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 March 31, 2006
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
--- --- ---
Indicated by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
--- ---
At April 30, 2006, there were 105,309,875 shares of UGI Corporation Common
Stock, without par value, outstanding.
UGI CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
PAGES
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31,
2006, September 30, 2005 and March 31, 2005 1
Condensed Consolidated Statements of Income for the three
and six months ended March 31, 2006 and 2005 2
Condensed Consolidated Statements of Cash Flows for the
six months ended March 31, 2006 and 2005 3
Notes to Condensed Consolidated Financial Statements 4 - 21
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 22 - 36
Item 3. Quantitative and Qualitative Disclosures About Market Risk 37 - 39
Item 4. Controls and Procedures 40
PART II OTHER INFORMATION
Item 1. Legal Proceedings 40
Item 1A. Risk Factors 40
Item 4. Submission of Matters to a Vote of Security Holders 41
Item 6. Exhibits 41
Signatures 42
-i-
UGI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(Millions of dollars)
March 31, September 30, March 31,
2006 2005 2005
--------- ------------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 249.1 $ 315.0 $ 161.6
Short-term investments (at cost, which approximates fair value) 120.0 70.0 65.0
Accounts receivable (less allowances for doubtful accounts of
$38.2, $29.2 and $34.8, respectively) 684.5 421.8 747.4
Accrued utility revenues 32.9 10.4 27.4
Inventories 168.6 239.9 135.4
Deferred income taxes 29.6 24.4 29.8
Derivative financial instruments 3.8 60.3 6.7
Prepaid expenses 15.8 26.2 17.8
Other current assets 2.9 4.3 3.2
-------- -------- --------
Total current assets 1,307.2 1,172.3 1,194.3
Property, plant and equipment, at cost (less accumulated depreciation
and amortization of $1,033.4, $986.9 and $947.0, respectively) 1,799.6 1,802.7 1,819.6
Goodwill and excess reorganization value 1,209.0 1,231.2 1,284.6
Intangible assets (less accumulated amortization of
$53.5, $45.4 and $37.8, respectively) 165.0 172.6 189.3
Utility regulatory assets 62.0 61.3 66.2
Investments in equity investees 55.6 12.8 14.3
Other assets 124.7 118.6 105.5
-------- -------- --------
Total assets $4,723.1 $4,571.5 $4,673.8
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 57.0 $ 252.0 $ 172.2
AmeriGas Propane bank loans -- -- 12.0
UGI Utilities bank loans 123.3 81.2 39.2
Other bank loans 11.5 16.2 26.0
Accounts payable 440.8 399.7 448.2
Deferred fuel refunds 7.5 17.4 24.0
Other current liabilities 302.8 396.6 398.1
-------- -------- --------
Total current liabilities 942.9 1,163.1 1,119.7
Long-term debt 1,636.8 1,392.5 1,520.3
Deferred income taxes 486.5 477.5 471.7
Other noncurrent liabilities 326.0 334.5 327.7
-------- -------- --------
Total liabilities 3,392.2 3,367.6 3,439.4
Commitments and contingencies (note 8)
Minority interests 219.9 206.3 214.2
Common stockholders' equity:
Common Stock, without par value (authorized - 300,000,000 shares;
issued - 115,152,994 shares) 800.5 793.6 768.8
Retained earnings 392.2 266.3 309.5
Accumulated other comprehensive (loss) income (6.0) 16.5 29.5
-------- -------- --------
1,186.7 1,076.4 1,107.8
Treasury stock, at cost (75.7) (78.8) (87.6)
-------- -------- --------
Total common stockholders' equity 1,111.0 997.6 1,020.2
-------- -------- --------
Total liabilities and stockholders' equity $4,723.1 $4,571.5 $4,673.8
======== ======== ========
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 Six Months Ended
March 31, March 31,
------------------- -------------------
2006 2005 2006 2005
-------- -------- -------- --------
Revenues $1,845.5 $1,787.7 $3,423.4 $3,150.1
Costs and expenses:
Cost of sales 1,297.0 1,210.5 2,447.7 2,135.7
Operating and administrative expenses 264.3 255.4 499.7 503.2
Utility taxes other than income taxes 3.7 3.7 7.0 6.9
Depreciation and amortization 35.9 37.7 72.2 75.3
Other (income) expense, net (18.0) (7.3) (26.0) (33.7)
-------- -------- -------- --------
1,582.9 1,500.0 3,000.6 2,687.4
-------- -------- -------- --------
Operating income 262.6 287.7 422.8 462.7
Loss from equity investees (0.6) (0.6) (1.2) (1.3)
Interest expense (30.4) (33.3) (63.0) (66.8)
Loss on early extinguishments of debt (18.5) -- (18.5) --
-------- -------- -------- --------
Income before income taxes and minority interests 213.1 253.8 340.1 394.6
Income tax expense (64.4) (83.5) (102.9) (125.5)
Minority interests, principally in AmeriGas Partners (44.7) (53.0) (75.7) (73.6)
-------- -------- -------- --------
Net income $ 104.0 $ 117.3 $ 161.5 $ 195.5
======== ======== ======== ========
Earnings per common share:
Basic $ 0.99 $ 1.13 $ 1.53 $ 1.90
======== ======== ======== ========
Diluted $ 0.98 $ 1.12 $ 1.52 $ 1.86
======== ======== ======== ========
Average common shares outstanding (millions):
Basic 105.365 103.582 105.261 103.162
======== ======== ======== ========
Diluted 106.401 105.086 106.472 105.128
======== ======== ======== ========
Dividends declared per common share $ 0.1688 $ 0.1563 $ 0.3375 $ 0.3125
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
-2-
UGI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Millions of dollars)
Six Months Ended
March 31,
----------------
2006 2005
------ ------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $161.5 $195.5
Adjustments to reconcile to net cash provided by operating activities:
Depreciation and amortization 72.2 75.3
Minority interests 75.7 73.6
Deferred income taxes, net 8.8 9.7
Loss on early extinguishments of debt 18.5 --
Net change in settled accumulated other comprehensive income (32.4) (1.3)
other, net 23.0 14.9
Net change in:
Accounts receivable and accrued utility revenues (269.7) (407.2)
Inventories 71.5 77.0
Deferred fuel costs (9.9) 14.8
Accounts payable 12.4 100.8
Other current assets and liabilities (60.6) 35.4
------ ------
Net cash provided by operating activities 71.0 188.5
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment (89.3) (74.5)
Net proceeds from disposals of assets 4.5 8.7
Net proceeds from sale of Energy Ventures 17.7 --
Investment in Flaga joint venture (10.9) --
Acquisitions of businesses, net of cash acquired (2.9) (27.7)
Short-term investments increase (50.0) (15.0)
Other, net 0.6 3.2
------ ------
Net cash used by investing activities (130.3) (105.3)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends on UGI Common Stock (35.5) (32.2)
Distributions on AmeriGas Partners publicly held Common Units (36.1) (32.9)
Issuances of debt 843.4 21.0
Repayments of debt including bank loans with maturities
greater than three months (893.0) (22.0)
AmeriGas Propane bank loans increase -- 12.0
Other bank loans (decrease) increase (5.0) 8.2
Increase (decrease) in Utilities bank loans with maturities of three
months or less 112.1 (21.7)
Redemption of UGI Utilities preferred shares subject to mandatory
redemption -- (20.0)
Issuance of UGI Common Stock 7.1 15.7
------ ------
Net cash used by financing activities (7.0) (71.9)
------ ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 0.4 0.7
------ ------
Cash and cash equivalents (decrease) increase $(65.9) $ 12.0
====== ======
Cash and cash equivalents:
End of period $249.1 $161.6
Beginning of period 315.0 149.6
------ ------
(Decrease) increase $(65.9) $ 12.0
====== ======
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 distribution utility, electricity generation, retail
propane distribution, energy marketing and related businesses in the United
States. Through foreign subsidiaries and joint-venture affiliates, UGI also
distributes liquefied petroleum gases ("LPG") in France, central and
eastern Europe 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 March 31, 2006, 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 and participates in a LPG
joint-venture business in central and eastern Europe (collectively,
"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 electric
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 own and operate a 48-megawatt coal-fired electric generation
station and 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 March 31, Six Months Ended March 31,
---------------------------- --------------------------
2006 2005 2006 2005
------- ------- ------- -------
Denominator (millions of shares):
Average common shares
outstanding for basic computation 105.365 103.582 105.261 103.162
Incremental shares issuable for stock
options and awards 1.036 1.504 1.211 1.966
------- ------- ------- -------
Average common shares outstanding for
diluted computation 106.401 105.086 106.472 105.128
------- ------- ------- -------
-5-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars and euros, except per share amounts)
EQUITY-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. 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.
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.
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 and we did not restate any
of the prior periods.
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 $2.5 million and $2.8 million during the three and six month periods
ended March 31, 2006, respectively.
-6-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars and euros, except per share amounts)
Both prior to and after the adoption of SFAS 123R, we measured and recorded
compensation cost of Units awarded that can be settled 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.
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.
Total net pre-tax equity-based compensation expense recorded during the
three and six months ended March 31, 2006 was $7.1 million and $2.4
million, respectively. Total net after-tax equity-based compensation
expense during the three and six months ended March 31, 2006 was $4.7
million and $1.5 million, respectively. Our compensation expense reflects
awards of UGI stock options, UGI Units and AmeriGas Partners Common Unit
awards. The lower net compensation expense during the six months ended
March 31, 2006 predominately reflects 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 equity-based compensation awards for the periods prior to the
adoption of SFAS 123R.
Three Months Ended Six Months Ended
March 31, March 31,
2005 2005
------------------ ----------------
Net income, as reported $117.3 $195.5
Add: Equity-based employee
compensation expense included in
reported net income, net of related tax effects 1.4 4.1
Deduct: Total equity-based
employee compensation expense
determined under the fair value method
for all awards, net of related tax effects (2.3) (5.3)
------ ------
Pro forma net income $116.4 $194.3
------ ------
Basic earnings per share:
As reported $ 1.13 $ 1.90
Pro forma $ 1.12 $ 1.88
Diluted earnings per share:
As reported $ 1.12 $ 1.86
Pro forma $ 1.11 $ 1.85
------ ------
-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
Granted 1,098,600 $20.56
Exercised (136,100) $10.22 $ 1.7 million
Forfeited (33,000) $17.50
Shares under option - March 31, 2006 5,882,518 $16.93 7.7 $24.4 million
Options exercisable - March 31, 2006 3,089,686 $14.14 6.7 $21.4 million
Unvested options - March 31, 2006 2,792,832 $20.03 8.8 $ 2.9 million
Cash received from the exercises of stock options and any associated tax
benefits were $1.4 million and $0.6 million, respectively, during the six
months ended March 31, 2006.
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 3.4% to 6.1%
Risk free interest rate 3.1% to 4.5%
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 March 31, 2006, there was $3.8 million
of unrecognized compensation cost related to non-vested stock options that
is expected to be recognized over a weighted average period of 2.3 years.
During the six months ended March 31, 2006, a portion of vested UGI Unit
awards were settled in shares of UGI Common Stock and approximately $2.3
million in cash. As of March 31, 2006, there was a total of approximately
$6.6 million of unrecognized compensation cost associated with 657,384 of
UGI Unit awards that is expected to be recognized over a weighted average
period of 1.8 years. There was a total of $2.2 million of unrecognized
compensation expense associated with 114,817 of AmeriGas Partners Common
Unit awards that is expected to be recognized over a weighted average
period of 2.1 years. At March 31, 2006 total liabilities of $14.1 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 tables illustrate Unit and AmeriGas Partners Common Unit
award activity:
Number of Average Fair
UGI Units Value (per Unit)
--------- ----------------
Non-vested Units - September 30, 2005 313,227 $30.08
Granted 158,450
Vested (189,608)
Non-vested Units - March 31, 2006 282,069 $23.10
Number of
AmeriGas Partners Average Fair
Common Units Value (per Unit)
----------------- ----------------
Non-vested Units - September 30, 2005 116,000 $36.33
Granted 36,850
Forfeited (6,200)
Vested (6,750)(a)
Performance criteria not met (25,083)
Non-vested Units - March 31, 2006 114,817 $35.00
- -------------------------------------------------------------------------------------
(a) Represents awards under the non-executive plan of 4,500 that were settled
through the issuance of new AmeriGas Partners Common Units and 2,250 that
were settled in cash.
COMPREHENSIVE INCOME. The following table presents the components of
comprehensive income for the three and six months ended March 31, 2006 and
2005.
Three Months Ended Six Months Ended
March 31, March 31,
------------------ ----------------
2006 2005 2006 2005
------ ------ ------ ------
Net income $104.0 $117.3 $161.5 $195.5
Other comprehensive income (loss) 4.8 (12.7) (22.5) 6.9
------ ------ ------ ------
Comprehensive income $108.8 $104.6 $139.0 $202.4
------ ------ ------ ------
Other comprehensive income (loss) 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.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS. In March 2006, the Financial
Accounting Standards Board issued SFAS No. 156, "Accounting for Servicing
of Financial Assets - An Amendment of FASB Statement No. 140" ("SFAS 156").
SFAS 156 requires that all separately recognized servicing assets and
servicing liabilities be initially measured at fair value, unless it is
impracticable to do so. SFAS 156 permits, but does not require, the
subsequent measurement of servicing assets and servicing liabilities at
fair value. SFAS 156 is effective as of the beginning of our fiscal year
ending September 30, 2007. We are currently evaluating the impact that the
adoption of SFAS 156 will have but do not believe it will have a material
impact on our financial position or results of operations.
-9-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars and euros, except per share amounts)
2. ACQUISITIONS AND INVESTMENTS
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 existing cash and proceeds from the issuance of
long-term debt. PG Energy serves approximately 158,000 customers in 13
counties in northeastern and central Pennsylvania. The proposed transaction
is subject to PUC approval and is currently expected to close during our
fourth fiscal quarter ending September 30, 2006. We anticipate that UGI
Utilities will acquire and operate, through a subsidiary, the regulated
assets of PG Energy immediately following UGI's completion of the
acquisition.
On February 15, 2006, Flaga entered into a joint venture with a subsidiary
of Progas GmbH & Co KG ("Progas") to create a company for the retail
distribution of LPG in central and eastern Europe. Headquartered in
Dortmund, Germany, Progas is controlled by Thyssen'sche Handelsgesellschaft
m.b.H. The joint venture company, Zentraleuropa LPG Holding (the "Flaga
JV"), an Austrian limited liability company, through its subsidiaries
engages in the business of retail distribution of LPG in the Czech
Republic, Hungary, Poland, Slovakia and Romania. In forming the joint
venture, Flaga contributed the shares of its LPG subsidiaries operating in
the Czech Republic and Slovakia to the Flaga JV and paid cash of E9.1
million to Progas. Progas contributed the shares of its LPG subsidiaries
operating in the Czech Republic, Hungary, Poland, Romania and Slovakia to
the Flaga JV. These LPG operating subsidiaries distributed approximately 77
million gallons of LPG in these five countries in 2005. The Flaga JV is
owned and controlled equally by Flaga and Progas. In a related transaction,
Progas sold its retail LPG business in Austria to Flaga.
In March 2006, UGID sold its 50% ownership interest in Hunlock Creek Energy
Ventures ("Energy Ventures") to Allegheny Energy Supply Hunlock Creek, LLC.
Energy Ventures' assets primarily comprised a 44-megawatt gas-fired
combustion turbine electric generator and a 48-megawatt coal-fired electric
generation facility. As part of the consideration in this sale, Energy
Ventures transferred the 48-megawatt coal-fired electric generation station
to UGID. UGID recorded a net pre-tax gain of $9.1 million ($5.3 million
after-tax) associated with this transaction, which is reflected in other
income, net in the Condensed Consolidated Statements of Income for the
three and six months ended March 31, 2006.
3. 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, the Flaga JV, and our
international LPG equity investment in China ("Other"); (4) Gas Utility;
(5) Electric Utility; and (6) Energy Services (comprising Energy Services'
gas marketing business, UGID's electric generation business and Asset
Management's propane terminal business). We refer to both international
segments collectively as "International Propane."
-10-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars and euros, except per share amounts)
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.
-11-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Millions of dollars, except per share amounts)
3. SEGMENT INFORMATION (CONTINUED)
Three Months Ended March 31, 2006:
Reportable Segments
------------------------------------------------------------
International Propane
AmeriGas Gas Electric Energy --------------------- Corporate
Total Elims. Propane Utility Utility Services Antargaz Other (a) & Other (b)
-------- ------- -------- ------- -------- -------- -------- --------- -----------
Revenues $1,845.5 $ (31.9) $ 718.2 $296.2 $ 25.4 $438.8 $ 358.4 $ 23.7 $ 16.7
======== ======= ======== ====== ====== ====== ======== ====== ======
Cost of sales $1,297.0 $ (30.9) $ 447.3 $223.0 $ 15.2 $411.4 $ 205.6 $ 15.4 $ 10.0
======== ======= ======== ====== ====== ====== ======== ====== ======
Segment profit:
Operating income (c) $ 262.6 $ -- $ 116.3 $ 39.9 $ 3.3 $ 26.1 $ 74.0 $ 2.5 $ 0.5
Loss from equity investees (0.6) -- -- -- -- -- (0.6) -- --
Loss on extinguishments of debt (18.5) -- (17.1) -- -- -- (1.4) -- --
Interest expense (30.4) -- (19.4) (4.6) (0.8) -- (5.3) (0.4) 0.1
Minority interests (44.7) (0.1) (44.3) -- -- -- (0.3) -- --
-------- ------- -------- ------ ------ ------ -------- ------ ------
Income before income taxes $ 168.4 $ (0.1) $ 35.5 $ 35.3 $ 2.5 $ 26.1 $ 66.4 $ 2.1 $ 0.6
======== ======= ======== ====== ====== ====== ======== ====== ======
Depreciation and amortization $ 35.9 $ -- $ 17.9 $ 5.4 $ 0.9 $ 1.7 $ 8.8 $ 1.0 $ 0.2
Partnership EBITDA (c) $ 116.2
Segment assets (at period end) $4,723.1 $(334.3) $1,670.9 $853.3 $108.1 $248.6 $1,489.5 $154.0 $533.0
======== ======= ======== ====== ====== ====== ======== ====== ======
Investments in equity investees
(at period end) $ 55.6 $ -- $ -- $ -- $ -- $ -- $ 0.4 $ 55.2 $ --
======== ======= ======== ====== ====== ====== ======== ====== ======
Goodwill and excess reorganization
value (at period end) $1,209.0 $ (4.0) $ 618.3 $ -- $ -- $ 11.8 $ 535.8 $ 40.7 $ 6.4
======== ======= ======== ====== ====== ====== ======== ====== ======
Three Months Ended March 31, 2005:
Reportable Segments
------------------------------------------------------------
International Propane
AmeriGas Gas Electric Energy --------------------- Corporate
Total Elims. Propane Utility Utility Services Antargaz Other (a) & Other (b)
-------- ------- -------- ------- -------- -------- -------- --------- -----------
Revenues $1,787.7 $ -- $ 698.3 $255.9 $25.6 $432.2 $ 340.9 $ 22.2 $ 12.6
======== ======= ======== ====== ===== ====== ======== ====== ======
Cost of sales $1,210.5 $ -- $ 429.8 $177.3 $11.9 $409.9 $ 161.9 $ 12.4 $ 7.3
======== ======= ======== ====== ===== ====== ======== ====== ======
Segment profit:
Operating income (c) $ 287.7 $ -- $ 117.9 $ 48.6 $ 7.2 $ 14.0 $ 96.0 $ 3.0 $ 1.0
Loss from equity investees (0.6) -- -- -- -- -- (0.6) -- --
Interest expense (33.3) -- (20.7) (4.0) (0.5) -- (7.4) (0.6) (0.1)
Minority interests (53.0) -- (52.4) -- -- -- (0.6) -- --
-------- ------- -------- ------ ----- ------ -------- ------ ------
Income before income taxes $ 200.8 $ -- $ 44.8 $ 44.6 $ 6.7 $ 14.0 $ 87.4 $ 2.4 $ 0.9
======== ======= ======== ====== ===== ====== ======== ====== ======
Depreciation and amortization $ 37.7 $ -- $ 18.5 $ 5.1 $ 0.8 $ 1.5 $ 10.2 $ 1.3 $ 0.3
Partnership EBITDA (c) $ 135.2
Segment assets (at period end) $4,673.8 $(333.6) $1,630.5 $802.2 $97.2 $288.0 $1,574.6 $166.2 $448.7
======== ======= ======== ====== ===== ====== ======== ====== ======
Investments in equity investees
(at period end) $ 14.3 $ -- $ -- $ -- $ -- $ 8.6 $ 3.0 $ 2.7 $ --
======== ======= ======== ====== ===== ====== ======== ====== ======
Goodwill and excess reorganization
value (at period end) $1,284.6 $ -- $ 615.8 $ -- $ -- $ 4.3 $ 586.2 $ 72.8 $ 5.5
======== ======= ======== ====== ===== ====== ======== ====== ======
(a) International Propane-Other principally comprises Flaga, its joint venture
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's 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) The following table provides a reconciliation of Partnership EBITDA to
AmeriGas Propane operating income:
Three months ended March 31, 2006 2005
---------------------------- ------ ------
Partnership EBITDA $116.2 $135.2
Depreciation and amortization (i) (18.0) (18.4)
Minority interests (ii) 1.0 1.1
Loss on extinguishments of debt 17.1 --
------ ------
Operating income $116.3 $117.9
====== ======
(i) Excludes General Partner depreciation and amortization of $0.1 million
in each of the three month periods ended March 31, 2006 and 2005.
(ii) Principally represents the General Partner's 1.01% interest in
AmeriGas OLP.
-12-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Millions of dollars, except per share amounts)
3. SEGMENT INFORMATION (CONTINUED)
Six Months Ended March 31, 2006:
Reportable Segments
------------------------------------------------------------
International Propane
AmeriGas Gas Electric Energy --------------------- Corporate
Total Elims. Propane Utility Utility Services Antargaz Other (a) & Other (b)
-------- ------- -------- ------- -------- -------- -------- --------- -----------
Revenues $3,423.4 $ (66.0) $1,348.4 $516.0 $ 49.3 $890.2 $ 607.2 $ 42.5 $ 35.8
======== ======= ======== ====== ====== ====== ======== ====== ======
Cost of sales $2,447.7 $ (64.0) $ 855.1 $382.9 $ 26.5 $845.1 $ 352.0 $ 28.1 $ 22.0
======== ======= ======== ====== ====== ====== ======== ====== ======
Segment profit:
Operating income (d) $ 422.8 $ -- $ 191.0 $ 75.6 $ 9.8 $ 34.3 $ 107.2 $ 2.9 $ 2.0
Loss from equity investees (1.2) -- -- -- -- -- (1.2) -- --
Loss on extinguishments of debt (18.5) -- (17.1) -- -- -- (1.4) -- --
Interest expense (63.0) -- (38.3) (9.7) (1.3) -- (12.9) (0.9) 0.1
Minority interests (75.7) (0.2) (75.3) -- -- -- (0.2) -- --
-------- ------- -------- ------ ------ ------ -------- ------ ------
Income before income taxes (c) $ 264.4 $ (0.2) $ 60.3 $ 65.9 $ 8.5 $ 34.3 $ 91.5 $ 2.0 $ 2.1
======== ======= ======== ====== ====== ====== ======== ====== ======
Depreciation and amortization $ 72.2 $ -- $ 36.2 $ 10.8 $ 1.7 $ 3.2 $ 17.8 $ 2.2 $ 0.3
Partnership EBITDA (d) $ 208.4
Segment assets (at period end) $4,723.1 $(334.3) $1,670.9 $853.3 $108.1 $248.6 $1,489.5 $154.0 $533.0
======== ======= ======== ====== ====== ====== ======== ====== ======
Investments in equity investees
(at period end) $ 55.6 $ -- $ -- $ -- $ -- $ -- $ 0.4 $ 55.2 $ --
======== ======= ======== ====== ====== ====== ======== ====== ======
Goodwill and excess reorganization
value (at period end) $1,209.0 $ (4.0) $ 618.3 $ -- $ -- $ 11.8 $ 535.8 $ 40.7 $ 6.4
======== ======= ======== ====== ====== ====== ======== ====== ======
Six Months Ended March 31, 2005:
Reportable Segments
------------------------------------------------------------
International Propane
AmeriGas Gas Electric Energy --------------------- Corporate
Total Elims. Propane Utility Utility Services Antargaz Other (a) & Other (b)
-------- ------- -------- ------- -------- -------- -------- --------- -----------
Revenues $3,150.1 $ -- $1,254.5 $417.1 $47.9 $761.2 $ 598.9 $ 42.4 $ 28.1
======== ======= ======== ====== ===== ====== ======== ====== ======
Cost of sales $2,135.7 $ -- $ 780.9 $283.9 $22.9 $723.1 $ 283.8 $ 24.4 $ 16.7
======== ======= ======== ====== ===== ====== ======== ====== ======
Segment profit:
Operating income (c) (d) $ 462.7 $ -- $ 176.5 $ 76.7 $11.9 $ 20.1 $ 171.7 $ 4.7 $ 1.1
Loss from equity investees (1.3) -- -- -- -- -- (1.3) -- --
Interest expense (66.8) -- (41.2) (8.1) (1.0) -- (14.9) (1.6) --
Minority interests (73.6) -- (72.7) -- -- -- (0.9) -- --
-------- ------- -------- ------ ----- ------ -------- ------ ------
Income before income taxes (c) $ 321.0 $ -- $ 62.6 $ 68.6 $10.9 $ 20.1 $ 154.6 $ 3.1 $ 1.1
======== ======= ======== ====== ===== ====== ======== ====== ======
Depreciation and amortization $ 75.3 $ -- $ 37.8 $ 10.2 $ 1.5 $ 2.8 $ 19.8 $ 2.6 $ 0.6
Partnership EBITDA (d) $ 221.6
Segment assets (at period end) $4,673.8 $(333.6) $1,630.5 $802.2 $97.2 $288.0 $1,574.6 $166.2 $448.7
======== ======= ======== ====== ===== ====== ======== ====== ======
Investments in equity investees
(at period end) $ 14.3 $ -- -- $ -- $ -- $ 8.6 $ 3.0 $ 2.7 $ --
======== ======= ======== ====== ===== ====== ======== ====== ======
Goodwill and excess reorganization
value (at period end) $1,284.6 $ -- $ 615.8 $ -- $ -- $ 4.3 $ 586.2 $ 72.8 $ 5.5
======== ======= ======== ====== ===== ====== ======== ====== ======
(a) International Propane-Other principally comprises Flaga, its joint venture
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's 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 six months ended March 31,
2005 include $19.9 million of operating income and income before income
taxes due to the resolution of certain non-income tax contingencies (see
Note 8).
(d) The following table provides a reconciliation of Partnership EBITDA to
AmeriGas Propane operating income:
Six months ended March 31, 2006 2005
-------------------------- ------ ------
Partnership EBITDA (i) $208.4 $221.6
Depreciation and amortization (ii) (36.2) (37.7)
Minority interests (iii) 1.7 1.7
Loss on extinguishments of debt 17.1 --
Gain on sale of Atlantic Energy -- (9.1)
------ ------
Operating income $191.0 $176.5
====== ======
(i) Includes a $9.1 million gain on the sale of Atlantic Energy to Energy
Services during the six months ended March 31, 2005.
(ii) Excludes General Partner depreciation and amortization of $0.1 million
in the six months ended March 31, 2005.
(iii) Principally represents the General Partner's 1.01% interest in
AmeriGas OLP.
-13-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars and euros, except per share amounts)
4. 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, to fund the redemption
of the E165 million High Yield Bonds in January 2006, including a premium,
and for general corporate purposes. As a result of this refinancing, we
incurred a pre-tax loss on extinguishment of debt of $1.4 million ($0.9
million after-tax). In addition, Antargaz executed interest rate swap
agreements 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 3.25%, plus margin.
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 AmeriGas OLP's $160 million
Series A and $68.8 million Series C First Mortgage Notes, including a
make-whole premium, its $35 million term loan due October 1, 2006 and $59.6
million of the Partnership's $60 million 10% Senior Notes due 2006 pursuant
to a tender offer, plus a premium. We recorded a loss on extinguishment of
debt associated with the refinancings of approximately $17.1 million ($4.6
million after-tax).
5. INTANGIBLE ASSETS
The Company's intangible assets comprise the following:
March 31, September 30,
2006 2005
--------- -------------
Not subject to amortization:
Goodwill $1,115.7 $1,137.9
Excess reorganization value 93.3 93.3
-------- --------
$1,209.0 $1,231.2
-------- --------
Other intangible assets:
Customer relationships, noncompete
agreements and other $ 177.3 $ 177.2
Trademark (not subject to amortization) 41.2 40.8
-------- --------
Gross carrying amount 218.5 218.0
-------- --------
Accumulated amortization (53.5) (45.4)
-------- --------
Net carrying amount $ 165.0 $ 172.6
-------- --------
Changes in intangible assets during the six months ended March 31, 2006
principally reflect the effects of our investment in the Flaga JV and
foreign currency translation. Amortization expense of intangible assets was
$4.2 million and $8.2 million for the three and six months ended March
-14-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars and euros, except per share amounts)
31, 2006, respectively, and $4.5 million and $8.8 million for the three and
six months ended March 31, 2005, 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.
6. 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 April 2009. 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.
During the six months ended March 31, 2006, Energy Services sold trade
receivables totaling $810.3 million to ESFC. During the six months ended
March 31, 2006, ESFC sold an aggregate $543.5 million of undivided
interests in its trade receivables to the commercial paper conduit. At
March 31, 2006, the outstanding balance of ESFC trade receivables was $56.5
million, which is net of $75.6 million that was sold to the commercial
paper conduit and removed from the balance sheet.
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 March 31, 2006, there were no letters of
credit outstanding. Energy Services expects to fund the collateral
requirements with borrowings under its Receivables Facility. The LC
Facility expires in April 2007.
7. 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.
-15-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars and euros, except per share amounts)
Net periodic pension expense and other postretirement benefit costs include
the following components:
Other
Pension Benefits Postretirement Benefits
Three Months Ended Three Months Ended
March 31, March 31,
------------------ -----------------------
2006 2005 2006 2005
---- ---- ---- ----
Service cost $1.5 $1.4 $0.1 $0.1
Interest cost 3.6 3.6 0.3 0.6
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 0.3 0.1 0.1
---- ---- ---- ----
Net benefit cost 1.0 1.0 0.3 0.9
Change in regulatory and other assets and liabilities (0.1) -- 0.7 0.2
---- ---- ---- ----
Net expense $0.9 $1.0 $1.0 $1.1
---- ---- ---- ----
Other
Pension Benefits Postretirement Benefits
Six Months Ended Six Months Ended
March 31, March 31,
---------------- -----------------------
2006 2005 2006 2005
---- ---- ---- ----
Service cost $3.0 $2.8 $0.2 $0.2
Interest cost 7.0 7.1 0.6 1.0
Expected return on assets (9.4) (9.0) (0.3) (0.2)
Amortization of:
Transition obligation -- -- 0.1 0.5
Prior service cost (benefit) 0.4 0.3 (0.1) --
Actuarial loss 0.9 0.7 0.1 0.2
---- ---- ---- ----
Net benefit cost 1.9 1.9 0.6 1.7
Change in regulatory and other assets and liabilities (0.2) -- 1.4 0.5
---- ---- ---- ----
Net expense $1.7 $1.9 $2.0 $2.2
---- ---- ---- ----
UGI Utilities Pension Plan assets are held in trust and consist principally
of equity and fixed income mutual funds. The Company does not believe it
will be required to make any contributions to the UGI Utilities Pension
Plan during the year ending September 30, 2006 for ERISA funding purposes.
Pursuant to orders previously issued by the PUC, UGI Utilities has
established a Voluntary Employees' Beneficiary Association ("VEBA") trust
to fund and pay UGI Utilities' postretirement health care and life
insurance benefits referred to above by depositing into the VEBA the annual
amount of postretirement benefit costs determined under SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions."
The difference between the annual amount calculated and the amount included
in UGI Utilities' rates is deferred for future recovery from, or refund to,
ratepayers. Amounts contributed to the VEBA by UGI Utilities were not
material during the six months ended March 31, 2006, 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 $1.0 million for the three and six
-16-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars and euros, except per share amounts)
months ended March 31, 2006, respectively, and $0.4 million and $0.9
million for the three and six months ended March 31, 2005, respectively.
8. 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 March 31, 2006. 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 March 31, 2006, 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, 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
-17-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars and euros, except per share amounts)
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 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
-18-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars and euros, except per share amounts)
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 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
-19-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars and euros, except per share amounts)
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.
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. By letter dated March 17, 2006,
the Northeast Companies estimated that remediation costs for all of the
sites would total approximately $215 million and claimed that UGI Utilities
is responsible for approximately $103 million of this amount. Based on
information supplied by the Northeast Companies and UGI Utilities' own
investigation, UGI Utilities believes that it may have operated one of the
sites, Waterbury North, under lease for a portion of its operating history.
UGI Utilities is reviewing the Northeast Companies' estimate that
remediation costs at Waterbury North could total $23 million. UGI Utilities
believes that it will have good defenses to any action that may arise out
of the remaining sites.
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 that
was issued by the French government to the French Committee of Butane and
Propane ("CFBP"), a butane/propane industry group, concerning the business
tax, 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 six months ended March 31, 2005 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.
-20-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars and euros, except per share amounts)
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.
-21-
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.
-22-
UGI CORPORATION AND SUBSIDIARIES
ANALYSIS OF RESULTS OF OPERATIONS
The following analyses compare our results of operations for (1) the three
months ended March 31, 2006 ("2006 three-month period") with the three months
ended March 31, 2005 ("2005 three-month period") and (2) the six months ended
March 31, 2006 ("2006 six-month period") with the six months ended March 31,
2005 ("2005 six-month period"). Our analysis of results of operations should be
read in conjunction with the segment information included in Note 3 to the
Condensed Consolidated Financial Statements.
EXECUTIVE OVERVIEW
Because most of our businesses sell energy products used in large part for
heating purposes, our Company's results are largely seasonal and dependent upon
weather conditions, particularly during the peak-heating season months of
November through March. As a result, our net income is generally highest in our
first and second 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.
During the 2006 six-month period, temperatures within each of our domestic
business units' service territories were significantly warmer than normal. Net
income in the 2006 six-month period declined $34.0 million compared to the 2005
six-month period. As previously reported, the 2005 six-month period net income
benefited from (1) $14.9 million (equal to $0.14 per diluted share) resulting
from the resolution of certain of Antargaz' non-income tax contingencies and (2)
Antargaz' unusually high LPG margins per gallon. In addition, the decrease in
net income during the 2006 six-month period for International Propane reflects a
decline of approximately $6 million due to the effect of a stronger dollar
versus the euro.
In January 2006, we announced that we 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. The
acquisition, which is subject to PUC approval, is expected to close during our
fourth fiscal quarter ending September 30, 2006. We expect to fund the
acquisition with existing cash and proceeds from the issuance of long-term debt.
In February 2006, Flaga entered into a joint venture with a subsidiary of Progas
GmbH & Co KG expanding our international presence in central and eastern Europe.
NET INCOME BY BUSINESS UNIT:
Three Months Ended Six Months Ended
March 31, March 31,
------------------ ----------------
2006 2005 2006 2005
------ ------ ------ ------
(millions of dollars)
Net income (loss):
AmeriGas Propane (a) $ 21.2 $ 27.0 $ 36.1 $ 37.4
International Propane 45.0 47.0 59.9 94.2
Gas Utility 21.5 26.7 39.9 41.2
Electric Utility 1.5 3.9 5.0 6.4
Energy Services 15.4 8.3 20.3 11.9
Corporate & Other (0.6) 4.4 0.3 4.4
------ ------ ------ ------
Total net income $104.0 $117.3 $161.5 $195.5
------ ------ ------ ------
(a) Amounts are net of minority interests in AmeriGas Partners, L.P.
-23-
UGI CORPORATION AND SUBSIDIARIES
2006 THREE-MONTH PERIOD COMPARED TO THE 2005 THREE-MONTH PERIOD
AMERIGAS PROPANE:
Increase
For the three months ended March 31, 2006 2005 (Decrease)
- ------------------------------------ ------ ------ --------------
(Millions of dollars)
Revenues $718.2 $698.3 $ 19.9 2.8%
Total margin (a) $270.9 $268.5 $ 2.4 0.9%
Partnership EBITDA (b) $116.2 $135.2 $(19.0) (14.1)%
Operating income $116.3 $117.9 $ (1.6) (1.4)%
Retail gallons sold (millions) 341.4 378.8 (37.4) (9.9)%
Degree days - % (warmer)
than normal (c) (12.1)% (4.9)% -- --
(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
3 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 national heating degree-day data, temperatures during the 2006
three-month period were 12.1% warmer than normal and 7.6% warmer than the
prior-year period. Retail propane volumes sold decreased approximately 10%
principally due to the warmer winter weather and the negative effects of
customer conservation driven by continued high propane selling prices.
Retail propane revenues increased $19.7 million reflecting an $80.1 million
increase due to higher average selling prices partially offset by a $60.4
million decrease due to the lower retail volumes sold. Wholesale propane
revenues decreased $4.9 million reflecting a $13.7 million decrease due to lower
volumes sold partially offset by an $8.8 million increase resulting from higher
average selling prices. In the 2006 three-month period, our average retail
propane product cost per retail gallon sold was approximately 17% higher than in
the 2005 three-month period, which resulted in higher year-over-year prices to
our customers. Total cost of sales increased to $447.3 million in the 2006
three-month period from $429.8 million in the 2005 three-month period, primarily
reflecting the increase in propane product costs partially offset by the
decreased volumes sold.
Total margin increased $2.4 million compared to the 2005 three-month period due
to increased customer pricing in response to an increase in costs incurred.
Partnership EBITDA during the 2006 three-month period was $116.2 million
compared to $135.2 million during the 2005 three-month period. This $19.0
million decrease in Partnership EBITDA primarily reflects (1) a $17.1 million
loss on the early extinguishment of debt associated with the refinancings of
AmeriGas OLP's Series A and Series C First Mortgage Notes totaling $228.8
million and $59.6 million of the Partnership's $60 million 10% Senior Notes, and
(2) a $4.5 million increase in operating and administrative expenses, partially
offset by the previously mentioned increase in total margin. The increase in
operating and administrative expenses principally resulted from higher employee
compensation and benefits expense, higher vehicle fuel costs and vehicle lease
expense and increased uncollectible accounts expense partially offset by a $3.4
million favorable net adjustment in reserves for general insurance, litigation
and medical claims, mainly reflecting an improvement in claims history.
-24-
UGI CORPORATION AND SUBSIDIARIES
Operating income decreased $1.6 million primarily reflecting the previously
mentioned increase in operating and administrative expenses, partially offset by
the increase in total margin and a decrease in depreciation and amortization
expense.
INTERNATIONAL PROPANE:
Increase
For the three months ended March 31, 2006 2005 (Decrease)
- ------------------------------------ ------ ------ --------------
(Millions of dollars)
Revenues $382.1 $363.1 $ 19.0 5.2%
Total margin (a) $161.1 $188.8 $(27.7) (14.7)%
Operating income $ 76.5 $ 99.0 $(22.5) (22.7)%
Income before income taxes $ 68.5 $ 89.8 $(21.3) (23.7)%
Antargaz retail gallons sold (millions) 125.4 126.5 (1.1) (0.9)%
Antargaz total margin, millions of euros (a) E127.2 E135.8 (E8.6) (6.3)%
(a) Total margin represents total revenues less total cost of sales.
Based upon heating degree day data, weather in Antargaz' service territory was
approximately 7% colder than normal in the 2006 three-month period compared to
weather that was 4% colder than normal in the 2005 three-month period. Flaga
experienced approximately 12% colder than normal weather in the 2006 three-month
period compared to approximately 3% colder than normal weather in the prior-year
three-month period. During the 2006 three-month period, the monthly average
currency translation rate was $1.20 per euro compared to $1.31 per euro during
the 2005 three-month period. Despite the colder weather, Antargaz' retail LPG
volumes sold decreased slightly to 125.4 million gallons in the 2006 three-month
period from 126.5 million gallons in the 2005 three-month period due in large
part to lower volumes sold in the butane cylinder market, lower volumes sold to
agricultural customers and the effects of customer conservation primarily
resulting from higher LPG costs. Competition in France has intensified,
including competition in the butane cylinder market, as hyper/supermarkets have
expanded vertically and begun marketing their own cylinders.
International Propane revenues increased during the 2006 three-month period
primarily due to higher retail LPG selling prices reflecting the effects of
significantly higher LPG product cost largely offset by the effect of the
stronger dollar versus the euro and, to a much lesser extent, the slightly lower
retail gallons sold. Both Antargaz and Flaga experienced significantly higher
LPG product costs compared to the prior-year three-month period. International
Propane's total cost of sales increased approximately 27% largely reflecting the
increased LPG product costs partially offset by the effect of a stronger dollar
versus the euro during the 2006 three-month period.
Total margin declined $27.7 million in the 2006 three-month period primarily
reflecting the effect of the stronger dollar versus the euro and lower average
margin per gallon of LPG ("unit margin"). Antargaz' total base currency margin
declined E8.6 million reflecting lower unit margins. Approximately $16 million
of the decline in International Propane total margin reflects the effects of the
change in the monthly average exchange rate. During the 2005 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 $22.5 million in the 2006
three-month period principally reflecting the decline in total margin,
approximately $3.4 million lower operating and administrative expenses and lower
depreciation and amortization expense. The decline in operating and
administrative expenses is primarily a result of the effect of the stronger
dollar versus the euro compared to the prior-year period despite an increase in
euro-based expenses.
-25-
UGI CORPORATION AND SUBSIDIARIES
The decrease in income before income taxes principally reflects the decrease in
operating income and a $1.4 million loss on the early extinguishment of debt
associated with Antargaz' refinancing of its High Yield Bonds partially offset
by lower interest expense.
GAS UTILITY:
Increase
For the three months ended March 31, 2006 2005 (Decrease)
- ------------------------------------ ------ ------ -------------
(Millions of dollars)
Revenues (a) $296.2 $255.9 $40.3 15.7%
Total margin (a) (b) $ 73.2 $ 78.6 $(5.4) (6.9)%
Operating income $ 39.9 $ 48.6 $(8.7) (17.9)%
Income before income taxes $ 35.3 $ 44.6 $(9.3) (20.9)%
System throughput -
billions of cubic feet ("bcf") (a) 27.1 31.0 (3.9) (12.6)%
Degree days - % (warmer) colder
than normal (c) (13.0)% 2.7% -- --
(a) Beginning in Fiscal 2006, Gas Utility adjusted its method of estimating
unbilled throughput and associated revenues for service provided through
the end of the month by more closely correlating such estimated throughput
to distribution system sendout data by rate class. The Company believes
that the new method of estimating Gas Utility's 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 0.3 bcf decrease in retail core-market volumes sold and
associated decreases in Gas Utility revenues and total margin of $5.8
million and $1.1 million, respectively, for the 2006 three-month period.
(b) Total margin represents total revenues less total cost of sales.
(c) Deviation from average heating degree days based upon weather statistics
provided by the National Oceanic and Atmospheric Administration ("NOAA")
for 4 airports located within our service territory. The 2005 three-month
period degree day statistics have been restated to reflect the
current-year, four-location average from the previous single location
statistic.
Weather in Gas Utility's service territory based upon heating degree days was
13.0% warmer than normal during the 2006 three-month period and 2.7% colder than
normal in the prior-year three-month period.
Notwithstanding year-over-year growth in the number of Gas Utility's customers,
total distribution system throughput decreased 12.6% in the 2006 three-month
period reflecting a 2.6 bcf decrease in sales to firm- residential, commercial
and industrial ("retail core-market") customers and lower volumes transported
for firm and interruptible delivery service customers. The decrease in
distribution system throughput largely reflects the effects of significantly
warmer weather and, to a lesser extent, continued effects of customer
conservation resulting from significantly higher natural gas prices.
Notwithstanding the decline in distribution system throughput, Gas Utility
revenues increased $40.3 million during the 2006 three-month period principally
reflecting a $28.0 million increase in retail core-market revenues, reflecting
the result of higher average purchased gas cost ("PGC") rates, and a $15.1
million increase in revenues from low-margin off-system sales partially offset
by the lower volumes sold. 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 $223.0 million in the 2006 three-month
period compared to $177.3 million in the 2005 three-month period reflecting the
impact of the previously mentioned higher retail core-market purchased gas costs
and greater costs associated with the higher off-system sales.
-26-
UGI CORPORATION AND SUBSIDIARIES
Gas Utility total margin in the 2006 three-month period decreased $5.4 million
reflecting decreased retail core-market margin principally resulting from the
lower sales to retail core-market customers and lower volumes transported for
delivery service customers. These declines were partially offset by higher total
margin from interruptible customers and customer assistance tariff revenues.
Gas Utility operating income decreased to $39.9 million in the 2006 three-month
period from $48.6 million in the 2005 three-month period principally reflecting
the $5.4 million decrease in total margin and a $2.8 million increase in total
operating and administrative expenses. Total operating and administrative
expenses were higher than the prior-year period predominately due to (1)
increased required environmental remediation reserves, (2) higher stock-based
incentive compensation costs and (3) higher customer assistance expenses
reflecting the effects of an expansion of our customer assistance program.
The decrease in Gas Utility income before income taxes reflects the previously
mentioned decrease in operating income partially and an increase in interest
expense principally attributable to higher short-term debt outstanding and
higher short-term interest rates.
ELECTRIC UTILITY:
For the three months ended March 31, 2006 2005 Decrease
- ------------------------------------ ------ ------ --------------
(Millions of dollars)
Revenues (a) $ 25.4 $ 25.6 $ (0.2) (0.8)%
Total margin (a) (b) $ 8.8 $ 12.3 $ (3.5) (28.5)%
Operating income $ 3.3 $ 7.2 $ (3.9) (54.2)%
Income before income taxes $ 2.5 $ 6.7 $ (4.2) (62.7)%
Distribution sales - millions of
kilowatt hours ("gwh") (a) 268.4 282.1 (13.7) (4.9)%
(a) Beginning in Fiscal 2006, Electric Utility adjusted its method of
estimating sales and associated revenues for electricity consumed, but not
yet billed to its customers. The change in the method of estimating
unbilled sales resulted in a 3.3 gwh decrease in distribution system sales
and associated decreases in Electric Utility revenues and total margin of
$0.3 million for the 2006 three-month period.
(b) Total margin represents total revenues less total cost of sales and
revenue-related taxes, i.e. Electric Utility gross receipts taxes, of $1.4
million in both of the three-month periods ended March 31, 2006 and 2005.
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 2006 three-month period kilowatt-hour sales were 4.9% lower
than in the prior-year period which is largely attributable to 9% warmer than
normal weather in Electric Utility's service area compared to 7% colder than
normal weather in the prior-year three month period (based upon heating degree
day statistics). Electric Utility revenues decreased slightly in the 2006
three-month period largely reflecting the effects of the decreased sales
partially offset by an increase in its Provider of Last Resort ("POLR") revenues
of 3% effective January 1, 2006. Electric Utility's cost of sales increased to
$15.2 million in the 2006 three-month period from $11.9 million in the 2005
three-month period reflecting higher per unit purchased power costs which were
partially offset by the effects of the lower sales.
Electric Utility total margin in the 2006 three-month period decreased $3.5
million compared to the 2005 three-month period principally reflecting the
higher per unit purchased power costs and the effects of the lower sales.
Operating income decreased in the 2006 three-month period reflecting the
decrease in total margin and an increase in operating and administrative
expenses that reflects, in part, higher stock-based incentive compensation
costs. The decrease in income before income taxes principally reflects the lower
operating income and higher interest expense on short-term debt.
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UGI CORPORATION AND SUBSIDIARIES
ENERGY SERVICES:
For the three months ended March 31, 2006 2005 Increase
- ------------------------------------ ------ ------ ------------
(Millions of dollars)
Revenues $438.8 $432.2 $ 6.6 1.5%
Total margin (a) $ 27.4 $ 22.3 $ 5.1 22.9%
Operating income $ 26.1 $ 14.0 $12.1 86.4%
Income before income taxes $ 26.1 $ 14.0 $12.1 86.4%
(a) Total margin represents total revenues less total cost of sales.
Energy Services revenues increased slightly in the 2006 three-month period
compared to the 2005 three-month period despite an approximate 32% decline in
natural gas volumes sold reflecting higher natural gas prices. The decline in
natural gas volumes reflects the effects of warmer weather conditions in Energy
Services' service territories and customer losses associated with maintenance of
our credit risk management policy in a high natural gas price environment.
Total margin increased $5.1 million in the 2006 three-month period compared to
the prior-year three-month period. The increase in total margin is primarily
attributed to higher margin contributed by UGID's electric generation and
natural gas and other commodities marketing activities.
The increase in Energy Services operating income and income before income taxes
principally reflects a $9.1 million gain on the sale of its 50% ownership
interest in Hunlock Creek Energy Ventures ("Energy Ventures") in March 2006 and
the increase in total margin partially offset by increased operating and
administrative expenses. As part of the consideration in the sale of our 50%
interest, Energy Ventures transferred its 48-megawatt coal-fired electric
generation facility to UGID.
2006 SIX-MONTH PERIOD COMPARED TO THE 2005 SIX-MONTH PERIOD
AMERIGAS PROPANE:
Increase
For the six months ended March 31, 2006 2005 (Decrease)
- ---------------------------------- -------- -------- -------------
(Millions of dollars)
Revenues $1,348.4 $1,254.5 $ 93.9 7.5%
Total margin (a) $ 493.3 $ 473.6 $ 19.7 4.2%
Partnership EBITDA (b) $ 208.4 $ 221.6 $(13.2) (6.0)%
Operating income $ 191.0 $ 176.5 $ 14.5 8.2%
Retail gallons sold (millions) 633.3 675.6 (42.3) (6.3)%
Degree days - % (warmer)
than normal (c) (8.7)% (6.2)% -- --
(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
3 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.
Temperatures during the 2006 six-month period were 8.7% warmer than normal and
2.6% warmer than the prior-year period. Retail propane volumes sold decreased
approximately 6% principally due to the warmer winter weather and the negative
effects of customer conservation driven by continued high propane selling
prices.
Retail propane revenues increased $87.4 million reflecting a $155.4 million
increase due to higher average selling prices partially offset by a $68.0
million decrease due to the lower retail volumes sold.
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UGI CORPORATION AND SUBSIDIARIES
Wholesale propane revenues decreased $1.7 million reflecting a $19.7 million
decrease due to lower volumes sold partially offset by a $18.0 million increase
due to higher average selling prices. In the 2006 six-month period, our average
retail propane product cost per retail gallon sold was approximately 19% higher
than in the 2005 six-month period, which resulted in higher year-over-year
prices to our customers. The average wholesale cost per gallon of propane at
Mont Belvieu, one of the major propane supply points in the United States, was
approximately 23% greater than the average cost per gallon during the 2005
six-month period. Total cost of sales increased to $855.1 million in the 2006
six-month period from $780.9 million in the 2005 six-month period, primarily
reflecting the increase in propane product costs partially offset by the
decreased volumes sold.
Total margin increased $19.7 million compared to the 2005 six-month period
principally due to higher average margin per retail gallon, which is largely
attributed to our product cost and customer pricing management efforts.
Partnership EBITDA during the 2006 six-month period was $208.4 million compared
to $221.6 million during the 2005 six-month period. This $13.2 million decrease
in Partnership EBITDA primarily reflects (1) a $17.1 million loss on the
previously mentioned early extinguishment of debt, (2) an $8.5 million decrease
in other income primarily reflecting the absence of a $9.1 million pre-tax gain
on the sale of Atlantic Energy recorded during the 2005 six-month period, and
(3) a $7.3 million increase in operating and administrative expenses, partially
offset by the previously mentioned increase in total margin. The increase in
operating and administrative expenses principally resulted from higher employee
compensation and benefits expense, vehicle fuel costs and vehicle lease expense
and increased uncollectible accounts expense partially offset by a $3.4 million
favorable net adjustment in reserves for general insurance, litigation and
medical claims, mainly reflecting an improvement in claims history.
Operating income increased $14.5 million principally reflecting the previously
mentioned increase in total margin and a $1.6 million decrease in depreciation
and amortization expense, partially offset by the increase in operating and
administrative expenses.
INTERNATIONAL PROPANE:
Increase
For the six months ended March 31, 2006 2005 (Decrease)
- ---------------------------------- ------ ------ ---------------
(Millions of dollars)
Revenues $649.7 $641.3 $ 8.4 1.3%
Total margin (a) $269.6 $333.1 $ (63.5) (19.1)%
Operating income $110.1 $176.4 $ (66.3) (37.6)%
Income before income taxes $ 93.5 $157.7 $ (64.2) (40.7)%
Antargaz retail gallons sold (millions) 218.1 230.4 (12.3) (5.3)%
Antargaz total margin, millions of euros (a) E213.3 E239.7 (E26.4) (11.0)%
(a) Total margin represents total revenues less total cost of sales.
Weather in Antargaz' service territory was approximately 3% colder than normal
compared to 1% warmer than normal in the 2005 six-month period. Flaga
experienced colder than normal weather in the 2006 six-month period compared to
slightly warmer than normal weather in the prior-year six-month period. During
the 2006 six-month period, the monthly average currency translation rate was
$1.20 per euro compared to $1.31 per euro in the 2005 six-month period.
Antargaz' retail LPG volumes sold decreased to 218.1 million gallons from 230.4
million gallons in the 2005 six-month period due in large part to the late onset
of winter weather in December, lower agricultural volumes sold and customer
conservation.
International Propane revenues increased during the 2006 six-month period
reflecting higher retail LPG selling prices per gallon on lower retails gallons
sold, largely offset by the effect of the stronger dollar
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UGI CORPORATION AND SUBSIDIARIES
versus the euro. Higher average LPG product cost per retail gallon sold than in
the 2005 six-month period resulted in higher year-over-year prices to our
customers. International Propane's total cost of sales was comparable in the
2006 six-month period to the 2005 six-month period reflecting the significantly
higher LPG product costs largely offset by the effect of the stronger dollar.
Total margin declined $63.5 million in the 2006 six-month period compared to the
prior-year period primarily reflecting the absence of higher than normal margin
per gallon of LPG ("unit margin") experienced in the prior year and
approximately $27 million due to the negative currency translation effect of a
stronger dollar. Antargaz' total base currency margin declined E26.4 million
reflecting the lower unit margins and, to a much lesser extent, lower volumes
sold.
International Propane operating income declined $66.3 million in the 2006
six-month period principally reflecting the decline in total margin, $19.9
million from the reversal of certain non-income related tax reserves in the
prior-year period (see discussion in "Antargaz Tax Matter") partially offset by
an approximate $13.1 million decrease in operating and administrative expenses
and slight decreases in depreciation and amortization, reflecting the effect of
the stronger dollar. International Propane's total base-currency operating and
administrative expenses were comparable with the 2005 six-month period. The
decrease in income before income taxes principally reflects the decrease in
operating income and the $1.4 million loss on early extinguishment of debt
partially offset by lower interest expense and changes in minority interest.
GAS UTILITY:
Increase
For the six months ended March 31, 2006 2005 (Decrease)
- ---------------------------------- ------ ------ ------------
(Millions of dollars)
Revenues (a) $516.0 $417.1 $98.9 23.7%
Total margin (a) (b) $133.1 $133.2 $(0.1) (0.1)%
Operating income $ 75.6 $ 76.7 $(1.1) (1.4)%
Income before income taxes $ 65.9 $ 68.6 $(2.7) (3.9)%
System throughput -
billions of cubic feet ("bcf") (a) 50.1 53.9 (3.8) (7.1)%
Degree days - % (warmer) than normal (c) (8.2)% (0.4)% -- --
(a) Beginning in Fiscal 2006, Gas Utility 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 by rate class. 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 did not
have a material impact on Gas Utility throughput, revenues or margin for
the 2006 six-month period.
(b) Total margin represents total revenues less total cost of sales.
(c) Deviation from average heating degree days based upon weather statistics
provided by the National Oceanic and Atmospheric Administration ("NOAA")
for 4 airports located within our service territory. The 2005 six-month
period degree day statistics have been restated to reflect the
current-year, four-location average from the previous single location
statistic.
Weather in Gas Utility's service territory based upon heating degree days was
8.2% warmer than normal during the 2006 six-month period and approximately
normal in the prior-year six-month period. Notwithstanding year-over-year growth
in the number of our customers, total distribution system throughput decreased
3.8 bcf due to lower volumes transported for firm and interruptible delivery
service customers and a decrease in sales to retail core-market customers
reflecting the warmer weather and price-induced customer conservation.
Gas Utility revenues increased $98.9 million during the 2006 six-month period
principally reflecting a $76.7 million increase in retail core-market revenues,
the result of higher average PGC rates, and a $23.0 million increase in revenues
from low-margin off-system sales. Gas Utility's cost of gas was $382.9 million
in the 2006 six-month period compared to $283.9 million in the 2005 six-month
period
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UGI CORPORATION AND SUBSIDIARIES
reflecting the impact of the previously mentioned higher retail core-market
purchased gas costs and greater costs associated with the higher off-system
sales.
Gas Utility total margin in the 2006 six-month period was comparable to the
prior-year six-month period as the decrease in margin largely associated with
lower sales to retail-core market customers was offset by higher total margin
from interruptible customers.
Gas Utility operating income decreased $1.1 million in the 2006 six-month period
compared to the 2005 six-month period principally reflecting increased
depreciation expense and $0.3 million of increased operating and administrative
expenses. Total operating and administrative expenses were slightly higher than
the prior-year period predominately reflecting increased required environmental
remediation reserves and higher uncollectible accounts and customer assistance
expenses largely offset by lower stock-based incentive compensation costs and
lower distribution system maintenance expenses resulting, in large part, from
the mild heating-season weather.
The decrease in Gas Utility income before income taxes reflects the previously
mentioned decrease in operating income and an increase in interest expense
attributable to higher short-term debt outstanding and higher short-term
interest rates.
ELECTRIC UTILITY:
Increase
For the six months ended March 31, 2006 2005 (Decrease)
- ---------------------------------- ------ ------ -------------
(Millions of dollars)
Revenues (a) $ 49.3 $ 47.9 $ 1.4 2.9%
Total margin (a) (b) $ 20.1 $ 22.3 $(2.2) (9.9)%
Operating income $ 9.8 $ 11.9 $(2.1) (17.6)%
Income before income taxes $ 8.5 $ 10.9 $(2.4) (22.0)%
Distribution sales - millions of
kilowatt hours ("gwh")(b) 526.4 531.2 (4.8) (0.9)%
(a) Beginning in Fiscal 2006, Electric Utility adjusted its method of
estimating sales and associated revenues for electricity consumed, but not
yet billed to its customers. The change in the method of estimating
unbilled sales did not have a material effect on sales, revenues or margin
for the 2006 six-month period.
(b) Total margin represents total revenues less total cost of sales and
revenue-related taxes, i.e. Electric Utility gross receipts taxes, of $2.7
million in both of the six-month periods ended March 31, 2006 and 2005. 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 2006 six-month period kilowatt-hour sales decreased 0.9%
compared to the prior-year period. Electric Utility revenues increased $1.4
million in the 2006 six-month period largely reflecting higher POLR electric
generation rates partially offset by the effects of the lower sales. Electric
Utility's cost of sales increased to $26.5 million in the 2006 six-month period
from $22.9 million in the 2005 six-month period reflecting higher per unit
purchased power costs partially offset by the effects of lower sales.
Electric Utility total margin in the 2006 six-month period decreased $2.2
million compared to the 2005 six-month period principally reflecting the higher
per unit purchased power costs partially offset by the increase in POLR electric
generation rates.
Operating income decreased in the 2006 six-month period principally reflecting
the decrease in total margin. The decrease in income before income taxes
principally reflects the lower operating income and higher interest expense on
short-term debt.
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UGI CORPORATION AND SUBSIDIARIES
ENERGY SERVICES:
For the six months ended March 31, 2006 2005 Increase
- ---------------------------------- ------ ------ -------------
(Millions of dollars)
Revenues $890.2 $761.2 $129.0 16.9%
Total margin (a) $ 45.1 $ 38.1 $ 7.0 18.4%
Operating income $ 34.3 $ 20.1 $ 14.2 70.6%
Income before income taxes $ 34.3 $ 20.1 $ 14.2 70.6%
(a) Total margin represents total revenues less total cost of sales.
Energy Services revenues increased $129.0 million in the 2006 six-month period
compared to the 2005 six-month period. Revenues generated by Energy Services'
natural gas and oil marketing business increased approximately $104 million in
the 2006 six-month period despite a 29% 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 warmer weather conditions in Energy
Services' service territories and customer losses associated with maintenance of
our credit risk management policy in a high natural gas price environment. Asset
Management provided approximately $20.6 million in higher revenues largely
reflecting the ownership of its propane terminal for the entire 2006 six-month
period and also higher propane product costs. The terminal was purchased in
November 2004. The remaining increase in revenues is attributed to our electric
generation marketing activities.
Total margin increased $7.0 million in the 2006 six-month period compared to the
prior-year six-month period. The increase in total margin is primarily
attributed to higher margin from electric generation and propane terminal
operations.
The increase in Energy Services operating income and income before income taxes
principally reflects the previously mentioned increase in total margin and the
$9.1 million gain on the sale of Energy Ventures partially offset by higher
operating and administrative expenses and higher depreciation and amortization
expense.
FINANCIAL CONDITION AND LIQUIDITY
FINANCIAL CONDITION
Our cash, cash equivalents and short-term investments totaled $369.1 million at
March 31, 2006 compared with $385.0 million at September 30, 2005. These amounts
include $235.8 million and $138.7 million, respectively, of cash, cash
equivalents and short-term investments available to UGI.
The Company's long-term debt outstanding at March 31, 2006 totaled $1,693.8
million (including current maturities of $57.0 million) compared to $1,644.5
million of long-term debt (including current maturities of $252.0 million) at
September 30, 2005.
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 March 31, 2006, there were no borrowings
outstanding under the Credit Agreement. Issued and outstanding letters of credit
under the Revolving Credit Facility, which reduce the amount available for
borrowings, totaled $58.9 million at
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UGI CORPORATION AND SUBSIDIARIES
March 31, 2006 and was approximately the same amount outstanding during the
entire six-month period ended March 31, 2006. 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. Due in part to the issuance of 2.3 million Common Units in September
2005, during the 2006 six-month period generally, the Partnership did not need
to use its Revolving Credit Facility to fund its operations. During the six
months ended March 31, 2005, the average daily borrowings outstanding under the
Credit Agreement were $30.7 million and the peak borrowings outstanding were
$84.0 million. 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.
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 AmeriGas OLP's $160 million Series A and $68.8
million Series C First Mortgage Notes, including a make-whole premium, its $35
million term loan due October 1, 2006 and $59.6 million of the Partnership's $60
million 10% Senior Notes due 2006 pursuant to a tender offer, plus a premium.
UGI incurred a pre-tax loss on extinguishment of debt associated with the
refinancings of approximately $17.1 million ($4.6 million after-tax) which was
recorded during the three months ended March 31, 2006.
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 March 31, 2006, 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, to fund the redemption of the
E165 million High Yield Bonds in January 2006, including a premium, and for
general corporate purposes. As a result of this refinancing, we incurred a
pre-tax loss on extinguishment of debt of $1.4 million ($0.9 million after-tax).
In addition, AGZ executed interest rate swap agreements 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 3.25%, plus margin.
Flaga's management plans to obtain an extension of or to refinance its
outstanding long-term debt. Flaga has long-term debt maturing during 2006 of
approximately $51.5 million.
UGI Utilities has revolving credit agreements 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 makes short-term borrowings under uncommitted
arrangements with major banks in order to meet liquidity needs. At March 31,
2006, UGI Utilities had $55 million in short-term borrowings outstanding under
these uncommitted arrangements and $68.3 million in borrowings outstanding under
the revolving credit agreements. Short-term borrowings, including borrowings
under revolving credit agreements, are classified as bank loans on the Condensed
Consolidated Balance Sheets. During the six months ended March 31, 2006 and
2005, average daily bank loan borrowings were $119.8 million and $61.6 million,
respectively, and peak bank loan borrowings totaled $175.9 million and $90.4
million, respectively. The increase in average and peak bank loans during the
2006 six-month period reflects, in large part, borrowings to fund increased
working capital resulting principally from higher natural gas prices. 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.
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UGI CORPORATION AND SUBSIDIARIES
Energy Services has a $150 million receivables purchase facility ("Receivables
Facility") with an issuer of receivables-backed commercial paper expiring in
April 2009. 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 March 31, 2006, the outstanding balance of ESFC
receivables was $56.5 million which is net of $75.6 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 March 31, 2006, there were no letters of credit outstanding.
Energy Services expects to fund the collateral requirements with borrowings
under its Receivables Facility. The LC Facility expires in April 2007.
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 use revolving credit facilities and Energy
Services uses its Receivables Facility to satisfy their seasonal operating cash
flow needs. Antargaz has historically been successful funding its operating cash
flow needs without the use of its revolver.
Cash flow provided by operating activities was $71.0 million in the 2006
six-month period compared to $188.5 million in the 2005 six-month period. Cash
flow from operating activities before changes in operating working capital was
$327.3 million in the 2006 six-month period compared with $367.7 million in the
prior-year six-month period. The decline in cash flow from operating activities
before changes in operating working capital mainly reflects the lower net income
and the impact of settlement payments made during the 2006 six-month period
associated with Energy Services' exchange-traded natural gas derivative hedge
contracts. Changes in operating working capital used $256.3 million in the 2006
six-month period and $179.2 million in the 2005 six-month period. The greater
cash requirements to fund working capital reflects, in part, the effects of
higher energy commodity prices.
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-
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UGI CORPORATION AND SUBSIDIARIES
term investments and proceeds from sales of assets. Net cash used in investing
activities was $130.3 million in the 2006 six-month period compared to $105.3
million in the prior-year period. The increase in investing activities largely
reflects the increase in short-term investments and in our international
operations partially offset by the net proceeds received from Energy Services'
sale of its 50% ownership interest in Energy Ventures in March 2006.
FINANCING ACTIVITIES. Cash flow used by financing activities was $7.0 million in
the 2006 six-month period compared with $71.9 million of cash used in the
prior-year six-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. The proceeds were used to repay
the existing E175 million Senior Facilities term loan, redeem its E165 million
of High Yield Bonds and for general corporate purposes. Antargaz incurred a $1.4
million loss on extinguishment of debt associated with its refinancings. 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. 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 AmeriGas OLP's $160
million Series A and $68.8 million Series C First Mortgage Notes, including a
make-whole premium, its $35 million term loan due October 1, 2006 and $59.6
million of the Partnership's $60 million 10% Senior Notes due 2006 pursuant to a
tender offer, plus a premium. The Partnership incurred a $17.1 million loss on
early extinguishment of debt associated with these refinancings. In February and
March 2006, UGI Utilities repaid the two September 2005 $35 million borrowings
it had under uncommitted arrangements.
We paid cash dividends on UGI Common Stock of $35.5 million and $32.2 million
during the six months ended March 31, 2006 and 2005, respectively. During the
six months ended March 31, 2006, the Partnership declared and paid quarterly
distributions on its limited partner units for the quarters ended December 31,
2005 and September 30, 2005. On April 24, 2006, AmeriGas Propane's Board of
Directors approved an increase in its quarterly distribution rate on AmeriGas
Partners Common Units to $0.58 per Common Unit ($2.32 annually) from $0.56 per
Common Unit ($2.24 annually). The quarterly distribution of $0.58 for the
quarter ended March 31, 2006 will be paid on May 18, 2006 to holders of record
on May 10, 2006.
UGI COMMON DIVIDEND INCREASE
On April 25, 2006, UGI's Board of Directors approved an increase in the
quarterly dividend rate on UGI Common Stock to $0.17625 per share or $0.705 per
common share on an annual basis. The new quarterly dividend is effective with
the dividend payable on July 1, 2006 to shareholders of record on June 15, 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
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UGI CORPORATION AND SUBSIDIARIES
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 that was
issued by the French government to the French Committee of Butane and Propane
("CFBP"), a butane/propane industry group, concerning the business tax, 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 Statements of Income for the three and
six months ended March 31, 2005 include 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.
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
existing cash and proceeds from the issuance of long-term debt. PG Energy serves
approximately 158,000 customers in 13 counties in northeastern and central
Pennsylvania. The proposed transaction is subject to PUC approval and is
expected to close during our fourth fiscal quarter ending September 30, 2006. We
anticipate that UGI Utilities will acquire and operate, through a subsidiary,
the regulated assets of PG Energy immediately following UGI's completion of the
acquisition.
FLAGA JOINT VENTURE
On February 15, 2006, Flaga entered into a joint venture with a subsidiary of
Progas GmbH & Co KG ("Progas") to create a company for the retail distribution
of LPG in central and eastern Europe. Headquartered in Dortmund, Germany, Progas
is controlled by Thyssen'sche Handelsgesellschaft m.b.H. The joint venture
company, Zentraleuropa LPG Holding (the "Flaga JV"), an Austrian limited
liability company, through its subsidiaries engages in the retail distribution
of LPG in the Czech Republic, Hungary, Poland, Slovakia and Romania. In forming
the joint venture, Flaga contributed the shares of its LPG subsidiaries
operating in the Czech Republic and Slovakia to the Flaga JV and paid cash of
E9.1 million to Progas. Progas contributed the shares of its LPG subsidiaries
operating in the Czech Republic, Hungary, Poland, Romania, and Slovakia to the
Flaga JV. These LPG operating subsidiaries distributed approximately 77 million
gallons of LPG in these five countries in 2005. The Flaga JV is owned and
controlled equally by Flaga and Progas. In a related transaction, Progas sold
its retail LPG business in Austria to Flaga.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 2006, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 156, "Accounting for Servicing of Financial
Assets - An Amendment of FASB Statement No. 140" ("SFAS 156"). We are currently
evaluating the impact that the adoption of SFAS 156 will have but do not believe
it will have a material impact on our financial position or results of
operations. See Note 1 to the Condensed Consolidated Financial Statements for
additional information.
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UGI CORPORATION AND SUBSIDIARIES
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,
effective January 1, 2005, Electric Utility increased its POLR generation rates
for all metered customers 4.5% of total rates in effect on December 31, 2004 and
increased POLR rates by 3% effective January 1, 2006 (total increase of 7.5% of
rates in effect on December 31, 2004). 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. Electric Utility has initiated discussions
with various parties to establish POLR rates for periods beginning January 1,
2007. On April 17, 2006, Electric Utility filed a proposal with the PUC to
establish POLR rates that are reflective of market prices. No resolution has
been reached regarding the level or structure of the proposed rates. 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
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UGI CORPORATION AND SUBSIDIARIES
into bilateral collateral arrangements with certain of them. 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 March 31, 2006, Energy Services had $34.7
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 electric generation assets. In
conjunction with certain of these sales agreements, at March 31, 2006, UGID had
$4.3 million in collateral deposits held by its counterparties which amount is
reflected in other assets on the 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, borrowings under UGI Utilities' revolving credit agreements and a
substantial portion of Flaga's debt. These debt agreements have interest rates
that are generally indexed to short-term market interest rates. At March 31,
2006, combined borrowings outstanding under these agreements totaled
approximately $186.7 million. Antargaz has effectively fixed the interest rate
on its variable-rate debt through June 2011 through the use of interest rate
swaps. Our long-term debt is typically issued at fixed rates of interest based
upon market rates for debt having similar terms and credit ratings. As these
long-term debt issues mature, we may refinance such debt with new debt having
interest rates reflecting then-current market conditions. This debt may have an
interest rate that is more or less than the refinanced debt. In order to reduce
interest rate risk associated with near to medium 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 March 31, 2006. 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 March
31, 2006. 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
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UGI CORPORATION AND SUBSIDIARIES
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)
March 31, 2006:
Propane commodity price risk $ 2.0 $ (4.4)
Natural gas commodity price risk (2.2) (9.4)
Electricity commodity price risk 7.2 (1.5)
Interest rate risk 11.2 (10.3)
Foreign currency exchange rate risk 5.4 (12.5)
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
March 31, 2006, the fair value of unsettled net investment hedges was a gain of
$1.7 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 $48.2 million, which amount would be reflected in other
comprehensive income.
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UGI CORPORATION AND SUBSIDIARIES
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness
of the Company's disclosure controls and procedures as of the end of the
period covered by this report. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures as of the end of the period covered by
this report were designed and functioning effectively to provide reasonable
assurance that the information required to be disclosed by the Company in
reports filed under the Securities Exchange Act of 1934, as amended, is (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.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Connecticut Gas Plants Matter. 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. By letter dated March 17,
2006, the Northeast Companies estimated that remediation costs for all of the
sites would total approximately $215 million and claimed that UGI Utilities is
responsible for approximately $103 million of this amount. Based on information
supplied by the Northeast Companies and UGI Utilities' own investigation, UGI
Utilities believes that it may have operated one of the sites, Waterbury North,
under lease for a portion of its operating history. UGI Utilities is reviewing
the Northeast Companies' estimate that remediation costs at Waterbury North
could total $23 million. UGI Utilities believes that it will have good defenses
to any action that may arise out of the remaining sites.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this report, you should
carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in
our Annual Report on Form 10-K for the fiscal year ended September 30, 2005,
which could materially affect our business, financial condition or future
results. The risks described in our Annual Report on Form 10-K are not the only
risks facing the Company. Other unknown or unpredictable factors could also have
material adverse effects on future results.
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UGI CORPORATION AND SUBSIDIARIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On February 22, 2006, the Annual Meeting of Shareholders of UGI was held. The
Shareholders (i) elected all nine nominees to the Board of Directors, and (ii)
ratified the appointment of PricewaterhouseCoopers LLP as our independent
registered public accountants.
The number of votes cast for and withheld from election of each director nominee
is set forth below. There were no abstentions or broker non-votes in the
election of directors.
DIRECTOR NOMINEES FOR WITHHELD
- ----------------- ---------- ---------
James W. Stratton 90,359,320 5,519,148
Richard C. Gozon 92,519,306 3,359,162
Stephen D. Ban 92,915,585 2,962,883
Lon R. Greenberg 92,858,387 3,020,081
Marvin O. Schlanger 90,419,019 5,459,449
Anne Pol 90,360,173 5,518,295
Ernest E. Jones 93,004,650 2,873,818
John L. Walsh 92,559,357 3,319,111
Roger B. Vincent 93,254,958 2,623,510
The number of votes cast for and against, and the number of abstentions in the
ratification of the appointment of PricewaterhouseCoopers LLP is as follows:
For: 93,926,034; Against: 734,517; Abstain: 1,217,917. There were no broker
non-votes.
ITEM 6. EXHIBITS
The exhibits filed as part of this report are as follows:
EXHIBIT NO. EXHIBIT
- ----------- -------
31.1 Certification by the Chief Executive Officer relating to the
Registrant's Report on Form 10-Q for the quarter ended March 31,
2006, 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 March 31,
2006, 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 March 31, 2006, pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
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UGI CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UGI Corporation
(Registrant)
Date: May 8, 2006 By: /s/ Anthony J. Mendicino
------------------------------------
Anthony J. Mendicino
Senior Vice President-Finance and
Chief Financial Officer
Date: May 8, 2006 By: /s/ Michael J. Cuzzolina
------------------------------------
Michael J. Cuzzolina
Vice President-Accounting and
Financial Control and
Chief Risk Officer
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UGI CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
31.1 Certification by the Chief Executive Officer relating to the Registrant's
Report on Form 10-Q for the quarter ended March 31, 2006, 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 March 31, 2006, 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 March 31, 2006, pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.