Executives
Robert W. Krick
John L. Walsh – Vice Chairman of the Board of the General Partner
Eugene V. N. Bissell – President, Chief Executive Officer & Director of the General Partner
Peter Kelly – Chief Financial Officer UGI
Lon R. Greenberg – Chairman of the Board of the General Partner
Jerry E. Sheridan – Chief Financial Officer & Vice President Finance of the General Partner
Analysts
Analyst for Faisel Khan - Citigroup
[Shaneer Grashooney] - UBS
Carl Kirst - BMO Capital Markets
[Peter Iselli - Schneider Capital Management]
Justin Mauer - Lord Abbott
AmeriGas Partners, L.P. (APU) F3Q08 Earnings Call November 11, 2008 4:00 PM ET
Operator
Welcome everyone to the UGI and AmeriGas Partners’ fourth quarter fiscal year 2008 earnings results conference call and webcast. This call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Mr. Bob Krick.
Robert W. Krick
As we begin let me remind you that our comments will contain certain forward-looking statements which the management of UGI and AmeriGas believe to be reasonable as of today’s date only. Actual results may differ significantly because of risks and uncertainties that are difficult to predict and many of which are beyond management’s control.
You should read the annual reports on Form 10k for a fuller list of factors that could affect results but among them are adverse weather conditions, price volatility and availability of all energy products including natural gas, propane and fuel oil, increased customer conservation measures, political, economic, legislative and regulatory changes in the US and abroad, currency exchange rates and competition from the same and alternative energy sources.
UGI and AmeriGas undertake no obligation to release revisions to these forward-looking statements to reflect events or circumstances occurring after today. In addition, our remarks today will reference certain non-GAAP financial measures for fiscal 2007 that management believes provide useful information to investors to more effectively evaluate the year-over-year results of the operations of the company in fiscal 2008.
These non-GAAP financial measures, net income, net income per diluted share, net income per partnership unit and EBITDA, all excluding the sale of a storage terminal by AmeriGas in 2007 are not comparable to measures used by other companies and should be considered in conjunction with reported net income, net income per diluted share, net income per diluted partnership unit, EBTIDA and other performance measures such as cash flows from operating activities.
With me today are John Walsh, President and COO of UGI, Gene Bissell, President and CEO of AmeriGas and Peter Kelly, CFO of UGI and of course your host Chairman and CEO of UGI, Lon Greenberg.
Lon R. Greenberg
Welcome to our year-end call. I trust you’ve all had the opportunity to review our press releases reporting our 2008 fiscal year results. UGI reported earnings per share of $1.99 compared to $1.89 last year. Included in last year’s earnings was a $0.12 gain from a sale of a terminal by AmeriGas. After eliminating that $0.12 gain the comparison would be $1.99 compared to $1.77 or about a 12% gain in earnings per share.
Similarly AmeriGas reported a good year as well. AmeriGas reported net income per unit of $2.70 compared to $3.15 last year. Like with the case of UGI, last year’s results for AmeriGas included the gain from a sale of a terminal and eliminating that gain results in net income per unit in 2007 of $2.51 so the applicable comparison would be $2.70 to $2.51.
EBITDA rose to $313 million from approximately $293 million last year after eliminating the asset sales gain. Looking at our earnings performance for the year, what I would point out to you is that we achieved our earnings growth and paid the dividend and distribution growth that we told you would despite encountering a very challenging environment.
During fiscal year 2008 I don’t have to remind you that we experienced a rapid escalation in commodity prices to record levels, we experienced warmer than normal weather and of course weakening worldwide economies. It’s obvious that none of these circumstances is a good thing for our business yet through adherence to long standing carefully thought out strategic plans and our unrelenting focus on execution we were able to deliver on our commitments.
As all of you know, we have a diversified group of energy marketing and distribution businesses and we adhere to rigorous fundamentally sound financial policies. We are not a significant producer of energy commodities and those do not have the opportunity to benefit from the rising tide of significant increases in commodity costs. Rather, we have to earn our money every day as we have millions of relatively small transactions on a regular basis with our customers.
We have said for many years we’re a sound growth and income vehicle for investors and we believe our performance last year once again demonstrates that fact. Before I make any further comments I’m going to turn the call over to Peter Kelly to review our financial performance in more detail. Peter will then turn the call over to John Walsh who will give you some flavor for the progress we made operationally last year. Gene Bissell will further amplify that with regard to AmeriGas and then it will circle back to me for some concluding remarks.
Peter Kelly
As Long covered in his remarks, 2008 was an extremely challenging year. Record commodity prices drove conservation, the weather didn’t corporate and we had a weaker economy. Despite this, we once again delivered on our commitment to deliver both growth in earnings and to increase our dividend. We continue to generate cash and at the end of the year closed on a significant acquisition giving us additional natural gas and propane assets that will be accretive in 2009.
To give you some back drop I’d like to cover four items: first, our consolidated results for 2008; second, some color on each of our major businesses; third, our balance sheet; and finally, our liquidity. Our EPS was $1.99 up 5% from the $1.89 reported in 2007. Though I’m sure you’ll all remember our 2007 numbers included the $0.12 gain on the sale of our Bumstead storage facility.
Excluding the Bumstead gain from 2007 the $1.99 we posted for 2008 compares to $1.77 in 2007 an improvement of over 12 year-on-year. In addition, for the 21st year in a row we increased our dividend and now have the enviable record of delivering a dividend 124 years in a row.
The $0.22 improvement over the 2007 adjusted number was largely a result of improved performance in our energy services operations which benefited from greater income in peaking supply and storage management services as well as higher electric generation margins and our international operations with weather although warmer than normal was colder than the record setting warm temperatures of 2007.
Turning now to our business segment results, AmeriGas’ net income contributions for 2008, 2007 were $43.9 million and $53.2 million. As previously mentioned, the 2007 results included a gain of $12.5 million from the sale of the Bumstead storage facility. Retail volumes were down 1.3% reflecting to a large part the impact of significantly higher propane costs. The average wholesale propane cost in Bellevue Texas increased nearly 50% during fiscal 2008.
Weather, although 3.4% warmer than normal in 2008 was colder than the 6.5% warmer than normal reported in 2007. AmeriGas EBITDA was $313 million versus $338.7 million in 2007. 2007 included the Bumstead gain of $46 million at the EBITDA level so 2008 once again represents outstanding performance from the AmeriGas team and Gene will have more comments on their performance in his remarks.
Net income for international propane was $52.3 million versus the $44.9 reported in 2007. The tremendous run up in propane prices clearly impacted our business. However, with weather only 4.1% warmer than normal in France versus the 21.1% warmer than normal in 2007 we saw volumes growth in our France by 8.7% from 269 million gallons in 2007 to nearly 293 million gallons in 2008.
In our domestic utility business we turned in a solid performance in both natural gas and electricity. Natural gas net income rose in 2008 to $60.3 million from the $59 million reported in 2007 and in our electric utility net income declined slightly from $13.7 to $13.1 million. In our natural gas utility temperatures in 2008 were 5.5% warmer than normal compared to the 4.7% warmer than normal reported in 2007.
Total distribution throughput in 2008 increased 1.9 bcf to 133.7 bcf principally reflecting greater interruptible delivery service volumes on an increase in the number of gas utility core market customers partially offset by lower average usage per customer. In our electric utility system throughput was essentially flat versus 2007 but margins were down slightly year-on-year reflecting higher per unit purchase power costs and higher revenue related taxes.
In energy services our net income increased to $45.3 million in 2008 from $34.5 million in 2007. This improvement in profitability was primarily driven by the expansion of our peaking supply services, higher peaking rate charge and higher electric generation margin resulting in large part from higher spot markets and fixed contract prices.
Consolidated interest expense increased to $142.5 million in 2008 from $139.6 million in 2007 principally due to higher interest expense associated with greater partnership short term borrowings to fund increases in working capital mainly resulting from higher commodity prices for propane. Our effective tax rate was comparable to our rate in fiscal 2007.
Moving to our balance sheets, our consolidated debt is approximately $2.2 billion is similar to last year’s level and our consolidated cash position was $245 million compared to $252 million at the end of 2007. Included in the $245 million at the end of 2008 and after contributing $120 million to UGI utilities on September 25th, we had about $97 million of cash available in our holding company to reinvest for growth.
We would typically expect to generate about $90 million to $100 million of such investable cash per year. Of the $2.2 billion of debt at the end of 2008, approximately $2.1 billion is long term debt and by business AmeriGas had $933 million of debt similar to the level in 2007, utilities had $532 million, up $20 million on the $512 million reported at the end of 2007 and the international business was approximately $590 million down from the $605 million reported at the end of 2007.
I’m pleased to say we have no significant refinancing requirements before spring of 2011. From a property, plant and equipment perspective we have nearly $4 billion in gross assets and $2.5 billion in net assets up from $2.4 billion in 2007. Capital expenditures were approximately $234 million with depreciation and amortization of $184 million.
As we discussed at our recent investor meeting in New York, we’re expecting our capital expenditures on internal projects to increase and are currently estimating that our expenditures in 2009 will be just over $325 million of which approximately $175 million will be for growth projects.
Turning to liquidity, clearly the last few months have seen unprecedented volatility and uncertainty in the capital markets but our traditionally conservative business approach including minimizing exposure to individual counterparties, hedging to reduce risk as opposed to generating trading profits and having available substantial lines of credit have stood us in great stead.
We believe we have adequate liquidity to fund our requirements throughout all of our operating subsidiaries as we go in to 2009. In utilities we have lines of credit in place for $350 million, we have $200 million of borrowing capacity in energy services and a $200 million line in AmeriGas and at our French operation, Antargaz we have a facility of $50 million Euros.
At the end of September AmeriGas had used $43 million of its revolver and had a cash balance of nearly $11 million. The utility used $57 million of its revolver with cash available of $3 million, Antargaz had pulled down $50 million Euros and had $69.3 million Euros of cash and energy services had an outstanding balance of approximately $71 million with cash available of $24 million.
In summary, a strong year despite the run up in commodity price, a winter that was warmer than normal and the effect of the economic downturn. All of our businesses continue to do well and once again the strength of our diversified business model along with our conservative business practices have allowed us to deliver both growth and income. We continue to generate cash and find excellent opportunities both internally and through acquisitions to put this cash to work.
With that, let me pass the call over to John to discuss our operational performance.
John L. Walsh
Peter’s taken you through the financial highlights for the fiscal year. I’d like to focus on our operational performance with specific emphasis on progress on three long term strategic objectives: growing our core business; continuously improving operations; and reinvesting cash in high quality projects.
First growing our core business, our teams were tested this year with a combination of a decelerating economy, a sluggish housing market and high commodity prices. When faced with these conditions it’s critical that we focus on identifying and developing customer segments with growth potential. We maintained our focus on growth in FYI ’08 and delivered solid results.
I’d like to highlight a few specific achievements. Gas utility team did an outstanding job of moving quickly to take advantage of a significant opportunity to covert fuel oil and electric customers to natural gas. Conversions for the full year up almost 90%. This strong performance more than offset the continued slowing in our new home segment where customer additions fell by 20%. We added over 12,000 new residential and commercial accounts in FY ’08 with total customers additions exceeding prior year by approximately 8%.
Antargaz’s program for development of the cylinder segment through a combination of innovative product offerings and a strong operations network continues to deliver excellence results. The Calypso branded composite cylinder is a market leading product. We added over 225,000 new Calypso customers in the last fiscal year. On our last call I referenced Antargaz’s agreements with Carrefour, a leading French retailer to introduce a new private branded cylinder.
This product was launched in June and the results for the first few months have been outstanding. We’ve added well over 100,000 new customers for the private label product and we’re still in the process of rolling out the product across the Carrefour network.
[AmeriGas] and Antargaz are both focused on developing opportunities for pipe networks. These installations serve a group of customers from a common storage tank. Individual customer usage is metered and billed monthly. This is an efficient way of serving more remote customer clusters such as small or midsized rural areas of the US. We typically contract with the township of the community with contracts normally running in excess of 10 years. We expect to be a leader in this segment due to the broad geographic reach of our businesses in France and the US and our knowledge of pipe gas systems and networks.
On to continuously improving operations; at UGI we benchmark all our operations on a broad range of activities to assess progress on continuous improvement initiatives. I’d like to focus today on our progress on safety. We have a strong track record at UGI on safety performance but this is an area where it is vital that we drive for continuous improvement. The two recent acquisitions in our utilities business provided us with an excellent opportunity to benchmark and align our key safety programs.
While our primary safety programs are designed for our own employees, we’ve also developed and implemented safety training and education programs targeted to our customers and our contractors. We can see the impact of this consistent approach in our safety statistics where our OSHA recordable rates in UGI Gas have declined by over 60% in the past decade. AmeriGas is also a leader in safety programs and practices within the propane sector.
Employee training is the cornerstone of the safety program as we seek to identify and eliminate safety risks on our production sites, within our delivery and transport fleet and at our customer’s sites. FY ’08 saw continuing strong safety performance for AmeriGas as our loss work day cases dropped by almost 20% year-on-year and our vehicle incident rates fell by almost 30%.
The focus and discipline we bring to safety are also brought to bear on customer service and productivity, the other primary focus areas for our continuous improvement programs. I’ll address each of these areas on future calls. Finally, on reinvesting cash and high quality projects identifying, developing quality projects for reinvestment both acquisitions and capital projects is a strategic priority.
As Peter indicated our businesses generate roughly $100 million in cash each year and achievement of our long term goals for EPS growth is predicated upon reinvesting that cash in attractive projects. We have a range of projects under development and we’re confident in our ability to deliver quality investment opportunities. We closed the acquisition of PPL’s gas utility and their Penn Fuel propane business on October 1st.
This acquisition adds 75,000 new customers to gas utilities existing base of over 475,000 and strengthens AmeriGas’ market coverage in our key mid Atlantic region. We’re excited to have our new employees on board and we’re very pleased with the smooth transition during our first month of operation. As stated in our prior calls we expect the financial results of PPL Gas to be accretive to earnings in FY ’09.
Energy services is making excellent progress on our recently announced Broad Mountain landfill gas project. This $36 million project which will generate 11 megawatts of tier-1 renewable energy using recovered landfill methane gas is expected to come on stream within the next 60 to 90 days. Energy services is also working on a power generation opportunity utilizing our existing Hunlock site. This project which is in the final stages of development would replace our existing 44 megawatt coal fire plant with a gas fire 130 megawatt plant.
The estimated capital cost for the project is in the $110 million to $115 million range and we’d expect the plant to come on line mid 2011. We’ll provide additional information on this project when we conclude the development phase. I’d now like to turn it over to Gene who will provide you with the details on AmeriGas’ performance in this last fiscal year.
Eugene V. N. Bissell
It’s a pleasure to talk about AmeriGas’ strong 2008 results and to comment on the progress we made on our core strategies. As Peter mentioned AmeriGas achieved EBITDA of $313 million in 2008 compared to $338.7 million in 2007. The 2007 results however included a $46 million gain on the sale of our Bumstead terminal. Excluding this gain we increased EBTIDA by $20.4 million or 7% compared to 2007.
On the same basis, net income per unit also increased by 7%. Over the last five years we’ve achieved a 14% compound annual growth rate in net income per unit. As a result of this earnings track record and our confidence in the future we announced a 5% increase in our distribution in April and raised our target for annual distribution increases from 3% to 5%.
These results were achieved despite a nearly 50% increase in the wholesale cost of propane that drove of selling prices to customers resulting in reduced customer demand as well as the impact of a weakening economy on commercial customer volumes. The dramatic increase in energy prices also raised our cost of diesel fuel for our trucks by over 40% and raised our bad debt, travel and utility expenses. In total, higher energy costs accounted for over 40% of our expense increase year-over-year.
Most of the increase in EBTIDA last year was a result of effective execution of our strategies. Our objective is to increase earnings by 4% and distributions by 5% annually by growing our market share, leveraging our scale, driving productivity and achieving world class safety performance.
We have a track record of growing our share through a combination of acquisitions, growth in our cylinder exchange business and strategic accounts and through growth in our traditional base of residential and commercial customers. More than half of the increase in earnings last year was a result of successful integration of the acquisitions we completed in the fiscal year 2007 especially the All Star and Shell acquisitions.
Last year we completed four more acquisitions which together with the Penn Fuel acquisition that closed on October 1st will add 20 million gallons in fiscal year 2009. ACE also helped us to grow our market share, we achieved 10% growth in ACE cylinder transactions through same store growth and by adding about 1,200 locations. Some of our store growth was the result of the installation of 300 7-11 convenience store locations. In total 7-11 awarded us over 1,500 locations so we still have quite a few to install this year.
Our self service cylinder dispensing machines continue to be a competitive advantage in this segment as well. We now have almost 1,000 machines in operation across the country. These machines give customers 7/24 access to propane grill cylinders without even having to step in the store. We also upgraded the quality of our strategic account customer base last year resulting in a 4% increase in its EBTIDA contribution.
For the first time in six years we were not successful in growing our local customer base primarily due to a fall off in new home sales. We believe however that our continued focus on customer growth and customer service helped to mitigate the impact of the weak housing market and the weak economy on internal growth. One indication of that was the fact that 93% of our customers last year rated our service as meeting or exceeding their expectations.
We also made considerable progress this last year towards our goal of achieving world class safety performance. As John mentioned we were successful in reducing employee and vehicle incidence by more than 25% year-over-year primarily through safety training and awareness programs.
In September Hurricane Ike slammed in to Texas and gave us an opportunity to demonstrate the benefits of our scale and our dedication to customer service. The hurricane primarily affected customers served from our four locations in the Houston area. Before the Hurricane landed we had already mobilized our emergency response team in Georgia who arrived at the scene with generators, satellite phones, trailers for temporary employee housing and diesel for our trucks.
Employees from a three state area joined local AmeriGas employees in responding to the crisis. The day after the storm passed over Houston, our trucks were back on the road. Our first priorities were to get fuel to back up generators at cell towers, propane for FEMA trailers and grill cylinders to customers at home centers to supply homeowners without power. Customers were amazed at how quickly we were back on the road and very complimentary to our response to the crisis.
I’d like to thank all of the employees who had helped us take care of our customers and the emergency works in Texas. Every year we seem to have a crisis like Hurricane Ike, it gives us an opportunity to demonstrate how we can bring national resources to bear to address local customer requirements. I’d also like to take this opportunity to thank the entire AmeriGas team for continuing to grow our business and our earnings in 2008 and for achieving a significant improvement in our safety performance.
With that, let me turn the call back to Lon for some concluding remarks.
Lon R. Greenberg
Let me quickly sum up with the following thoughts. As you know, we reiterated guidance of $2.10 to $2.20 a share for UGI’s earnings in fiscal year ’09 and $315 million to $325 million of EBTIDA for AmeriGas. In the challenging environment that exists today we see some positive factors that support our guidance among them is the drop in energy commodity costs that occurred over the last month or two. It is not only good for us but it’s good for us customers and it’s good for our industry.
We have nearly $100 million of cash on our balance sheet; we have a very strong balance sheet; and importantly sufficient liquidity to support our businesses. We have good internal growth opportunities that John and Peter talked about which are available to us for the next few years, and in addition given our overall strength if other opportunities arise during this difficult time in the economy, we expect to examine those opportunities and pursue those which create long-term value for our shareholders.
I don’t want our optimism to leave you with the impression that we are either unaware of or immune from the consequences of the difficult external environment that exists today because we most assuredly are not. However we have a long tradition of capitalizing on opportunities that arise in difficult times. In addition our keen focus on execution has served us well for many years and we will be focused once again on meeting our commitments. We will also continue to pursue our long-term strategies as we focus on that execution.
We remain committed to meeting our long-standing financial goals of growing UGI’s earnings per share 6% to 10% a year and increasing UGI’s dividend 4% and at the same time increasing the distribution to AmeriGas’ unit holders by 5%. We do have a very long-standing tradition of meeting those goals. That should instill confidence in all of you that our projection for next year, which once again meets these goals, is obtainable.
Finally, I’m comfortable that we are examining the right issues, putting in place the correct strategies and executing against clear objectives and goals as we move forward.
Thank you very much for your attention, and we’ll be happy to take questions.
Question-and-Answer Session
Operator
(Operator Instructions) Our first question comes from Analyst for Faisel Khan - Citigroup.
Analyst for Faisel Khan - Citigroup
What exchange rate are you guys assuming in your guidance?
Peter Kelly
About $1.42 or $1.43. But don’t forget we’ve already got that hedged.
Lon R. Greenberg
Effectively because of the way we hedge our propane purchases.
Analyst for Faisel Khan - Citigroup
Over what period do you hedge it?
Lon R. Greenberg
We’ve got all of 2009 covered; most of 2010 covered.
Analyst for Faisel Khan - Citigroup
What type of propane demand growth do you expect in both the US and international, and what have you seen so far with the decline in commodity prices versus your expectations with regard to the demand?
Lon R. Greenberg
Let me take a shot at that. The industry in the US probably is not going to experience any growth. For us to tell you that we could grow our business 5%, 6%, 7% you ought to be checking our sanity I think that that is something that’s achievable for us in that environment.
We do have a goal of some growth and the reason we are able to execute and create that growth is we really approach it through three prongs domestically. One prong is our cylinder exchange program, another is our strategic accounts program, and the third is our base business. We certainly are going to grow next year is our belief but it’s going to be very modest growth in the US. It’s not an area where we have high expectations for growth but I will tell you growing modestly in the environment that we face with virtually no new housing market, very difficult economic circumstances in the US and in particular in the Midwest and Upper Midwest would be a very nice achievement in the current environment.
Internationally we also expect very modest growth in I would say France. They too are facing similar issues that we face here. A little bit better growth probably in Eastern Europe. Those economies are still growing although we expect those economies to slow through the ripple effects as we go forward.
On balance I guess the answer is I could have shortcut all that by saying very, very modest growth in both international and the US.
Analyst for Faisel Khan - Citigroup
With regard to your revolver, what’s the total revolver, when does it mature and how much of it is currently available?
Lon R. Greenberg
I can take it only because I know the answer and Peter can correct me if I overstate it just for simplicity. Revolvers don’t expire until 2011. We extended those out as we extended out virtually a very significant part of all of our long-term debt. If you think about our debt generally, no revolvers are coming due no earlier than ’11 and a small maturity in AmeriGas in 2009, a small maturity in 2010 and then a big maturity for Antargaz in 2011. That’s in a nutshell the maturity schedule.
Analyst for Faisel Khan - Citigroup
How much is in the revolver and how much is available?
Peter Kelly
In terms of the total revolvers, $350 million for utilities, $200 million for AmeriGas, 50 million Euros for Antargaz and we have a receivables line in energy services of $200 million. At the end of September AmeriGas had used $43 million, utilities had used $57 million, Antargaz had pulled down the whole 50 million Euros and energy services had an outstanding balance of $71 million.
Lon R. Greenberg
Let me just add to Peter’s comment on Antargaz. They pulled down the whole amount but they’re sitting with 69 million Euros in cash so effectively they haven’t borrowed on their revolver and they can’t pay it back because when you borrow under your revolver you’ve got 30 day windows and when that window comes, our expectation is that that would be paid given the amount of cash that they had at the end of September.
Operator
Our next question comes from Shaneer Grashooney - UBS.
[Shaneer Grashooney] - UBS
I just wanted to follow up a bit on Barry’s question just to understand the guidance for AmeriGas. As you said Lon, just a little bit of modest growth in terms of volumes. Is there an implied assumption there of any acquisition volumes or that would just be incremental to kind of how you’re thinking?
Lon R. Greenberg
Generally speaking when I talked about growth I did not include acquisitions but when AmeriGas budgeted since it is a strategic imperative for AmeriGas to grow by acquisition we budget 10 million gallons of acquisitions a year. One of the things that’s built into our year-over-year numbers is the PPL propane transaction which was 20 million gallons that wasn’t there last year but will be there this year.
Eugene V. N. Bissell
The total acquisitions we made last year plus Penn Fuel would be 20 million gallons and we’ll get the benefit this year of that.
[Shaneer Grashooney] - UBS
In addition to anything that you’ve already acquired that is part of the budget you expect to do another 10 million gallons.
Lon R. Greenberg
Yes. We always budget 10 and if you look at our history over time I think Gene showed something at our analyst call that was probably averaging 20 million a year for the last five years or something like that. I can’t remember how long it was.
Eugene V. N. Bissell
Typically the deals that you do mid-year are not going to contribute a lot in that year. They contribute more in the following year.
Lon R. Greenberg
Generally what we’ll do is we’ll budget a half year convention on that stuff so it doesn’t have a big effect in this year’s numbers. What really drives this year’s numbers from an acquisition standpoint, this year being ’09, is what we did last year that was not part of ’08 and nominally that’s close to 20 million gallons.
[Shaneer Grashooney] - UBS
So I should assume that there’s some sort of investment cap ex above your maintenance cap ex when I’m thinking about cash flows for next year?
Lon R. Greenberg
Yes. We always have fairly substantial growth cap ex number for AmeriGas. We’re a little different than the other folks. That’s why our capital spending is up. As you heard Gene point out we have grown this business every year for a lot of years except for this year and that growth requires cylinders for ACE, it requires cylinders and tanks for strategic accounts, and it requires generally underground tanks for any kind of residential/commercial business you get.
Peter Kelly
In 2008 we spent $63 million on capital, $29 million was maintenance and $34 million was growth.
[Shaneer Grashooney] - UBS
I mean, basically in the assumptions on your total cap ex basically between maintenance and growth should be somewhere between your 30 and 60 numbers is kind of how I should be thinking about this unless you’ve got -?
Lon R. Greenberg
Yes. Maintenance is generally going to be somewhere slightly in excess of 30 and growth is nominally 35 to 40, somewhere in that area.
John L. Walsh
One other point on growth. Lon referenced the challenges in the residential segment but there’s still some as Gene mentioned good growth opportunities and some specifics in account wins in ACE but also in strategic accounts. So we’re certainly planning on and planning for growth in both those targeted segments.
Eugene V. N. Bissell
We have some actually nice backlogs and installations to do in both businesses right now.
[Shaneer Grashooney] - UBS
Before switching off AmeriGas, I was wondering if we could talk about margins, kind of what you forecast for your guidance with respect to margins? Did you expect a contraction at all or did you expect them to remain at current levels given the price is falling at this point? How your thoughts were with respect to margins?
Lon R. Greenberg
Let me talk qualitatively and then Gene jump in. Qualitatively we do not see in the market place any rush by the industry to reduce prices. Remember this industry carries over inventory that’s purchased during the summer, purchased during the spring; it’s stored; and that all has to work its way through the system. Of course it will as prices stay where they are. That will work its way down.
If you look at industry statistics published by EIA, you can see prices coming down but at this point in time we don’t see a degradation of margin. Our general philosophy is that in a static environment there ought to be margin increases sufficient to allow you to recover your inflationary costs, and that’s how we think about budgeting generally speaking.
But of course that’s subject to market dynamics out there. We are not the highest pricer in the market by far nor are we the lowest pricer. We try to deliver a value to our customers in a variety of ways and we intend to compete in the market place effectively so we have to watch it. But I can tell you at this point in time we don’t see as I said before any industry rush to reduce margins. There are price reductions going on but they are commensurate with a balanced approach of passing on inventory costs that people bought during the summer and passing on to the customers the benefit of the lower prices now.
[Shaneer Grashooney] - UBS
I was wondering if we could turn to energy services at UGI. I must applaud you guys on the amount of disclosure that you’ve been out there and I guess unfortunately I get to ask more questions. I was wondering first if you can start with the seasonality of the business? Clearly the fourth quarter in ’08 is down significantly relative to the third quarter of ’08. I just want to understand if there’s a seasonality aspect to it, if it’s related to commodities; just sort of the difference between the third quarter or is it really more a seasonality issue and we should be more looking not towards the previous year?
Lon R. Greenberg
Seasonality is clearly there. Two elements if you think of that business in three parts.
One is a gas commodity marketing business which is clearly seasonal. It’s got a lot of winter peaking to it so you’ll always see some seasonality in that business because the customers by and large use it not only for process which would be more year-round but they use it for heating as well. If you think of the business in thirds, 1/3 of it is clearly seasonal.
You’ve got an electric generation business which is typically a little counter-seasonal but what you saw on electric prices as electric prices dropped throughout the summer compared to where they were in the spring so we didn’t get the normal seasonal kick that you would get from electric prices. So that counter-seasonal piece was missing this year.
The last piece of the business is what we call our midstream peaking business. That too is seasonal. They recognize the demand charges they get for providing their services over the winter months which is when they need to provide those services. So that third of the business is largely seasonal. It’s not perfectly seasonal but it’s largely seasonal.
Nominally 2/3 of the business is seasonal to the winter, 1/3 of it is counter-seasonal to the summer but the counter-seasonal part this year wasn’t as good as it was in the fourth quarter compared to the third quarter because of falling electric generation prices.
Peter Kelly
Also in energy services there was a mark-to-market impact. There was a gain on an operating income level of $2 million in the quarter and they had a cost in the quarter, I think in September, of $3 million. So there was quite a big swing just on mark-to-market additionally.
[Shaneer Grashooney] - UBS
Is this a similar issue to what we had in the previous quarter?
Lon R. Greenberg
Yes.
Peter Kelly
The equitable impact at the UGI level is about $400,000 so basically nothing for the year.
[Shaneer Grashooney] - UBS
But in the fourth quarter there was a $3 million negative charge relative to the $2 million positive gain.
Peter Kelly
On an operating income level it’s basically hits us about $0.02 in the fourth quarter.
John L. Walsh
These changes for us, these are transportation we buy that we bundle to sell to customers for electricity. The accounting rules which we studiously adhere to but don’t always understand, if that’s a proper way to say it, require us that notwithstanding the fact that we’ve presold this stuff to a lot of customers who will pay us for it but we’re obliged inter-period to mark those to market.
But the electricity price volatility that occurred in the third quarter and fourth quarter had dragged down transportation prices with it. So third quarter saw transportation become more valuable because electricity prices were based off gas at $12, gas tank down to $6, electric prices fell commensurately and of course transportation fell commensurately. But we were indifferent to it because we already sold the transportation at a sum.
But nonetheless because we do follow the accounting rules we had some mark-to-markets in there. They’re small relative to our business so that’s why we don’t break them out. For $0.02 this long-winded explanation, we don’t want to confuse people on it. It’s not a big deal but you’ve identified the quarter swing when it’s always been the biggest and Peter responded appropriately to it.
[Shaneer Grashooney] - UBS
The reason I’m zeroing in on this right now is because we actually excluded it in the third quarter so we wanted to make sure that we made the right adjustments.
John L. Walsh
Yes. For that intellectual honesty we applaud you and in order to do the same you’ve got to exclude $3 million pre-tax, is it Peter?
Peter Kelly
It’s $2.7 for energy services and $3.3 for UGI as a whole pre-tax for Q4.
John L. Walsh
So $3.3 pre-tax for Q4 going a negative. So you could add that back if you’d like but again fundamentally as we tell you, we understand you need to do your modeling and stuff. At the end of the day over a full year there won’t be any swing because we pre-sell this stuff.
[Shaneer Grashooney] - UBS
It’s just more what quarter it lays up in.
John L. Walsh
You’re exactly right.
[Shaneer Grashooney] - UBS
With the landfill gas project, what is the expected EBITDA impact for 2009 and what would be the 12 month run rate once it’s up and running completely?
John L. Walsh
I don’t think we publicly disclosed it.
Peter Kelly
It’s small.
Eugene V. N. Bissell
If you look at our expected ROE on that project, it’s sort of high teens for a $36 million investment.
[Shaneer Grashooney] - UBS
I was wondering if you could give us the wholesale volumes at AmeriGas for the quarter and what is the corporate cap ex guidance for 2009 for all of UGI?
Lon R. Greenberg
20 million gallons wholesale for the quarter.
Peter Kelly
And the corporate cap ex is $325 million. $175 million of that is growth and $150 maintenance.
Operator
Our next question comes from Carl Kirst - BMO Capital Markets.
Carl Kirst - BMO Capital Markets
The LNG peaker, did you guys discuss an update to the status of that?
Lon R. Greenberg
No. That is something that’s still in the investigatory planning phases and as I think we said at our off-site that that’s kind of a 2011-ish event. Money will be spent ’10/’11 and we don’t expect to see earnings from it until probably late ‘11/’12 timeframe.
Eugene V. N. Bissell
Certainly at an earlier stage of development than Hunlock which is why we focused on Hunlock today. We continue to progress it and do the appropriate filings with the FERC but it’s still mid-cycle in terms of development.
Carl Kirst - BMO Capital Markets
Going back to the utility and Pennsylvania here, we sort of lost the groundswell for decoupling and conservation trackers earlier on in the year but with the environment that we’re in is there any anticipation that that might bring that back to the forefront?
John L. Walsh
That’s an intriguing question. I have a hard enough time predicting what I’m going to eat for dinner let alone what the legislators and the governor are going to do. It’s clear to us that the governor and the legislature are concerned about energy prices, are concerned about the environment, want to put together some kind of program to handle the rate caps coming off in the electric business because of the rate shock that will be experienced by customers beginning in 2010 in Pennsylvania. Not ours because we’re out of the rate caps but generally speaking, the preponderance of the population in Pennsylvania.
So there a variety of energy bills that were considered and the decoupling is not a principal driver in those bills. It’s kind of an add-on and it has some support we understand but I can’t predict for you whether that will happen this year or not.
Carl Kirst - BMO Capital Markets
Your comments are helpful. I mean, we’re certainly not seeing a groundswell toward it right now.
John L. Walsh
That’s right.
Carl Kirst - BMO Capital Markets
I know when we’re only talking about 3% warmer than normal or 4% warmer than normal statistically it gets kind of difficult to splice the numbers here. But on sort of the fiscal year 2008 is there any sense of on a corporate 30,000 foot standpoint had we have had normal weather, are we kind of looking at a $0.02 to $0.03 impact overall or something that was more $0.05+?
John L. Walsh
As you were talking I was trying to think back to where our expectations were and everything else. I would say approximately a nickel give or take a little.
Operator
Our next question comes from [Peter Iselli - Schneider Capital Management].
[Peter Iselli - Schneider Capital Management]
Lon, could you provide just some clarity or detail perhaps on the $175 million in growth cap ex that you’ve identified?
Lon R. Greenberg
Let me turn that to Peter. He’s got the details.
Peter Kelly
It’s year-on-year about probably $60 million. $35 million of that is in our energy services group which are the projects that John was talking about and the balance is in our international operations in AmeriGas and mainly around cylinders and cylinder exchange type programs.
[Peter Iselli - Schneider Capital Management]
Not just the increase but the absolute amounts by segment? Do you have something like that?
Peter Kelly
I have the 2008 number for AmeriGas which was $29 million of maintenance and $34 million of growth. I don’t have at hand the individual numbers in terms of maintenance and growth. I do have the absolute number if you’d like that?
[Peter Iselli - Schneider Capital Management]
Yes. I was specifically looking at on the growth cap ex by segment, the $175 million broken down.
Peter Kelly
I don’t have that at hand.
Lon R. Greenberg
What we can do is maybe we can try to break that out in the annual report in some fashion so that at least it’ll get out there. Just broadly speaking, Peter is correct that energy services will eat a nice piece of the $175 million with their growth program for the Hunlock conversion of the electric plant, let’s call it all-in for energy services nominally $40 million; and these are very broad numbers; and what did you say for AmeriGas Peter? $40 for them?
Peter Kelly
$40 million.
Lon R. Greenberg
So that’s $80. That’s nominally half of it. Antargaz part of it is dollar conversion numbers but I’m going to say Antargaz could be $25 million to $30 million of their total capital budget. In that area is growth related to their cylinder exchange business, their pipe business and other things they have going on.
That leaves our utility business, and remember we have the new business we bought from PP&L, there’s additional growth capital there. Probably the bulk of the remainder is the utility businesses where as John pointed out we had despite the housing slowdown nice growth in the utility businesses through conversions and otherwise.
That’s broadly speaking where the money’s going.
[Peter Iselli - Schneider Capital Management]
Did you mention on the bad debt or accounts 30 days overdue any information there in terms of trends?
John L. Walsh
Jerry, maybe you can speak definitively about AmeriGas and then we’ll jump in on the others if we can.
Jerry E. Sheridan
I guess we’re very happy so far with the way the agents have trended. We tend to look at accounts that are over 60 days and we’ve lost about 1% of [ground] if you look at September to September and the same goes for days outstanding. We’ve lost a day. Clearly there’s impact both on commercial and residential with slightly slower pay but nothing like what we expected.
John L. Walsh
At 1% you’d be going from 18% to 19%. It’s just a very marginal [inaudible].
Lon R. Greenberg
Let me qualitatively answer it using Jerry’s data and I know where we are in the utilities and the energy services. We get reports on that stuff. Generally speaking we are not seeing a significant issue with bad debt at this point in time.
I will credit all of our operating groups for doing an outstanding job of working with customers to avoid issues. We have light heat programs in our utilities that help customers that are low income and we work with them. I know AmeriGas lends a helping hand to customers where we can and they’re deserving. We stay on top of it where we expect people to pay their bills and we act accordingly and we have groups who try to collect those.
All that said we don’t see a qualitative problem at this time but it is something we are watching carefully because the economy continues to deteriorate and utility bills, energy bills for customers are a necessity so we just have to be mindful of keeping our eye on it and we have reports that do that.
Operator
Our next question comes from Justin Mauer - Lord Abbott.
Justin Mauer - Lord Abbott
On the hedge, you talked about the hedge on the propane buys. I assume that’s transactional, not translation? Is that fair?
Lon R. Greenberg
On the international currency you’re talking about?
Justin Mauer - Lord Abbott
Yes.
Jerry E. Sheridan
It gets complicated but effectively we hedge propane purchases by Antargaz because Antargaz has a currency in the Euro and they buy propane in dollars. So we try to hedge that cost of buying for them. That locks in an exchange rate and of course that creates gains or losses depending on the actual exchange rate. When we go through all the calculations implicit in that technique it has a direct correlation to hedging a good portion of our net income from Antargaz.
Justin Mauer - Lord Abbott
If you’re hedging your costs going in, it generates a certain profit therein. Is that subject to any exposure on fx as you translate back to dollars or you’re saying that’s effectively hedged?
Jerry E. Sheridan
I think it’s effectively hedged on income. We also hedge dividends that they give us so that if we expect a return of capital from Antargaz of 30 million Euros or something, we will hedge that return of capital out as well so that we get a return of that capital at a level that we understand it will be. So, we have a cash hedge effectively, a net investment hedge and we have a propane product hedge as well.
Justin Mauer - Lord Abbott
Then, just relative to [Slaga] and the stories we’ve been hearing over the last month about eastern European currency implosions and what not, do you guys get concerned at all from a demand perspective that people who apparently taking on debt, consumers taking on debt in Euros and therefore when their currencies are going upside down they’re having a hard time meeting obligations and having to cut corners and that type of thing, is that a consideration at all?
Lon R. Greenberg
Again, the nature of our business is we don’t have concentrated customers, we have a large number of transactions with customers and they’re all relatively small. What we saw last year was quite interesting. We saw a number of the eastern European currencies appreciate, vis-à-vis the Euro which was appreciating mightily against the dollar. So, we almost had a double effect if you will there.
Recently, some of those currencies have come back in versus the Euro but then they expanded a little bit more so on balance the other eastern European country currencies are weaker to the Euro than they were last year. But, they are still in a positive way and we don’t see much exposure to those currencies overall.
To give you a sense of scale, the entire eastern European business is kind of 35 to 45 million gallons and is broken up in to thousands, and thousands, and thousands of transactions so we don’t consider those currency fluctuations a big risk for us.
Justin Mauer - Lord Abbott
So you guys took down the debt at [Slaga] and have it sitting in cash, was there any particular reason for that?
Peter Kelly
No, it’s Antargaz, we pulled the revolver. It was essentially because it allowed us to reduce the interest rate on our long term debt.
Lon R. Greenberg
And when you pull it down you need to pull it down before year-end and then you need to repay it and that’s why we have $69 million Euros in cash.
Operator
At this time there are no further questions.
Lon R. Greenberg
I appreciate all of you on this Veterans Day paying attention to us and asking such good questions. It’s nice to have the exchange with all of you and hear your thoughts. To summarize, we’re feeling good about next year, of course we’re wary of the economic turmoil that’s out there but I think that you pay us to manage that turmoil and we’ve got the liquidity, the assets, the balance sheet and the execution skills to work our way through that.
We look forward to talking to you in January next time where we report our next quarter earnings and hopefully we’ll have some good information for you at that time. Talk to you all then and thank you all very much.
Operator
That does conclude today’s conference we do thank you for your participation.
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