UGI Corp (UGI) 2005 Q3 法說會逐字稿

Good day and welcome to the UGI and AmeriGas third quarter 2005 earnings release conference. As a reminder, today's call is being recorded. For opening remarks and introductions, I would like to return the conference over to Mr. Bob Krick, Vice President and Treasurer of UGI. Please go ahead sir.

Thank you Sara (ph) and good afternoon and thank you all for joining us today. As we begin, let me remind you that our comments will contain certain forward-looking statements, which the management of UGI and AmeriGas 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 full list of factors that could affect results. But among them are weather conditions, the costs and availability of all energy products, including natural gas propane and fuel, competitions from the same and alternative energy sources, currency exchange rate and political, economic, legislative, and regulatory changes in the US and abroad. UGI and AmeriGas undertake no obligation to release revisions to these forward-looking statements to reflect events or circumstance occurring after today.

With me today are John Walsh, President and Chief Operating Officer at UGI; Eugene Bissell, President and CEO of AmeriGas; Tony Mendicino, Senior Vice President and CFO of UGI; and of course your host Chairman and CEO of UGI Lon Greenberg. Lon?

Thank Bob. Let me also welcome all of you to our call. I have just got the opportunity to review our press releases reporting our 2005 third quarter results. Given the seasonal nature of our businesses, our third quarter this year like our fourth quarter in all years is not typically eventful for us and I must confess that the third quarter of this year was no exception.

UGI reported earnings per share of $0.01 a share compared to $0.08 last year, of course included in this year's results however was charge of $0.09 a share attributable to refinancing a certain debt that was done at AmeriGas, with one adjusted for this event. Earnings per share actually improved by $0.02 or 25% compared to last year. AmeriGas reported that its EBITDA improved by 3.8 million to $19.9 billion compared to 16.1 million last year again after adjusting for the charge associated with the payment of bad debt.

There really are no noteworthy overall trends evident in our results, which I believe should be brought to your attention. This is not to suggest that our business units didn't face challenges this quarter, but rather the magnitude and effect of those challenges was not significant this quarter. Our press release also sets forth new, higher earnings per share guidance for UGI for fiscal year 2005. The higher guidance reflects somewhat better results in most of our business units in the third quarter as well as we expected visibility that comes from three months having passed since our last guidance. With regard to AmeriGas, as you know, we continue to expect AmeriGas to report EBITDA in the 245 to $255 million range, again after adjusting for that loss associated with debt repayment.

We do remain pleased with our progress and are looking forward to the remainder of this year. But before I'd turn my attention to our outlook for the future, I want to have Tony Mendicino, our CFO who review our performance this quarter in more detail. After Tony concludes his remarks, Eugene will comment on AmeriGas's performance and following Eugene's remarks, I will come back to you with a few concluding remarks. So Tony tell them about this quarter.

Okay, thank you Lon. As Lon mentioned, we reported net income of $0.01 a share this year, which includes a $0.09 per share charge for the loss or extinguishments with debt at AmeriGas. Absent of this charge, earnings per share would be have been $0.10, which compares favorably to last year's third quarter earnings of $0.08. Overall, it was a good quarter. It should be noted that this is the first quarter that includes (indiscernible)gas on 100% ownership basis for both the current and previous year quarters. So, it provides good quarter-to-quarter comp liability. Let's look at some of the operating and financial details of our business groups.

AmeriGas, with national weather that was 5% warmer than normal, was 3% colder than last year. So our EBITDA increased to $19.9 million excluding the loss on extinguishments of debt of 33.6 million. This was about a $4 million improvement compared to last year's EBITDA of 16 million. Retail volume in AmeriGas was up 7 million gallons at 182 million gallons. The volume increase was spread across all places of business except agricultural, even though we believe customers continued to conserve in reaction to a high cost of energy products. The volume increase coupled with higher unit of margins offset the impact of higher expenses primarily in vehicle fuel costs incentive based long-term compensation and general insurance to result in the higher EBITDA for the quarter. AmeriGas called and refinanced approximately $400 million worth of debt in the third quarter. The transaction will save AmeriGas more than $4 million in annual interest expense and extend the maturity of the cold debt by full year as to 2015 and what we believe our attractive long-term rates. Ignoring the loss and extinguishment of this debt, AmeriGas contributed $1.6 million to UGI's operating income compared to a $4 million loss in the same quarter last year. Eugene, as always, will have more to say about AmeriGas' performance in his comments.

Operating income in our utility operations was $12.6 million compared to $12.4 million for the third quarter last year. And our gas utility operating income increased by $800,000 to 7.7 million. Throughput declined slightly to 15.2 bcf. However, gross margin increased as the benefit from increased sales of higher unit margin residential and small firm customers offset the decline in sales volume to lower unit margin, large firm and interruptible (ph) customers. Weather was 6% warmer than normal and 15% colder than last year. The higher gross profit -- gross margin was offset in part by increased operating expenses, particularly higher performance based long-term compensation. The gas utility continues to grow its core heating customer base at rates in line with our 3 to 4% annual growth target. On a year-to-date basis, the gas utility added more than 6,500 residential heating customers, approximately 800 fewer than last year on a year-to-date basis.

In Electric utility, operating income was 4.9 million, down $600,000 from last year. Gross margin was flat to last year and (indiscernible)was also flat to last year at 222,000-megawatt hours. The decline in operating income resulting from higher operating expenses primarily performance based long-term comp and a favorable adjustment made to depreciation last year.

Operating income in International Propane declined by $1.1 million, as increased operating income at Flaga offset in part reduced operating income at ensor (ph) gas. Operating income at Flaga improved as a function of higher volume, largely from the acquisition of the Czech business of British Petroleum in the fourth quarter of fiscal year 2004, and as a result of excellent expense control. Operating income at ensor gas was down as marginally higher gross profit resulting from higher unit margins reduced by lower volumes for the quarter was offset by slightly higher operating expenses. Again, this is the first quarter in which we are going to 100% in ensor gas for both the current and year-ago quarters.

Energy Services operating income increased by $400,000 to 10.6 million. Higher gross profit in electric generation resulting for more kilowatt hours sold and higher unit margins was in part offset by higher operating expenses in gas marketing due to increased bad debt expense and seasonal losses at their newly acquired propane import terminal in Virginia.

Moving out to balance sheet considerations, on consolidated basis, UGI's total debt on June 30th was $1.75 billion, up 30 million compared to last year. We currently have about $130 million in investable cash. AmeriGas closed the quarter with $929 million in debt on their balance sheet, up $30 million from last year. Other than letters of credit, AmeriGas currently has an $18 million balance on its revolver. Eugene will now expand on AmeriGas' results.

Thanks, Tony. As Tony mentioned, EBITDA for the quarter increased by 3.8 million, excluding the loss on debt repayments. The improvement in EBITDA was principally due to the higher volumes. Our volumes were up 4% on weather that was so much colder than last year, but still 5% warmer than normal. In addition to the weather, our volumes reflect the positive impact of acquisitions net of divestitures completed since last year and volume from customer growth, offset in part by price related customer conservation. Record high-energy prices continued to have a significant effect on the propane industry. The average cost of propane at Mt. Belvieu for the quarter was $0.82 compared to $0.65 last year for an increase of 26% and the Belvieu cost was up $0.30 from the preceding five-year average. Propane pricing is basically tracking with the rising cost of crude oil. In addition to causing customer conservation, high-energy prices drive up the cost for fuel for our vehicles. The cost of propane, diesel and gasoline for our vehicles is up 31% from last year.

Operating expenses for the quarter were up 6.6 million, the biggest contributor to this increase was the result of something I can hardly complain about, the effect of the increase in performance based compensation expense. Our general insurance expense was also up due to increases in accruals for prior-year claims. And together the increase in vehicle fuel, performance-based compensation and general insurance represented about 76% of the increase in expenses compared to last year. Salary expense for the quarter was virtually flat. I would like to give you an update, I would also like to give you an update on our core strategies of growth through acquisition of PPX, strategic accounts and through customer growth and our traditional ways of residential and commercial accounts.

Our goal in acquisition is to add 10 to 20 million gallons a year, through the acquisition of independent marketers, and then to pursue the larger regional or national deals when they become available. The amount that we acquire in a given years depends on the number of marketers, who are interested in selling the service expectations and what our competitors are offering. We are reviewing a number of promising opportunities right now, but we're also seeing an increase in multiples being offered by some of the other buyers. We completed one acquisition in the quarter, which will add 2 million gallons annually, that brings the total for this fiscal year to four acquisitions, which will add 10 million gallons annually. I also wanted to say that I'm pleased with integration of these acquisition, which has gone very smoothly. I would mention however that we have completed nine divestitures this year, with the annualized volume of 6 million gallons, and so the divestitures offset some of the gallons that we have gain through acquisition. These divestitures are the results of an ongoing program to prune our portfolio, the locations that we believe may be more valuable to another propane company than the AmeriGas.

Our second strategy is to leverage our geographic coverage through strategic accounts of PPX. Our strategic accounts volume is up about 12% first of last year. Our strategic accounts team has grown the account base by about 1,600 locations, and many of the new locations come from existing customers who are growing their businesses. Our PPX has also had good growth. Same-store sales are up about 10% and we had 1,200 more locations in the end of June, than we had last year at the same time. The growth in volume however, was offset by lower margins. The drop in margins was due to the higher cost of propane, which is more difficult to pass on to customers in this segment. The good news on PPX is that we recently signed two contracts with major customers that will add significantly to the PPX volume and EBITDA next year.

We continue to be enthusiastic about this segment, because of these growth opportunities and the fact that most of the volume comes in May to September. So, it's kind of a seasonal for the rest of our business. The third strategy is to grow our traditional base of residential and commercial customers through better customer service and sales. I'm pleased to report that despite high prices, and warmer than normal weather, we are slightly ahead of last year in the net number of these customers that we have gained. This is a real credit to our sales team, and our field employees, who are helping us to achieve our vision of being the most reliable, the safest, and most responsive propane company in each of the markets that we serve. Before I turn the call back to Lon for some closing remarks, I would like to thank my fellow AmeriGas employees for their commitment to our customers, and for growing our business. Lon?

I would like to leave all of you with the following thoughts, as I hand my prepared remarks. From a qualitative standpoint, we continue to be well situated for the future. We are in good businesses, we now have to run those businesses, and we are in excellent financial conditions. We expect to end the year at the end of September with nearly, $200 million of cash, and next year expect to generate an additional $80 million of cash to invest. We also expect to be able to deploy that cash over time in productive ways, such that we are able achieve our goals of producing above average long-term shareholder value. Like any business, we have our challenges however. High-energy prices continue to be a burden to our customers as Gene pointed out. And we have seen and expect to continue to see in the future, our customers conserve in their energy consumption. In addition, competition in the energy distribution business is always intense, and lastly, there is lower interest by others in energy distribution business than we have seen in recent years. As a result internal growths, efforts continue to require an intense focus on execution, and on other issues, we anticipate being coactive in addressing those issues. I also want to remind you as I did in both the first and second quarters that Antargaz is having an unusually strong year. In particular, margins have exceeded our expectations all-year along largely due to the timing of and patterns associated with the cost of product.

Furthermore as we noted in prior calls, the high level reached by the euro compared to the dollar in our first and second quarters also contributed to Antargaz's strong results. While the strength of Antargaz's results had persisted somewhat longer than we expected, we do anticipate that Antargaz's results will approach more normalized levels in the future.

On the other hand, as you know, some of our business units did not perform as well as we expected at the beginning of the year. A particular note in this regard is the AmeriGas, which was buffeted by warmer-than-normal weather and that weather was in the form of erratic weather patterns during the winter.

As you know, we remain fully committed to achieving our long-standing financial goals of 6 to 10% earnings per share growth, and our recently raised target of 4% dividend growth. We have stated many times that we expect to achieve our earnings goal over time through the combination of growth and earnings from our existing base businesses as well as from earnings attributable to reinvestment of our excess cash.

We remain committed to achieving the earnings growth rate that I mentioned. I also want to remind you as I had in the past to factor in as we always do on usual items as you calculate our earnings base from which to calculate this growth rate. The model we have for our Company is, growing our businesses somewhat in excess of their industries, operating those businesses efficiently and effectively, producing excess cash flow and reinvesting that cash flow for additional growth, while at the same time returning a portion of that cash to you in the form of a handsome dividend. That model exemplifies a balanced growth and income vehicle. We look forward to reporting more progress to you as we finish fiscal year 2005 and navigate our way through our 2006 fiscal year. Sara, that ends our prepared remarks, and we'd be happy to take some questions.

The question and answer session will be conducted electronically. [OPERATOR INSTRUCTIONS]. David Schanzer, Janney Montgomery Scott.

Good afternoon. Congratulations on a good performance on a sometimes-trying quarter.

Thank you very much.

You mentioned at the end, the positive impact of the euro. Is there any way to quantify that for the quarter?

For the quarter, Dave I would tell you, there was a positive impact, but what happened during this quarter, as you may recall, the euro dropped actually from $1.35 at its peak down to what it currently is at about $1.20. So, compared to our expectations at the beginning of the year, I would tell you, there wasn't a positive contribution from the euro in (indiscernible), but it was pretty modest, because we expected $1.20 and it ended up being $1.20.

Okay. So, that was your budget.

Yes, that was our budget kind of assumption on the euro, which was where the euro was at the beginning of the year when we started. So, I think that that's directionally correct as an answer to you. If you look at the euro in the first two quarters, it was over $1.30, and so that kind of 10% moved, and if you looked at our net income over those two quarters, you could see a fairly substantial contribution to earnings coming from a higher euro at that time.

My second question has to do with rather small electric operations you guys have. I know in the first three quarters or certainly in the first two quarters, electrics relatively small part of what to do. But in the fourth quarter and given what is going on with where they're today, electric could probably be marginally even little bit better for you than it has been. Are you seeing that kind of improvement so far in this quarter and is -- is your electric supply in good shape?

Yes, let me answer that in a couple of pieces, Dave. Electric supply is in very good shape, and we are -- on the margin, our peak load has been somewhat higher than we thought, and we covered most of our affected peaks. So on the margin, we've been out there on occasion buying a little bit excess electricity, and because sales have been so strong given this weather that I would tell you that the other business had benefits from this really warm weather, it's our HDA fee (ph) business. So, we're seeing the summer peaking businesses, which are small for us. Probably it produced better earnings than we had. We have the generation businesses, as you know, in UGI Enterprise's Energy services, which obviously is the biggest beneficiary of this because they sell a substantial portion of their generation into the L&Ps although we hedge a substantial portion as well. So, on balance, we will be better off to this hot weather than we would have otherwise, but September is a very important month to us and we need weather to return to the more normal temperatures to help at our winter peaking business as opposed to the summer figures.

Thanks, and then my last question, once you were talking about the cost of fuels and so forth, that's a fairly sizable increase in terms of fuel cost to operate the business. What kind of initiatives you guys are looking at the deal with that going forward hedging or what ever?

That's a tough one Dave. We have looked at hedging and we do hedge when we go out with a fixed price program as we are accustomed to doing in AmeriGas and our -- some of our other businesses, we hedge that back-to-back. But there hasn't been a point where one has had the opportunity to jump in because you felt prices really dropped a lot. So, I would tell you that this is very difficult to do anything with this cost other than attempt to pass it on to customers through higher prices to appropriate customers which pains us, but there is nothing we can do about that as a distributor, and also in our gas marketing business, they also passed those higher prices on. In a utility business, it's some what dampened because we have a gas cost rate and we go in for increases there in a way that lags the increase in the market place. So, that is one of the things we do but vehicle fuel is the biggest causality of that and that vehicle fuel expense is up, and we haven't had an opportunity or we haven't seen an opportunity to really hedge that vehicle fuel cost in any effective way.

John Freeman, Raymond James.

My question is on AmeriGas, on PPX, on the propane side, you did a good job of passing on the higher propane prices on to the customer, where on the PPX side, you mentioned that it is more difficult to do and obviously impacted your margin, I was wondering if you can elaborate on why you are not able to do it on a PPX side?

Just the competitive environment on the PTPX side makes it somewhat more difficult and the -- that's essentially the reason for it. You got -- some companies that you sell to in that segment Home Depot or Wal-Mart, good bargainers and that's just an essence of reason.

Okay. And on the divestitures that you mentioned, is sort of 6 million through about nine divestitures, were those primarily in a certain geography or whether they kind of spread -- I am wondering if it was certain part of the country that was just less profitable and the other -- other that you all decided trying to get out off?

No, they really were spread out and you know they tend to smaller locations and that's the part of the reason that they don't fit and they are a nice blend in for somebody else. So, there is no particular geography that they come from week. We look at our whole portfolio every year and look for out of the 650 locations though that we ought to think about pruning. But it's not because we decided to get out of any particular geography.

Okay. And a last question I had was I know on the last call you all were pretty excited about by having about 10% more PPX locations heading into the growing season. I was wondering if you can provide an update and a kind of how -- so far how the growing season is gone for the PPX segment?

The growing season has a nothing remarkable I would say, nothing too different than what we would have expected in the growing season. We -- in past years, we had the issue where a lot of people replacing cylinders because the valve had to replaced. We don't have a phenomenal like that this year. So -- and you know, the other thing that could effect us is hurricane. So, we haven't seen any impact from hurricanes this year either in terms of PPX volume.

Okay. Thanks that's all I had.

And Eugene, let me just -- and you correct me on this. On the inability to push price increases through on PPX. You do have fair number of customers who are contract customers, where they are for -- we have an arrangement with them or sign a contract with them at a price which is set earlier in the year, and in exchange for that obviously they agree to pay us a price for our product and if product cost goes down we make a little more money, if product cost goes up we make a little less money. And so a portion of our inability to raise prices in PPX is just the nature of the business as to when you set your prices.

That is correct. We set them well before the season starts typically --.

On top of that what percentage of that business is this contract type customers?

Well, I say, more than half of the business is contracted customers where we will agree on the price for the year before we start the season.

And when is that generally kind of locked in?

It depends a lot on the customer and how they manage the business, but some where in the December, January time frame is kind of typical.

And it's generally like a one-year type contract?

Yves Siegel, Wachovia Securities.

Just follow-up questions. One is, can you tell us what the proceeds were from the disposition to AmeriGas?

They show up in other income line and that will probably be on $5 million range, five or six is about the area of proceeds. Probably closer to six, everyone is giving me hand signals.

Okay, but that is not necessarily the gains that you had on them.

No, that's gross proceed.

And then in terms of the acquisitions on the 10 million gallons that you bought, how much did you spend there?

There is a footnote called the acquisitions in 10-Q, I think it's on the order of $10 million, is that right?

I don't remember that.

We better check that. It might have been 15. I'd say between 10 and 15.

Okay. Then, just looking at UGI, Lon, in terms of the imitational Propane business and Antargaz, is there any way to sort of quantify how much of the earnings stream would be above budget or characterize what you said unusual?

Parts of it are very easy to do. As you know, they had a -- and we talked about and have in our 10-Qs, they had a 15 million Euro tax benefit, one-time tax benefit catch up as result of some court decision basically or administrative decision in France, so there is 15 million of net income right there that we have identified in the past as sort of one-time stuff and that's an easy though. On the margin side, there is a number of ways of looking at that. I think we had said on many occasions that we expected earnings from our international business to be on the order of a third to little bit higher than a third, I think we've said that in our 10-Qs that we expect over a third of our earnings to be from international. If you look at what we have right now, you can see roughly half our earnings are from international and something less than that, if you take 15, there is a 100 million of net income reported from international, if you take off the 15 to get 85, and now you can do the math to take that down to somewhere between 30 and 40%, kind of where we have been telling people in the 10-Qs to look at. And you can get a number that gives you directionally the affect that is there. And I haven't done the math, I'm doing this on the fly as we go, but I think there is an extra 15 million bucks that comes out of that roughly. If you have got the difference a third and the numbers, I am looking at, are on the order of 15 million bucks. As we said -- in 10-Qs we've told people that we are expecting a third or something in excess access of a third to come international, and if you look 85 over where ever we are now, I think it gets you to number that will be a good ballpark number for you.

But it is fair to say that some of the gain that you saw this year in the margin is repeatable? Is there any thing that perhaps you're doing differently that --?

I think, you know, compared to our expectations, if you recall we started everybody off, and people thought I was being conservative, in kind of the 280 range for our number for this year as our estimate, and then we kept walking it up as we've gone along. I would tell you that we think the run rate in Antar (ph) Gas is higher than we anticipated certainly when we gave you that kind of 280 base rate that we've had before. And I would say, some of the improvement not only in margin, but also the effectiveness of the business, we would expect to see going forward. It's not all lost money in terms of one time -- it's not like the taxes, if you will. There is a piece of that that we think when you look at the business, obviously it's improving itself.

If I can keep going, just tell me to stop. When you look out to the international market, what's your thought in terms of acquisition opportunities?

I would tell you that there are a number of opportunities internationally that we look at as well on the domestic side, I think there are -- is a good pipeline of both international and domestic opportunities. And certainly in the international opportunities, there are some upscale and there are some of not great scale. As you recall last year, we did a small transaction from a BP that Tony alluded to where we bought their Czech business, which was a small transaction. So, I would tell you that the pipeline on both the domestic and international side is good. We are so much concerned about the escalation of the EBITDA and we are also so much concerned about the great interest shown in energy assets by private equity folks. It seems to be pricing energy assets by not the fundamental, but by how much debt they can bare and then they back into price. And when people do that, we probably will be unsuccessful in achieving our goal of purchasing, and we will wait for the next round, they come and we will buy on that.

I remember the old LBO days, right?

Yes, that's true, and everybody thinks that the world changes, and the world does change but somehow it reverts to mean in some cases.

Two quick ones. Is Shell determined that they are going to sell all their Propane, and are they determined as they may split up those assets, or are they looking to sell them in one big package?

I can you tell you, it's publicly out there, and I don't know that Shell has spoken on this specific issue, but I read the newspaper accounts, and newspaper accounts say Shell was out with a Teaser on the entire business as opposed to pieces of the business, so as I can tell you what I haven seen.

At what point in time do you start considering stock buybacks again?

As I told you, we expect to have between cash on our balance sheet and Anto, I guess this balance sheet that they are going dividend us this year. On the order of couple of hundred million bucks and if you look at what we can generate next year and get through other techniques, we could be a year from now with $300 million as conceivable. I would tell you that as I said consistently, if we don't feel that on the reasonable horizon that we have a good use for that cash, we are not adverse to buying back stock. So, certainly we have the resources to buy back stocks, and it's going to be question as we go long, what the line of side is for uses of that cash and investments and to the extent we believe we have got cash on the balance sheet in excess that what we reasonably think we can use, we will produce the productive uses.

[OPERATOR INSTRUCTIONS] Adam Galeon, Credit Suisse.

You talked a little bit more about this new major customers, to the extent are they new entrants to this market, or are they a pickup of market share from a competitor, how large is it in terms of impact to you, and is there growth potential associated with it?

We had a guy -- before Gene answers that, if you may recall, Dick Bunn used to run our energy utility businesses, and Dick used to say, when asked a question like that, the answer would be yes. I think the combination of both basically. It's new entrants and some exchange of customers and taking of customers from competition.

And you said there were two customers I thought so.

Yes, there are two. So, the answer still is yes. No matter how many times you ask, it will be yes.

How much impact should that be?

This year, for 2005, it's the minimus.

That was the next question, why is it not until next year, is it the contract doesn't begin until --?

Even if the contract began today, when you have a customer of some scale, it takes a while to roll that stuff out.--.

Correct, it takes a while to do the installation and get them in place, most of the season is -- we are getting close to the end of the season.

For (indiscernible)

And in terms of the retail propane, what have you seen in terms of any fixed price contract this year? Is there inquiries more or less than historical?

It's a little early to say if it's more or less than historical. We and competitors have fixed-price deals out there. We don't know what the up tick would be yet. We will know that, you know, in a few months we would get a better sense of what that's going to look like. And some of our competitors aren't even out yet with their fixed-price offers. But I can't really tell you what that's going to look like for the year.

Let me point out one thing, Adam, in that there is nothing wrong -- inherently wrong with the fixed-price contract and one would argue that there are benefits to fixed-price contracts in terms of customer satisfaction. The trick in any fixed-price contract is the discipline of backing up your fixed-price contract with adequate supply and pricing your fixed-price contract such that you get to the margin that you think you need to get in order to lock that fixed-price, because you are providing a significant value to the customer in locking that price. So, the true discipline and the true differentiator in offering fixed-price contracts I think is how one handles the supply situation behind that fixed price contract. And AmeriGas has an enviable record of matching their supply and their fixed-price commitments, and it has never been an issue for us.

Peter Henkel (ph), Schneider Capital Management (ph).

Did you talk about the churn in the bad debt at the AmeriGas level given the high prices that your customers had during the ceiling season?

Bad debts, and so far we aren't much of an impact from the higher prices. We reserve bad debt based on revenue. So, you will note that reserving is affected by the high prices, you know, the high costs resulting in the high prices we are passing on to the customers, but we are not really seeing an impact in terms of write-offs at this point.

And on the churn side?

Churn side, I wouldn't say that we have seen anything yet. An awful lot of the decisions that are made about whether you are going to stay with our current supplier or not are going to take place September through say November-December. That's when if you are going to see a lot of the churn, you might see it. So, a lot of people aren't, you know, especially with the heat that we have got right now lot of people aren't thinking about where they're going to get their heat next winter.

Yves Siegel, Wachovia Securities.

Eugene, on PPX, is it possible to sort of break out what percentage of overall EBITDA you get from PPX?

I think we have done that. I think in that past we have said it's on the order of 10% of it, and I think this year it will be something less than 10%, but in the past 10% has been a good number.

Is it fair going forward that as a percentage it probably grows faster than the overall business on an EBITDA basis or --?

The issue that occurred in PPX, and I am giving Eugene words, so please correct me, is you remember there was a rapid run- up in PPX EBITDA because of the valve change out and what the suppliers to the industry, that is us, (indiscernible)and others did was raise our uprising to the distributors, the Lowe's, the Wal-Mart's, et cetera in order to recover that capital. So on a cash flow basis, EBITDA was -- we didn't get any significant improvement of cash flow out of that exchange of dollars for capital, if you will. What's happened is most of the industry has revalved and they had to revalve because the law has changed. And so you are seeing the EBITDA for all of us in this industry clock off some because prices are coming down to reflect the lack of capital investment that we have to make in the industry. And so, you have to get to a levelized level first and then I would think that they would grow depending on the relative growth you have, but I don't think -- it may move somewhat faster, but it's on such a small base that you don't really notice it at the end of the day. And the real question is, are you producing more cash in your system by doing it or you have to increase your capital really to match it.

For the bonds -- so its generating free cash flow at this juncture.

Yes, it generates free cash flow for us. For those folks who have not been around the industry very long, it is very substantially cash negative for them. You got to go out and get cylinders, you got to out for the flow, you got to get cages and it is a very difficult business for folks without deposits to enter and let's say our very, very patience investors.

Okay, could you just give the outlook again and I apologize if I missed it on what you are seeing for energy services?

We didn't speak specifically about energy services, you know, I think just speaking of the top of my head. We go out and come up with electricity price forecast for generation and as you know we are a slow generator, but its a nice business for us and our ship prices remain high we will do nicely and somewhat better in that business. Although costs are going up as you also know coal costs for the plants and gas cost. But some what better, I would tell you that regarding investing in assets in that business, we would expect to see some increase, I think in our investor presentations we say, we expect $0.03, $0.04 a year, maybe $0.03 a year improvement in earnings out of that on a base of $0.22, $0.23 and that's where it is. That's I'm sorry. It's 11 million and -- close to 20 million bucks. So, you know, we will get a nice growth rate of that, but its kind of a $0.03 event for us in growth there and but we are heartened by the business we think that are good and not only good investment opportunities but good opportunities to pursue from grass roots activity. So we like the business.

And it seems like you did really well year as well.

Yes, no we had -- both the energy marketing business has done well and I would say a competitive market where we do provide real value there and the generation business has done well as also and as, you know, our philosophy on generation is we don't fly turn market, we do a hedge out normally two-thirds or so of our generation we tried to hedge out into future years and we have done that and so we're happy with our situation.

[OPERATOR INSTRUCTIONS]. And gentlemen, I'm show no further questions at this time. Mr. Greenberg, I will turn the conference back over to you for any additional or closing comments.

Thank you very much Sera (ph). We appreciate all your support as you know this has been an incredibly good year for UGI and its shareholders. Not only have we split the stock rates, the dividend substantially and increased our forward look on our dividend increases for the future. But our stock prices moved significantly matching our earnings per share growth. We look forward to keeping you happy with our progress and look forward to the growth and prosperity of our businesses as well. So I look forward to talking to you in November at our annual year-end wrap up. So everybody have a good summer and talk to you soon.

That does conclude today's conference meeting thank you all for joining us.