UGI Corp (UGI) 2004 Q4 法說會逐字稿

Good day, everyone, and welcome to this UGI and AmeriGas fourth-quarter 2004 earnings conference call. Today's program is being recorded. At this time for opening remarks, I would like to turn things over to Mr. Bob Krick, Vice President and Treasurer of UGI. Please go ahead, sir.

Thank you, Kelly. Good afternoon to all of you and thank you 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; currency exchange rates and political, economic, legislative and regulatory changes in the U.S. and abroad. UGI and AmeriGas undertake no obligation to release revisions to these forward-looking statements to reflect events or circumstances occurring after today.

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

Thank you, Bob. Good afternoon, everybody. Let me also welcome you to our call. I trust you have all had the opportunity to review our press releases reporting our fiscal year 2004 results. We apologize for getting them out a little bit later than we customarily do, but we had a few things we needed to deal with.

UGI reported as you know EPS of $2.31 a share compared to 2.29 last year and compared to our previously announced forecast range of about 2.15 to 2.20. Similarly AmeriGas exceeded our forecasted earnings targets of approximately 250 million of EBITDA by earning nearly $256 million of EBITDA. Obviously our performance in the fourth quarter exceeded our expectations, which as you well know is a good thing, and I would like to comment briefly on why we underestimated our performance when we put out our forecast.

During the month of September, all of our business units other than AmeriGas and Antargaz performed in line with our expectations. Both of these units, however, did better for a variety of reasons. Of course with Antargaz, full ownership of which is new to us, it is a bit more cumbersome for us to predict that our other business units.

During the fourth quarter, we also completed our evaluation of Antargaz assets for balance sheet purposes. We discovered during that process that we were a bit conservative in our preliminary evaluations. As a result, we picked up about 5 cents a share in this trueup process. Tony will have more to say about this and other financial matters later in the call.

As we sit, we are obviously quite pleased with our earnings performance in all of our business units this year. Adjusting for approximately 27 cents of dilution attributable to the midyear Antargaz transaction, our EPS would have been about $2.57 a share, a substantial increase over last year and in keeping with our tradition of excellent performance.

Add to that mix a nearly 10 percent dividend increase and an increase in total shareholder returns during the year of nearly 34 percent and one can only conclude that it has been another year of significant achievements and progress for us.

Similarly for AmeriGas, EBITDA rose to nearly 256 million from 234 million last year, a more than 9 percent increase. AmeriGas' earnings per unit also increase notably about 20 percent. AmeriGas' excellent results reflect progress on a variety of fronts, including acquisition and internal growth. Total return to unitholders rose a very healthy 27 percent during the year. Gene will comment further on AmeriGas' results in a bit.

Our employees obviously have done an absolutely fantastic job for our shareholders and unitholders. They have also done an excellent job for our customers. For example, customer satisfaction improved in AmeriGas. Likewise J.D. Powers once again named our gas utility as the best service provider in the East. Both of these facts underscore the success we are having in communicating the importance of customer service as a core value in our culture. I personally want to thank all of our employees in all of our businesses for their dedication to their customers and their overall contribution to our success.

One more unusual thing we noted in our press release was that in the course of preparing our financial statement for inclusion in our annual report on Form 10-K, which we expect to file on or before its due date December 14, a question arose over the amount of deferred taxes on our balance sheet. Frankly the issue is very complicated, but to give you an oversimplification of it so you can understand it, it relates to deferred taxes associated with our ownership of AmeriGas Partners units due to among other things the conversion of our subordinated units to common units in December of 2002 and to the sales of common units by AmeriGas over time.

As you may recall, we were required to book a gain of $157 million when the units converted. You also may recall that we did not run that gain through our income statement but instead, in accordance with accounting rules, increased equity directly by that amount. A similar accounting treatment occurs when AmeriGas Partners sells common units to the public.

You may also recall that the increases in equity resulting from the conversion and these issuances was disclosed fully and in my words is basically a non-event. You did not take great heed of the increase in equity.

The question which now arises is whether deferred taxes should have been created at the time all of those things occurred. That is the issue in its simplest form. We have now determined that the answer will not affect our cash flow, will not have a material adverse effect on our income statements for fiscal years 2004, 2003, and frankly we just ran out of time looking at 2002, 2001 all the way to 1995 when AmeriGas Partners was formed. We are still looking at those earlier years, expect to finalize our views on that shortly, but we continue to process those and obviously it is a lot of years to look at since AmeriGas was formed. It is a bit unusual for us to have something like that, but it was also unusual to have the 157 million gain in equity that we added at the time we had the conversion. These accounting rules are quite complicated, and we continue to work away at them.

That having been said, I want to turn the call over now to Tony Mendicino to comment further on our results, and then Gene will comment further on AmeriGas, and then I will come back and give you a sense of where we are going and what our thoughts are for the future of your Company. So, Tony, go ahead.

Thank you, Lon. As Lon mentioned, fiscal 2004 was an excellent year for UGI. We earned $2.31 a share or $2.57 a share adjusted for the dilution from Antargaz. All of our business units exceeded last year's results, except for the gas utility which suffered significantly warmer year-to-year weather. Our business units accomplished all of this in an environment of record high commodity costs that have only recently abated someone. The largest contributors to the increase in earnings were AmeriGas, Antargaz and Energy Services.

With respect to AmeriGas, earnings rose 27 percent over last year as accretive acquisitions and good margin and expense management offset the negative effects of 5 percent warmer than normal weather and customer conservation in the face of record high propane product prices. Average propane prices rose over 10 to 15 percent for the year. Gene will have more to say about AmeriGas in a moment.

International propane improved dramatically principally as a result of Antargaz. These results reflect the sum of several distinct pieces. For the first half of our fiscal year in the heart of the winter when we owned 20 percent of Antargaz and reported it as an equity investment, Antargaz performed significantly better than the prior year as a result of colder weather and lower Euro-based product costs.

Next, we consolidated Antargaz results for the second half of the year. This includes the two warmest quarters as you all know.

Third, we issued 7.8 million shares of UGI common stock to fund a portion of the purchase price, just prior to the two warm quarters.

Finally, as we reported in April, we took a loss on some currency contracts used to fix a portion of the Euro-based purchase price for Antargaz. While the Antargaz acquisition was diluted in 2004 by some 26 cents, we believe it will be significantly accretive in 2005.

FLAGA, our Austrian-based propane distributor, improved its results mainly as a result of cost reduction initiatives. FLAGA recently purchased the Czech Republic operations of BP to now become the third -- or the largest distributor in the Czech Republic.

Energy Services, which includes our regional gas and electric marketing business, as well as our electric generation business, improved primarily as a result of the full-year effects of both the acquisition of TXU's gas marketing business and the added ownership of the Conemaugh generating station. The shifting of gas marketing margin from winter to summer as a result of the intricacies of GAAP accounting and our conservative fixed-price fix cost business model occurred exactly as we expected I communicated to you throughout the year.

In our gas utility, warmer weather and conservation from high energy prices combined to reduce overall earnings in spite of continued growth in higher margin heating-related customers. Gas utility added over 10,000 new residential heat and nearly 1200 new commercial industrial customers in 2004.

Our electric utility continued to perform well, growing its earnings almost 4 percent. Its slightly higher sales and lower purchased power costs offset slightly higher operating expenses. We saw increased summer load from air-conditioning this year offset somewhat by lower sales to heating-related customers during a slightly warmer winter.

Moving now to our balance sheet. UGI had consolidated debt of approximately $1.7 billion at year-end, up $466 million, principally as a result of a consolidation of Antargaz debt offset by slightly lower debt at AmeriGas. As we previously announced, we culled our remaining $20 million of utility preferred stock outstanding on October 1 and in conjunction with that issued 20 million of 30-year notes at 6.1 percent. At year-end, AmeriGas had $902 million of debt. Other than letters of credit that reduced borrowing capacity, AmeriGas had no outstanding balances on its revolver and had roughly $40 million in cash. Currently as is typical for this time of year, we have just begun to draw on our working capital lines at AmeriGas.

On September 30, UGI had about $115 million of cash to invest for growth opportunities.

Gene, why don't you to expand on the AmeriGas results?

Well, thank you, Tony. AmeriGas was pleased to have achieved record-breaking earnings, while at the same time making progress on our core growth strategies. As Lon mentioned, we achieved a 20 percent increase in net income per unit despite 5 percent warmer weather and record propane costs. EBITDA increased by over 21 million.

Volume for the year was about 1 percent lower than in the prior year. The warmer weather and customer conservation more than offset volume growth from acquisitions and internal customer growth. The wholesale propane price per gallon at Mt. Belvieu for the year was up 21 percent from the prior year and was 47 percent over the five-year average. We were successful in passing on the higher cost to our customers and, in fact, increased our margin slightly in part due to mix and due to the impact of favorable agreements. While we were able to pass on these high wholesale costs, we are concerned about the impact that they have on our customers and customer conservation. We also worry about collections in this environment, so we have made sure that we have an adequate provision for bad debt.

Our operating expenses were up about 3 percent, but all of the increase relates to PPX and the acquisition of Horizon. Our base business operating expenses were actually down slightly, a reflection of the success of the reorganization that we completed last year and other expense initiatives. Our results for the quarter were down slightly from last year's level. Our volumes were weaker than expected, primarily due to 16 percent warmer than normal weather, but volumes were about flat to last year. Net income was about a million lower, and EBITDA was down about $2 million due to higher operating expenses offset in part by higher margins. Our higher operating expenses related primarily to acquisitions, PPX and to a lesser degree higher vehicle fuel and bad debt expense related to the higher energy prices.

The year was also a success in terms of our strategies of growth through acquisitions, PPX, strategic accounts, and in our traditional customer base of residential and non-residential customers. Through September we added 38 million gallons through acquisitions. The largest was Horizon completed right at the beginning of the fiscal year followed by Liquilux which we just closed in September.

In October and November we closed on three more deals -- Brisco & Hughes in Oklahoma, Choice Propane in Colorado, and Carroll Propane in Maryland. Together these three deals will add 8 million gallons on an annual basis.

We also have pruned our portfolio a bit this year, divesting 10 districts that together represent 5 million gallons a year.

PPX had a successful year with EBITDA increasing from 22 million in 2003 to 26 million in fiscal year 2004. The volumes for PPX increased 12 percent, primarily due to the addition of about 1600 locations. PPX is now serving customers through 22,000 locations across the country. Strategic accounts volume increased by 7 percent, and we added 1200 new locations. While this may seem like good growth in an industry that is growing at about 2 percent a year, it's actually the lowest growth we have had from strategic accounts in a number of years. By going forward, we expect strategic account growth to return to double-digit rates.

An important objective for AmeriGas in recent years has been growing our traditional customer base, excluding acquisitions of PPX and strategic accounts. This is the toughest battleground for growth because we compete with thousands of independent propane companies. This year to boost our performance in this segment we achieved improvements in our customer service, we conducted sales training, we increased the size of our sales force, and we enhanced our growth-oriented incentive programs. We were gratified with the results. Growth in this segment -- we had growth in this segment for the third year in a row, and each year the growth rate has increased.

Based on our success in 2004, we're starting 2005 with a wind in our sales. We have some momentum in each of our growth strategies, acquisitions, PPX, strategic accounts and in the growth of our base business. My only significant concern about the new year is the very high cost of propane which is being driven principally by the hard cost of crude oil. It has declined some in recent weeks, but the cost is still very high by historical standards. Propane at Mt. Belvieu is currently trading at about 82 cents, down from a high of 97 cents just a few weeks ago. The high propane prices are bound to have an impact on our volumes this winter. Customers only have to turn down their thermostats by about 1 degree to reduce their consumption by about 5 percent. We will be watching our volumes closely and managing our business in line with our volumes.

I would like to finish today by thanking our employees for their efforts in 2004. Thanks to them we produced record results on earnings, growth and safety. I was particularly proud of how they responded to the hurricanes in Florida. AmeriGas is the largest propane supplier in Florida with 47 locations. In the wake of the hurricanes, rail supply terminals in many parts of Florida were shut down, but we were able to bring in propane from terminals in other states using our large transport fleet. We also had 82 AmeriGas and UGI employees from all parts of the country who volunteered to help us get all of our customers in Florida back in service. As a result, I have received a number of compliments from customers and we were pleased to be awarded a community service award by Home Depot for our service during the storm. The way that our boys responded to the hurricanes was evidence once again that our employees are our most important competitive advantage.

With that, let me turn it back to Lon for some closing remarks.

Thank you, Gene, and thank you, Tony. I would like to leave you all with the following thoughts (inaudible). First, our press release notes that we have raised our guidance for next year by about 10 cents a share to 280 to 290 per share. We also reiterated our AmeriGas forecast of approximately $255 to $260 million of EBITDA. And as you know, both estimates assume a variety of things, including and most importantly perhaps, relatively normal weather. You are used to hearing that from us at this time of year.

From a business standpoint as Gene noted and it applies to all of our businesses, we're keeping a watchful eye on the effects of high-energy commodity prices on demand for all of our products and services. You should see a nice rebound of earnings in our gas utility, particularly in the second and third quarters and fourth quarter next year. At the first quarter, I would not expect to see too much, but thereafter you would see a nice rebound.

You would see again a somewhat different pattern to earnings from our gas marketing business this year, as the margin shifting issue that Tony noted will be less pronounced this year due to differences in customer buying patterns compared to last year.

In addition, due to a recent accounting pronouncement, you are going to see a different pattern to the earnings per unit of AmeriGas Partners. Although annual earnings per unit will not be effected, quarterly earnings per unit will be lower in the first and second quarters and be higher in the other quarters. And if I thought deferred taxes were complicated, this really is beyond my capabilities to fully comprehend, although I trust the people who tell me things. The accounting pronouncement does not affect either EBITDA or UGI's contribution from AmeriGas.

Finally, you should expect to see significant increases and a contribution from Antargaz in our first two fiscal year quarters this year, and that is largely due to our full ownership of Antargaz this year in those quarters compared to last year when we only owned 20 percent.

We remain very strong financially as Tony indicated, and we have approximately $114 million of investable cash on hand as Tony indicated as well. Both of those factors bode well for our performance in the future. We are as always actively seeking additional growth opportunities in all of our businesses. As always we will seeking growth opportunities which are consistent with our strategy and which aid us in achieving our financial goals of 6 to 10 percent growth in earnings per share and 3 percent dividend increases. You should expect to see us seek out both domestic and international propane growth opportunities, as well as opportunities in the gas and electric distribution marketing and service businesses. We will, of course, be disciplined in our approach so as to provide us with a real opportunity to growth total return to shareholders.

A big factor facing us, and I must say, we are not unique in this regard, is the identification and retention of high potential people. In this regard, we are fortunate to have a person like, for example, David Trego to step forward on the retirement of Bob Cheney as CEO in our Utility Businesses. We constantly are striving to identify and retain critical employees, and we are aware of the issue and constantly seeking to attract and retain the highest quality people at all levels in this organization. As you all know, the results that we have been able to achieve since 1999 are all attributable to the folks in this organization, and there is no substitute for getting the highest quality people that you can get in an organization.

Lastly, as always with our Company, we know we cannot be complacent and that our past success does not assure us of future success. We remain unwavering in our commitment to you to deliver above-average long-term shareholder value through our growth and income orientation, and we look forward to a terrific year at UGI during fiscal year 2005. At this point, Kelly, let me open it up to questions from folks.

(OPERATOR INSTRUCTIONS). Yves Siegel. Wachovia Securities.

Good afternoon, Lon and everybody else. You promised to talk about a 5 cent trueup, and I did not hear it.

Okay. You mean above our estimate?

Yes.

I think basically it comes from the following. We reported 231. We told folks we thought we would be in the 215 to 220 range. 5 cents of the difference is attributable to balance sheet finalization and Antargaz. As you know, we do a preliminary estimate of a balance sheet. We reflected that in our filings with the SEC. We then actually went out and got an appraisal of all the assets of Antargaz, and in that process things move around as they usually do, and you know us to be a conservative group and it turned out that we were 5 cents conservative. So there is a nickel of it.

AmeriGas outperformed, and we told people in AmeriGas we thought we would do 250-ish give or take a little, and they did almost 256. And Antargaz as well outperformed our expectations in September. And the issue with Antargaz and will continue to be to some degree with Antargaz is the management team there continues to do an excellent job. We continue to learn more and more about it as we go forward, although I must say we know a lot about it having been associated with it for three years. But for us to be able to predict with as much confidence and precision in Antargaz as we do in our other businesses will take us a bit of time. So when you cut through it, AmeriGas did better by about $6 million of EBITDA, and that translates to 4 or 5 cents a share for us. Antargaz did better, and everything else sort of washed through the pluses and minuses.

That trueup of the balance sheet, is that part of -- where would that be on the income statement? Would it just show up in the operating income for international propane?

It will show open in income for international propane in the form I think principally of lower depreciation and lower interest expense.

So it is fair to say going forward you will have a lower depreciation expense for Antargaz?

Yes. Lower depreciation and, in fact, a somewhat lower interest expense than we expected as well.

Okay. If I can just continue, when we look at 2005 at the gas utility, which was down about 10 million in net income, would you expect to be back to the level that you saw in 2003 given (inaudible) weather?

I will tell you 2003 as you may recall was about 7 percent colder than normal, so I think you need to go through an adjustment of that process.

And then my third question, at some point in time would you be able to give us a better guidance in terms of how the quarters are going to play out? I don't know if you want to say we now expect 20 percent of income to be in the first quarter or what have you, just so that we don't get -- so we can make sure that we are on track?

Yes, I think the problem I have always had, and I will tell you the board has it as well because we go over all this stuff with the board, is to the degree which we will move off an annual numbers to quarterly numbers as a degree of precision associated with it that folks start to get a little uncomfortable with. So I would tell you that I would love to help you, but in this area I think I've got to leave it to the talents of folks like you to know us and to try to look at the history and create that yourself. Sorry.

Would you be able to then at some point just explain what the accounting differences are so that that being the case somewhere that we can try to model it?

I think when you get the K, you will see our MD&As go on at a fair amount of length and explaining changes from year-to-year and what affects it and what does not affect it. I think our accounting folks do a tremendous job there. So perhaps why don't you wait until the K comes out, go through that process, and if you're still having trouble, raise it again on our January call.

All right. Thanks, Lon.

David Labonte. Smith Barney.

I've got a couple of questions. First, how did the run-up in propane costs impact AmeriGas' procurement program during the summer months?

Yes, that was a tough issue. Let me breakdown AmeriGas' procurement and tell you as much as I feel I can tell you without giving away our trade secret to all the other competitors of ours listening on the telephone.

We have fixed-price obligations out there. We always back up a fixed-price obligation with a fixed-price supply regardless of when that fixed-price obligation is created. So if we created a fixed-price obligation in June, we went out in June or prior to that time in some cases got the supply and then sold off that supply.

So to the extent we bought in May, June and July, April to back up fixed-price obligations for '05, we look like we are pretty smart from a supply standpoint, and our customers have been extremely well served by having a much lower price than they would have had otherwise. But when you cut through it all, it looks pretty, but it's all filtered through our assessment of where we're going to be in EBITDA.

We also have what we always called general winter, which is uncommitted on the price side, but we know we have lots of customers out there who are going to buy from us. Historically we have hedged you know I will go 15 to 50 percent, 40 percent of that kind of general winter demand and sometimes we do lower than that depending upon our assessment of the market.

And this is where I don't want to get into too much detail with you on what we have done from an assessment standpoint because I think it is competitive. Usually I will review that towards the end of the season as opposed to where we sit competitively today because I think that does have implications for us. I apologize for not being able to go through that more but --

So generally speaking how did you protect yourself at the end of the summer when again prices at Mt. Belvieu were in the high 90 cent range?

How did we protect ourselves from that? In some cases the way that we do inventory costing protects us because we have an average inventory cost, and if it was accelerating up, that gives us some protection. We also do some hedging. We also do some supply arrangements with folks.

But I can tell you that we're not protected from that in the traditional sense of what you might call protected. Our cost of gas has gone up very substantially. And as a result, we have been compelled to pass those cost increases onto our customers. We are not looking to increase margins as part of this. In fact, we are thankful we can hold onto margins when we can do it in this kind of environment. But we did some hedging. But we are not insulated by any means from the run-up in costs, David.

Another question. Gene mentioned I think during his part of his presentation that you guys increased the provision for uncollectible receivables. How much have you increased it by if you can talk about a specific amount, and how does that compare to what you all did last year?

Okay, Gene, why don't you answer that one?

Sure. We increased our reserve by about $3 million on a base of about $9 million, so up to about $12 million. If you look at -- what I tend to look at is the percent of receivables that are over 60 days old, and that is just about flat. So that has not increased that much, but we've had a slight increase in DSO.

So it is really because I'm anticipating with these high prices that we're going to have more issues in the future than anything we have seen so far. But you always worry when you see these high prices because there could be customers who struggle.

If they stop at 30, we will go to 60, we will go to 90.

Right.

Is what we are worried about.

In the assumptions you all made for EBITDA, how much customer conservation have you built into the model?

You know it is really hard to say. I can tell you that through October and into November we have seen some conservation without question, but it has been difficult to ascertain that. October, as you know because you follow these things, David, is 14 percent warmer than normal according to NOAH. November is off to a warm start as well nationally. And so when you have warm weather, at least in the propane side, you cannot get your arms around it because of the timing of deliveries. But we suspect we are seeing some conservation there. And if you look at as well our gas utility, I look at volumes almost on a daily basis in our gas utility. And I can seek that given the weather we have had there -- this is my -- we have not done the analysis -- I am looking at it and going, gee, the volumes just look a little bit weak to me, weaker than I would have thought they would be. And anecdotal stuff.

I cannot quantify it for you, but there is no question that we are going to see some conservation out here at prices like this. It's just very tough for our customers. We feel for them. We wish we would have hedged more so we can have passed that along, but this is a difficult environment, and you know we inevitably get a question, you did 255 this year, why are you saying 255 to 260 next year? And we are being cautious on demand restraint by our customers.

Just two quick questions if I can. You mentioned that the accounting change will make earnings lower and the first and second fiscal quarters higher in the second and third. Can you quantify that in any way that you can? Just from a housekeeping perspective, what are maintenance capital expenditures expected to be for fiscal 2005, and what were total capital expenditures -- not maintenance -- but total CapEx on acquisitions for fiscal '04?

Acquisitions was about 40 million-ish, and I'm going by memory off reading my draft annual report recently and Martha is shaking her head, so I know I am in the ballpark on acquisitions. (multiple speakers). CapEx for next year --

CapEx for next year will be about what it is this year in total, and maintenance capital will be similar.

23?

Yes. 23 t 25, somewhere in there.

Somewhere in that range.

And on the first question, can we articulate the difference in earnings? It is incredibly complicated. We have not run through the drill other than what you do is if you earn more and you have high splits but you have not reached high splits, they attribute the earnings as if you distributed up and over the high split area. So I wish I could give you some better guidance on that, but I frankly don't have it because it's so god darned complicated and we have not lived through it yet. This is a new pronouncement that came out I think last summer or certainly in the third quarter last year.

It is just earnings per unit.

It is just earnings per unit at AmeriGas (multiple speakers) which is what David is concerned with. It is not EBITDA. It will not affect EBITDA at all, David.

Thanks a lot.

Thanks. I wish I could do more for you.

David Schanzer. Janney Montgomery Securities.

Congratulations on another upside surprise, and I guess that is the subject of my question. I know we are steering through the fog of accounting here, and I understand that you are very very very conservative. I also understand that you cannot get specific on quarterly information because that is not what the Company does. And I also don't care too much about where the ranges are, but I think that after watching the succession, if you will, of kind of upside surprises, don't you think that your growth is really much -- well not much -- but some significant amount better than a 6 to 10 percent at this point? At least the low-end of the range seems very low.

And, of course, you know the reason I'm asking the question is because you're basing the dividend policy on the low-end of the range.

Yes, maybe I will answer your dividend policy question, Dave, and that hopefully will answer what you're saying. Sometimes, as I've always said to all of you, we are humbled by our achievements and I mean that literally. We're not nearly as smart as we may appear, and we are not going to be nearly as stupid as we appear when things go the other way.

And the upside surprises on earnings when you cut through them, you cannot really project them with any clarity when you are entering into a winter. Because you know I would hate to tell you guys I have assumed perfectly normal winter and tell you what our budget is and build a range around our budget, and then come out and disappoint the world. So I would agree that I am conservative on this. I might quarrel with your very, very's.

On the other hand, if you look at this quarter, I think you all have to give us a little bit of slack because the balance sheet changes. Antargaz was a nickel, and Antargaz is new to the family and it's difficult to get our arms around that with the same degree of precision. When you cut through it, that is basically the reason.

If you look at our dividend policy, we are very conscious of the fact that we are a growth and income vehicle, and we call ourselves as you know a balanced growth and income vehicle. That explains why we jumped our dividend 10 percent last year as opposed to our 3 percent dividend increase. We have said we are comfortable with a payout ratio north of you know, 40, the low 40s percent.

But as our payout ratio drops below 45 and approaches 40, we began to look at it more carefully than we normally do. The board begins to look at it, and we then evaluate the issue of if we are a balanced growth and income vehicle, what does that mean for our dividend?

And so there are a variety of ways that we can approach that, and obviously your point is well taken. If we continue to grow earnings at 15 percent a year and raise our dividend at 3, pretty soon our payout ratio drops very low. I still maintain that the nature of our businesses are 4 to 6 percent growth inherently in themselves. As we do acquisitions successfully, as we redeploy the cash successfully, we are going to exceed that, and you rightly point out I would say we move from track record of success to tradition of success in doing so. But I think you can rest assured that we are conscious of the balance in growth and income, and that if that 3 percent dividend increase appears inadequate given our earnings growth, I would expect our board to look at that issue very carefully.

Okay, that is a deal.

(OPERATOR INSTRUCTIONS). Hunter Horgan. Amaranth Advisors.

It is actually Jim McFadden. I had a question on the derivation of '05. This is high-level. We are starting with the 257 adjusted. As you grow that by the mid point of your range, 8 percent gives you 20 or so cents. Then Antargaz is supposed to generate another 20 or so cents, which would put our midpoint closer to $3.00. Is something wrong inherently with that real high-level calculation?

I think the only thing I would tell you is within -- we put out a 280 to 290 because, one, it is early in the year and it is (inaudible) are behind us, and it is warm already. Two, we are worried about demand given the high-priced environment. And one could certainly add up the numbers to get to $3.00 in earnings as you have done. I would tell you at 290 going into the winter at the high end of our range, we're not so far off that I would think folks would quibble with us too much on that.

But we are looking at a challenging year for us with the energy prices where they are, demand questions, and so I don't want to get ahead of myself having come off of 14 percent warm month and another month that is halfway through and continues to be warm.

Just a clarification on that. Is the 280 to 290, does that assume a normal weather year for October 1 through September 30? That includes already the warmer (multiple speakers)

I would tell you -- I will tell you a number today that reflects what I have seen and what I see at the time I speak. And so there is some play in that obviously. The warmth in October and early November, if I get a cold December, you won't find it. And so the difficult part in here is I can only tell you what I see at this point, and as you all have -- I will take David Schanzer's words modified by me -- if you characterized it as we are conservative in our outlook, we don't want to let Wall Street get ahead of us and dictate to us what we have to do because that puts pressure on our business units to do things which are not appropriate for the business. I don't want that to happen. We are running a business for the long-term here. We want to have the flexibility and freedom to run the businesses for the long-term.

One last if you don't mind. On Antargaz where was the forecast -- what is the French franc forecast I guess reflected in that?

Well, we are sitting on a Euro to dollar of about $1.30-ish, about $1.29.

We are $1.20 or so in our forecast.

If it turns out to be -- what is the sensitivity (multiple speakers)

A 10 percent move is somewhere like 6 to 8 cents, somewhere in there.

So if the year averaged 130, you would be 6 to 8 cents better off than you are forecasting?

Yes, exactly. All things considered and all things equal, absolutely.

Philip Salles. Credit Suisse First Boston.

It is Philip Salles from CSFB. Just a quick question on the 2005 revised earnings guidance. Of the 10 cents, can we look at the trueup of 5 cents that you described in 2004 as being part of that change? Perhaps you could even expand on the 2005 guidance as what is making up that 10 cents increase?

I think you hit the nail on the head. It is partially that, and it is partially our valuation. What we do, Philip, not withstanding all the bad names I get called as conservative, etc., is we kind of look at -- we take a snapshot this week before we talk to all of you where we are in our various business units, what the weather has been, what the Euro is as was suggested before by Jim. And we try to evaluate it all, and we give it the best shot we can with a little bit of conservative twist given the fact that there is so much uncertainty ahead of us with the winter weather and energy prices and demand. And so but 5 cents of it obviously was the balance sheet. You know a little bit more than that. Actually most of it was the balance sheet, as Tony is signaling me across the room, in an assessment of where we stand in our various businesses compared to where we were before.

As long as I cannot see Tony's signals, perhaps you could -- not to beat them all to death -- but to go back to this trueup, and as you described this conservatism on your part, but can you at least lead us -- is this an adjustment to the purchase price in marking up the assets? Does it have to do with any of the UGI balance sheet growth specific to an offset to deferred assets from deferred liabilities? Can you be a little bit more specific so we could understand what this benefit is and especially since it is going to impact you going forward and the level of conservatism? Was that just a question of the fair value versus the market value or the purchase price being paid?

No, I think Tony is going to give you -- will correct all my errors if I have in this. We estimated the fair value of the assets and the depreciable life of the assets for purposes of the balance sheet, which you must do and, therefore, get depreciation when it did our pro forma. We went out -- as you know, we're very conservative folks, and we went out and said we're going to get an appraisal of these assets, and we're going to get an independent group to tell us what the values are and how long-lived they are and what salvage values are going to look like and all that other stuff.

They came back with a different set of conclusions than our preliminary conclusions. That is the combination of life plus value was different than ours which resulted in lower depreciation going forward. And the common entry I suspect is more goodwill as you do that. If you lower the asset value, the allocation goes to goodwill.

We also have debt in Antargaz, which was issued a year or two ago, which is high-yield debt, kind of a 10 percent interest environment. There is a call on it in 2006 and it is due in 2010, and the accounting rules look at yield to maturity and yield to call, and they say the interest is not really 10 percent, it's something less than 10 percent for book purposes because of how they calculate those things.

So it reduces both interest expense down from the notational 10 percent we pay on that high-yield to a more market rate 8 percent roughly as Tony is telling me. And so there is a little bit of interest expense saving as well. Again all done by third parties, not done by us. And so when we put that against the pro forma balance sheet that we had, it created this nickel for the period we are talking about.

That was helpful. Thank you. One last question if I may. Just to give you another opportunity -- in your opening remarks you talked about Antargaz, and you actually your words you described it as cumbersome. And given the fact that Antargaz is a significant contributor to income, as well as anticipated cash flows, I would like to kind of give you another chance to talk a little bit about Antargaz and elaborate on those opening remarks, specific that it is being more cumbersome to predict.

Yes, I think I chose the words perhaps a little less precisely than I should have. What I meant by cumbersome to predict is, the earnings forecast that we create here come up from all of our business units, and then Tony and I and -- principally Tony and I have enough experience to look at those, and then we create a separate chart which says, alright where are they being conservative and where are they being too optimistic. And so we will have pluses and minuses that we apply to the information we get from all our business units to give you an answer.

We have the utmost regard for the Antargaz management team, but neither Tony nor I have an extensive period of time sitting down with them, and when we received their numbers to put our -- I would call it English, but in this case it is French -- put our French around the numbers and do the same kind of plus and minus that I do with our other units. And so it is more difficult -- that may be a better word than cumbersome -- it is more difficult for Tony and I to do the pluses and minuses and give you a number that I feel I can predict with as much certainty as I can with the other business units.

Again, it is not anything other than direct experience in interpreting the nature of the management of the business unit and allowing us to adjust for their nature whether they are generally optimistic or generally pessimistic.

As you well know, we have been around Antargaz for three years. We know the business well. We have the utmost regard not only for the top management but for the employees of that organization. It is a terrific organization. But they are not familiar with having to deal with the pressures of Wall Street, having to give earnings estimates and having to create some precision around those earnings estimates as we are as a public company. And as a result, there is a learning process that is going on. It is not a learning process of the business. It is not a learning process about the results. It is a learning process of how do we give useful and reliable information to Wall Street, which these people are not experienced in.

Yves Siegel.

Gene, a question for you. In terms of the recent acquisitions that you have made, any discernible trend on multiples what the acquisition market looks like?

Well, I guess we are getting more phone calls than we were for a while which is encouraging. I think we're talking to more parties than we were, which is good news. There are a number of other players out there buying those. So the multiples are still, though, in the 5 plus or minus range where they have been sometimes higher, sometimes lower. But you know the way we watch the market you have seen us over a period of time. If we see multiples getting too high, then we will start to pullback. We will show some restraint if we see them getting too high. But we're seeing a lot of opportunities at fairly reasonable multiples. (multiple speakers)

What I would add to that is you know, EBITDA is in the eyes of the beholder because the other side of that multiple is your earnings. Where we have a competitive advantage, I think it is clear that we're seeing prices that remain rational, although they are rising I would say is accurate as well. Where we don't have competitive advantages, I would say we are seeing multiples be pushed higher than we have in the past. So that is a sort of qualification.

I agree totally with what Gene said. We've got a nice deal flow. Folks are able to find deals which are rationally priced, and it is a credit to him and his management team that they are appropriately cautious when multiples begin to rise to us and our calculations that we don't overextend.

Do you still have assets to prune?

When you've got 700 locations, you always have assets that might be worth something more to somebody else. So every year we do this actually, we look at all our locations and look at their profitability and what we think their future is, and you know you could expect that every year we will prune a few of them, some years more than others depending on the opportunity.

Then my last question, what is an appropriate distribution coverage ratio after the winter?

In terms of coverage ratio for the distribution you said?

Yes, sir.

An appropriate one?

Yes.

The higher, the better obviously. But if the question is, how high will the coverage ratio need to get before we raise the distribution? Is that your implicit question?

I was trying to be diplomatic.

Yes, exactly. I would never -- I am no Colin Powell. I may be a Condoleezza Rice, though.

So I recommend a good dentist.

We have said previously, and I will reiterate that as we come out of this winter, if we see AmeriGas continuing to earn the kind of numbers that we believe they can earn, our coverage ratio last year was over 1.3?

1.3.

1.3 and most MLPs believe that to be a coverage ratio sufficient to begin to evaluate raising distribution. And I don't think our Board disagrees with that assessment, that if you can feel comfortable that you are at a 1.3 or better coverage ratio, somewhat a little bit better than that, that we will begin to look at distribution increases as well.

The other side of the equation I do want to emphasize, is that the rating agencies are always nervous, and as a result, we have made significant improvements in our balance sheets. Our interest coverage has really improved dramatically, our EBITDA -- debt divided by EBITDA number has improved dramatically. Yet while the rating agencies note our progress, they are not satisfied yet. So we still have the balance of making sure that as we entertain distribution increases that we are continuing to strengthen and support our balance sheet.

So that is what we are looking at, but certainly distribution -- certainly coverages that you have suggested have warranted other MLPs to evaluate their distribution. And I'm sure our Board, as we get through this winter, will do the same.

There are no further questions at this time.

Okay. Thank you very much, Kelly. I want to thank all of you for your attention, your extreme confidence in the management team, and our employees. We are gratified I think is the word I'm struggling to get, gratified by that confidence in us and our ability to produce results for you. And you can rest assured that the management team is composed of a group of warriors and a group of folks who are not complacent with having accomplished what we have accomplished, and we intend to keep growing this Company for the benefit of all of our constituencies and producing total returns that all of you are more than satisfied with.

So we look forward very much to speaking with you in January, and if we get a little better of weather here, we should have a very good year and quarter as we go forward. So thank you all very much for your attention, your support, and we look forward to talking to you. Bye-bye, now.

That concludes today's conference call. Have a pleasant day.