Q4 2021 UGI Corp Earnings Call
Thank you.
Good morning, everyone and thank you for joining our fiscal 2021 fourth quarter earnings call.
Today, I'm joined by Roger Perrault, President and CEO.
<unk> CFO and Bob Beard, Executive Vice President natural gas global engineering, and construction and procurement.
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 that our commence today include certain forward looking statements, which management believes to be reasonable as of today's date only.
Actual results may differ significantly because of risks and uncertainties that are difficult to predict.
Please read our earnings release, our most recent annual report and our quarterly reports on Form 10-Q for an extensive list of factors that could affect results.
We assume no duty to update or revise forward looking statements to reflect events or circumstances that are different from expectations. We'll also describe our business using certain non-GAAP financial measures.
Reconciliations of these measures to the comparable GAAP measures are available within or presentation now I'm pleased to turn the call over to Roger.
Thanks to Mika and good morning, everyone.
Thank you for joining the call today.
We are excited to discuss our fiscal 2021 results and expectations for 2022.
As you may have seen from our earnings release, we achieved all time record earnings which is particularly notable in the face of continued uncertainty and challenges in the global environment.
This performance is a direct testament to our resilient.
Diversified business, that's been built over 139 years and I'm proud of the 11000 plus employees that show up every day dedicated to safety and excellence.
In fiscal 2021, our diversified business reported GAAP EPS of $6 92.
And adjusted EPS of $2, 96, which was 11% higher than the previous year and at the top end of our revised guidance.
Prior to the <unk> noncash adjustment related to equity units that Ted will discuss in further detail in a moment.
All of our businesses reported higher results in comparison to fiscal 2020.
Particularly UGI international which delivered a record performance due to relatively normal weather conditions and continued strong margin management efforts.
This year marked the 34th consecutive year of increasing dividends and the 137th year of consecutively paying dividends.
Our shareholders have experienced a dividend growth rate of seven 2% and an EPS growth rate of seven 7% over the past 10 years.
Looking forward for fiscal 2022.
We expect adjusted EPS to be in the range of $3 five to $3 25.
We are encouraged by the growth prospects ahead of us and believe we are well positioned to continue the momentum from 2021 as we execute on our strategy of delivering reliable earnings growth.
Investing in renewable energy solutions.
And rebalancing our portfolio towards a more equal split between LPG and natural gas.
Next I'll comment on several major achievements over the course of fiscal 2021 before turning the call over to Ted who will provide more details on Ugi's financial performance.
This year, we made noteworthy progress on a range of strategic investments and focused on new opportunities that leverage our existing infrastructure and expertise.
We delivered reliable earnings growth as we executed on several growth in environmental social and governance initiatives.
In our natural gas business, we deployed a record level of capital at our regulated gas utilities investing $394 million.
In infrastructure replacement and reinforcement.
The gas utility continued to produce an attractive rate base growth rate with the five year average being 11% plus.
And we expect to continue that investment profile driving reliable earnings growth going forward.
Our gas utility also added more than 12000, new residential and commercial heating customers continuing our strong track record of annual customer growth.
We are pleased to increase our regulated utilities footprint with the mountaineer acquisition that closed on September one.
With this acquisition, we added roughly 6200 miles of pipeline and nearly 214000 customers in West Virginia.
Within the midstream and marketing segment, we continue to see a significant amount of margin from fee based income.
We also expanded our interest in the natural gas gathering systems in the Appalachian basin with its investment in Pine run in February 2021.
This investment has performed well and we are pleased with the strong production volumes during the fiscal year.
With the rising natural gas prices, we remain confident that our midstream assets position us well for future opportunities.
Moving to the global LPG business.
As I mentioned before UGI international generated record financial results this year.
The segment also realized approximately 14 million euros in annual benefits from our business transformation initiatives and remains on track to deliver on our previously stated goal of 30 million euros in annual benefits by the end of fiscal 2022.
Sure.
Amerigas grew national account volumes by over 9% and continue to expand its cylinder home delivery service Finch now offered in 22 cities in the U S.
As part of our business transformation initiatives at Amerigas, our teams are focused on enhancing the customer experience and driving operational efficiency.
During the year, we established a centralized customer engagement services center and.
Enhanced customer management tools and introduced a new routing and logistics tool.
In conjunction with those efforts amerigas realized $78 million in incremental annual benefits in fiscal 2021.
These transformation activities are substantially complete and we now expect to provide total annual benefits of more than $150 million at a total cost of $220 million by the end of fiscal 2022.
Moving to our ESG initiatives further demonstrating our commitment to sustainability, we established a dedicated ESG team and committed to a 55% reduction in scope, one and greenhouse gas emissions by 2025.
Using 2020 as the base year.
We also made great strides in advancing on our belonging inclusion diversity and equity initiative and we're pleased to increase our domestic spend and commitment with diverse suppliers by over 20%.
As part of these efforts, we also established partnerships with the human Library organization.
And strengthen existing relationships with the urban Affairs coalition and Big Brothers Big Sisters.
Turning to our progress in advancing our renewable strategy.
During fiscal 2021, the midstream and marketing segment entered into several strategic partnerships to produce renewable natural gas from a diversified set of feedstock and also from outside of our historical geographic boundaries.
In these attractive RMG partnerships, we committed over $100 million of investment during the year.
Adding to those RMG investments in October 2021, UGI energy services announced that it had identified this third RMG project in upstate New York to develop a dairy digester project to produce renewable natural gas through the Cayuga RMG joint venture.
We are also pleased with the foundation that we've begun to lay with Biofuels.
We established an exclusive supply arrangement that enabled us to receive bio LPG in Europe to meet customer needs.
In May we announced the intent to create a joint venture for the production and use of renewable dimethyl ether or our DMV, our low carbon sustainable liquid gas in the U S and Europe.
We are currently in the regulatory filing process with the European authorities and we'll provide more updates as we progress on this venture.
We are pleased with described that we've made in these initial renewable investment opportunities.
First these projects allow us to utilize our existing natural gas and LPG distribution infrastructure to deliver RMG and bio LPG to the customers we serve.
In most cases, they require no incremental investments by our customers and no community disruption related to infrastructure build out.
Secondly, <unk>.
Similar to our investments in the natural gas business through the mountaineer acquisition capital spend and replacement and betterment and investment in the Pine run midstream system. These investments in renewable energy solutions will drive forward, our portfolio rebalancing strategy and lead to continued earnings growth.
And now I'll turn over the call to Ted who will get into more details on the financials as well as our fiscal 2022 guidance.
Thanks Roger.
As Roger mentioned, we're pleased with our record fiscal 2021 results.
<unk> delivered adjusted diluted EPS of $2 96.
Compared to $2 67 in the prior year.
This table lays out our GAAP and adjusted diluted earnings per share for fiscal year 2021 in the comparable prior period.
As you can see our adjusted diluted earnings exclude adjustments totaling $3 96, which related to a number of items, including.
The impact of Mark to market changes in commodity hedging instruments, a gain of $4.72. This year versus 39 in fiscal 'twenty, which is largely attributable to the significant increase in commodity prices that we saw in the year.
Our business is employee a hedging strategy to manage market price risk associated with fixed price sales programs and to reduce the effects of short term commodity price volatility.
During fiscal 2021 average wholesale propane commodity prices at one of the major supply points in the U F Mount Belvieu, Texas, where approximately 97% higher than fiscal 2020.
In addition, UGI international saw 52% increase in average wholesale propane prices in Europe over the prior year. This led to a higher adjustment for mark to market gain in the current year.
Next we adjusted out 35 cents of expenses associated with our business transformation initiatives compared to 21 in the prior year as the LPG business transformation initiatives are substantially complete this will be the final year of adjusting for those costs.
Adjustments in fiscal 2022 will relate to the corporate functions transformation that began in fiscal 2020.
And are expected to cost roughly $40 million by the end of fiscal 2023, and will result in more than $15 million of ongoing annualized savings.
The corporate functions transformation will standardize processes and activities across our global platform, while leveraging the use of best practices and efficiencies between our businesses.
Next we adjusted <unk> for the acquisition and integration of Mountaineer gas that closed on September one of this fiscal year.
Seven for impairment of customer relationship intangible at D that due to a decline in anticipated volumes attributable to a historical customer.
We had a 44 impairment related to our Penn East assets as announced in September of 2021 Penny has ceased further development of the proposed pipeline project.
Despite this change we are confident that there are ample opportunities to deploy capital into other areas that meet our return objectives.
Lastly, due to a change in the Italian tax law that came into effect in fiscal 2021, we had a onetime 11 gain.
Looking at our year over year performance. This chart provides some additional color on the 29 cents improvement in adjusted earnings that we achieved versus the prior year.
As Roger mentioned all of our businesses delivered higher performance over the prior year and we will discuss each in further detail on the upcoming slides.
Overall, our operating segments experienced some recovery on volumes that were impacted by the COVID-19 pandemic.
<unk> benefited from weather that was colder than prior year at UGI International.
The new gas base rates that went into effect for our gas utility also contributed <unk> <unk> to the year over year increase.
At the corporate level, we saw in <unk> decreased versus the prior year period, largely due to higher cares act tax benefits that were realized in fiscal 2020.
In addition, we had a <unk> <unk> noncash impact related to the accounting treatment of the $220 million and equity units issued in May of 2021.
This dilutive impact on the company EPS resulted from the inclusion of the underlying shares in our calculation of weighted average shares outstanding and was not anticipated when we discussed our updated guidance range previously we expected that the underlying shares would be accounted for using the treasury stock.
<unk> method and therefore not be included in our calculation until settlement in 2024, which was consistent with market practice at the time.
Despite this accounting treatment, our long term EPS growth target of 6% to 10% remains unchanged in our fiscal 2022 guidance.
Flex the reliable earnings growth that we expect to continue providing our shareholders.
Turning to the individual businesses.
Amerigas reported an increase of $12 million in EBIT over the prior year retail volume declined by 2% due to continued COVID-19 impact on commercial and industrial volumes and other residential volume loss some of the volume impact.
On margin was offset by a 9% increase in national accounts volume as well as an increase in unit margins over prior year.
As I mentioned earlier average commodity prices were significantly higher than in fiscal 2020. In addition to deploying our hedging strategy. Our business continued to focus on margin management and customer affordability.
The $21 million of lower operating expenses are largely due to benefits realized from the LPG transformation initiatives that Roger discussed earlier.
We also had an increase in other income primarily due to the resumption of late fees that were suspended during the early months of the pandemic in fiscal 2020.
UGI International's EBIT increased by 22% compared to fiscal 2020 on a constant currency basis, we had a $31 million or 12% improvement in EBIT over the prior year.
Retail volumes increased by 5% largely due to the significantly colder than prior year weather and recovery of certain volumes that were impacted by the COVID-19 pandemic last year.
This increase in bulk volumes drove the higher total margin along with slightly higher unit margins due to effective margin management efforts.
Separately, our hedging strategy, which is intended to offset the multiyear impact of foreign currency changes is working as intended and is reducing the volatility associated with U S dollar shifts over time.
Moving to the natural gas businesses midstream and marketing reported EBIT of $190 million compared to $168 million in fiscal 2020.
The business experienced improved margins from capacity management, driven by Mark to market timing.
Improved margins from gas gathering and renewable energy marketing activities in comparison to the prior year also helped offset the margin loss from HVAC and economy that were divested in fiscal 2020.
Our recent investment in Pine run continues to perform above our expectations and contributed to the increase in EBIT versus prior year.
Our utilities segment now comprised of our gas and electric utilities, and mountaineer reported EBIT of $242 million $13 million higher than the prior fiscal year.
Core market volume increased due to continued growth in our customer base and addition of more than 12000, new customers in Pennsylvania and recovery of certain volume decreases related to COVID-19.
Total margin for the year increased by $39 million, which.
Which was largely driven by higher core market volume.
And the phased implementation of the new base rates, which became effective January one 2021.
Higher operating expenses were attributable to higher contracted labor expenses and employee costs and the incremental cost associated with the mountaineer acquisition.
Mountaineer had a one set dilutive impact for the year prior to the <unk> impact of the noncash adjustment related to the equity units.
Moving to liquidity.
Our business continued to generate strong cash flows and we saw 34% increase in the year to date cash flow from operating activities over prior year throughout the year UGI had available liquidity of $2 2 billion approximately $700 million more than the prior year period.
Our balance sheet remains strong with the capacity to fund the active projects and new investments across the company.
As Roger mentioned, our fiscal 2022 guidance range for adjusted EPS is $3 and five.
To $3 and 25 and.
And assumes normal weather based on a 10 year average and the current tax regime.
On the slide Youll see a comparison of the midpoint of our fiscal 2022 guidance through the fiscal 2021 actual adjusted EPS of $2 96.
First fiscal 2020 one's results were impacted by several nonrecurring items.
Net effect of these items is roughly neutral but to provide you with an update since the Q3 earnings call for the full fiscal year, we experienced cove.
COVID-19 headwinds of roughly 13.
Cares act tax benefit of approximately seven.
And benefits from our tax planning strategy of approximately five.
Next are two items that came with the mountaineer acquisition.
First we have the dilutive impact of the equity units that I discussed previously.
The guidance includes approximately <unk> <unk> for the full year dilutive impact of the equity units based on the current accounting treatment.
Year over year. This is an incremental <unk> <unk> of dilutive impact.
Next is the accretion from mountain, there, which is an increase of <unk> <unk> over fiscal 2021.
Lastly, we have other drivers which are expected to provide an incremental 15 cents over fiscal 2021. This includes benefits from the business transformation initiatives as well as the return to normal weather in the U S.
In establishing our guidance, we've taken into consideration some impact from inflation supply chain constraints and commodity price increases our disciplined approach to expense and margin management helped us mitigate the impact of these global challenges.
In summary.
The midpoint of the fiscal 2022 guidance represents a six 4% increase over fiscal 2021, and a solid 10 year annual growth rate of nine 7%, which is at the top end of our long term earnings growth commitment of 6% to 10%.
We expect to continue that consistent growth trajectory and are excited about the opportunities ahead to drive further earnings expansion.
Now I'll hand, the call back over to Roger.
Thanks Ted.
In closing we are proud of the resiliency of our business and people and the strong results, we were able to deliver in a year that was marked with several challenges in the global economy.
We continue to expand our operations.
Celebrated our growth strategy and advanced our commitment to the environment, our people and our customers.
I am very optimistic about the future and our execution against our strategy will deliver on our long term EPS and dividend growth commitments.
We have a strong pipeline of investment opportunities ahead, and look forward to discussing progress against those investments and our long term outlook with you at our virtual Investor day in December.
And with that we will open it up for questions.
Thank you to ask a question you will need to press Star then one on your telephone to withdraw your question. Please press the pound key again that is star then one if you would like to ask a question. Please standby, while we compile the Q&A roster.
Our first question comes from the line of Julien Dumoulin Smith with Bank of America. Your line is now open.
Hey, good morning, Dave.
I suppose I'm going to try my luck here I know you guys have your bigger update coming here, but that is just a couple of questions. If I can.
First off just on the nuances and counting.
Given the backdrop did you get anything from the FCC that led you to change the accounting practice and we're there.
Are you aware of this potential when you entered into it perhaps.
So let me take that good morning.
This is Ted <unk>.
We were aware that there were inquiries being put out on this subject right at the point in time in which we were engaging in creating the new instrument.
As you saw in the last quarter in Q3, we did account for it in the Treasury stock method.
Between the time that we close the books for Q3, and we release. These earnings it became clear that that the appropriate accounting that we needed to use was was the if converted method where you recognize the dilution of the shares so we issued too.
$220 million of equity units in May of 'twenty one.
Using the treasury stock method of the treatment.
The underlying shares were not included in our calculation of weighted average number of shares outstanding that was consistent with market practice at the time, we recognized that we needed to incorporate the new.
If converted method of accounting and reflected that in this release and we will be using it going forward and that recognizes those shares as though they're issued immediately that created a <unk> <unk> impact on our FY 'twenty one results it will create a fixed impac.
For the full year next year.
Hi.
I will say, we always incorporated in our thinking that we would have this dilutive impact under the old accounting, we assume that wouldnt happen until 24 that clearly has now moved forward, but it's always been incorporated in our long term thinking and therefore has no impact on our <unk>.
Our expectations for long term growth.
Did I answer your question.
Yes, no thats if I. Thank you I know, it's a little nuanced here.
Yes.
Okay excellent and just keeping going here, if I can I mean, how much unutilized capacity do you have on the existing midstream system, particularly be acquired Columbia system can you talk about the appetite to expand midstream investment given the elevated.
Gas price environment and specifically.
Some muted our limited offtake capacity in that geography.
Sure.
Okay.
You want to take that value I mean, not all please go ahead, Bob I was going to alright.
Perfect Good morning, everyone.
We have excess capacity on the acquired Columbia Midstream system and.
I think meaningful volumes still available for us to be able to move in relative to the macro question on.
Midstream activity in general.
We like the midstream business, we continue to think it's a good business I think it was a handful of weeks ago I read an article that.
Production out of Appalachia for that 12 month period was a record and coming on the heels of.
Our third warmer than normal winter I think that really tells you something about.
The fundamentals of the business so.
We are always looking at opportunities to either build onto our existing systems or perhaps by systems that are.
Complimentary so we're very much always looking but as everything we do it's got to make sense for us and it's got to be a deal that we think is appropriate.
Got it alright, no fair enough and then just lastly, if I can squeeze one more in here how are you managing margins at the global LPG business, obviously, you've got a higher gas price backdrop.
And youre hedging our procurement policies and more importantly, what are you reflecting here in the guidance again ultimately.
You're showing your cards here on what you think for the year ahead.
What assumptions are you, making there in around that global pricing environment and subsequent volumetric implications.
Yes, Julian I'll take that question. This is Roger.
Answering.
We have a history of really maintaining good margin management, and we don't see any change in that and our approach going forward. So as a reminder, we do have customers that want a fixed price those customers typically lock in we lock in the cost of.
That product to meet those fixed priced obligations with those customers. So we do have a hedging.
Process that.
Is recognizing fixed price contracts and then we have customers that.
Want to be priced on an index on our published index.
Those category of customers pay whatever the index is revealing and then we have another category of customers, which is really kind of like a posted price kind of equate it to what you see at the gas station, where we kind of post the price that has taken place.
That section of customers, we modify the price on an ongoing basis, there could be a small lag from time to time, because there are certain markets, where we give a notice to the marketplace that we will be adjusting the price.
But effectively what we've demonstrated in the past and what we continue to do is to manage those margins very carefully as commodity costs go up we continue to move the prices around two essentially reflect that near back to back model that we often talk about.
Alright fair enough. Thanks, guys I'll leave it there.
Really appreciate it.
Thank you as a reminder to ask a question you will need to pass Star then one on your telephone.
Our next question comes from the line of Mark <unk> with Barclays. Your line is now open.
Hi, good morning.
So just wanted to start on the international gas marketing business, obviously, that's a fairly small part of the portfolio and youre not taking much commodity your spread risk based upon how I understand it but.
Just given the volatility in European gas markets has that had any impact at all in your business.
Yes, let me kick it off and I'll.
Ted as well.
So youre right I mean first of all Mark.
Validate what your first statement was is yes, we essentially have the same kind of business model concept, where we have a back to back model, where we lock in margins as we go along in the merger in the energy marketing space.
Clearly, we've seen a lot of pickup in commodity costs and that led to what you see in our GAAP earnings a substantial pick up in.
In Mark to market unrealized mark to market gains, which we highlighted in the in the economics are in the P&L that we shared with you today.
I don't know if there's anything to add to that yes no.
We're just direct direct you as Roger did to our GAAP accounting and that $4.72 adjustment, we made for mark to market. So it is sizable it is fairly dramatically impacted by by gas and international and that is a direct.
Reflection of what we're seeing happening happening in pricing in Europe.
Got it Okay, and then with respect to R&D you guys have had a lot of success lately and moving forward with several small scale projects with GE GE hei, serving as the exclusive marketers I guess I'm just wondering as you think about scalability.
Are you thinking about gha would you need some sort of third party commercial framework to support larger investments or I guess, just how should we think about scalability of that framework.
Yes.
Mark I'll give you my opinion on that I think gha is very well positioned to handle the types of projects that we're bringing onboard and with a line of sight of the pipeline of projects that we will continue we we talked about investing over $1 billion into this into the space of renewable so thats a combination of renewable.
Natural gas, but also bio LPG facilities and potentially renewal dimethyl ether facilities. So <unk> is very very well positioned to continue to.
To provide those marketing capabilities.
In California the.
Attributes, we get as we continue to invest in renewable natural gas assets.
Got it thanks for the time.
Thank you Mark.
Thank you.
As a quick reminder to ask a question you will need to press Star then one on your telephone.
There are no further questions I will now turn the call back to Roger for closing remarks.
Thank you Sarah and thanks to all for joining our call today, we now look forward to the Investor day that will take place in January So I really look forward to seeing all of you there and I would just like to wish everybody a happy Thanksgiving.
Yes.
And in December.
Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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