UGI Corporation 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2017; comparisons are with the quarter ended December 31, 2016. UGI distributes and markets energy products and operates regulated utilities across the United States and Europe. Results are seasonal and typically strongest during the heating season.
Key financial results
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Revenue | $2,125.2 million | $1,679.5 million |
| Operating income | $391.8 million | $466.2 million |
| Income before income taxes | $329.8 million | $378.7 million |
| Income tax benefit (expense) | $104.4 million benefit | $87.8 million expense |
| Net income attributable to UGI | $365.9 million | $230.7 million |
| Diluted EPS | $2.07 | $1.30 |
| Adjusted net income attributable to UGI (non-GAAP) | $179.3 million | $160.9 million |
| Adjusted diluted EPS (non-GAAP) | $1.01 | $0.91 |
| Cash from operating activities | $31.4 million | $126.6 million |
Revenue increased about 27%, while operating income declined about 16%. GAAP net income and EPS rose substantially, but were boosted by tax-law-related discrete benefits. Adjusted net income increased 11.4%, and adjusted diluted EPS rose from $0.91 to $1.01. UGI declared dividends of $0.25 per common share, up from $0.2375.
Cash flow, debt and liquidity
- Operating cash flow was $31.4 million, down from $126.6 million. UGI reported $353.2 million of cash used for working-capital changes, chiefly reflecting higher receivables and inventory costs; it noted that first-quarter cash flows are seasonally low.
- Investing cash outflow was $327.5 million, including $147.5 million of property and equipment expenditures and $175.8 million for acquisitions, principally UniverGas and a natural-gas gathering system.
- Financing cash inflow was $181.1 million. Cash and cash equivalents ended the quarter at $446.4 million, down from $558.4 million at September 30, 2017.
- Total debt, including short-term borrowings, was $4.87 billion, compared with $4.54 billion at September 30, 2017. Short-term borrowings were $586.1 million; long-term debt, including current maturities, was $4.28 billion.
- UGI reported available capacity under principal credit agreements, including $269.3 million for AmeriGas OLP, €300 million for UGI International, $185 million for Energy Services and $116.5 million for UGI Utilities. Management said each business had sufficient liquidity for anticipated FY2018 needs, while cautioning that future capital-market financing may not be available on acceptable terms.
Segments and material changes
- AmeriGas Propane: Adjusted EBITDA increased to $194.1 million from $185.1 million. Retail gallons were nearly flat; higher selling prices and other operating income contributed to improvement. Propane commodity prices were substantially higher, and late-December cold weather was expected to affect volumes mainly in January.
- UGI International: Operating income rose to $93.1 million from $88.9 million, but income before taxes fell to $82.6 million from $84.0 million. Acquisitions and currency translation lifted revenue and margin; legacy business margins and heating-related sales were weaker, and the higher French FY2018 tax rate increased tax expense.
- Midstream & Marketing: Income before taxes increased to $52.6 million from $49.1 million, supported by natural-gas gathering, peaking and electricity-generation margins. Higher expenses and the absence of prior-year Sunbury Pipeline construction income partly offset gains.
- UGI Utilities: Income before taxes increased to $85.4 million from $72.2 million, reflecting colder weather, higher gas throughput and the PNG base-rate increase effective October 20, 2017.
Outlook, tax matters and risks
- The December 2017 U.S. Tax Cuts and Jobs Act and French tax legislation had a major effect on reported results. UGI recorded a $166.0 million U.S. tax-related discrete benefit and a $17.3 million French deferred-tax benefit. Separately, the tax changes increased current-period net income by about $20.4 million in the U.S., partly offset by $3.9 million of higher French tax expense. The company described some tax estimates as provisional and subject to refinement.
- UGI Utilities recorded a regulatory liability for excess deferred federal income taxes; the balance was $303.9 million at December 31, including amounts associated with the tax-law changes. Recovery and amortization depend on applicable regulation. The PUC had not issued orders on the lower tax rate.
- Electric Utility filed for a $9.2 million annual base distribution revenue increase in January 2018. Review could take up to nine months, and the outcome is uncertain. UGI also committed up to $225 million to AmeriGas through July 2019 if requested; no contributions had been made by quarter-end.
- Key risks include weather and energy demand, commodity prices and pass-through timing, regulatory recovery, foreign exchange, financing access and interest rates, acquisitions and integration, environmental exposure, and litigation. UGI said it could not reasonably estimate the impact of the propane-cylinder antitrust litigation. Environmental remediation liabilities included $53.4 million for Pennsylvania utility sites and a $7.5 million AmeriGas accrual for the Saranac Lake matter.
- UGI uses commodity and currency derivatives to manage exposures, not for speculation. Derivative values and collateral needs can nevertheless affect reported earnings and liquidity. Management provided no specific full-year earnings guidance in the supplied filing text.
Most important facts for investors to verify
- How much of GAAP earnings growth reflects recurring operating performance versus tax-related discrete benefits and derivative accounting; compare with the company’s non-GAAP reconciliations.
- Whether working-capital outflows reverse as seasonal customer collections occur, and how acquisitions and capital spending affect cash needs.
- Debt maturities, borrowing availability and covenant compliance, including the required PUC certificate for extending the Utilities Term Loan maturity to 2022.
- The PUC’s response to tax reform and the pending Electric Utility rate request, including effects on regulated earnings and customer refunds.
- Developments in the AmeriGas antitrust and environmental matters, and any changes to the related accruals or potential exposures.