UGI Corporation — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended December 31, 2018, UGI’s fiscal first quarter, compared with the three months ended December 31, 2017. UGI distributes and markets energy through AmeriGas Propane, UGI International, Midstream & Marketing, and UGI Utilities. Results are seasonal and generally strongest in the heating-season quarters. UGI Utilities completed the merger of PNG and CPG into UGI Utilities on October 1, 2018; the former utilities became rate districts, without an immediate ratemaking change.
Key financial metrics
| Metric | Quarter ended Dec. 31, 2018 | Prior-year quarter |
|---|---|---|
| Revenue | $2,200.2 million | $2,125.2 million |
| Operating income | $167.7 million | $395.0 million |
| Net income attributable to UGI | $64.2 million | $365.9 million |
| Diluted EPS | $0.36 | $2.07 |
| Adjusted net income attributable to UGI (non-GAAP) | $143.8 million | $179.3 million |
| Adjusted diluted EPS (non-GAAP) | $0.81 | $1.01 |
| Cash provided by operating activities | $96.6 million | $31.4 million |
| Capital expenditures | $183.3 million cash outflow | $147.5 million cash outflow |
| Dividends declared per common share | $0.26 | $0.25 |
Revenue increased 3.5%, while reported operating income and net income declined substantially. The prior-year comparison benefited from $166.0 million of tax remeasurement benefits related to the U.S. Tax Cuts and Jobs Act (TCJA) and a $17.3 million benefit related to French tax changes. Current-quarter results also included a $154.0 million pretax loss on derivative instruments not associated with current-period transactions; UGI excludes these and other specified items in its non-GAAP adjusted measures. Adjusted net income fell 19.8% year over year.
Segment results were mixed. AmeriGas Partnership Adjusted EBITDA, a non-GAAP measure, rose to $210.7 million from $194.1 million, supported by higher retail margins and volumes. UGI International income before taxes fell to $47.5 million from $82.6 million, primarily amid unusually warm European weather and lower LPG volumes; current-quarter results also included a $6.1 million debt-extinguishment loss. Midstream & Marketing income before taxes declined to $42.1 million from $52.6 million, including lower capacity-management and electric-generation margins. UGI Utilities income before taxes declined to $65.7 million from $85.4 million; the prior-year comparison included an $8.1 million tax benefit, while current-quarter customer credits under the PAPUC order reduced Gas Utility revenue by $13.5 million.
Cash, debt and liquidity
Cash and cash equivalents were $477.6 million at December 31, 2018, with an additional $17.4 million restricted; total debt was $4,846.5 million, versus $4,590.2 million at September 30, 2018. Short-term borrowings rose to $676.3 million from $424.9 million, while long-term debt was $4,170.2 million. Current assets were $2,242.2 million and current liabilities were $2,183.1 million.
Operating cash flow improved year over year, although cash flow before working-capital changes was lower ($372.2 million versus $380.9 million). Working capital used $275.6 million of cash, principally reflecting receivables and accrued utility revenues. Investing activities used $194.0 million; financing activities provided $134.0 million. At quarter-end, available borrowing capacity under principal credit facilities was $168.0 million for AmeriGas OLP, €300.0 million for UGI International, $240.0 million for Energy Services and $152.0 million for UGI Utilities. Management stated it believed its businesses had sufficient liquidity for anticipated commitments, but noted capital-market financing may not be available on acceptable terms.
UGI International refinanced foreign subsidiary debt with a €300 million term loan and €350 million of 3.25% senior notes, with proceeds also supporting general purposes. Subsequent to quarter-end, UGI Utilities issued $150 million of 4.55% senior notes due 2049; proceeds were used to reduce short-term borrowings and for general corporate purposes. UGI had committed up to $225 million to AmeriGas Partners through July 1, 2019; no contributions had been made under the commitment by quarter-end.
Changes, outlook, risks and unusual items
- Weather materially affected comparisons: UGI International experienced nine consecutive months of warmer-than-normal conditions through December, while domestic segment results reflected differing regional weather and an unusually cold late December 2017 comparison.
- UGI Gas filed in January 2019 for an annual revenue increase of $71.1 million and proposed a 4.5% negative surcharge to return $26.2 million of prior tax benefits. The requested rates were proposed to take effect March 29, 2019, but the filing says the PAPUC review timing and outcome are uncertain. Separately, Electric Utility received approval for a $3.2 million annual base-rate increase effective October 27, 2018; a consumer advocate appealed aspects of the order.
- A PAPUC complaint concerning a 2017 natural-gas incident in Manor Township remains pending. The regulator’s bureau seeks approximately $2.1 million in civil penalties; UGI Utilities contests the allegations. The incident involved a fatality, injuries and property damage.
- Other disclosed exposures include environmental remediation, including a $7.5 million accrued liability for the Saranac Lake site, and propane-cylinder antitrust class actions for which UGI says the impact cannot be reasonably estimated. Management believes other ordinary-course claims will not materially affect the financial statements.
- Key stated risks include weather and demand, commodity price and supply volatility, ability to recover utility costs through rates, regulation, litigation and environmental liabilities, foreign-exchange and interest-rate movements, counterparty defaults, capital access, operational interruptions and cybersecurity. Derivatives are used for risk management, not speculation; a hypothetical 10% adverse commodity-price move was estimated to reduce derivative fair value by about $91.2 million.
- UGI adopted ASC 606 on October 1, 2018, recording a $7.1 million reduction to opening retained earnings; management said adoption was not expected to materially affect revenue timing or financial results. UGI expects adoption of the new lease standard in fiscal 2020 to add significant right-of-use assets and lease liabilities.
The filing provides no consolidated earnings guidance. UGI declared a $0.26 quarterly dividend, payable April 1, 2019. Management described seasonality and factors that could cause actual results to differ materially from forward-looking statements.
Important facts for investors to verify
- Reconcile the sharp GAAP earnings decline with the prior-year tax benefits and current-quarter derivative losses; assess adjusted results alongside GAAP results.
- Track whether the proposed UGI Gas rate increase and tax-benefit surcharge are approved, and the outcome of the Electric Utility appeal.
- Monitor working-capital needs, short-term borrowings, facility availability and the use of proceeds from the post-quarter $150 million note issuance.
- Follow weather, LPG and natural-gas margins, segment volumes, and the recovery of UGI International and Midstream & Marketing earnings.
- Assess the outcomes and potential costs of the Manor Township proceeding, environmental matters and propane-cylinder litigation.