UGI Corp (UGI) 2008 Q3 法說會逐字稿

Good day and welcome everyone to the UGI and AmeriGas Partners third quarter fiscal year 2008 earnings results conference call and webcast. This call is being recorded. At this time for opening remarks and introductions I would like to turn the call over to the Treasurer Bob Krick. Please go ahead.

Thank you, [Sean]. 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?

Thanks, Bob. Let me also welcome everyone to our call. I trust you've all had the opportunity to review our press releases reporting our third quarter results. In summary, UGI reported earnings per share rose to $0.14 per share from last year's $0.11. Similarly, AmeriGas reported that its EBITDA fell modestly from $30.9 million last year to $29.7 million this year; and as usual Peter will provide you with more color on our earnings later in the call.

Our earnings this quarter, once again, illustrate the benefits of our business model of operating a diversified group of energy distribution and marketing companies. Three of our business units had improved earnings, while two experienced lower earnings. Yet, in the aggregate, we experienced a nice increase in earnings.

At this point, I'd like to turn the call over to Peter. Following Peter will be John Walsh and Gene Bissell, both of whom will comment more fully on business unit operations. Then I'll return and provide you with some closing comments. So, Peter, go ahead.

Thanks, Lon. The strength of our diversified model was once again demonstrated with an improvement in our international propane business. The weather in Europe moderated from the record warmth experienced in last year's quarter more than offsetting modest declines in domestic natural gas and propane distribution. In addition, we continue to see excellent performance in our Energy Services' business. A very warm April dampened the reserves of our Gas Utility business as people shut down their furnaces early in the quarter and high commodity prices, along with the general economic environment, are having an impact in all of our businesses.

Despite this, we were able to report for the quarter ending June, net income of $15.7 million or $0.14 per share, an increase of $0.03 or 27% on last year. Included in the $0.14 was $0.01 from mark-to-market gains related to changes in the estimated fair value of financial transmission rights.

So overall a very good quarter, and as Lon mentioned, our year-to-date performance gives us confidence that we can reiterate our full-year earnings guidance in a range of $1.95 to $2.05 per share.

Before Gene and John cover the businesses in detail, let me give you some color on the performance of each of the units. AmeriGas sold approximately 181 million retail gallons, marginally down from the 182 million gallons sold in the same period last year. Net income was a seasonal loss of $2.5 million compared to the $1.6 million loss in the same period last year. Weather nationally during the quarter was 1.8% colder than normal and 7% colder than the prior year. Total margins increased due to higher unit margins and fee income, but this was more than offset by higher operating expenses that increased depreciation and amortization related to growth investments. Gene will, of course, cover this in more detail in his comments later in the call.

Turning now to our utilities; in our gas utility, net income decreased to $2.1 million from the $4.3 million reported in the same quarter last year. Weather in the Gas Utility service area for the quarter was 4.3% warmer than normal and 7.8% warmer than last year. Unfortunately, we had a very warm April which led to reduced firm demand in the quarter as we believe many customers shut down their furnaces early. System throughput of 23.4 billion cubic feet was 7.9% lower than in the same period last year.

Net income in our electric utility was $4.1 million compared to the $4 million in the same period of last year. Sales volumes declined 2.7% to 224.9 million kilowatt hours from 231.1 million kilowatt, primarily as a result of weather that was 4.7% warmer than normal and 9.2% warmer than last year. Net income was essentially flat with lower unit margins and lower volumes offset by the sale of FTRs that were not required to hedge electricity congestion charges.

In our International Propane business, we had a good quarter with net income of the three months ended June increasing to $2.6 million from the loss of $3.3 million recorded in the same quarter of 2007. Our French business, Antargaz, increased retail sales by over 11% for 55.2 million gallons from the 49.6 million gallons recorded in the same quarter last year. This increase in volume, along with improved unit margins, drove the year-on-year improvement. Weather in the Antargaz service area was 14.8% warmer than normal, but significantly better than the 44.3% warmer than normal we experienced last year.

We continue to be pleased with the performance and the outlook for our Energy Services business, which in the third quarter increased net income to $9.4 million from the $8.2 million reported in the same period of 2007. Electric generation, retail electricity sales, and to a lesser extent peaking and asset management activities all contributed to the growth. This was partially offset by lower volumes in our retail natural gas business.

Our balance sheet continues to be very strong and we closed the quarter with approximately $270 million of cash, which includes approximately $190 million of investible cash held at the holding company level. Clearly, we are continually looking for profitable opportunities to invest our cash and we will be using a significant portion of our investible cash, along with a similar level of debt, to finance the acquisition of PPL Gas at the end of the fiscal year.

We continue to keep a very close eye on our working capital, and other than the growth that has arisen from the rise in commodity prices, we have maintained our performance at similar levels to those we had a year ago. Total debt was approximately $2.2 billion of which approximately $959 million was in AmeriGas Partners, $673 million within International Propane; and $562 million was in our Utility. This compares to levels at the end of June 2007 where AmeriGas was $933 million; International Propane was $587 million; and our Utility was $620 million. The increase in the level of debt in International mainly represents the change in exchange rates over the last year. Liquidity is good and I'm pleased to report that Moody's reiterated their rating on our Utility and improved their rating of AmeriGas debt.

In summary, a very good quarter given the general economic conditions and the significant rise in commodity prices over the last 12 months. Once again, a set of results that shows the strength of our diversified operating model. With that, let me pass the call over to John.

Thanks, Peter. Peter's provided you with details on our financial performance in Q3. I'd like to comment on our progress on three long-term strategic objectives; growing our core businesses, continuously improving operations and reinvesting cash in high quality projects.

First, in terms of growing our core businesses. Developing growth opportunities is a strategic priority for each of our businesses. Although market conditions remain challenging in Q3 due to high commodity costs and the slow housing market, we made solid progress in the quarter and remain upbeat about growth prospects in Q4 and FY09.

Some specific achievements in Q3. Our Gas Utility team has done an outstanding job of focusing on the conversion market as a growth opportunity. We've been particularly successful in converting fuel oil accounts to natural gas. Our conversions year-to-date are up over 60% and total new accounts year-to-date are above our prior-year levels. We remain confident that we'll add approximately 11,000 new residential and commercial heating customers in FY08.

is delivering solid growth, despite the slowdown in new home construction. We expect to add approximately 11,000 new residential and commercial customers and Antargaz continues to remain at the forefront of the French cylinder market with a combination of innovative products and a superior operations' network. Our lightweight composite cylinder marketed under the Calypso brand has gained rapid customer acceptance. Antargaz has over 250,000 Calypso cylinders with customers with 50,000 new customers added in Q3. Antargaz also reached agreement with one of France's largest retailers, [Car Four] to introduce a new private-branded cylinder. This new product was quickly rolled out and we now have distribution in over 700 of Car Four's 1,200 locations in France.

AmeriGas is also benefiting from innovation within the cylinder segment. We remain the market leader in the utilization of automated vending technology and we continue to see strong growth in the counter-seasonal segment. Our year-to-date volumes for AmeriGas cylinder exchange are running 11% above prior year.

Now on to continuously improving operations. A strong focus on continuous improvement is vital for any business and it's particularly important for UGI. As a distributor and marketer of energy products and services, we differentiate ourselves by delivering superior customer service consistently and efficiently. I'd like to comment on two of our productivity and efficiency initiatives.

Our Utility's business has completed a thorough review of its infrastructure and has identified a number of key actions to improve operational effectiveness and enhanced customer service. We've consolidated several of our field offices and integrated back-office operations. We are making incremental investments in our information systems to ensure that we can work effectively across our Utility's units. This advance planning is serving us well as we plan for the PPL Gas acquisition.

Energy Services has several projects underway to enhance reliability within its propane air plant network that supplies our peaking services customers. These projects involved increasing vaporization capacity at two of our five existing plants. We also continue to look for sites that would support new propane air plants.

Now, on to reinvesting cash and high-quality projects. In order to deliver on our commitment of 6% to 10% EPS growth, we must identify and develop quality projects as we look to invest the roughly $100 million in cash generated by our businesses each year. We have a range of projects under development, both acquisitions and capital projects, and we're confident in our ability to deliver quality investment opportunities.

Our Utility's team is making good progress as we plan for the upcoming acquisition of PPL Gas as a utility and their fuel propane business. This acquisition will add over 75,000 new customers to Gas Utility's existing base of over 475,000 customers, and will strengthen AmeriGas' customer density and market coverage in our key mid-Atlantic Region. The acquisition process is proceeding in line with our expectations. We hope to close the transaction on or about September 30, and expect the financial results with PPL Gas to be accretive to earnings in the first full year of our ownership.

We've commented several times over the past year on the strong portfolio of projects under development in our Energy Services business. We were very pleased last week to formally announce our Broad Mountain landfill gas projects. This $36 million project will generate 11 megawatts of Tier 1 renewable energy using recovered landfill methane gas. It's an outstanding example of a project that delivers clean and sustainable energy and delivers attractive recurrence for our shareholders.

We continue to work on a portfolio of opportunities with Energy Services. These projects range in size from $10 to $100 million and are focused in several key segments. Peaking services such as propane, air and L&G plants, renewable energy similar to our Broad Mountain and Grainger projects, and power generation.

On a final note, in addition to pen fuels which will add 15 million gallons of new volume, AmeriGas is actively developing a range of potential acquisition opportunities. These efforts are focused on markets where we can leverage our existing operational infrastructure and increase customer density.

I would now like to turn it over to Gene, who will provide you with more details on AmeriGas' performance in Q3.

Thanks, John. Although AmeriGas' third quarter results were slightly lower than our record results last year, I would like to note that the third quarter typically represents only about 9% of our annual EBITDA. Year-to-date we've increased EBITDA by $14 million and we're reiterating our EBITDA guidance for the fiscal year of $300 to $310 million. For the quarter volume was down less than 1%. We were able to offset most of the impact of customer conservation and a weak economy with acquisitions and growth in our cylinder exchange business.

Our record energy prices continue to be our biggest challenge. The average cost of propane in Mount Belleview] for the quarter was $1.70, up 50% from the same quarter last year. Our primary concern is the impact that rising propane prices have on our customers and we are seeing the impact on volume per customer. High energy prices, however, also have an impact on our expenses, particularly our cost of vehicle fuel, bad debt and utilities. In fact, 50% of the $10 million increase in expenses compared to last year was due higher energy prices in the form of higher vehicle fuel expense, higher utility expense and higher bad debt. The higher bad debt expense is a reflection of the $100 million increase in revenues this quarter, since we reserve for bad debt based on revenues and our aging.

The good news in this area is that despite the high prices we are not having significant issues with customer collections. In fact, our DSO at the end of June is about the same as last year.

Our core strategies of growth through acquisitions, through ACE, strategic accounts, and through our traditional base of residential and commercial customers, contributed to the continuity of our results this quarter and to our record year-to-date results. The 45 million gallons we added last year through acquisitions made a positive contribution to our volume and our profits this quarter compared to last year. EBITDA from last year's acquisitions is running 10% above our pro forma year-to-date.

We've also closed three acquisitions this year adding about 2.5 million gallons, and as John mentioned, we expect to close the acquisition of PENN Fuel on or about September 30, which will add another 15 million gallons. Ace volume is up 11% year-to-date, due both to new-store openings and same-store sales growth. We've grown the contribution from strategic accounts this year by over 12% while improving the quality of the accounts that we're serving. Year-to-date growth in our traditional base of residential and commercial customers is down compared to last year. We're seeing lower gains from new housing and higher customer losses due to credit issues that we're managing proactively in the high-price environment.

We're working off weakness in the housing market by focusing our sales force on commercial accounts and we are seeing some success with that approach. Our one encouraging fact despite the run-up in propane prices, 94% of our customers this year have rated our service as meeting or exceeding their expectations. I would also like to note that Moody's upgraded our credit rating as Peter mentioned, giving AmeriGas the strongest credit rating of the propane and LPs. To us, this is further recognition of the progress we've made, both in improving our balance sheet and increasing earnings through consistent execution of our strategy.

Looking forward, we'll continue to grow earnings through acquisitions, through our cylinder exchange business, by adding strategic account customers, and by growing our share of residential and commercial customers through a focus on customer service.

I'd like to finish up my comments by acknowledging the role that my fellow employees played in achieving record earnings so far this year. Together we built a business model that will continue to deliver the earnings to support our targeted 5% growth in distributions. With that, let me turn it back to Lon for closing comments.

Thank you, Gene.

Thank you, Gene. In our press release we reiterated guidance for the year for both UGI and AmeriGas. Given the dynamics of the energy markets, we believe performance at those levels is really pretty good performance; excellent performance. If we achieve the midpoint of the range for both UGI and AmeriGas, earnings per share will have grown by nearly 13% over last year's earnings after eliminating a one-time gain from an asset sale at UGI, and similarly at the midpoint of the range, AmeriGas' EBITDA will have grown by more than 4% over last year after excluding that same one-time asset sale gain. Pretty good performance, as I said.

From a qualitative standpoint, it certainly is a challenging environment for energy distributors. You know that no only from us, but you know that from all the discussions you've had with other companies. Rising energy prices not only cause hardship for our customers, but it also increases our expenses. This is a worldwide phenomenon for us. It affects us both domestically and internationally.

While we face challenging, competitive conditions in all markets, our management teams and employees have done an outstanding job of not only facing those challenges, but finding opportunities that will inure to our benefit in the future. As you know, John described several of those opportunities earlier in this call.

The model we've employed for many years of growing our businesses in excess of their industry growth rates, operating those businesses efficiently and effectively, producing excess cash flow and reinvesting that excess cash flow for additional growth, while at the same time returning a portion of that cash to you in the form of an above-average dividend increase, exemplifies the type of balanced growth and income vehicle that we are and expect to continue to be.

So we look forward to reporting our full fiscal year earnings to you on our next call and continuing our tradition of achieving our financial goals in providing you with above-average, long-term shareholder value. That concludes our prepared remarks, and Sean, we're ready to take any questions.

Absolutely. (OPERATOR INSTRUCTIONS) Our first question comes from Jay Yannello of Pali Capital.

Good afternoon. John, I think that most people that know you realize that you run the company well, but as you mentioned with some of the factors in the environment, everything hitting the consumer, the price of propane, I'm just wondering if you could provide us a little flavor how interactions are with customers now as they may be looking on refilling for the winter. And overall I know you're not going to want to talk about it too much, but what this might mean for '09 with the challenging environment; just any sort of dynamics or flavor you could put on what you see going forward in this time. Thanks.

Okay and I'll focus it largely on propane and then probably turn it over to Gene, but I want to talk about international as well as domestic and then Gene jump in on the domestic side. As you know, on the natural gas side, we're not seeing any unusual customer activity at all. Prices were relatively stable on the natural gas distribution business and the same in the electric distribution business where our prices were relatively stable. So, I would say no unusual activity there at all and we are not forecasting significant increases in the cost of gas to our customers which we pass through into utilities or the cost of electricity that we collect from our customers in the electric business. So, in that area it's not to say that it's not challenging because consumers are pressed by the gasoline purchases, etc., but nothing too much to talk about.

On the propane side, we certainly are seeing internationally, largely for the first time because there was a lot of insulation in the rise of the Euro against the dollar for energy costs. The affect on customers overseas, we're certainly are seeing some conservation. Each county is a little bit different. We're seeing more intense competition from electricity in France. As many of your know, electricity is largely generated nuclear facilities in France and the governmental keeps a relatively low price of electricity in France compared to other fuels, and LPG has become quite an expensive fuel there. So we are seeing customers call for pricing relief. We are seeing customers do the normal thing that one does; a little bit of conservation as well that one would expect to see over there.

I would say Austria is probably the same directionally true. Eastern Europe a little more a reaction of customers because the income levels are just lower there and it's more of a challenge for folks over there in Eastern Europe.

Moving to the domestic side, a couple of things I would tell you. Volumes that we're seeing in recent times are not disappointing us much. I mean they're within our expectation level give or take a little, so we aren't seeing it in our volumes this summer. But it's not a high-volume period of time for us on the domestic side of the business.

We are seeing two effects that we expect to see somewhat next year. It's clear that we did see some conservation on other calls. We know others have estimated the conservation at close to 10%. We aren't seeing conservation at nearly that level. I would suspect our conservation numbers or weather adjusted volumes are kind of 3%, Gene?

3% to 4%.

3% to 4% overall weather-adjusted declines.

Weather and acquisition adjusted.

Weather and acquisition adjusted decline, so we're in that 3% to 4% range, and I think most studies that study conservation put out by AGA and others suggest that that's the level of conservation you'd see in a price environment like we have seen. So, others may have better data that suggests it's higher and, if so, we're doing quite well in the marketplace.

I guess my feeling is, might that not accelerate here going into the resell season, the heating season in the U.S.?

You know, the prices were at roughly this level for quite some time. We raised them some more, obviously, as cost has gone up. It's a question, Jay, we're not quite sure; sort of the studies that we see conclude that every 10% price increase that you see you get kind of 1% to 2% conservation, and the price increase has not been that severe given the prices they experienced in the last six months compared to the prices they'll experience next year. So, you may see some more, in my opinion you may see some more marginal conservation; you may see another percent or so. But for today I would have told you that prices were going in the right direction with oil, and we have a lot of programs to help customers. We have fixed price offerings that the other folks don't have to the same extent. So, we'll see some conservation without question, and don't forget, we always view -- there's always 1% conservation which is structural.

We are seeing the other side an effect of the economy on our commercial/ industrial businesses, kind of the motor fuels which are cylinders for forklifts. We're seeing the effect of the housing market on gains and losses and things like that. So we're seeing less growth than we would ordinarily see, and we're seeing -- the economy does affect this business so we see some challenges there. But at the end of the day, the margin that we've been able to attain it was up -- it was up this quarter, Gene, on a percentage basis?

6%.

6% increase in margin on a year-over-year. Was it year-over-year or quarter to quarter? Quarter-to-quarter basis. We've been successful in passing our costs on to folks and recovering increases and operating expense through the margin. So at the end of the day, we're happy with where we are in this incredibly difficult environment. We don't expect unusual difficulties next year. We're confident that we're going to meet our goals for all of our businesses and the goals on the UGI side are to grow our earnings 6% to 10%, and the goals on AmeriGas side are grow our EBITDA enough to support our 5% distribution increases. So, while it's an uncertain environment, we have enough clarity in that environment to think we're going to do fine next year.

Okay, thank you very much.

Our next question comes from Shneur Gershuni of UBS.

Hi. Good afternoon, guys.

Hi, Shneur.

A couple of questions; I'll leave this whole FTR stuff to somebody else. But I guess my first question just starting with Utility, two questions there. You're expecting 11,000 new customers. I was wondering if you can just give me some color here with respect to how you plan to add 11,000 new customers? Is it just conversions from people going from heating oil to natural gas, or is it you're actively pursuing some other type of growth?

It's a mix as it always is in terms of new accounts. What we're seeing we'll add a range of residential customers. We still are hooking up and adding people moving into new homes. That's at a slightly lower rate than last year and then two or three years ago; a considerable ramp-up in conversions. So, maybe 20% of those new customers this year will be conversions; apartments, apartment units converting from fuel oil to natural gas. And that number might in a normal year be closer to 10% to 15%, 10% to 12% of our new accounts being conversions. So we're certainly taking advantage of the fact that natural gas is looking very attractive relative to somebody, an apartment complex or an individual homeowner that's heating their home with oil. We still see pretty solid growth, pretty consistent growth in commercial accounts.

So we have this portfolio much like our businesses. We have a portfolio of sort of new opportunities or updates to add new accounts. Based on market conditions we try to move quickly. This year, we clearly saw based on what's happened over the last 24 months, that our opportunities in terms of new homes was down and we saw the opportunities with conversions. We geared our sales team up to target that and they've been very successful. So, it's a change in mix. It's not a huge change, but there's a shift and we're likely going to -- that will likely continue into next year. We expect we'll see more conversions than we've typically seen and we'll see less new-home hookups than we've typically seen.

I would add only that, we have said for years that our base utility territory is not a boom-and-bust territory. While we've experienced above-average growth, the kind of 3% to 4% growth, we're not an area like Las Vegas or Florida or some of the places that really boom, nor are we an area as is evident from what John just said, that we really bust when the housing market changes as significantly as it has. And so, our agility of taking advantage of a fairly decent territory is what John is explaining.

Okay. I've just one other follow up there just before I move on. You just said you had commercial account growth and so forth and it was -- I guess you noticed, or rather I noticed in your press release that you said that there was an offset to the down volumes just due to low-margin customers and so forth. Are you just seeing a pickup in industrial volumes in general?

There's a pickup in industrial in delivery service volumes. I'm not sure of that particular reference. We're just checking the reference now; a little more to delivery service customers.

Basically, we saw a reduced firm demand in the quarter because of what Peter said, which was April, and then I think we saw higher demand from the lower margin or more consistent demand from the lower-margin customers. It's not a big trend that I would point out or worry about.

Okay, wondering if I could just switch to the propane business for a second. Historically, when prices go up you've actually had a lot of success at being able to expand margins and so forth. Do you kind of foresee that as a potential opportunity? And also, are you seeing any bit of a de-linking in the correlation between propane pricing and oil prices at all, just given how the dynamics have changed a little?

Yes. As you've looked at our margin increases over the years, they've been healthy but modest compared to many of our large competitors. We've maintained a steady policy over many years that we should be able to recover operating expense increases and inflationary increases through margin increases. And so -- and we spend a lot of time with our supply group making sure we buy properly and costing our product as well. And so, I don't think you've seen us change our pricing philosophy at all over the course of a long period of time. We have noted some changes in philosophy of competitors as we do our competitor evaluation and in the overall market. I think the overall market based on data we get from the governmental and otherwise, our assessment is that the market itself has trained itself to recover cost increases which have been substantial in this industry through margins. It's the only way you can recover those higher costs. And so that's something with 4,000 competitors out there or more that could change in the future, but we don't see any signs of change at this point in time. We don't expect to change our overall philosophy going forward. We've been consistent in recovering those costs that we experience and growing margin modestly, and nothing on the horizon that would suggest that's going to change.

I'd certainly agree with all that you said, Lon. On your second question about the relationship between propane prices and crude oil, if you look today, I guess at Mount Belleview it's about $1.73 and we've crude at I guess about $1.26. Today, we're right in the range that we typically would be at, about 58%-59%. That's actually the low end of the range for propane versus crude oil and we've been at the low end of the range for a while. So I guess our feeling is even if you see crude oil drop, you might not see propane drop to the same extent. Right now, inventory levels for propane are below last year, about 8% below last year; about 15% below the five-year average. So we would expect propane prices could be a little bit stickier than crude oil prices just based on the inventory levels. We'll have to see. A lot will change between now and when the season starts. It's not unusual for us to be at 70% of crude.

Okay. Just one final question, if I may, I guess of Lon and John. You sort of talked about growth opportunities to reinvest all of your cash flow and so forth. Obviously, you can't really talk about acquisitions. I was wondering if you can focus more on the organic growth side? I was wondering if you can sort of give us an idea with respect to backlog how big in terms of the type of projects you're looking at. Are we talking about billion-dollar backlog? And what kind of return hurdles you kind of target when you look at these types of organic growth projects.

I'll take a shot and then, John, you jump in. We could have internal growth projects that are easily close to $300 million. They're not at all stages along the way locked in, but the pipeline is kind of I would say internal growth projects of probably on the order of $300 million that we're evaluating, which is a lot for us.

On the hurdle rate side, we're real good at knowing our cost to capital and are firm believers that we need to earn a return in excess of our cost to capital. So we're looking IRRs I would say, and most of the things we see we believe are in the 11% to 13% kind of IRR range, some higher than that. You'd be hard pressed to find a lot lower than that, but substantially in excess of our cost to capital.

Great, thank you very much.

Sure.

Our next question comes from Ron Londe of Wachovia.

Thanks. Just looking at your nine months and the last 12 months' number, specifically the growth capital expenditures are significantly lower for the 2008; for last 12 months and for the nine months. Is this a process of just trying to conserve cash, or are you passed the peak in expanding the cylinder business, or is it just less opportunity on the propane side for growth projects?

Ron, on the growth side, growth capital side, the drop is really due to installing fewer of the self-serve dispensers. Last year, we were very busy trying to keep up with demand of self-serve dispensers that we installed at Home Depots and a number of other of our customers. So, that's really the reason for the drop.

A $24 million drop over the last 12 months is basically the cylinder business?

That sounds like too big a number to me. We're showing it seems like a $16 million drop; that's for the 12 months.

The 12 months at $16, and largely there's a couple of things going on. Gene is absolutely right that if you had to identify the single, largest project that it was related to it's that. But in any business we mention that our growth isn't as robust as it has been, so your capital is going to be constrained, because there's no need to spend the money if you're not growing as rapidly as you had been before, so.

Fewer new homes.

Fewer new homes and fewer new underground tanks getting installed; slowdowns that we see in motor fuel and things so perhaps you need fewer cylinders or something. So, it's across the board as well, and we are bringing a more intense focus to capital expenditures as well. As you know, we believe we grow more rapidly than our larger competitors and, hence, our capital is higher than our -- certainly our growth capital is higher than our large competitors. But, in every business there are areas that you can improve on, and capital is something that the guys look at pretty carefully now. And not to conserve cash and not because we lack opportunities to grow, but we want to make sure we get the right return for our growth opportunities as we do it.

Okay, thanks.

Our next question comes from [Ian Segal] of [Arroya Capital].

Good afternoon.

How are you?

Great, thanks. Just a couple of questions. On the propane side, are you seeing -- well, two questions. One, do you think you're gaining market share? And then number two, in terms of consolidation opportunities or acquisition opportunities, is there more of an opportunity today given working capital needs of the smaller mom and pops and just a tight credit environment?

Our sense is that if you look at our volume and you look at the volume of the other public companies, our sense is that we are growing share to some degree. In terms of acquisition opportunities, we are seeing more. Our pipeline is more full than it was and I do think that this environment is one that causes the independents to be interested in talking to us about selling. So, we've had three relatively small ones, two and a half million gallons. We've got PENN Fuel at 15 million gallons and we have a number of others that we're evaluating right now or we've got offers out to them. So, the benefit of this environment is that it's one that tends to get the independents to consider whether they want to sell their business.

Ian, it's nice, too, for us to grow the way that we think we're growing, and Gene rightly points out the volume differentials between us and the other folks that we can follow. And we do look at API industry's numbers and all sorts of statistics that you can think of; (inaudible) puts out things. We keep a close eye on that because our European brethren have trained us to focus more on market share than any U.S. company normally does.

Market share gains are, don't forget we have 600 locations and market share gains in this industry are small over time. You're not seeing us grow market share 3% in a year, or 2%. You're talking about modest market-share gains over a period of years that add up, but maybe in one year you're not seeing us grow market share substantially. We're not out there trying to take market share from competitors in a way that would create market share growth of 2% to 3% to 4% in a year. That just doesn't happen in this industry. You've got millions of customers and you fight the battle in every location for every customer every day. This is a tough business and the folks in the field do an outstanding job. We've aligned compensation to do that for many years for the entire business and it is a cultural change to grow in this industry. And Gene and the management at AmeriGas started on our process five, six, seven years ago, and we have built on it steadily, and so our confidence is that we are doing better than most competitors in this industry. But it's a slow gap. It's really hard.

Ian, you could look at the API data that shows the industry volume and compare it to our volume or others' volumes and that would give you a good sense of what's happened with market shares over time.

It would just seem to me that to the extent you tend to be more moderate in your margin increase, I would think that would lead to the market share gains.

There is no question that there is a correlation between price and volume, or at least no question that we think there is. And when you're in this business for as long as we are and expect to be, what you want to do is build a platform like that which Moody's recognized. We have an extended track record of producing excess cash flow, of growing the business compared to others and having solid financial performance based on good margin performance, smart operating expense management, paying down debt, increasing distribution of unit holders. So we've got a long-term value approach to the business and we should do exactly what you said. We should build over time better results than the average competitor out there.

And then just two final questions. One is, when you look at expenses on the propane side, can you just sort of review how that's tracking? If you could tie in steel costs and what other big variables are on the expense side? And then the second question gets back to your earlier comment in terms of what kind of IRR you're looking for. And on the MLP side the question is, what IRR are you looking for and is that sort of a pre-tax number or an after-tax number?

Let's go into the expense side. The only reason I feel qualified and not to turn it over to Gene immediately is we had a Board meeting yesterday where we went through expenses. Gene pretty much said it, 50% of the expense increase we saw this quarter is fuel related and energy related. Fuel expense for all of our trucks, bad debt increases and utilities, and frankly there's a little more borrowing under our revolver because working capital is up, and why is working capital up, because of fuel prices being higher. So you have that whole go-around you get to. That is the largest single increases we see. Other areas of increase are not as substantial. For example, our payroll expenses are really under control. That includes benefits, etc., and we are seeing differences in one-time items that affect our performance this year that's referenced in the press release.

Differences in -- we've got an incredible safety record that has allowed us to reduce our reserves for workers' comp areas and so the reserve reversal last year was larger than this one, for example. So there's a number of things there. And the other thing that we have that's driving a lot of our expenses are acquisitions last year that we made. We made a fair number of acquisitions that's driving our increases and expense as well. So I would say at the end of the day having thoroughly examined expenses as Gene presented to our Board and we look at otherwise, we feel that expenses are under pretty good control. And some of the expenses we recovered from our customers in terms of fees, so that you see some increase in charges to our customers to recover some of these. So, when you net things out, we feel pretty good about our expenses and we're not expecting anything going forward.

With respect to IRRs, we're very consistent and the reason -- that is we look at after-tax IRRs -- and the reason we do that is we don't want to burden our unit holders with looking at it on a pre-tax basis because summer pays tax here. And we've got to deliver a return to our unit holders in a way which allows them to pay that tax at some point in time. And so as we evaluate transactions for capital allocation, for consistency and otherwise, we're very disciplined to look at things on an after-tax basis. I'll repeat kind of what I said earlier to Jay. We know our cost to capital and the propane business pretty well and we won't do anything that doesn't have a return associated with it higher than our cost to capital. So, you would expect us in the LPG business to have IRRs in the same range, generally speaking, as I said before 11 to 13. You might see 10s on occasion for larger transactions, but you're not going to see us drop much below that. And you're going to see us be -- so maybe I'll widen the range the 10 to 13 for the LPG business just by nature of the acquisition process itself. But not substantially different than other things we do.

Got it, thank you.

Yes.

(OPERATOR INSTRUCTIONS) Our next question comes from Carl Kirst of BMO Capital.

Good afternoon, everyone. Most of my questions here have been answered, but just maybe a few quick cleanups. The first is on the addition of the 11,000 commercial and heating customers. Is that net of shutoffs and maybe more of the question is, are shutoffs running more than they have been in recent years?

11,000 is a gross number and it is not net of shutoff and things. I haven't seen a -- we are intentionally, Pennsylvania allows you to shut off people on a credit basis more aggressively. In the past two years, we've been able to do it on a more, frankly a more prudent basis and a more aggressive basis than you were under Pennsylvania law prior to that time.

Sure.

So we've seen an increase in shutoffs, but our increase in shutoffs pales to those of other utilities. Because again, the nature of our territory is such that we've got people who generally try to pay their bills. We're not in huge, major metropolitan areas where you run into some of the socioeconomic difficulties that you do, and our territory is not like that as much. We are seeing higher shutoffs than we've seen in the past because of -- by virtue of that. But nothing that would cause that 11,000 number to be substantially off in any way.

Now, those shutoffs, it's not a material number relative to the new accounts being added and building on to Lon's point, is that we've been ever since the new legislation went into effect, Chapter 14 legislation, we've taken a very sort of consistent approach. So we haven't seen a big run-up this year in terms of shutoffs. We've sort of consistently worked through the process in line with all the guidelines and communication requirements, so it hasn't been -- we haven't seen any significant jumps in terms of the number of shutoffs.

Okay, that's helpful. Two other quick questions; the first just on PPL everything is kind of going on target. I know the purchase price we were looking at $268, plus working capital, is the working capital projected to be anything material? And I guess I'm just trying to get to where we're likely to be with cash on hand at the end of the year, post the close of this acquisition.

Peter, you mentioned how much cash we have?

Yes, you have $190 million of investible cash. I guess we don't expect the working capital to be anything that would be a problem for us. We will use a significant percentage of the investible cash with equal amounts of debt from the PPL deal.

Okay, so we just assume a 50/50 debt equity, so that's $50 million of cash on hand at the end of the quarter or end of the year. That's what I was trying to get to. And then lastly just to sort of clarify, and I don't want to read too much into any statements, but John in his prepared remarks, you were kind of talking a little bit about acquisition with obviously the reinvestment opportunities that you guys are looking at. It had come right after when we were talking about the Energy Services' component, the peaking of the renewables, the power gen, and I wasn't sure if you guys being on the lookout for acquisitions was sort of more of a general comment as you always have been, or if you were specifically looking for acquisitions within this Energy Services' category?

Carl, the reference to acquisition was broad based. It sort of reflects an ongoing set of activities that cuts across all the businesses, so it wasn't intended specifically at Energy Services. What we've seen in Energy Services over the past few years is an increasing levels of opportunities of looking at capital projects. So from a directional standpoint, what we seen in Energy Services we still see some opportunities for acquisitions that we'll look at, but we've been really pleased to have the broader range of capital project opportunities that we're seeing now in Energy Services.

Great, thanks. I appreciate the color.

We have no further questions on the phone at this time. I'd like to turn things back over the speakers for any additional or closing remarks.

Okay, thank you, Sean very much and we were kind and didn't have to refer any questions to you. We, again, appreciate your calling us and your attention and we believe we're having a very good year and next year equally believe that the pieces are in place for us; notwithstanding the challenging environment to once again continue or tradition of meeting our financial goals. And so, you'll hear more from us as the year goes out. I'll talk to you again with our year-end call and then move forward from there. But we look forward to reporting great results to you and everybody have a good summer. Take care, thanks.