Q2 2020 Earnings Call
Requirements and higher cash generation from a timing perspective or entering the. When we're generating cash. Additionally. We're entering our cash generation. With greater capacity due to the historically low commodity prices in the first two quarters and we're benefiting from the incremental cash generated through our AmeriGas merger and the acquisition of the month Assets Now named UGI Appalachia all together these factors leave us confident with our ability to address any covid-19 liquidity challenges as mentioned covid-19 is impacted the timing of some of our Capital expenditures not eliminated then we expect to catch up on some of the projects still this fiscal year and that's cute on others next year the delay and timing supports free cash flow in the current fiscal year.
Lastly were proud to announce that we increased our quarterly dividend or 33 cents per share. This is the 33rd consecutive year that we've increased our annual dividend wage proud to honor our commitment to shareholders and maintain strong liquidity during these challenging economic conditions.
Turning to our results.
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From a timing perspective, we're entering the period when we're generating cash. Additionally, we're entering our cash generation period with greater capacity due to the historically low commodity prices in the first two quarters and we're benefiting from the incremental cash generated through our amerigas merger and the acquisition.
One of the CMG assets now named UGI Appalachia.
All together these factors leaves us confident with our ability to address any cobot 19 liquidity challenges as mentioned cobot 19 has impacted the timing of some of our capital expenditures not eliminated.
We expect to catch up on some of the projects still this fiscal year and execute on others next year. The delay in timing supports free cash flow in the current fiscal year.
Lastly, we're proud to announce that we increased our quarterly dividend 33 cents per share.
This is the 30 threerd consecutive year that we've increased our annual dividend, we're proud to honor our commitment to shareholders and maintained strong liquidity during these challenging economic conditions.
Turning to our results.
For the normal regardless, we delivered adjusted EPS of a dollar fifty six thirteen percent Improvement versus our second fiscal quarter last year the AmeriGas merge incremental margin from Yu-Gi-Oh Appalachia New base rates at the utility and expense management where the biggest drivers of the year-over-year Improvement.
Auburn for expansion coming online and our first quarter higher peaking margin and a $3000000 refund received in connection with pipeline contract rates from Pasadena management. Margin remains low due to low prices and warm leather lastly total margin decreased that are unlocked facility do to lower electric generation volt.
storage and vaporization facility near Bethlehem Pennsylvania this sixty million dollar project will add two million gallons of LNG storage to our Network
We delivered adjusted EPS of $1.56 versus 143 in the prior year period.
Please note the Dps figures for fiscal 2020 reflect an incremental 34.6 million shares issued in conjunction with the Amerigas merger.
it will enhance our supply position to meet the rapidly growing demand for LNG and strengthen our ability to use our LNG system assets dynamically based on market conditions off as Rodger indicated were making excellent progress on our LPG transformation programs in the US and Europe we we remain on track and will meet or exceed the commitments that we laid out for fiscal twenty cost savings from these initiatives we've also gain new insights from our work over the past two to three months as we change many of our field and office space activities in response to the pandemic in a number of cases will incorporate these new way these new ways of working into our plans as we resume normalized operation
Our reportable segments EBIT was 527 million compared to 551 million last year, our second quarter results were not significantly impacted by the coven 19 pandemic, but we do expect expect to face some headwinds in the third and fourth quarter. If we look at the.
Turning to the AmeriGas business again weather was a major headwind in the quarter total margin decreased sixty million dollars predominantly driven by lower retail volumes month old and lower average unit margins. The AmeriGas team did a nice job of offsetting some of the margin loss associated with warm weather by reducing operating and administrative expense by Twenty million dollars versus Q2 of 2019.
UGI Utilities reported ebit of $116 compared to $120 million in the prior year. Total margin was roughly flat despite historical warm weather is a 17% decrease in core Market volumes was partially offset by increased base rates effective October eleventh. The decrease in margin was off. So offset by a 10.5 million dollar credit to ratepayers of tax savings resulting from the tcja and Q2 of 2019. That did not impact this quarter's results.
Quarter, the international business experienced some volume loss from commercial customers.
But this was partially offset by the spike in cylinder sales, we experienced at Amerigas in total the LPG businesses had a two to three cents headwind related to cope with it.
And our last call Rodger spoke about the business transformation initiatives underway in our LPG businesses is Rodger just mentioned AmeriGas identified over a hundred fifty million a permanent operational efficiencies that we expect to be realized by the end of fiscal 2022. We called out a $0.07 adjustment to earnings in the second quarter related business transformation expenses. The majority of this expense comes from the AmeriGas business. We are now seeing benefits from these efforts across the 2L businesses of over ten million dollars.
One final performance related point I'd like to highlight is the strength of our cash flow and liquidity had noted our cash flow performance during his remarks. This is long. Been a core strength of the company and it becomes particularly relevant during periods of capital markets stress or economic uncertainty fiscal year 20 will be another very strong year for free cash flow, and we'll enter fiscal 21 a great position to fund our growth Investments strengthen our balance sheet and pay our dividends speaking of dividends. Ted mentioned that the confidence in our cash flow is reflected in our board's decision in April to increase dividend for the 33rd consecutive year with this most recent increase the compound annual growth rate for our dividend over the past five years was just under 8%
The natural gas businesses were not materially impacted by co bid in the second quarter is Bob highlighted we have not seen any atypical be payment behavior from utility customers, but continue to monitor this closely.
Topics was lower in the quarter you mostly the decreases of contractor expenses and allocated corporate expenses. Lastly our depreciation expense increased versus the prior-year quarter due to continued distribution system and I T capital expenditure activity with that. I'll turn the call back over to Josh Sean. Thanks Dad while we're a highly focused on continuing to successfully fulfill all of our critical obligations during the pandemic. I want to turn now to look forward to fiscal two thousand and Beyond one very significant development during the past quarter has been the dramatic fall in oil prices and the impact of that drop on production activities. This is particularly off to you guys Midstream business due to the significant reduction and Associated natural gas production that will occur as oil production declines.
Re delivered adjusted EPS of a dollar fifty six verses 143 in the prior Year. Please note that the EPS figures for fiscal 2020 reflective of mental 34.6 million shares issued in conjunction with the AmeriGas merger are reportable segments ebit was $527 Million compared to $551 billion last year our second quarter results were not significantly impacted by the covid-19 pandemic, but we do Express expect to face some headwinds in the third quarter. If we look at the quarter the international business experience and volume loss from commercial customers, but this was partially offset by the spike in cylinder sales. We experienced that AmeriGas in total the LPG businesses had a two to $0.03 headwind related to covid-19.
In the table lays out our GAAP and adjusted earnings per share for fiscal 2000 compared to fiscal 19 as you can see our adjusted earnings exclude a number of items such as the impact of Mark to market changes in commodity hedging instruments, a loss of 43 cents this year versus a loss of seven cents.
In the second quarter of fiscal 19th.
UGI International achieved ebit of $126 compared to $130 million in fiscal 2019 a very strong result in a warm course despite whether that was 13% warmer than normal and 6% warmer than the prior-year UGI Internationals even fell only 3% versus Q2 of 2019. This is largely the result of higher LPG unit margins and effective expense management. I should point out that not all the volume loss in the quarters related to Wednesday. We terminated a low-margin auto gas contract in Italy which accounted for roughly 35% of the volume reduction year-over-year.
Last year, we added two cents gain on foreign currency derivative instruments compared to a one cents gain this year.
Lastly, you can see we adjusted out seven cents of expenses associated with our LPG business transformation initiatives.
For future was very challenging quarter and numerous respects. It was also a very positive quarter for UGI. I believe. Our performance was another clear demonstration of the resiliency instead of UTIs businesses. We look forward to seeing the opportunities that will emerge in the coming quarters as the US economy and the energy sector precedes through this period of major change that I'll turn the call back over to Simon who will open it up for your questions Simon. Thank you. Ladies and gentlemen at this time. If you would like to ask a question, please press star then the number one choice or telephone keypad. If you would like to withdraw your question, please press the pound key will pause for just a moment to compile the Q&A roster.
We don't usually get into too much detail regarding emerging tax strategy, but I wanted to take a moment to address a few significant swap shifts that are taking place. These relate to the anticipated treatment of the terrorists Act and our foreign tax attributes which large.
Is Bob highlighted we have not seen any a typical payment behavior from utility customers, but continue to monitor this closely with the table leaves out or Gap and adjusted earnings-per-share for fiscal twenty compared to fiscal nineteen, as you can see our adjusted earnings exclude a number of items such as the impact of birth to Market changes in commodity hedging instruments a loss of $0.43 this year versus a loss of $0.07 in the second quarter of fiscal 19 last year. We had a choice on foreign currency derivative instruments compared to a $0.01 game this year lastly you can see we adjusted out $0.07 of expenses associated with our LPG business office initiatives.
We believe that the movement of the future strip for natural gas will have a positive impact on production activity in both the North East and southwest regions of the Marcellus.
Really offset one another.
We've already seen upward movement on that gas pricing as the market adjusted to the new normal for oil production over the past month.
As a result of weather related underperformance, we were unable to leverage foreign tax attributes tax credits to the extent anticipated.
Lastly we broke out realized at that gains from other income due to its significance in the court.
Udi's Gathering assets are well-positioned to efficiently serve increase production across our producer base. We can provide ready access to an improving Market through expansion of existing networks that serves some of the most prolific acreage in the Marcellus. One of the reasons that is likely to see increased activity is the Southwest Marcella's last year's acquisition of the Columbia Midstream assets now known as UGI Appalachia positions as well to serve an increase in production activity.
This last benefit is largely offset by a 19 million dollar expected tax benefit resulting from the carry back of tax net operating losses under the carriers Act.
Turning to the Natural Gas side of the house Midstream and marketing reported ebit of $79 million in the quarter compared.
And we have a question from the line. Of course with UBS your line is open.
Cares benefit coupled with the release of reserves related to the closure of prior period tax audits allow us to net a 5 million dollar benefit year to date, which were currently projecting to refer to reflect where we will finish the full fiscal year.
Morning, this is Jimmy John's car insurance. We have thank you for the color on the u g. I apologize. Could you please provide more updates on your latest discussions with producers who are your customers will capitalize on potentially could accelerate activity in Twenty-One. If natural gas prices remain at current strip? Sure. Thanks. I got yes. We're in discussion with with producers. Obviously every producers is in the process of assessing the impact of the most recent movements and on Thursday own Capital deployment plans. I think the important important factor for us is you know, we have available capacity on certain systems so we can accommodate additional flow immediately for some of these producers which is really attractive with sort of minimal incremental capital investment on their part or it certainly represents in many cases job.
Has had noted earlier and Bob.
We're very pleased with the performance of our UGI Appalachia assets since the acquisition over the first six months of fiscal twenty total volume shipped on those five systems increase 15% from prior-year levels, the strength of our shipper volumes during a period of low commodity prices provides us with significant confidence that our systems will be a preferred route to market for the producers. We serve our systems in the Northeast Marcellus will also benefit from the significant changes underway in the natural gas sector are Arbonne system serves most off some of the most productive dry gas acreage in the Marcellus producers shipments on the Auburn system grew by over 90% over the first six months of fiscal twenty as our options for expansion came on stream as we've previously noted the majority of our margin from UGI systems in the Marcellus is derived from take-or-pay fees.
We faced historically warm weather conditions in our second quarter, particularly in our natural gas businesses, where weather was approximately 20% warmer than normal.
We don't usually get into too much detail regarding emerging tax strategy, but I wanted to take a moment to address a few significant shifts that are taking place with these relate to the anticipated treatment of the terrorist act in our foreign tax attributes, which largely offset one another as a result of weather-related under-performance. We were unable to leverage foreign tax attributes tax credits, the extent anticipated. This loss benefit is largely offset by a ninety million dollar expected tax benefit resulting from the carry bag of tax net operating losses under the carers ACT tears benefit coupled with the role of reserves related to the closure of Prior. Tax audits allow us to net a $5 billion dollar benefit year to date which we're currently projecting your birth.
Our LPG businesses faced similar headwinds as amerigas experienced weather that was nearly 10% warmer than normal and the international business had another quarter of warm weather approximately 13% of warmer than normal.
Select where we will finish the full fiscal year.
Regardless, we delivered adjusted EPS of $1.50, 613% improvement versus our second fiscal quarter last year.
we faced his
The amerigas merger incremental margin from UGI, IHOP, Malaysia, new base rates at the utility and expense management, where the biggest drivers of the year over year improvement.
They're most efficient.
Option for increasing uh production or increasing flow from their acreage to our systems and and on wood to Market. So I would say that the discussions are are quite active. They're looking at the movement and and some of the positive movement particularly over the last month and Thursday. We're really really happy with kind of the the experience. We had over the first six months and in terms of continued growth and and in the Flo's on a systems, so I would characterize them as active discussions. The market is dynamic. I think those could accelerate as the impact of how long the shutdown of oil drilling in in other basins has the incremental impact on Nat gas valuations. So we'll Thursday.
Turning to the Amerigas business.
Again weather was a major headwind in the quarter total margin decreased $60 million predominantly driven by lower retail volumes sold and lower average unit margins.
Amerigas team did a nice job of offsetting some of the margin loss associated with warm weather by reducing operating and administrative expense by $20 million versus Q2 of 2019th.
And our last call Roger spoke about the business transformation initiatives underway at our LPG businesses as Roger just mentioned Amerigas identified over 120 million a permanent operational efficiencies that we expect to be realized by the end of fiscal 2022.
We called out a seven cents adjustment to earnings in the second quarter related to LPG business transformation expenses.
Stay inactive contact with with our producer customers and make sure they fully understand the options. We have to move additional volumes for them.
The majority of this expense comes from the Amerigas business. We're now seeing benefits from these efforts across the two LPG businesses of over $10 million.
Perfect. You discuss some scenarios assumptions included in the $0.20 to $0.03 range of covid-19 impact, how will it impact your leverage and what is expected leverage at the end of the school year sure. I'll come in on that briefly. I'll get and then I'll let Ted, as well. Obviously the the trying to estimate the impact of that is changing. What we wanted to do was use our experience that we're seeing in Europe and provide, uh, a basis, you know, a a provide an estimate of that impact assuming that it will be a uh, put a moderated reopening of activities, which is what we're seeing in Europe. So it's certainly a challenge to forecast what we wanted to be as specific as we could be assuming that the impacted commercial activities would over the balance of this fiscal.
UGI International achieved EBIT of $126 million compared to $130 million in fiscal 2019, a very strong result in a warm quarter.
Despite weather that was 13% warmer than normal and 6% warmer than the prior year UGI International EBIT fell only 3% versus Q2 of 29 team.
This is largely the result of higher LPG unit margins and effective expense management I should point out that not all the volume loss in the quarters related to weather, we terminated a low margin auto gas contract in Italy, which accounted for roughly 35% of the volume reduction year over year.
Lastly, we broke out realized FX gains from other income due to its significance in the core.
Turning to the natural gas side of the house midstream and marketing reported EBIT of $79 million in the quarter compared to 53 million in Q2 last year.
Here kind of return to normal levels that certainly subject to change and we would keep investors updated. Uhh, if for example activities accelerated across the u.s. At a pace that's faster than we've seen thus far in Europe. Would that I'll let Ted comment.
Oh Gee I Appalachian was the main driver of the year over year improvement total margin operating and administrative expenses depreciation and amortization and other income all reflect the impact of the acquisition.
Yeah, good morning Raga. I guess what what I would say is there's really nothing that's changed about our strategy for for managing leverage and and managing our our ratios. What what may change about that is is the timing on on on how we see that affected we continue to expect them to be paying debt down over time as we see cash flow increase increase from our our investments and and Appalachia. For example, we may see the lever come down at a little bit slower rate than what we had anticipated previously but nothing's really changed about the prioritization. We expect to see AmeriGas paying down over time. We expect to see our corporate debt be reduced over time also is is our cash flows continue to increase with the investment opportunities that we have.
We also benefited from our Auburn for expansion coming online in our first quarter higher peaking margin in a $3 million refund received in connection with pipeline contract rates.
Passively management margin remains low due to low prices and warm weather.
Lastly, total margin decrease that our unlock facility due to lower electric generation volumes.
UGI utilities reported EBIT of $116 million compared to 120 million in the prior year period total margin was roughly flat. Despite historically warm weather as a 17% decrease in core markets volumes was partially offset by increased base.
Rates effective October 11th the decrease in margin was also offset by a $10.5 million credit to rate payers of tax savings, resulting from the T.C.J. in Q2 of 29 team that did not impact this quarter's results.
Thank you for taking my question.
And there appears to be no further questions at this time. I will now turn it back over to mr. Walsh for any clothes closing remarks. Okay. Thank you Simon. And thank you all for your time. This morning will suck to keep you updated as things progress and look forward to speaking you to all of you again, very soon. Take care. Ladies and gentlemen, this concludes today's conference call. You may now disconnect.
Opex was lower in the quarter due mostly to decreases in contractor expenses and allocated corporate expenses.
Lastly, our depreciation expense increased versus the prior year quarter due to continued distribution system and IP capital expenditure activity.
With that I'll turn the call back over to John John.
Thanks, Dan.
While we're highly focused on continuing to successfully fulfill all of our critical obligations. During the pandemic I want to turn now to look forward to fiscal 21 and beyond.
One very significant development during the past quarter has been the dramatic falling oil prices and the impact of that drop on production activities.
home
This is particularly relevant to you guys midstream business due to the significant reduction in associated natural gas production that will occur as world production declines.
We believe that the up the movement of the future strip for natural gas will have a positive impact on production activity in both the northeast and southwest regions of the Marcellus.
We've already seen upward movement on that gas pricing as the market adjusted to the new normal for oil production over the past month.
You guys gathering assets are well positioned to efficiently serve increased production across our producer base.
We can provide ready access to an improving market through expansion of existing networks that serve some of the most prolific acreage in the Marcellus.
One of the regions that is likely to see increased activity as the southwest Marcellus last year's acquisition of the Columbia Midstream assets now known as you giant Malaysia positions us well to serve an increase in production activity.
As Tim noted earlier and Bob we're very pleased with the performance of our Ujobai Appalachian assets since the acquisition over.
Over the first six months of fiscal 20.
Total volume shift on those five systems increased 14% from prior year levels.
The strength of our shipment volumes during a period of low commodity prices provides us with significant confidence that our systems will be a preferred route to market for the producers we serve.
Our systems in the northeast Marcellus will also benefit from any significant changes underway in the natural gas sector.
Our operating system serves most some of the most productive dry gas acreage in the Marcellus.
Producers shipments on the operating system grew by over 90% over the first six months of fiscal 20 as our Orbin for expansion came onstream.
As we've previously noted the majority of our margin from you guys systems in the Marcellus is derived from take or pay fees under long term contractual arrangements.
Our midstream marketing team continues to build out its LNG asset network.
We see rising demand for peaking services as ldcs and end users respond to regional supply constraints, resulting from pipeline delays.
In response to that rising demand, we're well along in the construction of our new LNG storage and vaporization facility in your Bethlehem, Pennsylvania.
The $60 million project will add 2 million gallons of LNG storage to aren't work.
You will enhance our supply position to meet the rapidly growing demand for LNG and strengthen our ability to use our LNG system assets dynamically based on market conditions.
As Roger indicated, we're making excellent progress on our LPG transformation programs in the us in Europe.
Remain we remain on track and will meet or exceed the commitments that we laid out for fist grew 20 cost savings from these initiatives.
We've also gained new insights from our work over the past two to three months as we change many of our field and office based activities in response to the pandemic.
In a number of cases will incorporate these new way did these new ways of working into our plans as we resume normalized operation.
One final performance related point I'd like to highlight is the strength of our cash flow and liquidity Ted noted our cash flow performance during his remarks.
This has long been a core strength of the company and it becomes particularly relevant during periods of capital markets stress or economic uncertainty.
Fiscal year 20 will be another very strong year for free cash flow and we'll enter fiscal 21, and a great position to fund our growth investments strengthen our balance sheet and parent dividends.
Speaking of dividends, Ted mentioned that the confidence in our cash flow was reflected in our board's decision in April to increase you guys dividend for the 30 threerd consecutive year.
With this most recent increase.
Compound annual growth rate for our dividend over the past five years was just under 8%.
While Q2 was very challenging quarter in numerous respects. There was also very positive quarter for you guys.
I believe our performance was another clear demonstration of the resiliency and strength of you judge businesses.
We look forward to seizing the opportunities that will emerge in the coming quarters as the us economy in the energy sector proceeds through this period of major change.
With that I'll turn the call back over to Simon who will open it up for your questions.
Simon.
Thank you, ladies and gentlemen at this time it seems it back to ask a question. Please press Star then the number one on your telephone keypad, if you'd like to withdraw your question. Please press the pound key we'll pause for just a moment to can pop acuity roster.
Okay.
And we have a question from the line of Shneur Gershuni with yes. Your line is open.
Okay.
Good morning. This is I guess me guys come shares behalf.
Thank you for the color on the UGI I apologize could you. Please provide more updates on your latest discussions as producers are your customers will capitalize on potentially could accelerate activity in 21 ish natural gas prices remain at current strip.
Sure. Thanks Saga.
Yes, we're in active discussion with the with producers. Obviously every producers is in the process of assessing the impact of the most recent movements and on their own capital deployment plans I think the important.
If you are important factor for us is.
We have available capacity on certain systems. So we can accommodate additional flow immediately for some of these producers, which is really attractive with sort of minimal incremental capital investment on their part or certainly represents in many cases, they're most efficient option for.
Increasing production are increasing flow from their acreage.
To our systems and onward to market. So I would say that the discussions are quite active.
They're looking at the movement and some of the positive movement, particularly over the last.
Month.
And we're really really happy with kind of the.
Experience, we had over the first six months and in terms of continued growth and in.
The flows on our systems, so I would characterize them as active discussions.
The market is dynamic I.
I think those could accelerate as.
The impact of the shutdown.
Oil drilling.
In other basins has the incremental impact on Nat gas valuation so.
We'll just staying active contact.
With our producer customers and make sure they.
Fully understand the options, we have to move additional volumes for them.
Okay do you discussed some scenarios assumptions included in that 20 cents, a three cents range ups covet 19 impact how will it impact your leverage and what is expected leverage at the end of this fiscal year.
Sure I'll I'll comment on that briefly AGA, and then I'll, let Ted comment as well.
Obviously, the trying to estimate the impact of cobot is challenging what we wanted to do was use our experience that we're seeing in Europe.
And provide a basis.
Provided an estimate of that impact assuming that it will be a.
Moderated reopening of activities, which is what we're seeing in Europe. So it's certainly a.
Challenge to forecast when we wanted to be as specific as we could be assuming that.
The impacted commercial activities would.
Over the balance of this fiscal year.
Kind of return to normal levels, that's certainly subject to change.
And we would keep investors updated.
If for example, those activities accelerated across the you asked at a pace that's faster than we've seen thus far in Europe.
With that I'll, let Ted comment.
Yeah.
Good morning, Iga, I guess, what would what what I would say is there's really nothing that's changed about our strategy for managing leverage.
And managing our ratios.
What may change about that is the timing on on how we see that affected we continue to expect a to be paying debt down overtime as we see cash flow increase increased from our investments and Appalachian for example.
We may see the leverage rates come down at a little bit slower rate than what we had anticipated previously, but nothing has really changed about the prioritization, we expect to see amerigas paying down debt overtime, we expect to see our corporate debt be reduced overtime also as is our cash flows.
Continue to increase with the investment opportunities that we have.
Thank you for taking my question.
Okay.
There appears to be no further questions at this time I will now turn it back over to Mr. launch for any closing closing remarks, okay. Thank you Simon and thank you all for your time. This morning, we'll certainly keep you updated as things progress and look forward to speaking you to all of you again very soon take care.
Ladies and gentlemen. This concludes today's conference call you may now disconnect.
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