Will Ruthrauff - Director, IR John Walsh - President and CEO Kirk Oliver - CFO Jerry Sheridan - President and CEO, AmeriGas Propane.

Michael Gaugler - Janney Montgomery Scott Chris Sighinolfi - Jefferies Shneur Gershuni - UBS.

Good morning. My name is Christa and I will be your conference operator today. At this time, I would like to welcome everyone to the UGI and AmeriGas Partners' Third Quarter 2017 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. Will Ruthrauff, Director of Investor Relations, you may begin your conference, sir..

Thanks, Christa. Good morning, everyone, and thank you for joining us. Joining me today are Hugh Gallagher, CFO of AmeriGas Propane; Kirk Oliver, CFO of UGI Corporation; Jerry Sheridan, 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 will 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, I'll turn the call over to John..

Thanks Will. Good morning and welcome to our call. I hope that you've all had the opportunity to review our press releases reporting third quarter results for UGI and AmeriGas. On today's call, I'll provide an overview of our financial performance and key activities in the third quarter.

I'll turn it over to Kirk who will provide you with a more detailed review of UGI's financial performance. Jerry will follow with an overview on AmeriGas and I'll wrap it up with an update on our strategic initiatives. Our financial results this quarter were in line with our expectations.

While adjusted earnings were well below last year's exceptional third quarter, they were consistent with our typical Q3 earnings performance since we began reporting adjusted earnings per share. Kirk will provide you with some additional detail on Q3 financial performance in his remarks.

In addition to our solid financial performance in the quarter, we achieved some critical milestones on projects that will provide a solid foundation for future growth. Our Q3 GAAP EPS was a loss of $0.11, while our adjusted EPS was $0.09. As I indicated earlier, adjusted EPS was below our adjusted EPS of $0.23 in the third quarter of fiscal 2016.

Both quarters have been adjusted for the mark-to-market valuation of unsettled hedges and other items that Kirk will cover later. Based on the solid performance in Q3, we expect our full year adjusted EPS performance to surpass the record adjusted EPS from last year.

This will be a great result in a year when the weather challenge was quite significant. For the quarter and on a year-to-date basis, weather in our major service territories has been warmer than normal.

Our teams have done an outstanding job managing through the short-term weather challenges, while maintaining a strong focus on safety, customer service, and the development of emerging growth opportunities. We're very pleased with the underlying performance of our businesses and with the contributions from our major new investments.

Our outlook remains very positive for fiscal 2018 and beyond. I'll return later on the call to discuss progress on our long-term strategic opportunities. But first, I'd like to highlight several key achievements in the quarter.

We made good progress on the rate case filed by UGI PNG, our LDC serving about 170,000 natural gas customers in Northeast Pennsylvania. We recently filed a rate case settlement agreement with the Pennsylvania PUC. If approved by the PUC, our rates would increase by approximately $11.25 million and would go into effect in mid-October.

Our Midstream & Marketing business continues to invest in our network of LNG liquefaction storage facilities to serve the increasing demand for peaking services and a range of emerging LNG applications. Our Manning liquefaction unit is now on-stream, providing us with much needed liquid capacity as we near the start of fiscal 2018.

Q3 was another positive quarter for ACE and national accounts programs in AmeriGas with volumes in both these programs well above prior year. UGI International closed the acquisition of Preem Gas in Sweden. Preem distributes over 20 million gallons of LPG annually to a broad range of customers.

This investment will enhance our position in Sweden and strengthen our overall position in the Nordic region. The timing is ideal for us, allowing us to execute the initial elements of the integration plan prior to the onset of the winter season.

Our solid performance in Q3 and our strong year-to-date performance clearly demonstrate the resiliency of UGI's businesses. Kirk will now provide you with more details on overall financial performance.

Kirk?.

Thanks John, and good morning, everyone. As John mentioned Q3 was a solid quarter, particularly given the warmer weather in the shoulder months making up this quarter.

Adjusted earnings are coming in at $0.09 per share compared to $0.23 last year, where we experienced colder weather in all of our businesses and a significant unit margin increase in France due to the rapid decline in LPG prices in fiscal year 2016.

On this slide, we've laid out our typical adjustments to GAAP earnings, which bring us to the adjusted earnings of $16.6 million or $0.09 per share for the quarter.

Although weather has less of an impact for us in the shoulder months of Q3, it was significantly warmer than last year in all of our major segments, which did have an impact on volume and all of our businesses. This weather impact was significantly offset in our domestic natural gas businesses.

UGI Gas rate case, a favorable environmental settlement and customer growth at UGI Utilities and additional peaking and storage margins at Midstream & Marketing resulted in these businesses only experiencing a $0.01 and $0.02 decrease in EPS respectively versus the prior year.

As you can see here, UGI International accounted for the largest difference versus last year, due primarily to the significant change in unit margins that I referred to earlier. I should note that our UGI International unit margins in Q3, while below prior year, were in line with our expectations.

AmeriGas weather -- AmeriGas experienced weather that was 12% warmer than normal and 5% warmer than last year. April which is the most significant month in the quarter was 11% warmer than last year.

Volume was down about 4% on the warmer weather and operating expenses were impacted by $5.5 million in charges related to an insurance settlement, partially offset by some group medical insurance benefits. Adjusted EBITDA came in at $58.4 million, which is down $6 million from last year.

Operating expenses and adjusted EBITDA on this slide exclude a $7.5 million increase in an environmental reserve related to our ownership in the site of a former manufactured gas plant. Jerry will go into more detail on AmeriGas later on the call.

UGGI International results were impacted by the warmer water, 8% warmer than last year and a decline in unit margins from the high unit margins experienced last year, which I'll discuss further on the next slide. Total margin is down about $43 million, reflecting the lower unit margins and the decrease in retail gallons sold from the warmer weather.

Operating and administrative expenses are down about $14 million, driven primarily by the synergies achieved with the Finagaz acquisition in France, lower maintenance and logistics expenses, and the translation effect of the weaker European currencies. As a result of these factors, adjusted income before taxes is down $30 million.

Slide 11 provides more detail surrounding UGI International unit margins. As you can see from the left hand chart, LPG costs were quite low in Q3 2016, a €0.52 per gallon versus €0.63 in the third quarter of this year.

In periods of rapidly declining LPG prices, as we experienced in 2015 and 2016, our unit margins will typically expand, a phenomenon we describe as the parachute effect. Our goal over the long-term is to increase unit margins at or slightly above the rate of inflation.

You can see in the chart on the right that there was a short-term uplift in unit margins when prices decreased, but over the longer term, unit margins increased by approximately 2.5% on average. Midstream & Marketing posted income before taxes of $3.3 million, a decrease of $7.6 million versus the third quarter last year.

Total margin decreased by $8.5 million, largely reflecting lower capacity management margin, partially offset by higher storage and peaking margin. With respect to the capacity management margin, we get additional fixed demand charges and did not experience enough basis value to offset the cost increase.

Turning to slide 13, the Utilities reporting income before taxes of $17.5 million compared to $20.7 million in last year's quarter, down a little over $3 million in spite of weather that was 30% warmer than last year. In the month of April, weather was 43.6% warmer than last year.

Throughput, the core customers decreased by 1.6 bcf or 16% reflecting the warmer spring temperatures this year. However, total throughput increased almost 7% due to higher large firm delivery service volumes, principally associated with a new gas-fired generating facility.

Operating and administrative costs were up to $5.9 million this quarter, primarily due to higher customer account expense and slightly higher distribution expense. Other income also increased by $6 million reflecting environmental insurance settlement including the recovery of previously incurred costs.

On this slide, we provide a further breakout of the $1.2 million reduction in utilities margin versus the prior year. Margin from the core market throughput decreased $5.8 million resulting from the warmer weather.

This reduction in margin was largely offset by $4.2 million of additional margin from the UGI Gas base rate increase and a $1.3 million increase in larger firm delivery service margins.

Finally, as John mentioned earlier, on June 30th, we filed a joint petition for a settlement with the Pennsylvania PUC for an $11.3 million base rate increase at PNG with rates going into effect on October 20th. In closing, I'd just remind you that our earnings guidance for the full year is $2.30 to $2.45 per share.

We are not adjusting this guidance, but given the warm weather experience this year continue to expect our results to come in at or slightly below the low end of this range. That completes my remarks and I'll now turn the call that Jerry for his report on AmeriGas..

Okay. Thanks, Kirk. Good morning. AmeriGas adjusted EBITDA for the third quarter was $58 million compared to $65 million in the third quarter of last year, although not a peak weather quarter. It is worth noting that weather for the quarter was 12% warmer than normal.

In April, which is really the last heating shoulder month with 17% warmer than normal and 11% warmer than last April. As a result, our volume was down about 4% from last year on weather that was 5% warmer. Propane costs at Mt. Belvieu average $0.63 during the quarter, which was 28% above Q3 last year.

Despite the higher cost, we manage margins $0.01 above last year in the quarter.

Operating expenses including -- included $13 million in unusual charges including a $7.5 charge related to an environmental accrual, stemming from a manufactured gas site associated with an acquisition from 2001 and $5.5 million principally resulting from the settlement related to an insurance matter.

Q3 adjusted EBITDA excludes the impact of the $7.5 million environmental reserve. Now turning to our growth thrust, AmeriGas cylinder exchange had a very strong 4th of July weekend which will benefit you for this year. National accounts volume was also up meaningfully from last year's third quarter.

We expect those AmeriGas cylinder exchange and national accounts to both deliver record years in terms of both volume and earnings in 2017 despite the winter -- the warm winter which does affect national accounts in particular. We completed three acquisitions during the third quarter and five year-to-date.

And finally, we remained mindful of our balance sheet and we're pleased to have completed the first step in the refinancing of our long-term debt at attractive rates, the final step, I am sorry.

As a result of these refinancing activities, we have no significant debt maturities for seven years and we've lowered our average interest rate by over 100 basis points. In addition, our liquidity positions remained sound with about $380 million of available revolver capacity at June 30th.

We are in the planning phases of the upcoming fiscal 2018 winter and we're anxious to put these two warm years of course some of the warmers United States behind us. We expect AmeriGas to finish the year with adjusted EBITDA in the range of $550 million. So, let me now turn the callback over to John..

Thanks Jerry. I'd like to briefly review progress on the strategic investments that will provide the foundation for our future growth. Our midstream marketing team was extremely busy this quarter, as we brought new assets on stream and continued the development of a number of critical new projects.

Our Sunbury Pipeline is now in service with fees from our primary capacity older a large part generation facility commencing in Q4. This $160 million project will be immediately accretive to earnings.

Construction on our new LNG storage and vaporization facility in Steelton, Pennsylvania is underway and the project remains on schedule for completion early in 2018.

This is another key step in the build-out of our LNG network to serve the ramping demand for LNG in the mid-Atlantic region and in New England where we signed several new LNG customers in the past few months. Our PennEast project is ready for its final FERC certification review. The lack of a quorum at the FERC has delayed that process.

Once we receive our FERC certificate, the PennEast partnership will move quickly to satisfy the requirements for our remaining permits. We'll update the project timeline upon receipt of the FERC certificate. However, we do expect to commence construction on the project in 2018. Activity at our gas utility remains at record levels.

Our capital spend in fiscal 2017 will exceed $300 million with infrastructure replacement and system upgrades being the primary component of CapEx spend.

In addition to the infrastructure work, we’ll add over 14000 new residential heating and commercial customers in fiscal 2017 and we'll close out the fiscal year with the rollout of our new customer information system.

These investments are aimed at ensuring that UGI will remain at the forefront of the LDC sector in terms of customer service and support. Finally, I'd like to comment on the growth and investment opportunities for our LPG businesses in both the U.S. and Europe.

AmeriGas and UGI International are assessing a very healthy pipeline of potential investments. The Preem acquisition I referenced earlier is an example of strengthening our European position in an existing geography.

We're also looking for opportunities to push our boundaries in Europe to leverage our scale and the strength of our marketing and supply teams. AmeriGas continues to develop acquisition opportunity and as Jerry noted has closed on five deals this year serving 6 million gallons of annual demand.

In addition, AmeriGas is strengthening its position with large ace in national accounts customers with investments that support these growing customers. As I noted earlier, we're on track to deliver full year adjusted EPS well above fiscal 2016 in a year when we were consistently challenged by warm weather.

Our strong performance has been enabled by a series of acquisitions and new capital projects that have been executed over the past few years. These new investments expand our earnings and cash flow capacity and ensure that we are well-positioned for the future.

As always, we remained focused on reinforcing our traditional strength as an energy marketer and distributor, customer service, operations and commercial efficiency. As we turn our attention to fiscal 2018, we're very encouraged by the range of growth opportunities currently being developed by our teams.

We look forward to keeping you updated on our future calls. With that I'll turn the callback over to Christa who will open it up for your questions..

Thank you. [Operator Instructions] And your first question comes from the line of Michael Gaugler with Janney Montgomery. Your line is now open..

Good morning, everyone..

Good morning, Michael..

John, I got a question for you. We had some problems with some pipelines that have been under construction in Pennsylvania recently and certainly some increased scrutiny in the media regarding those lines and I know you guys have not had problems in the past and would never expect those problems from UGI.

Do you have any concerns that the heightened lengths on other projects could potential bleed into PennEast and maybe stretch your timeline a little bit?.

I don't think the events that you referenced Michael, I don't think it'll have a significant impact or material impact on our projects. On PennEast, specifically, we're focused on going through each step -- the finals certification step at the FERC and then the permitting at the state level in both Pennsylvania and New Jersey.

We've done a lot of work in terms of plans and mitigation and plans related to the routes that we have laid out.

So, we feel good about kind of the quality of the project plans that we have in place and we also feel good as UGI and also across the partnership with -- the experience and track record we've had in the region for us and within the state of executing large projects that included significant directional drills, river crossing, stream crossings, et cetera.

So, it's -- for us, we'll stay focused making sure we've got these well-developed plans and engage at step of the way with all the concerned parties about issues or questions with regard to our specific project..

Okay. That's helpful John. And then maybe one for Jerry. Certainly you called out that the pipeline of acquisition targets for AmeriGas remains strong.

You expect more just tuck-ins for the remainder of the year and maybe into 2018 or are there a few ones out there that could come to fruition?.

I think when I talk about our pipeline, I'm typically talking about the smaller independents that are available and the good news is there's about 3,000 of them. So, there's a long runway for AmeriGas and I think that's the kind of activity we will continue..

Okay. Go ahead, gentlemen. Thank you..

Okay. Thanks Michael..

And your next question comes from the line of Chris Sighinolfi with Jefferies. Your line is now open..

Hey John..

Hey Chris..

Couple of questions. I guess, first, obviously recognize and we've talked about some of this in the past that the French markets are a unique animal when it relates to labor policies, social considerations, et cetera. But I was just wondering how long do you expect to be incurring some of that Finagaz transition expenses.

I think it's been about two and a half years, so I'm just wondering is that something we likely see dissipate next fiscal year, eliminate entirely, or is that something that will extend for an elongated period of time?.

Chris when we made the acquisition, closed it in May of 2015, we talked about it two and a half to three year period during which we'd be executing a transition and integration plan and that hasn't changed. So, we will continue to incur and expense well into next year.

But in terms of any kind of material level of transition expenses, that should dissipate after fiscal 2018..

Okay..

And there wouldn't be any expense associated with it, but nothing material beyond 2018..

Okay.

And at this point, I guess what is the nature, if you could help us understand, the nature of what is transitioning at this point, is that mostly still employee-related or is that physical assets still at this point?.

The most significant pieces today and over the next year are people related, voluntary departure plans, and other activities such as that would be the primary contributors to transition expenses, which are all in line with -- from a cost level and timing level -- in line with your original plan for the integration, but primarily people related..

Okay. And then I was just curious there were some other items you referenced in last night's release in the quarter, obviously, highlighted some of them on the call today with regard to the environmental settlement.

I think there was a separate settlement that happened for environmental -- sorry reserve, but there was a separate settlement that happened at UGI Utilities. I was just wondering if you could give us a little bit more clarity on those items.

And then are they -- were they fully recognized in fiscal 3Q or will there be any lingering effects that we should anticipate, particularly with regard to sort of the environmental reserve in future periods?.

Yes. On -- with regard to the utility adjustment, there was a favorable adjustment. That is a conclusion of a process, so we wouldn't expect to be reporting any further with regard to that specific item, because what we reported was the kind of resolution and conclusion of it with our insurer.

With regard to the environmental items -- item at AmeriGas, it was noted, that's a process which is true for all of our -- many of our environmental process. That could go -- that is likely to go on for quite a while. What has been book reflects our best knowledge of the cost that could be associated with that at this point in time.

So, that could evolve over a number of years. It's very hard to call. We just make using best available information to make our best judgment in terms of an appropriate reserve to reflect our exposure..

Okay. And I guess final question from me John. We've seen some, I guess, some uptick in Northeast E&P combinations, obviously the rise in [Indiscernible] deal gains were chief amongst them.

But just curious if you're hearing or expecting any assets to fall out from those combinations, perhaps on the Midstream side or more related infrastructure? And maybe what the appetite might be? I know most of what you guys had appealed over the last decade or so and Midstream has been organically built.

But we're just curious -- if you're hearing anything, seeing anything, and then maybe what the potential appetite to participate in that might be at this--?.

Yes. We definitely are interested in acquiring assets in the areas that we serve. So, any assets that on their own are attractive, but also could be part of an augmented network of assets for us in the greater Marcellus region.

So, we would definitely be interested in assets that come to market that we could utilize to serve customer requirements directly, but also utilize as part of our overall network and capacity management in the Marcellus. So, we are active and will remain active as always with us and we're very focused on fair valuation.

So, that's always a part of the equation for us, but definitely would be interested. And you're right to point out that as combinations occur or there's any level of kind of restructuring or integration that goes on, it could result in assets coming to market that could be of interest to us and we'll certainly pursue those..

Okay, great. Thanks a lot for the time. I really appreciate it..

Thank you..

Your next question comes from the line Shneur Gershuni with UBS. Your line is now open..

Hi, good morning guys..

Good morning..

Most of my questions have been answered on the UGI side. I was wondering if we can sort of pivot to AmeriGas a little bit here. One of your peers is talking about a potential distribution cut. It's been sort of a challenged business for the last couple of years and so forth.

I was wondering if you can sort of talk about your distribution policy going forward just given the challenges that there have been and I recognize that it's been weather, but kind of the pressure that it's created in the business. If you can give us some color, that would be great..

Yes, we're in the throes of our 2018 planning now and although we've begun to plan on slightly warmer weather than we have in the past, our expectations are that we get back on the track of a normal year for AmeriGas. Our policy has been 1% to 2% increase in distribution, we expect that to continue..

Yes, I think one of the -- this is John, one of the silver lining in the cloud of warm weather for all of our businesses is very true -- for AmeriGas.

You do get to see how the business performs under really challenging conditions and when you look at AmeriGas in terms of earnings and cash flow under very challenging circumstances, it gives us a lot of confidence in the business' ability to continue to perform, deliver EBITDA, deliver cash moving forward, which underpins the position Jerry just kind of outlined..

Okay. That makes total sense. And then when you think about where propane inventories are today, if we happen to have normal weather, we might actually see a significant uptick in pricing. I guess sort of a two-part question one.

Would that be an opportunity for you to expand margins? And then at the same time, would it create any working capital issues with a higher cost purchase price in terms of how your credit facility works and so forth?.

Lots of liquidity, so I don't think on the last point, there's any concern there. I mentioned the $380 million available June 30th and that only gets better over the next couple of months as we continue to collect all last winter's receivables. Inventories are concerned, yes. So, propane is significantly higher in price than it was a year ago.

Inventories are below the both five and 10 year average, they are well below where we were last year. So, it's a concern. It does seem at least for a Pad 1 and Pad 3, the Gulf Coast and the East Coast that the arbitraged regulates. So, exports do slow down when the price gets high and that can solve itself.

But we do see some tightness in the Rocky Mountain region, which could cause problems, but we've got 22 storage terminals. We feel our supply chain and infrastructure is such that we're going to be in better shape than most to get to our customers, but less inventory means higher prices and no higher prices, don't turn into higher margins.

We try to achieve inflation type increases, but you only see the parachute that Kirk talked about if prices are falling. So, the trend we would seem is we're going to have higher prices this winter..

Okay. Just two more questions. Your guide for the year implies a fairly strong fourth quarter, let's say compared to last year. Are you anticipating some early fills or fills that didn't happen in, let's say, the fiscal third or fiscal second quarter just because of weather.

Has the weather been warm enough on the barbecue side? I'm trying to understand, it seems like a fairly strong guide..

Yes. It has less to do with this year than last year. So, last year we had approximately $30 billion of various litigation settlements and reserves that were a bit unusual. And if you carve them out, I think you'd see quarter-to-quarter we're just going to be about flat..

Okay. Yes, that makes sense.

And then at the same time given the stress in the market that some of your peers are seeing, just this sort of whet your appetite for further consolidation in acquisition?.

Well, as I said before, I mean we've got our sights on our normal operating growth through national accounts ACE and tuck-in acquisitions. We've got a decent list of them. We're chasing them. We've done five this year; we've done 21 deals just in the last three years. So, that's the kind of activity I think we'll be pursuing. .

And Shneur I'd just make one comment about both UGI and AmeriGas. We work hard to do is keep our balance sheet strong so that if and when significant opportunities arise, we've got the capacity -- balance sheet capacity and management capacity to take them on and to pursue opportunities.

So, we're always looking at any opportunity that might be out there and we always try to position ourselves so that we're ready to assess and move on any opportunity that comes our way that looks attractive to us..

All right. Perfect. That makes sense, and exhausts my questions. Thank you..

Thank you..

We have no further questions at this. I'll turn the call back over to John Walsh..

Okay. Thank you very much. Thank you for your time this morning. We look forward to speaking with you at year end and bring you up-to-date on Q4. Thank you..

This concludes today's conference call. You may now disconnect..