Reminds me of the Washington Post cable operations. Management would swap x number of subscribers on a well maintained system for say 1.5x customers from another companies subscribers on a poorly managed system, then turn around, fix up the system and again trade down for even more...
No, that dog won't hunt.
But notice that, as per today's press release, UGI is apparently intent on making money the old-fashioned way by capitalizing on its expertise of managing LPG businesses:
(a) It's combining wholly-owned Flaga into a JV with propane assets of Progas (owned by the Thyssen family), such that the UGI will own 50% of a 77m gallon operation (vs less than half that at old Flaga). The UGI guys are real propane guys; for the Thyssens it's probably an investment that needed to be managed better.
(b) The Flaga-Progas JV picks up a lot of scale and possibly reduces competition, in the market for propane acquisitions.
(c) Being a 50/50 JV, UGI will probably carry its JV interest on the equity basis, i.e. not consolidate the (rising?) JV debt.
(d) UGI will run the JV, I suspect, and then take out Thyssen at some later point. Sort of "win, win" for all concerned.
Details are skimpy, but it looks like a good move.
Well, the next question is this: Does UGI feel comfortable eventually dropping Antargaz down into APU? Most of the MLP's have avoided putting foreign assets into the MLP's, with the exception of say VLI.
You're right. EBITDA at AmeriGas is $220-250m, and distributable cashlfow is in the area of $150m (or $2.80/unit). Payout is about 80%. So, to get to the magic 50/50 splits (after APU LPs enjoy no less than $3.60/unit distributions), you need to generate about $4/unit in DCF (up from the current $2.80).
You don't get there with deals at 8-9 times EBITDA, which is why --I think-- UGI took its propane expertise overseas. Antargaz may have been closer to 4-5 times EBITDA.
I suspect that UGI simply waits for the opportunity --viz the PG Energy deal from Southern Union and that small power plant from Alleghany two years ago. Only buy at the price you want to pay, otherwise skip it. That conservatism has served UGI well.
"Just wait for that fat pitch", in the words of Buffett.
I built out a spreadsheet to calculate the GP take for UGI. I calculate it to be almost 2.7 million!! Seeing that they are still in the 2% splits and with a market cap already so large, the liklihood of them ever even making it to the 50/50 splits ($3.62) is slim to none. They would need to pull off a series of spectacularly accretive deals at ultra low multiples and they would need to be substantial in size. Any chane Titan (the old Cornerstone) ever seeks to list its units or do an exchange where they swap for units of say APU.
You are correct that UGI doesn't make most of its money, or even very much money from being the GP of APU.
UGI does have potentially lucrative incentive distribution rights, however. From the recent APU bond prospectus:
We will distribute available cash from operating surplus as follows:
� first, 99% to all unitholders, pro rata, and 1% to the general partner, until the unitholders have received the minimum quarterly distribution of $0.550 per unit for the quarter;
� second, 99% to all unitholders, pro rata, and 1% to the general partner, until the unitholders have received the first target distribution, resulting in a distribution of a total of $0.605 per unit for the quarter;
� third, 86% to all unitholders, pro rata, and 14% to the general partner, until all unitholders have received the second target distribution, resulting in a distribution of a total of $0.696 per unit for that quarter;
� fourth, 76% to all unitholders, pro rata, and 24% to the general partner, until all unitholders have received the third target distribution, resulting in a distribution of a total of $0.904 per unit for that quarter; and
� thereafter, 50% to all unitholders, pro rata, and 50% to the general partner.
However, since APU's quarterly distribution is well below the level where the splits kick in, and the distribution isn't growing particularly quickly, it's sort of moot unless the business can grow.
AmeriGas (symbol: APU) sold LP units last year and in the S-1 the IDRs were described in detail.
But I agree with you that, in the greater scheme of things, the value atributable to UGI's role as the AmeriGas GP is not all that significant at the moment.
jackguardian, can you point out where the splits are listed, I looked through several 10-K's at sec.gov and found no mention. In the initial prospectus perhaps? Or UGI's 10-K's?
I think it is really a moot point to expect the GP to be a growth drive for UGI. APU is heavy in terms of debt to cap, it has a large market cap (hindering growth-the law of large numbers) and they are still in the low low splits. That being said, yes, the GP Take can grow tremendously, but it will still be a very small, and insignificant part in relation to say Antargaz or the utes.
UGI does have the lucrative (50%) IDR as GP of AmeriGas, but they kick in at $0.90/qtr. That's sufficiently far down the road from the current $0.56/qtr to give it much value in the overall UGI context. Unless AmeriGas can make a big acquisition at a distressed price in the near future.
In fact, AmeriGas's role within the UGI finances has become quite a bit smaller after Antargaz (now the biggest cash generator). The pending acquisition of PG Energy ($580m cash deal in 3Q2006 from Southern Union) will make utilities the #2 free cash generator.
I like the PG Energy deal--it's a logical, low-risk extension to the existing properties. Paying 1.5-1.6 times rate base won't impair UGI's ability to earn above-average returns on that investment (synergies, etc). Augments US asset base.
UGI probably won't need to sell equity for the PG Energy deal-- current (9/30/05) cash, plus the $100mm of FCF in FY 2006, will reduce borrowing need to less than $150m.
UGI is cheap, in absolute terms and relative to other diversified energy companies. Has a record of making good acquisitions, and managing financials very well.
At the current price, upside outweighs downside by a factor of four.