UGI Corporation — Q2 FY2011 Form 10-Q
Business context and period. UGI is a diversified energy company spanning propane distribution, regulated gas and electric utilities, international LPG, and energy marketing and infrastructure. This unaudited filing covers the quarter and six months ended March 31, 2011; the quarter is the second quarter of UGI’s fiscal year. Results are seasonal, with earnings generally strongest in the first and second fiscal quarters.
Financial performance
| Metric | Three months ended Mar. 31, 2011 | Year-over-year | Six months ended Mar. 31, 2011 | Year-over-year |
|---|---|---|---|---|
| Revenue | $2,181.0 million | +$60.7 million (+2.9%) | $3,946.6 million | +$207.5 million (+5.5%) |
| Operating income | $357.0 million | -$9.0 million (-2.5%) | $609.3 million | +$0.1 million |
| Net income | $215.6 million | -$17.2 million | $370.6 million | -$7.7 million |
| Net income attributable to UGI | $149.4 million | -$7.7 million (-4.9%) | $262.5 million | +$7.0 million (+2.7%) |
| Diluted EPS | $1.32 | vs. $1.43 | $2.33 | vs. $2.32 |
| Operating cash flow | Not separately reported for quarter | — | $292.1 million | vs. $304.3 million |
For the quarter, revenue less cost of sales was $757.1 million, versus $753.4 million a year earlier; the corresponding six-month amounts were $1,360.1 million and $1,345.4 million. Consolidated operating margin was approximately 16.4% for the quarter and 15.4% for the six months, compared with 17.3% and 16.3%, respectively. These are calculated from reported revenue and operating income.
Six-month cash used in investing was $185.3 million, including $167.4 million of capital expenditures and $44.6 million for acquisitions. Cash used in financing was $69.1 million. Cash and cash equivalents were $298.1 million at March 31, 2011, plus $9.6 million of restricted cash.
Balance sheet and liquidity
- Total debt was $2,288.1 million at March 31, 2011, including $38.0 million of current maturities and $222.1 million of bank loans, versus $2,206.2 million at September 30, 2010. Long-term debt was $2,028.0 million; total equity was $2,443.1 million.
- Current assets were $1,579.1 million and current liabilities $1,227.9 million. Liquidity is seasonal; management said business units had sufficient available facilities and operating liquidity to meet anticipated fiscal 2011 needs.
- UGI Utilities had no revolving-credit borrowings at quarter-end. AmeriGas OLP had $194 million outstanding and $45.3 million available under its credit agreements; management expected to refinance those agreements in fiscal Q3. Flaga had €21.7 million of term debt maturing during the remainder of fiscal 2011 and expected long-term refinancing.
Material changes and management commentary
- Gas Utility was the principal earnings bright spot: six-month income before tax rose to $155.7 million from $134.3 million, supported by colder weather, higher throughput and an improving economy. Gas Utility throughput increased 13.7%.
- AmeriGas propane six-month retail gallons fell 4.0%; total margin declined $6.5 million and Partnership EBITDA fell 8.7% to $270.8 million. Warmer periods in key regions, conservation and comparison with a strong prior-year crop-drying season affected volumes; higher propane costs also pressured margins.
- International Propane revenue increased substantially, partly from acquisitions and higher selling prices, but six-month U.S.-dollar operating income declined 7.1% to $115.8 million. Rapid LPG cost increases pressured Antargaz unit margins, and a stronger U.S. dollar reduced translated earnings. A $9.4 million non-taxable reserve reversal at Antargaz supported the current-period result.
- Midstream & Marketing revenue declined 14.8% for six months, principally reflecting the sale of Atlantic Energy and lower natural-gas prices; operating income was nearly flat. Hunlock Creek’s coal-fired station ceased operating in May 2010; its replacement natural-gas facility was expected to begin operations in fiscal Q4 2011.
- The board raised UGI’s quarterly dividend from $0.25 to $0.26 per share, effective with the July 1, 2011 payment. AmeriGas Partners also approved an approximately 5% distribution increase.
Debt, unusual items, risks and outlook
- AmeriGas issued $470 million of 6.50% notes due 2021 to refinance $415 million of 7.25% notes due 2015 and redeem $14.6 million of 8.875% notes due 2011. The refinancing generated an $18.8 million pre-tax extinguishment loss, reducing UGI-attributable income by $5.2 million.
- Antargaz refinanced its €380 million term loan with a five-year facility and a €40 million revolver. UGI guaranteed up to €100 million of payments under the facility. The term loan’s effective interest rate was 4.75% at March 31, 2011.
- There is no company earnings guidance in the provided filing text. CPG requested a $16.5 million annual base-revenue increase; the PUC suspended the proposed effective date and review could delay new rates until late October 2011.
- Key exposures include weather and demand, propane and other commodity prices, timely cost recovery, competition and conservation, foreign exchange, access to credit, counterparty performance, and environmental or other legal claims. The filing warns that rapid LPG cost increases may not be passed through fully or promptly.
- Environmental and litigation matters remain, including the Waterbury North MGP site, where a second trial phase was scheduled for August 2011 and plaintiffs had estimated remediation costs could total $25 million. Management said excess losses cannot be estimated; unfavorable outcomes could affect future results or cash flows. Other MGP claims also remain, although certain claims against UGI were dismissed or affirmed in its favor.
- Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Most important facts for investors to verify
- Whether propane volumes and margins recover from weather-related weakness, customer conservation and elevated LPG costs.
- Completion and terms of planned AmeriGas and Flaga refinancing, including upcoming maturities and available credit capacity.
- Outcome and timing of the CPG rate case and the effect of any delay on utility investment and earnings.
- Operating progress and economics of the Hunlock Creek natural-gas facility, expected to start in fiscal Q4 2011.
- Developments in Waterbury North and other environmental or legal matters, and any resulting accruals or cash requirements.