UGI Corp (UGI) 2003 Q3 法說會逐字稿

Good day, everyone, and welcome to this UGI and AmeriGas Partners third-quarter earnings release. Today's call is being recorded. For opening remarks and introductions I would like to turn the call over to Mr. Bob Krick, VP and Treasurer of UGI Corp. and AmeriGas Partners. Please go ahead, sir.

Good afternoon to all of you and welcome to our call. As we begin let me remind you that our comments today will contain certain statements which the management of UGI, AmeriGas, and their subsidiaries believe to be reasonable as of today’s date only. Actual results could differ significantly because of risks and uncertainties which are difficult to predict and many of which are beyond management's control. You should read the Company's report on form 10-K for a fuller list of factors that could affect results. But among them are weather conditions, the cost and availability of all energy products, including natural gas, propane, and fuel oil, competition from the same and alternative energy sources, and political, legislative, and regulatory changes. UGI and AmeriGas undertake no obligation to release revisions to these forward-looking statements to reflect events and circumstances after today. Now I would like to introduce your host, Chairman and CEO of UGI, Lon Greenberg.

Thanks a lot, Bob. Let me also welcome all of you to our call. I trust you have all had the opportunity to review our press releases reporting 2003 fiscal year third-quarter results. Given the seasonal nature of our businesses, our third and indeed fourth quarters of the year are not very eventful for us, from an operating standpoint. This year's third quarter was not particularly remarkable, and frankly we don't expect our fourth quarter to be remarkable either.

You may recall that on our last earnings conference call I noted that the economy remained weak and I expected our results to reflect to some degree the weak economy. I also indicated that I expected higher expenses the remainder of the year compared to last year, given the tough-minded actions we took last year to control expenses in that warm winter year and given the opportunity to address a number of deferred items this year as a result of our terrific first-half results.

Balancing those factors I suggested to you that full-year EPS for UGI would be about $2.25 a share. With the quarter now behind us, I remain comfortable with that prior guidance; and if anything I would nudge guidance slightly upward to the $2.25 to $2.30 range.

We accomplished a lot this quarter to help position us for the future. AmeriGas close the active propane acquisition and at UGI we closed the Conemaugh electric plant transaction. We are also sitting with over $110 million in investable cash; and we are pursuing opportunities to invest that cash in a productive way. We sit today optimistic about our prospects for the future. But before I move too far out into our outlook I want to have Tony Mendicino review our quarterly performance with you. After Tony concludes his remarks, Gene Bissell will comment on AmeriGas's performance; and following Gene's remarks I will get the microphone back and have some concluding remarks. Here is Tony for you.

Thank you, Lon. As Lon mentioned we lost 5 cents per share this year compared a gain of 9 cent per share per quarter in fiscal year 2002. We normally expect to make a modest profit in this quarter, and would have met this expectation if not for the impact of the reorganization expense in AmeriGas and litigation related expenses in our utility. Let's look at some of the operating and financial details of our business group.

AmeriGas, with weather that was slightly colder than normal and last year, saw EBITDA fall to $13.1 million from 28.5 million last year; and total volume that was essentially flat at 182.4 million gallons. The decline in EBITDA is attributable to low unit margins; our unit margins are unusually strong last year, and higher operating expenses. Expenses were up nearly 10 million. Contributing to the increase was the cost associated with the management reorganization implemented in the quarter; higher insurance expenses, both medical and liability; higher expenses in PPX, and increased compensation expense associated with the improved fiscal year '03 financial results.

AmeriGas contributed a $6 million loss to UGI's operating income compared to a $12 million gain in this same quarter last year. Gene will have more to say about AmeriGas's performance in his comments. Operating income in our utility operations was $10 million compared to 13 million for the same period last year. Operatingincome at our gas utility decrease nearly 5 million; while operating income in our electric utility increased almost 2 million. While fewer than 10 percent of annual degree days occur in our third quarter, weather in both our gas and electric service territories were much colder than normal and last year, resulting in small increases in the volumes of gas and electricity delivered.

In our gas utility throughput was up nearly one Bcf or 6 percent, as increased deliveries to firm customers offset declines in volumes to interruptible customers that are sensitive to economic condition and fuel switching. Gross margin increased 3 million as a result of this increase in volume. The increase in gross margin was more than offset by an increase in operating expenses and decrease in other income. Expenses increased 6 million as a result of higher litigation-related cost and higher distribution system maintenance, bad debt, and incentive compensation expenses. On a year-to-date the gas utility added 6400 residential heating customers, in line with what last year's additions and in line with our targeted annual growth of 2 to 4 percent.

Operating income in electric operations, comprised of our electric utility and our unregulated generating assets, was $4.8 million, up 1.7 million from last year. Electric utility contributed 1.4 million to the increase as a result of reduced purchase power costs and a 1.5 percent increase in MW hours sold. Operating income from our generating assets increased $300,000 primarily as a result of higher sales prices.

Moving on to our other operations, first, Energy Services operating income increased 14 percent to $4 million. The benefit of increased volume from the acquisition of TXU's northeastern gas marketing business in March was inpart offset by lower unit margins and higher operating expenses. The higher operating expenses were due to the TXU acquisition. Overall results from international propane were down 1.2 million relative to the last year. Operating income of FLAGA declined $700,000 on lower volumes. Equity income at Antargaz declined $500,000, primarily as a result of lower unit margins due to higher propane costs.

Moving now to our balance sheet, on a consolidated basis UGI's total debt on March 30,-- on June 30, is just under $1.26 billion, about $37m dollars less than last year. Currently UGI has about 110 million in investable cash on his balancesheet, having spent 50 million at the end of June, for a 4.9 percent interest in Conemaugh generating station. We expect to have investable cash in excess of 110 million at fiscal year-end. AmeriGas closed the quarter with $930 million in debt on their balance sheet, down 16 million from last year. Other than letters of credit, AmeriGas is not currently using its revolver and has about $33 million in cash on its balance sheet. Gene Bissell will now expand on AmeriGas's results.

Thank you, Tony. As Tony mentioned our EBITDA was down about $15 million from the same quarter last year. This drop is in line with the earnings guidance we gave you for AmeriGas last quarter; and we are still on track for record year in terms of EBITDA and net income. Gallons were essentially flat. Residential volumes were up due to slightly colder weather customers’ growth and acquisitions, however, our commercial and industrial volumes were down. We have had growth year-to-date in our commercial and industrial customer base, so the problem is lower volume per customer, which we attribute to price conservation and to continuing weakness in the economy.

As expected margins for our base business in PPX were down somewhat from the unusually strong margin we received in last year's third quarter. PPX margins were also affected by competitive pressures and the 34% increase in the cost of propane that we experience this year. Operating expenses were up almost 10 million. Tony mentioned some of the reasons; 3 million of this increase was related to the reorganization that we announced at the beginning of June. Expenses were also up due to higher incentive compensation and savings plan contributions. Last year these expenses were lower due to actions that we took to offset some of the impact of the record warm weather.

We were also hit hard this quarter on insurance expense. Both our general insurance and our health insurance expense. The other expense areas that were an issue for us were vehicle fuel and bad debt. Both of these are influenced by the high cost of propane and in the case of fuel also by the high cost of diesel.

During the quarter we announced a reorganization which will be influencing the expenses going forward. The purpose of the reorganization is to improve our effectiveness. We reduced the number of regions from 7 to 4. We're moving the four VPs back to our headquarters office. We reduced the number of market managers from 80 to 60; and we reduced our corporate staffing levels. The reorganization was a result of an intensive review of our structure by my team, primarily with the goal of improving the way we manage the business. I am particularly excited about having the region VPs who really are field generals here in Valley Forge to participate to a greater extent in setting our direction. I'm convinced that the result of all these changes will make better decisions more quickly and execute them more effectively. I would also like to point out that we did not eliminate any front-line employees in the process. There was no change in the number of drivers, service reps, or inside sales reps, and those are the people who deal with our customers every day, as a result of this organization.

I’m pleased to point out that our non-propane income was up 5 percent for the quarter due primarily to initiatives we began rolling out in April to improve the management of our service business. PPX was results for the quarter did not meet the level that we achieved last year. In addition to the margin issue that I mentioned, volumes were actually off by about 3%. Last year the new regulation requiring that all cylinders be equipped with a safety device went into effect on April 1, which boosted our volume last year, as customers flocked to our stores to replace their old cylinders. This year we are still seeing customers frequent our stores for this reason, but the number of customers with the old style cyclinders is definitely down. The good news there is that our capital expenditures for upgrading the old style cylinders will also be down.

In addition, we had a cool rainy spring along the East Coast, which caused a bit of a slow start in the growth. Together, lower volume and margins reduced EBITDA for the quarter from PPX by 4.6 million. We expect our PPX business to have results for the balance of the year more in line with last year. We're getting some relief on the wholesale price of propane which will help on margins; and we completed the acquisition of Active propane during the quarter. Active has been a real leader in the cylinder exchange business since the early '90s. And in the Chicago area, their volume, they have been a leader in the Chicago area, and their volume will add 15 percent to PPX volumes going forward.

Active was only one of four acquisitions that we closed. While they contributed a negligible amount of gallons during the quarter, together they will add about 10 million gallons annually to our business. We continue to pursue the acquisition of both large and small marketers.

Growth through acquisition is certainly our heritage; and the integration of acquisitions is a real strength for our organization. We are reviewing a long list of acquisition opportunities, both large and small, right now. Despite our enthusiasm about growing the business through acquisition, I can assure you that we continue to be conservative both in terms of our pro forma assumptions and on the multiples that we are willing to pay. There are still a lot of sellers out there that have unrealistic price expectations; and that will certainly be a challenge for us as we move forward.

Our efforts to improve customer retention and growth for our 650 branches also seems to be paying off. We have growth in our customer accounts year-to-date, excluding the acquisitions that I mentioned. Of course the fourth quarter is typically a critical quarter for customer gains, so we're focused on maintaining our positive momentum.

We had made an investment this year in salespeople, sales managers, and local marketing programs. And we want to continue to see a return on those investments. Looking forward we will continue to leverage our competive advantages, our geographic coverage, our ability to integrate acquisitions, and our superior sales and marketing resources to grow our business. In addition, we will look for opportunities to introduce technology, new business practices to improve our productivity, and our customer service.

Before I turn the call back to Lon, let me take this opportunity to thank our employees. They had to work exceptionally had this year to deal with cold spikes, ice storms, tornados, hurricanes, and high propane prices. They reacted positively and professionally to all the changes in the organization that we just announced. I have heard it said that the only sustainable competitive advantage for any organization is the quality of its employees. I certainly feel fortunate to lead a highly dedicated and committed team of managers and employees who are responsible for the record results that we have had so far this year. Now Lon, let me turn it back to you.

Thank you, Gene. Let me leave you with the following thoughts as we end our prepared remarks, first and foremost we remain committed to achieving our longstanding financial goals of growing our EPS between 6 and 10 percent per year and increasing our dividend 3% a year. It is obvious to all of you that with our earnings per share in the 2.25, 2.30 area that we will once again exceed our targeted earnings growth this year. Contributing to our doing so has been the return to more normal winter weather nationally; and of course colder than normal winter weather in our utilities service territories. Given the contribution to earnings from that colder weather, achieving our EPS growth goal in an absolute sense is a real challenge for us. Yet we are committed as a management team to raising the bar for our performance.

Thus, expect us continue our efforts to not only grow each of our businesses internally and through acquisitions, but equally importantly to focus on productivity and efficiency; that is, running our businesses more effectively as we seek ways to deliver superior service to our customers. Our mindset remains to attack these issues even more vigorously in a good year.

We are presently in the preliminary phases of our budget cycle. Based on what I understand analyst covering us have estimates for next year that average about $2.30. Give what I have seen thus far in our budget process, I would guide you to raise those estimates to closer to 2.40 a share; give or take a little as always.

With respect to AmeriGas, I would preliminarily tell you that EBITDA of approximately 250 million next year give or take a little bit achievable. Of course both approximations envision relatively normal winter weather, which is critical to us. We have made a great deal of progress in our company over the past four years. That progress was continued during our fiscal 2003 year. That progress is reflected in that 2004 earnings estimate, which forecasts higher net income, notwithstanding colder than normal winter weather in our utilities last year.

The model that we have for our company, growing our businesses somewhat in excess of their industry growth rates, reducing excess cash flow, and reinvesting that excess cash flow for additional growth, while we at the same time return cash in the form of a handsome dividend to our owners, that model exemplifies a solid growth and income story. We believe that the growth and income model suits our businesses particularly well. We look forward to reporting more progress to you as we finish 2003 and navigate through 2004. That is the end of my comments. Let me turn it back to Bob Krick, who has got some closing issues.

No, I think at this point if we're finished with our prepared remarks, we can go to questions, Lisa.

(OPERATOR INSTRUCTIONS) David LaBonte of Smith Barney.

A couple questions for Eugene, specifically, about incentive comp, insurance expense, and bad debt expense. Could you put on a little bit more color just in terms of the magnitude of those expenses?

Yes, I can. If you are looking at the insurance, up about 4 million between the two categories. I think when you look at the bonus and the savings plan, that is probably about 3 million. I mentioned 3 million on the reorganization. I think that gets you to the 10.

Okay. PPX, it seemed like that was going to something. I think the USA was going to flat in the current quarter relative to last quarter; and it was down 3 percent on a volume basis. What did EBITDA look like?

EBITDA was down, I believe,about 4.6 last year. I don't have at my fingertips an EBITDA number for the quarter.

13.9 I think is what you gave for the last quarter.

For last year. I'm sure that is right. I just don't have that in front of me. But that sounds -- yes, you are right.

So the drop, the 4.6 decline is largely the reflection of greater expenses. What exactly?

Not as much as expenses really as -- margin and volume are the two pieces that hit the most. What is happening in PPX really is in large part a reflection of the OPD requirement that we talked a lot about last year. Where people have to replace their cylinders with a cylinder with safety device called an OPD -- prevention device. And last year in the quarter, the new regulation had just going into place. We had a lot of people who went to exchange locations in order to exchange those cylinders. And then the question was always, how many of those people would come back to us later, once they had a new cylinder? Or would they go back to the resellers that still represent about 70 percent of the gross cylinder market?

So we saw some reduction in customers that do that kind of an exchange. It is a very difficult thing for us to predict. Plus on the volume side as I mentioned we think part of that has to do with the amount of rain that we had on the East Coast. I forget how many weekends we went on the East Coast without having any dry weather; but it was quite a while.

43 out of 60 days it was wet.

It was amazing. And while I hate to think that we are in another business that has some weather sensitivity, it is a different kind of weather sensitivity than the rest of the business, certainly. The other thing that is happening on the margin side related -- to the valves are the prices we charge our customers went up considerably when we introduced the valves. Because, we had to recover the cost of that valve. As the number of valves that we are replacing drops, we're also bringing down our selling prices. And then on the other side, as I mentioned, the cost propane went up about 35 percent, which is exceptional for a summertime increase in the cost of propane. So there was a margins squeeze there that also affected the PPX results. On the expense side there wasn't a huge change in expenses. There was some increase, but not a huge one. It’s really the margin and the volume that drove that result.

When you say competitive pressure, did you just simply mean that people swapping back to their suppliers? Was that what you meant, when you said there were additional competitive pressures in the PPX business?

Really we are selling the cylinders to a Wal-Mart or a Home Depot or a CircleK; and they are of course always looking at us versus the competition, other people who can supply them with cylinders. So competition for us is the other players who are in the cylinder exchange business.

Okay. Sorry, just to go back to what you said before; $10 million was the breakdown of incentive, insurance comp, bad debt, and also the reorg?

Correct.

We’ll take the next question from Ron Londe, A.G. Edwards.

You look like, from what I could tell, your gross profit per gallon dropped to 62 cents versus 66. Can you give us a little insight into that? For the quarter.

Most of that is there is a combination of factors going on there. There were some-- if you look at last year's gross profit margins for our base for our retail business, they were unusually high. And I would attribute that to the fact that it was a warm year, and everybody in our industry was trying to stretched the margins a bit to make up for their lack of volume. Which is typically a practice in our industry. When we are doing our pricing, we're always looking at what the competition is doing we do a lot of price surveys. We had a lot of information to help us do that. And last year we had the latitude to push that a little bit higher than we typically would in a normal year.

So some of what you see he there is margins coming back to what I would consider to be a more normal level. Another part of that has to do with PPX. When you look at a whole year PPX doesn't have a huge impact; when you look at this quarter it has more significant impact on the margin. Then there is a mix issue that is going in there too, between our retail business and PPX.

Also there is a line item in the cost, in expense area of other income, $3 million. What does that reflect?

Martha, I think that is equity and that is a good guy. That is really increased asset sales, essentially, a little bit [better] late charges. Those two factors. But wwe havebracket sometimes people, unless you do the math, that is actually a good thing.

Yes, I know; that was an income item, not an expense. But I mean it is relatively significant versus the loss of 6.4 million. You had other income of 3 million. I guess that is what I was looking at.

We're on the same line, aren't we? You're talking about last year we had about 800,000 positive, wasn't it? This year it is 3 million positive.

Couple million dollars difference.

It is basically asset sales and late charges.

From a standpoint of maintenance CAPEX for next year, do you have kind of a ballpark number for that? For 2004?

Something in the range of 21, 22 million. And I haven't looked very carefully at that, but that would be in the range.

And we are doing our preliminary budgets now. But that is as good a guess as any.

Okay, thank you.

(OPERATOR INSTRUCTIONS) Ryan McLean, Sigma Capital.

Just wanted to get back to PPX a bit. Gene did a good job of explaining what has been happening there, but I just want to be sure I understand. Volumes were down 3 percent year-over-year. Is that correct? Do you guys have any comment on what you're expecting in terms of volumes for the rest of the year and if possible going into next year in the cylinder exchange business?

I have not really looked at -- for the balance of this year we are expecting them to be somewhere in the range of what they have been. What they were last year in the fourth quarter. Most of the volume is May, June, and July. The addition of Active certainly helps for the volume for the balance of the year. We have picked up some stores that we're doing installations on right now. But we really haven't got a projection ready to share with anybody on what the volumes will be like for next year. With the retail business we wait until the end of the season, and then we assess that and make our projection for the following year. We have not really reached the end of the real cylinder season. So we haven't assessed that yet and come up with a projection.

Okay. Just to make a general conclusion, then, would it be fair to say that organically volumes for the rest of the year will be roughly flat? Is that the general?

Yes, I think so.

Thank you very much.

The other point there is that I made when I was talking about it, the EBITDA is down but the other effect of that valve change that I talked about is that we invest less money in capital. So the capital expenditures related to PPX are also coming down.

Right. Okay, makes sense. Thanks.

Phillip Salles of CS First Boston.

A question for Lon. I understand you're still in the planning process for '04; and appreciate your comments relative to the backdrop. But could you kind of give us some insights to your thinking towards that guidance? The higher number than consensus currently? How much of that is the recovery of the economy. How much of that is tied to running a more efficiently, better prices and operation?

Phil, our model is we expect improved contribution from each of the business unit and the expectation we have for each business is typically consistent with the kind of industry it has. So-- we aren’t expecting wild and crazy growth from Amerigas as you can tell given the number, and we are not expecting wild and crazy growth from the utilities. We did had the advantage year-over-year of a full year of TXU, the purchase in GASMARK, our enterprises business. We also have the increase ownership percentage and Conemaugh electric plant for a full year which would add to it. I tell you it is a combination of largely those accretive acquisitions we made. Plus rational growth from each of our units otherwise. The way we are structured if we get several cents growth out of our business unit and you look at the increase-in profitability we get out of the other two acquisition that add up to the kind of numbers we looking at. We are not banking on an economic recovery in any of our businesses and nor are we expecting to have great pricing power out there either.

Thanks, Lon. I appreciate that. The cash on hand at the end of the current quarter was describe at about 110 million. I believe that at] the end of the prior quarter it was something like 194 million. And I was just wondering if any of that was tied to the gas marketing? Any obligations relative to collateral? Or is that is part of the inflows and the outflows of the gas marketing?

The 194 is balance sheet cash, I think. It wasn't investable cash. There were some crossing things in there. Investable cash was probably close to 165 million; then you drop either way of that. And during the quarter we bought the Conemaugh interest for the 50 million that Tony said; so that brought it back from the $965 million level to more like the 110 we're looking at now; gave or take a little again.

Okay, thank you. One last question relative to, again, to UGI and the international holdings. Seem to be very weather sensitive, adding to the volatility to earnings and maybe not as performing as we would have hoped for. Just long-term strategies relative to the international operation. Will we see continued spending there? Is that a place where we could see some potential growth coming down the road? Or is that an area that you may consider at some point even existing?

I will cuddle with you a little bit. I think the international stuff is EPS positive and fairly substantially EPS positive when you look at Antargaz and FLAGA combined. The -- our expectation are that we would see some improvement over all in the EPS contribution from those businesses next year compared to this year. You are probably in a 20 cent kind of range, Tony, maybe? Combined. Twenty cents contribute which is a nice contribute to earnings.

We do have, and I agree with you that our businesses will be more weather sensitive. But if you think about diversification of weather risk, you're looking at European weather as opposed to U.S. weather; which only seem to move in lockstep when it is warm everywhere. But in theory, someplace ought to be cold, where someplace is warm, and vice versa. So we are overall pleased with the international stuff. That is not to say that all businesses at all times are humming along the way we would like. So that is why we continue to push them.

We are still looking at opportunities overseas. Measured opportunities consistent with our growth and income theme. If you see us do things overseas, it will be in areas where we can count on income largely and cash flow. And hopefully there'll also be a component that has a growth component; but that growth component or what one might higher risk component will have less capital and less of a percentage in anything we do. So it is still part of our core businesses that we think about. They are good contributors and we look forward to continued improved performance out of those things.

Thanks, Lon.

David Fleischer of Goldman Sachs.

A few separate questions. Couple slow ones first. Specific ones first. You did mention in your comments, Lon, or one of you mentioned on AmeriGas that you had better customer retention and actual growth in customer count. And Eugene said in the earlier comments that the commercial and industrial customer count was up even as your volumes were off there. I would love any perspective you can give us on what you have done on the customer side in terms of the numbers. And that is this year, of course; one year doesn't necessarily make a trend. But you've been talking about working at that and cutting down on the churn and a little perspective on that, as a first question, would be very helpful.

We have done a lot to try to address that it was major goal for us this year. As I mentioned we increased the number of people in our sales force; we changed some of the structure within our sales group; and increased the number of managers. We rolled out a number of new incentive programs tied to growth. So it has been a big focus for us. And it looks like the things that we have been doing differently this year are resulting in better results. I would say particularly in terms of account retention. That is where we have seen the biggest change year-over-year; we're doing a much better job retaining the customers.

We're also improving on the gain side, but most of our improvements have been on our retention side. I am reluctant to give you any kind of specific percentages. From what I have seen, everybody uses different methodology and a different basis when it comes to counting their customers. But I am pleased with the results there. They are somewhat better than we expected. We have set some tough goals for ourselves.

I would just encourage you that, as you seek [lets just] hopefully you can sustain it, to think about giving us numbers. Because clearly the cheapest acquisition you can make is by growing internally. And if you can grow your customers accounts by 1, 2, 3 percent as opposed to losing customers as many propane companies have in the past, that would be terrific and great for investors to know.

Second question, you told us back a few months ago, last quarter, that your bad debt provision or reserve, excuse me, had gone up I think $12 million; it was up about 3 or $4 million, about a third from the year earlier. Everyone is looking at that relative to the price of the product and whatnot. How are the actual losses doing there? And I'm wondering how that is tracking with the provision; and whether in fact you're being conservative here or whether you are seeing those losses up as well?

We aren't seeing an increase in the losses. In terms of the reserve we are up a couple of million from last year. However that is pretty much an online with the increase in the revenues that we have had. If you look at both the volume and the average selling prices, due to the higher cost of propane, when you take those together and you look at it, the reserve is pretty much in line with that. We have not significantly changed the way that we reserve for that. It is just the increase in the revenues that is causing some increase at the end of June. And I would say if anything we have seen less in the way of bankruptcies; we have seen less write-offs than we were seeing at this time last year.

Okay. And the third question, maybe this will be a really easy fast one to answer. But you have got some higher cost debt, and certainly each year or so that is coming due; and you're paying off a nice chunk of it with lower-cost debt. I am just wondering. Look at all these different issues and the various issues, in this market environment it pays to pay some penalties to refinance; what your opportunities are? And as you look at the whole package, what you think you might be able to do there on refinancing?

We have looked at that extensively, David. We have been paying off debt, as you point out, through a combination of some cash flows, some refinancing [and some equity] We aren't satisfied with our balance sheet and have a process/program/goal in place to improve our credit ratings over time. We are making good progress on it, as you point out. We do have a lot of high-cost debt. Unfortunately that high-cost debt comes with Treasury make-wholes, and so it becomes very expensive to refinance in advance. And even though you guys are not allowed to talk to talk to investment bankers, we talk to them all the time for clever ideas to try to refinance that. And no one has come up with anything that is too helpful. One of the things that we have had in recent years is a program to lockup Treasury rates in the market, where -- looking at several years for our maturities, our treasury group has done an absolutely outstanding job of identifying good points in the market to take some Treasury positions, so that we can reduce the cash outflow when debt matures.

Actually, Lon, if we pass the investment bankers on the street, we are allowed to smile and wave to them and say hello.

Only if the lawyer says okay, David.

One final question. I would love, given your overall guidance here for next year's higher EBITDA, just to get some details there in terms of margin and volumes and flat margin, and [flat funds] eventually? Or is it somewhat better than that? With PPX doing better? Or what would be the mix of all that that you're expecting?

I think that the shape of the curve very preliminarily is, as we say we grew customer count; so probably some modest volume improvement. We are not a big believer that margins can grow a whole lot from here. So there is probably some very modest assumptions on margin growth going forward. I think longer-term our theory is that you ought to be able to recover some or all of inflationary increases in margins; at least your operating increase in inflation in margins. Which would not correspond to increasing your margins with inflation, but we see some very modest, perhaps, margin benefit. Keeping operating expenses under a tight control; and you roll those all out with maybe some other gross profit, some PPX contribution, and you sort of get the improvement we're looking at.

So you don't have any particular concerns then, that given a couple of years of better profits in the propane industry, including some of the mom-and-pops who have in the past made it more difficult in competing for customers, that they come back and give you margin competition there? Or you think that your controls and [better] situation will enable you to keep margins even if that competition does return?

Everyone around here jokes that I am paranoids, butI keep telling them even paranoids have real enemies. And sure I am worried about margins. I think Gene and his group are worried about margins always. In the environment in which we are in, where propane cost is fairly high and assessing what Gene tells me about the composition, where there are our pockets from time to time in some places across the country where there is tough competition on price. But by enlarge a lot of folks are trying to run their businesses and provide better service.

They are also facing hirer expenses in insurance, and medical insurance, and a whole bunch of things. And so our sense is they have got their hands full on expenses. They have got the same volume issues that Gene mentioned, with less volume per customer coming out of the system. And given all of those factors, I think Gene said it best. We are fairly sanguine about not a whole lot of margin decrease pressure; but we watch it very carefully, and we're not going to lose market share. But on the other hand we have got a great supply group, who keep us well supplied and at competitive prices. So we feel pretty good about it at this point.

Your guidance for next year, the 2.50 EBITDA does not include any acquisitions or does it include a certain amount of acquisitions?

It probably has a built-in assumption of some modest acquisitions in there. I think we always do that in our numbers.

Okay, thank you very much.

Joanne Fairechio, Salomon Smith Barney.

In your news release you made reference to greater litigation-related costs at the gas utility. I was just wondering, was that related to anything specific?

Yes, that is marginally related to some environmental litigation. We always budget for some of that, and some more of it came through this time.

So that is more or less an ongoing type of cost.

Not at that level, not at that level. It is an ongoing expense that we budget for every year, and some years we do better than budget on it, and some years we do worse than budget on it.

Okay, thank you.

(OPERATOR INSTRUCTIONS) Mr. Krick, it appears there are no further questions at this time. I will turn the conference back over to you for any additional or closing remarks.

I will just close and thank everybody for their attention at this time. We appreciate all of your support. And Bob Krick has yet another warning for all of you, I believe, so let me turn it over to Bob.

Just a reminder that as we close today, the forward-looking statement related to non-GAAP financial information that was discussed on this call is available at the Investor Relations section of our website at www. amergas.com. Thank you all.

That does conclude today's conference. We would like to thank you all for your participation and have a great day.