UGI Corp (UGI) 2008 Q2 法說會逐字稿

Good day and welcome everyone to the UGI and AmeriGas Partners second quarter fiscal year 2008 earnings results conference call and webcast. This call is being recorded.

At this time for opening remarks and introductions, I'd like to turn the call over to Mr. Robert Krick, Vice President and Treasurer of UGI. Please go ahead, sir.

Good. Thank you, Shirley. Good afternoon and thank you 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. 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. Amoung them are, adversere 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, Eugene Bissel, President and CEO of AmeriGas, Peter Kelly, CFO of UGI and your host, Chairman and CEO of UGI, Lon Greenberg. Lon?

Thank you, Bob. Let me also welcome all of you to our call today. I trust you've had the opportunity to review our press releases covering both our higher level of eanings and increases in dividends in the case of UGI and increases in distributions in the case of AmeriGas. To summarize, UGI reported a 4.5% increase in earnings per share which grew to $1.17 from $1.12 last year. UGI also announced a 4% increase in the dividend on it's common stock, which on an annualized basis now will be $0.77 per share. This is the 21st consecutive year in which we've raised the dividend and we've paying a dividend for six generations, 124 years. With regard to AmeriGas, it was an excellent year as well. AmeriGas reported net income of $133 million compared to $119.9 million last year. AmeriGas' EBITDA grew to a $172 million this year from $156 million for last year's quarter. Finally, AmeriGas announced a 5% increase in it's distribution, the $0.64 per unit, from $0.61 quarterly and stated it's intention to increase the distribution annually by 5%, which is an increase from the at least 3% policy, which was in effect prior to that time. Just one brief comment on results and I'll turn over to the other folks and then come back.

This quarter, once again, demonstrated the beneficial effects of business unit and geographical diversification, that we've been talking about for some time now. As you may recall, we have pointed out many times that having four, separate but related, energy distribution and marketing companies of scale, reduces risk for our owners. This quarter, significant improvements in earnings from our energy services and domestic propane business units, offset relatively modest declines in performance in our regulated utilities and our international propane segments. At this point, let me turn it over to Peter, John, and Gene, and then I'll have more to say at the end of the call. So, Peter?

Thanks, Lon. For the quarter ending March, we end $126.1 million, or $1.17 per share. An increase of 4.5%, versus the same quarter last year. For the first six months of fiscal 2008, we ended $1.90 a share. An improvement of 12.4% of performance for the same period in 2007 and putting us in good shape to achieve a full-year total of between $1.95 and $2.05 per share. In the face of record high commodity costs and mixed weather, we delivered a very credible performance in the second quarter. AmeriGas and our Energy Services businesses did particularly well. Our utility business delivered results that were at similar level to last year on weather that was over 4% warmer and although the weather in our European business was colder than last year, it was much warmer than normal, which resulted in weaker than expected results. Looking at each of our businesses in turn, AmeriGas Partners, our domestic propane business, had another record-breaking quarter on weather that was virtually normal and 4% colder than last year. In the second quarter, net income attributable to UGI was $36 million versus the $32.3 million delivered in the same quarter of last year. AmeriGas' retail volumes were essentially unchanged from the same period as last year and the partnership EBITDA increased approximately 9.8% to $171.8 million. Net incomes from our International Propane operations was $32.7 million, down from the $34.8 million reported in the same period last year. Volumes in our French business increased from 95 million retail gallons to 97 million gallons of LPG on weather that was 10% warmer than normal and 6.7% colder than last year.

Although volumes did increase, it was less than expected due to the recent run of very warm weather in France, and what could have been a very nice quarter for our International Propane group turned out to be lower than expected on unit margins that were similar to last year coupled with some planned increases in operating expenses and D&A. Net income for Gas Utility was $39.8 million for the quarter ending March, compared to $41 million in the previous year. Weather was 4.2% warmer than normal and 4.5% warmer than the previous year. System throughput was 49.6 billion cubic feet, slightly lower than the previous year as weather-related declines and coal markets were offset by higher volumes associated with delivery service customers. In our Electric Utility, net income of $3.5 million for the quarter was similar to the same quarter last year. Where there was 2.5% more than normal and 4.1% warmer than last year with throughput down slightly from approximately 282 million kilowatt hours in the second quarter of last year to 279 million kilowatt hours in the second quarter of this year. Last, but not least, our Energy Services group had an excellent quarter. Expounding net income to $16.4 million from the $10.3 million reported in the second quarter of 2007. John Walsh will discuss this more fully, later in the call, but our internal investments in this area are demonstrating a significant return.

We expanded our peaking capacity in the last year by 37 million cubic feet for per day and pricing has improved. Electric generation margins further improved and we have also seen gains from our asset management capability. Turning to the balance sheets, we closed the quarter with $241.7 million in cash. Up slightly from the $232 million reported in December. Total debt was $2.3 billion, a small reduction from the $2.4 billion reported at the end of December. Included in the $2.3 billion of debt at quarter end, AmeriGas closed at approximately $989 million, including $56 million on it's revolver. Utilities closed at approximately $628 million, including $96 million on it's revolver. Antargaz, our French operation, closed at $604 million with no use of it's revolver and including the impact of currency translation. Overall, I am confident we have the liquidity to run our business and our balance sheet is strong. I was pleased that we were able to announce yesterday an increase in our quarterly dividend of 4% and we raised our dividend in each of the last 21 years and we have the remarkable record of paying dividends for 124 consecutive years. Overall, strong first-half performance for 2008. Let me pass the call over to John.

Thanks, Peter. Now that Peter's provided you with details on our financial performance in Q2, I would like to comment on our progress in three areas critical to the achievement of UGI's long term strategic objectives. Growing our core businesses, continuously improving operations and reinvesting cash in high quality projects. First, growing our core businesses. Developing growth segments in each of our core businesses is a priority for us. While market conditions in the second quarter presented us with some challenges, we made excellent progress on a number of fronts. Our Gas Utilities is delivering solid growth, despite the slowdown in new home construction. We expect to add approximately 11,000 new residential and commercial customers in FY08. The utilities marketing team focused on residential conversions and midsize commercial accounts to largely offset the weakness in new home starts. Antargaz has had great success with the national rollout of a light composite weight cylinder, marketed under the Calypso brand. Antargaz has placed 200,00 new Calypso cylinders with customers over the first 15 months of their national campaign. The successful introduction of this new product, strengthened Antargaz's position in the critical cylinder segment and further reinforces their leadership position in new product development.

As Peter commented, Energy Services had an outstanding winter peaking season as they successfully brought two new propane air projects on stream. These investments expanded our peak day capacity by 30 million cubic feet per day to a total of 140 million cubic feet per day and strengthened our peaking infrastructure. This increase in capacity, coupled with improved peaking rates, resulted in a significant increase in the contribution from peaking services in the first half of FY08. In terms of continuously improving operations, as a distributor and marketer of energy products and services,, we must consistently drive for improved productivity in each of our business units. Several of our productivity and efficiency initiatives deserve mention. Our Utilities business has completed Phase 1 deployment of automated meter reading. We're conducting monthly automated reads for 430,000 gas and electric customers. This represents approximately 75% of our residential customer base. By automating this labor intensive process, we have been able to reduce our admin costs while enhancing customer service by significantly reducing the number of estimated billings. Energy Services, in addition to increasing system capacity with the two new propane air plants, has conducted a very successful initiative over of the past 12 months to increase output within our existing peaking network. (Indiscernible) making projects increase capacity by about seven million cubic feet per day, while enhancing system reliability. Both Utilities and AmeriGas have met all critical benchmarks for the delivery of synergies on our most recent large acquisitions. That's Penn Natural Gas for Utilities and All Star Propane for AmeriGas. Our disciplined approach to aquisition assessment and rigorous execution of our implementation plans are the keys to delivering strong returns on our acquisitions.

Finally, in terms of reinvesting cash in high quality projects, UGI's businesses generate roughly $100 million annually in cash available for reinvestment. In order to deliver on our commitment of 6% to 10% EPS growth, we must identify and develop quality projects. Our track record has been strong with the majority of our investments over the past decade being acquisitions. As we look ahead, we're excited about the number and quality of both acquisitions and capitol projects in our business development pipeline. Earlier this year, we announced our attention to purchase PPL's Gas Utilities and their Penn Fuel's propane business. This acquisition would add 75,000 new customers to Gas Utilites' existing base of over 475,000 and significantly enhance AmeriGas' customer density and market coverage in our northeast region by adding 33,000 new customers. We plan to close the transaction by year-end and expect the financial result of PPL's gas to be accretive to earnings the in first full year of ownership. Energy services is currently developing a strong portfolio of projects. These projects rage in size from $10 million to $100 million are focused in several different segments including peaking services, renewable energy, and power generation.

We're extremely pleased with Energy Services' recent track record on capital investments and we're hopeful that we will be announcing one or more new projects prior to year end. Antargaz is having very good success installing large metered systems in towns and villages across France not served by a natural gas main. These projects provide the convenience of central storage and metered service for community and will serve as an attractive growth segment for Antargaz. Finally, we continue to look for domestic and international propane acquisitions and we have a number of promising deals in our acquisition pipeline. I look forward to providing you with progress updates on these strategic objectives on future calls. I would like to turn it to Gene, who will provide you details on AmeriGas' strong performance in Q2.

Thanks, John. I'm pleased that the AmeriGas chain was able to deliver a 10.9% increase in net income for the second quarter despite the challenges presented by high energy prices. Our net income increased from $119.9 million last year to $133 million. EBITDA increased by $15 million for the quarter from $156.4 million to $171.8 million. This represents a 9.8% increase and a new record for AmeriGas. For the six months we were also ahead by $15 million, were on track to achieve our EBITDA guidance for 2008, of $300 million to $310 million. I am even more excited about the announcement that we made yesterday of our intention to increase the distribution by 5% per year. This new policy reflects the confidence that the management team and the AmeriGas board have in our ability to continue to deliver consistent growth in earnings and at the same time, maintain a strong balance sheet. Beyond good blocking and tackling, our track record of earnings growth has been the result of effective execution of the growth strategies. We've been able to leverage our scale and industry-leading geographic coverage through ACE, strategic accounts and acquisitions. We've also been focused on growing our traditional customer base of residential and commercial customers, through improvements in customer service, balanced with careful management of our prices.

Our second quarter results reflect our focus on these strategies. Volume was essentially flat. The acquisitions we completed last year and slightly colder weather, allowed us to largely offset the impact of lower propane usage due to a number of factors, including customer conservation in the face of 25% higher propane prices. High energy prices aslo increased our expenses for the quarter along with the acquisitions we completed last year. Of the $9 million increase in expenses about 95% can be attributed to acquisitions or to the effect of higher energy prices on vehicle fuel, bad debt expense and travel expenses. I should add, that in the case of vehicle fuel, we have been able to recover a portion of this expense through a fuel surcharge, which is included in other revenues. We managed pricing to offset the increase in the cost of propane and higher energy-related expenses but also with the objective of continuing to grow our residential and commercial customer base. I would also like to share with you, our progress on our other gross strategies. ACE volume is up 17% year-to-date and driven primarily by the stores we gained as a result of the self service dispensing machine, which we now have in place at 1,000 locations. Our strategic accounts team, which services over 19,000 locations for about 200 national or regional customers, reported volume that was roughly flat to last year, but we were able to improve customer quality, which resulted in improved earnings contribution from this market segment. Both ACE and strategic accounts have recently won several new major customers and as a result, we currently have a backlog of over 400 -- I'm sorry, 4,000 customer installations to complete that will add to volumes going forward.

Our other growth strategies is acquisitions, where we set a target of adding 20 million gallons a year. Last year we were able to exceed the target by adding 45 million gallons. I'm pleased to report that earnings from last year's acquisitions have exceeded our pro forma results for first six months. With the PENN Fuels' deal that John mentioned and the deals we have in our pipeline, we have a good shot of completing acquisitions that will add 20 million gallons for next year. Looking forward, we believe we have a business model, balance sheet, and a growth strategy that will allow us to continue to deliver at least 3% annual growth and EBITDA. Now that we reached the end of the heating season, I would like to thank our employees for their hard work this winter. In particular I want to recognize our teams in the Rockies, the upper Midwest and New England, where our employees continue to do a great job of taking care of our customers despite heavy snowfalls. With that, Lon, let me turn it back to you.

Okay, thank you, Gene. I would like to leave everyone with the following thoughts as we end our prepared remarks. First, with regard to our earnings per share for this fiscal year, that is the year ending September 30 of this year. Our earnings per share at a $1.90, for the six month period, are over 12% higher than last year's $1.69 for the similar period. We ended last year with earnings per share of $1.77 if you adjust out the $0.12 gain from AmeriGas' sale of the terminal last year. We believe our earnings per share this year will be in the $1.95 to $2.05 range, which would be an increase of approximately 13% over last year, if you use the midpoint of that range and eliminate the one time gain of last year. Obviously this is in excess of our stated 6% to 10% earnings per share growth target. Similiarly, we expect AmeriGas to have an outstanding year. EBITDA for the six months this year stands at $265 million compared to $250 million last year, which is an increase of about 6%. We expect EBITDA, as Gene said, in the range of $300 million to $310 million this year, which would be an increase of $12 million or 4% over last year's $293 million. Again, after deducting the $46 million gain on the sale of the terminal last year. We firmly believe this performance will contrast markedly with many of our competitors as we have been successful in focusing on achieving our growth strategies, which we believe differentiate us from many in the marketplace. Our confidence is attributable to our both performance this year as well as our prospects resulted in both a 4% dividend increase at UGI and a 5% distribution increase at AmeriGas. Our goals going forward are to do the same in the future. Raise UGI's dividend 4% annually and increase AmeriGas's distribution annually 5%.

It's important to note that both the dividend at UGI and the distribution at AmeriGas are quite well covered. Payout ratio at UGI is about 39%, which allows us to share cash with our owners as we retain cash to meet our earnings per share growth goals and keep cash to invest. Similarly, the distribution at AmeriGas is extremely well covered. Financially, as Peter indicated, we are in excellent shape. Our existing businesses do not have any refinancing needs that scale for several years We continue to generate nearly $100 million of cash annually, to invest for the future and we expect to have approximately $200 million of cash in the holding company at end of September of this year , of course, that is preclosing of the PPL Gas transaction. Our annual cash generation allows us to make acquisitions, like PPL Gas, without accessing equity markets. It also allows us to fund the equity portion of larger internal investment opportunities in our businesses of the kind that John mentioned earlier on the call. The PPL Gas transaction continues to move along as anticipated and we remain committed to having that transaction closed by the end of this current fiscal year, that is, by September 30 of this year.

Said succinctly, we remain optimistic about our future. This is not to suggest that we don't have our share of challenges. Many of those are external factors, including quite extraordinary high costs of energy products, a slow economy here in the U.S., and heightened levels of competition in all energy distribution markets,as new policy initiatives from governments and regulatory bodies evolve. Yet, we're alert not only for the challenges that result from this changing environment, but we are equally alert for opportunities which arise. In conclusion, we remain committed to growing our company, operating it with our usual unwavering focus on execution and, of course, meeting our financial targets of growing our earnings per share 6% to 10% a year and raising our dividend, in the case of UGI, 4% a year and raising the distribution, in the case of AmeriGas, 5% a year. With that, Shirley, I am prepared to take some questions.

Thank you, sir. (OPERATOR INSTRUCTIONS) We'll take our first question from Shneur Gershuni from UBS.

Hi, good afternoon, guys.

Hi.

A couple of questions, the first is the big picture question and with the most recent exception, are you done making acquisitions for this year and I guess the second part to the question was, given the right price, are you willing to do something significantly larger than the most recent acquisition?

Let me talk about being done for the year, there are those who suggest we're never done. Our policy is to explore acquisitions that make sense in our company within our vision that are accretive and beneficial to our shareholders and so I can tell you we're constantly in general on the look for acquisitions but I can't comment on any specific acquisition that we may or may not be looking at. It's our policy to be active in the acquisition area. With regard to scale, we are mindful of scale and said that many times before and we would look at transactions larger than PPL gas or the Southern Union transaction. As our scale grows, those transactions aren't the same scale that they would be three or four years ago. We're mindful of scale in the aggregate and we're particularly mindful of large-scale in the current financial environment where it's very difficult to access capital markets, even for a company as strong as we are. But we are in the lookout and if we see a transaction that beats our hurdle rate, that is within our vision for the company. We will pursue those acquisitions.

Okay. If we can turn over to the international propane segment for a second, I know John gave decent color on this and so forth. I wondered if you can expand on what is going to happen to margins on a go-forward basis. Just -- I want to understand, I guess, how they expected to grow to return to where they were a couple of years ago. And also, where you see volumes going as well, too.

Sure. Let's start with volumes. Volumes were above last year and we had colder-than-normal weather in the first quarter. Second quarter, we met, whether similar to last year and January and February, two critical months for this business and if you saw the quarter evolve, December's weather was decent and January was decent and January's weather was awful, February was awful and March's weather was decent and March's results improved as the month went on and I would tell you we're not concerned with volume per say or bulk volumes behaved, you know, probably better than we thought they would in this quarter given the weather.

Cylinder volumes are holding up nicely and in a very competitive market as well. Behind the scenes we lost some share and lost some customers and the -- I would say very large butane, very large propane side of the business where margins aren't very high and few adjusted volumes to reflect those loss of higher volume and very low margin customers, the volume performance would look better than it does now. From a volume standpoint, we think that the business is performing well and it is weather dependent, however, and if we go back to the years '05, '06, when we had normal second quarters, there is a very ample and adequate opportunity for volumes to meet our expectations and the expectations we had when we bought the business several years ago. I don't think it's necessarily a volume issue. John mentioned some initiatives we had on the pipe cast side that helped, collective housing helped. The cylinder side, we've been very innovative and on the volume side, we're doing okay. It's not like we don't have our issues with competition of other fuels. You won't see markets of volume decline. On the margin side, as Peter mentioned, margins were close to last year at this time. What you see by segment, if you look at things, some segments are doing better, other segments doing a little worse&leave all and if you look at the margins that we registered this year for this quarter, and added a little or subtract ised a little, depending on what cost was doing, you would be in the ballpark for our expectations for margins.

Overseas as we have said many times, if you get a rapid increase in cost, it's harder for them to catch up than it is in the U.S. for us because of competitive norms and hot tracks with customers and culture and the U.S. is much more responsive to the cost increases. You look at the first-quarter margins year-over-year, they were lower the first quarter. This year compared to the fourth quarter last year, second-quarter margins nearly caught up and were slightly behind last year and so that were able to catch up to close to last year's levels and, again, by segment, some segments are clearly going to have lower margins and others fine and on balance, margins in a striking range to where they are are rational.

If I used, turn over to AmeriGas for a minute. With respect -- respect to margins there, clearly the segment did very well this past quarter. You know, what is your belief on being able to maintain the margins and is there a concern to respect to uncollectibles?

You talk about the margins first. I think we would expect margins to continue to be both last year but lower than they have been because of the seasonal change in the last six months of the year. That said, obviously, we're going to manage margins in line with competitive situations and one of our goals is to continue to grow our base business, so we'll have to manage our pricing in line with that. On the bad debt side, year-to-date, we have seen a very small increase in the percentage of our receivables that is over 60 days and haven't seen that much impact. That would be the last six months of the year and it's too early to declare victory in that area, but to date we haven't seen a big impact on the receivables. The balances are bigger because the revenues are bigger and the higher selling price.

Great. Thank you very much, guys.

Sure.

Next go to Darren Horowitz from Raymond James.

Thanks. Lon, I'm trying to get a sense of how retail propane volumes are tracking. When you look at your results this quarter, They were down slightly year over year, similar to how the December quarter numbers were, and obviously, you're facing commodity price headwinds there as well and end user curtailment. Offsetting that to a certain extent have been an aggregate the amount of customers that you have added last year. Can you give us a sense for the expectations in the back half of this fiscal year as you currently sit today? I.E., do you think it's possible that based on a perpetuating higher sustainable commodity price environment that volumes might be flat to slightly down year-over-year?

Let me just give a ballpark and, Gene, jump in. If you adjust for acquisitions and all of the puts and takes that go into a process, volumes are probably off on the order of 4 to 5% year-over-year and that ballpark. The combination is clearly some conservation out there. The difficulty in the propane business of estimating conservation is that you don't know relative levels of customer stories of your product. You can try to estimate that and it's not a perfect flow like it is in the gas utility for example, and so I think there is clear evidence of conservation and at least in my mind that the economy slowed a little and different categoriess get affected by that to some degree. And I think as well just the nature of the weather patterns here affects volumes, when it's warm in the southeast you get a different result in our model than you do if it's real warm in somewhere else. It's the way the weather hits. overall, I would guess -- trending as they have trended. I don't think we see anything -- .

We'll have ace volumes up a bit year-over-year for the last six months, but generally about the same trend we have seen.

As Gene said, you get less weather sensitivity and there is a strong incentive for people to delay buying as long as they can given the high price there is out there.

And weather in September.

Weather in September, as Gene points out. If you're looking at volume performance the rest of the year, flat to last year, give or take a little bit would be a rational expectation.

Okay, appreciate it and switching gears to the operating and maintenance side, relative to your earlier comments, when you look at OEM, on year-over-year basis and sequentially, in absolute terms it was up, but actually as a percent of revenue generated, it was a little bit lower. As we factored in the recent acquisitions, how do we think of O&M going forward?

For operating expenses, going forward, I think the tread will be fairly consistent with what you have seen year-to-date.

Yes.

There is nothing particularly -- particularly unusual this year about the expense year-to-date.

The big increase of the year-over-year is, of course, the acquisitions is a big part of it.

The acquisitions, vehicle fuel, it's bad debt because we reserve on a bases of a percent of revenues. You will see expenses higher as a result of the same factors and in line with what you're saying.

This quarter should be used as a good platform then?

Yeah.

Thank you, guys I appreciate it.

Yeah. (OPERATOR INSTRUCTIONS). Next, we'll go to William Hsu from Janney Montgomery Scott.

Good afternoon.

Hi.

I have a question about the gas utility.

Sure.

I believe there was a decline in retail core market margin. Can you provide insight about that please? Thank you.

Unit margins don't change. On the retail core market margin, if it changed much, it would be weather oriented, that is the weather was 4.5% warmer than the prior year and throughput on the retail core was down, which is offset by higher delivery service volumes that ran through so volume on an aggregate bases is relatively flat. The only change you would see in the retail core market would be weather-related , really. You didn't have a huge fly up in natural gas prices like you did propane, heating oil and any oil-based product. Natural gas prices year-over-year until recently has moved a lot and for the winter months it was not a big issue and you would have your normal conservation and which we think of is on the order of 1% and the big difference, all weather-related.

Thank you very much.

Sure.

There appears to be no further questions at this time, gentlemen.

Okay, well, thank you all very much for dialing in and listening to what we have to say and those of you who listened to it otherwise, again, we're optimistic about what our future looks like. We're exceeding our earnings goal for this year, raised our dividend as we said we would, had business performance and looks promising for the future and, you know, airings estimate for both businesses as we go forward that looks as we throughout it would and increases our goal again. I look forward to talking to all of you and we will be in touch hopefully soon. Thank you very much.

That concludes today's conditions, thank you for your participation, you may now disconnect.