Morningstar | AmeriGas' Poor Results Highlight Benefit of UGI Acquisition
We are reaffirming our $34 per unit fair value estimate, no moat and negative moat trend ratings for AmeriGas Partners after the partnership reported fiscal 2019 second-quarter adjusted EBITDA of $290.3 million compared with $309.5 million in the same-year ago period. AmeriGas management expects to earn at the low end of its 2019 adjusted EBITDA guidance of $610 million-$650 million.In April, UGI announced a definitive agreement to acquire the remaining shares of AmeriGas it doesn't own. UGI will pay $7.63 in cash and 0.5 shares of UGI for each common unit of AmeriGas, a 12.5% premium to AmeriGas' prior-day closing price. The transaction is expected to close in the fourth quarter of fiscal 2019.
Results for the quarter support our view that the UGI transaction is the best outcome for AmeriGas shareholders. While the transaction offers little premium to our stand-alone $32 fair value estimate, it has been difficult for AmeriGas to manage the volume fluctuations for volatile weather. This stressed its balance sheet, making the current $3.80 distribution as unsustainable, in our opinion.
We forecast AmeriGas will need to cut its distribution to $2.60 per unit to create a sustainable distribution payout of 1.4 times, allaying the need for further equity and debt issuances, assuming normal weather. UGI's regulated operations, midstream services, and international businesses should provide AmeriGas shareholders more stable cash flow than AmeriGas as a stand-alone entity. However, we expect UGI's cash flow will be more volatile than a pure regulated utility.
For the quarter, earnings were supported by weather that was generally colder year over year. However, warmer-than-normal weather in the Southeast during the crucial winter heating months hurt earnings.
AmeriGas Partners is a holding company. Through its operating partnership, AmeriGas Propane, L.P., the company is engaged as a retail propane distributor. The company serves residential, commercial, industrial, agricultural, wholesale and motor fuel customers from several propane distribution locations. In addition to distributing propane, the company also sells, installs and services propane appliances, including heating systems and propane-powered generators. As part of its overall transportation and distribution infrastructure, the company operates as an interstate carrier throughout the continental U.S.
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