FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-1398
UGI UTILITIES, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1174060
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
UGI UTILITIES, INC.
100 Kachel Boulevard, Suite 400
Green Hills Corporate Center, Reading, PA
(Address of principal executive offices)
19607
(Zip Code)
(610) 796-3400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
At January 31, 2002, there were 26,781,785 shares of UGI Utilities, Inc.
Common Stock, par value $2.25 per share, outstanding, all of which were held,
beneficially and of record, by UGI Corporation.
UGI UTILITIES, INC.
TABLE OF CONTENTS
PAGES
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 2001,
September 30, 2001 and December 31, 2000 1
Condensed Consolidated Statements of Income for the three
and twelve months ended December 31, 2001 and 2000 2
Condensed Consolidated Statements of Cash Flows for the three and
twelve months ended December 31, 2001 and 2000 3
Notes to Condensed Consolidated Financial Statements 4 - 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9 - 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
-i-
UGI UTILITIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(Thousands of dollars)
December 31, September 30, December 31,
2001 2001 2000
-------- -------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 15,414 $ 7,711 $ 10,351
Accounts receivable (less allowances for doubtful accounts
of $2,363, $3,151 and $3,142, respectively) 52,510 39,152 70,156
Accrued utility revenues 27,293 11,110 37,277
Inventories 41,182 48,074 28,379
Deferred income taxes 8,615 5,527 --
Regulatory assets -- -- 18,403
Prepaid expenses and other current assets 1,441 2,178 2,461
-------- -------- --------
Total current assets 146,455 113,752 167,027
Property, plant and equipment, at cost (less accumulated depreciation
and amortization of $281,457, $276,429 and $271,811, respectively) 581,359 578,768 569,890
Regulatory assets 55,940 56,155 54,643
Other assets 35,989 35,734 30,560
-------- -------- --------
Total assets $819,743 $784,409 $822,120
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 26,000 $ -- $ 15,000
Bank loans 82,100 57,800 102,600
Accounts payable 64,864 67,456 88,089
Other current liabilities 61,399 52,182 45,231
-------- -------- --------
Total current liabilities 234,363 177,438 250,920
Long-term debt 182,451 208,477 177,929
Deferred income taxes 123,367 121,890 115,329
Deferred investment tax credits 8,684 8,783 9,082
Other noncurrent liabilities 11,966 12,064 13,543
Commitments and contingencies (note 4)
Redeemable preferred stock 20,000 20,000 20,000
Common stockholder's equity:
Common Stock, $2.25 par value (authorized - 40,000,000 shares;
issued and outstanding - 26,781,785 shares) 60,259 60,259 60,259
Additional paid-in capital 72,792 72,792 72,559
Retained earnings 105,400 102,706 102,499
Accumulated other comprehensive income 461 -- --
-------- -------- --------
Total common stockholder's equity 238,912 235,757 235,317
-------- -------- --------
Total liabilities and stockholders' equity $819,743 $784,409 $822,120
======== ======== ========
See accompanying notes to consolidated financial statements.
-1-
UGI UTILITIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(Thousands of dollars)
Three Months Ended Twelve Months Ended
December 31, December 31,
-------------------------- --------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Revenues $ 141,481 $ 166,503 $ 559,740 $ 482,289
--------- --------- --------- ---------
Costs and expenses:
Gas, fuel and purchased power 87,107 103,348 358,540 264,034
Operating and administrative expenses 20,237 23,688 84,859 88,840
Operating and administrative expenses - related parties 1,350 1,359 5,268 4,957
Taxes other than income taxes 2,586 2,456 9,312 12,311
Depreciation and amortization 5,810 5,925 23,652 23,790
Other income, net (3,218) (3,736) (14,593) (12,519)
--------- --------- --------- ---------
113,872 133,040 467,038 381,413
--------- --------- --------- ---------
Operating income 27,609 33,463 92,702 100,876
Interest expense 4,263 5,105 18,146 18,712
--------- --------- --------- ---------
Income before income taxes 23,346 28,358 74,556 82,164
Income taxes 9,301 11,263 29,469 32,411
--------- --------- --------- ---------
Net income 14,045 17,095 45,087 49,753
Dividends on preferred stock 388 388 1,550 1,550
--------- --------- --------- ---------
Net income after dividends on preferred stock $ 13,657 $ 16,707 $ 43,537 $ 48,203
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
-2-
UGI UTILITIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Thousands of dollars)
Three Months Ended Twelve Months Ended
December 31, December 31,
------------------------ ------------------------
2001 2000 2001 2000
-------- -------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 14,045 $ 17,095 $ 45,087 $ 49,753
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 5,810 5,925 23,652 23,790
Deferred income taxes, net (1,793) 4,420 (8,229) 6,177
Other, net 1,052 1,017 2,456 6,805
-------- -------- -------- --------
19,114 28,457 62,966 86,525
Net change in:
Accounts receivable and accrued utility revenues (31,012) (65,965) 20,249 (41,700)
Inventories 6,892 7,219 (14,835) (8,708)
Deferred fuel costs 6,870 (11,708) 28,526 (15,627)
Accounts payable (2,592) 33,951 (23,225) 49,939
Other current assets and liabilities 3,944 1,642 12,071 (2,604)
-------- -------- -------- --------
Net cash provided (used) by operating activities 3,216 (6,404) 85,752 67,825
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment (8,087) (8,740) (36,130) (37,134)
Net costs of property, plant and equipment disposals (375) (30) (1,752) (790)
Cash contribution to partnership -- (6,000) -- (6,000)
-------- -------- -------- --------
Net cash used by investing activities (8,462) (14,770) (37,882) (43,924)
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of dividends (11,351) (10,250) (37,910) (35,425)
Issuance of long-term debt -- 20,000 30,603 20,000
Repayment of long-term debt -- -- (15,000) (7,143)
Bank loans increase (decrease) 24,300 2,200 (20,500) 800
Capital contribution from UGI -- 4,000 -- 4,000
-------- -------- -------- --------
Net cash provided (used) by financing activities 12,949 15,950 (42,807) (17,768)
-------- -------- -------- --------
Cash and cash equivalents increase (decrease) $ 7,703 $ (5,224) $ 5,063 $ 6,133
======== ======== ======== ========
CASH AND CASH EQUIVALENTS:
End of period $ 15,414 $ 10,351 $ 15,414 $ 10,351
Beginning of period 7,711 15,575 10,351 4,218
-------- -------- -------- --------
Increase (decrease) $ 7,703 $ (5,224) $ 5,063 $ 6,133
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
-3-
UGI UTILITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Thousands of dollars)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of UGI Utilities, Inc. ("UGI Utilities") and its wholly owned
subsidiaries (collectively, "the Company" or "we"). We eliminate all
significant intercompany accounts and transactions when we consolidate. We
have reclassified certain prior-period balances to conform with the
current period presentation. UGI Utilities is a wholly owned subsidiary of
UGI Corporation ("UGI") and operates a natural gas distribution utility
("Gas Utility") in parts of eastern and southeastern Pennsylvania and an
electricity distribution utility and electricity generation business
(collectively, "Electric Utility") in northeastern Pennsylvania.
The accompanying condensed consolidated financial statements are unaudited
and have been prepared in accordance with the rules and regulations of the
U.S. Securities and Exchange Commission. They include all adjustments
which we consider necessary for a fair statement of the results for the
interim periods presented. Such adjustments consisted only of normal
recurring items unless otherwise disclosed. These financial statements
should be read in conjunction with the financial statements and the
related notes included in our Annual Report on Form 10-K for the year
ended September 30, 2001 ("Company's 2001 Annual Report"). Due to the
seasonal nature of our businesses, the results of operations for interim
periods are not necessarily indicative of the results to be expected for a
full year. UGI Utilities' comprehensive income as determined under
Statement of Financial Accounting Standards ("SFAS") No. 130 "Reporting
Comprehensive Income" was $14,506 for the three months ended December 31,
2001. Other comprehensive income of $461 in the three months ended
December 31, 2001 is the result of gains on derivative instruments
qualifying as hedges. The Company's comprehensive income was the same as
its net income for the three months ended December 31, 2000.
-4-
UGI UTILITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Thousands of dollars)
2. SEGMENT INFORMATION
Based upon SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"), we have determined that the Company has
two reportable segments: (1) Gas Utility and (2) Electric Utility. The
accounting policies of our two reportable segments are the same as those
described in the Significant Accounting Policies note contained in the
Company's 2001 Annual Report. We evaluate each segment's performance
principally based upon its earnings before income taxes. No single
customer represents more than 10% of the total revenues of either Gas
Utility or Electric Utility. Financial information by business segment
follows:
-5-
UGI UTILITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Thousands of dollars)
2. SEGMENT INFORMATION (continued)
THREE MONTHS ENDED DECEMBER 31, 2001:
Gas Electric
Total Utility Utility
---------------------------------------------
Segment revenues $ 141,481 $ 121,263 $ 20,218
=============================================
Segment profit:
EBITDA (1) $ 33,419 $ 29,874 $ 3,545
Depreciation and amortization (5,810) (4,973) (837)
---------------------------------------------
Operating income 27,609 24,901 2,708
Interest expense (4,263) (3,645) (618)
---------------------------------------------
Income before income taxes $ 23,346 $ 21,256 $ 2,090
=============================================
Segment assets (at period end) $ 819,743 $ 713,432 $ 106,311
=============================================
THREE MONTHS ENDED DECEMBER 31, 2000:
Gas Electric
Total Utility Utility
---------------------------------------------
Segment revenues $ 166,503 $ 146,030 $ 20,473
=============================================
Segment profit:
EBITDA (1) $ 39,388 $ 35,560 $ 3,828
Depreciation and amortization (5,925) (4,925) (1,000)
---------------------------------------------
Operating income 33,463 30,635 2,828
Interest expense (5,105) (4,402) (703)
---------------------------------------------
Income before income taxes $ 28,358 $ 26,233 $ 2,125
=============================================
Segment assets (at period end) $ 822,120 $ 719,650 $ 102,470
=============================================
(1) EBITDA (earnings before interest expense, income taxes, depreciation and
amortization) should not be considered as an alternative to net income (as an
indicator of operating performance) or as an alternative to cash flow (as a
measure of liquidity or ability to service debt obligations) and is not a
measure of performance or financial condition under accounting principles
generally accepted in the United States.
- 6 -
UGI UTILITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Thousands of dollars)
2. SEGMENT INFORMATION (continued)
TWELVE MONTHS ENDED DECEMBER 31, 2001:
Gas Electric
Total Utility Utility
---------------------------------------------
Segment revenues $ 559,740 $ 476,065 $ 83,675
=============================================
Segment profit:
EBITDA $ 116,354 $ 102,331 $ 14,023
Depreciation and amortization (23,652) (20,219) (3,433)
---------------------------------------------
Operating income 92,702 82,112 10,590
Interest expense (18,146) (15,501) (2,645)
---------------------------------------------
Income before income taxes $ 74,556 $ 66,611 $ 7,945
=============================================
Segment assets (at period end) $ 819,743 $ 713,432 $ 106,311
=============================================
TWELVE MONTHS ENDED DECEMBER 31, 2000:
Gas Electric
Total Utility Utility
---------------------------------------------
Segment revenues $ 482,289 $ 403,095 $ 79,194
=============================================
Segment profit:
EBITDA $ 124,666 $ 108,127 $ 16,539
Depreciation and amortization (23,790) (19,176) (4,614)
---------------------------------------------
Operating income 100,876 88,951 11,925
Interest expense (18,712) (16,369) (2,343)
---------------------------------------------
Income before income taxes $ 82,164 $ 72,582 $ 9,582
=============================================
Segment assets (at period end) $ 822,120 $ 719,650 $ 102,470
=============================================
- 7 -
UGI UTILITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Thousands of dollars)
3. ADOPTION OF SFAS 142
Effective October 1, 2001, we adopted the provisions of SFAS No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142 addresses
the financial accounting and reporting for acquired goodwill and other
intangible assets and supersedes Accounting Principles Board ("APB")
Opinion No. 17, "Intangible Assets." SFAS 142 addresses the financial
accounting and reporting for intangible assets acquired individually or
with a group of other assets (excluding those acquired in a business
combination) at acquisition and also addresses the financial accounting
and reporting for goodwill and other intangible assets subsequent to their
acquisition. Under SFAS 142, an intangible asset is amortized over its
useful life unless that life is determined to be indefinite. Goodwill and
other intangible assets with indefinite lives are not amortized but are
subject to tests for impairment at least annually.
Because we do not have significant intangible assets or goodwill
resulting from prior business conbinations, the adoption of SFAS 142
did not have any impact on our results of operations or financial
position during the three months ended December 31, 2001.
4. COMMITMENTS AND CONTINGENCIES
There have been no significant subsequent developments to the commitments
and contingencies reported in the Company's 2001 Annual Report.
-8-
UGI UTILITIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ANALYSIS OF RESULTS OF OPERATIONS
The following analyses compare our results of operations for (1) the three
months ended December 31, 2001 ("2001 three-month period") with the three months
ended December 31, 2000 ("2000 three-month period") and (2) the twelve months
ended December 31, 2001 ("2001 twelve-month period") with the twelve months
ended December 31, 2000 ("2000 twelve-month period"). Our analyses of results of
operations should be read in conjunction with the segment information included
in Note 2 to the Condensed Consolidated Financial Statements.
2001 THREE-MONTH PERIOD COMPARED WITH 2000 THREE-MONTH PERIOD
- --------------------------------------------------------------------------------------------------------
Three Months Ended December 31, 2001 2000 Decrease
- --------------------------------------------------------------------------------------------------------
(Millions of dollars)
GAS UTILITY:
Revenues $121.3 $146.0 $(24.7) (16.9)%
Total margin $ 46.0 $ 53.6 $ (7.6) (14.2)%
EBITDA (a) $ 29.9 $ 35.6 $ (5.7) (16.0)%
Operating income $ 24.9 $ 30.6 $ (5.7) (18.6)%
Natural gas system throughput - bcf 19.4 24.2 (4.8) (19.8)%
Heating degree days - % (warmer)
colder than normal (19.2) 10.0 -- --
ELECTRIC UTILITY:
Revenues $ 20.2 $ 20.5 $ (0.3) (1.5)%
Total margin (b) $ 7.5 $ 8.7 $ (1.2) (13.8)%
EBITDA (a) $ 3.5 $ 3.8 $ (0.3) (7.9)%
Operating income $ 2.7 $ 2.8 $ (0.1) (3.6)%
Distribution sales - gwh 227.9 241.8 (13.9) (5.7)%
- ---------------------------------------------------------------------------------------------------------
bcf - billions of cubic feet. gwh - millions of kilowatt hours.
(a) EBITDA (earnings before interest expense, income taxes, depreciation and
amortization) should not be considered as an alternative to net income (as
an indicator of operating performance) or as an alternative to cash flow
(as a measure of liquidity or ability to service debt obligations) and is
not a measure of performance or financial condition under accounting
principles generally accepted in the United States.
(b) Electric Utility's total margin represents total revenues less cost of
sales and revenue-related taxes, i.e. gross receipts taxes. For financial
statement purposes, revenue-related taxes are included in "taxes other
than income taxes" on the Condensed Consolidated Statements of Income.
-9-
UGI UTILITIES, INC.
GAS UTILITY. Weather in Gas Utility's service territory during the 2001
three-month period was 19.2% warmer than normal compared to weather that was
10.0% colder than normal in the prior-year period. In particular, the key
heating-season months of November and December 2001 were among the warmest on
record. The warmer weather and to a lesser extent the general economic recession
resulted in a significant reduction in sales to firm- residential, commercial
and industrial ("core market") customers and lower firm and interruptible
delivery service volumes.
The decrease in Gas Utility revenues in the 2001 three-month period is primarily
a result of the lower core market sales and to a lesser extent the lower firm
and interruptible delivery service volumes. Gas Utility cost of gas was $75.3
million in the 2001 three-month period compared to $92.4 million in the
prior-year period also a result of the decline in core-market sales.
The decrease in Gas Utility total margin reflects (1) a $4.6 million decrease in
core market margin resulting from the lower sales; (2) the impact of the lower
firm delivery service volumes; and (3) lower margin contribution from
interruptible customers. In accordance with Gas Utility's Restructuring order
entered on June 29, 2000 pursuant to Pennsylvania's Gas Competition Act,
beginning December 1, 2001 Gas Utility is required to reduce its PGC rates by an
amount equal to the margin it receives from interruptible customers using
pipeline capacity contracted by Gas Utility for core-market customers. As a
result, beginning December 1, 2001, Gas Utility's margin is more sensitive to
the effects of heating-season weather and less sensitive to the market prices of
alternative fuels.
Gas Utility EBITDA and operating income each decreased $5.7 million reflecting
the previously mentioned decline in total margin partially offset by lower
operating and administrative expenses. The decrease in operating and
administrative expenses principally resulted from lower charges for
uncollectible accounts and lower distribution system expenses.
ELECTRIC UTILITY. The decrease in kilowatt-hour sales in the 2001 three-month
period reflects the impact of weather that was 29% warmer than in the prior-year
period. Electric Utility revenues declined reflecting the decline in
distribution system sales partially offset by higher wholesale sales.
Notwithstanding the decrease in sales, Electric Utility cost of sales was $11.9
million in the 2001 three-month period, an increase of $1.0 million from the
prior-year period, reflecting higher per-unit purchased power costs and the
impact on cost of sales resulting from the formation of Hunlock Creek Energy
Ventures, our joint-venture electricity generation business formed December 8,
2000. The formation of Energy Ventures results in lower power production and
depreciation expenses but higher costs of sales because Electric Utility must
purchase a greater percentage of its electricity needs from others, including
Energy Ventures.
Total Electric Utility margin declined $1.2 million as a result of the higher
purchased power costs and the lower sales. EBITDA and operating income decreased
$0.3 million and $0.1 million, respectively, reflecting the lower total margin
offset by lower power production expenses and, with respect to operating income,
lower depreciation expense subsequent to the formation of Energy Ventures.
-10-
UGI UTILITIES, INC.
INTEREST EXPENSE. The lower interest expense in the 2001 three-month period
reflects lower borrowings under revolving credit agreements and lower revolving
credit agreement interest rates.
2001 TWELVE-MONTH PERIOD COMPARED WITH 2000 TWELVE-MONTH PERIOD
- ---------------------------------------------------------------------------------------------------------
Increase
Twelve Months Ended December 31, 2001 2000 (Decrease)
- ---------------------------------------------------------------------------------------------------------
(Millions of dollars)
GAS UTILITY:
Revenues $476.1 $403.1 $ 73.0 18.1 %
Total margin $170.4 $176.5 $ (6.1) (3.5)%
EBITDA $102.3 $108.1 $ (5.8) (5.4)%
Operating income $ 82.1 $ 89.0 $ (6.9) (7.8)%
Natural gas system throughput - bcf 72.5 81.9 (9.4) (11.5)%
Heating degree days - % (warmer)
than normal (8.5) (2.0) -- --
ELECTRIC UTILITY:
Revenues $ 83.6 $ 79.2 $ 4.4 5.6 %
Total margin $ 27.5 $ 38.2 $(10.7) (28.0)%
EBITDA $ 14.0 $ 16.5 $ (2.5) (15.2)%
Operating income $ 10.6 $ 11.9 $ (1.3) (10.9)%
Distribution sales - gwh 931.6 923.5 8.1 0.9 %
- ----------------------------------------------------------------------------------------------------------
GAS UTILITY. Weather in Gas Utility's service territory based upon heating
degree days was 8.5% warmer than normal in the 2001 twelve-month period compared
to weather that was 2.0% warmer than normal in the prior year twelve-month
period. Total system throughput declined 11.5% reflecting the effects of the
warmer weather, price-induced customer conservation, and the effects of the
general recession on commercial and industrial customers. In addition, higher
natural gas prices relative to oil prices during the winter of 2001 prompted
fuel switching by many of our interruptible customers who have the ability to
switch to alternative fuels.
The increase in Gas Utility revenues in the 2001 twelve-month period is
primarily a result of higher average purchased gas cost ("PGC") rates primarily
during the 2001 winter heating season offset partially by the effect of the
decline in throughput. Natural gas costs at the end of the 2001 twelve-month
period were significantly lower than they were at the beginning of the period.
Gas Utility cost of gas was $305.7 million in the 2001 twelve-month period
compared to $226.6 million in the 2000 twelve-month period reflecting the higher
average purchased gas costs during the 2001 winter heating season.
Gas Utility total margin declined $6.1 million principally due to lower margin
from interruptible and firm delivery service customers reflecting lower 2001
twelve-month period throughput to
-11-
UGI UTILITIES, INC.
these customers and lower average interruptible unit margins due to the decline
in the spread between oil and natural gas prices.
Gas Utility EBITDA and operating income declined $5.8 million and $6.9 million,
respectively, reflecting the net effects of the decrease in total margin,
slightly higher operating expenses and higher pension income. The increase in
operating expenses includes, among other things, greater required allowances for
uncollectible accounts and lower income from environmental insurance litigation
settlements partially offset by lower distribution system maintenance expense.
Depreciation expense increased $1.0 million reflecting greater depreciation
associated with distribution system capital expenditures.
ELECTRIC UTILITY. Distribution system sales in the 2001 twelve-month period
increased slightly from the prior year. Revenues were higher as a result of
wholesale sales generated by Energy Ventures and, to a lesser extent, the
greater distribution system sales. Cost of sales totaled $52.8 million in the
2001 twelve-month period compared to $37.4 million in the prior year reflecting
the impact on cost of sales resulting from the formation of Energy Ventures,
higher per-unit purchased power costs, and the higher 2001 sales.
Electric Utility total margin decreased $10.7 million as a result of the higher
purchased power costs. EBITDA and operating income declined less than the
decrease in total margin reflecting lower power production expenses resulting
from the formation of Energy Ventures and lower utility realty taxes.
Depreciation expense decreased $1.2 million reflecting the impact of the
formation of Energy Ventures.
INTEREST EXPENSE. Interest expense for the 2001 twelve-month period reflects
lower interest on revolving credit agreement borrowings partially offset by
greater interest on long-term debt outstanding.
FINANCIAL CONDITION AND LIQUIDITY
FINANCIAL CONDITION
The Company's debt outstanding at December 31, 2001 totaled $290.6 million
compared with $266.3 million at September 30, 2001. Included in these amounts
are bank loans of $82.1 million and $57.8 million, respectively.
At December 31, 2001, the Company had revolving credit agreements providing for
borrowings up to $97 million of which $82.1 million was outstanding. These
agreements expire at various dates from June 2003 through June 2004. We also
have shelf registration statements with the U.S. Securities and Exchange
Commission covering a total of $125 million of debt securities. We expect to
refinance $26 million of maturing Medium-Term Notes due October 2002 through
debt issued pursuant to these shelf registration statements.
-12-
UGI UTILITIES, INC.
CASH FLOWS
The Company's cash flows from operating activities are seasonal and are
generally greatest during the second and third fiscal quarters when customers
pay bills incurred during the heating season and are generally lowest during the
first and fourth fiscal quarters. Accordingly, cash flows from operations for
the three months ended December 31, 2001 are not necessarily indicative of cash
flows to be expected for a full year.
OPERATING ACTIVITIES. Cash provided by operating activities was $3.2 million
during the three months ended December 31, 2001. In the prior-year period, cash
used by operating activities was $6.4 million. The increase in 2001 three-month
period operating cash flow is a result of lower cash requirements to fund
changes in working capital. Cash flow from operating activities before changes
in operating working capital was $19.1 million in the 2001 three-month period, a
decrease of $9.3 million from the prior-year period, reflecting the decline in
operating results and lower noncash charges for deferred income taxes.
INVESTING ACTIVITIES. Expenditures for property, plant and equipment were $8.1
million in the 2001 three-month period, slightly lower than the prior-year
period. Net cash used by investing activities in the 2000 three-month period
includes a $6 million contribution made in connection with the formation of
Energy Ventures.
FINANCING ACTIVITIES. During the 2001 and 2000 three-month periods, we paid
dividends of $11.0 million and $9.9 million, respectively, to UGI. We also paid
dividends on our redeemable preferred stock totaling $0.4 million in both
periods. During the 2001 three-month period, we had a net increase in borrowings
of $24.3 million under our revolving credit agreements. During the 2000
three-month period, we issued $20 million of five-year notes and used the
proceeds for working capital purposes. During the 2000 three-month period, UGI
made a capital contribution of $4.0 million to fund a portion of the Company's
investment in Energy Ventures.
ADOPTION OF SFAS NO. 142
Effective October 1, 2001, we adopted the provisions of SFAS No. 142, "Goodwill
and Other Intangible Assets" ("SFAS 142"). SFAS 142 addresses the financial
accounting and reporting for acquired goodwill and other intangible assets and
supersedes APB Opinion No. 17, "Intangible Assets." SFAS 142 addresses the
financial accounting and reporting for intangible assets acquired individually
or with a group of other assets (excluding those acquired in a business
combination) at acquisition and also addresses the financial accounting and
reporting for goodwill and other intangible assets subsequent to their
acquisition. Under SFAS 142, an intangible asset is amortized over its useful
life unless that life is determined to be indefinite. Goodwill and other
intangible assets with indefinite lives are not amortized but are subject to
tests for impairment at least annually.
-13-
UGI UTILITIES, INC.
Because we do not have significant intangible assets or goodwill resulting
from prior business combinations, the adoption of SFAS 142 did not have any
impact on our results of operations or financial position during the
three months ended December 31, 2001.
IMPACT OF GAS RESTRUCTURING ORDER
On June 29, 2000, the Pennsylvania Public Utility Commission ("PUC") issued its
order ("Gas Restructuring Order") approving Gas Utility's restructuring plan
filed by Gas Utility pursuant to Pennsylvania's Natural Gas Choice and
Competition Act. Among other things, the implementation of the Gas Restructuring
Order resulted in an increase in Gas Utility's core-market base rates effective
October 1, 2000. This base rate increase was designed to generate approximately
$16.7 million in additional net annual revenues. The Gas Restructuring Order
also required Gas Utility to reduce its PGC rates by an annualized amount of
$16.7 million in the first 14 months following the October 1, 2000 base rate
increase.
Beginning December 1, 2001, Gas Utility is required to reduce its PGC rates by
an amount equal to the margin it receives from interruptible customers using
pipeline capacity contracted by Gas Utility for core-market customers. As a
result, beginning December 1, 2001, Gas Utility operating results are more
sensitive to the effects of heating-season weather and less sensitive to the
market prices of alternative fuels.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") recently issued SFAS No.
143, "Accounting for Asset Retirement Obligations" ("SFAS 143") and SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144").
SFAS 143 addresses financial accounting and reporting for legal obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. SFAS 143 requires that the fair value of a liability for
an asset retirement obligation be recognized in the period in which it is
incurred with a corresponding increase in the carrying value of the related
asset. Entities shall subsequently charge the retirement cost to expense using a
systematic and rational method over the asset's useful life and adjust the fair
value of the liability resulting from the passage of time through charges to
interest expense. We are required to adopt SFAS 143 effective October 1, 2002.
We are currently in the process of evaluating the impact SFAS 143 will have on
our financial condition and results of operations.
SFAS 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121") and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" as it relates to the disposal of a segment of a business. SFAS 144
establishes a single accounting model for long-lived assets to be disposed of
based upon the
-14-
UGI UTILITIES, INC.
framework of SFAS 121, and resolves significant implementation issues of SFAS
121. SFAS 144 is effective for the Company October 1, 2002. We believe that the
adoption of SFAS 144 will not have a material impact on our financial position
or results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Gas Utility's tariffs contain clauses which permit recovery of substantially all
of the cost of natural gas it sells to its customers. The recovery clauses
provide for a periodic adjustment for the difference between the total amount
actually collected from customers and the recoverable costs incurred. Because of
this ratemaking mechanism, there is limited commodity price risk associated with
our Gas Utility operations.
Electric Utility's electricity distribution business purchases most of its
electric power needs under power supply arrangements of various lengths and on
the spot market. Prices for electricity can be volatile especially during
periods of high demand or tight supply. Because the generation component of
Electric Utility's rates is subject to rate caps as a result of the Electricity
Restructuring Order that are expected to extend through August 2002 in the case
of its commercial and industrial customers and May 2003 in the case of its
residential customers, any increases in the cost of electricity purchased by
Electric Utility will negatively impact Electric Utility's results. Electric
Utility has mitigated this electricity cost exposure by entering into power and
capacity contracts for a substantial portion of these periods.
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 may refinance such debt with new debt having
interest rates reflecting then-current market conditions. This debt may have an
interest rate that is more or less than the refinanced debt. In order to reduce
interest rate risk associated with a forecasted issuance of fixed-rate debt in
October 2002, we entered into interest rate protection agreements during the
three months ended December 31, 2001. The fair value of these interest rate
protection agreements, which have been designated and qualify as cash flow
hedges, was $0.8 million at December 31, 2001. An adverse change in interest
rates on ten-year U.S. treasury notes of 100 basis points would result in a $2.1
million decrease in the fair value of these interest rate protection agreements.
-15-
UGI UTILITIES, INC.
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits:
12.1 Computation of ratio of earnings to fixed charges.
12.2 Computation of ratio of earnings to combined fixed charges and
preferred stock dividends.
(b) The Company did not file any Current Reports on Form 8-K during the
fiscal quarter ended December 31, 2001.
-16-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UGI Utilities, Inc.
-------------------
(Registrant)
Date: February 13, 2002 By:/s/ J. C. Barney
- ------------------------ -------------------------------------
J. C. Barney, Senior Vice President -
Finance
(Principal Financial Officer)
-17-
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