ITEM 1A. RISK FACTORS
There are many factors that may affect our business, financial condition and results of operations, many of which are not within our control, 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. Investors should carefully consider, together with the other information contained in this Report, the risks and uncertainties described below. Additional risks and uncertainties not currently known to us, or that we currently deem to be immaterial, also may materially affect our business, financial condition and results of operations. No priority or significance is intended by, nor should be attached to, the order in which the risk factors appear.
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 65% of PA 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, which may adversely impact their ability to pay for our products and services or decrease demand for our products and services. 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”;
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•“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 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 the continuation 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.
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 and 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 (such as agreements not to compete for certain businesses) or divestments of assets may be required to obtain clearance. Such commitments or divestments may adversely influence 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 business combinations, asset acquisitions and 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 increased consumer preference for alternative heating equipment installations, such as electric heat pumps, alongside concerted conservation measures, which have been exacerbated particularly in Europe by the evolving energy crisis, 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 our net income and adversely affect our cash flows. In addition, federal, European and/or local laws and regulations may require mandatory conservation
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measures, which would reduce the demand for our energy products. In Europe, measures are underway to decarbonize the electric generation grid, as well as residential and commercial heating, in order to achieve EU climate change objectives, including a net zero goal by 2050. 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. Updates to the EPBD continue to make their way through EU legislative approvals, which will establish stronger targets for management of new and existing building construction and integral heating systems that focus on low or zero carbon outcomes. 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 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 or the use of electric-powered equipment, such as heat pumps in heating applications, 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. Fuel oil, which is a major competitor to propane, is a less environmentally attractive energy source. Furnaces and appliances that burn LPG must be upgraded to run 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, and in multiple countries, the risk of conversion to fuel oil is diminishing due to regulations that prevent or disfavor the installation and/or use of fuel oil boilers or fuel oil for heating applications. Historically, most applications for LPG have generally not been competitive with natural gas in areas where natural gas pipelines already exist because natural gas was a significantly less expensive source of energy than LPG. However, as a result of the recent and ongoing energy crisis in Europe, the cost of LPG in many of our European markets is less than natural gas, which is driving a stronger demand for LPG applications. Nevertheless, the gradual expansion of natural gas distribution systems in our service areas may continue to result in the availability of natural gas in some areas that previously depended upon LPG resulting in lower demand for LPG.
Our natural gas businesses in the U.S. 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.
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
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results of operations. We have made, and may continue to 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. Although the effects from such adjustments have not been material to date, the effects of such adjustments may be significant 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.
Beginning in Fiscal 2020, we initiated a transformation project focused on our corporate support functions, including finance, human resources, procurement and information technology, that is designed to standardize processes and activities across our global platform, while leveraging the use of best practices and efficiencies between our businesses. This initiative is being coordinated across multiple support functions, each function being at a different stage of transformation, and is expected to be completed by the end of Fiscal 2023. 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 our 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 - Continuing Business Transformation 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. A number of our employees currently work remotely; as a result, our cyber-security program may be less effective and information technology security may be less robust for those employees. 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 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
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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. 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 and carbon emission laws, that may adversely affect the terms of contracts with customers, including with respect to exclusive supply rights and usage restrictions, and stricter regulations applicable to the storage and handling of LPG;
•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;
•local political and economic conditions as well as geopolitical conditions that could cause instability and adversely impact the global economy or specific markets, such as the war between Russia and Ukraine; 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.
The European energy crisis may create LPG commodity supply challenges and could negatively impact our business results. The geopolitical situation in Europe during 2022 led to a sharp decrease in natural gas imports from Russia to Europe. This
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decrease resulted in a significant increase in natural gas prices in Europe. In response to the significant price increase, refineries are substituting a portion of their natural gas refinery fuels with LPG, leading to a decrease in the availability of LPG in some areas of Europe as well as higher LPG costs. In addition, gas processing plants supplying the United Kingdom and Norway markets are injecting LPG into the natural gas grid, decreasing the overall supply of LPG from the gas processing plants. In this context, LPG supply patterns are substantially changing with increased reliance on sea-imports and land logistics.
We anticipate that the Europeanenergy crisis and the corresponding response by refineries and gas processing plants will continue in Fiscal 2023, which may lead to commodity supply challenges in some markets, higher commodity costs that may not be able to be absorbed by our customers, particularly in the United Kingdom and our Eastern European markets, and lower consumption by our customers, among other impacts, which could have a material adverse impact on our earnings, cash flows and overall financial condition.
Economic and geopolitical instability, including as a result of acts of war, could have a material adverse effect on our operating results, financial condition, and cash flows. In late February 2022, Russian military forces launched significant military action against Ukraine, which has continued through the date of this Report. We do not have operations in Russia or Ukraine. Nevertheless, the outbreak of war between Russia and Ukraine and the resulting sanctions by U.S. and European governments, together with any additional future sanctions by them, could have a larger impact that expands into other geographies where we do business, including our supply chain, business partners and customers in those markets, which could result in lost sales, supply shortages, commodity price fluctuations, increased costs, transportation logistics challenges, customer credit and liquidity issues, and lost efficiencies. The acceleration of a global energy crisis, including as a result of restrictions on Russia’s energy exports, could similarly impact the geographies where we do business. In addition, the U.S. and Europe have commenced certain trade actions as a result of the war between Russia and Ukraine, which are expected to result in retaliatory measures or actions, including tariffs, by Russia. While significant uncertainty exists with respect to this matter, the war between Russia and Ukraine and its broader impacts, including any increased trade barriers or restrictions on global trade imposed by the U.S. or Europe, or further retaliatory trade measures taken by Russia or other countries in response, could have a material adverse effect on our operating results, financial condition and cash flows.
Our energy marketing business in Europe may continue to be dramatically disrupted by extreme prices and volatility in the natural gas and power markets in Europe, which have resulted in, and may continue to result in, a material negative impact on our financial results. Our natural gas and power marketing businesses have traditionally relied upon stable price and availability conditions. The European energy markets have entered in an unprecedented state of volatility. In addition to the pre-existing natural gas supply shortages, the war between Russia and Ukraine and the resulting substantial reduction of natural gas imports from Russia to Europe have led to significant increases in the costs of both wholesale gas and power, and have created new risks that we have experienced and expect to continue to experience in Fiscal 2023 within our European energy marketing business. These risks include: (i) the ability to economically support the traditional fixed price and full requirement contracts of customers due to the significant increased cost to purchase incremental additional volumes consumed in excess of expectations; (ii) the ability to service typical portfolio needs with standard trading activities due to the limitations on purchasing cost effective services in the market; (iii) the ability to pass increased costs onto customers due, among other things, to timing, regulatory and contractual constraints, and (iv) the ability to maintain hedging services to customers due to the margining constraints and maximum trading limits implemented by clearing banks on supplier counterparties. As a result, UGI is considering all scenarios with respect to the future of its energy marketing business in Europe, including exit and wind down. On October 25, 2022, UGI announced the sale of its energy marketing business in the United Kingdom and in November 2022, UGI announced its intent to sell its energy marketing business located in France. The risks identified with respect to our energy marketing business in Europe have resulted in and may continue to have a material negative impact on our financial results.
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 2022, AmeriGas Propane purchased approximately 85% 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 provides 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 2022, UGI International’s business in the United Kingdom purchased approximately 90% of its LPG needs from two suppliers and, in Italy, approximately 74% of its supply was sourced from two suppliers. 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.
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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, we 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, 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 customers’ 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 result in a negative effect on our operating results.
Our business is dependent on the domestic andglobal 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
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constraints in the supply chain may 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 is 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 and distribution 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 Utilities segment, 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 Utilities may charge utility customers, thus impacting the returns that Utilities may earn on the assets that are dedicated to its operations. Utilities periodically files, and we expect to continue to periodically file, requests with these regulatory bodies to increase base rates charged to customers in the respective states in which Utilities operates. If 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, Utilities’ revenue growth will be limited and earnings may decrease.
The enactment of proposed or future tax legislation may adversely impact our financial condition and results of operations. On March 27, 2020, the U.S. enacted the CARES Act.Our financial statements 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. For example, the Inflation Reduction Act was enacted on August 16, 2022. This law, among other provisions, imposes a 15% corporate alternative minimum tax on adjusted financial statement income, which is effective for us beginning with Fiscal 2024, provides for an investment tax credit for qualified biomass property, and introduces a one percent excise tax on corporate stock repurchases after December 31, 2022. We are currently assessing the potential impact of these legislative changes and will continue to evaluate the overall impact of other 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 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 laws and regulations including, but not limited to, safety, health, transportation, tax, and environmental laws and regulations that govern 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 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.
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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 MGPs. 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 MGP 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 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, among other things, 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 as well as our suppliers, vendors, and customers. The adoption and implementation of any 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, but are not limited to, 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 could cause 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.
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Changes in data privacy and data protection laws and regulations or any failure to comply with such laws and regulations, could adversely affect our business and financial results. As part of our operations, we collect, use, store and transfer the personal information and data of our employees as well as customer, vendor and supplier data in and across various jurisdictions. 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 and data of our employees, vendors, suppliers and customers, which could lead to increased operating costs. Existing and emerging laws and regulations are inconsistent across jurisdictions and are subject to evolving, differing, and sometimes conflicting interpretations. The EU adopted the GDPR, which 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”) and the California Privacy Rights Act (the “CPRA”), which, among other things, grant a number of rights to California residents with respect to their personal information, and require companies to make extensive disclosures to consumers about such companies’ data collection, use, and sharing practices and inform consumers of their personal information rights. In addition, the CPRA created a new state privacy regulator, which will likely result in greater regulatory activity and enforcement in the privacy area. Comprehensive privacy laws with some similarities to the CCPA and CPRA have been proposed or passed at the U.S. federal and state levels, such as the Virginia Consumer Data Protection Act (the “VCDPA) and the Colorado Privacy Act (the “CPA”). 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. 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.
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, VCDPA and CPA, as well as other new and upcoming federal and state privacy laws and industry standards may cause us to incur substantial fines, additional significant 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 have and expect to continue 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 continue 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.
Based on information available as of the date of this Report, the effect of such requirements will be likely to (directly or indirectly) increase our overall costs of entering into derivatives transactions. In particular, new margin requirements, position limits and significantly higher capital charges resulting from new global capital regulations, even if not directly applicable to us, may cause an increase in the pricing of derivatives transactions entered into by market participants to whom such requirements apply or affect our overall ability to enter into derivatives transactions with certain counterparties. 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.
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 continue to qualify as a non-financial counterparty under the EMIR, and thus not be required to post margin, we are currently subject to limited derivatives reporting requirements that could expand in the future, and may also be
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subject to increased regulatory requirements, including recordkeeping, marking to market, timely confirmations, 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 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.
General Risks that May Impact Our Business and Our Shareholders
The inability to attract, develop, retain and engage key employees could adversely affect our ability to execute our strategic, operational and financial plans. We are dependent upon the continued service and contributions of our management and key technical and professional employees, as well as our ability to transfer the knowledge and expertise of our workforce to new employees as our employees retire or we otherwise experience employee turnover. In addition, the success of our operations depends on our ability to identify, attract and develop skilled and experienced key employees. There is increased competition for experienced management and technical and professional employees, which could increase the costs associated with identifying, attracting and retaining such individuals. Additionally, we may not be able to attract, retain or engage key employees if our compensation and benefits program is not as robust as the compensation and benefits programs offered by other employers for similar roles. Further, a lack of employee engagement could lead to loss of productivity and increased employee burnout, turnover, absenteeism, safety incidents as well as decreased customer satisfaction. If we cannot identify, attract, develop, retain and engage management, technical and professional employees, along with other qualified employees, to support the various functions of our business, our operations and financial performance could be adversely impacted.
The ongoing COVID-19 pandemic and the spread of variant strains has adversely impacted our business, and could in the future materially impact our business,financial condition and results of operations. The COVID-19 pandemic, including the spread of variant strains, has resulted in, and could continue to result in, widespread impacts on the global economy and on our employees, customers, third-party business partners and other stakeholders. While we have experienced improving activity in most markets and geographies, there remains 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. The continuation of the COVID-19 pandemic may, among other things:
•negatively impact the financial condition of our customers and their ability to pay for our products and services;
•decrease demand for our products and services, as was the case in Fiscal 2020 through part of Fiscal 2022 with respect to certain of our natural gas and propane products and services;
•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 and goodwill;
•delay the timeliness of our ability to source goods;
•result in commodity price volatility and supply chain constraints, as was the case in in Fiscal 2020 through part of Fiscal 2022; 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.
Throughout the pandemic, 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. While we have generally reopened our offices, our employees continue to be exposed to health and safety risks and we may reinstate modified or restricted business and workforce practices, including office closures, as the pandemic continues. 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.
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 efficacy of available vaccines, the severity of the disease, the duration of the pandemic, actions prescribed or ordered by governmental authorities, public health authority guidance, and when and to what extent economic and operating conditions can return to pre-pandemic levels.
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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 have resulted in, and could continue to result in, legal or regulatory proceedings (see “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 within our industry, may increase our costs and limit our revenue growth, which may adversely affect our operating results” for more information on such 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 acts of war and 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, war, 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 war or terrorism 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, war 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, war 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 indebtedness may adversely affect our business, financial condition and operating results. Our debt agreements also contain covenants that restrict our operational flexibility.As of September 30, 2022, we had total indebtedness of $7 billion. Our indebtedness could adversely affect our business, financial condition, operating results and operational flexibility by, among other things:
•impairing our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions or other purposes;
•limiting operational flexibility and our ability to pursue business opportunities and implement certain business strategies;
•impairing our ability to respond to changing business and economic conditions;
•impairing our ability to repay our indebtedness at maturity, especially where our debt agreements contain significant maturities;
•exposing us to the risk of increased interest rates where our debt agreements have variable interest rates; and
•placing us at a competitive disadvantage compared to our competitors that have proportionately less debt and fewer guarantee obligations.
The occurrence of any of such events could have a material adverse effect upon our business, financial condition and results of operations. Further, 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 negatively impacted. Additionally, our ability to make payments of principal and interest on our indebtedness depends upon our future performance,
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which is subject to economic and political conditions, seasonal cycles and financial, business and other factors, many of which are beyond our control. If we are unable to generate sufficient cash flow from operations to service our indebtedness, we may be required to, among other things, refinance or restructure all or a portion of our indebtedness, reduce or delay planned capital or operating expenditures or sell selected assets. Such measures might not be sufficient to enable us to service our indebtedness, and any such refinancing, restructuring or sale of assets might not be available on favorable terms or at all.
In addition, our debt agreements generally contain customary affirmative covenants, including, among others, covenants pertaining to the delivery of financial statements; certain financial covenants; notices of default and certain other material events; payment of obligations; preservation of corporate existence, rights, privileges, permits, licenses, franchises and intellectual property; maintenance of property and insurance and compliance with laws, as well as customary negative covenants, including, among others, limitations on the incurrence of liens, investments and indebtedness; mergers, acquisitions and certain other fundamental changes; transfers, leases or dispositions of assets outside the ordinary course of business; restricted payments; changes in our line of business; transactions with affiliates and burdensome agreements. These covenants could affect our ability to operate our business, respond to changes in business and economic conditions, obtain additional financing (if needed), and may increase the amount of interest expense we ultimately pay pursuant to the debt agreements. Further, our ability to comply with the covenants and restrictions contained in our debt agreements may be affected by events beyond our control, including prevailing economic, financial and industry conditions or regulatory changes. A failure to comply with the covenants in our debt agreements could result in a default or an event of default. Upon an event of default, unless waived, the lenders could elect to terminate their commitments, cease making further loans, require cash collateralization of letters of credit, cause their loans to become due and payable in full, foreclose against any assets securing the debt under our debt agreements and force us and our subsidiaries into bankruptcy or liquidation. If the payment of our debt is accelerated, we cannot be certain that we will have sufficient funds available to pay down the indebtedness (together with accrued interest and fees), or that we will have the ability to refinance the accelerated indebtedness on terms favorable to us or at all. This could have a material adverse effect upon our business, financial condition and results of operations.
Additionally, 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. See the liquidity section in Item 7. Management's Discussion and Analysis for additional information on our current debt agreements.
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. Payments to us by our 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.
Volatility in credit and capital markets may restrict our ability to grow,increase the likelihood of defaults by our suppliers and vendors, customers and counterparties and adversely 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.
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Declines in the stock market or bond 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 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 11, 2022, we had 6,485 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, 2022. As of September 30, 2022, the Company had 7.10 million shares of Common Stock available for repurchase through an extension of a previous share repurchase program announced by the Company on February 2, 2022. The Board of Directors authorized the repurchase of up to 8 million shares of Common Stock over a four-year period expiring in February 2026.
Recent Sale of Unregistered Securities
The Company did not sell any unregistered securities during Fiscal 2022.
Performance Graph
The following graph compares the cumulative five-year 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, 2017, through September 30, 2022. The stock performance shown on the graph below is based on historical data and is not necessarily indicative of future stock price performance.
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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 2022 and Fiscal 2021, and our financial condition. For discussion of our results of operations and cash flows for Fiscal 2021 compared with Fiscal 2020, refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Fiscal 2021 Annual Report on Form 10-K, filed with the SEC on November 19, 2021. 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
UGI International Energy Marketing Business
In October 2022, UGI International, through a wholly-owned subsidiary, sold its natural gas marketing business located in the United Kingdom resulting in a net cash payment to the buyer of $19 million which includes working capital adjustments. The assets and liabilities associated with this business, primarily attributable to the value of unrealized gains and losses on derivative contracts, are classified as held-for-sale on the accompanying Consolidated Balance Sheet as of September 30, 2022. During the fourth quarter of Fiscal 2022, the Company recognized an impairment charge, which was limited to the disposal group’s long-lived assets in accordance with its policy related to assets held for sale. Such impairment in Fiscal 2022 was not material. An incremental pretax loss of approximately $220 million was recognized in the first quarter of Fiscal 2023 in connection with the completed sale, largely attributable to the difference between the net cash payment to the buyer and the fair value of net derivative assets sold along with customer contracts as of the transaction date. The change in the net assets held for sale as of September 30, 2022, and the loss recognized upon disposal in October 2022, was due to the change in the fair value of the net derivative assets subsequent to September 30, 2022.
In November 2022, the Company announced its intent to sell its energy marketing business located in France, with a definitive agreement expected to be signed in the first quarter of Fiscal 2023. The Company expects to recognize a significant loss on the sale largely attributable to the value of net derivative assets sold along with the related customer contracts. At September 30, 2022, the carrying value of the net assets of the Company’s energy marketing business in France amounted to approximately $470 million with primarily all of that value related to the fair value of the applicable derivative contracts.
Global Macroeconomic Conditions
During Fiscal 2021 and continuing into the current fiscal year, global commodity and labor markets have experienced significant inflationary pressures attributable to various economic and political factors, including: the economic recovery and evolving consumer patterns associated with the COVID-19 pandemic; supply chain issues associated with labor shortages; significant inflationary pressures on commodity prices; and political and regulatory conditions resulting from the war between Russia and Ukraine, among others. These factors have led to significant volatility across various consumer price indices during Fiscal 2021 and Fiscal 2022. We have experienced substantial shifts in commodity prices, particularly in LPG, natural gas and electricity prices, which, in turn, have led to extensive mark-to-market impacts on commodity derivative instruments not associated with current-period activity. The ongoing strain on supply costs has resulted in increased inventory costs and certain distribution expenses across all of our businesses. It has also affected requirements around cash collateral and restricted cash associated with our outstanding derivatives. We cannot predict the duration or total magnitude of these factors and the total effects on our business, financial position, results of operations, liquidity or cash flows at this time. However, we continue to evaluate and react to these global economic and political conditions and remain focused on managing our financial condition and liquidity as these conditions continue to evolve.
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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 included 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, and 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. Mountaineer is included in the Utilities segment as of and in all periods subsequent to the acquisition date. For additional information on the Mountaineer Acquisition and the associated financing activities, see Notes 5, 6 and 13 to the Consolidated Financial Statements.
Continuing Business Transformation Initiatives
By the end of Fiscal 2021, AmeriGas Propane and UGI International substantially completed their previously announced business transformation initiatives. Benefits provided under each initiative were consistent with expectations during Fiscal 2022, and are expected to provide ongoing annual benefits of more than $150 million and €30 million, respectively.
Beginning in Fiscal 2020, we initiated a transformation project focused on our corporate support functions including: finance, procurement, human resources and information technology. This initiative will standardize processes and activities across our global platform, while leveraging the use of best practices and efficiencies between our businesses. While this initiative is being coordinated across multiple support functions, each function is at a different stage of transformation and will undergo the required changes by the end of Fiscal 2023. 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.
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 directly comparable GAAP measure, to adjusted diluted earnings per share:
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Year Ended September 30,
(Millions of dollars, except per share amounts) 2022 2021
Adjusted net income attributable to UGI Corporation:
Net income attributable to UGI Corporation 1,073 1,467
Impact of change in tax law (19) (23)
Loss on extinguishment of debt (net of tax of $(3) and $0, respectively) 8 —
Restructuring costs (net of tax of $(10) and $0, respectively) 24 —
Total adjustments (a) (b) (447) (838)
Adjusted net income attributable to UGI Corporation $ 626 $ 629
Adjusted diluted earnings per share:
Midstream & Marketing 0.76 0.51
Corporate & Other (a) 1.93 3.90
Earnings per share - diluted 4.97 6.92
Unrealized gains on foreign currency derivative instruments (0.17) (0.03)
Business transformation expenses 0.03 0.35
Impairment of customer relationship intangible — 0.07
Impairments of certain equity method investments and assets 0.12 0.44
Impact of change in tax law (0.09) (0.11)
Loss on extinguishment of debt 0.03 —
Restructuring costs 0.12 —
Total adjustments (a) (2.07) (3.96)
Adjusted diluted earnings per share $ 2.90 $ 2.96
(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 2022 Compared with Fiscal 2021
Discussion. Net income attributable to UGI Corporation was $1,073 million for Fiscal 2022 (equal to $4.97 per diluted share) compared to $1,467 million for Fiscal 2021 (equal to $6.92 per diluted share). Net income attributable to UGI Corporation in Fiscal 2022 reflects a $513 million year-over-year decrease in net unrealized gains on commodity derivative instruments and certain foreign currency derivative instruments. This decrease reflects the significant volatility related to commodity prices during Fiscal 2022 and Fiscal 2021, as well as the stronger U.S dollar versus the euro, and has contributed to the accumulation of substantial derivative assets related to the Company’s commodity derivative instruments at both September 30, 2022 and 2021. Net income attributable to UGI Corporation for Fiscal 2022 and Fiscal 2021 also includes (1) impairments of certain equity method investments and other assets of $26 million and $108 million, respectively; (2) benefits related to tax law changes of $19 million and $23 million, respectively; (3) business transformation expenses of $7 million and $74 million, respectively; and (4) acquisition and integration expenses of $1 million and $10 million, respectively. Net income attributable to UGI Corporation for Fiscal 2022 also includes restructuring costs of $21 million largely attributable to a reduction in workforce and related costs, and a loss on extinguishment of debt of $8 million associated with financing activities at UGI International.
Adjusted net income attributable to UGI Corporation for Fiscal 2022 was $626 million (equal to $2.90 per diluted share) compared to adjusted net income attributable to UGI Corporation for Fiscal 2021 of $629 million (equal to $2.96 per diluted share). The slight decrease in adjusted net income attributable to UGI Corporation during Fiscal 2022 reflects lower earnings contributions from our LPG businesses which were significantly impacted by the effects of commodity price volatility on current-period margins and related volumes and the absence of a Fiscal 2021 tax benefit under the CARES Act. These factors were largely offset by higher earnings from our Utilities and Midstream & Marketing segments, which include contributions attributable to recent acquisitions.
AmeriGas Propane’s adjusted net income attributable to UGI Corporation decreased $56 million during Fiscal 2022. This decrease largely reflects lower retail propane margin primarily attributable to lower retail volumes sold and higher operating and administrative expenses largely attributable to inflationary pressures. These factors were partially offset by higher non-propane margin and gains on asset sales.
UGI International’s adjusted net income attributable to UGI Corporation decreased $46 million during Fiscal 2022 principally reflecting lower total margin largely attributable to the effects of commodity price volatility on our energy marketing business and the net effect of weaker foreign currencies compared to the prior year. These factors were partially offset by higher gains on asset sales.
Midstream & Marketing adjusted net income in Fiscal 2022 was $56 million higher than the prior year. This increase principally reflects higher margins related to natural gas marketing activities, higher total earnings from renewable energy marketing activities, and incremental contributions from UGI Moraine East.
Utilities Fiscal 2022 adjusted net income increased $62 million compared to the prior year. The increase was largely related to the full-year impact of earnings attributable to the Mountaineer Acquisition, an increase in DSIC rates and higher margin from large delivery including the effects of customer growth at UGI Utilities also contributed to the earnings improvement during the current year.
AmeriGas Propane 2022 2021 Increase (Decrease)
(Dollars in millions)
Operating and administrative expenses $ 889 $ 869 $ 20 2 %
Retail gallons sold (millions) 888 968 (80) (8) %
Degree days – % warmer than normal (b) (0.8) % (2.8) % — —
(a)Total margin represents revenues less cost of sales.
(b)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.
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Average temperatures during Fiscal 2022 were 0.8% warmer than normal and 1.8% colder than the prior year. Total retail gallons sold decreased 8% during Fiscal 2022 principally reflecting the continuing impact of customer service challenges that occurred in Fiscal 2021, staffing shortages in key delivery related positions, increased price sensitivity in the higher commodity cost environment and the absence of the beneficial prior-year impact of COVID-19 on cylinder exchange and resale volumes.
Total revenues increased $329 million during Fiscal 2022 largely reflecting higher average propane selling prices ($468 million) and, to much lesser extent, higher wholesale volumes ($29 million). These increases were partially offset by the effects of the lower retail propane volumes sold ($182 million). Average daily wholesale propane commodity prices during Fiscal 2022 at Mont Belvieu, Texas, one of the major supply points in the U.S., were approximately 39% higher than such prices during Fiscal 2021. Total cost of sales increased $396 million during Fiscal 2022 largely attributable to the higher average propane product costs ($448 million) and, to a much lesser extent, the higher wholesale propane volumes ($27 million). These increases were partially offset by the effects of the lower retail propane volumes sold ($82 million).
AmeriGas Propane total margin decreased $67 million in Fiscal 2022 largely attributable to the lower retail propane volumes sold ($100 million) compared to the prior year. This decrease was partially offset by higher average retail propane margin ($28 million) and increased non-propane margin ($11 million) largely attributable to higher fuel recovery and tank rental fees.
Operating income and earnings before interest expense and income taxes decreased $78 million during Fiscal 2022 primarily attributable to the previously mentioned decrease in total margin and higher operating and administrative expenses ($20 million). Operating income and earnings before interest expense and income taxes in Fiscal 2022 also includes an increase in other income largely related to gains on asset sales. The increase in operating and administrative expenses in Fiscal 2022 was impacted by the inflationary cost environment and includes, among other things, higher bad debt expense ($13 million), vehicle fuel ($13 million), general insurance and claims expense ($11 million), and telecommunications expenses ($10 million). These increases were partially offset by lower expenses associated with employee compensation and benefits ($22 million), advertising ($8 million) and vehicle leases ($5 million).
UGI International 2022 2021 Increase (Decrease)
(Dollars in millions)
Operating and administrative expenses $ 611 $ 622 $ (11) (2) %
Earnings before interest expense and income taxes $ 254 $ 317 $ (63) (20) %
LPG retail gallons sold (millions) 799 792 7 1 %
Degree days - % (warmer) colder than normal (b) (2.6) % 0.4 % — —
(a)Total margin represents total revenues less total cost of sales.
(b)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.
Average temperatures during Fiscal 2022 were 2.6% warmer than normal and 5.0% warmer than Fiscal 2021. Total LPG retail gallons sold during Fiscal 2022 increased slightly compared to Fiscal 2021 largely attributable to the recovery of certain bulk volumes that were negatively impacted by COVID-19 in Fiscal 2021 and favorable crop drying campaigns, partially offset by warmer weather.
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 2022 and Fiscal 2021, the average unweighted euro-to-dollar translation rates were approximately $1.08 and $1.20, respectively, and the average unweighted British pound sterling-to-dollar translation rates were approximately $1.28 and $1.37, respectively. Fluctuations in these foreign currency exchange rates can have a significant impact on the individual financial statement components discussed below. The impact of such changes on earnings, however, is mitigated by the effects of forward foreign currency exchange contracts entered into over a multi-year period intended to reduce volatility in U.S. dollar amounts resulting from changes in exchange rates. These forward foreign currency exchange contracts resulted in realized net gains of $13 million and $1 million, respectively, in Fiscal 2022 and Fiscal 2021.
UGI International revenues and cost of sales increased $1,035 million and $1,153 million, respectively, during Fiscal 2022. Average wholesale prices for propane and butane during Fiscal 2022 in northwest Europe were approximately 53% and 70%
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higher, respectively, compared to Fiscal 2021. The increase in revenues and cost of sales principally reflects the impact on our energy marketing business from significant increases and volatility in natural gas and electricity prices and the effects of the previously mentioned higher average propane and butane selling prices and product costs on our LPG business compared to the prior year. These increases were partially offset by the translation effects of weaker foreign currencies as reflected in the previously mentioned average exchange rates.
UGI International total margin decreased $118 million during Fiscal 2022 primarily reflecting lower total margin from our energy marketing business (approximately $53 million) and the translation effects of the weaker foreign currencies. These factors were partially offset by higher total margin from our LPG business attributable to strong margin management efforts despite the effects of the previously mentioned higher product costs. The lower total margin from our energy marketing business is largely due to the impact of significant volatility in commodity costs and its effects on unit margins of certain customer contracts which were largely confined to the heating-season months of October through March during Fiscal 2022.
UGI International operating income and earnings before interest expense and income taxes decreased $77 million and $63 million, respectively, during Fiscal 2022. The decrease in operating income principally reflects the decrease in total margin partially offset by lower depreciation and amortization ($18 million), lower operating and administrative expenses ($11 million) and higher gains associated with the sale of assets compared to Fiscal 2021. The decrease in depreciation and amortization principally reflects the effects of currency translation. The net decrease in operating and administrative expenses compared to the prior year was driven by the translation effects of the weaker foreign currencies largely offset by the effects of inflation on the underlying distribution, personnel and maintenance costs. The decrease in earnings before interest expense and income taxes in Fiscal 2022 largely reflects the decrease in operating income partially offset by higher realized gains on foreign currency exchange contracts ($12 million) entered into in order to reduce volatility in UGI International earnings resulting from the effects of changes in foreign currency exchange rates.
(Dollars in millions)
Operating and administrative expenses $ 129 $ 129 $ — — %
Earnings before interest expense and income taxes $ 269 $ 190 $ 79 42 %
(a)Total margin represents total revenues less total cost of sales.
Average temperatures across Midstream & Marketing’s energy marketing territory during Fiscal 2022 were 8.1% warmer than normal and 4.3% warmer than the prior year.
Midstream & Marketing’s revenues increased $920 million compared to the prior year principally reflecting increased revenues from natural gas marketing activities ($845 million), including the effects of peaking and capacity management activities, which were impacted by significantly higher average natural gas prices compared to the prior year. This increase in revenues was partially offset by lower volumes attributable to the warmer weather. Higher revenues associated with retail power and generation ($45 million) and natural gas gathering activities ($27 million) also contributed to the increase.
Midstream & Marketing cost of sales was $1,876 million in Fiscal 2022 compared to $1,033 million in Fiscal 2021. The $843 million increase principally reflects higher cost of sales related to the previously mentioned natural gas marketing activities ($807 million) which include the effects of significantly higher product costs in Fiscal 2022 partially offset by the lower volumes sold. Higher cost of sales associated with retail power and generation ($40 million) also contributed to the increase.
Midstream & Marketing total margin increased $77 million in Fiscal 2022 largely reflecting improved margin from natural gas marketing activities ($38 million), including the effects of peaking and capacity management activities, and reflects the positive impact of settlement timing of certain multi-year commodity storage hedge contracts during Fiscal 2022. The increase in total margin also includes incremental margin attributable to UGI Moraine East ($15 million), higher total margin from renewable energy marketing activities ($9 million) including the impact of increased average pricing related to environmental credits compared to Fiscal 2021, and higher retail power and generation margin ($5 million).
Midstream & Marketing operating income and earnings before interest expense and income taxes during Fiscal 2022 increased $86 million and $79 million, respectively, compared to the prior year. The increase in operating income principally reflects the
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increase in total margin and the absence of a contingent consideration adjustment related to the GHI acquisition in the prior year partially offset by higher depreciation and amortization expense largely attributable to UGI Moraine East. The increase in earnings before interest expense and income taxes reflects the improvement in operating income partially offset by lower income from equity-method investments.
(Dollars in millions)
Operating and administrative expenses (a) $ 332 $ 254 $ 78 31 %
Earnings before interest expense and income taxes $ 336 $ 242 $ 94 39 %
Gas Utility system throughput – bcf
Electric Utility distribution sales - gwh 997 998 (1) — %
Natural gas degree days – % warmer than normal (b) (7.5) % (6.5) % — —
(a)Total margin represents total revenues less total cost of sales and revenue-related taxes (i.e. Electric Utility gross receipts and business and occupation taxes) of $21 million and $5 million, respectively, during Fiscal 2022 and Fiscal 2021. For financial statement purposes, revenue-related taxes are included in “Operating and administrative expenses” on the Consolidated Statements of Income (but are excluded from operating expenses presented above).
(b)Deviation from average heating degree days is determined on a 10-year period utilizing volume-weighted weather data based on weather statistics provided by NOAA for airports located within Utilities natural gas service territory.
Temperatures in Utilities’ natural gas service territory during Fiscal 2022 were 7.5% warmer than normal and slightly warmer than the prior year. Utilities’ core market and total natural gas system volumes increased (23 bcf and 52 bcf, respectively) during Fiscal 2022 largely related to incremental volumes attributable to Mountaineer.
Utilities revenues increased $541 million in Fiscal 2022 reflecting a $505 million increase in natural gas revenues and a $36 million increase in Electric Utility revenues. The increase in natural gas revenues principally reflects incremental revenues attributable to Mountaineer ($249 million), higher PGC rates reflecting higher natural gas costs, higher pricing on off-system sales, increased DSIC rates, and the full-year impact of the increase in base rates that went into effect during Fiscal 2021. The increase in Electric Utility revenues during Fiscal 2022 reflects higher DS rates compared to the prior year and the increase in base rates that went into effect in November 2021.
Utilities cost of sales (including revenue-related taxes) was $819 million in Fiscal 2022 compared with $463 million in Fiscal 2021. Natural gas cost of sales increased during Fiscal 2022 ($326 million) largely attributable to incremental cost of sales attributable to Mountaineer ($126 million), higher PGC rates compared to the prior year, and increased cost of sales associated with off-system sales. Electric Utility cost of sales increased during Fiscal 2022 ($30 million) primarily related to the higher DS rates compared to the prior year.
Utilities total margin increased $185 million during Fiscal 2022 primarily related to higher natural gas margin ($179 million) compared to Fiscal 2021 largely reflecting incremental margin attributable to Mountaineer ($123 million). The increase in total natural gas margin also includes higher margin attributable to the increased DSIC rates, higher margin from large delivery service customers including the effects of customer growth compared to the prior year, and the previously mentioned full-year impact of the increase in base rates. Electric Utility margin increased $6 million largely attributable to the increase in base rates compared to the prior year.
Utilities operating income and earnings before interest expense and income taxes during Fiscal 2022 increased $86 million and $94 million, respectively, compared to the prior year. The increase in operating income largely reflects the previously mentioned increase in total margin, partially offset by higher operating and administrative expenses ($78 million) and depreciation expense ($25 million) compared to the prior year, both principally related to incremental expenses attributable to Mountaineer. The higher depreciation expense compared to the prior year also includes the effects of continued distribution system capital expenditure activity. The increase in earnings before interest expense and income taxes principally reflects the increase in operating income and higher pension non-service income compared to the prior year.
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Interest Expense and Income Taxes
Our consolidated interest expense during Fiscal 2022 was $329 million compared to $310 million during the prior year. The increase in interest expense principally reflects the effects of incremental long-term debt outstanding during the current period, net of repayments, primarily related to the Mountaineer Acquisition and UGI Utilities’ issuance of senior notes during Fiscal 2022 and the second half of Fiscal 2021. Higher average short-term borrowings outstanding compared to the prior year also contributed to the increase in interest expense.
Our effective income tax rate decreased between Fiscal 2021 and Fiscal 2022 due primarily to the benefit of the impact on net deferred tax liabilities of the reduction in the Pennsylvania statutory income tax rate. This benefit exceeded the prior year net benefits attributable to the CARES Act and the election made under a tax law change in Italy which allowed us to step up its tax basis on certain assets in exchange for paying a three percent substitute tax, partially offset by the establishment of a valuation allowance on the PennEast impairment. 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 ongoing global macroeconomic conditions including, among others, changes in consumer behavior resulting from the COVID-19 pandemic, the inflationary cost environment and ongoing energy commodity price volatility. Our total available liquidity balance, comprising cash and cash equivalents and available borrowing capacity on our revolving credit facilities, totaled approximately $1.7 billion and $2.2 billion at September 30, 2022 and 2021, respectively. Our total available liquidity at September 30, 2022 was affected, in part, by $398 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. The Company cannot predict the duration or total magnitude of the uncertain economic factors mentioned above and the total effects they 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, 2022.
We depend on both internal and external sources of liquidity to provide funds for working capital and to fund capital requirements. Our short-term cash requirements not met by cash from operations are generally satisfied with borrowings under credit facilities and, in the case of Midstream & Marketing, also from a Receivables Facility. Long-term cash requirements are generally met through the issuance of long-term debt or equity securities. We believe that each of our business units has sufficient liquidity in the forms of cash and cash equivalents on hand; cash expected to be generated from operations; credit facility and Receivables Facility borrowing capacity; and the ability to obtain long-term financing to meet anticipated contractual and projected cash commitments. Issuances of debt and equity securities in the capital markets and additional credit facilities may not, however, be available to us on acceptable terms.
The primary sources of UGI’s cash and cash equivalents are the dividends and other cash payments made to UGI or its corporate subsidiaries by its principal business units. Our cash and cash equivalents totaled $405 million at September 30, 2022, compared with $855 million at September 30, 2021. Our cash and cash equivalents at September 30, 2022 reflects the previously mentioned 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 and volatility in commodity prices during Fiscal 2022 and 2021. This cash could be returned to such counterparties as commodity prices and their impact on 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, 2022 and 2021, our cash and cash equivalents totaled $140 million and $172 million, respectively. Such cash is available to pay dividends on UGI Common Stock and for investment purposes.
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During Fiscal 2022 and Fiscal 2021, our principal business units paid cash dividends and made other cash payments to UGI and its subsidiaries as follows:
Midstream & Marketing — 25
Utilities — 35
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 2022 and Fiscal 2021 were as follows:
On November 17, 2022, UGI’s Board of Directors declared a cash dividend equal to $0.360 per common share. The dividend will be payable on January 1, 2023, to shareholders of record on December 15, 2022.
Repurchases of Common Stock
During Fiscal 2022, the Company repurchased 900,000 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, 2022 and 2021, comprised the following:
Long-term debt (including current maturities):
Unamortized debt issuance costs (12) (6) (7) (6) (2) (33) (42)
Significant Financing Activities
Mountaineer Credit Agreement.On October 20, 2022, Mountaineer entered into the Mountaineer 2023 Credit Agreement, as borrower, with a group of lenders. The Mountaineer 2023 Credit Agreement amends and restates a previous credit agreement and provides for borrowings up to $150 million, including a $20 million sublimit for letters of credit. Mountaineer may request an increase in the amount of loan commitments to a maximum aggregate amount of $250 million, subject to certain terms and conditions. Borrowings under the Mountaineer 2023 Credit Agreement can be used to finance the working capital needs of Mountaineer and for general corporate purposes. The Mountaineer 2023 Credit Agreement is scheduled to expire in November 2024, with an option to extend the maturity date.
AmeriGas Propane. On September 28, 2022, AmeriGas Propane entered into the 2022 AmeriGas OLP Credit Agreement, as borrower, with a group of lenders. In connection with the entering into of the 2022 AmeriGas OLP Credit Agreement, the borrower paid off in full and terminated the existing AmeriGas OLP Credit Agreement. The 2022 AmeriGas OLP Credit Agreement provides for borrowings up to $600 million, including a $100 million sublimit for letters of credit. AmeriGas Propane may request an increase in the amount of loan commitments under the 2022 AmeriGas OLP Credit Agreement to a maximum aggregate amount of $900 million, subject to certain terms and conditions. Borrowings under the 2022 AmeriGas OLP Credit Agreement can be used to fund acquisitions and investments and for general corporate purposes. The 2022 AmeriGas OLP Credit Agreement is scheduled to expire in September 2026.
UGI Utilities. On July 12, 2022, UGI Utilities amended the Utilities Term Loan. The amendment extended the maturity date of the loan from October 2022 to July 2027, among other things. The current amount outstanding under the Utilities Term Loan remains unchanged and is payable in quarterly installments of $2 million, with the balance of the principal being due and payable in full at maturity. We have entered into an interest rate swap that will generally fix the underlying market-based interest rate on this variable-rate loan through June 2026.
On June 30, 2022, UGI Utilities entered into a note purchase agreement which provides for the private placement of (1) $90 million aggregate principal amount of 4.75% Senior Notes due July 15, 2032 and (2) $85 million aggregate principal amount of 4.99% Senior Notes due September 15, 2052. On July 15, 2022, UGI Utilities issued $90 million aggregate principal amount of 4.75% Senior Notes pursuant to the note purchase agreement. On September 15, 2022, UGI Utilities issued $85 million aggregate principal amount of 4.99% Senior Notes pursuant to the note purchase agreement. The net proceeds from the issuance of the 4.75% Senior Notes and 4.99% Senior Notes were used to reduce short-term borrowings and for general corporate purposes.
Mountaineer. On June 30, 2022, Mountaineer entered into a note purchase agreement which provides for the private placement of $40 million aggregate principal amount of 4.49% Senior Notes due August 16, 2052. On August 16, 2022, Mountaineer issued $40 million aggregate principal amount of 4.49% Senior Notes pursuant to the note purchase agreement. The net proceeds from the issuance of the 4.49% Senior Notes were used to reduce short-term borrowings and for general corporate purposes.
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UGI International. On December 7, 2021, UGI International, LLC issued, in an underwritten private placement, €400 million principal amount of the UGI International 2.50% Senior Notes due December 1, 2029. The UGI International 2.50% Senior Notes rank equal in right of payment with indebtedness issued under the UGI International Credit Facilities Agreement. The net proceeds from the UGI International 2.50% Senior Notes were used (1) to repay all of the UGI International 3.25% Senior Notes due November 1, 2025 and associated fees and expenses and (2) for general corporate purposes.
Credit Facilities
Information about the Company’s principal credit agreements (excluding Energy Services’ Receivables Facility, which is discussed below) as of September 30, 2022 and 2021, 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)Permits UGI International, LLC to borrow in euros or USD.
(b)Borrowings outstanding have been classified as “Long-term debt” on the Consolidated Balance Sheets. Subsequent to September 30, 2022 and 2021, the Company repaid $87 million and $70 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 are as follows:
(Currency in millions) Average Peak Average Peak
UGI International, LLC € 77 € 250 € — € —
Energy Services $ — $ — $ 3 $ 32
Receivables Facility. Energy Services also has a Receivables Facility with an issuer of receivables-backed commercial paper. On October 21, 2022, the expiration date of the Receivables Facility was extended to October 20, 2023. The Receivables Facility provides Energy Services with the ability to borrow up to $150 million of eligible receivables during the period October 21, 2022 through April 30, 2023, and up to $75 million of eligible receivables during the period May 1, 2023 through October 20, 2023. Energy Services uses the Receivables Facility to fund working capital, margin calls under commodity futures contracts, capital expenditures, dividends and for general corporate purposes.
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At September 30, 2022 and 2021, the outstanding balance of trade receivables was $101 million and $61 million, respectively, none of which was sold to the bank. During Fiscal 2022 and Fiscal 2021, peak sales of receivables were $98 million and $87 million, respectively. During Fiscal 2022 and Fiscal 2021, average daily amounts sold were $2 million and $21 million, respectively.
For further information on the Company’s long-term debt and credit facilities, see Note 6 to Consolidated Financial Statements.
Cash Flows
Due to the seasonal nature of the Company’s businesses, cash flows from operating activities are generally strongest during the second and third fiscal quarters when customers pay for natural gas, LPG, electricity and other energy products and services consumed during the peak heating season months. Conversely, operating cash flows are generally at their lowest levels during the fourth and first fiscal quarters when the Company’s investment in working capital, principally inventories and accounts receivable, is generally greatest.
Operating Activities:
Year-to-year variations in our cash flows from operating activities can be significantly affected by changes in operating working capital, especially during periods with significant changes in energy commodity prices. Cash flows from operating activities in Fiscal 2022 and Fiscal 2021 were $716 million and $1,481 million, respectively. Cash flows from operating activities before changes in operating working capital were $1,269 million in Fiscal 2022 and $1,200 million in Fiscal 2021. Changes in operating working capital provided (used) operating cash flow of $(553) million in Fiscal 2022 and $281 million in Fiscal 2021. The significant increase in cash used from changes in operating working capital principally reflects derivative instruments collateral repayments of $9 million in Fiscal 2022 compared to collateral received of $472 million in Fiscal 2021 reflecting the volatility in energy commodity prices and the timing of associated collateral receipts and payments; lower cash generated from changes in accounts payable due in part to the timing of payments and the impacts of changes in commodity energy prices; and an increase in accounts receivable principally reflecting the effects of higher energy prices on receivable balances.
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 $804 million in Fiscal 2022 and $690 million in Fiscal 2021. Cash payments for property, plant and equipment were higher in Fiscal 2022 compared with Fiscal 2021 reflecting, in part, higher capital expenditures at Utilities including the full-year impact of Mountaineer. Cash used for acquisitions of businesses and assets in Fiscal 2022 includes the Stonehenge Acquisition and the Pennant Acquisition in which the Company acquired the 53% interest in Pennant it did not already own. 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 was $47 million in Fiscal 2022 including investments in biomass and renewable energy projects at our Midstream & Marketing reportable segment and an investment in a renewable energy joint venture at UGI International. Cash inflows associated with investing activities during Fiscal 2022 includes cash received from the settlement of certain forward foreign currency contracts previously designated as net investment hedges. Fiscal 2021 includes cash contributions to Pine Run 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 used by financing activities was $51 million in Fiscal 2022 compared to cash flow provided by financing activities of $166 million in Fiscal 2021. During Fiscal 2022, UGI International issued €400 million principal amount of senior notes and Utilities issued a combined $215 million principal amount of senior notes. Proceeds from the UGI International senior notes were principally used to reduce existing long-term debt while proceeds from the Utilities borrowings were used to reduce short-term borrowings and for general corporate purposes. 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. During Fiscal 2021, Utilities issued $175 million of senior notes. In Fiscal 2022 and Fiscal 2021, the Company had net borrowings and (repayments) on credit facilities and the Receivables Facility of $1 million and $(35) million, respectively. Fiscal 2022 cash flow used by financing activities also includes $38 million of cash paid to repurchase 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 2022 and Fiscal 2021. We also provide amounts we expect to spend in Fiscal 2023. We expect to finance a substantial portion of our Fiscal 2023 capital expenditures from cash generated by operations and cash on hand.
Corporate & Other 20 — —
The increase in capital expenditures at Utilities during Fiscal 2022 reflects the continued execution on its infrastructure replacement and system betterment program as well as the full year impact of Mountaineer. Increased levels of capital expenditures estimated in Fiscal 2023 reflect natural gas infrastructure expansion and investments in renewable energy projects at Midstream & Marketing and UGI International; replacement and betterment projects at UGI Utilities; and expansion of Mountaineer’s capital expenditure programs.
Contractual Cash Obligations and Commitments
The Company has contractual cash obligations that extend beyond Fiscal 2022. The following table presents contractual cash obligations with non-affiliates under agreements existing as of September 30, 2022:
Payments Due by Period
Short-term borrowings (a) $ 368 $ 368 $ — $ — $ —
AmeriGas Propane supply contracts 13 13 — — —
UGI International supply contracts 238 238 — — —
(a)Based upon stated maturity dates for debt outstanding at September 30, 2022.
(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, 2022.
(d)Represents the sum of amounts due if derivative instrument liabilities were settled at the September 30, 2022 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, 2022, 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
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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 “U.S. Pension Plans”) in Fiscal 2023 are not expected to be material. Required minimum contributions to the U.S. Pension Plans in years beyond Fiscal 2023 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, and certain of UGI’s other domestic wholly owned subsidiaries, and (2) a defined benefit pension plan for substantially all Mountaineer employees. The fair values of the U.S. Pension Plans’ assets totaled $525 million and $717 million at September 30, 2022 and 2021, respectively. At September 30, 2022 and 2021, the underfunded positions of the U.S. Pension Plans, defined as the excess of the PBO over the U.S. Pension Plans’ assets, were $82 million and $109 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 2023 are not expected to be material. Pre-tax pension cost associated with the U.S. Pension Plans in Fiscal 2022 was not material. Pre-tax pension cost associated with the U.S. Pension Plans in Fiscal 2023 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, 2022, we have recorded after-tax charges to UGI Corporation’s stockholders’ equity of $14 million and recorded regulatory assets totaling $114 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 2022 and Fiscal 2021, we did not enter into any related-party transactions that had a material effect on our financial condition, results of operations or cash flows.
Off-Balance-Sheet Arrangements
UGI primarily enters into guarantee arrangements on behalf of its consolidated subsidiaries. These arrangements are not subject to the recognition and measurement guidance relating to guarantees under GAAP.
We do not have any off-balance-sheet arrangements that are expected to have a material effect on our financial condition, change in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Utility Regulatory Matters
Base Rate Filings. On January 28, 2022, PA Gas Utility filed a request with the PAPUC to increase its base operating revenues for residential, commercial and industrial customers by $83 million annually. On September 15, 2022, the PAPUC issued a final order approving a settlement providing for a $49 million annual base distribution rate increase for PA Gas Utility, through a phased approach, with $38 million beginning October 29, 2022 and an additional $11 million beginning October 1, 2023. In accordance with the terms of the final order, PA Gas Utility will not be permitted to file a rate case prior to January 1, 2024. Also in accordance with the terms of the final order, PA Gas Utility is authorized to implement a weather normalization adjustment rider as a 5-year pilot program beginning on the effective date of the new rates. Under this rider, customer billings for distribution services will be adjusted monthly to reflect normal weather conditions if weather deviates more than 3% from normal. Additionally, under the terms of the final order, PA Gas Utility will be authorized to implement a DSIC once its total property, plant and equipment less accumulated depreciation reaches $3,368 million (which threshold was achieved in September 2022).
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, PA 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 permitted PA Gas
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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, PA Gas Utility was authorized to implement a DSIC once PA Gas Utility total property, plant and equipment less accumulated depreciation reached $2,875 million. This threshold was achieved in December 2020, and PA Gas Utility implemented a DSIC effective April 1, 2021. The PAPUC’s final order also included 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 permitted PA 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 PA Gas Utility base rate case, to be recovered and amortized over a 10-year period. In accordance with the terms of the final order, PA Gas Utility was not permitted to file a rate case prior to January 1, 2022.
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 and option 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.
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 Utilities operations. PA 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 PA 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 a substantial portion of anticipated volumes under 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.
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Interest Rate Risk
We have both fixed-rate and variable-rate debt. Changes in interest rates impact the cash flows of variable-rate debt but generally do not impact their fair value. Conversely, changes in interest rates impact the fair value of fixed-rate debt but do not impact their cash flows.
Our variable-rate debt at September 30, 2022, includes revolving credit facility borrowings and variable-rate term loans at UGI International, Utilities, Energy Services and UGI Corporation. These debt agreements have interest rates that are generally indexed to short-term market interest rates. We have entered into pay-fixed, receive-variable interest rate swap agreements on all or a significant portion of the term loans’ principal balances and all or a significant portion of the term loans’ tenor. We have designated these interest rate swaps as cash flow hedges. At September 30, 2022, combined borrowings outstanding under variable-rate debt agreements, excluding the previously mentioned effectively fixed-rate debt, totaled $800 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 2022 interest expense by approximately $8 million. The remainder of our debt outstanding is subject to fixed rates of interest. A 100 basis point increase in market interest rates would result in decreases in the fair value of this fixed-rate debt of approximately $165 million at September 30, 2022. A 100 basis point decrease in market interest rates would result in increases in the fair value of this fixed-rate debt of approximately $265 million at September 30, 2022.
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 USD versus the euro and, to a lesser extent, the USD versus the British pound sterling. The USD 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, including anticipated foreign currency denominated dividends. 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 USD would reduce their aggregate net book value at September 30, 2022, by approximately $180 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 USD 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, 2022, 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 $2,418 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, 2022, we had received cash collateral from derivative instrument counterparties totaling $398 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
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of a downgrade of the Partnership’s debt rating. At September 30, 2022, 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, 2022 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.
Asset (Liability)
(Millions of dollars) Fair Value Change inFair Value
Interest rate risk (2) $ 66 $ (11)
Foreign currency exchange rate risk (3) $ 117 $ (47)
(1)Change in fair value represents a 10% adverse change in the market prices of certain commodities