UGI Corporation — FY2015 Form 10-K
Reporting period: Fiscal year ended September 30, 2015; the filing is an annual report, not a standalone fourth-quarter filing. UGI is an energy holding company with propane and LPG distribution, regulated gas and electric utilities, energy marketing and midstream assets, electric generation, and contracting operations.
Financial performance
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Revenue | $6,691.1 million | $8,277.3 million | Down 19.2% |
| Operating income | $834.9 million | $1,005.6 million | Down 17.0% |
| Net income attributable to UGI | $281.0 million | $337.2 million | Down 16.7% |
| Diluted EPS | $1.60 | $1.92 | Down 16.7% |
| Adjusted net income attributable to UGI (non-GAAP) | $353.8 million | $353.8 million | Flat |
| Adjusted diluted EPS (non-GAAP) | $2.01 | $2.02 | Down $0.01 |
| Net cash provided by operating activities | $1,163.8 million | $1,005.4 million | Up 15.8% |
Reported revenue fell largely with lower energy commodity prices and a weaker euro, which reduced translated international results. Operating margin was approximately 12.5%, compared with 12.2% in FY2014. The adjusted earnings measure excludes, among other items, $53.3 million of after-tax commodity derivative losses not associated with current-period transactions; management said these economic hedges were expected to be substantially offset by lower commodity purchase costs when settled.
Operating cash flow benefited from $191.8 million of cash from working-capital changes, principally as commodity costs declined. Cash used in investing activities was $976.3 million, including $490.6 million of property and equipment expenditures and significant acquisition spending; financing activities used $217.1 million. Cash and cash equivalents were $369.7 million at year-end, versus $419.5 million a year earlier.
Total debt was $3,889.7 million at September 30, 2015, versus $3,721.6 million a year earlier; debt was 52.1% of total capitalization. Current maturities of long-term debt were $258.0 million and short-term borrowings were $189.9 million. UGI reported $77.2 million of cash outside operating subsidiaries available for dividends and investment. Management stated that business units had sufficient liquidity for FY2016, while noting that subsidiary debt restrictions and access to capital markets affect holding-company liquidity.
Material changes and business drivers
- Acquisitions: UGI completed its $496.6 million cash acquisition of Totalgaz in France on May 29, 2015; the business, renamed Finagaz, nearly doubled UGI’s French retail LPG distribution business. UGI also acquired Total’s LPG business in Hungary. Finagaz contributed only after acquisition close and did not materially affect FY2015 UGI net income.
- AmeriGas Propane: Retail gallons declined 7.2% to 1,184.3 million, reflecting warmer-than-normal conditions in the western U.S. Partnership Adjusted EBITDA fell 6.9% to $619.2 million; lower volumes and margin outweighed cost savings.
- UGI International: Retail gallons rose 10.4%, principally due to Finagaz. Lower LPG costs improved local-currency margins, but weaker euro translation and acquisition/integration costs weighed on reported results. The average euro-dollar rate declined to about $1.15 from $1.36.
- Gas Utility: Throughput rose 2.3% to 213.5 bcf, and core-market customers increased 1.9%. Operating income declined 4.1% to $226.5 million as higher operating and depreciation costs exceeded modest margin growth.
- Midstream & Marketing: Operating income fell 6.9% to $184.8 million. Lower natural-gas marketing, peaking and capacity-management margins more than offset growth in gathering and retail power. UGI continued Marcellus-related projects, including pipeline, gathering and LNG capacity investments.
Outlook, risks and unusual items
Management provided qualitative, not quantified, FY2016 earnings guidance. It expected Finagaz to be accretive beginning in FY2016, anticipated continued benefits from natural-gas demand and midstream investments, and expected customer growth at Gas Utility, including conversions from oil. UGI said a UGI Gas base-rate case was likely in FY2016. Estimated FY2016 capital expenditures were $738.7 million, including increased utility infrastructure spending and Marcellus projects. UGI Utilities intended to refinance $247 million of debt maturing in FY2016; Flaga refinanced certain maturities in October 2015.
FY2015 included a $10.3 million pre-tax loss on early debt extinguishment and $14.9 million of after-tax Finagaz acquisition and transition expenses. The fourth quarter reported a $9.2 million net loss attributable to UGI, or a $0.05 diluted loss per share; the filing notes substantial seasonal losses outside the heating season.
Key risks include weather-driven demand, LPG and natural-gas price volatility and supply disruption, inability to pass through cost increases, competition and customer conservation, utility rate-recovery delays, acquisition integration and construction execution, foreign exchange and international political/regulatory exposure, interest rates and financing access, pension funding, environmental liabilities, catastrophic operating events, and cybersecurity. Environmental remediation obligations at certain Pennsylvania manufactured-gas-plant sites were accrued at $13.8 million for CPG and PNG, with corresponding regulatory assets; potential liabilities at sites outside Pennsylvania remain uncertain.
More than 35 purported class actions alleged collusion over propane-cylinder fill levels. The court dismissed direct-customer claims and most indirect-customer claims in July 2015; an appeal and remaining injunctive and state-law claims continued, and UGI said the exposure could not be reasonably estimated. Challenges to the French competition authority’s approval of the Totalgaz acquisition also remained pending; UGI stated that agreed divestitures included assets sold after year-end.
Important facts for investors to verify
- Reconcile GAAP earnings decline with flat adjusted net income, including the timing and eventual cash/earnings effects of derivative losses.
- Track Finagaz integration, realized synergies, accretion, acquisition-related debt and completion of required divestitures.
- Assess debt refinancing, subsidiary-level restrictions on distributions, available liquidity and the planned FY2016 capital program.
- Monitor weather, commodity margins, customer volumes and euro exchange rates across the propane, utility and midstream businesses.
- Review the unresolved propane-cylinder litigation, environmental exposures and the filing’s disclosure that Finagaz was excluded from management’s and the auditor’s internal-control assessment; it represented about 8% of assets and 2% of FY2015 revenue.