UGI Corporation (NYSE:UGI) Q4 2023 Earnings Call Transcript

UGI Corporation (NYSE:UGI) Q4 2023 Earnings Call Transcript November 17, 2023

Operator: Good day, and thank you for standing by. Welcome to the UGI Corporation’s Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your host today, Tameka Morris, Senior Director of Investor Relations. Please go ahead.

Tameka Morris: Good morning, everyone. Thank you for joining our fiscal 2023 fourth quarter earnings call. With me today are Roger Perreault, President and CEO; Sean O’Brien, CFO; and Bob Beard, COO. On today’s call we will review our financial results and some notable performance highlights for the year, discuss the strategic priorities and financial outlook for fiscal 2024, and conclude with a question-and-answer session. 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 duties 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, I’m pleased to turn the call over to Roger.

Roger Perreault: Thank you, Tameka, and good morning, everyone. We appreciate your interest in joining our call today. Fiscal 2023 was a year where we continued to see uncertainty in the macroeconomic environment, particularly with high interest rates and elevated inflation levels. Across most of our service territory, weather was significantly warmer than normal and we experienced challenges within our global LPG businesses, largely due to operational headwinds at AmeriGas and energy conservation, in Europe. Against that backdrop, UGI reported adjusted diluted earnings per share of $2.84 for the fiscal year. The Utilities and Midstream & Marketing segments delivered record earnings and an 8% growth in EBIT over the prior year.

This performance was aided by the weather normalization rider that was implemented in the fiscal first quarter and the higher gas base rates at our Pennsylvania gas utility, as well as incremental earnings for the prior year acquisitions of UGI Moraine East and Pennant. We also benefited from margin management actions taken to alleviate volume and costs-related pressures in the global LPG businesses. These businesses continue to generate attractive free cash flow which support actions to return capital to shareholders, service the balance sheet and make growth investments in other portions of the business. This diversified portfolio has provided a solid foundation for consecutively paying dividends over the past 139 years, increasing dividends in the past 36 consecutive years, and delivering a 10-year EPS CAGR of 6% and dividend CAGR of 7%.

Of course, our performance would not have been possible without the tremendous dedication of our employees who continue to safely serve our customers and other stakeholders despite the challenging economic and operating environment. In fiscal 2023, we continued to execute on critical elements of our long-term strategy in areas that provide the foundation for reliable earnings growth in the years to come. At our regulated utilities, we deployed a significant amount of capital with approximately $563 million invested, primarily in infrastructure replacement and betterment. The team replaced roughly 142 miles of pipeline and made noteworthy updates to its infrastructure, including an upgrade to its Auburn station to increase natural gas capacity as we accommodate growing customer demand.

Customer additions remained robust with more than 13,000 new residential heating and commercial customers added during the year, reflecting further growth in the business. We also continue to facilitate programs designed to aid our customers with energy affordability. Along with various customer assistance programs in fiscal 2023, we were pleased that nearly 51,000 utility customers received LIHEAP grants totaling more than $15 million, enabling those customers to pay for heating costs. At Mountaineer, the rate case continues to progress as expected and on October 6th, the company filed a joint stipulation and agreement for settlement, which included a revenue increase of $13.9 million. We anticipate that the new rates will go into effect on January 1st.

Looking at the Midstream & Marketing segment, we continue to provide a full suite of midstream services which includes LNG peaking, pipeline capacity, storage, and gathering services. Approximately 86% of our margins are underpinned by fee-based contracts, which includes take or pay arrangements and minimum volume commitments. These contracts are with gas and electric utilities’ top-tier producers and other commercial and industrial customers. Many of our midstream assets, which include LNG facilities, pipeline capacity, storage, and other assets are either located on or connected via pipelines to our utility system. Given the strategic positioning, UGI Utilities has typically been the largest customer of the midstream business with all contractual arrangements completed through open RFPs. Next, we made progress on the previously announced RNG projects and we were pleased to complete construction of two such projects in upstate New York, namely Allen Farm and EL-Vi Farms.

These facilities have the capacity to produce 140 million cubic feet of RNG annually. In total, that will be sold to local gas utilities. GHI Energy, our wholly owned subsidiary is the exclusive marketer of environmental credits on these projects. Moving to the global LPG businesses. At UGI International, we made important progress in exiting the non-core energy marketing business as we sold our operations in the UK and Belgium during fiscal 2023. In addition, in October 2023, we completed the sale of substantially all of the energy marketing portfolios in France. In completing these transactions, we have been able to substantially reduce our exposure to natural gas and power marketing in Europe and we anticipate that we will fully exit this business by the end of calendar 2025.

At AmeriGas, we continue to see a positive trend in several of our critical operating metrics, such as on-time deliveries, zero fills, and inefficient fills. Our teams have been focused on enhancing the customer experience and optimizing our systems to enable more efficient delivery. During the year we also made investments in technology and other areas to promote the safety of our employees and the communities we serve. At UGI, we are committed to making a difference in the communities in which we operate. I am so proud of our employees who continue to spend time each year serving their local communities through programs such as United Way, Big Brothers Big Sisters, Reading Is Fundamental, and Habitat for Humanity, among others. And with that, I will turn the call over to Sean, who will comment on the financial results for the year.

Sean O’Brien: Thanks, Roger, and good morning. I’ll start by sharing the key drivers of our financial performance for the year. As Roger mentioned, for fiscal 2023 UGI delivered adjusted diluted EPS of $2.84 in comparison to $2.90 in the prior year. The utility segment was up $0.06 as benefits from the weather normalization rider and higher gas base rates offset the impact of warmer weather and higher operating expenses. Next, Midstream & Marketing was up $0.13 with incremental earnings from the prior year acquisitions of UGI Moraine East and Pennant, as well as benefits from investment tax credits associated with the previously announced RNG facilities that were placed into service during the year. Turning to the global LPG businesses.

UGI International was down a penny as the impact of lower LPG volumes was largely offset by higher LPG unit margins, higher margin from the non-core energy marketing business, and lower taxes due to the optimization of foreign tax credits which yielded the benefit of approximately $0.09. AmeriGas was down $0.19 as the business [felt] (ph) with lower volumes and higher operating and administrative expenses as it experienced inflationary pressures and made investments to improve driver capacity. With these investments, we believe that AmeriGas is positioned to meet our customer demand in the heating season. Lastly, Corporate & Other was down $0.05 due to higher interest expense. Turning to the next slide. For each reportable segment. I’ll walk you through the key drivers of our results when compared to the prior year.

Starting with the Utility segment. Our regulated utilities delivered record EBIT of $365 million, up $29 million or 9% over the prior year. Despite significantly warmer weather, the business benefited from the weather normalization rider that was implemented in the first quarter. Utilities also realized higher margins due to higher gas base rates in Pennsylvania, incremental benefits from the DISC and IREP programs as well as continued customer growth. Operating and administrative expenses were up $36 million, largely due to higher uncollectible account expenses, contract labor costs, and personnel-related expenses. Next, Midstream & Marketing reported a record EBIT of $291 million, an increase of $22 million or 8% over the prior year. While weather was warmer than normal and also the prior year, the company benefited from its fee based portfolio and the optimization of its peaking assets during a cold weather snap in December.

These benefits helped to offset lower capacity management margins due to the settlement timing of certain multi-year commodity storage hedge contracts in fiscal 2022. In addition, the business realized incremental margin from UGI Moraine East acquired in January 2022 and from the full buy-in of Pennant that occurred in August 2022. These acquisitions have performed well, delivering robust returns for the fiscal year. At UGI International, LPG volumes were down 9% due to significantly warmer weather and the effects of energy conservation efforts in Europe as a result of the ongoing geopolitical situation. Total margin was down $15 million as the impact of lower volume and the translation effect of weaker foreign currencies were partially offset by higher LPG unit margins and a $29 million improvement in margin from the non-core energy marketing business.

The segment also experienced increased operating and administrative expenses, largely due to the global inflationary cost environment. The effect of the reduced total margin and higher operating and administrative expenses were partially offset by an increase in other income, largely associated with the release of cylinder deposits. Lastly, at AmeriGas, LPG volumes were down 7% due to the effects of driver staffing shortages, which also limited growth, continuing customer attrition and structural conservation, largely in the residential sector. Total margin was up $1 million as a result of higher LPG unit margins that helped to offset increased operating and administrative expenses. The increase in cost was attributable to inflationary pressures, increased staff employed to meet customer demand during the winter season, higher overtime and employee related cost, as well as increased vehicle and advertising expenses.

The business also benefited from higher gains from asset sales of approximately $21 million during the year. Turning to liquidity. At the end of the fiscal year, UGI had available liquidity of $1.6 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, focused on AmeriGas. Additionally, in fiscal 2023 we completed over $2.6 billion of long-term debt financing to support our ongoing operations and improved liquidity. In November 2023, we also amended AmeriGas credit agreement, decreasing the minimum interest coverage ratio from 2.75 times to 2.5 times, while also rightsizing the revolver from $600 million to $400 million.

The business did not utilize this revised threshold in Q4 and was in full compliance with its debt covenants. Going forward, these changes provide further support and financial flexibility as we continue to address the operational performance of the business and the balance sheet. Now before I pivot to fiscal 2024, I’d like to take a moment to summarize the year. As Roger noted, this was a challenging year due to both external and internal factors affecting certain parts of our business. Despite these circumstances, our natural gas businesses delivered record EBIT. We made key investments to strengthen operations in the global LPG businesses and we continue to make progress on several important priorities. With fiscal 2024 now underway, I’d like to address some important near-term priorities for the company as we strive to unlock and maximize shareholder value.

First, we remain focused on continuing to reduce costs. We believe we have further opportunities to enhance efficiencies, while providing our customers with optimal service levels and maintaining a relentless focus on safety. That is more crucial than ever as we see continued inflationary pressures. As such, we are scrutinizing costs across the entire business, including the corporate functions and evaluating essential versus non-essential spend. We’re also taking a hard look at our processes to identify inefficiencies and opportunities to reduce expenses. These efforts are currently underway with some actions already taken to help us with achieving 25% to 30% of the targeted cost savings in fiscal 2024. In totality, we are targeting permanent savings of approximately $70 million $100 million by the end of fiscal 2025.

Secondly, we are focused on strengthening the balance sheet to reduce leverage and provide more flexibility and capacity to make attractive growth investments. As a result, we have realigned our capital allocation plan to align with our strategic priorities. Next, during Q4, we announced a strategic review of the LPG businesses with a focus on AmeriGas. We’re running a thorough process with external advisors and we’ll provide an update once we have more information that we are able to share. Lastly, we continue to execute our growth strategy with regards to the natural gas businesses. We will prioritize investments in the regulated utilities, as we continue to meet our commitments, promote pipeline safety, reliability, and improvement, and to take into consideration customer affordability.

We will also leverage our midstream assets that are located in highly productive sections of the Marcellus and Utica production areas to drive reliable earnings growth. Yesterday, we announced our fiscal 2024 guidance range for adjusted diluted EPS of $2.70 to $3, which assumes normal weather based on a 10-year average, our existing portfolio and the current tax regime. Looking first at the natural gas businesses. We ended fiscal 2023 with strong momentum and we expect that trajectory to continue into fiscal 2024 as these assets proved the resiliency and stability in delivering robust earnings. At the Utilities, our margins are attractive as a substantial majority are underpinned by the weather normalization rider at the Pennsylvania gas utility.

We also anticipated higher base rates in similar trends in customer growth. In Midstream & Marketing, our margins are approximately 86% fee-based with limited commodity exposure due to our hedging programs. In the natural gas businesses, the benefits are expected to offset modest inflationary pressures and higher interest expense. Moving to Global LPG. At UGI International for fiscal 2024, we’ve assumed normal weather, a similar level of energy conservation to fiscal 2023, higher margins from the non-core energy marketing business, partially offset by lower benefits from foreign tax credit optimization. Lastly, for AmeriGas, we are expecting a slight decline in volumes over the prior year as the business continues to execute on operational improvements.

These operational improvements will enable us to more effectively serve our customers during the winter season with the goal to stabilize volumes and ultimately achieve growth in the future. Roger will also provide additional updates on the outlook for this business. Slide 14 walks you through our targeted cash deployment plan for fiscal 2024 and how it aligns with the priorities that we’ve shared with you. First, and of the utmost importance is meeting our commitment to the dividend as we return cash to shareholders. Similar to fiscal 2023, we expect to maintain an attractive payout ratio as we anticipate returning roughly $330 million of capital to shareholders. Next, as we look at the capital allocation plan, during 2023, we invested approximately $1.1 billion in capital expenditures with close to 75% of this amount attributable to our natural gas businesses.

For fiscal 2024, we will employ strong working capital management and tighten our capital expenditures in order to strengthen our balance sheet. As a result, total capital spend is expected to decline to roughly $960 million. Of the total capital expenditure for fiscal 2024, we anticipate that approximately 80% will be allocated to natural gas businesses, predominantly to our regulated utilities where we have a long runway of opportunities to deploy capital at attractive returns. Included in this amount is also capital related to the previously committed renewables projects where we continue to target unlevered internal rate of returns of 10% or more. And with that, I’ll hand back the call to Roger.

Roger Perreault: Thanks, Sean. As we’ve highlighted before, we are evaluating our AmeriGas business as part of our previously announced strategic review. AmeriGas is the largest propane distribution company in the US with an unparalleled supply and distribution network. Over the years, AmeriGas has been a generator of robust free cash flow that was used to fund growth investments in natural gas businesses and return capital to shareholders. Despite the current challenges, the business has continued to generate free cash flow and as we look to fiscal 2024, we have the opportunity to use that cash to improve the balance sheet and reduce leverage. Simultaneously with the strategic review, we will continue to focus on the operational improvements needed to improve customer experience and ensure that we are running the business as effectively as possible.

This means that we will continue to support and enhance our customer-facing activities, optimize our process, and scrutinize our cost to achieve savings and reduce inefficiencies. We’re also looking at ways to more accurately forecast demand and optimize our transportation network as we continually work on meeting the needs of customers. That is of the outmost importance in our distribution businesses. Similarly, we are focused on improving the balance sheet. We have reassessed our capital spend to ensure that we are being disciplined in how we are deploying capital within the LPG businesses. In particular, we anticipate that capital will be primarily focused on maintenance spend and select organic growth initiatives that provide a strong return.

As I close, I want to emphasize that we are confident in our ability to execute on the key strategic priorities that will further solidify our foundation to deliver consistent and reliable results and create long-term value for our shareholders. We have already identified many of the actions required to drive further improvements in our business and fiscal 2024 will be an important year in executing on these initiatives. Thank you for your continued interest in UGI and your participation on today’s call. And with that, we will open the line for your questions.

Operator: [Operator Instructions] Our first question will come from the line of Gabriel Moreen with Mizuho.

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Q&A Session

Gabriel Moreen: Hey, good morning, everyone.

Roger Perreault: Good morning.

Gabriel Moreen: [Multiple Speakers] maybe to start out on the strategic review. Can you give us a sense maybe around timing of the valuation with a specific focus on AmeriGas, given AmeriGas being embedded in the guidance for FY 2024, we do assume that UGI will still be AmeriGas’ owners through the winter heating season. So any comments you could maybe make in that regard?

Roger Perreault: Good morning, Gab. And thanks for your question. Yes, as we announced at the last — the last earnings call, the strategic review is something that’s still in its early days. So we have launched it. And at this time, we really don’t have an update that we can provide on weather timing or the outcome. Just as a reminder, right, the strategic review is — was launched with a view on the LPG businesses with a focus on AmeriGas. In parallel to that strategic review, we also announced that our operational efficiency objectives here, which is, to take $70 million to $100 million of expense out of the business. So that’s something that we are executing. So what you see in our guidance right now is the impact of — about the 30% of that, that we will get in addition to a continued focus on operating AmeriGas and continuing to improve customer delivery metrics, which are trending quite nicely.

And once we have more information on the strategic review, we’ll be pleased to come back to you and to the market with some updates.

Gabriel Moreen: Understood. And then maybe if I can drill down a little bit on the Global LPG assumptions for 2024. I think you’re assuming normal weather. But you’re also assuming volumes declined despite what was as a warm winter last winter. So I’m trying to reconcile those and I know you talked about a little bit in your remarks earlier. And then also as far as margins declining, it seems like the propane pricing environment is pretty benign at the moment. So I wondering to what degree that may be a conservative assumption or not, given I guess propane prices being so low right here.

Sean O’Brien: Yes. I can start Gabe, this is Sean. Hi. Let me hit the volume question. So we’ll start with the international LPG. It was a warm winter last year. So we did have, I think around 8% more — 7% to 8% warmer than normal. So we have normalized that with the 10-year average in our 2024 assumptions, but — and we have assumed — we saw some of that conservation last year. We’ve kept that constant. So that would not be a variable as you go into 2024. We’ll keep an eye on that. But we’ve kept that at the levels that we saw in 2023, maybe closing out the international with the EM exits, we see some — we definitely see some improvements in the EMs side of the equation that are helping the outlook for international. And then as Roger said, we’ve got a lot of self-help initiatives underway and that’s across the board.

So we’re going to continue to focus on cost. On AmeriGas, we did not — remember, we were fairly balanced on the weather front. When you look at 2023, we had some areas that had warm weather. We had some areas that had cooler weather. So really what you’re doing — what you’re seeing from AmeriGas going from 2023 to 2024 is a pretty — really not much of a weather shift. What we’re indicating on volumes there is that, we do still expect to continue to see volume declines. We expect those volume declines in 2024 to be at a lower rate than what we saw 2022 to 2023. Roger alluded to some improvements that we’re seeing. We’re going to be cautious, but we’ve made some investments, and we really are focused on getting through the winter, but we still anticipate some volume declines at AmeriGas.

Same concepts there, self-help, we’re focused on cost in that business as well. And you heard Roger say, capital is going to be pretty focused on just sustaining and maintenance type capital. So that’s sort of the outlook on AmeriGas as you move from 2023 to 2024.

Gabriel Moreen: Thanks, Sean.

Sean O’Brien: In terms of the price [Multiple Speakers]

Gabriel Moreen: Sorry, go ahead.

Sean O’Brien: Sorry, Gabe. You mentioned pricing. I think we see pricing at similar levels in terms of how we are currently forecasting, but we did see obviously — you’re referencing that maybe pricing is down a little bit. So we don’t see that as a big driver in terms of the delta, the variance to our 2024 versus 2023.

Gabriel Moreen: Okay, great. Thanks, guys.

Roger Perreault: Thank you, Gabe.

Operator: Our next question comes from the line of Julien Dumoulin-Smith with Bank of America.

Roger Perreault: Good Morning, Julien.

Cameron Taylor: Hey, good morning, guys. This is actually Cameron on for Julien. Thank you guys for taking our questions.

Roger Perreault: Hi, Cameron.

Cameron Taylor: Hey, good morning. Happy Friday. Real quick, I wanted to just continue on the discussion of volumes in — for AmeriGas in 2024. So, can appreciate the fact that obviously, you guys are working to right size the business or just kind of getting on more solid footing. You’ve got a couple of quarters now, three quarters of elevated OpEx as you kind of embarking on this effort. So maybe just could you speak to the any benefits you’re seeing thus far. And I guess just considering you’ve had a few quarters to work on this, why maybe we’re not seeing a little bit more of a positive impact for volumes in 2024 versus what maybe you would expect given these efforts.