UGI Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and first six months ended March 31, 2018; filed May 8, 2018. UGI distributes and markets energy products and operates regulated utilities, propane businesses, and midstream and energy-marketing operations. Amounts are in U.S. dollars unless noted.
Financial results
| Metric | Three months ended March 31, 2018 | Six months ended March 31, 2018 |
|---|---|---|
| Revenue | $2,812.0 million, up 29.4% | $4,937.2 million, up 28.1% |
| Operating income | $589.5 million, up 14.9% | $981.3 million, up 0.2% |
| Net income attributable to UGI | $276.0 million, up 25.5% | $641.9 million, up 42.5% |
| Diluted EPS | $1.57, versus $1.24 | $3.63, versus $2.55 |
| Adjusted net income attributable to UGI (non-GAAP) | $298.2 million; adjusted diluted EPS $1.69, versus $1.31 | $477.5 million; adjusted diluted EPS $2.70, versus $2.22 |
| Operating cash flow | Not presented for the quarter alone | $579.4 million, versus $585.0 million |
| Capital expenditures | Not presented for the quarter alone | $266.1 million, versus $341.8 million |
Quarterly operating income was approximately 21.0% of revenue, compared with 23.6% a year earlier; these ratios are calculated from reported figures. Six-month operating income was nearly unchanged despite higher revenue. Six-month GAAP net income benefited substantially from tax-law-related discrete benefits, while adjusted results rose 21.6%.
Balance sheet and liquidity
- At March 31, 2018, cash and cash equivalents were $474.8 million, down from $558.4 million at September 30, 2017. Current assets were $2,222.1 million and current liabilities $1,817.5 million.
- Total debt, including short-term borrowings and current maturities, was $4,581.6 million, versus $4,539.0 million at September 30, 2017. Short-term borrowings were $302.8 million; long-term debt was $4,278.8 million.
- Six-month cash flow from operations of $579.4 million was offset by $431.7 million used in investing and $240.2 million used in financing; cash declined $83.6 million. Working-capital changes used $369.8 million, principally reflecting increased receivables and higher energy costs and sales volumes.
- Available borrowing capacity under principal credit agreements was reported as $378.3 million for AmeriGas OLP, $163.0 million for UGI Utilities, and €300 million for UGI International, among other facilities. The Energy Services receivables facility was scheduled to expire in October 2018.
- Dividends declared were $0.25 per common share in the quarter and $0.50 per share for the six months. After quarter-end, the board raised the quarterly rate to $0.26, effective for the July 2018 payment.
Changes versus prior-year period
- Management attributed stronger adjusted quarterly and six-month performance mainly to colder U.S. weather than in the unusually warm prior-year comparison, higher propane volumes, utility rate increases, and expanded midstream operations.
- AmeriGas Propane’s quarterly retail gallons sold rose 9.9%; six-month gallons rose 5.3%. Higher propane prices lifted revenue, but also raised product costs.
- UGI International revenue growth included acquisitions of UniverGas in Italy and DVEP in the Netherlands, along with currency translation and higher LPG prices. Adjusted six-month income declined 5.3%, reflecting higher French taxes and other operating factors.
- Midstream & Marketing benefited from colder-weather-related demand and expanded pipeline, gathering, LNG, peaking, and electric-generation activities. UGI Utilities benefited from increased throughput and PNG’s higher base rates.
- Comparisons of GAAP earnings were affected by tax reform, foreign-currency and commodity derivative movements, and the absence of prior-year AmeriGas debt-extinguishment losses. The 2017 six-month period also included a French deferred-tax benefit.
Outlook, commentary, risks, and unusual items
- Outlook: The filing provides no specific company-wide earnings guidance. Management cautioned that interim results are seasonal and that heating-season weather materially affects demand; first- and second-quarter results are generally stronger.
- Tax changes: The U.S. Tax Cuts and Jobs Act and French tax legislation materially affected reported taxes. For the six months, UGI reported $171.3 million of net income benefit from TCJA-related one-time tax adjustments and a $13.6 million benefit from French deferred-tax adjustments. Current-period tax-rate effects also benefited adjusted six-month earnings by a net $49.5 million, according to management. Amounts were provisional and subject to refinement.
- Utility regulation: Pennsylvania regulators placed certain utility rates, including Gas Utility rates, on temporary status for six months, potentially extendable by another six months, while assessing tax-reform effects. UGI Utilities proposed passing approximately half of TCJA benefits to customers through rate reductions and program funding. The PUC’s review outcome and timing were uncertain. Electric Utility’s requested $9.2 million annual revenue increase was suspended for review.
- Expected impairment: Following a decision to phase out certain AmeriGas tradenames over about four years, the Partnership expected to record a roughly $70 million non-cash pre-tax impairment in the June 2018 quarter, reducing UGI-attributable net income by approximately $13 million.
- Contingencies: The propane-cylinder antitrust class-action litigation remained pending; management said its impact could not be reasonably estimated and intended to defend the claims. AmeriGas had accrued $7.5 million for remediation at a New York site, but actual costs could be materially higher or lower. Pennsylvania utility MGP remediation liabilities were $51.9 million and were considered recoverable through rates.
- Other risks: Weather, commodity prices and supply availability, customer cost pass-through, regulation and rate recovery, foreign exchange, interest rates, counterparty performance, environmental claims, litigation, acquisitions and integration, and cybersecurity or operational interruptions could affect results. A hypothetical 10% adverse commodity-price move would reduce derivative fair value by approximately $64.4 million; a 10% decline in relevant foreign currencies would reduce foreign net book value by about $145 million, reflected in other comprehensive income.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Separate recurring operating performance from the significant one-time tax benefits; compare GAAP EPS of $3.63 for six months with adjusted EPS of $2.70.
- Assess how much of operating improvement came from colder weather, higher commodity prices, acquisitions, and new midstream assets, and whether those drivers persist.
- Monitor cash conversion and working capital: operating cash flow was slightly lower year over year despite higher earnings, with substantial receivables-related cash use.
- Track total debt, borrowing availability, the Energy Services receivables-facility renewal, and AmeriGas’s potential use of UGI’s $225 million standby equity commitment.
- Follow the Pennsylvania PUC’s tax-reform rate review and Electric Utility rate case, as well as the anticipated AmeriGas impairment and pending litigation.