Daniel P. Donovan - Chief Executive Officer of Kestrel Heat Llc, President of Kestrel Heat Llc, Director of Kestrel Heat Llc, Chief Executive Officer of Star Gas Finance Company and President of Star Gas Finance Company Chris Witty Richard F. Ambury - Chief Financial Officer of Kestrel Heat Llc, Executive Vice President of Kestrel Heat Llc, Treasurer of Kestrel Heat Llc and Secretary of Kestrel Heat Llc Steven J. Goldman - Chief Operating Officer of Kestrel Heat Llc and Executive Vice President of Kestrel Heat Llc

Michael Prouting

Good day, ladies and gentlemen, and welcome to the Star Gas Partners Fiscal 2013 Second Quarter Earnings Conference Call. [Operator Instructions] And as a reminder, this call is being recorded. I would now like to turn the conference over to your host, Mr. Dan Donovan, Chief Executive Officer. Please go ahead. Daniel P. Donovan: Thanks, Pablo. Good morning to everybody, and thank you for joining us today. With me today is Star's Chief Financial Officer, Rich Ambury; and our Chief Operating Officer, Steve Goldman. As usual, I'm going to make some brief remarks and then Rich is going to review the company's fiscal second quarter ended March 31, 2013. This will be followed by some comments from Steve regarding our operating results, and then of course, we'll be happy to take your questions. Before we begin, Chris Witty of our Investor Relations firm, Darrow Associates, will read the Safe Harbor statement. Chris, please go ahead.

Thanks, Dan, 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, 2012. 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 Dan Donovan. Please go ahead, Dan. Daniel P. Donovan: Thanks, Chris. First, let me start again with a few comments about the weather. Similar to our first quarter, temperatures were colder than last year, up 25.6%, which was a very welcome development, although that was still 1.8% warmer than normal for the quarter, and I might add that for the fiscal year, we are 4.1% warmer than normal. Adjusted EBITDA increased by $14.2 million in the second quarter and by $24.7 million or 31% for the 6 months ended March 31, 2013. Clearly, weather conditions this fiscal year have been much more in line with our expectations, although we did face a number of major storms, including Sandy, which we're still dealing with. Oil prices continue to remain high, as I'm sure all of our listeners are aware. The March 31, 2013, average spot price was slightly higher than the period ended December 31, 2012, but lower than the average price for the last fiscal year's second quarter by about $0.10 a gallon. However, the average spot price for the quarter just ended was higher than the spot prices in 2009, 2010 and 2011 by $1.71, $1.01 and $0.24, respectively. In other words, what I'm trying to say is, we're obviously still operating in a high-priced environment for home heating oil. This makes our job harder in terms of keeping customers and maintaining margins. That said, our attrition rate improved versus last year just as it did on our first fiscal quarter. Year-to-date, attrition is favorable versus fiscal 2012 by some 5,400 accounts, as new accounts rose by 2,800 and losses fell by 2,600. Most of the decline in lost accounts was in the area of price and credit terms, perhaps a reflection of improving economic conditions. The increase in account gained was attributable to customer referrals and local marketing efforts. And while we also remain concerned about the price of oil compared to natural gas, we feel confident that when given the opportunity to discuss a possible conversion with our customers, we can provide them with the necessary information to help them make the best decision. I might add that while we're pleased by the overall improvement in net attrition, we will never be satisfied until we could show 0 attrition and obviously then, growth via acquisitions and organic additions to our base. As Steve will discuss in a moment, we also continue to focus on organic expansion within our propane operations and other services throughout the company. After the end of this fiscal second quarter, we did close on an acquisition in the New York area and we continue to discuss, model, analyze several potential purchases that will hopefully result in greater acquisition activity in the current months now that the heating season is over. Steve and his team are working hard on these opportunities, which may pick up steam as we come to a close here for the heating season of 2012, 2013. Regarding distributions, Star recently raised its quarterly payment by 6.5% to $0.0825 per unit for the fiscal 2013 second quarter. We also continue to repurchase units. Both actions are intended to enhance unitholder value. And as we said previously this fiscal year, we believe it makes sense to look at distribution increases after the end of the heating season. With that, I'll turn the call over to Rich to provide some comments on the first quarter results. Rich? Richard F. Ambury: Thanks, Dan, and good morning, everyone. For the quarter, our home heating oil and propane volume increased by 26% versus last year or 34 million gallons to 164 million gallons as the impact of 26% colder temperatures, and the additional volume provided by acquisitions, more than offset net customer losses for the trailing 12 months at 3.6%. As you may recall, last year's March quarter was the warmest in over 100 years in the New York metropolitan area. We were able to expand our heating oil and propane margins by 2% or about $0.02 to $0.95 per gallon versus the second quarter of fiscal 2012. Total gross profit did increase by $36 million, due to the combination of slightly higher margins and the impact of colder weather. Delivery and branch expenses increased by 35% or $22 million, of which $12.5 million of this variance related to a credit recorded under our weather hedge contract in the second quarter of fiscal 2012. On a cents per gallon basis, excluding the impact of the prior period weather hedge, delivery and branch expenses declined by $0.10 -- or I'm sorry, 10% to $0.48 per gallon. We posted net income for the quarter of $42 million, $1 million higher than the prior period, as the impact of colder temperatures was partially offset by an unfavorable non-cash change in the fair value of derivative instruments of $13.6 million. In addition, net income in the second quarter of fiscal 2012 was favorably impacted by $12.5 million from our weather hedge contract. Adjusted EBITDA increased by 24% or $14 million to $74 million, largely due to the increase in volume. Again, the second quarter fiscal 2012 benefited from $12.5 million recorded under our weather hedge contract. The results for the 6 months were very similar to the quarter. Home heating oil and propane volume increased by 18% versus last year or 40 million gallons to 262 million gallons, as the impact of colder temperatures and the additional volume provided by acquisitions more than offset net customer losses. On a year-to-date basis, our heating oil and propane margins increased to $0.95 per gallon versus the first half of fiscal 2012. As with the second fiscal quarter, the combination of slightly higher margins and the impact of colder weather drove an increase in product gross profit of $44 million. We were able to improve our service profitability by $2 million, due largely to the additional service and installation billings related to the major storm Sandy, which occurred in the first fiscal quarter of 2012. Net income for the quarter was $51 million or $8 million higher than the prior-year period, as the impact of colder temperatures was partially offset by, again, an unfavorable non-cash change in the fair value of derivative instruments of $14 million, in the absence of the weather hedge, which contributed $12.5 million in the prior-year period. Adjusted EBITDA increased by 31%, or $25 million, to $104 million, largely due to the impact of the increase in volume. Again, adjusted EBITDA for the 6 months ending March 2012 did include $12.5 million weather hedge benefit. As of March 31, 2013, we have borrowed $61 million under our revolving credit facility. As of today, we have reduced our bank borrowings to $7.5 million. Now I'd like to turn the call over to Steve for some further comments. Steve? Steven J. Goldman: Thank you, Rich, and good morning, everyone. We are pleased to report solid results from our operations this past quarter. While we always constructively look at how we could have done better, we were overall satisfied that our operating managers delivered the right balance of service and financial performance that we are constantly talking about. Our management team had a great opportunity these past 3 months to both execute a plan for normal winter period, as well as working on delivering better results going forward. As always, the first part of improving our business is continuing to root out expenses that can be reduced or eliminated, so that we can remain as competitive as possible. Our second most important focus is training. Training at all levels is critical to ensure that we can continue to provide the level of service that we pride ourselves on. It is also important as we continue to expand into other services throughout our footprint, which include propane sales, natural gas service, plumbing, air conditioning, home security and home emergency generators. We are very pleased with our growth across all of these areas, although we know we still have a long way to go before we will be satisfied with a balanced, complete suite of services we can offer to our customers. I am also pleased to announce that we have just launched a formal internal mentoring program, which will help better prepare our management team for the future. Overall, this has been a good winter season for our operations, but challenges remain. These include a still weak economy, oil prices that are rather high for consumers and conversion activities by natural gas utilities. We also view demand as remaining relatively sluggish for elective service and equipment replacement. Another important concern we've continued to see is the impact of more efficient equipment and other conservation actions by homeowners, which has reduced overall heating gallons used. This is why we need to expand the breadth of services as rapidly as we possibly can. In addition, a large part of our success is our strategy of growth by acquisition. While several events in the past 6 months, including super storm Sandy and the severe snow in February, slowed down some discussions with potential sellers, we have recently seen a pickup in interest. While we cannot yet say when or if we will successfully acquire any of these companies, there are several very active discussions underway. The successes of this past quarter serve to remind our team that the expectations are always there for Star Gas to continue to drive our performance to the best possible level regardless of the circumstances and conditions. As always, we are very proud of our team and our accomplishments both this quarter and this year so far. And with that, I'll turn the call back over to Dan. Daniel P. Donovan: Okay, Steve, thanks. At this time, we'll be pleased to take any questions anyone may have. So Pablo, can you please open the phone lines for questions.

[Operator Instructions] And our first question comes from the line of Ed Olsen [ph] of -- he's a private investor.

What -- how many shares were repurchased in the quarter? Richard F. Ambury: Sure. Just give me a second on that, Ed [ph]. 310,000.

Okay. And how many -- what was the date of the original or the current repurchase plan, and how much has been purchased against that? It's 3 million, wasn't it? Richard F. Ambury: Yes, it was July 2012. It was 3 million. And we purchased -- well, we have a remaining 1.7 million, so we repurchased 1.3 million.

Okay. So roughly half of what you got for the last 1.5 years. Okay. The... Richard F. Ambury: No, no, no. That's not 1.5 years. I mean, it's since July 2012.

Okay, sorry. June to June. Okay. That's fair enough. And then last year. In your press release, you mentioned to enhance unitholders' value. And the dividend has not been increased or was not increased for 2.5 years, the last increase. So I took that and calculated out how long it'll be before we get to the $0.45 magical number. And at that pace, it'll be 15 years. And if you look at the stock price, in the last 2 years, the S&P 500 is up 20% and Star Gas is down 12%. If you go out 3 years, the S&P is up 40% and Star Gas is down 10%. And I guess, if you look at the very slow pace of the share repurchase and the very slow pace of the dividend increase, I don't really see the follow-through on the company's desire to enhance "unitholders' value." That's a quote from your press release. So I guess it all leads to the questions, why should shareholders have confidence in this management and especially the board? The operating management did a brilliant job of what they're doing. But look, let's face it. The board calls the shots. So why should we have -- why should shareholders have confidence in that with this slow pace? Daniel P. Donovan: Well, Ed, let me try to take it from the beginning. This is Dan. First of all, we started out at a distribution of 0 and now, we're up to $0.33. It's been an increase from the $0.27, which we originally started with, that's a 22% increase, and we have bought back 16 million units since we started buying back units. But I just want to try to address the other thing. I don't look at myself as a -- comparing myself to the S&P 500. I'm a heating oil company. I don't know of any other heating oil company that's public, so I really don't know what their numbers are. I don't compare myself to many other companies because they are not like us. The one thing that I do know that we try to do is we try to maintain a disciplined approach to distributions, balanced with our other uses of cash, in particular, acquisition. I think the board is doing a great job, and I think that the decisions the board is making all [ph] fit into that very disciplined approach, which we, here on the management team, totally agree with. We try -- we attempt to manage a company that -- it looks very long-term. We don't look to a quarter. We don't even look to a year. We are looking long-term over multiple years. And what we want to do is increase both our account base and increase EBITDA. We try to do this by concentrating on ensuring superior customer experience, and we look to generate revenues and other things in customers' homes that makes that customer stickier to us, so they continue buying oil and propane from us. On top of all of that, we try to control expense based upon the weather. But weather is a funny thing. It's just not a given that just comes across evenly over a heating season. When the cold weather comes and what it comes with and over what period of time, means a lot to our results. So we look to make sensible profitable acquisitions that increase EBITDA over the long-term, maintain modest leverage ratios and we feel that we are increasing unitholder value for the long term. Not for a quarter, not for a year, not for 2 years, maybe not for a few years. So the people who want to stay with us, I hope, are looking at us as a long-term investment where we're going to increase distributions over time. I don't have a timeframe in my mind. I'm looking at it as how do we perform as a business, and that means that we have to ensure that we grow organically, grow through acquisitions and we'll continue increasing distributions as we have from 0 up to $0.33 or from $0.27 to $0.33, which is that 22%, continuing to buy back units in a disciplined approach. So that's how we look at things. And if that means that somebody doesn't like us because of the fact that we're not tracking the S&P 500, then they have a different agenda than what I just described.

Well, okay. Let me take that point by point. Even if you compare it to utilities, it's an underperformance. The stock was at $6, it's now at $4.80. I don't see the effort in enhanced unitholder value, only buying back 310,000 shares in a quarter is not aggressive. That's very slow and this, in my mind, and this -- I'm just 1 shareholder. The buyback should be operating much more quickly and the dividend should be increased much more quickly. And I think that -- if you look at the price in the marketplace, that's what the marketplace is saying, it's dissatisfied.

[Operator Instructions] Our next question in queue is from Michael Prouting of 10K Capital.

So first thing, nice job on the increase on the gross margin per gallon. Any commentary on what drove that? Richard F. Ambury: The gross margin's up a couple of pennies or a couple of percent, or you're referring to the gross profit, which is up significantly, due to the combination of a slight increase in the gross profit margin of around $0.02, as well as the additional volume provided by the weather.

Rich, I was just wondering, what drove that $0.02 improvement? I mean obviously, that's significant, and just wondering what, if anything, might have been behind that? Richard F. Ambury: Well, we manage our margins on a daily basis. So we try to manage our margins each and every day. Daniel P. Donovan: I think, Michael, it could also be a recognition in the industry that we need better margins in order to operate because of the increased expenses that we get hit with as an industry. Everybody wants a pay increase each year. Everything we do is more expensive each year. It certainly doesn't go down. And we have look to see what our competition is doing, too. While we might be the price leader, we still manage that margin very carefully so we don't lose business.

Okay, great. That's exactly what I was hoping to hear. And so on the acquisition outlook, a couple of questions around that. Firstly, what kind of prices you're seeing in the marketplace? And then secondly, I was just curious to get your characterization of the opportunities that are available out there, whether in terms of size or number or what have you. Steven J. Goldman: The size of acquisitions out there is -- versus the type of businesses that are actually our competitors, from businesses that have 1,000 accounts to businesses that have 10,000 or more accounts. We're seeing them all actively discussing what the possibilities are for the future. Some are short-term, some are long term. Pricing is a variable that you really can't put an exact number on because the characterization of the value of a business really -- well, 2 parts to that: One, obviously, to broadcast the number or any type of value that we place on something would probably be misplacing any information because it really comes down to the detail of how well each business is running, where the business is, and our geography is obviously expansive, and because of that, values of businesses vary greatly. And the overall ability to integrate that business into our business adds to the value of those businesses. And I would characterize as what we're looking at to be very similar mixes we've looked at in the past several years. There were some really attractive businesses and there are some that are -- would be a struggle to find a way to transact a sale because the quality of the business is relatively poor and there's a big separation between expectation of the sellers and what we think the value of those businesses are, but we do think that the chute for businesses is filling up for the next couple of years as the business is changing and some people don't really want to remain in this business and compete and shift. So that's a greater opportunity for us in the future.

Okay. And final question. So on the customer attrition side, obviously, on a percent basis, that was down year-over-year. Although on a net basis, you did lose some customers this quarter versus gaining customers in the December quarter. Now, I just wanted to get your thoughts on that and the outlook on customer attrition going forward. Daniel P. Donovan: Well, customer attrition, we always aim for it to be 0. Unfortunately, it doesn't get there all the time. The first quarter was a good quarter, where we actually had more gains than we had losses. And this quarter is not that way, but it's still an improvement over just about every other previous second quarter that we've had. Because of that high price of oil, it is something that is on the minds of consumers. So it's something we have to deal with. The good news is that we've gotten a lot better at dealing with it. Our employees have gotten a lot better at explaining the value that we offer consumers, that they say might not get from a utility. And the gas conversion scenario is still going on. As you know, the price of natural gas are very low. Price of heating oil are relatively high. And we're dealing pretty well with that. We think that we can -- if given the opportunity, we could convince people why staying with home heating oil is a better choice in the long-term. It's not an easy sell, but you can do it, and we have been pretty successful with that. And we've been trying to maintain that disciplined approach to credit losses also. We're not going to sell oil to people who are not going to pay us for it. So we have to really watch that very carefully and make sure that we're disciplined when it comes to that. So that's where we see the attrition, in the price and on the credit side. We expect that to continue with the higher price of oil. But like I said, I think we're getting better at it and people are understanding how our product is priced and what the value of dealing with a company like Star Gas might be.

[Operator Instructions] And with that, I'm showing no further questions in queue. I'd like to turn it back to Mr. Dan Donovan, Chief Executive Officer, for any further comments. Daniel P. Donovan: Okay, thank you. I want to thank everybody for taking the time to join us today, as always. And appreciate your interest in Star Gas, and we look forward to sharing our third quarter results with you in August. Thank you.

Thank you. And again, thank you, ladies and gentlemen, for joining today's conference. You may now disconnect. Have a great day.