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AmeriGas Partners LP (NYSE:APU)

Q4 2013 Earnings Call

November 19, 2013 9:00 am ET

Executives

Hugh J. Gallagher - Treasurer

John L. Walsh - Chief Executive Officer, President and Director

Kirk R. Oliver - Chief Financial Officer

Jerry E. Sheridan - Chief Executive Officer of AmeriGas Propane Inc, President of AmeriGas Propane Inc and Director of AmeriGas Propane Inc

Analysts

Theresa Chen - Barclays Capital, Research Division

Sharon Lui - Wells Fargo Securities, LLC, Research Division

Nathan Judge - Atlantic Equities LLP

Operator

Good morning, and welcome to the UGI and AmeriGas Fourth Quarter Fiscal Year 2013 Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Hugh Gallagher, Chief Financial Officer of AmeriGas. Please go ahead.

Hugh J. Gallagher

Thank you, Amy. Good morning, and thank you for joining us. As we begin, let me remind you that our comments today will include certain forward-looking statements, which management of UGI and AmeriGas believe to be reasonable as of today's date only. Actual results may differ significantly because of risks and uncertainties that are difficult to predict and many of which are beyond management's control.

You should read our annual reports on Form 10-K for a more extensive list of factors that could affect results, but among them are adverse weather conditions, cost volatility and availability of all energy products, increased customer conservation measures, the impact of pending and future legal proceedings, domestic and international political, regulatory and economic conditions, currency exchange rate fluctuations, the timing of development of Marcellus Shale gas production, the timing and success of our commercial initiatives and investments to grow our businesses 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 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?

John L. Walsh

Thanks, Hugh. 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 on our key activities in the fourth quarter and briefly touch on our full year results and FY '14 guidance and then I'll 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 and I'll wrap up with an update on our strategic initiatives and our outlook for FY '14.

Our full year GAAP EPS was $2.39, adjusting the GAAP number for 2 non-recurring items that Kirk will cover later, fiscal '13 EPS comes in at $2.45 per share, which is right at the midpoint of the guidance range that we provided on our Q1 earnings call in January. Our guidance for FY '14 of $2.60 to $2.70 is built on the strong foundation we've set in fiscal year '13 and reflects the positive impact of several key investments.

Our strong performance in Q4, both financially and operationally, closed out a very productive fiscal '13 for UGI. The return of more normal weather patterns this past winter enabled us to demonstrate the earnings power of our diverse businesses. Each business unit delivered significant increases in operating income, with weather being a major factor, but our strong performance was also enabled by a continued focus on our core activities of unit margin management, expense control, working capital management and the delivery of organic growth.

Q4 was particularly noteworthy, in that we achieved several strategic milestones that position us well for future profitable growth. AmeriGas successfully closed out the Heritage integration program this quarter, right in line with our plan when we made this key acquisition 22 months ago.

Our Midstream & Marketing team achieved mechanical completion of the Auburn II pipeline, which enhances our asset network in the Marcellus and we closed the BP Poland acquisition in September, further strengthening our European LPG distribution network. Our teams continue to demonstrate their ability to achieve our financial goals while striving to excel in the most critical activities we undertake: safety, customer service and operational efficiency.

On that note, our gas utility received recognition for their service levels from our customers, as they received the 2013 J.D. Power Award for the highest residential customer satisfaction rating for large utilities in the East region.

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

Kirk R. Oliver

Thanks, John. Good morning, everybody. As John mentioned, operating results for the fiscal year were higher in each of our businesses due to winter heating season and early spring temperatures that were much closer to normal when compared to the very warm temperatures we experienced last year.

We are reporting adjusted net income of $283 million or $2.45 per share, versus $215 million or $1.90 per share last year. GAAP income for fiscal '13 is adjusted here for the after-tax cost of $3.2 million or $0.03 per share associated with the BP Poland acquisition and transition expenses at UGI International, and a $3.7 million or $0.03 per share valuation adjustment associated with an investment in a renewable energy partnership.

GAAP income for fiscal '12 is adjusted for the after-tax cost of $13.3 million or $0.12 per share associated with the Heritage Propane and Shell LPG acquisitions, and $2.2 million or $0.02 per share related to the extinguishments of debt at AmeriGas.

We are reporting operating income at AmeriGas of $392 million, an increase of $222 million over last year. The increase in total margin of $305 million was driven largely by the colder weather and also reflects the incremental full year effects of Heritage Propane and modestly higher retail unit margins.

Operating expenses increased by $55 million, reflecting the incremental full year effect of Heritage Propane and increased variable costs associated with the higher volumes this year. Operating and administrative expenses include $27 million of transition expenses associated with the integration of Heritage versus $46 million last year. Jerry will spend some more time on AmeriGas in a few minutes.

UGI International saw an increase in income before taxes of $37 million. Total margin was up $62 million, primarily reflecting higher retail unit margins and volumes, principally at Antargaz, and to a lesser extent, higher total margin at AvantiGas and Flaga.

Our European businesses sold over $590 million of retail gallons this year, up $16 million versus last year, reflecting the effects of colder weather, partially offset by the effects of a decline in the economic activity, mainly on commercial and industrial customers in certain European markets.

The improvement in margin was partially offset by higher operating expenses of $18.5 million, largely attributable to a $16 million increase in expenses at Antargaz. The increases at Antargaz include greater incentive compensation and benefits cost and greater delivery expenses. International operating expenses include $4 million of acquisition and transition cost associated with the BP Poland acquisition this year and $7 million of transition expense for the integration -- for integrating the LP businesses acquired from Shell in October of 2012.

Turning now to Slide 10, the gas utility is reporting income before taxes of $161 million, up $29 million or 22% versus last year. Throughput to core customers increased 19%, reflecting the effects of colder weather, and to a lesser extent, customer growth from oil to gas conversions. Total margin increased about $49 million, or 12.8%, reflecting higher core market margin of $38 million and greater firm delivery service margins. Costs were up $20 million this year, primarily driven by higher pension and benefit expenses.

Midstream & Marketing income before taxes is up by $305 million –- I'm sorry, by $30 million for the year. Total margin increased by $37 million, or 29%, principally reflecting higher electric generation margin of $16 million, higher gas marketing margin of $14 million and increased peaking and capacity management margin due to the colder weather and higher natural gas price volatility. These increases were partially offset by lower retail power margin of $9 million, principally reflecting lower average unit margins. The higher expenses include expenses associated with peaking LNG liquefaction and storage facilities.

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. You can see from this table, that the businesses have sufficient capacity to meet their liquidity needs. Comparable ending cash balances at September 30, 2012 were $320 million for total cash on hand and $180 million -- $108 million for corporate cash.

In closing, I'd like to reiterate our guidance for fiscal year 2014, which is $2.60 to $2.70 per share. This guidance excludes the cost of integrating the BP Poland acquisition.

I'll now turn the call over to Jerry for his report on AmeriGas.

Jerry E. Sheridan

Thanks, Kirk. In the fourth quarter of fiscal 2013, AmeriGas finished with adjusted EBITDA of $46 million, which was 36% above the $34 million of earnings reported in Q4 of last year. Volume for the quarter was up 1% from last year's quarter, although our fourth quarter is not particularly weather sensitive, it's worth mentioning that we attained this volume increase despite September weather that was nearly 12% warmer than last September. For the quarter, weather nationally was 6% warmer than last year.

For the full year, adjusted EBITDA finished at $618 million, or $233 million above fiscal '12. Despite the strong fourth quarter, we did finish just below the lower end of our guidance due to the unusually warm September that I mentioned.

Propane prices ran up in Q4 after being fairly stable most of the year. The average Mont Belvieu price in the quarter was $1.03, which was 15% above Q4 2012 and 13% higher than the quarter ended June 30, 2013. Despite the run-up and a slow residential start in September due to weather, the business still delivered margins in line with our expectations.

Our expense management was solid during the quarter, with operating expenses down $23 million or 10%. A better apples-to-apples comparison for the quarter can be obtained by looking at the operating expenses excluding the impact of the Heritage transition. On this basis, expenses declined $9 million or 4% from last year's quarter as we continue to realize the synergies from the Heritage integration.

Now, looking to our growth thrusts. Our National Accounts program volume increased by over 30% this year, and there continues to be a strong pipeline of potential new accounts for this growth platform.

ACE, our AmeriGas Cylinder Exchange program, increased volume by 6% in the quarter and added over 2,800 new outlets this year to increase our footprint to over 47,000 locations across the U.S. For the year, ACE had a record 14 million cylinder transactions, an 8.5% increase over the prior year. A very strong year for these 2 growth programs.

Although we generally paused acquisition activity during the year as we completed the Heritage integration, our corporate development team is now actively sourcing new deals as we take advantage of the increased footprint and synergy opportunities resulting from the Heritage acquisition. We did close one acquisition right here in Pennsylvania during the month of September, adding over 9,000 new customers and 4 million gallons to our operation in the area.

As you've seen in our earnings release, guidance for fiscal 2014 is for EBITDA in the range of $645 million to $675 million, assuming normal weather. Our goal when we closed the Heritage acquisition in January of 2012 was to complete the integration by the summer of 2013 and generate over $50 million in net synergies. We're pleased to announce that the Heritage integration is now complete and we have realized over $60 million in net synergies from the deal.

In addition to the tangible financial benefits from the acquisition, the transaction has delivered a step change in efficiency and managerial capability throughout the organization, which will benefit our unit holders for years to come. We are now looking forward to demonstrating the full earnings power of the new AmeriGas as this winter season approaches.

In closing, I would like to thank our over 8,500 colleagues for a superb job on the integration and we look forward to a great 2014.

Now, I'll pass the call back over to John.

John L. Walsh

Thanks, Jerry. As I noted earlier, we were pleased with our strong financial performance in 2013 and we were equally pleased with the significant progress made on strategic investments and programs that are critical to our future. Each of our 4 businesses contributed to this progress.

Our propane businesses in the U.S. and Europe are clearly demonstrating the benefits of our major fiscal year '12 acquisition. We're expanding our Marcellus footprint and effectively utilizing our network of midstream assets within the Marcellus. And we've accelerated our growth and infrastructure investment program at our gas utility.

With our fiscal year '12 acquisitions fully integrated, we're seizing opportunities to leverage our expanded scale and enhanced distribution density in both the U.S. and Europe. As Jerry just noted in his remarks, we're seeing strong performance from our National Accounts and ACE cylinder exchange segments, where our expanded national footprints makes us an attractive supply partner for key customers.

We're excited about the upcoming winter season for AmeriGas and the opportunity for the team to further demonstrate the power of our superior national distribution network and a very strong field leadership team.

Fiscal '13 was an exceptionally strong year for our European propane business. Operating income increased by over 30% and we concluded the year by closing the BP Poland acquisition, which strengthens our position in one of Europe's largest LPG markets.

Our integration plans were well developed for Poland and we were able to move forward immediately upon closing. While we'll incur some additional transition expenses for Poland in fiscal '14, the acquisition will be accretive in its first full year.

Our gas utility had a very busy and productive year. Operating income was up 15% and activity on both infrastructure replacement and growth were at record levels. We remain on schedule with our enhanced infrastructure replacement program, with total utility infrastructure CapEx in fiscal '13 approximately 30% above fiscal '12.

Customer demand for natural gas is extremely strong. Our predominant growth segment is in convergence, but we're also seeing some modest recovery in the new residential and commercial development segment. As expected, we added about 17,000 customers in fiscal '13 and we continue to be extremely active with fuel oil conversions as well as some new housing development projects as we start fiscal '14.

Our demand outlook remains very positive due to the continuing large spread between natural gas and fuel oil. Our Midstream & Marketing business performed very well in 2013, delivering a 46% increase in operating income. We remain very active within the Marcellus region, executing a range of new projects and looking for opportunities to further utilize our existing infrastructure.

As I noted earlier, we achieved mechanical completion on our $160 million Auburn II project as we closed out the fiscal year. This new 28-mile pipeline extends our existing Auburn line southward to connect with the Transco pipeline. Auburn II is now in service and is subscribed to near capacity levels for this phase, with firm contracts.

This project represents critical new gas distribution infrastructure in Northeast Pennsylvania and clearly demonstrates the merits of projects that provide short haul transportation options connecting the mid-Atlantic demand markets with the abundant gas supply in the Marcellus.

Fiscal '13 was a year of significant progress for UGI. We delivered a strong financial performance while executing our acquisition integration programs and major capital projects. We demonstrated the collective strengths of our diversified set of businesses and we made clear and steady progress on the strategic programs that are vital to our future.

We continue to invest in our businesses to ensure that we have the resources and capabilities to execute at a high level. The company is well positioned for fiscal '14 and that confidence is reflected in our guidance.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Theresa Chen with Barclays Capital.

Theresa Chen - Barclays Capital, Research Division

Just a question on the AmeriGas EBITDA guidance. When we look at that 7%-ish growth number, would you mind giving us some details about the different levers of growth? What are you expectations for volume growth, unit margin, selling prices and such?

Jerry E. Sheridan

Yes. We usually don't dice up the pieces because although we have a plan, the growth tends to come from different portions of our growth thrusts. So certainly National Accounts continues to grow, AmeriGas Cylinder Exchange continues to grow. Acquisitions are lumpy, although we're going after them aggressively, but we'd really prefer not to give you the pieces. We just have confidence in the number.

Theresa Chen - Barclays Capital, Research Division

Okay. Got it. And then on acquisitions, any color on what kind of assets or geographies you're interested in right now?

Jerry E. Sheridan

Well, I mean a lot of it depends on what comes available, but we have a pretty aggressive cold call campaign that goes across the country and we tend to look for parts of the country where we're going to have great synergies. And with the addition of Heritage, we've added 200 new geographies and define a geography as a 30-mile radius where we now have good synergy. So I think we're going to be very competitive, if not the most competitive in getting the deals done at a price that works for the seller.

Theresa Chen - Barclays Capital, Research Division

Great. And then just lastly, what were your wholesale volumes in the fourth quarter?

Jerry E. Sheridan

Hugh?

Hugh J. Gallagher

Yes. They were around 20 million gallons for the fourth quarter and 22 million last year.

Operator

Your next question is from Sharon Lui with Wells Fargo.

Sharon Lui - Wells Fargo Securities, LLC, Research Division

Just following up on Theresa's question in terms of the guidance on AmeriGas, does that number include any potential synergies above that $60 million that you've realized already?

Jerry E. Sheridan

Well, not particularly. I mean, once a deal is completed, as we wrapped up the proper integration, call it, things do start to bloom out of deals like this. We'll find land that we're going to sell, we'll find more blend opportunities, but we don't have any proactive plans in that number. That is simply operating as we are today with normal weather, we will get to that number. So anything synergy-wise that we get as an additional benefit would be additional.

Hugh J. Gallagher

Yes, I think the way we think about it now it's just driving for ongoing operating efficiency in the business, as opposed to acquisition integration.

Sharon Lui - Wells Fargo Securities, LLC, Research Division

Okay. And then I think that you mentioned fourth quarter numbers were impacted by weather in September, were there any other, I guess, factors that impacted results?

Jerry E. Sheridan

No, not particularly. I think you heard the September weather was 12% warmer than the previous September, but I think it was something -- Hugh, you can correct me -- something like 28% warmer than normal.

Hugh J. Gallagher

Right.

Jerry E. Sheridan

So we really just didn't get the initial residential deliveries that we normally would get in September.

Hugh J. Gallagher

Performance in September, volumes in September, given the weather, were quite solid, it's not a big month, it's a shoulder month, but we were pleased with the volumes as we closed out the year, given the weather.

Sharon Lui - Wells Fargo Securities, LLC, Research Division

Okay. And were the cylinder exchange volumes impacted at all by –- I know that the South experienced very rainy weather, was that impacted at all?

Jerry E. Sheridan

Yes. We did feel it. It's interesting how many food and beverage and other kinds of companies also are citing the rainy weather as a reason for volume being off, less picnicking and so forth. Certainly, we saw that year-over-year, but we did have the early part of the year impact of Hurricane Sandy, which usually has consumers scrambling for some of these cylinders. So the 2 of them pretty much offset in our results for the year.

Operator

[Operator Instructions] Our next question is from Nathan Judge with Atlantic Equities.

Nathan Judge - Atlantic Equities LLP

Just wanted to ask if there's been any impact that you could comment about on the shortages in the Midwest of propane.

Jerry E. Sheridan

Yes. So there's been a tremendous pull on grain drying, a wet crop in the Midwest. We luckily have our own wholesale and transportation business that we run. So we have not had shortages ourselves, although we have had to scramble to move propane from different parts of the country to get there. But it seems at this point, at least for us, the crisis has passed.

Nathan Judge - Atlantic Equities LLP

And just as it relates to future political questions about exporting, well, propane among other things, is this going to change the political debate at all, or is this something that's just a hiccup in the near-term?

John L. Walsh

Nathan, this is John. I think it's, as a sector, there are periodic supply disruptions and periodic spikes in demand. So I don't think it's going to have a major impact on the discussion. It's a broader discussion around the export issues. And so I would see this as just kind of a blip that obviously impacted a certain region, but sort of a normal blip that we see in terms of supply ebb and flow.

Nathan Judge - Atlantic Equities LLP

Just on the midstream part of the business, clearly there were some benefits from the volatility in natural gas. How much of that is actually repeatable going forward, and what really drove that in the fourth quarter?

John L. Walsh

Yes. I think, Nathan, the nice thing about our Midstream business is we do have a configured set of assets around the Marcellus region. So as events occur, supply disruption issues on various pipelines and peak demand, we can utilize that -- those assets, the peaking assets and our pipeline capacity, to take advantage of those opportunities. So the nature of the opportunities will vary quarter-to-quarter and year-to-year, but in a typical year, we see opportunities that arise.

I think as we enter a period now with moderate -- modest to moderate economic recovery, clearly strong demand for natural gas and an evolutionary shift to natural gas for power generation, infrastructure is going to be strained, so with that comes opportunities to utilize the assets we have in the Marcellus. So we feel good about the fact that we'll have an opportunity to use our assets effectively as we see opportunities created by volatility in the market.

Nathan Judge - Atlantic Equities LLP

Right. And just finally, are you willing to provide any cost cutting or optimization opportunities surrounding the telemetry rollout? And when would you expect to have some benchmarks there for us?

John L. Walsh

Yes. I'll let Jerry comment. I think that's sort of part of a long-term drive across AmeriGas for efficiency and that's one element, but I'll let Jerry comment as well.

Jerry E. Sheridan

Telemetry is something that the company has experimented for years. We'd love it to be something that lots of consumers buy into. It's something that they count on and technology has gotten to the point now where you can certainly receive an email indicating your tank level and it just creates lots and lots of opportunities to ensure that our customer service is excellent, but we don't -- we view it as a customer service aid rather than a headcount reduction program, at least in the stage that we're in now.

Operator

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Mr. John Walsh for any closing comments.

John L. Walsh

Okay. Thank you, Amy. Thank you all for joining us this morning and sharing this update with us and wish you all the best for the upcoming holidays and look forward to speaking with you all again early in the new year when we discuss Q1. Thank you.

Kirk R. Oliver

Thank you.

Hugh J. Gallagher

Thank you.

Operator

This conference has now concluded. Thank you for attending today's presentation, and please disconnect your lines.

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