Prepared remarks
Good day, and thank you for joining us. Welcome to the UGI Corporation Q3 2025 Earnings Conference Call. Please note that today's conference call is being recorded. I would now like to turn the call over to your first speaker, Tameka Morris. Please go ahead.
Good morning, everyone. Thank you for joining our Fiscal 2025 Third 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 third quarter and fiscal year-to-date financial results, along with other 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 or quarterly reports 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 hand the call over to Bob.
Thanks, Tameka, and good morning. UGI has continued to deliver outstanding year-to-date results, reflecting the strength of our asset portfolio and our team's commitment to safely and reliably deliver positive energy solutions to our customers. Our increasing focus on safety, driving superior business performance, operational excellence, and creating greater financial flexibility is yielding results across each of our businesses. UGI's year-to-date adjusted diluted earnings per share of $3.55 is a record performance, up $0.33 over the prior year period. This performance reflects meaningful contribution from all segments, specifically from strategic investments in the growth-oriented natural gas infrastructure, operating efficiencies, particularly at UGI International, the customer-focused improvements now underway at AmeriGas, and income tax credits. For the fiscal third quarter, we reported adjusted diluted earnings per share of negative $0.01 compared to positive $0.06 in the prior year period.
As a reminder, our third and fourth quarters typically represent the seasonally weaker periods for our business, and this year's results reflect normal seasonal patterns. Given our strong year-to-date performance and the momentum across our businesses, we expect to be at the top end of our fiscal 2025 adjusted earnings per share guidance range of $3 to $3.15, which Sean will discuss later in the call. Slide 5 provides several key operational highlights for the third quarter. We deployed over $600 million of capital on a year-to-date basis, with more than 80% directed to our highest risk-adjusted return businesses, the regulated Utilities and UGI energy services. In addition, our Utilities segment continued to demonstrate strong fundamentals with sustained customer growth of approximately 9,000 residential heating and commercial customers added this fiscal year. We also made progress on the Pennsylvania Gas Utility rate case where there was a joint petition for approval of a settlement filed on July 9.
This petition was for a $69.5 million revenue increase, and it is subject to review and approval by the Administrative Law Judges and Pennsylvania Public Utility Commission. We anticipate that new rates will be finalized and implemented in the first quarter of fiscal 2026, which will support continued system investments to promote pipeline safety, reliability, and modernization. Separately, across both LPG businesses, we are successfully executing on our strategic portfolio optimization initiatives, entering into definitive agreements for asset sales, which are expected to generate approximately $150 million in total proceeds during fiscal 2025. These targeted divestitures demonstrate our intention to operate in locations where we have a competitive advantage, focusing resources on our highest return opportunities while providing financial flexibility to support deleveraging objectives and fund growth investments.
Turning to AmeriGas, our customer-focused improvement initiatives are progressing as expected, with ongoing execution of key actions, including procurement, routing and delivery, and call-center reshoring as we prepare for the upcoming winter season. Furthermore, we are focusing on profitable customer segments. Therefore, we will be substantially exiting the wholesale business. While this may reduce the total LPG gallons sold, we expect no meaningful impact on our overall results as these volumes have little to no earnings contributions. For reference, fiscal 2024, the wholesale business represented approximately 11% of total LPG gallons sold, and was essentially a breakeven business. And with that, I'll hand the call over to Sean to walk through the financial results in more detail.
Thanks, Bob, and good morning. I'll now provide more details on our financial performance. For the third quarter, UGI reported adjusted diluted EPS of negative $0.01 compared to positive $0.06 in the prior year period. This quarter reflected the impact of typical seasonal patterns within our business, warmer weather across a few of our service territories, and the anticipated reduction in Midstream margins. Specifically, the Utility segment was down $0.04, primarily due to higher operating and administrative expenses. Midstream & Marketing was down $0.01 as the higher investment tax credits associated with the RNG projects largely offset lower gathering and processing margin. UGI International was also down $0.02, as the lower total margins more than offset the benefits from reduced operating and administrative expenses and lower tax expense. At AmeriGas, while EBIT was fairly flat year-over-year, the business benefited from lower income tax expense.
At Corporate & Other, there is an offset to normalize the corporation's tax rate, and this is reflected in the EPS decline shown year-over-year. Turning to the quarterly results for each reportable segment, at the Utilities, EBIT was $30 million for the quarter versus $39 million in the prior year period. Total margin was up $4 million, largely due to benefits from the infrastructure replacement and betterment program at the West Virginia Gas Utility. Operating and administrative expenses rose by $10 million, reflecting, among other things, higher personnel-related and maintenance expenses. Depreciation and amortization expenses also increased due to continued investment in our distribution system. At the Midstream & Marketing segment, EBIT was $27 million for the quarter, down $16 million over the prior year. Total margin decreased $9 million as lower margins from natural gas gathering and processing operations, as well as the 2024 divestiture of our power generation asset, Hunlock Creek, were partially offset by increased margins from gas marketing activities.
Year-over-year, the segment also saw lower Other income, particularly due to the absence of income from a storage farm-out contract in the prior year. Turning to the Global LPG businesses. At UGI International, LPG volumes declined by 9% due to the effects of continued structural conservation, the absence of certain customers who previously converted from natural gas to LPG, and the impact of weather that was 16% warmer than the prior year. The effect of this volume decline, along with the lower LPG unit margins, were partially offset by the translation effects of stronger foreign currencies, leading to a $19 million decline in total margin. UGI International continued to drive operational efficiencies. And this quarter, we saw a $9 million decline in operating and administrative expenses driven by lower personnel and distribution expenses, which was partially offset by the translation effect of the stronger foreign currencies.
Overall, the segment reported EBIT of $43 million, in comparison to $57 million in the prior year period, largely due to a $19 million decline in margin and slightly higher depreciation and amortization expenses, partially offset by lower operating and administrative expenses. At AmeriGas, the operating loss of $28 million for the quarter was fairly consistent with the prior year as the effect of lower retail volumes stemming from continued but reduced customer attrition was more than offset by higher retail unit margins. Turning to the full year-to-date performance, the EBIT from our reportable segments was comparable year-over-year, demonstrating the resilience of our diversified portfolio amid a mixed operating environment. At the Utilities, EBIT was up $12 million, primarily driven by a 10% increase in core market volumes from favorable weather conditions. Midstream & Marketing experienced a $22 million EBIT decline, reflecting the anticipated impact of lower minimum volume commitments on one contract renewal completed in Q4 last year, as well as the 2024 power generation asset sale.
UGI International's EBIT decreased $9 million, largely due to the absence of the Swiss business divested in Q3 last year, along with softer retail volumes, and this was largely offset by the successful reduction of $35 million in operating and administrative expenses. AmeriGas showed some momentum with EBIT up $18 million, reflecting both higher total margins and disciplined expense management. Notably, the segment achieved a slight increase in total retail gallons largely due to colder weather conditions during the critical winter months, which offset customer attrition. This underlying operational performance, combined with meaningful tax benefits primarily associated with investment tax credits, led to the year-to-date adjusted diluted EPS of $3.55. Looking to the fiscal fourth quarter, we anticipate that earnings from our underlying businesses, excluding taxes, will be largely consistent with the prior year period.
Of note, while we recorded a diluted loss of $0.16 in Q4 of fiscal 2024, this included $0.20 of tax benefit from regulatory changes that allowed us to utilize previously expensed valuation allowance. With that outlook for the fiscal fourth quarter and our year-to-date results, we expect that UGI will achieve the top end of its fiscal 2025 adjusted EPS guidance range of $3 to $3.15 per share. This guidance excludes potential incremental benefits from the recently enacted One Big Beautiful Bill Act. While our team continues to review the impact of the bill on our business, the bill's changes to the deductibility of interest expense is expected to provide additional tax expense favorability as we move forward. Turning to the balance sheet, we continue to build financial strength and flexibility, as evidenced by our leverage ratio of 3.8x for the quarter and robust free cash flow generation, combined with strong available liquidity of approximately $1.9 billion as of June 30, 2025.
These metrics underscore our commitment to exercise financial discipline and maintain a solid foundation for value creation. Lastly, I am pleased with the progress made in optimizing our LPG portfolio, generating approximately $150 million in cash proceeds, while streamlining our footprint, enhancing our strategic focus, and providing meaningful support for our deleveraging objectives. And with that, I'll turn the call over to Bob for his closing remarks.
Thanks, Sean.
Questions and answers
Our first question comes from Julien Dumoulin-Smith of Jefferies.
It's actually Paul Zimbardo speaking for Julien. The first question I have is if you could explain a bit about the potential disclosure related to the One Big Beautiful Bill Act. Is this regarding bonus depreciation on regulated activities or the 45Zs on the RNG? Any qualitative insights you can provide would be appreciated.
Yes, Paul, this is Sean. I'll cover a few points. The most significant initial impact will be the loss of interest deductibility, particularly at AmeriGas, which began affecting us in 2023. This has also impacted 2024 and will affect this year as well. The first step is that we will be able to retroactively adjust and likely remove some of the valuation allowance that we have had on the books over the past two years and somewhat this year. This process will continue moving forward. Additionally, we have major impacts from the ITCs this year as we are concluding our RNG projects that are coming into service. While we haven't focused much on bonus depreciation, this act will likely allow us to utilize it more moving forward. The R&D credits are another area where we see benefits due to our capital spending at the Utility and Nat Gas. Finally, on the 45Zs, it is about strengthening our position as we approach next year and beyond. We haven't disclosed the exact numbers, but we are aware of the positive trend for the company.
Okay. It's good to hear across the board. And then, I know, I had asked about AmeriGas, I'll leave that for someone else. I wanted to drill in a little more on the Midstream side of the business. Obviously, you had a lot of activity with the Pennsylvania AI & Innovation Day. Are there any ways that you could frame what you think the investment opportunity set is for the Pennsylvania Midstream business, given a lot of the activity in your footprint that would be helpful?
Yes, Paul, I think the best I can do with that right now is to say that both Midstream and the Utility, we expect will benefit. We have well into the double digits of NDAs with potential generators and other opportunities to utilize our infrastructure for providing natural gas or providing on-site LNG. So we see pretty robust opportunities there, multiple counterparties and in-depth discussions that are ongoing. So we have the right assets in the right place to take advantage of all of this. So it's just to continue to cultivate those opportunities.
Okay. Great. And then if I could squeeze in one last one. Any commentary you provide on the multiple for the strategic divestitures you had as of date?
No. I mean, the way that we looked at all the divestitures is that we looked at, kind of, how we view the value in our hands versus the value that we're receiving from, again, the counterparty on it. And we wouldn't sell any asset that would be dilutive. So when you think about the various multiples of our business, even when you break them apart, it's got to either be equal or better than in our own hands. So that way, on a risk-adjusted basis, you're creating value versus not selling. So, that's the way we look at it. Again, we look at the NPV in our hands versus the sale price and make sure that it's not going to be dilutive to us. On leverage, Paul, when you think about it. So it's got to be much better than our leverage ratio as well.
Our next question comes from Gabriel Moreen of Mizuho.
Good morning, everyone. I'll address the AmeriGas question from two angles. First, there are many factors to consider, especially with the wholesale divestiture and the potential improvement of our customer base. Bob, as we approach the winter heating season, I am interested in knowing which metrics you are prioritizing, particularly if profitability is a key focus. Could you provide guidance on whether you are looking at absolute or relative metrics? The second part of my question is related to the divestiture program for LPG; do you believe you have completed everything for now, or is there more to come at this stage?
Thank you, Gabe. I'll address the AmeriGas topic without taking too much time. The wholesale business has been generating a lot of activity but hasn't contributed to our bottom line. We're working on simplifying this aspect of the business and will not supply our competitors at cost using our infrastructure, as that approach doesn't make sense. If we have any lost customers, they will either become new profitable national accounts or will no longer continue with us. We're focusing on enhancing our portfolio to concentrate on our highest value customers, ensuring they receive the level of service they expect and deserve. This is a positive move as we prepare for winter, allowing us to manage our profitable customers better. Safety is a key area we don't often discuss on these calls, but I'm pleased to report significant improvements in our safety record at AmeriGas in the third quarter. This is a key indicator of how well we're managing our operations and eliminating inefficiencies while maintaining a safe workforce.
I'm delighted with the notable advancements we've made in safety. We're transitioning from analyzing root causes to implementing solutions for improvement projects. This is a two-winter initiative. For customer service this winter, we will maintain some international support but have expanded our domestic presence to enhance service quality. We'll measure this through customer service statistics, Net Promoter Scores, wait times, and other relevant metrics. Additionally, we've been focusing on routing and delivery, and we've rolled out improvements to several locations, yielding an 8% to 10% efficiency gain in delivery metrics. By October 1, we aim to have this implemented nationwide, which will also be another area of measurement for us. We are generating strong cash flow from this business, which we believe should stand independently. I'm also excited about AmeriGas's improved leverage ratio by nearly one turn.
We will continue monitoring our balance sheet and maintaining correct credit metrics as we head into winter, tracking various performance metrics. Surprisingly, I've found significant opportunity to enhance our ACE business during the summer months through better productivity and processes. Initially, my focus was on winter, but visiting our locations has revealed potential for meeting our production targets, which would positively impact our summer performance as well. We expect to improve production metrics in our ACE facilities as we look ahead to next summer. We're also working on procurement for propane and proactive hedging to help our customers maintain stable bills. There's a lot happening, and I believe we're in excellent shape as we approach winter.
That was very comprehensive. Maybe if I can comment Midstream from a different angle. When you think about your producer activity behind some of the supply push systems that you have, can you maybe talk about what you're seeing, given the uptick in-basin demand, maybe some egress capacity, too. And as a second part to that question, are there any notable contract expiries on the Midstream side that you're kind of watching over the next, call it, 12 to 18 months?
Yes, I can hit a few of those, Gabe. No significant notable contract expiries or at least nothing that we anticipate where there's a significant shift, meaning on the re-up, we think it will be generally in line with what we're at. We did have that one last year. Maybe that's what you're referring to. So I think as we look at '26, we're not thinking about any big dip due to big contract expirations.
And again, Gabe, just a follow-up on maybe the earlier question from Paul as well. When we look at the potential developers within the state of Pennsylvania, both on the regulated and unregulated side for power generation and the like. We're seeing substantial inquiries and opportunities there. So we will continue to work with all of those counterparties to see what we can do to participate and help make the energy investment that's happening across the state. Again, we're in an exciting time for the state of Pennsylvania. The Energy Summit really highlighted that. And the great thing of Pennsylvania is how, from a political standpoint, all parties are aligned on bringing investment into the state of Pennsylvania. So it's really an exciting time here in Pennsylvania. And again, our Midstream business and our Utility business should be substantial benefactors of the movement underway.
I'm showing no further questions at this time. I would like to turn it back to Bob Flexon for closing remarks.
Thanks, Dana, and thank you everyone for joining us. I have just a few closing comments. We had a record year, which is certainly exciting. We're actively working to make the future even more successful. I'm very enthusiastic about our safety performance and the improvements we're seeing, as I believe this is a strong indicator of a well-managed company. We are pleased with our financial performance this year, particularly the cash flow of $558 million, which represents an 11% year-on-year improvement. Additionally, we've managed to reduce our corporate leverage to 3.8x, along with a $200 million debt reduction that I mentioned earlier. AmeriGas has nearly achieved a one turn improvement in its leverage ratio. We will continue to focus on the key drivers of intrinsic value in our business, particularly in Pennsylvania and West Virginia, where we have a constructive rate case proceeding that we're looking to finalize for our fiscal '26 results. We've completed our Midstream projects and are continuously exploring emerging opportunities. Lastly, we are fully focused on the upcoming winter to ensure a successful start to fiscal '26. Thank you for your engagement and discussion about the future.
Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.