UGI Corp (UGI) 2010 Q2 法說會逐字稿

Good day and welcome, everyone, to the UGI and AmeriGas Partners second quarter fiscal year 2010 earnings results conference call and webcast. This conference is being recorded. At this time for opening remarks and introductions, I'd like to turn the conference over to the Vice-President and Treasurer of UGI, Mr. Bob Krick. Please go ahead, sir.

Good, thank you Shawn. Good afternoon and thank you all for joining us today.

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

You should read the annual reports on form 10-K for a fuller list of factors that could affect results, but among them are -- adverse weather conditions, price volatility and availability of all energy products including natural gas, propane, and fuel oil, increased customer conservation measures, political, economic, legislative and regulatory changes in the US and abroad, currency exchange rates, and competition from the same and alternative energy sources. UGI and AmeriGas undertake no obligation to release revisions to these forward-looking statements to reflect events or circumstances occurring after today.

With us 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. Hello, everyone, and welcome to all of you for our call. Today's call features something a bit unusual for us. I am actually at a different location from all of the other speakers. I'm going do my best to manage the call from my location, but if it appears a bit more disjointed than usual, chock it up to the distances that we are at.

I trust all of you have had the opportunity to review our press releases covering both our earnings, as well as our substantial dividend increase at UGI and distribution increase at AmeriGas. Our good earnings performance at UGI was consistent with our expectations especially given the comparison to last year's exceptional second quarter. Similarly,, AmeriGas' EBITDA met our expectations if you exclude the one-time interest rate hedge adjustment. AmeriGas, too, had an exceptional quarter during the comparable period last year.

With our earnings at both UGI and AmeriGas in line with our expectations, not only for the quarter, but also in line with our full year expectations, as I will discuss later, the Boards of Directors of both AmeriGas and UGI met recently to evaluate our dividend and distribution levels, as you know. With respect to AmeriGas, AmeriGas' Board authorized an increase in the distribution by 5% to $2.82 on an annualized basis.

This increase made possible by the fine performance consistently delivered by AmeriGas, represents another year in which AmeriGas is keeping its commitment to its unitholders to raise its distribution annually by 5%. Of particular note is the fact that this distribution is covered not only by the highest levels of distributable cash coverage in the industry, or I should say one of the highest in the industry, but also one of the strongest balance sheets in our industry. With respect to UGI, I have to confess I've had some difficulty in coming up with the right words to describe our 25% increase in the dividend. Using the customary corporate speak to say I'm pleased or I'm gratified, somehow struck me as anemic, given that level of increase. The dividend increase reflects our confidence in UGI's future cash flows and its prospects.

I'll have a lot more to say about it later in the call, as I believe it is important to reinforce for you exactly what the dividend increase signifies. Briefly on our earnings, UGI's results reflect once again the benefits of our diversified group of energy, distribution, and marketing businesses. This year, for example, we had increased contributions to earnings from our utility and energy service businesses, which offset an expected decline in contribution from our propane businesses. This contrasts with last year, as may recall, when our international and domestic propane businesses carried the day.

With respect to AmeriGas, solid execution along a broad range of activities helped AmeriGas achieve its results which were nearly equal to that of last year's exceptional quarter adjusting, again, for the interest rate hedge write-off.

At this point I've completed my introductory remarks. And why don't I turn it over to Peter? As I said before, I'll provide some concluding remarks following John and Gene's remarks later in the call. So, Peter.

Thanks, Lon. Last night we reported second quarter earnings per share of $1.43. This compares to the $1.45 reported for the same period last year. As Lon mentioned, the $1.43 was pretty much in line with what we expected, with the exception that it included $0.03 for the write-off in AmeriGas of an interest rate hedge we deemed no longer necessary.

As usual, I will hit some of the highlights on the profit performance before moving on to a description of our balance sheets and liquidity. From an overall perspective, margin improved, expenses were down while volumes in the quarter continue to be impacted by the recession. Weather was a mixed bag with our French business benefiting from significantly colder weather. AmeriGas experiencing relatively normal weather, and our utilities experiencing weather slightly warmer than normal.

Our utilities had a good quarter compared to last year, mostly as a result of the base rate increases that were approved last August, though overall throughput was down and we were particularly impacted by March. That was 22% more than normal.

Energy services also improved year on year with a strong performance in the gas and Power Marketing business, and our propane businesses were down year on year, largely a result of the return to more normal unit margins at Antargaz. If I could take a second and discuss one item I referred to earlier, this quarter we felt it prudent to write off three interest rate hedges in AmeriGas that we entered into several years ago. This resulted in an after-tax loss to UGI of $3.3 million and reduced AmeriGas EBITDA by $12.2 million.

This item definitely falls into the category of no good deed goes unpunished. We've put these hedges in place to cover the refinancing of $150 million of our debt several years ago. And the reality is, however, that the performance of AmeriGas has been so strong over the past couple of years, that we currently do not need to replace this debt, and therefore don't need the hedges.

Turning to the balance sheet, our consolidated debt is approximately $2.2 billion, was essentially flat compared to the same period last year. Our consolidated cash position was $310 million compared to the $338 million reported this time last year. Restricted cash included in these numbers was approximately $39 million this year compared to $146 million reported last year. Included in the $310 million at the end of this quarter we had about $101 million of cash available at our holding company to reinvest for growth.

At our new annual dividend rate we would typically expect to generate, on average, about $100 to $105 million of such investable cash per year. Of the $2.2 billion of debt at the end of March, approximately $2.1 billion is long-term debt, including $0.6 billion classified as current maturities of long-term debt. By business and compared to the same quarter last year, AmeriGas had $890 million of debt, up $27 million from last year. Utilities have $677 million of debt, a reduction of $141 million, and the international business was approximately $649 million, up $80 million on last year. We have no significant refinancing requirements before 2011.

From a property, plant, and equipment perspective, we have just over $2.9 billion in net fixed assets, up from the 2.8 billion reported in the same quarter last year. Capital expenditures were approximately $71 million with depreciation and amortization of $53 million. Turning to liquidity, overall 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 in France we have a facility of EUR50 million. By the end of March AmeriGas had used $23 million of its revolver and had a cash balance of $10 million. Utilities used $37 million of its revolver, with cash on hand of $20 million. Antargaz had used EUR50 million of its revolver, with are $125 million of cash available. And energy services had not used any of its capacity and had cash on hand of $34 million.

So overall another good quarter, and I'm pleased to note that our consistently strong performance has been recognized recently by Fortune magazine, who ranked UGI 38th among the top 500 companies in the USA in delivering shareholder value over the last decade. It is this consistency of earnings performance, along with extremely strong cash generation, that enabled us to announce last night that we were increasing dividend by 25%, and reiterate our goals to achieve long-term average earnings growth of 6% to 10% and to annually increase our dividend by 4%.

Finally, for those of you who follow it, we have now been making dividend payments for 126 years and have increased our dividend in 23 consecutive years. So with that, let me pass the call over to John to discuss our operational performance.

Thanks, Peter. While the economy remained challenged in Q2 we continue to focus on achieving progress in our core objectives. As Lon and Peter have noted, our business performance was in line with our expectations. This performance can be attributed to the benefits derived from our diversified portfolio of businesses, and our team's commitment to execution in spite of challenging market conditions.

In addition to delivering solid financial performance in the quarter, we made good progress in our three long-term strategic objectives of growing our core businesses, continuously improving operations, and reinvesting cash in high quality projects. First,, on growing our core businesses, our focus on identifying and delivering on growth opportunities hasn't waned during the course of the current recession.

While new home starts, one of our key growth drivers over the past decade, remain at depressed levels, we've identified other growth segments within each of our businesses. Good progress was made in Q2 on several of those developing segments. Energy services has made great inroads in developing two emerging segments. Small commercial, gas, and retail power.

Since launching our small commercial marketing campaign about 24 months ago, we've added approximately 7,000 new natural gas accounts on LDCs in four states. I've mentioned our retail power marketing programs on several of our prior calls. Our progress in developing this new segment has been excellent over the past year, with over 1000 new commercial power accounts added.

We are excited about further growth opportunities for retail power in 2011 as several large Pennsylvania electric utilities emerge from rate gaps and their customers are given the opportunity to secure power from marketers on more attractive commercial terms. Antargaz remains at the forefront on cylinder product development in the French LPG market.

The Calypso lightweight composite cylinder and the Car 4 private label cylinder, continue to be very well received by our major retailers and our end use customers. Year to date, we've added roughly 70,000 new customers for Calypso, over 100,000 new Car 4 private label customers. While growth in our gas utilities service area has been slowed by the recession, we continue to add new accounts by focusing on conversions and upgrades, while also securing a high percentage of the available new home opportunities.

We've seen some modest improvement in new home starts in past quarter and believe that we may be seeing the initial phase of residential sector recovery. The commercial sector remains relatively weak, with new commercial additions continuing to lag prior levels. Our gas utility is also likely to benefit from the new rates going into effect for several Pennsylvania electric utilities. We believe we'll add new conversion and upgrade accounts as customers in eastern and central Pennsylvania see their power rates increase in January 2011.

Now on continuously improving operations. The challenges presented by the recession reinforce the importance of execution and continuous improvement across all UGIs operational activities. Cash generation by our businesses is one of our strategic objectives, as it serves as our engine for reinvestment. One critical element of cash generation is working capital management. We had another very strong quarter on working capital in Q2, with our focus on managing receivables being the key to our performance. We've used the challenges presented by the recession to enhance our working capital management processes. Although the heating season has just ended, and much work remains on receivables, we're very confident that we'll continue to perform well in this critical area.

One other key area for us over the course of the winter was communication with our customers in need. Our teams worked diligently with those customers to ensure that they took advantage of the full range of support services available to them, such as [life heat] funds and weatherization programs. And finally on reinvesting cash in high quality projects, while the majority of our capital spend historically has been on acquisitions, we have in recent years identified a broad range of opportunities that included both acquisitions and capital projects. As we assess our current pipeline of opportunities, we continue to see this balance.

Our two major capital projects for energy services remain on track. These projects are the $125 million project to repower our [Hemlock] coal-fired electric generating station as a larger gas-fired facility, which will come on-line in late 2011, and the $120 million expansion of our LNG peaking facility, scheduled for completion in late 2012. Site construction activities have commenced on both projects and we're meeting all critical project milestones. We continue to identify opportunities for renewable energy investments. These investments primarily in solar and combined heat and power solutions are relatively small, but are enabling us build our internal capabilities and improve our understanding of this rapidly evolving sector.

We noted on the prior two calls our interest in developing investment opportunities for UGI within the Marcellus Shale. We have assets, such as our storage facilities, high pressure transmission lines, pipeline capacity, and rights of way and resources, such as the considerable gas demand of our utilities and energy service units that provides us with competitive advantage, particularly in the central Pennsylvania portion of the Marcellus. We've been working diligently with producers and potential partners to develop projects to capitalize on these assets, and have made good progress.

We'll keep you updated on our progress on future calls. I'd now like to turn it over to Gene, who will provide you with the details on AmeriGas's performance in Q2.

Thanks, John. We are pleased to be reporting solid earnings for the quarter, despite the state of the economy. And I'm looking forward to sharing with you the progress we're making on our core strategies. As you know, on Monday we announced another 5% increase in our distribution. In line with our policy of increasing distributions 5% per year and our fifth annual distribution increase. EBITDA excluding the hedge loss was consistent with our expectations.

On that same basis we are projecting adjusted EBITDA of $335 to $345 million for the year. The 4% reduction in volume was in line with the volume trend in the first quarter, and is a reflection of the continuing impact of the recession, as well as customer conservation. While volume for most customer categories was down, we did see increases in grill cylinder exchange, and strategic account volumes.

In previous calls I had mentioned that our forklift volume has been the category most affected by the recession. I'm pleased to note that in March and continuing into April, we're actually seeing year on year improvements in forklift volume.

This encouraging, because in the past the forklift segment has been a leading indicator for our non-residential business. Also, propane prices continue to be well above last year's level. The average cost of propane at [Mont Belvieu] for the second quarter was $1.25 per gallon, up 58% from last year. Propane prices have moderated somewhat since the end of the quarter and are currently at $1.14, but this is still well above last year at this time when the wholesale price was $0.67 a gallon. These higher energy prices encourage conservation, particularly in this economic environment.

Higher energy prices also drive up the cost of our fuel and increase our investment in working capital. We continue to closely manage our expenses this quarter. Staffing levels across our business have been below last year levels.

We also continue to benefit from lower general insurance expense, based on our more favorable loss experience. Let me now turn to our core strategies of growth through acquisitions, by leveraging our footprint through ace and strategic accounts, and by growing our traditional residential and commercial customer base to superior customer service.

We have completed seven acquisitions through April, adding about 6 million gallons. We have another two closings scheduled, and we have several strong prospects. If deal activity continues at the current pace, we have a good shot at achieving our 20 million gallon goal this year. "A" cylinder volume was up almost 3% for the quarter, while same store sales were off slightly for the quarter, we've benefited from a nice increase in the number of locations we serve. We are pleased to be entering the grilling season with 9% more retail locations than we had last year at this time. Strategic accounts volume was up 6.7% for the quarter, compared to the same quarter last year.

This is a real turnaround since volume for the first quarter was down from the prior year by 3%. The uptick in volume was the result of a combination of higher usage per customer and new locations. We also just signed a contract with International Paper in March that will add almost 3 million gallons when fully rolled out, The growth of our traditional base of residential and commercial customers continues to lag this year, due to market conditions. We believe our focus on customer service will help us mitigate the impact of the weak housing market, and the weak economy on our internal growth.

Our vision is to be the most reliable, the safest and the most responsive propane company in every market that we serve. With that in mind, we are pleased to see the number of customers, who say they are satisfied or very satisfied with AmeriGas, increase from 93% last year to 94% this year.

I'd like to conclude my remarks by thanking my fellow AmeriGas employees for responding so effectively to the severe weather that we experienced last winter. They had to overcome record snow storms in many parts of the country, along with bitter cold temperatures, and that made taking care of our customers especially challenging. I appreciate their commitment to maintaining our reputation for excellent customer service. For that let me turn the call back to Lon for some concluding remarks.

Okay. Thank you, Gene, and thanks everyone else. I will give you some final thoughts and then we'll move to open it up for questions.

As you've heard several times, we reiterated our $2.20 to $2.30 earnings per share guidance for UGI. Similarly we reiterated guidance for AmeriGas as Gene described. We're pleased to be in a position to reiterate guidance, notwithstanding the fact that we face a difficult operating environment. By that, you've heard from Gene, John and Peter that we still see the effects of a slow economy in all of our business units, and this year we had to face rising commodity costs in our propane businesses. As I mentioned earlier, I will comment further on our dividend increase at UGI and try to clarify for you as best I can what message are we sending to you with that action.

First and foremost, the dividend increase truly does reflect our confidence in UGI's future cash flows and prospects. While the scale of this increase is, as you know, highly unusual for us, we have had in the past dividend increases which exceed our targeted 4% commitment in particular. You may recall in that 2004 and in 2005 we made larger dividend increases than 4%. The much larger increase this year of 25% does not reflect any change in our strategy, nor does it reflect any change in our financial committment to deliver earnings per share growth at a long term average of 6% to 10% and our dividend increases of 4% annually. Let me repeat that, so there's no misunderstanding.

We remain confident that we can achieve these goals in the future and if we thought we could not, we certainly would tell all of you that we could not. At the same time, the dividend increase is not a harbinger of an earnings growth acceleration in the company. We said many, many times that our earnings growth is -- the earnings growth inherent in our businesses is about 4% annually, and if you look at the nature of our businesses, utilities as well as propane businesses and energy distribution, we said we could grow those businesses inherently faster than 4%. We've said many times you should look at us a little bit funny.

We've been able to achieve much higher levels of earnings growth for over 10 years by reinvesting effectively the excess cash that we generate annually, which will be nearly $100 million a year even after the increase in our dividends. When we invest the cash through buying businesses or with buying assets, we get, as you know, a relatively quick bump in earnings. When we invest the cash in excellent return, internally generated projects that have a multi-year lead time, such as the ones John described -- [Hemlock] electric plant or expansion of our LNG facility. The earnings growth impact takes a bit longer. Yet either way of investing is good for our owners and reiterates in us the confidence to tell you that we are a 6% to 10% long term earnings growth vehicle.

Given that I've told you that our dividend increase does not signal an imminent earnings growth acceleration, I want to be equally clear that it does not signal an earnings growth deceleration. We know how to change our announced long term earnings growth targets and pointedly we did not do so here. So to summarize and be clear, what we did by increasing our dividend by 25% is to express confidence in our future, a commitment once again to achieving our longstanding financial goals, and to continue the very important balance of delivering above average total returns to our shareholders through a combination of both growth and income. And Peter referred to the fact that our track record over the last 10 years has been outstanding in this regard.

Forbes magazine ranked us 38th -- I'm sorry -- Fortune magazine ranked us 38th out of the Fortune 500 companies this year, at producing annual return to shareholders over a decade. That is 38th out of 500 companies, so pretty good track record. We are absolutely thrilled to be in a position to talk to you about a substantial dividend increase. Earnings in both businesses which met our expectations and what we see as a bright future of growing both our earnings and dividends in the future more. We have the resources, both human and financial, to meet our goals as we see them in the future.

So with that, I hope I have been very clear to all of you and if not please fire away with some questions. And at this point I think we are ready for some questions.

(Operator Instructions). We'll have our first question from Darren Horowitz from Raymond James.

Good afternoon, guys. Gene, a few questions for you on AmeriGas. In an effort to try to get a feel for the continued impact on volumes from the economy and also from customer conservation -- you mention that the past two quarters were about 4% lower versus same quarter a year ago. And, if you bake in that upward bias in cylinder exchange and also what you mentioned about forklift volumes, would that suggest that the June retail volumes are tracking north of 150, maybe 155 million gallons, is that fair?

I was going to say, what I'm going to do on the call, Darren, is -- or everyone, is sort of direct the questions. Again, I can't do that because we're not in the same room, but you directed that one to Gene, so Gene should take that.

Great, let me answer that in a more general way. I'd say in thinking about our projected earnings, we're assuming volume performance similar to what we've seen so far this year. We're encouraged by what we're seeing in corporate and in strategic accounts. But we're assuming the same kind of relationship to last year's volume in projecting our earnings for the balance of the year.

Darren, just to clarify a little, what Gene said, if you look at the percentage of volume that comes from those categories,p it can be overcome certainly by the effects of the economy and other things by a much larger base of volume elsewhere.

Lon, that's a good point. I mean, now that you are out of your seasonally stronger quarters, when you look at where June quarter volumes were last year at about 160 million gallons, are you getting much of a sense that at least further degradation from this point forward from customer conservation has slowed down? I mean, maybe we've hit a trough, and you should see some just legacy volume improvement?

I'll take a shot, Gene, and then give it to you. The economy, frankly, has been somewhat weaker up until this point than we would have expected. Certainly we expected going into the year -- we see the effects of the poor economic times certainly continuing through this past quarter, and in certain areas there's no question that it still continues normal commercial volumes, restaurant volumes, some of the more larger company businesses that we do -- as Jean noted, the forklift volumes in particular that we see through strategic accounts and otherwise are a leading indicator, and so we feel good about the direction of things. But I can't tell that you we see that we see that substantially across all categories yet. We see a leading indicator moving in the right direction, but it is a leading indicator.

Okay. And then, final question from me, just if you could, please, provide a little bit more color on those strong acquisition prospects that you mentioned. And also, as a derivative when you look at larger scale consolidation, has anything changed in the market, or is it really more of an issue that [bidax] spread just continues to be too wide?

Gene, I'll take the larger ones, and -- you take the ones that we deal with on a more everyday basis. Larger ones, it certainly, Darren, depends on how you define those. But the very largest ones have the same inherent difficulties associated with them that they always have. You've got the very largest players all publicly traded in MLP vehicles, and to have a transaction that meets our criteria to work, you'd have to find a situation where the synergies are large enough to overcome the inherent pricing that's reflected in everybody's MLP prices. It's not impossible to do that, but it is difficult to achieve that, and it takes two well run companies to take a look at that and find the right level of synergies and commitment forward to make that work. So those remain tough deals to do as we look forward. Gene, why don't you comment on all the other ones?

Sure, I mentioned that we had done about seven deals through April, and we'd added about 6 million gallons. So you can see the average deal that we've been doing is relatively small. The prospects that I talked about are somewhat larger than that but they're still in that 1-3 million gallon range generally, and so that's why I'm saying I think we've got a good shot if we continue to get good prospects in and close the deals that we're looking at of hitting our goal of 20 million gallons, or something close to that. So, that's a good result, but I'm really talking about the smaller, sort of typical propane deals.

Okay, Lon, Gene, thanks for the call, and congratulations on the quarter.

Thanks, Darren.

We'll go next to Barry Klein with Citi.

How's it going, guys?

Hey, Barry.

Just a follow-up, and then a couple of questions on -- followup on the first caller's questions -- with regards to the volumes at AmeriGas, I know that weather was a little bit on the -- it looked like it was a little bit on the positive side, but the volumes were down was this conservation expected in your guidance?

Go ahead, Gene, why don't you respond?

I'd say we were not surprised by it. It was very consistent with what we saw in the first quarter. And so, it was in line with what we've been seeing in the level of conservation. It's very hard to predict that going forward. And it's a combination of conservation and the impact on our non-residential customers, the impact of the recession.

Okay.

The recession, Barry, goes across all segments, as Gene said, in commercial, but it's also hit residential customers. And you hear about it. They've cut back expenditures everywhere. You see the unemployment rate as high as it is, people are watching every expenditure, moving in with other families, and it sounds trite, and anecdotal, but across a large customer base, there's no question that people are -- have -- and are continuing tightening their belts.

Got you

And we have seen quite a jump in the wholesale cost of propane.

Right.

Which is a factor.

Right. I guess moving on to energy services, there was a nice tickup there in the margins. Relating to the marketing margins with the commercial operations, I guess -- how much of the 7% increase in volume sold relates to the uptick in commercial operations? And should we expect, sort of a flow through going like a one tickup?

John, you want to take that one?.

Sure. Yes, I think a couple of things are at play. Across all of our businesses we see weakness in certain areas of the commercial sector and that is true in energy services as well. I think what energy services has done a great job of doing is continuing to develop the sort of mid-sized and some large commercial, so they've added some account there. And in addition to that, as I noted in my comments, we've had really good success in penetrating the small commercial segment which we've been working at a couple years, but as you start to add those accounts and they accumulate, and as you retain them, and which we have been doing a good job of doing in terms of retention, the cumulative effect starts to become more material. So you have good work on the larger accounts by our dedicated teams, and also now we start to see the impact of that sort of segmented, targeted small commercial development which involves telemarketing and reaching new customers in different ways through different channels.

Okay. And with regard to the retail power side, was there an increase in volumes? Or increase in customer base? Or just a move to higher marg -- or was it more a move to higher margin customers on why you did well in that segment?

Go ahead, John.

Yes, it's a combination of all those things. Certainly, we continue to increase our customer base. We had -- I talked about utilities in Pennsylvania in particular, coming out from under rate caps we had one large utility that came out from under its rate cap earlier this year. We have two more emerging next January. So that gives us an opportunity to market -- in a market like Pennsylvania where we've got quite a strong position. So we're leveraging our existing customer relationships from the gas side to add power contracts. We're doing a good job retaining our existing customers and margins have been quite good. So we haven't shifted our focus.

The focus is the same in terms of the types of accounts we're targeting. We've expanded our customer base and will continue to do so. And work -- we're working at obviously at unit margin management which we do in all the businesses. So it's really a combination of the three factors you asked about, Barry.

All right. Thanks a lot, guys.

Sure.

We'll go next to Ryan Rosenthal, Sidoti and Company.

Good afternoon everyone. My first question concerns AmeriGas. I guess, going back to the volume question that's been asked a few times. My question concerns your market share and I assume that your margins have improved since fiscal 2007 steadily while volumes have dropped off. I'm sure some of that is related to the economy, as you guys have mentioned. But I was curious if there's any market share decline given your strong pricing.

Yes, I'll take a shot, Gene, and then jump in to put color on it if you think. Actually, I think, if you look at the industry size as published by API -- is it API, Gene, that does that?

It is API, yes.

API. I think you'll see that the volume in the industry has come down somewhat. And our market share has been fairly flat. And with respect to the volume, you astutely ask whether there's a tie between margins and inherently prices, and volume loss. And, we often -- and I suspect you do, too, we compare our relative positioning in the marketplace versus others, and our volume performance versus others. And we have noted that correlation over time. And what we try to achieve is a balance between margin and volume. And again, if you were to sort of dissect the folks that you can dissect publicly, you'd find that over a long period of time that our volume performance and our margin performance has been among the better balances in the industry itself.

So, we don't thick we're out of line price-wise, and that we aren't seeing an intensification of pricing pressure any more than one would normally expect in a tough economy, and the volume loss we truly believe is related to two things. One is conservation due to rising prices tied largely to commodity costs, and that conservation can run, in our estimation, anywhere from 1% to 3% generally. We don't think it's some of the numbers that you hear bantered around at 5% to 10%. We think conservation inherently is in the 1 to 3. And then you've got the effects of the economy on that, and clearly high commodity prices and rising commodity prices as we experienced two or three years ago, and we experienced this year can contribute to more conservation than less conservation. I hope that gives you some per spec on it.

Absolutely, thank you. And turning to your opportunity to invest in Marcellus shell support infrastructure, I was curious if you could you give us any more insight into where you're currently at and the potential timing and scale of that investment.

Yes, I'm glad you asked that. And I'm reluctant to venture any guesses given that probably last call I told you we would have something ready by this call. So I will be cautious on my timing of my comments. I think John said it very well, and I will repeat what John said. We believe you got a significant competitive advantage in providing infrastructure in the Marcel sues shale area, particularly in the eastern portions of the Marcellus shale area. We have storage facilities. We have a lot of gas demand through our utilities and our energy services businesses, and we've got high pressure lines as well in those areas. And so that infrastructure makes us extraordinarily attractive to producers, other pipelines, and other folks who are participating today in the Marcellus shale area.

We're making excellent progress in our efforts to develop projection in that area, but I never like to make the same mistake twice, so I think what I will tell you is I am very confident we will have news on the Marcellus shale to talk to you about, and good news in that regard, in terms of project development, but I, I -- these are complex transactions, and they take a bit longer than I had hoped last call. So I think in due course is the best way to say it to you, you will hear from us on the Marcellus shale, but I think the good news that you should take from this, Ryan, is we have competitive advantage through our infrastructure that exists. We have and are sought out as a very highly regarded potential partner by everyone from producers to pipelines to other players in that area, and that we are very optimistic that we will have some good developments to report to you.

Okay. And in terms of those developments, would that likely be announced all at once, or could there be several projects that kind of flow forward from this point on?

Yes, my guess is the way these things evolve is that certainly you would anticipate hearing from us on a decent size project initially, and then as time guess on, more outshoots and outgrowth of those projects and additional projects to follow.

Thanks for your time, Lon.

Sure. Thank you, Ryan.

We'll go next to Ron Lunde with Wells Fargo.

Thank you. Just curious. Follow up some of the other questions. Have you seen any change in the competitive landscape in the propane distribution area? And I'm kind of talking between the major distributors and the mom and pops out there.

Yeah, Gene, you want to do that at first, then I'll jump in if I think that I have something to add.

Sure. Ron, I would not say I've seen a big change. It's very competitive environment with 3500 propane companies out there. Naturally, with the recession, everybody is out for every gallon they can get. But I would not tell that you I've seen a significant change in the competitive environment.

And, Ron, the only thing I would add, vis-a-vis our own competitive positioning, I think we're positioned as we have been in the past. There are a number of folks who are, we believe are positioned at the higher pricing range than we are, and among the larger organizations. And as a group, I would tell you that the larger organizations are higher service, higher value added and higher priced, than the smaller mom and pops, as a general rule. And as Gene said, I don't think you've seen a significant shift in that overall dynamic.

We came out of the winter with extremely low inventories of propane, and I guess around the normal level of propane going into the next winter would be about 60 million gallons historically. Do you feel that we can make up that difference from where we are now to next fall without really having a very high level of propane prices going into the fall and the winter?

Gene, let me take a shot at it, because we talk about this all the time, and I will express my opinion as I normally do on this question. I've been around this industry a long time, and I've been in situations where the inventory overhang looks enormous going into the year, and situations in which we end, as we are this year, on the lower side, although we've had some nice builds recently. And my theory is somehow the inventory levels always show up, and they reach a point where we get through, and when we have excess inventories, I've always told the folks, don't count on it, somehow the inventory always disappears. This year is great example.

We went into this winter with more than ample inventories at the high end if not over the high end of the typical five-year range this year, and we ended up where we did. And it was a nice winter, but it certainly wasn't 10% colder than 30-year normal. And it just has a tendency -- it's a worldwide market now. We can export out of Belvieu, and we can as well as import in that area. So I would not be unduly concerned about inventory levels. We've seen propane generally track at a low percentage of crude compared to historical norms, and I think the movement of crude will have a much better correlation to propane prices than just propane itself, inventory levels.

Okay, thank you.

Yes.

We'll go next to Carl Kirst with BMO Capital.

All of my questions have been hit, thank you.

We'll move on to John Hanson with Praesidis Asset Management.

Good evening. Pretty much all my questions have been answered as well, but just one area. In the energy services, the description there, we have the gas and the power marketing that's improving, but there also includes some electric generation that's -- margins have been a little bit less there. Can you kind of talk about an outlook for that business, electric generation, in the current markets?

Yes. Let me take that one, John, and then jump in, if you would like. You rightly point out that prices are down compared to prior years, and certainly in PJM, where we are, natural gas is setting the marginal price of electricity. And natural gas hovering around 4 bucks has created an environment with fairly low spot prices for electricity. A couple of things will affect us going forward. The first is during 2010 we'll have a turnaround of one of our large [kanima] units coming up. And so that will take one of those units out of commission for four to six weeks, I think. The other thing we're doing is we'll take down our Hunlock coal plant shortly, and we are converting that to a natural gas, kind of mid merit plant of 125 megawatts, so a lot larger.

Our theory is on the natural gas plants, when natural gas is setting the marginal price, you ought to have a decent margin in a natural gas production plant. It's just when you compare it to natural gas setting the marginal price against nuclear plants or coal plants, obviously there's a much more significant variation in margin that would occur. Directionally for us we expect to see the electric production -- electric generation business produce lower margin for the rest of this year because of the turnaround of [kanima] and secondly the shutdown of Hunlock, we would certainly expect volumes to pick up once [kanima] turns around and Hunlock picks up in mid to late '11, and pricing, it's tough to venture a guess on that because I'd have to guess on the price of natural gas. Personal view is, we're going to see natural gas in the $5 or $6 range, $4 to $6 range for quite some time because of all the excess gas we see in the Marcellus area and elsewhere, but that advice isn't worth a whole lot. I'm not more an expert in this area than I am in many others. That's just to venture a guess.

Thanks.

Yep.

We'll go next to Yves Siegel with Credit Suisse.

Hello, sir, I have a couple of questions, if I could. And I apologize up-front. Did you suggest how big an investment opportunity the Marcellus shale could be for you?

We have not, other than to say we thought it would be a larger internally generated capital opportunity. We haven't quantified it in any way.

Okay. And just to frame that, the organic growth projects that you have on the drawing board currently are about $100 million, is that right?

Each of them are about $125 million, John, is that right?

Yes, that's correct.

So is it fair that the Marcellus would be comparable to that or larger?

We wouldn't spend -- let me say it this way. We wouldn't spend as much time talking about if it were significant smaller.

Okay. And then, just to play devil's advocate, why would you increase the distribution -- you can tell I'm thinking propane -- but the dividend as much as you did if you have such a large appetite for organic growth projects going forward?

That's a good question, and we talked a lot about it, and frankly the board debated that extensively at the meeting they had. The scale of the investment, given our cash flows, if you add it up over a four-year period, five-year period, compared to what we might have done, is not great. If we generate $100 million plus in cash a year and we used to generate $120, and this takes to the $100, you're talking $80 million of cash over a four-year period. It's not enough to move the needle when you compare the balance that we try to strike between income to our investors and growth to our investors. Our payout ratio dropped to the very low end of our range of 35% to 45%, and we felt that we were getting somewhat out of balance with our growth rate becoming much more of a factor in our share price than the income side of it, and we like to think we're relatively balanced there, and when we did the math on evaluating the scale of the dividend increase and the effect on our earnings' growth rate in the future, it didn't move the needle enough on our ability to grow our earnings to suggest that we shouldn't declare the size of a dividend and reward our shareholders with it going forward.

Okay. And could I ask, going back to Marcellus for a moment, do you have all the in-house expertise that you need to develop the projects, or would you need to go outside?

We've done a combination of both. For example, we've had to rely on some consultants to help with us certain activities that are not traditionally things that we do. On the other hand, we've got a broad range of experience of folks in the company, some of whom have worked for pipeline companies before and some of whom have different experiences which had a value to it. So we feel like we've got the human resources internally and through some help on the outside, to be able to move a project forward rapidly and effectively.

Okay, great. I appreciate those answers. If I could just push it just a little bit, going back to propane? Could you just review again where you guys think the secular growth rate is for propane, all else being equal? Is propane, in a normal environment, and I don't know what "normal" is, but is it a 1% grower, or is propane a -- is demand for propane on a secular decline? How do you guys --

It's Gene, do you want me to take a shot at that Lon?

Yes, go ahead, Gene. You're familiar with that.

Well, there's the -- you might be familiar with the propane education and research council. It's a council that works for everyone in the industry. And they have, over a period of years, used an econometric firm to project outgrowth in propane, looking at a lot of factors, and I've come to have a lot of respect in the results that they're providing. What they're saying is, with relatively stable pricing and recovering economy, the underlying growth in the propane industry should be in that 1% range. We do see structural conservation, but they factored that into their numbers. So they really believe we'll come back once we see the housing market recover and the economy recover into that sort of 1% growth range.

Okay. And then when you think about your planning going forward, and you think about your target of 5% distribution growth, how do you think about growing cash flow? Do you incorporate a secular increase of 1%, and static gross margin, or could you perhaps just walk us through the -- and maybe this is another discussion, so I apologize --

No, no, we go through it in our investor presentations, and generally speaking, if you look at how we construct ourselves, we think we can get 3% to 4% EBITDA growth per year. And that's comprised of growing our base business if you will, consistent with the market. So if the market is net flat 0, we would expect to maintain our volume in our base business, and if it's a 1% grower, we'd expect to grow 1%. We don't expect to take share in sort of your basic propane business. We have two other areas where we expect to grow, because of competitive advantages we have, and the nature of our business. One is in our, what we call strategic accounts. We cover 95% of the population in the US.

So, any time a significant organization is looking for an entity to serve their needs across a large geographic area, we are one of a few who can participate in that business, and that has been in the past a growing business, and we would expect to add to our volumes through that segment. And secondly, of course, our cylinder exchange business we think is a different kind of business, and that ought to be growing as well, and growing through a number of things, converting more organizations to resellers of cylinders in that format, and then secondly, just taking share from charcoal grill markets, as it has done in the past. So if you look at the overall construct of it, we expect some volume growth through our initiatives and strategies.

We certainly expect overall, over a long periods of time, margins to grow consistent with operating expense growth. That is, we feel it is rational to assume that you can recover increases in operating expenses through margins. And then lastly, we expect to do a better job of riding our operating expenses to rates less than inflationary increases over time, and thereby control operating expenses through good management, growth in margins consistent with inflationary expectations and operating expenses in those increases, and lastly, some volume increases through our strategies. So that's how we construct our basic budget.

Lon, I would add to that, acquisitions as another.

Oh, I'm sorry, I left off acquisitions.

In that range of 20 million gallons being a target over time.

Yep. So if you take 10 to 20 million gallons, that's 1% to 2% growth through there Yves, as well.

Got it, got it. Thank you, guys.

Sure.

Thank you.

We'll go next to Adam Rothenberg with Zimmer Lucas partners.

Hi, good afternoon. The interest rate loss on the hedges -- where, does that show up in the AmeriGas income statement? Is that in the "other" line item?

Yes.

Go ahead, Peter.

Yes. It's in the "other" income expense.

Okay. And then, it looks like there is margin expansion as compared to same quarter of last year. What drove that?

Go ahead, Gene, do you want to take that, or Peter? I don't know if it's a --

You're talking about propane.

Yes. Retail propane.

It's a combination of things. Part of it is a little bit of favorable mix certainly helps with that margin improvement. Then the balance, we closely monitor our pricing compared to the competition and try to get the pricing right and try to get our costs right. So that worked out slightly better than last year. But a piece of it is the mix of somewhat higher margin product compared to last year.

Okay, great, thank you.

We have no further questions in the queue at this time. I will turn the conference back over the Mr. Greenberg to offer any additional or closing remarks.

Okay. Well, thank you very much for turning it back to me. We appreciate everybody's support and interest in the company, and participation in these calls. We look forward to seeing many of you as the year progresses and talking to you on these calls to fill you in on our progress. Again, we couldn't be happier with where we sit today and the prospects for this organization and AmeriGas as we move forward. So we look forward to talking to you, and everybody have a good couple of months until we do. Thanks. That will end the call.

Thank you, Lon.

And I'll call you guys back.

That concludes today's conference. Thank you for your participation.