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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
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, 2003, 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
-----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2003,
September 30, 2002 and June 30, 2002 1
Condensed Consolidated Statements of Income for the three
and nine months ended June 30, 2003 and 2002 2
Condensed Consolidated Statements of Cash Flows for the
nine months ended June 30, 2003 and 2002 3
Notes to Condensed Consolidated Financial Statements 4-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
Item 4. Controls and Procedures 16
PART II OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17-18
Signatures 19
-i-
UGI UTILITIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(Thousands of dollars)
June 30, September 30, June 30,
2003 2002 2002
--------- ------------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 1,708 $ 6,090 $ 12,113
Accounts receivable (less allowances for doubtful accounts
of $6,671, $1,972 and $4,275, respectively) 49,261 38,554 38,180
Accrued utility revenues 7,940 8,069 7,547
Inventories 27,530 38,654 25,564
Deferred income taxes 18,668 2,610 7,563
Deferred fuel costs -- 4,304 --
Income taxes recoverable -- 6,892 --
Prepaid expenses and other current assets 3,049 3,151 4,849
--------- --------- ---------
Total current assets 108,156 108,324 95,816
Property, plant and equipment, at cost (less accumulated depreciation
and amortization of $296,794, $290,194 and $289,877, respectively) 599,266 593,141 585,715
Regulatory assets 60,062 57,685 54,803
Other assets 29,423 38,973 38,317
--------- --------- ---------
Total assets $ 796,907 $ 798,123 $ 774,651
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 50,000 $ 76,000 $ 26,000
Bank loans 2,300 37,200 45,600
Accounts payable 40,731 57,499 40,256
Accrued income taxes 20,064 -- 7,247
Deferred fuel refunds 30,248 -- 2,938
Other current liabilities 40,267 45,518 35,515
--------- --------- ---------
Total current liabilities 183,610 216,217 157,556
Long-term debt 172,298 172,369 182,392
Deferred income taxes 138,003 131,483 128,738
Deferred investment tax credits 8,086 8,385 8,485
Other noncurrent liabilities 13,559 11,815 11,878
Commitments and contingencies (note 3)
Preferred shares subject to mandatory redemption 20,000 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 60,259
Additional paid-in capital 78,057 73,057 72,792
Retained earnings 126,107 107,312 132,727
Accumulated other comprehensive loss (3,072) (2,774) (176)
--------- --------- ---------
Total common stockholder's equity 261,351 237,854 265,602
--------- --------- ---------
Total liabilities and stockholders' equity $ 796,907 $ 798,123 $ 774,651
========= ========= =========
See accompanying notes to condensed 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,
------------------------- -------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Revenues $ 121,546 $ 88,249 $ 559,193 $ 409,675
--------- --------- --------- ---------
Costs and expenses:
Gas, fuel and purchased power 76,489 48,235 350,100 244,493
Operating and administrative expenses 25,303 19,894 71,185 61,568
Operating and administrative expenses - related
parties 2,528 1,402 7,498 4,420
Taxes other than income taxes 2,832 2,870 9,200 8,698
Depreciation and amortization 5,304 5,290 15,958 16,934
Other income, net (915) (2,664) (7,032) (8,588)
--------- --------- --------- ---------
111,541 75,027 446,909 327,525
--------- --------- --------- ---------
Operating income 10,005 13,222 112,284 82,150
Interest expense 3,903 4,054 12,379 12,545
--------- --------- --------- ---------
Income before income taxes 6,102 9,168 99,905 69,605
Income taxes 2,462 3,616 40,152 27,459
--------- --------- --------- ---------
Net income 3,640 5,552 59,753 42,146
Dividends on preferred stock 388 388 1,163 1,163
--------- --------- --------- ---------
Net income after dividends on preferred stock $ 3,252 $ 5,164 $ 58,590 $ 40,983
========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements.
-2-
UGI UTILITIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Thousands of dollars)
Nine Months Ended
June 30,
------------------------
2003 2002
--------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 59,753 $ 42,146
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 15,958 16,934
Deferred income taxes, net (11,836) 4,389
Other, net 8,541 3,862
Net change in:
Accounts receivable and accrued utility revenues (19,972) (753)
Inventories 10,885 22,510
Deferred fuel costs 35,858 1,491
Accounts payable (15,022) (27,201)
Other current assets and liabilities 22,050 (10,946)
--------- --------
Net cash provided by operating activities 106,215 52,432
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment (25,742) (22,374)
Net costs of property, plant and equipment disposals (832) (1,330)
--------- --------
Net cash used by investing activities (26,574) (23,704)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of dividends (25,551) (12,126)
Cash portion of UGID dividend (2,572) --
Repayment of long-term debt (26,000) --
Bank loans decrease (34,900) (12,200)
Capital contribution from UGI 5,000 --
--------- --------
Net cash used by financing activities (84,023) (24,326)
--------- --------
Cash and cash equivalents (decrease) increase $ (4,382) $ 4,402
========= ========
CASH AND CASH EQUIVALENTS:
End of period $ 1,708 $ 12,113
Beginning of period 6,090 7,711
--------- --------
(Decrease) increase $ (4,382) $ 4,402
========= ========
See accompanying notes to condensed consolidated financial statements.
-3-
UGI UTILITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Thousands of dollars)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include
the accounts of UGI Utilities, Inc. ("UGI Utilities") and, prior to
their transfer to UGI in June 2003 (as further described below), its
direct and indirect wholly owned subsidiaries (collectively, "the
Company" or "we"). UGI Utilities, Inc. ("UGI Utilities"), a wholly
owned subsidiary of UGI Corporation ("UGI"), owns and operates a
natural gas distribution utility ("Gas Utility") in parts of eastern
and southeastern Pennsylvania; owns and operates an electricity
distribution utility ("Electric Utility") in northeastern Pennsylvania;
and prior to the distribution to UGI of UGI Development Company
("UGID") and UGID's subsidiaries and joint-venture affiliate (which
together with Electric Utility are referred to herein as "Electric
Operations"), owned interests in Pennsylvania-based electricity
generation assets through UGID. Gas Utility and Electric Utility are
subject to regulation by the Pennsylvania Public Utility Commission
("PUC"). UGID was granted "Exempt Wholesale Generator" status by the
Federal Energy Regulatory Commission.
In June 2003, the Company dividended all of the common stock of UGID to
UGI. The net book value of the assets and liabilities of UGID and its
subsidiaries totaling $15,407 (including $2,572 of cash) was eliminated
from the consolidated balance sheet and reflected as a dividend from
retained earnings. UGID and its subsidiaries did not have a material
effect on the Company's results of operations for any of the periods
presented.
Our consolidated financial statements include the accounts of UGI
Utilities and its majority-owned subsidiaries. UGID's 50%-owned
joint-venture partnership, Hunlock Creek Energy Ventures ("Energy
Ventures"), was accounted for under the equity method. We eliminate all
significant intercompany accounts and transactions when we consolidate.
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 ("SEC").
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. The September 30, 2002 condensed consolidated balance sheet
data was derived from audited financial statements, but does not
include all disclosures required by accounting principles generally
accepted in the United States of America. 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, 2002 ("Company's 2002 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.
-4-
UGI UTILITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Thousands of dollars)
COMPREHENSIVE INCOME. The following table presents the components of
comprehensive income for the three and nine months ended June 30, 2003
and 2002:
Three Months Ended Nine Months Ended
June 30, June 30,
--------------------- -----------------------
2003 2002 2003 2002
------- ------- -------- --------
Net income $ 3,640 $ 5,552 $ 59,753 $ 42,146
Other comprehensive loss (524) (644) (298) (176)
------- ------- -------- --------
Comprehensive income $ 3,116 $ 4,908 $ 59,455 $ 41,970
------- ------- -------- --------
Other comprehensive loss comprises changes in the fair value of
interest rate protection agreements qualifying as hedges, net of
reclassifications to net income.
USE OF ESTIMATES. We make estimates and assumptions when preparing
financial statements in conformity with accounting principles generally
accepted in the United States. These estimates and assumptions affect
the reported amounts of assets and liabilities, revenues and expenses,
as well as the disclosure of contingent assets and liabilities. Actual
results could differ from these estimates.
2. SEGMENT INFORMATION
The Company has two reportable segments: (1) Gas Utility and (2)
Electric Operations. 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 2002 Annual Report. We
evaluate each segment's profitability 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 Operations.
There are no significant intersegment transactions. In addition, all of
our reportable segments' revenues are derived from sources within the
United States. 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, 2003:
Gas Electric
Total Eliminations Utility Operations
----- ------------ ------- ----------
Revenues $ 121,546 $ -- $ 99,683 $ 21,863
Cost of sales 76,489 -- 65,213 11,276
Depreciation and amortization 5,304 -- 4,541 763
Operating income 10,005 -- 5,544 4,461
Interest expense 3,903 -- 3,434 469
Income before income taxes 6,102 -- 2,110 3,992
Total assets (at period end) 796,907 -- 711,236 85,671
THREE MONTHS ENDED JUNE 30, 2002:
Gas Electric
Total Eliminations Utility Operations
----- ------------ ------- ----------
Revenues $ 88,249 $ -- $ 68,100 $ 20,149
Cost of sales 48,235 -- 37,018 11,217
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
Total assets (at period end) 774,651 (709) 669,391 105,969
-6-
UGI UTILITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Thousands of dollars)
2. SEGMENT INFORMATION (continued)
NINE MONTHS ENDED JUNE 30, 2003:
Gas Electric
Total Eliminations Utility Operations
----- ------------ ------- ----------
Revenues $559,193 $ -- $484,678 $74,515
Cost of sales 350,100 -- 312,582 37,518
Depreciation and amortization 15,958 -- 13,618 2,340
Operating income 112,284 -- 94,107 18,177
Interest expense 12,379 -- 10,654 1,725
Income before income taxes 99,905 -- 83,453 16,452
Total assets (at period end) 796,907 -- 711,236 85,671
NINE MONTHS ENDED JUNE 30, 2002:
Gas Electric
Total Eliminations Utility Operations
----- ------------ ------- ----------
Revenues $409,675 $ -- $347,523 $ 62,152
Cost of sales 244,493 -- 209,038 35,455
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
Total assets (at period end) 774,651 (709) 669,391 105,969
3. COMMITMENTS AND CONTINGENCIES
From the late 1800s through the mid-1900s, UGI Utilities and its former
subsidiaries owned and operated a number of manufactured gas plants
("MGPs") prior to the general availability of natural gas. Some
constituents of coal tars and other residues of the manufactured gas
process are today considered hazardous substances under the Superfund
Law and may be present on the sites of former MGPs. Between 1882 and
1953, UGI Utilities owned the stock of subsidiary gas companies in
Pennsylvania and elsewhere and also operated the businesses of some gas
companies under agreement. Pursuant to the requirements of the Public
Utility Holding Company Act of 1935, UGI Utilities divested all of its
utility operations other than those which now constitute Gas Utility
and Electric Utility.
UGI Utilities does not expect its costs for investigation and
remediation of hazardous substances at Pennsylvania MGP sites to be
material to its results of operations because Gas Utility is currently
permitted to include in rates, through future base rate proceedings,
prudently incurred remediation costs associated with such sites. UGI
Utilities has been notified of several sites outside Pennsylvania on
which (1) MGPs were formerly operated by it or owned or operated by its
former subsidiaries and (2) either environmental agencies or private
parties are investigating the extent of environmental
-7-
UGI UTILITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Thousands of dollars)
contamination or performing environmental remediation. UGI Utilities is
currently litigating two claims against it relating to out-of-state
sites.
Management believes that under applicable law UGI Utilities should not
be liable in those instances in which a former subsidiary owned or
operated an MGP. There could be, however, significant future costs of
an uncertain amount associated with environmental damage caused by MGPs
outside Pennsylvania that UGI Utilities directly operated, or that were
owned or operated by former subsidiaries of UGI Utilities, if a court
were to conclude that (i) the subsidiary's separate corporate form
should be disregarded or (ii) UGI Utilities should be considered to
have been an operator because of its conduct with respect to its
subsidiary's MGP.
With respect to a manufactured gas plant site in Manchester, New
Hampshire, EnergyNorth Natural Gas, Inc. ("EnergyNorth") filed suit
against UGI Utilities seeking contribution from UGI Utilities for
response and remediation costs associated with the contamination on the
site of a former MGP allegedly operated by former subsidiaries of UGI
Utilities. UGI Utilities and EnergyNorth agreed to a settlement of this
matter in June 2003. In June 2003, UGI Utilities recorded its estimated
liability for contingent payments to EnergyNorth under the terms of the
settlement agreement.
In April 2003, Citizens Communications Company ("Citizens") served a
complaint naming UGI Utilities as a third party defendant in a civil
action pending in United States District Court for the District of
Maine. In that action, the plaintiff, City of Bangor, sued Citizens to
recover environmental response costs associated with manufactured gas
plant wastes generated at a plant allegedly operated by Citizens'
predecessors at a site on the Penobscot River. Citizens subsequently
joined UGI Utilities and ten other third party defendants alleging that
the third party defendants are responsible for an equitable share of
any response costs Citizens may be required to pay to the City of
Bangor. Investigations of the site conducted to date are insufficient
to establish what, if any contamination is related to gas plant wastes.
Hence, UGI Utilities is unable to estimate the total cost of cleanup
associated with manufactured gas plant wastes at this site. UGI
Utilities believes that it has good defenses to the claim.
In addition to these environmental matters, there are other pending
claims and legal actions arising in the normal course of our
businesses. We cannot predict with certainty the final results of
environmental and other matters. However, it is reasonably possible
that some of them could be resolved unfavorably to us. Although we
currently believe, after consultation with counsel, that damages or
settlements, if any, recovered by the plaintiffs in such claims or
actions will not have a material adverse effect on our financial
position, damages or settlements could be material to our operating
results or cash flows in future periods depending on the nature and
timing of future developments with respect to these matters and the
amounts of future operating results and cash flows.
-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, 2003 ("2003 three-month period") with the three months
ended June 30, 2002 ("2002 three-month period") and (2) the nine months ended
June 30, 2003 ("2003 nine-month period") with the nine months ended June 30,
2002 ("2002 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.
2003 THREE-MONTH PERIOD COMPARED WITH 2002 THREE-MONTH PERIOD
Increase
Three Months Ended June 30, 2003 2002 (Decrease)
--------------------------------------------------------------------------------------------------
(Dollars in millions)
GAS UTILITY:
Revenues $ 99.7 $ 68.1 $ 31.6 46.4%
Total margin (a) $ 34.5 $ 31.1 $ 3.4 10.9%
Operating income $ 5.5 $ 10.1 $ (4.6) (45.5)%
Natural gas system throughput-bcf 15.0 14.2 0.8 5.6%
Heating degree days-% colder (warmer)
than normal 16.3 (5.6) -- --
ELECTRIC OPERATIONS:
Revenues $ 21.9 $ 20.1 $ 1.8 9.0%
Total margin (a) $ 9.5 $ 7.9 $ 1.6 20.3%
Operating income $ 4.5 $ 3.1 $ 1.4 45.2%
Electric Utility distribution sales-gwh 216.3 213.0 3.3 1.5%
bcf - billions of cubic feet. gwh - millions of kilowatt-hours.
(a) Gas Utility's total margin represents total revenues less cost of sales.
Electric Operation's total margin represents total revenues less cost of
sales and revenue-related taxes, i.e. Electric Utility gross receipts
taxes, of $1.1 million in each of the three month-periods ended June 30,
2003 and 2002. For financial statement purposes, revenue-related taxes are
included in "taxes other than income taxes" on the Condensed Consolidated
Statements of Income.
GAS UTILITY. Total distribution system throughput increased 0.8 bcf or 5.6% as
cooler 2003 three-month period weather and customer growth increased firm-
residential, commercial and industrial ("core-market") and retail delivery
service sales. The increase in Gas Utility revenues during the 2003 three-month
period reflects the pass through of higher purchased gas costs to core-market
customers and the greater core-market sales as well as a $10.1 million increase
in revenues from off-system sales as a result of higher natural gas prices. The
greater 2003 three-month period purchased gas cost ("PGC") rates reflect a
significant increase in the commodity price of natural gas. Gas Utility cost of
gas was $65.2 million in the 2003 three-month period
-9-
UGI UTILITIES, INC.
compared to $37.0 million in the 2002 three-month period reflecting the higher
PGC rates and greater core-market and off-system sales.
The increase in Gas Utility total margin is principally the result of greater
core-market and retail delivery service volumes.
Notwithstanding the increase in Gas Utility total margin in the 2003 three-month
period, operating income declined $4.6 million reflecting a $6.2 million
increase in operating and administrative expenses and a $1.8 million decline in
other income. The increase in operating expenses is due in large part to greater
litigation-related costs and expenses and, to a lesser extent, higher
distribution system maintenance, incentive compensation and bad debt expenses.
The decline in other income principally reflects lower pension income and a
decline in non-tariff service income.
ELECTRIC OPERATIONS. Electric Utility's 2003 three-month period kilowatt-hour
sales were slightly higher than in the prior-year period due in part to cooler
spring weather. The increase in Electric Operations' revenues reflects greater
sales of electricity produced by our electric generation assets to third parties
and, to a lesser extent, the greater Electric Utility distribution sales.
Electric Operations' cost of sales increased $0.1 million reflecting higher
costs associated with greater electric generation third-party sales
substantially offset by lower Electric Utility per-unit purchased power costs.
In June 2003, the Company dividended all of the Common Stock of UGID to UGI (see
Note 1 to Condensed Consolidated Financial Statements).
The increase in Electric Operations' total margin in the 2003 three-month period
principally reflects the effects of the lower Electric Utility per-unit
purchased power costs and increased margin from electric generation sales to
third parties. The increase in operating income primarily resulted from the
greater total margin partially offset by slightly higher operating and
administrative expenses.
-10-
UGI UTILITIES, INC.
2003 NINE-MONTH PERIOD COMPARED WITH 2002 NINE-MONTH PERIOD
Nine Months Ended June 30, 2003 2002 Increase
--------------------------------------------------------------------------------------------
(Dollars in millions)
GAS UTILITY:
Revenues $484.7 $347.5 $137.2 39.5%
Total margin $172.1 $138.5 $ 33.6 24.3%
Operating income $ 94.1 $ 73.5 $ 20.6 28.0%
Natural gas system throughput - bcf 70.7 59.7 11.0 18.4%
Heating degree days - % colder (warmer)
than normal 8.3 (16.5) -- --
ELECTRIC OPERATIONS:
Revenues $ 74.5 $ 62.2 $ 12.3 19.8%
Total margin (a) $ 33.4 $ 23.6 $ 9.8 41.5%
Operating income $ 18.2 $ 8.7 $ 9.5 109.2%
Electric Utility distribution sales-gwh 741.8 689.0 52.8 7.7%
(a) Electric Operations total margin represents total revenues less cost of
sales and Electric Utility gross receipts taxes of $3.6 million and $3.1
million for the nine months ended June 30, 2003 and 2002, respectively.
GAS UTILITY. Weather in Gas Utility's service territory was 8.3% colder than
normal during the 2003 nine-month period compared to weather that was 16.5%
warmer than normal during the 2002 nine-month period. The significantly colder
weather resulted in higher heating-related sales to core-market and retail
delivery service customers and, to a lesser extent, greater volumes transported
for commercial and industrial delivery service customers. System throughput also
benefited from year-over-year customer growth.
Gas Utility revenues increased principally as a result of the previously
mentioned greater core market and retail delivery service sales and higher
average core-market PGC rates resulting from higher natural gas costs. Gas
Utility cost of gas was $312.6 million in the 2003 nine-month period, an
increase of $103.5 million from the prior-year period, reflecting the higher
core-market volumes sold and higher core-market PGC rates.
The increase in Gas Utility total margin principally reflects a $30.9 million
increase in core-market and retail delivery service total margin as well as
higher margin from commercial and industrial delivery service customers.
The increase in Gas Utility operating income principally reflects the increase
in total margin partially offset by an $11.7 million increase in operating and
administrative expenses and lower other income. The 2003 nine-month period
operating and administrative expenses include higher litigation-related costs
and expenses, greater distribution system maintenance expenses, increased
incentive compensation costs and higher bad debt expense. Other income declined
$2.1 million principally reflecting a $1.8 million decrease in pension income.
-11-
UGI UTILITIES, INC.
ELECTRIC OPERATIONS. Electric Utility's 2003 nine-month period kilowatt-hour
sales increased principally as a result of weather that was 9.5% colder than
normal compared to weather that was 13.8% warmer than normal in the prior-year
period.
The higher Electric Operations revenues reflect greater Electric Utility sales
and greater sales of electricity produced by our electric generation assets to
third parties. Notwithstanding the significant increase in Electric Operations'
revenues, cost of sales increased only $2.1 million in the 2003 nine-month
period as the impact on cost of sales resulting from the greater Electric
Utility and electric generation third-party sales was partially offset by lower
Electric Utility per-unit purchased power costs.
The increase in Electric Operations' total margin principally reflects the
increased Electric Utility sales and lower Electric Utility per-unit purchased
power costs as well as increased margin from electric generation sales to third
parties. The higher operating income reflects the greater total margin and
higher other income partially offset by slightly higher 2003 nine-month period
operating and administrative expenses.
FINANCIAL CONDITION AND LIQUIDITY
FINANCIAL CONDITION
The Company's long-term debt outstanding at June 30, 2003 totaled $222.3 million
(including current maturities of $50.0 million) compared with $248.4 million
(including current maturities of $76.0 million) at September 30, 2002. On
October 1, 2002, the Company repaid $26 million of maturing long-term debt.
On August 14, 2003, after the end of the quarter, the Company issued $25 million
of ten-year notes at an interest rate of 5.37%, and $20 million of 30-year notes
at an interest rate of 6.50%, under its Medium Term Note program. The net
proceeds along with existing cash balances will be used to repay the Company's
$50 million 6.50% Senior Notes maturing on August 15, 2003.
The Company has commitments under revolving credit agreements which provide for
borrowings of up to $107 million. These agreements expire in June 2005 and June
2006. UGI Utilities also has a shelf registration statement with the SEC under
which it may issue up to an additional $40 million of Medium-Term Notes or other
debt securities.
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, 2003 are not necessarily indicative of cash flows
to be expected for a full year.
-12-
UGI UTILITIES, INC.
OPERATING ACTIVITIES. Cash provided by operating activities was $106.2 million
during the nine months ended June 30, 2003 compared with $52.4 million in the
prior-year nine-month period. Cash flow from operating activities before changes
in operating working capital was $72.4 million in the 2003 nine-month period
compared to the $67.3 million in the prior-year nine-month period reflecting the
significant increase in 2003 nine-month period net income partially offset by
the effects on net income of greater noncash deferred income tax benefits.
Changes in operating working capital provided $33.8 million of operating cash
flow during the nine months ended June 30, 2003 compared with $14.9 million
during the prior-year nine-month period principally reflecting greater cash flow
from changes in Gas Utility deferred fuel overcollections, accounts payable and
accrued income taxes partially offset by the effects on changes in accounts
receivable and inventories resulting from higher 2003 nine-month period natural
gas prices.
INVESTING ACTIVITIES. Expenditures for property, plant and equipment were $25.7
million in the 2003 nine-month period compared to $22.4 million recorded in the
prior-year period principally reflecting higher Gas Utility distribution system
expenditures. The lower costs on disposals of property, plant and equipment in
the 2003 nine-month period principally reflects lower disposal activity during
the 2003 nine-month period.
FINANCING ACTIVITIES. During the 2003 and 2002 nine-month periods, we paid
dividends of $24.4 million and $11.0 million, respectively, to UGI. In addition,
we paid dividends of $1.2 million on our redeemable preferred stock during both
periods. During the nine months ended June 30, 2003, UGI made a capital
contribution of $5 million to UGI Utilities. In October 2002, we repaid $26
million of maturing Medium-Term Notes and, as a result of the improved 2003
nine-month operating cash flow, reduced our bank loan borrowings $34.9 million
during 2003 nine-month period.
DIVIDEND OF UGID
In June 2003, the Company dividended all of the common stock of UGID to UGI. The
net book value of the assets and liabilities of UGID and its subsidiaries
totaling $15.4 million (including $2.6 million of cash) has been eliminated from
the consolidated balance sheet. The results of operations of UGID through the
date of distribution did not have a material effect on the Company's
consolidated results of operations for any of the periods presented.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") recently issued Statement of
Financial Accounting Standards ("SFAS") No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity"
("SFAS 150"); No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities ("SFAS 149"); SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS 146"); and FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" ("FIN 45").
SFAS 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
the instruments within the scope of SFAS 150 were previously classified as
equity. SFAS 150
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UGI UTILITIES, INC.
is effective for financial instruments entered into or modified after May 31,
2003, and otherwise shall be effective for the Company on July 1, 2003. For
financial instruments created before May 31, 2003, and still existing on July 1,
2003, transition shall be achieved by reporting the cumulative effect of a
change in an accounting principle by initially measuring the financial
instruments at fair value or other measurement attribute required by SFAS 150.
The Company will be required to present its preferred shares subject to
mandatory redemption in the liabilities section of the balance sheet. The
initial adoption of SFAS 150 did not affect our financial position or results of
operations.
SFAS 149 amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 149 amends
SFAS 133 for decisions made (1) as part of the FASB's Derivatives Implementation
Group ("DIG") process; (2) in connection with other FASB projects dealing with
financial instruments; and (3) in connection with implementation issues raised
in relation to the application of the definition of a derivative. SFAS 149 is
effective for contracts entered into or modified after June 30, 2003. Based upon
the types of contracts currently entered into by the Company, we do not believe
SFAS 149 will have a material impact on our financial position 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 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 an entity committed to an exit plan. SFAS 146 is effective for
disposal activities initiated after December 31, 2002. The initial adoption of
the provisions of SFAS 146 did not affect our financial position or results of
operations.
FIN 45 expands the existing disclosure requirements for certain guarantees and
requires that companies recognize, at the inception of a guarantee, a liability
for the fair value of the obligation undertaken when issuing the guarantee. The
initial recognition and measurement provisions of FIN 45 are effective for
guarantees issued or modified after December 31, 2002. The application of FIN 45
did not have a material effect on our financial position or results of
operations.
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UGI UTILITIES, INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Gas Utility's tariffs contain clauses that permit recovery of substantially all
of the prudently incurred 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.
Prior to September 2002, Electric Utility purchased all of its electric power
needs, in excess of the electric power it obtained from its interests in
electricity generation facilities, under power supply arrangements of various
lengths and on the spot market. Beginning September 2002, Electric Utility began
purchasing its power needs from electricity suppliers under fixed-price energy
and capacity contracts and, to a much lesser extent, on the spot market, and our
electricity generation business sold its electricity production and capacity on
the spot market to third parties. In June 2003, our electricity generation
business was dividended to UGI. 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, Electric Utility's fixed-price contracts with electricity marketers
mitigate most risks associated with offering customers a fixed price during the
contract 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 could
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 includes borrowings under our revolving credit
agreements. These agreements provide for interest rates on borrowings that are
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 near-term issuances of
fixed-rate debt, we may enter into interest rate protection agreements. At June
30, 2003, the fair value of our unsettled interest rate protection agreements,
which have been designated and qualify as cash flow hedges, was a loss of $2.0
million. An adverse change in interest rates on ten-year U.S. treasury notes of
50 basis points would result in a $1.5 million decrease in the fair value of
these interest rate protection agreements.
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UGI UTILITIES, INC.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, evaluated the
effectiveness of the Company's disclosure controls and procedures as of
the end of the period covered by this report. Based on that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that
the Company's disclosure controls and procedures as of the end of the
period covered by this report were designed and functioning effectively
to provide reasonable assurance that the information required to be
disclosed by the Company in reports filed under the Securities Exchange
Act of 1934, as amended, is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and
forms. The Company believes that a controls system, no matter how well
designed and operated, cannot provide absolute assurance that the
objectives of the controls system are met, and no evaluation of
controls can provide absolute assurance that all control issues and
instances of fraud, if any, within a company have been detected.
(b) Change in Internal Control over Financial Reporting
No change in the Company's internal control over financial reporting
occurred during the Company's most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
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UGI UTILITIES, INC.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
EnergyNorth Natural Gas, Inc. v. UGI Utilities, Inc. By letter dated
October 26, 2000, EnergyNorth Natural Gas, Inc. ("EnergyNorth") notified UGI
Utilities that it has filed suit in the United States District Court for the
District of New Hampshire, seeking contribution from UGI Utilities for response
and remediation costs associated with contamination on the site of a former
manufactured gas plant allegedly operated by former subsidiaries of UGI
Utilities. In June 2003, UGI Utilities and EnergyNorth agreed to a settlement in
exchange for dismissal of the suit. See Note 3 to Condensed Consolidated
Financial Statements.
City of Bangor, Maine v. Citizens Communications Co. In April 2003,
Citizens Communications Company ("Citizens") served a complaint naming UGI
Utilities as a third party defendant in a civil action pending in United States
District Court for the District of Maine. In that action, the plaintiff, City of
Bangor, sued Citizens to recover environmental response costs associated with
manufactured gas plant wastes generated at a plant allegedly operated by
Citizens' predecessors at a site on the Penobscot River. Citizens subsequently
joined UGI Utilities and ten other third party defendants alleging that the
third party defendants are responsible for an equitable share of any response
costs Citizens may be required to pay to the City of Bangor. Investigations of
the site conducted to date are insufficient to establish what, if any
contamination is related to gas plant wastes. Hence, UGI Utilities is unable to
estimate the total cost of cleanup associated with manufactured gas plant wastes
at this site. UGI Utilities believes that it has good defenses to the claim.
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.
31.1 Certification by the Chief Executive Officer relating
to the Registrant's Report on Form 10-Q for the
quarter ended June 30, 2003 pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification by the Chief Financial Officer relating
to Registrant's Report on Form 10-Q for the quarter
ended June 30, 2003 pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32 Certification by the Chief Executive Officer and
Chief Financial Officer relating to the Registrant's
Report on Form 10-Q for the quarter ended June 30,
2003 pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
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UGI UTILITIES, INC.
(b) The Company filed the following Current Report on Form 8-K
during the fiscal quarter ended June 30, 2003.
DATE ITEM NUMBER CONTENT
April 30, 2003 7, 9, 12 Press release of UGI Corporation, the parent of UGI
Utilities, Inc., reporting financial results for UGI
Corporation and UGI Utilities, Inc. for the second fiscal
quarter ended March 31, 2003.
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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 14, 2003 By: /s/ J.C. Barney
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J.C. Barney
Senior Vice President - Finance
(Principal Financial Officer)
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UGI UTILITIES, INC. AND SUBSIDIARIES
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.
31.1 Certification by the Chief Executive Officer relating to the
Registrant's Report on Form 10-Q for the quarter ended June 30, 2003
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification by the Chief Financial Officer relating to the
Registrant's Report on Form 10-Q for the quarter ended June 30, 2003
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certification by the Chief Executive Officer and Chief Financial
Officer relating to the Registrant's Report on Form 10-Q for the
quarter ended June 30, 2003 pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.