LP Gas, January 2012

ACQUISITIONS AmeriGas purchase of Heritage raises eyebrows questions I n late October AmeriGas Partners L P reached an agreement to acquire Heritage Propane the propane operations of Energy Transfer Partners L P for a staggering 29 billion Under the terms of the deal the countrys largest propane distributor will pay 15 billion in cash and 13 billion in shares as well as assume 71 million in debt from two Energy Transfer Partners subsidiaries Heritage Operating and Titan Energy Partners Energy Transfer conducts its propane operations in 41 states through the subsidiaries including Heritage Operating L P and Titan Energy Partners L P The acquisition of Heritage Propane will add more than 1 million retail propane customers and more than 500 million gallons to AmeriGas nationwide propane distribution operations which already included 13 million retail customers and more than 893 million gallons of annual propane sales News of the blockbuster deal made big waves in the consolidating propane Londe industry There were some red flags on the investment front however Some ratings firms put the credit ratings of AmeriGas Partners on watch for possible downgrade due to expectations that the deal will result in increased leverage at AmeriGas They also cited possible execution risks including challenges related to integration financing and greater thananticipated customer loss LP Gas Editor in Chief Patrick Hyland asked industry analyst Ronald Londe to evaluate the megadeal from both a competitive and operational standpoint Londe is managing director of equity research for energy master limited partnerships with Wells Fargo Securities LLC How does the deal strengthen the AmeriGas portfolio LONDE From the standpoint of AmeriGas it makes them much larger obviously and probably more diversified geographically from a competitive standpoint It will allow them to be a little more residential oriented I think they go from 40 residential to about 44 residential Obviously residential gallons have a somewhat higher margin associated with them and that is a positive The company feels it can gain some productivity through what they call improved density which has to do with more efficiency of supply and logistics as they blend locations Are their customer makeups much different from each other Are there any specialty areas that one is particularly good at or does more than the other LONDE No I dont think so Heritage traditionally had higher margins just because of their orientation toward residential Its hard to calculate what benefit AmeriGas will get on the ACE cylinder exchange side of the equation the barbeque tank cylinders that they sell They seem to think that they would be able to get some benefit by Heritage locations being able to supply other locations around the country that are now supplied by third parties What has the reaction been in the market LONDE The reaction has been fairly subdued If you look at the performance of AmeriGas when it was announced versus where the stock is selling now its pretty close to even I think the market viewed this as a fairly expensive acquisition one that would be diluted over the near term because of integration expense that they are going to incur over the next 12 to 18 months and the fact that theres skepticism over how much cost savings they can squeeze out of blending operations of Heritage into AmeriGas They basically said that they are going to blend about 200 of the 440 locations that Heritage operates We calculate savings of anywhere from 100000 to maybe 125000 per location which gives you 25 million in savings If they decide to relocate Heritages administrative office in Helena Mont to the AmeriGas facility in Pennsylvania we think that could possibly provide another 5 million in cost savings if that happens So thats 30 million The company talked about a cost savings of about 50 Continued on page 14 www LPGasmagazine com January 2012 LPGas 13