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Edited Transcript of SGU earnings conference call or presentation 1-Feb-18 4:00pm GMT

Thomson Reuters StreetEvents

Q1 2018 Star Group LP Earnings Call

STAMFORD Feb 2, 2018 (Thomson StreetEvents) -- Edited Transcript of Star Group LP earnings conference call or presentation Thursday, February 1, 2018 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Chris Witty

* Richard F. Ambury

Star Group, L.P. - CFO, Executive VP, Treasurer & Secretary of Kestrel Heat LLC

* Steven J. Goldman

Star Group, L.P. - President, CEO & Director of Kestrel Heat LLC

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Conference Call Participants

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* Andrew Elie Gadlin

Odeon Capital Group LLC, Research Division - Research Analyst

* Matthew Spiegelman

* Michael Prouting

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Presentation

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Operator [1]

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Good morning, and welcome to the Star Group Fiscal 2018 First Quarter Results Conference Call and Webcast. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Steve Goldman, Chief Executive Officer. Please go ahead.

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Steven J. Goldman, Star Group, L.P. - President, CEO & Director of Kestrel Heat LLC [2]

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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 our first quarter 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.

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Chris Witty, [3]

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Thanks, Steve, and good morning. This conference call may include forward-looking statements that represent the company's expectations and beliefs concerning future events that involve risks and uncertainties, and may cause the company'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 company 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 company's expectations are disclosed in this conference call and in the company's annual report in Form 10-K for the fiscal year ended September 30, 2017.

All subsequent written and oral forward-looking statements attributable to the company or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements. Unless otherwise required by law, the company 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?

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Steven J. Goldman, Star Group, L.P. - President, CEO & Director of Kestrel Heat LLC [4]

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Thanks, Chris. Good morning, everyone.

At the beginning of this fiscal year, we often asked ourselves, when will this winter begin? October 2017 was one of the warmest on record throughout most of our footprint, and it was not a good way to start this quarter. When November rolled in and we finally saw cooler weather, it seemed like everyone woke up and decided to turn on their heat at the same time. Basically, we saw much of the expected service demand and inbound phone volume from October squeezed into November, which was otherwise a fundamentally normal month for us. It certainly gave us a flavor for what we would see later on as the winter unfolded.

While December also began as a somewhat milder than we would like month, near the end of the year began a period of extremely cold weather, which rolled right into January.

So the first quarter did provide us the opportunity to ultimately begin delivering a reasonable flow of oil and propane, but it also brought with it some very challenging customer service, and service requirements in general. We handled these with the same high level of commitment we always provide to our accounts, and I'm proud of the outcome even while dealing with some very stressful days while boilers and furnaces across our footprint were battling Old Man Winter.

In addition and similar to last winter, we saw oil and propane products costs rise, putting pressure on both margins and our retention efforts with customers as their selling prices rose as well. However, such challenges are not new to us, and we believe our results were very good given the conditions we experienced.

We saw customer net growth of about 1% for the quarter, which were a level similar to last year's 1.2%, just a 400 net account difference. And we did this even while our strongest competitors were doing everything in their power to hold onto and to attract more customers.

While we did not close on any notable acquisitions this quarter, we believe we've made some very good progress working towards the integration of the organizations we purchased last summer. And we believe that we'll see some acquisitions that will fit with our design come to fruition in the near future. However, as we're in discussions with multiple entities and they all seem to be going very well, we have nothing specific to report on at this moment.

One area of managing our business that has become increasingly challenging involves the addition of talented employees and the development of a strong management team for the future leadership of the business. However, even in a competitive market, we are doing everything we believe possible to hire the best and brightest to Star Group across all levels of the organization. We will continue to improve our practices to attract, hire, train, and manage our human resources like no one else in the industry can.

Overall, we feel that even though this quarter's weather started out rather weak and then turned into one of the coldest periods in our memory, our team was able to manage the issues well and provide the excellent customer service that is the hallmark of our company. We are happy that our people continue to drive the business forward and can handle whatever conditions develop as we evolve into a strong and more successful Star Group for the years to come.

With that, I'll turn the call over to Rich Ambury to provide some comments on the quarter's results. Rich?

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Richard F. Ambury, Star Group, L.P. - CFO, Executive VP, Treasurer & Secretary of Kestrel Heat LLC [5]

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Thanks, Steve, and good morning, everyone.

For the quarter, our home heating oil and propane volume increased by 4 million gallons or 4% to 103 million gallons as colder temperatures and acquisitions more than offset the impact of net customer attrition and other factors.

Temperature for the fiscal 2018 first quarter were 5.5% colder than fiscal 2017, but 6% warmer than normal due to the record warm temperatures in October. Having said that, we believe that the extremely cold temperatures experienced during the last week of December 2017 will favorably impact deliveries during the second quarter of fiscal 2018.

Our product gross profit increased by $7 million or 6% to $124 million due to higher home heating oil and propane volumes and a $0.027 increase in home heating oil and propane margins. But please keep in mind that over 98% of our hedges for our price-protected customers were at their strike price, which reduces the potential for future per-gallon margin expansion.

Delivery and branch expenses increased $10 million or 12% to $91 million during the quarter. In the base business, operating expenses rose by $3 million or 3.7%, and acquisitions accounted for another $4 million of the $10 million increase. We also recorded a $3 million charge relating to our weather hedge contract based on temperatures experienced during November and December. As a reminder, our weather insurance hedge covers the period from November 1 through March 31, taken as a whole, and temperatures during November and December were 13% colder than the payment threshold.

We posted net income for the quarter of $30 million or $12 million higher than in the prior year period, largely due to a $12 million deferred tax benefit, reflecting a reduction in the federal corporate tax rate from 35% to 21%.

Adjusted EBITDA decreased by $4 million or 12% to $27 million as higher home heating oil and propane margins and the additional adjusted EBITDA provided from acquisitions were more than offset by higher operating costs in the base business of $3 million -- by the $3 million charge I mentioned on our weather insurance contract and by a little decline of volumes in the base business.

Before turning the call back over to Steve, I would like to point out that as a result of the recent tax reform, that our federal income tax rate will be reduced from 35% to 21% for fiscal 2018 tax year. As a rule of thumb, our blended state and federal effective tax rate will decline from 42% to 30%.

And with that, I'll turn the call back over to Steve.

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Steven J. Goldman, Star Group, L.P. - President, CEO & Director of Kestrel Heat LLC [6]

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Andrew Gadlin with Odeon Capital Group.

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Andrew Elie Gadlin, Odeon Capital Group LLC, Research Division - Research Analyst [2]

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Steve, early on in your comments, you highlighted that there were some challenges with the very cold weather as well. I was wondering if you could elaborate on that a little bit.

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Steven J. Goldman, Star Group, L.P. - President, CEO & Director of Kestrel Heat LLC [3]

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Yes. The -- some of this is spilling into January. While we did see the period of extreme cold begin in the end of December of -- the last few days of the period ending December, the first couple of weeks of January is -- both degree days per day and the duration of the amount of days that we had the cold for were unprecedented in recent memory. We have to go back to 1978 to see a period that looks as extreme. So the way that manifested itself was a lot of people needing service all at once. So a lot of people, delivery cycle increasing, meaning, a lot more driver activity and hours needed. All the states we operated in ultimately gave a waiver of service hours so we could increase our capacity to deliver. But the weather that we were experiencing for a relatively short duration for a whole year but a very intense period for us dictated that delivery -- oil and propane consumption was being burned by customers at a rate faster than we could replenish it for that period. And in some cases, it was also impacted by snow and ice in severe situations. A couple of states that we operated in -- very important roads were closed down, or areas of service were restricted from delivery for us, particularly in parts of New England. Telephone volume increased dramatically beyond our normal expectations in part due to some media attention to the weather and instructions from news stations, I think, trying to be helpful to their constituents, saying, "Call your heating provider and make sure you get a delivery." And people were calling that didn't need deliveries. And when you get weather that was sub-20 degrees for prolonged periods, you start getting a lot of call activity related to insufficient heat, which in a lot of cases is not even a serviceable item but does require an inspection. So there was an incredible demand for activity. Again, I think that in most part, we were able to do an extraordinary job in measure -- in areas -- moving resources, identifying priority customers to address, meaning situations that needed to be addressed as rapidly as possible. It certainly wasn't a perfect situation. Just the enormity of the demand across all heating companies, not just ours, that heated with any kind of resource, whether it was heating oil, propane, natural gas, the demand was extreme. And again, I think what we were able to do with our resources is extraordinary, but it was a real test for everybody in every single position in the organization.

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Richard F. Ambury, Star Group, L.P. - CFO, Executive VP, Treasurer & Secretary of Kestrel Heat LLC [4]

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Yes. And one thing I would like to add is that if you look at that last week of December into the first week of January, the temperatures were about 40% colder -- 40%, 45% colder.

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Steven J. Goldman, Star Group, L.P. - President, CEO & Director of Kestrel Heat LLC [5]

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Yes.

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Richard F. Ambury, Star Group, L.P. - CFO, Executive VP, Treasurer & Secretary of Kestrel Heat LLC [6]

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More than was expected.

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Andrew Elie Gadlin, Odeon Capital Group LLC, Research Division - Research Analyst [7]

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Yes. No. I mean, it was no picnic to live through. But I'm sure -- that's very helpful, the overview you just gave us. If we could just delve in and kind of translate some of that into numbers, if possible. The delivery and branch expenses in the December quarter were about $10 million higher year-over-year. And that makes sense given all that you just described...

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Steven J. Goldman, Star Group, L.P. - President, CEO & Director of Kestrel Heat LLC [8]

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Well, let me just add one more piece of color into that aspect, delivery expense. There is a national...

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Andrew Elie Gadlin, Odeon Capital Group LLC, Research Division - Research Analyst [9]

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That's overtime, right? That speaks to overtime?

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Steven J. Goldman, Star Group, L.P. - President, CEO & Director of Kestrel Heat LLC [10]

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Well, it does, but -- there is a national challenge to all industries to find, identify and train the needed CDL drivers. It has become, over the last few years an increasing element of challenge for any company that's involved in transportation. And we have some special challenges, being that a large portion of our delivery drivers are seasonal. And what we have needed to do is step up the cycle of training as we've seen kind of an older group of drivers start to retire. It happens from time to time that we reach a cycle in the aging of our employees, where we see larger-than-average group of employees start to retire as they get to a certain age. And we've brought in -- we've been bringing in more and more newer drivers in the last couple of years. And part of our concern isn't just base training but training for safety reasons and knowledge of areas and just getting up to our level of expectation. So we invest a lot in the new driver, and some of that is reflected in that cost. That's the quarter that it happens in.

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Richard F. Ambury, Star Group, L.P. - CFO, Executive VP, Treasurer & Secretary of Kestrel Heat LLC [11]

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If you take a step aside from -- going back to my remarks. If you look at the $10 million increase, $4 million of it was due to the acquisition-related volumes, $3 million had to do with a charge that we booked for the weather hedge because November and December were colder than the threshold amount and we recorded a charge of $3 million. So in the base business, if you will, our operating expenses are up $3 million, which is like 3.7%.

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Andrew Elie Gadlin, Odeon Capital Group LLC, Research Division - Research Analyst [12]

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That is helpful. Thinking about -- sorry, just thinking about now Q2, look, this business is difficult to forecast, I'm sure from where you sit even but definitely from where we sit. So I'm just trying to think about this upcoming quarter. The cold weather persisted into January, and as we enter February, it still feels a lot colder than it's been in a number of years.

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Richard F. Ambury, Star Group, L.P. - CFO, Executive VP, Treasurer & Secretary of Kestrel Heat LLC [13]

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Well, let me stop you right there. If you look at January, in and of itself, it's about 3%, 3.5% colder than the average of the -- kind of the average of the last 10 years or so, despite the first week being colder than normal-ish by 40%. So the tail 3 weeks are actually warmer. And then if you look at the next 7 days, 10 days and -- I'm not a forecaster as far as weather goes, but they're suggesting that it's going to be close to the 10-year average or even slightly warmer over the next 7 or 8 days. But go ahead -- just to put that in the backdrop, that January, even though that first week was cold, it's not turning out to be an extremely cold month.

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Andrew Elie Gadlin, Odeon Capital Group LLC, Research Division - Research Analyst [14]

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Okay. Fair enough, granted. But I'm just pointing out -- just trying to look at year-over-year comps to try to keep things as much apples-to-apples. And last year was a cold-ish January, now it's colder this year. February was incredibly warm last year, and then March was cold here in the Northeast. You know, I don't know where it stood relative to normal. But all-in, it was a normal -- it was a warmer-than-normal March quarter last year as well.

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Richard F. Ambury, Star Group, L.P. - CFO, Executive VP, Treasurer & Secretary of Kestrel Heat LLC [15]

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Yes.

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Andrew Elie Gadlin, Odeon Capital Group LLC, Research Division - Research Analyst [16]

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So I'm just trying to compare it -- so, okay, if there was a $92.25 million in delivery and branch last year in the March quarter -- we've got to expect it to be higher, right? You're investing in the new workforce. Is that $4 million -- is that $3 million -- I'm sorry, you've got $4 million of acquisition. That will carry over, presumably, probably at the same level into March. The weather hedge I'd assume, is there, if not more so. And in the mix business, I should assume at least that amount, right? I mean, is that a fair way to think about this?

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Richard F. Ambury, Star Group, L.P. - CFO, Executive VP, Treasurer & Secretary of Kestrel Heat LLC [17]

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It's a way to think about it. I'm not going to comment on as to whether it's fair or not. You have to do your own numbers.

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Andrew Elie Gadlin, Odeon Capital Group LLC, Research Division - Research Analyst [18]

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Okay. In terms of the margins, one of the things that we saw in the market at least was that some natural gas prices and oil prices were up quite a bit. Some spiked even during that last week of December, first week of January period. Is that going to have an impact on margins in this March quarter?

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Richard F. Ambury, Star Group, L.P. - CFO, Executive VP, Treasurer & Secretary of Kestrel Heat LLC [19]

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Like I said in my opening remarks, for our protected price business, 98% of those hedges for those customers were at the strike price. So at least on the protective price business, I would think there -- it's at a pretty, pretty high margin, or there's no room for significant margin expansion unless prices collapse.

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Andrew Elie Gadlin, Odeon Capital Group LLC, Research Division - Research Analyst [20]

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Yes. I'm worrying about margin deterioration, is what I'm asking about.

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Richard F. Ambury, Star Group, L.P. - CFO, Executive VP, Treasurer & Secretary of Kestrel Heat LLC [21]

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I don't know. Come back to me in April, when I know where heating oil prices end up being, and we'll find out.

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Andrew Elie Gadlin, Odeon Capital Group LLC, Research Division - Research Analyst [22]

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And during that period, you didn't suffer, meaning you weren't buying -- the spot market was up dramatically. You weren't buying in the spot? You weren't paying those exorbitant prices?

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Richard F. Ambury, Star Group, L.P. - CFO, Executive VP, Treasurer & Secretary of Kestrel Heat LLC [23]

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We buy based -- we bought -- all of our supply contracts are based on the Merc each and every day. And for our ceiling and our fixed price contracts, we buy over-the-counter hedges to protect against increase in prices. So for our variable business, we're buying based on the spot market. And our protected-price business, it's whatever price the market was on the day we entered into that agreement with our customers on a back-to-back basis.

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Andrew Elie Gadlin, Odeon Capital Group LLC, Research Division - Research Analyst [24]

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So in other words, the margin that you have on the gross margin, you're pretty much protected. There will be some variability a little bit, but I shouldn't expect major variability in that margin per day?

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Richard F. Ambury, Star Group, L.P. - CFO, Executive VP, Treasurer & Secretary of Kestrel Heat LLC [25]

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Well, I'm going to say yes, we protected the margins on our protected-price customers. And I would like to leave that discussion at that.

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Operator [26]

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The next question comes from Miles Barnett with HITE.

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Unidentified Analyst, [27]

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This is (inaudible) from HITE. So in terms of capital allocation, now that we're through the C corp conversion, is there a thought that the cash might be freed up to do more buybacks or otherwise return capital?

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Richard F. Ambury, Star Group, L.P. - CFO, Executive VP, Treasurer & Secretary of Kestrel Heat LLC [28]

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Well, like we've been saying for about 14 years now since we've been at this, since we capitalized in -- I guess, it was 2006, we look at acquisitions, we look at unit repurchases, we look at whatever we might need to do with our fixed assets and our fleet. I mean, there was a significant change in the tax law, now where you can dump almost 100% -- if not -- I guess, 100% of fixed assets put in place. So you know, we'll have to look at what is that allocation of capital at the end of the quarter or even during the quarter.

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Unidentified Analyst, [29]

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Okay. And in terms of the M&A opportunities that are out there, how does the pipeline look right now?

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Steven J. Goldman, Star Group, L.P. - President, CEO & Director of Kestrel Heat LLC [30]

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I think it looks healthy. We've not stopped looking at acquisitions for a good period now, probably -- meaning, a strong flow of prospects for the last couple of years. We've -- as we've expanded our footprint, we've gotten a lot more looks at more businesses. That hasn't always translated into us buying more because of our standard of what we're looking to buy. We are, as usual, curiously speaking to several businesses that at least some of them, we believe and hope that they will make it through our processes of due diligence and other aspects and they will survive our scrutiny and ultimately become purchases for us. So I'm pretty optimistic in that our continual outreach to find new prospects for us to help grow the business are working well and that we'll have other opportunities in the coming months. It's just a -- it's a very unpredictable aspect of the business, and we know that. And we kind of incorporate that into our expectation that when good ones come our way, we make sure we have the means to execute and we have to have some patience and the ability to work through all that we can possibly look at to make sure that we're making the appropriate purchases that are in the best interest of the business.

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Unidentified Analyst, [31]

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Great. And then in terms of the volume trends. So I was a little confused by the press release. You stated that, I believe at the end -- by the end of the quarter, you were -- you actually had net additions to your customer base, which is great. But then, you talked about volume declines in your base business and then heating degree days were up. And I think you have to exclude the last week there, up a little bit at least. So I'm trying to figure out where those volume declines in the base business came from. And if you could quantify what they were, that would be helpful.

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Richard F. Ambury, Star Group, L.P. - CFO, Executive VP, Treasurer & Secretary of Kestrel Heat LLC [32]

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Yes. The attrition number that's in -- that we use in the volume reconciliation in our, I guess, our 10-Q, we mentioned in the press release, it's basically a trailing 12-month attrition number. It's not just the attrition for the quarter. We have to look back over the preceding 9 months for the quarter and see what accounts we've added and see what accounts we've lost, so that when we reconcile the volume that we sold the prior year's comparable quarter, we might have lost 3% or 4% of our total customer base, but in the quarter, actually added 1%. So we look at the net attrition for the previous 12 months, not just the specific quarter.

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Unidentified Analyst, [33]

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Got it, okay. So the answer is that the quarter-end comment was referring to versus the end of Q3. From end of Q3 to end of Q4, you added. But from Q4 -- Q4 year-over-year, you were down 3% or 4%?

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Richard F. Ambury, Star Group, L.P. - CFO, Executive VP, Treasurer & Secretary of Kestrel Heat LLC [34]

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Well, we like to look at that as Q1 because we're on a fiscal year. But your analysis is correct.

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Steven J. Goldman, Star Group, L.P. - President, CEO & Director of Kestrel Heat LLC [35]

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And then that's only for the base business because it does not include the addition of acquisitions year-to-year.

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Unidentified Analyst, [36]

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Right, right. Understood. And that 3% to 4% net attrition of the base business...

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Richard F. Ambury, Star Group, L.P. - CFO, Executive VP, Treasurer & Secretary of Kestrel Heat LLC [37]

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Well, I threw out 3% to 4%. Let me give you the exact number of what the attrition in the base business was because we say that in the 10-Q. Just give me a second. And it was 1.6%.

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Unidentified Analyst, [38]

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1.6%?

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Richard F. Ambury, Star Group, L.P. - CFO, Executive VP, Treasurer & Secretary of Kestrel Heat LLC [39]

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1.6% was our net attrition for the 12 months ending December 31, 2017.

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Unidentified Analyst, [40]

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Got it. And then qualitatively, in terms of the -- how we think about the costs here. So was there some sense in which the difficult weather toward the end of -- particularly, in the last week added to costs in Q4? Because clearly, the revenue from that is at least partially deferred into Q1 because of the fill-up cycle. But I'm wondering if there were nonetheless extra costs that were incurred related to that extreme weather that sort of didn't get the benefit of that revenue.

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Richard F. Ambury, Star Group, L.P. - CFO, Executive VP, Treasurer & Secretary of Kestrel Heat LLC [41]

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Yes, I would say some, but I would not in the increase in costs in the quarter on the last week of December. Our insurance expense was up. Our customer service department, I guess, that possibly would be one of the drivers of the increase in costs, was up by $0.5 million.

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Unidentified Analyst, [42]

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Got it, okay. And then last question, just to make sure I understand this weather hedge. Effectively, you've sort of pinned your heating degree day based -- or perhaps your sort of pressure ultimately translates to your volume-based margin variation to something approximating normal. Is that the net of what you tried to accomplish here?

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Richard F. Ambury, Star Group, L.P. - CFO, Executive VP, Treasurer & Secretary of Kestrel Heat LLC [43]

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Yes. What we have this year, which is different than in the past years, is for November through March as a whole, we added a swap. So if it's colder, we -- and again, it's for the 5-month period, we might have to pay $5 million. But if it's warmer, we will receive $5 million. In addition, we also have a put that would kick in if it was 7.5% warmer. So conceivably, we could get $5 million and $12.5 million. That would be like $17.5 million if it was significantly warm this year. For example, last year, if we had the same weather conditions this year, our EBITDA would have been $4 million or $5 million higher. We added that swap this year.

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Unidentified Analyst, [44]

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And the hedging costs that you reported in this call and in the Q, is that all realized cash costs or is that a mark-to-market on the sort of entire hedge portfolio through the end of March?

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Steven J. Goldman, Star Group, L.P. - President, CEO & Director of Kestrel Heat LLC [45]

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All realized hedges go to cost of goods sold. That would include the options and the gain and loss. And what you see in the 10-Q in the change in fair value of derivative transactions is the -- basically, the increase or decrease in the market value of those hedges from the last time we reported, which would have been September 30.

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Unidentified Analyst, [46]

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Okay. But does that change in market value affect the EBITDA or that's below EBITDA?

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Steven J. Goldman, Star Group, L.P. - President, CEO & Director of Kestrel Heat LLC [47]

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It's below EBITDA because it's a noncash change.

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Operator [48]

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The next question comes from Matt Spiegelman with Locust Wood Capital.

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Matthew Spiegelman, [49]

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Just a couple of questions. I want to follow up on the delivery expenses. It seems like a portion of that was sort of investments you have made in different things to improve the level of service, and a portion of that was temporary costs by the conditions. I was wondering if you could give us any sort of rough breakout of how much of that increase was due to the temporary factors this quarter?

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Steven J. Goldman, Star Group, L.P. - President, CEO & Director of Kestrel Heat LLC [50]

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I think in this quarter, and I think Rich touched on it, the impact of the actual weather on additional costs for the quarter was marginal because the weather came in late. In the period, there was only a few days. A lot of the extra delivery activity was really subsequent to the end of the period falling into January. So the delivery cycle basically trails the weather for the most part, especially the expansion of overtime hours. And then to your point that some of the cost was investment in either providing better service, creating stronger fundamentals in the way of training or tools for drivers and/or protecting the business, as Rich talked about, the weather hedge, those certainly were additional costs for those reasons.

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Matthew Spiegelman, [51]

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Okay. And then you highlighted at the beginning that you're working to improve your human resources and get these drivers even though it may be challenging. Do you feel like at this cost level you have made a lot of the investments you need to make? Or are there incremental investments you need to make from here to have the business where it needs to be?

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Steven J. Goldman, Star Group, L.P. - President, CEO & Director of Kestrel Heat LLC [52]

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Yes. That's a -- I think that's a good question and a fair one and one we challenge ourselves with. I think we are substantially invested to the point that we have a much better platform to do what we need to do to address the issues I spoke about. When you get into that aspect of strengthening resources, especially as the economy increases and competition for better employees of every sort becomes a little more fierce, and minimum wages and most of our footprint have increased, substantially, impacting the base cost of any employment, I think there'll continue to be small incremental costs, but I think we've seen the most substantial aspect of those components of the business increase already.

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Matthew Spiegelman, [53]

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Okay. And it seems like you have turned the attrition around somewhat with these investments, so that's -- that's good.

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Steven J. Goldman, Star Group, L.P. - President, CEO & Director of Kestrel Heat LLC [54]

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And again, I think you've been noticing that and I do think that we have a lot better control on customer losses. I think we have much better tools and insight into things to satisfying the customers, and we're trying to address them. It's certainly not perfect and it's not beyond having defect or issues from time to time, but I think we can get our arms around it a lot quicker than we have been able to ever in the past. And I think one of our greatest challenges, obviously -- and I think the best organizations tend to be challenged by this -- is acquiring new customers and attracting new customers and finding the right additional customers to add to your revenue.

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Matthew Spiegelman, [55]

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Okay. And just a question on the -- you spent a bunch of time talking about the -- some stressful days where response times were a bit challenged. Do you expect that to have any impact on customer attrition in the coming quarters? Or was that more of an issue that affected the whole industry, not just you?

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Steven J. Goldman, Star Group, L.P. - President, CEO & Director of Kestrel Heat LLC [56]

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Well, what I'd say is, there were certainly some -- again, I deem it a relatively small percentage of our customers that were impacted in a way that we're not happy about. There were certainly situations way beyond anybody's capacity to control them. We did all we could to limit that with all means that we had possible. I can't tell you how many people that actively worked nearly around-the-clock to do that in the organization. But it wasn't just us. Most -- I would think, most other competitors of ours fared far worse than us. We have been attracting new customers because of that during this period. I would not be surprised to see some spike up because customers were dissatisfied with what we do. I would think it would be marginal and short-lived. We are doing all we can on a proactive basis to reach out to those customers to try to limit that. And so far that outreach has been pretty positive. So we -- I think we do what we say we're going to do. And one of the things we're trying to do with all the means post that situation is communicate with our customers our appreciation for them being customers and be very clear that we understand why they're -- they would be unhappy with the level of service we provided, looking to remediate that where we can and get their trust back and retain them as customers. And I think again, and like no other business, we'll be able to do the best in the situation, but I couldn't honestly say to you I don't think there will be any impact because there certainly are going to be people that were severely disappointed in their particular situation.

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Matthew Spiegelman, [57]

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Okay. That sounds like the right way to handle it. Just the last question for me, on the tax. It seemed like the effective tax rate comes down slightly less than the federal statutory. Is that just offsets in state and local or what's the offsetting factor there?

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Richard F. Ambury, Star Group, L.P. - CFO, Executive VP, Treasurer & Secretary of Kestrel Heat LLC [58]

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I'm sorry, what's your question?

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Matthew Spiegelman, [59]

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I just said it seemed like the -- in the press release, the federal statutory tax rate came down by more than the total effective tax rate. I think you guys pointed to a 30% ongoing tax rate by a few points. I was just wondering what was the offset?

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Richard F. Ambury, Star Group, L.P. - CFO, Executive VP, Treasurer & Secretary of Kestrel Heat LLC [60]

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Well, you've got to look at the footnote in the 10-Q. There's about 6 or 7 items impacting the tax rate for the quarter. To a certain extent, the quarter is a blending of the old rate plus the new rate. But kind of rest assured, once we get past this blending fiscal 2018 tax rate, we're going to go from 42% down to around 30% with state and local taxes. There's a lot of ins and outs to net taxes. And if you want to take a look at our tax footnote in the 10-Q, and if you have any questions, give me a call.

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Operator [61]

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The next question comes from Michael Prouting with 10K Capital.

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Michael Prouting, [62]

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Steve, on the customer churn, just to follow back on a question that was just asked. You guys are positioned in the market as being premier pricing, premier customer service, right? So I would imagine that competitors' customers have fared far worse as far as service is concerned. And I would think that, that should add to your ability to gain new customers in the coming quarters. Is that the right way to think about that?

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Steven J. Goldman, Star Group, L.P. - President, CEO & Director of Kestrel Heat LLC [63]

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We're hoping that. I can't guarantee that. That would be our presumption. That's one of the reasons we do all we do to try to maintain the level of service that it is warm year and cold year. That has to be the silver lining then to what we're doing, that if our reputation is unbroken, that we're committed to that. And even in the situations where we weren't able to absolutely 100% fulfill that in every situation, again, I would say that's a small percentage of the customers that we serve. We're using every means possible to have dialogue with those people and do what we can to win back their trust because our reputation for us is everything, and we have a lot invested in that. And that's one of our key selling points. I agree. I'm glad you get that. And I think the long-term situation, we've got a couple of more cold months ahead of us. We should be able to exploit that and try to garner some more customers out of it.

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Michael Prouting, [64]

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Yes, great. Because -- I mean, just looking a that as a glass half-full rather than a glass half-empty. The challenges that your competitors faced and the money that you guys invested in working around the clock to meet customer deliveries, that's actually an opportunity to improve your customer gains. So I mean, net-net, the logistical challenges of the last quarter should actually improve your market positioning rather than hurt it.

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Steven J. Goldman, Star Group, L.P. - President, CEO & Director of Kestrel Heat LLC [65]

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And I believe you're right.

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Michael Prouting, [66]

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Okay. All right, great. We'll be looking to see how you capitalize on that going forward. Turning to some financial stuff. Rich, I wanted to continue to beat the dead horse because I'm still a bit confused. On the weather hedge, am I understanding correctly that there were no costs related to that in the first fiscal quarter of last year, but there was $3 million related to the weather hedge in the fiscal quarter of this year? Is that correct?

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Richard F. Ambury, Star Group, L.P. - CFO, Executive VP, Treasurer & Secretary of Kestrel Heat LLC [67]

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That is correct. Now the question is, you know, cost. We basically added to our put that we normally had, is we added a swap -- to a certain extent, at the money, which was the average of the 10 years. So that, from a cash outlay to enter into that swap, cost us $0. But since November and December were 13% colder than the threshold amount, the degree days were higher, so we owed on that swap. Now if January and February and March come in a little bit warmer or somewhat warmer, that $3 million that we owe could go down conceivably to 0. But if it comes in a little bit colder, we could actually owe $5 million on that swap.

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Michael Prouting, [68]

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Okay, great. So then, apples-to-apples, so for the first -- second fiscal quarter of last year, how much weather-related hedge costs were there in the March quarter of last year?

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Richard F. Ambury, Star Group, L.P. - CFO, Executive VP, Treasurer & Secretary of Kestrel Heat LLC [69]

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Well, again, we have the same put costs as we had last year in fiscal -- in 2018 second quarter, we're going to have the same put costs this year versus last year. The question is whether we will owe any more money on the swap, or whether the swap will reverse or it gets so disastrously warm that the put that we have would start to come into play.

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Michael Prouting, [70]

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Okay. I'm still trying to simplify things without getting into derivatives and puts and hedges and all the rest of it. Just in purely financial terms, let's just suppose that the weather stays cold and that you don't collect anything on the weather insurance, whatsoever, in the March quarter, how do we think about the relative costs of -- relative costs in March?

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Richard F. Ambury, Star Group, L.P. - CFO, Executive VP, Treasurer & Secretary of Kestrel Heat LLC [71]

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I'll try to make it simple for you. If we have, for January, February, March, the -- basically, the average of the last 10 years or the threshold amount in the second quarter of fiscal 2018, there will be no additional charge in the second quarter of fiscal 2018 versus 2017.

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Michael Prouting, [72]

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Okay. So no additional charge, but you don't -- I guess -- so net-net over the first 2 fiscal quarters, the net result is that the weather insurance is going to cost you $3 million more in the current fiscal year than it did in the prior fiscal year?

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Richard F. Ambury, Star Group, L.P. - CFO, Executive VP, Treasurer & Secretary of Kestrel Heat LLC [73]

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That is correct.

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Michael Prouting, [74]

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Okay. All right. And then one other financial question. So I know you guys moved $34 million of cash into the pension fund, and I believe that was to -- that was instead of the -- shoot, what do you call it -- the letters of credit. One thing I'm just struggling to understand is you guys have a relatively high cost of capital, and I know that having the cash and capital available to make acquisitions has always been a major reason why you haven't had capital returns to shareholders in the past. So I'm just trying to understand given the high opportunity costs of raising capital and not paying that capital out to shareholders, why you choose to transfer that $34 million from the balance sheet to the pension fund?

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Richard F. Ambury, Star Group, L.P. - CFO, Executive VP, Treasurer & Secretary of Kestrel Heat LLC [75]

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Well, first of all, it wasn't to the pension fund, okay? What we did is we cash collateralized our liability for our prior year insurance claims, including workers' compensation, automobile, and to a certain extent, general liability. Now when we did that, we got relief of almost an equal amount of letters of credit. So our ability to borrow from the bank actually went up a little bit because the letters of credit went down by about $2 million more than the cash that we invested. And again, those are investments, and we are earning interest on that, and our letters of credit fee went down. And we also got to take for our calendar, if you will, 2017 tax return a pretty nice tax deduction. So kind of net-net, our liquidity, our ability to fund the acquisitions actually went up and we're earning -- and we reduced our interest in letters of credit cost.

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Michael Prouting, [76]

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Okay. So in terms of the additional ability to do acquisitions, I would think also that the fact that you guys now have a lower tax rate and also, your competitors or potential acquirees also have lower tax rates, so that presumably is going to improve cash flow and also make the numbers easier to run. So I'm just wondering, given that, do you expect to become -- a, do you expect to become more aggressive on the acquisition front? And b, what do you expect to do with that incremental cash flow? And I guess, c, the third part to that is some -- I'm also just curious given the lack of closed acquisitions recently, if you've run the numbers on potentially acquiring any of your publicly traded competitors out there? Because you guys certainly have a rock-solid balance sheet and there are other companies out there with much higher cost of capital. So I'm curious if that something you've looked at?

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Richard F. Ambury, Star Group, L.P. - CFO, Executive VP, Treasurer & Secretary of Kestrel Heat LLC [77]

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Well, that's a lot of questions. I think we bought $40 million last year in acquisitions. Didn't we?

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Steven J. Goldman, Star Group, L.P. - President, CEO & Director of Kestrel Heat LLC [78]

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Sure.

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Richard F. Ambury, Star Group, L.P. - CFO, Executive VP, Treasurer & Secretary of Kestrel Heat LLC [79]

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So I wouldn't say that we've been sitting here on our hands and not looking at acquisitions. We didn't close a lot this quarter, but last year, we closed on $40 million worth of acquisitions. And hey, we're going to evaluate acquisitions. Will there be a benefit of the tax, of the lower tax rate? Yes, I'm sure there is, whether -- we'll have to decide internally as to how that translates into our model.

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Steven J. Goldman, Star Group, L.P. - President, CEO & Director of Kestrel Heat LLC [80]

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One thing, when we are looking at the tax rate, we want to be cautious of. The tax benefit is the effect of a change in the political wins and the administration. We look at businesses -- when we look at them as -- from a 1-year return, a 5-year return, a 10-year return. No one can guarantee us that this change in tax rate will continue for 10 years. So we're being kind of cautious in the application of this new tax rate as we look at the acquisitions we're looking at right now. We still have one eye kind of on the old rate as we've begun progressing at some new businesses. And I think from a seller's standpoint, they all have very different situations. Some are partnerships, some have no real basis, some are distressed, some want to be paid over a longer period of time. So the tax thresholds may be lower if the business is kind of a small. So we're taking that into consideration. To the point about additional cash flow from the difference in tax, honestly, it's not that different -- not that big a difference in cash flow from this past year because Rich mentioned some of the tax savings from this year. And cash flow is only realized when we actually make money and get cash. We'll see what this year looks like. I don't want to count money that hasn't come yet. We do have some capital expenditures we're looking at. We always are as the business expands and grows in different directions. Fleet is a piece of that. We're looking at acquisitions as usual. And in the coming quarter, we evaluate the distribution as well as a piece of the whole picture of things we do. It's certainly helpful to get this change in the tax law, but I think we have demonstrated for a pretty long period of time that we're a conservative management team that tries to do things carefully and not leap to any wild activity or deviation from what we've done in the past. And I think the people who have been invested in the company for a long period of time have gotten to know that, and that's why they've stayed invested for the period of time that they've been with us.

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Operator [81]

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The next question comes from Jean Riley, a private investor.

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Unidentified Participant, [82]

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This is related to the collateral required for the capital insurance company again. Does that continue growing over time, or is there a point where it reaches a steady state -- or at some point, do you get to start reclaiming some of that money to use for something else?

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Richard F. Ambury, Star Group, L.P. - CFO, Executive VP, Treasurer & Secretary of Kestrel Heat LLC [83]

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That's a good question. It's possible it can grow. We've pretty much collateralized all our prior-year claims. We've collateralized to a certain extent some forward-looking claims. So to answer your question, it's going to be the difference between what claims run off and we pay, and what the expectation for the new claims coming on as we enter into another insurance year or another fiscal year. But having said that, we had that same issue with our letters of credit. So we basically swapped $34 million or $32 million of cash for $32 million, $33 million of letters of credit. And every year, our letters of credit would either go up or go down by that same expectation, and the same thing is going to happen in the captive, whether it's for collateral or whether -- I'm sorry, in the captive whether it's cash -- or when we didn't have the captive, it was letters of credit. Now the only thing is that the -- and we -- the cash deposited at the captive is on the balance sheet. And I guess, you'd have to look at the fine print in our 10-Ks and our 10-Qs to figure out what's the letters of credit. But you can see that a year ago, we probably had $45 million worth of letters of credit, and today we've got $7.2 million or around $7.8 million worth of letters of credit. So I don't say it was hidden. It was in there in the 10-K and the 10-Q. It just wasn't on the balance sheet, if you will.

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Unidentified Participant, [84]

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I understand that. Okay. Now how long do these tails last? I know you're starting 2004 to 2016, and then you added 2018. Like when does that 2004 number become 2005, and then 2005 becomes 2006?

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Richard F. Ambury, Star Group, L.P. - CFO, Executive VP, Treasurer & Secretary of Kestrel Heat LLC [85]

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These tails can go on forever. The majority of them are workers' comp claims or a good portion of workers' comp claim. I wouldn't say it's a majority. And that can be over a lifetime. I mean, if a poor fellow gets hurt when he's 25 years old and he lives to 80, that's a pretty long tail.

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Unidentified Participant, [86]

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Right. Okay. And then just one more question. Now that we're a corporation, I noticed on the 10-Q we're still talking about the partners and units. And does that ever become stockholders' equity, and stockholders instead of partners and units?

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Richard F. Ambury, Star Group, L.P. - CFO, Executive VP, Treasurer & Secretary of Kestrel Heat LLC [87]

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Well, we still are a Delaware-based partnership legally. We just have elected to file the partnership, if you will, with our C corp. and to be taxed as a C corporation. Isn't that kind of the correct way to say that? We still have the high splits. We still have the distribution and the incentive distribution rights. And we still have a general partner. So going forward, instead of getting a K-1 that you have to process for fiscal 2018, you're going to get 1099.

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Operator [88]

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There appear to be no further questions in the queue, so I'd like to turn the conference back over to Mr. Goldman for any closing remarks.

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Steven J. Goldman, Star Group, L.P. - President, CEO & Director of Kestrel Heat LLC [89]

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Gary, thank you for taking. And to all that joined us today, thank you, and for your growing interest in the Star Group. We look forward to sharing our second quarter 2018 results with you in May.

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Operator [90]

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