UGI Corp (UGI) 2006 Q2 法說會逐字稿

Good day and welcome everyone to the UGI and Amerigas Partners' second quarter fiscal year 2006 earnings results conference call and webcast. This call is being recorded. At this time for opening remarks and introductions, I would like to turn the over to Mr. Bob Krick. Mr. Krick, please go ahead, sir.

Good afternoon and thank you all for joining us today. As we begin, let me remind you that the 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 that 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 adverse weather conditions; price volatility and availability of all energy products, including natural gas, propane and fuel oil; increased customer conservation measures; political, economic, legislative and regulatory changes in the U.S. and abroad; currency exchange rates and competition from the same and alternative energy sources. UGI and AmeriGas undertake no obligation to release revisions to these forward-looking statements to reflect events or circumstances occurring after today.

With me today are John Walsh, President and COO of UGI; Gene Bissell, President and CEO of AmeriGas; and your host, Chairman and CEO of UGI, Lon Greenberg. Lon?

Thanks a lot, Bob. Let me also welcome all of you to our call. I trust you've all had the opportunity to review our press releases covering earnings and dividend matters.

To summarize, UGI reported earnings per share of $0.98 a share compared to $1.12 last year. UGI also reported an increase of 4% in the dividend on its common stock. At the same time, AmeriGas reported adjusted EBITDA of 133.2 million, compared to adjusted EBITDA last year of 135.2 million.

AmeriGas also announced a financial goal of raising its distribution 3% annually, and in furtherance of that goal, an increase in its distribution of $0.02 quarterly. We are obviously quite pleased with our performance, given the weather we experienced in the United States. Our confidence in our performance is reflected in the case of UGI in our reaffirmation of the guidance we gave of the commencement of our fiscal year, and in the case of AmeriGas, in the relatively modest reduction in guidance from that which we gave at the beginning of AmeriGas' fiscal year. I will have more to say later on our prospects.

In the meantime, I would like to turn the call over to Bob Krick, who incidentally, is substituting for Tony Mendicino, who couldn't be with us today. And Bob will comment on our financial results. John Walsh will then offer some comments on our operating trends. John will be followed by Gene Bissell, as we customarily do, and Gene will add some flavor to AmeriGas' results, and at that point, I will come back and give you some closing remarks. So Bob, take it away.

Thank you Lon. As Lon said, I will be pinch-hitting for Tony, who will return to his rightful position in the lineup next quarter.

We had a very good second quarter considering the weather. As Lon likes to say, we managed those things that within our control in order to mitigate those things over which we have no control, such as the weather. Earnings per share were $0.98 this year versus $1.12 last year. That $0.98 reflects two offsetting onetime items. In the generation portion of our Energy Services business, we recorded a $5.3 million gain on the sale of our 50% interest in the generation joint venture with Allegheny. That offset a loss on early extinguishment of debt at AmeriGas of 4.6 million as a result of the refinancing of debt in January at lower interest rates.

Let me review some of the details behind our earnings, beginning with AmeriGas, our domestic propane unit. AmeriGas performed remarkably well, considering the weather was roughly 8% warmer than last year. EBITDA before the loss on the early extinguishment of debt declined only about $2 million as improved margins on both propane and non-propane sales and effective expense control offset lower volumes resulting from the warmer weather and customer conservation due to persistently high commodity prices. Net income before the charge for early debt repayment was $25.8 million versus $27 million last year. Of course, Gene will provide more detail on AmeriGas performance later in the call.

Net income for the quarter from our gas utility declined to $21.5 million from $26.7 million. Lower margins from lower throughput due to the dramatic swing in weather more than offset growth in heating customers. Heating customer additions continued to exceed last year's pace slightly. Weather moved from slightly colder than normal in fiscal '05 to 13% warmer than normal this year.

A similarly dramatic swing in weather affected our electric utility that has a considerable heating customer load. Weather was 9% warmer than normal in 2006 compared to 7% colder than normal in 2005. Net income for our electric utilities fell to $1.5 million from $3.9 million in the prior year quarter, principally due to a decline in unit sales of nearly 5% to 268 gigawatt hours.

In our Regional Energy Services business, net income improved from 8.3 million in the 2005 quarter to $10.1 million, excluding the gain on the [Honlock] partnership sale. Improved margins on lower commodity sales volumes and higher electric generation volumes and margins were offset partially by higher operating expenses. The sale of the partnership interest returns the 48 megawatt coal-fired units to UGI, along with the physical facility in northeastern Pennsylvania that could be used for future development of additional generation capacity within our regional footprint.

Turning to our international propane operations for the three months, Antargaz operating income declined to $74 million from $96 million in the 2005 quarter. As you may recall, we've reminded investors that the usually high margins and currency gains experienced in 2005 would not likely be repeated. Euro-based margins have returned to more normal levels in France and the exchange rate has been reasonably stable over the current fiscal year at approximately $1.20 per euro. Notwithstanding those, we were very pleased with the results of both Flaga and Antargaz this year. Results are better than we expected this year on slightly colder weather.

Moving to our balance sheet items on a consolidated basis, UGI's debt at March 31 was $1.8 billion, up $58 million over the last March 31. The year-over-year increase results principally from higher long-term debt at both AmeriGas and Antargaz related to their respective financing this winter and higher bank debt at utilities to fund higher working capital needs, partially also by lower debt at Flaga and lower currency conversion rates on the euro denominated debt.

Long-term debt at AmeriGas rose as expected with its refinancing from 900 million to $936 million as a result of the financing in January. There were no borrowings on AmeriGas revolver at quarter end. At March quarter end, UGI had approximately $235 million of investable cash with which to fund growth projects and acquisitions. John Walsh, would you like to expand on the results of our domestic units?

Thanks, Bob. During our last call, I stressed the commitment of our businesses to focus on expense control, cash management and margin enhancement in order to effectively address the challenges of a sustained warm weather high energy cost environment. Market conditions in the second quarter proved to be extremely challenging with a record warm January providing a lead-in for a quarter that saw sustained periods of warm weather and continued high energy costs. However, despite these challenges, each of our domestic businesses delivered solid performance in the quarter as we achieved growth in our targeted market segments, effectively controlled operating expenses, limited our bad debt exposure and increased unit margins. Gene will provide you with more detail on Q2 performance for AmeriGas, but I would like to highlight achievements in two specific areas.

We successfully lodged a new automated vending machine for our PKX Barbecue Cylinder product. AmeriGas is first to market with this innovative solution that provides our customers the opportunity to exchange their cylinders 24 hours a day, 365 days a year. We continue to strengthen our leadership position in strategic accounts where our national coverage and high service levels are valued by larger customers with operations in multiple regions of the U.S. Our year-to-date volume growth in this segment exceeds 8%.

Our Energy Services business once again demonstrated its ability to deliver cost-effective solutions to a broad range of industrial, commercial and utility customers. This business includes our regional gas and electric marketing activities, our electric generation assets and our energy peeking business. This range of capability places us in an excellent position to develop and deliver innovative solutions for our customers' energy needs. These solutions can prove to be particularly valuable during periods of market volatility. We saw this again in Q2 as net income, excluding the 5.3 million gain related to the sale of our interest in Honlock, increased over 20% from 8.3 million to 10.1 million.

Key contributors to this strong growth were improve margins in both our gas and electric marketing businesses and increased volumes and improved margins at our propane import terminal in Virginia. We continue to apply rigorous credit policies within this business and we've done an excellent job adding high-quality customers as we grow energy services.

Both the gas and electric utilities felt the impact of winter weather that was 15% warmer than the second quarter of last year. Net income in the utilities business totaled 23 million compared to 30.6 million last year. Lower throughput in both our gas and electric businesses was the primary contributor to lower net income. The decline in throughput is largely attributable to the very warm weather and price-driven conservation was in line with our expectations.

Our gas utility continues to expand its customer base. Were extending our reach by working with residential and commercial developers on projects throughout our Northeast Pennsylvania service area. We've added over 6000 new customers in the first six months of the year and expect to meet or exceed last year's totals for new customers.

Our gas utility team is hard at work preparing for the acquisition of PG Energy. The acquisition process is progressing in line with our expectations. We've submitted our acquisition filing to the PUC and they've initiated their review process. Our UGI project team is working closely with their counterparts at PG in order to ensure a smooth transition for PG's customers and PG's people. As I stated in our last review, this represents a great opportunity to expand one of our core businesses, grow our customer base in eastern and central Pennsylvania and bring a talented and experienced group of people onto the UGI team.

While market conditions in Q2 were among the most challenging in recent memory, the commitment of our business teams to deal with the high-cost warm weather winter served us well. We focused on key factors within our businesses that were within our control, such as margin enhancement, cash management and expense control and delivered a solid performance in spite of these challenges. This focused and disciplined approach will continue to serve us well in future orders. I would now like to turn it over to Gene, who will provide you with more detail on AmeriGas' performance.

Thank you, John. I was very pleased last year at this time to announce an increase in our distribution. It gives me even greater pleasure this year to announce our intention to increase the distribution by 3% per year and in line with that policy, to announce a $0.02 quarterly increase in the distribution. Our decision to adopt this policy is a reflection of our ability over the last two years to achieve 1.2 times coverage, despite the challenges related to significantly warmer than normal weather, customer conservation and record high energy prices.

With that in mind, let me provide some color on our results for the quarter. Just to summarize my view of the quarter, I'm pleased to be reporting only a $2 million drop in EBITDA despite volume that was down by 37 million gallons. I'm excluding in this comparison the onetime cost of debt financing. Our volume was 10% lower than last year in part due to weather, but it was 12% warmer than normal and 7.6% warmer than last year. January weather set a new national record as the warmest January since 1895 when the government started keeping records. February and March didn't help as they were slightly warmer than normal. In addition to warmer than normal weather, it's clear that customer conservation also contributed to the drop in volumes.

Like other energy products, the wholesale cost of propane reached new highs last quarter. The average cost of propane at Mt. Bellevue was $0.95, a 20% increase compared to the same quarter last year and 53% higher than the previous five-year average. The resulting increase in the cost of propane to consumers gave them a powerful incentive to reduce their usage by dialing back their thermostat or installing equipment to improve energy efficiency.

The higher cost of energy also affected our expenses. The biggest impact was on vehicle fuel expense, which was up 24%. However, bad debt, utilities and travel were also affected by higher energy costs, and together, these four expenses were up 20%. On the other hand, we had the benefit in the quarter of 3.4 million in favorable reserve adjustments, primarily due to improved claims experience for both general and medical insurance. We have invested a lot of effort in recent years in reducing employee accidents and in better management of workers compensation claims, and it is gratifying to see our efforts result in lower expenses.

So based on lower than expected volumes offset by good management of margins and expenses, we ended the quarter at $133 million of EBITDA. For the trailing 12 months, we have earned EBITDA of 253 million resulting in distribution coverage of 1.2 times. Here again, I'm excluding the cost of debt refinancing. Our coverage for the comparable period in the prior year was also 1.2 times.

Let me also mention our results on our core strategies of growth through acquisitions, DPX, strategic accounts and in our traditional base of residential and commercial customers. We continue to have solid growth in our core customer base despite the warmer weather and higher prices, but the growth is somewhat lower than last year. We believe this is primarily a reflection of the lower industry growth rate due to record high propane prices. PTX volumes are up 16% year-to-date and we're going to go into the grill season with 4% more locations, including some high-volume Home Depots. Strategic accounts volume is up more than 8% despite warmer than normal weather and customer conservation.

Another key growth strategy for AmeriGas is acquisitions, and unfortunately we have not completed any this year. Our goal continues to be to add about 20 million gallons per year through acquisitions and we have stepped up our effort to generate leads in geographic areas that have good growth and earnings potential. We remain disciplined in our approach in order to assure that each acquisition adds value to our unit holders.

Finally, I would like to thank my fellow employees for another successful quarter. It is due to their hard work and good management over the last several years that we are able to announce our policy of increasing distributions by 3% per year.

And now let me turn it back to Lon for some concluding remarks.

Thanks, gene. Let me leave you with the following thoughts as we end prepared remarks. First on our dividend actions. At UGI, as I had mentioned before, we announced financial goals sometime ago. One of our financial goals is to increase our dividend 4% annually. Our action increasing the annualized dividend from $0.675 per share to $[0.705] per share continues our tradition of meeting our commitments. As you know, this is the 19th consecutive year in which our dividend has been increased.

With respect to the AmeriGas distribution, as gene noted, this is the second consecutive year we increased the distribution. But importantly, we have gone further than that. We have, like UGI, set forth a very clear goal of increasing our distribution 3% annually. Neither our Board nom we for that matter took this action lightly. It reflects our considered judgment that the actions we have taken to date to strengthen AmeriGas's balance sheet and AmeriGas's business and looking ahead and the plans we have in place to continue executing our focused strategies warrant rewarding our unit holders with an annual increase in the distribution.

With respect to guidance, we are heartened with the performance of both UGI and AmeriGas, notwithstanding the extraordinarily warm winter weather in the United States and the high, volatile commodity price environment in which we do business. We have said many times that we cannot control the weather, but instead, we're going to focus on those things that we can control.

In the case of AmeriGas, we adjusted our margins and other income to reflect higher expenses due to high commodity prices while we managed our non-fuel related expenses very carefully. While we are reducing guidance from the level we began the year with in AmeriGas, we were able to take out some of the historical volatility in results that you have become used to seeing in AmeriGas in the past. And most of debt as you know has been attributable to warm weather environment. Thus, we had less of a reduction in guidance than you might have expected given the extraordinarily warm winter weather that we have experienced.

With respect to UGI's guidance, the benefits of the diversification inherent in our business model have once again been demonstrated. That diversification, be it geographic or energy distribution business unit type, is doing exactly what the textbooks tell us it should -- it's reducing volatility, and thereby reducing risk. We were able to maintain our earnings guidance at $1.55 to $1.60 for that reason and additionally because of the actions we've taken to both adjust to the high-priced energy commodity environment and to offset the effects of warmer than normal winter weather.

But I do want to remind you that some of the actions that we have taken are intended to offset the effects of warm winter weather, and therefore you should not be considering them as ordinary course actions in a more normal weather environment. Said differently, you expect us to manage our business, given the circumstances we face, and we have thus far this year. In a more normal environment, we would expect to manage our businesses a bit differently in order to focus less on the short-term and more on the long-term.

Switching gears a bit, as John noted, we continue to make progress in our efforts to complete the PG Gas utility acquisition. We're working closely with the folks at Southern Union, as well as the employees at PG. The transaction's also working its way through the regulatory process and we continue to expect this transaction to be completed prior to the end of our fiscal year.

In conclusion, as you know, we are always focused on operating our businesses effectively and in meeting our commitments. We have much left to accomplish this year as we set the stage for what we believe will be an excellent year for us in 2007.

Cecilia, at this point, we are prepared to take some questions.

(Operator Instructions). (indiscernible), UBS.

I just wanted to go over your guidance comments for a second there. Given that it's 155 to 160 and that you did take AmeriGas EBITDA down by about 10 million, are there offsets elsewhere, say, Antargaz which is making up the difference? And then I guess the second part of my question is -- given that you've taken down the AmeriGas EBITDA, do you still think that you can hit the 160 in the range, because you didn't even tighten the range. Like you left the 155 to 160?

Yes, if we did not think we did could hit the 160, I would tell, we would not have set it. There are offsetting things, but you have to remember, a $10 million reduction in EBITDA in AmeriGas is probably on the order of $0.03 to us. And some of the offsetting factors were, as Bob mentioned, a little bit better performance at Antargaz than we anticipated. I would tell you, the energy services businesses are doing a little better than we expected. On the other hand, the utility businesses are obviously not doing nearly as well as we expected. The other things that contributed to that are lower interest expense because of the refinancings that we had, and then there is a whole hodgepodge of other things that helped us along in that process, but those are the principal ones.

The other thing, I think it was great that you put up this target for raising AmeriGas's distribution on an annual basis and so forth. Does this sort of change your outlook in terms of -- you sort of talked in the past about how you're going to raise UGI's division on a 4% basis, and it is obviously based on a series of assumptions of cash flow coming in from different businesses. Now that it's pretty clear where APU is going to be increasing its distribution, which therefore impacts UGI, is there something that we could feel -- is there a change coming on I guess on a strategy perspective UGI in terms of how it views its growth of its dividend or how much capital applies to employer and so forth over the upcoming years?

Yes. We're far enough away from a meaningful increasing in cash from AmeriGas because of that policy that I would tell you, there's certainly nothing on the horizon in that regard. We own 44% of AmeriGas and we are not and high splits as many of the other MLPs are, and we are several increases away from getting too high a split. So nominally, there's maybe a couple of million bucks, $1 million to us that comes out at somewhere between $1 million and $2 million a year I think that comes out of this increase to UGI because of our ownership, just like it does everyone else. And that is not enough cash to cause us to change in any material way of what we're doing and how we're thinking about things.

It's more something to review once you start hitting a higher split?

Yes.

Okay. And lastly, just on PG Energy, is it still scheduled to close at the end of the third quarter?

No, the end of the third quarter would be -- it depends on what you're talking about -- (indiscernible) the calendar third quarter or (MULTIPLE SPEAKERS).

Calendar third quarter.

I would say we certainly expect it to close prior to that time.

Thank you very much.

Adam White, Credit Suisse.

On the guidance issue, can you clarify for me the reduction, was that a result of what has occurred so far, or the expectations for the second half?

I think the rolling 250 (MULTIPLE SPEAKERS) [253], which would be in the range. Obviously there's some puts and takes. We still have six months left, but you know we're a winter peaking business and our visibility typically in AmeriGas in the last half of our fiscal year, which is the April through September quarter, is a little bit better than it is the first half because of the winter, is now behind us. And so that gives us confidence of that range. If we felt that everything was behind us, we probably would have tightened that range to make it 250 to 255. But there is still spring weather that is upon us and it has been a not helpful April, it's a warm April. And then September also impacts what we do. As you know, there's weather that hits in September. So the better part of [valor] in this, Adam, was to recognize it has been a warm April thus far, and to realize that we do -- we're pretty good during the summer months and late spring, but then once we getting to September, there's money always at risk in September, so we wanted to make sure we gave a number that we could feel comfortable making.

You can't tighten it to 249 to 251 yet?

That's right. We do that at the end of the third quarter in June.

On propane prices at this point in the year, do they matter to you? We have much higher than normal in the futures market at the moment?

Yes, they matter for a variety of reasons. One is, it's still harmful to our customers because as I said, there is demand in April, there is demand in May and there is demand in September. In addition, we have a history of offering our customers a variety of choices to guarantee prices for a year as part of an overall program we call our [AmeriGard] program. We have a large number of customers who depend on that to get stability and pricing. And as we look at prices today compared to where they were last year at this time, those customers would be looking at a higher level of pricing than they have in the past. And of course, they made a very good deal with us last year in that area. But it still causes us further consternation for our customers as we look at the environment. And lastly working capital, although we're not borrowing under our revolver at the current time, this environment is just not a healthy environment because it strikes a lot of anxiety in the newspapers and general publicity.

And are you prepared, given kind of what the underlying business has done, if weather returns to normal, do you revert to volumes that you saw a couple of years ago next year? Is that a good base line?

I would tell you that we are seeing some conservation as Gene mentioned. And on the other hand, we had some programs that are growing, like our PTX program, our strategic accounts program and the base business does grow somewhat. So at the end of the day, we have to figure out how all of those things offset. But I would tell you that if you use volumes, if you're trying to build a model, you're not going to be terribly far off either way if you use volumes that were close to last year's.

Lastly, could you be a little less cryptic -- maybe I just cannot read between the lines -- but when you refer to managing the business differently, what specifically would you be focusing on?

I will go from 1.5 spaces to double spacing. I would tell you, capital. We are watching capital pretty closely. We're watching expense levels pretty closely. At AmeriGas and all of our business, 60% or so of expense is people related, and so headcounts have been watched very carefully. Any discretionary spending has been watched very carefully. And at the same time, as John mentioned and Gene mentioned, that it's broader than AmeriGas, three's been a focus on improving the revenue line, be it through margins, other income, fees, et cetera, that allows us to improve the top line while managing that bottom line pretty carefully. And some of the managing of the expense line you cannot see very clearly because of the higher expenses attributable to energy commodities. Like fuel for AmeriGas is a big piece of -- they drive trucks like everybody else. And so it's not readily apparent in there, but I can tell you behind the scenes, there has been some good expense control and some focus on maximizing revenues in ways that we don't think will be replicatable.

Do you have a cash number and a sort of total debt number as of end of the quarter?

Cash number at AmeriGas or UGI?

AmeriGas.

AmeriGas has about $62 million today in the old bank account, something like that. I don't know (indiscernible) not far from where we ended the quarter I think, 56 at the end of the quarter. And what was the other one?

Total debt.

Total debt at AmeriGas.

936 million, (MULTIPLE SPEAKERS) with no revolvers drawn.

Okay great, thanks guys.

Yves Siegel, Wachovia.

Good afternoon, everybody. A couple of questions. One is on the -- when I look at the margins at AmeriGas, you did a real nice job of continuing to show improvement there. How do you think about that going forward? Is that a sustainable level that we saw this quarter, or is that something you may have to give back? How should we think about that?

Let me take a shot and let gene tell you the facts. Two factors I think have affected margins this year from my standpoint. Again, this is the forest, not the trees. One is, everyone in the industry is experiencing higher expenses because of fuel and other things that tie to that -- utilities, everything. There's an expense increase rippling through the system that is not typical. When you have those expenses, our viewpoint generally is you ought to be able to recover inflationary increase and expense through margin. And so we as you know are extraordinarily detailed and have great information systems on margin and we're pretty careful tracking that so that we can adjust margins to reflect expenses that are flowing there.

Secondly, it was a warm winter and I think we have seen in the past in this industry that people seem to push pricing a little bit more when it's a warm winter, and this year was no exception. It was a warm winter. Even the small guys were hard pressed to make enough money to do whatever they do with their money. And so we think the industry as a whole raised margin levels. I daresay when you hear the results of our competitors on phone calls, you'll see higher margins as well. Competitive positioning, as you know, we monitor that through a variety of techniques and we did not see any change for the bad. That is, we didn't see our competitive positioning or pricing become any different than it was in prior years compared to competitors'. And in fact, it probably improved a little bit versus competitors' in terms of the way we assess competitive pricing through the market that we are able to do. And so bottom-line is, I think the entire industry saw expanded margins. You get normal winter weather next year or anything close to it, you get some relief on the energy commodities side, I don't think you will see these margins replicate themselves to this extent. You'll give some of it back without question.

I would agree. And just looking at the balance of the year, I don't think you would expect to see as much of a difference in the margins year-over-year as you have seen so far this year. During the winter, we have agreements with our suppliers that allow us to manage margins and stay competitive in that kind of an environment. But as we come out and into the spring and head toward the fall, which is the heavy growth season for us, the margins will probably not be as strong relative to the prior year as they have been. By the same token, we're still going to be looking to maintain the track record of recovering inflationary expense increases through the margin.

Hitting on one of earlier points, when you look at acquisition opportunities on the propane side, was the lack of making any acquisitions because prices were too high, or were there any other factors that caused you not to be able to make an acquisition?

Let me address the big ones and I will turn it over to Gene to address the others. On the large acquisition side, I would tell you [price], there have been some transactions that have been announced, and you know us to complete transactions we think are good for our unit holders and walk away from transactions we don't. And we have a good track record in the large company acquisition area. But prices are higher and in the larger transactions, many competitors in the acquisition field have a different view than we do as to how to price those acquisitions because we own so much of the limited partnership units at AmeriGas that we look at different economic measurements than they do [because] other people may be at high splits and they're able to justify an acquisition on a different basis than we can. So I would tell you in the large transaction area, it has been solely price that has stopped us from completing acquisitions. On the small side, let me refer it to Gene.

On the small side, the same is true but to a lesser degree. I think we are seeing higher multiples than have been paid in the past. We are trying to remain disciplined in that regard. There have been somewhat fewer deals out there than I have seen typically in the past, but there's still deals to be done out there. There are a lot of independent marketers who still have succession issues. There are a number of marketers -- I was just at an industry meeting and a lot of the independents are tired of warm weather and high prices. And I wouldn't be surprised to see a lot more activity for the balance of the year in the smaller acquisitions. And we think we can continue to be a player in that market, but it is a pricier market than it has been in the past.

I have three real quick ones. Does it make sense to look at trying to hedge your fuel costs, would be one? The second is -- are you where you want to be in terms of AmeriGas's balance sheet? And the question on the balance sheet issue, is a more relevant metric debt to EBITDA when you think about it? ? And then the last question is on Energy Services at the UGI level. How much of the year-over-year improvement is driven by the volatility in the commodities market? Or thinking about it another way, how much of that improvement that we have seen is sustainable?

Let me talk hedging first. I will try to take them in the order you gave, Yves, and them everybody else jump when I leave something out that you think we should say. On the hedging side, remember our strategy. We don't hedge for the sake of testing. We hedge to give our customers an advantage, and we have several rules we always follow whatever the price is in the market. One rule is, if we offer a fixed-price commitment to a customer, we always back it up, regardless of the level. And we won't offer that fixed-price commitment until we understand cost so that we get an adequate margin on it. So we are regularly out there hedging, and not only in AmeriGas, in all of the businesses where we offer a fixed-price contract.

If you were referring to the general winter hedge that we sometimes do, we know we're going to sell, and the question is -- at what price? The volatility of that is out there has removed effectively some level of opportunity to hedge; that is puts, calls, all of the derivatives that one normally employed in the past have gotten extraordinarily expensive and don't provide the protection that they used to provide. So hedging implies a greater degree of risk to some degree because you're taking a position one way or the other. And we have, in this higher priced environment, done less of that than we have in the past because it's so volatile and there are the tools that we normally would employ as part of our strategy have not been available as much. And so that is an issue on the hedging side. Gene wants to add something.

Just on the hedging of vehicle fuel, if you're referring to that, I think most of our vehicle fuel expense now is diesel. And yes, we have looked at hedging the diesel, we have not to date taken advantage of that. We have -- a portion of our vehicle fuel is propane. Sometimes, we will hedge the vehicle fuel. But more and more, the biggest expense is diesel. And that has been a focus.

Is there a way to break out how much fuel expense you have?

Probably too much detail to do that, but you can see that the expenses were up, what, 3.5 million for the quarter overall?

It was over 20%.

(MULTIPLE SPEAKERS) 24% increase in fuel expenses. And a good surrogate for that is, all you have to do is look at diesel fuel prices and get a sense for how much they are up, and you'll know it's not a good thing. On the other hand, as we said, those kinds of expenses we make a concerted effort to try to recover on the revenue line through a variety of ways.

And certainly, diesel fuel is one we watch closely and make sure we're doing an effective job in terms of recovery.

On the balance sheet at AmeriGas, Yves, I would tell you that when we got our ratios down to debt to EBITDA in the 3 to 3.5 range and we got our interest coverage pushing towards 4, we thought that that began to strike the balance between paying attention to the rate payers and paying attention to our unit holders. That by far is the best balance sheet in this industry. We obviously watch all of our competitors and that balance sheet has been accorded in the marketplace as we have issued debt very, very strong support on the debt side. We are attentive to the balance sheet, no less attentive than we were before, but we didn't see -- we thought we would be crossing the line between unit holders and rating agencies if we started to push the debt to EBITDA much below three -- a little below, but push it considerably below 3 didn't make sense to us. And to push the coverage a lot above 4 towards 5, didn't make a while lot of sense to us, other than having great earnings, obviously, and having the earnings take care of the issue. But you can think of the balance sheet as relatively stable for us with -- we're going to watch it, but relatively stable for us at this point. And the last question related to Energy Service and the earnings?

In terms of Energy Services and the beneficial impact of volatility, it helps a portion of our business. Certainly the gas and electric marketing portion of Energy Services did benefit from volatility. However, I don't think we should look at this quarter's result or year-to-date result in Energy Services as being extraordinary in that we had as you know very warm weather, so the peaking assets portion of that business was negatively impacted by the warmer weather. So when we look at that portfolio of activities in Energy Services, we saw portions of it positively impacted by the volatile environment, we saw portions of it negatively impacted. So overall, I think it points out the attractiveness of that business and the range of capabilities we have. But I think in looking at the performance, it's not extraordinary. It provides a base for us for next year.

Thank you very much.

Faisel Khan, Citigroup.

All of our questions -- we tried to pull out of the queue -- all our questions have been answered. Thanks a lot.

Joanne Fairechio, Janney Montgomery Scott.

Bob, I believe you mentioned that you were able to offset some of the extinguishment of debt with the generation sale. Could you please just run through those numbers again?

Certainly, Joanne. The gain on the sale was $5.3 million, and the loss on extinguishment of debt to UGI was 4.6 million after tax. So both are after-tax numbers and they just tend to offset each other.

My second question -- what were the return on rate base and return on equity that were filed in the PGE rate case? And where there any incentive type mechanisms included; i.e., all that's going on with the decoupling or weather norm or anything like that?

As you may know, and as we have said before, I think they were earning about 7%. And I am going to -- I don't know precisely, but I think they filed in the 11.5% range for their return on equity. And there were no weather normalization or what we call insurance kind of product things in that rate case. It's a rate case that under a 10% increase for them in terms of rate case for the customer.

Okay, thank you.

Eric Kalamaras, Wachovia.

Could you deconsolidate the (indiscernible) AmeriGas a little bit and just talk about the net gain at Antargaz versus what I am presuming would have been a quarter-to-quarter loss at the domestic assets? Could you just talk about that in terms of cash flow?

Let me see if I can answer that. If you look at the net income of the utilities, you can see that net income down considerably, and that's all weather, virtually all weather. And last year for example, weather was somewhat warmer, but certainly not extraordinarily warmer. The Antargaz side -- and I'll do net income, then I'll kind of work my way to cash. The Antargaz side down from last year, but as we said, a little bit better than we would have thought. They had nice whether there and they did a good job of managing that business. And so I would tell you, there was some additional contribution compared to our expectations, notwithstanding the fact that it was lower than last year. And Energy Services, as John said, was a mixed bag, but [a] net-net positive this year because of the normal growth we expect to see in that business compared to this year. And then AmeriGas had a nice quarter compared to last year, but certainly not what we would have expected had they had normal weather.

On the cash to side, our cash is somewhat separated from the net income difference because we get our cash from AmeriGas as a holder of the units. And so when AmeriGas declares a distribution, we collect our cash and it's really independent of their net income, but it's obviously related over time because if they don't have the cash that the Board thinks is supportive of the dividend, they won't declare it. But it's really separate from -- on a quarter-to-quarter basis, it's separate from that performance.

On the utilities side, we generally end up taking about 75% of net income. We trade it as if it were publicly traded. So lower net income would result in lower cash to us as we take our dividends out of a utility, and we generally take dividends out of the utility quarterly. And so if you see lower net income in the utilities, generally speaking, you're going to see us take lower cash from the utilities. And if you use the rule of thumb of 75% of that, that's a pretty good rule of thumb.

On the Antargaz side, the cash we took out -- $100 million, Bob? How did we take out?

Yes.

About $100 million we took out in February, was it February? Over the last year. And that was a cumulative payment to us, but we actually cashed a check in this quarter. And generally speaking, what happens at Antargaz is we can take out net income, if you will, and there is a lag to how we take out that net income under French law. But if you looked at Antargaz net income, that would be a pretty good surrogate for what we will take out of Antargaz going forward. And then we also get cash from our Energy Services businesses, and again, there is some depreciation there, but historically it has not been a heavily D&A business. And so if you kind of look at their net income, that is probably generally speaking a decent surrogate for their cash, except for some reinvested capital that they would have, and their normal capital expenditures are not that great. So again, just kind of a surrogate would be net income for those guys.

Okay, that's helpful. Going back to Yves' earlier question about the margins, explain to me why it's different when in a warm environment where there is more emphasis on keeping your margin as opposed to not allowing that to happen when prices are a bit lower, or you get a colder winter? Is it just intrinsically, there's just not as much focus?

Not, not at all. Our focus is I tell people, I get a report and I'm two tiers above this, but I get a report daily on virtually all of our business units, but I get a report on AmeriGas daily on more statistics than probably I need to know, but we do look at it. We have an intense focus on all aspects of the business. But we manage price independently of cost. And you often hear people in this industry say it's an add-on business. We don't treat it as an add-on business, we really do try to treat it managing price costs independently.

The competition by and large consists of -- I will make up a number -- there's 500 competitors, 400 competitors; 10 of them are big and then there's 3990 who are little. And what we find as a behavioral matter that when people aren't earning their expected levels of income or cash because volume is down, warm whether, they have a tendency to raise prices. And we are in managing our prices independently of our costs and trying to be competitive in the marketplace, we follow those price trends and where we try to maintain our competitive positioning versus our competitors. And so I think what generally happens in warm weather, although it is counterintuitive, I agree with you, is that the cash flow to the bulk of the competitors drops because volume is down. They have bills to pay, they have businesses to run, payrolls to meet, they look for a way to get cash and the way that they get cash is to raise their prices. And from a competitive positioning standpoint, even if we don't make ourselves closer in price to them, we just maintain our normal value pricing strategy; that is, we provide more value than these little guys, and so we're open 24 hours, et cetera, we've got all of those benefits, so we charge a little more. And so if we maintain the normal spacing on pricing, our margins will go up at the same time because there is more focus by the bulk of our competitors on cash. So, again, a little counterintuitive, but if you go back over the years in this industry you will see higher margin environments in warm weather and lower margin environments in colder weather.

I appreciate the explanation.

Tom Nowak, Merrill Lynch.

Not to beat a dead horse on the margins, but I guess in periods of expanded margins when you alluded, you described before how you manage the expense side of things in warm winters to maximize that side, but you also mentioned the top line impact as well, passing on fees to customers and things like that, I -- intuitively, it seems like that would have a negative impact on churn. So I guess my questions are, A, is that intuition correct? And, B, how do you track churn? Do you provide any information on quarter-to-quarter changes in the customer base?

Let me attack the first issue on churn. We, like many of our competitors I think, we have a technique of measuring gained loss for ourselves. We have a very rigorous system that when we lose a customer, we record that loss internally, we have stopgap measures that will record losses even if we don't think we've lost a customer but we haven't delivered something to the customer in a period of time. And we have a boatload of reasons why we might have lost that customer so we track that carefully internally. On the gains side, we do similar things. And incidentally, we don't wait until we pick up the tank to count churn. There are some folks in the industry who say I haven't lost the customer until I pick up the tank and that creates an environment in the field where the people just don't pick up the tanks. We like to be more asset intensive and that's why we want our tanks, so we can them.

On the gain side, we have a similar mechanism. When we gain a customer, we have a mechanism for tracking it, codes for why we gain the customer. And so internally, we have a very good feel for how many customers we're gaining and how many we've losing, but that's not the measurement for us. What we have done is measure the value of each customer that we get, and we have our own way of doing it. I suspect other people have their way of doing it. For example, if you are a customer who owns a vacation home and uses propane for just cooking, you may not be -- in fact, in our mind, you are not as valuable as someone who has a year-round heating load for your propane use and you use considerably more. So in our gain/loss system, we have different ways of attributing value to the different kinds of customers we get. And so when we talk about that we are gaining, we're really gaining -- we may not be gaining in total customer count because we have lost low value and gained high value, but we have gained the right kind of customers and we have gained value; that is, the value we have gained is either in margin or some other measure of value that contributes to the bottom line for us. And so we have all of that information. We typically don't go out in great excruciating detail and talk about it. We do say whether we're in a gain position or a loss position. And I can tell you each of the last three years or four, Gene, we have been in a gain. In each of the last four years, we have been in a gain position. And this year as gene said, at this point, we are in a gain position, but we are not in ad strong a gain position as we were last year for a variety of reasons.

Okay, thank you.

Jay Yannello, Pali Capital.

It's late, I'll jump in really quick here, and part of this was covered. As far as the general M&A environment, you touched upon the propane area. And I realize you're still digesting a bolt-on utility deal. But Lon, is it fair to say, you are still active looking in the utility area? And if so, what's the vibes going on in that area now, as far as potentially doing additional bolt-on deals?

Let me comment more broadly first, and then I can see if I can now have Margaret kick me too hard under the table. (MULTIPLE SPEAKERS). Generally speaking, we're active in all areas of the business, not just the utility side. We are still continuing to look overseas. We continue to look domestically on the propane side, we continue to look on the Energy Services side and in the utilities side. The utilities side for us has been somewhat less active, but for the reason you say. That is, we have a transaction that is 50% our size and we have not closed it get and we have plenty to do and the utility folks are running as hard as they can to just assimilate that. That having been said, if we saw an opportunity that was, one, that was a value our unit holders, our shareholders, and added value, we would pursue it because the transactions as you know don't come along often. And when they do, you cannot order when they do, it's serendipitous when they do. So broadly speaking, we are active. We are looking at things that come our way across all business units. And with respect to any specifics, we don't comment on any specifics, but we are active in all facets of the business.

Okay, fair enough. Thank you.

Sure.

There are no further questions, so I'll turn it back over to you for any closing remarks.

Okay, we appreciate everybody's attention. Again, we are very pleased to return some money to our shareholders in the form of distribution increase in AmeriGas, a dividend increased in UGI, and importantly a policy at AmeriGas where we are pleased with our performance and really happy to be able to confirm guidance given the weather that we were dealt. We are building a good, stable momentum as we move forward into 2007 and we're very optimistic for the rest of this year and particularly for 2007. So we look forward to reporting continued good results to you and we will talk to you soon. Thank you very much.

That does conclude today's conference ladies and gentlemen. We thank you for your participation and you may disconnect your lines at this time.