UGI Corporation — Fiscal 2022 Third-Quarter 10-Q
Reporting period: Three and nine months ended June 30, 2022, compared with the corresponding 2021 periods. Amounts are in U.S. dollars; financial statement figures are in millions unless noted. UGI’s energy businesses are seasonal, so interim results may not indicate full-year performance.
Financial performance and position
| Metric | Three months ended June 30, 2022 | Three months ended June 30, 2021 | Nine months ended June 30, 2022 | Nine months ended June 30, 2021 |
|---|---|---|---|---|
| Revenue | $2,033 | $1,496 | $8,172 | $6,009 |
| Operating income | $99 | $391 | $1,363 | $1,564 |
| Net income (loss) attributable to UGI | $(7) | $150 | $829 | $942 |
| Diluted EPS | $(0.03) | $0.71 | $3.84 | $4.48 |
| Adjusted net income attributable to UGI (non-GAAP) | $12 | $28 | $626 | $693 |
| Adjusted diluted EPS (non-GAAP) | $0.06 | $0.13 | $2.90 | $3.30 |
Quarterly revenue rose 36%, but operating income and reported earnings fell sharply. Nine-month revenue increased 36%, while operating income declined 13% and net income declined 12%. Management’s non-GAAP adjusted results exclude, among other items, certain commodity and foreign-currency derivative gains and losses and specified discrete expenses; they also declined year over year.
Cash flow: Nine-month operating cash flow was $848, down from $1,047. Cash used in investing was $717, including $551 of capital expenditures and $188 for acquisitions and assets. Cash used in financing was $290. Cash, cash equivalents and restricted cash decreased $193 to $684; balance-sheet cash and cash equivalents were $670.
Debt and liquidity: Total debt, including short-term borrowings, was $6,722 at June 30, 2022; short-term borrowings were $276 and long-term debt including current maturities was $6,446. Available liquidity, including cash and available revolving-credit capacity, was approximately $2.1 billion, versus $2.2 billion at September 30, 2021. UGI reported compliance with debt covenants and no near-term senior-note or term-loan maturities.
Other measures: Total assets were $17,111 and total equity was $6,005. The quarterly common dividend was raised approximately 4%, to $0.36 per share. UGI repurchased 0.9 million shares for $38 during the first nine months.
Material changes and drivers
- Quarterly results: Lower adjusted earnings mainly reflected weaker LPG business contributions. AmeriGas Propane adjusted net loss increased $17, principally on lower retail margins and volumes. UGI International adjusted income fell $16, reflecting lower margins, warmer weather, foreign-currency translation and inflation. Utilities and Midstream & Marketing adjusted income increased $10 and $15, respectively.
- Nine-month results: Adjusted earnings declined mainly due to LPG margin and volume pressures, inflation and a prior-year CARES Act tax benefit. AmeriGas Propane adjusted income decreased $69 and UGI International decreased $61. Midstream & Marketing increased $25 and Utilities increased $59, with Utilities benefiting in part from the Mountaineer acquisition and rate increases.
- Commodity and derivative volatility: Higher LPG, natural-gas and electricity prices lifted reported revenue and cost of sales but affected margins, working capital and collateral. UGI cited net gains from changes in unrealized commodity and certain foreign-currency derivatives of $22 in the quarter, versus $231 in the prior-year quarter, and $269 for the nine months, versus $364. Such marks can make GAAP comparisons volatile because the related hedged transactions may occur in future periods.
- Unusual items: The quarter included a $50 pretax impairment of UGI’s Pennant equity-method investment, part of the $36 after-tax adjustment shown in the non-GAAP reconciliation, and $4 of restructuring costs. The nine-month period also included $17 of restructuring costs and an $11 pretax debt-extinguishment loss. Prior-year periods included a $93 PennEast impairment and, for nine months, a $23 Italian tax benefit.
- Acquisitions and investment: UGI acquired the Stonehenge gathering assets for approximately $190 in January 2022. Mountaineer, acquired in September 2021, contributed to Utilities’ year-over-year growth. Capital expenditures increased to $551 from $460 for the nine-month period.
Outlook, commentary and risks
- The filing provides no specific full-year earnings guidance. Management said it expects sufficient liquidity to support operations and long-term commitments, while noting uncertainty from commodity volatility, inflation and the ongoing effects of COVID-19.
- Management said the AmeriGas and UGI International transformation programs were substantially complete, with anticipated benefits for fiscal 2022 on target. The corporate support-functions initiative is expected to continue through fiscal 2023, with approximately $40 of non-recurring costs and more than $15 of annualized savings anticipated by then.
- A proposed Pennsylvania Gas Utility settlement provides for a phased annual base distribution rate increase of $49: $38 beginning October 29, 2022, and a further $11 beginning October 1, 2023. The administrative law judge approved the joint petition July 28, 2022; final approval by the PAPUC remained outstanding in the filing.
- After quarter-end, UGI Utilities extended a $125 term loan’s maturity from October 2022 to July 2027. UGI Utilities issued $90 of 4.75% notes in July; further UGI Utilities and Mountaineer note issuances were expected by September and August 2022, respectively.
- Key risks include weather and seasonality; inability to pass through rapidly rising LPG costs; commodity, interest-rate and foreign-exchange movements; collateral demands and counterparty default; inflation, labor and supply-chain constraints; customer service and volume pressures; regulation and rate-recovery timing; environmental and legal matters; and geopolitical uncertainty, including the Russia-Ukraine conflict.
- UGI reported effective disclosure controls. Integration of Mountaineer’s processes and internal controls was ongoing.
Most important facts for investors to verify
- Reconcile GAAP earnings with adjusted earnings, including the timing and eventual offset of derivative marks and the Pennant impairment.
- Track LPG customer volumes, service execution and margins, and UGI International’s energy-marketing margin recovery amid commodity volatility and inflation.
- Monitor operating cash flow, working-capital needs and collateral movements; the $659 of derivative collateral received affects liquidity and may fluctuate.
- Confirm final PAPUC approval and implementation of the proposed rate settlement, and assess the timing and returns of planned capital spending.
- Review total debt, borrowing costs, refinancing and post-quarter note issuances; evaluate sensitivity to interest rates, foreign exchange and commodity prices.
- Assess the expected completion, approval and economics of the proposed Pennant transaction, which was subject to approvals and customary closing conditions.