Good morning. My name is Denise, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the UGI Corporation AmeriGas Second Quarter Fiscal Year 2019 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
Thank you. Brendan Heck, Director of Investor Relations, you may begin your conference.
Thanks, Denise. Good morning, everyone, and thank you for joining us. With me today are Ted Yastrzewski, 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 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 ks 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, Brendan. Good morning and welcome to our call. I hope that you've all had the opportunity to review our press releases reporting second quarter results for UGI and AmeriGas. Our results in Q2 reflect a 2nd consecutive quarter of very warm weather in Europe as well as the impact of limited weather volatility in the Marcellus region on our capacity management business. Despite these challenges, we delivered a solid performance in the quarter posting the 2nd best Q2 adjusted EPS in our history.
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'll provide you with an overview of UGI's financial performance. Hugh will review Q2 for AmeriGas and I'll wrap up with an update on our strategic initiatives. Our Q2 GAAP EPS was $1.38 and our adjusted EPS was $1.43 Net adjusted Q2 EPS was 15% below our record fiscal 2018 Q2 adjusted EPS of $1.69 but 9% above Q2 fiscal 2017 adjusted EPS of 1.31 dollars As I noted earlier, this is the 2nd highest Q2 adjusted EPS in UGI's history. Both quarters have been adjusted for the mark to market valuation of unsettled hedges and other items which Ted will cover later. I should also note that our Q2 fiscal 2018 results included a $0.09 positive impact from tax reform in our utilities business, which was subsequently returned to ratepayers in Q3 fiscal 2018.
We're affirming our updated guidance of $2.40 to $2.60 which we reviewed on our April 2nd call. Ted will provide more detail on our outlook in his comments. In addition to the solid earnings performance in the Q2, there was significant progress on our strategic projects and initiatives. On April 2, we announced an agreement to acquire all the common units of AmeriGas owned by the public. This agreement was the outcome of the strategic review process we announced at our Analyst Day in early December.
We believe this agreement is in the best interest of our AmeriGas unitholders who will receive a fair value for their units and have the opportunity to become shareholders in UGI. This is also a favorable outcome for UGI shareholders as we expect the transaction to significantly enhance retained cash flow and to be earnings accretive in fiscal 2020 and The transaction is subject to approval by AmeriGas unitholders and we hope to receive that approval and close the transaction in our fiscal Q4. We're making good progress on our PennEast project. We've completed all required survey work in Pennsylvania, which is 2 thirds of the route and the Pennsylvania Department of Environmental Protection has determined that our applications are administratively complete. Pennsylvania DEP has formally initiated their technical review of our submission.
There is noteworthy progress in New Jersey as well, Having received favorable court rulings related to survey access, our PennEast team was given legal rights to complete the majority of the field surveys required for an updated submission of our New Jersey permit applications. We're awaiting a final court ruling regarding survey access for a small number of state owned land parcels along the route. Project remains on track to commence construction type activities as soon as possible, which in all likelihood will be in 2020 given anticipated permitting reviews. Growth and infrastructure replacement remain the key themes at utilities. We've added almost 8,500 new residential heating and commercial customers year to date and demand for gas service continues to be robust.
Our gas utility recorded a record send out in mid January and underlying demand for gas service is strong. In addition to the expenditure for our growth programs, we are continuing to invest record levels of capital on infrastructure replacement and reinforcement. Our infrastructure replacement program for cast iron and bare steel remains on pace with our PUC approved long term infrastructure replacement plan. The forecast capital spend of almost $400,000,000 in fiscal 2019 will be another record for us. AmeriGas had a challenge this quarter with particularly warm weather in the Southeast.
While overall volumes were slightly below last year, we delivered very strong performance in our ACE and National Accounts programs. ACE volumes were up 7% over prior year, while national accounts growth reached 6%. Hugh will comment in much more detail on AmeriGas' Q2 performance in a few minutes. UGI International faced a significant weather challenge in the quarter with weather that was 7.5% warmer than normal and 10% warmer than prior year. However, the impact of lower volumes was largely offset by effective margin management and diligent expense control.
We benefited from positive contributions from the DVEP and UniverGas acquisitions made in late fiscal 2017 early fiscal 2018. The solid performance in this weather challenged quarter once again demonstrates the resiliency and earnings power of UGI International. I'll return later on the call to comment on our strategic initiatives, but I'd like to turn it over to Ted at this point for the financial.
Ted? Thanks John. As John mentioned the results this quarter were solid but fell short of our record earnings last year. Adjusted earnings per share were $1.43 versus $1.69 in Q2 2018. This table lays out our GAAP and adjusted earnings per share for the Q2 of fiscal 2019 compared to the Q2 of fiscal 2018.
As you can see, our adjusted earnings exclude a number of items such as the impact of mark to market changes in commodity hedging instruments, a loss of $0.07 this year versus a loss of $0.08 last year. This quarter we had $0.02 of unrealized gains on our foreign currency derivative instruments, loss of a penny in 2018. As mentioned last quarter, you can also see that we no longer have Finagas integration expense as this acquisition has been fully integrated. Lastly, this quarter we booked approximately 200,000 of expenses related to the proposed merger with AmeriGas but the impact to adjusted EPS is negligible. Adjusted earnings per share decreased $0.26 versus Q2 of 2018.
For our LPG businesses, AmeriGas experienced colder weather overall, significantly warmer than normal weather in the Southeastern US during January February. They were down a penny versus last year. Our international business continued to face warmer weather conditions, but net income is up as a result of focused margin and expense management. Additionally, we benefited from reduced statutory tax rates in France. I'll speak to international results in more detail in a moment.
For our natural gas businesses, adjusted EPS for both midstream and marketing and utilities declined $0.22 $0.04 respectively. Less volatile weather and increased pipeline restrictions in the midstream and marketing business limited capacity management margin. At the utility, adjusted earnings were down versus last year primarily due to the $0.09 benefit
in the
prior period on revenues and associated margin as a result of the tax savings from AA. Turning now to the individual businesses, AmeriGas reported adjusted EBITDA of $290,000,000 versus $309,000,000 in the prior year period. Although weather was extreme cold in areas where we have a lighter operational footprint. The Southeastern U. S.
Experienced very warm weather during the critical heating months of January February. The team maintained a disciplined approach to expense management and continues to search for opportunities to drive efficiencies. Hugh will discuss AmeriGas results in more detail in a few minutes. UGI International reported adjusted income before taxes of $124,000,000 Weather for the quarter was 7.5% warmer than normal and 10% warmer than the Q2 last year. Furthermore, the international teams experienced warmer than normal weather in 11 of the past 12 months.
As you know, we layer in foreign currency exchange contracts to reduce volatility in UGI International's net income resulting from the translation effects of changes in foreign currency exchange rates. If you remove the impact of currency, margin decreased last year due to the sustained warm weather impact on volumes, but that was primarily offset by unit margin management. On a weather adjusted basis our team delivered a solid quarter. Operating expenses were well controlled given the warm weather and while up slightly versus last year this was largely due to higher compliance costs associated with energy conservation which are passed on to customers. Midstream and marketing reported income before taxes of $52,300,000 Total margin decreased $54,000,000 compared to Q2 of last year on weather that was slightly colder.
The primary driver approximately 47,000,000 of the decrease came from capacity management where we did not experience the same type of cold and volatility that we did in the early part of the quarter last year coupled with increased pipeline restrictions. The remaining decrease came from electric generation where volumes from our unlocked facility were lower reflecting a lack of economic opportunities. Operating expenses increased versus last year reflecting higher compensation and benefits expense, slightly higher expenses associated with greater peaking, LNG and natural gas gathering activities. UGI Utilities reported income before taxes of $108,100,000 When looking at comparative results, it's important to remember that the 2019 Q2 reflects the impact from the May 17, 2018 Pennsylvania PUC order addressing among other things the credit to rate payers of tax savings from the TCJA. As a result, revenues in the quarter were reduced by $23,000,000 Excluding the impact of the revenue reduction, total margin increased $8,000,000 due to higher core market volumes which increased due to customer growth and slightly colder weather.
Operating and administrative expenses decreased versus the primary driver is lower uncollectible accounts which improved versus last year. Depreciation increased $1,200,000 from increased distribution system and IT capital investments. Before I turn it over to Hugh, I want to comment briefly on our guidance and the dividend announcement last week. Last month, we revised our guidance range to $2.40 to $2.60 Based on our first half results and our historical performance in the 3rd 4th quarters, I want to highlight some of our initiatives that will help us achieve our revised guidance range. First, we continue to focus on OpEx management.
This has been a major focus for the UGI teams as we continue to look for efficiencies throughout our business. Next, we expect increased margin from our additional midstream assets such as Ponderosa and Texas Creek that will not benefit from that we did not benefit from in prior years. As I mentioned earlier, increased margins at UGI International to offset the energy compensation compliance costs. Margin increases are not realized immediately as there is a timing lag which simply means our customers buy product over time not all at once. We expect to realize some of these margin benefits in 3rd and 4th quarters.
Lastly, on a year over year basis 2019 will not have the 22 point $7,000,000 revenue reduction associated with the May 2018 Pennsylvania PUC order that we had in the Q3 of 2018. We believe that these factors will increase our performance versus historical results in the 3rd 4th quarters and help us to achieve our revised guidance. UGI remains well positioned to deliver on our commitment of 6% to 10% long term EPS growth. To our dividend, for the 32nd consecutive year, UGI has increased annual dividend. The quarterly dividend is now $0.30 per share representing a 15.4% increase.
As a reminder, we have an additional increase planned after the closing of the AmeriGas transaction. In total, the dividend will increase 25 percent by transaction close. That concludes my remarks and I'll now turn the call over to Hugh for his report on AmeriGas. Hugh?
Thanks, Ed. Adjusted EBITDA for the Q2 of fiscal 2019 was $290,300,000 compared to $309,500,000
dollars for the Q2
of last year. Nationwide degree days in Q2 were 4% colder than the 15 year norm and 5% colder than last year. Our financial results, which usually track the weather quite well, did not this quarter, largely due to regional weather patterns that I want to explain. The most intense cold was concentrated in the plains where as you know we have little in the way of operations presence. Conversely, in the Southeastern U.
S. Where we have a significant presence, we experienced temperatures that were significantly warmer than normal and last year, especially in January February. So our overall adjusted EBITDA was down from last year, primarily due to nearly 19% year over year shortfall in EBITDA contribution from our operations in the south of Similarly, retail volumes for the quarter were down 4% from last year with the shortfall also primarily related to our operations in Southeast. Turning now to our growth thrust, both our national accounts and AmeriGas Silver Exchange programs continue to experience solid growth, with volume for both programs increasing in the range of 6% to 7%. We are making good progress in developing the home cylinder delivery concept.
The integration of the business we acquired late last year has progressed very well, and we are in our initial we're planning our initial pilot for later this summer. We continue to experience strong demand for AmeriGas Cylinder Exchange. We are finalizing expansion plans with a major retailer and a large convenience store chain that would result in the rollout of several 100 additional 20 fourseven automated cylinder vending locations by the end of this calendar year. We were pleased to announce the transaction in which UGI would acquire 100 percent of AmeriGas including our 120 day review. As the various merger related work streams continue to advance toward an anticipated Q4 closing date, we remain focused on key business initiatives for fiscal 'twenty as we strive to take the business forward and generate long term sustainable financial performance.
As I stated last quarter, we are focused on leveraging technology and our scale to advance our customer facing capabilities and generate business efficiencies that will lower our costs. The cylinder exchange announcements we're making today are a tangible sign of this focus and that it is already starting to build momentum. In closing, I want to thank our employees both on the front lines and in support roles for their continued commitment to our customers and our company. And with that, I'll turn it over to John for his closing remarks.
Thanks Hugh. As I mentioned in my earlier remarks, we were pleased to report one of the best Q2 adjusted EPS results in UGI's history. In addition to that earnings performance, there were several other noteworthy achievements in the quarter that will position us well for future earnings growth. Our midstream marketing team remains focused on building out its asset network across the Marcellus region. We continue to grow our fee based income stream as we added new gathering assets in the Marcellus and utilized our new steelfin LNG storage and vaporization facility.
This shift to a higher percentage of fee based income is central to our long term midstream strategy. Many East Coast LDCs including UGI experienced record natural gas send out levels in mid January once again demonstrating the need for peaking solutions. In response to that rising demand, we've begun construction of our new LNG storage and vaporization facility near Bethlehem, Pennsylvania. This project representing approximately $60,000,000 and strengthen our ability to use our LNG system and strengthen our ability to use our LNG system assets dynamically based on market conditions. Our investment outlook for utility remains very strong.
We're deploying record levels of capital to address infrastructure needs while growing our customer base. Our teams are focused on providing safe, affordable and reliable access to low cost natural gas to the 660,000 families and businesses we serve throughout Central and Eastern Pennsylvania. We're also committed to providing access in previously unserved or underserved areas of the Commonwealth. We're likely to invest approximately $2,000,000,000 in capital at the utilities over the next 5 years. We filed our largest ever rate case request of $71,100,000 with the Pennsylvania PUC in late January.
The scale of the request reflects the growth opportunities in our service territory and our commitment to infrastructure replacement. The filing is under review by the PUC and we expect that the process will conclude later this year with new rates going into effect for the fiscal 2020 winter season. Our most significant recent strategic event actually occurred just after the end of the quarter when we announced the proposed merger with AmeriGas on April 2. Yesterday, we filed our Form S-four registration statement with the SEC. We're excited about the positive impact of this major transaction.
When this transaction closes later this year, UGI will be exceptionally well positioned to fund future growth. This transaction will significantly enhance our cash available for growth investments and dividends. This will provide a broader funding foundation for the major capital investments in our natural gas businesses over the next decade and position the company for future M and A across the entire corporation. We pride ourselves on our ability to deploy capital effectively across our businesses. Our disciplined approach to capital allocation positions us well to deliver on our long term commitment of 6% to 10% EPS growth.
We're excited about this major enhancement to UGI's cash engine for growth. As we look forward to fiscal 2020 and beyond, we're energized by the pending transaction and by the range of investment opportunities across our businesses. We have great confidence in the ability of our teams to execute operationally and identify attractive growth investments that align with our business unit strategies. With that, I'll turn the call back over to Denise who will open it up for
Your first question comes from Dennis Coleman with Bank of America. Your line is open.
Hi, good morning. Thank you.
Good morning.
A couple of questions for me, if you would please. Just on the rate case, can you just remind me what the timeline is? I know you talked about concluding later this year, but are there any milestones we can watch for along the way or filings or actions by the PUC that we should watch for?
Yes. We filed in late January. The PUC review process is underway. Testimonies have been filed and hearings have been scheduled. The typical timeframe for resolution is early fall in these cases.
Previously for us and most other companies in Pennsylvania that involves a settlement, but that process will obviously play out over the next 4 to 5 months, 4 months or so. [SPEAKER A Steve Scherger Okay.
Have you had settlement discussions already or is that something that's scheduled as well?
We're still in the process of the various parties filing testimony. That would follow conclusion of that process.
So too soon for that? Yes. Okay. I guess one other one. You mentioned the M and A and a lot of the APU transaction allowing you to do that.
Talk a little bit of I guess it's a broad question but areas that you're looking at and I know you've talked about this in the past but any updates there would be useful?
Sure. We look broadly across in terms of M and A, we look across the entire corporation. So, we would continue to do that across our propane businesses, further opportunities to invest in Europe would opportunities to invest in Europe would certainly fit that description. We're focused in the short term in AmeriGas on the upcoming transaction, but longer term there'll be opportunities there. And on the natural gas side of our business, most recently we've made several acquisitions involving natural gas gathering systems and continue to look for opportunities there as that segment or area evolves.
So we look broadly across the Greater Marcellus region for midstream investment opportunities, M and A and have a continuing interest in utilities M and A and anything we look at is always requirements in terms of deploying capital. So we look at it through that filter, but it's a broad based set of activities we have that spans the entire corporation looking at M and A opportunities and major capital project opportunities are not exclusive to the natural gas side of the house but tend to be clustered on that side.
Got it. Thanks for reviewing that. That's it for me. Okay.
Great. Thanks, Ben.
Your next question comes from Chris Sighinolfi with Jefferies. Your line is open.
Hey, good morning, John.
Good morning.
Just wanted to touch on a couple of things. I guess, first off, with regard to I guess, it's a 2 part question, but with regard to the performance this
past quarter, and we talked about this,
I think, on your last quarter call, but something AmeriGas has faced, but you see on the UGI front as well with AmeriGas has faced, but you see on the UGI front as well with regional variations in weather and the difficulty that that is, I guess, presenting in terms of forecasting and maybe even operating the company. I'm just wondering if there's things that came out of the review that you might look to do differently in regards to, I guess, both forecasting, but also operating the company? Anything that comes to mind could help us think about minimization of variability on a go forward basis post the acquisition?
Yes. In terms of challenges presented just by variable weather conditions, It's not a new challenge for us, but we have to be prepared and do respond. And I think Ted noted it in his comments. I think in Europe we did a nice job responding to where we had the most challenging weather this year. One of the areas that we're focusing on is where we can better leverage our scale to take fixed cost out of our activities, deploy technology, drive our costs down.
So certainly, the more we can do in terms of in some case, we're broadly deploying technology that we've already begun to utilize and drive it across our propane businesses consistently, that will help us in terms of addressing challenges inevitably that come up each year with where the cold and where the warm weather occurs. So that's I think a consistent theme that you'll be hearing from us as we move forward is can we accelerate some of these efforts and enable us to be a little bit more nimble in terms of how we respond to differing operating conditions, both warm and cold.
Okay. And just a clarification point for me, it's not regarding the quarter, it's more on the S-four which you filed last night and talked about in your release. Just want to be clear, the forecast that I see in there, those are all I know there's a series of footnotes, but those are all independent. They're not pro form a looks. Is that correct?
In terms of what
What is the Go ahead.
Go
ahead. As you've seen by reviewing it, Chris, it's a very extensive document. So you have various advisors that did some forecasting based on information that was provided to them by the company. The basis our planning for the company is budget and plan process that we go through each summer as we come out of the winter. So that's sort of the foundation for the work that was done and then shared with financial advisors that work with the various independent parties in that process with minor updates.
And obviously, as we come out of the winter now, we initiate another pretty extensive process looking at each of our businesses and the markets in which we operate. And that will be reflected when we come to market with an updated view for fiscal 2020. That's kind of the way that process works.
Okay. But I guess when I look at clearly the attributes of the deal are significant on the cash front. And you and Ted have talked about that. You talked about that on the merger call and again today. And we had a chance to separately go over some of that.
But I guess when I think about EPS accretion, which I think you guys noted beginning in fiscal 2020, I guess the spirit of my question, John, is when I look at Page 70 of that and I see independent it looks to be independent forecast based on the implied share count. Is it safe or fair to assume that the accretion you talk about would be sort of levels in excess of what I see reflected on that page? Or are those numbers 3rd party provided and not something we should anchor to?
[SPEAKER A. D. BAER PETTIT MSCI, INC.:] D. Baer Pettit MSCI, Inc.:] Those numbers are, as I said, some of the numbers and I have to look at the document to review the specific forecast that you're referencing. Basically, they started with information that management provided and then those advisors ran different scenarios for the special committee of the AmeriGas Board that established.
Okay. I'll just go through. D. Moriarty:] Just fundamentally what I'd say on EPS accretion, Chris, is come back to the statements we made when we announced the transaction. This will be EPS accretive.
It's much more of a cash flow impact, but it's EPS positive. That EPS benefit will grow over time because we have a sizable increase in cash available for reinvestment. So it's a positive EPS story at the outset that it is enhanced over time by our ability to take that cash and redeploy.
Understood. All right. Well, thanks a lot. Appreciate the time this morning. Sure.
Thank you.
There are no further questions queued up at this time. I'll turn the call back over to John Walsh.
Okay. Well, thank you for your time and attention this morning. We look forward to speaking with you in the near future when we brief you on our Q3 results. Thank you.
This concludes today's conference call. You may now disconnect.