Executive Summary / Key Takeaways

• UGI Corporation is executing a strategic transformation focused on optimizing its portfolio, strengthening the balance sheet, and driving operational excellence, particularly in its core natural gas businesses and the turnaround of AmeriGas Propane.
• The company delivered its highest adjusted diluted EPS for the fiscal second quarter and year-to-date periods, driven by solid operational execution, favorable weather, and significant contributions from all four segments.
• Balance sheet health is improving, with available liquidity of $1.9 billion and reduced leverage ratios at both the corporate and AmeriGas levels, supported by strong free cash flow generation (up 55% year-to-date).
• Strategic investments are heavily weighted towards the natural gas segments, including utility infrastructure modernization and midstream asset expansion (LNG, RNG), positioning UGI to capitalize on growing regional demand.
• Management has increased fiscal 2025 adjusted diluted EPS guidance to $3.00 - $3.15, reflecting confidence in continued operational improvements, favorable weather impacts year-to-date, and a reduced estimated impact from the UGI International jetty damage.

Setting the Scene: A Diversified Energy Player Undergoing Transformation

UGI Corporation operates as a holding company with a long history dating back over 140 years, evolving from early manufactured gas plant operations to a diversified energy distributor serving customers across the United States and Europe. Its business model spans regulated natural gas and electric utilities, energy marketing and midstream infrastructure, and retail propane distribution. This portfolio mix provides a degree of resilience, though it also presents distinct operational and strategic challenges across varied markets and regulatory environments.

The company's current strategic direction, particularly under recent leadership, centers on enhancing its financial profile through portfolio optimization, disciplined capital allocation, operational efficiency improvements, and balance sheet strengthening. This involves a deliberate shift towards emphasizing the growth potential of its natural gas businesses while simultaneously addressing performance issues within its propane operations, notably AmeriGas.

In the competitive landscape, UGI's Utilities segment operates within defined, regulated service territories in Pennsylvania, West Virginia, and Maryland, competing indirectly with alternative energy sources and other local distribution companies (LDCs) on factors like service reliability and rate structures. UGI Utilities is often benchmarked favorably, with management citing it as "best-in-class" among utilities, benefiting from constructive regulatory environments that support infrastructure investment and rate base growth. Its Midstream Marketing segment competes with other energy marketers and midstream operators like ONEOK (OKE), leveraging its strategically located assets (LNG, pipelines, storage) to serve growing regional natural gas demand, including emerging loads like data centers and new power generation facilities. The global LPG businesses, UGI International and AmeriGas Propane, face competition from other propane distributors and alternative heating/energy sources. While UGI International benefits from established European networks, AmeriGas has faced significant competitive pressures leading to customer attrition.

UGI's technological differentiators are primarily embedded within its infrastructure and operational capabilities across segments. In its Utilities, investments in infrastructure replacement and betterment programs utilize modern piping materials and potentially advanced monitoring systems, though specific quantifiable technological advantages over peers like Dominion (D) or NiSource (NI) in terms of efficiency or asset performance are not detailed beyond the general benefits of modernization. The Midstream segment leverages technology in its LNG and RNG facilities. The Moody RNG project, for example, is designed to produce up to 300 MMCF of RNG per year, representing an investment in renewable energy technology. The expansion at the Manning LNG facility, doubling liquefaction capacity to 20,000 dekatherms per day, utilizes liquefaction technology crucial for meeting peak demand and fulfilling peaking contracts. While specific technological metrics comparing UGI's midstream tech to rivals like ONEOK are not provided, the strategic value lies in the physical assets and their integration within UGI's supply chain, offering flexibility and reliability. In the propane business, recent operational improvements at AmeriGas, such as the transition to a localized POD model (over 90 pods) and the focus on redesigning core business processes (five key projects underway), represent an investment in operational technology and methodology aimed at improving delivery efficiency, customer service, and supply chain optimization. While not a unique technology in itself, the effective implementation of these process improvements is intended to provide a competitive edge by reducing costs and improving customer retention, addressing a key vulnerability compared to more agile competitors.

Performance Reflecting Strategic Execution and Market Dynamics

UGI's recent financial performance underscores the impact of its strategic focus and responsiveness to market conditions. The company achieved its highest adjusted diluted EPS for both the fiscal second quarter and year-to-date periods ended March 31, 2025. For the three months ended March 31, 2025, UGI reported adjusted diluted EPS of $2.21, a notable increase from $1.97 in the prior-year period. Year-to-date adjusted diluted EPS reached $3.58, up from $3.16. This strong performance was broadly supported across the portfolio, with all four segments contributing to EBIT growth in the second quarter.

The Utilities segment saw adjusted net income increase by $11 million in Q2 and $14 million year-to-date compared to the prior year. This was primarily driven by higher total margin, benefiting from significantly colder weather in the service territories (15.1 degrees colder in Q2 than the prior year) which boosted core market volumes (up 18% in Q2). The increase in base rates at the WV Gas Utility, effective January 2024, also contributed positively. These gains were partially offset by higher operating and administrative expenses, reflecting increased system maintenance and uncollectible accounts expenses, and higher depreciation from ongoing capital investments.

Midstream Marketing's adjusted net income increased by $30 million in Q2 and $27 million year-to-date, largely attributable to lower income tax expenses resulting from higher investment tax credits associated with RNG projects being placed in service. While Q2 total margin was only slightly higher due to gains in capacity management and gas marketing offsetting lower gathering/processing margins and the absence of the divested Hunlock Creek asset, the segment's strategic positioning allowed it to operate LNG infrastructure at peak capacity during periods of high demand.

UGI International demonstrated resilience, with adjusted net income increasing by $2 million in Q2 and $19 million year-to-date. The year-to-date improvement was mainly driven by lower operating and administrative expenses and lower income tax expenses, partially offsetting lower margin contributions from energy marketing activities following the exit of that non-core business in Fiscal 2024. Despite a 4% decline in Q2 LPG volumes due to structural conservation and customer conversions, the segment benefited from effective margin management and reduced operating costs (down $13 million in Q2).

AmeriGas Propane, while still facing challenges, showed signs of improvement. Adjusted net income decreased by $12 million in Q2 and $74 million year-to-date, primarily due to significantly higher income tax expenses. However, the business saw a $16 million increase in Q2 EBIT and a $19 million increase year-to-date, driven by higher total margin (up $13 million in Q2) from increased retail volumes (up 3% in Q2) due to colder weather and higher average retail unit margins. Management highlighted early operational improvements, including the POD model implementation, contributing to lower customer attrition rates in Q2.

Overall, the company's consolidated financial health is improving. Available liquidity stood at $1.9 billion at March 31, 2025. The overall leverage ratio decreased to 3.8 times, down from 4.0 times at the end of Fiscal 2024. Free cash flow generation saw a significant 55% increase year-to-date, reaching approximately $490 million, reflecting the positive impact of margin expansion, operational efficiencies, and disciplined capital deployment. AmeriGas specifically saw its net debt to EBITDA ratio improve to 5.4 times from 6.0 times at the start of the fiscal year, supported by improved cash flow and debt reduction efforts, including a partial prepayment of the intercompany loan from UGI International.

Strategic Initiatives Driving Future Performance

UGI's strategic initiatives are clearly defined and aimed at building a stronger, more focused company. A core priority is the continued optimization and growth of the natural gas businesses. This is evidenced by the significant capital allocation (85% of capital expenditure is directed towards natural gas) and strategic investments. The Utilities segment continues its infrastructure replacement program, essential for safety and reliability, and is actively expanding its customer base, adding over 6,600 new residential heating and commercial accounts year-to-date. The recent filing of a gas base rate case in Pennsylvania, requesting a $110 million annual increase, is intended to support over $750 million in future system improvements. In the Midstream segment, the completion of the Moody RNG project and the near-completion of the Manning LNG liquefaction capacity expansion (expected full operation by Fiscal 2026) underscore the commitment to leveraging physical assets and participating in the evolving energy mix. The acquisition of Superior Midstream Appalachian further enhances the gathering footprint and potential synergies.

Simultaneously, a major focus remains on the turnaround of AmeriGas Propane. Management acknowledges the need for fundamental change to reduce customer churn and improve performance. The implementation of the localized POD model and the initiation of five key business process improvement projects are central to this effort, aiming to enhance customer experience, streamline operations, and optimize the supply chain. While still in the early stages, these initiatives are viewed as critical for stabilizing the business and driving better performance in the upcoming winter season. The goal is to achieve significant operational efficiencies with minimal capital investment, relying instead on improved processes and talent.

Portfolio optimization also continues, with the company having exited substantially all of its European energy marketing business and divested other non-core assets like the Hunlock Creek power plant and the Switzerland LPG business. These actions are intended to streamline the portfolio and contribute to debt reduction.

Balance sheet strengthening remains a key priority. The company has executed significant financing activities, including new credit facilities at the corporate level and increased revolver capacity for AmeriGas, providing enhanced liquidity. The successful redemption of AmeriGas's May 2025 senior notes via an intercompany loan from UGI International demonstrates creative financing to manage maturities. The goal is to continue improving free cash flow generation and reducing absolute debt, aiming for lower leverage ratios at both the corporate and AmeriGas levels.

Outlook and Key Risks

Based on its performance and strategic progress, UGI has increased its fiscal 2025 adjusted diluted EPS guidance range to $3.00 to $3.15. This revised outlook is based on several factors, including the favorable weather experienced in the first half of the fiscal year compared to the 10-year normal assumed in the initial guidance, the early positive impacts of operational improvements at AmeriGas leading to lower attrition and increased year-to-date EBIT, and a reduced estimated headwind from the UGI International jetty damage (now estimated at approximately $0.04). Management expressed confidence in the underlying strength of the businesses and the ability to execute strategic priorities in the latter half of the year, despite some planned operational investments being shifted to this period.

However, the company faces several risks that could impact its ability to achieve this guidance and execute its long-term strategy. Market risks include volatility in commodity prices (LPG, natural gas, electricity), interest rate fluctuations (impacting variable-rate debt and refinancing costs), and foreign currency exchange rate movements (particularly USD/Euro and USD/British Pound Sterling, though partially hedged). While Utilities' regulated nature mitigates some commodity price risk, the non-utility segments remain exposed. The company also faces counterparty risk on derivative instruments.

Operational and business-specific risks include the potential for continued customer attrition at AmeriGas if turnaround efforts are not fully successful, operational strain during peak demand periods (as experienced in Q2 FY25), and the impact of the jetty damage in France on UGI International's supply chain and distribution costs. Regulatory risks include the outcome of rate cases (like the pending PA Gas Utility filing) and environmental liabilities related to former MGP sites, particularly those outside Pennsylvania where recovery is less certain. Litigation related to the West Reading explosion also presents a significant, albeit insured, risk with an uncertain outcome.

Despite these risks, the increased guidance signals management's belief that the tailwinds from operational improvements, strategic investments, and balance sheet actions are expected to outweigh potential headwinds in the current fiscal year.

Conclusion

UGI Corporation is navigating a period of strategic transformation, leveraging the foundational strength of its regulated natural gas utility and complementary midstream assets while undertaking a critical turnaround effort at its domestic propane business. The recent financial performance, marked by record adjusted EPS and significant free cash flow growth, demonstrates the initial success of initiatives focused on operational efficiency, portfolio optimization, and balance sheet improvement. The increased fiscal 2025 guidance reflects growing confidence in the trajectory of the business, driven by favorable market conditions year-to-date and tangible progress in addressing key operational challenges, particularly at AmeriGas.

While competitive pressures persist across its segments and various risks remain, UGI's strategic emphasis on investing in its natural gas growth engine, coupled with a disciplined approach to improving the profitability and stability of its LPG operations and strengthening its financial position, provides a clear path forward. The ability to execute on the AmeriGas turnaround and successfully integrate and expand its midstream assets will be crucial determinants of UGI's long-term value creation and its ability to narrow the perceived gap between its current market valuation and the underlying strength of its diversified asset base.