QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2023
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 1-11071
UGI CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania
23-2668356
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
460 North Gulph Road, King of Prussia, PA19406
(Address of Principal Executive Offices) (Zip Code)
(610) 337-1000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class:
Trading Symbol(s):
Name of each exchange on which registered:
Common Stock, without par value
UGI
New York Stock Exchange
Corporate Units
UGIC
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesý No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yesý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
ý
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ý
At April 30, 2023, there were 209,328,319 shares of UGI Corporation Common Stock, without par value, outstanding.
Terms and abbreviations used in this Form 10-Q are defined below:
UGI Corporation and Related Entities
AmeriGas OLP - AmeriGas Propane, L.P., the principal operating subsidiary of AmeriGas Partners
AmeriGas Partners - AmeriGas Partners, L.P., a Delaware limited partnership and an indirect wholly owned subsidiary of UGI; also referred to, together with its consolidated subsidiaries, as the “Partnership”
AmeriGas Propane - Reportable segment comprising AmeriGas Propane, Inc. and its subsidiaries, including AmeriGas Partners and AmeriGas OLP
AmeriGas Propane, Inc. - A wholly owned second-tier subsidiary of UGI and the general partner of AmeriGas Partners
AvantiGas - AvantiGas Limited, an indirect wholly owned subsidiary of UGI International, LLC
Company - UGI and its consolidated subsidiaries collectively
DVEP - DVEP Investeringen B.V., an indirect wholly owned subsidiary of UGI International, LLC
Electric Utility - UGI Utilities’ regulated electric distribution utility
Energy Services - UGI Energy Services, LLC, a wholly owned subsidiary of Enterprises
Enterprises - UGI Enterprises, LLC, a wholly owned subsidiary of UGI
ESFC - Energy Services Funding Corporation, a wholly owned subsidiary of Energy Services
Flaga - Flaga GmbH, an indirect wholly owned subsidiary of UGI International, LLC
Gas Utility - UGI’s regulated natural gas businesses, inclusive of PA Gas Utility and WV Gas Utility
GHI - GHI Energy, LLC, a Houston-based RNG company and indirect wholly owned subsidiary of Energy Services
MBL Bioenergy - MBL Bioenergy, LLC
Midstream & Marketing - Reportable segment comprising Energy Services and UGID
Mountaineer - Mountaineer Gas Company, a natural gas distribution company in West Virginia and a wholly owned subsidiary of Mountaintop Energy Holdings, LLC
Mountaintop Energy Holdings, LLC - Parent company of Mountaineer and wholly owned subsidiary of UGI, acquired on September 1, 2021
PA Gas Utility - UGI Utilities’ regulated natural gas distribution business, primarily located in Pennsylvania
Partnership - AmeriGas Partners and its consolidated subsidiaries, including AmeriGas OLP; also referred to as “AmeriGas Partners”
Pennant - Pennant Midstream, LLC, an indirect wholly owned subsidiary of Energy Services
Pine Run - Pine Run Gathering, LLC
Stonehenge - Stonehenge Appalachia, LLC, a midstream natural gas gathering business
UGI- UGI Corporation or, collectively, UGI Corporation and its consolidated subsidiaries
UGI France - UGI France SAS (a Société par actions simplifiée), an indirect wholly owned subsidiary of UGI International, LLC
UGI International- Reportable segment principally comprising UGI’s foreign operations
UGI International, LLC- UGI International, LLC, a wholly owned subsidiary of Enterprises
UGI Moraine East - UGI Moraine East Gathering LLC, a wholly owned subsidiary comprising the assets acquired in the Stonehenge Acquisition
UGI Utilities - UGI Utilities, Inc., a wholly owned subsidiary of UGI comprising PA Gas Utility and Electric Utility
UGID - UGI Development Company, a wholly owned subsidiary of Energy Services
UniverGas - UniverGas Italia S.r.l, an indirect wholly owned subsidiary of UGI International, LLC
Utilities - Reportable segment comprising UGI Utilities and Mountaintop Energy Holdings, LLC
WV Gas Utility - Mountaineer’s regulated natural gas distribution business, located in West Virginia
Other Terms and Abbreviations
2022 Annual Report -UGI Annual Report on Form 10-K for the fiscal year ended September 30, 2022
2022 six-month period -Six months ended March 31, 2022
2022 three-month period -Three months ended March 31, 2022
2023 six-month period -Six months ended March 31, 2023
2023 three-month period -Three months ended March 31, 2023
2024 Purchase Contract - A forward stock purchase contract issued by UGI Corporation as a part of the issuance of Equity Units which obligates holders to purchase a number of shares of UGI Common Stock from the Company on June 1, 2024
2022 AmeriGas OLP Credit Agreement - Entered into by AmeriGas OLP providing for borrowings of up to $600 million, with the option to increase to a maximum principal amount of $900 million assuming certain conditions are met, including a letter of credit subfacility of up to $100 million
AOCI - Accumulated Other Comprehensive Income (Loss)
ASC - Accounting Standards Codification
ASC 606- ASC 606, “Revenue from Contracts with Customers”
ASU - Accounting Standards Update
Bcf - Billions of cubic feet
COA - Consent Order and Agreement
CODM - Chief Operating Decision Maker as defined in ASC 280, “Segment Reporting”
Common Stock - Shares of UGI common stock
Convertible Preferred Stock - Preferred stock of UGI titled 0.125% series A cumulative perpetual convertible preferred stock without par value and having a liquidation preference of $1,000 per share
COVID-19 - A novel strain of coronavirus disease discovered in 2019
DS - Default service
DSIC - Distribution System Improvement Charge
Energy Services Amended Term Loan Credit Agreement - The first amendment to the Energy Services Term Loan Credit Agreement, entered into on February 23, 2023, comprising of an $800 million variable-rate term loan with a final maturity of February 2030
Energy Services Term Loan Credit Agreement - A seven-year $700 million variable senior secured term loan agreement entered into on August 13, 2019 by Energy Services
Equity Unit - A corporate unit consisting of a 2024 Purchase Contract and 1/10th or 10% undivided interest in one share of Convertible Preferred Stock
Exchange Act - Securities Exchange Act of 1934, as amended
FDIC - Federal Deposit Insurance Corporation
FERC - Federal Energy Regulatory Commission
Fiscal 2021 - The fiscal year ended September 30, 2021
Fiscal 2022 - The fiscal year ended September 30, 2022
Fiscal 2023 - The fiscal year ending September 30, 2023
GAAP - U.S. generally accepted accounting principles
Gwh - Millions of kilowatt hours
ICE - Intercontinental Exchange
IREP - Infrastructure Replacement and Expansion Plan
IRPA - Interest rate protection agreement
LIBOR - London Inter-Bank Offered Rate
LNG - Liquefied natural gas
LPG - Liquefied petroleum gas
MDPSC - Maryland Public Service Commission
MGP - Manufactured gas plant
Mountaineer Acquisition - Acquisition of Mountaintop Energy Holdings LLC, which closed on September 1, 2021
Mountaineer 2023 Credit Agreement - Third amendment to the third amended and restated credit agreement entered into by Mountaineer, as borrower, providing for borrowings up to $150 million, with the option to increase to a maximum principal amount of $250 million assuming certain conditions are met, including a letter or credit subfacility of up to $20 million, scheduled to expire in November 2024, with an option to extend the maturity date
NOAA - National Oceanic and Atmospheric Administration
NPNS - Normal purchase and normal sale
NTSB - National Transportation Safety Board
NYDEC - New York State Department of Environmental Conservation
NYMEX - New York Mercantile Exchange
OSHA - Occupational Safety and Health Administration
PADEP - Pennsylvania Department of Environmental Protection
PAPUC - Pennsylvania Public Utility Commission
Pennant Acquisition - During Fiscal 2022, Energy Services acquired the remaining 53% equity interest in Pennant
Purchase Contracts - Forward stock purchase contracts issued by UGI Corporation in May 2021, which obligate holders to purchase a number of shares of UGI common stock from the Company on June 1, 2024
Receivables Facility - A receivables purchase facility of Energy Services with an issuer of receivables-backed commercial paper
Retail core-market - Comprises firm residential, commercial and industrial customers to whom Utilities has a statutory obligation to provide service that purchase their natural gas from Utilities
RNG - Renewable natural gas
ROD - Record of Decision
SEC - U.S. Securities and Exchange Commission
SOFR - Secured Overnight Financing Rate
Stonehenge Acquisition - Acquisition of Stonehenge Appalachia, LLC, which closed January 27, 2022
U.K. - United Kingdom
U.S. - United States of America
UGI International 2023 Credit Facilities Agreement – A five-year unsecured senior facilities agreement entered into in March 2023 comprising a €300 million variable-rate term loan facility and a €500 million multicurrency revolving credit facility scheduled to expire in March 2028
UGI International Credit Facilities Agreement - A five-year unsecured senior facilities agreement entered into in October 2018, by UGI International, LLC comprising a €300 million term loan facility and a €300 million revolving credit facility, scheduled to expire in October 2023. Paid off in full and terminated concurrently with the execution of the UGI International 2023 Credit Facilities Agreement
UGI Utilities Credit Agreement - A five-year unsecured revolving credit agreement entered into by UGI Utilities on June 27, 2019 providing for borrowings up to $350 million, including a letter of credit subfacility of up to $100 million, scheduled to expire in June 2024. On December 13, 2022, UGI Utilities entered into an amendment to UGI Utilities Credit Agreement, providing for borrowings up to $425 million and to replace the use of LIBOR with SOFR
USD - U.S. dollar
WVPSC - Public Service Commission of West Virginia
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Currency in millions, except per share amounts and where indicated otherwise)
Note 1 — Nature of Operations
UGI is a holding company that, through subsidiaries and affiliates, distributes, stores, transports and markets energy products and related services. In the U.S., we own and operate (1) a retail propane marketing and distribution business; (2) natural gas and electric distribution utilities; and (3) energy marketing, midstream infrastructure, storage, natural gas gathering and processing, natural gas production, electricity generation and energy services businesses. In Europe, we market and distribute propane and other LPG, and market other energy products and services.
We conduct a domestic propane marketing and distribution business through AmeriGas Partners. AmeriGas Partners conducts a national propane distribution business through its principal operating subsidiary, AmeriGas OLP.
UGI International, LLC, through its subsidiaries and affiliates, conducts (1) an LPG distribution business throughout much of Europe and (2) an energy marketing business in France, Belgium, and the Netherlands. These businesses are conducted principally through our subsidiaries, UGI France, Flaga, AvantiGas, DVEP and UniverGas. See Note 5 for additional information regarding the energy marketing businesses at UGI International.
Energy Services conducts, directly and through subsidiaries and affiliates, energy marketing, including RNG, midstream transmission, LNG storage, natural gas gathering and processing, natural gas and RNG production, electricity generation and energy services businesses primarily in the eastern region of the U.S., eastern Ohio, the panhandle of West Virginia and California. UGID owns electricity generation facilities principally located in Pennsylvania. Energy Services and its subsidiaries’ storage, LNG and portions of its midstream transmission operations are subject to regulation by the FERC.
Our Utilities segment includes UGI Utilities and Mountaineer. PA Gas Utility serves customers in eastern and central Pennsylvania and in portions of one Maryland county, and Mountaineer serves customers in West Virginia. Electric Utility serves customers in portions of Luzerne and Wyoming counties in northeastern Pennsylvania. PA Gas Utility is subject to regulation by the PAPUC and FERC and, with respect to its customers in Maryland, the MDPSC. Mountaineer is subject to regulation by the WVPSC and FERC. Electric Utility is subject to regulation by the PAPUC and FERC.
Note 2 — Summary of Significant Accounting Policies
The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with the rules and regulations of the SEC. They include all adjustments that we consider necessary for a fair statement of the results for the interim periods presented. Such adjustments consisted only of normal recurring items unless otherwise disclosed. The September 30, 2022, Condensed Consolidated Balance Sheet was derived from audited financial statements but does not include all footnote disclosures from the annual financial statements.
These financial statements should be read in conjunction with the financial statements and related notes included in the Company’s 2022 Annual Report. Due to the seasonal nature of our businesses, the results of operations for interim periods are not necessarily indicative of the results to be expected for a full year.
Restricted Cash.Restricted cash principally represents those cash balances in our commodity futures brokerage accounts that are restricted from withdrawal.The following table provides a reconciliation of the total cash, cash equivalents and restricted cash reported on the Condensed Consolidated Balance Sheets to the corresponding amounts reported on the Condensed Consolidated Statements of Cash Flows.
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Currency in millions, except per share amounts and where indicated otherwise)
Earnings Per Common Share.Basic earnings per share attributable to UGI stockholders reflect the weighted-average number of common shares outstanding. Diluted earnings per share attributable to UGI stockholders include the effects of dilutive stock options, common stock awards and Equity Units.Shares used in computing basic and diluted earnings per share are as follows:
Three Months Ended March 31,
Six Months Ended March 31,
2023
2022
2023
2022
Denominator (thousands of shares):
Weighted-average common shares outstanding — basic
209,857
210,163
209,902
209,919
Incremental shares issuable for stock options, common stock awards and Equity Units (a)
6,263
5,765
—
6,017
Weighted-average common shares outstanding — diluted
216,120
215,928
209,902
215,936
(a)For the three months ended March 31, 2023, 5,980 shares associated with outstanding stock option awards were excluded from the computation of diluted earnings per share because their effect was antidilutive. For the six months ended March 31, 2023, 6,348 of such shares have been excluded as such incremental shares would be antidilutive due to the net loss for the period. For the three and six months ended March 31, 2022, 6,535 shares associated with outstanding stock option awards were excluded from the computation of diluted earnings per share because their effect was antidilutive.
Equity Method Investments. We account for privately held equity securities of entities without readily determinable fair values in which we do not have control, but have significant influence over operating and financial policies, under the equity method. These are included in "Other assets" on the Condensed Consolidated Balance Sheets. Equity method earnings are included in "Income from equity method investees" on the Condensed Consolidated Statements of Income. Our equity method investments primarily comprise MBL Bioenergy, Pine Run and other equity method investments in biomass and other renewable energy projects.
MBL Bioenergy.The Company has an approximate 99.99% interest in MBL Bioenergy, a company jointly owned by UGI Dakota, LLC, Sevana Bioenergy and a subsidiary of California Bioenergy. The sole purpose of MBL Bioenergy is the development of RNG projects in South Dakota comprising three dairy waste anaerobic digester systems. MBL Bioenergy is a variable interest entity whereby the Company has determined that it is not the primary beneficiary since it does not direct the activities that most significantly impact the entity’s economic performance. The carrying value of our investment in MBL Bioenergy at March 31, 2023 and 2022 was $78 and $0, respectively.
Pine Run. The Company has an approximately 49% interest in Pine Run, a company jointly owned by Stonehenge Energy Resources and UGI Pine Run LLC. Pine Run owns Pine Run Midstream which operates dry gas gathering pipelines and compression assets in western Pennsylvania. The carrying value of our investment in Pine Run at March 31, 2023 and 2022 was $72 and $65, respectively.
Pennant. At March 31, 2022, the carrying value of our investment in Pennant was $97. During Fiscal 2022, UGI through Energy Services, completed the Pennant Acquisition in which Energy Services acquired the remaining 53% of the equity interests in Pennant. The acquisition of the remaining interests was accounted for as an acquisition of assets, and the purchase price of approximately $61 was primarily allocated to property, plant and equipment.
Other Equity Method Investments. Our other equity method investments totaled $69 and $26 at March 31, 2023 and 2022, respectively, and principally comprise of a number of investments in biomass and other renewable energy projects at Midstream & Marketing and a renewable energy joint venture at UGI International. Our maximum exposure to loss related to these investments is limited to the amount invested.
Derivative Instruments. Derivative instruments are reported on the Condensed Consolidated Balance Sheets at their fair values, unless the NPNS exception is elected. The accounting for changes in fair value depends upon the purpose of the derivative instrument, whether it is subject to regulatory ratemaking mechanisms or if it qualifies and is designated as a hedge for accounting purposes.
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Currency in millions, except per share amounts and where indicated otherwise)
Certain of our derivative instruments qualify and are designated as cash flow hedges. For cash flow hedges, changes in the fair values of the derivative instruments are recorded in AOCI, to the extent effective at offsetting changes in the hedged item, until earnings are affected by the hedged item. We discontinue cash flow hedge accounting if occurrence of the forecasted transaction is determined to be no longer probable. Hedge accounting is also discontinued for derivatives that cease to be highly effective. We do not designate our commodity and certain foreign currency derivative instruments as hedges under GAAP. Changes in the fair values of these derivative instruments are reflected in net income. Gains and losses on substantially all of the commodity derivative instruments used by Utilities are included in regulatory assets or liabilities because it is probable such gains or losses will be recoverable from, or refundable to, customers. From time to time, we also enter into net investment hedges. Gains and losses on net investment hedges that relate to our foreign operations are included in the cumulative translation adjustment component in AOCI until such foreign net investment is substantially sold or liquidated.
Cash flows from derivative instruments, other than certain cross-currency swaps and net investment hedges, if any, are included in cash flows from operating activities on the Condensed Consolidated Statements of Cash Flows. Cash flows from the interest portion of our cross-currency hedges, if any, are included in cash flows from operating activities while cash flows from the currency portion of such hedges, if any, are included in cash flows from financing activities. Cash flows from net investment hedges, if any, are included in cash flows from investing activities on the Condensed Consolidated Statements of Cash Flows.
For a more detailed description of the derivative instruments we use, our accounting for derivatives, our objectives for using them and other information, see Note 12.
Use of Estimates.The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and costs. These estimates are based on management’s knowledge of current events, historical experience and various other assumptions that are believed to be reasonable under the circumstances. Accordingly, actual results may be different from these estimates and assumptions.
Goodwill. We do not amortize goodwill, but test it at least annually for impairment at the reporting unit level. A reporting unit is an operating segment, or one level below an operating segment (a component) if it constitutes a business for which discrete financial information is available and regularly reviewed by segment management. Components are aggregated into a single reporting unit if they have similar economic characteristics. Each of our reporting units with goodwill is required to perform impairment tests annually or whenever events or circumstances indicate that the value of goodwill may be impaired.
With respect to the AmeriGas Propane reporting unit’s Fiscal 2022 impairment test, we determined that AmeriGas Propane’s fair value exceeded its carrying value by approximately 30%. While the Company believes that the judgments used in that quantitative assessment of AmeriGas Propane’s fair value were reasonable based upon currently available facts and circumstances, if AmeriGas Propane were not able to achieve its anticipated results and/or if its weighted average cost of capital were to increase, its fair value would be adversely affected, which may result in an impairment. During the interim period ended March 31, 2023, AmeriGas Propane did not achieve its forecasted results and the weighted average cost of capital increased from the Fiscal 2022 impairment test. While these developments caused a decrease in the fair value of the AmeriGas Propane reporting unit, the Company has concluded that the decrease would not result in the carrying value of the reporting unit to exceed the estimated fair value. As a result, the Company has concluded that it is not more likely than not that the fair value of the AmeriGas Propane reporting unit is below its carrying amount as of March 31, 2023. There is approximately $2 billion of goodwill in this reporting unit as of March 31, 2023. The Company will continue to monitor its reporting units and related goodwill for any possible future non-cash impairment charges.
Note 3 — Accounting Changes
New Accounting Standard Adopted in Fiscal 2023
Debt and Derivatives and Hedging. Effective October 1, 2022, the Company adopted ASU 2020-06, “Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40).” The amendments in this ASU affect entities that issue convertible instruments and/or contracts indexed to and potentially settled in an entity’s own equity. This ASU reduces the number of accounting models for convertible debt instruments and convertible preferred stock, expands disclosure requirements for convertible instruments, and simplifies the
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Currency in millions, except per share amounts and where indicated otherwise)
related earnings per share guidance. We adopted this ASU using the modified retrospective transition method and applied the new guidance to applicable features of our Equity Units.Periods prior to October 1, 2022 have not been restated.
Upon adoption, we reclassified $6 from Common Stock to Preferred Stock associated with the previously separated equity-classified beneficial conversion feature, which was accounted for as a deemed dividend. The increase to Preferred Stock was partially offset by an increase of $1 to opening retained earnings for the previously recognized non-cash amortization of the beneficial conversion feature. The ASU 2020-06 also removes the presumption of cash settlement for contracts that may be settled in cash or shares. In accordance with the new guidance, we included the dilutive impact of the quarterly contract adjustment payment liability associated with the 2024 Purchase Contracts, which may be settled in cash or shares, in our computation of weighted average diluted common shares outstanding. The adoption of the new guidance did not, and is not expected to, have a material impact on our consolidated financial statements.
Note 4 — Revenue from Contracts with Customers
The Company recognizes revenue when control of promised goods or services is transferred to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. See Note 4 in the Company’s 2022 Annual Report for additional information on our revenues from contracts with customers.
Revenue Disaggregation
The following tables present our disaggregated revenues by reportable segment:
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Currency in millions, except per share amounts and where indicated otherwise)
Six Months Ended March 31, 2022
Total
Eliminations (a)
AmeriGas Propane
UGI International
Midstream & Marketing
Utilities
Corporate & Other
Revenues from contracts with customers:
Utility:
Core Market:
Residential
$
634
$
—
$
—
$
—
$
—
$
634
$
—
Commercial & Industrial
261
—
—
—
—
261
—
Large delivery service
97
—
—
—
—
97
—
Off-system sales and capacity releases
56
(62)
—
—
—
118
—
Other
12
(1)
—
—
—
13
—
Total Utility
1,060
(63)
—
—
—
1,123
—
Non-Utility:
LPG:
Retail
2,804
—
1,554
1,250
—
—
—
Wholesale
294
—
124
170
—
—
—
Energy Marketing
1,623
(136)
—
799
960
—
—
Midstream:
Pipeline
96
—
—
—
96
—
—
Peaking
29
(96)
—
—
125
—
—
Other
4
—
—
—
4
—
—
Electricity Generation
19
—
—
—
19
—
—
Other
149
—
112
37
—
—
—
Total Non-Utility
5,018
(232)
1,790
2,256
1,204
—
—
Total revenues from contracts with customers
6,078
(295)
1,790
2,256
1,204
1,123
—
Other revenues (b)
61
(2)
36
17
2
3
5
Total revenues
$
6,139
$
(297)
$
1,826
$
2,273
$
1,206
$
1,126
$
5
(a)Includes intersegment revenues principally among Midstream & Marketing, Utilities and AmeriGas Propane.
(b)Primarily represents revenues from tank rentals at AmeriGas Propane and UGI International, revenues from certain gathering assets at Midstream & Marketing, revenues from alternative revenue programs at UGI Utilities and gains and losses on commodity derivative instruments not associated with current-period transactions reflected in Corporate & Other, none of which are within the scope of ASC 606 and are accounted for in accordance with other GAAP.
(c)Includes the impact of the weather normalization adjustment rider, a five-year pilot program beginning on November 1, 2022 for PA Gas Utility. See Note 7 for additional information.
Contract Balances
The timing of revenue recognition may differ from the timing of invoicing to customers or cash receipts. Contract assets represent our right to consideration after the performance obligations have been satisfied when such right is conditioned on something other than the passage of time. Contract assets were not material for all periods presented. Substantially all of our receivables are unconditional rights to consideration and are included in “Accounts receivable” and, in the case of Utilities, “Accrued utility revenues” on the Condensed Consolidated Balance Sheets. Amounts billed are generally due within the following month.
Contract liabilities arise when payment from a customer is received before the performance obligations have been satisfied and represent the Company’s obligations to transfer goods or services to a customer for which we have received consideration. The balances of contract liabilities were $126, $164 and $100 at March 31, 2023, September 30, 2022 and March 31, 2022, respectively, and are included in “Other current liabilities” and “Other noncurrent liabilities” on the Condensed Consolidated
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Currency in millions, except per share amounts and where indicated otherwise)
Balance Sheets. Revenues recognized for the six months ended March 31, 2023 and 2022, from the amounts included in contract liabilities at September 30, 2022 and 2021, were $119 and $112, respectively.
Remaining Performance Obligations
The Company excludes disclosures related to the aggregate amount of the transaction price allocated to certain performance obligations that are unsatisfied as of the end of the reporting period because these contracts have an initial expected term of one year or less, or we have a right to bill the customer in an amount that corresponds directly with the value of services provided to the customer to date. Certain contracts with customers at Midstream & Marketing and Utilities contain minimum future performance obligations through 2047 and 2053, respectively. At March 31, 2023, Midstream & Marketing and Utilities expect to record approximately $2.2 billion and $0.2 billion of revenues, respectively, related to the minimum future performance obligations over the remaining terms of the related contracts.
Note 5 — Dispositions and Acquisition
UGI International Energy Marketing Businesses
Sale of U.K. Energy Marketing Business. On October 21, 2022, UGI International, through a wholly-owned subsidiary, sold its natural gas marketing business located in the U.K. for a net cash payment of $19 which includes certain working capital adjustments. In conjunction with the sale, during the first quarter of Fiscal 2023, the Company recorded a pre-tax loss of $215 ($151 after-tax) substantially all of which loss was due to the non-cash transfer of commodity derivative instruments associated with the business. At the date of closing of the sale, these commodity derivative instruments had a net carrying value of $206 which is attributable to net unrealized gains on such instruments. At September 30, 2022, these derivative instruments were classified as held for sale assets on the Condensed Consolidated Balance Sheet and a net carrying value of $276. The change in the carrying value of these derivative instruments between September 30, 2022 and October 21, 2022 resulted from changes in their fair values during that period.
Other UGI International Energy Marketing Businesses. In November 2022, the Company announced that it expected to sign a definitive agreement during the first quarter of Fiscal 2023 to sell its energy marketing business in France. In December 2022, the Company announced that it no longer expected to sign a definitive agreement during the first quarter of Fiscal 2023 as extended negotiations with the potential buyer had been discontinued. The Company continues to pursue the sale of its energy marketing business in France, as well as the wind-down of its energy marketing business located in Belgium and the Netherlands. At March 31, 2023, the sale of our energy marketing business in France was not considered probable of occurring within one year and, as such, assets and liabilities associated with this business were not classified as held for sale on the Condensed Consolidated Balance Sheet.
During the first quarter of Fiscal 2023, the Company recorded a $19 pre-tax impairment charge to reduce the carrying values of certain assets associated with its energy marketing business in the Netherlands, comprising property, plant and equipment and intangible assets. The impairment charge is reflected in “Operating and administrative expenses” on the Condensed Consolidated Statement of Income and included in the UGI International segment.
Acquisitions of Assets
Stonehenge. On January 27, 2022, UGI, through Energy Services, completed the Stonehenge Acquisition in which Energy Services acquired all of the equity interests in Stonehenge for total cash consideration of approximately $190. The Stonehenge business includes a natural gas gathering system, located in western Pennsylvania, with more than 47 miles of pipeline and associated compression assets. The Stonehenge Acquisition is consistent with our growth strategies, including expanding our midstream natural gas gathering assets within the Appalachian basin production region. The Stonehenge Acquisition was funded using available cash. This transaction has been accounted for as an acquisition of assets, and the purchase price has been primarily allocated to property, plant and equipment. We refer to Stonehenge and its assets as “UGI Moraine East.”
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Currency in millions, except per share amounts and where indicated otherwise)
Note 6 — Inventories
Inventories comprise the following:
March 31, 2023
September 30, 2022
March 31, 2022
Non-utility LPG and natural gas
$
230
$
335
$
253
Gas Utility natural gas
20
166
6
Energy certificates
76
70
63
Materials, supplies and other
107
94
76
Total inventories
$
433
$
665
$
398
Note 7 — Utility Regulatory Assets and Liabilities and Regulatory Matters
For a description of the Company’s regulatory assets and liabilities, other than those described below, see Note 9 in the Company’s 2022 Annual Report. Other than removal costs, Utilities currently does not recover a rate of return on its regulatory assets listed below. The following regulatory assets and liabilities associated with Utilities are included on the Condensed Consolidated Balance Sheets:
March 31, 2023
September 30, 2022
March 31, 2022
Regulatory assets (a):
Income taxes recoverable
$
94
$
83
$
148
Underfunded pension plans
118
114
104
Environmental costs
34
37
55
Deferred fuel and power costs
38
32
6
Removal costs, net
22
22
22
Other
53
52
49
Total regulatory assets
$
359
$
340
$
384
Regulatory liabilities (a):
Postretirement benefit overcollections
$
10
$
11
$
12
Deferred fuel and power refunds
28
3
17
State tax benefits — distribution system repairs
39
38
34
Excess federal deferred income taxes
262
279
283
Other
6
4
14
Total regulatory liabilities
$
345
$
335
$
360
(a)Current regulatory assets are included in “Prepaid expenses and other current assets” and regulatory liabilities are included in “Other current liabilities” and “Other noncurrent liabilities” on the Condensed Consolidated Balance Sheets.
Deferred fuel and power - costs and refunds. Utilities’ tariffs contain clauses that permit recovery of all prudently incurred purchased gas and power costs through the application of PGC rates, PGA rates and DS tariffs. These clauses provide for periodic adjustments to PGC, PGA and DS rates for differences between the total amount of purchased gas and electric generation supply costs collected from customers and recoverable costs incurred. Net undercollected costs are classified as a regulatory asset and net overcollections are classified as a regulatory liability.
The WVPSC, in an effort to mitigate the impact of WV Gas Utility’s 2022 PGA rate increase to customers, delayed the effective date in 2022 from November 1 to December 1 and deferred $12 of unrecovered gas costs in determining the rates to be charged to the various customer classes effective December 1, 2022. Additionally, in order to lower winter bills for residential customers, the WVPSC removed transportation and storage costs from the volumetric rate and created a fixed monthly pipeline demand charge applicable only to residential customers. On April 12, 2023, the WVPSC issued a final Order that increased the PGA rate, which included the unrecovered gas cost balance initially deferred in the interim order, and continued the fixed monthly demand charge for residential customers.
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Currency in millions, except per share amounts and where indicated otherwise)
PA Gas Utility uses derivative instruments to reduce volatility in the cost of gas it purchases for retail core-market customers. Realized and unrealized gains or losses on natural gas derivative instruments are included in deferred fuel and power costs or refunds. Net unrealized (losses) gains on such contracts at March 31, 2023, September 30, 2022 and March 31, 2022 were $(17), $5 and $21, respectively.
Other Regulatory Matters
UGI Utilities. On January 27, 2023, Electric Utility filed a request with the PAPUC to increase its annual base distribution revenues by $11. The increased revenues would fund ongoing system improvements and operations necessary to maintain safe and reliable electric service. Electric Utility requested that the new electric rates become effective March 28, 2023. The PAPUC issued an Order on March 2, 2023, suspending the effective date for the rate increase to allow for investigation and public hearings. Unless a settlement is reached sooner, this review process is expected to last up to nine months from the date of filing. The Company cannot predict the timing or the ultimate outcome of the rate case review process.
On January 28, 2022, PA Gas Utility filed a request with the PAPUC to increase its base operating revenues for residential, commercial and industrial customers by $83 annually. On September 15, 2022, the PAPUC issued a final order approving a settlement providing for a $49 annual base distribution rate increase for PA Gas Utility, through a phased approach, with $38 beginning October 29, 2022 and an additional $11 beginning October 1, 2023. In accordance with the terms of the final order, PA Gas Utility will not be permitted to file a rate case prior to January 1, 2024. Also in accordance with the terms of the final order, PA Gas Utility was authorized to implement a weather normalization adjustment rider as a five-year pilot program beginning on November 1, 2022. Under this rider, when weather deviates from normal by more than 3%, residential and small commercial customer billings for distribution services are adjusted monthly for weather related impacts exceeding the 3% threshold. Additionally, under the terms of the final order, PA Gas Utility was authorized to implement a DSIC once its total property, plant and equipment less accumulated depreciation reached $3,368 (which threshold was achieved in September 2022).
On February 8, 2021, Electric Utility filed a request with the PAPUC to increase its annual base distribution revenues by $9. On October 28, 2021, the PAPUC issued a final Order approving a settlement that permitted Electric Utility, effective November 9, 2021, to increase its base distribution revenues by $6.
Mountaineer. On March 6, 2023, Mountaineer submitted a base rate case filing with the WVPSC seeking a net revenue increase of $20, which consists of an increase in base rates of $38 and a decrease in the IREP rates of $18 annually to be effective on April 5, 2023. On March 31, 2023 the WVPSC suspended the effective date of the requested rate change increase until January 1, 2024 to allow for a full review of the filing.
On July 29, 2022, Mountaineer submitted its 2022 IREP filing to the WVPSC requesting recovery of costs associated with capital investments totaling $354 over the 2023 - 2027 period, including $64 in calendar year 2023. On November 16, 2022, Mountaineer and the intervening parties submitted a Joint Stipulation and Agreement for Settlement to the WVPSC requesting approval of 2023 IREP revenue of $22 to be charged effective January 1, 2023, which includes the recovery of a $1 under-recovery of 2021 IREP revenue. On December 21, 2022, the WVPSC issued an order approving the Joint Stipulation and Agreement for Settlement as filed.
Note 8 — Debt
AmeriGas Propane. Under the 2022 AmeriGas OLP Credit Agreement, AmeriGas OLP, as borrower, is required to comply with financial covenants related to leverage and interest coverage measured at the Partnership and at AmeriGas OLP. The 2022 AmeriGas OLP Credit Agreement contains an equity cure provision, which allows AmeriGas OLP’s direct or indirect parent, including UGI and its other subsidiaries, to fund capital contributions to eliminate any EBITDA (as defined in the 2022 AmeriGas OLP Credit Agreement) shortfalls that would otherwise result in non-compliance with these financial covenants. Each equity cure is eligible to eliminate such EBITDA shortfalls up to four quarters after contribution. We are permitted to use the equity cure provision five times over the course of the Credit Agreement, twice during any rolling four-quarter period, and not in consecutive quarters.
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Currency in millions, except per share amounts and where indicated otherwise)
As of March 31, 2023, AmeriGas OLP was in breach of the leverage ratio debt covenant and interest coverage ratio, which it cured with the funds received from UGI. UGI made capital contributions to AmeriGas OLP of $20 and $11 on March 31, 2023 and April 24, 2023, respectively, which in aggregate represented one equity cure in accordance with the 2022 AmeriGas OLP Credit Agreement. As a result of these capital contributions, AmeriGas OLP and the Partnership were in compliance with all financial covenants after consideration of the equity cure provision as of March 31, 2023.
UGI also provided an irrevocable letter of support, dated May 4, 2023, whereby UGI has committed to fund any such EBITDA shortfalls and debt service, if any. Based on the support and the projected EBITDA, AmeriGas OLP is expected to remain in compliance with its financial debt covenants for the succeeding twelve-month period.
UGI International 2023 Credit Facilities Agreement. On March 7, 2023, UGI International, LLC and its indirect wholly-owned subsidiary, UGI International Holdings B.V., entered into the UGI International 2023 Credit Facilities Agreement, a five-year unsecured senior facilities agreement, maturing March 7, 2028, with a consortium of banks. The UGI International 2023 Credit Facilities Agreement consists of (1) a €300 variable-rate term loan facility ("Facility A") and (2) a €500 multicurrency revolving credit facility, including a €100 sublimit for swingline loans ("Facility B"). We have designated borrowings under Facility A as a net investment hedge. In connection with the entering into of the UGI International 2023 Credit Facilities Agreement, UGI International, LLC paid off in full and terminated the UGI International Credit Facilities Agreement, dated as of October 18, 2018. The net proceeds from the UGI International 2023 Credit Facilities Agreement were used to refinance the UGI International Credit Facilities Agreement. Borrowings under the multicurrency revolving credit facility may be used to finance the working capital needs of UGI International, LLC and its subsidiaries and for general corporate purposes.
Borrowings under Facility A bear interest at the euro interbank offered rate plus the applicable margin and borrowings under Facility B bear interest at the daily non-cumulative compounded Reference Rate Terms, as defined in the Agreement plus the applicable margin. The applicable margin for Facility A ranges from 1.70% to 3.35%, and for Facility B from 1.35% to 3.35%, and are dependent on the total net leverage ratio of UGI International, LLC and its subsidiaries on a consolidated basis. UGI International, LLC entered into an interest rate swap, effective March 31, 2023, that fixes the underlying market-based interest rate on Facility A at 3.10% through March 2026.
The UGI International 2023 Credit Facilities Agreement requires UGI International, LLC to maintain a consolidated net leverage ratio of not more than 3.85 to 1.00, provided the maximum ratio permitted may be increased to 4.25 to 1.00 for two consecutive testing dates following a permitted acquisition.
Energy Services Amended Term Loan Credit Agreement. On February 23, 2023, Energy Services entered into the Energy Services Amended Term Loan Credit Agreement, the first amendment to the Energy Services Term Loan Credit Agreement, dated August 13, 2019. The Energy Services Amended Term Loan Credit Agreement provides, among other items, that (i) the outstanding principal amount of the loans will be increased by $125 to $800, (ii) the maturity date of the loans shall be extended to February 22, 2030, (iii) Term SOFR (as defined in the Energy Services Amended Term Loan Credit Agreement) shall replace LIBOR as a reference rate and (iv) borrowings under the Energy Services Term Loan Credit Agreement shall bear interest at a floating rate of, at Energy Services’ option, either (x) Term SOFR plus the applicable margin plus a credit spread adjustment of 0.10% or (y) the base rate, as defined in the Agreement, plus the applicable margin. The applicable margin shall be 3.25% per annum for Term SOFR loans and 2.25% per annum for base rate loans. Borrowings under the Energy Services Amended Term Loan Credit Agreement are payable in equal quarterly installments of $2, commencing in March 2023, with the balance of the principal being due and payable in full at maturity.
The Energy Services Amended Term Loan Credit Agreement contains customary covenants and default provisions and requires compliance with certain financial covenants including a minimum debt service coverage ratio as defined in the Agreement.
On March 1, 2023, in connection with the Energy Services Amended Term Loan Credit Agreement, Energy Services terminated and settled its existing interest rate swap derivative instrument associated with the Energy Services Term Loan Credit Agreement at a $32 gain. In accordance with GAAP, this gain has been deferred in AOCI and will be amortized to interest expense over the remaining term of the initial interest rate swap. Energy Services entered into a new interest rate swap, effective March 31, 2023, that fixes the underlying market-based interest rate on this variable-rate term loan at 4.53% through September 2026.
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Currency in millions, except per share amounts and where indicated otherwise)
UGI Utilities Credit Agreement. On December 13, 2022, UGI Utilities entered into an amendment to the UGI Utilities Credit Agreement, providing for borrowings up to $425 and to replace the use of LIBOR with SOFR. Borrowings under the amended UGI Utilities Credit Agreement can be used to finance the working capital needs of UGI Utilities and for general corporate purposes. The UGI Utilities Credit Agreement is scheduled to expire June 2024.
Borrowings under the amended UGI Utilities Credit Agreement bear interest, subject to our election, at a floating rate of either (i) Term SOFR plus the applicable margin plus a credit spread adjustment of 0.10% or (ii) the base rate plus the applicable margin. The applicable margin remains unchanged from the original credit agreement.
Mountaineer Credit Agreement. On October 20, 2022, Mountaineer entered into the Mountaineer 2023 Credit Agreement, with a group of lenders. The Mountaineer 2023 Credit Agreement amends and restates a previous credit agreement and provides for borrowings up to $150, including a $20 sublimit for letters of credit. Mountaineer may request an increase in the amount of loan commitments to a maximum aggregate amount of $250, subject to certain terms and conditions. Borrowings under the Mountaineer 2023 Credit Agreement can be used to finance the working capital needs of Mountaineer and for general corporate purposes. The Mountaineer 2023 Credit Agreement is scheduled to expire in November 2024, with an option to extend the maturity date.
Borrowings under the Mountaineer 2023 Credit Agreement bear interest, subject to our election, at either (i) the base rate, defined as the highest of (a) the prime rate, (b) the federal funds rate plus 0.50% and (c) the adjusted term SOFR rate for a one-month tenor plus 1%, in each case, plus the applicable margin or (ii) the adjusted term SOFR rate plus the applicable margin. The applicable margin for base rate loans ranges from 0% to 1.25%, and for SOFR loans from 1.00% to 2.25%, depending on the debt rating of Mountaineer. The adjusted term SOFR rate is defined as the term SOFR reference rate for the selected interest period, plus 0.10% per annum for a one-month interest period, 0.15% per annum for a three-month interest period, or 0.25% per annum for a six-month interest period. The Mountaineer Credit Agreement contains customary covenants and default provisions and requires compliance with certain financial covenants including a maximum leverage ratio and a minimum interest coverage ratio as defined in the agreement.
Note 9 — Commitments and Contingencies
Environmental Matters
UGI Utilities
From the late 1800s through the mid-1900s, UGI Utilities and its former subsidiaries owned and operated a number of MGPs prior to the general availability of natural gas. Some constituents of coal tars and other residues of the manufactured gas process are today considered hazardous substances under the Superfund Law and may be present on the sites of former MGPs. Between 1882 and 1953, UGI Utilities owned the stock of subsidiary gas companies in Pennsylvania and elsewhere and also operated the businesses of some gas companies under agreement. By the early 1950s, UGI Utilities divested all of its utility operations other than certain gas and electric operations. Beginning in 2006 and 2008, UGI Utilities also owned and operated two acquired subsidiaries, with similar histories of owning, and in some cases operating, MGPs in Pennsylvania.
UGI Utilities is subject to a COA with the PADEP to address the remediation of specified former MGP sites in Pennsylvania, which is scheduled to terminate at the end of 2031. In accordance with the COA, UGI Utilities is required to either obtain a certain number of points per calendar year based on defined eligible environmental investigatory and/or remedial activities at the MGPs, or make expenditures for such activities in an amount equal to an annual environmental minimum expenditure threshold. The annual minimum expenditure threshold of the COA is $5. The COA permits the transfer of the specified wells, with related costs counted towards the annual minimum expenditure. At March 31, 2023, September 30, 2022 and March 31, 2022, our aggregate estimated accrued liabilities for environmental investigation and remediation costs related to the current COA and the predecessor agreements totaled $52, $53 and $49, respectively.
We do not expect the costs for investigation and remediation of hazardous substances at Pennsylvania MGP sites to be material to UGI Utilities’ results of operations because UGI Utilities receives ratemaking recovery of actual environmental investigation and remediation costs associated with the sites covered by the COA. This ratemaking recognition reconciles the accumulated difference between historical costs and rate recoveries with an estimate of future costs associated with the sites. As such, UGI
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Currency in millions, except per share amounts and where indicated otherwise)
Utilities has recorded an associated regulatory asset for these costs because recovery of these costs from customers is probable (see Note 7).
From time to time, UGI Utilities is notified of sites outside Pennsylvania on which private parties allege MGPs were formerly owned or operated by UGI Utilities or owned or operated by a former subsidiary. Such parties generally investigate the extent of environmental contamination or perform environmental remediation. Management believes that under applicable law, UGI Utilities should not be liable in those instances in which a former subsidiary owned or operated an MGP. There could be, however, significant future costs of an uncertain amount associated with environmental damage caused by MGPs outside Pennsylvania that UGI Utilities directly operated, or that were owned or operated by a former subsidiary of UGI Utilities if a court were to conclude that (1) the subsidiary’s separate corporate form should be disregarded, or (2) UGI Utilities should be considered to have been an operator because of its conduct with respect to its subsidiary’s MGP. Neither the undiscounted nor the accrued liability for environmental investigation and cleanup costs for UGI Utilities’ MGP sites outside Pennsylvania were material for all periods presented.
AmeriGas Propane
AmeriGas OLP Saranac Lake. In 2008, the NYDEC notified AmeriGas OLP that the NYDEC had placed property purportedly owned by AmeriGas OLP in Saranac Lake, New York on the New York State Registry of Inactive Hazardous Waste Disposal Sites. A site characterization study performed by the NYDEC disclosed contamination related to a former MGP. AmeriGas OLP responded to the NYDEC in 2009 to dispute the contention it was a PRP as it did not operate the MGP and appeared to only own a portion of the site. In 2017, the NYDEC communicated to AmeriGas OLP that the NYDEC had previously issued three RODs related to remediation of the site totaling approximately $28 and requested additional information regarding AmeriGas OLP’s purported ownership. AmeriGas OLP renewed its challenge to designation as a PRP and identified potential defenses. The NYDEC subsequently identified a third party PRP with respect to the site.
The NYDEC commenced implementation of the remediation plan in the spring of 2018. Based on our evaluation of the available information as of March 31, 2023, the Partnership has an undiscounted environmental remediation liability of $8 related to the site. Our share of the actual remediation costs could be significantly more or less than the accrued amount.
In addition to the matters described above, there are other pending claims and legal actions arising in the normal course of our businesses. Although we cannot predict the final results of these pending claims and legal actions, including those described above, we believe, after consultation with counsel, that the final outcome of these matters will not have a material effect on our financial statements.
Other Matters
West Reading, Pennsylvania Explosion. On March 24, 2023, an explosion occurred in West Reading, Pennsylvania which resulted in seven fatalities, significant injuries to eleven others, and extensive property damage. The NTSB, OSHA and the PAPUC are investigating the West Reading incident. The NTSB investigative team includes representatives from the Company, the PAPUC, the local Fire Department and the Pipeline and Hazardous Materials Safety Administration. The Company is cooperating with the investigation. The NTSB may invite other parties to participate.
While the investigation into this incident is still underway and the cause of the explosion has not been determined, the Company has received claims as a result of the explosion and is involved in lawsuits relative to the incident. The Company maintains liability insurance for personal injury, property and casualty damages and believes that third-party claims associated with the explosion, in excess of the Company’s deductible, are recoverable through the Company’s insurance. The Company cannot predict the result of these pending or future claims and legal actions at this time.
Note 10 — Defined Benefit Pension and Other Postretirement Plans
The Company maintains defined benefit pension plans and other postretirement plans for certain current and former employees. The service cost component of our pension and other postretirement plans, net of amounts capitalized, is reflected in “Operating and administrative expenses” on the Condensed Consolidated Statements of Income. The non-service cost components, net of
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Currency in millions, except per share amounts and where indicated otherwise)
amounts capitalized by Utilities as a regulatory asset, are reflected in “Other non-operating income (expense), net” on the Condensed Consolidated Statements of Income. Other postretirement benefit cost was not material for all periods presented.
Net periodic pension cost includes the following components:
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Currency in millions, except per share amounts and where indicated otherwise)
Note 11 — Fair Value Measurements
Recurring Fair Value Measurements
The following table presents, on a gross basis, our financial assets and liabilities, including both current and noncurrent portions, that are measured at fair value on a recurring basis within the fair value hierarchy:
(a)Consists primarily of mutual fund investments held in grantor trusts associated with non-qualified supplemental retirement plans.
(b)Includes derivative assets and liabilities held-for-sale associated with the October 2022 sale of the U.K. energy marketing business (see Note 5).
The fair values of our Level 1 exchange-traded commodity futures and option contracts and non-exchange-traded commodity futures and forward contracts are based upon actively quoted market prices for identical assets and liabilities. Substantially all
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Currency in millions, except per share amounts and where indicated otherwise)
of the remaining derivative instruments are designated as Level 2. The fair values of certain non-exchange-traded commodity derivatives designated as Level 2 are based upon indicative price quotations available through brokers, industry price publications or recent market transactions and related market indicators. The fair values of our Level 2 interest rate contracts and foreign currency contracts are based upon third-party quotes or indicative values based on recent market transactions. The fair values of our Level 3 natural gas commodity contracts at September 30, 2022 attributable to our UGI International operations have been determined using unobservable inputs in an illiquid market and ranged from $7 to $27 given the available inputs considered. The actual realized value at which these contracts will settle could vary significantly compared to the fair values reflected at September 30, 2022. The fair values of investments held in grantor trusts are derived from quoted market prices as substantially all of the investments in these trusts have active markets.
Other Financial Instruments
The carrying amounts of other financial instruments included in current assets and current liabilities (except for current maturities of long-term debt) approximate their fair values because of their short-term nature. We estimate the fair value of long-term debt by using current market rates and by discounting future cash flows using rates available for similar type debt (Level 2). The carrying amounts and estimated fair values of our long-term debt (including current maturities but excluding unamortized debt issuance costs) were as follows:
March 31, 2023
September 30, 2022
March 31, 2022
Carrying amount
$
6,805
$
6,665
$
6,559
Estimated fair value
$
6,480
$
6,189
$
6,543
Financial instruments other than derivative instruments, such as short-term investments and trade accounts receivable, could expose us to concentrations of credit risk. We limit credit risk from short-term investments by investing only in investment-grade commercial paper, money market mutual funds, securities guaranteed by the U.S. Government or its agencies and FDIC insured bank deposits. The credit risk arising from concentrations of trade accounts receivable is limited because we have a large customer base that extends across many different U.S. markets and a number of foreign countries. For information regarding concentrations of credit risk associated with our derivative instruments, see Note 12.
Note 12 — Derivative Instruments and Hedging Activities
We are exposed to certain market risks related to our ongoing business operations. Management uses derivative financial and commodity instruments, among other things, to manage: (1) commodity price risk; (2) interest rate risk; and (3) foreign currency exchange rate risk. Although we use derivative financial and commodity instruments to reduce market risk associated with forecasted transactions, we do not use derivative financial and commodity instruments for speculative or trading purposes. The use of derivative instruments is controlled by our risk management and credit policies, which govern, among other things, the derivative instruments we can use, counterparty credit limits and contract authorization limits. Although our commodity derivative instruments extend over a number of years, a significant portion of our commodity derivative instruments economically hedge commodity price risk during the next twelve months. For information on the accounting for our derivative instruments, see Note 2.
The following summarizes the types of derivative instruments used by the Company to manage certain market risks:
Commodity Price Risk
Regulated Utility Operations
Natural Gas
PA Gas Utility’s tariffs contain clauses that permit recovery of all prudently incurred costs of natural gas it sells to retail core-market customers, including the cost of financial instruments used to hedge purchased gas costs. As permitted and agreed to by the PAPUC pursuant to PA Gas Utility’s annual PGC filings, PA Gas Utility currently uses NYMEX natural gas futures and option contracts to reduce commodity price volatility associated with a portion of the natural gas it purchases for its retail core-market customers. See Note 7 for further information on the regulatory accounting treatment for these derivative instruments.
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Currency in millions, except per share amounts and where indicated otherwise)
Non-utility Operations
LPG
In order to manage market price risk associated with the Partnership’s fixed-price programs and to reduce the effects of short-term commodity price volatility, the Partnership uses over-the-counter derivative commodity instruments, principally price swap contracts. In addition, the Partnership and our UGI International operations also use over-the-counter price swap and option contracts to reduce commodity price volatility associated with a portion of their forecasted LPG purchases.
Natural Gas
In order to manage market price risk relating to fixed-price sales contracts for physical natural gas, Midstream & Marketing enters into NYMEX and over-the-counter natural gas futures and over-the-counter and ICE natural gas basis swap contracts. In addition, Midstream & Marketing uses NYMEX and over-the-counter futures and options contracts to economically hedge price volatility associated with the gross margin derived from the purchase and anticipated later near-term sale of natural gas storage inventories. Outside of the financial market, Midstream & Marketing also uses ICE and over-the-counter forward physical contracts. UGI International also uses natural gas futures and forward contracts to economically hedge market price risk associated with a substantial portion of anticipated volumes under fixed-price sales contracts with its customers.
Electricity
In order to manage market price risk relating to fixed-price sales contracts for electricity, Midstream & Marketing enters into electricity futures and forward contracts. Midstream & Marketing also uses NYMEX and over-the-counter electricity futures contracts to economically hedge the price of a portion of its anticipated future sales of electricity from its electric generation facilities. UGI International also uses electricity futures and forward contracts to economically hedge market price risk associated with fixed-price sales and purchase contracts for electricity.
Interest Rate Risk
Certain of our long-term debt agreements have interest rates that are generally indexed to short-term market interest rates. In order to fix the underlying short-term market interest rates, we may enter into pay-fixed, receive-variable interest rate swap agreements and designate such swaps as cash flow hedges.
The remainder of our long-term debt is typically issued at fixed rates of interest. As this long-term debt matures, we typically refinance such debt with new debt having interest rates reflecting then-current market conditions. In order to reduce market rate risk on the underlying benchmark rate of interest associated with near- to medium-term forecasted issuances of fixed-rate debt, from time to time, we enter into IRPAs. We account for IRPAs as cash flow hedges. There were no unsettled IRPAs during any of the periods presented. At March 31, 2023, the amount of pre-tax net gains associated with interest rate hedges expected to be reclassified into earnings during the next twelve months is $39.
Foreign Currency Exchange Rate Risk
Forward Foreign Currency Exchange Contracts
In order to reduce the volatility in net income associated with our foreign operations, principally as a result of changes in the USD exchange rate to the euro and British pound sterling, we enter into forward foreign currency exchange contracts. We layer in these foreign currency exchange contracts over multi-year periods to eventually equal approximately 90% of anticipated UGI International foreign currency earnings before income taxes. Because these contracts are not designated as hedging instruments, realized and unrealized gains and losses on these contracts are recorded in “Other non-operating income (expense), net,” on the Condensed Consolidated Statements of Income.
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Currency in millions, except per share amounts and where indicated otherwise)
Net Investment Hedges
From time to time, we also enter into certain forward foreign currency exchange contracts to reduce the volatility of the USD value of a portion of our UGI International euro-denominated net investments, including anticipated foreign currency denominated dividends. We account for these foreign currency exchange contracts as net investment hedges and all changes in the fair value of these contracts are reported in the cumulative translation adjustment component in AOCI. We use the spot rate method to measure ineffectiveness of our net investment hedges.
Concurrent with the repayment of UGI International’s 3.25% Senior Notes on December 7, 2021, we settled an associated net investment hedge having a notional value of €93. Additionally, in May 2022, we restructured certain net investment hedges associated with anticipated foreign currency denominated dividends. Cash flows from these settlements are included in cash flows from investing activities on the Condensed Consolidated Statements of Cash Flows.
Our euro-denominated long-term debt has also been designated as net investment hedges, representing a portion of our UGI International euro-denominated net investment. We recognized pre-tax (losses) gains associated with these net investment hedges in the cumulative translation adjustment component in AOCI of $(9) and $21 during the three months ended March 31, 2023 and 2022, respectively, and $(73) and $34 during the six months ended March 31, 2023 and 2022, respectively.
Quantitative Disclosures Related to Derivative Instruments
The following table summarizes by derivative type the gross notional amounts related to open derivative contracts at March 31, 2023, September 30, 2022 and March 31, 2022, and the final settlement dates of the Company's open derivative contracts as of March 31, 2023, but excluding those derivatives that qualified for the NPNS exception:
Notional Amounts (in millions)
Type
Units
Settlements Extending Through
March 31, 2023
September 30, 2022
March 31, 2022
Commodity Price Risk:
Regulated Utility Operations
PA Gas Utility NYMEX natural gas futures and option contracts
Dekatherms
February 2024
12
19
11
Non-utility Operations
LPG swaps
Gallons
September 2025
691
874
622
Natural gas futures, forward, basis swap, options and pipeline contracts (a)
Dekatherms
October 2027
366
363
346
Electricity forward and futures contracts
Kilowatt hours
December 2026
1,890
2,446
3,098
Interest Rate Risk:
Interest rate swaps
Euro
March 2026
€
300
€
300
€
300
Interest rate swaps
USD
September 2026
$
1,277
$
1,358
$
1,414
Foreign Currency Exchange Rate Risk:
Forward foreign currency exchange contracts
USD
August 2025
$
285
$
465
$
274
Net investment hedge forward foreign exchange contracts
Euro
December 2026
€
331
€
411
€
486
(a)September 30, 2022 includes amounts held-for-sale associated with the October 2022 sale of the U.K. energy marketing business (see Note 5).
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Currency in millions, except per share amounts and where indicated otherwise)
Derivative Instrument Credit Risk
We are exposed to risk of loss in the event of nonperformance by our derivative instrument counterparties. Our derivative instrument counterparties principally comprise large energy companies and major U.S. and international financial institutions. We maintain credit policies with regard to our counterparties that we believe reduce overall credit risk. These policies include evaluating and monitoring our counterparties’ financial condition, including their credit ratings, and entering into agreements with counterparties that govern credit limits or entering into netting agreements that allow for offsetting counterparty receivable and payable balances for certain financial transactions, as deemed appropriate.
We have concentrations of credit risk associated with derivative instruments and we evaluate the creditworthiness of our derivative counterparties on an ongoing basis. As of March 31, 2023, the maximum amount of loss, based upon the gross fair values of the derivative instruments, we would incur if these counterparties failed to perform according to the terms of their contracts was $422. In general, many of our over-the-counter derivative instruments and all exchange contracts call for the posting of collateral by the counterparty or by the Company in the forms of letters of credit, parental guarantees or cash. At March 31, 2023, we had received cash collateral from derivative instrument counterparties totaling $55. In addition, we may have offsetting derivative liabilities and certain accounts payable balances with certain of these counterparties, which further mitigates the previously mentioned maximum amount of losses. Certain of the Partnership’s derivative contracts have credit-risk-related contingent features that may require the posting of additional collateral in the event of a downgrade of the Partnership’s debt rating. At March 31, 2023, if the credit-risk-related contingent features were triggered, the amount of collateral required to be posted would not be material.
Offsetting Derivative Assets and Liabilities
Derivative assets and liabilities are presented net by counterparty on the Condensed Consolidated Balance Sheets if the right of offset exists. We offset amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral against amounts recognized for derivative instruments executed with the same counterparty. Our derivative instruments include both those that are executed on an exchange through brokers and centrally cleared and over-the-counter transactions. Exchange contracts utilize a financial intermediary, exchange or clearinghouse to enter, execute or clear the transactions. Over-the-counter contracts are bilateral contracts that are transacted directly with a third party. Certain over-the-counter and exchange contracts contain contractual rights of offset through master netting arrangements, derivative clearing agreements and contract default provisions. In addition, the contracts are subject to conditional rights of offset through counterparty nonperformance, insolvency or other conditions.
In general, many of our over-the-counter transactions and all exchange contracts are subject to collateral requirements. Types of collateral generally include cash or letters of credit. Cash collateral paid by us to our over-the-counter derivative counterparties, if any, is reflected in the table below to offset derivative liabilities. Cash collateral received by us from our over-the-counter derivative counterparties, if any, is reflected in the table below to offset derivative assets. Certain other accounts receivable and accounts payable balances recognized on the Condensed Consolidated Balance Sheets with our derivative counterparties are not included in the table below but could reduce our net exposure to such counterparties because such balances are subject to master netting or similar arrangements.
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Currency in millions, except per share amounts and where indicated otherwise)
Fair Value of Derivative Instruments
The following table presents the Company’s derivative assets and liabilities by type, as well as the effects of offsetting:
March 31, 2023
September 30, 2022
March 31, 2022
Derivative assets:
Derivatives designated as hedging instruments:
Foreign currency contracts
$
9
$
57
$
18
Interest rate contracts
25
66
31
34
123
49
Derivatives subject to PGC and DS mechanisms:
Commodity contracts
19
31
38
Derivatives not designated as hedging instruments:
Commodity contracts (a)
355
2,202
1,931
Foreign currency contracts
14
62
17
369
2,264
1,948
Total derivative assets — gross
422
2,418
2,035
Gross amounts offset in the balance sheet
(190)
(295)
(215)
Cash collateral received
(55)
(398)
(603)
Total derivative assets — net
$
177
$
1,725
$
1,217
Derivative liabilities:
Derivatives designated as hedging instruments:
Interest rate contracts
(21)
—
(1)
Derivatives subject to PGC and DS mechanisms:
Commodity contracts
(36)
(26)
(17)
Derivatives not designated as hedging instruments:
Commodity contracts (a)
(396)
(487)
(304)
Foreign currency contracts
(4)
(2)
(2)
(400)
(489)
(306)
Total derivative liabilities — gross
(457)
(515)
(324)
Gross amounts offset in the balance sheet
190
295
215
Cash collateral pledged
102
7
—
Total derivative liabilities — net
$
(165)
$
(213)
$
(109)
(a)September 30, 2022 includes derivative assets and liabilities held-for-sale associated with the October 2022 sale of the U.K. energy marketing business (see Note 5).
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Currency in millions, except per share amounts and where indicated otherwise)
Effects of Derivative Instruments
The following tables provide information on the effects of derivative instruments on the Condensed Consolidated Statements of Income and changes in AOCI:
Three Months Ended March 31,:
Gain (Loss) Recognized in AOCI
Gain (Loss) Reclassified from AOCI into Income
Location of Gain (Loss) Reclassified from AOCI into Income
Cash Flow Hedges:
2023
2022
2023
2022
Interest rate contracts
$
(21)
$
36
$
7
$
(7)
Interest expense
Net Investment Hedges:
Foreign currency contracts
$
(1)
$
11
Gain (Loss) Recognized in Income
Derivatives Not Designated as Hedging Instruments:
2023
2022
Location of Gain (Loss) Recognized in Income
Commodity contracts
$
6
$
(7)
Revenues
Commodity contracts
(343)
599
Cost of sales
Commodity contracts
2
—
Other operating income, net
Foreign currency contracts
(2)
7
Other non-operating income (expense), net
Total
$
(337)
$
599
Six Months Ended March 31,:
Gain (Loss) Recognized in AOCI
Gain (Loss) Reclassified from AOCI into Income
Location of Gain (Loss) Reclassified from AOCI into Income
Cash Flow Hedges:
2023
2022
2023
2022
Interest rate contracts
$
(17)
$
48
$
14
$
(13)
Interest expense
Net Investment Hedges:
Foreign currency contracts
$
(24)
$
11
Gain (Loss) Recognized in Income
Derivatives Not Designated as Hedging Instruments:
2023
2022
Location of Gain (Loss) Recognized in Income
Commodity contracts
$
10
$
1
Revenues
Commodity contracts
(1,669)
326
Cost of sales
Commodity contracts
5
—
Other operating income, net
Foreign currency contracts
(34)
15
Other non-operating income (expense), net
Total
$
(1,688)
$
342
We are also a party to a number of other contracts that have elements of a derivative instrument. However, these contracts qualify for NPNS exception accounting because they provide for the delivery of products or services in quantities that are expected to be used in the normal course of operating our business and the price in the contract is based on an underlying that is directly associated with the price of the product or service being purchased or sold. These contracts include, among others, binding purchase orders, contracts that provide for the purchase and delivery, or sale, of energy products, and service contracts that require the counterparty to provide commodity storage, transportation or capacity service to meet our normal sales commitments.
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Currency in millions, except per share amounts and where indicated otherwise)
Note 13 — Accumulated Other Comprehensive Income (Loss)
The tables below present changes in AOCI, net of tax:
Three Months Ended March 31, 2023
Postretirement Benefit Plans
Derivative Instruments
Foreign Currency
Total
AOCI — December 31, 2022
$
14
$
35
$
(280)
$
(231)
Other comprehensive (loss) income before reclassification adjustments
—
(15)
10
(5)
Amounts reclassified from AOCI
—
(5)
—
(5)
Other comprehensive (loss) income attributable to UGI
—
(20)
10
(10)
AOCI — March 31, 2023
$
14
$
15
$
(270)
$
(241)
Three Months Ended March 31, 2022
Postretirement Benefit Plans
Derivative Instruments
Foreign Currency
Total
AOCI — December 31, 2021
$
(15)
$
(19)
$
(122)
$
(156)
Other comprehensive income (loss) before reclassification adjustments
—
24
(53)
(29)
Amounts reclassified from AOCI
1
6
—
7
Other comprehensive income (loss) attributable to UGI
1
30
(53)
(22)
AOCI — March 31, 2022
$
(14)
$
11
$
(175)
$
(178)
Six Months Ended March 31, 2023
Postretirement Benefit Plans
Derivative Instruments
Foreign Currency
Total
AOCI — September 30, 2022
$
14
$
37
$
(431)
$
(380)
Other comprehensive (loss) income before reclassification adjustments
—
(12)
161
149
Amounts reclassified from AOCI
—
(10)
—
(10)
Other comprehensive (loss) income attributable to UGI
—
(22)
161
139
AOCI — March 31, 2023
$
14
$
15
$
(270)
$
(241)
Six Months Ended March 31, 2022
Postretirement Benefit Plans
Derivative Instruments
Foreign Currency
Total
AOCI — September 30, 2021
$
(17)
$
(33)
$
(90)
$
(140)
Other comprehensive income (loss) before reclassification adjustments
—
34
(85)
(51)
Amounts reclassified from AOCI
3
10
—
13
Other comprehensive income (loss) attributable to UGI
3
44
(85)
(38)
AOCI — March 31, 2022
$
(14)
$
11
$
(175)
$
(178)
Note 14 — Segment Information
Our operations comprise four reportable segments generally based upon products or services sold, geographic location and regulatory environment: (1) AmeriGas Propane; (2) UGI International; (3) Midstream & Marketing; and (4) Utilities.
Corporate & Other includes certain items that are excluded from our CODM’s assessment of segment performance (see below for further details on these items). Corporate & Other also includes the net expenses of UGI’s captive general liability insurance company, UGI’s corporate headquarters facility and UGI’s unallocated corporate and general expenses as well as interest
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Currency in millions, except per share amounts and where indicated otherwise)
expense on UGI debt that is not allocated. Corporate & Other assets principally comprise cash and cash equivalents of UGI and its captive insurance company, and UGI corporate headquarters’ assets. The accounting policies of our reportable segments are the same as those described in Note 2, “Summary of Significant Accounting Policies,” in the Company’s 2022 Annual Report.
Three Months Ended March 31, 2023
Total
Eliminations
AmeriGas Propane
UGI International
Midstream & Marketing
Utilities
Corporate & Other (a)
Revenues from external customers
$
3,106
$
—
$
867
$
948
$
540
$
746
$
5
Intersegment revenues
$
—
$
(128)
(b)
$
—
$
—
$
98
$
28
$
2
Cost of sales
$
2,148
$
(126)
(b)
$
430
$
633
$
479
$
426
$
306
Operating income (loss)
$
255
$
(1)
$
138
$
120
$
103
$
203
$
(308)
(Loss) income from equity investees
—
—
—
(2)
2
—
—
Other non-operating income (expense), net
2
—
—
10
—
2
(10)
Earnings (loss) before interest expense and income taxes
257
(1)
138
128
105
205
(318)
Interest expense
(93)
—
(39)
(9)
(11)
(21)
(13)
Income (loss) before income taxes
$
164
$
(1)
$
99
$
119
$
94
$
184
$
(331)
Depreciation and amortization
$
132
$
—
$
45
$
28
$
22
$
37
$
—
Capital expenditures (including the effects of accruals)
$
214
$
—
$
28
$
30
$
23
$
133
$
—
Three Months Ended March 31, 2022
Total
Eliminations
AmeriGas Propane
UGI International
Midstream & Marketing
Utilities
Corporate & Other (a)
Revenues from external customers
$
3,466
$
—
$
1,048
$
1,224
$
533
$
667
$
(6)
Intersegment revenues
$
—
$
(179)
(b)
$
—
$
—
$
138
$
40
$
1
Cost of sales
$
1,470
$
(178)
(b)
$
545
$
930
$
540
$
380
$
(747)
Operating income
$
1,332
$
—
$
227
$
111
$
85
$
191
$
718
Income from equity investees
5
—
—
—
5
—
—
Other non-operating income (expense), net
11
—
—
9
—
3
(1)
Earnings before interest expense and income taxes
1,348
—
227
120
90
194
717
Interest expense
(82)
—
(38)
(8)
(10)
(16)
(10)
Income before income taxes
$
1,266
$
—
$
189
$
112
$
80
$
178
$
707
Depreciation and amortization
$
128
$
—
$
44
$
29
$
18
$
36
$
1
Capital expenditures (including the effects of accruals)
$
170
$
—
$
36
$
23
$
10
$
101
$
—
Six Months Ended March 31, 2023
Total
Eliminations
AmeriGas Propane
UGI International
Midstream & Marketing
Utilities
Corporate & Other (a)
Revenues from external customers
$
5,865
$
—
$
1,633
$
1,825
$
1,094
$
1,305
$
8
Intersegment revenues
$
—
$
(277)
(b)
$
—
$
—
$
213
$
61
$
3
Cost of sales
$
5,254
$
(275)
(b)
$
816
$
1,295
$
993
$
755
$
1,670
Operating (loss) income
$
(949)
$
—
$
248
$
176
$
209
$
329
$
(1,911)
Income (loss) from equity investees
1
—
—
(2)
3
—
—
Other non-operating (loss) income, net
(26)
—
—
20
—
4
(50)
(Loss) earnings before interest expense and income taxes
(974)
—
248
194
212
333
(1,961)
Interest expense
(185)
—
(82)
(16)
(22)
(42)
(23)
(Loss) income before income taxes
$
(1,159)
$
—
$
166
$
178
$
190
$
291
$
(1,984)
Depreciation and amortization
$
263
$
—
$
89
$
56
$
43
$
74
$
1
Capital expenditures (including the effects of accruals)
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Currency in millions, except per share amounts and where indicated otherwise)
Six Months Ended March 31, 2022
Total
Eliminations
AmeriGas Propane
UGI International
Midstream & Marketing
Utilities
Corporate & Other (a)
Revenues from external customers
$
6,139
$
—
$
1,826
$
2,273
$
974
$
1,063
$
3
Intersegment revenues
$
—
$
(297)
(b)
$
—
$
—
$
232
$
63
$
2
Cost of sales
$
3,590
$
(295)
(b)
$
963
$
1,723
$
953
$
580
$
(334)
Operating income
$
1,264
$
—
$
313
$
189
$
159
$
287
$
316
Income from equity investees
13
—
—
—
13
—
—
Loss on extinguishments of debt
(11)
—
—
—
—
—
(11)
Other non-operating income, net
21
—
—
13
—
5
3
Earnings before interest expense and income taxes
1,287
—
313
202
172
292
308
Interest expense
(163)
—
(79)
(15)
(20)
(32)
(17)
Income before income taxes
$
1,124
$
—
$
234
$
187
$
152
$
260
$
291
Depreciation and amortization
$
257
$
—
$
88
$
60
$
37
$
71
$
1
Capital expenditures (including the effects of accruals)
$
345
$
—
$
71
$
46
$
16
$
212
$
—
As of March 31, 2022
Total assets
$
17,777
$
(163)
$
4,563
$
4,905
$
3,195
$
5,106
$
171
(a)Corporate & Other includes specific items attributable to our reportable segments that are not included in the segment profit measures used by our CODM in assessing our reportable segments’ performance or allocating resources. The following table presents such pre-tax gains (losses) which have been included in Corporate & Other, and the reportable segments to which they relate:
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
Information contained in this Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements use forward-looking words such as “believe,” “plan,” “anticipate,” “continue,” “estimate,” “expect,” “may,” or other similar words and terms of similar meaning, although not all forward-looking statements contain such words. These statements discuss plans, strategies, events or developments that we expect or anticipate will or may occur in the future. All forward-looking statements made in this Quarterly Report on Form 10-Q rely upon the safe harbor protections provided under the Private Securities Litigation Reform Act of 1995.
A forward-looking statement may include a statement of the assumptions or bases underlying the forward-looking statement. We believe that we have chosen these assumptions or bases in good faith and that they are reasonable. However, we caution you against relying on any forward-looking statement as these statements are subject to risks and uncertainties that may cause actual results to vary from assumed facts or bases, and the differences between actual results and assumed facts or bases can be material, depending on the circumstances. When considering forward-looking statements, you should keep in mind those factors set forth in Item 1A. Risk Factors in this report and in the Company’s 2022 Annual Report and the Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2022 as well as the following important factors that could affect our future results and could cause those results to differ materially from those expressed in our forward-looking statements: (1) weather conditions, including increasingly uncertain weather patterns due to climate change, resulting in reduced demand, the seasonal nature of our business, and disruptions in our operations and supply chain; (2) cost volatility and availability of energy products, including propane and other LPG, electricity, and natural gas, as well as the availability of LPG cylinders, and the capacity to transport product to our customers; (3) changes in domestic and foreign laws and regulations, including safety, health, tax, transportation, consumer protection, data privacy, accounting, and environmental matters, such as regulatory responses to climate change; (4) inability to timely recover costs through utility rate proceedings; (5) the impact of pending and future legal or regulatory proceedings, inquiries or investigations; (6) competitive pressures from the same and alternative energy sources; (7) failure to acquire new customers or retain current customers thereby reducing or limiting any increase in revenues; (8) liability for environmental claims; (9) increased customer conservation measures due to high energy prices and improvements in energy efficiency and technology resulting in reduced demand; (10) adverse labor relations and our ability to address existing or potential workforce shortages; (11) customer, counterparty, supplier, or vendor defaults; (12) liability for uninsured claims and for claims in excess of insurance coverage, including those for personal injury and property damage arising from explosions, acts of war, terrorism, natural disasters, pandemics, and other catastrophic events that may result from operating hazards and risks incidental to generating and distributing electricity and transporting, storing and distributing natural gas and LPG in all forms; (13) transmission or distribution system service interruptions; (14) political, regulatory and economic conditions in the United States, Europe and other foreign countries, including uncertainties related to the war between Russia and Ukraine, the European energy crisis, and foreign currency exchange rate fluctuations, particularly the euro; (15) credit and capital market conditions, including reduced access to capital markets and interest rate fluctuations; (16) changes in commodity market prices resulting in significantly higher cash collateral requirements; (17) impacts of our indebtedness and the restrictive covenants in our debt agreements; (18) reduced distributions from subsidiaries impacting the ability to pay dividends or service debt; (19) changes in Marcellus and Utica Shale gas production; (20) the availability, timing and success of our acquisitions, commercial initiatives and investments to grow our businesses; (21) our ability to successfully integrate acquired businesses and achieve anticipated synergies; (22) the interruption, disruption, failure, malfunction, or breach of our information technology systems, and those of our third-party vendors or service providers, including due to cyber attack; (23) the inability to complete pending or future energy infrastructure projects; (24) our ability to achieve the operational benefits and cost efficiencies expected from the completion of pending and future business transformation initiatives, including the impact of customer service disruptions resulting in potential customer loss due to the transformation activities; (25) our ability to attract, develop, retain and engage key employees; (26) uncertainties related to a global pandemic, including the duration and/or impact of the COVID-19 pandemic; (27) the impact of proposed or future tax legislation; (28) the impact of declines in the stock market or bond market, and a low interest rate environment, on our pension liability; (29) our ability to protect our intellectual property; and (30) our ability to overcome supply chain issues that may result in delays or shortages in, as well as increased costs of, equipment, materials or other resources that are critical to our business operations.
These factors, and those factors set forth in Item 1A. Risk Factors in this report and those factors set forth in Item 1A. Risk Factors in the Company’s 2022 Annual Report and the Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2022, are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors could also have material adverse effects on future results. Any forward-looking statement speaks only as of the date on which such statement is made. We undertake no obligation (and expressly disclaim any obligation) to update publicly any forward-looking statement whether as a result of new information or future events except as required by the federal securities laws.
The following analyses compare the Company’s results of operations for the 2023 three-month period with the 2022 three-month period and the 2023 six-month period with the 2022 six-month period. Our analysis of results of operations should be read in conjunction with the segment information included in Note 14 to Condensed Consolidated Financial Statements.
Because most of our businesses sell or distribute energy products used in large part for heating purposes, our results are significantly influenced by temperatures in our service territories, particularly during the heating-season months of October through March. As a result, our operating results, excluding the effects of gains and losses on derivative instruments not associated with current-period transactions as further discussed below, are significantly higher in our first and second fiscal quarters.
Non-GAAP Financial Measures
UGI management uses “adjusted net income attributable to UGI Corporation” and “adjusted diluted earnings per share,” both of which are non-GAAP financial measures, when evaluating UGI’s overall performance. Management believes that these non-GAAP measures provide meaningful information to investors about UGI’s performance because they eliminate gains and losses on commodity and certain foreign currency derivative instruments not associated with current-period transactions and other significant discrete items that can affect the comparison of period-over-period results.
UGI does not designate its commodity and certain foreign currency derivative instruments as hedges under GAAP. Volatility in net income (loss) attributable to UGI Corporation can occur as a result of gains and losses on such derivative instruments not associated with current-period transactions. These gains and losses result principally from recording changes in unrealized gains and losses on unsettled commodity and certain foreign currency derivative instruments and, to a much lesser extent, certain realized gains and losses on settled commodity derivative instruments that are not associated with current-period transactions. However, because these derivative instruments economically hedge anticipated future purchases or sales of energy commodities, or in the case of certain foreign currency derivatives reduce volatility in anticipated future earnings associated with our foreign operations, we expect that such gains or losses will be largely offset by gains or losses on anticipated future energy commodity transactions or mitigate volatility in anticipated future earnings. Non-GAAP financial measures are not in accordance with, or an alternative to, GAAP and should be considered in addition to, and not as a substitute for, the comparable GAAP measures.
The following tables reflect the adjustments referred to above and reconcile net income (loss) attributable to UGI Corporation, the most directly comparable GAAP measure, to adjusted net income attributable to UGI Corporation, and reconcile diluted earnings (loss) per share, the most directly comparable GAAP measure, to adjusted diluted earnings per share:
Adjusted net income attributable to UGI Corporation
Three Months Ended March 31,
Six Months Ended March 31,
(Dollars in millions)
2023
2022
2023
2022
AmeriGas Propane
$
73
$
138
$
122
$
172
UGI International
92
89
137
146
Midstream & Marketing
66
58
143
109
Utilities
143
134
224
197
Corporate & Other (a)
(264)
514
(1,470)
212
Net income (loss) attributable to UGI Corporation
110
933
(844)
836
Net losses (gains) on commodity derivative instruments not associated with current-period transactions (net of tax of $(66), $204, $(429) and $93, respectively)
235
(535)
1,234
(243)
Unrealized losses (gains) on foreign currency derivative instruments (net of tax of $(3), $(1), $(14), and $1, respectively)
7
—
36
(4)
Loss on extinguishments of debt (net of tax of $0, $0, $0 and $(3), respectively)
—
—
—
8
Acquisition and integration expenses associated with the Mountaineer Acquisition (net of tax of $0, $0, $0 and $0, respectively)
—
—
—
1
Business transformation expenses (net of tax of $0, $0, $(1) and $(1), respectively)
AmeriGas operations enhancement for growth project (net of tax of $(1), $0, $(3) and $0, respectively)
5
—
10
—
Restructuring costs (net of tax of $0, $(5), $0 and $(5), respectively)
—
13
—
13
Loss on disposal of U.K. energy marketing business (net of tax of $0, $0, $(64) and $0, respectively)
—
—
151
—
Impairment of assets (net of tax of $4, $0, $0, and $0, respectively)
4
—
19
—
Total adjustments (a) (b)
253
(520)
1,453
(222)
Adjusted net income attributable to UGI Corporation
$
363
$
413
$
609
$
614
Three Months Ended March 31,
Six Months Ended March 31,
Adjusted diluted earnings per share
2023
2022
2023
2022
AmeriGas Propane
$
0.34
$
0.64
$
0.56
$
0.80
UGI International
0.43
0.41
0.64
0.68
Midstream & Marketing
0.31
0.26
0.66
0.50
Utilities
0.66
0.62
1.04
0.91
Corporate & Other (a)
(1.23)
2.39
(6.92)
0.98
Income (loss) per share - diluted (c)
0.51
4.32
(4.02)
3.87
Net losses (gains) on commodity derivative instruments not associated with current-period transactions (c)
1.09
(2.48)
5.80
(1.11)
Unrealized losses (gains) on foreign currency derivative instruments
0.03
—
0.17
(0.02)
Loss on extinguishments of debt
—
—
—
0.03
Acquisition and integration expenses associated with the Mountaineer Acquisition
—
—
—
—
Business transformation expenses
0.01
0.01
0.01
0.01
AmeriGas operations enhancement for growth project
0.02
—
0.05
—
Restructuring costs
—
0.06
—
0.06
Loss on disposal of U.K. energy marketing business
—
—
0.72
—
Impairment of assets
0.02
—
0.09
—
Total adjustments (a)
1.17
(2.41)
6.84
(1.03)
Adjusted earnings per share - diluted (c)
$
1.68
$
1.91
$
2.82
$
2.84
(a)Corporate & Other includes certain adjustments made to our reporting segments in arriving at net income (loss) attributable to UGI Corporation. These adjustments have been excluded from the segment results to align with the measure used by our CODM in assessing segment performance and allocating resources. See Note 14 to Condensed Consolidated Financial Statements for additional information related to these adjustments, as well as other items included within Corporate & Other.
(b)Income taxes associated with pre-tax adjustments determined using statutory business unit tax rates.
(c)The loss per share for the six months ended March 31, 2023, was determined excluding the effect of 6.35 million dilutive shares, as the impact of such shares would have been antidilutive to the net loss for the period.Adjusted earnings per share for the six months ended March 31, 2023, was determined based upon fully dilutive shares of 216.25 million.
EXECUTIVE OVERVIEW
Recent Developments
European Energy Marketing Business.
Sale of U.K. Energy Marketing Business. On October 21, 2022, UGI International, through a wholly-owned subsidiary, sold its natural gas marketing business located in the U.K. for a net cash payment of $19 million which includes certain working
capital adjustments. In conjunction with the sale, during the first quarter of Fiscal 2023, the Company recorded a pre-tax loss of $215 million ($151 million after-tax) substantially all of which loss was due to the non-cash transfer of commodity derivative instruments associated with the business. At the date of closing of the sale, these commodity derivative instruments had a net carrying value of $206 million which is attributable to net unrealized gains on such instruments. At September 30, 2022, these derivative instruments had a net carrying value of $276 million. The change in the carrying amount of these derivative instruments between September 30, 2022 and October 21, 2022 resulted from changes in their fair value during that period.
Other UGI International Energy Marketing Businesses. In November 2022, the Company announced that it expected to sign a definitive agreement during the first quarter of Fiscal 2023 to sell its energy marketing business in France. In December 2022, the Company announced that it no longer expected to sign a definitive agreement during the first quarter of Fiscal 2023 as extended negotiations with the potential buyer had been discontinued. The Company continues to pursue the sale of its energy marketing business in France, as well as the wind-down of its energy marketing business located in Belgium and the Netherlands. At March 31, 2023, the sale of our energy marketing business in France was not considered probable of occurring within one year and, as such, assets and liabilities associated with this business were not classified as held for sale on the Condensed Consolidated Balance Sheet.
During the first quarter of Fiscal 2023, the Company recorded a $19 million pre-tax impairment charge to reduce the carrying values of certain assets associated with its energy marketing business in the Netherlands, comprising property, plant and equipment and intangible assets.
Global Macroeconomic Conditions. Beginning in Fiscal 2021 and continuing into Fiscal 2023, global commodity and labor markets have experienced significant inflationary pressures attributable to various economic and political factors, including, among others: the economic recovery and evolving consumer patterns associated with the COVID-19 pandemic; supply chain issues including those associated with labor shortages; significant increases and volatility in energy commodity prices; and political and regulatory conditions resulting from the war between Russia and Ukraine. These factors have contributed to inflationary pressures as evidenced by recent increases in various consumer price indices. In response to these inflationary pressures, central banks in the U.S. and Europe began increasing interest rates during Fiscal 2022. In addition, during the last several years, we have experienced significant volatility in energy commodity prices, particularly in LPG, natural gas and electricity prices, which have resulted in substantial fluctuations in the fair values of our commodity derivative instruments. These inflationary pressures and commodity price fluctuations have resulted in, among other things, increases in inventory and certain operating and distribution expenses across all of our businesses. Commodity price fluctuations have also significantly affected the cash collateral deposit requirements of our derivative instrument counterparties and the restricted cash required to be held in our derivative broker and clearing institution accounts. We cannot predict the duration or total magnitude of these conditions and the effects such conditions may have on our future business, financial results, financial position, and liquidity and cash flows. However, we continue to monitor and respond to these global economic and political conditions and remain focused on managing our financial condition and liquidity as these conditions continue to evolve.
2023 three-month period compared with 2022 three-month period
Discussion. Net income attributable to UGI Corporation for the 2023 three-month period was $110 million (equal to $0.51 per diluted share) compared to $933 million (equal to $4.32 per diluted share) for the 2022 three-month period. These results include net (losses) gains from changes in unrealized commodity derivative instruments and certain foreign currency derivative instruments of $(242) million and $535 million during the 2023 and 2022 three-month periods, respectively. The higher losses from changes in commodity derivative instruments during the 2023 three-month period principally reflects significant declines in commodity energy prices in Europe following unprecedented increases in such prices during Fiscal 2022.
Net income attributable to UGI Corporation during the 2023 three-month period also includes (1) external advisory fees of $5 million associated with AmeriGas operations enhancement for growth project; (2) an impairment of assets of $4 million; and (3) business transformation expenses of $2 million associated with Corporate support functions.
Net income attributable to UGI Corporation during the 2022 three-month period also includes (1) restructuring costs of $13 million largely attributable to a reduction in workforce and related costs; and (2) business transformation expenses of $2 million associated with Corporate support functions.
Adjusted net income attributable to UGI Corporation for the 2023 three-month period was $363 million (equal to $1.68 per diluted share) compared to $413 million (equal to $1.91 per diluted share) for the 2022 three-month period. The decrease in adjusted net income attributable to UGI Corporation during the 2023 three-month period reflects a lower earnings contribution from the AmeriGas Propane business, partially offset by higher earnings contributions from our Midstream & Marketing,
Utilities and UGI International business segments. Temperatures in all our domestic and UGI International business segments during the 2023 three-month period were warmer than the prior-year period.
AmeriGas Propane’s adjusted net income attributable to UGI Corporation decreased $65 million in the 2023 three-month period. This decrease principally reflects lower retail propane margin primarily attributable to lower volumes sold and higher operating and administrative expenses primarily attributable to higher distribution-related expenses and other personnel-related expenses including the effects of continuing inflationary pressures. The effects of these items were partially offset by the benefit of slightly higher average retail propane unit margins in the 2023 three-month period.
UGI International’s adjusted net income attributable to UGI Corporation increased $3 million in the 2023 three-month period notwithstanding lower retail LPG gallons sold principally reflecting higher average retail LPG unit margin and higher total margin from our energy marketing business. This increase was partially offset by slightly higher operating and administrative expenses including inflationary increases.
Midstream & Marketing’s adjusted net income attributable to UGI Corporation increased $8 million in the 2023 three-month period primarily attributable to higher total margin from natural gas marketing activities and natural gas gathering activities reflecting in large part the Fiscal 2022 acquisitions of UGI Moraine East and Pennant. The higher margin was partially offset by higher operating expense and depreciation expense due in part to these Fiscal 2022 acquisitions.
Utilities’ adjusted net income attributable to UGI Corporation increased $9 million in the 2023 three-month period compared to the prior-year period. The increase was largely attributable to the increase in base rates and the implementation of the weather normalization adjustment at PA Gas Utility, both of which became effective during the first quarter of Fiscal 2023. The increase in margin was partially offset by higher operating expenses including higher uncollectible accounts expense and higher contractor costs.
2023 six-month period compared with 2022 six-month period
Discussion. Net loss attributable to UGI Corporation for the 2023 six-month period was $844 million (equal to $4.02 per diluted share) compared to net income attributable to UGI Corporation of $836 million (equal to $3.87 per diluted share) for the 2022 six-month period. These results include net (losses) gains from changes in unrealized commodity derivative instruments and certain foreign currency derivative instruments of $(1,270) million and $247 million during the 2023 and 2022 six-month periods, respectively. The higher losses from changes in commodity derivative instruments during the 2023 six-month period, principally reflects significant declines in commodity energy prices in Europe following unprecedented increases in such prices during Fiscal 2022.
Net loss attributable to UGI Corporation during the 2023 six-month period also includes (1) a $151 million loss on the sale of our energy marketing business in the U.K., principally reflecting the impact of the transfer of derivative hedge contracts; (2) an impairment of assets of $19 million; (3) external advisory fees of $10 million associated with AmeriGas operations enhancement for growth project; and (4) business transformation expenses of $3 million associated with Corporate support functions.
Net income attributable to UGI Corporation during the 2022 six-month period also includes (1) restructuring costs of $13 million largely attributable to a reduction in workforce and related costs; (2) business transformation expenses of $3 million associated with Corporate support functions; (3) acquisition and integration expenses of $1 million associated with Mountaineer; and (4) loss on extinguishment of debt of $8 million at UGI International.
Adjusted net income attributable to UGI Corporation for the 2023 six-month period was $609 million (equal to $2.82 per diluted share) compared to $614 million (equal to $2.84 per diluted share) for the 2022 six-month period. The slight decrease in adjusted net income attributable to UGI Corporation for the 2023 six-month period reflects lower earnings contributions from our AmeriGas Propane and UGI International business segments substantially offset by higher earnings contributions from our Midstream & Marketing and Utilities business segments. Temperatures in all of our business units were warmer than normal and, except for our AmeriGas Propane segment, warmer than the prior-year six-month period.
AmeriGas Propane’s adjusted net income attributable to UGI Corporation decreased $50 million in the 2023 six-month period. This decrease principally reflects the effects of lower retail propane gallons sold and higher operating and administrative expenses reflecting, among other things, higher distribution-related expenses and other personnel-related expenses including the effects of continuing inflationary pressures. The effects of these items on adjusted net income were partially offset by the benefit of higher average retail propane unit margins in the 2023 six-month period.
UGI International’s adjusted net income attributable to UGI Corporation decreased $9 million in the 2023 six-month period. The 2023 six-month period results reflect the impacts of weaker foreign currencies. UGI International operating results reflect lower total margin principally due to the weaker foreign currencies and lower LPG retail volumes attributable to the warmer weather and lower residential LPG consumption resulting from energy conservation measures in Europe due in large part to the war between Ukraine and Russia. These decreases were partially offset by higher margin from natural gas energy marketing activities and higher retail LPG average unit margins. The lower total margin was partially offset by lower operating and administrative expenses which reflect the translation effects of weaker foreign currencies partially offset by inflationary increases.
Midstream & Marketing’s adjusted net income attributable to UGI Corporation increased $34 million in the 2023 six-month period. The increase in adjusted net income is primarily attributable to higher margins related to natural gas marketing activities and incremental contributions from UGI Moraine East and Pennant.
Utilities’ adjusted net income attributable to UGI Corporation increased $27 million in the 2023 six-month period. The increase was largely related to the increase in base rates and the implementation of the weather normalization adjustment at PA Gas Utility, both of which became effective during the first quarter of Fiscal 2023. The increase in total margin was partially offset by higher operating and administrative expenses.
SEGMENT RESULTS OF OPERATIONS
2023 Three-Month Period Compared with the 2022 Three-Month Period
AmeriGas Propane
For the three months ended March 31,
2023
2022
Increase (Decrease)
(Dollars in millions)
Revenues
$
867
$
1,048
$
(181)
(17)
%
Total margin (a)
$
437
$
503
$
(66)
(13)
%
Operating and administrative expenses
$
263
$
240
$
23
10
%
Operating income/earnings before interest expense and income taxes
$
138
$
227
$
(89)
(39)
%
Retail gallons sold (millions)
279
329
(50)
(15)
%
Heating degree days—% (warmer) colder than normal (b)
(4.8)
%
2.9
%
—
—
(a)Total margin represents total revenues less total cost of sales.
(b)Deviation from average heating degree days is determined on a rolling 10-year period utilizing volume-weighted weather data based on weather statistics provided by NOAA for 344 regions in the United States, excluding Alaska and Hawaii.
Average temperatures during the 2023 three-month period were 4.8% warmer than normal and 6.8% warmer than the prior-year period. Total retail gallons sold decreased 15% during the 2023 three-month period due to the warmer weather, the effects of driver staffing shortages (which also limited growth), continuing customer attrition and structural conservation.
Average daily wholesale propane commodity prices during the 2023 three-month period at Mont Belvieu, Texas, one of the major supply points in the U.S., were approximately 37% lower than such prices during the 2022 three-month period. Total revenues decreased $181 million during the 2023 three-month period largely reflecting lower retail propane revenues ($153 million) primarily on the lower retail volumes sold ($138 million) and, to a much lesser extent, the effects of lower average retail propane selling prices ($15 million), and lower wholesale revenues ($23 million).
Total cost of sales decreased $115 million during the 2023 three-month period largely reflecting the lower average retail propane volumes sold ($70 million), the lower retail propane product costs ($19 million) and lower wholesale cost of sales ($22 million). Total margin decreased $66 million in the 2023 three-month period largely attributable to the lower retail propane volumes sold ($69 million), partially offset by slightly higher average retail unit margins ($4 million).
Operating income and earnings before interest expense and income taxes decreased $89 million during the 2023 three-month period primarily reflecting the decrease in total margin and higher operating and administrative expenses ($23 million) compared to the prior-year period. The increase in operating and administrative expenses reflects, among other things, higher salaries and benefits expenses, higher overtime and other employee-related costs associated with distribution activity and higher vehicle expenses.
(a)Total margin represents revenues less cost of sales.
(b)Deviation from average heating degree days is determined on a rolling 10-year period utilizing volume-weighted weather data at locations in our UGI International service territories.
Average temperatures during the 2023 three-month period were 7.0% warmer than normal and 1.6% warmer than the prior-year period. Total LPG retail gallons sold during the 2023 three-month period were 10% lower than the prior-year period largely attributable to lower consumption, principally from residential customers, primarily resulting from the European conservation measures due in large part to high global energy prices and the war between Russia and Ukraine, lower cylinder volumes and warmer weather.
UGI International base-currency results are translated into USD based upon exchange rates experienced during the reporting periods. The functional currency of a significant portion of our UGI International results is the euro and, to a much lesser extent, the British pound sterling. During the 2023 and 2022 three-month periods, the average unweighted euro-to-dollar translation rates were approximately $1.07 and $1.12, respectively, and the average unweighted British pound sterling-to-dollar translation rates were approximately $1.22 and $1.34, respectively. Fluctuations in these foreign currency exchange rates can have a significant impact on the individual financial statement components discussed below. The Company uses forward foreign currency exchange contracts entered into over multi-year periods to reduce the volatility in earnings that may result from such changes in foreign currency exchange rates in earnings. These forward foreign currency exchange contracts resulted in realized net gains of $8 million and $6 million in the 2023 and 2022 three-month periods, respectively.
UGI International revenues and cost of sales decreased $276 million and $297 million, respectively, during the 2023 three-month period compared to the prior-year period. Average wholesale prices for propane and butane during the 2023 three-month period in northwest Europe were approximately 18% and 24% lower, respectively, compared with the prior-year period. The decrease in revenues and cost of sales principally reflects the impact from lower retail volumes sold and the translation effects of the weaker foreign currencies (approximately $54 million and $38 million, respectively) partially offset by price increases.
UGI International total margin increased $21 million during the 2023 three-month period primarily reflecting higher total margins from our natural gas energy marketing business and higher average unit margins from our LPG business attributable to strong margin management efforts. These increases in total margin were partially offset by lower LPG retail volumes and the translation effects of weaker foreign currencies (approximately $14 million).
UGI International operating income and earnings before interest expense and income taxes increased $9 million and $8 million, respectively, during the 2023 three-month period compared to the prior-year period. The increase in operating income principally reflects the previously mentioned increase in total margin, partially offset by higher operating and administrative expenses ($9 million). The higher operating and administrative expenses during the 2023 three-month period primarily reflects inflationary effects on distribution activities and personnel-related costs, partially offset by the translation effects of the weaker foreign currencies ($8 million). The increase in earnings before interest expense and income taxes in the 2023 three-month period largely reflects the increase in operating income.
(a)Total margin represents revenues less cost of sales.
Average temperatures across Midstream & Marketing’s energy marketing territory during the 2023 three-month period were 18% warmer than normal and 17% warmer than the prior-year period.
Midstream & Marketing revenues decreased $33 million during the 2023 three-month period compared to the prior-period, primarily reflecting lower revenues from natural gas marketing activities ($45 million), including the effects of peaking and capacity management activities, that were impacted by lower volumes from the warmer weather and lower natural gas prices, partially offset by higher natural gas gathering and processing activities ($16 million), primarily due to the prior year acquisition of UGI Moraine East and Pennant.
Midstream & Marketing cost of sales decreased $61 million during the 2023 three-month period compared to the prior-year period, largely driven by the lower natural gas costs related to the previously mentioned natural gas marketing activities ($56 million).
Midstream & Marketing total margin increased $28 million during the 2023 three-month period largely reflecting higher margins from natural gas marketing activities ($11 million), including the effects of peaking and capacity management activities, and incremental natural gas gathering and processing activities ($16 million), primarily from the prior year acquisitions of UGI Moraine East and Pennant.
Midstream & Marketing operating income and earnings before interest expense and income taxes during the 2023 three-month period increased $18 million and $15 million, respectively, compared to the prior-year period. The increase in operating income is largely attributable to the previously mentioned increase in total margin, partially offset by higher operating and administrative expense ($5 million) and depreciation and amortization expenses ($4 million). The increase in earnings before interest expense and income taxes principally reflects the increase in operating income, partially offset by lower income from equity method investments following the acquisition of the remaining 53% ownership interest in Pennant during the fourth quarter of Fiscal 2022.
Natural gas heating degree days—% (warmer) than normal (b)
(19.7)
%
(3.4)
%
—
—
(a)Total margin represents revenues less cost of sales and revenue-related taxes (i.e., gross receipts and business and occupation taxes) of $10 million for each of the 2023 and 2022 three-month periods. For financial statement purposes, revenue-related taxes are included in “Operating and administrative expenses” on the Condensed Consolidated Statements of Income (but are excluded from operating and administrative expenses presented above).
(b)Deviation from average heating degree days is determined on a 10-year period utilizing volume-weighted weather data based on weather statistics provided by NOAA for airports located within Gas Utility’s service territories.
Temperatures in Gas Utility’s service territories during the 2023 three-month period were 19.7% warmer than normal and 17.0% warmer than the prior-year period. The decrease in Gas Utility core market volumes during the 2023 three-month period is largely related to the significantly warmer weather partially offset by growth in the core market customers. The decrease in Electric Utility distribution sales volumes is primarily attributable to warmer weather during the current-year period.
Utilities revenues increased $67 million in the 2023 three-month period reflecting a $63 million increase in Gas Utility revenues and a $4 million increase in Electric Utility revenues. The increase in Gas Utility revenues is principally the result of higher PGC and PGA rates reflecting higher natural gas costs, the effects of the increase in base rates and weather normalization adjustments for PA Gas Utility that went into effect during the first quarter of Fiscal 2023, and higher other revenues. These increases were partially offset by the lower core market volumes on the warmer weather. The increase in Electric Utility revenues during the 2023 three-month period was primarily driven by higher DS rates reflecting higher power costs.
Utilities cost of sales increased $46 million compared to the prior-year period. The increase in Gas Utility cost of sales ($42 million) during the 2023 three-month period mainly reflects higher PGC and PGA rates and higher other cost of sales. Electric Utility cost of sales increased $4 million during the 2023 three-month period largely reflecting the higher DS rates compared to the prior-year period.
Utilities total margin increased $21 million during the 2023 three-month period largely reflecting higher Gas Utility total margin ($23 million), mainly reflecting the effects of the increase in base rates and weather normalization adjustments for PA Gas Utility that went into effect during the first quarter of Fiscal 2023, partially offset by the effects on core market volumes of the warmer weather. Electric Utility margin was comparable to the prior-year period.
Utilities operating income and earnings before interest expense and income taxes increased $12 million and $11 million, respectively, during the 2023 three-month period. These increases largely reflect the previously mentioned increase in total margin partially offset by higher operating and administrative expenses ($6 million) compared to the prior-year period. The higher operating and administrative expenses reflects, among other things, higher uncollectible accounts expenses and contract labor costs.
Interest Expense and Income Taxes
Our consolidated interest expense during the 2023 three-month period was $93 million compared to $82 million during the 2022 three-month period. This increase largely reflects higher credit agreement interest rates and borrowings and higher long-term debt outstanding principally at UGI Utilities.
The increase in the Company’s effective income tax rate for the 2023 three-month period reflects in large part the effects on the estimated annual effective tax rate from a greater concentration of pretax income in higher tax rate jurisdictions resulting from losses on derivative instruments and adjustments to deferred tax valuation allowances.
The Company continues to evaluate the elections available under current regulations and pending legislation. Accordingly, the impacts on the Company’s income tax provisions and taxes payable or refundable related to these items are subject to change.
2023 Six-Month Period Compared with the 2022 Six-Month Period
AmeriGas Propane
For the six months ended March 31,
2023
2022
Increase (Decrease)
(Dollars in millions)
Revenues
$
1,633
$
1,826
$
(193)
(11)
%
Total margin (a)
$
817
$
863
$
(46)
(5)
%
Operating and administrative expenses
$
498
$
480
$
18
4
%
Operating income/earnings before interest expense and income taxes
$
248
$
313
$
(65)
(21)
%
Retail gallons sold (millions)
515
570
(55)
(10)
%
Heating degree days—% (warmer) than normal (b)
(0.4)
%
(2.7)
%
—
—
(a)Total margin represents total revenues less total cost of sales.
(b)Deviation from average heating degree days is determined on a rolling 10-year period utilizing volume-weighted weather data based on weather statistics provided by NOAA for 344 regions in the U.S., excluding Alaska and Hawaii.
Average temperatures during the 2023 six-month period were 0.4% warmer than normal and 2.9% colder than the prior-year period. Total retail gallons sold decreased 10% during the 2023 six-month period due to the effects of driver staffing shortages (which also limited growth), continuing customer attrition and structural conservation.
Average daily wholesale propane commodity prices during the 2023 six-month period at Mont Belvieu, Texas, one of the major supply points in the U.S., were approximately 37% lower than such prices during the 2022 six-month period. Total revenues decreased $193 million during the 2023 six-month period largely reflecting lower retail propane revenues ($165 million) primarily on the lower retail volumes sold ($150 million) and, to a much lesser extent, lower average retail propane selling prices ($15 million), and lower wholesale revenues ($28 million).
Total cost of sales decreased $147 million during the 2023 six-month period largely reflecting the lower average retail propane volumes sold ($77 million), the lower retail propane product costs ($42 million) and lower wholesale cost of sales ($25 million). Total margin decreased $46 million in the 2023 six-month period largely attributable to the lower retail propane volumes sold ($73 million), partially offset by higher average retail propane unit margins ($27 million).
Operating income and earnings before interest expense and income taxes each decreased $65 million during the 2023 six-month period primarily reflecting the previously mentioned decrease in total margin and higher operating and administrative expenses ($18 million). The increase in operating and administrative expenses reflects, among other things, the higher overtime and other employee-related costs associated with distribution activity, higher vehicle expenses and higher uncollectible accounts expenses, partially offset by lower salaries and benefits expenses, including the carryover impact from the workforce reductions made during Fiscal 2022.
(a)Total margin represents revenues less cost of sales.
(b)Deviation from average heating degree days is determined on a rolling 10-year period utilizing volume-weighted weather data at locations in our UGI International service territories.
Average temperatures during the 2023 six-month period were 9.2% warmer than normal and 9.5% warmer than the prior-year period. Total LPG retail gallons sold during the 2023 six-month period were 14% lower than the prior-year period largely attributable to significantly warmer weather, lower consumption, principally from residential customers, primarily resulting from the European conservation measures due in large part to high global energy prices and the war between Russia and Ukraine and reduced crop drying campaigns.
UGI International base-currency results are translated into USD based upon exchange rates experienced during the reporting periods. The functional currency of a significant portion of our UGI International results is the euro and, to a much lesser extent, the British pound sterling. During the 2023 and 2022 six-month periods, the average unweighted euro-to-USD translation rates were approximately $1.05 and $1.13, respectively, and the average unweighted British pound sterling-to-USD translation rates were approximately $1.19 and $1.35, respectively. Fluctuations in these foreign currency exchange rates can have a significant impact on the individual financial statement components discussed below. The Company uses forward foreign currency exchange contracts entered into over multi-year periods to reduce the volatility in earnings that may result from such changes in foreign currency exchange rates in earnings. These forward foreign currency exchange contracts resulted in realized net gains of $16 million and $10 million in the 2023 and 2022 six-month periods, respectively.
UGI International revenues and cost of sales decreased $448 million and $428 million, respectively, during the 2023 six-month period compared to the prior-year period. Average wholesale prices for propane and butane during the 2023 six-month period in northwest Europe were approximately 17% and 16% lower, respectively, compared with the prior-year period. The decrease in revenues and cost of sales principally reflects the impact from lower retail volumes sold and the translation effects of the weaker foreign currencies (approximately $163 million and $118 million, respectively) partially offset by price increases.
UGI International total margin decreased $20 million during the 2023 six-month period primarily reflecting the effects of the lower LPG retail volumes sold and the translation effects of the weaker foreign currencies (approximately $42 million). These factors were partially offset by higher average unit margins from our LPG business attributable to strong margin management efforts. Total margin from energy marketing activities were higher during the 2023 six-month period, as higher total margin from natural gas marketing activities was partially offset by lower total margin from electricity marketing activities.
UGI International operating income and earnings before interest expense and income taxes decreased $13 million and $8 million, respectively, during the 2023 six-month period. The decrease in operating income principally reflects the previously mentioned $20 million decrease in total margin and lower gains associated with sales of assets ($11 million), partially offset by lower operating and administrative expenses ($9 million), higher foreign currency transaction gains ($10 million) and lower depreciation and amortization expenses ($4 million). The lower operating and administrative expenses in the 2023 six-month period primarily reflects the translation effects of the weaker foreign currencies, partially offset by inflationary effects on distribution and personnel-related costs. The decrease in earnings before interest expense and income taxes in the 2023 six-month period largely reflects the $13 million decrease in operating income partially offset by higher realized gains on foreign currency exchange contracts entered into in order to reduce volatility in UGI International earnings resulting from the effects of changes in foreign currency exchange rates ($6 million).
(a)Total margin represents revenues less cost of sales.
Average temperatures across Midstream & Marketing’s energy marketing territory during the 2023 six-month period were 12% warmer than normal and 6% warmer than the prior-year period.
Midstream & Marketing revenues increased $101 million compared to the prior-year period, principally reflecting higher revenues from natural gas and power marketing activities ($70 million), including the effects of peaking and capacity management activities, that were impacted by higher natural gas prices during the first quarter of Fiscal 2023, partially offset by the impacts from lower volumes from the warmer weather during the second quarter of Fiscal 2023. The increase in revenues also includes higher natural gas gathering and processing activities ($34 million), primarily due to the prior-year acquisitions of UGI Moraine East and Pennant.
Midstream & Marketing cost of sales increased $40 million compared to the prior-year period, primarily reflecting the higher natural gas costs related to the previously mentioned natural gas and power marketing activities, partially offset by the impacts from lower volumes from the warmer weather ($40 million).
Midstream & Marketing total margin increased $61 million in the 2023 six-month period reflecting higher margins from natural gas marketing activities ($31 million), including the effects of peaking and capacity management activities that benefited from extremely cold weather in late December. The increase in total margin also includes incremental natural gas gathering and processing activities ($34 million), primarily from the prior year acquisitions of UGI Moraine East and Pennant.
Midstream & Marketing operating income and earnings before interest expense and income taxes during the 2023 six-month period increased $50 million and $40 million, respectively, compared to the prior-year period. The increase in operating income is largely attributable to the previously mentioned increase in total margin, partially offset by higher operating and administrative expense ($5 million) and depreciation and amortization expenses ($6 million). The increase in earnings before interest expense and income taxes principally reflects the increase in operating income, partially offset by lower income from equity method investments following the acquisition of the remaining 53% ownership interest in Pennant during the fourth quarter of Fiscal 2022.
Utilities
For the six months ended March 31,
2023
2022
Increase (Decrease)
(Dollars in millions)
Revenues
$
1,366
$
1,126
$
240
21
%
Total margin (a)
$
594
$
530
$
64
12
%
Operating and administrative expenses (a)
$
188
$
171
$
17
10
%
Operating income
$
329
$
287
$
42
15
%
Earnings before interest expense and income taxes
$
333
$
292
$
41
14
%
Gas Utility system throughput—bcf
Core market
78
81
(3)
(4)
%
Total
219
216
3
1
%
Electric Utility distribution sales - gwh
503
526
(23)
(4)
%
Gas Utility heating degree days—% (warmer) than normal (b)
(11.6)
%
(8.1)
%
—
—
(a)Total margin represents revenues less cost of sales and revenue-related taxes (i.e., gross receipts and business and occupation taxes) of $17 million and $16 million, respectively, during the 2023 and 2022 six-month periods. For financial
statement purposes, revenue-related taxes are included in “Operating and administrative expenses” on the Condensed Consolidated Statements of Income (but are excluded from operating and administrative expenses presented above).
(b)Deviation from average heating degree days is determined on a 10-year period utilizing volume-weighted weather data based on weather statistics provided by NOAA for airports located within Gas Utility’s service territories.
Temperatures in Gas Utility’s service territories during the 2023 six-month period were 11.6% warmer than normal and 4.1% warmer than the prior-year period. The decrease in Gas Utility core market volumes during the 2023 six-month period is largely related to the weather that was warmer than the prior-year period partially offset by growth in the core market customers. The decrease in Electric Utility distribution sales volumes is primarily attributable to warmer weather during the 2023 six-month period.
Utilities revenues increased $240 million in the 2023 six-month period reflecting a $226 million increase in Gas Utility revenues and a $14 million increase in Electric Utility revenues. The increase in Gas Utility revenues was largely driven by higher PGC and PGA rates reflecting higher natural gas costs, the effects of the increase in base rates and weather normalization adjustments for PA Gas Utility that went into effect during the first quarter of Fiscal 2023, higher off-system sales and higher other revenues. These increases were partially offset by the effects on core market volumes of the warmer weather. The increase in Electric Utility revenues was largely driven by higher DS rates reflecting higher power costs.
Utilities cost of sales increased $176 million in the 2023 six-month period primarily attributable to Gas Utility ($161 million) mainly reflecting higher PGC and PGA rates, higher cost of sales associated with off-system sales and higher other cost of sales. Electric Utility cost of sales increased $15 million during the 2023 six-month period largely reflecting the higher DS rates.
Utilities total margin increased $64 million during the 2023 six-month period primarily attributable to higher Gas Utility total margin ($65 million) mainly reflecting the effects of the increase in base rates and weather normalization adjustments for PA Gas Utility that went into effect during the first quarter of Fiscal 2023 and, to a much lesser extent, impacts from growth in the core market customers and higher other revenues. Electric Utility margin was comparable to the prior-year period.
Utilities operating income and earnings before interest expense and income taxes increased $42 million and $41 million, respectively, during the 2023 six-month period. These increases largely reflect the previously mentioned increase in total margin partially offset by higher operating and administrative expenses ($17 million) and higher depreciation expense ($3 million). The higher operating and administrative expenses reflect, among other things, higher uncollectible accounts expenses, contract labor costs, taxes other than income taxes and salary expenses. The higher depreciation expense compared to the prior-year period reflects the effects of continued distribution system capital expenditure activity.
Interest Expense and Income Taxes
Our consolidated interest expense during the 2023 six-month period was $185 million compared to $163 million during the 2022 six-month period. This increase largely reflects higher credit agreement interest rates and borrowings and higher long-term debt outstanding principally at UGI Utilities.
The slightly higher effective income tax rate for the 2023 six-month period reflects in large part the effects on the estimated annual effective tax rate from a greater concentration of pretax loss in higher tax rate jurisdictions resulting from losses on derivative instruments and adjustments to deferred tax valuation allowances offset by the projected availability of investment tax credits in Fiscal 2023 following enactment of the Inflation Reduction Act.
The Company continues to evaluate the elections available under current regulations and pending legislation. Accordingly, the impacts on the Company’s income tax provisions and taxes payable or refundable related to these items are subject to change.
FINANCIAL CONDITION AND LIQUIDITY
The Company expects to have sufficient liquidity, including cash on hand and available borrowing capacity, to continue to support long-term commitments and ongoing operations despite uncertainties associated with ongoing global macroeconomic conditions including, among others, changes in consumer behavior resulting from the COVID-19 pandemic, the inflationary cost environment and ongoing energy commodity price volatility. Our total available liquidity balance, comprising cash and cash equivalents and available borrowing capacity on our revolving credit facilities, totaled approximately $1.9 billion and $1.7 billion at March 31, 2023 and September 30, 2022, respectively. Our total available liquidity at March 31, 2023 increased due to higher available borrowing capacity on our revolving credit facilities, partially offset by the impact of cash collateral payments associated with a significant decline in commodity prices during the 2023 six-month period and increases in restricted
cash margin requirements in commodity futures brokerage accounts, principally at UGI International. The Company does not have any senior note or term loan maturities in the next twelve months. The Company cannot predict the duration or total magnitude of the uncertain economic factors mentioned above and the total effects they will have on its liquidity, debt covenants, financial condition or the timing of capital expenditures. UGI and its subsidiaries were in compliance with all debt covenants as of March 31, 2023. See Note 8 to the Condensed Consolidated Financial Statements for additional information on the equity cure provision.
We depend on both internal and external sources of liquidity to provide funds for working capital and to fund capital requirements. Our short-term cash requirements not met by cash from operations are generally satisfied with borrowings under credit facilities and, in the case of Midstream & Marketing, also from a Receivables Facility. Long-term cash requirements are generally met through the issuance of long-term debt or equity securities. We believe that each of our business units has sufficient liquidity in the forms of cash and cash equivalents on hand; cash expected to be generated from operations; credit facility and Receivables Facility borrowing capacity; and the ability to obtain long-term financing to meet anticipated contractual and projected cash commitments. Issuances of debt and equity securities in the capital markets and additional credit facilities may not, however, be available to us on acceptable terms.
The primary sources of UGI’s cash and cash equivalents are the dividends and other cash payments made to UGI or its corporate subsidiaries by its principal business units. Our cash and cash equivalents totaled $321 million at March 31, 2023, compared with $405 million at September 30, 2022. The decrease in cash and cash equivalents since September 30, 2022 is primarily attributable to commodity price volatility experienced in the 2023 six-month period and the seasonality of our business as further described in “Cash Flows” below. Excluding cash and cash equivalents that reside at UGI’s operating subsidiaries, at March 31, 2023 and September 30, 2022, UGI had $58 million and $140 million of cash and cash equivalents, respectively. Such cash is available to pay dividends on UGI Common Stock and for investment purposes.
Long-term Debt and Credit Facilities
Long-term Debt
The Company’s debt outstanding at March 31, 2023 and September 30, 2022, comprises the following:
March 31, 2023
September 30, 2022
(Millions of dollars)
AmeriGas Propane
UGI International
Midstream & Marketing
Utilities
Corp & Other
Total
Total
Short-term borrowings
$
30
$
166
$
15
$
242
$
—
$
453
$
368
Long-term debt (including current maturities):
Senior notes
$
2,575
$
434
$
—
$
1,505
$
—
$
4,514
$
4,472
Term loans
—
325
798
132
747
2,002
1,871
Other long-term debt
—
3
41
21
224
289
322
Unamortized debt issuance costs
(10)
(7)
(15)
(6)
(3)
(41)
(33)
Total long-term debt
$
2,565
$
755
$
824
$
1,652
$
968
$
6,764
$
6,632
Total debt
$
2,595
$
921
$
839
$
1,894
$
968
$
7,217
$
7,000
Credit Facilities
Additional information related to the Company’s credit agreements can be found in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Note 6 to Consolidated Financial Statements in the Company’s 2022 Annual Report.
Information about the Company’s principal credit agreements (excluding the Receivables Facility discussed below) as of March 31, 2023 and 2022, is presented in the table below.
(Currency in millions)
Total Capacity
Borrowings Outstanding
Letters of Credit and Guarantees Outstanding
Available Borrowing Capacity
As of March 31, 2023
AmeriGas OLP
$
600
$
30
$
2
$
568
UGI International, LLC (a)
€
500
€
150
€
—
€
350
Energy Services
$
260
$
—
$
—
$
260
UGI Utilities
$
425
$
183
$
—
$
242
Mountaineer
$
150
$
59
$
—
$
91
UGI Corporation (b)
$
300
$
218
$
—
$
82
As of March 31, 2022
AmeriGas OLP
$
600
$
30
$
3
$
567
UGI International, LLC (a)
€
300
€
170
€
—
€
130
Energy Services
$
260
$
—
$
—
$
260
UGI Utilities
$
350
$
192
$
—
$
158
Mountaineer
$
100
$
36
$
—
$
64
UGI Corporation (b)
$
300
$
260
$
—
$
40
(a)Permits UGI International, LLC to borrow in euros or USD. At March 31, 2023 and 2022, the amount borrowed consisted of euro-denominated borrowings equivalent to $163 million and $188 million, respectively.
(b)Borrowings outstanding have been classified as “Long-term debt” on the Condensed Consolidated Balance Sheets.
The average daily and peak short-term borrowings under the Company’s principal credit agreements are as follows:
For the six months ended
For the six months ended
March 31, 2023
March 31, 2022
(Millions of dollars or euros)
Average
Peak
Average
Peak
AmeriGas OLP
$
153
$
242
$
220
$
388
UGI International, LLC
€
188
€
300
€
119
€
250
Energy Services
$
13
$
82
$
—
$
—
UGI Utilities
$
248
$
340
$
208
$
270
Mountaineer
$
85
$
101
$
58
$
80
UGI Corporation
$
236
$
292
$
185
$
260
Receivables Facility. Energy Services has a Receivables Facility with an issuer of receivables-backed commercial paper currently scheduled to expire in October 2023. The Receivables Facility provides Energy Services with the ability to borrow up to $150 million of eligible receivables during the period October 21, 2022 to April 30, 2023, and up to $75 million of eligible receivables during the period May 1, 2023 to October 20, 2023. Energy Services uses the Receivables Facility to fund working capital, margin calls under commodity futures contracts, capital expenditures, dividends and for general corporate purposes.
Under the Receivables Facility, Energy Services transfers, on an ongoing basis and without recourse, its trade accounts receivable to its wholly owned, special purpose subsidiary, ESFC, which is consolidated for financial statement purposes. ESFC, in turn, has sold and, subject to certain conditions, may from time to time sell, an undivided interest in some or all of the receivables to a major bank. Amounts sold to the bank are reflected as “Short-term borrowings” on the Condensed Consolidated Balance Sheets. ESFC was created and has been structured to isolate its assets from creditors of Energy Services and its affiliates, including UGI. Trade receivables sold to the bank remain on the Company’s balance sheet and the Company reflects a liability equal to the amount advanced by the bank. The Company records interest expense on amounts owed to the bank. Energy Services continues to service, administer and collect trade receivables on behalf of the bank, as applicable.
At March 31, 2023, the outstanding balance of ESFC trade receivables was $115 million, $15 million of which were sold to the bank. At March 31, 2022, the outstanding balance of ESFC trade receivables was $120 million, none of which was sold to the
bank. During the six months ended March 31, 2023 and 2022, peak sales of receivables were $150 million and $98 million, respectively, and average daily amounts sold were $56 million and $4 million, respectively.
Significant Financing Activities
The following significant financing activities occurred during the 2023 six-month period. See Note 8 to Condensed Consolidated Financial Statements for additional information on these transactions.
AmeriGas Propane. Under the 2022 AmeriGas OLP Credit Agreement, AmeriGas OLP, as borrower, is required to comply with financial covenants related to leverage and interest coverage measured at the Partnership and at AmeriGas OLP. The 2022 AmeriGas OLP Credit Agreement contains an equity cure provision, which allows AmeriGas OLP’s direct or indirect parent, including UGI and its other subsidiaries, to fund capital contributions to eliminate any EBITDA (as defined in the 2022 AmeriGas OLP Credit Agreement) shortfalls that would otherwise result in non-compliance with these financial covenants. Each equity cure is eligible to eliminate such EBITDA shortfalls up to four quarters after contribution. We are permitted to use the equity cure provision five times over the course of the Credit Agreement, twice during any rolling four-quarter period, and not in consecutive quarters.
As of March 31, 2023, AmeriGas OLP was in breach of the leverage ratio debt covenant and interest coverage ratio, which it cured with the funds received from UGI. UGI made capital contributions to AmeriGas OLP of $20 million and $11 million on March 31, 2023 and April 24, 2023, respectively, which in aggregate represented one equity cure in accordance with the 2022 AmeriGas OLP Credit Agreement. As a result of these capital contributions, AmeriGas OLP and the Partnership were in compliance with all financial covenants after consideration of the equity cure provision as of March 31, 2023.
UGI also provided an irrevocable letter of support, dated May 4, 2023, whereby UGI has committed to fund any such EBITDA shortfalls and debt service, if any. Based on the support and the projected EBITDA, AmeriGas OLP is expected to remain in compliance with its financial debt covenants for the succeeding twelve-month period.
UGI International 2023 Credit Facilities Agreement. On March 7, 2023, UGI International, LLC and its indirect wholly-owned subsidiary, UGI International Holdings B.V., entered into the UGI International 2023 Credit Facilities Agreement, a five-year unsecured senior facilities agreement, maturing March 7, 2028, with a consortium of banks. The UGI International 2023 Credit Facilities Agreement consists of (1) a €300 million variable-rate term loan facility ("Facility A") and (2) a €500 million multicurrency revolving credit facility, including a €100 million sublimit for swingline loans ("Facility B"). We have designated borrowings under Facility A as a net investment hedge. In connection with the entering into of the UGI International 2023 Credit Facilities Agreement, UGI International, LLC paid off in full and terminated the UGI International Credit Facilities Agreement, dated as of October 18, 2018. The net proceeds from the UGI International 2023 Credit Facilities Agreement were used to refinance the UGI International Credit Facilities Agreement. Borrowings under the multicurrency revolving credit facility may be used to finance the working capital needs of UGI International, LLC and its subsidiaries and for general corporate purposes.
Energy Services Amended Term Loan Credit Agreement. On February 23, 2023, Energy Services entered into the Energy Services Amended Term Loan Credit Agreement, the first amendment to the Energy Services Term Loan Credit Agreement, dated August 13, 2019. The Energy Services Amended Term Loan Credit Agreement provides, among other items, that (i) the outstanding principal amount of the loans will be increased by $125 million to $800 million, (ii) the maturity date of the loans shall be extended to February 22, 2030, and (iii) Term SOFR (as defined in the Energy Services Amended Term Loan Credit Agreement) shall replace LIBOR as a reference rate.
UGI Utilities Credit Agreement. On December 13, 2022, UGI Utilities entered into an amendment to the UGI Utilities Credit Agreement, providing for borrowings up to $425 million and to replace the use of LIBOR with SOFR. Borrowings under the amended UGI Utilities Credit Agreement can be used to finance the working capital needs of UGI Utilities and for general corporate purposes. The UGI Utilities Credit Agreement is scheduled to expire June 2024.
Mountaineer Credit Agreement. On October 20, 2022, Mountaineer entered into the Mountaineer 2023 Credit Agreement, with a group of lenders. The Mountaineer 2023 Credit Agreement amends and restates a previous credit agreement and provides for borrowings up to $150 million, including a $20 million sublimit for letters of credit. Mountaineer may request an increase in the amount of loan commitments to a maximum aggregate amount of $250 million, subject to certain terms and conditions. Borrowings under the Mountaineer 2023 Credit Agreement can be used to finance the working capital needs of Mountaineer and for general corporate purposes. The Mountaineer 2023 Credit Agreement is scheduled to expire in November 2024, with an option to extend the maturity date.
On November 17, 2022, UGI’s Board of Directors declared a cash dividend equal to $0.36 per common share. The dividend was paid on January 1, 2023, to shareholders of record on December 15, 2022. On February 1, 2023, UGI’s Board of Directors declared a quarterly dividend of $0.36 per common share. The dividend was paid on April 1, 2023, to shareholders of record on March 15, 2023. On May 3, 2023, UGI’s Board of Directors approved an increase in the quarterly dividend rate on UGI Common Stock to $0.375 per common share, or $1.50 on an annual basis. The new dividend rate reflects an approximate 4.2% increase from the previous quarterly rate of $0.36. The new quarterly dividend rate is effective with the dividend payable on July 1, 2023, to shareholders of record on June 15, 2023.
On February 2, 2022, UGI’s Board of Directors authorized an extension of an existing share repurchase program for up to 8 million shares of UGI Common Stock for an additional four-year period, expiring in February 2026. Pursuant to such authorization, during the six months ended March 31, 2023, the Company purchased 0.6 million shares on the open market at a total purchase price of approximately $22 million.
Cash Flows
Due to the seasonal nature of the Company’s businesses, cash flows from operating activities are generally strongest during the second and third fiscal quarters when customers pay for natural gas, LPG, electricity and other energy products and services consumed during the peak heating season months. Conversely, operating cash flows are generally at their lowest levels during the fourth and first fiscal quarters when the Company’s investment in working capital, principally inventories and accounts receivable, is generally greatest.
Operating Activities.Year-to-year variations in our cash flows from operating activities can be significantly affected by changes in operating working capital, especially during periods with significant changes in energy commodity prices. Cash flow provided by operating activities was $424 million in the 2023 six-month period compared to $400 million in the 2022 six-month period. Cash flow from operating activities before changes in operating working capital was $1,089 million in the 2023 six-month period compared to $960 million in the 2022 six-month period. Cash used to fund changes in operating working capital totaled $665 million in the 2023 six-month period compared to $560 million in the 2022 six-month period. The increase in cash used to fund operating working capital changes in the 2023 six-month period principally reflects a significant increase in collateral payments on derivative instruments during the 2023 six-month period and greater cash required to fund changes in accounts payable. These increases in cash used to fund changes in operating working capital were offset in large part by lower 2023 six-month period cash required to fund changes in accounts receivable and higher cash from changes in inventories. These changes in working capital items largely reflect the impacts of the previously mentioned significant decrease in commodity energy prices during the 2023 six-month period, principally at our UGI International operations.
Investing Activities.Investing activity cash flow is principally affected by cash expenditures for property, plant and equipment; cash paid for acquisitions of businesses and assets; investments in equity method investees; and cash proceeds from sales and retirements of property, plant and equipment. Cash flow used by investing activities was $473 million in the 2023 six-month period compared to $515 million in the 2022 six-month period. Cash expenditures for property, plant and equipment were $414 million in the 2023 six-month period compared with $355 million in the 2022 six-month period principally reflecting higher cash capital expenditures in our Utilities segment. Cash flows from investing activities include cash received from the settlement of certain forward foreign currency contracts previously designated as net investment hedges of $22 million in the 2023 six-month period compared to $13 million in the 2022 six-month period. Investments in equity method investments during the 2023 six-month period include our continuing investments in renewable energy projects principally at Energy Services. Prior-year cash flows from investing activities include cash used for the Stonehenge Acquisition.
Financing Activities. Changes in cash flow from financing activities are primarily due to issuances and repayments of long-term debt; net short-term borrowings; dividends on UGI Common Stock; quarterly payments on outstanding Purchase Contracts; and issuances and repurchases of equity instruments.
Cash flow used by financing activities was $46 million in the 2023 six-month period compared to cash provided of $25 million in the 2022 six-month period. The 2023 six-month period includes the cash flow effects from entering into the previously mentioned UGI International 2023 Credit Facilities Agreement and the concurrent repayment of borrowings under the UGI International Credit Facilities Agreement (a predecessor agreement). The 2023 six-month period cash flows from financing activities also includes the cash proceeds from the previously mentioned Energy Services Amended Term Loan Agreement entered into in February 2023 and the concurrent repayment of amounts outstanding under the Energy Services variable rate term loan. Cash flow from financing activities in the prior-year period includes the cash flow effects of the refinancing of senior notes at UGI International.
UGI Utilities. On January 27, 2023, Electric Utility filed a request with the PAPUC to increase its annual base distribution revenues by $11 million. The increased revenues would fund ongoing system improvements and operations necessary to maintain safe and reliable electric service. Electric Utility requested that the new electric rates become effective March 28, 2023. The PAPUC issued an Order on March 2, 2023, suspending the effective date for the rate increase to allow for investigation and public hearings. Unless a settlement is reached sooner, this review process is expected to last up to nine months from the date of filing. The Company cannot predict the timing or the ultimate outcome of the rate case review process.
On January 28, 2022, PA Gas Utility filed a request with the PAPUC to increase its base operating revenues for residential, commercial and industrial customers by $83 million annually. On September 15, 2022, the PAPUC issued a final order approving a settlement providing for a $49 million annual base distribution rate increase for PA Gas Utility, through a phased approach, with $38 million beginning October 29, 2022 and an additional $11 million beginning October 1, 2023. In accordance with the terms of the final order, PA Gas Utility will not be permitted to file a rate case prior to January 1, 2024. Also in accordance with the terms of the final order, PA Gas Utility was authorized to implement a weather normalization adjustment rider as a five-year pilot program beginning on November 1, 2022. Under this rider, when weather deviates from normal by more than 3%, residential and small commercial customer billings for distribution services are adjusted monthly for weather related impacts exceeding the 3% threshold. Additionally, under the terms of the final order, PA Gas Utility was authorized to implement a DSIC once its total property, plant and equipment less accumulated depreciation reached $3,368 million (which threshold was achieved in September 2022).
On February 8, 2021, Electric Utility filed a request with the PAPUC to increase its annual base distribution revenues by $9 million. On October 28, 2021, the PAPUC issued a final Order approving a settlement that permitted Electric Utility, effective November 9, 2021, to increase its base distribution revenues by $6 million.
Mountaineer. On March 6, 2023, Mountaineer submitted a base rate case filing with the WVPSC seeking a net revenue increase of $20 million, which consists of an increase in base rates of $38 million and a decrease in the IREP rates of $18 million annually to be effective on April 5, 2023. On March 31, 2023 the WVPSC suspended the effective date of the requested rate change increase until January 1, 2024 to allow for a full review of the filing.
On July 29, 2022, Mountaineer submitted its 2022 IREP filing to the WVPSC requesting recovery of costs associated with capital investments totaling $354 million over the 2023 - 2027 period, including $64 million in calendar year 2023. On November 16, 2022, Mountaineer and the intervening parties submitted a Joint Stipulation and Agreement for Settlement to the WVPSC requesting approval of 2023 IREP revenue of $22 million to be charged effective January 1, 2023, which includes the recovery of a $1 million under-recovery of 2021 IREP revenue. On December 21, 2022, the WVPSC issued an order approving the Joint Stipulation and Agreement for Settlement as filed.
OTHER MATTERS
West Reading, Pennsylvania Explosion. On March 24, 2023, an explosion occurred in West Reading, Pennsylvania which resulted in seven fatalities, significant injuries to eleven others, and extensive property damage. The NTSB, OSHA and the PAPUC are investigating the West Reading incident. The NTSB investigative team includes representatives from the Company, the PAPUC, the local Fire Department and the Pipeline and Hazardous Materials Safety Administration. The Company is cooperating with the investigation. The NTSB may invite other parties to participate.
While the investigation into this incident is still underway and the cause of the explosion has not been determined, the Company has received claims as a result of the explosion and is involved in lawsuits relative to the incident. The Company maintains liability insurance for personal injury, property and casualty damages and believes that third-party claims associated with the explosion, in excess of the Company’s deductible, are recoverable through the Company’s insurance. The Company cannot predict the result of these pending or future claims and legal actions at this time.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risk exposures are (1) commodity price risk; (2) interest rate risk; and (3) foreign currency exchange rate risk. Although we use derivative financial and commodity instruments to reduce market price risk associated with forecasted transactions, we do not use derivative financial and commodity instruments for speculative or trading purposes.
Commodity Price Risk
The risk associated with fluctuations in the prices the Partnership and our UGI International operations pay for LPG is principally a result of market forces reflecting changes in supply and demand for LPG and other energy commodities. Their profitability is sensitive to changes in LPG supply costs. Increases in supply costs are generally passed on to customers. The Partnership and UGI International may not, however, always be able to pass through product cost increases fully or on a timely basis, particularly when product costs rise rapidly. In order to reduce the volatility of LPG market price risk, the Partnership uses contracts for the forward purchase or sale of propane, propane fixed-price supply agreements and over-the-counter derivative commodity instruments including price swap and option contracts. Our UGI International operations use over-the-counter derivative commodity instruments and may from time to time enter into other derivative contracts, similar to those used by the Partnership, to reduce market risk associated with a portion of their LPG purchases. Over-the-counter derivative commodity instruments used to economically hedge forecasted purchases of LPG are generally settled at expiration of the contract.
Utilities’ tariffs contain clauses that permit recovery of all prudently incurred costs of natural gas it sells to its retail core-market customers, including the cost of financial instruments used to hedge purchased gas costs. The recovery clauses provide for periodic adjustments for the difference between the total amounts actually billed to customers through PGC and PGA rates and the recoverable costs incurred. Because of this ratemaking mechanism, there is limited commodity price risk associated with our Utilities operations. PA Gas Utility uses derivative financial instruments, including natural gas futures and option contracts traded on the NYMEX, to reduce volatility in the cost of gas it purchases for its retail core-market customers. The cost of these derivative financial instruments, net of any associated gains or losses, is included in PA Gas Utility's PGC recovery mechanism.
In order to manage market price risk relating to substantially all of Midstream & Marketing’s fixed-price sale contracts for physical natural gas and electricity, Midstream & Marketing enters into NYMEX, ICE and over-the-counter natural gas and electricity futures and option contracts, and natural gas basis swap contracts or enters into fixed-price supply arrangements. Midstream & Marketing also uses NYMEX and over-the-counter electricity futures contracts to economically hedge a portion of its anticipated sales of electricity from its electricity generation facilities. Although Midstream & Marketing’s fixed-price supply arrangements mitigate most risks associated with its fixed-price sales contracts, should any of the suppliers under these arrangements fail to perform, increases, if any, in the cost of replacement natural gas or electricity would adversely impact Midstream & Marketing’s results. In order to reduce this risk of supplier nonperformance, Midstream & Marketing has diversified its purchases across a number of suppliers. UGI International’s natural gas and electricity marketing businesses also use natural gas and electricity futures and forward contracts to economically hedge market risk associated with a substantial portion of anticipated volumes under fixed-price sales and purchase contracts.
Midstream & Marketing has entered into fixed-price sales agreements for a portion of the electricity expected to be generated by its electric generation assets. In the event that these generation assets would not be able to produce all of the electricity needed to supply electricity under these agreements, Midstream & Marketing would be required to purchase electricity on the spot market or under contract with other electricity suppliers. Accordingly, increases in the cost of replacement power could negatively impact Midstream & Marketing’s results.
Interest Rate Risk
We have both fixed-rate and variable-rate debt. Changes in interest rates impact the cash flows of variable-rate debt but generally do not impact their fair value. Conversely, changes in interest rates impact the fair value of fixed-rate debt but do not impact their cash flows.
Our variable-rate debt at March 31, 2023, includes revolving credit facility borrowings and variable-rate term loans at UGI International, Utilities, Energy Services and UGI Corporation. These debt agreements have interest rates that are generally indexed to short-term market interest rates. We have entered into pay-fixed, receive-variable interest rate swap agreements on a significant portion of the term loans’ principal balances and a significant portion of the term loans’ tenor. We have designated these interest rate swaps as cash flow hedges. At March 31, 2023, combined borrowings outstanding under variable-rate debt agreements, excluding the previously mentioned effectively fixed-rate debt, totaled $1,031 million.
Long-term debt associated with our domestic businesses is typically issued at fixed rates of interest based upon market rates for debt with similar terms and credit ratings. As these long-term debt issues mature, we may refinance such debt with new debt having interest rates reflecting then-current market conditions. In order to reduce interest rate risk associated with near- to medium-term forecasted issuances of fixed rate debt, from time to time we enter into IRPAs.
Foreign Currency Exchange Rate Risk
Our primary currency exchange rate risk is associated with the USD versus the euro and, to a lesser extent, the USD versus the British pound sterling. The USD value of our foreign currency denominated assets and liabilities will fluctuate with changes in the associated foreign currency exchange rates. From time to time, we use derivative instruments to hedge portions of our net investments in foreign subsidiaries, including anticipated foreign currency denominated dividends. Gains or losses on these net investment hedges remain in AOCI until such foreign operations are sold or liquidated. With respect to our net investments in our UGI International operations, a 10% decline in the value of the associated foreign currencies versus the USD would reduce their aggregate net book value at March 31, 2023, by approximately $100 million, which amount would be reflected in other comprehensive income. We have designated certain euro-denominated borrowings as net investment hedges.
In order to reduce the volatility in net income associated with our foreign operations, principally as a result of changes in the USD exchange rate between the euro and British pound sterling, we enter into forward foreign currency exchange contracts. We layer in these foreign currency exchange contracts over a multi-year period to eventually equal approximately 90% of anticipated UGI International foreign currency earnings before income taxes.
Derivative Instrument Credit Risk
We are exposed to risk of loss in the event of nonperformance by our derivative instrument counterparties. Our derivative instrument counterparties principally comprise large energy companies and major U.S. and international financial institutions. We maintain credit policies with regard to our counterparties that we believe reduce overall credit risk. These policies include evaluating and monitoring our counterparties’ financial condition, including their credit ratings, and entering into agreements with counterparties that govern credit limits or entering into netting agreements that allow for offsetting counterparty receivable and payable balances for certain financial transactions, as deemed appropriate.
We have concentrations of credit risk associated with derivative instruments and we evaluate the creditworthiness of our derivative counterparties on an ongoing basis. As of March 31, 2023, the maximum amount of loss, based upon the gross fair values of the derivative instruments, we would incur if these counterparties failed to perform according to the terms of their contracts was $422 million. In general, many of our over-the-counter derivative instruments and all exchange contracts call for the posting of collateral by the counterparty or by the Company in the forms of letters of credit, parental guarantees or cash. At March 31, 2023, we had received cash collateral from derivative instrument counterparties totaling $55 million. In addition, we may have offsetting derivative liabilities and certain accounts payable balances with certain of these counterparties, which further mitigates the previously mentioned maximum amount of losses. Certain of the Partnership’s derivative contracts have credit-risk-related contingent features that may require the posting of additional collateral in the event of a downgrade of the Partnership’s debt rating. At March 31, 2023, if the credit-risk-related contingent features were triggered, the amount of collateral required to be posted would not be material.
The following table summarizes the fair values of unsettled market risk sensitive derivative instrument assets (liabilities) held at March 31, 2023 and changes in their fair values due to market risks. Certain of UGI Utilities’ commodity derivative instruments are excluded from the table below because any associated net gains or losses are refundable to or recoverable from customers in accordance with UGI Utilities ratemaking.
Asset (Liability)
(Millions of dollars)
Fair Value
Change in Fair Value
March 31, 2023
Commodity price risk (1)
$
(41)
$
(148)
Interest rate risk (2)
$
4
$
(20)
Foreign currency exchange rate risk (3)
$
19
$
(32)
(1) Change in fair value represents a 10% adverse change in the market prices of certain commodities
(2) Change in fair value represents a 50 basis point adverse change in prevailing market interest rates
(3) Change in fair value represents a 10% adverse change in the value of the Euro and the British pound sterling versus the USD.
(a)Evaluation of Disclosure Controls and Procedures
The Company's disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by the Company in reports filed or submitted under the Securities Exchange Act of 1934, as amended, is (i) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. The Company's management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures, as of the end of the period covered by this Report, were effective at the reasonable assurance level.
(b)Change in Internal Control over Financial Reporting
No change in the Company’s internal control over financial reporting occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
The information set forth in Note 9, Commitments and Contingencies to our Condensed Consolidated Financial Statements included in Item 1 of Part I of this report, is incorporated herein by reference.
ITEM 1A. RISK FACTORS
In addition to the information presented in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our 2022 Annual Report and the Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2022, which could materially affect our business, financial condition or future results. The risks described in our 2022 Annual Report and the Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2022, are not the only risks facing the Company. Other unknown or unpredictable factors could also have material adverse effects on future results.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table sets forth information with respect to the Company’s repurchases of its common stock during the quarter ended March 31, 2023.
Period
(a) Total Number of Shares Purchased
(b) Average Price Paid per Share
(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)
(d) Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (1)
January 1, 2023 to January 31, 2023
—
$0.00
—
6.80 million
February 1, 2023 to February 28, 2023
—
$0.00
—
6.80 million
March 1, 2023 to March 31, 2023
300,000
$35.51
300,000
6.50 million
Total
300,000
300,000
(1) Shares of UGI Common Stock are repurchased through an extension of a previous share repurchase program announced by the Company on February 2, 2022. The UGI Board of Directors authorized the repurchase of up to 8 million shares of UGI Common Stock over a four-year period expiring in February 2026.
The exhibits filed as part of this report are as follows (exhibits incorporated by reference are set forth with the name of the registrant, the type of report and last date of the period for which it was filed, and the exhibit number in such filing):
Inline XBRL Instance - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
Inline XBRL Instance - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
