Good day, and welcome to the Star Gas Partners, L.P. Fiscal Year 2015 Second Quarter Results Conference Call and Webcast. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over Mr. Steve Goldman, President and Chief Executive Officer of Star Gas Partners. Please go ahead, sir.

Good morning, and thank you for joining us today. With me today is Star's Chief Financial Officer, Rich Ambury. After some brief remarks, Rich will review the fiscal second quarter ended March 31, 2015. We will then take your questions. Before we begin, Chris Witty of our Investor Relations firm, Darrow Associates, will read the safe harbor statement. Please go ahead, Chris.

Thanks, Steve, and good morning. This conference call may include forward-looking statements that represent the partnership's expectations and beliefs concerning future events that involve risks and uncertainties and may cause the partnership's actual performance to be materially different from the performance indicated or implied by such statements. All statements other than statements of historical facts included in this conference call are forward-looking statements. Although the partnership believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the partnership's expectations are disclosed in this conference call and in the partnership's quarterly reports and annual report on Form 10-K for the fiscal year ended September 30, 2014. 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 publicly 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'd now like to turn the call back over to Steve Goldman. Steve?

Thanks, Chris. Star Gas' fiscal second quarter was certainly one for record books on so many levels, but we were all definitely pleased with the company's overall performance. We ended the first quarter of the year still hoping we would see colder temperatures since the weather during the quarter had been somewhat disappointing with temperatures 7% warmer than normal. We certainly got what we wished for and more. In fact, we experienced so much cold and snow during the second fiscal quarter that we were pushing the limits of our operating capacity in most of our locations. While Boston grabbed most of the headlines for the record snowfall, many additional areas in which we operate experienced snow-related conditions which challenged our ability to provide the level of service our customers have come to expect. In many cases, we took unusual steps and went well above and beyond the call of duty all in the name of customer satisfaction. Some of the adjustments we made worked very well, and I believe, will enhance our ability to deal with extreme conditions in the future. However, our operations performed -- but even under the pressure of extreme weather conditions, it was not without significant expense. The month of February was particularly a difficult one, with nearly 1/3 of our paid hours being counted as overtime. However, we obviously saw benefits in terms of volume growth. We also continue to benefit from oil prices that were significantly below last year for the same period. This lower cost of product helped us in many ways, including our ability to expand margins and possibly reduce conservation. It may have also positively impacted attrition, although this is very difficult to know for sure at this point. Our net attrition for the quarter was 0.5%. And for the…

Thanks, Steven. Good morning, everyone. For the second quarter, our home heating oil and propane volume increased by 22 million gallons to 12% as the additional volume provided from acquisitions, primarily Griffith, and the impact of 5.8% colder temperatures more than offset the net impact of customer attrition and other factors. Sales of other petroleum products rose 37% to 27 million gallons, reflecting a significant motor fuel volume provided by Griffith. Total sales declined, however, by 15% to $762 million this quarter as an increase in volume was more than offset by the negative impact of a 37% decline in per gallon of wholesale product cost. Total product cost -- total product gross profit rose by 21% or $43 million to $243 million due to the growth in sales volume as well as higher home heating oil and propane margins. The decline in home heating oil and propane costs contributed to the per gallon margin expansion. Having said that, the extreme cold temperatures created spot outages at times and added to the complexity of margin management. As such, our service and installation gross loss grew by $3.4 million, largely due to the impact of colder weather, numerous storms and the intensity of the winter weather. Temperatures were 19% colder than normal during the quarter, which not only taxed our customers' heating systems but our operations as well. We are grateful to the hard work of our employees during this period, as Steve mentioned. Delivery and branch expenses rose $14 million or 15%, reflecting the 14% in total volume. These costs increased in the base business by approximately 3% on a cents per gallon basis. This increase, along with the higher service expense experienced during the period, necessitated an increase in per gallon gross profit margins. Depreciation and amortization expense rose…

And those are our comments for this call, and we're open at this point for questions.

[Operator Instructions] The first question is from Mr. Andrew Gadlin from Odeon Capital Group.

First question. I missed your commentary on the acquisition from early January. I was wondering if you could talk a little bit about that and then follow up a little bit on the acquisition pipeline.

Okay. We completed a relatively small acquisition in the northern part of Georgia. Obviously, it's a propane acquisition. There's a few thousand accounts. Like most of our positions, it was a company that had a very strong brand in the area. We have retained a very strong General Manager to run it. We believe it's an opportunity not just as it is, but to cut into that territory of northern Georgia and the surrounding area. The pipeline there has been relatively good. There's been a lot of conversations going on. Again, it's a mixed bag of people now feel they have one more real good winter behind them and maybe they could consider transitioning out of the business, so there's been some increase in conversation. And at the same time, someone might think that -- still thinking about, do they want to roll the dice another year? So while we're having a lot of conversations, what will actually take place as a completed acquisition this year is still up in the air. But we're pretty optimistic that we'll see some movement with some of these conversations.

In the conversations, are you seeing a lot of smaller sellers or potential sellers or some larger ones as well?

The full spectrum, small and large, medium. Everything from end-to-end, we're getting contacts. Some propane, some heating oil, some HVAC. We've had pretty much conversations going full-time. And I mentioned several calls ago that we -- I put in place a full-time acquisition person just to facilitate those discussions. And it's good that we have that because they're relatively long conversations. There's a lot of things to discuss whether it's just getting to understand their business or the eventual timing of getting the deals on.

And then you mentioned that there were some operational initiatives undertaken in this quarter in order to meet your customer service standards. Can you talk a little bit about some of that? And is that still ongoing as well?

Well, most notably, we talked a little bit -- and we really didn't really lay out the math of the demand of the period late January and February, but degree days were over 30% of our expectation during that period. And no efficient operation would plan to have 30% more capacity than you need in a normal base that's in your planning. I mean, typically, we have 10% to 15% expansion capabilities. What we did was we exercised some outside resources for the first time as extra utility. We've never gone to that degree where basically we contracted with some companies to bring in resources from outside of our footprint. We had to do some additional training, but we believe that there is maybe a new-born partnership that gives us the ability to have additional resources that won't be on our continual payroll but will give us expansion ability beyond our normal staffing if we are faced with challenges such as this, or even going back to what happened a couple of years ago with Sandy. It was something where we're somewhat hesitant to do but it actually worked out very well. While the expense for the short period is relatively expensive, the rapid transition of the quality of people that we engage was very good. So relatively quickly, it took some pressure off of certain operations that were under a great deal of duress with the high demand.

Customers were happy with them? There weren't any customer issues with staff that you haven't been training for years?

No. It was relatively seamless, honestly. It was the -- obviously, there were customers unhappy about just the ability to do what we'd normally do in some areas, mostly because of the inhibitions we had because of road closures and the amount of snow in areas like New Hampshire, Rhode Island, Boston, parts of Long Island, even parts of Pennsylvania and Maryland, during certain days and weeks of the storm. The amounts of snow that weren't cleared during those periods by municipalities was very high compared to what we've experienced in previous years. So that was the greatest challenge we had. We -- I think we're able to not only mobilize people from all sections of our company and departments to get out in the field and help the customer in a satisfactory way. The thing we couldn't overcome was the actual weather conditions. But I think all in all, what we've seen, as we talked to customers coming out of the season, is for the most part, our customers are pretty happy.

And I assume your competition wasn't able to do the same thing. I assume comps were tougher for them.

Yes. I mean I don't have a good feel for all of them. Some certainly would have had some challenges. They don't have the strengths in staffing that we have, especially the smallest of companies. Everybody was facing a good deal of duress. And if they were operating in the same situation, they didn't have the resources that we had to call upon. And I'm sure in many cases, we outperformed them.

The next question is from Mr. Bill Gibbons of Locust Wood Capital.

I was just wondering how the company is weighing the dividend policy versus repurchasing shares with free cash flow, just giving what seems to be attractive valuation to shares right there despite the runoff.

Well, I mean, we went up $0.03, right? We went up from $0.35 to $0.38 on our distribution. We're looking at possibly buying in shares, but we got the acquisition alternative as well to the fund. But we're looking at all -- and we've got some debt out there that's at -- has an effective interest rate of 9%, so we're looking at acquisitions. We're looking at possibly doing something with the debt. And we're also looking at unit repurchasing.

Great. And then how do we think about -- just given the seasonality in the collection of the receivables, how should we think about the cash balance? Obviously, your $37 million gross as we collect those receivables, how do you think about your -- if we take it on average basis, how do you think about the cash balance of the company?

Well, prices were down over $1 this year versus last year. So when we start looking at cash balances for the future, I'm not so sure $1.60, $1.70 home heating oil price is what we're going to say for the future. I mean, we prepare the company for heating oil prices somewhere in the $3 per gallon range. I'm not going to say that there's going to be a lot of extra cash because of where heating oil prices are today. If prices go up $1 or so, we don't want to get pinched. But having said that, we are pretty having a -- having a pretty good year. So there will be, if I had to give you an estimate of what the cash balance is going to be, up or down versus last year, I would basically tax effect the growth in EBITDA.

[Operator Instructions] The next question is from Mr. David Spier of Nitor Capital.

So you continue to do a great job creating shareholder value, making very prudent acquisitions. Obviously, you continue to reduce the share count and growing your distribution. I know I've given you some pushback in the past, but it seems like the method and the strategy really just seems to work, and I get it now. So it looks like you mentioned before in previous calls, you're seeing working capital close to $140 million. The question I have is, is there any way you could give us an idea of how much further room there is to scale this business up from your current 452,000 full-service customers? Like more or less, how big could this business get if you continue on this pace?

That is -- that's a really hard question to answer from the standpoint of time looking at it. Because we -- obviously, our greatest growth is by acquisition even though we're expanding services. That's unpredictable. We saw a very large increase in the number of accounts we were able to acquire. Last year, when we acquired the Griffith company, there are other companies out there like that. We believe over the next several years we'll have opportunities to do to the same. And we, as you mentioned, prudently managing our capital and our ability to do acquisitions like that down the road. And we've, I think consistently, been able to incrementally add to the business on the propane side. There is probably some greater opportunity organically to do this. We certainly have barely gotten into our expansion of propane, and I don't think you're going to see anything in the way of a robust explosion of addition of accounts. So...

No, I understand. The question more was, over time, how big is this in your sweet spot of the market ...

I don't know that there's a -- now that we've expanded back into propane and we're expanding more on the service side, we don't see ourselves as having real limits. There is no -- obviously, our footprint is the limit, but heating oil, our old footprint, but it's not a limit when it comes propane, although we have to carefully look at what's the right propane for us. There are a lot of areas that have very low margins that may not be as attractive to us. But we think there's a lot of opportunity in front of us.

And what are the acquisition multiple is looking? I guess an idea of what it's looking at right now as compared to when [indiscernible].

They're looking -- they're -- on the heating oil side, they're probably anywhere from 3 to 4.5, and on the propane side borders -- reasonable companies are playing, boarders 6.5.

So still relatively attractive, especially compared to the overall economic and financial market, where multiples are going out for businesses.

Yes, I think so. We haven't seen any unusual pressure, especially in the last 2 years, of anything that's not reasonable.

And I know you mentioned this with the last call as well, you were looking at the debt. But and I ask, does it make sense -- especially first is I'm not saying to hold off in acquisitions, but if you're able to pay off that debt and potentially reduce interest expense by $10 million or essentially increasing income by around $10 million a year. How do you weigh that decision so that it somewhat attractive that you'd be able to derisk the balance sheet while also increasing the bottom line pretty substantially?

Rich, myself, our board, we continually have those discussions as we did back several years ago when Dan was running the company. What we do, we're looking at trying to make the best plans and decisions as a company. And acquisitions, for the most part, if we had to make a decision at reducing debt that was more fiscally prudent, most of the acquisitions would wait for us. And if not, there'll be others. We would make a decision on the basis what's best for the business first.

Got it. And then the last question I have is in terms of attrition rates, the last few years especially really able to maintain pretty low rates. How have you been able to do that? Is that the net impact of running a large-scale business and I guess the benefit of that? How it's been so dramatically improved from especially 2010, 2009?

Well a couple of things. One, I think we've been relatively fortunate by having the weather we've had for the last 2 years, right? That is an incredible gift, if nothing else. I don't want to take credit for some luck. Go back 3 years ago, we had Sandy. The last 2 years, we've had very cold winters, and we've always talked about that our value is in our ability to provide service. And when people realize what we can provide that other companies can't, there's a good and strong reason to stay with us. In addition to that, we've certainly worked hard at trying to strengthen our mechanism to communicate with our customers better and be more sensitive to the risk involved in our relationship with customers, although I think we have a ways to go in that arena as well.

But I'm thinking of the overall larger scale of your business. I mean, you mentioned the fact because you have a large-scale business, if there's a certain area you can divert trucks that way, has that enabled you to have much, obviously, stronger attrition rates and that...

No, I don't think so. I think, if anything, the rates are relative. The only thing an expansion of area does do is give us the ability selectively to try to choose areas that maybe we wouldn't have as much attrition risk due to the natural gas conversion. It's one of the things we're all looking at when we do acquisitions: how highly vulnerable is an area? We are wishing to get more areas that are a little more resistant to the incursions of natural gas.

The next question is from Mr. Michael Prouting from 10-K Capital.

It seems redundant, but I guess I'll add my congratulations for the quarter. Just a couple of questions on the debt. Is the debt callable at this point?

Yes, it is.

It is, okay. And can you remind me -- I know you called your debt last time around. I forget how -- how much earlier you called versus when it was due to mature.

Without looking it up, I can't tell you off the top of my head. I don't -- I really don't know. I forget.

Okay, no worries. I can look that up. And so last question on that. So if you were to retire the debt, do you see yourselves raising additional -- or I don't know what the word is, raising debt for future acquisitions or other uses of cash? Or would your expectation be is a par cour [ph] or assumed that you would retire the debt and not issue additional debt?

It all depends on the acquisition pipeline that we have before us. Having said that, the bank markets, to a certain extent, is pretty robust, so there might be some capital with our bank group that might -- we might be able to put to use. But we're looking at all our alternatives right now. We're in a fairly good position.

Okay. And then just related to that, obviously, yields have moved up a bit -- after a bit in the last 3 weeks or so. That aside, have you gotten any indications at this point of what kind of yield you need to offer?

On the debt?

Yes, if you were to issue debt.

No, I have not done any indications of what the yield would be.

There appears to be no further questions at this time. I would like to turn the conference back over to Mr. Goldman for any closing remarks.

Thank you, operator. And we'd like to thank everybody for your interest in Star Gas and for the questions and for joining us today, and we look forward to reporting on our next quarterly call. Thank you.

The conference has now concluded. Thank you for attending today's presentation, and you may disconnect.