TOP CONTRIBUTORS

Ricky Wat

UGI AT A GLANCE

P/E ► 10.5 AVG EV/EBITDA ► 5.72 AVG ROA ► 6.8% AVG ROE ► 16.6% AVG Debt to Equity ► 2.73 AVG Current Ratio ► 1.23 AVG Interest Coverage Ratio ► 4.98 HIGH

 

 

 

 

 

 

UGI Corporation (NYSE:UGI) is a northeastern utility holding company that markets and distributes propane, butane, natural gas, and electricity.^[1] As one of the largest energy marketers on the East Coast, UGI Energy Services supplies energy products and services to nearly 2.1 million residential customers, 11,000 commercial and industrial customers on 33 utility systems.^[2]

Coal prices rose from $56 a ton in the beginning of 2008 to over $100 a ton by mid 2008^[3], thanks to China's phenomenal expansion. Because of this, and because of increasing concerns about the environmental viability of coal, power generators around the world are scrambling for alternative fuels. UGI has stepped up generation capacity for clean energies, building two propane air power plants in 2007, and expanding overall peak capacity by 30%. It also extended its natural gas pipelines into Maryland, Delaware, New Jersey, Pennsylvania, portions of western, central and eastern Europe in order to meet increased customer demand for natural gas.^[2]

In 2007, UGI grew its operations abroad, entering into a joint venture with Progas Germany, and acquiring an LPG distributor in Poland.^[4] The latest acquisitions and international exposure have benefited UGI’s growth prospects by increasing UGI’s customer density and delivery efficiency in European markets. Poland, for example, has the second highest LPG demand growth in Europe and second largest LPG automotive gas market in the world.^[4]

UGI has shifted its focus in the last ten years from being a near pure-play utilities company to a more diversified energy company. Propane and utility distribution segments respectively account for 48% and 36% of net income as of fiscal 2007. ^[5] UGI's primary role as a distributor of home heating oil is adversely affected by negative weather conditions such as warm weather. Warmer than normal weather conditions in the past have reduced demand for heating fuel in the past. Higher revenue margins and reduced demand for heating oil can also be attributed to natural gas price fluctuations due to abnormal periods of severe cold weather, gas supply interruptions, and volatility in commodities prices. ^[4]

Business Overview and Financials

UGI Corporation is a diversified energy holding company and was incorporated in Pennsylvania in 1991. Nearly all of the business is involved in international and domestic retail distribution of propane, natural gas, electricity, and other related energy services. Liquefied Natural Gas or LPG is largely propane; common uses are for powering automotive vehicles, for cooking and heating, and sometimes for lighting in rural areas.

All of UGI's business is conducted through four primary business segments:

UGI Corporation Net Income by Segment^[6]

• AmeriGas Propane (41.6% revenue, 26.0% net income) is a segment that consists of the propane distribution business and is the nation's largest retail propane distributor. ^[7]
• International Propane (14.6% revenue, 22.0% net income) is a segment that consists of the LPG distribution business and consists of wholly owned subsidiaries Antargaz in France, Flaga in Austria, and LPG Joint Ventures in China.^[7]
• Utility Distribution (21.3% revenue, 35.6% net income) is a segment that consists of the natural gas and electricity distribution business. UGI's Gas and Electric Utility subsidiary, UGI Utilities is regulated by the Pennsylvania Public Utility Commission ("PUC").^[7]
• Energy Services (24.4% revenue, 16.9% net income) is a segment of energy related businesses. Businesses include marketing of energy services in the eastern region of the US, operating interests in electric generation assets, storing natural gas and propane storage facilities.^[8]

Since 1999, operating revenue has increased steadily year after year and in recent years increased from $4,888.7M in 2005, to $5,221.0M in 2006, to $5,476.9M in 2007.^[9] As of FY2007, UGI's government regulated utility business account for 35% of total net income.^[9] Of the revenue that came from the regulated segment, 81% came from gas sales and 19% came from electric sales.^[9] As the graph to the bottom left shows, the amount of electric and natural gas sold have remained fairly constant, so the increased revenue is due to higher prices for the products sold to UGI customers. Higher revenue was not due to higher demand. As the graph on the bottom left shows, retail sales of natural gas and electricity remained relatively constant over the past 5 years. Higher revenue was due to higher prices for the products sold to UGI customers. For example, The PUC has repeatedly authorized PNG Gas to increase its base rates to $12.5 million annual, or approximately 4% in Dec. of 2006. Similarly, Electric Utility's POLR rates increased 4.5% in 2005 and 3% in 2006, and 5.5% in 2007.^[10]

UGI Corporation Electric Sales^[6]

UGI Corporation Domestic and International Propane Sales^[6]

UGI Corporation Natural Gas Utility Sales^[6]

Adverse weather conditions has had a negative effect on revenue margins in UGI service territories. Europe in the summer of 2007 experienced record setting warm temperatures of 45°C in southern and eastern Europe. International propane posted a record loss of 33.1% or $22.1M dollars in fiscal 2007.^[5] The 2007 blistering heat wave help reduce volume and demand and increased competitive pressure in service territories such as France and Austria, regions where UGI operate.^[5]Domestic retail sale of propane in the United States however experienced weather conditions that were generally 4.0 degrees colder than the year prior. Amerigas Propane as opposed to International Propane posted record gain of 112.0% or $28.1M dollars in fiscal 2007.^[11] UGI owns and operates a more balanced portfolio with total income net distributed as domestic propane (26%), international propane (22%), gas utility (28.9%), electric utility (6.7%), energy services (16.9%) relative to ten years prior where it was almost entirely a pure-play utility company ^[5]

UGI Corporation Net Income by Subsidary over a 3 year period^[5]

Trends and Forces

China's growth provides revenue opportunities for UGI around the world

Globally, coal consumption increased 30% in the past five years alone, and it is projected to increase another 1.1 billion tons over the next 10 years.^[12] Much of this increase was driven by China's growth. Coal prices rose from $56 a ton in the beginning of 2008 to over $100 a ton by mid 2008^[3] China's thirst for energy has implications back at home, as coal is traded on global markets, so an increase in demand anywhere in the world affects world prices.

In part because of quickly rising coal prices, Amerigas Propane managed to post a 7.9% increase in total revenue in fiscal 2007 in spite of the fact that overall retail sales volume of propane dropped 5.8%. Higher average propane selling prices of $10.97 (FY2006) compared to $15.29 (FY2007) per gallon of propane partially offset the 5.8% decrease in retail volumes sold due to warmer weather. UGI benefits from increased oil prices either from higher revenue margins or increased demand for other energy sources such as propane and natural gas.

Seasonal Weather Conditions Adversely Affect Demand for UGI's Energy Products and Services

Seasonal weather conditions act as drivers for supply, demand, and price levels of natural gas, propane, and electricity. Warmer than normal heating season weather adversely affect UGI's revenue margin and net income results. For example, 55-60% of AmeriGas Propane's annual retail propane volume are sold between the peak heating season of November and March. These five months are directly affected and influenced by the severity of the winter weather. ^[13] UGI's fiscal calendar is different from its competitors, with the first quarter ending on Dec. 31st, second quarter ending on Mar. 31st, the winter quarters is where the bulk of the revenue and net income come from. Summer months reap less profit compared to the winter months. The company saw 2007 revenues of $1,463.20M (1Q), $2,002.10M (2Q), $1,076.80M (3Q), and $934.80M (4Q).^[14] Similarly, the company saw net income of $61.90M (1Q), $120.20M (2Q), $11.50M (3Q), and $10.20M (4Q) for 2007.^[14]

Price Volatility of Natural Gas May Make Revenue Margins Unpredictable.

Approximately 90% of UGI's natural gas supplies are long term forward fixed supply contracts which help limit the revenue margin lost due to natural gas price fluctuations. ^[15]The remaining 10% are purchased on a daily basis at real time market prices level and is susceptible to inventory accumulation and deaccumulation, decreased production of natural gas during hurricane season, strong demand growth globally, and fluctuations in global temperature.^[15]

The rapid fluctuation of natural gas prices can put a negative strain on UGI revenue margins if prices fluctuate too rapidly and if the cost cannot be passed on to consumers. ^[16] State regulatory committees such as the PUC are in charge of approving base rate changes.^[15] The PUC commission staff examines whether an increase in price ceiling is justified and if the company have scoured the market for the best price or deal.^[16]The PUC will approve an increase in price ceiling if it deems that the companies revenue margin is unreasonably squeezed and that current operations at the present level of base rate is no longer a viable option. ^[16] The process to lobby for change is a time consuming one. Until price ceilings do reflect fluctuations in changes in market value, UGI would pay for the brunt of the cost, thus making UGI's natural gas revenue margins very volatile and unpredictable.^[16]

Natural weather conditions such as the formation of Hurricane Ike off the Gulf Coast of Mexico has contributed to higher natural gas prices. 73.1% of natural gas production in the Gulf remained shutdown as Hurricane Ike passes over the Gulf coast. ^[17] At the same time, natural gas experienced a 6% price level jump from $7.24 dollars per MMBtu to $7.65 dollars per MMBtu between Sept. 4 to Sept. 10, 2008.^[18]

Government Incentives and Public Demand for Renewables is Encouraging a Shift Toward Clean Energy Generation

UGI sells approximately 150 megawatts of coal generated electricity (1.5% of total electricity sales) to customers in states like Maryland, Pennsylvania, Delaware and New Jersey.^[2] These states each have renewable portfolio standards or RPS which is a regulatory policy that mandates states to diversify and increase clean energy electricity generation by a certain deadline such as 18-22% by 2021 in Maryland (varies from state to state).^[19]UGI is therefore bound to obligations invest in new plant and operations equipment, creating higher costs.^[19] These regulations will impact UGI financially since 90 percent of their electricity is generated from natural gas.^[7] RPS schemes may not be a huge factor in calculating revenue margin losses since the electricity segment comprises less than 6.9% of UGI's total revenue. UGI's natural gas and propane sector are in the clear.

22% of UGI's Business is Regulated by Government Agencies.

Gas and Electric Utility is the only segment of UGI's primary business that is regulated by government agencies. The utility distribution segment consists of the regulated natural gas and electric distribution business and is regulated by the Pennsylvania Public Utility Commission ("PUC").

The PUC regulates the rate base of UGI's Utilities located on eastern regions of the United States in Pennsylvania. The rate base is the value that a utility is allowed to earn a rate of return on. In order to avoid utility companies monopolizing the industry and having complete control in determining the pricing structure, government agencies put regulatory caps to ensure residential, wholesale, and industrial customers alike are getting a fair price on their gas and electricity bill. The rate base regulation directly influences profits.

In Dec. 2006, The PUC approved UGI to increase its base rates 4% or $12.5 million annually.^[20] The last time UGI had a base rate gas increase was in 1995, and before that in 1983.^[20] Electricity POLR rates have increased 4.5% in 2005, 3% in 2006, 3.5% in 2007, and 5.5% in 2008. Revenues were $96.1M, $98.0M, and $121.9M in 2005, 2006, and 2007 respectively.^[20]

Competitors

Unlike many of its peers in the diversified utilities industry, UGI is a diversified energy holdings company that has a significant portion of net income and revenue from sources outside of government regulated entities (significant operations in domestic and international LPG and propane) For example, 95% of Alliant Energy (LNT) regulated by government agencies is a public holdings utility company that deals primarily in the segments of gas and electric sales and distribution with no significant international or domestic operations in LPG or propane. There are marked distinction between a highly diversified energy holdings company and public holdings company since the latter is highly government regulated, rate base market caps are in place, and therefore face little competition except to compete for lower prices to attract, retain, and sustain customers in their relative service region.

UGI's primary source of income does not come directly from a government regulated utility source or from its joint venture operation in France, Austria, or China. UGI draws from different sources of income as reflected in the UGI net income by segments chart. Therefore UGI faces a specific type of competitor within its diversified energy group.

Propane Competitors:

• Ferrellgas Partners, L.P. (FGP) is the second largest retail propane distributor in the U.S. serving one million residential, industrial/commercial, and agricultural customers in the US and Canada.^[21]

• Energy Transfer Partners (ETP) is the owner of Heritage Propane, the third largest retail propane distributor in the U.S. serving more than 1,500,000 customers in the 44 states in the country.^[22] Since 1989, Heritage has completed more than 150 take over acquisitions with 15 newly acquired companies in the past fiscal year alone.^[22]

• Suburban Propane Partners, L.P. (SPH) is fourth largest retail marketer of propane in the United States and provides natural gas and electricity to residential and commercial customers located in Pennsylvania and New York. ^[23]

Electrical Services and Utilities Competitors:

• Exelon (EXC) is one of the nation's largest electrical utilities, with over 5.4 million retail customers and over 33,000 Megawatts in energy capacity.^[24]UGI's electricity service areas overlap with EXC's market territories and competes against EXC (one of the nation's largest electrical utilities) in Pennsylvania.^[24]

References

1. ↑ Yahoo Finance "Business Summary," 8/19/2008
2. ↑ ^{2.0 2.1 2.2} UGI Corporation 2007 Annual Report, "The Foundation of our Success: Service," pg. 11, 9/30/2007
3. ↑ ^{3.0 3.1} Coal Price May Fall Despite Tight Supply, September 24, 2008
4. ↑ ^{4.0 4.1 4.2} UGI Corporation 2007 Annual Report, "The Foundation of our Success: Service," pg. 9, 9/30/2007
5. ↑ ^{5.0 5.1 5.2 5.3 5.4 5.5} UGI Corporation 2007 Annual Report, "Financial Review: Results of Operation," pg. 16, 9/30/2007
6. ↑ ^{6.0 6.1 6.2 6.3} UGI Corporation 2007 Annual Report, "Financial Highlights," pg. 1, 9/30/2007
7. ↑ ^{7.0 7.1 7.2 7.3} UGI 2007 Annual SEC 10-K Report, "Corporate Overview", pg. 3 11/29/2007
8. ↑ UGI 2007 Annual SEC 10-K Report, "Corporate Overview" pg. 4, 11/29/2007
9. ↑ ^{9.0 9.1 9.2 9.3} UGI 2007 Annual SEC 10-K Report, "Results of Operation" pg. 47, 11/29/2007
10. ↑ UGI 2007 Annual SEC 10-K Report, "Utility Regulatory Matters" pg. 56, 11/29/2007
11. ↑ UGI 2007 Annual SEC 10-K Report, "Executive Overview" pg. 42, 11/29/2007
12. ↑ Energy Information Administration - Coal
13. ↑ UGI 2007 Annual SEC 10-K Report, "Risk Factors" pg. 28, 11/29/2007
14. ↑ ^{14.0 14.1} UGI 2007 Annual Report: "Quarterly Data (unaudited)", pg 60, 11/29/2007
15. ↑ ^{15.0 15.1 15.2} Public Utility Commission: "2005 Natural Gas Price Factors"
16. ↑ ^{16.0 16.1 16.2 16.3} FCIC: "Residential Natural Gas Prices:Information for Consumers"
17. ↑ AP: Oil prices slip even after US inventories shrink 9/11/2008
18. ↑ Natural Gas Weekly Update: "Prices", 9/11/2008
19. ↑ ^{19.0 19.1} Department of Energy: "Renewables Portfolio Standards"
20. ↑ ^{20.0 20.1 20.2} UGI 2007 Annual SEC 10-K filing Report: "Electric Utility Rates"
21. ↑ FGP Annual 2007 SEC 10-K Report, "Business Overview", pg. 1 11/29/2007
22. ↑ ^{22.0 22.1} LPG Gas: "Heritage Propane"
23. ↑ ^{23.0 23.1} SPH 2007 Annual SEC 10-K Report, "Development of Business", pg. 1, 11/28/2007
24. ↑ ^{24.0 24.1} EXC 2007 Annual SEC 10-K Report, "Business Profile", pg. 1, 11/29/2007
25. ↑ ^{25.00 25.01 25.02 25.03 25.04 25.05 25.06 25.07 25.08 25.09 25.10 25.11 25.12 25.13 25.14 25.15} Yahoo Finance: UGI Direct Competitor Comparison 2008
26. ↑ UGI Annual 2007 SEC 10-K Report, "Results of Operations$", pg. 43, 11/28/2008
27. ↑ EXC Annual 2007 SEC 10-K Report, "Electric Generation Capacity", 2/07/2008
28. ↑ FGP Annual 2007 SEC 10-K Report, "Selected Financial Data", pg. 35 11/29/2007
29. ↑ Retailer Propane Market Rankings
30. ↑ ETP Annual 2007 SEC 10-K Filing: "Natural Gas Operation Results" pg. 11, 10/30/2007
31. ↑ ^{31.0 31.1} SPH 2007 Annual SEC 10-K Report, "Natural Gas and Electricity", pg. 7, 11/28/2007