UGI Corporation — FY2016 Form 10-K
Reporting period: Fiscal year ended September 30, 2016; the filing is an annual report, not a standalone fourth-quarter report. UGI is a diversified energy holding company operating U.S. propane distribution, European LPG distribution, energy marketing and midstream businesses, electric generation, and regulated gas and electric utilities.
Financial performance
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $5,685.7 million | $6,691.1 million |
| Operating income | $988.0 million | $834.9 million |
| Net income attributable to UGI | $364.7 million | $281.0 million |
| Diluted EPS | $2.08 | $1.60 |
| Adjusted net income attributable to UGI (non-GAAP) | $360.0 million | $353.8 million |
| Adjusted diluted EPS (non-GAAP) | $2.05 | $2.01 |
| Cash provided by operating activities | $969.7 million | $1,163.8 million |
| Capital expenditures | $604.5 million | $475.2 million |
| Total debt at year-end | $4,087.2 million | $3,857.3 million |
| Cash and cash equivalents at year-end | $502.8 million | $369.7 million |
Revenue fell 15.0%, principally reflecting lower energy commodity prices and reduced weather-driven volumes. GAAP net income rose 29.8%, while adjusted net income increased 1.8%; GAAP results benefited from a $29.9 million after-tax gain on commodity derivatives not associated with current-period transactions, compared with a $53.3 million after-tax loss in FY2015. Adjusted results exclude those derivative effects and other specified items.
Operating income was 17.4% of revenue, versus 12.5% in FY2015; interpret this comparison cautiously because commodity-price pass-through, derivative accounting, and business mix influence reported revenue and margins. The filing does not provide a single consolidated gross-margin percentage as a principal performance measure.
Material changes and segment drivers
- Weather: Unusually warm heating-season weather across the U.S. and Europe reduced demand. AmeriGas retail gallons fell 10.0%; UGI Utilities gas core-market throughput declined 18.6%; and Midstream & Marketing earnings were hurt by lower marketing volumes and capacity-management margins.
- UGI International: Adjusted net income increased substantially, primarily from the full-year contribution of Finagaz, acquired in May 2015, and stronger LPG unit margins. Reported retail gallons increased 17.7%, including acquisition volumes.
- AmeriGas Propane: Partnership Adjusted EBITDA declined 12.3% to $543.0 million as lower volume reduced total margin. A $24.5 million reduction in operating and administrative expenses partially offset the decline.
- UGI Utilities: Net income attributable to UGI fell $23.7 million, mainly from weather-related lower gas utility margin. A $27 million annual base-rate increase was approved in October 2016, effective October 19, after UGI Gas’s first base-rate filing in over 21 years.
- Midstream & Marketing: Income before taxes declined $35.9 million, chiefly due to lower capacity-management margin and weaker natural gas and power marketing results. Gathering and peaking margins improved modestly.
Cash, debt, liquidity, and capital returns
- Operating cash flow decreased $194.1 million year over year, reflecting lower working-capital contribution and warmer-weather operating results. Cash flow less property, plant and equipment expenditures was approximately $405.9 million, versus $673.2 million in FY2015.
- Total debt increased $229.9 million; debt represented 53.2% of total capitalization, compared with 51.9% a year earlier. Cash less total debt was approximately $3.58 billion.
- At September 30, 2016, short-term borrowings were $291.7 million. The company reported $304.6 million available under AmeriGas’s credit facility, $185.5 million under UGI Utilities’ facility, and $240 million under Energy Services’ facility, plus eligible-receivables borrowing capacity under its securitization facility. Availability is subject to facility terms and seasonal conditions.
- UGI and its subsidiaries paid $160.7 million in common-stock dividends. The quarterly dividend rose to $0.2375 per share in July 2016 ($0.95 annualized). UGI repurchased 1.25 million shares during the fiscal year for $47.6 million.
- FY2017 capital expenditures were estimated at $694.3 million, including $339.0 million for UGI Utilities and $125.6 million for Midstream & Marketing. Management expected to fund a substantial portion from operating cash flow, credit facilities, and cash on hand.
Outlook, risks, and unusual items
- Management reported adequate expected propane supply and sufficient business-unit liquidity for FY2017. It gave no consolidated earnings or EPS guidance in the provided filing text.
- Projects under development included the Sunbury Pipeline, expected in service in FY2017; the Manning LNG plant, expected to be completed in FY2017; and the Steelton LNG peak-shaving facility, expected in FY2018. The PennEast Pipeline remained subject to regulatory review and approval.
- AmeriGas refinanced debt by issuing $1.35 billion of senior notes and repaying $1.27 billion principal amount of older notes. The early repayment produced a $48.9 million pretax extinguishment loss. UGI Utilities also issued long-term notes to refinance maturities and support infrastructure investment.
- AmeriGas recorded a $15.0 million litigation-accrual adjustment after an appeals court affirmed an approximately $18 million class-action award, including associated interest. A rehearing motion was pending. Separate propane-cylinder antitrust class-action appeals remained pending; the company said the impact could not be reasonably estimated.
- Key risks include weather sensitivity, declining or mature propane markets, competition from natural gas and other fuels, LPG supply concentration and price volatility, inability to pass on cost increases, regulatory rate recovery, construction and permitting risks, foreign exchange exposure, pension funding, cyber incidents, and environmental and litigation liabilities.
- UGI reported estimated Pennsylvania manufactured-gas-plant remediation liabilities, including $43.7 million for UGI Gas and $11.3 million for CPG and PNG combined; associated regulatory assets were recorded because recovery through rates was considered probable. Potential exposure at sites outside Pennsylvania remains uncertain.
- Management and the independent auditor reported effective internal control over financial reporting as of September 30, 2016; the financial-statement audit opinion was unqualified.
Investor verification priorities
- Reconcile GAAP earnings growth with the nearly flat adjusted earnings trend, especially commodity-derivative marks, Finagaz integration expenses, and debt-extinguishment costs.
- Assess whether FY2017 weather, customer volumes, and LPG unit margins recover, and whether the Finagaz integration delivers expected benefits.
- Review debt maturities, refinancing terms, covenant headroom, subsidiary restrictions on distributions, and seasonal credit-facility usage.
- Track actual spending, timing, regulatory approvals, and expected returns for the LNG and pipeline projects, particularly PennEast.
- Follow the AmeriGas class-action motions and appeals, as well as remediation estimates and regulatory recovery assumptions for environmental matters.
- Compare FY2017 capital expenditures and operating cash flow with the stated plan, while accounting for working-capital and commodity-price volatility.