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UGI to invest more than $1B in renewable gas through 2025

Gas transportation and distribution company UGI Corp. expects to spend more than $1 billion on renewable gas investments over the next five years, executives said on the company's June 21 investor day presentation.

The target marks an uptick from UGI's last investor update in December, when executives envisioned investing up to $1 billion on renewable natural gas, bioLPG and renewable dimethyl ether ventures. Incoming UGI President and CEO Roger Perreault said it is now clear that the company will cross that threshold by 2025 given its line of sight and a "wide array of exciting opportunities" ahead.

The projects would allow the company to offer lower-emissions products and provide a lever to meet climate mandates in its Mid-Atlantic gas utility and midstream business and its U.S. and European LPG segments, Perreault said. The renewables plan is one part of UGI's "three R's" strategy, which also includes generating reliable earnings and rebalancing its business with greater exposure to natural gas.

The company has announced several renewable energy initiatives this year, including a joint venture to process renewable natural gas, or RNG, from dairy waste in upstate New York and an interconnection agreement with a large RNG supply project in Pennsylvania. In 2020, the company acquired an RNG marketer and agreed to invest in a utility-scale RNG project in Idaho.

UGI intends to grow its RNG business over the long-term by building a diversified portfolio of projects and expanding contractual arrangements with counter-parties willing to enter long-term, fixed-priced contracts for RNG, according to Matt Dutzman, vice president of strategy for natural gas at UGI.

That will entail seeking out attractive opportunities, potentially beyond UGI's natural gas footprint in the Northeast, Dutzman said. UGI is also exploring opportunities to invest in projects that process RNG from landfills and food waste, according to Dutzman. "We believe that diversity in our energy supply projects and revenue sources will help us to mitigate risk and ensure healthy returns as we scale up the business," Dutzman said.

UGI also plans to develop at least six renewable dimethyl ether production plants in the U.S. and Europe over the next five years through a joint venture with SHV Energy NV. Derived from renewable feedstocks, rDME can be blended with propane to make it nearly carbon neutral. Including third-party investment in plants, UGI sees aggregate investment in rDME reaching $1 billion.

The company is targeting 300,000 tons of rDME production per year by 2027, with 40% of capacity available to UGI to meet potential U.S. and European emissions reductions standards.

UGI expects any renewable energy investment to earn unlevered internal rates of return of 10% or above, Perreault said. Executives said they could not project the cadence of investments over the five years. However, provided the investments were fairly evenly distributed, UGI could manage to finance them with cash generated from operations, according to UGI CFO Ted Jastrzebski.

The company would look at alternative financing needs if it invests in projects of sizable scale, or if its total investments accelerate much beyond the $1 billion threshold, Jastrzebski said.