UGI Corp (UGI) 2007 Q4 法說會逐字稿

Good day and welcome, everyone, to the UGI and AmeriGas Partner's fourth quarter fiscal year 2007 earnings results conference call and audio webcast. Today's conference 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, Gwen. 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 10-K for a fuller list of factors that could affect results, but among them are adverse weather conditions, price volatility and availability of all energy products including natural gas, propane and fuel oil, increased customer conservation measures, political, economic, legislative and regulatory changes in the U.S. and abroad, currency exchange rates and competition from the same and alternative energy sources. UGI and AmeriGas undertake no obligation to release revisions to these forward-looking statements to reflect events or circumstances occurring after today.

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

Thank you, Bob.

Hi, everyone, let me welcome you to our call. I trust you've all had the opportunity to read our press releases that reported our 2007 fiscal year results. In the press releases UGI reported earnings per share of $1.89 for fiscal year 2007. As you noted by reading the press release, there was a $0.12 gain from the sale of a terminal by AmeriGas and if you adjust for that $0.12 earnings per share were $1.77 which we consider consistent with our approximately $1.75 earnings guidance. In addition, AmeriGas reported EBITDA of nearly $293 million excluding the one time gain on the terminal that I just mentioned. This, too was consistent with our guidance.

As most of you are aware, the last quarter of our fiscal year is not typically a significant earnings quarter for us and this year was no exception. Indeed there's really nothing noteworthy in our fourth quarter performance that I need to call to your attention. Looking at our earnings performance for the year, what strikes me is that fiscal year 2007 demonstrated the benefits of our product and geographic diversification which is inherent in our business units. Our international LPG distribution businesses were as you know buffeted by extraordinary record winter warmth.

On the other hand, our domestic business units picked up the slack with particularly excellent performance at our domestic propane business AmeriGas and our energy service businesses. Our results also show that we continue to execute well in our efforts to redeploy investable cash. In this case our earnings were helped by the expansion of our natural gas distribution business through the acquisition of UGI and Natural Gas.

All of you know by now that our long term financial goals are to grow our earnings per share 6% to 10%. In the case of UGI raise our dividend 4% and in the case of AmeriGas raise the distribution at least 3%. Before I go into why I believe next year will be yet another year where we achieve these financial goals, I'd like to turn the call over to Peter Kelly to give you some additional insight into our financial performance. Peter will then turn the call over to John Walsh who will give you some flavor for the progress we made in our operating units. John will then turn the call over to Gene Bissell who will comment on the outstanding overall year at AmeriGas. Finally Gene will return the microphone to me for some concluding comments.

At this time I'll turn it over to Peter.

Thanks, Lon.

I'd like to cover four items. First our consolidated results for 2007, second some color on each of our major businesses, third our balance sheet and finally liquidity. Our EPS was $1.89, up 14.5% from the $1.65 reported in 2006. If we remove the $0.12 gain on the sale of our Bumstead storage facility, our adjusted EPS was $1.77 which was in the range of guidance provided 12 months ago and represents a very credible performance given the extraordinary weather conditions in Europe.

The suggested $1.77 compares very favorably to an EPS of $1.58 in 2006, also adjusted for one time items. This $0.19 increase is largely a result of improved performance in our domestic operations with AmeriGas, energy services and utilities including PNG, all performing well with weather only slightly colder than 2006. This improved performance in our domestic operations was partially offset by the performance of our international operations which were impacted by extremely warm weather. In addition, our income tax charge was higher than 2006 as we return to a more typical effective tax rate of just over 38%.

Turning now to our business segment results, AmeriGas net income contributions for 2007 and 2006 were $53.2 million and $25.1 million, an improvement of $28.1 million of which $12 million was the gain from the sale of the Bumstead storage facility. Retail volumes were up 3.2% reflecting slightly colder weather than 2006 and the effects of higher sales in our AmeriGas cylinder exchange program. AmeriGas EBITDA was $338.7 million versus $237.9 million in 2006. 2007 was a record even after adjusting for the $46 million gain coming from the sale of our Bumstead facility and Gene will have more comments on AmeriGas' performance.

Net income for International Propane was $44.9 million versus the $67.1 million reported in 2006. The earnings for 2006 included a one-time income tax benefit of $7.8 million. So on a apples to apples basis the decline was just over $14 million. The majority of this decline was in our business in France, Antargaz where volumes fell 14.6% on weather that was astonishingly over 21% warmer than normal.

Net income in Flaga was also impacted by the same unusually warm weather. Exchange rate had a relatively small impact as we effectively hedge our European net income a year in advance. In our domestic utility business we performed well in both natural gas and electricity. Natural gas net income rose in 2007 to $59 million from $38.1 million in 2006 and our electric utility net income increased to $13.7 million from $10.5 million. In our natural gas utility the year on year improvement largely reflects the inclusion of PNG for a full year, for we also saw some increase in our base business with higher volumes reflecting the slightly colder weather and higher average interruptible delivery service unit margins reflecting higher natural gas versus oil price spreads.

In our electric utility the improved performance largely reflects the higher polar rates which became effective on January 1, 2007, partially offset by the increase in unit power costs. In energy services our net income increased to $34.5 million in 2007 from $31.3 million in 2006 and as a reminder, the $31.3 million in 2006 included an after tax gain of approximately $5 million on the sale of its interest in the energy ventures our hallmark joint venture. This improvement in profitability was primarily driven by increased natural gas margins, improved performance from storage management and peaking supply services and decreased expenses from bad debt and working capital management.

Now moving to our balance sheet, our consolidated debt of approximately $2.3 billion is similar to last year's level and our consolidated cash of $252 million is up on the $186 million reported last year. Included in the $252 million at the end of 2007 we had about $113 million of cash available at our holding company to reinvest for growth. We would typically expect to generate about $90 million to $100 million of such investable cash a year.

At year-end AmeriGas had $933 million of debt similar to the level in 2006. Other than letters of credit which reduced borrowing capacity, it had no outstanding balance on its revolver and roughly $34 million in cash as of September 30th. Turning to liquidity and as mentioned last year, high commodity prices will encourage customer conservation, but they can also impact our need for liquidity and with the recent increases in energy prices I believe it's important to reiterate we have adequate liquidity to fund increased levels of working capital throughout all of our operating subsidiaries, if we continue to see energy prices tick up.

In utility we have lines of credit in place of $350 million. We have $200 million of borrowing capacity in energy services and a $200 million line in AmeriGas. At Antargaz we have an unused facility of EUR50 million as well as EUR51 million in cash. So in summary, a strong year given the extremely warm weather in Europe, real progress in all of our domestic operations and very strong liquidity.

So with that let me pass the call over to John to discuss domestic operations.

Thanks, Peter.

Peter has provided you with a financial overview of our full year performance. I'll focus my remarks on the operational performance of our businesses and progress on our strategic initiatives. As a distributor and marketer UGI's ability to perform is built on our strong focus IN execution. In particular we believe that execution in three key areas, expense control, MARGIN enhancement and cash flow management enables us to deliver consistently high levels of performance as external market conditions vary. This focus on fundamentals served us well in fiscal year '07.

In addition to delivering the strong financial and operational performance, we also made good progress on the strategic objectives established for each business. I'd like to comment briefly on the progress made in each of our units. Our utilities business had an eventful and successful year.

We made great progress on our integration plan for UGI Penn Natural Gas which we acquired in August, 2006. We're on target in terms of synergy savings, operation alignment and the integration of key functions. The addition of the UGI Penn Natural Gas team has strengthened our overall utilities operation and we've identified further opportunities to improve performance.

Finally, and most critically we delivered on our commitment to maintain high levels of customer service during the acquisition integration process. Our gas utility which now covers both the UGI and UGI Penn Natural Gas service territories recently received a JD Power award for customer satisfaction as the highest rated gas utility in the northeast U.S. for the fifth consecutive year. As a result of the PNG acquisition and weather that was 4% colder than fiscal year '06, throughput in our gas utility increased by about 50 bcf, net income increased by over $20 million as we benefited from the full year contribution from our expanded base of operations.

As I've mentioned in our last few calls, new residential customer growth for the gas utility has slowed. For the year, growth in new residential customers was off about 20%, however, growth in our commercial sector was slightly above last year. We don't expect any significant changes in the outlook for growth in the short term. We'll continue to work closely with local builders and developers to stay abreast of market developments.

As Peter mentioned, our electric utility also had a very successful year. Net income increased by just over 30% to $13.7 million--$13.7 million while throughput was slightly higher, the primary contributor to the improved performance was the rate increase that went into effect last January 1st. Our energy services business had another outstanding year in 2007 with net income excluding the one time gain last year on the Hunlock Creek sale increasing 33%.

Several factors contributed to this strong performance. Our gas marketing team delivered volume growth while improving unit margins. They also made good progress on our campaign to increase our penetration of the small commercial sector. Margin for our peaking and asset management business grew as we benefited from capacity expansion at several of our existing peaking facilities and growth in our customer base.

We continue to be very optimistic about the growth opportunities in energy services. As I mentioned in our last call, we are expanding our peaking services network by adding two new propane air plants to our system. We expect these plants to come onstream during the next 60 days and add to our available peaking capacity for the 2007/2008 heating season. Our network of LNG and propane air plants provides our utilities customers in the Mid-Atlantic region with a very attractive commercial and operational solution to their winter peaking requirements.

AmeriGas delivered record performance on numerous fronts in 2007. Gene will provide you with much more detail but I'd like to comment on progress in two areas of strategic importance to the business. We achieved strong growth in the barbecue cylinder sector as we saw the full impact of the self-service cylinder dispenser program launched two years ago. This is a great example of customer-focus innovation and we're extremely pleased with customer and retailer response. We closed five acquisitions during FY '07 that will contribute almost $50 million gallons of new volume in fiscal year '08. We've made excellent progress in integrating these acquisitions in advance of the winter heating season.

Finally we continue to emphasize the need for continuous improvement in the areas of safety and customer service. Our teams have a strong track record of performance in both these areas, but we also see opportunities for continuous improvement. We work across our businesses to identify best practice within UGI on safety and customer service and we also look outside the Company for insight and expertise. Earlier in my comments I spoke about UGI's focus on fundamentals. We recognize that there is no more important fundamental than safety and customer service and will continue to place the highest priority on these initiatives.

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

Thank you, John.

Fiscal year 2007 was a successful year for AmeriGas, not just in terms of earnings, but also because of the progress that we made on our core strategies. We increased net income by 34% due primarily to an increase in the gallons we delivered and better margins. Volume was up 3% mostly due to colder weather but also as a result of growth in our cylinder exchange program.

Expenses increased by $27 million. Over a third of the increase and expenses relates to growth in the AmeriGas cylinder exchange program and the acquisitions we completed this year. A number of safety and regulatory initiatives also contributed to the increase in expenses last year, but I'm pleased to say that higher employee bonuses related to our strong financial results were another reason for the increase in expenses.

Last year we earned EBITDA of $292.6 million excluding the gain on the sale of our Arizona storage facility on weather that was roughly 6.5% warmer than normal. That compares to EBITDA of $249.5 million in 2005, a year with similar weather. We have achieved this 17% increase in earnings through effective execution of our core strategies.

Those strategies include adding 20 million gallons per year through acquisitions of independent marketers, growing our residential and commercial customer base, through improvements and sales effectiveness in customer service, leveraging our unmatched geographic coverage and dedicated resources to grow our strategic accounts and cylinder exchange programs and by applying innovation, technology and best practices to improve sales, customer service and safety. Let me review how we performed on each one of our strategies this year.

We completed the acquisition of five retail marketers this year adding about 46 million gallons and about 70,000 customers. The largest acquisitions were the Shell business in Michigan that added 13 million gallons and All-star which added 30 million gallons. Most of these deals were completed after the end of the heating season, so they didn't add to earnings last year, but they will contribute to earnings in 2008.

Over the last five years we've added more than 100 million gallons through acquisitions and there's still ample opportunity to continue to grow our business through acquisitions with over 3,500 marketers operating in the U.S. We achieved solid growth again this year in our traditional base of residential and commercial customers and, in fact, grew at a faster rate than in 2006. The improvement was a result of better customer retention, offset in part by a drop in customer gains related to the impact of the weak housing market. The key to our customer growth in this part of the business is our focus on sales and customer service. This year 96% of our customers that we surveyed said they were satisfied or very satisfied with our service.

Our volume in AmeriGas cylinder exchange was up 39% to about 10 million cylinders due to the addition of new locations and an 8% increase in same store sales. The key to the growth in cylinder exchange volume has been our self-service cylinder dispenser which is now in place at almost 1,000 locations. These dispensers make propane grill cylinders available to customers 24 hours a day seven days a week and require virtually no involvement from the retail personnel at the store.

We also reduced our cost per cylinder in this part of the business to more than 24 plant upgrades and the acquisition of two cylinder processing companies. We grew our strategic accounts program again this year by adding more than 2,300 locations. We were able to improve our profitability through enhanced focus on improving our commercial practices and we diversified our customer base.

Another strategic focus for AmeriGas is improving our safety performance. Since 2002 we've cut the number of employee lost workday cases in our business in half and we've been reducing vehicle accidents as well. Our improvements in safety are the results of training, accident investigation and root cause analysis and the focus we place on safety awareness through our communications efforts and incentive programs.

Looking forward to 2008 we are managing our business to offset the impact of the run-up in the cost of propane and other energy prices. Last year the average cost of propane was relatively flat to the prior year at $1.07 per gallon, now, however, the wholesale cost of propane at Mont Belvieu has risen to $1.52 compared to $0.95 per gallon the same time last year. We recognize these high prices are a burden for our customers and could result in some customer conservation. I'm pleased to say, however, that a number of AmeriGas customers signed up for fixed price programs, so they're insulated from the impact of the current run-up in propane cost.

Higher energy prices will also have an impact on our expenses like our vehicle fuel cost, bad debt and utility expenses. We can't control energy prices, but in recent years we have learned to manage our business to compensate for the impact of high energy prices. While each year presents new challenges we will continue to grow our earnings and distributions through a disciplined focus on our core strategies. We've set aggressive targets for improvements in customer service, safety performance and top line growth.

We will continue to grow our profitability through acquisitions, by leveraging our competitive advantages and cylinder exchange and strategic accounts and by winning new residential and commercial customers through our sales team and customer service improvements. Finally I'd like to recognize the role that our employees played in achieving record results last year. Despite fuel shortages in the Northeast and the West, record cold weather in February and a 39% increase in cylinder exchange volume, they continued to deliver excellent service to our customers.

Lon, with that let me turn it back to you.

Thanks, Gene.

Allow me to leave all of you with the following thought. With respect to next year we expect our 2008 fiscal year to be an excellent year for us with UGI EPS between $1.95 and $2.05 and AmeriGas EBITDA in the range of $300 million to $310 million. As you've become accustom with us, the usual caveats apply including in general all the risks that we note in our SEC filings and in particular, we expect to have weather that is relatively normal in both the U.S. and Europe in that forecast.

We made good progress in all of our business units during 2007. Some of that progress was noticeable in 2007 financial results and some of it not noticeable because it represented progress on our execution of our core strategies to build for the future. In particular we expect to see contributions to earnings this year from AmeriGas' progress last year in pursuing its acquisition strategy, from investments we made in energy services to grow its midstream natural gas peaking assets and from further progress in our gas utility from the continued assimilation of UGI Penn Natural Gas.

At the same time we assume performance in our international LPG units will improve due, if nothing else, to a return to more normal winter weather conditions. As Peter mentioned, we had investable cash at fiscal 2007 year-end of $113 million, and expect to generate another $90 million to $100 million more this year. There are opportunities out there to redeploy the cash balances. Expect us as always to pursue available opportunities in the disciplined manner we have traditionally done.

This is not to say that we don't have our share of challenges, we, of course, do. These include high LPG prices that Gene mentioned, developing regulatory and legislative policies which favor alternative non-carbon fuels at the expense of carbon-based fuels both internationally and domestically and, of course, in all of our businesses the usual highly competitive marketplace.

I'm comfortable that we are examining the right issues, putting in place the correct strategy and executing against clear objectives and goals and, of course, that gives me the confidence in our 2008 performance. In sum, I'm quite optimistic that we will have--when we have our call at this time next year we'll be reporting another year of progress and excellent financial performance.

That concludes our prepared remarks and, Gwen, we'll take whatever questions we get.

Thank you. (OPERATOR INSTRUCTIONS)

We'll go first to Shneur Gershuni with UBS.

Hi, good afternoon, guys.

Hi, Shneur.

Just a couple quick questions here. First and foremost, if you can remind us what the wholesale gallons were at APU during this past quarter.

Wholesale business as a whole was off year-over-year I think but Gene, do you have--Gene or Jerry, Jerry Sheridan the CFO of AmeriGas is also with us.

44 million

44 million for the quarter, Jerry? 44 million for the quarter versus 42 last year, so virtually flat.

There's not a lot of profit associated with that for us.

All right. Yes, no, it's just to fill in some of the blanks.

Just a couple interesting questions at APU. Given the fact that you're now entering into the high splits will we see less of an impact of the EITF over the next year during the winter heating season?

Less of an impact. We'll have more of an impact I think. We were going through some--the usual stuff for our Ks and things and I think I read that it would be more of an impact because of the increase in the high split. So doesn't that create more? You asked about for the winter season.

Yes.

Yes, that creates more cash flow, and creates disproportionate allocation. It should be more, shouldn't it?

The issue really is that our income is now exceeding our distribution.

Okay. We're different than a lot of people. Let me give it to Jerry, our CFO of AmeriGas.

What's really happening here is that this is for the crossover year for AmeriGas where our income per unit actually exceeded our distribution per unit and, of course, we have the extra $0.25 that was distributed this year. So going forward as long as our income continues to exceed our distribution we're going to have a higher impact on the EITF.

I think with a lot of the normal MLPs the earnings per unit don't exceed the distributions and so maybe you're accustomed to a different effect than we might have.

All right. Fair enough and if I can ask just one last final question, what is the volumes number that you're assuming for your EBITDA range for APU for 2008?

We generally don't give out a projection on volume. I'll tell you directionally assuming--last year was somewhat warmer. As you know, I think it was 6% or 7% warmer.

6.5%, right.

6.5% warmer last year than normal and so should we have more normal weather, we would expect to exceed that volume and we'll have acquisitions included as well, the 46 million gallons that Gene mentioned in acquisitions and then lastly, we expect to grow as we have these last few years as Gene mentioned. So there's always some normal growth that we expect to see, but again the market is relatively flat to 1% growth. So you don't see a lot of incremental volume associated with the internal growth but we do get a little bit of it. So you'll see the acquisition growth, you'll see weather that's better than 6.5% warmer than normal, you'll see some improved volume there and you'll see the effect of the acquisitions, also, in that.

Okay. I have some more questions but I'll jump back in the queue to give some others a chance.

Okay. Thanks. Talk to you in a minute.

We'll go next to Peter Eisel with Snyder Capital Management.

Yes. Good afternoon. Congratulations on great results despite clearly adverse weather.

Thank you, Peter.

Lon, if you look at where you stand today versus a year ago with respect to the--on the acquisition side of things, how would you characterize it? Are there more opportunities on your plate and maybe if you can talk a little bit about valuations?

Yes.

And which areas you're seeing more opportunities perhaps than others.

Yes, I would say as a whole I think there are more opportunities around this year than last. We were able to capitalize on a few in AmeriGas last year of decent size which is not a typical year for us. I would say that there are potential opportunities in the propane space with the normal smaller ones. Values I think are probably similar to last year. For in the way we look at them, I would say they're going to be around the 6 multiple area to 6.5 multiple area, Peter, synergized and we've kind of said in the past that they go from high 5's to something below 7's, so 6 to 6.5 is kind of a decent number synergized for us but again as you know because our EBITDA could be totally different than somebody else's. So it could be a bigger multiple for them.

We are seeing an occasional natural gas or utility asset come available. There's some announcements out there that everybody is aware of and like we did in UGI with Penn Natural Gas, we take take look at those and when they're auctioned it's hard to tell where prices go, prices seem to vary all over the place on those transactions but as you know, we're fairly disciplined in that. We don't want to venture too far from home because in our mind it's hard to justify the economics of paying a big multiple on a regulated business if you don't have decent sized synergies.

On the international side we are seeing opportunities come available. I'd say at the typical rate that we've seen in the past and pricing seems to be in rational ranges there on the whole. There are some countries, some transactions which are a little bit pricier than others and we are seeing in addition to the acquisition side we're seeing decent supply of internal growth opportunities out there, John mentioned a couple.

We built a couple of propane air plants that use some of our cash. Those have good earnings characteristics associated with them because we use them as a natural gas peaking asset. We see some other opportunities in that area for internal investment as well. So as we look at our pipeline of investment opportunities as a whole, we're fairly optimistic that we're going have some activity there as we go forward.

Okay, and one of the things you mentioned was some of the investments that you made where we haven't yet seen sort of evidence of that and in particular you talked about these mid-stream peaking plants. Can you give some idea of how much you've invested there and/or what we could expect from those investments?

Yes, I'd say the kind of--the ballpark investment on those was about $20 million last year combined for the plants and some upgrades we made on some other stuff and as you know, what we do on those assets as a whole, we use them in several ways. One is we try to lock in on a variety of utilities, not just ours but a variety of utilities. We will bid for their peaking service and in some cases it's one year contracts if we get it, in some cases it's longer term contracts and ordinarily I would say the returns that we would expect over time are kind of IRRs in the 12% to 14% range, 12% to 15% IRRs and those over time and you might not get it the first year obviously because you're phasing it in, but you get good returns in those and what we're seeing is the value of those assets is improving because the cost of constructing alternate arrangements for utilities is rising.

That is pipeline construction costs goes up and these--our asset fit people could use instead of pipelines to supply their peaks. So you've got that, the other thing we mentioned were the acquisitions from Gene where we bought two decent sized companies in AmeriGas and we would expect the usual kind of returns on those.

Okay. Great. Again, congratulations on the results and thanks again.

Good. Thanks. We look forward to a good year this year.

We'll go next to Ron [Londi] with Wachovia.

Thanks. Curious if you can give us some insight into what kind of conservation you saw last year and maybe if there's some way of thinking about 2008 and what you might see and how the season for first fills has started off.

Yes, sure. We haven't socialized that issue among all our business units, but in essence let me start by business unit. In the propane side we saw a bounce back last year. The law in the industry, Ron, as you may know is that when you have a big increase in cost, you see more of a step function in conservation and then as people adjust to it if you get a levelized environment, some of that demand comes back because people become accustomed to, it's like gasoline, you see a big drop initially and then people adjust and they come back, doesn't come back all the way, comes back part of the way.

So in the propane business on a weather adjusted basis I think our data and weather adjustments aren't perfect which suggest that we had negative conservation last year, that is, we had some extra usage, a bounce back, if you will. We always budget somewhere around 3/4 of a percent to a percent of structural conservation and so we would expect over a period of time, doesn't happen on a linear basis, but over a period of time through new housing, through efficiency and appliances, etc., that long term the client trends are structurally kind of 1%-ish.

When you have a cost move like we had this year in propane ordinarily we would expect to see more. Cost as--Gene didn't do the math for you, but cost was at $1.00 last year at this time, now it's at about $1.50--$1.60, I don't know, somewhere in there, so that causes obviously customer behavior to modify. We haven't--it's too early to tell how much that will affect us this year in terms of conservation, if this reverses itself in the next month or two, could prove to be an opportunity for us and the rest of the industry.

I want to differentiate it, though, I don't know if your question was directed at propane but on the natural gas side we really haven't seen natural gas prices move a whole lot due to the supply, storage conditions that are out there. So on the natural gas side we would just expect to see our normal trend line and regarding first fills, Gene, I I think volume is doing okay?

It's doing okay.

It's doing okay given the weather. October was much warmer than last year, 30% to 40% warmer than normal for October. November has been a much more normal month and we're doing okay volumewise.

Do you think you can seek out more cost savings for 2008 given as far as you've gone? This is on the AmeriGas side.

Yes, it's funny. It's a relative -- operating expenses are always going to rise. The issue for us is can we control that rise to a rate less than it would be otherwise? And we do have programs in place as we always do, Gene mentioned safety programs. We've got compensation programs in place that reward people for doing efficiencies and things.

So yes, I think we'll do better than the average company will in the operating expense side, but there's--until we get a new method to operate our business to drive (inaudible) of scale not just locally but nationally it will be tougher. One of the things that we have as you may know is that some of our operating expenses are directly tied to our fees, let me give you one example and it's vehicle fuel.

We have a fuel surcharge as does Federal Express, UPS, the airlines and everyone else in the world that is tied to the level of fuel expense and so as, for example, that expense rises, we recover some of that in increased fees from our customers and that's just an example of what we do there. So we'll do fine there, but don't expect to see a drop in operating expenses.

Have you seen any increase in fixed price contracts or budget billing customers?

Yes, it's funny. We have a fairly stable base of fixed price customers. We go out every spring and early summer with a program where we offer our customers the opportunity to lock in a price as part of an overall value offering we have for them and they pay us a fee to participate in that program. I'd say the number of customers locking in is roughly equivalent to last year, but we have a decent amount of customers who do that because it provides them with so much value and incidentally the retention rate of those customers is significantly higher than it is for the typical LPG customer.

What's the tax situation for unit holders due to the sale of the Arizona propane storage facility?

Yes, as you may recall, we realized that there was going to be some additional tax burden this year for our unit holders due to the gain on that and so what we did in the August quarter was we had an additional one time distribution of $0.25, Bob?

Yes.

$0.25 that we paid out to our unit holders to compensate them for the higher than normal level of taxes they would have to pay this year.

Yes, that's what I thought. Okay. Okay. Thank you very much.

All right. Great. Thank you.

We'll go next to Carl Kirst with Credit Suisse.

Good afternoon, guys. This is actually Stewart. Just wanted to clarify something really quickly. On the 30% to 40% warmer than normal in October and normal November, is that including Europe or purely domestic?

No, that was purely domestic. Europe is seeing what? 25%. Jerry is correcting me. It's 25% warmer nationally for propane.

Than normal. Your comparison was to last year which was very cold in October.

Okay. Let me be more precise. It's 25% warmer than normal and nationally it's 30% to 40% warmer in the utilities and it's 30% to 40% warmer than last year, but basically what we're seeing internationally is frankly somewhat slightly colder than normal weather has returned and it was odd. The summer was slightly colder than normal, not that you get anything out of it in our business, but winter hit in July and so it's been unhappy Europeans because it's been colder than normal, so we're having cooperative weather in Europe through October and into November so far.

Okay. Excellent and one last clarification. In the prepared remarks you mentioned that you hedged the Euro one year forward. Could you just compare what you hedged it at last year to what you hedged it at for this coming year?

You talking about what would be the kind of average exchange rate that we have?

Correct.

Yes, it was about double 30 in 2007 and in 2008 we put in about a double 34.

All right. Thank you very much.

Sure.

And we'll go next to Faisel Kahn with Citi.

This is actually Barry Klein.

Hi, Barry.

How's it going?

Good.

International, going back to that for a second you were saying weather is a little bit colder than normal and volumes are doing okay. I was just wondering, are they back to levels that we've historically seen and do you expect them to return to levels that we've historically seen in a short period of time or would that happen over a longer period of time as people have started to conserve--may start to conserve or use less?

Yes, let me sort of give you a ballpark of factors as I see them. The degree to which volume comes back in the early part of the year will depend on the level of inventory that people carried into the year and generally since it was warmer people carried in a little bit more inventory. We are clearly seeing a reaction and improved volume given the weather as one would normally expect to see as people use the stock they have and they don't want to run it too low.

So I would say that volumes are meeting our expectations which is they're approaching kind of a normal level which would be close to prior years at this point in time, but it's way early in the winter to see what happens. We certainly expect to see as we did a little bit last year some conservation, that the dollar has weakened which shields Europeans from the effects of the higher price of oil to a certain extent, but not totally and so we will see some conservation over there as to yet undetermined amounts. If you try to push that based on an analogy to the U.S., you could see 2% to 3%, but that's a guess on my part based on U.S. experience. We don't have a basis to have any other estimation into overseas volume, but we are satisfied with the volumes this year.

The challenge is as Gene mentioned are with the rapid increase in cost you've got do a good job of maintaining your margins and in some countries--developed countries, people can do that, people can afford the cost of the product much more easily than, for example, Eastern Europe where at some point the product becomes so expensive that it becomes beyond the ability of people to afford the product and they'll switch to wood or something just because they flat out can't afford it. So I wouldn't call that--that's a form of conservation I would guess, but it's an extension of conservation.

Okay. All right and switching over to AmeriGas, the MLP, what portion of the distribution, the GP distribution, excluding that bonus distribution, what kind of distribution were we seeing just related to the GP?

In dollars?

Yes.

Total distribution to the GP last year was--

Excluding that extra.

Excluding the extra, $4 million. About 4--Bob is going to do the math as we sit, but ballpark is $4 million and change I think.

Okay.

And as you know, with high splits as distribution grows we get a disproportionate part of it and should we make acquisitions with equity, that all plays into it.

Right. But as of now, almost all of it is in the lowest split level?

Yes, and--or we're just barely over, we're at 244--240, I think 244 last year versus 242. So that's an upside that's to come.

Yes. Okay. Thanks a lot.

Sure.

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We'll take a follow-up from Shneur Gershuni with UBS.

Actually, I attempted to withdraw myself, but just wanted to get an update on your acquisition idea or approach with respect to the gas utility. Are you interested in any of the assets that are currently in the market in Pennsylvania and so forth and is that something that would fit well with your strategy now that you've digested PNG?

We have a policy of not commenting on specific transactions because as you know, it gets you in trouble all the time and the lawyers yell at you if you start it once, you never get off the treadmill. So we don't comment on specific ones as to what we're interested in, but there are in general, within the framework of what we've always talked about opportunities that we would pursue if they strategically fit with our business and we've often said that we're not going go far upfield for a regulated distribution transaction because I don't think you can make those work off the backs of corporate overhead at those entities. So our strategy has always been to look at transactions where we bring value to the transaction and can get a better return than the average player can. Other than that we don't comment on specific ones.

Okay. Fair enough. Thanks a lot, guys.

Sure.

And it appear there's are no further questions at this time.

I'd like to turn the conference back over to our speakers for any closing remarks.

Okay, thank you very much, Gwen.

Thank you all for your interest. Thanks for the support. We look forward to reporting some significant progress to you as the year goes on as we continue to execute on our strategies and post some hopefully very good numbers as the year goes on. So, thanks again, and we look forward to talking to everybody soon. Bye bye.

Thanks, everyone. That does conclude today's conference. You may now disconnect.