Prepared remarks
Hello, and welcome to the UGI Corporation Fiscal 2025 Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Thank you. I would like to turn the conference over to Tameka Morris, Vice President of Investor Relations & ESG. You may begin.
Good morning, everyone. Thank you for joining our fiscal 2025 second quarter earnings call. With me today are Bob Flexon, President and CEO; and Sean O'Brien, CFO. On today's call, we will review our second quarter financial results and key business highlights before concluding with a question-and-answer session. Before we begin, let me remind you that our comments today include certain forward-looking statements, which management believes to be reasonable as of today's date only. Actual results may differ significantly because of risks and uncertainties that are difficult to predict. Please read our earnings release and our annual report for an extensive list of factors that could affect results. We assume no duty to update or revise forward-looking statements to reflect events or circumstances that are different from expectations. We will also describe our business using certain non-GAAP financial measures. Reconciliations of these measures to the comparable GAAP measures are available within our presentation. And with that, I'll turn the call over to Bob.
Thanks, Tameka, and good morning to all of you. Before we walk through our financial and operational results in detail, I want to start with a summary of our year-over-year performance on several key financial metrics. Starting with adjusted diluted EPS, UGI reported a 12% year-over-year increase for the fiscal second quarter, delivering the highest adjusted diluted EPS for the second quarter and year-to-date period in the company's history. All four segments provided EBIT growth as solid operational execution enabled us to effectively meet higher demand, particularly from colder weather in fiscal Q2, while maintaining cost efficiencies. With this strong performance, we have increased our fiscal 2025 guidance range to $3 to $3.15. The balance sheet continues to strengthen with $1.9 billion in available liquidity and an overall leverage ratio of 3.8 times at the end of the quarter. Now, let me also share several other highlights.
During the quarter, our LNG infrastructure operated at peak capacity, responding effectively to the sustained cold weather patterns experienced particularly in January and February. Regional natural gas demand continues to demonstrate robust growth, positioning our strategically located midstream assets to deliver these essential services reliably. Late last year, we initiated an expansion project to double the liquefaction capacity at our Manning facility. This significantly enhances our ability to fulfill additional peaking contracts and provide vital LNG services to customers in the Northeast. Construction has now been completed, and the facility is currently in commissioning with full operational status expected by fiscal 2026. In aggregate, during the quarter, we deployed $160 million in capital investment, primarily in the natural gas businesses. At the utilities, we continue to expand our reach, strategically extending our infrastructure to previously underserved communities.
Our customer base has grown by over 6,600 new residential heating and commercial accounts year-to-date, reflecting the persistent demand for natural gas service throughout our service territories. Now, before I hand the call over to Sean to walk through the financial results in more detail, I'd like to speak to our fiscal 2025 guidance range. Given our strong financial performance in the first half of the fiscal year and the continued momentum we're seeing across our businesses, we are pleased to announce an increase in the fiscal 2025 adjusted diluted earnings per share guidance range to $3 to $3.15. This increase is largely driven by several factors. First, during the fiscal second quarter, we experienced favorable weather conditions when compared to the 10-year normal weather used in establishing our guidance. These weather conditions drove incremental earnings throughout all of our businesses.
However, in order to meet the winter demand, we prioritized production and distribution over certain planned operational investments, which will be executed during the second half of our fiscal year. Next, we are beginning to see some operational improvements at AmeriGas, which have contributed to lower customer attrition levels. These early-stage enhancements began with the POD model launched in September, which has removed silos and provided greater alignment, operational efficiency, and accountability. Combined with the favorable weather conditions, these improvements have resulted in a $19 million increase in the fiscal year-to-date EBIT when compared with the prior year. Looking ahead, we are continuing our efforts to streamline and optimize key business processes to better position AmeriGas for the upcoming winter season. At UGI International, we are reducing the prior estimate of a $0.05 to $0.08 headwind from the jetty damage due to OpEx recovery.
Our revised estimate is approximately $0.04. Lastly, we are operating in a fluid environment with continued evolution in trade and tariff policies. Given the nature of our business and the limited number of items internationally, we believe the tariffs cost exposure is insignificant. We have seen that these policies have placed downward pressure on propane prices, which can be beneficial to our customers. Given the nature of our pricing contracts and hedging strategy, we do not anticipate material benefits or headwinds in this operating environment. In summary, the revised guidance reflects our confidence in the underlying strength of our businesses and our ability to continue executing our strategic priorities in the second half of the year. I'll now turn the call over to Sean to delve further into the financial results.
Thanks, Bob, and good morning. I'll now provide more detail on our financial performance for the fiscal second quarter. As Bob mentioned, we've delivered strong results across all business segments while continuing to strengthen our balance sheet and maintain disciplined capital allocation in a dynamic market environment. UGI delivered adjusted diluted EPS of $2.21, $0.24 above the prior year period. The Utility segment was up $0.04, given the colder weather, partially offset by higher operating and administrative expenses. Midstream & Marketing increased $0.13 as the business benefited from the effects of higher investment tax credits associated with the RNG projects being placed in service this fiscal year. UGI International was consistent year-over-year as lower operating and administrative expenses were more than offset by reduced tax benefits. At AmeriGas, while EBIT was up $16 million over the prior year period, largely due to colder weather, the effect of higher income tax expense led to a $0.06 decline in adjusted diluted EPS.
As noted on the Q1 call, AmeriGas is experiencing a higher tax rate due to limitations on interest expense deductibility. On a consolidated basis, there is a corresponding offset to normalize the corporation's tax rate, and this is reflected in Corporate & Other. Overall, Corporate & Other was up $0.52 due to lower income taxes of $0.54, partially offset by $0.02 of higher interest expense. I'll now walk you through the key drivers for each reportable segment when compared to the prior year. Starting with the Utility segment, EBIT was $241 million for the quarter, up $15 million over the prior year period. Both core market and total system throughput showed strong growth, primarily driven by weather conditions that were 15% colder than the comparable period last year. This favorable weather pattern contributed to a $22 million increase in total margin, though this gain was partially offset by the impact of the weather normalization mechanism in our Pennsylvania and West Virginia territories.
Operating and administrative expenses rose by $6 million, reflecting higher investments in system maintenance and increased uncollectible account expenses. Depreciation and amortization expenses also increased as we continue our capital investment strategy to enhance and modernize our distribution infrastructure. At the Midstream & Marketing segment, we reported EBIT of $154 million, which was comparable to the prior year. Total margin increased $2 million, driven by strong performance in capacity management and gas marketing activities, which more than offset lower margins from the gas-gathering and processing operations. Margin was also impacted by the divestiture of our power generation asset, namely Hunlock Creek in September 2024, which contributed $3 million in the prior year period. Turning to the global LPG businesses at UGI International. LPG volumes declined by 4%, as the impact of weather that was colder than prior year was more than offset by continued structural conservation and the absence of certain customers who previously converted from natural gas to LPG.
Total margin was down $3 million as the effect of lower LPG volumes and the translation effects of the weaker foreign currencies were largely offset by higher LPG unit margins. The business demonstrated continued cost discipline, reducing operating and administrative expenses by $13 million through lower personnel costs, optimized maintenance programs, and favorable foreign currency translation effects. As a reminder, we employ a multi-year foreign currency hedging strategy, which mitigates FX volatility within our overall financial results. Overall, EBIT grew by $12 million, driven by operational efficiencies and improved operating income that more than compensated for lower total margin compression and reduced gains on foreign currency hedge contracts. At AmeriGas, the business benefited from the colder weather conditions, which drove higher LPG volumes, and this effect was partially offset by continued customer attrition.
We capitalized on advantageous weather conditions, which drove LPG volume growth, partially counterbalanced by continued customer attrition. Total margin expanded by $13 million, reflecting the combined impact of higher retail volumes and LPG unit margin improvements with minimal offset from reduced fee income. The segment reported EBIT of $154 million, up $16 million over the prior year period, fueled by higher total margins and increased gains from tank sales. Turning to the balance sheet, I am pleased that our focus on balance sheet optimization is continuing to yield positive results, as evidenced by our available liquidity of $1.9 billion and the reduction in UGI’s net debt to EBITDA ratio from 4 times at the end of fiscal 2024 to 3.8 times as of March 31. Margin expansion, operational efficiencies, and disciplined capital deployment led to year-to-date free cash flow of approximately $490 million, up 55% year-over-year.
Specifically, at AmeriGas, there was also considerable improvement in the year-to-date free cash flow, which supported the segment's debt reduction of over $65 million, including a $21 million partial prepayment of its two-year intercompany loan with UGI International. AmeriGas' net debt to EBITDA ratio at March 31, 2025 was 5.4 times, down from 6 times at the beginning of this fiscal year. At April 30, 2025, AmeriGas had approximately $90 million in cash and no short-term borrowings. We are pleased with this enhanced cash generation, which supports our continued deleveraging goals while maintaining strategic investments and solid shareholder returns. And with that, I'll turn the call over to Bob for his closing remarks.
Thanks, Sean. Before we open the line for questions, I want to emphasize how our focus on operational excellence is delivering measurable improvements across several key metrics. This progress, combined with our disciplined approach to creating operational efficiencies, has expanded our margins on a year-over-year basis. In addition, we're particularly proud of the 55% improvement in free cash flow generated, reflecting both the strength and sustainability of our business model. Looking ahead, our natural gas businesses continue to be our primary growth engine with strategic infrastructure investments predominantly in the regulated utility business, driving rate base expansion. At AmeriGas, we are making steady progress on operational improvements, enhancing business processes and service quality to drive higher levels of customer retention. Internationally, our disciplined approach is generating strong cash flows that support our corporate priorities. Through focused capital allocation, infrastructure monetization, and strategic portfolio optimization, we are well positioned to navigate market uncertainties and create incremental value for our stakeholders. Thank you for your time with us today, and we will open the line for questions.
Questions and answers
And your first question comes from the line of Gabriel Moreen with Mizuho. Please go ahead.
Sorry. Hi, good morning. Sorry about that. I was on mute.
That's okay. So are we.
Hi, I wanted to start by asking about AmeriGas. It seems there has been some improved performance, likely due to favorable weather conditions. Can you discuss the insights you've gained from this winter and what your targets are for the upcoming fiscal year? Additionally, last quarter, you mentioned plans to refinance the '26 maturities by the end of this fiscal year. Can you provide an update on that? Are you still on track to meet that goal?
Sure. I'll take the first question, and I'll let Sean take the second one. So what I would say, Gabe, is that we got through the winter, we took advantage of the better weather. What we're really focused on between now and the beginning of next year is how do we make the AmeriGas business processes better. And we're full-fledged working on that. These are the type of projects that I love because it's little to no investment with big returns. So we're working on things like how we do routing and delivery, becoming more efficient on the density of our miles, which will drive OpEx down and customer satisfaction upward. We're working on how we purchase propane. We see tremendous opportunity to leverage our scale and consolidate our suppliers. We currently have 53 different suppliers for propane. So we're not taking advantage of our size. We're also looking at what's the most effective way to take advantage of propane prices, because what we're seeing with the tariff environment is pressure on propane prices to go downward.
So we see a lot of asymmetric risk there. And we've got the capacity to start creating and utilizing a more strategic hedging program to lock in some of this lower propane cost better than what we have in the past. We're looking at the customer value proposition. So segmenting our customers and making sure that the ones with the highest margin are getting the best service that they deserve and they should be getting. And for those that are just marginal, or at a loss, either we make them more profitable or we reduce those types of customers, because for us it's profitable volume that we need. It's just not being able to look and say what's the volume this year versus last year. What's the profitable volume this year versus last year? So we're looking to improve all elements of that business, how it's run, take pressure off the customer service center, particularly as we re-domesticate our customer service and make that a better-performing entity as well.
But right now, customer service has had to deal with an onslaught of questions or concerns from customers that we're making sure that we get to the root cause of all those things. So I'm very optimistic on what we can do by the time next winter arrives. And that's our goal here is to really improve how we do business in AmeriGas between now and next winter. And now's the time that we're doing it. We've got five key business process projects underway, fully staffed. This is being led by AmeriGas. This is not some outsourced thing that sends you down the wrong path. So there's not a lot of cost to it. It's all about getting business better, driving margin, driving the appropriate volume, and being much more efficient in quality processes that don't result in customer service issues. So I think we're going to see a very different AmeriGas as we go into next winter. And we've got new talent in the organization.
We've reinvigorated the talent in that organization. So I'm actually quite bullish on what we can do with AmeriGas. I think you're going to see a very strong propane business out there by next winter. So I'm excited about what that can do for this company. And as Sean mentioned in his comments as well, the great cash flow that we had to bring down our leverage ratio as well, I think we're positioned to really make a real difference when we go into next winter. And Sean, I'll hand it over to you to talk about the refinancing.
Yes, Gabe, regarding your question about refinancing, our goals remain unchanged. I want to highlight a few key points. We have approximately $664 million due next August, and we are committed to addressing that. What excites me are several developments at AmeriGas. We have seen strong cash generation, especially benefiting from a robust winter. For instance, as I mentioned earlier, we are nearing $100 million in cash as we close April, which is promising. We have also begun to repay part of the intercompany loan with international, amounting to about $20 million. Additionally, we have improved our leverage metrics, moving from 6 to about 5.4. These are all positive indicators for AmeriGas as we prepare for the 2026 maturity. On a broader market scale, there is good news too. Despite some volatility in capital markets recently, AmeriGas bonds have performed well. In fact, they are trading at levels equal to or better than where they were before the recent fluctuations. We are well positioned to manage our objectives, and the business is in a much stronger place as we approach the 2026 bonds.
Great. Thanks, guys. And maybe if I could follow-up, just sort of sticking on a bigger picture theme on in basin, sort of Appalachia natural gas demand. It seems like that's been very topical, no matter whose conference call, earnings conference call you listened to this quarter. Just wondering, kind of latest thoughts on UGI's positioning in terms of partnering with any of those folks looking to take advantage of cheap Appalachian gas and just what those conversations might be looking like lately?
The only thing I would say, Gabe, is that, certainly echo all your comments that you just made. And both our midstream business, which has the pipelines, as well as our utility that has the distribution as well, are having a lot of discussions with potential generators, data centers, and the like. So we expect to see some really robust growth in those areas. And we're fortunate to be located in the middle of all of that. So we're proactive with folks that want to come in to talk about where does it make sense to locate, say, new generation assets and where you can get the natural gas. So we're well positioned to be a big part of that just by where our infrastructure is. So as you'll see, as you know, our capital allocation is heavily skewed towards the natural gas business and that's not going to change, and for those reasons that you just really articulated.
Thanks, Bob. Appreciate that.
And your next question comes from Julien Dumoulin-Smith with Jefferies. Please go ahead.
Hi, good morning, team. It's actually Paul Zimbardo filling in for Julian. A busy morning. Thanks for the time.
Okay. Hi, Paul.
Hi. Bob, thank you for all that color on AmeriGas. Is there any quantification that you'd be willing to put on? How much incremental margin or EBITDA you see from AmeriGas as you turn into fiscal 2026? I know that there's been a little bit weaker performance, but there's been some strong performance in the past. Do you think you can get back to some of that EBITDA level that you've seen in the historical periods?
I can't specify a number at this moment. Our focus needs to be on strengthening our business processes. We are actively working on this. It's important to concentrate on our customer value proposition and ensure that our most profitable customers in the residential retail sector receive appropriate service. We want delivery to be efficient so that customers don’t have to worry about their propane needs. By prioritizing these areas, we can make a significant impact. I believe we won't be able to provide specific guidance until we approach the beginning of the next fiscal year. However, these are the essential steps we must take to improve the business. I'm genuinely optimistic about AmeriGas's potential. This doesn't require external investment; rather, it depends on our skilled employees using a structured problem-solving approach to enhance operations. We've identified five key objectives to accomplish before next winter, and everyone is committed to this effort. I believe we will emerge as a strong competitor as we head into the next winter season.
Got it. That's great to hear. And then the second one I had for Sean, just if you could comment a little bit on the fiscal second half drivers, just note that the implied net loss is particularly high versus historical levels. It sounded like you're pulling forward some costs into the second half of the fiscal year from the next fiscal year, but just if you could discuss the drivers that would be helpful. Thank you.
Yes, Paul. We aimed to provide some clarity. To start, in terms of managing expenses, we wanted to highlight that we experienced colder weather this year compared to last, particularly domestically. For our utility and midstream businesses, this colder weather included extended periods. As a result, some capital and operational expenditures that were planned for the first half of the year have been postponed to the second half. Therefore, when considering our initial guidance, expect some timing shifts in this regard during the latter half of the year. Additionally, from my two years at the company, I’ve observed that a significant portion of our earnings—often exceeding our total annual earnings—typically occurs in the first half of the year due to our winter-driven business model. On a positive note, we did raise our guidance from the midpoint of $290 million and are seeing encouraging trends internationally, which we are pleased with. AmeriGas is exceeding our expectations, and we are benefiting from several positive developments in the first half of the year. We continue to focus on ensuring that the efficiencies achieved over the past two years remain sustainable. So far, we’re doing well in that area. But that timing is what we were addressing, Paul.
And, Paul, I'm just going to add a couple of things. So I do rely heavily on Sean to make sure that we don't lose our way on cost management. But also the attrition for AmeriGas in our second quarter was in the very low single digits. So we're already seeing benefits of a lot of the work that the team has done to shore up how we deliver and maintain our customer service levels. So we've got a good running start for next year. And the other thing I'd add to that is, what I mentioned earlier around, we can be far more strategic in how we manage our propane costs than what we've been doing. And we have already achieved locked in some savings as we go into the latter part of the year on our propane purchases. So I expect some real benefits, financial benefits, from that again; requires no cost, just requires some brainpower, and we've got good people within AmeriGas who's going to make that happen.
No, excellent. It's great to see and hear the momentum. So thank you, both.
Thank you, Paul.
Thanks, Paul.
And there are no further questions at this time. I will now turn the call back over to Bob Flexon for closing remarks.
Thank you, Tricia, and thanks for those who attended the call. Just to reiterate, very pleased to see our strong year-to-date performance. What's particularly exciting for me is seeing our balance sheet improving both at the consolidated level and also down at the AmeriGas level. A strong balance sheet is a priority for us. We've got a lot of business process improvements underway, not only in AmeriGas, but in all of our divisions that we expect to see benefits from. We've got new talent within the organization. We are reinvigorating the culture here. We've got a lot of good people that have been here for a long time as well. So we're really excited about the things that come, and we're going to go to work and keep working at the things that we're doing and expect to see some good results from that. So with that, I thank you again for everyone for joining the call.
Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.