UGI Corp (UGI) 2015 Q4 法說會逐字稿

Good morning. My name is LeAnn, and I'll be your conference operator today. At this time, I like to welcome everyone to the UGI-AmeriGas fourth-quarter 2015 conference call.

(Operator Instructions)

Thank you. Dan Platt, Treasurer of UGI, you may begin.

Thanks, LeAnn. 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, and 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 will comment on our key activities, provide an overview of our full-year results and FY16 guidance, and then 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 key developments on our strategic projects and initiatives, as well as some additional comments on the outlook for FY16.

Our full-year GAAP EPS was $1.60, while our adjusted EPS was $2.01, which was roughly in line with the record adjusted EPS delivered in FY14. The adjusted EPS in 2015 excludes a negative impact of mark-to-market losses of $0.30, along with a combined negative $0.11 impact of acquisition and transition costs associated with the Totalgaz acquisition and the loss on early extinguishment of debt at Antargaz. Our 2015 adjusted EPS includes $0.01 of operating loss associated with Totalgaz operations for the period subsequent to the acquisition. Our adjusted EPS is consistent with our comments on the Q3 earnings call. The earnings delivered in 2015 represent a significant accomplishment for the Company as we match last year's record results, despite weather that was warmer than FY14 for all of our domestic businesses. Our guidance for FY16 of $2.15 to $2.30 assumes normal weather and volatility in our service territories.

The midpoint of our FY16 guidance represents an 11% increase in EPS versus FY15, and an 11% compound annual growth rate for the FY13 to FY16 three-year period. This significant growth in EPS demonstrates the underlying strength of our businesses, as contributions from our major new investments and organic growth across our businesses more than offset the impact of an assumed return to normal weather and volatility. It's important to note that margin contribution for most of our new projects is supported by long-term, fee-based commitments. These capital projects, which primarily address the infrastructure gap in the Marcellus, are not materially impacted by changes in the underlying commodity prices. Kirk will comment in more detail on our FY15 performance and our FY16 outlook in a few minutes.

FY15 was an exceptional year for UGI on numerous fronts. While we didn't see the weather extremes of FY14, colder than normal weather in the Eastern US extended volatility of pipeline capacity values in the Mid-Atlantic region, and strong operational performance enabled us to deliver a second consecutive year of record earnings. Although we faced some challenges in FY15, AmeriGas experienced warm weather in the Western and Southwest US, and Europe suffered through another extremely warm winter, we demonstrated the earnings power of our diverse businesses. In addition to executing all of the activities related to demand growth and new investments, 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 briefly on a few of our key FY15 achievements. Our Midstream & Marketing team continues to play a major role in the build-out of critically needed gas infrastructure in the Marcellus region. We successfully completed several significant projects, including our Auburn III expansion, the Uniondale lateral and the LNG expansion at Temple, while developing major new midstream projects that position us exceptionally well for future growth. I'll comment on these new projects later in the call.

I haven't commented on recent calls on the gas marketing business within Midstream & Marketing. This business has been a strong performer for us over the past two decades, and we delivered solid volume growth in FY15 through our targeted gas-marketing programs in the Mid-Atlantic region. Our weather-adjusted customer volumes are increasing, and we are pleased with the potential for continued growth as we enter FY16.

Our Gas Utility continues to deliver strong customer growth, while executing major infrastructure replacement programs. We added approximately 15,000 new residential heating customers in FY15, and 2,400 new commercial accounts. The progress in the commercial sector was noteworthy, as additions were up about 16%. Utilities also completed several large capital projects in FY15, including a pipeline to serve a new Panda Power generation facility in Lycoming County. We're also seeing very strong underlying customer demand as lower delivered-gas costs in our service territories influences consumer behavior. The most significant impact of this robust core demand is the resetting of peak demand levels. One final note on utilities: our cast-iron and bare-steel infrastructure replacement programs remain on track, and we are maintaining our accelerated schedule.

Jerry will provide you with an overview of AmeriGas's performance, but I'd like to comment on a couple of specific items. Our financial performance, which was below our EBITDA guidance, largely reflects the weather challenges faced by the business. We continue to make very good progress with our ACE and national accounts programs. FY15 was particularly strong for national accounts, as we grew volume with those major customers by 14%.

FY15 was a milestone year for our international propane business, as we significantly expanded the scale of our operations with the acquisition of Total's LPG distribution business in France. The deal closed on May 29, and we've been very pleased with our progress over the first five months. This business will be significantly accretive in FY16, and financial performance will improve as we integrate and align our activities in France over the next 36 to 48 months. We also closed on the acquisition of Total's LPG distribution business in Hungary. While the scale of this business is relatively small, this investment strengthens our position in one of the largest LPG markets in Eastern Europe.

As our business grows and the energy sector becomes increasingly complex, we've maintained our commitment to excel in the most critical activities we undertake: safety, customer service and operational efficiencies. Our team did an exceptional job serving UGI's customers in 2015, despite the challenges of another cold Mid-Atlantic winter, while executing a range of capital projects that is unparalleled in our history. 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, and good morning, everybody. Our strong results for FY15 were driven largely by the colder than normal weather in the Mid-Atlantic region of the United States, which resulted in significant demand and price volatility for natural gas. Although significantly colder than normal in this region, it was still slightly warmer than last year. And results for our natural gas businesses -- UGI Utilities and Midstream & Marketing -- were off slightly versus the record-setting performances we experienced last year. On the LPG side, all of our businesses, both in the US and in Europe, experienced much warmer than normal temperatures, which put downward pressure on volumes.

Turning first to the natural gas side of the business, Utilities reported income before taxes of about $187 million, which is down $12 million or about 6% versus the Utilities record performance last year. Throughput to core customers increased 1%, in spite of weather that was 4% warmer this year. This was driven largely by higher core market volumes, due to a 2% increase in core market customers. Total margin increased by $4 million, reflecting higher core market margin and greater large-firm delivery service margin, partially offset by lower margin from interruptible customers. Operating expenses were up about $13 million, reflecting increases in distribution system expenses of about $5 million, higher employee benefits and other general administrative expenses. Depreciation expense increased $4 million, reflecting the effects of greater distribution system capital expenditures.

Midstream & Marketing posted another strong year, reporting income before taxes of $183 million, down $13 million versus last year's record performance. Total margin is down about 3%, reflecting lower gas-marketing margin, a decline in peaking and capacity management margin, and slightly lower electric generation margin, partially offset by higher retail power and gas gathering margins. In FY14 and FY15, 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 Texas Eastern Zone 3 for the four most recent winter heating seasons. The bold blue line shows prices for the FY14 season, and the bold red line for the FY15 season. The FY14 season experienced some extreme pricing peaks in January, whereas prices in FY15 were not as extreme, but were strong for several months.

Turning now to the LPG businesses, we're reporting operating income at AmeriGas of $427.6 million, which is down $44 million or 9% versus last year. The decrease in total margin was driven by the effect of warmer weather on volume, partially offset by higher unit margins. Retail volume was down by over 90 million gallons or 7% versus last year. The decrease in operating expenses reflects lower vehicle expenses, primarily reflecting lower fuel cost and lower uncollectible accounts expense, partially offset by higher insurance-related expenses. Jerry will discuss AmeriGas results in more detail in a few minutes.

For UGI International, we achieved adjusted earnings before tax of $109 million, as shown on the bottom of the slide. These results include four months of operations for Finagaz since the closing of the acquisition on May 29 of this year. The lower local currency to US dollar translation rates reduced net income, but this decrease was largely offset by gains from foreign currency exchange contracts. We hedge our currency exposure by layering in hedges on a rolling three-year basis so that, in effect, a majority of the forward-year exposure is always locked in at the average exchange rate of the prior three years.

Total US dollar denominated margin is up $24 million, driven primarily by the addition of Finagaz margin. On a local currency basis, and excluding the margin from Finagaz, total UGI International margin was up versus last year, driven by higher unit margins, due to the significant drop in LPG prices and modestly higher volumes versus last year. Operating and administrative costs are up $23.5 million, reflecting the operation of Finagaz for four months, plus $22.6 million of acquisition and transition costs. Interest expense is up by $5.2 million versus last year, reflecting a $10.3 million charge associated with the early extinguishment of debt at Antargaz, partially offset by significantly lower borrowing costs.

The bottom half of the slide shows the adjustments to earnings before taxes for the one-time items related to the acquisition, and transition costs associated with Finagaz, and the early retirement of debt at Antargaz. As we've previously disclosed, we expect the acquisition of Finagaz to be accretive in its first full year of operations, which is FY16. The integration has been progressing as planned, and we estimate incremental contribution from the Finagaz operations of approximately $0.15 per share in FY16. This incremental contribution will increase gradually over the next 36 to 48 months as the Antargaz and Finagaz operations are aligned. We estimate this enhanced contribution to be a further $0.08 to $0.12. Transition expenses are expected to total EUR50 million to EUR60 million over the next four years, with EUR6 million to EUR10 million incurred in FY16.

I'd like to turn now to our updated guidance for FY16. On this slide, we've gone back to FY13, a fairly normal weather year, and compared adjusted results for that year to FY16, which implies an 11% CAGR to the midpoint of our guidance range. We've also listed a number of the drivers of that growth on the page. As John referenced earlier, much of our growth has come from growth in demand for natural gas, investments that address the existing Marcellus-related infrastructure gap, and investments in both the US and European LPG businesses. Achieving the midpoint of our guidance range implies a payout ratio of around 40% at our current quarterly rate. Management and the Board will continue to review the payout ratio, playing the strength of the businesses and opportunities for investment, and will adjust accordingly.

Also, just touching on our plans for FY17 and beyond, this page lists a number of items that will drive growth going forward. I won't touch on all these actions, but wanted to demonstrate that we have a clear line of sight on a number of tangible opportunities to execute against, and to drive growth. Again, this growth is driven by the opportunities presented in the diversified set of businesses we are managing. Growth is expected to continue into the future in all the same areas we've grown in over the last three years: meeting the increase in demand for natural gas, closing the infrastructure gap, and investing in LPG.

Finally, before turning the call over to Jerry, I'll close with an update of what many of you have heard us refer to as our growth engine. The concept here is that our base businesses generate a steady-state, long-term growth rate of between 3% to 4%. However, all of our business also generate significant excess cash flow. That excess cash flow results in cash available for dividends and reinvestment of between $320 million and $360 million per year. This annual excess cash generation has increased by over $100 million in the last five years, and allows us to grow our dividend by over 4% and still drive incremental earnings growth of 3% to 6%. With that, I'll now turn the call over to Jerry for his report on AmeriGas.

Okay, thanks, Kirk. AmeriGas finished the fourth quarter with adjusted EBITDA of $39.7 million, which was $8.5 million below the fourth quarter of 2014. Weather was our key story in the quarter, as we typically expect September to kick off fall heating season. Weather in Q4 was 49% warmer than normal nationally, and 32% warmer than last year. Volume for the quarter was 8% below 2014, with nearly half of the shortfall occurring in the month of September. Given the lower EBITDA result for the quarter, we took strives to rein in capital spending, with total CapEx coming in $9.5 million or 28% below last year's fourth quarter, making up for the cash flow shortfall from EBITDA.

Propane costs stabilized nicely at lower levels throughout the quarter. Average Mont Belvieu price in the quarter was $0.41 per gallon, which was 60% below the fourth quarter of 2014. This allowed us to manage margins nearly $0.08 above Q4 last year, which helped offset some of the volume impact. We also experienced several unusual expenses in the quarter, including approximately $3 million in liability insurance reserve adjustments related to a handful of specific cases. We had a $2 million write-off of software development costs related to an IT project that we mothballed during the year. And we experienced some higher severance costs also in the quarter. These non-run rate expenses are now behind us and not likely to recur in FY16.

Now let's spend a moment on our growth thrust for the year. ACE, our AmeriGas Cylinder Exchange program, saw a solid same-store sales growth in September. And we now have over 48,000 sales locations across the US where you can buy an AmeriGas barbecue cylinder. Our national accounts program increased volume by 14% this year, and we continue to see a strong pipeline of potential new customers from this program, which takes advantage of our unequaled national footprint.

We also closed nine small-scale acquisitions this year, adding $4 million of EBITDA for FY16. And our corporate development team is actively sourcing deals, and the pipeline remains strong. For the third consecutive year, proceeds from the sale of excess assets -- primarily related to the Heritage acquisition -- completely funded our acquisition program. We also made good progress on the customer service front in 2016, as we continue to emphasize and train for a great customer experience. Our Net Promoter Scores, which is a widely used customer satisfaction measure, were up 30% in 2015. And we've refreshed our online experience for our customers to more easily review and pay bills online.

Looking ahead now to FY16, you've seen in our press release we expect EBITDA in the range of $660 million to $690 million, assuming normal weather. This guidance is line with our long-term goal to raise EBITDA 3% to 4% over time, which will in turn, maintain solid distribution coverage and credit metrics for us. That concludes my comments for the call, and I'm going to turn it back over to John.

Thanks, Jerry. While we were very pleased with the strong financial performance delivered in FY15, I believe our progress on strategic investments is even more noteworthy. We entered the year with an exceptional portfolio of projects in development, and finished the year with an even stronger slate. Our Midstream and Utilities businesses continue to benefit from the demand for natural gas across the Mid-Atlantic region. This demand includes residential, commercial and industrial customers, as well as an expanding portfolio of gas-fired power generation projects. This exceptionally strong demand, and the lag in pipeline capacity additions, have accentuated the infrastructure gap that has been emerging in the Mid-Atlantic and Northeast over the past few years. UGI is working diligently to develop attractive projects that address this critical infrastructure need.

Our Midstream & Marketing business is executing two major pipeline projects that will deliver critical capacity to the Mid-Atlantic region by late 2017. Our 35-mile Sunbury Pipeline in Central Pennsylvania will serve a new 1,100-megawatt Panda Power facility. While our 115-mile PennEast project, where we've partnered with five other major companies, will transport low-cost Marcellus gas from Northeast Pennsylvania to Central New Jersey. In addition to these pipeline projects, we also announced a major expansion of our LNG infrastructure, with a liquefaction and storage investment at our site in Manning, Pennsylvania. This project will almost double our LNG liquefaction capacity and enable us to serve the increased demand for peaking services in our region. We'll be investing approximately $450 million in these three new projects over the next 36 months. The revenue stream for these projects are fee-based, with the majority of the fees guaranteed.

Our Gas Utility is also deploying record levels of capital to support ramping natural gas demand. Our total CapEx increased by almost 20% in FY15, and spending will accelerate in FY16. In addition to our infrastructure replacement and organic growth programs, we are also investing in pipeline projects for major customers within our service territory. As an example, we announced a pipeline project to serve Invenergy's new 1,480-megawatt facility in Lackawanna County. One final note on Utilities: our UGI Gas LDC is likely to file a rate case in FY16, which would be its first rate case in 20 years.

All of our businesses are benefiting from historically low commodity costs. But those declines are most noteworthy for our LPG businesses. After a decade of significant increases, costs for propane and butane have fallen by 60% to 75% over the past 12 months. Our teams at AmeriGas and UGI International are seeing product costs that are touching 15-year lows as we approach the winter heating season. As a distributor, we're delighted to be in a position to serve our customers with a lower-cost energy solution. Our unparalleled distribution networks and strong local leadership teams position us well to seize new opportunities in both the US and Europe.

FY15 was another year of significant progress for UGI. We delivered a financial performance that equaled the record FY14 performance, while executing the broadest range of strategic investment projects in our history. We clearly demonstrated the collective strengths of our diversified businesses, and made clear and steady progress on the strategic programs, such as our Marcellus infrastructure build-out, that are vital to our future. As we enter FY16, our outlook, as indicated by our guidance, is very positive. Our major investments that came online in FY15 -- Total France, Auburn III and Temple liquefaction -- are all accretive in FY16, with Totalgaz -- now rebranded as Finagaz -- having the most significant EPS impact. We're moving forward with our broad portfolio of new strategic investments, and we're busy assessing a range of new opportunities across all of our business units.

The Company starts the fiscal year with enhanced cash flow, strong balance sheets and a full complement of active projects. It's important note that we don't need to access equity markets to finance our current slate of projects. We also have the cash flow and balance sheet strength to support additional new investments, and we're committed to building on our long track record of profitable growth. Our path for growth is clearer today than at any point in our long history, and we are looking to keeping you updated on our progress through the year. With that, I'll turn it back over to LeAnn, who will open it up for questions.

(Operator Instructions)

Lin Shen, HITE.

Good morning, thanks for taking my questions. I have two questions for AmeriGas. The first one is that you said the propane inventory is high so the prices are low, which is going to be helpful for your business, assuming normal weather.

But we already have one and a half months coming in FY16. Is the weather seems warmer than normal now? And how is that impacting your outlook?

October certainly was warmer than normal, 20%-plus some odd, warmer. But we tend to not get too excited, as December has more degree days than October and November combined. So we really need to see the whites of the eyes of December to make a full assessment, but we've got lots of leverage to pull here, including a delay of seasonal hiring and so forth, that we can manage through these first couple months.

And one of the nice things you see when you look at the weather maps is colder weather in the Western US. We've had the last two years, very warm winters in the West. And the law of averages tends to play out with weather, and now we're seeing colder weather in the West, which is great for our businesses in those geographies.

Great. And also, AmeriGas -- I think you have a tradition to raise [division] maybe after the winter's over, sometime in May every year. So I'm just wondering, are you guys still following the trend to re-evaluate their division increase or not, after the winter?

And also, given the current weak market for MLP, a lot of companies are balanced between reserve cash versus distribution. I just want to get your thought about that?

You've seen a lot of stress among a lot of MLPs that are in a different business than from what we're in. We're a reseller of propane, so we're not actively involved in sourcing the propane itself, or fractionation activities.

We've had a good track record though. We've had nine consecutive years of increase in the distribution in the spring. But our Board takes that very seriously and looks at it every year. But our intention is to look at it again after winter in April.

And there's been no change to the stated target for distribution increase, the 5%. And I'd just reiterate what Jerry said, the nice thing about our businesses -- and I noted into my comments -- is that the cash generation capabilities of our business are there, regardless of the level of commodity valuation. And that's a key driver for us and a real source of strength over time.

Thank you. And the last question for me is that -- what is the performance that EBITDA for AmeriGas APU? And there are a couple markets MLP so weak that it's hard for anybody to [tap apart my full] equity issuance. I'm just wondering, do you have leverage, and also some time to wait for the capital market to be improved?

I'm sorry, I didn't follow that.

I was just trying to see, was it performance, that EBITDA for AmeriGas? And also how do you think about your equity issuance needs this year or next year?

Equity issuance needs.

Oh, we have no intention issuing any equity at this point.

Yes. It's true for both AmeriGas and UGI. We have the capability certainly, but no intention to access the equity markets for either AmeriGas or UGI at this point.

Okay, great. Thank you very much.

Yes, thank you

(Operator Instructions)

Nathan Judge, Janney.

Good morning.

Good morning.

Could you -- I didn't know if I missed, if you actually gave us, quantified, what the CapEx expectations would be for 2016?

We did not give that for 2016. I'm looking at -- it's going up, but I don't have the exact number on me for the total Company. But it's going -- the Utility is going up significantly. The CapEx program for the Utility is going up significantly. I can get you that, Nathan, after we get off the call.

I don't think, Nathan -- the reason we didn't highlight -- I don't think there's a major increase in capital. I mean, I think it's a number that's pretty consistent. We have timing on spend of various projects, the capital projects that ebb and flow. The only business that's got a significant ongoing change in the organic CapEx, as Kirk just referenced, the Utilities business, where we expect another increase.

I guess one of the -- obviously you have PennEast under construction. It would start really in 2016. So I'm curious as to how you look at that today. What's the capital expenditure timing of that over -- I guess it's supposed to be finished in, what, 2017 -- is that right?

Yes, for those projects, Nathan -- which is why we're not highlighting them as sort of a major delta as we go into 2016. But those projects, there is a spend, but the spend on those projects, given the timetable for approvals, tends to be backend-loaded. So given that they're 2017 onstream dates, a significant percentage of the capital will be actually in 2017 versus 2016, on both those projects.

Okay. And just to think about the capital deployment, when historically you look back at the Company, very strong history of raising a dividend -- I'm thinking of UGI here -- whenever you get below a 40% payout. I've seen historically that you either accelerated the pace of growth in one particular period and/or do share buybacks.

But thinking forward, obviously you have more clarity than you've ever had before. How do we think about growth now? Is it going to be perhaps truncated in one period as a step up, or perhaps is there more of a faster, longer-term pace?

Well, I think our basic philosophy remains the same. We have two elements. We have the -- what we call the policy, which is 4% dividend increase per annum. But we also look at our dividend payout ratio that Kirk referenced, that we've more or less kept in a band of between 35% and 45%, in terms of our payout ratio. And roughly; it's not an absolute ban, but just sort of a guide for us.

As we move forward and that payout ratio drops, when that's happened in the past, what we've done is do significant one-time adders. And we'd take the same approach.

As these new capital projects come onstream and begin to generate significant earnings and cash, we'd look hard at that in conjunction with the Board to keep that balance between growth and income that's so important to us and our shareholders.

And just as it relates to share buybacks, you did have authorized a share buyback some years ago. I don't know, I guess it was 24 months ago or so. And you've done a fair amount of buybacks.

Where do we stand on that? And what's your view of that as a capital deployment option, given the pullback?

We did about 1 million shares on that this year. And I think we had about 15 million shares authorized, so we are somewhere a little over one million of the way through on that. And we'll keep using that the same way we have been, Nathan, which is, opportunistically soak up shares as they come into the denominator from comp plans and other sources.

Yes, Nathan, it's Dan. The program to date, the 15 million shares authorized, we've repurchased 1 million this year and 1.3 million in the previous fiscal year. So we've repurchased about 2.3 million shares overall on the program.

And then just to touch on CapEx, just to give you a little more color on that, I think AmeriGas and the International business will be relatively flat coming in for FY16, whereas Utility will be up significantly. And Midstream & Marketing -- actually, the Sunbury Pipeline, there will be some fairly significant capital spend for Sunbury in FY16. So the Midstream & Marketing CapEx will be up fairly significantly year over year as well.

That's very helpful, thank you.

(Operator Instructions)

We have no further questions at this time. This does conclude the UGI-AmeriGas fourth-quarter 2015 conference call. Thank you for joining. You may now disconnect.

Thank you.