UGI Corporation — Form 10-Q Summary
Reporting period: Fiscal first quarter, the three months ended December 31, 2012. Financial statements are unaudited. UGI distributes and markets energy products and operates propane, natural gas and electric utilities, international LPG, energy marketing and generation businesses. Results are seasonal, with earnings generally higher in the first and second fiscal quarters.
Financial results and liquidity
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $2,023.2 million | $1,688.8 million | +19.8% |
| Operating income | $296.1 million | $188.3 million | +57.3% |
| Net income | $170.7 million | $110.1 million | +55.0% |
| Net income attributable to UGI | $102.6 million | $87.0 million | +17.9% |
| Diluted EPS | $0.90 | $0.77 | +16.9% |
| Operating cash flow | $31.1 million | $(22.4) million | Improved |
- Revenue less cost of sales was $804.4 million, or approximately 39.8% of revenue, versus $587.0 million, or 34.8%, a year earlier. Operating margin was approximately 14.6%, versus 11.1%.
- Cash and cash equivalents were $348.1 million at December 31, 2012. Current assets were $1,919.7 million and current liabilities $1,783.2 million, a current ratio of approximately 1.08.
- Total debt, including current maturities and bank loans, was $3,856.0 million, up from $3,679.4 million at September 30, 2012. Long-term debt carrying value, including current maturities, was $3,522.8 million; estimated fair value was $3,840.3 million.
- Investing cash outflow was $93.4 million, including $91.3 million of capital expenditures; financing cash inflow was $87.5 million. The company attributed operating cash flow improvement to stronger earnings and other items, partly offset by $233.8 million used for operating working capital.
Material changes and business drivers
- Comparisons reflect AmeriGas Partners’ January 2012 Heritage Propane acquisition. AmeriGas Propane revenue rose 28.2%, retail gallons sold rose 58.8%, and Partnership EBITDA increased to $187.8 million from $83.7 million. Management cited acquired operations and higher unit margins from lower propane costs. The reported revenue comparison is not fully like-for-like; the filing’s pro forma Q1 2012 revenue, assuming the acquisition from October 1, 2011, was $2,111.2 million.
- International Propane revenue increased 28.3% and operating income 38.6%, supported by higher LPG prices, somewhat higher volumes and colder weather than the prior-year period.
- Gas Utility operating income rose 14.1%. Colder-than-prior-year weather, customer growth and higher core-market volumes lifted margin, although lower gas costs reduced reported revenue.
- Midstream & Marketing operating income increased 15.1%, principally due to better electric generation results, including fuller operation of the Hunlock station.
- Interest expense increased $24.3 million, principally reflecting AmeriGas debt issued to fund the Heritage acquisition. Prior-year earnings included a $5.5 million benefit from a foreign tax credit valuation allowance adjustment; therefore, UGI-attributable earnings growth is lower than growth in consolidated net income.
- Quarterly UGI dividends declared were $0.27 per common share, up from $0.26 a year earlier.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management said operating performance benefited from colder weather than the prior-year quarter in several businesses, while temperatures remained warmer than normal across key service areas. The filing cautions that interim results are not necessarily indicative of full-year results.
- Energy Services’ $200 million receivables facility was scheduled to expire in April 2013, subject to possible earlier termination. Management intended to extend it; the facility supported working capital, commodity margin calls and capital expenditures. Energy Services also amended its bank credit agreement in December 2012, increasing capacity to $240 million and extending maturity to June 2016.
- On January 24, 2013, Pennsylvania regulators adopted a modified settlement concerning the 2011 Allentown gas explosion, which caused five deaths, injuries and property damage. Requirements included a $0.5 million civil penalty, a leak-detection pilot and additional pipeline-program reporting. UGI did not expect compliance costs to materially affect consolidated results or cash flows; the order was not yet described as final in the filing.
- Pending matters include environmental claims and investigations into AmeriGas cylinder labeling and filling practices by California authorities and the FTC. The company said it could not estimate possible losses above recorded amounts; adverse outcomes could affect future operating results or cash flows.
- Market risks include weather and demand, commodity prices and timely cost pass-through, interest rates, foreign exchange, counterparty performance, utility cost recovery, regulation and litigation. A hypothetical 10% adverse commodity-price change would increase the fair-value loss on specified unsettled commodity derivatives by approximately $32.4 million. Derivatives are used for risk management, not speculation.
Important facts for investors to verify
- How much of AmeriGas’ earnings improvement is sustainable after separating Heritage acquisition effects, integration costs and weather-related volume changes.
- Whether operating cash generation improves as seasonal receivables and inventory unwind, given the quarter’s substantial working-capital use.
- Whether the Energy Services receivables facility was extended before its April 2013 scheduled expiration and on what terms.
- The final terms and implementation costs of the Allentown settlement, and developments in the propane investigations and environmental matters.
- Debt repayment capacity, borrowing availability and the effect of acquisition-related leverage and interest expense on future earnings.