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UGI Corporation (NYSE:UGI)

Acquisition of European LPG Businesses

October 17, 2011 3:30 PM ET

Executives

Hugh Gallagher – Treasurer

Lon Greenberg – Chairman and CEO

John Iannarelli – VP, North Field Operations, AmeriGas Partners LP

Eugene Bissell – President and CEO, AmeriGas Partners LP

Analysts

Gabe Moreen – Bank of America Merrill Lynch

Brian Zarahn – Barclays Capital

Steven Karpel – Credit Suisse

John Tysseland – Citigroup

Christopher Sighinolfi – UBS

Ronald Londe – Wells Fargo

Gary Stromberg – Barclays Capital

Operator

Good day ladies and gentlemen and welcome to the AmeriGas webcast to discuss Acquisition of Propane Operations of Energy Transfer Partners. At this time, all lines are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host today, Mr. Hugh Gallagher, Treasurer. Please begin.

Hugh Gallagher

Thank you, Shaun. Good afternoon and thank you for joining us today as we share additional information related to this morning’s announcement that AmeriGas has agreed to acquire Heritage Propane from Energy Transfer Partners. As we begin, let me remind you that our comments today will include certain forward-looking statements, which 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. Among those is the risk that the conditions to closing the transaction are not met or that the anticipated benefits from the proposed transaction cannot be fully realized.

You should read the partnership’s Annual Report on Form 10-K for a more extensive list of factors that could affect results, but among them are adverse weather conditions, cost volatility and availability of propane, increased customer conservation measures, the capacity to transport propane to our market areas, the impact of pending and future legal proceedings, political, economic and regulatory conditions in the US and abroad, capital market conditions including reduced access to capital markets and interest rate fluctuations and the timing and success of our acquisitions and investments to grow our business. The partnership undertakes no obligation to release revisions to these forward-looking statements to reflect events or circumstances occurring after today.

In addition, our remarks will reference certain non-GAAP financial measures that management believes provide useful information to investors to more effectively evaluate the year-over-year results of the operations of the company. These non-GAAP financial measures are not comparable to measures used by other companies and should be considered in conjunction with performance measures such as cash flow from operating activities.

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

I will now turn it over to Lon for his introductory remarks, Lon?

Lon Greenberg

Welcome all to our call on what we think to be a very exciting and informative transaction for us at AmeriGas and UGI as well. I can recall virtually every earnings conference call that we have had over the last three to five years and perhaps even longer when the question inevitably comes up when are the larger LPG distribution companies in the United States going to merge?

And we have had a standard answer to that for all those years, which is it’s difficult to come up with a transaction, which is value adding for unit holders because of the way the MLPs trade, but if you, our investors, see us do one of those transactions, you will know that we’ve concluded that the transaction is value accretive for our owners.

And this transaction is just one of those cases. We are thrilled to have the opportunity to acquire and combined with Heritage Propane, Energy Transfer’s propane business. They are an outstanding company. They have terrific employees who are associated with it. They have a well run organization and a customer service-oriented culture that aligns quite well with ours.

This transaction is consistent with our focus on our core businesses; propane distribution is a core business for AmeriGas obviously and for UGI. This allows us to expand in our core business in a way, which produces value for our customers, broadens our platform, allows us to not only grow but utilize new technologies, enhance productivity and I could go on and on, but I don’t want to take all of Gene’s remarks away from him. As I said, we are thrilled to have this opportunity and welcome to AmeriGas the employees of Heritage and to demonstrate to all of you that this is the kind of transaction that UGI is known to do to produce value for all of you over time.

With those introductory comments, I’m going to turn it over to John Iannarelli, who is CFO of AmeriGas and have John go through a transaction summary. And if you look at your slides you’ll see a slide entitled transaction summary and that’s where John will start speaking from.

So, John?

John Iannarelli

Okay. Thanks a lot, Lon. We’re really excited about this deal. If you turn to slide five, I’d like to give you a high-level summary of the transaction. AmeriGas will acquire Energy Transfer Partners, LP basically the propane operations known as Heritage LP and Titan LP for a purchase price of $2.89 billion. This transaction consolidates AmeriGas, which is the largest propane distributor in the US with Heritage, the third largest propane distributor in the US. AmeriGas will pay ETP $1.5 billion in cash and $1.319 billion in limited partnered units, while assuming Heritage OLP notes of $71 million.

As a condition to closing, AmeriGas will issue new debt to fund the $1.5 billion in cash. To provide for working capital and ongoing liquidity, AmeriGas will upsize it’s revolver to approximately $500 million as part of the transaction. AmeriGas expects to retain its existing credit rating after these financings have occurred. Our pro forma assumes approximately $275 million of EBITDA from Heritage Propane Operations, plus $50 million in run rate deal synergies. The deal is subject to justice department and federal trade commission review and approval and as such we intend to close either late calendar 2011 or early calendar 2012.

If you turn to slide six outlines the transaction structure, UGI through its subsidiaries will remain a 100% owner of the general partner and will own 24.7 million in common units or approximately 28% LP interest. ETP will own 29.6 million in common units or approximately 34% LP interest.

Turning to slide seven, this transaction does not require unit holder approval nor is a contingent upon the closing of the Energy Transfer Partners transaction with Southern Union. As mentioned previously, AmeriGas will upsize its revolver and issue new debt prior to closing in either late 2011 or early 2012.

At this time, I’d like to hand it off to Gene Bissell, President and CEO of AmeriGas to tell you about our strategy and why we’re so excited about this deal. Gene?

Eugene Bissell

Thanks, John. And I’m going to begin with slide eight. And this is a slide that we’ve used in a number of our presentations to describe the competitive strength of AmeriGas. I also think it’s a good vehicle for talking about how the Heritage acquisition augments those strengths. First in terms of scale, the transaction adds about 60% to our size. Combining the businesses also adds to our geographic coverage. Heritage has about 440 locations; about 240 of those locations are in areas where we don’t currently have a district. So it broadens our geographic coverage, which will be a benefit in serving our strategic account and our ACE customers.

Both companies have a track record of successful acquisition integration. For us that includes a number of very large deals, Petrolane in the mid-90’s that was the equivalent in size of about 500 million gallons, Columbia in 2001, 250 million gallons. So we do have a lot of experience with acquisition integration.

Our strong credit profile is part of the reason we’re able to do this deal and we structured the deal to maintain our credit rating. Both companies have a long history as disciplined buyers focused on quality businesses and I think this is a good example of that. Both companies have experienced management teams and we’re going to work to retain the best both of the management teams and as you can see from the call today we benefit from strong sponsorship in UGI Corporation.

And going to slide nine, you’ll see how this acquisition fits with our strategy. First, the center piece of our strategy is profitable growth through acquisitions; and certainly this is a good example of that. Both companies have this as a key strategy and we would expect in the future to continue to use acquisitions to grow the business.

Utilizing scale to drive productivity and efficiency is our second strategy. And as I mentioned this increases our scale by 60% and all of the blends we’re going to be doing and we estimate there are about 200 blends that will drive productivity and our third strategy is achieving work class safety performance. The good news here is that both companies share a deep commitment to safety and in fact we have shared safety materials with each other over the years.

So, this deal certainly contributes to the achievement of AmeriGas’ long standing financial goals with a 3% annual increase in EBITDA and 5% annual increase in distributions. On the next slide, you will see our track record of earnings growth that have been driven by the strategy I just talked about. You can see we’ve averaged about a 6% increase in earnings each year and this acquisition will allow us to continue to grow our earnings.

On the next slide, the key point and this is slide 11 – the key point is that our balance sheet capacity allows us to do this deal. As, John mentioned, we’re going to maintain our strong liquidity by upsizing the bank credit facility. We’ve demonstrated access to the debt capital markets with the two note offerings we had this year and we have the kind of strong credit metrics that we need to do a deal of this scale. And you can see in 2010 our debt-to-EBITDA was 2.6 times EBITDA, the interest coverage was 5.2 times. So at that level, we actually feel that we have some unused debt capacity and we have been maintaining that for an opportunity just like this, but our credit rating is very important to us, so we have structured this deal to be able to maintain our current rating.

On slide 12, we are summarizing the significant value this transaction creates for us. The unit holders will be pleased to know that we plan to increase the distribution by 3% following the closure of the transaction and that’s an addition to our target of raising the distribution 5% per year, and this deal actually strengthens our ability in future years to meet the 5% distribution growth target. The deal contributes to the achievement of our financial goals which I’ve mentioned, growing our EBITDA 3% a year and growing distributions 5% a year. We’re targeting a minimum of $50 million in synergies when fully integrated, and those synergies are really coming primarily from expense reductions due to the 200 blends, the elimination of redundancies in management and general and administrative expense. It creates a stronger and more diversified propane company. As I mentioned, it extends our geographic coverage, and as I also mentioned we structured the transaction to reserve our current credit rating, and you can see UGI remains the 100% owner of the general partner.

The map on slide 13, you can see how well the businesses match each other geographically. I already mentioned the 440 locations. We think there are about 200 blends and then 240 locations that will extend our coverage. This deal is also a good cultural fit for AmeriGas. Both companies have gone through acquisition. We have a common focus on organic growth and a deep commitment to safety.

On slide 14, you can see that the transaction does increase our share to about 16% but it’s more important to point out that there’s still plenty of room for additional growth for two acquisitions in the future, it was about 69% of the market served by independent marketers.

On slide 15, you can see the pro-forma EBITDA impact of this deal. Heritage on their own expected to generate about $275 million in EBITDA in the coming year. We calculate synergies when fully realized will contribute at least $50 million. So the pro-forma incremental EBITDA is about $325 million. Pro-forma incremental capital expenditures would be an additional $48 million.

I should mention, because this is a seasonal business and we can’t do much integration during the winter. We estimate it will take us about 18 months to complete the integration and there will be significant transition expenses, we estimate about $70 million during the integration process most of that will be during the first 12 months of the integration process.

Slide 16 is a pro-forma overview of the combined business. You can see some of the statistics in terms of customers and gallons and locations. This transaction does increase our scale considerably, it enhances our logistics and supply capabilities through additional terminals, railcars and transports, it enhances our productivity through the blends that I discussed, it will give us additional purchasing synergies, it improves our product and technology development capabilities. There I’m talking about entering new market things like engine fuel market or technology to reduce our cost. It increases our geographic diversity as I discussed before, it broadens our geographic coverage and it makes us even more diversified in terms of customers and segments. So it lowers our risk profile.

So in summary AmeriGas has a long history of successful acquisitions. We’ve completed over 100 deals since our IPO in 1995. The integration of acquired business is a core strength. I would like to think it’s part of our DNA and we do have a detailed process we’ve developed over the years that helps us accomplish the smooth integration of these businesses and usually I’ll also take some comfort in the fact that the synergies are primarily expense for efficiency base. So we’re very confident in our ability to achieve them. Now we’ve been working with the Heritage team to do some integration planning, significant amount of that has already been completed and finally we have great confidence in our ability to deliver on this plan.

So, with that let me turn it back to you, Lon.

Lon Greenberg

Okay. Thank you, Gene. I want to close by just reflecting on a few things that we said before. And you’ve heard us talk about other question we get virtually every earnings call or several questions we get on every earnings call relate to the dynamics of the propane market, almost all of our owners have pointed out – as have analysts pointed out the slow decline in volume in the industry during the last several years and all of the propane companies out there recognize that there has been a slow decline, we might differ as to the scale of that decline but nonetheless the recession that we’re in the current economic times have exacerbated that to extraordinarily competitive industry product cost has increased as propane wholesale costs are tied to oil as opposed to natural gas and the competitive positioning as propane as a fuel has been questioned by all of you as well.

While this transaction is clearly and pointedly being done by us in response to those industry conditions this allows us to be a much more effective competitor. It gives us needed scale to drive productivity in that marketplace. It makes us more responsive to our customers and value creating for our owners in this marketplace. The transaction was structured again with our balance sheet in mind.

We have said before many times we’ve got what we felt was excess strength in our balance sheet to take advantage of an opportunity like this while we’re using some of that strength, but importantly after review with credit agencies, we’ve concluded that we are not going to – we’re going to retain our credit ratings in this process, preserve our credit rating, which is important to us. We still have very strong balance sheet after this transaction and you can see how the transaction was structured to combine with substantial equity taken as consideration in the transaction by Energy Transfer.

We are committed in this process combination to take the best practices of each company. There are certainly things that we admire the way the Heritage propane folks have approached the marketplace and I am sure there are aspects of our business that they admire the manner in which we have approached the marketplace whenever you have an opportunity like this to take two competitors and combine them in a fashion to take the best practices of both only good things can come from that and we’re convinced good things will come from it in this case as well.

Our confidence in the transaction is tangibly demonstrated by the fact that our Board expects to raise the distribution to our unit holders, which will include Energy Transfer as a unit holder. After we close, buy 3% to reflect tangible benefits and our confidence in this transaction going forward that it will create extra value for our owners. And all-in-all we reiterate that we believe this is a value-enhancing transaction for our owners, it’s a win for our customers, it’s a win for this industry as a whole to be able to take advantage of technology, drive productivity, and all-in-all produce a better product for our customers.

So with that having been said as in conclusion I’ll just thank many people who are involved in the transaction both on the Energy Transfer side and our side for all the hard work that went into this. This was a rather intense period and rather short period of intensity where people work extraordinarily hard to get to the point where we could complete a transaction and make the announcement. There is a lot of work that yet has to be done to get this transaction completed including integration planning on both teams.

We have to get in our trust approval we have to go to the financial markets and raise a substantial amount of debt, and we’ve got a lot of work to position this to get to the closing and of course once we close all of that hard work and negotiating the transaction and getting through the closing will look like a walk in the park. The real work starts from the time we close this transaction to make it a success and we are committed as always to making sure that this transaction is successful as we go forward.

So that ends my prepared remarks and why don’t I open it up for questions, Shaun.

Question-and-Answer Session

Operator

Thank you, ladies and gentlemen. (Operator Instructions). Our first question comes from Gabe Moreen with Bank of America Merrill Lynch. Please go ahead with your question.

Gabe Moreen – Bank of America Merrill Lynch

Hi, good afternoon and congratulations on the deal and I’ll try not to ask the same questions everybody ask on all the conference calls. A question on in terms of your expectations around any antitrust issues, clearly if you just take both of your respective market shares nationally, it doesn’t looks to be an issue, but I’m just wondering if authorities look at it also on a market-by-market basis as opposed to just on a consolidated national basis?

Lon Greenberg

Yes, I would tell you antitrust review in recent years has become a more complex process than it was several years before that, as you know. Generally speaking, we agree with you that were this to be evaluated on a national basis, there shouldn’t be any issues there. It’s likely to be evaluated locally as well and the one thing you have to remember about this industry it is a low barriers to entry industry that’s been accepted many times by anti-trust authorities and there is ease of entrance.

And so there truly is no ability to collect market shares and have a distinct advantage in the marketplace because of that low barriers to entry that is acknowledged in this industry. In addition, given the competitive positioning of propane that’s occurred in recent years, we are seeing more inter fuel competition as well. And so I guess that’s a long-winded way of saying, the anti-trust process is always unpredictable; it’s certainly been more unpredictable in recent years. Historically combining large propane entities has not been a particular concern, it’s passed muster. We’ve done a number of large transactions, Energy Transfer has done large transactions as well and gotten clearance. Our expectation is to get clearance, but we don’t want to be overly confident about it because it is a complex environment and a complex transaction.

Gabe Moreen – Bank of America Merrill Lynch

Great. Thanks a lot, and if I could follow-up and ask in terms of how you’re going to run Heritage, will you rebrand that as AmeriGas going forward in terms of the operating branches, I was just curious how you’re going to run it?

Eugene Bissell

Yes, our plan really is to in the 240 locations where it’s new territory for us, we intend to maintain the brands that Heritage uses. And in the places where we overlap there is 200 where we overlap we’ll have to look at each situation and see what makes sense, who is larger, who has got the best brand in that particular geography. So those we’re going to make on a case by case basis.

Gabe Moreen – Bank of America Merrill Lynch

Thanks, Gene. And then last question from me, and the $275 million in pro-forma incremental EBITDA before synergies. Is there any step down there that you’re expecting to lose business as you change ownership? I mean is there an expectation that should happen or do you expect us, I mean, look, hopefully you’ll execute flawlessly and you won’t lose any business, but are you budgeting for anything like that happening?

Lon Greenberg

Yes, I would tell you that we expect to execute flawlessly as well, but our experience has been in this industry and I think it’s a shared experience in the industry that it is very competitive. There are 3,500 small competitors out there and lots of medium and larger ones and whenever you have a transaction of this nature, people reassess their own competitive plans and they try to capitalize on those. So we would not go into it naively and think that we’re going to retain all of the business and so we have some realistic expectation of transitionary difficulties in our numbers. But we are committed to working with the Heritage folks to execute as flawlessly as we can to make every customer happy and demonstrate to them why they shouldn’t leave us. But as I said this is a competitive industry and people are going to look for opportunities to take advantage of the transaction.

Gabe Moreen – Bank of America Merrill Lynch

Great, thanks and congrats again.

Lon Greenberg

Thanks.

Gabe Moreen – Bank of America Merrill Lynch

Thanks.

Operator

Our next question comes from Brian Zarahn from Barclays Capital. Please go ahead with your question.

Brian Zarahn – Barclays Capital

Good afternoon.

Lon Greenberg

Good afternoon.

Brian Zarahn – Barclays Capital

I guess following up a little bit on Gabe’s question for the $275 million of EBITDA from Heritage, can you talk a little bit of what assumptions you have for that in terms of margins and volumes or Heritage sort of a change year over year, what risks are within that number?

John Iannarelli

This was a number that Heritage put together as their budget and we did get the chance to kind of look through those assumptions. We thought they were appropriately conservative assumptions for their numbers and not that different from the trailing 12.

Brian Zarahn – Barclays Capital

Okay. I guess and moving onto the debt financing, can you provide any color as to how you think you will structure that $1.5 billion?

Lon Greenberg

Our first structuring event is to do the equivalent of a rain dance and hope credit markets improve. As you know, it’s been a volatile market out there. Fortunately, AmeriGas has a very good name. We issued 400 – how much Eu...

Eugene Bissell

450.

Lon Greenberg

410 million just recently and last January, I think one in June, one in January, and the June issue was at six and a quarter and so I think our reputation is good in the marketplace. Our credit rating will be preserved and of course markets have moved off since that time. We are likely to do a combination of two things. One is we got to right-size our revolving capacity to make sure we have sufficient working capital availability.

And then secondly we have got to issue that $1.5 billion, likely be, as we have done for the last – I don’t know 10 years, Eu – senior notes as we have done in the past and we are not expecting to issue very short maturities. I think we lean towards having maturities in between the 5 and 10 year frame with an emphasis probably towards the latter part of that. But we got to be conscious of market conditions. We got to be flexible in that respect, but we’re looking for a longer term financing. We’re looking to use senior notes and we’re looking to maintain some flexibility as we go forward.

Brian Zarahn – Barclays Capital

Okay. And then if you can review just on the numbers you put out about the synergies you expect that $50 million to be achieved over 18 months timeframe post closing, but you said you had – if I heard you say $70 million of integration costs, is that correct?

John Iannarelli

That is correct over that sort of same time period. We think we’ll realize at least $50 million in synergies on an ongoing basis, but during that first 18 months we see about $70 million and most of that falls in the first 12.

Brian Zarahn – Barclays Capital

Okay. I’m assuming that $70 million for that $48 million you put out there as part of that $70 million?

John Iannarelli

No, that’s separate. The capital expenditures are 48 are on kind of an ongoing basis taking on the Heritage business what we think the ongoing capital would be. When I talked about $70 million that’s really all expense, so that to cover things like severance, computer system conversion, the training team that we’re going to put out there for doing some training and transition, moving tanks around, it’s things like that are really expense items.

Brian Zarahn – Barclays Capital

Okay.

Lon Greenberg

And with regard to the 50, I think don’t lose sight of the word at least 50 on synergies. These transactions are complex. We go into those with what we think are very grounded realistic conservative assumptions on what we can achieve and what kind of productivity can be achieved. You have to remember that no transaction of this scale has been attempted where you’ve got two organizations that got the footprints that we have.

The synergies in this business are driven off density most of the time and we are pursuing internally ourselves opportunities to improve our productivity through density and we had to take a stab at what that productivity improvement would be. Frankly I’d be disappointed if we only get 50 in synergy, but we felt very comfortable although it was a realistic number to use 50. But my sense and my advice to you is remember the focus on the word that we expect to get 50 but that’s a minimum number that we expect to get.

John Iannarelli

And we’ve put a lot of effort in a short period of time to be able to come up with those integration plans to define synergies but we’ve got a lot more work we can and will do over the – in the weeks ahead which gives us the confidence to point to that $50 million as a minimum number.

Brian Zarahn – Barclays Capital

Certainly a large transaction to digest. Just seems with the upfront integration cost that accretion is likely more of a 2013 event, is that fair?

Lon Greenberg

It will depend – yes, accretion is clearly a fiscal year 2013 event. In any sub-year in an acquisition, as Gene said, these expenses are front-end loaded, so 2013 is logical. Now again even with 2013, if we don’t have a real transition year and I think we have a month or two because closing gets delayed inordinately for some reason. If the closing gets pushed back far enough, 2013 could be a challenge because of the scale of transition, but our expectation is that we’ll get there by the end of this year beginning of next year and we think you get the lion share of those transition expenses upfront and the synergies come rolling in as we move along.

So, that’s the key point for us and it’s hard for us to predict now when it’s going to close, so what we can do is based on an assumption that a closing occurs in a very specific period of time which is the end of this year beginning in 2012 and if that’s the case as you know we’re at fiscal year ended September 30 will have ample time to try to accomplish as much as we can to the extent that period shrinks significantly. This is a national business that has a lot of small location, so you need time to be able to assimilate those locations of things.

Brian Zarahn – Barclays Capital

I appreciate the color. Thank you.

Operator

Our next question comes from Steven Karpel with Credit Suisse. Please go ahead with your question.

Steven Karpel – Credit Suisse

Hello, gentlemen.

Lon Greenberg

Hi.

Steven Karpel – Credit Suisse

There was a Moody’s report that came out indicating about following up on the debt questions about the guarantee would come from Energy Transfer. Can you explain how that loan or bonds will work?

Lon Greenberg

Sure. Hugh Gallagher?

Hugh Gallagher

Yes, Steve, this is Hugh. The guarantee is really of intercompany debt; it’s a last dollar guarantee. It was related to the structure of the transaction and not really credit related, I mean, we don’t see it as a big credit issue. It was really related to the structure of the deal and how we needed to structure the transaction to make it a tax-efficient transaction. So there is an indirect less dollar guarantee on an intercompany note that will be related to the debt that we intend to issue in the future.

Steven Karpel – Credit Suisse

How large is that intercompany note?

Hugh Gallagher

It will be the size of the debt, $1.5 billion.

Steven Karpel – Credit Suisse

Okay, okay.

Hugh Gallagher

And I think if you – as Hugh said, we don’t believe we received any credit benefit from it because it is so contingent in nature. And it’s my understanding in the process and having read Energy Transfers’ release as well that rating agencies have evaluated that very contingent obligation and really not adversely affected their situation either.

Steven Karpel – Credit Suisse

And do you think there will be no benefit to your new notes offering and as a result of this guarantee or benefit and secondly the all else being equal aside from this, these notes will be at the same level and the same parry as the existing?

Hugh Gallagher

Yes, second question first, the answer is yes to that. And then with regard to the note benefit, yes, we honestly having discussed this extensively with credit rating agencies and recognizing the very contingent nature of it, we don’t think there is any credit benefit. You have to remember AmeriGas has a long history of pretty conservative balance sheet management and obviously we made that point to the credit agencies.

You’ve got UGI here and we have no guarantees of AmeriGas debt but this is a core business for us and risk rating agencies have noted the connection to UGI over the years and given somewhat of – I’ll call that a halo effect to AmeriGas because of the relationship to UGI and the importance of AmeriGas to UGI. So by the time you get to a extraordinarily contingent obligation on the part of Energy Transfer so much has to transpire that the rating agencies we think included that AmeriGas has to stand on its own as opposed to standing – to get any benefit out of Energy Transfer.

Steven Karpel – Credit Suisse

Understood. And kind of two part one on the debt one and then I have another business one. I didn’t quite follow what your debt targets were at this point now, if you indicated that you’re under-levered before and you’re looking where you are now what’s the goal over time and then it cut out when you were talking about the revolver, the thoughts on kind of what ultimately you want that size and drive to look like?

Hugh Gallagher

Steve, we’re going up. So we’re planning on upsizing the revolver to around $500 million as a result of the transaction. So we believe that’s the neighborhood of the right size for the revolving credit agreement.

Lon Greenberg

And Steve, what was the first part of the question again?

Steven Karpel – Credit Suisse

Kind of targets on...

Lon Greenberg

The EBITDA. Moody’s makes it pretty clear on their report what they expect of us at 3.5.

Hugh Gallagher

Yes, we’ll manage our cap ratio in line with our credit profile and the credit ratings where we currently have, Steve. So I think over time as we recognize the synergies and deliver the business case, we intend to manage leverage down to that 3.5 times level.

Steven Karpel – Credit Suisse

Great. And then just one last one, as clearly the multiples are larger here and sure it’s a market leader and once in a lifetime transaction and such, but what does this say about your ability to do transactions that are smaller obviously historically the view has been we can buy smaller companies at smaller multiples. So can you give us the message that this sends on that market or maybe it doesn’t send any message at all on the ability to do those type of transactions in the future?

Lon Greenberg

Go ahead, Gene.

Eugene Bissell

I would say it doesn’t really change the multiple that we’d be doing the smaller transactions at. We have been saying that’s in the range of five to seven and this is completely different in terms of scale. And so that has an impact in terms of the multiple but for the small transactions we still see them in the same range.

Hugh Gallagher

Yes, I would just add that it increases our density, increases our coverage so it puts us in a better position to integrate those smaller acquisitions and increases the reach of our business.

Lon Greenberg

And we think over time, Steve, with this one while I recognize the math doesn’t literally add up, but we think the multiple on this one approaches 8.5 over time and we’re pretty comfortable with having to pay up compared to a small transaction because of all the intangible benefits we get that John referred to in terms of scope, scale, future opportunity to grow the business.

And again when you do a transaction like this there is not a lot of precedent for it, you’re never quite sure of the other benefits you get from it derived from the density that I talked about and the ability to serve your customers more effectively, the ability to experiment more with different technologies that are new that you might not have at a different scale level. So that the scope and scale of the business – we’re not good at speculating on those things, others might be better than we as to what you would get, but we’re basing our synergies and our analysis on kind of a known analysis of what happens as opposed to what could happen given the benefits of scale that you get from this business and scope.

Steven Karpel – Credit Suisse

Great. Thank you guys for the answers.

Operator

Our next question comes from John Tysseland with Citigroup. Please, go ahead with your question.

John Tysseland – Citigroup

Hi guys, good afternoon.

Lon Greenberg

Hi.

John Tysseland – Citigroup

Just on the evolution of this transaction; was this a bidding process or is this a negotiated transaction between Heritage and AmeriGas?

Lon Greenberg

You’d have to ask those guys. As far as we know, we were the only game into – we were the – we consider ourselves the most desirable person out there, so we assume that it was just a natural that they came to us, but frankly I never asked a question in the process what process they went through to come to us.

John Tysseland – Citigroup

Okay, great, and then also I think you touched on this, but I didn’t necessarily get a number, I mean, when you look at combining the two entities and some of the 200 blends, did you factor in into your model a certain amount of customer loss that you would experience? I mean what was that number? How do you view, I guess volumes and customer loss as a combined entity in this instance?

Lon Greenberg

I would tell you there was a long discussion and Gene you can jump in. I’d tell you that there were advocates on both sides of the table who suggested that we shouldn’t lose very much at all because the nature of the answer Gene gave you. We expect to likely keep the Heritage brands in those areas that aren’t combined where we are combining we’re going to look at the stronger brand and the strongest approach to the customers and so there are folks who suggest that if you – as we make this invisible to our customers that we would not see a lot of attrition.

I think given the realistic way we look at things that is we have a tendency to err on the side of being conservative. We have seen in other transactions some loss associated with it. The easy examples would be someone who is our customer up until a month before the transaction and we had a service failure and they got irritated with us and they went to Energy Transfer and woke up the next six months later and now they were back with their good friends at AmeriGas. Obviously, there are going to be situations like that where they are not going to be happy and they are going to leave. So we built in a number that we think is a, what I’ll call a realistic number on that it’s netted into the minimum synergy number that we mentioned and so I think the important number that you need to take away is that minimum of 50 synergies as opposed to kind of how we broke down each component of that.

John Tysseland – Citigroup

And then just to follow-up on the $50 million in synergies, do you see that as a combination of margin expansion or is that predominantly operating expense kind of saving?

John Iannarelli

It’s really almost all operating expense savings that we built in there and as Lon says net of any volume loss expectations we have.

Lon Greenberg

Yes, we hope to be able to drive purchasing efficiencies from this transaction and to the extent obviously we can do that, it’s going to be helpful to our overall financials, but the more scale you get in any business you hope to drive a better deal with your suppliers if you can, historically the larger companies have gotten some discount compared to the smaller ones overall in purchasing a propane and things like that, but it’s not been a hugely significant number. We’re going to do our best to remind our suppliers that we are a stronger company, we are more secure for them. We are buying more and we provide efficiencies to them and they ought to share those efficiencies with us, but we haven’t built a lot of analysis around that and a lot of expectation around that.

John Tysseland – Citigroup

And then lastly when you look at the credit rating agencies in this instance, have they set out any hurdles that they expect you to meet over the next year or two to meet synergies or to meet whatever expectations that they might have or you’re leverage to come back down back into a more normalized range?

Hugh Gallagher

John, this is Hugh. I think their expectation is that we delivered the business cases we presented it to them. And if we stay on track and I’m sure we’ll be visiting with them as we move through the process. If we stay on track and do what we said we were going to do, then we’ll stay on track to maintain the ratings.

Lon Greenberg

I mean their expectations align perfectly with our expectations that we’re going to focus and deliver the business case.

John Tysseland – Citigroup

All right, great. Thank you very much.

Operator

Our next question comes from Chris Sighinolfi with UBS. Please go ahead without your question.

Christopher Sighinolfi – UBS

Hi guys, congratulations.

Lon Greenberg

Hi, Chris.

Christopher Sighinolfi – UBS

Just wanted to follow-up quickly on some of the bolt-on acquisition questions that came previously. Are you still in light of this deal planning to do sort of a $20 million annual gallon per year run rate or is that sort of taking a hiatus while you integrate this and then potentially getting larger than that in the out year, can you talk about that?

Eugene Bissell

I think, Chris – this is Gene. We would plan to slow down a bit on the acquisitions we make, the smaller ones for a period of time while we’re focused on the integration. And it will depend a lot where the opportunities pop up and what else is going on. Is it an area where there is really no impact from the acquisition or not. So we’ll definitely slow down but then we’ll want to in the future get back into the game and target to continue to grow the business through acquisitions. Both companies have done a great job of that and we’re expecting to put together the capabilities of both companies to do more acquisitions in the future.

Lon Greenberg

As you know, when you do a transaction like this, something has got to give. You only have a certain number of people and something has got to give on a transaction, even as demanding as all of us are that nothing give. And so, as Gene said, I think he is exactly right. If a unique opportunity comes to us obviously we’re going to look at it; if something comes to us in an area totally unaffected by the transaction, we would look at it. But I think our base case, if you will, is to focus on making this work for an intense period of time and then get back more heavily in the game – I don’t think we’ll ever drop out, but I don’t think it will be as much a priority for the short-term as it would have been otherwise.

Christopher Sighinolfi – UBS

And, Lon, could you think when you guys size up sort of the 1.5 billion gallon per year of sale that $20 million target on an annual basis will prove to be too low, do you think you’d sort of look to maybe upsize given maybe the density of your program in a combined state?

Lon Greenberg

Hope spring’s eternal. I mean one of the benefits that we have in a transaction like this is we will expand our geographic coverage. We will be an attractive candidate for folks to associate with because of what we’ve become. And our hope is that as folks look at selling their businesses that they would turn to us first. I will point out that it is, as you know, because you talk to all the other propaners. It is a competitive market for propane acquisitions out there, I can’t tell you what the effect of this transaction will be on others, but I don’t expect it to get less competitive in terms of acquisitions out there.

So our hope is that we get a competitive advantage out of this transaction in terms of approaching the smaller businesses with a broader, stronger, more effective company but we’ll just have to see whether that pans out or not.

Christopher Sighinolfi – UBS

Okay. And I have two quick questions about the Heritage assets, I don’t know them well. It looks like the EBITDA contributions sort of on a per gallon basis is quite a bit higher than what you would sort of see on average at AmeriGas, is that due to some shift in terms of the business mix at the Heritage business versus what’s embedded in APU’s various operations?

Lon Greenberg

So, Chris you’re exactly right, there is a mix effect. They are about 57% residential, we’re about 40% residential so that has an impact and they have a bias towards some parts of the country that tend to be a little bit higher EBITDA per gallon which affects that. They also tend to own all their vehicles instead of leasing them which has an impact on the EBITDA per gallon.

Christopher Sighinolfi – UBS

Okay that’s helpful, thanks. And I guess the other question is with your retirement announcement we saw not too long ago is there sort of management at the Heritage business that we might look to sort of fill your replacement?

Lon Greenberg

We’ve got a great team here. They’ve got a great team. We’re not quite prepared to name and announce a successor, though we expect to do that shortly, but they’ve got a great deep management team that combined with our management team is going to, we think, be a world class management organization for this business. And incidentally, as Gene was considering what he wanted to do, there was a great temptation for him to postpone what he has wanted to do for some time and stay around and see this run through.

Eugene Bissell

That’s sure. I’m so excited about this deal. I mean this is the deal that we’ve hoped to put together for a long time. And so, it was a significant temptation for me. But as Lon said, it’s something we’ve been sort of working toward for a couple of years.

Lon Greenberg

And if you see Gene with like an arm sort of dangling at his side you’ll know why as this transaction came that we twisted a little bit, but unsuccessfully.

Christopher Sighinolfi – UBS

All right guys. Well, thank you so much and congratulations again.

Lon Greenberg

Yes, thanks.

Operator

Our next question comes from Ron Londe with Wells Fargo. Please go ahead with your question.

Ronald Londe – Wells Fargo

Thanks. One of the questions I had was how your overall customer base was going to shift with the Heritage combination from the standpoint of residential and commercial, and what the benefits might be to the ACE business, and does your overall tank control change?

Lon Greenberg

Yes, let’s take the first one, Ron. They are more what Gene mentioned it before, they are more – go ahead Gene.

Eugene Bissell

Yes that’s’ basically because they are 57% residential, we’ll go from 40% to 44% residential that’s sort of the mix change that takes place.

Lon Greenberg

On the ACE business this too is a competitive business, people have a tendency to talk about us in parallel with Blue Rhino as the larger players here, but we have seen regional people enter this business, we have seen local competition in this business and Heritage was not a very big player in the cylinder exchange business in addition.

So we don’t see one and one adding to three. We think that they’ve got a nice business, we have a nice business. There is lots of people who will be knocking on customers doors trying to take that each of our businesses both this and the ACE business and elsewhere. So it’s to me it’s like adding residential customers, it’s like adding other commercial customers, they do have some ACE customers, they do have some forklift customers, they do have some dispenser customers and it’s just a nice addition for us, but it certainly doesn’t move the needle a whole lot.

Eugene Bissell

And, Ron, I think your other question was about tank ownership and their tank ownership actually is slightly higher than ours. So it doesn’t significantly change the tank ownership percentage, both companies have high levels of tank ownership.

Ronald Londe – Wells Fargo

Okay, also typically in a situation where you are blending operations at various locations and not considering density issues you can expect like synergies of around $100,000 per blend. Is that what you’re kind of looking for and what you budgeted and modeled for this deal?

Lon Greenberg

It’s not a bad rule of thumb really. We approached it a different way really looking at kind of a deeper level where we looked at, okay, how many managers, drivers, where would we be able to merge facilities, where would we have to keep the other facility for storage. So, we kind of approached it at a more detailed level, but your number is not far off the mark in terms of what’s typical in a blend.

Eugene Bissell

Yes, Ron, this is – when you get to a transaction of this size, the math becomes a little more complex than it normally does because of the density issue, your desire to keep customers and you’re balancing of a whole variety of factors of scale. So, obviously if we gave you the exact number of synergy and divided it by a number, we could tell you what that number was, but I don’t feel that we can, for competitive reasons, go into that much detail, but I can tell you this was a very bottoms up look by our folks that took into account a whole bunch of issues including what I would call normal density benefits that we can understand given our traditional business models and their traditional business model.

Ronald Londe – Wells Fargo

Would you expect also to gain some cost savings from moving the Helena administrative center to your current administrative centers?

John Iannarelli

We haven’t gotten to that level of detail, but I will add that as my understanding is that there are many places in the US that are reasonably inexpensive to do business and because of labor situations, rents, et cetera. So we’re going to take, as I said before a look at all of the business on our side, all of the services on their side and our side, and use best practices and decide where we can do the best for our customers and our unit holders by creating value but I would tell you there have been no firm decisions made on any of that yet because it’s complex because of the very issues that we talked about.

Ronald Londe – Wells Fargo

On the standpoint of that $70 million in integration expense...

John Iannarelli

Yes.

Ronald Londe – Wells Fargo

...do you expect that to be spread kind of evenly over the four quarters after the deal closes or is it going to be frontend loaded or can you give us a feel for what the accounting is going to be?

John Iannarelli

Ron, it’s really over an 18-month period the $70 million. It’s over a year and a half, but it’s more in the first 12 months. I don’t think we really refined it down to the quarter level.

Lon Greenberg

Yes, I’d tell you as Gene mentioned before, Ron that during the winter you’re going to see less of it because you got to run the business, you got to serve your customers, et cetera. Depending upon when this closes, we’re certainly going to be aggressive and the periods of time that Mother Nature lets us address the issues with folks. And so when you have a seasonal business like this, you’ve got to be mindful of serving your customers as your number one priority and so that makes it more complicated than it might in a different kind of combination.

Eugene Bissell

When we look at the business, we sort of figure until the spring, we aren’t going to make a lot of changes just because we want to make sure that we take care of those customers during the winter. So, once we get to the spring, then we’re in a better position to begin the process so it depends a bit on the timing of the close.

Ronald Londe – Wells Fargo

From the standpoint of personnel in the integration expense, did you factor in there the non-compete agreements from some of your managers so don’t come back and start mom-and-pops up to compete you and take customers or how are you going to handle that?

Eugene Bissell

Yes, as we said before this is a serious consideration because this is a very low barriers to entry business and there is much experience and the lore of this industry with folks leaving you and starting business and being sponsored by others and picked up by competitors et cetera. Generally speaking my understanding is as I’m looking at our lawyers in the room that each state has different rules, their ability to get non-competes make non-competes forcible and – but to the extent we can legitimately seek non-competes from employees, we will do so. But obviously it takes two to tango and that employees are going to make decisions based on what’s right for them and their future and it’s just part of business that there will be entry and there will be folks who think their careers are better served elsewhere than here although we hope to retain as many as really good people as we can in this process because both companies have excellent, excellent people.

Ronald Londe – Wells Fargo

Okay. Thank you very much.

Eugene Bissell

Okay.

Operator

Our next question comes from Gabe Moreen with Banc of America Merrill Lynch. Please go ahead.

Gabe Moreen – Bank of America Merrill Lynch

I’ll keep it short –

Eugene Bissell

Now, Gabe you have to be careful not to ask something someone else did.

Gabe Moreen – Bank of America Merrill Lynch

Seriously, there was a lot of questions. Just wondering whether there is any propane storage assets or other noncore assets that you might be able to sell at a mid-teens multiple down the line somewhere?

Eugene Bissell

I don’t see a lot of storage assets that we would end up selling. We are picking up some nice terminals that will, I think, help our supply picture, but not a lot of assets we’re assuming.

Lon Greenberg

I don’t think they have any underground storage like we used to have, do they?

Eugene Bissell

No, no.

Lon Greenberg

Probably not anything of scale, Gabe.

Gabe Moreen – Bank of America Merrill Lynch

All right. It doesn’t sound like you are planning to divest any of it, so...

Lon Greenberg

Yes.

Gabe Moreen – Bank of America Merrill Lynch

Okay, great. Thank you.

Operator

Our next question comes from Gary Stromberg with Barclays Capital. Please go ahead.

Gary Stromberg – Barclays Capital

Hi, just a couple quick ones. First do you have committed bridge financing in place, what’s the financing risk here?

Lon Greenberg

We do not have a bridge, both we and Energy Transfer had extensive discussions about whether we should obtain a bridge or not obtain a bridge and I think both of us are comfortable that the way we’ve structured this transaction that a bridge was unnecessary, so we don’t have a bridge. We’ve got a detailed arrangement with Energy Transfer that encompasses a sharing of financial market risks, some termination fees that get paid under circumstances.

There are switches that reduce the size of equity – debt issuances and we can substitute some more equity should capital markets require that to happen, so there is latitude to both sophisticated sides put in the arrangement to share the risk of the financial markets because the financial markets can take away the ability to complete transactions and to the credit of the Energy Transfer people. They will be a large holder of ours and they want to make sure this transaction works for us as well and at the same time, they wanted to make sure that they were teethed to our obligation to close and we worked very hard to accomplish both of those goals and they were satisfied with the teeth and we were satisfied that we wouldn’t have to do a transaction that was not productive for our unit holders. So, there was a meeting of the minds there. And I think there is an 8-K that we filed that will have some disclosure around that.

Gary Stromberg – Barclays Capital

Okay that was going to be my next question, will there be disclosure? Is there a breakup fee, but I guess that will be in that document right?

Lon Greenberg

That will be in the document and I think it’s been filed already. Has it?

Eugene Bissell

AmeriGas.

Lon Greenberg

AmeriGas, we did file our 8-K so, you can just take that out.

Gary Stromberg – Barclays Capital

Okay, great. That’s all I had, thank you.

Lon Greenberg

All right thanks.

Operator

I’m not showing any other questions in the queue at this time.

Hugh Gallagher

Okay. Yes, I’ll close with taking off my AmeriGas hat for a minute and mentioning the transaction from a UGI standpoint for those of you who are interested in that. As you know, we take great pride on running AmeriGas as a separate entity. We’ve got the right corporate governance where they make decisions that are to their advantage and UGI also looks at transactions and opportunities to make sure it works for UGI as well. Given where we are on high splits, we’re at the 25% level in high splits. UGI would expect to see additional cash flow resulting from this transaction and the $10 million to $15 million range in the early years of additional cash flow. We expect that after the transition period that we’ve defined for you that this would be accretive to UGI’s earnings.

There is just kind of modest accretion when we have lingering transitionary expenses and that accretion slows somewhat after that period of time, but overall this is modestly if you look at it few years over time that this is going to be accretive to UGI’s earnings, it’s not going to be a homerun for UGI’s earnings but the combination of cash and earnings to UGI makes this a valuable transaction for UGI.

So with that I want to again thank everybody for taking the time to hear about this transforming transaction for us. As I said, we believe that we will execute on the plans that this is a value-creating opportunity not only for our unit holders but for the customers of the propane business generally. And we look forward on reporting our progress as time goes on and keeping you abreast the actions. So that ends the call and Shaun, thank you very much.

Operator

You’re welcome. Ladies and gentlemen thank you for your participation in today’s conference. This does conclude the conference, you may now disconnect. Good day.

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