UGI Corp F1Q09 (Qtr End 12/31/08) Earnings Call Transcript

Jan.28.09 | About: UGI Corporation (UGI)

UGI Corp. (NYSE:UGI)

F1Q09 (Qtr End 12/31/08) Earnings Call

January 28, 2009 4:00 pm ET

Executives

Lon Greenberg - Chairman and CEO

John Walsh - President and COO

Peter Kelly - CFO

Eugene Bissell - President and CEO of AmeriGas

Robert Krick - VP and Treasurer of AmeriGas Propane,. Inc

Analysts

Shneur Gershuni - UBS

Darren Horowitz - Raymond James

Carl Kirst - BMO Capital

Ron Londe - Wachovia

Ryan Rosenthal - Sidoti & Company

Barry Klein - Citigroup

Operator

Welcome to the UGI and AmeriGas Partners first quarter fiscal year 2009 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, Vice President and Treasurer. Please go ahead sir.

Robert Krick

Thank you, Shawn. Good afternoon, and thank you all for joining us today. 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 10-K 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 2009 that management believes provide useful information to investors to more effectively evaluate the year-over-year results of operations of the company in fiscal 2009.

These non-GAAP financial measures, net income, net income per diluted share, net income per diluted partnership unit and EBITDA, all excluding the sale of a storage terminal by AmeriGas 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, EBITDA and other performance measures, such as cash flows from operating activities.

With me today are John Walsh, President and COO of UGI, Eugene 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?

Lon Greenberg

Thanks a lot Bob and welcome to all as well. I am pleased that Bob finally ran out of warnings otherwise we would not have time for the rest of the call.

I hope you all had the opportunity to read our press releases, announcing our first quarter results today. To summarize UGI reported earnings per share of $1.05 per diluted share compared to $0.74 last year. Included in this year’s numbers was a $0.10 gain from the sale of the AmeriGas’s California storage terminal. Excluding that $0.10 gain the comparison is $0.95 against $0.74 last year.

AmeriGas also reported excellent results, EBITDA this quarter was a $164 million compared to $93 last year. Again, the EBITDA includes the gain of nearly $40 million on the storage terminal sale. Excluding that gain, the comparison is $124 million to about $93 million.

What is clear in our earnings is that the benefits of our diversified business mix and the successful execution of our strategies are reflected. Three of our business units had better earnings; domestic propane, international propane and gas utilities. The other two business units experienced lower earnings.

Successful execution of our growth through acquisition strategy is the principal reason for the growth in earnings in our gas utility businesses. Acquisition growth however, also contributed to higher earnings in AmeriGas. Both our domestic propane and international propane businesses also benefited significantly from higher unit margins, as a result of the extraordinarily rapid drop in wholesale propane product costs.

Partially offsetting the higher earnings contributions that I referred to before, were lower earnings from our electric utility, which was largely due to higher purchase power and transmission costs and from our energy services business due to lower earnings from our electric generation business for a variety of factors and reasons, including facility outages. The other two energy services lines of business that are gas marketing and asset management did well.

This obviously was a very good quarter for us and we are pleased with our progress and performance. This is the first time in my memory, which goes back quite a few years, that we experienced weather across almost every one of our business units, which was cooperative and at the same time wholesale commodity costs fell rapidly. These two factors largely drove the improvement in our earnings.

While I cannot reasonably predict weather patterns as I have said many times I feel much more comfortable suggesting to you that the speed and scale of the decline in wholesale commodity cost is likely a one-time event.

Thus I want to point out to all of you that margins achieved in this quarter were unusually high. We do not expect this level of margins or the scale of the margin increase to be replicable in every year going forward.

I also want to point out that we are not immune from the difficult economic circumstances that exist today. Our business units saw the adverse effects of the poor economy, in our volumes and in particular our commercial and industrial volumes.

We also saw a signs of stress in our customers' ability to pay us in a timely fashion. While I do not want to overemphasize these factors, at the same time I do not want you to ignore them and overlook them when you consider our results.

We did a fine job that managing the challenging environment we faced and every employee of this organization did an excellent job. Yet, we had a lot of good fortune with favorable weather and commodity price movements. However, there is a lot more winter weather ahead and we all have certainly seen and experienced the volatility of commodity prices.

Thus, while we are confident that we will have an excellent year this year, we do not have visibility on these two key variables. I will have more to say about that as we go forward, but at this point in the call, I want to turn it over to first Peter Kelly, our Chief Financial Officer, following Peter will be John Walsh, and then Eugene Bissel and then I will offer some concluding remarks, before we take some questions.

So, at this point, let me turn it over to Peter. Peter?

Peter Kelly

Okay. Thanks, Lon. As was noted in our earnings release this morning, we have got off to a good start of the year. Net income was $114.9 million versus the $80 million reported in the same quarter last year.

You should note however, that the $114.9 million reported for this quarter, included an after tax gain of $10.4 million from the sale of the AmeriGas’s propane storage facility in California. Earnings per share were $1.05 including $0.10 cents from the gain on the sale of AmeriGas terminal versus the $0.74 reported in the same quarter last year. Strong performance in our international and domestic propane businesses were the major drivers of this improvement.

I would now like to spend a few minutes outlining the year-on-year performance of our main business segments before moving on to cover our balance sheet and liquidity. In international propane, net income was $40.2 million up from the $22.4 million reported last year.

Having seen margins decline in 2008 from 2007, with the sharp runup in wholesale propane costs, we have experienced a significant improvement in margins in 2009 as wholesale propane costs declined over the past few months.

In the Antargaz service territory temperatures were approximately 4.9% colder than normal. But compared to temperatures that was 6.3% colder than normal in the same quarter last year.

Antargaz sold approximately 96 million retail gallons of LPG in the first quarter, about 2 million gallons less than in the same period last year. The reduction was essentially old in residential bulk sales. But as John will discuss later we are seeing real progress in our cylinder sales through the large hypermarkets.

Weather for our Flaga business was 9.5% warmer than normal compared to 5.8% colder than normal in the previous year. And as a result overall volumes of Flaga decreased by approximately 16% from the prior year period.

As regard to our domestic propane business AmeriGas’s net income contribution to UGI was $34.3 million compared to $15 million in the same period last year. As previously mentioned the $34.3 million includes an after-tax gain of $10.4 million from the terminal sale. Weather was nearly normal this quarter versus the 7.2% warmer than normal reported in the prior year. And that’s for our international business.

Our domestic business has experienced a rapid decline in wholesale cost in the fall, which has clearly helped from a margin perspective. We are, however, seeing an impact from the global recession. Overall, retail volumes of 278 million gallons, was down slightly from the 279 million gallons reported last year. But you have to remember, our current quarter includes the gallons that we acquired as part of the Penn Fuel Propane transaction and we are seeing weakness in motor fuels and residential sales.

Eugene as always will provide the more detailed review of AmeriGas's performance in his comments.

Net income in our gas utility was $28.3 million versus the $24 million reported last year. Throughput was 44 Bcf compared to the 39.5 Bcf reported in 2008. The improvement in income and throughput largely reflects the acquisition of PPLs natural gas utility, which we refer to as Central Penn Gas or CPG.

And to a lesser extent, colder weather was also an impact. Weather was 7.1% colder than normal versus the 4.3% warmer than normal experienced in the same quarter last year.

In our electric utility, net income was $2.8 million compared to the $4 million reported last year. Weather was 5.9% colder than normal, compared to the 6.9% warmer than normal experienced a year ago.

We sold 252.8 gigawatt-hours, down slightly from the 254.4 reported in 2008, as commercial and industrial companies experienced the impact of recessionary economic conditions.

Net income declined year-on-year, largely as a result of increases in purchased power and electricity transmission costs. In energy services, net income was $10.7 million, down from the $13.9 million reported in the first quarter of fiscal 2008. The majority of this decline was driven by costs associated with outages at our Conemaugh and Hunlock facilities.

Retail gas volumes were about equal to sales in the previous year and margins from peaking supplies improved year-over-year.

And now moving to our balance sheet. At December 31st, our total debt was $2.6 billion versus the $2.4 billion reported at the same date last year and our consolidated cash is also up at $292 million versus the $232 million reported last year. However, this does include restricted cash of $116 million as compared to $20 million in the same period of last year. It also includes $86 million of cash at the holding company level, which we will use to reinvest in the business.

Of the $2.6 billion of debt, approximately $2.1 billion is long-term. We have $70 million of AmeriGas short-term debt that will mature in March of this year. $283 million was outstanding on the utility revolver and $146 million on the AmeriGas revolver, both somewhat higher than historic levels but well within the bounds of our credit facilities.

We were able to excess the credit markets in the quarter as needed and with competitive rates. We raised $108 million of five-year debt on October 1st from the purchase of the PPL business. And again, in November to temporarily increase AmeriGas's working capital facility by $50 million.

We continue to believe we have adequate liquidity and with the additional cash we generated here, are well positioned to take advantage of the investment opportunities that will undoubtedly arise in the coming quarters.

So, in summary a good start to the year, good progress in our businesses and strong liquidity. And with that, let me pass the call over to John Walsh, who will expand on the performance of our operations.

John Walsh

Thanks Peter. The challenging external environment in the first quarter of 2009 reenforced the importance of focusing on our core activities. I would like to comment as I do each quarter on our operational performance with specific emphasis on our progress on three long-term strategic objectives for the company. Growing our core businesses, continuously improving operations and reinvesting cash in high quality projects.

First on growth; Identifying into developing growth opportunity remains a challenge due to the deceleration of the economy and the dramatic slowdown in the housing market. While the overall economy remains relatively weak, we continue to focus on identifying market segments with growth potentials. We have several excellent examples of these targeted initiatives that delivered growth in Q1.

Our gas utility had another solid quarter for growth. Our comp growth exceeded prior year in both the residential and commercial segments. Our campaign to convert fuel oil and electric customer to natural gas continued to pay dividends with conversions up almost 25%.

With the decline in fuel oil pricing of the past quarter, we have shifted our conversion focus to electric customers in our gas service areas. These customers will see their electric rates increasing substantially over the next 12 to 24 months, as rate caps expire for several major electric utilities in Pennsylvania.

One additional note on utilities, we filed a request with the Pennsylvania PUC earlier today to increase base rates for Penn Natural Gas and Central Penn Gas. The requested increases were $38.1 million for Penn naturals and $19.6 million for Central Penn. The increased rates would fund system improvements and operations necessary to maintain safe and reliable natural gas service. In addition, the increase would fund expanded energy assistance programs for low-income customers, and conservation programs for all customers. The review process for the rate request is expected to last approximately nine-months.

Antargaz's cylinder marketing programs continue to be a significant source of growth. We added 60,000 new customers for our Calypso lightweight composite cylinder in Q1. On the last two calls, I've spoken about Antargaz's agreements with Carrefour to supply a new private branded cylinder. This product has gained rapid consumer acceptance with approximately 150,000 new customers added in Q1, as we rolled out the product across the Carrefour network.

Energy Services has had very good success with their natural gas marketing program for small commercial customers, launched in 2008. We now serve a broad range of small commercial accounts on LDCs in seven states. We are finding that in today's economic environment, these small commercial accounts are very responsive to energy services, product service offerings for natural gas customers.

Now on to operations, we benchmark our operations on a broad range of activities to assess progress on continuous improvement initiative. I'd like to focus today on the critical role, our propane infrastructure plays and ensuring high levels of customer service during the winter months, when demand peaks and product supply can become constrained.

This winter is an excellent example of the benefits of our comprehensive supply, storage, and logistics plan. We've seen major supply chain disruptions in both the US and Europe, due to extreme weather, unplanned refinery shutdowns, and pipeline curtailments. Our teams at AmeriGas, Antargaz and Flaga have done an exceptional job addressing these challenges, while maintaining consistently high level of delivery reliability.

The key elements of our supply strategies are, diversification of product sourcing, geographically disperse storage, and sufficient rolling stock, that's transports, railcars and bobtails to provide emergency support during supply curtailments.

Most critically, we have dedicated operations and distribution teams, who commit themselves to achieving our customer service benchmarks, even when we're hit with the most challenging conditions. Maintaining these high levels of service builds customer loyalty, boosts customer retention, and over the long-term contributes to margin improvement.

Now on to reinvestment of our cash. We believe that the current economic environment will bring new investment opportunities for UGI, as other companies in the energy sector struggle to deal with the harsh realities of today's markets. Our combination of balance sheet strength and consistent cash generation puts us in an excellent position to take advantage of these emerging opportunities. We remained focused on business development and had several noteworthy achievements in Q1.

We closed the acquisition of PPL Gas Utility and their Penn Fuel's Propane business on October 1st. Our utility team worked diligently to ensure a smooth transition for PPL Gas, now known as Central Penn Gas and their 75,000 customers. We achieved the same smooth transition in AmeriGas for the Penn Fuel customers, who have now become AmeriGas customers, in our mid-Atlantic region. We were pleased with the businesses performance in the Q1 and we're confident that the acquisition would be accretive to earnings in FY'09.

Earlier in 2008, we announced our intention to construct a new 11-megawatt power generation facility in Northeast Pennsylvania, using recovered landfill gas to power the turbines. I'm pleased to report that the Broad Mountain landfill gas project was successfully commissioned in December. We're now generating and delivering Tier-1 renewable power into the PJM power grid. It's a great example of a quality investment project that delivers a sustainable energy solution.

Finally, we expect to acquire, our partners 50% interest in our ZLH propane distribution joint venture later this week. This business, which operates in five eastern European countries, that is Poland, Hungary, Romania, Slovakia and the Czech Republic, will become part of Flaga. While the business is still relatively small, we're excited about the long-term growth prospects for propane in Eastern Europe.

I'd now like to turn it over to Eugene, who will provide you with more detail on AmeriGas's performance in Q1.

Eugene Bissell

Thank you, John. We are pleased to be starting the year with such a strong quarter. As Lon mentioned, we completed the sale of our San Pedro terminal in November, resulting in a gain of $39.9 million. Excluding this gain, EBITDA increased by $31 million. But the big news this quarter was the stunning drop in the wholesale cost of propane. The average cost of propane at Mt. Belvieu for the quarter was $0.80, compared with $1.51 in last year's first quarter. This rapid drop in cost contributed to an unusual expansion in our margins.

Volume for the quarter was essentially flat to last year. The benefit of 7% colder weather and the acquisition of Penn Fuel were offset by residential customer conservation and the effect of the weak economy, on our commercial volume. The biggest impact has been on our forklift volume for many of customers are cutting back their shifts and reducing staffing.

We're also closely monitoring the impact of the weak economy on our customer's ability to pay their bills. We've increased our staffing levels in our collections group, to make sure that we can stay in touch our customers and increased our bad debt reserve to a level that we judge to be realistic, given the current situation in the economy.

In fact most of the increase and expenses in the quarter was due to this increase in our bad debt reserve. We did benefit from lower diesel and gasoline expenses in the first quarter, but this benefit was more than offset by the higher bad debt and general insurance expense and expenses related to the Penn Fuel acquisition.

We also made progress last quarter on our strategy of growing distributions by 5% and EBITDA by 4% per year through a combination of acquisitions, growth in ACE and strategic accounts and growth in our traditional customer base. We completed the acquisition of Penn fuel on October 1st, and for the first quarter EBITDA from Penn fuel was well above our performance.

We continue to review a number of attractive acquisition candidates and expect to close several deals between now and the end of the year. ACE cylinder transactions were up about 3% for quarter. We continue to roll out additional seven or eleven locations and have had other retailers express an interest in selling cylinder exchange through their locations.

Strategic accounts volume was also up 3%. Growth in the number of strategic account customers more than offset a drop in usage per customer due to the weak economy. We were particularly pleased to add over a thousand BNSF locations since last year. For our base business, our new customer growth is about flat to last year. The weak housing market continues to impact our customer gains.

We are putting our best foot forward in this tough environment by focusing on improving our customer service and our sales force effectively. While we are very pleased to have started the year with such a strong quarter, we still have most of the year ahead of us. It is unclear how the economy or weather may impact our volumes or our margins for the balance of the year.

With that in mind, we are increasing our guidance by $20 million to $335 to $345 million, excluding the $39.9 million gain on the sale of the San Pedro terminal.

I would like to finish my comments by thanking our employees for keeping up with customer demand this quarter. While our volume is flat overall, it was up considerably in the Northeast and the Midwest, which has put significant pressure on the propane supply chain.

At the same time, there have been a number of curtailments at key pipelines in marine terminals. As usual our Houston supply team and our employees in the Northeast and Midwest have been doing a commendable job of responding to make sure we take care of our customers.

Now I will turn the call back to Lon for some concluding remarks.

Lon Greenberg

Okay. Thank you, Eugene. Let me leave you all with the following thoughts as we end our prepared remarks. As you are likely aware, we ordinarily do not comment on guidance at the end of our first quarter. There are number of good reasons why we do not, including the fact that the bulk of our earnings come in the October to March timeframe. And there is a significant portion of winter weather that has yet to be experienced.

We’re going to make an exception this year and as you saw in our press release we did make an exception this year. Because we have enough visibility to know that given our first quarter results and our assessment of January thus far, our prior guidance is likely to be low.

Thus we raised our guidance for UGI to $2.30 to $2.40, including the $0.10 one-time gain or $2.20 to $2.30 without it. And for AmeriGas we raised the guidance to $335 million to $345 million of EBITDA excluding the nearly $40 million gain on the terminal.

Again, I would like to point out that in raising our guidance we have not become anymore clairvoyant on winter weather, wholesale product costs or the economy than we normally are at this time of the year. However, given what we know of the first quarter and of January and given our assumptions that weather will be relatively close to normal, that wholesale product costs will neither rapidly rise nor rapidly fall from here. And that the economy will continue to experience difficulty, we certainly believe our forecast to be a reasonable one. We obviously are having and are going to have an excellent year financially.

Of course, we are thrilled about our performance in these challenging times. We recognize that we cannot however, count on rapidly falling product costs in the future to drive our profitability or fuel our growth. Thus we are continuing to focus on improving our businesses, so we can meet our long-term financial goal of growing our earnings per share 6% to 10% annually in the case of UGI, and increasing UGI’s dividend by 4% a year. And in the case of AmeriGas growing its EBITDA by 4% annually and raising its distribution 5% a year.

Thus we are continuing our focus on improving our operating efficiency in all of our businesses as John said, also on driving improvements in a variety of our programs including our safety program. And on the marketing side providing our customers with innovative offers to grow internally.

We are also keeping a watchful eye on potential acquisition opportunities, which might arise as others either run into difficulty or refocus their business goals.

Finally, we are continuing to make progress in pursuing our internal investment opportunities that we’ve discussed from time-to-time. As Peter said, our financial condition is quiet strong. Our balance sheets are in excellent shape. We have access to capital and, importantly, we have cash available for investment.

All in all, while we are not immune from the difficult economic environment, which we find ourselves, we are in excellent shape. We expect to have a very good earnings year and we are moving forward to build for the future, so that we don’t find ourselves relying on the factors beyond our control, to grow this company profitably in the future.

That's the end of my prepared remarks and the end of our collective prepared remarks and so Shawn we'd like to open it up for questions now.

Question and Answer Session

Operator

(Operator Instructions). Our first question comes from Shneur Gershuni, UBS.

Shneur Gershuni - UBS

Hi, good morning. Good afternoon, guys.

Lon Greenberg

Hi, Shneur.

Shneur Gershuni - UBS

Just a couple of quick questions here, I mean, you have provided so much detail on our Analyst Day. I am buried in ideas here that I want to ask about. But just to start off, you talked about looking at distressed opportunities and so forth. Are there any specific areas where you are looking to invest more? Is AmeriGas becoming a target, as an area to add gallons more aggressively or you are looking at energy services Europe and so forth? Or is it just really whatever the MPV says?

Lon Greenberg

I think as I learned well from, if you saw at our Annual Meeting yesterday, Dick Bond, who is one of our senior executives for many years. When he was asked a question like that, he would say yes and so, and in a sense the answer truly is, yes. But we have said many times, we will pursue opportunities within our overall vision of an energy market or distributor.

We do see potential opportunities across the broad spectrum of all of our businesses, internationally in propane, domestically in propane, as well as, in the utility and energy services area. So we don't have any favorites and the last comment you made is an important one, that is, they all have to have an IRR, that's satisfactory to us, that contributes as opposed to detract from valuation, and finally, that is something that from an earning standpoint makes sense. So, I cannot identify any specific areas for you.

Shneur Gershuni - UBS

Is it looking riper or are people approaching you guys, like are you looking at more opportunities, now?

Lon Greenberg

Notwithstanding the press recounts on the death knell of investment banking, I can tell you that certainly the people we know and have dealt with over the years are still alive and well, and kicking and so. A lot of things come in through. The trends come in through more formal meetings. But we have our ears to the ground we have development people out kicking the tires, as well. So there is no specific way they come in, but they do come in.

Shneur Gershuni - UBS

Okay. You had mentioned in your prepared remarks about, the ZLH you are taking them out of -- you are ending the joint venture and so forth.

Lon Greenberg

Yeah.

Shneur Gershuni - UBS

Is that ending your JV across the board in Flaga or just specifically in the CEE countries?

Lon Greenberg

Yeah. We only have the joint venture in the Central European countries, with the investment arm of Tisane, the Tisane family they have been a spectacular partner. They have chosen to direct their investments in a different way and that is why they chose to exit the joint venture at this time. So, we will own 100% of Flaga, as well as, the operations in all the Central and the Eastern European countries.

Shneur Gershuni - UBS

Okay. If I can just switch to AmeriGas for a little bit here. I calculate that conservation in economic impact is down about 7.6%, I mean it is a rough estimate, obviously. How much would you say is part of -- due to the fact that propane prices are obviously higher at the beginning of the year, just because of inventory, how much is kind of economics and how much is true conservation in the natural decline. Is there a way to break that down?

Lon Greenberg

It is pretty hard too. We have taken stabs at it obviously and numbers in the ballpark that you mentioned are reasonable numbers, although you are more precise than even we are. The clear volume shortfalls we see in some of the commercial categories Eugene mentioned motor fuel, Eugene you may want to comment on that?

Eugene Bissell

Sure, what we call motor fuel is primarily forklift business and that's where we see the biggest shortfall and a lot of our customers there are, they are freight companies. And so they have cut back on ships typically, because they just start moving as much equipment. So that is where we have seen the biggest difference. The trouble looking at something like conservation at this point in a year, as you really have to wait till the end of the season, before you can come close to measuring the impact. So that is easier at the end of the second or the third quarter than it is right now.

Lon Greenberg

As you know, and this business is not like the natural gas business where it's constant flow, here it's, when the people call for deliveries and how much are they delivering, are you short filling tanks because of supply disruptions. And so there is a number of things that go on that Eugene's point is very well taken, that we got to wait till you get a full season in, before you can get a better sense of that. But without equivocation, commercial industrial volumes are being adversely affected by the economy.

Shneur Gershuni - UBS

Clearly, I understand waiting till the end of the season. It is not that often I get the gift of a normal weather quarter actually.

Peter Kelly

Yeah, yeah, we wished you more gifts in the future.

Lon Greenberg

Yes.

Shneur Gershuni - UBS

One last question with respect to AmeriGas, I remember you talking about in the past about technology implementation so forth. Kind of wondered and to see where you are at with that and where it is going and how that is coming along?

Lon Greenberg

There are a number of projects large and small; the largest Eugene once you answered talked about project foundation I guess that we have talked about.

Peter Kelly

Yeah. Well, we have something called project foundation, which is essentially a software replacement project that we are pursuing. But that software upgrade will allow us to do some things like employing better routing and scheduling technology. And that is where I see a lot of our technology investment for the next few years that we think will improve the productivity of our deliveries and customer service. So that is the biggest area of focus for us right now.

Shneur Gershuni - UBS

And have you started this process at all or is it still…

Peter Kelly

Yes we started the process of the software replacement, software upgrade. We officially kicked it off January 1st. And that is a process that will take several years to unfold.

Lon Greenberg

We have also done -- one of the beauties of AmeriGas is, you get the opportunity to take a certain geographic area and experiment with a variety of technologies. We had one area of the country that we run on a centralized basis versus the rest of the country, where we run on a decentralized basis to make sure that we can get the economy of scale benefits that we think. We are experimenting with routing software in different parts of the country as well, anticipating the successful adoption of the new software.

So, we got a variety of initiatives out there that contribute each year to our efficiency, but the biggest bang for the buck will several years out with the project foundation.

Shneur Gershuni - UBS

All right. Perfect. Thank you, guys.

Robert Krick

Okay.

Operator

Our next question comes from Darren Horowitz, Raymond James.

Darren Horowitz - Raymond James

Good afternoon guys. Eugene, on the AmeriGas side, aside from Penn Fuels volume growth, has there been any change to your expectations for organic retail propane volumes built into that revised guidance?

Eugene Bissell

I think, we would continue to expect to see the impact of the economy on our commercial volumes. We certainly factored that into our numbers. Weather is always a wild card and we will continue to pursue acquisitions, of course, but that is probably the sum of it.

Lon Greenberg

Yeah. I would add just a one thing Eugene you may want to talk about kind of where we stand on growth -- internal growth versus the prior year.

Eugene Bissell

Internal growth for ACE and strategic accounts, I think, I mentioned we had about 3% volume growth in both of those and we continue to add customers in those categories. The strategic accounts is kind of interesting because we have seen the forklift customers that make up a significant percentage of our strategic account business drop off but we've been able to offset that with new business. Primarily the BNSF business that I mentioned of a thousand location and other railroad accounts where we develop some expertise that we think allows us to serve them better than the lot of our competitors.

But, when it comes to the traditional base of residential and commercial customers we are about in the same position we were in last year, basically flat. And that probably will continue to be the case until we see some turnaround on the builder side. I think we do get a lot of our growth their from builders and we still haven’t seen much builder growth, so we're flat to last year in terms of the rate of growth in that part of the business.

Darren Horowitz - Raymond James

I appreciate your color. Switching gears over to the debt side for a minute, you mentioned the Series D, 7% notes that are maturing in March. Can you give us a little color on what you are seeing out there in the debt market today with respect to possibly replacing these notes or further enhancing our liquidity and being opportunistic?

Peter Kelly

We are obviously talking to people at the moment and as I mentioned in my remarks we actually put in place some five-year debt for the utility in October and an extension of the revolver for our working capital needs. There is still some extension for AmeriGas back in November. We were reasonably confident that we will be able to refinance $70 million. We just got to decide what is the best way to do for us, what is cheapest way and when is the best time to do it.

Darren Horowitz - Raymond James

Thanks. And, then quickly just a housekeeping question and I apologize if you mentioned this. What did say in level of bad debt reserve was?

Peter Kelly

No, we did not. We do not give out a level of bad debt, but the reality is we did book more bad debts across the businesses this quarter.

Darren Horowitz - Raymond James

Okay. Thanks guys, I appreciate it.

Lon Greenberg

Yeah.

Operator

Our next question comes from Carl Kirst, BMO Capital.

Carl Kirst - BMO Capital

Hey, good afternoon everybody and a nice way to start off the year. Lon, since you have got in sort of the assessment of January, and understanding we are not clairvoyant here on the margin, but clearly a great help in the first fiscal quarter. Can you give us some sense of where you have actually seen margins come down to or have they come down to from both AmeriGas as well as international, January versus this last calendar quarter?

Lon Greenberg

Yeah. Let me do it qualitatively for you more than quantitatively. Product cost has gone up over the course of the last 30 days. Somewhere in there. And, particularly more so in Europe than it has in the US. And, it’s a not a question of inventory shortages by any means it's just -- there have been dislocations in supply in certain regions and so basis, if you will, gets higher.

There is some product difficulties in getting some product overseas, because it's – some of it was tied to the Russian gas issue and people were trying to get prices to cover for that. But you have seen both all kinds of LPGs increase in price in the last 30 days. And so that well may not have an affect immediately on margins, because of average inventory situations and it gets diluted by sales and then the way one normally calculates inventory. One would expect that to have some effect on margins, as the rest of this quarter goes.

Again, the as I said earlier, when you have a rapid decrease in costs that is sustained, there are opportunities to expand margins as banks expand margins and lending. Similarly, last year at Antargaz you may recall we had lower than typical margins when there was a significant increase in costs and they were unable to pass through that cost increase as rapidly as one does, say, in the US. So we are quite satisfied where January sits and I do not think we are seeing anything untoward in the marketplace in terms of people becoming super aggressive or anything.

But we are careful to price ourselves independently of cost, as we watch out what the market does. And we are mindful of passing on to our customers the benefits of lower cost. As they are all stressed and we want to make sure we did the right thing. So it's a combination of a variety of factors, higher costs, the normal passing on of lower costs as you get them that, I believe will effect margins as we go through the rest of this year.

Carl Kirst - BMO Capital

No, I appreciate that color. Maybe kind of the follow-on, back in November, I guess, at the last call and I think there was a comment made that the industry was not on a retail basis rushing to follow prices down. And as we sit here in January and we have now seen products indeed all LNGs going to come up a little bit.

Lon Greenberg

Yeah.

Carl Kirst - BMO Capital

You mentioned that you are not seeing people being super aggressive. Is there the potential of the retail prices still coming down or are now what we are seeing is basically retail prices having essentially kind of flattened out. People are not being very aggressive and so it gets to be really more of now a wholesale price game to determine the margin going forward?

Eugene Bissell

It is always hard to figure out what other people do. But I can tell you a general observation, EIA puts out data every week during the winter, and their survey of retail price activity and retail cost activity. And we have seen in recent EIA things that retail prices appear to have leveled off, based on that EIA survey and given where EIA is reporting margins to be and prices to be and cost to be.

My expectation, I will be surprised if we saw people trying to recoup some of that product cost increase in higher prices. But it is just hard to predict, now I cannot predict everybody else's behavior in the marketplace. But we do have methods where we try to make sure that we are competitive and we are doing the right thing by our customers.

Carl Kirst - BMO Capital

It is very, very helpful. Thank you. You know, you mentioned Flaga had the difficulty of getting the propane, because of the Russian-Ukraine gas road. Does that actually have any positive benefits to Flaga as far as kind of an alternate fuel or is it something we are not real necessarily competing against pipeline LDC gas?

Eugene Bissell

Yes. It is a good point. What we found is in -- particularly in the areas of eastern Europe that were most impacted by some of the problems with the pipeline to the Ukraine for natural gas and that's portions of Slovakia and portions of Poland. We have had or are now having active discussions with a number of industrial and commercial accounts who are looking to put in propane systems to use as backup systems to be able to sort of dual -- dual fuel basis that has demand charges and obviously commodity charges when they switch from natural gas to propane. We are actually in very good supply position across all of Flaga including eastern European countries. We source from all across Europe and source some product from Russia and Kazakhstan and just a broad range of supply sources and in a good storage position. So we've really been unaffected by what we've been reading about with the natural gas pipeline but as you might expect you've got a number of customers particularly commercial and industrial customers that are -- were very concerned and its turned into a nice commercial opportunity for us.

Carl Kirst - BMO Capital

Well, we will keep our ears -- always feel for that. And last question just on the Pennsylvania filing there was mention of some conservation programs, do I take that to mean there wasn't sort of a specific decoupler asked for or I guess I'm just looking for a little more intel on the conversation programs that were in that filing?

Lon Greenberg

No, no Pennsylvania is not a big decoupler state.

Carl Kirst - BMO Capital

Right.

Lon Greenberg

And so on the other hand the commission historically has been supportive of programs to help people conserve, be they energy efficiency programs with appliances, be they installation programs, be they some programs that are little bit more newer than some of those older ones. But we are very mindful of trying to help out customers and I would tell you our public utility commission is equally mindful of trying to help out people who are experiencing difficulty, not only the lowest income people who have got [life] and things but also other customers and there they haven’t lost site of the energy crisis we had.

So, we want to be proactive and going forward to the PUC and advancing some programs and seeking their support for those programs, but to be specific, there is no decoupling going on.

Carl Kirst - BMO Capital

Okay. And, then should I, I know there was a mention of sort of a nine months perhaps in the review process. Should we assume that settlements always remain an option?

Lon Greenberg

Yeah. No, we will work with the commission in all the various affected parties and there are many who get a shot at (inaudible) in a rate case and work with them and see if we can settle it, our statement on the nine months is that normal regulatory process and we find that whenever you are trying to increase prices that people aren’t in a hurry to allow you to do that too much in advance of the nine months period,. But we have settled things in the six or seven months from time-to-time, and the scale we are asking for, and the statements we have made over the years and the fact that we don't go in our other utility when we don’t need it I think, gives us an amount of credibility that, when we go in and ask for it that we are not asking for things that aren’t inappropriate for us to get.

So, we are hopeful that the process will go well, we stand ready to discuss it with all parties and -- but in terms of advancing, you will pick a date assuming it is the beginning in the next year.

Carl Kirst - BMO Capital

Sure, I appreciate your color. Thanks everyone.

Lon Greenberg

Sure.

Operator

All right. Our next question comes from Ron Londe, Wachovia.

Ron Londe - Wachovia

Thanks. Can you give us a feel for what percentage of your current business is commercially oriented?

Peter Kelly

Roughly, I mean roughly 40% is commercially oriented.

Ron Londe - Wachovia

Okay. And also …

Peter Kelly

Different segments are affected differently by the situation forklift, which is a piece of that is really seeing the biggest impact commercial, industrial it’s more a weather – more weather impacted so you don’t see quite this affect there at least so far.

Ron Londe - Wachovia

Have you seen any change on the consumer level – I know when propane prices were very high you had partial fills. Are you seeing more customers do full fills now or are they still doing partial fills?

Peter Kelly

Yeah, it is funny I have not heard of any real changes there in terms of the fills. I am not hearing about people running out like they were for a while and saying stop at 100 gallons. On the other hand where we had shortages of product -- in a few areas we have short filled on our side giving them a 100 gallons of instead of 200 gallons to stretch the volume. As John Walsh mentioned in his comments in New England and in the Pacific Northwest there have been some shortages that we have been able to manage very effectively but that has had some effect on those deliveries. So we have not really seen a big impact of any kind yet Ron.

Ron Londe - Wachovia

And a just to follow up briefly on what Gene said, one of value proposition that we give our customers that oftentimes is lost on the financial community, is security of supply. We own our own transport company and we are able to in a shortage situation move a 100 transports, to move volume from the middle of the country or the deep Southeast to the Northeast or the Northwest.

And we have gotten calls from many a competitor, large, small and all in between out of gas, seeking our assistance and we help where we can of course, that is not a good thing for the industry, for people to run out. But, we have gotten calls from a lot of customers saying our supplier cannot supply us, can you please give us.

So we are in that kind of environment, we are making sure that we get our customers fully cared for. And as Gene said, we have been short filling some of those customers ourselves. And so presumably that buying gets reflected in future months as we go forward.

Ron Londe - Wachovia

And you stated earlier that your goal was a 5% distribution increase at AmeriGas. I see that you have the $39.9 million gain on the sale of the California propane storage facility, which is about $0.70 a unit. Do you expect any special or additional distribution to cover the tax consequences of that?

Lon Greenberg

Yeah, you may recall Ron, when we put out the release on that transaction we said the Board would likely consider what they wanted to do with that when we got through the winter, which would be kind of the April timeframe to consider that. They have not yet considered what they want to do with that. So well, tune into April and you will get a better indication.

Ron Londe - Wachovia

Okay. Thank you.

Lon Greenberg

Sure.

Operator

Our next question comes from Ryan Rosenthal, Sidoti.

Ryan Rosenthal - Sidoti & Company

Good afternoon, everyone.

Lon Greenberg

Hi, Ryan.

Ryan Rosenthal - Sidoti

Couple of questions. First, I guess regarding the cost side, could you take me through your different best segments and particularly AmeriGas. Now I was impressed with the costs in terms of the moderate increases we saw across the board, have there been any special initiatives to work on that?

Lon Greenberg

Do you mean the operating expense side?

Ryan Rosenthal - Sidoti

Right.

Lon Greenberg

Yeah. Eugene you might want comment on generally.

Eugene Bissell

We also have initiatives aimed to try to improve productivity. In this year, we are particularly focused on delivery productivity and trying to improve delivery productivity. But we do get -- we did have the benefit of lower fuel cost, because of the drop in diesel and gasoline that helped us, that is certainly was an advantage. And our costs do not rise in direct proportion to volume. So other than the delivery productivity initiatives, I would not point to anything in particular on the expense side, other than the savings that we achieved on fuel.

Ryan Rosenthal - Sidoti

Okay. I guess following up with that, in terms of your integration of PPL's natural gas utility business and also now the propane operations, has that been completed in terms of a one-time cost issue?

Lon Greenberg

Well, I will answer for AmeriGas and I will leave it to John to comment on the utilities. On the AmeriGas side we really won't finish the integration process for another probably six months. We have still got this [credit business] we do, we've done some of the initial integration. But some of the systems integrations still has to be completed and that will be changing over names of trucks and things like that. So for the first three months in the next six months we still have integration expenses.

John Walsh

Yeah. And in terms of the PPL gas integration it is similar to AmeriGas, the significant transition expenses certainly have been incurred in the major transition in terms of bringing the customers over and getting all the people on board is well behind us. As we look out we have a several year plan in terms of integration that really cuts across the now expanded utilities business, since we just over two years ago acquired PNG and now we have added Central Penn. We are taking advantage of the opportunity to combine facilities and sort of align and streamline our infrastructure.

And we have taken a number of steps over the last few years. That was following the Penn Natural acquisition, and we will continue to do that, with the opportunities provided to us with the CPG acquisition. But the most significant elements of the integration have been accomplished. And, Ryan just, I suspect you know this, the operating expense improvements or results would have been better. But for a fact, as Peter mentioned before, bad debt expense was taken up responsibly because of the difficult economic environment that is out there.

And, what you find with us is, we have 5 or 10 programs to improve the efficiency in all of our businesses. Propane, it is a difficult business to have one program driving through everything, unless you have got a technology platform that supports it and that is why we have been trying to get operating improvements in West Lake to the centralized model. And we are going to develop these software solutions to help us manage the business more effectively.

Ryan Rosenthal - Sidoti & Company

Okay. I appreciate the comments on the cost side. If I could switch over just to the electric utility energy services businesses, if you will. In terms of the rate caps exploration in Pennsylvania, how do you foresee that impacting both of those businesses going forward?

Lon Greenberg

I will take the electric utility first. Our electric utility came at a rate caps eight years ago and it has been about eight years -- or maybe '01 or so. And we have had a series of settlements with the commissions where we went out and bought power and have been able to resell that power to our customers. So we do not see any exposure to our sales in terms of a price shock to our specific customers.

We have under a PUC approved plan been buying power for our customers and the results of those power acquisitions have been quite favorable. And so as we sit today, we do not see any rate shock for our customers. On the other hand some of the larger distributors in Pennsylvania have announced that they expect to see fairly substantial price increases to their customers.

Given today's environment and depending upon how much purchasing they have done, some of those increases may not materialize or they may be less than they anticipated. But without question, virtually all of the other companies who have not been out of rate caps, their customers will experience higher, in some cases significantly higher prices. So for our utility, it's not a big deal, because we’re in a pretty good shape, having been out of rate caps and having bought a good bit of power for the next three, four years, two, three years so that we're sitting okay.

On the energy services side it is an opportunity. We do sell against utilities, both electricity and natural gas, and as these rate increases occur, several things will happen. It will make natural gas even more competitive, it will make even potentially propane more competitive, certainly more competitive than it is today. And that, together with the sort of carbon footprint of natural gas and propane, may present some nice opportunities for conversions or to take some market share away from electricity.

In addition, on the energy services side, it will present opportunities to the marketing group, who may be able to compete much more effectively in the future against utility rates and therefore be able to grow that segment of the business more aggressively.

So, it has got some real benefits to all of our businesses as these other companies come out and we are looking forward to that day.

Ryan Rosenthal - Sidoti & Company

I appreciate the comments. Thanks guys.

Lon Greenberg

Yeah.

Operator

We have a question from Barry Klein of Citi.

Barry Klein - Citigroup

How is it going?

Lon Greenberg

Great.

Barry Klein - Citigroup

What was the earnings impact of the weather versus normal for each of the segments?

Lon Greenberg

You know, we do not break that out in particular, because I forgot what presidential candidate it was or president was, who said voodoo economics in a way. It is a very hard thing to do when you make a weather adjustment, you get something called other, that you always get, you cannot explain in there.

But we take a shot at it, we are methodical and we do have methods of adjusting for weather, but we do not generally make those public. We will tell you that weather adversely affected or it helped. But we do not go into excruciating detail on it.

Barry Klein - Citigroup

Got you. I think you said AmeriGas growth on earnings of about 4%?

Lon Greenberg

Growth on EBITDA about 4%, yeah.

Barry Klein - Citigroup

Growth on EBITDA about 4%, does that infer that the margin declines that you talked, you said it might occur next year?

Lon Greenberg

Yeah. Generally speaking, let me try to put all of that in a context, because that is a good question. When you look at UGI and you look at AmeriGas we have set financial goals for them in addition to our strategic goals and those financials goals are over time to grow our earnings per share at 6% to 10% in UGI, and they grow AmeriGas EBITDA by 4%.

There are occasions when we exceed that and usually it's in connection with what I'll call a one-time event of some kind. And for example when we make a major acquisition obviously we're going to -- in the year following the acquisition we're going to exceed the 6% to 10% number if its enough – if it’s a large enough scale acquisition.

And that also shifts the paradigm because that acquisition is recurring every year and so it's reasonable for all of you to expect if its UGI 6% to 10% growth and off that new base going forward, and for AmeriGas same thing, if they shift the whole curve by an acquisition that’s upscale, you should expect that there as well.

There are times when the one-time events that occur are likely not recurring and as we've said during our comments, all of us, the drop in scale and rapidity of the drop in wholesale prices is not likely to be repeated very often. And so we would tell you that the earnings that you get from AmeriGas or UGI in a year like this will be robust. But it's not a permanent shift in the curve of the 6% to 10% or the 4% and so it's way too early to give any guidance for 2010. We have got nine months - eight and change left in this year to manage and for us to keep working our strategies. But I think that, if you will, a cautionary note that, this not a absent some event, the drop in commodity cost is not recurring. What happens to margins? There may be a permanent shift in margins, we do not know, what the industry will do and what competitive pricing we will have.

And, so our view at this point is we don’t have any visibility on that issue and what we want to do is raise what we would call a yellow flag, that the nature of this year’s jump in earnings, which are likely to exceed our goals as we point out just do the math, is such that it may not be replicable in future years. And, so you got to return to the normal 6 and 10s and fours that we talk about.

So, not a bad thing incidentally and this is a great year and if the potential build on exists, but we're a full eight months and change away from being able to have visibility into 2010.

Barry Klein - Citigroup

Got you. Broad Mountain and the ending of the JV taking 100% of Flaga. Is there going any significant earnings impact and also has that been included in your guidance and the earnings…

Lon Greenberg

It' a modest earnings impact and so its in the guidance.

Barry Klein - Citigroup

Okay.

Lon Greenberg

Modest good earnings impact.

Barry Klein - Citigroup

Got you. And, can you give us any other details on the rate base, what sort of rate base you applied for equity component and the current ROEs on those divisions?

Lon Greenberg

Yeah. There is -- you want to do that John.

John Walsh

Yeah. If you look at the rate base in PNG, it is about $425 million and the rate base of CPG is about $255 million. The -- we have proposed – the current ROEs are in the neighborhood and calculated for purposes of submission of the rate case of about 2%, we have applied for ROEs of 12%, that is assuming, roughly 50-50 net equity ratio.

Lon Greenberg

We are as John just stated, we are significantly under-earning in both PNG and CPG that is attributable to a variety of factors, including the investment of capital we make. The drop in revenues that has been experienced due to conservation across the board by our customers, and so the returns we're earning in those businesses are not what or proper under the law in Pennsylvania and not an adequate return for us. And so, we filed for ROEs around 12% as John said, and we will see how the discussion goes.

Barry Klein - Citigroup

Got you. That's 2% at current ROE at both of those divisions?

Lon Greenberg

Yeah roughly, they are about the same.

Barry Klein - Citigroup

Got you. Just one last question on the liquidity with the revolver on how much is available on the revolver and how much long-term debt you have coming due in the near-term?

Peter Kelly

Okay. Let us take your last question first, long-term debt coming due. We have $70 million of debt in AmeriGas coming due this year in March. Then $80 million in 2010 and then the next biggest one is 380 million Euros in France in 2011. So really we do not have any significant long-term debt coming due, so in great state there. From a revolver perspective, AmeriGas has a revolver of $250 million, at the end of December about $146 million pulled. So obviously, since come down [in natural sense].

Barry Klein - Citigroup

So do you have 146 available?

Peter Kelly

So, we got about a $100 million available.

Barry Klein - Citigroup

Okay.

Peter Kelly

Utilities $350 million revolver and used about $283. Energy Services has no revolver, it's a receivables credit line of $200 million and had about $88 million used, until gas have not used any of its revolver.

Barry Klein - Citigroup

And how much do they have?

Peter Kelly

50 million euros, so, from a liquidity perspective we are in really, very good shape.

Lon Greenberg

And generally working capital peaks in that December timeframe. And so as January has progressed, those numbers come down as you begin to collect and you work of inventories at your system etcetera.

Barry Klein - Citigroup

Okay. Thanks a lot.

Peter Kelly

Sure.

Operator

It appears we have no further questions on the phone at this time.

Lon Greenberg

Okay. And to wrap up for everybody, we are truly happy about our results for this quarter and our prospects for this year. This is a tough environment and to have results like this in this difficult environment is a testament to every one of our business units. And the strategy, we put in place for so many years and the attention to execution that we have. This is a difficult environment out there. We continue to make progress underneath the numbers, which is always important to all of us. We are executing on our strategies, we have got opportunities, we have got liquidity, capital availability.

And we keep building on a tradition of success in this company, over quite a number of years now, where we have made our numbers and produced excellent returns for our shareholders, both at UGI and unit holders at AmeriGas. Look forward to continuing to do that. We look forward to reporting good things this year to you. And I think the next official time that we will talk to you, would be on the second quarter call, probably in the end of April some time, and if there's any cause to talk to you before then, we certainly will.

So thank you all for your attention and support, and we look forward to talking to you soon. Bye-bye.

Operator

And again, ladies and gentlemen, this does conclude today's conference. We thank you for your participation. You may disconnect at this time.

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