John Walsh – President, Chief Executive Officer
Kirk Oliver – Chief Financial Officer
Jerry Sheridan – President, Chief Executive Officer, Amerigas Propane
Hugh Gallagher – Treasurer
Edward Rowe (ph) – (company not given)
Eric Shiu – Wells Fargo
UGI Corporation (UGI) Q2 2013 Earnings Call May 1, 2013 9:00 AM ET
Good morning and welcome to the UGI Corporation Second Quarter 2013 Earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today’s presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star and then two. Please note this even is being recorded.
I would now like to turn the conference over to Hugh Gallagher, Treasurer of UGI. Please go ahead.
Thank you, Emily. 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 report 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 and development of Marcellus Shale gas production, the timing and success of our commercial initiatives and investments to grow our business, our ability to successfully integrate acquired businesses, including Heritage Propane, and achieve anticipated synergies. UGI and Amerigas undertake no obligation to release revisions to their forward-looking statements to reflect events or circumstances occurring after today.
In addition, our remarks today will reference certain non-GAAP financial measures, including EBITDA, adjusted EBITDA and total margin, that management believes provide useful information to investors to more effectively evaluate the year-over-year results of operations of the company. 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 Jerry Sheridan, President and CEO of Amerigas Propane; Kirk Oliver, CFO of UGI Corporation, and your host, President and CEO of UGI Corporation, John Walsh. John?
Thanks Hugh. Good morning and welcome to our call. I’d also like to give a special welcome to UGI’s most recent retiree, Lon Greenburg. Since Lon remains our chairman, he certainly qualifies as a very active retiree, and I’m sure he’s listening out there.
We’ve made a few changes to our call format. We hope you find the addition of the reference slides and the move to the morning time slot beneficial. I trust that you’ve all had a chance to review our press release reporting second quarter results for UGI and Amerigas. I’ll briefly comment on the key factors that enabled our strong performance this quarter and then turn it over to Kirk, who will provide you with a more detailed review of UGI’s financial performance. Jerry will then follow with an overview on Amerigas’s fine quarter and I’ll wrap up with an update on our strategic initiatives and comment on the outlook for the balance of the year.
We were pleased with our performance in Q2 as our EPS increased almost 30%. While we certainly benefited from the positive of near-normal weather across most of our territories, the results can also be attributed to strong operational performance. Our teams in each business remain focused on the critical activities that enable strong performance: unit margin management, expense control, working capital management, and delivery of organic growth.
As we worked through the extreme challenges presented by last year’s historically warm winter, we stressed the underlying strength of our businesses and the benefits of our diversification. The near-normal weather conditions in Q2 gave each of our businesses the opportunity to demonstrate this strength. This came through clearly in the quarter as each of our businesses delivered a significant increase in operating income while continuing to drive forward on their strategic programs. I’ll comment a bit later on those strategic initiatives.
With that, I’ll turn it over to Kirk for the financial review. Kirk?
Thanks John. As John mentioned, we’ve seen a significant increase in earnings across all of our businesses over last year’s quarter. We benefited this quarter from a return to more normal weather versus the very warm weather we had last winter. International propane and utilities actually experienced colder than normal weather this quarter. Amerigas experienced weather that was slightly warmer than normal but significantly colder than last year’s record-setting warm weather.
Jerry will focus more on Amerigas in his discussion, but I would like to provide a reconciliation of operating income here, which increased by 71 million or 36.5% over the prior year quarter. The increase in total margin of 87 million was driven largely by the colder weather and to a much lesser extent the effect of having a full period of Heritage operations this quarter. Expenses were up 11.9 million due to the full period impact of Heritage operations and incremental costs associated with the higher sales activity, which were partially offset by synergies resulting from the acquisition. Depreciation and amortization expense increased 3.8 million principally associated with the Heritage acquisition.
International propane saw an increase in income before taxes of 12 million or over 19%. Total margin was up 12.4 million primarily reflecting retail unit margins at Antargaz, and to a lesser extent increased natural gas marketing of 2.8 million. Average wholesale propane prices in northwest Europe were about 15% lower and butane about 12% lower than in the prior year period. Volumes were down slightly due to the extremely cold February experienced in Europe last year, which influenced the timing of deliveries in the prior year period. Higher operating expenses at Antargaz were partially offset by lower operating expenses at Flaga and AvantiGas.
Turing to Slide 8, the gas utility had a very strong quarter with income before taxes up by 21.5 million, almost a 29% increase over the prior period. Throughput to core customers increased 28.8%, reflecting the effects of colder weather and to a lesser extent customer growth from oil to gas conversions. Total margin increased about 30 million or 21%, reflecting higher core market margin of 24.6 million and greater firm delivery service margins.
Costs were up this year with increases in pension and benefit expense of about 2.8 million and increases in system maintenance and other expenses.
Midstream and marketing income before taxes was up 13.9 million for the quarter, an increase of 47% over the prior year period. Total margin increased by 16 million or 34% due to higher margin from natural gas marketing, electricity generation, and greater peaking and capacity management margin. These increases were partially offset by lower retail power margin reflecting lower average unit margins, and lower storage margin. Depreciation expense increased primarily due to investment in the Temple LNG plant expansion completed in August of 2012.
Looking now at liquidity and cash resources, we use a combination of bank facilities and cash on hand to meet our liquidity needs. Total liquidity by business in the form of cash on hand and available credit capacity are laid out in the table on this slide. Excluding cash residing at the operating subsidiaries, UGI had a cash balance of 78.4 million at March 31.
I would like to touch briefly on the accounts receivable facility we have in place for energy services. On April 18, we amended that facility to lower the commitment cost during the summer months and to extend the maturity into November. In November, we anticipate entering into a new accounts receivable facility that will provide us with 200 million of capacity in the winter when we need it more and our receivable balances are higher, and 100 million in the summer. The new facility is expected to have a 364-day term.
That completes my prepared remarks, and I’ll now turn the call over to Jerry for his report on Amerigas.
Thanks very much, Kirk. This was a very strong quarter for Amerigas. Adjusted EBITDA for the quarter was 318 million, which was 29% above the 246 million reported last year. This $72 million increase in earnings was the result of colder weather and the impact of the Heritage integration and related synergies. Volume increased in line with our expectations on weather for the quarter that was nearly 25% colder than last year.
Amerigas acquired Heritage Propane on January 12, 2012; therefore, a better comparison can be made on a pro forma basis as if Heritage was part of Amerigas for the full quarter last year. On that pro forma basis, adjusted EBITDA increased about 59 million or 23%. After a slow start to the quarter, the weather turned more seasonal in February and was clearly our friend in March when the weather nationally was 10% colder than normal and 78% colder than last year. When the weather is very warm, as it was in March last year, thermostats are simply shut off and this rendered some of the weather percentage comparisons less meaningful; however, for the two months of January and February, weather was 11% colder than last year and the volume was up 8% on a pro forma basis, right in line with our expectations. This was also the first real winter quarter operating as our new company following the Heritage acquisition, and we were pleased with how the business performed with demand clearly responding to the colder temperatures.
The lower cost environment also continues to be a positive for us. The average (inaudible) price during the quarter was $0.86, which is $0.39 or 31% below the second quarter last year. U.S. propane inventories are currently 7% below last year and 27% above the five-year average. Propane today is trading at 37% of crude and well below the prior year relationship of 43%. This cost environment is great for our customers and the industry. Our average selling prices are 15% below where they were last year, and this reduced cost helps mitigate customer conservation for the whole industry.
Looking to our growth thrust and the headlines for the quarter, Amerigas Cylinder Exchange, our national barbecue cylinder program grew volume by 6% year-over-year and these strong results were somewhat muted by the cold weather that limited some grilling activity, particularly in March. Year-to-date, volume is up 10% and same store sales growth has been 3%, so a strong year of growth is underway as we head into the spring and summer peak season for ACE. Our national accounts program also benefited from the colder temperatures. Volumes increased 14 million gallons in the quarter and 22 million gallons year-to-date.
We did not close on any acquisitions during the quarter as we focused on the Heritage integration; however, our corporate development team is gearing up as we enter the spring and summer acquisition season, and they will begin their acquisition search efforts in earnest this spring.
As you’ve seen in the earnings release, our guidance of the year remains unchanged, although we believe we will most likely end up near the midpoint of our range given normal operating conditions for the remainder of the year. On the Heritage integration, we largely froze activities for the critical winter earnings months and are now prepared to complete the final stages of the integration involving the consolidation of over 200 stores. We’ve increased our estimate of transition expenses for the year by $5 million primarily to reflect the additional severance costs expected to be incurred this year, and we remain on track for the realization of at least $60 million in total net synergies for the deal this year. Most importantly, we’re achieving harmony in processes and policies across the system, evidenced by the strong performance of the combined business this quarter and our guidance for the fiscal year.
Additionally, I’m sure you notice in our press release the board has declared a 5% increase in our distribution to an annual rate of $3.36 per unit, and this marks the ninth consecutive year that we’ve increased the distribution, underscoring our confidence in the future prospects of the business and demonstrating our commitment to delivering value to the unitholders.
In closing, I want to thank John Iannarelli for 25 years here at Amerigas. John has been a big part of the company in both operations and as CFO, and he will surely be missed. I also welcome Hugh Gallagher to the Amerigas CFO position. We know Hugh well, most recently as treasurer for UGI, and we know Hugh will make a terrific impact on the company.
And now I’d like to turn it back to John.
Thanks Jerry. As I noted earlier in the call, the second quarter saw us making significant progress on the strategic initiatives that are so critical for our future. We’re delivering clear benefits from our major propane acquisitions in the U.S. and Europe. We’re continuing the expansion of our midstream position in the Marcellus, and we’re accelerating our growth and infrastructure investment program at our gas utility.
Our gas utility team is executing the enhanced infrastructure replacement program that was approved by the Pennsylvania PUC early in Q2. Our gas utility infrastructure CAPEX spend for FY13 will be approximately 25% above our FY12 level. Demand for natural gas service remains at unprecedented levels. Our net customer growth in the gas utility will exceed 2% again in FY13. We’re also executing several major line extension projects that will deliver natural gas service to a range of customers, including a major pharmaceutical production site, various federal, state and local administrative and educational facilities, and several large commercial complexes. Our demand outlook remains very position due to the large spread between natural gas and fuel oil.
We’ve had great success in executing the integration programs for last year’s propane acquisitions in both the U.S. and Europe. As Jerry just noted in his remarks, Amerigas had a very good quarter, delivering a strong financial performance while also making the necessary preparations to execute the final phase of their acquisition integration plan. This work is now underway and will conclude this summer.
We’re extremely pleased with the progress made in the 16 months since the Heritage acquisition. We’ll enter FY14 in a great position with a superior distribution network covering the entire U.S. and a very strong field leadership team.
Our European propane team had another strong quarter with operating income up over 16%. Effective unit margin management and a continuing focus on operational efficiencies were the keys this quarter. We’re very pleased with the performance of our teams in the eight new markets we entered following the Shell acquisition in late 2011. We’ve also identified a range of critical activities, such as product sourcing, for our broader base of operations in Europe provides us with new opportunities to reduce our cost and enhance efficiency.
We continue to look forward to the addition of BP’s LPG distribution business in Poland. The approval process is ongoing and we now expect to close in Q4. This acquisition will strengthen our position in one of Europe’s largest LPG markets and we are well prepared to move ahead once we receive the required regulatory approvals.
One final, very positive note for Europe is the moderation we’ve seen in LPG costs over the past five months. Propane costs have dropped about 20% from their peak and the differential between U.S. and European costs has narrowed considerably. While we pride ourselves on our ability to deliver strong unit margins under any circumstances, this drop in cost is a positive development for our customers and makes our job just a bit easier.
Our midstream and marketing business had another very active quarter as we focused on emerging growth opportunities within our existing midstream and storage assets, and on the execution of the major business development projects in and around the Marcellus, including our Auburn II pipeline project and our Tenaska midstream services project. We’re making good use of our expanded LNG peaking facility in Temple, Pennsylvania.
We had a very solid year for the core LDC peaking services provided by Temple and we continued to develop our position on LNG liquid supply services to the emerging customer segments, such as transport.
We’re in the field execution phase on our Auburn II project which will extend our existing Auburn line southward to connect with the Transco pipeline. Our expected in-service date for Auburn II remains early FY14. As natural gas costs move up, we’re seeing increased producer activity in the Marcellus, particularly around our existing assets and resources. We’re pleased to be bringing the Auburn pipeline online at this point and we continue to believe in the merits of projects that provide short haul transportation options that connect mid-Atlantic demand markets with the abundant supply in the Marcellus.
Last quarter, we announced a Marcellus Shale development agreement with Tenasca Resources. Our collaboration with Tenaska is progressing nicely and we expect to initiate new gathering system investments for Tenaska early in 2014.
As I mentioned in my opening remarks, we’re pleased with the progress made thus far in FY13 from both an operational and strategic perspective. We’ve demonstrated the strength and resiliency of our businesses and we’ve seen the benefits of our diversified platform; and as Kirk noted in his comments, we have the balance sheet strength and cash flow performance to support our growth programs. We’re confident that our businesses will continue to execute at a high level and our guidance for the full year remains at $2.40 to $2.50, although we believe it most likely will end up in the lower half of the current range given the seasonality of the business and our expectations for third quarter earnings and a fourth quarter seasonal loss.
Finally, we’re pleased to announce that UGI’s board recently demonstrated their confidence in UGI’s future prospects and cash flows by declaring a 4.6% increase in the quarterly dividend to $0.2825 a share or $1.13 per share on an annual basis. This year will mark UGI’s 129th consecutive year as a dividend paying stock and our 26th consecutive year that we’ve increased our dividend. We’re extremely proud of this long tradition of paying and increasing our dividend.
With that, I’ll turn the call back over to Emily who will open it up for questions. Emily?
Question and Answer Session
Thank you. [Operator instructions]
Our first question will come from Edward Rowe.
Good morning guys. This question is for Jerry. We’ve talked to several producers and there’s a general concern about lack of NGL storage capacity in the northeast, and that could really lead to steep discounts for the propane. Are there any opportunities for Amerigas to capture the cheap propane feedstock to help drive further retail margin expansion for you guys?
Well I mean, our supply group is always looking for the best opportunities, no matter where they are. Storage is always tight in the U.S., and the northeast has traditionally been a problem for us and the entire industry. We don’t have plans right now to expand storage but we do have probably more capacity than any of our competitors and we’ve been able to move propane around pretty nicely from even the midwest to the northeast as its needed. But at the moment, we’re not speculating on what’s going to happen with propane and investing either way.
Yeah, I’d just add—this is John. I’d just add that for us, it’s very beneficial certainly for Amerigas and for UGI to see this increase in activity. In addition to the Amerigas resources in the region, we’ve got some midstream and marketing assets, propane storage for our propane air plant. So we’re pretty well positioned as a company, both Amerigas and UGI, to take advantage of the geographic advantage we have in terms of great location as production ramps up. So we’d love to see excess NGL – it’s a good thing.
Yeah, no exactly. And just a final maintenance modeling question for Amerigas – do you guys happen to have the wholesale propane volumes and revenues for the quarter?
We do. Wholesale for the quarter – 39 million gallons.
Again, it’s a very small part of the business.
Yeah, all right. Thank you.
Again, if you do have a question, please press star then one at this time.
And our next question comes from Eric Shiu of Wells Fargo. Please go ahead.
Eric Shiu – Wells Fargo
Yes, can you quantify the expense synergies that Amerigas realized during the quarter?
The 60 million is coming in relatively evenly throughout the four quarters.
Eric Shiu – Wells Fargo
Okay, great. Thank you.
This will conclude our question and answer session. I’d like to turn the conference back over to Mr. Walsh for any closing remarks.
Okay, thanks Emily. I think the additional information we provided with the slides obviously helped in terms of clarifying and eliminating the number of questions; but we certainly appreciate your participation this morning. This concludes the call. Thanks very much for joining us. We look forward to speaking with you all soon. Take care.
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
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