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Our annual profile of noteworthy service managers and their accomplishments is back! We also highlight tools and techniques for troubleshooting and servicing heating systems.
High Prices, Slow Receivables Put Pressure on Dealers
This winter's high prices and difficult economic conditions have placed tremendous strains on Oilheat customers and marketers alike. Heating oil prices hit record highs early in the season and then continued to climb, while the U. S. economy was teetering on the verge of recession.
At the same time, credit has become harder to obtain in light of the subprime mortgage crisis.
At least three oil companies in the Northeast have landed in hot water for allegedly failing to deliver pre-paid oil. In Maine, Attorney General Steven Rowe targeted the assets of Nicholas Curro after customers complained that they did not receive deliveries from the companies he owns, Price Rite Oil, Perron Oil and Veilleux Oil & Service. In Pennsylvania, Attorney General Tom Corbett is suing David P. Gappa Oil Co. for allegedly failing to deliver pre-paid oil. And in Connecticut, the state Department of Consumer Protection is investigating F&S Oil Co., which reportedly shuttered its operations.
"This is the most challenging year in recent memory, " said Matthew Ide, of Citizens Bank. "We have seen a combination of pretty OK weather and very high commodity prices, and that's a combination we have not seen before. We're coming off of two years that were not all that great, primarily because of the weather, so some companies came into this season with a weakened balance sheet to begin with. Now they're under liquidity pressure that stresses a strong balance sheet and puts enormous strain on weaker balance sheets. "
Strain on Receivables
Ide said the high prices are causing problems at both ends of a marketer's business. "The price of underlying commodity is creating a lot of strain on receivables, " he said. "A lot of people are saying that they have not seen receivables so high before. Consumers' budgets are getting taxed, and they are slowing down their payments, so the dealer gets hit with a double whammy. "
Dealers are waiting longer to get paid, and this is putting them deeper into their trade lines with wholesalers. "If they have a revolving line of credit, they are using more of it and borrowing more than they normally would have, " he said.
Marketers who have managed their cash flow cycles effectively can survive the slowdown in receivables, but weaker operations are vulnerable. "Where people have a line of credit that is based on a formula where they can borrow against receivables and inventory, they may have difficulty increasing the amount they borrow because the accounts receivable and the inventory are not high enough to cover their needs. "
Bruce Haas, senior vice president at Eastern Bank, said that a struggling oil company that has exhausted its collateral within the company might need to look outside to secure the loans it needs. That could require the owner putting up his personal real estate.
While the high commodity prices play a role, Ide said, the real problem is "an underlying imbalance in their working capital position that in past years maybe they could manage because product prices were lower and the weather was warmer. Now we have decent weather and high prices, and it is exposing working capital imbalances and deficits. That is what's compounding the liquidity problem.
"The trap that dealers get caught in is when they go to the bank, they want to talk about high prices and high receivables, but the real need is being driven by working capital deficits that have nothing to do with that, and that's all the banker wants to talk about. It leads to a very frustrating experience. "
Decision Time
Accountant and valuation analyst John Nardozzi, of Nardozzi Consulting, also cites past performance in cash management as the key differentiator between companies in a tough winter like this one.
Companies that used this year's pre-buy money to cover last year's leftover expenses have dug themselves into a hole that has suddenly grown very deep. They wind up paying higher rates and using their homes and other personal assets to provide the collateral that is missing in their businesses, according to Nardozzi.
Receivables are a primary form of collateral, but banks generally only recognize receivables of 90 days or less. "As receivables go long-term, they are no longer creditworthy, " he said.
When a company can no longer obtain credit, it's time to reach out for help to avoid leaving customers in the lurch, according to Nardozzi. "You can go to a friendly competitor and try to buy under their umbrella and make a deal to sell the company, " he said. The companies can agree to co-operate immediately and then get a fair market valuation of the company that is selling. Nardozzi said he wishes every struggling company would reach for that kind of help rather than default on its obligations.
Ide said companies are better off selling from a position of strength, not weakness, but if the alternative is default, moving towards a sale may be the best option. "If you are in a situation where your supplier has said he's not going to go any further and you're at loggerheads with your bank, you really are put in a very tight situation. It may be a good idea, if you've come to the conclusion that you need to sell, to start talking to someone now about having an option to buy the company so that in the interim you can use their credit so you can at least afford to operate. "
Debt Restructuring
Citizens Bank can also rescue a faltering marketer with a total financial restructuring, according to Ide. "If you're limited to the assets of the company and your existing bank doesn't want to play ball, we can refinance the dealer to get the bank out and bring in a structure that's more appropriate. Because we know we're going to refinance, we have stepped in and given some level of financing to keep the guy going forward, and we have been subordinate to the existing bank, but we know we'll be taking the bank out."
Companies that struggle but survive the winter must use the off-season to regain their financial footing, according to Nardozzi. "They will need to re-establish a good, strong relationship with the bank, and they have to make a profit and no longer give away the product. "
He strongly urges that company attend to their bottom lines and not respond to their competitors' pricing. "You don't know what their circumstances are. You need to determine your margin and know your selling price, and competitors be damned. Ultimately they may not be in business. If you follow them and try to price off of them with no rhyme or reason, you might as well let them run your business. "