UGI Corp (UGI) 2006 Q1 法說會逐字稿

Good day everyone and welcome to the UGI and AmeriGas Partners first quarter fiscal year 2006 earnings results conference and Web cast conference call. This call is being recorded. At this time for opening remarks and introduction I would like to turn the call over to Mr. Bob Krick. Please go ahead, sir.

Thank you, Christina. Good afternoon and thank you all for joining us today. As we begin let me remind you that our comments will contain certain forward-looking statements, which the management of UGI and AmeriGas believe to be reasonable as of today's date only. Actual results may differ significantly because of risks and uncertainties that are difficult to predict and many of which are beyond management's control. You should read the annual reports on Form 10-K for a fuller list of factors that could affect results but among them are adverse weather conditions, price volatility and availability of all energy products including natural gas, propane and fuel oil, increased customer conservation measures, political, economic, legislative and regulatory changes in the U.S. and abroad, currency exchange rates and competition from the same and alternative energy sources. UGI and AmeriGas undertake no obligation to release revisions to these forward-looking statements to reflect events or circumstances occurring after today.

With me today are John Walsh, President and COO of UGI, Gene Bissell, President and CEO of AmeriGas, Tony Mendocino, Senior VP and CFO of UGI and, of course, your host, Chairman and CEO of UGI, Lon Greenberg. Lon?

Thanks, Bob. Welcome everybody. I trust you've all had the opportunity to review our Press Releases reporting our first quarter results. We're going to do things a little differently on this call in order to streamline our presentation. I'm going to ask Tony to review our overall financial results first. John Walsh will then comment on operating trends along with Gene who will provide further color on AmeriGas's results and then I'll come back at the end of the call to give you some concluding remarks. So at this point let me just turn it over to Tony.

Thank you, Lon. We had a very solid quarter with earnings per share at $0.54 compared to $0.74 per share last year. Last year included a one-time gain of $0.14 at Antargaz for non-income tax accruals. Absent this one-time gain of-- gain the comparison is $0.54 per share this quarter versus $0.60 in fiscal year '05, a decline of $0.06 per share or about $6 million. Despite a difficult product cost environment, all of our domestic operations outperformed last year on a net income basis to partially offset the substantial decline in net income at Antargaz. As you will recall, our first quarter results for last year were dominated by Antargaz's extraordinary results due to the non-income tax accrual mentioned above of their unsustainably high unit margins and the beneficial effects of a weak dollar.

Let's get into some of the details first with our domestic propane business, AmeriGas. AmeriGas performed well during the quarter despite weather that was 4% warmer than normal but about 4% colder than last year. AmeriGas's EBITDA was $92.2 million, up from $77.3 million in fiscal year '05 and '05's EBITDA did not include the gain on the sale of Termaline assets. Retail volume for the quarter was down about 5 million gallons compared to last year as reduced residential demand due to conservation and reduced agricultural volumes due to lower crop growing demand offset volume gains at all other customer categories. The negative effect of the decline in volumes and the modest increase in operating expenses were more than offset by higher unit margins to result in the increase in EBITDA.

At the net income line AmeriGas contributed $14.9 million to UGI compared 10.4 million for the first quarter of fiscal year '05. Gene, as always, will provide a more fulsome explanation of AmeriGas's performance in his comments. Net income in our utility operations was $21.9 million compared to 17 million for the same period last year. Net income in gas operations increased 3.9 million to 18.4 million on weather that was 1% warmer than normal but nearly 4% colder than last year. Throughput was essentially flat quarter-to-quarter with gross margin increased more than $5 million as higher unit margin residential and small firm customers-- customer volumes increased and volumes from lower unit margin large firm and interruptible customers decreased.

Operating expenses for the quarter declined as reduced equity based long-term compensation expense was partially offset by increased bad debt expense. Customer additions for the quarter were in line with customer gains for the same quarter last year as we continue to grow our core heating customer base.

Net income in electric operations was $3.5 million, up 1 million from last year on weather that was 3% colder than normal and 3% colder than last year. Gross margin increased as a result of a 3.6% increase in total watt hours sold and operating expenses were down slightly.

In International Propane declined to $18.4 million from $47.2 million. 28.5 million of the $28.8 million decline is attributable to Antargaz. Last year's net income was inflated by a one-time $14.9 million gain related to a non-income tax item, unit margins that were unsustainably high and a weak dollar. Weather in France this quarter was nearly normal and 3% colder than last year. However, winter got off to a slow start in France with October weather more than 50% warmer than normal.

Antargaz volume was 92.7 million gallons, down from 103.8 million gallons last year. The volume decline relates to the late start of winter, customer conservation and poor crop drying demands. Gross margin declined as a result of the reduced volumes and unit margins that were at or a little lower than more traditional sustainable levels.

Net income at Flaga was down $600,000 on lower volumes and lower unit margins coupled with flat operating expenses. Finally, in energy services net income was $14.9 million, up 1.3 million from last year. Net income from energy services gas marketing business increased by $900,000 as a modest increase in unit margins and reduced uncollectible expenses offset a decline in their volumes sold. In electric generation net income was flat to last year as the benefit of higher unit margins was offset by fewer kilowatt hours sold.

Moving now to our balance sheet considerations, AmeriGas finished the quarter with no revolver debt and $912 million of total debt. Total debt is $19 million lower than it was at the end of the December quarter in fiscal year '05. On a consolidated basis UGI's debt on December 31st was $2 billion compared to 1.7 billion last year. The increase is primarily due to an increase in debt in Antargaz as new debt was placed to finance the call of approximately $200 million of public high-yield debt, which was completed in January. At calendar year-end UGI had $160 million of investable cash.

Over the last several months we have refinanced debt at both AmeriGas and Antargaz. As a result interest expense at AmeriGas should decline by approximately $5 million for the balance of fiscal year '06. This equates to about a penny or two per share benefit to UGI. Interest expense at Antargaz should decline by about 7 million euros, which equates to about a $0.05 per share benefit to UGI over the balance of fiscal year 2006. John Walsh will now expand on the results of our domestic businesses. John?

Thanks, Tony. Each of our domestic businesses delivered a strong first quarter performance when compared to prior year despite the continued challenges of warmer than normal weather, customer conservation and high energy costs. During our last call I stressed the commitment of our business teams to focus on expense control, cash management and margin improvement as we enter the 2005-2006 heating season. This proactive approach paid off in Q1 as we delivered growth in our targeted market segments, effectively controlled operating expenses, limited our bad debt exposure and increased unit margins in each of our businesses. Gene will provide you with a detailed review of AmeriGas performance but I'd like to comment on two specific areas of strategic importance.

Growth in our PPX and strategic account segments was outstanding. We're excited about the prospects for continued growth in these segments where our national footprint and high service levels enable us to differentiate the products and services offered by AmeriGas from those of our competitors. We continued to grow our customer base and our core residential segment in Q1 despite the difficult marketing conditions-- market conditions. Continued growth in this key segment is a priority for Gene and the entire AmeriGas team.

Our energy services business has shown the ability to deliver strong performance across the full spectrum of market conditions. This trend continued in quarter one as net income in energy services increased from 3.6 million to 4.9 million. Key contributors to this increase were higher income in our energy peaking business, customer gains and increased throughput at our propane import terminal in Virginia and a reduction in bad debts expenses as we focused our gas marketing efforts on the most credit worthy customer segments.

The focus on margin improvement in very evident in our natural gas marketing business where an increase in unit margin helped to partially offset the impact of reduced volumes. We continued to be pleased with the progress made in energy services and believe that the innovative products and services offered by this team are highly valued by our customers as they seek cost effective solutions in today's volatile energy markets.

Both the gas and electric utilities grew operating income in quarter one. Net income in the gas utility was 18.4 million, a significant increase over the 14.5 million achieved in the first quarter last year. Within the gas utilities volume grew in our core retail customer segment due to weather that while slightly warmer than normal was 4% colder than last year. Our analysis of customer demand patterns show weather-adjusted consumption at levels consistent with our expectations. We continue to grow our gas utility customer base with over 3,000 new residential, commercial and industrial customers added in the quarter. Net income in our electric utility increased to 3.5 million in the quarter from 2.5 million in the first quarter of last year. We benefited from higher kilowatt hour sales across all of our customer segments due to colder weather and improved margins resulting from increased generation rates and lower expenses.

The announcement last week of our intention to purchase PG Energy demonstrates our confidence in our utilities business. This represents a great opportunity to expand one of our core businesses, grow our customer base in eastern and central Pennsylvania and bring a talented and experienced group of people on to the UGI team.

Finally, I'd like to emphasize our ongoing commitment to enhancing customer service levels in each of our businesses. This commitment takes many forms with examples being our work with the Public Utility Commission and the State of Pennsylvania on customer assistance programs to provide support to our gas utility customers who need assistance paying their bills, our investments in automated meter reading systems in both our electric and gas utilities to simplify the meter reading and customer invoicing processes and finally, our ongoing rollout of end cap computers to our AmeriGas delivery fleet to increase delivery efficiency. We continue to face the challenges of warm weather and high energy cost in quarter two. Rest assured that we will maintain our focus on expense control, cash and credit management and margin improvement in the months ahead. I would now like to turn it over to Gene who will provide you with more detail on AmeriGas's performance.

Thanks, John. We are pleased to be reporting an increase in EBITDA of 15 million on a comparable basis despite warmer than normal weather, conservation and high energy prices. Unit holders should also be pleased that in spite of a challenging environment distribution coverage for the trailing twelve months was 1.3 times. As Tony mentioned, weather was about 4% colder than last year but volume was down about 5 million gallons or 1.7%. Since about half of our volume is weather sensitive we would normally expect the colder weather to result in an increase in volumes compared to last year. The lower volume was partially due to lower sales to our agricultural customers due to drought conditions in many parts of the Midwest. We had a significant drop in propane used for crop drying.

Our residential volumes were also lower and we assume that this was due to customer conservation although it's a bit hard to measure the impact of conservation until the end of the heating season. Offsetting these lower volumes to some extent was double-digit volume growth in both PPX and strategic accounts. Now PPX volume was up 20% and the strategic accounts volume was up 13%.

Propane prices continued to set records this quarter. The average price of propane in Mount Belleview was $1.06, off 25% from last year and up 82% from the previous five-year average. In addition to customer conservation higher energy prices also affected our expenses. Our vehicle fuel expense was up 30% accounting for over half of our year-over-year expense increase. High propane prices also affected our reserve for bad debt. We reserve for bad debt expense based on revenues so as we pass on the increase in the cost of our propane to our customers, our bad debt expense increases. With a 14% increase in propane revenues we ended up reserving more for bad debt expense. Utilities expenses were also up for the quarter. Together these energy related expenses accounted for most of the $2.8 million increase in expenses.

Let me also mention the results for the quarter on our core strategies of growth through acquisitions, PPX strategic accounts and in our traditional customer base of residential and commercial customers. As I noted earlier we had strong growth in PPX and strategic accounts. Growth in the base business while positive was not as strong as last year. It appears that the high propane prices and a less robust housing market may be affecting the number of new propane customers. We are launching new sales and marketing efforts to improve customer retention and sales growth for the balance of the year. We did not complete any acquisitions in the quarter but we are reviewing a number of opportunities and we still expect to be able to meet our goal of adding 20 million gallons on an annualized basis.

Looking forward with our volume, our volume in January obviously was adversely affected by the exceptionally warm weather. According to NOAA January weather through the 28th was more than 27% warmer than normal. Now fortunately there's still a lot of winter left and we'll be looking for colder than normal weather for the rest of the season to offset the impact of the warm weather in January. We can't control weather or customer conservation so we're focusing our efforts on mitigating, to the extent possible, the impact of lower volume in the way that we manage the business for the balance of the year. We'll also be concentrating on growing our business through acquisitions, residential and commercial customers, PPX and strategic accounts.

Finally, I'd like to thank my fellow employees for their many contributions to our strong results for the quarter. Their careful management of margins and expenses helped us offset the impact of lower volumes and higher energy prices. I'm counting on them to continue delivering excellent service to our customers, which is the key to delivering strong returns for our unit holders. Now, with that, let me turn it back to you, Lon.

Thanks, Gene. I'd like to leave everybody with the following thoughts as we end our prepared remarks. First, diversification inherent in our businesses is doing exactly what diversification is supposed to do, reduce risk. In fact, our earnings performance this quarter was a bit better than we had expected at the beginning of this fiscal year. Our domestic businesses, as John said, made good progress notwithstanding the challenging environment associated with high energy prices. We're doing exactly what we said we would do. We are managing the things that are within our control and we're doing so quite effectively.

Similarly, we anticipated the lower level of earnings from our international businesses and I want to emphasize something for you so you can put it in context. We are not saying that Antargaz is performing poorly. On the contrary last year's results, as Tony said, were extraordinarily due to the unusually high margins, strong Euro and the one-time tax benefit we received. Antargaz's performance remains in excess of our expectations when we purchased the remainder of the equity in early 2004.

As you heard from everyone else, yes, we are experiencing some conservation and, of course, we are trying to take actions to help our customers with their bills in this environment, but neither the conservation nor the level of bad debt is worse than we expected. We anticipated these things. Most importantly we remain focused on operating our businesses effectively and on capitalizing on opportunities, which you would want and expect us to. For example, the two refinancings that Tony mentioned, one Antargaz and one AmeriGas, were designed to capitalize on advantageous financial market conditions and, as Tony pointed out, those two refinancings will benefit us in the future.

Likewise, we have been active in reviewing opportunities to redeploy our cash balances and that's, in fact, what we said we would do. I can tell you that we had opportunities to complete a number of transactions that we concluded were not beneficial to you as our owners and so we did not complete those, but happily we were able to uncover transactions that were advantageous to you and we did complete those transactions in our efforts to build value for the future. As John pointed out, certainly the PG Energy transaction is a good one for this Company. It's a domestic business in an industry we excel at managing and it will be accretive in the first full year of ownership. At the same time, we continue to work on a number of other transactions like the Flaga potential Eastern European Propane joint venture, which although quite a bit smaller in scale than the PG Energy transaction, will also be accretive to us in its first full fiscal year.

Gene, Tony and others have mentioned that we've experienced quite a warm January and, of course, those of you who know us realize that that presents us with a variety of challenges as we go forward. Yet notwithstanding those challenges, we're affirming our guidance assuming we experience normal weather from here on in, as the benefit of some of the things we have discussed in this call should help us offset a very slow January. And frankly more important to me and the rest of our management team, and it should be more important to you than how weather treats us and hence how our short-term earnings will turn out, is the fact that we continue to build value for the future. Our focus remains on meeting our long-term financial goals of delivering above average shareholder return by growing our earnings 6% to 10% annually and increasing our dividend 4% annually. We've taken a number of steps that will help us secure that for next year and we are confident that we will be able to deliver on those in the future as we go forward. So at this point let me turn the call back to you to answer any questions you have, so Christina, you want to take some questions?

[Operator Instructions] And our first question will come from [Matthew Liney] with UBS.

Hey guys, it's actually [Darin Matthew] calling from UBS. Just a couple of housekeeping type questions, when we look at the EITF at AmeriGas would it be fair to say that we can add back the charge because it's kind of non-recurring in nature, as it will smooth itself out throughout the course of the year and kind of look at it on an EPU basis at $0.96?

I think that is correct, yes.

Okay and you guys had also mentioned that there's extremely strong coverage at AmeriGas and so fourth. Would it be fair to say following the heating season barring any significant changes and so forth that the Board would probably review its distribution policy and kind of similar to happened last year and so forth?

Everyone sees the wisdom of reviewing our distribution policy at the end of winter rather than now, given the strong start we had through the first quarter in AmeriGas and, of course, then the very slow January, given that weather. I think it would be presumptuous of me to tell you how the Board would vote on a review of the distribution policy, but I can tell you it is something that we said last year when we raised our distribution that we did not do lightly and that our Board would review the distribution policy on a regular basis and end of winter is probably the best time for the Board to review that policy.

I definitely agree. Just wondering if you could sort of, you know there is definitely a big jump at AmeriGas, as well as-- and there was changes in earnings in terms of the international business in terms of Antargaz. I was wondering if you could sort of break out some of the deltas for us in terms of what-- I guess at AmeriGas what was related to conservation, what's related to margin growth and so fourth and if you can kind of do the same thing at Antargaz as well too, but in respect to what's currency, what's conservation and what's margin?

Let me take a shot at that. I'll be probably less precise than you, Lon, but I'll be directionally correct. At AmeriGas the preponderance of the improvement in EBITDA is related to margins. The team did an excellent job of managing their expenses. As Gene pointed out, the expense growth is very modest, but for the higher year-over-year energy prices I think you would have seen expenses drop frankly.

The margin increase is due to a variety of circumstances and I want to emphasize to you that we are not pricing in a way that's unusual for the marketplace. We're consistent with our pricing philosophy and what happens in this environment is there's more volatility as prices get higher and sometimes due to that volatility and good supply situation that we have is you have an opportunity to improve your margins a bit.

Our prices, we're quite confident. We look at pricing all the time. Our prices are very competitive and are our relative standing versus the industry in terms of our prices is through the winter months certainly has been a little bit better than it was in the prior year, so we feel good about our pricing. Our customers should feel good about our pricing and at the same time we were able to capitalize on an opportunity for some better unit margins. On the volume side Gene mentioned ag was lower year-over-year and that was a piece of it.

Conservation in the propane industry is at this time of year very difficult to predict because you don't have a constant flow of volume and so what you have to do is look at your deliveries and unfortunately the industry has not evolved to the point where we can tell what's in our clients tanks and so usually what we try to do is wait for an entire season and then take a shot at conservation. I would tell you that it's clear to us that there's some conservation going on out there. It would be impossible not to have conservation, but it's entirely consistent with our expectations for conservation and so was within our planning framework that it's occurring. On the--

Can you--

Go ahead. I'm sorry.

Would you be able to quantify to us what it was that you were expecting?

I would tell you that it was on the order of a couple of percent, or so and again, preliminarily it's hard to tell where it's really shaking out. It was probably on the order of I would say 2% to 4%, 3% to 4%. It was in the ballpark of what we expected and it's hard to tell whether it's less than that or not and we'll just have to wait until the year goes on.

Okay, that answers the bulk of my question. Thank you.

Our next question will come from Janney Montgomery Scott, David Schanzer.

Could you tell us what percentage of US propane revenue is relying on the agricultural business, the grain drying?

I do know what percentage of that is. I'm going to try to remember off the top of my head. Volume, you mean volume?

Yes.

I know it's in the 10-K. We have a breakout. Isn't that right, Margaret? But I don't remember it offhand, the percentage. It's relatively small, but--

Yes, I'm going to-- 5%. I'd say between 5 and-- certainly 5% and 6%,7%, somewhere in that area, David, of total volume.

Same overseas or is that a little different?

Overseas, you know what? Frankly, I don't know. I know that when we looked at their volumes for this quarter a fair amount of the shortfall that they experienced was due to lower ag volumes as well and ag volumes, as you know, are not the highest margin volumes. They're decent margins. Otherwise we wouldn't do it, but it is largely dependent on weather trends, how moist it is during the season and part of ag volume is also chicken brooding, which is basically heating chicken coops and things like that, so some of it-- true ag, which is crop drying and some of it is more tied to keeping animals warm.

Okay and at the utility, the U.S. utility, what was the return on equity for the year? Do you have that yet?

You know what, Dave, I don't have it yet. What we have a tendency to do is just look at our net income over our asset base, but that's not allowed return as such.

Right, I was talking about utility returns.

Yes, no. I don't know that John Barney has filed his stuff yet with the PUC, so I couldn't tell you what it was for rate making purposes. As you know, there are a lot of adjustments that occur from books to rate making and so I can tell you last year I know and the numbers aren't a whole lot different than last year, we were very comfortable with our returns that they weren't excessive in terms of rate making and I'd say in the, I don't know, not far off what the PUC allows in returns from a regulated standpoint. But on a book basis, obviously, the book rate return betters are different. Bob Krick is telling me there were 11 to 12 last year nominally on a rate making basis and on a book basis, obviously, somewhat better than that.

All right. You seem to be fairly enthusiastic about the PPX performance in the quarter. Can you give us any additional color on that?

Well, there are probably couple of reasons for it. One, it was warmer than normal and so we figure people, you know particularly if you look at October and November it was quite a bit warmer than normal. We really got all the cold weather in December, so we think people grilled a little bit longer, so there is an upside to warmer than normal weather, although from a volume standpoint it's not particularly significant particularly this time of year. The other thing that helped PPX, again, a silver living of an otherwise bad thing is the hurricanes. Demand related to the hurricanes in the areas that were affected by hurricanes last year certainly helped boost their volume and then we did gain some stores, so it was a combination of things that affected it but PPX, this is not an important quarter for PPX. Really we're getting for the grill season, which will be starting in May and about 50% of their volume is May, June and July, so that's the key time period, but we're glad to see strong volumes out of season.

All right, thanks.

[Operator Instructions] [Sido Capital Management], [Peter Isle].

Tony, I didn't catch at the beginning what you mentioned on the savings, the interest savings. Could you go over that again and whether that was for the remainder of the year or for a twelve months forward basis?

It is for AmeriGas the balance for the year, their interest expense ought to be down about $5 million.

Okay.

And Peter, that looks like $0.01 or $0.02 a share to UGI.

Okay.

And for Antargaz it should be down about 7 million euros, which looks like $0.05 a share to UGI. That's, again, the balance of the year.

Balance of the year, got it, great. Okay, thanks very much.

[Operator Instructions] And at this time, Mr. Krick, there appears to be no more further questions.

Okay, I want to thank everybody for participating on the call. Let me emphasize, again, that we are confident that we are building value for the future. We feel good about the remainder of this year assuming we get some weather that's a little bit different than January and I think you'll find us keeping our commitments on earnings growth and dividend increases in the future, so I look forward to talking to you next call and see you soon. Bye-bye.

That does conclude our teleconference for today. We'd like to thank everyone for your participation and have a wonderful day.