UGI Corp (UGI) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the UGI and AmeriGas Partners LP third quarter fiscal year 2010 earnings conference call and audio webcast. At this time, all participants are in a listen only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. (Operator Instructions). As a reminder, this conference call is being recorded. I would now like to turn the conference over to our host, Mr. Bob Krick. Sir, you may begin.

Thank you, Shannon. Good afternoon to all of you and thank you for joining us today. As we begin, let me remind you our comments will contain certain forward-looking statements which the Management of UGI and AmeriGas believes to be reasonable as of today and today 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. Among them are adverse weather conditions; price volatility and availability of all energy products including natural gas, propane, and fuel oil; increased customer conservation measures; political, economic, legislative, and regulatory changes in the US and abroad; currency exchange rates; and competition from the same and alternative energy sources. UGI and AmeriGas undertake no obligation to release revisions to these forward-looking statements to reflect events or circumstances occurring after today.

In addition, our remarks today will reference certain non-GAAP financial measures for fiscal 2009 and 2010 that management believes provide useful information to investors to more effectively evaluate the year-over-year results of operations of the Company in the fiscal years. These non-GAAP financial measures are not comparable to measures used by other companies and should be considered in conjunction with other performance measures such as cash flows from operating activities. With us today are John Walsh, President and COO of UGI; Gene Bissell, President and CEO of AmeriGas; and Peter Kelly, CFO of UGI. [With us is] also your host, Chairman and CEO of UGI Lon Greenberg. Lon?

Thank you, Bob. Let me also welcome all of you to our call today and trust you have all had the opportunity to review our press releases reporting our third quarter results. Peter will provide you with more detail on our financial results when he gives his comments.

As stated in our press releases, the overall financial performance of each of our business units was in line with our expectations given the very warm, early spring weather we experienced. Just by way of example, April weather and some of our business units domestically was nearly 30% warmer than normal, and this followed a very warm winter weather domestically in March. Given that we normally experience decent heating demand in those months, our financial results were obviously adversely affected by that weather. I don't want to, however, overemphasize this, as weather sometimes gives and other times it takes. After taking into account both our performance thus far this fiscal year and our prospects for the remainder of our year this fourth quarter we're in, it certainly is more noteworthy that we are comfortable reiterating our full year guidance of $2.20 to $2.30 for UGI and $335 million to $345 million of EBITDA for AmeriGas.

I will have more to say later in the call, but now I would like to turn it over to Peter, who will turn it over to John and then Gene, and then I will come back at the end of the call. Peter?

Thanks, Lon. Last night we reported third quarter earnings per share of $0.03. This compares to the net loss of $0.03 reported for the same period last year. Our results in the third quarter of last year included a charge of $0.09 related to the competition proceedings in France. As Lon mentioned, overall the $0.03 was pretty in which line with what we expected though we did have some moving parts, which I will cover shortly. As usual, I will give some of the highlights on the profit performance before moving on to a discussion of our balance sheet and liquidity. Though I would like to take the opportunity to remind you all that with the winter largely over, that third fiscal quarter is a transition quarter where relatively small movements can have a disproportionate effect on our results.

For the quarter, weather was warmer than normal across our businesses. Natural gas prices and electricity prices remain low, but we have seen some increases in LPG. Excluding the previously mentioned charge taken last year for the French competition issue, earnings for the third quarter were lower than last year, reflecting lower international propane results partially offset by stronger performance in our utilities. For our utilities, the increase in base rates and reduced operating expenses helped overcome a tough quarter for weather, with temperatures over 26% warmer than normal impacting in particular residential volumes. AmeriGas also experienced significantly warmer weather at 17% warmer than normal. Slightly better unit margins and reduced operating expense helped to offset the impact on margin of reduced volumes.

Our Energy Services business continued to benefit from growth in retail power marketing, and short-term volatility in gas prices helped with our capacity management assets. We closed the Hunlock Power Plant on schedule and expect to bring it back up in a year. Electric generation operating income was weaker year-on-year, but this was essentially due to lower prices and the impact on volumes and costs of a planned maintenance outage at [Calimar]. In our international business and excluding the impact of French competition matter, net income was down about $5 million as overall unit margins as expected returned to more normal levels when we took EUR1 million charge for a shared storage facility that is being closed.

Turning to the balance sheet, our consolidated debt at just under $2.1 billion was down about $160 million compared to the same period last year. Our consolidated cash position was $265 million compared to the $305 million reported this time last year. Restricted cash included in these numbers was approximately $23 million this year compared to the $65 million reported last year. Included in the $265 million at the end of the quarter, we had about $119 million of cash available at our holding Company to reinvest for growth. On our current annual dividend rate, we would typically expect to generate on average about $100 million to $105 million of such investable cash per year.

Of the $2.1 billion of debt at the end of June, approximately $2 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 $884 million of debt, up $21 million from last year, and utilities had $640 million of debt, a reduction of $110 million. And the international business was approximately $465 million, down $69 million on last year, which is essentially a result of exchange rate translation. We currently plan to refinance EUR380 million of debt in France before it becomes due next spring. From a property plant and equipment perspective, we have almost $2.9 billion in net fixed assets, similar to the level reported in the same quarter last year. Capital expenditures were approximately $83 million, with depreciation and amortization of $52 million.

Turning to liquidity overall, we continue to 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 of $350 million. We have $200 million of financing capability in Energy Services and $275 million in lines of credit at AmeriGas. At Antargaz, we have a facility of EUR50 million, which we plan to extend when we refinance our long-term debt. At the end of June, AmeriGas had used $15 million of its revolver and had a cash balance of $10 million. Utilities had not pulled any of its revolver with cash on hand of $42 million. Antargaz had not used its revolver and had $31 million of cash available, and Energy Services had not used any of its capacity and had cash on hand of $39 million.

So overall, another good quarter with our business model responding well to the headwind caused by the warm weather. This sets us up to deliver our full year guidance for EPS of $2.20 to $2.30. I would like to remind you all that this guidance excludes the recently announced sale of our storage asset in Virginia, but it does include the $0.03 loss we incurred last quarter for the writeoff in AmeriGas of interest rate protection agreements. For those of you who follow it, we have 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 economic conditions in the third quarter can best be described as mixed, we made good progress on our core business initiatives. These are the key programs and activities focused on three long-term strategic objectives for UGI -- growing our core businesses, continuously improving operations, and reinvesting cash in high quality projects. Today I will limit my comments to two of these areas, growth within our core businesses and reinvesting cash.

Identifying high quality growth opportunity has certainly been a challenge over the past two years. However, our teams have done a very good job of pursuing and developing opportunities within market segments that meet our standards for financial returns and long-term performance. Good progress was made in Q3 on several of those developing segments. Energy services continues to deliver growth through their marketing programs aimed at developing two new customer segments -- power marketing and small commercial gas. We've had good success in expanding our business with existing customers by adding power supply to our portfolio of products and services. Our existing natural gas customer base has its highest concentration within the PJM grid. So power is a natural extension of our supply relationships with those customers. Our small commercial gas program is building on the growth momentum established since its launch in fiscal year 2008. We expect to finish this fiscal year with approximately 8,000 new customer locations added over the trailing 24 month period.

We're excited about Antargaz's entry into the natural gas marketing business in France. Although this program has just been launched, we believe there is a good long-term opportunity to build an attractive gas marketing business in France, particularly within the commercial sector. We have several key strengths as we enter this segment. These include our strong brand and established commercial sales network in France and our detailed knowledge of the natural gas marketing business here in the US. We're hopeful that this segment will develop steadily over the course of several years, similar to the approach we have taken with our small commercial and power marketing programs in the US.

Our gas utility continues to grow its customer base in spite of the challenges provided by the housing market. We have had great success over the past three to four years on conversions, with the majority of that growth coming from fuel oil customers. With the expiration of electric rate caps underway in Pennsylvania, we're seeing increased opportunity for conversion of electric customers. We have also seen a modest recovery in new home construction over the past two quarters and our new home additions year-to-date are running above last year. We're monitoring new home activity closely to determine if activity levels will fall as government incentives expire.

Now on to reinvesting cash in high quality projects. I will comment briefly on two critical areas for reinvestment. Our two major capital projects for Energy Services are progressing nicely. These projects are the $125 million investment to repower the Hunlock coal fired electric generating station as a larger gas-fired facility, which will come online in late fiscal 2011, and the $120 million expansion of our LNG peaking facility scheduled for completion in late fiscal 2012. Almost all of the major equipment modules for the Hunlock project are onsite and installation activity is well underway. We're also making solid progress on fabrication of the LNG storage facility in Temple. We continue to meet all critical project milestones and will keep you updated on future calls.

On the acquisition front, we have been very pleased with the success AmeriGas has had this year in acquiring local distributors that expand our presence in targeted local markets. We have completed 10 acquisitions year-to-date and our active deal pipeline to stronger than at any point in recent years.

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

Thanks, John. We're pleased to be reporting an improvement in net income and EBITDA despite the impact of warm spring weather on our volume this quarter. EBITDA increased $1.8 million or 7%. Volume was 6% lower due to weather that was almost 15% warmer than last year. Usually weather is not a big factor in the third quarter, but this year weather was particularly warm in April when many customers would normally get their last fill of the season. For the month of April, weather in our service territories was 24% warmer than normal and 24% warmer than last year.

In addition to the impact of weather, the lower volume reflects the impact of customer conservation, the weak housing market, and a sluggish economy. As I mentioned last quarter, our forklift volume continues to be a bright spot, with volume for the quarter up 7% from last year. This is encouraging because historically forklift has been a leading indicator. Today, however, we have not seen a positive trend in most of the other categories. The wholesale cost of propane in the third quarter averaged $1.08, up about 49% from last year and resulting in higher prices to our customers. The higher cost in diesel also increased the cost of running our vehicles.

We were able to offset the impact of lower volume through our margins and expenses. Margin per gallon was slightly higher than last year as a result of higher margins in our ACE business. Operating expenses were $2.1 million under last year, primarily due to lower payroll and benefit expense as a result of managing our staffing in line with lower volumes.

Turning to our core strategies, our ACE cylinder exchange business is performing well this year, with volume up 3% compared to last year. Same-store sales have not increased, so all of this growth is from new locations. We continue to gain new accounts due to our self serve vending machines. We now have over 1,400 vending machines at 11 different retailers. We're also gaining customers that are not interested in vending machines. For example, we're in the process of setting up $500 general stores.

Our strategic account volume increased 2.4% year-to-date. Here again, all the growth in volume is due to adding more customer locations. We have had particular success with rail accounts that use propane for their switch heaters. We now service over 6,000 rail locations for the top four national rail companies. We closed several more small acquisitions this quarter, bringing the total annualized gallons acquired to 11 million, and we have several more small deals we expect to close before the end of the year. Most of the deals we're doing are total blends with great synergy savings, but we have done a few that help us extend our geographic footprint. Based on our results year-to-date and expectations for the fourth quarter, we are reiterating our guidance on adjusted EBITDA for the year to be between $335 million and $345 million.

I would like to finish my remarks by thanking our employees for their dedication to our customers and perseverance answer in this challenging economic environment. Looking forward, we'll continue to focus on growing our EBITDA through effective execution of our growth strategies -- acquisitions; growth in ACE and strategic accounts; and by striving to be the most reliable, safest, and most responsive propane company in every market we serve. Lon, back to you.

Thank you, Gene. As we work our way through the last few months of our 2010 fiscal year, I thought I would try to take a step back and raise my viewpoint to 40,000 feet and get out of $0.01 here or there and last quarter, because it's not as meaningful as what's going on. First, we continue to make good progress in our two larger capital projects as John mentioned, the construction of our 125 megawatt gas-fired electric generating station and the significant expansion of our LNG plant. These projects are essentially on time and on budget. Secondly, we're diligently pursuing a number of opportunities in the Marcellus shale area. As you all know, we have a strong presence in that area. We have significant gas demand. We have storage assets. We have a number of our gas utility operations located there. We expect that we'll have an opportunity to play a meaningful role in the Marcellus shale area. Third, we're seeing an increase in opportunities, as both John and Gene said, for smaller acquisitions domestically, and I will add that we're seeing an increase in opportunities for smaller acquisitions internationally in our propane businesses as well. In that regard, we expect to complete a few more of these types of transactions domestically and internationally by the end of this year. While none of these opportunities are material in and of themselves, as you know, a well executed program to grow through small acquisitions does become more meaningful over time.

The discipline attendant to how we manage our businesses was once again demonstrated this past quarter, and it was demonstrated by the recently announced divestiture of our propane import terminal in Chesapeake, Virginia. We acquired that asset a number of years ago, with the goal of making it more than just a propane import terminal. We found that we couldn't do so in a way that produced acceptable returns, and thus we concluded the asset was not strategic to us and we embarked on a process to sell it to someone to whom it had greater value. It is not that we needed the cash, because we certainly don't. Instead we adhered to our disciplined approach, which focuses us on strategy, returns, and shareholder value. And ultimately we will put that cash to a better use than having it remain in that propane import terminal.

Operationally, as Gene and John both mentioned, we continue to see some signs of a recovery in the economy and our volumes. These signs are certainly not a V-like recovery in nature, and they're certainly not uniform across all classes of business. Nonetheless, we feel a pulse and we have bounced off the bottom. At the same time, I would characterize our margins in our businesses as relatively stable. It certainly is competitive in every business that we own, but competition is not solely focused on price, service, and other aspects of customer oriented value continue to be a part of the competitive landscape.

As you can surmise from my comments, we continue to execute our strategies well and we're making solid progress as we do so. You have often heard us use baseball analogies and probably others do as well, so I can't resist the opportunity with the Phillies on a winning streak to do so here. We're not a club pretty much like the Phillies that swings for the fences and wins solely on hitting a home run. That's not to suggest that we don't have some power hitters and occasionally hit a home run, but more often you're going to see us win by scratching out runs, by hitting singles, and sticking with sound fundamentals of execution. I referred to a number of instances of that in my prior remarks.

2010 for us was a fiscal year in which we demonstrated that. There are no home runs that will produce a step function jump in earnings next year. However, we will have our usual growth and we'll have the benefit of the singles that we hit during 2010, as well as the benefit of the excellent execution on a few longer term projects that will in the years in the future result in an acceleration of growth in earnings.

The confidence that we have in our future was clearly demonstrated to you by the action of our Board a few months ago. As you know, the board raised our dividend by 25% to an annualized level of $1, and we were quite pleased, and included in that we is me and my spouse. We were all quite pleased to receive our first dividend checks at the beginning of July that had that increased level of payment in it. It is not only our hope but our expectation that we're going to continue to deliver superior returns to all of our shareholders for the foreseeable future in the balanced fashion that we have, a combination of earnings growth and dividends.

By the way, this year we are planning to have an Analyst Day to update you more fully on our progress. I think the date is going to be October 19, but stay tuned for more information about the Analyst Day, as it will take place during October this year, and we'll provide more information at a later date. Shannon, those are our prepared remarks, and at this point we'll be prepared to answer some questions.

(Operator Instructions). Our first question comes from Carl Kirst with BMO Capital. You may begin.

Good afternoon, everybody. Actually, my first question may be for Gene on APU with respect to volumes, understanding the weather issue we had. What is your sense of where we are on a conservation right now? Are we structurally still in this 1% range or is it perhaps better or worse than that?

We estimate that conservation -- we look at that every year. We think this year we're seeing conservation in the range of 2.5% plus or minus, and then that's primarily looking at the residential customers where it is easiest to analyze their usage. And then looking -- the rest of what you are seeing is the combination of weather and the impact of the sluggish economy on our nonresidential customers.

Okay. Appreciate that. And follow on if I could, really for propane with respect to actually both domestic and international -- to the extent we have seen wholesale propane prices continue to decline in July at least relative to calendar second quarter, has there been any early read with respect to unit margins here in July, and understanding this quarter is even more of a shorter period than last quarter, but has there been any discernible direction in those unit margins?

I will take a shot at it, and Gene, if you want to amplify because I can cover both. As you may have heard earlier, I would characterize our margins as stable, Carl. This is the time of year as you point out that we're in a quiet period. This is the gain season domestically for propane internationally. We don't adjust our prices as often as we do domestically, and so I would tell you that margins are relatively stable within the bounds of being stable, and so I don't think you should expect big changes in where they have been. And if you look at last year and last quarter, you're going to see things within reason in those areas. Is that about right, Gene?

I agree.

Last question if I could. Actually, Lon, appreciate your mentioning of the Marcellus and understand there is only limited perhaps to say at this point. Is there any color you can provide with respect to the tone of discussions? Have they accelerated or slowed down, for instance, with respect to the last three or four months? Is there any particular challenge that producers are looking at in order to get over a certain hump? Any extra color you might be able to provide?

It is hard to say. It is a fluid situation out there. The one point I will make is I think among all gas related companies in the universe all of you cover, I will win for holding off mentioning Marcellus until the latest in comments. But aside from that poor joke, I will say that it varies by producers. Producers want to get their product to the market, and what they're doing is generally drilling along existing pipelines because there is no infrastructure in place. They are looking for folks to put in that infrastructure so that they can move the gas to the more desirable pipelines and optimize among the pipelines that are out there. And as you know, it sounds like there is a heated race among a variety of folks to provide infrastructure, and there is plenty of room for infrastructure in the Marcellus.

And each producer appears to have different issues. Pennsylvania is getting tougher on how they're looking at the Marcellus area because there were a couple of accidents here. Other producers are -- as you read the paper, every other day producers is being taken over by another company and their processes stop for a while and then they kick up again with different personalities involving different people involved. So it is a very fluid area and I would say that the pace of our activity [isn't] intensifying and accelerating in terms of the progress we're making and the discussions we're having. I will give you that color, but they're complex, and we will an announcement on the Marcellus as quickly as we think it prudent to do so. But we're making good progress there.

Understood and appreciate the commentary. Thank you.

Thank you. Our next question comes from Darren Horowitz with Raymond James. You may begin.

Good afternoon, guys. Gene, a couple of questions for you on the AmeriGas side. When you look at improving margins, outside of any tweaks to product mix, how much more can you rationalize the operating and administrative cost lines?

You're asking more about the expense side?

That's right.

We certainly look for opportunities to do that all the time. The best way for us is when we make acquisitions, there are a lot of synergies available through the acquisitions that help us manage down the expenses. But we really look to the efficiencies that we gain to offset the impact of some of inflation. We aren't looking for a step change in the expense area.

Second question on the acquisition front. In total, can you quantify for us how many gallons these several small deals will add? Does it get to you that target 20 million of acquired gallons for the year?

The ones we have done so far don't. Right now we're at 11 million gallons with the deals that I mentioned on annualized basis.

I was more asking about the several small deals you hope to close before year end.

Unclear to me that we'll get to the 20 million -- somewhere between the 11 million and the 20 million I would say.

Okay. And to the extent that you expand geographically, what new markets will you be entering?

Generally with our footprint we cover about 95% of the propane consumers in the US, so when I talk about extending our coverage, usually it is stepping out 25 or 30 miles. In this case, we did one acquisition that gave us a better footprint in North Carolina. We did another one that has improved our footprint in Texas, but it is not huge stepouts for us. It is really areas that are within about an hour of another store.

Okay. Final question for me on the maintenance CapEx line. If we were to assume that this current quarter likely experiences the same type of maintenance capital spend that you guys experienced in the year ago September quarter, would that suggest somewhere around $39 million to $40 million for the year? Is that fair? And more importantly, is that a fair target for fiscal 2011?

That's right on for 2010. You hit it exactly.

Can I extrapolate that for next year as well?

2011 I think will be somewhat lower, so we'll be projecting more specific numbers, but it could be as much as $5 million lower next year because we're completing some of our IT spending that has increased our numbers this year.

Okay. Thank you very much. I appreciate it.

Thank you. Our next question comes from Faisel Khan with Citigroup.

Good afternoon. You talked a little bit about expanding your natural gas marketing business in France. Does that mean you will also be looking at physical assets there for gas as well like storage and pipeline?

Yes. France is -- and John, jump in here, or Peter. France is a completely different marketplace than here. Originally when we began to look at it, the first thing we did since we have a lot of experience here is ship over the guys who know the business here and meet with those folks. And the structure of the market is different over there, so there aren't the same kind of opportunities for storage pipelines and infrastructure there that there are here. And so we're branching out initially as a marketer and starting with that and focusing on that as opposed to the US, where we really started with assets and grew a business out of assets.

Okay. And then on the storage assets that you sold in Virginia, what was the earnings contribution from that? Was it material?

It is probably $0.03 ish, somewhere in that area.

Okay. And then the two projects you're working on, the repowering of the power plant and the LNG [Temple] facility, can you talk about where you are in terms of construction on those facilities today?

Yes. I will have John do that.

Hi, Faisel. In terms of at Hunlock, we have basically -- all the major equipment modules are either onsite -- the majority are onsite, the others are very close or in transit from port to site. So we're in the process of taking those major equipment modules, doing installation work and obviously then progressing through start up over the next several quarters. So we're looking at -- certainly by the end of next fiscal year to have the Hunlock plant fully operational really right on schedule, no surprises in terms of major equipment deliveries, which is always an issue or concern on a major capital project, and good progress being made throughout the summer. So that's Hunlock. At in terms of Temple we're right in the middle of the fabrication process on site with the tank, again making good progress there with the various intertank shells and we'll very shortly be making the pour with -- the external pour in the tank, the outer tank shell, so very good progress there. We're a little bit farther out. That's fiscal -- by the end of fiscal 2012, but no surprises there either. Very good progress, no issues with materials, and very pleased with progress to date.

Okay. And I did note down you mentioned how much cash you had at each subsidiary. What's the total amount of cash at UGI Corp excluding AmeriGas for the quarter?

Excluding AmeriGas? We have $265 million in total and there is $10 million at AmeriGas, so it is $255 million.

Perfect. Okay. Thanks, guys. Appreciate it.

Sure.

Thank you. Our next question comes from Ryan Rosenthal with Sidoti and Company. You may begin.

Good afternoon, everyone.

Hey, Ryan.

Most of my questions have been asked and answered, but I do have a couple more. Concerning the propane acquisition environment both in the US and in Europe, I wanted to get a sense if I could in terms of what the dynamics are that are suggesting the market has improved, and perhaps more importantly does that -- can I read into that unit margins will be more difficult to grow in the future as well?

Let me take a shot at the dynamics of the market. I think overseas there is a series of strategic decisions being made by players to evaluate their LPG portfolios and decide if they want to sell an individual country or two or pieces of their networks, and that's really driving those opportunities. There are also some smaller players out there who are evaluating whether they want to remain in the business, or, as any owner would, diversify their holdings into something else. Domestically, the market has improved somewhat, but I would say our effectiveness in a tough market has improved even more. So if you would look at the percentage of transactions we are getting of transactions done, I would tell you that's up, and that's a combination of improved effectiveness, of how we began to structure the group more than a year ago, and staff the group and organize our activities. And it is a function of sellers looking at the environment and certain people reaching ages where they want to get out, which is typical.

So I would say there is credit that our folks deserve for the improved performance. There is serendipity in marketplace and some strategic decisions being made by individual owners or larger organizations that are all contributing to it out there. I will tell you that one thing that hasn't changed is our discipline in doing it, multiples are in the -- I will group international and domestic together. I would say multiples are in the 5 to mid 6 range generally speaking. So we haven't seen multiples run away from us. We haven't seen pricing run away from us. We haven't modified our own behavior to fool ourselves and keep multiples low and pretend we're going to grow the business 40% the year after we get it by way of example. We haven't changed our discipline, and we think that the market is at a price level for many of the transactions which is acceptable to us.

Turning to the unit margins and your outlook on that, is that something you feel comfortable you can continue to grow at least at the pace of inflation? Has anything changed in terms of your thought process on that?

I don't think so. Again, I will talk about both generally and then, Gene, you jump in. Our long-term thesis is, margins ought to grow with inflation and other costs. We don't see anything -- I mentioned the competitive environment, and the competitive environment today I would say is relatively stable across domestically and internationally. The competition is existent. It is intense, but in this business it always is when you have hundreds and thousands of competitors. The competition is not solely price based competition. It is competing on service, competing on terms, competing on capabilities that are important to the customers. And so it is a relatively normal tough market, but I wouldn't call it unusually intense for this marketplace.

Thanks. One final question on your electric utility business. I noted since the default service rates went into effect as of January that the earnings for the business had declined. Are you considering a rate case in order to reach the allowed ROE for the electric utility?

Right -- it's John. No, we're -- actually, we look at that, but we're not close at this point to any need for rate case filing.

We'll continue to monitor it, but that's likely to be several years out.

I will turn it over. Thank you, everybody.

Thank you. Our next question comes from the Ron Londe with Wachovia Securities. You may begin.

Thanks. I am curious, given the record warm weather we have had in June and into July, if that had any effect on the same-store sales being flat in the cylinder business in that people were less likely to go out and spend time outdoors barbequing rather than hiding in the air conditioning? Do you have a feel for that?

Actually, I really looked at the same-store sales year-to-date, which are about the same, about 0.5% down to be specific. And we think that had more to do with the severe winter weather that we saw in the Southeast and South Central part of the country. So it was more the impact of earlier in the year than it is what we have seen in the last couple of months. The last couple of months the same-store sales look about where -- look a little bit more favorable.

From the standpoint of the recovery and the forklift demand, was there any specific sector of the economy that was better or worse than another?

For us it is mostly driven by freight or the big box retailers. Those are the kinds of things that tend to drive that number for us. Beyond that, I wouldn't say there is anything specific.

You heard, Ron, in terms of other companies announcing the freight area, transportation area, seem to be having some solid improvements in volumes and things.

It is UPS.

Fed Express, UPS, those guys. Railroads.

Home Depot, all of those are the one that is tend to drive those numbers for us.

Very good. Thank you.

Thank you. (Operator Instructions). Our next question is from [Chris Ignaci] with UBS. You may begin.

Hey, guys.

Hi, Chris.

Just had a follow-up question on international propane. Peter, correct me if I'm wrong, but I think I heard you mention that charge there was EUR1 million, is that right?

That's right, yes.

Okay. And then could you guys provide a little more clarity on the margins internationally? I know the price movements last year created the opportunity for pretty wide margin gains. Is that really the only thing in your minds driving the margin decline this year or was there something else occurring?

The margins internationally again -- the overall sense, combining all of the products together, the aggregate margin I would tell you is about where we expected it given the business mix that we have. This quarter probably in certain classes of business was lower than we would like, and -- but when you run a business like this, you compensate in other areas to some degree. So the overall aggregate margin was close to what I would say a normalized level. You would obviously like to do better every time, but if you look at 2007 or 2008 margins, this quarter was similar, slightly higher than the margin, similar margins during those years, and so again in the aggregate you are in the right ballpark. Could you optimize a little here or there, yes. The cost environment moved around a little bit, and given that you don't change prices all the time over there, you either suck it up a little bit there. But I wouldn't tell you that there is significant -- that we're disappointed in those margins or that there is significant room for upside in them.

Okay. And then on the gas utility front, I know there is a lot of Marcellus talk and there is a lot of infrastructure talk related to the Marcellus. Some of your peers in Pennsylvania have been talking about BTU content of the gas ticking up a little bit with the introduction of Marcellus into supply sphere there. Are you seeing something similar and does that pose any long-term challenge?

No. I think the impact on us thus far in terms of Marcellus gas on the utility side that's making its way into our system is pretty minimal. I mean, I think long-term certainly it will be a factor and any variations in BTU content we'll have to take into account as we kind of balance our system, but we don't consider that to be a significant concern or issue moving long-term as we pull product into our systems on the kind of eastern side of Marcellus. We look at it as a great opportunity for the utility and our customers to over the long-term to kind of restructure our supply portfolio and incorporate gas produced in the state of Pennsylvania in a significant way.

Okay. Thanks, guys.

Chris, sorry, just one point on international margins. Obviously there has been a lot of talk about exchange rates recently. Fortunately, this year and last year, they've had almost no impact on those, because we hedge out our exchange rate exposure. As we look into 2011, though, it could be a little bit of impact there, maybe a couple of cents or $0.03, but that's probably the only kind of real impact from a module perspective in international.

So $0.03 headwind do you think at this point?

On exchange rates.

And as you know, our program is we do hedge over -- we lay in over a three year period, and the whole idea is I think -- this year the euro went from dropped $0.30 this year, $0.40 this year, and it was a significant move, 20% move or more. And our objective is to do exactly as Peter described, make it a few cents here or there so that we have the have the opportunity to manage that change as we move forward, but as things move -- and this is obviously we have legged in 2011 over the prior periods as well. And so as we looked at it, Peter has accurately described the effect on us potentially next year, but it is a couple cents here or there, as he said.

Thanks for the added color, guys.

Thank you. I am showing no further questions at this time.

Okay. Terrific. Thank you all very much -- again, a quarter for us which was totally in line with our expectations. We expect our earnings to fall into the range that we gave you at the beginning of the year, and we continue to make good progress in executing our strategies. We look forward to seeing many of you at our October 19, Analyst Day and then having some more conversations with you then. So thanks for your attention. Thanks for your support. We look forward to seeing you soon. Bye.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day.