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, 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 a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. Large
accelerated filer Accelerated filer Non-accelerated filer X
----- ----- -----
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
----- -----
At January 31, 2006, there were 26,781,785 shares of UGI Utilities, Inc.
Common Stock, par value $2.25 per share, outstanding, all of which were held,
beneficially and of record, by UGI Corporation.
UGI UTILITIES, INC.
TABLE OF CONTENTS
PAGES
-------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of December 31, 2005,
September 30, 2005 and December 31, 2004 1
Condensed Statements of Income for the three
months ended December 31, 2005 and 2004 2
Condensed Statements of Cash Flows for the
three months ended December 31, 2005 and 2004 3
Notes to Condensed Financial Statements 4 - 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12 - 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16 - 17
Item 4. Controls and Procedures 18
PART II OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 6. Exhibits 20
Signatures 21
-i-
UGI UTILITIES, INC.
CONDENSED BALANCE SHEETS
(unaudited)
(Thousands of dollars)
December 31, September 30, December 31,
2005 2005 2004
------------ ------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,514 $ 2,686 $ 1,608
Accounts receivable (less allowances for doubtful accounts
of $5,560, $4,562 and $3,395, respectively) 89,253 48,597 65,014
Accounts receivable - related parties 1,268 1,063 1,010
Accrued utility revenues 59,190 10,360 38,828
Inventories 81,023 71,584 55,367
Deferred income taxes 2,184 12,484 7,507
Deferred fuel costs 9,435 -- --
Prepaid expenses and other current assets 3,457 9,563 1,481
---------- -------- --------
Total current assets 248,324 156,337 170,815
Property, plant and equipment, at cost (less accumulated depreciation
and amortization of $335,802, $330,329 and $317,975, respectively) 659,092 655,322 635,480
Regulatory assets 61,794 61,334 65,577
Other assets 31,763 30,680 28,715
---------- -------- --------
Total assets $1,000,973 $903,673 $900,587
========== ======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt $ -- $ 50,000 $ 70,000
Bank loans 145,500 81,200 83,000
Accounts payable 95,304 38,430 67,397
Accounts payable - related parties 3,520 14,371 5,670
Deferred fuel refunds -- 17,370 3,017
Other current liabilities 45,263 58,015 54,704
---------- -------- --------
Total current liabilities 289,587 259,386 283,788
Long-term debt 237,000 187,030 167,121
Deferred income taxes 162,198 160,920 159,206
Deferred investment tax credits 7,096 7,193 7,489
Other noncurrent liabilities 14,255 14,213 14,140
---------- -------- --------
Total liabilities 710,136 628,742 631,744
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 80,622 80,622 79,773
Retained earnings 148,599 133,807 130,936
Accumulated other comprehensive income (loss) 1,357 243 (2,125)
---------- -------- --------
Total common stockholder's equity 290,837 274,931 268,843
---------- -------- --------
Total liabilities and stockholder's equity $1,000,973 $903,673 $900,587
========== ======== ========
See accompanying notes to condensed financial statements.
-1-
UGI UTILITIES, INC.
CONDENSED STATEMENTS OF INCOME
(unaudited)
(Thousands of dollars)
Three Months Ended
December 31,
-------------------
2005 2004
-------- --------
Revenues $243,673 $183,481
-------- --------
Costs and expenses:
Cost of sales - gas, fuel and purchased power 171,246 117,589
Operating and administrative expenses 21,986 22,765
Operating and administrative expenses - related
parties 726 3,095
Taxes other than income taxes 3,262 3,188
Depreciation and amortization 6,188 5,800
Other income, net (1,961) (1,825)
-------- --------
201,447 150,612
-------- --------
Operating income 42,226 32,869
Interest expense 5,636 4,526
-------- --------
Income before income taxes 36,590 28,343
Income taxes 14,665 11,377
-------- --------
Net income $ 21,925 $ 16,966
======== ========
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,
-------------------
2005 2004
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 21,925 $ 16,966
Adjustments to reconcile net income to net cash used
by operating activities:
Depreciation and amortization 6,188 5,800
Deferred income taxes, net 10,397 540
Provision for uncollectible accounts 2,771 1,914
Other, net (1,827) 1,511
Net change in:
Accounts receivable and accrued utility revenues (92,462) (58,127)
Inventories (9,439) 9,810
Deferred fuel costs (26,805) (4,845)
Accounts payable 46,023 10,360
Other current assets and liabilities (4,170) 12,974
-------- --------
Net cash used by operating activities (47,399) (3,097)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment (9,713) (9,656)
Net costs of property, plant and equipment disposals (227) (276)
-------- --------
Net cash used by investing activities (9,940) (9,932)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of dividends (7,133) (7,484)
Redemption of preferred shares subject to mandatory redemption -- (20,000)
Increase in bank loans with maturities of
three months or less 64,300 22,100
Repayment of debt (50,000) --
Issuance of debt 50,000 20,000
-------- --------
Net cash provided by financing activities 57,167 14,616
-------- --------
Cash and cash equivalents (decrease) increase $ (172) $ 1,587
======== ========
CASH AND CASH EQUIVALENTS:
End of period $ 2,514 $ 1,608
Beginning of period 2,686 21
-------- --------
(Decrease) increase $ (172) $ 1,587
======== ========
See accompanying notes to condensed financial statements.
-3-
UGI UTILITIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
(Thousands of dollars)
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, 2005
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, 2005 ("Company's 2005 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, 2005 and 2004:
Three Months Ended
December 31,
------------------
2005 2004
------- -------
Net income $21,925 $16,966
Other comprehensive income (loss) 1,114 (670)
------- -------
Comprehensive income $23,039 $16,296
======= =======
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 ("Units") of UGI
Common Stock under UGI's equity compensation plans. Such awards typically
vest ratably over a period of years (generally three years). There are
certain change of control and retirement eligibility conditions that, if
met, generally result in an acceleration of vesting. Stock options for UGI
Common Stock generally can be exercised no later than ten years from the
grant date, Effective October 1, 2005, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 123 (revised 2004),
"Share-Based Payment" ("SFAS 123R"). Prior to October 1, 2005, as
permitted, we applied 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 stock, stock options and other
equity instruments to
-4-
UGI UTILITIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
(Thousands of dollars)
employees. Under APB 25, the Company did not record any compensation
expense for stock options, but provided the required pro forma disclosures
as if we had determined compensation expense under the fair value method
prescribed by the provisions of SFAS No. 123. Under SFAS 123R, all
equity-based compensation cost is measured on the grant date or at period
end based on the fair value of that award and is recognized in the income
statement over the requisite service period.
Under the modified prospective approach, effective October 1, 2005, we
began recording compensation expense for awards that were not vested as of
that date. We used the Black-Scholes option-pricing model to estimate the
fair value of each option prior to adoption of SFAS 123R and continue to
use this model. The adoption of SFAS 123R resulted in compensation expense
associated with stock options of $43 ($25 after-tax) during the three
months ended December 31, 2005. As of December 31, 2005, there was $287 of
unrecognized compensation cost related to non-vested stock options that is
expected to be recognized over a weighted average period of 1.9 years.
Assuming no significant change in the level of future stock option grants
to UGI Utilities' employees, we do not believe that compensation expense
associated with stock options will have a material impact on our financial
position, results of operations or cash flows.
Both prior to and after the adoption of SFAS 123R, we measured and recorded
compensation cost of Units awarded that can be settled in cash or at UGI's
option in cash or shares of Common Stock, or a combination of both, based
upon their fair value as of the end of each period. The fair value of Units
are dependent upon UGI's stock price and its performance in comparison to a
group of peer companies. The fair value of these awards is expensed over
requisite service periods.
We recorded total net pre-tax equity-based compensation (benefit) expense
of ($621) and $761, during the three months ended December 31, 2005 and
2004, respectively. The period ended December 31, 2005 reflects a net
compensation benefit predominantly due to changes in stock prices. The
following table illustrates the effects on net income as if we had applied
the provisions of SFAS 123R to all stock-based compensation awards for the
period prior to the adoption of SFAS 123R
For the Three Months Ended December 31, 2004
Net income, as reported $16,966
Add: Stock-based employee compensation (benefit)
expense included in reported net income, net
of related tax effects 445
Deduct: Total stock-based employee compensation benefit
(expense) determined under the fair value method
for all awards, net of related tax effects (490)
-------
Pro forma net income $16,921
=======
The total net after-tax equity-based compensation benefit recorded during
the three months ended December 31, 2005 was $364. As of December 31, 2005,
there was a total of $510 of unrecognized compensation expense associated
with 32,400 Unit awards that are expected to be recognized over a weighted
average period of 1.7 years. At December 31, 2005, total liabilities of
$1,340 associated with Unit awards are reflected in other current
liabilities and other noncurrent liabilities in the Condensed Balance
Sheet.
The following table illustrates the number of non-vested Unit awards:
Number of Average Fair
UGI Units Value (per Unit)
--------- ----------------
Non-vested awards-September 30, 2005 43,650 $30.14
Vested (11,250)
Non-vested awards-December 31, 2005 32,400 $22.52
RECLASSIFICATIONS. We have reclassified certain prior-year balances to
conform to the current period presentation.
-5-
UGI UTILITIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
(Thousands of dollars)
USE OF ESTIMATES. We make estimates and assumptions when preparing
financial statements in conformity with accounting principles generally
accepted in the United States 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 2005 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.
Financial information by business segment follows:
THREE MONTHS ENDED DECEMBER 31, 2005:
Gas Electric
Total Utility Utility
---------- -------- --------
Revenues $ 243,673 $219,799 $ 23,874
Cost of sales - gas, fuel and purchased power 171,246 159,920 11,326
Depreciation and amortization 6,188 5,375 813
Operating income 42,226 35,690 6,536
Interest expense 5,636 5,109 527
Income before income taxes 36,590 30,581 6,009
---------- -------- --------
Total assets at period end 1,000,973 896,809 104,164
========== ======== ========
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 900,587 809,634 90,953
======== ======== =======
-6-
UGI UTILITIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
(Thousands of dollars)
3. LONG-TERM DEBT
In December 2005, UGI Utilities refinanced $50,000 of its maturing 7.14%
Medium-Term Notes with proceeds from the issuance of $50,000 of 5.64%
Medium-Term Notes due in December 2015. These Medium-Term Notes were issued
pursuant to the Company's $125,000 shelf registration statement with the
SEC.
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.
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,
------------------ -----------------------------
2005 2004 2005 2004
------- ------- ----- -----
Service cost $ 1,310 $ 1,090 $ 32 $ 29
Interest cost 3,222 2,998 204 368
Expected return on assets (4,448) (3,975) (152) (119)
Amortization of:
Transition obligation -- -- -- 169
Prior service cost (benefit) 196 155 (55) --
Actuarial loss 427 308 48 81
------- ------- ----- -----
Net benefit cost 707 576 77 528
Change in regulatory assets
and liabilities -- -- 698 247
------- ------- ----- -----
Net expense $ 707 $ 576 $ 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, 2006 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 three months ended December 31, 2005, the Company
contributed approximately $180 to the VEBA and expects to
-7-
UGI UTILITIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
(Thousands of dollars)
contribute a total of approximately $800 during the twelve months ending
September 30, 2006.
We also sponsor an unfunded and non-qualified supplemental executive
retirement income plan. We recorded pre-tax expense for this plan of $96
and $108 for the three months ended December 31, 2005 and 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. We accrue environmental investigation and cleanup costs
when it is probable that a liability exists and the amount or range of
amounts can be reasonably estimated.
Management believes that under applicable law UGI Utilities should not be
liable in those instances in which a former subsidiary owned or operated an
MGP. There could be, however, significant future costs of an uncertain
amount associated with environmental damage caused by MGPs outside
Pennsylvania that UGI Utilities directly operated, or that were owned or
operated by former subsidiaries of UGI Utilities, if a court were to
conclude that (1) the subsidiary's separate corporate form should be
disregarded or (2) UGI Utilities should be considered to have been an
operator because of its conduct with respect to its subsidiary's MGP.
In 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
-8-
UGI UTILITIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
(Thousands of dollars)
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
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 plant from 1901 to 1928. Studies
conducted by the City and Citizens suggest that it could cost up to $18,000
to clean up the river. Citizens' third-party claims have been stayed
pending a resolution of the City's suit against Citizens, which was tried
in September 2005 and has not yet been decided. 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 dismissing AGL's
complaint. AGL has appealed.
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 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.
The trial court granted UGI Utilities' motion for summary judgment and
dismissed ConEd's complaint. The grant of summary judgment was entered
April 1, 2004. ConEd appealed and on September 9, 2005 a panel of the
Second Circuit Court of Appeals affirmed in part and reversed in part the
decision of the trial court. The appellate panel affirmed the trial court's
decision dismissing claims that UGI Utilities was liable under CERCLA as an
operator of MGPs owned and operated by its former subsidiaries. The
appellate panel reversed the trial court's decision that UGI Utilities was
released from
-9-
UGI UTILITIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
(Thousands of dollars)
liability at three sites where UGI Utilities operated MGPs under lease. On
October 7, 2005, UGI Utilities filed for reconsideration of the panel's
order. On January 17, 2006, the Second Circuit denied UGI Utilities'
request for reconsideration of the panel's order. UGI Utilities believes
that any liability it may have for a share of the response costs at the
three leased MGP sites will not have a material effect on its financial
condition or results of operations.
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 Utilities controlled
operations of the plants from 1883 to 1941. According to the letter,
investigation and remediation 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 and result in losses in excess of recorded
amounts. We are unable to estimate any possible losses in excess of
recorded amounts. 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.
6. RELATED PARTY TRANSACTIONS
UGI provides certain financial and administrative services to UGI
Utilities. UGI bills UGI Utilities monthly for all direct and for an
allocated share of indirect corporate expenses incurred or paid on behalf
of UGI Utilities. These billed expenses are classified as operating and
administrative expenses - related parties in the Condensed Statements of
Income. In addition, UGI Utilities provides limited administrative services
to UGI and
-10-
UGI UTILITIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
(Thousands of dollars)
certain of UGI's subsidiaries, principally payroll related services.
Amounts billed to these entities by UGI Utilities for all periods presented
were not material.
Effective December 1, 2004, following a competitive bidding process, UGI
Utilities entered into a Storage Contract Administration Agreement
("Storage Agreement") with Energy Services, Inc., a second-tier wholly
owned subsidiary of UGI ("Energy Services"). The Storage Agreement was
initially scheduled to expire on October 31, 2005, but effective November
1, 2005, UGI Utilities and Energy Services agreed to extend the Storage
Agreement through October 31, 2008. Under the Storage Agreement, Energy
Services provides a firm natural gas delivery service to UGI Utilities. UGI
Utilities has released certain gas transportation and storage contracts
through October 31, 2008 and 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 Storage Agreement. In exchange for the ability to
utilize these assets, Energy Services pays a monthly fee to UGI Utilities.
During the three months ended December 31, 2005, UGI Utilities purchased
natural gas storage inventories from Energy Services under the Storage
Agreement totaling $10,297 and incurred associated pipeline transportation
and storage capacity charges of $5,435.
UGI Utilities reflects the historical cost of the gas storage inventories
and any exchange receivable from Energy Services (representing amounts of
natural gas inventories used 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, 2005, comprising
approximately 8.7 billion cubic feet of natural gas, was $72,358.
UGI Utilities has a Gas Supply and Delivery Service Agreement with Energy
Services pursuant to which Energy Services provides certain gas supply and
related delivery services to Gas Utility during the peak heating-season
months of November to March. In addition, from time to time, Gas Utility
purchases natural gas or pipeline capacity from Energy Services. The
aggregate amount of these transactions (exclusive of Storage Agreement
transactions) during the three months ended December 31, 2005 and 2004,
totaled $3,271 and $2,201, respectively.
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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) price volatility and availability of oil, electricity
and natural gas and the capacity to transport them 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 due to high energy prices and improvements in energy efficiency
and technology resulting in reduced demand; (7) adverse labor relations;
(8) large customer, counterparty or supplier defaults; (9) increased
uncollectible accounts expense; (10) liability for personal injury and
property damage arising from explosions and other catastrophic events,
including acts of terrorism, resulting from operating hazards and risks
incidental to generating and distributing electricity and transporting,
storing and distributing natural gas, including liability in excess of
insurance coverage; (11) political, regulatory and economic conditions in
the United States; and (12) reduced access to capital markets and interest
rate fluctuations.
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.
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UGI UTILITIES, INC.
ANALYSIS OF RESULTS OF OPERATIONS
The following analysis compares our results of operations for the three months
ended December 31, 2005 ("2005 three-month period") with the three months ended
December 31, 2004 ("2004 three-month period"). Our analysis 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 December 31, 2005 2004 (Decrease)
- ------------------------------- ------ ------ -------------
(Millions of dollars)
GAS UTILITY:
Revenues $219.8 $161.2 $58.6 36.4%
Total margin (a) $ 59.9 $ 54.6 $ 5.3 9.7%
Operating income $ 35.7 $ 28.1 $ 7.6 27.0%
Income before income taxes $ 30.6 $ 24.1 $ 6.5 27.0%
System throughput - bcf 22.9 23.0 (0.1) (0.4)%
Heating degree days - % warmer
than normal (b) (1.3)% (4.9)% -- --
ELECTRIC UTILITY:
Revenues $ 23.9 $ 22.3 $ 1.6 7.2%
Total margin (a) $ 11.2 $ 10.1 $ 1.1 10.9%
Operating income $ 6.5 $ 4.7 $ 1.8 38.3%
Income before income taxes $ 6.0 $ 4.3 $ 1.7 39.5%
Distribution sales - gwh 258.0 249.1 8.9 3.6%
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 $1.3 million and $1.2 million in the three-month periods ended
December 31, 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.
(b) Deviation from average heating degree days based upon weather data provided
by the National Oceanic and Atmospheric Administration ("NOAA") for four
airports located within Gas Utility's service territory.
GAS UTILITY. Weather in Gas Utility's service territory based upon heating
degree-days was 1.3% warmer than normal during the 2005 three-month period and
3.7% colder than in the prior-year three-month period. During the 2005
three-month period, the Company revised its method of calculating heating degree
day statistics to more accurately reflect temperatures across Gas Utility's
service territory by using a four location average. Previously we reported
degree day statistics using temperatures measured at one location in our service
territory. Heating degree day statistics for the 2004 three-month period have
been adjusted to reflect the revised method.
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UGI UTILITIES, INC.
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 a 0.8 bcf increase in sales to firm- residential,
commercial and industrial ("retail core-market") customers was more than offset
by lower volumes transported for firm and interruptible delivery service
customers.
During the 2005 three-month period, the Company adjusted its method of
estimating throughput and associated revenues for service provided through the
end of the month but not yet billed by more closely correlating such estimated
throughput to distribution system sendout data. The Company believes that the
new method of estimating unbilled throughput results in a more accurate
quarterly estimate of unbilled revenues and associated total margin. The change
in the method of estimating unbilled throughput resulted in a 0.6 bcf increase
in retail core-market volumes sold and associated increases in Gas Utility
revenues and total margin of $10.2 million and $1.9 million, respectively. Gas
Utility revenues increased $58.6 million during the 2005 three-month period
principally resulting from a $48.7 million increase in retail core-market
revenues, reflecting the effects of higher average purchased gas cost ("PGC")
rates and the higher volumes sold, and a $7.9 million increase in revenues from
low-margin off-system sales. Increases or decreases in retail core-market
customer revenues and cost of sales result principally from changes in retail
core-market volumes 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 at amounts included
in PGC rates. The difference between actual gas costs and the amount included in
rates is deferred on the balance sheet as a regulatory asset or liability and
represents amounts to be collected from or refunded to customers in a future
period. As a result of the PGC recovery mechanism, increases or decreases in the
cost of gas associated with retail core-market customers have no direct effect
on retail core-market margin. Gas Utility's cost of gas was $159.9 million in
the 2005 three-month period compared to $106.6 million in the 2004 three-month
period reflecting the impact of the previously mentioned higher retail
core-market purchased gas costs, the higher retail core-market volumes, and
costs associated with the greater off-system sales.
Gas Utility total margin in the 2005 three-month period increased $5.3 million
reflecting increased retail core-market margin principally resulting from the
higher sales to retail core-market customers and higher average unit margins
from interruptible customers.
Gas Utility operating income increased to $35.7 million in the 2005 three-month
period from $28.1 million in the 2004 three-month period principally reflecting
the $5.3 million increase in total margin and a $2.5 million decrease in total
operating and administrative expenses partially offset by an increase in
depreciation expense reflecting year-over-year increases in plant and equipment.
Total operating and administrative expenses were lower than the prior-year
period predominately reflecting lower stock-based incentive compensation costs,
including such costs allocated by UGI, partially offset by increased
uncollectible accounts expense. The increase in Gas Utility income before income
taxes reflects the previously mentioned increase in operating
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UGI UTILITIES, INC.
income partially offset by an increase in interest expense principally
attributable to higher short-term debt outstanding and higher short-term
interest rates.
ELECTRIC UTILITY. Electric Utility's 2005 three-month period kilowatt-hour sales
were 3.6% higher than in the prior-year period. Electric Utility revenues
increased $1.6 million in the 2005 three-month period largely reflecting a 4.5%
increase in its Provider of Last Resort ("POLR") electric generation rates
effective January 1, 2005 and the effects of the higher sales. Electric
Utility's cost of sales increased $0.3 million as a result of the increased
kilowatt-hour sales.
Electric Utility total margin in the 2005 three-month period increased $1.1
million compared to the 2004 three-month period principally reflecting the
increase in POLR electric generation rates and the effect of the higher sales.
During the 2005 three-month period, the Company adjusted its method of
estimating sales and associated revenues for electricity consumed but not yet
billed to its customers. The change in the method of estimating unbilled sales
resulted in a 5 gwh increase in distribution system sales and associated
increases in Electric Utility revenues and total margin of $0.4 million.
Operating income increased in the 2005 three-month period reflecting the
increase in total margin and a decrease in operating and administrative expenses
that reflects, in part, lower stock-based incentive compensation costs. The
increase in income before income taxes principally reflects the higher operating
income reduced by higher interest expense on short-term debt.
FINANCIAL CONDITION AND LIQUIDITY
FINANCIAL CONDITION
The Company's total debt outstanding at December 31, 2005 totaled $382.5 million
(including $145.5 million in bank loans) compared with $318.2 million (including
$81.2 million in bank loans) at September 30, 2005. In December 2005, we
refinanced $50 million of maturing 7.14% Medium-Term Notes with proceeds from
the issuance of $50 million of 5.64% Medium-Term Notes due 2015.
The Company has revolving credit commitments under which it may borrow up to
$110 million. These agreements expire in June 2007 through June 2008. From time
to time, UGI Utilities enters into short-term borrowings under uncommitted
arrangements with major banks in order to meet liquidity needs during the
peak-heating season. At December 31, 2005, UGI Utilities had two $35 million
borrowings outstanding under these uncommitted arrangements and $75.5 million in
borrowings outstanding under the revolving credit agreements. Short-term
borrowings, including borrowings under revolving credit agreements, are
classified as bank loans on the Condensed Balance Sheets. UGI Utilities also has
a shelf registration statement with the Securities and Exchange Commission under
which it may issue up to an additional $75 million of Medium-Term Notes or other
debt securities. During the three months ended December 31, 2005 and 2004, peak
bank loan borrowings totaled $155.1 million and $89.7
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UGI UTILITIES, INC.
million, respectively. Average daily bank loan borrowings were $101.6 million
and $63.6 million during the three months ended December 31, 2005 and 2004,
respectively. The increase in bank loan borrowings during the 2005 three-month
period reflects, in large part, borrowings to fund increased working capital
resulting principally from higher natural gas prices.
CASH FLOWS
OPERATING ACTIVITIES. Due to the seasonal nature of UGI Utilities' gas business,
cash flows from operating activities are generally strongest during the second
and third fiscal quarters when customers pay bills 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 used by operating activities was $47.4 million during the
three months ended December 31, 2005 compared with $3.1 million during the
prior-year three-month period. Cash flow from operating activities before
changes in operating working capital was $39.5 million in the 2005 three-month
period compared to $26.7 million in the prior-year three-month period
reflecting, in large part, higher operating results and higher non-cash deferred
income tax expense. Changes in operating working capital used $86.9 million of
operating cash flow during the 2005 three-month period compared with $29.8
million used during the prior-year three-month period reflecting, in large part,
the effects of the higher gas costs on accounts receivable and inventories and
higher net undercollections of deferred fuel costs.
INVESTING ACTIVITIES. Cash used by investing activities was $9.9 million in both
the 2005 and 2004 three-month periods. Expenditures for property, plant and
equipment in the 2005 three-month period were comparable with the prior-year
period.
FINANCING ACTIVITIES. Cash used by financing activities was $57.2 million in the
2005 three-month period compared with $14.6 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 three-month periods, we paid
dividends of $7.1 million and $7.5 million, respectively, to UGI. During the
2005 three-month period, we had net short-term borrowings of $64.3 million
compared to net borrowings of $22.1 million in the prior-year period. As
previously mentioned, in December 2005, we refinanced $50 million of our
maturing 7.14% Medium-Term Notes through the issuance of $50 million of 5.64%
Medium-Term Notes due 2015.
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 periodic
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UGI UTILITIES, INC.
adjustments 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
Electric Utility purchases its power needs from electricity suppliers under
fixed-price energy and capacity contracts and, to a much lesser extent, on the
spot market. Prices for electricity can be volatile especially during periods of
high demand or tight supply. In accordance with 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, Electric Utility
increased its POLR generation rates for all metered customers by a total 7.5% of
its total rates in effect on December 31, 2004 (an increase of 4.5% effective
January 1, 2005 and an additional increase of 3% effective January 1, 2006).
Currently, Electric Utility's fixed-price power and capacity contracts with
electricity suppliers mitigate a substantial portion of its commodity price risk
associated with POLR service rate limits in effect through December 31, 2006.
With respect to its existing fixed-price power and capacity contracts, should
any of the counterparties fail to provide electric power or capacity under the
terms of such contracts, any increases in the cost of replacement power or
capacity could negatively impact Electric Utility results. In order to reduce
the risk associated with non-performance, Electric Utility has diversified its
purchases across several suppliers and entered into bilateral collateral
arrangements with certain of them. At December 31, 2005, Electric Utility held
$5.9 million in collateral deposits which are reflected in other current
liabilities on the Condensed Balance Sheet. Electric Utility has and may enter
into electric price swap agreements to reduce the volatility in the cost of a
portion of its anticipated electricity requirements.
Our variable-rate debt includes short-term borrowings, including 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 December
31, 2005. At December 31, 2005, the fair value of our electricity price swap was
a gain of $7.5 million. An adverse change in electricity prices of ten percent
would result in a $1.5 million decrease in the fair value of the swap. At
December 31, 2005, the fair value of our unsettled interest rate protection
agreements, which have been designated and qualify as cash flow hedges, was a
gain of $0.2 million. An adverse change in interest rates on ten-year U.S.
treasury notes of ten percent would result in a $0.4 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 (i)
recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms, and
(ii) accumulated and communicated to our management, including the Chief
Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding disclosure..
(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 1. LEGAL PROCEEDINGS
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 million.
The trial court granted UGI Utilities' motion for summary judgment and dismissed
ConEd's complaint. The grant of summary judgment was entered April 1, 2004.
ConEd appealed and on September 9, 2005 a panel of the Second Circuit Court of
Appeals affirmed in part and reversed in part the decision of the trial court.
The appellate panel affirmed the trial court's decision dismissing claims that
UGI Utilities was liable under CERCLA as an operator of MGPs owned and operated
by its former subsidiaries. The appellate panel reversed the trial court's
decision that Utilities was released from liability at three sites where UGI
Utilities operated MGPs under lease. On October 7, 2005, UGI Utilities filed for
reconsideration of the panel's order. On January 17, 2006, the Second Circuit
Court of Appeals denied UGI Utilities' request for reconsideration of the
panel's order. UGI Utilities believes that any liability it may have for a share
of the response costs at the three leased MGP sites will not have a material
effect on its financial condition or results of operations.
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UGI UTILITIES, INC.
ITEM 6. EXHIBITS
The exhibits filed as part of this report are as follows (exhibits incorporated
by reference are set forth with the name of the registrant, the type of report
and registration number or last date of the period for which it was filed, and
the exhibit number in such filing):
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, 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 December
31, 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 December 31, 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: February 9, 2006 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 December 31, 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 December 31, 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 December 31, 2005, pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.