UGI Corporation — FY2013 Form 10-K
Reporting period: Fiscal year ended September 30, 2013 (not a calendar-year fourth-quarter filing). UGI is an energy holding company with propane and LPG distribution, regulated gas and electric utilities, energy marketing and midstream operations, electric generation, and HVAC services in the U.S. and internationally.
Financial results and position
Unless noted, amounts are U.S. dollars. Consolidated revenue rose 10.3% to $7.195 billion from $6.521 billion. Operating income increased to $831.1 million from $538.6 million. Net income attributable to UGI was $278.1 million, up 32.3% from $210.2 million; diluted EPS was $2.41 versus $1.85. Management’s non-GAAP adjusted net income was $273.8 million and adjusted diluted EPS was $2.37, excluding specified Midstream & Marketing commodity-derivative timing and fair-value effects.
| Metric | FY2013 | FY2012 |
|---|---|---|
| Revenue | $7,194.7 million | $6,521.3 million |
| Net income attributable to UGI | $278.1 million | $210.2 million |
| Diluted EPS | $2.41 | $1.85 |
| Operating cash flow | $801.5 million | $707.7 million |
| Capital expenditures | $490.2 million | $343.2 million |
| Total debt at year-end | $3,837.3 million | $3,679.4 million |
| Cash and cash equivalents | $389.3 million | $319.9 million |
Cash flow from operations before working-capital changes was $845.6 million; working capital used $44.1 million. Investing activities used $553.3 million, including $486.0 million of cash property, plant and equipment expenditures; financing activities used $186.1 million. Total debt was 52.0% of capitalization. Current liabilities were $1.425 billion against current assets of $1.627 billion. UGI reported $171.6 million of cash at the parent company, excluding cash at operating subsidiaries. Management said business units had adequate liquidity for FY2014, supported by cash, operating cash flow, credit facilities and Energy Services’ receivables facility; access to future capital markets on acceptable terms was not assured.
UGI’s common dividend declared was $1.105 per share for FY2013; the quarterly rate was raised to $0.2825 in July 2013, with a stated annualized rate of $1.13.
Business performance and changes versus prior year
- AmeriGas Propane: Revenue was $3.169 billion, total margin $1.512 billion, operating income $394.4 million and Partnership EBITDA $596.5 million. Retail gallons increased 22.4% to 1.245 billion, reflecting the full-year contribution of Heritage Propane and colder weather than FY2012. Weather was still 4.9% warmer than normal. Lower average propane costs supported unit margins.
- UGI International: Revenue was $2.179 billion and operating income $147.0 million. Results improved with colder weather, higher retail LPG unit margins and lower operating costs. FY2013 includes approximately $4 million of costs related to Flaga’s Poland acquisition; FY2012 included Shell acquisition and transition costs.
- Gas Utility: Revenue was $839.0 million, operating income $196.5 million and total margin $431.8 million. Colder weather than FY2012 and customer growth lifted throughput and margin. The utility connected over 15,000 residential heating customers, including nearly 8,800 conversions from other fuels.
- Midstream & Marketing: Revenue was $1.038 billion, total margin $164.0 million and operating income $90.0 million. Colder weather and greater gas-price volatility benefited marketing, peaking and capacity-management activities; electric generation also benefited from higher output, spot prices and capacity revenues.
Overall FY2013 improvement was driven substantially by weather: U.S. and European heating-season conditions were colder than FY2012, which had been unusually warm. UGI also recorded the full-year effects of the Heritage Propane and Shell LPG acquisitions. Consolidated interest expense increased $19.9 million, principally reflecting the full-year cost of debt issued to fund Heritage Propane.
Outlook, risks and unusual items
Management provided no specific FY2014 earnings or revenue guidance. It expected continued growth from natural-gas conversions at Gas Utility and from Marcellus Shale infrastructure and other midstream projects. The Temple liquefaction expansion was expected to be completed during FY2014; a gathering-system extension was completed in the first quarter of FY2014. Estimated FY2014 capital expenditures were $451.2 million. Management identified weather, commodity-price levels and volatility, and U.S. and European economic conditions as key influences on results.
- Accounting and controls: UGI identified incorrect hedge accounting for certain Midstream & Marketing commodity derivatives, revised FY2012 and FY2011 annual statements and restated specified quarterly periods. The annual statements were audited as fairly presented, but management and PwC reported a material weakness in internal control over financial reporting; disclosure controls were also deemed ineffective at September 30, 2013. Management planned additional expertise and stronger derivative-accounting controls, targeting remediation in FY2014. Substantially all Midstream & Marketing commodity derivatives would no longer use hedge accounting, increasing potential reported earnings volatility. The filing states the corrections did not affect cash flows or liquidity.
- Debt and liquidity: Debt increased year over year, with substantial indebtedness at subsidiaries and restrictions on distributions to the holding company. UGI Utilities borrowed $175 million under a short-term term loan at year-end and planned to refinance it with $175 million of 4.98% notes due 2044, expected in March 2014. Commodity-price moves can also trigger collateral or margin requirements.
- Operating risks: Earnings are seasonal and weather-sensitive. Risks include LPG and natural-gas supply interruptions and cost volatility, inability to fully pass cost increases to customers, competition from natural gas and other fuels, conservation, supplier or customer defaults, regulatory cost recovery, construction and acquisition execution, foreign exchange, interest rates, and catastrophic operating events.
- Contingencies: UGI disclosed environmental investigations and former manufactured-gas-plant claims for which some potential losses could exceed recorded amounts, but excess losses could not be estimated. The Allentown gas-explosion regulatory settlement required a $0.5 million penalty and additional leak-detection and reporting measures; management did not expect a material financial impact. A California cylinder-labeling/filling matter was resolved by a consent judgment approved in December 2013, with a penalty and injunctive relief; UGI said it would not materially affect consolidated results. The separate FTC investigation remained unresolved and its financial impact could not be assessed.
- Other unusual item: UGI recorded a $6.3 million pretax impairment of a private-equity partnership investment in FY2013. The filing also noted proposed French tax legislation that could reduce Antargaz interest deductions if adopted.
Important facts for investors to verify
- Review the derivative-accounting restatements, quarterly revisions and FY2014 remediation progress; distinguish GAAP EPS from management’s adjusted EPS.
- Assess debt maturities, subsidiary covenant and distribution restrictions, and completion of the planned UGI Utilities refinancing.
- Test earnings sensitivity to winter weather, LPG and natural-gas prices, customer pass-through timing, and collateral requirements.
- Track returns and integration of the Poland acquisition, Marcellus projects and planned capital spending.
- Follow developments in environmental claims and the FTC cylinder-practices investigation, where potential exposure was not fully quantified.