UGI Corp (UGI) 2002 Q2 法說會逐字稿

Good day and welcome to this UGI AmeriGas second quarter earnings release conference call. Today's call is being recorded. For opening remarks and introductions I would like to turn the call over to Mr. Bob Krick. Please go ahead sir.

Thank you Philip and good afternoon welcome to our call. As you know our comments today will contain certain forward looking statements which the management of UGI AmeriGas and their subsidiaries will need to be reasonable as of today's date only. Actual results may differ significantly because of risk and uncertainities, which are difficult to predict, and many of which are beyond management's control. You should read the report on Form 10-K for a fuller list of factors that could affect results, but among them are weather conditions, the cost and availability of all energy products including natural gas, propane and fuel. Competition from the same and alternative energy sources and political legislative and regulatory changes. UGI AmeriGas undertake no obligation to release revisions to these forward-looking statements to reflect the end source circumstances occurring after today. said I would like to introduce to your host Chairman and Chief Executive Officer of UGI Lon Greenberg.

Thank you Bob. Let me also welcome all of you to our call today. I trust you have all had the opportunity to review our press release reporting our second quarter results of a dollar 92 a share versus a dollar 67 last year for UGI and net income per unit of a dollar 64 versus a dollar 67 last year from AmeriGas. I hope all of you also saw our releases yesterday and when we announced the distribution on AmeriGas unit and a 3.1 percent increase in UGI's dividends. Before everyone else speaks I am going to provide you with an overview of our quarter and then turn the discussion over to Tony our Chief Financial Officer to comment about our financial results and then Eugene Bissell to comment further about AmeriGas's results. I am of course pleased to be reporting a 15 percent increase in earnings for UGI despite a very warm winner compared to last year or normal for that matter. Of course we know that our earnings per share this year include a change in accounting for goodwill but importantly even after adjusting for that goodwill accounting change. Our earnings are higher this year than they were last year on whether that would considerably warmer this year than last year. So even more gratifying for me and frankly should be more encouraging for all of you is the atypical way that we reach our achievement in earnings this year. and we both have grown a custom to price satisfying performance by our utilities not withstanding the environment in which they find themselves and something less than satisfying performance by our other business units in warm winter environments. This quarter there was something of a reversal in that tradition in that traditional motion. First our international businesses contributed noticeably to our earnings. Second our domestic propane business AmeriGas performed in an outstanding manner given the warm winter that they face and last while our utilities did an outstanding job of managing in the environment , which was 18 percent warmer than normal. We believe that to be a record for our utilities in terms of warmth a 107th out of a 107 years. They were unable for the first time in many years that over come this factor and reported lower earnings. What the sum of all these factors means for all of you is that a stronger UGI with somewhat less weather related earnings volatility than you have become a custom to in the past exists and this is because of the diversification of risk inherit in our business mix given their locations and given their present scale. What is equally encouraging to us and again should be equally encouraging to you is that this diversification of risk as I call it has been achieved under a clear vision for UGI. UGI is a distributor and marketer of energy products and services and within that vision and presumed to that vision we have been executing a focused strategy to grew our earnings. At this point I would like to turn the meeting over to Tony who will give you some more detail about our financial results.

Thanks a lot. As Lon mentioned despite weather that was pretty warm throughout the country and extraordinarily warm in our utility service area we had a darn good quarter. Our earnings per share was a dollar 92 a 15 percent increase compared to the same quarter last year. We delivered this improvement in earnings despite weather that was about 8 percent warmer than last year internationally and nearly 17 percent warmer than last year in area served by our gas and electric utilities. Last years weather for the quarter was essentially normal. Significant contributors to the earnings improvement were AmeriGas, international propane operation and the elimination of goodwill amortization.

AmeriGas which experienced weather that was about 8 percent warmer than both normal and last year saw EBITDA increase from a 113 million to 121 million and a 58 million gallon increase in retail volume sold. Volume increase is the result of the acquisition of Columbia offset by the negative weather impact. Margins for the quarter were down 5 cents per gallon from last years unusually high levels. Operating expenses increased as a function of the Columbia acquisition however operating expenses were substantially below budget levels as AmeriGas managed its expenses very well in the warm weather environment. AmeriGas's operating income was a 104 million dollars compared to 95 million for the second quarter of fiscal year 2001. Operating income in our utility operations declined to 41 million from nearly 47 million for the same period last year. The short fall came primarily from our gas utility operations where weather was 17 percent warmer than both normal and last year. Our gas utility throughput decreased to 26.1 BCS and volumes were down across all stern customer segment primarily as a result of the weather. Interruptible volumes were up compared to last year and oil and gas price spreads were very with that. Operating expenses were down nearly 6 percent in the gas utility primarily as a result of lower maintenance expense and reduced bad debt expense and customer account expenses.

We continued to add to our core heeding customer base during the quarter we added more than 2000 residential heeding customers. This is as I said more customers that we added in the same quarter last year. Operating income in our electric division was down 1 million dollars quarter to quarter. Decline in operating income was primarily due to lower pension income and higher bad debt expense in the current quarter. In other operations first gas market operating income decreased to 2 million dollars in the current quarter from 3.5 million for the same quarter last year on volume that was 29 percent higher this year, but at lower unit margins. The volume improvement was due primarily to fiscal year 2001 acquisitions and customer additions, offset by the impact of weather and a slow economy.

EBIT margins were down from last years high levels. Despite lagging last years performance on a year to year basis or year to date basis we expect that gas market will show a year over year improvement in operating income for the full fiscal year. International propane contributed net income of 15 cents per share in the quarter compared to loss of 4 cents per share last year. This improvement comes from flaga and Antargaz. Flaga despite weather that was 15 percent warmer than normal and 5 percent warmer than last year. So operating income increased 2 million dollars from 900,000 dollars last year. Volume was up 3 percent. EBITA margins remains good and operating expenses declined 13 percent. Our equity investment made in March 2001in Antargaz French propane distributor of which we owned approximately 20 percent contributed to the substantial improvement in our equity income. Equity income from international operations for the quarter was 3.5 million dollars and compared very favorably to a loss of 1.3 million last year. Last years loss included in 1 million dollar write off of our investment in Romania. Antargaz's earnings contribution came despite weather that was 19 percent warmer than normal. Antargaz continues to benefit from very good unit margins throughout the quarter. It is likely that unit margins will decline from their attractive current levels as propane cost stabilize will begin a up turn. We adopted SFAS 142 as of October 1, 2001. This accounting pronouncement allows us to stop amortizing goodwill. The benefit of this change is about 50 cents per share on an annual basis. SFAS 142 also refires an evaluation of a carrying value of existing goodwill. We have evaluated the goodwill associated with all of our operations and concluded that none of the carrying value of goodwill for any of our business is impaired.

Moving to our balance sheet consolidated total debt for UGI is 1.32 billion dollars down about 40 million dollars from a September 2001 level. UGI consolidated has about 55 million of investable cash. Total debt for AmeriGas at March 31st was 966 million dollars down 40 million from mid September 30 level. AmeriGas at March 31st had 66 million dollars in cash and effectively 0 balances on its 100 million dollar working capital and 70 million dollar acquisition line. AmeriGas issued 60 million of its cash balance to make a required debt principle payment in April and AmeriGas is planning to place 40 million dollars of debt very shortly here in May. With that I will turn it over to Eugene to give a little more color on AmeriGas's results.

Thanks Tony. As Tony mentioned we are pleased to achieve the 7 percent increase in the EBITA for the quarter despite weather that was about 8 percent warmer than last year. We are also pleased to have achieved the 10 percent increase in net income while a portion of this increase is related to the change in accounting for amortization expense. We still recorded in as a net income after adjusting for that change and despite the warm weather. The reason is that our colleagues did a great job of managing operating expenses and margins to partially mitigate the impact of the weather. At the same time our customers also benefited from about a 25 percent drop in the average selling price compared to last venture. Our retail volume for the second quarter rose 20 percent primarily due to the acquisition of Columbia offset by warmer weather and the impact of the recession on certain business segments. As you know this winter has been one of the warmest on record and for the quarter it was slightly more than 8 percent warmer than normal. Of the warm weather actually helped our PPX volumes, which were up 37 percent while our national account volumes were up about 10 percent. As you can see from the press release we are very pleased by the way our employees and managers responded to the warm as a normal weather. Our expenses did increase by 17 million due to the Columbia acquisition and the growth in our PPX business. However, if you add back Columbia's expenses for the second quarter of 2001 of 34 million. Expenses were actually down year over year by 16.7 million or 12 percent. Of the growth in PPX also added 2 million dollars of expense up for the quarter versus last year. Of course some of our expense is naturally declined with volume, but we are after our managers and employees to go further in this difficult environment to reduce expenses while not compromising on safety or customer service and they really stepped up to the play. As you can see from the numbers that attached to the press release, our margins are lower this year than they were last year. As I mentioned in call a year ago at this time our margins last year were exceptionally high due to a number of factors including hedge gains and some favorable supply agreements. Compared to any other year our margins this year are certainly healthy and we have not seen any unusual competitive activity. We continued to manage our margins to be competitive and to attempt to take volatility out of the price for our customers. We are also making significant progress on the integration of Columbia. We completed about 80 of our 90 and we converted over a 135 locations to our customer information system. We are on track to complete the integration by July. Today's volume on a weather adjusted basis margins and expenses are all as or favorable to our pro forma. We also have had a good customer and employee retention. In talking about Columbia, I wanted to mention that our maintenance capital will be a bit a higher this year due to the Columbia acquisition. At the time of acquisition we visited every plant and identified maintainance capital that would be required for safety and productivity improvement. Now that we finished the winter season we will be completing these upgrades, which will add about 3 million dollars to our maintenance capital this year. Still under exchange business PPX also performed well for the quarter. As I mentioned earlier volume was up 37 percent. As a result EBITA increased by 2.4 million. A year to date PPX has earned 4.5 million 3.8 million dollar increase from last year. And while the winter heeding season is coming to an end, the season for PPX is just beginning. Historically about 50% of our volume will be recorded in May, June, and July. This will be a unique year for PPX and for the whole grill cylinder industry and I would like to take a minute to describe what you are going to expect to see for the balance for the year. As of April 1st, in the majority of states, propane retailers will only be allowed to fill a grill cylinder thus equipped with an over filled prevention device or OPD. This device is an important safety upgrade that will be real benefit to customers. As a result of the new OPD requirements upto half of the cylinders that we exchange will have to retrofitted with the new valve. This cost is being passed along to customers in different ways by different retailers that the bottom line is that PPX will rack up a big increase in revenue and EBITA to the replacement of these valves, but will also see a significant increase in maintenance capital. At the end of the day we expect PPX to be modestly cash positive this year after being a consumer of cash for the last several years. Looking forward to the third quarter we continue to experience warm weather in April, but our non weather sensitive volumes in March and April have improved. We are taking this as an less impact from the recession in some of our customer segments and so we are optimistic about prospectus for the balance of the year. Our strategy will continue to be to focus on growth in our target customer base, on acquisition and on leveraging our national footprints through PPX and national accounts. Before I turn the call back to Lon I would like to once again acknowledge the performance of our employees and managers this quarter. They really responded to our calls to manage expenses margin and capital in line with the warm weather that we have experienced in compromising on safety for customer service. Lon

Thank you Eugene. Let me end our call by leaving all of you with the following thoughts. First we remained focused on growing our company in leading our financial goals growing our earnings 6 to 10 percent per year and increasing our dividend 3 percent annually. Indeed with our 3.1 percent dividend increase announced yesterday we certainly achieved that goal for 2002 with regard to earnings per share. We believe our fiscal 2002 earnings per share should be some where around 2 dollars and 50 cents of share if I take a little. Therefore it is that what would occur. We would exceed the high end of our 6 to 10 percent earnings per share growth goal for the fourth consecutive year. Second we are financially strong with significant cash on hand and at the same time we have excellent liquidity and access to capital markets. Third we all know it is a difficult time in financial markets and indeed it is a difficult time in our various industries. In times of stress companies that have remained disciplined and have a strong financial position like ourselves and Suburban Propane for example. We are able to capitalize on these difficulties encountered by others due to difficult environments or changes in strategies that occur. We have been able to seize the opportunities in the past resulting from these factors. In domestic and international propane markets as well as in our energy services businesses. I assure you we have the right people in the right place focused on growth opportunities and at the same time we have got the right people in place who are focused on operational excellence. As always we remain committed to meeting our goals and indeed as I said before we expect to meet them for the fourth consecutive year as we go forward throughout the remainder of 2002. That ends my remark. So Philip we are prepared to take some questions now.

Thank you. Today's question and answer period will be handled electronically. If you would like to ask a question please press the star key followed by the digit 1 on your touch-tone phone. Once again to ask a question please press the star key followed by the digit 1 on your touch-tone phone. We pause a moment to assemble our question and answer.

We go first to Ronald F. Londe , A. G. Edwards & Sons Inc.

Thank you. I was curious if you could give us an idea of what the retail volume gallons were on the same store basis? Was Columbia involved?

Let me take a share and then I will let Eugene correct me if I go straight on. Eugene mentioned we have done a lot blending and I forgot the number Eugene was it a 100 locations or 135.

It was actually 135 as converted to our computer system, but we have actually lended 80.

Lended 80 locations already and so when you lend the location and you start lending customers around locations to derive the efficiencies that you need to derive when you need do an acquisition. You lose track of those kind of things and so I cannot say on a store-by-store basis that we have those kind of numbers like it was given to you. I will tell you that we have been reading what our competitors have put out in terms of over all volumes and their volumes are down in the 8 to 10 percent range on our aggregate basis. Our volumes if you add all our pro forma if you look at that volumes are down in that same range as our competitors.

You mentioned that the Columbia was an add about 3 more million dollars to where you maintenance CAPEX, what do you expect for maintenance CAPEX now in total basis for 2002 and fiscal 2003?

I think I can comment on 2002 and may be Eugene can answer as well. In 2002, I know you are going to take a look at that. 25 million of maintenance capital for the year of which is a 5 million. No it is actually 3 million that is related to Columbia. We spent a little bit under a million so far. There was another 2 million in the balance of the year and PPX as I mentioned as I was talking about PPX for this valve issue. Maintainance capital for PPX is going up year over year.

1.5

What do you expect it to be?

I want it to include it in the 25 million and concluded what we have estimated on the PPX side.

How many locations do have now in PPX?

I usually check that before the call. I think we are in the range of 17,000. As you Ron we are the second largest PPX probably could get some of their server in their marketplace. By far you may get the third one a fraction of our size. It is really and one other and we have had growth in the number of locations. As I mentioned volume is up about 3 .7 percent and same store growth is up for the quarter about 18 percent. So the balance of that is due to growth in location. May be that is another way to answer without scientifically on the number of locations that they did not shut down.

Okay thank you.

Once again to ask a question please press the star key followed by the digit 1. We will go to Peter Snyder Capital .

Yes. Congratulations. Good results on the fairly adverse condition. The question I had is on the tax rate. It was like a little bit lower and I guess that is my questions. What do you expect to the tax rate going forward?

Let me comment on that and I do not think it will change considerably Peter, but let me comment. Because of the diversification that I mentioned in terms of business mix Antargaz has contributed a larger portion of our earnings this year than one would have expected and that is primarily due to the fact that they have not hit as hard as weather as we have and they really done a tremendous job in managing the business and margins have been quite higher overseas. As a result we account for that on equity method and that equity method comes in as already taxed earnings and when those already taxed earnings come in that lowers your over all tax rate. So the tax rate deploy to all our businesses are largely the same. It is just that when you add the taxes due to Antargaz the overall rates drops down. I do not think Tony we see except a change for the year. but let me turn that over to Tony.

Whatever we have for current quarter is our effective tax rate estimate for the year. That is why the number is derived as long as to the extend that the earnings of Antargaz vary from our assumptions and the earnings for the rest of the company vary. That ratio changes may be a little bit, but I think it is in the right area. The big reason for the change is in last year we have goodwill amortization, which comes through after tax basis if you will and will that go on an effective tax rate as the company really drops a lot.

Great thank you.

We get our next question from David with Edan .

I got on the call very late so you have covered this one. I know it may be difficult to account given the lending, but are you well ahead of schedule in the cost savings and synergies expected on the Columbia gas or is there way to track that?

We do have ways to track on the expense side and the news there is good. We are a bit ahead of where we expected to be on savings on Columbia. It could be experienced overall just in outstanding margins, expenses, volume, capital everything has been as good or better than what we have projected. So a good news there because our overall business expenses for lower than we expected and the Columbia expenses were down proportionately and we are getting a bit more savings than we thought we would get from the plant.

Okay and one other how much of the distribution do you think will be taxable this year for individual investors?

What if we buy their units. The best thing I can tell you is when we did our offerings in the fall we estimated that for people who bought on that offering they would see an 80 percent tax deferral over the first four years of ownership and in the first year it would be 100 percent. Just by the nature of the account. Having said that I think your investor need to know the that number moved with earnings of the partnership as well as reinvestment that made as you move through times. So it is very difficult to predict each year for example. But I hope that will gives you the broad range.

It is a real complicated. Sure I would thank that general and to continue to grow through acquisitions here and replenish the tax offsets.

Yeah. I think that is one of our strategies that we have been operating under for a number of years as they grow through acquisitions and reinvest in the business. So our expectation would be is to continue that as if we are successful in the futures we have been in the past.

Okay great thank you.

There are no further questions at this time. I would like to turn the call back over to you for any additional closing comments.

Okay. Well thank you Philip. Thank you all of you for participating in the call. As we have said and you have heard from each of us who have spoken, we are very pleased with the positioning of UGI, the positioning of AmeriGas, where we stand at this time, our results today is the future for both of these entities is extremely bright and we look forward to continuing to show you results that exceed expectations as we look forward throughout the rest of this year and into the future. Well thanks for your support and thanks for your comments. We will be in touch with you certainly no later than our next call. Thanks again.

That concludes today's conference. Thank you for your participation. You may now disconnect.