UGI Corp (UGI) 2009 Q2 法說會逐字稿

Good day and welcome to the UGI and AmeriGas Partners second 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 Bob Krick. Please go ahead, sir.

Thank you, Michael. Good afternoon and thank you for joining us today. As we begin let me remind you that our comments will contain certain forward looking statements which the management of UGI and AmeriGas believe to be reasonable as of today's date only. Actual results may differ significantly because of risks and uncertainties that are difficult to predict and many of which are beyond management's control.

You should read the annual reports on Form 10K for a fuller list of factors that could affect results, but among them are adverse weather conditions; price volatility and availability of all energy products including natural gas, propane and fuel oil; increased customer conservation measures; political, economic, legislative and regulatory changes in the 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. These non GAAP financial measures including EBITDA, excluding the sale of a storage terminal by AmeriGas in the first quarter of 2009 are not comparable measures used by other companies and should be considered in conjunction with a similar number EBITDA and other performance measures, such as cash flow 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, Bob, and hi to everybody. I trust you've all had the opportunity to review our press releases covering not only the higher levels of earnings, but also the increase in dividend in the case of UGI and the increase in the distribution in the case of AmeriGas.

We're obviously quite pleased with the 24% increase in earnings per share at UGI and the 9% increase in EBITDA at AmeriGas this quarter. This is also the time of the year when we formally consider the level of our dividend at UGI and the level of the distribution at AmeriGas. And consistent with our announced financial goals we're happy to share our success with our owners by increasing the dividend at UGI by 4% and the distribution at AmeriGas by 5%. Incidentally, this is the 22nd consecutive dividend increase for UGI and the fifth consecutive distribution increase for AmeriGas.

Our impressive performance this quarter was particularly gratifying to me because nearly all of our business units contributed to the earnings improvement. The only exception to that was our electric businesses which experienced lower earnings.

As I stated during our first quarter conference call we are not and were not immune from the difficult economic circumstances that existed during this quarter. In addition, our earnings benefited from the unusually rapid decline in wholesale commodity costs and the relatively benign weather we experienced during the quarter. These factors were of great assistance to us in navigating through the difficult economic times we experienced during the quarter. I'll have more to say about those subjects later in the call.

At this point, I'd like to turn it over to Peter Kelly who will then be followed by John and Gene and then I'll come back with some concluding comments. Peter?

Thanks, Lon. For the quarter ended March we earned $158.2 million, or $1.45 per share versus the $126.1 million or $1.17 reported in the same quarter of last year. For the first six months of fiscal 2009 we earned $2.50 compared to $1.90 for the same period in 2008. As a reminder the $2.50 includes the $0.10 gain from the sale of the AmeriGas terminal in the first quarter.

Clearly the second quarter performance was very strong and builds upon the excellent results we achieved in the first quarter. In particular the propane businesses both in Europe and in the USA have performed extremely well. Energy Services had a good quarter. Our gas utilities improved year on year, though our electric utility was weaker.

Looking at each of our businesses in turn, net income from our international propane operations was $54.5 million, up substantially from the $32.7 million reported in the same period last year. Volumes in our French business increased from 97 million retail gallons of LPG to 103 million gallons on weather that was 5.4% colder than normal and 17.5% colder than last year.

Volume in our Central European business, Flaga, following the acquisition of the remaining 50% in ZLH was 19 million gallons. The volume increase in international was in large part related to the substantially colder weather experienced versus the previous year. As John will discuss later we are continuing to see the benefits of our recent investments in the French cylinder business.

The additional weather driven volume plus the benefits of the higher than normal unit margins following the sharp decline of wholesale propane prices earlier in the year were the main drivers of the increased profitability.

AmeriGas Partners, our domestic propane business, reported net income attributable to UGI of $40.2 million versus $36 million reported last year. Again, up substantially. AmeriGas, as with our European propane operations, benefited significantly from the sharp decline in wholesale propane prices earlier this fiscal year and along with our European business we expect the impact of these higher than normal unit margins to diminish as we move through the year.

Volumes at AmeriGas were down 6.9% to 343 million gallons versus the 369 million reported last year on weather that was 2.3% warmer than normal and 1.3% warmer than last year. We believe that the current deterioration in economic conditions has had an impact on customer demand and in particular in the commercial and industrial sector and to a lesser extent in the residential sector. Gene will cover this in more detail in his remarks.

Energy Services had a good quarter expanding net income to $19.6 million from the $16.4 million reported in the second quarter of 2008. The growth in earnings was largely driven by our peaking services and asset management business that benefited from the colder regional weather. Our energy marketing business continues to do well with resale volumes at about the same retail sales volumes at about the same level as last year.

This good performance was somewhat tempered by lower total margin in our electric generation business with lower volumes due to plant outages and lower spot market prices as the economy softened as well as higher operating costs.

Net income from our gas utility was $41.8 million for the quarter ended March compared to $39.8 million in the previous year. Weather was 4.1% colder than normal this quarter and 5.7% colder than last year. System throughput was 56.5 billion cubic feet, an increase over the 49.6 billion cubic feet reported last year as we saw the benefit of the addition of Central Penn Gas and colder weather. The benefit to net income of the Central Penn Gas acquisition was somewhat tempered by higher provisions for bad debt, legal matters and pension costs.

In our electric utility net income was $2.8 million for the quarter compared to $3.5 million for the same quarter last year. Weather was 3.1% colder than normal and 2.2% colder than last year. Distribution volumes were down from approximately 279 million kilowatt hours in the second quarter last year to 273 million kilowatt hours in the second quarter of this year.

Although sales to residential customers rose on the back of cold weather they were more than offset by lower sales to commercial and industrial customers as a result of the deterioration in general economic activity.

Now turning to the balance sheet. At March 31st our total debt was $2.3 billion, up slightly from the $2.2 billion we had at September 30, 2008. Our consolidated cash position was $338 million, up from the $315 million reported in September. However, this does include restricted cash of $146 million as compared to the $70 million at the end of September.

Of the $2.3 billion of debt at quarter end approximately $2.1 billion is long term. AmeriGas closed at approximately $863 million with no amount outstanding on its revolver and in fact used balance sheet cash to pay off the $70 million maturity of Series D notes on March 31st.

Utilities closed at approximately $818 million including $178 million on its revolver. Antargaz, our French operation, closed at 380 million Euros, which is approximately $507 million with no use of its revolver. Energy Services closed the quarter with $88 million of its facility used.

Overall, I continue to be confident that we have the liquidity to run our business. Our balance sheet is strong, and once again we were able to access the capital markets. Earlier this month we were able to put in place an additional $75 million 15 month facility for AmeriGas and we were also able to extend our AR Facility at Energy Services through to April 2010.

As Lon mentioned we've increased our earnings guidance for 2009 mainly as a result of the exceptional performance in the propane business in the first half of this year, along with the benefit of a colder than normal winter in several of our service territories. And the benefit from our recent growth in investments the benefit from our recent growth investments in such things as Central Penn Gas and additional peaking assets.

Our expectation is that margins will return to more normal levels as we move through the year and the impact of the general economic decline will continue to impact customer demand. Contrary to the general industry trend I'm pleased that we were able to announce yesterday an increase in our quarterly dividend of 4%. We have raised our dividend in each of the last 22 years and also have the remarkable record of paying dividends for 125 consecutive years through all types of economic conditions.

With that, let me pass the call over to John.

Thanks, Peter. Our businesses delivered strong operational performance in Q2 despite the continuing slowdown impacting virtually all sectors of the economy. At UGI we pride ourselves on our ability to stay focused on core objectives regardless of external conditions. That focus continued to pay dividends in Q2 as we forged ahead on our three long term strategic objectives growing our core businesses, continuously improving operations, and reinvesting cash in high quality projects.

I'll first turn to growing our core businesses. Despite the obvious challenges presented by the slowing economy, we had success on a number of growth initiatives that delivered results in Q2. Recognizing that one of our primary growth drivers, new home starts, is severely depressed we shifted our focus and resources to other segments.

Our gas utilities delivered another solid quarter for growth. Year to date new account growth remains above prior year for both our residential and commercial segments. The growth in residential has been driven by conversions rather than new home additions. Growth slowed as the second quarter progressed and we expect that growth over the balance of FY '09 will fall below the levels achieved last year.

We'll continue to focus on conversion opportunities with electric customers within our gas service areas. These customers will see their electric rates increasing substantially over the next 12 to 24 months as rate caps expire for several major electric utilities in Pennsylvania.

One additional reminder on utilities. We continue to move through the review process for the base rate increase request filed with the Pennsylvania PUC in January. The requested revenue 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.

We're mindful of the potential burden that these higher rates could place on our customers. The proposed rate increase includes energy assistance program for low income customers and conservation programs for all customers. We're fortunate that falling natural gas prices will enable us to pass through lower gas costs to our customers; therefore, it is likely that our average customer will see a minimal increase in their total bill next winter. The review process for the rate request is expected to conclude late this fiscal year.

I've spoken several times in recent quarters about Antargaz's success with their cylinder marketing programs. The new products offered by Antargaz continue to be very well received by both major retailers and end use consumers. 41,000 new customers were added for our Calypso lightweight composite cylinders in Q2, while over 70,000 new customers were added for the [Car4] private label cylinder that was launched last year. Our success with these programs has enabled us to grow our cylinder business in France at a rate that outpaces the market.

Energy Services successfully concluded its winter campaign for small commercial customers. These customers have responded very favorably to our product service offerings. We've added over 2,000 new small commercial customers on LDCs in seven states over the past 12 months. We've enhanced our direct mail and telemarketing tools and capabilities to identify and win these smaller accounts.

On to continuously improving operations. I comment each quarter on our commitment to continuous improvement within our operating units. I'd like to focus today on our recently concluded project to integrate the customer information systems in our utilities business. This project was one of the final elements of the acquisition transition plan for Penn Natural Gas which we acquired in 2006.

The common platform, which covers all utility units except the recently acquired Central Penn Gas, improves the tools used by our customer service representatives enabling them to provide our customers with more timely responses to their inquiries. The shared system also provides us with significantly more operational flexibility as we manage our resource levels across several call centers.

We made the successful cutover to the common platform earlier this month. Last point on this, and certainly not least, the transition was seamless for the 550,000 customers supported by the system.

And finally, reinvesting cash in high quality projects. While the current economic climate presents us with numerous challenges we believe that it will also bring new investment opportunities as companies in the energy sector struggle with the downturn and the tightening credit markets.

On our last call I mentioned our intention to acquire our partners' 50% interest in our ZLH propane distribution joint venture. That acquisition was closed at the beginning of Q2. This business, which operates in five Eastern European countries, will now operate under the Flaga brand.

Our internal development projects for Energy Services are proceeding well. We're meeting critical milestones on pre construction phase activities, such as permitting and design for the $120 million expansion of our LNG peaking facility and our $125 million project to repower the Hemlock coal fired electric generating station as a larger gas fired facility.

Finally, each of our US businesses is actively pursuing projects related to the stimulus plan funding initiatives. Funds are being disbursed through multiple channels including state and local governments and federally funded institutions. We're likely to participate in collaboration with our customers on a range of projects involving both conventional and renewable energy solutions.

I'd now like to turn it over to Gene who will provide you with details on AmeriGas' performance in Q2.

Thank you, John. We're pleased to be reporting a $15 million increase in net income for the partnership despite the impact of the weak economy on our volume. We continued to benefit this quarter from the drop in wholesale propane prices compared to last year. The average cost of propane at Mt. Bellevue for the quarter was $0.68 compared to $1.47 last year. This dramatic drop in cost contributed to an unusual expansion in our unit margins, which are now beginning to trend toward more normal levels.

The 7% drop in volume was due to the impact of the weak economy on our commercial customers, customer conservation, and to a lesser extent to warmer weather. While the recession is reducing our volumes across all categories we've seen the sharpest drop in the volumes sold to our corporate customers. These customers are cutting back their shifts and reducing staffing or in some cases actually closing their doors.

Expenses for the quarter were virtually flat with last year. The savings we achieved on vehicle fuel were offset by increased incentive compensation expense related to our strong earnings and by higher medical insurance expense.

We also made progress in the 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.

ACE cylinder transactions were up about 4% for the quarter and we have also been able to improve the contribution from this part of our business by reducing the cost of packaging and distribution. Strategic accounts has felt more of the impact of the weak economy, but still managed to achieve a 1% increase in volume year to date.

We also have a healthy backlog of new customers that we have gained where we're in the process of installing tanks. Base business customer growth continues to be weak due to a lack of residential and commercial builder activity and credit issues with existing accounts.

Our strategy in this tough environment is to focus on improving our customer service and our sales force effectiveness. We've achieved improvements in the metrics we used to track customer service levels as well as the productivity of our sales team.

On the acquisition front the Penn fuels deal that we completed in October continues to earn more than we assumed in our pro forma and we completed two small acquisitions, Rock Creek Propane in Mammoth Lakes, California and Snowy Range Propane in Rawlings, Wyoming. We are working on a number of other acquisitions of quality marketers that should close before year end.

While we're very pleased with our results for the first half of the year looking forward we expect volume for the balance of the year to fall below last year's levels and margins to decline to more normal levels. These expectations are in line with the forecast we made last quarter of EBITDA in the range of $335 million to $345 million for the fiscal year excluding the gain of about $40 million on the sale of the San Pedro terminal.

I'd like to finish my comments by acknowledging that on April 15th AmeriGas celebrated our 50th anniversary. It was on that day in 1959 that UGI completed the acquisition of Ward Bottled Gas in (inaudible) Pennsylvania. This deal was followed up by a second propane acquisition a month later of Eastern Propane which added six locations in Pennsylvania and Maryland. Today, over 100 acquisitions later we have grown to be the largest propane company in the country with locations coast to coast and border to border.

I'd like to thank all the employees who over the last 50 years have helped build this company into the leader in our industry. Now, I'll pass the call back to Lon for some concluding remarks.

Thank you, Gene. I'd like to leave all of you with the following thoughts. First, we announced financial goals for UGI and AmeriGas as you know many years ago and we take those commitments very seriously. In that regard, we are once again meeting our commitment to you to raise UGI's dividend by 4% and AmeriGas' distribution by 5%. In addition, we will substantially exceed our earnings growth goal this year for both UGI and AmeriGas.

We have for the second time this year increased our guidance now set at $2.40 to $2.50 per share for UGI, including the one time $0.10 gain. As you know we like to look at earnings independent of those one time items as a better indicator of our earnings power going forward. Thus, if you eliminate that one time gain our guidance is more reflective of being $2.30 to $2.40. At the midpoint of that range our earnings growth for this year will be about 17%, far in excess of our 6% to 10% goal that we think is sustainable for the long term.

Similarly, AmeriGas will exceed its 4% EBITDA growth goal this year. If you use the midpoint of its reiterated guidance of $3.35 to $3.45 of EBITDA, again excluding that one-time gain. We are clearly pleased with this performance as you've heard from all of us as the extra cash resulting from the higher earnings levels is helpful to achieving our long term objectives.

I also want to emphasize what you heard earlier in the call that we continue to make important progress on our strategies for all of our businesses. John and Gene pointed out some of that progress. John also noted that we're in the midst of a much needed rate case for two of our gas utility units.

While we continue to make progress that I just spoke about we also need to remind you and we need to be mindful of the unusual items that contributed to our outstanding earnings this year, but that are unlikely to reoccur next year. Most notable, we've talked about several times, is the rapid decline in wholesale commodity prices and the relative stability of those prices thereafter. All of our propane businesses benefited from those factors in the form of higher than normal unit margins. This is something we do not expect to reoccur next year.

As you may recall to give you some recent history we had an analogous situation during our 2005 fiscal year. Our prediction that more normal margins would return proved accurate in our 2006 fiscal year. Similarly, we have accurately advised you when margins were under unusual pressure and when we expected them to recover.

Thus, as you consider our future prospects please keep in mind the balance of future opportunities that we spoke about with the unusual benefits that we had this year.

We have said many times that we believe we are capable of our growing our earning 6% to 10% a year as a long term trend. And we've been successful in doing so since 1998.

So, in sum, we're pleased to report excellent results to you for this quarter. We continue to make good progress in pursuing our business unit strategies and opportunities. It is a rare pleasure for us to tell you about an unusual factor that helped earnings this year as opposed to tell you about those unusual factors that depress earnings.

Our balance sheet remains in excellent shape. We've got good capital market access. We continue to generate excess cash for investment and we are keeping a watchful eye out for additional investment opportunities. And finally, as always, we remain committed to meeting our long term earnings growth and dividend and distribution increase targets.

So, at this point Michael, we would like to open it up for some questions.

Thank you very much. (Operator Instructions). Our first question will come from Barry Klein of Citi.

How's it going guys?

Well. How about you?

Good. I think Gene mentioned that you guys were reiterating the $3.35/$3.45 EBITDA expectations for AmeriGas.

That's correct.

With the increase in the guidance what's the main driver behind the increase in the guidance if not at AmeriGas?

For UGI there's several factors that affect the guidance and most of it's behind us, frankly, for the six month period. The performance we've had to date if you look at the performance we've had to date it's in probably this order. The international business has performed much better than the prior year. AmeriGas has performed better than the prior year. The gas utility has performed better and Energy Services have performed better than the prior year.

So, the only one who's been down is the electric business and all of you are familiar with what's going on in the generation side where prices are much lower and in our distribution side where we've got some increased power costs and increased expenses.

And if you look at the second half of our year when you do your math you'll note that that's lower than the second half we had last year. And that's really attributable to a variety of factors including the return to more normal margins at AmeriGas that we talked about, the lower volume that Gene talked about at AmeriGas, return to more normal margin at Antargaz Gas overseas and Flaga overseas and the continuation of the trend that we saw in our electric businesses where, again, as all of you know, electric businesses are not doing as well as they did in the prior year. So, that's kind of the balance of what's going on there.

Okay. What was the impact of weather on earnings for the quarter and year to date at the utilities?

We didn't do a calculation on weather this year because it was a little bit warmer for Gene for AmeriGas and a little bit colder for the utilities, but not that notably. And what you had normally mixed in there is decent core market volumes, but they were offset by the effects of the poor economic conditions in the commercial/industrial principally areas. So when you much those two together it's really hard to figure out where weather helped and the economy detracted. It's more difficult than it is in a typical year. But weather wasn't so noticeably colder that it had a huge difference, but the core market volumes were clearly up.

Got you. And one last question relating to the rate cases. When do you expect to put these new rates into effect?

The process in Pennsylvania is generally a nine month process. We filed in January. There's always a chance that rates can go into effect sooner than the nine months, but the Public Utility Commission did as they typically do to give them a chance to study the increases. They suspended the increase for the nine month period. We have hearings scheduled in kind of the June timeframe. Usually around the hearing times or shortly thereafter you make an effort to settle these things and if you can't be settled, a fully litigated case would be early October.

Okay. Thanks a lot for the time.

Sure.

We'll go next to Ryan Rosenthal of Sidoti & Company.

Good afternoon, everyone. A couple questions. First, concerning AmeriGas. I noted a 7% decline in year over year volume in terms of retail gallons sold. I wanted to better understand your guidance in terms of what your projections are for volumes for the second half of 2009.

We do expect volumes to continue to trail last year's volumes. We don't really have any visibility to a recovery in the economy and we have higher residential volumes in the winter. And in the last six months of the year more of the volume is commercial and industrial. So, we are being cautious in terms of our view of volume going forward and expect it to continue to be below last year's level.

Thanks. And in terms of your Energy Services businesses talking to that can you discuss some of the projects you have ongoing now including the [Hunt Lock] project and possibly the LNG peaking facility and if they're still going forward as planned.

Those projects are proceeding as planned for both in pre construction phase, so we're going through all the necessary permitting requirements and working with contractors on final elements of design. So, no surprises in terms of the progression of the project. No surprises in terms of anything we're seeing in the permitting process at the state or federal level. So, we're pleased with the progress to date.

Okay. I'll turn it over. Thanks for your time.

Thank you.

We'll go next to [Maggie Qualava] of Raymond James.

Hi. I was wondering if you could speak to the two acquisitions you mentioned for AmeriGas -- the Rock Creek Propane and Snowy Range Propane. How many volumes are expected from that? Is that a 2010 story?

They're relatively small deals and completing them at this time of the year you're past the heating season, so most of the volume will affect next year. It won't have a big impact on this year.

Okay. And then also I noticed that interest went down. Is that because of debt decrease?

You're speaking for AmeriGas?

AmeriGas, yes, sir.

Basically lower rate.

Lower rate? Okay.

Basically a lower rate.

Okay. Could I get the weighted average?

Why don't you tie into Bob on that later?

I don't have that in my file right now. I can get with you.

Generally speaking, it was higher borrowings at lower rates.

Okay. Great. Thank you very much.

We'll go next to Ron Londe of Wachovia.

Thanks. A couple things. It looked like maintenance CapEx and growth CapEx were both up the second quarter, which is I guess a little unusual because during those periods of time you're generally delivering propane and growing or spending money on growth. Can you give us a little insight on what was happening there?

Sure, I can give you some insights into that. First of all you know on our 10K we projected that we've spent about $87 million in capital for the year and I think we're still on a path to that kind of a number. We are making some investments in software replacement that's been happening during this time period. The other thing is we've been installing some new customers and ACE and strategic accounts and that's had some impact on capital spending. And that often happens during this time period before the season starts for ACE. So, those are the two principal drivers.

Last year you had about 36% of your volumes were commercial/industrial. Where do you think that that's going to end up this year? Obviously, it's going to be a little tougher environment due to the economy. Do you expect that to be 30%, 27%? Can you give a feel for it yet?

Just definitionally I guess residential last year I think represented about 40% and so nonresidential represented the other 60%. A portion of that is ACE, which you could call either residential because it's consumed in homes or you could call it commercial; whatever you want to call. And also resale for people to use at barbecues. But in terms of the percentage it might be slightly higher residential, slightly lower nonresidential, but it's not going to be a huge change.

Okay. Also, you talked a lot about margins kind of coming down. Can you give us a feel for the degree of margin contraction this year and probably into next year?

I think the best way to answer that is to make two points. First, we manage our prices based on a competitive environment, so that always is something we have to watch in managing our margins. However, on a long term basis we've been able to increase our margins to recover inflationary expense increases and a bit more than that. And what we see is over the long term margins returning to that kind of a trend. So, if that helps you.

I don't know if it helps or not.

Ron, I'll jump in because Gene said it the right way. If you look at the margins the first half of this year they're up substantially more than they would normally be up. And I think what Gene is advising you to do and advising everybody to do is you go back to a long term trend over several years and look at where the margins normally increase kind of as a level and if you compare the normal increase one would expect to see absent the unusual wholesale drop compared to where we are today that would ballpark it for you.

Look at our trend up to this point.

Look at the trend over the last few years. We do not expect let me take some doubt out of your mind. We don't expect margins to contract year over year. We do expect them to be higher than our trend line or on the trend line that we talk about, but this year truly was extraordinary with the drop in cost at exactly the time you have your volume.

And so on a weighted basis, you're getting all your volume when your cost is dropping marginal cost is dropping so quickly and you're reducing your prices to your customers, but its chasing itself on the way down. And so, your margins necessarily expand in that kind of environment even as you do decrease your price to your customers.

And so, once you get stability in cost as we indicated the price decreases stabilize the wholesale price decreases stabilize. You have the opportunity to reduce your prices to your customers to get your margins more in line where they would traditionally be given that trend line. So, that's why they're coming in. We don't want anybody to walk away from this call thinking that margins are collapsing or that margins are dropping to levels below that trend line kind of area that we would normally expect them to be. We don't see that yet.

Right. They'll be higher than last year, just not as much higher than they've been.

When you said "last year" you mean '09?

Our fiscal '08 which ended September 30 last year.

Okay. Also you talked about paying a special distribution maybe in August to counter the gain on the asset sale in California. Is there going to be is that on the K1 is that going to be a K1 item for '09?

Let me try to do this. Bob Krick knows the answer. The distribution would be

A K1 item in tax year '09.

The distribution will be a K1 item in '09, but as I understand the K1s it's really the income of AmeriGas. Distributions don't matter too much. So, for tax purposes it's when the income is received, which was last year, and the distribution cash will be received this year.

Okay. That's all. Thank you.

Thanks, Ron.

We'll go next to Carlos Rodriguez of Hartford Investment Management.

Yes, thanks for taking my call. I just want to follow up on the previous questions regarding the margin. I guess the expectation is that margins won't be up. I guess I understand that conceptually, but if we sit here and we look into the future for next year and propane prices stay the wholesale prices stay the same should we expect that the adjusted EBITDA per gallon should stay the same all else equal? Or are you suggesting that there are competitive pressures that would reduce that margin next year assuming the wholesale propane price stays flat where it is today?

Let me try to answer that as best I can. When you do EBITDA per gallon there's a numerator and a denominator. And so, there's the EBITDA number and there's the number of gallons you had. As Gene indicated, certainly for the period of time that we have visibility, which is the next quarter or so, we expect volume to be less this year than last year. And so, if you get no recovery in the economy and depending upon winter weather is it's certainly conceivable. Volume would be less next year than this year, so your denominator may shrink, which would have the tendency at a stable EBITDA to raise your EBITDA per gallon.

Understand.

Okay. The second piece is on unit margins. I guess we haven't been as articulate as we would like to be. Ordinarily if you go back three, four years in the industry and our performance as well there's been a trend line of unit margin increase in the industry. Fundamentally in our view and the way we think about it related to the ability to pass through inflationary increases and costs and compensate a little bit for other factors. So, if you looked at increases in margin over that trend line you'd probably see something in excess of inflationary increases in unit margin that have occurred.

This year if you looked at the increase you're looking at increases in excess of 10% in unit margins this year. And as we explained before, that's largely attributable to the fact that your spot price was dropping so fast as you were reducing your prices to your customers and Gene said it correctly we evaluate the marketplace as we do that. The prices to customers came down somewhat more slowly than the price decrease on the wholesale basis spot wholesale basis we saw. So, what happens is your margin expanded to a much greater increase this year over what would normally be expected in any business on a trend line.

So, we think in a stable product cost environment or an increasing cost product environment that you won't experience those factors again. If your belief is that energy commodity costs will crater some more and crater at the right time, which is kind of that August, September, October timeframe, it's conceivable that margins will grow significantly again, but that is something that we truly don't expect.

We expect stable to maybe rising product costs and in that kind of environment there's no reason why competitive conditions one would think competitive conditions would allow you to have unusually high margins. So, our expectation is based on a normal competitive environment, based on a stable to modestly or rising commodity cost, and in that environment we don't see any reason why one wouldn't revert to a stable competitive environment which has existed for the last three or four years. Is that more helpful?

Yes. I was just trying to abstract from the volume side of it, holding that constant and holding the wholesale price constant. I was wondering if we should expect on a per unit basis margins to stay the same or whether there's some competitive dynamic that would force the give up to customers of that lower wholesale cost to be passed through. I'm just trying to understand that dynamic, how intense that competitive dynamic is.

Let me try to address the competitive situation as we see it today. This industry is a low barriers to entry, highly fragmented industry in which there are thousands and thousands of competitors and the Top 10 players have, what, Gene? 40% of the market?

Right.

40% of the market. So, this is a highly competitive industry and in addition it's a flat growth kind of industry at best. The competitive dynamics typically in those industries are what we experience. It's competitive and you have to compete. We don't like to compete solely on commodities. We compete based on value that we deliver and we believe we deliver the safest, most reliable service in the industry. And so, we don't position ourselves as a low price player who's just selling a commodity.

That having been said, the competitive dynamic that we see out there is I would call it normal. Certainly, we don't see anyone going on huge market share campaigns, large or small. We do see the normal activity we see at this time of year when people are looking at reduced volumes. They experienced a difficult economic time and everybody wants to improve their situation for the following year.

But I wouldn't call it extraordinary in any way. I would call it kind of rather typical for an industry like this and typical of what we've seen in the past with the only exception being is that every marketer I can speak for every marketer. Certainly, we feel bad for the customers having experienced very high bills a year ago, having experience somewhat lower bills this year, and being in a very difficult economic environment. And I think we and I hope I speak for the rest of the industry want to treat all those customers fairly and make sure that we're charging a fair price for the value we give. But competitively, I would tell you it's a normal competitive environment.

That's helpful. Thank you very much.

(Operator Instructions). We'll go next to John Tysseland of Citi.

Hi. It's actually Unidentified Participant standing in for John. A quick question on your commercial and industrial volumes. How much of the lower volumes this year do you expect to get back if and when the economy recovers and how much of it is permanent demand instruction, if you will?

I'll speak about perhaps the utility side. You may be asking just about AmeriGas. But on the utility side as you know we're the only service provider by franchise. And so, to the extent one hasn't suffered permanent factory closedowns or permanent shutdowns of business and you referred to a more normal environment one would expect to get all of that volume back. I think on the propane side it's different, but I think the factors are roughly the same.

What we've seen in the past with forklift I mentioned forklift in particular because that's the place where we've seen the biggest drop. Usually when the economy comes back that comes along with it. When people start shipping things again we see the forklift volume pick up. And in fact, the forklift usually comes back a couple of months before the rest of the economy does. That's what we've seen in the past. This recession is a little bit different, so we'll have to wait to see how that turns out.

The only other point I would make when we talk about industrial and commercial, that segment, if you look across our businesses, utilities and AmeriGas as well as Energy Services, we're primarily commercial. We do have some industrial accounts, but over the last few decades a lot of that industrial base has left the northeast. So, we're most commercial and as Gene just indicated people are seeing a slowing in terms of their requirements or reduction. We would look for that to come back.

We're not looking at large numbers of industrial customers who are shutting down or moving their operations. It's really a large percentage of that is made up of commercial accounts who are seeing lower demand in their businesses, but as the economy recovers they'll see increased demand and that demand will flow through to us as increased gas or propane demand.

The trick is we can't give you any more visibility than any other person on when the economy will recover if.

That's what I was only trying to get a sense for the extent of demand instruction, if any. Thank you so much.

We'll take our next question from Ron Londe with Wachovia.

Thanks. You haven't talked much about the cylinder barbecue business except to say that it was up I think 4% in volumes for the quarter. What's the situation going into the summer? How many more locations do you have versus last year? What kind of volume? Do you think prices are going to remain flat with cost down to help the cash flow from that area? Can you give us any kind of an overview of what's going on there?

I think our locations right now are up about 6% to 7% from where they were last year just as we're entering into the season. So, that's certainly good news. As I told you for this last quarter we've seen about a 4% increase in volume. It's a bit hard to call how the economy might affect this business. You could speculate that people are going to grill more and go to restaurants less or they cut back on grilling. Depending on who you ask you get different predictions on that. Margins are fine in that business. We're not running into any unusual competitive issues on the margin side in that business.

Have you gained any large customers?

Well, I think I talked earlier about 7 11 and that we rolled out a bunch of those locations, which was a nice size customer.

Okay. Thank you.

We'll take our next question from [Aneil Latany] from Barclays Capital.

Hey, guys. Your operating and administrative expense line was flat year over year. How should we think about that for the remainder of the year? And also a housekeeping question. Can you provide a breakdown of retail and wholesale gallons?

I'll take maybe I can't give you the specifics. When we give you gallons we give you retail gallons principally. We don't combine the categories, I don't think, as some people do. It's in the press release statistics. We've got retail gallons sold for the quarter up $343 million versus $368 million. So, when you look at our stuff it's easy to tell what's retail because we just say its retail. The wholesale is not significant for us. Some companies combine the two, but we don't think that that is for us that's the right way to do it because wholesale gallons move around a lot and can distort what's going on.

On the expense side, I think expenses probably would be they've been flat for the quarter. They'll probably be a bit higher than last year for the balance of the year. We are making some investment expenses for the balance of the year, but we'll also have the benefit of lower fuel expense. Some of the same factors that I mentioned earlier, but modestly higher.

And also can you give an update of what your credit facility is?

For AmeriGas? Credit facilities?

Peter can give you what's outstanding under the revolver at quarter end.

At the end of March we had zero outstanding on our revolver. We have a facility at 250. In April we put in place a new facility for $75 million for 15 months. We paid off our Series D notes at the end of March and cash on our balance sheet. I think AmeriGas's liquidity is in terrific shape.

Thanks guys.

At this time we have no further questions in the queue. I'll turn the conference back over to Bob Krick.

Okay. I'll jump in for Bob Krick or this is Bob Krick with a different voice. Thank you all for your attention. We really do appreciate it. We, again, have performed quite well for this year and continuing our tradition of excellent performance. We do have challenges like everybody else going forward, but we are making the progress that we talked about and have the opportunities that we talked about as well. So, we look forward to reporting to you after next quarter's earnings and hope to see some of you in between as we do our road shows. So, thanks again for your support and we look forward to talking to you again in the future. Bye bye.

This concludes today's UGI and AmeriGas Partners conference call. Thank you for your participation.