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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 March 31, 2004
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 April 30, 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 March 31, 2004,
September 30, 2003 and March 31, 2003 1
Condensed Consolidated Statements of Income for the three
and six months ended March 31, 2004 and 2003 2
Condensed Consolidated Statements of Cash Flows for the
six months ended March 31, 2004 and 2003 3
Notes to Condensed Consolidated Financial Statements 4 - 12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13 - 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Item 4. Controls and Procedures 20
PART II OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
-i-
UGI UTILITIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(Thousands of dollars)
March 31, September 30, March 31,
2004 2003 2003
------------- ------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,796 $ 304 $ 8,617
Accounts receivable (less allowances for doubtful accounts
of $6,573, $3,275 and $6,202, respectively) 86,880 30,101 99,847
Accrued utility revenues 24,230 7,431 21,721
Inventories 8,648 54,017 6,563
Deferred income taxes 13,537 10,375 18,074
Prepaid expenses and other current assets 6,029 5,552 3,907
------------- ------------- -------------
Total current assets 142,120 107,780 158,729
Property, plant and equipment, at cost (less accumulated depreciation
and amortization of $305,764, $296,871 and $299,273, respectively) 617,141 610,987 598,395
Regulatory assets 62,102 60,253 59,212
Other assets 30,860 30,028 40,574
------------- ------------- -------------
Total assets $ 852,223 $ 809,048 $ 856,910
============= ============= =============
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 42,400 40,700 27,700
Accounts payable 48,674 55,298 51,079
Accrued income taxes 16,438 479 29,671
Deferred fuel refunds 18,245 14,734 31,369
Other current liabilities 42,296 41,700 37,034
------------- ------------- -------------
Total current liabilities 169,053 152,911 226,853
Long-term debt 217,211 217,271 172,322
Deferred income taxes 151,000 144,176 138,169
Deferred investment tax credits 7,788 7,987 8,186
Other noncurrent liabilities 12,170 11,951 12,821
Preferred shares subject to mandatory redemption, without par value 19,000 20,000 -
------------- ------------- -------------
Total liabilities 576,222 554,296 558,351
Commitments and contingencies (note 4)
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 138,696 117,496 147,791
Accumulated other comprehensive loss (2,000) (2,049) (2,548)
------------- ------------- -------------
Total common stockholder's equity 276,001 254,752 278,559
------------- ------------- -------------
Total liabilities and stockholder's equity $ 852,223 $ 809,048 $ 856,910
============= ============= =============
See accompanying notes to condensed consolidated financial statements.
- 1 -
UGI UTILITIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(Thousands of dollars)
Three Months Ended Six Months Ended
March 31, March 31,
--------------------------- ---------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Revenues $ 268,217 $ 269,296 $ 438,901 $ 437,647
------------ ------------ ------------ ------------
Costs and expenses:
Cost of sales - gas, fuel and purchased power 176,491 173,167 282,136 273,611
Operating and administrative expenses 25,823 25,074 46,638 45,882
Operating and administrative expenses - related parties 2,242 3,080 5,818 4,970
Taxes other than income taxes 3,555 3,430 6,653 6,368
Depreciation and amortization 6,076 5,340 11,470 10,654
Other expense (income), net 753 (4,244) (1,041) (6,117)
------------ ------------ ------------ ------------
214,940 205,847 351,674 335,368
------------ ------------ ------------ ------------
Operating income 53,277 63,449 87,227 102,279
Interest expense 4,457 4,141 9,061 8,476
------------ ------------ ------------ ------------
Income before income taxes 48,820 59,308 78,166 93,803
Income taxes 19,671 23,909 31,509 37,690
------------ ------------ ------------ ------------
Net income 29,149 35,399 46,657 56,113
Dividends on preferred shares subject to mandatory redemption - 387 - 775
------------ ------------ ------------ ------------
Net income after dividends on preferred shares subject to
mandatory redemption $ 29,149 $ 35,012 $ 46,657 $ 55,338
============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements.
- 2 -
UGI UTILITIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Thousands of dollars)
Six Months Ended
March 31,
---------------------------
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 46,657 $ 56,113
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 11,470 10,654
Deferred income taxes, net 1,485 (10,328)
Provision for uncollectible accounts 5,691 5,810
Other, net 1,836 (2,077)
Net change in:
Accounts receivable and accrued utility revenues (79,270) (80,756)
Inventories 45,369 32,091
Deferred fuel costs 3,360 35,673
Accounts payable (6,624) (6,420)
Other current assets and liabilities 13,674 28,672
------------ ------------
Net cash provided by operating activities 43,648 69,432
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment (16,499) (15,452)
Net costs of property, plant and equipment disposals (899) (319)
------------ ------------
Net cash used by investing activities (17,398) (15,771)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of dividends (25,458) (15,634)
Repayment of long-term debt - (26,000)
Bank loans increase (decrease) 1,700 (9,500)
------------ ------------
Net cash used by financing activities (23,758) (51,134)
------------ ------------
Cash and cash equivalents increase $ 2,492 $ 2,527
============ ============
CASH AND CASH EQUIVALENTS:
End of period $ 2,796 $ 8,617
Beginning of period 304 6,090
------------ ------------
Increase $ 2,492 $ 2,527
============ ============
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, prior to their distribution to UGI, UGID and its
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. The results of operations of UGID and its
subsidiaries did not have a material effect on the Company's results of
operations for the three- or six-month periods ended March 31, 2003.
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 and six months ended March 31, 2004
and 2003:
Three Months Ended Six Months Ended
March 31, March 31,
----------------------- -----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net income $ 29,149 $ 35,399 $ 46,657 $ 56,113
Other comprehensive (loss) income (202) 25 49 226
- -------------------------------------------------------------------------------------
Comprehensive income $ 28,947 $ 35,424 $ 46,706 $ 56,339
- -------------------------------------------------------------------------------------
Other comprehensive (loss) 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 MARCH 31, 2004:
Gas Electric
Total Utility Operations (a)
------------------------------------------------
Revenues $ 268,217 $ 243,543 $ 24,674
Cost of sales - gas, fuel and purchased power 176,491 165,026 11,465
Depreciation and amortization 6,076 5,079 997
Operating income 53,277 46,492 6,785
Interest expense 4,457 3,912 545
Income before income taxes 48,820 42,580 6,240
Total assets at period end 852,223 763,096 89,127
THREE MONTHS ENDED MARCH 31, 2003:
Gas Electric
Total Utility Operations (a)
------------------------------------------------
Revenues $ 269,296 $ 239,920 $ 29,376
Cost of sales - gas, fuel and purchased power 173,167 158,974 14,193
Depreciation and amortization 5,340 4,547 793
Operating income 63,449 55,020 8,429
Interest expense 4,141 3,502 639
Income before income taxes 59,308 51,519 7,789
Total assets at period end 856,910 744,907 112,003
(a) Electric Operations comprises Electric Utility and, for the three
months ended March 31, 2003, UGID and its consolidated subsidiaries.
- 6 -
UGI UTILITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
(unaudited)
(Thousands of dollars)
SIX MONTHS ENDED MARCH 31, 2004:
Gas Electric
Total Utility Operations (a)
------------------------------------------------
Revenues $ 438,901 $ 392,808 $ 46,093
Cost of sales - gas, fuel and purchased power 282,136 260,136 22,000
Depreciation and amortization 11,470 9,737 1,733
Operating income 87,227 75,893 11,334
Interest expense 9,061 8,028 1,033
Income before income taxes 78,166 67,865 10,301
Total assets at period end 852,223 763,096 89,127
SIX MONTHS ENDED MARCH 31, 2003:
Gas Electric
Total Utility Operations (a)
------------------------------------------------
Revenues $ 437,647 $ 384,995 $ 52,652
Cost of sales - gas, fuel and purchased power 273,611 247,368 26,243
Depreciation and amortization 10,654 9,077 1,577
Operating income 102,279 88,563 13,716
Interest expense 8,476 7,220 1,256
Income before income taxes 93,803 81,343 12,460
Total assets at period end 856,910 744,907 112,003
(a) Electric Operations comprises Electric Utility and, for the six months
ended March 31, 2003, UGID and its consolidated subsidiaries.
3. DEFINED BENEFIT PENSION AND OTHER POSTRETIREMENT PLANS
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"). As required
by SFAS 132, the Company is providing the following supplemental
disclosures regarding the UGI Utilities defined benefit pension plan
and its postretirement health and life insurance plan.
We sponsor a defined benefit pension plan ("UGI Utilities Pension
Plan") for employees of UGI, UGI Utilities, and certain of UGI's other
wholly owned subsidiaries. In addition, we provide postretirement
health care benefits to certain retirees and a limited number of active
employees meeting certain age and service requirements, and
postretirement life insurance benefits to nearly all domestic active
and retired employees.
- 7 -
UGI UTILITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
(unaudited)
(Thousands of dollars)
Net periodic pension expense (income) and other postretirement benefit
costs relating to UGI Utilities employees include the following
components:
Pension Benefits Other Postretirement Benefits
---------------- ---------------------------
Three Months Ended March 31, Three Months Ended March 31,
2004 2003 2004 2003
- -----------------------------------------------------------------------------------------------
Service cost $ 1,165 $ 1,013 $ 30 $ 27
Interest cost 3,095 3,001 364 374
Expected return on assets (4,108) (4,162) (115) (104)
Amortization of:
Transition (asset) obligation (328) (378) 170 170
Prior service cost 166 161 - -
Actuarial loss 288 54 68 51
---------------------------------------------------------
Net benefit cost (income) 278 (311) 517 519
Change in regulatory assets
and liabilities - - 258 256
---------------------------------------------------------
Net expense (income) $ 278 $ (311) $ 775 $ 775
- -----------------------------------------------------------------------------------------------
Pension Benefits Other Postretirement Benefits
---------------- ---------------------------
Six Months Ended March 31, Six Months Ended March 31,
2004 2003 2004 2003
- -----------------------------------------------------------------------------------------------
Service cost $ 2,330 $ 2,026 $ 60 $ 55
Interest cost 6,189 6,002 728 749
Expected return on assets (8,216) (8,323) (230) (207)
Amortization of:
Transition (asset) obligation (655) (755) 340 340
Prior service cost 331 322 - -
Actuarial loss 577 108 136 102
---------------------------------------------------------
Net benefit cost (income) 556 (621) 1,034 1,038
Change in regulatory assets
and liabilities - - 516 512
---------------------------------------------------------
Net expense (income) $ 556 $ (621) $ 1,550 $ 1,550
- -----------------------------------------------------------------------------------------------
UGI Utilities Pension Plan assets are held in trust and consist
principally of equity and fixed income mutual funds. The Company does
not believe it will be required to make any contributions to the UGI
Utilities Pension Plan during the year ended September 30, 2004.
Pursuant to orders previously issued by the PUC, UGI Utilities has
established a Voluntary Employees' Beneficiary Association ("VEBA")
trust to fund the UGI Utilities' postretirement obligations and to pay
retiree health care and life insurance benefits by depositing into the
VEBA the annual amount of postretirement benefits costs determined
under SFAS No. 106, "Employers Accounting for Postretirement Benefits
Other Than Pensions." The difference between the annual amount
calculated and the amount included in UGI Utilities rates is deferred
for future recovery from, or refund to, ratepayers. The Company expects
to contribute approximately $2,300 to the VEBA during the year ended
September 30, 2004, subject to the actuarial impact of the Medicare
Prescription Drug Improvement and Modernization Act of 2003 (as more
fully described in Note 5 to Condensed Consolidated Financial
Statements). Through March
- 8 -
UGI UTILITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
(unaudited)
(Thousands of dollars)
31, 2004, the Company has made contributions of approximately $1,200 to
the VEBA in respect of the year ended September 30, 2004.
The net benefit cost of our unfunded and non-qualified supplemental
executive retirement plan includes the following components:
Three Months Ended March 31, Six Months Ended March 31,
2004 2003 2004 2003
- ----------------------------------------------------------------------------------------
Service cost $ 13 $ (2) $ 26 $ (4)
Interest cost 50 41 100 82
Amortization of:
Transition obligation 13 13 26 26
Prior service cost (1) (1) (2) (2)
Actuarial loss 29 16 58 32
---------------------------------------------------------
Net benefit cost $ 104 $ 67 $ 208 $ 134
- ----------------------------------------------------------------------------------------
4. 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
- 9 -
UGI UTILITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
(unaudited)
(Thousands of dollars)
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 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, Maine ("City")
sued Citizens to recover environmental response costs associated with
MGP 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
costs Citizens may be required to pay to the City for cleaning up tar
deposits in the Penobscot River. The City believes that it could cost
as much as $50,000 to clean up the river. UGI Utilities believes that
it has good defenses to the claim and is defending the suit.
By letter dated July 29, 2003, Atlanta Gas Light Company ("AGL") served
UGI Utilities with a complaint filed in the United States District
Court for the Middle District of Florida in which AGL alleges that UGI
Utilities is responsible for 20% of approximately $8,000 incurred by
AGL in the investigation and remediation of a former MGP site in St.
Augustine, Florida. UGI Utilities formerly owned stock of the St.
Augustine Gas Company, the owner and operator of the MGP. UGI Utilities
believes that it has good defenses to the claim and is defending the
suit.
AGL previously informed UGI Utilities that it was investigating
contamination that appeared to be related to MGP operations at a site
owned by AGL in Savannah, Georgia. A former subsidiary of UGI
Utilities' operated the MGP in the early 1900's. AGL has recently
informed UGI Utilities that it has begun remediation of MGP wastes at
the site and believes that the total cost of remediation could be as
high as $55,000. AGL has stated an intention to make a claim against
UGI Utilities for a share of these costs. UGI Utilities believes that
it will have substantial defenses to any action that may arise out of
this site.
On September 20, 2001, Consolidated Edison Company of New York
("ConEd") filed suit against UGI Utilities in the United States
District Court for the Southern District of New York, seeking
contribution from UGI Utilities for an allocated share of response
costs associated with investigating and assessing gas plant related
contamination at former MGP sites in Westchester County, New York. The
complaint alleges that UGI Utilities "owned and operated" the MGPs
prior to 1904. The complaint also seeks a declaration that UGI
Utilities is responsible for an allocated percentage of future
investigative and remedial costs at the sites. ConEd believes that the
cost of remediation for all of the sites could exceed $70,000. In
November 2003, the court granted UGI Utilities' motion for summary
judgment in part, dismissing all claims premised on a disregard of the
separate corporate form of UGI Utilities' former subsidiaries and
dismissing claims premised on UGI
- 10 -
UGI UTILITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
(unaudited)
(Thousands of dollars)
Utilities' operation of three of the MGPs under operating leases with
ConEd's predecessors. In March 2004, the court granted summary judgment
on the remaining claims and dismissed ConEd's complaint. ConEd has
appealed.
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 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.
5. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2003, the FASB revised Financial Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46"), which was
originally issued in January 2003 and clarifies Accounting Research
Bulletin No. 51, "Consolidated Financial Statements." FIN 46 was
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 our interim
period ended March 31, 2004. The Company has not created or obtained
any variable interest entities after January 31, 2003. If certain
conditions are met, FIN 46 requires the primary beneficiary to
consolidate certain variable interest entities. The adoption of FIN 46
did not have any impact on 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 principally 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 previously issued by the PUC, UGI Utilities has established a
VEBA trust to fund the UGI Utilities' postretirement obligations and to
pay retiree health care and life insurance benefits 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.
- 11 -
UGI UTILITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
(unaudited)
(Thousands of dollars)
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"
("FSP-106-1"). Therefore, the condensed consolidated financial
statements and accompanying footnotes do not reflect the effects of the
Act. 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.
- 12 -
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 March 31, 2004 ("2004 three-month period") with the three
months ended March 31, 2003 ("2003 three-month period") and (2) the six months
ended March 31, 2004 ("2004 six-month period") with the six months ended March
31, 2003 ("2003 six-month period"). Results of operations in the 2004 three-
and six-month periods comprise those of Electric Utility. Results of operations
in the 2003 three- and six-month periods comprise those of Electric Utility and
UGID (see Note 1 to Condensed Consolidated Financial Statements). 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.
2004 THREE-MONTH PERIOD COMPARED WITH 2003 THREE-MONTH PERIOD
Increase
Three Months Ended March 31, 2004 2003 (Decrease)
- ---------------------------------------------------------------------------------------------------
(Millions of dollars)
GAS UTILITY:
Revenues $ 243.5 $ 239.9 $ 3.6 1.5%
Total margin (a) $ 78.5 $ 80.9 $ (2.4) (3.0)%
Operating income $ 46.5 $ 55.0 $ (8.5) (15.5)%
Income before income taxes $ 42.6 $ 51.5 $ (8.9) (17.3)%
System throughput - bcf 31.2 32.4 (1.2) (3.7)%
Heating degree days - % colder
than normal 2.7% 7.9% - -
ELECTRIC OPERATIONS (b):
Revenues $ 24.7 $ 29.4 $ (4.7) (16.0)%
Total margin (a) $ 11.9 $ 13.9 $ (2.0) (14.4)%
Operating income $ 6.8 $ 8.4 $ (1.6) (19.0)%
Income before income taxes $ 6.2 $ 7.8 $ (1.6) (20.5)%
Distribution sales - gwh 282.2 281.1 1.1 -
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 $1.3 million in each
of the three-month periods ended March 31, 2004 and 2003. For
financial statement purposes, revenue-related taxes are
included in "taxes other than income taxes" on the Condensed
Consolidated Statements of Income.
(b) Electric Operations comprises Electric Utility and, for the
three months ended March 31, 2003, UGID and its consolidated
subsidiaries.
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UGI UTILITIES, INC.
GAS UTILITY. Weather in Gas Utility's service territory during the 2004
three-month period was 2.7% colder than normal compared with weather that was
7.9% colder than normal in the 2003 three-month period. Total distribution
system throughput decreased 1.2 bcf or 3.7% as lower volumes transported for
residential, commercial and industrial delivery service customers and lower
heating-related sales to firm- residential, commercial and industrial ("retail
core-market") customers were partially offset by the volume effects of
year-over-year retail core-market customer growth. The increase in Gas Utility
revenues during the 2004 three-month period reflects greater revenues from
retail core-market customers principally as a result of higher average purchased
gas cost ("PGC") rates partially offset by lower revenues from delivery service
customers and a decrease in revenues from off-system sales. Gas Utility cost of
gas was $165.0 million in the 2004 three-month period compared to $159.0 million
in the 2003 three-month period reflecting the previously mentioned higher
average PGC rates partially offset by the effects of the lower retail
core-market and off-system sales.
The decline in Gas Utility total margin reflects a $1.6 million decline in
residential, commercial and industrial delivery service total margin resulting
from lower volumes transported and, to a lesser extent, lower retail core-market
total margin resulting from the decline in retail core-market sales.
Gas Utility operating income declined $8.5 million in the 2004 three-month
period principally reflecting the previously mentioned decline in total margin,
lower other income, and slightly higher operating and administrative expenses.
Other income declined $4.9 million due in large part to a $2.7 million decline
in non-tariff service income and costs related to settling a regulatory claim
resulting from the discontinuance of natural gas service to certain customers.
Operating and administrative expenses include, among other things, an increase
in provisions for injuries and damages claims and higher pension costs partially
offset by lower stock-based incentive compensation costs. The decrease in Gas
Utility income before income taxes reflects the previously mentioned decline in
operating income and higher interest expense in the 2004 three-month period as a
result of including dividends paid on preferred shares subject to mandatory
redemption as a component of interest expense 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").
ELECTRIC OPERATIONS. Electric Utility's 2004 three-month period kilowatt-hour
sales were essentially equal with the prior-year period on weather that was
slightly warmer. Temperatures based upon the number of heating degree days in
the 2004 three-month period were approximately 1.2% warmer than in the
prior-year period.
The decline in Electric Operations revenues in the 2004 three-month period
principally reflects the absence of revenues from UGID's electricity generation
business. Electric Operations' cost of sales declined $2.7 million in the 2004
three-month period principally reflecting the absence of $2.4 million of costs
related to UGID's operations and $0.3 million of lower Electric Utility cost of
sales reflecting slightly lower per-unit purchased power costs.
Electric Operations total margin in the 2004 three-month period declined $2.0
million principally as a result of the absence of margin related to UGID's
operations. Operating income and income before income taxes were lower in the
2004 three-month period principally reflecting the decline in total margin
partially offset by the absence of operating expenses related to UGID's
operations and lower Electric Utility operating and administrative expenses.
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UGI UTILITIES, INC.
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 did not have a
material effect on Electric Utility's 2004 three-month period results of
operations.
2004 SIX-MONTH PERIOD COMPARED WITH 2003 SIX-MONTH PERIOD
Increase
Six Months Ended March 31, 2004 2003 (Decrease)
- -------------------------------------------------------------------------------------------------
(Millions of dollars)
GAS UTILITY:
Revenues $ 392.8 $ 385.0 $ 7.8 2.0%
Total margin (a) $ 132.7 $ 137.6 $ (4.9) (3.6)%
Operating income $ 75.9 $ 88.6 $ (12.7) (14.3)%
Income before income taxes $ 67.9 $ 81.3 $ (13.4) (16.5)%
System throughput - bcf 54.5 55.7 (1.2) (2.2)%
Heating degree days - % colder
than normal 0.0% 7.3% - -
ELECTRIC OPERATIONS (b):
Revenues $ 46.1 $ 52.6 $ (6.5) (12.4)%
Total margin (a) $ 21.6 $ 23.9 $ (2.3) (9.6)%
Operating income $ 11.3 $ 13.7 $ (2.4) (17.5)%
Income before income taxes $ 10.3 $ 12.5 $ (2.2) (17.6)%
Distribution sales - gwh 525.7 525.5 0.2 -
(a) Gas Utility's total margin represents total revenues less cost
of sales. Electric Operations' total margin represents total
revenues less cost of sales and revenue-related taxes, i.e.
Electric Utility gross receipts taxes, of $2.5 million and
$2.6 million in the six-month periods ended March 31, 2004 and
2003, respectively.
(b) Electric Operations comprises Electric Utility and, for the
six months ended March 31, 2003, UGID and its consolidated
subsidiaries.
GAS UTILITY. Weather in Gas Utility's service territory during the 2004
six-month period was essentially normal compared with weather that was 7.3%
colder than normal in the 2003 six-month period. Total distribution system
throughput decreased 1.2 bcf or 2.2% as the adverse effects of the warmer
weather on sales to retail core-market customers were partially offset by a
slight increase in sales to residential, commercial and industrial delivery
service customers and the volume effects of year-over-year retail core-market
customer growth. The increase in Gas Utility revenues during the 2004 six-month
period includes a $9.4 million increase in revenues from off-system sales and
slightly higher retail core-market revenues partially offset by lower delivery
service revenues. The slight increase in retail core-market revenues reflects
higher average PGC rates substantially offset by the effects of reduced retail
core-market volumes. Gas Utility cost of gas was $260.1 million in the 2004
six-month period compared to $247.4 million in the 2003 six-month period
reflecting the effects of higher average PGC rates and increased cost of gas
associated with the higher off-system sales partially offset by the effects of
the lower retail core-market volumes sold.
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UGI UTILITIES, INC.
The decline in Gas Utility total margin is principally the result of a $2.9
million decline in retail core-market margin resulting from the lower retail
core-market sales and a $2.3 million decline in delivery service and
interruptible retail margin.
Gas Utility operating income declined $12.7 million in the 2004 six-month period
principally reflecting the previously mentioned decline in total margin, lower
other income, and an increase in operating and administrative expenses. Other
income declined $4.7 million due in large part to a $2.6 million decline in
non-tariff service income and costs related to settling a regulatory claim
resulting from the discontinuance of natural gas service to certain customers.
Operating and administrative expenses increased $2.4 million due principally to
increases in provisions for injuries and damages claims and higher compensation
and benefits expenses partially offset by lower distribution system maintenance
expenses. The decrease in Gas Utility income before income taxes reflects the
decline in operating income and higher interest expense in the 2004 six-month
period as a result of including dividends paid on preferred shares subject to
mandatory redemption as a component of interest expense in accordance with SFAS
150.
ELECTRIC OPERATIONS. Electric Utility's 2004 six-month period kilowatt-hour
sales were essentially equal with the 2003 six-month period. Temperatures in the
2004 six-month period were approximately 5.0% warmer than in the prior-year
period.
The decline in Electric Operations revenues in the 2004 six-month period
principally reflects the absence of revenues from UGID's electricity generation
business. Electric Operations' cost of sales declined $4.2 million in the 2004
six-month period principally reflecting the absence of $4.5 million of costs
related to UGID's operations offset by $0.3 million of higher Electric Utility
purchased power costs.
Electric Operations total margin in the 2004 six-month period declined $2.3
million principally as a result of the absence of total margin related to UGID's
operations. Operating income and income before income taxes were lower in the
2004 six-month period principally reflecting the decline in total margin.
FINANCIAL CONDITION AND LIQUIDITY
FINANCIAL CONDITION
The Company's total debt outstanding at March 31, 2004 totaled $259.6 million
(including $42.4 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
$110 million. These agreements expire in June 2006. At March 31, 2004 borrowing
under these agreements totaled $22.4 million. In addition, UGI Utilities has an
uncommitted arrangement with a major bank under which it may borrow up to $20
million. At March 31, 2004, there was $20 million outstanding under this
agreement which amount matured and was repaid on April 13, 2004. Amounts
outstanding under the revolving credit agreements and the uncommitted
arrangement are classified as bank loans on the Condensed Consolidated Balance
Sheets. UGI Utilities also
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UGI UTILITIES, INC.
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
provided by operating activities was $43.6 million during the six months ended
March 31, 2004 compared with cash provided by operating activities of $69.4
million in the prior-year period. The decline in operating cash flow principally
reflects lower net overcollections of deferred fuel costs during the 2004
six-month period. Cash flow from operating activities before changes in
operating working capital was $67.1 million in the 2004 six-month period
compared to $60.2 million in the prior-year six-month period principally
reflecting greater noncash deferred income tax expense partially offset by lower
operating results. Changes in operating working capital used $23.5 million of
operating cash flow during the 2004 six-month period compared with $9.3 million
provided during the prior-year six-month period.
INVESTING ACTIVITIES. Cash used by investing activities was $17.4 million in the
2004 six-month period compared with $15.8 million in the prior-year period.
Expenditures for property, plant and equipment were $16.5 million in the 2004
six-month period compared with $15.5 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 2004
six-month period as the prior-year amount reflected greater proceeds from the
sale of property.
FINANCING ACTIVITIES. Cash used by financing activities was $23.8 million in the
2004 six-month period compared with $51.1 million in the prior-year period.
Financing activity cash flows are primarily the result of issuances and
repayments of long-term debt, net borrowings under revolving credit agreements,
dividends on common and preferred shares (prior to the adoption of SFAS 150),
and capital contributions from UGI. During the 2004 and 2003 six-month periods,
we paid dividends of $25.5 million and $14.9 million, respectively, to UGI.
Although we paid dividends of $0.8 million on our preferred shares subject to
mandatory redemption during both six-month periods, dividends paid on preferred
shares subject to mandatory redemption during the six months ended March 31,
2004 are reflected in cash flow from operations as a result of the application
of SFAS 150 (see "Preferred Shares Subject to Mandatory Redemption" below).
During the 2004 six-month period, we had net borrowings of $1.7 million under
our revolving credit agreements and the uncommitted arrangement with a major
bank compared to net repayments of $9.5 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
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UGI UTILITIES, INC.
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") revised
Financial Interpretation No. 46, "Consolidation of Variable Interest Entities"
("FIN 46"), which was originally issued in January 2003 and clarifies Accounting
Research Bulletin No. 51, "Consolidated Financial Statements." FIN 46 was
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 our interim period ending March 31, 2004. If
certain conditions are met, FIN 46 requires the primary beneficiary to
consolidate certain variable interest entities. The Company has not created or
obtained any variable interest entities after January 31, 2003. The adoption of
FIN 46 did not have any impact on 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 principally 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 fund the UGI Utilities' postretirement
benefit obligations and to pay retiree health care and life insurance benefits
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 included in UGI Utilities' rates is deferred for future recovery
from, or refund to, ratepayers.
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"
("FSP-106-1"). Therefore, the Condensed Consolidated Financial Statements and
accompanying footnotes do not reflect the effects of the Act. 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. At March 31, 2004, Electric Utility is a party to an
electricity price swap agreement to reduce the volatility in the cost of a
portion of its anticipated electricity requirements in 2007. At March 31, 2004,
the fair value of this price swap was a gain of $1.6 million. Fair value
reflects the estimated amount that we would expect to receive or pay to
terminate the contract based upon quoted market prices of comparable contracts
at March 31, 2004. An adverse change in electricity prices of ten percent would
result in a $0.9 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 March
31, 2004, the fair value of our unsettled interest rate protection agreements,
which have been designated and qualify as cash flow hedges, was a loss of $1.3
million. An adverse change in interest rates on ten-year U.S. treasury notes of
ten percent would result in a $2.3 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
Consolidated Edison Company of New York v. UGI Utilities, Inc. On
September 20, 2001, Consolidated Edison Company of New York ("ConEd") filed suit
against Utilities in the United States District Court for the Southern District
of New York, seeking contribution from Utilities for an allocated share of
response costs associated with investigating and assessing gas plant related
contamination at former MGP sites in Westchester County, New York. The complaint
alleges that Utilities "owned and operated" the MGPs prior to 1904. The
complaint also seeks a declaration that Utilities is responsible for an
allocated percentage of future investigative and remedial costs at the sites.
ConEd believes that the cost of remediation for all of the sites could exceed
$70 million.
In November 2003, the court granted Utilities' motion for summary
judgment in part, dismissing all claims premised on a disregard of the separate
corporate form of Utilities' former subsidiaries and dismissing claims premised
on Utilities' operation of three of the MGPs under operating leases with ConEd's
predecessors. In March 2004, the court granted summary judgment on the remaining
claims and dismissed ConEd's complaint. ConEd has appealed.
Savannah, Georgia Matter. Atlanta Gas Light Company ("AGL") previously
informed UGI Utilities that it was investigating contamination that appeared to
be related to MGP operations at a site owned by AGL in Savannah, Georgia. A
former subsidiary of UGI Utilities' operated the MGP in the early 1900's. AGL
has recently informed UGI Utilities that it has begun remediation of MGP wastes
at the site and believes that the total cost of remediation could be as high as
$55 million. AGL has stated an intention to make a claim against UGI Utilities
for a share of these costs. UGI Utilities believes that it will have substantial
defenses to any action that may arise out of this site.
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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 March 31, 2004, 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 March 31, 2004, 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 March 31, 2004, 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
second quarter of fiscal year 2004.
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* This Exhibit shall not be deemed "filed" for purposes of Section 18 of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
or otherwise subject to liability under that section, nor shall it be
deemed incorporated by reference in any filing under the Securities Act
of 1933, as amended, or the Exchange Act, except as expressly set forth
by specific reference in such filing.
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UGI UTILITIES, INC.
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: May 17, 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 March 31, 2004
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 March 31, 2004 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 March 31, 2004 pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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* This Exhibit shall not be deemed "filed" for purposes of Section 18 of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
or otherwise subject to liability under that section, nor shall it be
deemed incorporated by reference in any filing under the Securities Act
of 1933, as amended, or the Exchange Act, except as expressly set forth
by specific reference in such filing.