UGI Corporation — Form 10-Q Summary
Business context and reporting period
UGI distributes and markets energy products and services through U.S. propane, natural gas and electric utilities, energy marketing and infrastructure, and international LPG businesses. This unaudited report covers the three months ended December 31, 2011, UGI’s fiscal first quarter, compared with the three months ended December 31, 2010. Results are seasonal and typically strongest in the first and second fiscal quarters.
Financial results and liquidity
Amounts are in millions of dollars except per-share data. Comparisons are year over year unless otherwise noted.
| Metric | Quarter ended Dec. 31, 2011 | Prior-year quarter |
|---|---|---|
| Revenue | $1,688.8 | $1,765.6 |
| Operating income | $188.3 | $252.3 |
| Net income | $110.1 | $155.0 |
| Net income attributable to UGI | $87.0 | $113.1 |
| Diluted EPS | $0.77 | $1.01 |
| Operating margin (operating income/revenue) | 11.1% | 14.3% |
| Net margin attributable to UGI (UGI net income/revenue) | 5.2% | 6.4% |
| Net cash used by operating activities | $22.4 | $36.0 |
| Net cash used by investing activities | $243.4 | $104.1 |
| Net cash provided by financing activities | $256.7 | $22.2 |
- Operating cash flow before working-capital changes was $153.4, down from $203.3. Seasonal working-capital needs used $175.8 of cash.
- Capital expenditures were $87.4; business acquisitions used $152.8, principally for the European Shell LPG businesses.
- Cash and cash equivalents were $229.0 at December 31, versus $238.5 at September 30, 2011. Total debt was $2,584.4, up from $2,296.4 at September 30; this included $421.9 of bank loans and $46.8 of current long-term debt maturities.
- Dividends declared were $0.26 per common share, compared with $0.25. The effective tax rate benefited from a $5.5 foreign tax-credit valuation-allowance adjustment.
Material changes versus the prior period
- UGI-attributable net income declined $26.1, or 23.1%. Management cited substantially warmer weather across most businesses: AmeriGas service territories were 11.9% warmer than normal, and Gas Utility’s territory was 12.2% warmer than normal. The prior-year period included a $9.4 nontaxable reserve reversal at Antargaz; the current period included a $5.5 foreign-tax-credit benefit.
- AmeriGas Propane operating income fell to $60.1 from $91.6, with retail gallons sold down 13.8% and total margin down $24.9; warmer weather was the principal volume driver. Higher propane prices partly offset lower volumes.
- International Propane revenue increased to $518.3 from $454.9, largely due to the October 2011 Shell acquisition, but operating income declined to $41.7 from $54.0. Acquired-business costs, unusually warm European weather and the absence of the prior-year reserve reversal weighed on earnings.
- Gas Utility income before taxes declined to $51.1 from $65.0, principally due to lower core-market margin amid warm weather. Midstream & Marketing income before taxes fell to $22.8 from $26.8; higher storage income was offset by weaker marketing, capacity management and generation results, including a planned Conemaugh outage.
- Other comprehensive income fell to $59.2 from $184.7, including current-period derivative losses and foreign-currency translation losses.
Outlook, risks, contingencies and unusual items
- No quantified full-year earnings guidance is provided in the supplied filing text. Management said operating cash flows are usually weakest in the first and fourth fiscal quarters because of working-capital investment. Business-unit management expected to meet fiscal 2012 commitments and projected cash needs using operating cash flow and available facilities; Energy Services also cited possible capital contributions from UGI.
- On January 12, 2012, after quarter-end, AmeriGas Partners completed the Heritage Propane acquisition for approximately $2.6 billion: $1.46 billion cash plus 29.6 million partnership units valued at approximately $1.1 billion. The cash portion was financed with $550 million of 6.75% notes due 2020 and $1.0 billion of 7.00% notes due 2022. UGI’s effective ownership of AmeriGas Partners decreased to 27.4% limited partner interest (29.2% effective interest in AmeriGas OLP). Management cited potential synergies; pro forma quarterly financial information was not reasonably determinable.
- Key stated risks include weather and demand, commodity prices and availability, ability to pass through cost increases, regulation and rate recovery, competition, acquisitions and integration, currency and interest rates, capital-market access, counterparty or supplier default, and environmental, safety and legal exposures.
- The FTC is investigating AmeriGas cylinder-filling practices, including cylinder fill volume, labeling and competitor arrangements. The Partnership said it believes it has defenses, but the financial impact cannot be assessed. The filing also describes environmental and other litigation; management said some matters could produce losses above recorded amounts and that excess losses cannot be estimated. Potential effects could be material to future operating results or cash flows, depending on developments.
- UGI identified a $200 million Energy Services receivables facility scheduled to expire in April 2012 and said it intended to extend it. UGI Utilities’ $300 million revolving facility was scheduled to expire in May 2012, subject to a possible extension requiring PUC approval; management expected approval. Flaga also expected to extend euro facilities expiring in March 2012.
- The filing reports effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How Heritage’s financing, reduced UGI ownership percentage, integration costs and anticipated synergies affect leverage, distributions and earnings.
- Whether operating performance recovers as weather normalizes, particularly propane volumes and utility core-market demand.
- Renewal status and terms of the receivables and revolving credit facilities, and liquidity needs through the seasonal working-capital cycle.
- Developments and potential financial exposure from the FTC investigation and environmental and other legal matters.
- Cash-flow conversion and debt levels, given negative operating cash flow for the quarter and increased acquisition-related borrowing.