UGI Corp (UGI) 2011 Q1 法說會逐字稿

Good day, Ladies and gentlemen, and thank you for standing by. And welcome to the UGI and AmeriGas Partners LP first quarter fiscal year 2011 earnings conference call and live audio webcast. At this time, all participants are in a listen only mode. Later we'll conduct a question and answer session and instructions will follow at that time. (Operator Instructions)As a reminder, this conference is being recorded, and now I'll turn the program over to Hugh Gallagher, Director, Treasury Services and Investor Relations. Please go ahead, sir.

Thank you. Good afternoon, and thank you for joining us today. As we begin, let me remind you that our comments will contain forward-looking statements which 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 more complete list of factors that could affect results.

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, the impact of pending and future legal and regulatory proceedings, political, economic, legislative and regulatory changes in the United States and abroad, currency exchange rates, the timing and success of our acquisitions and investments to grow our business 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. In addition, our remarks today will reference certain non-GAAP financial measures that management believes provide useful information to investors to more effectively evaluate the year-over-year results of operations of the Companies. These non-GAAP financial measures are comparable -- are not comparable to those measures used by other companies and should be considered in conjunction with other performance measures such as cash flows from operating activities. With us today are John Walsh, President and COO of UGI, Gene Bissell, President and CEO of AmeriGas, Peter Kelly, CFO of UGI and your host, Chairman and CEO of UGI, Lon Greenberg. Lon?

Thank you, Hugh. Let me also welcome all of you to our call. I trust you've had the opportunity to review our press releases reporting our first quarter results. In those press releases we reported earnings per share for UGI of $1.01 compared to $0.90 last year. This year included an $0.08 reserve reversal. That's a mouthful, reserve reversal, for the French Competition Authority proceeding. Adjusting for that unusual item, our earnings per share were $0.93 compared to $0.90 last year for an increase of just over 3%. AmeriGas reported a decline in net income and EBITDA. AmeriGas' net income declined to about $75 million compared to last year of $84 million. Similarly, EBITDA declined to just over $113 million from $123 million last year. This was both an interesting and a challenging quarter for us and one that once again showed merits of diversification in our energy marketing and distribution businesses.

Among the challenges we face this quarter were erratic weather patterns, and by that I mean we started off very slowly to the heating season in the US with October being more than 35% warmer than last year nationally and early November not being a whole lot better. This is one of the principal reasons for the volume and earnings shortfall at AmeriGas. Weather turned much colder in the second half of November through December domestically ,and our domestic propane and utility businesses really picked up. But then they had to encounter snow, sleet, ice, just liked today, which challenged our ability to deliver to our customers in our propane business.

While weather was more favorable overseas, all of our propane businesses, and in particular, our international propane businesses, faced a significant increase in wholesale product costs. This was largely invisible to most of you but in fact, our wholesale commodity costs overseas rose to record levels, and those record levels were higher than the wholesale commodity costs were when oil was $150 a barrel. Thus, margin management was a real challenge for us overseas. On top of this, there were strikes in France for a large part of October which disrupted our normal patterns of serving our customers. Overseas, we also had to devote a great deal of time and effort to integrating our new acquisitions at Flaga. I won't go on, but I will offer the thought that all of our business units had their hands full this quarter. Yet, we did an excellent job across-the-board of managing in this environment.

At UGI, our earnings per share rose to a level consistent with our expectations for the quarter. And you should remember that the rate at which we hedged the euro this year is lower than last year, and the lower euro cost us about $0.03 to $0.04 this quarter. At AmeriGas, our earnings and volume in each of November and December were greater than the prior year, but they weren't sufficient to overcome the extraordinary slow start we had in October due to the really warm weather. I'll have more to say later in the call, but I will summarize by saying I'm really pleased with both our financial and operating performance this quarter. At this point, I'd like to turn the call over to Peter and then John and Gene to follow. Peter?

Thanks, Lon. As Lon covered in his remarks, the first quarter represents a good start to the year given the relatively warm October and November and the rapid rise of LPG costs, particularly in Europe. In my comments I'll discuss our results for the first quarter and give some color on each business before moving on to our balance sheet and then liquidity.

Our EPS for the quarter was $1.01, an increase of $0.11 compared to the $0.90 reported in the same quarter of fiscal 2010. Included in the $1.01 for this quarter is $0.08 for the reversal of the provision taken in fiscal 2009 for the French Competition Authority matter. The weather ended the quarter very positively with colder than normal temperatures for all businesses in the month of December. The quarter having gotten off to a relatively warm start, particularly in the service area of AmeriGas with weather in October 35% warmer than last year. Also, LPG costs rose quite rapidly in the quarter, particularly in Europe where they increased year on year by over 40%, negatively impacting international unit margins. As I mentioned earlier, we believe the first quarter represents a good start to the year and once again, our diversified model demonstrated its strength. Volumes in our utility business benefited from higher throughput to interruptible customers, and margin benefited from the impact of the colder weather on volumes with our residential and commercial customers.

In our international business, volumes increased given the colder weather and the recent acquisitions, but exchange rate worked against us impacting our year on year results by approximately $4 million. And clearly, the resolution of the French Competition matter was spoke of favorable and excellent news. The contribution from AmeriGas was slightly down year on year as the colder weather in December and improved unit margins were not able to fully mitigate the impact of the warmer than normal weather in October and November. Our midstream and marketing business performed well with our marketing and asset management largely offsetting the lower margin from electric generation and the absence of margin from the Atlantic energy terminal we sold last year.

Turning to the balance sheet, our consolidated debt of $2.3 billion was down about $64 million compared to the same quarter last year. Our consolidated cash position was $158.8 million compared to the $225.2 million reported this time last year. Restricted cash included in these numbers was approximately $19.4 million this year compared to the $9.6 million reported last year. Included in the $158.8 million at the end of this quarter, we had about $71.2 million of cash available at our holding company to reinvest for growth. At our current annual dividend rate, we would typically expect to generate on average about $100 million to $125 million of such investable cash per year.

Of the $2.3 billion of debt at the end of December, approximately $2 billion is long term debt including $500 million plus defined as current maturities of long term debt. By business and compared to the same quarter last year, AmeriGas had $971.7 million of debt, up $80.8 million from last year. Utilities have $714 million of debt, a reduction of $105 million, and the international business was approximately $571.4 million, down $44.4 million on last year. We currently plan to refinance $318 million euros of debt in France before it becomes due this Spring. From a property, plant and equipment perspective, we have $3.1 billion in net fixed assets, up approximately $194 million on last year. Capital expenditures were approximately $85.3 million with depreciation and amortization of $55.3 million.

Turning to liquidity, overall, we have strong liquidity and the ability to fund our requirements throughout all of our operating subsidiaries. In utilities, we had a line of credit in place for $350 million. We have $370 million of financing capacity in midstream and marketing and $275 million in lines of credit at AmeriGas. At Antargaz, we have a facility of 50 million euros which we plan to extend when we refinance our long term debt, and we have a facility of 36 million euros in Flaga. At the end of December, AmeriGas used $178 million of its revolver and had a cash balance of $9.5 million. Utilities have used $74 million of its revolver with cash on hand of $15.5 million. Antargaz had no borrowings on its revolver with $9.4 million of cash available, and midstream and marketing used none of its facility and had cash on hand of $26.4 million. From a perspective point of view, we recently refinanced $430 million of AmeriGas debt with $470 million of MLP senior debt at favorable rates. And during this year, we'll renegotiate our revolvers at both AmeriGas and our utility.

So overall, a good start to the year with our diversified business model responding well. For those of you who follow it, we've been making dividend payments for 126 years and have increased our dividend in 23 consecutive years. Before I pass the call over to John to discuss our operational performance, I'd like to say what a pleasure it's been to have the opportunity to work with both my colleagues here at UGI and you, our investors over the last three years. So, with that, I'll pass the call over to John.

Thanks, Peter. As Lon and Peter have noted, we delivered a solid performance in Q1. While we still see sluggishness in some of the market segments we serve, we're encouraged by the strengthening demand we see in other areas. We worked diligently throughout the recessionary period to identify and deliver growth in our core businesses. We focused on expanding our customer base within segments currently served as well as adding new segments within our existing service areas. That focus was evident in Q1 as we made significant progress on a number of fronts. Our gas utility is seeing the benefits of an enhanced focus on conversions with over 3,000 new residential customer additions in the quarter. Customer conversions, primarily from fuel oil, accounted for approximately two-thirds of the new accounts.

We're also seeing an increase in new commercial account activity with commercial account additions up 10% year on year. One very positive economic indicator in our utility service territory is the increased throughput at many of our existing commercial and industrial accounts. One additional note on utilities, we filed a $16.5 million rate increase request for UGI Central Penn Gas with the Pennsylvania PUC last week. We expect the rate case proceedings to conclude by the end of our fiscal year. Our midstream and marketing business continues to expand its power marketing segment. We've added 1,100 new accounts in the last 12 months on 13 local distribution systems within the PJM network. We expect a ramp up in Q2 activity in Pennsylvania where two large LDCs, First Energy and PECO, have just emerged from rate caps. This is a great example of new segment development as we're leveraging our strong relationships with our natural gas customers in the Mid Atlantic region by adding power to our energy supply portfolio.

Antargaz is making very good progress on their natural gas marketing program. We launched this new program, which leverages Antargaz's strong customer relationships and excellent market reputation about six months ago, and we've added about a 1,000 new accounts in that time. While this segment remains in its developmental phase, we're encouraged by the early success.

In addition to delivering growth in our core businesses, we're focusing -- or excuse me, we're maintaining our focus on reinvestment of cash generated by those businesses. These activities span the corporation but I'll comment on progress in three key areas.

Our two major midstream and generation capital projects that are in the construction phase remain on track. Our $125 million Hunlock project to repower our coal fired electric generating station as a larger gas fired facility will come on stream this summer. The second project, the $120 million expansion of our LNG peaking facility in Temple, Pennsylvania is also on schedule. We expect mechanical completion at Temple in mid 2012 with start ups scheduled for late fiscal year 2012. We made excellent progress on the integration programs for our newly acquired propane businesses in Denmark, Poland and Hungary. As noted on our last call, these acquisitions more than doubled Flaga's sales volume and strengthened our overall market position.

Finally, our project development activity in the Marcellus Shale region continues to be a priority, and activity levels remain high over the last quarter. The transfer of our 15 BCF gas storage facility in north central Pennsylvania to FERC regulation at market base rates will occur on April 1. We're currently awaiting the results of an open season process that is underway. Interest in the storage capacity among producers, marketers and LDCs has been high. We started work on a gathering system project to serve Marcellus gas producers in Wyoming County, Pennsylvania. We announced the signing of an agreement with the anchor shipper on this project, Citrus Energy, last quarter, and we expect the gathering services to begin later this fiscal fear.

We continue to market Penn Star, the natural gas pipeline project in northeastern Pennsylvania that we're jointly developing with NiSource to major producers. Our plan is to have this project in service in 2013. The timing of our FERC filing will be dependent on commitments from target anchor shippers. I'd now like to turn it over to Gene who will provide you with details on AmeriGas' performance in Q1. Gene?

Thanks, John. As Lon mentioned, AmeriGas EBITDA of $113.3 million was down for the quarter compared to last year. I'd like to give you some color on our volume and expenses and also on the progress we made on our core growth strategy. The lower volume for the quarter was principally the result of unusually warm weather we experienced in October. Weather in October was 35% warmer than last year. I think I'm the third person to mention that. And that resulted in volume for the month that was 22% below last year. Volume in November and December exceeded prior year, but not by enough to offset the impact of the warm weather in October. The other factor that affected our first quarter volume was lower propane demand for crop drying.

In the first quarter of last year, we benefited from record levels of crop drying demand, and this year the demand was at a more normal level. Excluding the drop in agricultural sales, our volume for the quarter was off about 2%, principally due to the warm weather in October. This variability in weather did have an impact on our expenses. Expenses were up about $9.6 million for the quarter, a portion of this was due to higher overtime as we work to meet significantly higher demand in December. Other expense increases included higher fuel expense due to higher diesel costs, higher general and medical insurance expense and higher legal expenses. Now, the higher expense level for the first quarter is not indicative of the expense trend that we expect for the balance of the year. We're projecting that for the rest of the year, expenses will be up only modestly from last year's levels.

Turning to our growth strategies, our ACE cylinder exchange business is off to a great start this year with volume up 10% due to strong same-store sales and an increase in the number of locations that we serve. Of course, this is not a key corridor for the cylinder exchange business, but we're glad to be starting the year with such strong results. We still have a backlog of about 2,000 new ACE installations to complete before the grilling season starts in May. Strategic account volume was also up with gallons up over 3% from last year. We've closed eight acquisitions so far this fiscal year, which will add about 8 million gallons on an annualized basis. We continue to target adding 20 million gallons through acquisitions on an annualized basis for the year.

Looking forward, we're pleased to be starting the second quarter with cold weather in much of the country. In addition to keeping up with the strong demand, we will continue to focus on growing our EBITDA through effective execution of our growth strategies, acquisitions, growth in ACE and strategic accounts and growing our local residential and commercial customer base through superior customer service. I'd like to finish my remarks by thanking our employees for the long hours they are working in unusually cold weather to keep up with the heavy demand in propane in December and January. Their dedication to customer service and safety are critical to our continued success. With that, I'll turn the call back to Lon for some concluding remarks.

Thank you, Gene. I'll offer you the following thoughts to close out our call. We are all obviously very pleased with the result in the French Competition Authority investigation. While we were comfortable that we hadn't done anything improper, the mere existence of the investigation obviously created some uncertainty, and we're happy to have that uncertainty removed at this point.

We talked during this call about a number of challenges we experienced during the first quarter and some of the progress we made during that quarter. Let me just emphasize a few of those things for you. Weather was erratic during the first quarter as we said, and I won't repeat how warm it was in October. Weather in the second quarter, that is beginning January 1, has been satisfactory. But as we always tell you when we have the call at this time of year, there is a lot of winter left to unfold, and if you recall last year, winter left on the early side towards the end of February, early March and it was very warm period in March of last year. So, we don't want to leave any impression with you that just because its been a satisfactory January, domestically and internationally, that means the rest of the winter will be that way.

Secondly, wholesale LPG prices overseas have come off their record highs by approximately 10%. However, prices remain at unusually high levels. And so that's something that we are continuing to work on overseas. We are seeing signs of improved economic activity, as John mentioned, including the return of some volatility in energy market pricing as demand improves. Some volatility is actually very good for our midstream and marketing business. That same volatility does present challenges in some of our other business units. And so it's kind of a mixed bag for us, but there are good elements that come from that. John mentioned we continue to make good progress at all of the projects which we've identified for you as important to our future growth, particularly in our midstream and marketing businesses. At the same time, we are executing on our strategies in all of our business units, including AmeriGas with regard to acquisitions, cylinder exchange and strategic accounts, Antargaz with respect to its natural gas marketing initiative, our utilities with respect to operating as one Company to pursue growth opportunities and recently filing the rate increase that John mentioned. In addition, we are also doing a fine job in integrating our acquisitions at Flaga, and we will continue to work on that as the year progresses. Lastly, we are on the lookout for opportunities, both domestically and internationally, to expand all of our footprint in our business units.

To sum up, it was really a good quarter for us with earnings at expected levels and progress made across-the-board in all of our strategies. I'd also like to reiterate that our balance sheets are strong. We have excellent access to capital markets as evidenced by the AmeriGas refinancing we just did. And if needed, we can access capital markets to support our long term growth goals in addition to using the large sums of cash that we do generate each year. I look forward to reporting on our progress as the year progresses, and I'd like to end by just acknowledging what Peter said. This is his last call with us at UGI. Peter is leaving, and I will tell you that in terms of UGI years, Peter has not been here very long, but as most UGI executives and employees in this Company, Peter has had a very beneficial and lasting impact on the Company. I think all of you could have seen it in the refocus on our investor relations. We had an opportunity to learn from Peter on renewing our balance sheet focus as well and on some operation improvements. I will say that our new CFO, Bob Flexon will have a tough act to follow. Peter really made a difference for the Company, and we are a better Company for Peter having been here. So, Peter, thank you very much for that. And at this point, I will open the call up to questions Huey, so you can start those coming in.

(Operator Instructions)Our first questioner in queue in James [Wang] with Raymond James. Please go ahead.

Good afternoon, everyone. I have a couple questions for Gene regarding AmeriGas. First, do you think that the recent rise in propane prices will continue to spur customer conservation, or do you think that we're getting to the point where demand is starting to become more inelastic, especially with the recent frigid weather in the Northeast?

Well, that's very hard to predict. We've seen in the past when propane prices have risen, that we seen some conservation. We saw about 15% increase this quarter versus last year in the cost of propane. We did see some additional conservation on the residential side, but that was offset by a pick up in some of the non-residential categories, so hard to say going forward. I think if we could see some stability in pricing, that certainly would be helpful looking forward.

And to that end, John, do you want to comment on natural gas to back up what Gene said?

Yes, on the natural gas side, kind of a different picture with natural gas costs having come down pretty dramatically over the last couple years and being stable. What we're seeing as we look at both residential and the commercial segments, we're seeing that conservation actually flip, and we're starting to see a bit of increased demand on a weather adjusted basis. So, customers certainly do respond as the cost of the energy supply declines, you do see changes in habits. So, we're seeing a different picture on the natural gas side, which is certainly helping us in both the regulated and non-regulated side.

Great. Thanks. Also, could you give us some more color on the M&A market? Is it fair to say that the typical EBITDA multiple ranges really smaller acquisitions is still around five to seven times?

Yes, James, it is. That hasn't changed.

Excellent. And final question. Your initial guidance of $345 million to $355 million in 2011 EBITDA, is that still -- are you still on track to meet that?

We don't normally update our guidance in the middle of the heating season since we still have a lot of winter to go. January, February and March are such critical months in terms of degree days, so we'll talk about that at the end of the next quarter.

Alright, no problem. Thank you.

Thank you. Our next questioner in queue is Ron Londe with Wells Fargo. Please go ahead.

Thank you. Looked like you did a pretty good job in the first quarter and improving your gross margin per gallon above last year, slightly above last year. Do you feel that that's going to continue into the second quarter of this year?

Well, Ron, if you look at the increase that you saw in this first quarter, some of that is due to mix. Our ag volume was down, our ACE volume was up, ag tends to be a lower margin category, ACE tends to be higher margin, so some of that is mix. Looking forward, assuming no changes in the competitive landscape, I'd expect margins to be similar to last year, roughly in line with last year.

Okay, also the cash flow was about $10 million short of the first quarter last year. Do you think you're going to be able to make that up, given the significantly colder weather we've had in the month of January? Do you think that will offset the warm weather that we had in October and beginning of November?

Ron, this is Lon. If I had assurance that February and March would be nice and cold like January, I would give you an unequivocal yes. I think the difficulty we face is that nobody knows what February and March will look like, so ordinarily, and we want to adhere to that. We don't make any guess at this point because you're dead in the season, and it's so difficult to make a judgment on that that we would feel good about telling the market because it's so much winter ahead of us that I wouldn't want to say X today based on weather in January and then have it turn warm in February and then have to say why and try to explain to everybody why it's different in April. So, we think the proper course for us is to give an annual guidance when we start the year and then update that at the end of April when we have that phone call. So, we'd ask you to bear with us on that.

Also, the AmeriGas long-term compensation plan, the cash paid out there, where was that? Is that in a line item somewhere, or where does that show up on the P&L statement, or how did you account for it?

We really accrued that as the period, it was really -- the program takes place over a three year period, and so it's a pay out on a program that started three years ago and ran through December of 2010. So, we accrue that as we go along and it's in operating expenses, if that answers your question.

Okay, sure. That's all I have, thanks.

Thank you, sir. Our next questioner in queue is Carl Kirst with BMO Capital. Please go ahead.

Thanks, good afternoon, everybody.

Carl.

Actually, most of my questions have been hit, but I don't suppose you guys would want to break out the incremental net income either from the acquisitions internationally or from the Antargaz gas marketing, just to give us a sense of leverage?

You suppose right. (laughter)

I had to ask. I didn't figure, but I wanted to ask. John, you mentioned that we're currently in the open season for the proposed interstate pipeline. Could you just refresh what the timing is as far as when that open season closes? And can you also refresh my memory if that was a binding or non-binding? I'm trying to figure out where we are in the process.

The open season, Carl, is on the 15 BCF storage facility.

It is on the storage, I apologize.

So, that process is under way. The bidding closes mid March -- excuse me, mid February, and certainly we'll have the results prior to the start of the New Year on April 1. So, that's binding, yes.

And then with respect then to where we are, because I thought we were going to have -- if I remembered correctly, we were trying to put the schedule up in front of the FERC by the end of calendar 2010 and with respect to the pipeline. And so can you help me out with where we might stand on the timeframe on that?

Yes, in terms of the Penn Star pipeline, we're actively marketing that along with NiSource to producers across the region. We expect the project to be in service in 2013. We're talking to a number of potential anchor shippers, and the timing of the FERC filing will be triggered or dependent upon progression of those discussions. But we're still confident that we'll have that project in service in 2013.

And Carl, it's Lon. For your benefit, as John described, we're not solely dependent in the Marcellus Shale opportunity we have on any one project. That is a big project that's moving along on schedule, as John said, but there are a number of opportunities that we're pursuing in the Marcellus Shale that are nice opportunities in addition to that as well.

Great, and maybe one, Peter, one final question. Obviously, as I said before, I hate to see you go, but one final question for you. The French Competitive Transition reversal, presumably that was non-recurring and not expected when we gave out guidance back last year?

That's correct, yes.

Thanks guys.

Thanks, Carl.

Thank you, sir. [(Operator Instructions)Our next questioner in queue is John Hanson with Praesidis. Please go ahead.

Good evening.

Hi.

Just -- all my questions have been answered except for one, just, I jumped on a little late, just to make sure with the French litigation, that is now complete, and there's no other issues with that now. Is that correct?

That is correct. The time for appeal has passed and no appeals were filed from that order from the competition authority, so that is behind us at this point.

Great. Everything else has been answered. Peter, best of luck. Thanks.

Thanks.

Thank you. And at this time, gentlemen, I'm showing no additional questioners in the queue. I'd like to turn the program back over to Lon Greenberg.

Well, thank you very much, Huey. Once again, we appreciate your support of the Company. We feel like we made good progress this quarter. We look forward to reporting our progress as the year goes on, and we will be talking to you soon. So, thanks again and look forward to talking with everyone. Bye-bye.

Thank you, sir. Ladies and gentlemen, this does conclude today's program. Thank you for your participation, and have a wonderful day. Attendees, you may now disconnect.