UGI Corp (UGI) 2010 Q1 法說會逐字稿

Good day and welcome, everyone, to the UGI and AmeriGas Partners first quarter fiscal year 2010 earnings results conference call and webcast. This call is being recorded. At this time, for opening remarks and introductions, I would turn the call over to Mr. Bob Krick. Please go ahead, sir.

Thank you, Jay. Good afternoon and thank you for joining us today. As we begin, let me remind you that our comments will contain certain forward-looking statement 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 the events or circumstances occuring after today.

In addition our remarks today, we will reference certain non-GAAP financial measures 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 such as net income, net income per diluted share, net income per diluted partnership unit and EBITDA all excluding the sale of its storage terminal by AmeriGas in the first quarter of 2009 are not comparable to measures used by other companies and should be considered in conjunction with similar 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.

Thank you, Bob. Let me also welcome all of you to our call. I trust you've had the opportunity to review our press releases reporting our first quarter results. To summarize UGI reported earnings per share attributable to UGI shareholders of $0.90 a share compared to $1.05 last year. As Bob noted adjusting for the sale of a terminal by AmeriGas last year that comparison year-over-year becomes $0.90 versus $0.95 last year. Additionally AmeriGas reported net income of $84 million compared to $124 million last year. If you once again adjust for that terminal sale the comparison is basically net income is flat with last year. These net income numbers affectively translate into EBITDAs of $123 million this quarter compared to $124 million last year as we report.

Although we did not anticipate all of the conditions in our business units as you might expect that we incurred during this quarter, our financial results were in line with our overall expectations for the quarter. For example, we did not expect to encounter rapidly rising wholesale propane costs this quarter. However our propane business unit did an excellent job of managing both cost and price with the result that we were able to maintain margins at acceptable levels during this quarter. This contrasts with last year, as you may recall, where margins in our propane businesses were significantly easier to not only manage but to grow due to the rapidly declining wholesale cost environment we encountered.

Our overall results also reflect excellent management in all facets of our other business units as well. Peter, John and Gene will go into further detail on our results during the call. And when they are finished I'll provide you with some concluding thoughts. So at this time I'll turn it over to Peter.

Thanks, Lon. This morning we reported first quarter earnings per share of $0.90. This compares to the $1.05 reported for the same period last year. Although I'm sure you'll remember last year results included a $0.10 gain from the sale of AmeriGas's propane storage terminal in California. As Lon mentioned the $0.90 was pretty much in line with what we had expected.

This quarter we've reformatted our press release. So I'll be hitting some of the highlights on the profit performance rather than going through the detail that was in the press release. I'll then move on to a discussion of our balance sheet and liquidity. Overall volumes in the quarter continue to be impacted by the recession. And weather that was close to normal in the USA, though warmer than normal in our European operations. All of our businesses continue to manage expenses and included in this we have the beneficial impact of lower bad debt provisions following the improved processes we implemented last year in anticipation of the potential issues we may have had stemming from the recession.

If you remember, this time last year our propane businesses and in particular our French businesses unit margins benefited from the sudden drop in propane costs. In this quarter we've seen unit margins return to more normal levels in France and this along with warmer weather impacted total margins in our international business. Gas Utilities profitability improved largely as a result of the base rate increases of PNG and CPG as well as lower operating expenses. Energy services business improved year on year driven by higher volumes and unit margins and the GAS and POWERMARK-eting business as well as stronger peaking in asset management margins. In addition, electric generation results improved as we had less down time at our coal powered units compared to the same period last year.

Turning to the balance sheet. Our consolidated debt of approximately $2.3 billion was down on the $2.6 billion reported last year. As we have lower use of our revolving facilities and have paid off the $70 million of series D Notes in AmeriGas. Our consolidated cash position was $225 million, compared to the $292 million reported in the same period last year. Restricted cash included in these numbers was approximately $10 million this year, compared to the $116 million reported last year. Included in the $225 million at the end of this quarter, we had about $99 million of cash available at our holding Company to reimburse for growth. We would typically expect to generate on average about $110 million to $125 million of such investable cash each year. Of the $2.3 billion of debt that we had in 2009, approximately $2.1 billion is long-term debt.

Prior business and compared to the same quarter last year, AmeriGas had $891 million of debt, at a reduction of $188 million. Utilities had $819 million of debt, and a reduction of $104 million and the international business was approximately $616 million, up $22 million on last year. Mostly as a result of the purchase of the remainder of our central European business. We have no significant refinancing requirements before 2011. From a property plant and equipment perspective, we have just over $4.7 billion in gross fixed assets and $2.9 billion in net fixed assets, up from the $2.7 billion recorded in the same quarter last year. Capital expenditures were approximately $75 million, with depreciation and amortization of $53 million.

Turning to liquidity, and as I mentioned in October, over the last year we have seen unprecedented volatility and uncertainty in the capital markets but our traditionally conservative business approach, including minimizing exposure to individual counter partings, hedging to reduce risk as opposed to generating trading profits and having available substantial lines of credit have stood us in great stead. We have strong liquidity and the ability to fund our requirements throughout all of our operating subsidiaries. In utilities we have a line of credit in place for $350 million. We have $200 million of financing capacity in Energy Services. And $275 million in lines of credit at AmeriGas. At Antargaz we have a facility of EUR 50 million. At the end of December AmeriGas had used $24 million of its revolver and had a cash balance of $23 million. Utilities used $179 million of its revolver with cash available of $13 million. Antargaz Gas has not used any of its revolver and had $60 million of cash and Energy Services had an outstanding balance of approximately $28 million with cash available of $9 million.

So in summary, a good quarter. And in line with our expectations. With that, let me pass the call over to John to discuss our operational performance.

Thanks, Peter. Although the broader economic environment remains somewhat uncertain, we had a very solid first quarter. One of the highlights for the Company in the quarter from my perspective was our ability to retain our focus on UGI's growth initiatives. Therefore, I would like to use my time on the call to review key developments on the growth programs across all of our business units. Peter commented on the strong performance of our Energy Services business in Q1. Our team has done a great job of developing attractive new market segments over the past decade and those efforts continue to bear fruit.

We made noteworthy progress in developing two of those segments in Q1. GASMARK-eting to small commercial customers and POWERMARK-eting. For the past few quarters I've commented on the small commercial program in Energy Services. We have now added close to 6,000 new small commercial natural gas customers since the start of FY '09 and have great success in retaining those accounts when they've come up for renewal. Our POWERMARK-eting program, while still fairly small, ramped up considerably in Q1 with total megawatt hours sold increasing by 40%. We're particularly active in Pennsylvania where the large Electric Utilities in the eastern part of the state are coming out of long-term rate caps and customers are looking for alternatives. Our gas utilities business added approximately 3,400 residential and commercial accounts in Q1. The rate of growth has slowed since the first quarter of FY '09 with new account additions down about a third when compared to prior year.

On a positive note, we're seeing an increase in new housing starts across our service territories. Two of our core markets, Harrisburg and the Lehigh Valley were included on a recent Forbes.com ranking of fastest recovering metropolitan areas. Antargaz continues to deliver growth with their differentiated cylinder offerings which include the Calypso lightweight composite cylinder and the Carrefour private label cylinder. These two programs, both launched within the last three years, now account for over 30% of Antargaz butane cylinder sales and have enabled Antargaz to strengthen its position in this key segment of the French market.

Our two major capital projects for Energy Services are proceeding well. These projects are the $120 million expansion of our LNG peaking facility near Reading and our $125 million project to repower the Hunlock coal-fired electric generating station as a larger gas-fired facility. Site construction work has begun for both projects and key materials and long lead items secured. Both projects remain on schedule with Hunlock project completion anticipated in late fiscal 2011 and the LNG project in late fiscal 2012.

One final growth area worthy of comment is our Renewables program. Our Broad Mountain landfill gas project, which uses recovered landfill gas to power an 11 megawatt power generation facility recently completed its first full year of operation. Broad Mountain is one of the largest landfill gas recovery projects in the eastern United States. Our two megawatt solar project with Crayola is progressing well. This project, done in conjunction with PPL is expected to come online midyear. We remain active in our pursuit of renewables projects. Just last week we were notified by the Commonwealth of Pennsylvania that UGI received grants totaling $3.2 million for three solar projects under development in eastern Pennsylvania. We were also designated as a state approved solar design and installation contractor. We'll remain focused on developing attractive projects within the renewable sector while building expertise and capability as this sector evolves.

I'd like to conclude my remarks by thanking our teams at UGI and AmeriGas who responded so affectively in the aftermath of the fire last month at our Corporate Headquarters in Valley Forge. The fire occurred on the evening of December 16th. We immediately deployed our disaster recovery plan and our teams began recovery activities later that same evening. We had most of our essential people back to work at an alternate location within two days and all 350 of our AmeriGas and UGI Headquarters team back to work in our temporary Headquarters location by the first week of January. We expect to return to our Valley Forge Headquarters prior to year end. The good news is that no one was injured and our field teams and customers were unaffected by the fire due to the exceptional efforts on disaster recovery. I would now like to turn it over to Gene who will provide you with details on AmeriGas's performance in Q1.

Thank you, John. I'm pleased to be announcing EBITDA and net income that are essentially flat to last year's first quarter excluding the impact of the San Pedro terminal sale. Lower expenses offset the impact of lower volume and slightly lower unit margins. It was a challenge in the first quarter keeping up with rising energy prices. The average cost of propane in Mount Bellevue for the first quarter was $1.09, up 36% from last year. We started the quarter with a wholesale cost of $0.95, then the cost peaked at $1.44 in December and has now fallen back to about $1.32. That compares to $0.72 at this time last year. We have a good track record of responding to changes in the cost of propane and this quarter was no different.

We do recognize, however, that rising prices are not good news for our customers. Fortunately we do offer marketing programs which gives our customers the option to avoid this volatility. Our volume for the quarter was down 4%. On weather that was approximately 2% colder than last year. The recession and customer conservation continued to have a negative impact on our volume. Our operating expenses were $13 million or 8% lower than last year for the quarter. The biggest contributor to our favorable expense performance was lower bad debt expense. Given the economic conditions we targeted increased resources at our collections management effort and as a result our receivables aging has improved considerably from last year.

We also had lower general and health insurance expense based on recent loss experience. Payroll expenses were also favorable to last year due to a conscious effort to manage our staffing in line with our volume. I would also like to comment on the progress we made this quarter on our core strategies of growth through acquisitions leveraging our footprint through ACE and strategic accounts and by growing our traditional residential and commercial customer base through superior customer service. Our acquisition strategy is to add 20 million gallons on average a year. We completed four acquisitions in the first quarter, (inaudible) with about four million gallons. We have several other deals pending and we're encouraged by our backlog of deals in consideration. Ace volume was up 1% for the quarter.

We had a nice increase in the number of locations we serve, however same-store sales were down from last year. The shortfall in same-store sales appears to be weather related as regions with severe weather were down and other regions were up. Strategic accounts felt more of the impact of the recession. Strategic accounts volume was down 3%, despite an increase in the number of locations served. The good news is that when the economy improves, we should see a pick-up in our volume due to the Ace and strategic account locations that we've added since last year. The growth of our traditional base of residential and commercial customers is lagging this year, due to market conditions. We believe, however, that our continued focus on customer service will help mitigate the impact of the weak housing market and the weak economy on our internal growth. We did have some blasts of cold weather along with heavy snow and ice in some markets this quarter, that our team in the field had to overcome to keep us -- to keep up with customer delivery.

I'd like to conclude my remarks by thanking our employees for their commitment to our customer and for helping us to realize our vision of being the most reliable, safest and most responsive propane Company in each of the markets that we serve. And with that, let me turn the call back to Lon for some concluding remarks.

Thanks, Gene. As you gathered from listening to Peter, John and Gene that we are pleased with our first quarter results. As you heard in our comments as well as you might expect in any business, some things went our way during the quarter and other things did not go our way during the quarter. Thus the diversity of our business model once again reduced risk for you and permitted us to report overall financial results for the quarter which were consistent with our expectations and that applies to AmeriGas as well, where their results were consistent with our expectations. In addition, in both UGI and AmeriGas, we do not presently foresee any changes in the external environment which would cause us to alter our view of financial performance for those businesses for the remainder of this fiscal year.

Our business units continue to do an excellent job in pursuing their goals, and what is in our industries a difficult economic environment. We've not seen any firm indication that conditions for our customers are improving. Thus, demand has not changed noticeably this year for our products either from the consumer side, with unemployment being as high as it is, or on the commercial side, with the economic conditions remaining at low levels. Thus, as we move forward, we expect variations in demand will be largely dependent on winter weather conditions in our various markets throughout the next several months.

In the economic environment in which we find ourselves, we obviously remain diligent in managing our expenses and in carefully managing our margins. At the same time, we remain focused in pursuing our growth opportunities. In this regard, John mentioned a number of those and to reiterate, we are on schedule in our two large internally generated capital projects our expansion and conversion of our Hunlock electricity generating station and the expansion of our Temple LNG facility. We are also exploring a number of other capital projects, including projects in the Marcella Shale area where we have a significant presence as you know in our regulated natural gas businesses. And also as usual for us, we are on the look for opportunities to grow our business units through acquiring assets or businesses.

Peter noted our financial conditions strong, we have great cash generation and our balance sheet strength and our cash permits us to pursue value added acquisition opportunities when they arise. In summary, we are on target to meet our overall financial expectations for the year and we are executing on our various strategic initiatives. Thus, we look forward to reviewing our progress with you at our next call when, as you know, the winter will be largely behind us and we'll have a good idea for how the year is shaping up. With that, I'll open it up for questions, Jay?

(Operator Instructions), We'll go first to Carl Kirst with BMO Capital.

Good afternoon everybody and thank you for the revamp for lease. I appreciate the added data. First question I had was just -- and I know this is difficult with so many dynamics impacting, but with respect to the warm weather that was in France, is there any way to kind of parse out how much of the 14% drop in volumes you guys think is weather related at this point?

Yes, it's difficult to do it with any precision, Carl. Obviously when you have colder than normal weather in one year, and you have warmer than normal weather in another, to that extent, anything that is heat sensitive has a big affect in that volume. The other thing I'll point out for you is, last year we had a very strong crop drying year. And this year it went to another extreme. If you think of weather as colder than normal last year, and this year significantly warmer than normal, same thing with crop drying. Last year was real wet and crop drying was exceptionally strong and this year crop drying was very dry and as a result, that volume was also very weak as well.

I'll point out that it's a low margin business so it didn't hurt our financial results as much as the volume might indicate. But I would tell you that in that volume, you've got a good piece of the shortfall in the crop drying area and a significant shortfall in weather related volumes. Ordinarily volumes overseas are experiencing conservation like they do in the US. But our view of the volumes there is there was nothing, if you separated out weather and you separated out the crop drying, we didn't see anything that would cause us real concern.

Okay. So I mean typically I kind of tend to think of conservation for instance in the states, maybe sort of a continued low single digits and I guess just to your point, you're not seeing anything that is kind of making you fearful of an acceleration of that trend, we just have a lot of noise here with respect to the environment.

Yes. Unfortunately you had weather extremes and you had crop drying extremes. But to reiterate your point, conservation and the low single-digits is what we think of it as and we didn't see much beyond that yet in our businesses.

Okay. And two other questions if I could. Both more sort of a -- speak to structural and sustainability. The first on the expenses. It was certainly nice to see the reduction in the bad debt, the uncollectibles. Is this something where you think through the year we're going to continue to see sort of year-over-year improvements in expense?

Yes, two comments on that and I'll either let Peter or John amplify it. One is last year through the first half of the year certainly we saw a deteriorating trend in receivables and aging of receivables and hence reserves built during those quarters. We responded as a good management team would, we put a lot more resources in. We got some outsiders to help us and our folks did an exceptionally good job such that by the end of the year, we saw significant improvement in agings, et cetera. And that trend continued now into this first quarter.

So you could probably see another quarter or so of improvement in there, but I would tell you, one of the things we do is reserve based on revenues, as you go forward, and since prices are higher this year you're go to see some build in year-over-year in bad debt expense for that category of it but that will be netted against better performance. So, Peter, do you want to add? I don't see a big change to it.

I think you hit it on the head.

Okay, and the last sort of structural question just speaks to Energy Services. You guys had a great quarter and mentioned a number of things that drove that. I guess -- was trying to get a better sense of -- did one of those, whether it was the peaking in a cold December, or the fact that we had unhedged power prices this year, was there one thing in particular more than anything else that was driving it? And if what we have seen has been sort of a ramp up in the POWERMARK-eting, do you think we should be able to continue to see these year-over-year improvements as we go through the quarters in Energy Services, even before we get sort of the capital projects coming online, if you will?

Sure. Go ahead.

Hey, Carl. It's Peter. In terms of kind of general size, the biggest impact was the improvements in the MARK-eting business, both from a volume and the unit margin perspective. The electric generation was the kind of next impact but that was really a result of lower prediction facility outages more than anything else. And then peaking and asset management all came in behind them. But I think that the really big thing was our GASMARK-eting and POWERMARK-eting business.

And year-over-year, Peter, one would expect that trend to continue to some degree.

Yes. So you would expect the GASMARK-eting business to continue to do okay. Electric generation was an issue for us all year last year. But don't forget we did have in 2009 a part of our year hedged already and those hedges have now fallen off. So I would not expect the electric generation business to maybe improve quite as much as it did year on year in the first quarter.

When I mentioned, Carl, that certain things broke our way during this quarter to offset those things that didn't break our way so that in the aggregate we ended up pretty much where we thought we would end up, Peter accounted a couple of the things that broke our way this quarter so that they counterbalance some of the things you also astutely pointed out in terms of weather and overseas being a little light, et cetera.

Great. Appreciate all of the color.

Yes.

And we'll go next to Ryan Rosenthal with Sidoti & Company.

Good afternoon, everyone.

Hi, Ryan.

I just have one follow-up question here concerning the Marcella Shale opportunity. I had read that you had filed with the FERC to move some of your assets from the utility to possibly using for transportation assets from Marcella producers and that the FERC had taken issue with that. Considering that development can you discuss what your opportunities are and how you might go forward in both cases?

Sure, Ryan. This is John. On terms of the FERC filing, yes we're going through a process. So that's -- as you noted, we made that filing and that process is proceeding. They'll be ongoing reviews and we're still positive in terms of the process moving forward to a successful conclusion from our perspective. So we'll assess that as we go through this year but there's been no developments in that process that are a surprise from our standpoint. That is certainly one element, given the location of that storage field and for the north central Pennsylvania it's advantageous with regard to Marcella Shale.

We're also looking at a number of different opportunities, talking to producers, talking to other -- to the pipeline company, looking at essentially any opportunities we have to leverage our existing infrastructure that cuts across that Marcella Shale area particularly in the sort of northern part of Pennsylvania, central part of Pennsylvania which overlaps with our coverage or service territories for our three utilities.

So there is a broad range of opportunities. We have infrastructure that we believe is ideally situated and we'll be looking at mid stream opportunities and other opportunities to invest and leverage our existing infrastructure. And also the fact that we have significant demand from both our Gas Utilities operation and Energy Services. We have significant demand for natural gas which is quite attractive to those producers.

And following up on that, in the absence of being able to use some of your utility assets or assets that are currently part of our utility, would you still move forward with some of those plans and kind of how would that affect your long-term planning for the region?

Yes, we would continue to -- we'll continue to move forward and look at investment opportunities. So we're very much encouraged by the discussions we've had thus far with producers, with some of the pipeline companies. So yes we would continue to progress in terms of those opportunities and believe as Lon noted, believe we will have some quality opportunities that emerge here.

One point, Ryan, to reiterate that John referenced, that activity in the Marcella Shale is really a win-win not only for our regulated business, but also our non regulated business. You asked about the regulated business. There is going to be sources that supply to lower cost for our regulated businesses as the Marcella Shale develops and there are going to be lots of opportunities which are too risky for us to keep in our regulated businesses. It's not what our regulated businesses want us to do and what the commission wants us to do. Because it doesn't serve our existing customers in those areas, which provide opportunities for Energy Services in which rightly sit there. But the best thing about the Marcella Shale activity where we're located is it's truly a win-win for the right payers and for our unregulated businesses and it's always great when that happens because it smooths the way for your regulatory relations at the state level because you're offering up some opportunities for the regulated customers to benefit by the activity that occurs there.

Great. I appreciate the insight on that. And one question concerning International Propane business. In the past you've discussed trying to acquire about 20 million gallons a year for the domestic business. Is there any outlook in terms of what you may try to acquire internationally?

You rightly got our target domestically and one of the reasons that we have that target is, as you know, because you know our industries well there, is 3,000ish small LPG businesses in the US and acquisitions and which are euphemistically called roll-ups in the US have been around for a long time and there are some predictability to those. Generally speaking markets overseas have a different competitive landscape and you do not see that many smaller companies, so it's harder to build into our planning and our thought processies anything other than we're active, we will consider any transaction which benefits our shareholders and makes our businesses stronger.

But from a planning standpoint, we can't build anything into our processies. I will tell you that there are opportunities out there now. We are evaluating a number of opportunities in the international area. And again, you can count on us to be focused in our approach, disciplined in our approach. But there are some nice opportunities which we are evaluating and expect to continue to evaluate.

Great. Thanks for your time, everyone.

(Operator Instructions). We'll go next to Ron Londe with Wells Fargo.

Thanks. Can you give us an idea of how your margins have been holding up in the second quarter for the month so far?

And Ron I assume you're asking on the propane side?

Yes, on the propane side.

And the way we're looking at the margins, assuming no change in the competitive landscape, we continue to expect margins would be roughly in line with last year.

Okay. Also the growth capital expenditures for the quarter look like they [shemped] about $6 million and can you five us an idea of where you spent the money?

Sure. Most of that was for Ace. We bought our Ace cylinders earlier this year than we normally do to take advantage of some special pricing we were able to get. So it hasn't really changed what we expect to spend for the year on capital.

It's timing.

It's a timing difference.

Okay. It just looked like a big increase for the quarter. That's all I had. Thanks.

Thanks, Ron.

We'll go next to Barry Klein with Citi. Mr. Klein, your line is open.

Hello.

Barry?

Hey, can you hear me?

Yes. We've got you.

Okay. Good. I just wanted to go back to the Marcellas opportunities that you discussed. You talked about these things in the past and we know there are some significant opportunities out there. Would you look to get involved with some bigger players to sort of leverage your capital position, the free cash flow and your asset base and maybe somebody who has a little bit more of a footprint in the region and a little bit more operational expertise in sort of a JV role or are you looking to go it alone and have a little bit more control on any projects you get involved with?

I'll give you a teasing answer first. We had an Executive here at UGI, when I would ask him questions that had an opportunity with an either-or in it, he would go yes. So my answer is yes. You know us well enough that one of the things that's made us successful in acquisitions and joint ventures and other growth opportunities is we truly are flexible in our approach. We know what value we bring to the table. We know what we're good at. And where we have people who are better than we are, we either acquire the expertise by buying a person or buying an entity, or we joint venture with folks.

So again, we have found over the years that if you are open to ideas from people, figure out where you add value and you align -- make sure you are aligned with folks you can joint venture and we are considering joint venture opportunities with folks that, as you described, producers, other pipelines, other people with lots of demand across the spectrum. And we are considering doing a lot on our own as well. The opportunities, to put it in context again, we really accelerated our view of this stuff in late summer, early fall is when we began to do it, began to dimension the opportunity which arises because of our presence in that area, basically east of Lehigh, east of big storage there at Lehigh and we have devoted additional resources to dimensioning those and working actively.

And I would tell you directionally we expect in the next 90 days or so to be able to put a little bit more color on these opportunities for everyone. But I think it's fair to say we're being as flexible as you would probably want us to be and we're not going to let opportunities slip by because we don't think we have the right mix of things at the current time.

I think we would, from our perspective, a partnership isn't a requirement by any means because we bring a lot, as Lon just said to any of these opportunities. But we're flexible and we recognize the benefits of partnerships and we feel we have got a great track record in terms of operating effectively in a partnership or JV so we're flexible.

I've got you. And then one follow-up and the answer might be yes to this one as well. But are you leaning toward a pipeline gathering or process facility or it doesn't really -- again is the answer just yes, whatever presents itself?

We would consider all three of those, if we believe we added value and that we could make a good return on them.

Okay, I've got you. Thank you.

The one thing I will qualify is we're not going to be a producer.

Okay.

So I can say no to that.

All right. Thanks a lot.

Sure, Barry.

(Operator Instructions). We'll take a follow-up question from Carl Kirst of BMO Capital.

Thanks. Actually Barry hit my follow-up but I actually maybe have one more I just remembered. Peter, when we met in early December, you had mentioned that the French government was suggesting a potential tax on seemingly everything but nuclear heads. Has there been any change either progress or not on that?

Yes. We put everything in place for it to happen at the end of December and I think two days before it was to be implemented the French legal system rejected it. It was unconstitutional. So as of the moment there is no tax.

All right.

Very frustrating for our IT people who spent a large part of their Christmas vacation getting ready for it.

Okay. Thank you.

And our next question comes from Peter Hark from Talon Capital.

Yes, good afternoon. I was hoping Peter could review again the cash balance of UGI Corp.

Right now with the way we look at cash is what is immediately available to us in the holding Company as opposed to necessarily out in the businesses and as of the end of December we had $99 million of cash at the holding Company.

Okay. But at the end of September it was close to $300 million so the other $200 million is wrapped up in the other businesses?

Okay, if you go from -- if you look at the -- you're looking at the total cash for the Company and think the equivalent holding Company number at the end of September, I want to say it's about $105 million or $106 million maybe.

Okay, then generating cash of another $100 million plus over the course of this year, is that right? Is that disposable also?

We typically expect to generate over $100 million a year and we use it for different projects. Either to -- in the past to buy companies or most of it this year will be used in the two big capital programs we have, the Hunlock, the repowering of the Hunlock facility and the expansion of our LNG facility.

And how much will that take up, Peter, of the cash balance?

It will take up a significant portion of the $100 million that we generate.

Okay. Thank you.

Let me just help a drop on that. One of the beauties of our model is, as Peter said, we generate about $110 million a year in cash, somewhere in that area. And we get to -- we never let it burn holes in our pocket. We've in the past deployed it in capital projects but more often in acquisitions to represent the equity component of acquisitions, so be it, PNG or CPG, the two utility deals, they were all funded in cash. The equity part was funded in cash. What we're doing, as Peter points out now, is we are using that cash to fund the entire cost of the capital projects that we have and that what we're affectively doing is until we decide to finance out Energy Services to allow it to put the debt part of those capital projects on its books, we're funding it with internally generated cash essentially.

And so what you might see is a little bit of lumpiness in our cash, that is we may support Energy Services capital needs with our equity portion being cash and the normal debt portion being cash until such time as we think the debt markets are settled enough and attractive enough for us, and then we will finance a portion of the capital of those projects in debt so that at the end of the day those capital projects are financed in a long-term cap ratio of somewhere in the 50-50, give or take a little bit. So you'll see cash being a little lumpy until such time as we refinance out those capital projects. Is that right, Peter?

Yes. From September through to December you would expect normally to see a reduction in our cash which is really based on the increase in working capital we have as we enter the winter. We start to build some inventory, we -- our revenue increases and therefore our receivables increase.

That's great. Between the both of you, that's a great explanation. Thank you very much. On the energy marketing side, my guess is that you're participating in the market that is IPPL and I'm wonder if you're able to win customers in that market and are you planning on also taking on Allegheny's territory once it opens up in 2011.

Yes. We are active in PPL, now obviously with the rate caps off and in each of the markets open up with the sequential lifting of the caps and the different service territories will be active and we can leverage our existing sales teams which are active certainly all across the mid-Atlantic region to reach each of those service territories. So we'll continue to be very active with POWERMARK-eting. We've been encouraged by the success we've had to date.

That's perfect. And then just to clarify, Lon, your comments on Shale, Marcellas, you're not going to be a producer, you're going to participate in the infrastructure side, it sounds like storage and pipe. Is that what we should be thinking about and what order of magnitude of expenditures be for those type of projects?

Yes, the infrastructure is absolutely the correct assumption there. And it will depend on which opportunities we decide to pursue. So it's hard to give you a number until we decide what opportunities. But should we choose to do a relatively long line pipeline, it's going to be real expensive.

As you know, those things are not cheap. Should we just do gathering, you're stepping down a few levels and then you can go down from there. Ordinarily something in the $50 million range, we're not going to spend a lot of time talking to you about it, so you can assume that as we evolve and develop our ideas over the next quarter and are able to give you a firmer idea that they're going to be of a size that would warrant us talking to you about it.

Okay. Fair enough. Can I put you on the spot and maybe you'll pine why you think your stock is trading so cheap. I mean the 10 or 11 times this year's earning, what do you think is holding back the valuation?

It's funny you said that. We had our annual meeting yesterday and so one of the things I did is affectively play you and say, I get asked all of the time why our stock price is flat and it's been flat for a while. And I confess that I typically have a few theories that I advance, but the simple truth is I don't know. The earnings per share growth that we've demonstrated over long periods of time, pushing 12, 13, 14 years now, has been steadily in excess of our goals. We raise our dividend -- our goal is to raise our dividend 4% a year and I think we've averaged 5% a year over the last five years and we've raised it 22 years in a row so people understand that we are serious about reaching our financial goals. They know we're serious about our dividend and our Board is serious about the dividend.

If I had a simple clear answer, I would tell you. We are accelerating our efforts to communicate to shareholders so they understand what your question -- what is implicit in your question which is that we believe we are undervalued but I always caution the world with -- I don't know a management team out there that doesn't think their stock is undervalued. We have seen significant contraction in the PE ratio. We're not sure we understand why and when we're on the road we do ask our investors if they have an idea and if they have suggestions for us and generally the answer we get from the investors that we talk to is keep doing the same stuff, keep running your businesses well, keep your earnings growing and keep your dividend going up and over time the rest of it will take care of itself. So we are patient on it, however that doesn't mean we're complacent on it. I want to draw the distinction.

I'm sure you've been bugged about it in the past, but why not consider a share repurchase program or a sizable -- a sizable dividend increase or even a special dividend before the change in the tax law?

Remember I told you about that executive we used to have when he asked me a question like that, I would say yes. So people who know us well know that there isn't anything under the sun that this organization doesn't consider in terms of creating value for its shareholders, pursuing opportunities that make sense and add value and demonstrating flexibility, both in the marketplace and elsewhere to achieve our goals. And we consider everything.

And however I will add that the one thing that's been a constant certainly as long as I've been around and probably a lot longer in the UGIs 127 year history, we're not impulsive and we won't do anything just for the short-term. We really do think the right thing to do is -- it could be any one of the things you mentioned, but our Board of Directors I don't think would ever authorize and I do not believe we would recommend to them to do something just because of a short-term expediency. It would have to fit with a long-term value creation for the shareholders.

That's great. Lon, thank you very much for your time.

Sure.

And our next question comes from James Heckler with Levin Capital Strategies.

Hi. Good afternoon.

Hi, how are you?

I'm doing well. Peter asked a couple of my questions. I was wondering if you could review the dividend policy for us. And in terms of target payout ratios and where you currently stand.

Our targets are to maintain our payout ratio between 35% and 45%. I guess we're currently at the -- towards the low end of that. But we also have a stated policy of increasing our annual dividend by 4% a year.

And I guess if you were to increase it 4% this year, you would probably still be at the low end of that target range?

Yes, that's true.

Would you take it up more than the 4% to get further into that target range?

Well, I think if you look back over the last few years, we have an earnings per share target to grow, 6% to 10%. So clearly over time, we've grown our earnings by a higher rate than the dividend and we want to maintain it in that 35% to 45%, we have to do one off increases in dividends and I think I can't remember the last time we did it, but periodically we do one off increases in our dividend to bring it back into the 35% to 45% range.

That's all I had. Thank you.

Just to add to that, this is consistently our views on it. We present our views to the Board but it truly is a Board decision. One of the great things that all of you should take comfort from is the corporate governance of this organization as the Board plays an active role. The normal time that our Board considers the dividend is after the winter is done, so to will be in the April time frame that the Board considers that. And obviously Peter has done an excellent job of describing the considerations around it.

Thank you.

That's all of the questions that we do have. I would like to turn the call back over to the host for closing remarks.

Okay. Well we appreciate all of your support, your attention and we're pleased with where we are this year. It's consistent with our expectations and we're moving forward. You can count on us to continue to do what we say we're going to do. So we look forward to talking to you next call and everybody, we hope you stay warm in this inevitably going to be cold winter weather for the rest of this winter. Take care. We'll talk to you soon.

That does conclude today's conference. Thank you for your participation.