James Jampel with HITE. Please go ahead, sir.

Hi, I was just wondering if you could comment on the switching of people from heating oil to natural gas, and how you see that playing out with the economic crisis going forward and the relative prices?

Okay. Well, we definitely saw an increase as I mentioned in this particular quarter, the last quarter and in the year as a whole, mainly because natural gas had a significant price advantage over heating oil for that particular time period. That has since changed with the decrease in price, we're probably more equalized now. And just to give you some facts on this, home heating oil has offered significant savings to consumer when compared to natural gas or electricity for that matter over the past three decades.

For instance, in the Northeast heating oil has been the better buy, 16 out of the last 20 years, and I have those stats for each state, but basically we've always been a better buy. It is just that in this particular last quarter and for the year as a whole, they did have that advantage on us. But we feel that probably is going to lessen mainly because of the huge cost to switch fuels. Switching fuels can cost more than $10,000 in total expenditures, and that cost can take years to amortize over any savings that are realized. So heating oil really becomes the lower cost fuel when you do a really valid comparison.

Can I ask a follow-up as well?

Sure.

As we go into the heating season here with these new-found low prices, do you see that customers are ordering now to fill up their tanks or are they just too broke to even think about doing that?

Most of our customers are on automatic schedule. We have a small percentage of what we call will call customers of customers who call for their oil, but our homeowners basically depend on us to deliver when the time is right. Some of them have fixed price contracts. Some of them have the fueling program, and some of them ride with the market. We don't really see any big call in saying, "I want to lock in now", because just like us they have no idea where the price of oil is going. You're hearing $25.00 a barrel, and then some people talk about $150.00 a barrel. I think our consumers are basically leaving it to us, and we're delivering oil on our normal schedule.

And how does the change in fuel prices affect your operating costs going forward here?

Well, basically because we set our pricing based upon whatever the cost is, the effect is not -- the effect is not all that great. Obviously --

Not the cost of goods sold, not the cost of goods sold, but your other operating costs that you're driving around. That's not going to have much of an effect. Steve, do you want to comment on that?

We actually fully hedged our vehicle purchase to our planned expense, so there really is no benefit, although we're evaluating the opportunity for benefit of that going forward.

Obviously our cost last year, because fuel costs were so high right through the whole year, right through the end of September, and bad debt expense Richard mentioned were high, those operating expenses obviously are driven by the high cost of oil.

We should see an improvement in our hopefully our bad debt expense on an absolute dollar basis, just due to lower level of sales with decline in heating oil prices. We also should experience some kind of benefit in lower working capital requirements, as we have lower level of receivables and inventory to finance. Now, we did hedge as Steve mentioned majority of our vehicle purchases for both our service vans and our delivery trucks, and we kind of did lock in that cost. Does that answer your question?

Yes, it does. Thank you.

You're welcome.

Our next question coming from [Da Hoicha] from [Mikaisho].

Good morning. I was wondering if you could just talk a little bit about how you're managing the timing differences, and when you purchase your heating oil versus when you actually are charging and delivering that heating oil to your customers. Has it become more difficult? This is more a question for Richard.

Well, sure. When you look at our physical inventory, we operate between 10 to 15 days physical inventory. And we hedge that inventory so that when we bring that product to market, we're basically bringing it to market on a wherever the market price is. We buy it, we hedge it, we put on a short future or short swap against that. We might have a couple of days of price physical inventory, but when we basically come to market every day, we are at wherever the market is and wherever the market.

Has the volatility in pricing added to the cost of hedging, that I guess is what I am asking and whether changes --

Actually the volatility in costs really added to the cost of hedging back in July, where we were paying upwards to $0.60 a gallon for a call premium. But those call premiums have collapsed as well, with the heating oil market to 12 -- the call premium is probably below $0.30 a gallon now. The cost of hedging has come down, if that's what you're questioning.

As far as your overall strategy, given your liquidity position going into the heating season. And I don't know if you have a few of where heating oil prices are going next year. Just wondering if any of that has changed as far as your appetite for potential acquisitions or how much your budgeting for growth initiative?

No. We still maintain the same goals that we've had. We as anybody else obviously we don't know where the price of oil is going, but our first priority has always been to grow through attractive acquisitions, and that's still our goal. It might change some of the multiples. The marketplace we live in has maybe changed some of the multiples that we'll pay, but at the same time we still feel that there will be attractive acquisitions probably coming out of this next season.

Okay. Are you -- can you give us an update on what you're seeing from some of your competitors? I know that you talked about some challenges that your competitors were facing when heating oil was at $4.00, but is that generally now gone, that pressure gone, and you're seeing them kind of healthy and ready to deliver or participate in this heating season? Or are you continuing to see some weakness from your competitors?

The credit situation hasn't changed. Money is still tight as we all know, and they're feeling that pinch, and just as everybody is. So the ability to borrow money, the ability to finance their business, the ability to get working capital is definitely not the same as it had been, even though the price of oil has dropped down. So that continues to be a problem for everybody.

Lastly, if you can give us an update on your assumption for bad debt expense going forward and what kind of -- if you can kind of talk about any trends you have seen in the current quarter?

Well, we haven't really seen much in the current quarter. We only have really October financials in. We're still in the process of closing November. And our bad debt as a percent of sales has been between 7/10 to 8/10 of a percent of sales, and that's sort of historically what it was for this year. In '07 it was about 5/10 of a percent of sales, '06 it was 5/10 of a percent of sales, and in '05 it was 8/10 of a percent of sales. So somewhere between 5/10 and 8/10 of a percent of sales is where our bad debt is going to come in at. That's a big range but --

Obviously, but those years were probably pretty healthy years for the economy. Just wondering if you see any reason to up your provisions and -- or do you not see evidence of that yet?

We will as the year evolves to a certain extent, folks do not pay, the deliveries will get restricted.

We have a pretty good handle on our receivables a daily basis as to what's coming in, how our collections are going, and being that it is an internal operation. So if we see any changes in that, obviously we're going to act, but we're thinking that we're same type of shape we've been in any other year. We realize the economy is weaker, people have less ability to pay, but we feel that this is the type of product that we hopefully will continue to receive payments in a normal manner. (multiple speakers). Go ahead.

I thought that the collections in your fiscal fourth quarter were very good. I was a little worried to be honest, June quarter because you had mentioned that customers were taking a little bit longer to pay. I am just wondering if that kind of trend, if you're seeing any of that. I know it is kind of early but.

It is pretty normal in our business though. In April, May and June, the last thing homeowners are really thinking about is paying the home heating oil bill. They're more thinking about financing vacations. But from the last quarter going into the first quarter, we get a lot more thought and people realize if they have a bill they have to pay if they want to continue getting the same type of service protection on the heating systems and deliveries of oil and that's what usually happens.

Good quarter. Thanks.

Thank you.

Our next question is from the line of David Shuldiner from Asakusa Holdings. Go ahead.

I am wondering if you can clarify. We are talking about acquisitions. And last year you spent a $1.8, a $1.9 million on acquisitions. And you acquired 9,500 accounts which would be roughly 9 million gallons, but in the 10-K that you filed, it shows acquisitions of $13.4 million, and you just referred to something of 5.8 million gallons, and I kind of missed where we were going. Could you kind of go through that a little bit again, please?

Yes. The 5.8 million that I was referring to, were the fiscal fourth quarter through the end of October. On numbers for the year, that it is 9.5 million, number of accounts, and the gallonage is close to 9 million-gallons.

That includes an acquisition that we closed on early in October.

Right.

Right. So --

There is one subsequent event that didn't quite make the cash flow on the statement of changes.

Okay. Well in other words, you're able to buy your gallonage quite reasonably then, aren't you? By 9 million gallons for a $1.9 million, that's --

That 9 million didn't -- that 9 million gallons does not include the $1.9 million does not include what we paid for an acquisition subsequent.

Oh okay.

To the fiscal year end.

Okay. So there is another acquisition to come?

Yes, there's another

More dollars involved in other words?

Yes, there are more dollars. Let me see if I can get that for you.

Our next question is from the line of Steven Lockton of Greenwich Securities. Please go ahead.

Just to clarify one thing. We did spend an extra -- a

Just keep going.

Continue with your question. I am sorry.

Well, am I on?

Yes, you are.

I came in late to the call, so I apologize if anybody asked this before, but I am new to your company. What percentage of your clients are on a fixed price and what percent are on a floating rate?

On a protected price -- is approximately 51%, and that's split out between a ceiling product and a fixed product, and the remainder is on a variable.

So help me understand. It is obviously the hedge out against someone who is on a fixed price contract, but how are you hedging out against the people that are getting fuel on a floating basis?

People who are on a ceiling price or if you want to call it a cap price, we hedge those with call options.

We don't put on any hedges for those.

They pay with the market.

No, but for the people who are on a floating basis, how are you protecting yourselves? In other words, if some -- one guy is fixed at $4 a gallon, obviously you know precisely how to protect him for the duration of the season. But if oil goes from $4.00 to $2,00, you may have bought originally to protect that $4.00 rate, and all of a sudden oil comes down on the floating basis. Help me understand how you deal with that.

For a fixed price customers, we will either buy Merck contracts or buy swap. For ceiling customers who we sell them a product where we tell them their price will not go higher than X, at the time they enter into an agreement with us, we buy a call. Now, on the other 49% of our customers or so, they want to float with the market, and they pay whatever the market price is, plus our margin. We do not hedge for our variable, our pure variable rate customers. We do not put any hedges on for them.

Is the elasticity of demand important to you? In other words, if you have oil at $4.00, people are going to turn their thermostat down to 62 or 65, and if you have oil at $2.25 or $2.50 they might turn it up to 72, and be using more oil. How are you -- do you have any scientific formulas to account for that?

Not really, but we know there is conservation out there. There has been conservation in every year for the last three years, because the price of oil has steadily risen. This particular year when it rose to record levels where the cost of oil and prices of oil hit the $5.00 mark, conservation definitely kicked in. We estimated probably this year might have been another 3% or 4% in the year that just ended. And we're anticipating that there might be some further conservation going into 2009, because of the cost of oil and obviously it has gotten a lot of publicity.

Oil is up as we speak, up 3.20 this second, just up 3.63. They are now talking about perhaps a surprising cut by OPEC as much as 3 million gallons. Just how do you deal, if all of a sudden if oil goes from 44 to 55 in 48 hours, how are you dealing with that?

Well, on our fixed and on our ceiling customers, they already locked in and we locked in. We're covered there because we already locked in those margins. On our variable price customers, as you might have missed this when Rich was explaining how we do our inventories. But we basically are able to price with the market on a daily basis, so whatever the market is, we have to adjust our prices daily. We constantly adjust our variable prices to fit with the market.

And do you have some sort of formula for your spreads?

It varies from location to location, because operating expenses vary from location to location.

But it --- averages about $0.75 a gallon?

That's what it was this year about, blended with almost all our businesses including some commercial.

Okay. And could you refresh your thinking on your dividend policy?

Basically our plan all along was to start distribution again in February of '09, and we expect that to happen.

So that's a board meeting in January or what?

Yes.

And it is announced in January or February?

It will probably be announced towards the end of January, towards the beginning of February.

Okay. Thank you very much.

We have a follow-up question from the line of David Shuldiner from Asakusa Holdings.

Hi. I don't think we finished what we were talking about.

Yes, we made one acquisition subsequent to year end, which is included in the customer count that's in the press release, and that aggregated $3.9 million, it's on page 25 of the 10-K.

That's the 3.9 million. One other question. On your interest income, I know you have a lot of free balances now, but the interest income I guess is substantially lower given where rates are. Is that pretty good assumption?

That's a pretty good assumption. (Laughter)

Sure is.

I know you had a lot of liquidity of almost $100 million of liquidity. I see that, so it is a pleasure on that score, but the interest rates aren't too good.

That is correct.

Okay. So I guess really the most important -- not the most important factor, I mean you're running a great business. I guess it is really trying to acquire additional gallonage, and how much it costs you to acquire additional gallonage going forward which to replace your attrition really. Isn't that the one -- I mean, you indicate what your CapEx are, and if your heating acquisitions are running like 5 million a year or something like that, and because if you lose 4% or 5%, you have to replace 17 million gallons a year. Is that about right?

Besides acquisitions, we look at organic growth as something that we're constantly working on. And we've done a pretty good job as you can see on the gain side, and we've seen done a much better job on the loss side. Our attrition has come down.

I know you've improved it this year substantially.

We're never going to be happy with it until we're -- our organic growth has us as a growing company. But it is very difficult when you have homeowners moving out of their homes, you are going to have automatic losses right there. Our goal is to have a better marketing and sales organization. And I think we're getting to the point where we have a pretty well oiled machine which is going to allow us to continue to grow organically. And of course we're always working on our customer service to ensure that we give quality service to everybody and thereby keep our losses to a minimum.

Right. Well thanks. I mean, I just think you're doing a great job. Don't misinterpret. Okay, thanks so much.

Our next question coming from the line of Kevin Moran with Anchor Capital. Please go ahead.

Yes. Hi. I think you guys are doing a great job as well. I was wondering just a follow-up question on the fixed contracts. When you have as big a drop in oil as we've seen, is there is a fear that some of the customers that have bought basically fixed price there will abandon or just go to a competitor or something like that? Or pay the termination fee and how would that impact the Company?

That can have a large impact, and I think we disclosed that in the 10-K. Customers who have a fixed price contract are obligated to stay with that contract. If they decide to pay a termination fee, they can get out of that contract, and work out a new deal with us or go elsewhere. And some of that has happened. We still have a lot of fixed price customers, though, who are basically sticking with their contract because they remember one thing.

Last year they had a low fixed price and the price of oil went up to over $4.00 a gallon, and they continued to get that low price because we had actually covered their contract, unlike some people in this industry who basically might not cover all of their sales, we do. And now this year they're looking at a fixed price contract which they might have agreed to in the summertime which is a higher level. And they realize after they talk to us they realize that, hey, just like the previous year we went out and made a commitment to buy that oil at those prices, so we expect them to live up to their contract just like we did in the previous year. But obviously if some people want to pay the termination fee, they can, and that has happened to a certain degree.

Okay.

Another interesting aspect of it is also created some additional churn in the marketplace right now, that we're trying to reap the benefits with our sales and marketing team as well. So other companies who are in the same situation are giving us an opportunity we might not of had this -- time of year to gain new customers.

Do the competitors have a similar ratio of fixed price contracts or do some of the competitors operate differently in that respect?

I really don't know what our competition has, but fixed price has been around a long time. We have been successful over the years of not emphasizing fixed price, because basically we don't like it because of this particular problem. The ceiling product if somebody wants protected prices, much better product because the price can come down. Granted you have to pay a premium for that, but your price still can come down, and then you got that upside protection. And then there are a lot of customers who like the variable price because like us they have no idea where the oil markets are going, and they just want to ride with the market. So our competition has a mix of all three of those.

Okay. Thank you.

You're welcome.

Our next question coming from the line of Steven Lockton with Greenwich Securities. Please go ahead.

What is your schedule for amortizing goodwill? You have a lot of goodwill on your balance sheet.

Well, goodwill doesn't get amortized.

Doesn't?

No, does not. Our customer list gets amortized over, I believe between 6.5, 7 years, over ten years depending on the acquisition. And there is some restricted covenants that get amortized over the life of the restrictive covenant, but the goodwill does not get amortized.

Thank you.

Our next question coming from the line of John Mullin with Plainfield Asset Management. Please go ahead.

I wanted to revisit the effect or the reaction of demand given the falling prices, the last three years have been characterized by rising prices and declining demand. And now that we're seeing heating oil at $1.60 a gallon. How is the demand reacted during the month of October, November, and December?

It is really way too early to tell that, and as I answered before, we deliver on an automatic basis. And we haven't seen a lot of our automatic customers calling in wanting deliveries early because price is down. A lot of people think the price is going to go further. We do sometimes get our automatic customers call in and ask for a delivery early, but usually that's related to a weather event. We haven't seen any changes, so we really have no data to show that the conservation area is over, and people are now going to start burning oil at former rates.

All right. From a different tact, how have you started the discussion with your lenders regarding your bank line?

Yes, we have.

We have started those discussions with our lenders.

And any sense for change in pricing or terms?

Sure. I mean, I believe the market for our facility will probably come up -- to we're currently paying LIBOR at our most favorable rate of LIBOR plus 1.50. I believe that's a pretty good rate considering where things are today. So I imagine that will increase.

But you don't suspect that there will be any change in terms of the capacity? Or their willingness to lend the absolute dollar amount?

I really can't speak for the banks. We started out with a $260 million facility which increases to 360 in season if we elect. We'll have to see where everything plays out in the summer.

Now, given the existing peak capacity of $260 million, at what heating oil price do you start to worry about being able to fund your operations during the peak season? It is obviously sufficient at current prices, but what price do you want --

It is sufficient at current, and it was pretty much sufficient where we were at the heating oil prices in the summer, but I can't predict where prices are going to go.

So even up to $4.00 you're pretty comfortable with that, and the threshold is beyond $4.00 a gallon?

Between $3.00 and $4.00, I am pretty comfortable. I can't speak for where option costs are going to go and where weather it going to go, so I really don't want to make a prediction. But we were okay at the 3.00, 3.50 level when we were looking at it during the summer.

Sure.

Things could change.

Yes. With the distribution, the amount that had been thought of before was $20 million or am I looking at the wrong notes?

The total distribution annually will be $20.5 million if that's what your question is annually.

And each quarter is .0675.

Right. Okay. Do you have time for one more question, or should I get back in the queue?

Sure. What's your question?

I would be curious to know what is the fixed price when people are locking in, what are they locked in at?

When customers lock in at a fixed price, it is basically the heating oil strip because we buy swaps. And we have the margin, that we add onto that, and the margins vary from place to place.

But how big of a difference are they looking at? I mean are people locked in? Do they all lock in in the summer and you're sitting at $4.00 and now $1.60 or are they locked in at $2.00, and they are looking at a $1.60

I see what you mean. It depends upon when you lock in. If you locked in in the summer, we have customers locked in over $4.00 a gallon, and customers locking in now, it is going to be a much lower price. That's why you see different prices in the marketplace. And some people don't understand that, but with the volatility we're up 21 day, down 12, up 20, down 10. I mean the market is so volatile, we change that pricing every single day, based upon where the strip is.

And what's the termination fee? Is it flat or dependent on the price?

The termination fee is right now is about $600, and we evaluate that regularly, to make sure that we can cover liquidated damages because that's basically what it is, liquidated damages.

Sure. Sure. Okay. Thank you.

You're welcome.

Our next question coming from the line of Michael Prouting with Lone Star Capital. Please go ahead.

Hey, guys.

Hi. I had a couple of questions. Firstly on the acquisitions side. Can you talk about what you're seeing right now as far as availability of properties for sale is concerned? Are you talking about businesses for sale or properties for sale?

Businesses for sale.

So far as companies we're not seeing too many. We're seeing a few. But really this is really not the time of the year now. And we're sort of past the peak time, as we're getting into the heating season, winter starts in a week or two, and people are more geared up on getting through the season. But we start discussions with people now, to maybe do something at the end of the heating season. And that's probably what we'll be seeing.

Okay. My understanding is there were a couple of larger opportunities available is that correct?

Not that I am aware of right now. I mean, obviously I wouldn't disclose on a conference call who I am speaking to, but there may be.

Okay. But sounds like from what you're saying that we shouldn't expect any significant deals probably until we get through the next season?

I would think that's a good assumption.

Okay. So at least my next question, which is given your sizable cash position right now, how do you think in terms of priorities. For example, some things you could do with your cash. I guess you could hold it to protect yourself against volatility in the market price. You could use some of it to maybe repurchase some of your bonds which I guess aren't that liquid, but have traded at some pretty attractive prices, that you could do a distribution to unit holders, potentially you could do a unit repurchase. How are you thinking about those?

You just about touched on all of them, and we have mentioned this right really since the Kestrel recapitalization. We have always talked about our first priority was to grow through attractive acquisitions, and use the dollars for that. But there are other options for employing excess capital, whether it be a debt repayment, special distributions, unit repurchases. Although on the unit repurchase, it is not really an option due to an NOL, and that issue goes away in April of '09. And then all of the options that you mentioned are on the table.

What's your current thinking then in terms of I suppose really in terms of how much cash do you feel like you need to have to run the business and how much cash do you feel is available for other uses and how are you thinking about priorities among those various options?

First of all, we're going to need to redo our credit agreement in the spring and in the summer. And once I get that done, then I will be able to answer your question. But right now as you opened up we want to keep as much liquidity as we possibly can for now.

Okay. So sounds like obviously you can't really -- you're not going to increase the distribution rate at this point. You can't do any repurchases until April. So it sounds like no real big acquisitions that are available at least until we get through the next season, so probably if you are going to do anything on a near term basis it would be repurchase some bonds I guess, right? Sounds like you're saying that you're not even looking at that, until you get the credit agreement off the table?

We to want get the credit agreement in place in the spring and early summer.

Okay. Just touching real quickly on an issue which I know a couple of other folks have touched on, which is the issue of fixed price customers getting out of their contracts. I had a couple of additional questions around that. One is how are you feeling about the collectibility of the receivables that are currently on your balance sheet given those issues? And secondly, to what degree do you feel the current $600 termination fee is adequate or not adequate to cover your potential losses as a result of you guys hedging yourselves at much higher prices?

To answer the second part first. We're always looking at the liquidated damages clause to see if it covers us, and when oil was $4.00 to $5.00, obviously we would have had to look at that. And that's something that we constantly consider, but we normally try to do is keep the customers in the contract, being that it is a contractual obligation that the customer has and that we have. And that in years where the price goes the other way, we don't walk away from it, and we don't expect customers to walk away from it either. But it's something that we do have to evaluate, so far as what that termination fee might be.

And in fact customers do pay the termination fee, and the price of oil drops big, like it did in the summertime, that can hurt us. And that was something that we have disclosed in the 10-K to the best estimate we can possibly give you.

Which is $3 million at this point, although obviously that really depends on -- I guess how many additional customers continue to cancel as you move into the season, right?

Right. We have no idea how that is going to play out. Most of the fixed price customers have gotten deliveries, and they know -- a lot of people sign a contract, and they're very honorable people and they say, "Hey, I signed the contract, this is my deal this year." We have customers doing fixed price contracts with us for years and years. And as it averages out, they think that they made a pretty good deal. This is a year where they might be on the losing side, but last year they were on the winning side really big.

Sure. How about the first issue, in terms of collectibility and receivables your balance sheet?

We evaluated the collectibility of our receivables when we just completed our year end audit. And we put up the reserve that we thought was proper. I mean I can't predict what future collections are going to be.

Sure.

Or how the economy might deteriorate. But we have an audited financial statement.

Sure, I understand, Rich. I would assume that customers -- well, customers canceling their contracts in this kind of way, to some degree has to affect the collectibility, right? Because in other situations, if someone is still under contract -- if they don't pay up, you don't deliver the oil, right? But if someone walks away from a contract, you have a lot less leverage to actually collect that receivable?

We have a contract signed by them that they would pay that termination fee, and obviously we go to the full extent to collect those.

Okay. Fair enough. I am just curious to -- for people that are trying to get out of those. Is there any opportunity maybe to, as an alternative to losing customers to offer people some kind of opportunity to maybe convert their fixed price into a ceiling contract or something like that?

There is some kind of

Go ahead, I'm sorry.

I am just wondering the extent to which you can be creative on the sales and marketing side, in order to reduce the churn associated with the issue?

Some customers have done that. They have gone from the fixed product. They realized it is maybe not the thing for them, because of what's happened over the last two years. You are either a winner or loser it seems. And they like the ceiling product better based upon their experience. Some decide to stay with the market because they feel that might be the better way to go. Some people have very strong opinions about what's happening to the price of oil, so it is up to them.

We always explain all of the options to them, and we offer different types of products. We even have offered multiple year ceiling products. And we'll probably -- we're not offering it right now, because at one time the cost of the hedge, the cost of the call option was so high we decided not to offer the multiple year. But we're probably going to be looking at that again to be able to offer two and possibly three-year ceiling prices.

Okay. Great. And then final question. I don't know if this has been touched on as well. But I just wanted to understand the extent to which you guys have risk exposure, as a result of the physical inventory that you hold. So say with the variable price customer obviously if you purchase heating oil -- go ahead.

All our physical inventory or the majority of our physical inventory we put a short futures or short swap against that physical inventory, so it is basically unpriced. So that when we bring it to market, it might have a few days of price inventory, probably no more than five.

Okay. All right. Great. In other words, then, you're completely hedged on your fixed and ceiling price customers. And you're more or less effectively completely hedged on your variable price customers as well -- except to the extent that very short-term movements and the price of heating oil.

I think on our protected price customers we are fully hedged, and on a variable price customers we have a market price. We use our shorts to bring us to a market price so we can sell with the market.

Got you. Thanks for clarifying that.

Our next question coming from the line of Bill Gibbons with Locust Wood Capital. Please go ahead.

All my questions were answered but I I would like to echo the previous caller comments you are doing a great job so thank you and keep it up.

Thank you.

Thank you. Our final question coming from the line of Collin Moran with Ideal Capital. Please go ahead.

Hi, guys, can you tell me what was the gross profit per gallon in the fourth quarter?

I don't have that right in front of me. You can just kind of strike that, by taking the sales less the cost of goods sold and dividing that. I don't have that right in front of me.

Okay. And then the big improvement in service and installation gross profit in the quarter. You mentioned a little bit that was attributable, if I understood you to the roll off of some less profitable business that you acquired. But can you maybe just elaborate. Is the level of profitability you achieved in the fourth quarter something you would expect to more or less recur in the future, or was there some kind of one-time goody there that we shouldn't expect to see again?

It was probably our best. I haven't gone back and done the numbers, but it was a very good quarter for us. So I wouldn't say that that was a -- while we were pleased with the quarter, I wouldn't say that it was something that's going to be 100% repeatable.

Okay. Yeah. Okay. And then the low attrition in the quarter, how should we think about how representative that is of future attrition?

We're doing a much better job on the gain side, as I mentioned. We've been working for several quarters in getting a marketing machine in our sales machine, to where we want to be in. We're getting there where we think we're well positioned to do take advantage of opportunities in the marketplace to sign accounts. We're always trying to improve ourselves on the loss side. Obviously our biggest losses this year were to price, and that was mainly because of what's happened in the market.

The price went up so high, and unfortunately in this business, everybody's new account prices always lower than the price they're going to charge you in years two and on. So it is one of these things where it is hard to keep customers, when they're shopping price every year and when it is so publicized. You can't read a newspaper or turn on the TV without hearing about the price of oil. So it is a big triggering event. But we think we've been able to capitalize on that on the gains side. And that's where our gains have been strong, and we're hoping the gaining do stay strong, and that we continue to minimize our losses.

Okay. So maybe in the upcoming year, expectation of zero or nearly zero attrition that you had in the fourth quarter is too optimistic, but some ongoing improvement from the full year '08 is not out of the cards?

Our goal is always to get to zero. We fight with that all the time. That's where we want to go, and we spend most of our time dealing with that. I mean, that and margin management and expense control is the whole ball game, and we'll always be doing that. We want to lose no customers, and we want to gain every customer that's out there. And we're going to do whatever we can to get to that goal -- and to stay consistent, along with that adding good profitable acquisitions is going to make us a growth company.

Got it. Okay. And then despite the decline in volume, I notice that delivery and branch expenses ticked up a little bit. Was that fuel costs or what was behind the inability to reduce delivery and branch expenses with the lower volumes?

Are you talking about the quarter or the year?

The quarter.

Well, there is a little bit bad debt expense in there. Plus we also had stand alone acquisitions that hit our financial statements. We did buy that installation and plumbing business on Long Island. That's one of the reasons you saw the profitability in service increase. So you have a profitability in the quarter of service from that acquisition in the gross profit, and you also have the operating expenses from that acquisition. It really wasn't the pure delivery and branch expenses, that we had prior to making that insulation and plumbing business acquisition.

The cost of fuels and utilities too added to that just from a regular basis.

Okay. Got it. And then maybe just can you just make a general comment. As your -- anything you sort of sense in your customer base about what the tough economy is likely to do with them? I realize it is kind of an open ended question, but any thoughts you have on whether you see kind of stress showing up in one place or another in the business? That is in the customer base.

We know what we charge has been higher. What the industry charged, what they've been paying for oil what, they've been paying for gasoline what, they've been paying for just about everything has gone up, so we understand that.

We emphasize with our customers because we know it is a tough nut. But at the same time they also realize that we protect their largest asset, their home. And we feel that our collections are in line and albeit maybe a little bit slower. But we think that we might not see the same effect of some other segments of the economy may see. Which we hope not, but we have no idea where this thing is going to go, whether the economy is going to get worse, whether it is going to turn around, when it is going to happen. And obviously that's something that as is unpredictable as the weather and the price of oil.

Yep. Okay. Well, fantastic execution. Thanks a lot.

Thank you.

Hello sir. I will turn it back to you for closing remarks.

Okay. Thank you, Fran, I just want to thank everybody for joining us today. And obviously thank everybody for their ongoing interest in Star Gas and all the questions. We look forward to sharing the 2009 first quarter results with you on our next call. Thank you.

Thank you, ladies and gentlemen. This does conclude the conference call for today. We thank you all for your participation and kindly ask that you please disconnect your lines. Have a great day, everyone.