UGI Corp (UGI) 2016 Q4 法說會逐字稿

Good morning. My name is Lindsey, and I will be your conference up operator today. At this time, I would like to welcome everyone to the UGI Corporation and AmeriGas Partners FY16 earnings call.

(Operator Instructions)

Thank you. Mr. Will Ruthrauff, Director of Investor Relations, you may begin your conference.

Thanks, Lindsay. Good morning, everyone, and thank you for joining us. With me today are Hugh Gallagher, CFO of AmeriGas Propane; Kirk Oliver, CFO of UGI Corporation; Jerry Sheridan, President & CEO of AmeriGas Propane; and John Walsh, President and CEO of UGI.

Before we begin, let me remind you that our comments today will include certain forward-looking statements which Management believes to be reasonable as of today's date only. Actual results may differ significantly because of risks and uncertainties that are difficult to predict. Please read our earnings release and our annual report on Form 10-K for an extensive list of factors that could cause affect results. We assume no duty to update or revise forward-looking statements to reflect events or circumstances that are different from expectations.

We will also describe our business using certain non-GAAP financial measures. Reconciliations of these measures to the comparable GAAP measures are available in the appendix of our presentation. Now let me turn the call over to John.

Thanks, Will. 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 briefly on critical achievements in the quarter, and provide an overview of our full-year results and FY17 guidance.

I'll then turn it over to Kirk who will provide a more detailed review of UGI's financial performance in FY16. Jerry will cover AmeriGas' FY16 performance and FY17 outlook. I'll wrap up by reviewing progress on our strategic projects and initiatives, and providing some additional perspectives on the outlook for FY17.

We're very pleased to report record earnings per share in spite of abnormally warm temperatures in each of our markets. Our full-year GAAP EPS was $2.08, while our adjusted EPS was $2.05, which was in line with the guidance we provided at the end of Q3, and in our press release on October 13. The adjusted EPS of $2.05 establishes a new high-water mark for UGI earnings. The adjusted EPS in 2016 excludes the impact of marked-to-market gains of $0.17, along with a combined negative $0.14 impact of transition costs associated with Finagaz, and the loss on early extinguishment of debt at AmeriGas.

We were very pleased with the earnings delivered in 2016, as we achieved record earnings despite a challenging whether environment. We were particularly excited about the progress made over the past 12 months on our primary strategic initiatives, such as our mid-stream infrastructure investments in the Marcellus, and the Finagaz integration in France.

One other relevant benchmark for assessing our FY16 performance is a comparison to our most recent ultra warm weather year, which was FY12. Our FY16 adjusted EPS of $2.05 was over 60% above our FY12 adjusted EPS of $1.25, reflecting the tremendous growth in our businesses over the past four years, as well as the positive impact of significantly higher level of fee-based income, which enhances earnings resiliency in warm-weather years.

Our guidance for FY17 of $2.30 to $2.45 assumes normal weather and volatility in our service territories. The mid-point of our FY17 guidance represents a 16% increase versus FY16, and a 10% CAGR since 2013, which is the most recent year of relatively normal weather for us.

This strong EPS growth demonstrates the fundamental strength of our businesses, as earnings contributions from our recent strategic investments in organic growth across our businesses, bolstered by an assumed return to normal weather and volatility, combined to deliver significant earnings growth. Kirk will comment in more detail on our FY16 performance in a few minutes.

FY16 was a noteworthy year for the Company in many ways. It was the first full year of operations with our expanded business in France, and we saw the positive impact of the Finagaz acquisition in our UGI international results.

Our mid-stream and marketing team is successfully executing the broadest range of projects in their history. All of our teams successfully addressed the challenges of the exceptionally warm winter weather by maintaining our focus on unit margin management, expense control, working capital management, and the delivery of organic growth.

I'd like to comment on a few of our key FY16 achievements. The mid-stream and marketing team made significant progress over the past 12 months on a broad range of critical infrastructure projects. Our Sunbury pipeline and Manning LNG liquefaction projects are well into the construction phase. Both projects remain on schedule and on budget, and we look forward to adding them to our network of mid-stream assets in FY17.

The FERC issued its draft environmental impact statement on our Penn East project in July, and on Tuesday issued a notice to revise schedule that extends the date for the issuance of its final environmental impact statement by two months, from December 2016 to February 2017. Despite the revised timeline, we continue to believe that a late 2018 in-service date is achievable.

This new capacity, serving capacity constrained areas of New Jersey and Pennsylvania, is a critical project for the region. Our outlook for our mid-stream and marketing business remains very strong. I will comment more on this later in the call.

Our gas utility had a very productive FY16. We filed and successfully concluded the first rate case in over 20 years for UGI Gas, the largest of our three gas utilities in Pennsylvania. The outcome was a $27 million rate increase, with those new rates going into effect late last month. Our UGI Gas customers continue to benefit from our proximity to low-cost Marcellus gas, with the average residential bill for a UGI Gas customer, assuming the new rates, still 47% below their average bill in 2008.

The team at utilities once again deployed record levels of capital, as we continue to add new customers, while also executing an extensive infrastructure replacement program. We added approximately 14,000 new residential heating customers in FY16, and 2,300 new commercial accounts.

Infrastructure replacement and upgrade remains a priority. Our cast iron and bare steel infrastructure replacement programs remain on track, and in the process, we are addressing some constrained areas within our distribution system.

Lastly, yesterday UGI Gas received approval for its DISC, which will be effective as of January 1. We expect to begin collecting DISC revenues at UGI Gas in FY18.

Jerry will comment in detail on AmeriGas' performance, but I would like to comment on the progress within our ACE program. This is an area where our national footprint is crucial, and our team has done an outstanding job of building our position with national retailers. There was some noteworthy gains in FY16, as we reached agreement with several large retailers, which will add approximately $1 million additional cylinder sales to our ACE portfolio.

I will close out my remarks on FY16 with a few comments on our international propane business, where we delivered an extremely strong performance, despite the challenge of warmer-than-normal weather. We saw the significant positive impact of the Finagaz acquisition, as our FY16 EBIT, excluding transition expenses for international propane, increased by 73%.

We've made significant progress on our integration and alignment activities over the past 12 months. Our team is doing an outstanding job on the integration, and we are on track as we hit the 18-month mark post-acquisition. While the integration work for Finagaz will continue into FY18, we expect to achieve the majority of our critical integration milestones by the end of FY17.

FY16 was a year of challenges, with warmer than normal weather in all of our service areas, and dampened volatility and pipeline capacity values being our most significant head winds. These challenges provided us with the opportunity to demonstrate the resiliency of UGI's businesses, and our teams responded to this challenge.

We delivered record earnings, which were underpinned by significant contributions from our recent major investments in Europe and our mid-stream business. We also maintained our commitment to excel in the most critical activities we undertake -- safety, customer service, and operational efficiency.

I'll return to comment on our FY17 outlook and our strategic initiatives, but I'd like to turn the call over to Kirk at this point for the financial review. Kirk?

Thanks, John, and good morning, everybody. As John mentioned, FY16 was a strong year, with adjusted earnings coming in at $2.05 per share, which is $0.04 over last year. On this slide, we've laid out the adjustments to GAAP earnings, which are pretty straightforward. We back out $0.17 for unrealized gains on commodity derivatives. We then add back $0.10 of after-tax integration expenses associated with the Finagaz acquisition, and $0.04 for loss on extinguishment of debt.

We experienced a loss on extinguishment of debt in both years, this year for the refinancing at AmeriGas, and last year in connection with the financing of the Finagaz acquisition.

Turning first to the LPG side of the business, AmeriGas is reporting adjusted EBITDA of $543 million, which is down $76 million, or about 12% 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 10% versus last year. The decrease in operating expenses reflects lower vehicle fuel, employee compensation and benefits, and uncollectible accounts expense, partially offset by an increase in litigation and general liability reserves. Jerry will discuss AmeriGas results in more detail in a few minutes.

For UGI International, we achieved adjusted income before taxes of $210 million, as shown on the bottom-right column of this slide. These results include a full year of operations for Finagaz, which closed on May 29 of last year. The Finagaz acquisition nearly doubled our retail distribution business in France. Finagaz results and higher unit margins in the legacy business combined to overcome the warmer weather, and drive the strong results for this year.

Turning now to the natural gas businesses, mid-stream and marketing posted income before taxes of $145 million, down $36 million versus last year, strong performance. Total margin is down about $45 million, or 14%, reflecting lower capacity management, natural gas and power marketing, and electric generation margins. These decreases in margin were partially offset by higher fee-based margins generated in gathering and peaking services.

Utilities is reporting income before taxes of $163 million, which is down $37 million, or about 19% versus last year. Throughput to core customers decreased 19% in the face of weather that was 14% warmer than normal, and 18% warmer than last year. Total margin decreased by $51 million, reflecting the lower core market volume and lower electric utility margin.

Operating expenses decreased significantly, reflecting lower IT project costs, and other costs that were down due to the mild winter weather. Depreciation expense increased $4 million, reflecting the effects of greater distribution system capital expenditures.

Finally, we're proud of the Company's continued track record of outstanding cash generation. You can see on this slide that UGI has continued to steadily increase cash flow from operations over the long term, despite the vagaries of weather. This strong cash generation allows us to fund growth projects and grow the dividend without having to access the capital markets.

Our balance sheet is strong, as reflected by our conservative leverage and credit ratings. This flexibility ensures we have the capacity to meet our growth needs for the foreseeable future. That concludes my remarks, and I'll now turn the call over to Jerry for his report on AmeriGas.

Okay, thank you, Kirk. For AmeriGas, the fiscal year ended September 30 was the second warmest on record -- that's 121 years -- which obviously had a significant impact on our earnings performance. The 15% warmer-than-normal weather resulted in a 10% reduction in volumes from prior year. We immediately mobilized to execute our warm-weather plan to offset a portion of the impact of the warm weather through solid margin management, and of course cost-containment activities.

The reduction expenses is partially offset by a $30 million increase in litigation reserves. As previously disclosed, we received a significant adverse judgment in a class-action case, formally believed to be remote, along with some other adverse developments in our litigation portfolio. This resulted in the need for the reserve increase. As a result of the factors just mentioned, AmeriGas achieved adjusted EBITDA of $543 million, which would have been in line with previously announced guidance, absent the $30 million charge.

Beyond the headlines of warm weather impact on earnings, we were pleased with the number of accomplishments across several fronts during 2016. We are well positioned for growth, given our technology investments which have enhanced our customer service levels, while also reducing our cost to serve, and enabling us to turn fixed costs into variable.

Now some brief comments on growth drivers. Our national accounts program added 39 new accounts during the year, and renewed 40 deals, a very strong performance. Our AmeriGas cylinder exchange program added new business that represents over $1 million additional cylinders sales going into 2017. Our corporate development program added six additional tuck-in acquisitions, adding 10 million gallons annually.

In April we increased our distribution to $3.76 per unit, the 12th consecutive year of distribution increases. In June, we refinanced $1.35 billion of our debt, at an average rate of 5.75%, lowering our weighted average cost of debt, while extending our maturity profile and improving coverage.

We were also pleased with our AmeriGas unit performance, which has been quite strong in a volatile NLP environment. Our ability to grow our distributions without the need for large capital outlays or a need to access equity or debt markets has put us in a good position, and has delivered a compound annual unitholder return of 19.8%, 8.8%, and 12.2% for the one, five, and 10-year periods ended September 30.

Looking ahead to 2017, we expect to report adjusted EBITDA in the range of $660 million to $700 million, assuming normal weather.

In closing, I would like to just say thank you to the entire AmeriGas family for performing so well through one of the warmest winters in history, and for continuing to provide excellent service to all of our customers. Now let me turn the call back over to John.

Thanks, Jerry. While FY16 was a year of record EPS for UGI, I think it's the progress on strategic investments that is the most noteworthy aspect of our performance over the past 12 months. The scale and reach of our businesses continues to provide us with an exceptional pipeline of high-quality investment opportunities, and our team is working diligently to identify, assess, and execute the most attractive projects.

As we kick off FY17, our portfolio projects in development and execution is stronger than ever. This strength is reflected in our guidance for FY17, and provides us with great confidence in our ability to continue to deliver strong earnings growth in future years.

Our mid-stream and utilities teams continue to see very strong natural gas demand across the Mid-Atlantic region. This demand strength is evident in all of our key customer segments; residential, commercial, and industrial, as well as an expanding portfolio of gas-fired power generation projects.

This strong demand and the extended timelines for approval of pipeline capacity additions will stress the gas system network in the Mid-Atlantic and northeast during any periods of extended cold weather. UGI is working diligently to develop and execute new investments that address this critical infrastructure gap.

The field execution phase of our $160 million Sunbury pipeline is going extremely well. We expect this pipeline, which will serve a new 1,100-megawatt Panda Power facility, and supply a portion of UGI PPG customers to be completed early in 2017, and commence service to Panda Power next summer.

We are in the FERC environmental impact statement phase of the Penn East project, where we partner with five other major companies to construct a 120-mile pipeline to transport low-cost Marcellus gas from northeast Pennsylvania to customers in eastern Pennsylvania and central New Jersey. The FERC issued their draft environmental impact statement in July, and as I mentioned earlier, recently revised its expected completion date for their final environmental review to February 17.

This project will serve areas of New Jersey, where customers were particularly impacted by the polar vortex of 2014, when delivered gas costs and power prices spiked due to the lack of gas pipeline capacity. Phase one of Penn East is fully subscribed, which reflects the high demand for this badly needed new capacity. We anticipate an in-service date for the $1.2 billion project late in 2018.

One other area of our mid-stream business that reflects the significant demand growth is our LNG infrastructure. The continued increase in peak winter demand for natural gas has created a need for enhanced LNG peaking. We are nearing completion of our new $60 million LNG liquefaction unit in northeast Pennsylvania, and expect the unit to be on stream in January.

In addition to expanding liquefaction, we're making a series of smaller investments in LNG storage, vaporization, and fueling facilities in central and eastern Pennsylvania. This infrastructure will ensure that we can meet the rapidly increasing demand for peaking services, and serve the growing LNG demand in the Mid-Atlantic and northeast. As we build LNG infrastructure in these areas, we free up assets such as pipeline capacity to serve additional customers in the same markets.

One final point on this portfolio of major mid-stream projects, where we will be investing approximately $450 million over the next 24 months. The revenue streams for these projects are fee-based, with the majority of the fees guaranteed.

Our capital deployment at the gas utility has reached record levels, which we expect to continue for the foreseeable future. Our total CapEx spend almost tripled from FY11 to FY16, due to the rapid acceleration of growth projects and infrastructure replacement. We expect total CapEx spend at utilities over the next four years to exceed $1.1 billion, or roughly 40% above the CapEx spend over the past four years.

Our team at UGI Utilities has done an exceptional job of achieving the step-change in project execution, while maintaining high levels of customer service in a very strong focus on customer and employee safety.

Our LPG businesses, AmeriGas and UGI International, start the year on very strong footing. Both of these businesses will contribute to the EPS growth reflected in our FY17 guidance. In addition to the earnings growth, our LPG businesses also generate a significant level of free cash flow that is crucial to UGI's ability to fund our growth investments.

AmeriGas's EBITDA guidance of $660 million to $700 million assumes a return to normal weather, and reflects the contributions from the continued growth of our Asian and national accounts programs, as well as the benefits of deployment of enhanced logistics and customer service tools. These tools enhance our service levels while also reducing our cost to serve.

FY17 will be another very busy year for UGI International, with France being the primary focus. Our team in France is performing at a high level, and we're excited to be entering a year when much of the integration and alignment work will be completed. We will also continue to assess opportunities for attractive acquisitions for both AmeriGas and UGI International, as we strive to leverage our market-leading infrastructure on both continents.

FY16 was a dynamic year for UGI, as our expanded base of operation enabled us to deliver record EPS despite the major challenge presented by an extremely warm winter. We demonstrated the collective strength of our diversified businesses, and made noteworthy progress on our critical strategic programs, including our Marcellus infrastructure build-out and the integration of the Finagaz acquisition.

Our outlook as we enter FY17 is extremely positive, as indicated in our FY17 guidance. Our major investments that came on line in the past 18 months -- Finagaz, the [Auburn] 3 and Uniondale pipelines, and the Temple liquefaction expansion, are significantly accretive. In addition, we have a series of new investments, several of which I've commented on today, that will come on stream in the next 12 to 24 months.

The Company starts the new fiscal year with the cash flow and balance sheet capacity and strength to fund our full range of active projects, with significant spare capacity to support additional new investment. We'll remain proactive and disciplined as we seek new opportunities to expand our businesses, and position the Company to deliver the long-term growth and income that our shareholders have come to expect.

While we have much work to do on all these projects, I can say with confidence that we've never had a clearer view of our future earnings growth at UGI than we have today. We are moving forward with these strategic investments, and we're busy assessing a range of new opportunities across all of our business units.

We're looking forward to keeping you updated on our progress through the year, and we hope that many of you can join us at our Analyst Day in New York City on December 8, where we'll share more information on the critical elements of our strategy, and the future outlook for our businesses. With that, I'll turn the call back over to Lindsay, who will open it up for your questions.

(Operator Instructions)

Ben Brownlow, Raymond James.

Hi, good morning, Jerry. Obviously, a tough quarter from a demand perspective. As you look at -- can you give some color around the inventory levels as you head into the fiscal first quarter? Do you expect any incremental propane margin benefit to that quarter, just given the low inventory turns in the September quarter, assuming there's a lower cost relative to more recent wholesale pricing?

Yes, we're lucky that cost has been relatively stable for the last few months. We're also lucky that, relatively, we're pretty lean on inventory. Most of our locations go through their inventory in cold weather times several times a week. Right now, we're positioned with inventories that are actually below last year, and that's mostly because October was looking to be pretty warm.

But I think as far as margins go, the margin impacts that we've experienced are really mix related, so residential tends to be a higher-margin piece of the business or segment. When residential isn't there, as it wasn't in September, you start to see that impacting the overall margin. But margins generally across the segments are very strong. It's really a mix issue.

Great. You commented on the cylinder additions, the 1 million at retail. Can you just elaborate on that expansion? Obviously, that's just a continued improvement and expansion of that business, but what does that bring the total to? Is there any way to quantify that profit contribution as you continue to increase that business?

Yes, we've made a point not to unpack the pieces with AmeriGas, just because I think it puts us at a disadvantage competitively. I would tell you that the wins that we've had commercially that I described, the 1 million additional cylinders, represents about 5,000 new retail locations which we have completely rolled out. That ends up being about an 8% increase in total locations served.

Great. One last one for me, and I'll jump back in the queue. The six acquisitions you completed year to date, were those still accretive, just given the weaker demand backdrop?

They come at different times. A lot of them closed in the latter part of the year, so not accretive that much to this current year we just closed out, but certainly very accretive to next year.

Great, thank you.

Chris Sighinolfi, Jefferies.

Hi, good morning, guys. Kirk, appreciate the slide 15, the cash generation growth over the last decade. It's pretty impressive. I know that's a cornerstone of the UGI story.

I was just curious. I don't know if I missed it or if you said it, the consolidated cash position as of the end of the fiscal year, but it was rather significant, at least as of June 30. I was curious, if you gave it, what that balance was, first question.

Yes, I didn't give it, but it's around $500 million.

Okay. I guess with regard to that, clearly you have spending. John mentioned uptick in spending on a ratable basis at the utility, and you have investments like PennEast that are going to draw some cash over the course of the next couple of years. What are the plans for that magnitude of cash?

There's been a lot written about perhaps in the wake of yesterday's election results maybe there's an opportunity to repatriate some cash. I don't know how much of that sits abroad versus domestically, but any idea around potentially cash that was sitting overseas coming back home?

Chris, we're a pretty full taxpayer here in the US, and we happen to be in a high tax jurisdiction in France. There's some friction with getting cash out, and each country has different rules around how you can move cash. We don't have any plans to change the way we've been doing it.

We still see a lot of opportunity in Europe, so unless we have a need for it, a lot of that cash will stay in Europe until it's deployed there. We do take regular dividends out of the Business, which we do out of all of the businesses. But we don't have any plans to really change. About half the cash is in Europe.

In terms of stepping back to your question, Chris, on strategic intent, as we get larger, we've been very fortunate in continuing to build our businesses with investments that are significantly cash-flow positive. We've talked historically about our cash engine. That continues, and the engine gets larger, which is what we need to invest -- to support the investments that we have on our plate over the next few years that we can see, plus other opportunities that we'll identify.

We still see strategically a nice balance of growth and income that's underpinned by that cash flow. It gives us the opportunity and the capability to seize attractive investments and fund them with cash, if necessary. We continue to like the balance we have with this enhanced level of cash flow, which is consistent with the growth in the scale of the Company overall.

Okay. All right, thanks for the time. That's really it for me. I'll look forward to the Analyst Day for additional deep dive, but appreciate it.

Thanks, Chris.

(Operator Instructions)

Michael Gaugler, Janney Montgomery.

Good morning, everyone.

Good morning, how are you?

Good, John. Congrats on the record earnings in 2016. Going back to some of your remarks earlier in the call, you mentioned new investments for natural gas infrastructure. I know I've asked this question before, but now with the post-election results, I'm wondering again if maybe you could refresh us on your thoughts in terms of large-scale projects out there that potentially you might be more interested in chasing now, like PennEast, or do you still think it's more smaller extensions of pre-existing assets?

Yes, I think it's both, Michael. We absolutely believe that projects such as PennEast are crucially needed, and that a project like PennEast has the potential for multiple phases as, for example, we saw in our [Arbon] project, and as you see on many other pipeline projects.

We're very positive about a continued pursuit and development of major pipeline projects. We've got Sunbury, as I noted, well under way, that will be completed in the next couple of months here from a construction standpoint.

PennEast is clearly in the FERC review phase, but we remain very positive on that project, and for the potential. Phase one is fully subscribed. We see demand continue to grow, so the need for that capacity grows. We're very optimistic about continued opportunities to invest on projects with that type of scale.

We're also very focused on smaller projects within our network of assets that incrementally will be attractive projects on their own, but also, when they become part of our network, increase our flexibility to be able to seize margins when you have disruptive days or highly volatile days. We'll be actively developing a broad range of projects, from small to large, and we think the environment is positive for that, basically because we see a significant need that is based on the ramping of demand that's been happening over the last seven or eight years, actually.

That's all I had. Thanks, John.

Okay, thank you.

There are no further questions in queue at this time. I will turn the call back over to Mr. John Walsh for closing comments.

Okay, thank you very much, Lindsay. Thank you for your time this morning. We hope to see many of you on December 8 at our meeting in New York. If not, we'll talk to you on our next call. Thank you.

This concludes today's conference call. You may now disconnect.