UGI Corp (UGI) 2013 Q2 法說會逐字稿

Good morning, and welcome to the UGI Corporation's second quarter 2013 earnings conference call. (Operator Instructions). Please note this event is being recorded. I would now like to turn the conference over to Hugh Gallagher, Treasurer of UGI. Please go ahead.

Thank you, Emily. Good morning, and thank you for joining us. As we begin, let me remind you that our comments today will include certain 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 our annual reports on Form 10-K for more extensive list of factors that could affect results, but among them, are adverse weather conditions, cost volatility, and availability of all energy products, increased customer conservation measures, the impact of pending and future legal proceedings, domestic and international political, regulatory and economic conditions, currency exchange rate fluctuations, the timing and development of Marcellus Shale gas production, the timing and success of our commercial initiatives, and investments to grow our business, our ability to successfully integrate acquired businesses including Heritage Propane, and achieve anticipated synergies.

UGI and AmeriGas undertake no obligation to release revisions to their forward-looking statements to reflect events or circumstances occurring after today. In addition, our remarks today will reference certain non-GAAP financial measures including EBITDA, adjusted EBITDA and total margin that management believes provide useful information to investors to more effectively evaluate the year-over-year results of operations of the Company. These non-GAAP financial measures are not comparable to measures used by other companies and should be considered in conjunction with performance measures such as cash flow from operating activities.

With me today are Jerry Sheridan, President and CEO of AmeriGas Propane, Kirk Oliver, CFO of UGI Corporation, and your host, President and CEO of UGI Corporation, John Walsh. John.

Thank you. Good morning and welcome to our call. I would also like to give a special welcome to UGI's most recent retiree, Lon Greenberg. Since Lon remains our Chairman, he certainly qualifies as a very active retiree, and I am sure he is listening out there.

We have made a few changes to our call format. We hope you find the addition of the reference slides and the move to the morning time slot beneficial. I trust that you have all had a chance to review our press releases reporting second quarter results for UGI and AmeriGas. I will briefly comment on the key factors that enabled our strong performance this quarter, and then turn it over to Kirk who will provide you with a more detailed review of UGI's financial performance.

Jerry will then follow with an overview on AmeriGas' fine quarter, and I will wrap up with an update on our strategic initiatives and comment on the outlook for the balance of the year. We were pleased with our performance in Q2, as our EPS increased almost 30%. While we certainly benefited from the positive impact of near normal weather across most of our territories, the results can also be attributed to strong operational performance. Our teams in each business remain focused on the critical activities that enable strong performance, unit margin management, expense control, working capital management, and delivery of organic growth.

As we work through the extreme challenges presented by last year's historically warm winter, we stress the underlying strength of our businesses and the benefits of our diversification. The near normal weather conditions in Q2 gave each of our businesses the opportunity to demonstrate this strength. This came through clearly in the quarter as each of our businesses delivered a significant increase in operating income while continuing to drive forward on their strategic programs. I will comment a bit later on those strategic initiatives. With that, I will turn it over to Kirk for the financial review. Kirk.

Thanks, John. As John mentioned, we have seen a significant increase in earnings across all of our businesses over last year's quarter. We benefited this quarter from a return to more normal weather versus the very warm weather we had last winter. International Propane and utilities actually experienced colder than normal weather this quarter.

AmeriGas experienced weather that was slightly warmer than normal, but significantly colder than last year's record-setting warm weather. Jerry will focus more on AmeriGas in his discussion, but I would like to provide a reconciliation of operating income here which increased by $71 million or 36.5% over the prior year quarter.

The increase in total margin of $87 million was driven largely by the colder weather and to a much lesser extent the effect of having a full period of Heritage operations this quarter. Expenses were up $11.9 million due to the full period impact of Heritage operations and incremental costs associated with a higher sales activity which were partially offset by synergies resulting from the acquisition. Depreciation and amortization expense increased $3.8 million principally associated with the Heritage acquisition. International Propane saw an increase in income before taxes of $12 million or over 19%.

Total margin was up $12.4 million primarily reflecting retail unit margins at Antargaz, and to a lesser extent, increased natural gas marketing of $2.8 million. Average wholesale propane prices in Northwest Europe were about 15% lower, and butane about 12% lower than in the prior year period. Volumes are down slightly due to the extremely cold February experienced in Europe last year which influenced the timing of deliveries in the prior year period.

Higher operating expenses at Antargaz were partially offset by lower operating expenses at Flaga and AvantiGas. Turning to slide eight, the gas utility had a very strong quarter with income before taxes up by $21.5 million, almost a 29% increase over the prior period. Throughput to core customers increased 28.8% reflecting the effects of colder weather and to a lesser extent customer growth from oil to gas conversions.

Total margin increased about $30 million or 21% reflecting higher core market margin of $24.6 million and greater firm delivery service margins. Costs were up this year with increases in pension and benefit expense of about $2.8 million and increases in system maintenance and other expenses. Midstream and marketing income before taxes is up $13.9 million for the quarter, an increase of 47% over the prior year period.

Total margin increased by $16 million or 34% due to the higher margin from natural gas marketing, electricity generation and greater peaking and capacity management margin. These increases were partially offset by lower retail power margin reflecting lower average unit margins and lower storage margin. Depreciation expense increased primarily due to investment in the Temple LNG plant expansion completed in August of 2012. Looking now at liquidity and cash resources, we use a combination of bank facilities and cash on hand to meet our liquidity needs. Total liquidity by business in the form of cash on hand and available credit capacity are laid out in the table on this slide.

Excluding cash residing at the operating subsidies, UGI had a cash balance of $78.4 million at March 31. I would like to touch briefly on the accounts receivable facility we have in place for energy services. On April 18, we amended that facility to lower the commitment cost during the summer months and to extend the maturity into November. In November, we anticipate entering into a new accounts receivable facility that will provide us with $200 million of capacity in the winter when we need it more and our receivable balances are higher and $100 million in the summer.

The new facility is expected to have a 364-day term. That completes my prepared remarks. I will turn the call over to Jerry for his report on AmeriGas.

Thanks very much, Kirk. This is a very strong quarter for AmeriGas. Adjusted EBITDA for the quarter was $318 million which is 29% above the $246 million reported last year. This $72 million increase in earnings was the result of colder weather and the impact of Heritage integration and related synergies. Volume increased in line with our expectations on weather for the quarter that was nearly 25% colder than last year.

AmeriGas acquired Heritage Propane on January 12, 2012. Therefore, a better comparison can be made on a pro forma basis as if Heritage was part of AmeriGas for the full quarter last year. On that pro forma basis, adjusted EBITDA increased about $59 million or 23%. After a slow start to the quarter, weather turned more seasonal in February and was clearly our friend in March when the weather nationally was 10% colder than normal and 78% colder than last year. When the weather was very warm as it was in March last year thermostats are simply shut off, and this rendered some of the weather percentage comparisons less meaningful.

However for the two months of January and February weather was 11% colder than last year, and the volume was up 8% on a pro forma basis right in line with our expectations. This was also the first real winter quarter operating as our new Company following the Heritage acquisition, and we are pleased with how the business performed with demand clearly responding to the colder temperatures. The lower cost environment also continues to be a positive for us.

The average Mont Belvieu price during the quarter was $0.86 which is $0.39 or 31% below the second quarter last year. US propane inventories are currently 7% below last year and 27% above the five-year average. Propane today is trading at 37% of crude and well below the prior year relationship of 43%.

This cost environment is great for our customers and the industry. Our average selling prices are 15% below where they were last year. And this reduced cost helps mitigate customer conservation for the whole industry.

Looking to our growth thrusts and the headlines for the quarter. AmeriGas Cylinder Exchange, our National Barbecue Cylinder program grew volume by 6% year-over-year, and these strong results were somewhat muted by the cold weather that limited some grilling activity particularly in March. Year to date, volumes up 10% and same store sales growth has been 3%. So a strong year of growth is underway as we head into the spring and summer peak season for ACE.

Our national accounts program also benefited from the colder temperatures. Volume increased 14 million gallons in the quarter and 22 million gallons year-to-date. We did not close on any acquisitions during the quarter as we focused on the Heritage integration. However, our corporate development team is gearing up as we enter the spring and summer acquisition season, and they will begin their acquisition search efforts in earnest this spring. As you have seen in the earnings release, our guidance for the year remains unchanged, although we believe it will most likely end up near the midpoint of our range given normal operating conditions for the remainder of the year.

On the Heritage integration, we largely froze activities for the critical winter earnings' months, and are now prepared to complete the final stages of the integration involving the consolidation of over 200 stores. We have increased our estimate of transition expenses for the year by $5 million primarily to reflect the additional severance cost expected to be incurred this year, and we remain on track for the realization of at least $60 million in total net synergies for the deal this year.

Most importantly, we are achieving harmony in processes and policies across the system evidenced by the strong performance of the combined business this quarter and our guidance for the fiscal year. Additionally, I am sure you noticed in our press release, the Board has declared a 5% increase in our distribution to an annual rate of $3.36 per unit, and this marks the ninth consecutive year that we have increased the distribution, underscoring our confidence in the future prospects of the business and demonstrating our commitment to delivering value to the unit holders.

In closing, I want to thank John Iannarelli for 25 years here at AmeriGas. John has been a big part of the Company in both operations and as CFO, and he will surely be missed. I also welcome Hugh Gallagher to the AmeriGas CFO position. We know Hugh well, most recently as treasurer for UGI, and we know Hugh will make a terrific impact on the Company. And now I would like to turn it back to John.

Thanks, Jerry. As I noted earlier in the call, the second quarter saw us making significant progress on the strategic initiatives that are so critical for our future. We are delivering clear benefits from our major propane acquisitions in the US and Europe. We are continuing the expansion of our midstream position in the Marcellus, and we are accelerating our growth in infrastructure investment program at our gas utility. Our gas utility team is executing the enhanced infrastructure replacement program that was approved by the Pennsylvania PUC early in Q2.

Our gas utility infrastructure CapEX spend for FY 2013 will be approximately 25% above our FY 2012 level. Demand for natural gas service remains at unprecedented levels. Our net customer growth in the gas utility will exceed 2% again in FY 2013. We are also executing several major line extension projects that will deliver natural gas service to a range of customers including a major pharmaceutical production site, various federal, state, and local administrative and educational facilities, and several large commercial complexes.

Our demand outlook remains very positive due to the large spread between natural gas and fuel oil. We have had great success in executing the integration programs for last year's propane acquisitions in both the US and Europe. As Jerry just noted in his remarks, AmeriGas had a very good quarter delivering a strong financial performance while also making the necessary preparations to execute the final phase of their acquisition integration plan. This work is now underway and will conclude this summer. We are extremely pleased with the progress made in the 16 months since the Heritage acquisition.

We will enter FY 2014 in a great position with a superior distribution network covering the entire US and a very strong field leadership team. Our European propane team had another strong quarter with operating income up over 16%. Effective unit margin management and a continuing focus on operational efficiencies were the keys this quarter. We are very pleased with the performance of our teams in the eight new markets we entered following the Shell acquisition in late 2011. We have also identified a range of critical activities, such as product sourcing for our broader base of operations in Europe, provides us with new opportunities to reduce our cost and enhance efficiency.

We continue to look forward to the addition of BP's LPG distribution business in Poland. The approval process is ongoing, and we now expect to close in Q4. This acquisition will strengthen our position in one of Europe's largest LPG markets, and we are well prepared to move ahead once we receive the required regulatory approvals. One final very positive note for Europe is the moderation we have seen in LPG costs over the past five months. Propane costs have dropped about 20% from their peak and the differential between US and European costs has narrowed considerably.

While we pride ourselves on our ability to deliver strong unit margins under any circumstances, this drop in cost is a positive development for our customers and makes our job just a bit easier. Our midstream and marketing business had another very active quarter as we focused on emerging growth opportunities within our existing midstream and storage assets and on the execution of the major business development projects in and around the Marcellus including our Auburn II pipeline project and our Tenaska midstream services project. We are making good use of our expanded LNG peaking facility in Temple, Pennsylvania. We had a very solid year for the core LDC peaking services provided by Temple, and we continue to develop our position on LNG liquid supply services to the emerging customer segments such as Transport.

We are in the field execution phase on our Auburn II project which will extend our existing Auburn line southward to connect with the Transco pipeline. Our expected in-service date for Auburn II remains early FY 2014. As natural gas costs move up, we are seeing increased producer activity in the Marcellus particularly around our existing assets and resources. We are pleased to be bringing the Auburn pipeline online at this point, and we continue to believe in the merits of projects that provide short haul transportation options that connect Mid-Atlantic demand markets with the abundant gas supply in the Marcellus.

Last quarter, we announced the Marcellus Shale development agreement with Tenaska Resources. Our collaboration with Tenaska is progressing nicely and we expect to initiate new gathering system investments for Tenaska early 2014.

As I mentioned in my opening remarks, we are pleased with the progress made thus far in FY 2013 from both an operational and strategic perspective. We have demonstrated the strength and resiliency of our businesses, and we have seen the benefits of our diversified platform. As Kirk noted in his comments, we have the balance sheet strength and cash flow performance to support our growth programs. We are confident that our businesses will continue to execute at a high level, and our guidance for the full year remains at $2.40 to $2.50 although we believe it is most likely will end up in the lower half of the current range given the seasonality of the business, and our expectations for third quarter earnings and a fourth quarter seasonal loss.

Finally, we are pleased to announce that UGI's Board recently demonstrated their confidence in UGI's future prospects and cash flows by declaring a 4.6% increase in the quarterly dividend to $0.2825 a share or $1.13 per share on an annual basis. This year will mark UGI's 129th consecutive year as a dividend-paying stock and our 26th consecutive year that we have increased our dividend.

We are extremely proud of this long tradition of paying and increasing our dividend. With that, I will turn the call back over to Emily who will open it up for questions. Emily

(Operator Instructions). Our first question will come from Edward Rowe.

Good morning, guys. This question is for Jerry. We've talked to several producers and there is a general concern about lack of NGL storage capacity in the Northeast, and that could really lead to steep discounts for propane. Are there any opportunities for AmeriGas to capture the cheap propane feed stock to help drive further retail margin expansion for you guys?

Well, I mean, our supply group is always looking for the best opportunities no matter where they are. Storage is always tight in the US and the Northeast has traditionally been a problem for us and the entire industry. We do not have plans right now to expand storage, but we do have probably more capacity than any of our competitors, and we have been able to move propane around pretty nicely from even the Midwest to the Northeast as it is needed. But at the moment, we are not speculating on what is going to happen with the propane and investing that way either way.

Yes I would just add, this is John. I would just add that for us it is very beneficial, certainly for AmeriGas and for UGI to see this increase in activity. In addition to the AmeriGas resources in the region, we have got some midstream and marketing assets and propane storage for our propane air plants. So we are pretty well positioned as a company both AmeriGas and UGI to take advantage -- so that the geographic advantage we have in terms of great location as production ramps up. We would love to see excess NGL. So that is a good thing.

Yes, exactly. Just a final maintenance modeling question for the AmeriGas. Do you guys happen to have the wholesale propane volumes and revenues for the quarter?

We do. Wholesale for the quarter, 39 million gallons.

Okay.

Again, just -- it's a very small part of the business.

Yes, yes, all right. Thank you.

(Operator Instructions). Your next question comes from Eric Shiu of Wells Fargo. Please go ahead.

Can you quantify the expense synergies that AmeriGas realized during the quarter?

The $60 million is coming in relatively evenly throughout the four quarters.

Okay. Great, thank you.

This will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Walsh for any closing remarks.

Okay. Thanks, Emily. I think the additional information we provided with the slides obviously helped in terms of clarifying and limiting the number of questions but we certainly appreciate your participation this morning. This concludes the call. Thanks very much for joining us. We look forward to speaking with you all soon. Take care.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.