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UGI > SEC Filings for UGI > Form 10-K on 21-Nov-2012All Recent SEC Filings

Show all filings for UGI CORP /PA/

Form 10-K for UGI CORP /PA/


21-Nov-2012

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") discusses our results of operations and our financial condition. MD&A should be read in conjunction with our Items 1 & 2, "Business and Properties," our Item 1A, "Risk Factors" and our Consolidated Financial Statements in Item 8 below including "Segment Information" included in Note 21 to Consolidated Financial Statements.

Executive Overview

We recorded net income attributable to UGI Corporation in Fiscal 2012 of $199.4 million, equal to $1.76 per diluted share, compared to net income attributable to UGI Corporation in Fiscal 2011 of $232.9 million, equal to $2.06 per diluted share. Our results in Fiscal 2012 were significantly affected by record-setting warm heating-season weather in the United States and heating-season weather in Europe that was warmer than normal and warmer than the prior year. The Gas Utility and AmeriGas Propane heating seasons ended abruptly in March 2012 as March temperatures in both service territories were more than 38% warmer than normal. In Europe, only one month of the heating season was at or below normal. At our Midstream & Marketing - Energy Services business, the Fiscal 2012 weather resulted in lower volumes and margin from natural gas marketing activities, and lower and less volatile natural gas prices during Fiscal 2012 reduced capacity management total margin. Our Midstream & Marketing - Electric Generation business unit margins were below the prior year reflecting the weather's impact on demand for electricity and the effects of lower natural gas prices on electricity prices.
Results for Fiscal 2012 were also affected by (1) the January 2012 acquisition of Heritage Propane at AmeriGas Partners (the "Heritage Acquisition") and (2) the October 2011 acquisition of Shell's LPG distribution businesses in the United Kingdom, Belgium, the Netherlands, Luxembourg, Denmark, Finland, Norway and Sweden (the "Shell Transaction") at our International Propane business segment. On January 12, 2012, AmeriGas Partners completed the acquisition of the subsidiaries of ETP which operated ETP's propane distribution business (collectively referred to as "Heritage Propane") for total consideration of approximately $2.6 billion, including approximately $1.5 billion in cash and 29,567,362 AmeriGas Partners Common Units. In October 2011, we completed the Shell Transaction for total cash consideration of 133.6 million ($179.0 million). The results of these acquired businesses are included in our consolidated results from their respective dates of acquisition (see Note 4 to Consolidated Financial Statements).
We believe that each of our business units has sufficient liquidity in the form of revolving credit facilities, and in the case of Energy Services also an accounts receivable securitization facility, to fund business operations in Fiscal 2013.
Looking ahead, our results in Fiscal 2013 will be influenced by a number of factors including heating-season temperatures, the level and volatility of commodity prices for natural gas, LPG, electricity and oil, and economic conditions in the U.S. and Europe. During the last several years, we have taken a number of steps toward accelerating our future growth including the April 2011 transfer of CPG's underground natural gas storage assets to our Midstream & Marketing business; the completion of the conversion and expansion of the Hunlock Creek gas-fired electricity generating station in July 2011; the October 2011 Shell Transaction; and the Partnership's acquisition of Heritage Propane in January 2012. In addition, at our Midstream & Marketing - Energy Services business we are continuing work on our gathering system in the Marcellus Shale region in northern Pennsylvania and we completed the expansion of our Temple, Pennsylvania, LNG plant during Fiscal 2012. With the return of normal weather patterns, we hope to reap the benefits from these growth initiatives in Fiscal 2013 and beyond.

Results of Operations
The following analyses compare the Company's results of operations for
(1) Fiscal 2012 with Fiscal 2011 and (2) Fiscal 2011 with the year ended September 30, 2010 ("Fiscal 2010").


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Fiscal 2012 Compared with Fiscal 2011
Consolidated Results
Net Income Attributable to UGI Corporation by Business Unit:

                                                                                   Variance - Favorable
                                       2012                     2011                   (Unfavorable)
                                             % of                     % of
(Dollars in millions)           Amount       Total       Amount       Total        Amount         % Change
AmeriGas Propane              $   15.9         8.0 %   $   39.9        17.1 %   $    (24.0 )       (60.2 )%
International Propane             65.1        32.6 %       41.0        17.6 %         24.1          58.8  %
Gas Utility                       80.5        40.4 %       99.3        42.6 %        (18.8 )       (18.9 )%
Midstream & Marketing             36.4        18.3 %       52.5        22.5 %        (16.1 )       (30.7 )%
Corporate & Other                  1.5         0.7 %        0.2         0.2 %          1.3          N.M.
Net income attributable to
UGI Corporation               $  199.4       100.0 %   $  232.9       100.0 %   $    (33.5 )       (14.4 )%

N.M. - Variance is not meaningful.
Highlights - Fiscal 2012 versus Fiscal 2011

         Our U.S. and European business units were adversely affected by
          significantly warmer heating-season temperatures during Fiscal 2012.
          The Fiscal 2012 heating season in the U.S. came to an abrupt end in
          March 2012.


         Fiscal 2012 consolidated results were impacted by the Heritage
          Acquisition at AmeriGas Propane and the Shell Transaction in Europe.
          Results include combined pre-tax acquisition and transition expenses
          totaling approximately $53 million (after-tax impact of $13.3 million
          equal to $0.12 per diluted share).


         AmeriGas Propane Fiscal 2012 results include a $2.2 million after-tax
          loss ($0.02 per diluted share) on extinguishments of debt while Fiscal
          2011 results include a $10.3 million after-tax loss ($0.09 per diluted
          share) on extinguishments of debt.


         Midstream & Marketing net income was lower in Fiscal 2012 reflecting
          the effects of warmer weather on natural gas volumes sold and lower
          unit margins from our Electric Generation business. Lower and less
          volatile natural gas prices in Fiscal 2012 reduced capacity management
          income.


         Fiscal 2012 International Propane net income benefited from a lower
          effective income tax rate. Fiscal 2011 Antargaz' results include
          $9.4 million ($0.08 per diluted share) from the reversal of a
          nontaxable reserve associated with the French Competition Authority
          Matter.


                                                                               Increase
AmeriGas Propane                               2012           2011            (Decrease)
(Dollars in millions)
Revenues                                   $ 2,921.6      $ 2,538.0      $ 383.6      15.1  %
Total margin (a)                           $ 1,201.9      $   932.7      $ 269.2      28.9  %
Partnership EBITDA (b)                     $   324.7      $   297.1      $  27.6       9.3  %
Operating income                           $   170.3      $   242.9      $ (72.6 )   (29.9 )%
Retail gallons sold (millions)               1,017.5          874.2        143.3      16.4  %
Degree days - % (warmer) than normal (c)       (18.6 )%        (1.0 )%         -         -

(a) Total margin represents total revenues less total cost of sales.

(b) Partnership EBITDA (earnings before interest expense, income taxes and depreciation and amortization) should not be considered as an alternative to net income (as an indicator of operating performance) and is not a measure of performance or financial condition under accounting principles generally accepted in the United States of America ("GAAP"). Management uses Partnership EBITDA as the primary measure of segment profitability for the AmeriGas Propane segment (see Note 21 to Consolidated Financial Statements). Partnership EBITDA for Fiscal 2012 and Fiscal 2011 includes pre-tax losses of $13.3 million and $38.1 million associated with extinguishments of debt. Partnership EBITDA and operating income for Fiscal 2012 also includes acquisition and transition expenses of $46.2 million associated with Heritage Propane.


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(c) Deviation from average heating degree days for the 30-year period 1971-2000 based upon national weather statistics provided by the National Oceanic and Atmospheric Administration ("NOAA") for 335 airports in the United States, excluding Alaska.

Based upon heating degree-day data, temperatures in the Partnership's service territories during Fiscal 2012 averaged 18.6% warmer than normal and 18.3% warmer than Fiscal 2011. The winter heating season also came to an early end with temperatures in the month of March averaging 38% warmer than normal. Notwithstanding the record warm weather's impact on our legacy AmeriGas Propane volumes, retail propane gallons sold were 143.3 million gallons greater than in the prior year reflecting the impact of Heritage Propane.

Retail propane revenues increased $362.8 million during Fiscal 2012 primarily reflecting higher retail volumes sold. The higher retail volumes sold reflects incremental gallons sold associated with Heritage Propane partially offset by the effects of weather-reduced volumes in AmeriGas Propane's legacy operations. Wholesale propane revenues decreased $45.7 million principally reflecting lower wholesale volumes sold ($28.8 million) and lower average wholesale propane selling prices ($16.9 million). Average daily wholesale propane commodity prices during Fiscal 2012 at Mont Belvieu, Texas, one of the major supply points in the U.S., were approximately 20% lower than such prices during Fiscal 2011. Total revenues from fee income and other ancillary sales and services in Fiscal 2012 were $66.5 million higher than Fiscal 2011 reflecting such revenues from Heritage Propane. Total cost of sales increased $114.4 million principally reflecting incremental cost of sales from Heritage Propane offset in part by both the previously mentioned lower retail and wholesale volumes sold by our legacy AmeriGas Propane operations and the lower average propane commodity prices.

Total margin increased $269.2 million in Fiscal 2012 reflecting higher total propane margin ($220.7 million) and higher total margin from ancillary sales and services ($48.5 million). The increases principally reflect incremental margin from Heritage Propane partially offset by lower total propane margin from legacy AmeriGas Propane operations resulting from the significantly warmer weather.

Partnership EBITDA (which includes the losses on extinguishments of debt) in Fiscal 2012 increased $27.6 million principally reflecting the higher total margin ($269.2 million) and a $24.8 million lower loss from extinguishments of debt partially offset by higher operating and administrative expenses ($268.1 million) primarily attributable to Heritage Propane. Fiscal 2012 operating expenses include $46.2 million of acquisition and transition expenses associated with Heritage Propane. Operating income (which excludes the losses on extinguishments of debt) decreased $72.6 million in Fiscal 2012 principally reflecting the higher total margin ($269.2 million) more than offset by the increased operating expenses ($268.1 million) and greater depreciation and amortization expense ($74.4 million) principally associated with Heritage Propane.

International Propane                        2012            2011                Increase
(Dollars in millions)
Revenues                                 $  1,946.0      $  1,488.7      $    457.3         30.7 %
Total margin (a)                         $    620.2      $    517.9      $    102.3         19.8 %
Operating income                         $    111.8      $     86.1      $     25.7         29.8 %
Income before income taxes               $     80.6      $     57.0      $     23.6         41.4 %

Retail gallons sold (millions) (b)            576.5           429.7           146.8         34.2 %
Antargaz degree days - % (warmer) than
normal (c)                                    (10.3 )%         (7.8 )%            -            -
Flaga degree days - % (warmer) than
normal (c)                                     (8.8 )%         (4.6 )%            -            -

(a) Total margin represents total revenues less total cost of sales.

(b) Excludes retail gallons from operations in China.

(c) Deviation from average heating degree days for the 30-year period 1971-2000 at locations in our Antargaz and Flaga service territories.

International Propane operating results in Fiscal 2012 include the operating results from the Shell Transaction. Based upon heating degree day data, temperatures across Europe were significantly warmer than normal and warmer than the prior year. Weather at Antargaz was approximately 10.3% warmer than normal in Fiscal 2012 compared to weather that was approximately 7.8% warmer than normal in Fiscal 2011. Temperatures in Flaga's central and eastern European operations were approximately 8.8% warmer than normal in Fiscal 2012 compared to temperatures that were approximately 4.6% warmer than normal in Fiscal 2011. During Fiscal 2012, the average un-weighted wholesale commodity price for propane in northwest Europe was approximately


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4% higher than such prices in Fiscal 2011, while the average un-weighted wholesale commodity price for butane was approximately 5% higher than Fiscal 2011. Retail LPG gallons sold were higher than the prior year reflecting incremental volumes of approximately 175 million gallons associated with the Shell Transaction partially offset by the effects of warmer and erratic weather patterns on volumes sold in our legacy International Propane operations.

Our International Propane base-currency results are translated into U.S. dollars based upon exchange rates experienced during each of the reporting periods. The functional currency of a significant portion of our International Propane results is denominated in euros. During Fiscal 2012 and Fiscal 2011, the average un-weighted translation rate was approximately $1.30 and $1.40 per euro, respectively. The difference in exchange rates did not have a significant impact on International Propane net income.

International Propane revenues increased $457.3 million, notwithstanding the effects of the significantly warmer weather, principally reflecting the effects of the Shell Transaction (approximately $569 million) partially offset by lower revenues from our legacy European LPG distribution businesses due in large part to the effects of the weaker euro. Cost of sales increased to $1,325.8 million in Fiscal 2012 from $970.8 million in Fiscal 2011 principally reflecting incremental cost of sales from the Shell Transaction (approximately $443 million) offset by lower cost of sales from our legacy European LPG distribution businesses due in large part to the effects of the weaker euro.

Total International Propane margin increased $102.3 million principally reflecting incremental margin from the Shell Transaction (approximately $125.8 million) and higher unit margins at our Antargaz legacy operations partially offset by the effects of the lower volumes at our legacy Antargaz and Flaga units resulting from the warmer weather.

International Propane operating income in Fiscal 2012 was $25.7 million higher than Fiscal 2011 principally reflecting the higher total margin ($102.3 million) resulting from the Shell Transaction offset by incremental expenses associated with these acquired businesses, including operating and administrative expenses, depreciation and acquisition integration costs. Fiscal 2012 operating and administrative expenses include approximately $7.0 million of Shell Transaction transition expenses. Fiscal 2011 operating income includes $9.4 million of other income from the reversal at Antargaz of a nontaxable reserve associated with the French Competition Authority Matter. The $23.6 million increase in income before income taxes principally reflects the previously mentioned increase in operating income ($25.7 million) partially offset by a $2.7 million increase in interest expense, principally higher interest expense on Antargaz' long-term debt and higher Flaga debt outstanding. Net income from International Propane operations in Fiscal 2012 benefited from a lower International Propane effective income tax rate resulting from the impact of tax efficient structuring of certain of our international operations, the realization of $4.6 million of previously unrecognized foreign tax credits, and a higher proportion of pre-tax income in lower statutory tax-rate countries as a result of the Shell Transaction.

                                                                                 Increase
Gas Utility                                  2012            2011               (Decrease)
(Dollars in millions)
Revenues                                 $    785.4      $  1,026.4     $   (241.0 )      (23.5 )%
Total margin (a)                         $    382.9      $    415.8     $    (32.9 )       (7.9 )%
Operating income                         $    172.2      $    199.6     $    (27.4 )      (13.7 )%
Income before income taxes               $    132.1      $    159.2     $    (27.1 )      (17.0 )%
System throughput - billions of cubic
feet ("bcf") -
   Core market                                 59.2            70.4          (11.2 )      (15.9 )%
   Total                                      177.6           173.2            4.4          2.5  %
Degree days - % (warmer) colder than
normal (b)                                    (16.3 )%          3.5 %            -            -

(a) Total margin represents total revenues less total cost of sales.

(b) Deviation from average heating degree days for the 15-year period 1995-2009 based upon weather statistics provided by the National Oceanic and Atmospheric Administration ("NOAA") for airports located within Gas Utility's service territory.

Temperatures in the Gas Utility service territory in Fiscal 2012 based upon heating degree days were 16.3% warmer than normal and approximately 18.7% warmer than the prior year. Total distribution system throughput was slightly higher than last year, notwithstanding the significantly warmer weather, principally reflecting greater throughput to certain non-weather-sensitive low-margin interruptible delivery service customers. Excluding total volumes to interruptible delivery service customers, Gas Utility system throughput declined 14.3 bcf in Fiscal 2012 principally reflecting the effects of the significantly warmer weather


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on throughput to core market customers (11.2 bcf) and lower firm delivery service volumes. Gas Utility's core market customers comprise firm- residential, commercial and industrial ("retail core-market") customers who purchase their gas from Gas Utility and, to a much lesser extent, residential and small commercial customers who purchase their gas from alternate suppliers.

Gas Utility revenues decreased $241.0 million during Fiscal 2012 principally reflecting a decline in revenues from retail core-market customers ($169.4 million) and lower revenues from off-system sales ($68.1 million). The decrease in retail core-market revenues principally reflects the effects on gas cost recovery revenues of the lower retail core-market volumes ($91.9 million) and lower average purchased gas cost ("PGC") rates resulting from lower natural gas prices ($43.2 million). Increases or decreases in retail core-market revenues and cost of sales principally result from changes in retail core-market volumes and the level of gas costs collected through the PGC recovery mechanism. Under the PGC recovery mechanism, Gas Utility records the cost of gas associated with sales to retail core-market customers at amounts included in PGC rates. The difference between actual gas costs and the amounts included in rates is deferred on the balance sheet as a regulatory asset or liability and represents amounts to be collected from or refunded to customers in a future period. As a result of this PGC recovery mechanism, increases or decreases in the cost of gas associated with retail core-market customers have no direct effect on retail core-market margin. Gas Utility's cost of gas was $402.5 million in Fiscal 2012 compared with $610.6 million in Fiscal 2011 reflecting the previously mentioned lower retail core-market sales ($91.9 million), the lower average PGC rates ($43.2 million) and the above-mentioned lower off-system sales.

Gas Utility total margin decreased $32.9 million in Fiscal 2012. The decrease principally reflects lower core market total margin ($27.7 million) and firm delivery service total margin ($4.8 million). Fiscal 2012 Gas Utility total margin includes a full-year of incremental margin from the August 2011 base rate increase at CPG of approximately $9.0 million.

The decreases in Gas Utility operating income and income before income taxes during Fiscal 2012 principally reflects the previously mentioned decrease in total margin ($32.9 million) partially offset by lower operating and administrative expenses.

Midstream & Marketing          2012        2011            Decrease
(Dollars in millions)
Revenues (a)                 $ 853.0    $ 1,059.7    $ (206.7 )   (19.5 )%
Total margin (b)             $ 128.5    $   139.7    $  (11.2 )    (8.0 )%
Operating income             $  62.4    $    82.9    $  (20.5 )   (24.7 )%
Income before income taxes   $  57.6    $    80.2    $  (22.6 )   (28.2 )%

(a) Amounts are net of intercompany revenues between Midstream & Marketing's Energy Services and Electric Generation segments.
(b) Total margin represents total revenues less total cost of sales.

Midstream & Marketing Fiscal 2012 results were impacted by significantly warmer than normal heating-season temperatures and lower and less volatile natural gas prices. Midstream & Marketing total revenues decreased $206.7 million in Fiscal 2012 principally reflecting lower total revenues from natural gas marketing activities ($211.6 million), the result of lower average natural gas prices and lower volumes sold due to the warmer weather and, to a much lesser extent, lower electric generation revenues ($6.1 million) and capacity management revenues ($5.8 million). These decreases were partially offset by greater retail power revenues ($8.9 million), reflecting higher sales, and higher storage services revenues ($7.5 million).

The $11.2 million decrease in Midstream & Marketing's total margin principally reflects lower natural gas marketing total margin ($17.4 million), lower capacity management total margin ($5.8 million), principally the result of the lower and less volatile natural gas prices, and lower electric generation total margin ($2.1 million) partially offset by greater retail power, natural gas storage and gas gathering total margin. The decrease in electric generation total margin principally reflects the effects of lower electricity prices due in large part to the the effects on electricity prices of lower natural gas prices.

Midstream & Marketing's operating income in Fiscal 2012 was $20.5 million lower than the prior-year period reflecting the decrease in total margin ($11.2 million) and greater operating, administrative and depreciation expenses associated with electric generation assets ($3.2 million), including incremental expenses associated with the repowered Hunlock Station and higher fuel and maintenance expenses associated with the Conemaugh generation station, and greater energy marketing and storage services' operating and administrative expenses. The decline in income before income taxes reflects the lower operating income ($20.5


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million) and greater interest expense principally on Energy Services' credit facility borrowings.
Interest Expense. Our consolidated interest expense was $83.5 million higher in Fiscal 2012 reflecting higher AmeriGas Propane interest expense ($79.1 million) on debt issued to fund the Heritage Acquisition; greater International Propane interest expense ($2.7 million); and slightly higher Midstream & Marketing interest expense.
Income Taxes. Our effective income tax rate in Fiscal 2012 was greater than in Fiscal 2011 principally reflecting a much smaller share of pre-tax income from AmeriGas Partners which income is generally not subject to entity-level income taxes. Excluding the impact on the effective income tax rate of AmeriGas Partners' pre-tax income not subject to tax, the Fiscal 2012 effective tax rate was lower than in Fiscal 2011 reflecting, in large part, the effects of the previously mentioned lower International Propane income tax rate. The Fiscal 2011 effective tax rate was reduced by, among other things, the effect of the reversal of the $9.4 million reserve associated with the French Competition Authority Matter at Antargaz which was not subject to tax and the regulatory effects of greater state tax depreciation (as further described below under "UGI Utilities Income Taxes").
Fiscal 2011 Compared with Fiscal 2010
Consolidated Results
Net Income Attributable to UGI Corporation by Business Unit:

                                                                                   Variance - Favorable
                                       2011                     2010                   (Unfavorable)
                                             % of                     % of
(Dollars in millions)           Amount       Total       Amount       Total        Amount         % Change
AmeriGas Propane              $   39.9        17.1 %   $   47.3        18.1 %   $     (7.4 )       (15.6 )%
International Propane             41.0        17.6 %       58.8        22.5 %        (17.8 )       (30.3 )%
Gas Utility                       99.3        42.6 %       83.1        31.8 %         16.2          19.5  %
Midstream & Marketing             52.5        22.5 %       68.2        26.1 %        (15.7 )       (23.0 )%
Corporate & Other                  0.2         0.2 %        3.6         1.5 %         (3.4 )        N.M.
Net income attributable to
UGI Corporation               $  232.9       100.0 %   $  261.0       100.0 %   $    (28.1 )       (10.8 )%

N.M. - Variance is not meaningful.
Highlights - Fiscal 2011 versus Fiscal 2010

         Gas Utility results in Fiscal 2011 reflect the benefits of colder
          heating-season weather. Gas Utility results in Fiscal 2011 also include
          lower state income tax expense resulting from the regulatory effects of
          greater state tax depreciation.


         Antargaz' Fiscal 2011 results were negatively affected by warmer than
          normal late winter and spring weather resulting in an early end to the
. . .
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