UGI Corporation — Form 10-Q summary
Business context and reporting period. This unaudited filing covers the fiscal quarter and six months ended March 31, 2012. UGI operates propane distribution, regulated gas and electric utilities, international LPG businesses, and energy marketing and infrastructure operations. Results are seasonal and materially affected by heating-season weather.
Financial results and liquidity
Amounts are in millions of dollars, except per-share data.
| Metric | Three months ended March 31, 2012 | Prior year | Six months ended March 31, 2012 | Prior year |
|---|---|---|---|---|
| Revenue | $2,427.5 | $2,181.0 | $4,116.3 | $3,946.6 |
| Operating income | $380.8 | $357.0 | $569.1 | $609.3 |
| Net income | $227.0 | $215.6 | $337.1 | $370.6 |
| Net income attributable to UGI | $133.4 | $149.4 | $220.4 | $262.5 |
| Diluted earnings per share | $1.18 | $1.32 | $1.95 | $2.33 |
| Interest expense | $65.3 | $34.3 | $101.3 | $67.6 |
- For the quarter, revenue increased 11%, but UGI-attributable net income fell 11%; for the six months, revenue rose 4% while UGI-attributable net income declined 16%. Higher costs, financing expense, warm weather, and increased noncontrolling interests contributed to weaker shareholder earnings.
- Operating cash flow was $334.7 for the six months, versus $292.1 a year earlier. Cash flow before working-capital changes was lower, at $504.2 versus $560.6.
- Investing cash outflow was $1,714.0, principally reflecting acquisitions; capital expenditures were $152.3. Financing cash inflow was $1,540.2, including $1,551.0 of debt issuance and $276.6 from AmeriGas unit issuance.
- Cash and cash equivalents were $402.4 at March 31, 2012, compared with $238.5 at September 30, 2011. Total debt was $3,801.8, up from $2,296.4 at fiscal year-end. Total debt includes $190.2 of bank loans and $68.8 of current maturities.
- Quarterly UGI dividends declared were $0.26 per share, versus $0.25 a year earlier. The Board subsequently approved an increase to $0.27 per quarter, effective for the July 2012 payment.
Material changes and management commentary
- Heritage Propane: AmeriGas Partners completed the acquisition on January 12, 2012 for approximately $2.6 billion, comprising about $1.5 billion cash and $1.1 billion in AmeriGas units. The acquired business contributed $404.2 of revenue and approximately $97 of operating income from acquisition through March 31. Acquisition-related financing included $1.55 billion of senior notes, with stated coupons of 6.75% and 7.00%. UGI’s results include Heritage only from the acquisition date.
- Shell LPG businesses: UGI acquired Shell distribution businesses in several European countries in October 2011 for approximately €133.6 million ($179.0 million). These operations also contributed to year-over-year revenue growth.
- Weather and segments: U.S. service territories experienced record warmth; AmeriGas service territories were 21.7% warmer than normal in the quarter, and Gas Utility territories were 19.3% warmer. Warm weather reduced legacy propane volumes, utility core-market throughput, and Midstream & Marketing margins. Acquisition-driven volume growth partly offset the weather impact.
- Quarterly UGI-attributable earnings declined despite acquisition contributions. For the six-month period, AmeriGas segment EBITDA increased to $308.2 from $270.8, but higher interest expense and depreciation, warm-weather pressure, and other segment declines weighed on consolidated earnings.
- UGI recorded a $13.4 loss on extinguishment of debt after AmeriGas redeemed $200 of its 6.50% notes in March at 105% of principal. A March public offering of 7 million AmeriGas common units helped fund the redemption and reduce borrowings.
- Management said the businesses generally expect to meet fiscal 2012 contractual commitments and projected cash needs using operating cash flow, available credit facilities, and, for Midstream & Marketing, receivables financing and potential parent contributions. No consolidated earnings guidance is stated in the provided filing text.
Risks, contingencies, and unusual items
- Key risks include adverse weather and demand, LPG and other commodity-price volatility, cost-recovery and regulatory delays, competition, acquisition integration and synergy execution, foreign exchange, capital-market and interest-rate conditions, counterparty defaults, and environmental, safety, and legal exposures.
- UGI reported environmental and other legal matters with outcomes that cannot be predicted. Management said some matters could be resolved unfavorably and losses could exceed recorded amounts, but excess losses could not be estimated. The company did not expect the described matters to materially affect financial position, while acknowledging possible material effects on future operating results or cash flows.
- In April 2012, a court entered judgment for UGI Utilities in the SCE&G environmental case; an appeal remained possible. A separate Waterbury North ruling found some contamination related to UGI Utilities’ operations; management did not expect its liability to materially affect financial condition.
- The FTC was investigating AmeriGas cylinder-filling practices, including cylinder fill volumes and competitor-related arrangements. UGI said it could not assess the financial impact. The Heritage acquisition’s preliminary purchase-price allocation remained subject to refinement.
- Pennsylvania legislation enabling a distribution system improvement charge became effective April 14, 2012; utilities were evaluating its potential effect, and filings could begin no earlier than January 2013.
Important facts for investors to verify
- How much of reported growth and segment improvement is attributable to Heritage and Shell acquisitions versus underlying performance, and whether expected integration benefits materialize.
- Whether unusually warm weather effects reverse in subsequent periods and how legacy propane, utility, and Midstream & Marketing margins develop.
- Debt-service capacity after the acquisition, including the impact of new notes, higher interest expense, refinancing needs, and available borrowing capacity.
- Cash conversion and working-capital trends, given acquisition-related spending and seasonal operating cash flows.
- Any material developments in the FTC investigation, environmental matters, and final purchase accounting for Heritage.
- Whether the planned dividend and AmeriGas distribution increases remain supported by cash generation and the company’s financing needs.