UGI Corp (UGI) 2007 Q2 法說會逐字稿

Ladies and gentlemen, please stand by. We're about to begin.

Good day everyone and welcome to the UGI and AmeriGas Partners Second Quarter Fiscal Year 2007 Earnings Results Conference Call and Web Cast. This call is being recorded and at this time for opening remarks and introductions, I'd like to turn the call over to Mr. Bob Krick. Please go ahead, sir.

Good, thank you Richard. Good afternoon and thank you for joining us today. As we begin, let me remind you that our comments will contain certain forward-looking statements which the management of UGI and AmeriGas believe to be reasonable as of today's date only. Actual results may differ significantly because of risks and uncertainties that are difficult to predict and many of which are beyond management's control. You should read the annual reports on Form 10K 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?

Thank you, Bob. Let me also welcome you to our call. I trust as usual you've had the opportunity to review our press releases covering our earnings and dividend matters.

To summarize, UGI reported a 14% increase in earnings per share to $1.12 compared to $0.98 last year. As you may recall, earnings per share last year included two one time items that approximately offset each other. UGI also announced a 5% increase in its dividend on its common stock. This represents the twentieth consecutive year in which UGI has increased the dividend on its common stock.

AmeriGas also reported excellent results. AmeriGas reported net income of $119.9 million compared to $78.8 million last year. As you may remember, last year's net income was depressed by a one time debt restructuring cost of about $17 million, thus the applicable net income comparison is really the $119.9 million to $95.9 million or a 25% increase.

AmeriGas' EBIDTA grew to $156.4 million this year from $133.2 million last year, excluding that one time charge which is an increase of approximately 17%. Also, AmeriGas announced a 5% increase in its distribution on its common units and this is the third consecutive year in which AmeriGas has increased its distribution. Incidentally, with this distribution increase, UGI is now into the 15% layer of high splits.

This was an interesting quarter for us as it demonstrated the benefits of diversification that we've been discussing with you for several years. To refresh your recollection, we said that having four separate but related energy distribution and marketing companies of scale reduces risks for our owners. In particular, when one unit has a difficult time, we have the opportunity to diminish the effects of those difficulties by performing in a better than expected manner in our other businesses.

So, like prior years, including last year, we confronted adverse winter weather conditions. Read, as usual, warm winter weather. This year however, these conditions were predominately encountered in our overseas businesses. The winter this year in the overseas countries in which we operate -- and as you know, they are France, Austria, and eastern Europe -- was astoundingly warm, and I use the term astoundingly advisedly. It was approximately 20% -- yes, that's 20% -- warmer than normal throughout the winter season. We have faced many times warm winters in the United States and you've heard us talk about those winters and we generally have seen those winters be in the range of 10% warmer than normal at worst. It is unprecedented in Europe, or for the U.S. for that matter, to face such warm winter weather. It was as if there was no winter this year at all overseas. And then as you might expect, our overseas businesses struggled with volumes that were 25 to 30% lower than one would expect in a normal winter. Our businesses did a fine job of managing what is controllable -- operating expenses and margins -- but there is no way to offset the adverse effects of this unprecedented winter overseas.

Yet our domestic businesses overall came to the rescue with better than expected performance. We'll talk more about that later in the call but I will tell you that I am not only pleased with our earnings this quarter, but I'm also pleased with the earnings potential that I saw from our collective businesses.

At this time, what I'd like to do is turn the call over to Bob Krick who is substituting for Tony Mendicino to comment further on our financial results. John Walsh will then offer some comments on our operating trends of the domestic businesses. John will be followed by Gene who will provide some color to AmeriGas' fine results and at that point, I'll offer some concluding remarks.

So Bob, it's all yours.

Thank you, Lon. As Lon said, our shareholders were well served by our diversification. For the quarter, we earned just over $120 million or $1.12 per share, compared to nearly $104 million or $0.98 per share in the same quarter last year. The improvement year over year resulted from a number of factors, the addition of PNG, the gas utility we acquired in August 2006, colder weather than last year in our domestic service territories, excellent margin management, and continuing customer growth, offset by the effects of the record warm weather in Europe.

Now let's get into some of the details, beginning with our domestic business units. AmeriGas Partners, our domestic propane distribution business, had a record breaking quarter on weather that was nearly 10% colder than last year but still nearly 4% warmer than normal. Weather related volume increases, higher average unit margins, and non-propane value added fees more than offset higher expenses related to the growth in delivered volumes. Gene will provide more color on what looks to be a record year.

Net income from our gas utility operations rose to $41 million for the quarter, compared to $21.5 million last year. These results include about $14 million of net income from the Penn Natural Gas assets. Throughput increased by nearly 23 Bcf to nearly 50 Bcf as a result of the almost 19 Bcf throughput from PNG and a 15% increase in throughput from our legacy gas operations due to 15% colder weather than last year and customer growth. While customer additions to our core heating customer base in our legacy gas utility continue to lag last year, annualizing our year-to-date customer additions would still put us at the low end of our three to 4% annual target range.

Net income from our electric utility rose to $3.6 million from $1.5 million for the quarter. We delivered nearly 282 gigawatt hours, a 5% increase primarily driven by colder weather. The positive effect of higher average rates on higher gigawatt hours delivered was somewhat mitigated by higher purchased power costs.

In energy services, reported net income decreased to $10.3 million from $15.4 million, reflecting the absence of the $5.3 million after tax gain on the sale of the joint venture a year ago. Excluding the effects of that sale, energy services' results were even with last year, with improvements in gas marketing, offset by lower generation income. Energy services' net income, excluding electric generation, increased $1.1 million to $7.9 million, primarily because of greater margin from peaking supply and storage management activities and customer growth. In electric generation, net income declined by nearly $1 million, mainly because of lower prices for the electricity they would produce.

Turning to our international operations, the story was unprecedented weather and France weather was over 15% warmer than normal, compared to last year's weather that was 6.5% colder than normal. Reports are that the entire heating season may be the warmest in over 100 years. As a result, net income for international propane declined to $34.8 million, from $45 million. Higher average unit margins, lower distribution related expenses and a strong Euro could not offset the full effects of the lower, weather induced, sales volumes. The average exchange rate for the quarter was $1.32 per Euro versus $1.20 per Euro last year.

With respect to our balance sheet, consolidated debt totaled just under $2.2 billion at March 31, compared to just over $1.8 billion last year, the increase principally arising from the permanent financing and working capital needs of PNG. AmeriGas long term debt remained unchanged and liquidity throughout our businesses remains robust as we exit the heating season. AmeriGas had no outstanding balances on its revolvers at quarter end.

The dividends and distributions that we receive from our operating subsidiaries between now and the end of September, net of our corporate dividends paid to our shareholders, will build cash for future investments of between 80 million and $90 million.

John, do you want to expand on our domestic businesses?

Thanks, Bob. Second quarter performance across UGI's domestic businesses was strong as we benefited from weather that was colder than Q2 fiscal year '06 as well as our continued focus on UGI's core strengths of margin delivery, cash flow management, and customer service. Throughput increased in each of our businesses. While this increase was primarily due to the colder weather, we continue to be pleased with the contributions from our strategic growth initiatives within each unit. Gene will provide you with the detail on AmeriGas' Q2 performance, but I'd like to take a minute to comment on two specific areas.

AmeriGas' EBIDTA increased by over $23 million in the second quarter when compared to prior year. The increased volumes from colder weather were a major contributor, but in addition to that, Gene and his team did outstanding work on margin delivery, non-propane fees, and supply chain management in order to deliver this strong performance. AmeriGas Cylinder Exchange, or ACE, delivered impressive growth during its off season, with fiscal year to date volumes up almost 35%. We expect our install base of self service vending units to exceed 1,000 by year end. We're well positioned for growth in our ACE business as the summer season approaches.

Net income increased significantly in both of our utility businesses in quarter two. Weather in our gas utility service areas was close to normal and approximately 13% colder than Q2 FY06. As Bob mentioned, throughput increased by over 80% due to the combined impact of the PNG acquisition and the colder weather. The result was a near doubling of gas utility net income in the quarter. We continue to see growth in both our residential and commercial customer base but the greater growth is lagging the growth achieved for the same period last year.

We're very pleased with the performance of the Penn Natural Gas, or PNG, operations and we remain ahead of schedule on our integration plan. The people at PNG have strengthened our gas utility organization and we are benefiting from sharing best practice across a wide range of operational and administrative activities.

Our electric utility net income increased by over $2 million in the second quarter as a result of the rate changes implemented on January 1st and increased demand. Throughput increased approximately 5%, reflecting the impact of colder weather. Our communication plan advising customers of the rate increase was effective and we continue to provide them with information on steps that can be taken to manage their energy costs.

Energy services delivered net income from the quarter that was roughly in line with prior year after adjusting for the gain on the 2006 sale of our 50% share of Hunlock Creek Ventures. Total margins increased slightly in energy services due to the improved performance in our asset management and peaking services businesses. Just as a reminder, the peaking services business is our portfolio of assets used to provide supplemental energy, primarily LNG or propane-air mixtures to gas utilities at times of peak demand.

Our gas marketing team is having continued success growing our customer base in our targeted small and midsize commercial segment. Volumes year-to-date are running 6% ahead of last year and we have improved our unit margins while delivering this growth. Year-to-date, energy services' net income, after adjusting for the 2006 asset sale, is running almost 40% ahead of prior year and they are on track to deliver another outstanding year.

Finally, we see UGI's commitment to safety as one of our greatest strengths. We work diligently to enhance our safety focus within each business, but we're also seeing great opportunities to share best safety practices across UGI's businesses. This commitment to continuous improvement of our operations is vitally important to UGI, our customers, and our communities.

I'd now like to turn it over to Gene who will provide you with more detail on AmeriGas.

Thanks, John. We're pleased to be announcing record earnings and to be sharing the benefit of higher earnings with our unit holders in the form of a 5% increase in our distribution. As you've already heard, based on these strong results, we're also raising our guidance for full year EBIDTA to a range of 280 to $290 million.

Volume for the quarter was up 8.4% due primarily to weather that was almost 10% colder than last year. About 75% of the volume increase occurred in the month of February. In the northeast and Midwest, February volume was actually up about 30%. Naturally we were thrilled to get these strong volumes and it gave us the opportunity to demonstrate our ability to deal with a real spike in our demand. To make the situation more interesting, the industry experienced supply shortages in the northeast due to a rail strike, a temporary shutdown in a major pipeline, and shortages at the two marine terminals that serve the northeast. We are fortunate to have the largest transport fleet in the industry and we were able to effectively shift resources from other parts of the country into the northeast to make sure that all of our districts had propane. I'm grateful for the way that our employees overcame the twin challenges of demand and supply to take care of our customers.

We also had strong results in our cylinder exchange and strategic account businesses. ACE volumes for the quarter were up 49%. Same store sales accounted for approximately one third of this increase and the rest was due to new stores added since last year. As you know, the cylinder exchange business has higher margins than our traditional business, but also higher expenses and higher maintenance capital requirements.

Strategic accounts volume was up 9% for the quarter due both to colder weather and to account gains. We also had growth in our residential and commercial base, consistent with last year.

Expenses were up by $14 million, primarily due to the increase in volumes for our base business and ACE, our cylinder exchange business. Other areas that affected our expenses are higher medical claims and higher equipment repair and maintenance expenses.

Looking forward, our results for the balance of the year will continue to benefit from strong growth and our ACE business as we enter the growing season. I expect to see continued growth in strategic accounts and in our base residential and commercial business. We also have a number of acquisitions that we're currently reviewing.

I'd like to conclude by thanking my fellow employees for going above and beyond to take care of our customers in this challenging quarter and for helping us deliver a 17% increase in EBIDTA and a 5% increase in our distribution.

Now let me turn the call back to Lon.

Thanks Gene, and thanks John and Bob as well. Let me leave you with the following thoughts as we end our prepared remarks.

First on our dividend actions, at UGI as you know, we announced financial goals some time ago and one of those goals is to increase our dividend around 4% a year. Our action in increasing the annualized dividend to $0.74 from $0.755 cents per share continues our tradition of meeting our commitments.

With respect to AmeriGas, this is the third consecutive year in which the distribution was increased. The increase this year at 5% is greater than our announced target of 3%. The greater than target increase reflects our confidence in AmeriGas' performance overall this year which is, as everyone has said, exceeding our goals.

We're not changing however, our long term goal to raise the distribution 3% annually. Instead, what we are saying by our actions is that in those situations in which we have exceptional performance, we will evaluate whether it's appropriate to share some of the excess earnings with our fellow unit holders.

With respect to our expectations for earnings this year, we indicated in early October that we expected earnings at UGI to be in the range of $1.75 to $1.85, assuming relatively normal winter weather. Since that time, as I noted earlier, our domestic businesses on the whole have done somewhat better than we anticipated while our international businesses have done worse due to the unprecedented warm winter weather. Balancing those factors, we continue to believe our earnings will be in the range of $1.75 to $1.85 this year.

With regard to AmeriGas, we started the year with expectations in the $265 million of EBIDTA to $275 of EBIDTA range. Given the relatively benign weather conditions we encountered and the outstanding performance we achieved, we now believe EBIDTA will be in the range of 280 million to $290 million as Gene said.

I must confess to being a bit pleasantly surprised at the resiliency of our earnings. While external conditions in our U.S. businesses have not been perfect, with warmer than normal weather which was erratic and it was volatile, and which was combined with high commodity prices, our business units in the U.S. have done a fine job capitalizing on opportunities and as has been said before, managing their businesses.

As John mentioned, the integration of our UGI/Penn Natural Gas business moves along well and it's aided by both the quality of the people working on this matter and the commitment that all of us have shown in achieving our goals.

In summary, the external environment domestically this quarter and this winter for that matter, while certainly not optimal, was manageable. This contrasts markedly with the extreme weather related challenges we faced overseas. The absence of winter brought the attendant drop in demand. Those of you who know us well understand that there is very little we can do in the short term to offset fully lower weather induced demand of this scale. It's also important for me to emphasize for you that the demand drop is not permanent. It's not permanent. It's weather related and when winter returns next year, the demand will return with it. That is not to say that we do not face challenges internationally or domestically. Like all businesses, we have our share such as increasing levels of competition, high energy prices, and a housing slowdown. Both domestically and internationally, the political environment is intensely focused on energy prices and on global warming. You can't pick up a newspaper these days without reading an article on those subjects. Thus we continue to monitor the evolution of policy with regard to fossil and alternative fuels and in particular with regard to mandated levels in the future of alternate fuel use and related incentives. In addition, the regulators and politicians are continuing to evaluate the entire value chain in the energy industry and of course they're seeking ways to mitigate the impact of high prices on consumers. This is not unexpected and while we don't see any short term material impact, we are alert for not only the long term implications of these policies, but also for opportunities to add value for our owners. As Bob mentioned, our cash balances are building and we are on the alert for opportunities to invest for the future.

In conclusion, I am quite heartened by our performance and all of us are proud of our accomplishment this quarter. Our businesses were able to manage through the many challenges. We were able to recognize and seize opportunities and at the same time produce a level of earnings for our owners that we forecasted at the beginning of the year when we obviously didn't know of the challenging environment we would face. Our folks have done a great job and their performance reinforces my optimism about our future.

Well, there certainly is more to accomplish this year. Expect us to remain focused, to continue to build momentum and we anticipate a bright future in 2008 and beyond.

At this point Richard, I think we'll take some questions.

Thank you very much, sir. If you would like to ask a question today, please press *1 on your touch tone telephone at this time and if you are on a speakerphone, make sure your mute function is turned off to allow your signal to reach our equipment. Once again everyone, it is *1 for questions today and we will pause for just a moment to allow everyone a chance to signal.

And we will take our first question from Schneer Kruschuni, UBS.

Hi, good afternoon guys.

Hi, Schneer.

Hey, just a couple quick questions if we can focus on AmeriGas for a second. I mean, you took up the earnings -- it appears to have been a normal weather quarter certainly for the big quarter, or closer to normal than we've seen in awhile. Can we think of this as sort of the guidance that you have for this year, as kind of the new level of what normal does look like for AmeriGas? You know, we can sort of assume that that would be where sort of the baseline would be for 2008, if not a bit higher?

Let me put some flavor around that. Certainly it is a good base for the future for us but I will say that when we do experience difficulties in our businesses as a whole, we are probably on the phone more to Gene and the AmeriGas folks to redouble their efforts to improve their results. On the other hand, as you know we have what I'll call a balanced approach to our business. If you look at our margin increases, they're steady recovering our costs and doing a nice job in margin, but certainly not as aggressive in margin as some of our competitors are and we balance that with managing our expenses tightly and making sure that we grow in this business and so if you take a step back from us, I've always said I think we can grow our EBIDTA in nominally the 3% range on an annual basis and so we might have accelerated a little bit of that EBIDTA growth this year through good actions and good management to make sure that we achieve goals that we need to achieve but fundamentally if you're looking at the 280 to 290 as a base for going forward and then adding some growth on that, if you start at the lower end of those ranges, you've got a good base to go forward from.

Okay, and I guess the second question which applies to both the gas utility and I guess your observations with AmeriGas, if this is really one of the first quarters that we've seen normal weather and we've talked about conservation -- nobody has ever been really able to measure it because there hasn't been anything close to normal. What has been your experience thus far with respect to volume growth at I guess the gas utility and at AmeriGas?

Let me give you a qualitative assessment. You may know, and you probably do, that AGA put out a study on conservation over the last five years I think it was, and it's really a good study. I commend it to all of you because it verifies our -- not because it verified that we were right by any means -- but it certainly verified our underlying assumption that there is structural conservation every year in the energy business. That structural conservation I think AGA targeted at around 1%. We've always used ¾ to 1% or close to that but fundamentally, it's two kinds of conservation -- structural conservation year in, year out and then there was this step function conservation that AGA identified as basically a 10% increase in price. What kind of conservation will that produce and I think they probably said it produced kind of a 1.5 to 2% conservation addition to it. As we step back and look at this year and implicit in the AGA study is that if prices are relatively stable, you don't get those step functions, that people adjust to it. And there is a limit obviously to how far they can turn down their thermostats before they have not only their winter coat on but sweaters underneath it.

So, I would tell you qualitatively this year, we think demand has, on a weather adjusted basis, come back up a little bit from the step function conservation we've experienced. I'd say we were probably on the order of -- consistently with the AGA study, couple percent or so in step function and 1% in structural and then if we look at it this year and try to take a look at our numbers and run them through our weather adjusting models that we're anal on, but I know they're not right, it would say that weather adjusted usage is higher this year than we would have expected it to be.

Okay, that's great, very insightful. Thank you very much.

Sure.

We'll go next to Adam Light with Credit Suisse.

Good afternoon. It looks to be in the incentive distribution range.

Hey, I'll buy you a drink, Adam. It's about all I can afford.

You guys had a very nice quarter -- good results so far this year, but just maybe I missed it. If you can walk me even a little bit towards how you do as much better in the second half when you're typically not earning nearly as much money than you have over the last umpteen years to get to the new guidance range.

Yeah, the AmeriGas -- are you referring to Adam?

-- the AmeriGas, sorry.

-- rolling 12 on AmeriGas?

For the second half of '07 to get to the -- especially the upper end of your range, it implies a better second half of the year than you have historically done so where does that come from?

Would you accept brilliant management?

You've had that for years.

Okay, alright. Now I'll tell you the truth instead. The improved performance is a combination of several things. It's one, fees -- you know, non margin-related fees that improve every year for us. Our fee income goes up -- non propane-related fees, that is. Secondly, I'd say a principle driver is the cylinder exchange business. We continue, as Gene said, as John said, if you look at our volumes in our cylinder exchange business, they are up 35% year-to-date and I think Gene pointed out, they're up more in the quarter.

49% for the quarter.

49% in the quarter, and I think that's driven largely by same store sales are up for that but also, we're improving the quality of the nature of our stores in the cylinder exchange business. We're getting more high volume stores than we formerly had and I think that that obviously helps your turnover and increases your sales as well. So, if you kind of look at it, there's a contribution from ACE. If you look at the differential, because on a rolling 12 I think we're at 279, and that would be the low end of the range, but you get to the higher end of the ranges through an improvement in EBIDTA contribution from the cylinder exchange business, a little bit of unit margin maybe offsetting expenses and a little bit of non-propane fees that get you there.

I'm sorry -- so not figuring in anything in the way of acquisitions?

No, if we do an acquisition this time of year, we're satisfied to break even for right now and as you walk down months, you lose -- you get a little bit of EBIDTA from it but not enough to make a difference.

Okay, great, thanks.

Sure.

We'll go next to Yves Siegel with Wachovia.

Thanks, good afternoon.

Hi, Yves.

Just a couple quick questions for you. Number one, could you just remind us how much -- what the proceeds are from the sale of the Arizona storage?

When it closes, it'll be nearly $50 million or so -- I don't know, between --

$52 million.

$52 million is the sale price and so probably you're in the high 40s to low, you know, fifty-ish in net proceeds.

So what do you do with the cash? That stays at AmeriGas, right?

How do you think I'm paying for Adam's drink?

We're evaluating. We take those issues to our Board and we discuss them with our Board and we're in the process of making conclusions as to what to do with that and as soon as we can tell you about what we intend to do with it, we will.

Does that include potentially a special distribution, you think?

As you know in dealing with us Yves, we examine all alternatives for uses of capital. I will tell you that we certainly understand that when you sell an asset in a Master Limited Partnership, because of the way the tax rules work, we create a tax burden for our limited partners and our general partner obviously as well. So, we examine the full spectrum of things and we make sure that the Board has before it all the alternatives. Obviously AmeriGas could put that cash to good use as well so it's a balancing of a whole variety of factors as well look at the use of cash. But as soon as we can tell you something about that, we will.

Please don't scold me for the next few questions.

Is that a teacher's tone or --

What was the EBIDTA contribution of the storage?

I'd say on the order of two to $4 million. Gene, I don't know. What was it? On the higher end of that range -- say $4 million, nominally.

Okay, then the next question would be what does the acquisition environment look like for you today?

I would tell you it's kind of mixed. We are out there looking for transactions. We regularly are talking to people as you know, and across the spectrum of deals -- very tiny ones to medium sized ones to larger ones and that our success rate has not been as high as we would have liked over the course of the last year or so, and that's due to our disciplines, not due to a lack of opportunities. It's due to our discipline, but we're feeling pretty good about the pipeline of acquisitions and hopefully we'll have some good news to report. No assurances on that, but certainly we're more optimistic than we've been in that area for some time.

Okay, here's the scolding part. Do you think the acquisitions would offset the loss of EBIDTA from the sale of storage assets?

Certainly for this year because most of the earnings in the storage assets are already in. For the future, we're not troubled by it and I think AmeriGas could put that cash to use in a manner which will produce EBIDTA and more value going forward. So I don't think that's something -- I think it's a good question so I wouldn't scold you for the question, but I think in the greater scheme of things, you won't and we won't miss that EBIDTA.

Okay, when you look at the cylinder exchange program, could you just discuss how much free cash flow that's generating? Has that changed with the growth? You know, how should we think about that?

I would tell you that as we grow, depending upon the nature of the growth, we chew up more capital or less capital. As we've said to you, one of the things that we think has been advantageous for us in the cylinder exchange business is that we have perfected a vending machine approach so that if you go to a store like a Home Depot, you can stick in a credit card and pull out a cylinder and put your cylinder in there and you don't have to wait. Those machines are capital intensive and so as we for example, roll out those machines on a more accelerated basis, you're investing for the future, but when we do that we also make sure that we have enough of a commitment to give us a good return on that over time. So, the cash flow in any year will vary depending upon the growth and the -- in particular, the nature of the growth but so, I don't know what to tell you beyond that. It does vary. It's positive cash flow. You shouldn't worry about that at all and the EBIDTA contribution from that business we've said in the past approaches kind of 10% of total EBIDTA and obviously that will -- the more we invest, successfully invest -- caveat -- the more that EBIDTA will grow.

Okay, sticking with -- I guess it'll be the last question. I apologize.

That's alright.

But sticking with cash and thinking about the distribution -- this is our observation so feel free to tell us what's wrong with it -- but it would seem to us that when you look across the propane space that we would argue that companies are doing a heck of a lot better job managing through the weather risk and if that's the case, what it also says is that perhaps you don't need as big a cushion or distribution coverage ratio as maybe you needed several years back because of the variability on cash flow. Having said that, when we looked through this year and going forward, it would suggest that you have a pretty nice cash cushion so the question is number one, do you think the observation is right? Number two, what are your thoughts on distribution coverage and number three, if your distribution coverage is x, do you think you might get into a situation where because you're generating so much cash right now, you might have one year, or another year, of what we would call just sort of catch up?

I think that's a good question and I would never scold you. You know that. The -- this is a very complex question and let me take the best shot at it. I think your observation on how the companies are managing through difficult times is correct. Everybody is managing through it in a better fashion. However, I don't think everyone is managing through it on a consistent approach basis. I think some of the companies are focused on operating expense management together with growing volume. Other companies are focused on margin expansion and some are focused on everything and if you go into the detail of everybody's reported results, you can see differences based on exactly what we've said. We believe our volume performance has been better than most. We think our unit margin growth has probably been a little bit less than most and that our operating expense performance has probably been a little bit better than most in recent years and we believe our customer growth as a result of all of those factors, is probably a little bit better than most as well. That's not to say that I believe our competitors aren't doing a good job but every management has a different form of emphasis and certainly results of everyone speak for themselves and I have nothing but great regard for the results that everybody is putting up in this industry at this point in time. You know me. I worry about a lot of things and as I jokingly say, even paranoids have enemies.

The great strength of this industry can also be the great weakness of the industry in the future and so we have a tendency to be cautious. If you look at our balance sheet, our balance sheet is in pretty darn good shape and that was a conscious effort to put it there. You are accurate that our coverage ratios in the 1:3 to 1:4 kind of area are conservative compared to most companies out there. I will tell you it is a subject that is discussed regularly by management and between management and our Board and it's a balancing of all the opportunities because coverage ratios is an artificiality to some degree as you know because not everyone classifies maintenance capital in the same way and coverage ratios are a function of what one defines as maintenance capital, not total capital. And so when you're -- certainly when we look at our distribution policy, we're not only looking at the coverage ratio that you and the financial community look at, we also look at our total capital including growth capital, acquisition capital, etcetera, and we might reserve a little bit more cash for things that we see on our plate that might not be readily apparent to you compared to others who push the distribution more and I think it's a long, long race out there and while sometimes the rabbit gets out ahead, sometimes the tortoise, over an extended period of time, kind of brings up the rear and takes the lead and we're satisfied with where we are. We're very mindful, if you know us really well, of our obligation to our unit holders and I think the 5% this year reflects a balance of that and our recognition of that. But it is something that I will tell you -- it's as if you were sitting in on our management and Board meetings when you asked that question because that's something regularly discussed.

It's a good problem.

Yeah, oh yeah. I remember the days, as do you, when people would worry about well, how are you supporting that distribution? So I think -- I like when you ask me that question.

Alright, thank you.

Take care.

Yep, bye.

We'll go next to Wyatt McCormick with Raymond James.

Hi, I'm speaking for Ted Gardner. My question concerns the --

We're having trouble hearing you.

I'm speaking for Ted Gardner.

Oh, okay. That's better.

And my question concerns the pending sale of that Bumstead LPG storage terminal.

Sure.

What was the utilization of that terminal and also how will it affect cost as it's going to be operated through a third party?

You want to take that one, Gene?

Sure. It's a storage terminal with about 147 million gallons of storage capacity -- propane and some butane. We leased a portion of that ourselves and then we leased out the rest of it to about 17 to 20 different marketers or wholesalers of product. So it's basically storage that is quite important to the whole southwest area. That product gets transported a long distance from Arizona to southern California and we retained the portion of the storage -- as a part of this deal, we locked up the portion of the storage that our retail business has traditionally used, on a long term agreement. So from a retail perspective, we'll have the use of that storage for our business.

If you look at that transaction sort of at 40,000 feet, the portion of the terminal we used ourselves was strategic to us and as Gene points out, we covered that strategic need for our retail business. The portion of the terminal that wasn't used by us was opportunistic and not strategic and we being the kind of management we are, are more conservative than others are who operate these businesses on a regular basis and there are things that the purchaser of those assets and others in their industry can do to optimize those assets with other assets they have and change the business model for those assets where it can produce additional earnings for them where it won't produce the same level of earnings for us. But the strategic part of the deal as Gene emphasized, we took care of ourselves.

Great, thank you.

We'll go next to Barry Klein with Citigroup.

How's it going?

Hi, how are you?

Pretty good. A couple quick ones, and then a couple more in depth, but what exchange rates are you assuming for the Euro in your guidance?

No change. I mean, I think it was $1.31--ish for the last quarter.

$1.32.

$1.32 for the last quarter, and to tell you the truth since we are transparent, we didn't focus on it but I'd assume we weren't as -- Bob is telling me we didn't really assume anything higher or lower than that $1.32-ish.

Okay, the effective tax rate we should use going forward? I think it was 37%. Is that still the same?

Yeah, I don't think there was anything unusual in tax rate this quarter.

Nothing unusual.

Nothing unusual this quarter, so whatever the -- I would use the year-to-date number, maybe not the quarter number.

Okay, on AmeriGas, you said the debt would be the same, I believe. On the UGI side, what debt amounts did you -- did you have about the same also?

Yeah, UGI year over year is higher by about $300 million or so and that's because when we bought the, as you know, when we bought the gas utility from Southern Union, we financed half of it with debt and that reflects the additional half. But they will be stable going forward.

Okay, and how about your cash balances at UGI?

Cash balances -- Bob said the cash balances will grow from -- to nominally 80 to $90 million by the end of this year.

Okay, international propane -- what was the overall impact of weather versus -- just the weather, not taking into account the exchange rates, the weather versus normal.

Let me -- I mean, the volume was down significantly. I'll give you an overall guess on that, that it was probably on the order of, netting Euro against it and everything, a dime in earnings, somewhere in that area.

Of just the weather?

Yeah, what the weather did was took away 30 -- 25 to 30% of the volume and if you took that volume times the typical margin and whatever and you offset that with the operating expense savings you had and adjust for the Euro -- all that in 30 seconds, mind you -- you come out with probably close to a dime in earnings, I would say. Let me ballpark it for you, eight to $0.12 but I'll center on a dime.

Okay, and is this -- I guess is this purely -- this decrease, I mean that was a huge decrease -- I mean, 25%. Granted, it was an extremely warm winter but is this something that is purely weather or is there -- should we assume some sort of further impact to demand going forward? Is that something that should concern us or is this purely weather related impact?

I'll answer it broadly for you. The overwhelming predominance of the impact was weather. There is no question. Given our expectations based on prior years and what we expected this year, the weather took away virtually all that volume. That's sort of the immediate answer so I would tell you as I said during my prepared remarks, winter comes back next year. We would expect predominately all that volume to come back.

Okay, so you're saying if -- more or less, if weather is like it was last year, we would assume about the same volumes as last year.

I think within reason, yeah. I think I would tell you that that's a good opening assumption for you. There's always, as we've said many times, when you look at the developed European markets -- Austria and France -- there's an intensity of competition going on. There are new entrants in the market in France that our management team has adjusted to, has been innovative in attacking and our market shares are pretty good year over year, so -- but there are always little things that happen in any business, but again, you're looking for material trends either way and I would tell you that in a volume sense that I don't see a material degradation in volume at all. This is due to weather.

Okay, and lastly, the impact of the weather on AmeriGas versus normal on earnings, if you could also ballpark that.

The folks would tell me at AmeriGas likely, and then I'll let Gene tell me if he would tell me this, that they pushed in other areas to compensate for lower volumes which is normally what you do in any business as you see. I mean, the weather was warmer and you look at your results and so you push harder on operating expense. You push your other controllable areas a little bit harder than you would otherwise to make sure you're having the right kind of year. So I'm not sure it would have improved the performance enough to point out to you a number. I think the number is a good balance of how -- what is representative going forward, subject to our normal kind of growth on top of that.

I absolutely agree, especially since we're going into the budgeting season.

That's not my budget view, mind you.

Okay. Alright, so on weather -- weather comes back to normal --

Don't expect a huge difference in AmeriGas because of weather normal -- we've always said as you may recall, that if weather is within a two to 4% of normal that it's not going to affect our earnings significantly in AmeriGas because we expect the management team, given the vast unfortunate experience they've had in managing through warm winters, to be able to compensate for that.

Okay, and on the propane side, we should again -- assuming, in a ballpark, coming back to a normal type of temperature, about $0.10?

I would -- yeah, again, I think that's a -- absent other factors that are out there, there was nominally a dime of earnings this year that disappeared because of the weather situation.

Okay, that's it for me. Thanks a lot.

Yep.

And ladies and gentlemen, just a quick reminder that it is *1 for questions today and we'll go next to Carl Kirst with Credit Suisse.

Hey, good afternoon everybody. Actually, I think all of my questions were just hit. Maybe if I could just quickly summarize weather impact then as we've talked about international and AmeriGas. If this were really a weather normal quarter, we would expect to see international eight to $0.12 (inaudible). Is that your ballpark there? Is that fair?

Mm-hmm.

And then on Antar gas, again from the competition standpoint, you couldn't at this point really say that any of the loss volume is coming from sort of the increasing competition from the grocery chains or wherever that actually is coming from. Is that fair?

I would tell you that roughly -- I think I mentioned this -- that roughly 20% of the volume is in cylinders in France. The intensity of competition certainly as you point out in the supermarket chain is there. There is however a structural decline in that business that exists so nominally, we're going to lose some volume each year out of structural decline and I would say apart from that, our folks are doing a good job of holding their own competitively in the marketplace. So if you wanted to be cautious, you might take off a little bit of volume for competition, but there is a structural decline of three to 5% every year in that cylinder business. At least there has been for the last ten years in the cylinder business overseas so you'd have to model a little bit of decline in cylinder volume.

Okay, great, that helps. And then just final clarification -- the 80 to $90 million of cash on hand at the end of the year, that is net to UGI, excludes the AmeriGas consolidation and no acquisitions, correct?

AmeriGas cash is kept separate from that and so this would be solely UGI coffers that UGI could write a check on and spend as opposed to AmeriGas which will be long cash -- about $75 million long in cash at the end of the year.

Perfect. Thanks for the help, guys.

Sure.

And ladies and gentlemen, at this time we have no further questions. I'll turn it back to Mr. Krick for any closing remarks.

Okay. Thanks, Bob. I want to thank you all for your attention and support. As you can see, we had a good quarter and especially given the circumstances we faced and we're feeling good about where we are and we look forward to talking to all of you either at AGA or another forum until next quarter. And we're, as you can tell, feeling good about where we are and moving forward. So, hope to see you all soon and talk to you then. Thank you very much.

And ladies and gentlemen, this will conclude our teleconference for today. Once again, we do thank you for your participation and you may disconnect at this time.