UGI Corporation — Form 10-Q Summary
Business context and reporting period
UGI distributes and markets propane and other energy products, operates natural gas and electric utilities, and conducts energy marketing and midstream businesses. This unaudited filing covers the fiscal quarter and six months ended March 31, 2015 (fiscal Q2); most operations are seasonal, and interim results may not indicate full-year performance. Amounts below are in millions of dollars except per-share data.
Financial performance and position
| Metric | Three months ended March 31, 2015 | Six months ended March 31, 2015 |
|---|---|---|
| Revenue | $2,455.6 | $4,460.2 |
| Operating income | $702.1 | $785.4 |
| Net income attributable to UGI | $246.5 | $280.6 |
| Diluted EPS | $1.40 | $1.60 |
| Adjusted net income attributable to UGI (non-GAAP) | $215.7 | $331.7 |
| Adjusted diluted EPS (non-GAAP) | $1.23 | $1.89 |
| Operating cash flow | Not separately reported | $657.8 |
For the six months, investing cash outflow was $265.8, including $233.5 of capital expenditures; financing cash outflow was $337.9. Cash and cash equivalents were $445.5 at March 31, 2015, including restricted cash of $56.7. Total debt was $3,518.6, down from $3,721.6 at September 30, 2014; $470.5 was current maturities of long-term debt and $89.9 was short-term borrowings. Total assets were $10,182.7 and total equity was $3,883.7. Dividends declared were $0.2175 per common share for the quarter.
Material changes versus comparable periods
- Quarterly revenue declined 22.4% year over year, while UGI-attributable net income rose 15.0% and diluted EPS rose from $1.22 to $1.40. The reported profit increase was driven substantially by commodity-derivative gains: adjusted quarterly net income fell from $222.1 to $215.7, and adjusted EPS declined from $1.27 to $1.23.
- Six-month revenue declined 18.6%; UGI-attributable net income declined 16.6%, from $336.4 to $280.6, and diluted EPS fell from $1.92 to $1.60. Adjusted net income decreased from $345.6 to $331.7 and adjusted EPS from $1.98 to $1.89. The adjusted prior-year comparison includes a $5.7 French tax-law adjustment.
- Six-month results included $51.1 of after-tax losses on commodity derivatives not associated with current-period transactions, versus $3.5 of such losses in the prior year. The filing attributes the current-year losses principally to falling energy prices. The quarter, by contrast, included $30.8 of after-tax gains from these derivatives.
- Six-month operating cash flow improved from $483.0 to $657.8, mainly because lower commodity costs reduced cash tied up in working capital. Cash flow before working-capital changes was lower, at $780.6 versus $832.6.
- Segment conditions were mixed. AmeriGas six-month adjusted EBITDA fell 5.5% to $530.6, with retail gallons down 7.2% amid warmer weather. Gas Utility six-month income before taxes declined 4.5% to $190.9 as higher operating expenses outweighed margin growth. Midstream & Marketing income before taxes fell 6.0% to $146.3, reflecting lower margins and higher expenses. UGI International income before taxes was nearly flat at $104.7; currency translation and acquisition costs weighed on results.
Outlook, commentary, risks and unusual items
- Management said business units had sufficient liquidity for fiscal 2015 needs, while cautioning that capital-market debt or equity financing may not be available on acceptable terms.
- UGI expected to complete its acquisition of Total’s French LPG business, Totalgaz, during fiscal Q3 and no later than June 30, 2015. The purchase price was expected to be €400–€450 million, subject to adjustments. On April 30, UGI France arranged financing of up to €600 million in term debt and a €60 million revolving facility, intended in part to fund the acquisition and refinance Antargaz debt. The facilities had not been drawn at the filing date.
- After quarter-end, UGI raised its quarterly common-stock dividend to $0.2275, effective with the July 1, 2015 payment. AmeriGas also announced a 4.5% increase in its quarterly unit distribution.
- More than 35 purported class actions allege antitrust violations related to propane-cylinder fill levels. UGI said it could not reasonably estimate any potential impact, believes it has strong defenses, and intends to defend the claims. Environmental remediation obligations and other routine legal claims are also disclosed; management said the other pending matters were not expected to materially affect consolidated results, position or cash flow.
- Key risks include weather and energy demand, commodity-price volatility and related collateral needs, foreign-exchange movements, regulation and cost recovery, competition, supplier or counterparty defaults, environmental and operational liabilities, litigation, and acquisition execution and integration. A 10% adverse commodity-price move was estimated to increase the relevant derivative loss by about $48.4; a 10% decline in foreign currencies would reduce the net book value of international propane investments by about $90.0.
- Management uses non-GAAP adjusted earnings to exclude certain commodity-derivative effects and unusual items; these measures supplement, but do not replace, GAAP results. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much reported earnings volatility reflects derivative accounting rather than current-period operating performance, and how adjusted earnings reconcile to GAAP.
- Completion timing, final consideration, funding and integration assumptions for the Totalgaz acquisition, plus the resulting debt and covenant position.
- The amount and timing of the $470.5 current debt maturities and the status of planned extensions of credit and receivables facilities.
- Whether warmer weather, lower propane volumes, currency translation and segment margin pressures persist, and how operating costs and capital spending develop.
- Any material developments in the propane-cylinder class actions, environmental matters, derivative collateral requirements or other disclosed contingencies.