UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005
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 No X
--- ---
At July 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
-----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements i
Condensed Balance Sheets as of June 30, 2005,
September 30, 2004 and June 30, 2004 1
Condensed Statements of Income for the three and
nine months ended June 30, 2005 and 2004 2
Condensed Statements of Cash Flows for the
nine months ended June 30, 2005 and 2004 3
Notes to Condensed Financial Statements 4 - 14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15 - 21
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21 - 22
Item 4. Controls and Procedures 23
PART II OTHER INFORMATION
Item 6. Exhibits 24
Signatures 25
UGI UTILITIES, INC.
CONDENSED BALANCE SHEETS
(unaudited)
(Thousands of dollars)
<Table>
<Caption>
June 30, September 30, June 30,
2005 2004 2004
--------- ------------- ---------
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 653 $ 21 $ 2,266
Accounts receivable (less allowances for doubtful accounts
of $7,222, $3,374 and $6,459, respectively) 57,511 38,897 47,127
Accrued utility revenues 8,503 9,742 8,070
Inventories 39,198 65,177 32,746
Deferred income taxes 15,661 6,658 11,757
Prepaid expenses 3,054 3,455 2,960
Other current assets 679 5,268 1,463
-------- -------- --------
Total current assets 125,259 129,218 106,389
Property, plant and equipment, at cost (less accumulated depreciation and
amortization of $327,961, $313,030 and $309,687, respectively) 644,882 631,264 622,354
Regulatory assets 66,778 65,060 62,997
Other assets 29,012 29,664 31,860
-------- -------- --------
Total assets $865,931 $855,206 $823,600
======== ======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
- ---------------------------------------
Current liabilities:
Current maturities of long-term debt $ 50,000 $ 20,000 $ 20,000
Current maturities of preferred shares subject to mandatory
redemption, without par value - 20,000 1,000
Bank loans 49,500 60,900 30,100
Accounts payable 23,243 60,073 41,061
Accounts payable - related parties 15,616 2,634 786
Accrued income taxes 12,264 2,111 15,040
Deferred fuel costs 19,082 7,862 16,621
Other current liabilities 35,665 44,170 32,922
-------- -------- --------
Total current liabilities 205,370 217,750 157,530
Long-term debt 187,060 197,151 197,181
Deferred income taxes 164,732 157,561 154,975
Deferred investment tax credits 7,290 7,589 7,688
Other noncurrent liabilities 17,691 15,124 14,890
Preferred shares subject to mandatory redemption, without par value - - 19,000
-------- -------- --------
Total liabilities 582,143 595,175 551,264
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 145,896 121,454 133,419
Accumulated other comprehensive loss (2,140) (1,455) (388)
-------- -------- --------
Total common stockholder's equity 283,788 260,031 272,336
-------- -------- --------
Total liabilities and stockholder's equity $865,931 $855,206 $823,600
======== ======== ========
</Table>
See accompanying notes to condensed financial statements.
-1-
UGI UTILITIES, INC.
CONDENSED STATEMENTS OF INCOME
(unaudited)
(Thousands of dollars)
Three Months Ended Nine Months Ended
June 30, June 30,
----------------------------- ------------------------------
2005 2004 2005 2004
------------- ------------- ------------- -------------
Revenues $ 111,534 $ 118,717 $ 576,469 $ 557,618
--------- --------- --------- ---------
Costs and expenses:
Cost of sales - gas, fuel and purchased power 65,244 74,751 372,033 356,887
Operating and administrative expenses 21,698 21,559 70,239 68,197
Operating and administrative expenses - related parties 3,995 2,072 9,612 7,890
Taxes other than income taxes 3,152 3,110 10,079 9,763
Depreciation and amortization 6,019 5,436 17,785 16,906
Other income, net (1,242) (493) (4,486) (1,534)
--------- --------- --------- ---------
98,866 106,435 475,262 458,109
--------- --------- --------- ---------
Operating income 12,668 12,282 101,207 99,509
Interest expense 4,394 4,399 13,543 13,460
--------- --------- --------- ---------
Income before income taxes 8,274 7,883 87,664 86,049
Income taxes 3,367 3,388 35,083 34,897
--------- --------- --------- ---------
Net income $ 4,907 $ 4,495 $ 52,581 $ 51,152
========= ========= ========= =========
See accompanying notes to condensed financial statements.
-2-
UGI UTILITIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
(Thousands of dollars)
Nine Months Ended
June 30,
---------------------------
2005 2004
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 52,581 $ 51,152
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 17,785 16,906
Deferred income tax (benefit) expense, net (3,531) 5,029
Provision for uncollectible accounts 7,135 6,688
Other, net 2,136 2,163
Net change in:
Accounts receivable and accrued utility revenues (24,510) (24,353)
Inventories 25,979 21,271
Deferred fuel costs 11,220 2,414
Accounts payable (23,848) (13,451)
Other current assets and liabilities 6,453 7,891
--------- ---------
Net cash provided by operating activities 71,400 75,710
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment (30,355) (26,602)
Net costs of property, plant and equipment disposals (873) (1,317)
--------- ---------
Net cash used by investing activities (31,228) (27,919)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of dividends (28,140) (35,229)
Redemption of preferred shares subject to mandatory redemption (20,000) -
Increase in bank loans with maturities of three months or less (11,400) (10,600)
Issuance of debt 60,000 -
Repayment of debt (40,000) -
--------- ---------
Net cash used by financing activities (39,540) (45,829)
--------- ---------
Cash and cash equivalents increase $ 632 $ 1,962
========= =========
CASH AND CASH EQUIVALENTS:
End of period $ 653 $ 2,266
Beginning of period 21 304
--------- ---------
Increase $ 632 $ 1,962
========= =========
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 and nine months ended June 30, 2005 and
2004:
--------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
June 30, June 30,
------------------- ---------------------
2005 2004 2005 2004
-------------------------------------------------------- ---------------------
Net income $ 4,907 $ 4,495 $ 52,581 $ 51,152
Other comprehensive income (loss) (1,509) 1,612 (685) 1,661
-------------------------------------------------------- ---------------------
Comprehensive income $ 3,398 $ 6,107 $ 51,896 $ 52,813
--------------------------------------------------------------------------------
Other comprehensive income (loss) comprises changes in the fair value of
interest rate protection and electricity price swap agreements qualifying
as hedges, net of reclassifications to net income.
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 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 $525 and $1,518 during the three and nine months ended June 30, 2005,
respectively, and $368 and $1,843 during the three and nine months ended
June 30, 2004, 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 Nine Months Ended
June 30, June 30,
------------------ ------------------
2005 2004 2005 2004
-------------------------------------------------------------------- ------------------
Net income, as reported $4,907 $4,495 $52,581 $51,152
Add: Stock-based employee compensation
expense included in reported net income, net
of related tax effects 307 215 888 1,079
Deduct: Total stock-based employee compensation
expense determined under the fair value method
for all awards, net of related tax effects (337) (218) (1,042) (1,153)
-------------------------------------------------------------------- -------------------
Pro forma net income $4,877 $4,492 $52,427 $51,078
------------------------------------------------------------------------------------------
RECLASSIFICATIONS. We have reclassified certain prior-year balances to
conform to the current period presentation.
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 JUNE 30, 2005:
- ----------------------------------------------------------------------------------
Gas Electric
Total Utility Utility
- ----------------------------------------------------------------------------------
Revenues $111,534 $ 89,504 $22,030
Cost of sales - gas, fuel and purchased power 65,244 54,612 10,632
Depreciation and amortization 6,019 5,240 779
Operating income 12,668 7,692 4,976
Interest expense 4,394 3,923 471
Income before income taxes 8,274 3,769 4,505
Total assets at period end 865,931 768,723 97,208
- ----------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, 2004:
- ----------------------------------------------------------------------------------
Gas Electric
Total Utility Utility
- ----------------------------------------------------------------------------------
Revenues $118,717 $ 97,710 $21,007
Cost of sales - gas, fuel and purchased power 74,751 65,107 9,644
Depreciation and amortization 5,436 4,895 541
Operating income 12,282 6,857 5,425
Interest expense 4,399 3,859 540
Income before income taxes 7,883 2,998 4,885
Total assets at period end 823,600 735,503 88,097
- ----------------------------------------------------------------------------------
-6-
UGI UTILITIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
---------------------------------------
(unaudited)
(Thousands of dollars, except per share amounts)
NINE MONTHS ENDED JUNE 30, 2005:
- ----------------------------------------------------------------------------------
Gas Electric
Total Utility Utility
- ----------------------------------------------------------------------------------
Revenues $576,469 $506,584 $69,885
Cost of sales - gas, fuel and purchased power 372,033 338,500 33,533
Depreciation and amortization 17,785 15,470 2,315
Operating income 101,207 84,379 16,828
Interest expense 13,543 12,034 1,509
Income before income taxes 87,664 72,345 15,319
Total assets at period end 865,931 768,723 97,208
- ----------------------------------------------------------------------------------
NINE MONTHS ENDED JUNE 30, 2004:
- ----------------------------------------------------------------------------------
Gas Electric
Total Utility Utility
- ----------------------------------------------------------------------------------
Revenues $557,618 $490,518 $67,100
Cost of sales - gas, fuel and purchased power 356,887 325,243 31,644
Depreciation and amortization 16,906 14,632 2,274
Operating income 99,509 82,750 16,759
Interest expense 13,460 11,887 1,573
Income before income taxes 86,049 70,863 15,186
Total assets at period end 823,600 735,503 88,097
- ----------------------------------------------------------------------------------
-7-
UGI UTILITIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
---------------------------------------
(unaudited)
(Thousands of dollars, except per share amounts)
3. REDEMPTION OF SERIES PREFERRED STOCK AND LONG-TERM DEBT
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.
In May 2005, UGI Utilities refinanced $20,000 of its maturing 6.62%
Medium-Term Notes with proceeds from the issuance of $20,000 of 5.16%
Medium-Term Notes due in May 2015.
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 postretirement life insurance benefits to nearly
all active and retired employees.
-8-
UGI UTILITIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
---------------------------------------
(unaudited)
(Thousands of dollars, except per share amounts)
Net periodic pension expense and other postretirement benefit costs
relating to UGI Utilities' employees include the following components:
--------------------------------------------------------------------------------
Other Postretirement
Pension Benefits Benefits
---------------------- --------------------
Three Months Ended Three Months Ended
June 30, June 30,
---------------------- ------------------
2005 2004 2005 2004
--------------------------------------------------------------------------------
Service cost $ 1,090 $ 1,165 $ 29 $ 30
Interest cost 2,998 3,095 368 364
Expected return on assets (3,975) (4,108) (119) (115)
Amortization of:
Transition (asset) obligation - (328) 169 170
Prior service cost 155 166 - -
Actuarial loss 308 288 81 68
--------------------------------------------------------------------------------
Net benefit cost 576 278 528 517
Change in regulatory assets
and liabilities - - 247 258
--------------------------------------------------------------------------------
Net expense $ 576 $ 278 $ 775 $ 775
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Other Postretirement
Pension Benefits Benefits
---------------------- --------------------
Nine Months Ended Nine Months Ended
June 30, June 30,
-------------------- --------------------
2005 2004 2005 2004
--------------------------------------------------------------------------------
Service cost $ 3,270 $ 3,495 $ 86 $ 90
Interest cost 8,994 9,285 1,105 1,092
Expected return on assets (11,925) (12,324) (357) (345)
Amortization of:
Transition (asset) obligation - (984) 507 510
Prior service cost 465 498 - -
Actuarial loss 924 864 244 204
--------------------------------------------------------------------------------
Net benefit cost 1,728 834 1,585 1,551
Change in regulatory assets
and liabilities - - 740 774
--------------------------------------------------------------------------------
Net expense $ 1,728 $ 834 $2,325 $2,325
--------------------------------------------------------------------------------
UGI Utilities Pension Plan assets are held in trust and consist principally
of equity and fixed income mutual funds. The Company does not believe it
will be required to make any contributions to the UGI Utilities Pension
Plan during the year ending September 30, 2005 for ERISA funding purposes.
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. During the nine months ended June 30, 2005, the Company
contributed approximately $1,900 to the VEBA and expects to contribute
approximately $2,300 for the twelve months ended September 30, 2005.
-9-
UGI UTILITIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
---------------------------------------
(unaudited)
(Thousands of dollars, except per share amounts)
We also sponsor an unfunded and non-qualified supplemental executive
retirement income plan. We recorded pre-tax expense for this plan of $116
and $332 for the three and nine months ended June 30, 2005, respectively,
and $104 and $312 for the three and nine months ended June 30, 2004,
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 alleging that the third party defendants are
responsible for an equitable share of costs
-10-
UGI UTILITIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
---------------------------------------
(unaudited)
(Thousands of dollars, except per share amounts)
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. In March 2005, the court
granted UGI Utilities' motion for summary judgment and dismissed AGL's
complaint. AGL has appealed.
AGL has informed UGI Utilities that it has begun remediation of MGP wastes
at a site owned by AGL in Savannah, Georgia. A former subsidiary of UGI
Utilities operated the MGP in the early 1900s. AGL 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 nine cities in the State of
Connecticut. The Northeast Companies allege that UGI
-11-
UGI UTILITIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
---------------------------------------
(unaudited)
(Thousands of dollars, except per share amounts)
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 June
30, 2005, 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 at the expiration of
the SCAA, Energy Services is required to transfer 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 reflects 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 June 30, 2005, comprising 4.4 billion cubic feet of natural
gas, was $33,668.
-12-
UGI UTILITIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
---------------------------------------
(unaudited)
(Thousands of dollars, except per share amounts)
7. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In May 2005, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 154, "Accounting Changes and Error Corrections" ("SFAS 154"). SFAS 154
replaces APB No. 20, "Accounting Changes" and SFAS No. 3, "Reporting
Accounting Changes in Interim Financial Statements," and establishes
retrospective application as the required method for reporting a change in
accounting principle. SFAS 154 provides guidance for determining whether
retrospective application of a change in accounting principle is
impracticable and for reporting a change when retrospective application is
impracticable. SFAS 154 is effective for accounting changes and corrections
of errors made in fiscal years beginning after December 15, 2005.
In March 2005, the FASB issued Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations" ("FIN 47"). It requires an entity
to recognize a liability for a conditional asset retirement obligation when
incurred if the liability can be reasonably estimated. FIN 47 clarifies
that the term "Conditional Asset Retirement Obligation" refers to a legal
obligation to perform an asset retirement activity in which the timing
and/or method of settlement are conditional on a future event that may or
may not be within the control of the entity. FIN 47 also clarifies when an
entity would have sufficient information to reasonably estimate the fair
value of an asset retirement obligation. FIN 47 is effective no later than
the end of fiscal years ending after December 15, 2005. We are currently
evaluating the impact of FIN 47 but do not expect it to have a material
effect on our financial position or results of operations.
In December 2004, the 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 with our fiscal year ending September 30, 2006. 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
our results of operations or financial position. For disclosure regarding
pro forma net income as if we had determined stock-based compensation under
the fair value method prescribed by SFAS 123, see Note 1.
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UGI UTILITIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
---------------------------------------
(unaudited)
(Thousands of dollars, except per share amounts)
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. The adoption of SFAS 153
will not have a material effect on our financial position or results of
operations.
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UGI UTILITIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ANALYSIS OF RESULTS OF OPERATIONS
The following analyses compare our results of operations for (1) the three
months ended June 30, 2005 ("2005 three-month period") with the three months
ended June 30, 2004 ("2004 three-month period") and (2) the nine months ended
June 30, 2005 ("2005 nine-month period") with the nine months ended June 30,
2004 ("2004 nine-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.
2005 THREE-MONTH PERIOD COMPARED WITH 2004 THREE-MONTH PERIOD
- -------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Increase
Three Months Ended June 30, 2005 2004 (Decrease)
- -----------------------------------------------------------------------------------------------------------
(Millions of dollars)
GAS UTILITY:
Revenues $ 89.5 $ 97.7 $(8.2) (8.4)%
Total margin (a) $ 34.9 $ 32.6 $ 2.3 7.1%
Operating income $ 7.7 $ 6.9 $ 0.8 11.6%
Income before income taxes $ 3.8 $ 3.0 $ 0.8 26.7%
System throughput - bcf 15.3 15.5 (0.2) (1.3)%
Heating degree days - % warmer than normal (6.4)% (18.7)% - -
ELECTRIC UTILITY:
Revenues $ 22.0 $ 21.0 $ 1.0 4.8%
Total margin (a) $ 10.2 $ 10.2 $ - 0.0%
Operating income $ 5.0 $ 5.4 $(0.4) (7.4)%
Income before income taxes $ 4.5 $ 4.9 $(0.4) (8.2)%
Distribution sales - gwh 222.5 221.5 1.0 0.5%
- -----------------------------------------------------------------------------------------------------------
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 and $1.1 million in the three-month
periods ended June 30, 2005 and 2004, respectively. For financial
statement purposes, revenue-related taxes are included in "taxes other
than income taxes" on the Condensed Statements of Income.
GAS UTILITY. Although weather in Gas Utility's service territory based upon
heating degree-days was 6.4% warmer than normal during the 2005 three-month
period, weather was 15.1% colder than the prior-year three-month period.
Notwithstanding the colder 2005 three-month period weather and year-over-year
growth in the number of our customers, total distribution system throughput
decreased slightly as slightly higher sales to firm- residential, commercial and
industrial ("retail core-market") customers were more than offset by lower
volumes transported
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UGI UTILITIES, INC.
for firm and interruptible delivery service customers. Although sales to retail
core-market customers increased, persistently high natural gas prices resulted
in price-induced customer conservation. The $8.2 million decrease in Gas Utility
revenues during the 2005 three-month period reflects a $15.6 million decrease in
revenues from low-margin off-system sales partially offset principally by higher
retail core-market revenues reflecting the effects of higher average purchased
gas cost ("PGC") rates and the previously mentioned higher retail core-market
volumes. Gas Utility's cost of gas was $54.6 million in the 2005 three-month
period compared to $65.1 million in the 2004 three-month period reflecting the
impact of the previously mentioned lower off-system sales partially offset by
higher retail core-market purchased gas costs.
Gas Utility total margin in the 2005 three-month period increased $2.3 million
reflecting higher average unit margins from interruptible customers and
increased retail core-market margin resulting from the higher sales.
Gas Utility operating income increased to $7.7 million in the 2005 three-month
period from $6.9 million in the 2004 three-month period principally reflecting
the $2.3 million increase in total margin and a $0.8 million increase in other
income partially offset by higher operating and administrative costs and greater
depreciation expense. Total operating and administrative expenses were $1.9
million higher than the prior-year period principally reflecting higher
employee-related expenses including higher incentive compensation costs. The
increase in Gas Utility income before income taxes reflects the previously
mentioned increase in operating income.
ELECTRIC UTILITY. Electric Utility's 2005 three-month period kilowatt-hour sales
were essentially equal with the prior-year period. Electric Utility revenues
increased $1.0 million in the 2005 three-month period reflecting an increase in
its Provider of Last Resort ("POLR") electric generation rates effective January
1, 2005. Electric Utility's cost of sales increased $1.0 million as a result of
higher per-unit purchased power costs.
Electric Utility total margin in the 2005 three-month period was comparable to
the 2004 three-month period as the increase in POLR electric generation revenues
was substantially offset by the increase in purchased power costs.
Operating income and income before income taxes were lower in the 2005
three-month period primarily reflecting higher operating and administrative
expenses and greater depreciation expense.
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UGI UTILITIES, INC.
2005 NINE-MONTH PERIOD COMPARED WITH 2004 NINE-MONTH PERIOD
- -----------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Increase
Nine Months Ended June 30, 2005 2004 (Decrease)
- -----------------------------------------------------------------------------------------------------------
(Millions of dollars)
GAS UTILITY:
Revenues $506.6 $490.5 $16.1 3.3%
Total margin (a) $168.1 $165.3 $ 2.8 1.7%
Operating income $ 84.4 $ 82.8 $ 1.6 1.9%
Income before income taxes $ 72.3 $ 70.9 $ 1.4 2.0%
System throughput - bcf 69.2 70.0 (0.8) (1.1)%
Heating degree days - % colder (warmer) than normal 0.0% (2.0)% - -
ELECTRIC UTILITY:
Revenues $ 69.9 $ 67.1 $ 2.8 4.2%
Total margin (a) $ 32.5 $ 31.8 $ 0.7 2.2%
Operating income $ 16.8 $ 16.8 $ - 0.0%
Income before income taxes $ 15.3 $ 15.2 $ 0.1 0.7%
Distribution sales - gwh 753.7 747.2 6.5 0.9%
- -----------------------------------------------------------------------------------------------------------
(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 $3.9 million and $3.6 million in the nine-month
periods ended June 30, 2005 and 2004, respectively.
GAS UTILITY. Weather in Gas Utility's service territory during the 2005
nine-month period was approximately normal compared with weather that was 2.0%
warmer than normal in the 2004 nine-month period. Notwithstanding the slightly
colder weather and year-over-year customer growth, total distribution system
throughput decreased 0.8 bcf or 1.1% as persistently high natural gas prices
resulted in price-induced customer conservation principally in our retail
core-market. During the quarter ended June 30, 2005, the Company revised its
heating degree day statistics for the first and second fiscal quarters of 2005
due to a measurement error caused by an equipment malfunction. On an adjusted
basis, weather was 3.0% warmer than normal during the three months ended
December 31, 2004 (versus 0.5% colder than normal as previously reported), and
3.6% colder than normal during the three months ended March 31, 2005 (versus
5.7% colder than normal as previously reported). For the six months ended March
31, 2005, weather was 0.9% colder than normal (versus 3.6% colder than normal as
previously reported). The adjusted statistics did not have an effect on the
Company's results of operations or the discussion of those results included in
the Company's "Management's Discussion and Analysis of Results of Operations"
for the periods described above, other than to lessen the estimated effects of
price-induced conservation on throughput from our retail core-market customers
for all the periods affected. The decrease in retail core-market throughput
during the 2005 nine-month period was partially offset by higher interruptible
delivery service volumes. The increase in Gas Utility revenues during the 2005
nine-month period principally is a result of a $52.4 million increase in retail
core-market revenues and higher revenues from interruptible customers partially
offset by a $40.6 million decrease in revenues from low-margin off-system sales.
The increase in retail core-market revenues reflects higher average PGC rates.
Gas Utility's cost of gas was $338.5 million in
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UGI UTILITIES, INC.
the 2005 nine-month period compared to $325.2 million in the 2004 nine-month
period reflecting the effects of the higher average PGC rates partially offset
by the effects on cost of sales from the lower off-system sales.
The $2.8 million increase in Gas Utility total margin principally reflects
greater margin generated from the higher interruptible delivery service volumes
and higher average interruptible delivery service unit margins. The increased
interruptible unit margins reflect an increase in the spread between prices for
natural gas and alternative fuels, principally oil.
Gas Utility operating income increased $1.6 million during the 2005 nine-month
period as the previously mentioned $2.8 million increase in total margin and a
$2.9 million increase in other income were partially offset by higher operating
and administrative costs and a $0.8 million increase in depreciation expense.
Other income increased due in large part to the absence of costs recorded in the
prior-year nine-month period related to settling a regulatory claim resulting
from the discontinuance of natural gas service to certain customers and higher
other non-tariff income. Operating and administrative expenses increased $3.3
million in the 2005 nine-month period principally reflecting higher employee
compensation and benefits expense including greater incentive compensation
expenses, the absence of environmental insurance settlements received in the
prior-year period and, to a lesser extent, greater uncollectible accounts
expense. These increases in expenses were partially offset by lower required
provisions for injuries and damages claims. The increase in Gas Utility income
before income taxes principally reflects the increase in operating income
partially offset by the effects of slightly higher interest expense.
ELECTRIC UTILITY. Electric Utility's 2005 nine-month period kilowatt-hour sales
were slightly higher than the prior-year period on weather that was slightly
colder than the prior year. The increase in Electric Utility revenues
principally reflects higher POLR rates. Electric Utility's cost of sales
increased $1.9 million reflecting higher per-unit purchased power costs and, to
a lesser extent, the higher kilowatt-hour sales.
Electric Utility total margin in the 2005 nine-month period increased $0.7
million principally as a result of the previously mentioned increase in POLR
rates and the slight increase in kilowatt-hour sales partially offset by the
higher purchased power costs. Operating income and income before income taxes in
the 2005 nine-month period were comparable with the prior-year reflecting the
previously mentioned increase in total margin offset by increased operating and
administrative expenses, most notably related to increased distribution system
maintenance.
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UGI UTILITIES, INC.
FINANCIAL CONDITION AND LIQUIDITY
FINANCIAL CONDITION
The Company's total debt outstanding at June 30, 2005 totaled $286.6 million
(including $49.5 million in bank loans) compared with $278.1 million (including
$60.9 million in bank loans) at September 30, 2004. In May 2005, we refinanced
$20 million of our maturing 6.62% Medium-Term Notes that were due in May 2005
through the issuance of $20 million of 5.16% Medium-Term Notes due in May 2015.
In addition, we expect to refinance the $50 million of Medium-Term Notes due in
December 2005 with new Medium-Term Notes.
The Company has revolving credit commitments under which it may borrow up to
$110 million. These agreements expire in June 2007 and June 2008. At June 30,
2005, borrowings under these agreements totaled $49.5 million. UGI Utilities
filed a shelf registration statement with the U.S. Securities and Exchange
Commission covering a total of $125 million of debt securities. The registration
statement was declared effective on June 27, 2005.
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 short-term
borrowings, primarily its revolving credit agreements, to manage these seasonal
cash flow needs. Cash provided by operating activities was $71.4 million during
the nine months ended June 30, 2005 compared with $75.7 million during the
prior-year nine-month period. Cash flow from operating activities before changes
in operating working capital was $76.1 million in the 2005 nine-month period
compared to $81.9 million in the prior-year nine-month period principally
reflecting lower non-cash deferred income tax expense partially offset slightly
by higher operating results. Changes in operating working capital used $4.7
million of operating cash flow during the 2005 nine-month period compared with
$6.2 million used during the prior-year nine-month period principally reflecting
changes in accounts payable and higher net overcollections of deferred fuel
costs.
INVESTING ACTIVITIES. Cash used by investing activities was $31.2 million in the
2005 nine-month period compared with $27.9 million in the prior-year period.
Expenditures for property, plant and equipment were $30.4 million in the 2005
nine-month period compared with $26.6 million recorded in the prior-year period
due in part to greater information technology systems expenditures. Net costs of
property, plant and equipment disposals were lower in the 2005 nine-month period
reflecting slightly greater proceeds from the sale of property.
FINANCING ACTIVITIES. Cash used by financing activities was $39.5 million in the
2005 nine-month period compared with $45.8 million in the prior-year period.
Financing activity cash flows are primarily the result of 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. During the 2005 and 2004 nine-month periods, we paid
dividends of
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UGI UTILITIES, INC.
$28.1 million and $35.2 million, respectively, to UGI. On October 1, 2004, we
redeemed all 200,000 shares of $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 million of 6.13% Medium-Term Notes due 2034. During the 2005 nine-month
period, we had net repayments of short-term borrowings of $31.4 million ($11.4
million with maturities of three months or less) compared to net repayments of
$10.6 million in the prior-year period. UGI Utilities borrowed and repaid $20
million associated with a short-term loan that matured March 1, 2005. As
previously mentioned, in May 2005, we refinanced $20 million of our maturing
6.62% Medium-Term Notes through the issuance of $20 million of 5.16% Medium-Term
Notes.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In May 2005, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 154, "Accounting Changes and
Error Corrections" ("SFAS 154"). SFAS 154 replaces APB No. 20, "Accounting
Changes" and SFAS No. 3, "Reporting Accounting Changes in Interim Financial
Statements" and establishes retrospective application as the required method for
reporting a change in accounting principle. SFAS 154 provides guidance for
determining whether retrospective application of a change in accounting
principle is impracticable and for reporting a change when retrospective
application is impracticable. SFAS 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
In March 2005, the FASB issued Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations" ("FIN 47"). It requires an entity to
recognize a liability for a conditional asset retirement obligation when
incurred if the liability can be reasonably estimated. FIN 47 clarifies that the
term "Conditional Asset Retirement Obligation" refers to a legal obligation to
perform an asset retirement activity in which the timing and/or method of
settlement are conditional on a future event that may or may not be within the
control of the entity. FIN 47 also clarifies when an entity would have
sufficient information to reasonably estimate the fair value of an asset
retirement obligation. FIN 47 is effective no later than the end of fiscal years
ending after December 15, 2005. We are currently evaluating the impact of FIN 47
but do not expect it to have a material effect on our financial position or
results of operations.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS 123R"). SFAS 123R replaces SFAS 123 and supersedes Accounting
Principles Board 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 with our fiscal year ending September 30, 2006.
Under all of the transition
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UGI UTILITIES, INC.
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 our results of operations or financial
position. For disclosure regarding pro forma net income as if we had determined
stock-based compensation under the fair value method prescribed by SFAS 123, see
Note 1 to the 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. The
adoption of SFAS 153 will not have a material effect on our financial position
or results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Gas Utility's tariffs contain clauses that permit recovery of substantially all
of the prudently incurred costs of natural gas it sells to its customers. The
recovery clauses provide for a periodic adjustment for the difference between
the total amount actually collected from customers and the recoverable costs
incurred. Because of this ratemaking mechanism, there is limited commodity price
risk associated with our Gas Utility operations. Gas Utility uses
exchange-traded natural gas call option contracts to reduce volatility in the
cost of gas it purchases for its retail core-market customers. The cost of these
call option contracts, net of associated gains, if any, is included in Gas
Utility's PGC recovery mechanism.
The risks associated with fluctuation in the prices 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 electricity from suppliers under fixed-price
energy and capacity contracts and, to a much lesser extent, on the spot market.
Prices for electricity can be volatile especially during periods of high demand
or tight supply. In accordance with Provider of Last Resort ("POLR") settlements
approved by the PUC, Electric Utility may increase its POLR rates up to certain
limits through December 31, 2006. In accordance with these settlements,
effective January 1, 2005, Electric Utility increased its POLR generation rates
for all metered customers by 4.5% of total rates in effect on December 31, 2004.
In addition, the POLR settlements permit Electric Utility to increase POLR
generation rates effective January 1, 2006 for all metered customers to a level
that is not greater than 7.5% above the total rates in effect on 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
could negatively impact Electric Utility's results. In order to reduce this
non-performance risk, Electric Utility has diversified its purchases across
several suppliers and entered into bilateral collateral arrangements
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UGI UTILITIES, INC.
with certain of them. Electric Utility may enter into electricity price swap
agreements to reduce the volatility in the cost of a portion of its anticipated
electricity requirements.
Our variable-rate debt includes borrowings under our revolving credit
agreements. These agreements provide for interest rates on borrowings that are
indexed to short-term market interest rates. Our long-term debt is typically
issued at fixed rates of interest based upon market rates for debt having
similar terms and credit ratings. As these long-term debt issues mature, we
expect to refinance such debt with new debt having an interest rate that is more
or less than the refinanced debt. In order to reduce interest rate risk
associated with near-term issuances of fixed-rate debt, we may enter into
interest rate protection agreements.
The fair values of our unsettled market risk sensitive derivative instruments
reflect the estimated amount that we would expect to receive or pay to terminate
the contract based upon quoted market prices of comparable contracts at June 30,
2005. At June 30, 2005, the fair value of our electricity price swap was a gain
of $3.9 million. An adverse change in electricity prices of ten percent would
result in a $1.2 million decrease in the fair value of the swap. At June 30,
2005, the fair value of our unsettled interest rate protection agreements, which
have been designated and qualify as cash flow hedges, was a loss of $4.3
million. An adverse change in interest rates on ten-year U.S. treasury notes of
ten percent would result in a $2.1 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.
PART II OTHER INFORMATION
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 June 30, 2005,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification by the Chief Financial Officer relating to the
Registrant's Report on Form 10-Q for the quarter ended June 30, 2005,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certification by the Chief Executive Officer and the Chief Financial
Officer relating to the Registrant's Report on Form 10-Q for the
quarter ended June 30, 2005, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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UGI UTILITIES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UGI Utilities, Inc.
-------------------
(Registrant)
Date: August 8, 2005 By: /s/ John C. Barney
- --------------------- -----------------------
John C. Barney
Senior Vice President - Finance
(Principal Financial Officer)
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UGI UTILITIES, INC.
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 June 30, 2005,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification by the Chief Financial Officer relating to the
Registrant's Report on Form 10-Q for the quarter ended June 30, 2005,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certification by the Chief Executive Officer and the Chief Financial
Officer relating to the Registrant's Report on Form 10-Q for the quarter
ended June 30, 2005, pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.