UGI Corp (UGI) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the UGI and AmeriGas Partners, LP Second Quarter Fiscal Year 2012 Earnings Conference Call and Live Audio Webcast. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will follow at that time.

If anyone should require assistance during the conference, please press star and then zero. As a reminder, today's conference is being recorded. I'd now like to turn the conference to your host, Mr. Hugh Gallagher.

Thanks, Amy, and good afternoon, everyone, and thanks for joining us. As we begin, let me remind you that our comments today will include certain forward-looking statements, which management of UGI and AmeriGas believes 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 affect 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 the Shell acquisition and achieve anticipated synergies.

UGI and AmeriGas undertake no obligation 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. These non-GAAP financial measures are not comparable to measures used by other companies and should be considered in conjunction with performance measures, such cash flow from operating activities.

With me today are John Walsh, President and COO of UGI; Jerry Sheridan, President and CEO of AmeriGas and your host Chairman and CEO of UGI Corporation, Lon Greenberg. Lon?

Thanks, Hugh. Let me also welcome you to our call and a special welcome to our recent retirees Bob Knauss and Margaret Calabrese. I hope you're nice and relaxed and don't feel compelled to jump out of your chair during our comments.

I hope you've all had the opportunity to read our press releases for the second quarter. UGI reported earnings per share of $1.18 compared to $1.32 last year. This year's results include a $0.02 charge related to the extinguishment of debt compared to $0.05 last year and a $0.02 charge related to transaction costs for international and domestic LPG acquisitions. So the $1.18 with those two added back becomes $1.22.

AmeriGas reported net income attributable to AmeriGas Partners of $133.9 million compared to $118 million last year on adjusted EBITDA of $246 million compared to $176 million last year.

Well, as we sit here today and in preparing for the call, I remembered telling you last quarter how frustrating the first quarter was due to uniformly and unusually warmer winter weather in the first quarter. Well, on the whole, weather didn't get any better and, as a result, we remain frustrated with our results because of the weather.

Incidentally, weather records were broken in the United States for not only March of this year but also for the entire second quarter and for the last 12 months. All of those periods were the warmest in recorded history for the United States.

In our business, as you know, being a record breaker for warm winter weather is not a good thing. Thus, as you might expect, our results reflect that weather. Yet, as I've said many times, results don't always tell you what's going on in the business and there are a large number of silver linings in the clouds of those weather.

Our management teams did a fine job of mitigating the adverse effects of weather by controlling expenses and managing margins. We made significant progress on a number of important projects that we will discuss during this call and that progress sets the stage for a significant rebound in earnings next year.

However, before I jump ahead to next year I'd like to turn the call over to Hugh, John and Jerry to discuss this quarter's results, so Hugh?

Thanks, Lon. As Lon just mentioned the highlight or low light of this quarter was the lack of demand for all energy products resulting from the record warm weather and encountered domestically and the volatile warm, cold, warm weather patter experienced in Europe during the quarter.

As outlined in our earnings release giving our results to date and our current assessment of acquisition integration efforts and business prospects for the remainder of this year, we expect to report GAAP earnings per share of between $1.65 and $1.75 per share for the full fiscal year ending September 30th, 2012. It is important to note that the full-year guidance includes the dilutive impact of about $0.15 associated with the acquisition transition costs at AmeriGas and at International Propane and the loss on extinguishment of debt at AmeriGas.

Excluding these unusual items related to recent acquisitions, we would expect to report adjusted EPS in the range of $1.80 to $1.90 for the full fiscal year ended September 30, 2012.

Looking at year-to-date EPS on an adjusted basis, excluding the impact of the loss on extinguishment of debt and the transition expenses that have been incurred thus far, we would be at $2.02 per diluted share versus $1.95 GAAP EPS that was reported. This means that excluding the impact of the transition costs that we expect to occur during the second half we would incur a seasonal net loss in the $0.10 to $0.20 per share range.

Now, turning back to this quarter's results for each business unit, most notably AmeriGas completed the Heritage acquisition in mid-January but both businesses were significantly impacted by the warm weather during the quarter.

Heritage contributed 138 million gallons and $194 million in total margin from its mid-January acquisition date through March 31. Heritage operating expenses during the period were approximately $78 million, which translates in total to roughly $117 million of EBITDA from Heritage.

In the AmeriGas legacy business we sold 252 million gallons during the quarter compared to 316 million gallons during the prior year period. Total margin at the AmeriGas legacy business was $292 million this quarter compared to $342 million in the prior year and operating expenses in the legacy business, excluding transition costs associated with the acquisition, were $166 million.

Adjusted EBITDA from the AmeriGas legacy business was approximately $129 million versus adjusted EBITDA of $176 million in the prior year.

Although we were able to disclose the Heritage and AmeriGas results separately for this quarter, our ability to do so will diminish as we integrate the businesses and, Jerry -- AmeriGas has made significant progress on the integration and Jerry will be sharing some thoughts on that later during his part of the presentation.

Turning to International Propane, contribution to earnings before income tax has increased this year versus the prior year reflecting the beneficial impact of the Shell acquisition, partially offset by transition expenses related to the transaction. The Shell acquisition added 52 million gallons and $39 million in total margin. The acquisition also added about $25 million in total operating expenses including $1.0 million in transition costs.

Total operating income contribution from the acquisition during the quarter was approximately $12 million.

Weather across Europe during the quarter was particularly volatile. Although weather in France on average was about normal for the quarter, January was 10% warmer than normal followed by a February that was 32% colder than normal and a March that was 22% warmer than normal.

Similarly in Flaga service territory, temperatures for the quarter averaged about 3% warmer than normal but with a similar rollercoaster. January was 11% warmer than normal. February was 19% colder than normal. March was then 18% warmer than normal. The abrupt end to the heating season in March had a negative impact on the volume performance of our businesses in Europe.

At the Legacy Flaga and Antargaz businesses volumes were 131 million gallons, about 2% lower than the prior year period. Total margin was about $169 million or 5% below the prior year period. The lower total margin in the legacy business was largely attributable to much higher international wholesale propane product cost.

According to Platts prices in Northwest Europe averaged $1.91 per gallon, $1.91 per gallon during the current quarter versus $1.72 per gallon in the prior quarter and $1.56 per gallon in Q1 of 2012. Put another way, our European businesses encountered a propane product cost environment that was 11% higher than the prior year period and 22% higher than the previous quarter. Despite this our teams did an excellent job of managing margins, given this rising cost environment.

Operating expenses at the legacy business were $93 million in operating income; at the legacy business in Europe was about $58 million during the quarter.

Gas utilities contributions to earnings decreased $12.1 million, or nearly 21%, on weather that was over 19% warmer than normal and over 23% warmer than last year.

The warmer weather resulted in a decrease in throughput to retail core market customers of 6.7 Bcf, or about 20% from the prior year. Importantly, the weather related decrease in volume at AmeriGas and Heritage was consistent with this weather related decrease experienced in our utility business.

Midstream and Marketing's earnings contribution also decreased significantly as the benefits of increased natural gas storage income were more than offset by lower earnings from natural gas marketing, capacity management activities and to a lesser extent electric generation.

And now I want to provide a little bit of color on cash and liquidity. UGI's balance sheet is very strong despite the near-term challenges related to the weather and we remain committed to maintaining a strong balance sheet as a means to support our business initiatives.

Consolidated cash was approximately $402 million at March 31, 2012 compared to $298 million at March 31st, 2011. The current year-end cash balances were higher than last year, primarily due to cash balances associated with the Heritage and Shell acquisitions.

In discussing financing activities this quarter, I want to spend most of my time on AmeriGas since there has been a significant amount of activity there since the last time we spoke.

In January AmeriGas completed the $1.0 billion senior note offering and the $550 million senior note offering in conjunction with the Heritage Propane acquisition. In March AmeriGas sold seven million units in an underwritten public offering and the net proceeds from this offering were used to redeem $200 million of AmeriGas's senior notes due 2021 and to reduce bank loan borrowings outstanding. Both the equity offering and the debt tender offer were part of our financing plan related to the Heritage acquisition and were intended to bring AmeriGas's credit metrics back in line following the acquisition.

At March 31 AmeriGas had $140.3 million in cash on hand and, as a result of the transactions I just described, the AmeriGas capital structure was as follows; revolving credit borrowings of $50.9 million, current maturities of long-term debt of $26 million, senior notes outstanding of $2.270 billion, other long-term debt of $67.9 million and total debt of $2,414.8 million.

Total partners capital, including non-controlling interest, was $1.8 billion, meaning our debt to total capitalization was about 57% as of March 31.

In order to provide ample headroom under its debt covenants following the historic warm weather and the additional leverage resulting from the Heritage acquisition, AmeriGas recently entered into an amendment to its credit agreement that increases the consolidated MLP total leverage ratio to 5.5 times through March 31st of 2013 and then to 5.25 times thereafter. Prior to the amendment this ratio was 5.25 times through June 30th, 2012 and five times thereafter.

And a final note on AmeriGas, as we sit here today there are no borrowings outstanding under AmeriGas's $525 million credit facility. There are $39.2 million in letters of credit outstanding and capacity under the facility is $485.8 million.

Moving briefly to UGI's other business units, at March 31 UGI utilities had zero borrowed under its revolving credit facility and $47 million of cash on hand.

Antargaz had no borrowings under its EUR40 million facility and had EUR78 million of cash on hand.

Flaga had approximately EUR17 million of borrowings and EUR18 million of guarantees outstanding under its two primary revolving credit facilities, but Flaga also had approximately EUR11 million of cash on hand at March 31.

AvantiGas, our propane operation in the UK, had cash on hand of GBP11 million at the end of the quarter.

Our Midstream and Marketing business had outstanding balances of $27 million under its accounts receivable facility and $85 million on its revolving credit facility at March 31.

And finally, at the UGI Corporation level excluding cash held by operating subsidiaries, we had $63 million of cash available at March 31, 2012 compared with $78 million at March 31st, 2011.

And with that I'll turn it over to John for his report on operations. John?

Thanks, Hugh. Although the short-term financial impact of the record setting warm weather in the quarter was substantial, our businesses have done a solid job responding to those challenges.

Our teams have executed a broad range of actions to manage costs as we responded to reduced demand from our weather sensitive segments. We've also taken advantage of the opportunity provided by the weather to drive critical projects and activities that are typically curtailed during the winter months. I'll comment on both the operational and strategic activities in the quarter since there were significant developments in both areas.

Our core businesses, while managing costs effectively over the course of this challenging winter, moved forward with our growth programs and critical operational initiatives.

Our gas utility team is converting customers to natural gas at a record pace. The natural gas versus fuel oil spread remains very wide and customers in both the residential and commercial segments are eager to take advantage of the savings, while upgrading the quality of their energy solution.

Through the first six months of our fiscal year, conversions and upgrades are running over 50% ahead of prior year. We've taken full advantage of the warm weather to continue the conversion activity throughout the winter months.

Our commercial additions are running about 25% ahead of prior year with customers being added across our entire service territory. While new residential and commercial construction activity remains weak, we've addressed this growth challenge by our targeted conversion program. We expect to add 13,000 to 15,000 new customers at utilities by the end of the fiscal year.

Our Midstream and Marketing business continues to have good success growing our power marketing segment. We've ramped up our activities over the past 24 to 36 months and now serve over 8,000 commercial customers in the Mid-Atlantic region.

Total megawatt hours billed year-to-date have increased about 25%. In many cases we serve both the power and natural gas requirements for these customers. This puts us in a great position to develop long-term relationships as we serve as their primary energy supplier and advisor.

Much of our effort this year has been focused on the development and execution of a range of strategic investments across our businesses. Many of these opportunities, which include both capital projects and acquisitions have moved into the execution phase. We're excited about the progress made to date and remain highly focused on the successful execution of each of these individual opportunities.

Our Midstream and Marketing team continues to make progress on our key Marcellus projects, which are at various stages of development, execution and operation.

Early in Q2 we conducted an open season for our 15 Bcf natural gas storage facility in Central Pennsylvania. The storage capacity was 100% subscribed at average rates that were slightly above the prevailing rate.

We also completed the final stage of our project to add compression on our existing Auburn gathering system. That system is now operating at full capacity.

In addition to these assets now in operation in the Marcellus region, we have two significant pipeline projects under development. The Auburn II project, which will extend our existing system southward to connect with the Transco pipeline, is in the land acquisition phase at present with a significant portion of that capacity subscribed. Field execution is scheduled for 2013.

In early March we announced our intention to jointly develop and market a new interstate pipeline known as the Commonwealth Pipeline. This proposed 200 mile project, which is being developed along with Energy Midstream and a subsidiary of WGL Holdings, would run southward from Central Pennsylvania accessing major markets in Southeast Pennsylvania, Maryland and the District of Colombia. We're currently in the marketing stage in preparation for an open season in Q3.

The integration programs for our major propane acquisitions in Europe and the US are right on track. European integration is well advanced and we will have achieved the majority of our synergy goals and incurred most of the transition expenses this fiscal year.

AmeriGas has made great progress on the Heritage integration plan that we discussed on our last call. The team has used a lower level of delivery activity resulting from the warm weather as an opportunity to accelerate key elements of the plan.

We're very pleased with the progress made in the first three months post acquisition and remain highly confident that we'll achieve the operational, service and growth performance that underpin the business case for the investment. Jerry will provide additional details on the integration work during his comments.

We're nearing completion of two projects that we've been discussing with you over the past two years. The $120 million expansion of our LNG Peaking facility in Temple, Pennsylvania is in the final stages of commissioning.

We're on schedule to be fully operational for the 2012, 2013 winter peaking season. We're also in the commissioning stage for the (inaudible) start of the second gas fired turbine at our Hunlock Power generation facility. The unit will be fully operational and the Hunlock Plant will be back at full capacity by the end of this quarter.

While I can't say I'm sorry to see the second quarter come to a close, the performance challenge presented by the weather was significant. I can say that the achievements in the quarter on our two major propane integrations, our continued strong growth in utilities and the major developments on our Marcellus activities position us well for a return to strong performance in 2013 and beyond.

I'd now like to turn it over to Jerry Sheridan, who will take you through the AmeriGas performance in Q2. Jerry?

Thanks, John. This was a milestone quarter for AmeriGas as we closed the largest acquisition in the history of the Company. Our acquisition of Heritage Propane on January 12th was the primary focus of our activities in the quarter and will remain so for the next 15 months as we execute our integration plan.

Our reported EBITDA in this year's second quarter grew by 40% versus the legacy AmeriGas business last year. In order to provide you with insights on the underlying performance, my comments will include references to the separate volume performances of the legacy, AmeriGas and Heritage businesses during this extraordinarily warm second quarter.

First, the actual EBITDA results for the quarter for the new AmeriGas were $246 million after adjusting for $13 million of debt extinguishment caused an $8 million of acquisition integration expense. The $246 million result is almost $70 million above the legacy AmeriGas performance in the prior year.

It's worth noting that the quarter included an improvement in total margin that resulted from the settling the fair market value of inventory for the opening balance sheet for Heritage as of January 12th. The benefit of this lower cost inventory, much of which liquidated during the quarter, was the largest contributor to an adjusted EBITDA performance that exceeded the top end of our previously issued guidance for the quarter of $235 million.

As a result of this adjustment and the positive impact of a declining product cost during the quarter, unit margins were stronger than normal during the quarter. Weather for the quarter nationally was 22% warmer than last year and the warmest January to March period ever recorded since record keeping began 118 years ago. In order to better understand the impact of the weather on the business, the legacy AmeriGas volume was down 20% during the quarter and the legacy Heritage volume was down 19% for the full quarter January to March. The volume decrease for both businesses therefore was in line with the weather impact.

Our teams performed well in this most challenging of weather environments. We closely managed our operating expenses while simultaneously executing the early phases of the integration plan. Operating expenses increased by roughly $82 million in the quarter due to the acquisition but the operating expenses declined in the AmeriGas Propane legacy operations.

The warm weather has afforded us the opportunity to accelerate our selection of field locations where there are consolidations, as well as the individual selection of our senior management and field management teams. In addition, we're moving forward with the consolidation of headquarters operations and will be closing the legacy Heritage headquarters in July.

As I noted earlier, the integration activities will be our primary focus over the next 15 months. We have 15 internal teams focused on everything from back office consolidations to real estate selection to systems conversions and implementing distribution best practices. Our integration is on track to consolidate over 200 field locations. Our attention now is focused on completing a successful integration and moving forward with our growth strategies around national accounts, AmeriGas cylinder exchange and acquisitions. We've acquired six small propane operations this year and have blended them into our existing operations.

Based on our year-to-date EBITDA of $335.5 million, we're reiterating our guidance for the fiscal 2012 to be an adjusted EBITDA of between $375 million and $395 million including $15 million of synergies to be realized this year. Further, based on the progress of the Heritage integration and the assumption of a return to normal weather, our adjusted EBITDA guidance for fiscal 2013 remains $610 million to $660 million including the impact of over $50 million in net synergies expected to be realized in 2013.

We always take a long-term view of the business. We were pleased to increase our distribution 3% upon the close of the acquisition, as we had committed to, and again increased our distribution 5% in April, our sixth consecutive annual increase of 5%.

We have a strong business that can endure cycles and still deliver consistent returns to unit holders. The acquisition of Heritage solidifies our strength in an industry that clearly needs consolidation. I thank our new management team and the over 9,000 AmeriGas employees who have shown outstanding commitment and a great deal of flexibility through the acquisition and the ongoing integration process.

Now, I'll turn it back over to Lon.

Thanks, Jerry. My concluding comments are on the brief side, just given that we've had a longer presentation than usual. We've given you guidance already. Hugh has done it. It's in the press release. Jerry has done it and that guidance obviously reflects our view of the remainder of this year as well as our results to date.

I want to comment on the results to date a little bit more to give you some color. We conducted an internal exercise to ascertain and quantify the effects of this record setting warm weather on us. And, as you know, this isn't an exact science to weather adjust our results. However, we believe that we would have been very comfortable in advising you today that the guidance we gave you in November of $2.35 to $2.45 a share was achievable this year with -- had weather been more normal.

Said differently we gave you guidance in November of $2.35 to $2.45. If we had experienced relatively normal weather we're comfortable that we'd be at least reiterating guidance today. Said differently, the weather effect on our earnings based on our calculations, which again is not an exact science, is in the $55 million to $65 million range. However, as I said, this is a hypothetical exercise and we'll wait till next year to demonstrate our earnings capacity in more normal winter weather environment.

Yet, as John and Jerry and Hugh indicated, we don't have to wait very long to talk about our progress. The Heritage transaction integration effort, as everyone has told you, is progressing very well. I know there is a lot of discomfort with the domestic propane industry. However, we believe the current level of discomfort is extreme and it's unwarranted. By way of illustration, in comparison to our gas utility volumes the significant weather related volume declines in our propane business that Jerry commented on were very consistent with the experience in our retail core market throughput and our gas utility with similar weather.

Said very plainly, our gas utility experienced weather similar to AmeriGas and Heritage during the quarter and their -- both of their volumes were down a comparable amount and there is nobody out there who suggests that the gas utility industry is not a good industry, generally nor is our gas utility a sound growing company. So we are not prone to exaggeration, as you know, and I assure you we are very comfortable with our 2013 projection of EBITDA in the range of $610 million to $660 million or we would not be telling you it on a consistent basis.

Our international propane business also is doing very well and progressing nicely with its integration. The transactions made last year were very sound transactions based on strong fundamentals and were excellent values and we are very comfortable that they will contribute nicely to next year's earnings. John mentioned how much growth we're seeing in our gas utility. Our gas utility continues to grow at near record levels. We're seeing an overall pick up in demand if you look at the underlying fundamentals of demand and this all bodes well for next year if we have any kind of return to relatively normal winter weather.

Midstream and Marketing business, John describe the activities there. We continue to invest and grow. We described during this meeting our activities and the whole, what's coming on stream and later this year and in 2012 and '13. You will see a good contribution to earnings next year from our investments and progress we make in our Marketing and Midstream business.

So, in summary, we've created a strong foundation for a significant rebound in earnings next year and, as John said, for earnings growth in the future. Our financial condition is strong. Hugh went over that thoroughly and, as importantly as anything, our management teams are eager to demonstrate that our efforts are bearing fruit and will bear fruit for you in the future. There may be some who have been disheartened with our results this year but we offer no excuses for it, just facts about weather and our progress. We're as optimistic as ever about our future and frankly can't wait to prove it to you as the rest of this year unfolds and next year begins.

So, with that, we'll take whatever questions you have. So, Amy, you can open it up for questions.

(Operator Instructions). Our first question comes from Carl Kirst of BMO Capital Markets.

Thanks. Good afternoon, everybody, and very much appreciate all of the detail and, Lon, certainly your comments at the end and, in fact, just if I can ask a clarification since we're on the call here and the original $2.35 to $2.45 guidance from last November I guess it was, was that in and of itself an adjusted number, i.e. it excluded the debt retirement and the transition costs or did that number even include that? I just couldn't remember that off the top of my head.

The only thing that would have included, Carl, would have been the impact of transitioning expenses for the European acquisition.

Just for European?

Right because that was pre-Heritage.

Pre Heritage and pre extinguishment of debt.

Thank you. I appreciate that. Actually a question on Heritage if I could and a lot of the numbers thrown out there so I may have missed this but just looking at the Heritage and thank you for splitting it out for this quarter, but wondering about the legacy Heritage from this time last year just to sort of see what the weather impact was, and I believe I caught that volumes were down 19% year-over-year just at Heritage. I didn't catch what the margin was or the decline in the margin.

I'll take margin, Carl, and then Jerry or Paul Grady, who is here, or someone else can jump in if I overstate it or understate it. Margins as a whole are up year-over-year and they're up in the Heritage business and they're up in the AmeriGas business as well. This quarter there were two factors that affected that. One was a declining cost environment. I am going to do a guess and somebody correct me but now Belleview is down $0.30 during this quarter peak-to-trough down $0.30-ish and obviously in a falling cost environment that helps as you try to maintain your margins and particular in a tough weather environment where earnings are somewhat pressed.

Secondly, as jerry mentioned, we've got some purchase accounting preliminary results in Heritage and there was an inventory adjustment that also lowered our cost of gas, if you will, and gets passed through margin so that also helped the Heritage margins. We don't have exact numbers on both but unit margins were nicely higher than last year's unit margins and, again, the explanation is the falling cost environment in the inventory.

And, Carl, this is Hugh. A couple pitfalls I just want to point everyone to avoid, if you look at Heritage's results last year in the ETP reports, that's going to include the cylinder exchange business that we didn't acquired number one, so that's different that -- and the second one is we had what, 10 weeks of operations this year versus a full quarter that would have been in their report last year.

No. Thank you for the clarification, Hugh. That's great. And then just last question if I could and this was really on the going back to the Midstream and we're going to have I understand a lot of moving parts and, of course, as projects go from execution and service this is going to change but as we look at either this current quarter just reported or six months to date can you break out sort of the different buckets that we're seeing right now as far as how much from gas marketing, power marketing, other services and within that partly I just want to make sure I understand what the difference is between gas marketing and capacity management because I think heretofore I was probably thinking of those as quite frankly the same thing, using gas marketing to manage your capacity.

Carl, this is John. We -- one of the things we're planning on doing is holding an Analyst Day in the Fall. I think that's probably the best venue for us to go into a sort of a detailed review of the Midstream and Marketing business, at which point we could -- and you're right. It's clearly a completely separate activity around gas marketing and then the capacity management activities for the Midstream business, so not in a position to break it out on this call.

The only thing I would say about gas marketing is the experience we saw or the volume impact of warm weather in our gas marketing business within Midstream kind of mirrored what we saw in the gas utilities, very similar in some of the service territories overlap so we saw that impact certainly. Margins held up but volumes were impacted by weather.

But in terms of a much more detailed review of performance by segment, I think we'd target that Analyst Day in the early Fall as the best time to do that.

And we will try, Carl, to give more color as the year goes on too. We've got Chad at AGA. We've got a shot and we'll webcast stuff when we do that. The one thing I'll point out is the -- in addition to what John said, in the press release there's reference to year-over-year margin decreasing from gas marketing of about $6 million, lower capacity management margin of $6 million as well, so that will give you some framework of a decline that you see and that should be helpful to you a little bit to try to understand year-over-year results.

And, just at a high level, the comment on the factors that might impact capacity management it's certainly impacted by volatility and in many cases caused by demands put on systems by colder weather and then subsequent disruptions so we see some of that capacity management decline as being directly related to lower demand and less system stress throughout the Mid Atlantic and Northeast US this year. It's a very uneventful year in terms of volatility within the market.

Great, appreciate all the color, guys.

Darren Horowitz, Raymond James.

Hey, Lon, just one question from me regarding AmeriGas; can you give us a sense for the fiscal 2012 and fiscal 2013 adjusted EBITDA sensitivity due to propane prices because, based on what you were just talking about, it would seem that substantially higher than normal propane inventories are driving and will continue to drive a rather material decrease in wholesale propane prices basis Mount Bellevue. Clearly until LPG export capacity comes on line later this year but that could potentially set the stage for some retail margin expansion certainly heading into September and October I would imagine but I would love your thoughts there.

Yes let me give you -- I mean one of the things that we see in the industry that we particularly like is what you referenced to, Darren, which is the tremendous growth domestically in natural gas liquids. It has separated domestic propane prices from crude oils, traditional relationship but we're probably trading at 48, 47, somewhere at 47%, 48% of crude whereas the old lore in the industry was closer to 80% of crude. That -- you benefit most from that in a falling cost environment and if it levelizes somewhat then I think everybody over time and the market adjusts and so you return to a more normal environment.

But lower prices to our customers is also very healthy for this industry. It makes it more competitive compared to other fuels. It makes our customers happier. It provides growth opportunities that don't exist in a higher cost environment. So yes your observation is correct that falling costs, like it does in all industries, helps margins.

Eventually that catches up to itself and margins levelize at more normal levels but the extra benefit that you didn't mention that I would emphasize is lower prices to customers is very good for an industry. We see in the natural gas side that as natural gas prices have declined, the level of conservation that we expected in the industry doesn't exist and so we're seeing improvements in volumes in natural gas, both retail customers, home owners, residential as well as commercial businesses and so there's the added benefit of better volume performance as prices get lower.

Thanks, Lon.

(Operator Instructions). Mark Barnett, Morningstar.

Just a quick details question, if I heard you correctly the O&M for the quarter at legacy AmeriGas looks down about 2%. Should we assume that you're going to be able to hit that trajectory kind of through the second half of the year?

Yes it was down more, like 4% or 5%. Yes we didn't say 2%. We just said it was lower. But yes certainly. I mean this is warm weather time so we've got good control and flexibility about, particular overtime and our vehicle repair and maintenance and our plant repair and maintenance costs are things that we can flex and we're going to have to, just as we would in any warm year.

Okay and I guess maybe this is a difficult question but I'm going to go ahead and ask anyway. Big picture, given kind of the consolidation obviously with your Heritage deal and then Suburban Steel announced today, could you share kind of your general thoughts on how this might impact kind of growth through acquisition model that's served you so well?

Yes the -- a couple of comments. One is I'll congratulate John Sherman and Mike Dunn on the transaction. I know Mike and his team at Suburban well. They're good operators and they will do a good job of blending those two businesses together and I also know John and his team on the energy side and they're a quality business and I wish them both lots of luck with it, although not as much luck as I wish ourselves but I do wish them luck because they're two quality companies coming together.

The consolidation is good for the industry as a whole. It's good for most industries and particularly this industry because costs need to come down. We need to get more efficient and scale brings efficiency, which allows us to become more competitive across the industry and not only across the industry but with other fuels. We've just got to get more efficient. We've got to modernize the industry.

That having been said, the top 10 players of this industry have had about 40% of the market for a very long period of time. We've had the consolidation of two of those players into others so now it might be 43% of the market or 44% of the market. So the growth through acquisition story is intact. We completed a number of smaller transactions over the course of this year. We intend to make sure we digest what we have but we haven't gotten out of the market itself and so in terms of our expectations for the future, we still will build in a grow through rollup, a continued rollup of this industry and when the largest market share player has 15% as we do, there's lots of room for a growth in the future.

Thanks for that.

And I am showing no additional questions at this time, sir.

Okay, thank you very much, Amy. Well, we appreciate everybody's attention to the call. Again, we are committed to demonstrate the earnings capacity of this business in a more normal winter environment. I remind you this was an extreme. The reason they have records is every once in a while they are broken. This one lasted 114, 118 years -- 118 years? We trust that we won't see it for at least the longevity of the people in this room and that it will return to a more normal environment next year and you will see the earnings capacity of this business when you get anything close to more normal weather. So we look forward to making continued progress during the next quarter, not a big weather quarter but we are making good progress and look forward to reporting that to you some time in July, those of you who we'll see at AGA and along the way look forward to seeing you then. So thanks a lot and everybody take care.

Ladies and gentlemen, this does conclude today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.