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 Third Quarter Fiscal Year 2019 Earnings Conference Call. [Operator Instructions] Thank you. Alanna Zahora, you may begin your conference..

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..

Thanks Alanna. 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. Our third quarter is typically a quiet period for us, since we're beyond the winter heating season. However, our third quarter in fiscal '19 has been anything but quiet.

It's been an exciting time for the company, as we've announced and made significant progress on two large investments that are aligned with our core strategies, provide visibility for future growth and cash flow generation, and ensure that we will have a balanced portfolio of investment opportunities for the foreseeable future.

I'll come back later in the call to provide more color on the AmeriGas and Columbia Midstream transactions. Before I do that, I'd like to review our performance in Q3 and the major milestones achieved across our businesses. Our results in Q3 demonstrate the resiliency of our portfolio of businesses.

Despite the overhang of warmer than normal Q2 weather in Europe, and the continued impact of limited weather volatility in the Marcellus region on our capacity management business, we delivered a very solid overall performance in Q3.

On today's call, I'll comment on key activities and market developments in the quarter, then I'll turn it over to Ted, who will provide you with an overview of UGI's financial performance. Hugh will review Q3 for AmeriGas and I'll wrap up with an update on the Columbia Midstream and AmeriGas transaction.

Our Q3 GAAP EPS was negative $0.01 and our adjusted EPS was $0.13. Net adjusted Q3 EPS was $0.04 above our fiscal '18 Q3 adjusted EPS, and also well above our Q3 fiscal '17 adjusted EPS of $0.09. These quarters have been adjusted for the mark-to-market valuation of unsettled hedges.

We expect our full year EPS to be at the low end of our $2.40 to $2.60 guidance. Ted will provide more detail on our outlook in his comments. While the big news in the quarter related to the AmeriGas and Columbia transactions, there were a number of additional noteworthy developments.

Our utilities team filed a joint settlement petition with the Pennsylvania PUC in late July for our combined gas utilities rate case. This represents a major step for us, as this is the first combined rate case for our merged gas LDCs.

The settlement reflects a $30 million rate increase and we're hopeful that the Commission will rule on this settlement in the early fall. UGI Energy Services is nearing completion of our Auburn IV expansion project.

This $50 million project, which will expand capacity on the Auburn system by 150,000 dekatherms a day or about 30%, will come on stream by November 1 and is underwritten by a 10-year take-or-pay commitment.

Energy Services has also been active in adding gathering system infrastructure, to support new well pad developments on our Texas Creek and Marshlands projects. We continue to see new gathering system projects with the producers on our systems in the Marcellus, despite the current low commodity prices.

We began to see positive impact of efficiency programs across our propane businesses. The results were most evident in UGI International, where we've executed a range of initiatives, that leverage the increasing scale of our businesses, and ensure that we are uniformly adopting best practices, in areas such as sourcing, distribution and marketing.

We continue to make very good progress on the local permitting process for the PennEast pipeline project. As a reminder, two-thirds of the pipeline is in Pennsylvania, with the balance in New Jersey. The Pennsylvanian DEP has determined that our permit applications are administratively complete, and is now performing its technical review.

We're making good progress in New Jersey as well. All of the required field surveys had been conducted. We expect to be filing for our New Jersey permits within the next week. The project remains on track to commence construction, once all necessary approvals have been received.

In addition to reaching the proposed rate case settlement, our utilities team continue to focus on adding new customers across our system and executing our long-term infrastructure replacement program. We've added almost 11,000 new residential heating and commercial customers year-to-date and we expect our full year additions to exceed 14,000.

We're continuing to invest record levels of capital on infrastructure replacement and reinforcement, with a primary emphasis on replacement of cast iron and bare steel. The forecast capital spend of almost $400 million in fiscal '19 will be another record for us. This capital was included in the rate base for our recent rate case settlement.

I'll return later in the call to comment on the status of the Columbia and AmeriGas transactions, but I'd like to turn it over to Ted at this point for the financial review.

Ted?.

Thanks John. As John mentioned, the results this quarter were solid, particularly given significantly warmer weather in the shoulder month of April.

Although weather isn't as impactful in the third quarter as it is in the first two quarters, April accounts for approximately 70% of the heating degree days in the quarter, and the very warm weather negatively impacted volumes.

On this slide, we've laid out our adjustments from GAAP earnings to adjusted earnings per share for the third quarter of fiscal 2019, compared to the third quarter of fiscal 2018.

As you can see, our adjusted earnings exclude the impact of mark-to-market changes in commodity hedging instruments, a loss of $0.14 this year versus a gain of $0.21 last year.

We had 500,000 of unrealized losses on our foreign currency derivative instruments and booked approximately $300,000 of expenses related to the AmeriGas merger, but the impact to adjustable EPS is negligible. Adjusted earnings per share increased $0.04 versus Q3 of 2018.

For our LPG businesses, AmeriGas was down $0.03 versus last year, largely a result of lower volumes due to April weather that was 30% warmer than Q3 of 2018. Our International business increased $0.02 year-over-year, largely due to margin and expense management.

The team has done a great job year-to-date, despite unseasonably warm weather dating back to last summer. Adjusted EPS increased to total $0.04 at our natural gas businesses. Midstream and Marketing declined $0.02 versus last year, as there was lower capacity management and lower electric generation margin.

At Utility, adjusted earnings increased $0.06 versus last year, primarily due to the negative impact of the $22.7 million revenue reduction associated with the TCJA from the prior year period. Turning now to the individual businesses. AmeriGas reported adjusted EBITDA of $42.4 million versus $67.2 million in the prior year period.

AmeriGas experienced normal weather in the quarter, but 8.7% warmer than last year. April, which is the most significant month in the quarter was 30% warmer than last year. Volume was down 6.7% on the warmer weather, and operating expenses were impacted by reserves for litigation, and a correction of an accounting error relating to prior years.

In the light of these adjustments, we are taking AmeriGas guidance down $680 million to $690 million. The team maintains a disciplined approach to expense management and continues to identify opportunities to optimize operational efficiencies. Hugh will discuss AmeriGas results in more detail in a few minutes.

UGI International reported adjusted income before taxes of $22.9 million. As a reminder, translation effects impact the results on this slide. Weather for the quarter was 10.8% colder than normal, the first quarter of colder than normal weather, since the second quarter of 2018.

Volumes were slightly lower this quarter, due to competitive pricing in the East. In the local currency, total margin increased versus the prior year period, due to margin management and the recovery of costs associated with energy conservation.

Our team focused on expense management, keeping operating and administrative expenses flat versus Q3 of 2018, despite the incremental effects of Q1 and Q2 acquisitions in Belgium, Netherlands and the U.K., that weren't included in the prior year. Midstream and Marketing reported income before taxes of $3.6 million.

Total margin decreased $6.9 million on weather that was 14.5% warmer than normal, largely reflecting lower capacity management margin, and lower electric generation volumes from our Hunlock facility. Operating expenses decreased versus last year, reflecting lower compensation, legal and consulting expenses.

UGI Utilities reported income before taxes of $8.4 million. When looking at comparative results, it's important to remember that the 2018 third 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 $22.7 million. Excluding the impact of the revenue reduction, total margin decreased $7 million, due to lower core market volumes from warmer April weather.

Operating and administrative expenses decreased versus last year, due to lower uncollectible accounts, lower IT, maintenance and consulting and lower allottable corporate expenses. Depreciation increased $1.7 million from increased distribution system and IT capital investments.

Before I turn it over to Hugh, I want to comment on expectations for our fourth quarter. The CMG acquisition closed on August 1, and we expect it to be neutral to adjusted EPS. We expect the AmeriGas transaction to close in late August and have a negative impact to EPS within the $0.05 range.

As a reminder, due to the lack of heating degree days the AmeriGas business usually has negative earnings in the fourth fiscal quarter. As discussed in the previous quarter, we increased margins at UGI International, to offset the energy conservation compliance costs and expect to realize these margin benefits in the fourth quarter and beyond.

During the quarter, we expect our focus on OpEx management and operational efficiency to incrementally improve our historical fourth quarter results. UGI remains well positioned to grow and deliver value to our shareholders, and expects to come in at the low end of our guidance range of $2.40 to 2.60.

Finally UGI is completing the 25% dividend increase that was announced with the AmeriGas merger transaction, and the quarterly dividend will now be $32.50 per share payable in October. That concludes my remarks and I'll now turn it over to Hugh for his report on AmeriGas.

Hugh?.

Thanks Ted. Nationwide degree days during the quarter were 9% warmer than last year, with April averaging 30% warmer than April of 2018. Largely as a result of the April weather, retail volumes declined 6.7% versus the prior year period. Adjusted EBITDA for the quarter was $42.5 million, compared to $67.2 million in the prior year.

And it's worth noting, as stated earlier, that our adjusted EBITDA for the current quarter includes the impact of approximately $15 million in unusual items related to reserve adjustments, and the correction of an accounting error related to prior period vehicle lease expense.

Given our results for the quarter, as mentioned earlier, we are adjusting our guidance of EBITDA to $580 million to $590 million for this year.

Our AmeriGas Cylinder Exchange program experienced solid growth in the quarter, with volume up 4.5% and our National Accounts program volume was up slightly from last year's quarter, despite the warmer weather. On last quarter's call, we discussed our progress in the development of the home delivery - home cylinder delivery concept.

I'm pleased to announce that we launched the program, which we call that Cynch, that's C-Y-N-C-H, in the Philadelphia market in June. Customer response has been very encouraging, and we continue to plan the expansion of this offering into other cities in the near future.

This program was just in the discussion phase at this time last year, so we're very pleased to have a program like this go from concept to execution to launch in such a short period of time.

Also during the quarter, our AmeriGas Cylinder Exchange team completed expansion plans with a major retailer and a large convenience store chain, that will result in the rollout of several hundred additional 24/7 automated cylinder vending locations, and rollouts of these machines are already underway.

We continue to make good progress on the merger with UGI. The S4 registration statement related to securities to be issued in conjunction with the transaction was declared effective on July 12.

Our proxy solicitation process is underway, and we are currently preparing for the unitholder meeting, which is scheduled for August 21, and we look forward to a closing, pending approval of the transaction shortly thereafter.

As we work our way towards the closing of the transaction, we remain focused on leveraging technology and our scale, to drive significant improvements in operating efficiencies in our customer experience, and we expect to make significant progress related to these initiatives during our fourth fiscal quarter.

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, as we navigate through this important period in AmeriGas' 60-year history. With that, I'll turn the call over to John for his closing remarks.

John?.

Thanks Hugh. As I mentioned in my earlier remarks, Q3 was a particularly noteworthy quarter for us. With the pending AmeriGas transaction and the closing of the Columbia Midstream transaction last week, we've significantly enhanced our platform for long-term cash flow and earnings growth.

In the case of Columbia Midstream, we're broadening the reach and increasing the scale of our midstream network. Columbia significantly expands our producer relationships and adds critical resources in an area of our business that has expanded rapidly over the past decade. With the AmeriGas transaction, we're acquiring a company that we know well.

In both cases, we're enhancing the organic cash flow of UGI and fueling the cash engine that has been a critical element of our long-term success. Both transactions have proceeded as we expected with critical developments over the past few weeks. The Columbia Midstream transaction closed on August 1.

We're pleased that all of the Columbia Midstream team members have joined UGI. As I noted on our call last month announcing the deal, we're excited about the opportunity to invest in expansion projects on the five systems we acquired.

We expect to invest $300 million to $500 million in a series of Western Appalachia projects on these core systems over the next three to five years. We expect these investments to be supported by long-term take-or-pay contracts, consistent with our approach to midstream infrastructure investments over the past decade.

Our focus in the short term is on welcoming the Columbia Midstream team to UGI, meeting the key customers and producers on each of the Columbia systems, and executing our detailed roadmap for future investments. The AmeriGas transaction process as you noted, has also proceeded on schedule.

All unitholders have received notice of the UGI proposal and the voting process is underway. We have the scheduled unitholder meeting on August 21, to confirm the outcome of the vote. We're looking forward to concluding this process in Q4 and starting fiscal '20 with AmeriGas as a wholly-owned UGI entity.

This transaction will significantly enhance our free cash flow and provide a broader funding foundation for the company.

This enhanced cash flow will be used for major capital investments in our natural gas businesses over the next decade, technology investments to drive operational improvements in our LPG businesses, and future M&A across the entire corporation.

We're excited about this major enhancement to UGI's cash engine for growth and the opportunity to drive future growth with this enhanced free cash flow.

As we look forward to fiscal '20 and beyond, we're focused on the opportunities provided by these two major transactions and by the broader range of attractive investment opportunities across our natural gas and propane 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 will turn the call back over to Denise, who will open it up for your questions..

[Operator Instructions] Your first question comes from Dennis Coleman with Bank of America. Your line is open..

This is Alex on for Dennis. Just a quick couple of questions for me.

For the accounting error and the litigation expense, could you guys provide any more detail on that?.

So the accounting error is related to the approach we use on how we lease the vehicles, where we were getting the vehicles a little earlier than we were starting our depreciation. So we had to clawback that accounting. On the litigation, there is nothing more that I can add..

Thank you. And then, John, I know on the beginning of the call you said that, that the weather impacts or weather is a little warmer in the UGI International segment.

Could you guys provide any additional color on the weather throughout that segment for the quarter?.

Sure. It's a - given the calendar, coming out of the winter. So it's a shoulder quarter for us.

So weather in April is particularly important on the propane side of the business, particularly because, as you come out of winter, and if you have a warmer April, there is a strong tendency for people to kind of shutdown their heating systems and defer any fill, for example, on a residential propane tank until the beginning of the next winter heating season.

So we came out of a relatively warm Q2, leading into this shoulder season. So that carryover is what's reflected in demand. Although having said that, the international business had a really strong quarter, when you look at the underlying performance of the business, both around margin management and operating expense management..

Your next question comes from Chris Sighinolfi with Jefferies. Your line is open..

John just - I want to circle back on PennEast.

I think in prepared remarks, you noted the progress you've made on the permit process in both Pennsylvania and New Jersey for PennEast, and I think you previously had noted an expectation to commence construction by year-end and have that project online by the end of calendar next year - year-end next year.

But I did see that one of your project partners, New Jersey Resources, did kick the CapEx they are anticipating from 2020 and 2021.

So I'm just curious where we stand in terms of your expected in-service for that and what milestones we should watch to see when we might start construction and therefore, when the project and service might be?.

Yes, I think the key, Chris, becomes just the duration of the permitting process. So it's difficult and obviously it's not our decision in terms of timing of that process.

So we would - that will be - the development of those processes will be crucial, and as they move along, and certainly the most critical milestones will be the issuance of the relevant permits, both in Pennsylvania and New Jersey, which would then open it up for execution, enable us to begin executing the project.

And then there are windows for when you can actually execute. So you are looking at not being able to start - typically not being able to start major construction activities, until the winter is over. You can do some preliminary construction type work.

But, so then the key driver really is, the issuance of the relevant permits, concluding the permit process, getting the permits issued, and then looking at kind of where we are in the calendar and when we can begin to execute significant field work..

Okay..

The last update that you're referencing, is I think an accurate an update based on potential timing for issuance of permits, which is - we don't want to speculate on, since its the various agencies in Pennsylvania and New Jersey and then, if you apply a timeframe to that, you are then looking at, certainly beyond the end of next year before you can start construction..

Beyond the end of this - next year, this fiscal - okay, do you mean for an in-service or you mean construction wouldn't begin until that point?.

Construction activities wouldn't begin until that point..

And if we presume that you could start, let's say, spring of '21, then can you - is it safe to assume that the project will be completed within that year?.

Yes. So if you assume, just to pick a timeframe that we wouldn't be in a position of having all permits, and executing all other sort of pre-construction activity, commencing construction in the spring of '21, you would actually - you would conclude construction within that year. Definitely..

And If I could switch gears and just - Ted, obviously you've seen series of 8-Ks and presentations related to some of your bondholder offerings.

Can you just remind us where - I know you got bridge loan financing went from one of the banks when you announced the AmeriGas deal, and we're going to put corporate level debt potentially in either a credit facility or term loan, and then obviously we have the CME deal.

Can you just remind us where we are, in both processes in terms of terming out what you want, what you wanted to do, at both the Energy Services business and the corporate level?.

Yes. So we did have a bridge facility that we established for the CMG assets. We did not end up using that asset - we did not end up using that facility to close the deal. We are fully financed against our plans at the corporate level.

We've raised $850 million, $550 million of that is in term loans, and $300 million in a revolver facility, and we are in the process of raising $700 million in funds at the Energy Services level, for a debut financing for Energy Services, it's a term loan B that's secured, and we expect to be pricing that on Thursday and closing it early next week..

And then is the expectation still for any excess cash sweep to go towards - at the AmeriGas level to short-term debt repayment there, and then at the UGI corporate level, to go towards either paying down the revolver of borrowings or for clearing out some of the term loan.

Is that still a safe expectation for us?.

That's still a safe expectation, given where we are today and what we have visibility towards in the future at AmeriGas. We do want to bring down the debt multiple and bring that closer to the $4 billion to $4.25 billion level over time, and with the cash inflow we get with the buying of AmeriGas, that's very feasible over the next couple of years.

And then, as we've talked about in the past, we like having availability at the corporate level to be able to finance ourselves for strategic compelling opportunities. And so over time, we would want to see that debt level at corporate come down, all things equal..

And just one quick to add here, Chris. We're also in the form of the increases we've announced to the dividend associated with these transactions, particularly AmeriGas transaction we made the announcement, we're sharing some of that cash with our investors to the enhanced dividend payments..

[Operator Instructions] Your next question comes from Christine Cho with Barclays. Your line is open..

So appreciate the color of the AmeriGas impact on 4Q on UGI. Can you just give us an idea, what it would have been if - the APU deal were to close this quarter.

I just want to make sure we're modeling the combination correctly, in terms of the APU new impact that we have from pro forma UGI is right?.

So I'm not sure I completely understand the question.

I guess I'd go back to my remarks and say we expect to close the deal with AmeriGas late August, and in doing that, we would expect there to be an EPS impact within about a $0.05 range, depending on the timing for that, and that is incremental to the guidance we've been offering, which excluded the deals and that continues to be at the $2.40 to $2.60 range..

I guess I was just hypothetically asking like if the deal had closed in time for the quarter results, what the impact would have been for the second quarter? But if you don't it, that's fine?.

Yes, well I'd just assume not to answer a hypothetical for a previous period..

We don't have that calculation in front of us..

And I will turn the call back over to John Walsh for closing remarks..

Okay, Denise. Thank you very much. Thank you all for your time and attention this morning and we'll look forward to discussing with you our Q4 results and the outlook for fiscal '20 on our next call. Take care..

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