UGI Corporation

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

UGI Corporation is a holding company that, through its subsidiaries, distributes, stores, transports and markets energy products and related services in the U.S. and Europe.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

UGI operates in the energy sector through four primary segments: Utilities, Midstream & Marketing, UGI International, and AmeriGas Propane.

Revenues by Segment

  • Utilities: This segment primarily involves the regulated distribution of natural gas and electricity to residential, commercial, and industrial customers, mainly in Pennsylvania and Maryland.
  • Midstream & Marketing: This segment’s primary businesses are natural gas gathering, natural gas processing, natural gas transportation, and LNG storage and transportation activities. They also provide natural gas and electricity marketing services.
  • UGI International: This segment consists of the Company’s international LPG distribution businesses operating in 17 European countries, a global LNG import and regasification business, and the renewable energy business in the United Kingdom and other European countries.
  • AmeriGas Propane: This segment distributes propane to customers throughout the United States and serves diverse markets.

Industry Trends

  • Energy Transition: The global push towards cleaner energy is affecting UGI’s operations as well, particularly their European assets. Companies face pressure to transition away from fossil fuels and towards renewable energy sources.
  • Increased Price Volatility: Energy prices (particularly natural gas and propane) have become increasingly volatile due to geopolitical uncertainties, weather, and global energy supply imbalances. This affects both the costs and revenue volatility for UGI’s operations.
  • Regulatory Landscape: Utilities in general are heavily regulated. In UGI’s case, regulations pertaining to pipeline integrity, rate setting, and environmental factors are all major considerations. In addition, the company’s exposure to foreign regulations brings new layers of complexity.
  • Shift Towards Decentralization and Electrification: There is an ongoing shift in energy consumption toward smaller, more decentralized energy sources. Also, increasing interest is seen in electrical energy and renewable energy, potentially affecting the demand for traditional gas and propane.
  • Emerging Market Opportunities: Emerging markets are expected to experience continued growth for energy demand. UGI is present in some of these markets, which creates opportunities but brings also risks linked to different financial and legal requirements, which are significantly different from developed economies.

Competitive Landscape

  • Utilities: This segment faces relatively stable local competition within its regulated service areas.
  • Midstream & Marketing: The midstream and marketing segment faces competition from other energy producers, midstream operators, and marketers, both on price and access to resources.
  • UGI International: UGI operates in competitive European markets, where companies with large scale can dominate smaller local players.
  • AmeriGas Propane: The propane industry is characterized by regional players and national companies, and is prone to competition.

What makes UGI different?

UGI has a very diverse business with revenue coming from a number of different segments and geographies. It also has a good mix of regulated and unregulated businesses, which offers some protection from industry swings. However, some of their businesses do not have wide moats, as their commodity products are mostly unbranded.

Other Relevant Information

UGI’s recent earnings calls highlight the company’s emphasis on growth and efficiency improvements. They plan to grow via investments in renewable energy, increasing customer base, and cost reductions. They emphasize improving the balance between debt and equity in the company’s financial position.

Financial Analysis

Revenue Trends

The company’s revenue has increased over the past few years, although profitability has fluctuated. For example, in FY 2023 the company reported a decrease in revenue of 18.96% versus 2022, as well as a net loss of -424.5 million compared to net income of 585.8 in 2022. The decline in profitability is partly attributable to lower natural gas prices, while the increase in profitability in 2022 was helped by the same factor and positive margin contributions across all segments.

Profitability & Margins

  • Gross Profit Margins: UGI’s gross profit margins vary across different segments. The retail energy and propane distribution businesses typically have lower margins than midstream and marketing segments.
  • Net Income Margins: The net income margin is highly vulnerable to volatility in the energy sector and is therefore unpredictable.
  • The net income for the last 3 months of 2023 is -346.8 million compared to a net income of 755.7 million during 2022.
  • Return on Invested Capital (ROIC): ROIC fluctuates from year to year based on economic cycles and acquisitions. Recently it has stayed between the 10-13% range.

Capital Structure

  • Debt Levels: UGI relies heavily on debt to finance its capital-intensive operations, which has a negative impact on its balance sheet. There has been some improvements in deleveraging over the past years, as shown in debt-to-capital ratio figures.
  • The long-term debt for the most recent quarter is $6.16 Billion compared to a book equity of 5.097 billion. The leverage, defined as Debt/(Debt+Equity) is at a high ratio of 0.54.
  • Interest Coverage: UGI’s interest coverage has been below average due to the high debt load and interest rate fluctuations. As of 2022, EBITDA over interest expense was 4.17x which was up 0.59x since the previous year, but the company’s high levels of debt still present a risk.
  • Free Cash Flow: Free Cash Flows have fluctuated quite a bit in the past few years, showing significant cash flow issues during the 2019 to 2020 period. Recent cash flows are positive again, but not consistent.

Recent Developments

  • Acquisition of Mountaintop Energy Holdings: This acquisition should enable UGI to establish a more streamlined pipeline system and help the growth of the Midstream segment.
  • Share repurchases: Share repurchases are used as a method for rewarding investors, and also to boost the company’s stock price.
  • In FY 2023 the Company repurchased $22 million of common stock.
  • Credit Agreements: The company’s dependence on credit facilities is a point of risk, especially with fluctuating interest rates, that could harm profitability if the company is not hedged correctly.

Controversies

  • 2023 Weak Performance: The company experienced a steep drop in earnings during 2023, along with a significant drop in operating income. This was due to macroeconomic factors, unfavorable weather, and increased operating costs. This has led some investors to doubt the company’s ability to generate consistent profits.
  • Russian sanctions: The Russian invasion of Ukraine has introduced uncertainty on European operations, as well as some instability in the energy prices.

Moat Analysis

UGI has a narrow moat. Let’s break down the analysis:

  • Intangible Assets: UGI owns a lot of physical infrastructure for distribution, and also some regulatory franchises. Both provide a limited moat, since the asset value can diminish in times of distress, and new regulations could weaken monopolies.
  • Switching Costs: The regulated and propane distribution parts of the business have some switching costs, because it can be hard for customers to change.
  • Network Effect: UGI benefits very little from network effect, because most of the energy products distributed are commodities, and consumers can switch between distributors with little cost.
  • Cost Advantages: The company has cost advantages in areas of logistics and infrastructure. However, low-cost labor and manufacturing costs in emerging markets has somewhat diminished this advantage.

Given these factors, a moat of 2 seems to be appropriate, as it has some defensible business areas, but most of them are prone to outside factors.

Risks

  • Commodity Price Risk: High exposure to volatile prices for natural gas and propane, including significant exposure to price fluctuation between delivery agreements and purchasing contracts
  • Interest Rate Risk: The company is heavily reliant on debt financing, so any change in the borrowing rates can affect profits.
  • Regulatory Risk: Highly regulated operations, and the business is therefore subject to changes in local, state, federal and international energy regulations, along with any political decisions made.
  • Currency Risk: Changes in the foreign currency value of different contracts can erode profitability.
  • Weather Risk: UGI’s energy business is highly sensitive to weather conditions, and significant deviation from expected weather patterns can impact financial results.
  • Demand Risk: Any decline in consumption or lower economic activity may result in diminished sales.
  • Cybersecurity Risk: Operations and revenues are vulnerable to potential disruptions through cybersecurity attacks.
  • Emerging Markets Risk: Operating within emerging markets can expose the company to unknown risks, as well as higher financial and legal barriers.

Business Resilience

UGI has shown resilience in the past by being able to deliver solid profits even in bad periods, however, the company’s dependence on debt and commodity prices does make the company vulnerable to extreme economic events. The wide variety of businesses gives it some protection, but individual businesses still have substantial downside potential.

Understandability

UGI’s operations are somewhat complex, with exposure to different markets, geographies and energy products. It’s financial statements are also complicated, making a thorough understanding harder. A 3/5 rating is adequate, as there are a lot of easily explainable things, but some areas still require deeper investigation.

Balance Sheet Health

UGI’s balance sheet shows that they are highly levered, as evidenced by the net debt compared to the equity value. A more efficient capital structure would lead to lower interest payments, and more freedom in deploying capital. Therefore a 3/5 is adequate, as the company is not exactly unstable, but has clear areas for improvement.