UGI Corporation — FY2017 Form 10-K
Reporting period: Fiscal year ended September 30, 2017. This is an annual filing; the quarterly figures below refer to the fourth quarter ended September 30, 2017, where disclosed. UGI is an energy holding company operating through AmeriGas Propane, UGI International, Midstream & Marketing, and regulated UGI Utilities.
Financial results
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Revenue | $6,120.7 million | $5,685.7 million | +7.7% |
| Operating income | $1,004.2 million | $988.0 million | +1.6% |
| Net income attributable to UGI | $436.6 million | $364.7 million | +19.7% |
| Diluted EPS | $2.46 | $2.08 | +18.3% |
| Adjusted net income attributable to UGI (non-GAAP) | $406.1 million | $360.0 million | +12.8% |
| Adjusted diluted EPS (non-GAAP) | $2.29 | $2.05 | +11.7% |
| Cash from operating activities | $964.4 million | $969.7 million | -0.5% |
| Capital expenditures | $638.9 million | $563.8 million | +13.3% |
| Total debt at year-end | $4,539.0 million | $4,087.2 million | +$451.8 million |
Consolidated operating margin was approximately 16.4%, compared with 17.4% in FY2016. Net income included sizable discrete and market-related items; management’s non-GAAP adjustment reduced FY2017 attributable earnings by a net $30.5 million, principally reflecting unrealized commodity derivative gains, foreign-currency derivative losses, debt-extinguishment costs, Finagaz integration expenses, and the French tax-rate change.
FY2017 fourth quarter: Revenue was $1,113.9 million versus $976.2 million. Operating income was $27.6 million versus an operating loss of $88.6 million. Net income attributable to UGI was $5.0 million versus a loss of $43.8 million; diluted EPS was $0.03 versus a loss of $0.25.
Liquidity, debt and capital returns
- Cash and cash equivalents were $558.4 million at year-end, up from $502.8 million. Cash from operations less reported capital expenditures was approximately $325.5 million.
- Total debt was $4.54 billion; debt represented 54.8% of total capitalization, versus 53.2% a year earlier. Short-term borrowings were $366.9 million. UGI reported approximately $317.8 million available under AmeriGas’s credit facility, $128.0 million under UGI Utilities’ facility, and $240.0 million under Energy Services’ facility, in addition to other facilities and its receivables program.
- AmeriGas issued $1.225 billion of 5.50% and 5.75% senior notes due 2025 and 2027, refinancing its 7.00% notes. The refinancing generated a $59.7 million pre-tax extinguishment loss. UGI Utilities issued $100 million of 4.12% notes due 2046.
- UGI declared $0.975 per common share in FY2017 dividends and raised the quarterly dividend to $0.25, or $1.00 annualized. The board-authorized buyback repurchased 0.9 million shares for $43.3 million during the year.
Material changes and management commentary
- UGI reported record GAAP and adjusted attributable net income despite significantly warmer-than-normal conditions across its domestic businesses for a second year. Domestic heating-season temperatures were slightly colder than FY2016 overall, but January and February were warmer.
- UGI International attributable net income rose to $158.6 million from $111.6 million. The comparison benefited from a $29.0 million deferred-tax benefit from a French corporate tax-rate reduction, plus a foreign-tax-credit valuation allowance release and a French tax settlement refund. Excluding such items and other adjustments, adjusted segment earnings were $155.8 million versus $128.9 million. Higher LPG costs pressured margins, while Finagaz integration synergies helped offset costs.
- UGI Utilities attributable net income increased to $116.0 million from $97.4 million, supported by customer growth, the UGI Gas rate increase effective October 2016, and infrastructure-improvement charges. PNG’s $11.3 million annual rate increase took effect October 20, 2017.
- AmeriGas retail gallons declined 1.7%; higher selling prices and cost control largely offset lower volumes and higher propane costs. Segment adjusted EBITDA increased 1.5% to $551.3 million.
- Midstream & Marketing revenue grew 29.4%, largely from higher natural-gas prices and volumes, but operating income declined 5.1%; capacity-management and electricity-generation margins weakened.
- Strategic investment included the Sunbury Pipeline entering service and completion of the Manning LNG plant. Steelton LNG was expected to be completed in FY2018; PennEast remained subject to regulatory approvals. UGI estimated FY2018 capital expenditures of $583 million and said each business unit had sufficient liquidity for FY2018.
Outlook, risks and contingencies
- Management expected adequate propane/LPG supplies for FY2018 and adequate utility gas supply and pipeline capacity. These expectations are not guarantees.
- Results are seasonal and exposed to winter weather, commodity-price changes, the ability to pass cost increases to customers, supply interruptions, competition from other fuels, and customer conservation. Commodity-price movements can also increase collateral and working-capital needs.
- UGI committed up to $225 million to AmeriGas through July 1, 2019, in exchange for Class B units. The filing said AmeriGas did not intend to draw on the commitment at that time.
- Environmental remediation liabilities for specified Pennsylvania manufactured-gas-plant sites were $54.3 million and were considered probable of recovery through utility rates. AmeriGas recorded a $7.5 million environmental accrual for a disputed New York site; actual costs could be materially higher or lower.
- Propane-cylinder antitrust class-action litigation remained unresolved. UGI said it could not reasonably estimate the impact and intended to defend the claims. Other disclosed risk areas include utility regulation, construction and permitting, foreign exchange, cyber incidents, pension funding, and potential uninsured losses.
- Management and the auditor reported effective internal control over financial reporting; the financial statements received an unqualified audit opinion.
Important facts for investors to verify
- Reconcile GAAP earnings with adjusted earnings and assess how recurring the tax benefits, derivative gains and losses, integration costs, debt-extinguishment losses, and investment impairment are.
- Review segment-level operating trends, especially AmeriGas volume and margins, UGI International LPG unit margins, and Midstream & Marketing project economics.
- Assess leverage, refinancing needs and subsidiary restrictions on cash transfers; approximately $567 million of UGI International debt principal was scheduled for FY2020.
- Track actual FY2018 capital spending, project approvals and completion, and whether new infrastructure earns expected returns.
- Monitor winter weather, commodity-price pass-through, working-capital and collateral requirements, and outcomes of environmental and antitrust matters.