UGI Corp (UGI) 2017 Q1 法說會逐字稿

Good morning my name is Scott and I will be your conference operator today. At this time I would like to welcome everyone to the UGI AmeriGas first-quarter 2017 conference call.

[Operator Instructions]

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

Thanks, Scott. 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 and 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 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 first-quarter results for UGI and AmeriGas. We had a very strong Q1 at both AmeriGas and UGI with all of our businesses contributing higher adjusted net income than in 2016, resulting in a record first quarter for UGI. This very strong performance can be attributed to colder weather across our service territories versus FY16 and the significant positive impact of major investments and acquisitions made over the past few years.

We were very pleased with the quality of our earnings in the quarter, as our performance was driven by strong customer demand and very solid operational execution by our teams. I will comment on our key activities and market developments in the first quarter, then I will 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 will wrap up with an update on our strategic initiatives.

Our Q1 adjusted EPS of $0.91 established a new high water mark for UGI Q1 performance. This was well above last year's adjusted EPS of $0.64. Both quarters have been adjusted for the mark-to-market valuation of unsettled hedges and other items that Kirk will cover later. These exceptionally strong results not only reflect the impact of colder weather in each of our businesses but also reflect the underlying strength of our businesses.

In the quarter, we saw the continued major earnings contribution from our Finagaz acquisition. The impact of increased base rates at UGI Gas and the earnings contributions from new LNG contracts and gas marketing growth in midstream and marketing.

It's important to note that while weather was colder than in FY16, we still experience weather that was warmer than normal in each of our domestic businesses. I should also note that the $0.91 adjusted EPS was also above the prior Q1 record adjusted EPS performance of $0.71, achieved in FY14, the year of the polar vortex.

While our earnings performance was the headline for the quarter; we also made noteworthy progress on a number of strategic projects and activities. Our teams did outstanding work in Q1 on that front.

There were two keys to our solid performance in the quarter. First, I will focus on the fundamentals for consistent long-term performance. Unit margin management, working capital management, and control of operating expenses. Second, the positive contributions from new investments that will also provide the foundation for future growth.

With respect to major projects, we achieved some noteworthy strategic milestones over the past three months. Our $160 million Sunbury pipeline has been placed into service. The project was completed ahead of schedule and is currently providing service to UGI CPG. Gas service to our base load power generation customer in Sunbury, will commence in August.

We've also achieved mechanical completion of our $60 million LNG liquefaction unit in Manning, Pennsylvania. The unit will come on stream this quarter and will add critical capacity to our network, as we strive to meet the increasing demand for LNG.

Our utility had an exceptional busy quarter. Demand in the quarter was very strong with our core throughput up 32% versus FY16 on weather that was 25% colder.

We continue to grow the customer base at our gas utility with over 4,600 new residential heating and commercial customers added in Q1. Our infrastructure replacement program for cast iron and bare steel remains on pace with 67 miles replaced during calendar year 2016 and a similar target for 2017.

Utilities [came] was also busy with rate case related activities. Our new base rates at UGI Gas went into effect in October and we saw the positive impact in our results.

Earlier this month we filed a $21.7 million rate case request for UGI PNG. We expect the PNG rate case process to conclude by the end of the year. Even after factoring in this request, it's important to note that our customers at UGI PNG would still have a total monthly bill that is approximately 40% below their bill in 2009.

AmeriGas had a strong quarter with EBITDA up year-to-date due to very effective control of operating expenses and solid volume growth. Jerry will comment in much more detail on AmeriGas's Q1 performance in a few minutes.

Our international team built on it's very strong performance in FY16 and delivered a record Q1 performance. Adjusted income before income taxes was up 14% over prior year, primarily due to increased unit margins and volume growth in our profitable residential and small commercial markets. Our integration of the Finagaz business remains on schedule and we expect the integration process to conclude by the middle of FY18.

I will close with a few final points on the quarter before I turn it over to Kirk for a detailed review of our financials. While weather for the quarter was significantly better than Q1 FY16, we still face a warm weather challenge at utilities, midstream marketing, and AmeriGas.

We also face the challenge of rising commodity costs which makes our unit margin goals more difficult to attain. The good news is that our business has responded very effectively to these two key challenges and delivered a record Q1. I'll return later on the call to comment on our strategic initiatives, but I'd like to turn over to Kirk at this point for the financial review. Kirk?

Thanks, John, and good morning to everyone on the call. This first table lays out our gap and adjusted earnings per share for this quarter, compared to the same for Q1 of last year. As you can see, adjusted results exclude the impact of mark-to-market changes in commodities and foreign-exchange hedging instruments; transition costs associated with the integration of Finagaz; a loss on extinguishment of debt; and a recent change in French tax law which will lower the corporate tax rate in France beginning in FY21 for UGI.

At the end of December, the French Parliament approved a reduction in the corporate tax rate from 34.4% to 28.9% beginning in 2020. Because our French operations have deferred tax liabilities that are expected to be paid after the new rates become effective, we reduced our net-deferred tax liabilities by $24.7 million.

Also, beginning with Q1, we centralized our hedging program associated with UGI's international foreign currency exposure. We use foreign currency exchange contracts to reduce the exposure to foreign-exchange rate volatility. These new foreign currency contracts are not accounted for as hedges and the mark-to-market adjustments are recorded in our gas net income, are excluded from adjusted earnings.

Our prior year foreign currency contracts continue to be accounted for as hedges and will be recognized in earnings upon their settlement. Our adjusted earnings of $0.91 per share for the quarter, is up $0.27 over last year. Reflecting as John mentioned earlier, contributions from strategic investments in weather that was colder than in the prior-year period.

I'll now run through the Q1 results for each of the businesses. Turning first to AmeriGas. Volume was about 4% higher as the effects of very warm October and November were offset by colder weather in December.

Adjusted EBITDA of $185 million was up over $7 million versus last year, reflecting among other items, a reduction in O&M expense. These results also include a one-time non-cash charge for the correction of previously recorded gains on asset sales.

Operating expenses were down 2% in spite of the increase in volume, due to technology driven efficiencies and cost control. Jerry will review AmeriGas in more detail later on the call.

UGI International contributed $92.1 million in adjusted income before taxes, an $11 million increase over last year. Driven largely by an increase in bulk volume, due to the return of more normal winter weather which was 21% colder than last year, along with an increase in LPG unit margins.

The favorable average unit-margin impact was primarily due to exiting the lower margin bottle gas business in Poland partially offset by lower average cylinder and bulk unit margins due to rising LPG costs in the quarter, compared to the declining LPG costs in the prior period. Also, you should note that the adjusted income before tax of $92 million excludes about $8 million of Finagaz integration expense.

Turning to slide 10, midstream and marketing income before taxes, increased by about $7 million to $49 million for the quarter. Total margin is up about $6 million or 8% primarily reflecting higher peaking margin, gas marketing margin, and capacity management margin. Other income primarily reflects the recording of [AFUDC] associated with construction of the Sunbury pipeline.

UGI Utilities is reporting income before taxes of $72 million, up $33 million on weather that was 25% colder than last year which, along with customer growth, drove a 32% increase in core market volumes. The UGI Gas base rate increase also contributed to the substantial increase in margin.

Operating expenses were down slightly primarily due to lower distribution system expenses and other expenses decreased due to a prior year environmental charge. Finally, on January 19, we filed a request with the Pennsylvania PUC for a $21.7 million base rate increase at our PNG utility. We expect the process with the PUC to conclude by the end of this fiscal year. As you can see from this slide, we had a very strong quarter. All of our businesses contributing to the record quarter for earnings per share.

As I mentioned earlier, the utility benefited from a large increase in core volumes due to the colder weather this December, the UGI Gas base rate case and continued customer growth. The international business contributed significantly stronger results due to the combined impact of the return of normal weather, operational synergies associated with Finagaz, and unit margin management.

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

Okay. Thanks, Kurt and good morning. Adjusted EBITDA for AmeriGas in the first quarter of FY17 was $185 million, compared to $178 million first quarter last year.

As mentioned in our earnings release, adjusted EBITDA in the current quarter includes the impact of an $8.8 million charge which is recorded to correct an error from prior periods. Therefore, this was a non-operating and non-recurring charge.

Although October and November were 26% warmer than last year, December came in essentially normal and first quarter weather over-all was 14% warmer than normal and 7% colder than last year. Retail volumes increased 10.5 million gallons or 4% on this colder weather.

Average propane costs at Mt. Belvieu increased 39% when compared to the prior year; however, national inventories remain at strong levels and although propane costs have risen, the supply outlook remains relatively stable historically. We kept up with the rising cost environment and our retail margins were in-line with last year.

Expense management was particularly good in the quarter, as we remained in warm weather mode through the first two months of the quarter and then quickly transitioned into winter mode in December. Operating expenses were down $4 million despite the 4% increase in volume.

Although our performance this quarter was certainly better than last year on modestly colder weather, we are most encouraged by an additional comparison of this quarter to Q1 in FY15. This analysis reveals that our current quarter's operating results compare nicely to the comparable quarter in FY15 despite 11% warmer weather.

Adjusted EBITDA was $185 million this year and again, includes the $8.8 million error correction I mentioned. This compares to the $189 million of adjusted EBITDA in Q1 of 2015. This year's quarter again, was 11% warmer than Q1 in 2015 and as a result, the volume is 35 million gallons or 10% lower.

Expenses were down $20 million or 8% from Q1 2015. So we believe these results demonstrate the efficiencies we're gaining from our various technology investments and the commitment of our field management to use new tools to drive these efficiencies basically turning fixed cost into variable.

In addition to our emphasis on efficiency, we continue to focus on our growth thrust. AmeriGas cylinder exchange, our barbecue cylinder program both delivered volume that was 13% higher than last year and same-store sales growth was up 4%.

Our national accounts program volume also increased 17%, benefiting from both December weather and several large new accounts. Finally, on December 28, the partnership completed a tender offer for $500 million of its 7% notes, due 2022 and issued $700 million of 5.5% notes, due 2025.

Excess proceeds from the bond offerings were used to repay borrowings under the operating partnerships revolving line of credit. For the second time in six months we were able to extend our debt maturities at lower rates. So after a very warm start and a strong December, this has now put us back on solid footing for FY17. Let me now turn the call back over to John.

Thanks, Jerry. As I noted earlier on the call, we were very pleased with our strong financial performance in Q1. We were equally pleased with the progress on our portfolio strategic investments.

We've strengthened our midstream asset network in the Marcellus with the addition of the Sunbury pipeline and the Manning LNG liquefaction unit. Our PennEast pipeline project continues to move through the FERC approval process, although the current phase has been extended. We now expect the environmental impact assessment phase to conclude by mid-April.

Our target completion date for PennEast remains the end of calendar 2018. In addition to the Manning project, we are executing a series of smaller LNG projects that will add storage, vaporization, and fueling facilities at strategic points in Central and Eastern Pennsylvania. LNG peaking is one of the core activities for our midstream business.

We continue to see an increase in requests for peaking services and our LNG network is being enhanced to ensure that we can meet this demand. These projects leverage our existing LNG asset base and provide very attractive returns.

We're deploying record levels of capital at UGI Utilities to support our growth and infrastructure replacement programs. These investments ensure that we continue to deliver efficient and reliable service to our expanding customer base.

We expect our total capital spend in utilities to exceed $1.1 billion over the next four years. Roughly 40% above the capital spend over the preceding four years. These projects enable access to low-cost natural gas for our core customers; and have contributed to the significant reduction, 40% to 50%, in the average monthly bill our customers have enjoyed versus their peak monthly bills in 2008 and 2009.

AmeriGas is positioned well as we enter Q2. Jerry and the team have done a great job of utilizing enhanced distribution logistics and customer service tools, to improve our customer service performance while reducing our cost to serve.

We continue to leverage AmeriGas's scale as the largest LPG distributor in the US; with noteworthy customer gains in both our national accounts and cylinder exchange programs in Q1 and a healthy pipeline of opportunities as we look ahead. Our UGI international team is performing at a high level.

We are right on track with our Finagaz integration plan and we continue to look for opportunities to expand our position, both organically and by acquisitions. As I've noted on our prior calls, our LPG businesses are contributing both earnings growth and significant free-cash flow for UGI. They play a major role in fueling the growth engine that is powering UGI's performance.

In closing, I'd like to emphasize our strong performance across the board in Q1. Each of our businesses delivered improved financial performance versus FY16 and push forward with their critical growth projects. We demonstrated the collective strength of our businesses while retaining our strong focus on critical strategic programs, including our Marcellus infrastructure build out and the Finagaz integration process. As I noted when we provided our FY17 EPS guidance on the last call, the major investments that came on-line over the past 18 months such as Finagaz, Auburn III, and our Temple LNG liquefaction expansion are all significantly accretive.

We can now add Sunbury and Manning LNG to that list. These major projects provide the foundation for our future earnings growth.

Our cash flow and balance sheet are extremely strong providing us the capacity to fund all of our existing projects and support major new investments. We are very proactive in developing new investment projects while remaining focused and disciplined in our assessment of each opportunity.

The strong performance of our businesses and the diversity of our growth opportunities, position us to deliver on a long-term growth and income targets. Our path forward has never been clearer and we are excited about the opportunities that lie ahead for the company.

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

(Operator Instructions)

Michael Gaugler, Janney.

Morning, everyone. Congrats on a great quarter.

Thank you.

Just a couple questions, John. On the FERC EIS date, you mentioned you are expecting mid-April. I wonder how you're feeling about the vacancies at the FERC, and if perhaps all those vacancies could potentially slow down that final EIS?

On the EIS, that assessment can be finalized and issued with the FERC as currently constructed. The lack of a quorum at the FERC would potentially impact the final certificate being issued, which will be several months after the environmental impact statement. We are assuming that by the time -- the timing comes up for the certificate, that we would have a quorum at the FERC.

Okay. You also mentioned deploying capital into other projects of significance. I was wondering if you would anticipate any announcements this year, or if new larger projects might be more tilted towards the 2018/2019 timeframe?

Yes, Mike. I wouldn't speculate on that. We're constantly looking at opportunities. There's a broad range of activities that cut across the businesses. We are working every day to develop opportunities that kind of run the gamut in terms of scale. We are eager, and as soon as we have something to communicate, we will communicate it. A nice range of opportunities are out there for us.

Okay. I just want to slip one more question in. Thinking about your guidance and the weather here in the quarter; I know Eastern Europe in particularly has been particularly cold, where the US has been probably warmer than you'd like. Just maybe your thoughts on how you see the quarter playing out in terms of the weather and the impacts when we get out to the next quarter's results?

As you know, Michael, we typically don't comment on guidance until at least we get through the winter, and there is a lot of winter left. The nice thing about our business, and we saw in the past quarter, is that we do have a diversified set of businesses. As you noted, the weather in Europe has been, up to this point, normal for the winter, which is great. And it's currently fairly cold in parts of Europe with winter. That diversification is key. Any cold weather, any place on our map will help us, and we'll benefit from the diversification we have in terms of the reach of our businesses. We are really pleased. The blue on the weather maps in Europe, that's a very helpful situation for us.

All right. Again congrats on the quarter, guys. Thanks.

Ben Brownlow, Raymond James.

Good morning. Jerry, on the propane margin stability, unit margin stability, and actually it looks like a slight increase year over year despite the cost backdrop. How much of that was favorable mix shift to residential, and can you just give a little bit more color there?

No, it really wasn't a mix shift to residential. We did have some warm weather in those first two months, so if anything we had mix going against us a little bit. Commercial is very strong. Our field teams are just very good at this: pricing management, support competence, across the system. You imagine 650 stores and they all have to adjust their pricing accordingly. With the run up we've seen, I was just pleased that we were able to stay even with last year, despite a little bit of a mix going against us, actually.

Okay. That's helpful. The $8.8 million error correction was that in -- what line item did that fall into?

It was other income and expense, below OpEx.

Okay. Just from a one more modeling, quick question. Do you have the December quarter breakout on revenue from the wholesale propane at your fingertips?

I do. As you know, the wholesale generally is a fairly immaterial aspect of our business. We had 13 million gallons sold in the quarter versus 12 million last year, so about -- close to 10% increase.

Do have the revenue numbers?

I do.

I have it. Revenue was $594 million versus $565 million last year.

Great. Thank you.

No, I'm sorry, $10.5 million versus $8.8 million.

That makes sense. Great. Thank you, guys.

(Operator Instructions)

Chris Sighinolfi, Jefferies.

Good morning. I so rarely say it because I think it sounds hokey, but congrats on the quarter. It was really solid.

Thank you.

With regard to picking up maybe where the last series of questions were, Jerry, looking at propane prices. Clearly, they were up in the fiscal 1Q from the prior quarter. We've seen a spike as of late, I think driven mostly by export activity. I'm just wondering how you and the AP team managed that cost dynamic? I think were up now 60% from where did we average last quarter, if I look at last night's Belvieu price. I know with polar vortex that that pricing spike a couple years ago sort of coincided with some procurement issues That was weather driven; this maybe is export driven. Just any color you could offer on how you're managing that price dynamic would be helpful.

Well, as I said with the last question, it's a real core competence. We watch pricing every single day, and we often reset pricing every single day. We're quickly reacting, penny by penny, as this run-up has occurred. If you're getting at a possible shortage and resulting in a real serious spike, so far we are not seeing that. Propane inventories nationally still remain about 7% or 8% above the five-year average. We're feeling good and we're coming through the winter that at least for this year, we're in pretty good shape. But we will have to keep an eye on exports going into next winter.

Okay. So the supply disruption issues that affected us a couple years ago, we're not seeing anything along those lines?

No.

Okay. Perfect. Switching gears, John. I know there was a prior question about FERC. I'm just curious -- clearly, we're all hopeful that things return to normal from a functionality perspective on the Commission. I'm just wondering how you're thinking about not only pennies but other things that might be in the hopper and if there is anything that you are seeing? There's been a debate with our investors about if there's federal relaxation in the review process coming off Obama, his term and going into Trump. Do we see retrenchment by some of the left-leaning states, maybe New York being one of them? Anything that you are seeing that would maybe offer color on that? As it pertains, what you guys are considering doing on midstream backlog?

Yes. I can't say that we've observed any fundamental change in activity at the ground level. We basically keep doing the same thing we've been doing.

In the case of PennEast, it's with our partners, is stay focused in terms of working hard to address any issues that have arisen over the last year and a half on the project. Then communicate very actively with all the stakeholders at the federal level and also at the state level and the municipality level, including the landowners, to make sure everybody understands what we're doing, how are going to do it, and why we are doing it.

That continues. Any steps that can be taken that would improve the efficiency of the process and address some of the timing issues, certainly would be beneficial. On a day-to-day basis, it's really continued -- on PennEast, continued collaboration with our partners and communication. It's a great project, basically fully subscribed, or close to fully subscribed, with a major need that is to be served in terms of homes and businesses in New Jersey.

In terms of more broadly on infrastructure development, that continues on an ongoing basis. We've had a lot of success over the last five or seven years executing on infrastructure projects, such as Sunbury that just went into service. We'll keep doing what we're doing, keep our heads up to look at any changes that happen in the regulatory processes. Most critically, make sure we're undertaking projects that meet a required need and that we are confident we can execute.

For us, it's keep doing what we are doing, but make sure we stay abreast of any changes in developments in both the federal and state level that could ease the process in any way.

Okay. As it pertains to other investments, on the utility side, you guys are clearly -- as you highlighted earlier on this call and have in prior statements -- planning to spend quite a bit of money at the utility business over the next couple of years. We saw the rate case on UGI Utilities last year. We're seeing filing now on Penn National Gas. I'm just curious, as we think about the cadence of rate action, if there is things that we should be thinking about from a model perspective? Like when might CPG be in for the next case? When should we make that expectation? Any guidance you can offer on that front would be helpful.

I can certainly make a broad statement that we expect to be filing rate cases with more frequency than we have. UGI there was a 20 year gap. PNG there was an eight or nine year gap, so those intervals will shorten.

Although, one thing that's changed for us in the last couple of years, is we now are eligible for the -- to use the DISC tariff, which will enable us to earn a return on our infrastructure investments, which is the largest portion of our capital spend in between rate cases. That certainly will put push rate cases filings out of it. Much -- a significantly shorter interval than we've seen in the past.

We still have growth in our utilities. We added 4,600 new customers in the quarter. That continued growth -- and we've got some larger projects as well, in terms of adding customers. That growth also has the effect of pushing out rate cases. One of the things that has changed -- we talked about propane cost running up. Fuel oil costs have run-up.

That differential between natural gas and fuel oil, if you look at a customer assessing conversion, that differential bottomed out and has increased again. So that will help us in terms of growth of our customer base in utilities, if we continue to see an increase in that differential and an increase in the savings that a fuel oil customer will attain if they convert. That growth will also have the impact of pushing rate cases out.

That was a long answer, but much shorter intervals than we've historically have seen. We don't expect to be filing constantly because of the DISC and growth.

Okay. In following the rate case last year at UGI, now all three utilities are capable of recovering under the DISC? Is that right?

Yes, all three now qualify for the DISC, yes.

Okay. Perfect. Thanks a lot for the time this morning, guys. I appreciate it.

Jeremy Tonet, JPMorgan.

(Technical difficulties) and apologies if I missed it. With the final environmental review getting pushed to mid-April, what does that do to the completion date? Prior you said, or had it around the second half of 2018. Does that get risked to 2019? I'm trying to understand where that is.

Jeremy, it stays in the second half, by the end of calendar 2018. Assuming we stay on the schedule we are on, we would still execute in the window that we have at the end of 2018. Start in the spring and work through the end of the year.

Okay. And you also said almost fully committed?

Yes.

Okay. Great.

The great thing about PennEast is it's underwritten by capacity holders who are directly serving customer demand, so it's a demand driven project.

Got you. Secondly, just a little more color on the inventory levels, just trying to see what turns you saw in December? I know last quarter you said inventory was pretty lean. Trying to understand the magnitude of demand we saw in December, obviously opposed to the prior two months of the quarter.

Yes, I will comment -- this is John. I'll comment brief, I'll turn it over to Jerry.

Our own inventory turns pretty quickly. Our inventory that we retain in the business is quite low. During the winter, if you look at -- if you are talking about propane. If you look at gallons on hand, we're talking about days of inventory on hand during the winter because of the level of demand. We haven't seen any material differences. What you see typically, in our -- across the balance sheets of UGI, we tend to have maximum inventory at the beginning of the winter. If you look across all of our businesses and then that inventory and we work down the various elements of inventory, particularly in the nat gas side, get worked down.

I'll let Jerry talk about inventories.

Yes, not too much more to add, other than our inventory levels are actually a little bit lower than last year, simply because December was so strong. As John said, we don't have a lot of storage infrastructure, so our inventories are turning very rapidly. That's good because we don't want high-cost inventory sitting around too much, if prices are dropping. Generally, our inventory levels are stable, and as I mentioned a couple of questions ago, the supply levels have also been stable.

Great. Thanks.

There are no further questions at this time. I will turn the call back over to the presenters.

Okay. Thank you, Scott. Thank you, everyone. I appreciate your time this morning and we look forward to talking with you after our quarter two results are issued. Thank you.

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