ITEM 1A. RISK FACTORS
There are many factors that may affect our business, financial condition and results of operations, including the following risks relating to: (1) the demand for our products and services and our ability to grow our customer base; (2) our business operations, including internal and external factors that may impact our operational continuity; (3) our international operations; (4) our supply chain and our ability to obtain and transport adequate quantities of LPG; (5) government regulation and oversight; and (6) general factors that may impact our business and our shareholders.
Risks Relating to the Demand for Our Products and Services and Our Ability to Grow Our Customer Base
Our business is seasonal and decreases in the demand for our energy products and services because ofwarmer-than-normal heating season weather or unfavorable weather conditions may adversely affect our resultsof operations.
Because many of our customers rely on our energy products and services to heat their homes and businesses, and for agricultural purposes such as crop drying, our results of operations are adversely affected by warmer-than-normal heating season weather. Weather conditions have a significant impact on the demand for our energy products and services for both heating and agricultural purposes. Accordingly, the volume of our energy products sold is at its highest during the peak heating season of October through March and is directly affected by the severity of the winter weather. For example, historically, approximately 60% to 70% of AmeriGas Propane’s annual retail propane volume, 60% to 70% of UGI International’s annual retail LPG volume, 60% to 70% of Energy Services’ retail natural gas volume and 60% to 70% of Gas Utility’s natural gas throughput (the total volume of gas sold to or transported for customers within our distribution system) has typically been sold during these months. Additionally, as a result of the AmeriGas Merger, an even greater portion of our earnings has been and will continue to be derived during the peak heating season of October through March. There can be no assurance that normal winter weather in our market areas will occur in the future.
In addition, our agricultural customers use LPG for purposes other than heating, including for crop drying, and unfavorable weather conditions, such as lack of precipitation, may impact the demand for LPG. Moreover, harsh weather conditions may at times impede the transportation and delivery of LPG, or restrict our ability to obtain LPG from suppliers. Spikes in demand caused by weather or other factors can stress the supply chain and limit our ability to obtain additional quantities of LPG. Changes in LPG supply costs are normally passed through to customers, but time lags (between when we purchase the LPG and when the customer purchases the LPG) may result in significant gross margin fluctuations that could adversely affect our results of operations.
The potential effects of climate change may affect our business, operations, supply chain and customers, which could adversely impact our financial condition and results of operations.
Shifts and fluctuations in weather patterns and other environmental conditions, including temperature and precipitation levels, may affect consumer demand for our energy products and services. In addition, the potential physical effects of climate change, such as increased frequency and severity of storms, floods and other climatic events, could disrupt our operations and supply chain, and cause us to incur significant costs in preparing for or responding to these effects. These or other meteorological changes could lead to increased operating costs, capital expenses or supply costs. Our commercial and residential customers may also experience the potential physical impacts of climate change and may incur significant costs in preparing for or responding to these efforts, including increasing the mix and resiliency of their energy solutions and supply. The impact of any one or all of the foregoing factors may adversely affect our financial condition and results of operations.
In addition to the direct physical impact that climate change may have on our business, financial condition and results of operations, we may also be adversely impacted by other environmental factors, including: (i) technological advances designed to promote energy efficiency and limit environmental impact; (ii) increased competition from alternative energy sources; (iii) regulatory responses aimed at decreasing GHG emissions; and (iv) litigation or regulatory actions that address the environmental impact of our energy products and services. For more information on these risks, please refer to the following risk factors included elsewhere in this section:
•“Energy efficiency and technology advances, as well as price induced customer conservation, may result in reduced demand for our energy products and services”;
•“Our operations may be adversely affected by competition from other energy sources”;
•“Our need to comply with, and respond to industry-wide changes resulting from, comprehensive, complex, and sometimes unpredictable governmental regulations, including regulatory initiatives aimed at increasing competition
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within our industry, may increase our costs and limit our revenue growth, which may adversely affect our operating results”;
•“Our operations, financial results and cash flows may be adversely affected by existing and future global climate change laws and regulations, including with respect to GHG emission restrictions, as well as market responses thereto”; and
•“We are subject to operating and litigation risks that may not be covered by insurance.”
Our potential to increase revenues may be affected by the decline in retail volumes of LPG and our ability to retain and grow our customer base.
The retail LPG distribution industry in the U.S. and many of the European countries in which we operate is mature and has been declining over the past several years, with no or modest growth (or decline) in total demand foreseen in the near future. Accordingly, we expect that year-to-year industry volumes will be principally affected by weather patterns. Therefore, our ability to grow within the LPG industry is dependent on our ability to acquire other retail distributors and to achieve internal growth, which includes expansion of the ACE, Cynch and National Accounts programs in the U.S. and expansion in Europe, as well as the success of our sales and marketing programs designed to attract and retain customers. Any failure to retain and grow our customer base and successfully acquire other distributors would have an adverse impact on our results. Acquisitions in the U.S. and Europe may require merger control filings with the Federal Trade Commission and the European Commission, as applicable, and commitments or divestments of assets may be required to obtain clearance. Such commitments or divestments may influence the overall economics and risk profile of the transaction.
Our ability to grow our businesses will be adversely affected if we are not successful in identifying and completing business combinations, asset acquisitions or investments in joint ventures intended to advance our business strategy, or if we are unable to realize the anticipated benefits from such transactions we have completed.
One element of our business strategy is to grow through investments in the U.S. and in international markets, which includes our recent efforts to expand our presence in the renewable energy industry. We may choose to finance such future investments with debt, equity, cash or a combination of the three. We can give no assurances that we will find attractive investment opportunities in the future (including renewable energy opportunities), that we will be able to complete and finance these transactions on economically acceptable terms, that any investments and related transactions will not be dilutive to earnings or that any additional debt incurred to finance such investment will not affect our ability to pay dividends. Moreover, certain investments, including some acquisitions, may require antitrust and other regulatory clearances. We may have to offer commitments (such as agreements not to compete for certain businesses) or divest assets in order to obtain clearance, which may adversely affect the overall economics and risk profile of the contemplated transaction.
To the extent we are successful in executing these transactions, such transactions involve a number of risks. These risks include, but are not limited to, the assumption of material liabilities, environmental liabilities, the diversion of management’s attention from the management of daily operations to the integration of acquired operations, difficulties in the assimilation and retention of employees and difficulties in the assimilation of different cultures and practices and internal controls, challenges with consolidating the operations of acquired companies into our own, as well as in the assimilation of broad and geographically dispersed personnel and operations. Future investments could also result in, among other things, the failure to identify material issues during due diligence, the risk of overpaying for assets, unanticipated capital expenditures, the failure to maintain effective internal control over financial reporting, recording goodwill and other intangible assets at values that ultimately may be subject to impairment charges and fluctuations in quarterly results. There can also be no assurance that our past and future investments, including our recent investments in renewable energy, will deliver the strategic, financial, operational and environmental benefits that we anticipate, nor can we be certain that strategic investments will remain available in the future.
The failure to successfully identify, complete, and implement investments intended to advance our business strategy could have an adverse impact on our business, cash flows, financial condition and results of operations.
Energy efficiency and technology advances, as well as price induced customerconservation, may result in reduced demand for our energy products andservices.
The trend toward increased energy efficiency and technological advances, including installation of improved insulation and the development of more efficient boilers and other heating equipment, as well as conservation measures, may reduce the demand for our energy products. Prices for LPG and natural gas are subject to volatile fluctuations as a result of changes in supply and demand as well as other market conditions. During periods of high energy commodity costs, our prices generally increase, which may lead to customer conservation and attrition. A reduction in demand could lower our revenues and, therefore, lower
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our net income and adversely affect our cash flows. State and/or federal regulation may require mandatory conservation measures, which would reduce the demand for our energy products. Additionally, at the international level, EU and local laws and regulations may require mandatory conservation measures, which would reduce the demand for our energy products. For example, in 2018 the EU revised the Energy Performance of Buildings Directive (the “EPBD”), with the goal to create a clear path towards a low and zero-emission and decarbonized building stock in the EU by 2050. Due to delays resulting from the COVID-19 pandemic, EU countries will now be adopting laws through 2021 to implement the EPBD. The EU is also adopting further measures to decarbonize electricity generation in order to reduce dependence on fossil fuel imports and achieve its climate change objectives. Over time, these various measures will impact fossil fuel consumption in Europe and the demand for our energy products. We cannot predict the materiality of the effect of future conservation measures or the effect that any technological advances in heating, conservation, energy generation or other devices might have on our operations.
Our operations may be adversely affected by competition from other energysources.
Our energy products and services face competition from other energy sources, some of which are less costly for equivalent energy value. In addition, we cannot predict the effect that the development of alternative energy sources might have on our operations.
Our LPG distribution businesses compete for customers against suppliers of electricity, fuel oil and natural gas. Electricity is a major competitor of LPG but, except in France, is generally more expensive than LPG on a Btu equivalent basis for space heating, water heating and cooking. However, in Europe and elsewhere, climate change policies favoring electricity from renewable energy sources may cause changes in current relative price relationships. Moreover, notwithstanding cost, the convenience and efficiency of electricity make it an attractive energy source for consumers and developers of new homes. In addition, due to the prevalence of nuclear electric generation in France, the cost of electricity is generally less expensive than that of LPG, particularly when the cost to install new equipment to convert to LPG is considered. Fuel oil, which is also a major competitor of propane, is currently more expensive than propane and is a less environmentally attractive energy source. Furnaces and appliances that burn LPG will not operate on fuel oil and vice versa, and, therefore, a conversion from one fuel to the other requires the installation of new equipment. Our customers generally have an incentive to switch to fuel oil only if fuel oil becomes significantly less expensive than LPG. Except for certain industrial and commercial applications, LPG is generally not competitive with natural gas in areas where natural gas pipelines already exist because natural gas is generally a significantly less expensive source of energy than LPG. The gradual expansion of natural gas distribution systems in our service areas has resulted, and may continue to result, in the availability of natural gas in some areas that previously depended upon LPG. As long as natural gas remains a less expensive energy source than LPG, our LPG business will lose customers in each region into which natural gas distribution systems are expanded.
Our natural gas businesses compete primarily with electricity and fuel oil, and, to a lesser extent, with LPG and coal. Competition among these fuels is primarily a function of their comparative price and the relative cost and efficiency of fuel utilization equipment. There can be no assurance that our natural gas revenues will not be adversely affected by this competition.
The expansion, construction and development of our energy infrastructure assets subjects us to risks.
We seek to grow our business through the expansion, construction and development of our energy infrastructure, including new pipelines, gathering systems, facilities and other assets. These projects are subject to state and federal regulatory oversight and require certain property rights, such as easements and rights-of-way from public and private owners, as well as regulatory approvals, including environmental and other permits and licenses. There is no assurance that we or our project partners, as applicable, will be able to obtain the necessary property rights, permits and licenses in a timely and cost-efficient manner or at all, which may result in a delay or failure to complete a project. We may face opposition to the expansion, construction or development of new or existing pipelines, gathering systems, facilities or other assets from environmental groups, landowners, local groups and other advocates. This opposition could take many forms, including organized protests, attempts to block or sabotage our operations, intervention in regulatory or administrative proceedings involving our assets, or lawsuits or other actions designed to prevent, disrupt, or delay the development or operation of our assets and business. Failure to complete any pending or future infrastructure project may have a materially adverse impact on our financial condition and results of operations.
Even if we are able to successfully complete any pending or future infrastructure project, our revenues may not increase immediately upon the expenditure of funds on a particular project or as anticipated during the lifespan of the project. As a result, there is the risk that new and expanded energy infrastructure may not achieve our expected investment returns, which could have a material adverse effect on our business, financial condition and results of operations.
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Risks Relating to Our Business Operations, Including Internal and External Factors that May Impact Our Operational Continuity
Our efforts to create operational benefits and cost efficiencies through business transformation initiatives at our business units and various corporate services functions may be disruptive and adversely affect our business, financial condition and results of operations.
We may make adjustments to our workforce in response to management changes, product changes, performance issues, changes in strategy, acquisitions or other internal and external considerations. These adjustments may result in increased costs and temporarily reduced productivity, as well as a disruption in our ability to perform functions critical to our strategy, including, but not limited to, disruptions in customer service. The effects of such adjustments could recur in connection with any current or future business transformation initiatives or we may not achieve or sustain the expected growth or cost savings benefits of any such initiatives, or do so within the expected timeframe. As a result, our business, financial condition and results of operations could be negatively affected.
We have substantially completed transformation initiatives at our AmeriGas and UGI International business units that are designed to achieve operational benefits and cost efficiencies and to leverage technology to provide an enhanced customer experience. Additional initiatives are ongoing in certain of our corporate services functions, including finance, human resources, procurement and information technology, that are designed to standardize processes and activities across our global platform, while leveraging the use of best practices and efficiencies between our businesses. If we are unable to deliver the strategic and financial benefits that we anticipate, the achievement of these benefits is delayed, or the volume and nature of change challenges our available resources, then our business operations and financial results could be materially and adversely impacted. Our ability to successfully manage and execute these initiatives and realize expected savings and benefits in the amounts and at the times anticipated is important to our business success. Any failure to do so, which could result from our inability to successfully execute organizational change and business transformation initiatives, unanticipated costs or charges, loss of key personnel, customer loss and other factors described herein, could have a material adverse effect on our business, financial condition and results of operations. For further information on these initiatives, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Executive Overview - Strategic Initiatives.”
Our information technology systems and those of our third-party vendors have been the target of cyber-security attacks in the past. If we are unable to protect our information technology systems against future service interruption, misappropriation of data, or breaches of security resulting from cyber-security attacks or other events, or if we encounter other unforeseen difficulties in the design, implementation or operation of our information technology systems, or if our third-party vendors or service providers experience compromises to their information technology systems, our operations could be disrupted, our business and reputation may suffer, and our internal controls could be adversely affected.
In the ordinary course of business, we rely on information technology systems, including the Internet and third-party hosted services, to support a variety of business processes and activities and to store sensitive data, including (i) intellectual property, (ii) our proprietary business information and that of our suppliers and business partners, (iii) personally identifiable information of our customers and employees, and (iv) data with respect to invoicing and the collection of payments, accounting, procurement, and supply chain activities. In addition, we rely on our information technology systems to process financial information and results of operations for internal reporting purposes and to comply with financial reporting, legal, and tax requirements.
Cyber-security incidents have recently increased in both frequency and magnitude and have involved malicious software and attempts to gain unauthorized access to data and systems, including ransomware attacks where a target’s access to its information systems is blocked until a ransom has been paid.The White House and various regulators, including the SEC, have accordingly increased their focus on companies’ cybersecurity vulnerabilities and risks.Despite our security measures, our technologies, systems, and networks have been and may continue to be the target of cyber-security attacks or information security breaches that could result in the unauthorized release, misuse, loss or destruction of proprietary and other information, or other disruption of our business operations.Due to increasingly sophisticated threat actors, we may be unable to detect, identify or prevent attacks, and even if detected, we may be unable to adequately stop, investigate or remediate our systems given the tools and techniques being used by threat actors to circumvent controls and to remove or obfuscate forensic evidence.Attacks and incidents may also occur due to malfeasance by employees or contractors, as well as human error as in the case of social engineering and phishing campaigns. As a result of the COVID-19 pandemic, a number of our employees have transitioned to working remotely; as a result, more of our employees are working from locations where our cyber-security program may be less effective and information technology security may be less robust. Similarly, our third-party vendors or service providers have been impacted by cyber-security attacks and incidents and are subject to many if not all of the same risks
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and disruptions as described above. A loss of our information technology systems, or temporary interruptions in the operation of our information technology systems, or those of our third-party vendors or service providers, or any other misappropriation of data, or breaches of security could lead to investigations and fines or penalties, litigation, increased costs for compliance and for remediation or rebuilding of our systems, and could have a material adverse effect on our business, financial condition, results of operations, and reputation. In addition, a cyber-security attack could provide a cyber-intruder with the ability to control or alter our pipeline operations. Such an act could result in critical pipeline failures.
The efficient execution of our businesses is dependent upon the proper design, implementation and functioning of its current and future internal systems, such as the information technology systems that support our underlying business processes. Any significant failure or malfunction of such information technology systems may result in disruptions of our operations. In addition, the effectiveness of our internal controls could be adversely affected if we encounter unforeseen problems with respect to the operation of our information technology systems.
Moreover, as cyber incidents increase in frequency and magnitude, we may be unable to obtain cyber-security insurance in amounts and on terms we view as adequate for our operations, including the agreement to certain indemnification provisions by our insurance providers.
Our utility transmission and distribution systems, our non-utility midstream assets, and the assets of upstream interstate pipelines and other midstream providers may not operate as planned, which may increase our expenses or decrease our revenues and, thus, have an adverse impact on our financial results.
Our ability to manage operational risk with respect to utility distribution and transmission and non-utility midstream assets, and the availability of natural gas delivered by interstate natural gas pipelines and midstream gathering assets is critical to our financial results. We obtain our supply from local Marcellus and Utica Shale sources, as well as other trading points in the U.S. If we experience physical capacity constraints on one or more of the interstate or intrastate natural gas pipelines that supply our businesses, we may not be able to supply our customers, which could have an adverse impact on our financial results. Our businesses also face several risks, including the breakdown or failure of or damage to equipment or processes (especially due to severe weather or natural disasters), accidents and other factors, including as a result of overpressurization of or damage to natural gas pipelines. Operation of our transmission and distribution systems or our midstream assets below our expectations may result in lost revenues or increased expenses, including higher maintenance costs, civil litigation and the risk of regulatory penalties.
Risks Relating to Our International Operations
Our international operations could be subject to increased risks, which maynegatively affect our business results.
We operate LPG distribution and energy marketing businesses in Europe through our subsidiaries and we continue to explore the expansion of our international businesses. As a result, we face risks in conducting business abroad that we do not face domestically. Certain aspects inherent in transacting business internationally could negatively impact our operating results, including:
•costs and difficulties in staffing and managing international operations;
•potentially adverse tax consequences, including restrictions on repatriating earnings, the threat of “double taxation,” and potential increases to corporate income taxes (including the proposed OECD framework that aims to reform international taxation rules with the goal of ensuring that multinational corporations pay adequate taxes in the jurisdictions in which they operate and other similar proposals);
•fluctuations in currency exchange rates, particularly the euro, which can affect demand for our products, increase our costs and adversely affect our profitability and reported results;
•new or revised regulatory requirements, including European competition laws that may adversely affect the terms of contracts with customers, including with respect to exclusive supply rights, and stricter regulations applicable to the storage and handling of LPG;
•economic and political uncertainty relating to the United Kingdom’s withdrawal from the EU, commonly known as “Brexit,” which may result in, among other things, increased regulatory costs and challenges, greater volatility in the British pound sterling and euro, business disruptions and increased tariffs;
•new and inconsistently enforced industry regulatory requirements, which can have an adverse effect on our competitive position;
•tariffs and other trade barriers;
•difficulties in enforcing contractual rights;
•longer payment cycles;
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•local political and economic conditions; and
•potential violations of federal regulatory requirements, including anti-bribery, anti-corruption, and anti-money laundering law, economic sanctions, the Foreign Corrupt Practices Act of 1977, as amended, and EU regulatory requirements, including the GDPR and Sapin II.
In particular, certain legal and regulatory risks are associated with international business operations. We are subject to various anti-corruption, economic sanctions and trade compliance laws, rules and regulations. For example, the U.S. government imposes restrictions and prohibitions on transactions in certain foreign countries, including restrictions directed at oil and gas activities in Russia. U.S. laws also prohibit the improper offer, payment, promise to pay, or authorization of the payment of money or anything of value to any foreign official or political party, or to any person, knowing that all or a portion of it will be used to influence a foreign official in his or her official duties or to secure an improper advantage. Ensuring compliance with all relevant laws, rules and regulations is a complex task. Violation of one or more of these laws, rules or regulations could lead to loss of import or export privileges, civil or criminal penalties for us or our employees, or potential reputational harm, which could have a material adverse impact on earnings, cash flows and financial condition.
Risks Relating to Our Supply Chain and Our Ability to Obtain Adequate Quantities of LPG
We are dependent on our principal LPG suppliers, which increases therisks from an interruption in supply and transportation.
During Fiscal 2021, AmeriGas Propane purchased approximately 83% of its propane needs from 20 suppliers. If supplies from these sources were interrupted, the cost of procuring replacement supplies and transporting those supplies from alternative locations might be materially higher and, at least on a short-term basis, our earnings could be affected. Additionally, in certain geographic areas, a single supplier may provide more than 50% of AmeriGas Propane’s propane requirements. Disruptions in supply in these geographic areas could also have an adverse impact on our earnings. Our international businesses are similarly dependent upon their LPG suppliers. For example, during Fiscal 2021, UGI International’s business in the United Kingdom purchased approximately 87% of its LPG needs from two suppliers and, in Italy, approximately 52% of its supply was sourced from a single supplier. If supplies from UGI International’s principal LPG sources are interrupted, the cost of procuring replacement supplies and transporting those supplies from alternative locations might be materially higher and our earnings could be adversely affected. There is no assurance that our international businesses will be able to continue to acquire sufficient supplies of LPG to meet demand at prices or within time periods that would allow them to remain competitive.
Our ability to obtain sufficient quantities of LPG is dependent on transportation facilities and providers.
Spikes in demand caused by weather or other factors can limit our access to port terminals and other transportation and storage facilities, disrupt transportation and limit our ability to obtain sufficient quantities of LPG. A significant increase in port and similar fees and fuel prices may also adversely affect our transportation costs and business. Transportation providers (rail and truck) in some circumstances have limited ability to provide additional resources in times of peak demand. Moreover, the ability of our transportation providers to maintain a staff of qualified truck drivers is critical to the success of our business. Regulatory requirements and an improvement in the economy could reduce the number of eligible drivers or require us to pay higher transportation fees as our transportation providers seek to pass on additional labor costs associated with attracting and retaining drivers.
Our profitability is subject to LPG pricing and inventory risk.
The retail LPG business is a “margin-based” business in which gross profits are dependent upon the excess of the sales price over LPG supply costs. LPG is a commodity, and, as such, its unit price is subject to fluctuations in response to changes in supply or other market conditions. We have no control over supplies, commodity prices or market conditions. Consequently, the unit price of the LPG that our subsidiaries and other distributors and marketers purchase can change rapidly over a short period of time. Most of our domestic LPG product supply contracts permit suppliers to charge posted prices at the time of delivery or the current prices established at major U.S. storage points such as Mont Belvieu, Texas or Conway, Kansas. Most of our international LPG supply contracts are based on internationally quoted market prices. We also purchase a portion of our supplies in the spot market. Because our subsidiaries’ profitability is sensitive to changes in wholesale LPG supply costs, it will be adversely affected if we cannot pass on increases in the cost of LPG to our customers, or if there is a delay in passing on such cost increases. Due to competitive pricing in the industry, our subsidiaries may not fully be able to pass on product cost increases to our customers when product costs rise, or when our competitors do not raise their product prices in a timely manner. Finally, market volatility may cause our subsidiaries to sell LPG at less than the price at which they purchased it,
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which would adversely affect our operating results.
We offer our customers various fixed-price LPG programs, and a significant number of our customers utilize our fixed-price programs. In order to manage the price risk from offering these services, we utilize our physical inventory position, supplemented by forward commodity transactions with various third parties having terms and volumes substantially the same as our customer’s contracts, but there can be no assurance that such measures will be effective. In periods of high LPG price volatility, the fixed-price programs create exposure to over or under-supply positions as the demand from customers may significantly exceed or fall short of supply procured. In addition, if LPG prices decline significantly subsequent to customers signing up for a fixed-price program, there is a risk that customers will default on their commitments, adversely affecting our results of operations.
Changes in commodity market prices may have a significant negative effect on ourliquidity.
Depending on the terms of our contracts with suppliers as well as our use of financial instruments to reduce volatility in the cost of LPG and natural gas, changes in the market price of LPG and natural gas can create margin payment obligations for us and expose us to increased liquidity risk. In addition, increased demand for domestically produced LPG and natural gas overseas may, depending on production volumes in the U.S., result in higher domestic prices and expose us to additional liquidity risks.
Supplier and derivative counterparty defaults may have a negative effect on our operating results.
When we enter into fixed-price sales contracts with customers, we typically enter into fixed-price purchase contracts with suppliers. Depending on changes in the market prices of products compared to the prices secured in our contracts with suppliers of LPG, natural gas and electricity, a default of or force majeure by one or more of our suppliers under such contracts could cause us to purchase those commodities at higher prices from alternate suppliers, which would have a negative impact on our operating results.
Additionally, we economically hedge the market risk associated with a substantial portion of our supply purchases using certain derivative instruments. Such changes in market prices of the aforementioned commodities could result in material exposures or significant concentrations of balances with derivative counterparties. If certain counterparties were unable to meet the obligations set forth in these derivative contracts and we were unable to fully mitigate this exposure via collateral deposit requirements and master netting arrangements, such outcomes could also result in a negative effect on our operating results.
Our business is dependent on the global supply chain to ensure that equipment, materials and other resources are available to both expand and maintain services in a safe and reliable manner. Moreover, prices of equipment, materials and other resources have increased recently and may continue to increase in the future. Failure to secure equipment, materials and other resources on economically acceptable terms may adversely impact our financial condition and results of operations.
Current domestic and global supply chain issues are delaying the delivery, and in some cases resulting in shortages of, materials, equipment and other resources that are critical to our business operations. Failure to eliminate or manage the constraints in the supply chain may eventually impact the availability of items that are necessary to support normal operations as well as materials that are required for continued infrastructure growth, including the replacement of end-of-life assets.
Moreover, inflation has recently become an area of increasing economic concern, both domestically and internationally. Changes in the costs of providing our energy products and services, including price increases in equipment and materials as well as increases in labor costs, may negatively impact our financial condition and results of operations and/or result in corresponding price increases for the energy products and services we offer our customers.
Risks Relating to Government Regulation and Oversight
Regulators may not approve the rates we request and existing rates may be challenged, which may adversely affect our results of operations.
In our UGI Utilities segment (comprised of UGI Utilities, Inc. and Mountaineer Gas Company), our distribution operations are subject to regulation by the PAPUC, WVPSC and MDPSC, depending on the state in which the operations are located. These regulatory bodies, among other things, approve the rates that UGI Utilities may charge utility customers, thus impacting the returns that UGI Utilities may earn on the assets that are dedicated to its operations. We expect that UGI Utilities will periodically file requests with these regulatory bodies to increase base rates charged to customers in the respective states in which UGI Utilities operates. If UGI Utilities is required in a rate proceeding to reduce the rates it charges its utility customers, or is unable to obtain approval for timely rate increases from the appropriate regulatory body, particularly when necessary to cover increased costs, UGI Utilities’ revenue growth will be limited and earnings may decrease.
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The enactment of proposed or future tax legislation, including the reversal of recently enacted tax legislation that is beneficial to us, may adversely impact our financial condition and results of operations.
On March 27, 2020, the U.S. enacted the CARES Act.Our financial statements for Fiscal 2021 reflect the realized benefits of the CARES Act. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Application of the CARES Act requires significant judgments to be made in the interpretation of the law and significant estimates in the calculation of the provision for income taxes.If our interpretation of the CARES Act differs significantly from the interpretation of governing bodies, or if future administrations choose to repeal or replace the provisions of the CARES Act, our financial condition and results of operations may be adversely impacted.
Additionally, the enactment of future tax legislation (such as the proposed OECD framework that aims to reform international taxation rules with the goal of ensuring that multinational corporations pay adequate taxes in the jurisdictions in which they operate and other similar proposals) could have a material impact on our financial condition and results of operations, including our worldwide income tax provision and accruals reflected in our financial statements. We are also monitoring several tax proposals set forth by the Biden Administration, Senate Finance Committee Chairman Ron Wyden, and the Ways and Means Committee of the U.S. House of Representatives. If enacted into law, these proposals would result in significant changes to U.S. tax laws, including, but not limited to, corporate tax rate increases, corporate minimum tax rates, interest expense deduction limitations, and changes to foreign income taxation. We will continue to evaluate the overall impact of current, future, and proposed regulations and interpretive guidance from tax authorities on our effective tax rate and consolidated balance sheets. We are unable to predict whether any such changes or other proposals will ultimately be enacted. Any future legislative changes could negatively impact our anticipated cash-flow and after-tax results of operations.
Our need to comply with, and respond to, industry-wide changes resulting from, comprehensive, complex, and sometimes unpredictablegovernmental regulations, including regulatory initiatives aimed at increasing competition within our industry, may increase our costs and limit our revenue growth,which may adversely affect our operating results.
While we generally refer to our UGI Utilities segment as our “regulated segment,” there are many governmental regulations that have an impact on all of our businesses. Currently, we are subject to extensive and changing international, federal, state, and local safety, health, transportation, tax, and environmental laws and regulations governing the marketing, storage, distribution, and transportation of our energy products. Moreover, existing statutes and regulations may be revised or reinterpreted and new laws and regulations may be adopted or become applicable to us that may affect our businesses in ways that we cannot predict.
New regulations, or a change in the interpretation of existing regulations, could result in increased expenditures. In addition, for many of our operations, we are required to obtain permits from regulatory authorities and, in some cases, such regulatory permits could subject our operations to additional regulations and standards of conduct. Failure to obtain or comply with these permits or applicable regulations and standards of conduct could result in civil and criminal fines or the cessation of the operations in violation. Governmental regulations and policies in the U.S. and Europe may provide for subsidies or incentives to customers who use alternative fuels instead of carbon fuels. The EU has committed to cut CO2 emissions by at least 40% by 2030 and EU member states are proposing and implementing a range of subsidies and incentives to achieve the EU’s climate change goals. These subsidies and incentives may result in reduced demand for our energy products and services.
We are investigating and remediating contamination at a number of present and former operating sites in the U.S., including former sites where we or our former subsidiaries operated manufactured gas plants. We have also received claims from third parties that allege that we are responsible for costs to clean up properties where we or our former subsidiaries operated a manufactured gas plant or conducted other operations. Most of the costs we incur to remediate sites outside of Pennsylvania cannot currently be recovered in PAPUC rate proceedings, and insurance may not cover all or even part of these costs. Our actual costs to clean up these sites may exceed our current estimates due to factors beyond our control, such as:
•the discovery of presently unknown conditions;
•changes in environmental laws and regulations;
•judicial rejection of our legal defenses to third-party claims; or
•the insolvency of other responsible parties at the sites at which we are involved.
Moreover, if we discover additional contaminated sites, we could be required to incur material costs, which would reduce our net income.
We also may be unable to timely respond to changes within the energy and utility sectors that may result from regulatory
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initiatives to further increase competition within our industry. Such regulatory initiatives may create opportunities for additional competitors to grow their business or enter our markets and, as a result, we may be unable to maintain our revenues or continue to pursue our current business strategy.
Our operations, financial results and cash flows may be adversely affected by existing and future global climate change laws and regulations, including with respect to GHG emission restrictions, as well as market responses thereto.
Climate change continues to attract considerable public and scientific attention in the U.S. and in foreign countries. As a result, numerous proposals have been made and could continue to be made at the international, national, regional, state and local levels of government to monitor and limit GHG emissions and climate impact. These efforts have included consideration of cap-and-trade programs, carbon taxes, GHG reporting and tracking programs, and regulations that directly limit GHG emissions from certain sources. Increased regulation of GHG emissions, or climate impact generally, could have significant additional adverse impacts on us, our suppliers, our vendors, and our customers. The following provides a brief overview of the material climate-related regulatory provisions that may impact our domestic and international businesses, respectively.
Domestic Regulatory Landscape
In September 2009, the EPA issued a final rule establishing a system for mandatory reporting of GHG emissions. In November 2010, the EPA expanded the reach of its GHG reporting requirements to include the petroleum and natural gas industries, which include certain facilities of our natural gas distribution business. These subject facilities have been required to monitor emissions since January 2011 and to submit detailed annual reports beginning in March 2012.
In March 2021, the Biden Administration announced a framework for the "Build Back Better" agenda. The proposed framework included policies to address climate change across the federal government through the tax code, an energy efficiency and clean energy standard, research and development, among other areas of focus. Relatedly, the U.S. House Energy and Commerce Committee released, and has been holding hearings on, the Climate Leadership and Environmental Action for our Nation's ("CLEAN") Future Act, which is expected to influence legislation furthering the "Build Back Better" agenda. The CLEAN Future Act proposes, among other things, a clean electricity standard that would require electricity suppliers to procure and retire clean energy credits offsetting, in aggregate, 80% of the energy sold by 2030 and 100% by 2035. It would establish an auction-based mechanism for these credits and award partial credits to certain types of carbon-emitting generation that have lower-than-average emissions rates.
"Build Back Better" has been on two tracks in Congress, with a bipartisan "core infrastructure” bill that has passed in the Senate and House of Representatives and was signed into law on November 15, 2021, which includes climate provisions focused on transportation and resiliency and an expected multi-trillion budget social spending bill that is being advanced under the reconciliation process to address additional priorities, including the climate impacts of energy production. A Clean Electricity Standard, or similar program, remains a goal of the Biden Administration, despite an unclear political path forward. The reconciliation bill may also include energy tax credits, which are expected to incentivize producers and purchasers of certain forms of energy, such as solar, wind, and nuclear, but not other forms of energy production. Although the social spending bill and Clean Electricity Standard proposals have not yet resulted in any new legislation being enacted or regulations promulgated, we are closely monitoring both legislative and executive agency action.
In April 2021, President Biden announced that the United States' Nationally Defined Contribution to the international Paris Climate Agreement will be an economy-wide reduction in GHG emissions of 50-52% by 2030, relative to 2005 levels. In advance of the November 2021 Conference of the Parties 26 meeting in Glasgow, Scotland, the Biden Administration released details on its strategy to achieve those targets as part of the "Build Back Better" agenda.
In addition to climate-related initiatives at the federal level, some states have adopted provisions designed to regulate GHG emissions for some industry sectors. Examples include (i) the California cap-and-trade program that requires certain covered entities, including propane companies, to purchase GHG emission allowances, and (ii) the Regional Northeast Gas Initiative, in which a number of states in the northeastern U.S. participate and have agreed to establish cap and trade programs to reduce power plant emissions.
International Regulatory Landscape
In the EU, there is a commitment to cut CO2 emissions by at least 40% by 2030 and EU member states have implemented a range of subsidies and incentives to achieve the EU’s climate change goals. Further, emissions are regulated via a number of means, including the European Union Emissions Trading System (the ‘‘EU ETS’’). The EU ETS is a trading system across the
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EU for industrial emissions and is expected to become progressively more stringent over time, including by reducing the number of allowances to emit GHGs.
The adoption and implementation of any U.S. federal, state or local laws or regulations or foreign laws or regulations imposing obligations on, or limiting GHG emissions from, our equipment and operations could require us to incur significant costs to reduce GHG emissions associated with our operations or could adversely affect demand for our energy products. The potential increase in our operating costs could include new costs to operate and maintain our facilities, install new emission controls on our facilities, acquire allowances to authorize our GHG emissions, pay taxes related to our GHG emissions, administer and manage a GHG emissions reduction program, and adversely impact the value of certain assets. We may not be able to pass on resulting increases in costs to customers. In addition, changes in regulatory policies that result in a reduction in the demand for hydrocarbon products and carbon-emitting fuel sources that are deemed to contribute to climate change, or restrict the use of such products or fuel sources, may reduce volumes available to us for processing, transportation, marketing and storage and cause potential increases in costs or production disruptions. These developments could have a material adverse effect on our results of operations, financial results, valuation and useful life of assets, and cash flows.
Changes in data privacy and data protection laws and regulations, particularly in Europe and California, or any failure to comply with such laws and regulations, could adversely affect our business and financial results.
There has been increased public attention regarding the use of personal information and data transfers, accompanied by legislation and regulations intended to strengthen data protection, information security and consumer and personal privacy. The laws in these areas continue to develop and the changing nature of data protection, information security and privacy laws in the U.S., the EU and elsewhere could impact our processing of the personal information of our employees, vendors and customers, which could lead to increased operating costs. The EU adopted the GDPR, which became effective in May 2018 and expanded EU data protections, in certain circumstances, to companies outside of the EU processing data of EU residents, regardless of whether the processing occurs in the EU. Similarly, the State of California legislature passed the California Consumer Privacy Act of 2018 (the “CCPA”), effective January 1, 2020, which grants certain rights to California residents with respect to their personal information, and the California electorate recently approved Proposition 24, the California Privacy Rights Act (the “CPRA”), which will expand the CCPA effective January 1, 2023 and grant additional rights to California residents as well as create a new state privacy regulator. We expect that there will continue to be new laws, regulations and industry standards concerning data privacy and data protection in the U.S., the EU and other jurisdictions, and we cannot yet determine the impact such laws, regulations, interpretations and standards may have on our business.
The GDPR requires companies to satisfy extensive requirements regarding the handling of personal information, including its use, protection and the ability of persons whose data is processed to exercise a number of rights with respect to their personal information, such as correcting or requiring deletion of data about themselves. Supervisory authorities from different EU member states may interpret and apply the GDPR somewhat differently, and the GDPR also permits EU member states to create supplemental national laws, which increases the complexity of compliance. Failure to comply with GDPR requirements could result in penalties of up to €20 million or 4% of worldwide revenue, whichever is greater, for a serious breach. Additionally, in July 2020, the Court of Justice of the European Union (the “CJEU”), the EU’s highest court, issued a landmark ruling in which it invalidated the U.S. – EU Privacy Shield framework for transferring the personal data of EU residents to the United States and suggested that the parties to data transfers can only rely on standard contractual clauses as a valid data transfer mechanism on a case-by-case basis. This ruling, and subsequent commentary on it from local European data protection authorities, have raised questions about the continuing viability of existing legal tools to support data transfers to the U.S., and additional regulatory guidance is likely to be forthcoming. Finally, The United Kingdom’s decision to leave the EU, often referred to as “Brexit,” has created uncertainty with regard to data protection regulation in the United Kingdom. In particular, while the European Commission has issued adequacy decisions that have the effect of authorizing data transfers between the United Kingdom and the European Economic Area, it is unclear how data transfers between the United Kingdom and the rest of the world will be regulated now that the United Kingdom has left the EU.
The CCPA requires companies to make new extensive disclosures to consumers about such companies’ data collection, use, and sharing practices and inform consumers of their personal information rights (such as deletion rights), allows consumers to opt out of data sales to third parties, and provides a new cause of action for data breaches. The CPRA will add more disclosure obligations (including an obligation to disclose retention periods or criteria for categories of personal information), grant consumers additional rights (including rights to correct their data, limit the use and disclosure of sensitive personal information, and opt out of the sharing of personal information for certain targeted behavioral advertising purposes), and impose a requirement that a covered business’ use, retention and sharing of personal information of California residents be reasonably necessary and proportionate to the purposes of collection or processing. The CPRA also creates a new California Privacy Protection Agency (CPPA) to serve as California’s chief privacy regulator, which will likely result in greater regulatory activity and enforcement in the privacy area.
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Comprehensive privacy laws with some similarities to the CCPA and CPRA have been proposed or passed at the U.S. federal and state levels, including the Virginia Consumer Data Protection Act, which will take effect on January 1, 2023, and the Colorado Privacy Act, which will take effect on July 1, 2023. The State of Nevada also recently amended its online privacy law to allow consumers to submit requests to prevent websites and online service providers from selling personal information that is collected through a website or online service. Additionally, the Federal Trade Commission and many state attorneys general are interpreting federal and state consumer protection laws to impose standards for the online collection, use, dissemination, and security of data as well as requiring disclosures about these practices.
While we have invested significant time and resources in our GDPR compliance program, emerging and changing data privacy and data protection requirements, including CCPA, CPRA, and Virginia’s and Colorado’s new privacy laws, and any new considerations and requirements that emerge from the CJEU’s ruling, may cause us to incur additional substantial costs or require us to change our business practices. Any failure or perceived failure to comply may result in proceedings or actions against us by government entities or individuals. Moreover, any inquiries or investigations, any other government actions, or any actions by individuals, may be costly to comply with, result in negative publicity, increase our operating costs, require significant management time and attention, and subject us to remedies that may harm our business, including fines, demands or orders that we modify or cease existing business practices.
The provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), related regulations, and the rules adopted thereunder and other regulations, including the European Market Infrastructure Regulation (the “EMIR”), may have an adverse effect on our ability to use derivative instruments to hedge risks associated with our business.
Our derivative hedging activities are subject to Title VII of the Dodd-Frank Act, which regulates the over-the-counter derivatives market and entities that participate in that market. The Dodd-Frank Act requires the CFTC and the federal banking regulators to implement the Dodd-Frank Act’s provisions through rulemaking, including rules regarding mandatory clearing, trade execution and margin requirements. We expect to qualify for and rely upon an exception from mandatory clearing and trade execution requirements for swaps entered into by commercial end-users to hedge commercial risks. In addition to relief from the clearing mandate, we also expect to qualify for an exception for non-financial end-users from the margin requirements on uncleared swaps. If we are not able to do so and have to post margin as to our uncleared swaps in the future, our costs of entering into and maintaining swaps would be increased.
While most of the CFTC’s rules and regulations under the Dodd-Frank Act have been finalized, some additional rules and regulations have yet to be adopted. It is possible that additional rules and regulations under the Dodd-Frank Act (including position limits as described below) may increase our cost of using derivative instruments to hedge risks associated with our business or may reduce the availability of such instruments to protect against risks we encounter. While costs imposed directly on us due to regulatory requirements for derivatives under the Dodd-Frank Act, such as reporting, recordkeeping and electing the end-user exception from mandatory clearing, are relatively minor, costs imposed upon our counterparties may increase the cost of our doing business in the derivatives markets to the extent such costs are passed on to us.
If we become subject to position limits, our ability to hedge risks would be further limited and we would be subject to additional compliance and reporting obligations. The CFTC has re-proposed position limits for certain futures and option contracts in the major energy markets and for swaps that are their economic equivalents, although certain bona fide hedging transactions would be exempt from these position limits. The CFTC has also finalized a rule that requires market participants to aggregate their positions with those of certain other persons under common ownership or control for purposes of determining compliance with applicable position limits. If adopted, the revised position limit rule and its finalized companion rule on aggregation may adversely impact our ability to hedge exposure to price fluctuation of certain commodities. In addition to the CFTC federal position limit regime, designated contract markets also have established position limits and accountability regimes. We may have to modify trading decisions or liquidate positions to avoid exceeding such limits or at the direction of the relevant exchange to comply with accountability levels. Further, any such position limit regime, whether imposed at the federal level or by a designated contract market, may impose added operating costs to monitor compliance with such position limit levels, addressing accountability level concerns and maintaining appropriate exemptions, if applicable.
The EMIR may result in increased costs for over-the-counter derivative counterparties trading in the EU and may also lead to an increase in the costs of, and demand for, the liquid collateral that the EMIR requires central counterparties to accept. Although we expect to qualify as a non-financial counterparty under the EMIR, and thus not be required to post margin under the EMIR, we may still be subject to increased regulatory requirements, including recordkeeping, marking to market, timely confirmations, derivatives reporting, portfolio reconciliation and dispute resolution procedures. Provisions under the EMIR could significantly increase the cost of derivatives contracts, materially alter the terms of derivatives contracts and reduce the
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availability of derivatives to protect against risks that we encounter. The increased trading costs and collateral costs may have an adverse impact on our business, contracts, financial condition, operating results, cash flow, liquidity and prospects.
Accordingly, our business and operating results may be adversely affected if we are forced to reduce or modify our current use of derivatives as a result of the Dodd-Frank Act and the rules and regulations promulgated thereunder as a result of the EMIR and other similarly applicable rules and regulations.
General Risks that May Impact Our Business and Our Shareholders
The COVID-19 pandemic and the spread of variant strains could adversely impact our business, financial condition and results of operations.
The COVID-19 pandemic, including the spread of variant strains, has resulted in widespread impacts on the global economy and on our employees, customers, third-party business partners and other stakeholders. There is considerable uncertainty regarding the extent to which COVID-19 and variant strains will continue to spread and the extent and duration of domestic and global measures designed to contain the spread, including travel bans and restrictions, quarantines, shelter-in-place orders, vaccination mandates and business and government shutdowns. These restrictions may, among other things:
•negatively impact the financial condition of our customers and their ability to pay for our products and services;
•reduce energy consumption by certain of our customers, which would affect demand for our products;
•disrupt or delay progress in the development and completion of our energy infrastructure projects;
•prolong the time period necessary to perform maintenance of our infrastructure;
•result in operational delays, including delay in the delivery of our products to customers;
•result in temporary or permanent shortages in our workforce;
•result in impairment relating to certain current and long-lived assets;
•delay the timeliness of our ability to source goods; and
•limit or curtail significantly or entirely the ability of public utility commissions to approve or authorize applications and other requests we may make with respect to our regulated businesses.
Additionally, while we have modified or restricted certain business and workforce practices (including employee travel, presence at employee work locations, and physical participation in meetings, events, and conferences) to protect the health and safety of our workforce, and to conform to government orders, as well as regulatory and public health authority guidance, we depend on our workforce to operate our facilities, deliver our products and provide services to customers. If a large portion of our operational workforce were to contract COVID-19 simultaneously, we would rely upon our business continuity plans in an effort to continue operations, but there is no certainty that such measures would be sufficient to mitigate the adverse impact to our operations.
We are also monitoring announcements by the Biden Administration requiring that: (i) certain employees working on or in connection with covered federal government contracts or subcontracts become fully vaccinated against COVID-19, with limited exceptions; and (ii) employers with workforces of more than 100 employees require their employees to either become fully vaccinated for COVID-19 or be subjected to weekly testing. The deadlines for these requirements remain fluid; however, both are currently expected to be effective in January 2022. Failure to comply with these requirements may result in monetary penalties to the employer for each violation. While we are still assessing the potential impact of the foregoing, including monitoring legal challenges to the rules, we may incur monetary costs and/or experience a reduction in our workforce, which may adversely impact our operational continuity, financial condition and/or results of operations.
Finally, if we seek to raise additional capital, our access to and cost of financing will depend on, among other things, global economic conditions, conditions in the financing and equity markets, the availability of sufficient amounts of financing, our prospects and our credit ratings. Our total available liquidity balance as of September 30, 2021 totaled approximately $2.2 billion. Nonetheless, if our credit ratings were to be downgraded, or general market conditions were to ascribe higher risk to our rating levels, our industry, or us, our access to capital and the cost of any future debt financing could be further negatively impacted. In addition, the terms of future debt agreements could include more restrictive covenants, or require incremental collateral, which may further restrict our business operations or conflict with covenant restrictions then in effect. As a result, there is no guarantee that financings will be available in the future to fund our obligations, or that they will be available on terms consistent with our expectations.
The degree to which COVID-19 and variant strains may impact our business operations, financial condition, liquidity and results of operations is unknown at this time and will depend on future developments, including the continued spread of the virus and its variants, the severity of the disease, the duration of the pandemic, actions prescribed or ordered by governmental
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authorities, public health authority guidance, and when and to what extent economic and operating conditions can return to pre-pandemic levels.
We may not be able to collect on the accounts of our customers.
We depend on the viability of our customers for collections of accounts receivable and notes receivable. Moreover, our businesses serve numerous retail customers, and as we grow our businesses organically and through acquisitions, our retail customer base is expected to expand. There can be no assurance that our customers will not experience financial difficulties in the future or that we will be able to collect all of our outstanding accounts receivable or notes receivable. Any such nonpayment by our customers could adversely affect our business.
We are subject to operating and litigation risks that may not be covered byinsurance.
Our business operations are subject to all of the operating hazards and risks normally incidental to the handling, storage and distribution of combustible products, such as LPG and natural gas, and the generation of electricity. These risks could result in substantial losses due to personal injury and/or loss of life, and severe damage to and destruction of property and equipment arising from explosions and other catastrophic events, including acts of terrorism. As a result of these and other incidents, we are sometimes a defendant in legal proceedings and litigation arising in the ordinary course of business, including regulatory investigations, claims, lawsuits and other proceedings. Additionally, environmental contamination or other incidents resulting in an environmental impact could result in future legal or regulatory proceedings. There can be no assurance that our insurance coverage will be adequate to protect us from all material expenses related to pending and future claims or that such levels of insurance would be available in the future at economical prices. Moreover, defense and settlement costs may be substantial, even with respect to claims and investigations that have no merit. If we cannot resolve these matters favorably, our business, financial condition, results of operations and future prospects may be materially adversely affected.
The risk of natural disasters, pandemics and catastrophic events, including terrorism, may adversely affect the economy and the price and availability of LPG, other refined fuels and natural gas.
Natural disasters, pandemics and catastrophic events, such as fires, earthquakes, explosions, floods, tornadoes, hurricanes, terrorist attacks, political unrest and other similar occurrences, may adversely impact the demand for, price and availability of LPG (including propane), other refined fuels and natural gas, which could adversely impact our financial condition and results of operations, our ability to raise capital and our future growth. The impact that the foregoing may have on our industries in general, and on us in particular, is not known at this time. A natural disaster, pandemic or an act of terror could result in disruptions of crude oil or natural gas supplies and markets (the sources of LPG), cause price volatility in the cost of LPG, fuel oil and natural gas, and our infrastructure facilities could be directly or indirectly impacted. Additionally, if our means of supply transportation, such as rail, truck or pipeline, are delayed or temporarily unavailable due to a natural disaster, pandemic or terrorist activity, we may be unable to transport LPG and other refined fuels in a timely manner or at all. A lower level of economic activity could result in a decline in energy consumption, which could adversely affect our revenues or restrict our future growth. Instability in the financial markets as a result of a natural disaster, pandemic or terrorism could also affect our ability to raise capital. We have opted to purchase insurance coverage for natural disasters and terrorist acts within our property and casualty insurance programs, but we can give no assurance that our insurance coverage would be adequate to fully compensate us for any losses to our business or property resulting from natural disasters or terrorist acts.
Our holding company structure could limit our ability to pay dividends orservice debt.
We are a holding company whose material assets are the stock of our subsidiaries. Our ability to pay dividends on our common stock and to pay principal and accrued interest on our debt, if any, depends on the payment of dividends to us by our principal subsidiaries, AmeriGas, Inc., UGI Utilities, Inc., Mountaintop Energy Holdings, LLC and Enterprises (including Energy Services and UGI International’s subsidiaries in Europe, which may be subject to complexities regarding the repatriation of funds to the U.S.). Payments to us by those subsidiaries, in turn, depend upon their consolidated results of operations and cash flows. The operations of our subsidiaries are affected by conditions beyond our control, including weather, regulations, competition in national and international markets we serve, the costs and availability of propane, butane, natural gas, electricity, and other energy sources and capital market conditions. The ability of our subsidiaries to make payments to us is also affected by the level of indebtedness of our subsidiaries, which is substantial, and the restrictions on payments to us imposed under the terms of such indebtedness.
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Volatility in credit and capital markets may restrict our ability to grow,increase the likelihood of defaults by our customers and counterparties andadversely affect our operating results.
Volatility in credit and capital markets may create additional risks to our businesses in the future. We are exposed to financial market risk (including refinancing risk) resulting from, among other things, changes in interest rates and conditions in the credit and capital markets. Adverse developments in the credit markets may increase our possible exposure to the liquidity, default and credit risks of our suppliers and vendors, counterparties associated with derivative financial instruments and our customers. Although we believe that current financial market conditions, if they were to continue for the foreseeable future, will not have a significant impact on our ability to fund our existing operations, less favorable market conditions could restrict our ability to grow through acquisitions, limit the scope of major capital projects if access to credit and capital markets is limited, or adversely affect our operating results.
We depend on our intellectual property and failure to protect that intellectual property could adversely affect us.
We seek trademark protection for our brands in each of our businesses, and we invest significant resources in developing our business brands. Failure to maintain our trademarks and brands could adversely affect our customer-facing businesses and our operational results.
Declines in the stock market and a low interestrate environment may negatively impact our pension liability.
Declines in the stock market and a low interest rate environment historically have resulted in a significant impact on our pension liability and funded status. Declines in the stock or bond market and valuation of stocks or bonds, combined with low interest rates, could further impact our pension liability and funded status and increase the amount of required contributions to our pension plans.
Unless we otherwise consent in writing, our Amended and Restated Bylaws designate a state court located in Montgomery County, Pennsylvania or, if no state court located within such county has jurisdiction over such action or proceeding, the federal United States District Court for the Eastern District of Pennsylvania, as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our shareholders, which could discourage lawsuits against us and our directors and officers.
Our Amended and Restated Bylaws provide that, unless we otherwise consent in writing, a state court located in Montgomery County, Pennsylvania or, if no state court located within such county has jurisdiction over such action or proceeding, the federal United States District Court for the Eastern District of Pennsylvania, as the sole and exclusive forum for: (a) any derivative action or proceeding brought on behalf of us; (b) any action or proceeding asserting a claim of breach of duty owed to us or our shareholders by any director, officer, or other employee of ours; (c) any action or proceeding asserting a claim against us or against any of our directors, officers or other employees arising pursuant to, or involving any interpretation or enforcement of, any provision of the Pennsylvania Associations Code, Pennsylvania Business Corporation Law of 1988, or our Amended and Restated Articles of Incorporation or Amended and Restated Bylaws; and (d) any action or proceeding asserting a claim peculiar to the relationship between or among us and our officers, directors, and shareholders, or otherwise governed by or involving the internal affairs doctrine. This exclusive forum provision does not apply to suits brought to enforce a duty or liability created by the Exchange Act or the Securities Act.
This exclusive forum provision may limit the ability of our shareholders to bring a claim in a judicial forum that such shareholders find favorable for disputes with us or our directors or officers, which may discourage such lawsuits against us and our directors and officers. Alternatively, if a court outside of Pennsylvania were to find this exclusive forum provision inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings described above, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, results of operations and financial condition.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 3. LEGAL PROCEEDINGS
With the exception of those matters set forth in Note 17 to Consolidated Financial Statements included in Item 15 of this Report, no material legal proceedings are pending involving the Company, any of its subsidiaries, or any of their properties, and
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no such proceedings are known to be contemplated by governmental authorities other than claims arising in the ordinary course of business.
ITEM 4. MINE SAFETY DISCLOSURES
None.
EXECUTIVE OFFICERS
Information regarding our executive officers is included in Part III of this Report and is incorporated in Part I by reference.
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PART II:
ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information and Dividend Policy
Our Common Stock is traded on the New York Stock Exchange under the symbol “UGI.” On November 12, 2021, we had 6,569 holders of record of Common Stock.
Payment of dividends is subject to declaration by the Board of Directors. Factors considered in determining dividends include our profitability and expected capital needs. Subject to these qualifications, we presently expect to continue to pay dividends on a quarterly basis.
Equity Compensation Plan Information
Information regarding the securities authorized for issuance under our equity compensation plans can be found under Part III of this Report.
Issuer Purchases of Equity Securities
The Company did not repurchase any shares of its Common Stock during the quarter ended September 30, 2021. As of September 30, 2021, the Company had 5.85 million shares of Common Stock available for repurchase under an extension of a previous share repurchase program announced by the Company on January 25, 2018. The Board of Directors authorized the repurchase of up to 8 million shares of Common Stock over a four-year period expiring January 2022.
Recent Sale of Unregistered Securities
The Company did not sell any unregistered securities during Fiscal 2021.
Performance Graph
The following graph compares the cumulative total shareholder return (stock price appreciation and the reinvestment of dividends) on an investment of $100 in UGI Common Stock, the S&P 500 Index, and the S&P 500 Utilities Index over the five years from September 30, 2016, through September 30, 2021.
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ITEM 6.SELECTED FINANCIAL DATA
Intentionally omitted.
ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MD&A discusses our results of operations for Fiscal 2021 and Fiscal 2020, and our financial condition. For discussion of our results of operations and cash flows for Fiscal 2020 compared with Fiscal 2019, refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Fiscal 2020 Annual Report on Form 10-K, filed with the SEC on November 20, 2020. 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
Acquisition of Mountaineer Gas Company
On September 1, 2021, UGI acquired Mountaineer, the largest natural gas distribution company in West Virginia for a purchase price of $540 million, which includes the assumption of approximately $140 million principal amounts of long-term debt. Mountaineer serves nearly 214,000 customers across 50 of the state’s 55 counties. Mountaineer is subject to regulation by the WVPSC. The Mountaineer Acquisition was funded with cash proceeds from the 2021 UGI Corporation Senior Credit Facility and the issuance of Equity Units and cash on hand. The Mountaineer business is included in the UGI Utilities segment as of the acquisition date. For additional information on the Mountaineer Acquisition and the associated financings, see Notes 5, 6 and 13 to the consolidated financial statements.
COVID-19 Pandemic
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 continue to be 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 potential effects of a prolonged disruption and the continued impact on our results of operations. These items may include, but are not limited to: the financial condition of our customers; decreased availability and demand for our products and services; realization of accounts receivable; impairment considerations related to certain current assets, long-lived assets and goodwill; delays related to current and future projects; and the effects of government stimulus efforts including tax legislation (see “Interest Expense and Income Taxes” below and Note 7 to the consolidated financial statements) in response to COVID-19.
We cannot predict the duration or total magnitude of the pandemic and the total effects on our business, financial position, results of operations, liquidity or cash flows at this time, but we remain focused on managing our financial condition and liquidity throughout this global crisis.
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
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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 a two to three year period. 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 the end of Fiscal 2023.
AmeriGas Propane: At AmeriGas Propane, we began executing on business transformation initiatives during Fiscal 2019 focused on efficiency and effectiveness in the following key areas: customer digital experience; customer relationship management; operating process redesign and specialization; distribution and routing optimization; sales and marketing effectiveness; purchasing and general and administrative efficiencies; and supply and logistics. These transformation activities are substantially complete and are expected to provide total annual benefits of more than $150 million by the end of Fiscal 2022. These benefits will allow us to continue 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. The total cost of executing on these initiatives, including approximately $110 million of related capital expenditures, will amount to approximately $220 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. The goal of this initiative (Project Alliance) was to focus attention on enhanced customer service and safe and efficient operations through the establishment of two centers of excellence. One center focuses on commercial excellence to identify and execute projects that improve the customer’s experience. The second center focuses on operational excellence across our distribution network and our filling centers. These business activities are substantially complete and are expected to generate over €30 million of annual benefits by the end of Fiscal 2022. The total cumulative cost of executing these Project Alliance initiatives, including approximately €10 million related to IT capital expenditures, will amount to approximately €55 million.
Non-GAAP Financial Measures
UGI management uses “adjusted net income attributable to UGI Corporation” and “adjusted diluted earnings per share,” both of which are non-GAAP financial measures, when evaluating UGI’s overall performance. Management believes that these non-GAAP measures provide meaningful information to investors about UGI’s performance because they eliminate gains and losses on commodity and certain foreign currency derivative instruments not associated with current-period transactions and other significant discrete items that can affect the comparison of period-over-period results.
UGI does not designate its commodity and certain foreign currency derivative instruments as hedges under GAAP. Volatility in net income attributable to UGI Corporation can occur as a result of gains and losses on such derivative instruments not associated with current-period transactions. These gains and losses result principally from recording changes in unrealized gains and losses on unsettled commodity and certain foreign currency derivative instruments and, to a much lesser extent, certain realized gains and losses on settled commodity derivative instruments that are not associated with current-period transactions. However, because these derivative instruments economically hedge anticipated future purchases or sales of energy commodities, or in the case of certain foreign currency derivatives, reduce volatility in anticipated future earnings associated with our foreign operations, we expect that such gains or losses will be largely offset by gains or losses on anticipated future energy commodity transactions or mitigate volatility in anticipated future earnings. Non-GAAP financial measures are not in accordance with, or an alternative to, GAAP and should be considered in addition to, and not as a substitute for, the comparable GAAP measures.
The following tables reflect the adjustments referred to above and reconcile net income attributable to UGI Corporation, the most directly comparable GAAP measure, to adjusted net income attributable to UGI Corporation, and reconcile diluted earnings per share, the most comparable GAAP measure, to adjusted diluted earnings per share:
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Year Ended September 30,
(Millions of dollars, except per share amounts) 2021 2020
Adjusted net income attributable to UGI Corporation:
Midstream & Marketing 107 92
Corporate & Other (a) 827 (25)
Net income attributable to UGI Corporation 1,467 532
Impact of change in Italian tax law (23) —
Total adjustments (a) (b) (838) 29
Adjusted net income attributable to UGI Corporation $ 629 $ 561
Adjusted diluted earnings per share:
Midstream & Marketing 0.51 0.44
Corporate & Other (a) 3.90 (0.11)
Earnings per share - diluted 6.92 2.54
Unrealized (gains) losses on foreign currency derivative instruments (0.03) 0.12
Acquisition and integration expenses associated with the CMG Acquisition — 0.01
Business transformation expenses 0.35 0.21
Loss on disposals of Conemaugh and HVAC — 0.18
Impairment of customer relationship intangible 0.07 —
Impairment of investment in PennEast 0.44 —
Impact of change in Italian tax law (0.11) —
Total adjustments (a) (3.96) 0.13
Adjusted diluted earnings per share $ 2.96 $ 2.67
(a)Corporate & Other includes certain adjustments made to our reporting segments in arriving at net income attributable to UGI Corporation. These adjustments have been excluded from the segment results to align with the measure used by our CODM in assessing segment performance and allocating resources. See Note 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.
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Fiscal 2021 Compared with Fiscal 2020
Discussion. Net income attributable to UGI Corporation was $1,467 million for Fiscal 2021 (equal to $6.92 per diluted share) compared to $532 million for Fiscal 2020 (equal to $2.54 per diluted share). Net income attributable to UGI Corporation in Fiscal 2021 reflects a $951 million year-over-year increase in net unrealized gains on commodity derivative instruments and certain foreign currency derivative instruments. This increase is primarily attributable to the significant rise in commodity prices during Fiscal 2021, and has contributed to the accumulation of substantial derivative assets related to the Company’s commodity derivative instruments at September 30, 2021. Fiscal 2021 net income attributable to UGI Corporation also reflects higher business transformation expenses, impairments of investments and long-lived assets, and acquisition and integration expenses compared to the prior year, as well as a $23 million tax benefit related to an election made in connection with a tax law change in Italy. Fiscal 2020 net income attributable to UGI Corporation includes a $39 million loss on assets that were disposed of in September 2020.
Adjusted net income attributable to UGI Corporation for Fiscal 2021 was $629 million (equal to $2.96 per diluted share) compared to adjusted net income attributable to UGI Corporation for Fiscal 2020 of $561 million (equal to $2.67 per diluted share). The increase in adjusted net income attributable to UGI Corporation during Fiscal 2021 reflects higher earnings contributions from each of our four business segments including improved margin at UGI International which benefited from colder weather compared to the prior year and the translation effects of stronger foreign currencies. Higher average LPG unit margins including the continued effects of margin management efforts, the increase in base rates at UGI Utilities, Inc. in Fiscal 2021, and the effects of acquisitions and assets placed into service since the fourth quarter of Fiscal 2020 also contributed to the improvement. These positive impacts were partially offset by higher depreciation and amortization expense and a lower benefit under the CARES Act compared to the prior year.
AmeriGas Propane’s adjusted net income attributable to UGI Corporation increased $12 million during Fiscal 2021. This increase principally reflects lower operating and administrative expenses, including partial benefits related to the execution of transformation initiatives, higher other income attributable to customer fees and gains on the early settlement of certain commodity derivative instruments during Fiscal 2021, and lower interest and depreciation and amortization expense compared to the prior year. These positive factors were partially offset by lower retail propane margin primarily attributable to lower volumes.
UGI International’s adjusted net income attributable to UGI Corporation increased $48 million during Fiscal 2021 principally reflecting increased LPG volumes which benefited from colder weather compared to Fiscal 2020, higher average LPG unit margins including effective margin management efforts, and the translation effects of stronger foreign currencies. These positive factors were partially offset by higher operating and administrative expenses reflecting increased maintenance and distribution costs attributable to the stronger LPG volumes compared to Fiscal 2020, as well as the previously mentioned effects of stronger foreign currencies.
Midstream & Marketing adjusted net income in Fiscal 2021 was $15 million higher than the prior year. This increase principally reflects incremental margin from capacity management and renewable energy marketing activities, and lower operating and administrative expenses largely related to the impact of divested assets.
UGI Utilities Fiscal 2021 adjusted net income increased $8 million compared to the prior year. This increase reflects higher natural gas margin largely attributable to the increase in base rates that went into effect in Fiscal 2021 and higher margin from large delivery service customers, and an increase in Electric Utility margin resulting from higher volumes compared to the prior year. These improvements were partially offset by higher operating and administrative expenses attributable to the effects of the Mountaineer Acquisition and increased depreciation expense related to continued capital expenditure activity.
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AmeriGas Propane 2021 2020 Increase (Decrease)
(Dollars in millions)
Operating and administrative expenses $ 869 $ 890 $ (21) (2) %
Retail gallons sold (millions) 968 987 (19) (2) %
Degree days – % warmer than normal (b) (2.8) % (0.7) % — —
(a)Total margin represents revenues less cost of sales.
(b)Beginning in Fiscal 2021, deviation from average heating degree days is determined on a rolling 10-year period utilizing volume-weighted weather data based on weather statistics provided by NOAA for 344 regions in the United States, excluding Alaska and Hawaii. Prior-period amounts have been restated to conform to the current-period presentation.
Average temperatures during Fiscal 2021 were 2.8% warmer than normal and 2.2% warmer than the prior year. Total retail gallons sold decreased during Fiscal 2021 principally reflecting structural conservation and other residual volume loss and the greater impact of COVID-19 on commercial volumes compared to Fiscal 2020. These decreases were partially offset by higher resale and motor fuel volumes during Fiscal 2021.
Total revenues increased $233 million during Fiscal 2021 largely reflecting higher average propane selling prices ($255 million) and increased wholesale volumes ($26 million) partially offset by the lower retail propane volumes ($39 million) compared to Fiscal 2020. Average daily wholesale propane commodity prices during Fiscal 2021 at Mont Belvieu, Texas, one of the major supply points in the U.S., were approximately 97% higher than such prices during Fiscal 2020. Total cost of sales increased $257 million during Fiscal 2021 largely attributable to the higher average propane product costs ($245 million) and higher wholesale propane volumes ($24 million), partially offset by the lower retail propane volumes ($16 million).
AmeriGas Propane total margin decreased $24 million in Fiscal 2021 largely attributable to the lower retail propane volumes ($24 million) and decreased non-propane margin ($13 million) principally reflecting lower fees and services partially offset by increased cylinder sales. These decreases were partially offset by higher average propane margin ($10 million) resulting from the rising propane cost environment and effective margin management efforts.
Operating income and earnings before interest expense and income taxes increased $12 million during Fiscal 2021 reflecting lower operating and administrative expenses ($21 million) compared to Fiscal 2020, higher other income ($10 million) attributable to customer fees and gains on the early settlement of certain commodity derivative instruments during Fiscal 2021, and lower depreciation and amortization expense ($5 million). These positive impacts were largely offset by the previously mentioned decrease in total margin ($24 million). The decrease in operating and administrative expenses in Fiscal 2021 reflects, among other things, lower employee compensation and benefits-related costs ($26 million), decreased equipment operating and maintenance expenses ($7 million), and lower general insurance costs ($4 million) compared to Fiscal 2020. These decreases were partially offset by increased advertising expenses ($7 million) and higher vehicle lease expense ($4 million) compared to Fiscal 2020. The lower operating and administrative expenses reflect the partial benefits related to the previously mentioned ongoing business transformation initiatives.
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(Dollars in millions)
Operating and administrative expenses $ 622 $ 545 $ 77 14 %
Earnings before interest expense and income taxes $ 317 $ 259 $ 58 22 %
LPG retail gallons sold (millions) 792 757 35 5 %
Degree days - % colder (warmer) than normal (b) 0.4 % (12.7) % — —
(a)Total margin represents total revenues less total cost of sales and in Fiscal 2020, LPG cylinder filling costs of $28 million. For financial statement purposes, LPG cylinder filling costs in Fiscal 2020 are included in “Operating and administrative expenses” on the 2020 Consolidated Statement of Income (but are excluded from operating and administrative expenses presented above). LPG cylinder filling costs are included in “Cost of sales” on the 2021 Consolidated Statement of Income.
(b)Beginning in Fiscal 2021, deviation from average heating degree days is determined on a rolling 10-year period utilizing volume-weighted weather data at locations in our UGI International service territories. Prior-period amounts have been restated to conform to the current-period presentation.
Average temperatures during Fiscal 2021 were slightly colder than normal and 14.1% colder than Fiscal 2020. Total LPG retail gallons sold during Fiscal 2021 increased 5% compared to Fiscal 2020 largely attributable to higher bulk volumes reflecting the effects of the colder weather on heating-related bulk sales. These volume improvements also reflect small acquisitions in Switzerland and Finland and the recovery of certain volume decreases attributable to COVID-19 during Fiscal 2021, and were partially offset by the termination of a high-volume, low-margin autogas contract in Italy during Fiscal 2020. Average wholesale prices for propane and butane during Fiscal 2021 in northwest Europe were approximately 52% and 33% higher, respectively, compared to Fiscal 2020.
UGI International base-currency results are translated into U.S. dollars based upon exchange rates experienced during the reporting periods. 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 2021 and Fiscal 2020, the average unweighted euro-to-dollar translation rates were approximately $1.20 and $1.12, respectively, and the average unweighted British pound sterling-to-dollar translation rates were approximately $1.37 and $1.28, respectively. Fluctuations in these foreign currency exchange rates can have a significant impact on the individual financial statement components discussed below. The net effect of changes in foreign currency exchange rates on UGI International’s earnings before interest expense and income taxes resulted in a net benefit of $26 million in Fiscal 2021. However, the impact of these changes is mitigated by the effects of forward foreign currency exchange contracts entered into over a multi-year period intended to substantially offset this volatility. These forward foreign currency exchange contracts resulted in realized net gains of $1 million and $15 million, respectively, in Fiscal 2021 and Fiscal 2020.
UGI International revenues and cost of sales increased $524 million and $379 million, respectively, during Fiscal 2021. The increase in revenues and cost of sales principally reflects the translation effects of stronger foreign currencies (approximately $174 million and $102 million, respectively), the effects of higher average butane and propane selling prices and product costs compared to Fiscal 2020, and the previously mentioned increase in bulk volumes. Energy marketing activities also contributed to the increased revenues and cost of sales during Fiscal 2021 largely related to higher natural gas volumes and prices.
UGI International total margin increased $145 million during Fiscal 2021 reflecting the translation effects of stronger foreign currencies (approximately $72 million), the previously mentioned increase in total LPG volumes, lower costs associated with energy conservation certificates, and higher average LPG unit margins including the continued effects of margin management efforts. These margin improvements include the impact of LPG assets acquired in Fiscal 2021 and higher margin from energy marketing activities principally reflecting increased natural gas volumes.
UGI International operating income and earnings before interest expense and income taxes increased $73 million and $58 million, respectively, during Fiscal 2021. The increase in operating income principally reflects the increase in total margin partially offset by higher operating and administrative expenses ($77 million) which was largely attributable to the effects of stronger foreign currencies ($38 million) compared to Fiscal 2020. The increase in operating and administrative expenses also reflects higher maintenance, distribution and employee compensation costs attributable to the increased volumes. The increase in earnings before interest expense and income taxes in Fiscal 2021 largely reflects the increase in operating income partially
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offset by lower realized gains on foreign currency exchange contracts entered into in order to reduce volatility in UGI International earnings resulting from the effects of changes in foreign currency exchange rates ($14 million).
Midstream & Marketing 2021 2020 Increase (Decrease)
(Dollars in millions)
Operating and administrative expenses $ 129 $ 140 $ (11) (8) %
Earnings before interest expense and income taxes $ 190 $ 168 $ 22 13 %
(a)Total margin represents total revenues less total cost of sales.
Average temperatures across Midstream & Marketing’s energy marketing territory during Fiscal 2021 were 6.9% warmer than normal and 2.6% warmer than the prior year. Midstream & Marketing’s prior year results include contributions from operating activities attributable to 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 increased $159 million compared to the prior year principally reflecting increased revenues from natural gas ($144 million) and renewable energy ($27 million) marketing activities and higher capacity management revenues ($24 million) which were impacted by the timing of certain mark-to-market contract settlements. Higher revenues associated with electricity marketing ($8 million) and natural gas gathering activities ($6 million) also contributed to the increase. These factors were partially offset by the absence of revenues attributable to its former HVAC business and ownership interest in Conemaugh ($59 million). Midstream & Marketing cost of sales was $1,033 million in Fiscal 2021 compared to $892 million in Fiscal 2020. The $141 million increase principally reflects higher cost of sales related to natural gas ($138 million), renewable energy ($20 million), and electricity ($7 million) marketing activities, partially offset by the absence of costs attributable to HVAC and Conemaugh ($30 million). The increases in both natural gas revenues and cost of sales during Fiscal 2021 are largely attributable to higher average natural gas prices compared to the prior year partially offset by lower volumes attributable to weather that was warmer than the prior year.
Midstream & Marketing total margin increased $18 million in Fiscal 2021 reflecting improved capacity management margin ($24 million), higher margin from renewable energy ($7 million) and natural gas ($5 million) marketing activities, and higher margin from natural gas gathering activities ($6 million). These margin improvements include the impact of acquisitions and new assets placed into service since the fourth quarter of Fiscal 2020, and were partially offset by the absence of margins attributable to HVAC and Conemaugh ($29 million).
Midstream & Marketing operating income and earnings before interest expense and income taxes during Fiscal 2021 increased $20 million and $22 million, respectively, compared to the prior year. The increase in operating income principally reflects the increase in total margin and lower operating and administrative expenses compared to the prior year, partially offset by an adjustment to the contingent consideration related to the GHI acquisition ($9 million). The decrease in operating and administrative expenses was largely related to the absence of the previously mentioned divested assets partially offset by an increase in employee and benefits-related costs and increases related to new assets placed into service. The increase in earnings before interest expense and income taxes reflects the improvement in operating income and incremental equity method earnings related to the investment in Pine Run.
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(Dollars in millions)
Operating and administrative expenses (a) $ 254 $ 239 $ 15 6 %
Earnings before interest expense and income taxes $ 242 $ 229 $ 13 6 %
Natural gas system throughput – bcf
Electric Utility distribution sales - gwh 998 978 20 2 %
Natural gas degree days – % warmer than normal (b) (7.9) % (6.9) % — —
(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 2021 and Fiscal 2020. 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)Beginning in Fiscal 2021, deviation from average heating degree days is determined on a rolling 10-year period utilizing volume-weighted weather data based on weather statistics provided by NOAA for airports located within UGI Utilities natural gas service territory. Prior-period amounts have been restated to conform to the current-period presentation.
Temperatures in UGI Utilities’ natural gas service territory during Fiscal 2021 were 7.9% warmer than normal and slightly warmer than the prior year. UGI Utilities’ core market volumes increased (2 bcf) during Fiscal 2021 reflecting the effects of continued growth in the number of core market customers and the recovery of certain volume decreases attributable to COVID-19 during Fiscal 2021, partially offset by the warmer weather compared to the prior year. Total natural gas distribution system throughput increased slightly during Fiscal 2021 primarily attributable to the impact of the Mountaineer Acquisition and the increase in core market volumes, partially offset by lower large delivery service volumes. Electric Utility distribution sales volumes increased during Fiscal 2021 primarily attributable to customer growth.
UGI Utilities revenues increased $49 million in Fiscal 2021 reflecting a $42 million increase in natural gas revenues and a $7 million increase in Electric Utility revenues. The increase in natural gas revenues principally reflects the increase in base rates that went into effect as part of a phased approach on January 1, 2021 and July 1, 2021, higher revenues from off system sales, and incremental revenues attributable to the Mountaineer acquisition ($9 million) in September 2021. These factors were partially offset by lower PGC rates compared to the prior year. The increase in Electric Utility revenues during Fiscal 2021 is largely attributable to the increased distribution sales volumes and higher DS rates compared to the prior year.
UGI Utilities cost of sales was $458 million in Fiscal 2021 compared with $448 million in Fiscal 2020 reflecting higher natural gas ($8 million) and Electric Utility ($2 million) cost of sales compared to the prior year. Higher natural gas cost of sales associated with off system sales and incremental cost of sales related to Mountaineer were partially offset by lower PGC rates compared to the prior year. Electric Utility cost of sales increased during Fiscal 2021 reflecting the increased volumes and DS rates compared to the prior year.
UGI Utilities total margin increased $39 million during Fiscal 2021 reflecting higher natural gas margin ($34 million) and Electric Utility margin ($5 million). The increase in natural gas margin reflects higher margin from core market customers ($18 million) largely attributable to the previously mentioned increase in base rates, incremental margin attributable to Mountaineer ($6 million), and higher margin from large delivery service customers. The increased natural gas margin also benefited from the implementation of a DSIC effective April 1, 2021 and higher customer account fees compared to the prior year. The increase in Electric Utility margin is largely attributable to the increase in distribution sales volumes compared to the prior year.
UGI Utilities operating income and earnings before interest expense and income taxes during Fiscal 2021 increased $12 million and $13 million, respectively, compared to the prior year. These increases largely reflect the previously mentioned increase in total margin, partially offset by higher operating and administrative expenses ($15 million) and depreciation expense ($14 million) compared to the prior year. The increase in operating and administrative expenses reflects incremental activities related to Mountaineer ($7 million) as well as higher contracted labor expenses and employee costs. The higher depreciation expense compared to the prior year includes the effects of continued distribution system and IT capital expenditure activity and incremental depreciation attributable to Mountaineer.
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Interest Expense and Income Taxes
Our consolidated interest expense during Fiscal 2021 was $310 million compared to $322 million during the prior year. The $12 million decrease in interest expense principally reflects lower average short-term borrowings outstanding compared to the prior year, partially offset by incremental interest on the UGI Utilities, Inc.’s senior notes issued during the year.
Our effective income tax rate increased between Fiscal 2021 and Fiscal 2020 due primarily to an increase in the concentration of foreign earnings largely attributable to gains on commodity derivatives reflecting foreign statutory tax rates that exceed the U.S. statutory rate and a lower NOL benefit under the CARES Act compared to the prior year. These items were partially offset by an election made in the current year available under a tax law change in Italy which allowed the Company to step up its tax basis on certain assets in exchange for paying a three percent substitute tax in connection with such election. This election resulted in a $23 million net benefit in the current period resulting in incremental tax basis that will be deductible in future periods. 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 impact of COVID-19. Our total available liquidity balance, comprising cash and cash equivalents and available borrowing capacity on our revolving credit facilities, totaled approximately $2.2 billion and $1.5 billion at September 30, 2021 and 2020, respectively. Our total available liquidity at September 30, 2021 includes $468 million of cash collateral received from derivative counterparties resulting from the impact of rising commodity prices and an accumulation of derivative assets associated with our commodity derivative instruments. The Company does not have any near-term senior note or term loan maturities. While the Company’s operations and financial performance continue to be impacted by COVID-19, 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, 2021.
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 $855 million at September 30, 2021, compared with $336 million at September 30, 2020. Our cash and cash equivalents at September 30, 2021 includes the previously mentioned $468 million of cash collateral deposits received from our derivative instrument counterparties. This is attributable to significant mark-to-market gains on our commodity derivative instruments resulting from the steep rise in commodity prices during Fiscal 2021. This cash could be returned to such counterparties as commodity prices and their impact to our commodity derivative instruments stabilizes or reverses. Excluding these collateral deposits received and cash and cash equivalents that reside at UGI’s operating subsidiaries, at September 30, 2021 and 2020, our cash and cash equivalents totaled $172 million and $112 million, respectively. Such cash is available to pay dividends on UGI Common Stock and for investment purposes.
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During Fiscal 2021 and Fiscal 2020, our principal business units paid cash dividends and made other cash payments to UGI and its subsidiaries as follows:
Midstream & Marketing 25 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.
Common and Preferred Stock
Issuance of Equity Units
On May 25, 2021, the Company issued 2.2 million Equity Units with a total notional value of $220 million. Each Equity Unit has a stated amount of $100 and consists of (1) a 10% undivided beneficial ownership interest in one share of Convertible Preferred Stock with a liquidation preference of $1,000 per share and (2) a 2024 Purchase Contract. The Company received approximately $213 million in proceeds from the issuance of the Equity Units, net of offering expenses and underwriting costs and commissions, and issued 220,000 shares of Convertible Preferred Stock, recording $213 million in “Preferred stock” on the accompanying Consolidated Balance Sheet. The proceeds were used to pay a portion of the purchase price for the Mountaineer Acquisition and related fees and expenses, and for general corporate purposes. For additional information on the Mountaineer Acquisition and the issuance of Equity Units, see Notes 5 and 13 to the Consolidated Financial Statements.
Dividends
Quarterly dividends per share of UGI Common Stock paid during Fiscal 2021 and Fiscal 2020 were as follows:
On November 18, 2021, UGI’s Board of Directors declared a cash dividend equal to $0.345 per common share. The dividend will be payable on January 1, 2022, to shareholders of record on December 15, 2021.
Repurchases of Common Stock
During Fiscal 2020, the Company repurchased 1 million shares at a total purchase price of $38 million. There were no such repurchases during Fiscal 2021. For additional information on the authorization of these repurchases, see Note 13 to the Consolidated Financial Statements.
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Long-term Debt and Credit Facilities
The Company’s debt outstanding at September 30, 2021 and 2020, comprises the following:
Long-term debt (including current maturities):
Unamortized debt issuance costs (16) (5) (10) (6) (5) (42) (47)
Significant Financing Activities
Mountaineer. As further described in Note 5 to the consolidated financial statements, UGI acquired Mountaineer on September 1, 2021. Mountaineer has a credit facility agreement which provides for borrowings up to $100 million, with an option to increase the maximum borrowing capacity to $200 million. The credit facility agreement is scheduled to expire in November 2024, with the option to extend the maturity for up to two additional one-year periods. Borrowings under this credit facility agreement bear interest at (1) a prime rate plus a margin or (2) an adjusted LIBOR plus a margin. Such margin is dependent upon Mountaineer’s unsecured debt rating.
Mountaineer also has several unsecured senior notes and principal amounts are due in full at maturity. Interest is payable on a semiannual basis in June and December for each of these senior notes. See Note 6 to the Consolidated Financial Statements for further information on these senior notes.
UGI Utilities, Inc.’s Senior Notes. On May 7, 2021, UGI Utilities, Inc. entered into a Note Purchase Agreement with a consortium of lenders. Pursuant to the Note Purchase Agreement, UGI Utilities, Inc. issued $100 million aggregate principal amount of 1.59% Senior Notes due June 15, 2026 and $75 million aggregate principal amount of 1.64% Senior Notes due September 15, 2026 in June and September 2021, respectively. The net proceeds from these issuances were used to reduce short-term borrowings and for general corporate purposes.
2021 UGI Corporation Senior Credit Facility. On May 4, 2021, UGI amended the existing UGI Corporation Senior Credit Facility. The 2021 UGI Corporation Senior Credit Facility (1) extends the maturity date of the previous three-year $300 million term loan included in the existing UGI Corporation Senior Credit Facility, which is now due in May 2025; and (2) includes a new four-year $215 million term loan commitment. Proceeds from new term loan borrowings under the 2021 UGI Corporation Senior Credit Facility were used to finance a portion of the Mountaineer Acquisition and for general corporate purposes.
Borrowings on the new term loan under the 2021 UGI Corporation Senior Credit Facility bear interest subject to our election, at either (1) the associated prime rate plus a margin or (2) an adjusted LIBOR or an alternate benchmark rate plus a margin and are due in their entirety at the maturity date. The applicable margin on the new borrowings, which is dependent upon a ratio of consolidated net indebtedness to consolidated EBITDA, as defined, or UGI’s credit ratings, ranges from 0.125% to 1.50% if the prime rate option is elected and 1.125% to 2.50% if the LIBOR option is elected.
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Credit Facilities
Information about the Company’s principal credit agreements (excluding Energy Services’ Receivables Facility, which is discussed below) as of September 30, 2021 and 2020, is presented in the tables below.
UGI International, LLC (a) October 2023 € 300 € — € — € 300 N.A.
Energy Services March 2025 $ 260 $ — $ — $ 260 N.A.
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.
(b)Borrowings outstanding have been classified as “Long-term debt” on the Consolidated Balance Sheets. In October 2021 and 2020, the Company repaid $70 million and $30 million, respectively, of such borrowings and classified these repayments as “Current maturities of long-term debt” on the Consolidated Balance Sheets.
N.A. - Not applicable
N.M. - Not meaningful
The average daily and peak short-term borrowings under the Company’s principal credit agreements during Fiscal 2021 and Fiscal 2020 are as follows:
(Currency in millions) Average Peak Average Peak
UGI International, LLC € — € — € 158 € 179
Mountaineer $ 58 $ 67 $ — $ —
Receivables Facility. Energy Services also has a Receivables Facility with an issuer of receivables-backed commercial paper. On October 22, 2021, the expiration date of the Receivables Facility was extended to October 21, 2022. 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 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, 2021, the outstanding balance of trade receivables was $61 million, none of which was sold to the bank. At September 30, 2020, the outstanding balance of trade receivables was $50 million of which $19 million was sold to the bank. Amounts sold to the bank are reflected as “Short-term borrowings” on the Consolidated Balance Sheet. During Fiscal 2021 and Fiscal 2020, peak sales of receivables were $87 million and $97 million, respectively. During Fiscal 2021 and Fiscal 2020, average daily amounts sold were $21 million and $45 million, respectively.
For further information on the Company’s long-term debt and credit facilities, see Note 6 to Consolidated Financial Statements.
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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 2021 and Fiscal 2020 were $1,481 million and $1,102 million, respectively. Cash flows from operating activities before changes in operating working capital were $1,200 million in Fiscal 2021 and $1,176 million in Fiscal 2020. Changes in operating working capital provided (used) operating cash flow of $281 million in Fiscal 2021 and $(74) million in Fiscal 2020. Changes in operating working capital during Fiscal 2021 reflect cash generated from changes in accounts payable and higher cash received for commodity derivative instrument collateral deposits in the Fiscal 2021 as compared to Fiscal 2020, as well as cash generated from changes in income taxes receivable and other current liabilities. These changes were partially offset by an increase in cash required to fund changes in accounts receivable and inventories due to rising commodity prices during Fiscal 2021, net refunds of deferred fuel and power costs compared to net recoveries during the Fiscal 2020 as well as an increase in cash required to fund changes in other current assets.
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 method investees; and cash proceeds from sales and retirements of property, plant and equipment. Cash expenditures for property, plant and equipment totaled $690 million in Fiscal 2021 and $655 million in Fiscal 2020. Cash payments for property, plant and equipment were higher in Fiscal 2021 compared with Fiscal 2020 reflecting, in part, the return of normal capital spending in the absence of curtailments experienced at the onset of the COVID-19 pandemic in Fiscal 2020. Cash used for acquisitions of businesses and assets in Fiscal 2021 reflects UGI’s acquisition of Mountaineer. Cash used for investments in equity method investees in Fiscal 2021 includes contributions to Pine Run of $56 million to fund the acquisition of Pine Run Midstream, LLC.
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; and issuances or repurchases of equity instruments.
Cash flow provided by financing activities was $166 million in Fiscal 2021 compared to cash used to fund financing activities of $635 million in Fiscal 2020. During Fiscal 2021, the Company received $213 million in net cash proceeds from the issuance of Equity Units and $215 million from the issuance of a new variable rate term loan due in May 2025. These funds were used partially to fund the Mountaineer Acquisition. Also during Fiscal 2021 and Fiscal 2020, UGI Utilities, Inc. issued $175 million of senior notes and $150 million of senior notes, respectively. In Fiscal 2021 and Fiscal 2020, the Company had net repayments on credit facilities and the Receivables Facility of $35 million and $449 million, respectively. Cash used to fund changes in financing activities in Fiscal 2020 includes $38 million of cash paid to repurchase UGI Common Stock.
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Capital Expenditures
In the following table, we present capital expenditures (which exclude acquisitions of businesses and assets) for Fiscal 2021 and Fiscal 2020. We also provide amounts we expect to spend in Fiscal 2022. We expect to finance a substantial portion of our Fiscal 2022 capital expenditures from cash generated by operations and cash on hand.
Corporate & Other 15 — —
Capital expenditures at Midstream & Marketing declined during Fiscal 2021 primarily due to the use of funds to invest in Pine Run. Increased levels of capital expenditures estimated in Fiscal 2022 reflect natural gas infrastructure expansion and investments in renewable energy projects at Midstream & Marketing; replacement and betterment projects at UGI Utilities, Inc.; and the addition of Mountaineer’s capital expenditure programs.
Contractual Cash Obligations and Commitments
The Company has contractual cash obligations that extend beyond Fiscal 2021. The following table presents contractual cash obligations with non-affiliates under agreements existing as of September 30, 2021:
Payments Due by Period
AmeriGas Propane supply contracts 17 17 — — —
UGI International supply contracts 254 254 — — —
Derivative instruments (d) 68 44 23 1 —
(a)Based upon stated maturity dates for debt outstanding at September 30, 2021.
(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, 2021.
(d)Represents the sum of amounts due if derivative instrument liabilities were settled at the September 30, 2021 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, 2021, principally comprise operating lease liabilities (see Note 16 to Consolidated Financial Statements); regulatory liabilities (see Note 9 to Consolidated 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 the U.S. Pension Plans (as further described below under
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“U.S. Pension Plans”) in Fiscal 2022 are not expected to be material. Required minimum contributions to the U.S. Pension Plans in years beyond Fiscal 2022 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 Plans
The U.S. Pension Plans consist of (1) a defined benefit pension plan for employees hired prior to January 1, 2009, of UGI, UGI Utilities, Inc. and certain of UGI’s other domestic wholly owned subsidiaries, and (2) a noncontributory defined benefit pension plan covering substantially all Mountaineer employees. The fair values of the U.S. Pension Plans’ assets totaled $717 million and $566 million at September 30, 2021 and 2020, respectively. At September 30, 2021 and 2020, the underfunded positions of the U.S. Pension Plans, defined as the excess of the PBO over the U.S. Pension Plans’ assets, were $109 million and $170 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 Plans in Fiscal 2022 are not expected to be material. Pre-tax pension cost associated with the U.S. Pension Plans in Fiscal 2021 was not material. Pre-tax pension cost associated with the U.S. Pension Plans in Fiscal 2022 is not expected to be material.
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, 2021, we have recorded after-tax charges to UGI Corporation’s stockholders’ equity of $8 million and recorded regulatory assets totaling $108 million in order to reflect the funded status of the U.S. Pension Plans. For a more detailed discussion of the U.S. Pension Plans and our other postretirement benefit plans, see Note 8 to Consolidated Financial Statements.
Related Party Transactions
During Fiscal 2021 and Fiscal 2020, 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 February 8, 2021, Electric Utility filed a rate request with the PAPUC to increase its annual base distribution revenues by $9 million. On October 28, 2021, the PAPUC issued a final Order approving a settlement that permitted Electric Utility, effective November 9, 2021, to increase its base distribution revenues by $6 million.
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 settlement that permits Gas Utility 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 was authorized to implement a DSIC once Gas Utility total property, plant and equipment less accumulated depreciation reaches $2,875 million. This threshold was achieved in December 2020, and Gas Utility implemented a DSIC effective April 1, 2021. The PAPUC’s final Order 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 PAPUC’s final Order permits 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 amortized over a 10-year period. In accordance with the terms of the Joint Petition, Gas Utility is not 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
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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.
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.
UGI Utilities’ 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 billed to customers through PGC and PGA rates and the recoverable costs incurred. Because of this ratemaking mechanism, there is limited commodity price risk associated with our UGI Utilities 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.
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.
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Our variable-rate debt at September 30, 2021, includes revolving credit facility borrowings and variable-rate term loans at UGI International, UGI Utilities, Inc., 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, 2021, combined borrowings outstanding under variable-rate debt agreements, excluding the previously mentioned effectively fixed-rate debt, totaled $807 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 2021 interest expense by approximately $7 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 $292 million at September 30, 2021. A 100 basis point decrease in market interest rates would result in increases in the fair value of this fixed-rate debt of approximately $249 million at September 30, 2021.
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, 2021, by approximately $170 million, which amount would be reflected in other comprehensive income. We have designated certain euro-denominated borrowings 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 foreign 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.
We have concentrations of credit risk associated with derivative instruments and we evaluate the creditworthiness of our derivative counterparties on an ongoing basis. As of September 30, 2021, 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 $1,687 million. In general, many of our over-the-counter derivative instruments and all exchange contracts 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, 2021, we had received cash collateral from derivative instrument counterparties totaling $468 million. In addition, we may have offsetting derivative liabilities and certain accounts payable balances with certain of these counterparties, which further mitigates the previously mentioned maximum amount of losses. 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, 2021, 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, 2021 and changes in their fair values due to market risks. 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.
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Asset (Liability)
(Millions of dollars) Fair Value Change inFair Value
Interest rate risk (2) $ (29) $ (10)
Foreign currency exchange rate risk (3) $ 30 $ (50)
(1)Change in fair value represents a 10% adverse change in the market prices of certain commodities
(2)Change in fair value represents a 50 basis point adverse change in prevailing market interest rates
(3)Change in fair value represents a 10% adverse change in the value of the Euro and the British pound sterling versus the U.S. dollar.
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.