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UGI Corporation (NYSE:UGI)

F3Q13 Earnings Call

July 31, 2013 9:00 AM ET

Executives

Hugh Gallagher – CFO, AmeriGas

John Walsh – President and CEO, UGI

Kirk Oliver – CFO, UGI

Jerry Sheridan – President and CEO, AmeriGas

Analysts

Theresa Chen – Barclays Capital

Eric Shiu – Wells Fargo

Amy Stepnowski – The Hartford

Operator

Good morning and welcome to the UGI and AmeriGas Third Quarter Fiscal 13 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. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Hugh Gallagher, Chief Financial Officer of AmeriGas. Please go ahead.

Hugh Gallagher

Thanks Sue. Good morning, everyone and thanks 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 managements control. You should read our annual reports on Form 10-K for 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 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 that management believes to provide useful information to investors to more effectively evaluate the year-over-year results of the 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?

John Walsh

Thanks, Hugh. Good morning everyone and welcome to our call. I trust that you’ve all had a chance to review our press release is reporting third-quarter results for UGI and AmeriGas. I’ll comment on the key contributors to our strong performance this quarter and then I will turn it over to Kirk who will provide you with some more detailed review of UGI’s financial performance. Jerry will then follow with an overview on AmeriGas’ strong quarter. And I will wrap up with an update on our strategic initiatives.

We’re very pleased with our performance in Q3 as net income increased by $21 million which is Q3 2012. As noted on our last call, we entered the quarter with positive momentum from strong execution and favorable weather as we closed out Q2. The momentum clearly carried over into this quarter as always the key for us with a strong execution across our businesses while we were very busy on a broad range of strategic programs which I’ll comment on later, our teams retain their focus on the critical activities that enable strong financial performance, unit margin management, expense control, working capital management and delivery of organic growth.

Q3 was another good example of the underlying strengths of our core businesses and the benefits of our diversification. Our team’s demonstrated their ability to achieve our financial goals will striving to excel in the most critical activities we understate safety, customer service, and operational efficiency. I’ll return to comment on our strategic initiatives in a bit but I’d like to turn it over to Kirk at this point for the financial review. Kirk?

Kirk Oliver

Thanks, John. As John mentioned we’ve seen a significant increase in earnings this quarter as we benefited from cooler weather versus a very warm whether we experienced last spring. Antargaz experienced weather that was almost 20% colder than normal and AmeriGas experienced weather that was slightly cooler than normal but significantly colder than last year’s record-setting warm weather.

Jerry will focus more on AmeriGas in his discussion but I’d like to provide a reconciliation of AmeriGas operating income which was $6 million an increase of $55 million over the loss of $48 million in the prior-year quarter. The increase in total margin of $38 million was driven largely by the colder weather and reflects the increase in retail volume sold and modestly higher average retail propane margin units.

Operating expenses improved by $18.5 million reflecting among other things, expense synergies from the integration of Heritage Propane, lower self-insured liability and casualty expense and lower Heritage Propane transition expenses. Expenses in this quarter included $9.9 million of transition expenses associated with the integration of Heritage Propane versus $15 million in the prior-year quarter. Even excluding the effect of the lower transition expenses and other income, AmeriGas saw substantial improvement and operating expenses due mainly to the synergies resulting from the Heritage acquisition.

UGI International saw an increase in income before taxes of $20 million after the $6.4 million loss recorded last year. Total margin was up $29.6 million primarily reflecting higher average retail LPG unit margins principally at Antargaz and to a lesser extent greater retail volumes sold.

Our European businesses experienced spring weather that was significantly colder than the prior-year period. Although weather has less of an impact during the shorter shoulder months of the spring quarter, retail LPG volumes were up by 6% over the prior-year period. Average wholesale propane prices in Northwest Europe were about 6% lower and butane about 8% lower. The improvement in margin was partially offset by higher operating expenses of $7.9 million, largely attributable to a $6.2 million increase in expenses at Antargaz. Antargaz costs include greater incentive compensation and benefits cost and greater delivery expenses. International operating expenses last year included $1.4 million of transition expense for integrating the LPG businesses acquired from Shell in October 2012.

Turning to slide eight, the gas utility is reporting income before taxes of $6.9 million, down $5.7 million versus the prior period. Throughput to core customers increased 6% reflecting the effects of colder weather and to a lesser extent customer growth from oil to gas conversions. Total margin increased by about $3.4 million, or 4.8%, reflecting higher core market margin of $1.3 million and greater firm delivery service margins. Costs were $9.4 million this quarter, largely on increases in non-cash expenses and reserve adjustments that are not expected to be recurring.

Midstream & Marketing income before taxes is up $3.9 million for the quarter. Total margin increased by $5.6 million, or 26%, principally reflecting higher electric generation margin of $3.4 million an increase peaking capacity management and storage margin of $4.7 million. These increases were partially offset by lower retail power margin, reflecting lower average unit margins. The higher expenses include greater Energy Services operating and depreciation expenses associated with peaking assets and greater electric generation operating and depreciation excesses.

The increase in electric generation expense is primarily due to higher maintenance expenses associated with the planned outages at Conemaugh generating station in which we own about a 6% interest. The increase in midstream and marketing income before taxes also reflects lower interest expense on volumes. 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. As you can see from this table, that the businesses have sufficient capacity to meet their liquidity needs. Comparable ending cash balances at June 30, 2012 were $436.5 million for total cash on hand and $94.8 million for corporate cash.

In conclusion, our guidance for the full-year remains it $2.40 to $2.50 a share, although we believe it’s most likely to end up in the lower half of the current range given the seasonality of the business and our expectations for our fourth quarter seasonal loss.

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

Jerry Sheridan

Hi, thanks, Kirk. This is another strong quarter for AmeriGas. Adjusted EBITDA for the third quarter was $69 million, which was $52 million above the $16.8 million reported last year. The significant increase in adjusted EBITDA was primarily the result of a 10% increase in retail volumes sold, coupled with sound unit margins and a significant decrease in operating expenses. Cool spring weather allowed for this shoulder quarter to be much more representative with a normal demand coming out of winter and we experienced strong results in both our residential and commercial segments.

Another key to the success of the quarter was operating expense performance which decreased $18 million or 7.6% from prior levels. Even if one were to exclude the beneficial impact to $5 million in lower transition expense, operating expenses were still over $13 million below the prior year. A clear demonstration of the beneficial impact of synergies we’ve captured related to the Heritage deal.

We continue to benefit from a stable cost environment. The average amount value price during the quarter was about 7% lower than the third quarter of last year. This continued price stability is good for our customers as it allows us to deliver stable, steady pricing to them. Weather in the quarter was nearly normal versus 24% warmer than normal weather in Q3 last year.

Looking to our growth thrusts. AmeriGas Cylinder Exchange, our national barbeque cylinder exchange program grew volume by 9% in the quarter. Although this was a solid growth quarter, the performance is somewhat muted by a cold April and relatively rainy weather across much of the country which reduced some drilling activity. Year-to-date, volume is up 9.5% and same store sales growth is up 3.7% so a very strong year for our exchange program so far.

Our National Accounts program also benefited from cooler spring temperatures. Volume increased 32% in the quarter and volume was up 34% year-to-date versus last year. This quarter marked a major milestone and that we completed the last significant test of the Heritage integration namely, the consolidation of over 200 stores across the country. When we announced the Heritage deal, we indicated the integration would take 18 months. We have now completed all major integration tasks and activities on time as noted in our press release, our EBITDA guidance for the year is $620 million to $635 million and includes over $60 million in net synergies from the Heritage transaction.

And finally, an update on a few items that occurred just after the quarter ended. Earlier this month, we merged our Heritage and AmeriGas operating limited partnership subsidiaries into one legal entity, enabling us to streamline field operations and providing additional flexibility in utilizing our assets across the entire customer base.

Also, earlier this month Energy Transfer Partners sold $7.5 million of AmeriGas units as part of their plan to monetize units they received in the deal for Heritage Propane. As you know, this transaction was merely the sale of existing units from one limited partner to another and has no impact on the number of units outstanding or the cash flow of AmeriGas.

We’re pleased to have completed the quarter on a strong note and we’re very excited to have the integration work behind us. We look forward to finishing the year strong and focusing on customer growth as the new AmeriGas continues to take shape. Finally, I’d like to thank the over 8,500 colleagues serving all 50 states for their great performance during the quarter and throughout the acquisition integration process.

Let me now turn it back over to John.

John Walsh

Thanks, Jerry. In addition to our strong financial performance in Q3, we were pleased with the progress made on the strategic programs that will shape the future for UGI, those initiatives cross all four of our major businesses. We’ve essentially completed the integration programs within our propane businesses in U.S. and Europe and we’re delivering significant benefits through our major acquisitions.

We’re executing on our expansion program for our midstream business in the Marcellus Shale and we’re accelerating our growth and infrastructure investment program at our Gas Utility. With our acquisition integration activities essentially complete, our teams in the U.S. and Europe can now focus on the opportunities provided by our extended distribution network and increased customers densities. Jerry just provided an overview of AmeriGas’ outstanding quarter. The benefits of the Heritage acquisition are obvious. We saw increased volumes in Q3 due to more normal weather patterns while reducing operating expenses versus the same period last year.

As Jerry noted, we also made excellent progress on two of our critical organic growth programs; A Cylinder Exchange and National Accounts. Due to our expanded distribution network we’ve never been in a better position to serve these multiple segments. AmeriGas will enter FY’14 in a great position with the integration work completed, a superior national distribution network and a very strong field leadership team.

Our European propane team had an exceptionally strong quarter with operating income up almost $20 million versus prior year. The combination of higher volumes on more normal weather, improved unit margins and our continuing focus on operational efficiencies enabled the strong performance. Having completed the integration of the Shell businesses we acquired in early FY’12, we’re now concentrating on opportunities such as product sourcing, and major development where our broader base of operations in Europe makes us an attractive partner and creates new opportunities.

We continue to believe that our acquisition of BP’s LPG distribution business in Poland will be approved in Q4. This acquisition will strengthen our position in one of Europe’s largest LPG markets and we’re well prepared to move ahead once we received the required regulatory approvals in Poland. Activity at our gas utility remains at record levels for both infrastructure replacement and growth. We are on schedule with our enhanced infrastructure replacement programs. Our gas utility infrastructure CapEx spend for FY’13 will be approximately 25% above our FY’12 level.

We also continue to see very strong demand for natural gas service. We expect to add almost 17,000 new customers this fiscal year and we are executing several large main extension projects to convert major industrial state and federal facilities to natural gas. While our Q3 performance trailed FY’12 due to higher OpEx level in the period as Kirk noted, year-to-date net income at utilities is 14% above prior year. Our demand outlook remains very positive due to large spread between natural gas and fuel oil.

Our midstream and marketing business remains a focused area for us as we develop new projects to serve the region and look for new opportunities to further utilize our existing infrastructure. Our Auburn II project which will extend our existing Auburn pipeline southward to connect with the Transco pipeline is now in the peak period for field execution. Our expected in-service date for this $160 million project remains early FY’14.

This new line is subscribed to near capacity levels with FT contracts and we’re excited about the opportunity to enhance natural gas distribution infrastructure in Northeast Pennsylvania. Auburn II it will demonstrate the merits of projects that provide short haul transportation options connecting the mid-Atlantic demand markets with the abundant gas supply in the Marcellus region.

We also continue to see strong demand for LNG liquid supply services to emerging customer segments such as transport and stationary applications. Our expanded LNG peaking facility in Temple, Pennsylvania puts us in an excellent position to serve these new customers and we made our initial filing with FERC to expand our liquefaction capability of the site. As I mentioned in my opening remarks, we’re pleased with the progress made thus far in FY’13.

As Kirk noted, we’ve confirmed the FY’13 guidance issued on our last call. The strength of our diversified set of businesses have been demonstrated this year and we’ve made clear and steady progress on the strategic programs that are vital to our future. It’s been a very busy but productive period for UGI. We’re confident that our businesses will continue to execute at a high level as we close out this fiscal year and prepare for FY’14.

With that, I will turn it back over to Sue. We’ll open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Theresa Chen of Barclays Capital. Please go ahead.

Theresa Chen – Barclays Capital

Can you give us an update on the current profitability trends in the cylinder exchange business, I understand the volumes have been growing nicely but if we could get any color on either prep margins or pricing that would be great?

Jerry Sheridan

We generally don’t get into the profitability of the cylinder exchange as part of our larger business but we do comment on volume. We consider just another aspect of selling propane.

Theresa Chen – Barclays Capital

Okay, that’s fine. Would you mind discussing customer mix in the quarter please, residential, commercial, and are there any unique competitive dynamics within the customer segments?

Jerry Sheridan

No, it was strong across every segment, the volumes up 10%, certainly April weather was very helpful but it was just terrific compared to, of course, last year to see every single segment growing relatively the same percentage wise.

Theresa Chen – Barclays Capital

Okay. Great. And then lastly, in terms of further acquisitions from here, where do you see potential value add to your existing business either geographically products or otherwise?

John Walsh

That’s really the beauty of the deal. I mean we’ve got the synergies out but this will be a deal that just keeps giving over the next several years. For cash flow, we’re going to have excess trucks and assets and land but on the acquisition side we are now in over 830 geographies for, so just about any deal we look at we’re going to have synergies. So this just expands our reach and our ability to get deals done. It will be more profitable for us.

Kirk Oliver

That’s certainly true for AmeriGas. We would say the same thing in terms of UGI’s European propane distribution businesses with the expanded footprint it open us up new opportunities for us in terms of reach which makes acquisitions potentially more viable and just open up, broadens the scope in terms of potential acquisition opportunities.

Theresa Chen – Barclays Capital

Great, thank you.

Kirk Oliver

Thank you.

Jerry Sheridan

Thank you.

Operator

The next question comes from Eric Shiu of Wells Fargo. Please go ahead.

Eric Shiu – Wells Fargo

Good morning, guys.

John Walsh

Good morning.

Eric Shiu – Wells Fargo

Just following up on that acquisition question. So given that the, I guess the Heritage integration is largely complete. Are you guys starting to actively look at new acquisition opportunities and I guess what does that market look like, right now?

Kirk Oliver

We are. And that we really did take a pause on acquisition activity but our corporate development team has now turned away from acquisition integration impact on the road meeting with various sellers in the pipelines developing and I think you’ll see us doing deals over the next 12 months.

Eric Shiu – Wells Fargo

Okay. Great. And then how much of the, would you estimate of this $60 million of operating synergies have been realized so far this year?

Kirk Oliver

All but what we’ll see in the fourth quarter. I’d say its maybe in the neighborhood of $8 million or so, we’ll see in Q4. We are fairly ratable over the four quarters.

Eric Shiu – Wells Fargo

Okay. Perfect. And then last one from me, I guess what were your wholesale gallons sold for the quarter?

Kirk Oliver

We always get this question. 14 million gallons.

Eric Shiu – Wells Fargo

14 million. Perfect. Thank you.

Kirk Oliver

Thank you.

Operator

(Operator Instructions) Our next question comes from Amy Stepnowski of The Hartford. Please go ahead.

Amy Stepnowski – The Hartford

Hi. I was wondering if you could give us an idea at AmeriGas how the organic growth was this quarter. There is any change in the trends obviously you benefited from the integration etcetera but wondering about organic growth?

Kirk Oliver

Like I said, we’ve come through the integration pretty nicely. We always plan and the net synergies are net of some customer loss that always occurs when you put two stories together and change brand names but we are outperforming on customer gain loss what we actually expected going into the year. And on the commercial, side we are seeing terrific growth and some of that may just be the economy coming back but very strong in both forklift and commercial end use.

Jerry Sheridan

And the differential, one of the great opportunities for us is would the continued differential between fuel oil and propane and fuel oil and natural gas. Whether it’s the propane side of the business in U.S. or Europe or the natural gas side of the business, you do open up more opportunities on the propane side. Commercial conversions from fuel oil to propane certainly are accelerating, and it’s a nice opportunity for us. And, once again, our spread and coverage puts us in a great position to be able to take advantage of those opportunities.

Amy Stepnowski – The Hartford

Okay. So I’m not trying to pin you down. But typically, within the industry, we see sort of small decline year-over-year decline in terms of organic growth. But are you guys saying you’re maybe closer to seeing some positive growth or are pretty much in line with the rest of the industry?

Kirk Oliver

No. We do our annual study of what we’re seeing as far as conservation in the industry. And that has stayed pretty flat and kind of 1% range, and I think that’s true of just all of our competitors, whether they be large or small.

Amy Stepnowski – The Hartford

Okay. Perfect.

Jerry Sheridan

And just to comment on that because we’ve been asked over the last few years especially about underlying growth or level of attrition, whether it’s a natural gas customer base or propane customer base, you will see through various means, you’ll see conservation naturally from 1% to 1.5%. So we see that on the natural gas side of the business of the house. We also see it in propane. And one of the nice things is we’ve seen a moderation in cost base on the propane side of our business. And so you start to see that conservation level come back to the norm, which is that 1% to 1.5%, and we’re certainly pleased to see that.

Amy Stepnowski – The Hartford

Okay. Great. And actually if I could just ask one more? You led right into it with regards to the cost base. We’ve seen propane prices obviously to drive just a little bit this year at the beginning of the year but still lower than on a year-over-year basis. Just wondering, if you could give us your views on the outlook for the rest of the year, given there are some views out there is that there will be greater exports that could put some upward pricing pressure on propane? So just curious if you could comment on that.

John Walsh

Yeah. I’ll comment briefly, and then I’ll let Jerry. And certainly propane is turning into a global market. I’d lead by saying that we don’t really have, we certainly don’t exercise any judgment in terms of future trend of propane costs. As a distributor, we’re really focused on making sure our businesses in both the U.S. and Europe are prepared to execute our unit margin programs regardless of the movement of the commodity.

When we step back and look at the larger picture, we’re encouraged by the new capacity coming on stream, new NGL capacity on a global basis. And we think there’s also potential for further new capacity to come on, as natural gas demand in liquids-rich areas increases. So we’re going to see more propane and butane come to market. And you’ll have some export, which for UGI is a good thing. We like supply diversity. So export facilities being built in the U.S. that will open up new sources for the global market it is a good thing. But we don’t have a corporate view on where the commodity is going to move. We basically have a team that’s focused on executing regardless of movement.

And the good news for us is, if you look back over the last 10 years and look at our unit margin performance, we’re able to execute that in a variety of scenarios in terms of underlying commodity costs.

Amy Stepnowski – The Hartford

Okay. Thank you very much.

Jerry Sheridan

Yeah I think I’ll turn this over to John.

Amy Stepnowski – The Hartford

Thank you.

John Walsh

Great. Thank you.

Operator

(Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back to John Walsh for any closing remarks.

John Walsh

Thank you, Sue. And thanks to all of you for joining us this morning. We appreciate your attendance and participation in the call. Have a great summer. We look forward to speaking with you next on our year-end call. Take care.

Operator

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

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