UGI Corporation — Form 10-Q Summary
Business and period: UGI is an energy holding company with domestic propane distribution, regulated gas and electric utilities, U.S. midstream and marketing operations, and European LPG businesses. This unaudited filing covers the fiscal third quarter and nine months ended June 30, 2017; comparisons are with the corresponding 2016 periods. Results are seasonal, with earnings generally concentrated in the heating-season quarters.
Financial performance and liquidity
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue | $1,153.5 million vs. $1,130.8 million | $5,006.8 million vs. $4,709.5 million |
| Operating income (loss) | $(2.8) million vs. $155.7 million | $976.6 million vs. $1,076.6 million |
| Net income (loss) attributable to UGI | $(19.0) million vs. $60.7 million | $431.6 million vs. $408.5 million |
| Diluted EPS attributable to UGI | $(0.11) vs. $0.34 | $2.44 vs. $2.33 |
| Adjusted net income and diluted EPS (non-GAAP) | $16.6 million; $0.09 vs. $40.0 million; $0.23 | $409.3 million; $2.31 vs. $368.6 million; $2.10 |
Cash flow: Nine-month operating cash flow was $846.0 million, down from $863.0 million. Capital expenditures were $471.9 million, up from $370.6 million; investing cash outflow was $531.7 million. Financing cash outflow was $217.1 million, compared with $48.6 million of inflow in 2016. Cash and cash equivalents increased $101.5 million to $604.3 million.
Debt and liquidity: Total debt, including short-term borrowings, was $4,297.6 million at June 30, 2017, versus $4,087.2 million at September 30, 2016. Current maturities of long-term debt were $119.1 million, short-term borrowings $163.9 million, and long-term debt $4,014.6 million. UGI reported substantial unused capacity under its principal credit facilities and said it expected each business unit to have sufficient liquidity for fiscal 2017. Its Energy Services receivables facility was scheduled to expire in October 2017; management intended to extend it.
UGI declared dividends of $0.25 per common share in the quarter, versus $0.2375 a year earlier. In April, the company announced a 5.3% increase in its quarterly dividend rate to $0.25.
Changes versus prior periods
- Quarterly GAAP results swung to a loss, despite higher revenue. The quarter included after-tax commodity-derivative losses of $19.8 million, unrealized foreign-currency derivative losses of $10.5 million, Finagaz integration costs of $4.6 million, and a $0.7 million after-tax debt-extinguishment loss. Prior-year quarterly results included $29.6 million of after-tax gains on commodity derivatives not associated with current-period transactions.
- Quarterly adjusted net income fell to $16.6 million from $40.0 million, principally due to lower UGI International results, with smaller declines in Midstream & Marketing, AmeriGas Propane, and UGI Utilities. Management cited unusually warm spring weather and weaker international LPG unit margins.
- Nine-month adjusted net income rose to $409.3 million from $368.6 million. UGI Utilities, UGI International, and Midstream & Marketing improved; AmeriGas Propane declined. Nine-month GAAP income also benefited from a $27.4 million deferred-tax benefit tied to a French tax-rate reduction and a French tax settlement refund.
- AmeriGas Propane’s nine-month Partnership Adjusted EBITDA fell $23.0 million to $514.7 million, reflecting lower total margin and lower gains on asset sales. UGI Utilities’ nine-month income before taxes increased $31.1 million, supported by base-rate increases and higher gas volumes.
Outlook, risks, contingencies, and unusual items
- Outlook: The filing provides no quantified consolidated earnings guidance. Management said liquidity was expected to be sufficient for fiscal 2017. It expects a final PUC order on the PNG rate settlement by October 2017, but cautioned that timing and outcome are not assured.
- Weather, margins, and markets: Warmer-than-normal temperatures reduced demand in the quarter. LPG and other commodity price volatility may pressure margins if cost increases cannot be passed through promptly. Foreign exchange movements, interest rates, and counterparty performance also present risks.
- Debt refinancing: AmeriGas issued $700 million of 5.50% notes due 2025 and $525 million of 5.75% notes due 2027, using proceeds primarily to repay higher-coupon 7.00% notes and reduce borrowings. Early repayments generated $59.7 million of nine-month pre-tax extinguishment losses. UGI Utilities issued $100 million of 4.12% notes due 2046.
- Environmental exposure: AmeriGas accrued $7.5 million for a former manufactured-gas-plant site in Saranac Lake. New York’s estimated remediation plan is approximately $27 million; AmeriGas disputes aspects of its potential responsibility, and its ultimate exposure and timing cannot currently be estimated.
- Litigation: A propane-cylinder antitrust class action has returned to appellate proceedings after the Eighth Circuit reversed dismissal of direct-customer claims. UGI says it cannot reasonably estimate any impact and intends to defend the claims. Other routine legal matters are not expected by management to have a material effect.
- Other items: UGI recorded a $7.0 million pre-tax impairment of a private-equity investment and a $7.5 million environmental accrual. Finagaz integration costs were $14.3 million after tax for the nine-month period. Segment reporting was reorganized, with prior-period segment information restated.
Most important facts for investors to verify
- Reconcile GAAP and non-GAAP earnings, especially the treatment and timing of commodity and foreign-currency derivative gains and losses.
- Track whether the Saranac Lake environmental liability changes from the $7.5 million accrual and how responsibility for the estimated remediation cost is allocated.
- Monitor the antitrust class-action appeals and any change in the company’s ability to estimate potential exposure.
- Confirm renewal or replacement of the Energy Services receivables facility scheduled to expire in October 2017.
- Assess debt levels, capital spending, seasonal working-capital needs, and the sustainability of dividends alongside cash generation.
- Follow final regulatory approval and implementation of the PNG rate settlement and related utility recovery mechanisms.