UGI Corporation — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and nine months ended June 30, 2015, UGI’s fiscal third quarter and year-to-date period. UGI operates propane distribution, regulated gas and electric utilities, international LPG businesses, and energy marketing and midstream operations. Results are seasonal, with earnings generally strongest in the first and second fiscal quarters.
Financial performance
| Metric | Three months ended June 30, 2015 | Nine months ended June 30, 2015 |
|---|---|---|
| Revenue | $1,148.1 million, down 22.8% year over year | $5,608.3 million, down 19.5% |
| Operating income | $56.1 million, down from $62.7 million | $841.5 million, down from $1,015.0 million |
| Net income (loss) attributable to UGI | $9.6 million, versus $20.6 million | $290.2 million, versus $357.0 million |
| Diluted EPS attributable to UGI | $0.05, versus $0.12 | $1.65, versus $2.04 |
| Adjusted net income attributable to UGI (non-GAAP) | $4.7 million, versus $17.1 million | $336.4 million, versus $362.7 million |
| Adjusted diluted EPS (non-GAAP) | $0.03, versus $0.10 | $1.92, versus $2.07 |
Consolidated net loss was $15.9 million for the quarter, compared with a $12.7 million loss a year earlier; UGI-attributable income was positive because of the allocation to noncontrolling interests. Nine-month consolidated net income was $466.5 million, down from $592.6 million. The filing reports total margin by business segment rather than a consolidated gross margin.
- Cash flow: Nine-month operating cash flow was $968.1 million, up from $858.1 million. Investing outflow was $775.0 million, including $428.2 million for acquisitions net of cash acquired and $330.4 million of capital expenditures. Financing outflow was $207.3 million. Cash and cash equivalents declined $33.6 million to $385.9 million.
- Debt and liquidity: Total debt was $3,779.6 million at June 30, including $83.3 million of current maturities and $68.0 million of short-term borrowings; debt was $3,721.6 million at September 30, 2014. Available capacity included $416.7 million for AmeriGas, $295.3 million for UGI Utilities, $240 million for Energy Services, and €60 million for Antargaz, plus Flaga capacity. Management said business units had sufficient liquidity for fiscal 2015 needs.
- Dividends: UGI raised its quarterly common dividend to $0.2275 per share, an annualized $0.91, effective with the July 2015 payment.
Material changes versus prior periods
- Lower energy commodity prices reduced reported revenue and cost of sales across propane and energy marketing businesses. Lower volumes, warmer-than-normal weather, and lower midstream capacity margins also pressured performance.
- Nine-month GAAP attributable income included $46.2 million of after-tax losses on commodity derivatives not associated with current-period transactions; comparable prior-year effects were not material. Management’s adjusted figures exclude these items and certain unusual items.
- UGI acquired Totalgaz, subsequently called Finagaz, on May 29, 2015, for €453.0 million ($497.8 million). It nearly doubles UGI’s French retail LPG distribution business. Finagaz’s post-acquisition results were not material to consolidated results through June 30.
- The acquisition was funded in part with a €600 million term loan. UGI recorded a $10.3 million pretax loss on early debt extinguishment and related swap settlement. Nine-month acquisition and transition expenses at UGI International were approximately $16.3 million pretax.
- Foreign currency translation, principally the weaker euro, reduced reported international revenue and contributed to a $118.0 million nine-month foreign-currency loss in other comprehensive income.
Outlook, management commentary, risks and unusual items
- The filing provides no specific consolidated earnings guidance. Management cited ongoing demand for natural gas in the Northeast and Mid-Atlantic and infrastructure constraints as support for Midstream & Marketing, while noting weather, commodity prices and acquisition integration as important variables.
- Key risks include adverse weather and lower energy demand; commodity-price volatility and collateral needs; inability to pass through cost increases or recover utility costs promptly; regulatory and competitive changes; foreign-exchange movements; counterparty or supplier defaults; environmental and other legal claims; and acquisition integration and synergy execution.
- At June 30, unsettled commodity derivatives outside utility customer-recovery mechanisms had a fair-value loss of $127.9 million. A hypothetical 10% adverse commodity-price move would increase the loss by about $54.0 million. Restricted cash in brokerage accounts was $45.2 million, versus $5.9 million a year earlier.
- Receivables Facility capacity was scheduled to expire in October 2015; management intended to extend it. Flaga working-capital facilities were scheduled to expire in September 2015, with extension expected. UGI Utilities’ new $300 million revolving credit agreement was scheduled to expire in March 2016 unless extended subject to regulatory approval.
- More than 35 purported propane-cylinder antitrust class actions remained in process. In July 2015, the court dismissed direct-customer claims and most indirect-customer claims; appeals or further proceedings remained possible. UGI said it could not reasonably estimate the impact and intended to defend the claims.
- French competition remedies require divestiture of certain Totalgaz and Antargaz assets within 15 months of acquisition. Competitors challenged the remedies; interim suspension was denied, while proceedings on the merits continued.
- UGI corrected a prior-period deferred-tax error in other comprehensive income, recording a $57.8 million decrease to current-quarter OCI. Management concluded prior-period and current-period financial-statement impacts were not material. Disclosure controls were assessed as effective.
Important facts for investors to verify
- How much of the year-over-year earnings decline reflects recurring operating performance versus derivative mark-to-market losses, acquisition costs and the debt-extinguishment loss.
- Whether Finagaz integration, required divestitures and expected acquisition synergies proceed on schedule and within the preliminary purchase-price allocation.
- Renewal status and terms of the Energy Services receivables facility and Flaga working-capital facilities, and regulatory approval for the UGI Utilities credit-agreement extension.
- Changes in commodity prices, derivative exposures, collateral requirements and foreign-exchange rates, alongside the company’s reported liquidity.
- Developments in the propane-cylinder litigation and French competition proceedings, including any material change in exposure or required divestitures.