UGI Corp (UGI) 2015 Q1 法說會逐字稿

Good morning. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the UGI AmeriGas First Quarter 2015 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

Daniel Platt, Treasurer of UGI, you may begin your conference.

Thank you, Tiffany. 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; and 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 obligation 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 first quarter results for UGI and AmeriGas.

It was a busy quarter for us, and while weather was less favorable than Q1 of fiscal 2014, we saw strong underlying demand in many of the markets that we serve. I'll comment on our key activities and market developments in the first quarter; then turn it over to Kirk, who will provide you with a detailed overview of UGI's financial performance. Jerry will review Q1 for AmeriGas, and I'll wrap up with an update on our strategic initiatives.

Our Q1 adjusted EPS was $0.66 compared to $0.71 for the first quarter of FY14. Due to the significant declines in commodity values over the past six months, we booked mark-to-market adjustments on unsettled hedges of $0.47 in the quarter. The largest adjustments were in AmeriGas and Midstream and Marketing. Our adjusted EPS reflected strong underlying performance despite weather that was warmer than prior year in all of our businesses. I should note that most of our mark-to-market adjustment relates to our normal business practice of hedging fixed price commitments from our customers.

These volume commitments peak in Q1 and then decline quite significantly as we move through Q2. Kirk will comment in more detail on our first quarter performance in a few minutes.

While the warmer-than-normal weather resulted in earnings that were a bit below our expectations, the underlying performance of our business was strong. The solid performance in the quarter results from robust demand in our natural gas businesses and the positive contributions from new investments that came onstream in the past year. These contributions helped offset the challenge of warmer weather in each business.

Europe had one of its warmest first quarters in history with Antargaz weather being 20% warmer than normal and Flaga 17% warmer. In addition to being warmer than normal, all businesses experienced weather that was warmer than Q1 fiscal 2014, with the most significant variances being in AmeriGas, with weather almost 10% warmer than Q1 2014; and Antargaz, which was 14% warmer.

A key to our solid performance in the quarter was our focus on the core activities that provide the foundation for long-term performance -- unit margin management, working capital management, project management, and the delivery of organic growth.

Q1 was also noteworthy in terms of the strategic milestones achieved. Our midstream and marketing project teams had a very busy quarter. We've made good progress on the FERC-approved expansion of our LNG facility in Temple, Pennsylvania. This project will expand our local capacity by approximately 50% and support the continued growth of our LNG peaking and transport markets. We expect the project to be completed and the new capacity onstream by early in Q3.

We are also executing the next phase of our Auburn pipeline expansion. This badly needed new capacity is expected to be online by the fall of 2015, in time for the peak demands of the 2015-2016 winter season.

Our gas utility continued to attract new heating customers at an impressive rate with over 6,500 customers added in Q1. Our infrastructure replacement program for cast iron and bare steel remains a key priority for our team. We replaced a record number of miles of cast iron and bare steel in 2014, and our program is moving forward on pace with our commitments.

Our propane distribution businesses had a solid quarter despite the weather challenges. As always, we focused on unit margins, working capital, and OpEx management during these periods of warm weather.

Our performance in Europe was particularly noteworthy, where strong unit margins and lower OpEx largely offset the significant headwinds created by the very warm weather.

One final point that I'd like to make on our Q1 performance relates to the resiliency of our businesses during a quarter when the energy sector saw major commodity movements, and we experienced relatively warm weather in our service territories. Our businesses did a good job of delivering earnings despite the dampening effects of the warmer weather.

Solid working capital and credit management processes in the businesses helped us to maintain our strong balance sheet and cash positions. While the significant drop in commodity prices during the quarter presented some challenges, there was a net positive development in overall basis for our Company.

The lower energy costs will be appreciated by our customers and will encourage demand. We continue to see very strong demand for natural gas and significant infrastructure constraints in the mid-Atlantic and Northeast regions. This demand was evident in Q1 and also apparent during the period of early January cold weather in the mid-Atlantic.

I'll return later on the call 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, and good morning, everybody. As John mentioned, adjusted results are $0.66 per share for the quarter versus $0.71 for the first quarter last year. Adjusted results exclude the impact of mark-to-market changes and commodity hedging instruments for all of our businesses and the effect of a change in the French tax law that impacted the first quarter of fiscal year 2014.

I'd like to be sure to note that this is the first time that we are reporting results since we elected to discontinue the use of hedge accounting for commodity derivatives across all of the businesses. As John mentioned earlier, this change in accounting combined with the recent decline in commodity prices resulted in the adjustment to GAAP earnings of $0.47 per share for the mark-to-market value of unrealized losses in the quarter. This change in accounting policy will result in more volatility in GAAP earnings in the future as we continue with our business practice of using commodity derivatives to mitigate the risk associated with changes in commodity prices.

As you can see from this slide, we experienced much warmer weather this winter -- warmer than normal and warmer than last year in all of our businesses.

AmeriGas experienced significantly warmer weather this quarter and still delivered $140 million of operating income, with a cash distribution coverage ratio of about 1.1 times on a trailing 12 basis. The reported operating income of $140 million at AmeriGas is also a decrease of $40 million versus the first quarter of last year, where we experienced colder-than-normal temperatures.

Weather for this quarter was 9.6% warmer, and the month of December was 18% warmer than last year. Total margin decreased by $37 million, reflecting a 9.1 decrease in retail volume sold.

Operating expenses increased by $9.8 million due primarily to higher casualty and general liability expenses and professional fees, partially offset by lower vehicle OEM and other volume-related expenses. Jerry will review AmeriGas in more detail later on the call.

UGI International contributed $46 million in income before taxes, a slight decrease compared to the prior year. Weather in France was 20% warmer than normal and 14% warmer than last year, while weather in Flaga service territory was over 17% warmer than normal and 5% warmer than last year. Retail volumes sold were down 7.5% due to the warmer weather.

A decrease in total margin reflects the effects of the weaker euro and, to a lesser extent, the British pound sterling. Unit margins unadjusted for changes in foreign exchange rates was up $4.6 million, driven primarily by higher retail margins at Antargaz.

Expenses decreased $20.5 million primarily reflecting the effects of the weaker European currencies and the impact of lower volumes, partially offset by about $3 million of transaction expenses associated with the Total gas acquisition in France.

The average euro-to-dollar translation rate for the current quarter was approximately $1.24 compared with $1.36 for the prior-year period. Our practice is to layer in FX hedges over time in an effort to smooth out the effect of changes in foreign exchange rates. As a result, a significant portion of the internationals earnings for this quarter were hedged, mitigating the impact of the declining value of the euro.

Turning now to slide 11, the gas utility is reporting income before taxes of $61.7 million, down about $12 million or 16% versus last year's quarter.

Throughput to core customers was down slightly, although total throughput was about even with last year due to higher firm delivery service volumes and year-over-year growth in the number of core market customers. Total margin decreased by about $2.8 million, or 2%, reflecting the effects of warmer weather on volumes partially offset by customer growth. Costs were up $6 million this quarter, reflecting higher system maintenance expenses and higher employee benefit and IT expenses.

Midstream and Marketing income before taxes increased about $10 million to about $45 million for the quarter. Total margin increased by $15 million, or slightly more than 27%, primarily reflecting higher margin from capacity management and peaking service. Natural gas gathering and storage margins were also up, while margins from electric generation were down, reflecting the impact of scheduled outages at the Hunlock and Conemaugh generating stations.

The greater capacity management margins reflect higher prices for pipeline capacity, resulting from higher locational basis differentials and greater volatility and capacity values between Marcellus and non-Marcellus delivery points.

Operating expenses are up $5 million over the prior-year period due to the expenses associated with the planned maintenance outages at Hunlock and Conemaugh and higher operating costs associated with our expanded natural gas gathering business, including the impact of the Auburn pipeline extension.

Looking now at liquidity and cash resources, total liquidity by business in the form of cash on hand and available credit capacity are laid out in the table on this slide. As you can see from this table that the businesses have sufficient capacity to meet their liquidity needs.

Excluding cash residing at the operating subsidiaries, UGI had $246 million of cash at December 31, 2014, compared with $205 million for December 13.

Finally, with the colder weather experienced in the mid-Atlantic and Northeastern United States and more normal winter weather in Europe this January, we are confirming our adjusted EPS guidance for fiscal year 2015 at $1.88 to $1.98 per share.

That completes my prepared remarks, and I'll now turn the call over to Jerry for his report on AmeriGas.

Thanks, Kirk. For AmeriGas, adjusted EBITDA for the quarter was $199 million adjusted for mark-to-market hedge effects as compared to $230 million in the first quarter of fiscal 2014. The decrease in earnings was principally the result of volume, which decreased $34 million gallons, or 9%, on weather that was 10% warmer than last year. In fact, the very mild December was 18% warmer than last year, and you'll recall there are nearly as many degree days in December than October and November combined.

Of course, the big story in the quarter is the precipitous drop in cost for both crude oil and propane. Mont Belvieu cost decreased from $1.06 on October 1, 2014, to $0.48 on December 31, 2014, or 55%.

You may have seen in our GAAP numbers a large mark-to-market loss. Although this is a required disclosure in accordance with GAAP, it's important to point out that this is a noncash charge resulting from our out-of-the money positions on hedges that are not associated with current period transactions but are associated with future transactions.

Prior to last April, the volatility resulting from the rapid decline in propane prices would have been run through our balance sheet, but starting in April 2014, we changed our designation of hedges. Although we have had this accounting for several quarters, this is the first quarter to reflect a significant charge, and I wanted to specifically point this out so there would be no confusion or concerns about the accounting treatment.

Despite the significant decreases in spot costs of propane, our average cost in Q1 was flat to our cost in Q4 of 2014. In an effort to ensure ample customer supply this winter following the propane shortage last year, we increased our inventory storage going into the winter and have not fully utilized this more expensive stock due to the unusually mild December. In addition, customer demand for fixed prices grew this year as a result of the run-up in propane costs last year.

US propane inventories at the end of December were 76 million barrels, or 33 million barrels above the same time last year; and 22 million barrels, or 41% above the last five-year average. As a result, most observers anticipate propane costs will remain at the current low levels throughout the winter and spring.

Typically, one would anticipate some margin expansion in a falling cost environment. However, as previously mentioned, our cost has not dropped significantly. We expect modest cost decreases in Q2 and a more significant cost drop in our average cost for Q3 as inventories are fully refreshed with lower-cost product.

As you've seen, we've lowered our guidance to a range of $635 million to $665 million, assuming normal weather the rest of the year. Performance at the midpoint of this new guidance would result in EBITDA of $650 million, or 2% below the record EBITDA delivered in 2014 despite the challenges of Q1 weather.

Although winter weather is currently being experienced in the eastern part of the country, we feel it's important to reset earnings expectations for fiscal 2015, given Q1 and the sustained warmer weather in the western part of the country.

In addition, at these earnings guidance levels, we'll continue to demonstrate our traditionally strong distribution coverage as Kirk outlined.

Now turning to our growth for us. ACE, our AmeriGas Cylinder Exchange program, increased volume by 4% in the quarter and added over 1,000 new locations quarter-to-quarter. Our National Accounts program volume increased by 10%, which is a very positive event given the mild weather in December, since last year's cold weather was a large factor in National Accounts volume growth in Q1 last year.

We completed four small-scale acquisitions, and our pipeline of targets continues to be quite solid. Each year presents different challenges; however, we've designed a plan for the rest of 2015 which will deliver positive free cash flow, which covers all capital, all planned acquisitions, and, of course, maintain strong distribution coverage.

Lower-priced propane is good for our customers and our industry in the form of lower heating costs, as it tends to decrease the headwinds of conservation. This trend toward a lower price deck is very promising for the rest of 2015 as well as 2016.

That concludes my comments, and I will now turn the call back over to John.

Thanks, Jerry. As noted when I kicked off this call, we were pleased with the solid financial performance in Q1 as well as the significant progress we're making on the strategic investments that are critical to UGI's future growth and performance.

The PennEast Pipeline Project is progressing through the FERC pre-approval process. Our team is working closely with our partners as we reach out to the communities and constituencies that will be impacted by this $1 billion investment in critical new nat gas infrastructure to serve increasing demand in the mid-Atlantic region.

The PennEast partners have held a series of outreach meetings in the local communities along the route, and these are being followed with local meetings held by the FERC. The feedback from these meetings will provide input as we finalize our FERC filing. The project is expected to be onstream late in 2017.

Our proposed acquisition of Total's LPG distribution business in France is currently in the regulatory review phase with the ADLC, the French Competition Authority. While the closing date will be largely determined by the regulatory process, we remain hopeful that the closing will occur during the first half of calendar 2015.

Our acquisition of Total's LPG distribution business in Hungary is also proceeding as expected. We recently received confirmation that the EU has delegated responsibility for the regulatory review to the authority in Hungary. That process has been initiated, and we're hopeful that closing will occur within the next six months.

During this interim period leading up to closing, our teams have been hard at work. They're focused on developing their project plans that will be executed once we have completed the regulatory review processes.

Our Get Gas program at the utility continues to be extremely well received by local communities in our service territories that are currently unserved or underserved. Demand for natural gas remains at unprecedented levels in our region, and we are working diligently to expand the reach of our system to provide families and small businesses with access to this clean and affordable energy.

We continue to actively pursue and develop a range of new infrastructure projects in the Marcellus, and we look forward to discussing those projects with you as we move forward into the execution phase.

Finally, while my comments this morning are focused on our solid Q1 results, I thought I should comment on developments during the month of January. The first month has seen colder weather in the mid-Atlantic and Northeast US and more normal temperatures across most of Europe. We have also seen the impact of colder weather on pipeline capacity values as the mid-Atlantic and Northeast regions struggle with the nat gas infrastructure gap that limits available pipeline capacity during periods of peak demand. These periods of increased pipeline capacity values provides our Midstream and Marketing team with the opportunity to utilize our mid-Atlantic asset network to deliver incremental margin.

While we still have much of Q2 and the fiscal year remaining, we were pleased to see the positive turn in the weather at the outset of the quarter. Our earnings outlook for fiscal 2015 remains unchanged, and we're looking forward to meeting the service challenges and seizing the commercial opportunities associated with colder weather.

We continue to generate strong cash flows, and our balance sheets are in great shape with significant capacity for future growth and investment. We look forward to keeping you updated on our progress.

With that, I'll turn the call back over to Tiffany, who will open it up for questions.

(Operator Instructions) Ben Brownlow, Raymond James.

Given the comments on the higher-cost inventory on propane, is it fair to say that the March quarter you're looking for, kind of, a high single-digit or a fairly decent decline in adjusted EBITDA for the March quarter relative to the second half of the fiscal year?

Usually we don't comment on quarterly guidance -- just the full-year guidance is really all we're comfortable with discussing.

Okay, great. And on the wholesale volume, can you give some color there on the decline year-over-year?

Yes, our wholesale business is not a big contributor to our profitability, but last year during the shortage, we had to redirect certain propane away from our wholesale customers toward our retail customers; and, as a result, our sign-ups this year did go down. But, for the quarter, the total EBITDA effect of that was less than $1 million.

Yes -- this is John. I would just comment as well -- one of the things we do across the business in Europe as well, similar to what Jerry and his team did at AmeriGas. You look at your channels to market and make sure you're kind of optimizing your supply infrastructure in Europe as well. We've kind of assessed that channel, and are making some changes with regard to, sort of, the wholesale segment. It's not a crucial segment. You just want to make sure your supply infrastructure is set up to serve your -- primarily, your direct customers. So that's a continuous process for us -- to make sure, as I said, that supply infrastructure is well aligned to meet any demand from our customer base, particularly during peak periods.

That's helpful. Thanks for the color. And just -- when I look at the guidance, going back to the guidance, is there any color you can give on the OpEx and the admin outlook there? I mean, should we look for, kind of, a similar 3% to 5% year-over-year growth going forward? Or just any insight into what's baked into the guidance.

Yes, again, I think our comfort is not going line item by line item but we feel comfortable with the full-year guidance on EBITDA.

Okay. And just a housekeeping question -- do you have the wholesale revenue dollars that you could give?

Well, I'm sure we do. This is wholesale revenue --

While Jerry is --

$13 million.

$13 million. One comment I'd make with regard to the remainder of the year is -- and this is true of, particularly, of both the LPG businesses, is you're in a much better position as you go into the second quarter to assess and address OpEx in that first quarter year, largely gearing up for the peak season. And, obviously, this year we've seen weaker demand because of weather, so you then begin to address that as you move through Q2, and you can take action that would favorably impact OpEx as you move through Q2 and, obviously, you get beyond the winter.

But first quarter is a challenge because a lot of the quarter is spent gearing up to serve the peak demand. In Q2 you can start to take some actions.

Yes, we do have a pretty decent seasonal workforce that -- we've got to keep them on staff until we see the whites of the eyes of spring.

That makes sense. Thank you so much for the color.

Okay. Thanks, Ben.

Operator: Again, to ask a question that is star 1 on your telephone keypad. There are no further questions in queue at this time. This concludes today's conference call. You may now disconnect. .