UGI Corp (UGI) 2007 Q3 法說會逐字稿

Please standby we're about to begin. Good day and welcome everyone to the UGI and AmeriGas Partners Third Quarter Fiscal Year 2007 Earnings Results Conference Call and web cast. 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. Please go ahead, sir.

Thank you, Deana. 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 of 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, Lon, Chairman and CEO of UGI, Lon Greenberg. Lon.

Thanks, Bob, for remembering my title. I'd also like to welcome all of you to our call today. I trust you've all had the opportunity to review our press releases reporting our third quarter results.

In summary, UGI reported EPS of $0.11 a share compared to $0.18 last year, but if you adjust for the benefit in last year's earnings of $0.05 tax adjustment the more appropriate comparison is really $0.11 versus $0.13 last year.

At the same time AmeriGas reported improved results. Its EBITDA grew substantially to $30.9 million from $20.7 million last year. Similarly, AmeriGas' seasonal net loss fell substantially to $5.7 million from nearly $15 million last year. Our earnings this quarter really reflect the trend of our earnings thus far in our 2007 fiscal year with apologies to Charles Dickens, it's a tale of two continents.

Our domestic businesses performed well in the quarter with notable improvements in earnings while at the same time those improvements could not, this quarter, overcome a lower contribution from our international businesses which is attributable, principally, to extraordinarily warm weather during not only this quarter but the entire winter period.

I have more to say about our results but at this point I'd like to turn the meeting back to Bob Krick to review the financial aspects of our performance this quarter. Following Bob, John Walsh will add some color to our domestic business performance. Gene Bissell will then comment on AmeriGas' performance and at that point the meeting will be turned back to me and I'll provide you with some closing comments. So, Bob, why don't you take it from here?

Thank you, Lon. For the quarter although higher volume sales brought on by colder weather in the U.S. combined with higher unit margins at some of our domestic businesses improved earnings, the record warm weather combined with lower average unit margins in Europe more than offset them. We earned over $11 million or $0.11 per share in the quarter compared to over $13 million or $0.13 per share in the same quarter last year excluding the $0.05 one-time tax benefit that we disclosed last year.

Let's get into some of the details beginning with our domestic business units. AmeriGas partners our domestic propane distribution business had another record quarter on weather that was nearly 20% colder than last year but still 6% warmer than normal. As in the second quarter, weather related volume increases, higher average unit margins and non-propane value added fees more than offset higher expenses principally related to the growth in delivered volumes.

Gene will provide more color to support our increase in the earnings guidance for the fiscal year for the partnership.

Net income from our gas utility operations rose to $4.3 million for the quarter compared to $800,000 last year. These results include income from the Penn Natural Gas assets purchases last August. Throughput increased to 25.4 billion cubic feet as a result of the almost 9 billion cubic feet throughput from PNG and a 17% increase in throughput from our legacy gas operations due to 19% colder weather than last year and customer growth.

While customer additions to our core heating customer base and our legacy gas utility lag in comparison to last year we continue to believe that annualizing our year-to-date customer additions would still put us at the low end of our 3% to 4% annual target range in our gas utility operation.

Net income from our electric utility rose to $4 million from $2.7 million for the quarter. We delivered over 231 gigawatt hours, a 4% increase, primarily driven by colder weather in April. The positive effect of higher average rates on higher sales delivered was somewhat mitigated by higher purchase power cost.

In Energy Services, net income increased to $8.2 million from $6.4 million, reflecting higher margins on higher natural gas volume sold. Income from Energy Services midstream are two -- I'm sorry, two other main business lines asset management in the midstream and electric generation were even with last year.

Turning to our international operations, the story continued to be unprecedented warm weather. In France weather was 44% warmer than normal, compared to last year's weather that was 22% warmer than normal. Flaga reported similar weather for its central and eastern European service areas. This has been a historically warm year for the region. As a result, we had a loss of $3.3 million from international propane compared to income $7.5 million last year absent the one-time tax benefit we mentioned.

Lower volume sales to customer collapses with higher unit margins combined with increased product cost and increased competition due to warmer weather principally led to the lower results. The average exchange rate for the quarter was $1.35 per Euro versus $1.26 per Euro last year.

With respect to our balance sheet consolidated debt totaled just over $2.1 billion at June 30 virtually unchanged from March 31, and compared to just over $1.8 billion last year, with the increase principally arising from the permanent financing and working capital needs of PNG. AmeriGas long term debt remained unchanged and it had no outstanding balances on its revolvers at quarter end. Liquidity throughout our businesses remains robust as we again prepare for the upcoming heating season.

The dividends and distributions that UGI receives from its operating subsidiaries between now and the end of September, net of our corporate dividends paid to our shareholders, and our planned reinvestments in our businesses will build cash for future investments of approximately $80 million at fiscal year end.

John will now review the domestic operations.

Thanks, Bob. Each of UGI's domestic businesses delivered a strong performance in Q3. We benefited from weather that was colder than prior year with throughput increasing in each of our units. While the colder weather was the primary contributor to our increased volumes, we continue to see excellent results from our strategic growth initiatives. Our focus on margin delivery and cash flow management was also evident in our results as we grew our unit margins and maintained strong working capital performance across the Board.

Gene will take you through AmeriGas' Q3 performance in detail, but I'd like to comment on our progress in two key growth segments. We had a very strong start to the season for AmeriGas Cylinder Exchange, or ACE, total year-to-date cylinder volumes are running about 40% above FY '06. We're having good success with our automated vending kiosks, and we'll have over a 1,000 vending units deployed by yearend.

Unit margins for strategic accounts, those are our regional and national key accounts, continue to improve. Gross margins for this segment has increased by over 9% in FY '07 and we're pleased with the range of growth opportunities identified by this strategic account sales team.

We had another strong quarter in both of our utility businesses. Weather in our gas utility was almost 4% colder than normal and almost 19% colder than Q3 FY '06. Gas throughput increased by over 75% due to the combined impact of the PNG acquisition and the colder weather. Operating income more than doubled in the quarter increasing to $16 million versus $6.6 million in Q3 FY '06.

As reported last quarter we continue to see growth in both our residential and commercial customer base but the rate of growth is lagging. The growth achieved for the same period last year particularly for residential new construction.

We're approaching the one year anniversary of the PNG acquisition, and we remain ahead of schedule on our integration plan. The team with PNG has done a great job maintaining their high levels of customer service as we move through each phase of our transition program. Our electric utility contributed net income of $4 million in Q3 a 50% increase over the same period last year. As Bob mentioned, our throughput increased by approximately 4% due to the colder than normal weather early in the period and we also saw the positive margin impact of the rate increases that went into effect earlier this year.

Energy Services had another strong quarter in Q3 with net income increasing by 28% to $8.2 million. Performance in the quarter was driven by increased volumes and higher unit margin in our gas marketing business and continued strong performance in our asset management and peaking services businesses.

We're expanding our peaking capacity by adding two new propane air plants to our system. We expect these two projects located in Eastern Pennsylvania to come on stream by the start of the 2007-2008 heating season. Our network of LNG and propane air plants offers our utility customers an attractive commercial and operational solution to their winter peaking challenges. On a year-to-date basis, after adjusting for the FY '06 gain on the sale of the Hunlock Creek turbine Energy Services operating income has increased by 30%. I'd now like to turn it over to Gene who will provide you with more detail on AmeriGas' performance.

Thank you, John. We're pleased to be reporting a $10 million increase in EBITDA for the third quarter and to be announcing and increase in our earnings guidance. Our trailing twelve EBITDA was $289 million. As you saw in the press release on that basis and based on our expectations for the fourth quarter we're raising our guidance for the year to $290 to $295 million. I'd also like to note that distribution coverage for the trailing twelve period was 1.4 times.

The volume for the quarter was up 6.4% in part due to colder weather but also as a result of strong growth in ACE, our cylinder exchange business. ACE volume was up 40% for the quarter. It's worth noting that the ACE business tends to have higher margins but also higher expenses and higher capital, so you'll see the impact of the higher ACE volume reflected to some extent in higher margins, expenses, and capital.

Expenses for the quarter were up 5.8%. More than a third of this increase was due to the higher ACE volume and installation expense for new ACE customers.

Energy prices continue to be at record levels. The average cost of propane at Mt. Belvieu for the quarter was $1.13, up 8% from the same quarter last year but up 64% from the five year average. Now, since the end of the quarter prices have continued to climb with Mt. Belvieu currently at a $1.22.

Our primary concern is the impact that rising propane prices have on our customers. High energy prices however also have an impact on our expenses, particularly in our cost of vehicle fuel, utilities, and travel. Let me also review the results on our core strategies of growth for acquisitions through our cylinder exchange business and through strategic accounts and also through our traditional base of residential and commercial customers.

In May, we announced the acquisition of Shell's retail propane business in Michigan adding 13 million gallons and 20,000 customers. We also completed the acquisition of two cylinder refurbishing businesses during the quarter McKnight Cylinder in Ruffs Dale, Pennsylvania and Nevada Cylinder in Pahrump, Nevada.

These two highly automated cylinder refurbishing corporations added about 1.7 million in annual cylinder refurbishing capacity which will drive down cost for ACE. Now, we have a number of other acquisitions pending and expect to achieve our goal of adding 20 million gallons per year. Year-to-date growth in our traditional base of residential and commercial customers is roughly in par with last year. Lower gains from new housing are being offset by better customer retention. Our strategic accounts volume is not up significantly compared to last year, but as John mentioned, we have improved our margins and gross profit.

ACE volume is up 40% year-to-date. Same store sales have grown by 8% and the balance of the volume increase is due to customer growth. I'd like to finish up my comments by acknowledging the role that my fellow employees played in achieving record earnings this quarter. I particularly appreciate their efforts to keep up with all of the ACE installations and the 40% increase in ACE volume.

Now, let me turn it back to Lon.

Okay. Thanks, Gene. I'd like to leave you with the following thoughts. As you saw in our press release we adjusted our fiscal year 2007 guidance for UGI to reflect our performance to date, and the fact that we only have one quarter left in the year.

With respect to UGI, again, the low end of our earnings range remained unchanged at $1.75, but we adjusted the high end to a $1.80 from a $1.85. This narrowing of the range reflects the weather induced earnings shortfall overseas. And importantly, it's not reflective of how we view the prospects for our businesses overseas in a more normal winter weather environment.

For AmeriGas we adjusted the previous guidance which was $280 million to $290 of EBITDA to $290 million to $295 million of EBITDA. As opposed to the UGI guidance change which I said was not reflective of the prospects of our business in a normal environment this change is reflective of our view of the improved prospects for AmeriGas in the future.

From a qualitative standpoint, we continue to be well situated for the future and believe our ability to manage our businesses effectively while we actively pursue our strategic goals is going well. Doing these things effectively gives us confidence in our ability to meet our financial targets of growing UGI's earnings per share 6% to 10% annually while increasing UGI's dividend 4% annually and raising AmeriGas' distribution at least 3% annually. Yet, like all businesses, we have our challenges. Of course as illustrated this year one of those challenges is winter weather. In addition, energy prices are once again on the rise and I've said many times that high volatile energy prices pose a difficult environment for energy distributors.

Finally, we are in competitive businesses, both here and overseas, and competitive dynamics are constantly evolving at all markets including our overseas markets. Yet, you expect us to manage these dynamics and not only have our business unit managers done a very good job in doing so, but we've also enhanced our ability to overcome difficulties experienced by any one of our business units by assembling a diverse -- diversified group of energy distribution and marketing businesses, and as we have said many times that diversification reduces risks for you, our owners.

The model we've employed in our company for many years of growing our businesses in excess of their industries, operating these businesses efficiently and affectively, producing excess cash flow and reinvesting that cash for additional growth, while at the same time returning a portion of that cash to our investors in the form of an above average dividend or distribution increase exemplifies the balanced growth income vehicle that UGI is today.

We look forward to speaking with you next time and continuing our tradition of successfully achieving our financial goals and producing above average long term shareholder wealth. With that Deana, we're ready for questions.

Thank you, sir. (OPERATOR INSTRUCTIONS) We'll go first to Carl Kirst of Credit Suisse.

Hey, good afternoon, everybody.

Hi, Carl.

Hey, congratulations certainly on the strong domestic performance, that seems to be pretty good here. Let me try first to just touch on the international -- I guess just to kind of get it out of the way. Principally, as look at the delta year over year and we talked about it primarily being due to weather. Are you seeing any of the -- we've talked in the past about the increasing competition that is coming over in France. But it's safe to say that basically 99% of the delta here was really just due to weather?

Yes, I would tell you that a couple of things are happening, weather won it this quarter 44% warmer than normal, and it's hard to conceive that, then again this -- the degree days in June are not large, but certainly the degree days of April and first half of May are meaningful and it was particularly warm then.

Coming off winter weather that was nearly 25% warmer, that is huge in terms of how we look at the business. Attendant to that weather as Bob said, has been, in some of the overseas markets an intensity of competition. People don't have volume and they're out there trying to get volume as you'd expect people to do, and so you get an intensity and you saw some of the effects on unit margins overseas at the same time.

You rightly point out Carl that the, particularly in France, the competitive dynamics in the cylinder business have and are changing. I would tell you that notwithstanding those changes our French management team has done an outstanding job of creating new products and innovating such that our cylinder volume adjusted for weather is not far off our expectations at all.

That gives me the confidence to tell you that largely what we're seeing overseas is the confluence of the weather induced changes to our results, but keep in mind, we've told you results overseas have been extraordinarily good and much higher than we thought when we bought the business, and if you've seen the trend, then those earnings over the two -- last two, three years, you've seen them trend out to a more normalized level.

And just to remind you that when we bought this business we bought it assuming EBITDA in the $115 million range. We've far exceeded that in all years, we want to exceed that this year obviously as you can tell, but we're comfortable that we understand what's going on, it's largely weather and the business will perform significantly better next year.

Right, and all of us appreciate the color there. As we try and attempt, as things are performing better Flaga dollar are performing better than what the original purchase economics were. As we look at trying to find out what kind of a weather normalized to the extent we can get it. Do you feel comfortable at all projecting range -- recognizing that second quarter last year or third fiscal was also warmer than normal last year.

I guess, as we look at your $1.75 to $1.80 guidance here for this fiscal year, obviously, last quarter was impacted significantly by weather, this quarter significantly impacted by weather. Do you feel comfortable looking at sort of the mosaic that's out there and saying, hey, under a normal weather scenario? This is what that same guidance would have been for 2007 because it seems to be that it could be as much as $0.20 to $0.30 higher and I didn't know if you would comment on that?

Yes, probably not at this time. Let me -- we come out with guidance for next year by the end of September early October. We're going through budget now. I can tell you based on what I understand about the budgets, I'm not seeing any surprises that would cause me to direct you in anyway to suggest that we can't make our 6% to 10% overall earnings goals that we have and so if we're in that $1.75 to $1.80 and you were to throw somewhere between 6% and 10% on top of that as our normalized commitment on things, you'd be directionally going the right way.

But again, I don't come out with any specific guidance until we finish our budget process, we collect all that data and we will hit you with numbers the end of September, October, but I want to be clear with you that there's nothing fundamentally out there that suggests to me that I can say with confidence to you that our normal range of 6% to 10% increase is in anyway jeopardized.

Fair enough. Thanks and good luck.

Thank you. We will go next to Sharon Lui of Wachovia Capital Market.

Hi, there. Good afternoon.

Hi, Sharon.

I was wondering perhaps Gene could just provide some color on current acquisition multiples and expect the contributions from the Shell acquisitions.

Yes, let me jump in for Gene first. I see him scribbling something down, while you asked the question. The multiples are, I would say and if you -- the usual tutorial I give, Sharon, as you know is a multiple for us could be different than a multiple for someone else because of synergies, and so if we have five blends on a deal and someone else has no blends, obviously the multiple -- a competitor might think that multiple's awfully high that we paid, while we might think it reasonable.

When we're winning acquisitions or we're able to complete acquisitions, I would say the multiples we're looking at are anywhere from six'ish to six and a half to six and a quarter in that kind of range. I'd say, maybe -- I'll broaden it a little, it's five and three quarters to six and half to six and three quarters, somewhere in there depending on market synergies and other things.

So if you look at -- I'm trying to -- if you took the Shell price and divided it by six or something, you'd probably have a number that you should feel very comfortable with in terms of your modeling and if you thought we were smarter than that, you might divide it by a lower number, but generally speaking, you've seen the multiples and the five and three quarters, the six and half'ish range

And the price of the Shell acquisition, was it around 30, $30 million?

Did we disclose the trade?

20-25.

Yes, somewhere in 25 to 26, in that range.

Okay.

And about 13 million gallons.

13 million gallons. And also are you guys seeing any opportunities that add gallons above that $20 million -- 20 million gallon target? Are there any sizable acquisitions that you guys are evaluating right now?

We don't -- I'll save Gene dancing, because we don't comment on anything that's pending other than say that we feel good about the pipeline or bad about the pipeline. I would tell you, generally speaking, we feel good about the pipeline of opportunities we have.

There are always large prospects out there that are rumors to be in the marketplace and lots of small ones that are always out there and it is a very competitive market for transactions and where we seem to have the most success is where we bring some unique value to the transaction, be it through having more blend synergies or special relationships or other ties that give us an opportunity to provide the seller with a fulsome price, but have the transaction look like a very good transaction for us. So we feel pretty good about the pipeline basically.

All right, thank you.

Thank you. We'll go next to Shneur Gershuni of UBS.

Hi good afternoon guys.

How are you?

Good. Just a couple of big questions -- few questions, rather of a little more big picture and nature. I was wondering with respect to the acquisition of PG Energy, are you further -- are you far enough down the road in terms of de integration, in terms of de financing and everything else, that you could possibly consider bidding on new assets, as I am sure you saw PPL announce that they have gotten LDC and a propane business up for sale. I am not asking if you are actually specifically bidding on it, but whether you're in the position to be able to consider something like that?

Yes, the way we're organized, we can do that, I would tell you that the integration has gone exceptionally well for several reasons including that as you know that there are electric businesses in those same territories. But the contribution made by both groups of employees, now all UGI employees, but the PNG team and our own team, steadfastly looking at what's right for the company and going at it. And having a clear plan to execute and following that plan and the logic of it.

We feel very good as to where we are, we're meeting the goals we set for ourselves there, and we set our selves pretty much a kind of a full year time table to get things organized and in place. There are some longer -- always longer term items on there, so you never get everything right away, but the bulk of it is behind us and the -- the management teams have been integrated, the employees have been acclimated to our culture and we would be in a position to look at opportunities that we felt would advance the value for our share holders.

I have a -- just another question also on a big picture basis for Gene. I was wondering if you can comment on APU's earnings levels or sort of the EBITDA level. I -- we're approaching a record. But it seems that margins continue to be extremely strong -- I think had a normal winter quarter last quarter, and obviously that's most important quarter. Are we kind of at -- do baseline earnings levels for AmeriGas or is this something I can trend a little bit down assuming no acquisition and so forth?

Okay. Gene kicked me under the table and asked me to handle it. The -- as you know, in my comments I said that the change in guidance reflects a change in our view of the improved prospects for AmeriGas. But I want to just recharacterize what you said a little bit.

For us it is not all about margin. If you look at our volumes have been nicely up, our -- the way we measure growth, we are growing, the business, and we're controlling our operating expenses nicely. Our other gross profit in addition to just unit margin is up and I would tell we feel very rood about having executed on multi faceted strategies which all complement each other and create what we think is a unique propane company which is growing, which has year-over-year volume increases, largely attributable to the weather, but nonetheless we're growing independently of weather, where we're not relying solely on unit margin to get there.

We've got other gross profit increasing, we've got strategies to do that, and value added programs for our customers and so --. We're firing on many cylinders, safety performance is contributing vitally. All of our employees have taken to heart safety, and so I can't tell you there's any one thing that's driving our performance and we feel that differentiates us from a lot of our competitors out there.

As far as going forward, we've often said on the road, and I will repeat here that under normal circumstances our goal is for AmeriGas to improve their earnings as a result of executing out all the strategies I told you on the order of 3% a year. We look for normally $10 million of EBITDA improvement year-over-year in performance and some years you get breaks that makes the $10 million harder to get to. Some years you've got bad breaks that makes the $10 million a lot easier to get to, but on average we look for $10 million.

But the environment out there at least as we perceive it is -- has been better from a number of the areas, but internal execution, I think on our side is doing a lot better job with that. But that's a very long winded way, after recharacterizing what you are saying is that we feel very comfortable with our level of earnings this year and we would expect to build on it next year. I don't want to give you any numbers until we go through the budget cycle with Gene and the gang. Because he knows much more than I do, and I never let facts get in the way on these things, but I am fairly comfortable that they'll be -- they'll be presenting me with something that's an improvement year-over-year.

Well, I mean, given your comments, and the fact that you kind of expect this, I guess, on a long term normalized growth rate of roughly 3%. What I contrasted against the fact that you've got coverage in the territory of 1.4 times, certainly a very healthy coverage ratio. Can we assume when you say at least 3% distribution growth that we could probably see something north of that, assuming results continue to hold up as they did this year?

I was hoping that no one would parse my words like to do Chairman Ben Bernanke on the Feds. But I inserted those words intentionally, I will say. I don't want to speak for the board. This is -- it's kind of a -- as you know, we have been very measured in our approach balancing of financial condition strength, that is the balance sheet with rewarding our share holders with something which is very sustainable. We are aware, the board is aware of our improving and rising coverages. On the balance sheet side, you look at interest coverages in excess of 4, you can look at -- that the EBITDA is pushing close to 3 above 3s, so we have got financial condition that gives us flexibility. We've got very good coverage which also gives our board the flexibility to examine the use of cash in rewarding our shareholders and I can't speak for them at this early point, but I can tell you they're mindful of the coverage, we're mindful of the coverage as well.

Okay, if I could just ask one last little, (inaudible) question. I was just wondering if you had wholesale volumes available for AmeriGas?

Excuse me, which volumes?

Wholesale volumes.

Wholesale volumes, we break that out don't we. We'll break it out in the Q wholesale volume; it is not a big contributor to earnings for us.

Because the margin is quite (inaudible).

Because the margin is very low on wholesale side. So do you have it at there?

For the quarter?

Yes, for this. But we have it for the quarter, and I don't think it is material in anyways, let me just read it. Wholesale volumes are up, a big increase however; I was told when I did a good job once by my boss, that I did a really good job and that he said of course, if you start from low base it's easy to do a good job. So a big increase of almost 18% is of a low base, so it is 20 -- it's that -- somewhat -- slightly in excess of 20 million gallons of wholesale this quarter.

Perfect, thanks guys.

Yes.

Thank you, we'll go next to Angela Ho of Wachovia.

Hi congratulations on the quarter. I just got a couple of quick questions. One on the natural gas utilities; you guys have done really well from the integration of PNG. So in terms of the cost savings, can you disclose like how much you are able to [bleed] out the system and that was translated to the bottom line?

I don't think we have disclosed that Angela, but let me try to give you qualitatively. As you know, historically PNG was kind of in the I think $50 million'ish EBITDA range and you could see our nine months -- you can't see the nine months numbers, you can't see, we don't bring them out separately, no you can't see it there. But they are doing better with -- we got a nice rate increase as you know, it is about somewhere between $10-$12 million rate increase, $12.5 Bob is telling me, rate increase for the business that's obviously contributed to the improved performance that you see. And we had very specific synergies to achieve which are also contributing to the improvement, but offsetting synergies in the first year as you know, are one time costs associated with simulating and treating employees fairly as part of that process where the synergy came from overlapping employment positions so that that offset some of it.

So I guess, I would prefer not to be specific with it if I could, but I can tell you that we had clear expectations, clear plans, and we're meeting the synergy -- cost synergy side, we're doing as well as we hope to do on the rate case side, and it's contributing an aggregate, pretty much what we thought it would contribute, maybe slightly better than what we thought it would contribute.

Okay, great, thank you. And then the other question I have is on international, I know -- I don't want to belabor this question, but -- and most of it is weather. But in terms of some of the hyper markets that's gone into cylinder exchange program, in terms of -- what kind new products are you offering? You were saying about creating new products and so forth.

Yes.

Is that something that you're also doing in Europe or --?

Yes, let me talk about that, because that will be illustrative of the confidence you all should have, one in the business, and two in the management of that business. We -- when people think of the cylinder business here in the U.S., you'll think of barbecue cylinder business and there are many companies who do that, but there are two principle companies who do that between Blue Rhino and ourselves, and there are new entrants all the time with people, smaller people who do it, but at least nationally, at this point, two major ones who are doing it.

And there's not much differentiation itself in the cylinder. What happens in the market is there's a demand for our product by the consumer and the home depots, the Wal-Marts and others are the points of distribution for those cylinders. In France, it is a similar market except everybody's cylinder is at a location. So in the U.S. for example, if you go to Home Depot, for sake of argument, you will only find our cylinder there. If you go to another customer, you might only find a Blue Rhino cylinder there, but you won't find both. In France, you find everybody's, all the competitors cylinders are there.

So what our management has done, and typically the differentiation has been color of cylinder in France and price based competition and incentives and things. What our management realized was that the market would be changing and so they created changes to the cylinder and improvements in the cylinder, which caused the consumer to want the cylinder as -- and I call that sort of the consumer pulling the cylinder through the system, that is they are dictating to the hypermarkets, we want this cylinder, so please carry it.

Got you.

As opposed to the cylinder being pushed through the system as just a point of distribution, which is the other cylinder. So let me give you an example. Our folks came up with a cylinder which they nicknamed the Calypso, which is a composite cylinder and it's much lighter and it's easier to carry, it's easier to use and it's got some differentiating features to it, besides just being lighter. You can see the level through it, because it is a composite cylinder, so you know when you're going to run out, and it has created that exact environment of pulling it through the system.

Consumers want it, they advertised it, and so as a result, we've created this demand that consumers are taking and so we're not losing as much market share as the other players because of the new entry of the hypermarkets.

Right.

And that's just one example. We also have another differentiating feature of a special (inaudible) one that tells you how much is in the container, that's called our [plus] control cylinder. And so again, we've almost taken lessons in marketing from organizations that are brand marketers like the P&G or Gillette or some of these companies, what you do is pull marketing through the system, and the French folks have done an excellent job creating that demand and therefore we've withstood the challenges better than the other folks had so far.

So that's pretty interesting, I mean, like, basically what you're saying is that you don't have exclusive agreement in that area, I mean, versus what you have in U.S. So you would have -- it's easy for a competitor to come in and just take market share. So it seems to me that it's very price sensitive over there and like you said, it's more through what consumers want, so you provide a product that's easier for them to handle, and may be, less expensive or whatnot then you could gain market share that way; is that -- that's pretty much what you're saying, right?

Yes, absolutely, gain, defend, lose less, so all the way across the board, but it gives you something where you don't have to compete solely on price, and you're creating a -- as you said, a customer based demand, which is -- which was, I think, an outstanding innovation by our folks overseas.

Great, thank you very much.

Sure.

Thank you. (OPERATOR INSTRUCTIONS). We'll go to Faisel Khan of Citi.

Hi, good afternoon. The acquisitions -- the acquisitions which were shown in the terminal sale, is that basically -- does that make it earnings neutral, those two asset perspectives?

I would say no, it's a positive, its' a plus.

Positive, okay.

Yes, positive, plus.

And then early in the call, in your prepared remarks, I think you talked about two projects in Energy Services; I think I kind of missed those two projects. Can you just go back and --

Yes, John commented on those, so hold on Faisel, I'll turn it over to John to --

Yes, Faisel, we have two propane air plants that are part of our Energy Services business. We currently have a -- an LNG plant and three propane air plants on our systems to provide peaking services to utilities in the mid-Atlantic region, so we're constructing two new propane-air plants in Pennsylvania, that will add to that network and those plans should be ready by the start of the heating season this coming winter. So it's a nice addition to our network and that's -- as you know, that's a part of our business that's been developing nicely over the last five years or so.

So we're excited about the opportunity there to expand the system of peaking assets, and we're finding that utilities -- find out attractive in terms of that physical -- that physical network of assets that can support their peak requirements, that each gas utility needs to address.

What's the capital cost of this project?

Its combined capital cost is under $20 million.

Okay. And as a basic, those are really unregulated profits, right, I mean, they're on long-term contract or is it kind of like a year.

It's a combination of some contracted volumes and capacity, and some year-to-year volume.

Great, thanks for the time.

Thank you, and with no further questions, I'd like to turn the conference back over to Mr. Greenberg for any additional or closing remarks.

Thank you very much. It was a pleasure talking to all of you; hope we answered your questions clearly today. This time of the year is a little bit quieter in our businesses from a day-to-day operating standpoint, but it doesn't stop us from making progress on our strategic goals and setting the stage for what we hope will be a very good year next year for UGI and AmeriGas.

So we look forward to speaking with you. We'll probably be out with guidance sometime late September, early October. Then we'll have our year-end call early November, I think is on the schedule as well. So I look forward to talking with all of you, and thank you well for the support. And have a good rest of the summer.

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