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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-11071
UGI CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2668356
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
UGI CORPORATION
460 North Gulph Road, King of Prussia, PA
(Address of principal executive offices)
19406
(Zip Code)
(610) 337-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
----- -----
At January 31, 2005, there were 51,550,472 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 December 31, 2004,
September 30, 2004 and December 31, 2003 1
Condensed Consolidated Statements of Income for the three
months ended December 31, 2004 and 2003 2
Condensed Consolidated Statements of Cash Flows for the
three months ended December 31, 2004 and 2003 3
Notes to Condensed Consolidated Financial Statements 4-17
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18-27
Item 3. Quantitative and Qualitative Disclosures About Market Risk 27-29
Item 4. Controls and Procedures 30
PART II OTHER INFORMATION
Item 6. Exhibits 31
Signatures 32
-i-
UGI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(Millions of dollars)
December 31, September 30, December 31,
2004 2004 2003
------------ ------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 121.7 $ 149.6 $ 143.6
Short-term investments (at cost, which approximates fair value) 55.0 50.0 49.9
Accounts receivable (less allowances for doubtful accounts of
$26.9, $22.3 and $15.5, respectively) 644.4 367.3 373.1
Accrued utility revenues 38.8 9.7 30.6
Inventories 226.3 198.4 148.6
Deferred income taxes 22.6 14.9 18.8
Prepaid expenses and other current assets 34.1 46.6 39.8
-------- -------- --------
Total current assets 1,142.9 836.5 804.4
Property, plant and equipment, at cost (less accumulated depreciation
and amortization of $924.9, $892.4 and $827.6, respectively) 1,843.0 1,781.9 1,360.3
Goodwill and excess reorganization value 1,305.3 1,245.9 679.8
Intangible assets (less accumulated amortization of
$32.6, $27.5 and $18.1, respectively) 200.6 184.4 36.3
Utility regulatory assets 65.6 65.0 61.3
Other assets 123.1 121.7 96.9
-------- -------- --------
Total assets $4,680.5 $4,235.4 $3,039.0
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 175.9 $ 122.8 $ 65.3
Current maturities of UGI Utilities preferred shares subject to
mandatory redemption, without par value -- 20.0 1.0
AmeriGas Propane bank loans 30.0 -- 36.0
UGI Utilities bank loans 83.0 60.9 72.2
Other bank loans 19.2 17.2 18.1
Accounts payable 521.7 323.9 327.2
Other current liabilities 388.3 378.0 242.0
-------- -------- --------
Total current liabilities 1,218.1 922.8 761.8
Long-term debt 1,561.9 1,547.3 1,161.6
Deferred income taxes 474.2 441.4 301.6
UGI Utilities preferred shares subject to
mandatory redemption, without par value -- -- 19.0
Other noncurrent liabilities 337.5 311.4 107.3
-------- -------- --------
Total liabilities 3,591.7 3,222.9 2,351.3
Commitments and contingencies (note 8)
Minority interests 169.8 178.4 149.8
Common stockholders' equity:
Common Stock, without par value (authorized - 150,000,000 shares;
issued - 57,576,497, 57,576,497 and 49,798,097 shares, respectively) 763.3 762.8 512.2
Retained earnings 208.4 146.2 117.5
Accumulated other comprehensive income 42.2 22.6 15.6
Notes receivable from employees (0.2) (0.2) (0.4)
-------- -------- --------
1,013.7 931.4 644.9
Treasury stock, at cost (94.7) (97.3) (107.0)
-------- -------- --------
Total common stockholders' equity 919.0 834.1 537.9
-------- -------- --------
Total liabilities and stockholders' equity $4,680.5 $4,235.4 $3,039.0
======== ======== ========
See accompanying notes to condensed consolidated financial statements.
-1-
UGI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(Millions of dollars, except per share amounts)
Three Months Ended
December 31,
------------------
2004 2003
-------- -------
Revenues $1,363.1 $ 893.7
Costs and expenses:
Cost of sales 913.3 596.9
Operating and administrative expenses 257.6 163.3
Utility taxes other than income taxes 3.2 3.1
Depreciation and amortization 37.6 27.5
Other income, net (23.6) (5.4)
-------- -------
1,188.1 785.4
-------- -------
Operating income 175.0 108.3
Income (loss) from equity investees (0.7) 4.2
Interest expense (33.5) (26.7)
Minority interests, principally in AmeriGas Partners (20.6) (22.7)
-------- -------
Income before income taxes 120.2 63.1
Income tax expense (42.0) (24.3)
-------- -------
Net income $ 78.2 $ 38.8
======== =======
Earnings per common share:
Basic $ 1.52 $ 0.91
======== =======
Diluted $ 1.49 $ 0.88
======== =======
Average common shares outstanding (millions):
Basic 51.374 42.839
======== =======
Diluted 52.600 43.947
======== =======
Dividends declared per common share $ 0.3125 $0.2850
======== =======
See accompanying notes to condensed consolidated financial statements.
-2-
UGI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Millions of dollars)
Three Months Ended
December 31,
------------------
2004 2003
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 78.2 $ 38.8
Reconcile to net cash provided by operating activities:
Depreciation and amortization 37.6 27.5
Minority interests 20.6 22.7
Deferred income taxes, net 1.5 6.1
Other, net (6.3) 6.2
Net change in:
Accounts receivable and accrued utility revenues (296.3) (185.3)
Inventories (12.4) (8.3)
Deferred fuel costs (4.8) (8.4)
Accounts payable 169.6 124.1
Other current assets and liabilities 17.1 (9.8)
------- -------
Net cash provided by operating activities 4.8 13.6
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment (40.9) (24.1)
Net proceeds from disposals of assets 6.1 4.0
Acquisitions of businesses, net of cash acquired (24.7) (33.5)
Other, net 2.5 0.1
------- -------
Net cash used by investing activities (57.0) (53.5)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends on UGI Common Stock (16.0) (12.2)
Distributions on AmeriGas Partners publicly held Common Units (16.5) (15.3)
Issuance of long-term debt 20.5 --
Repayment of long-term debt (2.3) (1.4)
AmeriGas Propane bank loans increase 30.0 36.0
UGI Utilities bank loans increase 22.1 31.5
Other bank loans increase -- 1.0
Redemption of UGI Utilities preferred shares subject to
mandatory redemption (20.0) --
Issuance of UGI Common Stock 3.1 1.7
------- -------
Net cash provided by financing activities 20.9 41.3
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 3.4 0.1
------- -------
Cash and cash equivalents (decrease) increase $ (27.9) $ 1.5
======= =======
Cash and cash equivalents:
End of period $ 121.7 $ 143.6
Beginning of period 149.6 142.1
------- -------
(Decrease) increase $ (27.9) $ 1.5
======= =======
See accompanying notes to condensed 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, retail propane
distribution, energy marketing and related businesses in the United States.
Through foreign subsidiaries and a joint-venture affiliate, UGI also
distributes liquefied petroleum gases ("LPG") in France, Austria, the Czech
Republic, Slovakia and China.
We conduct a national propane distribution business through AmeriGas
Partners, L.P. ("AmeriGas Partners") and its principal operating
subsidiaries AmeriGas Propane, L.P. ("AmeriGas OLP") and AmeriGas OLP's
subsidiary, AmeriGas Eagle Propane, L.P. ("Eagle OLP"). AmeriGas Partners,
AmeriGas OLP and Eagle OLP are Delaware limited partnerships. UGI's wholly
owned second-tier subsidiary AmeriGas Propane, Inc. (the "General Partner")
serves as the general partner of AmeriGas Partners and AmeriGas OLP.
AmeriGas OLP and Eagle OLP (collectively referred to as "the Operating
Partnerships") comprise the largest retail propane distribution business in
the United States serving residential, commercial, industrial, motor fuel
and agricultural customers from locations in 46 states. We refer to
AmeriGas Partners and its subsidiaries together as "the Partnership" and
the General Partner and its subsidiaries, including the Partnership, as
"AmeriGas Propane." At December 31, 2004, the General Partner and its
wholly owned subsidiary Petrolane Incorporated ("Petrolane") collectively
held a 1% general partner interest and a 44.6% limited partner interest in
AmeriGas Partners, and effective 46.1% and 46.0% ownership interests in
AmeriGas OLP and Eagle OLP, respectively. Our limited partnership interest
in AmeriGas Partners comprises 24,525,004 Common Units. The remaining 54.4%
interest in AmeriGas Partners comprises 29,952,268 publicly held Common
Units representing limited partner interests.
Our wholly owned subsidiary, UGI Enterprises, Inc. ("Enterprises") (1) owns
and operates LPG distribution businesses in France ("Antargaz"); (2) owns
and operates LPG distribution businesses in Austria, the Czech Republic and
Slovakia ("FLAGA"); and (3) participates in a propane joint-venture
business in China. We refer to our foreign operations collectively as
"International Propane."
Our natural gas and electric distribution utility businesses are conducted
through our wholly owned subsidiary, UGI Utilities, Inc. ("UGI Utilities").
UGI Utilities owns and operates a natural gas distribution utility ("Gas
Utility") in parts of eastern and southeastern Pennsylvania and an
electricity distribution utility ("Electric Utility") in northeastern
Pennsylvania. Gas Utility and Electric Utility are subject to regulation by
the Pennsylvania Public Utility Commission ("PUC").
In addition, Enterprises conducts an energy marketing business primarily in
the Eastern region of the United States through its wholly owned
subsidiary, UGI Energy Services, Inc. ("Energy Services"). Energy Services'
wholly owned subsidiary UGI Development Company ("UGID"), and UGID's
subsidiaries and joint-venture affiliate Hunlock Creek Energy Ventures, own
and operate interests in Pennsylvania-based electricity generation
-4-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars, except per share amounts)
assets. Through other subsidiaries, Enterprises owns and operates a
heating, ventilation, air-conditioning and refrigeration service business
in the Middle Atlantic states ("HVAC/R").
Our condensed consolidated financial statements include the accounts of UGI
and its controlled subsidiary companies, which, except for the Partnership,
are majority owned, and are together referred to as "we" or "the Company."
We eliminate all significant intercompany accounts and transactions when we
consolidate. We report the public's limited partner interests in the
Partnership and the outside ownership interest in a subsidiary of Antargaz
as minority interests. Entities in which we own 50 percent or less and in
which we exercise significant influence over operating and financial
policies are accounted for by the equity method. Prior to the March 2004
acquisition of the 80.5% remaining ownership interests in AGZ Holding that
we did not already own, Antargaz was accounted for by the equity method.
The accompanying condensed consolidated financial statements are unaudited
and have been prepared in accordance with the rules and regulations of the
U.S. Securities and Exchange Commission ("SEC"). They include all
adjustments which we consider necessary for a fair statement of the results
for the interim periods presented. Such adjustments consisted only of
normal recurring items unless otherwise disclosed. The September 30, 2004
condensed consolidated balance sheet data was derived from audited
financial statements, but does not include all disclosures required by
accounting principles generally accepted in the United States of America.
These financial statements should be read in conjunction with the financial
statements and related notes included in our Annual Report on Form 10-K for
the year ended September 30, 2004 ("Company's 2004 Annual Report") and the
restated condensed consolidated balance sheets and the related Note 2
included in our Amendment No. 1 on Form 10-Q/A for the quarter ended
December 31, 2003. Due to the seasonal nature of our businesses, the
results of operations for interim periods are not necessarily indicative of
the results to be expected for a full year.
EARNINGS PER COMMON SHARE. Basic earnings per share reflect the
weighted-average number of common shares outstanding. Diluted earnings per
share include the effects of dilutive stock options and common stock
awards. Shares used in computing basic and diluted earnings per share are
as follows:
Three Months Ended
December 31,
------------------
2004 2003
------ ------
Denominator (millions of shares):
Average common shares
outstanding for basic computation 51.374 42.839
Incremental shares issuable for stock
options and awards 1.226 1.108
------ ------
Average common shares outstanding for
diluted computation 52.600 43.947
------ ------
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
-5-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars, except per share amounts)
Stock Issued to Employees" ("APB 25"), in recording compensation expense
for grants of stock, stock options and other equity instruments to
employees. We use the intrinsic value method prescribed by APB 25 for our
stock-based employee compensation plans.
We recognized total stock and unit-based compensation expense of $4.5
million and $4.1 million in the three months ended December 31, 2004 and
2003, respectively. If we had determined stock-based compensation expense
under the fair value method prescribed by SFAS 123, net income and basic
and diluted earnings per share for the three months ended December 31, 2004
and 2003 would have been as follows:
Three Months Ended
December 31,
------------------
2004 2003
----- -----
Net income, as reported $78.2 $38.8
Add: Stock and unit-based employee
compensation expense included in
reported net income, net of related tax effects 2.7 2.5
Deduct: Total stock and unit-based
employee compensation expense
determined under the fair value method
for all awards, net of related tax effects (3.0) (2.6)
----- -----
Pro forma net income $77.9 $38.7
----- -----
Basic earnings per share:
As reported $1.52 $0.91
Pro forma $1.52 $0.90
Diluted earnings per share:
As reported $1.49 $0.88
Pro forma $1.48 $0.88
----- -----
COMPREHENSIVE INCOME. The following table presents the components of
comprehensive income for the three months ended December 31, 2004 and 2003.
Three Months Ended
December 31,
------------------
2004 2003
----- -----
Net income $78.2 $38.8
Other comprehensive income 19.6 10.9
----- -----
Comprehensive income $97.8 $49.7
----- -----
Other comprehensive income principally comprises (1) changes in the fair
value of derivative commodity instruments, interest rate protection
agreements and foreign currency derivatives qualifying as hedges and (2)
foreign currency translation adjustments, net of reclassifications to net
income.
-6-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars, except per share amounts)
RECLASSIFICATIONS. We have reclassified certain prior-year period balances
to conform to the current-period presentation.
USE OF ESTIMATES. We make estimates and assumptions when preparing
financial statements in conformity with accounting principles generally
accepted in the United States of America. These estimates and assumptions
affect the reported amounts of assets and liabilities, revenues and
expenses, as well as the disclosure of contingent assets and liabilities.
Actual results could differ from these estimates.
2. ACQUISITIONS
In November 2004, a wholly owned subsidiary of Energy Services acquired
from ConocoPhillips Company ("Conoco") and a wholly owned, indirect
subsidiary of AmeriGas OLP, in separate transactions, 100% of the issued
and outstanding common stock of Atlantic Energy, Inc. ("Atlantic Energy"),
for an aggregate purchase price of approximately $23.4 million in cash,
subject to post-closing adjustments. Atlantic Energy's principal asset is a
20 million gallon propane storage terminal located in Chesapeake, Virginia.
We are currently in the process of completing the review and determination
of the fair value of the assets acquired and liabilities assumed,
principally the fair value of the terminal. The effect of the sale of
AmeriGas OLP's 50% ownership interest in Atlantic Energy to Energy Services
is eliminated in consolidation and only the 50% of Atlantic Energy's assets
and liabilities acquired from Conoco have been subject to a preliminary
purchase price allocation. In connection with this acquisition, Atlantic
Energy and AmeriGas OLP entered into a long-term propane supply agreement.
The pro forma effect of this acquisition was not material to our results of
operations.
Also, during the three months ended December 31, 2004, AmeriGas OLP
completed three acquisitions of small retail propane distribution
businesses. The operating results of these businesses have been included in
our operating results from their respective dates of acquisition. The pro
forma effect of these transactions was not material to our results of
operations.
3. SEGMENT INFORMATION
We have organized our business units into six reportable segments generally
based upon products sold, geographic location (domestic or international)
or regulatory environment. Our reportable segments are: (1) AmeriGas
Propane; (2) an international LPG segment comprising Antargaz; (3) an
international LPG segment comprising FLAGA and our international LPG equity
investment ("Other"); (4) Gas Utility; (5) Electric Utility; and (6) Energy
Services (comprising Energy Services' gas marketing business and UGID's
electricity generation business). We refer to both international segments
collectively as "International Propane."
The accounting policies of the six segments disclosed are the same as those
described in the Significant Accounting Policies note contained in the
Company's 2004 Annual Report. We
-7-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars, except per share amounts)
evaluate AmeriGas Propane's performance principally based upon the
Partnership's earnings before interest expense, income taxes, depreciation
and amortization ("Partnership EBITDA"). Although we use Partnership EBITDA
to evaluate AmeriGas Propane's profitability, it should not be considered
as an alternative to net income (as an indicator of operating performance)
or as an alternative to cash flow (as a measure of liquidity or ability to
service debt obligations) and is not a measure of performance or financial
condition under accounting principles generally accepted in the United
States of America. The Company's definition of Partnership EBITDA may be
different from that used by other companies. We evaluate the performance of
our International Propane, Gas Utility, Electric Utility and Energy
Services segments principally based upon their income before income taxes.
-8-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Millions of dollars, except per share amounts)
3. SEGMENT INFORMATION (CONTINUED)
Three Months Ended December 31, 2004:
Reportable Segments
------------------------------------------------------------
International Propane
AmeriGas Gas Electric Energy --------------------- Corporate
Total Elims. Propane Utility Utility Services Antargaz Other (a) & Other (b)
-------- ------- -------- ------- -------- -------- --------- --------- -----------
Revenues $1,363.1 $ -- $ 556.2 $161.2 $22.3 $329.0 $ 258.7 $ 20.2 $ 15.5
======== ======= ======== ====== ===== ====== ======== ====== ======
Cost of sales $ 913.3 $ -- $ 351.1 $106.6 $11.0 $313.2 $ 110.0 $ 12.0 $ 9.4
======== ======= ======== ====== ===== ====== ======== ====== ======
Segment profit:
Operating income (c) $ 175.0 $ -- $ 58.6 $ 28.1 $ 4.7 $ 6.1 $ 75.8 $ 1.6 $ 0.1
Loss from equity investees (0.7) -- -- -- -- -- (0.6) (0.1) --
Interest expense (33.5) -- (20.5) (4.1) (0.5) -- (7.6) (0.9) 0.1
Minority interests (20.6) -- (20.3) -- -- -- (0.3) -- --
-------- ------- -------- ------ ----- ------ -------- ------ ------
Income before income taxes (c) $ 120.2 $ -- $ 17.8 $ 24.0 $ 4.2 $ 6.1 $ 67.3 $ 0.6 $ 0.2
======== ======= ======== ====== ===== ====== ======== ====== ======
Depreciation and amortization $ 37.6 $ -- $ 19.3 $ 5.1 $ 0.7 $ 1.3 $ 9.6 $ 1.3 $ 0.3
Partnership EBITDA (d) $ 86.4
Segment assets (at period end) $4,680.5 $(334.6) $1,639.9 $810.1 $91.1 $298.3 $1,561.3 $172.8 $441.6
======== ======= ======== ====== ===== ====== ======== ====== ======
Investments in equity investees
(at period end) $ 15.1 $ -- $ -- $ -- $ -- $ 8.5 $ 3.8 $ 2.8 $ --
======== ======= ======== ====== ===== ====== ======== ====== ======
Goodwill and excess reorganization
value (at period end) $1,305.3 $ -- $ 616.8 $ -- $ -- $ 5.0 $ 603.6 $ 74.4 $ 5.5
======== ======= ======== ====== ===== ====== ======== ====== ======
Three Months Ended December 31, 2003:
Reportable Segments
------------------------------------------------------------
International Propane
AmeriGas Gas Electric Energy --------------------- Corporate
Total Elims. Propane Utility Utility Services Antargaz Other (a) & Other (b)
-------- ------- -------- ------- -------- -------- --------- --------- -----------
Revenues $ 893.7 $ (0.6) $ 460.2 $149.3 $21.4 $232.9 $ -- $ 15.8 $ 14.7
======== ====== ======== ====== ===== ====== ===== ====== ======
Cost of sales $ 596.9 $ -- $ 254.5 $ 95.1 $10.5 $220.6 $ -- $ 7.6 $ 8.6
======== ====== ======== ====== ===== ====== ===== ====== ======
Segment profit:
Operating income (loss) $ 108.3 $ -- $ 65.6 $ 29.4 $ 4.5 $ 6.3 $(0.2) $ 2.0 $ 0.7
Income from equity investees 4.2 -- -- -- -- -- 4.2 -- --
Interest expense (26.7) -- (21.1) (4.1) (0.5) -- (0.9) (0.1)
Minority interests in AmeriGas
Partners (22.7) -- (22.7) -- -- -- -- -- --
-------- ------ -------- ------ ----- ------ ----- ------ ------
Income before income taxes $ 63.1 $ -- $ 21.8 $ 25.3 $ 4.0 $ 6.3 $ 4.0 $ 1.1 $ 0.6
======== ====== ======== ====== ===== ====== ===== ====== ======
Depreciation and amortization $ 27.5 $ -- $ 19.7 $ 4.7 $ 0.7 $ 1.0 $ -- $ 1.1 $ 0.3
Partnership EBITDA (d) $ 84.6
Segment assets (at period end) $3,039.0 $(46.3) $1,617.8 $781.8 $84.8 $219.0 $30.0 $152.5 $199.4
======== ====== ======== ====== ===== ====== ===== ====== ======
Investments in equity investees
(at period end) $ 45.2 $ -- $ 2.8 $ -- $ -- $ 9.4 $30.0 $ 3.0 $ --
======== ====== ======== ====== ===== ====== ===== ====== ======
Goodwill and excess reorganization
value (at period end) $ 679.8 $ -- $ 603.9 $ -- $ -- $ 2.8 $ -- $ 67.8 $ 5.3
======== ====== ======== ====== ===== ====== ===== ====== ======
(a) International Propane-Other principally comprises FLAGA and our
joint-venture business in China.
(b) Corporate & Other's results principally comprise UGI Enterprises' HVAC/R
operations, net expenses of UGI's captive general liability insurance
company and UGI Corporation's unallocated corporate and general expenses,
and interest income. Corporate & Other assets principally comprise cash,
short-term investments and an intercompany loan. The intercompany interest
associated with the intercompany loan is removed in the segment
presentation.
(c) International Propane-Antargaz' results for the three months ended December
31, 2004 include $19.9 million of operating income and income before income
taxes due to the resolution of certain non-income tax contingencies as of
December 31, 2004 (see Note 8).
(d) The following table provides a reconciliation of Partnership EBITDA to
AmeriGas Propane operating income:
Three months ended December 31, 2004 2003
- ---------------------------------- ------- -------
Partnership EBITDA (i) $ 86.4 $ 84.6
Depreciation and amortization (ii) (19.3) (19.6)
Minority interests (iii) 0.6 0.6
Gain on sale of Atlantic Energy (9.1) --
------ ------
Operating income $ 58.6 $ 65.6
====== ======
(i) Includes $9.1 million gain on sale of Atlantic Energy to Energy Services
during the three months ended December 31, 2004.
(ii) Excludes General Partner depreciation and amortization of $0.1 million in
the three months ended December 31, 2003.
(iii) Principally represents the General Partner's 1.01% interest in AmeriGas
OLP.
-9-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars, except per share amounts)
4. REDEMPTION OF $7.75 UGI UTILITIES SERIES PREFERRED STOCK
On October 1, 2004, UGI Utilities redeemed all 200,000 shares of the $7.75
UGI Utilities Series Preferred Stock at a price of $100 per share together
with full cumulative dividends. The redemption of the $7.75 UGI Utilities
Series Preferred Stock was funded with proceeds from the October 2004
issuance of $20 million of 6.13% Medium-Term Notes due October 2034.
5. INTANGIBLE ASSETS
The Company's intangible assets comprise the following:
December 31, September 30,
2004 2004
------------ -------------
Not subject to amortization:
Goodwill $1,212.0 $1,152.6
Excess reorganization value 93.3 93.3
-------- --------
$1,305.3 $1,245.9
-------- --------
Other intangible assets:
Customer relationships, noncompete
agreements and other $ 187.1 $ 169.7
Trademark (not subject to amortization) 46.1 42.2
-------- --------
Gross carrying amount 233.2 211.9
-------- --------
Accumulated amortization (32.6) (27.5)
-------- --------
Net carrying amount $ 200.6 $ 184.4
======== ========
The increase in intangible assets during the three months ended December
31, 2004 principally reflects the effects of foreign currency translation
and business acquisitions. Amortization expense of intangible assets was
$4.4 million and $1.7 million for the three months ended December 31, 2004
and 2003, respectively. Our expected aggregate amortization expense of
intangible assets for the next five fiscal years is as follows: Fiscal 2005
- $17.7 million; Fiscal 2006 - $17.3 million; Fiscal 2007 - $16.6 million;
Fiscal 2008 - $16.2 million; Fiscal 2009 - $14.9 million.
6. ENERGY SERVICES ACCOUNTS RECEIVABLE SECURITIZATION FACILITY
Energy Services has a $150 million receivables purchase facility
("Receivables Facility") with an issuer of receivables-backed commercial
paper expiring in August 2007, although the Receivables Facility may
terminate prior to such date due to the termination of the commitments of
the Receivables Facility's back-up purchasers. Under the Receivables
Facility, Energy Services transfers, on an ongoing basis and without
recourse, its trade accounts receivable to its wholly owned, special
purpose subsidiary, Energy Services Funding Corporation ("ESFC"), which is
consolidated for financial statement purposes. ESFC, in turn, has sold, and
subject to certain conditions, may from time to time sell, an undivided
interest in the receivables to a commercial paper conduit of a major bank.
The
-10-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars, except per share amounts)
maximum level of funding available at any one time from this facility is
$150 million. The proceeds of these sales are less than the face amount of
the accounts receivable sold by an amount that approximates the purchaser's
financing cost of issuing its own receivables-backed commercial paper. ESFC
was created and has been structured to isolate its assets from creditors of
Energy Services and its affiliates, including UGI. This two-step
transaction is accounted for as a sale of receivables following the
provisions of SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." Energy Services
continues to service, administer and collect trade receivables on behalf of
the commercial paper issuer and ESFC.
During the three months ended December 31, 2004, Energy Services sold trade
receivables totaling $285.8 million to ESFC. During the three months ended
December 31, 2004, ESFC sold an aggregate $63 million of undivided
interests in its trade receivables to the commercial paper conduit. At
December 31, 2004, the outstanding balance of ESFC trade receivables was
$93.9 million which is net of $26 million that was sold to the commercial
paper conduit and removed from the balance sheet.
In addition, a major bank has committed to issue up to $50 million of
standby letters of credit, secured by cash or marketable securities ("LC
Facility"). Energy Services expects to fund the collateral requirements
with borrowings under its Receivables Facility. Energy Services expects to
renew the LC Facility prior to its expiration in April 2005.
7. DEFINED BENEFIT PENSION AND OTHER POSTRETIREMENT PLANS
We sponsor a defined benefit pension plan ("UGI Utilities Pension Plan")
for employees of UGI, UGI Utilities, and certain of UGI's other wholly
owned subsidiaries. In addition, we provide postretirement health care
benefits to certain retirees and a limited number of active employees
meeting certain age and service requirements, and postretirement life
insurance benefits to nearly all domestic active and retired employees.
Antargaz provides certain pension and postretirement health care benefits
for its employees.
Net periodic expense (income) and other postretirement benefit costs
include the following components:
Other
Pension Benefits Postretirement Benefits
Three Months Ended Three Months Ended
December 31, December 31,
------------------ -----------------------
2004 2003 2004 2003
----- ----- ----- -----
Service cost $ 1.4 $ 1.3 $ 0.1 $ 0.1
Interest cost 3.5 3.3 0.5 0.3
Expected return on assets (4.5) (4.4) (0.1) (0.1)
Amortization of:
Transition (asset) obligation -- (0.4) 0.2 0.1
Prior service cost 0.2 0.1 -- --
Actuarial loss 0.4 0.3 0.1 --
----- ----- ----- -----
Net benefit cost 1.0 0.2 0.8 0.4
Change in regulatory assets and liabilities -- -- 0.3 0.2
----- ----- ----- -----
Net expense $ 1.0 $ 0.2 $ 1.1 $ 0.6
===== ===== ===== =====
-11-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars, except per share amounts)
UGI Utilities Pension Plan assets are held in trust and consist principally
of equity and fixed income mutual funds. The Company does not believe it
will be required to make any contributions to the UGI Utilities Pension
Plan during the year ended September 30, 2005. Pursuant to orders
previously issued by the PUC, UGI Utilities has established a Voluntary
Employees' Beneficiary Association ("VEBA") trust to fund and pay UGI
Utilities' postretirement health care and life insurance benefits referred
to above by depositing into the VEBA the annual amount of postretirement
benefit costs determined under SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." The difference between the
annual amount calculated and the amount included in UGI Utilities' rates is
deferred for future recovery from, or refund to, ratepayers. UGI Utilities
expects to contribute approximately $2.5 million to the VEBA during the
year ending September 30, 2005. During the three months ended December 31,
2004, UGI Utilities made contributions of approximately $0.6 million to the
VEBA.
We also sponsor unfunded and non-qualified supplemental executive
retirement income plans. We recorded expense for these plans of $0.4
million in both of the three months ended December 31, 2004 and 2003.
8. COMMITMENTS AND CONTINGENCIES
The Partnership has succeeded to certain lease guarantee obligations of
Petrolane relating to Petrolane's divestiture of non-propane operations
before its 1989 acquisition by QFB Partners. Future lease payments under
these leases total approximately $12 million at December 31, 2004. The
leases expire through 2010 and some of them are currently in default. The
Partnership has succeeded to the indemnity agreement of Petrolane by which
Texas Eastern Corporation ("Texas Eastern"), a prior owner of Petrolane,
agreed to indemnify Petrolane against any liabilities arising out of the
conduct of businesses that do not relate to, and are not a part of, the
propane business, including lease guarantees. In December 1999, Texas
Eastern filed for dissolution under the Delaware General Corporation Law.
PanEnergy Corporation ("PanEnergy"), Texas Eastern's sole stockholder,
assumed all of Texas Eastern's liabilities as of December 20, 2002, to the
extent of the value of Texas Eastern's assets transferred to PanEnergy as
of that date (which was estimated to exceed $94 million), and to the extent
that such liabilities arise within ten years from Texas Eastern's date of
dissolution. Notwithstanding the dissolution proceeding, and based on Texas
Eastern previously having satisfied directly defaulted lease obligations
without the Partnership's having to honor its guarantee, we believe that
the probability that the Partnership will be required to directly satisfy
the lease obligations subject to the indemnification agreement is remote.
On August 21, 2001, AmeriGas Partners, through AmeriGas OLP, acquired the
propane distribution businesses of Columbia Energy Group (the "2001
Acquisition") pursuant to the terms of a purchase agreement (the "2001
Acquisition Agreement") by and among Columbia Energy Group ("CEG"),
Columbia Propane Corporation ("Columbia Propane"), Columbia Propane, L.P.
("CPLP"), CP Holdings, Inc. ("CPH," and together with Columbia Propane and
CPLP, the "Company Parties"), AmeriGas Partners, AmeriGas OLP and the
General
-12-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars, except per share amounts)
Partner (together with AmeriGas Partners and AmeriGas OLP, the "Buyer
Parties"). As a result of the 2001 Acquisition, AmeriGas OLP acquired all
of the stock of Columbia Propane and CPH and substantially all of the
partnership interests of CPLP. Under the terms of an earlier acquisition
agreement (the "1999 Acquisition Agreement"), the Company Parties agreed to
indemnify the former general partners of National Propane Partners, L.P. (a
predecessor company of the Columbia Propane businesses) and an affiliate
(collectively, "National General Partners") against certain income tax and
other losses that they may sustain as a result of the 1999 acquisition by
CPLP of National Propane Partners, L.P. (the "1999 Acquisition") or the
operation of the business after the 1999 Acquisition ("National Claims").
At December 31, 2004, the potential amount payable under this indemnity by
the Company Parties was approximately $58 million. These indemnity
obligations will expire on the date that CPH acquires the remaining
outstanding partnership interest of CPLP, which is expected to occur on or
after July 19, 2009. Under the terms of the 2001 Acquisition Agreement, CEG
agreed to indemnify the Buyer Parties and the Company Parties against any
losses that they sustain under the 1999 Acquisition Agreement and related
agreements ("Losses"), including National Claims, to the extent such claims
are based on acts or omissions of CEG or the Company Parties prior to the
2001 Acquisition. The Buyer Parties agreed to indemnify CEG against Losses,
including National Claims, to the extent such claims are based on acts or
omissions of the Buyer Parties or the Company Parties after the 2001
Acquisition. CEG and the Buyer Parties have agreed to apportion certain
losses resulting from National Claims to the extent such losses result from
the 2001 Acquisition itself.
Samuel and Brenda Swiger and their son (the "Swigers") sustained personal
injuries and property damage as a result of a fire that occurred when
propane that leaked from an underground line ignited. In July 1998, the
Swigers filed a class action lawsuit against AmeriGas Propane, L.P. (named
incorrectly as "UGI/AmeriGas, Inc."), in the Circuit Court of Monongalia
County, West Virginia, in which they sought to recover an unspecified
amount of compensatory and punitive damages and attorney's fees, for
themselves and on behalf of persons in West Virginia for whom the
defendants had installed propane gas lines, allegedly resulting from the
defendants' failure to install underground propane lines at depths required
by applicable safety standards. The court recently granted the plaintiffs'
motion to include customers acquired from Columbia Propane in August 2001
as additional potential class members and to amend their complaint to name
additional parties consistent with such ruling. In 2003, we settled the
individual personal injury and property damage claims of the Swigers. Class
counsel has indicated that the class is seeking compensatory damages in
excess of $12 million plus punitive damages, civil penalties and attorneys'
fees. We believe we have good defenses to the claims of the class members
and intend to vigorously defend against the remaining claims in this
lawsuit.
From the late 1800s through the mid-1900s, UGI Utilities and its former
subsidiaries owned and operated a number of manufactured gas plants
("MGPs") prior to the general availability of natural gas. Some
constituents of coal tars and other residues of the manufactured gas
process are today considered hazardous substances under the Superfund Law
and may be present on the sites of former MGPs. Between 1882 and 1953, UGI
Utilities owned the stock of subsidiary gas companies in Pennsylvania and
elsewhere and also operated the businesses
-13-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars, except per share amounts)
of some gas companies under agreement. Pursuant to the requirements of the
Public Utility Holding Company Act of 1935, UGI Utilities divested all of
its utility operations other than those which now constitute Gas Utility
and Electric Utility.
UGI Utilities does not expect its costs for investigation and remediation
of hazardous substances at Pennsylvania MGP sites to be material to its
results of operations because Gas Utility is currently permitted to include
in rates, through future base rate proceedings, prudently incurred
remediation costs associated with such sites. UGI Utilities has been
notified of several sites outside Pennsylvania on which private parties
allege MGPs were formerly owned or operated by it or owned or operated by
its former subsidiaries. Such parties are investigating the extent of
environmental contamination or performing environmental remediation. UGI
Utilities is currently litigating three claims against it relating to
out-of-state sites.
Management believes that under applicable law UGI Utilities should not be
liable in those instances in which a former subsidiary owned or operated an
MGP. There could be, however, significant future costs of an uncertain
amount associated with environmental damage caused by MGPs outside
Pennsylvania that UGI Utilities directly operated, or that were owned or
operated by former subsidiaries of UGI Utilities, if a court were to
conclude that (1) the subsidiary's separate corporate form should be
disregarded or (2) UGI Utilities should be considered to have been an
operator because of its conduct with respect to its subsidiary's MGP.
In April 2003, Citizens Communications Company ("Citizens") served a
complaint naming UGI Utilities as a third-party defendant in a civil action
pending in United States District Court for the District of Maine. In that
action, the plaintiff, City of Bangor, Maine ("City"), sued Citizens to
recover environmental response costs associated with MGP wastes generated
at a plant allegedly operated by Citizens' predecessors at a site on the
Penobscot River. Citizens subsequently joined UGI Utilities and ten other
third party defendants alleging that the third-party defendants are
responsible for an equitable share of costs Citizens may be required to pay
to the City for cleaning up tar deposits in the Penobscot River. The City
believes that it could cost as much as $50 million to clean up the river.
UGI Utilities believes that it has good defenses to the claim and is
defending the suit.
By letter dated July 29, 2003, Atlanta Gas Light Company ("AGL") served UGI
Utilities with a complaint filed in the United States District Court for
the Middle District of Florida in which AGL alleges that UGI Utilities is
responsible for 20% of approximately $8 million incurred by AGL in the
investigation and remediation of a former MGP site in St. Augustine,
Florida. UGI Utilities formerly owned stock of the St. Augustine Gas
Company, the owner and operator of the MGP. UGI Utilities believes that it
has good defenses to the claim and is defending the suit.
AGL previously informed UGI Utilities that it was investigating
contamination that appeared to be related to MGP operations at a site owned
by AGL in Savannah, Georgia. A former subsidiary of UGI Utilities operated
the MGP in the early 1900s. AGL has recently informed UGI Utilities that it
has begun remediation of MGP wastes at the site and believes that the
-14-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars, except per share amounts)
total cost of remediation could be as high as $55 million. AGL has not
filed suit against UGI Utilities for a share of these costs. UGI Utilities
believes that it will have good defenses to any action that may arise out
of this site.
On September 20, 2001, Consolidated Edison Company of New York ("ConEd")
filed suit against UGI Utilities in the United States District Court for
the Southern District of New York, seeking contribution from UGI Utilities
for an allocated share of response costs associated with investigating and
assessing gas plant related contamination at former MGP sites in
Westchester County, New York. The complaint alleges that UGI Utilities
"owned and operated" the MGPs prior to 1904. The complaint also seeks a
declaration that UGI Utilities is responsible for an allocated percentage
of future investigative and remedial costs at the sites. ConEd believes
that the cost of remediation for all of the sites could exceed $70 million.
By orders issued in November 2003 and March 2004, the court granted UGI
Utilities' motion for summary judgment and dismissed ConEd's complaint.
ConEd has appealed.
By letter dated June 24, 2004, KeySpan Energy ("KeySpan") informed UGI
Utilities that KeySpan has spent $2.3 million and expects to spend another
$11 million to clean up an MGP site it owns in Sag Harbor, New York.
KeySpan believes that UGI Utilities is responsible for approximately 50% of
these costs as a result of UGI Utilities' alleged direct ownership and
operation of the plant from 1885 to 1902. UGI Utilities is in the process
of reviewing the information provided by KeySpan and is investigating this
claim.
By letter dated August 5, 2004, Yankee Gas Services Company and Connecticut
Light and Power Company, subsidiaries of Northeast Utilities, (together,
the "Northeast Companies"), demanded contribution from UGI Utilities for
past and future remediation costs related to MGP operations on thirteen
sites owned by the Northeast Companies in nine cities in the State of
Connecticut. The Northeast Companies allege that UGI Utilities controlled
operations of the plants from 1883 to 1941. According to the letter,
investigation and remedial costs at the sites to date total approximately
$10 million and complete remediation costs for all sites could total $182
million. The Northeast Companies seek an unspecified fair and equitable
allocation of these costs to UGI Utilities. UGI Utilities is in the process
of reviewing the information provided by Northeast Companies and is
investigating this claim.
Antargaz filed suit against the French tax authorities in connection with
the assessment of non-income tax related to Antargaz owned tanks at
customer locations used to store LPG. Elf Antar France, now Total France,
and Elf Aquitaine, former owners of Antargaz, agreed to indemnify Antargaz
for all payments which would have been due from Antargaz in respect of the
tax related to its tanks for the period from January 1, 1997 through
December 31, 2000. The indemnity from the former owners amounts to
approximately E9.4 million ($12.8 million) of the tax liability and is
reflected in "Prepaid and other current assets" in the Condensed
Consolidated Balance Sheet at December 31, 2004. Antargaz had recorded a
liability for the tax relating to tanks of various customer classes for the
period from January 1, 1997 through December 31, 2004 of approximately
E29.9 million ($40.6 million). On February 4, 2005, Antargaz received a
letter from French authorities which eliminated the requirement for
Antargaz to provide taxes on Antargaz owned tanks at certain customer
-15-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars, except per share amounts)
locations. In addition, resolution was reached on tax contingencies
relating to a prior year. Therefore, effective December 31, 2004, Antargaz
reversed (1) E8.8 million ($12.0 million) resulting from the exemption of
tanks at certain customer locations and (2) E5.9 million ($7.9 million)
resulting from the resolution reached on a prior year's taxes. The total
pre-tax amount of $19.9 million is reflected in "Other income, net" in the
Condensed Consolidated Statement of Income for the three month period ended
December 31, 2004. The after-tax effect of this reversal resulted in $14.9
million of net income.
In addition to these matters, there are other pending claims and legal
actions arising in the normal course of our businesses. We cannot predict
with certainty the final results of environmental and other matters.
However, it is reasonably possible that some of them could be resolved
unfavorably to us. 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. At December 31, 2004,
the Company's accrued liability for environmental investigation and cleanup
costs was not material.
9. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"). SFAS 123R
replaces SFAS 123 and supersedes APB 25. SFAS 123, as originally issued in
1995, established as preferable a fair-value-based method of accounting for
share-based payment transactions with employees. However, SFAS 123
permitted entities the option of continuing to apply the guidance in APB
25, as long as the footnotes to financial statements disclosed what net
income would have been had the preferable fair-value-based method been
used. SFAS 123R requires that the compensation cost relating to share-based
payment transactions be recognized in the financial statements. The cost is
required to be measured based on the fair value of the equity or liability
instruments issued. SFAS 123R covers a wide range of share-based
compensation arrangements including share options, restricted share plans,
performance-based awards, share appreciation rights and employee share
purchase plans. SFAS 123R is effective for our interim period beginning
after June 15, 2005. Under all of the transition methods, unrecognized
compensation expense for awards that are not vested on the adoption date
will be recognized in the Company's statements of income through the end of
the requisite service period. We do not believe that the adoption of SFAS
123R will have a material impact on its results of operations or financial
position. Also, see Note 1.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets - An Amendment of APB Opinion No. 29, Accounting for Nonmonetary
Transactions" ("SFAS 153"). SFAS 153 eliminates the exception from fair
value measurement for nonmonetary exchanges of similar productive assets in
paragraph 21(b) of APB Opinion No. 29, "Accounting for Nonmonetary
Transactions," and replaces it with an exception for exchanges that lack
commercial substance. SFAS 153 specifies that a nonmonetary
-16-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars, except per share amounts)
exchange has commercial substance if the future cash flows of the entity
are expected to change significantly as a result of the exchange. SFAS 153
is effective for our interim period beginning after June 15, 2005. We do
not believe that the adoption of SFAS 153 will have a material effect on
our results of operations or financial position.
In December 2004, the FASB issued FASB Staff Position 109-1, "Application
of FASB Statement No. 109, Accounting for Income Taxes, to the Tax
Deduction on Qualified Production Activities Provided by the American Jobs
Creation Act of 2004" ("FSP 109-1") and FASB Staff Position 109-2,
"Accounting and Disclosure Guidance for the Foreign Earnings Repatriation
Provision Within the American Jobs Creation Act of 2004" ("FSP 109-2"). The
American Jobs Creations Act provides deductions for qualified domestic
production activities and repatriation of foreign earnings. We are
currently assessing the impact of the American Jobs Creation Act, but do
not expect the impact of FSP 109-1 and FSP 109-2 to have a material effect
on our financial position or results of operations.
-17-
UGI CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Information contained in this Management's Discussion and Analysis of Financial
Condition and Results of Operations and elsewhere in this Quarterly Report may
contain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Such statements use forward-looking words such as "believe," "plan,"
"anticipate," "continue," "estimate," "expect," "may," "will," or other similar
words. These statements discuss plans, strategies, events or developments that
we expect or anticipate will or may occur in the future.
A forward-looking statement may include a statement of the assumptions or bases
underlying the forward-looking statement. We believe that we have chosen these
assumptions or bases in good faith and that they are reasonable. However, we
caution you that actual results almost always vary from assumed facts or bases,
and the differences between actual results and assumed facts or bases can be
material, depending on the circumstances. When considering forward-looking
statements, you should keep in mind the following important factors which could
affect our future results and could cause those results to differ materially
from those expressed in our forward-looking statements: (1) adverse weather
conditions resulting in reduced demand; (2) cost volatility and availability of
propane and other liquefied petroleum gases ("LPG"), oil, electricity, coal and
natural gas and the capacity to transport product to our market areas; (3)
changes in domestic and foreign laws and regulations, including safety, tax and
accounting matters; (4) competitive pressures from the same and alternative
energy sources; (5) failure to acquire new customers thereby reducing or
limiting any increase in revenues; (6) liability for environmental claims; (7)
customer conservation measures and improvements in energy efficiency and
technology resulting in reduced demand; (8) adverse labor relations; (9) large
customer, counterparty or supplier defaults; (10) liability in excess of
insurance coverage for personal injury and property damage arising from
explosions and other catastrophic events, including acts of terrorism, resulting
from operating hazards and risks incidental to generating and distributing
electricity and transporting, storing and distributing natural gas, propane and
LPG; (11) political, regulatory and economic conditions in the United States and
in foreign countries; (12) interest rate fluctuations and other capital market
conditions, including foreign currency rate fluctuations; (13) reduced
distributions from subsidiaries; and (14) the timing and success of the
Company's efforts to develop new business opportunities.
These factors are not necessarily all of the important factors that could cause
actual results to differ materially from those expressed in any of our
forward-looking statements. Other unknown or unpredictable factors could also
have material adverse effects on future results. We undertake no obligation to
update publicly any forward-looking statement whether as a result of new
information or future events except as required by federal securities laws.
-18-
UGI CORPORATION AND SUBSIDIARIES
ANALYSIS OF RESULTS OF OPERATIONS
The following analysis compares our results of operations for the three months
ended December 31, 2004 ("2004 three-month period") with the three months ended
December 31, 2003 ("2003 three-month period"). Our analysis of results of
operations should be read in conjunction with the segment information included
in Note 3 to the Condensed Consolidated Financial Statements.
EXECUTIVE OVERVIEW
Net income for the 2004 three-month period was $39.4 million higher than in the
2003 three-month period, substantially as a result of our 100% ownership of
Antargaz effective with our March 2004 acquisition of the remaining 80.5%
ownership interests in AGZ Holding ("Antargaz Acquisition"). Antargaz' results
for the 2004 three-month period include $14.9 million in net income ($0.28 per
diluted share) resulting from the resolution of certain non-income tax
contingencies. Weather in the United States and Europe experienced by our major
businesses was warmer than normal, with the exception of our Gas Utility, which
experienced approximately normal weather.
2004 THREE-MONTH PERIOD COMPARED WITH 2003 THREE-MONTH PERIOD
Three months ended December 31, 2004 2003
- ------------------------------- ----- -----
(millions of dollars)
Net income (loss):
AmeriGas Propane (a) $10.4 $12.9
International Propane 47.2 4.8
Gas Utility 14.5 15.2
Electric Utility 2.5 2.4
Energy Services 3.6 3.7
Corporate & Other -- (0.2)
----- -----
$78.2 $38.8
Total net income ===== =====
(a) Amounts are net of minority interests in AmeriGas Partners, L.P.
-19-
UGI CORPORATION AND SUBSIDIARIES
2004 THREE-MONTH PERIOD COMPARED WITH 2003 THREE-MONTH PERIOD
Increase
Three months ended December 31, 2004 2003 (Decrease)
- ----------------------------------- ------ ------ ---------------
(Millions of dollars)
AMERIGAS PROPANE:
Revenues $556.2 $460.2 $ 96.0 20.9%
Total margin (a) $205.1 $205.7 $ (0.6) (0.3)%
Partnership EBITDA (b) $ 86.4 $ 84.6 $ 1.8 2.1%
Operating income $ 58.6 $ 65.6 $ (7.0) (10.7)%
Retail gallons sold (millions) 296.8 304.5 (7.7) (2.5)%
Degree days - % warmer
than normal (c) (8.0)% (7.4)% -- --
INTERNATIONAL PROPANE:
Revenues $278.9 $ 15.8 $263.1 N.M.
Total margin (a) $156.9 $ 8.2 $148.7 N.M.
Operating income $ 77.4 $ 1.8 $ 75.6 N.M.
(Loss) income from equity investees $ (0.7) $ 4.2 $ (4.9) N.M.
Income before income taxes $ 67.9 $ 5.1 $ 62.8 N.M.
GAS UTILITY:
Revenues $161.2 $149.3 $ 11.9 8.0%
Total margin (a) $ 54.6 $ 54.2 $ 0.4 0.7%
Operating income $ 28.1 $ 29.4 $ (1.3) (4.4)%
Income before income taxes $ 24.0 $ 25.3 $ (1.3) (5.1)%
System throughput -
billions of cubic feet ("bcf") 23.0 23.3 (0.3) (1.3)%
Degree days - % colder (warmer)
than normal 0.5% (3.8)% -- --
ELECTRIC UTILITY:
Revenues $ 22.3 $ 21.4 $ 0.9 4.2%
Total margin (a) $ 10.1 $ 9.7 $ 0.4 4.1%
Operating income $ 4.7 $ 4.5 $ 0.2 4.4%
Income before income taxes $ 4.2 $ 4.0 $ 0.2 5.0%
Distribution sales - millions of
kilowatt hours ("gwh") 249.1 243.5 5.6 2.3%
ENERGY SERVICES:
Revenues $329.0 $232.9 $ 96.1 41.3%
Total margin (a) $ 15.8 $ 12.3 $ 3.5 28.5%
Operating income $ 6.1 $ 6.3 $ (0.2) (3.2)%
Income before income taxes $ 6.1 $ 6.3 $ (0.2) (3.2)%
N.M. - Due to the Antargaz Acquisition, variance is not meaningful.
(a) Total margin represents total revenues less total cost of sales and, with
respect to Electric Utility, revenue-related taxes, i.e. Electric Utility
gross receipts taxes, of $1.2 million in each of the three-month periods
ended December 31, 2004 and 2003. For financial statement purposes,
revenue-related taxes are included in "Utility taxes other than income
taxes" on the Condensed Consolidated Statements of Income.
(b) Partnership EBITDA (earnings before interest expense, income taxes and
depreciation and amortization) should not be considered as an alternative
to net income (as an indicator of operating performance) or as an
alternative to cash flow (as a measure of liquidity or ability to service
debt obligations) and is not a measure of performance or financial
condition under accounting principles generally accepted in the United
States of America. Management uses
-20-
UGI CORPORATION AND SUBSIDIARIES
Partnership EBITDA as the primary measure of segment profitability for the
AmeriGas Propane segment (see Note 3 to the Condensed Consolidated
Financial Statements).
(c) Deviation from average heating degree days based upon national weather
statistics provided by the National Oceanic and Atmospheric Administration
("NOAA") for 335 airports in the United States, excluding Alaska.
AMERIGAS PROPANE. Based upon national heating degree day data, temperatures were
8.0% warmer than normal during the 2004 three-month period compared to
temperatures that were 7.4% warmer than normal in the 2003 three-month period.
Retail propane volumes sold decreased 2.5% due to the negative effect of
price-induced customer conservation resulting from higher propane selling
prices.
Retail propane revenues increased $75.4 million reflecting an $85.5 million
increase due to higher average selling prices partially offset by a $10.1
million decrease due to the lower retail volumes sold. Wholesale propane
revenues increased $18.8 million reflecting (1) a $10.9 million increase due to
higher average selling prices and (2) a $7.9 million increase due to the higher
volumes sold principally relating to product cost hedging activities. The higher
average retail and wholesale selling prices per gallon reflect significantly
higher propane product costs. The average wholesale cost per gallon at Mont
Belvieu, one of the major propane supply points in the United States, was
approximately 47% greater than the average cost per gallon during the 2003
three-month period. Total cost of sales increased $96.6 million primarily
reflecting increased propane product costs. Notwithstanding the lower retail
volumes sold, total margin was comparable to the 2003 three-month period
principally due to slightly higher average retail propane margins per gallon.
The increase in Partnership EBITDA during the 2004 three-month period reflects a
$9.3 million increase in other income due to a $9.1 million pre-tax gain
recognized on the Partnership's sale of its 50% ownership interest in Atlantic
Energy, Inc. ("Atlantic Energy") to Energy Services. The increase in other
income was partially offset by a $6.9 million increase in operating and
administrative expenses principally resulting from higher (1) vehicle costs
associated with increased fuel prices and higher vehicle lease expense, (2)
employee compensation costs and (3) general insurance expenses. Our operating
income from AmeriGas Propane decreased primarily resulting from the previously
mentioned increase in operating and administrative expenses.
INTERNATIONAL PROPANE. International Propane results of operations in the 2004
three-month period significantly increased compared to the 2003 three-month
period due to the Antargaz Acquisition. Antargaz' revenues, margin and operating
income during the 2004 three-month period were $258.7 million, $148.7 million
and $75.8 million, respectively, which includes $19.9 million in operating
income resulting from the resolution of certain non-income tax contingencies.
Antargaz sold approximately 104 million gallons of LPG while experiencing
weather that was 3.3% warmer than normal during the 2004 three-month period
compared to approximately 97 million gallons and weather that was 2.5% warmer
than normal during the 2003 three-month period. Antargaz benefited from
unusually high unit margins during the latter part of the 2004 three-month
period reflecting declining LPG product costs and the effects of a weaker dollar
versus the euro. The remaining $4.4 million increase in International Propane
revenues is a result of higher FLAGA revenues due to increased volumes sold and
higher LPG prices. FLAGA's higher revenues also reflect the beneficial currency
translation effects of a stronger euro. Due to higher LPG costs and competition,
FLAGA's average LPG margins per gallon declined compared to the 2003 three-month
period. However total margin was comparable to the prior-year three-month period
resulting from the effects of a stronger euro.
The increase in International Propane operating income reflects Antargaz' 2004
three-month period operating income which is only slightly offset by lower
base-currency FLAGA operating income in the
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UGI CORPORATION AND SUBSIDIARIES
2004 three-month period. International Propane's operating income also benefited
by the reversal of $19.9 million in non-income tax reserves due to resolution of
certain contingencies. See Antagaz Tax Matter section below. Income from equity
investees declined in the 2004 three-month period due to the absence of equity
income from our 19.5% equity investment in AGZ Holding as a result of the
Antargaz Acquisition.
The increase in income before income taxes reflects the increase in operating
income partially offset by greater interest expense as a result of the Antargaz
Acquisition.
GAS UTILITY. Weather in Gas Utility's service territory during the 2004
three-month period was 0.5% colder than normal compared with weather that was
3.8% warmer than normal in the 2003 three-month period. Notwithstanding the
colder weather, total distribution system throughput was slightly lower due to
lower sales to firm- residential, commercial and industrial ("retail
core-market") customers and lower firm-delivery service volumes due in part to
customer conservation resulting from high natural gas prices. The increase in
Gas Utility revenues during the 2004 three-month period primarily reflects
higher purchased gas cost ("PGC") rates partially offset by a $14.4 million
decrease in revenues from low-margin off-system sales. Gas Utility cost of gas
was $106.6 million in the 2004 three-month period compared to $95.1 million in
the 2003 three-month period reflecting the higher PGC rates. Increases or
decreases in Gas Utility's cost of gas associated with retail core-market
customers result from changes in retail core-market volumes, the price of the
gas purchased and the level of gas costs collected through the PGC recovery
mechanism. Under this recovery mechanism, Gas Utility records the cost of gas
associated with sales to retail core-market customers equal to the amount
included in rates and defers the difference on the balance sheet as a regulatory
asset or liability representing an amount to be collected from or refunded to
customers in a future period. As a result, increases or decreases in the cost of
gas associated with retail core-market customers have no direct effect on retail
core-market margin.
The slight increase in Gas Utility total margin reflects higher margin from
interruptible delivery service customers and the effects of year-over-year
customer growth partially offset by a decline in retail core-market margin
resulting from the lower retail core-market sales.
Gas Utility operating income declined $1.3 million in the 2004 three-month
period reflecting the previously mentioned increase in total margin which was
more than offset by higher operating and administrative expenses and a $0.4
million increase in depreciation and amortization expense. Operating and
administrative expenses increased $1.4 million principally reflecting the
absence of environmental insurance recoveries recorded in the prior-year
three-month period and greater uncollectible accounts receivable expense
partially offset by lower system maintenance expense. The decrease in Gas
Utility income before income taxes reflects the decline in operating income.
ELECTRIC UTILITY. Electric Utility's 2004 three-month period kilowatt-hour sales
were higher while experiencing weather that was slightly colder than in the
prior-year period. Temperatures based upon heating degree days in the 2004
three-month period were approximately 0.4% warmer than normal compared with
temperatures that were approximately 1.7% warmer than normal in the comparable
prior-year period.
The increase in Electric Utility revenues in the 2004 three-month period
principally reflects the slightly higher kilowatt-hour sales. Electric Utility's
cost of sales increased approximately 4.2% in the 2004 three-month period
reflecting higher Electric Utility purchased power costs associated with the
increase in sales.
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UGI CORPORATION AND SUBSIDIARIES
Electric Utility total margin in the 2004 three-month period increased $0.4
million principally reflecting the effects of the previously mentioned increase
in kilowatt-hours sold. Operating income and income before income taxes were
higher in the 2004 three-month period principally reflecting the increase in
total margin which was partially offset by higher operating and administrative
expenses including greater distribution system expenses.
ENERGY SERVICES. The $96.1 million increase in Energy Services revenues in the
2004 three-month period resulted primarily from higher natural gas prices on
approximately 5% higher volumes sold. Total margin from Energy Services' gas
marketing business increased $2.3 million in the 2004 three-month period
principally due to the increased volumes and to a lesser extent higher average
unit margins on annual fixed-price customer contracts than in the prior-year
period. Under these fixed-price contracts, customers pay an average fixed price
for the natural gas they purchase throughout the year. Although the total margin
to be earned over the term of these contracts remains unchanged, margin
realization is seasonal because gas costs are higher, and unit margins lower,
during the peak heating season months of late fall and winter, while gas costs
are lower, and unit margins higher, during the late spring and summer months.
The remaining increase in margin is attributed to $1.5 million of margin
resulting from the operations of Atlantic Energy, which was acquired by Energy
Services in November 2004 partially offset by slightly lower margin contributed
by Energy Services' electric generation business. Atlantic Energy, the owner of
a 20 million gallon propane storage terminal located in Chesapeake Virginia, was
purchased through two separate transactions with ConocoPhillips Company
("Conoco") and AmeriGas Propane. See Note 2 to Condensed Consolidated Financial
Statements for additional information regarding the acquisition.
The decrease in Energy Services operating income and income before income taxes
principally reflects the previously mentioned increase in total margin partially
offset by higher operating expenses resulting from higher uncollectible accounts
receivable expense and additional expenses resulting from the purchase of
Atlantic Energy.
FINANCIAL CONDITION
Our cash, cash equivalents and short-term investments totaled $176.7 million at
December 31, 2004 compared with $199.6 million at September 30, 2004. These
amounts include $103.0 million and $114.6 million, respectively, of cash, cash
equivalents and short-term investments available to UGI.
The Company's long-term debt outstanding at December 31, 2004 totaled $1,737.8
million (including current maturities of $175.9 million) compared to $1,670.1
million of long-term debt (including current maturities of $122.8 million) at
September 30, 2004. UGI Utilities expects to refinance all of the $70 million in
Medium-Term Notes due in May and December 2005. AmeriGas Partners expects to
refinance all or a portion of the $53.8 million of principal on the AmeriGas OLP
First Mortgage Notes due in April 2005.
AmeriGas OLP's Credit Agreement expires on October 15, 2008 and consists of (1)
a $100 million Revolving Credit Facility and (2) a $75 million Acquisition
Facility. The Revolving Credit Facility may be used for working capital and
general purposes of AmeriGas OLP. The Acquisition Facility provides AmeriGas OLP
with the ability to borrow up to $75 million to finance the purchase of propane
businesses or propane business assets or, to the extent it is not so used, for
working capital and general purposes, subject to restrictions in the AmeriGas
Partners Senior Notes indentures. At December 31, 2004, there was $30 million of
borrowings outstanding under the Credit Agreement. Issued and outstanding
letters of credit under the Revolving Credit Facility, which reduce the amount
available for borrowings, totaled $51.0 million at December 31, 2004. AmeriGas
OLP's short-term borrowing needs are seasonal and are typically greatest during
the fall and winter heating-season months due to the need to fund higher levels
of working capital.
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UGI CORPORATION AND SUBSIDIARIES
AmeriGas Partners periodically issues debt and equity securities and expects to
continue to do so. It has issued debt securities and common units in
underwritten public offerings in each of the last three fiscal years. Most
recently, it has issued debt securities in April 2004 and issued common units in
an underwritten public offering in May 2004. The Partnership has effective debt
and equity shelf registration statements with the SEC under which it may issue
up to an additional (1) 1.4 million AmeriGas Partners Common Units and (2) up to
$446.2 million of debt or equity securities pursuant to an unallocated shelf
registration statement.
Antargaz has a variable interest rate Senior Facilities Agreement consisting of
a euro-denominated term loan and a E50 million revolver which expires June 2008.
At December 31, 2004, there were no borrowings outstanding under the revolver.
UGI Utilities has revolving credit commitments under which it may borrow up to a
total of $110 million. These agreements expire in June 2007. At December 31,
2004, UGI Utilities had $63 million in borrowings outstanding under these
revolving credit agreements. In addition, at December 31, 2004, UGI Utilities
had $20 million outstanding under an uncommitted agreement with a major bank
which amount matures March 1, 2005. UGI Utilities also has a shelf registration
statement with the SEC under which it may issue up to an additional $20 million
of Medium-Term Notes or other debt securities.
Energy Services has a $150 million receivables purchase facility ("Receivables
Facility") with an issuer of receivables-backed commercial paper expiring in
August 2007, although the Receivables Facility may terminate prior to such date
due to the termination of the commitments of the Receivables Facility back-up
purchasers. Under the Receivables Facility, Energy Services transfers, on an
ongoing basis and without recourse, its trade accounts receivable to its wholly
owned, special purpose subsidiary, Energy Services Funding Corporation ("ESFC"),
which is consolidated for financial statement purposes. ESFC, in turn, has sold,
and subject to certain conditions, may from time to time sell, an undivided
interest in the receivables to a commercial paper conduit of a major bank. The
maximum level of funding available at any one time from this facility is $150
million. The proceeds of these sales are less than the face amount of the
accounts receivable sold by an amount that approximates the purchaser's
financing cost of issuing its own receivables-backed commercial paper. ESFC was
created and has been structured to isolate its assets from creditors of Energy
Services and its affiliates, including UGI. This two-step transaction is
accounted for as a sale of receivables following the provisions of SFAS No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." Energy Services continues to service, administer and collect
trade receivables on behalf of the commercial paper issuer and ESFC. At December
31, 2004, the outstanding balance of ESFC receivables was $93.9 million which
amount is net of $26 million in trade receivables sold to the commercial paper
conduit.
In addition, a major bank has committed to issue up to $50 million of standby
letters of credit, secured by cash or marketable securities ("LC Facility"). At
December 31, 2004, there were no letters of credit outstanding. Energy Services
expects to fund the collateral requirements with borrowings under its
Receivables Facility. Energy Services expects to renew the LC Facility prior to
its expiration in April 2005.
CASH FLOWS
OPERATING ACTIVITIES. Due to the seasonal nature of the Company's businesses,
cash flows from operating activities are generally strongest during the second
and third fiscal quarters when customers pay for natural gas, propane and other
LPG and electricity consumed during the heating season months.
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UGI CORPORATION AND SUBSIDIARIES
Conversely, operating cash flows are generally at their lowest levels during the
first and fourth fiscal quarters when the Company's investment in working
capital, principally inventories and/or accounts receivable, is generally
greatest. AmeriGas Propane and UGI Utilities use revolving credit facilities and
Energy Services uses its Receivables Facility to satisfy their seasonal
operating cash flow needs. Antargaz has historically been successful funding its
operating cash flow needs without the use of its revolver. Cash flow from
operating activities was $4.8 million in the 2004 three-month period compared to
$13.6 million in the 2003 three-month period. Cash flow from operating
activities before changes in operating working capital was $131.6 million in the
2004 three-month period compared with $101.3 million in the prior-year
three-month period. Changes in operating working capital used $126.8 million of
cash in the 2004 three-month period and $87.7 million of cash in the 2003
three-month period. Cash flow provided by operating activities principally
reflects operating cash flow provided by Antargaz partially offset by cash used
in operating activities by AmeriGas Propane and UGI Utilities.
INVESTING ACTIVITIES. Cash flow used in investing activities was $57.0 million
in the 2004 three-month period compared to $53.5 million cash used in the
prior-year period. Investing activity cash flow is principally affected by
capital expenditures and investments in property, plant and equipment, cash paid
for acquisitions of businesses, investments in and distributions from our equity
investees, and proceeds from sales of assets. During the 2004 three-month
period, we spent $40.9 million for property, plant and equipment, an increase
from the 2003 three-month period, principally reflecting Antargaz capital
expenditures in the 2004 three-month period and higher AmeriGas Propane capital
expenditures. Cash paid for business acquisitions in the 2004 three-month period
principally reflects AmeriGas Propane's acquisition of three small propane
businesses and Energy Services' acquisition of Conoco's 50% ownership interest
in Atlantic Energy.
FINANCING ACTIVITIES. Cash flow provided by financing activities was $20.9
million in the 2004 three-month period and $41.3 million in the 2003 three-month
period. Financing activity cash flow changes are primarily due to issuances and
repayments of long-term debt, net borrowings under revolving credit facilities,
dividends and distributions on UGI Common Stock and AmeriGas Partners Common
Units, and proceeds from public offerings of AmeriGas Partners Common Units and
issuances of UGI Common Stock. We paid cash dividends on UGI Common Stock of
$16.0 million and $12.2 million during the three months ended December 31, 2004
and 2003, respectively. The increased dividends reflect the additional shares of
UGI Common Stock issued in March 2004 in conjunction with the Antargaz
Acquisition. Also, the Partnership paid the minimum quarterly distribution of
$0.55 (the "MQD") on all limited partner units during both of the three-month
periods ended December 31, 2004 and 2003.
On October 1, 2004, UGI Utilities redeemed all 200,000 shares of the $7.75
Series Preferred Stock at a price of $100 per share together with full
cumulative dividends. The redemption of the $7.75 Series Preferred Stock was
funded with proceeds from the October 2004 issuance of $20 million of 6.13%
Medium-Term Notes due 2034.
UGI COMMON DIVIDEND
On January 25, 2005, UGI's Board of Directors declared a quarterly dividend on
UGI Common Stock of $0.3125 per share payable on April 1, 2005 to shareholders
of record on February 28, 2005.
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UGI CORPORATION AND SUBSIDIARIES
ANTARGAZ TAX MATTER
Antargaz filed suit against the French tax authorities in connection with the
assessment of non-income tax related to Antargaz owned tanks at customer
locations used to store LPG. Elf Antar France, now Total France, and Elf
Aquitaine, former owners of Antargaz, agreed to indemnify Antargaz for all
payments which would have been due from Antargaz in respect of the tax related
to its tanks for the period from January 1, 1997 through December 31, 2000. The
indemnity from the former owners amounts to approximately E9.4 million ($12.8
million) of the tax liability and is reflected in "Prepaid and other current
assets" in the Condensed Consolidated Balance Sheet at December 31, 2004.
Antargaz had recorded a liability for the tax relating to tanks of various
customer classes for the period from January 1, 1997 through December 31, 2004
of approximately E29.9 million ($40.6 million). On February 4, 2005, Antargaz
received a letter from French authorities which eliminated the requirement for
Antargaz to provide taxes on Antargaz owned tanks at certain customer locations.
In addition, resolution was reached on tax contingencies relating to a prior
year. Therefore, effective December 31, 2004, Antargaz reversed (1) E8.8 million
($12.0 million) resulting from the exemption of tanks at certain customer
locations and (2) E5.9 million ($7.9 million) resulting from the resolution
reached on a prior year's taxes. The total pre-tax amount of $19.9 million is
reflected in "Other income, net" in the Condensed Consolidated Statement of
Income for the three month period ended December 31, 2004. The after-tax effect
of this reversal resulted in $14.9 million of net income.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123 (revised 2004),
"Share-Based Payment" ("SFAS 123R"). SFAS 123R replaces SFAS 123 and supersedes
Accounting Principles Board ("APB") Opinion No 25, "Accounting for Stock Issued
to Employees" ("APB 25"). SFAS 123, as originally issued in 1995, established as
preferable a fair-value-based method of accounting for share-based payment
transactions with employees. However, SFAS 123 permitted entities the option of
continuing to apply the guidance in APB 25, as long as the footnotes to
financial statements disclosed what net income would have been had the
preferable fair-value-based method been used. SFAS 123R requires that the
compensation cost relating to share-based payment transactions be recognized in
the financial statements. The cost is required to be measured based on the fair
value of the equity or liability instruments issued. SFAS 123R covers a wide
range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. SFAS 123R is effective for our interim period
beginning after June 15, 2005. Under all of the transition methods, unrecognized
compensation expense for awards that are not vested on the adoption date will be
recognized in the Company's statements of income through the end of the
requisite service period. We do not believe that the adoption of SFAS 123R will
have a material impact on its results of operations or financial position. Also,
see Note 1 to Condensed Consolidated Financial Statements.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets
- - An Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions"
("SFAS 153"). SFAS 153 eliminates the exception from fair value measurement for
nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB
Opinion No. 29, "Accounting for Nonmonetary Transactions," and replaces it with
an exception for exchanges that lack commercial substance. SFAS 153 specifies
that a nonmonetary exchange has commercial substance if the future cash flows of
the entity are expected to change significantly as a result of the exchange.
SFAS 153 is effective for our interim period beginning after June 15, 2005. We
do not believe that the adoption of SFAS 153 will have a material effect on our
results of operations or financial position.
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UGI CORPORATION AND SUBSIDIARIES
In December 2004, the FASB issued FASB Staff Position 109-1, "Application of
FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on
Qualified Production Activities Provided by the American Jobs Creation Act of
2004" ("FSP 109-1") and FASB Staff Position 109-2, "Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision Within the American
Jobs Creation Act of 2004" ("FSP 109-2"). The American Jobs Creations Act
provides deductions for qualified domestic production activities and
repatriation of foreign earnings. We are currently assessing the impact of the
American Jobs Creation Act, but do not expect the impact of FSP 109-1 and FSP
109-2 to have a material effect on the Company's financial position or results
of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risk exposures are (1) market prices for propane and other
LPG, natural gas and electricity; (2) changes in interest rates; and (3) foreign
currency exchange rates.
The risk associated with fluctuations in the prices the Partnership and our
International Propane operations pay for propane and other LPG is principally a
result of market forces reflecting changes in supply and demand for propane and
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 sensitive to changes
in LPG supply costs and International Propane generally passes on increases in
such costs to customers. International Propane may not, however, always be able
to pass through product cost increases fully or on a timely basis, particularly
when product costs rise rapidly. In order to reduce the long-term volatility of
Antargaz' LPG market price risk, Antargaz hedges a portion of its future U.S.
dollar denominated LPG product purchases through the use of forward foreign
exchange contracts. Antargaz may also enter into other contracts, similar to
those used by the Partnership to reduce the volatility in the cost of LPG it
purchases. FLAGA may use 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 to hedge forecasted purchases
of propane are generally settled at expiration of the contract. In order to
minimize credit risk associated with its derivative commodity contracts, the
Partnership monitors established credit limits with the contract counterparties.
Although we use derivative financial and commodity instruments to reduce market
price risk associated with forecasted transactions, we do not use derivative
financial and commodity instruments for speculative or trading purposes.
Gas Utility's tariffs contain clauses that permit recovery of substantially all
of the prudently incurred costs of natural gas it sells to its customers. The
recovery clauses provide for a periodic adjustment for the difference between
the total amounts actually collected from customers through PGC rates and the
recoverable costs incurred. Because of this ratemaking mechanism, there is
limited commodity price risk associated with our Gas Utility operations. Gas
Utility uses exchange-traded natural gas call option contracts to reduce
volatility in the cost of gas it purchases for its retail core-market customers.
The cost of these call option contracts, net of any associated gains, is
included in Gas Utility's PGC recovery mechanism.
The risks associated with fluctuations in prices the Electric Utility pays for
its electric power needs are principally a result of market forces reflecting
changes in supply and demand for electricity and other
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UGI CORPORATION AND SUBSIDIARIES
energy commodities. Electric Utility purchases its electric power needs from
electricity suppliers under fixed-price energy and capacity contracts and, to a
much lesser extent, on the spot market. In accordance with Provider of Last
Resort ("POLR") settlements approved by the PUC, Electric Utility may increase
its POLR rates up to certain limits through December 31, 2006. In accordance
with these settlements, effective January 1, 2005, Electric Utility increased
its POLR generation rates for all metered customers 4.5% of total rates in
effect on December 31, 2004. In addition, the POLR settlements permit Electric
Utility to increase its POLR generation rates effective January 1, 2006 for all
metered customers up to 7.5% of total rates in effect at December 31, 2004.
Currently, Electric Utility's fixed-price contracts with electric suppliers
mitigate most risks associated with the POLR service rate limits in effect
through December 31, 2006. However, should any of the suppliers under these
contracts fail to provide electric power under the terms of the power and
capacity contracts, any increases 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. Electric Utility has and may enter into electric price swap
agreements to reduce the volatility in the cost of a portion of its anticipated
electricity requirements.
In order to manage market price risk relating to substantially all of Energy
Services' forecasted fixed-price sales of natural gas, Energy Services purchases
exchange-traded natural gas futures contracts or enters into fixed-price supply
arrangements. Exchange-traded natural gas futures contracts are guaranteed by
the New York Mercantile Exchange ("NYMEX") and have nominal credit risk. An
adverse change in market value of these contracts may require 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.
UGID has entered into fixed-price sales agreements for a portion of the
electricity expected to be generated by its interests in electricity generating
assets. In the event that these generation assets would not be able to produce
all of the electricity needed to supply electricity under these agreements, UGID
would be required to purchase such electricity on the spot market or under
contract with other electricity suppliers. Accordingly, increases in the cost of
replacement power could negatively impact the Company's results.
We have both fixed-rate and variable-rate debt. Changes in interest rates impact
the cash flows of variable-rate debt but generally do not impact its fair value.
Conversely, changes in interest rates impact the fair value of fixed-rate debt
but do not impact their cash flows.
Our variable-rate debt includes borrowings under AmeriGas OLP's Credit
Agreement, borrowings under UGI Utilities' revolving credit agreements and the
uncommitted arrangement with a major bank, and a substantial portion of
Antargaz' and FLAGA's debt. These debt agreements have interest rates that are
generally indexed to short-term market interest rates. At December 31, 2004,
combined borrowings outstanding under these agreements totaled $466.2 million.
Antargaz has effectively fixed the interest rate on a portion of its variable
rate debt through June 2005 through the use of interest rate swaps. Our
long-term debt is typically issued at fixed rates of interest based upon market
rates for debt having similar terms and credit ratings. As these long-term debt
issues mature, we may refinance such debt with new debt having interest rates
reflecting then-current market conditions. This debt may have an interest rate
that is more or less than the refinanced debt. In order to reduce interest rate
risk associated with
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UGI CORPORATION AND SUBSIDIARIES
near-term forecasted issuances of fixed-rate debt, from time to time we enter
into interest rate protection agreements.
The following table summarizes the fair values of unsettled market risk
sensitive derivative instruments held at December 31, 2004. Fair values reflect
the estimated amounts that we would receive or pay to terminate the contracts at
the reporting date based upon quoted market prices of comparable contracts at
December 31, 2004. The table also includes the changes in fair value that would
result if there were a ten percent adverse change in (1) the market price of
propane; (2) the market price of natural gas; (3) the market price of
electricity; (4) interest rates on ten-year U.S. treasury notes and; (5) value
of the euro versus the U.S. dollar.
Change in
Fair Value Fair Value
---------- ----------
(Millions of dollars)
December 31, 2004:
Propane commodity price risk $(9.8) $(13.0)
Natural gas commodity price risk (2.9) (4.2)
Electricity commodity price risk 1.8 (0.9)
Interest rate risk (3.1) (3.6)
Foreign currency exchange rate risk (4.9) (8.7)
----- ------
Gas Utility's exchange-traded natural gas call option contracts are excluded
from the table above because any associated net gains are included in Gas
Utility's PGC recovery mechanism. Because our derivative instruments generally
qualify as hedges under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," ("SFAS 133"), we expect that changes in the fair value of
derivative instruments used to manage commodity or interest rate market risk
would be substantially offset by gains or losses on the associated anticipated
transactions.
The primary currency for which we have exchange rate risk is the U.S. dollar
versus the euro. The U.S. dollar value of our foreign-denominated assets and
liabilities will fluctuate with changes in the associated foreign currency
exchange rates. We use derivative instruments to hedge portions of our net
investments in foreign subsidiaries ("net investment hedges"). Realized gains or
losses remain in other comprehensive income until such foreign operations are
liquidated. At December 31, 2004, the fair value of unsettled net investment
hedges was a loss of $4.3 million. With respect to our net investments in FLAGA
and Antargaz, a 10% decline in the value of the euro versus the U.S. dollar,
excluding the effects of any net investment hedges would reduce their aggregate
net book value by approximately $72.4 million, which amount would be reflected
in other comprehensive income.
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UGI CORPORATION AND SUBSIDIARIES
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness
of the Company's disclosure controls and procedures as of the end of the
period covered by this report. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures as of the end of the period covered by
this report were designed and functioning effectively to provide reasonable
assurance that the information required to be disclosed by the Company in
reports filed under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms. The Company believes that 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.
(b) Change in Internal Control over Financial Reporting
No change in the Company's internal control over financial reporting
occurred during the Company's most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting. As previously
disclosed, on March 31, 2004, the Company acquired the remaining
outstanding 80.5% ownership in Antargaz that it did not already own. The
internal control over financial reporting of Antargaz is being aligned with
that of the Company as part of the post-acquisition financial integration
process. We have extended internal control procedures over quarterly
financial reporting to include Antargaz.
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UGI CORPORATION AND SUBSIDIARIES
PART II OTHER INFORMATION
ITEM 6. EXHIBITS
10.1 Summary of Director Compensation
31.1 Certification by the Chief Executive Officer relating to the Registrant's
Report on Form 10-Q for the quarter ended December 31, 2004, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification by the Chief Financial Officer relating to the Registrant's
Report on Form 10-Q for the quarter ended December 31, 2004, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certification by the Chief Executive Officer and the Chief Financial
Officer relating to the Registrant's Report on Form 10-Q for the quarter
ended December 31, 2004, pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
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UGI CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UGI Corporation
(Registrant)
Date: February 9, 2005 By: /s/ Anthony J. Mendicino
------------------------------------
Anthony J. Mendicino
Senior Vice President-Finance and
Chief Financial Officer
Date: February 9, 2005 By: /s/ Michael J. Cuzzolina
------------------------------------
Michael J. Cuzzolina
Vice President-Accounting and
Financial Control and
Chief Risk Officer
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UGI CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
10.1 Summary of Director Compensation
31.1 Certification by the Chief Executive Officer relating to the Registrant's
Report on Form 10-Q for the quarter ended December 31, 2004, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification by the Chief Financial Officer relating to the Registrant's
Report on Form 10-Q for the quarter ended December 31, 2004, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certification by the Chief Executive Officer and the Chief Financial
Officer relating to the Registrant's Report on Form 10-Q for the quarter
ended December 31, 2004, pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.