Q3 2021 UGI Corp Earnings Call
And Bob Beard, Executive Vice President of natural gas.
Roger and Ted will provide an overview of our results and the entire team will then be available to answer your questions.
Before we begin let me remind you of that or commence today include certain forward looking statements, which management believes to be reasonable as of today's date on them.
Actual results may differ significantly because of risks and uncertainties that are difficult to predict.
He's the lead our earnings release and our annual report on form 10-K for an extensive list of factors that could affect the results.
We assume no duty to update or revise forward looking statements to reflect events or circumstances that are different from expectations. We will also describe our business using certain non-GAAP financial measures reconciliations of these measures to the comparable GAAP measures are available within all of presentation and with that I'll turn the.
The call over to Roger.
Thanks, Tommy and good morning, everyone.
UGI delivered strong third quarter results from performed well, while managing the ongoing impact of the COVID-19 pandemic.
Our third quarter GAAP EPS was <unk> 71, while the adjusted earnings per share was <unk> 13.
<unk> performance of the comparable prior year period, reflecting strong execution across our diversified business and increased margins at UGI International.
On a year to date basis, our GAAP EPS of $4.48 and.
And adjusted EPS of $3.30.
Represent record earnings through the first 3 quarters of the fiscal year.
We are really pleased with this performance, which demonstrates the earnings strength of our diversified business.
During the Q2 earnings call, we shared the revised EPS guidance of $2.90 to $3 for this fiscal year.
Given the strong year to date performance, we expect to be at the top end of our guidance range.
Next I'll comment briefly on several key accomplishments during the quarter before turning it over to Ted who will provide you with an overview of Ugi's financial performance.
I'll return to cover other key operational highlights before opening it up for questions.
During the quarter, our teams continued to execute on our major business initiatives as we deliver reliable earnings growth.
Progress incremental opportunities related to renewables.
And make investments to rebalance our portfolio.
We are well positioned to meet our objectives and are pleased with the pipeline of opportunities ahead.
Turning to the key highlights for the quarter.
UGI utilities is on track for another record year of capital expenditure, where we will invest in infrastructure replacement and reinforcement.
These investments, which are primarily focused on replacement of cast iron and bare steel are expected to drive continued reliable earnings growth as our utility has seen a rate base CAGR of 11, 4% over the past 5 years.
The utilities team also continues to focus on adding new customers across our system with more than 2200, new residential heating and commercial customers added in Q3.
Roughly 10000 added on a year to date basis.
Our midstream and marketing business continues to leverage our supply of assets to take advantage of opportunities that arise and we continue to expect that we will invest substantial capital over the next several years.
Our recent investments in the UGI Appalachia system, including our interest in the pint rug system continued to perform well and we were pleased with the strong production volumes during the quarter.
As we continue to see growth in demand and rising prices, we remain confident that our midstream assets position us well for future opportunities.
Our LPG businesses had a strong quarter of execution as we continued to deliver on the business transformation initiatives. We previously outlined.
We will drive efficiencies within our operations improve the customer experience and remain focused on operational and commercial excellence.
We are on track to deliver the previously targeted benefits for both Amerigas and UGI International and expect that the strategy, coupled with continuous improvement will generate customer and shareholder value.
Our teams are progressing on exciting an attractive range of investment opportunities in renewable solutions as we execute against the renewable strategy that we previously shared with you.
Yesterday, we announced that UGI energy services has entered into definitive agreements to develop innovative food waste digester projects to produce renewable natural gas in Ohio, and Kentucky through the Hamilton RMG joint venture.
In conjunction with that project pipeline quality RMG will be injected into a local natural gas pipeline that serves the regional distribution system.
In addition, we are able to leverage <unk>, which will be the exclusive off taker and marketer of RMG for Hamilton R&D.
Similar to the arrangement with Cayuga R&D.
In addition.
During our last Investor update we discussed the intent to create a joint venture for the production and use of renewable dimethyl ether.
We have started the regulatory filing process with the European authorities and we will provide an update on our future calls as we progress on this venture.
As you can see we are making strong progress on the number of initiatives across our businesses.
We will remain focused on executing against our strategy of delivering reliable earnings growth.
Exploring renewables opportunities and rebalancing our portfolio.
We are confident that this will allow us to continue to deliver long term EPS growth of 6% to 10% and 4% dividend growth.
I'll return later on the call to discuss other business updates, but at this point I'd like to turn it over to Ted for the financial review Okay.
Thanks, Roger as Roger mentioned, we're pleased with the strong third quarter results. We delivered adjusted diluted EPS of 13, an increase of <unk> over the prior year fiscal quarter, our reportable segments had EBIT of $98 million compared to 81 million.
In the prior year.
This table lays out our GAAP and adjusted diluted earnings per share for fiscal year 2021, compared to fiscal year 2020, as you can see our adjusted diluted earnings exclude a number of items such as the impact of mark to market changes in commodity hedging instruments, a gain of $1 <unk>.
9 this year versus 55 in the third quarter of fiscal 'twenty.
Last year, we recorded in the 18th impairment of our ownership interest in the economy station.
This interest was divested as of September 32020.
Also last year, we added <unk> loss on foreign currency derivative instruments.
We adjusted out <unk> of expenses associated with our LPG business transformation initiatives compared to <unk> in the prior year.
Okay.
At the corporate level, we saw 15 cents decrease versus the prior year period, largely due to cares act tax benefits that were realized last year.
When we shared our revised FY 21 guidance range of $2.90 to $3. We noted that this included 10 cents of anticipated COVID-19 headwind and tax benefits of roughly 12 cents from cares and other strategic tax planning actions.
Our experienced during the quarter continues to align with the amounts. We previously projected and is Roger shared we expect to deliver at the top end of our guidance range.
Delivering at the top end of our guidance range and given our year to day non-GAAP results of $3.30.
We expect that Q4, we'll see a sizeable reduction that is primarily driven by tax items when compared to the prior year period.
<unk> F Y 20 of the entire guilty tax benefit was realized in queue for while the benefit is reflected in the quarterly results of FY 21.
In addition, our leverage of the cares act is reduced with our strong performance this year.
Looking at the individual businesses.
Amerigas reported EBIT of $11 million compared to $19 million on the prior year.
There was a slight increase in total retail volume driven by an 18% increase of national accounts volumes in comparison to the prior year period. This volume increased fully offset of 19% decrease in cylinder exchange volume the.
That we saw as sales normalized after of significant uptick in Q3 of FY 20, when compared to 2019 third quarter. There was a 5% increase in cylinder exchange volume this quarter.
Overall, the business saw of decline of $14 million in total margin that was largely attributable to customer mix, we saw lower volumes in the higher margin residential and cylinder exchange customer segments that was partially offset by the higher volumes from lower margin commercial and motor fuel customer.
Per segments.
Other income increased by $7 million largely due to higher finance charges, which were suspended in response of the COVID-19 pandemic in the prior year period, and 1 time gains on asset sales in the current period.
UGI international generated EBIT of $41 million compared to $21 million in fiscal 2020.
Retail volumes increased by 21% largely due to the significantly colder than prior year, whether that I described earlier.
And recovery uncertain volumes that were impacted by the COVID-19 pandemic last year.
This increase in bulk and cylinder volumes drove the higher total margin and to offset the slightly lower unit margins given the 81% increase in average wholesale propane prices over prior year.
We saw roughly an 18 million dollar or 86% improvement in the year over year constant currency performance in the EBIT.
Separately are hedging strategy, which is intended to offset the multiyear impact of foreign currency exchanges is working as intended and reducing the volatility associated with the U S dollar shifts overtime.
Moving to the natural gas businesses midstream and marketing reported EBIT of $21 million, which was fairly consistent with fiscal 2020, the business experienced improved the margins from capacity management gas gathering and renewable energy marketing activities in comparison to the price.
Per year period.
A recent investment in Pine run continues to deliver in line with our expectations and as the primary driver for the increase in this quarters EBIT versus prior year.
UGI utilities delivered the strong performance for the quarter and reported EBIT of $25 million $4 million higher than the prior fiscal year.
This increase was largely attributable to continued growth in our customer base and implementation of increased gas base rates on January 1st.
Depreciation expense increased due to continued distribution system in the capital expenditure activity.
Turning to our liquidity cash flows remains strong with the 9% increase in the year to date cash provided by operating activities over the corresponding prior year period.
As of the end of the quarter UGI had available liquidity of $2.4 billion approximately $800 million more than the prior year period.
Our balance sheet remains strong we continue to be comfortable with the financing capacity across all of our business units and are well within our debt covenants.
We have now completed the financing needed to close the mountaineer acquisition and that includes a mix of debt and equity units, consisting and part of convertible preferred stock, which is consistent with the financing mix that we shared in the past.
And with that I'll hand, the call back over to Roger.
Thanks Ted.
Before we moved to Q&A I'll share with you some other key business updates since our last call.
First the mountaineer acquisition continues to progress Moodily in.
In July we completed the key milestone in the regulatory process by filing an agreement for settlement as well as providing testimony in of hearing before the commission.
Our next step will be the file a proposed order by August 10th seeking the commission's approval.
While the precise timing of the Commission's approval is uncertain. We have completed several key steps on the regulatory approval process and now expect the clothes well before the end of the calendar year and even potentially within this fiscal year.
We continue to expect the transaction will be accretive to earnings and the first full year of operation and believed mountaineer will provide of meaningful growth opportunities moving forward.
During the quarter are UGI utilities Electric Division reached a settlement agreement on its rate case and filed the joint petition for approval of that agreement with the Pennsylvania PUC on July 19th.
Under the terms of the settlement agreement the electric division would be permitted to increase base rates by $615 million and we anticipate new rates going into effect in November 2021.
Separately, the second phase of the gas base rate increase of $10 million went into effect on July 1st.
In July UGI utilities completed construction of the new state of the art centralized safety training facility.
Safety is our top priority and of core value of UGI.
We are pleased the place this new facility and service has it reinforces our commitment to safety across the organization.
Lastly are amerigas team continues to increase the footprint of our home delivery service synch.
During the quarter, we launched since and 3 additional markets, bringing the total to 23 cities across the U S.
As we look forward to the remaining quarter of this fiscal year and fiscal year 2002.
We are pleased with the strong year to day performance on the investment opportunities available to us as we execute on our strategy.
We have demonstrated our resiliency and our ability to operate effectively despite the challenging and volatile macro environment.
I remain confident that we're well positioned both strategically and financially to continue executing of delivering reliable long term EPS growth of 6% to 10% and return capital to shareholders through a robust dividend that we expect to grow of 4% of over the long term.
To do this.
We will remain committed to our core businesses.
Driving continuous improvements and efficiencies in our operations.
And lean into investment opportunities in our natural gas business and in renewable energy solutions.
And with that we will open it up for questions.
At this time, if you'd like to ask the question. Please prints on 1.
Touchtone phone.
Once again net style of 1 for the questions 1 more for the questions.
Once again as a reminder that style of 1 for the questions.
Our first question on comes from the line of my ex Szeto from Barclays You may begin.
Hi, good morning.
So your gross margin percentage came in a bit weighted Apu. This quarter. Just wondering was that a function of LPG prices sharply rising during the quarter business mixed with lower cylinder sales or perhaps with your LPG dripped LPGA transformation I know part of the strategy was the share some of your cost of you say.
Evenings with customers. So just wondering if you could comment on the drivers there.
Good morning, Mark Thank you for that for that question.
I think you hit it during your question of the main the main element the drill margins down is what we have seen in the quarter is an increase in national accounts activity as the economy's continue to improve.
While at the same time, we have seen a decrease in cylinder volumes as.
Obviously, barbecueing or the non obviously, but the the utilization of cylinders for propane per heating on patios et cetera has decreased so a large component of the margin.
Period over a period is really due to the mix. The fact, we continue to have.
Good pricing control as we see commodity prices come up.
We continue to always have.
A an approach where we will go recover that there could be of small timing.
Gap between when commodity price are coming up and when were effectively able to drive the prices to the market, but as we've shown in the past the continue to see good margin and consistent margin evolution as commodities go up and down.
Got it and then and then on your guidance seems like there's some nice momentum in the business with the tracking towards the upper end of the Provider's range, but obviously, sometimes it's a bit of I'll take in terms of quantifying weather impacts versus more structural drivers at least from an outside of perspective. So I'm just wondering if you could.
Comment on how underlying or whether normalize the results year to date has compared to your budget and how that's trending for next year.
Yes, all all scarred and I'll pass on over to Ted for a few additional comments.
So as as we've highlighted during the quarter and now it's been several quarters and the role we continue to have very good performance, we continue to track well compared to our budgets are plans and the guidance that we've provided to the story.
It's driven with a lot of components and I think 1 point that I would like to highlight demonstrates.
Demonstrates the power of the diversification, we have as of business.
The fact that we operate across 17 European countries, we operate across the us not only geographic diversification, but also business activity. So we continue to see all of these puts and takes provide us with the very solid robust earnings growth and it really largely explains.
The the strong performance, we've had now over several quarters.
But I'll pass it to Ted for additional additional comment yes. The the only thing I would add is.
I think it's very fair to say that we have underlying strong momentum.
Has been.
Enhanced with with really great weather in Europe, So international is especially strong, but the underlying momentum as strong.
We are very much on track on our transformation efforts at LPG.
R capital spending and therefore, our rateable spending at the utilities continues to be strong. We're we're hitting yet another record year and investments and utilities and while we may be a little bit short on capital spending against our initial projections.
We will be delivering on the mileage expectations for replacement and betterment.
That get charged through our rate base.
And so yeah very strong momentum for the business.
Great and then maybe just lastly on pennies would you be able to just provide an update with where that project stands and I get steps forward. Following the Supreme Court ruling.
Yes, most certainly.
AB beard is on the call. So I'll, let him add further color but.
Certainly.
This really does not change our belief that pennies as an important project for the region and that it's the project that should be built.
And we certainly remain committed.
The partnership agreement.
But with that what I would like to do is to lead Bob explain a little more detail.
The the decisions we made on obviously the of the the future.
On that project Sherlock Bob.
Thanks Roger.
I agree with Roger I think the partnerships still firmly believes that the.
New Jersey needs another source of natural gas of what what's what's the question now is the timing, even though we got a really good what we consider to be necessary ruling from the Supreme Court or still remains quite a few hurdles from of regulatory standpoint, so the the <unk>.
Timing of the project remains of the question.
Great. Thanks for the time.
Sure.
And once again, that's the number 1 for any questions on.
On 1 moment for the questions.
I'm currently the National unit from the questions in the queue at this moment.
Great. Thank you.
I'd like to just thank everybody for joining us on the call today and we certainly look forward to seeing you on our next call.
Thanks and have a good day.
This includes the conference call you may now disconnect.
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