UGI Corp (UGI) 2006 Q4 法說會逐字稿

Good day, everyone, and welcome to the UGI and Amerigas Partners fourth quarter fiscal year 2006 earnings results conference call and webcast.

At this time for opening remarks and introduction, I would like to turn the call over to Mr. Bob Krick. Please go ahead.

Thank you, Dixie. Good afternoon, and thank you for joining us today.

As we being 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 which are difficult to predict and many of which are among 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.

We me today are John Walsh, President and COO of UGI, Gene Bissell, President and CEO of Amerigas, Tony Mendicino, Senior VP and CFO of UGI, and your host. Chairman and CEO of UGI, Lon Greenburg.

Lon?

Thanks, Bob. Let me also welcome everyone to our call I trust you have all had the opportunity to review our press releases reporting our 2006 fiscal year results.

UGI reported earnings per share of $1.65 for fiscal year 2006 which as you know is at the high end of our projection of $1.60 to $1.65. Amerigas reported adjusted EBITDA of $255 million which again was consistent with our recent projection. Tony is going to review in more detail with you our earnings performance later in this call.

As you are aware, the last quarter of our fiscal year is not typically a significant earnings quarter and frankly this year was no exception for us. While we are happy to have done better than last year, there is nothing noteworthy that happened during the quarter that I need to bring to your attention.

Looking at our earnings performance for the entire year, we are obviously very pleased with our performance given the warm winter weather and high energy price challenges that we face. As we sit today, the shareholders of UGI and the unit holders of Amerigas have seen excellent total returns on their investment. UGI's total return for calendar year '06 thus far is 34% and Amerigas' total return for the same period is 22%. And as you know, producing above average total returns to shareholders over the long term is one of our principal goals, and we have a fine tradition of doing just that.

But before I go into why I believe next year will be another good year for us, I want to turn the call over to Tony Mendicino, for some additional information on our financial statements. Tony will then turn it over to John Walsh who will then turn it over to Gene Bissell who at the end of his comments will turn it back to me for concluding remarks. With that having been said, let me turn it over to Tony for the financial review.

Thank you, Lon.

I'd like to speak briefly today of four items. First our consolidated results. Second, give you some color on the financial results of each of our major business units. Third, our balance sheet and finally, our liquidity.

As Lon said, given the adverse operating environment, much warmer than normal weather in the states and high product prices resulting in customer conservation here and abroad, we are very happy with our financial performance for the year. Our EPS was $1.65 before adjustments for significant one-time items. Adjusted -- adjusting for major one-time items, losses on extinguishment of debt, a gain on the sale of our Hunlock Creek joint venture and the benefit of lower estimated taxes to be paid on repatriated foreign earnings our EPS was about $1.60 which was actually ahead of our budget.

This adjusted $1.60 compares to an EPS of $1.72 in 2005 also adjusted for one-time items. The $0.12 decline in adjusted EPS is largely attributable to the earnings decline in international propane where as you may recall Antargaz had an extraordinary performance in fiscal year '05 owing to higher than normal unit margins and the benefit of a weak dollar.

Let's now look at our 2006 results by major business segment. Amerigas' net income contributions for '06 and '05 after adjustments for the losses on extinguishment of debt in both years were $29.7 million and $27 million respectively. This $2.7 million improvement came despite volume that was down nearly 6% because of warm weather and customer conservation. Weather that was 3% warmer than last year and 10% warmer than normal.

Amerigas' EBITDA was $255 million in fiscal year '06 excluding the loss on extinguishment of debt an increase of nearly $15 million compared to adjusted EBITDA for last year. Gene will have more comments on Amerigas' performance.

Net income from international propane as reported was $67.1 million. This result includes a one-time benefit of approximately $7.8 million relating to lower estimated income taxes paid on the repatriation on foreign earnings. In fiscal year 2005, net income from international propane was $99.4 million. This results -- this result included a one-time benefit of $14.2 million related to non-income tax matters. On an apples to apples basis, netting out the one-time adjustments, international net income declined to $59.3 million in fiscal '06 from $85.2 million in fiscal '05.

Virtually all this decline came from Antargaz our French propane distribution business. Net income at Antargaz declined on lower volumes, lower unit margins and a stronger dollar offset in part by lower interest expense. Volume declined 7% to 315 million gallons on weather that 4% warmer than normal and about the same as last year. Our volume decline is primarily the result of lower agricultural volumes and of customer conservation.

Unit margins declined from fiscal '05's unsustainably high levels. The dollar was about 10% stronger this year compared to last year in Antargaz's two primary earnings quarters. Finally, Antargaz's interest expense declined as a result of a lower interest rate on its long-term debt after refinancing its long-term debt in December of '05 and as a result of the stronger dollar.

Net income at Flaga, our other international subsidiary was down slightly year to year on lower volumes. Our front page story to Flaga this year is the formation of the joint venture with Progas develop our businesses in central and eastern Europe where we believe LPG has above average growth prospects.

Domestically our utilities perform well in the face of unfavorable weather and high prices. Net income from our gas utility which includes the results of our Penn Natural Gas acquisition for about one month was $38.1 million down about $1 million from last year. Weather was 9% warmer than normal and 7% warmer than last year. Ignoring the throughput of Penn Natural throughput declined about 6% year to year as a result of warmer winter -- I'm sorry -- the warmer weather and customer conservation.

Higher unit margins for interruptible service offset the decline in throughput resulting in a $6.2 million improvement in gross margin year to year and operating income that was $2.5 million better than last year. The improved operating income was more than offset by higher interest expense resulting from higher short-term borrowing levels and higher rates and the interest costs associated with the Penn Natural acquisition.

Net income from electric utility was $10.5 million compared to 11.5 million last year. The $1million shortfall in earnings primarily results from fewer kilowatt hours sold due to warmer weather during the heating season and from lower unit margins due to higher purchase power costs.

Energy services net income increased $10 million compared to last year. About half of the favorable variance comes from the gain on the sale of its interest in the Hunlock Creek joint venture, a small coal and gas turbine generating property. The remaining $5 million favorable variance came from increased gross margin on liquid fuels sold primarily to duel fuel customers.

Now, moving to our balance sheet. UGI had total consolidated debt of approximately $2.2 billion. Up about $500 million from last year end. About half of the increase came from the purchase of Penn Natural with the balance resulting from increased working capital needs and funding the coal premiums in two of our refinancing. We used virtually all of our investable cash to fund the equity portion of the Penn Natural acquisition in August and had essentially no investable cash available corporate at year end.

With the addition of Penn Natural, we expect to generate about $90 million of investable cash annually. At year end, Amerigas had $933 million in debt, up slightly from the $913 million balance last year. Other than letters of credit that reduced borrowing capacity, Amerigas had no outstanding balances on it's revolver and roughly $85 million in cash on September 30.

And we have talked today about high commodity prices and their impact on customer conservation. As we have told you in the past, the high commodity prices also affect our need for liquidity. While energy prices increase had moderated recently we have adequate liquidity to fund increased levels of working capital throughout all of our offerings subsidiaries if we see energy prices pick up again.

In utilities increased our short-term committed borrowing capacity by $170 million to a current level of $350 million. This will provide increased capacity for our legacy utility business and meet the needs of Penn Natural. We now have $200 million of borrowing capacity in energy services with expanded eligibility of receivables.

As I mentioned, Amerigas at year end had $85 million in cash and just increased its revolver from $25 million to $200 million. Just accomplished last month. At Antargaz we ended the year with about 40 million Euro of cash and 50 million Euro of unused revolver capacity. Again our liquidity is in great shape throughout the organization.

I will now pass the baton on to John Walsh to discuss domestic operations. John?

Thanks, Tony.

There's no question that 2006 will be remembered as the year of unprecedented challenges for our domestic businesses. We started the year dealing with the supply disruptions caused by Hurricanes Katrina and Rita and then worked through a winter season combination of very warm weather and high commodity costs.

As I have noted during our previous calls this year, we decided early on that strong performance in three critical areas expense control, margin enhancement and cash flow management would ensure a solid performance in 2006 despite the market turbulence. Our businesses responded effectively to these challenges and once again demonstrated our ability to perform well across a broad range of market conditions.

While we are pleased with our financial performance this past year, we are equally pleased with the progress made on developing the growth segments within each business. I will highlight several of these growth areas as I briefly review each unit's performance.

The most significant within our domestic operations in 2006 was the acquisition of PG Energy now known as UGI Penn Natural Gas. Although it's been less than 90 days since the acquisition was completed, we are making excellent progress on our integration plan. Our integration teams are hard at work and we remain convinced that there are significant opportunities to enhance productivity and expand growth prospects across our entire utilities operation.

We have worked diligently to ensure a smooth transition for UGI Penn Natural Gas' customers and employees. We remain very excited about this opportunity to expand and strengthen UGI's core utility business in Pennsylvania. While demand in both the gas and electric utilities in 2006 was impacted by the combination of warmer than normal weather and customer conservation, our utilities team delivered year-on-year growth in operating income.

Our gas utility experienced the most significant volume impact as weather across our service territory was almost 9% warmer than normal. The combination of warm weather and customer conservation led to a 6% drop in volumes for our gas utility for the full year.

Our electric utility experienced weather that was slightly more favorable than the gas utility and our throughput in electrical was only 2% below 2005 levels.

2006 was another strong growth year in our gas utility. We added almost 10,000 new residential customers and 1400 new industrial and commercial accounts. This growth was roughly in line with last year and in line with our target to grow our domestic heating customer base by 3 to 4% per annum. We have been particularly effective working with both residential and commercial developers on projects throughout our service area.

We look -- we will look for opportunities to leverage this strength in UGI Penn Natural Gas' service area. While we have yet to see any noticeable weakening in demand related to the short-term issues in the housing market, we will continue to work closely with the developers to identify any significant changes that would impact our operations.

Our energy services business performed extremely well in 2006 with operating income net of the one-time gain on the Hunlock Creek sale increasing 17% over 2005. There were several key factors contributing to this strong performance. Our gas marketing team delivered increased unit margins in a year where we saw significant volatility in the cost of commodities and our credit and collections performance in energy services has been outstanding. Our focus on establishing long-term relationships with high quality customers and suppliers has been a key to our success.

We continue to look for opportunities to expand our customer base and energy services. One example is the recent successful campaign by our gas marketing team aimed at mid-sized commercial customers in the PGW service area. We see excellent growth opportunities in energy services and as we move into 2007, we will continue to seek out growth opportunities across the full range of our activities, natural gas in power marketing, electric generation and energy peaking services.

Amerigas grew underlying EBITDA by $15 million in 2006 despite weather that was 3% warmer than 2005. Gene will provide you with more detail on this strong performance but I would like to comment on the significant progress made in one segment of the business cylinder exchange. Our Amerigas cylinder exchange volumes grew 13% in 2006, well in excess of the market growth rate. We now have almost 500 of our self-service grill cylinder dispensers installed and operational nationwide. We expect to continue to deploy new dispensers throughout 2007 and hope to double our install base over the next 12 months.

This is an excellent example of new technology stimulating growth. In addition to the advances made within each of our businesses, we continue to invest in ongoing development of the safety and customer service programs across UGI. While we are pleased with the recognition we received for performance in both these critical areas, such as the recent J.D. Power Award for our gas utility, we remain committed to continuous improvement of these critical capabilities.

I now would like to turn it over to Gene who will provide more detail on Amerigas' performance.

Thanks, John.

We are pleased to be reporting a 6% increase adjusted EBITDA for the fiscal year 2006 despite warmer weather and the effect of higher energy prices on customer volumes and operating expenses. As you know, this is the top of the range that we projected earlier in the year when we increased the distribution by 3% and announced our policy of increasing the distribution by 3% per year.

In addition to improving our financial results, and increasing our distribution, we made progress in 2006 by growing our strategic accounts and cylinder exchange segments, improving customer service and by reducing employee and vehicle accidents by more than 20%.

Volume for the year was off by 6% due to weather that was 3% warmer than 2005, and customer conservation in the face of a 21% increase in the wholesale cost of propane. We managed to offset the impact of lower volumes through margin and expense management.

Operating expenses increased by about 3%. Due to higher energy prices we added about $8 million to our vehicle fuel travel and utility expenses. Fortunately this is largely offset by a $7.2 million favorable adjustment in general insurance and litigation reserves due to lower claims. In part, the lower claims are a reflection of our improved safety performance of recent years and a focused effort to manage workers compensation cases.

In addition to comparing year-over-year results I would like to compare our results in 2006 to two other years when the weather was 10% warmer than normal. This shows as a progress that we achieved. Fiscal years of 1999, 2002, and 2006 were all 10% warmer than normal. In 1999, we earned $0.61 a unit, in 2002 we earned $1.12 and 2006 of we earned $1.89 excluding debt refinancing cost. Our improved performance is a result numerous strategies designed to grow the business and reduce our sensitivity to weather including adding over 300 million gallons through acquisitions an average growth rate of 10% per year in our strategic accounts and cylinder exchange business, two segments that are less weather sensitive, by growth in customer services and fees that are not tied to customer volumes, and a three-fold increase in the number of seasonal employees whose hours can be flexed in response to customer volumes.

Our increase in earnings per unit also reflects a reduction in interest expense per unit as a result of negotiation of more favorable rates and lower leverage. I would also like to comment on the progress we made this year on our course strategies. Let me begin with cylinder exchange and strategic account. As John mentioned we grew our cylinder exchange volume by 13%. Same-store growth was about 7%.

A lot of our growth this year came from adding about 435 new Home Depot locations to our base of about 600 Home Depot locations. The key to our growth at Home Depot was the self-service grill cylinder dispenser. This was a real innovation for the cylinder exchange segment. It allows customers to exchange a cylinder without ever entering the Home Depot and they can exchange their cylinders seven days a week, 24 hours a day.

We have currently rolled out the dispensers to about 500 Home Depots and by the end of 2007 we will have rolled out the machine at more than 1000 Home Depot locations. Strategic accounts volume grew by 5% this year and we added over 1300 locations. This continues to be a segment where we have a significant competitive advantage because we have a better -- we have better geographic coverage than any other propane company.

About half of the growth comes from existing customers opening up new locations and the balance from adding new customers. Acquisitions is our other key growth strategy. We completed two small acquisitions this year adding less than 2 million gallons. We are seeing two somewhat contradictory trends. The number of deals completed within the industry is down from about 60 two years ago, to about 30 for the last two years. And at the same time multiples are higher.

Despite the challenging environment for acquisitions, we will continue to pursue acquisitions as a core growth strategy and at the same time we will remain disciplined in this high multiple environment. In fiscal year 2007, we will continue to focus on the strategies that have allowed is to achieve a 103% cumulative increase in total shareholder return over the last five years. Those strategies include acquisitions, growing our residential and commercial customer base through improvements of sales effectiveness and customer service, leveraging our unmatched geographic coverage and dedicated resources to grow our strategic accounts and cylinder exchange businesses and by applying innovation, technology and best practices to improve sales customer service, safety and productivity.

Finally I would like to take a minute to thank our team of over 5000 employees. They helped us overcome warm weather and record energy prices to achieve a 20% increase in net income per unit in fiscal year 2006.

With that, let me turn it over to Lon for some concluding remarks.

Thanks, Gene.

Let me leave you with the following thoughts as we end our formal remarks. We believe our 2007 fiscal year is going to be an excellent year for us with UGI earnings per share ranging between $1.75 and $1.85 a share. And Amerigas EBITDA in the range of 265 to $275 million and this projection is consistent with what we said roughly a month ago or so.

The usual caveats are attached to the projection including the fact that we expect in that projection relatively normal winter weather and we are looking for some relative stability in energy prices. We also expect our PG Energy acquisition which we now call UGI Penn Natural Gas to be a good contributor to our earnings as we spend the year combining that business with our existing utility businesses.

With respect to all of our other businesses, they have the usual assortment of opportunities and the usual assortment of challenges. The most notable of which relates to Antargaz with the trend that we have seen towards intensifying competition continuing. Yet, we are confident that we will be able to meet all of those challenges we face while we devote the resources to pursuing the opportunities that we see.

We are also going to continue to pursue acquisition growth opportunities both domestically and internationally. As you have come to understand, all of these acquisition opportunities are going to be consistent with our overall vision and our overall long-standing strategies. You should expect us as always to remain disciplined as we evaluate those opportunities. In closing we look forward to fiscal year '07, and we look forward to speaking with you as we end our first quarter and reporting the progress that we made up till that point. Dixie, that's the end of our prepared remarks and we'll be happy to answer questions, if any.

All right.

[OPERATOR INSTRUCTIONS]

We will take our first question from Matthew Linney from UBS Please go ahead.

Hi, Lon, good afternoon.

What do you say, Matt?

Two questions. First one, more strategic in nature. The electric utility business, relatively speaking, it's gotten lot smaller over the last few years. And just wanted to know your thoughts strategically on that business. You know, in 2004 you guys did the Antargaz transaction. This year you did the PG deal. Could we see a -- possible acquisition on the electric front in the next couple years? How do you think about that business strategically?

As you know, we consider the electric business to be a part of our kind of integrated energy distribution businesses. We learn a lot from the electric business in terms of our ability to understand both the natural gas and the propane distribution businesses as well. And separate from our electric distribution business as you know, we have some generating assets in PJM as well.

The business is small, as you point out. But it earns a nice return for us and it provides us with that opportunity as I said to allow us to understand and be better competitors in all of the other businesses we are in. Without commenting specifically on electric acquisition, we did make the acquisition in the utility business with buying the business from Southern Union, PG Energy that does happen to be in the same area as our electric business as well.

I would tell you that in terms of our opportunities before us, we do look at opportunities to grow all of our businesses. And if we saw something that in the electric business was complimentary to that business and provided an opportunity to earn a good return for our shareholders, we would look at that. Right now the scale of those acquisitions that have come available and been announced in the paper and on some occasions not been completed are such, that they are a bit sizable for us to look at as a Company.

Great. Thank you.

And the second question I had was more housekeeping in nature. The PG deal I thought I heard a number earlier of $90 million in cash flow from that business? And just wanted to verify that that was either net of CapEx or if that's cash from operations.

I think either misspoke or you misheard me. Our consolidated result at UGI level we generated about $90 million in free cash flow at UGI corporate level that's available for reinvestment. So some component of that would be a piece of the PG transaction.

Okay. I just misheard it then. Thank you.

Okay. Thanks, Matt.

[OPERATOR INSTRUCTIONS]

And, Mr. Krick, it appears we have no further phone questions at this time.

That's not surprising to us given the fact we just had a web based public kind of forum about a month ago. Obviously we must have done a good job anticipating the questions at that time in responding to them.

We want thank all of you who took the time to listen to us today. Our next call as you might remember is at the end of January as we release our first quarter earnings. And we look forward to catching up with all of you, if not sooner, at that time.

Let's all hope for nice weather. Bye-bye now.

Ladies and gentlemen that does conclude today's conference. We thank you for your participation, and you may now disconnect.