UGI Corp (UGI) 2014 Q4 法說會逐字稿

Good morning. My name is Melissa, and I will be your conference operator today. At this time, I would like to welcome everyone to the UGI AmeriGas fourth-quarter 2014 conference call.

(Operator Instructions)

I will now turn the conference over to Mr. Daniel Platt, Treasurer of UGI. You may begin your conference.

Thanks, Melissa. 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 a 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 of development of Marcellus Shale gas production, the timing and success of our commercial initiatives and investments to grow our business, and our ability to successfully integrate acquired businesses and achieve anticipated synergies. UGI and AmeriGas undertake no obligations to release revisions to their forward-looking statements to reflect events or circumstances occurring after today.

In addition, our remarks 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 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 Hugh Gallagher, CFO of AmeriGas Propane; Kirk Oliver, CFO of UGI Corporation; Jerry Sheridan, President and CEO of AmeriGas Propane; and your host, President and CEO of UGI Corporation, John Walsh. John?

Thanks, Dan. Good morning, and welcome to our call. I trust that you've all had a chance to review our press releases reporting full-year results for UGI and AmeriGas.

I'll comment on our key activities, provide an overview of our full-year results and FY15 guidance, and then I'll turn it over to Kirk, who will provide you with a more detailed review of UGI's financial performance. Jerry will follow with an overview on AmeriGas, and I'll wrap up with comments on our strategic projects and initiatives, as well as our outlook for FY15.

Our full-year GAAP EPS was $1.92, while our adjusted EPS was $1.99, a 26% increase over our FY13 adjusted EPS of $1.58. The adjusted EPS excludes the negative impact of mark-to-market losses of $0.03 at Midstream & Marketing, and $0.01 at AmeriGas, along with a negative $0.03 impact of a retroactive change in French tax legislation enacted in the first quarter of FY14. Our adjusted EPS of $1.99 is in line with our previous FY14 guidance of $1.97 to $2.03.

Our guidance for FY15 of $1.88 to $1.98 assumes normal weather and volatility in our service territories. This guidance reflects the underlying strength of our businesses, with organic earnings growth from each of our businesses and the contribution from new investments.

While we don't expect to see a recurrence of the extraordinary margin opportunities created by the extreme volatility of the 2013/2014 winter season, we see continued growth in the underlying earnings of our businesses. Kirk will comment in more detail on our FY14 performance, and our FY15 outlook, in a few minutes.

FY14 was a milestone year for UGI on many fronts. The combination of cold weather in the Eastern US, extreme volatility of pipeline capacity values in the mid-Atlantic region, and strong operational performance, enabled us to deliver record earnings. Although conditions weren't uniformly positive, AmeriGas experienced warm weather in the Western US, and Europe suffered through one of its warmest winters on record, we demonstrated the earnings power of our diverse businesses, as well as our ability to deliver earnings from the major investments we've made over the past few years.

While 2014 was an extraordinary year, we maintained our focus on our core activities of unit margin management, expense control, working capital management, and the delivery of organic growth. I'd like to comment on a few of the noteworthy FY14 achievements.

Our Midstream & Marketing team announced its participation in the PennEast pipeline project. This 100-plus mile pipeline, with an estimated cost of $1 billion, will link prolific Northeast Pennsylvania Marcellus production with major customer markets in Southeast Pennsylvania and New Jersey.

The project is expected to be onstream late in 2017. UGI is the project manager, and will operate the pipeline.

Our Gas Utility concluded the year with record levels of new customer additions and infrastructure investments. We're seeing continued strong demand for residential and commercial conversions, and we're also receiving very positive response to our new growth extension tariff, which enables us to extend our service territories to reach unserved or underserved communities. Our infrastructure replacement program remains a top priority for our team, and we're maintaining our accelerated pace of cast iron and bare steel maintenance replacement.

Jerry will provide you with an overview of AmeriGas' performance for the quarter and the year. But I'd like to highlight the strong performance in AmeriGas cylinder exchange, where we delivered 8% volume growth in National Accounts, where volumes increased over 20% versus FY13. These are two great examples of areas where AmeriGas' operational and commercial capabilities enable us to deliver superior solutions for our customers.

In July, we announced an agreement in principle to acquire Total's LPG distribution business in France. The formal purchase agreement with Total was signed earlier this week.

This acquisition, which is valued at EUR400 million to EUR450 million would significantly expand the scale of our business in Europe. The regulatory review process is underway, and the closing date for the acquisition will be determined by that process. We're hopeful that the closing will occur during the first half of calendar 2015.

While we moved forward on a range of strategic investments in FY14, we also maintained our commitment to excel in the most critical activities we undertake: safety, customer service and operational efficiency. On that note, our Gas Utility received recognition for their service levels from our customers, as they received the 2014 JD Power award for the highest residential customer satisfaction rating for large utilities in the East region.

I'll return to comment on our strategic initiatives, but I'd like to turn it over to Kirk at this point for the financial review. Kirk?

Thanks, John.

Our strong results for FY14 were driven largely by the colder weather in the Eastern United States, which resulted in significant natural gas price volatility that benefited our Midstream & Marketing business. Utilities in AmeriGas also benefited from this colder weather, while our international operations offset some of this performance as they experienced a very warm winter this year.

We're reporting operating income at AmeriGas of $472 million, an increase of $78 million over last year. The increase in total margin of $94 million was driven by the colder weather, and modestly higher retail unit margins, offset somewhat by lower margin from ancillary sales and services.

Operating expenses increased by $19 million. Operating expenses for FY13 include $27 million of Heritage transition expenses. Excluding the effects of these FY13 Heritage expenses, operating expenses increased by $46 million this year.

The increase this year was driven in part by higher distribution related expenses associated with the higher volumes delivered. And higher distribution costs, caused by the supply challenges in certain regions of the US during the second quarter. Jerry will discuss AmeriGas results in more detail in a few minutes.

UGI International saw a decline in income before taxes of nearly $29 million from $116 million last to $87 million for FY14. Retail volumes were off slightly, reflecting the significant warmer weather, partially offset by incremental retail gallons from the BP Poland acquisition.

The margin declined by $16.4 million, reflecting lower margin at Antargaz of $30 million, offset by slightly higher margin at Flaga due to the BP Poland acquisition, higher-margin at AvantiGas and slightly stronger euro and British pound currencies. Operating expenses are up about $16 million this year, driven primarily by $8.5 million of transition- and acquisition-related expenses.

Turning now to the natural gas side of the business, Gas Utility reported income before taxes of about $200 million, up $41 million or 25.5% over last year. The throughput to core customers increased 13.9%, reflecting the effects of colder weather and, to a lesser extent, customer growth from oil to gas conversions.

Total margin increased by about $49 million or 11.3%, reflecting higher core market margin of $34 million, and greater large firm delivery service margin of $11 million. Operating expenses were up $7.6 million or 4.3%, reflecting greater distribution system maintenance, higher uncollectible accounts, and greater incentive compensation expenses, partially offset by lower pension expense.

Midstream & Marketing posted an exceptionally strong year, reporting income before taxes of $196 million, an increase of $109 million over the prior year. Total margin increased to $292 million for the year, reflecting significantly higher capacity management and peaking margin of $79 million, and higher retail Gas Marketing margin from the unusually cold winter.

Natural gas gathering margin also increased by about $13 million this year, reflecting incremental margin from the Auburn pipeline extension, which was placed into service earlier this year. The increase in expenses reflect greater operating and depreciation expenses associated with storage and natural gas gathering assets, and higher incentive compensation costs, among other things.

Our Midstream & Marketing business benefited from increased volatility in the mid-Atlantic region of the United States. This chart shows a spot price comparison for natural gas in the Texas Eastern, zone three, for the six most recent winter heating seasons prior to this season.

The bold red line shows prices for the 2007/2008 season, demonstrating that until this year, as I'll show on the next slide, prices and volatility have been declining, reaching their low point in the 2011/2012 heating season. Please note, on this graph, that the highest price shown is less than $18 per Mcf.

Now adding prices for this season to the same graph, you can see that we experienced exceptional volatility, with daily prices in the same zone reaching highs of over $80 per Mcf, as a result of capacity shortages in the region. During this time, our supply point pricing remained relatively stable. Interruptions by numerous LBCs and operation flow orders were quite extensive, and power generators, who typically rely on interruptible capacity, were bidding up values because they had to run.

This all came together to result in exceptionally strong results for our Midstream & Marketing business this year. While we do not expect this extreme volatility to repeat itself any time soon, we do expect a return to more normal or pre-recession pipeline capacity values going forward.

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. You can see from this table that the businesses have sufficient capacity to meet their liquidity needs.

Finally, in closing, I would like to reiterate our guidance for FY15, which is $1.88 to $1.98 per share. With that, I'll now turn the call over to Jerry for his report on AmeriGas.

Thanks, Kirk. AmeriGas closed our FY14 with a strong fourth quarter. Adjusted EBITDA of $48 million was 4% above the $46 million we earned last year. The volume for Q4 was up 3% over the prior year on cooler weather, and product costs were generally stable during the quarter, with Mont Belvieu prices averaging about $1.04 per gallon, up 1% from $1.03 per gallon last year.

It's worth noting that despite the fact that Q4 is typically a seasonal low point for adjusted EBITDA, our earnings profile is now substantially stronger than it was in the years before we acquired Heritage Propane, when EBITDA was typically in the range of zero plus or minus $5 million. Adjusted EBITDA for the full year was a record $665 million, up 8% from the $617 million reported last year, and in line with our expectations and guidance.

Now looking to our growth [thrust]. ACE, our AmeriGas cylinder exchange program, volume was up 5% in the quarter and 8% in FY14. The business added 1,300 new locations. In addition, marketing efforts by the ACE team working with our retail customers helped produce same store sales growth of 6% among the 48,000 locations across the country where you can find an AmeriGas barbeque cylinder.

Our National Accounts program, volume was up 14% in the quarter and up 22% for the full-year. This unique propane offering for large-scale customers has added over 50 customers this year, and maintained a strong pipeline of new prospects. In the quarter, we completed five acquisitions, bringing the total to seven deals for the year.

We're very pleased with how the business performed during this very unusual year for weather, with polar vortex events in the Central and East contrasted with very warm weather in the West. And I want to thank all of our 8,500 AmeriGas colleagues for their tireless efforts this year in helping us get to a very strong result.

In closing, I'd like to mention that our leverage at 3.6 times, and our distribution coverage at 1.2 times, are right back to the historical levels for AmeriGas. This was our commitment following the $3 billion acquisition of Heritage Propane, and we are now back to very healthy metrics as we move forward.

Finally, you've seen in our press release that we have issued guidance for FY15 in the range of $670 million to $700 million in EBITDA, assuming normal weather. This guidance is in line with our long-term goals of 3% to 4% EBITDA growth, and supports our long-term goal of 5% distribution growth annually. With that, I will turn the call back over to John.

Thanks, Jerry. As I noted earlier, we saw 2014 as a milestone year for the Company. While our record financial performance was the most obvious milestone indicator, it's the progress made on our strategic investments in programs that are the most noteworthy element of our performance. Each of our four businesses contributed to this major progress in areas that are vital to our future.

The combination of colder weather, exceptionally strong natural gas demand, and the lag in pipeline capacity additions, accentuated the infrastructure gap that has been emerging in the mid-Atlantic and Northeast regions over the past few years. Both our Marketing & Midstream and Utilities businesses are benefiting from the tremendous ramp-up in activity in the Marcellus basin, and in the markets adjacent to the Marcellus.

Our Gas Utility delivered record levels of customer growth, adding 16,000 new residential heating customers, and over 2,000 new commercial customers over the past 12 months. We launched our Get Gas program to extend the reach of our systems, and attract new customers.

In addition, we continued to ramp up our infrastructure replacement program, with our infrastructure CapEx in FY14 approximate 25% above FY13. Operating income at Utilities was up 20%, as we benefited from the combined effect of colder weather and our expanding customer base.

Our Midstream & Marketing business had an extraordinary year, with operating income more than doubling. The combination of cold weather and heightened natural gas price volatility due to locational basis differentials, enabled us to utilize our expanded network of assets in the Marcellus.

We successfully concluded a series of capital projects over the past 12 months, which include the first phase of our two-phase Auburn pipeline capacity expansion, and the completion of our Uniondale lateral, a 6-mile, 12-inch pipeline serving a major Northeast Pennsylvania producer. These projects add 160,000 dekatherms a day of badly needed new capacity as we enter the winter season.

In addition to the PennEast project, which I referenced earlier in the call, we've also announced FERC approved expansion of our LNG liquefaction capacity at Temple, and the second phase of the Auburn expansion. We expect the Temple LNG expansion to be completed by the spring of 2015, while the increased capacity in the Auburn line is scheduled to be online by the fall of 2015.

The infrastructure gap in the mid-Atlantic and Northeast regions is significant, and UGI is well-positioned to participate in the buildout, which is likely to extend over the next decade. We're focused on expanding our asset network, and building our organizational capabilities to ensure that we maintain an attractive long-term position in this dynamic market.

Our European LPG business had a major challenge, with extremely warm weather in FY14. While operating income fell about 20% versus prior year, our teams performed well in the face of weather that was 15% to 20% warmer than 2013.

We are highly confident that as normal weather returns, our performance will be strong, as was the case in FY13 following the very warm winter of FY12. We're very pleased with the performance of the businesses we acquired from Shell and BP over the past few years, which significantly expanded the scale and reach of our European business. UGI now serves 16 countries in Northern and Central Europe, and we have the distribution network and core capabilities to build on that position.

We're excited about the opportunity to further expand our business with the planned acquisition of Total's LPG businesses in France and Hungary. We'll keep you advised of our progress as the regulatory process moves forward.

As Jerry just noted, AmeriGas performed very well in a year when the Eastern and Midwest regions saw extreme cold and supply shortages, while weather in the West and Southwest was warmer than normal. The weather experienced by AmeriGas nationally was about 9% colder than prior year, while operating income increased almost 20%.

AmeriGas did an exceptional job ensuring that customers in the Midwest and East received an uninterrupted supply of propane throughout the winter. The scale of our operations enabled us to move product, assets and our people to the areas most in need.

In addition to stepping up to this critical customer service challenge, the AmeriGas team also made great progress strengthening the position of our national accounts and ACE cylinder exchange program, where our expanded national footprint makes us an attractive supply partner for key customers. AmeriGas is in great shape as we enter the 2014/2015 winter season, and we look forward to demonstrating the power of a superior national distribution network, and the very strong field leadership team.

FY14 was truly a milestone year for UGI. We delivered the strongest financial performance in our history, while making significant progress on a range of strategic growth opportunities. We demonstrated the collective strength of our diversified set of businesses, and we've made clear and steady progress on the strategic programs that are vital to our future.

As we enter FY15, we're focused on the execution of our core business strategies and the completion of a range of active capital projects. In addition, we have begun work on PennEast, the largest capital project in our history, and we're planning for the pending European LPG acquisitions, which are expected to close within the next three to six months.

The Company is well-positioned for FY15, and with major investments such as PennEast and Total underway, and the cash flow and balance sheet strength to support additional new investment, we have a clear view of our path for growth in FY16 and beyond. With that, I'll turn the call back over to Melissa, who will open it up for your questions. Melissa?

(Operator Instructions)

Mark Barnett, Morningstar Equity.

Good morning, everyone. Just a quick question on AmeriGas, or two actually, if you don't mind. With the number of acquisitions, could you give any detail on the actual amount of volumes that you acquired this year?

Yes, it was just a little under 10 million gallons.

A little under 10 million, okay. And In general, given the bigger base and the return to very good conservative credit metrics, is that a number that maybe over the next couple of years you might see maybe a little bit more activity?

Expecting maybe after the past winter, you'd see some of the smaller players maybe shaken out a little bit, given some of the supply issues. But I don't know if you can comment on that looking forward?

I think acquisition activity in the pipeline has been relatively strong, not extraordinary, but fairly normal, from what we've seen over the last several years.

Okay, but nothing that really -- no step change, I guess, from where you'd been prior to the Heritage acquisition?

Seven deals in a year is a good year for us. We've had years where we do 3 deals, years where we do 14. So it varies, but the pipeline remains strong, and it seems like it is healthy but not extraordinary, in terms of what's available.

All right, thanks for that.

There are no further questions in queue at this time.

Okay. Thank you all for your time this morning. We appreciated the opportunity to bring you up to speed on our FY14 activities, and we very much look forward to speaking with you again in January to describe our FY15 first quarter with you.

Thank you.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.