Making Sense of UGI Corp.'s Messy Quarter

If there were one theme to describe UGI's (UGI 2.55%) fiscal fourth-quarter report, it would be that it was messy. The energy distributor and marketer had a lot of moving parts this quarter, with gains on commodity hedges and additional expenses relating to an acquisition clouding the picture. That said, once the adjustments are made and the true picture comes into focus, the quarter was solid, though certainly not spectacular.

Clearing up the confusion
On a GAAP basis, UGI reported a loss of $9.2 million, or $0.05 per share, which was an improvement over the year-ago quarter, when it reported a loss of $19.9 million, or $0.11 per share. That said, this still isn't a good apples-to-apples comparison because the current quarter was affected by commodity price volatility as well as additional expenses relating to its Finagaz acquisition. If we exclude these impacts, the company earned $1.9 million, or $0.01 per share, which was ahead of last year's loss of $8.9 million, or $0.05 per share.

Still, all four of the company's business segments were under pressure during the quarter, with revenue falling on a year-over-basis across the board while operating income fell in two of the four segments:

Data source: UGI Corp.

While it is worth noting that the company's fiscal fourth quarter is seasonally weak, this past quarter was certainly weaker than the fourth quarter of last year.

At its AmeriGas Partners (APU) subsidiary, where it owns the General Partner and 26% of the master limited partnership's limited partner units, revenue declined due to lower propane costs and lower volumes. Volumes for the year at AmeriGas Partners were down 7.2% primarily due to temperatures that were 8.9% warmer than the prior year while propane costs fell 50% due to weaker commodity prices.

UGI International's operations were also affected by warmer weather, though volume was higher due to the acquisition of Finagaz. That said, for the quarter the company had $4 million in incremental acquisition and integration expenses resulting from that transaction. Furthermore, international revenue was affected by a weaker euro and British pound.

The gas utility segment was also affected by warmer weather, though volumes actually increased. However, revenue fell due to lower off-system sales while its income fell due to higher expenses.

Finally, the midstream and marketing segment was affected by lower natural gas prices. However, that segment's margin was higher due to a number of factors, including the expansion of the company's natural gas gathering system in the Marcellus shale.

A look ahead
In a lot of ways, 2015 was a transition year for UGI because of how external and internal factors weighed on its operations. Externally, it was affected by warmer-than-normal weather conditions, which muted demand for natural gas and propane as heat sources, while commodity price volatility and foreign currency fluctuations also weighed on results. Meanwhile, internally, acquisition-related costs as well as higher costs in general held back results. In fact, for the fiscal year, its earnings were $2.01 per share, which were roughly flat with 2014's full-year financial results when it earned $2.02 per share. 

Having said that, the company's fiscal 2016 is expected to be much stronger, with UGI issuing adjusted earnings per share guidance in a range of $2.15 to $2.30 per share. Driving this expected growth are the investments the company made in 2015. For example, while Finagaz hurt UGI International's results this year due to those charges, it should boost results in 2016 as should the recent acquisition of Total's LPG business in Hungry. Likewise, AmeriGas Partners completed nine acquisitions in 2015, which should fuel growth in 2016, assuming the weather cooperates. Finally, the midstream and marketing segment will benefit from the completion of the Auburn III and Temple LNG liquefaction expansions while the gas utility will benefit from the addition of 17,000 customers over the past year.

Investor takeaway
Overall, UGI's fiscal fourth quarter and 2015 as a whole were a bit messy after a range of factors weighed on results. That said, the company laid a lot of groundwork for the future and investments made in 2015 are expected to pay off in 2016 by fueling higher earnings.