UGI Corporation — Q2 FY2019 Form 10-Q
Reporting period: Quarter and six months ended March 31, 2019; filed May 8, 2019. UGI distributes and markets propane and other energy products, operates natural gas and electric utilities, and conducts energy marketing and midstream businesses in the U.S. and Europe. Amounts below are in U.S. dollars unless stated otherwise. Results are seasonal, with earnings generally strongest in the first and second fiscal quarters.
Financial performance and liquidity
| Metric | Three months ended March 31, 2019 | Six months ended March 31, 2019 |
|---|---|---|
| Revenue | $2,606.1 million, down 7.3% year over year | $4,806.3 million, down 2.7% |
| Operating income | $538.8 million, down from $591.0 million | $706.5 million, down from $986.0 million |
| Net income attributable to UGI | $245.4 million; diluted EPS $1.38 | $309.6 million; diluted EPS $1.74 |
| Adjusted net income attributable to UGI (non-GAAP) | $253.9 million; adjusted diluted EPS $1.43, versus $298.2 million and $1.69 | $397.7 million; adjusted diluted EPS $2.24, versus $477.5 million and $2.70 |
| Operating cash flow | Not separately reported for the quarter | $617.6 million, versus $579.4 million |
| Capital expenditures | Not separately reported for the quarter | $340.6 million, versus $266.1 million |
Six-month GAAP earnings comparisons are substantially affected by prior-year tax benefits: the six months ended March 31, 2018 included $171.3 million of TCJA-related tax remeasurement benefit and $13.6 million from French tax-law changes. The current six-month period included a $6.1 million debt-extinguishment loss and $92.7 million in after-tax losses on commodity derivatives not associated with current-period transactions; the latter is excluded from UGI’s adjusted net income measure.
At March 31, 2019, cash and cash equivalents were $492.1 million ($518.4 million including restricted cash). Total debt was $4,642.8 million, including $341.0 million of short-term borrowings; long-term debt on the balance sheet was $4,283.8 million. Total debt was $4,590.2 million at September 30, 2018. Current assets were $2,180.0 million and current liabilities $1,777.3 million. UGI reported $617.6 million of operating cash flow and $393.3 million of cash used in investing activities for the six-month period.
UGI declared dividends of $0.26 per share for the quarter and $0.52 per share for the six months, versus $0.25 and $0.50 in the comparable periods. On April 30, 2019, the board approved an increase to $0.30 quarterly, effective with the July 1, 2019 payment.
Material changes and management commentary
- AmeriGas Propane: Quarterly Partnership Adjusted EBITDA fell 6.2% to $290.3 million, primarily on lower retail propane volumes. For six months it was $500.9 million, essentially flat year over year; lower volume was offset by stronger retail unit margins.
- UGI International: Six-month adjusted net income was $126.4 million versus $142.0 million. Warmer-than-normal European weather and lower heating and crop-drying volumes, together with weaker euro and pound exchange rates, weighed on results; currency-hedge gains provided an offset.
- Midstream & Marketing: Six-month adjusted net income declined to $69.1 million from $114.3 million. Management cited lower pipeline capacity-management margins, increased pipeline restrictions, weaker electric generation margins, and lower natural-gas marketing unit margins. Higher natural-gas revenues included the effect of customer growth and an acquisition.
- UGI Utilities: Six-month net income was $132.7 million versus $157.5 million. Results included $36.2 million of customer credits related to TCJA tax savings under a Pennsylvania regulator order. Excluding that reduction, utility margin increased, supported by customer growth and higher throughput.
Outlook, transactions, risks and contingencies
- UGI entered into an agreement on April 1, 2019 to acquire the publicly held AmeriGas Partners units it does not already own. Unit holders may elect stock, cash-and-stock, or cash consideration, subject to proration; the transaction is designed to issue approximately 34.6 million UGI shares and pay approximately $530 million cash. Completion is expected in the fourth quarter of FY2019, subject to conditions including unitholder approval. UGI filed a registration statement on Form S-4 on May 6. The filing provides no quantified consolidated earnings guidance.
- UGI Utilities’ requested annual gas-utility revenue increase of $71.1 million was suspended by the Pennsylvania PUC for investigation and hearings; the company said timing and outcome cannot be predicted. An appeal also challenges aspects of the electric utility rate order.
- A regulator complaint relating to a 2017 gas explosion, which caused one employee death and injuries, seeks approximately $2.1 million in civil penalties; the matter remains pending. UGI also disclosed propane-cylinder antitrust litigation, for which it cannot reasonably estimate potential impact, and environmental matters. The company says the expected Pennsylvania MGP remediation costs are recoverable through rates.
- Key stated risk exposures include weather and energy demand, commodity costs and pass-through timing, utility regulation and cost recovery, foreign-exchange and interest-rate changes, pipeline or supply disruptions, counterparty performance, environmental and safety liabilities, and merger approval, execution, litigation and transaction costs. UGI says it does not use derivatives for speculative purposes. Management concluded disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Investor verification priorities
- Review the Form S-4 and merger terms, including election proration, required approvals, closing conditions, transaction costs and the effect of issuing shares and paying cash.
- Separate recurring operating trends from prior-year tax benefits and current-period derivative and debt-extinguishment effects; compare GAAP results with the company’s non-GAAP reconciliations.
- Track the Pennsylvania gas rate case, proposed tax-benefit surcharge, electric-rate appeal, and the pending explosion and antitrust matters.
- Monitor debt, interest expense, short-term borrowing needs and capital spending, including whether operating cash flow supports investment and dividends.
- Assess the persistence of weather-related volume changes, Midstream & Marketing capacity margins, and UGI International currency and demand pressures.