UGI Corp (UGI) Q2 2019 Earnings Call Transcript
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UGI Corp (NYSE: UGI)
Q2 2019 Earnings Call
May. 7, 2019, 9:00 a.m. ET
Contents:
Prepared Remarks
Questions and Answers
Call Participants
Prepared Remarks:
Operator
Good morning. My name is Denise and I'll be your conference operator today. At this time, I'd like to welcome everyone to the UGI Corporation AmeriGas Second Quarter Fiscal Year 2019 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)
Thank you. Brendan Heck, Director of Investor Relations, you may begin your conference.
Brendan Heck -- Director of Investor Relations
Thanks, Denise. Good morning, everyone, and thank you for joining us. With me today are Ted Jastrzebski, CFO of UGI Corporation; Hugh Gallagher, President and CEO of AmeriGas Propane; and John Walsh, President and CEO of UGI.
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 annual report on Form 10-K 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 in the appendix of our presentation.
Now, let me turn the call over to John.
John L. Walsh -- President and Chief Executive Officer
Thanks, Brendan. Good morning and welcome to our call. I hope that you've all had the opportunity to review our press releases reporting second quarter results for UGI and AmeriGas. Our results in Q2 reflect the second consecutive quarter of very warm weather in Europe as well as the impact of limited weather volatility in the Marcellus region on our capacity management business. Despite these challenges, we delivered a solid performance in the quarter posting the second best Q2 adjusted EPS in our history. On today's call, I'll comment on key activities and market developments in the quarter and then I'll turn it over to Ted, who will provide you with an overview of UGI's financial performance. Hugh will review Q2 for AmeriGas and I'll wrap up with an update on our strategic initiatives.
Our Q2 GAAP EPS was $1.38 and our adjusted EPS was $1.43. Our adjusted Q2 EPS was 15% below our record fiscal '18 Q2 adjusted EPS of $1.69, but 9% above Q2 fiscal '17 adjusted EPS of $1.31. As I noted earlier, this is the second highest Q2 adjusted EPS in UGI's history. Both quarters have been adjusted for the mark-to-market valuation of unsettled hedges and other items, which Ted will cover later. I should also note that our Q2 fiscal '18 results included a $0.09 positive impact from tax reform in our Utilities business, which was subsequently returned to repairs in Q3 fiscal '18. We are affirming our updated guidance of $2.40 to $2.60, which we reviewed on our April 2nd call. Ted will provide more detail on our outlook in his comments.
In addition to the solid earnings performance in the second quarter, there was significant progress on our strategic projects and initiatives. On April 2nd, we announced an agreement to acquire all the common units of AmeriGas owned by the public. This agreement was the outcome of the strategic review process we announced at our Analyst Day in early December. We believe this agreement is in the best interest of our AmeriGas unitholders who will receive a fair value for their units and have the opportunity to become shareholders of UGI. This is also a favorable outcome for UGI shareholders as we expect the transaction to significantly enhance retained cash flow and to be earnings accretive in fiscal '20 and beyond. The transaction is subject to approval by AmeriGas unitholders and we hope to receive that approval and close the transaction in our fiscal fourth quarter.
We're making good progress in our Penny's project. We've completed all required survey reports in Pennsylvania, which is two-thirds of the route and the Pennsylvania Department of Environmental Protection has determined that our applications are administratively complete. Pennsylvania DEP has formally initiated their technical review of our submission. There is noteworthy progress in New Jersey as well, having received favorable court rulings related to survey access, our Penny's team was given legal rights to complete the majority of the field surveys required for an updated submission of our New Jersey permit applications. We are awaiting a final court ruling regarding survey access for a small number of state-owned land parcels along the route. Project remains on track to commence construction-type activities as soon as possible, which in all likelihood will be in 2020 given the anticipated permitting reviews.
Growth in infrastructure replacement remained the key themes at Utilities. We've added almost 8,500 new residential heating and commercial customers year-to-date and demand for gas service continues to be robust. Our gas utility recorded a record send out in mid-January and underlying demand for gas service is strong. In addition to the expenditure for our growth programs, we're continuing to invest record levels of capital on infrastructure replacement and reinforcement. Our infrastructure replacement program for cast iron and bare steel remains on pace with our PUC approved long-term infrastructure replacement plan. The forecast capital spend of almost $400 million in fiscal '19 will be another record for us.
AmeriGas had a challenge this quarter with particularly warm weather in the Southeast. While overall volumes were slightly below last year, we delivered very strong performance in our ACE and National Accounts programs. ACE volumes were up 7% over prior year, while National Accounts growth reached 6%. Hugh will comment in much more detail on AmeriGas's Q2 performance in a few minutes.
UGI International faced a significant weather challenge in the quarter with weather that was 7.5% warmer than normal and 10% warmer than the prior year. However, the impact of lower volumes was largely offset by effective margin management and diligent expense control. We benefited from positive contributions from the DVEP and UniverGas acquisitions made in late fiscal '17 and early fiscal '18. The solid performance in this weather-challenged quarter once again demonstrates the resiliency and earnings power of UGI International.
I'll return later in the call to comment on our strategic initiatives, but I'd like to turn it over to Ted at this point for the financials. Ted?
Ted J. Jastrzebski -- Chief Financial Officer
Thanks, John. As John mentioned, the results this quarter were solid, but fell short of our record earnings last year. Adjusted earnings per share were $1.43 versus $1.69 in Q2 2018. This table lays out our GAAP and adjusted earnings per share for the second quarter of this 2019 compared to the second quarter of fiscal 2018. As you can see, our adjusted earnings exclude a number of items such as the impact of mark-to-market changes and commodity hedging instruments. A loss of $0.07 this year versus a loss of $0.08 last year. This quarter, we had $0.02 of unrealized gains on our foreign currency derivative instruments, loss of a $0.01 in 2018. As mentioned last quarter, you can also see that we no longer have Finagaz integration expense as this acquisition has been fully integrated. Lastly, this quarter, we booked approximately $200,000 of expense related to the proposed merger with AmeriGas, but the impact to adjusted EPS is negligible.
Adjusted earnings per share decreased $0.26 versus Q2 of 2018. For our LPG businesses, AmeriGas experienced colder weather overall, significantly warmer than normal weather in the Southeastern US during January and February. They were down a $0.01 versus last year. Our International business continue to face warmer weather conditions, but net income is up as a result of focused margin and expense management. Additionally, we benefited from reduced statutory tax rates in France. I'll speak to International results in more detail in a moment.
For our natural gas businesses, adjusted EPS for both Midstream & Marketing and Utilities declined $0.22 and $0.04, respectively. Less volatile weather and increased pipeline restrictions in the Midstream & Marketing business limited capacity management margin. At the Utility, adjusted earnings were down versus last year, primarily due to the $0.09 benefit in the prior period on revenues and associated margin as a result of the tax savings from TCJA.
Turning now to the individual businesses. AmeriGas reported adjusted EBITDA of $290 million versus $309 million in the prior period -- prior year period. Although, weather was cold nationally, this number was skewed by extreme cold in areas, where we have a wider operational footprint. The Southeastern US experienced very warm weather during the critical heating months of January and February. The team maintained a disciplined approach to expense management and continues to search for opportunities to drive efficiencies. Hugh will discuss AmeriGas results in more detail in a few minutes.
UGI International reported adjusted income before taxes of $124 million. Weather for the quarter was 7.5% warmer than normal and 10% warmer than the second quarter last year. Furthermore, the international teams experienced a warmer than normal weather in 11 of the past 12 months. As you know, we layer in foreign currency exchange contracts to reduce volatility in UGI International's net income resulting from the translation effects of changes in foreign currency exchange rates. If you remove the impact of currency, margin decreased last year due to the sustained warm weather impact on volumes, but that was primarily offset by unit margin management. On a weather-adjusted basis, our team delivered a solid quarter. Operating expenses were well controlled, given the warm weather, while up slightly versus last year, this was largely due to higher compliance costs associated with energy conservation, which are passed on to customers.
Midstream & Marketing recorded income before taxes of $52.3 million. Total margin decreased $54 million compared to Q2 of last year on weather that was slightly colder. The primary driver approximately $47 million of the decrease came from capacity management, where we did not experience sustained type of extreme cold and volatility that we did in the early part of the quarter last year, coupled with increased pipeline restrictions. The remaining decrease came from electric generation, where volumes from our Hunlock facility were lower, reflecting a lack of economic dispatch opportunities. Operating expenses increased versus last year, reflecting higher compensation and benefits expense, slightly higher expenses associated with greater peaking, LNG and natural gas gathering activities.
UGI Utilities reported income before taxes of $108.1 million. When looking at comparative results, it's important to remember that the 2019 second quarter reflects the impact from the May 17, 2018 Pennsylvania PUC order addressing, among other things, the credit to ratepayers of tax savings from the TCJA. As a result, revenues in the quarter were reduced by $23 million. Excluding the impact of the revenue reduction, total margin increased $8 million due to higher core market volumes, which increased due to customer growth and slightly colder weather. Operating and administrative expenses decreased versus (inaudible) the primary driver is lower uncollectible accounts, which improved versus last year. Depreciation increased $1.2 million from increased distribution system and IT capital investments.
Before I turn it over to Hugh, I want to comment briefly on our guidance and the dividend announcement last week. Last month, we revised our guidance range to $2.40 to $2.60. Based on our first half results and our historical performance in the third and fourth quarters, I want to highlight some of our initiatives that will help us achieve our revised guidance range. First, we continue to focus on OpEx management. This has been a major focus for the UGI teams as we continue to look for efficiencies throughout our business. Next, we expect increased margin from our additional midstream assets, such as Ponderosa and Texas Creek that will not benefit from -- that we did not benefit from in prior years. As I mentioned earlier, we increased margins at UGI International to offset the energy conservation compliance costs. Margin increases are not realized immediately as there's a timing lag, which simply means our customers buy product over time, not all at once. We expect to realize some of these margin benefits in the third and fourth quarters. Lastly, on a year-over-year basis, 2019 will not have the $22.7 million revenue reduction associated with the May 2018 Pennsylvania PUC order that we had in the third quarter of 2018.
We believe that these factors will increase our performance versus historical results in the third and fourth quarters and help us to achieve our revised guidance. UGI remains well positioned to deliver on our commitment of 6% to 10% long-term EPS growth. To our dividend, for the 32nd consecutive year, UGI has increased (inaudible) dividend. The quarterly dividend is now $0.30 per share, representing a 15.4% increase. As a reminder, we have an additional increase planned after the closing of the AmeriGas transaction. In total, the dividend will increase 25% by transaction close.
That concludes my remarks and I'll now turn the call over to Hugh for his report on AmeriGas. Hugh?
Hugh J. Gallagher -- President and Chief Executive Officer
Thanks, Ted. Adjusted EBITDA for the second quarter of fiscal 2019 was $290.3 million compared to $309.5 million for the second quarter of last year. Nationwide degree days within Q2 were 4% colder than the 15-year norm and 5% colder than last year. Our financial results, which usually track the weather quite well, did not this quarter largely due to regional weather patterns that I want to explain. The most intense cold was concentrated in the plains, where as you know, we have a little in the way of operations presence. Conversely, in the Southeastern US, where we have a significant presence, we experienced temperatures that were significantly warmer than normal and last year, especially in January and February. So our overall adjusted EBITDA was down from last year, primarily due to nearly 19% year-over-year shortfall in EBITDA contribution from our operations in the (inaudible). Similarly, retail volumes for the quarter were down 4% from last year with the shortfall also primarily related to our operations in the Southeast.
Turning now to our growth fronts, both our National Accounts and AmeriGas Cylinder Exchange programs continue to experience solid growth, with volumes for both programs increasing in the range of 6% to 7%. We are making good progress in developing the home cylinder delivery concept, the integration of the business we acquired late last year has progressed very well and we are in our initial -- we're planning our initial pilot for later this summer.
We continue to experience strong demand for AmeriGas Cylinder Exchange. We are finalizing expansion plans with major retailer and a large convenient store chain that would result in the rollout of several hundred additional 24*7 automated cylinder vending locations by the end of this calendar year.
We were pleased to announce the transaction in which UGI would acquire 100% of AmeriGas, including our 120-day review. As the various merger-related work streams continue to advance with an anticipated Q4 closing date, we remain focused on key business initiatives for fiscal '20 as we strive to take the business forward and generate long-term sustainable financial performance. As I stated last quarter, we are focused on leveraging technology and our scale to advance our customer-facing capability and generate business efficiencies that will lower our costs. The Cylinder Exchange announcements we're making today are tangible signs of this focus and that it is already starting to build momentum.
In closing, I want to thank our employees, both on the front lines and in support roles for their continued commitment to our customers and our Company. And with that, I'll turn it over to John for his closing remarks.
John L. Walsh -- President and Chief Executive Officer
Thanks, Hugh. As I mentioned in my earlier remarks, we were pleased to report one of the best Q2 adjusted EPS results in UGI's history. In addition to that earnings performance, there were several other noteworthy achievements in the quarter that will position us well for future earnings growth. Our Midstream & Marketing team remains focused on building out its asset network across the Marcellus region. We continue to grow our fee-based income stream as we added new gathering assets in the Marcellus and utilized our new Steelton LNG storage and vaporization facility. This shift to a higher percentage of fee-based income is central to our long-term midstream strategy. Many East Coast LDCs, including UGI, experienced record natural gas send out levels in the January, once again demonstrating the need for peaking solution.
In response to that rising demand, we've begun construction of our new LNG storage and vaporization facility near Bethlehem, Pennsylvania. This project representing approximately $60 million investment will add 2 million gallons of LNG storage to our network. It will enhance our ability to meet the rapidly growing demand for LNG and strengthen our ability to use our LNG system assets dynamically based on market conditions.
Our investment outlook for Utility remains very strong. We're deploying record levels of capital to address infrastructure needs, while growing our customer base. Our teams are focused on providing safe, affordable and reliable access to low-cost natural gas to the 660,000 families and businesses we serve throughout Central and Eastern Pennsylvania. We're also committed to providing access in previously unserved or underserved areas of the Commonwealth. We're likely to invest approximately $2 billion in capital at the Utilities over the next five years.
We fired -- filed our largest ever rate case request of $71.1 million with the Pennsylvania PUC in late January. The scale of the request reflects the growth opportunities in our service territory and our commitment to infrastructure replacement. The filing is under review by the PUC and we expect that the process will conclude later this year with new rates going into effect for the fiscal '20 winter season.
Our most significant recent strategic event actually occurred just after the end of the quarter when we announced the proposed merger with AmeriGas on April 2nd. Yesterday, we filed our Form S-4 registration statement with the SEC. We're excited about the positive impact of this major transaction. When this transaction closes later this year, UGI will be exceptionally well positioned to fund future growth. This transaction will significantly enhance our cash available for growth investments and dividends. This will provide a broader funding foundation for the major capital investments in our natural gas businesses over the next decade and position the Company for future M&A across the entire corporation.
We pride ourselves on our ability to deploy capital effectively across our businesses. Our disciplined approach to capital allocation positions us well to deliver on our long-term commitment of 6% to 10% EPS growth. We are excited about this major enhancement to UGI's cash engine for growth. As we look forward to fiscal '20 and beyond, we are energized by the pending transaction and by the range of investment opportunities across our businesses. We have great confidence in the ability of our teams to execute operationally and identify attractive growth investments that align with our business unit strategies.
With that, I'll turn the call back over to Denise who will open it up for questions.
Questions and Answers:
Operator
Thank you. (Operator Instructions) Your first question comes from Dennis Coleman with Bank of America. Your line is open.
Dennis Coleman -- Bank of America Merrill Lynch -- Analyst
Hi, good morning. Thank you.
John L. Walsh -- President and Chief Executive Officer
Good morning.
Dennis Coleman -- Bank of America Merrill Lynch -- Analyst
A couple of questions for me, if you would please. Just on the rate case, can you just remind me what the timeline is? I know you've talked about concluding later this year, but are there any milestones we can watch for along the way or filings or actions by the PUC that we should watch for?
John L. Walsh -- President and Chief Executive Officer
Yeah. The -- we filed in late January, the PUC review process is under way. Testimonies are being -- have been filed and hearings have been scheduled. The typical timeframe for resolution is early fall in these cases. Previously for us and most other companies in Pennsylvania, that involves a settlement, but that process will obviously play out over the next four to five months -- four months or so.
Dennis Coleman -- Bank of America Merrill Lynch -- Analyst
Okay. Have you had settlement discussions already or is that something that's scheduled as well?
John L. Walsh -- President and Chief Executive Officer
The -- we're still in the process of the various parties filing testimony.
Dennis Coleman -- Bank of America Merrill Lynch -- Analyst
Okay.
John L. Walsh -- President and Chief Executive Officer
So that would follow (inaudible) conclusion of that process.
Dennis Coleman -- Bank of America Merrill Lynch -- Analyst
So too soon for that? Okay.
John L. Walsh -- President and Chief Executive Officer
Yes.
Dennis Coleman -- Bank of America Merrill Lynch -- Analyst
I guess, one other one. You mentioned the M&A and a lot of that -- APU transaction allowing you to do that. Talk a little bit, I guess, it's a broad question, but areas that you're looking at. And I know you've talked about this in the past, but any updates there would be useful.
John L. Walsh -- President and Chief Executive Officer
Sure. We look broadly across -- in terms of M&A, we look across the entire corporation, so we would continue to do that across our propane businesses with further opportunities to invest in Europe, which certainly fit that description. We're focused in the short-term on AmeriGas on the upcoming transaction, but longer-term, there will be opportunities there. And on the natural gas side of our business, most recently, we've made several acquisitions involving natural gas gathering systems and continue to look for opportunities there as that segment or area evolves. So we'd look broadly across the greater Marcellus region for midstream investment opportunities, M&A and having continuing interest in Utilities M&A and anything we look at as always with respect to our normal return requirements in terms of deploying capital. So, we'll look at it through that filter, but it's a broad-based set of activities we have that spans the entire Corporation looking at M&A opportunities and then capital -- major capital project opportunities, but not exclusive to the natural gas side of the house, but tend to be clustered on that side.
Dennis Coleman -- Bank of America Merrill Lynch -- Analyst
Got it. Thanks for reviewing that. That's it from me.
John L. Walsh -- President and Chief Executive Officer
Okay. Right. Thanks, Dennis.
Operator
Your next question comes from Chris Sighinolfi with Jefferies. Your line is open.
Chris Sighinolfi -- Jefferies -- Analyst
Hey. Good morning, John.
John L. Walsh -- President and Chief Executive Officer
Good morning.
Chris Sighinolfi -- Jefferies -- Analyst
Just wanted to touch on a couple of things. I guess, first off, with regard to -- I guess, it's a two part question, but with regard to the performance this past quarter, and we talked about this I think on your last quarter call, but something that's detailed in the S-4 is just the experience that AmeriGas has faced, but you see on the UGI front as well with regional variations in weather and the difficulty that that is, I guess, presenting in terms of forecasting and may be even operating the Company. I'm just wondering, if there's things that came out of the review that you might look to do differently in regards to, I guess, both forecasts and -- but also operating the Company, anything that comes to mind could help us think about minimization of the variability on a go-forward basis post the acquisition?
John L. Walsh -- President and Chief Executive Officer
Yeah. In terms of challenges presented just by variable weather conditions, it's not a new challenge for us, but we have to be prepared and do respond. And I think Ted noted it in his comments, I think in Europe, we did a nice job responding to where we had the most challenging weather this year. One of the areas that we're focusing on is where we can better leverage our scale to take fixed costs out of our activities (inaudible) technology drive our costs down. So certainly, the more we can do in terms of -- in some cases, we're broadly deploying technology that we've already begun to utilize and drive it across our propane businesses consistently, that will help us in terms of addressing challenges, inevitably that come out each year with where the cold and where the warm weather occurs. So that's I think a consistent theme that you'll be hearing from us as we move forward is can we accelerate some of these efforts and enable us to be a little bit more nimble in terms of how we respond to different operating conditions both warm and cold.
Chris Sighinolfi -- Jefferies -- Analyst
Okay. And just a clarification point from me, it's not regarding the quarter, it's more on the S-4, which you filed last night and talked about in your release. Just wanted to be clear, the forecast that I see in there, those are all -- I know is a series of footnotes, but those are all independent, they're not pro forma looks. Is that correct? In terms of (Multiple Speakers) go ahead.
John L. Walsh -- President and Chief Executive Officer
There's -- I'd say as you've seen by looking -- reviewing, Chris, it's a very extensive document, so you have various advisors that did some forecasting based on information that was provided to them by the Company. The basis of our planning for the Company is (inaudible) budget and plan process that we go through each summer as we come out of the winter. So, that's sort of the foundation for the work that was done and then shared with financial advisors that work with the various independent parties in that process with some minor updates. And obviously, we -- as we've come out of the winter now, we initiate another pretty extensive process looking at each of our businesses and the markets in which we operate. And that'll be reflected when we come to market with an updated view for fiscal '20. So that's kind of the way that process works.
Chris Sighinolfi -- Jefferies -- Analyst
Okay. But I guess when I looked at -- clearly the attributes of the deal are significant on the cash front and you and Ted have talked about that, you talked about that on the merger call and again today and we had a chance to separately go over some of that. But I guess when I think about EPS accretion, which I think you guys noted beginning in fiscal 20 -- I guess, the spirit of my question, John, is when I look at page 70 of that and I see independent, it looks to be independent forecast based on the implied share count. Is it safe or fair to assume that the accretion you talk about would be sort of levels in excess of what I see reflected on that page or are those numbers third-party provided and not something we should anchor to?
John L. Walsh -- President and Chief Executive Officer
Those numbers are, as I said, some of the numbers, and I have to look at the document to review the specific forecast that you're referencing. Basically they started with information that Management provided and then those advisors ran different scenarios for the special committee of the AmeriGas, a board that was established.
Chris Sighinolfi -- Jefferies -- Analyst
Okay. I'll (Multiple Speakers)
John L. Walsh -- President and Chief Executive Officer
Just fundamentally what I'd say on EPS accretion, Chris, is come back to the statements we made when we announced the the transaction. This will be EPS accretive. It's much more of a cash flow impact, but it's, I guess, positive that EPS benefit tends -- will grow over time because we have a sizable increase in cash available for reinvestment. So it's a -- and -- it's a positive EPS story at the outset that it is enhanced over time by our ability to take that cash and redeploy (inaudible).
Chris Sighinolfi -- Jefferies -- Analyst
Understood. Understood. All right. Well, thanks a lot. Appreciate the time this morning.
John L. Walsh -- President and Chief Executive Officer
Sure. Thank you.
Operator
There are no further questions queued up at this time, I'll turn the call back over to John Walsh.
John L. Walsh -- President and Chief Executive Officer
Okay. Well, thank you for your time and attention this morning. We look forward to speaking with you in the near future when we update you on our future results. Thank you.
Operator
This concludes today's conference call. You may now disconnect.
Duration: 34 minutes
Call participants:
Brendan Heck -- Director of Investor Relations
John L. Walsh -- President and Chief Executive Officer
Ted J. Jastrzebski -- Chief Financial Officer
Hugh J. Gallagher -- President and Chief Executive Officer
Dennis Coleman -- Bank of America Merrill Lynch -- Analyst
Chris Sighinolfi -- Jefferies -- Analyst
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