UGI Corp. F2Q09 (Qtr End 31/03/09) Earnings Call Transcript

May. 1.09 | About: UGI Corporation (UGI)

UGI Corp. (NYSE:UGI)

F2Q092009 Earnings Call

April 30, 2009; 4:00 pm ET

Executives

Lon Greenberg - Chairman and Chief Executive Officer

Peter Kelly - Chief Financial Officer

John Walsh - President and Chief Operating Officer

Eugene Bissell - President and CEO of AmeriGas

Robert Krick - Vice President and Treasurer of AmeriGas Propane, Inc

Analysts

Barry Klein - Citi

Ryan Rosenthal - Sidoti & Company

Magi Colaba - Raymond James

Ron Londe - Wachovia

Carlos Rodriguez - Hartford Investment Management

Ganesh Narayanan - Citi

Anil Atluri - Barclays Capital

Operator

Good day and welcome to the UGI and AmeriGas Partners second 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 Bob Krick. Please go ahead sir.

Robert Krick

Thank you, Michael. Good afternoon and thank you 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 U.S 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.

These non-GAAP financial measures, including EBITDA excluding the sale of a storage terminal by AmeriGas in the first quarter of 2009 are not comparable measures used by other companies and should be considered in conjunction with a similar number 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

I trust you’ve all had the opportunity to review our press releases covering not only the higher levels of earnings, but also the increase in dividend in the case of UGI and the increase in the distribution in the case of AmeriGas.

We are obviously quite pleased with the 24% increase in earnings per share of UGI and the 9% increase in EBITDA at AmeriGas this quarter. This is also the time in the year when we formally consider the level of our dividend that UGI and the level of the distribution at AmeriGas and consistent with our announced financial goals. We are happy to share our success with our owners by increasing the dividend that UGI by 4% and the distribution at AmeriGas by 5%.

Certainly this is the 22 consecutive dividend increases for UGI and the fifth consecutive distribution increase for AmeriGas. Our impressive performance this quarter was particularly gratifying to me, because nearly all of our business units contributed to the earnings improvement. The only exception to that was our electric businesses, which experienced lower earnings.

As I stated during our first quarter conference call and we are not immune from the difficult economic circumstances that existed during this quarter. In addition, our earnings benefited from the unusually rapid decline in wholesale commodity costs and the relatively benignant weather we experienced during the quarter.

These factors were of great assistance to us in navigating through the difficult economic times we experienced during the quarter. I’ll have more to say about those subjects later in the call.

At this point, I’d like to turn it over to Peter Kelly, who will then be followed by John and Eugene and then I’ll come back with some concluding comments. Peter.

Peter Kelly

Thanks Lon. For the quarter ended March we earned $158.2 million or $1.45 per share versus the $126.1 million or $1.17 reported in the same quarter of last year. For the first six months of fiscal 2009 we earned $2.50, compared to $1.90 for the same period in 2008 and as a reminder the $2.50 includes the $0.10 gain from the sale of the AmeriGas terminal in the first quarter.

Clearly, the second quarter performance was very strong and built upon the excellent results we achieved in the first quarter. In particular, the propane businesses both in Europe and in the U.S.A have performed extremely well. Energy Services had a good quarter, our Gas Utilities improved year-on-year though our Electric Utility was weaker.

Looking at each of our businesses in turn, net income from our International Propane operations was $54.5 million, up substantially from the $32.7 million reported in the same period last year. Volumes in our French business increased from $97 million retail gallons of LPG to 103 million gallons on whether that was 5.4% colder than normal and 17.5% colder than last year.

Volume in our central European business Flaga following the acquisition of the remaining 50% in GLH was 19 million gallons. The volume increase in International was in large part related to the substantially colder weather experienced versus the previous year.

Well as John will discuss later, we are continuing to see the benefits of our recent investments in the French cylinder business. The additional weather driven volume, plus the benefits of the higher than normal unit margins following the sharp decline of wholesale propane prices earlier in the year were the main drivers of the increased profitability.

AmeriGas Partners, our domestic propane business reported net income attributable to UGI of $40.2 million versus $36 million reported last year, again up substantially. AmeriGas as with our European propane operations benefited significantly from the sharp decline in wholesale propane prices earlier this fiscal year and along with our European business we expect the impact of these higher than normal unit margins to diminish as we move through the year.

Volumes in AmeriGas were down 6.9% to $343 million gallons versus the $369 million reported last year, and weather that was 2.3% warmer than normal and 1.3% warmer than last year. We believe that the current deterioration in economic conditions has had an impact on customer demand and in particular in the commercial and industrial sector, and to a lesser extent in the residential sector. Eugene will cover this in more detail in his remarks.

Energy services had a good quarter expanding net income to $19.6 million from the $16.4 million reported in the second quarter of 2008. The growth in earnings was largely driven by our peaking services and asset management business that benefited from the colder regional weather.

Our energy marketing business continues do well with retailer sales volumes at about the same level as last year, but its good performance was some what tampered by lower total margin in our electric generation business, with lower volumes due to plant outages and lowest spot market prices as the economy softened as well as higher operating costs.

Net income from our Gas Utility was $41.8 million for the quarter ended March compared to $39.8 million in the previous year. Weather was 4.1% colder than normal this quarter and 5.7% colder than last year. System throughput was 56.5 billion cubic feet, an increase over the 49.6 billion cubic feet reported last year as we saw the benefit of the addition of Central Penn Gas and colder weather. The benefit to net income of the Central Penn Gas acquisition was somewhat tempered by higher provisions for bad debt, legal matters and fencing costs.

In our Electric Utility, net income was $2.8 for the quarter compared to $3.5 million for the same quarter last year, weather was 3.1% colder than normal and 2.2% colder than last year. Distribution volumes were down from approximately 279 million kilowatt hours in the second quarter last year to 273 million kilowatt hours in the second quarter of this year.

Although sales to residential customers rose on the back of cold weather, they were more than offset by lower sales to commercial and industrial customers as a result of the deterioration in general economic activity.

Now turning to the balance sheet, at March 31 our total debt was $2.3 billion, up slightly from the $2.2 billion we had at September 30, 2008. Our consolidated cash position was $338 million, up from the $315 million reported in September. However, this did include restricted cash of $146 million as compared to the $70 million as of the end of September.

Of the $2.3 billion of debt at quarter end, approximately $2.1 billion is long-term. AmeriGas closed at approximately $863 million with no amounts outstanding on its revolver and in fact to use balance sheet cash to pay off the $70 million maturity of series denotes on March 31.

Utilities closed at approximately $818 million including $178 million on its revolver. Antargaz, our French operation closed at 380 million euros, which is approximately $507 million with no use of its revolver. Energy Services closed the quarter with $88 million of its facility used.

Overall, I continue to be confident that we have the liquidity to run our business. Our balance sheet is strong and once again, we were able to access the capital markets. Earlier this month that we were able to put in place an additional $75 million 15-month facility for AmeriGas and we were also able to extend our facility at Energy Services through April 2010.

As Lon mentioned, we’ve increased our earnings guidance for 2009, mainly as a result of the exceptional performance in the propane business in the first half of this year. Along with the benefit of a cold normal winter in several of our service territories and the benefit from our recent growth investments in such things are Central Penn Gas on additional peaking assets.

Our expectation is that margins will return to more normal levels as we move through the year and the impact of the general economic decline will continue to impact customer demand. Country to the general industry trend I’m pleased that we’re able announce yesterday an increase in our quarterly dividend of 4%. We have raised our dividend in each of the last 22 years and also have the remarkable record of paying dividends for 125 consecutive years through all types of economic conditions.

So, now with that let me pass the call over to John.

John Walsh

Thanks Peter. Our businesses delivered strong operational performance in Q2 despite the continuing slow down impacting virtually all sectors of the economy. At UGI we pride ourselves on our ability to stay focused on core objectives regardless of external condition.

That focus continued to pay dividends in Q2 as we forced ahead on our three long-term strategic objectives growing our core businesses, continuously improving operations and reinvesting cash in high quality projects. I’ll first turn to growing our core businesses.

Despite the obvious challenges presented by the slowing economy, we had success on a number of growth initiatives that delivered results in Q2. Recognizing that one of our primary growth drivers, New Home Starts is severely depressed, we’ve shifted our focus and resources to other segments.

Our Gas Utility delivered another solid quarter for growth, year-to-date newer comp growth remains above prior year for both our residential and commercial segments. The growth in residential has been driven by conversions rather than new home additions. Gross slowed as the second quarter progressed and we expect that growth over the balance of FY09 will fall below the levels achieved last year.

We’ll continue to focus on conversion opportunities with electric customers within our gas service areas, these customers will see their electric rates increasing substantially over the next 12 to 24 months as rate cuts expire for several major electric utilities in Pennsylvania.

One additional reminder on utilities, we continue to move through the review process for the base rate increase request filled with the Pennsylvania PUC in January. The requested revenue increases were $38.1 million for Penn Natural 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.

We’re mindful of the potential burden that these higher rates could place on our customers. The proposed rate increase includes energy assistance programs for low-income customers and conservation programs for all customers. We’re fortunate that falling natural gas prices will enable us to pass through lower gas cost to our customers. Therefore, it is likely that our average customer will see a minimal increase in their total bill next winter.

The review process for the rig request is expected to conclude late this fiscal year. I’ve spoken several times in recent quarters about Antargaz’s success with their cylinder marketing programs. The new products offered by Antargaz continue to be very well received by both major retailers and unused consumers.

41,000 new customers were added for our Calypso light weight composite cylinders in Q2 well over 70,000 new customers where added for the Carrefour private label cylinder that was launched last year. Our success with these programs has enabled us to grow our cylinder business in France, at a rate that outpaces the market.

Energy Services successfully concluded its winter campaign for small commercial customers. These customers have responded very favorably to our product service offerings. We’ve added over 2000 new small commercial customers on LDCs in seven states over the past 12 months. We’ve enhanced our direct mail and telemarketing tools and capabilities to identify and win these smaller accounts.

On to continuously improving operations, I comment each quarter on our commitment to continuous improvement within our operating units. I’d like to focus today on our recently concluded project to integrate the customer information systems in our utilities business. This project was one of the final elements of the acquisition transition plan for Penn Natural Gas, which we acquired in 2006.

The common platform, which covers all utilities units except the recently acquired Central Penn Gas improves the tools used by our customer service representatives enabling them to provide our customers with more timely responses to their increase. The sharing system also provides us with significantly more operational flexibility as we manage our resource levels across several call centers.

We made the successful cut over to the common platform earlier this month, last point on this and certainly not least, the transition was seamless for the 550,000 customers supported by this system and finally our reinvesting cash in high quality projects.

While the current economic climate presents us with numerous challenges we believe that it will also bring new investment opportunities as companies in the energy sector struggle with the downturn and the tightening credit markets. On our last call, I mentioned our intension to acquire our partners 50% interest in our GLH propane distribution joint venture. That acquisition was closed at the beginning of Q2, this business which operates in five eastern European countries will now operate under the Flaga brand.

Our internal development projects for energy services are proceeding well. We are meeting critical milestones on three construction phase activities such as permitting and design for the $120 million expansion of our LNG peaking facility and our $125 million project to re-power the Hunlock coal-fired electric generating station as a larger gas fired facility.

Finally, each of our U.S. businesses is actively perusing projects related to the stimulus plan funding initiatives. Funds are being dispersed through multiple channels including state and local governments and federally funded institutions. We’re likely to participate in collaboration with our customers on a range of projects involving both conventional and renewable energy solutions.

I’d now like to turn it over Eugene, who’ll provide you with details on AmeriGas’s performance in Q2.

Eugene Bissell

Thank you, John. We’re pleased to be recording $15 million increase in net income for the partnership, despite the impact of the week economy on our volume. We continue to benefit this quarter from the drop in wholesale propane prices compared to last year.

The average cost of propane in Mt. Belvieu for the quarter was $0.68 compared to $1.47 last year. This dramatic drop in cost contributed to an unusual expansion on our unit margins, which are now beginning to trend toward more normal levels.

The 7% drop in volume was due to the impact of the weak economy on our commercial customers, customer conservation, and to a lesser extent to warmer weather. Well, the recession is reducing our volumes across all categories; we’ve seen a sharpest drop in the volume sold to our forklift customers. These customers are cutting back their shares and reducing staffing or in some case they are actually closing their doors.

Expenses for the quarter were virtually flat with last year. The savings we achieved on vehicle fuel were offset by increased incentive compensation expense related to our strong earnings and by higher medical insurance expense.

We also made progress in the quarter on our strategy, our 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.

ACE cylinder transactions were up about 4% for the quarter and we have also been able to improve the contribution from this part of our business by reducing the cost of packaging and distribution. Strategic accounts dispelled more of the impact of the weak economy, but still managed to achieve 1% increase in volume year-to-date.

We also have a healthy backlog of new customers than we’ve gained where we are in the process of installing tanks. Base business customer growth continues to be weak due to a lack of residential and commercial builder activity and credit issues with existing accounts.

Our strategy in this tough environment is to focus on improving our customer service and our sales force effectiveness. We’ve achieved improvements in the metrics we used to attract customer service levels as well as the productivity of our sales team.

On the acquisition front the Penn Fuel’s deal that we completed in October continues to earn more than we assumed in our pro forma and we completed two small acquisitions Rock Creek propane [inaudible] California and Snowy Range propane in Wyoming. We are working a number of other acquisitions of quality marketers that should close before year end.

While we’re very pleased with our results for the first half of the year looking forward we expect volume for the balance of the year to fall below last year’s levels and margins to decline to more normal levels. These expectations are in line with the forecast we made last quarter of EBITDA in the range of $335 million to $345 million for the fiscal year excluding the gain of about $40 million on the sale of the San Pedro terminal.

I would like to finish my comments by acknowledging that on April 15 AmeriGas celebrated our 50 anniversary, it was on that day in 1959 that UGI completed the acquisition of World Auto gas in that happened in Pennsylvania. This deal was followed up by a second propane acquisition a month later of eastern propane, which added six locations in Pennsylvania and Maryland.

Today over 100 acquisitions later we have grown to be the largest propane company in the country with locations coast-to-coast and border-to-border. I would like to thank all of the employees who over the last 50 years have helped to build this company into the leader in our industry.

Now I’ll pass the call back to Lon for some concluding remarks.

Lon Greenberg

Thank you Eugene. I would like to leave all of you with the following thoughts. First we announced the financial goals for UGI and AmeriGas as you know many years ago and we take those commitment very seriously, in that regard we’re once again meeting our commitment to you to raise UGIs dividend by 4% and AmeriGas’s distribution by 5%.

In addition, we will substantially exceed our earnings growth goal this year for both UGI and AmeriGas. We have for the second time this year increased our guidance now said at $2.40 to $2.50 per share for you UGI including the one time $0.10 gain. As you know we like to look at earnings and dependent of those one time items as a better indicator of our earnings power going forward that such you eliminate that one time gain our guidance is more reflective of being $2.30 to $2.40.

At the mid point of that range our earnings growth for this year will be about 17%, foreign access of about 6% to 10% goal that we think sustainable for the long term. Similarly AmeriGas will exceeds its EBITDA growth goal this year if you use the mid point of its reiterated guidance of 335 to 345 of EBITDA again excluding that one time gain. We are clearly pleased with this performance as you’ve heard from all of us. As we extra cash resulting from the higher earnings levels is helpful to achieving our long-term objectives.

I also want to emphasize what you’ve heard earlier in the call that we continue to make important progress on our strategies for all of our businesses. John and Eugene pointed out some of that progress. John also noted that we are in a midst of the much needed rate case for two of our gas utility units.

While, we continue to make progress that I just spoke about. We also need to remind you and we need to be mindful of the unusual items that contributed to our outstanding earnings this year, but that are unlikely to reoccur next year. Most notable, we’ve talked about several times is the rapid decline in wholesale commodity prices and the relative stability of those prices they are after.

All of our propane businesses benefited from those factors in the form of higher than normal unit margins. This is something we do not expect to reoccur next year. As you may recall to give you some recent history, we had a situation during our 2005 fiscal year. Our prediction that more normal margins would return prudent accurate in our 2006 fiscal year. Similarly, we have accurately advised you when margins were under unusual pressure and when we expected them to recover.

Thus as you consider our future prospects, please keep in mind that the balance of future opportunities that we spoke about with the unusual benefits that we had this year. We’ve said many times that we believe we are capable of growing our earnings 6% to 10% a year as a long-term trend and we have been successful in doing so since 1998.

So in sum, we are please to report excellent results to you for this quarter. We continue to make good progress in pursuing our business unit strategies and opportunities. It is a rare pleasure for us to tell you about an unusual factor that helped earnings this year as opposed to tell you about those unusual factors that depressed earnings.

Our balance sheet remains in excellent shape; we’ve got good capital market access. We continue to generate excess cash for investments and we are keeping a watchful eye out for additional investment opportunities and finally as always, we remain committed to meeting our long-term earnings growth and dividend and distribution increase targets.

So at this point Michael, We’d like to open it up for some questions.

Question-and-Answer Session

Operator

(Operator Instruction)Your first question will come from Barry Klein - Citi.

Barry Klein - Citi

I think Eugene mentioned that you guys were reiterating the 335, 345 EBITDA expectations for AmeriGas? With the increase in the guidance, what’s the main driver behind the increase in the guidance, if not AmeriGas?

Lon Greenberg

For UGI, there is several factors that affect the guidance, and most of it’s behind us, frankly for the six month period. The performance we had to-date, if you look at the performance we’ve had to-date and probably in this order, the international business has performed much better than the prior year. AmeriGas has performed better than the prior year. The Gas Utility has performed better and Energy Services have performed better than the prior year.

So the only one who’s been down is the electric business, and all of you are familiar what’s going on in the generation side where prices are much lower and then our distribution side, where we’ve got some increased power costs and increased expenses.

If you look at the second half of our year, when you do your math, you’ll note that that’s lower than the second half we had last year and that’s really attributable to a variety of factors including the return to more normal margins at AmeriGas that we talked about, the lower volume that Eugene talked about at AmeriGas. Return to more normal margins at Antargaz overseas and Flaga overseas and the continuation of the trend that we saw in our electric businesses. Again as all of you know electric businesses are not doing as well as they did in the prior year.

So that’s kind of a balance of what’s going on there.

Barry Klein - Citi

What was the impact of weather on earnings for the quarter and year-to-date, I guess at the utilities?

Lon Greenberg

Weather, it’s hard. We didn’t do a calculation on weather this year because it was a little bit warmer for AmeriGas and then a little bit colder for the utilities, but not that notably, and what you had normally mixed in there that is decent core market volumes, but they were offset by the effects of the poor economic conditions and the commercial industrial principally areas.

So when you mush those two together, it’s really hard to figure out where weather helped, and the economy detracted. It’s more difficult than it is in the typical year, but weather wasn’t so noticeably colder that it had a huge difference, but the core market volumes where clearly up.

Barry Klein - Citi

One last question relating to the rate cases, when do you expect to put these new rates into effect?

Lon Greenberg

The process in Pennsylvania is generally a 9-month process, we filed in January. There is always a chance that rates can go and effect sooner than the 9-months, but the Public Utility Commission did as they typically do to give them a chance to study the increases.

They suspended the increase for the 9-month period. We had year-end scheduled in kind of the June timeframe usually around the hearing times or shortly there after you’re making effort to settle these things, and if it can’t be settled the fully litigated case would be early October.

Operator

Your next question comes from Ryan Rosenthal - Sidoti & Company.

Ryan Rosenthal - Sidoti & Company

Couple of questions; first concerning AmeriGas, I noted a 7% decline in year-over-year volume in terms of the retail gallons sold. I wanted to better understand your guidance in terms of what your projections are for volumes for the second half of 2009?

John Walsh

We do expect volumes to continue to trail last year’s volumes. We don’t really have any visibility to recovery in the economy, and we have higher residential volumes in the winter. Then in the last six months of the year, more of the volume is commercial and industrial. We are being cautious in terms of our view of volume going forward and expected to continue to be below last year’s levels.

Ryan Rosenthal - Sidoti & Company

In terms of your Energy Services business, stopping to that you discussed some of the projects you have on-going now including the [inaudible] projects and possibly the LNG peaking facility and if they are still going forward as planned?

John Walsh

Yes, those projects are proceeding as planned, where for both in pre construction phase. They were going through all the necessary permitting requirements and working with contractors on final elements of design. So no surprises in terms of the progression of the project, no surprises in terms of anything we’re seeing in the permitting process at the state or federal level. So we’re pleased with the progress today.

Operator

Your next question comes from [Magi Colaba] - Raymond James.

Magi Colaba - Raymond James

I was wondering if you could speak to the two acquisitions you mentioned for AmeriGas, the Rock Creek propane and Snowy Range propane and how many volumes are you expecting from that, is that a 2010 story?

John Walsh

They’re relatively small deals, and just linking them at this time of the year getting your path season for most of the volume that will affect next year, won’t have a big impact on this year.

Magi Colaba - Raymond James

Also I noticed that interest went down because that decreased.

John Walsh

You’re speaking for AmeriGas.

Magi Colaba - Raymond James

AmeriGas, yes.

John Walsh

Basically lower rate.

Magi Colaba - Raymond James

Okay. Could I get the weighted average or?

Lon Greenberg

Generally speaking, it was higher borrowings at lower rates.

Operator

Your next question comes from Ron Londe - Wachovia.

Ron Londe - Wachovia

Couple of things, it looks like maintenance CapEx and growth CapEx were both up the second quarter, which is I guess a little unusual because during those periods of time year you are generally delivering propane or spending money on growth. Can you give us a little inside into what was happening there?

Eugene Bissell

I can give you some insights into that. Well first of all in our 10-K we projected that we spent about $87 million in capital for the year and I think we are still on a path to that kind of number.

We are making some investments in software replacement that’s been happening during this time period. The other thing is we’ve been installing some new customers in ACE and strategic accounts, and that’s had some impact on capital spending and that often happens during this time period before the season starts for ACE. So, those are the two principal drivers.

Ron Londe - Wachovia

Last year you had about 36% of your volumes were commercial industrial. What do you think that’s going to end up this year, obviously its going to be will cover environment for due to the economy; do you expect that to be 30%, 27% can you give a feel for us?

Eugene Bissell

Just definitionally, I guess residential last year represented about 40% and so non-residential represented the other 60%. A portion of that is ACE, which you could call either residential because it’s consumed in homes or you call it commercial or whatever you want to call and also resale for people who’re using barbecue, but in terms the percentage it was slightly higher residential slightly lower non-residential, but it is not going to be a huge change.

Ron Londe - Wachovia

Also, you kind of talked a lot about margins kind of coming down. Can you give us some feel for the degree of margin contraction this year and probably into next year?

Eugene Bissell

I think the best way to answer that is make two points; first, we manage our prices based on the competitive environment. So, that always is something we have to watch in managing our margins. However, on a long term basis we’ve been able to increase our margins to recover inflationary expense increases and a bit more than that. What we see is over the long term margins returning to that kind of a trend. So that helps you.

Ron Londe - Wachovia

I don’t know if it helps.

Lon Greenberg

Ron I’ll jump in, because Eugene said it the right way. If you look at margins, the first half of this year, they are up substantially more than they would normally be up and I think what Eugene is advising you that to do and advising everybody to do is you go back to a long term chain over several years look at where the margins normally increased kind of as a level and if you compare the normal increase one would expect to see our some of the unusual wholesale drop compared to where we are today that would ballpark it for you.

Ron Londe - Wachovia

Kind of look at our trend --

Lon Greenberg

Yes, look at the trend over the last few years. We do not expect, let me take some doubt at your mind. We don’t expect margins to contract year-over-year. We do expect them to be higher than our trend line or on the trend line that we talk about, but this year truly was extraordinary with a drop in cost at exactly the time you have your volume.

So on a weighted basis, you’re getting all your volume, when your marginal cost is dropping so quickly and you are reducing your prices to your customers, but its chasing itself on the way down and so your margins necessarily expand in that kind of environment even as you do decrease your price to your customers.

So, once you get stability and cost as we indicated as the wholesale price decreases stabilize, the opportunity reduce your prices to your customers to get your margins more inline where they would traditionally being given that trend line.

So, that’s why they are coming in. We don’t want anybody to walk away from this call thinking that margins are collapsing or that margins are dropping to levels below that trend line kind of area that we would normally expect them to be, we don’t see that yet.

Eugene Bissell

Right, they’ll be higher than last year, just not as much higher that they’ve been.

Ron Londe - Wachovia

When you said last year, do you mean ’09 to ---?

Lon Greenberg

Our fiscal ’08, which ended September 30 last year.

Ron Londe - Wachovia

Also you talked about paying a special distribution maybe in August to cover the gain on the asset sale in California. Is that going to be K1 item for ‘09?

Lon Greenberg

Let me try do this, Bob Krick knows the answer. The distribution will be a K1 item in ’09, but as I understand the K1 it’s really the income of AmeriGas distribution don’t matter too much. So, for tax purposes it’s when the income is received which was last year, and the distribution cash will be received this year.

Operator

Your next question comes from Carlos Rodriguez - Hartford Investment Management.

Carlos Rodriguez - Hartford Investment Management

I just want to follow up on the previous questions regarding the margin, I guess the expectation that margins won’t be up. I guess I understand that conceptually, but if we sit here and we look into the future for next year and the wholesale prices stay the same.

Should we expect that the adjusted EBITDA per gallon should stay the same or else equal, or are you suggesting that there are competitive pressures that would reduce that margin next year assuming the wholesale propane price stays flat, where it is today?

Lon Greenberg

Let me try to answer that as best as I can. When you do EBITDA per gallon there is a numerator and a denominator and so there is the EBITDA number and then there is the number of gallons you had. As Eugene indicated certainly for the period of time that we have visibility, which is the next quarter or so, we expect volumes to be less this year than last year.

So if you get no recovery in the economy and depending upon when to weather it’s certainly conceivable, volume would be less next year than this year. So your denominator may shrink which would have the tendency at a stable EBITDA to raise your EBITDA per gallon.

The second piece is on the unit margins, if I guess we haven’t been as articulate as we would like to be. Ordinarily, if you go back three, four years in the industry and our performance as well, there has been a trend line of unit margin increase in the industry fundamentally in our view and the way we think about it, relate it to the ability to pass through inflationary increases in costs and compensate a little bit for other factors. So if you looked at increases in margin over that trend line, you’d probably see something in excess of inflationary increases in unit margin that have occurred.

This year if you looked at the increase, you’re looking at increases in excess of 10% in unit margins this year. As we explained before that’s largely attributable to the fact that your spot price was dropping so fast and as you are reducing your prices to your customers and Eugene said it correctly, we evaluate the market place as we do that.

The prices to customers came down somewhat more slowly than the price decrease on the wholesale basis, spot wholesale basis we saw. So what happens is your margins expanded to a much greater increase this year over what would normally be expected in any business on a trend line.

So we think in a stable product cost environment, or an increasing cost product environment that you will experience those factors again. If your belief is that energy commodity cost will crater some more and crater at the right time, which is kind of that August, September, October timeframe. It’s conceivable that margins will grow significantly again, but that is something that we truly don’t expect.

We expect stable to maybe rising product cost and in that kind of environment there is no reason why competitive conditions -- one would think competitive conditions would allow you to have unusually high margins. So our expectation is based on a normal competitive environment, based on a stable to modestly or rising commodity cost, and in that environment we don’t see any reason why one wouldn’t revert to a stable competitive environment which has existed for the last three or four years. Is that more helpful?

Carlos Rodriguez - Hartford Investment Management

Yes, I mean I was just trying to abstract from the volume side of it, holding that constant and holding the wholesale price constant, I was wondering if we should expect on a per unit basis margins to stay the same or whether there is some competitive dynamic that would force the give-up to customers of that lower wholesale cost to be passed through. I’m just trying to understand that dynamic, how intense that competitive dynamic is?

Lon Greenberg

Although they try to adjust the competitive situation as we see it today. This industry is a low barrier entry, highly fragmented industry in which there are thousands and thousands of competitors and the top ten players have about a 40% of the market.

So this is a highly competitive industry and in addition, it’s a flat growth kind of industry at that. So the competitive dynamics typically on those industries are what where you experience. It’s competitive and you have to compete, we don’t like to compete solely on commodities. We compete based on value that we deliver and we believe we deliver the safest, most reliable service in the industry and so we don’t position ourselves as a low price player, is just selling your commodity.

That having been said, the competitive dynamic that we’ll see out there is, I would call it normal. Certainly we don’t see any one going on huge market share campaigns, large or small. We do see the normal activity, we see at this time of the year when people are looking at reduced volumes. They experience the difficult economic time and everybody wants to improve their situation for the following year.

But, I wouldn’t call it extraordinary in anyway, I would call it kind of rather typical for an industry like this and typical of what we’ve seen in the past with the only exception being is that every market, I can’t speak for every market earned. Certainly, we feel bad for the customers have experienced very high bills a year ago, having experienced somewhat lower bills this year and being in a very difficult economic environment.

I think we, and I hope I speak for the rest of the industry want to treat all those customers fairly and make sure that we are charging a fair price for the value we give, but competitively, I would tell you it’s a normal competitive environment.

Operator

(Operator Instructions) Your next question comes from Ganesh Narayanan - Citi.

Ganesh Narayanan - Citi

A quick question on your commercial and industrial volumes, how much of the lower volumes this year do you expect to get back, if and when the economy recovers and how much of it is permanent demand destruction if you will?

Lon Greenberg

I’ll speak about perhaps the utility side. You may be asking just that about AmeriGas. On utility side, as you know we’re the only service provider by franchise and so to the extent one hasn’t suffered permanent factory close downs or permanent shut downs of business, we revert to a more normal environment one would expect to get all of that volume back. I think on the propane side, it’s different, but I think the factor is roughly the same.

Eugene Bissell

And what we’ve seen in the past, with Forklift, I mentioned Forklift in particular because that’s the place where we’ve seen the biggest drop. Usually when the economy comes back that comes along with it. When people start shipping things again we see that forklift volume pick up and in fact forklift usually comes back a couple of months before the rest of the economy does.

That’s what we’ve seen in the past, this recession is a big difference, so we’ll have to wait and see how that turns out.

Peter Kelly

Here another point I would make, when we talk about industrial and commercial that segment, if you look across our business these utilities and AmeriGas as well as Energy Services, we are primarily commercial. We do have some industrial accounts, but over the last few decades lot of that industrial base left and to the Northeast.

We are mostly commercial and as Eugene just indicated that people are seeing a slowing in terms of their requirements or reduction and we would look for that to come back. We are not looking at in large numbers of industrial customers who are shutting down or moving their operations. It’s really a large percentage of that, it’s made up of commercial accounts who are seeing lower demand in their businesses, but as the economy recovers they’ll see increased demand and that demand will flow through to us to increase gas or propane demand.

Lon Greenberg

Yes, the trick is we can’t give you any more visibility than any other person on when the economy will recover.

Ganesh Narayanan - Citi

I was only trying to get a sense for the extent of demand destruction if any? Thank you so much.

Operator

Your next question comes from Ron Londe – Wachovia.

Ron Londe - Wachovia

You didn’t talk much about the cylinder or barbeque business. Except to say that it was up I think 4% in volumes for the quarter. What’s the situation going in to this summer? How many more locations do you have versus last year? What kind of volumes do you think are prices are going to remain flat with the cost down? Can you help your cash flow from that area? Can you give us some kind of an overview of what’s going on there?

Eugene Bissell

I think our locations right now are up about 6% to 7 % from where they were last year just as we’re entering into the season. So that’s certainly good news, as I told you for those last quarter we’ve seen about a 4% increase in volume. It’s a bit hard to call how the economy might affect this business.

You could speculate the people are going to grill more and go to restaurants less, where they cut back on grilling, depending on who you’re ask you would get different predictions on that. Margins are fine in that business, we are not running in into any unusual competitive issues on the margin side in that business.

Ron Londe - Wachovia

Have you gained any large customers?

Lon Greenberg

Well, I think I talked earlier about 7/11 and that we rolled out a bunch of those locations which was a nice sized customer.

Operator

Your final question comes from line of Anil Atluri - Barclays Capital.

Anil Atluri - Barclays Capital

Your operating and administrative expense line was flat year-over-year, how should we think about that for the remainder of the year, and also a housekeeping question can you provide a breakdown of retail and wholesale gallons?

Lon Greenberg

I can’t give you the specifics, but we give you retail gallons. Principally we don’t combine the categories, I don’t think some people do and it’s in the press release statistics how we got retail gallons sold for the quarter of $343 million versus $368 million.

So when you look at our stuff it’s easy to tell what’s retail, because we just say its retail. The wholesale is not significant for us, there are some companies combine the two, but we don’t think that for us that’s the right way to do it because wholesale gallons move around a lot and can distort what’s going on.

Eugene Bissell

On the expense side I think expense have been flat for the quarter, they will probably be a bit higher than last year for the balance of the year. We are making some investment expenses for the balance to the year, but we will also have the benefit of lower fuel expense, some of the same factors that I mentioned earlier, but modestly higher.

Anil Atluri - Barclays Capital

And also can you give an update of your credit facilities?

Lon Greenberg

What we can give you on, what’s outstanding under the revolver at the quarter end and it was --

Peter Kelly

At the end of March we had zero outstanding on our revolver, we’ve got a facility of $50 we just in April we put in place a new facility for $75 million for 15-months. We paid off Series B Notes at the end of March from cash on our balance sheet. So I think AmeriGas’s liquidity is in terrific shape.

Operator

At this time we have no further questions in the queue. I’ll turn the conference back over to Bob Krick.

Lon Greenberg

Thank you all for your attention, we really do appreciate it. We again have performed quite well for this year in continuing our tradition of excellent performance. We do have challenges like everybody else going forward, but we are making the progress that we talked about and have the opportunities that we talked about as well.

So we look forward to reporting to you at our next quarter’s earnings and hope to see some of you in between as we do our road shows. So, thanks again for your support and we look forward to talking to you again in the future.

Operator

This concludes today’s UGI and AmeriGas Partners conference call. Thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!