UGI Corporation — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the third fiscal quarter and nine months ended June 30, 2012; UGI’s fiscal year ends September 30. UGI distributes and markets propane and other energy products, operates regulated gas and electric utilities, and conducts energy marketing and midstream businesses. Results are seasonal, with earnings generally strongest in the first and second fiscal quarters.
Period results include Heritage Propane from its January 12, 2012 acquisition and Shell LPG businesses acquired in October 2011. Heritage was acquired by AmeriGas Partners for approximately $2.6 billion, comprising $1.5 billion cash and AmeriGas units valued at $1.1 billion. The purchase-price allocation remained preliminary at June 30.
Financial results and liquidity
- Revenue: Third-quarter revenue was $1.277 billion, up 15.5% from $1.105 billion. Nine-month revenue was $5.394 billion, up 6.8% from $5.052 billion.
- Profit: Third-quarter consolidated net loss was $76.5 million, versus a $13.5 million loss a year earlier; net loss attributable to UGI was $6.3 million versus $7.2 million. Nine-month net income attributable to UGI was $214.1 million, down 16.1% from $255.3 million; diluted EPS was $1.89 versus $2.26.
- Operating performance: UGI reported a third-quarter operating loss of $19.2 million versus operating income of $17.2 million. Nine-month operating income was $549.9 million, down from $626.5 million. AmeriGas nine-month Partnership EBITDA, a non-GAAP segment measure, was $310.0 million versus $301.9 million.
- Cash flow: Nine-month operating cash flow was $566.2 million, versus $467.2 million. Cash flow before working-capital changes fell to $523.7 million from $621.3 million; working-capital changes provided $42.5 million compared with using $154.1 million. Capital expenditures were $236.0 million. Investing used $1.800 billion, principally reflecting the Heritage acquisition.
- Debt and liquidity: Total debt was $3.749 billion at June 30, up from $2.296 billion at September 30, 2011. Cash and cash equivalents were $436.5 million; bank loans were $187.3 million. AmeriGas had $417.1 million of available capacity under its credit agreement. UGI Utilities had no borrowings under its $300 million revolving facility; Energy Services had $85 million outstanding under its $170 million credit facility.
- Margins and distributions: Nine-month segment total margin was $963.5 million at AmeriGas, $501.0 million in International Propane, $326.2 million at Gas Utility, $26.1 million at Electric Utility, and $108.9 million in Midstream & Marketing. UGI declared $0.79 per common share for the nine-month period; the quarterly dividend was raised to $0.27. AmeriGas Partners raised its quarterly distribution to $0.80 per unit.
Changes versus the prior comparable period
- Exceptionally warm U.S. weather materially reduced heating demand: U.S. service territories were more than 18% warmer than normal over the nine-month period, and March temperatures were over 38% warmer than normal. European operations were also warmer than normal.
- Acquisitions increased reported sales and volumes, but also brought higher operating costs, depreciation, amortization, interest expense and integration costs. AmeriGas recorded $26.9 million of acquisition and transition expenses for nine months, including $15.0 million in the quarter.
- International Propane nine-month operating income rose to $113.1 million from $100.8 million, principally reflecting Shell-acquired operations. Gas Utility operating income fell to $168.7 million from $193.2 million, largely due to lower weather-sensitive volumes and margin. Midstream & Marketing operating income declined to $59.4 million from $76.7 million, reflecting lower marketing, capacity-management and generation margins.
- Interest expense rose $60.0 million for nine months, principally due to debt issued to finance Heritage. AmeriGas recorded a $13.4 million loss on the tender of $200 million of 6.50% notes.
Outlook, commentary and risks
Management provided no quantified earnings guidance in the supplied filing text. Management said it expects the businesses to meet fiscal 2012 contractual commitments and projected cash needs using operating cash flow, available facilities and, for Midstream & Marketing, potential capital contributions from UGI. UGI cited acquisition growth and integration as part of its strategy. The filing emphasizes that weather, commodity prices, demand, cost recovery, competition, foreign exchange, financing access and successful acquisition integration could cause actual results to differ materially.
AmeriGas was subject to California cylinder-practice inquiries and an FTC investigation concerning portable-cylinder filling and related practices; UGI said it could not assess the FTC matter’s financial impact. Environmental and other claims remain pending, including Omaha and acquired Heritage-site matters for which cleanup costs could not be estimated. Management said some matters could result in losses above recorded amounts, although it did not expect the described matters to materially affect financial position. The SCE&G judgment for UGI Utilities became final in UGI’s favor; Frontier voluntarily dismissed its appeal.
Important facts for investors to verify
- Heritage’s final purchase-price allocation, realized integration savings, and ongoing acquisition-related costs.
- Debt repayment capacity, interest costs, credit-agreement availability and refinancing needs following the acquisition-driven increase in debt.
- Whether results recover from unusually warm weather and whether acquired volumes translate into sustainable margins.
- Potential financial exposure from the FTC inquiry, environmental matters and other contingencies; some possible losses are not estimable.
- Cash generation quality: operating cash flow increased, but cash flow before working-capital changes declined.