UGI Corp (UGI) 2009 Q3 法說會逐字稿

Good day, everyone, and welcome to the UGI and AmeriGas Partners third quarter fiscal year 2009 earnings results conference call and webcast. Today's call is being recorded. At this time, for opening remarks and introductions, I'd like to turn the conference over to Mr. Bob Krick. Please go ahead, sir.

Thank you, Justin. Good afternoon, and thank you, all, for joining us today. As we begin, let me remind you 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 US 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 COO of AmeriGas, and Peter Kelly, CFO of UGI, and, of course, your host Chairman and CEO of UGI, Lon Greenberg. Lon.

Thanks Bob, and hello everybody. Let me welcome you to our call as well. I trust you have all had the opportunity to review our press releases reporting our third quarter results. Peter will provide you with greater detail about our financial results as we go forward in the call. Our earnings this quarter from our business units were in line with our expectations. In addition, however, our earnings reflect a $10 million charge related to the French competition proceedings which we described in a Form 8-K filed the other day.

In summary, during the quarter our propane, both international and domestic propane, and our gas utility businesses posted solid results. As was the case with prior quarters this year, our electric distribution business had lower demand. This quarter's results also include higher cost of goods in our electric utility business tied to mark to market adjustments from transportation rights. Our energy services businesses results were adversely affected by lower margin principally from electric generation businesses and those of you who follow the electric generation business know that prices are considerably lower this year than they were in prior years. You will get more color on our performance as we go forward in the call from John, Peter and Gene. When they complete their remarks, I will provide you with some closing thoughts. At this point I'll turn it over to Peter to give you some color on our financial results.

Thanks Lon. As Lon previously, mentioned the quarter was generally in line with our expectations. Propane businesses and natural gas businesses performed well in the face of difficult economic conditions. We took a charge to the French competition issue and our electric businesses suffered from lower volumes, lower prices and higher costs. Net income for the quarter was a loss of $3.6 million or $0.03 per share. We took a charge to the French competition issue and cents per share though as mentioned earlier this includes a charge of $10 million or $0.09 per share for the previously disclosed competition matter in France.

The economic recession continues to impact our businesses and before Gene and John speak, let me give you some color on the performance of each of the units. UGI's domestic propane distributor, AmeriGas Partners, net income contribution to UGI was a seasonal loss of $2.9 million compared to the $2.5 million loss in the same period last year. AmeriGas sold approximately 160 million retail gallons down on the 181 million gallons sold in the same period last year where nationally during the quarter it was 3.1% warmer than normal and 10.3% warmer than the prior year period. We believe the current deterioration in economic conditions continues to have an impact on customer demand, in particular in the commercial and industrial sector and to a lesser extent in the residential center. Gene will of course cover this in more detail in his comments later in the call.

Turning now to our utilities. In our gas utility net income was $1.3 million compared to the $2.1 million reported in the same quarter last year. System through puts of 25.8 billion cubic feet including the acquisition of Central Penn Gas was 10.3% higher than in the same period last year. Net income in our electric utility was $1.7 million compared to the $4.1 million reported a year ago with largest single change being the realized and unrealized gains of FTRs we had this time last year. Sales volumes declined 6.7% to 209.8 million kilowatt hours from 224.9 million kilowatt hours primarily as a result of weak economic conditions impacting sales to commercial and industrial customers and the effects of cool early summer temperatures.

In our international propane business net income for the three months ended June was a loss of $8 million including the $10 million charge for the French competition issue compared to the $2.6 million profit made in the same period last year. Margin level of French business, Antargaz, was essentially flat year on year with declines in volume offset by high unit margins. We did see incremental margin from Flaga with a consolidation of the remaining interest of the central European joint venture in January of 2009. Antargaz sold 48.1 million gallons of LPG compared to the 55.2 million gallons recorded in the same quarter last year on weather that was 29.3% warmer than normal and 17% warmer than the prior year. Energy services contributed net income of $5.1 million compared to $9.4 million reported last year. Our gas marketing business performed at similar levels to 2008 and our power marketing business continues to grow; however, our overall performance was impacted by lower overall margin in our electric and asset management businesses. Electric generation continues to be weak with lower volumes and prices coupled with higher operating and maintenance costs and our asset management business was impacted by the unusual lack of volatility in gas prices.

Turning to the balance sheet. June 30 our total debt was $2.2 billion similar to the level we had in September 2008, and our consolidated cash position was $305 million, although $65 million of this is restricted cash for margin purposes. We are holding $95 million in investable cash at the UGI corporate level with an expectation of more than $100 million by fiscal year end, but the $2.2 billion of debt at quarter end, approximately $2.1 billion is long term. AmeriGas closed at approximately $863 million of long-term debt, $70 million down from the same period last year, and with no amounts outstanding on its revolver. Utility closed at approximately $750 million including $110 million on its revolver. Antargaz our French operation closed at EUR380 million with no use of its revolver. Energy services closed the quarter with $44 million on its facility. Liquidity is good and our focus on the balance sheet remains strong. We added resources early in the cycle to manage receivables and our collections have been healthy. I'm also pleased to report that Moody's reiterated the A3 rating on our utility. In summary, a quarter very much in line with our expectations given the general economic conditions and, once again, a set of results that show the strength of our diversified operating model. With that, let me pass the call over to John.

Thanks, Peter. As Lon and Peter have noted, the external environment has been particularly challenging in FY 2009. Our businesses have performed well despite the continuing economic slow down and most critically have continued to focus on the core business objectives that drive our success. I would like to comment briefly on our progress in each of these three key areas, growing our core business, continuously improving operations and reinvesting cash in high quality projects. First on growing our core. During our recessionary period it's critically important to remain focused on identifying and securing growth opportunities. We have worked hard in 2009 to focus on growth and we have had some notable successes thus far this year. Energy services marketing program targeting small commercial customers is progressing well. We anticipate that we will have added over 4500 new customers through this program by the end of FY 2009 and believe we have the potential to further expand the program in 2010. We are using a combination of direct sales and telemarketing to reach this fragmented but attractive segment of customers.

AmeriGas continues to have good success on strategic accounts. One particularly noteworthy new account is Tractor Supply, the US's largest retail farm and ranch store chain which operates almost 900 retail stores in 44 states. AmeriGas recently signed a letter -- signed a contract to serve Tractor Supply nationally and is in the process of installing our equipment at many of their locations. This roll out process should be completed within six months. Our gas utility is on track to deliver another solid year for new account growth despite the significant reduction in new home additions. While growth in residential new accounts has slowed over the course of the year, our commercial account additions are running above FY 2008 levels. We will maintain our focus on conversion opportunities with electric customers within our gas service areas. These customers will see their electric rates increasing over the next 6 to 18 months as rate caps expire for several major electric utilities in Pennsylvania.

Our PNG and CPG base rate cases continue to move through the review process with the Pennsylvania PUC. The increased rates would fund system improvements and operations necessary to maintain safe and reliable natural gas service. The proposed rate increase includes energy assistance programs for low income customers and conservation programs for all customers. The review process for the rate request is still expected to include by the end of our fiscal year.

On to continuously improving operations, each quarter I comment on our commitment to continuous improvement within each of the operating units. The third quarter of our fiscal year is a critical period for working capital management, particularly accounts receivable. We recognize the credit and collections activity this spring would be particularly challenging due to the difficult economic conditions impacting all customers. In response to these challenges, we added additional credit resources internally and externally, cross trained some of our team on credit and collection activities, and communicated with customers early and often. These efforts have been quite successful and we finished up the quarter in good shape on receivables as measured by both DSO and receiving aging analyses in each of our businesses. Working capital management requires constant attention so we recognize the need to continue to focus on this critical activity. However, our performance in the last quarter given the significant challenges we face gives us confidence that we will continue to manage our working capital levels effectively.

Now on to reinvesting cash. As we approach the end of FY 2009 I thought I'd comment on both performance to date on two key FY 2009 investments and the outlook for major projects. First a quick comment on our Q1 acquisition of Central Penn Gas and our Q2 acquisition of our partner's 50% interest in our eastern European propane business. We have had excellent first nine months of operations at Central Penn Gas. The addition of the CPG team has strengthened our gas utilities operations and the propane locations acquired in the deal have enhanced AmeriGas' Mid-Atlantic market coverage. Our eastern European propane business, 100% UGI owned as of January, is operating under the Flaga brand in five countries, Poland, Hungary, Romania, Slovakia, and the Czech Republic. This business, while small, is performing well and provides a platform for future growth and investment.

Our business development teams are actively pursuing a range of investment opportunities, both acquisitions and capital projects. These opportunities include conventional and renewable energy projects. We are encouraged by the diversity and the quality of these opportunities and will keep you advised on our progress. I would now like to turn it over to Gene who will provide you with the details on AmeriGas' performance in Q3. Gene.

Thanks, John. AmeriGas is reporting EBITDA for the quarter of $25.4 million, a decrease of about $4 million from last year due principally to an 11.5% drop in our volume. The lower volume was the result of the weak economy and customer conservation and also weather that was 10% warmer than the same quarter last year. Often, warm spring weather can result in customers skipping their last bill of the season. As Peter noted, the results for the quarter were in line with expectations and consistent with our EBITDA forecast for the year of $335 to $345 million excluding the $40 million gain on the sale of our San Pedro terminal. This will represent between a 7% and 10% increase in EBITDA compared to the prior year, adjusted for the impact of the terminal sales. These results for the year compare favorably to our strategic objective of growing EBITDA by 4% per year.

Volume for the quarter was down across all categories excluding Ace. The volume shortfall to last year was particularly pronounced in our forklift segment, but we have also seen a drop in our residential and commercial volumes. The volume decline in the forklift segment is consistent with reduced volumes being reported by ground and air freight companies and big box retailers that make up a significant portion of our forklift customer base. Our customers continue to benefit from the fall in wholesale propane prices compared to last year. The average wholesale cost of propane at [Mount Bellevue] in the third quarter was $0.73 compared to $1.70 last year, a decrease of almost a dollar. Prices actually peaked last year on July 11 at $1.98 and now we're at about $0.80 a gallon, close to 60% drop. These lower prices are bringing welcome relief to our customers as selling prices decline in reaction to lower cost.

We are pleased with the efforts of our field team to manage expenses for the quarter. Expenses were down $5 million and essentially flat when you take out the beneficial effect of lower vehicle fuel expense. The favorable expense performance was a result of managing staffing levels in response to lower volume. One area where we continue to see growth in this environment is Ace, where cylinder transactions were up about 3% year to date. We also had a good increase in the number of retailer locations where we have Ace cages. Strategic accounts has felt more of the impact to the weak economy with volume down 1% year to date. A fairly significant number of strategic account customers use propane to fuel their forklifts, so the drop in forklift volume has been reducing the volume per customer in this part of the business. Despite the challenging economic environment the number of strategic account customer locations that we service is actually up 4% from last year, which bodes well for our volumes once the economy turns. In part, this is due to rolling out over 2500 BNSF rail locations this year.

Going forward strategic accounts will also benefit from the rollout of the Tractor Supply location that Jon mentioned. Base business customer growth continues to be weak due to a lack of residential and commercial builder activity and tight credit management with existing accounts. Our strategy in this part of our business is to gain customers through superior service. With that in mind, I'm pleased to report that in our customer surveys we have seen an increase in the number of customers who say they will stay with AmeriGas from 86% last year to 96% this year and an increase in the number of customers that say they will recommend AmeriGas from 89% to 94% this year. We believe these results reflect the focus our team in the field places on customer service and they position us well for the future. Year to date we have completed four acquisitions including Penn fuel which we acquired in October. The Penn fuel acquisition continues to contribute more to earnings than we assumed in our pro forma.

Looking forward we expect to see continued weakness in our volume as a result of the impact of the recession on our economy. It will be our job to manage our business appropriately given the lower volume to achieve our financial objectives while aggressively pursuing our strategy of growth through acquisitions, Ace, strategic accounts and in our traditional customer base. I would like to finish my comments by thanking our team in the field for all they're doing to manage our expenses in reaction to the lower volume. We have had to reduce our staffing in many locations or work reduced hours. The tough decisions that we're making now will position us to achieve our financial objectives for the balance of this year and in future years. Now I'll pass the call back to Lon for some concluding remarks.

Thanks, Gene. Let me leave you-all with the following thoughts. As you know, we reiterated guidance at AmeriGas and updated guidance at UGI. The updated UGI reflects no more than the reserve related to the French competition proceedings. Our prior guidance of $2.40 to $2.50 included a gain of $0.10 related to the sale of the terminal by AmeriGas earlier this fiscal year. We now have an additional nonoperational item affecting our guidance, the $0.09 related to the French competition matter. Because these two items are of an unusual nature, we believe it more useful to look at earnings from our operating units and our view of earnings from those units of $2.30 to $2.40 netting out the two unusual items remains unchanged.

I want to talk a little bit more also about the French competition matter for which we filed an 8-K earlier this week and we took a EUR7 million or $10 million charge this quarter. French competition authorities completed their investigation which began in 2005. Antargaz received a statement of objections from the authorities which we are in the process of reviewing. As we noted in the Form 8-K, the time period during which the alleged conduct at issue took place was largely in the 1999 to 2004 timeframe, virtually all of which was prior to the time we acquired control of Antargaz at UGI. Where again reviewing the statement of objections and intend to vigorously defend ourselves as the process ensues in that matter.

All of you are generally aware that we had what I would call a fantastic year this fiscal year and it's fantastic under any circumstances, but particularly fantastic given the generally adverse economic conditions we faced. Beyond the numbers, we also made good progress in executing our strategies. All of our business units moved forward in making their businesses better performers for the long term. We also identified, as John noted, some larger scale internal capital investment opportunities and we continue to evaluate opportunities to strengthen our business unit through acquisition. We have said many times that despite our excellent results, we're not immune from the adverse economic conditions which exist. We continue to take actions to adjust to that environment while at the same time look forward to a potential improvement in conditions next year.

The model we have employed for many years of growing our diverse energy distribution related businesses in excess of their industry growth rates, operating those businesses effectively and efficiently, producing excess cash and reinvesting that cash for additional growth while at the same time returning a portion of that cash to you in the form of an above average dividend increase each year exemplifies the type of balance stroke and income vehicle we have become for these many years. We look forward to reporting to you our full fiscal year earnings during our next call in October, or is it November, I don't know.

November.

November. Bob corrects me, thank you. That ends my remarks for this moment and we're ready to take whatever questions you have. So we're ready to go.

Thank you sir. (Operator Instructions). And we will go first to Barry Klein with Citigroup.

How's it going guys.

Good Barry, now are you.

The margins over the past few quarters have really ramped up, the per unit margins that is. If the economy continues to drag, do you think there will be a situation where customers start to retrench and start to challenge these increasing margins or do you feel like it will be like historically growing gradually as they have been historically?

You're referring to AmeriGas?

AmeriGas, yes.

Yes. Well, if you look at, let me take a stab at it. Margins were at their greatest level year over year much earlier in the fiscal year as product cost came down. And if you look in this quarter's results on an equivalent basis, margin year over year growth was not as great as prior quarters. And we have said from the first quarter and we said in the second quarter and we will reiterate in this quarter margins are approaching what we consider more normalized sustainable levels. Don't forget margins expanded not because of price growing, so it's been largely invisible to our consumers. In fact, our customers have benefited as we have reduced price, the fact that our costs came down a bit more quickly than our price came down that margins expanded. And that's catching up to itself as time has gone on as we said it would. If you look forward, we don't see a collapse in margins imminent. In fact, we would expect over time that margins will next year approximate margins that were around this year. So we aren't anticipating any problems and consumers have benefited significantly because our prices have come down significantly.

The cost of products dropped about $1 or more than $1. So from a customer perspective they're seeing selling prices that look like 2007.

Right.

So I don't think that there will be a lot of push there, it will be competitive pressures we will watch carefully.

Got you. I guess from a volume perspective also there appears to be significant conservation this year. Do you feel these, the volumes we have been seeing will become the norm or do you think we will see a return to higher volume levels?

Conservation, as you know, it's a tough economy out there. We have identified and Gene has spoken about volume being the most down in categories which are economically sensitive, Barry. So forklift volumes, for example, are down significantly year over year and that's all economy related, you can see that in commercial volumes as well, economy related. Of course there's some conservation going on and you would expect that conservation in an economic environment like we have. As economic conditions improve, we would expect volume to improve without question because the demand for our product will go up and the economically sensitive areas and, on the other hand, we have said for years there is a structural conservation going on not only in propane business but all energy product businesses because of the higher efficiency, demand, responses that utilities have to put in place, and we think that structural conservation is on the order of 1% a year give or take a little. So to be a little more specific, as economic conditions improve and we're all hearing a little bit about improving economic conditions, we would expect volumes to improve. If economic conditions remain depressed and we don't see any improvement, we would expect the trend to continue what we see which has been tougher volumes in the economically sensitive areas.

One final question relating to pension. You guys I guess since you have year ended September you sort of missed out on some of the stuff going on with pensions with the discount rate and with the market coming down towards the end of the year. Should there be any concern over pensions going into 2010?

Let me differentiate a couple things for you just quickly, I know you know it, but just to make sure those who are listening understand. There's a difference between book expense and value of assets and cash. Regardless of when our fiscal year ended, as you know, the value of the assets took the hit, it was just what fiscal year it fell into. We had an increase in pension expense this year on the order of magnitude of $5 million year over year. This year we go out and get valuations which tell us what our pension expense ought to be based on those valuations right about this time of year we're going through the budgeting cycle and we're developing that analysis. Now, I will tell you that the rise in the market off the lows has helped a lot in that regard and valuations of our pension plan have responded accordingly. So we don't see any impending huge issue coming out of the pension plan. Compared to most plans, we're pretty well funded overall and we did have a noticeable rise in pension expense this year that we have already absorbed.

Okay, thanks a lot for the time guys.

Sure.

We will go next to Ryan Rosenthal with Sidoti & Company.

Good afternoon everyone.

Hi, Ryan.

A couple questions. Concerning the domestic and international propane divisions, could you give us some details on how your internal growth and growth plans and growth opportunities through acquisitions that you foresee?

Let me, I'll let Gene comment on the propane, domestic propane side, then I'll talk about international. International activity, as you know, we bought out our joint venture partner this year in central and eastern Europe. And there are a number of what I'll call smaller fill-in acquisitions that we look at from time to time and from time to time larger transactions come up as well. By nature of the business overseas, there aren't as many players there as there are here, so it's a little bit less frequent there than here on the acquisition side, but there are a number of opportunities that we come across our desk and we evaluate and continue to evaluate internationally. Let me turn the domestic propane side over to Gene.

Sure. Well, on the domestic side, when it comes to internal growth we try to leverage our footprint from our locations, our 650 locations across the country, we can reach about 95% of all propane consumers and we're able to leverage that through Ace, our cylinder exchange business, and also through strategic accounts. We have a number of customers where we serve over 1,000 locations for them. Really nobody else in the industry can do that as well as we do it. So we do have a competitive advantage there and opportunity to continue to grow and we have seen growth in the number of locations in both cases. As I mentioned with strategic accounts, the usage per customers down because a lot of those were forklift customers, but the number of customers is up. So we do continue to see growth in those areas. On the acquisition side, our goal is to add about 20 million gallons a year through acquisitions. If you look over the last five or six years, we have averaged right in that neighborhood. We continue to talk to lots of independent marketers. Activity in the industry I'd say has been a little bit lower this year than in prior years. Historically we have seen across the industry maybe 30 deals done in a year. This year so far we have only seen about seven done in the industry. So activity is a little bit lower, but there's usually a lot of activity between now and December. So it's a bit too early to say what the acquisition levels will be, but we're talking to just as many people right now as we have in prior years.

Okay. Thanks for your comments on that. Jumping over to the energy services businesses, perhaps you could comment on natural gas versus coal electricity generation and the effect of lower natural gas prices may have had on margins for that business and just general opportunities that you have going forward there.

Okay. On the energy services side, the most notable effect that you see in our result of natural gas prices really ironically is in electric prices. Electric, anyone who follows the electric generation industry knows that electric prices have come down significantly as natural gas prices have come down because natural gas is, in many markets, that's certainly PJM where we are, sets the marginal price for electricity. So electric prices are down. In addition, the summer has been a very relatively warm summer in the PJM areas as it was in June. And so you haven't seen the hot temperatures come in and you have seen demand drop and that demand can be, you can't see it in our energy services business as such, but you can see it in our electric utility business. So the natural gas effect is largely in our electric generation business.

On the gas marketing side actually we're doing quite well. Gas marketing side, because of the financial crises and the number of players exiting the business, we have seen margins expand a little bit on the gas marketing side and we have had opportunities really as people have exited to improve our business in a number of ways. So that gas marketing side has been favorably affected by the marketplace in that business.

I think, Ryan, you also asked about generation generally. Can't build coal plants, nuke plants, the government I guess picked their six players to build nuke plants. We weren't in the running, you all will be happy to know. So we are, as John has mentioned on several occasions, converting one of our coal plants into a much larger natural gas fired plant and that process continues smoothly along and that's 2011 by the time that facility is up and running and we're quite optimistic about the returns associated with that generation plant. So all in all, I would say energy services in a sense reflects the diversification of it's own units which is almost like UGI itself. They have got a unit that's down, the electric generation business, their marketing businesses are doing clearly better than they are.

Just a follow up on that. In terms of electric generation and the margins you earn on that business, how much of that is generated with contracts versus what you earn on the spot market?

We hedge through the end of this year about 60%, John says, of that generation.

Okay. Is there any hedging that goes out further than that?

About a third. Next year.

A third next year. Okay, thanks for your time everybody.

Yes.

(Operator Instructions). Gentlemen, at this time there appear to be no further questions.

All right. Thank you all very much for your interest and questions for those of you who asked questions. As I said we look forward to keeping you posted on our results as we move forward into the relatively quiet period for us, which is the summer, it accelerates in activity as we come out of the summer into September. And we will be out to see folks again as the year progresses and look forward to talking to you in November on year-end results. So, thank you, all, for your attention, bye bye.

That does conclude today's conference call. We thank you for your participation.