UGI Corp (UGI) 2003 Q4 法說會逐字稿

Good day and welcome to the UGI AmeriGas Partners 2003 earnings conference call. Today's program is being recorded. For opening remarks and introductions I would like to turn the conference over to Mr. Robert Krick, Vice President and Treasurer of UGI Corporations and AmeriGas Partners, please go ahead sir.

Thank you, Kelly. Good afternoon to you all. As we begin today, let me remind that you our comments will contain certain forward-looking statements which the management of UGI, AmeriGas and their subsidiaries believe to be reasonable as of today's date only. Actual results may differ significantly because of risks and uncertainties which are difficult to predict and many of which are beyond management's control. You should read the company's 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 oil, competition from the same and alternative energy sources, and political, legislative and regulatory changes. UGI and AmeriGas undertake no obligation to release revisions to these forward-looking statements to reflect events or circumstances occurring after today. Now, I would like to introduce your host, Chairman and CEO of UGI, Lon Greenberg.

Thank you, Bob. Let me also welcome everyone to our call. This call is going to be a little bit more awkward than other calls, given that I am overseas making sure that your investments overseas are going to be productive for the upcoming year. I trust you've all had the opportunity to review our press releases, reporting our 2003 fiscal year results. And I want to comment on those, and then comment on the future as well. Results for our fourth quarter ended September 30 were three cents a share or nearly 19% better than last year. And frankly, a bit better than I anticipated. This is also true with respect to AmeriGas, which reported fourth quarter EBITDA of $10.5 million which was triple that of last year. Given the seasonal nature of our businesses, our fourth quarter is not a particularly eventful period for us. In reviewing the quarter's results, I don't see anything which is meaningful from a trend point of view.

As all of you are aware, fiscal year 2003 was an excellent year for UGI. Earnings per share for the year grew 27% to 229. Which is at the high end of our 225 to 230 range estimate. Earnings reflect the return of more normal winter weather for AmeriGas, and colder-than-normal weather for our utilities. This was the fifth consecutive year in which we exceeded our 6-10% EPS growth objective. During the year, we raised our dividend to $1.14 a share an increase of 3.6%. This was the 16th consecutive year of dividend increases. Our dividend payout ratio fell to just below 50%. We also split our stock three for two during the year. Total shareholder return for the year was approximately 24%. We are awfully proud of that result. But even more proud that the five-year annualized total return to our shareholders exceeds 20%. During the year, we completed acquisitions in our gas marketing, electric generation, HVAC and domestic propane distribution businesses. These transactions are part of the reason we're optimistic about our results for next year.

Recognizing that this is an AmeriGas call as well, AmeriGas also had a fine year last year. EBITDA increased $24.8 million to $234.4 million. Earnings per unit rose nearly 27% to $1.42. Volume was 9% greater than the prior year. And AmeriGas made good progress on its acquisition program. AmeriGas also made good progress in improving its balance sheet. The ratio of net debt to total EBITDA improved to 3.76% at year-end. At the same time, interest coverage improved to better than 2.6 times last year. Nearly 2.7 times. Total return to an AmeriGas unit holder was also very good last year. In that it was in excess of 18%. Our employees obviously have done a fantastic job for our shareholders. They also have done a similarly excellent job for our customers. Recently, JD Powers named our gas utility the best service provider among natural gas utilities in the east. This recognition is illustrative of the high quality service provided by all of our employees in our business units. I want to take the time to thank every employee in our gas and electric, HVAC, gas marketing and domestic and international propane businesses for their efforts to make all of these companies the best in their industries.

Well, as all of you know, the mind set of our management team is to celebrate our achievements for a very brief period of time, and quickly move on to confront the challenges we face so we can maintain our tradition of performance. And before I address our prospects for next year, I would like to turn the call over to Tony Mendicino to comment further on our fiscal year 2003 results, and then have the call turned to Gene Bissell who will comment further on AmeriGas's performance. So Tony, why don't you take it away.

Thank you, Lon. Our earnings per share for the year were $2.29. Up 49 cents or 27% compared to last year. Colder weather this year and the continued execution of our fundamental business strategies, combined to produce this excellent result. For the quarter, we had a seasonal loss of 13 cents per share, compared to a loss of 16 cents per share last year. As Lon mentioned, the lack of heating degree days makes this a generally uneventful quarter with relatively small variances compared to last year. However let's take a look at some of the operating and financial details of our business group. First, AmeriGas EBITDA was $10.5 million for the quarter compared to $3.2 million last year. An increase of $7.3 million. This increase in EBITDA resulted from higher retail volumes, and unit margins, offset in part by higher operating expenses. UGI's net loss from AmeriGas was $8.8 million. $1 million better than for the same quarter last year. Gene will have more to say about AmeriGas's performance in his comments.

Net income for the quarter in our utility operations was $3.1 million, compared to $1.5 million for the same period last year. Gas utilities, seasonal loss was $1.1 million, half a million dollars larger than last year. Net income in electric operations were up $2.1 million compared to last year at $4.2 million. And our gas utility, residential and small firm volumes were essentially flat for last year, while both large firm and interruptable volumes were up. This produced a modest $400,000 increase in gross margin. The improvement in gross margin was offset by increased operating expenses, up approximately a million dollars, and reduced miscellaneous income, down about a million dollars. In electric operations, both our electric utility and our electric generation enjoyed increased net income. Net income from electric utility increased $600,000, owing to higher unit margins resulting from lower purchase power costs, offset in part by lower volumes due to a cooler summer. Net income from electric generation increased $1.3 million resulting from our acquisition of an additional 83 megawatts of generating capacity at Conemaugh. At the end of June this year.

Of our 102 megawatts of capacity at Conemaugh we have sold 50 megawatts of output at a fixed price through December of 2004. And another 25 megawatts at a fixed price through this March. Moving on to our other operations, first, energy services net income for the quarter was $700,000, a $1.3 million decrease from last year. The benefit from higher volume sold primarily as a result of the TXU acquisition was offset by lower unit margins and increased operating expenses. Operating expenses increased primarily as a result of the TXU acquisition. Next, international propane had a seasonal loss of $2.6 million this quarter compared to a loss of $400,000 for the same quarter last year. FLAGA lost $600,000 in the quarter as lower volumes and higher operating expenses offset the benefit of higher unit margin. Antargaz our French propane investment lost $1.7 million this year compared to a gain last year of $300,000. Last year's gain resulted in part from a refinancing completed by Antargaz for the period.

Moving now to balance sheet considerations, on a consolidated basis, UGI's total debt on September 30 was just under $1.3 billion, about $50 million less than last year. At year end, UGI had $116 million in investable cash on its balance sheet. AmeriGas closed the year with $927 million in debt on their balance sheet, down $28 million from last year. Other than letters of credit, AmeriGas was not using its revolver at year end and had about $48 million in cash on its balance sheet. Gene will now expand on AmeriGas's results.

Thanks, Tony. As Lon mentioned we're pleased to be reporting record earnings of $1.42 per unit. Compared to $1.12 last year. About a 27% increase. We achieved this level of earnings despite two expenses we incurred this year that diluted earnings per unit by about 13 cents. So we will improve earnings in future years, I'm referring to the $3.8 million one time cost related to our reorganization and a $3 million loss on the early retirement of some debt. With this year's return to normal weather we were able to demonstrate the effectiveness of our strategies to grow our business organically and through quality acquisitions like Columbia propane. Our volume for the year was up 9%. On weather that was normal. Compared to last year, when the weather was 10% warmer than normal. While the majority of the volume increase is due to the return of normal weather and acquisitions, of the increase in volumes also reflects growth in our business from PPX national accounts, and our traditional customer base. We're pleased to see that the investment that we've been making in improving our sales and marketing capabilities and our focus on customer service are resulting in solid organic growth. Unfortunately, while we're reading many reports about a recovery in the economy, we have not seen much in the way of a recovery in our commercial and industrial segment.

One of the challenges we faced this year was a 30% increase in the cost of propane. As we have in prior years, we were able to pass this on to our customers and maintain our margins while continuing to charge competitive prices. There was a modest increase in the margin per gallon but this was mostly the result, the change in our sales mix. Expenses were up about 8%. Excluding the impact of the reorganization. A portion of the increase was due to the 9% increase in volumes. However, a third of this increase resulted from higher general and medical insurance expense. These increases in insurance expense are something that every industry is facing. And we are certainly doing whatever we can to control these expenses.

Expenses were also up due to higher incentive compensation, and savings plan contributions. Last year these expenses were much lower due to actions we took to offset some of the impact of the near record warm weather. The other expense areas that were an issue for us were vehicle fuel and bad debt. Vehicle fuel increased due to the high cost of propane and diesel this year, and bad debt increased due to our 25% increase in revenue. PPX results for the year were not as strong as we had expected but we were able to increase our cash flow from PPX by about a million dollars. To $5 million. PPX contributed $22 million of EBITDA, compared to $27 million last year. Volume increased by 7%. And we increased our store count from 15,000 to 20,000. About half of the increase was due to the acquisition of active propane and the balance to new locations. But the decline in EBITDA for PPX resulted from our inability to recover the 30% increase in the cost of propane from our customers in this segment. Fortunately, the number of cylinders that required new valves also dropped significantly so our capital expenditures for PPX dropped by more than the drop we saw in EBITDA.

Our national accounts business had another strong year. Growing by 15%. And we were also pleased to see that our efforts to improve service and strengthen our sales and marketing capabilities resulted in growth in our traditional customer base. In addition to beefing up our sales staffing and introducing growth incentives for our field employees this year we introduced a new customer service vision to be the most reliable, the safest and the most responsive propane company in each of the markets we serve. Based on our research, we know that these are the attributes that our customers most value. Now, we have initiatives in each of those areas to make sure that our vision becomes a reality.

Acquisitions also contributed to our growth this year. We completed four acquisitions during the year that will add 10 million gallons annually and on October 1st, we closed on the acquisition of horizon propane which will add another 30 million gallonss. Horizon formally known as Level propane had about 90 locations, spread over 12 states. About 80% of the volume we gained from this acquisition was residential customers. While AmeriGas has overlapping locations in most of the markets that horizon served, we are not planning to consolidate locations until the end of the heating season, because we don't want to jeopardize customer service. For this reason, you will not see most of the benefit of this acquisition until our next fiscal year. The other big news for AmeriGas this year was our reorganization. We completed a thorough review of our overhead structure, and we made changes that will result in more than $10 million in expense reduction on an ongoing basis. More important to us than the expense savings, we streamlined the business in a way that is making us more effective as an organization. With the new structure now firmly in place, I can confidently report that we are making decisions more quickly and executing them more effectively.

Now, let me just make a few comments about the quarter. As you know, the fourth quarter is not terribly significant for us. We are pleased however to be reporting a $7 million increase in EBITDA, primarily as a result of 8% higher volumes. The higher volumes reflect colder weather in September, along with the benefit of our growth initiative. Expenses were up about 4.5%, basically due to the same issues that I talked about for the year, on insurance expense, incentives, higher savings plan expense and higher vehicle fuel expense. We also had about $700,000 in expenses related to the reorganization in the quarter. Turning to the current fiscal year, we will continue to grow our business organically through a strong local focus on customer retention and growth. Supported by our national sales and marketing resources. We will also take advantage of our geographic coverage and expertise to grow PPX and National Account.

We will pursue a strategy of disciplined growth through acquisitions, both of local independents and regional and national propane marketers to the extent that we can buy them at a reasonable multiple. We will also be diligent in controlling our costs, changing our business practices, and investing in technology to improve productivity. Of course, the key to achieving our goal this year will be our well-trained and talented team of employees and managers. They are the ones that I want to thank for helping us to achieve our record results. In fiscal year 2003. We had a tough winter in many parts of the country and once again, they rose to the challenge, and provided excellent service to our customers. I continue to consider their dedication to our customers and their commitment to the company to be a real competitive advantage for AmeriGas. Thank you, Lon. Let me turn it back to you.

Okay. Gene. Thanks a lot. Let me leave everybody with the following thoughts as we end our presentation. I've stated publicly before that I expect our earnings to approximate $2.40 for our 2004 fiscal year. And I want to reiterate that today. Similarly, I expect EBITDA for AmeriGas to approximate $250 million. Of course, both estimates assume that winter weather will be approximately normal. From a business standpoint, from a business unit standpoint, earnings from our gas and electric distribution utilities should be somewhat lower than last year, given the 7% colder-than-normal weather that those businesses experienced last year. Somewhat offseting that decline will be contributions in our gas utility from customer growth. The growth in AmeriGas's EBITDA will result from contributions from acquisitions and internal customer growth. From PPX and from National Accounts, offset somewhat by a small decline in unit margins, and modest growth in our overall operating expenses.

We expect to see increased contributions from our electric generating assets, given our purchase of additional generating assets last year. We also expect to realize the full-year benefits of our TXU acquisition and our gas marketing business. A solid improvement in contributions from our international propane businesses. And a modest improvement in contribution from our HVAC businesses. In terms of the timing of our earnings, you may recall that in last year's first quarter, our utility service territories were quite cold, and it turned warmer in the second and third quarters. Accordingly, you should expect the bulk of our forecast earnings improvement in 2004 versus last year to come in the second and third quarters of 2004. I want to point out that we remain strong financially and have approximately $115 million in investable cash, as Tony noted. We are also actively seeking additional growth opportunities in all of our businesses. We will be pursuing those growth opportunities, which are consistent with our strategy, and which aid us in achieving our financial goals. You can expect us to seek out domestic and international propane growth opportunities, as well as opportunities in the gas and electric distribution, marketing and service businesses. Let me close by saying that we know we can't be complacent. That our past success does not assure us future success. And we remain unwavering in our commitment to you to you to deliver above average long-term shareholder value through our growth and income orientation. That ends our prepared remarks, so Kelly why don't I turn it back to you to see if you can get some questions.

Thank you, gentlemen. At this time if you do have a question please signal by pressing star one on your touch-tone telephone. If you are using a speaker phone we ask that you please pick up the hand set so that your signal can reach our equipment. Again that is star one. For any questions at this time. And we will take the first question from David Schanzer from Janney Montgomery.

Yes. Good afternoon, gentlemen.

Hi, Dave.

Hi, with you on the ground there, in Europe, Lon, my question is directed to specifically to the international propane business, being over there at this point, I know you alluded to some potential opportunities there. Are you finding things to be as you would expect it? Or is there any surprises that you can inform us of? And also maybe elaborate a little bit on those opportunities?

Sure, I think from an earnings standpoint, Dave, I mentioned that we expect to see a solid improvement in international contribution in '04. Although we made good money in last year, as you know. In terms of overall opportunities, there are some opportunities over here that we're examining. You know our policy is not to comment in general on what we're doing and how we're doing it, and so I don't think it is appropriate to do that, beyond the fact that I said that one of our strategies is to grow our international propane distribution businesses, and we will remain a disciplined buyer and that -- in all acquisition opportunities that we look at. But if there is an opportunity that we think adds value to our shareholders, and presents an accretive opportunity, well, we will certainly take a hard look at that.

Lon, does that also follow that you're happy with what you have?

Dave, you know me well enough to know that I'm never happy with anything. I think there is room for improvement. And I think the comment I made that we ought to see a solid contribution increase next year from our businesses reflects that judgment.

Got it. Thanks.

Yep.

We will move on to Ron Londe with A.G. Edwards.

Thanks. Maybe you can give us some insight into anything that you see going to this, you know, early into this winter, that's changed from last winter, with respect to the fundamentals of the business? You know, pricing, margins, competition, that sort of thing.

Okay. Ron are you referring to the propane business?

Yes, right.

Okay. Why don't turn that over to Eugene to answer that.

Nothing has fundamentally changed. You know, we -- starting out a bit warmer than normal right now, but whenever I look at October and November, I remember that there is many degree days in January as in those two months, so it's early in the year, so we -- it is a little too early to say anything about the weather at this point. Competition hasn't changed materially. As Lon said, we expect margins to be roughly flat to down a small amount in the coming year. But there isn't any material change versus last year at this time.

Okay. On the Horizon acquisition, do you expect the EBITDA margins to be similar for this season, for the winter? To your overall margins?

Well, this first year, we've got -- we aren't able to pull out all the expenses this first year that we would expect to pull out. So I would not expect them to be contributing much when you get down to the net income line this year. It is really going to be kind of an even game. And then in the spring, we will consolidate it and the following year, you are going to see some nice benefits from that acquisition.

Well, your EBITDA per gallon was about 22 cents for the year, for fiscal 2003. Do you think that that's something that you can match with the Horizon acquisition this year or is it -- we're going to have to wait until 2005 to get close to that?

I can tell you in 2005, we will certainly get close to that, or even a little bit better, because it's a heavier retail, heavier residential business, so in general, the EBITDA per gallon is going to be better. This year, the EBITDA per gallon for Horizon, I couldn't tell you off the top of my head. I remember that it is pretty much offset by the, you know, the financing associated with it, so it -- you know, it is just not -- but I can't tell you off the top of my head what it is on a per gallon basis.

Okay. One other kind of picky question. In the cost and expenses section of the P&L statement, under other, for the year, you had income of $8.9 million versus $4.4 last year. What was the difference there?

Okay. There were a couple of things that contributed to that. Finance charges were up a couple of million. And last year, we had a hedge loss of a couple of million. So that's the $4 million swing.

Okay. Thank you.

Again, that is star one for any questions at this time. And gentlemen, it appears that there are no further questions. Mr. Crick, I will turn things back to you for additional or closing remarks.

Bob, you want me to close?

Yeah.

Yeah, okay. As usual, I want to thank all of you for your kind attention. And confidence in us as a management team. And all of our employees. We look forward to having a terrific year for you. And continuing our tradition of performing excellently. So with that, I will leave you and we look forward to our January call, when we have an opportunity to tell you about all the progress we've made in the company at that time. So have a good evening, and we will talk to you all soon. Thank you.

That concludes today's conference call. Have a good day.