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 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% of UGI International’s annual retail LPG volume, 55% to 65% of Energy Services’ retail natural gas volume and 60% 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. 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, fires 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”;
•“Our operations may be adversely affected by competition from other energy sources”;
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•“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 experienced either no or modest growth (or decline) the past few years, and we do not expect significant changes to total demand 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 successfully execute on strategic initiatives and achieve our long-term goals may be adversely affected if we are not successful in identifying and completing strategic transactions and investments, or if we are unable to realize the anticipated benefits from such strategic transactions and investments. As part of our business strategy, we have pursued, and may continue to pursue, acquisitions, joint ventures, partnerships, divestitures, dispositions, and other strategic transactions and relationships with third parties. We have grown the Company through investments in the U.S. and in international markets, and have expanded our presence in the renewable energy industry. We may choose to finance any 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, including 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. We also may experience integration difficulties, including in implementing new systems and processes and with integrating systems and processes of companies with complex operations, which can result in inconsistencies in standards, controls, procedures and policies and may increase the risk that our internal controls are found to be ineffective. 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.
Similarly, any divestitures or dispositions of assets have inherent risks, including the inability to find potential buyers upon favorable terms, expenses associated with a divestiture, the possibility that any anticipated sale will be delayed or will not occur, the potential impact on our cash flows and results of operations, the potential delay or failure to realize the perceived strategic or financial benefits of the divestment or disposition, difficulties in the separation of operations, services, information technology, products and personnel, potential loss of customers or employees, exposure to unanticipated liabilities, unexpected costs associated with such separation, diversion of management’s attention from other business concerns and potential post-closing claims for alleged breaches of related agreements, indemnification or other disputes. Further, any cost saving measures, restructurings and divestitures may result in workforce reduction and consolidation of our facilities. As a result of these actions, we may experience a loss of continuity, loss of accumulated knowledge, disruptions to our operations and inefficiency during transitional periods. These actions could also impact employee retention. In addition, we cannot be sure that these actions will be as successful in reducing our overall expenses as we expect or that we do not forego future business opportunities as a result of these actions.
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The failure to successfully identify, complete, implement and manage business combinations, acquisitions, divestitures and investments intended to advance our business strategy could have an adverse impact on our business, cash flows, financial condition and results of operations.
Further, our long-term goal to grow our earnings per share is driven by disciplined investments and is impacted by, among other things, our ability to increase investments in our regulated utilities businesses and generate significant fee-based income in our Midstream and Marketing operations. Other factors, assumptions and beliefs of management and our Board regarding external factors, including the global economy and regulatory developments, on which our long-term goals were based may also prove to differ materially from actual future results. Accordingly, we may not achieve our stated long-term goals, or our stated long-term goals may be negatively revised, as a result of less than expected progress toward achieving these goals.
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 and external factors. 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 regulators may offer energy conservation incentives or otherwise enact laws and regulations that may require mandatory conservation 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. For example, certain EU countries have adopted legislation mandating the replacement of existing fossil-fuel based heating systems with lower carbon solutions and requiring newly installed heating systems to operate with renewable energy sources. 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 or regulatory mandates or incentives, 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. 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.
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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 review of potential strategic alternatives may not result in the approval or completion of any specific transaction or outcome, and the process of reviewing strategic alternatives or the outcome could adversely affect our business, financial condition, operations and stock price. In August 2023, we announced that our Board of Directors initiated a process to evaluate potential strategic alternatives, including cost optimization initiatives, with the intent to unlock and maximize shareholder value. Our Board has not yet established a timeline for completion of the strategic review process, and there is no assurance that the process will result in the approval or completion of any specific transaction or outcome. We are actively working with financial and legal advisors in connection with our review of potential strategic alternatives.
Any potential transaction or other strategic alternative would be dependent on a number of factors that may be beyond our control, including, among other things, market conditions, industry trends, regulatory approvals, and the availability of financing for a potential transaction on reasonable terms. The process of reviewing potential strategic alternatives, including optimization of our cost structure, is time consuming, may divert the attention of our Board and management from core business operations, and may be distracting and disruptive to our business operations and long-term planning, which may cause concern to our current or potential customers, employees, investors, strategic partners and other stakeholders, and may have a material impact on our business and operating results or our internal controls and procedures, or result in increased volatility in our share price. We may incur substantial expenses associated with identifying, evaluating and negotiating potential strategic alternatives. There can be no assurance that any potential transaction or other strategic alternative, if consummated, will provide greater value to our shareholders than that reflected in the current price of our common stock. Additionally, the outcome of the strategic review may adversely impact our business, cash flows, operations, financial condition and stock price. Until the review process is concluded or developments on the progress of the strategic review are disclosed, perceived uncertainties related to our future may result in the loss of potential business opportunities, volatility in the market price of our common stock, and difficulty attracting and retaining qualified employees and business partners. Similarly, activist investors may engage in proxy solicitations or advance shareholder proposals, or otherwise attempt to affect changes and assert influence on our Board of Directors and management, which could negatively impact our business and operations and cause a distraction to our Board, management and employees.
Our information technology systems and those of our third-party vendors have been the target of cybersecurity 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 cybersecurity 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.
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Cybersecurity 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 cybersecurity 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 full-time or on a hybrid basis; as a result, our cybersecurity 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 cybersecurity 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, an attack could provide an intruder with the ability to control or alter our pipeline operations. Such an act could result in critical pipeline failures.
The efficient execution of our businesses is dependent upon the proper design, implementation and functioning of its current and future internal systems, such as the information technology systems that support our underlying business processes. Any significant failure or malfunction of such information technology systems may result in disruptions of our operations. In addition, the effectiveness of our internal controls could be adversely affected if we encounter unforeseen problems with respect to the operation of our information technology systems.
Moreover, as cybersecurity incidents increase in frequency and magnitude, we may be unable to obtain cybersecurity 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;
•disagreements and disputes with our employees represented by a works council or union;
•strikes and work stoppages by the employees of the Company or our suppliers and vendors;
•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 reduction 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
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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 decrease resulted in a significant increase in natural gas prices in Europe. Although the natural gas prices have declined from the unprecedented highs of 2022, in response to the significant price increases experienced, refineries still see an incentive to, and are substituting a portion of their natural gas refinery fuels with, LPG leading to a decrease in the availability of inland LPG 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 European energy crisis and the corresponding response by refineries and gas processing plants will continue in Fiscal 2024, leading to continued commodity supply challenges in some markets, higher commodity costs that may not be able to be absorbed by our customers, particularly in the Nordic countries 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, have had, and could continue to have, an 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. 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 trade measures taken by Russia or other countries in response, could have a material impact on our operating results, financial condition and cash flows.
Our energy marketing business in Europe may continue to be 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 relative pricing and periods of market stability. Since the end of 2021, the European energy markets have been in an unprecedented state of volatility. The war between Russia and Ukraine and the resulting substantial reduction of natural gas imports from Russia to Europe have led to significant uncertainty in supply, including price volatility of both wholesale gas and power, and have created new risks that we have experienced and expect to continue to experience 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 adjust for shifting volumes due to excess or shortage of consumption 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 and volume deviation costs, including balancing costs, onto customers due, among other
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things, to timing, regulatory and contractual constraints, (iv) the ability to maintain sourcing services to customers due to the margining and liquidity constraints as well as maximum trading limits implemented by both clearing banks and wholesale counterparties on energy suppliers, and (v) the ability to economically support fixed and variable price products while offering competitive services in the market. As a result, UGI considered all scenarios with respect to the future of its energy marketing business in Europe and decided to exit this market. UGI sold its energy marketing businesses in the United Kingdom, France and Belgium and UGI continues to make progress on the wind-down of its energy marketing business in the Netherlands. 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 2023, 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 2023, UGI International’s business in the United Kingdom purchased approximately 76% of its LPG needs from two suppliers and, in Italy, approximately 72% 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.
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 negotiated prices based on the current industry index 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.
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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 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 has been and continues to be 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, have negatively impacted, and may continue to 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. We continue to assess the impact of various U.S. federal, state, local and international legislative proposals that could result in a material increase to our U.S. federal, state, local and/or international taxes. We cannot predict what impact, if any, changes in federal policy, including tax policies, will have on our industry or whether any specific legislation will be enacted or the terms of any such legislation. However, if such proposals were to be enacted, or if modifications were to be made to certain existing regulations, the consequences could have a material adverse impact on us, including increasing our tax burden, increasing our cost of tax compliance or otherwise adversely affecting our financial position, results of operations, cash flows and liquidity. Changes in applicable U.S. or foreign tax laws and regulations, or their interpretation and application, including the possibility of retroactive effect, could affect our tax expense and profitability. Such impact may also be affected positively or negatively by subsequent potential judicial interpretation or related regulation or legislation which cannot be predicted with certainty.
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
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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.
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, including artificial intelligence, 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 and U.S. privacy law compliance program, emerging and changing data privacy and data protection requirements as well as other new and upcoming European and U.S. federal and state privacy and cybersecurity 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, including class actions. 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 supporting 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. 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. Additionally, uncertainty as a result of our ongoing review of strategic alternatives could negatively impact our ability to recruit and retain key employees. 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.
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 (including conflict in the Middle East), 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
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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, 2023, we had total indebtedness of approximately $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, 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.
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An impairment of our assets could adversely affect our financial condition and results of operations. We test goodwill, intangible, and other long-lived assets for impairment annually or whenever events or circumstances indicate impairment may have occurred. To the extent the value of goodwill or long-lived assets becomes impaired, the Company may be required to incur impairment charges that could have a material impact on our results of operations. The testing of assets for impairment requires us to make significant estimates about our future events, including our performance and projected cash flows, as well as other assumptions. These estimates can be affected by numerous factors, including developments in the global economic environment, including the prospect of higher interest rates, developments in regulatory, industry and market conditions, changes in business operations, changes in competition or changes in technologies. Any changes in key assumptions, or actual performance compared with key assumptions, about our business and its future prospects could affect the fair value of one or more of our assets, which may result in an impairment charge. We have incurred and may continue to incur impairment charges on certain of our assets that could have a material impact on our results of operations.
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, capital market conditions and interest rates and other business risks impacting liquidity levels. 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 factors beyond our control, including, among other things, commodity price volatility and 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.
We depend on our intellectual property and failure to protect that intellectual property could adversely affect us. We seek trademark protection for our brands in each of our businesses, and we invest significant resources in developing our business brands. Failure to maintain our trademarks and brands could adversely affect our customer-facing businesses and our operational results.
Declines in the stock market 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.
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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 16 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 10, 2023, we had 6,313 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, 2023. As of September 30, 2023, the Company had 6.50 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 2023.
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, 2018, through September 30, 2023. 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 2023 and Fiscal 2022, and our financial condition. For discussion of our results of operations and cash flows for Fiscal 2022 compared with Fiscal 2021, refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Fiscal 2022 Annual Report on Form 10-K, filed with the SEC on November 21, 2022. 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 22 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
Review of Strategic Alternatives. In August 2023, the Company announced the commencement of a strategic review, focused on the LPG businesses, intending to unlock and maximize shareholder value. The Company is exploring a full range of options with the goal of reducing UGI’s earnings volatility and strengthening our balance sheet. In conjunction with the strategic review, the Company is also pursuing actions to optimize its cost structure and re-align its capital allocation priorities. The Company expects to continue on its existing plans while the review of strategic alternatives is ongoing.
Impairment of Goodwill. During the quarter ended June 30, 2023, the Company identified interim impairment indicators related to goodwill within the AmeriGas Propane reporting unit: (1) AmeriGas Partners issued $500 million of Senior Notes at an interest rate of 9.375%, which was significantly higher than the interest rates on the other AmeriGas Propane debt obligations; and (2) financial projections for the AmeriGas Propane reporting unit were reduced significantly compared to previous forecasts following declines in gross margins and customer retention and higher operating expenses. The Company concluded that these events constituted triggering events that indicate that the AmeriGas Propane goodwill may be impaired and, as such, performed an interim impairment test of its goodwill as of May 31, 2023.
Based on such impairment test, the estimated fair value of the AmeriGas Propane reporting unit was determined to be less than its carrying value. As a result, the Company recorded a non-cash pre-tax goodwill impairment charge of $656 million, included in “Impairment of goodwill” on the Consolidated Statement of Income, to reduce the carrying value of AmeriGas Propane to its fair value.
The performance of the AmeriGas Propane reporting unit and the potential for future developments in the global economic environment, including the prospect of higher interest rates, introduces a heightened risk for additional impairment in the AmeriGas Propane reporting unit. If there is continued deterioration in the results of operations, a portion or all of the remaining recorded goodwill for the AmeriGas Propane reporting unit, which was $1.3 billion as of September 30, 2023, could be subject to further impairment.
See Note 12 to Consolidated Financial Statements for additional information.
UGI International Energy Marketing Transactions
During Fiscal 2023 and in October 2023, the Company entered into a number of transactions pursuant to its previously announced decision to exit its European energy marketing business. The European energy marketing business primarily markets natural gas and electricity to customers through third-party distribution systems in France, the Netherlands and, prior to its sales, in Belgium and the United Kingdom.
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France. In October 2023, UGI International, through a wholly-owned subsidiary, sold substantially all of its energy marketing business located in France for a net cash payment to the buyer of $25 million (which approximates a pre-tax loss) subject to certain adjustments principally related to the pending transfer of certain customer contracts. As of September 30, 2023, the $25 million cash to be paid to the buyer in October 2023 had been placed in escrow and is reflected in “Other current assets” on the September 30, 2023 Consolidated Balance Sheet. The carrying values of the assets and liabilities associated with this business, principally comprising certain commodity derivative instruments, energy certificates and certain working capital, have been classified as held-for-sale on the September 30, 2023 Consolidated Balance Sheet. The Company did not recognize any impairment associated with the assets held for sale in Fiscal 2023 because, in accordance with our policy related to such assets, any impairment is limited to the disposal group’s long-lived assets, and such assets were not material.
Belgium. In September 2023, UGI International, through a wholly-owned subsidiary, sold its energy marketing business located in Belgium for a net cash payment to the buyer of $3 million. Pursuant to the sale agreement, the Company transferred to the buyer certain assets, principally comprising customer and energy broker contracts. In conjunction with the sale, the Company recorded a pre-tax loss of $6 million ($5 million after-tax) which amount includes the net payment to the buyer, the write-off of certain prepaid energy broker payments and associated transaction costs and fees. The loss is reflected in “Loss on disposal of UGI International energy marketing business” on the Consolidated Statements of Income.
United Kingdom. In October 2022, UGI International, through a wholly-owned subsidiary, sold its natural gas marketing business located in the U.K. for a net cash payment to the buyer of $19 million which includes certain working capital adjustments. In conjunction with the sale, the Company recorded a pre-tax loss of $215 million ($151 million after-tax) substantially all of which loss was due to the non-cash transfer of commodity derivative instruments associated with the business. The loss is reflected in “Loss on disposal of UGI International energy marketing business” on the Consolidated Statements of Income. At the date of closing of the sale, these commodity derivative instruments had a net carrying value of $206 million which is attributable to net unrealized gains on such instruments. At September 30, 2022, these derivative instruments were classified as held-for-sale assets and liabilities on the Consolidated Balance Sheets and had a net carrying value of $276 million. The change in the carrying value of these derivative instruments between September 30, 2022 and October 21, 2022 resulted from changes in their fair values during that period.
Netherlands. In September 2023, a substantial number of DVEP’s customers agreed to modify their energy marketing contracts whereby the Company will continue to provide for the delivery of electricity and natural gas at fixed prices through December 31, 2023 but the Company’s obligations to provide future services will be terminated effective January 1, 2024. As consideration for the early termination of such contracts, the Company has agreed to make cash payments to the customers equal to the fair values of specific commodity derivative instruments associated with periods after December 31, 2023. The carrying values of these commodity derivative instruments are subject to change until such contracts are settled, and the cash payments are made, during the first quarter of Fiscal 2024. At September 30, 2023, the carrying value of these commodity derivative instruments was $44 million. The early termination agreements with DVEP customers are considered contract modifications and the cash consideration to be paid to these customers has been, and will be, reflected as a reduction in revenues on a pro-rata basis, over the remaining performance period of such agreements through December 31, 2023. Accordingly, during the fourth quarter of Fiscal 2023, the Company reduced its revenues from these customers by $4 million, which represents the pro-rated performance obligation through September 30, 2023 from the aforementioned $44 million.
In conjunction with the wind-down of its European energy marketing business, in July 2023, DVEP agreed to sell a substantial portion of its power purchase agreements to a third party for a cash payment to the buyer of $6 million. The closing of the sale is expected to occur during the first quarter of Fiscal 2024. The loss from the sale is not expected to be material.
During the first quarter of Fiscal 2023, the Company recorded a $19 million pre-tax impairment charge to reduce the carrying values of certain assets associated with its energy marketing business in the Netherlands, comprising property, plant and equipment and intangible assets. The impairment charge is reflected in “Operating and administrative expenses” on the Consolidated Statements of Income and included in the UGI International reportable segment.
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Global Macroeconomic Conditions
Beginning in Fiscal 2021 and continuing into Fiscal 2023, global commodity and labor markets have experienced significant inflationary pressures attributable to various economic and political factors, including, among others: supply chain issues including those associated with labor shortages; significant increase and volatility in energy commodity prices; and geopolitical and regulatory conditions resulting from the war between Russia and Ukraine. These factors have contributed to inflationary pressures as evidenced by increases in various consumer price indices. In response to these inflationary pressures, central banks in the U.S. and Europe increased interest rates during Fiscal 2022 and Fiscal 2023. In addition, during the last several years, we have experienced significant volatility in energy commodity prices, particularly in LPG, natural gas and electricity prices, which, have resulted in substantial fluctuations in the fair values of our commodity derivative instruments. These inflationary pressures and commodity price fluctuations have resulted in, among other things, fluctuations in inventory and cost of sales, and increases in certain operating and distribution expenses across all of our businesses. Commodity price fluctuations have also significantly affected the cash collateral deposit requirements of our derivative instrument counterparties and the restricted cash required to be held in our derivative broker and clearing institution accounts. We cannot predict the duration or total magnitude of these conditions and the effects such conditions may have on our future business, financial results, financial position, liquidity and cash flows. However, we continue to monitor and respond to these global economic and geopolitical conditions and remain focused on managing our financial condition and liquidity as these conditions continue to evolve.
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.
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The following tables reflect the adjustments referred to above and reconcile net income (loss) 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:
Year Ended September 30,
(Millions of dollars, except per share amounts) 2023 2022
Adjusted net income (loss) attributable to UGI Corporation:
AmeriGas Propane $ 71 $ 112
Net (loss) income attributable to UGI Corporation (1,502) 1,073
Loss on extinguishments of debt (net of tax of $(2) and $(3), respectively) 7 8
Business transformation expenses (net of tax of $(3) and $(2), respectively) 7 7
Restructuring costs (net of tax of $0 and $(8), respectively) — 21
Impact of change in tax law — (19)
Total adjustments (a) (b) 2,115 (447)
Adjusted net income attributable to UGI Corporation $ 613 $ 626
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Year Ended September 30,
Adjusted diluted earnings per share:
Midstream & Marketing 0.89 0.76
(Loss) earnings per share - diluted (c) (7.16) 4.97
Unrealized losses (gains) on foreign currency derivative instruments 0.13 (0.17)
Loss associated with impairment of AmeriGas Propane goodwill 3.14 —
Loss on extinguishments of debt 0.03 0.03
Business transformation expenses 0.03 0.03
AmeriGas operations enhancement for growth project 0.09 0.02
Impairments of certain equity method investments — 0.10
Restructuring costs — 0.10
Net gain on sale of UGI headquarters building (0.05) —
Impact of change in tax law — (0.09)
Adjusted diluted earnings per share (c) $ 2.84 $ 2.90
(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 22 to Consolidated Financial Statements for additional information related to these adjustments, as well as other items included within Corporate & Other.
(b)Income taxes associated with pre-tax adjustments determined using statutory business unit tax rates.
(c)The loss per share for Fiscal 2023, was determined excluding the effect of 6.13 million dilutive shares as the impact of such shares would have been antidilutive due to the net loss for the period, while the adjusted earnings per share for Fiscal 2023, was determined based upon fully diluted shares of 215.94 million.
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Fiscal 2023 Compared with Fiscal 2022
Discussion. Net (loss) income attributable to UGI Corporation was $(1,502) million in Fiscal 2023 (equal to $(7.16) per diluted share) compared to $1,073 million in Fiscal 2022 (equal to $4.97 per diluted share). These results include net (losses) gains from changes in unrealized commodity derivative instruments and certain foreign currency derivative instruments of $(1,252) million and $494 million in Fiscal 2023 and Fiscal 2022, respectively. The higher losses from changes in commodity derivative instruments in Fiscal 2023 principally reflects significant declines in commodity energy prices in Europe following unprecedented increases in such prices during Fiscal 2022.
Net loss attributable to UGI Corporation in Fiscal 2023 also includes (1) a $660 million loss associated with impairment of AmeriGas Propane goodwill; (2) $181 million costs associated with exit of our UGI International energy marketing business in Europe, principally reflecting loss on the sale of the energy marketing business located in the U.K. and Belgium and wind-down activities in the Netherlands; (3) external advisory fees of $18 million associated with AmeriGas operations enhancement for growth project; (4) a $10 million net gain on sale of UGI Corporation’s headquarters building; (5) loss on extinguishment of debt of $7 million at AmeriGas Propane; and (6) business transformation expenses of $7 million associated with corporate support functions.
Net loss attributable to UGI Corporation in Fiscal 2022 also includes (1) impairments of certain equity method investments of $22 million; (2) restructuring costs of $21 million largely attributable to reductions in workforce and related costs; (3) $19 million of income tax benefits related to tax law changes; (4) loss on extinguishment of debt of $8 million at UGI International; (5) business transformation expenses of $7 million associated with corporate support functions; (6) $4 million costs associated with exit of our UGI International energy marketing business in the U.K.; (7) external advisory fees of $3 million associated with AmeriGas operations enhancement for growth project; and (8) acquisition and integration expenses of $1 million associated with the Mountaineer Acquisition.
Adjusted net income attributable to UGI Corporation for Fiscal 2023 was $613 million (equal to $2.84 per diluted share) compared to adjusted net income attributable to UGI Corporation for Fiscal 2022 of $626 million (equal to $2.90 per diluted share). The decrease in adjusted net income attributable to UGI Corporation during Fiscal 2023 reflects lower earnings contributions from our LPG businesses, primarily AmeriGas Propane. Such decrease was partially offset by higher earnings contributions from our Midstream & Marketing and Utilities segments. In Fiscal 2023, temperatures in all of our business segments, except for AmeriGas Propane, were warmer than the prior year.
AmeriGas Propane’s adjusted net income attributable to UGI Corporation decreased $41 million during Fiscal 2023. This decrease principally reflects higher operating and administrative expenses primarily resulting from, among other things, higher vehicle expenses, higher overtime and other employee-related costs associated with distribution activity, and the effects of continuing inflationary pressures. These factors were partially offset by higher gains on sales of fixed assets.
UGI International’s adjusted net income attributable to UGI Corporation decreased $3 million during Fiscal 2023. This decrease mainly reflects the translation effects of weaker foreign currencies. UGI International operating results principally reflect (1) lower total LPG margin principally due to the effects of the lower LPG retail volumes sold attributable to the significantly warmer weather and lower residential LPG consumption resulting from energy conservation measures in Europe due in large part to the war between Ukraine and Russia; and (2) higher operating and administrative expenses primarily resulting from the effects of continuing inflationary pressures. These decreases were partially offset by higher margin from our natural gas energy marketing activities and higher retail LPG average unit margins attributable to strong margin management efforts and lower commodity prices.
Midstream & Marketing adjusted net income in Fiscal 2023 was $30 million higher than the prior year. This increase principally reflects incremental earnings contributions from UGI Moraine East and Pennant, partially offset by lower margins related to natural gas marketing activities.
Utilities Fiscal 2023 adjusted net income increased $13 million compared to the prior year. The increase was largely related to the increase in base rates and the implementation of the weather normalization adjustment at PA Gas Utility, both of which became effective during the first quarter of Fiscal 2023. This increase was partially offset by higher operating and administrative expenses.
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AmeriGas Propane 2023 2022 Increase (Decrease)
(Dollars in millions)
Operating and administrative expenses $ 950 $ 889 $ 61 7 %
Retail gallons sold (millions) 823 888 (65) (7) %
Degree days – % colder (warmer) than normal (b) 0.5 % (0.8) % — —
(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.
Average temperatures during Fiscal 2023 were 0.5% colder than normal and 1.9% colder than the prior year. Total retail propane gallons sold decreased 7% during Fiscal 2023 due to the effects of driver staffing shortages (which also limited growth), continuing customer attribution and structural conservation.
Average daily wholesale propane commodity prices during Fiscal 2023 at Mont Belvieu, Texas, one of the major supply points in the U.S., were approximately 39% lower than such prices during Fiscal 2022. Total revenues decreased $362 million during Fiscal 2023 largely reflecting the lower retail propane volumes sold ($179 million), lower wholesale revenues ($100 million) and the effects of lower average retail propane selling prices ($76 million). Total cost of sales decreased $363 million during Fiscal 2023 largely attributable to the lower average propane product costs ($160 million), lower wholesale cost of sales ($101 million) and the lower retail propane volumes sold ($95 million).
AmeriGas Propane total margin increased $1 million in Fiscal 2023 largely attributable to higher average retail propane unit margins ($84 million), substantially offset by the lower retail propane volumes sold ($83 million).
AmeriGas Propane operating income and earnings before interest expense and income taxes decreased $39 million in Fiscal 2023 primarily attributable to higher operating and administrative expenses ($61 million), partially offset by higher other operating income ($21 million), largely related to gains on sales of fixed assets. The increase in operating and administrative expenses reflects, among other things, higher vehicle expenses, higher staffing, overtime and other employee-related costs associated with distribution activity and higher advertising expenses, partially offset by lower salaries and benefits expenses, including the carryover impact of the workforce reductions made during Fiscal 2022.
UGI International 2023 2022 Increase (Decrease)
(Dollars in millions)
Operating and administrative expenses $ 623 $ 611 $ 12 2 %
Earnings before interest expense and income taxes $ 234 $ 254 $ (20) (8) %
LPG retail gallons sold (millions) 729 799 (70) (9) %
Degree days - % (warmer) than normal (b) (10.5) % (2.6) % — —
(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 2023 were 10.5% warmer than normal and 8.4% warmer than Fiscal 2022. Total LPG retail gallons sold decreased 9% during Fiscal 2023, largely attributable to the significantly warmer weather; lower consumption, principally from residential customers, primarily resulting from the European conservation measures due in large part to high global energy prices and the war between Russia and Ukraine; lower cylinder volumes; and reduced crop drying campaigns. These decreases were partially offset by growth due to natural gas conversions.
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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 2023 and Fiscal 2022, the average unweighted euro-to-dollar translation rates were approximately $1.07 and $1.08, respectively, and the average unweighted British pound sterling-to-dollar translation rates were approximately $1.23 and $1.28, respectively. Fluctuations in these foreign currency exchange rates can have a significant impact on the individual financial statement components discussed below. The Company uses forward foreign currency exchange contracts entered into over multi-year periods to reduce the volatility in earnings that may result from such changes in foreign currency exchange rates. These forward foreign currency exchange contracts resulted in realized net gains of $15 million and $13 million in Fiscal 2023 and Fiscal 2022, respectively.
Average wholesale prices for propane and butane during Fiscal 2023 in northwest Europe were approximately 25% and 26% lower, respectively, compared to Fiscal 2022. UGI International revenues and cost of sales decreased $721 million and $706 million, respectively, in Fiscal 2023. The decrease in revenues and cost of sales principally reflects the impact from our energy marketing business of lower volumes sold, partially offset by the impact of higher prices. The decrease in revenues and cost of sales also reflects the impact of the lower LPG retail volumes sold and the lower average LPG product costs. The decrease in revenues and cost of sales also reflects the translation effects of the weaker foreign currencies (approximately $115 million and $88 million, respectively).
UGI International total margin decreased $15 million during Fiscal 2023 primarily reflecting the effects of the lower LPG retail volumes sold ($90 million) and the translation effects of the weaker foreign currencies (approximately $27 million). These factors were substantially offset by higher average LPG retail unit margins attributable to strong margin management efforts, the lower average LPG product costs and higher total margin from our energy marketing business ($29 million). The higher energy marketing margin reflects higher natural gas energy marketing margin, partially offset by lower electricity energy marketing margin.
UGI International operating income and earnings before interest expense and income taxes decreased $22 million and $20 million, respectively, during Fiscal 2023. The decrease in operating income principally reflects the decrease in total margin ($15 million) and higher operating and administrative expenses ($12 million), partially offset by higher other operating income ($8 million). The higher operating and administrative expenses during Fiscal 2023 primarily reflects the effects of inflationary increases, partially offset by lower distribution and personnel-related costs and the translation effects of the weaker foreign currencies (approximately $11 million). The higher other operating income during Fiscal 2023 primarily represents higher foreign currency transaction gains ($12 million) and higher cylinder deposit income ($5 million), partially offset by lower gains associated with sales of fixed assets ($11 million). The decrease in earnings before interest expense and income taxes in Fiscal 2023 largely reflects the decrease in operating income partially offset by higher realized gains on foreign currency exchange contracts ($2 million) entered into in order to reduce volatility in UGI International earnings resulting from the effects of changes in foreign currency exchange rates.
Midstream & Marketing 2023 2022 Increase (Decrease)
(Dollars in millions)
Operating and administrative expenses $ 133 $ 129 $ 4 3 %
Earnings before interest expense and income taxes $ 291 $ 269 $ 22 8 %
(a)Total margin represents total revenues less total cost of sales.
Average temperatures across Midstream & Marketing’s energy marketing territory during Fiscal 2023 were 11.0% warmer than normal and 6.0% warmer than the prior year.
Midstream & Marketing’s revenues decreased $479 million during Fiscal 2023, principally reflecting lower revenues from natural gas marketing activities ($519 million), including the effects of peaking and capacity management activities, principally reflecting significantly lower average natural gas prices and, to a lesser extent, lower volumes from the warmer weather. This decrease was partially offset by higher natural gas gathering and processing activities ($43 million), primarily due to the impact on revenues from the prior-year acquisitions of UGI Moraine East and Pennant.
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Midstream & Marketing cost of sales decreased $516 million during Fiscal 2023, primarily reflecting the lower natural gas costs ($511 million) related to the previously mentioned natural gas marketing activities.
Midstream & Marketing total margin increased $37 million in Fiscal 2023, primarily reflecting incremental natural gas gathering and processing activities ($49 million), primarily from the prior year acquisitions of UGI Moraine East and Pennant, partially offset by lower margins from natural gas marketing activities ($8 million), including the effects of peaking and capacity management activities, despite the benefits from extremely cold weather in late December 2022. In Fiscal 2022, the margin from natural gas marketing activities included the positive impact of settlement timing of certain multi-year commodity storage hedge contracts.
Midstream & Marketing operating income and earnings before interest expense and income taxes during Fiscal 2023 increased $39 million and $22 million, respectively. The increase in operating income principally reflects the increase in total margin ($37 million) and higher other operating income ($13 million), partially offset by higher depreciation and amortization expense ($7 million) and higher operating and administrative expenses ($4 million). The increase in earnings before interest expense and income taxes principally reflects the higher operating income ($39 million), partially offset by lower income from equity investees ($17 million) following the acquisition of the remaining 53% ownership interest in Pennant during the fourth quarter of Fiscal 2022.
(Dollars in millions)
Operating and administrative expenses (a) $ 368 $ 332 $ 36 11 %
Earnings before interest expense and income taxes $ 365 $ 336 $ 29 9 %
Gas Utility system throughput – bcf
Electric Utility distribution sales - gwh 959 997 (38) (4) %
Gas Utility degree days – % (warmer) than normal (b) (11.7) % (7.5) % — —
(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 $24 million and $21 million, respectively, during Fiscal 2023 and Fiscal 2022. 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 Gas Utility service territories.
Temperatures in Gas Utility’s service territories during Fiscal 2023 were 11.7% warmer than normal and 4.8% warmer than the prior year. The decrease in Gas Utility core market volumes during Fiscal 2023 is largely related to the warmer weather, partially offset by growth in the core market customers. The decrease in Electric Utility distribution sales volumes during Fiscal 2023 is primarily attributable to warmer weather.
Utilities revenues increased $234 million in Fiscal 2023 reflecting a $225 million increase in Gas Utility revenues and a $9 million increase in Electric Utility revenues. The increase in Gas Utility revenues was largely driven by higher PGC and PGA rates reflecting higher natural gas costs; the effects of the increase in base rates and weather normalization adjustments for PA Gas Utility that went into effect during the first quarter of Fiscal 2023; and higher other revenues. These increases were partially offset by the effects on core market volumes of the warmer weather and lower off-system sales. The increase in Electric Utility revenues during Fiscal 2023 was largely driven by higher DS rates, reflecting higher power costs.
Utilities cost of sales (including revenue-related taxes) was $977 million in Fiscal 2023 compared with $819 million in Fiscal 2022. The increase of $158 million is primarily attributable to Gas Utility ($149 million) mainly reflecting higher PGC and PGA rates and higher other cost of sales, partially offset by lower cost of sales associated with off-system sales. Electric Utility cost of sales increased $9 million in Fiscal 2023 largely reflecting the higher DS rates.
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Utilities total margin increased $76 million during Fiscal 2023 substantially attributable to higher Gas Utility total margin mainly reflecting the effects of the increase in base rates and weather normalization adjustments for PA Gas Utility that went into effect during the first quarter of Fiscal 2023 and, to a much lesser extent, impacts from growth in the core market customers and higher other revenues. Electric Utility margin was comparable to the prior year.
Utilities operating income and earnings before interest expense and income taxes during Fiscal 2023 increased $30 million and $29 million, respectively, compared to the prior year. These increases largely reflect the previously mentioned increase in total margin, partially offset by higher operating and administrative expenses ($36 million) and higher depreciation expense ($8 million). The higher operating and administrative expenses reflect, among other things, higher uncollectible accounts expenses, contract labor costs and personnel-related expenses. The higher depreciation expense compared to the prior year reflects the effects of continued distribution system capital expenditure activity.
Interest Expense and Income Taxes
Our consolidated interest expense during Fiscal 2023 was $379 million compared to $329 million during the prior year. The increase in interest expense largely reflects higher credit agreement interest rates and borrowings, higher average interest rates on UGI Corporation long-term debt and higher average long-term debt outstanding principally at our Utilities and Midstream & Marketing segments.
Our effective income tax rate decreased between Fiscal 2022 and Fiscal 2023, primarily due to the release of a valuation allowance related to the utilization of foreign tax credits and the availability of investment tax credits in Fiscal 2023 that were not available in Fiscal 2022. These decreases were partially offset by (1) a higher concentration of pre-tax losses in higher income tax rate jurisdictions resulting from losses on derivative instruments; (2) establishing a valuation allowance for interest expense disallowance at AmeriGas Propane; and (3) the impact on income taxes from the goodwill impairment at AmeriGas Propane, which included certain adjustments to the associated deferred tax assets. 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, 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 $1.6 billion and $1.7 billion at September 30, 2023 and 2022, respectively. The Company does not have any senior notes or term loans maturing in the next twelve months. 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 its debt covenants as of September 30, 2023. See Note 6 to the Consolidated Financial Statements for additional information on compliance.
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 $241 million at September 30, 2023, compared with $405 million at September 30, 2022. Excluding cash and cash equivalents that reside at UGI’s operating subsidiaries, at September 30, 2023 and 2022, our cash and cash equivalents totaled $51 million and $140 million, respectively. Such cash is available to pay dividends on UGI Common Stock and for investment purposes. The decrease in cash and cash equivalents since September 30, 2022, can be attributed to, among other things, temporary restrictions on the payment of dividends from AmeriGas OLP to UGI resulting from the use of an equity cure, as defined by the 2022 AmeriGas OLP Credit Agreement and an increase in cash outflow in the form of capital contributions to AmeriGas Partners. In November 2023, the Company amended the 2022 AmeriGas OLP Credit agreement to reduce both the revolver amount and the minimum interest
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coverage ratio. As of September 30, 2023 the Partnership was in compliance with all debt covenants as set forth in the amended 2022 AmeriGas OLP Credit Agreement without the consideration of the equity cure provisions, alleviating the restriction on the subsidiaries ability to pay dividends to the parent. See Note 6 to the Consolidated Financial Statements for additional information.
During Fiscal 2023 and Fiscal 2022, our principal business units paid cash dividends and made other cash payments to UGI and its subsidiaries as follows:
AmeriGas Propane $ — $ 227
Midstream & Marketing 215 —
Utilities 5 —
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 2023 and Fiscal 2022 were as follows:
On November 16, 2023, UGI’s Board of Directors declared a cash dividend equal to $0.375 per common share. The dividend will be payable on January 1, 2024, to shareholders of record on December 15, 2023.
Repurchases of Common Stock
During Fiscal 2023 and Fiscal 2022, the Company repurchased 600,000 shares and 900,000 shares of its common stock at a total purchase price of $22 million and $38 million, respectively. 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, 2023 and 2022, comprised the following:
Long-term debt (including current maturities):
Unamortized debt issuance costs (15) (8) (15) (6) (3) (47) (33)
Significant Financing Activities
2022 AmeriGas OLP Credit Agreement. Under the 2022 AmeriGas OLP Credit Agreement, AmeriGas OLP, as borrower, is required to comply with financial covenants related to leverage and interest coverage measured at the Partnership and at AmeriGas OLP. On November 15, 2023, the Company entered into an amendment to the 2022 AmeriGas OLP Credit Agreement, which amends certain provisions of the credit agreement dated as of September 28, 2022 to, among other things, (i) reduce the maximum revolver amount from $600 million to $400 million, (ii) reduce the minimum interest coverage ratio, effective for the fourth quarter of Fiscal 2023 through the end of the fourth quarter of Fiscal 2024 and (iii) beginning for the first quarter of Fiscal 2025, the minimum interest coverage ratio will remain reduced if the net leverage ratio is below a threshold as defined by the agreement; if the net leverage ratio exceeds such threshold, the minimum interest coverage ratio will revert to the original ratio as defined by the agreement.
As of March 31, 2023, AmeriGas OLP was in breach of the leverage ratio debt covenant and interest coverage ratio, which it cured with the funds received from UGI. The 2022 AmeriGas OLP Credit Agreement contains an equity cure provision, which allows AmeriGas OLP’s direct or indirect parent, including UGI and its other subsidiaries, to fund capital contributions to eliminate any EBITDA (as defined in the 2022 AmeriGas OLP Credit Agreement) shortfalls that would otherwise result in non-compliance with these financial covenants. UGI made capital contributions to AmeriGas OLP of $20 million and $11 million on March 31, 2023 and April 24, 2023, respectively, which in aggregate represented one equity cure in accordance with the 2022 AmeriGas OLP Credit Agreement. As a result of these capital contributions, AmeriGas OLP and the Partnership were in compliance with its financial covenants after considering the equity cure provision as of June 30, 2023 and March 31, 2023. As of September 30, 2023 the Partnership was in compliance with all debt covenants as set forth in the amended 2022 AmeriGas OLP Credit Agreement without the consideration of the equity cure provisions.
UGI also provided an irrevocable letter of support whereby UGI has committed to fund any such EBITDA shortfalls and debt service, if any. Based on the support and the projected EBITDA, AmeriGas OLP is expected to remain in compliance with its financial debt covenants for the succeeding twelve-month period. In addition, in May 2023, the Company contributed $52 million in an equity contribution to AmeriGas Partners principally to fund debt service on AmeriGas Partners Senior Notes.
UGI Utilities 2023 Credit Agreement. On November 9, 2023, UGI Utilities entered into the UGI Utilities 2023 Credit Agreement providing for borrowings up to $375 million (including a $50 million sublimit for letters of credit and a $38 million sublimit for swingline loans). UGI Utilities may request an increase in the amount of loan commitments under the credit agreement to a maximum aggregate amount of $125 million. The interest rates applicable to borrowings under the UGI Utilities 2023 Credit Agreement will remain unchanged. The credit agreement contains customary covenants and default provisions and requires compliance with certain financial covenants including a maximum debt to capitalization ratio as defined in the agreement. The maturity of the credit agreement was extended to November 2024 with an additional automatic 5-year extension upon receipt of authorization for such extension from the PAPUC. Borrowings under the credit agreement may be used to refinance UGI Utilities existing indebtedness, finance the working capital needs of UGI Utilities and for general corporate purposes.
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On December 13, 2022, UGI Utilities entered into an amendment to the UGI Utilities Credit Agreement, providing for borrowings up to $425 million and to replace the use of LIBOR with Term SOFR.
AmeriGas Partners Senior Notes. On May 31, 2023, AmeriGas Partners and AmeriGas Finance Corp. issued $500 million principal amount of 9.375% Senior Notes due May 2028. The 9.375% Senior Notes rank equally with AmeriGas Partners’ existing senior notes. The net proceeds from the issuance of the 9.375% Senior Notes, together with cash on hand, a $150 million cash contribution from the Company and other sources of liquidity, were used for the early repayment, pursuant to a tender offer and notice of redemption, of all AmeriGas Partners 5.625% Senior Notes having an aggregate principal balance of $675 million, plus tender premiums and accrued and unpaid interest. In conjunction with the early repayment of the 5.625% Senior Notes, in June 2023 the Partnership recognized a pre-tax loss of $9 million primarily comprising tender premiums and the write-off of unamortized debt issuance costs, which is reflected in “Loss on extinguishments of debt” on the Consolidated Statements of Income.
UGI International 2023 Credit Facilities Agreement. On March 7, 2023, UGI International, LLC and its indirect wholly-owned subsidiary, UGI International Holdings B.V., entered into the UGI International 2023 Credit Facilities Agreement, a five-year unsecured senior facilities agreement, maturing March 7, 2028, with a consortium of banks. The UGI International 2023 Credit Facilities Agreement consists of (1) a €300 million variable-rate term loan facility ("Facility A") and (2) a €500 million multicurrency revolving credit facility, including a €100 million sublimit for swingline loans ("Facility B"). We have designated borrowings under Facility A as a net investment hedge. In connection with the entering into of the UGI International 2023 Credit Facilities Agreement, UGI International, LLC paid off in full and terminated the UGI International Credit Facilities Agreement, dated as of October 18, 2018. Borrowings under the multicurrency revolving credit facility may be used to finance the working capital needs of UGI International, LLC and its subsidiaries and for general corporate purposes.
UGI Energy Services Credit Agreement. On May 12, 2023, Energy Services entered into the second amendment to the UGI Energy Services Credit Agreement, which provides that the Term SOFR rate (as defined in the UGI Energy Services Credit Agreement) shall replace LIBOR as a reference rate. After giving effect to the second amendment, the UGI Energy Services Credit Agreement shall bear interest at a floating rate of, at Energy Services’ option, either (i) Term SOFR plus the Applicable Rate (as defined in the UGI Energy Services Credit Agreement) plus a credit spread adjustment of 0.10%, or (ii) the base rate plus the Applicable Rate. The Applicable Rate will be based on the leverage of Energy Services.
Energy Services Amended Term Loan Credit Agreement. On February 23, 2023, Energy Services entered into the Energy Services Amended Term Loan Credit Agreement, the first amendment to the Energy Services Term Loan Credit Agreement, dated August 13, 2019. The Energy Services Amended Term Loan Credit Agreement provides, among other items, that (i) the outstanding principal amount of the loans shall be increased by $125 million to $800 million, (ii) the maturity date of the loans shall be extended to February 22, 2030, and (iii) Term SOFR (as defined in the Energy Services Amended Term Loan Credit Agreement) shall replace LIBOR as a reference rate.
Mountaineer 2023 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, and Mountaineer has the option, with the consent of the lenders, to request extension of the maturity date to November 2025, and then to November 2026, upon fulfillment of specified conditions.
UGI Corporation Credit Facility Agreement. On May 12, 2023, the Company entered into the second amendment to the UGI Corporation Credit Agreement, which provides that the Term SOFR rate (as defined in the UGI Corporation Credit Agreement) shall replace LIBOR as a reference rate. After giving effect to the second amendment, the UGI Corporation Credit Agreement shall bear interest at a floating rate of, at the Company’s option, either (i) Term SOFR plus the Applicable Rate (as defined in the UGI Corporation Credit Agreement) plus a credit spread adjustment of 0.10%, or (ii) the base rate plus the applicable margin that will be based on the leverage of the Company or credit ratings assigned to certain indebtedness of the Company.
On September 20, 2023, UGI amended the UGI Corporation Credit Facility Agreement which extended the maturity date of the (1) five-year $250 million amortizing variable-rate term loan and (2) five-year $300 million revolving credit facility to May 2025 and increased the applicable rates (as defined in the amended UGI Corporation Credit Agreement) by 0.125%.
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Credit Facilities
Information about the Company’s principal credit agreements (excluding Energy Services’ Receivables Facility, which is discussed below) as of September 30, 2023 and 2022, is presented in the tables below.
UGI International, LLC (a) October 2023 € 300 € — € — € 300 N.A.
Energy Services March 2025 $ 260 $ — $ — $ 260 N.A.
(a)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, the Company repaid $87 million of such borrowings and classified these repayments as “Current maturities of long-term debt” on the Consolidated Balance Sheets.
(c)On November 9, 2023, UGI Utilities entered into the UGI Utilities 2023 Credit Agreement and concurrently terminated the UGI Utilities Credit Agreement, a predecessor agreement. See Significant Financing Activities above and Note 6 for additional information.
N.A. - Not applicable
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
Energy Services $ 13 $ 82 $ — $ —
Receivables Facility. Energy Services has a Receivables Facility with an issuer of receivables-backed commercial paper. On October 20, 2023, the expiration date of the Receivables Facility was extended to October 18, 2024. The Receivables Facility provides Energy Services with the ability to borrow up to $200 million of eligible receivables during the period October 20, 2023 to April 30, 2024, and up to $100 million of eligible receivables during the period May 1, 2024 to October 18, 2024. Energy Services uses the Receivables Facility to fund working capital, margin calls under commodity futures contracts, capital expenditures, dividends and for general corporate purposes.
Under the Receivables Facility, Energy Services transfers, on an ongoing basis and without recourse, its trade accounts receivable to its wholly owned, special purpose subsidiary, ESFC, which is consolidated for financial statement purposes.
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ESFC, in turn, has sold and, subject to certain conditions, may from time to time sell, an undivided interest in some or all of the receivables to a major bank. Amounts sold to the bank are reflected as “Short-term borrowings” on the Consolidated Balance Sheets. ESFC was created and has been structured to isolate its assets from creditors of Energy Services and its affiliates, including UGI. Trade receivables sold to the bank remain on the Company’s balance sheet and the Company reflects a liability equal to the amount advanced by the bank. The Company records interest expense on amounts owed to the bank. Energy Services continues to service, administer and collect trade receivables on behalf of the bank, as applicable.
At September 30, 2023, the outstanding balance of trade receivables was $62 million, $46 million of which were sold to the bank. At September 30, 2022, the outstanding balance of trade receivables was $101 million, none of which was sold to the bank. Amounts sold to the bank are reflected as “Short-term borrowings” on the Consolidated Balance Sheet. During Fiscal 2023 and Fiscal 2022, peak sales of receivables were $150 million and $98 million, respectively. During Fiscal 2023 and Fiscal 2022, average daily amounts sold were $46 million and $2 million, respectively.
For further information on the Company’s long-term debt, credit facilities and the Receivables Facility, 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 2023 and Fiscal 2022 were $1,107 million and $716 million, respectively. The increase in cash flow from operations principally reflects greater cash flow from changes in operating working capital offset in part by higher net derivative instrument collateral repayments. Cash flows from operating activities before changes in operating working capital were $1,258 million in Fiscal 2023 and $1,269 million in Fiscal 2022. Changes in operating working capital and collateral deposits used operating cash flow of $151 million in Fiscal 2023 compared to $553 million of cash flow used in Fiscal 2022. The significant decrease in cash used to fund changes in operating working capital principally reflects lower cash used to fund changes in accounts receivable and inventories partially offset by a significant increase in collateral deposit repayments and cash required to fund changes in accounts payable. These changes in operating working capital and collateral deposits principally reflect the effects of the previously mentioned significant decrease in commodity energy prices during Fiscal 2023, principally at UGI International and Midstream & Marketing.
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 $974 million in Fiscal 2023 and $804 million in Fiscal 2022. The increase in cash payments for property, plant and equipment in Fiscal 2023 compared with Fiscal 2022 principally reflects higher cash capital expenditures in our Midstream & Marketing segment due in large part to the investments in committed renewable energy projects and new LNG facilities and, to a lesser extent, slightly higher cash capital expenditures at our Utilities segment. Cash used for acquisitions of businesses and assets in Fiscal 2023 reflects a small acquisition in Europe while Fiscal 2022 includes the Stonehenge Acquisition and the Pennant Acquisition. Cash used for investments in equity method investees was $146 million in Fiscal 2023 compared to $47 million in Fiscal 2022 principally reflecting investments in biomass and renewable energy projects at our Midstream & Marketing reportable segment and, to a much lesser extent, our investment in a renewable energy joint venture at UGI International. Cash inflows associated with investing activities during Fiscal 2023 and Fiscal 2022 also includes cash received from the settlement of certain forward foreign currency contracts previously designated as net investment hedges.
Financing Activities:
Changes in cash flow from financing activities are primarily due to issuances and repayments of long-term debt; net short-term borrowings; dividends on UGI Common Stock; quarterly payments on outstanding Purchase Contracts; and issuances and repurchases of equity instruments.
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Cash flow used by financing activities was $168 million in Fiscal 2023 compared to cash flow used by financing activities of $51 million in Fiscal 2022. Fiscal 2023 activities include (1) entering into the previously mentioned UGI International 2023 Credit Facilities Agreement in March 2023 and the concurrent repayment of borrowings under the UGI International Credit Facilities Agreement (a predecessor agreement); (2) entering into the previously mentioned Energy Services Amended Term Loan Agreement in February 2023 and the concurrent repayment of amounts outstanding under the Energy Services variable rate term loan; and (3) the May 2023 issuance of $500 million principal amount of AmeriGas Partners’ 9.375% Senior Notes and the repayment of the $675 million aggregate principal balance of AmeriGas Partners 5.625% Senior Notes. 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 Fiscal 2022 UGI International senior notes were used to repay existing long-term debt, while proceeds from the Utilities notes were used to reduce short-term borrowings and for general corporate purposes. In Fiscal 2023 and Fiscal 2022, the Company had aggregate net borrowings from credit facilities and the Receivables Facility totaling $267 million and $1 million, respectively.
Capital Expenditures
In the following table, we present capital expenditures (which exclude acquisitions of businesses and assets) for Fiscal 2023 and Fiscal 2022. We also provide amounts we expect to spend in Fiscal 2024. We expect to finance a substantial portion of our Fiscal 2024 capital expenditures from cash generated by operations and cash on hand.
The increases in capital expenditures at Midstream & Marketing in Fiscal 2023, and the projected increase in Fiscal 2024, reflect increased levels of capital expenditures associated with investments in renewable energy projects and in new LNG facilities.
Contractual Cash Obligations and Commitments
The Company has contractual cash obligations that extend beyond Fiscal 2023. The following table presents contractual cash obligations with non-affiliates under agreements existing as of September 30, 2023:
Payments Due by Period
Short-term borrowings (a) $ 649 $ 649 $ — $ — $ —
AmeriGas Propane supply contracts 10 10 — — —
UGI International supply contracts 464 464 — — —
Derivative instruments (d) 99 69 29 1 —
(a)Based upon stated maturity dates for debt outstanding at September 30, 2023.
(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, 2023.
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(d)Represents the sum of amounts due if derivative instrument liabilities were settled at the September 30, 2023 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, 2023, principally comprise operating lease liabilities (see Note 15 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 16 to Consolidated Financial Statements); pension and other postretirement benefit liabilities recorded in accordance with accounting guidance relating to employee retirement plans (see Note 8 to Consolidated Financial Statements); and liabilities associated with executive compensation plans (see Note 14 to Consolidated Financial Statements). These liabilities, with the exception of operating lease liabilities, are not included in the table of Contractual Cash Obligations and Commitments because they are estimates of future payments and not contractually fixed as to timing or amount. Required minimum contributions to the U.S. Pension Plans (as further described below under “U.S. Pension Plans”) in Fiscal 2024 are $22 million. Required minimum contributions to the U.S. Pension Plans in years beyond Fiscal 2024 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 Mountaineer employees hired prior to January 1, 2023. The fair values of the U.S. Pension Plans’ assets totaled $539 million and $525 million at September 30, 2023 and 2022, respectively. At September 30, 2023 and 2022, the underfunded positions of the U.S. Pension Plans, defined as the excess of the PBO over the U.S. Pension Plans’ assets, were $55 million and $82 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 2024 is $22 million.
GAAP guidance associated with pension and other postretirement plans generally requires recognition of an asset or liability in the statement of financial position reflecting the funded status of pension and other postretirement benefit plans with current year changes recognized in shareholders’ equity unless such amounts are subject to regulatory recovery. At September 30, 2023, we have recorded pre-tax credits to UGI Corporation’s stockholders’ equity of $4 million and recorded regulatory assets totaling $111 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 2023 and Fiscal 2022, 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
UGI Utilities. On January 27, 2023, Electric Utility filed a request with the PAPUC to increase its annual base distribution revenues by $11 million. On September 21, 2023, the PAPUC issued a final order approving a settlement providing for a $9 million annual base distribution rate increase for Electric Utility, effective October 1, 2023.
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.
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Also in accordance with the terms of the final order, PA Gas Utility was authorized to implement a weather normalization adjustment rider as a five-year pilot program beginning on November 1, 2022. Under this rider, when weather deviates from normal by more than 3%, residential and small commercial customer billings for distribution services are adjusted monthly for weather related impacts exceeding the 3% threshold. Additionally, under the terms of the final order, PA Gas Utility was authorized to implement a DSIC once its total property, plant and equipment less accumulated depreciation reached $3,368 million (which threshold was achieved in September 2022).
On February 8, 2021, Electric Utility filed a 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.
Mountaineer. On July 31, 2023, Mountaineer submitted its 2023 IREP filing to the WVPSC requesting recovery of $10 million, an increase of $6 million, for costs associated with capital investments after December 31, 2022, that total $131 million, including $67 million in calendar year 2024. With new base rates expected to be effective January 1, 2024, revenues from IREP rates would decrease by $12 million. The filing included capital investments totaling $383 million over the 2024 - 2028 period.