Hello, and welcome to the Star Gas Partners Fiscal 2015 Third Quarter Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Steve Goldman, Star Gas Partners' Chief Executive Officer. Please go ahead, sir. .

Thank you, Chad. Good morning, and thank you for joining us today. With me today is Star Gas Chief Financial Officer, Richard Ambury. .

After I provide some brief remarks about the quarter and first 9 months of fiscal 2015, Rich will review the fiscal third quarter ended June 30, 2015, and year-to-date financial results. 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 its 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. We know that this has been an extraordinary fiscal year thus far as we've been benefiting greatly from falling oil prices and an incredibly cold period this winter, unlike anything we have seen in recent memory. And we are pleased that we've been able to retain much of the benefit of these factors despite an uneven year for weather. .

Our first and third quarters were certainly not what we had planned for or what we were counting on in terms of temperatures. Our first quarter, you may recall, was warmer than normal, which challenges us in several ways.

It caused equipment sales to be slower than expected and tempered our ramp-up of staffing prior to the coldest part of the winter season due to the uncertainty as to how the rest of the winter would proceed. We also faced competitors who were much more aggressive on price due, we believe, to the lack of weather and related volume. .

The second quarter was starkly different with its severe temperatures and numerous snowstorms such that we saw increased expense related to these -- to service and maintenance for both of these during the second quarter and third quarter. I mention this because our third quarter results were somewhat mixed.

But given the temperatures and other factors impacting it from the quarter before, we believe the partnership operated to the best of its ability. .

In terms of weather, the third quarter was cooler during the beginning but then included higher temperatures during May and June. Warm days specifically over 90 degrees helped to drive air-conditioning, equipment sales and service. So despite the somewhat unusual weather patterns, we believe we've still been able to deliver our solid results.

Our EBITDA and attrition continue to support our belief in that by focusing on the customer and on efficient operations, we're making Star Gas a stronger business every day. .

One of the areas of improvement that I've spoken about in the past is training, and I think it's important to mention that we are now in the process of creating an internal culture of continuous improvement.

We have put in place several new processes to improve the way our employees perform to both better please our customers as well as strengthen the bottom line. While we are in the beginning phases of these initiatives, our employees have reacted positively to everything we've implemented thus far. .

I mentioned earlier that we are pleased with our attrition numbers this year, but the third quarter's net attrition was slightly worse than the same period last year. And so our sales group has redoubled its efforts to replace these accounts by reaching farther out of our existing footprint for new customers.

That said, one area of our customer segment that does continue to grow very well has been and is propane, and these operations certainly have room to expand even further. In that vein, I'd like to mention, we just began operating in Eastern Tennessee this month. .

We continue to try new things to constantly improve our operating results. Notably, from a marketing perspective, we expanded the use of social media and billboards as 2 examples to better spread the message about our ability to do more than just service heating equipment. .

As we all know, acquisitions are always an important part of our measure of success. In this regard, I'd like to mention that we are in the final negotiations, and hopefully, we will close soon on another great addition to Star Gas family of businesses in a deal worth approximately $20 million. If so, when completed, we will announce this acquisition.

Aside from this acquisition, we will also continue to speak to several other large and small potential owners as usual. .

Before turning the call over to Rich, who will be discussing our financial results, I'd like to thank him and his team for the tremendous effort that we went through in closing our new credit agreement, which allows us to redeem our high interest notes outstanding. This took a great deal of time and will strengthen our company financially. .

With that, I'd like to turn the call over to Rich. .

Thanks, Steve, and good morning, everyone. For the third quarter of fiscal 2015, our home heating oil and propane volume decreased by 6% versus last year or 2.6 million gallons to 45 million gallons. Heating degree days were 15% warmer than during the prior year's comparable fiscal third quarter and 22% warmer than normal.

Note that temperatures during this non-heating period are not as impactful to annual volume sales as during the heating season. .

Our heating oil and propane margins increased by over $0.07 year-over-year to approximately $1 per gallon. As a reminder, since the third quarter is a nonheating period with relatively low overall volumes, margins can be impacted quite easily. .

Total product gross profit was $52 million, slightly lower than last year as home heating oil and propane margins were offset by the impact of lower volumes..

Star's net loss declined by $1 million to $8.4 million, largely due to a favorable noncash change in the fair value of derivative instruments. .

The adjusted EBITDA loss for the quarter increased by $900,000 to $9.3 million as the impact of higher home heating oil and propane per gallon margin was more than offset by the decline in volume attributable to the warmer weather and a decrease in service and installation profitability. .

Now let's review the 9-month results. Home heating oil and propane volume rose by 7% as acquisitions, primarily Griffith, more than offset the impact of net customer attrition, conservations and other factors.

In analyzing the results, please keep in mind that the first and third quarters of fiscal 2015 were warmer than the first and third quarters of fiscal 2014, while the second quarter of fiscal 2015 was much colder than the second quarter of fiscal 2014.

On balance, the average temperatures over the 9-month period were approximately equal to the average temperatures of the prior year's comparable period and 5% colder than normal. .

Volume of other petroleum products rose 27% to 76 million gallons, again, reflecting the significant motor fuel volume provided by Griffith. .

Total sales declined by 13% to $1.5 billion versus $1.7 billion in the prior year period as the additional sales provided by acquisitions were more than offset by lower selling prices in response to a decline in wholesale product cost of 32% per gallon. .

Year-to-date, product gross profit rose by 18% -- rose 18% or $64 million to $421 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 cost contributed to the per gallon margin expansion.

However, as we have mentioned on earlier calls, the extreme cold temperatures during the second fiscal quarter of 2015 created additional service requirements. Service and installation gross profit declined by $4 million, largely due to the impact of the colder temperatures and storms experienced in the second quarter of fiscal 2015. .

Delivery and branch expenses rose by $23 million or 10%, reflecting the increase in total volume of 10%. This cost increased in the base business on a cents per gallon basis by approximately 3%. As previously mentioned, this increase as well as the higher service expense increased our per gallon margin gross profit requirement. .

Depreciation and amortization expense rose by $3.5 million, largely due to the Griffith acquisition, and interest expense was lower by 19%, reflecting lower bank borrowings. .

Net income increased by $21 million to $83 million due to the impact of higher home heating oil and propane margins, acquisitions and a favorable noncash change in the fair value of derivative instruments. .

Adjusted EBITDA increased by $33 million or 26% to $164 million as the impact of higher home heating oil and propane per gallon margins and acquisitions more than offset higher operating and service costs, largely attributable to colder temperatures and the numerous snowstorms experienced during the second quarter of fiscal 2015. .

Now let's move over to the balance sheet for a second. We recently announced that we entered into a new 5-year asset-based revolving credit facility that provides the ability to borrow up to $300 million, $450 million during the heating season, for working capital purposes.

The credit facility also provides for $100 million 5-year senior secured term loan. .

Proceeds from the term loan, along with cash on the balance sheet, will be used to redeem our 8.875 senior notes due 2017. The term loan payment schedule is comprised of $10 million per year, plus 25% of excess cash flow with the final payment at maturity. We expect to see lower interest expense going forward through this new debt structure. .

And with that, I'd like to turn the conference -- the call back to Steve. .

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

[Operator Instructions] Our first question comes today from Andrew Gadlin with Odeon Capital. .

You mentioned earlier in the call that there's an acquisition in the works for approximately $20 million in proceeds.

Could you talk a little bit about geography or business mix?.

It's a New York area company located on Long Island, it's about somewhere around 19,000 customers. It's a business that more or less reflects our average retail heating oil-type business in the area. It's a very strong competitor of ours. We think of it as a very strong brand.

As I've mentioned in the past, it's one of these acquisitions that we've been speaking to on and off for years to try to get to this point. We are very excited about the opportunity because we believe it's a very good addition to Star Gas. .

And if the acquisition closes mid-quarter, would you guys put out a press release just to let us know that it's been done?.

We either will file a press release or an 8-K. .

Got it.

And then in terms of the term loan that you're taking out, could you remind me what the interest rate on that term loan is?.

Well, it's variable. And there is a grid. But the lowest grid is LIBOR plus 3.25. .

Got it.

With a 100 basis point floor?.

There is no floor. .

Okay.

And in terms of that facility, as you think about it, priorities for cash flow in the near term, would you say you'd want to pay that debt down as quickly as possible or balancing the opportunities in the share buybacks and dividend increases, et cetera?.

Sure. We want to balance everything out. The way the excess cash flow covenant to repay anything back over the $10 million, it includes acquisitions. So there is no hurry to pay back that loan. So if at the end of the term, there's a $60 million bullet, which includes a $10 million final maturity, so be it. .

We don't believe that doing this alters our strategy from what we've been doing for the last several years, which is looking to make the best use of our earnings to better the business and strengthen the investment of those people that have believed in us up to now. .

The next question comes from James Vermeulen [ph] with Locust Wood Capital. .

At Locust Wood, we're just wondering how you guys think about your dividend payout ratios. .

We evaluate our dividend payout each and every year. It's usually sometime in April the fiscal year, depending on what kind of year we're having and what our opportunities for acquisitions or paying back this debt, although we probably -- with this lower rate, it's not -- it's very attractive to keep this outstanding and unit repurchases. .

Rich, this is Steve [ph], also from Locust Wood. Great job. You guys have done very well for us over the years. Would you guys think about in the future reporting your results more in a distributable cash flow basis? I mean, obviously, we can figure it out, but the type of people who are following your company, it might be helpful to them.

Have you guys given any thought to that?.

No, we really haven't given any thought to that. It's just another non-GAAP SEC-type term, and I'm not so sure we want to really go down that road right now. .

The last question comes from David Spier with Nitor Capital. .

I just wanted -- most of my questions have already been asked. I just wanted to clarify, on the term loan, you mentioned about $10 million in annual payments. That's -- you're referring to principal payments. .

That is correct. .

That is correct. .

So essentially, it's $10 million principal payments plus, and then the interest on that is LIBOR plus, you said, 375 basis points?.

Well, there is a grid, depending on our availability, yes. .

Got it. Okay. All right. It makes a lot of sense. So essentially, be able to take that -- take down that debt, which you were previously paying about, let's say, $11 million in interest payments. So you're going to be able to take it down slowly over time and then you estimate [ph] about $60 million in the final balloon payment.

So that's correct?.

Yes. So although there is a -- we do have to set aside 25% of excess cash flow to pay that final maturity during -- for each fiscal year. .

[Operator Instructions] The next question, it comes from Michael Prouting with 10K Capital. .

So it sounds like the strategy really is to not pay that down any quicker than you have to and keep the firepower for any large acquisitions that might come along?.

Yes, that's pretty much it. Yes. .

Okay, that makes total sense. You talked about an acquisition that you're in the final stages of closing right now.

Can you just give us a sense of how the acquisition pipeline looks at this point? And also, in particular, any larger deals that might be out there on the horizon?.

It looks probably like it's been looking for the last several years. We're speaking to 4 or 5 different people in different parts of our geography right now. We're always looking to get some others going at the same time. We don't have anything extraordinarily large that's imminent right now.

But again, we continue to speak to all potential acquisitions for down the road. And as I mentioned before, this took, really, several years to get this one done. So you really never know when the seller will be ready to go ahead and finalize the transition. So, again, it doesn't look any better than it did before, but it certainly isn't any worse.

And I think our opportunities are out there. And we're happy where we are with that. .

Okay. I appreciate the color on that. And I would assume also that as far as valuation is concerned, that you're still within your historical parameters in terms of what you would be willing to pay. .

That's correct. .

Okay. And just one, I guess, somewhat random question. I know there's been discussion previously about collapsing or getting rid of the limited partner structure. I'm just wondering if that's something that's on the front burner or something that's still under consideration. .

It's sure not on the front burner, but that doesn't necessarily mean that we won't look at it from time to time. .

Our next question comes from Gary McHam with McHam Taylor & Co. .

Steve, I believe it was you that said just a couple of minutes ago, concerning the cash flow, the 25% cash flow to pay back on the term loan. You used the phrase, "set aside." I had read, I thought, that this had to be paid and not set aside. .

You're right. It is to be paid from the 25% of the excess cash flow. .

Okay.

At the end of the term? Or can you do it -- or is it along the -- each of the 5 years?.

Yes, the way the term loan works is we pay $10 million a year for each fiscal year. And at the end of each fiscal year, we basically see what the excess cash flow is as defined, which is roughly EBITDA less interest, less taxes, less fixed asset, less pension payments as well as any acquisitions that we might make. .

Yes.

There's a cap on -- there's a cap on it, is there not?.

Yes, the cap would be $15 million. That is correct. .

Yes. Okay. All right. So it's not set aside necessarily. It is to be paid. Okay. .

That is correct. Sorry for the term. .

No, that's okay. I just want to clarify. .

Our next question comes from Jean Riley [ph], a private investor. .

I just have a question about the stock -- the unit repurchase program. For the last 2 years, you've been having record earnings and record cash flow, but you seem to have ground to a halt on the repurchases.

Is there -- when does that turn around?.

Again, we look at all our opportunities, whether it's acquisitions, having cash on the balance sheet to take debt off the table. It's almost at 9%. And we look at it all, at various prices and analysis. .

[Operator Instructions] At this time, there are no further questions. So I'd like to turn the conference back over to Steve Goldman for any closing remarks. .

Okay, thanks, Chad. Thank you for taking the time today in joining us and for your ongoing interest in Star Gas. We look forward to sharing our fourth quarter 2015 results with all of you in December. .

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect..