Steve Goldman - President, Chief Executive Officer, Director of Kestrel Heat, LLC Chris Witty - Investor Relations firm, Darrow Associates Rich Ambury - Chief Financial Officer, Executive Vice President, Treasurer, Secretary of Kestrel Heat, LLC.

David Spier - Nitor Capital Timothy Healy - Healy Group, LLC Andrew Board - Fenimore Asset Management Michael Prouting - 10K Capital.

Good day, ladies and gentlemen and welcome to the Star Gas fiscal 2014 fourth quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference call is being recorded.

I would like to introduce your host for today's conference, Mr. Steve Goldman, Chief Executive Officer. You may begin..

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 fourth quarter and the fiscal year ended September 30, 2014. 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 annual report and 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 would now like to turn the call back over to Steve Goldman.

Steve?.

Thanks, Chris. It is great to be able to review the results of this past year with our investors. We believe fiscal 2014's overall positive performance should further strengthen everyone's belief that our organizational strategy is sound.

We have come to a year where the weather has both pleased and disappointed us, yet we were able to produce some of the best operating results our company has ever seen.

Whether looking at EBITDA of $108 million or our attrition of less than 1% or even our ability to incrementally expand our service offerings and geographic footprint, fiscal 2014 was certainly one for the record books.

What we accomplished this year illustrates that we can achieve solid financial performance, while continuing with our tradition of excellent customer service. We were also able to complete three acquisitions in fiscal 2014 with the biggest one being one of the large transactions we have ever done, Griffith Energy.

At the same time, we have been very focused on strengthening the organization through training at every level. At the end of the day, even with our overall solid performance, there is still plenty of room for us to further improve.

We continue to focus on how to balance the cost of expanding service offerings, while maintaining the profit margins we expect. This is an ongoing learning experience for all of us and it has been quite challenging at times.

We were reminded of this during this summer when cool weather resulted in disappointing results in many areas where we have expanded HVAC operations. The bottom line is that we always need to keep on our toes when it comes to expense management, since both weather and margin expansion opportunities are very unpredictable.

Our lower attrition this past year has made us very proud, given how hard we work to get to this point. We believe that all of our employees are finally living up to the expectation to do everything possible to ensure customer retention and to make certain we are the best home comfort company for the services our customers need.

We know we must continue working to maintain what we have achieved and we certainly are committed to doing that. One of the ways we can achieve results like these going forward is through a comprehensive management development program.

This grassroots approach which began with a fundamental mentoring program has now been expanded with the intent of developing bench strength for the organization and opportunities for our best employees. The results of these initiatives have been very good so far.

We have been able to source many internal candidates instead of going outside the company for management talent which we have had do in the past. In the area of acquisitions, it has been a very good year for Star Gas. While we only closed on three acquisitions in 2014, we looked at more than 40 companies during the past 12 months.

With the help of our dedicated VP of Acquisitions, we know that we have many companies that while they haven't proven to be a good financial fit and operating fit at this point, the criteria makes us believe that some these businesses will ultimately be acquired in the future. One last note on this year's acquisition of Griffith Energy.

We have been very pleased with the performance of this business and the team at Griffith has done a great job integrating its operations with Star Gas.

Our commitment to product expansion for our customers has never been greater and we are seeing a continued positive response to our ability to offer our customers a broader breath of products and services. I think it is very important to mention that the results of this past year did not come easy go nor without challenges.

They reflect sound management and dedication to customer service and a great team of employees. With that, I will turn the call over to Rich Ambury to provide some comments on the quarter and the year's results.

Rich?.

Thanks, Steve. For the fourth quarter of fiscal 2014, our home heating oil and propane sales volume increased by 8% versus the same quarter last year or 1.6 million gallons to 22 million gallons and sales of other petroleum products rose by 97% or 13 million gallons to 26 million gallons.

The much higher volume of other petroleum products, primarily reflect the impact of the Griffith acquisition, which was completed in March 2014. Our home heating oil and propane margins increased $0.03 year-over-year during the quarter to approximately $0.94 per gallon.

As a reminder, the fourth quarter is a non-heating period with relatively low overall volumes, so margins can be impacted quite easily.

Total product gross profit rose by $5.6 million due to the higher home heating oil and propane volume and increase in home heating oil and propane margins and an increase in other petroleum products gross profit largely, again, attributable to the Griffith acquisition.

Delivery and branch expenses rose by 24% or $10.8 million, again primarily due to the Griffith acquisition, which accounted for over $7.6 million of the increase. We also saw higher sales and marketing expense of $1.1 million in the base business and reserves for insurance expense also rose as well.

We posted a net loss for the quarter of $26 million, $12 million higher than the prior-year period, largely due to an unfavorable non-cash change in the fair value of derivative instruments of $11 million, along with the Griffith acquisition, higher marketing expenses and an increase in insurance expense.

In addition, a decline in service and installation profitability in the base business also drove the increase in the additional loss.

During the fourth quarter of fiscal 2014, the price of home heating oil declined by over $0.30 a gallon, which reduced the market value of certain hedges purchased for the upcoming season and drove its $11 million increase in the non-cash derivative increase.

Also as expected, Griffith's operations contributed to a larger loss during the quarter, as would normally be the case during a non-heating season period.

Marketing expense growth and service and installation profitability declined due to certain initiatives undertaken in the quarter to grow sales of other products as well as reduce net customer attrition.

The adjusted EBITDA loss for the quarter increased by $7.2 million to $22.4 million due to the adjusted EBITDA loss associated with Griffith and several small acquisitions totaling $1.1 million, higher marketing expenses of $1.1 million, a decline in the service and installation profitability in the base business of $3 million and an increase in insurance expense.

Now let's review the year results. For fiscal 2014, Star's home heating oil and propane sales volume increased by 11% versus last year or 36 million gallons to 361 million gallons, as the impact of 9% colder temperatures and the additional volume provided by acquisitions more than offset net customer losses, conservation and other factors.

Sales of other petroleum products rose by 45% or 27 million gallons, again, which reflects the impact of the Griffith acquisition. Our total product gross profit rose by $58 million or 18% to $385 million. The increase in volume and higher per gallon home heating oil and propane margins drove the improvement in product gross profit.

In addition, gross profit provided by other petroleum products rose in fiscal 2014, again due to the Griffith acquisition. The colder winter drove an increase in service costs in fiscal 2014, while the prior year period benefited by higher installation and service work related to various storms, including Storm Sandy.

In addition, the cost of several growth initiatives also impacted service and installation gross profit. As a result the gross profit from service and installation in the base business declined by $7 million in fiscal 2014 compared to fiscal 2013.

Delivery and branch expenses rose by 13% or $32 million in fiscal 2014 due to the 16% increase in total volume and higher sales and marketing expenses of $2.9 million. In addition, during fiscal 2014, the partnership recorded a $1.7 million charge for certain sales and petroleum taxes for years prior to fiscal 2014.

Depreciation and amortization expense increased by $4.3 million, again largely due to the Griffith acquisition and general and administrative expenses rose by $4 million primarily due to an increase in profit-sharing expense of $1.5 million, higher acquisition related costs of about $1 million, again largely tied to the Griffith acquisition and an increase in overall legal and professional expenses of $1.1 million.

Net income for fiscal 2014 was $36 million or $6 million greater than the prior-year period, as the impact of colder temperatures and higher per gallon margins more than offset the higher delivery and branch expenses, G&A depreciation and amortization.

Adjusted EBITDA increased to $108 million, up $18 million as an increase in home heating oil and propane volumes, higher home heating oil and propane per gallon margins and an increase in gross profit from other petroleum products more than offset the decline in net service and installation profitability.

As a reminder, during fiscal 2013, the partnership's home heating oil and propane volume was negatively impacted by Storm Sandy, while service and installation gross profit and gross profit from the sales of other petroleum products was positively impacted. Now let's take a peek at our balance sheet.

As of September 30, we had $49 million in cash and long-term debt $125 million. In fiscal 2014, we are able to pay distributions of $19.9 million and fund acquisitions and capital expenditures of over $81 million, while our cash balance declined by only $36 million. With that, I would like to turn the call back over to Steve..

Thanks, Rich. At this time, we will be pleased to address any questions you may have. Operator, please open the phone lines for questions..

[Operator Instructions]. Our first question comes from the line of David Spier of Nitor Capital. Your line is now open..

Hi.

How is it going, guys?.

Very good, David.

How are you?.

Good. First, I just want to congratulate you guys on what appears to be quite an impressive year, operationally. So I just wanted to say that the way we look at Star Gas, especially at the current price, is that if someone were to own this business outright, they would essentially own a business that is generating close to 20% cash-on-cash return.

Based on the fact that, excluding Griffith, the acquisition, the company generated around $86 million in free cash in 2014.

So this current lower trend world we are in, where you get about 2% in terms of treasury, that's an incredible proposition, especially for a company that's generating recurring revenues and using minimal leverage, the way you guys run the business. So I just wanted to state that first off.

But in the current market, where crude has fallen significantly, NatGas has held up quite well. One would think that's quite beneficial for your business. Could you clarify on that? I assume that's correct.

And also maybe quantify what type of a benefit that will lead to, going forward?.

Sure. We love lower heating oil prices. That just makes it easier for us to retain and attract customers. We have lower working capital interest expense, as one would imagine with lower cost of product, as well as we do have 1,000 trucks on the road and 1,000 servicemen on the road. So we will have lower cost to the power those vehicles.

So overall, operationally, lower heating oil prices are just good for us..

And also in terms of the attrition and the fact that your biggest competitor is natural gas, is that a big fact there as well, where it will limit the desire to potentially switch?.

Well, that would really be kind of -- well, our real, our largest competitors is the other 4,000 to 5,000 other home heating oil dealers in our footprint, not necessarily natural gas. Switching to natural gas is more of a long-term decision as opposed to where heating oil prices today might be versus natural gas..

Got it and back to more of my first comment in terms of acquisitions. Again, it looks like you are doing about $100 million EBITDA annually. Based on the net debt, which you mentioned was around $76 million, your [indiscernible], right now they are, give or take, $415 million.

Now considering the company has made several accretive acquisitions at higher multiples, wouldn't it be fair to say that buying back a substantial portion of your shares at the current price would be quite accretive? Obviously if the balance with acquisitions, in terms of growth, but in terms of the current value of the company versus what the company is doing in terms of earnings, wouldn't you say a buyback is quite compelling at this price?.

Yes. Buybacks are quite compelling at this price, but we have to balance buying back units along with acquisition opportunities as well..

No, I would just say, because obviously you guys, in terms of operationally, you guys are the exception, quite further, much better than a lot of the deals that we have been buying. So the fact that you are trading at lower multiple than a couple of acquisitions represents just a pretty good opportunity.

And then in terms of the business structure, are there any updates regarding that?.

The business structures? No real update..

All right.

So the partnership is basically staying intact for the time being?.

That is correct..

And if you are to make another additional acquisition, what would be -- is there a tax impact of cash where it leave the holding company?.

Well, any acquisition that we do make, it is tucked into our C corporation, which is basically the only asset or the stock that the partnership owns. And those C corporations are full tax payers..

Understood. Okay. I just wanted to clarify that. I appreciate it. Thank you very much..

[Operator Instructions]. Our next question comes from Timothy Healy of Healy Group, LLC. Your line is now open..

Gentlemen, would you reiterate how many units were outstanding here at the end of this fiscal year?.

Well, as of the end of November, it's 57.3 million..

Okay. That's essentially unchanged over the course of the recent, say, 18 month period..

That is true..

It appears to be stabilizing down here in the middle 50, you would say?.

Yes..

Okay and calculating the equity value per unit would be? I miss that, if you spoke about it earlier..

Well, the units are around $6 currently..

All right. So it's $6. Okay.

Now one other, before Griffin, or do I pronounce it like Griffin of Griffith?.

Griffith..

Griffith. Okay, my apologies.

A number of lost accounts this year before ex-Griffith, the business going in to the merger, how many lost accounts did you have roughly?.

Well, it was roughly 1% this year, including Griffith but Griffith did not really change the overall, let me just get you that number..

You are doing a great job of declining number of lost accounts since 2009 on a moving average basis.

So I just wondered what the number was here at the end of this fiscal year?.

Yes, the number of accounts that we lost, including Griffith, but we only had Griffith --.

For a little while?.

Yes. It was 4,100 accounts. We don't add in our gains..

Down again..

We don't add into our gains, acquisition gains..

Okay..

But we do add, since we bought Griffith, we add in whatever marketing activity Griffith had, which would be gains and/or losses..

I would say that, from 2009 on, you have had a steady decline from 30 to 4. You guys seem to have acquired loyalty from your own base.

Would you value those at $500 a piece for the sake of argument, roughly?.

Well, I would say that it would be more than that, but that's for somebody else to figure out..

Okay. I bet it's down. It's just you are going in the right direction, continuing going in the right direction. You are building -- clearly the loyalty is building up on a moving average basis. Seems to me, from your numbers..

Correct..

Great. Thank you very much..

You are welcome..

I will yield to the next speaker..

Thank you. Our next question comes from the line of Andrew Board of Fenimore Asset Management. Your line is now open..

Hi. Thank you very much. I am little new to the story. Trying to figure some things out. I am a little surprised by the cost of your debt. It seems like such a stable business. You have been paying a lower interest rate.

I wondered is that something that might change? Could your refinance that debt? Or is something, I guess, unique that I don't quite understand yet?.

Well, we did do that chunk of high-yield. We did do that in 2010 when the markets were a tad bit different, but I will tell you, one of the obstacles we do have is that we are relatively small in relation to the high-yield market. So there's a premium for, I guess, being so small. It's only $125 million outstanding..

Yes. I guess that's a good point. Okay. Thank you very much..

You are welcome..

Thank you. [Operator Instructions]. Our next question comes from the line of David Spier of Nitor Capital. Your line is now open..

Hi. Sorry about that. I just had one follow-up.

Is there a way you can give comment or color on how the winter season is shaping up right now? And what do you guys see going forward?.

Well, if we could predict the weather, I would probably be in a different business, but degree days up until yesterday were pretty much normal in the New York Metropolitan area. And with the lower heating oil prices, as we discussed before, that's pretty good for us..

Great and do you have -- the last caller's question, do you have any plans or intentions in terms of, I know there is a call option on that bond, is there any intentions regarding what to do with that [indiscernible]?.

There's no intention right now. But we do talk from time to time internally about what might be the best time to refinance..

All right, great. I appreciate that. Thanks again..

Thank you. Our next question comes from the line of Michael Prouting of 10K Capital. Your line is now open..

Hi, guys. My question has been answered. Thanks..

Okay, Mike..

Thank you. Our next question comes from the line of [indiscernible]. Your line is now open..

Good job guys.. I remember in 2008 when oil went down so much that you had customers walking away from contracts.

Are you seeing that now? And if so, how hard is it for them to unwind, if they had locked in their prices?.

We are seeing more activity from our customers than we may have normally anticipated in conversations about what their pricing is because of the market change and the amount of coverage in the news and the awareness that the markets are falling.

But since that period of time, our customers, a lot of them, have put themselves into more adjusting plans by nature, just because of what happens during those couple of years with the spike in the market. So we are not seeing the struggle we showed back then.

We certainly are having a lot of customers who are at prices higher than they believe they want to be or they feel that it hasn't moved down enough in touch with us, because the pricing is generated out of the ongoing inventory. It's not connected to that day's market in most cases.

So sometimes there is a disconnect between what they expect pricing to be and what it might be at any given moment, but for the most part, we are dealing with that, I would say. We are doing okay with it..

Just to follow-up a little bit on that, Dick and for everybody else on the phone, back into 2008, 45% of our customers or so who were on our pricing plan were without a fixed plan. Today that number as of September 30, is 5.7% on fixed. So that means the balance are either on variable pricing or on our ceiling program, which basically is a cap.

So with on our ceiling program, if our prices come down, our costs come down and the selling price to our customers can come down as well. So we have changed that dynamic from 2008, today by significantly reducing the number of customers who are on a fixed price plan and ultimately reducing the exposure for those customers..

Okay. Thanks so much..

We reduced that exposure, again from over 40% of our customer base to less than 6%..

Okay. Good. Well, that's great. Thank you..

You are welcome..

Thank you. [Operator Instructions]. And I am showing no further questions at this time. I would like to hand the call back over to Mr. Goldman for any closing remarks..

Thank you, Nicole. Thank you for taking the time, everybody, for joining us today and your ongoing interest in Star Gas and we look forward to sharing our first quarter 2015 results with you in February. Thank you..

Ladies and gentlemen, thank you for participating in today's conference. That does conclude today's program. You may all disconnect. Have a great day, everyone..