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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
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 April 30, 2003, there were 42,080,609 shares of UGI Corporation Common
Stock, without par value, outstanding.
UGI CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
PAGES
-------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2003,
September 30, 2002 and March 31, 2002 1
Condensed Consolidated Statements of Income for the three
and six months ended March 31, 2003 and 2002 2
Condensed Consolidated Statements of Cash Flows for the
six months ended March 31, 2003 and 2002 3
Notes to Condensed Consolidated Financial Statements 4 - 14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15 - 26
Item 3. Quantitative and Qualitative Disclosures About Market Risk 27 - 28
Item 4. Controls and Procedures 29
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 6. Exhibits and Reports on Form 8-K 31
Signatures 32
Certifications 33 - 34
-i-
UGI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(Millions of dollars)
March 31, September 30, March 31,
2003 2002 2002
---------- ------------ ----------
ASSETS
Current assets:
Cash and cash equivalents $ 149.2 $ 194.3 $ 139.5
Short-term investments (at cost, which approximates fair value) 45.0 -- --
Accounts receivable (less allowances for doubtful accounts of
$20.1, $11.8 and $18.6, respectively) 414.8 157.7 265.1
Accrued utility revenues 21.7 8.1 19.7
Inventories 83.3 109.2 74.6
Deferred income taxes 28.9 10.4 22.6
Utility regulatory assets -- 4.3 --
Prepaid expenses and other current assets 40.7 46.0 32.4
---------- ---------- ----------
Total current assets 783.6 530.0 553.9
Property, plant and equipment, at cost (less accumulated depreciation
and amortization of $765.8, $720.5 and $686.6, respectively) 1,279.3 1,271.9 1,262.9
Goodwill and excess reorganization value 653.5 644.9 638.9
Intangible assets (less accumulated amortization of $12.8, $10.3 and
$8.3, respectively) 33.8 25.8 28.8
Utility regulatory assets 59.2 57.7 55.2
Other assets 93.3 84.1 101.6
---------- ---------- ----------
Total assets $ 2,902.7 $ 2,614.4 $ 2,641.3
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 123.9 $ 148.7 $ 95.1
AmeriGas Propane bank loans -- 10.0 --
UGI Utilities bank loans 27.7 37.2 58.9
Other bank loans 9.7 8.6 11.3
Accounts payable 302.7 166.1 169.7
Other current liabilities 256.0 215.8 205.0
---------- ---------- ----------
Total current liabilities 720.0 586.4 540.0
Long-term debt 1,133.3 1,127.0 1,155.2
Deferred income taxes 213.0 200.2 186.3
Other noncurrent liabilities 99.2 87.5 78.7
Commitments and contingencies (note 7)
Minority interests in AmeriGas Partners 148.1 276.0 330.1
UGI Utilities redeemable preferred stock 20.0 20.0 20.0
Common stockholders' equity:
Common Stock, without par value (authorized - 150,000,000 shares;
issued - 49,798,097 shares) 554.2 396.6 395.1
Retained earnings 122.7 39.7 65.0
Accumulated other comprehensive income 10.1 6.6 1.2
---------- ---------- ----------
687.0 442.9 461.3
Treasury stock, at cost (117.9) (125.6) (130.3)
---------- ---------- ----------
Total common stockholders' equity 569.1 317.3 331.0
---------- ---------- ----------
Total liabilities and stockholders' equity $ 2,902.7 $ 2,614.4 $ 2,641.3
========== ========== ==========
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 Six Months Ended
March 31, March 31,
------------------------ ------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Revenues:
AmeriGas Propane $ 625.6 $ 460.1 $ 1,070.6 $ 831.5
UGI Utilities 269.2 179.9 437.6 321.4
International Propane 18.1 12.7 32.4 26.4
Energy Services and other 223.0 111.3 335.2 204.1
---------- ---------- ---------- ----------
1,135.9 764.0 1,875.8 1,383.4
---------- ---------- ---------- ----------
Costs and expenses:
AmeriGas Propane cost of sales 360.6 224.6 604.0 423.8
UGI Utilities - gas, fuel and purchased power 173.1 109.1 273.6 196.2
International Propane cost of sales 10.4 6.2 18.6 13.2
Energy Services and other cost of sales 210.8 102.8 311.8 187.0
Operating and administrative expenses 175.4 149.8 330.8 294.5
Utility taxes other than income taxes 3.5 3.2 6.4 5.8
Depreciation and amortization 25.4 23.5 49.6 46.7
Other income, net (7.7) (5.7) (10.8) (8.8)
---------- ---------- ---------- ----------
951.5 613.5 1,584.0 1,158.4
---------- ---------- ---------- ----------
Operating income 184.4 150.5 291.8 225.0
Income from equity investees 5.0 3.7 6.9 7.5
Loss on extinguishments of debt (3.0) -- (3.0) (0.7)
Interest expense (27.1) (27.4) (55.3) (55.6)
Minority interests in AmeriGas Partners (44.8) (41.5) (65.3) (50.6)
---------- ---------- ---------- ----------
Income before income taxes and subsidiary preferred
stock dividends 114.5 85.3 175.1 125.6
Income tax expense (44.3) (30.9) (67.8) (46.7)
Dividends on UGI Utilities Series Preferred Stock (0.4) (0.4) (0.8) (0.8)
---------- ---------- ---------- ----------
Net income $ 69.8 $ 54.0 $ 106.5 $ 78.1
========== ========== ========== ==========
Earnings per share - basic $ 1.66 $ 1.31 $ 2.55 $ 1.90
========== ========== ========== ==========
Earnings per share - diluted $ 1.62 $ 1.28 $ 2.49 $ 1.86
========== ========== ========== ==========
Average common shares outstanding:
Basic 41.958 41.288 41.822 41.193
========== ========== ========== ==========
Diluted 42.990 42.132 42.790 41.922
========== ========== ========== ==========
Dividends declared per common share $ 0.285 $ 0.267 $ 0.56 $ 0.533
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
-2-
UGI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Millions of dollars)
Six Months Ended
March 31,
----------------------
2003 2002
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 106.5 $ 78.1
Reconcile to net cash provided by operating activities:
Depreciation and amortization 49.6 46.7
Minority interests in AmeriGas Partners 65.3 50.6
Deferred income taxes, net (7.9) (0.5)
Other, net 13.8 8.1
Net change in:
Accounts receivable and accrued utility revenues (282.1) (100.8)
Inventories 26.4 53.9
Deferred fuel costs 34.3 6.3
Accounts payable 135.2 3.1
Other current assets and liabilities 9.8 (23.8)
-------- --------
Net cash provided by operating activities 150.9 121.7
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment (51.1) (43.0)
Net proceeds from disposals of assets 2.3 3.8
Acquisitions of business, net of cash acquired (13.6) --
Increase in short-term investments (45.0) --
Other, net 1.6 0.8
-------- --------
Net cash used by investing activities (105.8) (38.4)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends on UGI Common Stock (23.4) (21.9)
Distributions on AmeriGas Partners publicly held Common Units (27.4) (26.1)
Issuance of long-term debt 89.1 0.2
Repayment of long-term debt (117.0) (40.6)
AmeriGas Propane bank loans decrease (10.0) --
UGI Utilities bank loans (decrease) increase (9.5) 1.1
Other bank loans increase 0.1 1.7
Issuance of AmeriGas Partners Common Units -- 49.6
Issuance of UGI Common Stock 8.2 4.7
-------- --------
Net cash used by financing activities (89.9) (31.3)
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (0.3) --
-------- --------
Cash and cash equivalents (decrease) increase $ (45.1) $ 52.0
======== ========
Cash and cash equivalents:
End of period $ 149.2 $ 139.5
Beginning of period 194.3 87.5
-------- --------
(Decrease) Increase $ (45.1) $ 52.0
======== ========
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
a natural gas distribution utility ("Gas Utility") in parts of eastern
and southeastern Pennsylvania; owns and operates an electricity
distribution utility ("Electric Utility") in northeastern Pennsylvania;
and through its wholly owned subsidiary, UGI Development Company
("UGID"), owns interests in Pennsylvania-based electricity generation
assets (which together with Electric Utility are referred to herein as
"Electric Operations"). Gas Utility and Electric Utility are subject to
regulation by the Pennsylvania Public Utility Commission ("PUC").
We conduct a national propane distribution business through AmeriGas
Partners, L.P. ("AmeriGas Partners") and its principal operating
subsidiaries AmeriGas Propane, L.P. ("AmeriGas OLP") and AmeriGas OLP's
subsidiary, AmeriGas Eagle Propane, L.P. ("Eagle OLP"). AmeriGas
Partners, AmeriGas OLP and Eagle OLP are Delaware limited partnerships.
UGI's wholly owned second-tier subsidiary AmeriGas Propane, Inc. (the
"General Partner") serves as the general partner of AmeriGas Partners
and AmeriGas OLP. AmeriGas OLP and Eagle OLP (collectively referred to
as "the Operating Partnerships") comprise the largest retail propane
distribution business in the United States serving residential,
commercial, industrial, motor fuel and agricultural customers from
locations in 46 states. We refer to AmeriGas Partners and its
subsidiaries together as "the Partnership" and the General Partner and
its subsidiaries, including the Partnership, as "AmeriGas Propane." At
March 31, 2003, 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 24,908,204 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 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. On January 28, 2003, UGI's Board of
Directors approved a 3-for-2 split of UGI's Common Stock. On April 1,
2003, UGI issued one additional common share for every two common
shares outstanding to shareholders of record on February 28, 2003.
Average shares outstanding, earnings per share and dividends declared
per share for the three and six months ended March 31, 2003 are
reflected on a post-split basis. Prior-year amounts have been
retroactively restated to reflect the effects of the common stock
split.
Basic earnings per share reflect the weighted-average number of common
shares outstanding. Diluted earnings per share include the effects of
dilutive stock options and common stock awards. Shares used in
computing basic and diluted earnings per share are as follows:
Three Months Ended Six Months Ended
March 31, March 31,
------------------ -----------------
2003 2002 2003 2002
------- ------- ------- -------
Denominator (millions of shares):
Average common shares outstanding for basic computation 41.958 41.288 41.822 41.193
Incremental shares issuable for stock options and awards 1.032 0.844 0.968 0.729
------- ------- ------- -------
Average common shares outstanding for diluted computation 42.990 42.132 42.790 41.922
------- ------- ------- -------
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.
-5-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Millions of dollars, except per share amounts)
We recognized total stock and unit-based compensation expense of $4.8
million and $6.6 million in the three and six months ended March 31,
2003, respectively, and $1.0 million and $1.5 million in the three and
six months ended March 31, 2002, respectively. If we had determined
stock-based compensation expense under the fair value method prescribed
by SFAS 123, net income and diluted earnings per share for the three
and six months ended March 31, 2003 and 2002 would have been as
follows:
Three Months Ended Six Months Ended
March 31, March 31,
------------------ -----------------
2003 2002 2003 2002
------- ------- ------- -------
Net income, as reported $ 69.8 $ 54.0 $ 106.5 $ 78.1
Add: Stock and unit-based employee compensation expense
included in reported net income, net of related tax effects 2.9 0.6 4.0 0.9
Deduct: Total stock and unit-based employee compensation expense
determined under the fair value method for all awards,
net of related tax effects (3.1) (0.8) (4.4) (1.2)
------ ----- ------- ------
Pro forma net income $ 69.6 $53.8 $ 106.1 $ 77.8
------ ----- ------- ------
Basic earnings per share:
As reported $ 1.66 $ 1.31 $ 2.55 $ 1.90
Pro forma $ 1.66 $ 1.30 $ 2.54 $ 1.89
Diluted earnings per share:
As reported $ 1.62 $ 1.28 $ 2.49 $ 1.86
Pro forma $ 1.62 $ 1.28 $ 2.48 $ 1.86
COMPREHENSIVE INCOME. The following table presents the components of
comprehensive income for the three and six months ended March 31, 2003
and 2002:
Three Months Ended Six Months Ended
March 31, March 31,
----------------- -------------------
2003 2002 2003 2002
------ ------ ------- -------
Net income $ 69.8 $ 54.0 $ 106.5 $ 78.1
Other comprehensive (loss) income
(1.4) 13.9 3.5 14.7
------ ------ ------- -------
Comprehensive income $ 68.4 $ 67.9 $ 110.0 $ 92.8
------ ------ ------- -------
Other comprehensive (loss) 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
-6-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Millions of dollars, except per share amounts)
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 and six months ended March 31, 2003, certain
costs previously reflected in operating and administrative expenses
have been included in cost of sales. We have reclassified $3.2 million
and $6.0 million of such costs incurred during the three and six months
ended March 31, 2002, respectively, to conform to the current-period
presentation.
In January 2003, the Partnership recorded a loss on an early
extinguishment of long-term debt. This loss has been reflected in the
Condensed Consolidated Statements of Income as "loss on extinguishments
of debt." A loss associated with a November 2001 early extinguishment
of long-term debt previously included in other income, net, has been
reclassified to conform to the current-period presentation (see
Note 5).
2. SEGMENT INFORMATION
We have organized our business units into five reportable segments
generally 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' profitability principally based
upon their earnings before interest expense, income taxes, depreciation
and amortization, minority interests, loss on extinguishments of debt
and income from equity investees ("EBITDA"). Although we use EBITDA to
evaluate these segments' profitability, it should not be considered as
an alternative to net income (as an indicator of operating performance)
or as an alternative to cash flow (as a measure of liquidity or ability
to service debt obligations) and is not a measure of performance or
financial condition under accounting principles generally accepted in
the United States. 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 March 31, 2003:
Reportable Segments
-----------------------------------------------------
AmeriGas Gas Electric Energy International Corporate &
Total Elims. Propane Utility Operations Services Propane Other (a)
-------- ------- -------- -------- ---------- -------- ------------- -----------
Revenues $1,135.9 $ (0.6) $ 625.6 $239.9 $ 29.3 $212.6 $ 18.1 $ 11.0
======== ======= ======== ====== ====== ====== ====== ======
Segment profit (loss):
EBITDA $ 209.8 $ -- $ 134.2 $ 59.7 $ 9.2 $ 4.2 $ 2.2 $ 0.3
Depreciation and amortization (25.4) -- (18.6) (4.6) (0.8) (0.2) (0.9) (0.3)
-------- ------- -------- ------ ------ ------ ------ ------
Operating income 184.4 -- 115.6 55.1 8.4 4.0 1.3 --
Income from equity investees 5.0 -- (0.1) -- -- -- 5.1 --
Loss on extinguishments of debt (3.0) -- (3.0) -- -- -- -- --
Interest expense (27.1) -- (21.8) (3.5) (0.7) -- (1.0) (0.1)
Minority interests (44.8) -- (44.8) -- -- -- -- --
-------- ------- -------- ------ ------ ------ ------ ------
Income (loss) before income taxes and
subsidiary preferred stock dividends $ 114.5 $ -- $ 45.9 $ 51.6 $ 7.7 $ 4.0 $ 5.4 $ (0.1)
======== ======= ======== ====== ====== ====== ====== ======
Segment assets (at period end) $2,902.7 $ (43.7) $1,580.9 $744.9 $112.0 $147.6 $162.1 $198.9
======== ======= ======== ====== ====== ====== ====== ======
Investments in equity investees
(at period end) $ 46.1 $ -- $ 3.5 $ -- $ 11.4 $ -- $ 31.2 $ --
======== ======= ======== ====== ====== ====== ====== ======
Goodwill and excess reorganization value
(at period end) $ 653.5 $ -- $ 590.3 $ -- $ -- $ -- $ 58.7 $ 4.5
======== ======= ======== ====== ====== ====== ====== ======
Three Months Ended March 31, 2002:
Reportable Segments
-----------------------------------------------------
AmeriGas Gas Electric Energy International Corporate &
Total Elims. Propane Utility Operations Services Propane Other (a)
-------- ------- -------- -------- ---------- -------- ------------- -----------
Revenues $ 764.0 $ (0.6) $ 460.1 $ 158.1 $ 21.8 $ 103.5 $ 12.7 $ 8.4
======== ======= ======== ======= ======= ======= ======= ======
Segment profit:
EBITDA $ 174.0 $ -- $ 120.9 $ 43.5 $ 3.8 $ 2.2 $ 2.5 $ 1.1
Depreciation and amortization (23.5) -- (16.5) (5.1) (0.9) (0.2) (0.7) (0.1)
-------- ------- -------- ------- ------- ------- ------- ------
Operating income 150.5 -- 104.4 38.4 2.9 2.0 1.8 1.0
Income from equity investees 3.7 -- 0.2 -- -- -- 3.5 --
Loss on extinguishments of debt -- -- -- -- -- -- -- --
Interest expense (27.4) -- (22.0) (3.7) (0.6) -- (0.9) (0.2)
Minority interests (41.5) -- (41.5) -- -- -- -- --
-------- ------- -------- ------- ------- ------- ------- ------
Income before income taxes and
subsidiary preferred stock dividends $ 85.3 $ -- $ 41.1 $ 34.7 $ 2.3 $ 2.0 $ 4.4 $ 0.8
======== ======= ======== ======= ======= ======= ======= ======
Segment assets (at period end) $2,641.3 $ (29.9) $1,571.6 $ 683.8 $ 104.0 $ 61.0 $ 144.8 $106.0
======== ======= ======== ======= ======= ======= ======= ======
Investments in equity investees
(at period end) $ 50.2 $ -- $ 3.6 $ -- $ 10.2 $ -- $ 36.4 $ --
======== ======= ======== ======= ======= ======= ======= ======
Goodwill and excess reorganization value
(at period end) $ 638.9 $ -- $ 589.1 $ -- $ -- $ -- $ 46.3 $ 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)
2. SEGMENT INFORMATION (CONTINUED)
Six Months Ended March 31, 2003:
Reportable Segments
-----------------------------------------------------
AmeriGas Gas Electric Energy International Corporate &
Total Elims. Propane Utility Operations Services Propane Other
-------- ------- -------- -------- ---------- -------- ------------- -----------
Revenues $1,875.8 $ (1.2) $1,070.6 $385.0 $ 52.6 $315.7 $ 32.4 $ 20.7
======== ======= ======== ====== ====== ====== ====== ======
Segment profit (loss):
EBITDA $ 341.4 $ -- $ 215.9 $ 97.7 $ 15.3 $ 8.7 $ 3.4 $ 0.4
Depreciation and amortization (49.6) -- (36.1) (9.1) (1.6) (0.5) (1.8) (0.5)
-------- ------- -------- ------ ------ ------ ------ ------
Operating income (loss) 291.8 -- 179.8 88.6 13.7 8.2 1.6 (0.1)
Income from equity investees 6.9 -- 0.1 -- -- -- 6.8 --
Loss on extinguishments of debt (3.0) -- (3.0) -- -- -- -- --
Interest expense (55.3) -- (44.5) (7.2) (1.3) -- (2.1) (0.2)
Minority interests (65.3) -- (65.3) -- -- -- -- --
-------- ------- -------- ------ ------ ------ ------ ------
Income (loss) before income taxes and
subsidiary preferred stock dividends $ 175.1 $ -- $ 67.1 $ 81.4 $ 12.4 $ 8.2 $ 6.3 $ (0.3)
======== ======= ======== ====== ====== ====== ====== ======
Segment assets (at period end) $2,902.7 $ (43.7) $1,580.9 $744.9 $112.0 $147.6 $162.1 $198.9
======== ======= ======== ====== ====== ====== ====== ======
Investments in equity investees
(at period end) $ 46.1 $ -- $ 3.5 $ -- $ 11.4 $ -- $ 31.2 $ --
======== ======= ======== ====== ====== ====== ====== ======
Goodwill and excess reorganization value
(at period end) $ 653.5 $ -- $ 590.3 $ -- $ -- $ -- $ 58.7 $ 4.5
======== ======= ======== ====== ====== ====== ====== ======
Six Months Ended March 31, 2002:
Reportable Segments
-----------------------------------------------------
AmeriGas Gas Electric Energy International Corporate &
Total Elims. Propane Utility Operations Services Propane Other
-------- ------- -------- -------- ---------- -------- ------------- -----------
Revenues $1,383.4 $ (1.1) $ 831.5 $ 279.4 $ 42.0 $ 187.2 $ 26.4 $ 18.0
======== ======= ======== ======= ======= ======= ======= =======
Segment profit:
EBITDA $ 271.7 $ -- $ 179.6 $ 73.3 $ 7.3 $ 4.6 $ 5.0 $ 1.9
Depreciation and amortization (46.7) -- (32.8) (10.0) (1.7) (0.4) (1.4) (0.4)
-------- ------- ------- ------- ------- ------- ------- -------
Operating income 225.0 -- 146.8 63.3 5.6 4.2 3.6 1.5
Income from equity investees 7.5 -- 0.5 -- -- -- 7.0 --
Loss on extinguishments of debt (0.7) -- (0.7) -- -- -- -- --
Interest expense (55.6) -- (44.7) (7.3) (1.2) -- (2.1) (0.3)
Minority interests (50.6) -- (50.6) -- -- -- -- --
-------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes and
subsidiary preferred stock dividends $ 125.6 $ -- $ 51.3 $ 56.0 $ 4.4 $ 4.2 $ 8.5 $ 1.2
======== ======= ======== ======= ======= ======= ======= =======
Segment assets (at period end) $2,641.3 $ (29.9) $1,571.6 $ 683.8 $ 104.0 $ 61.0 $ 144.8 $ 106.0
======== ======= ======== ======= ======= ======= ======= =======
Investments in equity investees
(at period end) $ 50.2 $ -- $ 3.6 $ -- $ 10.2 $ -- $ 36.4 $ --
======== ======= ======== ======= ======= ======= ======= =======
Goodwill and excess reorganization value
(at period end) $ 638.9 $ -- $ 589.1 $ -- $ -- $ -- $ 46.3 $ 3.5
======== ======= ======== ======= ======= ======= ======= =======
-9-
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:
March 31, September 30,
2003 2002
--------- -------------
Subject to amortization:
Customer relationships, noncompete agreements and other $ 46.6 $ 36.1
Accumulated amortization
(12.8) (10.3)
------- -------
$ 33.8 $ 25.8
------- -------
Not subject to amortization:
Goodwill $ 560.2 $ 551.6
Excess reorganization value
93.3 93.3
------- -------
$ 653.5 $ 644.9
------- -------
The increase in goodwill during the six months ended March 31, 2003
principally reflects foreign currency translation effects while the
increase in other intangible assets is the result of business
acquisitions. Amortization expense of intangible assets was $1.4
million and $2.5 million for the three and six months ended March 31,
2003, respectively, and $1.3 million and $2.5 million for the three and
six months ended March 31, 2002, respectively. Our expected aggregate
amortization expense of intangible assets for the next five fiscal
years is as follows: Fiscal 2003 - $6.1 million; Fiscal 2004 - $5.2
million; Fiscal 2005 - $4.4 million; Fiscal 2006 - $3.8 million; Fiscal
2007 - $3.2 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, in accordance with the
Amended and Restated Agreement of Limited Partnership of AmeriGas
Partners, L.P., 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
-10-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Millions of dollars, except per share amounts)
resulting from the Subordinated Unit conversion had no effect on the
Company's net income or cash flow and did not result in an increase in
the number of AmeriGas Partners limited partner units outstanding.
5. LONG-TERM DEBT
On October 1, 2002, UGI Utilities repaid $26 million of its maturing
6.73% Medium-Term Notes. 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
$89.1 million were used on January 6, 2003 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
Partnership recognized a pre-tax loss of $3.0 million in the quarter
ended March 31, 2003 related to the redemption premium and other
associated costs and expenses. In November 2001, AmeriGas Partners
redeemed prior to maturity $15 million face value of its 10.125% Senior
Notes at a redemption price of 103.375%. The Partnership recognized a
pre-tax loss of $0.8 million in the quarter ended December 31, 2001
related to the redemption premium and other associated costs and
expenses.
In April 2003, AmeriGas OLP repaid $53.8 million of maturing First
Mortgage Notes. In conjunction with this repayment, in April 2003
AmeriGas Partners issued $32 million face amount of 8.875% Series B
Senior Notes due 2011 and contributed the net proceeds of $33.7 million
to AmeriGas OLP.
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 ownership interest of up to $50 million 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. This two-step transaction is
accounted for as a sale of receivables following the provisions of SFAS
No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities." Energy Services continues to
service, administer and collect trade receivables on behalf of the
commercial paper issuer and ESFC.
During the three and six months ended March 31, 2003, Energy Services
sold trade receivables totaling $186.3 million and $289.0 million,
respectively, to ESFC. During the three months ended March 31, 2003,
ESFC sold an aggregate $15 million of trade
-11-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Millions of dollars, except per share amounts)
receivables to the commercial paper conduit. At March 31, 2003, the
outstanding balance of ESFC receivables was $89.8 million which is net
of an undivided interest of $12 million in trade receivables sold by
ESFC to the commercial paper conduit.
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 $18.0 million at March 31, 2003.
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.
Pursuant to a Liquidation and Winding Up Agreement dated September 17,
2002, PanEnergy Corporation ("PanEnergy"), Texas Eastern's sole
stockholder, assumed all of Texas Eastern's liabilities as of
December 20, 2002, to the extent of the value of Texas Eastern's
assets transferred to PanEnergy as of that date (which was estimated
to exceed $94 million), and to the extent that such liabilities arise
within ten years from Texas Eastern's date of dissolution.
Notwithstanding the dissolution proceeding, and based on Texas
Eastern previously having satisfied directly defaulted lease
obligations without the Partnership's having to honor its guarantee,
we believe that the probability that the Partnership will be required
to directly satisfy the lease obligations subject to the
indemnification agreement is remote.
On August 21, 2001, AmeriGas Partners, through AmeriGas OLP, acquired
the propane distribution businesses of Columbia Energy Group (the "2001
Acquisition") pursuant to the terms of a purchase agreement (the "2001
Acquisition Agreement") by and among Columbia Energy Group ("CEG"),
Columbia Propane Corporation ("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 March 31,
2003, the potential
-12-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Millions of dollars, except per share amounts)
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.
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
-13-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Millions of dollars, except per share amounts)
environmental and other matters. However, it is reasonably possible
that some of them could be resolved unfavorably to us. Although we
currently believe, after consultation with counsel, that damages or
settlements, if any, recovered by the plaintiffs in such claims or
actions will not have a material adverse effect on our financial
position, damages or settlements could be material to our operating
results or cash flows in future periods depending on the nature and
timing of future developments with respect to these matters and the
amounts of future operating results and cash flows.
8. PROPOSED INVESTMENT IN CONEMAUGH
On February 25, 2003, Allegheny Energy Supply Company, LLC ("Allegheny
Supply"), Allegheny Energy Supply Conemaugh, LLC, UGID and UGI entered
into an asset purchase agreement ("Asset Purchase Agreement") pursuant
to which UGID will acquire an additional 83 megawatt ownership interest
in the Conemaugh electricity generation station ("Conemaugh") from
Allegheny Supply, a unit of Allegheny Energy, Inc. ("Allegheny"), for
approximately $51.3 million in cash, subject to a $3.0 million credit.
Conemaugh is a 1,711-megawatt, coal-fired electricity generation
station located near Johnstown, Pennsylvania and is owned by a
consortium of energy companies and operated by a unit of Reliant
Resources, Inc. under contract. The purchase will increase UGID's
interest in Conemaugh to 102 megawatts (6.0%) from 19 megawatts (1.1%)
currently. The transaction, which is subject to customary closing
conditions and regulatory approvals, is expected to close by the end of
June 2003. The purchase of the additional investment in Conemaugh will
be financed from existing UGI cash balances.
-14-
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 (1) the three
months ended March 31, 2003 ("2003 three-month period") with the three months
ended March 31, 2002 ("2002 three-month period") and (2) the six months ended
March 31, 2003 ("2003 six-month period") with the six months ended March 31,
2002 ("2002 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 Consolidated Financial Statements.
-15-
UGI CORPORATION AND SUBSIDIARIES
2003 THREE-MONTH PERIOD COMPARED WITH 2002 THREE-MONTH PERIOD
Increase
Three Months Ended March 31, 2003 2002 (Decrease)
- ---------------------------- -------- ------- ----------------------
(Dollars in millions)
AMERIGAS PROPANE:
Revenues $ 625.6 $ 460.1 $ 165.5 36.0%
Total margin (a) $ 265.0 $ 235.5 $ 29.5 12.5%
EBITDA (b) $ 134.2 $ 120.9 $ 13.3 11.0%
Operating income $ 115.6 $ 104.4 $ 11.2 10.7%
Retail gallons sold (millions) (c) 393.4 363.4 30.0 8.3%
Degree days - % colder (warmer) than normal (d) 1.0 (8.5) -- --
GAS UTILITY:
Revenues $ 239.9 $ 158.1 $ 81.8 51.7%
Total margin (a) $ 80.9 $ 61.4 $ 19.5 31.8%
Operating income $ 55.1 $ 38.4 $ 16.7 43.5%
System throughput - billions of cubic feet ("bcf") 32.4 26.1 6.3 24.1%
Degree days - % colder (warmer) than normal 7.9 (16.9) -- --
ELECTRIC OPERATIONS:
Revenues $ 29.3 $ 21.8 $ 7.5 34.4%
Total margin (a) $ 13.9 $ 8.2 $ 5.7 69.5%
Operating income $ 8.4 $ 2.9 $ 5.5 189.7%
Electric Utility distribution sales - millions
of kilowatt hours ("gwh") 281.1 248.1 33.0 13.3%
ENERGY SERVICES:
Revenues $ 212.6 $ 103.5 $ 109.1 105.4%
Total margin (a) $ 7.8 $ 4.7 $ 3.1 66.0%
Operating income $ 4.0 $ 2.0 $ 2.0 100.0%
INTERNATIONAL PROPANE:
Revenues $ 18.1 $ 12.7 $ 5.4 42.5%
Total margin (a) $ 7.7 $ 6.5 $ 1.2 18.5%
EBITDA (b) $ 2.2 $ 2.5 $ (0.3) (12.0)%
Operating income $ 1.3 $ 1.8 $ (0.5) (27.8)%
Income from equity investees $ 5.1 $ 3.5 $ 1.6 45.7 %
- -----------------
(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, loss on extinguishments of debt 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.
Management uses EBITDA as the primary measure of segment profitability for
the AmeriGas Propane and International Propane segments. The Company's
definition of EBITDA may be different from that used by other companies.
(c) Retail gallons sold in the 2003 three-month period include certain bulk
gallons previously reflected in wholesale gallons. Prior-period gallon
amounts have been adjusted to conform to the current period classification.
-16-
UGI CORPORATION AND SUBSIDIARIES
(d) Deviation from average heating degree days based upon national weather
statistics provided by the National Oceanic and Atmospheric Administration
("NOAA") for 335 airports in the United States, excluding Alaska.
AMERIGAS PROPANE. Weather based upon national degree day data averaged 1.0%
colder than normal during the 2003 three-month period and 6.8% colder than the
2002 three-month period. Although temperatures on a nationwide basis averaged
near normal in the 2003 three-month period, weather in the western United States
was significantly warmer than normal while weather in the eastern United States
was generally colder than normal. The increase in retail volumes sold reflects
the impact of the colder weather on heating-related sales partially offset by
the impact of price-induced conservation and, with respect to commercial and
industrial customers, the effects of continuing economic weakness. Low-margin
wholesale propane volumes sold totaled 95.3 million gallons in the 2003
three-month period compared to 69.0 million gallons in the prior-year period
reflecting in large part the effects of the colder weather and product cost
hedging activities.
Retail propane revenues increased $129.3 million reflecting (1) a $96.1 million
increase due to higher average retail selling prices and (2) a $33.2 million
increase due to the higher volumes sold. Wholesale propane revenues increased
$32.8 million reflecting (1) a $21.3 million increase as a result of higher
average wholesale propane selling prices and (2) an $11.5 million increase as a
result of the greater wholesale volumes sold. Retail and wholesale propane
selling prices in the 2003 three-month period reflect a significant increase in
the commodity price of propane. The higher propane commodity costs resulted
from, among other things, high crude oil prices and historically low propane
inventory levels. Total cost of sales increased $136.0 million principally
reflecting the higher propane commodity costs and the higher retail and
wholesale volumes sold.
The increase in 2003 three-month period total margin is due principally to the
higher retail propane gallons sold and higher average retail unit margins.
Notwithstanding the previously mentioned significant increase in the commodity
price of propane in the 2003 three-month period, retail unit margins were higher
reflecting the effects of the higher average selling prices and the benefits of
favorable propane product cost management activities.
The increase in EBITDA reflects the previously mentioned increase in total
margin and greater other income partially offset by higher Partnership operating
and administrative expenses. The higher 2003 three-month period operating
expenses reflect higher volume-driven overtime and vehicle expenses, greater
general and group insurance expenses, and higher incentive compensation and
uncollectible accounts expenses. Other income in the 2003 three-month period
includes a gain of $1.1 million from the settlement of certain hedge contracts.
Operating income increased $11.2 million reflecting the previously mentioned
increase in EBITDA partially offset by greater depreciation expense principally
associated with PPX(R).
GAS UTILITY. Total distribution system throughput increased 6.3 bcf or 24.1% as
the significantly colder 2003 three-month period weather resulted in greater
heating-related sales to firm- residential, commercial and industrial
("core-market") customers and, to a lesser extent, greater volumes transported
for residential, commercial and industrial delivery service customers.
The increase in Gas Utility revenues reflects the greater core-market volumes
and residential, commercial, and industrial delivery service volumes and the
effects of higher core-market purchased gas cost ("PGC") rates. The higher 2003
three-month period PGC rates resulted from the pass through of higher natural
gas commodity costs. Gas Utility cost of gas was $159.0 million in the
-17-
UGI CORPORATION AND SUBSIDIARIES
2003 three-month period compared to $96.8 million in the 2002 three-month period
reflecting the higher core-market volumes and PGC rates.
The increase in Gas Utility total margin principally reflects a $14.3 million
increase in margin from core-market customers and, to a lesser extent, greater
margin from residential, commercial and industrial delivery service customers.
The higher Gas Utility operating income is due to the previously mentioned
increase in total margin, slightly higher other income, and lower depreciation
expense partially offset by a $4.6 million increase in operating and
administrative expenses. The higher operating and administrative expenses
reflect, among other things, the impact of colder weather on distribution system
maintenance expenses, higher uncollectible accounts expense, and greater
incentive compensation expenses. Depreciation expense declined $0.5 million in
the 2003 three-month period due to a change, effective April 1, 2002, in the
estimated useful lives of Gas Utility's distribution assets resulting from a
PUC-mandated asset life study.
ELECTRIC OPERATIONS. Electric Operations benefited from the effects of weather
that was 8.0% colder than normal in the 2003 three-month period compared to
weather that was 16.4% warmer than normal in the prior-year period. Electric
Utility's distribution sales increased 13.3% principally as a result of the
colder weather.
The increase in Electric Operations' revenues reflects the effects of the
greater Electric Utility distribution sales and a $4.4 million increase in
revenues from sales of electricity produced by our interests in electricity
generation assets to third parties. Prior to September 2002, substantially all
of the electricity generated by our interests in electricity generation assets
was used by Electric Utility to meet a portion of its distribution system
requirements. Beginning September 2002, Electric Utility began purchasing
substantially all of its electricity requirements under fixed-price energy and
capacity contracts with unaffiliated third-party suppliers, and we began selling
electricity produced by our interests in generation assets and related capacity
on the spot market. Electric Operations' cost of sales was $14.2 million in the
2003 three-month period compared to $12.4 million in the prior year reflecting
the third-party spot market sales in the 2003 three-month period partially
offset by the effects of lower Electric Utility per-unit purchased power costs.
The increase in Electric Operations' total margin reflects greater Electric
Utility total margin, resulting from lower per-unit purchased power costs and
greater distribution system sales, and margin from third-party spot market sales
of electricity produced by our electricity generation assets. Electric
Operations' operating income increased in the 2003 three-month period reflecting
the increase in total margin.
ENERGY SERVICES. Energy Services' revenues more than doubled in the 2003
three-month period reflecting higher natural gas prices, the volume effects of
colder weather and, to a lesser extent, the March 1, 2003 acquisition of the
northeastern U.S. gas marketing business of TXU Energy Retail Company, L.P., a
subsidiary of TXU Energy ("the TXU Energy Acquisition"). As a result of the TXU
Energy Acquisition, Energy Services assumed sales and supply agreements for
approximately 1,000 commercial and industrial customers located primarily in New
York, Pennsylvania, Ohio and New Jersey. Although the TXU Energy Acquisition did
not have a material impact on sales volumes and operating results in the 2003
three-month period, it is expected to increase Energy Services' annual sales
volumes by more than 50 percent. The greater 2003 three-month period total
margin reflects the higher volumes sold and slightly higher average unit
margins. Operating income also
-18-
UGI CORPORATION AND SUBSIDIARIES
increased reflecting the higher total margin partially offset principally by
greater operating expenses.
INTERNATIONAL PROPANE. FLAGA's revenues increased $5.4 million in the 2003
three-month period principally reflecting greater propane selling prices and the
effects of a stronger euro. The higher propane selling prices resulted from
higher propane commodity costs. Temperatures in the 2003 three-month period were
slightly colder than normal compared to temperatures in the 2002 three-month
period that were nearly 15% warmer than normal. FLAGA's volumes were slightly
higher in the 2003 three-month period as the effects of the colder weather were
reduced by price-induced conservation and continued weak economic activity. The
increase in FLAGA's total margin reflects the stronger euro and the greater
sales partially offset by a decline in average unit margins resulting from
higher propane product costs. FLAGA's EBITDA and operating income declined as
the greater total margin was more than offset by higher operating expenses.
The increase in income from international propane equity investees in the 2003
three-month period reflects higher income from our investment in Antargaz due in
large part to the effects of the stronger euro and the absence of goodwill
amortization in the current-year period. Antargaz adopted the provisions of SFAS
No. 142, "Goodwill and Other Intangible Assets," effective April 1, 2002.
-19-
UGI CORPORATION AND SUBSIDIARIES
2003 SIX-MONTH PERIOD COMPARED WITH 2002 SIX-MONTH PERIOD
Increase
Six Months Ended March 31, 2003 2002 (Decrease)
- -------------------------- -------- -------- -------------------
(Dollars in millions)
AMERIGAS PROPANE:
Revenues $1,070.6 $ 831.5 $239.1 28.8%
Total margin $ 466.6 $ 407.7 $ 58.9 14.4%
EBITDA $ 215.9 $ 178.9 $ 37.0 20.7%
Operating income $ 179.8 $ 146.8 $ 33.0 22.5%
Retail gallons sold (millions) (a) 717.6 643.7 73.9 11.5%
Degree days - % colder (warmer) than normal 1.1 (11.4) -- --
GAS UTILITY:
Revenues $ 385.0 $ 279.4 $105.6 37.8%
Total margin $ 137.6 $ 107.4 $ 30.2 28.1%
Operating income $ 88.6 $ 63.3 $ 25.3 40.0%
System throughput - billions of cubic feet ("bcf") 55.7 45.5 10.2 22.4%
Degree days - % colder (warmer) than normal 7.3 (17.8) -- --
ELECTRIC OPERATIONS:
Revenues $ 52.6 $ 42.0 $ 10.6 25.2%
Total margin $ 23.9 $ 15.7 $ 8.2 52.2%
Operating income $ 13.7 $ 5.6 $ 8.1 144.6%
Electric Utility distribution sales - millions
of kilowatt hours ("gwh") 525.5 476.0 49.5 10.4%
ENERGY SERVICES:
Revenues $ 315.7 $ 187.2 $128.5 68.6%
Total margin $ 14.9 $ 9.3 $ 5.6 60.2%
Operating income $ 8.2 $ 4.2 $ 4.0 95.2%
INTERNATIONAL PROPANE:
Revenues $ 32.4 $ 26.4 $ 6.0 22.7%
Total margin $ 13.8 $ 13.2 $ 0.6 4.5%
EBITDA $ 3.4 $ 5.0 $ (1.6) (32.0)%
Operating income $ 1.6 $ 3.6 $ (2.0) (55.6)%
Income from equity investees $ 6.8 $ 7.0 $ (0.2) (2.9)%
- ---------------
(a) Retail gallons sold in the 2003 six-month period include certain bulk
gallons previously reflected in wholesale gallons. Prior-period gallon
amounts have been adjusted to conform to the current period classification.
AMERIGAS PROPANE. Weather based upon national heating degree days was 1.1%
colder than normal during the 2003 six-month period compared to weather that was
11.4% warmer than normal in the 2002 six-month period. Although temperatures on
a nationwide basis averaged near normal in the 2003 six-month period, weather in
the western United States was significantly warmer than normal while weather in
the eastern United States was generally colder than normal. Retail propane
volumes sold increased 73.9 million gallons due principally to the effects of
the colder weather. Wholesale volumes sold totaled 167.0 million gallons in the
2003 six-month period compared to 137.4 million gallons in the prior-year
principally reflecting the effects of colder weather and product cost hedging
activities.
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UGI CORPORATION AND SUBSIDIARIES
Retail propane revenues increased $195.6 million reflecting (1) a $114.0 million
increase due to higher average selling prices and (2) an $81.6 million increase
due to the higher volumes sold. Wholesale propane revenues increased $38.0
million reflecting (1) a $24.7 million increase due to higher average selling
prices and (2) a $13.3 million increase due to the higher volumes sold. The
higher retail and wholesale selling prices reflect significantly higher propane
product costs during the 2003 six-month period. Total cost of sales increased
$180.2 million reflecting the higher volumes sold and higher average propane
product costs.
The increase in total margin is principally due to the higher propane gallons
sold and higher average retail propane unit margins. Notwithstanding the
significant increase in the commodity price of propane, retail propane unit
margins during the 2003 six-month period were higher than the prior-year period
reflecting the effects of higher average selling prices and the benefits of
favorable propane product cost management activities.
EBITDA increased $37.1 million in the 2003 six-month period as the previously
mentioned increase in total margin and higher other income was partially offset
by a $25.4 million increase in operating and administrative expenses. Operating
and administrative expenses increased principally due to higher volume-driven
overtime and vehicle expenses, greater general and group insurance expenses, and
higher incentive compensation and uncollectible accounts expense. Other income
in the 2003 six-month period includes a gain of $1.1 million from the settlement
of certain hedge contracts while other income in the prior-year six-month period
was reduced by a $2.1 million loss from declines in the value of propane
commodity option contracts. Operating income in the 2003 six-month period
increased less than the increase in EBITDA due to higher depreciation expense
principally associated with PPX(R).
GAS UTILITY. Weather in Gas Utility's service territory was 7.3% colder than
normal during the 2003 six-month period compared to weather that was 17.8%
warmer than normal during the 2002 six-month period. The significantly colder
weather resulted in higher heating-related sales to core- market customers and,
to a lesser extent, greater volumes transported for residential, commercial and
industrial delivery service customers.
Gas Utility revenues increased principally as a result of the greater sales to
core-market customers and higher average PGC rates. Gas Utility cost of gas was
$247.4 million in the 2003 six-month period compared to $172.0 million in the
2002 six-month period principally reflecting the higher core-market volumes sold
and higher core-market PGC rates.
The increase in Gas Utility total margin in the 2003 six-month period
principally reflects a $24.2 million increase in core-market total margin due to
the higher core-market sales and increased margin from greater delivery service
volumes.
The increase in Gas Utility operating income reflects the increase in total
margin and lower depreciation expense partially offset by a $5.5 million
increase in operating and administrative expenses. The higher operating and
administrative expenses reflect, among other things, greater distribution system
maintenance expenses, higher uncollectible accounts expense and increased
incentive compensation expense. Depreciation expense declined $0.9 million due
to the previously mentioned change in the estimated useful lives of Gas
Utility's distribution assets. Other income of $5.7 million in the 2003
six-month period was generally comparable to the prior-year period as higher
non-tariff service income was offset by a decline in pension income and lower
interest income on PGC undercollections.
-21-
UGI CORPORATION AND SUBSIDIARIES
ELECTRIC OPERATIONS. Electric Utility's 2003 six-month period kilowatt-hour
sales increased principally as a result of weather that was 8.6% colder than
normal compared to weather that was 16.7% warmer than normal in the prior-year
period.
The higher Electric Operations' revenues reflect higher Electric Utility sales
and greater sales of electricity produced by our electric generation assets to
third parties. Notwithstanding the significant increase in Electric Operations'
revenues, cost of sales increased only $2.0 million in the 2003 six-month period
as the impact on cost of sales resulting from the greater sales was
substantially offset by lower Electric Utility per-unit purchased power costs.
The increase in Electric Operations' total margin principally reflects the
increased Electric Utility sales and lower Electric Utility per-unit purchased
power costs. The increase in operating income reflects the greater total margin
and higher other income partially offset by slightly higher 2003 six-month
period general and administrative expenses.
ENERGY SERVICES. The substantial increase in Energy Services' revenues
principally resulted from significantly higher natural gas prices, the effects
of colder 2003 six-month period weather and growth from the March 2003 TXU
Energy Acquisition. The greater Energy Services' total margin reflects the
effects of the higher natural gas volumes, greater average unit margins on sales
of natural gas, and higher volumes and total margin from sales of fuel oil. The
increase in total margin was partially offset by higher operating expenses
resulting principally from growth initiatives and the TXU Energy Acquisition.
INTERNATIONAL PROPANE. FLAGA's weather was near normal in the 2003 six-month
period compared with weather that was approximately 7.5% warmer than normal in
the prior year. Notwithstanding the colder weather, volumes declined slightly
due in large part to price-induced conservation and continued weak economic
activity. Although FLAGA volumes and unit margins were lower during the 2003
six-month period, total margin was slightly higher reflecting the effects of the
stronger euro. The declines in EBITDA and operating income reflect higher
operating expenses resulting principally from the effects of the stronger euro
and higher payroll expenses.
The decline in earnings from equity investees in the 2003 six-month period
reflects lower income from our debt and equity investments in Antargaz. Income
from equity investees in the prior-year six-month period includes $0.6 million
of interest income from our debt investments in AGZ Holdings, the parent company
of Antargaz. AGZ Holdings redeemed these investments in July 2002.
FINANCIAL CONDITION AND LIQUIDITY
FINANCIAL CONDITION
The Company's long-term debt outstanding totaled $1,257.2 million at March 31,
2003 (including current maturities of $123.9 million) compared to $1,275.7
million of long-term debt at September 30, 2002 (including current maturities of
$148.7 million). On October 1, 2002, UGI Utilities repaid $26 million of
maturing Medium-Term Notes. 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 $89.1 million were used on January 6, 2003 to
redeem prior to
-22-
UGI CORPORATION AND SUBSIDIARIES
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
recognized a pre-tax loss, net of minority interests, of $1.5 million relating
to the redemption premium and other associated costs and expenses.
In April 2003, AmeriGas OLP repaid $53.8 million of maturing First Mortgage
Notes. In conjunction with this repayment, in April 2003 AmeriGas Partners
issued $32 million face amount of 8.875% Series B Notes due 2011 and contributed
the net proceeds of $33.7 million to AmeriGas OLP.
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 March 31, 2003, there were no borrowings outstanding under these facilities.
Issued and outstanding letters of credit under the Revolving Credit Facility,
which reduce available borrowing capacity, totaled $22.2 million at March 31,
2003. AmeriGas OLP's Bank Credit Agreement expires October 1, 2003. The
Partnership's management expects to renew this facility prior to its expiration.
At March 31, 2003, 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 or replace those agreements expiring in June 2003 prior to their maturity.
At March 31, 2003, UGI Utilities had borrowings under these agreements totaling
$17.7 million and an additional $10 million under an uncommitted facility.
UGI Utilities has a shelf registration statement with the SEC under which it may
issue up to an additional $85 million of debt securities. AmeriGas Partners has
debt and equity shelf registration statements with the SEC under which it may
issue up to an additional $28 million of Series B 8.875% Senior Notes and an
additional 4.3 million Common Units.
Energy Services has a $50 million receivables purchase facility with an issuer
of receivables-backed commercial paper expiring November 30, 2004. During the
three and six months ended March 31, 2003, Energy Services sold trade
receivables totaling $186.3 million and $289.0 million, respectively, to its
wholly owned, bankruptcy-remote subsidiary, ESFC, which is consolidated for
financial statement purposes. During the three months ended March 31, 2003, ESFC
sold an aggregate $15 million of trade receivables to the facility's commercial
paper conduit. At March 31, 2003, the outstanding balance of ESFC receivables
was $89.8 million which is net of $12 million in trade receivables sold to the
commercial paper conduit.
During the six months ended March 31, 2003, the Partnership declared and paid
the minimum quarterly distribution of $0.55 (the "MQD") on all limited partner
units for the quarters ended September 30, 2002 and December 31, 2002. The MQD
for the quarter ended March 31, 2003 will be paid on May 18, 2003 to holders of
record on May 9, 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.
-23-
UGI CORPORATION AND SUBSIDIARIES
CASH FLOWS
The Company's cash flows from operating activities are seasonal and are
generally greatest during the second and third fiscal quarters when customers
pay bills incurred during the heating season and are generally lowest during the
first and fourth fiscal quarters. Accordingly, cash flows from operations for
the six months ended March 31, 2003 are not necessarily indicative of cash flows
to be expected for a full year. Included in the March 31, 2003 Condensed
Consolidated Balance Sheet is $136.7 million of cash, cash equivalents and
short-term investments held by UGI.
OPERATING ACTIVITIES. Cash provided by operating activities was $150.9 million
in the 2003 six-month period compared to $121.7 million in the prior-year
six-month period. The increase in operating cash flow reflects the effects of
the improved 2003 six-month period operating results partially offset by greater
cash required to fund changes in operating working capital. Changes in operating
working capital required $76.4 million of operating cash flow in the 2003
six-month period compared to $61.3 million required in the prior-year period.
The higher working capital cash needs primarily reflect the effects of higher
2003 six-month period natural gas and propane commodity prices on changes in
customer accounts receivable and inventories partially offset by operating cash
flow from changes in accounts payable, Gas Utility deferred fuel
overcollections, and accrued income taxes.
INVESTING ACTIVITIES. We spent $51.1 million for property, plant and equipment
during the 2003 six-month period, an increase of $8.1 million over the
prior-year six-month period, principally reflecting a $6.1 million increase in
Partnership capital expenditures. The increase in Partnership capital
expenditures is due in large part to greater PPX(R) capital expenditures
associated with purchases of overfill protection devices ("OPDs"). Proceeds from
asset disposals were lower in the 2003 six-month period due in large part to
lower sales of Partnership excess assets. Cash paid for business acquisitions
reflects the March 2003 TXU Energy Acquisition and, to a lesser extent, HVAC and
Partnership business acquisitions. During the six months ended March 31, 2003,
UGI invested $45 million of its cash and cash equivalents in short-term
investments.
FINANCING ACTIVITIES. We paid cash dividends on UGI Common Stock of $23.4
million, and the Partnership paid the MQD on all publicly held limited partner
units (as well as the limited partner units we own) during the 2003 six-month
period. 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, AmeriGas Partners used the net proceeds to repay prior
to maturity the then-remaining $85 million face amount of 10.125% Senior Notes
at a redemption price of 102.25%, plus accrued interest. In October 2002, UGI
Utilities repaid $26 million of maturing Medium-Term Notes. Also during the 2003
six-month period, AmeriGas OLP repaid all outstanding borrowings under its
Revolving Credit Facility and UGI Utilities reduced its bank loan borrowings by
$9.5 million.
-24-
UGI CORPORATION AND SUBSIDIARIES
PROPOSED INVESTMENT IN CONEMAUGH
On February 25, 2003, Allegheny Energy Supply Company, LLC ("Allegheny Supply"),
Allegheny Energy Supply Conemaugh, LLC, UGID and UGI entered into an asset
purchase agreement ("Asset Purchase Agreement") pursuant to which UGID will
acquire an additional 83 megawatt ownership interest in the Conemaugh
electricity generation station ("Conemaugh") from Allegheny Supply, a unit of
Allegheny Energy, Inc. ("Allegheny"), for approximately $51.3 million in cash,
subject to a $3.0 million credit. Conemaugh is a 1,711-megawatt, coal-fired
electricity generation station located near Johnstown, Pennsylvania and is owned
by a consortium of energy companies and operated by a unit of Reliant Resources,
Inc. under contract. The purchase will increase UGID's interest in Conemaugh to
102 megawatts (6.0%) from 19 megawatts (1.1%) currently. The transaction, which
is subject to customary closing conditions and regulatory approvals, is expected
to close by the end of June 2003. The purchase of the additional investment in
Conemaugh will be financed from existing UGI cash balances.
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 and did not result in an increase in the number of
AmeriGas Partners limited partner units outstanding.
UGI COMMON STOCK SPLIT AND DIVIDEND INCREASE
On January 28, 2003, UGI's Board of Directors approved a 3-for-2 split of UGI's
Common Stock. On April 1, 2003, UGI issued one additional common share for every
two common shares outstanding to shareholders of record February 28, 2003. Also
on January 28, 2003, UGI's Board of Directors approved an increase in the
quarterly dividend rate on UGI Common Stock to $0.2850 per post-split share or
$1.14 per post-split share on an annual basis. The increased quarterly dividend
was paid April 1, 2003 to shareholders of record on February 28, 2003.
-25-
UGI CORPORATION AND SUBSIDIARIES
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") recently issued SFAS No. 149,
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities"
("SFAS 149"); 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 149 amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 149 amends
SFAS 133 for decisions made (1) as part of the FASB's Derivatives Implementation
Group ("DIG") process; (2) in connection with other FASB projects dealing with
financial instruments; and (3) in connection with implementation issues raised
in relation to the application of the definition of a derivative. SFAS 149 is
effective for contracts entered into or modified after June 30, 2003. Based upon
the types of contracts currently entered into by the Company, we do not believe
SFAS 149 will have a material impact on our financial position or results of
operations.
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. The disclosures required by SFAS 148 are included in 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. The
application of FIN 45 did not have a material effect on our financial position
or results of operations.
-26-
UGI CORPORATION AND SUBSIDIARIES
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
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 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 and
capacity 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
-27-
UGI CORPORATION AND SUBSIDIARIES
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.
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 March 31,
2003, combined borrowings outstanding under these agreements totaled $104.0
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 $2.8 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 March 31, 2003. 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)
March 31, 2003:
Propane commodity price risk $1.2 $(0.8)
Natural gas commodity price risk 2.7 (3.8)
Interest rate risk (3.8) (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.
-28-
UGI CORPORATION AND SUBSIDIARIES
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 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.
-29-
UGI CORPORATION AND SUBSIDIARIES
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On February 25, 2003 the Annual Meeting of Shareholders of UGI was
held. The Shareholders reelected the eight nominees from the existing Board of
Directors to another term, and ratified the appointment of
PricewaterhouseCoopers LLP as independent certified accountants. No other
matters were considered at the meeting.
The number of votes cast for and withheld from election of each
director nominee is set forth below. There were no abstentions or broker
non-votes in the election of directors.
Director Nominees For Withheld
- ----------------- --- --------
James W. Stratton 23,782,704 359,403
Richard C. Gozon 23,793,300 348,827
Stephen D. Ban 23,808,951 333,176
Lon R. Greenberg 23,636,350 505,777
Marvin O. Schlanger 23,713,268 428,859
Thomas F. Donovan 23,702,749 439,378
Anne Pol 23,707,232 434,895
Ernest E. Jones 23,782,271 359,856
The number of votes cast for and against, and the number of abstentions
in the ratification of the appointment of PricewaterhouseCoopers LLP is as
follows: For: 23,668,764; Against, 282,646; Abstain, 190,717. There were no
broker non-votes.
-30-
UGI CORPORATION AND SUBSIDIARIES
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits:
3.1 Amended and Restated Articles of Incorporation of UGI
Corporation are incorporated by reference to Exhibit 4.1 to
UGI's Registration Statement on Form S-8, No. 333-104938.
3.2 Bylaws of UGI Corporation as in effect since February 25,
2003.
4.1 UGI's Amended and Restated Articles of Incorporation and
Bylaws referred to in Exhibit Nos. 3.1 and 3.2 above.
10.1 UGI Corporation 2000 Directors' Stock Option Plan Amended and
Restated as of April 29, 2003.
10.2 1992 Directors' Stock Plan Amended and Restated as of April
29, 2003.
10.3 UGI Corporation Directors' Equity Compensation Plan Amended
and Restated as of April 29, 2003.
10.4 UGI Corporation 1997 Stock Option and Dividend Equivalent Plan
Amended and Restated as of April 29, 2003.
10.5 UGI Corporation 2000 Stock Incentive Plan Amended and Restated
as of April 29, 2003.
10.6 UGI Corporation 1992 Non-Qualified Stock Option Plan Amended
and Restated as of April 29, 2003.
10.7 UGI Corporation 2002 Non-Qualified Stock Option Plan Amended
and Restated as of April 29, 2003.
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 March 31, 2003.
(b) The Company filed the following Reports on Form 8-K during the fiscal
quarter ended March 31, 2003:
DATE ITEM NUMBERS CONTENT
---- ------------ -------
January 22, 2003 5 Notice of first quarter earnings
conference call webcast
February 26, 2003 5 & 7 Press release regarding purchase
of additional electricity generation
-31-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UGI Corporation
--------------------------------------
(Registrant)
Date: May 15, 2003 By: /s/ A. J. Mendicino
--------------------------------------
A. J. Mendicino, Senior Vice President
and Chief Financial Officer
-32-
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 or not 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: May 15, 2003
/s/ Lon R. Greenberg
------------------------------------------
Lon R. Greenberg
Chairman, President and
Chief Executive Officer of
UGI Corporation
-33-
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 or not 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: May 15, 2003
/s/ Anthony J. Mendicino
------------------------------------
Anthony J. Mendicino
Senior Vice President and
Chief Financial Officer of
UGI Corporation
-34-
UGI CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
3.1 Amended and Restated Articles of Incorporation of UGI Corporation are
incorporated by reference to Exhibit 4.1 to UGI's Registration
Statement on Form S-8, No. 333-104938.
3.2 Bylaws of UGI Corporation as in effect since February 25, 2003.
4.1 UGI's Amended and Restated Articles of Incorporation and Bylaws
referred to in Exhibit Nos. 3.1 and 3.2.
10.1 UGI Corporation 2000 Directors' Stock Option Plan Amended and Restated
as of April 29, 2003.
10.2 1992 Directors' Stock Plan Amended and Restated as of April 29, 2003.
10.3 UGI Corporation Directors' Equity Compensation Plan Amended and
Restated as of April 29, 2003.
10.4 UGI Corporation 1997 Stock Option and Dividend Equivalent Plan Amended
and Restated as of April 29, 2003.
10.5 UGI Corporation 2000 Stock Incentive Plan Amended and Restated as of
April 29, 2003.
10.6 UGI Corporation 1992 Non-Qualified Stock Option Plan Amended and
Restated as of April 29, 2003.
10.7 UGI Corporation 2002 Non-Qualified Stock Option Plan Amended and
Restated as of April 29, 2003.
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 March 31, 2003.