Q3 2022 UGI Corp Earnings Call
With annual reports 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 will also describe our business using certain non-GAAP financial measures.
Conciliations of these measures to the comparable GAAP measures are available within or presentation.
Now I'm pleased to turn the call over to Roger.
Thank you tamika and good morning, everyone.
I hope that you've all had the opportunity to review our earnings release reporting the third quarter results.
On today's call, we'll provide a business update review our financial results for the quarter and discuss the outlook for the rest of this fiscal year before concluding with a question and answer session.
For the fiscal third quarter, Ugi's reportable segments delivered adjusted EBIT of $100 million versus $98 million in the prior fiscal year.
We were pleased with the strong results from our natural gas businesses, largely driven by increased margin from capacity management and commodity marketing as well as higher disc margin.
The global LPG businesses were impacted by warmer than prior year weather in Europe , rising cost inflation and difficulty in filling key delivery related positions in the U S.
These impacts were partially offset by benefits from the disciplined cost control actions that were implemented earlier in the year.
UGI delivered adjusted diluted EPS of <unk> <unk> compared to 13 in fiscal 2021.
And this was largely attributable to <unk> of cares Act and other tax benefits realized in the prior fiscal year.
Based on the year to date results and our expectations for the fourth quarter. We now expect to deliver at the bottom end or slightly below the fiscal 2022 guidance range of $2 90 to $3.
There is continued economic uncertainty due to persistent inflation commodity price volatility customer price sensitivity and labor shortages.
Nevertheless, we believe in the resiliency of our base business designed to minimize the impact of those risk over the long term.
And remain focused on executing our strategy to meet shareholder commitments.
Ted will provide more details on our fiscal third quarter results, but first I'd like to highlight some key accomplishments.
The utility segment, which has an attractive rate base growth rate of approximately 11% remains on track to deploy a record level of capital this fiscal year with infrastructure replacement and betterment being the primary component of the capital spend.
Year to date, we've also added over 11000, new residential heating and commercial customers at the utilities, demonstrating sustained and attractive customer growth within our service territories.
Yes.
On July 28, we received a recommended decision from the administrative law judge assigned to our current rate case.
We are very pleased with the Alj's recommendation that the commission approved the settlement in its entirety and without modification.
The terms of the settlement include an increase in gas base rates of $49 $45 million in two phases.
$38 million effective on October 29 of this year and another increase of 11 $45 million in October of 2023.
The settlement also includes a weather normalization adjustment rider that would also be effective on October 29th under a five year pilot program.
This program would reduce our sensitivity to weather fluctuations as it allows us to adjust the customer's bill to reflect normal weather conditions, if weather deviates more than 3% from the 15 year average.
Mountaineer gas company continues to meet our expectations and we're pleased with our record year to date performance from the business.
Demand for natural gas within our region remains strong and we have been pleased with the incremental earnings from UGI moraine east the legal entity holding the Stonehenge assets acquired in January of this year.
At UGI International our LPG business has shown tremendous resiliency in the face of higher commodity prices and sustained inflationary pressures.
There is robust underlying demand despite the impact of significantly warmer weather year over year.
And our domestic propane business Amerigas continues to experience strong demand for cylinder exchange and national account volumes during the quarter showing sustained increases in comparison to pre pandemic volumes.
Turning to our renewables and rebalancing strategy.
During the quarter, we made progress in expanding our renewables footprint with a commitment to fully fund III project converting dairy waste to RMG in South Dakota.
These projects are expected to produce approximately 300 million cubic feet annually when completed by the end of calendar 2024.
Our previously announced RMG projects are also on track with two projects expected to be completed and operational in this fiscal year.
Our business development teams are assessing a healthy pipeline of potential renewables investments as we look for opportunities to leverage our scale and expertise and continue to build our platform.
Finally in June we were pleased to issue our fourth annual ESG report entitled Transparency action and progress.
I encourage you to review the report that highlights our commitments and the strong progress that we've made on all key performance indicators.
Now I'll turn the call over to Ted to walk through our financial results.
Thanks Roger.
<unk> delivered adjusted diluted EPS of <unk> <unk> compared to 13 in the prior year fiscal quarter.
We've provided a comparison of our GAAP and adjusted diluted EPS for the third quarter to the prior period as you can see our adjusted diluted earnings exclude adjustments totaling <unk> <unk> related to a number of items.
First the impact of Mark to market changes in commodity hedging instruments, a gain of six this year versus $1 nine in the prior year.
Adjustment for a <unk> gain on foreign currency derivative instruments, a penny of expenses associated with the corporate functions transformation in comparison to seven in the prior year for all of the business transformation initiatives.
<unk> expenses related to restructuring cost, which is largely attributable to a reduction in workforce and the related costs.
Lastly, this quarter, we adjusted out 17 for the impairment of tenant and natural gas gathering system in which UGI energy services has a 47% membership interest.
Subject to agency approvals and other customary closing conditions UGI expects to acquire a controlling financial interest and payment in the fourth quarter of this fiscal year, which will be immediately accretive to earnings.
As Roger noted total EBIT from the reportable segments is fairly consistent year over year. Despite the challenging environment on this slide we provide additional color on the year over year quarterly performance by segment.
At the global LPG businesses. There was continued focus on margin management and expense control actions, which partially offset net volume loss at amerigas and the effect of significantly warmer than prior year weather in Europe .
Our natural gas businesses reported higher earnings largely due to an increase in disk margins that utilities, driven primarily by record deployment of replacement and betterment capital.
In addition, utilities continued to see solid customer growth with year to date customer additions exceeding the levels. We saw during the same period last year.
We're very pleased to see our utilities team executing at such a high level, especially considering the tightness in the labor market and the competition for skilled labor we are seeing.
In addition, another driver of higher earnings at our natural gas businesses was higher capacity management margin and midstream and marketing.
Moving to the individual businesses.
<unk> reported a loss of $10 million in comparison to EBIT of $11 million for the prior year period, as Roger mentioned significantly higher inflation labor shortages and increased commodity costs have created headwinds for the business.
Retail volume declined 6% largely due to the continued tail effect of last year's customer service challenges.
<unk> shortages in key delivery related positions and increased price sensitivity and conservation efforts and the higher commodity cost environment.
In addition to the effect of lower volume total margin was impacted by a lower average retail unit margins stemming from higher propane costs recognized during the period. The business continues to balance its margin management efforts customer affordability and the competitive pressures that exist.
Operating and administrative expenses decreased by $8 million, reflecting lower employee benefits and compensation advertising and vehicle leases. These decreases were largely offset and impacted by the rising cost inflation, which also impacted our bad debt reserves in <unk>.
Vehicle fuel expenses.
UGI International reported EBIT of $26 million compared to $41 million in the prior year period.
Retail volumes decreased 7% due to weather that was roughly 29% warmer than the prior year with some offset from the recovery of certain bulk in auto gas volumes that had been negatively affected by the COVID-19 pandemic.
The LPG business reported higher average LPG unit margins as the business focused on margin management, passing on higher commodity costs to customers. As a result total margin for the quarter was roughly flat year over year on a constant currency basis.
Operating and administrative expenses for the quarter were impacted by the global inflationary cost environment, which led to higher distribution personnel and maintenance costs when compared to the prior year period.
On a constant currency basis operating and administrative expenses increased by approximately 15% year over year, primarily due to these inflationary pressures.
Turning to UGI International's energy marketing business.
During the fiscal third quarter, we saw another wave of increased volatility in natural gas and power prices, which led to continued margin pressure.
When compared to the prior year period total year to date energy marketing EBIT has decreased by roughly $81 million.
Given continued volatility in commodity prices and the pervasive inflation that we've seen we anticipate that roughly 20% of the year to date EBIT loss will be recovered in the fiscal fourth quarter.
Roger will also speak to the status of the strategic review shortly.
Lastly, 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.
Next midstream and marketing reported EBIT of $44 million versus $21 million in the prior year period total margin and operating income both increased $24 million due to a $4 million increase in commodity marketing margin $5 million and <unk>.
Incremental margin from UGI moraine east and approximately $15 million from capacity management contracts.
Capacity management margins were largely impacted by the settlement timing of certain multiyear hedge contracts for storage volume, which is expected to reverse when the gas is extracted from storage during the upcoming winter.
Our utility segment reported EBIT of $40 million.
<unk> million dollars or 60% higher than the prior year. This was primarily driven by the increase in disk rates and strong growth in residential and large delivery service customers.
Core market volume and total volume were both up largely due to the incremental volume for mountaineer.
Total margin increased by $38 million with the incremental margin for mountaineer benefits from disc and growth in residential and large delivery service customers. The.
The increase in operating and administrative expenses as well as depreciation expense were mainly a result of the incremental expenses attributable to mountaineer.
Turning to liquidity.
At quarter end UGI had available liquidity of $2 1 billion, demonstrating our attractive cash generation capability and strong balance sheet.
This amount is affected in part by $659 million of cash collateral received from derivative counterparties.
Lastly on August <unk>, our board of directors declared a quarterly dividend of <unk> 36 per share.
UGI is paid common dividends for 138 consecutive years and raised its dividend in each of the last 35 years.
And with that I'll turn the call back over to Roger.
Thanks, Tien tsin.
In summary, the fiscal third quarter was particularly important as we navigated the challenging business environment and advanced on several key initiatives.
I am proud of how our teams have been committed to maintaining safe operations, serving our customers identify and commercial and operational efficiencies and supporting the well being of the communities we serve.
As a reminder.
Last quarter, we announced the strategic review of UGI International's energy marketing business.
The review is progressing and we are exploring all options, including a sale and wind down of operations.
Based on the actions that we took to discontinue renewing customer contracts and renegotiate contractual obligations, where feasible projected volumes continued to decrease and we expect more substantive reductions in fiscal 2023.
It is clear, though that heightened commodity price volatility remains which impacts financial performance.
We look forward to providing further updates on the strategic review when appropriate.
Overall, as we look forward to Q4 and fiscal 2023. It is clear that some of the macroeconomic pressures that have persisted this year, such as inflation labor shortages and commodity price volatility will continue to impact the global business community.
While there is ongoing economic uncertainty I am confident in Ugi's resiliency and capability to meet its long term financial targets of 6% to 10% EPS growth and 4% dividend growth.
This was driven by.
Our robust strategic assets and integrated asset portfolio, including pipelines gathering systems natural gas storage and LNG that positions us well to meet the energy needs of customers today and in the future.
And provides a competitive advantage to deliver sustained growth.
Strong underlying demand for the energy solutions that we offer.
New investments, including mountaineer and UGI in moraine east that have expanded our earnings and cash flow capacity.
The long pipeline of opportunities to invest capital in our regulated utilities businesses and jurisdictions that provide an attractive return on equity.
<unk> balance sheet with ample liquidity to meet capital needs and our dedicated employees, who are committed to doing the right thing each and everyday.
Thank you for your interest in UGI and your participation in today's call now we will open the line for your questions.
As a reminder.
Ask a question you will need to press star one one on your telephone please standby, while we compile the Q&A roster.
Okay.
Alright, and our first question comes from the line of <unk> with Bank of America. Your line is open.
Hi, good morning team. Thank you.
Good morning, Bob.
I just wanted to check in a little bit if you could give some color on how the cost mitigation efforts have trended just how to think about some of the sustainability of that.
Efforts, you've undertaken in 2022 for 2023 and beyond.
Yes, Paul Thanks for the question. So so yes, as we talked about during the earnings release, we continue to put tremendous focus on efficiency improvements and some cost mitigation. So we did highlight that there was some one time expenses.
Related to the risks that we have done and those are costs that we don't expect to come back in so we have done some.
Sizeable head count reductions to deal with the economic environment, we're in with high inflation.
With volumes that were not trending as we had desired.
And as such we will continue to see some of those benefits continue to show up in fiscal 'twenty three.
Okay I understand thank you.
And then if you could elaborate a bit on the potential impacts across the businesses from draft inflation reduction act like the biofuel tax credit minimum tax just how youre thinking about it holistically.
Yes, it's a very comprehensive package when you look at the inflation reduction Act.
There's a lot of there's a lot of material. So right now we are in the process of reviewing it and looking at the potential impacts we're not in a position today to be able to describe how we believe that's going to impact us.
But we're certainly going to be using the next week.
Weeks and couple of months to packet understand it and then we'll be able to provide some additional color to you and the rest of the shareholders of how we believe that's going to impact us going into fiscal 'twenty three.
Okay understood. Thank you all.
Thank you Paul.
Please standby for our next question.
Alright. Our next question comes from the line of Michael Gaugler with Janney Montgomery. Your line is open.
Good morning, everyone.
Good morning, Mike.
I'd like to get your thoughts on the shortage of energy in Europe . This winter.
What opportunities does that create for the international segment.
Any.
And then kind of as a follow up do you have all the supply you need or is that a challenge.
Yes. Thank you Michael for the question. So a couple of thoughts that I would like to share with you and the rest of our shareholders.
Theres no doubt theres going to be some pressure on natural gas supply in Europe is up we're all reading.
One of the aspects for US is when we think of our energy marketing business.
And we look at the fact that we are currently above 90% hedged.
Some reduction in consumption.
Could play out to help us.
Bye.
Commodity at the very elevated prices that we've seen today.
That if the volume decreases so there is.
A.
Somewhat of a positive here, if our customers that are consuming natural gas.
Are reducing their consumption based on the fact that governments are pushing to reduce consumption and of course, we're also working very closely with our customers too.
Help them lower consumption and can meet the commercial contractual obligations that we've agreed to.
So that's on one on the one hand on the other hand.
LPG plays a vital role in the energy mix in Europe .
There is some potential here there is potential that LPG will continue to precipitate as an alternative molecule that will provide energy to that.
The household and commercial businesses.
So we always look at LPG is a very convenient molecule, it's easier to package, it's easy to transport.
And we do have a very robust infrastructure to receive such so we do we do get supply from Northern Africa over time of course, we are getting more and more supply coming in from the U S.
So when I think about the infrastructure our supply arrangements, which are in good standing there is an opportunity that LPG will play a bigger role in the energy mix in Europe as we continue to be facing the significant headwinds that we've all been.
Experiencing and reading about.
Alright.
And then just one more on the utility segment.
Strong customer growth there.
Can that level being maintained for the next few years.
I guess there was asking about what do you what do you have in terms of customers that or potential customers that or.
All the main but not yet hooked up.
Yes, we are certainly pleased with the continued progress our utility has made to.
I would just add that when we made the acquisition here Youre doing acquisition accounting that allocates that purchase price.
Across five different gathering systems.
Before we've actually had a chance to own them run them understand them and so there is quite a bit of discretion and how is that accounting allocation works a lot of variability there and so part of this is correction over time of understanding those assets. This is Bob again, one one thing we wanted to be clear on that.
And what we've said is that the Columbia Midstream group continues to perform.
Very much in line with the expectations, we had when we acquired it so well.
We remain pleased with the assets and the growth potential around those assets.
Got it and maybe tying on to that I'd like midstream marketing had a pretty good quarter pretty good year over year growth in <unk>.
Can you just talk about the outlook for Q I think you guys referenced some of the capacity management management benefits as well as commodity marketing have you seen those trends continue and talk to you here.
Yes. This is Bob again, yes, we continue to see strong activity in our marketing group a lot of the tailwind that we're seeing is I think Ted mentioned in his remarks.
Would be.
Some of the storage hedges that we have the value of the gas that we put in storage.
At the time it went in the ground versus its value today. So that's been a pretty good tailwind we expect to see as Roger indicated some of that reverse next year, but generally to answer your question sure. We think the midstream and marketing group.
Activity is going to remain strong for the foreseeable future.
Great I appreciate the time.
Thank you Mark.
As a reminder to ask a question you will need to press star one one on your telephone.
Please standby.
Okay.
Please standby.
At this time im not showing any further questions.
I would now like to turn the conference back to Roger Roger <unk> for closing remarks.
Thanks, Amy and thanks, all of you for joining us today. So we do look forward to meeting many of you in the upcoming conferences and also talking with you at our next earnings call, which will be in mid November thanks, and have a great day.
Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.
Gainesville team to raise your hand during Q&A you can dial one one.
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