UGI Corporation 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2017. UGI is an energy holding company with propane, utility, international LPG, and midstream and marketing operations. Results are seasonal, with earnings generally strongest in the first and second fiscal quarters.
Key financial results
| Metric | Three months ended March 31, 2017 | Six months ended March 31, 2017 |
|---|---|---|
| Revenue | $2,173.8 million, up 10.2% year over year | $3,853.3 million, up 7.7% |
| Operating income | $513.2 million, down 16.6% | $979.4 million, up 6.4% |
| Net income attributable to UGI | $219.9 million, down 5.7% | $450.6 million, up 29.6% |
| Diluted EPS | $1.24, versus $1.33 | $2.55, versus $1.99 |
| Adjusted net income attributable to UGI (non-GAAP) | $231.8 million, versus $216.2 million | $392.7 million, versus $328.6 million |
| Adjusted diluted EPS (non-GAAP) | $1.31, versus $1.24 | $2.22, versus $1.88 |
| Operating cash flow | Not separately reported for the quarter | $585.0 million, versus $618.3 million |
| Capital expenditures | Not separately reported for the quarter | $341.8 million, versus $254.6 million |
Balance sheet and liquidity at March 31, 2017: Cash and cash equivalents were $637.8 million; total debt, including short-term borrowings and current maturities, was approximately $4.25 billion; and total equity was $3.94 billion. Available capacity under principal credit agreements was substantial, including $457.8 million for AmeriGas OLP and $249.5 million for UGI Utilities. UGI reported that its business units had sufficient liquidity for anticipated fiscal 2017 needs, while cautioning that future capital-market financing may not be available on acceptable terms.
Changes and drivers versus prior periods
- Quarterly GAAP net income and EPS declined, while adjusted net income and adjusted EPS increased. The comparison was affected by derivative gains in the prior-year quarter and derivative losses in the current quarter, as well as a $22.1 million pre-tax debt-extinguishment loss in the current quarter.
- Six-month GAAP net income rose substantially, but included a $27.4 million deferred-tax benefit from France’s enacted future tax-rate reduction and $49.1 million of after-tax gains on commodity derivatives not associated with current-period transactions. Adjusted six-month net income also increased.
- Warmer-than-normal weather weighed on heating-related demand, particularly at AmeriGas Propane. Its quarterly retail gallons sold fell 6.0%, and Partnership Adjusted EBITDA declined 8.2%. Higher propane prices lifted revenue but also increased product costs.
- UGI Utilities’ six-month income before taxes rose 23.8%, supported by higher throughput, a base-rate increase effective October 2016, and colder weather than the prior-year period. Midstream & Marketing and UGI International also reported higher six-month income before taxes.
- Operating cash flow declined as working-capital investment increased: cash used for working-capital changes was $277.5 million, compared with $159.0 million a year earlier. Cash flow before working-capital changes increased to $862.5 million from $777.3 million.
- Total debt increased from $4.09 billion at September 30, 2016. AmeriGas issued $700 million of 5.50% notes and $525 million of 5.75% notes, primarily refinancing 7.00% notes; UGI Utilities issued $100 million of 4.12% long-term notes.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific consolidated earnings or EPS guidance. Management stated that it expected business-unit liquidity to be adequate for fiscal 2017 operating and projected cash commitments.
- UGI’s board approved a quarterly common-stock dividend increase to $0.25 per share, effective for the dividend payable July 1, 2017. The prior quarterly rate was $0.2375.
- Weather, commodity-cost volatility and the ability to pass cost increases through to customers, regulatory recovery timing, foreign-exchange movements, interest rates, competition, counterparties, environmental claims, litigation, and operational or cyber disruptions are among the risks identified.
- PNG’s request for a $21.7 million annual base-revenue increase remained under PUC review; timing and outcome were uncertain. A separate $27.0 million annual UGI Gas rate increase took effect in October 2016. UGI disclosed that certain DSIC collections remained subject to regulatory review or final orders.
- AmeriGas recorded $55.3 million of pre-tax losses on early debt extinguishments during the six-month period and expected an additional approximately $5.0 million pre-tax loss from the remaining 7.00% notes’ planned May 2017 redemption.
- UGI recorded a $7.0 million pre-tax impairment of a renewable-energy private-equity investment. The carrying value was $11.0 million at quarter-end.
- More than 35 purported propane-cylinder class-action cases remained subject to appeals and related proceedings. UGI said it could not reasonably estimate any impact and intended to defend the claims. The filing also describes environmental remediation obligations, including $55.7 million accrued for specified Pennsylvania manufactured-gas-plant agreements; related costs are expected to be recoverable through rates.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether adjusted earnings growth is sustained when excluding derivative timing effects, tax benefits, debt-refinancing charges, and Finagaz integration costs; adjusted measures are non-GAAP.
- AmeriGas’s ability to restore propane volumes and margins after unusually warm weather and higher supply costs.
- Cash conversion and working-capital needs, particularly if commodity costs or receivables rise further.
- Debt-refinancing costs, leverage, and the terms and availability of credit facilities, including the receivables facility scheduled to expire in October 2017.
- Outcomes of PNG’s rate case, DSIC proceedings, and propane-related litigation, along with the eventual cost and recovery of environmental obligations.
- Future segment performance amid weather variability, foreign-currency movements, and commodity-price changes.