UGI Corporation — FY2019 Form 10-K
Reporting period: Fiscal year ended September 30, 2019. The filing is an annual report, not a report for calendar 2019 Q4; quarterly results were seasonally variable.
Business context
UGI distributes propane and other LPG in the U.S. and Europe, operates regulated natural gas and electric utilities in Pennsylvania, and conducts energy marketing, midstream, storage, gathering, and generation businesses. Its four reportable segments are AmeriGas Propane, UGI International, Midstream & Marketing, and UGI Utilities.
Two major transactions reshaped the company: UGI acquired the remaining publicly held AmeriGas Partners interests on August 21, 2019, making it an indirect wholly owned subsidiary; and Energy Services acquired Columbia Midstream Group (CMG) on August 1, 2019.
Financial performance and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $7,320.4 million | $7,651.2 million |
| Operating income | $617.1 million | $1,064.7 million |
| Net income attributable to UGI | $256.2 million | $718.7 million |
| Diluted EPS | $1.41 | $4.06 |
| Adjusted net income attributable to UGI (non-GAAP) | $412.9 million | $485.6 million |
| Adjusted diluted EPS (non-GAAP) | $2.28 | $2.74 |
| Cash from operating activities | $1,078.1 million | $1,085.3 million |
| Capital expenditures, excluding acquisitions | $706.7 million | $594.3 million |
Revenue declined 4.3%. Operating margin was approximately 8.4%, versus 13.9% in FY2018; net income attributable to UGI was approximately 3.5% of revenue, versus 9.4%. The large GAAP earnings decline primarily reflects year-over-year derivative gains and losses and the prior-year tax benefits from deferred-tax remeasurement. Adjusted EPS, which excludes specified derivative effects and discrete items, declined approximately 17%.
Operating cash flow was nearly flat year over year. Cash and cash equivalents were $447.1 million at year-end, plus $63.7 million of restricted cash. Total debt rose to $6.60 billion from $4.59 billion; debt was 63.3% of capitalization, compared with 52.8%. Short-term borrowings were $796.3 million and long-term debt, including current maturities, was $5.80 billion. The filing reports available capacity of $209.3 million on AmeriGas OLP’s facility, $155.0 million on Energy Services’ facility, $184.0 million on UGI Utilities’ facility, and €107.3 million on UGI International’s facility; UGI Corporation’s $300 million revolving facility was fully drawn.
Consolidated interest expense increased to $257.8 million from $230.1 million, principally due to borrowing for the AmeriGas transaction and CMG acquisition. The board raised UGI’s quarterly dividend during FY2019; the annualized rate became $1.30 per share effective with the October 2019 payment.
Material changes and segment results
- AmeriGas Propane: UGI issued 34.6 million shares and paid $528.9 million cash to acquire the remaining public units. FY2019 segment net income attributable to UGI was $68.2 million, down $8.1 million. Retail gallons declined 2.5%, despite temperatures 3.6% colder than normal.
- UGI International: Segment net income was $144.8 million, down $8.3 million. Retail LPG volume fell 4.8%; unusually warm heating-season weather and a warm, dry crop-drying season were factors. Weaker euro and sterling translation also reduced reported results.
- Midstream & Marketing: Segment net income was $78.0 million, down $48.7 million. Lower capacity-management margins, fewer weather-driven price spreads, lower generation margins, and lower natural-gas marketing unit margins outweighed growth in gathering and peaking. The CMG acquisition expanded gathering and processing operations.
- UGI Utilities: Segment net income was $133.2 million, down $7.7 million. The decrease reflected warmer weather and a full-year customer credit for tax savings. A Pennsylvania rate order effective October 11, 2019 authorized a $30 million annual increase in base distribution revenues.
Outlook, commentary, risks and unusual items
- Management estimated FY2020 capital expenditures of $840 million, including $404 million for UGI Utilities. The estimate includes LPG transformation spending, utility system replacement, and midstream expansion. The filing does not provide a clear FY2020 earnings or EPS forecast.
- Management expects more than $120 million in annual AmeriGas savings after transformation initiatives are implemented, at an estimated total cost of approximately $175 million, including about $100 million in capital expenditures. UGI International’s Project Alliance is expected to generate over €30 million in annual savings, at an estimated cost of approximately €55 million, including about €20 million in IT capital expenditures. These are management targets, not guaranteed outcomes.
- The Bethlehem LNG peak-shaving facility was expected to enter service in early FY2021. The Auburn IV pipeline expansion was completed in November 2019. Management stated that business units had sufficient liquidity for FY2020 and expected adequate propane supply, but noted that capital-market access and commodity conditions could change.
- PennEast faces significant legal and permitting uncertainty: a Third Circuit ruling on New Jersey’s sovereign immunity was followed by rejection of certain state permits. The project could be delayed, incur additional costs, or not proceed, potentially impairing UGI’s investment.
- Other key risks include seasonal weather, LPG and natural-gas price and supply volatility, inability to pass through cost increases promptly, competition and declining LPG industry volumes, acquisition integration, pipeline and operational hazards, environmental liabilities, regulation and climate policy, cybersecurity, foreign-exchange exposure, and interest-rate and liquidity risks.
- Unusual comparability items include FY2018 tax remeasurement benefits of $166.3 million from U.S. tax reform and $12.1 million from French tax changes. FY2019 included $147.4 million of after-tax commodity-derivative losses excluded from adjusted results, $22.9 million of after-tax foreign-currency derivative gains excluded, and $15.6 million of after-tax LPG transformation costs. FY2018 also included a $75 million pre-tax AmeriGas tradename impairment.
- The CMG purchase-price allocation remained preliminary at year-end; reported consideration was $1.284 billion, including $323.9 million of preliminary goodwill. The acquisition’s FY2019 impact on consolidated revenue and net income was not material. Management and the auditor excluded CMG, representing about 10% of year-end assets and less than 1% of FY2019 revenue, from the internal-control assessment.
- The filing identifies a pending Pennsylvania utility-safety complaint related to a 2017 gas incident; the company said it did not expect a material consolidated impact. A direct-purchaser class-action settlement concerning propane cylinder fill levels was reached in October 2019, subject to court approval; the company stated it did not expect pending claims to materially affect its financial statements.
Important facts for investors to verify
- Whether FY2020 operating performance and cash generation support higher debt levels following the AmeriGas merger and CMG acquisition.
- Whether AmeriGas and UGI International achieve their stated transformation savings, on schedule and within estimated costs.
- Actual FY2020 capital spending versus the $840 million estimate, and the funding required for major utility and midstream projects.
- Developments in PennEast litigation, permits, project timing, and potential investment impairment.
- How weather, LPG volumes and margins, commodity-derivative volatility, and foreign-exchange movements affect reported and adjusted results.
- Final CMG purchase accounting, integration outcomes, and any changes to acquisition goodwill or asset valuations.
- Utility rate recovery and regulatory outcomes, including the rate increase and customer tax-credit surcharge, and the status of the Electric Utility appeal.