UGI Corp (UGI) 2006 Q3 法說會逐字稿

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

Thank you, Miranda. Good afternoon and welcome to our call. 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, freight 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 Mendicino, Senior Vice President Finance and CFO of UGI, and, of course, your host, Chairman and CEO of UGI, Lon Greenberg. Lon?

Thank you, Bob. I appreciate it. Let me welcome everyone to our call, as well. I trust all of you have had the opportunity to read our press releases reporting our 2006 third quarter results. UGI reported earnings per share of $0.18 compared to $0.01 last year. Eliminating one-time items from each year shows the comparison to be $0.13 this year compared to $0.10 last year, which is, as you know, a nice improvement. Amerigas also reported improved earnings. Its EBITDA improved to $20.7 million from $19.7 million in the prior year, if you adjust out last year's -- from last year's number the loss on the extinguishment of debt.

There are really only two noteworthy things I'd say about our third quarter this year. First, the weather. The weather this quarter was unusually warm. In fact, the weather was in excess of 20% warmer than normal in some of our business units. Despite this warm weather, we were able to have comparable operating income year-over-year despite last year having much cooler weather than we had this year. That is our operating income on much warmer weather this year was comparable to last year.

Second, the benefits of the actions we took to refinance debt in several of our business units became apparent. Our interest expense this quarter was about $3 million lower than it was last quarter.

We also gave some earnings guidance in our press releases for UGI, earnings per share guidance of $1.55 to $1.60, and with respect to Amerigas, EBITDA of 245 million to 255 million.

At this point, let me turn the meeting over to Tony Mendicino to review our performance for the quarter in more detail. From Tony, we will do our imitation of the Tinker to Evers to Chance; that is, go to John Walsh, then Gene Bissell and then back to me. Following the end of the call, I will offer a few concluding remarks. So, Tony, why don't you give some amplification on the results?

Thank you, Lon. As Lon said, we had another solid quarter with operating income about $1 million ahead of last year despite weather that was substantially warmer than last year for our domestic propane and natural gas businesses and despite continued high and volatile commodity prices for energy worldwide. Our EPS was $0.18 for the quarter, compared to $0.01 last year. This year's earnings included a $0.05 benefit from lower income taxes related to the repatriation of foreign income and prior year's earnings included a $0.09 charge from a loss on extinguishment of debt at Amerigas. Adjusting for these two items would lead to $0.13 per share this year versus $0.10 in 2005, a $0.03 improvement.

Let's get into some of the details, first with our domestic propane business, Amerigas. Amerigas performed well during the quarter with their EBITDA at $20.7 million, up slightly from $19.9 million last year, despite weather that was about 20% warmer than normal than last year. Last year's EBITDA does not include a $33.6 million charge on extinguishment of debt. Retail volumes sold was down about 11 million gallons as a function of warmer weather and continued customer conservation due to high energy costs. The effect of lower volumes and increased operating expenses were offset by higher unit margins. Gene, as always, will provide more expansive comments on Amerigas's performance a little bit later.

Net income in our utility operations were $3.5 million compared to $5 million for the same period in 2005. Net income in gas operations was down $1.5 million on weather that was more than 10% warmer than normal in last year, resulting in lower throughput. Additions of core heating customers remain modestly ahead of last year and we expect to hit our target of 3 to 4% growth in this key customer class, notwithstanding uncertainty regarding national housing growth.

Net income in electric operations was flat to last year at $2.7 million. Distribution volumes, gross margin and operating expenses were all essentially unchanged from the prior year.

In International Propane, net income increased to $13.1 million from $6.4 million, an increase of $6.7 million. More than $5 million of the increase derives from lower estimated taxes on the foreign earnings that will be repatriated. Antargaz' earnings before interest and taxes were flat to last year as the effect of lower volumes, due to warmer weather and customer conservation, was offset by slightly higher unit margins and lower operating expenses. Net income at Flaga was unchanged from the same quarter in fiscal year 2005. The dollar euro exchange rate averaged about $1.26 to the euro for the June quarter in both '05 and '06.

Finally, in Energy Services, net income was $6.4 million, up slightly from last year. Increased net income from Energy Services' gas marketing business offset lower net income from its electric generation operations.

Moving now to balance sheet considerations. Amerigas finished the quarter with $63 million in cash, no revolver debt and $934 million of total debt. Total debt is $4 million higher than at the end of the June quarter last year. On a consolidated basis, UGI's total debt on June 30 was $1.8 billion, compared to $1.7 billion in 2005. At the end of June, UGI had $260 million of investable cash, which will be dedicated to the purchase of PG Energy later this year.

As Lon mentioned, over the last year, we refinanced debt at both Amerigas and Antargaz, the benefits of which are becoming apparent in our quarterly comparisons. Interest expense for Amerigas for the quarter is $1.8 million less than for the same quarter last year and Antargaz interest expense is 1.5 million euros less this quarter compared to the same quarter last year. John will now expand on domestic operations.

Thanks, Tony. On each of our calls this year, I stressed the importance of expense control, cash management and margin enhancement in order to effectively address the challenges of a sustained warm weather, high energy cost environment. We maintained our focus on these critical areas in Q3. Market conditions continued to be a challenge as warm weather tempered demand during the tail end of the heating season while product costs continued to trend upward. Each of our domestic businesses successfully addressed the challenge posed by reduced customer demand and delivered a solid performance in the quarter. Of equal importance is the progress made by each of our teams on the implementation of their growth strategies.

Gene will take you through Amerigas's Q3 performance in a few minutes, but I'd like to comment briefly on two developments. We now have over 250 automated vending machines for barbecue cylinders installed and operational, providing our customers with the ability to buy or exchange cylinders 24 hours a day, 365 days a year. Customer response to this unique service offer has been outstanding and rollout of the product is ongoing.

Our strategic accounts program continues to deliver strong growth. For the quarter, our volumes with strategic accounts are up over 6% and year-to-date we've added over 5 million gallons of volume growth in this key segment while increasing our average unit margins.

Our Energy Services business performed well in Q3 with net income increasing slightly from fiscal year '05. Our nine-month performance has been excellent with underlying growth in net income, excluding the gain on the sale of the Hunlock Creek assets in Q2 of 18%. One of the keys to the strong performance has been our ability to increase unit margins in our gas marketing business. While I'm very pleased with credit and collections performance across all the UGI businesses, I think the work done at Energy Services has been outstanding. We continue to see excellent growth opportunities in Energy Services due to our ability to offer a range of valuable products and services such as natural gas and power marketing, electric generation and energy peaking services to a customer base that stretches across the industrial, commercial and utility sectors.

Performance in both the Gas and Electric Utility was impacted by warmer than normal weather. This was particularly true for our Gas Utility, where weather for our service territory was 13.5% warmer than normal and 10% warmer than the third quarter of 2005. This led to an approximate 6% decline in our Gas Utility volumes in the quarter. For the first nine months of the fiscal year, Gas Utility volumes are running 6.9% below prior year, on weather that is 8.1% warmer. Our Electric Utility delivered performance for the quarter that was roughly in line with last year. One major development in electric was the recent PUC approval of a three-year rate agreement that will go into effect January 1, 2007.

Growth programs in our Gas Utility continue to deliver excellent results. We've been particularly effective working with residential and commercial developers on projects throughout our service area. We've added over 8,000 new customers in fiscal year '06 and we continue to outpace last year's growth.

We're making good progress on our PG Energy acquisition. The PUC review process is proceeding and teams at UGI and PG are jointly developing integration plans to ensure that we're ready to go once the PUC approval process has concluded. This will ensure a smooth transition for PG's customers and the members of the PG team. We remain very excited about this opportunity to expand and strengthen one of UGI's core businesses and expect to close on schedule before the end of the fiscal year.

Finally, we continue to invest in people, technology and training to support the ongoing development of the safety and customer service programs in each of our businesses. While we're pleased with the external recognition we've received for performance in both these critical areas, we remain committed to continuous improvement of these critical capabilities.

I'd now like to turn it over to Gene who will provide you with more detail on Amerigas's performance.

Thanks, John. I will begin by noting that the third quarter is not our most significant quarter. It typically only represents about 8% of our annual EBITDA. That said, I am pleased to be reporting a 4% increase in EBITDA despite volume that was down 6% from last year's third quarter. This result is a tribute to the efforts of our employees to manage margins and expenses to offset the impact of lower-than-expected volumes. Retail volume for the quarter declined by about 10.8 million gallons, primarily due to weather that was significantly warmer than last year, as Tony mentioned, and due to customer conservation. Our customers continue to pay record prices for propane, due to the high wholesale cost of propane. The average cost of propane for the quarter at Mt. Belleview was $1.05, up 28% from last year and up 81% from the previous five-year average. The resulting increase in the cost of propane to consumers gave them a powerful incentive to conserve.

As I reported last quarter, the higher cost of energy also is increasing our expenses. The biggest impact was in our vehicle fuel expense, which was up 27%. Bad debt, utilities and travels were also affected by higher energy costs. We were able to limit the overall operating expense increase to 3% because of a favorable reserve adjustment to our general insurance expense. This is the second time this year that we've been able to reduce our general insurance reserve due to improved claims experience. In the last five years, reducing the number and severity of employee accidents has been a major focus. It's gratifying to see the success of our safety initiatives result in a reduction in our expenses.

Another concern related to the high price of propane this year has been the impact it might have on the ability of our customers to pay their propane bills. I am pleased to report, however, that as of the end of June, both our day sales outstanding and our delinquency are slightly better than last year.

Let me also review our results on our core strategies of growth through acquisitions, through our cylinder exchange business, strategic accounts and through our traditional base of residential and commercial customers. I would say that the results in each of these areas are in line with what we reported last quarter. We have reviewed a number of potential acquisitions and have made several offers but have yet to close any deals this year. We're actively prospecting for quality acquisitions and we continue to target the addition of an average of 20 million gallons a year through acquisitions of independent marketers. We have achieved growth in our traditional residential and commercial customer base but the rate of growth lags last year's level due to high prices and warm weather.

We've also achieved growth in strategic accounts and PPX. Strategic accounts volume is up 6% year-to-date and PPX volume is up 13%. In fact, the growth and earnings from these two customer segments, PPX and strategic accounts, has helped us mitigate the impact of lower volumes for the quarter and year-to-date.

I'd also like to mention that we have renamed PPX. The new name for our cylinder exchange business is ACE for Amerigas Cylinder Exchange. We've changed the name and we're changing the graphics on our cage signage and on our cylinders with the objective of highlighting the Amerigas name. We have cylinder exchange cages at more than 21,000 retailers across the country and our customers use more than 6 million grill cylinders a year so we realized that this is a great opportunity to sell the Amerigas brand.

Finally, with just one quarter to grow, we're reaffirming our EBITDA guidance of 245 to 255 million. I'm pleased that despite warmer weather, customer conservation and record propane prices, we will improve our year-over-year underlying profitability in fiscal 2006. I'd like to thank my fellow employees for once again helping us achieve an increase in earnings despite the many challenges that we faced this year. Lon?

Thanks, Gene. Let me leave all of you with the following thought. From a qualitative point of view, we continue to be well-situated for the future. We are in good businesses and we know how to run them. We're also in excellent financial shape and expect to continue to generate excess investable cash flow each year of around $80 million. Yet like all businesses, we have our share of challenges. Of course, you're all familiar with the challenge called weather.

In addition, I've said many times that high volatile energy prices create a difficult environment for energy distributors. The challenges from the high volatile energy prices appear on really on two fronts and Gene mentioned both. One is on the operating expense side and the other is on the demand side. Obviously our customers are understandably conserving in their usage of energy products. We also see the dynamics of fuel on fuel competition changing based on the relative cost of competing fuels and finally we are in, as you all know, very competitive businesses and we see changing competitive landscapes in certain markets, as well.

Yet, you expect us to manage these challenges and we are, in fact, taking steps to position ourselves for a bright future. For example, we are focusing and have focused on enhancing the productivity of our workforce and on making more productive use of our assets by closing certain facilities and improving our efficiency. We have also refinanced debt at lower rates of interest, as Tony mentioned, and redeployed our cash in acquiring businesses like the PG Energy transaction that John mentioned.

The actions we've taken reinforce our belief that we can continue to achieve the financial goals for UGI of growing our earnings per share 6 to 10% annually and raising our dividend 4% annually and for Amerigas of increasing its distribution 3% annually. The model we have for our company of growing our businesses somewhat in excess of their industries, operating those businesses efficiently and effectively, producing excess cash flow and reinvesting that cash flow for additional growth while at the same time returning a portion to you in the form of above-average dividend increases exemplifies the type of balance growth and income vehicle that UGI is today. We look forward to reporting more progress to you as we finish 2006 and navigate our way through the beginning of our 2007 fiscal year. We really do appreciate your support and at this point, Miranda, we'll open it up for questions.

Thank you. [ OPERATOR INSTRUCTIONS ] We'll take our first question from Jay Yannello with Pali Capital.

Good afternoon, Lon and everyone. Just quick question. I think you hinted on this in the introductory comments, but we're seeing real estate slowing down. The Pennsylvania area has been a great growth area. Can you give us your latest view there? And any electricity of demand starting? Elasticity of demand with electricity, excuse me, any of that taking place right now? And your views, Lon, on -- I ask you this all the time, but there's been another round of M&A, private equity and things like that. Your latest views on that? Thank you.

Okay. Let me start with your real estate question, Jay. Yes, I mean we are obviously watching the real estate market in Pennsylvania, particularly in our Gas Utility territory and in addition nationally because it does affect the LPG business. I would tell you in our Gas Utility territory, we've never been a boom and bust kind of territory and as a result, we haven't yet seen any significant signs of slowing. Permits are about at the same levels they've traditionally been. New housing stock, the inventory isn't increasing all that significantly. So, so far so good in our Gas Utility territory which is important to us in it that territory, as you know, Jay.

On the elasticity of demand and electricity, I don't think we've seen it. Frankly, what we've seen in electricity is because rates have been capped in Pennsylvania. We have seen real demand in electricity growth for us on the order of 2% a year and some of that is peak demand from our territory becoming more air conditioned. But I'd say on balance, with computers and all other things being equal, we're seeing real demand growth in electricity of a couple percent a year.

So that may be attributable to the fact that rates don't reflect current market rates. They do reflect caps that have been in place in Pennsylvania for a number of years. John referred to some new caps that we will have for a three-year period going forward and we work very hard for our rate payers in that area. And if you looked at the size of the increases we have, we have a three-year -- three-year agreement approved by the Pennsylvania Public Utility Commission. Probably the first year is an increase in the high 30s, which is substantial. Second year is in mid to high single digits and the last year is in low single digits so a three-year deal, and most of the increases that you're reading about in the paper are 50, 60, 70% over long periods of time. So we were fortunate to be able to present our customers and rate payers with a better looking transaction than most out there. Yet, it is -- it is a sizeable increase and we know that. But at least in year 2 and 3 for them, there is a very, very modest increase and they can have stability going forward.

With respect to M&A, M&A, as you suggest, continues to -- to roll along at fairly high multiples. In the LPG space, Energy Transfer announced the acquisition of Titan and that's been digested by the marketplace. Our belief was that was a heady price for that transaction and the guys at Energy Transfer are good operators. They know what they're doing and I'm sure it's a good transaction for them, but in our view that was a heady price. The midstream assets continue to go at astounding values in our view. And we are active in the M&A market, both internationally and domestically, in all of our business lines. We continue to look for value, but you all know us as discipline players. We will do transactions only if they are accretive and only if they provide value for the shareholders. So it's a little bit more challenging out there in the M&A area.

Just following up on -- on your holding back on expenditures, discretionary expenditures. How long can that go on? If we continue to have solid elasticity of natural gas demand going forward, you think you can keep holding back these expenses for a while or at what point do you have to start catching up and getting some stuff done?

Yes, each of those expenditures we manage pretty tightly. You hope that you can go back to a more normal rate in a year if demand and/or weather -- and weather has a much more sizeable effect in any year than demand changes due to conservation, for example. And I don't really know the answer to that. We are pretty tough-minded operators. In good years, you've heard me say that we make up for it and we spend more money to catch up and get all of our assets in good operating condition so that we can, in bad years, cut back a little bit more. But we have been fortunate, knock on wood, not to have two years in a row where we've had to worry about it. So ask me next year at this time and I will tell you how the answer worked out.

Okay. All right. Thank you.

Sure.

[ OPERATOR INSTRUCTIONS ] We'll take our next question from Yves Siegel with Wachovia.

Good afternoon.

Hi, Yves.

Lon, could you comment a little bit further on the PG acquisition, in terms of any thoughts on what you discovered going through the process? Any positive surprises? I know you haven't closed yet. And what kind of thoughts do you have in this environment if you need to go in and file a rate case.

Okay, two aspects to that, Yves. I would say the most pleasant surprise we found, and this is going to sound like mom, apple pie and the flag, but it's really the quality of the workforce and management team up there. They are really -- they know how to run a business. They are conscientious, they're good people, they're hard working, and I would say similarly while we're engaged in the process with the -- before the Public Utility Commission -- with all the usual parties, the trial staff, the consumer advocates, the small-business advocates, the unions and everyone else, at the end of the day there is a lot of support for us completing this transaction. People realize that we bring value to that transaction and so I would tell you that my optimism that the transaction will be approved is continuing and probably heightened and my optimism that the quality of the company we're picking up is good is also heightened. Beyond that, I think there's give and takes on all the economic sides of things. So, that's really what I would sum up there. We continue, incidentally, to expect, as John said, that this transaction will close by the end of our fiscal year, which is the end of September this year.

On the rate side, I thought we had told people, I'm pretty sure we did. You may have just forgotten it for this call. They filed their rate case in March or April of this year, shortly after we announced the transaction. They had been working on it for nearly six months. It takes them a long time to do it because you have to get all your numbers for the test year done and you have to do a projection. So they had been working on it well before the acquisition was known to them and known to us. They filed that it is proceeding in the ordinary course before the Public Utility Commission and we would expect that rate case -- if we can't settle it sooner, to be resolved at the end of the calendar year and we are optimistic that we'll get fair treatment by folks. As we've told you all, that company filed the rate case -- PG filed that rate case because they were not earning anywhere close to their allowed returns. They were earning 7 percentish and that was way, way too low for them. So, we're optimistic that will proceed in the normal course and that we will get a satisfactory result in that.

Thank you. I apologize, I should have remembered that.

That's all right. You have a lot of things to remember. So... and you're getting older, Yves.

So, was that the Cleveland Indians?

Exactly!

Okay, thank you.

Yes.

We will take our next question from Ron Londe with A.G. Edwards.

Yes, thanks. Can you give us an idea of what the cost will be and timetable for the rebranding of PPX to the ACE brand?

Sure, Gene, why don't you take that one?

Sure. In terms of cost, we replace the sleeves on the cylinders every time they come back to a plant so there is really no cost to that. The signage we replace on a schedule over a period of years and that -- that also will not be a material expense. So there's no -- no material expense involved in in the rebranding.

Did you say that you had 21,000 locations now?

We have over that. It's closer to 22,000. I don't have the exact number, but it's in that range.

And importantly, Ron, in that regard, we have, as John mentioned, 250 automatic vending machines out there which are garnering good customer acceptance because they can just go up there to those vending machines. They don't have to wait for a body, swipe their credit cards and pull out and exchange a cylinder. That's a terrific innovation on the propane side.

How fast do you think you can roll in more of those units?

We're rolling out quite a few every month. I would say, we'll be -- by the end of the year, we will probably double that figure.

Okay. That's all I had.

Thank you.

And there are no further questions at this time. I will turn the call back over to our host for any additional or closing remarks.

Okay. Well thank you, Miranda. We want to thank all of you for your support as we go forward. You know we are committed to achieving our goals and I think the next time we'll be in communication with you will be probably announcing year-end earnings but, as you know, we do a webcast at some point where we attempt to give you some guidance for next year and that's usually in late September/early October. So, until then, we look forward to seeing you and talk to you then. Bye-bye.

And that does conclude today's conference call. We'd like to thank you all for your participation. Have a great day.