ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MD&A discusses our results of operations for Fiscal 2020 and Fiscal 2019, and our financial condition. For discussion of our results of operations and cash flows for Fiscal 2019 compared with Fiscal 2018, refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Fiscal 2019 Annual Report on Form 10-K, filed with the SEC on November 26, 2019. MD&A should be read in conjunction with Items 1 and 2, “Business and Properties,” Item 1A, “Risk Factors,” and the Consolidated Financial Statements in Item 8 below including “Segment Information” included in Note 23 to 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. Accordingly, our results of operations, after adjusting for the effects of gains and losses on derivative instruments not associated with current-period transactions as further discussed below, are significantly higher in our first and second fiscal quarters.
Executive Overview
Recent Developments
In March 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 for Fiscal 2020 have been negatively impacted by COVID-19, 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 continued effects of a prolonged disruption including the 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. We have also remained focused on managing our financial condition and liquidity throughout this global crisis.
In March 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 before January 1, 2021. For additional information related to the CARES Act and the related impact on our results of operations for Fiscal 2020, see “Interest Expense and Income Taxes” below and Note 7 to Consolidated Financial Statements.
While our operations and financial performance have been significantly impacted by COVID-19 in Fiscal 2020, we cannot predict the duration or total magnitude of the pandemic and the future effects on our business, financial position, results of operations, liquidity or cash flows at this time.
Strategic Initiatives
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: At AmeriGas Propane, we began executing on LPG 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 business activities are in process and
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resulted in more than $40 million of benefits during Fiscal 2020. These initiatives will continue to be carried out over the next fiscal year and, once completed, are expected to provide more than $140 million of annual savings that 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.
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 resulted in approximately €7 million of savings during Fiscal 2020. These initiatives will continue to be executed primarily over the next fiscal year and, once completed, are expected to generate over €30 million of annual savings. 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.
Strategic Transactions
Our Fiscal 2020 results reflect the impacts of two strategic transactions completed in late Fiscal 2019. The larger of these transactions was the purchase of all of the public’s ownership interest in AmeriGas Partners for 34.6 million shares of UGI Common Stock and $529 million in cash, resulting in UGI owning 100% of the Partnership effective August 21, 2019. The second significant strategic transaction was the acquisition of CMG from TC Energy on August 1, 2019, resulting in a substantial increase in our natural gas gathering assets as well as the acquisition of important gas processing assets in the Marcellus and Utica Shale formations. We anticipate executing on a number of future system expansion projects associated with the CMG assets. We refer to CMG and its equity interest in Pennant as “UGI Appalachia.”
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 commodity and certain foreign currency 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 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 comparable GAAP measure, to adjusted diluted earnings per share, to reflect the adjustments referred to above:
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Year Ended September 30,
(Millions of dollars, except per share amounts) 2020 2019
Adjusted net income attributable to UGI Corporation:
AmeriGas Propane $ 156 $ 68
Midstream & Marketing 92 78
Corporate & Other (a) (25) (168)
Net income attributable to UGI Corporation 532 256
Loss on extinguishments of debt (net of tax of $0 and $(2), respectively) — 4
AmeriGas Merger expenses (net of tax of $0 and $0, respectively) — 1
Total adjustments (a) (b) 29 157
Adjusted net income attributable to UGI Corporation $ 561 $ 413
Adjusted diluted earnings per share:
Midstream & Marketing 0.44 0.43
Corporate & Other (a) (0.11) (0.94)
Earnings per share - diluted (c) 2.54 1.41
Unrealized losses (gains) on foreign currency derivative instruments 0.12 (0.13)
Loss on extinguishments of debt — 0.02
AmeriGas Merger expenses — 0.01
LPG business transformation expenses 0.21 0.09
Loss on disposals of Conemaugh and HVAC 0.18 —
Total adjustments (a) (c) 0.13 0.87
Adjusted diluted earnings per share (c) $ 2.67 $ 2.28
(a)Corporate & Other includes certain adjustments made to our reporting segments in arriving at net income attributable to UGI Corporation, including the impact of the tax benefits resulting from tax law changes for Fiscal 2020. 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 “Interest Expense and Income Taxes” below and Note 23 to 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.
(c)Earnings per share for Fiscal 2020 reflect 34.6 million incremental shares of UGI Common Stock issued in conjunction with the AmeriGas Merger.
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The following analysis compares the Company’s results of operations for Fiscal 2020 with Fiscal 2019.
Fiscal 2020 Compared with Fiscal 2019
Discussion. Net income attributable to UGI Corporation was $532 million for Fiscal 2020 (equal to $2.54 per diluted share) compared to $256 million for Fiscal 2019 (equal to $1.41 per diluted share). Net income in Fiscal 2020 reflects significant year-over-year changes in unrealized gains and losses on commodity derivative instruments and certain foreign currency derivative instruments, the full ownership of AmeriGas Partners as a result of the AmeriGas Merger completed in August 2019, and tax law changes under the CARES Act and GILTI provisions of the IRC which resulted in current year tax benefits. These positive factors were partially offset by losses related to the disposal of non-core assets, higher interest and depreciation and amortization expense, and higher LPG business transformation expenses in Fiscal 2020 compared to the prior year. Fiscal 2020 earnings per share amounts include the full-year impact of 34.6 million shares of UGI Common Stock issued in connection with the AmeriGas Merger transaction.
Adjusted net income attributable to UGI Corporation for Fiscal 2020 was $561 million (equal to $2.67 per diluted share) compared to adjusted net income attributable to UGI Corporation for Fiscal 2019 of $413 million (equal to $2.28 per diluted share). The increase in adjusted net income attributable to UGI Corporation during Fiscal 2020 reflects higher earnings contributions across our four business segments despite the effects of warmer weather and COVID-19, and the effects of the previously mentioned AmeriGas Merger and incremental earnings from UGI Appalachia in Fiscal 2020 partially offset by increased interest expense from debt issued in conjunction with these transactions. Adjusted net income in Fiscal 2020 also reflects the effects of the previously mentioned tax benefits resulting from the CARES Act and modified GILTI provisions.
The significant increase in adjusted net income attributable to UGI from AmeriGas Propane in Fiscal 2020 reflects the inclusion of 100% of AmeriGas Propane’s results in the current-year period as a result of the AmeriGas Merger and lower operating and administrative expenses. These positive factors were partially offset by lower total margin largely attributable to decreased retail volumes.
UGI International adjusted net income increased $28 million in Fiscal 2020 reflecting decreased operating and administrative expenses and lower income taxes. These positive effects were partially offset by lower total margin, including the effects of significantly warmer weather and the impacts of COVID-19, and higher interest expense during the current year. Although UGI International Fiscal 2020 adjusted net income was impacted by a slightly weaker euro compared to the prior year, adjusted net income also benefited from higher realized gains on foreign currency exchange contracts.
Midstream & Marketing adjusted net income in Fiscal 2020 was $14 million higher than the prior year. This increase principally reflects incremental net income from UGI Appalachia, which includes the effects of increased depreciation and amortization expense and interest expense related to debt issued to finance a portion of its acquisition.
UGI Utilities Fiscal 2020 adjusted net income increased slightly compared to the prior year principally attributable to an increase in total margin, reflecting incremental margin from an increase in Gas Utility base rates effective October 11, 2019, and lower operating and administrative expenses. The increase in total margin resulting from the increase in Gas Utility base rates was partially offset by the effects of warmer weather compared to the prior year and reduced volumes attributable to COVID-19. Depreciation and interest expense also increased during Fiscal 2020 compared to the prior year.
(Dollars in millions)
Operating and administrative expenses $ 890 $ 929 $ (39) (4) %
Retail gallons sold (millions) 987 1,054 (67) (6) %
Degree days – % (warmer) colder than normal (b) (1.2) % 3.6 % — —
(a)Total margin represents revenues less cost of sales.
(b)Deviation from average heating degree days for the 15-year period 2002-2016 based upon national weather statistics provided by NOAA for 344 Geo Regions in the United States, excluding Alaska and Hawaii. Beginning in Fiscal 2021, deviation from average heating degree days will be based on a rolling 10-year period.
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Average temperatures during Fiscal 2020 were 1.2% warmer than normal and 4.6% warmer than the prior year. Total retail gallons sold during Fiscal 2020 were 6% lower than the prior year reflecting the effects of COVID-19, structural conservation and other residual volume loss, and the effects of the warmer weather on heating-related sales. The decrease in certain retail volumes was partially offset by higher cylinder exchange volumes and, to a much lesser extent, higher national accounts volumes compared to the prior year.
Total revenues decreased $301 million during Fiscal 2020 principally related to lower retail propane revenues ($304 million) reflecting the effects of lower average retail selling prices ($156 million) and the lower retail volumes sold ($148 million). Average daily wholesale propane commodity prices during Fiscal 2020 at Mont Belvieu, Texas, one of the major supply points in the U.S., were approximately 28% lower than such prices during Fiscal 2019. Total cost of sales decreased $231 million during Fiscal 2020 principally reflecting the effects of lower average retail product costs ($170 million) and the lower retail propane volumes sold ($66 million).
AmeriGas Propane total margin decreased $70 million in Fiscal 2020 largely attributable to the previously mentioned lower retail volumes sold ($82 million) partially offset by slightly higher average retail unit margins ($14 million) compared to Fiscal 2019.
Operating income and earnings before interest expense and income taxes decreased $31 million in Fiscal 2020 principally reflecting the previously mentioned decrease in total margin partially offset by lower operating and administrative expenses ($39 million). The decrease in operating and administrative expenses in Fiscal 2020 includes, among other things, lower employee compensation and benefits-related costs ($19 million), decreased vehicle operating and maintenance expenses ($10 million), lower litigation expense ($7 million), and lower business travel expenses ($6 million). These improvements were partially offset by increased vacation accruals ($4 million) which include the effects of COVID-19 in Fiscal 2020. The lower total operating and administrative expenses reflected above include the partial benefits related to the previously mentioned ongoing LPG transformation initiatives.
UGI International 2020 2019 Increase (Decrease)
(Dollars in millions)
Operating and administrative expenses $ 573 $ 611 $ (38) (6) %
Earnings before interest expense and income taxes $ 259 $ 234 $ 25 11 %
LPG retail gallons sold (millions) 757 833 (76) (9) %
Degree days - % warmer than normal (b) (12.1) % (5.8) % — —
(a)Total margin represents total revenues less total cost of sales.
(b)Deviation from average heating degree days for the 15-year period 2002-2016 at locations in our UGI International service territories. Beginning in Fiscal 2021, deviation from average heating degree days will be based on a rolling 10-year period.
Average temperatures during Fiscal 2020 were 12.1% warmer than normal and 6.7% warmer than the prior year. Total LPG retail gallons sold during Fiscal 2020 were 9% lower principally reflecting the effects of the warmer weather on heating-related bulk sales, the impacts of COVID-19 on commercial and industrial volumes, and the termination of a low-margin autogas contract in Italy. These decreases were partially offset by higher crop drying volumes during the current year. During Fiscal 2020, average wholesale prices for propane and butane in northwest Europe were approximately 19% and 10% lower, respectively, compared with the prior year.
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 Fiscal 2020 and Fiscal 2019, the average unweighted euro-to-dollar translation rates were approximately $1.12 and $1.13, respectively, and the average unweighted British pound sterling-to-dollar translation rates were approximately $1.28 during both periods. During Fiscal 2020 and Fiscal 2019, realized gains and losses on foreign currency exchange contracts used to reduce volatility in our foreign operations’ net income settled at average euro-to-dollar exchange rates of $1.18 during both periods and at average British pound sterling-to-dollar exchange rates of $1.31 during both periods.
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UGI International revenues and cost of sales decreased $245 million and $225 million, respectively, during Fiscal 2020 compared to the prior year. These decreases to both revenues and cost of sales principally reflect the effects of lower average LPG selling prices and product costs throughout Fiscal 2020, lower total LPG retail and wholesale volumes, and the translation effects of the weaker euro (approximately $33 million and $19 million, respectively, on revenues and cost of sales).
UGI International total margin decreased $20 million during Fiscal 2020 largely attributable to the previously mentioned decrease in total LPG volumes and the translation effects of the weaker euro (approximately $14 million) compared to the prior year. These decreases were partially offset by higher average LPG unit margins including the effects of margin management efforts and lower LPG product costs.
UGI International operating income and earnings before interest expense and income taxes increased $12 million and $25 million, respectively, during Fiscal 2020 compared to the prior year. The increase in operating income principally reflects lower operating and administrative expenses ($38 million) partially offset by the decrease in total margin and the absence of a customer contract settlement recorded in Fiscal 2019. The decrease in operating and administrative expenses in Fiscal 2020 includes, among other things, lower employee compensation and benefits related costs, decreased distribution costs and business travel expenses, and the translation effects of the weaker euro (approximately $8 million). The increase in earnings before interest expense and income taxes in Fiscal 2020 largely reflects the higher operating income and increased 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 ($10 million).
Midstream & Marketing 2020 2019 Increase (Decrease)
(Dollars in millions)
Operating and administrative expenses $ 140 $ 120 $ 20 17 %
Earnings before interest expense and income taxes $ 168 $ 114 $ 54 47 %
(a)Total margin represents total revenues less total cost of sales.
Average temperatures across Midstream & Marketing’s energy marketing territory during Fiscal 2020 were 7.9% warmer than normal and 6.3% warmer than the prior year. Midstream & Marketing’s Fiscal 2020 and Fiscal 2019 results include contributions from its HVAC business and ownership interest in Conemaugh, both of which were sold in September 2020. Losses associated with the disposal of these assets are reflected in “Corporate & Other” (see “Non-GAAP Financial Measures” above).
Midstream & Marketing’s revenues for Fiscal 2020 were $269 million lower than the prior year principally reflecting decreased natural gas revenues ($330 million) and, to a much lesser extent, lower services-related revenues ($13 million) associated with its HVAC business and lower electric generation revenues ($9 million). The effect of these revenue decreases was partially offset by higher natural gas gathering revenues ($84 million) largely attributable to incremental revenues from UGI Appalachia. Midstream & Marketing cost of sales was $892 million in Fiscal 2020 compared to $1,241 million in Fiscal 2019. The $349 million decrease in cost of sales principally reflects decreased natural gas costs ($326 million), lower peaking costs ($13 million) and lower services-related costs ($11 million) attributable to its HVAC business. The significant decreases in both natural gas revenues and cost of sales are primarily attributable to lower average natural gas prices during Fiscal 2020 and, to a much lesser extent, lower natural gas volumes.
Midstream & Marketing total margin increased $80 million in Fiscal 2020 reflecting higher natural gas gathering total margin ($84 million) largely attributable to incremental margin from UGI Appalachia and, to a much lesser extent, increased peaking ($5 million) and capacity margins ($4 million) including a refund received in Fiscal 2020 in connection with contracted pipeline rates. The effect of these increases was partially offset by lower electric generation margin ($5 million) largely related to lower volumes at the Conemaugh generating facility in Fiscal 2020 and lower retail commodity margin ($5 million) which reflects lower volumes attributable to the warmer weather compared to the prior year.
Midstream & Marketing operating income and earnings before interest expense and income taxes during Fiscal 2020 increased $35 million and $54 million, respectively, compared to the prior year. The increase in operating income principally reflects the increase in total margin partially offset by higher depreciation and amortization expense ($24 million) and increased operating and administrative expenses ($20 million). The higher depreciation and amortization expense and operating and administrative expenses are largely attributable to UGI Appalachia. The increase in earnings before interest expense and income taxes largely
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reflects the previously mentioned increase in operating income ($35 million) and higher equity income ($18 million) primarily attributable to Pennant, a natural gas gathering and processing equity interest that was acquired as part of UGI Appalachia.
UGI Utilities 2020 2019 Increase (Decrease)
(Dollars in millions)
Operating and administrative expenses (a) $ 239 $ 244 $ (5) (2) %
Earnings before interest expense and income taxes $ 229 $ 226 $ 3 1 %
Gas Utility system throughput – bcf
Electric Utility distribution sales - gwh 978 983 (5) (1) %
Gas Utility degree days – % warmer than normal (b) (11.0) % (5.0) % — —
(a)Total margin represents total revenues less total cost of sales and revenue-related taxes (i.e. Electric Utility gross receipts taxes) of $5 million in both Fiscal 2020 and Fiscal 2019. For financial statement purposes, revenue-related taxes are included in “Operating and administrative expenses” on the Consolidated Statements of Income (but are excluded from operating expenses presented above).
(b)Deviation from average heating degree days for the 15-year period 2000-2014 based upon weather statistics provided by NOAA for airports located within Gas Utility’s service territory. Beginning in Fiscal 2021, deviation from average heating degree days will be based on a rolling 10-year period.
Temperatures in Gas Utility’s service territory during Fiscal 2020 were 11.0% warmer than normal and 5.8% warmer than the prior year. Despite continued growth in the number of core market customers and higher average use per customer, Gas Utility core market volumes decreased during Fiscal 2020 (5 bcf) reflecting the effects of the warmer weather and reduced volumes attributable to COVID-19. Total Gas Utility distribution system throughput increased 16 bcf during Fiscal 2020 reflecting higher interruptible delivery service volumes (10 bcf) and higher large firm delivery service volumes (11 bcf) partially offset by the lower core market volumes. Electric Utility distribution sales volumes were lower than the prior year principally reflecting the effects of warmer heating-season weather partially offset by increased consumption during the warmer summer months.
UGI Utilities revenues decreased $19 million in Fiscal 2020 reflecting a $14 million decrease in Gas Utility revenues and $5 million decrease in Electric Utility revenues. The decrease in Gas Utility revenues principally reflects lower off-system sales and capacity release revenues ($18 million) partially offset by the effects of an adjustment in Fiscal 2019 ($6 million) related to credits provided to customers in connection with the TCJA. Gas Utility core market revenues increased slightly during Fiscal 2020 as the effects of the increase in base rates effective October 11, 2019 were largely offset by the decrease in core market volumes. The decrease in Electric Utility revenues during Fiscal 2020 is largely attributable to the lower distribution sales volumes and lower DS rates.
UGI Utilities cost of sales was $448 million in Fiscal 2020 compared with $481 million in Fiscal 2019 reflecting lower Gas Utility cost of sales ($30 million) and lower Electric Utility cost of sales ($3 million). The lower Gas Utility cost of sales relates to core market customers ($16 million) largely attributable to the effect of decreased volumes, and lower cost of sales associated with off-system sales ($20 million), partially offset by higher large firm delivery service cost of sales. The decrease in Electric Utility cost of sales is largely attributable to the lower distribution sales volumes and lower average DS rates.
UGI Utilities total margin increased $14 million during Fiscal 2020 reflecting higher margin from Gas Utility ($16 million) partially offset by slightly lower Electric Utility margin ($2 million). The increase in total Gas Utility margin includes higher core market margin ($18 million) which reflects the effects of the increase in base rates which became effective October 11, 2019 partially offset by the lower core market volumes. The increase in Gas Utility margin also reflects the absence of the previously mentioned customer credit adjustment related to the TCJA reflected in the prior year. These positive factors were partially offset by lower customer late payment fees ($3 million) attributable to our response to COVID-19 and lower margin from large firm delivery service ($2 million) compared to the prior year.
UGI Utilities operating income and earnings before interest expense and income taxes increased $5 million and $3 million, respectively, during Fiscal 2020 compared to the prior year. The increase in operating income reflects the previously
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mentioned increase in total margin and lower operating and administrative expenses ($5 million), partially offset by higher depreciation expense ($12 million). The lower operating and administrative expenses reflect, among other things, decreases in contractor costs and transportation expenses, partially offset by higher IT maintenance and consulting expenses. Higher depreciation expense compared to the prior year relates to continued IT and distribution system capital expenditure activity. The increase in earnings before interest expense and income taxes largely reflects the increase in operating income partially offset by the absence of a non-service pension benefit reflected in the prior year.
Interest Expense and Income Taxes
Our consolidated interest expense during Fiscal 2020 was $322 million compared to $258 million during the prior year. The $64 million increase in interest expense principally reflects higher interest expense on long-term debt outstanding including debt incurred by UGI Corporation and Energy Services in late Fiscal 2019 to fund a portion of the CMG Acquisition and the cash portion of the AmeriGas Merger, and increased interest expense on higher average short-term borrowings.
Our effective income tax rate decreased between Fiscal 2020 and Fiscal 2019 due primarily to a benefit from the changes to NOL carryback rules under the CARES Act ($32 million) and lower U.S. tax on foreign source income as the result of the issuance of final regulations related to the high-tax exception on GILTI income. These decreases were partially offset by changes in the mix of domestic versus foreign income as the current year blend contained a larger foreign percentage than the prior year reflecting foreign statutory tax rates that exceed the U.S. statutory rate. For additional information on our income taxes, including tax law changes, see Note 7 to Consolidated Financial Statements.
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 and $1.1 billion at September 30, 2020 and 2019, respectively. The Company's liquidity has been positively influenced by continued low commodity prices experienced during Fiscal 2020 and overall decreased margin calls and collateral deposits associated with derivative instruments. In addition, the Company does not have any near-term senior note or term loan maturities. While the Company’s operations and financial performance has been significantly impacted by COVID-19 during Fiscal 2020, 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 of September 30, 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 generated 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 $336 million at September 30, 2020, compared with $447 million at September 30, 2019. Excluding cash and cash equivalents that reside at UGI’s operating subsidiaries, at September 30, 2020 and 2019, our cash and cash equivalents totaled $112 million and $225 million, respectively. Such cash is available to pay dividends on UGI Common Stock and for investment purposes.
UGI receives cash distributions from the Partnership in accordance with the Partnership Agreement’s requirement to make quarterly distributions in a total amount equal to its Available Cash. Prior to the AmeriGas Merger during Fiscal 2019, amounts paid to the General Partner included incentive distributions when AmeriGas Partners’ quarterly distribution exceeded $0.605 per limited partner unit. During Fiscal 2019 (prior to the AmeriGas Merger), distributions received by the General Partner with respect to its aggregate 2% general partner interest in the Partnership totaled $55 million, which included incentive distributions of $45 million. See Note 15 to Consolidated Financial Statements for the definition of Available Cash included in the Partnership Agreement and additional information related to Partnership distributions.
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During Fiscal 2020 and Fiscal 2019, our principal business units paid cash dividends and made other cash payments to UGI and its subsidiaries as follows:
UGI International (a) 250 64
Midstream & Marketing 50 50
(a) Represents cash payments to UGI International’s U.S. holding company subsidiary. Cash dividends in Fiscal 2020 were used, in part, to pay down all outstanding revolving credit facility borrowings on the UGI International Credit Facilities Agreement in September 2020.
Dividends
On April 21, 2020, UGI’s Board of Directors approved an increase in the quarterly dividend rate on UGI Common Stock to $0.33 per Common Share, or $1.32 on an annual basis, reflecting, an approximate 1.5% increase from the previous quarterly rate of $0.325. The dividend was paid on July 1, 2020, to shareholders of record on June 15, 2020.
On November 20, 2020, UGI’s Board of Directors declared a cash dividend equal to $0.33 per common share. The dividend will be payable on January 1, 2021, to shareholders of record on December 15, 2020.
Repurchases of Common Stock
In January 2018, UGI’s Board of Directors authorized the repurchase of up to 8 million shares of UGI Corporation Common Stock over a four-year period expiring in January 2022. Pursuant to such authorizations, during Fiscal 2020 and Fiscal 2019, the Company purchased on the open market 1.0 million and 0.3 million shares at a total purchase price of $38 million and $17 million, respectively.
Long-term Debt and Credit Facilities
The Company’s debt outstanding at September 30, 2020 and 2019, comprises the following:
Long-term debt (including current maturities):
Unamortized debt issuance costs (20) (7) (12) (5) (3) (47) (53)
(a)Midstream & Marketing includes finance lease liabilities recognized as a result of the adoption of ASU No. 2016-02. For additional information, see Note 2 and Note 16 to Consolidated Financial Statements.
Significant Financing Activities
UGI Utilities. On April 16, 2020, UGI Utilities issued in a private placement $150 million of UGI Utilities 3.12% Senior Notes due April 16, 2050 pursuant to a Note Purchase Agreement dated March 19, 2020, between UGI Utilities and certain note purchasers. The UGI Utilities 3.12% Senior Notes are unsecured and rank equally with UGI Utilities’ existing outstanding
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senior debt. The net proceeds from the issuance of the UGI Utilities 3.12% Senior Notes were used to reduce short-term borrowings and for general corporate purposes.
Credit Facilities
Energy Services. On March 6, 2020, Energy Services entered into the Energy Services 2020 Credit Agreement, as borrower, with a group of lenders. The Energy Services 2020 Credit Agreement amends and restates the Energy Services Credit Agreement. The Energy Services 2020 Credit Agreement provides for borrowings up to $260 million, including a $50 million sublimit for letters of credit. Energy Services may request an increase in the amount of loan commitments under the Energy Services 2020 Credit Agreement to a maximum aggregate amount of $325 million, subject to certain terms and conditions. Borrowings under the Energy Services 2020 Credit Agreement can be used to fund acquisitions and investments and for general corporate purposes. The Energy Services 2020 Credit Agreement is scheduled to expire in March 2025.
Information about the Company’s principal credit agreements (excluding Energy Services’ Receivables Facility, which is discussed below) as of September 30, 2020 and 2019, is presented in the tables below.
UGI International, LLC (a) October 2023 € 300 € — € — € 300 N.A.
Energy Services March 2025 $ 260 $ — $ — $ 260 N.A.
(a)The UGI International Credit Facilities Agreement permits UGI International, LLC to borrow in euros or dollars. UGI International repaid all borrowings outstanding on this facility in September 2020. At September 30, 2019, the amount outstanding consisted of USD-denominated borrowings of $210 million.
(b)Borrowings outstanding have been classified as “Long-term debt” on the Consolidated Balance Sheets. In October 2020, the Company repaid $30 million of such borrowings and classified these repayments as “Current maturities of long-term debt” on the 2020 Consolidated Balance Sheet.
N.A. - Not applicable
The average daily and peak short-term borrowings under the Company’s principal credit agreements during Fiscal 2020 and Fiscal 2019 are as follows:
(Currency in millions) Average Peak Average Peak
Receivables Facility. Energy Services also has a Receivables Facility with an issuer of receivables-backed commercial paper. On October 23, 2020, the expiration date of the Receivables Facility was extended to October 22, 2021. The Receivables Facility provides Energy Services with the ability to borrow up to $150 million of eligible receivables during the period November through April, and up to $75 million of eligible receivables during the period May through October. Energy Services
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uses the Receivables Facility to fund working capital, margin calls under commodity futures contracts, capital expenditures, dividends and for general corporate purposes.
At September 30, 2020, the outstanding balance of trade receivables was $50 million of which $19 million was sold to the bank. At September 30, 2019, the outstanding balance of trade receivables was $55 million of which $46 million was sold to the bank. Amounts sold to the bank are reflected as “Short-term borrowings” on the Consolidated Balance Sheet. During Fiscal 2020 and Fiscal 2019, peak sales of receivables were $97 million and $68 million, respectively. During Fiscal 2020 and Fiscal 2019, average daily amounts sold were $45 million and $21 million, respectively.
For further information on the Company’s long-term debt and credit facilities, see Note 6 to Consolidated Financial Statements.
Cash Flows
Due to the seasonal nature of the Company’s businesses, cash flows from operating activities are generally strongest during the second and third fiscal quarters when customers pay for natural gas, LPG, electricity and other energy products and services consumed during the peak heating season months. Conversely, operating cash flows are generally at their lowest levels during the fourth and first fiscal quarters when the Company’s investment in working capital, principally inventories and accounts receivable, is generally greatest.
Operating Activities:
Year-to-year variations in our cash flows from operating activities can be significantly affected by changes in operating working capital especially during periods with significant changes in energy commodity prices. Cash flows from operating activities in Fiscal 2020 and Fiscal 2019 were $1,102 million and $1,078 million, respectively. Cash flows from operating activities before changes in operating working capital were $1,176 million in Fiscal 2020 and $1,025 million in Fiscal 2019. The higher cash flow from operating activities before changes in operating working capital in Fiscal 2020 principally reflects, in large part, incremental cash flow from UGI Appalachia and higher cash contributions from UGI International. Changes in operating working capital (used) provided operating cash flow of $(74) million in Fiscal 2020 and $53 million in Fiscal 2019. Changes in operating working capital during Fiscal 2020 reflects, among other things, an increase in cash used to fund accounts receivable and inventories attributable to the absence of declining commodity prices that occurred during Fiscal 2019 and an increase in income taxes receivable associated with an NOL carryback benefit under the CARES Act. This increase in cash used by changes in operating working capital were partially offset by net recoveries of deferred fuel and power costs compared to net refunds during the prior year, net cash collateral deposits received as compared to net cash collateral paid in the prior year and cash provided by changes in accounts payable as compared to a use of cash in the prior year.
Investing Activities:
Investing activity cash flow is principally affected by cash expenditures for property, plant and equipment; cash paid for acquisitions of businesses and assets; investments in equity investees; and cash proceeds from sales and retirements of property, plant and equipment. Cash expenditures for property, plant and equipment totaled $655 million in Fiscal 2020 and $705 million in Fiscal 2019. Cash payments for property, plant and equipment were lower in Fiscal 2020 compared with Fiscal 2019 reflecting, in part, the curtailment of certain nonessential business operations across the U.S. and Europe due to the outbreak of COVID-19. Cash used for acquisitions of businesses and assets in Fiscal 2019 principally comprises Midstream & Marketing’s $1.275 billion acquisition of CMG and its acquisition of South Jersey Energy Company’s natural gas marketing business, and UGI International’s acquisitions of several smaller LPG retail businesses in Belgium, the Netherlands and the United Kingdom.
Financing Activities:
Changes in cash flow from financing activities are primarily due to issuances and repayments of long-term debt; short-term borrowings; dividends on UGI Common Stock; issuances or repurchases of equity instruments; and, in Fiscal 2019, the cash portion of the AmeriGas Merger and distributions on publicly held AmeriGas Partners Common Units.
In both Fiscal 2020 and Fiscal 2019, UGI Utilities issued, in separate private placements, $150 million of senior notes due in April 2050 and February 2049, respectively. Cash flows from financing activities in Fiscal 2019 reflect significant UGI International refinancing transactions during the month of October 2018 including €300 million borrowed under a variable-rate term loan facility and €350 million principal amount of 3.25% senior unsecured notes issued in an underwritten private placement. The net proceeds from these borrowings plus cash on hand were used principally to repay €540 million outstanding principal of UGI France’s variable-rate term loan; €46 million of outstanding principal of Flaga’s variable-rate term loan; and $50 million of outstanding principal of Flaga’s U.S. Dollar Term loan, plus accrued and unpaid interest.
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Also in Fiscal 2019, UGI Corporation borrowed a total of $850 million under the UGI Corporation Senior Credit Facility and Energy Services borrowed $700 million under the Energy Services Term Loan. A portion of the proceeds from borrowings under the UGI Corporation Senior Credit Facility were used to finance the cash portion of the AmeriGas Merger. Proceeds from the Energy Services Term Loan as well as a portion of the borrowings under the UGI Corporation Senior Credit Agreement were used to finance the CMG Acquisition.
Capital Expenditures
In the following table, we present capital expenditures (which exclude acquisitions) for Fiscal 2020 and Fiscal 2019. We also provide amounts we expect to spend in Fiscal 2021. We expect to finance a substantial portion of our Fiscal 2021 capital expenditures from cash generated by operations and cash on hand.
In Fiscal 2020, higher capital expenditures at AmeriGas Propane primarily resulted from ongoing business transformation initiatives. Also in Fiscal 2020, lower levels of capital expenditures at our other operating business segments primarily resulted from the curtailment of certain non-essential business activities across the U.S. and Europe due to the outbreak of COVID-19. Increased levels of capital expenditures estimated in Fiscal 2021 reflect a return to normal capital spending due to the easing of restrictions associated with the outbreak of COVID-19. In addition, the increase in Fiscal 2021 reflects continued business transformation expenditures associated with initiatives at AmeriGas Propane and UGI International; natural gas infrastructure expansion projects at Midstream & Marketing; and replacement and betterment projects at UGI Utilities.
Contractual Cash Obligations and Commitments
The Company has contractual cash obligations that extend beyond Fiscal 2020. The following table presents contractual cash obligations with non-affiliates under agreements existing as of September 30, 2020:
Payments Due by Period
AmeriGas Propane supply contracts 23 23 — — —
UGI International supply contracts 257 257 — — —
Derivative instruments (d) 68 47 21 — —
(a)Based upon stated maturity dates for debt outstanding at September 30, 2020.
(b)Based upon stated interest rates adjusted for the effects of interest rate swaps.
(c)Calculated using applicable interest rates or forward interest rate curves, and UGI’s and its subsidiaries’ leverage ratios, as of September 30, 2020.
(d)Represents the sum of amounts due if derivative instrument liabilities were settled at the September 30, 2020 amounts reflected in the Consolidated Balance Sheet (but excluding amounts associated with interest rate contracts).
“Other noncurrent liabilities” included in our Consolidated Balance Sheet at September 30, 2020, principally comprise operating lease liabilities (see Note 16 to Consolidated Financial Statements); regulatory liabilities (see Note 9 to Consolidated
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Financial Statements); refundable tank and cylinder deposits (as further described in Note 2 to Consolidated Financial Statements under the caption “Refundable Tank and Cylinder Deposits”); litigation, property and casualty liabilities and obligations under environmental remediation agreements (see Note 17 to Consolidated Financial Statements); pension and other postretirement benefit liabilities recorded in accordance with accounting guidance relating to employee retirement plans (see Note 8 to Consolidated Financial Statements); and liabilities associated with executive compensation plans (see Note 14 to Consolidated Financial Statements). These liabilities, with the exception of operating lease liabilities, are not included in the table of Contractual Cash Obligations and Commitments because they are estimates of future payments and not contractually fixed as to timing or amount. Required minimum contributions to UGI Utilities’ pension plan (as further described below under “U.S. Pension Plan”) in Fiscal 2021 are not expected to be material. Required minimum contributions to the U.S. Pension Plan in years beyond Fiscal 2021 will depend, in large part, on the impacts of future returns on pension plan assets and interest rates on pension plan liabilities.
U.S. Pension Plan
The U.S. Pension Plan is a defined benefit pension plan for employees hired prior to January 1, 2009, of UGI, UGI Utilities and certain of UGI’s other domestic wholly owned subsidiaries. The fair values of the U.S. Pension Plan’s assets totaled $566 million and $529 million at September 30, 2020 and 2019, respectively. At September 30, 2020 and 2019, the underfunded positions of the U.S. Pension Plan, defined as the excess of the PBO over the U.S. Pension Plan’s assets, were $170 million and $176 million, respectively.
We believe we are in compliance with regulations governing defined benefit pension plans, including the ERISA rules and regulations. Required minimum contributions to the U.S. Pension Plan in Fiscal 2021 are not expected to be material. Pre-tax pension cost associated with the U.S. Pension Plan in Fiscal 2020 was $9 million. Pre-tax pension cost associated with the U.S. Pension Plan in Fiscal 2021 is expected to be approximately $5 million.
GAAP guidance associated with pension and other postretirement plans generally requires recognition of an asset or liability in the statement of financial position reflecting the funded status of pension and other postretirement benefit plans with current year changes recognized in shareholders’ equity unless such amounts are subject to regulatory recovery. At September 30, 2020, we have recorded after-tax charges to UGI Corporation’s stockholders’ equity of $26 million and recorded regulatory assets totaling $175 million in order to reflect the funded status of our pension and other postretirement benefit plans. For a more detailed discussion of the U.S. Pension Plan and our other postretirement benefit plans, see Note 8 to Consolidated Financial Statements.
Related Party Transactions
During Fiscal 2020 and Fiscal 2019, we did not enter into any related-party transactions that had a material effect on our financial condition, results of operations or cash flows.
Off-Balance-Sheet Arrangements
UGI primarily enters into guarantee arrangements on behalf of its consolidated subsidiaries. These arrangements are not subject to the recognition and measurement guidance relating to guarantees under GAAP.
We do not have any off-balance-sheet arrangements that are expected to have a material effect on our financial condition, change in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Utility Regulatory Matters
Base Rate Filings. On January 28, 2020, Gas Utility filed a request with the PAPUC to increase its annual base distribution operating revenues by $75 million annually. On October 8, 2020, the PAPUC issued a final Order approving a previously filed Joint Petition for Approval of Settlement of all issues (the “Joint Petition”). Under the terms of the Joint Petition, Gas Utility will be permitted to increase its annual base distribution rates by $20 million, through a phased approach, with $10 million beginning January 1, 2021 and an additional $10 million beginning July 1, 2021. Additionally, Gas Utility will be authorized to implement a DSIC once Gas Utility total property, plant and equipment less accumulated depreciation reaches $2,875 million, with this threshold being unchanged from Gas Utility’s 2019 base rate case. The Joint Petition also includes enhanced COVID-19 customer assistance measures, including the establishment of an Emergency Relief Program for a defined set of payment troubled customers (“ERP”). Additionally, the Joint Petition will permit the Gas Utility to establish a regulatory asset for certain incremental expenses attributable to the ongoing COVID-19 pandemic, most notably expenses related to the ERP and uncollectible accounts expense, through the effective date of rates in the next Gas Utility base rate case, to be recovered and
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amortized over a 10-year period. In accordance with the terms of the Joint Petition, Gas Utility will not be permitted to file a rate case prior to January 1, 2022.
On January 28, 2019, Gas Utility filed a rate request with the PAPUC to increase the base operating revenues for residential, commercial, and industrial customers throughout its Pennsylvania service territory by an aggregate $71 million. On October 4, 2019, the PAPUC issued a final Order approving a settlement that permitted Gas Utility, effective October 11, 2019, to increase its base distribution revenues by $30 million under a single consolidated tariff, approved a plan for uniform class rates, and permitted Gas Utility to extend its Energy Efficiency and Conservation and Growth Extension Tariff programs by an additional term of five years. The PAPUC’s final Order approved a negative surcharge, to return to customers $24 million of tax benefits experienced by Gas Utility over the period January 1, 2018 to June 30, 2018, plus applicable interest, in accordance with the May 17, 2018 PAPUC Order, which became effective for a twelve-month period beginning on October 11, 2019, the effective date of Gas Utility’s new base rates, subject to final reconciliation of any over- or under-crediting of the tax savings.
On October 25, 2018, the PAPUC approved a final order providing for a $3 million annual base distribution rate increase for Electric Utility, effective October 27, 2018. As part of the final PAPUC Order, Electric Utility provided customers with a one-time billing credit associated with 2018 TCJA tax benefits. On November 26, 2018, the Pennsylvania Office of Consumer Advocate filed an appeal to the Pennsylvania Commonwealth Court challenging the PAPUC’s acceptance of UGI Utilities’ use of a fully projected future test year and handling of consolidated federal income tax benefits. On January 15, 2020, the Pennsylvania Commonwealth Court issued a decision affirming the PAPUC Order adopting UGI Utilities’ position on both issues. No party exercised their right to seek an appeal of the Commonwealth Court decision.
Market Risk Disclosures
Our primary market risk exposures are (1) commodity price risk; (2) interest rate risk; and (3) foreign currency exchange rate risk. Although we use derivative financial and commodity instruments to reduce market price risk associated with forecasted transactions, we do not use derivative financial and commodity instruments for speculative or trading purposes.
Commodity Price Risk
The risk associated with fluctuations in the prices the Partnership and our UGI International operations pay for LPG is principally a result of market forces reflecting changes in supply and demand for LPG and other energy commodities. Their profitability is sensitive to changes in LPG supply costs. Increases in supply costs are generally passed on to customers. The Partnership and UGI International may not, however, always be able to pass through product cost increases fully or on a timely basis, particularly when product costs rise rapidly. In order to reduce the volatility of LPG market price risk, the Partnership uses contracts for the forward purchase or sale of propane, propane fixed-price supply agreements and over-the-counter derivative commodity instruments including price swap contracts. Our UGI International operations use over-the-counter derivative commodity instruments and may from time to time enter into other derivative contracts, similar to those used by the Partnership, to reduce market risk associated with a portion of their LPG purchases. Over-the-counter derivative commodity instruments used to economically hedge forecasted purchases of LPG are generally settled at expiration of the contract.
Gas Utility's tariffs contain clauses that permit recovery of all prudently incurred costs of natural gas it sells to its retail core-market customers, including the cost of financial instruments used to hedge purchased gas costs. The recovery clauses provide for periodic adjustments for the difference between the total amounts actually collected from customers through PGC rates and the recoverable costs incurred. Because of this ratemaking mechanism, there is limited commodity price risk associated with our Gas Utility operations. Gas Utility uses derivative financial instruments, including natural gas futures and option contracts traded on the NYMEX, to reduce volatility in the cost of gas it purchases for its retail core-market customers. The cost of these derivative financial instruments, net of any associated gains or losses, is included in Gas Utility's PGC recovery mechanism.
In order to manage market price risk relating to substantially all of Midstream & Marketing’s fixed-price sale contracts for physical natural gas and electricity, Midstream & Marketing enters into NYMEX, ICE and over-the-counter natural gas and electricity futures and option contracts, and natural gas basis swap contracts or enters into fixed-price supply arrangements. Midstream & Marketing also uses NYMEX and over-the-counter electricity futures contracts to economically hedge a portion of its anticipated sales of electricity from its electricity generation facilities. Although Midstream & Marketing’s fixed-price supply arrangements mitigate most risks associated with its fixed-price sales contracts, should any of the suppliers under these arrangements fail to perform, increases, if any, in the cost of replacement natural gas or electricity would adversely impact Midstream & Marketing’s results. In order to reduce this risk of supplier nonperformance, Midstream & Marketing has diversified its purchases across a number of suppliers. UGI International’s natural gas and electricity marketing businesses also use natural gas and electricity futures and forward contracts to economically hedge market risk associated with fixed-price sales and purchase contracts.
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Midstream & Marketing has entered into fixed-price sales agreements for a portion of the electricity expected to be generated by its electric generation assets. In the event that these generation assets would not be able to produce all of the electricity needed to supply electricity under these agreements, Midstream & Marketing would be required to purchase electricity on the spot market or under contract with other electricity suppliers. Accordingly, increases in the cost of replacement power could negatively impact Midstream & Marketing’s results.
Interest Rate Risk
We have both fixed-rate and variable-rate debt. Changes in interest rates impact the cash flows of variable-rate debt but generally do not impact their fair value. Conversely, changes in interest rates impact the fair value of fixed-rate debt but do not impact their cash flows.
Our variable-rate debt at September 30, 2020, includes revolving credit facility borrowings and variable-rate term loans at UGI International, UGI Utilities, Energy Services and UGI Corporation. These debt agreements have interest rates that are generally indexed to short-term market interest rates. We have entered into pay-fixed, receive-variable interest rate swap agreements on all or a significant portion of the term loans’ principal balances and all or a significant portion of the term loans’ tenor. We have designated these interest rate swaps as cash flow hedges. At September 30, 2020, combined borrowings outstanding under variable-rate debt agreements, excluding the previously mentioned effectively fixed-rate debt, totaled $597 million. Based upon average borrowings outstanding under variable-rate borrowings (excluding effectively fixed-rate term loan debt), an increase in short-term interest rates of 100 basis points (1%) would have increased our Fiscal 2020 interest expense by approximately $8 million. The remainder of our debt outstanding is subject to fixed rates of interest. A 100 basis point increase in market interest rates would result in decreases in the fair value of this fixed-rate debt of approximately $312 million at September 30, 2020. A 100 basis point decrease in market interest rates would result in increases in the fair value of this fixed-rate debt of approximately $314 million at September 30, 2020.
Long-term debt associated with our domestic businesses is typically issued at fixed rates of interest based upon market rates for debt with similar terms and credit ratings. As these long-term debt issues mature, we may refinance such debt with new debt having interest rates reflecting then-current market conditions. In order to reduce interest rate risk associated with near- to medium-term forecasted issuances of fixed rate debt, from time to time we enter into IRPAs.
Foreign Currency Exchange Rate Risk
Our primary currency exchange rate risk is associated with the U.S. dollar versus the euro and, to a lesser extent, the U.S. dollar versus the British pound sterling. The U.S. dollar value of our foreign currency denominated assets and liabilities will fluctuate with changes in the associated foreign currency exchange rates. From time to time, we use derivative instruments to hedge portions of our net investments in foreign subsidiaries. Gains or losses on these net investment hedges remain in AOCI until such foreign operations are sold or liquidated. With respect to our net investments in our UGI International operations, a 10% decline in the value of the associated foreign currencies versus the U.S. dollar would reduce their aggregate net book value at September 30, 2020, by approximately $105 million, which amount would be reflected in other comprehensive income. We have designated euro-denominated borrowings under the UGI International Credit Facilities Agreement and the UGI International 3.25% Senior Notes as net investment hedges.
In order to reduce the volatility in net income associated with our foreign operations, principally as a result of changes in the U.S. dollar exchange rate between the euro and British pound sterling, we enter into forward foreign currency exchange contracts. We layer in these foreign currency exchange contracts over a multi-year period to eventually equal approximately 90% of anticipated UGI International local currency earnings before income taxes.
Derivative Instrument Credit Risk
We are exposed to risk of loss in the event of nonperformance by our derivative instrument counterparties. Our derivative instrument counterparties principally comprise large energy companies and major U.S. and international financial institutions. We maintain credit policies with regard to our counterparties that we believe reduce overall credit risk. These policies include evaluating and monitoring our counterparties’ financial condition, including their credit ratings, and entering into agreements with counterparties that govern credit limits or entering into netting agreements that allow for offsetting counterparty receivable and payable balances for certain financial transactions, as deemed appropriate.
Certain of these derivative instrument agreements call for the posting of collateral by the counterparty or by the Company in the forms of letters of credit, parental guarantees or cash. At September 30, 2020, we had pledged cash collateral with derivative
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instrument counterparties totaling $7 million. Additionally, our commodity exchange-traded futures contracts generally require cash deposits in margin accounts. At September 30, 2020, restricted cash in brokerage accounts totaled $21 million. Although we have concentrations of credit risk associated with derivative instruments, the maximum amount of loss, based upon the gross fair values of the derivative instruments, we would incur if these counterparties failed to perform according to the terms of their contracts was not material at September 30, 2020. Certain of the Partnership’s derivative contracts have credit-risk-related contingent features that may require the posting of additional collateral in the event of a downgrade of the Partnership’s debt rating. At September 30, 2020, if the credit-risk-related contingent features were triggered, the amount of collateral required to be posted would not be material.
The following table summarizes the fair values of unsettled market risk sensitive derivative instrument assets (liabilities) held at September 30, 2020. The table also includes the changes in fair values of derivative instruments that would result if there were (1) a 10% adverse change in the market prices of certain commodities; (2) a 50 basis point adverse change in prevailing market interest rates; and (3) a 10% adverse change in the value of the euro and the British pound sterling versus the U.S. dollar. Certain of UGI Utilities’ commodity derivative instruments are excluded from the table below because any associated net gains or losses are refundable to or recoverable from customers in accordance with UGI Utilities ratemaking.
Asset (Liability)
(Millions of dollars) Fair Value Change inFair Value
Commodity price risk $ (18) $ (123)
Interest rate risk $ (55) $ (8)
Foreign currency exchange rate risk $ 18 $ (51)
Critical Accounting Policies and Estimates
The accounting policies and estimates discussed in this section are those that we consider to be the most critical to an understanding of our financial statements because they involve significant judgments and uncertainties. The application of these accounting policies and estimates necessarily requires management’s most subjective or complex judgments regarding estimates and projected outcomes of future events. Changes in these policies and estimates could have a material effect on our financial statements. Management has reviewed these critical accounting policies, and the estimates and assumptions associated with them, with the Company’s Audit Committee. Also, see Note 2 to Consolidated Financial Statements which discusses our significant accounting policies.
Goodwill Impairment Evaluation. Our goodwill is the result of business acquisitions. We do not amortize goodwill, but test it at least annually for impairment at the reporting unit level. A reporting unit is an operating segment, or one level below an operating segment (a component), if it constitutes a business for which discrete financial information is available and regularly reviewed by segment management. Components are aggregated into a single reporting unit if they have similar economic characteristics. A reporting unit with goodwill is required to perform an impairment test annually or whenever events or circumstances indicate that the value of goodwill may be impaired.
For certain of our reporting units with goodwill, we assess qualitative factors to determine whether it is more likely than not that the fair value of such reporting unit is less than its carrying amount. For our other reporting units with goodwill, we bypass the qualitative assessment and perform the quantitative assessment by comparing the fair values of the reporting units with their carrying amounts, including goodwill. We determine fair values generally based on a weighting of income and market approaches. For purposes of the income approach, fair values are determined based upon the present value of the reporting unit’s estimated future cash flows, including an estimate of the reporting unit’s terminal value based upon these cash flows, discounted at appropriate risk-adjusted rates. We use our internal forecasts to estimate future cash flows, which may include estimates of long-term future growth rates based upon our most recent reviews of the long-term outlook for each reporting unit. Cash flow estimates used to establish fair values under our income approach involve management judgments based on a broad range of information and historical results. In addition, external economic and competitive conditions can influence future performance. For purposes of the market approach, we use valuation multiples for companies comparable to our reporting units. The market approach requires judgment to determine the appropriate valuation multiples. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to such excess but not to exceed the total amount of the goodwill of the reporting unit. As of September 30, 2020, our goodwill totaled $3,518 million. No impairments of goodwill were recorded during any of the periods presented.
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Impairment of Long-Lived Assets. Impairment test for long-lived assets (or an asset group) is required when circumstances indicate that such assets may be impaired. If it is determined that a triggering event has occurred, we perform a recoverability test based upon estimated undiscounted cash flow projections expected to be realized over the remaining useful life of the long-lived asset. If the undiscounted cash flows used in the recoverability test are less than the long-lived asset's carrying amount, we determine its fair value. If the fair value is determined to be less than its carrying amount, the long-lived asset is reduced to its estimated fair value and an impairment loss is recognized in an amount equal to such shortfall. When determining whether a long-lived asset has been impaired, management groups assets at the lowest level that has identifiable cash flows. Performing an impairment test on long-lived assets involves judgment in areas such as identifying when a triggering event requiring evaluation occurs; identifying and grouping assets; and, if the undiscounted cash flows used in the recoverability test are less than the long-lived asset's carrying amount, determining the fair value of the long-lived asset. Although cash flow estimates are based upon relevant information at the time the estimates are made, estimates of future cash flows are by nature highly uncertain and contemplate factors that change over time such as the expected use of the asset including future production and sales volumes, expected fluctuations in prices of commodities and expected proceeds from disposition. See Note 5 to Consolidated Financial Statements for information on the impairment losses associated with the disposal of Conemaugh during the third quarter of Fiscal 2020. No other material provisions for impairments of long-lived assets were recorded during Fiscal 2020 or Fiscal 2019.
Loss Contingencies and Environmental Remediation Liabilities. We are involved in litigation that arises in the normal course of business, and we are subject to risk of loss for general, automobile and product liability and workers’ compensation claims for which we obtain insurance coverage subject to self-insured retentions or deductibles. We are also subject to environmental laws and regulations intended to mitigate or remove the effects of past operations and improve or maintain the quality of the environment. These laws and regulations require the removal or remedy of the effect on the environment of the disposal or release of certain specified hazardous substances at current or former operating sites.
We establish reserves for loss contingencies including pending litigation, and for pending and incurred but not reported claims associated with general and product liability, automobile and workers’ compensation when it is probable that a liability exists and the amount or range of amounts related to such liability can be reasonably estimated. When no amount within a range of possible loss is a better estimate than any other amount within the range, liabilities recorded are based upon the low end of the range. With respect to unasserted claims arising from unreported incidents, we may use the work of specialists to estimate the ultimate losses to be incurred using actuarially determined loss development factors applied to actual claims data.
The likelihood of a loss with respect to a particular loss contingency is often difficult to predict. In addition, a reasonable estimate of the loss, or a range of possible loss, may not be practicable based upon the information available and the potential effects of future events and decisions by third parties that will determine the ultimate resolution of the loss contingency. Reasonable estimates involve management judgments based on a broad range of information and prior experience. For litigation and pending claims including those covered by insurance policies, the analysis of probable loss is performed on a case by case basis and includes an evaluation of the nature of the claim, the procedural status of the matter, the probability or likelihood of success in prosecuting or defending the claim, the information available with respect to the claim, the opinions and views of outside counsel and other advisors, and past experience in similar matters. These judgments are reviewed quarterly as more information is received, and the amounts reserved are updated as necessary. Our estimated reserves for loss contingencies and for pending and incurred but not reported claims associated with general and product liability, automobile and workers’ compensation may differ materially from the ultimate liability and such reserves may change materially as more information becomes available and estimated reserves are adjusted.
We accrue reserves for environmental remediation when assessments indicate that it is probable a liability has been incurred and an amount can be reasonably estimated. Amounts recorded as environmental liabilities on the Consolidated Balance Sheets represent our best estimate of costs expected to be incurred or, if no best estimate can be made, the minimum liability associated with a range of expected environmental investigation and remediation costs. These estimates are based upon a number of factors including whether the company will be responsible for such remediation, the scope and cost of the remediation work to be performed, the portion of costs that will be shared with other potentially responsible parties, the timing of the remediation and possible impact of changes in technology, and the regulations and requirements of local governmental authorities. Our estimated reserves for environmental remediation may differ materially from the ultimate liability and such reserves may change materially as more information becomes available and estimated reserves are adjusted. UGI Utilities receives ratemaking recognition of environmental investigation and remediation costs associated with their in-state environmental sites. This ratemaking recognition balances the accumulated difference between historical costs and rate recoveries with an estimate of future costs associated with the sites.
Regulatory Assets and Liabilities. The accounting for our rate regulated gas and electric utility operations differs from the accounting for nonregulated operations in that these operations are required to reflect the effects of rate regulation in the
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consolidated financial statements. Regulatory practices that assign costs to accounting periods may differ from accounting methods generally applied by nonregulated businesses. When it is probable that regulators will permit the recovery of current costs through future rates charged to customers, these costs that otherwise would be expensed by nonregulated companies are deferred as regulatory assets. Similarly, regulatory liabilities are recognized when it is probable that regulators will require customer refunds through future rates or when revenue is collected from customers for expenditures that have yet to be incurred. We continually assess whether the regulatory assets are probable of future recovery by evaluating the regulatory environment, recent rate orders and public statements issued by the PAPUC, discussions with regulatory authorities and legal counsel. If future recovery of regulatory assets ceases to be probable, the elimination of those regulatory assets would adversely impact our results of operations and cash flows. As of September 30, 2020, our regulatory assets and regulatory liabilities totaled $397 million and $353 million, respectively. For additional information on regulatory assets and liabilities, see Notes 2 and 9 to Consolidated Financial Statements.
Income Taxes. We use the asset and liability method of accounting for income taxes. Under this method, income tax expense is recognized for the amount of taxes payable or refundable for the current year and for deferred tax liabilities and assets for the future tax consequences of events that have been recognized in our financial statements or tax returns. Positions taken by an entity in its tax returns must satisfy a more-likely-than-not recognition threshold assuming the positions will be examined by tax authorities with full knowledge of relevant information. We use assumptions, judgments and estimates to determine our current provision for income taxes. We also use assumptions, judgments and estimates to determine our deferred tax assets and liabilities and any valuation allowance to be recorded against a deferred tax asset. The interpretation of tax laws, including the provisions of the TCJA and its related treasury regulations, involves uncertainty, since tax authorities may interpret the laws differently. In addition, the states in which we operate may or may not conform to some or all of the provisions in the TCJA. Our assumptions, judgments and estimates relative to the current provision for income tax give consideration to current tax laws, our interpretation of current tax laws and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. Changes in tax law or our interpretation thereof and the resolution of current and future tax audits could significantly impact the amounts provided for income taxes in our consolidated financial statements. Our assumptions, judgments and estimates relative to the amount of deferred income taxes take into account estimates of the amount of future taxable income. Actual taxable income or future estimates of taxable income could render our current assumptions, judgments and estimates inaccurate. Changes in the assumptions, judgments and estimates mentioned above could cause our actual income tax obligations to differ significantly from our estimates. As of September 30, 2020, our net deferred tax liabilities totaled $571 million.
Business Combination Purchase Price Allocations. From time to time, the Company enters into material business combinations. The purchase price is allocated to the various assets acquired and liabilities assumed at their estimated fair value as of the acquisition date with the residual of the purchase price allocated to goodwill. From time to time, we engage third-party valuation experts to assist us in determining the fair values of certain assets acquired and liabilities assumed. Such valuations require management to make significant judgments, estimates and assumptions especially with respect to intangible assets. Management makes estimates of fair value based upon assumptions it believes to be reasonable. These estimates are based upon historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Critical estimates in valuing certain of the intangible assets include, but are not limited to, discount rates and expected future cash flows from and the economic lives of customer relationships, trade names, existing technology, and other intangible assets. Unanticipated events and circumstances may occur, which may affect the accuracy or validity of such assumptions or estimates. The allocation of the purchase price may be modified up to one year after the acquisition date, under certain circumstances, as more information is obtained about the fair value of assets acquired and liabilities assumed.
Recently Issued Accounting Pronouncements
See Note 3 to Consolidated Financial Statements for a discussion of the effects of recently issued accounting guidance.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
“Quantitative and Qualitative Disclosures About Market Risk” are contained in Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations under the caption “Market Risk Disclosures” and are incorporated by reference.
ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Management’s Annual Report on Internal Control Over Financial Reporting and the financial statements and financial statement schedules referred to in the Index contained on page F-2 of this Report are incorporated herein by reference.
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a)The Company's disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by the Company in reports filed or submitted under the Exchange Act is (i) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. The Company's management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures, as of September 30, 2020, were effective at the reasonable assurance level.
(b)For “Management’s Annual Report on Internal Control Over Financial Reporting” see Item 8 of this Report (which information is incorporated herein by reference).
(c)During the most recent fiscal quarter, no change in the Company’s internal control over financial reporting occurred that has materially affected, or reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
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PART III:
ITEMS 10 THROUGH 14.
In accordance with General Instruction G(3), and except as set forth below, the information required by Items 10, 11, 12, 13 and 14 is incorporated in this Report by reference to the following portions of UGI’s Proxy Statement, which will be filed with the SEC by December 31, 2020.
Information Captions of Proxy StatementIncorporated by Reference
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Equity Compensation Table
The following table sets forth information as of the end of Fiscal 2020 with respect to compensation plans under which our equity securities are authorized for issuance.
Equity compensation plans not approved by security holders —
(1)Represents 9,989,534 stock options under the UGI Corporation 2004 Omnibus Equity Compensation Plan Amended and Restated as of December 5, 2006 and the UGI Corporation 2013 Omnibus Incentive Compensation Plan.
(2)Represents 6,105,754 securities remaining for issuance from the UGI Corporation 2013 Omnibus Incentive Compensation Plan, which includes 982,941 AmeriGas Common Units that were available for grant under the AmeriGas Propane, Inc. Long-Term Incentive Plan and converted to UGI Corporation units in connection with the AmeriGas Merger. The UGI Corporation 2013 Omnibus Incentive Compensation Plan was approved by the shareholders on January 24, 2013.
(3)Represents 831,274 restricted stock units under the UGI Corporation 2004 Omnibus Equity Compensation Plan Amended and Restated as of December 5, 2006 and the UGI Corporation 2013 Omnibus Incentive Compensation Plan.
(4)Weighted-average exercise price of outstanding options; excludes restricted stock units.
The information concerning the Company’s executive officers required by Item 10 is set forth below.
EXECUTIVE OFFICERS
Name Age Position
John L. Walsh 65 President and Chief Executive Officer
Ted J. Jastrzebski 59 Chief Financial Officer
Joseph L. Hartz 57 President, UGI Energy Services, LLC
Hans G. Bell 47 President, UGI Utilities, Inc.
Monica M. Gaudiosi 57 Vice President, General Counsel and Secretary
Judy A. Zagorski 57 Vice President - Chief Human Resources Officer
All officers are elected for a one-year term at the organizational meeting of the Board of Directors held each year.
There are no family relationships between any of the officers or between any of the officers and any of the directors.
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John L. Walsh
Mr. Walsh is a Director and President (since 2005) and Chief Executive Officer (since 2013) of UGI Corporation. He previously served as UGI Corporation’s Chief Operating Officer (2005 to 2013) and as the President and Chief Executive Officer of UGI Utilities, Inc. (2009 to 2011). Previously, Mr. Walsh was the Chief Executive of the Industrial and Special Products division of the BOC Group plc, an industrial gases company, a position he assumed in 2001. He was an Executive Director of BOC (2001 to 2005), having joined BOC in 1986 as Vice President - Special Gases and having held various senior management positions in BOC, including President of Process Gas Solutions, North America (2000 to 2001) and President of BOC Process Plants (1996 to 2000). Mr. Walsh also serves as Director at Main Line Health, Inc., the United Way of Greater Philadelphia and Southern New Jersey, the Greater Philadelphia Chamber of Commerce, the Mastery Charter School, the Satell Institute, and the Philadelphia Zoo, and as Trustee at the Saint Columbkille Partnership School.
Ted J. Jastrzebski
Mr. Jastrzebski is Chief Financial Officer of UGI Corporation (since 2018). Mr. Jastrzebski previously served as Principal Financial Officer of AmeriGas Propane, Inc. (2018 to 2019). From 2013 until 2018, Mr. Jastrzebski served as Executive Vice President and Chief Financial Officer of Qurate Retail Group, which is comprised of QVC, HSN, Cornerstone Brands, and Zulily. Previously, Mr. Jastrzebski held various positions at The Hershey Company, including Senior Vice President and President, Hershey Americas (2011 to 2013), Senior Vice President and President, Hershey International (2007 to 2010) and Vice President, Finance, Hershey International (2004 to 2007). Mr. Jastrzebski also served as Senior Vice President, Finance, IT and Administration and Chief Financial Officer of CARE (2002 to 2004) and as Vice President and Chief Financial Officer of Project Hope (1999 to 2002).
Robert F. Beard
Mr. Beard is Executive Vice President, Natural Gas (since 2018) and Chief Executive Officer of UGI Utilities, Inc. (since 2011). He previously served as President (2011 to September 2020), Vice President - Marketing, Rates and Gas Supply (2010 to 2011) and Vice President - Southern Region (2008 to 2010) of UGI Utilities, Inc. From 2006 until 2008, Mr. Beard served as Vice President - Operations and Engineering of PPL Gas Utilities Corporation and, from 2002 until 2006, he served as Director - Operations and Engineering of PPL Gas Utilities Corporation.
Roger Perreault
Mr. Perreault is Executive Vice President, Global LPG of UGI Corporation (since 2018) and President - UGI International, LLC (since 2015). Prior to joining UGI Corporation, Mr. Perreault held various positions at Air Liquide, an industrial gases company he joined in 1994, and served in various leadership positions from 2008 to 2014, including in a global role as President, Large Industries with international responsibilities and, prior to that, in a role with responsibility for Air Liquide’s North American large industries business. Prior to joining Air Liquide, Mr. Perreault was a chemical engineer and operations manager with I.C.I. in Quebec, Canada.
Hugh J. Gallagher
Mr. Gallagher is President and Chief Executive Officer of AmeriGas Propane, Inc. (since 2018). Previously he served as its Vice President - Finance and Chief Financial Officer (2013 to 2018). He has also served as Treasurer of both UGI Corporation and AmeriGas Propane, Inc. (2011 to 2014), Director - Treasury Services and Investor Relations of UGI Corporation (2009 to 2011) and Director - Treasury Services (2007 to 2009) of UGI Corporation. He has also served as Director - Business Development (2004 to 2007), Director of Financial Planning and Analysis (2000 to 2004), Financial Manager - Operations (1999 to 2000), Manager of Financial Reporting (1996 to 1999), and Team Leader - Financial Reporting (1995 to 1996) at AmeriGas Propane, Inc. Mr. Gallagher joined UGI Corporation in 1990, serving in various finance and accounting roles of increasing responsibility.
Joseph L. Hartz
Mr. Hartz is President of UGI Energy Services, LLC (since 2017). He previously served as Chief Operating Officer (2014 to 2017) and as Vice President - Supply and Operations (2010 to 2014) of UGI Energy Services, LLC. He joined UGI Utilities, Inc. in 1985 as an accountant and has held various positions of increasing responsibility at UGI Utilities and UGI Energy Services, including Vice President - Assets and Supply and Chief Financial Officer.
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Hans G. Bell
Mr. Bell is the President of UGI Utilities, Inc. (since September 2020). Mr. Bell joined UGI Utilities in 2013 as Vice President - Engineering and Operations Support, a role he held until 2017 when he was promoted to Chief Operating Officer. Prior to joining UGI Utilities, Mr. Bell held senior operating and engineering positions at AGL Resources (2012 to 2013) and Nicor Gas (1996 to 2011).
Monica M. Gaudiosi
Ms. Gaudiosi is the Vice President, General Counsel and Secretary of UGI Corporation and UGI Utilities, Inc. (since 2012). She is also Vice President (since 2012), General Counsel (since 2015) and Secretary (since 2012) of AmeriGas Propane, Inc. Prior to joining UGI Corporation, Ms. Gaudiosi served as Senior Vice President and General Counsel (2007 to 2012) and Senior Vice President and Associate General Counsel (2005 to 2007) of Southern Union Company. Prior to joining Southern Union Company in 2005, Ms. Gaudiosi held various positions with General Electric Capital Corporation (1997 to 2005). Before joining General Electric Capital Corporation, Ms. Gaudiosi was an associate at the law firms of Hunton & Williams (1994 to 1997) and Sutherland, Asbill & Brennan (1988 to 1994).
Laurie A. Bergman
Ms. Bergman is Vice President, Chief Accounting Officer and Corporate Controller of UGI Corporation (since February 2019). She previously served as the Chief Accounting Officer and Corporate Controller of AmeriGas Propane, Inc. (2016 to 2019) and as its Group Director - Financial Planning and Operations (2014 to 2016). Ms. Bergman joined AmeriGas Propane, Inc. in 2006 as Manager - Disbursements and served in various roles for AmeriGas Propane, Inc., including Assistant Controller (2011 to 2012), Director of Financial Analysis and Planning (2012 to 2013), and Group Director of Financial Planning and Revenue Management (2013 to 2014). Previously, Ms. Bergman served as a Financial Analysis Specialist and a Disbursement Operations Manager at CIGNA Corporation, a leading employee benefits provider, positions in which she served from 2001 to 2005.
Judy A. Zagorski
Ms. Zagorski is the Vice President, Chief Human Resources Officer of UGI Corporation (since September 2020). Ms. Zagorski most recently served as Executive Vice President, Global Human Resources & CHRO at Church & Dwight, a major manufacturer of household products headquartered in Ewing, New Jersey (2017 to 2020). Prior to joining Church & Dwight, Ms. Zagorski held the positions of Senior Vice President – Human Resources and Vice President – Human Resources, Development and Strategy at BASF (2011 to 2017).
PART IV:
ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)Documents filed as part of this report:
(1)Financial Statements:
Included under Item 8 are the following financial statements and supplementary data:
Management’s Annual Report on Consolidated Financial Statements and Schedules
Management’s Annual Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm (on Internal Control Over Financial Reporting)
Report of Independent Registered Public Accounting Firm (on Consolidated Financial Statements and Schedules)
Consolidated Balance Sheets as of September 30, 2020 and 2019
Consolidated Statements of Income for the years ended September 30, 2020, 2019 and 2018
Consolidated Statements of Comprehensive Income for the years ended September 30, 2020, 2019 and 2018
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Consolidated Statements of Cash Flows for the years ended September 30, 2020, 2019 and 2018
Consolidated Statements of Changes in Equity for the years ended September 30, 2020, 2019 and 2018
Notes to Consolidated Financial Statements
(2)Financial Statement Schedules:
I — Condensed Financial Information of Registrant (Parent Company)
II — Valuation and Qualifying Accounts for the years ended September 30, 2020, 2019 and 2018
We have omitted all other financial statement schedules because the required information is (1) not present; (2) not present in amounts sufficient to require submission of the schedule; or (3) included elsewhere in the financial statements or related notes.
(3)List of Exhibits:
The exhibits filed as part of this report are as follows (exhibits incorporated by reference are set forth with the name of the registrant, the type of report and registration number or last date of the period for which it was filed, and the exhibit number in such filing):
Incorporation by Reference
Exhibit No. Exhibit Registrant Filing Exhibit
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Incorporation by Reference
Exhibit No. Exhibit Registrant Filing Exhibit
70
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Incorporation by Reference
Exhibit No. Exhibit Registrant Filing Exhibit
71
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Incorporation by Reference
Exhibit No. Exhibit Registrant Filing Exhibit
72
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Incorporation by Reference
Exhibit No. Exhibit Registrant Filing Exhibit
73
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Incorporation by Reference
Exhibit No. Exhibit Registrant Filing Exhibit
74
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Incorporation by Reference
Exhibit No. Exhibit Registrant Filing Exhibit
75
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Incorporation by Reference
Exhibit No. Exhibit Registrant Filing Exhibit
76
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Incorporation by Reference
Exhibit No. Exhibit Registrant Filing Exhibit
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Incorporation by Reference
Exhibit No. Exhibit Registrant Filing Exhibit
14 Code of Business Conduct and Ethics. UGI Form 10-K(9/30/19) 14
*21 Subsidiaries of the Registrant.
*23 Consent of Ernst & Young LLP
*101.SCH XBRL Taxonomy Extension Schema
*101.CAL XBRL Taxonomy Extension Calculation Linkbase
*101.DEF XBRL Taxonomy Extension Definition Linkbase
*101.LAB XBRL Taxonomy Extension Labels Linkbase
*101.PRE XBRL Taxonomy Extension Presentation Linkbase
* Filed herewith.
** As required by Item 15(a)(3), this exhibit is identified as a compensatory plan or arrangement.
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ITEM 16. FORM 10-K SUMMARY
None.
EXHIBIT INDEX
Exhibit No. Description
21 Subsidiaries of the Registrant.
23 Consent of Ernst & Young LLP.
101.SCH XBRL Taxonomy Extension Schema
101.CAL XBRL Taxonomy Extension Calculation Linkbase
101.DEF XBRL Taxonomy Extension Definition Linkbase
101.LAB XBRL Taxonomy Extension Labels Linkbase
101.PRE XBRL Taxonomy Extension Presentation Linkbase
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
UGI CORPORATION
Date: November 20, 2020 By: /s/ Ted J. Jastrzebski
Ted J. JastrzebskiChief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below on November 20, 2020, by the following persons on behalf of the Registrant in the capacities indicated.
Signature Title
John L. Walsh
/s/ Ted J. Jastrzebski Chief Financial Officer (Principal Financial Officer)
Ted J. Jastrzebski
Laurie A. Bergman
/s/ Frank S. Hermance Chairman and Director
Frank S. Hermance
/s/ Marvin O. Schlanger Vice Chairman and Director
Marvin O. Schlanger
/s/ M. Shawn Bort Director
M. Shawn Bort
/s/ Theodore A. Dosch Director
Theodore A. Dosch
/s/ Alan N. Harris Director
Alan N. Harris
/s/ Mario Longhi Director
Mario Longhi
/s/ William J. Marrazzo Director
William J. Marrazzo
/s/ Cindy J. Miller Director
Cindy J. Miller
Director
/s/ Kelly A. Romano
Kelly A. Romano
/s/ James B. Stallings, Jr. Director
James B. Stallings, Jr.
/s/ K. Richard Turner Director
K. Richard Turner
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UGI CORPORATION AND SUBSIDIARIES
FINANCIAL INFORMATION
FOR INCLUSION IN ANNUAL REPORT ON FORM 10-K
YEAR ENDED SEPTEMBER 30, 2020
F-1
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UGI CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Pages
Management’s Annual Report on Internal Control Over Financial Reporting F-4
Financial Statements:
Consolidated Balance Sheets as of September 30, 2020 and 2019 F-8
Notes to Consolidated Financial Statements F-13
Financial Statement Schedules:
I — Condensed Financial Information of Registrant (Parent Company) S-1
II — Valuation and Qualifying Accounts S-4
We have omitted all other financial statement schedules because the required information is either (1) not present; (2) not present in amounts sufficient to require submission of the schedule; or (3) included elsewhere in the financial statements or related notes.
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Management’s Annual Report on Consolidated Financial Statements and Schedules
The Company’s consolidated financial statements and other financial information contained in this Annual Report were prepared by management, which is responsible for their fairness, integrity and objectivity. The consolidated financial statements and related information were prepared in accordance with GAAP and include amounts that are based on management’s best judgments and estimates.
The Audit Committee of the Board of Directors (the “Committee”) is composed of four members, each of whom is independent and a non-employee director of the Company. The Committee is responsible for monitoring and overseeing the financial reporting process, the adequacy of internal accounting controls, the independence and performance of the Company’s independent registered public accounting firm and internal auditors. The Committee meets regularly, with and without management present, with the independent registered public accounting firm and the internal auditors, both of which report directly to the Committee. In addition, the Committee provides regular reports to the Board of Directors.
/s/ John L. Walsh
Chief Executive Officer
/s/ Ted J. Jastrzebski
Chief Financial Officer
/s/ Laurie A. Bergman
Chief Accounting Officer
F-3
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Management’s Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company, as such term is defined in Rule 13a-15(f) of the Securities Exchange Act of 1934, as amended. In order to evaluate the effectiveness of internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002, management has conducted an assessment, including testing, of the Company’s internal control over financial reporting as of September 30, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”).
Internal control over financial reporting refers to the process, designed under the supervision and with the participation of management, including our Chief Executive Officer and our Chief Financial Officer, and effected by the Company’s Board of Directors, to provide reasonable, but not absolute, assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate due to changing conditions, or the degree of compliance with the policies or procedures may deteriorate.
Based on its assessment, management has concluded that the Company’s internal control over financial reporting was effective as of September 30, 2020, based on the COSO criteria. Ernst & Young LLP, our independent registered public accounting firm, has audited the effectiveness of the Company’s internal control over financial reporting as of September 30, 2020, as stated in their report, which appears herein.
/s/ John L. Walsh
Chief Executive Officer
/s/ Ted J. Jastrzebski
Chief Financial Officer
/s/ Laurie A. Bergman
Chief Accounting Officer
F-4
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Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of UGI Corporation
Opinion on Internal Control over Financial Reporting
We have audited UGI Corporation and subsidiaries’ internal control over financial reporting as of September 30, 2020, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, UGI Corporation and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of September 30, 2020, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of September 30, 2020 and 2019, the related consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the three years in the period ended September 30, 2020, and the related notes and the financial statement schedules listed in the Index at Item 15(a) and our report dated November 20, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying “Management’s Annual Report on Internal Control over Financial Reporting”. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
November 20, 2020
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Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of UGI Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of UGI Corporation and subsidiaries (the Company) as of September 30, 2020 and 2019, the related consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the three years in the period ended September 30, 2020, and the related notes and the financial statement schedules listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at September 30, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of September 30, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated November 20, 2020, expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
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/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2014.
Philadelphia, Pennsylvania
November 20, 2020
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UGI CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Millions of dollars)
September 30,
ASSETS
Current assets
Cash and cash equivalents $ 336 $ 447
Restricted cash 21 64
Accrued utility revenues 14 15
Income taxes receivable 80 —
Derivative instruments 44 29
Prepaid expenses 96 72
Other current assets 59 68
Property, plant and equipment
Net property, plant, and equipment 6,960 6,688
Utility regulatory assets 395 387
Derivative instruments 38 43
LIABILITIES AND EQUITY
Current liabilities
Current maturities of long-term debt $ 53 $ 24
Employee compensation and benefits accrued 162 133
Derivative instruments 64 85
Accrued interest 64 63
Other current liabilities 386 320
Noncurrent liabilities
Derivative instruments 59 48
Commitments and contingencies (Note 17)
Equity:
UGI Corporation stockholders’ equity:
Accumulated other comprehensive loss (147) (217)
Treasury stock, at cost (49) (16)
Total UGI Corporation stockholders’ equity 4,128 3,817
Noncontrolling interests 9 10
See accompanying Notes to Consolidated Financial Statements.
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UGI CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Millions of dollars, except per share amounts)
Year Ended September 30,
Costs and expenses:
Impairment of Partnership tradenames and trademarks — — 75
Loss on disposals of Conemaugh and HVAC 54 — —
Other operating income, net (21) (31) (32)
Income from equity investees 27 9 4
Loss on extinguishments of debt — (6) —
Other non-operating (expense) income, net (20) 39 16
Net income including noncontrolling interests 532 308 822
Net income attributable to UGI Corporation $ 532 $ 256 $ 719
Earnings per common share attributable to UGI Corporation stockholders:
Weighted-average common shares outstanding (thousands):
See accompanying Notes to Consolidated Financial Statements.
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UGI CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Millions of dollars)
Year Ended September 30,
Net income including noncontrolling interests $ 532 $ 308 $ 822
Other comprehensive income (loss) 70 (100) (17)
Comprehensive income including noncontrolling interests 602 208 805
Comprehensive income attributable to UGI Corporation $ 602 $ 156 $ 702
See accompanying Notes to Consolidated Financial Statements.
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UGI CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of dollars)
Year Ended September 30,
CASH FLOWS FROM OPERATING ACTIVITIES
Net income including noncontrolling interests $ 532 $ 308 $ 822
Deferred income tax expense (benefit), net 146 (43) (69)
Provision for uncollectible accounts 32 29 36
Changes in unrealized gains and losses on derivative instruments (81) 259 (133)
Impairment of Partnership tradenames and trademarks — — 75
Loss on disposals of Conemaugh and HVAC 54 — —
Equity-based compensation expense 15 18 23
Other, net (6) 6 7
Net change in:
Accounts receivable and accrued utility revenues (18) 83 (148)
Income taxes receivable (80) — —
Utility deferred fuel costs, net of changes in unsettled derivatives 17 (30) 31
Accounts payable 3 (97) 65
Derivative instruments collateral received (paid) 22 (41) 4