UGI Corporation — Form 10-Q summary
Business context and reporting period
UGI distributes and markets propane and other energy products, operates natural gas and electric utilities, and conducts energy marketing, midstream, generation and international LPG businesses. This unaudited filing covers the quarter and six months ended March 31, 2014, UGI’s fiscal second quarter. Results are seasonal, with earnings generally strongest in the heating-season quarters. Amounts are in millions of dollars except per-share data.
Financial performance and position
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Revenue | $3,163.3; prior year $2,542.7 | $5,479.2; prior year $4,561.4 |
| Operating income | $588.6; prior year $507.7 | $952.3; prior year $801.9 |
| Net income attributable to UGI | $214.4; prior year $180.7 | $336.4; prior year $283.2 |
| Diluted EPS | $1.84; prior year $1.57 | $2.89; prior year $2.47 |
- For the six months, operating cash flow was $483.0 versus $480.8; cash flow before working-capital changes was $832.6 versus $729.8. Working capital used $349.6, primarily reflecting increased receivables and lower net cash from utility fuel-cost recovery.
- Investing cash outflow was $237.3, including $224.4 of capital expenditures. Financing cash outflow was $145.4. Cash and cash equivalents increased $104.3 to $493.6.
- At March 31, total debt was $3,873.7, including $260.1 of bank loans and $65.0 of current maturities. Long-term debt was $3,548.6. Total debt was $3,837.3 at September 30, 2013.
- Current assets were $2,281.1 and current liabilities $1,655.3. Total assets were $10,720.5; total equity was $4,002.1.
- UGI declared dividends of $0.2825 per common share for the quarter. After quarter-end, the Board raised the quarterly rate to $0.295, effective for the July 1, 2014 payment.
Material changes versus the prior comparable period
- Cold U.S. winter weather supported higher volumes and earnings at Gas Utility, AmeriGas Propane and Midstream & Marketing. The quarter’s domestic gains were partly offset by record-warm weather and weaker retail volumes in European LPG operations.
- For the six months, UGI’s adjusted net income, a non-GAAP measure, was $345.6 ($2.97 per diluted share), compared with $275.2 ($2.40). Reported net income attributable to UGI rose 18.8%. Adjusted results exclude certain Midstream & Marketing derivative effects and the French tax-law item; they are not GAAP measures.
- Six-month segment income attributable to UGI increased at AmeriGas Propane ($68.2 versus $56.7), Gas Utility ($117.8 versus $92.1) and Midstream & Marketing ($93.8 versus $41.7); UGI International declined ($66.2 versus $88.9).
- AmeriGas reported higher retail volumes and margins, but severe propane supply and transportation constraints limited sales and raised distribution costs. Midstream & Marketing benefited from extreme cold, high natural-gas basis spreads, increased demand for pipeline capacity and peaking services, and higher generation output.
- UGI International’s six-month margin and operating income fell despite acquisition-related revenue growth at Flaga, principally reflecting warm European weather and higher expenses.
- Comparative 2013 financial statements were restated after UGI identified incorrect hedge accounting for certain Midstream & Marketing commodity derivatives. Those derivative fair-value changes and certain settled-contract gains and losses were moved into income rather than other comprehensive income. The restatement also included other immaterial corrections. 2013 comparative figures in this filing are restated.
Outlook, commentary, risks and unusual items
- Management said each business unit had sufficient liquidity for anticipated fiscal 2014 needs, using cash, operating cash flow, credit facilities and, for Energy Services, receivables financing. No specific consolidated earnings guidance is provided in the supplied filing text.
- UGI Utilities issued $175 million of 4.98% senior notes due 2044 and used the proceeds to repay a $175 million term loan. Energy Services’ receivables facility, due to expire in October 2014, had capacity of up to $150 million through May 2014 and $75 million thereafter; the company intended to extend it. Flaga also expected to extend working-capital facilities expiring in September 2014.
- New French tax legislation limited deductions for certain Antargaz intercompany interest and temporarily increased a corporate surtax. UGI recorded $5.7 of tax expense for the retroactive effect, reducing six-month UGI earnings by $0.05 per diluted share.
- Midstream & Marketing derivative mark-to-market volatility reduced reported six-month earnings by $3.5 after tax, while the prior-year period included $8.0 of after-tax gains. Management cautions that derivative timing and fair-value movements can cause earnings volatility.
- The FTC filed an administrative complaint alleging anticompetitive conduct regarding AmeriGas propane cylinder fill levels. The complaint seeks no monetary remedy; UGI and the Partnership said they had good defenses, but could not reasonably estimate any impact.
- Other key risks include weather and energy demand, commodity supply and transport constraints, timely recovery of utility costs, competition, environmental and operational liabilities, capital-market access, foreign exchange, and dependence on international LPG supply routes. The filing highlights Flaga’s supply route through Russia and Ukraine as a potential disruption exposure.
- A hypothetical 10% adverse commodity-price move would increase the relevant derivative loss by about $34.8; a 10% euro decline would reduce international net book value by about $103.9. These sensitivities are estimates, not forecasts.
- Management reported disclosure controls were effective and said remediation of the material weakness in commodity-derivative accounting had been completed.
Important facts for investors to verify
- Review the restated 2013 comparisons and the accounting treatment and earnings sensitivity of Midstream & Marketing derivatives.
- Assess whether propane supply, transportation availability and customer affordability normalize after the unusually severe winter conditions.
- Track European weather, Flaga’s integration of the BP Poland business, and LPG sourcing and transit risks.
- Confirm extension or refinancing of the Energy Services receivables facility and Flaga working-capital facilities, and monitor debt, bank borrowings and liquidity.
- Monitor the FTC proceeding, its eventual outcome and any related costs or operational effects; the filing does not provide a clear estimate of exposure.
- Compare reported GAAP earnings with management’s adjusted non-GAAP measures, including the excluded derivative and French tax effects.