UGI Corp (UGI) 2004 Q1 法說會逐字稿

Good day everyone and welcome to this UGI AmeriGas first-quarter 2004 earnings conference call. Today's call is being recorded. For opening remarks and introductions I would like to turn the conference over to Mr. Robert Krick, Vice President and Treasurer of UGI Corporation and AmeriGas Partners. Mr. Krick, please go ahead, sir.

Thank you, and good afternoon and thank you all for joining us. As we begin today let me remind you that our comments will contain certain forward-looking statements which the management of UGI AmeriGas and their subsidiaries believe to be reasonable as of today's date only. Actual results may 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 annual reports 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, political, legislative and regulatory changes, currency exchange rates and the timing of the completion of our proposed acquisition of the remaining interest in Antargaz. UGI AmeriGas undertake no obligation to release revisions to these forward-looking statements to reflect events or circumstances occurring after today. And now I would like to introduce your host, Chairman and CEO of UGI, Lon Greenberg.

Thank you, Bob. Let me also welcome everyone to our call. I trust you all had the opportunity to review our press releases today reporting our first-quarter results and our press release yesterday, stating our intention to increase our dividend by nearly 10 percent to an annualized rate of $1.25 following the close of the proposed Antargaz purchase and effective with the July dividend payment. I believe it is fair to say that the information contained in all of our press releases tangibly demonstrates not only the continued progress we are making at both UGI and AmeriGas, but also our firm commitment to deliver superior long-term shareholder value. We have shown by our actions that UGI is truly a balanced growth and income investment for our shareholders.

We are pleased to have reported higher earnings notwithstanding weather which was considerably warmer than normal during the quarter. I want to point out that our earnings demonstrate our ability to deliver good returns on our various investments we've made over the past several years, as well as our ability to execute effectively in all of our business units. We are obviously excited about our performance and our prospects, particularly given the recent developments relating to the proposed Antargaz transaction and our dividend actions. However, before I get too far ahead of myself I would like to turn the meeting over to Tony Mendicino for a review of our first-quarter results. Tony will turn the meeting over to Gene to comment further on AmeriGas' performance and when Gene is done, I'll conclude the conference with a few closing remarks.

Thank you, Lon. We are all very happy with our results for the quarter. Beating last year's EPS by two cents in the face of weather that was 9 percent warmer than last year nationally and 9.5 percent warmer than last year in our Gas Utility service territory is quite an accomplishment. Our two largest earners, AmeriGas and gas utility operations performed very well with these much warmer weather patterns. A key to the quarter was an increased earnings contribution from our expanded electric generation assets and our International Propane investments FLAGA and Antargaz.

Let's look at some of the operating and financial details of our business groups. AmeriGas, despite weather that was 7.4 percent warmer than normal and 9 percent warmer than last year saw EBITDA improve by 4 percent to $85 million from $81 million last year. Retail gallons sold was down approximately 6 percent as the negative impact of warmer weather is partially offset by volumes from acquisitions and customer growth. Unit margins were higher than last year. Operating expenses were up about 2 percent as increased costs from acquisitions were nearly offset by the expense savings from last year's reorganization.

AmeriGas' operating income contribution in UGI was $65.6 million compared to $64.2 million for the first quarter of fiscal year '03. Gene will have more to say about AmeriGas' performance in his comments. Operating income in our utility operations was 33.9 million compared to $39.1 million for the same period last year. Operating income and gas operations declined 4.1 million to $29.4 million on weather that was 3.8 percent warmer than normal and 9.5 percent warmer than last year. Throughput was essentially flat quarter-to-quarter at 23.3 Bcf.

Increased sales for large firm customers offset weather-related reduced volumes to residential and small firm customers. As a result of this change of mix, unit and total gross margins declined. Operating expenses increased $1.7 million. Additions to our core heating customer base exceeds those of last year; we added about 3400 residential heating customers in the quarter compared to 2700 added last year.

Operating income and electric operations was $4.5 million, down $1.1 million compared to last year. Gross margin for the quarter declined by approximately $600,000 compared to the same quarter last year as a result of lower unit margins and a small decrease in kilowatt hours sold due to the warmer weather. Operating expenses increased by $400,000 because of increased long-term compensation accruals and storm damage expense.

Moving on to our other operations, as you'll note in our press release, we transferred our generating assets into energy services in 2003. For comparability we have included generation and energy services for both this year and last year. Energy services now includes both GASMARK and electric generation. Operating income and energy services increased $2.4 million as the increased operating income electric generation due to the purchase of 4.9 percent of (indiscernible)in 2003 offset a decline in operating income in GASMARK. Operating income and electric generation was $3.4 million compared to $600,000 last year on increased megawatt hours sold due to the (indiscernible) acquisition and high unit margins. In GASMARK operating income declined to $2.9 million from 2.2 million last year.

While total volumes sold increased due to the TXU acquisition in GASMARK lower unit margins and higher operating expenses combined to produce the decline in income. Unit margins were lower primarily as a result of a higher percentage of fixed-price contracts this quarter, and a larger standard deviation in the forward monthly delivered cost of natural gas when the contracts were entered. Under these fixed-price contracts while the unit margin and the total margin to be earned over the life of the contract are fixed at the time the contracts are signed, the timing of margin recognition as defined under GAAP rules result in unit margin moving from the high product cost months, generally our first and second quarters, to the low product cost months, generally our third and fourth quarters.

Operating expenses in GASMARK increased primarily due to the TXU acquisition. In International Propane both FLAGA and Antargaz enjoyed improved net income. Net income for FLAGA was $700,000 for the current quarter compared to a loss of $300,000 for the same quarter last year. FLAGA volumes were flat to last year on weather that was essentially normal in both periods. Higher unit margins and lower operating expenses combined to produce the increase in net income.

The net income contribution from Antargaz was $4 million compared to $1.6 million last year. Gross profit for the quarter exceeded last year as increased sales the high unit margin residential heat customers offset reduced gross profit from low unit margin large bulk customers. Residential heat volumes increased as a function of weather that while warmer than normal was 16 percent colder than last year. Large bulk sales were down primarily due to the reduced demand in crop drying applications as a result of the heat wave experienced in Europe this past summer.

Moving now to our balance sheet, AmeriGas finished the quarter with approximately $36 million of revolver debt and $935 million of net debt. Net debt is $24 million lower than it was at the end of the December quarter in fiscal year '03. On a consolidated basis UGI's net debt on December 31 was $1.16 billion, down 32 million from the same time last year. At calendar year end UGI had $131 million of investable cash on its balance sheet. Following the use of the 100 million of this balance and the Antargaz purchase we expect to have $40 million of investable cash on our balance sheet in April.

At this point I will turn it back to Gene who will talk about AmeriGas' results in expanded fashion.

Thanks, Tony. It's hard to believe with the weather we are having right now, but the first quarter was actually quite warm. According to the National Weather Service the quarter ended December was the 11th warmest fall quarter in 109 years with. With weather that was 9 percent warmer than last year I am pleased that we are reporting earnings per unit of 81 cents basically flat with last year. Our solid results for the quarter reflect the benefits of the acquisitions that we've made since last year and the reorganization that we announced last July, along with careful management of margins and expenses.

Volume for the quarter was down about 6 percent due to the impact of the warmer weather and continuing weakness in our non-residential sectors, offset in part by our acquisitions of Horizon in October and Active Propane in May of last year. Operating expenses were up just 2.8 million, due entirely to the acquisitions I mentioned. In fact, expenses excluding these acquisitions were actually down modestly, evidence that we are delivering on the savings we projected from the reorganization completed last year.

In addition to the operating expense benefits, I am pleased to say that as expected, the reorganization has improved our effectiveness in decision-making and in execution. One of our biggest challenges this year has been the high cost of propane. Last year at this time I complained to you that the price of propane in Mount Bellevue was 67 cents a gallon compared to about 29 cents a gallon in January of 2002. This year the prices have been even higher, averaging in the mid '70s for the last week or so. For the quarter the average price at Mount Bellevue was 58 cents compared to 49 cents last year, an increase of 18 percent.

Our supply department has done a capable job of managing our costs in this dynamic environment and helping us to stay competitive. Still we are concerned about the significant increase in selling prices because in the past high prices have led to customer conservation and more customer churning in the spring. As you know, customer growth has been a high priority for us in recent years, and we have aggressive plans in place to retain our customers coming out of the season and to gain more than our share of customers that are looking for a new propane supplier. We are pursuing a number of initiatives to help us achieve our customer service vision of being the most reliable, the safest and most responsive propane company in each of the markets we serve.

We can also report progress in our core strategies in the first quarter, most significant was our acquisition of Horizon in October. As I mentioned in the last call, we are continuing to run Horizon as a separate operation to the winter, and then we will integrate the overlapping district locations in the spring to improve our efficiency. However, I am pleased to report that we are beating our acquisition projections, and we're confident that we will be able to generate the income from Horizon that we expected.

We also continue to leverage our geographic coverage to grow our business through strategic accounts and CPX. Our strategic accounts volume was up 5 percent over the same quarter last year and we've added a number of customers to the business that will push up volumes going forward. This quarter is not very significant for PPX because most of the sonar exchange volume is sold in May, June or July, but I can tell you that volume and EBITDA were about flat with last year. Our store count however is up to 20,350, so we are expecting an increase in EBITDA in cash flow from PPX for the year. At the local level we continue to pursue customer retention and growth in our traditional customer base with the support of our national sales and marketing staff.

Now let me say a few words about the current quarter and the rest of the year. We are delighted that degree days for the first three weeks of January have been about 7 percent above normal and the weather forecast for the next few weeks are encouraging. The increase in demand, however, is placing considerable pressure on the propane distribution network in some parts of the country, particularly here in the Northeast and in the Northwest. Fortunately there is still plenty of propane available. Inventories are at 37 million barrels, which is the lower end of average for this time of year. The trick of course is to get that propane to the markets that have the demand. AmeriGas' extensive logistical network, our rail cars transport to terminals as well as our strong relationships with suppliers, are real advantages when we get this kind of demand. And they allow us to be a more reliable supplier to our customers.

I am also grateful for the way our employees are responding to the challenge of taking care of our customers in spite of the increased demand and the snow and ice that are making deliveries of propane especially challenging right now. We are continuing the careful management of margins and expenses that resulted in the successful first quarter, and we will continue to pursue our strategy of growing the business organically through a strong local focus on customer retention and growth along with our national focus on PPX and strategic accounts.

We are also pursuing acquisitions of both large and small marketers to the extent we can buy them at reasonable multiples. I would like to finish by thanking our employees who are responsible for our success in the last quarter. They consistently provide excellent service to our customers despite high propane prices, spikes in demand, more challenging road conditions. I view their dedication and professionalism as a key competitive advantage for AmeriGas. Lon, let me turn it back to you.

Thanks, Gene. I would like to leave you with the following thoughts as we end our presentation. Regarding our earnings outlook for fiscal year 2004, our first-quarter earnings were a bit better than I expected, but not enough so that I would have you revise estimates. Obviously the return of colder weather in January is helpful to us, but I remind you that there remains a lot of winter weather yet to be experienced. As you know, cold weather brings many challenges with it, including high volatile commodity costs, logistical challenges and higher customer bills. In this kind of environment we are on the lookout for signs of potential increases in maintenance expense or higher bad debt expense, as well.

Our employees and all business units have done an outstanding job of managing the many challenges that come with colder weather, and I'm confident that they will continue to do so. I previously issued guidance of about $2.40 a share for UGI and approximately $250 million of EBITDA for AmeriGas. I want to reiterate the AmeriGas guidance and modify the UGI guidance to about $2.10 a share to reflect the effect of the Antargaz transaction. As we recently told you in this stub year and a seasonal business given the timing of closing of that transaction we expect to have approximately 20 to 30 cents of dilution and I'm taking the higher end of the range just for the sake of being careful in this process.

I have not included the effects of any onetime gain or loss we might experience in our second quarter as a result of fixing the euro based purchase price of Antargaz in terms of dollars. I want to remind you of what Tony noted, as well, regarding the earnings of UGI Enterprises GASMARK business for the remainder of this year. We do anticipate lower earnings from GASMARK for our second fiscal quarter, and thereafter higher earnings due to the margin recognition timing issue that Tony mentioned. For the full year our expectations are for improved contributions from GASMARK. That remains unchanged.

More importantly, we remain optimistic and confident about the outlook for our future. Of course that confidence is reflected in the actions of our Board with regard to the increase in the dividend that we mentioned. That increase is due to the closing of the proposed Antargaz transaction, and of course will be effective following that close and we anticipate that to be included in the July dividend that our shareholders received. Once again, I want to reiterate the benefits of the Antargaz transaction to us as we really look forward to Antargaz being part of the family of our various businesses. We believe that transaction will add approximately 20 cents a share in earnings in our fiscal year 2005. We also expect Antargaz to have the capacity to contribute significant cash to UGI.

Of course, you all know that the cash at UGI is available for new investment opportunities, for share repurchases and/or for dividend increases to our shareholders. I frankly couldn't be happier about the benefits of the Antargaz transaction and what that will do for our company. By announcing the dividend increase of nearly 10 percent following completion of that transaction, our Board has tangibly shared those benefits with you, our shareholders. We remain fully committed to our earnings and dividend objectives for the long-term. They are to grow our earnings per share between 6 to 10 percent annually and for us to increase the dividend on our common stock 3 percent annually. I might add that with regard to our dividend, we are now narrowing our focus on a payout ratio to about between 40 and 60 percent of earnings from our prior payout ratio that we focused on.

Of course, with the completion of Antargaz, we expect to exceed our earnings target next year, and with the dividend increase announcements that we just made we will obviously have a greater than 3 percent increase in the dividend should the Antargaz transaction close. As we look forward we are focusing on two things. First and foremost, executing effectively in all of our business units and secondly, seeking out new opportunistic investment opportunities for the future. Of course, as I noted earlier, the cash we generate helps us significantly as we pursue investment opportunities.

I want to end by mentioning two things. I would be remiss if I did not acknowledge the very significant contribution to UGI that Bob Chaney has made during his many years with this company. His leadership of our utility businesses has been absolutely outstanding, and he will be missed when he does retire sometime during the summer of this year. I also want to thank all of you for your support of us, and I want to reiterate our goal of producing long-term superior increases in shareholder value for our owners. With that, that is the end of our prepared remarks, and we will be happy to open it up for questions.

(OPERATOR INSTRUCTIONS) David Schanzer with Janney Montgomery Scott.

Congratulations on the dividend increase and the good quarter. Two questions, yesterday at the American Gas Association lunch in New York there was a kind of a brief discussion of weather and it was pointed out that weather in the northeastern part of the United States has been about 25 to 35 percent colder than normal. And I guess that bodes well for the LDC, but they also mentioned that on a national basis overall the weather has been slightly warmer than normal, and I was wondering if that has been something observable with the propane operation.

As Gene mentioned, Dave, weather was nearly 9 percent warmer nationally in the December quarter. January started quite warm, and then we had a state of nearly three weeks now of quite chilly weather nationally. I still think it is about 4 percent warmer than normal even after taking into account the nice cold weather that we've experienced here, and we've always said that we can manage our businesses with weather that approximates normal. If we get weather that is 2, 3 percent warmer than normal I would expect us to be able to overcome that through management, good management.

Great. And kind of following the discussion that we started when you announced acquisition of Antargaz, I was wondering if you could give us a little more color -- you mentioned FLAGA with a little detail. I was wondering could you give us more color as to what Antargaz did in the quarter? And whether there is any initiatives you know of going forward to talk about.

Tony mentioned the contribution from Antargaz compared to last year. And it was significantly higher I think in the press release where we cite that number -- let me pull that out a second, Dave. They are doing an absolutely excellent job -- Antargaz was 4 million contribution for our 20 percent interest compared to 1.6 million last year and as Tony pointed out, they had the benefit of colder weather compared to last year, although the weather was still warmer than normal for them. I think all European based, actually all world non-U.S. dollar-based economies are benefiting from having a weak dollar price of oil that is paid for in dollars and so the effective oil prices propane prices that we're seeing in Europe are considerably lower than they experienced last year, with a weaker dollar and with higher propane prices in total.

So they've had a benefit of being able to have more stable prices to their customers probably at a somewhat lower level than the prior year, and they are very good, the management of Antargaz is very good at managing their expenses quite carefully. We have a lot of confidence in that management, Dave. They have done an outstanding job. They have indicated that they intend to stay with us and as I said on the prior call, I think we can expect excellent results from Antargaz going forward as we complete that transaction.

What about customer growth, has there been any changes since the increase in ownership?

In Antargaz?

Yes.

We have not quite increased it yet, and we haven't had them a long enough time that the announcement of the transaction to cause any negative reaction or positive reaction for that matter in the marketplace. Our sense is in the French marketplace it will be a nonevent. There is really only one French owned propane distribution company in France at the four majors, two of the others are effectively Dutch companies. And then there's us after we close this transaction. So we don't think the change in ownership from a market standpoint is a big change, and I remind you that that market resembles the U.S. market; it is a mature market, we would classify it as an income market as opposed to a growth market.

Okay, thanks.

(OPERATOR INSTRUCTIONS) Nancy Doyle with MetLife.

Could you talk about your international investment plans, you have some I guess investments in emerging markets and you intend to increase those? I am talking about Brazil, China what are your plans there?

Let me go through that. That's a good question, and we tried to give some indication of how we think about it. We are very mindful of the fact that we are a balanced growth and income vehicle. So when we look at our international expansion we try to classify our markets and structure our growth around the fact that we need mature market entities as well as high-growth entities in order to support our overall objectives. And if you looked at the balance of where we are, Austria is more of a stable mature market, Czech Republic is perhaps a higher growth market, Slovakia a higher growth market, certainly China is a higher growth market. France, as I indicated, is a more mature market. And by and large we get most of our position is in the mature income market as opposed to the higher growth. But we do want to pursue opportunities that are balanced for us to expand internationally in Eastern Europe with a primary focus in Europe as a whole. But I don't think you will see us in South America, for example, expanding in that area. We are trying to take a targeted approach and an approach consistent with the scale of the company in our ability to manage it.

And those will be done using local expertise?

Yes, we used kind of a -- one of the things that we have really focused on as a company is and the management team is "know what you know, and know what you don't know." The propane distribution business is something we feel like we have a lot of intellectual capital in, particularly given the international expansion we have had to date. And we believe that we can add value in that business. On the other hand, we know that we don't know the local culture morays of the various countries, and so we always make sure that we have a strong local country presence and that local country presence can come from a joint venture partner, it can come from a local Board of Directors, it can come from a strong local management team.

And if you look at our structure now, in Austria we have an Austrian who is running that business, and we have a U.S. CFO in that business. The French business we have been associated with for three years and they have an outstanding management team who we have a tremendous amount of confidence in. And in China we actually had a U.S. expatriate running that business, as well. And so it is a balance for us, but rest assured we know what we do not know, and we make sure we get that expertise when we don't know it.

Okay, and then you mentioned the possibility of getting more cash out of Antargaz while the Company historically has not paid dividends. How do you see it simply becoming cash flow, cash flowing?

They have the opportunity to pay half their net income in dividends, and as you probably know, the current majority owner is a private equity entity, PAI Partners who again we can't say enough good about. They have done an outstanding job as have the contributions from our Italian partner, Medit, and it's been very helpful to that organization. As most private equity entities they are ROI driven, and there are tax issues that make it advantageous for them to take money out in the form of capital instead of in the form of dividends, one. And secondly, there have been some restrictions previously on the ability of Antargaz to pay debt as pay dividends because of the refinancing of Antargaz, which has occurred prior to this time. We expect Antargaz to generate, I think I said 40 million of excess cash flow for Antargaz. And that money will be used to make sure Antargaz's balance sheet is properly situated.

Secondly, it will be used to support any extra growth opportunities for Antargaz itself to support that business. And lastly, if it truly is cash flow that is not necessary in that business, we do not think there is any point in leaving it in Antargaz; it could be used back here at UGI to support other opportunities. And we do not believe at the end of the day we will have restrictions and credit documents that preclude us from taking that cash.

One last question the FLAGA debt that contains put options if ratings get downgraded, do you have any plans to refinance that or remove those triggers?

FLAGA right now that debt to cap ratio is kind of 80, 75 percent debt, its not a full put. It is a $10 million cash at FLAGA -- rating changes at FLAGA. We have to put up $10 million in cash if the ratings get downgraded, right? At UGI utilities incidentally, and it's a $10 million issue for us to put up some cash balances. And so again, we have enough cash at UGI to pay that debt down to the point where it's not an issue. Again, it was a question of financing, FLAGA in a fashion which gave us currency protection at the time we did it, we had better uses for the cash at the time than putting it in FLAGA, interest rates overseas were quite attractive for us. We had converted a year or two ago some of that debt from Euro based into dollar based debt. We are very comfortable with FLAGA's cap structure, and our goal over the next several years is to contribute a little bit of cash to FLAGA each year and get that debt to cap ratio down to 60 percent debt or so.

Thank you very much.

Yves Siegel with Wachovia.

I have two questions, if I could. The first is on the propane side. What is the strategy in terms of adding new customers? I presume it is a marketshare grab, and how do you execute that?

Let me try a shot at that and then I will turn it over to Gene to correct all the mis-statements I make. If you look at marketshare growth in the propane distribution business the government has come out with some statistics that show about 2 percent growth over the decade of 1990 to 2000 in residential uses of propane. And I think what you find is that the majors in this industry have ceded marketshare to the small players, and I don't think that we are expecting all of a sudden to say we are going to grow 4 percent and we are going to take marketshare from all of the other players. What we are saying is there is no point in our ceding marketshare and that maintaining our marketshare through internal growth and then growing on top of that through special programs that we have like a PBX or national accounts or acquisitions, will improve our overall share in this industry. But we are not expecting in what I would call our base propane business to take marketshare at a rate in excess of the growth of the market.

Okay. And if I could just follow up with the thought on acquisitions, domestically A) what type of assets are you taking about? And B) you haven't done this in the past, but -- forgive me for asking the question -- what about the thought of buying qualifying MLPS at AmeriGas other than propane?

Again, both good questions. No need to apologize for those. Those are good questions. On the UGI side, I think what you would expect us to do is consistent with what we call our vision for the company where we are a distributor and marketer of energy products and services, and we are looking for assets that fall into those categories that capitalize on intellectual capital that we have, that is the intellectual capital we have in each of our businesses, as well as leveraging off our asset-based in all of our businesses. So I would tell you if we saw some assets, gas marketing assets as we've done in the past that are in our sphere of influence, we would certainly go after those. If we saw even some storage assets in our sphere of influence, our midstream assets in our sphere of influence we would look seriously at those, as well as the UGI level. And again, it's a real focus on energy distribution and marketing and related products and services. And I think you would find it to be very consistent there but you would find us to be, as we have demonstrated, a value buyer in those things.

We have not really stretched ourselves to buy assets because there is no way to recover from a bad transaction, we find. On the other hand, in the propane side we have focused solely on domestic distribution of propane. That business, as you know (indiscernible) some appliance sales to some related things in that business service work etc. We haven't really faced the strategic issue of putting other qualifying assets in there primarily because the midstream assets that you would like to put in there are very, very competitive and expensive to get. And so the focus I think for AmeriGas has been and is likely to remain propane distribution. And UGI will have a broader sphere, if you will as we look at things.

That's great. Thanks a lot.

David Fleischer with Cain Anderson (ph).

I guess I want to go to a margin question at this point. You did a good job this last quarter despite a difficult market, maybe in part because, I don't know. But I wanted to ask where you are now with the higher prices you are seeing, the price that you talked about in your earlier comments and what your confidence to hold margins at this level, or should we see a bit of a trade-off there on the margin side. And second part of that question, playing off of what Eve was just asking about where you indicated that the majors had ceded some marketshare to the small boys. I am just -- as I hear you talking about wanting to get your share of the growth, just wanted to hear your comments once again on the trade-off for margin, because you can always get growth with the right price, but I think a lot of us would rather have you maintain those margins.

If you recall -- I'm going to let Gene answer this because this is up his alley, but when I first took over UGI AmeriGas, got to be '96 or so, David, we did grow nicely that year. But your point on the effect on margin of doing that growth was borne out by our experience at the time, and I think Gene and his management team fortunately are in that position because they do a better job at it than I do -- I did, I should say. So I'm going to let him answer the question first on overall margin levels, where we are, what his prospects are, and then turn it to the growth side.

David, on the margins you're right, we did have some margin expansion for the quarter. That often happens when we have this kind of wholesale cost volatility that we had last quarter, due to favorable agreements that we'd gotten with our suppliers and our efforts to mitigate price volatility. However, we also closely monitor our competitive position, and I can tell you we feel we are in about the same competitive position on pricing as we were in the first quarter of last year.

However, looking forward getting to your question about the future, I wouldn't assume that the higher margins would continue. I would, in fact, expect them to be more in line with last year for the balance of the year. Assuming we don't continue to see a lot of volatility in the wholesale cost, I think you will see margins very comparable to last year.

On the growth side, there is always that balance between margin and growth. We monitor it very closely. We want to maintain our share and then grow through PPX and strategic accounts as Lon said earlier. So we do watch that closely, and there is a real cycle to it. We gain a lot of customers in the fall. The trick is to retain all those customers when you come out of the season and then to start with good gains when you get towards September again. And so we've got some work ahead of us on the growth side this year because of the high prices that people have seen, and in years like that when the prices are high, even though competitively we are in the same position we were before, we have to work a little bit harder.

Our focus has been on making sure that we have service that retains our customers and attracts new customers. And in the last customer survey that we did, we were pleased with the results. About 90 percent of our customers said that they were satisfied or very satisfied, which we think is quite a high score. Even so, we established a customer service goal of being the most reliable and the safest and most responsive propane company in every market we serve. We're taking it very seriously and we've defined projects in each of those areas in order to improve our service above where it is today. And ultimately, being competitive on price and then having a higher level of service we think will cause us to have the success we want with customer growth.

Okay, thank you.

(OPERATOR INSTRUCTIONS) Eric Mark (ph) with Goldman Sachs.

Just want to ask a couple housekeeping questions, could you repeat on the balance sheet for AmeriGas what your cash and net long-term debt positions were as well as the revolver? And then also had a question on what was the working capital swing in the December quarter as it is usually historically quite large?

Let me have Gene or Tony respond to that.

Revolver balance at AmeriGas on December 31st was $36 million, and their net debt at that point in time was $935 million.

Is that long-term, or is that just net debt total?

It is long-term revolver net of cash.

Okay, what is your debt for current maturities?

60 million.

About $60 million, principally the first mortgage note is due in April.

Okay and then also just finally what was the working capital swing in the quarter?

We're looking that up as we go. As soon as we get that we will make sure we repeat it and respond to somebody else's question.

Great. Thank you.

(indiscernible) Green with Boston American.

I also have a clarification question on the dividend payout ratio for UGI. Could you bring us up-to-date on what you felt historically it was and if you are paying 28.5 cents the current quarter, I know it is a little bit seasonal business here and then explain the seasonality of the business, too.

Sure. The first thing to understand is sort of fiscal year for us, we begin it October first, so we get an entire winter heating season in our fiscal year. And we are predominately a winter season peaking Company for earnings. And so just take for example, what we expected in terms of earnings for the year prior to Antargaz about $2.40 a share. Virtually all that is earned in the winter years and we get back some in losses and certainly the summer time period. And the third quarter for us can be modest loss, kind of push kind of quarter. So virtually all the earnings are made during the wintertime, and we previously if we go back a little bit of history four years or so ago had a payout ratio that was for too many years in excess of our dividend. We were pushing 110, 120 percent four, five years ago.

We set out a goal to have a payout ratio between 50 and 75 percent. And because of the outstanding performance we've had of earnings growing at pretty close to a 25 percent compounded rate over five years and our dividend increases only being 3 percent, and I say only in the context of our earnings, not in the context of the market because that is a high a dividend increase rate for the market. We have taken ourselves to a payout ratio below 50 percent, and it's something that our Board has watched very carefully because we position ourselves as a balance between growth and income.

And it's a pleasure I must say to address that issue, how low will you let your payout ratio go, and so I wanted to give clarification since we were already below the existing payout ratio goal of 50 to 75 percent. I wanted to clarify that for people and put out a kind of 40 to 60 percent payout ratio idea and certainly in warmer years we'll be closer to the high end of that. And in normal years we would be hopefully in the middle to lower end of that. And we will continue to watch that payout ratio to make sure it is appropriate given the balance of our businesses, our growth opportunities and our acknowledged reliance on income as an important factor in the total return to our shareholders.

Just a follow-up question. Assuming that the company continues a secular trend of higher earnings growth, then what your stated goal is 6 to 10, that payout ratio is obviously going to drift lower given some seasonality or yearly weather-related issues. Does that mean that we could expect if you do that a little bit higher dividend growth than three percent?

I will tell you that one of the reasons we feel very comfortable with a 10 percent increase in the dividend following the completion of the Antargaz transaction is that very point you are making now, which is we were drifting to the low-end of our range and what we expect it to be in the future. And so the Board acted to give a fix to that and a onetime fix as opposed to a permanent 5 percent for example increase in the dividend announced. Our assessment is that we are comfortable with the 3 percent. We have a five-year track record of excellent performance. We are confident about the future, and the onetime fixed at least for the near-term seems to be appropriate and seems to be the right thing to do for shareholders rather than announcing a long-term secular change in the dividend rate of increase.

Congratulations. You have one of the few stocks up today after the Federal Reserve lowered the boom on continuously low interest rates.

Exactly. Thank you very much. We are in it for long-term shareholder value but we will take every day that is up, we know it's a good day. Are you satisfied yet on that working capital number?

53 million.

Answer to the question Eric had on working capital, it's about a $50 million, give or take a little change in working capital. We are ready for more questions if there are.

Julie Clark (ph) with Credit Suisse First Boston.

Could you repeat the cash number and the revolver balance? I'm sorry I did not get that.

The revolver balance 36 million and the cash was 27 million.

Okay, and also could you discuss a little bit where or directionally operating and maintenance costs should go this year in light of plans to manage Horizon separately for the winter season? Relative to last year?

The question on AmeriGas?

Are you talking about maintenance capital?

No, I am talking about O&M. Expense.

Operating expenses?

Yes.

The operating expense savings that we expect to get from Horizon will really get next fiscal year. We will see a lot of that -- we will be consolidating the operations through the summer, but we will see most of that benefit in next year's results.

I think part of the question was do you have a view as to what your operating expenses should look like year-over-year looking toward 2004? The rest of this year would you expect operating expenses to approximate last year's? Could they be 5 percent higher, 2 percent higher or do you have a view that you want to give the market on that?

Well, the operating expenses will benefit from the reorganization, but most of that will be offset, will be more than offset by the effect of the acquisition that we made. So they are going to be modestly higher similar to what you've seen in the first quarter a modest --.

Incremental year-over-year.

Right. Two to three percent, something like what you're seeing in the first quarter.

That would be subject of course to my admonition on cold weather does bring out issues of extra maintenance expense, does bring out issues of sometimes bad debt expense etc. So I would take Gene's comments in conjunction with that admonition.

On the next part of my question regarding maintenance CAPEX, is the first quarters maintenance sort of a good run rate for the year?

I would expect our maintenance capital for the year to be very similar to what it was last year in the range of about 22 to 24 million. That is what I am expecting.

About six or so a quarter?

Correct.

Okay, great. Thank you.

There are no further questions. I will turn the call back over to you.

Thank you very much. We appreciate everybody's attention and support. Again, we are optimistic and confident about our future and look forward to our next opportunity to address all of you with hopefully some good news on that call, as well. Thank you all very much and hope to speak to you soon. Bye-bye.

This does conclude today's conference. I would like to thank everyone for joining us today.