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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2002
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 | |
At January 31, 2003, there were 27,796,103 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 December 31, 2002,
September 30, 2002 and December 31, 2001 1
Condensed Consolidated Statements of Income for the three
months ended December 31, 2002 and 2001 2
Condensed Consolidated Statements of Cash Flows for the
three months ended December 31, 2002 and 2001 3
Notes to Condensed Consolidated Financial Statements 4 - 13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14 - 21
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21 - 23
Item 4. Controls and Procedures 23 - 24
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 26
Certifications 27 - 28
-i-
UGI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Millions of dollars)
December 31, September 30, December 31,
2002 2002 2001
------------ ------------- ------------
(unaudited) (unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 273.9 $ 194.3 $ 108.7
Accounts receivable (less allowances for doubtful accounts of
$13.7, $11.8 and $16.4, respectively) 299.0 157.7 232.1
Accrued utility revenues 27.8 8.1 27.3
Inventories 117.2 109.2 122.2
Deferred income taxes 11.1 10.4 33.1
Utility regulatory assets -- 4.3 --
Prepaid expenses and other current assets 46.3 46.0 25.3
-------- -------- --------
Total current assets 775.3 530.0 548.7
Property, plant and equipment, at cost (less accumulated depreciation
and amortization of $743.3, $720.5 and $666.4, respectively) 1,276.1 1,271.9 1,267.9
Goodwill and excess reorganization value 649.5 644.9 639.9
Intangible assets (less accumulated amortization of $11.4, $10.3 and $7.1, respectively) 25.1 25.8 30.0
Utility regulatory assets 58.3 57.7 55.9
Other assets 89.5 84.1 99.6
-------- -------- --------
Total assets $2,873.8 $2,614.4 $2,642.0
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 123.4 $ 148.7 $ 98.7
AmeriGas Propane bank loans 37.0 10.0 8.0
UGI Utilities bank loans 78.3 37.2 82.1
Other bank loans 11.2 8.6 10.0
Accounts payable 254.6 166.1 212.3
Other current liabilities 195.1 215.8 233.2
-------- -------- --------
Total current liabilities 699.6 586.4 644.3
Long-term debt 1,219.9 1,127.0 1,157.3
Deferred income taxes 210.4 200.2 190.3
Other noncurrent liabilities 94.5 87.5 80.2
Commitments and contingencies (note 7)
Minority interests in AmeriGas Partners 122.9 276.0 277.5
UGI Utilities redeemable preferred stock 20.0 20.0 20.0
Common stockholders' equity:
Common Stock, without par value (authorized - 100,000,000 shares;
issued - 33,198,731 shares) 553.9 396.6 395.0
Retained earnings 65.0 39.7 22.0
Accumulated other comprehensive income (loss) 11.5 6.6 (12.7)
-------- -------- --------
630.4 442.9 404.3
Treasury stock, at cost (123.9) (125.6) (131.9)
-------- -------- --------
Total common stockholders' equity 506.5 317.3 272.4
-------- -------- --------
Total liabilities and stockholders' equity $2,873.8 $2,614.4 $2,642.0
======== ======== ========
See accompanying notes to consolidated financial statements.
-1-
UGI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(Millions, except per share amounts)
Three Months Ended
December 31,
---------------------------
2002 2001
--------- ---------
Revenues:
AmeriGas Propane $ 445.0 $ 371.4
UGI Utilities 168.4 141.5
International Propane 14.3 13.7
Energy Services and other 112.2 92.8
--------- ---------
739.9 619.4
--------- ---------
Costs and expenses:
AmeriGas Propane cost of sales 243.4 199.2
UGI Utilities - gas, fuel and purchased power 100.5 87.1
International Propane cost of sales 8.2 7.0
Energy Services and other cost of sales 101.0 84.2
Operating and administrative expenses 155.4 144.7
Utility taxes other than income taxes 2.9 2.6
Depreciation and amortization 24.2 23.2
Other income, net (3.1) (2.4)
--------- ---------
632.5 545.6
--------- ---------
Operating income 107.4 73.8
Income from equity investees 1.9 3.8
Interest expense (28.2) (28.2)
Minority interests in AmeriGas Partners (20.5) (9.1)
--------- ---------
Income before income taxes and subsidiary preferred
stock dividends 60.6 40.3
Income tax expense (23.5) (15.8)
Dividends on UGI Utilities Series Preferred Stock (0.4) (0.4)
--------- ---------
Net income $ 36.7 $ 24.1
========= =========
Earnings per share - basic $ 1.32 $ 0.88
========= =========
Earnings per share - diluted $ 1.29 $ 0.87
========= =========
Average common shares outstanding:
Basic 27.792 27.401
========= =========
Diluted 28.394 27.813
========= =========
Dividends declared per common share $ 0.4125 $ 0.40
========= =========
See accompanying notes to consolidated financial statements.
-2-
UGI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Millions of dollars)
Three Months Ended
December 31,
---------------------
2002 2001
------ ------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 36.7 $ 24.1
Reconcile to net cash provided by operating activities:
Depreciation and amortization 24.2 23.2
Minority interests in AmeriGas Partners 20.5 9.1
Deferred income taxes, net 1.3 (0.7)
Other, net 9.8 (1.0)
Net change in:
Accounts receivable and accrued utility revenues (169.0) (70.6)
Inventories (7.8) 6.3
Deferred fuel costs 7.1 6.9
Accounts payable 87.8 45.6
Other current assets and liabilities (14.6) (13.5)
------ ------
Net cash (used) provided by operating activities (4.0) 29.4
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment (25.7) (23.4)
Net proceeds from disposals of assets 2.1 2.8
Acquisition of business, net of cash acquired (2.2) --
Other, net 0.3 (0.5)
------ ------
Net cash used by investing activities (25.5) (21.1)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends on Common Stock (11.5) (11.0)
Distributions on AmeriGas Partners publicly held Common Units (13.7) (12.4)
Issuance of long-term debt 89.1 0.2
Repayment of long-term debt (27.0) (36.9)
AmeriGas Propane bank loans increase 27.0 8.0
UGI Utilities bank loans increase 41.1 24.3
Other bank loans increase 2.0 0.2
Issuance of AmeriGas Partners Common Units -- 37.5
Issuance of Common Stock 2.0 3.0
------ ------
Net cash provided by financing activities 109.0 12.9
------ ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 0.1 --
------ ------
Cash and cash equivalents increase $ 79.6 $ 21.2
====== ======
Cash and cash equivalents:
End of period $273.9 $108.7
Beginning of period 194.3 87.5
------ ------
Increase $ 79.6 $ 21.2
====== ======
See accompanying notes to consolidated financial statements.
-3-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars, except per share amounts)
1. BASIS OF PRESENTATION
UGI Corporation ("UGI") is a holding company that owns and operates
natural gas and electric utility, electricity generation, propane
distribution, energy marketing and related businesses in the United
States. Through foreign subsidiaries and joint-venture affiliates, UGI
also distributes propane in Austria, the Czech Republic, Slovakia, France
and China.
Our utility business is conducted through our wholly owned subsidiary, UGI
Utilities, Inc. ("UGI Utilities"). UGI Utilities owns and operates (1) a
natural gas distribution utility ("Gas Utility") in parts of eastern and
southeastern Pennsylvania and (2) an electricity distribution utility
("Electric Utility") and electricity generation business (which together
with Electric Utility are referred to herein as "Electric Operations") in
northeastern Pennsylvania.
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 Eagle
Propane, L.P. ("Eagle OLP"). AmeriGas Partners, AmeriGas OLP and Eagle OLP
are Delaware limited partnerships. UGI's wholly owned second-tier
subsidiary AmeriGas Propane, Inc. (the "General Partner") serves as the
general partner of AmeriGas Partners and AmeriGas OLP. AmeriGas OLP and
Eagle OLP (collectively referred to as "the Operating Partnerships")
comprise the largest retail propane distribution business in the United
States serving residential, commercial, industrial, motor fuel and
agricultural customers from locations in 46 states. We refer to AmeriGas
Partners and its subsidiaries together as "the Partnership" and the
General Partner and its subsidiaries, including the Partnership, as
"AmeriGas Propane." At December 31, 2002, the General Partner and its
wholly owned subsidiary Petrolane Incorporated ("Petrolane") collectively
held a 1% general partner interest and a 49.1% limited partner interest in
AmeriGas Partners, and effective 50.6% and 50.5% ownership interests in
AmeriGas OLP and Eagle OLP, respectively. Our limited partnership interest
in AmeriGas Partners comprises 24,525,004 Common Units. The remaining
49.9% interest in AmeriGas Partners comprises 24,907,354 publicly held
Common Units representing limited partner interests.
Our wholly owned subsidiary, UGI Enterprises, Inc. ("Enterprises"),
conducts an energy marketing business primarily in the Middle Atlantic
region of the United States through its wholly owned subsidiary, UGI
Energy Services, Inc. ("Energy Services"). Through other subsidiaries,
Enterprises (1) owns and operates a propane distribution business in
Austria, the Czech Republic and Slovakia ("FLAGA"); (2) owns and operates
a heating, ventilation and air-conditioning service business in the Middle
Atlantic states ("HVAC"); and (3) participates in propane joint-venture
businesses in France ("Antargaz") and China.
-4-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Millions of dollars, except per share amounts)
Our condensed consolidated financial statements include the accounts of
UGI and its majority-owned subsidiaries, 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's results of operations and net assets as
minority interests in the condensed consolidated statements of income and
balance sheets.
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. 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, 2002 ("Company's 2002 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. Basic earnings per share reflect the
weighted-average number of common shares outstanding. Diluted earnings per
share include the effects of dilutive stock options and common stock
awards. Shares used in computing basic and diluted earnings per share are
as follows:
Three Months Ended,
December 31,
-------------------
2002 2001
------ ------
Denominator (millions of shares):
Average common shares
outstanding for basic computation 27.792 27.401
Incremental shares issuable for stock
options and awards 0.602 0.412
------ ------
Average common shares outstanding for
diluted computation 28.394 27.813
====== ======
STOCK-BASED COMPENSATION. As permitted by Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), we apply the provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"), in recording compensation expense for grants of
stock, stock options, and other equity instruments to employees. We use
the intrinsic value method prescribed by APB 25 for our stock-based
employee compensation plans.
We recognized total stock-based compensation expense of $1.8 million and
$0.4 million in the three months ended December 31, 2002 and 2001,
respectively. If we had determined
-5-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Millions of dollars, except per share amounts)
stock-based compensation expense under the fair value method prescribed by
SFAS 123, net income and diluted earnings per share for the three months
ended December 31, 2002 and 2001 would have been as follows:
Three Months Ended
December 31,
------------------
2002 2001
------ ------
Net income, as reported $ 36.7 $ 24.1
Add: Stock and unit-based employee compensation expense
included in reported net income, net of related tax effects 1.1 0.3
Deduct: Total stock and unit-based employee compensation
expense determined under the fair value
method for all awards, net of related tax effects (1.3) (0.4)
------ ------
Pro forma net income $ 36.5 $ 24.0
------ ------
Basic earnings per share:
As reported $ 1.32 $ 0.88
Pro forma $ 1.31 $ 0.88
Diluted earnings per share:
As reported $ 1.29 $ 0.87
Pro forma $ 1.29 $ 0.86
------ ------
COMPREHENSIVE INCOME. The following table presents the components of
comprehensive income for the three months ended December 31, 2002 and
2001:
Three Months Ended
December 31,
------------------
2002 2001
------ ------
Net income $ 36.7 $ 24.1
Other comprehensive income 4.9 0.8
------ ------
Comprehensive income $ 41.6 $ 24.9
====== ======
Other comprehensive income principally comprises (1) changes in the fair
value of derivative commodity instruments and interest rate protection
agreements qualifying as hedges and (2) foreign currency translation
adjustments, net of reclassifications to net income.
USE OF ESTIMATES. We make estimates and assumptions when preparing
financial statements in conformity with accounting principles generally
accepted in the United States. 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.
RECLASSIFICATIONS. In order to more appropriately classify direct costs
associated with the Partnership's Prefilled Propane Xchange ("PPX(R)")
program, for the three months ended December 31, 2002 certain costs
previously reflected in operating and administrative
-6-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Millions of dollars, except per share amounts)
expenses have been included in cost of sales. We have reclassified $2.8
million of such costs incurred in the prior-year period to conform to the
current-period presentation.
2. SEGMENT INFORMATION
We have organized our business units into five reportable segments based
upon products sold, geographic location (domestic or international), or
regulatory environment. Our reportable segments are: (1) AmeriGas Propane;
(2) Gas Utility; (3) Electric Operations; (4) Energy Services; and (5) an
international propane segment comprising FLAGA and our international
propane equity investments ("International Propane").
The accounting policies of the five segments disclosed are the same as
those described in the Significant Accounting Policies note contained in
the Company's 2002 Annual Report. We evaluate our AmeriGas Propane and
International Propane segments' performance principally based on their
earnings before interest expense, income taxes, depreciation and
amortization, minority interests, and income from equity investees
("EBITDA"). Although we use EBITDA to evaluate these segments'
performance, 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. The
Company's definition of EBITDA may be different from that used by other
companies. We evaluate the performance of Gas Utility, Electric
Operations, and Energy Services principally based upon their earnings
before income taxes.
-7-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Millions of dollars, except per share amounts)
2. SEGMENT INFORMATION (CONTINUED)
Three Months Ended December 31, 2002:
Reportable Segments
-----------------------------------------------------------
AmeriGas Gas Electric Energy International Corporate
Total Elims. Propane Utility Operations Services Propane & Other (a)
-------- -------- -------- -------- ---------- -------- ------------- -----------
Revenues $ 739.9 $ (0.6) $ 445.0 $ 145.1 $ 23.3 $ 103.1 $ 14.3 $ 9.7
======== ======== ======== ======== ======== ======== ======== ========
Segment profit (loss):
EBITDA $ 131.6 $ -- $ 81.7 $ 38.0 $ 6.1 $ 4.5 $ 1.2 $ 0.1
Depreciation and amortization (24.2) -- (17.5) (4.5) (0.8) (0.3) (0.9) (0.2)
-------- -------- -------- -------- ---------- -------- ------------- ----------
Operating income (loss) 107.4 -- 64.2 33.5 5.3 4.2 0.3 (0.1)
Income from equity investees 1.9 -- 0.2 -- -- -- 1.7 --
Interest expense (28.2) -- (22.7) (3.7) (0.6) -- (1.1) (0.1)
Minority interests (20.5) -- (20.5) -- -- -- -- --
-------- -------- -------- -------- ---------- -------- ------------- ----------
Income (loss) before income taxes
and subsidiary preferred stock
dividends $ 60.6 $ -- $ 21.2 $ 29.8 $ 4.7 $ 4.2 $ 0.9 $ (0.2)
======== ======== ======== ======== ======== ======== ======== ========
Segment assets (at period end) $2,873.8 $ (36.3) $1,650.1 $ 731.1 $ 107.6 $ 90.8 $ 152.3 $ 178.2
======== ======== ======== ======== ======== ======== ======== ========
Investments in equity investees
(at period end) $ 39.3 $ -- $ 3.6 $ -- $ 10.5 $ -- $ 25.2 $ --
======== ======== ======== ======== ======== ======== ======== ========
Goodwill and excess reorganization
value (at period end) $ 649.5 $ -- $ 590.2 $ -- $ -- $ -- $ 56.6 $ 2.7
======== ======== ======== ======== ======== ======== ======== ========
Three Months Ended December 31, 2001:
Reportable Segments
------------------------------------------------------------------------
AmeriGas Gas Electric Energy International Corporate
Total Elims. Propane Utility Operations Services Propane & Other (a)
-------- -------- -------- -------- ---------- -------- ------------- -----------
Revenues $ 619.4 $ (0.5) $ 371.4 $ 121.3 $ 20.2 $ 83.7 $ 13.7 $ 9.6
======== ======== ======== ======== ======== ======== ======== ========
Segment profit (loss):
EBITDA $ 97.0 $ -- $ 58.0 $ 29.8 $ 3.5 $ 2.4 $ 2.5 $ 0.8
Depreciation and amortization (23.2) -- (16.3) (4.9) (0.8) (0.2) (0.7) (0.3)
-------- -------- ------- -------- -------- -------- -------- --------
Operating income 73.8 -- 41.7 24.9 2.7 2.2 1.8 0.5
Income from equity investees 3.8 -- 0.3 -- -- -- 3.5 --
Interest expense (28.2) -- (22.7) (3.6) (0.6) -- (1.2) (0.1)
Minority interests (9.1) -- (9.1) -- -- -- -- --
-------- -------- ------- -------- -------- -------- -------- --------
Income before income taxes and
subsidiary preferred stock
dividends $ 40.3 $ -- $ 10.2 $ 21.3 $ 2.1 $ 2.2 $ 4.1 $ 0.4
======== ======== ======= ======== ======== ======== ======== ========
Segment assets (at period end) $2,642.0 $ (30.5) $1,543.0 $ 713.4 $ 106.3 $ 59.1 $ 145.1 $ 105.6
======== ======== ======= ======== ======== ======== ======== ========
Investments in equity investees
(at period end) $ 47.3 $ -- $ 3.4 $ -- $ 10.4 $ -- $ 33.5 $ --
======== ======== ======= ======== ======== ======== ======== ========
Goodwill and excess reorganization
value (at period end) $ 639.9 $ -- $ 589.0 $ -- $ -- $ -- $ 47.4 $ 3.5
======== ======== ======= ======== ======== ======== ======== ========
(a) Principally comprises UGI, UGI Enterprises' HVAC operations, and UGI
Enterprises' corporate and general expenses.
-8-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Millions of dollars, except per share amounts)
3. INTANGIBLE ASSETS
The Company's intangible assets comprise the following:
December 31, September 30,
2002 2002
------------ -------------
Subject to amortization:
Customer relationships, noncompete
agreements and other $ 36.5 $ 36.1
Accumulated amortization (11.4) (10.3)
-------- --------
$ 25.1 $ 25.8
======== ========
Not subject to amortization:
Goodwill $ 556.2 $ 551.6
Excess reorganization value 93.3 93.3
-------- --------
$ 649.5 $ 644.9
======== ========
The change in the carrying amount of goodwill from September 30, 2002 to
December 31, 2002 is the result of goodwill associated with a business
acquisition and the effects of foreign currency translation. Amortization
expense of intangible assets for the three months ended December 31, 2002
and 2001 was $0.9 million and $1.1 million, respectively. Our expected
aggregate amortization expense of intangible assets for the next five
fiscal years is as follows: Fiscal 2003 - $3.8 million; Fiscal 2004 - $3.4
million; Fiscal 2005 - $3.0 million; Fiscal 2006 - $2.6 million; Fiscal
2007 - $1.9 million.
4. CONVERSION OF AMERIGAS PARTNERS SUBORDINATED UNITS
In December 2002, the General Partner determined that the cash-based
performance and distribution requirements for the conversion of the
remaining 9,891,072 Subordinated Units of AmeriGas Partners, all of which
were held by the General Partner, had been met in respect of the quarter
ended September 30, 2002. As a result, these Subordinated Units were
converted to a like number of Common Units effective November 18, 2002.
Concurrent with the Subordinated Unit conversion, the Company recorded a
$157.0 million increase in common stockholders' equity, and a
corresponding decrease in minority interests in AmeriGas Partners,
associated with gains from sales of Common Units by AmeriGas Partners in
conjunction with, and subsequent to, the Partnership's April 19, 1995
initial public offering. These gains were determined in accordance with
the guidance in SEC Staff Accounting Bulletin No. 51, "Accounting for
Sales of Common Stock by a Subsidiary." The gains resulted because the
public offering prices of the AmeriGas Partners Common Units exceeded the
associated carrying amount of our investment in the Partnership on the
dates of their sale. Due to the preference nature of the Common Units, the
Company was precluded from recording these gains until the Subordinated
Units converted to Common Units. No deferred income taxes were recorded on
these gains due to the Company's intent to hold its investment in the
Partnership indefinitely. The changes to the Company's balance sheet
resulting from the Subordinated Unit conversion had no effect on the
Company's net income or cash flow. The conversion of the Subordinated
-9-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Millions of dollars, except per share amounts)
Units did not result in an increase in the number of AmeriGas Partners
limited partner units outstanding.
5. LONG-TERM DEBT
On December 3, 2002, AmeriGas Partners issued $88 million face amount of
8.875% Senior Notes due 2011 at an effective interest rate of 8.30%. The
proceeds, net of underwriters' fees, of approximately $89.1 million were
used on January 6, 2003, subsequent to the end of the quarter, to redeem
prior to maturity AmeriGas Partners' $85 million face amount of 10.125%
Senior Notes due 2007 at a redemption price of 102.25%, plus accrued
interest. The Company will recognize a pre-tax loss, net of minority
interest, of approximately $1.5 million in the quarter ending March 31,
2003 related to the redemption premium and other associated costs and
expenses.
On October 1, 2002, UGI Utilities repaid $26 million of its maturing 6.73%
Medium-Term Notes.
6. ENERGY SERVICES ACCOUNTS RECEIVABLE SECURITIZATION FACILITY
Energy Services has a receivables purchase facility ("Receivables
Facility") with an issuer of receivables-backed commercial paper expiring
on November 30, 2004. Under the Receivables Facility, Energy Services
transfers, on an ongoing basis and without recourse, its trade accounts
receivable to its wholly owned, special purpose, bankruptcy-remote
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 these receivables for up to $50 million in proceeds
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. In accordance with a servicing arrangement,
Energy Services continues to service, administer and collect trade
receivables on behalf of the commercial paper issuer and ESFC. 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."
During the three months ended December 31, 2002, Energy Services sold
$102.7 million of trade receivables to ESFC. During that period, there
were no sales of receivables to the commercial paper conduit. At December
31, 2002, no receivables had been sold to the commercial paper conduit and
removed from the balance sheet.
-10-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Millions of dollars, except per share amounts)
7. COMMITMENTS AND CONTINGENCIES
The Partnership has succeeded to certain lease guarantee obligations of
Petrolane relating to Petrolane's divestiture of nonpropane operations
before its 1989 acquisition by QFB Partners. Future lease payments under
these leases total approximately $19.0 million at December 31, 2002. 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.
In May 2001, Petrolane filed a declaratory judgment action in the Delaware
Chancery Court seeking confirmation of Texas Eastern's indemnification
obligations and judicial supervision of Texas Eastern's dissolution to
ensure that its indemnification obligations to Petrolane are paid or
adequately provided for in accordance with law. Those proceedings are
pending. In a Liquidation and Winding Up Agreement dated September 17,
2002, PanEnergy Corporation ("PanEnergy"), Texas Eastern's sole
stockholder, agreed to assume 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 is expected 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 ("CPC"), Columbia Propane, L.P. ("CPLP"), CP
Holdings, Inc. ("CPH," and together with CPC 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 CPC and CPH and substantially all of the partnership interests of
CPLP. Under the terms of an earlier acquisition agreement (the "1999
Acquisition Agreement"), the Company Parties agreed to indemnify the
former general partners of National Propane Partners, L.P. (a predecessor
company of the Columbia Propane businesses) and an affiliate
(collectively, "National General Partners") against certain income tax and
other losses that they may sustain as a result of the 1999 acquisition by
CPLP of National Propane Partners, L.P. (the "1999 Acquisition") or the
operation of the business after the 1999 Acquisition ("National Claims").
At December 31, 2002, the potential amount payable under this indemnity by
the Company Parties was approximately $71.0 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.
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UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Millions of dollars, except per share amounts)
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 to apportion certain
losses resulting from National Claims to the extent such losses result
from the 2001 Acquisition itself.
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 (1) MGPs were
formerly operated by it or owned or operated by its former subsidiaries
and (2) either environmental agencies or private parties are investigating
the extent of environmental contamination or performing environmental
remediation. UGI Utilities is currently litigating two claims against it
relating to out-of-state sites.
Management believes that under applicable law UGI Utilities should not be
liable in those instances in which a former subsidiary 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 the
subsidiary's separate corporate form should be disregarded.
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. We 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 but could be material to our operating results
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UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Millions of dollars, except per share amounts)
or cash flows in future periods depending on the nature and timing of
future developments with respect to these matters and the amounts of
future operating results and cash flows.
8. SUBSEQUENT EVENT - STOCK SPLIT
On January 29, 2003, UGI's Board of Directors approved a 3-for-2 common
stock split. The Company will issue one additional common share for every
two common shares outstanding. The new shares will be distributable April
1, 2003 to shareholders of record February 28, 2003. Earnings per share
and dividends declared per share for the three months ended December 31,
2002 and 2001 have been reflected on a pre-split basis.
The following table presents pro forma basic and diluted earnings per
share to reflect the effect of the 3-for-2 common stock split.
Three Months Ended
December 31,
---------------------
2002 2001
-------- --------
Basic earnings per share:
As reported $ 1.32 $ 0.88
Pro forma $ 0.88 $ 0.59
Diluted earnings per share:
As reported $ 1.29 $ 0.87
Pro forma $ 0.86 $ 0.58
-------- --------
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UGI CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
ANALYSIS OF RESULTS OF OPERATIONS
The following analyses compare our results of operations for the three months
ended December 31, 2002 ("2002 three-month period") with the three months ended
December 31, 2001 ("2001 three-month period"). Our analyses of results of
operations should be read in conjunction with the segment information included
in Note 2 to the Condensed Consolidated Financial Statements.
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UGI CORPORATION AND SUBSIDIARIES
2002 THREE-MONTH PERIOD COMPARED WITH 2001 THREE-MONTH PERIOD
Increase
Three Months Ended December 31, 2002 2001 (Decrease)
------ ------ --------------------
(Dollars in millions)
AMERIGAS PROPANE:
Revenues $445.0 $371.4 $ 73.6 19.8%
Total margin (a) $201.6 $172.2 $ 29.4 17.1%
EBITDA (b) $ 81.7 $ 58.0 $ 23.7 40.9%
Operating income $ 64.2 $ 41.7 $ 22.5 54.0%
Retail gallons sold (millions) 306.6 265.6 41.0 15.4%
Degree days -% colder (warmer) than normal (c) 1.1 (15.3) -- --
GAS UTILITY:
Revenues $145.1 $121.3 $ 23.8 19.6%
Total margin (a) $ 56.7 $ 46.0 $ 10.7 23.3%
Operating income $ 33.5 $ 24.9 $ 8.6 34.5%
System throughput - billions of cubic feet ("bcf") 23.3 19.4 3.9 20.1%
Degree days -% colder (warmer) than normal 6.4 (19.2) -- --
ELECTRIC OPERATIONS:
Revenues $ 23.3 $ 20.2 $ 3.1 15.3%
Total margin (a) $ 10.0 $ 7.5 $ 2.5 33.3%
Operating income $ 5.3 $ 2.7 $ 2.6 96.3%
Electric Utility distribution sales - millions
of kilowatt hours ("gwh") 244.4 227.9 16.5 7.2%
ENERGY SERVICES:
Revenues $103.1 $ 83.7 $ 19.4 23.2%
Total margin (a) $ 7.1 $ 4.6 $ 2.5 54.3%
Operating income $ 4.2 $ 2.2 $ 2.0 90.9%
INTERNATIONAL PROPANE:
Revenues $ 14.3 $ 13.7 $ 0.6 4.4%
Total margin (a) $ 6.1 $ 6.7 $ (0.6) (9.0)%
EBITDA (b) $ 1.2 $ 2.5 $ (1.3) (52.0)%
Operating income $ 0.3 $ 1.8 $ (1.5) (83.3)%
Income from equity investees $ 1.7 $ 3.5 $ (1.8) (51.4)%
(a) Total margin represents total revenues less cost of sales and, with
respect to Electric Operations, revenue-related taxes, i.e. Electric
Utility gross receipts taxes. For financial statement purposes,
revenue-related taxes are included in "Utility taxes other than income
taxes" on the Condensed Consolidated Statements of Income.
(b) EBITDA (earnings before interest expense, income taxes, depreciation and
amortization, minority interests, and income from equity investees) 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. EBITDA is included to provide additional
information for evaluating the performance of AmeriGas Propane and
International Propane. The Company's definition of EBITDA may be different
from that used by other companies.
(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 continental United States.
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UGI CORPORATION AND SUBSIDIARIES
AMERIGAS PROPANE. Nationwide temperatures based upon heating degree day
statistics provided by NOAA were 1.1% colder than normal in the 2002 three-month
period compared with temperatures that were 15.3% warmer than normal in the
prior-year three-month period. Retail gallons sold increased 15.4% principally
as a result of the colder 2002 three-month period weather. Commercial and
industrial sales in both three-month periods were negatively affected by a
sluggish U.S. economy. Low margin wholesale volumes increased 6.1 million
gallons primarily reflecting the effects of the colder 2002 three-month period
weather.
Retail propane revenues were $361.8 million in the 2002 three-month period, an
increase of $63.0 million, reflecting a $46.1 million increase as a result of
the greater retail volumes sold and a $16.9 million increase as a result of
higher average selling prices. Wholesale propane revenues increased $8.4 million
reflecting higher average wholesale selling prices and the previously mentioned
increase in wholesale volumes sold. The higher average retail and wholesale
selling prices in the 2002 three-month period reflect higher propane commodity
prices. Total cost of sales increased $44.2 million reflecting the effects of
the greater retail and wholesale volumes sold and the increase in the commodity
price of propane.
Total margin increased $29.4 million principally as a result of the
weather-related increase in retail gallons sold during the 2002 three-month
period and, to a lesser extent, a $4.4 million increase in margin from PPX(R).
The increase in PPX(R) margin reflects higher volumes, and greater unit margins
to fund the purchase of grill cylinder overfill protection devices ("OPDs") in
order to meet National Fire Protection Association ("NFPA") guidelines. These
guidelines require that propane grill cylinders refilled after April 1, 2002, be
fitted with OPDs. The extent to which this greater level of PPX(R) margin is
sustainable will depend upon a number of factors including the continuing rate
of OPD valve replacement and competitive market conditions.
The $23.7 million increase in EBITDA (earnings before interest expense, income
taxes, depreciation and amortization, minority interests and income from equity
investees) in the 2002 three-month period principally reflects the previously
mentioned higher total margin and a $2.1 million increase in other income
partially offset by a $7.8 million increase in the Partnership's operating and
administrative expenses. Although EBITDA is not a measure of performance or
financial condition under accounting principles generally accepted in the United
States, it is included in this analysis to provide additional information for
evaluating the Partnership's ability to pay and declare the Minimum Quarterly
Distribution of $0.55 ("MQD") and for evaluating the Partnership's performance.
The Partnership's definition of EBITDA may be different from the definition of
EBITDA used by other companies. Notwithstanding the significant increase in
retail volumes sold in the 2002 three-month period, payroll and benefits expense
increased only $2.0 million principally reflecting the full-period benefit of
the consolidation of 90 Columbia Propane and AmeriGas Propane districts. In
addition, 2002 three-month period operating and administrative expenses reflect
higher provisions for doubtful accounts due in large part to the increased
sales; greater general insurance and litigation expense; and an increase in
delivery vehicle expenses due in large part to the greater retail volumes
delivered during the 2002 three-month period. Other income in the prior-year
three-month period was reduced by a $2.1 million loss from declines in the value
of propane commodity option contracts. Operating income increased less than the
increase in EBITDA principally as a result of higher depreciation expense
associated with OPDs.
GAS UTILITY. Gas Utility results in the 2002 three-month period benefited from
significantly colder weather. Temperatures in Gas Utility's service territory
during the 2002 three-month period were
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UGI CORPORATION AND SUBSIDIARIES
6.4% colder than normal compared to weather that was 19.2% warmer than normal in
the prior-year three-month period. Total system throughput increased 3.9 bcf
principally as a result of the colder weather's effect on sales to firm-
residential, commercial and industrial ("core-market") customers and core-market
customer growth.
Gas Utility revenues increased $23.8 million in the 2002 three-month period
reflecting a $20.1 million increase in core-market and firm delivery service
revenues due to greater volumes sold and delivered. Gas Utility cost of gas
increased $13.2 million principally reflecting the effects of the higher
core-market sales.
The increase in Gas Utility total margin in the 2002 three-month period
principally reflects a $9.9 million increase in total core-market margin
principally as a result of the higher core-market and firm delivery service
volumes. These increases were partially offset by a decline in total margin from
interruptible customers resulting from the flowback of certain interruptible
margin to core-market customers beginning December 1, 2001 pursuant to the June
29, 2000 Gas Restructuring Order ("Gas Restructuring Order"). Interruptible
customers are those customers who have the ability to switch to alternate fuels.
Gas Utility operating income increased $8.6 million principally reflecting the
previously mentioned increase in total margin partially offset by slightly
higher operating and administrative expenses, principally provisions for
doubtful accounts and incentive compensation costs, and a $1.5 million decline
in other income. The decline in other income reflects, among other things, lower
interest income on purchased gas cost undercollections, reduced non-tariff
service income and lower pension income. Depreciation expense declined $0.4
million due to a change effective April 1, 2002 in the estimated useful lives of
Gas Utility's natural gas distribution assets resulting from an asset life study
required by the Pennsylvania Public Utility Commission.
ELECTRIC OPERATIONS. The increase in Electric Utility's kilowatt-hour sales in
the 2002 three-month period principally reflects the impact of colder weather on
heating-related sales. Temperatures based upon heating degree days in the 2002
three-month period were approximately 9.5% colder than normal compared with
temperatures that were approximately 17.1% warmer than normal in the comparable
prior-year period.
Electric Operations revenues increased $3.1 million reflecting the greater
Electric Utility distribution sales as well as greater sales of electricity by
our electricity generation business to third parties. Prior to September 2002, a
significant amount of the power produced by our electricity generation business
was sold to Electric Utility. Beginning September 2002, Electric Utility began
purchasing substantially all of its power needs under fixed-price energy and
capacity contracts with electricity suppliers, and our electricity generation
business began selling substantially all of its electricity production on the
spot market. Electric Operations cost of sales increased only $0.2 million in
the 2002 three-month period, notwithstanding the more significant increase in
Electric Operations revenues, reflecting lower Electric Utility per-unit
purchased power costs.
Electric Operations total margin increased $2.5 million, and operating income
increased $2.6 million, reflecting the increase in Electric Utility sales and
the margin benefit of lower Electric Utility per-unit purchased power costs.
ENERGY SERVICES. Revenues from Energy Services increased $19.4 million
reflecting higher volumes from an increase in the number of customers, the
effects of colder 2002 three-month period weather,
-17-
UGI CORPORATION AND SUBSIDIARIES
and higher average natural gas prices. Total margin was higher in the 2002
three-month period principally reflecting higher average unit margins and the
increase in sales volumes. Operating expenses were slightly higher in the 2002
three-month period reflecting the impact of growth initiatives on administrative
expenses.
INTERNATIONAL PROPANE. FLAGA's results during the 2002 three-month period were
negatively impacted by warmer weather. Although temperatures for the entire 2002
three-month period were only 1.4% warmer than normal and 3.0% warmer than last
year, temperatures in November 2002 were significantly warmer than normal. As a
result, the volume and related margin effects from colder weather late in the
2002 three-month period were not fully realized. FLAGA's revenues were higher
during the 2002 three-month period, notwithstanding the lower volumes,
principally as a result of the stronger euro versus the U.S. dollar. EBITDA and
operating income declined in the 2002 three-month period principally reflecting
the effects of the decline in sales on FLAGA's total margin and lower other
income.
Income from our international propane equity investees declined principally as a
result of lower income from AGZ Holdings, the parent company of Antargaz.
Antargaz retail propane gallons sold during the 2002 three-month period were
lower than in the prior-year period principally as a result of weather that was
approximately 20% warmer than normal. In addition, the prior year's unit margins
benefited substantially from declines in propane product costs. Income from our
investments in Antargaz in the 2001 three-month period also included $0.3
million of interest income from our debt investments in Antargaz. AGZ Holdings
redeemed these debt investments in July 2002.
FINANCIAL CONDITION AND LIQUIDITY
FINANCIAL CONDITION
The Company's long-term debt outstanding totaled $1,343.3 million at December
31, 2002 (including current maturities of $123.4 million) compared to $1,275.7
million of long-term debt (including current maturities of $148.7 million) at
September 30, 2002. On December 3, 2002, AmeriGas Partners issued $88 million
face amount of 8.875% Senior Notes due 2011 at an effective interest rate of
8.30%. The net proceeds of approximately $89.1 million, which are included in
cash and cash equivalents at December 31, 2002, were used on January 6, 2003,
subsequent to the end of the quarter, to redeem prior to maturity AmeriGas
Partners' $85 million face amount of 10.125% Senior Notes due April 2007 at a
redemption price of 102.25%, plus accrued interest. The Company will recognize a
pre-tax loss, net of minority interest, of approximately $1.5 million in the
quarter ending March 31, 2003 relating to the redemption premium and other
associated costs and expenses. On October 1, 2002, UGI Utilities repaid $26
million of maturing Medium-Term Notes.
AmeriGas OLP's Second Amended and Restated Bank Credit Agreement consists of a
$100 million Revolving Credit Facility and a $75 million Acquisition Facility.
At December 31, 2002, there was $37 million outstanding under the Revolving
Credit Facility. Issued and outstanding letters of credit under the Revolving
Credit Facility, which reduce available borrowing capacity, totaled $22.2
million at December 31, 2002. At December 31, 2002, UGI Utilities had
commitments under revolving credit agreements providing for borrowings of up to
$97 million. These agreements expire from June 2003 through June 2005. UGI
Utilities currently expects to renew those agreements expiring in June 2003
prior to their maturity. UGI Utilities also has a shelf registration statement
with the SEC under which it may issue up to an additional $85 million of debt
securities.
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UGI CORPORATION AND SUBSIDIARIES
During the three months ended December 31, 2002, Energy Services sold $102.7
million of trade receivables to its wholly owned, bankruptcy-remote subsidiary,
ESFC. Because Energy Services' existing cash balances and cash flow from
operations were sufficient to meet its liquidity needs, there were no sales of
receivables to the commercial paper conduit during the three months ended
December 31, 2002.
During the three months ended December 31, 2002, the Partnership declared and
paid the minimum quarterly distribution of $0.55 (the "MQD") on all limited
partner units for the quarter ended September 30, 2002. The MQD for the quarter
ended December 31, 2002 will be paid on February 18, 2003 to holders of record
on February 10, 2003. Effective November 18, 2002, the 9,891,072 Subordinated
Units held by the General Partner were converted to Common Units (see
"Conversion of AmeriGas Partners Subordinated Units" below). The ability of the
Partnership to declare and pay the MQD on limited partner units in the future
depends upon a number of factors. These factors include (1) the level of
Partnership earnings; (2) the cash needs of the Partnership's operations
(including cash needed for maintaining and increasing operating capacity); (3)
changes in operating working capital; and (4) the Partnership's ability to
borrow under its Bank Credit Agreement, to refinance maturing debt, and to
increase its long-term debt. Some of these factors are affected by conditions
beyond our control including weather, competition in markets we serve, and the
cost of propane.
CONVERSION OF AMERIGAS PARTNERS SUBORDINATED UNITS
In December 2002, the General Partner determined that the cash-based performance
and distribution requirements for the conversion of the remaining 9,891,072
Subordinated Units of AmeriGas Partners, all of which were held by the General
Partner, had been met in respect of the quarter ended September 30, 2002. As a
result, these Subordinated Units were converted to a like number of Common Units
effective November 18, 2002. Concurrent with the Subordinated Unit conversion,
the Company recorded a $157.0 million increase in common stockholders' equity,
and a corresponding decrease in minority interests in AmeriGas Partners,
associated with gains from sales of Common Units by AmeriGas Partners in
conjunction with, and subsequent to, the Partnership's April 19, 1995 initial
public offering. These gains were determined in accordance with the guidance in
SEC Staff Accounting Bulletin No. 51, "Accounting for Sales of Common Stock by a
Subsidiary." The gains resulted because the public offering prices of the
AmeriGas Partners Common Units exceeded the associated carrying amount of our
investment in the Partnership on the dates of their sale. Due to the preference
nature of the Common Units, the Company was precluded from recording these gains
until the Subordinated Units converted to Common Units. No deferred income taxes
were recorded on these gains due to the Company's intent to hold its investment
in the Partnership indefinitely. The changes to the Company's balance sheet
resulting from the Subordinated Unit conversion had no effect on the Company's
net income or cash flow. The conversion of the Subordinated Units did not result
in an increase in the total number of AmeriGas Partners limited partner units
outstanding.
SUBSEQUENT EVENT - UGI COMMON STOCK SPLIT AND DIVIDEND INCREASE
On January 29, 2003, UGI's Board of Directors approved a 3-for-2 common stock
split. The Company will issue one additional common share for every two common
shares outstanding. The new shares will be distributable April 1, 2003 to
shareholders of record February 28, 2003. Earnings per share and dividends
declared per share for the three months ended December 31, 2002 and 2001 have
been reflected on a pre-split basis. Also on January 29, 2003, UGI's Board of
Directors approved an increase in the quarterly dividend rate on UGI Common
Stock to $0.4275 per pre-split
-19-
UGI CORPORATION AND SUBSIDIARIES
common share ($0.2850 per share after the common stock split), or $1.71 per
pre-split common share ($1.14 per share after the common stock split) on an
annual basis. The dividend is payable April 1, 2003 to shareholders of record on
February 28, 2003.
CASH FLOWS
Our cash flows are seasonal and are generally greatest during the second and
third fiscal quarters when customers pay bills incurred during the heating
season and are typically at their lowest levels during the first and fourth
fiscal quarters. Accordingly, cash flows from operations during the three months
ended December 31, 2002 are not necessarily indicative of cash flows to be
expected for a full year. Our consolidated cash and cash equivalents totaled
$273.9 million at December 31, 2002 compared to $194.3 million at September 30,
2002. The higher consolidated cash and cash equivalents balance at December 31,
2002 includes the previously mentioned $89.1 million of proceeds from the
December 3, 2002 issuance of $88 million face amount of AmeriGas Partners Senior
Notes. Included in consolidated cash and cash equivalents at December 31, 2002
and September 30, 2002 are $123.5 million and $114.0 million, respectively, of
cash and cash equivalents held by UGI.
OPERATING ACTIVITIES. Cash used by operating activities was $4.0 million during
the 2002 three-month period compared to cash provided by operating activities of
$29.4 million in the prior-year three-month period. Cash flow from operating
activities before changes in working capital was $92.5 million in the 2002
three-month period compared to $54.7 million in the prior-year three-month
period principally reflecting the significant increase in 2002 three-month
period operating results. Changes in operating working capital used $96.5
million of operating cash flow during the three months ended December 31, 2002
compared with $25.3 million during the prior-year three-month period principally
reflecting the effects of the higher natural gas and propane volumes sold and
higher natural gas and propane commodity prices.
INVESTING ACTIVITIES. We spent $25.7 million for property, plant and equipment
during the three months ended December 31, 2002, an increase of $2.3 million
over the prior-year three-month period, principally reflecting slightly higher
Partnership capital expenditures. Proceeds from sales of assets were lower
during the 2002 three-month period principally due to lower sales of Columbia
Propane excess assets. During the three months ended December 31, 2002, the
Partnership acquired a propane distribution business for $2.2 million.
FINANCING ACTIVITIES. We paid cash dividends on UGI Common Stock of $11.5
million and $11.0 million during the three months ended December 31, 2002 and
2001, respectively. The Partnership paid the MQD on all publicly held limited
partner units (as well as the limited partner units we owned). In December 2002,
AmeriGas Partners received $89.1 million of net proceeds from the issuance of
$88 million face amount of 8.875% Senior Notes due 2011. On January 6, 2003,
subsequent to the end of the quarter, AmeriGas Partners used the net proceeds to
repay prior to maturity the remaining $85 million face amount of 10.125% Senior
Notes at a redemption price of 102.25%, plus accrued interest. During the three
months ended December 31, 2002, UGI Utilities and AmeriGas OLP had greater
borrowings under their revolving credit facilities reflecting in large part
higher cash needs to fund changes in operating working capital. In October 2002,
UGI Utilities repaid $26 million of maturing Medium-Term Notes. During the 2001
three-month period, the Partnership received net proceeds of $37.5 million from
its public offering of 1,843,047 Common Units. In addition, during the
prior-year period, AmeriGas OLP repaid $20 million of Acquisition
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UGI CORPORATION AND SUBSIDIARIES
Facility borrowings and AmeriGas Partners redeemed prior to maturity $15 million
face value of its 10.125% Senior Notes.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") recently issued SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure" ("SFAS
148"); SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities" ("SFAS 146"); and FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45").
SFAS 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), to provide alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based employee compensation.
In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. As permitted by SFAS 123, we currently apply
the provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), in recording compensation
expense for grants of stock, stock options, and other equity instruments to
employees. We adopted the disclosure provisions of SFAS 148 during the quarter
ended December 31, 2002 (see Note 1 to Condensed Consolidated Financial
Statements).
SFAS 146 addresses accounting for costs associated with exit or disposal
activities and replaces the guidance in Emerging Issues Task Force ("EITF") No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity." Generally, SFAS 146 requires that a liability for
costs associated with an exit or disposal activity, including contract
termination costs, employee termination benefits and other associated costs, be
recognized when the liability is incurred. Under EITF No. 94-3, a liability was
recognized at the date an entity committed to an exit plan. SFAS 146 became
effective for disposal activities initiated after December 31, 2002. The initial
adoption of the provisions of SFAS 146 did not affect our financial position or
results of operations.
FIN 45 expands the existing disclosure requirements for guarantees and requires
that companies recognize, at the inception of a guarantee, a liability for the
fair value of the obligations undertaken when issuing the guarantee. The initial
recognition and measurement provisions of FIN 45 are effective for guarantees
issued or modified after December 31, 2002. The disclosure requirements of FIN
45 are included in Note 7 to Condensed Consolidated Financial Statements. We do
not believe the application of FIN 45 will have a material effect on our
financial position or results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risk exposures are (1) market prices for propane, 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 propane is principally a result of
market forces reflecting changes in supply and demand for propane and any other
energy commodities. The Partnership's profitability is sensitive to changes in
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UGI CORPORATION AND SUBSIDIARIES
propane supply costs, and the Partnership generally attempts to pass on
increases in such costs to customers. The Partnership may not, however, always
be able to pass through product cost increases fully, particularly when product
costs rise rapidly. In order to reduce the volatility of the Partnership's
propane market price risk, it 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. International
Propane's profitability is also sensitive to changes in propane supply costs. On
occasion, FLAGA uses derivative commodity instruments to reduce market risk
associated with a portion of its propane purchases. Over-the-counter derivative
commodity instruments utilized by the Partnership and FLAGA 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 cost of natural gas it sells to its customers. The
recovery clauses provide for a periodic adjustment for the difference between
the total amount actually collected from customers and the recoverable costs
incurred. Because of this ratemaking mechanism, there is limited commodity price
risk associated with our Gas Utility operations.
Prior to September 2002, Electric Utility purchased all of its electric power
needs, in excess of the electric power it obtained from its interests in
electric generating facilities, under power supply arrangements of various
lengths and on the spot market. Beginning September 2002, Electric Utility began
purchasing its power needs from electricity suppliers under fixed-price energy
and capacity contracts, and to a much lesser extent on the spot market, and our
electricity generation business began selling its electricity production on the
spot market to third parties. Prices for electricity can be volatile especially
during periods of high demand or tight supply. Although the generation component
of Electric Utility's rates is subject to various rate cap provisions, Electric
Utility's fixed-price contracts with electricity suppliers mitigate most risks
associated with offering customers a fixed price during the contract periods.
However, should any of the suppliers under these contracts fail to provide
electric power under the terms of the power and capacity contracts, increases,
if any, in the cost of replacement power or capacity would negatively impact
Electric Utility results. In order to reduce this non-performance risk, Electric
Utility has diversified its purchases across several suppliers and entered into
bilateral collateral arrangements with certain of them.
In order to manage market price risk relating to substantially all of Energy
Services' forecasted fixed-price sales of natural gas, we purchase
exchange-traded natural gas futures contracts or enter 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 may require Energy Services to make
daily cash deposits in margin accounts with brokers. 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.
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UGI CORPORATION AND SUBSIDIARIES
Our variable-rate debt includes borrowings under AmeriGas OLP's Bank 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 December 31,
2002, combined borrowings outstanding under these agreements totaled $205.4
million. Our long-term debt is typically issued at fixed rates of interest based
upon market rates for debt having similar terms and credit ratings. As these
long-term debt issues mature, we may refinance such debt with new debt having
interest rates reflecting then-current market conditions. This debt may have an
interest rate that is more or less than the refinanced debt. In order to reduce
interest rate risk associated with near-term forecasted issuances of fixed-rate
debt, from time to time we enter into interest rate protection agreements.
The primary currency for which the Company has exchange rate risk is the U.S.
dollar versus the euro. We do not currently use derivative instruments to hedge
foreign currency exposure associated with our international propane businesses,
principally FLAGA and Antargaz. As a result, the U.S. dollar value of our
foreign-denominated assets and liabilities will fluctuate with changes in the
associated foreign currency exchange rates. With respect to FLAGA, the net
effect of changes in foreign currency exchange rates on assets and liabilities
has been significantly limited because FLAGA's U.S. dollar denominated financial
instrument assets and liabilities are substantially equal in amount. With
respect to our equity investment in Antargaz, a 10% decline in the value of the
euro versus the U.S. dollar would reduce the book value of this investment by
approximately $2.2 million, which amount would be reflected in other
comprehensive income.
The following table summarizes the fair values of unsettled market risk
sensitive derivative instruments held at December 31, 2002. It also includes the
changes in fair value that would result if there were adverse changes in (1) the
market price of propane of 10 cents per gallon; (2) the market price of natural
gas of 50 cents per dekatherm; and (3) interest rates on ten-year U.S. treasury
notes of 50 basis points:
Fair Change in
Value Fair Value
----- ----------
(Millions of dollars)
December 31, 2002:
Propane commodity price risk $ 8.8 $ (6.1)
Natural gas commodity price risk 9.3 (6.4)
Interest rate risk (3.2) (3.2)
Because the Company's derivative instruments generally qualify as hedges under
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," 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.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation of the effectiveness of the design and operation of the Company's
disclosure controls and procedures was carried out within the 90-day period
prior to the filing of this quarterly report by the Company under the
supervision and with the participation of the Company's management, including
the Chief Executive Officer and Chief Financial Officer. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure
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UGI CORPORATION AND SUBSIDIARIES
controls and procedures have been designed and are being operated in a manner
that provides reasonable assurance that the information required to be disclosed
by the Company in reports filed under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms. A controls system, no matter how well designed and
operated, cannot provide absolute assurance that the objectives of the controls
system are met, and no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within a company have
been detected. Subsequent to the date of the most recent evaluation of the
Company's internal controls, there were no significant changes in the Company's
internal controls or in other factors that could significantly affect the
internal controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.
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UGI CORPORATION AND SUBSIDIARIES
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits:
99 Certification by the Chief Executive Officer and Chief Financial
Officer relating to the Registrant's Report on Form 10-Q for the
quarter ended December 31, 2002.
(b) The Company filed the following Report on Form 8-K during the fiscal
quarter ended December 31, 2002:
DATE ITEM NUMBER CONTENT
November 1, 2002 5 Notice of Fourth Quarter and Year End Earnings
Conference Call Webcast
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UGI Corporation
---------------
(Registrant)
Date: February 13, 2003 By: /s/ A. J. Mendicino
- ------------------------ --------------------------------------
A. J. Mendicino, Senior Vice President -
Finance and Chief Financial Officer
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CERTIFICATIONS
I, Lon R. Greenberg, certify that:
1. I have reviewed this quarterly report on Form 10-Q of UGI Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors:
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: February 13, 2003
/s/ Lon R. Greenberg
------------------------------
Lon R. Greenberg
Chairman, President and
Chief Executive Officer of
UGI Corporation
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I, Anthony J. Mendicino, certify that:
1. I have reviewed this quarterly report on Form 10-Q of UGI Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors:
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: February 13, 2003
/s/ Anthony J. Mendicino
-----------------------------
Anthony J. Mendicino
Senior Vice President and
Chief Financial Officer of
UGI Corporation
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UGI CORPORATION
EXHIBIT INDEX
99 Certification by the Chief Executive Officer and the Chief Financial
Officer relating to the Registrant's Report on Form 10-Q for the quarter
ended December 31, 2002.