Q1 2020 Earnings Call

[music], ladies and gentlemen, thank you for standing by and welcome to the UGI Corporation first quarter fiscal year 20 earnings call and webcast. At this time all participants are they listen only mode. After the speakers presentation. There will be a question and answer session to ask a question.

The section you want me to press Star one on your telephone if you require any further assistance. Please press star zero I would now like to handle the conference over to your speaker today I want as an Investor Relations manager. Please go ahead.

Thanks, Kenzie good morning, everyone and thank you for joining US with me today are tied to disrupt.

<unk> CFO of easy I Corporation by Beard, Executive Vice President natural gas and John Walsh, President and CEO of Ujobai before we begin began let me remind you that our comments today include certain forward looking statements, which management believes to be reasonable as of todays date only actual results.

May differ significantly because of risks and uncertainties are difficult to predict please read our earnings release and our annual report on form 10-K for an extensive list the factors that could affect result.

We assume no duty to update or revise forward looking statements to reflect events or circumstances that are different from expectations will also.

Scriber business using certain non-GAAP financial measures reconciliations of these measures to the comparable GAAP measures are available on slide seven of our presentation.

We turn the call over to John.

Oh, Thanks, a lot and good morning, and welcome to our coal.

I hope that you've all had a chance to review our press release reporting first quarter results.

Yes.

UGI I posted a very strong Q1 with each of our business is performing at a high level.

Our teams did an outstanding job of delivering this strong performance, while executing a set of key initiatives that will provide the foundation for superior long term performance.

This was a noteworthy quarter for a number of reasons. It was our first.

First full quarter would be a newly acquired CMG asset network.

The first full quarter with Amerigas back in the pool, that's a wholly owned subsidiary.

It was also our first quarter with the combined rate structure for our gas utility.

Those new rates went into effect in October.

We also made.

Significant progress on the major restructuring programs across our LPG line of business. Roger Pro described these programs on last quarter's call and we've been hard at work over the past 90 days developing detailed plans that will be rolled out over the next 18 months.

Those programs are delivering their initial results as.

As planned and remain on track to deliver the committed savings and enhanced customer service levels.

I'll review, our key activities in Q1, and then turn it over to Ted will provide you with an overview of you judge financial performance in the quarter.

Our beard, our executive VP natural gas will provide an update on our natural gas businesses.

As including progress on the CMG system, and I'll wrap up with comments on our strategic initiatives.

Our Q1 GAAP EPS was a dollar while our adjusted Q1 EPS was a dollar in 17 cents.

Our adjusted EPS was over 40% above our Q1 fiscal 19 adjusted EPS of 81.

Sense and significantly exceeded the prior high point, Okay for Q1, adjusted Vps of a dollar one cent achieved in Q1 fiscal 18.

Both quarters up an adjusted for the Mark to Mark valuation of unsettled hedges and other items, which Ted will cover later.

As I noted earlier.

Sure. This very strong earnings performance reflected the strength of our diversified businesses with all four business units contributing in a major way.

This performance was in a quarter when weather in the mid Atlantic in Europe was a bit of a challenge.

Our French teams were managing the impact of the general strike activities.

And there were no opera.

Charities for incremental capacity margin at energy services.

Despite those challenges we delivered our highest adjusted Q1 EPS ever by a wide margin.

Our teams did an exceptional job executing as we managed our supply chain to optimize margin and saw the positive impact of our restructuring programs on operating.

<unk> expenses, all while maintaining high levels of service to our customers.

Before I turn the call over to chat I'd like to comment on the progress achieved in several key areas with major developments in Q1.

We had a very successful first full quarter with the Columbia Midstream systems and team the positive impact of the new.

New fee based revenues is evident in the Q1 financial performance of midstream and marketing adjusted EBIT is up nearly 45% would see I'm just contributions being the major growth driver also going forward, we'll be referring to the acquired CMG assets as you JPY Appalachia.

Our utility had another busy quarter out or adding over 4000, new heating customers, while continuing to execute our broad range of infrastructure replacement and reinforcement projects.

For a long term infrastructure replacement program remains on schedule.

The combined focused on infrastructure replacement and.

From a growth will remain for the foreseeable future as we invest in the infrastructure to serve our expanding customer base.

We expect capex for the utilities to exceed 400 million in fiscal 20.

Amerigas had a solid Q1 with adjusted EBIT just below prior year, despite weather that was slightly.

Warmer amerigas continues to excel with our cylinder exchange and national accounts programs.

National accounts volumes increased 12% versus Q1 fiscal 19 and cylinder exchange volumes were up almost 7%.

We'll continue to look for opportunities to leverage our exceptional U.S. distribution infrastructure to drive growth.

Growth in these two very successful programs.

You Jack International had an extremely strong first quarter adjusted EBIT EBIT was up substantially over Q1 fiscal 19, despite warmer weather.

We benefited from higher grain drying volumes, lower propane and butane cost that enabled strong.

Hormones and lower operating expenses, resulting from our transformation program in Europe.

Our return later on the call to comment on our strategic initiatives, but I'd like to turn it over to try to at this point for the financial review that.

Thanks, John as John mentioned, we delivered adjusted the P.S. of a dollar and 17 cents.

A 44% increase versus fiscal 2019 results.

Reportable segments, EBIT, and EBIT was $418 million compared to 346 million last year.

After a busy fourth quarter with the completion of two significant transactions.

Our teams return their focus on operational excellence and delivered a strong start to the fiscal year.

This table lays out our GAAP and adjusted earnings per share for fiscal 20 compared to fiscal 19 as you can see our adjusted earnings exclude a number of items such as the impact of Mark to.

<unk> changes in commodity hedging instruments, a loss of five cents this year versus a loss of 46 cents in the first quarter fiscal 19.

Last year, we had a three cents gain on foreign currency derivative instruments compared to a six that loss this year.

Lastly, you can see we adjusted.

Doubts six cents of expenses associated with our LPG business transformation initiatives that we discussed in detail last quarter, and we'll update momentarily.

Before I get into the numbers on the year on year Bridge.

Wanted to take a moment to reiterate how the.

Seasonality of the Amerigas business impacts our earnings.

As you recall from our Q4 earnings presentation, the buying of Amerigas shifts the timing of the company's earnings over the quarters, we now expect to earn roughly 110% and the first two quarters compared to only 90.

5% historically.

This outsized performance in the first half to send balance with lower than historical performance and the second half.

Okay, returning to the slide we are off to a good start in fiscal 2020.

We faced warm weather conditions compared to last year, but.

Benefited from our recent investments we delivered adjusted EPS of $1.17 36 cents improvement versus our first fiscal quarter last year.

Amerigas merger incremental margin from C.M. G now UGI I Felicia.

New base rates.

At the utility and margin management at UGI International where the biggest drivers of the here of the year over year improvement.

The 26 cents increase at Amerigas was largely attributable to the full consolidation of Amerigas results. Following the merger that was completed in August.

In the quarter, we benefited from onetime tax adjustments, primarily in France that were largely offset by the higher tax rates a corporate.

One final point, our interest expense increase versus last year as we added that to complete both the amerigas merger and CMG.

Yes.

Turning to the Amerigas business the quarter got off to a cold start warmed up in the critical month of December.

December weather.

<unk> warmer than normal and as a result volumes were down slightly versus last year Amerigas reported EBIT of one.

Hundred 65 million, which is roughly flat versus the prior year quarter. Total margin was also flat versus last year as the lower volumes were largely offset by higher unit margins.

Opex increased $5 million, principally the result of higher general insurance and vehicle.

Lease expenses and other income increased versus the prior year period due to a gain on the sale of excess real estate.

On our last call Roger spoke about the.

Excuse me.

Roger spoke about the business transformation initiatives underway at.

LPG businesses.

As a reminder, amerigas identified over $120 million of permanent operational efficiencies that we expect to be realized by the end of fiscal 2022.

We called out a six that adjustment to earnings in the first quarter related to LPG business.

Nation expenses. The majority of this expense comes from the Amerigas business.

UGI International achieved EBIT of $100 million compared to 59 million in fiscal 2019.

The team delivered strong results in the face of another year of significantly warmer.

Armor than normal leather total margin benefited from strong crop crying volumes and focus on margin management.

The large increase in total margin was driven by propane prices that were roughly 15% lower than the prior year period and effective recovery of costs associated with energy.

Conservation certificates.

Additionally, the international team continued to manage Opex opex in the challenging conditions I should point out that this improvement was supported by the translation effects of the weaker euro, but also lower maintenance and outside service expenses compared to the prior.

Prior year period.

Lastly, we broke out realized FX hedging gains from other income due to its significance in the corner.

Like Amerigas the international teams also making an investment in the business to drive operational efficiency. We expect these efforts to generate over 30 million.

Billion euros of permanent annual savings.

Although it's early in the process, both Amerigas and UGI international are on pace to deliver the operational efficiencies and the timeframe laid out on our last call.

Turning to the natural gas side of the house midstream and marketing reported.

EBIT of $62 million in the quarter compared to 43 million in Q1 last year CMG or UGI I Appalachia was the main driver of the year over year improvement total margin operating and administrative administrative expenses depreciation and amortization.

Monetizations and other income all reflect the impact of the acquisition.

We also benefited from our all burn for expansion coming online in November but to a much lesser extent.

Capacity management margin was lower in the quarter is pipeline capacity values remain depressed.

Finally, due to very low prices and warm weather.

Pipeline restrictions that not meaningfully impact earnings in the quarter, but we still expect pipeline operators to enforce them during periods of volatile weather.

Lastly margin decrease that are hunlock facility due to lower electric generation.

James.

UGI utilities reported EBIT of $92 million compared to 77 million in the prior year period.

Total margin increased the 15 million despite warm weather as a slight decrease in core markets spot volumes was offset by increased base.

Rates effective October 11th.

We also saw higher margin from large firm and corruptible delivery service customers.

You can see opex decreased $3 million versus the prior year period, due to increased systems and process capabilities and collections and lower.

And station and benefits expenses.

Lastly, our depreciation expense increased versus the prior year quarter due to continued distribution system and high Tech capital expenditure activity.

With that I'll turn the call over to Bob for an update on new G.I. Appalachian and.

Natural gas business priorities, Bob great. Thanks to our natural gas businesses continued to focus on growth opportunities. We are seeing at both our utility and our midstream and marketing companies and we continue to identify opportunities to drive efficiencies across both businesses by sharing best practices.

And as always we emphasize safety and everything we do.

That energy services were very pleased with the quality of the team that joined us from Columbia Midstream group.

I remain encouraged about.

Growth potential or what is now ujobai Appalachian.

Performance of these assets was solid in Q1.

This.

This performance was driven primarily by throughput contracts and efficiency gains, which helped control operating expenses.

While warmer than normal temperatures are helping drive lower natural gas prices. The forecast is for continued growth in the natural gas production.

From the Marcellus and Utica.

When you Joe I.

The acquisition of CMG, we indicated we would spend between three and $500 million on growth projects over the next five years.

Having owned these assets were approximately six months, we continue to believe this level of growth capital is likely and we continue to work with our existing and potential customers too.

Identify expansion opportunities.

Our midstream activities in north Eastern and Central Pennsylvania remains remains strong as well.

Of note on November 1st we placed into service, our Ahlborn for project, which increased the throughput of the system by over 40% or 150000.

Therms per day.

The Buildout of our all burn system is just one example of how energy services continues to find growth opportunities in the Marcellus and Utica basins.

On January Thirtyth FERC issued the declaratory order agreeing with pennies to view that the natural gas act properly gives for the authority.

The grant power of condemnation, including against parcels in which they told them interest to certificate holders pennies believes this is important information for the U.S. Supreme Court to consider when pennies files of certain petition later in February.

Also on January Thirtyth pennies filed.

The request with FERC to face construction of the pennies project.

While demand for the overall project has not declined.

Legal and regulatory delays, primarily in new Jersey have delete have delayed the start of construction on the overall project.

In response to these delays Penn East has received significant market interest.

And commitments were phase project with initial delivery points in Pennsylvania.

In addition to to delivery points that were initially planned with UGI utilities in Columbia pipeline.

Penn East intends to connect to the recently approved Adelphia Gateway pipeline, which provides which provides new supply to southeastern Pennsylvania.

Yes, if approved this first phase would come online in November of 2021.

Excuse me with the balance of the project estimated to be completed in 2023.

Our utility business continued to perform well in Q1, despite weather that was 4.2% warmer than normal.

Utilities recently filed a request with the Pennsylvania public utility Commission to increase natural gas rates by approximately $75 million.

This requested rate increase is driven by the record level of capital UGI utilities is deploying.

Utilities expects to spend nearly $2 billion over the next five years.

To upgrade and expand our piping systems and enhance our I T systems.

Our infrastructure upgrade programs have significant impact on carbon emissions, our CFO to equivalent admissions have been reduced by approximately 30% since 2009, and we expect a further.

30% reduction from current levels over the next 10 years.

Growth that utilities remains robust as conversions from few loyal to natural gas remains strong and we see an increasing interest in the use of natural gas for electric generation industrial processes and vehicle fuel.

Over the last 10 years utility has added nearly 150000 new heating customers.

The majority of this growth has come from conversions as customers choose natural gas to replace fuel oil.

These conversions provide our customers with meaningful savings and reduce carbon emissions for each converted customer bio.

Almost 50%.

So in summary, we're very pleased with the performance of both natural gas businesses and see meaningful growth opportunities as demand for natural gas remains strong.

With that I'll turn it back to John.

Thanks, Bob I'd now like to highlight developments in key areas that are crucial to our long term success.

From a strategic perspective, the first quarter was noteworthy in several respects.

We continue to see significant demand for LNG, peaking.

As ldcs focus on accessing viable natural gas supply options to meet their peak demand.

Our latest storage and vaporization project in Bethlehem.

So vanja remains on schedule and we expect to bring that unit online later this year.

In addition to our large permanent units. We've also seen significant interest in portable LNG systems, which can be utilized to address short term supply challenges created by pipeline constraints or supply shortfalls due to.

Construction activities.

Our LNG network remains a critical element of our midstream strategy and an area of strength for UGI.

The midstream and marketing team is active in the northeast Marcellus. In addition to the huge Appalachia activities in the southwest must marsalis that I referenced earlier on the call.

Paul as Bob noted are often for expansion project was placed in service on November 1st supported by a 10 year take or pay commitment.

As Bob noted in his remarks, we remain focused on our pennies project.

Our partnership will continue to pursue the development of pennies with a two phase execution.

We're encouraged by the continued strong interest in this project.

Penneast is a noteworthy project in our portfolio and of investment opportunities for the company. This portfolio. In addition to pennies includes LNG expansion capacity additions on our existing systems.

Continued growth.

With that utilities and the initial development of renewable natural gas and bio LPG projects.

The diversity of our product portfolio is critically important as energy policy at the state and federal level evolve.

We made significant progress in Q1 on the transformation programs underway.

At Amerigas and UGI International.

As Roger Pro noted on last quarter's call. These initiatives are expected to yield 120 million, a permanent operational efficiencies and amerigas, and 30 million euros or permanent efficiencies and UGI International in both cases were realized the full benefits by the end of fiscal 22.

We.

To be on track with these key programs and expect to achieve our fiscal 2000 commitments for savings related to these efficiency initiatives.

As Bob noted, we filed our latest rate request for.

Our gas utility in late January for a total of just under $75 million, we look forward to working with the.

You see and all the rate case constituents in the coming months.

We're hopeful that this process will conclude by the early fall and new rates will go into effect on or about October onest.

Given that Q2 is the most significant earnings quarter of year I thought I should comment on whether to date in the quarter in short the weather.

Challenges that we saw in December continue through January weather in the eastern Us and in Europe was over 15% warmer than normal in January.

The higher temperatures and penalty plentiful supply also dampened pipeline capacity values in January consistent with our December experience.

As we did in Q1.

We'll look for every opportunity to take actions to help offset the short term impact of the challenging weather.

The long term strategic investments that I've described and the critical transformation programs underway in the company provide us with a great foundation for future growth.

We're excited about the opportunities that lie ahead for the company.

With that.

Now I'll turn the call back over to Kenzie, who will open it up for your questions.

Thank you at this time I would like to remind everyone in order to ask a question. Please press Star then the number one on your telephone keypad.

Again that istar than the number one team on your telephone keypad.

First question comes from the line of.

Please go ahead your line is open.

Hi, good morning, everyone.

Maybe just to start off with literally your last comment on the prepared remarks.

Given the fact that January makes up the bulk of the weather for this quarter and it's it's a bigger weather quarter or you still.

Bill with your guidance range for for this year.

Do you feel that enough of the margin offsets the to successfully achieved during last quarter. You are able to extend this quarter and can sort of partially offset where we are.

Just sort of any comments as to how you think about your.

Sure as.

As you know, we typically and.

And this year will be no exception kind of revisit that at the end of the second quarter.

When when the.

Basically the degree days for the year. The winter season is over January is significant, but but February and march or material as well so.

Yeah, we don't have any comment in terms of guidance.

Yes, and we're just stick to our our normal.

Practice of waiting at least until the end of the winter season to comment on that.

Okay Fair enough and then my follow up questions just with respect to the update that you provide about the numerous.

Assets.

When we sort of steel.

The producers slowing their capex spend rig counts are falling and so forth.

You sort of talked about you still see opportunities for growth capital I was kind of wondering if what kind of capital as it is it really just.

Connection capital.

To existing facilities and so forth.

And is there an opportunity to actually defer some of the Capex that you had intended to.

Spend and redirect some of the capital towards buybacks or further deleveraging.

Yes, sure as we look at it today and we're talking to our.

Customers are producers.

All the time.

We still have meaningful discussions underway essentially about expansion of existing systems. So as.

And each producers.

In their own unique position, but as they look at optimizing their capital spend and.

Almost.

Most every case trimming the capital spend in many instances their best option is an expansion in existing acreage that's been developed and is already supported.

By gathering infrastructure so.

Most of what we're doing is.

Looking.

At expansions to our existing systems, which which provide the producer with an efficient.

Incremental production opportunity.

Can be very attractive at a time, where.

Some other production expansion opportunities require a lot more capital investment on their part so.

Thats the nature.

Clearly we're going to be.

Our path and the timing of our spend will be determined in the end by the producers decisions around.

Their production levels, and where they want to bring that product to market, but we're encouraged by the discussions we've had even with the.

Lower commodity prices so.

We haven't fundamentally changed our outlook on.

Our capital spend capex levels, but.

Obviously, we're going to monitor that and we're going to be working closely with our customers.

As they finalize their plans around capital spend and production levels.

Just to paraphrase a little bit so youre basically, saying the capital spend will be driven by.

What's the growth plans are your customers. So if they end up deferring or slowing down their pace.

What do you do with deceived Capex is you do you consider buybacks you consider leverage reduction.

And.

And with the priority sure sure.

We consider all those alternatives certainly for us and we.

Particularly for the last several quarters here as the two transactions were executed we talked about the prioritization of.

Paying down debt.

In Amerigas, but it's important for you John Corp. as well, but we'll look across all those alternatives in terms of incremental cash being available to deploy.

Well look at paying down some of that.

We'll look at other new investments that.

Could emerge so the full range of opportunities remain.

And you saw last year, we obviously bumped our dividend significantly last year. So we'll look at that full range to.

Deployed.

Any incremental available cash and in the end and.

And.

As with the board and what we see as the most effective way possible.

Alright, perfect well, thank you very much and I will jump back in the Q.

Great. Thanks, Sir.

Our next question comes from the line of Christine Cho from Barclays. Your line is open. Please go ahead.

Good morning, everyone.

Hi, good if I.

To start with the lower LPG Caslon International.

Can you just provide some more color on.

What drove that lower and how we should expect this to continue through the remainder there.

Yes.

I can't provide you with a.

A commodity.

Oddity forecast, but generally what's been happening.

Internationally and were specific refocused on Europe is that the increased production levels.

Of.

Propane and butane and particularly in the us have resulted in commodity costs dropping.

Pretty considerably over the last year, especially.

And because now the market for both propane and butane has become much more global and fluid we're seeing the benefits of that in Europe. So we've seen a.

Pretty solid drop in our costs.

Which.

That's helpful.

And enhance margins.

And the outlook and as far as we can see.

In terms of the current future strip it remains attractive.

Now that's that's.

That obviously can change, but it's pretty positive outlook and.

With warmer weather.

LPG storage levels of LPG are quite high because demand is less.

Weather weather sensitive demand. So again, that's probably a positive indicator or at least for the short term.

On.

Costs remaining.

Low but but.

As a company were.

We are ready to move if we need to have costs move in.

In the opposite direction or unexpectedly, but it's a it's a very healthy supply environment as they just as a distribution company.

And Europe as I noted earlier Europe has become much more liquid over the last five years, primarily due to the availability of.

Propane and butane produced in the U.S. has had a huge impact on the global market and as a distributor we benefited from that.

Okay.

Well like with the Saudi outage in September like you know.

Global supply of propane and butane were brought offline did that impact.

Europe at all.

No I mean, you probably noticed it for a day or two you know there was almost.

You know.

I'm very minimal impact I think.

I think that's a great.

Example of how the market has changed.

Europe used to be a lot more volatile.

Supply interruptions because.

Europe was more dependent on product coming from the east and.

Some from the golf now you've got product coming.

From from from the West from the US in addition to some of these other supply options. So there's a.

Resiliency now in Europe that wasn't there five or seven years ago.

Okay terms of supply.

And then if I.

I could just move on Q.

Penny Phase one how do we think about economics here and now that you split the project into.

Should we think that you're earning the full 14% Ali on phase one capital costs and you know I assume you know like a 50 50 equity that capitalization.

I think at a high level you could make that kind of assumption, we're going to you could make that assumption, obviously will will progress that we've just made the filing with FERC will progress that and advise as we move forward, but the fundamental economics of the project haven't changed materially.

Okay, great. Thank you.

There are no further questions at this time ill turn the call back to John Walsh for closing remarks.

Okay. Thank you for your time and attention. This morning, I, we look forward to keeping you updated on our progress on two speaking with you again on our second quarter call take care.

This concludes today's conference call.

Thank you for your participation you may now disconnect.

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