UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-11071
UGI CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2668356
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
UGI CORPORATION
460 North Gulph Road, King of Prussia, PA
(Address of principal executive offices)
19406
(Zip Code)
(610) 337-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No
At January 31, 2004, there were 42,906,336 shares of UGI Corporation Common
Stock, without par value, outstanding.
UGI CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
PAGES
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 2003,
September 30, 2003 and December 31, 2002 1
Condensed Consolidated Statements of Income for the three
months ended December 31, 2003 and 2002 2
Condensed Consolidated Statements of Cash Flows for the
three months ended December 31, 2003 and 2002 3
Notes to Condensed Consolidated Financial Statements 4 - 15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16 - 24
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24 - 27
Item 4. Controls and Procedures 28
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 29
Signatures 30
-i-
UGI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(Millions of dollars)
December 31, September 30, December 31,
2003 2003 2002
------------ ------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 143.6 $ 142.1 $ 273.9
Short-term investments (at cost, which approximates fair value) 49.9 50.0 -
Accounts receivable (less allowances for doubtful accounts of
$15.5, $14.8 and $13.7, respectively) 361.1 199.2 299.0
Accrued utility revenues 30.6 7.4 27.8
Inventories 148.6 136.6 117.2
Deferred income taxes 18.8 23.5 11.1
Prepaid expenses and other current assets 39.8 28.6 46.3
------------ ------------- -------------
Total current assets 792.4 587.4 775.3
Property, plant and equipment, at cost (less accumulated depreciation
and amortization of $827.6, $805.2 and $743.3, respectively) 1,360.3 1,336.8 1,276.1
Goodwill and excess reorganization value 679.8 671.5 649.5
Intangible assets (less accumulated amortization of
$18.1, $16.4 and $11.4, respectively) 36.3 34.7 25.1
Utility regulatory assets 61.3 60.3 58.3
Other assets 96.9 90.6 86.3
------------ ------------- -------------
Total assets $ 3,027.0 $ 2,781.3 $ 2,870.6
============ ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 65.3 $ 65.0 $ 208.4
Current maturities of UGI Utilities preferred shares subject to
mandatory redemption, without par value 1.0 - -
AmeriGas Propane bank loans 36.0 - 37.0
UGI Utilities bank loans 72.2 40.7 78.3
Other bank loans 18.1 15.9 11.2
Accounts payable 327.2 202.5 254.6
Other current liabilities 230.0 246.2 195.1
------------ ------------- -------------
Total current liabilities 749.8 570.3 784.6
Long-term debt 1,161.6 1,158.5 1,134.9
Deferred income taxes 230.9 223.1 210.4
UGI Utilities preferred shares subject to
mandatory redemption, without par value 19.0 20.0 -
Other noncurrent liabilities 107.3 105.4 94.5
------------ ------------- -------------
Total liabilities 2,268.6 2,077.3 2,224.4
Commitments and contingencies (note 6)
Minority interests in AmeriGas Partners 149.8 134.6 122.9
UGI Utilities preferred shares subject to
mandatory redemption, without par value - - 20.0
Common stockholders' equity:
Common Stock, without par value (authorized - 150,000,000 shares;
issued - 49,798,097 shares) 582.9 582.4 553.9
Retained earnings 117.5 90.9 65.0
Accumulated other comprehensive income 15.6 4.7 11.5
Notes receivable from employees (0.4) (0.4) (3.2)
------------ ------------- -------------
715.6 677.6 627.2
Treasury stock, at cost (107.0) (108.2) (123.9)
------------ ------------- -------------
Total common stockholders' equity 608.6 569.4 503.3
------------ ------------- -------------
Total liabilities and stockholders' equity $ 3,027.0 $ 2,781.3 $ 2,870.6
============ ============= =============
See accompanying notes to condensed consolidated financial statements.
- 1 -
UGI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(Millions of dollars, except per share amounts)
Three Months Ended
December 31,
--------------------
2003 2002
-------- --------
Revenues $ 893.7 $ 739.9
Costs and expenses:
Cost of sales 596.9 453.1
Operating and administrative expenses 163.3 155.4
Utility taxes other than income taxes 3.1 2.9
Depreciation and amortization 27.5 24.2
Other income, net (5.4) (3.1)
-------- --------
785.4 632.5
-------- --------
Operating income 108.3 107.4
Income from equity investees 4.2 1.9
Interest expense (26.7) (28.2)
Minority interests in AmeriGas Partners (22.7) (20.5)
-------- --------
Income before income taxes and subsidiary preferred
stock dividends 63.1 60.6
Income tax expense (24.3) (23.5)
Dividends on UGI Utilities preferred shares subject to mandatory redemption - (0.4)
-------- --------
Net income $ 38.8 $ 36.7
======== ========
Earnings per share - Basic $ 0.91 $ 0.88
======== ========
Earnings per share - Diluted $ 0.88 $ 0.86
======== ========
Average common shares outstanding:
Basic 42.839 41.688
======== ========
Diluted 43.947 42.593
======== ========
Dividends declared per common share $ 0.285 $ 0.275
======== ========
See accompanying notes to condensed consolidated financial statements.
- 2 -
UGI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Millions of dollars)
Three Months Ended
December 31,
------------------
2003 2002
------ ------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 38.8 $ 36.7
Reconcile to net cash provided by operating activities:
Depreciation and amortization 27.5 24.2
Minority interests in AmeriGas Partners 22.7 20.5
Deferred income taxes, net 6.1 1.3
Other, net 6.2 9.8
Net change in:
Accounts receivable and accrued utility revenues (187.2) (169.0)
Inventories (8.3) (7.8)
Deferred fuel costs (8.4) 7.1
Accounts payable 124.1 87.8
Other current assets and liabilities (7.9) (14.6)
------ ------
Net cash provided (used) by operating activities 13.6 (4.0)
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment (24.1) (25.7)
Net proceeds from disposals of assets 4.0 2.1
Acquisitions of businesses, net of cash acquired (33.5) (2.2)
Other, net 0.1 0.3
------ ------
Net cash used by investing activities (53.5) (25.5)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends on UGI Common Stock (12.2) (11.5)
Distributions on AmeriGas Partners publicly held Common Units (15.3) (13.7)
Issuance of long-term debt - 89.1
Repayment of long-term debt (1.4) (27.0)
AmeriGas Propane bank loans increase 36.0 27.0
UGI Utilities bank loans increase 31.5 41.1
Other bank loans increase 1.0 2.0
Issuance of UGI Common Stock 1.7 2.0
------ ------
Net cash provided by financing activities 41.3 109.0
------ ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 0.1 0.1
------ ------
Cash and cash equivalents increase $ 1.5 $ 79.6
====== ======
Cash and cash equivalents:
End of period $143.6 $273.9
Beginning of period 142.1 194.3
------ ------
Increase $ 1.5 $ 79.6
====== ======
See accompanying notes to condensed consolidated financial statements.
- 3 -
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars, except per share amounts)
1. BASIS OF PRESENTATION
UGI Corporation ("UGI") is a holding company that owns and operates
natural gas and electric utility, electricity generation, retail
propane distribution, energy marketing and related businesses in the
United States. Through foreign subsidiaries and joint-venture
affiliates, UGI also distributes propane in Austria, the Czech
Republic, Slovakia, France and China.
Our natural gas and electric distribution utility businesses are
conducted through our wholly owned subsidiary, UGI Utilities, Inc.
("UGI Utilities"). UGI Utilities owns and operates a natural gas
distribution utility ("Gas Utility") in parts of eastern and
southeastern Pennsylvania and an electricity distribution utility
("Electric Utility") in northeastern Pennsylvania. Gas Utility and
Electric Utility are subject to regulation by the Pennsylvania Public
Utility Commission ("PUC").
We conduct a national propane distribution business through AmeriGas
Partners, L.P. ("AmeriGas Partners") and its principal operating
subsidiaries AmeriGas Propane, L.P. ("AmeriGas OLP") and AmeriGas OLP's
subsidiary, AmeriGas Eagle Propane, L.P. ("Eagle OLP"). AmeriGas
Partners, AmeriGas OLP and Eagle OLP are Delaware limited partnerships.
UGI's wholly owned second-tier subsidiary AmeriGas Propane, Inc. (the
"General Partner") serves as the general partner of AmeriGas Partners
and AmeriGas OLP. AmeriGas OLP and Eagle OLP (collectively referred to
as "the Operating Partnerships") comprise the largest retail propane
distribution business in the United States serving residential,
commercial, industrial, motor fuel and agricultural customers from
locations in 46 states. We refer to AmeriGas Partners and its
subsidiaries together as "the Partnership" and the General Partner and
its subsidiaries, including the Partnership, as "AmeriGas Propane." At
December 31, 2003, the General Partner and its wholly owned subsidiary
Petrolane Incorporated ("Petrolane") collectively held a 1% general
partner interest and a 46.4% limited partner interest in AmeriGas
Partners, and effective 47.9% and 47.8% ownership interests in AmeriGas
OLP and Eagle OLP, respectively. Our limited partnership interest in
AmeriGas Partners comprises 24,525,004 Common Units. The remaining
52.6% interest in AmeriGas Partners comprises 27,822,704 publicly held
Common Units representing limited partner interests.
Our wholly owned subsidiary, UGI Enterprises, Inc. ("Enterprises"),
conducts an energy marketing business primarily in the Eastern region
of the United States through its wholly owned subsidiary, UGI Energy
Services, Inc. ("Energy Services"). Energy Services' wholly owned
subsidiary UGI Development Company ("UGID"), and UGID's subsidiaries
and joint-venture affiliate Hunlock Creek Energy Ventures, own and
operate interests in Pennsylvania-based electricity generation assets.
Prior to their transfer to Energy Services in June 2003, UGID and its
subsidiaries were wholly owned subsidiaries of UGI Utilities. Through
other subsidiaries, Enterprises (1) owns and operates a propane
distribution business in Austria, the Czech Republic and Slovakia
("FLAGA"); (2) owns and operates a heating, ventilation,
air-conditioning and refrigeration service business in the Middle
Atlantic states ("HVAC"); and (3) participates in propane joint-venture
businesses in France ("Antargaz") and China.
- 4 -
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Millions of dollars, except per share amounts)
Our condensed consolidated financial statements include the accounts of
UGI and its controlled subsidiary companies, which, except for the
Partnership, are majority owned, and are together referred to as "we"
or "the Company." We eliminate all significant intercompany accounts
and transactions when we consolidate. We report the public's limited
partner interests in the Partnership as minority interests. Entities in
which we own 50 percent or less and in which we exercise significant
influence over operating and financial policies are accounted for by
the equity method.
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 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.
EARNINGS PER COMMON SHARE. On January 28, 2003, UGI's Board of
Directors approved a 3-for-2 split of UGI's Common Stock. On April 1,
2003, UGI issued one additional common share for every two common
shares outstanding to shareholders of record on February 28, 2003.
Average shares outstanding, earnings per share and dividends declared
per share for the three months ended December 31, 2002 have been
restated to reflect the effects of the common stock split.
Basic earnings per share reflect the weighted-average number of common
shares outstanding. Diluted earnings per share include the effects of
dilutive stock options and common stock awards. Shares used in
computing basic and diluted earnings per share are as follows:
Three Months Ended
December 31,
------------------
2003 2002
------ ------
Denominator (millions of shares):
Average common shares
outstanding for basic computation 42.839 41.688
Incremental shares issuable for stock
options and awards 1.108 0.905
------ ------
Average common shares outstanding for
diluted computation 43.947 42.593
------ ------
STOCK-BASED COMPENSATION. As permitted by Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), we apply the provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for
- 5 -
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Millions of dollars, except per share amounts)
Stock Issued to Employees" ("APB 25"), in recording compensation
expense for grants of stock, stock options, and other equity
instruments to employees. We use the intrinsic value method prescribed
by APB 25 for our stock-based employee compensation plans.
We recognized total stock and unit-based compensation expense of $4.1
million and $1.8 million in the three months ended December 31, 2003
and 2002, respectively. If we had determined stock-based compensation
expense under the fair value method prescribed by SFAS 123, net income
and basic and diluted earnings per share for the three months ended
December 31, 2003 and 2002 would have been as follows:
Three Months Ended
December 31,
------------------
2003 2002
------ ------
Net income as reported $ 38.8 $ 36.7
Add: Stock and unit-based employee
compensation expense included in
reported net income, net of related tax effects 2.5 1.1
Deduct: Total stock and unit-based
employee compensation expense
determined under the fair value method
for all awards, net of related tax effects (2.6) (1.3)
------ ------
Pro forma net income $ 38.7 $ 36.5
------ ------
Basic earnings per share:
As reported $ 0.91 $ 0.88
Pro forma $ 0.90 $ 0.88
Diluted earnings per share:
As reported $ 0.88 $ 0.86
Pro forma $ 0.88 $ 0.86
COMPREHENSIVE INCOME. The following table presents the components of
comprehensive income for the three months ended December 31, 2003 and
2002:
Three Months Ended
December 31,
------------------
2003 2002
----- --------
Net income $38.8 $ 36.7
Other comprehensive income 10.9 4.9
Comprehensive income $49.7 $ 41.6
Other comprehensive income principally comprises (1) changes in the
fair value of derivative commodity instruments and interest rate
protection agreements qualifying as hedges and (2) foreign currency
translation adjustments, net of reclassifications to net income.
RECLASSIFICATIONS. We have reclassified certain prior-year period
balances to conform to the current-period presentation.
- 6 -
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Millions of dollars, except per share amounts)
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.
UGI UTILITIES PREFERRED SHARES SUBJECT TO MANDATORY REDEMPTION.
Beginning July 1, 2003, the Company accounts for UGI Utilities
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 UGI
Utilities 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.
2. SEGMENT INFORMATION
Effective October 1, 2003, we realigned our business units in order to
expand the energy management services available to our customers and
strengthen our focus on power marketing. Under the new realignment, the
operating results of UGID are combined with Energy Services rather than
combined with UGI Utilities' Electric Utility. We have restated our
segment data for the three months ended December 31, 2002 to be
consistent with our realigned business segments.
We have organized our business units into five reportable segments
generally based upon products sold, geographic location (domestic or
international) or regulatory environment. Our reportable segments are:
(1) AmeriGas Propane; (2) Gas Utility; (3) Electric Utility; (4) Energy
Services (comprising Energy Services' gas marketing business and UGID's
electricity generation business); and (5) an international propane
segment comprising FLAGA and our international propane equity
investments ("International Propane").
The accounting policies of the five segments disclosed are the same as
those described in the Significant Accounting Policies note contained
in the Company's 2003 Annual Report. We evaluate AmeriGas Propane's
performance principally based upon the Partnership's earnings before
interest expense, income taxes, depreciation and amortization
("Partnership EBITDA"). Although we use Partnership EBITDA to evaluate
AmeriGas Propane's profitability, it 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 of America. The Company's definition of Partnership
EBITDA may be different from that used by other companies. We evaluate
the performance of our Gas Utility, Electric Utility, Energy Services
and International Propane segments principally based upon their income
before income taxes.
- 7 -
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Millions of dollars, except per share amounts)
Three Months Ended December 31, 2003:
Reportable Segments
-------------------------------------------------------------
AmeriGas Gas Electric Energy International Corporate
Total Elims. Propane Utility Utility Services Propane & Other (a)
-------- ------ -------- -------- ---------- ---------- ------------- -----------
Revenues $ 893.7 $ (0.6) $ 460.2 $ 149.3 $ 21.4 $ 232.9 $ 15.8 $ 14.7
======== ====== ======== ======== ========== ========== ============= ===========
Cost of sales $ 596.9 $ - $ 254.5 $ 95.1 $ 10.5 $ 220.6 $ 7.6 $ 8.6
======== ====== ======== ======== ========== ========== ============= ===========
Segment profit:
Operating income $ 108.3 $ - $ 65.6 $ 29.4 $ 4.5 $ 6.3 $ 1.8 $ 0.7
Income from equity investees 4.2 - - - - - 4.2 -
Interest expense (26.7) - (21.1) (4.1) (0.5) - (0.9) (0.1)
Minority interests (22.7) (22.7) - - - - -
-------- ------ -------- -------- ---------- ---------- ------------- -----------
Income before income taxes $ 63.1 $ - $ 21.8 $ 25.3 $ 4.0 $ 6.3 $ 5.1 $ 0.6
======== ====== ======== ======== ========== ========== ============= ===========
Depreciation and amortization $ 27.5 $ - $ 19.7 $ 4.7 $ 0.7 $ 1.0 $ 1.1 $ 0.3
Partnership EBITDA (b) $ 84.6
Segment assets at period end $3027.00 $(46.3) $ 1605.8 $ 781.8 $ 84.8 $ 219.00 $ 182.5 $ 199.4
======== ====== ======== ======== ========== ========== ============= ===========
Investments in equity investees
at period end $ 45.2 $ - $ 2.8 $ - $ - $ 9.4 $ 33.0 $ -
======== ====== ======== ======== ========== ========== ============= ===========
Goodwill and excess reorganization
value at period end $ 679.8 $ - $ 603.9 $ - $ - $ 2.8 $ 67.8 $ 5.3
======== ====== ======== ======== ========== ========== ============= ===========
(a) Corporate & Other results of operations principally comprises UGI
Enterprises' HVAC operations, net expenses of UGI's captive general liability
insurance company and UGI Corporation's unallocated corporate and general
expenses, and interest income. Corporate & Other assets principally comprises
cash and short-term investments.
(b) The following table provides a reconciliation of Partnership EBITDA to
AmeriGas Propane operating income:
Three months ended December 31, 2003
- ------------------------------- -------
Partnership EBITDA $ 84.6
Depreciation and amortization (i) (19.6)
Minority interests (ii) 0.6
Income from equity investees -
------
Operating income $ 65.6
======
(i) Excludes General Partner depreciation and amortization of $0.1 in
the three months ended December 31, 2003.
(ii) Principally represents the General Partner's 1.01% interest in
AmeriGas OLP.
- 8 -
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Millions of dollars, except per share amounts)
2. SEGMENT INFORMATION (CONTINUED)
Three Months Ended December 31, 2002:
Reportable Segments
--------------------------------------------------------------------------
AmeriGas Gas Electric Energy International Corporate
Total Elims. Propane Utility Utility Services Propane & Other (a)
-------- ------- --------- --------- -------- ---------- ------------- -----------
Revenues $ 739.9 $ (0.6) $ 445.0 $ 145.1 $ 21.5 $ 104.9 $ 14.3 $ 9.7
======== ======= ======== ======== ======== ========== ============= ==========
Cost of sales $ 453.1 $ - $ 243.4 $ 88.4 $ 9.9 $ 98.2 $ 8.2 $ 5.0
======== ======= ======== ======== ======== ========== ============= ==========
Segment profit:
Operating income $ 107.4 $ - $ 64.2 $ 33.5 $ 5.6 $ 3.9 $ 0.3 $ (0.1)
Income from equity investees 1.9 - 0.2 - - - 1.7 -
Interest expense (28.2) - (22.7) (3.7) (0.6) - (1.1) (0.1)
Minority interests (20.5) - (20.5) - - - - -
-------- ------- -------- -------- -------- ---------- ------------- ----------
Income before income taxes $ 60.6 $ - $ 21.2 $ 29.8 $ 5.0 $ 3.9 $ 0.9 $ (0.2)
======== ======= ======== ======== ======== ========== ============= ==========
Depreciation and amortization $ 24.2 $ - $ 17.5 $ 4.5 $ 0.8 $ 0.3 $ 0.9 $ 0.2
Partnership EBITDA (b) $ 81.4
Segment assets at period end $2,870.6 $ (36.3) $1,650.1 $ 731.1 $ 88.9 $ 109.5 $ 152.3 $ 175.0
======== ======= ======== ======== ======== ========== ============= ==========
Investments in equity
investees at period end $ 39.3 $ - $ 3.6 $ - $ - $ 10.5 $ 25.2 $ -
======== ======= ======== ======== ======== ========== ============= ==========
Goodwill and excess reorganization
value at period end $ 649.5 $ - $ 590.2 $ - $ - $ - $ 56.6 $ 2.7
======== ======= ======== ======== ======== ========== ============= ==========
(a) Corporate & Other results of operations principally comprises UGI
Enterprises' HVAC operations, net expenses of UGI's captive general liability
insurance company and UGI Corporation's unallocated corporate and general
expenses, and interest income. Corporate & Other assets principally comprises
cash and short-term investments.
(b) The following table provides a reconciliation of Partnership EBITDA to
AmeriGas Propane operating income:
Three months ended December 31, 2002
- ------------------------------- -------
Partnership EBITDA $ 81.4
Depreciation and amortization (17.5)
Minority interests (i) 0.5
Income from equity investees (0.2)
-------
Operating income $ 64.2
=======
(i) Principally respresents the General Partner's 1.01% interest in
AmeriGas OLP.
- 9 -
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Millions of dollars, except per share amounts)
3. INTANGIBLE ASSETS
The Company's intangible assets comprise the following:
December 31, September 30,
2003 2003
------------ -------------
Subject to amortization:
Customer relationships, noncompete
agreements and other $ 54.4 $ 51.1
Accumulated amortization (18.1) (16.4)
------------ -------------
$ 36.3 $ 34.7
------------ -------------
Not subject to amortization:
Goodwill $ 586.5 $ 578.2
Excess reorganization value 93.3 93.3
------------ -------------
$ 679.8 $ 671.5
------------ -------------
The increase in intangible assets during the three months ended
December 31, 2003 principally reflects business acquisitions and, with
respect to goodwill, the effects of foreign currency translation.
Amortization expense of intangible assets was $1.7 million and $0.9
million for the three months ended December 31, 2003 and 2002,
respectively. Our expected aggregate amortization expense of intangible
assets for the next five fiscal years is as follows: Fiscal 2004 - $5.7
million; Fiscal 2005 - $4.8 million; Fiscal 2006 - $4.3 million; Fiscal
2007 - $3.7 million; Fiscal 2008 - $3.3 million.
4. ACQUISITIONS
On October 1, 2003, AmeriGas OLP acquired substantially all of the
retail propane distribution assets and business of Horizon Propane LLC
("Horizon Propane") for total cash consideration of $31.0 million. In
December 2003, AmeriGas OLP paid Horizon a working capital adjustment
of $0.1 million in accordance with the Asset Purchase Agreement. During
its 2003 fiscal year, Horizon Propane sold over 30 million gallons of
propane from ninety locations in twelve states. In addition, AmeriGas
OLP completed two smaller acquisitions of retail propane businesses and
HVAC acquired a heating, ventilation, air-conditioning and
refrigeration business during the three months ended December 31, 2003.
The pro forma effect of all of these transactions is not material.
5. ENERGY SERVICES ACCOUNTS RECEIVABLE SECURITIZATION FACILITY
Energy Services has a $100 million receivables purchase facility
("Receivables Facility") with an issuer of receivables-backed
commercial paper expiring on August 26, 2006, although the Receivables
Facility may terminate prior to such date due to the termination of the
commitments of the Receivables Facility back-up purchasers. Under the
Receivables Facility, Energy Services transfers, on an ongoing basis
and without recourse, its trade accounts receivable to its wholly
owned, special purpose subsidiary, Energy Services Funding Corporation
("ESFC"), which is consolidated for financial statement purposes. ESFC,
in turn, has sold, and subject to certain conditions, may from time to
time sell, an undivided interest in the receivables to a commercial
paper conduit of a major bank. The maximum level of funding available
at any one time from this facility is $100 million. The
- 10 -
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Millions of dollars, except per share amounts)
proceeds of these sales are less than the face amount of the accounts
receivable sold by an amount that approximates the purchaser's
financing cost of issuing its own receivables-backed commercial paper.
ESFC was created and has been structured to isolate its assets from
creditors of Energy Services and its affiliates, including UGI. This
two-step transaction is accounted for as a sale of receivables
following the provisions of SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities."
Energy Services continues to service, administer and collect trade
receivables on behalf of the commercial paper issuer and ESFC.
During the three months ended December 31, 2003 Energy Services sold
trade receivables totaling $217.4 million to ESFC. During the three
months ended December 31, 2003, ESFC sold an aggregate $74 million of
undivided interests in its trade receivables to the commercial paper
conduit. At December 31, 2003, the outstanding balance of ESFC trade
receivables was $47.8 million which amount is net of $22 million in
trade receivables sold to the commercial paper conduit.
In addition, a major bank has committed to issue up to $50 million of
standby letters of credit, secured by cash or marketable securities
("LC Facility"). Energy Services expects to fund the collateral
requirements with borrowings under its Receivables Facility. The LC
Facility expires on September 13, 2004.
6. COMMITMENTS AND CONTINGENCIES
The Partnership has succeeded to certain lease guarantee obligations of
Petrolane relating to Petrolane's divestiture of nonpropane operations
before its 1989 acquisition by QFB Partners. Future lease payments
under these leases total approximately $14.0 million at December 31,
2003. The leases expire through 2010 and some of them are currently in
default. The Partnership has succeeded to the indemnity agreement of
Petrolane by which Texas Eastern Corporation ("Texas Eastern"), a prior
owner of Petrolane, agreed to indemnify Petrolane against any
liabilities arising out of the conduct of businesses that do not relate
to, and are not a part of, the propane business, including lease
guarantees. In December 1999, Texas Eastern filed for dissolution under
the Delaware General Corporation Law. In May 2001, Petrolane filed a
declaratory judgment action in the Delaware Chancery Court seeking
confirmation of Texas Eastern's indemnification obligations and
judicial supervision of Texas Eastern's dissolution to ensure that its
indemnification obligations to Petrolane are paid or adequately
provided for in accordance with law. Those proceedings are pending.
Pursuant to a Liquidation and Winding Up Agreement dated September 17,
2002, PanEnergy Corporation ("PanEnergy"), Texas Eastern's sole
stockholder, assumed all of Texas Eastern's liabilities as of December
20, 2002, to the extent of the value of Texas Eastern's assets
transferred to PanEnergy as of that date (which was estimated to exceed
$94 million), and to the extent that such liabilities arise within ten
years from Texas Eastern's date of dissolution. Notwithstanding the
dissolution proceeding, and based on Texas Eastern previously having
satisfied directly defaulted lease obligations without the
Partnership's having to honor its guarantee, we believe that the
probability that the Partnership will be required to directly satisfy
the lease obligations subject to the indemnification agreement is
remote.
- 11 -
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Millions of dollars, except per share amounts)
On August 21, 2001, AmeriGas Partners, through AmeriGas OLP, acquired
the propane distribution businesses of Columbia Energy Group (the "2001
Acquisition") pursuant to the terms of a purchase agreement (the "2001
Acquisition Agreement") by and among Columbia Energy Group ("CEG"),
Columbia Propane Corporation ("Columbia Propane"), Columbia Propane,
L.P. ("CPLP"), CP Holdings, Inc. ("CPH," and together with Columbia
Propane and CPLP, the "Company Parties"), AmeriGas Partners, AmeriGas
OLP and the General Partner (together with AmeriGas Partners and
AmeriGas OLP, the "Buyer Parties"). As a result of the 2001
Acquisition, AmeriGas OLP acquired all of the stock of Columbia Propane
and CPH and substantially all of the partnership interests of CPLP.
Under the terms of an earlier acquisition agreement (the "1999
Acquisition Agreement"), the Company Parties agreed to indemnify the
former general partners of National Propane Partners, L.P. (a
predecessor company of the Columbia Propane businesses) and an
affiliate (collectively, "National General Partners") against certain
income tax and other losses that they may sustain as a result of the
1999 acquisition by CPLP of National Propane Partners, L.P. (the "1999
Acquisition") or the operation of the business after the 1999
Acquisition ("National Claims"). At December 31, 2003, the potential
amount payable under this indemnity by the Company Parties was
approximately $64.0 million. These indemnity obligations will expire on
the date that CPH acquires the remaining outstanding partnership
interest of CPLP, which is expected to occur on or after July 19, 2009.
Under the terms of the 2001 Acquisition Agreement, CEG agreed to
indemnify the Buyer Parties and the Company Parties against any losses
that they sustain under the 1999 Acquisition Agreement and related
agreements ("Losses"), including National Claims, to the extent such
claims are based on acts or omissions of CEG or the Company Parties
prior to the 2001 Acquisition. The Buyer Parties agreed to indemnify
CEG against Losses, including National Claims, to the extent such
claims are based on acts or omissions of the Buyer Parties or the
Company Parties after the 2001 Acquisition. CEG and the Buyer Parties
have agreed to apportion certain losses resulting from National Claims
to the extent such losses result from the 2001 Acquisition itself.
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
- 12 -
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Millions of dollars, except per share amounts)
environmental remediation. UGI Utilities is currently litigating three
claims against it relating to out-of-state sites.
Management believes that under applicable law UGI Utilities should not
be liable in those instances in which a former subsidiary owned or
operated an MGP. There could be, however, significant future costs of
an uncertain amount associated with environmental damage caused by MGPs
outside Pennsylvania that UGI Utilities directly operated, or that were
owned or operated by former subsidiaries of UGI Utilities, if a court
were to conclude that (1) the subsidiary's separate corporate form
should be disregarded or (2) UGI Utilities should be considered to have
been an operator because of its conduct with respect to its
subsidiary's MGP.
In addition to these matters, there are other pending claims and legal
actions arising in the normal course of our businesses. We cannot
predict with certainty the final results of environmental and other
matters. However, it is reasonably possible that some of them could be
resolved unfavorably to us. Although we currently believe, after
consultation with counsel, that damages or settlements, if any,
recovered by the plaintiffs in such claims or actions will not have a
material adverse effect on our financial position, damages or
settlements could be material to our operating results or cash flows in
future periods depending on the nature and timing of future
developments with respect to these matters and the amounts of future
operating results and cash flows.
7. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2003, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 132 (revised 2003), "Employers' Disclosures about
Pensions and Other Postretirement Benefits" ("SFAS 132"). SFAS 132
revises the disclosure requirements about pension plans and other
postretirement benefit plans, but does not change the measurement or
recognition of those plans required by FASB Statements No. 87,
"Employers' Accounting for Pensions," No. 88, "Employers' Accounting
for Settlements and Curtailments of Defined Benefit Pension Plans and
for Termination Benefits," and No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." SFAS 132 requires
additional disclosures concerning, among other things, the measurement
date used to determine pension and other postretirement benefit
measurements, plan assets, accumulated benefit obligations, cash flows
and net periodic benefit costs as well as disclosure in interim
financial statements of net periodic benefit costs, and employer's
contributions paid and expected to be paid during the fiscal year (if
amounts are significantly different from those previously disclosed in
the annual financial statements). SFAS 132 is effective for fiscal
years ending after December 15, 2003, and for quarters beginning after
December 15, 2003. As required by SFAS 132, the Company will provide
supplemental disclosures in its interim financial statements for the
quarter ended March 31, 2004.
In January 2003, the FASB issued Financial Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46"), which
clarifies Accounting Research Bulletin No. 51, "Consolidated Financial
Statements." FIN 46 is effective immediately for variable interest
entities created or obtained after January 31, 2003. For variable
interests created or acquired before February 1, 2003, FIN 46 is
effective for the first fiscal or interim period beginning
- 13 -
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Millions of dollars, except per share amounts)
after December 15, 2003. If certain conditions are met, FIN 46 requires
the primary beneficiary to consolidate certain variable interest
entities in which the other equity investors lack the essential
characteristics of a controlling financial interest or their investment
at risk is not sufficient to permit the variable interest entity to
finance its activities without additional subordinated financial
support from other parties. The Company has not created or obtained any
variable interest entities after January 31, 2003. In December 2003,
the FASB issued a revision to FIN 46 which addresses new effective
dates and certain implementation issues. Among these issues is the
addition of a scope exception for certain entities that meet the
definition of a business provided certain criteria are met. The Company
is currently in the process of evaluating the impact of FIN 46, as
revised, which is not expected to have a material effect 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 UGI Utilities retirees and a limited number of active
employees meeting certain age and service requirements. These
postretirement benefits include certain retiree prescription drug
benefits. Pursuant to orders issued by the PUC, UGI Utilities has
established a Voluntary Employees' Beneficiary Association ("VEBA")
trust to pay retiree health care and life insurance benefits and to
fund the UGI Utilities' postretirement benefit liability. UGI Utilities
is required to fund its postretirement benefit obligations by
depositing into the VEBA the annual amount of postretirement benefit
costs determined under SFAS No. 106, "Employers Accounting for
Postretirement Benefits Other than Pensions." The difference between
the annual amount calculated and the amount in UGI Utilities' rates is
deferred for future recovery from, or refund to, ratepayers.
The Company is currently in the process of evaluating the effects of
the Act on the benefits it provides to its retirees and whether or not
it is appropriate to amend certain provisions of the retiree health
care program in response to the Act. Due to inherent uncertainties
regarding the direct effects of the Act, the effects of the Act on
retiree's behavior with respect to prescription drug benefits, pending
authoritative guidance on how actuarial equivalency in order to qualify
for the federal subsidy is measured, and how the federal subsidy will
be reflected under accounting principles generally accepted in the
United States of America, we have elected to defer recognizing the
effects of the Act in accounting for these benefits and in providing
disclosures until authoritative guidance on the accounting for the
federal subsidy is issued, in accordance with FASB Staff Position No.
FAS 106-1, "Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003."
Authoritative guidance, when issued, could require us to change the
amount of postretirement benefit costs we are currently recording.
However, under the current ratemaking described above, any increases or
decreases in postretirement benefit costs resulting from the Act will
not affect our reported results. In addition, because of the limited
- 14 -
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Millions of dollars, except per share amounts)
number of participants in the program and the current level of
postretirement benefits, we do not believe the Act will have a material
effect on the Company's cash flows.
- 15 -
UGI CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ANALYSIS OF RESULTS OF OPERATIONS
The following analyses compare our results of operations for the three months
ended December 31, 2003 ("2003 three-month period") with the three months ended
December 31, 2002 ("2002 three-month period"). Effective October 1, 2003, our
Energy Services segment includes the operating results of Energy Services' gas
marketing business as well as UGID's electricity generation business. Energy
Services' segment presentation for the 2002 three-month period has been restated
to conform to the current period presentation. 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
<Table>
<Caption>
Three months ended December 31, 2003 2002
- -------------------------------------------------------------------------------------
(millions of dollars)
Net income (loss):
AmeriGas Propane (a) $12.9 $12.7
Gas Utility 15.2 17.6
Electric Utility 2.4 2.9
Energy Services (b) 3.7 2.3
International Propane 4.8 1.2
Corporate & Other (0.2) --
------ -----
Total net income $38.8 $36.7
====== =====
- --------------------------------------------------------------------------------------
</Table>
(a) Amounts are net of minority interests in AmeriGas Partners, L.P.
(b) Effective October 1, 2003, the Energy Services segment includes the
operating results of Energy Services' gas marketing business as well as UGID's
electricity generation business. Energy Services' segment presentation for the
2002 three-month period has been restated to conform to the current period
presentation.
Net income for the 2003 three-month period was higher than in the 2002
three-month period notwithstanding the adverse effects of the warmer than
normal weather experienced by all of our business units. The beneficial effects
of our acquisitions in gas marketing, electric generation and domestic propane
distribution, along with improvements in our international propane results more
than offset the weather-induced decline in results from our utility businesses.
- 16 -
UGI CORPORATION AND SUBSIDIARIES
2003 THREE-MONTH PERIOD COMPARED WITH 2002 THREE-MONTH PERIOD
Increase
Three months ended December 31, 2003 2002 (Decrease)
- ------------------------------- -------- --------- -------------------
(Millions of dollars)
AMERIGAS PROPANE:
Revenues $ 460.2 $ 445.0 $ 15.2 3.4%
Total margin (a) $ 205.7 $ 201.6 $ 4.1 2.0%
Partnership EBITDA (b) $ 84.6 $ 81.4 $ 3.2 3.9%
Operating income $ 65.6 $ 64.2 $ 1.4 2.2%
Retail gallons sold (millions) (c) 304.5 324.2 (19.7) (6.1)%
Degree days - % colder (warmer)
than normal (d) (7.4)% 1.1% - -
GAS UTILITY:
Revenues $ 149.3 $ 145.1 $ 4.2 2.9%
Total margin (a) $ 54.2 $ 56.7 $ (2.5) (4.4)%
Operating income $ 29.4 $ 33.5 $ (4.1) (12.2)%
Income before income taxes $ 25.3 $ 29.8 $ (4.5) (15.1)%
System throughput -
billions of cubic feet ("bcf") 23.3 23.3 - -
Degree days - % colder (warmer)
than normal (3.8)% 6.4% - -
ELECTRIC UTILITY (e):
Revenues $ 21.4 $ 21.5 $ (0.1) (0.5)%
Total margin (a) $ 9.7 $ 10.4 $ (0.7) (6.7)%
Operating income $ 4.5 $ 5.6 $ (1.1) (19.6)%
Income before income taxes $ 4.0 $ 5.0 $ (1.0) (20.0)%
Distribution sales - millions of
kilowatt hours ("gwh") 243.5 244.4 (0.9) (0.4)%
ENERGY SERVICES (e):
Revenues $ 232.9 $ 104.9 $ 128.0 122.0%
Total margin (a) $ 12.3 $ 6.7 $ 5.6 83.6%
Income before income taxes $ 6.3 $ 3.9 $ 2.4 61.5%
INTERNATIONAL PROPANE:
Revenues $ 15.8 $ 14.3 $ 1.5 10.5%
Total margin (a) $ 8.2 $ 6.1 $ 2.1 34.4%
Operating income $ 1.8 $ 0.3 $ 1.5 500.0%
Income from equity investees $ 4.2 $ 1.7 $ 2.5 147.1%
Income before income taxes $ 5.1 $ 0.9 $ 4.2 466.7%
(a) Total margin represents total revenues less total cost of sales and,
with respect to Electric Utility, revenue-related taxes, i.e. Electric
Utility gross receipts taxes, of $1.2 million in each of the
three-month periods ended December 31, 2003 and 2002. For financial
statement purposes, revenue-related taxes are included in "Utility
taxes other than income taxes" on the Condensed Consolidated Statements
of Income.
(b) Partnership EBITDA (earnings before interest expense, income taxes and
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 of America. Management uses Partnership EBITDA as the
primary measure of segment profitability for the AmeriGas Propane
segment (see Note 2 to the Condensed Consolidated Financial
Statements).
- 17 -
UGI CORPORATION AND SUBSIDIARIES
(c) Retail gallons sold in the 2003 three-month period include certain bulk
gallons previously considered wholesale gallons. Prior-period gallon
amounts have been adjusted to conform to the current period
classification.
(d) Deviation from average heating degree days based upon national weather
statistics provided by the National Oceanic and Atmospheric
Administration ("NOAA") for 335 airports in the United States,
excluding Alaska.
(e) Effective October 1, 2003, we realigned our business units in order to
expand the energy management services available to our customers and
strengthen our focus on power marketing. Under the new realignment, the
operating results of UGID's electricity generation business are
combined with Energy Services rather than combined with UGI Utilities'
Electric Utility (see Note 2 to the Condensed Consolidated Financial
Statements).
AMERIGAS PROPANE. Weather based upon heating degree days was 7.4% warmer than
normal during the 2003 three-month period compared to weather that was 1.1%
colder than normal in the prior-year three-month period. Retail propane volumes
sold decreased 19.7 million gallons or 6.1% in the 2003 three-month period due
principally to the effects of the warmer weather, and with respect to commercial
and industrial customers, continuing economic weakness partially offset by
volume growth from recent acquisitions, principally the October 1, 2003
acquisition of Horizon Propane. Low margin wholesale volumes decreased 38.7
million gallons primarily reflecting the effects of product cost hedging
activities.
Retail propane revenues increased $26.1 million reflecting (1) a $48.8 million
increase due to higher average selling prices and (2) a $22.7 million decrease
due to the lower retail volumes sold. Wholesale propane revenues decreased $13.4
million reflecting (1) a $19.6 million decrease due to the lower volumes sold
and (2) a $6.2 million increase due to higher average selling prices. The higher
retail and wholesale selling prices reflect significantly higher propane product
costs during the 2003 three-month period resulting from, among other things,
higher crude oil and natural gas prices. Other revenues from ancillary sales and
services were $36.9 million in the 2003 three-month period and $34.4 million in
the 2002 three-month period. Total cost of sales increased $11.1 million
reflecting the higher propane product costs.
Total margin increased $4.1 million as a result of recent acquisitions and
higher average retail and wholesale propane unit margins on the reduced gallons
sold during the 2003 three-month period, and a $2.2 million increase in margin
from ancillary sales and services. Notwithstanding the previously mentioned
increase in the commodity price of propane, retail and wholesale propane unit
margins were higher than in the 2002 three-month period reflecting the effects
of the higher average selling prices.
Partnership EBITDA increased $3.2 million in the 2003 three-month period
reflecting the previously mentioned increase in total margin and a $2.0 million
increase in other income partially offset by a $2.8 million increase in
Partnership operating and administrative expenses. Operating and administrative
expenses increased principally from the impact of Horizon Propane and other
recent acquisitions partially offset by the beneficial effects on operating
expenses from the management realignment completed in late Fiscal 2003. Other
income in the 2003 three-month period includes greater income from finance
charges and asset sales while other income in the prior year three-month period
was reduced by a $1.0 million charge associated with the adoption of SFAS No.
143, "Accounting for Asset Retirement Obligations." Operating income in the 2003
three-month period increased less than the increase in Partnership EBITDA due to
higher depreciation expense associated with the Partnership's Prefilled Propane
Xchange program ("PPX(R)").
GAS UTILITY. Weather in Gas Utility's service territory during the 2003
three-month period was 3.8% warmer than normal compared with weather that was
6.4% colder than normal in the 2002 three-month period. Total distribution
system throughput was unchanged as lower sales to firm- residential, commercial
and industrial ("retail core-market") customers, resulting from warmer weather,
were offset
- 18 -
UGI CORPORATION AND SUBSIDIARIES
by greater sales to firm delivery service customers and year-over-year customer
growth. The increase in Gas Utility revenues during the 2003 three-month period
reflects a $12.5 million increase in revenues from off-system sales partially
offset by lower revenues from retail core-market customers resulting from the
lower volumes sold. Gas Utility cost of gas was $95.1 million in the 2003
three-month period compared to $88.4 million in the 2002 three-month period
reflecting increased cost of gas associated with the higher off-system sales
reduced by lower retail core-market gas costs as a result of the lower volume
sold.
The decline in Gas Utility total margin reflects a $2.0 million decline in
retail core-market margin resulting from lower retail core-market sales and
lower margin from interruptible customers.
Gas Utility operating income declined $4.1 million in the 2003 three-month
period reflecting the previously mentioned decline in total margin, an increase
in operating and administrative expenses and slightly higher depreciation and
amortization expense. Operating and administrative expenses increased $1.7
million principally reflecting greater compensation and benefits expense due in
large part to higher stock-based incentive compensation costs. The decrease in
Gas Utility income before income taxes reflects the decline in operating income
and higher interest expense due to including dividends paid on preferred shares
subject to mandatory redemption as a component of interest expense in accordance
with SFAS 150.
ELECTRIC UTILITY. Electric Utility's 2003 three-month period kilowatt-hour sales
were slightly lower reflecting the effects on heating-related sales of weather
that was warmer than in the prior-year period. Temperatures based upon heating
degree days in the 2003 three-month period were approximately 1.7% warmer than
normal compared with temperatures that were approximately 9.5% colder than
normal in the comparable prior-year period. The decline in Electric Utility
revenues reflects the effects of the slightly lower kilowatt-hour sales.
Electric Utility's cost of sales increased $0.6 million reflecting higher
purchased power costs.
Electric Utility total margin in the 2003 three-month period declined $0.7
million principally because Electric Utility's cost of sales in the prior year
benefited from transmission system congestion credits. Operating income and
income before income taxes were lower in the 2003 three-month period principally
reflecting the decline in total margin and higher operating and administrative
expenses reflecting greater distribution system and stock-based incentive
compensation expenses.
ENERGY SERVICES. The increase in Energy Services revenues in the 2003
three-month period resulted primarily from a more than 70% increase in natural
gas volumes sold due in large part to the March 2003 acquisition of the
northeastern U.S. gas marketing business of TXU Energy Retail Company, L.P., a
subsidiary of TXU Energy (the "TXU Energy Acquisition"), and to a lesser extent
customer growth and the effects of UGID's June 2003 purchase of an additional
4.9% (83 megawatt) interest in the Conemaugh electricity generation station
("Conemaugh"). Notwithstanding the significant increase in natural gas volumes
sold, total margin from Energy Services' gas marketing business increased only
$0.9 million in the 2003 three-month period principally due to lower average
unit margins reflecting a greater proportion of annual fixed-price customer
contracts. Under these contracts, customers pay an average fixed price for the
natural gas they purchase throughout the year. Although the unit margin and the
total margin to be earned over the term of these contracts is fixed, margin
realization is seasonal because gas costs are higher, and unit margins lower,
during the peak heating season months of late fall and winter, while gas costs
are lower, and unit margins higher, during the late spring and summer months.
Total margin from UGID's electricity generation business increased $4.7 million
reflecting the additional interest in Conemaugh.
The increase in Energy Services income before income taxes principally reflects
the previously mentioned increase in total margin partially offset by higher
operating expenses resulting from our
- 19 -
UGI CORPORATION AND SUBSIDIARIES
purchase of the additional interest in Conemaugh and the TXU Energy Acquisition,
and higher uncollectible accounts expenses.
INTERNATIONAL PROPANE. FLAGA's revenues increased $1.5 million, notwithstanding
a 2% decline in volumes sold, primarily reflecting the currency translation
effects of a stronger euro and, to a lesser extent, higher average selling
prices. Volumes were lower in the 2003 three-month period principally due to the
loss of a high-volume, low unit margin customer and, to a lesser extent,
increased competition. The increase in the 2003 three-month period total margin
reflects the translation effects of the stronger euro and higher base-currency
total margin. The increase in FLAGA operating income is substantially the result
of higher base-currency total margin, lower base-currency operating and
administrative expenses, and the translation effects of the stronger euro.
The increase in the 2003 three-month period earnings from our equity investees
is principally the result of higher income from AGZ Holding, the parent company
of Antargaz, reflecting favorable base-currency results and the effects of the
stronger euro. Antargaz' total margin increased due to greater retail propane
gallons sold to residential heating customers as a result of weather that was
approximately 16% colder than the prior-year period offset by reduced sales to
high-volume, low unit margin customers. In addition, the 2003 three-month period
benefited from declines in propane product costs. The increase in International
Propane income before income taxes reflects the combined increase in FLAGA
operating income and in our income from equity investees and slightly lower
interest expense.
FINANCIAL CONDITION
Our cash, cash equivalents and short-term investments totaled $193.5 million at
December 31, 2003 compared with $192.1 million at September 30, 2003. These
amounts include $130.3 million and $116.3 million, respectively, of cash, cash
equivalents and short-term investments held by UGI.
The Company's long-term debt outstanding at December 31, 2003 totaled $1,226.9
million (including current maturities of $65.3 million) compared to $1,223.5
million of long-term debt (including current maturities of $65.0 million) at
September 30, 2003. AmeriGas Partners expects to refinance all or a portion of
the $53.8 million of principal on the AmeriGas OLP First Mortgage Notes due in
April 2004.
AmeriGas OLP's Credit Agreement expires on October 15, 2006 and consists of (1)
a $100 million Revolving Credit Facility and (2) a $75 million Acquisition
Facility. The Revolving Credit Facility may be used for working capital and
general purposes of AmeriGas OLP. The Acquisition Facility provides AmeriGas OLP
with the ability to borrow up to $75 million to finance the purchase of propane
businesses or propane business assets or, to the extent it is not so used, may
be used for working capital and general purposes. Issued and outstanding letters
of credit under the Revolving Credit Facility, which reduce the amount available
for borrowings, totaled $38.0 million at December 31, 2003. AmeriGas OLP's
short-term borrowing needs are seasonal and are typically greatest during the
fall and winter heating-season months due to the need to fund higher levels of
working capital.
AmeriGas Partners periodically issues debt and equity securities and expects to
continue to do so. It has effective debt and equity shelf registration
statements with the SEC under which it may issue up to an additional (1) $28
million principal amount of 8.875% Senior Notes due 2011, (2) 1.4 million
AmeriGas Partners Common Units and (3) up to $500 million of debt or equity
securities pursuant to an unallocated shelf registration statement.
UGI Utilities has revolving credit commitments under which it may borrow up to a
total of $107 million. These agreements expire in June 2005 and 2006. At
December 31, 2003, UGI Utilities had $52.2
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UGI CORPORATION AND SUBSIDIARIES
million in borrowings outstanding under these revolving credit agreements. In
addition, UGI Utilities has an uncommitted arrangement with a major bank under
which it may borrow up to $20 million. At December 31, 2003, there was $20
million outstanding under this agreement which amount matures March 9, 2004. UGI
Utilities also has a shelf registration statement with the SEC under which it
may issue up to an additional $40 million of Medium-Term Notes or other debt
securities.
Energy Services has a $100 million receivables purchase facility ("Receivables
Facility") with an issuer of receivables-backed commercial paper expiring on
August 26, 2006, although the Receivables Facility may terminate prior to such
date due to the termination of the commitments of the Receivables Facility
back-up purchasers. Under the Receivables Facility, Energy Services transfers,
on an ongoing basis and without recourse, its trade accounts receivable to its
wholly owned, special purpose subsidiary, Energy Services Funding Corporation
("ESFC"), which is consolidated for financial statement purposes. ESFC, in turn,
has sold, and subject to certain conditions, may from time to time sell, an
undivided interest in the receivables to a commercial paper conduit of a major
bank. The maximum level of funding available at any one time from this facility
is $100 million. The proceeds of these sales are less than the face amount of
the accounts receivable sold by an amount that approximates the purchaser's
financing cost of issuing its own receivables-backed commercial paper. ESFC was
created and has been structured to isolate its assets from creditors of Energy
Services and its affiliates, including UGI. This two-step transaction is
accounted for as a sale of receivables following the provisions of SFAS No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." Energy Services continues to service, administer and collect
trade receivables on behalf of the commercial paper issuer and ESFC. At December
31, 2003, the outstanding balance of ESFC receivables was $47.8 million which
amount is net of $22 million in trade receivables sold to the commercial paper
conduit.
In addition, a major bank has committed to issue up to $50 million of standby
letters of credit, secured by cash or marketable securities ("LC Facility").
Energy Services expects to fund the collateral requirements with borrowings
under its Receivables Facility. The LC Facility expires on September 13, 2004.
CASH FLOWS
OPERATING ACTIVITIES. Due to the seasonal nature of the Company's businesses,
cash flows from operating activities are generally strongest during the second
and third fiscal quarters when customers pay for natural gas, propane and
electricity consumed during the 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
inventories and accounts receivable, is generally greatest. The Company's major
business units use revolving credit facilities, or in the case of Energy
Services its Receivables Facility, to satisfy their seasonal operating cash flow
needs. Cash flow from operating activities was $13.6 million in the 2003
three-month period compared to cash used by operating activities of $4.0 million
in the 2002 three-month period. Cash flow from operating activities before
changes in operating working capital was $101.3 million in the 2003 three-month
period compared with $92.5 million in the prior-year three-month period. Changes
in operating working capital used $87.7 million of cash in the 2003 three-month
period and $96.5 million of cash in the 2002 three-month period. The increase in
cash flows from operating activities principally reflects greater operating cash
flow from AmeriGas Propane.
INVESTING ACTIVITIES. Cash flow used in investing activities was $53.5 million
in the 2003 three-month period compared to $25.5 million cash used in the
prior-year period. Investing activity cash flow is principally affected by
capital expenditures and investments in property, plant and equipment, cash paid
for acquisitions of businesses, investments in and distributions from our equity
investees, and proceeds from sales of assets. During the 2003 three-month
period, we spent $24.1 million for property, plant and
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UGI CORPORATION AND SUBSIDIARIES
equipment, a decrease from the 2002 three-month period, principally reflecting
lower AmeriGas Propane and FLAGA capital expenditures. Cash paid for business
acquisitions in the 2003 three-month period principally reflects the
Partnership's acquisition of Horizon Propane.
FINANCING ACTIVITIES. Cash flow provided by financing activities was
$41.3 million in the 2003 three-month period and $109.0 million in the 2002
three-month period. Financing activity cash flow changes are primarily due to
issuances and repayments of long-term debt, net borrowings under revolving
credit facilities, dividends and distributions on UGI Common Stock and AmeriGas
Partners Common Units, and proceeds from public offerings of AmeriGas Partners
Common Units and issuances of UGI common stock. The increases during the
quarter in AmeriGas Propane and UGI Utilities bank loans reflects their
seasonal cash flow needs.
We paid cash dividends on UGI Common Stock of $12.2 million and $11.5
million during the three months ended December 31, 2003 and 2002, respectively.
Also, the Partnership paid the minimum quarterly distribution of $0.55 (the
"MQD") on all limited partner units during both of the three-month periods
ended December 31, 2003 and 2002.
UGI UTILITIES PREFERRED SHARES SUBJECT TO MANDATORY REDEMPTION
Beginning July 1, 2003, the Company accounts for UGI Utilities 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 UGI Utilities 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.
PROPOSED PURCHASE OF REMAINING OUTSTANDING OWNERSHIP INTERESTS IN AGZ HOLDING
In January 2004, the Company announced that one of its subsidiaries communicated
its offer to purchase the remaining outstanding 80.5% ownership interests of AGZ
Holding, the parent company of Antargaz, for approximately 257 million euros
("Proposed AGZ Holding Acquisition"). Antargaz is one of the four largest retail
liquefied petroleum gas (LPG) distributors in France, delivering approximately
350 million gallons of propane and butane to over 220,000 customers nationwide.
The prospective sellers are PAI Partners, a leading Private Equity Fund Manager
and the majority owner, Medit Mediterranea GPL, a privately-held Italian
company, and members of Antargaz management. The proposed transaction was
presented to the Works Council of Antargaz, the labor representative body for
Antargaz, as required by French law and received a favorable opinion. The
parties intend to consummate the proposed transaction effective April 1, 2004.
In addition, UGI filed a registration statement in January 2004 with the SEC for
the sale of up to 8,165,000 shares of UGI Common Stock to fund a portion of the
purchase price for the Proposed AGZ Holding Acquisition. The balance of the
purchase price of approximately $100 million will be funded from existing cash
at UGI.
UGI COMMON DIVIDEND INCREASE
On January 27, 2004, UGI's Board of Directors declared a quarterly dividend on
UGI Common Stock of $0.2850 per share payable on April 1, 2004 to shareholders
of record on February 27, 2004. UGI also announced its intention to increase the
annual dividend rate to $1.25 per share, or $0.3125 per share on a quarterly
basis, from $1.14 per share, or $0.2850 per share on a quarterly basis,
effective with the regularly scheduled July dividend payment, assuming the
closing of the previously mentioned Proposed AGZ Holding Acquisition.
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UGI CORPORATION AND SUBSIDIARIES
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2003, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 132 (revised 2003), "Employers' Disclosures about Pensions and Other
Postretirement Benefits" ("SFAS 132"). SFAS 132 revises the disclosure
requirements about pension plans and other postretirement benefit plans, but
does not change the measurement or recognition of those plans required by FASB
Statements No. 87, "Employers' Accounting for Pensions," No. 88, "Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and
for Termination Benefits," and No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." SFAS 132 requires additional
disclosures concerning, among other things, the measurement date used to
determine pension and other postretirement benefit measurements, plan assets,
accumulated benefit obligations, cash flows and net periodic benefit costs as
well as disclosure in interim financial statements of net periodic benefit
costs, and employer's contributions paid and expected to be paid during the
fiscal year (if amounts are significantly different from those previously
disclosed in the annual financial statements). SFAS 132 is effective for fiscal
years ending after December 15, 2003, and for quarters beginning after December
15, 2003. As required by SFAS 132, the Company will provide supplemental
disclosures in its interim financial statements for the quarter ended March 31,
2004.
In January 2003, the FASB issued Financial Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("FIN 46"), which clarifies Accounting Research
Bulletin No. 51, "Consolidated Financial Statements." FIN 46 is effective
immediately for variable interest entities created or obtained after January 31,
2003. For variable interests created or acquired before February 1, 2003, FIN 46
is effective for the first fiscal or interim period beginning after December 15,
2003. If certain conditions are met, FIN 46 requires the primary beneficiary to
consolidate certain variable interest entities in which the other equity
investors lack the essential characteristics of a controlling financial interest
or their investment at risk is not sufficient to permit the variable interest
entity to finance its activities without additional subordinated financial
support from other parties. The Company has not created or obtained any variable
interest entities after January 31, 2003. In December 2003, the FASB issued a
revision to FIN 46 which addresses new effective dates and certain
implementation issues. Among these issues is the addition of a scope exception
for certain entities that meet the definition of a business provided certain
criteria are met. The Company is currently in the process of evaluating the
impact of FIN 46, as revised, which is not expected to have a material effect 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 UGI Utilities retirees and a limited number of active employees meeting
certain age and service requirements. These postretirement benefits include
certain retiree prescription drug benefits. Pursuant to orders issued by the
Pennsylvania Public Utility Commission ("PUC"), UGI Utilities has established a
Voluntary Employees' Beneficiary Association ("VEBA") trust to pay retiree
health care and life insurance benefits and to fund the UGI Utilities'
postretirement benefit liability. UGI Utilities is required to fund its
postretirement benefit obligations by depositing into the VEBA the annual amount
of postretirement benefit costs determined under SFAS No. 106, "Employers
Accounting for Postretirement Benefits Other than Pensions." The difference
between the annual amount calculated and the amount in UGI Utilities' rates is
deferred for future recovery from, or refund to, ratepayers.
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UGI CORPORATION AND SUBSIDIARIES
The Company is currently in the process of evaluating the effects of the Act on
the benefits it provides to its retirees and whether or not it is appropriate to
amend certain provisions of the retiree health care program in response to the
Act. Due to inherent uncertainties regarding the direct effects of the Act, the
effects of the Act on retiree's behavior with respect to prescription drug
benefits, pending authoritative guidance on how actuarial equivalency in order
to qualify for the federal subsidy is measured, and how the federal subsidy will
be reflected under accounting principles generally accepted in the United States
of America, we have elected to defer recognizing the effects of the Act in
accounting for these benefits and in providing disclosures until authoritative
guidance on the accounting for the federal subsidy is issued, in accordance with
FASB Staff Position No. FAS 106-1, "Accounting and Disclosure Requirements
Related to the Medicare Prescription Drug, Improvement and Modernization Act of
2003." Authoritative guidance, when issued, could require us to change the
amount of postretirement benefit costs we are currently recording. However,
under the current ratemaking described above, any increases or decreases in
postretirement benefit costs resulting from the Act will not affect our reported
results. In addition, because of the limited number of participants in the
program and the current level of postretirement benefits, we do not believe the
Act will have a material effect on the Company's cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risk exposures are (1) market prices for propane, natural gas
and electricity; (2) changes in interest rates; and (3) foreign currency
exchange rates.
The risk associated with fluctuations in the prices the Partnership and our
International Propane operations pay for propane is principally a result of
market forces reflecting changes in supply and demand for propane and other
energy commodities. The Partnership's profitability is sensitive to changes in
propane supply costs, and the Partnership generally attempts to pass on
increases in such costs to customers. The Partnership may not, however, always
be able to pass through product cost increases fully, particularly when product
costs rise rapidly. In order to reduce the volatility of the Partnership's
propane market price risk, it uses contracts for the forward purchase or sale of
propane, propane fixed-price supply agreements, and over-the-counter derivative
commodity instruments including price swap and option contracts. International
Propane's profitability is also sensitive to changes in propane supply costs.
FLAGA uses derivative commodity instruments to reduce market risk associated
with a portion of its propane purchases. Over-the-counter derivative commodity
instruments utilized by the Partnership and FLAGA to hedge forecasted purchases
of propane are generally settled at expiration of the contract. In order to
minimize credit risk associated with its derivative commodity contracts, the
Partnership monitors established credit limits with the contract counterparties.
Although we use derivative financial and commodity instruments to reduce market
price risk associated with forecasted transactions, we do not use derivative
financial and commodity instruments for speculative or trading purposes.
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 amounts actually collected from customers through PGC rates 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 electric power needs from third-party electricity
suppliers under fixed-price energy and capacity contracts and, to a much lesser
extent, on the spot market. Prices for electricity can be volatile especially
during periods of high demand or tight supply. In accordance with a Provider of
Last Resort ("POLR") settlement approved by the PUC, Electric Utility may
increase its POLR rates up
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UGI CORPORATION AND SUBSIDIARIES
to certain limits through December 31, 2004, and charge market rates thereafter.
Electric Utility's fixed-price contracts with electricity suppliers mitigate
most risks associated with the POLR service rate limits in effect through
December 31, 2004. However, should any of the suppliers under these contracts
fail to provide electric power under the terms of the power and capacity
contracts, increases, if any, in the cost of replacement power or capacity 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. During the quarter ended December 31, 2003, Electric Utility
entered into an electricity price swap agreement to reduce the volatility in the
cost of a portion of its anticipated electricity requirements in 2007.
In order to manage market price risk relating to substantially all of Energy
Services' forecasted fixed-price sales of natural gas, Energy Services purchases
exchange-traded natural gas futures contracts or enters into fixed-price supply
arrangements. Exchange-traded natural gas futures contracts are guaranteed by
the New York Mercantile Exchange ("NYMEX") and have nominal credit risk. An
adverse change in market value of these contracts may require daily cash
deposits in margin accounts with brokers. Although Energy Services' fixed-price
supply arrangements mitigate most risks associated with its fixed-price sales
contracts, should any of the natural gas suppliers under these arrangements fail
to perform, increases, if any, in the cost of replacement natural gas would
adversely impact Energy Services' results. In order to reduce this risk of
supplier nonperformance, Energy Services has diversified its purchases across a
number of suppliers.
UGID has entered into fixed-price sales agreements for a portion of the
electricity expected to be generated by its interests in electricity generating
assets. In the event that these generation assets would not be able to produce
all of the electricity needed to supply electricity under these agreements, UGID
would be required to purchase such electricity on the spot market or under
contract with other electricity suppliers. Accordingly, increases in the cost of
replacement power could negatively impact the Company's results.
We have both fixed-rate and variable-rate debt. Changes in interest rates impact
the cash flows of variable-rate debt but generally do not impact its fair value.
Conversely, changes in interest rates impact the fair value of fixed-rate debt
but do not impact their cash flows.
Our variable-rate debt includes borrowings under AmeriGas OLP's Credit
Agreement, borrowings under UGI Utilities' revolving credit agreements and the
uncommitted arrangement with a major bank, and a substantial portion of FLAGA's
debt. These debt agreements have interest rates that are generally indexed to
short-term market interest rates. At December 31, 2003, combined borrowings
outstanding under these agreements totaled $194.4 million. 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 near-term forecasted issuances of fixed-rate debt, from time to
time we enter into interest rate protection agreements.
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UGI CORPORATION AND SUBSIDIARIES
The following table summarizes the fair values of unsettled market risk
sensitive derivative instruments held at December 31, 2003. Fair values reflect
the estimated amounts that we would receive or pay to terminate the contracts
at the reporting date based upon quoted market prices of comparable contracts
at December 31, 2003. The table also includes the changes in fair value that
would result if there were a ten percent adverse change in (1) the market price
of propane; (2) the market price of natural gas; (3) the market price of
electricity; and (4) interest rates on ten-year U.S. treasury notes.
Change in
Fair Value Fair Value
---------- ----------
(Millions of dollars)
December 31, 2003:
Propane commodity price risk $ 11.4 $ (12.7)
Natural gas commodity price risk 2.7 (4.3)
Electricity commodity price risk 0.1 (0.8)
Interest rate risk 1.1 (2.4)
Gas Utility's exchange-traded natural gas call option contracts which had a fair
value of $4.2 million as of December 31, 2003, are excluded from the table above
because any associated net gains or losses are included in Gas Utility's PGC
recovery mechanism. Because the Company's derivative instruments generally
qualify as hedges under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," ("SFAS 133"), we expect that changes in the fair value of
derivative instruments used to manage commodity or interest rate market risk
would be substantially offset by gains or losses on the associated anticipated
transactions.
The primary currency for which the Company has exchange rate risk is the U.S.
dollar versus the euro. We do not currently use derivative instruments to hedge
foreign currency exposure associated with our international propane businesses,
principally FLAGA and Antargaz. As a result, the U.S. dollar value of our
foreign-denominated assets and liabilities will fluctuate with changes in the
associated foreign currency exchange rates. With respect to FLAGA, the net
effect of changes in foreign currency exchange rates on their U.S. dollar
denominated assets and liabilities would not be material because FLAGA's U.S.
dollar denominated financial instrument assets and liabilities are not
materially different in amount. With respect to our net investments in FLAGA and
Antargaz, a 10% decline in the value of the euro versus the U.S. dollar would
reduce their aggregate net book value by approximately $6.6 million, which
amount would be reflected in other comprehensive income. In January 2004, we
entered into two contracts for the forward purchase of 164.8 million euros to be
used in conjunction with the Proposed AGZ Holding Acquisition of all of the
outstanding shares of AGZ Holding not already held by the Company. These forward
contracts meet the definition of a derivative instrument under the provisions of
SFAS 133. In accordance with the provisions of SFAS 133, the Company is not
permitted to account for changes in the fair value of these contracts as a cash
flow hedge because the forecasted transaction involves a business combination
subject to the provisions of SFAS No. 141, "Business Combinations." As a result,
changes in the fair value of these forward contracts will be recorded in net
income. A ten percent adverse change in the value of the euro versus the U.S.
dollar subsequent to these contracts dates would reduce the Company's net income
by approximately $13.7 million.
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UGI CORPORATION AND SUBSIDIARIES
FORWARD-LOOKING STATEMENTS
Information contained in this Financial Review and elsewhere in this Annual
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
propane, oil, electricity, and natural gas and the capacity to transport them to
our 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) failure to acquire new customers thereby reducing or
limiting any increase in revenues; (6) liability for environmental claims; (7)
customer conservation measures and improvements in energy efficiency and
technology resulting in reduced demand; (8) adverse labor relations; (9) large
customer, counterparty or supplier defaults; (10) 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 and propane including liability in excess of
insurance coverage; (11) political, regulatory and economic conditions in the
United States and in foreign countries; (12) interest rate fluctuations and
other capital market conditions, including foreign currency rate fluctuations;
(13) reduced distributions from subsidiaries; (14) the timing of the completion
of our proposed acquisition of the ownership interests that we do not already
own in AGZ Holding; and (15) the timing and success of the Company's efforts to
develop new business opportunities.
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 as required by federal securities laws.
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UGI CORPORATION AND SUBSIDIARIES
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 CORPORATION AND SUBSIDIARIES
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits:
31.1 Certification by the Chief Executive Officer relating
to the Registrant's Report on Form 10-Q for the
quarter ended December 31, 2003, pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification by the Chief Financial Officer relating
to the Registrant's Report on Form 10-Q for the
quarter ended December 31, 2003, pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
*32 Certification by the Chief Executive Officer and the
Chief Financial Officer relating to the Registrant's
Report on Form 10-Q for the quarter ended December
31, 2003, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) The Company furnished information in a Current Report on Form
8-K during the first quarter of fiscal year 2004 as follows:
DATE ITEM NUMBER(S) CONTENT
October 1, 2003 12 Public announcement of estimated
earnings for fiscal year ended
September 30, 2003
November 19, 2003 7, 12 Press release reporting financial
results for the fiscal year ended
September 30, 2003
Item 12 and the related exhibit in each of the Current Reports listed above
(the "Reports") shall not be deemed "filed" for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended ("Exchange Act"), or otherwise
subject to liability under that Section, nor shall the Reports be deemed
incorporated by reference in any filing under the Securities Act of 1933, as
amended, or the Exchange Act.
- ----------
* The Exhibit attached to this Form 10-Q shall not be deemed filed for purposes
of Section 18 of the Exchange Act.
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UGI CORPORATION AND SUBSIDIARIES
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 Corporation
(Registrant)
Date: February 13, 2004 By: /s/ Anthony J. Mendicino
__________________________________
Anthony J. Mendicino
Senior Vice President-Finance and
Chief Financial Officer
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UGI CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
31.1 Certification by the Chief Executive Officer relating to the
Registrant's Report on Form 10- Q for the quarter ended December 31,
2003, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification by the Chief Financial Officer relating to the
Registrant's Report on Form 10- Q for the quarter ended December 31,
2003, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certification by the Chief Executive Officer and the Chief Financial
Officer relating to the Registrant's Report on Form 10-Q for the
quarter ended December 31, 2003, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.