UGI (UGI) Q2 2026 Earnings Call Transcript

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DATE

Thursday, May 7, 2026 at 9 a.m. ET

CALL PARTICIPANTS

- Interim Chief Executive Officer — Robert Flexon

- Chief Financial Officer — Sean O’Brien

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Full Conference Call Transcript

Robert Flexon: Thanks, Tameka, and good morning. Fiscal 2026 is shaping up to be a year of meaningful progress against the strategic priorities we laid out at the start of the year. Our natural gas businesses continue to anchor the portfolio, supported by strong customer demand and operational execution. We continue to have a robust pipeline of data center opportunities, much like the announcement of our partnership with Prime Data Centers. UGI International continues to demonstrate the strength of its business, generating strong free cash flow and effectively managing margins through a dynamic operating environment.

Of note, we do not anticipate any full year impact to margins or supply availability issues from the ongoing conflict in the Middle East due to the nature of our sales contracts and our risk management hedging program. The operational transformation at AmeriGas is delivering substantial measurable results and on target to set the business up for a successful heating season at the start of fiscal year 2027. Our balance sheet ended the quarter with consolidated leverage below the targeted range of at or below 3.75x. Sean will cover in more detail the leverage milestones we expect to achieve this fiscal year.

Our year-to-date reportable segment's EBIT is up $17 million over prior year, largely from higher gas base rates at our utilities and effective margin management at UGI International, which offset the impact of warmer weather in our global LPG service territories. At our utilities, we deployed approximately $280 million of capital year-to-date, advancing our commitment to pipeline safety, reliability and modernization while adding more than 6,000 new heating customers across our service territories. Through our weather normalization riders in Pennsylvania and West Virginia, customers were able to save $26 million on heating bills this past winter. At AmeriGas, we are excited that in select cities, our barbecue cylinders are now available online through Amazon.

We are rolling this out in a phased approach across the markets where we currently operate AmeriGas' cylinder home delivery service called Cynch, leveraging our established direct-to-consumer delivery infrastructure. Turning to the next slide. I want to spend a few minutes on several strategic actions that together reflect the deliberate execution of our long-term value creation strategy, sharpening our focus on natural gas and deploying capital into the most attractive growth opportunities we see in our service territories. First, subsequent to the quarter, we entered into a definitive agreement to sell our electric division at UGI Utilities.

The transaction valued at approximately $470 million with further potential earn-outs prior to working capital adjustments is expected to close in the first quarter of calendar 2027, subject to customary closing conditions and applicable regulatory approvals. The strategic rationale here is clear. The transaction sharpens UGI's focus in our area of greatest competitive advantage and the after-tax proceeds will be used to reduce UGI debt and for general corporate purposes, further strengthening the balance sheet and providing greater financial flexibility for natural gas capital investment. We're excited to announce the strategic partnership between UGI Energy Services and Prime Data Centers to develop major natural gas supply infrastructure in Pennsylvania's Northern tier.

Under a purchase and sale agreement, UGI Energy Services will sell Prime property to build a proposed on-site gas fuel electric generation facility. UGI will retain the storage capacity and oil and gas rights associated with the property and is expected to supply the data center with reliable, large-scale gas supply. Prime's natural gas demand is expected to exceed 100,000 dekatherms per day within 3 to 5 years, a scale that underscores the importance of the project for the region's energy infrastructure. This partnership is a powerful example of how UGI's integrated natural gas platform is uniquely positioned to support the next wave of energy demand.

The northern tier of Pennsylvania offers direct access to locally produced natural gas and multiple redundant interstate pipeline pathways, a combination of supply, security and infrastructure depth. And importantly, Prime is one of many opportunities we are actively pursuing. Our team is in active conversations with numerous parties across the data center and large load industrial space with over 75 nondisclosure agreements directly related to potential future projects signed to date. While we don't expect that every one of those will translate into contracted opportunity, the breadth of inbound interest continues to be a strong signal of the demand environment in our service territories and UGI's position to be a strategic partner for large-scale natural gas infrastructure.

Lastly, during the quarter, we ran a successful oversubscribed open season for the projected Auburn pipeline expansion, which is pending FERC approval. The level of customer demand validates our expansion strategy. Taken together, these announcements provide additional avenues to creating long-term value, sharpening focus, strengthening the balance sheet and deploying capital where the demand exists. Now let me spend a few minutes on UGI International because this segment really embodies what disciplined execution looks like over the long term. When you look at the financial and operational profile of this business, there are several metrics worth highlighting.

First, the return on capital employed of approximately 15% indicates that we're earning attractive returns on the capital invested in this business, reflecting the quality of our market positions, a thoughtful approach to capital allocation and an operating model that has been refined over many years to drive efficiency at every level. We've also continued to expand operating margin, drive cost productivity and improve on already strong safety and customer metrics, areas where this team has long set a high bar and continues to raise it. Free cash flow generation is equally important. And over the past 3 years, UGI International has generated more than $800 million in free cash flow.

Free cash flow that has been used to fund dividends to shareholders, invest in growth initiatives in our natural gas line of business and maintain a strong balance sheet with net leverage consistently below 2x. This reflects disciplined CapEx, working capital rigor and the structural cost improvements this team has driven consistently over time. Together, these metrics describe a business that is efficient, generates strong returns on the capital it deploys and built to perform through changing economic cycles. Turning to Slide 7. The operational transformation is fully underway at AmeriGas and making a significant difference. We continue to advance many active improvement work streams across 6 focus areas with measurable improvements compared to fiscal 2024.

Over the past 2 years, we have reduced the recordable incident and lost time injury rates by roughly 50%. In operations, the percentage of 0 fill stops and out-of-gas events are down considerably while we've become more efficient in the number of miles driven to serve customers. And when I think of customer satisfaction, our customer service call volumes are down 32%, while our Net Promoter Score is up 67%, significant progress when compared to fiscal year '24. A major milestone on our turnaround for AmeriGas is the full reshoring of our call center to the U.S. at the end of the second quarter.

We now have over 250 agents dedicated to serving customers and regional teams that are closer to our customers and can better understand and respond to our customers' needs. This was a multi-quarter effort, and we executed on schedule, on budget and well ahead of the upcoming heating season. Our route optimization program is fully implemented and the productivity benefits are showing up in miles driven and on-time delivery metrics. Although we've seen strong improvements, our established PMO team remains focused on efforts to improve our cylinder exchange business, customer segmentation, pricing and billing, service operations improvement, supply chain optimization and inventory modernization.

Taken together, the operational transformation at AmeriGas is delivering tangible results with volumes stabilized and a 9% improvement in EBIT over the 2-year period. And with that, I'll hand the call over to Sean to walk through our financial results for the quarter and year-to-date in more detail.

Sean O’Brien: Thanks, Bob, and good morning. For the fiscal 2026 second quarter, UGI delivered total reported segment EBIT of $688 million in comparison to $692 million in the prior year period. This performance was largely driven by higher base rates at our Pennsylvania gas utility and effective margin management across our global LPG businesses in a quarter that was warmer than the prior year across their respective service territories. I want to highlight the strong operational execution by our natural gas teams who faced periods of colder weather in their service territories and delivered safe, reliable service for our customers. Turning to EPS. Adjusted diluted EPS was $2.09 compared to $2.21 in the prior year period.

As we previously anticipated, the year-over-year decline in adjusted EPS was driven primarily by the absence of investment tax credits realized last year and higher interest expense. Turning to the drivers of each segment's results. First, the utilities delivered EBIT of $250 million, up $9 million over the prior year. Total margin increased $23 million, primarily due to the effect of higher gas base rates that went into effect in Pennsylvania at the end of October 2025. As designed, our weather normalization adjustment mechanism mitigated approximately $19 million of the weather impact this quarter, providing bill stability for our customers. Operating and administrative expenses increased $8 million, reflecting higher personnel costs and uncollectible account expenses.

Depreciation and amortization rose $4 million on our continued distribution system capital investment. At Midstream & Marketing, EBIT was $150 million for the quarter in comparison to $154 million in the prior year. While heating degree days were 3% colder than the prior year, this winter, we saw longer durations of cold weather where the team was focused on reliably serving its peaking customers who pay a fixed demand charge regardless of usage, driving greater earnings stability in this business. Next, operating and administrative expenses were higher year-over-year, primarily due to new assets placed in service in the prior year.

In the global LPG businesses, starting with UGI International, EBIT was $132 million in comparison to $143 million in the prior year. Retail volumes were 8% lower, largely due to divestitures of the LPG businesses in Italy and Austria and the impact of warmer weather. Total margin was down $4 million as the lower retail volumes were substantially offset by the translation effects of stronger foreign currencies, which contributed approximately $30 million. Operating and administrative expenses were comparable with the prior year period as the impact of the aforementioned divestitures as well as lower distribution expenses were largely offset by the translation effects of the stronger foreign currencies of approximately $15 million.

Other income declined $11 million, and this included approximately $8 million of lower realized gains on foreign currency exchange contracts. Lastly, while we are closely monitoring the current geopolitical situation involving Iran, the structure of our LPG contracts with customers, combined with proactive actions taken by our team, gives us confidence that we do not anticipate any impact to margin or supply availability constraints. Importantly, the underlying business continues to perform well from a margin management and cash generation standpoint. Moving to AmeriGas. EBIT was $156 million, up $2 million versus the prior year. Retail gallons decreased 5%, primarily due to temperatures in the West that were warmer than prior year period as well as continuing customer attrition.

For the quarter, while weather in the Eastern region of the U.S. was comparable on a year-over-year basis, temperatures in the West were 12% warmer than the prior year period, impacting total volumes sold. On aggregate, on a weather-adjusted basis and excluding the effect of the Hawaii divestiture, retail gallons were comparable to the prior year period. Total margin increased $2 million as higher average LPG unit margins and increased fee income were largely offset by the lower retail gallons. OpEx increased $2 million from the continued investment in customer-facing initiatives, which resulted in higher compensation and advertising expenses. Turning to our year-to-date results.

Adjusted diluted EPS for the first half of fiscal 2026 was $3.35 in comparison to $3.58 in the prior year period. UGI delivered core EBIT growth, largely driven by higher gas base rates at our utilities, which more than offset the impact of warmer weather in our global LPG service territories and the previously announced LPG divestitures. This EBIT growth was offset by higher income tax expense, reflecting the absence of investment tax credits realized last year and higher interest expense. As we turn to the full year outlook, we are revising our fiscal 2026 adjusted diluted EPS guidance range to $2.75 to $2.90.

This primarily reflects lower expected earnings contributions from our Midstream & Marketing segment, where there are delays in planned growth investments and lower production volume in the Appalachian region. Also, to a lesser extent, the pace at which operational improvements at AmeriGas are translating into earnings is slower than originally anticipated. The fundamentals of these businesses remain intact. And as Bob discussed earlier, the recent announcements and progress on the operational transformation underscore our confidence in the long-term growth trajectory of this business. Moving to the balance sheet update. We continue to make strong progress against our balance sheet objectives.

Available liquidity at the end of the quarter was approximately $2.1 billion, an increase of approximately $200 million over the prior year quarter. Net leverage at UGI Corporation was 3.7x at the end of the quarter, which was the lowest in 5 years and below our targeted level of at or below 3.75x. At AmeriGas, we closed the quarter with net le