UGI Corporation — FY2011 Form 10-K
Reporting period: Fiscal year ended September 30, 2011. The filing also reports the fourth quarter ended September 30, 2011. Unless noted, financial amounts are in millions of U.S. dollars.
Business context
UGI is an energy holding company operating in retail propane and LPG distribution, regulated natural gas and electric utilities, energy marketing and midstream infrastructure, power generation, and HVAC/refrigeration contracting. Its six reportable segments are AmeriGas Propane, International Propane, Gas Utility, Electric Utility, and Midstream & Marketing (International Propane is divided into two segments). UGI has an effective 44% ownership interest in AmeriGas Partners.
Financial performance and liquidity
| Metric | FY2011 | FY2010 |
|---|---|---|
| Revenue | $6,091.3 | $5,591.4 |
| Operating income | $616.0 | $659.2 |
| Net income | $308.2 | $355.7 |
| Net income attributable to UGI | $232.9 | $261.0 |
| Diluted earnings per share | $2.06 | $2.36 |
| Cash from operating activities | $554.7 | $598.8 |
| Cash and cash equivalents at year-end | $238.5 | $260.7 |
| Total debt at year-end | $2,296.4 | $2,206.2 |
Revenue increased about 9%, while UGI-attributable net income and diluted EPS fell about 11% and 13%, respectively. Operating cash flow declined; cash flow before working-capital changes rose to $697.6 from $663.8, with working capital using $142.9. Net cash used in investing was $415.4, including $360.7 of property and equipment expenditures; financing used $152.1. Total debt was 51.2% of total capitalization. Current assets were $1,306.1 and current liabilities $1,077.9.
Segment highlights: Gas Utility net income attributable to UGI rose to $99.3 from $83.1; International Propane fell to $41.0 from $58.8; AmeriGas Propane fell to $39.9 from $47.3; Midstream & Marketing fell to $52.5 from $68.2, including the absence of the prior-year Atlantic Energy sale gain; and Electric Utility fell to $5.7 from $6.8. Reported total margin was $932.7 for AmeriGas, $517.9 for International Propane, $415.8 for Gas Utility, $35.1 for Electric Utility, and $139.7 for Midstream & Marketing.
In the fourth quarter, UGI reported an operating loss of $10.5, net loss of $48.9, net loss attributable to UGI of $22.4, and diluted loss per share of $0.20. The comparable 2010 quarter reported operating income of $18.8, UGI-attributable net income of $2.1, and diluted EPS of $0.02. FY2011 included $38.1 of pretax debt-extinguishment losses; quarterly data identifies $19.3 of these losses in the September quarter.
Material changes and unusual items
- Colder-than-normal weather supported Gas Utility results and throughput. Warmer late-winter and spring weather in France, rapidly rising LPG costs that compressed Antargaz unit margins, and currency translation weighed on International Propane. AmeriGas retail gallons declined 2.1%.
- UGI recognized a $9.4 benefit from reversing Antargaz’s French Competition Authority reserve after the objections against Antargaz were dismissed and the appeal period expired. FY2010 included a $17.2 after-tax gain on the Atlantic Energy sale.
- AmeriGas refinanced senior notes, issuing $470 at 6.50% due 2021 and $450 at 6.25% due 2019; the related extinguishments generated $38.1 in pretax losses. Antargaz also refinanced its term loan. Long-term debt due within one year fell to $47.4 from $573.6, mainly reflecting refinancing.
- UGI acquired Shell LPG distribution businesses in eight European countries on October 14, 2011 for approximately €130 million. AmeriGas agreed to acquire Energy Transfer Partners’ propane operations for approximately $2.9 billion, including cash, AmeriGas units, and assumed debt; closing was expected by March 31, 2012, subject to approvals and financing.
Outlook, risks and contingencies
Management said business units had sufficient liquidity for FY2012 and that UGI had no significant long-term debt maturities in that year. FY2012 results were expected to depend on heating-season weather, commodity prices and volatility, and U.S. and European economic conditions. Growth projects include the Temple LNG facility expansion, Marcellus Shale gathering and storage infrastructure, and integration of acquired businesses. Estimated FY2012 capital expenditures were $419.8; management cautioned that the growth contribution would be phased and not fully realized in FY2012.
Key risks include weather-driven demand, LPG and other commodity cost volatility and the ability to pass costs through, competition and conservation, supplier or counterparty default, access to capital and subsidiary distributions, regulatory cost recovery, pension funding, environmental claims, foreign exchange, and acquisition execution and integration. The filing lists $4,393.2 of contractual cash obligations, including $2,157.7 of long-term debt principal and $975.4 of interest on fixed-rate debt.
Legal and environmental matters include an FTC investigation into AmeriGas grill-cylinder filling practices; the filing says the financial impact could not yet be assessed. AmeriGas also faced a BP billing dispute, which management expected not to have a material impact, and California cylinder-practices investigations. UGI disclosed environmental remediation claims, including out-of-state manufactured-gas-plant matters for which potential excess losses could not be estimated. UGI reported $17.9 accrued for specified Pennsylvania remediation obligations, with equal regulatory assets. Management stated that some claims could adversely affect results or cash flows, depending on developments.
UGI’s auditor gave an unqualified opinion on the financial statements and internal control over financial reporting. Management and the auditor concluded internal controls were effective as of September 30, 2011.
Investor verification points
- Confirm the financing, closing conditions, unit issuance, and integration economics of the proposed $2.9 billion Heritage Propane acquisition, including the potential termination fee of up to $125.
- Assess post-year-end performance and financing effects of the Shell European LPG acquisition, including currency exposure and integration costs.
- Track the FTC investigation and other propane-cylinder matters for scope, outcomes, and potential financial exposure.
- Review cash conversion and seasonal working-capital needs, debt maturities and covenants, and funding for projected capital expenditures.
- Monitor weather, LPG margins and pass-through capability, pension contributions, and environmental claims whose potential excess losses are not estimable.