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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
At July 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
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2004,
September 30, 2003 and June 30, 2003 1
Condensed Consolidated Statements of Income for the three
and nine months ended June 30, 2004 and 2003 2
Condensed Consolidated Statements of Cash Flows for the
nine months ended June 30, 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 - 20
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20 - 21
Item 4. Controls and Procedures 21
PART II OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 6. Exhibits and Reports on Form 8-K 22 - 23
Signatures 24
-i-
UGI UTILITIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(Thousands of dollars)
June 30, September 30, June 30,
2004 2003 2003
--------- ------------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 2,266 $ 304 $ 1,708
Accounts receivable (less allowances for doubtful accounts
of $6,459, $3,275 and $6,671, respectively) 47,127 30,101 49,261
Accrued utility revenues 8,070 7,431 7,940
Inventories 32,746 54,017 27,530
Deferred income taxes 12,398 10,375 18,668
Prepaid expenses and other current assets 4,423 5,552 3,049
--------- ---------- ----------
Total current assets 107,030 107,780 108,156
Property, plant and equipment, at cost (less accumulated depreciation
and amortization of $309,867, $296,871 and $296,794, respectively) 622,354 610,987 599,266
Regulatory assets 62,997 60,253 60,062
Other assets 31,860 30,028 29,423
--------- ---------- ----------
Total assets $ 824,241 $ 809,048 $ 796,907
========= ========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt $ 20,000 $ - $ 50,000
Current maturities of preferred shares subject to mandatory
redemption, without par value 1,000 - -
Bank loans 30,100 40,700 2,300
Accounts payable 41,847 55,298 40,731
Accrued income taxes 15,040 479 20,064
Deferred fuel refunds 16,621 14,734 31,554
Other current liabilities 37,200 41,700 38,961
--------- ---------- ----------
Total current liabilities 161,808 152,911 183,610
Long-term debt 197,181 217,271 172,298
Deferred income taxes 155,616 144,176 138,003
Deferred investment tax credits 7,688 7,987 8,086
Other noncurrent liabilities 10,612 11,951 13,559
Preferred shares subject to mandatory redemption, without par value 19,000 20,000 -
--------- ---------- ----------
Total liabilities 551,905 554,296 515,556
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 78,057
Retained earnings 133,419 117,496 126,107
Accumulated other comprehensive loss (388) (2,049) (3,072)
--------- ---------- ----------
Total common stockholder's equity 272,336 254,752 261,351
--------- ---------- ----------
Total liabilities and stockholder's equity $ 824,241 $ 809,048 $ 796,907
========= ========== ==========
See accompanying notes to condensed consolidated financial statements.
- 1 -
UGI UTILITIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(Thousands of dollars)
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------ -----------------------
2004 2003 2004 2003
---------- ---------- ---------- ---------
Revenues $ 118,717 $ 121,546 $ 557,618 $ 559,193
---------- ---------- ---------- ---------
Costs and expenses:
Cost of sales - gas, fuel and purchased power 74,751 76,489 356,887 350,100
Operating and administrative expenses 21,559 25,303 68,197 71,185
Operating and administrative expenses - related parties 2,072 2,528 7,890 7,498
Taxes other than income taxes 3,110 2,832 9,763 9,200
Depreciation and amortization 5,436 5,304 16,906 15,958
Other income, net (493) (915) (1,534) (7,032)
---------- ---------- ---------- ---------
106,435 111,541 458,109 446,909
---------- ---------- ---------- ---------
Operating income 12,282 10,005 99,509 112,284
Interest expense 4,399 3,903 13,460 12,379
---------- ---------- ---------- ---------
Income before income taxes 7,883 6,102 86,049 99,905
Income taxes 3,388 2,462 34,897 40,152
---------- ---------- ---------- ---------
Net income 4,495 3,640 51,152 59,753
Dividends on preferred shares subject to mandatory redemption - 388 - 1,163
---------- ---------- ---------- ---------
Net income after dividends on preferred shares subject to
mandatory redemption $ 4,495 $ 3,252 $ 51,152 $ 58,590
========== ========== ========== =========
See accompanying notes to condensed consolidated financial statements.
- 2 -
UGI UTILITIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Thousands of dollars)
Nine Months Ended
June 30,
------------------------
2004 2003
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 51,152 $ 59,753
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 16,906 15,958
Deferred income taxes, net 5,029 (11,836)
Provision for uncollectible accounts 6,688 7,470
Other, net 2,163 1,071
Net change in:
Accounts receivable and accrued utility revenues (24,353) (19,972)
Inventories 21,271 10,885
Deferred fuel costs 2,414 35,858
Accounts payable (13,451) (15,022)
Other current assets and liabilities 7,891 22,050
---------- ----------
Net cash provided by operating activities 75,710 106,215
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment (26,602) (25,742)
Net costs of property, plant and equipment disposals (1,317) (832)
---------- ----------
Net cash used by investing activities (27,919) (26,574)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of dividends (35,229) (25,551)
Cash portion of UGID dividend - (2,572)
Repayment of long-term debt - (26,000)
Bank loans decrease (10,600) (34,900)
Capital contribution from UGI - 5,000
---------- ----------
Net cash used by financing activities (45,829) (84,023)
---------- ----------
Cash and cash equivalents increase (decrease) $ 1,962 $ (4,382)
========== ==========
CASH AND CASH EQUIVALENTS:
End of period $ 2,266 $ 1,708
Beginning of period 304 6,090
---------- ----------
Increase (decrease) $ 1,962 $ (4,382)
========== ==========
See accompanying notes to condensed consolidated financial statements.
- 3 -
UGI UTILITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Thousands of dollars, except per share amounts)
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 nine-month periods ended June 30, 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
(unaudited)
(Thousands of dollars, except per share amounts)
COMPREHENSIVE INCOME. The following table presents the components of
comprehensive income for the three and nine months ended June 30, 2004 and
2003:
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -----------------
2004 2003 2004 2003
------- ------- -------- --------
Net income $ 4,495 $ 3,640 $ 51,152 $ 59,753
Other comprehensive income (loss) 1,612 (524) 1,661 (298)
------- ------- -------- --------
Comprehensive income $ 6,107 $ 3,116 $ 52,813 $ 59,455
------- ------- -------- --------
Other comprehensive income (loss) 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
(see Note 6).
-5-
UGI UTILITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Thousands of dollars, except per share amounts)
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 JUNE 30, 2004:
Gas Electric
Total Utility Operations (a)
--------- --------- --------------
Revenues $ 118,717 $ 97,710 $ 21,007
Cost of sales - gas, fuel and purchased power 74,751 65,107 9,644
Depreciation and amortization 5,436 4,895 541
Operating income 12,282 6,857 5,425
Interest expense 4,399 3,859 540
Income before income taxes 7,883 2,998 4,885
Total assets at period end 824,241 736,035 88,206
THREE MONTHS ENDED JUNE 30, 2003:
Gas Electric
Total Utility Operations (a)
--------- --------- --------------
Revenues $ 121,546 $ 99,683 $ 21,863
Cost of sales - gas, fuel and purchased power 76,489 65,213 11,276
Depreciation and amortization 5,304 4,541 763
Operating income 10,005 5,544 4,461
Interest expense 3,903 3,434 469
Income before income taxes 6,102 2,110 3,992
Total assets at period end 796,907 711,236 85,671
(a) Electric Operations comprises Electric Utility and, for the three
months ended June 30, 2003, UGID and its consolidated subsidiaries
prior to their transfer to UGI.
-6-
UGI UTILITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Thousands of dollars, except per share amounts)
NINE MONTHS ENDED JUNE 30, 2004:
Gas Electric
Total Utility Operations (a)
--------- --------- --------------
Revenues $ 557,618 $ 490,518 $ 67,100
Cost of sales - gas, fuel and purchased power 356,887 325,243 31,644
Depreciation and amortization 16,906 14,632 2,274
Operating income 99,509 82,750 16,759
Interest expense 13,460 11,887 1,573
Income before income taxes 86,049 70,863 15,186
Total assets at period end 824,241 736,035 88,206
NINE MONTHS ENDED JUNE 30, 2003:
Gas Electric
Total Utility Operations (a)
--------- --------- --------------
Revenues $ 559,193 $ 484,678 $ 74,515
Cost of sales - gas, fuel and purchased power 350,100 312,582 37,518
Depreciation and amortization 15,958 13,618 2,340
Operating income 112,284 94,107 18,177
Interest expense 12,379 10,654 1,725
Income before income taxes 99,905 83,453 16,452
Total assets at period end 796,907 711,236 85,671
(a) Electric Operations comprises Electric Utility and, for the nine
months ended June 30, 2003, UGID and its consolidated subsidiaries
prior to their transfer to UGI.
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
(unaudited)
(Thousands of dollars, except per share amounts)
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 June 30, Three Months Ended June 30,
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) 517 518
Change in regulatory assets
and liabilities - - 258 256
--------- --------- --------- --------
Net expense (income) $ 278 $ (311) $ 775 $ 774
--------- --------- --------- --------
Pension Benefits Other Postretirement Benefits
---------------- -----------------------------
Nine Months Ended June 30, Nine Months Ended June 30,
2004 2003 2004 2003
--------- --------- --------- --------
Service cost $ 3,495 $ 3,039 $ 90 $ 82
Interest cost 9,285 9,003 1,092 1,123
Expected return on assets (12,324) (12,486) (345) (311)
Amortization of:
Transition (asset) obligation (984) (1,134) 510 510
Prior service cost 498 483 - -
Actuarial loss 864 162 204 153
--------- --------- --------- --------
Net benefit cost (income) 834 (933) 1,551 1,557
Change in regulatory assets
and liabilities - - 774 768
--------- --------- --------- --------
Net expense (income) $ 834 $ (933) $ 2,325 $ 2,325
--------- --------- --------- --------
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, if any, of the Medicare Prescription Drug Improvement and
Modernization Act of 2003 (as more fully
-8-
UGI UTILITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Thousands of dollars, except per share amounts)
described in Note 5 to Condensed Consolidated Financial Statements).
Through June 30, 2004, the Company has made contributions of approximately
$1,788 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 June 30, Nine Months Ended June 30,
2004 2003 2004 2003
---- ---- ---- ----
Service cost $ 13 $ (2) $ 39 $ (6)
Interest cost 50 41 150 123
Amortization of:
Transition obligation 13 13 39 39
Prior service cost (1) (1) (3) (3)
Actuarial loss 29 16 87 48
----- ---- ----- -----
Net benefit cost $ 104 $ 67 $ 312 $ 201
----- ---- ----- -----
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
(unaudited)
(Thousands of dollars, except per share amounts)
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 1900s. 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 good
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
-10-
UGI UTILITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Thousands of dollars, except per share amounts)
dismissing claims premised on UGI 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.
By letter dated June 24, 2004, KeySpan Energy ("KeySpan") informed UGI
Utilities that KeySpan has spent $2,300 and expects to spend another
$11,000 to clean up a MGP site it owns in Sag Harbor, New York. KeySpan
believes that UGI Utilities is responsible for approximately 50% of these
costs as a result of UGI Utilities' alleged direct ownership and operation
of the plant from 1885 to 1902. UGI Utilities is in the process of
reviewing the information provided by KeySpan and is investigating this
claim.
By letter dated August 5, 2004, Yankee Gas Services Company and
Connecticut Light and Power Company, subsidiaries of Northeast Utilities,
(together, the "Northeast Companies"), demanded contribution from UGI
Utilities for past and future remediation costs related to MGP operations
on thirteen sites owned by the Northeast Companies in nine cities in the
State of Connecticut. The Northeast Companies allege that UGI Utilities
controlled operations of the plants from 1883 to 1941. According to the
letter, investigation and remedial costs at the sites to date total
approximately $10,000 and complete remediation costs for all sites could
total $182,000. The Northeast Companies seek an unspecified fair and
equitable allocation of these costs to UGI Utilities. UGI Utilities is in
the process of reviewing the information provided by Northeast Companies
and is investigating this claim.
In addition to these environmental matters, there are other pending claims
and legal actions arising in the normal course of our businesses. We
cannot predict with certainty the final results of environmental and other
matters. However, it is reasonably possible that some of them could be
resolved unfavorably to us. Although we currently believe 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 was effective beginning with 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
-11-
UGI UTILITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Thousands of dollars, except per share amounts)
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.
In May 2004, the FASB issued Staff Position No. FAS 106-2, "Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003" ("FSP 106-2"). FSP 106-2 is
effective for periods beginning after June 15, 2004. Therefore, the
Condensed Consolidated Financial Statements and accompanying footnotes do
not reflect the effects of the Act. 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
postretirement medical benefits program and the current level of
postretirement medical benefits, we do not believe the Act will have a
material effect on the Company's cash flows.
6. SUBSEQUENT EVENT - REDEMPTION OF SERIES PREFERRED STOCK
On July 27, 2004, UGI Utilities' Board of Directors approved the
redemption on October 1, 2004 of all 200,000 shares of the $7.75 Series
Preferred Stock at a price of $100 per share together with full cumulative
dividends. Currently, we intend to fund the redemption of the $7.75 Series
Preferred Stock with proceeds from the issuance of Medium-Term Notes.
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UGI UTILITIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Information contained within this Management's Discussion and Analysis of
Financial Condition and Results of Operations and elsewhere in this Quarterly
Report may contain forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. Such statements use forward-looking words such as "believe," "plan,"
"anticipate," "continue," "estimate," "expect," "may," "will," or other similar
words. These statements discuss plans, strategies, events or developments that
we expect or anticipate will or may occur in the future.
A forward-looking statement may include a statement of the assumptions or bases
underlying the forward-looking statement. We believe that we have chosen these
assumptions or bases in good faith and that they are reasonable. However, we
caution you that actual results almost always vary from assumed facts or bases,
and the differences between actual results and assumed facts or bases can be
material, depending on the circumstances. When considering forward-looking
statements, you should keep in mind the following important factors which could
affect our future results and could cause those results to differ materially
from those expressed in our forward-looking statements: (1) adverse weather
conditions resulting in reduced demand; (2) price volatility and availability of
oil, electricity and natural gas and the capacity to transport them to market
areas; (3) changes in laws and regulations, including safety, tax and accounting
matters; (4) competitive pressures from the same and alternative energy sources;
(5) liability for environmental claims; (6) customer conservation measures and
improvements in energy efficiency and technology resulting in reduced demand;
(7) adverse labor relations; (8) large customer, counterparty or supplier
defaults; (9) liability for personal injury and property damage arising from
explosions and other catastrophic events, including acts of terrorism, resulting
from operating hazards and risks incidental to generating and distributing
electricity and transporting, storing and distributing natural gas, including
liability in excess of insurance coverage; (10) political, regulatory and
economic conditions in the United States; and (11) interest rate fluctuations
and other capital market conditions.
These factors are not necessarily all of the important factors that could cause
actual results to differ materially from those expressed in any of our
forward-looking statements. Other unknown or unpredictable factors could also
have material adverse effects on future results. We undertake no obligation to
update publicly any forward-looking statement whether as a result of new
information or future events except as required by federal securities laws.
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UGI UTILITIES, INC.
ANALYSIS OF RESULTS OF OPERATIONS
The following analyses compare our results of operations for (1) the three
months ended June 30, 2004 ("2004 three-month period") with the three months
ended June 30, 2003 ("2003 three-month period") and (2) the nine months ended
June 30, 2004 ("2004 nine-month period") with the nine months ended June 30,
2003 ("2003 nine-month period"). Results of operations in the 2004 three- and
nine-month periods comprise those of Electric Utility. Results of operations in
the 2003 three- and nine-month periods comprise those of Electric Utility and
UGID prior to its transfer to UGI in June 2003 (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 June 30, 2004 2003 (Decrease)
- --------------------------- --------- -------- ----------
(Millions of dollars)
GAS UTILITY:
Revenues $ 97.7 $ 99.7 $ (2.0) (2.0)%
Total margin (a) $ 32.6 $ 34.5 $ (1.9) (5.5)%
Operating income $ 6.9 $ 5.5 $ 1.4 25.5%
Income before income taxes $ 3.0 $ 2.1 $ 0.9 42.9%
System throughput - bcf 15.5 15.0 0.5 3.3%
Heating degree days - % (warmer) colder
than normal (18.7)% 16.3% - -
ELECTRIC OPERATIONS (b):
Revenues $ 21.0 $ 21.9 $ (0.9) (4.1)%
Total margin (a) $ 10.2 $ 9.5 $ 0.7 7.4%
Operating income $ 5.4 $ 4.5 $ 0.9 20.0%
Income before income taxes $ 4.9 $ 4.0 $ 0.9 22.5%
Distribution sales - gwh 221.5 216.3 5.2 2.4%
bcf - billions of cubic feet. gwh - millions of kilowatt-hours.
(a) Gas Utility's total margin represents total revenues less cost of sales.
Electric Operations' total margin represents total revenues less cost of
sales and revenue-related taxes, i.e. Electric Utility gross receipts
taxes, of $1.1 million in each of the three month-periods ended June 30,
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 June 30, 2003, UGID and its consolidated subsidiaries.
GAS UTILITY. Weather in Gas Utility's service territory during the 2004
three-month period based upon heating degree days was 18.7% warmer than normal
compared with weather that was 16.3% colder than normal in the 2003 three-month
period. Notwithstanding the warmer weather, total distribution system throughput
increased 0.5 bcf or 3.3% reflecting higher volumes transported for delivery
service customers and the volume effects of year-over-year firm-
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UGI UTILITIES, INC.
residential, commercial and industrial ("retail core-market") customer growth.
The decrease in Gas Utility revenues during the 2004 three-month period
principally reflects a $7.9 million decrease in revenues from retail core-market
customers as a result of lower retail core-market sales partially offset by an
increase in revenues from off-system sales. Retail core-market average purchased
gas cost ("PGC") rates were slightly higher during the 2004 three-month period.
Gas Utility cost of gas was $65.1 million in the 2004 three-month period
compared to $65.2 million in the 2003 three-month period reflecting the effects
of the previously mentioned lower retail core-market sales substantially offset
by the effects of the higher off-system sales and higher average PGC rates.
The decline in Gas Utility total margin reflects a $2.2 million decline in
retail core-market total margin resulting from the lower volumes sold partially
offset by higher commercial and industrial delivery service total margin
reflecting greater volumes transported.
Gas Utility operating income increased $1.4 million in the 2004 three-month
period principally reflecting a $3.8 million decline in operating and
administrative expenses partially offset by the previously mentioned decline in
total margin. The decrease in operating and administrative expenses is due in
large part to the absence of costs related to settling an environmental claim
recorded in the prior-year three-month period and, to a lesser extent, lower
stock-based incentive compensation costs in the current-year three-month period.
The increase in Gas Utility income before income taxes reflects the previously
mentioned higher operating income offset by a $0.5 million increase in interest
expense in the 2004 three-month period principally 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 the Characteristics of Both Liabilities and Equity" ("SFAS
150").
ELECTRIC OPERATIONS. Electric Utility's 2004 three-month period kilowatt-hour
sales were slightly higher than in the prior-year period due in large part to
greater air conditioning sales partially offset by the adverse effects of warmer
spring weather on heating-related sales. Temperatures based upon the number of
heating degree days in the 2004 three-month period were approximately 22.9%
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 partially offset by the effects of the increased Electric Utility
sales. 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 $1.6 million in the 2004 three-month period principally
reflecting the absence of costs related to UGID's operations.
Electric Operations total margin in the 2004 three-month period increased $0.7
million principally as a result of the increased Electric Utility sales
partially offset by the absence of margin related to UGID's operations.
Operating income and income before income taxes were higher in the 2004
three-month period principally reflecting the increase in total margin, lower
Electric Utility operating and administrative expenses, and the absence of
operating expenses related to UGID's operations.
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UGI UTILITIES, INC.
2004 NINE-MONTH PERIOD COMPARED WITH 2003 NINE-MONTH PERIOD
Increase
Nine Months Ended June 30, 2004 2003 (Decrease)
- -------------------------- ---------- ----------- -----------------------
(Millions of dollars)
GAS UTILITY:
Revenues $ 490.5 $ 484.7 $ 5.8 1.2%
Total margin (a) $ 165.3 $ 172.1 $ (6.8) (4.0)%
Operating income $ 82.8 $ 94.1 $ (11.3) (12.0)%
Income before income taxes $ 70.9 $ 83.5 $ (12.6) (15.1)%
System throughput - bcf 70.0 70.7 (0.7) (1.0)%
Heating degree days - % (warmer) colder
than normal (2.0)% 8.3% - -
ELECTRIC OPERATIONS (b):
Revenues $ 67.1 $ 74.5 $ (7.4) (9.9)%
Total margin (a) $ 31.8 $ 33.4 $ (1.6) (4.8)%
Operating income $ 16.8 $ 18.2 $ (1.4) (7.7)%
Income before income taxes $ 15.2 $ 16.5 $ (1.3) (7.9)%
Distribution sales - gwh 747.2 741.8 5.4 0.7%
(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 $3.6 million in each of the nine-month periods ended June 30,
2004 and 2003.
(b) Electric Operations comprises Electric Utility and, for the nine months
ended June 30, 2003, UGID and its consolidated subsidiaries.
GAS UTILITY. Weather in Gas Utility's service territory during the 2004
nine-month period was 2.0% warmer than normal compared with weather that was
8.3% colder than normal in the 2003 nine-month period. Total distribution system
throughput decreased 0.7 bcf or 1.0% as the adverse effects of the warmer
weather on heating-related sales to retail core-market customers were partially
offset by greater volumes transported for 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 nine-month period includes a
$15.6 million increase in revenues from off-system sales partially offset by
lower retail core-market and delivery service revenues. The decline in retail
core-market revenues reflects the effects of the reduced retail core-market
volumes partially offset by higher average PGC rates. Gas Utility cost of gas
was $325.2 million in the 2004 nine-month period compared to $312.6 million in
the 2003 nine-month period reflecting greater cost of gas associated with the
higher off-system sales and the higher average PGC rates partially offset by the
effects of the lower retail core-market volumes sold.
Gas Utility total margin declined $6.8 million principally reflecting a $5.1
million decline in retail core-market margin and also reflecting the effects of
lower volumes transported for small weather-sensitive delivery service
customers.
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UGI UTILITIES, INC.
Gas Utility operating income declined $11.3 million in the 2004 nine-month
period principally reflecting the previously mentioned decline in total margin,
lower other income, and a $1.0 million increase in depreciation expense
partially offset by a decrease in operating and administrative expenses. Other
income declined $4.9 million due in large part to a $2.9 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 decreased $1.4 million due in large part
to the absence of costs related to settling an environmental claim recorded in
the prior-year nine-month period and lower distribution system maintenance
expenses partially offset by increases in provisions for injuries and damages
claims and higher compensation and benefits expenses. The decrease in Gas
Utility income before income taxes reflects the decline in operating income and
higher interest expense in the 2004 nine-month period principally 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 nine-month period kilowatt-hour
sales were slightly higher than in the 2003 nine-month period due in large part
to greater air conditioning sales partially offset by the adverse effects of
warmer winter weather on heating-related sales. Temperatures based upon heating
degree days in the 2004 nine-month period were approximately 7.4% warmer than in
the prior-year period.
The decline in Electric Operations revenues in the 2004 nine-month period
principally reflects the absence of revenues from UGID's electricity generation
business partially offset by the effects of the increased Electric Utility
sales. Electric Operations' cost of sales declined $5.8 million in the 2004
nine-month period principally reflecting the absence of $6.2 million of costs
related to UGID's operations offset by $0.4 million of higher Electric Utility
purchased power costs.
Electric Operations total margin in the 2004 nine-month period declined $1.6
million principally reflecting the absence of $1.9 million of total margin
related to UGID's operations partially offset by a $0.3 million increase in
Electric Utility total margin as a result of the higher Electric Utility sales.
Operating income and income before income taxes were lower in the 2004
nine-month period principally reflecting the decline in total margin.
FINANCIAL CONDITION AND LIQUIDITY
FINANCIAL CONDITION
The Company's total debt outstanding at June 30, 2004 totaled $247.3 million
(including $30.1 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 and 2007. At June 30, 2004
borrowing under these agreements totaled $30.1 million. In addition, UGI
Utilities has an uncommitted arrangement with a major bank under which it may
borrow up to $20 million. At June 30, 2004, there were no borrowings outstanding
under this agreement. Amounts outstanding under the revolving
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UGI UTILITIES, INC.
credit agreements and the uncommitted arrangement are classified as bank loans
on the Condensed Consolidated Balance Sheets. 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. On July 27, 2004, UGI
Utilities' Board of Directors approved the redemption on October 1, 2004 of all
200,000 shares of the $7.75 Series Preferred Stock at a price of $100 per share
together with full cumulative dividends. Currently, we intend to fund the
redemption of the $7.75 Series Preferred Stock with proceeds from the issuance
of Medium-Term Notes.
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 $75.7 million during the nine months ended
June 30, 2004 compared with $106.2 million in the prior-year period. Cash flow
from operating activities before changes in operating working capital was $81.9
million in the 2004 nine-month period compared to $72.4 million in the
prior-year nine-month period. Changes in operating working capital used $6.2
million of operating cash flow during the 2004 nine-month period compared with
$33.8 million provided during the prior-year nine-month period. The decline in
operating cash flow during the 2004 nine-month period principally reflects
significantly lower net overcollections of deferred fuel costs and lower net
income, partially offset by higher noncash deferred income tax expense and
greater cash flow from changes in inventories.
INVESTING ACTIVITIES. Cash used by investing activities was $27.9 million in the
2004 nine-month period compared with $26.6 million in the prior-year period.
Expenditures for property, plant and equipment were $26.6 million in the 2004
nine-month period compared with $25.7 million recorded in the prior-year period
principally reflecting higher Electric Utility capital expenditures. Net costs
of property, plant and equipment disposals were higher in the 2004 nine-month
period as the prior-year amount reflected greater proceeds from the sale of
property.
FINANCING ACTIVITIES. Cash used by financing activities was $45.8 million in the
2004 nine-month period compared with $84.0 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, prior to the adoption of SFAS 150, preferred shares and
capital contributions from UGI. During the 2004 and 2003 nine-month periods, we
paid dividends of $35.2 million and $24.4 million, respectively, to UGI.
Although, we paid dividends of $1.2 million on our preferred shares subject to
mandatory redemption during both nine-month periods, dividends paid on preferred
shares subject to mandatory redemption during the nine months ended June 30,
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 nine-month period, we had net repayments of $10.6 million under
our bank loans compared to net
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UGI UTILITIES, INC.
repayments of $34.9 million in the prior-year period. The prior-year period also
reflects the repayment of $26.0 million of maturing long-term debt.
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. As previously
mentioned, on July 27, 2004 UGI Utilities' Board of Directors approved the
redemption on October 1, 2004 of all 200,000 shares of the $7.75 Series
Preferred Stock.
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 was effective beginning with our interim period ended 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
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UGI UTILITIES, INC.
difference between the annual amount calculated and the amount included in UGI
Utilities' rates is deferred for future recovery from, or refund to, ratepayers.
In May 2004, the FASB issued Staff Position No. FAS 106-2, "Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003" ("FSP-106-2"). FSP 106-2 is effective for periods
beginning after June 15, 2004. Therefore, the Condensed Consolidated Financial
Statements and accompanying footnotes do not reflect the effects of the Act.
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 postretirement medical benefits program and the current level of
postretirement medical benefits, we do not believe the Act will have a material
effect on the Company's cash flows.
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 Provider of Last Resort ("POLR")
settlements approved by the PUC, Electric Utility may increase its POLR rates up
to certain limits through December 31, 2006. In accordance with these
settlements, effective January 1, 2005 and January 1, 2006, POLR generation
rates for all metered customers may increase up to 4.5% and 7.5%, respectively,
of total rates in effect on December 31, 2004. Currently, Electric Utility's
fixed-price contracts with electricity suppliers mitigate most risks associated
with the POLR service rate limits in effect through December 31, 2006. However,
should any of the suppliers under these contracts fail to provide electric power
under the terms of the power and capacity contracts, any increases 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 June 30, 2004, the fair value
of our electricity price swap was a gain of $1.7 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 June 30,
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
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UGI UTILITIES, INC.
borrowings that are indexed to short-term market interest rates. Our long-term
debt is typically issued at fixed rates of interest based upon market rates for
debt having similar terms and credit ratings. As these long-term debt issues
mature, we expect to refinance such debt with new debt having an interest rate
that is more or less than the refinanced debt.
In order to reduce interest rate risk associated with near-term issuances of
fixed-rate debt, we may enter into interest rate protection agreements. At June
30, 2004, the fair value of our unsettled interest rate protection agreements,
which have been designated and qualify as cash flow hedges, was a gain of $1.2
million. An adverse change in interest rates on ten-year U.S. treasury notes of
ten percent would result in a $2.4 million decrease in the fair value of these
interest rate protection agreements.
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
Sag Harbor, New York. By letter dated June 24, 2004, KeySpan Energy
("KeySpan") informed UGI Utilities, Inc. ("Utilities") that KeySpan has spent
$2.3 million and expects to spend another $11 million to clean up a manufactured
gas plant site it owns in Sag Harbor, New York. KeySpan believes that Utilities
is responsible for approximately 50% of these costs as a result of Utilities'
alleged direct ownership and operation of the plant from 1885 to 1902. Utilities
is in the process of reviewing the information provided by KeySpan and is
investigating this claim.
Connecticut Gas Plants. By letter dated August 5, 2004, Yankee Gas
Services Company and Connecticut Light and Power Company, subsidiaries of
Northeast Utilities, (together, the "Northeast Companies"), demanded
contribution from Utilities for past and future remediation costs related to
manufactured gas plant operations on thirteen sites owned by the Northeast
Companies in nine cities in the State of Connecticut. The Northeast Companies
allege that Utilities controlled operations of the plants from 1883 to 1941.
According to the letter, investigation and remedial costs at the sites to date
total approximately $10 million and complete remediation costs for all sites
could total $182 million. The Northeast Companies seek an unspecified fair and
equitable allocation of these costs to Utilities. Utilities is in the process of
reviewing the information provided by Northeast Companies and is investigating
this claim.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits:
10.1 UGI Utilities, Inc. Severance Plan for Exempt Employees in
Salary Grades 34-37 and Salary Grades 18-23, as amended
December 16, 2003.
10.2 UGI Corporation 2004 Omnibus Equity Compensation Plan,
effective as of January 1, 2004. (Incorporated by reference to
Exhibit 99.1 of UGI Corporation's Registration Statement No.
333-118147).
10.3 UGI Corporation 2000 Stock Incentive Plan Amended and Restated
as of December 16, 2003. (Incorporated by reference to Exhibit
10.2 of UGI Corporation's Quarterly Report on Form 10-Q for
the period ended June 30, 2004).
10.4 UGI Corporation Senior Executive Employee Severance Pay Plan,
as amended December 16, 2003. (Incorporated by reference to
Exhibit 10.3 of UGI Corporation's Quarterly Report on Form
10-Q for the period ended June 30, 2004).
12.1 Computation of ratio of earnings to fixed charges.
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UGI UTILITIES, INC.
12.2 Computation of ratio of earnings to combined fixed charges and
preferred stock dividends.
31.1 Certification by the Chief Executive Officer relating to the
Registrant's Report on Form 10-Q for the quarter ended June
30, 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 June
30, 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 June 30, 2004, pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
(b) The Company furnished information in a Current Report on Form 8-K
during the third quarter of fiscal year 2004 as follows:
DATE ITEM NUMBER(s) CONTENT
- ---- -------------- -------
April 28, 2004 12 Press Release reporting financial results for the
fiscal quarter ended March 31, 2004.
- -------------------------------
* 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.
- 23 -
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: August 13, 2004 By: /s/ John C. Barney
-----------------------
John C. Barney
Senior Vice President - Finance
(Principal Financial Officer)
- 24 -
UGI UTILITIES, INC.
EXHIBIT INDEX
10.1 UGI Utilities, Inc. Severance Plan for Exempt Employees in Salary Grades
34-37 and Salary Grades 18-23, as amended December 16, 2003.
10.2 UGI Corporation 2004 Omnibus Equity Compensation Plan, effective as of
January 1, 2004. (Incorporated by reference to Exhibit 99.1 of UGI
Corporation's Registration Statement No. 333-118147).
10.3 UGI Corporation 2000 Stock Incentive Plan Amended and Restated as of
December 16, 2003. (Incorporated by reference to Exhibit 10.2 of UGI
Corporation's Quarterly Report on Form 10-Q for the period ended June 30,
2004).
10.4 UGI Corporation Senior Executive Employee Severance Pay Plan, as amended
December 16, 2003. (Incorporated by reference to Exhibit 10.3 of UGI
Corporation's Quarterly Report on Form 10-Q for the period ended June 30,
2004).
12.1 Computation of ratio of earnings to fixed charges
12.2 Computation of ratio of earnings to combined fixed charges and preferred
stock dividends
31.1 Certification by the Chief Executive Officer relating to the Registrant's
Report on Form 10-Q for the quarter ended June 30, 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 June 30, 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 June 30, 2004, pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
- ----------------------
* 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.
UGI UTILITIES INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES - EXHIBIT 12.1
(THOUSANDS OF DOLLARS)
Nine
Months
Ended Year Ended September 30,
June 30, -----------------------------------------
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
EARNINGS:
Earnings before income taxes $ 86,049 $100,212 $ 73,665 $ 79,568 $ 82,882
Interest expense 13,285 17,412 16,365 18,724 18,135
Amortization of debt discount and expense 175 244 287 264 218
Estimated interest component of rental expense 1,080 1,434 1,563 1,541 1,318
-------- -------- -------- -------- --------
$100,589 $119,302 $ 91,880 $100,097 $102,553
======== ======== ======== ======== ========
FIXED CHARGES:
Interest expense $ 13,285 $ 17,412 $ 16,365 $ 18,724 $ 18,135
Amortization of debt discount and expense 175 244 287 264 218
Allowance for funds used during
construction (capitalized interest) 8 7 19 12 17
Estimated interest component of rental expense 1,080 1,434 1,563 1,541 1,318
-------- -------- -------- -------- --------
$ 14,548 $ 19,097 $ 18,234 $ 20,541 $ 19,688
======== ======== ======== ======== ========
Ratio of earnings to fixed charges 6.91 6.25 5.04 4.87 5.21
======== ======== ======== ======== ========
UGI UTILITIES INC.
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS - EXHIBIT 12.2
(THOUSANDS OF DOLLARS)
Nine
Months
Ended Year Ended September 30,
June 30, -----------------------------------------
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
EARNINGS:
Earnings before income taxes $ 86,049 $100,212 $ 73,665 $ 79,568 $ 82,882
Interest expense 13,285 17,412 16,365 18,724 18,135
Amortization of debt discount and expense 175 244 287 264 218
Estimated interest component of rental expense 1,080 1,434 1,563 1,541 1,318
-------- -------- -------- -------- --------
$100,589 $119,302 $ 91,880 $100,097 $102,553
======== ======== ======== ======== ========
COMBINED FIXED CHARGES AND PREFERRED
STOCK DIVIDENDS:
Interest expense $ 13,285 $ 17,412 $ 16,365 $ 18,724 $ 18,135
Amortization of debt discount and expense 175 244 287 264 218
Allowance for funds used during
construction (capitalized interest) 8 7 19 12 17
Estimated interest component of rental expense 1,080 1,434 1,563 1,541 1,318
Preferred stock dividend requirements - 1,163 1,550 1,550 1,550
Adjustment required to state preferred stock
dividend requirements on a pretax basis - 753 1,012 995 968
-------- -------- -------- -------- --------
$ 14,548 $ 21,013 $ 20,796 $ 23,086 $ 22,206
======== ======== ======== ======== ========
Ratio of earnings to combined fixed charges
and preferred stock dividends 6.91 5.68 4.42 4.34 4.62
======== ======== ======== ======== ========