UGI Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2019; filed August 6, 2019. Amounts are in U.S. dollars unless stated otherwise. UGI operates U.S. and European propane and energy businesses, regulated gas and electric utilities, and midstream and energy-marketing operations. Results are seasonal, with heating demand generally strongest in the first half of the fiscal year.
Financial performance
| Metric | Three months ended June 30, 2019 | Prior-year quarter | Nine months ended June 30, 2019 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $1,363.7 million | $1,440.9 million | $6,170.0 million | $6,378.1 million |
| Operating income | $9.6 million | $29.5 million | $716.1 million | $1,015.5 million |
| Net income attributable to UGI | $(1.9) million | $52.4 million | $307.7 million | $694.3 million |
| Diluted earnings per share | $(0.01) | $0.30 | $1.73 | $3.93 |
| Adjusted net income attributable to UGI (non-GAAP) | $23.9 million | $15.1 million | $421.6 million | $492.6 million |
| Adjusted diluted EPS (non-GAAP) | $0.13 | $0.09 | $2.38 | $2.79 |
- For the quarter, adjusted net income increased 58.3%; the GAAP net loss primarily reflected mark-to-market losses on commodity and foreign-currency derivatives not associated with current-period transactions. Management says those instruments economically hedge anticipated future transactions.
- For the nine months, adjusted net income declined 14.4%. Management attributed the decrease mainly to lower Midstream & Marketing margins, weaker AmeriGas propane volumes and lower UGI International results.
- Nine-month GAAP comparisons are significantly affected by prior-year tax remeasurement benefits: $172.1 million from U.S. tax-law changes and $13.5 million from French tax-law changes. The prior-year period also included a $75 million noncash impairment of Partnership tradenames; that charge did not recur.
- Interest expense was $60.5 million for the quarter and $181.7 million for the nine months, versus $56.5 million and $172.8 million, respectively, in 2018.
- UGI declared dividends of $0.30 per share for the quarter. The board subsequently approved an increase to $0.325 quarterly, effective with the October 1, 2019 payment.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $924.6 million, compared with $926.8 million. Capital expenditures were $510.2 million, up from $394.2 million; operating cash flow less capital expenditures was approximately $414.4 million.
- Cash and cash equivalents were $533.7 million at June 30, 2019; restricted cash was $42.3 million. Total debt, including short-term borrowings, was approximately $4.69 billion, versus $4.59 billion at September 30, 2018. Long-term debt was $4.29 billion and short-term borrowings were $380.2 million.
- At June 30, UGI reported available capacity under principal credit facilities, including $288.7 million for AmeriGas OLP, €300 million for UGI International, $240 million for Energy Services and $274 million for UGI Utilities. The Energy Services receivables facility was scheduled to expire in October 2019.
- On August 1, after quarter-end, UGI completed the approximately $1.275 billion CMG acquisition. It used $600 million of borrowings under a newly established UGI credit facility, along with Energy Services borrowings and cash on hand. The acquisition’s final purchase-price allocation was not yet available.
Material changes and management commentary
- AmeriGas nine-month Partnership Adjusted EBITDA was $543.5 million, down from $570.8 million. Lower retail gallons sold and higher operating costs, including litigation accruals and vehicle-lease costs, weighed on results. The quarter included a $5 million correction of prior-period vehicle-lease expense and $1.8 million of merger expenses.
- UGI International nine-month operating income fell 9.3%, reflecting lower LPG volumes, weaker foreign-exchange translation and lower margin, partly offset by lower expenses and foreign-currency contract gains. The prior-year period included Finagaz integration costs.
- Midstream & Marketing nine-month income before taxes declined to $98.0 million from $168.4 million. Lower pipeline capacity values, less favorable weather-related pricing spreads and reduced electricity-generation margins were key factors; higher gas-marketing revenues reflected customer growth and higher prices.
- UGI Utilities nine-month income before taxes was $182.2 million, down from $203.3 million. Lower gas costs and customer credits related to the Tax Cuts and Jobs Act affected revenue and margin; higher operating and depreciation costs also contributed.
- The proposed AmeriGas merger would convert publicly held units into a choice of UGI shares, mixed cash and shares, or cash, subject to proration. The transaction was expected to close in the fourth quarter of fiscal 2019, subject to unitholder approval and other conditions. UGI estimated approximately $530 million of cash consideration and 34.6 million shares.
Outlook, risks and contingencies
- The filing provides no clear quantified full-year earnings guidance. Management cautions that weather, energy prices and seasonal demand can materially affect results.
- Key risks include commodity-price volatility and related collateral needs, foreign-exchange and interest-rate movements, regulation and delayed cost recovery, competition, customer or counterparty default, environmental and operational liabilities, and acquisition execution and integration.
- UGI’s proposed gas-utility rate case requested a $71.1 million annual revenue increase and a customer surcharge credit related to prior tax benefits. A settlement petition was filed in July 2019; regulatory approval and timing remained uncertain.
- A Pennsylvania regulator complaint concerning the 2017 Manor Township gas incident remained pending and sought up to approximately $2.1 million in civil penalties. UGI also reported $47.6 million of accrued Pennsylvania manufactured-gas-plant remediation liabilities, for which it expects rate recovery.
- Two lawsuits challenged disclosures related to the proposed AmeriGas merger and sought, among other relief, to block or rescind the transaction. Management could not predict outcomes; it believed pending claims would not materially affect the financial statements.
- At quarter-end, UGI reported a $50.7 million fair-value loss on unsettled commodity derivatives excluded from utility customer-recovery mechanisms. A hypothetical 10% adverse commodity-price move would reduce their fair value by approximately $97.9 million.
Important facts for investors to verify
- Reconcile GAAP results with management’s non-GAAP adjusted earnings, particularly derivative mark-to-market effects and prior-year tax benefits.
- Track post-quarter funding, debt levels and covenant headroom following the CMG acquisition and the proposed AmeriGas merger.
- Confirm the status, final terms and regulatory outcomes of the AmeriGas merger and UGI Utilities’ rate case.
- Assess whether AmeriGas can stabilize volumes and operating costs, and whether Midstream & Marketing margins recover as pipeline capacity conditions change.
- Monitor the receivables facility renewal, cash needs, derivative collateral requirements, and the resolution of significant litigation and regulatory matters.