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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-1398
UGI UTILITIES, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1174060
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
UGI UTILITIES, INC.
100 Kachel Boulevard, Suite 400
Green Hills Corporate Center, Reading, PA
(Address of principal executive offices)
19607
(Zip Code)
(610) 796-3400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
At July 31, 2002, there were 26,781,785 shares of UGI Utilities, Inc.
Common Stock, par value $2.25 per share, outstanding, all of which were held,
beneficially and of record, by UGI Corporation.
UGI UTILITIES, INC.
TABLE OF CONTENTS
PAGES
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2002 and
September 30, 2001 1
Condensed Consolidated Statements of Income for the three and nine
months ended June 30, 2002 and 2001 2
Condensed Consolidated Statements of Cash Flows for the
nine months ended June 30, 2002 and 2001 3
Notes to Condensed Consolidated Financial Statements 4 - 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9 - 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
- i -
UGI UTILITIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(Thousands of dollars)
June 30, September 30,
2002 2001
-------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 12,113 $ 7,711
Accounts receivable (less allowances for doubtful accounts
of $4,275 and $3,151, respectively) 38,180 39,152
Accrued utility revenues 7,547 11,110
Inventories 25,564 48,074
Deferred income taxes 7,563 5,527
Prepaid expenses and other current assets 4,849 2,178
-------- --------
Total current assets 95,816 113,752
Property, plant and equipment, at cost (less accumulated depreciation
and amortization of $289,877 and $276,429, respectively) 585,715 578,768
Regulatory assets 54,803 56,155
Other assets 38,317 35,734
-------- --------
Total assets $774,651 $784,409
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 26,000 $ -
Bank loans 45,600 57,800
Accounts payable 40,256 67,456
Other current liabilities 45,700 52,182
-------- --------
Total current liabilities 157,556 177,438
Long-term debt 182,392 208,477
Deferred income taxes 128,738 121,890
Deferred investment tax credits 8,485 8,783
Other noncurrent liabilities 11,878 12,064
Commitments and contingencies (note 4)
Redeemable preferred stock 20,000 20,000
Common stockholder's equity:
Common Stock, $2.25 par value (authorized - 40,000,000 shares;
issued and outstanding - 26,781,785 shares) 60,259 60,259
Additional paid-in capital 72,792 72,792
Retained earnings 132,727 102,706
Accumulated other comprehensive loss (176) -
-------- --------
Total common stockholder's equity 265,602 235,757
-------- --------
Total liabilities and stockholders' equity $774,651 $784,409
======== ========
See accompanying notes to consolidated financial statements.
- 1 -
UGI UTILITIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(Thousands of dollars)
Three Months Ended Nine Months Ended
June 30, June 30,
---------------------- -----------------------
2002 2001 2002 2001
------- -------- -------- --------
Revenues $88,249 $103,772 $409,675 $501,866
------- -------- -------- --------
Costs and expenses:
Gas, fuel and purchased power 48,235 64,849 244,493 323,993
Operating and administrative expenses 19,894 20,106 61,568 66,981
Operating and administrative expenses - related parties 1,402 1,149 4,420 3,908
Taxes other than income taxes 2,870 1,713 8,698 7,179
Depreciation and amortization 5,290 5,992 16,934 17,798
Other income, net (2,664) (2,782) (8,588) (10,701)
------- -------- -------- --------
75,027 91,027 327,525 409,158
------- -------- -------- --------
Operating income 13,222 12,745 82,150 92,708
Interest expense 4,054 4,485 12,545 14,520
------- -------- -------- --------
Income before income taxes 9,168 8,260 69,605 78,188
Income taxes 3,616 3,270 27,459 30,947
------- -------- -------- --------
Net income 5,552 4,990 42,146 47,241
Dividends on preferred stock 388 388 1,163 1,163
------- -------- -------- --------
Net income after dividends on preferred stock $ 5,164 $ 4,602 $ 40,983 $ 46,078
======= ======= ======== ========
See accompanying notes to consolidated financial statements.
- 2 -
UGI UTILITIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Thousands of dollars)
Nine Months Ended
June 30,
----------------------
2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 42,146 $ 47,241
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 16,934 17,798
Deferred income taxes, net 4,389 (5,414)
Other, net 3,862 408
Net change in:
Accounts receivable and accrued utility revenues (753) (24,247)
Inventories 22,510 (3,030)
Deferred fuel costs 1,491 14,016
Accounts payable (27,201) (1,840)
Other current assets and liabilities (10,946) 6,344
-------- --------
Net cash provided by operating activities 52,432 51,276
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment (22,374) (23,240)
Net costs of property, plant and equipment disposals (1,330) (502)
Cash contribution to partnership - (6,000)
-------- --------
Net cash used by investing activities (23,704) (29,742)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of dividends (12,126) (27,956)
Issuance of long-term debt - 50,603
Repayment of long-term debt - (15,000)
Bank loans decrease (12,200) (47,100)
Capital contribution from UGI - 4,000
-------- --------
Net cash used by financing activities (24,326) (35,453)
-------- --------
Cash and cash equivalents increase (decrease) $ 4,402 $(13,919)
======== ========
CASH AND CASH EQUIVALENTS:
End of period $ 12,113 $ 1,656
Beginning of period 7,711 15,575
-------- --------
Increase (decrease) $ 4,402 $(13,919)
======== ========
See accompanying notes to consolidated financial statements.
- 3 -
UGI UTILITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Thousands of dollars)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of UGI Utilities, Inc. ("UGI Utilities") and its wholly owned
subsidiaries (collectively, "the Company" or "we"). We eliminate all
significant intercompany accounts and transactions when we consolidate. UGI
Utilities is a wholly owned subsidiary of UGI Corporation ("UGI") and owns
and operates a natural gas distribution utility ("Gas Utility") in parts of
eastern and southeastern Pennsylvania. UGI Utilities also owns and operates
an electricity distribution utility and, through a subsidiary and its
joint-venture partnership Hunlock Creek Energy Ventures ("Energy
Ventures"), an electricity generation business (collectively, "Electric
Utility") in northeastern Pennsylvania. Electric Utility's investment in
Energy Ventures is accounted for under the equity method.
The accompanying condensed consolidated financial statements are unaudited
and have been prepared in accordance with the rules and regulations of the
U.S. Securities and Exchange Commission. They include all adjustments which
we consider necessary for a fair statement of the results for the interim
periods presented. Such adjustments consisted only of normal recurring
items unless otherwise disclosed. These financial statements should be read
in conjunction with the financial statements and the related notes included
in our Annual Report on Form 10-K for the year ended September 30, 2001
("Company's 2001 Annual Report"). Due to the seasonal nature of our
businesses, the results of operations for interim periods are not
necessarily indicative of the results to be expected for a full year.
UGI Utilities' comprehensive income was $4,908 and $41,970 for the three
and nine months ended June 30, 2002. Other comprehensive loss of $644 and
$176 in the three and nine months ended June 30, 2002 is the result of
losses on derivative instruments qualifying as hedges. The Company's
comprehensive income was the same as its net income for the three and nine
months ended June 30, 2001.
- 4 -
UGI UTILITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Thousands of dollars)
2. SEGMENT INFORMATION
Based upon SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"), we have determined that the Company
currently has two reportable segments: (1) Gas Utility and (2) Electric
Utility. The accounting policies of our two reportable segments are the
same as those described in the Significant Accounting Policies note
contained in the Company's 2001 Annual Report. We evaluate each segment's
performance principally based upon its earnings before income taxes. No
single customer represents more than 10% of the total revenues of either
Gas Utility or Electric Utility. Financial information by reportable
segment follows:
- 5 -
UGI UTILITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Thousands of dollars)
2. SEGMENT INFORMATION (continued)
THREE MONTHS ENDED JUNE 30, 2002:
Gas Electric
Total Eliminations Utility Utility
-------- ------------ -------- --------
Segment revenues $ 88,249 $ - $ 68,100 $ 20,149
======== ===== ======== ========
Segment profit:
EBITDA(1) $ 18,512 $ - $ 14,676 $ 3,836
Depreciation and amortization (5,290) - (4,528) (762)
-------- ----- -------- --------
Operating income 13,222 - 10,148 3,074
Interest expense (4,054) - (3,413) (641)
-------- ----- -------- --------
Income before income taxes $ 9,168 $ - $ 6,735 $ 2,433
======== ===== ======== ========
Segment assets (at period end) $774,651 $(709) $669,391 $105,969
======== ===== ======== ========
THREE MONTHS ENDED JUNE 30, 2001:
Gas Electric
Total Eliminations Utility Utility
-------- ------------ -------- --------
Segment revenues 103,772 $ - $ 84,532 $ 19,240
======== ===== ======== ========
Segment profit:
EBITDA(1) $ 18,737 $ - $ 15,918 $ 2,819
Depreciation and amortization (5,992) - (5,112) (880)
-------- ----- -------- --------
Operating income 12,745 - 10,806 1,939
Interest expense (4,485) - (3,796) (689)
-------- ----- -------- --------
Income before income taxes $ 8,260 $ - $ 7,010 $ 1,250
======== ===== ======== ========
Segment assets (at period end) $773,511 $(137) $672,085 $101,563
======== ===== ======== ========
(1) EBITDA (earnings before interest expense, income taxes, depreciation and
amortization) should not be considered as an alternative to net income (as
an indicator of operating performance) or as an alternative to cash flow
(as a measure of liquidity or ability to service debt obligations) and is
not a measure of performance or financial condition under accounting
principles generally accepted in the United States. The Company's
definition of EBITDA may be different from that used by other companies.
- 6 -
UGI UTILITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Thousands of dollars)
2. SEGMENT INFORMATION (continued)
NINE MONTHS ENDED JUNE 30, 2002
Gas Electric
Total Eliminations Utility Utility
-------- ------------ -------- --------
Segment revenues $409,675 $ - $347,523 $ 62,152
======== ===== ======== ========
Segment profit:
EBITDA $ 99,084 $ - $87,994 $ 11,090
Depreciation and amortization (16,934) - (14,504) (2,430)
-------- ----- -------- --------
Operating income 82,150 - 73,490 8,660
Interest expense (12,545) - (10,690) (1,855)
-------- ----- -------- --------
Income before income taxes $ 69,605 $ - $ 62,800 $ 6,805
======== ===== ======== ========
Segment assets (at period end) $774,651 $(709) $669,391 $105,969
======== ===== ======== ========
NINE MONTHS ENDED JUNE 30, 2001:
Gas Electric
Total Eliminations Utility Utility
-------- ------------ -------- --------
Segment revenues $501,866 $ - $439,708 $ 62,158
======== ===== ======== ========
Segment profit:
EBITDA $110,506 $ - $ 99,140 $ 11,366
Depreciation and amortization (17,798) - (15,069) (2,729)
-------- ----- -------- --------
Operating income 92,708 - 84,071 8,637
Interest expense (14,520) - (12,459) (2,061)
-------- ----- -------- --------
Income before income taxes $ 78,188 $ - $ 71,612 $6,576
======== ===== ======== ========
Segment assets (at period end) $773,511 $(137) $672,085 $101,563
======== ===== ======== ========
- 7 -
UGI UTILITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Thousands of dollars)
3. ADOPTION OF SFAS 142
Effective October 1, 2001, we adopted the provisions of SFAS No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142 addresses the
financial accounting and reporting for acquired goodwill and other
intangible assets and supersedes Accounting Principles Board ("APB")
Opinion No. 17, "Intangible Assets." SFAS 142 addresses the financial
accounting and reporting for intangible assets acquired individually or
with a group of other assets (excluding those acquired in a business
combination) at acquisition and also addresses the financial accounting and
reporting for goodwill and other intangible assets subsequent to their
acquisition. Under SFAS 142, an intangible asset is amortized over its
useful life unless that life is determined to be indefinite. Goodwill and
other intangible assets with indefinite lives are not amortized but are
subject to tests for impairment at least annually.
Because we do not have significant intangible assets or goodwill resulting
from prior business combinations, the adoption of SFAS 142 did not impact
our results of operations or financial position during the three and nine
months ended June 30, 2002.
4. COMMITMENTS AND CONTINGENCIES
There have been no significant subsequent developments to the commitments
and contingencies reported in the Company's 2001 Annual Report.
- 8 -
UGI UTILITIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
ANALYSIS OF RESULTS OF OPERATIONS
The following analyses compare our results of operations for (1) the three
months ended June 30, 2002 ("2002 three-month period") with the three months
ended June 30, 2001 ("2001 three-month period") and (2) the nine months ended
June 30, 2002 ("2002 nine-month period") with the nine months ended June 30,
2001 ("2001 nine-month period"). Our analyses of results of operations should be
read in conjunction with the segment information included in Note 2 to the
Condensed Consolidated Financial Statements.
2002 THREE-MONTH PERIOD COMPARED WITH 2001 THREE-MONTH PERIOD
Increase
Three Months Ended June 30, 2002 2001 (Decrease)
- --------------------------- ------ ------ --------------------
(Millions of dollars)
GAS UTILITY:
Revenues $ 68.1 $ 84.5 $(16.4) (19.4)%
Total margin(a) $ 31.1 $ 31.4 $ (0.3) (1.0)%
Operating income $ 10.1 $ 10.8 $ (0.7) (6.5)%
Natural gas system throughput - bcf 14.2 13.4 0.8 6.0%
Heating degree days - % (warmer)
than normal (5.6) (12.8) - -
ELECTRIC UTILITY:
Revenues $ 20.1 $ 19.2 $ 0.9 4.7%
Total margin(a) $ 7.9 $ 6.8 $ 1.1 16.2%
Operating income $ 3.1 $ 1.9 $ 1.2 63.2%
Distribution sales - gwh 213.0 209.6 3.4 1.6%
bcf - billions of cubic feet. gwh - millions of kilowatt-hours.
(a) Gas Utility's total margin represents total revenues less cost of sales.
Electric Utility's total margin represents total revenues less cost of
sales and revenue-related taxes, i.e. gross receipts taxes. For financial
statement purposes, revenue-related taxes are included in "taxes other than
income taxes" on the Condensed Consolidated Statements of Income.
GAS UTILITY. Weather in Gas Utility's service territory during the 2002
three-month period was slightly colder than in the prior-year period. Total
system throughput increased 0.8 bcf reflecting higher firm and interruptible
delivery service volumes.
Gas Utility revenues declined $16.4 million in the 2002 three-month period
reflecting the impact of lower purchased gas cost ("PGC") rates associated with
our firm- residential, commercial and industrial
- 9 -
UGI UTILITIES, INC.
("core market") customers as a result of lower natural gas costs. Gas Utility
cost of gas was $37.0 million in the 2002 three-month period compared to $53.1
million in the prior-year period reflecting the pass through of the lower
natural gas costs.
Gas Utility total margin for the 2002 three-month period was approximately equal
to the prior-year period as greater margin from core market customers was offset
by lower margin from interruptible customers. In accordance with Gas Utility's
Restructuring Order issued pursuant to Pennsylvania's Gas Competition Act, Gas
Utility was required to reduce its PGC rates, beginning December 1, 2001, by an
amount equal to the margin it receives from interruptible customers who use
pipeline capacity contracted for core market customers. As a result of this
ratemaking, beginning December 1, 2001, core market unit margins effectively
increased and total margins from interruptible customers decreased.
Gas Utility's operating income declined $0.7 million in the 2002 three-month
period reflecting the previously mentioned decline in total margin and greater
operating expenses partially offset by a $0.5 million decline in depreciation
expense resulting from a change in the estimated useful lives of Gas Utility's
distribution assets. Total operating expenses in the prior year were net of $1.5
million of income from an insurance recovery and a reduction to accruals for
taxes other than income taxes.
ELECTRIC UTILITY. Distribution system sales for the 2002 three-month period were
slightly higher than in the prior-year period. Revenues increased as a result of
increased state tax surcharge revenue and higher distribution system and
off-system sales. Electric Utility cost of sales was $11.2 million in the 2002
three-month period compared to $11.7 million in the prior-year period reflecting
the impact of lower purchased power unit costs partially offset by the increased
distribution system sales. Total margin increased $1.1 million in the 2002
three-month period principally as a result of lower purchased power unit costs
and the increased distribution system sales. Electric Utility's $1.2 million
increase in operating income principally reflects the previously mentioned
increase in total margin.
INTEREST EXPENSE. The lower 2002 three-month interest expense principally
reflects lower borrowings under revolving credit agreements and lower short-term
interest rates.
- 10 -
UGI UTILITIES, INC.
2002 NINE-MONTH PERIOD COMPARED WITH 2001 NINE-MONTH PERIOD
Increase
Nine Months Ended June 30, 2002 2001 (Decrease)
- -------------------------- ------ ------ ------------------
(Millions of dollars)
GAS UTILITY:
Revenues $347.5 $439.7 $(92.2) (21.0)%
Total margin $138.5 $152.2 $(13.7) (9.0)%
Operating income $ 73.5 $ 84.1 $(10.6) (12.6)%
Natural gas system throughput - bcf 59.7 66.1 (6.4) (9.7)%
Heating degree days - % (warmer)
colder than normal (16.5) 2.0 - -
ELECTRIC UTILITY:
Revenues $ 62.2 $ 62.2 $ - 0.0%
Total margin $ 23.6 $ 23.2 $ 0.4 1.7%
Operating income $ 8.7 $ 8.6 $ 0.1 1.2%
Distribution sales - gwh 689.0 716.8 (27.8) (3.9)%
GAS UTILITY. Weather in Gas Utility's service territory during the 2002
nine-month period was 16.5% warmer than normal compared to weather that was 2.0%
colder than normal in the prior-year period. As a result of the significantly
warmer weather and the effects of a slowing economy on commercial and industrial
natural gas usage, distribution system throughput declined 9.7%.
The decrease in Gas Utility revenues reflects the impact of lower PGC rates,
reflecting the pass through of lower natural gas costs in the 2002 nine-month
period, and the lower distribution system throughput. Gas Utility cost of gas
was $209.0 million in the 2002 nine-month period compared to $287.5 million in
the prior-year period. The decrease in cost of gas resulted from the pass
through of lower natural gas costs and the decline in system throughput.
The decline in Gas Utility margin principally reflects (1) a $5.7 million
decline in core market margin due to the lower sales; (2) a $5.9 million decline
in interruptible margin due principally to the flowback of certain interruptible
customer margin to core market customers beginning December 1, 2001; and (3)
lower firm delivery service total margin.
Gas Utility operating income declined $10.6 million in the 2002 nine-month
period reflecting the previously mentioned decline in total margin partially
offset by lower operating expenses. Operating expenses declined $2.9 million
primarily as a result of lower distribution system expenses and lower charges
for uncollectible accounts.
ELECTRIC UTILITY. The decline in kilowatt-hour sales in the 2002 nine-month
period reflects the effects of weather that was nearly 19% warmer than in the
prior-year nine-month period. Notwithstanding the decrease in kilowatt-hour
sales, revenues were unchanged due principally to differences in customer sales
mix and an increase in state tax surcharge revenue. Electric Utility cost of
sales was $35.5 million
- 11 -
UGI UTILITIES, INC.
in the 2002 nine-month period compared to $36.4 million in the 2001 nine-month
period reflecting the impact of the lower sales and lower purchased power unit
costs partially offset by the full-period impact on cost of sales resulting from
the transfer of generation assets to Hunlock Creek Energy Ventures ("Energy
Ventures") in December 2000. Subsequent to the formation of Energy Ventures,
Electric Utility must purchase substantially all of its electricity needs from
power producers, including Energy Ventures.
Electric Utility total margin increased $0.4 million as a result of lower
purchased power unit costs partially offset by the weather-driven decline in
sales. Operating income increased $0.1 million reflecting the greater total
margin and lower operating costs subsequent to the formation of Energy Ventures
offset by a decline in Electric Utility other income.
INTEREST EXPENSE. The lower interest expense in the 2002 nine-month period
reflects lower borrowings under revolving credit agreements and lower short-term
interest rates.
FINANCIAL CONDITION AND LIQUIDITY
FINANCIAL CONDITION
The Company's debt outstanding at June 30, 2002 totaled $254.0 million compared
with $266.3 million at September 30, 2001. Included in these amounts are bank
loans of $45.6 million and $57.8 million, respectively.
At June 30, 2002, the Company had commitments under revolving credit agreements
providing for borrowings up to $97 million of which $45.6 million was
outstanding. These agreements expire at various dates from June 2003 through
June 2004. We also have shelf registration statements with the U.S. Securities
and Exchange Commission covering a total of $125 million of debt securities. We
expect to refinance $26 million of maturing Medium-Term Notes due October 2002
through debt issued pursuant to these shelf registration statements.
- 12 -
UGI UTILITIES, INC.
CONTRACTUAL CASH OBLIGATIONS AND COMMITMENTS
The following table presents significant contractual cash obligations under
long-term agreements existing as of June 30, 2002 (in millions).
Three Months
Ended
September 30, Fiscal Fiscal
2002 2003 - 2004 2005 - 2006 Thereafter Total
-------------- ----------- ----------- ---------- ------
Long-term debt $ - $ 75.9 $ 70.5 $ 62.0 $208.4
UGI Utilities redeemable preferred stock - - 2.0 18.0 20.0
Operating leases 0.8 5.7 3.9 1.9 12.3
Electric supply contracts 9.0 67.2 33.7 - 109.9
Gas supply contracts 16.6 130.4 42.7 109.8 299.5
----- ------ ------ ------ ------
Total $26.4 $279.2 $152.8 $191.7 $650.1
===== ====== ====== ====== ======
CASH FLOWS
The Company's cash flows from operating activities are seasonal and are
generally greatest during the second and third fiscal quarters when customers
pay bills incurred during the heating season and are generally lowest during the
first and fourth fiscal quarters. Accordingly, cash flows from operations for
the nine months ended June 30, 2002 are not necessarily indicative of cash flows
to be expected for a full year.
OPERATING ACTIVITIES. Cash provided by operating activities was $52.4 million
during the nine months ended June 30, 2002 compared with $51.3 million in the
prior-year nine-month period. Notwithstanding the lower 2002 nine-month period
results, operating cash flow increased as a result of lower cash flow required
to fund changes in working capital. Cash flow from operating activities before
changes in operating working capital was $67.3 million in the 2002 nine-month
period compared to the $60.0 million of such cash flow recorded in the
prior-year nine-month period reflecting significantly higher noncash charges for
income taxes.
INVESTING ACTIVITIES. Expenditures for property, plant and equipment were $22.4
million in the 2002 nine-month period, slightly lower than the $23.2 million
recorded in the prior-year period. Investing activities in the 2001 nine-month
period includes a cash contribution of $6 million associated with the formation
of Energy Ventures in December 2000.
FINANCING ACTIVITIES. During the 2002 and 2001 nine-month periods, we paid
dividends of $11.0 million and $26.8 million, respectively, to UGI. We also paid
dividends of $1.2 million on our redeemable preferred stock in both periods.
During the prior-year nine-month period, we issued $50 million face value of
Medium-Term Notes and used the proceeds for working capital purposes, to repay
$15 million of maturing Medium-Term Notes and to reduce borrowings under our
revolving credit agreements. We had net repayments under our revolving credit
agreements of $12.2 million in the 2002 nine-month period compared to net
repayments of $47.1 million in the 2001 nine-month period.
- 13 -
UGI UTILITIES, INC.
ADOPTION OF SFAS NO. 142
Effective October 1, 2001, we adopted the provisions of SFAS No. 142, "Goodwill
and Other Intangible Assets" ("SFAS 142"). SFAS 142 addresses the financial
accounting and reporting for acquired goodwill and other intangible assets and
supersedes APB Opinion No. 17, "Intangible Assets." SFAS 142 addresses the
financial accounting and reporting for intangible assets acquired individually
or with a group of other assets (excluding those acquired in a business
combination) at acquisition and also addresses the financial accounting and
reporting for goodwill and other intangible assets subsequent to their
acquisition. Under SFAS 142, an intangible asset is amortized over its useful
life unless that life is determined to be indefinite. Goodwill and other
intangible assets with indefinite lives are not amortized but are subject to
tests for impairment at least annually.
Because we do not have significant intangible assets or goodwill resulting from
prior business combinations, the adoption of SFAS 142 did not impact our results
of operations or financial position during the three and nine months ended June
30, 2002.
REGULATORY MATTERS
The Pennsylvania Public Utility Commission ("PUC") approved a settlement
establishing rules for Electric Utility Provider of Last Resort ("POLR") service
on March 28, 2002, and a separate settlement that modified these rules on June
13, 2002 (collectively the "POLR Settlement"). Under the terms of the POLR
Settlement, Electric Utility will terminate stranded cost recovery through its
Competitive Transition Charge ("CTC") from commercial and industrial ("C&I")
customers on July 31, 2002, and from residential customers on October 31, 2002,
and will no longer be subject to the statutory rate cap as of August 1, 2002 for
C&I customers and as of November 1, 2002 for residential customers. Charges for
generation service will initially be set at a level equal to the rates currently
paid by Electric Utility customers for POLR service, may be raised at certain
designated times up to certain specified caps through December 2004, and may be
set at market rates thereafter. Electric Utility may also offer multiple year
POLR contracts to its customers. The POLR Settlement provides for annual
shopping periods during which customers may elect to remain on POLR service or
choose an alternate supplier. Customers who do not select an alternate supplier
will be obligated to remain on POLR service until the next shopping period.
Residential customers who return to POLR service at a time other than during the
annual shopping period must remain on POLR service until the date of the second
open shopping period after returning. Commercial and industrial customers who
return to POLR service at a time other than during the annual shopping period
must remain on POLR service until the next open shopping period, and may, in
certain circumstances, be subject to generation rate surcharges. Under the June
13, 2002 settlement, the Office of Consumer Advocate also agreed to withdraw a
complaint challenging Electric Utility's recovery of $1.2 million through an
increase in the state tax adjustment surcharge for 2002.
On June 29, 2000, the PUC issued its order ("Gas Restructuring Order") approving
Gas Utility's restructuring plan filed by Gas Utility pursuant to Pennsylvania's
Natural Gas Choice and Competition
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UGI UTILITIES, INC.
Act. Among other things, the implementation of the Gas Restructuring Order
resulted in an increase in Gas Utility's core-market base rates effective
October 1, 2000. This base rate increase was designed to generate approximately
$16.7 million in additional net annual revenues. The Gas Restructuring Order
also required Gas Utility to reduce its core-market PGC rates by an annualized
amount of $16.7 million in the first 14 months following the October 1, 2000
base rate increase.
Beginning December 1, 2001, Gas Utility was required to reduce its PGC rates by
an amount equal to the margin it receives from interruptible customers using
pipeline capacity contracted by Gas Utility for core-market customers. As a
result, beginning December 1, 2001, Gas Utility operating results are more
sensitive to the effects of heating-season weather and less sensitive to the
market prices of alternative fuels.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In response to the SEC's Release No. 33-8040, "Cautionary Advice Regarding
Disclosure About Critical Accounting Policies," the Company has identified the
critical accounting policies that are most important to the portrayal of the
Company's financial condition and results of operations. The following
accounting policies require management's most subjective or complex judgments,
often as a result of the need to make estimates regarding matters that are
inherently uncertain.
LITIGATION ACCRUALS AND ENVIRONMENTAL REMEDIATION LIABILITIES. The Company is
involved in litigation regarding pending claims and legal actions that arise in
the normal course of its businesses. In addition, UGI Utilities and its former
subsidiaries owned and operated a number of manufactured gas plants in
Pennsylvania and elsewhere at which hazardous substances may be present. In
accordance with generally accepted accounting principles, the Company
establishes reserves for pending claims and legal actions or environmental
remediation obligations when it is probable that a liability exists and the
amount or range of amounts can be reasonably estimated. Reasonable estimates
involve management judgments based on a broad range of information and prior
experience. These judgments are reviewed quarterly as more information is
received and the amounts reserved are updated as necessary. Such estimated
reserves may differ materially from the actual liability, and such reserves may
change materially as more information becomes available and estimated reserves
are adjusted.
REGULATORY ASSETS AND LIABILITIES. Gas Utility, and Electric Utility's
distribution business, are subject to regulation by the Pennsylvania Public
Utility Commission. In accordance with SFAS No. 71, "Accounting for the Effects
of Certain Types of Regulation," we record the effects of rate regulation in our
financial statements as regulatory assets or regulatory liabilities. We
continually assess whether the regulatory assets are probable of future recovery
by evaluating the regulatory environment, recent rate orders and public
statements issued by the PUC and the status of any pending deregulation
legislation. If future recovery of regulatory assets ceases to be probable, the
elimination of those regulatory assets would adversely impact our results of
operations.
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UGI UTILITIES, INC.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") recently issued SFAS No. 143,
"Accounting for Asset Retirement Obligations" ("SFAS 143"), SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"),
SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections" ("SFAS 145") and SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146").
SFAS 143 addresses financial accounting and reporting for legal obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. SFAS 143 requires that the fair value of a liability for
an asset retirement obligation be recognized in the period in which it is
incurred with a corresponding increase in the carrying value of the related
asset. Entities shall subsequently charge the retirement cost to expense using a
systematic and rational method over the related asset's useful life and adjust
the fair value of the liability resulting from the passage of time through
charges to interest expense. We are required to adopt SFAS 143 effective October
1, 2002. We are currently in the process of evaluating the impact of SFAS 143 on
our financial condition and results of operations.
SFAS 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121") and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" as it relates to the disposal of a segment of a business. SFAS 144
establishes a single accounting model for long-lived assets to be disposed of
based upon the framework of SFAS 121, and resolves significant implementation
issues of SFAS 121. SFAS 144 is effective for the Company October 1, 2002. We
believe that the adoption of SFAS 144 will not have a material impact on our
financial condition or results of operations.
SFAS 145 rescinded SFAS No. 4, "Reporting Gains and Losses from Extinguishment
of Debt" (an amendment of APB Opinion No. 30) ("SFAS 4"), effective May 15,
2002. SFAS 4 had required that material gains and losses on extinguishment of
debt be classified as an extraordinary item. Under SFAS 145, it is less likely
that a gain or loss on extinguishment of debt would be classified as an
extraordinary item in our Consolidated Statement of Income. Among other things,
SFAS 145 also amends SFAS 13, "Accounting for Leases," to require that certain
lease modifications that have economic effects similar to sale-leaseback
transactions be accounted for in the same manner as sale-leaseback transactions.
The provisions of SFAS 145 relating to leases are effective for transactions
occurring after May 15, 2002. We believe that SFAS 145 will not have a material
effect on our financial condition or results of operations.
SFAS 146 addresses accounting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force ("EITF") No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity." Generally, SFAS 146 requires that a
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UGI UTILITIES, INC.
liability for costs associated with an exit or disposal activity, including
contract termination costs, employee termination benefits and other associated
costs, be recognized when the liability is incurred. Under EITF No. 94-3, a
liability was recognized at the date of an entity's commitment to an exit plan.
SFAS 146 will be effective for disposal activities initiated after December 31,
2002. We believe that SFAS 146 will not have a material effect on our financial
condition or results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Gas Utility's tariffs contain clauses that permit recovery of substantially all
of the cost of natural gas it sells to its customers. The recovery clauses
provide for a periodic adjustment for the difference between the total amount
actually collected from customers and the recoverable costs incurred. Because of
this ratemaking mechanism, there is limited commodity price risk associated with
our Gas Utility operations.
Electric Utility's electricity distribution business purchases all of its
electric power needs, in excess of the electric power it obtains from its
interests in electric generating facilities, under power supply arrangements of
various lengths and on the spot market. Commencing September 2002, Electric
Utility's transmission and distribution business will purchase substantially all
of its anticipated power needs from electricity marketers under fixed-price
energy and capacity contracts and expects to sell electric power produced from
its interests in electricity generating assets to third parties under contract
or on the spot market. Prices for electricity can be volatile especially during
periods of high demand or tight supply. Although the generation component of
Electric Utility's rates is subject to various rate cap provisions as a result
of the Electricity Restructuring Order and the POLR Settlement, Electric
Utility's fixed-price contracts with electricity marketers mitigate most risks
with offering customers a fixed price during the rate cap periods. However,
should any of the suppliers under these contracts fail to provide electric power
under the terms of the power and capacity contracts, increases, if any, in the
cost of replacement power or capacity would negatively impact Electric Utility
results. In order to reduce this non-performance risk, Electric Utility has
diversified its purchases across several suppliers and entered into bilateral
collateral arrangements with certain of them.
Our variable-rate debt comprises borrowings under our revolving credit
facilities. These facilities have interest rates that are generally indexed to
short-term market interest rates. Our long-term debt is typically issued at
fixed rates of interest based upon market rates for debt having similar terms
and credit ratings. As these long-term debt issues mature, we expect to
refinance such debt with new debt having an interest rate that is more or less
than the refinanced debt. In order to reduce interest rate risk associated with
a forecasted issuance of fixed-rate debt in October 2002, we entered into
interest rate protection agreements during the nine months ended June 30, 2002.
The fair value of these interest rate protection agreements, which have been
designated and qualify as cash flow hedges, was $(0.3) million at June 30, 2002.
An adverse change in interest rates on ten-year U.S. treasury notes of 100 basis
points would result in a $2.2 million decrease in the fair value of these
interest rate protection agreements.
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UGI UTILITIES, INC.
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits:
12.1 Computation of ratio of earnings to fixed charges.
12.2 Computation of ratio of earnings to combined fixed charges and
preferred stock dividends.
99 Certification by the Chief Executive Officer and the Chief
Financial Officer relating to the Registrant's Report on Form
10-Q for the quarter ended June 30, 2002.
(b) The following Current Reports on Form 8-K were filed during the fiscal
quarter ended June 30, 2002:
DATE ITEM NUMBER CONTENT
- ---- ----------- -------
May 15, 2002 7 Documents relating to Series C Medium Term Note Program
May 21, 2002 4, 7 Changes in Registrant's Certifying Accountant
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UGI Utilities, Inc.
-------------------
(Registrant)
Date: August 13, 2002 By: /s/ J.C. Barney
- ---------------------- --------------------------------
J. C. Barney
Senior Vice President - Finance
(Principal Financial Officer)
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UGI UTILITIES, INC.
EXHIBIT INDEX
12.1 Computation of ratio of earnings to fixed charges
12.2 Computation of ratio of earnings to combined fixed charges and
preferred stock dividends
99 Certification by the Chief Executive Officer and the Chief Financial
Officer relating to the Registrant's Report on Form 10-Q for the
quarter ended June 30, 2002