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, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-1398
UGI UTILITIES, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1174060
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
UGI UTILITIES, INC.
100 Kachel Boulevard, Suite 400
Green Hills Corporate Center, Reading, PA
(Address of principal executive offices)
19607
(Zip Code)
(610) 796-3400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
At January 31, 2005, there were 26,781,785 shares of UGI Utilities, Inc.
Common Stock, par value $2.25 per share, outstanding, all of which were held,
beneficially and of record, by UGI Corporation.
UGI UTILITIES, INC.
TABLE OF CONTENTS
PAGES
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of December 31, 2004,
September 30, 2004 and December 31, 2003 1
Condensed Statements of Income for the three
months ended December 31, 2004 and 2003 2
Condensed Statements of Cash Flows for the
three months ended December 31, 2004 and 2003 3
Notes to Condensed Financial Statements 4 - 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12 - 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17 - 18
Item 4. Controls and Procedures 19
PART II OTHER INFORMATION
Item 6. Exhibits 20
Signatures 21
- i -
UGI UTILITIES, INC.
CONDENSED BALANCE SHEETS
(unaudited)
(Thousands of dollars)
December 31, September 30, December 31,
2004 2004 2003
----------- ------------ -----------
ASSETS
Current assets:
Cash and cash equivalents $ 1,608 $ 21 $ 2,692
Accounts receivable (less allowances for doubtful accounts
of $3,395, $3,374 and $3,328, respectively) 66,024 38,897 66,604
Accrued utility revenues 38,828 9,742 30,649
Inventories 55,367 65,177 47,497
Deferred income taxes 8,072 7,230 7,742
Prepaid expenses and other current assets 1,481 8,723 5,370
---------- ----------- ----------
Total current assets 171,380 129,790 160,554
Property, plant and equipment, at cost (less accumulated depreciation
and amortization of $317,975,$313,030 and $301,171, respectively) 635,480 631,264 614,456
Regulatory assets 65,577 65,060 61,322
Other assets 28,715 29,664 30,309
---------- ----------- ----------
Total assets $ 901,152 $ 855,778 $ 866,641
========== =========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt $ 70,000 $ 20,000 $ -
Current maturities of preferred shares subject to mandatory
redemption, without par value - 20,000 1,000
Bank loans 83,000 60,900 72,200
Accounts payable 73,067 62,707 76,923
Other current liabilities 62,802 59,340 55,555
---------- ----------- ----------
Total current liabilities 288,869 222,947 205,678
Long-term debt 167,121 197,151 217,241
Deferred income taxes 159,771 158,136 147,674
Deferred investment tax credits 7,489 7,589 7,887
Other noncurrent liabilities 9,059 9,924 12,337
Preferred shares subject to mandatory redemption, without par value - - 19,000
---------- ----------- ----------
Total liabilities 632,309 595,747 609,817
Commitments and contingencies (note 5)
Common stockholder's equity:
Common Stock, $2.25 par value (authorized - 40,000,000 shares;
issued and outstanding - 26,781,785 shares) 60,259 60,259 60,259
Additional paid-in capital 79,773 79,773 79,046
Retained earnings 130,936 121,454 119,317
Accumulated other comprehensive loss (2,125) (1,455) (1,798)
---------- ----------- ----------
Total common stockholder's equity 268,843 260,031 256,824
---------- ----------- ----------
Total liabilities and stockholder's equity $ 901,152 $ 855,778 $ 866,641
========== =========== ==========
See accompanying notes to condensed financial statements.
- 1 -
UGI UTILITIES, INC.
CONDENSED STATEMENTS OF INCOME
(unaudited)
(Thousands of dollars)
Three Months Ended
December 31,
---------------------
2004 2003
--------- ---------
Revenues $ 183,481 $ 170,684
--------- ---------
Costs and expenses:
Cost of sales - gas, fuel and purchased power 117,589 105,645
Operating and administrative expenses 22,765 20,815
Operating and administrative expenses - related parties 3,095 3,576
Taxes other than income taxes 3,188 3,098
Depreciation and amortization 5,800 5,394
Other income, net (1,825) (1,794)
--------- ---------
150,612 136,734
--------- ---------
Operating income 32,869 33,950
Interest expense 4,526 4,604
--------- ---------
Income before income taxes 28,343 29,346
Income taxes 11,377 11,838
--------- ---------
Net income $ 16,966 $ 17,508
========= =========
See accompanying notes to condensed financial statements.
- 2 -
UGI UTILITIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
(Thousands of dollars)
Three Months Ended
December 31,
-------------------
2004 2003
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 16,966 $ 17,508
Adjustments to reconcile net income to net cash used
by operating activities:
Depreciation and amortization 5,800 5,394
Deferred income taxes, net 540 4,882
Provision for uncollectible accounts 1,914 1,692
Other, net 1,511 1,398
Net change in:
Accounts receivable and accrued utility revenues (58,127) (61,412)
Inventories 9,810 6,520
Deferred fuel costs (4,845) (8,420)
Accounts payable 10,360 21,624
Other current assets and liabilities 12,974 6,189
-------- --------
Net cash used by operating activities (3,097) (4,625)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment (9,656) (8,404)
Net costs of property, plant and equipment disposals (276) (396)
-------- --------
Net cash used by investing activities (9,932) (8,800)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of dividends (7,484) (15,687)
Redemption of preferred shares subject to mandatory redemption (20,000) -
Bank loans increase 22,100 31,500
Issuance of long-term debt 20,000 -
-------- --------
Net cash provided by financing activities 14,616 15,813
-------- --------
Cash and cash equivalents increase $ 1,587 $ 2,388
======== ========
CASH AND CASH EQUIVALENTS:
End of period $ 1,608 $ 2,692
Beginning of period 21 304
-------- --------
Increase $ 1,587 $ 2,388
======== ========
See accompanying notes to condensed financial statements.
- 3 -
UGI UTILITIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
(Thousands of dollars, except per share amounts)
1. BASIS OF PRESENTATION
UGI Utilities, Inc. ("UGI Utilities"), a wholly owned subsidiary of UGI
Corporation ("UGI"), owns and operates a natural gas distribution utility
("Gas Utility") in parts of eastern and southeastern Pennsylvania and an
electricity distribution utility ("Electric Utility") in northeastern
Pennsylvania. We refer to Gas Utility and Electric Utility collectively as
"the Company" or "we." Gas Utility and Electric Utility are subject to
regulation by the Pennsylvania Public Utility Commission ("PUC").
The accompanying condensed 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, 2004
condensed balance sheet data was derived from audited financial
statements, but does not include all disclosures required by accounting
principles generally accepted in the United States of America. These
financial statements should be read in conjunction with the financial
statements and the related notes included in our Annual Report on Form
10-K for the year ended September 30, 2004 ("Company's 2004 Annual
Report"). Due to the seasonal nature of our businesses, the results of
operations for interim periods are not necessarily indicative of the
results to be expected for a full year.
COMPREHENSIVE INCOME. The following table presents the components of
comprehensive income for the three months ended December 31, 2004 and
2003:
Three Months Ended
December 31,
-------------------
2004 2003
-------- --------
Net income $ 16,966 $ 17,508
Other comprehensive (loss) income (670) 251
-------- --------
Comprehensive income $ 16,296 $ 17,759
-------- --------
Other comprehensive (loss) income comprises changes in the fair value of
interest rate protection and electricity price swap agreements qualifying
as hedges, net of reclassifications to net income.
STOCK-BASED COMPENSATION. Certain members of the Company's management may
be granted stock options and other equity-based awards of UGI Common Stock
under UGI's current equity compensation plans. 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 Stock
Issued to Employees" ("APB 25"), in recording compensation expense for
grants of equity instruments to employees.
We use the intrinsic value method prescribed by APB 25 for UGI's
equity-based employee compensation plans. We recorded pre-tax equity-based
compensation expense
- 4 -
UGI UTILITIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
(Thousands of dollars, except per share amounts)
of $761 and $794 during the three months ended December 31, 2004 and 2003,
respectively. If we had determined stock-based compensation expense under
the fair value method prescribed by the provisions of SFAS 123, net income
would have been as follows:
Three Months Ended
December 31,
-------------------
2004 2003
-------- --------
Net income, as reported $ 16,966 $ 17,508
Add: Stock-based employee compensation
expense included in reported net income, net
of related tax effects 445 465
Deduct: Total stock-based employee compensation
expense determined under the fair value method
for all awards, net of related tax effects (490) (494)
-------- --------
Pro forma net income $ 16,921 $ 17,479
-------- --------
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.
2. SEGMENT INFORMATION
The Company has two reportable segments: (1) Gas Utility and (2) Electric
Utility. The accounting policies of our two reportable segments are the
same as those described in the Significant Accounting Policies note
contained in the Company's 2004 Annual Report. We evaluate each segment's
profitability principally based upon its income before income taxes. No
single customer represents more than 10% of the total revenues of either
Gas Utility or Electric Utility. There are no significant intersegment
transactions. In addition, all of our reportable segments' revenues are
derived from sources within the United States.
- 5 -
UGI UTILITIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
(Thousands of dollars, except per share amounts)
Financial information by business segment follows:
THREE MONTHS ENDED DECEMBER 31, 2004:
Gas Electric
Total Utility Utility
-------- -------- --------
Revenues $183,481 $161,219 $22,262
Cost of sales - gas, fuel and purchased power 117,589 106,605 10,984
Depreciation and amortization 5,800 5,054 746
Operating income 32,869 28,146 4,723
Interest expense 4,526 4,073 453
Income before income taxes 28,343 24,073 4,270
Total assets at period end 901,152 810,092 91,060
THREE MONTHS ENDED DECEMBER 31, 2003:
Gas Electric
Total Utility Utility
-------- -------- -------
Revenues $170,684 $149,265 $21,419
Cost of sales - gas, fuel and purchased power 105,645 95,110 10,535
Depreciation and amortization 5,394 4,658 736
Operating income 33,950 29,401 4,549
Interest expense 4,604 4,116 488
Income before income taxes 29,346 25,285 4,061
Total assets at period end 866,641 781,804 84,837
- 6 -
UGI UTILITIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
(Thousands of dollars, except per share amounts)
3. REDEMPTION OF SERIES PREFERRED STOCK
On October 1, 2004, UGI Utilities redeemed all 200,000 shares of its $7.75
Series Preferred Stock at a price of $100 per share together with full
cumulative dividends. The redemption of the $7.75 Series Preferred Stock
was funded with proceeds from the October 2004 issuance of $20,000 of
6.13% Medium-Term Notes due 2034.
4. DEFINED BENEFIT PENSION AND OTHER POSTRETIREMENT PLANS
We sponsor a defined benefit pension plan ("UGI Utilities Pension Plan")
for employees of UGI, UGI Utilities and certain of UGI's other wholly
owned subsidiaries. In addition, we provide postretirement health care
benefits to certain retirees and a limited number of active employees
meeting certain age and service requirements, and postretirement life
insurance benefits to nearly all active and retired employees.
Net periodic pension expense and other postretirement benefit costs
relating to UGI Utilities employees include the following components:
Pension Benefits Other Postretirement Benefits
Three Months Ended Three Months Ended
December 31, December 31,
--------------------- -----------------------------
2004 2003 2004 2003
------- ------- ----- -----
Service cost $ 1,090 $ 1,165 $ 29 $ 30
Interest cost 2,998 3,094 368 364
Expected return on assets (3,975) (4,108) (119) (115)
Amortization of:
Transition (asset) obligation - (327) 169 170
Prior service cost 155 165 - -
Actuarial loss 308 289 81 68
------- ------- ----- -----
Net benefit cost 576 278 528 517
Change in regulatory assets
and liabilities - - 247 258
------- ------- ----- -----
Net expense $ 576 $ 278 $ 775 $ 775
------- ------- ----- -----
UGI Utilities Pension Plan assets are held in trust and consist
principally of equity and fixed income mutual funds. The Company does not
believe it will be required to make any contributions to the UGI Utilities
Pension Plan during the year ending September 30, 2005. Pursuant to orders
previously issued by the PUC, UGI Utilities has established a Voluntary
Employees' Beneficiary Association ("VEBA") trust to fund and pay UGI
Utilities' postretirement health care and life insurance benefits referred
to above by depositing into the VEBA the annual amount of postretirement
benefit costs determined under SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." The difference between the
annual amount calculated and the amount included in UGI Utilities rates is
deferred for future recovery from, or refund to, ratepayers. The Company
expects to contribute approximately $2,500 to the VEBA
- 7 -
UGI UTILITIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
(Thousands of dollars, except per share amounts)
during the year ending September 30, 2005. During the three months ended
December 31, 2004, the Company made contributions of approximately $625 to
the VEBA.
We also sponsor an unfunded and non-qualified supplemental executive
retirement income plan. We recorded expense for this plan of $108 and $98
for the three months ended December 31, 2004 and 2003, respectively.
5. COMMITMENTS AND CONTINGENCIES
From the late 1800s through the mid-1900s, UGI Utilities and its former
subsidiaries owned and operated a number of manufactured gas plants
("MGPs") prior to the general availability of natural gas. Some
constituents of coal tars and other residues of the manufactured gas
process are today considered hazardous substances under the Superfund Law
and may be present on the sites of former MGPs. Between 1882 and 1953, UGI
Utilities owned the stock of subsidiary gas companies in Pennsylvania and
elsewhere and also operated the businesses of some gas companies under
agreement. Pursuant to the requirements of the Public Utility Holding
Company Act of 1935, UGI Utilities divested all of its utility operations
other than those which now constitute Gas Utility and Electric Utility.
UGI Utilities does not expect its costs for investigation and remediation
of hazardous substances at Pennsylvania MGP sites to be material to its
results of operations because Gas Utility is currently permitted to
include in rates, through future base rate proceedings, prudently incurred
remediation costs associated with such sites. UGI Utilities has been
notified of several sites outside Pennsylvania on which private parties
allege MGPs were formerly owned or operated by it or owned or operated by
its former subsidiaries. Such parties are investigating the extent of
environmental contamination or performing environmental remediation. UGI
Utilities is currently litigating three claims against it relating to
out-of-state sites.
Management believes that under applicable law UGI Utilities should not be
liable in those instances in which a former subsidiary owned or operated
an MGP. There could be, however, significant future costs of an uncertain
amount associated with environmental damage caused by MGPs outside
Pennsylvania that UGI Utilities directly owned or operated, or that were
owned or operated by former subsidiaries of UGI Utilities, if a court were
to conclude that (1) the subsidiary's separate corporate form should be
disregarded or (2) UGI Utilities should be considered to have been an
operator because of its conduct with respect to its subsidiary's MGP.
In April 2003, Citizens Communications Company ("Citizens") served a
complaint naming UGI Utilities as a third-party defendant in a civil
action pending in United States District Court for the District of Maine.
In that action, the plaintiff, City of Bangor, Maine ("City") sued
Citizens to recover environmental response costs associated with MGP
wastes generated at a plant allegedly operated by Citizens' predecessors
at a site on the Penobscot River. Citizens subsequently joined UGI
Utilities and ten other third-party defendants
- 8 -
UGI UTILITIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
(Thousands of dollars, except per share amounts)
alleging that the third party defendants are responsible for an equitable
share of costs Citizens may be required to pay to the City for cleaning up
tar deposits in the Penobscot River. Citizens alleges that UGI Utilities
and its predecessors owned and operated the MGP from 1901 to 1928. The
City believes that it could cost as much as $50,000 to clean up the river.
UGI Utilities believes that it has good defenses to the claim and is
defending the suit.
By letter dated July 29, 2003, Atlanta Gas Light Company ("AGL") served
UGI Utilities with a complaint filed in the United States District Court
for the Middle District of Florida in which AGL alleges that UGI Utilities
is responsible for 20% of approximately $8,000 incurred by AGL in the
investigation and remediation of a former MGP site in St. Augustine,
Florida. UGI Utilities formerly owned stock of the St. Augustine Gas
Company, the owner and operator of the MGP. UGI Utilities believes that it
has good defenses to the claim and is defending the suit.
AGL previously informed UGI Utilities that it was investigating
contamination that appeared to be related to MGP operations at a site
owned by AGL in Savannah, Georgia. A former subsidiary of UGI Utilities
operated the MGP in the early 1900s. AGL has recently informed UGI
Utilities that it has begun remediation of MGP wastes at the site and
believes that the total cost of remediation could be as high as $55,000.
AGL has not filed suit against UGI Utilities for a share of these costs.
UGI Utilities believes that it will have good defenses to any action that
may arise out of this site.
On September 20, 2001, Consolidated Edison Company of New York ("ConEd")
filed suit against UGI Utilities in the United States District Court for
the Southern District of New York, seeking contribution from UGI Utilities
for an allocated share of response costs associated with investigating and
assessing gas plant related contamination at former MGP sites in
Westchester County, New York. The complaint alleges that UGI Utilities
"owned and operated" the MGPs prior to 1904. The complaint also seeks a
declaration that UGI Utilities is responsible for an allocated percentage
of future investigative and remedial costs at the sites. ConEd believes
that the cost of remediation for all of the sites could exceed $70,000. By
orders issued in November 2003 and March 2004, the court granted UGI
Utilities' motion for summary judgment and dismissed ConEd's complaint.
ConEd has appealed.
By letter dated June 24, 2004, KeySpan Energy ("KeySpan") informed UGI
Utilities that KeySpan has spent $2,300 and expects to spend another
$11,000 to clean up an MGP site it owns in Sag Harbor, New York. KeySpan
believes that UGI Utilities is responsible for approximately 50% of these
costs as a result of UGI Utilities' alleged direct ownership and operation
of the plant from 1885 to 1902. UGI Utilities is in the process of
reviewing the information provided by KeySpan and is investigating this
claim.
By letter dated August 5, 2004, Yankee Gas Services Company and
Connecticut Light and Power Company, subsidiaries of Northeast Utilities,
(together, the "Northeast Companies"), demanded contribution from UGI
Utilities for past and future remediation costs related to MGP operations
on thirteen sites owned by the Northeast Companies in
- 9 -
UGI UTILITIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
(Thousands of dollars, except per share amounts)
nine cities in the State of Connecticut. The Northeast Companies allege
that UGI Utilities controlled operations of the plants from 1883 to 1941.
According to the letter, investigation and remedial costs at the sites to
date total approximately $10,000 and complete remediation costs for all
sites could total $182,000. The Northeast Companies seek an unspecified
fair and equitable allocation of these costs to UGI Utilities. UGI
Utilities is in the process of reviewing the information provided by
Northeast Companies and is investigating this claim.
In addition to these environmental matters, there are other pending claims
and legal actions arising in the normal course of our businesses. We
cannot predict with certainty the final results of environmental and other
matters. However, it is reasonably possible that some of them could be
resolved unfavorably to us. Although we currently believe, 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.
At December 31, 2004, the Company's accrued liability for environmental
investigation and cleanup costs was not material.
6. STORAGE CONTRACT ADMINISTRATION AGREEMENT
Effective December 1, 2004, following a competitive bidding process, UGI
Utilities entered into a Storage Contract Administration Agreement
("SCAA") with UGI Energy Services, Inc. ("Energy Services"), a wholly
owned, indirect subsidiary of UGI. Under the SCAA, UGI Utilities has
released certain gas transportation and storage contracts through October
31, 2005 and has transferred associated gas storage inventories to Energy
Services. UGI Utilities may recall such released transportation and
storage contracts without penalty if recalled to meet operational
requirements, and if not recalled, the releases will terminate at the end
of the term of the SCAA. In the event that released contracts are recalled
or expire at the end of the term of the SCAA, Energy Services is required
to transfer such gas transportation and storage contracts and associated
gas storage inventories to UGI Utilities. In exchange for the ability to
utilize these assets, Energy Services will pay a monthly fee to UGI
Utilities and will provide a firm natural gas delivery service to UGI
Utilities. In support of Energy Services' performance obligations under
the SCAA, UGI has provided UGI Utilities with performance security in the
amount of $20,000.
UGI Utilities will reflect the historical cost of the gas storage
inventories and any exchange receivable from Energy Services (for any
amounts of gas utilized but not yet replenished by Energy Services) on its
balance sheet under the caption "Inventories." The carrying value of these
gas storage inventories at December 31, 2004, comprising 7.7 billion cubic
feet of natural gas, was $48,186.
- 10 -
UGI UTILITIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
(Thousands of dollars, except per share amounts)
7. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"). SFAS
123R replaces SFAS 123 and supersedes APB 25. SFAS 123, as originally
issued in 1995, established as preferable a fair-value-based method of
accounting for share-based payment transactions with employees. However,
SFAS 123 permitted entities the option of continuing to apply the guidance
in APB 25, as long as the footnotes to financial statements disclosed what
net income would have been had the preferable fair-value-based method been
used. SFAS 123R requires that the compensation cost relating to
share-based payment transactions be recognized in the financial
statements. The cost is required to be measured based on the fair value of
the equity or liability instruments issued. SFAS 123R covers a wide range
of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation
rights and employee share purchase plans. SFAS 123R is effective for our
interim period beginning after June 15, 2005. Under all of the transition
methods, unrecognized compensation expense for awards that are not vested
on the adoption date will be recognized in the Company's statements of
income through the end of the requisite service period. We do not believe
that the adoption of SFAS 123R will have a material impact on its results
of operations or financial position. Also, see Note 1.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets - An Amendment of APB Opinion No. 29, Accounting for Nonmonetary
Transactions" ("SFAS 153"). SFAS 153 eliminates the exception from fair
value measurement for nonmonetary exchanges of similar productive assets
in paragraph 21(b) of APB Opinion No. 29, "Accounting for Nonmonetary
Transactions," and replaces it with an exception for exchanges that lack
commercial substance. SFAS 153 specifies that a nonmonetary exchange has
commercial substance if the future cash flows of the entity are expected
to change significantly as a result of the exchange. SFAS 153 is effective
for our interim period beginning after June 15, 2005. We do not believe
that the adoption of SFAS 153 will have a material effect on our results
of operations or financial position.
- 11 -
UGI UTILITIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Information contained in this Management's Discussion and Analysis of Financial
Condition and Results of Operations and elsewhere in this Quarterly Report may
contain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Such statements use forward-looking words such as "believe," "plan,"
"anticipate," "continue," "estimate," "expect," "may," "will," or other similar
words. These statements discuss plans, strategies, events or developments that
we expect or anticipate will or may occur in the future.
A forward-looking statement may include a statement of the assumptions or bases
underlying the forward-looking statement. We believe that we have chosen these
assumptions or bases in good faith and that they are reasonable. However, we
caution you that actual results almost always vary from assumed facts or bases,
and the differences between actual results and assumed facts or bases can be
material, depending on the circumstances. When considering forward-looking
statements, you should keep in mind the following important factors which could
affect our future results and could cause those results to differ materially
from those expressed in our forward-looking statements: (1) adverse weather
conditions resulting in reduced demand; (2) cost volatility and availability of
oil, electricity and natural gas and the capacity to transport product to market
areas; (3) changes in laws and regulations, including safety, tax and accounting
matters; (4) competitive pressures from the same and alternative energy sources;
(5) liability for environmental claims; (6) customer conservation measures and
improvements in energy efficiency and technology resulting in reduced demand;
(7) adverse labor relations; (8) large customer, counterparty or supplier
defaults; (9) liability in excess of insurance coverage 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; (10) political, regulatory and economic conditions in
the United States; and (11) interest rate fluctuations and other capital market
conditions.
These factors are not necessarily all of the important factors that could cause
actual results to differ materially from those expressed in any of our
forward-looking statements. Other unknown or unpredictable factors could also
have material adverse effects on future results. We undertake no obligation to
update publicly any forward-looking statement whether as a result of new
information or future events except as required by the federal securities laws.
- 12 -
UGI UTILITIES, INC.
ANALYSIS OF RESULTS OF OPERATIONS
The following analyses compare our results of operations for the three months
ended December 31, 2004 ("2004 three-month period") with the three months ended
December 31, 2003 ("2003 three-month period"). Our analyses of results of
operations should be read in conjunction with the segment information included
in Note 2 to the Condensed Financial Statements.
Increase
Three Months Ended December 31, 2004 2003 (Decrease)
- -------------------------------- ------ ------ ----------------
(Millions of dollars)
GAS UTILITY:
Revenues $161.2 $149.3 $ 11.9 8.0%
Total margin (a) $ 54.6 $ 54.2 $ 0.4 0.7%
Operating income $ 28.1 $ 29.4 $ (1.3) (4.4)%
Income before income taxes $ 24.1 $ 25.3 $ (1.2) (4.7)%
System throughput - bcf 23.0 23.3 (0.3) (1.3)%
Heating degree days - % colder (warmer)
than normal 0.5 (3.8) - -
ELECTRIC UTILITY:
Revenues $ 22.3 $ 21.4 $ 0.9 4.2%
Total margin (a) $ 10.1 $ 9.7 $ 0.4 4.1%
Operating income $ 4.7 $ 4.5 $ 0.2 4.4%
Income before income taxes $ 4.3 $ 4.1 $ 0.2 4.9%
Distribution sales - gwh 249.1 243.5 5.6 2.3%
bcf - billions of cubic feet. gwh - millions of kilowatt-hours.
(a) Gas Utility's total margin represents total revenues less cost of sales.
Electric Utility's total margin represents total revenues less cost of
sales and revenue-related taxes, i.e. Electric Utility gross receipts
taxes, of $1.2 million in each of the three month-periods ended December
31, 2004 and 2003. For financial statement purposes, revenue-related taxes
are included in "taxes other than income taxes" on the Condensed
Statements of Income.
GAS UTILITY. Weather in Gas Utility's service territory during the 2004
three-month period was 0.5% colder than normal compared with weather that was
3.8% warmer than normal in the 2003 three-month period. Notwithstanding the
colder weather, total distribution system throughput was slightly lower due to
lower sales to firm- residential, commercial and industrial ("retail
core-market") customers and lower firm-delivery service volumes due in part to
customer conservation resulting from high natural gas prices. The increase in
Gas Utility revenues during the 2004 three-month period primarily reflects
higher purchased gas cost ("PGC") rates partially offset by a $14.4 million
decrease in revenues from low-margin off-system sales. Gas Utility cost of gas
was $106.6 million in the 2004 three-month period compared to $95.1 million in
the 2003 three-month period reflecting the higher PGC rates. Increases or
decreases in Gas Utility's cost of gas associated with retail core-market
customers result from changes in retail core-
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UGI UTILITIES, INC.
market volumes, the price of the gas purchased and the level of gas costs
collected through the PGC recovery mechanism. Under this recovery mechanism, Gas
Utility records the cost of gas associated with sales to retail core-market
customers equal to the amount included in rates and defers the difference on the
balance sheet as a regulatory asset or liability representing an amount to be
collected from or refunded to customers in a future period. As a result,
increases or decreases in the cost of gas associated with retail core-market
customers have no direct effect on retail core-market margin.
The slight increase in Gas Utility total margin reflects higher margin from
interruptible delivery service customers and the effects of year-over-year
customer growth partially offset by a decline in retail core-market margin
resulting from the lower retail core-market sales.
Gas Utility operating income declined $1.3 million in the 2004 three-month
period reflecting the previously mentioned increase in total margin which was
more than offset by higher operating and administrative expenses and a $0.4
million increase in depreciation and amortization expense. Operating and
administrative expenses increased $1.4 million principally reflecting the
absence of environmental insurance recoveries recorded in the prior-year
three-month period and greater uncollectible accounts receivable expense
partially offset by lower system maintenance expense. The decrease in Gas
Utility income before income taxes reflects the decline in operating income
partially offset by slightly lower interest expense.
ELECTRIC UTILITY. Electric Utility's 2004 three-month period kilowatt-hour sales
were higher while experiencing weather that was slightly colder than in the
prior-year period. Temperatures based upon heating degree days in the 2004
three-month period were approximately 0.4% warmer than normal compared with
temperatures that were approximately 1.7% warmer than normal in the comparable
prior-year period.
The increase in Electric Utility revenues in the 2004 three-month period
principally reflects the slightly higher kilowatt-hour sales. Electric Utility's
cost of sales increased approximately 4.2% in the 2004 three-month period
reflecting higher Electric Utility purchased power costs associated with the
increase in sales.
Electric Utility total margin in the 2004 three-month period increased $0.4
million principally reflecting the effects of the previously mentioned increase
in kilowatt-hours sold. Operating income and income before income taxes were
higher in the 2004 three-month period principally reflecting the increase in
total margin which was partially offset by higher operating and administrative
expenses including greater distribution system expenses.
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UGI UTILITIES, INC.
FINANCIAL CONDITION AND LIQUIDITY
FINANCIAL CONDITION
The Company's total debt outstanding at December 31, 2004 totaled $320.1 million
(including $83 million in bank loans) compared with $278.1 million (including
$60.9 million in bank loans) at September 30, 2004. At December 31, 2004,
current maturities of long-term were $70 million. The Company expects to
refinance all of the $70 million in Medium-Term Notes due in May and December
2005.
The Company has revolving credit commitments under which it may borrow up to
$110 million. These agreements expire in June 2007. At December 31, 2004
borrowings under these agreements totaled $63 million. In addition, at December
31, 2005, there was $20 million outstanding under an uncommitted agreement with
a major bank which amount matures March 1, 2005. UGI Utilities also has a shelf
registration statement with the SEC under which it may issue up to an additional
$20 million of Medium-Term Notes or other debt securities.
CASH FLOWS
OPERATING ACTIVITIES. Due to the seasonal nature of UGI Utilities' businesses,
cash flows from operating activities are generally strongest during the second
and third fiscal quarters when customers pay for gas and electricity consumed
during the peak heating season months. Conversely, operating cash flows are
generally at their lowest levels during the first and fourth fiscal quarters
when the Company's investment in working capital, principally accounts
receivable and inventories, is generally greatest. UGI Utilities uses its
revolving credit agreements and the uncommitted arrangement with a major bank to
satisfy its seasonal operating cash flow needs. Cash used by operating
activities was $3.1 million during the three months ended December 31, 2004
compared with $4.6 million of cash used in the prior-year period. Cash flow from
operating activities before changes in operating working capital was $26.7
million in the 2004 three-month period compared to $30.9 million in the
prior-year three-month period principally reflecting lower noncash deferred
income tax expense and the lower operating results. Changes in operating working
capital used $29.8 million of operating cash flow during the 2004 three-month
period compared with $35.5 million during the prior-year three-month period.
INVESTING ACTIVITIES. Cash flow used in investing activities was $9.9 million in
the 2004 three-month period compared with $8.8 million in the prior-year period.
Expenditures for property, plant and equipment were $9.7 million in the 2004
three-month period compared with $8.4 million in the prior-year period
principally reflecting higher expenditures for distribution system assets.
FINANCING ACTIVITIES. Cash flow from financing activities was $14.6 million in
the 2004 three-month period compared with $15.8 million in the prior-year
period. Financing activity cash flow changes are primarily due to issuances and
repayments of long-term debt, net short-term borrowings including borrowings
under revolving credit agreements, dividends on common shares, and capital
contributions from UGI Corporation ("UGI"). During the 2004 and 2003 three-month
periods, we paid dividends of $7.5 million and $15.7 million, respectively, to
UGI. On October 1, 2004, we redeemed all 200,000 shares of the $7.75 Series
Preferred Stock at a price of
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UGI UTILITIES, INC.
$100 per share together with full cumulative dividends. The redemption of the
$7.75 Series Preferred Stock was funded with proceeds from the October 2004
issuance of $20 million of 6.13% Medium-Term Notes due 2034. During the 2004
three-month period, we had net borrowings of $22.1 million under our revolving
credit agreements and the uncommitted arrangement with a major bank compared to
net borrowings of $31.5 million in the prior-year period.
STORAGE CONTRACT ADMINISTRATION AGREEMENT
Effective December 1, 2004, following a competitive bidding process, UGI
Utilities entered into a Storage Contract Administration Agreement ("SCAA") with
UGI Energy Services, Inc. ("Energy Services"), a wholly owned, indirect
subsidiary of UGI. Under the SCAA, UGI Utilities has released certain gas
transportation and storage contracts through October 31, 2005 and has
transferred associated gas storage inventories to Energy Services. UGI Utilities
may recall such released transportation and storage contracts without penalty if
recalled to meet operational requirements, and if not recalled, the releases
will terminate at the end of the term of the SCAA. In the event that released
contracts are recalled or expire at the end of the term of the SCAA, Energy
Services is required to transfer such gas transportation and storage contracts
and associated gas storage inventories to UGI Utilities. In exchange for the
ability to utilize these assets, Energy Services will pay a monthly fee to UGI
Utilities and will provide a firm natural gas delivery service to UGI Utilities.
In support of Energy Services' performance obligations under the SCAA, UGI has
provided UGI Utilities with performance security in the amount of $20 million.
UGI Utilities will reflect the historical cost of the gas storage inventories
and any exchange receivable from Energy Services (for any amounts of gas
utilized but not yet replenished by Energy Services) on its balance sheet under
the caption "Inventories." The carrying value of these gas storage inventories
at December 31, 2004, comprising 7.7 billion cubic feet of natural gas, was
$48.2 million.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123 (revised 2004),
"Share-Based Payment" ("SFAS 123R"). SFAS 123R replaces SFAS 123 and supersedes
Accounting Principles Board ("APB") Opinion No 25, "Accounting for Stock Issued
to Employees" ("APB 25"). SFAS 123, as originally issued in 1995, established as
preferable a fair-value-based method of accounting for share-based payment
transactions with employees. However, SFAS 123 permitted entities the option of
continuing to apply the guidance in APB 25, as long as the footnotes to
financial statements disclosed what net income would have been had the
preferable fair-value-based method been used. SFAS 123R requires that the
compensation cost relating to share-based payment transactions be recognized in
the financial statements. The cost is required to be measured based on the fair
value of the equity or liability instruments issued. SFAS 123R covers a wide
range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. SFAS 123R is effective for our interim period
beginning after June 15, 2005. Under all of the transition methods,
unrecognized compensation expense for awards that are not vested on
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UGI UTILITIES, INC.
the adoption date will be recognized in the Company's statements of income
through the end of the requisite service period. We do not believe that the
adoption of SFAS 123R will have a material impact on its results of operations
or financial position. Also, see Note 1 to Condensed Financial Statements.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets
- - An Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions"
("SFAS 153"). SFAS 153 eliminates the exception from fair value measurement for
nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB
Opinion No. 29, "Accounting for Nonmonetary Transactions," and replaces it with
an exception for exchanges that lack commercial substance. SFAS 153 specifies
that a nonmonetary exchange has commercial substance if the future cash flows of
the entity are expected to change significantly as a result of the exchange.
SFAS 153 is effective for our interim period beginning after June 15, 2005. We
do not believe that the adoption of SFAS 153 will have a material effect on our
results of operations or financial position.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Gas Utility's tariffs contain clauses that permit recovery of substantially all
of the prudently incurred costs of natural gas it sells to its customers. The
recovery clauses provide for a periodic adjustment for the difference between
the total 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 any associated gains, is
included in Gas Utility's PGC recovery mechanism.
The risks associated with fluctuations in prices the Electric Utility pays for
its electric power needs are principally a result of market forces reflecting
changes in supply and demand for electricity and other energy commodities.
Electric Utility purchases its electric power needs from electricity suppliers
under fixed-price energy and capacity contracts and, to a much lesser extent, on
the spot market. In accordance with Provider of Last Resort ("POLR") settlements
approved by the PUC, Electric Utility may increase its POLR rates up to certain
limits through December 31, 2006. In accordance with these settlements,
effective January 1, 2005, Electric Utility increased its POLR generation rates
for all metered customers 4.5% of total rates in effect on December 31, 2004. In
addition, the POLR settlements permit Electric Utility to increase its POLR
generation rates effective January 1, 2006 for all metered customers up to 7.5%
of total rates in effect at December 31, 2004. Currently, Electric Utility's
fixed-price contracts with electric suppliers mitigate most risks associated
with the POLR service rate limits in effect through December 31, 2006. However,
should any of the suppliers under these contracts fail to provide electric power
under the terms of the power and capacity contracts, any increases in the cost
of replacement power or capacity 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. Electric Utility has and may enter
into electricity price swap
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UGI UTILITIES, INC.
agreements to reduce the volatility in the cost of a portion of its anticipated
electricity requirements. At December 31, 2004, the fair value of their price
swap was a gain of $1.8 million. Fair value reflects the estimated amount that
we would expect to receive or pay to terminate the contract based upon quoted
market prices of comparable contracts at December 31, 2004. An adverse change in
electricity prices of ten percent would result in a $0.9 million decrease in the
fair value of the swap.
Our variable-rate debt includes borrowings under our revolving credit agreements
and the uncommitted arrangement with a major bank. These agreements provide for
interest rates on borrowings that are indexed to short-term market interest
rates. Our long-term debt is typically issued at fixed rates of interest based
upon market rates for debt having similar terms and credit ratings. As these
long-term debt issues mature, we expect to refinance such debt with new debt
having an interest rate that is more or less than the refinanced debt.
In order to reduce interest rate risk associated with near-term issuances of
fixed-rate debt, we may enter into interest rate protection agreements. At
December 31, 2004, the fair value of our unsettled interest rate protection
agreements, which have been designated and qualify as cash flow hedges, was a
loss of $2.1 million. An adverse change in interest rates on ten-year U.S.
treasury notes of ten percent would result in a $2.2 million decrease in the
fair value of these interest rate protection agreements.
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UGI UTILITIES, INC.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness
of the Company's disclosure controls and procedures as of the end of the
period covered by this report. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures as of the end of the period covered by
this report were designed and functioning effectively to provide
reasonable assurance that the information required to be disclosed by the
Company in reports filed under the Securities Exchange Act of 1934, as
amended, is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms. The Company believes that
a controls system, no matter how well designed and operated, cannot
provide absolute assurance that the objectives of the controls system are
met, and no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within a company have been
detected.
(b) Change in Internal Control over Financial Reporting
No change in the Company's internal control over financial reporting
occurred during the Company's most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
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UGI UTILITIES, INC.
ITEM 6. EXHIBITS
12.1 Computation of ratio of earnings to fixed charges
31.1 Certification by the Chief Executive Officer relating to the
Registrant's Report on Form 10-Q for the quarter ended
December 31, 2004, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification by the Chief Financial Officer relating to the
Registrant's Report on Form 10-Q for the quarter ended
December 31, 2004, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32 Certification by the Chief Executive Officer and the Chief
Financial Officer relating to the Registrant's Report on Form
10-Q for the quarter ended December 31, 2004, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
- 20 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UGI Utilities, Inc.
------------------------
(Registrant)
Date: February 9, 2005 By: /s/ John C. Barney
-------------------------------
John C. Barney
Senior Vice President - Finance
(Principal Financial Officer)
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UGI UTILITIES, INC. AND SUBSIDIARIES
EXHIBIT INDEX
12.1 Computation of ratio of earnings to fixed charges
31.1 Certification by the Chief Executive Officer relating to the
Registrant's Report on Form 10-Q for the quarter ended December 31,
2004, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification by the Chief Financial Officer relating to the
Registrant's Report on Form 10-Q for the quarter ended December 31,
2004, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certification by the Chief Executive Officer and the Chief Financial
Officer relating to the Registrant's Report on Form 10-Q for the
quarter ended December 31, 2004, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.