Hello. Thank you for standing by. And welcome to the UGI Corporation First Quarter Fiscal 2022 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advise that today’s conference is being recorded.

[Operator Instructions] I would now like to hand the conference over to your speaker today, Tameka Morris, Director of Investor Relations. Please go ahead..

Thanks, Josh, and good morning, everyone. And thank you for joining our fiscal 2022 first quarter earnings calls. Today I’m joined by Roger Perreault, President and CEO; Ted Jastrzebski, CFO; and Bob Beard, Executive Vice President, Natural Gas, Global Engineering & Construction, and Procurement.

Roger and Ted will provide an overview of our results, and the entire team will then be available to answer your questions. 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 report for an extensive list of factors that could affect results.

We ask you 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 within our presentation.

Now, I’m pleased to turn the call over to Roger..

Thank you, Tameka, and good morning, everyone. I’ll start today by providing an update on the quarter, including our progress on several strategic initiatives. Ted will then provide an overview of first quarter’s financial results and liquidity position.

I believe everyone is aware of the extremely challenging macroeconomic environment experienced in the first quarter, significant increases and volatility in commodity prices, rising inflation and the tight labor market. These factors along with December being the warmest on record in the U.S.

allowing to have a negative impact on our results, as we reported adjusted earnings per share of $0.93 for the quarter.

AmeriGas despite seeing promising customer growth in several areas reported lower overall volumes due to weather, the impact of customer service challenges from the prior year after establishing the new operating model and the effect of higher commodity prices on customer usage.

UGI International had lower average LPG unit margins and lower energy marketing margins that were largely due to higher commodity costs.

Our Natural Gas businesses delivered strong results, despite the warmer weather, due to incremental earnings from Mountaineer, the higher gas base rates that went into effect last year and higher margin from renewable energy marketing activities.

As per our historical practice, we are not discussing full fiscal year guidance after a single quarter given the amount of heating degree days remaining.

However, we are executing on a robust plan, leveraging our proven capabilities of focus margin and expense management, and we expect these actions will have a disproportionate benefit in the back half of the fiscal year. Additionally, we are encouraged that January was colder than normal in the U.S.

We are confident in the strength and resilience of our business and our ability to deliver against our long-term commitment to providing 6% to 10% EPS growth. Turning to slide five. In the first quarter, we continue to advance our strategy to deliver reliable earnings growth, invest in renewables and rebalance our business.

We are off to a strong start in our Utilities Capital Expenditure Program, which is an area of significant growth for the company. During the quarter, we deployed over $110 million of capital and we expect to execute on our plan of investing over $500 million in fiscal 2022.

Our goal is to continue replacing cast iron and bare steel pipes to promote the long-term safety and integrity of our infrastructure, drive operational efficiency, provide access to reliable and affordable natural gas to our customers, while reducing emissions.

We continue to see attractive customer growth at the Utilities, in particular with conversions from other fuel sources, the most predominant of which is fuel oil. During the quarter, we added more than 4,500 new residential heating and commercial customers. Mountaineer performed in line with our expectations, delivering solid results for the quarter.

We also saw that in the midst of significant increases in commodity prices in comparison to the prior year period, AmeriGas benefited from disciplined margin management efforts. Late last week, UGI Utilities filed a request with the Pennsylvania Public Utility Commission to increase natural gas rates by approximately $83 million.

This requested rate increase is driven by the record cap level of capital that UGI Utilities is deploying to upgrade and expand our piping systems.

Included in this rate case is a request for a weather normalization adjustment mechanism that is intended to stabilize the Utilities revenue and customer distribution charges, as we continue to execute our strategy of delivering reliable earnings growth.

Turning to our renewables strategy, in December 2021, we received approval from the European Commission for the intended joint venture with SHV Energy that will advance the production and use of renewable dimethyl ether in the U.S. and Europe.

With this approval, we’ve now begun the process of forming the joint venture and expect to provide more details in the coming months. We anticipate that the first production facility will be located in the U.K.

We also entered into a multiyear agreement with Vertimass to utilize their catalytic technology to produce and distribute renewable fuels within the U.S. and Europe. The intent is to bolt-on the technology to existing bioethanol facilities in order to produce the renewable fuels.

The first production facility is expected to be operational in fiscal year 2024, with an annual production target of approximately 50 million gallons of combined renewable fuels. We are pleased with the momentum that we’ve built upon fiscal 2021 in identifying renewable investment opportunities.

In addition, our previously announced projects remain on track with the Idaho and Spruce Haven RNG projects expected to be completed in calendar 2022. We are moving forward our ESG programs as well as the commitment to lower our own carbon emissions and help our customers to do the same.

I am proud of that -- of our efforts to maintain robust governance practices and improved greenhouse gas mitigation strategies were recognized, with UGI being upgraded to AA rating by MSCI. This rating positions us among the leading companies worldwide for action across ESG matters.

Turning to the third prong of our strategy, rebalancing our portfolio. On January 27th, we completed the previously announced Stonehenge acquisition for a total cash consideration of $190 million. The Stonehenge business includes a 47-mile natural gas gathering system and associated compression.

It is located in Western Pennsylvania and complements our UGI Appalachia assets. This transaction is immediately accretive to earnings and as stable cash flows underpinned by long-term contract with minimum volume commitments. And now, I’ll turn the call over to Ted, who will get into more details on our financial results..

Thanks, Roger, and good morning. As Roger mentioned, UGI delivered adjusted diluted EPS of $0.93, compared to $1.18 in the prior fiscal quarter. This table lays out our GAAP and adjusted diluted earnings per share for the quarter in the comparable prior period. As you can see, our adjusted diluted earnings exclude adjustments totaling $1.39.

That related to a number of items. First is the impact of mark-to-market changes in commodity hedging instruments, a loss of $1.37 this year versus a gain of $0.40 in the prior year, which is largely attributable to the increases and volatility in commodity prices.

Last year we had a $0.07 loss on foreign currency derivative instruments, compared to a $0.02 gain this year. We had a $0.03 loss on the extinguishment of debt associated with a refinancing at UGI International during the quarter.

In addition, we adjusted out a penny of expenses associated with the corporate functions transformation in comparison to $0.06 in the prior year for all of the business transformation initiatives. As a reminder, the LPG business transformation initiatives were substantially complete as of the end of fiscal 2021.

Therefore, the expenses being adjusted out in the fiscal 2022 solely relate to the transformation of the corporate support functions. On this slide, we provide additional color on the $0.25 decline in the year-over-year quarterly performance by segment.

Global LPG was impacted by unprecedented warmer weather in the U.S., the significant increases in volatility and commodity prices, and the effect of customer service challenges from the prior year at AmeriGas.

Our Natural Gas businesses reported higher contribution in comparison to the prior year period due to the incremental margin for Mountaineer and higher margin from renewable energy marketing activities. Turning to the individual businesses. AmeriGas reported a $55 million decrease in EBIT over the prior year.

Retail volume declined 13% reflecting lower customer usage as the country experienced the warmest December on record coupled with significant increases in commodity prices. Average wholesale propane prices at one of the major supply points in the U.S., Mount Bellevue, Texas were approximately 125% higher than the comparable prior year period.

As we shared last year, we experienced customer service challenges with our transformation driven new operating model. Our service metrics have improved dramatically and we’re seeing high quality customer growth in certain areas, but the challenges from last year had a follow on customer retention effect during the quarter.

We continue to make customer experience and accelerating customer growth a top priority. The impact of the lower volume on total margins was partially offset by higher average retail unit margins, as we continue to focus on margin management, while being conscious of customer affordability.

As Roger mentioned, our business is navigating rising cost inflation and a tight labor market. These inflationary pressures affected operating and administrative expenses during the quarter, which increased $19 million, reflecting higher general insurance, vehicle fuel and maintenance expenses, bad debt reserves and advertising expenses.

Turning to slide 10, UGI International reported EBIT of $82 million, compared to $136 million in prior year period. Retail volumes increased 6% largely due to the colder than prior year weather, which had a favorable impact on heating related bulk and crop drying volumes.

Average wholesale propane prices in Northwest Europe were approximately 100% higher than the comparable prior year period. This significant increase and unprecedented volatility in commodity pricing -- prices had a negative impact on average LPG unit margins and energy marketing margins.

Price increases have been put in place to recover this accelerated increase in LPG cost and the margin shift for energy marketing attributable to backwardation is recoverable in future periods of the contract, which are typically two years to three years in length.

Also impacting the decline in energy marketing margin was increased commodity costs associated with higher than anticipated volumes purchased by certain customers through fixed price sales contracts.

Turning to operating and administrative expenses, the modest increase over price year -- over prior year is largely due to additional distribution and packaging costs, because of the higher retail volume sold.

Separately, our hedging strategy, which is intended to offset the multiyear impact of foreign currency exchanges is working as intended and is reducing the volatility associated with U.S. dollar shifts over time. Moving to the Natural Gas businesses. Midstream and Marketing reported EBIT of $82 million, compared to $59 million in prior year period.

The business experienced increased margins from renewable energy marketing activities, capacity management and peaking contracts in comparison to the prior year period. The higher renewable energy marketing activities reflect increased sales volumes, as well as higher average pricing for environmental credits.

Our Utility segment reported EBIT of $98 million, $20 million higher than the prior year period, which is largely attributable to the incremental contribution from Mountaineer. Both core market and total volume increased over the prior year period, despite warmer weather, largely due to the additional volume from Mountaineer.

Our Utilities continued to experience strong customer growth with an addition of more than 4,500 new customers, roughly 4,000 of which were in Pennsylvania.

Total margin increased by $46 million, due to the higher core market volume, the higher gas base rates at UGI Utilities that went into effect in fiscal 2021 and a distribution system improvement charge that was implemented in Q3 of fiscal 2021.

The increase in operating and administrative expenses, as well as depreciation expense were largely as a result of the incremental expenses attributable to Mountaineer. Liquidity, as of the end of the quarter, UGI had available liquidity of $1.5 billion, which is consistent with the corresponding prior year period.

We’re pleased with the cash generation capabilities of our business and our current liquidity position, given the significant increases in volatility and commodity prices, and since we typically experienced higher seasonal working capital requirements in the first quarter.

Our balance sheet remains strong, with the capacity to fund active projects and growth investments. Additionally, on February 2nd, our Board of Directors declared a quarterly dividend of $0.345 per share.

On that date, our Board also approved an extension of the existing share repurchase program for up to 8 million shares for an additional four-year period through to February 2026.

This program extension will provide additional flexibility in deploying cash with the intent to keep shares outstanding fairly constant and at times return excess cash to shareholders. And with that, I’ll turn the call back over to Roger..

Thank you, Ted. In closing, I want to emphasize that our long-term financial commitments of achieving 6% to 10% EPS growth and 4% dividend growth are unchanged.

We are leaning into our strong capabilities of focus margin and expense management, and this includes discipline to actions to recover higher commodity costs incurred, control and minimize discretionary expenses across the entire business and accelerate the corporate function transformation that began in fiscal 2020.

We have a long runway of growth opportunities ahead and our teams are making tremendous progress on key initiatives across the business.

These opportunities and initiatives align with our strategy to deliver reliable earnings growth, invest in renewables and rebalance our business in order to create sustainable value for our shareholders, customers and employees. We thank you for your interest in UGI and your participation in today’s call.

And with that, we will open the line for your question.

Josh?.

Thank you. [Operator Instructions] Our first question comes from Julien Dumoulin-Smith with Bank of America. You may proceed with your question..

Hey. Good morning. This is actually Kody Clark on for Julien. Thanks for taking my question. So, first, wondering if you can quantify the weather impacts overall for the quarter.

And also, if you could just give a little bit more detail on the offsets to the weak first quarter for the balance of the year, you talked about some of the inflationary pressures you’re seeing on the expense side.

So how much latitude do you see for the balance of the year?.

Yeah. Thanks. Thanks, Kody, for your question this morning. So, maybe just a couple of things. So, we don’t typically go into that level of detail, talking about specifics on weather, but as you know, December has the highest amount of heating degree days in the first quarter and we did see an all time record warm December across the U.S.

So, while our business is certainly designed to manage some weather volatility, we did see unprecedented warm weather this particular quarter and especially in December.

So I’d like to highlight, though, that despite this, our Natural Gas businesses did deliver some pretty strong results and this speaks to the benefits of the diversification of our business, and the fact that we have these attractive fee-based structures in the Midstream business..

Okay. Got it.

And then looking at UGI International, just wondering if you can kind of expand on that margin impact attributable to the fluctuations in commodity prices, I know you’ve shown how you’ve managed margins at Global LPG over time and you had some volume up there on the colder weather, yet, it was more than offset by the margin impact?.

Yeah. So let me just provide a bit more color on the energy marketing margin impact that we saw. So we really did see unprecedented and an accelerated increase in natural gas costs and electricity costs. So I think everybody can see that it’s been a very well known fact over the year -- over the quarter.

So our business is one where we signed the two-year to three-year deals. And when we do, customers want a fixed price, so when we lock in our fixed price, we hedge it. And therefore there’s this margin shift that occurs, where in the short-term, we won’t see the margin, but we certainly recover that margin over the longer period.

So the first quarter was impacted by margin shift. The other item that we pointed out is that, we did have some customers that took volumes that were in excess of what we previously took. And that created a scenario where we had to buy products from the market at spot prices and that also created some margin erosion in the first quarter.

Now, our teams have been hard at work at preventing that or minimizing that going forward, through commercial arrangements with customers, where we’re really looking at, if they take in additional volume, we have the commercial attitude to go in and make sure that we recover excess cost as much as possible going forward.

So that’s one of the action items we’ve been very much focused on. And also really minimizing the type of -- the amount of renewal -- renewals that we will do that will provide this opportunity for customers to take excess product above what we agreed to and what we are able to hedge..

Okay. Understood.

And lastly, on Midstream if I can, just wondering how you’re thinking about opportunities for organic versus inorganic growth, where’s the focus now? And similarly, can you quantify, either revenue or BCF, how much capacity you have on the existing Midstream system and what you see as available for expansion there?.

Yeah. Kody, thanks, as well, for that question. I’ll pass it over to Bob Beard who is here with us to answer that question..

Good morning. Yeah. We see significant opportunities in the Southwestern part of the state. If you give me a second, excuse me, I will tell you the capacity of the systems that we have. Sorry about that. Yeah, sure.

So on the Midstream system, in total, we have total vaporization capacity of about 360,000 decatherms per day, liquefaction of about 22,500 decatherms per day and a total pipeline capacity of over 4 BCF a day. So what we’re seeing in this, go ahead, I’m sorry..

No. I was just going to ask the second part on the organic versus inorganic growth..

Yeah. We’re seeing -- it was about a month and a half ago that we saw a statistic come out of EIA, that the prior six months was the highest production out of the Marcellus in the history of Marcellus production in Utica.

So we’re seeing strong activity continuing and we continue to see -- using our Utility as a proxy, for instance, we continue to see, I’m going to say, single-digit percentage increase of capacity out of the Marcellus.

And as a proxy, the Stonehenge system that we reach -- recently purchased, we’ve seen increases in production out of that system over the last four years or five years of about 40% or 50%.

So, when we look at the Midstream system, we look at our Utility as a proxy, right? So our Utility system continues to add anywhere between 8,000 and 16,000 customers a year. We continue to see existing customers grow their load. And for the first time in my career, we’re seeing industry locate to the Appalachian Basin as opposed to move out of it.

So if we use our Utility as a proxy and Mountaineer as a proxy as well, we see continued strong growth out of the Marcellus. So we’re bullish on it. As far as organic growth, yes, I think the rig count was up last month by one over the prior year.

As prices stabilize at what we believe to be reasonable for decatherm rates, I think, we’ll continue to see interest in production out of the Marcellus..

Okay. That’s all I had. Thanks again for the time..

Thank you, Kody..

Thank you. [Operator Instructions] And I’m not showing any further questions at this time. I would now like to turn the call back over to Roger Perreault for any further remarks..

Yeah. Thank you, Josh. So, just in closing, I’d like to share a few additional remarks today. So, as we highlighted during the call, we don’t discuss guidance after the first quarter, it’s just too early in the year, given the amount of heating degree days that we have ahead of us. That being said, we can say that January in the U.S.

was a colder than usual than the normal month. The other thing I’d like to highlight is that the first quarter was a tough quarter. A lot of headwinds at the same time that with the warm December in the U.S., a lot of volatility in commodity costs, the residual effects from customer service challenges that we spoke about.

So we are clearly disappointed with the first quarter, but our team’s really sprung to action. We are absolutely managing margins and being proactive with margin management, as we continue to execute through the next quarters. We are controlling expense and reducing discretionary expenses, while keeping a very keen eye on safety and customer service.

So these -- all of these actions will lead to recovery over the remainder of the years. We really expect recovery through Q2, Q3 and Q4. So, with that, I’d like to thank you for your participation today and your questions, and we look forward to the next earnings call. Thank you very much..

Thank you. This concludes today’s conference call. Thank you for participating. You may now disconnect..