UGI Corporation — Form 10-Q Summary
Reporting period: First quarter of fiscal 2016, the three months ended December 31, 2015. Comparisons are with the three months ended December 31, 2014. Financial amounts are in millions of dollars unless noted. UGI distributes and markets propane, natural gas, electricity and related energy services in the U.S. and internationally. Results are seasonal and are generally strongest in the first and second fiscal quarters.
Financial performance
- Revenue: $1,606.6, down 19.8% from $2,004.6. Lower energy prices and warmer weather reduced reported sales; revenue also reflects commodity-price pass-throughs.
- Profit: Operating income was $305.5, versus $83.3; income before tax was $247.5, versus $23.3. Net income attributable to UGI was $114.6, or $0.65 diluted EPS, versus $34.1, or $0.19. Operating margin was approximately 19.0%, versus 4.2%.
- Adjusted results: Management’s non-GAAP adjusted net income was $112.4, or $0.64 diluted EPS, versus $118.7, or $0.68. The much higher GAAP year-over-year profit principally reflects the comparison with large prior-year commodity-derivative losses: current-period after-tax gains were $3.6, compared with prior-year after-tax losses of $81.9. Finagaz acquisition and transition costs reduced adjusted results by $1.4 in the current quarter and $2.7 in the prior-year quarter.
- Segment developments: UGI International income before tax increased to $78.5 from $45.9, including Finagaz, acquired in May 2015. UGI Utilities income before tax fell to $38.8 from $65.0, primarily from weather-related lower demand. AmeriGas Partnership Adjusted EBITDA declined to $177.7 from $188.5. Midstream & Marketing income before tax was $42.1 versus $45.0.
- Cash flow and investment: Operating cash flow was $127.5, up from $19.0; operating cash flow before working-capital changes was $258.4 versus $267.2. Capital expenditures were $132.0, and acquisitions used $41.7. Investing cash outflow was $155.3; financing cash inflow was $68.4.
- Liquidity and debt: Cash and cash equivalents were $403.0 at quarter-end; restricted cash was $55.5. Total debt, including current maturities and short-term borrowings, was $4,066.1, up from $3,889.7 at September 30, 2015. Short-term borrowings rose to $456.8 from $189.9. Principal credit facilities had stated available capacity of $279.8 for AmeriGas, $80.3 for UGI Utilities, and $210.0 for Energy Services, plus euro-denominated availability for UGI France and Flaga. Management said the business units had sufficient liquidity for fiscal 2016, while cautioning that capital-market financing may not be available on acceptable terms.
- Margins and shareholder returns: The quarter’s unusually high GAAP operating margin should be viewed alongside the large derivative-related year-over-year comparison and management’s lower adjusted earnings. UGI declared a quarterly dividend of $0.2275 per share, up from $0.2175 a year earlier. AmeriGas’s quarterly distribution was $0.92 per unit.
Material changes and management commentary
- Temperatures were substantially warmer than normal across UGI’s U.S. and European operations. AmeriGas retail gallons fell 13.3%; UGI Utilities core gas throughput fell 25.0%, and utility total throughput fell 12.1%.
- Management attributed the gap between GAAP and adjusted earnings chiefly to commodity-derivative gains in the current period and substantial derivative losses in the prior period. The derivatives are used to manage exposure to anticipated future commodity purchases and sales; management expects much of the derivative impact to be offset as the underlying transactions occur.
- Lower wholesale LPG costs reduced selling prices but supported higher average retail unit margins at AmeriGas and UGI International, partly offsetting weather-related volume declines. UGI International’s reported growth also reflects Finagaz and smaller acquisitions, alongside currency translation effects.
- UGI Utilities filed a request on January 19, 2016, for a $58.6 annual increase in UGI Gas base operating revenues. The company requested rates effective March 19, 2016; regulatory review is expected to take about nine months, and the outcome and timing are uncertain.
- UGI repurchased 717,500 shares during the quarter at an average price of $32.87, for approximately $23.6. A further 12.1 million shares remained authorized under its repurchase program at December 31.
Outlook, risks and contingencies
- The filing provides no quantified earnings guidance. Management noted that warm weather reduced heating-related sales and said liquidity was expected to support operations through fiscal 2016.
- Key risks include weather and demand, energy-price volatility and pass-through timing, commodity collateral needs, access to capital, interest and foreign-exchange movements, regulatory cost recovery, competition, customer or counterparty defaults, environmental exposure, and successful integration of acquisitions.
- UGI disclosed ongoing propane-cylinder antitrust litigation. Some claims were dismissed, but an appeal and certain state-law claims remained; the company said it could not reasonably estimate any impact and intended to defend the claims. The filing also describes environmental remediation obligations and other ordinary-course legal matters; management did not expect those matters, overall, to materially affect financial position, results or cash flows.
- Following the Totalgaz acquisition, UGI agreed to divest certain French assets within 15 months of the acquisition date. Competitors challenged the regulatory decision; interim relief was denied, but proceedings on the merits continued. Purchase-price allocation remained preliminary for certain liabilities and deferred taxes.
- The company uses derivatives for commodity, interest-rate and currency risk management, not speculation. A hypothetical 10% adverse commodity-price move would increase the disclosed net loss on relevant unsettled commodity derivatives by about $51.8; other disclosed sensitivities include interest-rate, foreign-exchange and translation exposures.
Most important facts for investors to verify
- Whether adjusted earnings and segment performance recover as weather normalizes, and how much quarter-to-quarter results depend on commodity prices and derivative accounting.
- Progress and final outcome of the UGI Gas rate case, including whether and when the requested $58.6 annual revenue increase is approved.
- Debt maturities, refinancing plans, short-term borrowing levels and available facility capacity, particularly as UGI Utilities expects to refinance debt during fiscal 2016.
- Finagaz integration, required French divestitures, final acquisition accounting and realization of expected synergies.
- Developments in antitrust litigation, environmental remediation and other contingencies, and any resulting financial exposure.