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 1-1398
UGI UTILITIES, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1174060
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
UGI UTILITIES, INC.
100 Kachel Boulevard, Suite 400
Green Hills Corporate Center, Reading, PA
(Address of principal executive offices)
19607
(Zip Code)
(610) 796-3400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer Non-accelerated filer X
--- --- ---
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 26,781,785 shares of UGI Utilities, Inc.
Common Stock, par value $2.25 per share, outstanding, all of which were held,
beneficially and of record, by UGI Corporation.
UGI UTILITIES, INC.
TABLE OF CONTENTS
PAGES
-------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of March 31, 2006,
September 30, 2005 and March 31, 2005 1
Condensed Statements of Income for the three and six
months ended March 31, 2006 and 2005 2
Condensed Statements of Cash Flows for the
six months ended March 31, 2006 and 2005 3
Notes to Condensed Financial Statements 4 - 14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15 - 22
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 23 - 24
Item 4. Controls and Procedures 25
PART II OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 1A. Risk Factors 26
Item 6. Exhibits 26
Signatures 27
-i-
UGI UTILITIES, INC.
CONDENSED BALANCE SHEETS
(unaudited)
(Thousands of dollars)
March 31, September 30, March 31,
2006 2005 2005
--------- ------------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 3,582 $ 2,686 $ 2,008
Accounts receivable (less allowances for doubtful accounts
of $8,909, $4,562 and $7,448, respectively) 121,363 48,597 101,852
Accounts receivable - related parties 2,984 1,063 1,492
Accrued utility revenues 32,876 10,360 27,418
Inventories 28,254 71,584 8,934
Deferred income taxes 8,790 12,484 15,396
Derivative financial instruments 1,814 5,688 2,613
Prepaid expenses and other current assets 4,895 3,875 4,381
-------- -------- --------
Total current assets 204,558 156,337 164,094
Property, plant and equipment, at cost (less accumulated depreciation
and amortization of $341,126, $330,329 and $323,100, respectively) 665,213 655,322 639,487
Regulatory assets 61,956 61,334 66,171
Other assets 29,608 30,680 29,678
-------- -------- --------
Total assets $961,335 $903,673 $899,430
======== ======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt $ -- $ 50,000 $ 70,000
Bank loans 123,300 81,200 39,200
Accounts payable 55,129 38,430 55,905
Accounts payable - related parties 5,259 14,371 7,338
Employee compensation and benefits accrued 6,794 9,007 8,219
Customer deposits and refunds 14,272 20,064 12,183
Deferred fuel refunds 7,504 17,370 23,973
Accrued income taxes 11,456 -- 21,418
Electric supplier collateral deposits -- 13,500 5,400
Other current liabilities 12,449 15,444 14,382
-------- -------- --------
Total current liabilities 236,163 259,386 258,018
Long-term debt 237,000 187,030 167,090
Deferred income taxes 161,248 160,920 162,877
Deferred investment tax credits 6,998 7,193 7,390
Other noncurrent liabilities 16,077 14,213 13,337
-------- -------- --------
Total liabilities 657,486 628,742 608,712
Commitments and contingencies (note 5)
Common stockholder's equity:
Common Stock, $2.25 par value (authorized - 40,000,000 shares;
issued and outstanding - 26,781,785 shares) 60,259 60,259 60,259
Additional paid-in capital 80,622 80,622 79,773
Retained earnings 161,467 133,807 151,317
Accumulated other comprehensive income (loss) 1,501 243 (631)
-------- -------- --------
Total common stockholder's equity 303,849 274,931 290,718
-------- -------- --------
Total liabilities and stockholder's equity $961,335 $903,673 $899,430
======== ======== ========
See accompanying notes to condensed financial statements.
-1-
UGI UTILITIES, INC.
CONDENSED STATEMENTS OF INCOME
(unaudited)
(Thousands of dollars)
Three Months Ended Six Months Ended
March 31, March 31,
------------------- -------------------
2006 2005 2006 2005
-------- -------- -------- --------
Revenues $321,645 $281,454 $565,318 $464,935
-------- -------- -------- --------
Costs and expenses:
Cost of sales - gas, fuel and purchased power 238,193 189,200 409,439 306,789
Operating and administrative expenses 27,459 25,776 49,445 48,541
Operating and administrative expenses - related
parties 3,992 2,522 4,718 5,617
Taxes other than income taxes 3,720 3,739 6,982 6,927
Depreciation and amortization 6,295 5,966 12,483 11,766
Other income, net (1,220) (1,419) (3,181) (3,244)
-------- -------- -------- --------
278,439 225,784 479,886 376,396
-------- -------- -------- --------
Operating income 43,206 55,670 85,432 88,539
Interest expense 5,320 4,622 10,956 9,148
-------- -------- -------- --------
Income before income taxes 37,886 51,048 74,476 79,391
Income taxes 14,857 20,340 29,522 31,717
-------- -------- -------- --------
Net income $ 23,029 $ 30,708 $ 44,954 $ 47,674
======== ======== ======== ========
See accompanying notes to condensed financial statements.
-2-
UGI UTILITIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
(Thousands of dollars)
Six Months Ended
March 31,
--------------------
2006 2005
--------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 44,954 $ 47,674
Adjustments to reconcile net income to net cash used
by operating activities:
Depreciation and amortization 12,483 11,766
Deferred income taxes, net 2,351 (5,464)
Provision for uncollectible accounts 6,980 6,548
Other, net 780 1,073
Net change in:
Accounts receivable and accrued utility revenues (104,183) (88,671)
Inventories 43,330 56,243
Deferred fuel costs (9,866) 14,827
Accounts payable 7,587 2,264
Other current assets and liabilities (5,913) 15,094
--------- --------
Net cash (used) provided by operating activities (1,497) 61,354
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment (21,878) (19,287)
Net costs of property, plant and equipment disposals (535) (568)
--------- --------
Net cash used by investing activities (22,413) (19,855)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of dividends (17,294) (17,812)
Redemption of preferred shares subject to mandatory redemption -- (20,000)
Increase in bank loans with maturities of
three months or less 112,100 (21,700)
Repayments of debt including bank loans with maturities
greater than three months (120,000) --
Issuance of debt 50,000 20,000
--------- --------
Net cash provided (used) by financing activities 24,806 (39,512)
--------- --------
Cash and cash equivalents increase $ 896 $ 1,987
========= ========
CASH AND CASH EQUIVALENTS:
End of period $ 3,582 $ 2,008
Beginning of period 2,686 21
--------- --------
Increase $ 896 $ 1,987
========= ========
See accompanying notes to condensed financial statements.
-3-
UGI UTILITIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
(Thousands of dollars, except per share amounts)
1. BASIS OF PRESENTATION
UGI Utilities, Inc. ("UGI Utilities"), a wholly owned subsidiary of UGI
Corporation ("UGI"), owns and operates a natural gas distribution utility
("Gas Utility") in parts of eastern and southeastern Pennsylvania and an
electricity distribution utility ("Electric Utility") in northeastern
Pennsylvania. We refer to Gas Utility and Electric Utility collectively as
"the Company" or "we." Gas Utility and Electric Utility are subject to
regulation by the Pennsylvania Public Utility Commission ("PUC").
The accompanying condensed financial statements are unaudited and have been
prepared in accordance with the rules and regulations of the U.S.
Securities and Exchange Commission ("SEC"). They include all adjustments
which we consider necessary for a fair statement of the results for the
interim periods presented. Such adjustments consisted only of normal
recurring items unless otherwise disclosed. The September 30, 2005
condensed balance sheet data was derived from audited financial statements,
but does not include all disclosures required by accounting principles
generally accepted in the United States of America. These financial
statements should be read in conjunction with the financial statements and
the related notes included in our Annual Report on Form 10-K for the year
ended September 30, 2005 ("Company's 2005 Annual Report"). Due to the
seasonal nature of our businesses, the results of operations for interim
periods are not necessarily indicative of the results to be expected for a
full year.
COMPREHENSIVE INCOME. The following table presents the components of
comprehensive income for the three 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 $23,029 $30,708 $44,954 $47,674
Other comprehensive income 144 1,494 1,258 824
------- ------- ------- -------
Comprehensive income $23,173 $32,202 $46,212 $48,498
------- ------- ------- -------
Other comprehensive income comprises changes in the fair value of interest
rate protection and electricity price swap agreements qualifying as hedges,
net of reclassifications to net income.
EQUITY-BASED COMPENSATION. Under UGI's 2004 Omnibus Equity Compensation
Plan ("OECP"), certain key employees of UGI Utilities may be granted stock
options and other equity-based awards ("Units") of UGI Common Stock. Such
awards typically vest ratably over a period of years (generally three
years). There are certain change of control and retirement eligibility
conditions that, if met, generally result in an acceleration of vesting.
Stock options for UGI Common Stock generally can be exercised no later than
ten years from the grant date. Effective October 1, 2005, the Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 123
(revised 2004), "Share-Based Payment" ("SFAS 123R"). Prior to October 1,
2005, as permitted, we applied the provisions of Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
-4-
UGI UTILITIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
(Thousands of dollars, except per share amounts)
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 period end 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 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
continue to use this model. The adoption of SFAS 123R resulted in
compensation expense associated with stock options of $145 ($85 after-tax)
and $188 ($110 after-tax) during the three and six months ended March 31,
2006, respectively. As of March 31, 2006, there was $529 of unrecognized
compensation cost related to non-vested stock options that is expected to
be recognized over a weighted average period of 2.1 years. Assuming no
significant change in the level of future stock option grants to UGI
Utilities' employees, we do not believe that compensation expense
associated with stock options will have a material impact on our financial
position, results of operations or cash flows.
Both prior to and after the adoption of SFAS 123R, we measured and recorded
compensation cost of Units awarded that can be settled at UGI's option in
cash or shares of Common Stock, or a combination of both, based upon their
fair value as of the end of each period. The fair value of Units is
dependent upon UGI's stock price and its performance in comparison to a
group of peer companies. The fair value of these awards is expensed over
requisite service periods.
We recorded total net pre-tax equity-based compensation expense (benefit)
of $431 and $(190) during the three and six months ended March 31, 2006,
respectively. The total net after-tax equity-based compensation expense
(benefit) recorded during the three and six months ended March 31, 2006 was
$252 and $(111), respectively. The net equity-based compensation benefit
recorded during the six months ended March 31, 2006 is principally due to
changes in the fair value of awards made under the OECP, largely resulting
from changes in the price of UGI's stock.
-5-
UGI UTILITIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
(Thousands of dollars, except per share amounts)
The following table illustrates the effects on net income as if we had
applied the provisions of SFAS 123R to all equity-based compensation awards
for the comparable periods prior to the adoption of SFAS 123R.
Three Months Ended Six Months Ended
March 31, March 31,
2005 2005
------------------ ----------------
Net income, as reported $30,708 $47,674
Add: Equity-based employee compensation
expense included in reported net income, net
of related tax effects 136 581
Deduct: Total equity-based employee compensation
expense determined under the fair value method
for all awards, net of related tax effects (215) (705)
Pro forma net income $30,629 $47,550
During the six months ended March 31, 2006, a portion of vested Unit awards
were settled in shares of UGI Common Stock and $384 in cash. As of
March 31, 2006, there was a total of $782 of unrecognized compensation
expense associated with 66,234 Unit awards that are expected to be
recognized over a weighted average period of 2.1 years. At March 31,
2006, total liabilities of $828 associated with Unit awards are reflected
in other current liabilities and other noncurrent liabilities in the
Condensed Balance Sheet.
The following table illustrates the number of unvested Unit awards:
Number of Average Fair
UGI Units Value (per Unit)
--------- ----------------
Non-vested awards - September 30, 2005 27,182 $30.19
Granted 19,500
Vested (13,557)
Non-vested awards - March 31, 2006 33,125 $23.29
RECLASSIFICATIONS. We have reclassified certain prior-year balances to
conform to the current period presentation.
USE OF ESTIMATES. We make estimates and assumptions when preparing
financial statements in conformity with accounting principles generally
accepted in the United States of America. These estimates and assumptions
affect the reported amounts of assets and liabilities, revenues and
expenses, as well as the disclosure of contingent assets and liabilities.
Actual results could differ from these estimates.
2. SEGMENT INFORMATION
We have two reportable segments: (1) Gas Utility and (2) Electric Utility.
The accounting policies of our two reportable segments are the same as
those described in the Significant Accounting Policies note contained in
the Company's 2005 Annual Report. We evaluate each segment's profitability
principally based upon its income before income taxes. No single customer
represents more than 10% of the total revenues of
-6-
UGI UTILITIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
(Thousands of dollars, except per share amounts)
either Gas Utility or Electric Utility. There are no significant
intersegment transactions. In addition, all of our reportable segments'
revenues are derived from sources within the United States. Financial
information by business segment follows:
THREE MONTHS ENDED MARCH 31, 2006:
Gas Electric
Total Utility Utility
-------- -------- --------
Revenues $321,645 $296,218 $ 25,427
Cost of sales - gas, fuel and purchased power 238,193 222,989 15,204
Depreciation and amortization 6,295 5,468 827
Operating income 43,206 39,918 3,288
Interest expense 5,320 4,591 729
Income before income taxes 37,886 35,327 2,559
Total assets at period end 961,335 853,262 108,073
THREE MONTHS ENDED MARCH 31, 2005:
Gas Electric
Total Utility Utility
-------- -------- --------
Revenues $281,454 $255,861 $25,593
Cost of sales - gas, fuel and purchased power 189,200 177,283 11,917
Depreciation and amortization 5,966 5,176 790
Operating income 55,670 48,541 7,129
Interest expense 4,622 4,037 585
Income before income taxes 51,048 44,504 6,544
Total assets at period end 899,430 802,188 97,242
-7-
UGI UTILITIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
(Thousands of dollars, except per share amounts)
SIX MONTHS ENDED MARCH 31, 2006:
Gas Electric
Total Utility Utility
-------- -------- --------
Revenues $565,318 $516,017 $ 49,301
Cost of sales - gas, fuel and purchased power 409,439 382,909 26,530
Depreciation and amortization 12,483 10,843 1,640
Operating income 85,432 75,608 9,824
Interest expense 10,956 9,700 1,256
Income before income taxes 74,476 65,908 8,568
Total assets at period end 961,335 853,262 108,073
SIX MONTHS ENDED MARCH 31, 2005:
Gas Electric
Total Utility Utility
-------- -------- --------
Revenues $464,935 $417,080 $47,855
Cost of sales - gas, fuel and purchased power 306,789 283,888 22,901
Depreciation and amortization 11,766 10,230 1,536
Operating income 88,539 76,687 11,852
Interest expense 9,148 8,110 1,038
Income before income taxes 79,391 68,577 10,814
Total assets at period end 899,430 802,188 97,242
-8-
UGI UTILITIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
(Thousands of dollars, except per share amounts)
3. LONG-TERM DEBT
In December 2005, UGI Utilities refinanced $50,000 of its maturing 7.14%
Medium-Term Notes with proceeds from the issuance of $50,000 of 5.64%
Medium-Term Notes due in December 2015. These Medium-Term Notes were issued
pursuant to the Company's $125,000 shelf registration statement with the
SEC.
4. DEFINED BENEFIT PENSION AND OTHER POSTRETIREMENT PLANS
We sponsor a defined benefit pension plan ("UGI Utilities Pension Plan")
for employees of UGI, UGI Utilities and certain of UGI's other wholly owned
subsidiaries. In addition, we provide postretirement health care benefits
to certain retirees and postretirement life insurance benefits to nearly
all active and retired employees.
Net periodic pension expense and other postretirement benefit costs
relating to UGI Utilities' employees include the following components:
Other Postretirement
Pension Benefits Benefits
Three Months Three Months Ended
Ended March 31, March 31,
----------------- --------------------
2006 2005 2006 2005
------- ------- ----- -----
Service cost $ 1,309 $ 1,090 $ 32 $ 29
Interest cost 3,220 2,998 204 368
Expected return on assets (4,444) (3,975) (152) (119)
Amortization of:
Transition obligation -- -- -- 169
Prior service cost (benefit) 196 155 (55) --
Actuarial loss 427 308 48 81
------- ------- ----- -----
Net benefit cost 708 576 77 528
Change in regulatory and other
assets and liabilities (93) -- 698 247
------- ------- ----- -----
Net expense $ 615 $ 576 $ 775 $ 775
------- ------- ----- -----
Other Postretirement
Pension Benefits Benefits
Six Months Ended Six Months Ended
March 31, March 31,
----------------- --------------------
2006 2005 2006 2005
------- ------- ------ ------
Service cost $ 2,620 $ 2,180 $ 65 $ 57
Interest cost 6,442 5,996 408 737
Expected return on assets (8,892) (7,950) (305) (238)
Amortization of:
Transition obligation -- -- -- 338
Prior service cost (benefit) 392 310 (110) --
Actuarial loss 854 616 96 163
------- ------- ------ ------
Net benefit cost 1,416 1,152 154 1,057
Change in regulatory and other
assets and liabilities (182) -- 1,396 493
------- ------- ------ ------
Net expense $ 1,234 $ 1,152 $1,550 $1,550
------- ------- ------ ------
-9-
UGI UTILITIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
(Thousands of dollars, except per share amounts)
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. Pursuant to orders
previously issued by the PUC, UGI Utilities has established a Voluntary
Employees' Beneficiary Association ("VEBA") trust to fund and pay UGI
Utilities' postretirement health care and life insurance benefits referred
to above by depositing into the VEBA the annual amount of postretirement
benefit costs determined under SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." The difference between the
annual amount calculated and the amount included in UGI Utilities rates is
deferred for future recovery from, or refund to, ratepayers. During the six
months ended March 31, 2006, the Company made contributions of
approximately $360 to the VEBA and expects to contribute a total of
approximately $750 during the twelve months ending September 30, 2006.
We also sponsor an unfunded and non-qualified supplemental executive
retirement income plan. We recorded pre-tax expense for this plan of $105
and $201 for the three and six months ended March 31, 2006, respectively,
and $108 and $216 for the three and six months ended March 31, 2005,
respectively.
5. COMMITMENTS AND CONTINGENCIES
From the late 1800s through the mid-1900s, UGI Utilities and its former
subsidiaries owned and operated a number of manufactured gas plants
("MGPs") prior to the general availability of natural gas. Some
constituents of coal tars and other residues of the manufactured gas
process are today considered hazardous substances under the Superfund Law
and may be present on the sites of former MGPs. Between 1882 and 1953, UGI
Utilities owned the stock of subsidiary gas companies in Pennsylvania and
elsewhere and also operated the businesses of some gas companies under
agreement. Pursuant to the requirements of the Public Utility Holding
Company Act of 1935, UGI Utilities divested all of its utility operations
other than those which now constitute Gas Utility and Electric Utility.
UGI Utilities does not expect its costs for investigation and remediation
of hazardous substances at Pennsylvania MGP sites to be material to its
results of operations because Gas Utility is currently permitted to include
in rates, through future base rate proceedings, prudently incurred
remediation costs associated with such sites. UGI Utilities has been
notified of several sites outside Pennsylvania on which private parties
allege MGPs were formerly owned or operated by it or owned or operated by
its former subsidiaries. Such parties are investigating the extent of
environmental contamination or performing environmental remediation. UGI
Utilities is currently litigating three claims against it relating to
out-of-state sites. We accrue environmental investigation and cleanup costs
when it is probable that a liability exists and the amount or range of
amounts can be reasonably estimated.
-10-
UGI UTILITIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
(Thousands of dollars, except per share amounts)
Management believes that under applicable law UGI Utilities should not be
liable in those instances in which a former subsidiary owned or operated an
MGP. There could be, however, significant future costs of an uncertain
amount associated with environmental damage caused by MGPs outside
Pennsylvania that UGI Utilities directly operated, or that were owned or
operated by former subsidiaries of UGI Utilities, if a court were to
conclude that (1) the subsidiary's separate corporate form should be
disregarded or (2) UGI Utilities should be considered to have been an
operator because of its conduct with respect to its subsidiary's MGP.
In April 2003, Citizens Communications Company ("Citizens") served a
complaint naming UGI Utilities as a third-party defendant in a civil action
pending in United States District Court for the District of Maine. In that
action, the plaintiff, City of Bangor, Maine ("City") sued Citizens to
recover environmental response costs associated with MGP wastes generated
at a plant allegedly operated by Citizens' predecessors at a site on the
Penobscot River. Citizens subsequently joined UGI Utilities and ten other
third-party defendants alleging that the third party defendants are
responsible for an equitable share of costs Citizens may be required to pay
to the City for cleaning up tar deposits in the Penobscot River. Citizens
alleges that UGI Utilities and its predecessors owned and operated the MGP
from 1901 to 1928. Studies conducted by the City and Citizens suggest that
it could cost up to $18,000 to clean up the river. Citizens' third-party
claims have been stayed pending a resolution of the City's suit against
Citizens, which was tried in September 2005 and has not yet been decided.
UGI Utilities believes that it has good defenses to the claim and is
defending the suit.
By letter dated July 29, 2003, Atlanta Gas Light Company ("AGL") served UGI
Utilities with a complaint filed in the United States District Court for
the Middle District of Florida in which AGL alleges that UGI Utilities is
responsible for 20% of approximately $8,000 incurred by AGL in the
investigation and remediation of a former MGP site in St. Augustine,
Florida. UGI Utilities formerly owned stock of the St. Augustine Gas
Company, the owner and operator of the MGP. In March 2005, the court
granted UGI Utilities' motion for summary judgment dismissing AGL's
complaint. AGL has appealed.
AGL previously informed UGI Utilities that it was investigating
contamination that appeared to be related to MGP operations at a site owned
by AGL in Savannah, Georgia. A former subsidiary of UGI Utilities operated
the MGP in the early 1900s. AGL has informed UGI Utilities that it has
begun remediation of MGP wastes at the site and believes that the total
cost of remediation could be as high as $55,000. AGL has not filed suit
against UGI Utilities for a share of these costs. UGI Utilities believes
that it will have good defenses to any action that may arise out of this
site.
On September 20, 2001, Consolidated Edison Company of New York ("ConEd")
filed suit against UGI Utilities in the United States District Court for
the Southern District of New York, seeking contribution from UGI Utilities
for an allocated share of response costs associated with investigating and
assessing gas plant related contamination at former MGP sites in
Westchester County, New York. The complaint alleges that UGI Utilities
"owned
-11-
UGI UTILITIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
(Thousands of dollars, except per share amounts)
and operated" the MGPs prior to 1904. The complaint also seeks a
declaration that UGI Utilities is responsible for an allocated percentage
of future investigative and remedial costs at the sites. ConEd believes
that the cost of remediation for all of the sites could exceed $70,000.
The trial court granted UGI Utilities' motion for summary judgment and
dismissed ConEd's complaint. The grant of summary judgment was entered
April 1, 2004. ConEd appealed and on September 9, 2005 a panel of the
Second Circuit Court of Appeals affirmed in part and reversed in part the
decision of the trial court. The appellate panel affirmed the trial court's
decision dismissing claims that UGI Utilities was liable under CERCLA as an
operator of MGPs owned and operated by its former subsidiaries. The
appellate panel reversed the trial court's decision that UGI Utilities was
released from 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 $2,300 and expects to spend another
$11,000 to clean up an MGP site it owns in Sag Harbor, New York. KeySpan
believes that UGI Utilities is responsible for approximately 50% of these
costs as a result of UGI Utilities' alleged direct ownership and operation
of the plant from 1885 to 1902. UGI Utilities is in the process of
reviewing the information provided by KeySpan and is investigating this
claim.
By letter dated August 5, 2004, Yankee Gas Services Company and Connecticut
Light and Power Company, subsidiaries of Northeast Utilities, (together the
"Northeast Companies"), demanded contribution from UGI Utilities for past
and future remediation costs related to MGP operations on thirteen sites
owned by the Northeast Companies in nine cities in the State of
Connecticut. The Northeast Companies allege that UGI Utilities controlled
operations of the plants from 1883 to 1941. By letter dated March 17, 2006,
the Northeast Companies estimated that remediation costs for all of the
sites would total approximately $215,000 and claimed that UGI Utilities is
responsible for approximately $103,000 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 $23,000. UGI Utilities believes that
it will have good defenses to any action that may arise out of the
remaining sites.
In addition to these environmental matters, there are other pending claims
and legal actions arising in the normal course of our businesses. We cannot
predict with certainty the final results of environmental and other
matters. However, it is reasonably possible that some of them could be
resolved unfavorably to us and result in losses in excess of recorded
amounts. We are unable to estimate any possible losses in excess of
recorded amounts. Although we currently believe, after consultation with
counsel, that damages or settlements, if any, recovered by the plaintiffs
in such claims or actions will not have a
-12-
UGI UTILITIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
(Thousands of dollars, except per share amounts)
material adverse effect on our financial position, damages or settlements
could be material to our operating results or cash flows in future periods
depending on the nature and timing of future developments with respect to
these matters and the amounts of future operating results and cash flows.
6. RELATED PARTY TRANSACTIONS
UGI provides certain financial and administrative services to UGI
Utilities. UGI bills UGI Utilities monthly for all direct and for an
allocated share of indirect corporate expenses incurred or paid on behalf
of UGI Utilities. These billed expenses are classified as operating and
administrative expenses - related parties in the Condensed Statements of
Income. In addition, UGI Utilities provides limited administrative services
to UGI and certain of UGI's subsidiaries, principally payroll related
services. Amounts billed to these entities by UGI Utilities for all periods
presented were not material.
Effective December 1, 2004, following a competitive bidding process, UGI
Utilities entered into a Storage Contract Administrative Agreement
("Storage Agreement") with Energy Services, Inc., a second-tier wholly
owned subsidiary of UGI ("Energy Services"). The Storage Agreement was
initially scheduled to expire on October 31, 2005, but effective November
1, 2005, UGI Utilities and Energy Services agreed to extend the Storage
Agreement through October 31, 2008. Under the Storage Agreement, Energy
Services provides a firm natural gas delivery service to UGI Utilities. UGI
Utilities has released certain gas transportation and storage contracts
through October 31, 2008 and transferred associated gas storage inventories
to Energy Services. UGI Utilities may recall such released transportation
and storage contracts without penalty if recalled to meet operational
requirements, and if not recalled, the releases will terminate at the end
of the term of the Storage Agreement. In exchange for the ability to
utilize these assets, Energy Services pays a monthly fee to UGI Utilities.
During the three and six months ended March 31, 2006, UGI Utilities
incurred costs associated with purchases of natural gas storage inventories
from Energy Services pursuant to the Storage Agreement totaling $267 and
$10,565, respectively, and incurred associated pipeline transportation and
storage capacity charges of $5,479 and $10,914, respectively.
UGI Utilities reflects the historical cost of the gas storage inventories
and any exchange receivable from Energy Services (representing amounts of
natural gas inventories used but not yet replenished by Energy Services) on
its balance sheet under the caption "Inventories." The carrying value of
these gas storage inventories at March 31, 2006, comprising approximately
2.8 billion cubic feet of natural gas, was $25,410.
UGI Utilities has a Gas Supply and Delivery Service Agreement with Energy
Services pursuant to which Energy Services provides certain gas supply and
related delivery service to Gas Utility during the peak heating-season
months of November to March. In addition, from time to time, Gas Utility
purchases natural gas or pipeline capacity from Energy Services. The
aggregate amount of these transactions (exclusive of Storage Agreement
transactions) during the three months ended March 31, 2006 and 2005,
totaled
-13-
UGI UTILITIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
(Thousands of dollars, except per share amounts)
$5,664 and $5,865, respectively, and during the six months ended March 31,
2006 and 2005, totaled $8,935 and $8,066, respectively.
From time to time, the Company sells natural gas or pipeline capacity to
Energy Services. During the three and six month periods ended March 31,
2006 and 2005, these transactions did not have a material effect on the
Company's financial position, results of operations or cash flows.
-14-
UGI UTILITIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Information contained in this Management's Discussion and Analysis of Financial
Condition and Results of Operations and elsewhere in this Quarterly Report may
contain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Such statements use forward-looking words such as "believe," "plan,"
"anticipate," "continue," "estimate," "expect," "may," "will," or other similar
words. These statements discuss plans, strategies, events or developments that
we expect or anticipate will or may occur in the future.
A forward-looking statement may include a statement of the assumptions or bases
underlying the forward-looking statement. We believe that we have chosen these
assumptions or bases in good faith and that they are reasonable. However, we
caution you that actual results almost always vary from assumed facts or bases,
and the differences between actual results and assumed facts or bases can be
material, depending on the circumstances. When considering forward-looking
statements, you should keep in mind the following important factors which could
affect our future results and could cause those results to differ materially
from those expressed in our forward-looking statements: (1) adverse weather
conditions resulting in reduced demand; (2) price volatility and availability of
oil, electricity and natural gas and the capacity to transport them to market
areas; (3) changes in laws and regulations, including safety, tax and accounting
matters; (4) competitive pressures from the same and alternative energy sources;
(5) liability for environmental claims; (6) customer conservation measures due
to high energy prices and improvements in energy efficiency and technology
resulting in reduced demand; (7) adverse labor relations; (8) large customer,
counterparty or supplier defaults; (9) increased uncollectible accounts expense;
(10) liability for personal injury and property damage arising from explosions
and other catastrophic events, including acts of terrorism, resulting from
operating hazards and risks incidental to generating and distributing
electricity and transporting, storing and distributing natural gas, including
liability in excess of insurance coverage; (11) political, regulatory and
economic conditions in the United States; and (12) reduced access to capital
markets and interest rate fluctuations.
These factors are not necessarily all of the important factors that could cause
actual results to differ materially from those expressed in any of our
forward-looking statements. Other unknown or unpredictable factors could also
have material adverse effects on future results. We undertake no obligation to
update publicly any forward-looking statement whether as a result of new
information or future events except as required by the federal securities laws.
-15-
UGI UTILITIES, INC.
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 analyses of results of operations should be
read in conjunction with the segment information included in Note 2 to the
Condensed Financial Statements.
2006 THREE-MONTH PERIOD COMPARED WITH 2005 THREE-MONTH PERIOD
Increase
Three Months Ended March 31, 2006 2005 (Decrease)
- ---------------------------- ------ ------ ----------------
(Millions of dollars)
GAS UTILITY:
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 $ 48.5 $ (8.6) (17.7)%
Income before income taxes $ 35.3 $ 44.5 $ (9.2) (20.7)%
System throughput - bcf (a) 27.1 31.0 (3.9) (12.6)%
Heating degree days - % (warmer) colder
than normal (c) (13.0)% 2.7% -- --
ELECTRIC UTILITY:
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 $ 7.1 $ (3.8) (53.5)%
Income before income taxes $ 2.6 $ 6.5 $ (3.9) (60.0)%
Distribution sales - gwh (a) 268.4 282.1 (13.7) (4.9)%
bcf - billions of cubic feet. gwh - millions of kilowatt-hours.
(a) Beginning in Fiscal 2006, Gas Utility and Electric Utility adjusted their
methods of estimating unbilled sales volumes and associated revenues for service
provided through the end of the month by more closely correlating such estimated
sales volumes to distribution system sendout data. The Company believes that the
new methods of estimating unbilled sales volumes results in a more accurate
quarterly estimate of unbilled revenues and associated total margin. The change
in the method of estimating Gas Utility's unbilled sales volumes 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 three months ended March 31, 2006. In addition, the change
in the method of estimating Electric Utility's unbilled sales volumes 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 three months
ended March 31, 2006.
(b) Gas Utility's total margin represents total revenues less cost of sales.
Electric Utility's 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
-16-
UGI UTILITIES, INC.
purposes, revenue-related taxes are included in "Taxes other than income taxes"
on the Condensed Statements of Income.
(c) Deviation from average heating degree days based upon weather statistics
provided by the National Oceanic and Atmospheric Administration ("NOAA") for
four airports located within our service territory. 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.
GAS UTILITY. 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 than normal 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, 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.
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 $48.5 million in the 2005 three-month period principally reflecting
the previously mentioned
-17-
UGI UTILITIES, INC.
$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, including such costs allocated by UGI, 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 and an increase in interest expense
principally attributable to higher short-term debt outstanding and higher
short-term interest rates.
ELECTRIC UTILITY. 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 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 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.
-18-
UGI UTILITIES, INC.
2006 SIX-MONTH PERIOD COMPARED WITH 2005 SIX-MONTH PERIOD
Increase
Six Months Ended March 31, 2006 2005 (Decrease)
- -------------------------- ------ ------ -------------
(Millions of dollars)
GAS UTILITY:
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 - bcf (a) 50.1 53.9 (3.8) (7.1)%
Heating degree days - % warmer than normal (c) 8.2% 0.4% -- --
ELECTRIC UTILITY:
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 $ 8.6 $ 10.8 $(2.2) (20.4)%
Distribution sales - gwh (a) 526.4 531.2 (4.8) (0.9)%
(a) Beginning in Fiscal 2006, Gas Utility and Electric Utility adjusted their
methods of estimating unbilled sales volumes and associated revenues for service
provided through the end of the month by more closely correlating such estimated
sales volumes to distribution system sendout data. The Company believes that the
new methods of estimating unbilled sales volumes results in a more accurate
quarterly estimate of unbilled revenues and associated total margin. The change
in the method of estimating unbilled sales volumes did not have a material
effect on Gas Utility or Electric Utility sales volumes, revenues or margin for
the six months ended March 31, 2006.
(b) Gas Utility's total margin represents total revenues less cost of sales.
Electric Utility's 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 "Taxes other
than income taxes" on the Condensed Statements of Income.
(c) Deviation from average heating degree days based upon weather statistics
provided by the National Oceanic and Atmospheric Administration ("NOAA") for
four airports located within our service territory. 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.
GAS UTILITY. 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.
-19-
UGI UTILITIES, INC.
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 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,
including such costs allocated by UGI, and lower distribution system maintenance
expenses resulting, in 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. 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.
-20-
UGI UTILITIES, INC.
FINANCIAL CONDITION AND LIQUIDITY
FINANCIAL CONDITION
The Company's total debt outstanding at March 31, 2006 totaled $360.3 million
(including $123.3 million in bank loans) compared with $318.2 million (including
$81.2 million in bank loans) at September 30, 2005. In December 2005, we
refinanced $50 million of maturing 7.14% Medium-Term Notes with proceeds from
the issuance of $50 million of 5.64% Medium-Term Notes due 2015.
The Company has revolving credit agreements under which it may borrow up to $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
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 balances were $175.9 million and $90.4 million, respectively.
The increase in average and peak bank loan borrowings during the 2006 six-month
period reflects, in large part, borrowings to fund increased working capital
resulting from higher natural gas prices. UGI Utilities also has a shelf
registration statement with the Securities and Exchange Commission under which
it may issue up to an additional $75 million of Medium-Term Notes or other debt
securities.
CASH FLOWS
OPERATING ACTIVITIES. Due to the seasonal nature of UGI Utilities' businesses,
cash flows from operating activities are generally strongest during the second
and third fiscal quarters when customers pay for gas and electricity consumed
during the peak heating season months. Conversely, operating cash flows are
generally at their lowest levels during the first and fourth fiscal quarters
when the Company's investment in working capital, principally accounts
receivable and inventories, is generally greatest. UGI Utilities uses short-term
borrowings, primarily borrowings under its revolving credit agreements as well
as borrowings under uncommitted arrangements, to manage these seasonal cash flow
needs.
Cash used by operating activities was $1.5 million for the six months ended
March 31, 2006 compared with cash provided by operating activities of $61.4
million in the prior-year six-month period. The significant decrease in cash
flow from operating activities reflects a $69.0 million decrease in cash flow
from changes in operating working capital, principally greater cash required to
fund accounts receivable and inventories, a decrease in cash flow as a result of
purchased gas cost undercollections during the period and a refund of $13.5
million in electricity supplier collateral deposits. The greater cash
requirements to fund working capital principally reflect the
-21-
UGI UTILITIES, INC.
effects of higher natural gas costs in the 2006 six-month period and higher
natural gas storage inventory volumes at the end of the 2006 six-month period.
Cash flow from operating activities before changes in operating working capital
was $67.5 million in the 2006 six-month period compared with $61.6 million for
the 2005 six-month period. The higher amount in the 2006 six-month period
principally reflects lower noncash deferred income tax expense.
INVESTING ACTIVITIES. Cash used by investing activities was $22.4 million in the
2006 six-month period compared to cash used by investing activities of $19.9
million in the 2005 six-month period. An increase in 2006 six-month period
capital expenditures principally reflects greater in information system capital
expenditures and greater Electric Utility capital expenditures principally
associated with substation improvements.
FINANCING ACTIVITIES. Cash provided by financing activities was $24.8 million in
the 2006 six-month period compared with cash used by financing activities of
$39.5 million in the 2005 six-month period. Financing activity cash flows are
primarily the result of issuances and repayments of long-term debt, net
short-term borrowings including borrowings under revolving credit agreements and
other uncommitted arrangements, cash dividends to UGI, and capital contributions
from UGI. During the 2006 and 2005 six-month periods, we paid dividends to UGI
totaling $17.3 million and $17.8 million, respectively. During the 2006
six-month period, net bank loan borrowings totaled $42.1 million compared with
net bank loan repayments of $21.7 million in the prior-year six-month period.
Included in the 2006 six-month period bank loan borrowings are repayments of two
$35 million borrowings having initial maturities greater than three months. The
increase in short-term borrowings in the 2006 six-month period reflects
borrowings needed to finance the higher working capital requirements resulting
from the previously mentioned higher natural gas costs. In December 2005, we
refinanced $50 million of 7.14% maturing Medium-Term Notes through the issuance
of $50 million of 5.64% Medium-Term Notes due in 2015.
UGI'S 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. PG Energy serves
approximately 158,000 customers in thirteen counties in northeastern and central
Pennsylvania. The proposed transaction is subject to PUC approval and is
expected to close during the fourth fiscal quarter ending September 30, 2006. We
anticipate that we will acquire and operate, through a subsidiary, the regulated
assets of PG Energy immediately following UGI's completion of the acquisition.
We expect to fund the purchase price and related costs with a combination of
equity and long-term debt.
-22-
UGI UTILITIES, INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Gas Utility's tariffs contain clauses that permit recovery of substantially all
of the prudently incurred costs of natural gas it sells to its customers. The
recovery clauses provide for a periodic adjustment for the difference between
the total amounts actually collected from customers through PGC rates and the
recoverable costs incurred. Because of this ratemaking mechanism, there is
limited commodity price risk associated with our Gas Utility operations. Gas
Utility uses exchange-traded natural gas call option contracts to reduce
volatility in the cost of gas it purchases for its retail core-market customers.
The cost of these call option contracts, net of any associated gains, is
included in Gas Utility's PGC recovery mechanism.
Electric Utility purchases its power needs from electricity suppliers under
fixed-price energy and capacity contracts and, to a much lesser extent, on the
spot market. Prices for electricity can be volatile especially during periods of
high demand or tight supply. In accordance with POLR settlements approved by the
PUC, Electric Utility may increase its POLR rates up to certain limits through
December 31, 2006. In accordance with these settlements, Electric Utility
increased its POLR generation rates for all metered customers by a total 7.5% of
its total rates in effect on December 31, 2004 (an increase of 4.5% effective
January 1, 2005 and an additional increase of 3% effective January 1, 2006).
Currently, Electric Utility's fixed-price power and capacity contracts with
electricity suppliers mitigate a substantial portion of its commodity price risk
associated with POLR service rate limits in effect through December 31, 2006.
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 into bilateral collateral arrangements with certain of them. Electric
Utility has and may enter into electric price swap agreements to reduce the
volatility in the cost of a portion of its anticipated electricity requirements.
Our variable-rate debt includes short-term borrowings, including borrowings
under our revolving credit agreements. These agreements provide for interest
rates on borrowings that are indexed to short-term market interest rates. Our
long-term debt is typically issued at fixed rates of interest based upon market
rates for debt having similar terms and credit ratings. As these long-term debt
issues mature, we expect to refinance such debt with new debt having an interest
rate that is more or less than the refinanced debt. In order to reduce interest
rate risk associated with near-term issuances of fixed-rate debt, we may enter
into interest rate protection agreements.
-23-
UGI UTILITIES, INC.
The fair values of our unsettled market risk sensitive derivative instruments
reflect the estimated amount that we would expect to receive or pay to terminate
the contract based upon quoted market prices of comparable contracts at March
31, 2006. At March 31, 2006, the fair value of our electricity price swap was a
gain of $7.2 million. An adverse change in electricity prices of ten percent
would result in a $1.5 million decrease in the fair value of the swap. At March
31, 2006, the fair value of our unsettled interest rate protection agreements,
which have been designated and qualify as cash flow hedges, was a gain of $0.5
million. An adverse change in interest rates on ten-year U.S. treasury notes of
ten percent would result in a $0.4 million decrease in the fair value of these
interest rate protection agreements.
-24-
UGI UTILITIES, INC.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness
of the Company's disclosure controls and procedures as of the end of the
period covered by this report. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures as of the end of the period covered by
this report were designed and functioning effectively to provide reasonable
assurance that the information required to be disclosed by the Company in
reports filed under the Securities Exchange Act of 1934, as amended, is (i)
recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms, and
(ii) accumulated and communicated to our management, including the Chief
Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding disclosure.
(b) Change in Internal Control over Financial Reporting
No change in the Company's internal control over financial reporting
occurred during the Company's most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
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.
-25-
UGI UTILITIES, INC.
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.
ITEM 6. EXHIBITS
The exhibits filed as part of this report are as follows:
EXHIBIT NO. EXHIBIT
- ----------- -------
12.1 Computation of ratio of earnings to fixed charges.
31.1 Certification by the Chief Executive Officer relating to the
Registrant's Report on Form 10-Q for the quarter ended 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.
-26-
UGI UTILITIES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UGI Utilities, Inc.
(Registrant)
Date: May 8, 2006 By: /s/ John C. Barney
------------------------------------
John C. Barney
Senior Vice President - Finance
(Principal Financial Officer)
-27-
UGI UTILITIES, INC.
EXHIBIT INDEX
12.1 Computation of ratio of earnings to fixed charges.
31.1 Certification by the Chief Executive Officer relating to the Registrant's
Report on Form 10-Q for the quarter ended 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.