UGI CORPORATION Forward-Looking Statements
Information contained in this Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. Such statements use forward-looking words such as "believe," "plan," "anticipate," "continue," "estimate," "expect," "may," or other similar words. These statements discuss plans, strategies, events or developments that we expect or anticipate will or may occur in the future. 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 that actual results almost always 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 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 and the seasonal nature of our business; (2) cost volatility and availability of 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, tax, consumer protection, data privacy, accounting matters, and environmental, including 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; (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, 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 in all forms; (13) transmission or distribution system service interruptions; (14) political, regulatory and economic conditions inthe United States ,Europe and other foreign countries, including the current conflicts in theMiddle East and the withdrawal of theUnited Kingdom from theEuropean Union , and foreign currency exchange rate fluctuations, particularly the euro; (15) 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) reduced distributions from subsidiaries impacting the ability to pay dividends; (18) changes in Marcellus andUtica Shale gas production; (19) the availability, timing and success of our acquisitions, commercial initiatives and investments to grow our businesses; (20) our ability to successfully integrate acquired businesses and achieve anticipated synergies; (21) the interruption, disruption, failure or malfunction of our information technology systems, including due to cyber attack; (22) the inability to complete pending or future energy infrastructure projects; (23) 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; (24) uncertainties related to a global pandemic, including the duration and/or impact of the COVID-19 pandemic; and (25) the extent to which we are able to utilize certain tax benefits currently available under the CARES Act and similar tax legislation and whether such benefits will remain available in the future. These factors, and those factors set forth in Item 1A. Risk Factors in the Company's 2020 Annual Report, 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. We undertake no 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. ANALYSIS OF RESULTS OF OPERATIONS The following analyses compare the Company's results of operations for the 2020 three-month period with the 2019 three-month period. Our analyses of results of operations should be read in conjunction with the segment information included in Note 12 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 commodity derivative 31
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UGI CORPORATION AND SUBSIDIARIESinstruments not associated with current-period transactions as further discussed below, are significantly higher in our first and second fiscal quarters.
Recent Developments
Pending Acquisition ofMountaineer Gas Company OnDecember 29, 2020 ,UGI Corporation signed a definitive agreement to acquire Mountaineer, the largest natural gas distribution company inWest Virginia for a preliminary purchase price of$540 million , which includes the assumption of approximately$140 million of debt. Mountaineer serves nearly 215,000 customers across 50 of the state's 55 counties. The pending acquisition is subject to customary regulatory and other closing conditions, including approval by thePublic Service Commission of West Virginia and federal antitrust clearance, and is expected to close in the second half of calendar year 2021. UGI currently expects to finance the pending acquisition through the issuance of debt and/or equity-linked securities and existing liquidity. COVID-19 Pandemic InMarch 2020 , the WHO declared a global pandemic attributable to the outbreak and continued spread of COVID-19 that has had a significant impact throughout the global economy. In connection with the mitigation and containment procedures recommended by the WHO, the CDC, and as imposed by federal, state, and local governmental authorities, including shelter-in-place orders, quarantines and similar restrictions, we implemented a variety of procedures to protect our employees, third-party business partners, and customers worldwide. Although our results continue to be impacted by COVID-19 in Fiscal 2021, we continue to provide essential products and services to our global customers in a safe and reliable manner and will continue to do so in compliance with mandated restrictions presented by each of the markets we serve. We continue to evaluate and react to the potential effects of a prolonged disruption and the continued impact on our results of operations. These items may include, but are not limited to: the financial condition of our customers; decreased availability and demand for our products and services; realization of accounts receivable; impairment considerations related to certain current assets, long-lived assets and goodwill; delays related to current and future projects; and the effects of government stimulus efforts including tax legislation in response to COVID-19. OnMarch 27, 2020 , the CARES Act was enacted in response to the COVID-19 pandemic. Among other things, the CARES Act includes provisions which modify the NOL limitation and carryback rules including a five-year carryback for NOLs and the temporary removal of the 80 percent limitation on NOL utilization for taxable years beginning beforeJanuary 1, 2021 . For additional information related to the CARES Act and its impact on our results of operations, see "Interest Expense and Income Taxes" below. We cannot predict the duration or total magnitude of the pandemic and the total effects on our business, financial position, results of operations, liquidity or cash flows at this time, but we remain focused on managing our financial condition and liquidity throughout this global crisis. Business Transformation Initiatives Corporate Services. Beginning in Fiscal 2020, we initiated a transformation project focused on our support functions including: finance, procurement, human resources, and information technology. This initiative will standardize processes and activities across our global platform, while leveraging the use of best practices and efficiencies between our businesses. While this initiative is being coordinated across multiple support functions, each area is at a different stage of transformation and will undergo the required changes over the next two to three years. In connection with these activities, we expect to incur approximately$40 million of non-recurring costs during that time resulting in more than$15 million of ongoing annualized savings by Fiscal 2023.AmeriGas Propane . AtAmeriGas Propane , we began executing on business transformation initiatives during Fiscal 2019 focused on efficiency and effectiveness in the following key areas: customer digital experience; customer relationship management; operating process redesign and specialization; distribution and routing optimization; sales and marketing effectiveness; purchasing and general and administrative efficiencies; and supply and logistics. The transformation activities will continue to be carried out over Fiscal 2021 and may result in customer service disruptions over the near term. However, once completed, these initiatives are expected to provide total annual benefits of more than$140 million by the end of Fiscal 2022 which will allow us to improve profitability and cash flow through operational efficiencies and expense reductions and enable increased investment into base business customer retention and growth initiatives, including the reduction of margins in select segments of our base business. We estimate the total cost of executing on these initiatives, including approximately$100 million of related capital expenditures, to be approximately$200 million . 32
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UGI CORPORATION AND SUBSIDIARIES
UGI International . At our UGI International LPG business, we launched an
initiative in Fiscal 2019 and embarked on a process of identifying operational
synergies across all 17 countries in which we currently do business. We call
this initiative Project Alliance , the goal of which is to focus attention on
enhanced customer service and safe and efficient operations through the
establishment of two centers of excellence. One such center will be focused on
commercial excellence to identify and execute projects that improve the
customer's experience. The second center will be focused on operational
excellence across our distribution network and our filling centers. The business
activities are in process and will continue to be executed primarily during
Fiscal 2021. Once completed, these activities are expected to generate over €30
million of annual benefits. We estimate the total cumulative cost of executing
on these Project Alliance initiatives, including approximately €10 million
related to IT capital expenditures, to be approximately €55 million.
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 attributable to UGI
Corporation as determined in accordance with GAAP 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 attributable to UGI Corporation , the most directly comparable GAAP
measure, to adjusted net income attributable to UGI Corporation , and reconcile
diluted earnings per share, the most directly comparable GAAP measure, to
adjusted diluted earnings per share:
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UGI CORPORATION AND SUBSIDIARIES
Three Months Ended
Adjusted net income attributable to UGI Corporation December 31,
(Dollars in millions) 2020 2019
AmeriGas Propane $ 74 $ 91
UGI International 92 73
Midstream & Marketing 35 36
UGI Utilities 49 61
Corporate & Other (a) 53 (49)
Net income attributable to UGI Corporation 303 212
Net (gains) losses on commodity derivative instruments not
associated with current-period transactions (net of tax of
(85) 10
Unrealized losses on foreign currency derivative instruments (net
of tax of
15 11
Acquisition and integration expenses associated with the CMG
Acquisition (net of tax of
- 1
Acquisition expenses associated with the pending Mountaineer
Acquisition (net of tax of
1 -
Business transformation expenses (net of tax of $(4) and $(5) ,
respectively) 13 12
Total adjustments (a) (b) (56) 34
Adjusted net income attributable to UGI Corporation $ 247 $ 246
Three Months Ended
December 31,
Adjusted diluted earnings per share 2020 2019
AmeriGas Propane $ 0.35 $ 0.43
UGI International 0.44 0.34
Midstream & Marketing 0.17 0.17
UGI Utilities 0.23 0.29
Corporate & Other (a) 0.25 (0.23)
Earnings per share - diluted 1.44 1.00
Net (gains) losses on commodity derivative instruments not associated with current-period transactions
(0.40) 0.05
Unrealized losses on foreign currency derivative instruments 0.07 0.06
Acquisition and integration expenses associated with the CMG Acquisition
- -
Acquisition expenses associated with the pending Mountaineer Acquisition
0.01 -
Business transformation expenses 0.06 0.06
Total adjustments (a) (0.26) 0.17
Adjusted earnings per share - diluted (a)Corporate & Other includes certain adjustments made to our reporting segments in arriving at net income attributable toUGI 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 12 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. 34
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UGI CORPORATION AND SUBSIDIARIESEXECUTIVE OVERVIEW
2020 three-month period compared with 2019 three-month period
Discussion. Net income attributable toUGI Corporation for the 2020 three-month period was$303 million (equal to$1.44 per diluted share) compared to net income attributable toUGI Corporation for the 2019 three-month period of$212 million (equal to$1.00 per diluted share). Net income in the 2020 three-month period reflects gains from changes in unrealized commodity derivative instruments and certain foreign currency derivative instruments compared to losses in the prior-year period. Net income also reflects business transformation expenses of$13 million and$12 million , respectively, for the three-months endedDecember 31, 2020 and 2019. Adjusted net income attributable toUGI Corporation for the 2020 three-month period was$247 million (equal to$1.18 per diluted share) compared to adjusted net income attributable toUGI Corporation for the 2019 three-month period of$246 million (equal to$1.17 per diluted share). The slight increase in adjusted net income attributable toUGI Corporation during the 2020 three-month period reflects higher earnings attributable to our international business segment largely offset by lower earnings contributions from ourAmeriGas Propane andUGI Utilities business segments. Net income and adjusted net income in the 2020 three-month period both reflect an NOL benefit resulting from the CARES Act. The decrease in adjusted net income attributable to UGI fromAmeriGas Propane in the 2020 three-month period largely reflects lower total margin resulting from lower volumes and lower average unit margins, partially offset by lower operating and administrative expenses including partial benefits related to ongoing transformation initiatives.UGI International adjusted net income increased$19 million in the 2020 three-month period principally reflecting higher total margin driven by colder weather compared to the prior-year period, higher average LPG unit margins, and the translation effects of the stronger euro in the 2020 three-month period. These positive factors were partially offset by slightly higher operating and administrative expenses compared to the prior-year period. Midstream & Marketing adjusted net income in the 2020 three-month period was largely consistent with the prior-year period. The absence of earnings contributions from assets divested in the prior year were largely offset by improved capacity management earnings and lower operating and administrative expenses during the three-months endedDecember 31, 2020 .UGI Utilities 2020 three-month period adjusted net income decreased$12 million compared to the prior-year period. The decrease was principally attributable to lower total margin attributable to reduced volumes resulting from warmer weather and the impact of COVID-19, higher depreciation expenses and slightly higher operating and administrative expenses compared to the prior-year period. 35
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SEGMENT RESULTS OF OPERATIONS
2020 Three-Month Period Compared with the 2019 Three-Month Period
AmeriGas Propane
For the three months ended December 31, 2020 2019 Decrease
(Dollars in millions)
Revenues $ 666 $ 730 $ (64) (9) %
Total margin (a) $ 394 $ 441 $ (47) (11) %
Operating and administrative expenses $ 221 $ 240 $ (19) (8) %
Operating income/earnings before interest
expense and income taxes $ 141 $ 165 $ (24) (15) %
Retail gallons sold (millions) 276 304 (28) (9) %
Heating degree days-% (warmer) colder than
normal (b) (4.6) % 4.0 % - -
(a)Total margin represents total revenues less total cost of sales.
(b)Beginning in Fiscal 2021, 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 323 regions in the United
States , excluding Alaska and Hawaii . Prior-period amounts have been restated to
conform to the current-period presentation.
Average temperatures during the 2020 three-month period were 4.6% warmer than
normal and 8.2% warmer than the prior-year period. Total retail gallons sold
during the 2020 three-month period were 9% lower than the prior-year period
principally reflecting the effects of warmer weather on heating-related sales,
structural conservation and other residual volume loss, and the continued impact
of COVID-19 on commercial and motor fuel volumes. These decreases were partially
offset by higher resale and cylinder exchange volumes compared to the prior-year
period attributable to growth and pandemic-related usage increases.
Total revenues decreased $64 million during the 2020 three-month period largely
reflecting lower retail and wholesale propane volumes ($63 million ) and slightly
lower average retail propane selling prices ($1 million ) compared to the
prior-year period. Average daily wholesale propane commodity prices during the
2020 three-month period at Mont Belvieu, Texas , one of the major supply points
in the U.S. , were approximately 15% higher than such prices during the 2019
three-month period. Total cost of sales decreased $17 million during the 2020
three-month period principally reflecting the lower retail propane volumes ($23
million ) partially offset by higher average retail propane product costs ($6
million ).
AmeriGas Propane total margin decreased $47 million in the 2020 three-month
period largely attributable to the lower retail propane volumes ($36 million )
and lower average retail unit margins ($7 million ) compared to the prior-year
period.
Operating income and earnings before interest expense and income taxes decreased
$24 million during the 2020 three-month period principally reflecting the
previously mentioned decrease in total margin partially offset by lower
operating and administrative expenses ($19 million ). The decrease in operating
and administrative expenses in the 2020 three-month period reflects, among other
things, lower employee compensation and benefits-related costs ($11 million ),
decreased vehicle and equipment operating and maintenance expenses ($6 million ),
and lower general insurance costs ($3 million ). The lower operating and
administrative expenses reflect the partial benefits related to the previously
mentioned ongoing business transformation initiatives.
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UGI International
For the three months ended December 31, 2020 2019 Increase (Decrease)
(Dollars in millions)
Revenues $ 700 $ 651 $ 49 8 %
Total margin (a) $ 317 $ 276 $ 41 15 %
Operating and administrative expenses $ 157 $ 151 $ 6 4 %
Operating income $ 135 $ 96 $ 39 41 %
Earnings before interest expense and income
taxes $ 136 $ 100 $ 36 36 %
LPG retail gallons sold (millions) 236 246 (10) (4) %
Heating degree days-% warmer than normal (b) (2.0) % (6.6) % - -
(a)Total margin represents revenues less cost of sales and, in the 2019
three-month period, LPG cylinder filling costs of $7 million . For financial
statement purposes, LPG cylinder filling costs in the 2019 three-month period
are included in "Operating and administrative expenses" on the 2019 Condensed
Consolidated Statement of Income (but are excluded from operating and
administrative expenses presented above). LPG cylinder filling costs are
included in "Cost of sales" on the 2020 Condensed Consolidated Statement of
Income.
(b)Beginning in Fiscal 2021, 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. Prior-period amounts
have been restated to conform to the current-period presentation.
Average temperatures during the 2020 three-month period were 2.0% warmer than
normal, but 4.9% colder than the prior-year period. Total LPG retail gallons
sold during the 2020 three-month period were 4% lower reflecting the impact of
the termination of a high-volume, low-margin autogas contract in Italy during
the prior year partially offset by increased bulk volumes attributable to crop
drying and heating-related bulk sales. COVID-19 also continued to negatively
impact commercial and industrial volumes during the 2020 three-month period.
Average wholesale prices for propane and butane in northwest Europe were
approximately 8% and 13% lower, respectively, during the three-months ended
December 31, 2020 compared with the prior-year period.
UGI International base-currency results are translated into U.S. dollars based
upon exchange rates experienced during the reporting periods. Differences in
these translation rates affect the comparison of line item amounts presented in
the table above. 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 2020 and 2019 three-month periods, the average
unweighted euro-to-dollar translation rates were approximately $1.19 and $1.11 ,
respectively, and the average unweighted British pound sterling-to-dollar
translation rates were approximately $1.32 and $1.29 , respectively.
UGI International revenues and cost of sales increased $49 million and $8
million , respectively, during the 2020 three-month period compared to the
prior-year period. The increase in revenues principally reflects the translation
effects of the stronger euro (approximately $44 million ) and the previously
mentioned bulk volume increases, partially offset by the low-margin volumes lost
in connection with the autogas contract termination in Italy . The increase in
cost of sales is largely attributable to the translation effects of the stronger
euro (approximately $23 million ) partially offset by the decrease in low-margin
wholesale and autogas volumes.
UGI International total margin increased $41 million during the 2020 three-month
period reflecting higher average LPG unit margins and the previously mentioned
increase in crop drying and heating-related bulk volumes. The translation
effects of the stronger euro (approximately $21 million ) compared to the
prior-year period and higher margins from energy marketing activities also
contributed to the improvement in total margin. These positive impacts were
partially offset by lower autogas and other low-margin volumes and the continued
impact of COVID-19. The increase in average LPG unit margins includes the
effects of margin management efforts, lower LPG product costs, and lower costs
associated with energy conservation certificates including adjustments related
to the current compliance period.
UGI International operating income and earnings before interest expense and
income taxes increased $39 million and $36 million , respectively, during the
2020 three-month period compared to the prior-year period. The increase in
operating income principally reflects the increase in total margin partially
offset by slightly higher operating and administrative expenses ($6 million )
compared to the prior-year period. The increase in operating and administrative
expenses is largely attributable to the effects of the stronger euro
(approximately $10 million ) partially offset by lower expenses attributable to
the effects of COVID-19. The increase in earnings before interest expense and
income taxes in the 2020 three-month period largely reflects
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the higher operating income and lower pre-tax realized gains on foreign currency
exchange contracts entered into in order to reduce volatility in UGI
International net income resulting from the translation effects of changes in
foreign currency exchange rates ($4 million ).
Midstream & Marketing
For the three months ended December 31, 2020 2019 Decrease
(Dollars in millions)
Revenues $ 341 $ 373 $ (32) (9) %
Total margin (a) $ 104 $ 109 $ (5) (5) %
Operating and administrative expenses $ 32 $ 35 $ (3) (9) %
Operating income $ 52 $ 55 $ (3) (5) %
Earnings before interest expense and income taxes $ 59 $ 62 (a)Total margin represents revenues less cost of sales.
Average temperatures across Midstream & Marketing's energy marketing territory during the three months endedDecember 31, 2020 were 9.1% warmer than normal and 11.4% warmer than the prior-year period. Midstream & Marketing's prior year results include contributions from its HVAC business and ownership interest in Conemaugh, both of which were sold inSeptember 2020 . Midstream & Marketing revenues for the 2020 three-month period were$32 million lower than the prior-year period principally reflecting decreased natural gas revenues ($27 million ) and, to a much lesser extent, lower peaking revenues ($7 million ) and the absence of revenues attributable to its former HVAC business and ownership interest in Conemaugh ($16 million ). The effect of these revenue decreases was partially offset by higher capacity management revenues ($8 million ) and renewable energy revenues ($7 million ). Midstream & Marketing cost of sales were$237 million in the 2020 three-month period compared to$264 million in the prior-year period. The$27 million decrease in cost of sales principally reflects decreased natural gas costs ($24 million ) and the absence of costs attributable to HVAC and Conemaugh ($9 million ), partially offset by higher renewable energy costs ($8 million ). The significant decreases in both natural gas revenues and cost of sales during the 2020 three-month period are largely attributable to lower average natural gas prices and, to a much lesser extent, lower volumes compared to the prior-year period. Midstream & Marketing total margin decreased$5 million in the 2020 three-month period reflecting the absence of margins attributable to HVAC and Conemaugh ($7 million ) and lower peaking margin ($5 million ) compared to the prior-year period. The effect of these decreases was partially offset by improved capacity management margin ($8 million ) in the 2020 three-month period. Midstream & Marketing operating income and earnings before interest expense and income taxes during the 2020 three-month period each decreased$3 million compared to the prior-year period. These decreases principally reflect the lower total margin partially offset by lower operating and administrative expenses ($3 million ). The decrease in operating and administrative expenses was largely related to the absence of the previously mentioned divested assets partially offset by increases related to new assets placed into service and acquisitions. 38
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UGI Utilities
For the three months ended December 31, 2020 2019 Increase (Decrease)
(Dollars in millions)
Revenues $ 300 $ 329 $ (29) (9) %
Total margin (a) $ 167 $ 177 $ (10) (6) %
Operating and administrative expenses (a) $ 60 $ 58 $ 2 3 %
Operating income $ 77 $ 92 $ (15) (16) %
Earnings before interest expense and income
taxes $ 78 $ 92 $ (14) (15) %
Gas Utility system throughput-bcf
Core market 23 26 (3) (12) %
Total 83 85 (2) (2) %
Electric Utility distribution sales - gwh 244 246 (2) (1) %
Gas Utility heating degree days-% (warmer)
colder than normal (b) (9.8) % 0.3 % - -
(a)Total margin represents revenues less cost of sales and revenue-related taxes
(i.e., Electric Utility gross receipts taxes) of $1 million and $1 million
during the three months ended December 31, 2020 and 2019, respectively. 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)Beginning in Fiscal 2021, 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 airports located within Gas
Utility's service territory. Prior-period amounts have been restated to conform
to the current-period presentation.
Temperatures in Gas Utility's service territory during the three months ended
December 31, 2020 , were 9.8% warmer than normal and 10.1% warmer than the
prior-year period. Gas Utility core market volumes decreased during the 2020
three-month period (3 bcf) reflecting the effects of the warmer weather and
reduced commercial and industrial volumes attributable to COVID-19, partially
offset by growth in the number of core market customers. Total Gas Utility
distribution system throughput decreased (2 bcf) during the 2020 three-month
period reflecting the lower core market volumes partially offset by higher large
firm delivery service volumes. Electric Utility distribution sales volumes
decreased slightly during the 2020 three-month period as a result of warmer
weather compared to the prior-year period.
UGI Utilities revenues decreased $29 million in the 2020 three-month period
reflecting a $30 million decrease in Gas Utility revenues partially offset by a
slight increase in Electric Utility revenues. The decrease in Gas Utility
revenues principally reflects lower core market revenues ($28 million ) largely
attributable to the decrease in core market volumes. The increase in Electric
Utility revenues during the 2020 three-month period reflects higher DS rates
which were largely offset by the decrease in sales volumes.
UGI Utilities cost of sales was $132 million in the 2020 three-month period
compared with $151 million in the prior-year period reflecting lower Gas Utility
cost of sales ($20 million ) partially offset by higher Electric Utility cost of
sales ($1 million ). The lower Gas Utility cost of sales is largely attributable
to the effect of decreased core market volumes ($11 million ) and lower PGC rates
($9 million ) compared to the prior-year period. The increase in Electric Utility
cost of sales reflects higher average DS rates compared to the prior-year
period.
UGI Utilities operating income and earnings before interest expense and income taxes decreased$15 million and$14 million , respectively, during the 2020 three-month period. These decreases reflect the previously mentioned decrease in total margin, higher depreciation expense ($3 million ), and higher operating and administrative expenses ($2 million ) compared to the prior-year period. The increase in depreciation expense relates to continued IT and distribution system capital expenditure activity. The increase in operating and administrative expenses reflect, among other things, higher employee compensation and benefits-related costs and higher allocation of corporate expenses. These increases were partially offset by lower contracted labor and professional services costs compared to the prior-year period. 39
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UGI CORPORATION AND SUBSIDIARIESInterest Expense and Income Taxes
Our consolidated interest expense during the 2020 three-month period was
The effective income tax rate for the 2020 three-month period was largely consistent with the prior-year period. Current year benefits related to the CARES Act and the impact of high-tax exception legislation described below were largely offset by the absence of a discrete benefit which impacted the prior-year period. InJuly 2020 , theU.S. Department of the Treasury and theIRS released regulations which modify the GILTI provisions of the IRC, as well as proposed regulations related to other IRC provisions. The Company continues to evaluate the elections available under these regulations, including the current period benefit mentioned above and any impact on anticipated benefits under the CARES Act. Accordingly, the impacts on the Company's income tax provisions and taxes payable or refundable related to the CARES Act and the GILTI provisions 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 the outbreak and continued spread of COVID-19. Our total available liquidity balance, comprising cash and cash equivalents and available borrowing capacity on our revolving credit facilities, totaled approximately$1.5 billion at bothDecember 31, 2020 andSeptember 30, 2020 . The Company does not have any near-term senior note or term loan maturities. While the Company's operations and financial performance has been impacted by COVID-19 in the 2020 three-month period, it is a rapidly evolving situation and the Company cannot predict the ultimate impact that COVID-19 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 ofDecember 31, 2020 . 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$416 million atDecember 31, 2020 , compared with$336 million atSeptember 30, 2020 . Excluding cash and cash equivalents that reside at UGI's operating subsidiaries, atDecember 31, 2020 andSeptember 30, 2020 , UGI had$245 million and$112 million of cash and cash equivalents, respectively. Such cash is available to pay dividends on UGI Common Stock and for investment purposes. 40
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UGI CORPORATION AND SUBSIDIARIESLong-term Debt and Credit Facilities
Long-term Debt
The Company's debt outstanding atDecember 31, 2020 andSeptember 30, 2020 , comprises the following: September 30, December 31, 2020 2020 AmeriGas Midstream & Corp & (Millions of dollars) Propane UGI International Marketing UGI Utilities Other Total Total Short-term borrowings$ 222 $ 1 $ 79 $ 266 $ -$ 568 $ 347 Long-term debt (including current maturities): Senior notes$ 2,575 $ 428 $ - $ 975 $ -$ 3,978 $ 3,960 Term loans - 366 690 146 550 1,752 1,741 Other long-term debt 4 24 41 2 277 348 380 Unamortized debt issuance costs (19) (6) (12) (5) (3) (45) (47) Total long-term debt$ 2,560 $ 812 $ 719$ 1,118 $ 824 $ 6,033 $ 6,034 Total debt$ 2,782 $ 813 $ 798$ 1,384 $ 824 $ 6,601 $ 6,381
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