UGI Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and first six months ended March 31, 2016; filed May 6, 2016. Amounts are in millions of dollars except per-share data. UGI operates propane and LPG distribution businesses, regulated gas and electric utilities, and energy marketing, midstream and generation businesses. Results are seasonal and are generally strongest in the first and second fiscal quarters.
Financial performance and liquidity
| Metric | Three months ended Mar. 31, 2016 | Prior year | Six months ended Mar. 31, 2016 | Prior year |
|---|---|---|---|---|
| Revenue | $1,972.1 | $2,455.6 | $3,578.7 | $4,460.2 |
| Operating income | $615.4 | $702.1 | $920.9 | $785.4 |
| Net income attributable to UGI | $233.2 | $246.5 | $347.8 | $280.6 |
| Diluted EPS | $1.33 | $1.40 | $1.99 | $1.60 |
| Adjusted net income attributable to UGI (non-GAAP) | $216.2 | $220.8 | $328.6 | $339.5 |
| Adjusted diluted EPS (non-GAAP) | $1.24 | $1.26 | $1.88 | $1.93 |
- Margins and segment performance: AmeriGas total margin fell 11.1% in the quarter and 8.9% for six months; its adjusted EBITDA fell 13.7% and 10.8%, respectively. UGI International total margin rose 56.6% and 54.6%, substantially reflecting the Finagaz acquisition. UGI Utilities total margin declined 17.0% and 16.1%, while Midstream & Marketing total margin declined 18.6% and 14.4%. Consolidated operating margin is not stated directly in the filing.
- Cash flow: Six-month operating cash flow was $618.3 versus $657.8; investing cash outflow was $268.2 versus $265.8, including $254.6 of property and equipment expenditures; financing cash outflow was $259.6 versus $337.9. Cash and cash equivalents increased $96.5 to $466.2. Working-capital changes used $159.0 of cash.
- Debt and liquidity: Total debt was $3,866.1 at March 31, 2016, versus $3,889.7 at September 30, 2015; this includes $227.1 of short-term borrowings and $8.5 of current long-term debt. Current assets were $1,707.0 and current liabilities $1,466.7. UGI reported $143.0 available under its $300 million utility revolver and $396.7 available under AmeriGas’s $525 million facilities; Energy Services had $240 million available under its credit agreement. Management said business units had sufficient liquidity for fiscal 2016, while cautioning that future capital-market access may not be available on acceptable terms.
- Dividends: Dividends declared were $0.2275 per common share for the quarter and $0.4550 for six months. Subsequent to quarter-end, UGI approved a quarterly rate increase to $0.2375 per share, effective with the July 1, 2016 payment.
Material changes and management commentary
- Quarterly revenue declined 19.7%, while six-month revenue declined 19.8%, mainly due to lower energy commodity prices and lower weather-driven volumes. Warm temperatures reduced heating demand across U.S. businesses and Europe. Lower LPG wholesale prices also reduced reported selling prices, though improved unit margins partly offset volume weakness at propane businesses.
- Quarterly UGI-attributable GAAP net income fell 5.4%; six-month GAAP income rose 23.9%. The different trends principally reflect commodity-derivative results: six-month 2016 included $26.0 of after-tax gains on derivatives not associated with current-period transactions, compared with $51.1 of after-tax losses in 2015. Adjusted six-month net income declined 3.2%.
- Finagaz, acquired in May 2015, nearly doubled UGI’s French retail LPG business and contributed materially to international revenue and margin growth. Finagaz acquisition and transition costs reduced UGI-attributable net income by $5.4 in the quarter and $6.8 for six months in 2016.
- AmeriGas retail gallons sold declined 13.9% in the quarter and 13.6% for six months. Gas Utility core-market throughput fell 23.3% and 23.9%, respectively. In contrast, UGI International retail gallons increased with Finagaz and smaller acquisitions.
- UGI’s board approved an April 2016 increase in the quarterly common dividend of approximately 4.4%. AmeriGas also approved a 2.2% increase in its quarterly distribution.
Outlook, risks, contingencies and unusual items
- The filing provides no specific consolidated earnings or revenue guidance. Management emphasized weather sensitivity, commodity-price and supply risks, competition, currency movements, regulatory cost recovery, acquisition integration and access to capital as factors that could affect results.
- UGI Utilities requested a $58.6 annual increase in UGI Gas base operating revenues. The Pennsylvania PUC suspended the requested effective date for review; the company could not predict the timing or outcome. Related DSIC petitions were also pending.
- UGI Utilities had estimated accrued environmental remediation liabilities of $43.8 for UGI Gas MGP sites, with associated regulatory assets recorded because recovery from customers was considered probable. A proposed DEP consent order would cap required spending at $2.5 per calendar year; it was awaiting execution. Existing CPG and PNG environmental agreements also carry annual expenditure caps.
- Propane-cylinder antitrust litigation remained pending, including an appeal by direct customers and state-law claims by indirect customers. UGI said it could not reasonably estimate the impact and intended to defend the claims. The filing also describes ongoing French competition-related proceedings concerning divestiture remedies tied to the Finagaz acquisition; the agreed divestitures were due by August 15, 2016.
- On March 31, UGI Utilities settled interest-rate protection agreements at a $36.0 loss, paid in early April. The loss was recorded in accumulated other comprehensive income and is to be recognized in interest expense as the related future interest affects earnings. UGI Utilities also arranged $400 of senior notes for issuance later in 2016, principally to refinance debt and for general purposes.
- UGI sold its LPG distribution business in China in March 2016; the filing says the sale did not materially affect the financial statements. The company also capitalized $5.8 of previously expensed preliminary IT project costs after determining they were probable of recovery in utility rates.
- Management reported effective disclosure controls and procedures and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether UGI Gas’s rate case and pending DSIC applications are approved, and when any resulting revenues may take effect.
- Whether unusually warm weather and lower commodity prices continue to pressure volumes, reported revenue and segment margins.
- Finagaz’s ongoing contribution to earnings, integration costs, currency exposure and completion of required divestitures.
- Debt refinancing and funding plans, including issuance of the $400 million UGI Utilities notes and the October 2016 expiry of Energy Services’ receivables facility.
- Developments in environmental remediation obligations and the pending propane-cylinder litigation.
- The composition of GAAP earnings versus adjusted earnings, especially the impact and timing of commodity-derivative gains and losses; adjusted measures are non-GAAP.