Business context and reporting period
UGI Corporation’s unaudited Form 10-Q covers the three and six months ended March 31, 2013 (its fiscal second quarter and first half). UGI operates propane distribution, regulated gas and electric utilities, international LPG businesses, and energy marketing, midstream and generation businesses. Results are seasonal, with earnings generally strongest in the October–March heating season. Comparisons are affected by the January 2012 Heritage Propane acquisition.
Financial performance and position
| Metric | Three months ended Mar. 31, 2013 | Six months ended Mar. 31, 2013 | Comparable 2012 period |
|---|---|---|---|
| Revenue | $2,537.1 million | $4,560.3 million | $2,427.5 million; $4,116.3 million |
| Operating income | $486.2 million | $782.3 million | $380.8 million; $569.1 million |
| Net income attributable to UGI | $171.9 million | $274.5 million | $133.4 million; $220.4 million |
| Diluted EPS | $1.49 | $2.39 | $1.18; $1.95 |
For the first half, operating cash flow was $480.8 million, versus $334.7 million; investing cash use was $205.9 million, versus $1,714.0 million, largely because the prior year included major acquisitions. Financing used $145.0 million, compared with $1,540.2 million provided in the prior year. Cash rose to $446.3 million from $319.9 million at September 30, 2012. Working-capital changes used $242.5 million of cash in the first half, including increased receivables.
At March 31, 2013, total debt was $3,680.6 million, essentially unchanged from $3,679.4 million at September 30, 2012. It included $162.4 million of current maturities, $177.7 million of bank loans and $3,340.5 million of long-term debt. Total assets were $10,236.3 million and total equity was $3,717.3 million. UGI declared dividends of $0.27 per share for the quarter, versus $0.26 a year earlier.
Material changes and management commentary
- UGI-attributable net income increased 28.9% in the quarter and 24.5% in the first half. Management attributed the improvement principally to colder weather than in the unusually warm prior-year periods, plus the full-period contribution of Heritage Propane.
- AmeriGas Propane first-half revenue increased 11.6% and Partnership EBITDA increased 59.4%; retail gallons sold rose 33.6%. The period benefited from colder weather and Heritage operations, partly offset by lower propane selling prices and higher expenses.
- Gas Utility first-half total margin increased 16.2%, supported by higher core-market volumes. Midstream & Marketing first-half total margin increased 24.4%, with contributions from natural-gas marketing, peaking services and electricity generation.
- International Propane first-half total margin increased 7.3%; colder weather and higher retail unit margins contributed, while European economic weakness affected some customer volumes.
- Management noted higher first-half interest expense, primarily reflecting a full period of interest on debt associated with the Heritage acquisition. The prior-year first half also included a $13.4 million pre-tax debt-extinguishment loss and a $5.5 million foreign-tax-credit benefit.
Outlook, risks and unusual items
The filing provides no specific earnings guidance. Management said operating subsidiaries expect to meet fiscal 2013 cash commitments using operating cash flow and available credit facilities; Midstream & Marketing also cited its receivables facility and potential UGI capital contributions. Management cautioned that interim results are not necessarily indicative of full-year results. On April 30, UGI’s board approved a 4.6% increase in the quarterly dividend to $0.2825 per share, effective for the July 2013 payment.
Energy Services’ receivables facility was reduced from $200 million to $100 million and extended to November 2013; it may terminate earlier if back-up purchasers end their commitments. UGI intends to seek a further extension. The filing highlights weather and energy-demand variability, commodity costs and pass-through timing, supplier or counterparty defaults, regulatory cost recovery, interest and currency movements, access to capital, and legal, environmental and safety matters as risks.
In February 2013, the Pennsylvania PUC approved a settlement concerning the 2011 Allentown gas explosion, which caused five deaths and other harm. Requirements include a $0.5 million civil penalty, a leak-detection pilot and additional reporting; UGI said compliance would not materially affect its consolidated financial position, results or cash flows. The filing also describes unresolved environmental and other claims, including propane-cylinder investigations and litigation; some outcomes could affect future operating results or cash flows, and potential losses beyond recorded amounts could not be estimated.
UGI corrected its accounting for certain AmeriGas customer credits by estimating credits when propane revenue is recorded. The correction reduced first-half revenue and accounts receivable by $7.0 million and UGI-attributable net income by $1.2 million; management said the effects were not material to prior periods or expected to be material for fiscal 2013. Heritage transition expenses were $10.9 million at AmeriGas in the first half.
Important facts for investors to verify
- How much of earnings growth reflects weather and Heritage Propane, and whether margins persist under more typical conditions.
- Working-capital and receivables trends, operating cash conversion, and the extension or replacement of the $100 million receivables facility before November 2013.
- Debt service, refinancing needs and covenant headroom across subsidiaries, including AmeriGas and International Propane.
- Developments in the Allentown matter and the unresolved environmental, cylinder-practice and other legal claims.
- Effects of propane and other commodity prices, foreign exchange, and counterparty or supplier performance on margins and collateral requirements.
- The customer-credit estimate and the related correction’s effect on reported revenue and earnings in subsequent periods.