Q3 2023 UGI Corporation Earnings Call
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Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today to Mika Morris. Please go ahead.
Good morning, everyone. Thank you for joining our fiscal 2023 third quarter earnings call with me today are Roger <unk>, President and CEO , Shawn O'brien, CFO , and Bob B or C O <unk>.
Roger and Sean 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 comments 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, and our most recent annual and quarterly 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.
Reconciliations of these measures to the comparable GAAP measures are available within our presentation now.
Now I'm pleased to turn the call over to Roger.
Thank you tamika and good morning, everyone.
On our call today, I would like to share several key highlights for the quarter as well as some important areas of focus as we continue to execute on our strategy.
Sean will provide a high level overview of our quarterly financial performance and then we will have ample time for your questions.
We were pleased to see solid margin improvement in aggregate for our business as this enabled us to withstand cost and inflationary pressures during the quarter.
Year to date EBIT from our reportable segments was relatively consistent with prior year largely due to cigna.
Significant benefits from the weather normalization writer and increased gas base rates in our Pennsylvania gas utility.
Higher margins and the attractive fee based contracts structures in our midstream and marketing segment and higher LPG unit margins in the global LPG businesses, partially offset the impact of lower retail volumes and increased operating and administrative expenses.
With our increasing focus on improving earnings reliability and strengthening the balance sheet.
We continue to focus on creating shareholder value and this is demonstrating that attractive dividend growth of seven 2%, which exceeds our long term target of 4%.
Next given UGI as year to date results and our expectations for the fiscal fourth quarter. We now anticipate that adjusted diluted EPS will be at the low end of our guidance range of $2 75 to $2 90.
As we close out fiscal year 2023, we are employing a strong focus on cost control, including disciplined position management and removal of discretionary spend to help offset weather impacts and volume pressure earlier in the year.
Beyond our financial results. We've also made some meaningful progress since our last earnings call.
We continue to deploy a significant amount of capital in our regulated utilities businesses with approximately $400 million invested year to date, primarily in infrastructure replacement and betterment.
The utility segment continues to be an area of organic growth and we are pleased with the addition of roughly 11000, new residential heating and commercial customers year to date.
Our utilities team also continues to make progress on the rate cases filed this fiscal year.
First in mid July we filed a joint settlement petition with the Pennsylvania Public utility Commission for our electric utilities rate case.
The settlement reflects an $8 $5 million rate increase which is greater than 70% of the requested revenue increase and we anticipate the commission will rule on the settlement in early fall for implementation in Q1 of fiscal 2024 or <unk>.
Secondly.
Their rate case continues to progress as expected and I anticipate you raised in the unit.
Great.
As a reminder, this rate case included a request for a revenue increase of approximately $20 million and a weather normalization adjustment similar to the mechanism that we have in Pennsylvania.
Looking at our global LPG businesses.
As we've shared over the past few months and important area of focus has been to exit the non core energy marketing businesses in Europe .
We were pleased to make additional progress in this area by signing definitive agreements to divest of certain natural gas and power marketing portfolios in Belgium, and France, and the wind and solar business in the Netherlands.
With those agreements in place and the continued exploration of customer contracts, we anticipate that natural gas and power marketing volumes for fiscal 2024 will decline by more than 65% and 80% respectively.
Also.
Our UGI International we continue to monitor energy conservation trends that began in response to energy security concerns and government mandates that were issued ahead of this past winter season.
As we head into the next winter, we will continue to monitor customer behaviors, we can react as quickly as possible.
Similarly at Amerigas, we are seeing improvement in some of our critical operating metrics such as on time deliveries zero sales inefficient sales and staffing levels and this positions us very well for the future volume growth.
Lastly, I wanted to make note of the fact that last month, we released our fifth annual ESG report entitled Partners for the future.
This new report organized to align with TC ft. We provided an update on our prior commitments and highlight progress across a number of our key ESG initiatives.
I am proud of the efforts from our teams and the partnerships that we've established that better enable us to operate in a sustainably and socially responsible manner.
Now I'll turn the call over to Sean who will comment on the financial results for the quarter.
Thanks, Roger and good morning, everyone.
I'll start by highlighting some of the key drivers by segment of our third quarter performance.
For fiscal 2023 third quarter UGI delivered adjusted diluted EPS of zero cents in comparison to <unk> in the prior year.
Amerigas was flat in comparison to prior year as higher margins offset increased operating and administrative expenses.
International was down a penny as higher LPG margins were offset by lower earnings from the noncore energy marketing business.
Next midstream and marketing was down a penny as we saw the previously anticipated reversal of capacity management margins from the prior year.
Finally in the utility segment was lower than the previous year, primarily driven by higher operating and administrative expenses during the quarter.
Also of note the company recorded a pretax noncash goodwill impairment charge of approximately $660 million to reduce the carrying values of amerigas, reflecting lower growth expectations post acquisition and an increase in our discount rate due to the current interest rate environment.
On a year to date basis, our natural gas businesses are up 23, due to higher gas base rate benefits from the weather normalization rider, which offset the effect of warmer weather.
<unk> margin from the acquisitions of UGI moraine east and pennant and higher margins from natural gas marketing activities, including the effects of peaking and capacity management activities that benefited from extremely cold weather in late December .
These increases were partially offset by higher operating and administrative expenses.
Our global LPG businesses were down 29 on a year to date basis, largely due to lower volumes attributable to driver capacity constraints and attrition at Amerigas.
As well as energy conservation in Europe .
Additionally, Amerigas also saw an increase in operating and administrative expenses as we made investments focused on improving distribution metrics and experienced higher overtime costs.
Starting with Amerigas.
Volumes were down 6% due to continued softening in motor fuel demand customer attrition and continued structure conservation.
Total margin was up $36 million due to higher LPG unit margins that helped to offset the increase in operating administrative expenses, which resulted from continued inflation and the effective efforts to increase driver capacity in preparation for the upcoming heating season.
At UGI International LPG volumes were up 2% as colder than prior year weather offset the continued effects of energy conservation efforts, which began in response to the ongoing geopolitical situation in Europe .
The effect of the increased volumes and higher LPG unit margins, largely offset the lower margin from the noncore energy marketing business.
The segment also experienced increased operating and administrative expenses largely due to the global inflationary cost environment and increased uncollectible account expenses.
The effect of the reduced total larger and higher Opex was partially offset by an $8 million increase in other income primarily attributable to the release of similar deposits.
Next EBIT for midstream and marketing was down $3 million for the quarter.
The business realized incremental margin from tenant as well as increased earnings from natural gas marketing activities and electric generation, which partially offset lower capacity management margins.
Lastly, we turned to the utilities, where margin was up $5 million over the prior year period due to higher gas base rates in Pennsylvania, as well as benefits from the disk and IRA programs.
More than offsetting this increased market were higher operating expenses and increased depreciation and amortization, resulting in a reduction in EBIT of $6 million versus last year.
Also as anticipated operating and administrative expenses were up $8 million largely due to timing of certain employee related expenses and the effects of higher cost inflation.
Turning to liquidity at the end of the quarter UGI had available liquidity of $1 8 billion.
Inclusive of cash and cash equivalents and available borrowing capacity on our revolving credit facilities.
Over the past few months, we have emphasized our priority to strengthen the balance sheet. I'm. Therefore pleased that we were able to refinance the 2024 bonds at amerigas during the quarter and use that transaction at the deleveraging opportunity to reduce approximately $200 million of debt at amerigas.
Before I hand, the call back to Roger I want to spend some time on a key area of focus for UGI. As you know we continue to operate in a challenging global environment and is therefore, the utmost importance that we run the business efficiently and manage cost effectively.
With that being said across the organization, we are increasing our focus on rationalizing and optimizing our cost profile based on the changing business environment.
We are challenging ourselves to identify opportunities to simplify processes optimize our structure leveraging technological improvements and use digital innovation and analytics to create operational efficiencies and improve the customer and employee experience.
These actions will enable us to reset our cost base line achieved sustainable cost savings create incremental cash flow and capital headroom and ultimately enhance shareholder return and with that I'll turn it back over to Roger to close this out.
Thanks, Sean.
As I close I want to emphasize some of the key messages that we've shared with you today.
First we have sharpened our focus on transforming our cost structure to deliver sustainable cost savings.
We remain committed to improving the earnings quality of our business and strengthening the balance sheet and this supports our solid track record of providing attractive dividend growth.
Finally, we must be disciplined in allocating capital by concentrating on the best opportunities, including prior commitments, which support our strategy and enable us to deliver higher earnings growth over the long term.
We believe that with these key actions UGI will be well positioned to build on our solid foundation and enhance long term shareholder value.
Thank you for your continued interest in UGI and your participation on today's call and with that we will open the lines for your questions.
Thank you at this time, we will now conduct a question and answer session. As a reminder to ask a question. Please press star one one on your telephone.
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Please standby, while we compile the Q&A roster.
The first question comes from the line of Christopher Jaffray at Mizuho Securities. Your line is now open.
Hi, Good morning, everyone. Thanks for taking my question.
Just wanted to kind of focus on one line from the press release, I mentioned as far as improving the earnings quality of the business.
This strategy leverages available to UGI when Youre.
Thinking about improving earnings quality.
Yes, good morning, Chris and thank you for your question.
Yes, there's no doubt.
Are certainly emphasizing during the call a need for us to look at Opex carefully as we continue to proceed here and continue to deploy capital in a very.
Thoughtful manner as we're looking at investments in our renewables projects deploying.
Deploying capital at our regulated utility, which as we talked about during the call. We continue to make really good progress.
Continue to be very thoughtful in our capital we're deploying in our midstream business.
So theres definitely a lot of focus right now on quality.
Quality of earnings and.
Looking at the mix of how we are going to be deploying operating expenses throughout the next quarter and into next year.
Got it thanks, and then maybe just a follow up on that.
Are you looking at kind of M&A as a potential avenue in that vein and improving the earnings quality.
Kevin.
Utility assets up for sale right now.
Yes, right now, we're really focused on improving the balance sheet and making sure that we.
Have the appropriate liquidity when we are going to be looking and looking at potential M&A. So M&A is always a part of our strategy. We're always looking at opportunities that come through.
But at this present time, we are very focused on improving balance sheet and with that I'll. Let you know maybe a couple quick things to add to what Roger said and Roger hit it well Chris.
Focusing on things, we can control and that's why you heard about Opex that falls to the bottom line, but I think the other thing to keep in mind is that the.
The mix of our earnings is shifting some if you looked at the quarter you saw more growth in utilities, and midstream and the Nat gas side of the equation. So and obviously you saw some diminishing.
Some downward trend, which we've addressed on the other side of the equation. So more that's the other thing to keep in mind the mix of Nat gas LPG continues to shift some of it's related to grow some of it's related to some things that we're very focused on but we anticipate that changing over time and that also is a nod to the.
The reliability of the earnings and the quality of the earnings.
Last thing I would point out.
Is it in terms of.
More more deliverability of earnings is the exit of the energy marketing business.
That adds that took some volatility out of the equation is we can do to execute on.
Taking that out of the portfolio.
Great. Thanks, and then maybe just one last follow up.
Roger also mentioned the renewables investments as part of that just kind of.
How youre thinking about sticking with that $1 3 billion investment.
I think you've mentioned also recently about maybe and then from R&D to more focus on the.
Propane up there.
Opportunities just kind of an update on how youre thinking about that renewables opportunities.
Yes, so a couple of things to bring to your attention, though we do expect four projects four of the R&D projects to come on stream. This year. So we continue to make nice progress on the RMG portions of the renewables portfolio.
When it comes to the renewable dimethyl ether. That's also continued to progress nicely. We expect that by the end of this calendar year, where can be small scale facility that is being worked on and in the UK and Europe will be fully up and running there are portions of it running today other portions that are going to be running by the end of the calendar year.
That will put us in a really good position to assess the first full scale.
Facility.
And of course, we continue to.
Also be very active in the bio LPG space as well so the thesis on renewables continues with what we highlighted in prior calls we remain very focused as we continue to develop not only the LNG portions of the portfolio, but also the LPG.
These opportunities we have.
Great I appreciate it great. Thanks, guys.
Thank you thank you Chris.
As a reminder to ask a question please press star.
One one on your telephone and wait for your name to be announced one moment. Our next question.
Our next question comes from the line of Julien Dumoulin.
Smith of Bank of America. Please proceed with your question.
Hey, good morning team. Thank you very much I appreciate the opportunity and can you guys hear me.
Yes can hear you well. Thank you Julien how are you.
Oh.
Awesome excellent. Thank you guys appreciate it.
Wanted to actually circle back here on <unk>.
Just the earnings variance here and improving that mix. It sounds like there is two pronged strategy are first looking at acquisitions that both reduced the corporate wide.
Volatility and then separately to try and get the business level to reduce some of the variability driven and some of those contracting efforts is that fair I'm just trying to make sure I heard the last response to the last question appropriately.
Yes, I can start Julien I think that's fair.
Think if you maybe to say it differently. Obviously, if you are looking at significant growth in areas.
Which our company is always looking at everything that Nat gas tends to make more sense and then what we're doing with the baseline businesses as we're trying to take volatility out of things like the energy marketing you saw some of those positive steps that were taken this quarter trying to stabilize the LPG theres a lot of focus on that side of the equation all the while.
Youre seeing actual growth in the Nat gas side. If you look year to date, you saw pretty pretty strong growth on the utility side and pretty strong growth on the marketing side. So I think if you take that all into consideration youre seeing that gas become a much larger are becoming a larger percentage of the mix of the company's earnings.
The only thing that Roger added was we're taking a really hard book on cost for the quarter, you saw cost pop up quite a bit some.
Some of that was investments that we knew we wanted debate, but you're in an inflationary environment and I think the company is really going to take a hard look at.
Increasing the bottom line and controlling those things as well.
Yes, the only thing.
Oh, sorry go for it.
Yes, I was just going to add one additional point Julien.
And as we've talked about we continue to be very disciplined in our energy <unk>.
Services business to move contracts to more fee type structures, so take or pays monthly fees et cetera, which is also one of our focus areas to continue to improve the reliability of earnings.
The combination of all with Sean just mentioned and that additional focus and then disciplined on where we're allocating capital and as you can see from what we've been talking about and highlighted during the quarter. We continued to be very focused on meeting our requirements to inject capital in our regulated utility and rate cases in practice.
Sure.
Right and just in terms of improving the balance sheet overall, especially considering acquisitions here do you have kind of a threshold sort of a target of maximum leverage that you think.
You would kind of.
Maybe a couple of things to consider obviously, when we talk about balance sheet strength in particular.
Leverage ratio below five we're focused on that we were able to make some progress.
In Q by Delevering.
Below four <unk>.
Got it so you wouldn't be looking at re leveraging as part of any transaction.
It sounds like.
Actually maybe just since you bring up amerigas and the balance sheet just to come to that piece.
The impairment decision I was just curious I mean, why why now right I mean, especially intra year, if you will.
What triggered that today or.
And versus say.
At the annual biomarker, if you will.
Yes.
The things that would be obviously as you look at those impairments. It's typically abuse, a new view that kind of moves you into moving towards taking that transact are taken that impairment. It was really the growth levels for as we look forward Julien those those have shifted over time a lot of that goodwill was put on over the years and you go.
Back a decade or so through some of the transactions as we look at Q3, it's going to be our expectations of future growth those were diminished we modified for those and the other big the other big adjustment.
It would have added to that is where interest rates have gone.
So we had to modify things like interest rate costs as well as our future growth outlook with those two things in mind you ended up in a position where you have to take about $660 million of the goodwill off the books.
Got it.
In fact actually just since.
You talk about that growth side and the last question.
<unk> contributes meaningfully here, but and especially considering the amerigas impairment how do you think about the different pieces contributing to it.
<unk> of it through the five year period, if you will.
Yes.
I'll kick it off and certainly invite Shawn and or Bob to comment as well Julien. So so as we always highlight the long term growth rate of 6% to 10%. So we remain committed to our long term growth rate of 6% to 10%.
Sean just talked about <unk>, specifically, a couple of things I'd like to add too to the Amerigas story.
Although we've taken a different outlook for growth, we continue to see the amerigas business and leading metrics progressed very nicely. When we think of on time deliveries when.
When we think of customer service levels et cetera, we're seeing that progress nicely. So we certainly are looking towards a and amerigas volume growth projection that will take place over time.
We are of course.
So I didn't want to highlight that during.
As part of the answer anything to add to that Bob.
I just think as we think about the growth.
Outlook, the Nat gas business at my time here continues to strengthen we have I.
I think Julien.
Contemplate as we are taking a focus on the balance sheet. So thats more near term I think <unk> I think we have a line of sight to improving that outlook, but that would've been something that wasn't in the equation here.
A year ago or two years ago. So that's going to change your outlook a little bit in the next year or so we've got to stay focused on improving the balance sheet, but I do see some really good trends on the Nat gas side in terms of.
And in our ability to continue to grow EPS dividend growth's been something the company has been very proud of I think Roger mentioned it in his remarks and something that the company has really delivered on very very well and I expect that to continue but balance sheet focused probably puts us in that mode for the next year or so.
Got it but six to 10 intact for the five year periods.
Correct.
Awesome. Thank you guys appreciate it.
Joseph has always right, we're going to be providing a lot more color on this at the year end as we finish out our fourth quarter and as typical when we have.
I have a much more in depth conversation around.
The plan years, and what we're seeing at that time, so expect a lot more at the end of the fourth quarter of course.
Thank you Julien.
Okay.
Thank you as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced.
I'm showing no further questions at this time I would now like to turn the conference back to Roger Perrault, President and CEO for closing remarks.
This concludes today's conference call. Thank you for participating you may now disconnect.
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Yes.
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Okay.