UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-1398
UGI UTILITIES, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1174060
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
UGI UTILITIES, INC.
100 Kachel Boulevard, Suite 400
Green Hills Corporate Center, Reading, PA
(Address of principal executive offices)
19607
(Zip Code)
(610) 796-3400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No | |
At April 30, 2003, there were 26,781,785 shares of UGI Utilities,
Inc. Common Stock, par value $2.25 per share, outstanding, all of which were
held, beneficially and of record, by UGI Corporation.
UGI UTILITIES, INC.
TABLE OF CONTENTS
PAGES
-----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2003,
September 30, 2002 and March 31, 2002 1
Condensed Consolidated Statements of Income for the three
and six months ended March 31, 2003 and 2002 2
Condensed Consolidated Statements of Cash Flows for the
six months ended March 31, 2003 and 2002 3
Notes to Condensed Consolidated Financial Statements 4 - 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8 - 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13 - 14
Item 4. Controls and Procedures 14
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
Certifications 17 - 18
-i-
UGI UTILITIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(Thousands of dollars)
March 31, September 30, March 31,
2003 2002 2002
--------- --------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 8,617 $ 6,090 $ 1,955
Accounts receivable (less allowances for doubtful accounts
of $6,202, $1,972 and $3,887, respectively) 99,847 38,554 65,329
Accrued utility revenues 21,721 8,069 19,695
Inventories 6,563 38,654 12,418
Deferred income taxes 18,074 2,610 8,843
Deferred fuel costs -- 4,304 --
Income taxes recoverable -- 6,892 --
Prepaid expenses and other current assets 3,907 3,151 4,931
--------- --------- --------
Total current assets 158,729 108,324 113,171
Property, plant and equipment, at cost (less accumulated depreciation
and amortization of $299,273, $290,194 and $285,945, respectively) 598,395 593,141 582,986
Regulatory assets 59,212 57,685 55,227
Other assets 40,574 38,973 36,358
--------- --------- --------
Total assets $ 856,910 $ 798,123 $787,742
========= ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 50,000 $ 76,000 $ 26,000
Bank loans 27,700 37,200 58,900
Accounts payable 51,079 57,499 39,152
Accrued income taxes 29,671 -- 15,356
Deferred fuel refunds 31,369 -- 8,975
Other current liabilities 37,034 45,518 31,115
--------- --------- --------
Total current liabilities 226,853 216,217 179,498
Long-term debt 172,322 172,369 182,426
Deferred income taxes 138,169 131,483 124,699
Deferred investment tax credits 8,186 8,385 8,584
Other noncurrent liabilities 12,821 11,815 11,453
Commitments and contingencies (note 3)
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 73,057 73,057 72,792
Retained earnings 147,791 107,312 127,563
Accumulated other comprehensive (loss) income (2,548) (2,774) 468
--------- --------- --------
Total common stockholder's equity 278,559 237,854 261,082
--------- --------- --------
Total liabilities and stockholders' equity $ 856,910 $ 798,123 $787,742
========= ========= ========
See accompanying notes to consolidated financial statements.
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UGI UTILITIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(Thousands of dollars)
Three Months Ended Six Months Ended
March 31, March 31,
------------------------ ------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Revenues $ 269,296 $ 179,945 $ 437,647 $ 321,426
--------- --------- --------- ---------
Costs and expenses:
Gas, fuel and purchased power 173,167 109,151 273,611 196,258
Operating and administrative expenses 25,074 21,437 45,882 41,674
Operating and administrative expenses - related parties 3,080 1,668 4,970 3,018
Taxes other than income taxes 3,430 3,242 6,368 5,828
Depreciation and amortization 5,340 5,834 10,654 11,644
Other income, net (4,244) (2,706) (6,117) (5,924)
--------- --------- --------- ---------
205,847 138,626 335,368 252,498
--------- --------- --------- ---------
Operating income 63,449 41,319 102,279 68,928
Interest expense 4,141 4,228 8,476 8,491
--------- --------- --------- ---------
Income before income taxes 59,308 37,091 93,803 60,437
Income taxes 23,909 14,542 37,690 23,843
--------- --------- --------- ---------
Net income 35,399 22,549 56,113 36,594
Dividends on preferred stock 387 387 775 775
--------- --------- --------- ---------
Net income after dividends on preferred stock $ 35,012 $ 22,162 $ 55,338 $ 35,819
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
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UGI UTILITIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Thousands of dollars)
Six Months Ended
March 31,
----------------------
2003 2002
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 56,113 $ 36,594
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 10,654 11,644
Deferred income taxes, net (10,328) (1,206)
Other, net 3,733 3,596
Net change in:
Accounts receivable and accrued utility revenues (80,756) (38,805)
Inventories 32,091 35,656
Deferred fuel costs 35,673 6,222
Accounts payable (6,420) (28,304)
Other current assets and liabilities 28,672 (4,914)
-------- --------
Net cash provided by operating activities 69,432 20,483
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment (15,452) (14,615)
Net costs of property, plant and equipment disposals (319) (986)
-------- --------
Net cash used by investing activities (15,771) (15,601)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of dividends (15,634) (11,738)
Repayment of long-term debt (26,000) --
Bank loans (decrease) increase (9,500) 1,100
-------- --------
Net cash used by financing activities (51,134) (10,638)
-------- --------
Cash and cash equivalents increase (decrease) $ 2,527 $ (5,756)
======== ========
CASH AND CASH EQUIVALENTS:
End of period $ 8,617 $ 1,955
Beginning of period 6,090 7,711
-------- --------
Increase (decrease) $ 2,527 $ (5,756)
======== ========
See accompanying notes to consolidated financial statements.
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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"). 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 through its
wholly owned subsidiary, UGI Development Company ("UGID"), owns
interests in Pennsylvania-based electricity generation assets (which
together with Electric Utility are referred to herein as "Electric
Operations"). UGID's 50%-owned joint-venture partnership, Hunlock
Creek Energy Ventures ("Energy Ventures"), is accounted for under the
equity method. Gas Utility and Electric Utility are subject to
regulation by the Pennsylvania Public Utility Commission ("PUC").
UGID has been granted "Exempt Wholesale Generator" status by the
Federal Energy Regulatory Commission.
Our consolidated financial statements include the accounts of UGI
Utilities and its majority-owned subsidiaries. We eliminate all
significant intercompany accounts and transactions when we
consolidate.
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. These financial statements should be read in conjunction
with the financial statements and the related notes included in our
Annual Report on Form 10-K for the year ended September 30, 2002
("Company's 2002 Annual Report"). Due to the seasonal nature of our
businesses, the results of operations for interim periods are not
necessarily indicative of the results to be expected for a full year.
COMPREHENSIVE INCOME. The following table presents the components of
comprehensive income for the three and six months ended March 31,
2003 and 2002:
Three Months Ended March 31, Six Months Ended March 31,
---------------------------- --------------------------
2003 2002 2003 2002
---- ---- ---- ----
Net income $35,399 $22,549 $56,113 $36,594
Other comprehensive income 25 7 226 468
- ---------- ------- ------- ------- -------
Comprehensive income $35,424 $22,556 $56,339 $37,062
======= ======= ======= =======
Other comprehensive income comprises changes in the fair value of
interest rate protection agreements qualifying as hedges, net of
reclassifications to net income.
-4-
UGI UTILITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Thousands of dollars)
USE OF ESTIMATES. We make estimates and assumptions when preparing
financial statements in conformity with accounting principles
generally accepted in the United States. These estimates and
assumptions affect the reported amounts of assets and liabilities,
revenues and expenses, as well as the disclosure of contingent assets
and liabilities. Actual results could differ from these estimates.
2. SEGMENT INFORMATION
The Company currently has two reportable segments: (1) Gas Utility
and (2) Electric Operations. The accounting policies of our two
reportable segments are the same as those described in the
Significant Accounting Policies note contained in the Company's 2002
Annual Report. We evaluate each segment's profitability principally
based upon its earnings before income taxes. No single customer
represents more than 10% of the total revenues of either Gas Utility
or Electric Operations. There are no significant intersegment
transactions. In addition, all of our reportable segments' revenues
are derived from sources within the United States. Financial
information by reportable segment follows:
THREE MONTHS ENDED MARCH 31, 2003:
Gas Electric
Total Utility Operations
-------- ------- ----------
Revenues $269,296 $239,920 $ 29,376
Depreciation and amortization 5,340 4,547 793
Operating income 63,449 55,020 8,429
Interest expense 4,141 3,502 639
Income before income taxes 59,308 51,519 7,789
Total assets (at period end) 856,910 744,907 112,003
THREE MONTHS ENDED MARCH 31, 2002:
Gas Electric
Total Utility Operations
-------- ------- ----------
Revenues $179,945 $158,160 $ 21,785
Depreciation and amortization 5,834 5,003 831
Operating income 41,319 38,441 2,878
Interest expense 4,228 3,632 596
Income before income taxes 37,091 34,809 2,282
Total assets (at period end) 787,742 683,742 104,000
-5-
UGI UTILITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Thousands of dollars)
SIX MONTHS ENDED MARCH 31, 2003:
Gas Electric
Total Utility Operations
-------- ------- ----------
Revenues $437,647 $384,995 $ 52,652
Depreciation and amortization 10,654 9,077 1,577
Operating income 102,279 88,563 13,716
Interest expense 8,476 7,220 1,256
Income before income taxes 93,803 81,343 12,460
Total assets (at period end) 856,910 744,907 112,003
SIX MONTHS ENDED MARCH 31, 2002:
Gas Electric
Total Utility Operations
-------- ------- ----------
Revenues $321,426 $279,423 $ 42,003
Depreciation and amortization 11,644 9,976 1,668
Operating income 68,928 63,342 5,586
Interest expense 8,491 7,277 1,214
Income before income taxes 60,437 56,065 4,372
Total assets (at period end) 787,742 683,742 104,000
3. COMMITMENTS AND CONTINGENCIES
From the late 1800s through the mid-1900s, UGI Utilities and its
former subsidiaries owned and operated a number of manufactured gas
plants ("MGPs") prior to the general availability of natural gas.
Some constituents of coal tars and other residues of the manufactured
gas process are today considered hazardous substances under the
Superfund Law and may be present on the sites of former MGPs. Between
1882 and 1953, UGI Utilities owned the stock of subsidiary gas
companies in Pennsylvania and elsewhere and also operated the
businesses of some gas companies under agreement. Pursuant to the
requirements of the Public Utility Holding Company Act of 1935, UGI
Utilities divested all of its utility operations other than those
which now constitute Gas Utility and Electric Utility.
UGI Utilities does not expect its costs for investigation and
remediation of hazardous substances at Pennsylvania MGP sites to be
material to its results of operations because Gas Utility is
currently permitted to include in rates, through future base rate
proceedings, prudently incurred remediation costs associated with
such sites. UGI Utilities has been notified of several sites outside
Pennsylvania on which (1) MGPs were formerly operated by it or owned
or operated by its former subsidiaries and (2) either environmental
agencies or private parties are investigating the extent of
environmental
-6-
UGI UTILITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Thousands of dollars)
contamination or performing environmental remediation. UGI Utilities
is currently litigating two claims against it relating to
out-of-state sites.
Management believes that under applicable law UGI Utilities should
not be liable in those instances in which a former subsidiary
operated an MGP. There could be, however, significant future costs of
an uncertain amount associated with environmental damage caused by
MGPs outside Pennsylvania that UGI Utilities directly operated, or
that were owned or operated by former subsidiaries of UGI Utilities,
if a court were to conclude that the subsidiary's separate corporate
form should be disregarded.
In addition to these environmental matters, there are other pending
claims and legal actions arising in the normal course of our
businesses. We cannot predict with certainty the final results of
environmental and other matters. However, it is reasonably possible
that some of them could be resolved unfavorably to us. Although we
currently believe, after consultation with counsel, that damages or
settlements, if any, recovered by the plaintiffs in such claims or
actions will not have a material adverse effect on our financial
position, damages or settlements could be material to our operating
results or cash flows in future periods depending on the nature and
timing of future developments with respect to these matters and the
amounts of future operating results and cash flows.
4. UGID TRANSACTIONS
On February 25, 2003, Allegheny Energy Supply Company, LLC
("Allegheny Supply"), Allegheny Energy Supply Conemaugh, LLC, UGID
and UGI entered into an asset purchase agreement ("Asset Purchase
Agreement") pursuant to which UGID will acquire an additional 83
megawatt ownership interest in the Conemaugh electricity generation
station ("Conemaugh") from Allegheny Supply, a unit of Allegheny
Energy, Inc. ("Allegheny") for approximately $51,300 in cash, subject
to a $3,000 credit. Conemaugh is a 1,711-megawatt, coal-fired
electricity generation station located near Johnstown, Pennsylvania
and is owned by a consortium of energy companies and operated by a
unit of Reliant Resources, Inc. under contract. The purchase will
increase UGID's interest in Conemaugh to 102 megawatts (6.0%) from 19
megawatts (1.1%) currently. The transaction, which is subject to
customary closing conditions and regulatory approvals, is expected to
close by the end of June 2003.
On April 29, 2003, the Board of Directors of the Company declared a
dividend of all of the common stock of UGID to UGI. UGID's net assets
as of March 31, 2003 comprised approximately seven percent of the
Company's consolidated net assets. The pending investment in
Conemaugh by UGID described above is expected to occur after payment
of the dividend of UGID common stock to UGI.
-7-
UGI UTILITIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ANALYSIS OF RESULTS OF OPERATIONS
The following analyses compare our results of operations for (1) the three
months ended March 31, 2003 ("2003 three-month period") with the three months
ended March 31, 2002 ("2002 three-month period") and (2) the six months ended
March 31, 2003 ("2003 six-month period") with the six months ended March 31,
2002 ("2002 six-month period"). Our analyses of results of operations should be
read in conjunction with the segment information included in Note 2 to the
Condensed Consolidated Financial Statements.
2003 THREE-MONTH PERIOD COMPARED WITH 2002 THREE-MONTH PERIOD
Three Months Ended March 31, 2003 2002 Increase
---------------------------- ------ ------ ------------------
(Dollars in millions)
GAS UTILITY:
Revenues $239.9 $158.2 $ 81.7 51.6%
Total margin (a) $ 80.9 $ 61.4 $ 19.5 31.8%
Operating income $ 55.0 $ 38.4 $ 16.6 43.2%
Natural gas system throughput - bcf 32.4 26.1 6.3 24.1%
Heating degree days - % colder (warmer)
than normal 7.9 (16.9) -- --
ELECTRIC OPERATIONS:
Revenues $ 29.4 $ 21.8 $ 7.6 34.9%
Total margin (a) $ 13.9 $ 8.2 $ 5.7 69.5%
Operating income $ 8.4 $ 2.9 $ 5.5 189.7%
Electric Utility distribution sales - gwh 281.1 248.1 33.0 13.3%
bcf - billions of cubic feet. gwh - millions of kilowatt-hours.
(a) Gas Utility's total margin represents total revenues less cost of sales.
Electric Operation's total margin represents total revenues less cost of
sales and revenue-related taxes, i.e. Electric Utility gross receipts
taxes. For financial statement purposes, revenue-related taxes are
included in "taxes other than income taxes" on the Condensed Consolidated
Statements of Income.
GAS UTILITY. Total distribution system throughput increased 6.3 bcf or 24.1% as
the significantly colder 2003 three-month period weather resulted in greater
heating-related sales to firm- residential, commercial and industrial
("core-market") customers and, to a lesser extent, greater volumes transported
for residential, commercial and industrial delivery service customers.
The increase in Gas Utility revenues reflects the greater core-market volumes
and residential, commercial and industrial delivery service volumes and the
effects of higher core-market purchased gas cost ("PGC") rates. The higher 2003
three-month period PGC rates resulted from the pass through of higher natural
gas commodity costs. Gas Utility cost of gas was $159.0
-8-
UGI UTILITIES, INC.
million in the 2003 three-month period compared to $96.8 million in the 2002
three-month period reflecting the higher core-market volumes and PGC rates.
The increase in Gas Utility total margin principally reflects a $14.3 million
increase in margin from core-market customers and, to a lesser extent, greater
margin from residential, commercial and industrial delivery service customers.
The higher Gas Utility operating income is due to the previously mentioned
increase in total margin, slightly higher other income, and lower depreciation
expense partially offset by a $4.6 million increase in operating and
administrative expenses. The higher operating and administrative expenses
reflect, among other things, the impact of colder weather on distribution system
maintenance expenses, higher uncollectible accounts expense, and greater
incentive compensation expenses. Depreciation expense declined $0.5 million in
the 2003 three-month period due to a change, effective April 1, 2002, in the
estimated useful lives of Gas Utility's distribution assets resulting from a
PUC-mandated asset life study.
ELECTRIC OPERATIONS. Electric Operations benefited from the effects of weather
that was 8.0% colder than normal in the 2003 three-month period compared to
weather that was 16.4% warmer than normal in the prior-year period. Electric
Utility's distribution sales increased 13.3% principally as a result of the
colder weather.
The increase in Electric Operations' revenues reflects the effects of the
greater Electric Utility distribution sales and a $4.4 million increase in
revenues from sales of electricity produced by our interests in electricity
generation assets to third parties. Prior to September 2002, substantially all
of the electricity generated by our interests in electricity generation assets
was used by Electric Utility to meet a portion of its distribution system
requirements. Beginning September 2002, Electric Utility began purchasing
substantially all of its electricity requirements under fixed-price energy and
capacity contracts with unaffiliated third-party suppliers, and we began selling
electricity produced by our interests in generation assets and related capacity
on the spot market. Electric Operations' cost of sales was $14.2 million in the
2003 three-month period compared to $12.4 million in the prior year reflecting
the third-party spot market sales in the 2003 three-month period partially
offset by the effects of lower Electric Utility per-unit purchased power costs.
The increase in Electric Operations' total margin reflects greater Electric
Utility total margin, resulting from lower per-unit purchased power costs and
greater distribution system sales, and margin from third-party spot market sales
of electricity produced by our electricity generation assets. Electric
Operations' operating income increased in the 2003 three-month period reflecting
the increase in total margin.
-9-
UGI UTILITIES, INC.
2003 SIX-MONTH PERIOD COMPARED WITH 2002 SIX-MONTH PERIOD
Six Months Ended March 31, 2003 2002 Increase
-------------------------- ------ ------ ------------------
(Dollars in millions)
GAS UTILITY:
Revenues $385.0 $279.4 $105.6 37.8%
Total margin $137.6 $107.4 $ 30.2 28.1%
Operating income $ 88.6 $ 63.3 $ 25.3 40.0%
Natural gas system throughput - bcf 55.7 45.5 10.2 22.4%
Heating degree days - % colder (warmer)
than normal 7.3 (17.8) -- --
ELECTRIC OPERATIONS:
Revenues $ 52.6 $ 42.0 $ 10.6 25.2%
Total margin $ 23.9 $ 15.7 $ 8.2 52.2%
Operating income $ 13.7 $ 5.6 $ 8.1 144.6%
Electric Utility distribution sales - gwh 525.5 476.0 49.5 10.4%
GAS UTILITY. Weather in Gas Utility's service territory was 7.3% colder than
normal during the 2003 six-month period compared to weather that was 17.8%
warmer than normal during the 2002 six-month period. The significantly colder
weather resulted in higher heating-related sales to core-market customers and,
to a lesser extent, greater volumes transported for residential, commercial and
industrial delivery service customers.
Gas Utility revenues increased principally as a result of the greater sales to
core-market customers and higher average PGC rates. Gas Utility cost of gas was
$247.4 million in the 2003 six-month period compared to $172.0 million in the
2002 six-month period principally reflecting the higher core-market volumes sold
and higher core-market PGC rates.
The increase in Gas Utility total margin in the 2003 six-month period
principally reflects a $24.2 million increase in core-market total margin due to
the higher core-market sales and increased margin from greater delivery service
volumes.
The increase in Gas Utility operating income reflects the increase in total
margin and lower depreciation expense partially offset by a $5.5 million
increase in operating and administrative expenses. The higher operating and
administrative expenses reflect, among other things, greater distribution system
maintenance expenses, higher uncollectible accounts expense and increased
incentive compensation expense. Depreciation expense declined $0.9 million due
to the previously mentioned change in the estimated useful lives of Gas
Utility's distribution assets. Other income of $5.7 million in the 2003
six-month period was generally comparable to the prior-year period as higher
non-tariff service income was offset by a decline in pension income and lower
interest income on PGC undercollections.
ELECTRIC OPERATIONS. Electric Utility's 2003 six-month period kilowatt-hour
sales increased principally as a result of weather that was 8.6% colder than
normal compared to weather that was 16.7% warmer than normal in the prior-year
period.
-10-
UGI UTILITIES, INC.
The higher Electric Operations' revenues reflect higher Electric Utility sales
and greater sales of electricity produced by our electric generation assets to
third parties. Notwithstanding the significant increase in Electric Operations'
revenues, cost of sales increased only $2.0 million in the 2003 six-month period
as the impact on cost of sales resulting from the greater distribution and
generation sales was substantially offset by lower Electric Utility per-unit
purchased power costs.
The increase in Electric Operations' total margin principally reflects the
increased Electric Utility sales and lower Electric Utility per-unit purchased
power costs. The increase in operating income reflects the greater total margin
and higher other income partially offset by slightly higher 2003 six-month
period general and administrative expenses.
FINANCIAL CONDITION AND LIQUIDITY
FINANCIAL CONDITION
The Company's long-term debt outstanding at March 31, 2003 totaled $222.3
million (including current maturities of $50.0 million) compared with $248.4
million (including current maturities of $76.0 million) at September 30, 2002.
On October 1, 2002, the Company repaid $26 million of maturing long-term debt.
At March 31, 2003, the Company had commitments under revolving credit agreements
providing for borrowings of up to $97 million. These agreements expire at
various dates from June 2003 through June 2005. The Company currently expects to
renew or replace those agreements expiring in June 2003 prior to their maturity.
At March 31, 2003, the Company had borrowings under these agreements totaling
$17.7 million and an additional $10 million under an uncommitted facility. UGI
Utilities also has a shelf registration statement with the SEC under which it
may issue up to an additional $85 million of debt securities.
CASH FLOWS
The Company's cash flows from operating activities are seasonal and are
generally greatest during the second and third fiscal quarters when customers
pay bills incurred during the heating season and are generally lowest during the
first and fourth fiscal quarters. Accordingly, cash flows from operations for
the six months ended March 31, 2003 are not necessarily indicative of cash flows
to be expected for a full year.
OPERATING ACTIVITIES. Cash provided by operating activities was $69.4 million
during the six months ended March 31, 2003 compared with $20.5 million in the
prior-year six-month period. Cash flow from operating activities before changes
in operating working capital was $60.2 million in the 2003 six-month period
compared to the $50.6 million in the prior-year six-month period reflecting the
significant increase in 2003 six-month period results. Changes in operating
working capital provided $9.3 million of operating cash flow during the six
months ended March 31, 2003 compared with $30.1 million of cash used during the
prior-year six-month period principally reflecting greater cash flow from
changes in Gas Utility deferred fuel overcollections, accounts payable and
accrued income taxes partially offset by the effects of the higher natural gas
volumes sold and higher natural gas commodity prices on customer accounts
receivable.
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UGI UTILITIES, INC.
INVESTING ACTIVITIES. Expenditures for property, plant and equipment were $15.5
million in the 2003 six-month period, slightly higher than the $14.6 million
recorded in the prior-year period. The lower costs on disposals of property,
plant and equipment in the 2003 six-month period reflect lower disposal activity
during the 2003 six-month period.
FINANCING ACTIVITIES. During the 2003 and 2002 six-month periods, we paid
dividends of $14.9 million and $11.0 million, respectively, to UGI. We also paid
dividends of $0.8 million on our redeemable preferred stock in both periods.
During the 2003 six-month period, we repaid $26 million of maturing Medium-Term
Notes. As a result of the improved operating cash flow, we reduced our bank loan
borrowings $9.5 million compared to net borrowings of $1.1 million during the
prior-year period.
UGID TRANSACTIONS
On February 25, 2003, Allegheny Energy Supply Company, LLC ("Allegheny Supply"),
Allegheny Energy Supply Conemaugh, LLC, UGID and UGI entered into an asset
purchase agreement ("Asset Purchase Agreement") pursuant to which UGID will
acquire an additional 83 megawatt ownership interest in the Conemaugh
electricity generation station ("Conemaugh") from Allegheny Supply, a unit of
Allegheny Energy, Inc. ("Allegheny") for approximately $51,300 in cash, subject
to a $3,000 credit. Conemaugh is a 1,711-megawatt, coal-fired electricity
generation station located near Johnstown, Pennsylvania and is owned by a
consortium of energy companies and operated by a unit of Reliant Resources, Inc.
under contract. The purchase will increase UGID's interest in Conemaugh to 102
megawatts (6.0%) from 19 megawatts (1.1%) currently. The transaction, which is
subject to customary closing conditions and regulatory approvals, is expected to
close by the end of June 2003.
On April 29, 2003, the Board of Directors of the Company declared a dividend of
all of the common stock of UGID to UGI. UGID's net assets as of March 31, 2003
comprised approximately seven percent of the Company's consolidated net assets.
The pending investment in Conemaugh by UGID described above is expected to occur
after payment of the dividend of UGID common stock to UGI.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") recently issued Statement of
Financial Accounting Standards ("SFAS") No. 149; "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities ("SFAS 149"); SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146");
and FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others" ("FIN 45").
SFAS 149 amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 149 amends
SFAS 133 for decisions made (1) as part of the FASB's Derivatives Implementation
Group ("DIG") process; (2) in connection with other FASB projects dealing with
financial instruments; and (3) in connection with implementation issues raised
in relation to the application of the definition of a derivative. SFAS 149 is
effective for contracts entered into or modified after June 30, 2003. Based upon
the types of contracts currently entered into by the Company, we do not believe
SFAS 149 will have a material impact on our financial position or results of
operations.
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UGI UTILITIES, INC.
SFAS 146 addresses accounting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force ("EITF") No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity." Generally, SFAS 146 requires that a liability for costs
associated with an exit or disposal activity, including contract termination
costs, employee termination benefits and other associated costs, be recognized
when the liability is incurred. Under EITF No. 94-3, a liability was recognized
at the date an entity committed to an exit plan. SFAS 146 is effective for
disposal activities initiated after December 31, 2002. The initial adoption of
the provisions of SFAS 146 did not affect our financial position or results of
operations.
FIN 45 expands the existing disclosure requirements for certain guarantees and
requires that companies recognize, at the inception of a guarantee, a liability
for the fair value of the obligation undertaken when issuing the guarantee. The
initial recognition and measurement provisions of FIN 45 are effective for
guarantees issued or modified after December 31, 2002. The application of FIN 45
did not have a material effect on our financial position or results of
operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Gas Utility's tariffs contain clauses that permit recovery of substantially all
of the prudently incurred cost of natural gas it sells to its customers. The
recovery clauses provide for a periodic adjustment for the difference between
the total amount actually collected from customers and the recoverable costs
incurred. Because of this ratemaking mechanism, there is limited commodity price
risk associated with our Gas Utility operations.
Prior to September 2002, Electric Utility purchased all of its electric power
needs, in excess of the electric power it obtained from its interests in
electricity generation facilities, under power supply arrangements of various
lengths and on the spot market. Beginning September 2002, Electric Utility began
purchasing its power needs from electricity suppliers under fixed-price energy
and capacity contracts and, to a much lesser extent, on the spot market, and our
electricity generation business began selling its electricity production and
capacity on the spot market to third parties. Prices for electricity can be
volatile especially during periods of high demand or tight supply. Although the
generation component of Electric Utility's rates is subject to various rate cap
provisions, Electric Utility's fixed-price contracts with electricity marketers
mitigate most risks associated with offering customers a fixed price during the
contract periods. However, should any of the suppliers under these contracts
fail to provide electric power under the terms of the power and capacity
contracts, increases, if any, in the cost of replacement power or capacity would
negatively impact Electric Utility results. In order to reduce this
non-performance risk, Electric Utility has diversified its purchases across
several suppliers and entered into bilateral collateral arrangements with
certain of them.
Our variable-rate debt includes borrowings under our revolving credit
agreements. These agreements provide for interest rates on borrowings that are
indexed to short-term market interest rates. Our long-term debt is typically
issued at fixed rates of interest based upon market rates for debt having
similar terms and credit ratings. As these long-term debt issues mature, we
expect to refinance such debt with new debt having an interest rate that is more
or less than the refinanced debt.
In order to reduce interest rate risk associated with near-term issuances of
fixed-rate debt, we may enter into interest rate protection agreements. At March
31, 2003, the fair value of our unsettled interest rate protection agreement,
which has been designated and qualifies as a cash flow hedge, was
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UGI UTILITIES, INC.
a loss of $1.0 million. An adverse change in interest rates on ten-year U.S.
treasury notes of 50 basis points would result in a $1.1 million decrease in the
fair value of this interest rate protection agreement.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation of the effectiveness of the design and operation of the Company's
disclosure controls and procedures was carried out within the 90-day period
prior to the filing of this quarterly report by the Company under the
supervision and with the participation of the Company's management, including
the Chief Executive Officer and Chief Financial Officer. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures have been designed and are
being operated in a manner that provides reasonable assurance that the
information required to be disclosed by the Company in reports filed under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms. 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. Subsequent to the date of
the most recent evaluation of the Company's internal controls, there were no
significant changes in the Company's internal controls or in other factors that
could significantly affect the internal controls, including any corrective
actions with regard to significant deficiencies and material weaknesses.
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UGI UTILITIES, INC.
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits:
10.1 UGI Corporation 1997 Stock Option and Dividend
Equivalent Plan Amended and Restated as of April 29,
2003 is incorporated by reference to Exhibit 10.4 to
UGI's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2003.
10.2 UGI Corporation 2000 Stock Incentive Plan Amended and
Restated as of April 29, 2003 is incorporated by
reference to Exhibit 10.5 to UGI's Quarterly Report
on Form 10-Q for the quarter ended March 31, 2003.
10.3 UGI Corporation 1992 Non-Qualified Stock Option Plan
Amended and Restated as of April 29, 2003 is
incorporated by reference to Exhibit 10.6 to UGI's
Quarterly Report on Form 10-Q for the Quarter ended
March 31, 2003.
10.4 UGI Corporation 2002 Non-Qualified Stock Option Plan
Amended and Restated as of April 29, 2003 is
incorporated by reference to Exhibit 10.7 to UGI's
Quarterly Report on Form 10-Q for the quarter ended
March 31, 2003.
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.
99 Certification by the Chief Executive Officer and
Chief Financial Officer relating to the Registrant's
Report on Form 10-Q for the quarter ended March 31,
2003.
(b) The Company filed the following Current Report on Form 8-K
during the fiscal quarter ended March 31, 2003.
DATE ITEM NUMBER CONTENT
February 26, 2003 5 Press release regarding purchase of
additional electricity generation by
UGI Development Company
-15-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UGI Utilities, Inc.
-------------------
(Registrant)
Date: May 15, 2003 By: /s/ J.C. Barney
--------------------------------
J. C. Barney
Senior Vice President - Finance
(Principal Financial Officer)
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CERTIFICATIONS
I, Robert J. Chaney, certify that:
1. I have reviewed this quarterly report on Form 10-Q of UGI Utilities,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors:
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 15, 2003
Robert J. Chaney
-------------------------------------
Robert J. Chaney
President and Chief Executive Officer
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I, John C. Barney, certify that:
1. I have reviewed this quarterly report on Form 10-Q of UGI Utilities, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors:
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 15, 2003
John C. Barney
-------------------------------------
John C. Barney
Senior Vice President -
Finance and Chief Financial Officer
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UGI UTILITIES, INC. AND SUBSIDIARIES
EXHIBIT INDEX
10.1 UGI Corporation 1997 Stock Option and Dividend Equivalent Plan Amended
and Restated as of April 29, 2003 is incorporated by reference to
Exhibit 10.4 to UGI's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2003.
10.2 UGI Corporation 2000 Stock Incentive Plan Amended and Restated as of
April 29, 2003 is incorporated by reference to Exhibit 10.5 to UGI's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2003.
10.3 UGI Corporation 1992 Non-Qualified Stock Option Plan
Amended and Restated as of April 29, 2003 is incorporated by
reference to Exhibit 10.6 to UGI's Quarterly Report on Form 10-Q for
the Quarter ended March 31, 2003.
10.4 UGI Corporation 2002 Non-Qualified Stock Option Plan Amended and
Restated as of April 29, 2003 is incorporated by reference to Exhibit
10.7 to UGI's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2003.
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
99 Certification by the Chief Executive Officer and the Chief Financial
Officer relating to the Registrant's Report on Form 10-Q for the
quarter ended March 31, 2003.