UGI Corp (UGI) 2004 Q2 法說會逐字稿

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

Thank you Shannon. Good afternoon. And thank you for joining us. As we begin, let me remind you that our comments today 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, currency exchange rates, political, economic, legislative, and regulatory changes in the U.S. and abroad. UGI and AmeriGas undertake no obligation to release revisions of these forward-looking statements to reflect events or circumstances occurring after today.

Now I would like to introduce your host, the Chairman and CEO of UGI, Lon Greenberg.

Thanks Bob. Let me also welcome all of you to our call. I trust you had the opportunity to review our press releases, reporting our 2004 fiscal year second quarter results. For the quarter, IGI reported net income of $67.1m, or $1.48 a share, compared to net income last year of $69.8m, or $1.62 per share.

Our net income this quarter included a charge of $5.9m, or $0.13 per share, associated with our hedging of the Euro-based purchase price of Antargaz. Adjusting for this charge, out net income rose 4.6% for the quarter. We are pleased with the net income increase, given the significantly warmer weather experienced by our utility and other businesses this quarter, compared to last year.

AmeriGas also announced fine results this quarter. Fixed net income rose from $89.9m last year, or $1.80 a share, to $105.7m, or $1.99 a share this quarter. EBITDA generated by AmeriGas similarly rose from $129.9m to $146.6m. From a qualitative standpoint, I would tell you that all of our businesses performed well, both operationally and financially. In particular, the improved performance of our international propane and domestic propane businesses can easily be ascertained from their financial results.

While it’s less apparent, our gas marketing business performed somewhat better than we expected, given the seasonality of margin realization. In the same vein, our electric distribution utility continues to perform at high levels. And the returns from our small electric generating business continue to be excellent and visible in the reported numbers.

Likewise, our HVAC businesses continue to perform at expected levels. Our gas utility results may appear to you to be a bit lower than anticipated. However, weather in the second quarter last year was quite a bit colder than normal, which of course makes this year’s results look not as good. In addition, there were higher levels of litigation-related charges this quarter, resulting from both accidents in our service territory, and also related to a regulatory proceeding arising out of our termination of service to certain customers.

As I look at the results of the gas utility qualitatively, I would tell you that it’s performing well, with continued customer growth, and attention to managing its operating expenses. I see no reason why it will not sustain its high level of performance in the future.

At this point, I am going to turn the call over to Bob Krick, who is substituting for Tony Mendocino, to review our financial performance in more detail. After Bob concludes his remarks, Gene Bissell will comment on AmeriGas’ results. And when Gene finishes, of course, I will offer a few concluding remarks. Bob?

Thank you Lon. As Lon indicated, we enjoyed another good quarter. EPS was $1.48, including a one-time $0.13 charge related to fixing two-thirds of the dollar/Euro conversion associated with our Antargaz purchase in March. Ignoring this $0.13 charge, we would have reported $1.61 per share, compared to $1.62 per share in fiscal ’03, on 5% more shares outstanding. These results were achieved in the face of weather that was 2% warmer than last year nationally, and nearly 4% warmer than last year in our gas utility service territory.

Operations at AmeriGas, Electric Generations, FLAGA and Antargaz all produced increased EPS contributions for the quarter. Let’s look at some of the operating and financial details of our business group. AmeriGas, despite weather that was approximately 2% warmer than normal and last year saw EBITDA improve by almost 13%, to $147m from $130m last year. Last year’s EBITDA includes a $3m charge for the early extinguishment of debt.

Retail gallons sold were up approximately 3% to 404 million gallons, as the negative impact of modestly warmer weather and slow to recover commercial industrial demand was partially offset by increased volume from the Horizon acquisition completed this past October. Unit margins were higher than last year. Operating expenses were up $5.5m, as inflationary expense increases, expenses from the Horizon acquisition, and higher PPX volumes were partially offset by savings from the management realignment accomplished last summer.

AmeriGas operating income contribution to UGI was $127m, compared to approximately $116m for the second quarter of fiscal ’03. Gene will have more to say about AmeriGas performance in his comments. Operating income in our utility operations was $53.3m, down from $61.6 for the same period last year. Operating income in our gas operations declined $8.6m to $46.5m on weather that was 3% colder than normal, but 4% warmer than last year.

Throughput was down approximately 4%, to 31.2 bcf. Increased sales to large firm customers were offset by weather related reduced volumes to deliver service customers and to residential and small firm customers. The decline in volumes resulted in lower gross margins. Operating expenses were essentially flat to last year. However, other income was down by $4.9m as a result of reduced non-tariff service income, and the greater litigation related costs.

We added about 6,000 residential eating customers on a year to date basis, compared to about 5,000 for the first six months of last year. In the electric utility, operating income was $6.8m, up $300,000 compared to last year. Gross margin for the quarter rose slightly as a result of a modest increase in kilowatt hours sold. Reduced operating expenses were offset in part by higher depreciation charges.

Moving on to our other operations, as we footnoted in our press release, we transferred our generating assets into energy services in 2003. For comparability, we have included generation in energy services for both this year and last year. Energy services now includes both GASMARK® and electric generation.

Operating income in energy services increased $1.6m, as the increased operating income of electric generation due to the purchase of 4.9% of Conemaugh in ’03 offset the decline in operating income in GASMARK®. Operating income in electric generation was $4m, compared to $1.9m last year, on increased megawatt hours sold, due to the Conemaugh acquisition, but lower unit margins.

In GASMARK®, operating income was down slightly, to $3.5m, from $4m last year. While total volumes sold increased, due to the full quarter effect TXU acquisition, lower unit margins and higher operating expenses combined to produce a decline in income. Unit margins were lower, primarily as a result of the higher percentage of fixed price contracts this quarter, and a larger standard deviation than 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 contracts are fixed at the time the contracts are signed, the timing of the margin recognition as defined under GAAP rules results in unit margins moving from the high product cost months, generally our first and second quarter, to the low product cost months, generally our third and fourth quarters. Beginning in April and through the rest of this fiscal year, I expect to tell you that our unit margins were artificially high, as the margin recognition calculation turns around. Operating expenses increased primarily due to the full quarter effect of the TXU acquisition.

In international propane, both FLAGA and Antargaz enjoyed improved net income, before the impact of the forward currency exchange chart. Both for FLAGA and Antargaz, about one-half of the improved results came from improved operations, and one-half from the impact of the weaker dollar. Net income for FLAGA was $1.3m for the current quarter, compared to $300,000 for the same quarter last year.

Lower volumes due to warmer weather, reduced auto gas sales, and customer conservation, were offset by higher unit margins. Operating expenses were essentially flat quarter to quarter. The net income contribution from Antargaz was $7.8m, compared to $5.1m last year. Gross profit for the quarter exceeded last year, as higher unit margins offset lower volumes sold. Operating expenses were flat period to period. And interest expense was lower than the fiscal ’04 quarter.

Moving to our balance sheet considerations, AmeriGas finished the quarter with essentially no revolver debt, and $915m of net debt. Net debt is approximately $11m lower than it was at the end of March quarter in fiscal ’03. In April, AmeriGas Partners issued $28m of 8-7/8 senior notes at a premium, to repay indirectly a portion of some maturing debt, saving approximately $1m of interest expense annually.

On a consolidated basis, UGI’s debt on March 31 was $1.7b, up over $400m, entirely due to the consolidation of the existing debt at Antargaz. At calendar year-end, UGI had $131m of investible cash on its balance sheet. Following the use of $100m of this balance in the Antargaz purchase, we expect to have $40m of investible cash on our domestic balance sheet in April, and another $48m at Antargaz, pending repatriation at some later date. By September 30, we expect to have approximately $100m of cash to invest for our shareholders. Now Gene will expand on AmeriGas results.

Thanks Bob. As Bob mentioned, it was a strong quarter for AmeriGas. We’re glad to be reporting a $16.7m increase in EBITDA, and an 11% increase in net income per unit for the quarter, despite weather that was approximately 2% warmer than last year. These results demonstrate the savings from the management realignment that we completed last year, along with the benefit of acquisitions and continued organic growth.

Volume for the quarter increased by 2.7%, due to acquisitions and internal growth, offset by the impact of warmer than normal weather, and continued sluggish commercial volume. It may seem surprising to many of you that weather could have been warmer than normal nationally, considering the cold weather that we’ve had this year in the Northeast. However, the cold weather in the northeast was offset by warmer weather in the West, and some parts of the Midwest and South.

Operating expenses increased by $5m. However, excluding acquisitions, our expenses were essentially flat. I am pleased to say that the savings from the realignment offset inflationary increases in salaries, insurance, and other expense. We continue to experience some of the highest wholesale propane prices in 15 years. The average cost of propane at [Bellview] [ph] for the quarter was $0.68, just a penny above the average for the same quarter last year, but more than 50% above the 10 year average cost of $0.41 a gallon.

While we’ve been successful in passing on this cost to our customers, we see evidence of customer conservation in our volumes. As of this morning, the price at [Mt. Bellview] [ph] was $0.64, an exceptionally high price for this time of year. The prices are being held up by the high cost of crude oil. Propane’s value in relation to crude is right in the normal range, at 71%. The high cost of crude is being attributed to a number of different factors, including the weakness of the dollar, threats of production cutbacks by OPEC, and unrest in the Middle East.

I’d also like to take this opportunity to update you on our core strategies of growth through acquisition, PPX, strategic accounts, and through growth in our traditional residential and commercial customer bases. We’ve completed six acquisitions so far this year. By far the largest was Horizon, which closed in October, and continues to exceed our expectations. We are reviewing a number of promising opportunities. In reviewing prospects, we’re giving preference to propane businesses in growing areas, and where we have strong local management.

While the heating season is winding down, we’re just entering the barbeque grilling season, the time of year when PPX generates most of its business. For the quarter, EBITDA for PPX increased by over $2m. And we’re going into the season with over 20,000 stores, a significant increase from our store count a year ago. We continue to project an increase in EBITDA and cash flow from PPX for the year.

Our strategic accounts volume was up 8% for the quarter. Much of the growth came from additional locations, added by existing customers. These customers appreciate our industry leading geographic coverage, which means that we can serve all of their locations, while offering one point of contact and lower transaction processing costs.

Finally, we continue to be very focused on growing our traditional base of residential and commercial customers, through competitive pricing and superior service. This year we adopted a customer service proposition, of being the most reliable, the safest, and the most responsive propane company in each of the markets we serve. And we are making tangible progress on realizing that vision.

I am pleased to say that we are on target to achieve a solid gain in customers for the year. Our unit holders should be pleased to see that our strategies are resulting in improved distribution coverage, despite warmer than normal weather. Our coverage for the trailing 12 months increased to 1.3 times, compared to 1.2 at the same time last year. Based on results for the first half of the year, we’re reiterating our EBITDA guidance for AmeriGas of $250m.

I’d like to finish by thanking our employees for their performance this season. While it was modestly warmer than normal nationally, there were many times and many places where our employees had to meet record demand, and over come difficult road conditions to take care of our customers. In addition, they’ve had to deal with pipeline shortages and refinery shutdowns, that create logistical problems. As usual, they rose to meet the challenges. Their dedication to our customers and their commitment to AmeriGas continue to be our greatest competitive advantage. Now I’ll turn the call back to Lon.

Thanks a lot Gene. Let me leave you with the following thoughts as we end our prepared remarks. In addition to our fine financial performance this quarter, we made some notable progress for the long-term success of our company. I am referring to the completion of the Antargaz transaction, and the attendant common stock offering to help finance it.

Antargaz, as I have said many times, is a compelling transaction for us. It is a business we know well, having owned 20% of it for three years. And it has an excellent management team. We expect Antargaz to contribute approximately $0.20 a share to earnings next year, as well as provide us with approximately $40m of excess cash flow. Obviously this is a transaction that builds long-term shareholder value.

Indeed, we are sharing the fruits of that transaction already with our shareholders. Beginning July 1, we increased our annualized dividend per share by nearly 10% to $1.25 from $1.14. As always, we remain committed to achieving our longstanding financial goals of growing our earnings per share 6-10%, and growing our dividends at 3%.

In that vein, we raised earnings guidance for UGI this year by about $0.10 a share last month. We are expecting UGI’s EPS this year to be between $2.10 and $2.20. We are also confirming our prior guidance on AmeriGas at $250m of EBITDA, or $88m in net income. While the earnings guidance for UGI may at first blush appear to break our five year record of meeting or exceeding our annual financial goals, you must remember that our projection this year includes a per share loss of $0.13, attributable to hedging the Antargaz purchase price, and approximately $0.25 of additional loss over the next six months, attributable to making and financing the Antargaz transaction.

Adjusting for these two items, we would have been at the high end of our earnings per share targets yet again. And next year we’re confident that we will continue that tradition of success. We’re particularly well situation for the future. We’re in good businesses. We know how to run those businesses. And we will be generating about $80m of cash to invest each year. We expect to be able to redeploy that cash in a disciplined fashion, to produce long-term, above-average shareholder returns.

The Antargaz transaction is just the latest in a series of transactions we’ve completed to do just that. Whether it’s in our domestic propane business, where we completed the Columbia Propane and Horizon Propane transactions over the last few years, our gas marketing business, where we completed the TXU transaction last year, the electric generating business, where we acquired an additional interesting the Conemaugh generating station, or in our international propane, where we just completed the Antargaz transaction, we have a track record, feel and focus to redeploy our cash effectively.

Combining this transaction track record with our unrelenting focus on execution has led to our enviable tradition of success. And it really gives us cause to be optimistic about our future. At this point in the call, Shannon, I’d like to open it up for questions from folks.

Thank you gentlemen. (Caller instructions.) We’ll go first to David Schanzer of Janney, Montgomery, Scott.

Hi. Good afternoon.

Hi Dave.

You made reference to litigation with regard to the utility part of the business. Could you give us an update on where that stands? I know you can’t talk about the limitations or anything. But give us some idea of where that’s going.

Yeah. I mean some of the litigation is kind of what I would call unfortunate, but characteristic of our types of business, that on injuries and damages stuff, where we increased reserves Dave. And part of it was related to our termination of service to some customers in our gas utility territory – not that many, very few customers, where we had folks who thought they were really doing the right thing, had customer agreements to terminate service.

But from a broader perspective, probably it was not advisable to do so. We think we’ve put that behind us. We’re working now to put that behind us, and feel very comfortable that the charges that we took for that this quarter put it behind us financially. And of course we have a continuing mindset to make sure that we don’t repeat the kind of thing that happened in our service territory.

As you know, we are a very high service-oriented company. J.D. Powers rates us the best service provider in the East. And we take our service obligation seriously. And again, this is just an unfortunate situation. And financially, we’ve put it behind us.

Can you give us any idea of the timing of when you think this will all be resolved?

I think very shortly – very shortly. Again, financially, we feel very comfortable it is behind us. And it’s now just a question of dotting i’s, crossing t’s, and continuing to work effectively with the involved parties.

And one other thing about weather, just as a clarification. The weather, for your entire propane operation in comp, this is a lot of different sections of the United States. And it’s very different than the weather for the utility. Do you have a sense of what the weather was vis a vis normal?

I think for the year Gene, it’s what, 4% warmer?

For the year. For this period it was about a percent and a half warmer than normal.

Okay. Thanks.

Yeah.

And Ron Londi of A.G. Edwards has the next question.

Yes. Thanks. Lon, you said your dividend – your goal for the UGI dividend increase was 3%. And you also said that for AmeriGas that the coverage for the last 12 months was about 1.3. And if you look at your guidance, it would fall between 1.2 and 1.3 for this year. A nickel increase in the distribution for AmeriGas would equal about $2.6m. You said you saved a million dollars in interest expense this year when you rolled over some debt. A nickel increase would be a 2.2% increase. What do you think the board is looking at? What’s your perspective looking forward on increasing the distribution for AmeriGas?

Usually [Stacey] asks me that question Ron. So thank you. The distribution is always on the radar screen of the board of AmeriGas. It is something that is thought about regularly. As we’ve told you in the past, we have been balancing the balance sheet strength of AmeriGas against the strong desire to increase the distribution when the timing is appropriate. Obviously this is -- the coverage of 1.2, 1.3 is good coverage. And many other MLPs have increased their distribution when they’ve achieved that coverage level.

I would tell you that it is on the radar screen of our directors. We’re through this winter. I am sure the directors want to see how we perform over the course of the rest of this year, and see how weather begins next winter, and see how that evolves. But obviously coverages at this level are an area where questions like this get asked. We’re mindful of our obligation to our unit holders. And it is a pleasure to be able to respond to a question about a potential distribution increase, I might add, as opposed to other questions you can get.

So it is on the radar screen, something we are watching. I can tell you it will not be immanent, based on the board’s discussions. But it is on the radar screen.

With inflation and the up tick, I think it’s important for MLPs to try to keep their unit holders whole.

Yeah. No. We are quite mindful of that. And, as I say, it is something we’re watching. At the same time, we do regard our balance sheet as something that’s very important to watch. At the same time, the energy industry, S&P and Moody’s and Fitch have all been a little bit more cautious than they have been in prior years. And we do have to balance those two things. But it is something – we’re well aware of the desire of our unit holders to see some action there. And, again, it’s just a balance that a board of directors goes through.

Okay, thanks.

Yes.

We’ll now move on to David Maccarrone of Goldman Sachs.

Thank you. I was hoping you could comment on what your long-term outlook for propane unit margins is from current levels, and put that into context perhaps with your competitive strategy. If the industry is generating excess returns, if these are peakish margins, do you maybe sell lesser performing assets, or compete more aggressively for customers? How do you react in this environment, in the current unit margin environment?

Hi Dave. Since that’s a particularly difficult question, I will have Gene answer it.

Hi Dave. Well, in terms of our margins going forward, we were able this quarter to expand our margins a bit. And that often happens when we have the kind of wholesale cost volatility that we had last quarter, due to the favorable agreements that we have with our suppliers, and our efforts to mitigate price volatility.

We do, however, closely monitor our competitive position. And, if anything, I would say last quarter we were more competitive than we were in the same quarter last year. But, looking forward, which is your question, I would not assume that margins will continue to be over last year’s. I think they’ll be more in line with what we saw last year, for the balance of this year.

Is that a level that you would say is sustainable over a multi-year period, the fiscal 2003 unit margins?

I think it is a sustainable level of margin going forward. I think that’s a fair statement.

Okay. And is that the basis for, going to Ron’s question, for how you’re going to look at the distribution?

Lon, I’ll let you answer that.

Since that was a really difficult question. Right, that’s coming at the same question from a different angle.

Right. Yeah, no. I think, Dave, I can tell you we’re beginning budgeting for next year. And I will certainly have more to say on what we expect for next year, probably in our July call. But we want to see how AmeriGas is going to be budgeting for next year. Margin is important. But one of the important things AmeriGas has been working on is managing their expense growth at levels less than inflation. And they’ve got a variety of strategies also that they’re executing, that contributed to growth in earnings. But it would be premature of us to look too far into the future in terms of a distribution increase, until we saw how AmeriGas was budgeting for next year, and then how weather evolved a little.

Okay. Thank you.

Mmm-hmm.

And Peter Eisele of Snyder Capital has our next question.

Yes. Good afternoon. I have a question with regards to Antargaz. I thought I heard Bob mention that half of the improvement of the – in terms of income, was related to currency, and the other half being operational. Can you go into more detail, how much of that was gross margin improvement versus operating expense line items? And I don’t know if I’ve caught, in terms of what the weather differences were year over year for that group.

Yeah. Peter, I am going to do this from memory. But I am sure it will be directionally correct. I think unit margins in Antargaz for the quarter were pretty healthy. They were higher. I would tell you that volume was marginally lower, about the same, pretty close to the same. And operating expenses were probably right in line with the prior year as well.

So it was probably – the improvement was largely a unit margin event at Antargaz, reflecting some of the same things that Gene mentioned, although I must say in the non-U.S. dollar economies, prices of all energy products are a low lower than they are in dollar denominated economies, like the U.S., particularly those economies who have got the Euro, with the Euro trading at a buck twenty. You can take 20% right off the top of the cost of the dollar denominated energy security.

So they haven’t had the same shock to their customers that we’ve experienced here, for example in the U.S., in terms of pricing. So they have done a very effective job at running the business. I can tell you weather was significantly warmer than normal there, as it has been the last couple of years.

I think they’ve suffered with weather that’s anywhere from 5% to 15% warmer than normal over the last few years. And this quarter was no exception. It was a fairly warm quarter. It got cold, I think, in late February/early March. But for the month it was a good March month. But, by and large, January and February were weak volume months for them, due to weather largely.

Do you anticipate being able to maintain those higher unit margins?

Yeah. I think there will be, as always in the propane business, somewhat of a trade-off between unit margin and volume, and sort of gross profit management. We are mindful of what we need to earn there. The management team there does an outstanding job of managing gross profit. The market characteristics in France are somewhat different than they are here, as I have said before.

The competitive environment is a little bit different. It’s not a fragmented industry. It’s several large players. And we find that, while there is plenty of competition on the margin for customers, because it is a tough market, and people watch market shares very closely, that all of the people in the industry, because they’re large public companies by and large, are mindful of their earnings of their various businesses. So it is a competitive market. But the basis of competition is much different than the U.S. It is really a lot more focused on service to achieve customers.

Okay great. Thanks a lot.

Sure [Peter].

We’ll now move on to Eric Felle of Wachovia Securities.

Hey guys. I don’t know if you guys went over this yet. But I was wondering if you could break out the EBITDA growth at AmeriGas, pro forma, for stripping out the recent acquisitions.

Yeah. I think I’ll do this. And then Gene, you correct me if I am wrong directionally. Other than the Horizon acquisition that was closed at the beginning of this fiscal year, the other acquisitions haven’t had a meaningful impact one way or the other. Gene?

No.

Horizon has done a little bit better than we would have thought. And I think the contribution from – it’s difficult. This is pure estimation, because you do a lot of blending in these things. And it’s hard to tell. It’s probably $3-5m for the year. Somewhere in that area.

Okay. So for this quarter I could strip that out?

For this quarter, no. That would be an annual number. I would say this quarter it’s probably – actually that wouldn’t be a bad number for this quarter, somewhere in that $3-4m number for this quarter.

Okay.

It’s a heavy residential business. So it really makes all of its profit in these winter months. And then when you come out of the winter, there is not a PPX business or a heavy commercial industrial business. So this is where the earnings are.

Okay.

And the other thing is, you know, on these transactions you do a lot of synergenistic stuff. And so it’s really hard to attribute it solely to one area or another, because you move customers around to suit the better dynamics, delivery, etc. So these are broad numbers. And it’s really hard to get a precise gauge on it.

I will tell you it’s doing better than we thought it would. We’re very pleased with it.

And then, looking at future acquisitions, what segments do you think are you guys focused on? I mean is it in pipeline? Or is there anything outside your core competency? Or is it going to be within that, in propane? Or where are you guys targeting going forward?

It’s an interesting question, one we’ve given a great deal of thought to. The overarching rule for us is we’re going to remain consistent with our mission of being an energy marketer and distributor. And if you look at the past, I think it’s the best thing to point out, as a harbinger of what we intend to do.

We’ve done domestic propane acquisitions. We’ve done international propane acquisitions. We’ve done gas marketing. We’ve done some electric generation. We’ve done some HVAC. We would look at acquisitions in each and every one of our business units. And we do – I would point out that we don’t have a corporate development group, as such, at the corporate level. And so the ideas for these are generated by the business units themselves, apart from AmeriGas, that spends a little bit more of its strategy on doing acquisitions.

And so we don’t have an intense focus in any area, other than consistently focusing on the businesses we’re in, and allowing those business units to develop ideas that are consistent with the overall mission. And we evaluate it at corporate. That’s kind of a check and balance.

Okay. Well thanks a lot for your time.

Okay [Eric].

We’ll now move on to Yves Seigal of Wachovia Securities.

Good afternoon.

Hi [Yves].

Sir, a couple questions. One is just to hit you three different ways. What is the debt goal at AmeriGas?

The debt goal is such – I mean, if you take a broader, let me answer it more broadly. We’re investment grade people. We hate not being investment grade. We’ve always hated not being investment grade. Unfortunately, some of the rating agencies are making it difficult for energy companies to be investment grade, and regularly change the rules on what is involved in being an investment grade issuer.

We’ve got a plan in AmeriGas over a period of time to get us back to investment grade. As Bob mentioned to you, that are debt levels are $11m lower than last year. And you wouldn’t expect us to issue incremental long-term debt for any purpose, other than for an acquisition, where we would finance it with a debt to cap ratio roughly 50/50 over time, and to refinance all or a portion of the long-term maturing debt.

For example, we financed a $53m maturity, with $30m of proceeds from issuing debt just recently. So we’re trying to keep the debt under control. And we are mindful of our comfort level as an investment grade issuer, as opposed to a high yield issuer.

Okay. Well, and that’s the point, that you’re sort of balancing that with raising the distribution.

You’ve got it.

Okay. Then the second is, have you definitively – this might be redundant – definitively decided not to hedge the Antargaz business going forward?

No. It’s something that one of the hallmarks, as you know, about us [Yves], is we know what we know, and we know what we don’t know. And we have not had to spend a whole lot of time hedging in the past, because of the scale of what we have had, and the nature of how we financed it. Antargaz is something that we are exploring effective ways to hedge. A 10% movement in the Euro costs us about $0.07 a share is it, total? Total and aggregate. Three percent is it Bob?

Yeah, 3% of our income.

Three percent of our income moves with a 10% change in the Euro. So nominally, that $0.07 I told you, or so, on a 10% change in the Euro. So it’s something we’re obviously mindful of. It’s certainly not a killer for this company in terms of our exposure to the Euro/dollar relationship. But it’s enough of an item that we are spending time trying to figure out effective ways, if there are effective, cost-effective ways to hedge it.

Well, did the currency have any impact on the quarter’s results?

Yeah. I mean if you look at the quarter, it didn’t have a whole lot of impact on us, because FLAGA is relatively small. It helped FLAGA. But FLAGA’s contribution to UGI was rather small. And it also helped Antargaz, as Bob pointed out. But that incremental contribution, because of our 20% ownership of Antargaz is rather small.

Okay.

And so it didn’t have a whole lot of effect on the quarter.

Okay. And if I can just push a little bit, could you elaborate on perhaps the growth outlook for PPX and also what contribution that business makes in terms of EBITDA?

Yeah. Let me turn that one to Gene.

Sure. I’ll start in reverse. In terms of the contribution to EBITDA, it’s in the range of 10-12%. And it continues – we continue to see growth from PPX going forward. The number of grills being sold is increasing. So that increases the market. There are more and more people choosing to exchange cylinders rather than refill them. So we continue to see that as a market that will grow at a double-digit rate going forward. So it’s a nice growth business, in an industry that tends to be relatively mature.

What kind of investment does that take?

Well actually, the investment in PPX is changing. In recent years, the investment has been relatively heavy, because we’ve had to replace all of the old valves with new valves. That – a year ago, we were probably replacing more than half of the valves and cylinders that we got back. Now that’s dropped down to about a third, or less than a third. So as time goes on, and we get those valves out, the investment in PPX changes. And then it really depends on the growth rate. But it’s hard for me to put really good guidelines around it.

Yeah. No. The only thing I would add to that is that PPX this year will be positive cash flow for us, on the order of ten million bucks, or some number of cash flow or –

Which is actually double what it was a year ago.

Yeah.

So that’s the great thing, is the cash flow is growing, because of the drop in the investment in valves. Now also, as the investment in valves drops, selling prices will be affected by that to some degree. But the net cash flow, as Lon indicated, we expect to be in the range of $10m.

Okay. The – is the growth - ? You said double-digit growth. Is that something that, when you look out three, five years, is that a sustainable growth rate, do you think? Or when do you thin that may start decelerating?

That’s very hard to say. What the – right now the exchange portion of the market probably represents somewhere between 35% and 40% of the total grill cylinder market. And what we don’t know is what’s the saturation point, where people stop moving away from refillers towards exchange. That’s something that’s hard to identify.

Otherwise, what you have to look at is the growth rate in appliances that use those grill cylinders. And there is the grill market. But in addition, one of the fastest growing markets right now is the patio heater market, within that whole segment. So if more people are getting patio heaters – you know, there are these new mosquito devices that use the 20-pound cylinders.

So if there are additional applications that come on the market, and these things become popular, that’s going to continue to dual the growth. Historically, the growth rate in grill cylinders for grilling has been about 8% on average. Grilling has been very popular. But that’s kind of the underlying growth rate that affects both reseller and exchange. I am reluctant to tell you what I think that’s going to do over the next three to five years. But those are the factors that will drive it.

That’s great. Well thank you very much.

Thank you Yves.

We’ll now move on to John Tysseland of Raymond James.

Thanks guys. If you look at your credit rating agencies, what do they look at the most when you are talking about ATU and possibly an investment grade credit rating? And are they looking at more of the debt to EBITDA number? Or are they looking at your debt to total cap, for both maybe and S&P?

We used to have an executive here years ago that when you would ask him an either/or question, he would say yes. And so they’re looking at both. And they’re looking – I mean you’d have to get a precise explanation, of course, from them. But I think directionally, the first they would do is they look at an industry, and they assign it some kind of ranking within their overall scheme of industries.

And because we’ve had a number of companies encounter difficulties in the propane business, my understanding is that the propane business as an industry is not regarded particularly well by the credit agencies. Then they begin to evaluate within that industry ranking your debt divided by EBITDA, your interest coverage, your free cash flow coverage, and a number of other secrets that they won’t expose to us.

And so we’re mindful of moving up the things that we understand, which are improving our interest coverage, improving our debt to cap ratio – debt to EBITDA ratio, as such. And we think with sustained good performance, like AmeriGas has had these last few years, and as we hope will continue in the future, that the rating agencies will become more comfortable with the industry, and that they will be comfortable with our ability to sustain our high level of performance.

The reason I ask is I mean obviously with your debt to EBITDA right now in the mid-threes, you are above – I mean you are below or less levered than a lot of your competitors. And I was just kind of curious what your range is for that. I think it was asked a little bit differently by [Yves]. But how much lower would you like that to go prior to possible distribution increases, or making another acquisition?

Yeah. In terms of acquisitions, acquisitions will always be incrementally beneficial to that, because we’re going to finance them in a way that has an equity component to it. And so if we’re targeting acquisitions at roughly a 50/50 debt to cap ratio, there will be marginal improvements to those things as we go along.

It’s a balancing act. We aren’t given what we understand from the rating agencies. We aren’t going to be able to press a magic button and reduce our leverage fast enough to cause them to make us an investment grade in the near term. We are unwilling to do that by issuing equity. And we are balancing the needs of our unit-holders with the needs of the credit agencies.

So I can’t give you a precise target in that. I can tell you directionally. Obviously we need that to be lower. And at the same time, we need to keep focusing on improving the way we run the business, and raising EBITDA. And of course over time, if you keep your debt level flat to down, as you move ahead, absent acquisitions, and you improve your EBITDA as you go forward, all of those things take care of themselves. So what we focus on is running the business well, improving the EBITDA, making sure incremental things we do are consistent with a strong balance sheet, and believe that those things will take care of themselves.

Thank you.

Mmm-hmm.

And ladies and gentlemen, at this time we do have one question remaining in the queue. (Caller instructions.) We’ll take a follow-up question from Peter Eisele of Snyder Capital.

Yeah, one question. I noticed the tax rate was lower this quarter, year over year. I am wondering if that’s a good number going forward. And secondarily, in terms of the cash that’s sitting in Antargaz, how quickly do you think you’ll be able to repatriate that?

Let me answer the second one first. On the repatriation of Antargaz cash, without really changing loan agreements, we have the ability to take out about half that cash as a dividend under their existing restricted payment tests and things. And then we’re evaluating the kind of changes to the loan agreement, long-term cap structures for Antargaz that we want to entertain in order to take out the rest of the cash, consistent with what lenders might want to see over there. But certainly in the near-term, we expect to be able to get at least half that cash [Peter].

Okay.

Okay. On the tax rate, I am trying to determine whether there were any unusual items to hit the tax rate this quarter. Typically the only things that hit it are – there’s usually some foreign income implications to it. I don’t know why –

I think it was down about 100 basis points.

Yeah. Frankly, I don’t know the answer to that one. And there is nothing unusual that I remember in this year. Last year we may have had some issues. But there is nothing unusual that I can recall in this year’s tax rate. So that’s the best I can do for you now [Peter].

Okay. That’s great. Okay. Thank you.

Yes.

(Caller instructions.) And we’ll pause for just a moment. And it appears there are no further questions at this time. Gentlemen, I would like to turn the conference back over to you for any additional or closing remarks.

Okay. We want to thank everyone for their attention. As you can see from the earnings guidance we have given you for this year, and our continued positive outlook for the company as we go forward, that we’re excited about the prospects for UGI and AmeriGas. We think we’ve got a great balance of businesses. We’ve got the cash. We’ve got the skills to invest that cash. And we’ve got a real focus on execution as we go forward.

So I think you should expect to continue to hear good things from us as we go forward. Thanks for your attention. Thanks for your confidence in us. And we look forward to talking to you in the near future. So long everybody.

And that does conclude today’s teleconference. Thank you for your participation.