UGI Corp (UGI) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the UGI and AmeriGas Partners, [LP], second quarter fiscal year 2011 earnings call and live audio webcast. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time.

(Operator Instructions)

As a reminder, this conference call is being recorded. I will now like to turn the conference over to Hugh Gallagher. You may begin.

Good afternoon, and thank you for joining us.

As we begin, let me remind you that our comments will contain certain forward-looking statements which 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 more complete 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; the impact of pending and future legal and regulatory proceedings; political, economic, legislative and regulatory changes in the US and abroad; currency exchange rates; the timing and success of our acquisitions and investments to grow our business; 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 will reference certain non-GAAP financial measures that management believes provide useful information to investors to more effectively evaluate the year-over-year results of operations of the Company. These non-GAAP financial measures are not comparable to measures used by other companies, and should be considered in conjunction with performance measures such as cash flow from operating activity.

With me today are John Walsh, President and COO of UGI; Gene Bissell, President and CEO of AmeriGas; Bob Flexon, CFO of UGI; and your host, Chairman and CEO of UGI, Lon Greenberg.

Lon?

Hello to everyone, and welcome to our call. I trust you have all had the opportunity to review our press releases, reporting both our second-quarter results and our dividend and distribution increases.

Just to briefly summarize, UGI reported earnings per share of $1.32, compared to $1.43 last year. This year included a $0.05 charge from refinancing activities at AmeriGas, while last year had a $0.03 charge associated with discontinuance of hedge accounting on interest rate hedges at AmeriGas. With regard to AmeriGas, it reported lower net income of $118 million, compared to $134.5 million last year. As noted, with UGI, there was a refinancing charge at AmeriGas this year, and a hedge accounting discontinuance charge last year. Since virtually all of you follow EBITDA at AmeriGas, the EBITDA year-over-year comparison adjusted for the 2 charges is $176.3 million this year, compared to $185.8 million last year. We also reported late last week that UGI's board approved a 4% increase in the dividend on UGI's common stock, and AmeriGas's board approved a 5% increase on the distribution on AmeriGas's units.

Before I turn the meeting over to the others, I want to give you a bit of color on our earnings this quarter. Our Utilities and Energy Services businesses did better than last year. These units also outperformed our budgeted expectations for the quarter. The outperformance was driven by a variety of factors, including colder year-over-year weather, the return of some volatility to natural gas markets, which is helpful to our asset management business and our energy services Midstream Marketing business; and a slowly improving economy helped volumes in our territories.

On the other hand, our Propane businesses did not fare as well as last year, or for that matter, our original expectations for the quarter. But I want to point out to you, the reasons for the lower performance are principally weather-related, and allow me to elaborate. Domestically, AmeriGas's lower performance was volume driven with volumes nearly 4% lower than last year. On weather, which was ostensibly about the same as last year. However, in 2 of AmeriGas's 6 regions -- which are the Southeast and South Central regions -- weather was more than 25% warmer than last year in February and March. This allowed people to virtually stop heating their homes and businesses by the end of January. Our volume in those two regions was lower by nearly 19 million gallons. In the other four regions, weather was 7.5% colder than last year, and volume was up by 3% or 6 million gallons over last year.

So where we had extraordinarily warm weather, we had a 19-million gallon shortfall, a significant shortfall for those regions. Where it was colder, we have improved volume. And when you netted the two, we were 12 million gallons shy of the prior year. And that netting is the netting of the weather that I mentioned. To summarize, in essence, where we have our businesses, we had more warm than cold. Internationally, a similar story. Weather was about 16% warmer than the prior year. To help you understand the effects of weather on volume internationally, all you need to do is compare the first quarter of our fiscal year with the second quarter of our fiscal year internationally. In the first quarter, it was significantly colder this year than the first quarter last year, and our volume was up by nearly 11 million gallons. And this quarter, weather was significantly warmer than last year, and similarly warmer as the cold in the first quarter, and volume was down by almost the same amount --12 million gallons. I hope this prolonged explanation puts our second quarter decline in earnings at UGI and AmeriGas in context.

I will have more to add later in the call, but at this point I want to turn the call over to Bob, John, and Gene. This is Bob's first call with you, and I'm confident that you will find the same clarity from him that you've found from our prior CFOs, and we are delighted to have Bob join us.

Bob?

Thanks, Lon.

As Lon covered in his remarks, the company's second quarter performance was particularly strong for the gas utility and the Midstream and Marketing businesses; whereas the propane businesses were adversely impacted by higher propane prices and unseasonably warm weather in several of our markets. Our reported earnings per share for the second quarter was $1.32 per share, a decrease of $0.11 compared to the $1.43 per share reported for the same quarter of fiscal 2010. As Lon reported, included in the current quarter results is an after-tax charge of $5.2 million, or $0.05 per share, related to the early extinguishment of AmeriGas Partners' senior note.

Second quarter 2010 results included a $3.3 million charge, or $0.03 per share, associated with the termination of interest rate hedges. Gas utility total margin was $9.9 million higher in the current quarter versus last year, and was the principal driver of this $9.8 million increase in operating income between the 2 periods. The margin improvement was primarily driven by a $9.1 million of higher core market margins, resulting from improved volume. System throughput climbed from 54.6 Bcf during the second quarter of 2010, to 61.3 Bcf during this year's second quarter, an increase of over 12%. Midstream and Marketing operating income was flat between the current and prior year second quarter, at $40.8 million. Decreased margins in the 2011 quarter from lower power generation, as the Hunlock facility is repowered, and the prior-year sale of the Atlantic energy facility were nearly offset by increased margins from winter peaking and asset management activity.

AmeriGas Propane Partnership EBITDA was $157.5 million in the current quarter, versus $173.6 million in the prior year; a $16.1 million, or 9.3% quarter-over-quarter decline. Included in 2011 is the $18.8 million charge associated with the early extinguishment of debt; whereas the 2010 quarter had a $12.2 million charge in connection with the termination of interest rate hedges. Total margin in the current quarter declined $4.4 million, primarily from reduced sales volume that was only partly offset by fee income and slightly higher unit margins. International propane operating income was $61.8 million in the second quarter of 2011, versus $80.8 million during the same period of last year, a decline of 24%. Total margins for the International Propane segment were flat quarter-over-quarter, as the EUR9.2 million margin improvement in Flaga resulting from recent acquisitions, was offset by EUR10 million lower margins at Antargaz, principally caused by lower volume. Average exchange rate for the quarter was $1.37 per Euro, versus $1.38 during same quarter of last year.

Year-to-date cash flow from operating activities for the company was approximately $282 million, versus $304 million for the same period last year. The second and third quarters are historically the highest quarters for cash generation. Capital expenditures were $166.1 million for the 6-month ended 2011, versus $146.3 million for the same period last year. The increase compared to the prior year is equally attributable to the gas utility and the Midstream and Marketing businesses. CapEx for the year is forecasted to be approximately $386 million, a $20 million decline from the previous estimate contained in the 2010 Form 10-K. The change reflects a slower paced spending on investment for the Midstream and Marketing businesses primarily from Marcellus Shale infrastructure-related investments. This decrease was partly offset by higher CapEx across the other business segment.

Our consolidated cash position at March 31 was $298.1 million, excluding restricted cash. This compares with $270.7 million at March 31, 2010. At March 31, 2011, approximately $220 million of the cash balance was held by the operating subsidiary. Consolidated debt of $2.29 billion is higher by about $58 million, compared to the same quarter last year. The increased debt is primarily attributable to additional revolver borrowing to meet working capital needs at AmeriGas, due to the impact of higher propane costs. Of the $2.29 billion of debt at the end of March, approximately $2 billion is long term debt. By business and compared to the same quarter last year, AmeriGas had $1.03 billion of debt, up $138.7 million from March 2010. Utilities had $640 million of debt, a reduction of $37 million, and the International business was approximately $606.2 million, down $42.9 million from last year. Financings during the quarter included the AmeriGas $470 million issuance of 6.5% senior notes due 2021. The proceeds were used to refinance AmeriGas Partners $415 million, 7.25% senior notes, and its $14.6 million, 8.875% senior notes. As noted earlier, the Partnership incurred a loss on extinguishment of this debt of $18.8 million, which reduced net income attributable to UGI by $5.2 million.

In addition, Antargaz entered into a new 5-year variable-rate term loan agreement to repay their existing senior facility borrowings. The new agreement consists of EUR380 million variable-rate term loan, and a EUR40 million revolving credit facility. A series of forward starting interest rate swaps have been entered into by Antargaz to fix the term loan underlying Euribor rate, resulting in an interest rate that substantially over the term of the loan equates to 4.75%, given the current spread. Energy Services $200 million receivable facility was also renewed through April 19, 2012. Planned financings for the balance of the current fiscal year include the credit facilities for both AmeriGas and UGI Utilities; and the term loan and credit facilities at Flaga. At the end of March, AmeriGas had $239 million of its revolver capacity, including LCs, and had a cash balance of $35.4 million. Utilities had no borrowings under its $350 million revolver, and had $75.5 million of cash on hand. Antargaz had no borrowings on its revolver, with $31.9 million of cash available; at Midstream, the Marketing had cash on hand of $56 million and was not utilizing either the accounts receivable facility or its revolving credit facility.

Finally, as Lon mentioned, on April 27, 2011, AmeriGas announced a 5% increase to its quarterly distribution, raising the annualized distribution from $2.82 per limited partnership unit to $2.96 per limited partnership unit. In addition, on April 28, UGI increased its dividend by 4%, marking the twenty-fourth consecutive increase on the 127 consecutive annual common dividends. These declarations represent remarkable achievements by both the companies and their employees. For the benefit of our shareholders and unit holders and the benefit of my voice, I will turn it to John.

Thanks, Bob.

As Lon and Bob have noted, we delivered solid performance in Q2, despite a number of challenges, particularly weather patterns and higher product costs within our propane businesses. While the recession has presented us with some headwinds over the past two years, we've remained focused on delivering growth in our core businesses. Our gross programs target both the expansion of our customer base within currently served segments, and the identification of new and attractive segments that can be developed within our existing service areas. Our strong focus was evident in Q2, as we made significant progress on a number of fronts. Customer growth and our gas utility continues to benefit from our focus on conversions. We've added over 6,000 new customers year to date, despite the continued sluggishness in new home construction. Customer conversions, primarily from fuel oil, accounted for almost two-thirds of our new accounts in both the residential and commercial segments. We're seeing an acceleration of recovery within the commercial sector at Utilities, with year-to-date new customer additions up almost 20% versus fiscal year 2010.

The Power Marketing segment within our Midstream and Marketing business is an excellent example of a new segment in development. This program targets commercial power accounts in the mid-Atlantic region, utilizing the same sales team that markets natural gas. Over the past 12 months, we've more than doubled the number of power customers. We now serve approximately 2,250 locations on 13 local distribution systems within the PJM network.

Antargaz is pushing forward on several fronts to deliver growth. Within its core cylinder segment, Antargaz remains at the forefront of new product development. The Calypso lightweight composite cylinder and the Carrefour private label cylinder continue to be very well received by our major retailers and end-use customers. These new products were introduced to the market within the last five years, and they now account for a substantial portion of Antargaz's cylinder sales. Antargaz is also making good progress in the developing a new segment, natural gas marketing, within its existing service area. This program leverages Antargaz's strong customer relationship and excellent market reputation. Since its launch late last year, we've added over 1,500 new commercial natural gas accounts through this program.

While growth in our core business is critically important for UGI, it is equally important for us to maintain our focus on reinvestment of cash generated by those businesses. Our 2 major Midstream and generation capital projects are proceeding on schedule. The construction phase of the Hunlock project to repower our coal-fired electric generating station as a larger gas-fired facility, will be completed this month, and we will initiate the commissioning phase. We expect the plant to come on stream within the next 90 days. The second project, the $120 million expansion of our LNG peaking facility in Temple, Pennsylvania, is also on schedule. We expect mechanical completion at Temple early next year, with start-up scheduled before the end of fiscal year 2012. We made good progress in the development of our renewables portfolio over the past few years, with the majority of the investment focused on solar projects. By the end of Q3, we will have installed a total of 3.5 MW of solar facilities, with another 2.5 MW under construction and scheduled to start up over the next 6 months.

Our activity in the Marcellus Shale region continues to be a high priority. I would like to comment on the status of our key projects. The transfer of our 15 Bcf gas storage facility in north central Pennsylvania to FERC regulation and market-based rates, took place on April 1. The storage capacity was 100% subscribed by a range of bidders under 1-year contracts, and service commenced on April 1 to the winning bidders. We've been making good progress in our gathering system project to serve Marcellus producers in Wyoming County, Pennsylvania. We previously announced the agreement with an anchor shipper, Citrus Energy, and discussions with other producers in the area are progressing nicely. We expect the gathering services operation in Wyoming County to begin late this fiscal year. We remain in contract discussions with major producers regarding our PENNSTAR project, the natural gas pipeline in northeastern Pennsylvania that we are jointly developing with NiSource. We originally estimated that this project would be in service in late 2012, but we are now estimating an in-service date in late 2013 or early 2014. The timing of our filing will be dependent on commitments from anchor shippers.

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

Thanks, John.

AmeriGas adjusted EBITDA of $176 million was down by $9.5 million for the quarter compared to last year. Volume was about 4% lower than last year. As Lon mentioned, lower volume in our two southern regions really explains the shortfall. In total, our volume was down 13 million gallons, and in these two regions, volume was down nearly 19 million gallons. In the South, winter this year really ended at the end of January. Weather in our southern regions was about 25% warmer than prior year in February and March. It appears that many of our customers in these regions were simply able to forgo propane deliveries after January.

In addition to this regional weather effect, we continue to see some impact from customer conservation. This quarter, due to the success of our targeted strategies, the impact of conservation was partially offset by stronger volumes from our ACE and strategic account customers. Wholesale propane prices have been rising during the quarter, in line with the increases in crude oil prices. The average cost of propane for the quarter was $1.40 a gallon, an increase of 12% compared to last year. The prices continue to rise, with propane at Mont Belvieu currently priced at $1.59 compared to $1.08 at the same time last year, a 47% increase. These increases in costs, when passed through to the customer, tend to encourage customer conservation. Expenses for the quarter were up about 2.6%. About half of this increase was due to higher vehicle fuel expense due to the increase in the cost of diesel and gasoline.

Turning to our growth strategies, volume in our ACE grill cylinder exchange business continues to be strong, with volume up 10%, due to an increase in same-store sales and the number of locations that we serve. Of course, the season for this part of our business is just about to start. About half of our grill cylinder volume is delivered in May, June, and July. We are optimistic about our ACE volume for the summer, given the number of locations that we've added this year. Strategic accounts volume is also up year- to-date. Gallons delivered in this part of our business has increased by 6% compared to last year. The number of strategic account customer locations we service has increased by 2,600. The largest wins for our strategic accounts team this year have been FedEx Freight, Estes Express, and Covance Research Lab. These customers appreciate AmeriGas's unmatched geographic coverage, our ability to reduce transaction processing costs, and the service they receive from our dedicated support team.

We also had an increase in the number of customer gains in our residential and commercial segment, as a result of investments in advertising and new sales and marketing campaigns. We closed 11 acquisitions so far this fiscal year, which will add about 10.5 million gallons on an annualized basis. We continue to target adding 20 million gallons through acquisitions each year. Based on our results for the first 2 quarters and our estimates for the rest of the fiscal year, we are revising our adjusted EBITDA guidance for the year, to $335 million to $345 million, which would be about flat to last year. We will continue to manage our margins and expenses in line with our volume. In addition we will continue to focus on growing our EBITDA through effective execution of our growth strategies -- acquisitions, growth in ACE and strategic accounts, and growing our local residential and commercial customer base through superior customer service.

I would like to finish my remarks by thanking our employees for the long hours that many of them worked during the heating season. Year-to-date they've made over 3 million deliveries, often in spite of significant amounts of ice and snow. Their dedication to customer service and safety are critical to our continued success.

Lon, let me turn it back to you.

I would like to offer the following concluding remarks. First, with regard to guidance. As you may recall, we began our 2011 fiscal year with earnings per share guidance for UGI of $2.30 to $2.40 a share. Given our results to date, including the small net benefit of unusual adjustments to date, we are giving guidance today at the same $2.30 to $2.40 per share; and I would suggest to you that, given what I've seen, our results will tend towards the lower end of that range. To achieve this level of performance, we will have to perform better than we did in the second half of last year, even after you eliminate that one-time gain we had through the sale of our propane terminal in the second half of last year. So basically, our operations need to do better than our operations did last year.

Here's how we are thinking about it. We expect our Utility businesses to perform at nearly the same level as last year. We expect our International Propane businesses to perform at about the same level as last year, given the challenges associated with high wholesale propane and butane costs. We expect to see improvement from our other two business units, and in the case of our Midstream and Marketing business, we expect to see the benefits coming from earnings associated with our underground storage facility and the Marcellus Shale region that John mentioned, commencement of operations at our Hunlock gas-fired generating plant, and the completion of several solar projects. With regards to improvement at AmeriGas, we expect to see improvement due to better volume performance than our year-to-date trend, and the continuation of the higher unit margin and fee trend. In addition, we would expect to see expenses moderate, due in part to the absence of last year's increase in our litigation reserve that we announced in the fourth quarter.

With regard to guidance for AmeriGas, we began the fiscal year with guidance at $345 million to $355 million of EBITDA, and we are today revising that guidance down to $335 million to $345 million. Given that EBITDA adjusted for one-time items this year is lower than our EBITDA last year as adjusted, we are once again expecting AmeriGas to do better in this year's second half than they did in last year's second half. That is for the reasons that I described earlier.

Moving beyond the remainder of this year and into future years, we remain quite optimistic about our prospects over the next few years. We would anticipate seeing improvement in our utilities as the economy in our region continues to improve, and as we execute on our growth strategy, driven in the near term by conversions, and in the longer term by ultimately a rebound in housing, We also anticipate seeing rate relief in our CPG unit as this fiscal year ends. With regard to our Midstream and Marketing businesses, we anticipate seeing the benefits of our internal investments in the Hunlock gas generating station and our LNG storage facility expansion. We also will see the benefits coming from our growing asset base in the Marcellus Shale, like our underground storage facility and the Citrus and other pipeline projects that John mentioned.

Furthermore, we expect our domestic and international propane businesses to benefit. In the case of our international businesses, from acquisitions completed in the past year or so, and in the case of AmeriGas, from pursuit of its acquisition growth strategy. We also expect to see both our international and our domestic businesses benefit from execution of their product innovation and other strategies, including strategic accounts and cylinder exchange in the US, and natural gas marketing overseas.

Of course, all of this good news is not to suggest that we don't have our share of challenges, because of course we do. Most noteworthy is the very high cost of propane and butane. We have said many times that high and volatile wholesale LPG prices are not good for the long term of our propane distribution businesses. At the same time, the dynamics of the LPG markets are creating opportunities. It's becoming increasingly more apparent to us that there is a need to consolidate further in domestic and international LPG markets. We anticipate there being additional consolidation opportunities arising. And you should expect us to evaluate any additional opportunity which might arise, and to pursue those that enhance our ability to capitalize not only on changing market dynamics, but also to capitalize on creating long-term value for our owners.

In addition, in the United States in particular, natural gas and associated liquid markets are undergoing change, principally due to the discoveries of large quantities of wet gas in shale areas. The markets for storage, gathering, and pipeline infrastructure to support gas market developments are evolving, and we are evaluating opportunities to capitalize on changing market dynamics. We've discussed a number of these opportunities in the past with you, including our underground storage opportunities in the Marcellus Shale, as well as our pursuit of pipeline opportunities there. You should expect us to continue to seek out Midstream growth opportunities, which complement our businesses and provide value to our owners.

Of course, it's necessary to have the financial strength to pursue these activities, and as you know, we do. We have the financial strength to do so because we generate about $100 million of investable cash each year and because our balance sheets are managed well, and they are strong; and that provides us with excellent access to capital markets should we need it. In sum, despite the fact that we occasionally encounter short-term weather fluctuations in our businesses, we are positioned well for future profitable growth.

With that, we'll take some questions.

(Operator Instructions). Our first question is from James Wang with Raymond James. The line is open.

.Good afternoon, everyone. I've a few quick questions for Gene regarding AmeriGas FIrst, I notice that your margins are pretty healthy this quarter despite the recent in base propane prices. At what point do you think high propane prices would make it difficult for you to maintain your margins?

If you look at the history of AmeriGas and the history of the industry, the industry does a great job of passing on increases in the cost of propane to end users. So we've got a great track record there. I don't see that changing going forward.

And just to -- James, it's Lon. Just to expand on that a bit. You are hearing -- the propane industry is not alone in this. You're hearing many industries passing on commodity cost increases, Procter & Gamble, Kimberly Clark, a number of consumer products, coffee makers, et cetera, passing on higher prices to consumers. We are not happy about doing it. Obviously it's a challenge for our customers. We have programs to help them through this. But our modest increase in unit margins this past quarter is reflective of the discipline that we show in trying to treat our customers fairly while maintaining our margins.

Great. Also, has there been any change in the M&A market, or are you still expecting to make a smaller number of acquisitions around a 5 to 7 EBITDA multiple?

I would say it is the same. We've had a lot of success. Last year we closed 15 acquisitions. This year, 11 so far. What you are referring to is smaller deals, correct? So I don't see any change. Multiples are about the same they have had been.

And just quickly, as I mentioned in my comments. With higher prices, higher wholesale prices should they stay, we are seeing, domestically and internationally, a view that further consolidation in the industry is necessary through our small programs, both internationally and domestically, and perhaps more larger transactions over time. The industry is challenged by these high prices and we think there will be over time more opportunities to drive that consolidation both domestically and internationally.

Great. One final question. Could you also comment on the growth of your AmeriGas cylinder exchange program. Does it still have a backlog of another 3,000 locations to be installed, or have you been able to whittle that number down a little bit?

We still have a pretty good backlog. We had nice growth in that business. I mentioned the 10% volume growth year-to-date. And we still have I would guess, about 1,500 locations left to install before the beginning of -- well probably 1,000 before the beginning of the grilling season, probably 1,500 before the end of the year. So we still have a pretty significant backlog. You try to get all of those in by Memorial Day, which is traditionally the beginning of the season. We won't quite get all of them in, but we will push to get as many in as we can.

All right.

Our next question is from Carl Kirst of BMO Capital. Your line is open.

Lon, just actually keying off your last comments, that's actually what I wanted to be clear on. But notwithstanding you guys own expectation of needing to consolidate further, it sounds that as you are indicating the higher wholesale prices, that is almost becoming now more perhaps accepted amongst the industry itself, i.e., the sellers perhaps are understanding that as well and so maybe there might be more opportunities, and I'm trying to take valuation aside. It just sounds you're expecting more assets might be shaking loose.

Yes, I think that's a fair characterization. You would go to international domestic association meetings, and there's all -- there's lots of talk, not about deals but talk about the environment, the industry environment, how difficult it is, or the industry given the high cost environment, volumes, and how over the long term, this has to be something that is factored into account. It is, with high cost out there, something that our expectation is people will consider over time.

Okay, I appreciate that. One question I had, with respect actually, this sticks with the International propane. The -- and perhaps it has to do with maybe which volumes were weather-impacted, the unit margins came out -- looked actually fairly nice, relative to both the first fiscal quarter and even fairly close to last year. I was thinking that all of the Flaga volumes coming in were much lower margin than the Antargaz, and so to the extent that we saw a big pick up in unit margins second quarter over first quarter, is that level of unit margin sustainable here, or will we be seeing that turn down or how should we think about that?

Yes, I would tell you that quarter over quarter, the normal trend occurred internationally. What you saw was, the international businesses aren't able because of market dynamics to raise prices as rapidly as you can domestically. So while domestically we have a tendency to pass through costs on a real time basis, internationally for a variety of reasons we are slower to do so, and first quarter margins were at a lower level because of the rapidly rising cost of products. Product costs stabilized overseas and even dropped a little into February and early March and then picked up again. But during that period of dropping costs and stable costs, we caught up on price increases, and so I think you would see that improvement quarter-over-quarter. You are correct that the Flaga business that we purchased in Poland and in Hungary would be at lower levels than the businesses you see elsewhere. The businesses we bought or developed in Europe, like Denmark, have similar margins to the higher margin countries.

Okay I appreciate the color, and last question, and I suspect this is maybe more micro, but just to just to dot the I and cross the T. It was mentioned on the utility side, the lower effective tax rate, that comes from the bonus depreciation. How much of that benefit -- is that a $0.01 to $0.02, or is that a $0.05 to $0.06 on a full-year basis? How should we think about that? I did not know if that would reverse going forward.

Yes. That for this year, as you know you get 100% deduction for depreciation for this year. And it's about --

$0.03 to $0.04.

$0.03 to $0.04, Bob has intimated. I don't think all of it was realized yet. But over the course of the year directionally $0.03 to $0.04.

It has a 1% impact on the tax rate.

Great.

Our next question is from John may not at Lord Abbett. Your line is open.

Good afternoon, guys. Just a quick question on Penn Star. Can you put a little bit of color around the push out?

Sure, this is John. As we talked to producers, there's a lot of interest in the project. I think with the dynamics, with lower natural gas product cost and higher value on NGLs, we are seeing some acceleration of activity in the West and producers assessing their drilling programs in the central Pennsylvania area. We are disciplined in terms of the approach we're taking to the development of the project, so we're looking to attract anchor shippers before we do our FERC filings. So that is what is pushing that schedule out. What we are seeing is other smaller projects, like the one I described with the gathering project in a more eastern section of northeastern Pennsylvania it's proceeding. Smaller projects seem to be proceeding more rapidly, larger projects like Pennstar particularly in central Pennsylvania, a little bit slower pace, primarily due to product cost and some changes in the drilling programs for the producers.

Got you. Any sense -- I know Dow Chemical has talked about working in that area now trying to pull out the liquids. Is it -- do you guys hear of customers or companies outside the traditional set of producers? How do you think a lot of that starts to play out, and what you guys think your roles can be in such an opportunity?

Tremendous amount of activity, obviously you have major, major companies such as Shell and Exxon taking acquisitions and active, and some nontraditional players getting involved as well because of the nature of the natural gas streams in certain parts of Marcellus. We see our role as being a critical enabler given our existing position and infrastructure in central and eastern Pennsylvania, and particularly, the demand that we bring as a significant utility and significant marketer of natural gas. We believe that combination of our existing infrastructure and position coupled with a fairly unique capability in terms of the demand for natural gas that exists within UGI companies makes us an attractive partner.

Okay. Thanks a lot guys, I appreciate it.

Our next question is from Ron Londe from Wells Fargo.

Just curious. You were talking about the second half of the year, and it looked to me that adjusted EBITDA last year was around $32 million. And from your forecast of $340 million, it looks like you would have to have adjusted EBITDA somewhere around $50 million to $51 million to get to your forecast, which is a 60% increase. Can you give us some more insight into what might drive that to get to your forecast?

Part of it, Ron, is volume. Lon already mentioned we would expect volume performance to be better than the trend you've seen so far this year. We've been running last quarter about 4% under last year, so we expect volumes to be slightly better. We have the benefit of some acquisitions, strategic accounts, and ACE growth, so that's a piece of it. We expect the margin pattern to be similar to what you've see relative to the prior year. Expenses, recognizing the volume that we've seen so far this year, we are certainly adjusting our expenses for the balance of the year to keep them relatively flat, except for things like vehicle fuel. So that's the combination that gets us there.

Okay. Do you see any of the mom and pops out there being challenged by difficulty in getting financing for their inventories?

Ron, I really don't. Most of the -- we get to see lots of companies, because we look at so many. If you buy 15, you can probably look at 60. Most of the mom and pops don't have a lot of debt at all. So generally they don't have a lot of issues around financing their working capital.

Okay thank you.

(Operator Instructions). There are no further questions at this time.

Okay, thank you very much. I want to thank all of you for participating in the call. As you can tell, we've got a very bright future from the comments we've made before. We are comfortable with where we are headed. And we look forward to the June quarter when we can sit down and talk to you again and update you on our progress. So we will talk with you then, and some of you will see at AGA, and some of you we'll see elsewhere along the way. So, take care and have a good spring. Goodbye.

Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day.