UGI Corporation — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2019; comparative period ended December 31, 2018. Financial statements are unaudited. Unless otherwise noted, amounts are in millions of U.S. dollars. UGI distributes propane and other LPG, operates regulated gas and electric utilities, and conducts energy marketing and midstream businesses in the U.S. and Europe.
Financial performance
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Revenue | $2,006.6 | $2,200.2 |
| Operating income | $377.2 | $167.7 |
| Net income attributable to UGI | $212.0 | $64.2 |
| Diluted EPS | $1.00 | $0.36 |
| Adjusted net income attributable to UGI (non-GAAP) | $246.2 | $143.8 |
| Adjusted diluted EPS (non-GAAP) | $1.17 | $0.81 |
| Operating cash flow | $118.4 | $96.6 |
| Cash used in investing activities | $(175.9) | $(194.0) |
| Cash used by financing activities | $(32.6) | Cash provided: $134.0 |
- Revenue fell 8.8%, while operating income and GAAP net income increased. Management attributed the earnings improvement chiefly to lower unrealized commodity-derivative losses, stronger segment results, inclusion of 100% of AmeriGas following the August 2019 merger, and the absence of the prior-year debt-extinguishment loss. Comparisons also reflect the CMG acquisition and the prior-year noncontrolling interest in AmeriGas.
- Interest expense rose to $84.1 from $60.2, principally due to acquisition and merger financing, higher utility debt, and short-term borrowings. Income tax expense was $76.1 versus $23.4; management cited taxes on full ownership of the partnerships versus its prior partial ownership.
- Operating cash flow before working-capital changes was $355.6, compared with $372.2. Working capital used $237.2 of cash, compared with $275.6 in the prior-year quarter. Property, plant and equipment cash expenditures were $182.0.
- At December 31, 2019, cash and cash equivalents were $333.4 and restricted cash was $95.8. Short-term borrowings were $869.7; long-term debt, including current maturities, was approximately $5,855.4. The company’s debt table reported total debt of $6,725.1, up from $6,600.3 at September 30, 2019.
- Available borrowing capacity under the listed principal credit agreements was $477.3 million plus €139.5 million, before the separate receivables facility. Management said business units had sufficient liquidity for anticipated commitments, but cautioned that future capital-market financing may not be available on acceptable terms.
Segments and material period-over-period changes
- AmeriGas Propane: Revenue was $730.4 versus $820.2; operating income was $165.3 versus $166.6. Total margin was nearly unchanged at $441.2. Retail gallons declined 1.9%; lower selling prices reduced revenue, while lower product costs and improved unit margins largely offset the volume decline.
- UGI International: Revenue was $651.4 versus $710.7; operating income rose to $95.8 from $58.3. Total margin increased $30.9 to $283.0, supported by improved unit margins and higher retail volumes, including crop-drying demand. Warmer weather and a weaker euro were headwinds.
- Midstream & Marketing: Revenue was $372.5 versus $459.4; operating income increased to $55.1 from $41.1. Total margin rose $26.4 to $108.3, largely from CMG-related gathering activity. Lower natural gas prices reduced reported revenue; acquisition-related costs and depreciation increased.
- UGI Utilities: Revenue was $329.3 versus $322.7; operating income increased to $91.8 from $77.0. Higher Gas Utility margins reflected a $30.0 annual base-rate increase effective October 11, 2019. Weather was warmer than normal and core-market gas volumes declined slightly.
Outlook, commentary, risks and unusual items
- UGI described its businesses as seasonal: earnings are generally strongest in the first and second fiscal quarters, while operating cash flow is typically lowest in the fourth and first quarters as working-capital needs rise. The quarter’s temperatures were warmer than the prior year across segments; December was notably warmer than normal in several heating markets.
- Management’s multi-year LPG transformation programs target annual savings of more than $120 million at AmeriGas and more than €30 million at UGI International. Estimated total implementation costs are approximately $175 million and €55 million, respectively, including capital spending. UGI recorded $16.7 of transformation expenses this quarter.
- Gas Utility filed in January 2020 for a proposed $74.6 annual increase in base operating revenues; the timing and outcome of the rate review are uncertain. A prior rate settlement approved a $30.0 annual increase effective October 2019, alongside a customer tax-benefit surcharge refund.
- The PennEast pipeline faces permitting and eminent-domain litigation challenges. UGI said delay, added costs, or inability to proceed could impair some or all of its investment; FERC issued an order favorable to PennEast’s position on January 30, 2020. The filing also describes environmental remediation obligations and ongoing propane-cylinder class-action litigation; management did not expect the described claims to materially affect the financial statements.
- Key risks cited include weather and energy demand, commodity prices and collateral needs, regulation and timely cost recovery, foreign exchange, interest rates, counterparty performance, environmental and legal claims, IT/cyber disruptions, infrastructure project execution, and integration and transformation execution.
- UGI adopted lease accounting guidance effective October 1, 2019, recognizing $451.9 of operating-lease right-of-use assets and liabilities at adoption; management said adoption was not expected to significantly affect income or cash flows. The company repurchased 500,000 shares during the quarter at an average $45.15 per share. The quarterly dividend was $0.325 per share.
Most important facts for investors to verify
- How much of the earnings increase reflects recurring operating performance versus AmeriGas consolidation, derivative adjustments, acquisition effects, and unusual transformation expenses.
- Whether projected savings from the LPG transformation programs are achieved, and whether actual implementation costs remain within estimates.
- Debt, interest expense, refinancing capacity, and liquidity needs, particularly given acquisition-related borrowings and seasonal working-capital demands.
- The outcome and timing of the $74.6 Gas Utility rate request and the ultimate regulatory and legal path for PennEast.
- The effects of weather, commodity prices, foreign exchange, and derivative collateral requirements on future margins and cash flows.