UGI Corp (UGI) 2009 Q1 法說會逐字稿

Good day, everyone, and welcome to the UGI and AmeriGas Partners first-quarter fiscal year 2009 earnings results conference call and webcast. This call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Bob Krick, Vice President and Treasurer. Please go ahead, sir.

Thank you. Good afternoon and thank you all 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 US 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.

In addition, our remarks today will reference certain non-GAAP financial measures for fiscal 2009 that management believes provide useful information to investors to more effectively evaluate the year-over-year results of operations of the Company in fiscal 2009. These non-GAAP financial measures -- net income, net income per diluted share, net income per diluted partnership unit and EBITDA, all excluding the sale of a storage terminal by AmeriGas -- are not comparable to measures used by other companies and should be considered in conjunction with reported net income, net income per diluted share, net income per diluted partnership unit, EBITDA and other performance measures, such as cash flows from operating activities.

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 a lot, Bob, and welcome to all as well. I am pleased that Bob finally ran out of warnings; otherwise we wouldn't have time for the rest of the call.

I hope you all had the opportunity to read our press releases announcing our first-quarter results today. To summarize, UGI reported earnings per share of $1.05 per diluted share compared to $0.74 last year. Included in this year's numbers were a $0.10 gain from the sale of AmeriGas' California storage terminal. Excluding that $0.10 gain, the comparison is $0.95 against $0.74 last year.

AmeriGas also reported excellent results. EBITDA this quarter was $164 million compared to $93 million last year. Again, the EBITDA includes a gain of nearly $40 million on the storage terminal sale. Excluding that gain, the comparison is $124 million to about $93 million.

What is clear in our earnings is that the benefits of our diversified business mix and the successful execution of our strategies are reflected. Three of our business units had better earnings -- domestic propane, international propane and gas utilities. The other two business units experienced lower earnings.

Successful execution of our growth through acquisition strategy is the principal reason for the growth in earnings in our gas utility businesses. Acquisition growth, however, also contributed to higher earnings in AmeriGas. Both our domestic propane and international propane businesses also benefited significantly from higher unit margins as a result of the extraordinarily rapid drop in wholesale propane product costs.

Partially offsetting the higher earnings contributions that I referred to before were lower earnings from our electric utility, which was largely due to higher purchased power and transmission costs, and from our energy services business due to lower earnings from our electric generation business, for a variety of factors and reasons, including facility outages. The other two energy services lines of business, that are gas marketing and asset management, did well.

This obviously was a very good quarter for us, and we are pleased with our progress and performance. This is the first time in my memory, which goes back quite a few years, that we experienced weather across almost every one of our business units which was cooperative, and, at the same time, wholesale commodity costs fell rapidly. These two factors largely drove the improvement in our earnings.

While I cannot reasonably predict weather patterns, as I've said many times, I feel much more comfortable suggesting to you that the speed and scale of the decline in wholesale commodity costs is likely a onetime event. Thus, I want to point out to all of you that margins achieved in this quarter were unusually high. We do not expect this level of margins or the scale of the margin increase to be replicatable in every year going forward.

I also want to point out that we are not immune from the difficult economic circumstances that exist today. Our business units saw the adverse effects of the poor economy in our volumes, in particular our commercial and industrial volumes. We also saw signs of stress in our customers' ability to pay us in a timely fashion.

While I don't want to overemphasize these factors, at the same time, I don't want you to ignore them and overlook them when you consider our results. We did a fine job of managing the challenging environment we faced, and every employee of this organization did an excellent job. Yet we had a lot of good fortune with favorable weather and commodity price movements.

However, there is a lot more winter weather ahead, and we all have certainly seen and experienced the volatility of commodity prices. Thus, while we are confident that we will have an excellent year this year, we don't have visibility on these two key variables. I will have more to say about that as we go forward, but at this point in the call, I want to turn it over to, first, Peter Kelly, our Chief Financial Officer. Following Peter will be John Walsh and then Gene Bissell. And then I will offer some concluding remarks before we take some questions.

So at this point, let me turn it over to Peter. Peter, the microphone is yours.

Okay. Thanks, Lon. As noted in our earnings release this morning, we've gotten off to a good start to the year. Net income was $114.9 million versus the $80 million reported in the same quarter last year. You should note, however, that the $114.9 million reported for this quarter included an after-tax gain of $10.4 million from the sale of AmeriGas' propane storage facility in California.

Our earnings per share were $1.05, including $0.10 from the gain on the sale of the AmeriGas terminal, versus the $0.74 reported in the same quarter last year. Strong performance in our international and domestic propane businesses were the major drivers of this improvement.

I would now like to spend a few minutes outlining the year-on-year performance of our main business segments before moving on to cover our balance sheet and liquidity.

In international propane, net income was $40.2 million, up from the $22.4 million reported last year. Having seen volumes decline in 2008 from 2007 with the sharp runoff in wholesale propane costs, we have experienced a significant improvement in margins in 2009 as wholesale propane costs declined over the past few months.

In the Antargaz service territory, temperatures were approximately 4.9% colder than normal compared to temperatures that were 6.3% colder than normal in the same quarter of last year. Antargaz sold approximately 96 million retail gallons of LPG in the first quarter, about 2 million gallons less than in the same period last year. The reduction was essentially all in residential bulk sales, though, as John will discuss later, we are seeing real progress in our cylinder sales through the large tanker markets.

Weather for our Flaga business was 9.5% warmer than normal compared to 5.8% colder than normal in the previous year. As a result, overall volumes of Flaga decreased by approximately 16% from the prior-year period.

As regards our domestic propane business, AmeriGas' net income contribution to UGI was $34.3 million compared to $15 million in the same period last year. As previously mentioned, the $34.3 million included an after-tax gain of $10.4 million from the terminal sale. Weather was nearly normal this quarter versus the 7.2% warmer than normal reported in the prior year.

And as with our international business, our domestic businesses experienced the rapid decline in wholesale costs in the fall, which has clearly helped from a margin perspective. We are, however, seeing an impact from the global recession. Overall retail volumes of 278 million gallons was down slightly from the 279 million gallons reported last year. But you have to remember, our current quarter includes the gallons that we acquired as part of the Penn Fuel Propane transaction. And we are seeing weakness in motor fuels and residential sales. Gene, as always, will provide a more detailed review of AmeriGas' performance in his comments.

Net income in our gas utility was $28.3 million versus the $24 million reported last year. Throughput was 44 bcf compared to the 39.5 bcf reported in 2008. The improvement in income and throughput largely reflects the acquisition of PPL's natural gas utility, which we refer to as Central Penn Gas, or CPG. And to a lesser extent, colder weather was also an impact. Weather was 7.1% colder than normal versus the 4.3% warmer than normal experienced in the same quarter of last year.

In our electric utility, net income was $2.8 million compared to the $4 million reported last year. Weather was 5.9% colder than normal compared to the 6.9% warmer than normal experienced a year ago. We sold 252.8 gigawatt-hours, down slightly on the 254.4 reported in 2008, as commercial and industrial companies experienced the impact of recessionary economic conditions.

Net income declined year on year, largely as a result of increases in purchase power and electricity transmission costs.

In energy services, net income was $10.7 million, down from the $13.9 million reported in the first quarter of fiscal 2008. The majority of this decline was driven by costs associated with outages at our [Cannama] and our Hunlock facilities. Retail gas volumes were about equal to sales in the previous year. And margins from peaking supplies improved year over year.

Now moving to our balance sheet, at December 31, our total debt was $2.6 billion versus the $2.4 billion reported at the same date last year. Our consolidated cash is also at $292 million versus the $232 million reported last year. However, this does include restricted cash of $116 million as compared to $20 million in the same period of last year. It also includes $86 million of cash at the holding company level, which we will use to reinvest in the business.

Of the $2.6 billion of debt, approximately $2.1 billion is long term. We have $70 million of AmeriGas short-term debt that will mature in March of this year. $283 million was outstanding on the utility revolver and $146 million on the AmeriGas revolver, both somewhat higher than historical levels, but well within the bounds of our credit facilities.

We were able to access the credit markets in the quarter as needed and with competitive rates. We raised $108 million of five-year debt on October 1 to fund the purchase of the PPL business, and again in November to temporarily increase AmeriGas' working capital facility by $50 million. We continue to believe we have adequate liquidity and, with the additional cash we generate each year, are well positioned to take advantage of the investment opportunities that will undoubtedly arise in the coming quarters.

So in summary, a good start to the year, good progress in our businesses and strong liquidity. With that, let me pass the call over to John Walsh, who will expand on the performance of our operations.

Thanks, Peter. The challenging external environment in the first quarter of 2009 reinforced the importance of focusing on our core activities. I would like to comment, as I do each quarter, on our operational performance, with specific emphasis on our progress on three long-term strategic objectives for the Company -- growing our core businesses, continuously improving operations and reinvesting cash in high-quality projects.

First, on growth, identifying and developing growth opportunity remains a challenge due to the deceleration of the economy and the dramatic slowdown in the housing market. While the overall economy remains relatively weak, we continue to focus on identifying market segments with growth potential. We have several excellent examples of these targeted initiatives that delivered growth in Q1.

Our gas utility had another solid quarter for growth. Our comp growth exceeded prior year in both the residential and commercial segments. Our campaign to convert fuel oil and electric customers to natural gas continued to pay dividends, with conversions up almost 25%. With the decline in fuel oil pricing over the past quarter, we've shifted our conversion focus to electric customers in our gas service areas. These customers will see their electric rates increasing substantially over the next 12 to 24 months as rate caps expired for several major electric utilities in Pennsylvania.

One additional note on utilities. We filed requests with the Pennsylvania PUC earlier today to increase base rates for both Penn Natural Gas and Central Penn Gas. The requested increases were $38.1 million for Penn Natural and $19.6 million for Central Penn. The increased rates would fund system improvements and operations necessary to maintain safe and reliable natural gas service. In addition, the increase would fund expanded energy assistance programs for low-income customers and conservation programs for all customers. The review process for the rate request is expected to last approximately nine months.

Antargaz's cylinder marketing programs continue to be a significant source of growth. We added 60,000 new customers for our Calypso lightweight composite cylinder in Q1. On the last two calls, I have spoken about Antargaz's agreements with Carrefour to supply a new private-branded cylinder. This product has gained rapid consumer acceptance, with approximately 150,000 customers added in Q1 as we rolled out the product across the Carrefour network.

Energy Services has had very good success with their natural gas marketing program for small commercial customers launched in 2008. We now serve a broad range of small commercial accounts on LDCs in seven states. We are finding that in today's economic environment, these small commercial accounts are very responsive to Energy Services' product service offerings for natural gas customers.

Now on to operations. We benchmark our operations on a broad range of activities to assess progress on continuous improvement initiatives. I would like to focus today on the critical role our propane infrastructure plays in ensuring high levels of customer service during the winter months, when demand peaks and product supply can become constrained.

This winter is an excellent example of the benefits of a comprehensive supply, storage and logistics plan. We have seen major supply chain disruptions in both the US and Europe due to extreme weather, unplanned refinery shutdowns and pipeline curtailment. Our teams at AmeriGas, Antargaz and Flaga have done an exceptional job addressing these challenges while maintaining a consistently high level of delivery reliability.

The key elements of our supply strategies are diversification of product sourcing, geographically dispersed storage, and sufficient rolling stock -- that's transports, rail cars and bobtails -- to provide emergency support during supply curtailments. Most critically, we have dedicated operations and distribution teams who commit themselves to achieving our customer service benchmarks even when we are hit with the most challenging conditions. Maintaining these high levels of service builds customer loyalty, boosts customer retention and, over the long term, contributes to margin improvement.

Now on to reinvestment of our cash. We believe that the current economic environment will bring new investment opportunities for UGI as other companies in the energy sector struggle to deal with the harsh realities of today's markets. Our combination of balance sheet strength and consistent cash generation puts us in an excellent position to take advantage of these emerging opportunities.

We remain focused on business development and had several noteworthy achievements in Q1. We closed the acquisition of PPL's gas utility and their Penn Fuel Propane business on October 1. Our utility team worked diligently to ensure a smooth transition for PPL Gas, now known as Central Penn Gas, and their 75,000 customers. We achieved the same smooth transition in AmeriGas for the Penn Fuel customers, who have now become AmeriGas customers in our mid-Atlantic region. We were pleased with the businesses' performance in Q1 and we're confident that the acquisition will be accretive to earnings in FY '09.

Early in 2008, we announced our intention to construct a new 11-megawatt power generation facility in Northeast Pennsylvania using recovered landfill gas to power the turbines. I'm pleased to report that the Broad Mountain landfill gas project was successfully commissioned in December. We're now generating and delivering Tier 1 renewable power into the PGA and power grid. This is a great example of a quality investment project that delivers a sustainable energy solution.

Finally, we expect to acquire our partner's 50% interest in our ZLH propane distribution joint venture later this week. This business, which operates in five Eastern European countries -- that's Poland, Hungary, Romania, Slovakia and the Czech Republic -- will become part of Flaga. While the business is still relatively small, we are excited about the long-term growth prospects for propane in Eastern Europe.

I would now like to turn it over to Gene, who will provide you with more detail on AmeriGas' performance in Q1.

Thank you, John. We are pleased to be starting the year with such a strong quarter. As Lon mentioned, we completed the sale of our San Pedro terminal in November, resulting in a gain of $39.9 million. Excluding this gain, EBITDA increased by $31 million.

But the big news this quarter was the stunning drop in the wholesale cost of propane. The average cost of propane in [Mount Bellevue] for the quarter was $0.80 compared to $1.51 in last year's first quarter. This rapid drop in costs contributed to an unusual expansion in our margins.

Volume for the quarter was essentially flat to last year. The benefit of 7% colder weather and the acquisition of Penn Fuel were offset by residential customer conservation and the effect of the weak economy on our commercial volume. The biggest impact has been on our forklift volume, where many of our customers are cutting back their shifts and reducing staffing.

We're also closely monitoring the impact of the weak economy on our customers' ability to pay their bills. We've increased our staffing levels in our collections group to make sure that we can stay in touch with our customers and increase our bad debt reserve to a level that we judge to be realistic, given the current situation in the economy. In fact, most of the increase in expenses in the quarter was due to this increase in our bad debt reserve. We did benefit from lower diesel and gasoline expenses in the first quarter, but this benefit was more than offset by the higher bad debt and general insurance expense and expenses related to the Penn Fuel acquisition.

We also made progress last quarter on our strategy of growing distributions by 5% and EBITDA by 4% per year through a combination of acquisitions, growth in ACE and strategic accounts, and growth in our traditional customer base. We completed the acquisition of Penn Fuel on October 1, and for the first quarter, EBITDA from Penn Fuel was well above our pro forma. We continue to review a number of attractive acquisition candidates and expect to close several deals between now and the end of the year.

ACE cylinder transactions were up about 3% for the quarter. We continued to roll out additional 7-11 locations and have had other retailers express an interest in selling cylinder exchange through their locations.

Strategic accounts volume was also up 3%. Growth in the number of strategic account customers more than offset a drop in usage per customer due to the weak economy. We were particularly pleased to add over 1000 BNSF locations since last year.

For our base business, our new customer growth was about flat to last year. The weak housing market continues to impact our customer gains. We're putting our best foot forward in this tough environment by focusing on improving our customer service and our salesforce effectiveness.

While we're very pleased to have started the year with such a strong quarter, we still have most of the year ahead of us. It is unclear how the economy or weather may impact our volume or our margins for the balance of the year. With that in mind, we're increasing our guidance by $20 million to $335 million to $345 million, excluding the $39.9 million gain on the sale of the San Pedro terminal.

I would like to finish my comments by thanking our employees for keeping up with customer demand this quarter. While our volume is flat overall, it was up considerably in the Northeast and the Midwest, which has put significant pressure on the propane supply chain. At the same time, there have been a number of curtailments at key pipelines and marine terminals. As usual, our Houston supply team and our employees in the Northeast and Midwest have been doing a commendable job of responding to make sure we take care of our customers.

Now I will turn the call back to Lon for some concluding remarks.

Okay, thank you, Gene. Let me leave you all with the following thoughts as we end our prepared remarks.

As you are likely aware, we ordinarily don't comment on guidance at the end of our first quarter. There are a number of good reasons why we do not, including the fact that the bulk of our earnings come in the October to March timeframe, and there is a significant portion of winter weather that has yet to be experienced.

We're going to make an exception this year, and as you saw in our press release, we did make an exception this year, because we have enough visibility to know that, given our first-quarter results and our assessment of January thus far, our prior guidance is likely to be low. Thus, we raised our guidance for UGI to $2.30 to $2.40, including the $0.10 onetime gain, or $2.20 to $2.30 without it. And for AmeriGas, we raised guidance to $335 million to $345 million of EBITDA, excluding the nearly $40 million gain on the terminal.

Again, I would like to point out that in raising our guidance, we have not become any more clairvoyant on winter weather, wholesale product costs or the economy than we normally are at this time of year. However, given what we know of the first quarter and of January, and given our assumptions that weather will be relatively close to normal, that wholesale product costs will neither rapidly rise nor rapidly fall from here, and that the economy will continue to experience difficulty, we certainly believe our forecast to be a reasonable one.

We obviously are having and are going to have an excellent year financially. Of course, we are thrilled about our performance in these challenging times. We recognize that we cannot, however, count on rapidly falling product costs in the future to drive our profitability or fuel our growth. Thus, we're continuing to focus on improving our businesses so we can meet our long-term financial goal of growing our earnings per share 6% to 10% annually in the case of UGI and increasing UGI's dividend by 4% a year, and in the case of AmeriGas, growing its EBITDA by 4% annually and raising its distribution 5% a year.

Thus, we're continuing our focus on improving our operating efficiency in all of our businesses, as John said, also on driving improvements in a variety of our programs, including our safety program, and on the marketing side, providing our customers with innovative offers to grow internally.

We are also keeping a watchful eye on potential acquisition opportunities which might arise as others either run into difficulty or refocus their business goals. Finally, we're continuing to make progress in pursuing our internal investment opportunities that we have discussed from time to time.

As Peter said, our financial condition is quite strong. Our balance sheets are in excellent shape. We have access to capital. And, importantly, we have cash available for investment. All in all, while we are not immune from the difficult economic environment in which we find ourselves, we are in excellent shape. We expect to have a very good earnings year. And we are moving forward to build for the future so that we don't find ourselves relying on factors beyond our control to grow this Company profitably in the future.

That's the end of my prepared remarks and the end of our collective prepared remarks. So we would like to open it up for questions now.

(Operator Instructions) Shneur Gershuni, UBS.

Just a couple of quick questions here. You've provided so much detail in your analyst statement. I'm buried in ideas here that I want to ask you about. But just to start off, you talked about looking at distressed opportunities and so forth. Are there any specific areas where you are looking to invest more? Is AmeriGas becoming a target as an area to add gallons more aggressively, or are you looking at Energy Services, Europe and so forth, or is it just really whatever the NPV says?

I think, as I learned from -- if you saw at our annual meeting yesterday, Dick Bunn, who is one of our senior executives for many years, and when he was asked a question like that, he would say, yes. And so in a sense, the answer truly is yes. We have said many times we will pursue opportunities within our overall vision of an energy marketer and distributor. We do see potential opportunities across the broad spectrum of all of our businesses, internationally in propane, domestically in propane, as well as in the utility and energy services area.

So we don't have any favorites. And the last comment you made is an important one -- that is, they all have to have an IRR that is satisfactory to us, that contributes as opposed to detracts from valuation, and finally, that it is something that, from an earnings standpoint, makes sense. So I can't identify any specific areas for you.

Is it looking riper? Are people approaching you guys? Are you looking at more opportunities now?

Notwithstanding the press accounts on the death knell of investment banking, I can tell you that certainly the people we know and have dealt with over the years are still alive and well and kicking. And so a lot of things are coming through. The [trends] may come in through more formal means. But we have our ears to the ground. We have development people out kicking the tires as well. So there is no specific way they come in, but they do come in.

Okay. You had mentioned in your prepared remarks about the ZLH. You're taking them out of -- or you're ending the joint venture and so forth. Is that ending your JV across the board in Flaga or just specifically in the CEE countries?

We only have the joint venture in the Central European countries with the investment arm of [Tissen], the Tissen family. They have been a spectacular partner. They have chosen to direct their investments in a different way, and that's why they chose to exit the joint venture at this time. So we will own 100% of Flaga, as well as the operations in all the Central and Eastern European countries.

Okay. If I can just switch to AmeriGas for a little bit here, I calculate that conservation and economic impact is down about 7.6%. I mean, it is a rough estimate, obviously. How much would you say is part of -- due to the fact that propane prices are obviously higher at the beginning of the year just because of inventory, how much is kind of economics, and how much is true conservation and the natural decline? Is there a way to break that down, or is that --

You know what, it is pretty hard to. We have taken stabs at it, obviously, and numbers in the ballpark that you mentioned are reasonable numbers, although you are more precise than even we are. The clear volume shortfalls we see in some of the commercial categories -- Gene mentioned motor fuel -- Gene, you may want to comment on that.

Sure. Forklift is -- what we call motor fuel is primarily forklift business, and that is where we see the biggest shortfall. And a lot of our customers there are the freight companies. So they've cut back on shifts typically because they just aren't moving as much equipment. So that's where we've see the biggest difference. The trouble looking at something like conservation at this point in the year is you really have to wait until the end of the season before you can come close to measuring the impact. So that is easier at the end of the second or the third quarter than it is right now.

Yes. As you know, in this business, it's not like the natural gas business, where it's constant flow. Here it's when do people call for deliveries and how much are they delivering and are you short-filling tanks because of supply disruptions. And so there's a number of things that go on that Gene's point is very well taken, that you've got to wait until you get a full season in before you can get a better sense of that. But without equivocation, the commercial industrial volumes are being adversely affected by the economy.

Clearly, I understand waiting until the end of the season. It's just it's not that often I get the gift of a normal weather quarter to actually look at it.

Yes. We wish you more gifts in the future.

One last question with respect to AmeriGas. I remember you talking in the past about technology implementations and so forth. I kind of wanted to see where you are at with that and where it is going and how that is coming along.

There's a number of projects, large and small. The largest, Gene, why don't you answer it and talk about Project Foundation, I guess, that we've talked about?

We have something called Project Foundation, which is essentially software replacement projects that we are pursuing. But that software upgrade will allow us to do some things like employing better routing and scheduling technology. And that is where I see a lot of our technology investment for the next few years that we think will improve the productivity of our deliveries and customer service. So that is the biggest area of focus for us right now.

Have you started this process at all or is it still--?

Yes, we've started the process of the software replacement, software upgrade. We officially kicked it off January 1, and that is a process that will take several years to unfold.

We have also done -- one of the beauties of AmeriGas is you get the opportunity to take a certain geographic area and experiment with a variety of technologies. We had one area of the country that we run on a centralized basis versus the rest of the country, where we run on a decentralized basis, to make sure that we can get these economy of scale benefits that we think -- we are experimenting with routing software in different parts of the country as well, anticipating the successful adoption of the new software. So we've got a variety of initiatives out there that contribute each year to our efficiency. But the biggest bang for the buck will come several years out with the Project Foundation.

Darren Horowitz, Raymond James.

Gene, on the AmeriGas side, aside from Penn Fuel's volume growth, has there been any change to your expectations for organic retail propane volumes built into that revised guidance?

I think we would continue to expect to see the impact of the economy on our commercial volumes. We've certainly factored that into our numbers. Weather is always a wild-card. And we will continue to pursue acquisitions, of course, but that is probably the sum of it.

I would add just the one thing, Gene. You might want to talk about where we stand on growth, internal growth, versus the prior year.

Internal growth, for ACE and strategic accounts, I think I mentioned we had about 3% volume growth in both of those. We continue to add customers in those categories. The strategic accounts is kind of interesting, because we have seen the forklift customers that make up a significant percentage of our strategic account business drop off. But we've been able to offset that with new business, primarily the BNSF business that I mentioned, those 1000 locations, and other railroad accounts, where we have developed some expertise that we think allows us to serve them better than a lot of our competitors.

When it comes to the traditional base of residential and commercial customers, we are in about the same position we were in last year, basically flat. That probably will continue to be the case until we see some turnaround on the builder side, because we do get a lot of our growth there from builders. And we still haven't seen much builder growth. So we are flat to last year in terms of the rate of growth in that part of the business.

I appreciate your color. Switching gears over to the debt side for a minute, you mentioned the Series D 7% notes that are maturing in March. Can you give us a little color on what you are seeing out there in the debt market today with respect to possibly replacing these notes or further enhancing your liquidity, just being opportunistic?

Yes. We are obviously out talking to people at the moment. As I mentioned in my remarks, we actually put in place some five-year debt for the utility in October and an extension of the revolver for working capital needs for -- a [fuel turn] extension for AmeriGas back in November. We are reasonably confident that we will be able to refinance the $70 million. We've jut got to decide what is the best way to do it for us, what is the cheapest way, and when is the best time to do it.

And then quickly, just a housekeeping question, and I apologize if you mentioned this. What did you say the level of bad debt reserve was?

We didn't. We don't give out a level of bad debt. But the reality is we did book more bad debt across the businesses this quarter.

Carl Kirst, BMO Capital.

Nice way to start off the year. Lon, since you've brought in sort of the assessment of January, and understanding we're not clairvoyant here on the margins, but clearly a great help in the first fiscal quarter, can you give us some sense of where you have actually seen margins come down to, or have they come down to, from both AmeriGas as well as international, January versus this last calendar quarter?

Yes, let me do it qualitatively for you more than quantitatively. Product cost has gone up over the course of the last 30 days, somewhere in there, and particularly more so in Europe than it has in the US. And it is not a question of inventory shortages by any means. It is just there have been dislocations in supply in certain regions. And so basis, if you will, gets higher.

There is some product difficulty, getting some product overseas, because some of it was tied to the Russian gas issue and people were trying to get product to cover for that. But you have seen both -- all kinds of LPGs increase in price in the last 30 days. And so while it may not have an effect immediately on margins because of average inventory situations and it gets diluted by sales in the way one normally calculates inventory, one would expect that to have some effect on margins as the rest of this quarter goes.

Again, as I said earlier, when you have a rapid decrease in cost that is sustained, there are opportunities to expand margins as banks expand margins in lending. Similarly, last year in Antargaz, you may recall, we had lower than typical margins when there was a significant increase in costs, and they were unable to pass through that cost increase as rapidly as one does, say, in the US.

So we are quite satisfied where January sits. And I don't think we're seeing anything untoward in the marketplace in terms of people becoming super-aggressive or anything. But we are careful to price ourselves independently of costs as we watch what the market does. And we are mindful of passing on to our customers the benefits of lower costs, as they are all stressed, and we want to make sure that we do the right thing. So it is a combination of a variety of factors -- higher costs, the normal passing on of lower costs as you get them, that I believe will affect margins as we go through the rest of this year.

I appreciate that color. Maybe kind of as a follow-on, back in November, I guess at the last call, I think there was a comment made that the industry wasn't, on a retail basis, rushing to follow prices, follow prices down. And as we sit here in January and we have now seen products, indeed all NGLs come up a little bit, you mention that you're not seeing people being super-aggressive. Is there the potential of the retail prices still coming down, or are now what we are seeing is basically retail prices having essentially flattened out, people aren't being very aggressive, and so it gets to be really more of now a wholesale price gain to determine the margin going forward?

It is always hard to figure out what other people do. But I can tell you, general observation, EIA puts out data every week during the winter on their survey of retail price activity and retail cost activity. And we have seen in recent EIA things that retail prices appear to have leveled off, based on that EIA survey. And given where EIA is reporting margins to be and prices to be and costs to be, my expectation -- I would be surprised if we saw people trying to recoup some of that product cost increase in higher prices. But it is just hard to predict -- you know, I can't predict everybody else's behavior in the marketplace. But we do have methods where we try to make sure that we are competitive and we are doing the right thing by our customers.

No, that's very, very helpful. Thank you. You mentioned Flaga, the difficulty of getting the propane because of the Russian-Ukraine gas row. Does that actually have any positive benefits to Flaga as far as kind of an alternate fuel, or is it something where we are not really necessarily competing against pipeline LDC gas?

John, do you want to talk to that?

Yes. That's a good point. What we found is in, particularly in the areas of Eastern Europe that were most impacted by some of the problems with the pipeline through the Ukraine for natural gas, and that's portions of Slovakia and portions of Poland, we have had, now are having active discussions with a number of industrial and commercial accounts who are looking to put in propane systems to use as backup systems to be able to run on a dual-fuel basis, pass demand charges, and obviously commodity charges when they switch from natural gas to propane.

We are actually in a very good supply position across all of Flaga, including the Eastern European countries. We source from all across Europe and source some product from Russia and Kazakhstan and just a broad range of supply sources and in a good storage position. So we have really been unaffected by what we have been reading about with the natural gas pipeline. But as you might expect, you've got a number of customers, particularly commercial and industrial customers, that we're very concerned, and it has turned into a nice commercial opportunity for us.

Great. We will keep our ears -- eyes peeled for that. And last question -- just on the Pennsylvania filing, there was mention of some conservation programs. Do I take that to mean there wasn't sort of a specific decoupler asked for? I guess I'm just looking for a little more intel on what the conservation programs were in that filing.

No. Pennsylvania is not a big decoupler state. And so, on the other hand, the commission historically has been supportive of programs to help people conserve, be they energy efficiency programs with appliances, be they installation programs, be they some programs that are a little bit more newer than some of those older ones.

But we are very mindful of trying to help out our customers. I would tell you our Public Utility Commission is equally mindful of trying to help out people who are experiencing difficulty, not only the lowest-income people who've got [lie heap] and things, but also other customers. And they haven't lost sight of the energy crisis we had. So we want to be proactive in going forward to the PUC and advancing some programs and seeking their support for those programs. But to be specific, there's no decoupling going on.

Okay. And then, I know there was a mention of sort of the nine months, perhaps, in the review process. Should we assume that settlements always remain an option?

Oh, yes. No, we will work with the commission and all the various affected parties. And there are many who've got a shot at [a June] rate case, to work with them and see if we can settle it. Our statement on the nine months is that normal regulatory process -- and we find that -- and whenever you're trying to increase prices, that people aren't in a hurry to allow you to do that too much in advance of the nine-month period. But we have settled things in six or seven months from time to time.

The scale of what we are asking for and the statements we have made over the years and the fact that we don't go in on our other utility when we don't need it I think gives us an amount of credibility that, when we go in and ask for it, that we're not asking for things that aren't appropriate for us to get. So we're hopeful that the process will go well. We stand ready to discuss it with all parties. But in terms of advancing -- you all picking a date, assume it's the beginning of next year.

Ron Londe, Wachovia.

Can you give us a feel for what percentage of your current business is commercially oriented?

Roughly 40% is commercially oriented. Different segments are affected differently by the situation in forklift, which is a piece of that, is where we're seeing the biggest impact. Commercial and industrial, it's more weather impacted. So you don't see quite the effect there, at least so far.

Have you seen any change on the consumer level? I know when propane prices were very high, you had partial fills. Are you seeing more customers do full fills now, or are they still doing partial fill?

It is funny; I haven't heard of any real changes there in terms of the fills. I'm not hearing about people running out, like they were for a while, and saying stop at 100 gallons. On the other hand, where we have had shortages of product in a few areas, we have short-filled on our side, giving them 100 gallons instead of 200 gallons to stretch the volume. As John Walsh mentioned in his comments, in New England and the Pacific Northwest, there have been some shortages that we have been able to manage very effectively, but that has had some effect on those deliveries. But we haven't really seen a big impact of any kind yet, Ron.

And just to follow up briefly on what Gene said, one of the value propositions that we give our customers that oftentimes is lost on the financial community is security of supply. We own our own transport company. We are able to, in a shortage situation, move 100 transports to move volume from the middle of the country or the deep Southeast to the Northeast or the Northwest.

And we have gotten calls from many a competitor, large, small and all in between, out of gas, seeking our assistance. And we help where we can, of course. It's not a good thing for the industry for people to run out. But we have gotten calls from a lot of customers saying our supplier can't supply us; can you please give us? So we're, in that kind of environment, we're making sure that we get our customers fully cared for. And as Gene said, we have been short-filling some of those customers ourselves. And so, presumably, that volume gets reflected in future months as we go forward.

You stated earlier that your goal was a 5% distribution increase at AmeriGas. I see that you have the $39.9 million gain on the sale of the California propane storage facility, which is about $0.70 a unit. Do you expect any special or additional distribution to cover the tax consequences of that?

Yes. As you may recall, Ron, when we put out the release on that transaction, we said the Board would likely consider what they wanted to do with that when we got through the winter, which would be kind of the April timeframe, to consider that. They have not yet considered what they want to do with that. So tune in until April and you'll get a better indication.

Ryan Rosenthal, Sidoti.

A couple questions. First, I guess, regarding the cost side, can you take me through your different segments and particularly AmeriGas? I was impressed with the costs in terms of the moderate increases we saw across the board. Has there been any special initiatives to work on that?

Do you mean the operating expense side?

Yes.

Gene, you might want to comment on that generally.

We always have initiatives aimed at trying to improve productivity. This year, we're particularly focused on delivery productivity and trying to improve delivery productivity. But we do get -- we did have the benefit of lower fuel costs because of the drop in diesel and gasoline that helped us. That certainly was an advantage. And our costs don't rise in direct proportion to volume. But other than that, other than the delivery productivity initiatives, I wouldn't point at anything in particular on the expense side, other than the savings that we achieved on fuel.

Okay. And I guess following up with that, in terms of your integration of PPL's natural gas utility business and also the propane operations, has that been completed in terms of the onetime cost issue?

Well, I will answer it for AmeriGas and I will leave it to John to comment on the utilities. On the AmeriGas side, we really won't finish the integration process for another probably six months. We've still got -- there's quite a bit that you do. We have done some of the initial integration, but some of the systems integration still has to be completed. And they'll be changing over names of trucks and things like that. So for the next -- for the first three months and the next six months, we will still have integration expenses.

And in terms of the PPL Gas integration, it's similar to AmeriGas, that significant transition expenses certainly have been incurred in the major transition in terms of bringing the customers over, getting people on board, is well behind us. As we look out, we have a several-year plan in terms of integration that really cuts across the now-expanded utilities business. Since we, just over two years ago, acquired PNG and now we have added Central Penn, we're taking advantage of the opportunity to combine facilities and align and streamline our infrastructure. We have taken a number of steps over the last few years that was following the Penn Natural acquisition. We will continue to do that with the opportunities provided to us with the CPG acquisition. But the most significant elements of the integration have been accomplished.

And, Ryan, I suspect you know this -- the operating expense improvement or results would have been better but for the fact, as Peter mentioned before, bad debt expense was taken up responsibly because of the difficult economic environment that is out there. And what you are finding with us is we have five or 10 programs to improve efficiency in all of our businesses. Propane is a difficult business to have one program driving through everything, unless you've got a technology platform that supports it. And that is why we have tried to get operating improvements in Westlake through the centralized model, and we're going to develop these software solutions to help us manage the business more effectively.

I appreciate the comments on the cost side. If I could switch over just to the electric utility energy services businesses, if you will, in terms of the rate cap expiration in Pennsylvania, how do you foresee that impacting both of those businesses going forward?

I will take the electric utility first. Our electric utility came out of rate caps -- eight years ago? It has been about eight years. Yes, maybe '01 or so. And we have had a series of settlements with the commissions where we went out and bought power and have been able to resell that power to our customers. So we don't see any exposure to ourselves in terms of a price shock to our specific customers.

We have, under a PUC-approved plan, been buying power for our customers, and the results of those power acquisitions have been quite favorable. And so as we sit today, we don't see any rate shock for our customers.

On the other hand, some of the larger distributors in Pennsylvania have announced that they expect to see fairly substantial price increases to their customers. Given today's environment and depending upon how much purchasing they have done, some of those increases may not materialize or they may be less than they anticipated. But without question, virtually all of the other companies who have not been out of rate caps, their customers will experience higher and in some cases significantly higher prices.

So, for our utility, it is not a big deal because we're in pretty good shape, having been out of rate caps and having bought a good bit of power for the next three, four years, two, three years, so that we're sitting okay.

On the energy services side, it is an opportunity. We do sell against utilities, both electricity and natural gas. As these rate increases occur, several things will happen. It will make natural gas even more competitive. It will make even potentially propane more competitive, certainly more competitive, perhaps, than it is today. And that, together with the carbon footprint of natural gas and propane, may present some nice opportunities for conversions or to take some market share away from electricity.

In addition, on the energy services side, it will present opportunities to the marketing group, who may be able to compete much more effectively in the future against utility rates and therefore be able to grow that segment of the business more aggressively. So it's got some real benefits to all of our benefits as these other companies come out, and we're looking forward to that day.

Barry Klein, Citi.

What was the earnings impact of the weather versus normal for each of the segments?

We don't break that out in particular because -- I forgot what presidential candidate it was or president it was who said voodoo economics, in a way. It is a very hard thing to do. And when you make a weather adjustment, you get something called other that you always get and you can't explain in there. We take shots at it. We are methodical, and we do have methods of adjusting for weather. But we don't generally make those public. We will tell you that weather adversely affected or it helped, but we don't go into excruciating detail on it.

Got you. I think you said AmeriGas growth on earnings of about 4%?

Growth on EBITDA of about 4%, yes.

Does that infer the margin declines that you took you said might occur next year?

Generally speaking -- let me try to put all of that in a context, because that is a good question. When you look at UGI and you look at AmeriGas, we have set financial goals for them, in addition to our strategic goals. Those financial goals are, over time, to grow our earnings per share 6% to 10% in UGI and to grow AmeriGas EBITDA by 4%.

There are occasions when we exceed that, and usually it is in connection with what I will call a onetime event of some kind. For example, when we make a major acquisition, obviously, we are going to, in the year following the acquisition, we're going to exceed a 6% to 10% number if it is enough of -- if it's a large enough scale acquisition. That also shifts the paradigm because that acquisition is recurring every year. So it is reasonable for all of you to expect if it is UGI, 6% to 10% growth off that new base going forward, and for AmeriGas, same thing. If they shift the whole curve up by an acquisition that is of scale, you should expect that as well.

There are times when the onetime events that occur are likely not recurring. As we said during our comments, all of us, the scale and rapidity of the drop in wholesale prices is not likely to be repeated very often. And so we would tell you that the earnings that you get from AmeriGas or UGI in a year like this will be robust, but it is not a permanent shift in the curve of the 6% to 10% or the floor.

So it is way too early to give any guidance for 2010 for us. We've got nine months, eight and change left of this year, to manage and for us to keep working on our strategies. But I think the sort of, if you will, cautionary note that this is not, absent some event, the drop in commodity costs is not recurring. What happens to margins? There may be a permanent shift in margins; we don't know what the industry will do and what competitive pricing will allow.

And so our view at this point is we don't have any visibility on that issue. And what we want to do is raise what we would call a yellow flag, that the nature of this year's jump in earnings, which are likely to exceed our goals, as we point out -- just do the math -- is such that it may not be replicatable in future years. And so you've got to return to the normal 6 to 10s and 4s that we talk about. So, not a bad thing, incidentally. This is a great year, and the potential to build on it exists. But we are a full eight months and change away from being able to have visibility into 2010.

Got you. Broad Mountain and the ending of the JV, taking 100% of Flaga, is there going to be any significant earnings impact? And also, has that been included in your guidance, in the earnings --

It is a modest earnings impact. So it's in the guidance. A modest good earnings impact.

Got you. And can you give us any of the details on the rate case -- what sort of rate base you applied for, equity component, and if you can, your current ROEs on those divisions?

Yes. There's -- do you want to do that, John?

Yes. If you look at the rate base in PNG, it is about $425 million, and the rate base in CPG is about $255 million. We have proposed -- well the current ROEs are in the neighborhood and calculated for purposes of submission of the rate case of about 2%. We have applied for ROEs of 12%. That is assuming a roughly 50-50 debt-equity ratio.

We are, as John just stated, we are significantly underearning in both PNG and CPG. That is attributable to a variety of factors, including the investment of capital that we make, the drop in revenues that has been experienced due to conservation across the board by our customers. And so the returns we are earning in those businesses are not what are proper under the law in Pennsylvania and not an adequate return for us. And so we filed for ROEs around 12%, as John said, and we will see how the discussion goes.

Got you. That's 2% of the current ROE at both of those divisions?

Yes, roughly about the same.

Got you. Just one last question on liquidity with the revolver, on how much is available on the revolver, and how much long-term debt do you have coming due in the near term?

Let's take the last question first. Long-term debt coming due, we have $70 million of debt at AmeriGas coming due this year, in March, then $18 million in 2010. And then the next biggest one is EUR380 million in France in 2011. So really, we don't have any significant long-term debt coming due. So we're in great shape there. From a revolver prospective, AmeriGas has a revolver of $250 million at the end of December there. The $146 million pool has obviously since gone down since then.

$146 million available, or (multiple speakers)?

So we've got about $100 million available. Utilities, $350 million revolver, had used about $283 million. Energy services has -- it's not a revolver; it's a receivables credit line of $200 million and had about $88 million used. Antargaz has not used any of its revolver.

How much do they have?

EUR50 million. So from a liquidity perspective, we are in really, really good shape.

Generally, working capital peaks in that December timeframe. And so as January has progressed, those numbers come down as you begin to collect and you work your inventories out of your system, et cetera.

It appears we have no further questions on the phone at this time.

Okay. And to wrap up for everybody, we are truly happy about our results for this quarter and our prospects for this year. This is a tough environment, and to have results like this in this difficult environment is a testament to every one of our business units and the strategy we've put in place for so many years and the attention to execution that we have.

This is a difficult environment out there. We continue to make progress underneath the numbers, which is always important to all of us. We are executing on our strategies. We've got opportunities. We've got liquidity, capital availability. And we keep building on a tradition of success in this Company over quite a number of years now, where we have made our numbers and produced excellent returns for our shareholders, both at UGI and unitholders at AmeriGas.

Look forward to continuing to do that. We look forward to reporting good things this year to you. And I think the next official time that we will talk to you will be on the second-quarter call probably in the end of April sometime. If there is any cause to talk to you before then, we certainly will.

So thank you all for your attention and support, and we look forward to talking to you soon. Bye-bye.

And again, ladies and gentlemen, this does conclude today's conference. We thank you for your participation. You may disconnect at this time.