UGI Corporation — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2022, ended March 31, 2022. UGI distributes and markets propane and other energy products, operates regulated gas and electric utilities, and owns energy marketing and midstream businesses. Amounts below are in millions of dollars unless noted.
Financial performance
| Metric | Three months ended March 31, 2022 | Six months ended March 31, 2022 |
|---|---|---|
| Revenue | $3,466; prior year $2,581 | $6,139; prior year $4,513 |
| Operating income | $1,332; prior year $671 | $1,264; prior year $1,173 |
| Net income attributable to UGI | $933; prior year $489 | $836; prior year $792 |
| Diluted EPS | $4.32; prior year $2.33 | $3.87; prior year $3.77 |
| Adjusted net income attributable to UGI | $413; prior year $418 | $614; prior year $665 |
| Adjusted diluted EPS | $1.91; prior year $1.99 | $2.84; prior year $3.17 |
Reported GAAP earnings included substantial gains on commodity derivatives not associated with current-period transactions: $535 million for the quarter and $243 million for the six months, net of tax in the company’s non-GAAP reconciliation. These gains make reported profit and operating results unusually volatile; adjusted results declined versus the prior year.
Quarterly operating margin was approximately 38.4% of revenue, compared with 26.0% a year earlier; the six-month margin was approximately 20.6%, versus 26.0%. These GAAP ratios are affected by commodity-derivative mark-to-market gains and should not be read as underlying operating-margin trends.
Segments and material changes
- AmeriGas Propane: Six-month operating income fell to $313 from $380. Retail gallons sold declined 10%; management cited customer-service challenges, customer price sensitivity, and inflation in distribution costs. Higher propane prices lifted revenue but did not prevent lower total margin.
- UGI International: Six-month operating income fell to $189 from $282. Higher energy commodity prices drove revenue growth, but energy-marketing margin pressure and weaker foreign currencies reduced results. Management said volatility’s impact on certain customer-contract unit margins was expected to be largely confined to the primary heating season.
- Midstream & Marketing: Six-month operating income increased to $159 from $142, supported by renewable-energy marketing, peaking activity, and the Stonehenge acquisition. Quarterly earnings were lower year over year, in part due to timing of multi-year storage-hedge settlements.
- Utilities: Six-month operating income increased to $287 from $219, chiefly from the Mountaineer acquisition, rate increases, and the distribution-system improvement charge (DSIC). Mountaineer was acquired in September 2021; Stonehenge, a gas-gathering business, was acquired in January 2022 for about $190 million.
Cash flow, debt, and liquidity
- Operating cash flow for the six months was $400, down from $646. UGI attributed the decline to lower operating cash flow before working-capital changes and greater working-capital use, including cash tied up in receivables amid higher commodity prices.
- Investing cash outflow was $515, including $355 of capital expenditures and $188 for acquisitions. Financing cash inflow was $25. Cash, cash equivalents, and restricted cash decreased $104 to $773.
- Total debt was $6,967 at March 31, 2022, compared with $6,816 at September 30, 2021; this includes $447 of short-term borrowings. Cash and cash equivalents were $718. Long-term debt, including current maturities, was $6,520.
- Management reported approximately $1.9 billion of available liquidity, including cash and unused borrowing capacity, versus $2.2 billion at September 30, 2021. UGI and its subsidiaries were in compliance with debt covenants. A UGI Utilities variable-rate term loan was due in October 2022; management reported no other near-term senior-note or term-loan maturities.
- The quarterly common dividend was raised after quarter-end from $0.345 to $0.36 per share, effective with the July 1, 2022 payment. The board also extended the authorization to repurchase up to 8 million shares through February 2026.
Outlook, risks, and unusual items
- The filing provides no clear quantified full-year fiscal 2022 earnings guidance. Management said it expected sufficient liquidity to support operations and commitments, while noting that the duration and effects of COVID-19 and commodity-price volatility could not be predicted.
- Management cited inflation, supply-chain strain, sharp commodity-price movements, and increased cash-collateral needs. UGI International energy-marketing margins were particularly affected by volatile natural-gas prices and higher-than-anticipated customer volumes under fixed-price and full-requirement contracts.
- The Russia-Ukraine conflict was identified as a source of potential energy-price, supply, geopolitical, and regional-market disruption; the company said its business impact could not be estimated.
- PA Gas Utility requested an $83 million annual increase in base operating revenues. The Pennsylvania commission suspended the requested effective date for investigation and hearings; the company could not predict the timing or outcome.
- UGI reported $13 million of quarterly and six-month restructuring costs, largely associated with workforce reductions, and an $11 million pretax debt-extinguishment loss related to refinancing UGI International notes. Its ongoing corporate-services transformation was expected to incur about $40 million in nonrecurring costs and generate more than $15 million of annualized savings by the end of fiscal 2023.
- Environmental and other legal matters were discussed. UGI accrued $49 million for specified Pennsylvania former manufactured-gas-plant remediation obligations; management did not expect these costs to materially affect results because recovery through utility rates was expected. The filing states that other pending claims were not expected to have a material effect, while acknowledging uncertainty.
Important facts for investors to verify
- How much of reported earnings reflects derivative mark-to-market gains versus recurring operating performance; review the company’s adjusted-income reconciliation and segment disclosures.
- Whether propane and European energy-marketing margins, customer volumes, and inflation-related costs improve after the heating season.
- Working-capital and collateral movements, available liquidity, borrowings, and the October 2022 UGI Utilities term-loan maturity.
- The outcome and timing of PA Gas Utility’s $83 million rate request, and the realized earnings contribution and integration costs of Mountaineer and Stonehenge.
- The effects of commodity volatility, foreign-exchange movements, supply-chain pressures, and geopolitical developments on cash requirements and operating results.