The Return of Cooler Weather Heats Up UGI Corp.'s Earnings

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UGI (UGI -0.92%) is off to a strong start to its fiscal year. The utility benefited from several recently completed strategic investments, which combined with cooler weather to fuel strong results across its business lines.

UGI results: The raw numbers

Data source: UGI Corporation.

What happened with UGI this quarter? 

The weather was the story this quarter:

• The company's AmeriGas Propane (APU) subsidiary reported solid results, with operating income rising 9.5% to $141.9 million. Fueling that growth was a 3.6% increase in retail gallons sold thanks to colder temperatures than the prior year and higher margins as a result of the increase in volumes. AmeriGas Propane also completed one small acquisition during the quarter and refinanced some of its debt at a lower rate.
• The international segment's adjusted income rose 4.5% to $88.9 million. Again, cooler temperatures fueled higher demand which expanded margins. This segment also benefited from recent acquisitions, including making additional progress on the integration of Finagaz during the quarter.
• The utilities segment reported robust earnings growth, with operating income jumping 70.2% to $82.2 million. A 25.4% drop in the average temperature versus the prior year fueled a 32% increase in natural gas demand through its gas utility system. In addition to that, the UGI Gas business benefited from an increase in base rates that went into effect in the middle of October.
• Finally, the midstream and marketing segment's operating income rose 15.9% to $49.7 million due to higher natural gas volumes flowing through its systems. Fueling those volumes were, you guessed it, cooler temperatures.

What management had to say 

CEO John Walsh commented on the results by saying:

This was a very strong quarter for the company as all of our businesses contributed higher adjusted net income than in the prior year. Our adjusted earnings of $0.91 per share were 42% higher than the first quarter of fiscal year 2016, primarily reflecting the contributions from the strategic investments made in recent years, as well as the impact of weather that was colder than the prior-year period. We continue to see the benefits from our recent investments and marked significant milestones for several current growth projects.

A return of cooler weather compared to the prior period made a significant impact on UGI's results this quarter. That said, the weather was still warmer than normal, which means earnings are not quite as good as they could have been. That is muting some of the positive impacts from the strategic investments.

Speaking of growth initiatives, the company's midstream and market segment recently placed the Sunbury pipeline into service and continued to make progress on its LNG investments. Meanwhile, the utilities business recently filed a rate case for UGI Penn Natural Gas, which could lead to its first rate increase since 2009. It would use the increased revenue to pay for system improvements and a new energy efficiency and conservation program. These investments will help the company better serve customers while also boosting earnings.

Looking forward 

Despite the strong start to the year, UGI is maintaining its full-year outlook at the moment, still calling for adjusted earnings in the range of $2.30 to $2.45 per share. However, given the seasonality of its business, the upcoming fiscal second quarter is a significant driver of full-year results. Because of this, the company plans to update guidance when it reports those results.