UGI Corp (UGI) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the UGI and AmeriGas first quarter earnings conference call. At this time, all participants are in a 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 would now like to introduce your host for today's conference Hugh Gallagher, Treasurer of UGI.

Thank you and good afternoon, and thank you for joining us. As we begin, let me remind you that our comments today will include certain forward-looking statements which management at 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 our annual reports on Form 10-K for a more extensive list of factors that could effect results, but among them are adverse weather conditions, cost volatility and availability of all energy products, increased customer conservation measures, the impact of pending and future legal proceedings, domestic and international political regulatory and economic conditions, currency exchange rate fluctuations, the timing of development of Marcellus Shale gas production, the timing and success of our commercial initiatives and investments to grow our businesses, and our ability to successfully integrate acquired businesses, including Heritage Propane and achieve anticipated synergies.

UGI and AmeriGas undertake no obligations to release revisions to their forward-looking statements to reflect events or circumstances occurring after today. In addition, our remarks today 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's. 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 activities. With me today are John Walsh, President and COO of UGI Corporation, Gene Bissell, President and CEO of AmeriGas, and your host, Chairman and CEO of UGI Corporation, Lon Greenberg. Lon?

Thanks, Hugh. Let me also welcome everybody to our call. I'm sure you have had the opportunity to review our press releases reporting our first quarter results. As you know, we reported earnings per share of $0.77 versus $1.01 last year. AmeriGas reported net income attributable to AmeriGas partners of $42.5 million, compared to $74.9 million last year, on EBITDA of $83.7 million compared to $113 million last year.

I must say that this has been one of the more frustrating quarters I have encountered during my many years as UGI CEO. Surely, we have encountered periods of warm weather in the past, as many of you know, but I must say, they've never been as uniformly extraordinary as this. For example, weather in our French liquefied petroleum gas operation was nearly 30% warmer than the prior year. Weather in our utility operations was nearly 19% warmer than the prior year. Weather in our domestic propane operation AmeriGas was nearly 10% warmer than the prior year. So, whether you were in Philadelphia, Paris, Vienna, Chicago, Atlanta, you experienced very little winter weather this year. And that lack of winter weather also adversely affected our midstream and marketing business, which, as you know, not only sells gas and electricity on a non-regulated basis, but it also owns and manages assets which prosper when cold temperatures create volatility in commodity markets.

However, as is often the case, there are occasions when headline earnings numbers mask important positive trends in developments, and this certainly is one of those cases. You'll note that our margins and our domestic and international propane businesses were managed quite effectively, despite a high cost environment. While it's less visible to you, we note in our release that our customer growth and our gas utility businesses was robust, due to record conversions from oil to gas. Our midstream and marketing businesses began operations on our Auburn pipeline project, and also announced $150 million expansion of that project to extend the line south. Our international propane businesses completed the acquisition of Shell's liquefied petroleum gas distribution businesses in the UK, Scandinavia and the Benelux countries, and our results this quarter reflect a contribution from that acquisition despite incurring integration costs. Finally, AmeriGas closed a few weeks ago the Heritage transaction which we have great hopes for.

While we were disappointed that our substantial progress cannot be seen in our earnings this quarter, I certainly prefer it this way, compared to reporting a quarter of great earnings, perhaps even record earnings, along with a much less promising future. We've experienced in the past occasions and fortunately, they have been far apart, when weather or some other abnormal market circumstance causes a short-term interruption in our steady progress. On these occasions, like today, our fundamentals were strong, our execution solid, and our opportunities plentiful. And so you are going to hear from us today that we are confident that, like on those other few occasions, we are -- we will demonstrate the strength of our business and strategies when conditions return to more normal levels. I'll have more to add on this later in the call, but at this point I would like to turn it over to Hugh and John and then Gene for some comments as well. Hugh?

Thanks, Lon. As Lon mentioned in his remarks, the overarching theme for this quarter was a lack of demand for all energy products resulting from the extraordinarily warm weather we encountered in each of our business units. There are two themes that we often repeat when discussing our business with investors. First is if you watch the weather during the heating season and you evaluate historical trends in our business units, you will have a sense of how our businesses will perform, given variations in weather. And second that we believe in diversification as a means of reducing risk and that geographic diversification reduces weather related risk.

For the first quarter of fiscal 2012, this first statement clearly held true. But unfortunately, geographic diversification did not do its job and we experienced weather that was incredibly warm everywhere we operated. AmeriGas experienced the warmest first quarter weather in the last ten years. Weather for the quarter was approximately 12% warmer than normal, 10% warmer than last year. During the critical heating month of December, weather was 16% warmer this year than it was last year. As a result, volumes saw a decline nearly 14% year-over-year. The primary contributor to the $8.5 million decrease in net income contribution from AmeriGas. Operating expenses increased modestly at AmeriGas due to $3.7 million in costs incurred during the quarter related to the Heritage acquisition.

International propane's contribution to net income also decreased due to significantly warmer weather and our legacy businesses at Antargaz in Flaga. In France, weather was 30% warmer than last year resulting in a 20% decline in volumes year-over-year. Flaga's weather was about 12% warmer than normal, resulting in a 11% decrease in volumes sold. It is important to note, however, that this weather related volume decrease was offset by the benefits from the investment we made in the Shell acquisition, which contributed 48 million retail gallons and $32 million of incremental total margin. Operating expenses also increased over last year due to costs associated with the acquired businesses and acquisition integration costs. These integration costs were about $3.6 million during the current year quarter, compared to about $1.2 million in the prior year period.

Just as any prudent investor would, we read the papers and see the economic news coming out of Europe these days. We have the benefit, however, of frequent interaction with our managers and employees on the ground in Europe, which enables us to get beyond the headlines, if you will, in Europe. Thus far we have not seen any significant economic impact on our businesses in Europe. We provide energy solutions to thousands of homes and small businesses across Europe, a large number of small transactions spread across a large customer base. For the vast majority of these European consumers, our product is not a discretionary purpose but a basic need for space heating, agricultural industrial processes, cooking or auto fuel.

Now switching back to this side of the pond, our gas and total contributions to net income decreased $8.1 million, again, on weather that was 12% warmer than normal and nearly 19% warmer than last year. The warmer weather resulted in a decrease of throughput to our core market customers of 5.3 Bcf. This is about 14% below the prior year. You may recall that gas utility had a very strong quarter last year on weather that averaged about 8% colder than normal. Midstream and marketing's net income was also decreased as the benefits of natural gas storage income were more than offset by lower earnings from natural gas marketing, electric generation and capacity management activities.

Turning to cash and liquidity, our balance sheet is strong, despite the near term weather challenges and we remain committed to maintaining a strong balance sheet as a means to support our business initiatives. Our consolidated cash position, excluding restricted cash, was approximately $229 million at December 31, compared with $139 million in the prior year. The current year cash balance was higher than last year, primarily due to increased balances in our international propane businesses, including balances related to the recently completed acquisitions, and the timing of borrowings and repayments under AmeriGas's credit facility. At December 31 AmeriGas had outstanding borrowings of $226 million and outstanding letters of credit of $36 million, on its $325 million revolving credit facility, but it also had a significant balance of cash on hand, such that on January 3, AmeriGas repaid approximately $47 million of its revolver borrowings. Utilities had $58 million outstanding on its $300 million revolver and $4 million of cash on hand at December 31.

Turning to the international propane segment, at Antargaz there were no borrowings on its EUR40 million revolve and EUR29 million of cash on hand. Flaga had approximately EUR14 million of borrowings and EUR20 million in outstanding guarantees on its two primary revolving credit facilities. These facilities have a combined capacity of EUR58 million. Flaga also had EUR32 million of cash on hand, including EUR19 million from a financing that closed on December 30. AvantiGas, our propane operation in the UK, had cash on hand of approximately GBP12 million. The midstream and marketing business had outstanding balances of $33 million under its accounts receivable facility and $85 million on its revolving credit facility. Excluding cash held by the operating subsidiaries, UGI had $45 million of cash available at December 31, compared with $71 million at December 31, 2010. This balance is slightly lower than the previous year, as a result of the funding of the cash portion of the Shell acquisition.

Financing activities during the quarter included the previously mentioned placement of a term loan, EUR19 million term loan for five years at Flaga. This was primarily related to the Shell acquisition and the proceeds from this loan were used in January to repay short-term borrowings and for general corporate purposes. Flaga entered into an interest rate swap that effectively fixes the LIBOR component of this term loan, resulting in a rate of about 3.5% at the end of December. Total long-term debt at December 31 was virtually unchanged from the prior year, as increases at AmeriGas, and to a lesser extent at Flaga, were offset by the currency exchange impact of lower Euro -- lower exchange rates on Euro denominated debt at Flaga and Antargaz.

Current maturities of long-term debt at December 31, 2011 were approximately $47 million, primarily due to maturing medium term notes in our utility business. Last year at this time we had nearly $550 million in current maturities of debt, as well as revolving credit facilities to refinance at Antargaz, Flaga, Utilities, and AmeriGas. So from a financing standpoint, we have no significant maturities over the next 12 months and we are very comfortable that we have adequate liquidity in all of our business units and sufficient capacity to support our growth initiatives for the foreseeable future.

And finally, the most significant financing news occurred shortly after the quarter end when AmeriGas issued $1.55 billion in senior notes in conjunction with the closing of the Heritage Propane acquisition. AmeriGas also amended its revolving credit agreement in conjunction with the acquisition, increasing the size of the facility to $525 million, extending its term one additional year to October 2016 and modifying certain other provisions of the facility in relation to the acquisition. Now I'll turn it over to John for his report on operations. John?

Thanks, Hugh. While the unprecedented warm weather in each of our business had a significant impact on our financial performance in the quarter, we remain focused on driving progress on the critical strategic initiatives that will determine the future of the Company. On the operational side, our teams took the necessary steps to manage costs as we responded to reduced demand from our weather sensitive segments. I'll comment on both the operational and strategic activities in the quarter, since there were significant developments in both areas.

Our core businesses, in addition to responding to the warm weather challenge, continued to press forward with their growth plans and key operational initiatives. Our gas utility built on the growth momentum for conversions established over the past few years. The natural gas versus fuel oil spread remains wide and our marketing team has done an exceptional job reaching potential customers situated very close to our mains. We achieved a record level of conversions and upgrades in Q1, which ran 50% above the same quarter last year. This more than offset the continued weakness in new home developments. Our commercial segment also remains strong with customer additions running 20% above prior year.

Our midstream and marketing business, in addition to pursuing new projects, has been very active utilizing our existing assets in the Marcellus region. We added compression on the Auburn gathering system that was activated late last year and initiated several projects to enhance the utility of our gas storage field. While there has been considerable near term uncertainty in the natural gas market due to low commodity cost and dampened volatility, we still see major opportunities for growth across this business. There are segments of our business such as power generation and asset management that have been negatively impacted in the short-term. But, we also see these lower gas costs opening up new growth opportunities within our gas utilities and gas marketing segments. In addition to this enhanced customer demand, we see the significant need for new infrastructure, such as the new gathering system and gas storage field enhancements, in the Marcellus region as producers attempt to deliver their output to the key east coast markets.

I started my comments with a reference to driving progress on the critical strategic initiatives that will shape our future. We moved from the planning stage to the execution stage on several of these programs, which is an exciting development for us. We are very pleased with the progress made on the integration plan for the propane operations acquired from Shell in eight European countries covering the Benelux and Nordic regions, as well as the UK. These operations feature a loyal customer base, quality assets, and markets adjacent to our own and a talented team at all levels. We are executing the necessary back office and field base projects to ensure that we hit the transition targets included in our investment case. Whether adjusted demand in the 16 countries where we operate in Europe has shown strength, with the customer segments we serve holding up well. Based on the progress made on the integration in Q1, and the solid customer demand, we are very positive about the prospects for our European business as we move into 2013.

While AmeriGas's acquisition of Heritage Propane didn't close until the second week of January, we focused a tremendous amount of effort in Q1 on developing the integration plan and preparing for rapid implementation. The combined Heritage AmeriGas team is making great progress and we are confident that we will achieve the operational service and growth performance that was envisioned in the business case for the investment.

Much of the capital work -- much of our capital project work is focused on our Marcellus Shale projects. In addition to the current capital projects I discussed earlier, we are making good progress on our Auburn 2 project, which will extend that gathering system southward to connect with the Transco pipeline. We are in the permitting and land acquisition phase at present, with a significant portion of the capacity subscribed. The pipeline installation work is targeted for 2013. We are nearing completion of the $120 million expansion of our LNG peaking facility in Temple, Pennsylvania. We have achieved mechanical completion and we are proceeding through the commissioning phase. The plant will be fully available for the winter of 2012, 2013 peaking season.

We've begun the marketing effort in support of the upcoming opening season for our 15 Bcf natural gas storage facility in central Pennsylvania. As noted earlier, our midstream team is undertaking a series of capital projects to enhance performance of the fields. Our open season will conclude in April.

In summary, the significant progress we are making on the two major propane integrations, our continued strong growth in utilities and the acceleration of our Marcellus developments places us in an excellent position for 2013 and beyond. I would now like to turn it over to Gene, who will take you through the AmeriGas performance in Q1. Gene?

Thanks, John. EBITDA for the first quarter was down significantly due to weather that was about 10% warmer than last year and about 12% warmer than normal. Of course, most of the degree days during the quarter occurred in December. And December was 16% warmer than last year. This is the warmest weather we have experienced in the first quarter since the October to December quarter in 2001. When the weather is this warm, the degree date comparison understates the impact because many of our customers simply don't have to use their heaters at all. Fortunately, this type of significantly warmer than normal weather only occurs very sporadically, the last time being nearly six years ago, when our volume for the second quarter of 2006 dropped about 10% year-over-year on weather that was about 7% warmer than the prior year.

As a result of last quarter's warm weather, our volume was down nearly 14% from last year. The only benefit of the warm weather is that lower demand is beginning to result in lower wholesale propane prices. For the quarter the average price at Mount Bellevue averaged $1.44, or about 14% higher than last year. Since we entered January, however, propane prices have been falling. The current price at Mount Bellevue is $1.27, down 12% from last quarter, and down from $1.35 last year at this time. These lower prices will bring welcome relief to our customers.

Expenses for the quarter were flat to last year, excluding about $3.7 million, excuse me, in expenses related to the Heritage acquisition. Vehicle fuel expense increased due to higher diesel and gasoline prices, but that was offset by lower salary and overtime expense. We can't control the weather, but we do have a good track record of responding to lower than expected volume by dialing back on our expenses. And that will certainly be the case for the balance of this year. Of course, the big news for AmeriGas was the closing of the Heritage acquisition on January 12. I want to welcome the Heritage employees to the AmeriGas family, and reiterate that we believe that we can combine these two great companies in a way that will result in a new AmeriGas that is far more than the sum of its parts.

So, the deal just closed. We have been actively planning for integration with Heritage management for about three months. We have a total of 30 top employees from the two companies working on 13 teams to put together detailed plans for every aspect of the integration. We will not be making many changes until spring, so that we don't disrupt operations during the heating season, but we'll be ready starting in March to implement our plans to achieve the significant synergies associated with this deal. From the detailed planning that we have done so far, we are even more confident of our ability to deliver on the minimum level of $50 million in synergies, that we used in valuing the business.

In terms of our other growth strategies, ACE had a strong quarter with volumes up 8% from the same quarter last year, due primarily to adding new locations. Of course, this isn't a key quarter for the cylinder exchange business but we are glad to be starting the year with such strong results. National accounts also added quite a few customers but due to the weather, volume was off about 7%. While most of the attention of our corporate development team was on Heritage, we have closed four small acquisitions so far this year, and we have a number of smaller deals in negotiation.

Since this is my last call with all of you prior to my retirement, I wanted to express my thanks for your attention that you paid to the Company over my years as CEO, and for your great questions and comments. For someone who started at UGI as a management trainee in 1981, serving as CEO for almost 12 years has been a dream come true. I'm proud of what the Company accomplished during my tenure from 2001 to 2011, we achieved a compound average return to our unit holders of over 15%. I want to finish by thanking Lon and John for giving me this opportunity and I would also like to thank the AmeriGas leadership team and our front line employees for all they have contributed to our success.

I also want to express my confidence in Jerry Sheridan who will be stepping into the CEO role when I retire. I have had the opportunity to work closely with Jerry over the last six years and recommended him as my replacement. As CFO and during the last year as Chief Operating Officer, Jerry's been my partner in managing the Company and I have had the opportunity to observe his considerable talents, integrity and dedication to our business.

I'm also thrilled to have Paul Grady rejoining AmeriGas. Until a few weeks ago Paul was President of Heritage and he will become Chief Operating Officer of AmeriGas when I retire. As many of you know, Paul worked at AmeriGas and UGI for 14 years and was Chief Operating Officer of AmeriGas for 4 of those years. During his tenure at AmeriGas, Paul and I spent a great deal of time together in the trenches, where I came to have a great deal of respect for his natural leadership ability and deep understanding of our of our business and our industry. Given his background, there is no better person to make sure we create a new AmeriGas that leverages the strengths of both companies. Now I would like to turn the call back to Lon for some concluding remarks.

Thank you, Gene. Let me leave all of you with the following thought. As we note in our release, we'll be updating guidance next quarter. When we'll have the -- we will have experienced the remainder of the winter weather, and we can give you better information regarding our expectations for the level of integration costs we'll incur this year, related to the Heritage and Shell transactions.

In this regard, Hugh mentioned that we had relatively modest transition costs in this past quarter. There is nothing nefarious or in our not giving you an update on guidance at this point, we have seen that weather has a major effect on our business, we are in the middle of the winter and so it doesn't make sense, to us, to try to predict what will happen over the course of the next three months worth of weather as we move forward. And we've just closed the acquisition of Heritage, and that closed somewhat sooner than we expected, and so we'll have an opportunity to get a better feel for the integration costs we'll be able to put into this year as we move forward throughout the year.

As I'm sure all of you are aware, winter weather during January has continued to be warmer than last year, and normal, but hope lives on. And we are looking forward to a colder February and March. And for that matter, April, as the year goes on. Also want to remind you that we previously indicated that integration costs to be incurred this year for the Heritage and Shell transactions will be significant. At the same time, these transactions will contribute in a significant way next year, to improved year-over-year performance.

To reiterate what we've said earlier, we are focusing on those things we can control. Capitalizing on internally generated and acquisition growth opportunities, we mentioned several of these during our call. As we complete the capital projects, and effectively integrate the acquisitions, they will add to our earnings capacity. Hence our optimism about the future. While unusual weather on occasion will affect our earnings of our existing businesses, additions to our businesses resulting from the capital projects and the acquisitions will produce good return investments and associated incremental growth in earnings beyond our base businesses. We will, in the near future, make an effort to define more clearly to you the earnings opportunity that we see over the next few years, as these internally generated capital projects come on stream, and as we integrate the acquisitions.

I also want to note that we are not slowing down in our efforts to uncover additional growth opportunities. We have the capacity, both from a financial standpoint as Hugh said and from a human resource perspective to pursue and complete good return projects. Energy markets are undergoing change, and those changes are resulting in other companies evaluating their strategies and priorities. Changing markets and priorities have always created excellent opportunities for us and all of our business units, and we don't expect the current environment to be any exception to that rule. Of course, we will be selective as we've always been and will be disciplined as we evaluate opportunities both internally, as well as acquisition opportunities.

I look forward to demonstrating to you the efficacy of our business model and the strength of our earnings capacity as we move through the rest of 2012, and into the future. Thank you very much, and we are ready for questions at this point.

(Operator Instructions) Our first question comes from Carl Kirst with Bank of Montreal.

Hello, everybody. Just to -- certainly weather is weather and that is a tough quarter and no one is going to expect any kind of prediction sort of on a go forward basis, so maybe we can kind of leave that to the side. But is it primarily that as far as giving -- wanting to wait on giving guidance for the remainder of the year, is that just you feel it is too premature to give expectations for integration costs? I just want to get a better sense of that. Because I think most people are probably putting weather into a box. At least I hope they are.

Yes. Let me, as I said, there is really no hidden motives in our not giving guidance. We have said, when we did the Heritage call, that we expected integration costs on the Heritage transaction to approximate $70 million over 18 months. We closed that acquisition earlier than we thought we would, through some excellent effort across the board on both sides of that have transaction. And so, we are trying to recalibrate the transaction costs and the integration costs we'll incur and we will, Carl, make an effort to break those out so that people can see what those are and get a handle on what the business is doing independent of those costs as best we can do that. And the same goes for the Shell acquisitions. We'll try to break those out. Hugh mentioned there was about $3.6 million I think this year versus a modest amount last year in integration costs in the European acquisitions, and we'll continue to dry to break those out so people get a feel for that.

But I will tell you, in all the years I have been doing this, only once did we give guidance at the end of the first quarter. An update to guidance in the first quarter, and we did it because the environment was such that the weather was so cold and beneficial, through January, and margins were exploding in a way that we felt leaving people with the information they had at that time wouldn't be the right course of action. Here, you have said, people put the weather in a box. January has not been particularly good. It's been somewhat better than December, for example, but it's not been particularly good. And it's just impossible for us, given the nature of our businesses and the things we can control, to offset that to predict with any benefit for you where we might be.

So, I could give you a very wide range, but I don't know that, that's particularly helpful you so what we've tried to do, and what we'll continue to try to do is talk to you about what's happening in the business that sets the stage for when the environment, the weather environment returns to normal, what's our capacity to earn. So, the things like the Shell acquisitions, which we expect to be nicely accretive next year, the Heritage transaction, which year-over-year is going to show great changes to results, the things that are going on in the gas utility with growth from conversions, all the things John mentioned with energy services and all the businesses, the good work we are doing, we should and will, over the course of the next quarter, make an effort to allow you to layer the improvement in earnings from those things given a normal environment.

But we just don't feel comfortable trying to guess the weather, given where it is and predict the effect on the base business and our newly expanded business, frankly, with Heritage where we don't have any experience estimating that and with Shell's propane businesses, where we don't have the same level of experience and hazard a guess on it. The range would be so wide as to not be useful to you.

I understand. Appreciate the color. Maybe if I could just sort of more into a micro question or a few sort of related micro questions on international propane, and in part, given that we had the Shell addition to Flaga and that the actual weather experience was somewhat different, between the two entities. I didn't know if there was a split that we could look at, between Antargaz and Flaga on a volume basis? And also looking at things on -- the retail gallons were given, but I didn't know if the wholesale could be given as well. My understanding was Shell was kind of bringing in more of the wholesale gallons. But I may have that incorrect.

You are correct on the wholesale side, Shell did what they referred to as unbranded volume. That doesn't have a lot -- there are some of our competitors who spend time talking about it. But the margins on that, while it's nice and it does have other supply benefits for us, the margins aren't enough, Carl, that we would have you focus on that. We are happy to provide it, but I would tell you that wouldn't be a big area of focus for us. It is certainly not an area of focus internally.

With regard to the acquisition, the Shell acquisition, I can tell you probably contributed this quarter upwards of a couple of pennies during the quarter. That includes a fair amount of integration costs, that we had to offset that as well. If I were to give you a qualitative view, the process we've gone through since we've acquired it has gone well. Integration is proceeding as well or even perhaps a little better than we expected. The earnings capacity of those businesses is somewhat we've gone through with each of the management of those units, a thorough kind of what I'll call budgeting kind of process, although it's not technically a budget, and the earnings capacity of those businesses we acquired is somewhat better than we built into our acquisition models as well.

So, qualitatively, those are moving ahead very nicely. There was a modest contribution this quarter from those businesses and we'll take your comments into consideration as we try to sort of provide some valuable information to you as we go forward this year.

No, I appreciate that. And then maybe again one other micro on the Shell just because it was noted that I guess it comprised $48 million of the entire amount. I didn't know, just given the weather difference, if you had sort of the same store sales from last year so we can get a better understanding of what maybe a weather normalized might look like in total.

Yes, it is a hard one to do. I can tell you directionally Antargaz's volumes were off 15% to 20%-ish year-over-year. Isn't that right?

No it was 30.

Volume or weather?

Oh, I'm sorry.

Volume was off close to 20% at Antargaz and that's sort of a same store number, if you will on 30% warmer weather.

What we tried to do, Carl, was give you the legacy businesses kind of on that same store sales basis. The Antargaz number, the 20%, is Antargaz as it was configured last year and the Flaga numbers, also their legacy business the 11% volume decrease. We don't have as much detailed information for the Shell acquisition and I don't know they are as weather sensitive either to those businesses.

More commercial business.

I want to emphasize Carl, that John alluded to it and talked about it in his remarks, as did Hugh. I know there is a lot of consternation generally in the US, everyday we pick up the newspaper, we hear about economies in Europe. I would tell you that we aren't seeing significant impacts from the economies, France or Austria or most of the countries we are in, Switzerland, et cetera, the UK even. We are not seeing that trickle into what as Hugh described as purchasing a necessity to heat your houses, when it's cold enough to do so. And for the small commercial business that his use it that serve internal markets, we are just not seeing significant effects in all the things we are looking at in those businesses.

So the weather, truly was the dominating factor that affected their results. I will point out, expenses were managed pretty well over there and margins were managed very well over there. Last year we had nice weather and a little bit more difficulty with margins. This year folks did a very good job of staying on top of their margins and making sure we were positioned properly had volumes showed up.

Very much appreciate the color. I'm jump back in queue, thank you.

Our next question comes from Darren Horowitz with Raymond James.

Congratulations, Gene, we wish you the best and look forward to working with Jerry and Paul going forward. I just have one question. Thinking about wholesale propane costs from a structural perspective and obviously this pertains to AmeriGas. When you consider higher crude prices, low natural gas prices and the increased bid that propane is getting from pet chem consumers and also for LPG export, are you concerned that on a relative basis higher wholesale propane costs continue and possibly continue to pressure retail margins?

Well thanks for your comments, first of all I appreciate that. I would say we are seeing propane, relative to the price of crude, lower than it's been recently. So, we have been running more in the 55% range where in the past it's been up to 65%, 70%. So, the relative price of propane is reflecting, I think, the low level of demand for propane. I don't think we are going to see a big impact in terms of volume performance, based on where our prices are relative to other commodities. I would love to see propane come down relative to electric prices. We are more competitive there. That certainly has been more of an issue than it was in the past, but we aren't seeing a big impact from that.

Do you think that if propane prices relative to crude remain cheap, and propane, as it relates to ethylene production, continues to generate a pretty high double digit margin in terms of cents per pound of ethylene produced, don't you think that's going to increase the bid for propane and the intrinsic value of propane is going to be worth more to a petrochemical consumer?

It is John. I think that is more margin potential marginal increase demand, but I think the factor, certainly from our perspective that is significant, as we see activity in Marcellus, and the other liquid rich shale plays ramping up, certainly is an opportunity for us and an opportunity for the industry to benefit from that additional liquid coming to market. We see that happening in the western elements of the Marcellus. There is opportunities for us to work with producers and find a home for that propane that's coming off that natural gas production.

So, we see a significant potential, potential and likely expansion of supply of propane from natural gas streams over the next decade, which we think is going to be positive and positive for us means dampening and lowering the price of the commodity. And in particular, it is going to be a significant amount of that is going to be in the northeast US, which is fantastic from a propane supply standpoint.

Darren, we have a little bit of insight into the chemical side of it with some of our directors. It is clear and you saw Shell is looking at putting some chemical plants -- the chemical industry coming back to the US. There is a lot of discussion about that and using the liquids. But I dare say they wouldn't be coming here if they thought the liquids would be more expensive here than it would be elsewhere. And I think we are aligned with most of those chemical companies in viewing that the supply of liquids is going to exceed the demand nicely and that you would likely see a separation of -- continued separation, as Gene alluded to, of propane to crude oil and approaching more natural gas pricing. It's not going to get all the way there, but at 50% accrued, it's come a long way. From the 80s and 90s it used to trade at.

And hence, our base case, frankly, is that supply will outstrip demand and you'll see propane prices were dropping relative closer to natural gas prices. And even announcements like Chesapeake making that they are slow in their natural gas drilling, they are slowing their dry natural gas drilling and focusing on the liquid rich areas that so many people have demand for. I think there's a lot of folks who are aligning around it. Yes, there's going to be more demand without question as you point out and propane will have an important role in the chemical side. But given the prognostications of the amount of supply coming on, we think net-net that we are aligned with the chemicals and we see a lower cost environment here.

Thanks Lon. I appreciate the color.

Our next question comes from Ron Londe with Wells Fargo.

Just talk a little bit about that subject again. It appears that we are going to depart the winter of 2012 with an above average level of propane in inventory. Do you think that is going to create opportunities for you to, to enhance margins in the fall of next year? What do you think about that scenario?

It's a hard question, Ron. Why don't I give Gene a stab at it?

My experience has been that no matter where you end up at the end of the season, by the time you get to the fall, things have righted themselves in terms of inventory. So, I don't know that at this point, I could predict that we are going to have a lot of excess inventory going into the fall. We'll probably be in better shape than we were this year. If you remember we went into the winter this year with about 5% less inventory than the prior year and the five year average. So, next year, perhaps going in at the average. But that is pretty far ahead to predict inventory values.

And I don't think we are looking, I agree 100% with Gene. We have a saying around here, everybody panics at the beginning of the year, there is not enough inventory, and then you get to typical years, you get to January and February, we are going to run out, and there is always enough. We never run out and then everybody worries about the build and somehow it shows up in Mount Bellevue. I think they must have another layer below it that they suck it up in because it always ends up showing up.

We are not looking for a margin collapse and we are not looking for a substantial margin expansion. The best thing that could happen to this industry, Ron, is costs coming down, and everyone trying to pass that relief on to their customers, in this economy, to lower the price, make this fuel more competitive with other fuels as Gene alluded to, electricity and others, and right the industry in terms of growth opportunities for the long-term, as opposed to trying to capitalize on something that would last a few months or so, and not have a real benefit to the industry longer term.

Our expectations would have been that operating expenses might have been a bit lower given the weather in December and we've experienced some fairly warm weather in January. What's your view about controlling operating expense going into the second quarter?

We certainly have a big focus on that going forward. We put together recovery plans. The challenge in propane business is the fact that you had a warm December doesn't mean you'll have a warm January or a warm February. So, there is a limit to how much you can cut back on the expense short-term. As you start to see the shape of the winter and knowing you are coming out of the winter, there is a better opportunity to cut the expense for the balance of the year.

So, for example, we have a lot of seasonals that we employ. When you see a December like this, of course you pull back on the number of hours you give them. But you can't really release them because you don't know if you are going to get a blast of winter in February where you'll need them. So, I think you'll see more of the impact of expense reduction when you look at the full year than you do in the first quarter.

As Gene said, we are not tepid about managing those expenses and you'll see some benefit from it. We are also mindful of our responsibility to our customers to deliver the product should weather show up and we think again, looking at the medium and longer term of this business, the best way to lose a customer is to give them a service problem. So, you are constantly balancing, ensuring that you've got the capacity to serve the customer should weather come with the length of the remaining winter and your responsibility to manage your business effectively. It is a very, very tough in the propane industry to do that right.

Okay. Thank you.

Our next question comes from the line of [Stephanie Guan] with Bank of America.

Hi, everyone. I just have one question for Gene. Can you possibly give us a sense of how the results were for Heritage Propane in the December quarter? Would you say it was relatively in line with AmeriGas's results in terms of the weather impact or from a conservation standpoint?

Thanks for the question. I think you'll get those results when Energy Transfer has their call. We don't -- those results are not part of our results. And when they have their earnings call, and their release, you'll see the results for them.

All right.

Affected by the weather, just like we were. But otherwise, no other comments on it.

Okay. And then one more follow-up. So, given the weather impact, I understand what your -- what your comments were regarding -- earlier comments regarding the weather impact. But do you think you are still committed to the 5% year-over-year distribution growth rate over the longer term?

I'll take that because Gene may say something on his way out that he would regret. Yes, he's beginning to switch to his investor mode already. The next question I'll have as a retiree will be when is my pension going out. Stephanie, as you know, have been following us that we treat the UGI dividend and the AmeriGas dividend -- distribution increase as commitments to our investors. We know our board looks at that as a commitment to our investors. They always have. It's their decision, it's not our decision. We don't make distribution and dividend decisions on one quarters results. They are long term issues for us.

As Hugh said, we've got lots of financial strength in this Company, significant amounts of liquidity and unused revolver capacity, and we managed our balance sheets in that some call it conservative fashion in order to be able to be able to weather, to use a bad word, weather storms like this. And come out the other end strong and able to take advantage of opportunities. So, I'm sure our boards will be mindful of our results and will be probably as displeased as everybody is or unhappy with them. But I'm equally confident that they realize our distribution and dividend decisions across the board are long-term commitments to our owners.

Okay thanks Lon and best of luck Gene.

Thank you.

Next on the line we have Jay Yannello with Skiden Capital.

Good afternoon, Lon. Can you give us a little more flavor on your comments regarding acquisition opportunities in this challenging time? Sort of magnitude, what types of deals you are seeing? Candidly, as usual with me, it is the end of January, a lot of the weather period has been passed by now and you are still quantifying integration from past acquisitions. So, I think a little hand holding is necessary. I don't know if we might in a period where we are still not getting guidance and all of a sudden you are announcing another big deal. So, can you just give us a little flavor on that? Thanks.

Sure. Absolutely, Jay. The temperament of the management team here pretty well, we are assertive and understand our limitations. And at the same time, on the other shoulder is a conservative group who make sure that we keep our balance sheet strong and are mindful of our human resources also. I meant exactly what I said. There are changes going on. Some people, as we saw, because they don't manage as conservatively as we do to keep their financial strength up, have to adjust their priorities because of short-term needs. There are other companies who become less enamored with industries because they don't fit their strategic plans and that is constantly being evaluated.

I would say certainly in our -- you identified in our propane business in the US, that in the near term we are stretching our human resources with integrating a very large transaction. So, it would be, let's say, out of character for us to do something large in that environment, given the uncertainty associated with what we've done. Other business units have more strength and are less taxed than our domestic propane businesses. So, we are -- the one thing I've seen in all my years, Jay, is there is a constant flow of transactions and changes and views. And most of the time valuations are such that you can't do them because they are not prudent to do. There are occasions when it is not prudent to do when you look internally, as you suggest, because you've got your hands full with other things you are doing. So, we are mindful of both of those and I would tell you, that you shouldn't lose a ton of sleep about it.

On the other hand, none of you would want us to turn away a compelling value merely because of the short-term concern, provided we were in a position from a human resource standpoint and financial standpoint to absorb it. I'm not signaling that there is something imminent in that comment. But I am signaling to you that it is always a market -- like any other year, there are years when we won't get stuff done and people will ask us, you are accumulating cash, why aren't you doing things? And there are times when we are more stressed, as you suggest, because we have just done something large.

We try to keep even keel about it. We are very mindful of the human resources we have available. We are very mindful of the financial resources we have available. If anything, you have known us to be conservative and we won't change our stripes in that regard. So, I don't want to you read into it that something imminent is coming, nor do I want to you read into it that we are out of the deal market for two years. So, it is that balance.

Okay. All right. Fair enough. Just kind of a minor question. I don't ever remember a winter where the temperatures fluctuate, at least in this region, up and down so much. Literally for the past three months. My guess is that has a disproportionate impact on heating demand, is that a fair statement? As soon as it gets cold, it warms up and it just keeps going back and forth.

So, from your experience, is it true that a period like that creates less overall demand? Even if it was the same amount of degree days, as a period where there is just a hell of a spell of really cold and then a warm spell and then, in other words, a more prolonged period? It is like every few days it is going from 30 to 55 and up and down. Is that having a disproportionate impact on demand, at least in the regions where you are experiencing that?

Yes, I'll tell you, one, regional weather is completely different. If you look at the west coast, for example, weather has not been so bad and demand doesn't look so bad either. Down 2% on the west coast, where again, where weather is not normal, but it is not so abnormal as to drive things. In the southeast, we had an experience in recent years, where it warmed up just enough so that people turned off their heaters and on a sunny -- I'm always mindful because we have an internal debate about this all the time. Unfortunately, some of the engineers in the Company are no longer with us that can yell at me. But I subscribe to your view, that degree days aren't created equally. I know that in my own home, for example, if I get a sunny day going from 60 in my house to 30, I don't have to worry about my heat the way I do if I get five days in a row of 30.

Exactly.

Where all of a sudden, doesn't matter how sunny it is, it's not there so that volatility has hurt. Regional differences have hurt and again, in the southeast and places where you are right on that cusp, sometimes the heater kicks in and sometimes it doesn't kick in at all because you are on the cusp of the area. I know the engineers are probably saying that I'm speaking -- a little bit of knowledge is dangerous and I'm not speaking of what I know, but I can tell you the school of hard knocks agrees with you that certainly the volatility in weather has also contributed to what's happening out there. It is just an unusual period. John?

The only other comment I would make is on the natural gas side of the house, particularly for the midstream and marketing business, when you see periods of sustained cold or intense cold, it creates some of the volatility that, in terms of market conditions, that presents opportunities for that business. So, in that sense, sustained cold will create opportunities that more dispersed level of cold over a longer period of (Inaudible).

Again, all of us in this management hate giving you reasons for bad performance. It's not an excuse. It is what it is. It is the weather. It is not like where a patent expired on one of our key revenue producers. It is not like we have a product that's become obsolete because another product has been invented. We've got a little bit of electricity generation.

These are the days I thank my lucky stars we are not a big electric producer because gas prices are down. Certainly for the near foreseeable future, you are going to have low gas prices and low electricity prices. So, if I'm an unregulated electric producer, I'm probably not happy. That is a fundamental change. None of that applies to us. This is -- we can see as far as the national service weather map and they are more wrong than they are right because it's an art not a science. The fundamentals of the Company are strong and we hate having to sit here and spend a good part of the time talking about weather.

Okay. Thank you.

Our next question comes from the line of Mark Barnett with Morningstar.

I know this call's gone a little bit long, but just one more quick question about adding volume through acquisition. Just, first if you had maybe a ballpark number of volumes that you expect from the smaller deals you have already made. And then just again on the sort of environment, are economic pressures -- obviously your competitors and smaller competitors are feeling the same kind of pain. Have the multiples come down or are they in the same five to seven times region? I don't know if you have any comment on that?

Sure the deals that we have done, I would say volume would be in the range of 2 million to 3 million. Not a huge amount of volume, relatively small deals. Sometimes those are the best deals because typically you're buying business that blends right in with one of your existing operations, and you are not going to have as much competition for those kinds of deals. In terms of the multiples, there hasn't been a change. I think all of the buyers and the sellers tend to value the business based on the longer term trend, not just based on what we are seeing in any particular quarter. So, we still see the multiples in the range of five to seven as we have in the past.

The more likely result that we've seen in the past from a situation like this, is go back to Ron Londe's question a little bit, which is people on the small companies are no different than the large companies. Everybody likes to make money. And sometimes, you count on the money coming in through volume, and sometimes you have to count on it coming in through margin. So historically, what's happened when volume hasn't shown up is people get a little bit more aggressive in pricing to try to create financial results for themselves. Even the mom and pops I'm talking about, so they can pay their bills and discharge their own obligations that they have.

So historically, if I had to point you to a trend, it is usually a trend which would suggest that there would be less pressure on margins as people try to make up for the volume shortfall. But that is historical. I can't predict the future on that.

Okay. Thanks for your comments.

Next on the line we have a question from Carl Kirst with Bank of Montreal.

Sorry just a quick follow-up because on the Auburn 2, did I catch that you guys said that, that is now basically moving to execution? So, that project has been green lighted?

The project's moving forward, we are in land acquisition phase and permitting phase and have a substantial portion of the capacity already committed.

So, my question on that was, I didn't know, is there sort of a way to ballpark kind of minimum economics on that project with just what we have contracted today?

At a very basic, we tend to look at low, 10%, 11% IRI. You can intuit at a 50/50 debt equity ROE from that. But that's a basic guide on investment, but too early for us to be definitive.

That will be a mid to late '13 event, John?

Yes.

Mid to late '13 event, Carl.

Talking about 2014 impact.

Sure. One other question if I could? Just with respect to in the midstream and marketing natural gas marketing, not a surprise, had some pressure given weather and prices. Can you actually, can you tell us what the delta of that was or what the actual margin contribution was from natural gas marketing? Just trying to get a sense of from magnitude just what the swing was?

I don't think we have that. I would tell you, Carl, it's in the -- I'm doing this from memories. But it is not in the tens of millions of dollars, it is in the millions of dollars kind of range on it.

Right.

I'm just remembering operating reports and things. So, it's there. And there are several factors in that business, which militate against declines because, remember, our model largely, not 100%, our motto largely is, customers have take or pay obligations, and they don't commit for all of their guests, they commit for a substantial portion and if they don't use that substantial portion, we liquidate the gas on their behalf in the marketplace. We are not financially exposed. We have a built-in mechanism to deal with that.

Yes. And it's basically volume not margin that is driving that delta. It is reflecting the warmer weather. And reduced demand from customers unit margins have always been strong in that business and have held up. So, we are not seeing a unit margin issue, we are seeing a demand issue as that customer base is focused in the mid-Atlantic region, up north and south from the state of Pennsylvania across eight states, and the weather has been poor. So, demand has been weak, but margins have held up well.

Right. I appreciate all the color. Thank you.

Our next question comes from John Hanson with Praesidis.

Good evening. Just a quick item on -- I didn't see much on the generating units. If there is any particular update you might have on the new one in the coal plant in terms of how things are going?

Yes, the -- we brought the Hunlock -- the Hunlock has the two turbines, it is a combined cycle plant. The one turbine came up late last year, and was running this quarter. And the second unit, in terms of bringing that plant up to full capacity, will come on in the late spring. So, that is proceeding. There is a significant amount of repair work underway to modules within that second unit. But that work is underway and we expect to be in place for the summer season, which will be helpful.

What about the coal unit? How are things going there in terms of some of the things that we have seen in the industry?

In [conima]? Well in conima, our ownership in conima in that unit is kind of reflecting what is going on in the market in general. That was off line for a couple of months -- excuse me, a couple of weeks in December. No surprise really in terms of operations. It's just exposed to some of the extreme downward movements in terms of power pricing.

As I said, we are not a power, we've got obviously some generation and it rounds out our portfolio and it gives us a lot of information that helps our other businesses as well. But this is a tough time to be an electric producer. With natural gas pricing coming down, you are seeing efficient coal plants and PJM cycling as much as they've ever cycled before. In periods of low demand you don't have the weather. So, the demand is low. And as a result of that, you are seeing some of the bigger coal plants cycling and pricing is tight. It is all based on natural gas pricing. So, it's a tough time to be an electric generator. Again fortunately for us, it is a nice part of what we have, but it is not a material element, either up or down, for us typically year-over-year.

Okay thanks very much. Just one more. In terms of CapEx, I know you are finishing up a couple of things there as well. Are we pretty well set on permanent financing now? I know you mentioned all the liquidity and all debt and all those kinds of things. Are we pretty well set?

Yes, we are.

Good thanks.

Next in line we have Steven Karpel with Credit Suisse.

Evening, guys. You made somewhat qualitative comments, so maybe I'll push you a little bit more on this. If you looked -- you talked about some users don't use heat at all when the weather is like this. If you look into the quarter now as we move into the second portion of the heating season, do some users say well don't fill me up basically, because I'm now so close to the end of the season and it's been warm. If you think about degree days become less of a predictor in the second quarter now of the heating season here?

As we approach the end of February, early March, that would be the case. But again, what happens in an environment like this, as you may know, we had something like in our AmeriGas business, what 18% fewer deliveries than we had the prior year, for example. So, in the old days what you would see is you would see everybody -- your delivery has not dropped so much and everybody would just take smaller deliveries, but we are seeing truly 18% fewer deliveries in December. As a result,, I would guess that stock and tank is lower than it might otherwise be. Because they haven't taken their deliveries, they haven't received the deliveries.

So even -- we might get, strangely enough, we might get a pop in volume, should any cold weather come because they won't have the opportunity to defer that they would normally have if you have a normal delivery cycle. That is speculation on my part, but your point's well taken. If you get, if you see February sort of easing in, and an early March forecast that suggests warmth, then people will be calling us. Not in great numbers, but enough people call you and tell you please don't deliver, I'll defer it until next year.

In this time of the year, what is the typical -- maybe lead time is the appropriate term because I suppose it becomes a little stretched or condensed versus maybe other times of the year. So, I guess I'm trying to understand if your, what is your viewpoint on the next few weeks? I would think you would have some semblance of an idea. Does it look better or worse than you would otherwise expect year-over-year or some idea like that?

It is hard to predict from week to week. I would tell you that our collective experience has been if it turns cold, it takes a week for the volume to somehow hit us. Because of the way the systems work, you are basing consumption on a model which predicts consumption per unit, so it is all degree day base and usage based. Typically cold hits takes a week before you see the volume and then the volume will continue a little bit past the cold, as well. So, certainly, the weather forecast, I saw for the next 6 to 10 days is not -- my favorite color is blue and not because my eyes are blue, but because that means cold and I see more red than blue, and red is warm, than cold.

So, but again, these things change. The weather forecasts are erratic at best in their ability to predict what really happens. So, hang in there with us, we are in the same boat you are, in trying to predict what will happen volume-wise. But I think in terms of efficiencies of how we've run the business, 18% fewer deliveries in December than we had the prior year.

Any mention about M&A? I know it is only one season. But obviously, if you are struggling with the warmth -- maybe not struggling is the right word, but seeing the impact of the weather, certainly some of the smaller operators are as well. How does that impact M&A market? Especially given the price of propane, I don't want to call it working capital issue. But how does this impact some of your M&A activity in terms of your ability to go out and hear some of the smaller players?

Typically in times when this has happened in the past, it hasn't had as much impact as you would expect. Most of these guys don't have a lot of debt. They have been in business for awhile. The ones that you really want, the established ones, and it doesn't really change the -- their desire to sell the business. In fact, sometimes if you have a really bad year, then they want to wait until they have a good year to sell on. But I don't expect this to significantly increase the number of people who want to sell their business.

Number of our competitors don't have, who are in the acquisition market side competitors, don't have the financial strength that we do. Sometimes it affects their appetite to do transactions, because they are a little bit more stressed than we are. But we are mindful of the fact that we may not be stressed from a capital resource standpoint, but we are certainly occupied from a human resource standpoint, so we are going to be very selective and prudent in doing stuff.

Two last ones that are completely separate, but I'll ask. You are a bit reticent to provide guidance today. I didn't hear if you said when you would update your guidance. I know you have done later in the season historically, so when has that been historically? And, separately, I didn't quite hear the revolver numbers or debt numbers that you had given, so if you could just repeat those.

I'll do the first half and let Hugh do the second. We'll do it on the April call, after the March quarter we'll update. And we are going to be working, as I said, in response to a number of comments we have had over time, to try to delineate more clearly the earnings of our, what we call our base business, before the internal capital projects, and before the acquisitions. And then, do a better job than we've done, although we've tried, to layer in the earnings opportunity, incremental earnings that come from all the investments we have made, both internally and by acquisition, and create a road map for folks to better understand. And we'll do that as well, hopefully over the next three to six months. But certainly guidance will be updated at the April call at the latest, when we announce our second quarter earnings. Hugh?

Steve, I'm just going to focus on the AmeriGas revolver. At December 31, they had $226 million drawn on the resolver and $59 million of cash. The following business day we paid down $47 million. So, kind of the normal what you would expect, would be $179 million and $12 million of cash.

And directionally, that is similar to -- I know --

That would be similar to last year.

Similar to where we are today? No large changes today?

It's probably lower than that today.

Great. Thank you gentlemen.

Sure.

That is all the time we have for questions today. I would like to turn over to our speakers for any closing remarks.

Okay. Again, you could tell two things from this call. We have a great deal of comfort with our future, our earnings capacity in a normal environment. The things we are doing, our ability to execute, but you could also tell we have a great deal of discomfort trying to explain why we didn't meet our commitment to you. That is not something we have had a lot of practice at, but we'll, and I won't tell you we are going to try to get better at it. We are going to try to get better at making sure, under most circumstances, we can do what we can to keep our commitments to you.

I also want to note, Gene, as he said, is leaving. Gene's had a tremendous impact on this organization, as our CEO of AmeriGas and more broadly as one of the leaders of UGI. And he will be sorely missed, as he goes out and many of us are jealous of his doing all the exciting things he is going to do in the future. So, I want to thank him for everybody, all the employees of this Company thank Gene for his service as well.

So, that is it from us. And we look forward to going into February with blue on the screen and cold weather. But the one thing you can count on is we will keep executing on our projects, we'll keep doing the right things for the Company for the long-term and you can count on us to produce value for you in the long run. So, thank you very much for listening for as long as you have and we'll talk to you soon.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect. Everyone have a great day.