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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 1-11071
UGI CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2668356
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
UGI CORPORATION
460 North Gulph Road, King of Prussia, PA
(Address of principal executive offices)
19406
(Zip Code)
(610) 337-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
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 X Accelerated filer __ Non-accelerated filer __
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 105,075,576 shares of UGI Corporation
Common Stock, without par value, outstanding.
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UGI CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
PAGES
-----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 2005,
September 30, 2005 and December 31, 2004 1
Condensed Consolidated Statements of Income for the three
months ended December 31, 2005 and 2004 2
Condensed Consolidated Statements of Cash Flows for the
three months ended December 31, 2005 and 2004 3
Notes to Condensed Consolidated Financial Statements 4 - 19
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20 - 30
Item 3. Quantitative and Qualitative Disclosures About Market Risk 30 - 32
Item 4. Controls and Procedures 33
PART II OTHER INFORMATION
Item 1. Legal Proceedings 34
Item 6. Exhibits 34 - 36
Signatures 37
-i-
UGI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(Millions of dollars)
December 31, September 30, December 31,
2005 2005 2004
------------ ------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 284.6 $ 315.0 $ 121.7
Restricted cash 237.7 -- --
Short-term investments (at cost, which approximates fair value) 75.0 70.0 55.0
Accounts receivable (less allowances for doubtful accounts of
$31.9, $29.2 and $26.9, respectively) 675.7 421.8 644.4
Accrued utility revenues 59.2 10.4 38.8
Inventories 262.0 239.9 226.3
Deferred income taxes 26.3 24.4 22.0
Derivative financial instruments 16.5 60.3 0.8
Deferred fuel costs 9.4 -- --
Prepaid expenses and other current assets 21.8 30.5 33.3
-------- -------- --------
Total current assets 1,668.2 1,172.3 1,142.3
Property, plant and equipment, at cost (less accumulated depreciation
and amortization of $1,012.9, $986.9 and $924.9, respectively) 1,805.7 1,802.7 1,843.0
Goodwill and excess reorganization value 1,222.1 1,231.2 1,305.3
Intangible assets (less accumulated amortization of
$48.9, $45.4 and $32.6, respectively) 166.4 172.6 200.6
Utility regulatory assets 61.8 61.3 65.6
Other assets 133.7 131.4 123.1
-------- -------- --------
Total assets $5,057.9 $4,571.5 $4,679.9
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 423.0 $ 252.0 $ 175.9
AmeriGas Propane bank loans -- -- 30.0
UGI Utilities bank loans 145.5 81.2 83.0
Other bank loans 16.7 16.2 19.2
Accounts payable 619.2 399.7 521.7
Deferred fuel refunds -- 17.4 3.0
Other current liabilities 380.3 396.6 380.3
-------- -------- --------
Total current liabilities 1,584.7 1,163.1 1,213.1
Long-term debt 1,454.5 1,392.5 1,561.9
Deferred income taxes 483.5 477.5 473.6
Other noncurrent liabilities 324.4 334.5 342.5
-------- -------- --------
Total liabilities 3,847.1 3,367.6 3,591.1
Commitments and contingencies (note 7)
Minority interests 198.0 206.3 169.8
Common stockholders' equity:
Common Stock, without par value (authorized - 300,000,000 shares;
issued - 115,152,994 shares) 795.0 793.6 763.3
Retained earnings 306.8 266.3 208.4
Accumulated other comprehensive (loss) income (10.8) 16.5 42.2
Notes receivable from employees -- -- (0.2)
-------- -------- --------
1,091.0 1,076.4 1,013.7
Treasury stock, at cost (78.2) (78.8) (94.7)
-------- -------- --------
Total common stockholders' equity 1,012.8 997.6 919.0
-------- -------- --------
Total liabilities and stockholders' equity $5,057.9 $4,571.5 $4,679.9
======== ======== ========
See accompanying notes to condensed consolidated financial statements.
- 1 -
UGI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(Millions of dollars, except per share amounts)
Three Months Ended
December 31,
-------------------------------
2005 2004
------------- --------------
Revenues $ 1,577.9 $ 1,362.4
Costs and expenses:
Cost of sales 1,150.7 925.2
Operating and administrative expenses 235.4 247.8
Utility taxes other than income taxes 3.3 3.2
Depreciation and amortization 36.3 37.6
Other income, net (8.0) (26.4)
------------- --------------
1,417.7 1,187.4
------------- --------------
Operating income 160.2 175.0
Loss from equity investees (0.6) (0.7)
Interest expense (32.6) (33.5)
------------- --------------
Income before income taxes and minority interests 127.0 140.8
Income taxes (38.5) (42.0)
Minority interests, principally in AmeriGas Partners (31.0) (20.6)
------------- --------------
Net income $ 57.5 $ 78.2
============= ==============
Earnings per common share:
Basic $ 0.55 $ 0.76
============= ==============
Diluted $ 0.54 $ 0.74
============= ==============
Average common shares outstanding (millions):
Basic 105.157 102.748
============= ==============
Diluted 106.623 105.200
============= ==============
Dividends declared per common share $ 0.1688 $ 0.1563
============= ==============
See accompanying notes to condensed consolidated financial statements.
- 2 -
UGI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Millions of dollars)
Three Months Ended
December 31,
-----------------------------------
2005 2004
--------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 57.5 $ 78.2
Reconcile to net cash provided by operating activities:
Depreciation and amortization 36.3 37.6
Minority interests 31.0 20.6
Deferred income taxes, net 10.8 1.5
Other, net (6.5) (6.3)
Net change in:
Accounts receivable and accrued utility revenues (312.2) (296.3)
Inventories (22.7) (12.4)
Deferred fuel costs (26.8) (4.8)
Accounts payable 222.0 169.6
Other current assets and liabilities (6.9) 17.1
--------------- --------------
Net cash (used) provided by operating activities (17.5) 4.8
--------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment (42.0) (40.9)
Net proceeds from disposals of assets 2.2 6.1
Acquisitions of businesses, net of cash acquired (0.6) (24.7)
Cash restricted for redemption of Antargaz' High Yield Bonds (239.4) -
Other, net (5.0) 2.5
--------------- --------------
Net cash used by investing activities (284.8) (57.0)
--------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends on UGI Common Stock (17.7) (16.0)
Distributions on AmeriGas Partners publicly held Common Units (18.1) (16.5)
Issuances of debt 503.1 20.5
Repayments of debt (259.8) (2.3)
AmeriGas Propane bank loans increase - 30.0
Increase in UGI Utilities bank loans with maturities of three months or less 64.3 22.1
Other bank loans increase 0.6 -
Redemption of UGI Utilities preferred shares subject to mandatory redemption - (20.0)
Issuance of UGI Common Stock 1.5 3.1
--------------- --------------
Net cash provided by financing activities 273.9 20.9
--------------- --------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (2.0) 3.4
--------------- --------------
Cash and cash equivalents decrease $ (30.4) $ (27.9)
=============== ==============
Cash and cash equivalents:
End of period $ 284.6 $ 121.7
Beginning of period 315.0 149.6
--------------- --------------
Decrease $ (30.4) $ (27.9)
=============== ==============
See accompanying notes to condensed consolidated financial statements.
- 3 -
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars and euros, except per share amounts)
1. BASIS OF PRESENTATION
UGI Corporation ("UGI") is a holding company that owns and operates
natural gas and electric utility, electricity generation, retail propane
distribution, energy marketing and related businesses in the United
States. Through foreign subsidiaries and a joint-venture affiliate, UGI
also distributes liquefied petroleum gases ("LPG") in France, Austria, the
Czech Republic, Slovakia and China.
We conduct a national propane distribution business through AmeriGas
Partners, L.P. ("AmeriGas Partners") and its principal operating
subsidiaries AmeriGas Propane, L.P. ("AmeriGas OLP") and AmeriGas OLP's
subsidiary, AmeriGas Eagle Propane, L.P. ("Eagle OLP"). AmeriGas Partners,
AmeriGas OLP and Eagle OLP are Delaware limited partnerships. UGI's wholly
owned second-tier subsidiary AmeriGas Propane, Inc. (the "General
Partner") serves as the general partner of AmeriGas Partners and AmeriGas
OLP. AmeriGas OLP and Eagle OLP (collectively referred to as the
"Operating Partnerships") comprise the largest retail propane distribution
business in the United States serving residential, commercial, industrial,
motor fuel and agricultural customers from locations in 46 states. We
refer to AmeriGas Partners and its subsidiaries together as the
"Partnership" and the General Partner and its subsidiaries, including the
Partnership, as "AmeriGas Propane." At December 31, 2005, the General
Partner and its wholly owned subsidiary Petrolane Incorporated
("Petrolane") collectively held a 1% general partner interest and a 42.7%
limited partner interest in AmeriGas Partners, and effective 44.3%
ownership interests in AmeriGas OLP and Eagle OLP. Our limited partnership
interest in AmeriGas Partners comprises 24,525,004 Common Units. The
remaining 56.3% interest in AmeriGas Partners comprises 32,272,101
publicly held Common Units representing limited partner interests.
Our wholly owned subsidiary, UGI Enterprises, Inc. ("Enterprises") (1)
owns and operates LPG distribution businesses in France ("Antargaz"); (2)
owns and operates LPG distribution businesses in Austria, the Czech
Republic and Slovakia ("FLAGA"); and (3) participates in a propane
joint-venture business in China. We refer to our foreign operations
collectively as "International Propane."
Our natural gas and electric distribution utility businesses are conducted
through our wholly owned subsidiary, UGI Utilities, Inc. ("UGI
Utilities"). UGI Utilities owns and operates a natural gas distribution
utility ("Gas Utility") in parts of eastern and southeastern Pennsylvania
and an electricity distribution utility ("Electric Utility") in
northeastern Pennsylvania. Gas Utility and Electric Utility are subject to
regulation by the Pennsylvania Public Utility Commission ("PUC").
In addition, Enterprises conducts an energy marketing business primarily
in the Eastern region of the United States through its wholly owned
subsidiary, UGI Energy Services, Inc. ("Energy Services"). Energy
Services' wholly owned subsidiary UGI Development Company ("UGID"), and
UGID's subsidiaries and joint-venture affiliate Hunlock Creek Energy
Ventures, own and operate interests in Pennsylvania-based electricity
generation assets. In addition, Energy Services' wholly owned subsidiary
UGI Asset Management, Inc., through its subsidiary Atlantic Energy, Inc.
(collectively, "Asset Management"), owns a propane storage terminal
located in Chesapeake, Virginia. Through other subsidiaries, Enterprises
owns and operates a heating, ventilation, air-
-4-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars and euros, except per share amounts)
conditioning, refrigeration and electrical contracting services business
in the Middle Atlantic states ("HVAC/R").
Our condensed consolidated financial statements include the accounts of
UGI and its controlled subsidiary companies, which, except for the
Partnership, are majority owned, and are together referred to as "we" or
the "Company." We eliminate all significant intercompany accounts and
transactions when we consolidate. We report the public's limited partner
interests in the Partnership and the outside ownership interest in a
subsidiary of Antargaz as minority interests. Entities in which we own 50
percent or less and in which we exercise significant influence over
operating and financial policies are accounted for by the equity method.
The accompanying condensed consolidated financial statements are unaudited
and have been prepared in accordance with the rules and regulations of the
U.S. Securities and Exchange Commission ("SEC"). They include all
adjustments which we consider necessary for a fair statement of the
results for the interim periods presented. Such adjustments consisted only
of normal recurring items unless otherwise disclosed. The September 30,
2005 condensed consolidated balance sheet data was derived from audited
financial statements, but does not include all disclosures required by
accounting principles generally accepted in the United States of America.
These financial statements should be read in conjunction with the
financial statements and related notes included in our Annual Report on
Form 10-K for the year ended September 30, 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.
EARNINGS PER COMMON SHARE. On April 26, 2005, UGI's Board of Directors
approved a 2-for-1 common stock split. On May 24, 2005 the Company issued
one additional common share for every common share outstanding to
shareholders of record on May 17, 2005. Prior-year amounts have been
retroactively restated to reflect the effects of the common stock split.
Basic earnings per share reflect the weighted-average number of common
shares outstanding. Diluted earnings per share include the effects of
dilutive stock options and common stock awards. Shares used in computing
basic and diluted earnings per share are as follows:
- -----------------------------------------------------------------------------
Three Months Ended
December 31,
--------------------------
2005 2004
- -----------------------------------------------------------------------------
Denominator (millions of shares):
Average common shares
outstanding for basic computation 105.157 102.748
Incremental shares issuable for stock
options and awards 1.466 2.452
- -----------------------------------------------------------------------------
Average common shares outstanding for
diluted computation 106.623 105.200
- -----------------------------------------------------------------------------
STOCK-BASED COMPENSATION. Under UGI's 2004 Omnibus Equity Compensation
Plan ("OECP"), we may grant options to acquire shares of Common Stock, or
issue stock-based awards ("Units") to key employees and non-employee
directors.
-5-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars and euros, except per share amounts)
The exercise price for options may not be less than the fair market value
on the grant date. Grants of stock options may vest immediately or ratably
over a period of years (generally three to four year periods) and
generally can be exercised no later than ten years from the grant date.
There are certain change of control and retirement eligibility conditions
that, if met, generally result in an acceleration of vesting.
Units may vest immediately or ratably over a period of years (generally
three to four year periods). Units granted typically provide for the
crediting of Common Stock dividend equivalents to participants' accounts.
Dividend equivalents on employee awards will be paid in cash. It is the
Company's practice to issue treasury shares to satisfy option exercises
and Unit awards. The Company does not expect to repurchase shares for such
purposes during the year ending September 30, 2006. Dividend equivalents
on non-employee director Unit awards are paid in additional Common Stock
Units. Stock-based awards may be settled, at the option of the Company, in
shares of Common Stock, cash, or a combination of Common Stock and cash.
The actual number of shares (or their cash equivalent) ultimately issued,
and the actual amount of dividend equivalents paid, is generally dependent
upon the achievement of market performance goals and service conditions.
Under the OECP, awards representing up to 7,000,000 shares of Common Stock
may be granted. The maximum number of shares that may be issued pursuant
to grants other than stock options or dividend equivalents is 1,600,000
shares. We did not grant any options or Unit awards during the three
months ended December 31, 2005 or 2004.
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 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 the end of each period based on the fair value of that award and is
recognized in the income statement over the requisite service period.
As permitted by the standard, under the modified prospective approach,
effective October 1, 2005, we began recording compensation expense for
awards that were not vested as of the 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 we continue to use this model. The adoption of
SFAS 123R resulted in pre-tax stock option expense of $0.3 million during
the three months ended December 31, 2005 which did not impact our reported
basic and diluted earnings per share.
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 our 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.
-6-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars and euros, except per share amounts)
The fair value of Units is generally dependent upon the Company'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.
Certain employees of the General Partner have been granted the right to
receive AmeriGas Partners Common Units. A total of 700,000 AmeriGas
Partners Common Unit awards may be granted under the General Partner's
plans. 500,000 of these awards have terms similar to UGI Unit awards and
compensation expense is estimated and recorded in the same manner; 200,000
have service requirements only.
We recorded total net pre-tax equity-based compensation (benefit) expense
of ($4.7) million and $4.5 million, during the three months ended December
31, 2005 and 2004, respectively. The period ended December 31, 2005
reflects a net compensation benefit due predominately to changes in stock
prices.
The following table illustrates the effects on net income and basic and
diluted earnings per share 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 $ 78.2
Add: Stock and unit-based employee
compensation expense included in
reported net income, net of related tax effects 2.7
Deduct: Total stock and unit-based
employee compensation expense
determined under the fair value method
for all awards, net of related tax effects (3.0)
- -----------------------------------------------------------------------------------------------------
Pro forma net income $ 77.9
- -----------------------------------------------------------------------------------------------------
Basic earnings per share:
As reported $ 0.76
Pro forma $ 0.76
Diluted earnings per share:
As reported $ 0.74
Pro forma $ 0.74
- -----------------------------------------------------------------------------------------------------
The total net after-tax compensation benefit recorded during the three
months ended December 31, 2005 was $3.2 million which reflects option,
UGI Unit and AmeriGas Partners Common Unit awards.
-7-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars and euros, except per share amounts)
The following table provides stock option activity information:
- --------------------------------------------------------------------------------
Weighted
Weighted Average
Average Remaining
Exercise Term Intrinsic
Shares Price (years) Value
- ----------------------------------------------------------------------------------------------------------
Shares under option - September 30, 2005 4,953,018 $ 15.95
Exercised (13,100) $ 10.51 $0.2 million
Forfeited (23,000) $ 17.54
Shares under option - December 31, 2005 4,916,918 $ 15.95 7.7 $22.8 million
Options exercisable - December 31, 2005 2,080,720 $ 12.39 5.8 $17.1 million
Unvested options - December 31, 2005 2,836,198 $ 18.57 8.3 $5.8 million
- ----------------------------------------------------------------------------------------------------------
Cash received from the exercises of stock options and any associated tax
benefits were not material during the three months ended December 31, 2005.
The assumptions used to estimate the fair value of stock options were as
follows:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Expected life of option 6 years
Expected volatility 17.7% to 21.6%
Expected dividend yield 4.1% to 6.1%
Risk free interest rate 3.1% to 4.0%
- --------------------------------------------------------------------------------
The expected term of option awards represents the period of time which option
grants are expected to be outstanding and is derived from historical exercise
patterns. Expected volatility is based on the historical volatility of the price
of UGI's Common Stock. Expected dividend yield is based on the historical UGI
dividend rates. The risk free interest rate is based upon U.S. Treasury
bonds with comparable terms to the options in effect on the date of grant. As of
December 31, 2005, there was $2.3 million of unrecognized compensation cost
related to non-vested stock options that is expected to be recognized over a
weighted average period of 2.2 years.
Also, as of December 31, 2005, there was a total of approximately $5.8 million
of unrecognized compensation cost associated with 670,934 UGI Unit awards that
are expected to be recognized over a weighted average period of 1.8 years. There
was a total of $0.6 million of unrecognized compensation expense associated with
89,967 of AmeriGas Partners Common Unit awards that are expected to be
recognized over a weighted average period of 1.7 years. AmeriGas Partners Common
Unit awards granted during the three months ended December 31, 2005 and 2004 and
any associated expense was not material to the Company's financial position,
results of operations or cash flows. At December 31, 2005, total liabilities of
$14.4 million associated with both UGI's and the General Partner's plans are
reflected in other current liabilities and other noncurrent liabilities in the
Condensed Consolidated Balance Sheet.
-8-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars and euros, except per share amounts)
The following table illustrates Unit and AmeriGas Partners Common Unit award
activity:
- --------------------------------------------------------------------------------
Number of Average Fair
UGI Units Value (per Unit)
- ---------------------------------------------------------------------------------------------------------------
Non-vested awards - September 30, 2005 322,550 $ 30.01
Vested (20,250)
Non-vested awards - December 31, 2005 302,300 $ 22.34
- ---------------------------------------------------------------------------------------------------------------
Number of
AmeriGas Partners Average Fair
Common Units Value (per Unit)
- ---------------------------------------------------------------------------------------------------------------
Non-vested awards - September 30, 2005 (a) 112,967 $ 37.31
Non-vested awards - December 31, 2005 (a) 86,967 $ 32.65
- ---------------------------------------------------------------------------------------------------------------
(a) The decrease in non-vested AmeriGas Partners Common Unit awards from
September 30, 2005 compared to December 31, 2005 is primarily a result of
market performance conditions not being met.
COMPREHENSIVE INCOME. The following table presents the components of
comprehensive income (loss) for the three months ended December 31, 2005 and
2004.
- --------------------------------------------------------------------------------
Three Months Ended
December 31,
------------------------
2005 2004
- -----------------------------------------------------------------------------------------------------------
Net income $ 57.5 $ 78.2
Other comprehensive (loss) income (27.3) 19.6
- -----------------------------------------------------------------------------------------------------------
Comprehensive income $ 30.2 $ 97.8
- -----------------------------------------------------------------------------------------------------------
Other comprehensive (loss) income principally comprises (1) changes in the fair
value of derivative commodity instruments, interest rate protection agreements
and foreign currency derivatives qualifying as hedges and (2) foreign currency
translation adjustments, net of reclassifications to net income.
RECLASSIFICATIONS. We have reclassified certain prior-year period balances to
conform to the current-period presentation.
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.
SEGMENT INFORMATION
We have organized our business units into six reportable segments generally
based upon products sold, geographic location (domestic or international) or
regulatory environment. Our reportable segments are: (1) AmeriGas Propane; (2)
an international LPG segment comprising Antargaz; (3) an international LPG
segment comprising FLAGA and our international LPG equity investment in China
("Other"); (4) Gas Utility; (5) Electric Utility; and (6) Energy Services
(comprising Energy
-9-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars and euros, except per share amounts)
Services' gas marketing business, UGID's electricity generation business and
Asset Management's propane terminal business). We refer to both international
segments collectively as "International Propane."
The accounting policies of the six segments disclosed are the same as those
described in the Organization and Significant Accounting Policies note contained
in the Company's 2005 Annual Report. We evaluate AmeriGas Propane's performance
principally based upon the Partnership's earnings before interest expense,
income taxes, depreciation and amortization ("Partnership EBITDA"). Although we
use Partnership EBITDA to evaluate AmeriGas Propane's profitability, it should
not be considered as an alternative to net income (as an indicator of operating
performance) or as an alternative to cash flow (as a measure of liquidity or
ability to service debt obligations) and is not a measure of performance or
financial condition under accounting principles generally accepted in the United
States of America. The Company's definition of Partnership EBITDA may be
different from that used by other companies. We evaluate the performance of our
International Propane, Gas Utility, Electric Utility and Energy Services
segments principally based upon their income before income taxes.
-10-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Millions of dollars, except per share amounts)
2. SEGMENT INFORMATION (CONTINUED)
Three Months Ended December 31, 2005:
Reportable Segments
------------------------------------------------------------------------
International Programs
AmeriGas Gas Electric Energy --------------------- Corporate
Total Elims. Propane Utility Utility Services Antargaz Other (a) & Other (b)
------- ------- -------- -------- -------- -------- --------- -------- ---------
Revenues $1,577.9 $ (34.1) $ 630.2 $ 219.8 $ 23.9 $ 451.4 $ 248.8 $ 18.8 $ 19.1
======== ======= ======== ======= ======== ======== ======== ======= ========
Cost of sales $1,150.7 $ (33.1) $ 407.8 $ 159.9 $ 11.3 $ 433.7 $ 146.4 $ 12.7 $ 12.0
======== ======= ======== ======= ======== ======== ======== ======= ========
Segment profit:
Operating income $ 160.2 $ -- $ 74.7 $ 35.7 $ 6.5 $ 8.2 $ 33.2 $ 0.4 $ 1.5
Loss from equity investees (0.6) -- -- -- -- -- (0.6) -- --
Interest expense (32.6) -- (18.9) (5.1) (0.5) -- (7.6) (0.5) --
Minority interests (31.0) (0.1) (31.0) -- -- -- 0.1 -- --
-------- ------- -------- ------- -------- -------- -------- ------- --------
Income before income taxes $ 96.0 $ (0.1) $ 24.8 $ 30.6 $ 6.0 $ 8.2 $ 25.1 $ (0.1) $ 1.5
======== ======= ======== ======= ======== ======== ======== ======= ========
Depreciation and amortization $ 36.3 $ -- $ 18.3 $ 5.4 $ 0.8 $ 1.5 $ 9.0 $ 1.2 $ 0.1
Partnership EBITDA (d) $ 92.2
Segment assets (at period end) $5,057.9 $(335.9) $1,720.0 $ 896.8 $ 104.2 $ 307.8 $1,713.5 $ 154.1 $ 497.4
======== ======= ======== ======= ======== ======== ======== ======= ========
Investments in equity
investees (at period end) $ 12.3 $ -- $ -- $ -- $ -- $ 8.6 $ 1.0 $ 2.7 $ --
======== ======= ======== ======= ======== ======== ======== ======= ========
Goodwill and excess reorganization
value (at period end) $1,222.1 $ (4.0) $ 618.2 $ -- $ -- $ 11.8 $ 523.4 $ 66.3 $ 6.4
======== ======= ======== ======= ======== ======== ======== ======= ========
Three Months Ended December 31, 2004:
Reportable Segments
------------------------------------------------------------------------
International Programs
AmeriGas Gas Electric Energy --------------------- Corporate
Total Elims. Propane Utility Utility Services Antargaz Other (a) & Other (b)
------- ------- -------- -------- -------- -------- --------- -------- ---------
Revenues $ 1,362.4 $ -- $ 556.2 $ 161.2 $ 22.3 $ 329.0 $ 258.0 $ 20.2 $ 15.5
========= ======= ======== ======= ======== ======== ======== ======= ========
Cost of sales $ 925.2 $ -- $ 351.1 $ 106.6 $ 11.0 $ 313.2 $ 121.9 $ 12.0 $ 9.4
========= ======= ======== ======= ======== ======== ======== ======= ========
Segment profit:
Operating income (c) $ 175.0 $ -- $ 58.6 $ 28.1 $ 4.7 $ 6.1 $ 75.8 $ 1.6 $ 0.1
--------- ------- -------- -------- -------- -------- -------- ------- --------
Loss from equity investees (0.7) -- -- -- -- -- (0.6) (0.1) --
Interest expense (33.5) -- (20.5) (4.1) (0.5) -- (7.6) (0.9) 0.1
Minority interests (20.6) 3.9 (24.2) -- -- -- (0.3) -- --
--------- ------- -------- -------- -------- -------- --------- ------- --------
Income before income taxes (c) $ 120.2 $ 3.9 $ 13.9 $ 24.0 $ 4.2 $ 6.1 $ 67.3 $ 0.6 $ 0.2
========= ======= ======== ======= ======== ======== ========= ======= ========
Depreciation and amortization $ 37.6 $ -- $ 19.3 $ 5.1 $ 0.7 $ 1.3 $ 9.6 $ 1.3 $ 0.3
Partnership EBITDA (d) $ 86.4
Segment assets (at period end) $ 4,679.9 $(334.6) $1,639.9 $ 809.6 $ 91.0 $ 298.3 $ 1,561.3 $ 172.8 $ 441.6
========= ======= ======== ======= ======== ======== ========= ======= ========
Investments in equity
investees (at period end) $ 15.1 $ -- $ -- $ -- $ -- $ 8.5 $ 3.8 $ 2.8 $ --
========= ======= ======== ======= ======== ======== ========= ======= ========
Goodwill and excess reorganization
value (at period end) $ 1,305.3 $ -- $ 616.8 $ -- $ -- $ 5.0 $ 603.6 $ 74.4 $ 5.5
========= ======= ======== ======= ======== ======== ========= ======= ========
(a) International Propane-Other principally comprises FLAGA and our
joint-venture business in China.
(b) Corporate & Other's results principally comprise UGI Enterprises'
HVAC/R operations, net expenses of UGI's captive general liability
insurance company and UGI Corporation's unallocated corporate and general
expenses, and interest income. Corporate & Other assets principally
comprise cash, short-term investments and an intercompany loan. The
intercompany interest associated with the intercompany loan is removed in
the segment presentation.
(c) International Propane-Antargaz' results for the three months ended
December 31, 2004 include $19.9 of operating income and income before
income taxes due to the resolution of certain non-income tax contingencies
as of December 31, 2004 (see Note 7).
(d) The following table provides a reconciliation of Partnership EBITDA to
AmeriGas Propane operating income:
Three months ended December 31, 2005 2004
- ------------------------------- ------- --------
Partnership EBITDA (i) $ 92.2 $ 86.4
Depreciation and amortization (ii) (18.2) (19.3)
Minority interests (iii) 0.7 0.6
Gain on sale of Atlantic Energy -- (9.1)
------- --------
Operating income $ 74.7 $ 58.6
======= ========
(i) Includes a $9.1 gain on the sale of Atlantic Energy to Energy Services
during the three months ended December 31, 2004.
(ii) Excludes General Partner depreciation and amortization of $0.1 in the three
months ended December 31, 2005.
(iii) Principally represents the General Partner's 1.01% interest in AmeriGas
OLP.
-11-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars and euros, except per share amounts)
2. LONG-TERM DEBT
In December 2005, UGI Utilities refinanced $50 million of its maturing
7.14% Medium-Term Notes with proceeds from the issuance of $50 million of
5.64% Medium-Term Notes due in December 2015. These Medium-Term Notes were
issued pursuant to the UGI Utilities' $125 million shelf registration
statement with the SEC.
On December 7, 2005, Antargaz executed a new five-year, floating rate
Senior Facilities Agreement with a major French bank providing for a E380
million term loan and a E50 million revolving credit facility. The
proceeds of the term loan were used in December 2005 to repay immediately
the existing E175 million Senior Facilities term loan and for general
corporate purposes. As of December 31, 2005, AGZ Finance had notified the
holders of its High Yield Bonds of its decision to redeem them, including
a premium, pursuant to the Trust Deed. Approximately E200 million of the
proceeds from the new Senior Facilities Agreement were used to fund the
redemption of the High Yield Bonds in January 2006. This amount is
reflected in restricted cash on the Condensed Consolidated Balance Sheet
at December 31, 2005. In addition, Antargaz executed an interest rate swap
agreement with the same bank to fix the rate of interest on the term loan
for the duration of the loan at a rate of approximately 4%.
In January 2006, the Partnership and AP Eagle Finance Corp. issued $350
million of 7.125% Senior Notes due 2016. The proceeds of this registered
public debt offering were used to refinance $59.5 million of the
Partnership's $60 million 10% Senior Notes due 2006 pursuant to a tender
offer, plus a premium, and AmeriGas OLP's $35 million term loan due
October 1, 2006. On January 27, 2006, AmeriGas OLP notified the holders of
its $160 million Series A and $68.8 million Series C First Mortgage Notes
of its intention to redeem the notes, including a make-whole premium, on
February 16, 2006. UGI expects to incur an after-tax loss on
extinguishment of debt associated with these refinancings of approximately
$4 to $4.5 million during the three months ending March 31, 2006.
-12-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars and euros, except per share amounts)
4. INTANGIBLE ASSETS
The Company's intangible assets comprise the following:
- --------------------------------------------------------------------------------
December 31, September 30,
2005 2005
- --------------------------------------------------------------------------------
Not subject to amortization:
Goodwill $ 1,128.8 $ 1,137.9
Excess reorganization value 93.3 93.3
- --------------------------------------------------------------------------------
$ 1,222.1 $ 1,231.2
- --------------------------------------------------------------------------------
Other intangible assets:
Customer relationships, noncompete
agreements and other $ 175.1 $ 177.2
Trademark (not subject to amortization) 40.2 40.8
- --------------------------------------------------------------------------------
Gross carrying amount 215.3 218.0
- --------------------------------------------------------------------------------
Accumulated amortization (48.9) (45.4)
- --------------------------------------------------------------------------------
Net carrying amount $ 166.4 $ 172.6
================================================================================
Changes in intangible assets during the three months ended December 31,
2005 principally reflect the effects of foreign currency translation.
Amortization expense of intangible assets was $4.0 million and $4.4
million for the three months ended December 31, 2005 and 2004,
respectively. Our expected aggregate amortization expense of intangible
assets for the next five fiscal years is as follows: Fiscal 2006 - $15.8
million; Fiscal 2007 - $15.2 million; Fiscal 2008 - $14.8 million; Fiscal
2009 - $14.1 million; Fiscal 2010 - $12.8 million.
5. ENERGY SERVICES ACCOUNTS RECEIVABLE SECURITIZATION FACILITY
Energy Services has a $150 million receivables purchase facility
("Receivables Facility") with an issuer of receivables-backed commercial
paper expiring in August 2007. In order to provide additional short-term
liquidity during the peak heating season due to increased product costs,
the maximum level of funding available at any one point in time from this
facility was temporarily increased to $300 million for the period from
November 1, 2005 to April 24, 2006. After April 24, 2006, the maximum
level of funding available at any one time from this facility is $150
million. Under the Receivables Facility, Energy Services transfers, on an
ongoing basis and without recourse, its trade accounts receivable to its
wholly owned, special purpose subsidiary, Energy Services Funding
Corporation ("ESFC"), which is consolidated for financial statement
purposes. ESFC, in turn, has sold, and subject to certain conditions, may
from time to time sell, an undivided interest in some or all of the
receivables to a commercial paper conduit of a major bank. The proceeds of
these sales are less than the face amount of the accounts receivable sold
by an amount that approximates the purchaser's financing cost of issuing
its own receivables-backed commercial paper. ESFC was created and has been
structured to isolate its assets from creditors of Energy Services and its
affiliates, including UGI. This two-step transaction is accounted for as a
sale of receivables following the provisions of SFAS No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." Energy Services continues to service, administer and collect
trade receivables on behalf of the commercial paper issuer and ESFC.
-13-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars and euros, except per share amounts)
During the three months ended December 31, 2005, Energy Services sold
trade receivables totaling $393.9 million to ESFC. During the three months
ended December 31, 2005, ESFC sold an aggregate $242.5 million of
undivided interests in its trade receivables to the commercial paper
conduit. At December 31, 2005, the outstanding balance of ESFC trade
receivables was $64.5 million, which is net of $95 million that was sold
to the commercial paper conduit and removed from the balance sheet.
In addition, a major bank has committed to issue up to $50 million of
standby letters of credit, secured by cash or marketable securities ("LC
Facility"). At December 31, 2005, there were no letters of credit
outstanding. Energy Services expects to fund the collateral requirements
with borrowings under its Receivables Facility. The LC Facility, which we
intend to renew, expires in April 2006.
6. 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 domestic active and retired employees. Antargaz provides
certain pension and postretirement health care benefits for its employees.
Net periodic pension expense and other postretirement benefit costs
include the following components:
- -----------------------------------------------------------------------------------------
Other
Pension Benefits Postretirement Benefits
Three Months Ended Three Months Ended
December 31, December 31,
------------------- -----------------------
2005 2004 2005 2004
- -----------------------------------------------------------------------------------------
Service cost $ 1.5 $ 1.4 $ 0.1 $ 0.1
Interest cost 3.5 3.5 0.3 0.5
Expected return on assets (4.7) (4.5) (0.2) (0.1)
Amortization of:
Transition obligation -- -- 0.1 0.2
Prior service cost (benefit) 0.2 0.2 (0.1) --
Actuarial loss 0.4 0.4 0.1 0.1
- -----------------------------------------------------------------------------------------
Net benefit cost 0.9 1.0 0.3 0.8
Change in regulatory assets and liabilities -- -- 0.7 0.3
- -----------------------------------------------------------------------------------------
Net expense $ 0.9 $ 1.0 $ 1.0 $ 1.1
- -----------------------------------------------------------------------------------------
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
-14-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars and euros, except per share amounts)
between the annual amount calculated and the amount included in UGI
Utilities' rates is deferred for future recovery from, or refund to,
ratepayers. Amounts contributed to the VEBA by UGI Utilities were not
material during the three months ended December 31, 2005, nor are they
expected to be material for the year ending September 30, 2006.
We also sponsor unfunded and non-qualified supplemental executive
retirement income plans. We recorded pre-tax expense for these plans of
$0.5 million and $0.4 million for the three months ended December 31, 2005
and 2004, respectively.
7. COMMITMENTS AND CONTINGENCIES
The Partnership has succeeded to certain lease guarantee obligations of
Petrolane relating to Petrolane's divestiture of non-propane operations
before its 1989 acquisition by QFB Partners. Future lease payments under
these leases total approximately $9 million at December 31, 2005. The
leases expire through 2010 and some of them are currently in default. The
Partnership has succeeded to the indemnity agreement of Petrolane by which
Texas Eastern Corporation ("Texas Eastern"), a prior owner of Petrolane,
agreed to indemnify Petrolane against any liabilities arising out of the
conduct of businesses that do not relate to, and are not a part of, the
propane business, including lease guarantees. In December 1999, Texas
Eastern filed for dissolution under the Delaware General Corporation Law.
PanEnergy Corporation ("PanEnergy"), Texas Eastern's sole stockholder,
assumed all of Texas Eastern's liabilities as of December 20, 2002, to the
extent of the value of Texas Eastern's assets transferred to PanEnergy as
of that date (which was estimated to exceed $94 million), and to the
extent that such liabilities arise within ten years from Texas Eastern's
date of dissolution. Notwithstanding the dissolution proceeding, and based
on Texas Eastern previously having satisfied directly defaulted lease
obligations without the Partnership's having to honor its guarantee, we
believe that the probability that the Partnership will be required to
directly satisfy the lease obligations subject to the indemnification
agreement is remote.
On August 21, 2001, AmeriGas Partners, through AmeriGas OLP, acquired the
propane distribution businesses of Columbia Energy Group (the "2001
Acquisition") pursuant to the terms of a purchase agreement (the "2001
Acquisition Agreement") by and among Columbia Energy Group ("CEG"),
Columbia Propane Corporation ("Columbia Propane"), Columbia Propane, L.P.
("CPLP"), CP Holdings, Inc. ("CPH," and together with Columbia Propane and
CPLP, the "Company Parties"), AmeriGas Partners, AmeriGas OLP and the
General Partner (together with AmeriGas Partners and AmeriGas OLP, the
"Buyer Parties"). As a result of the 2001 Acquisition, AmeriGas OLP
acquired all of the stock of Columbia Propane and CPH and substantially
all of the partnership interests of CPLP. Under the terms of an earlier
acquisition agreement (the "1999 Acquisition Agreement"), the Company
Parties agreed to indemnify the former general partners of National
Propane Partners, L.P. (a predecessor company of the Columbia Propane
businesses) and an affiliate (collectively, "National General Partners")
against certain income tax and other losses that they may sustain as a
result of the 1999 acquisition by CPLP of National Propane Partners, L.P.
(the "1999 Acquisition") or the operation of the business after the 1999
Acquisition ("National Claims"). At December 31, 2005, the potential
amount payable under this indemnity by the Company Parties was
approximately $58 million. These indemnity obligations will expire on the
date that CPH acquires the remaining outstanding partnership interest of
CPLP, which is expected to occur on or after July 19, 2009. Under the
terms of the 2001 Acquisition Agreement,
-15-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars and euros, except per share amounts)
CEG agreed to indemnify the Buyer Parties and the Company Parties against
any losses that they sustain under the 1999 Acquisition Agreement and
related agreements ("Losses"), including National Claims, to the extent
such claims are based on acts or omissions of CEG or the Company Parties
prior to the 2001 Acquisition. The Buyer Parties agreed to indemnify CEG
against Losses, including National Claims, to the extent such claims are
based on acts or omissions of the Buyer Parties or the Company Parties
after the 2001 Acquisition. CEG and the Buyer Parties have agreed to
apportion certain losses resulting from National Claims to the extent such
losses result from the 2001 Acquisition itself.
Samuel and Brenda Swiger and their son (the "Swigers") sustained personal
injuries and property damage as a result of a fire that occurred when
propane that leaked from an underground line ignited. In July 1998, the
Swigers filed a class action lawsuit against AmeriGas Propane, L.P. (named
incorrectly as "UGI/AmeriGas, Inc."), in the Circuit Court of Monongalia
County, West Virginia, in which they sought to recover an unspecified
amount of compensatory and punitive damages and attorney's fees, for
themselves and on behalf of persons in West Virginia for whom the
defendants had installed propane gas lines, allegedly resulting from the
defendants' failure to install underground propane lines at depths
required by applicable safety standards. In 2003, AmeriGas OLP settled the
individual personal injury and property damage claims of the Swigers. In
2004, the court granted the plaintiffs' motion to include customers
acquired from Columbia Propane in August 2001 as additional potential
class members and the plaintiffs amended their complaint to name
additional parties pursuant to such ruling. Subsequently, in March 2005,
AmeriGas OLP filed a crossclaim against CEG, former owner of Columbia
Propane, seeking indemnification for conduct undertaken by Columbia
Propane prior to AmeriGas OLP's acquisition. Class counsel has indicated
that the class is seeking compensatory damages in excess of $12 million
plus punitive damages, civil penalties and attorneys' fees. We believe we
have good defenses to the claims of the class members and intend to
vigorously defend against the remaining claims in this lawsuit.
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
-16-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars and euros, except per share amounts)
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 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
million 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 million 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 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 million. 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
-17-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars and euros, except per share amounts)
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
UGI 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 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 $2.3 million and expects to spend another
$11 million 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 million and complete remediation costs for all sites
could total $182 million. 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.
The French tax authorities levy taxes on legal entities and individuals
regularly operating a business in France which are commonly referred to
collectively as "business tax." The amount of business tax charged
annually is generally dependent upon the value of certain of the entity's
tangible fixed assets. Prior to the Antargaz Acquisition, Antargaz filed
suit against French tax authorities in connection with the assessment of
business tax related to the tax treatment of certain of its owned tanks at
customer locations. Elf Antar France and Elf Aquitaine, now Total France,
former owners of Antargaz, agreed to indemnify Antargaz for all payments
that would have been due from Antargaz in respect of the tax related to
its tanks for the period from January 1, 1997 through December 31, 2000.
Antargaz has recorded liabilities for business taxes related to various
classes of equipment. On February 4, 2005, Antargaz received a letter from
the French government that eliminated the requirement for Antargaz to pay
business tax associated with tanks at certain customer locations. In
addition, during Fiscal 2005, resolution was reached relating to business
taxes relating to a prior year. Further changes in the French government's
interpretation
-18-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars and euros, except per share amounts)
of the tax laws or in the tax laws themselves could have either an adverse
or a favorable effect on our results of operations. Our Condensed
Consolidated Statement of Income for the three months ended December 31,
2004 includes a pre-tax gain of $19.9 million and a net after-tax gain of
$14.9 million associated with the resolution of certain business tax
matters related principally to prior years.
In addition to these matters, there are other pending claims and legal
actions arising in the normal course of our businesses. We cannot predict
with certainty the final results of environmental and other matters.
However, it is reasonably possible that some of them could be resolved
unfavorably to us 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.
8. SUBSEQUENT EVENT - PG ENERGY ACQUISITION
On January 26, 2006, UGI signed a definitive agreement to acquire the
natural gas utility assets of PG Energy from Southern Union Company for
approximately $580 million in cash, subject to certain adjustments. UGI
expects to fund the purchase price and related costs of the acquisition
with a combination of cash and long-term debt. PG Energy serves customers
in 13 counties in northeastern and central Pennsylvania. This transaction
is subject to PUC approval and federal antitrust review under the
Hart-Scott-Rodino Act. This transaction is expected to close during our
fourth fiscal quarter ending September 30, 2006.
-19-
UGI CORPORATION AND SUBSIDIARIES
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 may contain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. Such statements use forward-looking
words such as "believe," "plan," "anticipate," "continue," "estimate," "expect,"
"may," "will," or other similar words. These statements discuss plans,
strategies, events or developments that we expect or anticipate will or may
occur in the future.
A forward-looking statement may include a statement of the assumptions or bases
underlying the forward-looking statement. We believe that we have chosen these
assumptions or bases in good faith and that they are reasonable. However, we
caution you that actual results almost always vary from assumed facts or bases,
and the differences between actual results and assumed facts or bases can be
material, depending on the circumstances. When considering forward-looking
statements, you should keep in mind the following important factors which could
affect our future results and could cause those results to differ materially
from those expressed in our forward-looking statements: (1) adverse weather
conditions resulting in reduced demand; (2) cost volatility and availability of
propane and other LPG, oil, electricity and natural gas and the capacity to
transport product to our market areas; (3) changes in domestic and foreign laws
and regulations, including safety, tax and accounting matters; (4) competitive
pressures from the same and alternative energy sources; (5) failure to acquire
new customers thereby reducing or limiting any increase in revenues; (6)
liability for environmental claims; (7) increased customer conservation measures
due to high energy prices and improvements in energy efficiency and technology
resulting in reduced demand; (8) adverse labor relations; (9) large customer,
counterparty or supplier defaults; (10) liability in excess of insurance
coverage for personal injury and property damage arising from explosions and
other catastrophic events, including acts of terrorism, resulting from operating
hazards and risks incidental to generating and distributing electricity and
transporting, storing and distributing natural gas, propane and other LPG; (11)
political, regulatory and economic conditions in the United States and in
foreign countries, including foreign currency rate fluctuations, particularly in
the euro; (12) reduced access to capital markets and interest rate fluctuations;
(13) reduced distributions from subsidiaries; and (14) the timing and success of
the Company's efforts to develop new business opportunities.
These factors are not necessarily all of the important factors that could cause
actual results to differ materially from those expressed in any of our
forward-looking statements. Other unknown or unpredictable factors could also
have material adverse effects on future results. We undertake no obligation to
update publicly any forward-looking statement whether as a result of new
information or future events except as required by the federal securities laws.
-20-
UGI CORPORATION AND SUBSIDIARIES
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 Consolidated Financial Statements.
EXECUTIVE OVERVIEW
Our Company's results are largely seasonal and dependent upon weather
conditions, particularly during the peak-heating season, which occurs in the
first half of our fiscal year. As a result, our net income is generally higher
in our first and second fiscal quarters whereas lower net income or net losses
occur in our third and fourth fiscal quarters. In addition to weather
conditions, our volumes reflect the effects of customer conservation due to a
continuing trend of high energy commodity prices.
All of our businesses contributed higher net income in the 2005 three-month
period than in the 2004 three-month period with the exception our International
operations. As previously reported, Antargaz' net income in the 2004 three-month
period included $14.9 million ($0.14 per diluted share) resulting from the
resolution of certain non-income tax contingencies. In addition, the 2004
three-month period included unusually high LPG margins per gallon during the
latter part of that period.
NET INCOME BY BUSINESS UNIT:
- --------------------------------------------------------------------------------
Three Months Ended
December 31,
------------------------
2005 2004
- --------------------------------------------------------------------------------
Net income (loss): (millions of dollars)
AmeriGas Propane (a) $ 14.9 $ 10.4
International Propane 14.9 47.2
Gas Utility 18.4 14.5
Electric Utility 3.5 2.5
Energy Services 4.9 3.6
Corporate & Other 0.9 -
- --------------------------------------------------------------------------------
Total net income $ 57.5 $ 78.2
- --------------------------------------------------------------------------------
(a) Amounts are net of minority interests in AmeriGas Partners, L.P.
-21-
UGI CORPORATION AND SUBSIDIARIES
Increase
AMERIGAS PROPANE: 2005 2004 (Decrease)
- --------------------------------------------------------------------------------
(Millions of dollars)
Revenues $ 630.2 $ 556.2 $ 74.0 13.3%
Total margin (a) $ 222.4 $ 205.1 $ 17.3 8.4%
Partnership EBITDA (b) $ 92.2 $ 86.4 $ 5.8 6.7%
Operating income $ 74.7 $ 58.6 $ 16.1 27.5%
Retail gallons sold (millions) 291.9 296.8 (4.9) (1.7)%
Degree days - % warmer
than normal (c) (4.1)% (8.0)% -- --
- --------------------------------------------------------------------------------
(a) Total margin represents total revenues less total cost of sales.
(b) Partnership EBITDA (earnings before interest expense, income taxes and
depreciation and amortization) should not be considered as an alternative to net
income (as an indicator of operating performance) or as an alternative to cash
flow (as a measure of liquidity or ability to service debt obligations) and is
not a measure of performance or financial condition under accounting principles
generally accepted in the United States of America. Management uses Partnership
EBITDA as the primary measure of segment profitability for the AmeriGas Propane
segment (see Note 2 to the Condensed Consolidated Financial Statements).
(c) Deviation from average heating degree-days based upon national weather
statistics provided by the National Oceanic and Atmospheric Administration
("NOAA") for 335 airports in the United States, excluding Alaska.
Based upon heating degree-day data, temperatures were 4.1% warmer than normal
during the 2005 three-month period compared to temperatures that were 8.0%
warmer than normal during the 2004 three-month period. Notwithstanding the
colder weather, retail propane volumes sold decreased 1.7% compared to the
prior-year three-month period reflecting the previously mentioned decline in
volumes sold to agricultural customers. High propane selling prices continued to
cause price-induced customer conservation. In the 2005 three-month period, our
average retail propane product cost per retail gallon sold was approximately 20%
higher than in the 2004 three-month period, which resulted in higher
year-over-year prices to our customers. Low-margin wholesale propane volumes
sold decreased during the 2005 three-month period reflecting lower volumes sold
in connection with product cost management activities.
Retail propane revenues increased $67.7 million reflecting a $75.6 million
increase due to higher average selling prices partially offset by a $7.9 million
decrease due to the lower retail volumes sold. Wholesale propane revenues
increased $3.2 million reflecting a $9.1 million increase resulting from higher
average selling prices partially offset by a $5.9 million decrease due to lower
volumes sold. The higher average retail and wholesale selling prices per gallon
reflect the continuance of significantly higher propane product costs compared
to the prior year. The average wholesale cost per gallon of propane at Mont
Belvieu, one of the major propane supply points in the United States, was
approximately 25% greater than the average cost per gallon during the 2004
three-month period. Total cost of sales increased to $407.8 million in the 2005
three-month period from $351.1 million in the 2004 three-month period largely
reflecting the increase in propane product costs partially offset by the
decreased volumes sold.
Total margin increased $17.3 million compared to the 2004 three-month period
principally reflecting higher average margin per retail gallon which is largely
attributable to the Partnership's product cost and customer pricing management
efforts.
Partnership EBITDA during the 2005 three-month period was $92.2 million compared
to $86.4 million during the 2004 three-month period. The $5.8 million increase
in Partnership EBITDA primarily reflects the increase in total margin partially
offset by (1) an $8.6 million decrease in other income primarily reflecting the
absence of the gain on the sale of Atlantic Energy in November 2004 and (2) a
$2.8 million increase in operating and administrative expenses. Operating and
administrative expenses
-22-
UGI CORPORATION AND SUBSIDIARIES
increased principally reflecting higher vehicle fuel costs and vehicle lease
expense. Operating income increased $16.1 million reflecting the previously
mentioned increase in total margin and lower depreciation and amortization
expense partially offset by $2.8 million higher operating and administrative
expenses.
Increase
INTERNATIONAL PROPANE: 2005 2004 (Decrease)
- -----------------------------------------------------------------------------------------------
(Millions of dollars)
Revenues $ 267.6 $ 278.2 $ (10.6) (3.8)%
Total margin (a) $ 108.5 $ 144.3 $ (35.8) (24.8)%
Operating income $ 33.6 $ 77.4 $ (43.8) (56.6)%
Income before income taxes $ 24.9 $ 67.9 $ (43.0) (63.3)%
Antargaz retail gallons sold (millions) 92.7 103.8 (11.1) (10.7)%
Antargaz total margin, millions of euros (a) E 86.1 E 103.9 (E 17.8) (17.1)%
- -----------------------------------------------------------------------------------------------
(a) Total margin represents total revenues less total cost of sales.
Weather in Antargaz' service territory was approximately 0.7% warmer than normal
compared to 3.3% warmer than normal in the 2004 three-month period. FLAGA
experienced only slightly warmer than normal weather in the 2005 three-month
period compared to approximately 7% warmer than normal weather in the prior-year
three-month period. During the 2005 three-month period, the monthly average
currency translation rate was 1.19 dollars per euro compared to 1.30 dollars per
euro in the 2004 three-month period. Antargaz' retail LPG volumes sold decreased
to 92.7 million gallons from 103.8 million gallons in the 2004 three-month
period due in large part to the late onset of winter weather, lower
agricultural volumes sold and customer conservation. In addition, competition in
France has intensified, including in the butane cylinder market, as
hyper/supermarkets expanded vertically and began marketing their own cylinders.
International Propane revenues declined during the 2005 three-month period
reflecting the effects of the stronger dollar versus the euro and the lower
retail gallons sold which were partially offset by higher retail LPG selling
prices. Both Antargaz and FLAGA experienced significantly higher LPG product
costs. International Propane's total cost of sales increased approximately 19%
largely reflecting the increased LPG product costs partially offset by the
decreased volumes sold.
Total margin declined $35.8 million in the 2005 three-month period primarily
reflecting the decline in Antargaz' results. Antargaz' total base currency
margin declined E17.8 million reflecting the lower volumes sold and lower margin
per gallon of LPG ("unit margin"). Approximately $11 million of the decline in
International Propane total margin reflects the effects of the change in the
monthly average exchange rate. During the 2004 three-month period, Antargaz
experienced higher than normal unit margins which reflected a decline in LPG
product costs during the quarter coupled with a strengthening euro.
International Propane operating income declined $43.8 million in the 2005
three-month period principally reflecting the decline in total margin and the
absence of income recorded in the 2004 three-month period resulting from the
reversal of certain non-income related tax reserves (see discussion in "Antargaz
Tax Matters"). The decrease in income before income taxes principally reflects
the decrease in operating income partially offset by FLAGA's slightly lower
interest expense.
-23-
UGI CORPORATION AND SUBSIDIARIES
Increase
GAS UTILITY: 2005 2004 (Decrease)
- -----------------------------------------------------------------------------------------------
(Millions of dollars)
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 $ 24.0 $ 6.6 27.5%
System throughput -
billions of cubic feet ("bcf") 22.9 23.0 (0.1) (0.4)%
Degree days - % warmer than normal (b) (1.3)% (4.9)% -- --
- -----------------------------------------------------------------------------------------------
(a) Total margin represents total revenues less total cost of sales.
(b) Deviation from average heating degree days based upon weather statistics
provided by the National Oceanic and Atmospheric Administration ("NOAA")
for four airports located within our service territory.
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.
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 reflecting 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, higher retail core-market volumes, and costs associated with the greater
off-system sales.
-24-
UGI CORPORATION AND SUBSIDIARIES
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 which were partially offset by an increase
in depreciation expense. 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
income partially offset by an increase in interest expense principally
attributable to higher short-term debt outstanding and higher short-term
interest rates.
Increase
ELECTRIC UTILITY: 2005 2004 (Decrease)
- -----------------------------------------------------------------------------------------------
(Millions of dollars)
Revenues $ 23.9 $ 22.3 $ 1.6 7.2%
Total margin (a) $ 11.3 $ 10.1 $ 1.2 11.9%
Operating income $ 6.5 $ 4.7 $ 1.8 38.3%
Income before income taxes $ 6.0 $ 4.2 $ 1.8 42.9%
Distribution sales - millions of
kilowatt hours ("gwh") 258.0 249.1 8.9 3.6%
- -----------------------------------------------------------------------------------------------
(a) Total margin represents total revenues less total cost of sales and
revenue-related taxes, i.e. Electric Utility gross receipts taxes, of $1.3
million and $1.2 million in three-month periods ended December 31, 2005 and
2004, respectively. For financial statement purposes, revenue-related taxes are
included in "Utility taxes other than income taxes" on the Condensed
Consolidated Statements of Income.
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 an 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 increased kilowatt-hour sales.
Electric Utility total margin in the 2005 three-month period increased $1.2
million compared to the 2004 three-month period principally reflecting the
increase in POLR electric generation rates and the effects 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 net 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.
-25-
UGI CORPORATION AND SUBSIDIARIES
Increase
ENERGY SERVICES: 2005 2004 (Decrease)
- -----------------------------------------------------------------------------------------------
(Millions of dollars)
Revenues $ 451.4 $ 329.0 $ 122.4 37.2%
Total margin (a) $ 17.7 $ 15.8 $ 1.9 12.0%
Operating income $ 8.2 $ 6.1 $ 2.1 34.4%
Income before income taxes $ 8.2 $ 6.1 $ 2.1 34.4%
- -----------------------------------------------------------------------------------------------
(a) Total margin represents total revenues less total cost of sales.
Energy Services revenues increased $122.4 million in the 2005 three-month period
compared to the 2004 three-month period. Revenues generated by Energy Services'
natural gas and oil marketing business increased approximately $100 million in
the 2005 three-month period despite a 25% decrease in natural gas volumes sold
reflecting the effects of higher natural gas product costs. The decline in
natural gas volumes reflects the effects of higher natural gas prices, including
the volume impact of maintaining our credit risk management policies. Asset
Management provided approximately $16.9 million in higher revenues largely
reflecting the ownership of the propane terminal for a full quarter in the 2005
three-month period. The terminal was purchased through two separate transactions
with ConocoPhillips Company and AmeriGas Propane in November 2004.
Total margin increased $1.9 million in the 2005 three-month period compared to
the prior-year three-month period. The increase in total margin is primarily
attributed to the full three months of margin from Asset Management's propane
terminal operations and higher margin from UGID than in the prior-year period.
The increase in Energy Services operating income and income before income taxes
principally reflects the previously mentioned increase in total margin and lower
uncollectible accounts expense.
FINANCIAL CONDITION AND LIQUIDITY
FINANCIAL CONDITION
Our cash, cash equivalents and short-term investments totaled $597.3 million at
December 31, 2005 compared with $385.0 million at September 30, 2005. These
amounts include $161.9 million and $138.7 million, respectively, of cash, cash
equivalents and short-term investments available to UGI. In addition, the use of
$237.7 million of our cash is restricted for Antargaz' redemption of its High
Yield Bonds which is discussed below.
The Company's long-term debt outstanding at December 31, 2005 totaled $1,877.5
million (including current maturities of $423.0 million) compared to $1,644.5
million of long-term debt (including current maturities of $252.0 million) at
September 30, 2005. At December 31, 2005, our current maturities of long-term
debt include Antargaz' High Yield Bonds that were redeemed in January 2006.
AmeriGas OLP's Credit Agreement expires on October 15, 2008 and consists of (1)
a $100 million Revolving Credit Facility and (2) a $75 million Acquisition
Facility. The Revolving Credit Facility may be used for working capital and
general purposes of AmeriGas OLP. The Acquisition Facility provides AmeriGas OLP
with the ability to borrow up to $75 million to finance the purchase of propane
businesses or propane business assets or, to the extent it is not so used, for
working capital and general purposes, subject to restrictions in the AmeriGas
Partners Senior Notes indentures. At December 31, 2005, there were no borrowings
outstanding under the Credit Agreement. Issued and outstanding letters of credit
-26-
UGI CORPORATION AND SUBSIDIARIES
under the Revolving Credit Facility, which reduce the amount available for
borrowings, totaled $58.9 million at December 31, 2005. AmeriGas OLP's
short-term borrowing needs are seasonal and are typically greatest during the
fall and winter heating-season months due to the need to fund higher levels of
working capital. Largely due to the issuance of 2.3 million Common Units in
September 2005, during the 2005 three-month period the Partnership did not need
to use its revolving credit facility to fund its operations. The average daily
borrowings outstanding under the Credit Agreement during the three months ended
December 31, 2004 were $20.2 million. The peak borrowings outstanding under the
Credit Agreement during the 2004 three-month period were $51.0 million.
In January 2006, the Partnership and AP Eagle Finance Corp. issued $350 million
of 7.125% Senior Notes due 2016. The proceeds of this registered public debt
offering were used to refinance $59.5 million of the Partnership's $60 million
10% Senior Notes due 2006 pursuant to a tender offer, plus a premium, and
AmeriGas OLP's $35 million term loan due October 1, 2006. On January 27, 2006,
AmeriGas OLP notified the holders of its $160 million Series A and $68.8 million
Series C First Mortgage Notes of its intention to redeem the notes, including a
make-whole premium, on February 16, 2006. UGI expects to incur an after-tax loss
on extinguishment of debt associated with these refinancings of approximately $4
to $4.5 million during the three months ending March 31, 2006.
AmeriGas Partners periodically issues debt and equity securities and expects to
continue to do so. It has issued debt securities in underwritten public
offerings or private offerings and Common Units in underwritten public offerings
in each of the last three fiscal years. Most recently, it issued debt securities
in January 2006 and Common Units in September 2005 in underwritten public
offerings. Proceeds from these offerings are generally used to reduce or
refinance indebtedness and for general Partnership purposes, including funding
acquisitions. AmeriGas Partners has an effective unallocated debt and equity
shelf registration statement with the U.S. Securities and Exchange Commission
("SEC") under which it may issue Common Units or Senior Notes due 2016 in
underwritten public offerings.
On December 7, 2005, Antargaz executed a new five-year, floating rate Senior
Facilities Agreement with a major French bank providing for a E380 million term
loan and a E50 million revolving credit facility which expires March 31, 2011.
At December 31, 2005, there were no borrowings outstanding under the revolver.
The proceeds of the term loan were used in December 2005 to repay immediately
the existing E175 million Senior Facilities term loan and for general corporate
purposes. As of December 31, 2005, AGZ Finance had notified the holders of its
High Yield Bonds of its decision to redeem them, including a premium, pursuant
to the Trust Deed. Therefore, E200 million of the proceeds from the new Senior
Facilities Agreement were restricted to fund the redemption of the High Yield
Bonds that occurred in January 2006. This amount is reflected in restricted cash
on the Condensed Consolidated Balance Sheet at December 31, 2005. In addition,
Antargaz executed an interest rate swap agreement with the same bank to fix the
rate of interest on the term loan for the duration of the loan at a rate of
approximately 4%. As of January 17, 2006, the High Yield Bonds were redeemed,
with premium. The restrictions on excess proceeds of approximately E21 million
were removed and such proceeds are available for general corporate purposes.
FLAGA's management plans to obtain an extension of or refinance its outstanding
long-term debt. FLAGA has long-term debt maturing during 2006 of approximately
$56.2 million.
UGI Utilities has revolving credit commitments under which it may borrow up to a
total of $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
-27-
UGI CORPORATION AND SUBSIDIARIES
outstanding under the revolving credit agreements. Short-term borrowings,
including borrowings under revolving credit agreements, are classified as bank
loans on the Condensed Consolidated Balance Sheets. UGI Utilities also has a
shelf registration statement with the SEC 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 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 loans during the
2005 three-month period reflects, in large part, borrowings to fund increased
working capital resulting principally from higher natural gas prices.
Energy Services has a $150 million receivables purchase facility ("Receivables
Facility") with an issuer of receivables-backed commercial paper expiring in
August 2007. In order to provide additional short-term liquidity during the peak
heating season due to increased energy product costs, the maximum level of
funding available at any one time from this facility was temporarily increased
to $300 million for the period from November 1, 2005 to April 24, 2006. After
April 24, 2006, the maximum level of funding available at any one time from this
facility is $150 million. Under the Receivables Facility, Energy Services
transfers, on an ongoing basis and without recourse, its trade accounts
receivable to its wholly owned, special purpose subsidiary, Energy Services
Funding Corporation ("ESFC"), which is consolidated for financial statement
purposes. ESFC, in turn, has sold, and subject to certain conditions, may from
time to time sell, an undivided interest in some or all of the receivables to a
commercial paper conduit of a major bank. The proceeds of these sales are less
than the face amount of the accounts receivable sold by an amount that
approximates the purchaser's financing cost of issuing its own
receivables-backed commercial paper. ESFC was created and has been structured to
isolate its assets from creditors of Energy Services and its affiliates,
including UGI. This two-step transaction is accounted for as a sale of
receivables following the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities." Energy Services continues to
service, administer and collect trade receivables on behalf of the commercial
paper issuer and ESFC. At December 31, 2005, the outstanding balance of ESFC
receivables was $64.5 million which is net of $95 million in trade receivables
sold to the commercial paper conduit.
In addition, a major bank has committed to Energy Services to issue up to $50
million of standby letters of credit, secured by cash or marketable securities
("LC Facility"). At December 31, 2005, there were no letters of credit
outstanding. Energy Services expects to fund the collateral requirements with
borrowings under its Receivables Facility. The LC Facility, which we intend to
renew, expires in April 2006.
CASH FLOWS
OPERATING ACTIVITIES. Due to the seasonal nature of the Company's businesses,
cash flows from operating activities are generally strongest during the second
and third fiscal quarters when customers pay for natural gas, propane and other
LPG and electricity consumed during the heating season months. Conversely,
operating cash flows are generally at their lowest levels during the first and
fourth fiscal quarters when the Company's investment in working capital,
principally accounts receivable and/or inventories, is generally greatest.
AmeriGas Propane and UGI Utilities primarily use revolving credit facilities
and, as previously mentioned, have used other borrowings to satisfy their
seasonal operating cash flow needs. Energy Services uses its Receivables
Facility to satisfy its seasonal operating cash flow needs. Antargaz has
historically been successful funding its operating cash flow needs without the
use of its revolver. Cash flow used by operating activities was $17.5 million in
the 2005 three-month period compared to cash flow provided of $4.8 million in
the 2004 three-month period. The decrease in operating cash flow principally
reflects our increased need for cash to fund working capital which
-28-
UGI CORPORATION AND SUBSIDIARIES
reflects, in large part, the effects of higher energy commodity prices. Cash
flow from operating activities before changes in operating working capital was
$129.1 million in the 2005 three-month period compared with $131.6 million in
the prior-year three-month period. Changes in operating working capital used
$146.6 million in the 2005 three-month period and $126.8 million in the 2004
three-month period.
INVESTING ACTIVITIES. Investing activity cash flow is principally affected by
capital expenditures and investments in property, plant and equipment, cash paid
for acquisitions of businesses, changes in short-term investments and proceeds
from sales of assets. Cash flow used in investing activities was $284.8 million
in the 2005 three-month period compared to $57.0 million in the prior-year
period. The increase in cash flow used in investing activities primarily
reflects the restricted investment in cash reflecting proceeds from Antargaz'
issuance of debt part of which it used to redeem its High Yield Bonds in January
2006.
FINANCING ACTIVITIES. Cash flow provided by financing activities was $273.9
million in the 2005 three-month period compared with $20.9 million of cash
provided in the prior-year three-month period. Financing activity cash flow
changes are primarily due to issuances and repayments of long-term debt, net
borrowings under revolving credit facilities, dividends and distributions on UGI
Common Stock and AmeriGas Partners Common Units, and proceeds from public
offerings of AmeriGas Partners Common Units and issuances of UGI Common Stock.
In December 2005, Antargaz entered into a E380 million term loan. A portion of
the proceeds were used to repay the existing E175 million Senior Facilities term
loan and for general corporate purposes. Antargaz used a portion of the
remaining proceeds to redeem its E165 million of High Yield Bonds. Also, in
December 2005, UGI Utilities refinanced $50 million of its maturing 7.14%
Medium-Term Notes with the proceeds from the issuance of $50 million of 5.64%
Medium-Term Notes.
We paid cash dividends on UGI Common Stock of $17.7 million and $16.0 million
during the three months ended December 31, 2005 and 2004, respectively. During
the three months ended December 31, 2005, the Partnership declared and paid the
quarterly distributions on all limited partner units for the quarter ended
September 30, 2005. The quarterly distribution of $0.56 for the quarter ended
December 31, 2005 will be paid on February 18, 2006 to holders of record on
February 10, 2006.
ANTARGAZ TAX MATTER
The French tax authorities levy taxes on legal entities and individuals
regularly operating a business in France which are commonly referred to
collectively as "business tax." The amount of business tax charged annually is
generally dependent upon the value of certain of the entity's tangible fixed
assets. Prior to the Antargaz Acquisition, Antargaz filed suit against French
tax authorities in connection with the assessment of business tax related to the
tax treatment of certain of its owned tanks at customer locations. Elf Antar
France and Elf Aquitaine, now Total France, former owners of Antargaz, agreed to
indemnify Antargaz for all payments that would have been due from Antargaz in
respect of the tax related to its tanks for the period from January 1, 1997
through December 31, 2000. Antargaz has recorded liabilities for business taxes
related to various classes of equipment. On February 4, 2005, Antargaz received
a letter from the French government that eliminated the requirement for Antargaz
to pay business tax associated with tanks at certain customer locations. In
addition, during Fiscal 2005 resolution was reached relating to business taxes
relating to a prior year. Further changes in the French government's
interpretation of the tax laws or in the tax laws themselves could have either
an adverse or a favorable effect on our results of operations. Our Condensed
Consolidated Statement of Income for the 2004 three-month period includes a
pre-tax gain of $19.9 million and a net after-tax gain of $14.9 million
associated with the resolution of certain business tax matters related
principally to prior years.
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UGI CORPORATION AND SUBSIDIARIES
PG ENERGY ACQUISITION
On January 26, 2006, UGI signed a definitive agreement to acquire the natural
gas utility assets of PG Energy from Southern Union Company for approximately
$580 million in cash, subject to certain adjustments. We expect to fund the
purchase price and related costs of the acquisition with a combination of cash
and long-term debt. PG Energy serves customers in 13 counties in northeastern
and central Pennsylvania. This transaction is subject to PUC approval and
federal antitrust review under the Hart-Scott-Rodino Act. This transaction is
expected to close during our fourth fiscal quarter ending September 30, 2006.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risk exposures are (1) market prices for propane and other
LPG, natural gas and electricity; (2) changes in interest rates; and (3) foreign
currency exchange rates.
The risk associated with fluctuations in the prices the Partnership and our
International Propane operations pay for LPG is principally a result of market
forces reflecting changes in supply and demand for propane and other energy
commodities. Their profitability is sensitive to changes in LPG supply costs.
Increases in supply costs are generally passed on to customers. International
Propane and the Partnership may not, however, always be able to pass through
product cost increases fully or on a timely basis, particularly when product
costs rise rapidly. In order to reduce the volatility of LPG market price risk,
the Partnership uses contracts for the forward purchase or sale of propane,
propane fixed-price supply agreements, and over-the-counter derivative commodity
instruments including price swap and option contracts and Antargaz hedges a
portion of its future U.S. dollar denominated LPG product purchases through the
use of forward foreign exchange contracts. Antargaz may also enter into other
contracts, similar to those used by the Partnership. FLAGA has and may use
derivative commodity instruments to reduce market risk associated with a portion
of its propane purchases. Over-the-counter derivative commodity instruments
utilized to hedge forecasted purchases of propane are generally settled at
expiration of the contract. In order to minimize credit risk associated with its
derivative commodity contracts, the Partnership monitors established credit
limits with the contract counterparties. Although we use derivative financial
and commodity instruments to reduce market price risk associated with forecasted
transactions, we do not use derivative financial and commodity instruments for
speculative or trading purposes.
Gas Utility's tariffs contain clauses that permit recovery of substantially all
of the prudently incurred costs of natural gas it sells to its customers. The
recovery clauses provide for periodic 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 electric 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 of 7.5% of its total rates in effect on December
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UGI CORPORATION AND SUBSIDIARIES
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 in the Condensed
Consolidated Balance Sheet. From time to time, Electric Utility enters into
electric price swap agreements to reduce the volatility in the cost of a portion
of its anticipated electricity requirements.
In order to manage market price risk relating to substantially all of Energy
Services' fixed-price sales contracts for natural gas, Energy Services purchases
exchange-traded natural gas futures contracts or enters into fixed-price supply
arrangements. Exchange-traded natural gas futures contracts are guaranteed by
the New York Mercantile Exchange ("NYMEX") and have nominal credit risk. The
change in market value of these contracts generally requires daily cash deposits
in margin accounts with brokers. At December 31, 2005, Energy Services had $10.1
million deposited into such margin accounts. Although Energy Services'
fixed-price supply arrangements mitigate most risks associated with its
fixed-price sales contracts, should any of the natural gas suppliers under these
arrangements fail to perform, increases, if any, in the cost of replacement
natural gas would adversely impact Energy Services' results. In order to reduce
this risk of supplier nonperformance, Energy Services has diversified its
purchases across a number of suppliers.
UGID has entered into fixed-price sales agreements for a portion of the
electricity expected to be generated by its interests in electric generation
assets. In conjunction with certain of these sales agreements, at December 31,
2005, UGID had $14.7 million in collateral deposits with its counterparties
which is reflected in other assets on the Condensed Consolidated Balance Sheet.
In the event that these generation assets would not be able to produce all of
the electricity needed to supply electricity under these agreements, UGID would
be required to purchase such electricity on the spot market or under contract
with other electricity suppliers. Accordingly, increases in the cost of
replacement power could negatively impact the Company's results.
Asset Management has and may continue to enter into fixed-price sales agreements
for a portion of its propane sales. In order to manage the market price risk
relating to substantially all of its fixed-price sales contracts for propane,
Asset Management enters into price swap and option contracts.
We have both fixed-rate and variable-rate debt. Changes in interest rates impact
the cash flows of variable-rate debt but generally do not impact its fair value.
Conversely, changes in interest rates impact the fair value of fixed-rate debt
but do not impact their cash flows.
Our variable-rate debt includes borrowings under AmeriGas OLP's Credit
Agreement, AmeriGas OLP's $35 million term loan, UGI Utilities' bank loans and a
substantial portion of FLAGA's debt. These debt agreements have interest rates
that are generally indexed to short-term market interest rates. Antargaz has
effectively fixed the interest rate on its variable-rate debt through June 2011
through the use of an interest rate swap. At December 31, 2005, combined
borrowings outstanding under these agreements totaled approximately $254
million. Our long-term debt is typically issued at fixed rates of interest based
upon market rates for debt having similar terms and credit ratings. As these
long-term debt issues mature, we may refinance such debt with new debt having
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UGI CORPORATION AND SUBSIDIARIES
interest rates reflecting then-current market conditions. This debt may have an
interest rate that is more or less than the refinanced debt. In order to reduce
interest rate risk associated with near-term forecasted issuances of fixed-rate
debt, from time to time we enter into interest rate protection agreements.
The following table summarizes the fair values of unsettled market risk
sensitive derivative instruments held at December 31, 2005. Fair values reflect
the estimated amounts that we would receive or pay to terminate the contracts at
the reporting date based upon quoted market prices of comparable contracts at
December 31, 2005. The table also includes the changes in fair value that would
result if there were a ten percent adverse change in (1) the market price of
propane; (2) the market price of natural gas; (3) the market price of
electricity; (4) interest rates on ten-year U.S. treasury notes and the
three-month Euribor and; (5) value of the euro versus the U.S. dollar.
Change in
Fair Value Fair Value
- --------------------------------------------------------------------------------
(Millions of dollars)
December 31, 2005:
Propane commodity price risk $ 15.5 $ (12.9)
Natural gas commodity price risk (4.6) (8.5)
Electricity commodity price risk 7.5 (1.5)
Interest rate risk (8.0) (19.4)
Foreign currency exchange rate risk 8.4 (15.5)
- --------------------------------------------------------------------------------
Gas Utility's exchange-traded natural gas call option contracts are excluded
from the table above because any associated net gains are included in Gas
Utility's PGC recovery mechanism. Because our derivative instruments generally
qualify as hedges under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," ("SFAS 133"), we expect that changes in the fair value of
derivative instruments used to manage commodity or interest rate market risk
would be substantially offset by gains or losses on the associated anticipated
transactions.
Our primary exchange rate risk is associated with the U.S. dollar versus the
euro. The U.S. dollar value of our foreign-denominated assets and liabilities
will fluctuate with changes in the associated foreign currency exchange rates.
We use derivative instruments to hedge portions of our net investments in
foreign subsidiaries ("net investment hedges"). Realized gains or losses remain
in other comprehensive income until such foreign operations are liquidated. At
December 31, 2005, the fair value of unsettled net investment hedges was a gain
of $2.5 million, which is included in the foreign currency exchange rate risk in
the table above. With respect to our net investments in FLAGA and Antargaz, a
10% decline in the value of the euro versus the U.S. dollar, excluding the
effects of any net investment hedges, would reduce their aggregate net book
value by approximately $49.6 million, which amount would be reflected in other
comprehensive income.
-32-
UGI CORPORATION AND SUBSIDIARIES
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, evaluated the
effectiveness of the Company's disclosure controls and procedures as of
the end of the period covered by this report. Based on that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that
the Company's disclosure controls and procedures as of the end of the
period covered by this report were designed and functioning effectively
to provide reasonable assurance that the information required to be
disclosed by the Company in reports filed under the Securities Exchange
Act of 1934, as amended, is (i) recorded, processed, summarized and
reported within the time periods specified in the SEC'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.
-33-
UGI CORPORATION AND SUBSIDIARIES
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
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 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.
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):
<Table>
<Caption>
EXHIBIT NO. EXHIBIT REGISTRANT FILING EXHIBIT
- ----------- ------- ---------- ------ -------
4.1 Indenture, dated January 26, AmeriGas Form 8-K 4.1
2006 by and among AmeriGas Partners, (1/26/06)
Partners, L.P., a Delaware L.P.
limited partnership, AP Eagle
Finance Corp., a Delaware
corporation, and U.S. Bank
National Association, as
trustee.
-34-
UGI CORPORATION AND SUBSIDIARIES
<Table>
<Caption>
EXHIBIT NO. EXHIBIT REGISTRANT FILING EXHIBIT
- ----------- ------- ---------- ------ -------
10.1 Senior Facilities Agreement
dated December 7, 2005 by and
among AGZ Holding, as
Borrower and Guarantor,
Antargaz, as Borrower and
Guarantor, Calyon, as
Mandated Lead Arranger,
Facility Agent and Security
Agent and the Financial
Institutions named therein.
10.2 Pledge of Financial
Instruments Account relating
to Financial Instruments held
by AGZ Holding in Antargaz,
dated December 7, 2005, by
and among AGZ Holding, as
Pledgor, Calyon, as Security
Agent, and the Lenders.
10.3 Pledge of Financial
Instruments Account relating
to Financial Instruments held
by Antargaz in certain
subsidiary companies, dated
December 7, 2005, by and
among Antargaz, as Pledgor,
Calyon, as Security Agent,
and the Revolving Lenders.
10.4 Letter of Undertakings dated
December 7, 2005, by UGI
Bordeaux Holding to AGZ
Holding, the Parent of
Antargaz, and Calyon, the
Facility Agent, acting on
behalf of the Lenders, (as
defined within the Senior
Facilities Agreement).
10.5 Amendment No. 1 dated as of
June 24, 2004, to Tax
Consolidation Agreement,
dated June 18, 2004, as
amended, entered into by UGI
Bordeaux Holding and its
Subsidiaries named therein.
10.6 Amendment No. 2 dated as of
December 7, 2005 to Tax
Consolidation Agreement,
dated June 18, 2004, as
amended, entered into by UGI
Bordeaux Holding and its
Subsidiaries named therein.
-35-
UGI CORPORATION AND SUBSIDIARIES
<Table>
<Caption>
EXHIBIT NO. EXHIBIT REGISTRANT FILING EXHIBIT
- ----------- ------- ---------- ------ -------
10.7 Security Agreement for the
Assignment of Receivables
dated as of December 7, 2005
by and among AGZ Holding, as
Assignor, Calyon, as Security
Agent, and the Lenders named
therein.
10.8 Security Agreement for the
Assignment of Receivables
dated as of December 7, 2005
by and among Antargaz, as
Assignor, Calyon, as Security
Agent, and the Lenders named
therein.
10.9 Purchase and Sale Agreement UGI 8-K 10.1
by and between Southern Union (1/26/06)
Company, as Seller, and UGI
Corporation, as Buyer, dated
as of January 26, 2006.
10.10 Employee Agreement by and UGI 8-K 10.2
between Southern Union (1/26/06)
Company and UGI Corporation
dated as of January 26, 2006.
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.
</Table>
-36-
UGI CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UGI Corporation
---------------
(Registrant)
Date: February 9, 2006 By: /s/ Anthony J. Mendicino
- ---------------------- ---------------------------------
Anthony J. Mendicino
Senior Vice President-Finance and
Chief Financial Officer
Date: February 9, 2006 By: /s/ Michael J. Cuzzolina
- ---------------------- ---------------------------------
Michael J. Cuzzolina
Vice President-Accounting and
Financial Control and
Chief Risk Officer
-37-
UGI CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
10.1 Senior Facilities Agreement dated December 7, 2005 by and among AGZ
Holding, as Borrower and Guarantor, Antargaz, as Borrower and
Guarantor, Calyon, as Mandated Lead Arranger, Facility Agent and
Security Agent and the Financial Institutions named therein.
10.2 Pledge of Financial Instruments Account relating to Financial
Instruments held by AGZ Holding in Antargaz, dated December 7, 2005,
by and among AGZ Holding, as Pledgor, Calyon, as Security Agent, and
the Lenders.
10.3 Pledge of Financial Instruments Account relating to Financial
Instruments held by Antargaz in certain subsidiary companies, dated
December 7, 2005, by and among Antargaz, as Pledgor, Calyon, as
Security Agent, and the Revolving Lenders.
10.4 Letter of Undertakings dated December 7, 2005, by UGI Bordeaux
Holding to AGZ Holding, the Parent of Antargaz, and Calyon, the
Facility Agent, acting on behalf of the Lenders, (as defined within
the Senior Facilities Agreement).
10.5 Amendment No. 1 dated as of June 24, 2004, to Tax Consolidation
Agreement, dated June 18, 2004, as amended, entered into by UGI
Bordeaux Holding and its Subsidiaries named therein.
10.6 Amendment No. 2 dated as of December 7, 2005 to Tax Consolidation
Agreement, dated June 18, 2004, as amended, entered into by UGI
Bordeaux Holding and its Subsidiaries named therein.
10.7 Security Agreement for the Assignment of Receivables dated as of
December 7, 2005 by and among AGZ Holding, as Assignor, Calyon, as
Security Agent, and the Lenders named therein.
10.8 Security Agreement for the Assignment of Receivables dated as of
December 7, 2005 by and among Antargaz, as Assignor, Calyon, as
Security Agent, and the Lenders named therein.
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.