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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 December 31, 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 January 31, 2004, 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 December 31, 2003,
September 30, 2003 and December 31, 2002 1
Condensed Consolidated Statements of Income for the three
months ended December 31, 2003 and 2002 2
Condensed Consolidated Statements of Cash Flows for the
three months ended December 31, 2003 and 2002 3
Notes to Condensed Consolidated Financial Statements 4 - 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10 - 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
Item 4. Controls and Procedures 16
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
-i-
UGI UTILITIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(Thousands of dollars)
December 31, September 30, December 31,
2003 2003 2002
----------- ------------ -----------
ASSETS
Current assets:
Cash and cash equivalents $ 2,692 $ 304 $ 8,510
Accounts receivable (less allowances for doubtful accounts
of $3,328, $3,275 and $2,669, respectively) 66,604 30,101 68,471
Accrued utility revenues 30,649 7,431 27,844
Inventories 47,497 54,017 33,832
Deferred income taxes 7,742 10,375 4,792
Prepaid expenses and other current assets 5,370 5,552 1,623
--------- --------- ---------
Total current assets 160,554 107,780 145,072
Property, plant and equipment, at cost (less accumulated depreciation
and amortization of $301,171, $296,871 and $294,948, respectively) 614,456 610,987 596,144
Regulatory assets 61,322 60,253 58,338
Other assets 30,309 30,028 39,134
--------- --------- ---------
Total assets $ 866,641 $ 809,048 $ 838,688
========= ========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt $ - $ - $ 50,000
Current maturities of preferred shares subject to mandatory
redemption, without par value 1,000 - -
Bank loans 72,200 40,700 78,300
Accounts payable 76,923 55,298 67,915
Other current liabilities 55,555 56,913 39,888
--------- --------- ---------
Total current liabilities 205,678 152,911 236,103
Long-term debt 217,241 217,271 172,345
Deferred income taxes 147,674 144,176 135,590
Deferred investment tax credits 7,887 7,987 8,286
Other noncurrent liabilities 12,337 11,951 13,312
Preferred shares subject to mandatory redemption, without par value 19,000 20,000 -
--------- --------- ---------
Total liabilities 609,817 554,296 565,636
Commitments and contingencies (note 3)
Preferred shares subject to mandatory redemption, without par value - - 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 79,046 79,046 73,057
Retained earnings 119,317 117,496 122,309
Accumulated other comprehensive loss (1,798) (2,049) (2,573)
--------- --------- ---------
Total common stockholder's equity 256,824 254,752 253,052
--------- --------- ---------
Total liabilities and stockholder's equity $ 866,641 $ 809,048 $ 838,688
========= ========= =========
See accompanying notes to condensed consolidated financial statements.
-1-
UGI UTILITIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(Thousands of dollars)
Three Months Ended
December 31,
-----------------------
2003 2002
--------- ---------
Revenues $ 170,684 $ 168,351
--------- ---------
Costs and expenses:
Cost of sales - gas, fuel and purchased power 105,645 100,444
Operating and administrative expenses 20,815 20,808
Operating and administrative expenses - related parties 3,576 1,890
Taxes other than income taxes 3,098 2,938
Depreciation and amortization 5,394 5,314
Other income, net (1,794) (1,873)
--------- ---------
136,734 129,521
--------- ---------
Operating income 33,950 38,830
Interest expense 4,604 4,335
--------- ---------
Income before income taxes 29,346 34,495
Income taxes 11,838 13,781
--------- ---------
Net income 17,508 20,714
Dividends on preferred shares subject to mandatory redemption - 388
--------- ---------
Net income after dividends on preferred shares subject to
mandatory redemption $ 17,508 $ 20,326
========= =========
See accompanying notes to condensed consolidated financial statements.
-2-
UGI UTILITIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Thousands of dollars)
Three Months Ended
December 31,
-----------------------
2003 2002
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 17,508 $ 20,714
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 5,394 5,314
Deferred income taxes, net 4,882 453
Provision for uncollectible accounts 1,692 1,867
Other, net 1,398 473
Net change in:
Accounts receivable and accrued utility revenues (61,412) (51,558)
Inventories 6,520 4,822
Deferred fuel costs (8,420) 7,098
Accounts payable 21,624 10,416
Other current assets and liabilities 6,189 1,389
-------- --------
Net cash (used) provided by operating activities (4,625) 988
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment (8,404) (8,211)
Net (costs of) proceeds from property, plant and equipment disposals (396) 261
-------- --------
Net cash used by investing activities (8,800) (7,950)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of dividends (15,687) (5,718)
Repayment of long-term debt - (26,000)
Bank loans increase 31,500 41,100
-------- --------
Net cash provided by financing activities 15,813 9,382
-------- --------
Cash and cash equivalents increase $ 2,388 $ 2,420
======== ========
CASH AND CASH EQUIVALENTS:
End of period $ 2,692 $ 8,510
Beginning of period 304 6,090
-------- --------
Increase $ 2,388 $ 2,420
======== ========
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
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
June 2003 distribution to UGI of UGI Development Company ("UGID") and
UGID's subsidiaries and 50%-owned joint-venture affiliate Hunlock Creek
Energy Ventures ("Energy Ventures"), owned interests in
Pennsylvania-based electricity generation assets through UGID. We refer
to Gas Utility, Electric Utility and UGID (prior to its distribution to
UGI) collectively as "the Company" or "we," and Electric Utility and
UGID collectively as "Electric Operations."
Our condensed consolidated financial statements include the accounts of
UGI Utilities and its majority-owned subsidiaries. We eliminate all
significant intercompany accounts and transactions when we
consolidate. Our investment in Energy Ventures was accounted for under
the equity method. 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 the three months
ended December 31, 2002.
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, 2003 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, 2003 ("Company's 2003 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 months ended December 31, 2003 and
2002:
Three Months Ended
December 31,
------------------------
2003 2002
- --------------------------------------------------------------------------------
Net income $17,508 $20,714
Other comprehensive income 251 201
- --------------------------------------------------------------------------------
Comprehensive income $17,759 $20,915
- --------------------------------------------------------------------------------
Other comprehensive income comprises changes in the fair value of
interest rate protection and electricity price swap 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 of America. 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.
PREFERRED SHARES SUBJECT TO MANDATORY REDEMPTION. Beginning July 1,
2003, the Company accounts for its preferred shares subject to
mandatory redemption in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and
Equity" ("SFAS 150"). SFAS 150 establishes guidelines on how an issuer
classifies and measures certain financial instruments with
characteristics of both liabilities and equity. The adoption of SFAS
150 results in the Company presenting its preferred shares subject to
mandatory redemption in the liabilities section of the balance sheet,
and reflecting dividends paid on these shares as a component of
interest expense, for periods presented after June 30, 2003. Because
SFAS 150 specifically prohibits the restatement of financial statements
prior to its adoption, prior period amounts have not been reclassified.
-5-
UGI UTILITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Thousands of dollars)
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 2003 Annual Report. We
evaluate each segment's profitability principally based upon its income
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 business segment follows:
THREE MONTHS ENDED DECEMBER, 2003:
Gas Electric
Total Utility Operations(a)
-----------------------------------
Revenues $170,684 $149,265 $ 21,419
Cost of sales - gas, fuel and purchased power 105,645 95,110 10,535
Depreciation and amortization 5,394 4,658 736
Operating income 33,950 29,401 4,549
Interest expense 4,604 4,116 488
Income before income taxes 29,346 25,285 4,061
Total assets at period end 866,641 781,804 84,837
THREE MONTHS ENDED DECEMBER 31, 2002:
Gas Electric
Total Utility Operations(a)
----------------------------------
Revenues $168,351 $145,075 $ 23,276
Cost of sales - gas, fuel and purchased power 100,444 88,394 12,050
Depreciation and amortization 5,314 4,530 784
Operating income 38,830 33,543 5,287
Interest expense 4,335 3,718 617
Income before income taxes 34,495 29,824 4,671
Total assets at period end 838,688 731,125 107,563
(a) Electric Operations comprises Electric Utility and, for the three
months ended December 31, 2002, UGID.
-6-
UGI UTILITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Thousands of dollars)
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 contamination or
performing environmental remediation. UGI Utilities is currently
litigating three 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 (1) the subsidiary's separate corporate form
should be disregarded or (2) UGI Utilities should be considered to have
been an operator because of its conduct with respect to its
subsidiary's MGP.
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.
-7-
UGI UTILITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Thousands of dollars)
4. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2003, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 132 (revised 2003), "Employers' Disclosures about
Pensions and Other Postretirement Benefits" ("SFAS 132"). SFAS 132
revises the disclosure requirements about pension plans and other
postretirement benefit plans, but does not change the measurement or
recognition of those plans required by FASB Statements No. 87,
"Employers' Accounting for Pensions," No. 88, "Employers' Accounting
for Settlements and Curtailments of Defined Benefit Pension Plans and
for Termination Benefits," and No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." SFAS 132 requires
additional disclosures concerning, among other things, the measurement
date used to determine pension and other postretirement benefit
measurements, plan assets, accumulated benefit obligations, cash flows
and net periodic benefit costs as well as disclosure in interim
financial statements of net periodic benefit costs, and employer's
contributions paid and expected to be paid during the fiscal year (if
amounts are significantly different from those previously disclosed in
the annual financial statements). SFAS 132 is effective for fiscal
years ending after December 15, 2003, and for quarters beginning after
December 15, 2003. As required by SFAS 132, the Company will provide
supplemental disclosures in its interim financial statements for the
quarter ended March 31, 2004.
In January 2003, the FASB issued Financial Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46"), which
clarifies Accounting Research Bulletin No. 51, "Consolidated Financial
Statements." FIN 46 is effective immediately for variable interest
entities created or obtained after January 31, 2003. For variable
interests created or acquired before February 1, 2003, FIN 46 is
effective for the first fiscal or interim period beginning after
December 15, 2003. If certain conditions are met, FIN 46 requires the
primary beneficiary to consolidate certain variable interest entities
in which the other equity investors lack the essential characteristics
of controlling financial interest or their investment at risk is not
sufficient to permit the variable interest entity to finance its
activities without additional subordinated financial support from other
parties. The Company has not created or obtained any variable interest
entities after January 31, 2003. In December 2003, the FASB issued a
revision to FIN 46 which addresses new effective dates and certain
implementation issues. Among these issues is the addition of a scope
exception for certain entities that meet the definition of a business
provided certain criteria are met. The adoption of FIN 46, as revised,
is not expected to impact the Company's financial position or results
of operations.
On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the "Act") was signed into law. Among other
things, the Act provides for a prescription drug benefit to Medicare
beneficiaries on a voluntary basis beginning in 2006. To encourage
employers to continue to offer retiree prescription drug benefits, the
Act provides for a tax-free subsidy to employers who offer a
prescription drug benefit that is at least actuarially equivalent to
the standard benefit offered under the Act.
-8-
UGI UTILITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Thousands of dollars)
The Company provides postretirement health care benefits to certain of
its retirees and a limited number of active employees meeting certain
age and service requirements. These postretirement benefits include
certain retiree prescription drug benefits. Pursuant to orders issued
by the PUC, UGI Utilities has established a Voluntary Employees'
Beneficiary Association ("VEBA") trust to pay retiree health care and
life insurance benefits and to fund the UGI Utilities' postretirement
benefit liability. UGI Utilities is required to fund its postretirement
benefit obligations by depositing into the VEBA the annual amount of
postretirement benefit costs determined under SFAS No. 106, "Employers
Accounting for Postretirement Benefits Other than Pensions." The
difference between the annual amount calculated and the amount in UGI
Utilities' rates is deferred for future recovery from, or refund to,
ratepayers.
The Company is currently in the process of evaluating the effects of
the Act on the benefits it provides to its retirees and whether or not
it is appropriate to amend certain provisions of the retiree health
care program in response to the Act. Due to inherent uncertainties
regarding the direct effects of the Act, the effects of the Act on
retiree's behavior with respect to prescription drug benefits, pending
authoritative guidance on how actuarial equivalency in order to qualify
for the federal subsidy is measured, and how the federal subsidy will
be reflected under accounting principles generally accepted in the
United States of America, we have elected to defer recognizing the
effects of the Act in accounting for these benefits and in providing
disclosures until authoritative guidance on the accounting for the
federal subsidy is issued, in accordance with FASB Staff Position No.
FAS 106-1, "Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003."
Authoritative guidance, when issued, could require us to change the
amount of postretirement benefit costs we are currently recording.
However, under the current ratemaking described above, any increases or
decreases in postretirement benefit costs resulting from the Act will
not affect our reported results. In addition, because of the limited
number of participants in the program and the current level of
postretirement benefits, we do not believe the Act will have a material
effect on the Company's cash flows.
-9-
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 the three months
ended December 31, 2003 ("2003 three-month period") with the three months ended
December 31, 2002 ("2002 three-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.
Increase
Three Months Ended December 31, 2003 2002 (Decrease)
- -------------------------------------------------------------------------------------
(Millions of dollars)
GAS UTILITY:
Revenues $149.3 $145.1 $ 4.2 2.9%
Total margin (a) $ 54.2 $ 56.7 $ (2.5) (4.4)%
Operating income $ 29.4 $ 33.5 $ (4.1) (12.2)%
Income before income taxes $ 25.3 $ 29.8 $ (4.5) (15.1)%
System throughput - bcf 23.3 23.3 - -
Heating degree days - % colder (warmer)
than normal (3.8) 6.4 - -
ELECTRIC OPERATIONS:
Revenues $ 21.4 $ 23.3 $ (1.9) (8.2)%
Total margin (a) $ 9.7 $ 10.0 $ (0.3) (3.0)%
Operating income $ 4.5 $ 5.3 $ (0.8) (15.1)%
Income before income taxes $ 4.1 $ 4.7 $ (0.6) (12.8)%
Distribution sales - gwh 243.5 244.4 (0.9) (0.4)%
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 $1.2 million in each of the three month-periods
ended December 31, 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. Weather in Gas Utility's service territory during the 2003
three-month period was 3.8% warmer than normal compared with weather that was
6.4% colder than normal in the 2002 three-month period. Total distribution
system throughput was unchanged as lower sales to firm- residential, commercial
and industrial ("retail core-market") customers, resulting from warmer weather,
were offset by greater sales to firm delivery service customers and
year-over-year customer growth. The increase in Gas Utility revenues during the
2003 three-month period reflects a $12.5 million increase in revenues from
off-system sales partially offset by lower revenues from retail core-market
customers resulting from the lower volumes sold. Gas Utility cost of gas was
$95.1 million in the 2003 three-month period compared to $88.4 million in the
-10-
UGI UTILITIES, INC.
2002 three-month period reflecting increased cost of gas associated with the
higher off-system sales reduced by lower retail core-market gas costs as a
result of the lower volumes sold.
The decline in Gas Utility total margin reflects a $2.0 million decline in
retail core-market margin resulting from lower retail core-market sales and
lower margin from interruptible customers.
Gas Utility operating income declined $4.1 million in the 2003 three-month
period reflecting the previously mentioned decline in total margin, an increase
in operating and administrative expenses and slightly higher depreciation and
amortization expense. Operating and administrative expenses increased $1.7
million principally reflecting greater compensation and benefits expense due in
large part to higher stock-based incentive compensation costs. The decrease in
Gas Utility income before income taxes reflects the decline in operating income
and higher interest expense due to including dividends on preferred shares
subject to mandatory redemption as a component of interest expense in accordance
with SFAS 150.
ELECTRIC OPERATIONS. Electric Utility's 2003 three-month period kilowatt-hour
sales were slightly lower reflecting the effects on heating-related sales of
weather that was warmer than in the prior-year period. Temperatures based upon
heating degree days in the 2003 three-month period were approximately 1.7%
warmer than normal compared with temperatures that were approximately 9.5%
colder than normal in the comparable prior-year period.
The decline in Electric Operations' revenues in the 2003 three-month period
principally reflects the absence of revenues from UGID's electricity generation
business. In June 2003, UGID and its subsidiaries were dividended to UGI (see
Note 1 to Condensed Consolidated Financial Statements). Electric Operations cost
of sales declined $1.5 million in the 2003 three-month period principally
reflecting the absence of $2.1 million of costs related to UGID's operations
offset by $0.6 million of higher Electric Utility's purchased power costs.
Electric Operations total margin in the 2003 three-month period declined $0.3
million principally because Electric Utility's cost of sales in the prior year
benefited from transmission system congestion credits. Operating income and
income before income taxes were lower in the 2003 three-month period principally
reflecting the decline in total margin and higher operating and administrative
expenses including greater distribution system and stock-based incentive
compensation expenses.
Consistent with the terms of Electric Utility's Provider of Last Resort ("POLR")
Settlement, effective January 1, 2004, Electric Utility's POLR rates for
commercial and industrial customers increased. This increase is not expected to
have a material effect on Fiscal 2004 operating results.
-11-
UGI UTILITIES, INC.
FINANCIAL CONDITION AND LIQUIDITY
FINANCIAL CONDITION
The Company's total debt outstanding at December 31, 2003 totaled $289.4 million
(including $72.2 million in bank loans) compared with $258.0 million (including
$40.7 million in bank loans) at September 30, 2003.
The Company has revolving credit commitments under which it may borrow up to
$107 million. These agreements expire in June 2005 and 2006. At December 31,
2003 borrowing under these agreements totaled $52.2 million. In addition, UGI
Utilities has an uncommitted arrangement with a major bank under which it may
borrow up to $20 million. At December 31, 2003, there was $20 million
outstanding under this agreement which amount matures March 9, 2004. 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
OPERATING ACTIVITIES. Due to the seasonal nature of UGI Utilities' businesses,
cash flows from operating activities are generally strongest during the second
and third fiscal quarters when customers pay for gas and electricity consumed
during the peak heating season months. Conversely, operating cash flows are
generally at their lowest levels during the first and fourth fiscal quarters
when the Company's investment in working capital, principally accounts
receivable and inventories, is generally greatest. UGI Utilities uses its
revolving credit agreements to manage these seasonal cash flow needs. Cash used
by operating activities was $4.6 million during the three months ended December
31, 2003 compared with cash provided by operating activities of $1.0 million in
the prior-year period. Cash flow from operating activities before changes in
operating working capital was $30.9 million in the 2003 three-month period
compared to $28.8 million in the prior-year three-month period, notwithstanding
the lower operating results, principally reflecting greater noncash deferred
income tax expense. Changes in operating working capital used $35.5 million of
operating cash flow during the 2003 three-month period compared with $27.8
million during the prior-year three-month period.
INVESTING ACTIVITIES. Cash flow used in investing activities was $8.8 million in
the 2003 three-month period compared with $8.0 million in the prior-year period.
Expenditures for property, plant and equipment were $8.4 million in the 2003
three-month period compared with $8.2 million recorded in the prior-year period
principally reflecting slightly higher Gas Utility capital expenditures. Net
costs of property, plant and equipment disposals were higher in the 2003
three-month period as the prior-year amount reflected greater proceeds from the
sale of property.
FINANCING ACTIVITIES. Cash flow from financing activities was $15.8 million in
the 2003 three-month period compared with $9.4 million in the prior-year period.
Financing activity cash flows are primarily due to issuances and repayments of
long-term debt, net borrowings under revolving credit agreements, dividends on
common and preferred shares, and capital contributions from UGI. During the 2003
and 2002 three-month periods, we paid dividends of $15.7 million and $5.3
million, respectively, to UGI. In addition, we paid dividends of $0.4 million on
our preferred
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UGI UTILITIES, INC.
shares subject to mandatory redemption during both periods. The dividends paid
on preferred shares subject to mandatory redemption during the three months
ended December 31, 2003 are reflected in cash flow from operations as a result
of the application of SFAS No. 150 (see "Preferred Shares Subject to Mandatory
Redemption" below). During the 2003 three-month period, we had net borrowings of
$31.5 million under our revolving credit agreements and the uncommitted
arrangement with a major bank compared to net borrowings of $41.1 million in the
prior-year period.
PREFERRED SHARES SUBJECT TO MANDATORY REDEMPTION
Beginning July 1, 2003, the Company accounts for its preferred shares subject to
mandatory redemption in accordance with SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity"
("SFAS 150"). SFAS 150 establishes guidelines on how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. The adoption of SFAS 150 results in the Company presenting its
preferred shares subject to mandatory redemption in the liabilities section of
the balance sheet, and reflecting dividends paid on these shares as a component
of interest expense, for periods presented after June 30, 2003. Because SFAS 150
specifically prohibits the restatement of financial statements prior to its
adoption, prior period amounts have not been reclassified.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2003, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 132 (revised 2003), "Employers' Disclosures about Pensions and Other
Postretirement Benefits" ("SFAS 132"). SFAS 132 revises the disclosure
requirements about pension plans and other postretirement benefit plans, but
does not change the measurement or recognition of those plans required by FASB
Statements No. 87, "Employers' Accounting for Pensions," No. 88, "Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and
for Termination Benefits," and No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." SFAS 132 requires additional
disclosures concerning, among other things, the measurement date used to
determine pension and other postretirement benefit measurements, plan assets,
accumulated benefit obligations, cash flows and net periodic benefit costs as
well as disclosure in interim financial statements of net periodic benefit
costs, and employer's contributions paid and expected to be paid during the
fiscal year (if amounts are significantly different from those previously
disclosed in the annual financial statements). SFAS 132 is effective for fiscal
years ending after December 15, 2003, and for quarters beginning after December
15, 2003. As required by SFAS 132, the Company will provide supplemental
disclosures in its interim financial statements for the quarter ended March 31,
2004.
In January 2003, the FASB issued Financial Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("FIN 46"), which clarifies Accounting Research
Bulletin No. 51, "Consolidated Financial Statements." FIN 46 is effective
immediately for variable interest entities created or obtained after January 31,
2003. For variable interests created or acquired before February 1, 2003, FIN 46
is effective for the first fiscal or interim period beginning after December 15,
2003. If certain conditions are met, FIN 46 requires the primary beneficiary to
consolidate certain variable interest entities in which the other equity
investors lack the essential characteristics of controlling financial interest
or their investment at risk is not sufficient to permit the variable interest
entity to finance its activities without additional subordinated financial
support from other parties. The Company has not created or obtained any variable
interest entities after January 31,
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UGI UTILITIES, INC.
2003. In December 2003, the FASB issued a revision to FIN 46 which addresses
new effective dates and certain implementation issues. Among these issues is the
addition of a scope exception for certain entities that meet the definition of a
business provided certain criteria are met. The adoption of FIN 46, as revised,
is not expected to impact the Company's financial position or results of
operations.
On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the "Act") was signed into law. Among other things,
the Act provides for a prescription drug benefit to Medicare beneficiaries on a
voluntary basis beginning in 2006. To encourage employers to continue to offer
retiree prescription drug benefits, the Act provides for a tax-free subsidy to
employers who offer a prescription drug benefit that is at least actuarially
equivalent to the standard benefit offered under the Act.
The Company provides postretirement health care benefits to certain of its
retirees and a limited number of active employees meeting certain age and
service requirements. These postretirement benefits include certain retiree
prescription drug benefits. Pursuant to orders issued by the Pennsylvania Public
Utility Commission ("PUC"), UGI Utilities has established a Voluntary Employees'
Beneficiary Association ("VEBA") trust to pay retiree health care and life
insurance benefits and to fund the UGI Utilities' postretirement benefit
liability. UGI Utilities is required to fund its postretirement benefit
obligations by depositing into the VEBA the annual amount of postretirement
benefit costs determined under SFAS No. 106, "Employers Accounting for
Postretirement Benefits Other than Pensions." The difference between the annual
amount calculated and the amount in UGI Utilities' rates is deferred for future
recovery from, or refund to, ratepayers.
The Company is currently in the process of evaluating the effects of the Act on
the benefits it provides to its retirees and whether or not it is appropriate to
amend certain provisions of the retiree health care program in response to the
Act. Due to inherent uncertainties regarding the direct effects of the Act, the
effects of the Act on retiree's behavior with respect to prescription drug
benefits, pending authoritative guidance on how actuarial equivalency in order
to qualify for the federal subsidy is measured, and how the federal subsidy will
be reflected under accounting principles generally accepted in the United States
of America, we have elected to defer recognizing the effects of the Act in
accounting for these benefits and in providing disclosures until authoritative
guidance on the accounting for the federal subsidy is issued, in accordance with
FASB Staff Position No. FAS 106-1, "Accounting and Disclosure Requirements
Related to the Medicare Prescription Drug, Improvement and Modernization Act of
2003." Authoritative guidance, when issued, could require us to change the
amount of postretirement benefit costs we are currently recording. However,
under the current ratemaking described above, any increases or decreases in
postretirement benefit costs resulting from the Act will not affect our reported
results. In addition, because of the limited number of participants in the
program and the current level of postretirement benefits, we do not believe the
Act will have a material effect on the Company's cash flows.
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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 costs 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. Gas Utility uses
exchange-traded natural gas call option contracts to reduce volatility in the
cost of gas it purchases for its retail core-market customers. The cost of these
call option contracts, net of associated gains, if any, is included in Gas
Utility's PGC recovery mechanism.
Electric Utility purchases its power needs from electricity suppliers under
fixed-price energy and capacity contracts and, to a much lesser extent, on the
spot market. Prices for electricity can be volatile especially during periods of
high demand or tight supply. In accordance with a Provider of Last Resort
("POLR") settlement approved by the PUC, Electric Utility may increase its POLR
rates up to certain limits through December 31, 2004, and charge market rates
thereafter. Electric Utility's fixed-price contracts with electricity suppliers
mitigate most risks associated with the POLR service rate limits in effect
through December 31, 2004. 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. During the quarter ended December 31, 2003, Electric Utility
entered into an electricity price swap agreement to reduce the volatility in the
cost of a portion of its anticipated electricity requirements in 2007. At
December 31, 2003, the fair value of this price swap was $0.1 million. Fair
value reflects the estimated amount that we would receive or pay to terminate
the contract at the reporting date based upon quoted market prices of comparable
contracts at December 31, 2003. An adverse change in electricity prices of ten
percent would result in a $0.8 million decrease in the fair value of the swap.
Our variable-rate debt includes borrowings under our revolving credit agreements
and the uncommitted arrangement with a major bank. 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
December 31, 2003, the fair value of our unsettled interest rate protection
agreement, which has been designated and qualifies as a cash flow hedge, was
$0.5 million. An adverse change in interest rates on ten-year U.S. treasury
notes of ten percent would result in a $0.4 million decrease in the fair value
of this interest rate protection agreement.
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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.
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 December 31, 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 December 31, 2003, pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
*32 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 December 31, 2003,
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) The Company did not file any Current Reports on Form 8-K during the
fiscal quarter ended December 31, 2003.
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* The Exhibit attached to this Form 10-Q shall not be deemed filed for purposes
of Section 18 of the Securities Exchange Act of 1934, as amended.
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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: February 13, 2004 By: /s/ John C. Barney
-------------------------------
John 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 December 31,
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 December 31, 2003 pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32 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 December 31, 2003 pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.