UGI Corporation — Form 10-Q Summary
Business context and period. This filing covers the fiscal first quarter ended December 31, 2016, compared with the three months ended December 31, 2015. UGI operates propane distribution, international LPG, midstream and energy marketing, and regulated gas and electric utilities. Results are seasonal, with earnings generally strongest in the first and second fiscal quarters.
Financial performance
| Metric | Quarter ended Dec. 31, 2016 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $1,679.5 million | $1,606.6 million | Up 4.5% |
| Operating income | $466.2 million | $305.5 million | Up 52.6% |
| Net income, including noncontrolling interests | $290.9 million | $167.9 million | Up 73.3% |
| Net income attributable to UGI | $230.7 million | $114.6 million | Up 101.3% |
| Diluted EPS | $1.30 | $0.65 | Up 100% |
| Operating cash flow | $126.6 million | $127.5 million | Down $0.9 million |
| Cash capital expenditures | $197.1 million | $132.0 million | Up $65.1 million |
Underlying earnings: Management’s non-GAAP adjusted net income attributable to UGI was $160.9 million, or $0.91 per diluted share, compared with $112.4 million, or $0.64, in the prior-year quarter. This measure excludes certain derivative gains and discrete items; it is not a substitute for GAAP results.
Segment performance: AmeriGas Adjusted EBITDA rose 4.2% to $185.1 million; retail gallons sold increased 3.6%. UGI International operating income rose 4.5% to $88.9 million despite lower revenue, while Midstream & Marketing operating income rose 15.9% to $49.7 million. UGI Utilities operating income increased 70.2% to $82.2 million, reflecting colder weather versus the prior year and higher base rates.
Margins and unusual earnings effects: Consolidated operating income increased substantially, but GAAP results included $52.2 million of after-tax gains on commodity derivatives not associated with current-period transactions and a $27.4 million deferred tax benefit from France’s future tax-rate reduction. These items were excluded from adjusted earnings. GAAP income also included a $33.2 million pretax loss from AmeriGas debt extinguishment; UGI-attributable after-tax impact was $5.3 million. The filing does not provide a single consolidated gross-margin percentage.
Cash, debt and liquidity
- Cash and cash equivalents were $515.2 million at December 31, 2016, including $127.5 million held at UGI parent and corporate subsidiaries.
- Total debt was $4.277 billion, versus $4.087 billion at September 30, 2016; short-term borrowings were $234.4 million. Long-term debt, including current maturities, was $4.043 billion.
- Operating cash flow was nearly flat year over year. Higher cash generation before working-capital changes was offset by $207.3 million of cash used for working capital, chiefly receivables and inventory.
- Cash capital expenditures exceeded operating cash flow by $70.5 million in the quarter. Investing cash outflow was $192.4 million.
- UGI reported available capacity of $380.3 million under AmeriGas OLP’s facility, $199.6 million under UGI Utilities’, and $220.0 million under Energy Services’; additional euro-denominated facilities were also available. Management said business units had sufficient liquidity for fiscal 2017 commitments.
- AmeriGas issued $700 million of 5.50% notes due 2025, using proceeds in part to tender for $500 million of 7.00% notes and reduce short-term borrowings. UGI Utilities issued $100 million of 4.12% notes due 2046.
Changes, outlook and risks
- Management attributed improved adjusted earnings mainly to increases from UGI Utilities, UGI International, Midstream & Marketing and AmeriGas. Domestic weather was warmer than normal but colder than the unusually warm prior-year quarter; European weather was approximately normal and colder than the prior year.
- UGI Gas’s $27 million annual base-rate increase took effect October 19, 2016. PNG filed for a further $21.7 million annual increase in January 2017; timing and outcome remained uncertain. A newly approved UGI Gas infrastructure charge is subject to regulatory conditions and refunds, and recovery was not expected to begin before September 30, 2017.
- No numerical full-year earnings guidance is provided in the supplied filing text. Management cautions that interim results are seasonal and not necessarily indicative of full-year results.
- Risks include weather and energy demand, commodity prices and the ability to pass through cost increases, regulatory recovery delays, foreign-exchange movements, interest rates, counterparty performance, access to capital, environmental liabilities, legal proceedings and operational or cybersecurity disruptions.
- Environmental liabilities for Pennsylvania manufactured-gas-plant remediation were accrued at $55.3 million and are recorded with corresponding regulatory assets because customer recovery is considered probable. A propane tank-rental class-action award of approximately $18 million, plus interest, was accrued; rehearing motions were pending. UGI stated it could not reasonably estimate potential impact from propane-cylinder antitrust litigation and intended to defend the claims.
- Foreign currency translation reduced other comprehensive income by $70.9 million in the quarter. UGI also began using certain foreign-currency contracts whose fair-value changes flow through earnings.
Important facts for investors to verify
- How much of GAAP earnings growth reflects recurring operating performance versus the derivative gains and French tax benefit; compare against adjusted earnings and its reconciliation.
- Whether working-capital needs, capital spending and seasonal cash flows remain manageable, and whether the stated liquidity capacity is maintained.
- Progress and final outcomes of PNG’s rate case, UGI Gas’s infrastructure-recovery mechanism and related regulatory proceedings.
- Developments in the pending litigation, particularly the accrued class-action award and antitrust claims whose exposure was not estimable.
- Debt levels, refinancing costs and exposure to commodity and foreign-exchange movements, including potential collateral requirements.