UGI Corp (UGI) 2007 Q1 法說會逐字稿

Good day. Welcome, everyone, to the UGI and Amerigas Partners first quarter fiscal year 2007 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 call over to Mr. Bob Krick. Mr. Krick, please go ahead.

Thank you, Mark, and good afternoon, and thank you all for joining us today. As we begin, let me remind you our comments will contain certain forward-looking statements which the Management of UGI and Amerigas believe to be reasonable as to 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 and 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, Tony Mendicino, Senior Vice President and CFO of UGI, and your host, Chairman and CEO of UGI, Lon Greenberg. Lon?

Thank you, thank you, Bob. Let me also welcome everyone to our call. I trust you've all had the opportunity to review our press releases reporting our first quarter results. In those releases you saw that UGI reported a 7.4% increase in earnings per share, and Amerigas reported a slight improvement in both earnings per unit and EBITDA.

I just have a few opening comments before I turn the call over to others, and then I will rejoin the call at the end of it. The predominant factor affecting our earnings this quarter was the unusually warm weather. Equally unusual was the fact that it affected all of our business units, whether they be doing business in Austria, Eastern Europe, France, Pennsylvania, or other parts of the United States. The weather was not just warm, it was extraordinarily warm, but you've learned if you sat through these calls before, that it is not our style to complain about what is uncontrollable, it is our job to manage what is controllable, and I think you'll find that we did an excellent job in this area. You will in particular be hearing more from others on this subject as the call progresses.

Secondly, the benefits of our longstanding efforts to grow our Company were once again apparent. Notwithstanding the adverse effects of the warm weather, we were able to grow our earnings per share through year in and year out execution of our strategies to grow internally, and reinvest our cash flow and value producing opportunities. As you might imagine, our most recent transaction of significance, the acquisition of PG Energy last year contributed significantly to our ability to report better EPS this quarter. At this point I am going to turn the microphone over to Tony Mendicino, and he will pass it to John Walsh, and then to Gene, and then it will come back to me for some concluding remarks.

Okay. Thank you, Lon. Weather, weather, weather. Despite weather, that was substantially warmer than normal, and last year in all of our operating areas, earnings per share was $0.58, a $0.04 per share increase relative to the same quarter last year. Increased net income contributions from Energy Services, International Propane, and the earnings from the acquisition of PG Energy's assets by our gas utility more than offset the decline in earnings from our legacy gas utility business, which experienced weather that was about 15% warmer than normal and last year.

Let's get into some of the details first with our domestic propane business, Amerigas. Amerigas EBITDA at $93.1 million and net income contribution at $15.4 million were slightly higher than last year, despite weather that was 9% warmer than normal and 5% warmer than last year. Retail volume was 283 million gallons, down from 292 million gallons last year. The volume decline was due to the warmer weather. Offsetting the volume decline were higher unit margins and higher fee income. Gene as always will provide a more fulsome explanation of Amerigas' performance in his comments.

Net income in our utility operations was $19.7 million compared to $21.9 million for the same period last year. Net income in gas operations decreased $1.9 million to $16.5 million on weather that was 15% warmer than normal and last year. These results included significant net income contribution from the gas utility assets that we acquired from PG Energy last August. Throughput increased by 10.5 Bcf to 33.4 Bcf as the 12.2 Bcf throughput from the PG assets was partially offset by the decline in volume delivered by our legacy gas utility assets due to the warm weather.

Customer additions to our core heating customer base in our legacy gas utility lagged last year. However, annualizing our year-to-date customer additions which still put us at the low end of our 3 to 4% annual targeted growth range. Net income in electric operations was $3.2 million, down slightly from $3.5 million last year on weather that was again about 15% warmer than both normal and last year. We delivered about 250 gigawatts of power, down 3.5% compared to last year, again as a function of warmer weather.

In international propane, net income was $18.3 million, up $3.4 million from last year. Weather in Europe was even warmer than weather here in the States, and Antargaz services area, the weather was 22% warmer than normal and last year. The increase in net income is a function of non-operating factors as operating income in international propane actually declined slightly to $33.1 million from $33.6 million last year. Due to the warm weather, volume declined by about 14%. Decline in volume was partially offset by higher unit margins. With slightly lower operating income quarter to quarter, the favorable net income comparisons results from lower interest expense, due to refinancing we completed in January of last year, a lower effective tax rate, due to a change of estimate from taxes that will be paid on repatriated foreign earnings and a weaker dollar.

Finally in energy services, net income was $9 million, up $4.1 million from last year. Net income from energy services gas marketing business increased by $4.5 million, on higher unit margins and increased margins from both capacity management and peaking service activities. In electric generation net income was down about $400,000 at $1.4 million, primarily due to lower sale price of electric power during the quarter. Moving now to balance sheet considerations, Amerigas finished the quarter with no revolver debt and $933 million of total debt, total debt is $21 million higher than it was at the end of the December quarter in fiscal year '06. On a consolidated basis, UGI's net debt on December 31st was $2.1 billion compared to $1.7 billion last year. The increase is primarily due to an increase in debt in our utilities as new debt was placed to finance the acquisition of the PG Energy assets and due to the increase in dollar-based debt as our Euro based debt in international propane was translated in weaker dollars.

John Walsh will expand on our domestic operations.

Thanks, Tony. The first quarter of fiscal 2007 picked up right where we left off in 2006 with weather conditions that provided a real test for our domestic business teams. Our businesses have become accustomed to this challenge and once again delivered a solid performance in spite of the weather. Our focus on fundamentals, customer service, margin deliveries and cash flow management remain the keys to performing well in the face of adverse conditions. We're also pleased with the progress made on our strategic growth initiatives within each unit, and I will address both financial performance and progress on key initiatives as I briefly review each unit's performance.

Demand across both of our gas and electric utilities businesses was negatively impacted by weather that was approximately 15% warmer than normal. While gas utility operating income increased from $35.7 million to $38.2 million in the quarter, this increase was solely attributable to the addition of the Penn Natural Gas operations. We continue to see growth in new customers in our gas service territories, but as Tony mentioned, the growth rate in the first quarter lagged behind the growth achieved in 2006. We're monitoring this closely to determine if the short-term softening of demand is likely to persist.

We continue to make excellent progress on the integration of the Penn Natural Gas business. PNG financial performance in light of the weather related reduction in customer demand during the period was in line with our expectations. Through our numerous initiatives under way to enhance marketing, operational and administrative activities as we leverage the benefits of our expanded utilities business. Our most recent electric utilities rate increase, which is approved by the Pennsylvania Public Utility Commission in June 2006 went into effect on January 1st. During the six months leading up to the rate increase, we conducted an extensive communication program with our customers to prepare them for the increase.

Quarter one was another outstanding quarter for our energy services business. Net income of $9 million was 80% above the levels achieved in the first quarter of 2006. The keys to the strong performance were strong margin performance in our natural gas marketing business, continued expansion of our peaking services and storage management activities, and effective management of our credit and gas supply functions which serve as the engine for energy services. The energy services gas marketing team has been successful in increasing our penetration of the mid--sized commercial customer segment.

We'll continue to focus efforts on developing this attractive segment and expect to deliver solid growth in our mid--sized commercial customer base in 2007. Amerigas performance in the quarter was noteworthy as the team delivered slightly higher EBITDA despite weather 9% warmer than normal and 5% warmer than the first quarter of last year. Strong margin performance and the effective use of service fees to offset increased expenses were the keys to this strong performance. I would now like the turn it over to Gene who will provide you with more detail on Amerigas' performance.

Thanks, John.

We're pleased to be reporting a small creates in EBITDA in the face of weather that was about 5% warmer than last year and almost 9% warmer than normal. The warmer weather resulted in volume that was 3% lower than last year. While weather continued to be an issue in the first quarter, we actually benefited from some stability in our cost of propane. Our average cost of product was down 2% from last year. This is the first time in 17 consecutive quarters, actually since 2002, that we've been able to report a lower average wholesale cost of propane compared to the same quarter in the previous year. Operating expenses were up 3.8% for the quarter due to higher employee compensation, higher medical expenses, and higher repair and maintenance expense. We were able to offset the impact of lower volumes and higher expenses through increases in margin per gallon and fee income. It is important to note that this increase in margin was achieved without compromising our competitive position relative to other propane marketers.

Let me also mention highlights for the quarter on our core growth strategies, which include acquisitions, ACE, strategic accounts, and growth in our traditional base of residential and commercial customers through industry-leading customer service. We had a strong quarter in ACE, our cylinder exchange business. Volume was up 29% over last year due primarily to adding new high-volume locations and increased same-store sales. While this is not an important quarter for ACE, it is encourage to go see such strong volume even before the grilling season begins.

Strategic accounts volume was actually down 6% in comparison to last year. This is the first time I can remember reporting a decline in strategic account volume, the decline was due in part to the weather and in part to the loss of some low margin customers. Fortunately, the strong performance in ACE more than offset the negative impact of the lower strategic account volume. Our strategic account group is also well on their way to replacing the customers they lost with new accounts. Customer growth in the base business was positive and about on par with last year. We did not complete any acquisitions in the quarter, while we continue to review a number of prospects, there has definitely been a decline in the number of acquisition opportunities and an increase in seller's expectations in terms of price.

Looking forward, we're finally getting the kind of weather that makes propane guys happy, our volume for January is benefiting from weather that, while warmer than normal, has been about 16% colder than last year, and cold weather's forecasted nationally for the next few weeks. Wholesale propane prices had declined to about $0.87 per gallon a week ago, but with the recent cold snap across the U.S., prices are back to about $0.96, roughly in line with last year. I'm optimistic we will to see strong growth from our ACE business, which has a backlog of more than 500 new location to roll out and also expect to see an improvement in our strategic account results based on recent customer gains. We will proactively pursue acquisitions and focus on continuing to grow our base business customer account through superior Customer Service and improvements in sales effectiveness. I would like to conclude by thanking my fellow employees for helping us deliver better results despite weather that -- weather-related decline in our volume through careful management of margins and expenses and superior customer service. With that, let me turn the call back to Lon to wrap up our prepared remarks.

Thanks, Gene.

You've heard from all of us the term warmer weather, and I don't want to belabor it any more than we already have with you. That warmer weather continued into early mid-January, and since that time, as probably all of you know, weather has improved, read for us, turned much colder since mid-January. In addition, both short term forecasts as Gene mentioned, and longer-term forecasts for the remainder of the winter call for colder weather than certainly we've experienced. This all points out one obvious fact that weather patterns vary, and secondly that there is a lot of heating season weather yet to be experienced. As you saw in the first quarter, our results will reflect the weather yet to be experienced during the remainder of the heating season.

While that's all going on we continue to focus on the things we can control, we take action on Management-sensitive issue to say improve both our short-term and our long-term performance. We have taken and will continue to take action to mitigate the effects of the factors like warm weather that adversely affect our short-term performance, and at the same time, allow us to capitalize on factors like colder weather, which beneficially affect our short-term performance. Said differently, day in, day out, we're actively managing our businesses given the conditions we face. At the same time, importantly, we have not in the past, nor will we in the future, let short-term trends be they positive or negative, affect our attention to execution of our long-term strategy. Thus you can expect us to execute our strategies for each of our business units while we continue to seek out growth opportunities to invest in for the future.

As Tony pointed out, our balance sheet remained strong, our cash generations on target, and we're committed to meeting our longstanding financial goals of growing our earnings per share 6 to 10% annually and raising our dividend 4% annually for UGI and 30% annually for Amerigas. As all of you know who follow us, our goal is to build value for the long-term. You also know that the total return to UGI shareholders and Amerigas' unitholders has been outstanding for many years, and we will continue to use that as a guide post to measure our success in the future. We are optimistic about our overall progress and we look forward to responding to your questions and reporting our progress to you as the rest of this year unfolds. Mark, at this point we'll take some questions.

Thank you, sir. [OPERATOR INSTRUCTIONS]. First question is from Shneur Gershuni with UBS.

Hi, guys. Just had a couple of quick questions here. Lon, I wonder if you can comment, I know it is pretty early in the game, but if you can comment how PG is performing as per your expectations, absent the weather impact?

Sure. PG is performing probably, certainly at least at our expected level, and maybe even a little bit better. We have taken a lot of actions to realize the improvements that we forecasted when we bought the business. They've got a great group of employees, and we've been pleasantly surprised with the quality of everybody in that organization. Obviously the weather had somewhat of a adverse effect on the performance. I think it was in excess of 15% warmer up in that area during the quarter, but we look through that, and we see something which we're quite pleased with, and we think it will continue to show real improvements as we go forward.

Two other quick questions with respect to Antargaz, you mentioned in the past about the competitive situation from cross-border competitors. Can you give us an update on how that's going, is it still impacting margins and volumes or is it sort of stabilized?

Yes. It was a difficult quarter to really gauge ay Antargaz. We thought weather was pretty warm here, it was 22% warmer than normal and about the same warmer than last year for Antargaz, and so it is hard to figure out, what your true volume is in that kind of context, because it is not like a gas utility that flows. As you know, we have to make deliveries there. I would say qualitatively on the -- in particular, in the cylinder side of the business, competition continues to intensify by measures we use. We're doing a very good job of holding our own against that competition, but there are new entrants into the market, and there are new products and services being offered, and we are very fortunate that the management at Antargaz has been very forward in their thinking, and we have introduced several new products and services that have been very well received in the marketplace.

In the bulk side of the business, in the deliveries side of the business, competition has always been pretty -- I wouldn't call it -- intense is the wrong word, but it's always been a competitive market on the bulk side of the business. I don't think we've seen the same kind of intensification of competition on the bulk side that we have seen in the cylinder side. Again, it has always been a competitive market. You can't really measure again how all that's shaking out in a market where it is warmer because the natural inclination in all markets across the world that we participate in in the LPG business is when you don't have weather and volume, people have a tendency to use margin in other ways to try to make up the short fall in earnings they have, and so Tony mentioned that our margins did improve somewhat in Antargaz, and that's no different in France than it is in the United States or in Eastern Europe and other very competitive markets. It is just a function of how the market works itself.

So on balance, the competition continues, it is intensifying on the cylinder side of the business, by the measures we keep we're holding our own, but the environment in France and for that matter Austria and some of the other countries is doing exactly what we thought it would do when we bought those businesses, barriers are coming down, borders are coming down, transportation is easier, flow of commerce is easier, and we anticipated all that when we bought the businesses, so I can't tell you we're seeing something -- we aren't seeing anything we didn't expect, but it is certainly much more competitive than when we first got in this business five, six, seven years ago.

If I can just ask one last question about Amerigas, the January volumes, are they tracking the same as last year or are they tracking a little better than last year?

I think Gene mentioned, and I will extrapolate from what Gene said to what I said. As you know in this business, when weather is considerably warmer or colder than a prior period, you're going to see volume track that relationship. Usually there is a delay of some kind when weather first turns cold because it is not an instantaneous system as I said. It is -- you got to get people used to looking at their tanks, inventories, and realizing that they need deliveries. We also have automatic deliveries, and the increased cold weather causes our automatic systems to go off because we try to predict inventory levels, so I think it is fair to say that volumes have improved significantly compared to last year, and in all of our businesses including Amerigas.

Thank you for all the details.

Sure.

Our next question is from Adam Leight with Credit Suisse.

Good afternoon.

How are you?

Well, just a couple of quick ones. Elaborating on that last question, you did better than the weather, I guess, in terms of volume comparisons at Amerigas. Is that a timing difference, regional weather patterns, or is there a business mix component such as ACE that helped you offset the decline on the warmer weather?

Yes. It is funny. If you look at our volume in Amerigas which is your question, only a portion of that is weather sensitive, and I think it's fair to say we believe we've been doing much better in volume than many of the competitors out there, and if you look at absolute trends, that's true, and part of it is hard to tell. I think we have been growing for several years now, and we think that has something to do with the contribution to the volume. Part of it is just the serendipity of timing of delivery to say some degree. People had filled their tanks, for example, in March of last year and may have needed a delivery this year earlier than a prior year, but qualitatively, I would tell you that we are doing a better job in managing the customer growth aspects of our businesses, and I think that's reflected in the trend of our volume that you see out there.

Okay. We agree you're smarter and better looking.

Not me, people running that business.

On the cost side, however, operating costs per gallon went up. Is that something controllable, noncontrollable fuel?

A big piece is it is not the biggest piece I think fuel, but very big piece was increased fuel expense.

We had some increased reserves for long-term incentive programs compared to last year in the first quarter, and we did have higher health insurance claims for the quarter, hard to say if that's an ongoing trend, but they were higher than we expected them to be this quarter. And then we did have some things like vehicle fuel and repair and maintenance where we've implemented fees to offset those higher expenses which we had anticipated.

Again, qualitatively, Adam, I would tell you that when you get a decline in volume as you know in the propane business, there is a significant portion of your expenses that are fixed, and then there are some that are variable, and you can't offset all the expenses that you would like to offset with the did he line in volume. Gene hit the highlights, but there is nothing I would tell you qualitatively would say we've got an expense problem. I think there is lots of little things. To some extent we recover those increases in expense through higher fees, and to some extent we don't, like wages and things like that, but we don't have any -- I would tell you if we had an issue that we were worried about I don't see anything in the expense side we're particularly worried about.

Great. Thank you. Great job under the circumstances.

Thank you, sir.

Our next call is from Sharon Lui from Wachovia.

Good afternoon. For Amerigas the maintenance CapEx looks like it has been trending up for the last two quarters. I was wondering if you have a good run rate for 2007?

I am sorry, Sherry, maintenance capital, Sharon, is that what you asked?

Yes.

Maintenance capital in terms of where we think we'll be for the year, we're thinking we'll number the range of about 25, say 24 to 26 million, somewhere in that range, not too much different than last year, maybe a little bit higher. We did have this quarter some districts that we had to move because of local government had other plans for our property, and as a result of that, we bought some land and moved some buildings, so it was a little bit higher this quarter than it would otherwise be, plus the big increase in volume for ACE pushes up our maintenance capital requirements.

Thank you.

Our next question is from Ron Londe from AG Edwards.

Thanks. In the good old days a jump in propane costs generally resulted in lower margins, and there was a time lag involved. Has that time lag narrowed or widened? Do you get a feel to are that in today's environment?

Yes. Let me take a shot at that, and then let Gene or John jump in. I would tell you that I think two things. One is I think the tools that the major players have been developing and implementing to manage their margins are better than they were in the old days. We were always anal about having information that allowed to us watch our pricing and manage our margins, and I think we at Amerigas always did a pretty good job of watching that. I would tell you that I have been impressed with the -- with what I believe are the evolution of reports, tools, systems, and a lot of our significant competitors that permit them to watch it as well. The other two factors that I think have changed is the cost of doing business in the propane business has risen, insurance is more expensive, fuel costs is more expensive, and particularly when you get a warm weather period, you get people who are trying to recover those expenses and keep their profitability in any way they can, and it is natural for folks to want to keep a higher margin in that kind of environment because that's the only tool that they can effect in the short-term to help them. It is a whole bunch of things, higher expenses, recovering the higher expenses through higher margin, they've got better tools to manage margins, and I think the warm weather certainly caused people to look at their margins more carefully than they have in the past and made sure they get enough earnings to sustain them, and that's particularly true as you know, Ron, we have, I don't know, 4,000 competitors, 3500 competitors, and no one has enough market share to drive the pricing in this market, but I think when weather is as severe as it is, people look at cash flow, and they look at their cost to carry their inventory, they look at their fuel costs, and they know they have to bring in some money, and if the volume is not there, the only place they can offset all of these increases in expenses and costs that they have is to try to eke out a few more cents in margin.

Okay.

Our next question is from Faisel Khan from Citigroup.

Good afternoon. Can you give us a breakdown on the Antargaz side, how much of the volume and margin are from cylinder and the bulk side you called it?

Yes. I would tell you that as you know, generally speaking the businesses in Europe have a much higher component of their business tied to the cylinder business. Here in the U.S. basic use of cylinders is for the ACE business, and whereas in Europe they use cylinders for heating, they keep -- they're able to use it for cooking much more than we do here, and it is a much, much bigger business, it is capital intensive but a much bigger business. I would tell you generally speaking somewhere around 20% of the volume is probably cylinder related over in Antargaz, thereabouts, and on the bulk side is almost all the rest, but you've got the other difference overseas is you've got decent sized auto gas businesses, that is people use it to fuel their cars, and the propane is sold in gas stations as a gasoline substitute, so you will have a lot more of the auto gas business overseas than you will here.

Are the margins roughly the same on both those business?

No. The margin in the cylinder business is higher, and the reason for that is it is much more capital intensive. It is much more costly to operate, and so of course you'll have a higher margin when that happens, but I would tell you that both sides of those businesses, all sides of the businesses overseas, we have a good discipline, and I think all the players in Europe and the U.S. have a decent discipline of evaluating the profitability by segment and ensuring that they try to recover their costs and expense and earn a different living in all the segments.

Okay. On the energy services side, can you go into a little more granularity in terms of what will cause you to perform well in that business besides -- you talk about how you were able to take advantage of your peaking supply and storage activities, but was there something in particular that happened in the quarter that enabled you to earn the higher margins?

Yes. I would tell you the starting and I will defer to John a little bit after this. About with last year when Katrina hit and probably before that, we went into a program to take a hard look at that business because working capital was exploding, and I think the folks did a great job of looking at their customer base, aligning their strategy to get customers who value the services we provided because the cost of serving every customer just exploded last year.

Right.

And so what happened this year is a continuation of the execution of the strategy, we've grown volume, grown customer count, I think those are both good trends for us. To some degree there are some timing differences that enter into our earnings in this business. They're difficult to describe in a short call to you, but essentially if customers -- the degree to which customers look in their business and the time of year at which they lock in their business moves some of our earnings from quarter to quarter, and our earnings in prior years, you have seen this where we would have a spectacular first quarter and a second quarter wouldn't be as good on a comparison to the prior year, smoothing all of that out, I would say that there was timing differences in our results this year compared to last year, okay, and that was probably not the predominant factor. We've also invested in assets, and as John mentioned, that service we sell not only to our own utility but to other utilities for peak shaving contributed more money than it did in prior years, and so that whole asset management function contributed more money, and part of that as well was due to the nature of the curve you get in forward prices and so we were able to take advantage of some of the that, and lastly, it was just good old-fashioned execution of strategies of growth in terms of customer count and identifying what kind of customer you want and going after those customers. John?

I think just to provide a little more detail particularly on the gas marketing side, as Lon indicated, a lot of good work done over the last twelve to fifteen months segmenting our customer base and identifying attractive customers, many of them mid--sized customers who have consistent demands who value the service we provide, and an effective job of growing that segment of our customer base over the last year. Those are customers that we believe we can retain long-term. They're credit worthy customers which is quite critical, and they provide a consistent base for the business. That underpinned the latter part of last year and certainly got us off to a good start this year, and on the asset side and peaking side, it is really an expansion of the customer base we serve with those particular services.

I would tell you Faisel, there is good things there but I would not extrapolate the 80% throughout the entire year and assume we're going to be that good in that business. We're going to improve, we're going to have a fine year in that business, and we're grateful to have it for this quarter, but don't extrapolate that going forward.

Were there any mark-to-market gains or losses from from that business?

As you may recall, we do not take positions. What we do is we get a supply, and then we call a customer and say this is your price and lock it in simultaneously. We don't have those issues.

In terms of with the new gas utility, have you guys outlined kind of what you expect long-term synergies both on the revenue and on the cost side to be from that asset with your other gas utility?

Yes. I would -- let me answer it this way. I don't think we ever gave a clear picture of what we expected there, but there were estimates in the market last year that all of the folks who cover us put out and the $0.10 to $0.15 a year incremental earnings from that business next year, this current year, and we think those were reasonable numbers to use for projecting whether where we were going to be. We said it last year, and I think those are good, and those are rational numbers.

Is it 10 to $0.15 of synergies or gross?

Gross. Gross contribution.

I got you. I think you mentioned in your prepared remarks a little bit the electric utility rates moving up. I think those are your polar rates.

Yes.

Are the -- is that going to be significant or material to I guess margins moving up at electric utility?

No. As you know, the electric utility for us is a terrific business. It fits exactly with what we do, energy distribution, gives us a tremendous amount of knowledge. If you look at their overall contribution to our earnings, it is not the largest contributor to our business.

Sure.

On the rate side we went through an intensive process with the commission to get in the position where we could raise those polar rates. The folks up there did an outstanding job. If you read in the press that Maryland wanted a 70% increase in rates, I think New Jersey went for the third year in a row at 50% some increase in rates, a small utility in Pennsylvania got a 72% increase in rates.

Okay.

We've been following this area for awhile, and we were able to secure power to support our polar position through some excellent management by our folks, and the rates to our customers went up sizably, I don't want to diminish that thought, at 35% increase overall, so that's substantial, but it was considerably less than anyone else, and we have spent, as John said, an extensive amount of time with customers explaining the situation to them, and I would tell you the reaction and no one likes paying higher rates, mind you, but we have not been singled out in any fashion in the press or anyone else by being the bad guy in this. The important thing for our customers is it did go up 35% this year. If you look out going forward, as to what we -- the maximum we can raise rates and things, you're looking at kind of pretty flat rates for the next couple of years. You might see a 5 to 7% increase next year, 4 to 7% increase next year, and then basically a 0 to 2% increase the next year after that. We were able to provide a great value to our customers and unfortunately a big increase came in one year, and then the following two years will be relatively flat for them, and they get security of supply from us.

So what's the dollar amount in terms of margin from this $35 million -- 35% increase.

It is not significant.

It is want significant. Okay.

It is good, mind you, but it is not a significant number that you would point out.

And what was your effective -- what do you expect your effective tax rate to be going forward? I want to make sure I got this right.

I think the tax rate we're showing this quarter is more reflective of what we expect our tax rate to be going forward. There was a 2% difference I think, Tony? Year to year there was a 2% difference, and as you may recall last year, I don't recall June quarter or September, I think it was the June quarter, we indicated that we had changed our view of what the tax costs would be of repatriating earnings from overseas, and this is the largely the current year affected that, and the tax rate we're showing now would be the tax rate you should model going forward.

Okay. Great. Thanks for the time, guys.

Yes.

Our next question is from Eric Kalamaras from Wachovia Securities.

Yes, this is actually Napoleon Wallace with Eric Kalamaras. I am curious like assuming that going forward your volumes continue to climb or volumes like the [inaudible] volumes continue to climb, just assuming how far could you all push out margins I guess on a percentage basis to kind of counteract some of those volume declines?

That's always -- I would tell you that's an art not a science.

Right.

And as you know, let's do it by segment. Obviously there are some businesses like our utility business where we -- there is nothing you can do. Price is price, and we've got some things we can do within the bounds of what our tariffs are, but by in large it is not a utility issue, it is a non-utility propane issue. We spend a great deal of time monitoring our prices to make sure that our prices are competitive. We have a longstanding way of doing that which gives us publicly available data on what average prices are and the market place and gives us indications of pricing across the board because as you know in the LPG business, it is not transparent like drive to go a gasoline station.

We use that data to help us formulate our pricing, and then we look at you are costs which should be and we try to treat it as much as we can as a separate factor in price. First you look at your appropriate price is given the marketplace, and secondly you look at your costs, and many cases, for example, Amerigas, because of its size has cost advantages that other people don't have. We also have storage that some other people don't have that gives us an advantage. We also have our own logistics company that gives us advantages that some of the other folks don't have, and so you have to when you look at margins you have to look at the price side of it which we try to be as competitive as we can be in the marketplace, and we have measurements of that, and then have you to look at the cost side, where we believe we've got a cost advantage to many of the other players, certainly the smaller guys we have a cost advantage to, and we run smaller guys we have a cost advantage to, and we run reports that show us what our cost advantage is should be by area, so we've got one of the things you know about us is we got lots of useful reports that try to help us in margin management and that the mantra is we want to charge our customers a fair, competitive price based on the value we deliver to them, and then we want to manage our costs and our supply function in a way that provides us with a competitive advantage, and we think we do a good job at both.

I realize that doesn't specifically answer your question on how far you can push margins, but bottom line is it would depend on how good we bought and what the marketplace did at the end of the day because one of our core strategies is to grow that business, and we don't want to take a short-term action which would cause us not to achieve a long-term strategy.

Assuming that like just sticking to the Amerigas side, like if you were to layout maybe like the top two strategies, tactics, that sort of thing, like to increase the or to keep costs low, and to continue managed costs from where you are now considering some of the cost-cutting initiatives you've already taken, would you layout something like that or give us an idea about that?

We spend a lot of time had we go on the road with doing exactly that, laying out our strategies for one, growing business and secondly controlling our costs and expenses, and I will give you an indication of some of the things we've done. Gene, you jump in here if I over state. One of the things is to make your expenses variable because your volume is variable. So hiring of seasonal employees, quality seasonal employees who are well-trained to help in the peak of your season and so that you don't carry those people during the entire year is a tactic that we've been implementing over the last few years to variable lies our costs.

We are driving productivity of our employees as hard as we can through employment of technology to help us measure productivity and make sure that we're getting a fair day's work out of every employee out there, and we want to assure them we want to give them a fair day's pay in connection with that fair day's work, and a variety of other initiatives. We really focusing on supply chain. We have new people come aboard on supply chain side to help out in that area, so there is no home run in this business. What you find is there is a series of strategies and steps that if you can execute them consistently over a period of time, you can achieve a better result, and I think t it is reflected in our numbers that we've been able to do that.

Thanks, guys.

Sure.

Our next question is from Jay Yannello of Pali Capital.

It has been a busy day to say the least. I may have missed this. Is there any comment on guidance or should we assume it is reiterated or are there just too many moving variables with the way weather has swung around to comment on that now?

I think the latter is true. I said at my concluding remarks that we expect our performance to mirror the weather going forward, and of course that's easier for me to say now that the weather has turned colder, and the forecasts are for colder weather. If you take a look at it, I think as best I can tell from the numbers that we're in First Call kind of numbers we were $0.04 short of the First Call number on weather that was, I will use the word we use about 30 times extraordinarily warm, and that's a heck of a performance given that weather.

Agreed.

And so to be -- to look at it with the warm weather continued into the first two weeks of January without question, yet it turned on a dime at that point, and we've experienced much, much better weather, and as I said the short-term and long-term forecasts are for better weather, so that's as far as I went. I basically said watch weather, weather is cold, we're going to be fine. So the weather has been so variable that it would be inappropriate for me to try to hazard a guess at this time.

That's fair. As far as international is concerned, do you have a rough number of what it would have been international propane if you normalize for weather and held currency constant?

The currency was $0.01, Tony is telling me. The weather really beat the hell out of that overseas, 22% weather really hurt it. The problem with doing that, I mean we obviously have a budgeted number we do, and I hesitate to use that as the comparison with you, but let me tell you the factors. Volume would have been considerably higher without question, and I dare say margins would have been lower because of the relationship that we see between in all countries all competitors trying to retain your margin to cover your higher costs and return something to the bottom line when it is warm. Maybe I can just leave it with we would have done nicely better, I don't know how to -- I don't want to say significantly better. Certainly not modestly better. We would have been done better, and getting hand signals as to how better that was.

There is always too many hand signals going on in that room.

Usually as long as it is not a lifted middle finger I am a happy camper.

I think there has been kicking in the past, too.

Exactly. Maybe a good way to ballpark is for you is instead of referring just to international let me look at the whole business. And if you look at our net income for the whole business, we certainly would have been better than that 10% better that we were. I feel very comfortable to tell you that we under performed where we expected to be by more than 10%, and so if that helps you sort of dimension the entire thing, that's probably the best I can do.

Okay. That's helpful. These service fee that helped mitigate the impact at Amerigas, what are they exactly?

There is a whole variety of fees we charge. Some of the fees are charged for value-added services we provide, I will give you an example of one of those. We offer fixed price programs out in the marketplace where we have to go out and buy the product and we take the risk on volume, so we'll go to a customer, for example, and tell them here is your price for the year if you want to lock in, and but we're going to charge you a fee to do that because we have all the volume risk, and of course when you don't take your volume it is warm, and the price craters, so we have to eat losses, so we charge fees associated with providing that very valuable product of certainty and price to our customers, and another is a fuel surcharge. Almost every industry out there as you know, put in a fuel surcharge when the gasoline diesel fuel charges really went through the roof. We implemented one last year at some point or rather early, but it wasn't fully implemented until probably the first quarter last year, second quarter, I mean the January quarter was full implementation of it because we were just like everyone else after Katrina, we were just suffering mightily, and fuel charge, and we didn't want to institutionalize that in your pricing because should that fuel charge go down, we're going to reduce the fee just as any responsible person would do, but that has helped us offset some of increase in expenses. Does that give you an indication?

Absolutely. Last question. I guess there was some mention of losing strategic customers. Can you provide some flavor on that?

Yes. I will call it -- let me explain that, and I will let Gene amplify. Our strategy is to grow our base business, our normal business at least as fast as the market if not a little faster, so that's part of the strategy. We then have two really three other pieces of growth, one is acquisitions, two is our cylinder exchange business which we now call ACE, and the third is strategic accounts, and the reason we seized on strategic accounts and on ACE is our best geographic coverage. We cover more of the population than anyone else in the United States and our -- we cover almost the entire United States itself, and that gives us a significant advantage certainly versus the smaller companies and many of the medium and larger companies in serving somebody like a Home Depot or a Wal-Mart or someone like that or a big freight company that wants to have one price nationally and have one bill and consistent service and one point of contact, and so we've got -- and we've had for five or six years now, Gene, an identification of that area as an area that would be lower cost to us, we could share those benefits with these customers, and have a nice business.

From time to time you will shed some of the that business because it is too low large margin, and most of this business, not most of it but a fair amount of this business is bid, and a fair amount is not, and so sometimes for example in a bidding situation the price gets to a point where we being focused on gross profit after delivery expense, we look at things differently than others in the industry who might just look at the margin on it, so we have a very disciplined process and from time to time we go through a period where we will lose an account or two or three because of the way we measure it probably is different from the way someone else measures it, and where I am sure they're convinced they measure it properly and we're convinced we measure it properly, the volume for the sake of volume doesn't cause us to be real excited. It is that contribution to earnings that we get from it that gets us excited, and there is a couple of instances in the last year where we realized that the profitability of some of these customers wasn't our standards, the contract came up, and we took appropriate action and someone else took action they thought was appropriate and took the accounts from us.

Are they bringing it in-house at all, if it is a distribution center, for example, are they doing it themselves?

It is not really that. It is competitive situation. Part of what's happening is not too different than what John talked about with energy services. We've had double-digit growth from strategic accounts for five or six years. We've been looking at our accounts segmenting them, trying to focus on the higher value accounts, those that have got a good payment record, so there has been a focus on trying to make sure that we're getting the right value in our -- in terms of our pricing with those accounts, looking carefully at bid situations to make sure that we're reflecting all of our costs, things like that.

Okay.

I think we're improving the quality of strategic accounts at the same time we may have lost a little volume.

We continue to be in a great position to grow strategic accounts. We have infrastructure, we have salesforce, and as Lon and Gene commented we want to make sure we're selective, we want to aggressively pursue growth, but we want to be electricity slive in terms of margin. That's some of what you saw in the first quarter, but still very positive about our potential to grow the segment of our business.

Okay. Thank you.

Yep.

[OPERATOR INSTRUCTIONS]. I would like the turn the call back to Mr. Lon Greenberg.

Thank you very much. We appreciate everyone's interest, everyone's support, and we look forward to next quarter, and as I say, if you have a significant interest in UGI, just keep hoping for this kind of weather. We will manage the things that are manageable, and management sensitive, and we'll do an excellent job there, but a little cold weather wouldn't hurt as they say. Thank you all very much, and we look forward to talking to you later on. Bye-bye.

That does conclude today's conference. Thank you for your participation. You may now disconnect.