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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
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 April 30, 2005, there were 51,860,000 shares of UGI Corporation Common
Stock, without par value, outstanding.
UGI CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
PAGES
-------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2005,
September 30, 2004 and March 31, 2004 1
Condensed Consolidated Statements of Income for the three
and six months ended March 31, 2005 and 2004 2
Condensed Consolidated Statements of Cash Flows for the
six months ended March 31, 2005 and 2004 3
Notes to Condensed Consolidated Financial Statements 4 - 19
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20 - 32
Item 3. Quantitative and Qualitative Disclosures About Market Risk 33 - 35
Item 4. Controls and Procedures 36
PART II OTHER INFORMATION
Item 1. Legal Proceedings 37
Item 4. Submission of Matters to a Vote of Security Holders 37
Item 6. Exhibits 38
Signatures 39
-i-
UGI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(Millions of dollars)
March 31, September 30, March 31,
2005 2004 2004
------------- ---------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 161.6 $ 149.6 $ 143.3
Short-term investments (at cost, which approximates fair value) 65.0 50.0 10.0
Accounts receivable (less allowances for doubtful accounts of
$34.8, $22.3 and $28.0, respectively) 747.4 367.3 624.3
Accrued utility revenues 27.4 9.7 24.2
Inventories 135.4 198.4 105.1
Deferred income taxes 30.4 14.9 25.4
Prepaid expenses and other current assets 27.7 46.6 55.6
------------- ------------- ---------
Total current assets 1,194.9 836.5 987.9
Property, plant and equipment, at cost (less accumulated depreciation
and amortization of $947.0, $892.4 and $852.6, respectively) 1,819.6 1,781.9 1,884.8
Goodwill and excess reorganization value 1,284.6 1,245.9 1,171.6
Intangible assets (less accumulated amortization of
$37.8, $27.5 and $19.6, respectively) 189.3 184.4 144.9
Utility regulatory assets 66.2 65.0 62.1
Other assets 119.8 121.7 118.6
------------- ------------- ---------
Total assets $ 4,674.4 $ 4,235.4 $ 4,369.9
============= ============= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 172.2 $ 122.8 $ 95.8
Current maturities of UGI Utilities preferred shares subject to
mandatory redemption, without par value - 20.0 1.0
AmeriGas Propane bank loans 12.0 - 3.0
UGI Utilities bank loans 39.2 60.9 42.4
Other bank loans 26.0 17.2 15.9
Accounts payable 448.2 323.9 398.5
Other current liabilities 427.1 378.0 263.6
------------- ------------- ---------
Total current liabilities 1,124.7 922.8 820.2
Long-term debt 1,520.3 1,547.3 1,609.7
Deferred income taxes 472.3 441.4 463.4
UGI Utilities preferred shares subject to
mandatory redemption, without par value - - 19.0
Other noncurrent liabilities 322.7 311.4 435.5
------------- ------------- ---------
Total liabilities 3,440.0 3,222.9 3,347.8
Commitments and contingencies (note 8)
Minority interests 214.2 178.4 198.3
Common stockholders' equity:
Common Stock, without par value (authorized - 150,000,000 shares;
issued - 57,576,497, 57,576,497 and 57,298,097 shares, respectively) 768.8 762.8 744.7
Retained earnings 309.5 146.2 172.4
Accumulated other comprehensive income 29.5 22.6 11.4
Notes receivable from employees - (0.2) (0.3)
------------- ------------- ---------
1,107.8 931.4 928.2
Treasury stock, at cost (87.6) (97.3) (104.4)
------------- ------------- ---------
Total common stockholders' equity 1,020.2 834.1 823.8
------------- ------------- ---------
Total liabilities and stockholders' equity $ 4,674.4 $ 4,235.4 $ 4,369.9
============= ============= =========
See accompanying notes to condensed consolidated financial statements.
-1-
UGI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(Millions of dollars, except per share amounts)
Three Months Ended Six Months Ended
March 31, March 31,
---------------------------- -------------------------------
2005 2004 2005 2004
-------- -------- --------- ---------
Revenues $1,788.2 $1,316.6 $ 3,151.3 $ 2,210.3
Costs and expenses:
Cost of sales 1,195.1 914.4 2,108.4 1,511.4
Operating and administrative expenses 271.7 183.5 529.3 346.8
Utility taxes other than income taxes 3.7 3.6 6.9 6.7
Depreciation and amortization 37.7 28.4 75.3 55.8
Other (income) expense, net (7.7) 5.1 (31.3) (0.3)
-------- -------- --------- ---------
1,500.5 1,135.0 2,688.6 1,920.4
-------- -------- --------- ---------
Operating income 287.7 181.6 462.7 289.9
Income (loss) from equity investees (0.6) 8.4 (1.3) 12.6
Interest expense (33.3) (26.7) (66.8) (53.4)
Minority interests, principally in AmeriGas Partners (53.0) (55.6) (73.6) (78.3)
-------- -------- --------- ---------
Income before income taxes 200.8 107.7 321.0 170.8
Income tax expense (83.5) (40.6) (125.5) (64.9)
-------- -------- --------- ---------
Net income $ 117.3 $ 67.1 $ 195.5 $ 105.9
======== ======== ========= =========
Earnings per common share:
Basic $ 2.26 $ 1.51 $ 3.79 $ 2.43
======== ======== ========= =========
Diluted $ 2.23 $ 1.48 $ 3.72 $ 2.37
======== ======== ========= =========
Average common shares outstanding (millions):
Basic 51.791 44.299 51.581 43.566
======== ======== ========= =========
Diluted 52.543 45.310 52.564 44.625
======== ======== ========= =========
Dividends declared per common share $ 0.3125 $ 0.2850 $ 0.6250 $ 0.5700
======== ======== ========= =========
See accompanying notes to condensed consolidated financial statements.
-2-
UGI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Millions of dollars)
Six Months Ended
March 31,
------------------------------
2005 2004
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 195.5 $ 105.9
Adjustments to reconcile to net cash provided by operating activities:
Depreciation and amortization 75.3 55.8
Minority interests 73.6 78.3
Deferred income taxes, net 9.7 3.9
Other, net 13.6 10.8
Net change in:
Accounts receivable and accrued utility revenues (407.2) (270.0)
Inventories 77.0 52.9
Deferred fuel costs 14.8 3.4
Accounts payable 100.8 78.2
Other current assets and liabilities 35.4 (15.0)
------- -------
Net cash provided by operating activities 188.5 104.2
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment (74.5) (50.2)
Net proceeds from disposals of assets 8.7 3.9
Acquisitions of businesses, net of cash acquired (27.7) (275.7)
Short-term investments (increase) decrease (15.0) 40.0
Other, net 3.2 0.1
------- -------
Net cash used by investing activities (105.3) (281.9)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends on UGI Common Stock (32.2) (24.4)
Distributions on AmeriGas Partners publicly held Common Units (32.9) (30.6)
Issuance of long-term debt 21.0 -
Repayment of long-term debt (22.0) (6.6)
AmeriGas Propane bank loans increase 12.0 3.0
UGI Utilities bank loans (decrease) increase (21.7) 1.7
Other bank loans increase (decrease) 8.2 (0.9)
Redemption of UGI Utilities preferred shares subject to mandatory redemption (20.0) -
Issuance of UGI Common Stock 15.7 236.6
------- -------
Net cash (used) provided by financing activities (71.9) 178.8
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 0.7 0.1
------- -------
Cash and cash equivalents increase $ 12.0 $ 1.2
======= =======
Cash and cash equivalents:
End of period $ 161.6 $ 143.3
Beginning of period 149.6 142.1
------- -------
Increase $ 12.0 $ 1.2
======= =======
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 March 31, 2005, 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
29,967,601 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"). 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 Six Months Ended
March 31, March 31,
------------------------ ---------------------
2005 2004 2005 2004
------ ------ ------ ------
Denominator (millions of shares):
Average common shares
outstanding for basic computation 51.791 44.299 51.581 43.566
Incremental shares issuable for stock
options and awards 0.752 1.011 0.983 1.059
------ ------ ------ ------
Average common shares outstanding for
diluted computation 52.543 45.310 52.564 44.625
------ ------ ------ ------
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 $2.4
million and $6.9 million in the three and six months ended March 31, 2005,
respectively, and $3.2 million and $7.3 million in the three and six
months ended March 31, 2004, 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 and six months ended March 31, 2005 and 2004 would have been as
follows:
Three Months Ended Six Months Ended
March 31, March 31,
------------------- ------------------
2005 2004 2005 2004
------- ------ ------- ------
Net income, as reported $ 117.3 $ 67.1 $ 195.5 $105.9
Add: Stock and unit-based employee
compensation expense included in
reported net income, net of related tax effects 1.4 1.9 4.1 4.4
Deduct: Total stock and unit-based
employee compensation expense
determined under the fair value method
for all awards, net of related tax effects (2.3) (2.2) (5.3) (4.9)
------- ------ ------- ------
Pro forma net income $ 116.4 $ 66.8 $ 194.3 $105.4
------- ------ ------- ------
Basic earnings per share:
As reported $ 2.26 $ 1.51 $ 3.79 $ 2.43
Pro forma $ 2.25 $ 1.51 $ 3.77 $ 2.42
Diluted earnings per share:
As reported $ 2.23 $ 1.48 $ 3.72 $ 2.37
Pro forma $ 2.22 $ 1.47 $ 3.70 $ 2.36
COMPREHENSIVE INCOME. The following table presents the components of
comprehensive income for the three and six months ended March 31, 2005 and
2004.
Three Months Ended Six Months Ended
March 31, March 31,
--------------------- ---------------------
2005 2004 2005 2004
------- ----- ------- -------
Net income $ 117.3 $67.1 $ 195.5 $ 105.9
Other comprehensive (loss) income (12.7) (4.2) 6.9 6.7
------- ----- ------- -------
Comprehensive income $ 104.6 $62.9 $ 202.4 $ 112.6
------- ----- ------- -------
Other comprehensive (loss) income principally comprises (1) changes in the
fair value of derivative commodity instruments, interest rate protection
agreements and foreign currency
-6-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars, except per share amounts)
derivatives qualifying as hedges and (2) foreign currency translation
adjustments, net of reclassifications to net income.
RECLASSIFICATIONS. We have reclassified certain prior-year period balances
to conform to the current-period presentation.
USE OF ESTIMATES. We make estimates and assumptions when preparing
financial statements in conformity with accounting principles generally
accepted in the United States of America. These estimates and assumptions
affect the reported amounts of assets and liabilities, revenues and
expenses, as well as the disclosure of contingent assets and liabilities.
Actual results could differ from these estimates.
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 six months ended March 31, 2005, AmeriGas OLP completed
several 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 effects
of these transactions were 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 in China ("Other"); (4) Gas Utility; (5) Electric
Utility; and (6) Energy Services (comprising Energy Services' gas
marketing business, UGID's electricity generation business and Atlantic
Energy's propane terminal business). We refer to both international
segments collectively as "International Propane."
-7-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars, except per share amounts)
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 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 March 31, 2005:
Reportable Segments
--------------------------------------------------------------
International Propane
AmeriGas Gas Electric Energy --------------------- Corporate
Total Elims. Propane Utility Utility Services Antargaz Other (a) & Other (b)
--------- -------- -------- -------- -------- ---------- -------- -------- ----------
Revenues $ 1,788.2 $ - $ 698.3 $ 255.9 $ 25.6 $ 432.2 $ 341.4 $ 22.2 $ 12.6
========== ======== ======== ======== ======== ========== ======== ======== ==========
Cost of sales $ 1,195.1 $ - $ 429.8 $ 177.3 $ 11.9 $ 409.9 $ 146.5 $ 12.4 $ 7.3
========== ======== ======== ======== ======== ========== ======== ======== ==========
Segment profit:
Operating income (c) $ 287.7 $ - $ 117.9 $ 48.6 $ 7.2 $ 14.0 $ 96.0 $ 3.0 $ 1.0
Loss from equity investees (0.6) - - - - - (0.6) - -
Interest expense (33.3) - (20.7) (4.0) (0.5) - (7.4) (0.6) (0.1)
Minority interests (53.0) - (52.4) - - - (0.6) - -
---------- -------- -------- -------- -------- ---------- -------- -------- ----------
Income before income taxes $ 200.8 $ - $ 44.8 $ 44.6 $ 6.7 $ 14.0 $ 87.4 $ 2.4 $ 0.9
========== ======== ======== ======== ======== ========== ======== ======== ==========
Depreciation and amortization $ 37.7 $ - $ 18.5 $ 5.1 $ 0.8 $ 1.5 $ 10.2 $ 1.3 $ 0.3
Partnership EBITDA (c) $ 135.2
Segment assets (at period end) $ 4,674.4 $ (333.6) $1,630.5 $ 802.7 $ 97.3 $ 288.0 $1,574.6 $ 166.2 $ 448.7
========== ======== ======== ======== ======== ========== ======== ======== ==========
Investments in equity investees
(at period end) $ 14.3 $ - $ - $ - $ - $ 8.6 $ 3.0 $ 2.7 $ -
========== ======== ======== ======== ======== ========== ======== ======== ==========
Goodwill and excess
reorganization value (at period
end) $ 1,284.6 $ - $ 615.8 $ - $ - $ 4.3 $ 586.2 $ 72.8 $ 5.5
========== ======== ======== ======== ======== ========== ======== ======== ==========
Three Months Ended March 31, 2004:
Reportable Segments
----------------------------------------------------------
International Propane
AmeriGas Gas Electric Energy --------------------- Corporate
Total Elims. Propane Utility Utility Services Antargaz Other (a) & Other (b)
----------- ------- --------- ------- ------- -------- -------- --------- -----------
Revenues $ 1,316.6 $ (0.7) $ 687.7 $ 243.5 $ 24.7 $ 328.8 $ - $ 18.6 $ 14.0
=========== ======= ========= ======= ======= ======== ======== ========= ===========
Cost of sales $ 914.4 $ - $ 405.2 $ 165.0 $ 11.5 $ 315.3 $ - $ 9.3 $ 8.1
=========== ======= ========= ======= ======= ======== ======== ========= ===========
Segment profit:
Operating income (loss) $ 181.6 $ - $ 127.2 $ 46.5 $ 6.8 $ 7.5 $ (9.2) $ 2.9 $ (0.1)
Income (loss) from equity
investees 8.4 - 0.7 - - - 7.8 (0.1) -
Interest expense (26.7) - (21.2) (3.9) (0.5) - (0.1) (0.9) (0.1)
Minority interests in AmeriGas
Partners (55.6) - (55.6) - - - - - -
----------- ------- --------- ------- ------- -------- -------- --------- -----------
Income before income taxes $ 107.7 $ - $ 51.1 $ 42.6 $ 6.3 $ 7.5 $ (1.5) $ 1.9 $ (0.2)
=========== ======= ========= ======= ======= ======== ======== ========= ===========
Depreciation and amortization $ 28.4 $ - $ 19.8 $ 5.1 $ 1.0 $ 1.0 $ - $ 1.2 $ 0.3
Partnership EBITDA (c) $ 146.6
Segment assets (at period end) $ 4,369.9 $(352.5) $ 1,605.9 $ 763.2 $ 89.0 $ 217.6 $1,487.7 $ 147.4 $ 411.6
=========== ======= ========= ======= ======= ======== ======== ========= ===========
Investments in equity investees
(at period end) $ 15.1 $ - $ 3.5 $ - $ - $ 8.7 $ - $ 2.9 $ -
=========== ======= ========= ======= ======= ======== ======== ========= ===========
Goodwill and excess reorganization
value (at period end) $ 1,171.6 $ - $ 605.7 $ - $ - $ 2.8 $ 491.6 $ 66.3 $ 5.2
=========== ======= ========= ======= ======= ======== ======== ========= ===========
(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's assets principally comprise cash,
short-term investments and an intercompany loan. The intercompany interest
associated with the intercompany loan is removed in the segment
presentation.
(c) The following table provides a reconciliation of Partnership EBITDA to
AmeriGas Propane operating income:
Three months ended March 31, 2005 2004
- ---------------------------- ------- --------
Partnership EBITDA $ 135.2 $ 146.6
Depreciation and amortization (i) (18.4) (19.8)
Minority interests (ii) 1.1 1.1
Income from equity investees - (0.7)
------- -------
Operating income $ 117.9 $ 127.2
======= =======
(i) Excludes General Partner depreciation and amortization of $0.1 million in
the three months ended March 31, 2005.
(ii) Principally represents the General Partner's 1.01% interest in AmeriGas
OLP.
-9-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Millions of dollars, except per share amounts)
3. SEGMENT INFORMATION (CONTINUED)
Six Months Ended March 31, 2005:
Reportable Segments
-------------------------------------------------------------
International Propane
AmeriGas Gas Electric Energy --------------------- Corporate
Total Elims. Propane Utility Utility Services Antargaz Other (a) & Other (b)
---------- -------- --------- ------- ------- -------- -------- -------- ----------
Revenues $ 3,151.3 $ - $ 1,254.5 $ 417.1 $ 47.9 $ 761.2 $ 600.1 $ 42.4 $ 28.1
========== ======== ========= ======= ======= ======== ======== ======== ==========
Cost of sales $ 2,108.4 $ - $ 780.9 $ 283.9 $ 22.9 $ 723.1 $ 256.5 $ 24.4 $ 16.7
========== ======== ========= ======= ======= ======== ======== ======== ==========
Segment profit:
Operating income (c) $ 462.7 $ - $ 176.5 $ 76.7 $ 11.9 $ 20.1 $ 171.7 $ 4.7 $ 1.1
Loss from equity investees (1.3) - - - - - (1.3) - -
Interest expense (66.8) - (41.2) (8.1) (1.0) - (14.9) (1.6) -
Minority interests (73.6) - (72.7) - - - (0.9) - -
---------- -------- --------- ------- ------- -------- -------- -------- ----------
Income before income taxes (c) $ 321.0 $ - $ 62.6 $ 68.6 $ 10.9 $ 20.1 $ 154.6 $ 3.1 $ 1.1
========== ======== ========= ======= ======= ======== ======== ======== ==========
Depreciation and amortization $ 75.3 $ - $ 37.8 $ 10.2 $ 1.5 $ 2.8 $ 19.8 $ 2.6 $ 0.6
Partnership EBITDA (d) $ 221.6
Segment assets (at period end) $ 4,674.4 $ (333.6) $ 1,630.5 $ 802.7 $ 97.3 $ 288.0 $1,574.6 $ 166.2 $ 448.7
========== ======== ========= ======= ======= ======== ======== ======== ==========
Investments in equity investees
(at period end) $ 14.3 $ - $ - $ - $ - $ 8.6 $ 3.0 $ 2.7 $ -
========== ======== ========= ======= ======= ======== ======== ======== ==========
Goodwill and excess reorganization
value (at period end) $ 1,284.6 $ - $ 615.8 $ - $ - $ 4.3 $ 586.2 $ 72.8 $ 5.5
========== ======== ========= ======= ======= ======== ======== ======== ==========
Six Months Ended March 31, 2004:
Reportable Segments
-----------------------------------------------------------
International Propane
AmeriGas Gas Electric Energy --------------------- Corporate
Total Elims. Propane Utility Utility Services Antargaz Other (a) & Other (b)
---------- -------- --------- ------- ------- -------- --------- --------- -----------
Revenues $ 2,210.3 $ (1.3) $ 1,147.9 $ 392.8 $ 46.1 $ 561.7 $ - $ 34.4 $ 28.7
========== ======== ========= ======= ======= ======== ========= ========= ===========
Cost of sales $ 1,511.4 $ - $ 659.7 $ 260.1 $ 22.0 $ 536.0 $ - $ 16.9 $ 16.7
========== ======== ========= ======= ======= ======== ========= ========= ===========
Segment profit:
Operating income (loss) $ 289.9 $ - $ 192.8 $ 75.9 $ 11.3 $ 13.8 $ (9.3) $ 4.8 $ 0.6
Income from equity investees 12.6 - 0.7 - - - 11.9 - -
Interest expense (53.4) - (42.3) (8.0) (1.0) - - (1.9) (0.2)
Minority interests in AmeriGas
Partners (78.3) - (78.3) - - - - - -
---------- -------- --------- ------- ------- -------- --------- --------- -----------
Income before income taxes $ 170.8 $ - $ 72.9 $ 67.9 $ 10.3 $ 13.8 $ 2.6 $ 2.9 $ 0.4
========== ======== ========= ======= ======= ======== ========= ========= ===========
Depreciation and amortization $ 55.8 $ - $ 39.5 $ 9.7 $ 1.7 $ 2.0 $ - $ 2.3 $ 0.6
Partnership EBITDA (d) $ 231.2
Segment assets (at period end) $ 4,369.9 $ (352.5) $ 1,605.9 $ 763.2 $ 89.0 $ 217.6 $ 1,487.7 $ 147.4 $ 411.6
========== ======== ========= ======= ======= ======== ========= ========= ===========
Investments in equity investees
(at period end) $ 15.1 $ - $ 3.5 $ - $ - $ 8.7 $ - $ 2.9 $ -
========== ======== ========= ======= ======= ======== ========= ========= ===========
Goodwill and excess reorganization
value (at period end) $ 1,171.6 $ - $ 605.7 $ - $ - $ 2.8 $ 491.6 $ 66.3 $ 5.2
========== ======== ========= ======= ======= ======== ========= ========= ===========
(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's assets principally comprise cash,
short-term investments and an intercompany loan. The intercompany interest
associated with the intercompany loan is removed in the segment
presentation.
(c) International Propane-Antargaz' results for the six months ended March 31,
2005 include $19.9 million of operating income and income before income
taxes due to the resolution of certain non-income tax contingencies
effective as of December 31, 2004 (see Note 8).
(d) The following table provides a reconciliation of Partnership EBITDA to
AmeriGas Propane operating income:
Six months ended December 31, 2005 2004
- --------------------------------- ------- -------
Partnership EBITDA (i) $ 221.6 $ 231.2
Depreciation and amortization (ii) (37.7) (39.5)
Minority interests (iii) 1.7 1.8
Income from equity investees - (0.7)
Gain on sale of Atlantic Energy (9.1) -
------- -------
Operating income $ 176.5 $ 192.8
======= =======
(i) Includes a $9.1 million gain on the sale of Atlantic Energy to Energy
Services during the six months ended March 31, 2005.
(ii) Excludes General Partner depreciation and amortization of $0.1 million in
the six months ended March 31, 2005.
(iii) Principally represents the General Partner's 1.01% interest in AmeriGas
OLP.
-10-
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:
March 31, September 30,
2005 2004
--------- ------------
Not subject to amortization:
Goodwill $ 1,191.3 $ 1,152.6
Excess reorganization value 93.3 93.3
--------- ---------
$ 1,284.6 $ 1,245.9
--------- ---------
Other intangible assets:
Customer relationships, noncompete
agreements and other $ 183.1 $ 169.7
Trademark (not subject to amortization) 44.0 42.2
--------- ---------
Gross carrying amount 227.1 211.9
--------- ---------
Accumulated amortization (37.8) (27.5)
--------- ---------
Net carrying amount $ 189.3 $ 184.4
--------- ---------
The increase in intangible assets during the six months ended March 31,
2005 principally reflects the effects of foreign currency translation and
business acquisitions. Amortization expense of intangible assets was $4.5
million and $8.8 million for the three and six months ended March 31,
2005, respectively, and $1.5 million and $3.2 million for the three
and six months ended March 31, 2004, 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
-11-
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 six months ended March 31, 2005, Energy Services sold trade
receivables totaling $702.1 million to ESFC. During the six months ended
March 31, 2005, ESFC sold an aggregate $260 million of undivided interests
in its trade receivables to the commercial paper conduit. At March 31,
2005, the outstanding balance of ESFC trade receivables was $120.3 million
which is net of $23 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. The LC Facility expires in
April 2006.
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.
-12-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars, except per share amounts)
Net periodic expense (income) and other postretirement benefit costs
include the following components:
Other
Pension Benefits Postretirement Benefits
---------------- -----------------------
Three Months Ended Three Months Ended
March 31, March 31,
------------------ -----------------------
2005 2004 2005 2004
------ ----- ----- -----
Service cost $ 1.4 $ 1.2 $ 0.1 $ -
Interest cost 3.6 3.2 0.6 0.4
Expected return on assets (4.5) (4.3) (0.1) (0.1)
Amortization of:
Transition (asset) obligation - (0.3) 0.2 0.2
Prior service cost 0.2 0.2 - -
Actuarial loss 0.3 0.3 0.1 0.1
------ ----- ----- -----
Net benefit cost 1.0 0.3 0.9 0.6
Change in regulatory assets and liabilities - - 0.2 0.3
------ ----- ----- -----
Net expense $ 1.0 $ 0.3 $ 1.1 $ 0.9
------ ----- ----- -----
Other
Pension Benefits Postretirement Benefits
---------------- -----------------------
Six Months Ended Six Months Ended
March 31, March 31,
---------------- -----------------------
2005 2004 2005 2004
----- ----- ----- -----
Service cost $ 2.8 $ 2.5 $ 0.2 $ 0.1
Interest cost 7.1 6.5 1.0 0.7
Expected return on assets (9.0) (8.7) (0.2) (0.2)
Amortization of:
Transition (asset) obligation - (0.7) 0.5 0.3
Prior service cost 0.3 0.3 - -
Actuarial loss 0.7 0.6 0.2 0.1
----- ----- ----- -----
Net benefit cost 1.9 0.5 1.7 1.0
Change in regulatory assets and liabilities - - 0.5 0.5
----- ----- ----- -----
Net expense $ 1.9 $ 0.5 $ 2.2 $ 1.5
----- ----- ----- -----
UGI Utilities Pension Plan assets are held in trust and consist
principally of equity and fixed income mutual funds. The Company does not
believe it will be required to make any contributions to the UGI Utilities
Pension Plan during the year ending September 30, 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 six months ended
March 31, 2005, UGI Utilities made contributions of approximately $1.2
million to the VEBA.
-13-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars, except per share amounts)
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 March 31, 2005 and 2004 and $0.9
million and $0.8 million during the six months ended March 31, 2005 and
2004, respectively.
8. COMMITMENTS AND CONTINGENCIES
The Partnership has succeeded to certain lease guarantee obligations of
Petrolane relating to Petrolane's divestiture of non-propane operations
before its 1989 acquisition by QFB Partners. Future lease payments under
these leases total approximately $11 million at March 31, 2005. The leases
expire through 2010 and some of them are currently in default. The
Partnership has succeeded to the indemnity agreement of Petrolane by which
Texas Eastern Corporation ("Texas Eastern"), a prior owner of Petrolane,
agreed to indemnify Petrolane against any liabilities arising out of the
conduct of businesses that do not relate to, and are not a part of, the
propane business, including lease guarantees. In December 1999, Texas
Eastern filed for dissolution under the Delaware General Corporation Law.
PanEnergy Corporation ("PanEnergy"), Texas Eastern's sole stockholder,
assumed all of Texas Eastern's liabilities as of December 20, 2002, to the
extent of the value of Texas Eastern's assets transferred to PanEnergy as
of that date (which was estimated to exceed $94 million), and to the
extent that such liabilities arise within ten years from Texas Eastern's
date of dissolution. Notwithstanding the dissolution proceeding, and based
on Texas Eastern previously having satisfied directly defaulted lease
obligations without the Partnership's having to honor its guarantee, we
believe that the probability that the Partnership will be required to
directly satisfy the lease obligations subject to the indemnification
agreement is remote.
On August 21, 2001, AmeriGas Partners, through AmeriGas OLP, acquired the
propane distribution businesses of Columbia Energy Group (the "2001
Acquisition") pursuant to the terms of a purchase agreement (the "2001
Acquisition Agreement") by and among Columbia Energy Group ("CEG"),
Columbia Propane Corporation ("Columbia Propane"), Columbia Propane, L.P.
("CPLP"), CP Holdings, Inc. ("CPH," and together with Columbia Propane and
CPLP, the "Company Parties"), AmeriGas Partners, AmeriGas OLP and the
General Partner (together with AmeriGas Partners and AmeriGas OLP, the
"Buyer Parties"). As a result of the 2001 Acquisition, AmeriGas OLP
acquired all of the stock of Columbia Propane and CPH and substantially
all of the partnership interests of CPLP. Under the terms of an earlier
acquisition agreement (the "1999 Acquisition Agreement"), the Company
Parties agreed to indemnify the former general partners of National
Propane Partners, L.P. (a predecessor company of the Columbia Propane
businesses) and an affiliate (collectively, "National General Partners")
against certain income tax and other losses that they may sustain as a
result of the 1999 acquisition by CPLP of National Propane Partners, L.P.
(the "1999 Acquisition") or the operation of the business after the 1999
Acquisition ("National Claims"). At March 31, 2005, 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
-14-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars, except per share amounts)
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. In 2004, the court 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 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.
-15-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars, except per share amounts)
Management believes that under applicable law UGI Utilities should not be
liable in those instances in which a former subsidiary owned or operated
an MGP. There could be, however, significant future costs of an uncertain
amount associated with environmental damage caused by MGPs outside
Pennsylvania that UGI Utilities directly operated, or that were owned or
operated by former subsidiaries of UGI Utilities, if a court were to
conclude that (1) the subsidiary's separate corporate form should be
disregarded or (2) UGI Utilities should be considered to have been an
operator because of its conduct with respect to its subsidiary's MGP.
In April 2003, Citizens Communications Company ("Citizens") served a
complaint naming UGI Utilities as a third-party defendant in a civil
action pending in United States District Court for the District of Maine.
In that action, the plaintiff, City of Bangor, Maine ("City"), sued
Citizens to recover environmental response costs associated with MGP
wastes generated at a plant allegedly operated by Citizens' predecessors
at a site on the Penobscot River. Citizens subsequently joined UGI
Utilities and ten other third party defendants alleging that the
third-party defendants are responsible for an equitable share of costs
Citizens may be required to pay to the City for cleaning up tar deposits
in the Penobscot River. 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. In March 2005, the court
granted UGI Utilities' motion for summary judgment dismissing AGL's
complaint. AGL has appealed.
AGL has informed UGI Utilities that it has begun remediation of MGP wastes
at a site owned by AGL in Savannah, Georgia. A former subsidiary of UGI
Utilities operated the MGP in the early 1900s. AGL believes that the total
cost of remediation could be as high as $55 million. AGL has not filed
suit against UGI Utilities for a share of these costs. UGI Utilities
believes that it will have good defenses to any action that may arise out
of this site.
On September 20, 2001, Consolidated Edison Company of New York ("ConEd")
filed suit against UGI Utilities in the United States District Court for
the Southern District of New York, seeking contribution from UGI Utilities
for an allocated share of response costs associated with investigating and
assessing gas plant related contamination at former MGP sites in
Westchester County, New York. The complaint alleges that UGI Utilities
"owned and operated" the MGPs prior to 1904. The complaint also seeks a
declaration that UGI Utilities is responsible for an allocated percentage
of future investigative and remedial costs at the sites. ConEd believes
that the cost of remediation for all of the sites could exceed $70
million. 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.
-16-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars, except per share amounts)
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 ($12.2 million) of the tax liability and
is reflected in "Prepaid and other current assets" in the Condensed
Consolidated Balance Sheet at March 31, 2005. 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 six
month period ended March 31, 2005. 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
-17-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars, except per share amounts)
the amounts of future operating results and cash flows. At March 31, 2005,
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 with our
fiscal year ending September 30, 2006. 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 our 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 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. The impact of
FSP 109-1 and FSP 109-2 does not have a material effect on our financial
position or results of operations.
-18-
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars, except per share amounts)
10. SUBSEQUENT EVENT - PARTNERSHIP LONG-TERM DEBT REFINANCING
In April 2005, the Partnership repaid $53.8 million of maturing AmeriGas
OLP First Mortgage Notes with the proceeds from a $35 million term loan,
borrowings under its revolving credit facility and existing cash balances.
In May 2005, the Partnership refinanced $373.4 million of its outstanding
8.875% Senior Notes due 2011 through the issuance of $415 million
of 7.25% Senior Notes due 2015. In connection with the refinancing, UGI
incurred an after-tax loss on early extinguishment of debt of $9.4
million.
11. SUBSEQUENT EVENT - UGI COMMON STOCK SPLIT
On April 26, 2005, UGI's Board of Directors approved a 2-for-1 common
stock split. The Company will issue one additional common share for every
common share outstanding. The new shares will be distributable May 24,
2005 to shareholders of record May 17, 2005. Basic and diluted earnings
per share and dividends declared per share for the three and six month
periods ended March 31, 2005 and 2004 have been reflected on a pre-split
basis. The following table presents pro forma basic and diluted earnings
per share to reflect the effect of the 2-for-1 common stock split.
Three Months Ended Six Months Ended
March 31, March 31,
------------------ ----------------
2005 2004 2005 2004
------ ------ ------ ------
Basic earnings per share:
As reported $ 2.26 $ 1.51 $ 3.79 $ 2.43
Pro forma $ 1.13 $ 0.76 $ 1.90 $ 1.22
Diluted earnings per share:
As reported $ 2.23 $ 1.48 $ 3.72 $ 2.37
Pro forma $ 1.12 $ 0.74 $ 1.86 $ 1.19
-19-
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.
-20-
UGI CORPORATION AND SUBSIDIARIES
ANALYSIS OF RESULTS OF OPERATIONS
The following analyses compare our results of operations for (1) the three
months ended March 31, 2005 ("2005 three-month period") with the three months
ended March 31, 2004 ("2004 three-month period") and (2) the six months ended
March 31, 2005 ("2005 six-month period") with the six months ended March 31,
2004 ("2004 six-month period"). Our analyses 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
Our improved performance is substantially the 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").
Net income increased approximately 75% in the 2005 three-month period compared
to the 2004 three-month period. Of the $50.2 million increase in net income,
Antargaz operations accounted for nearly 90% of the increase with the remainder
of our improved results shared across our major operating units, with the
exception of AmeriGas Propane. AmeriGas Propane's performance reflects the
effects of what we believe is customer conservation due to high energy prices
coupled with the effects of warmer than normal winter weather. The increase in
net income attributed to Antargaz reflects unusually high LPG margin per gallon
primarily resulting from lower LPG product costs and a prior-period loss of $9.1
million on the settlement of contracts for the forward purchase of euros used to
fund the Antargaz Acquisition. Weather across our European and regulated utility
service areas was colder than normal during the 2005 three-month period.
For the 2005 six-month period, net income increased by approximately $90 million
which is primarily attributed to the effects of our 100% ownership of Antargaz
in the 2005 six-month period. Antargaz' results include $14.9 million in net
income ($0.28 per diluted share) resulting from the resolution of certain
non-income tax contingencies and continued high LPG margin per gallon. Antargaz'
margins are expected to return to a more normal level later this fiscal year.
Weather across our regulated utility service areas was also colder than normal
during the 2005 six-month period whereas AmeriGas Propane, Antargaz and FLAGA
experienced warmer than normal weather or approximately normal weather.
Our consolidated results for the remainder of fiscal 2005 will include a loss on
early extinguishment of AmeriGas Propane's debt in the amount of approximately
$9.4 million after tax or $0.18 per diluted share due to the May 3, 2005
refinancing of $373.4 million of its 8.875% Senior Notes due 2011 with $415
million of 7.25% Senior Notes due 2015.
Three Months Ended Six Months Ended
March 31, March 31,
--------------------- --------------------
2005 2004 2005 2004
------- ------ ------- -------
Net income (loss): (millions of dollars)
AmeriGas Propane (a) $ 27.0 $ 30.8 $ 37.4 $ 43.7
International Propane 47.0 2.9 94.2 7.7
Gas Utility 26.7 25.6 41.2 40.8
Electric Utility 3.9 3.4 6.4 5.8
Energy Services 8.3 4.3 11.9 8.0
Corporate & Other 4.4 0.1 4.4 (0.1)
------- ------ ------- -------
Total net income $ 117.3 $ 67.1 $ 195.5 $ 105.9
------- ------ ------- -------
(a) Amounts are net of minority interests in AmeriGas Partners, L.P.
-21-
UGI CORPORATION AND SUBSIDIARIES
2005 THREE-MONTH PERIOD COMPARED WITH 2004 THREE-MONTH PERIOD
Increase
Three months ended March 31, 2005 2004 (Decrease)
- ----------------------------------- ------- ------- ------------------
(Millions of dollars)
AMERIGAS PROPANE:
Revenues $ 698.3 $ 687.7 $ 10.6 1.5%
Total margin (a) $ 268.5 $ 282.5 $ (14.0) (5.0)%
Partnership EBITDA (b) $ 135.2 $ 146.6 $ (11.4) (7.8)%
Operating income $ 117.9 $ 127.2 $ (9.3) (7.3)%
Retail gallons sold (millions) 378.8 403.9 (25.1) (6.2)%
Degree days - % warmer
than normal (c) (4.9)% (1.5)% - -
INTERNATIONAL PROPANE:
Revenues $ 363.6 $ 18.6 $ 345.0 N.M.
Total margin (a) $ 204.7 $ 9.3 $ 195.4 N.M.
Operating income (loss) $ 99.0 $ (6.3) $ 105.3 N.M.
(Loss) income from equity investees $ (0.6) $ 7.7 $ (8.3) N.M.
Income before income taxes $ 89.8 $ 0.4 $ 89.4 N.M.
GAS UTILITY:
Revenues $ 255.9 $ 243.5 $ 12.4 5.1%
Total margin (a) $ 78.6 $ 78.5 $ 0.1 0.1%
Operating income $ 48.6 $ 46.5 $ 2.1 4.5%
Income before income taxes $ 44.6 $ 42.6 $ 2.0 4.7%
System throughput -
billions of cubic feet ("bcf") 31.0 31.2 (0.2) (0.6)%
Degree days - % colder
than normal 5.7% 2.7% - -
ELECTRIC UTILITY:
Revenues $ 25.6 $ 24.7 $ 0.9 3.6%
Total margin (a) $ 12.3 $ 11.9 $ 0.4 3.4%
Operating income $ 7.2 $ 6.8 $ 0.4 5.9%
Income before income taxes $ 6.7 $ 6.3 $ 0.4 6.3%
Distribution sales - millions of
kilowatt hours ("gwh") 282.1 282.2 (0.1) 0.0%
ENERGY SERVICES:
Revenues $ 432.2 $ 328.8 $ 103.4 31.4%
Total margin (a) $ 22.3 $ 13.5 $ 8.8 65.2%
Operating income $ 14.0 $ 7.5 $ 6.5 86.7%
Income before income taxes $ 14.0 $ 7.5 $ 6.5 86.7%
N.M. - 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 $1.4 million and $1.3 million in three-month
periods ended March 31, 2005 and 2004, respectively. 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
-22-
UGI CORPORATION AND SUBSIDIARIES
(as a measure of liquidity or ability to service debt obligations) and is
not a measure of performance or financial condition under accounting
principles generally accepted in the United States of America. Management
uses Partnership EBITDA as the primary measure of segment profitability
for the AmeriGas Propane segment (see Note 3 to the Condensed Consolidated
Financial Statements).
(c) Deviation from average heating degree days based upon national weather
statistics provided by the National Oceanic and Atmospheric Administration
("NOAA") for 335 airports in the United States, excluding Alaska.
AMERIGAS PROPANE. Based upon national heating degree day data, temperatures were
4.9% warmer than normal during the 2005 three-month period compared to
temperatures that were 1.5% warmer than normal during the 2004 three-month
period. Retail propane volumes sold decreased 6.2% due to the combination of
warmer than normal winter weather and the negative effects of customer
conservation resulting from record-high propane prices.
Retail propane revenues increased $36.8 million reflecting a $72.5 million
increase due to higher average selling prices partially offset by a $35.7
million decrease due to the lower retail volumes sold. Wholesale propane
revenues decreased $27.4 million reflecting a $37.8 million decrease due to
lower volumes sold partially offset by a $10.4 million increase resulting from
higher average selling prices. The higher average retail and wholesale selling
prices per gallon reflect the continuance of significantly higher propane
product costs principally resulting from higher crude oil prices. The average
wholesale cost per gallon at Mont Belvieu, one of the major propane supply
points in the United States, was approximately 17% greater than the average cost
per gallon during the 2004 three-month period. Notwithstanding the lower propane
volumes sold, total cost of sales increased $24.6 million primarily reflecting
the increase in propane product costs. Total margin decreased $14.0 million
compared to the 2004 three-month period due to the lower retail volumes sold
partially offset by slightly higher average retail propane margins per gallon
and higher margin from ancillary sales and services.
Partnership EBITDA during the 2005 three-month period was $135.2 million
compared to $146.6 million during the 2004 three-month period. The $11.4 million
decline in Partnership EBITDA reflects the aforementioned decrease in total
margin partially offset by lower operating and administrative expenses. In
conjunction with the Partnership's warm weather action plans, operating and
administrative expenses decreased $2.3 million reflecting lower employee
compensation and benefit costs and vehicle repair expenses partially offset by
higher vehicle fuel and vehicle lease expenses. Operating income decreased less
than the decrease in Partnership EBITDA due to slightly lower depreciation
expense.
INTERNATIONAL PROPANE. International Propane's results of operations in the 2005
three-month period significantly increased compared to the 2004 three-month
period due to the March 31, 2004 Antargaz Acquisition. Antargaz' revenues,
margin and operating income during the 2005 three-month period were $341.4
million, $194.9 million and $96.0 million, respectively. Antargaz sold
approximately 127 million gallons of LPG while experiencing weather that was
3.8% colder than normal during the 2005 three-month period compared to
approximately 123 million gallons while experiencing weather that was
essentially normal during the 2004 three-month period. International Propane
revenues increased $345.0 million reflecting revenues from Antargaz and a $3.6
million increase in FLAGA's revenues. The increase in FLAGA's revenues is
attributed to higher LPG prices, a 9% increase in LPG volumes sold while
experiencing weather that was colder than normal and colder than the
corresponding prior-year period and to a lesser extent the currency translation
effects of a stronger euro. In the French LPG market, Antargaz is able to
sustain higher margins per gallon of LPG during periods of declining product
costs and conversely, experiences lower margins per gallon of LPG during periods
of rising product costs. Antargaz continued to benefit from unusually high unit
margins during the 2005 three-month period primarily reflecting declines in LPG
product costs. Aside from Antargaz' contribution to
-23-
UGI CORPORATION AND SUBSIDIARIES
total margin in the 2005 three-month period, FLAGA's increase in total margin
reflects the translation effects of the stronger euro. Due to higher LPG costs
and competition, FLAGA's average LPG margins per gallon declined compared to the
2004 three-month period. The $105.3 million increase in International Propane
operating income primarily reflects Antargaz' operating income for the 2005
three-month period and a prior-period loss of $9.1 million on the settlement of
contracts for the forward purchase of euros used to fund the Antargaz
Acquisition.
Income from equity investees declined in the 2005 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 International Propane income before income taxes reflects
Antargaz' operating income and the previously mentioned prior-period loss on the
forward purchase contracts partially offset by higher interest expense resulting
from the Antargaz Acquisition.
GAS UTILITY. Weather in Gas Utility's service territory based upon heating
degree days was 5.7% colder than normal during the 2005 three-month period
compared with weather that was 2.7% colder than normal in the 2004 three-month
period. Notwithstanding the colder weather and year-over-year growth in the
number of our customers, total distribution system throughput decreased slightly
as lower sales to firm- residential, commercial and industrial ("retail
core-market") customers due in part to the effects of price-induced customer
conservation, and lower volumes transported for firm delivery service customers,
were partially offset by increased volumes transported for interruptible
delivery service customers. The $12.4 million increase in Gas Utility revenues
during the 2005 three-month period reflects $21.0 million greater revenues from
retail core-market customers principally as a result of higher average purchased
gas cost ("PGC") rates partially offset by a decrease in revenues from
low-margin off-system sales. The higher PGC rates reflect higher 2005
three-month period natural gas costs. Gas Utility's cost of gas was $177.3
million in the 2005 three-month period compared to $165.0 million in the 2004
three-month period reflecting the previously mentioned higher average PGC rates
partially offset by the effects of lower off-system sales. Gas Utility total
margin in the 2005 three-month period was comparable with the prior-year period.
Gas Utility operating income increased to $48.6 million in the 2005 three-month
period from $46.5 million in the 2004 three-month period principally reflecting
higher other income. Other income increased $2.1 million due in large part to
the absence of costs recorded in the prior-year period related to settling a
regulatory claim resulting from the discontinuance of natural gas service to
certain customers. Total operating and administrative expenses were comparable
with the prior year reflecting in large part lower required provisions for
injuries and damages claims partially offset principally by higher uncollectible
accounts expense. The increase in Gas Utility income before income taxes
reflects the previously mentioned increase in operating income and the effects
of slightly higher interest expense.
ELECTRIC UTILITY. Electric Utility's 2005 three-month period kilowatt-hour sales
were essentially equal with the prior-year period on weather that was comparable
to the prior-year period. Electric Utility's increased revenues reflect an
increase in its Provider of Last Resort ("POLR") electric generation rates
effective January 1, 2005. Electric Utility's cost of sales increased $0.5
million as a result of higher per-unit purchased power costs.
Electric Utility total margin in the 2005 three-month period increased by $0.4
million reflecting the previously mentioned higher POLR rates slightly offset by
the effects of increased per-unit purchased power costs. Operating income and
income before income taxes were higher in the 2005 three-month period
principally reflecting the increase in total margin.
-24-
UGI CORPORATION AND SUBSIDIARIES
ENERGY SERVICES. Energy Services revenues in the 2005 three-month period
increased (1) approximately $75 million resulting from increased natural gas
prices and to a lesser extent a 7% increase in natural gas volumes sold by
Energy Services' gas marketing business and (2) approximately $28 million in
revenues generated by Atlantic Energy Inc. ("Atlantic Energy"), which was
acquired by Energy Services in November 2004. 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 and
AmeriGas Propane. See Note 2 to Condensed Consolidated Financial Statements for
additional information regarding the acquisition. Total margin increased $8.8
million in the 2005 three-month period compared to the prior-year three-month
period. The increase in total margin is attributed to (1) higher average natural
gas unit margins than in the prior-year period due to fewer annual fixed-price
customer contracts and more shorter-termed, seasonal fixed-price contracts in
the current period, (2) the acquisition of Atlantic Energy, and to a lesser
extent, (3) higher income from winter storage services. Under the annual
fixed-price customer 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 terms of these contracts remains unchanged, margin realization
is seasonal because gas costs are usually higher, and unit margins lower, during
the peak heating season months of late fall and winter, while gas costs are
usually lower, and unit margins higher, during the late spring and summer
months.
The increase in Energy Services income before income taxes principally reflects
the previously mentioned increase in total margin partially offset by higher
operating expenses primarily resulting from additional expenses associated with
Atlantic Energy's operations and higher depreciation and amortization expense.
-25-
UGI CORPORATION AND SUBSIDIARIES
2005 SIX-MONTH PERIOD COMPARED WITH 2004 SIX-MONTH PERIOD
Increase
Six months ended March 31, 2005 2004 (Decrease)
- -------------------------- -------- -------- ----------------
(Millions of dollars)
AMERIGAS PROPANE:
Revenues $1,254.5 $1,147.9 $ 106.6 9.3%
Total margin (a) $ 473.6 $ 488.2 $ (14.6) (3.0)%
Partnership EBITDA $ 221.6 $ 231.2 $ (9.6) (4.2)%
Operating income $ 176.5 $ 192.8 $ (16.3) (8.5)%
Retail gallons sold (millions) 675.6 708.4 (32.8) (4.6)%
Degree days - % warmer
than normal (6.2)% (4.1)% - -
INTERNATIONAL PROPANE:
Revenues $ 642.5 $ 34.4 $ 608.1 N.M.
Total margin (a) $ 361.6 $ 17.5 $ 344.1 N.M.
Operating income (loss) $ 176.4 $ (4.5) $ 180.9 N.M.
(Loss) income from equity investees $ (1.3) $ 11.9 $ (13.2) N.M.
Income before income taxes $ 157.7 $ 5.5 $ 152.2 N.M.
GAS UTILITY:
Revenues $ 417.1 $ 392.8 $ 24.3 6.2%
Total margin (a) $ 133.2 $ 132.7 $ 0.5 0.4%
Operating income $ 76.7 $ 75.9 $ 0.8 1.1%
Income before income taxes $ 68.6 $ 67.9 $ 0.7 1.0%
System throughput -
billions of cubic feet ("bcf") 53.9 54.5 (0.6) (1.1)%
Degree days - % colder
than normal 3.6% 0.0% - -
ELECTRIC UTILITY:
Revenues $ 47.9 $ 46.1 $ 1.8 3.9%
Total margin (a) $ 22.3 $ 21.6 $ 0.7 3.2%
Operating income $ 11.9 $ 11.3 $ 0.6 5.3%
Income before income taxes $ 10.9 $ 10.3 $ 0.6 5.8%
Distribution sales - millions of
kilowatt hours ("gwh") 531.2 525.7 5.5 1.0%
ENERGY SERVICES:
Revenues $ 761.2 $ 561.7 $ 199.5 35.5%
Total margin (a) $ 38.1 $ 25.7 $ 12.4 48.2%
Operating income $ 20.1 $ 13.8 $ 6.3 45.7%
Income before income taxes $ 20.1 $ 13.8 $ 6.3 45.7%
N.M. - 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 $2.7 million in the 2005 six-month period and
$2.5 million in the 2004 six-month period. For financial statement
purposes, revenue-related taxes are included in "Utility taxes other than
income taxes" on the Condensed Consolidated Statements of Income.
AMERIGAS PROPANE. Temperatures during the 2005 six-month period were 6.2% warmer
than normal compared to temperatures that were 4.1% warmer than normal during
the 2004 six-month period. Retail propane volumes sold decreased nearly 5%
principally due to the warmer than normal winter weather and the negative
effects of customer conservation driven by higher propane selling prices.
-26-
UGI CORPORATION AND SUBSIDIARIES
Retail propane revenues increased $112.2 million reflecting a $157.3 million
increase due to higher average selling prices partially offset by a $45.1
million decrease due to the lower retail volumes sold. Wholesale propane
revenues decreased $8.5 million reflecting a $29.6 million decrease due to lower
volumes sold partially offset by a $21.1 million increase due to higher average
selling prices. The higher average retail and wholesale selling prices per
gallon reflect significantly higher propane product costs principally resulting
from higher crude oil prices. The average wholesale cost per gallon of propane
at Mont Belvieu was approximately 31% greater than the average cost per gallon
during the 2004 six-month period. Total cost of sales increased $121.2 million
reflecting the higher propane product costs. Total margin decreased $14.6
million principally due to the lower retail volumes sold partially offset by
slightly higher average retail propane margins per gallon and higher margin from
ancillary sales and services.
Notwithstanding a $9.1 million pre-tax gain recognized on the Partnership's sale
of its 50% ownership interest in Atlantic Energy, Partnership EBITDA during the
2005 six-month period decreased $9.6 million compared to the 2004 six-month
period as a result of the aforementioned decrease in total margin and a $4.6
million increase in operating and administrative expenses. The increase in
operating and administrative expenses principally resulted from higher vehicle
fuel costs, vehicle lease expense, general insurance and uncollectible accounts
expense. These increases were partially offset principally by lower employee
compensation and benefit costs and lower vehicle repairs and maintenance
expenses. Operating income decreased more than the decrease in Partnership
EBITDA principally reflecting the elimination of the gain on the sale of the
Partnership's ownership interest in Atlantic Energy to Energy Services.
INTERNATIONAL PROPANE. International Propane results of operations in the 2005
six-month period significantly increased compared to the 2004 six-month period
as a result of the Antargaz Acquisition. Antargaz' revenues, margin and
operating income during the 2005 six-month period were $600.1 million, $343.6
million and $171.7 million, respectively, which includes $19.9 million in
operating income resulting from the resolution of certain non-income tax
contingencies. Antargaz sold approximately 230 million gallons of LPG during the
2005 six-month period compared to approximately 220 million gallons during the
2004 six-month period. Weather in the 2005 six-month period was approximately
normal and slightly colder than the prior-year period. Antargaz was able to
sustain higher than expected margins during the 2005 six-month period. The
increase in International Propane revenues reflects revenues from Antargaz and,
despite FLAGA's slightly warmer than normal weather, an $8.0 million increase in
FLAGA's revenues. The increase in FLAGA's revenues is primarily attributed to a
10% increase in LPG volumes sold and higher LPG prices and, to a lesser extent,
the currency translation effects of a stronger euro. The increase in total
margin is a result of margin generated from Antargaz' operations and an increase
FLAGA's total margin reflecting the translation effects of the stronger euro
which was partially offset by decreased average LPG margins per gallon.
The $180.9 million increase in International Propane operating income primarily
reflects Antargaz' operating income for the 2005 six-month period. International
Propane operating income benefited from Antargaz' reversal of $19.9 million in
non-income tax reserves due to resolution of certain contingencies. See Antargaz
Tax Matter section below. In addition, the increase in operating income includes
a prior-period loss of $9.1 million on the settlement of contracts for the
forward purchase of euros used to fund the Antargaz Acquisition.
Income from equity investees declined in the 2005 six-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 and to a lesser extent Antargaz' equity
investee losses.
The increase in International Propane income before income taxes reflects
Antargaz' operating income and the previously mentioned prior-period loss on the
forward purchase contracts partially offset by
-27-
UGI CORPORATION AND SUBSIDIARIES
higher interest expense associated with the Antargaz Acquisition and the
decrease in equity investee income.
GAS UTILITY. Weather in Gas Utility's service territory during the 2005
six-month period was 3.6% colder than normal compared with weather that was
essentially normal in the 2004 six-month period. Notwithstanding the colder
weather and year-over-year customer growth, total distribution system
throughput decreased 0.6 bcf or 1.1% as persistently high natural gas prices
resulted in price-induced customer conservation primarily in our retail
core-market. The increase in Gas Utility revenues during the 2005 six-month
period includes a $45.3 million increase in retail core-market revenues
partially offset by a decrease in revenues from low-margin off-system sales.
The increase in retail core-market revenues reflects higher average PGC rates.
Gas Utility's cost of gas was $283.9 million in the 2005 six-month period
compared to $260.1 million in the 2004 six-month period reflecting the effects
of the higher average PGC rates partially offset by the effects of the lower
off-system sales.
The $0.5 million increase in Gas Utility total margin reflects greater margin
generated from slightly higher interruptible delivery service volumes and
slightly higher average delivery service margin partially offset by lower
retail core-market margin resulting from the previously mentioned decline in
retail core-market volumes.
Gas Utility operating income increased $0.8 million in the 2005 six-month period
principally reflecting the $0.5 million increase in total margin and higher
other income partially offset by increased operating and administrative
expenses. Other income increased $2.2 million due in large part to the absence
of costs recorded in the prior-year period related to settling a regulatory
claim resulting from the discontinuance of natural gas service to certain
customers. Operating and administrative expenses increased $1.4 million in the
2005 six-month period principally reflecting greater uncollectible accounts
expense and the absence of environmental insurance settlements received in the
prior-year period partially offset by lower required provisions for injuries and
damages claims. The increase in Gas Utility income before income taxes
principally reflects the increase in operating income and the effects of
slightly higher interest expense.
ELECTRIC UTILITY. Electric Utility's 2005 six-month period kilowatt-hour sales
were slightly higher than the prior-year period on weather that was comparable
to the prior year. The increase in Electric Utility revenues reflect higher POLR
rates. Electric Utility's cost of sales increased approximately 4% reflecting
higher per-unit purchased power costs.
Electric Utility total margin in the 2005 six-month period increased $0.7
million principally as a result of the previously mentioned increase in POLR
rates and slight increase in kilowatt-hour sales partially offset by the higher
purchased power costs. Operating income and income before income taxes were
higher in the 2005 six-month period principally reflecting the increase in total
margin.
ENERGY SERVICES. The increase in Energy Services revenues in the 2005 six-month
period resulted primarily from (1) increased natural gas prices and to a lesser
extent an approximate 6% growth in natural gas volumes sold and (2)
approximately $45 million of revenues generated by Atlantic Energy. Total margin
from Energy Services' gas marketing business increased by $8.0 million in the
2005 six-month period principally due to higher average unit margins. The
remainder of the increase in total margin is attributed to the purchase of
Atlantic Energy. Energy Services' higher average unit margins reflect the lower
proportion of annual fixed-price customer contracts and more seasonal
fixed-price customer contracts compared to the prior-year period.
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UGI CORPORATION AND SUBSIDIARIES
The increase in Energy Services income before income taxes principally reflects
the previously mentioned increase in total margin partially offset by higher
operating and administrative expenses and higher depreciation and amortization.
The higher operating and administrative expenses were primarily a result of
higher uncollectible accounts expense and operating and administrative expenses
associated with Atlantic Energy since its acquisition in November 2004.
FINANCIAL CONDITION
Our cash, cash equivalents and short-term investments totaled $226.6 million at
March 31, 2005 compared with $199.6 million at September 30, 2004. These amounts
include $111.0 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 March 31, 2005 totaled $1,692.5
million (including current maturities of $172.2 million) compared to $1,670.1
million of long-term debt (including current maturities of $122.8 million) at
September 30, 2004. In April 2005, the Partnership repaid $53.8 million of
maturing AmeriGas OLP First Mortgage Notes with the proceeds from a $35 million
term loan, borrowings under its revolving credit facility and existing cash
balances. In May 2005, the Partnership refinanced $373.4 million of its
outstanding 8.875% Senior Notes due 2011 through the issuance of $415 million of
7.25% Senior Notes due 2015. In connection with the refinancing, UGI incurred an
after-tax loss on early extinguishment of debt totaling $9.4 million. In
addition, UGI Utilities expects to refinance $20 million of its Medium-Term
Notes due in May 2005 with the issuance of $20 million of Medium-Term Notes
under the existing shelf registration statement. UGI Utilities expects to
refinance the $50 million of Medium-Term Notes due in December 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, may
be used for working capital and general purposes, subject to restrictions in the
AmeriGas Partners Senior Notes indentures. At March 31, 2005, there were $12
million of borrowings under the Credit Agreement which are classified as bank
loans on the Condensed Consolidated Balance Sheets. Issued and outstanding
letters of credit under the Revolving Credit Facility, which reduce the amount
available for borrowings, totaled $54.4 million at March 31, 2005. 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.
AmeriGas Partners periodically issues debt and equity securities and expects to
continue issuing securities in the future. 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 through a private placement
in May 2005 and common units in May 2004 in an underwritten public offering. 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 March 31, 2005, there were no borrowings outstanding under the
revolver.
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UGI CORPORATION AND SUBSIDIARIES
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 March 31, 2005,
UGI Utilities had $39.2 million in borrowings outstanding under these revolving
credit agreements. Short-term borrowings, including borrowings under revolving
credit agreements are classified as bank loans on the Condensed Consolidated
Balance Sheets. 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 March
31, 2005, the outstanding balance of ESFC receivables was $120.3 million which
amount is net of $23 million in trade receivables sold to the commercial paper
conduit.
In addition, a major bank has committed to Energy Services to issue up to $50
million of standby letters of credit, secured by cash or marketable securities
("LC Facility"). At March 31, 2005, there were no letters of credit outstanding.
Energy Services expects to fund the collateral requirements with borrowings
under its Receivables Facility. The LC Facility expires April 2006.
CASH FLOWS
OPERATING ACTIVITIES. Due to the seasonal nature of the Company's businesses,
cash flows from operating activities are generally strongest during the second
and third fiscal quarters when customers pay for natural gas, propane and other
LPG and electricity consumed during the heating season months. Conversely,
operating cash flows are generally at their lowest levels during the first and
fourth fiscal quarters when the Company's investment in working capital,
principally accounts receivable and/or inventories, is generally greatest.
AmeriGas Propane and UGI Utilities use revolving credit facilities and Energy
Services uses its Receivables Facility to satisfy their seasonal operating cash
flow needs. Antargaz has historically been successful funding its operating cash
flow needs without the use of its revolver. Cash flow from operating activities
was $188.5 million in the 2005 six-month period compared to $104.2 million in
the 2004 six-month period. The increase in operating cash flow principally
reflects our improved results, primarily reflecting the effects of the Antargaz
Acquisition. Cash flow from operating activities before changes in operating
working capital was $367.7 million in the 2005 six-month period compared with
$254.7 million in the prior-year six-month period. Changes in operating working
capital used $179.2 million in the 2005 six-month period and $150.5 million in
the 2004 six-month period.
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UGI CORPORATION AND SUBSIDIARIES
INVESTING ACTIVITIES. Investing activity cash flow is principally affected by
capital expenditures and investments in property, plant and equipment, cash paid
for acquisitions of businesses, changes in short-term investments and proceeds
from sales of assets. Cash flow used in investing activities was $105.3 million
in the 2005 six-month period compared to $281.9 million in the prior-year period
principally reflecting the prior-year purchase of the remaining ownership
interests in AGZ Holding and AmeriGas Propane's acquisition of Horizon Propane,
net of cash acquired.
FINANCING ACTIVITIES. Cash flow used by financing activities was $71.9 million
in the 2005 six-month period compared with $178.8 million of cash provided in
the prior-year six-month period. Financing activity cash flow changes are
primarily due to issuances and repayments of long-term debt, net borrowings
under revolving credit facilities, dividends and distributions on UGI Common
Stock and AmeriGas Partners Common Units, and proceeds from public offerings of
AmeriGas Partners Common Units and issuances of UGI common stock. The
prior-period cash flows from financing activities reflects the issuance of 7.8
million shares of UGI Common Stock sold in an underwritten public offering to
fund the Antargaz Acquisition. On October 1, 2004, UGI Utilities redeemed all
200,000 shares of $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.
We paid cash dividends on UGI Common Stock of $32.2 million and $24.4 million
during the six months ended March 31, 2005 and 2004, respectively. Also, the
Partnership paid the minimum quarterly distribution of $0.55 (the "MQD") on all
limited partner units during both of the six-month periods ended March 31, 2005
and 2004. On April 26, 2005, the Partnership declared an increase in their
regular quarterly distribution to $0.56 per limited partnership unit ($2.24 on
an annual basis). The quarterly distribution of $0.56 for the quarter ended
March 31, 2005 will be paid on May 18, 2005 to holders of record on May 10,
2005.
UGI COMMON STOCK SPLIT AND DIVIDEND INCREASE
On April 26, 2005, UGI's Board of Directors approved a 2-for-1 common stock
split. The Company will issue one additional common share for every common share
outstanding. The new shares will be distributable May 24, 2005 to shareholders
of record May 17, 2005. Basic and diluted earnings per share and dividends
declared per share for the three and six month periods ended March 31, 2005 and
2004 have been reflected on a pre-split basis. Also, on April 26, 2005, UGI's
Board of Directors approved an increase in the quarterly dividend rate on UGI
Common Stock to $0.3375 on a pre-split basis ($0.16875 per share after the
common stock split), or $1.35 per pre-split common share ($0.675 per share after
the common stock split) on an annual basis. The new quarterly dividend is
effective with the dividend payable on July 1, 2005 to shareholders of record on
June 15, 2005.
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
($12.2 million) of the tax liability and is reflected in "Prepaid and other
current assets" in the Condensed Consolidated Balance Sheet at March 31, 2005.
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
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UGI CORPORATION AND SUBSIDIARIES
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 six month period ended March
31, 2005. 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 with our fiscal year
ending September 30, 2006. 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 our 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.
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. The impact of FSP 109-1 and FSP 109-2 does not
have a material effect on the Company's financial position or results of
operations.
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UGI CORPORATION AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risk exposures are (1) market prices for propane and other
LPG, natural gas and electricity; (2) changes in interest rates; and (3) foreign
currency exchange rates.
The risk associated with fluctuations in the prices the Partnership and our
International Propane operations pay for 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 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
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UGI CORPORATION AND SUBSIDIARIES
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' fixed-price sales contracts for natural gas, Energy Services purchases
exchange-traded natural gas futures contracts or enters into fixed-price supply
arrangements. Exchange-traded natural gas futures contracts are guaranteed by
the New York Mercantile Exchange ("NYMEX") and have nominal credit risk. 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 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 March 31, 2005, combined borrowings outstanding under these agreements
totaled $374.3 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 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 March 31, 2005. Fair values reflect the
estimated amounts that we would receive or pay to terminate the contracts at the
reporting date based upon quoted market prices of comparable contracts at March
31, 2005. 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.
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UGI CORPORATION AND SUBSIDIARIES
Change in
Fair Value Fair Value
---------- ----------
(Millions of dollars)
March 31, 2005:
Propane commodity price risk $ 1.2 $ (1.1)
Natural gas commodity price risk (0.2) (3.4)
Electricity commodity price risk 3.5 (1.1)
Interest rate risk (3.6) (6.2)
Foreign currency exchange rate risk (1.8) (11.4)
Gas Utility's exchange-traded natural gas call option contracts are excluded
from the table above because any associated net gains are included in Gas
Utility's PGC recovery mechanism. Because our derivative instruments generally
qualify as hedges under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," ("SFAS 133"), we expect that changes in the fair value of
derivative instruments used to manage commodity or interest rate market risk
would be substantially offset by gains or losses on the associated anticipated
transactions.
Our primary exchange rate risk is associated with the U.S. dollar versus the
euro. The U.S. dollar value of our foreign-denominated assets and liabilities
will fluctuate with changes in the associated foreign currency exchange rates.
We use derivative instruments to hedge portions of our net investments in
foreign subsidiaries ("net investment hedges"). Realized gains or losses remain
in other comprehensive income until such foreign operations are liquidated. At
March 31, 2005, the fair value of unsettled net investment hedges was a loss of
$2.4 million, which is included in the foreign currency exchange rate risk in
the table above. With respect to our net investments in FLAGA and Antargaz, a
10% decline in the value of the euro versus the U.S. dollar, excluding the
effects of any net investment hedges, would reduce their aggregate net book
value by approximately $45.8 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.
-36-
UGI CORPORATION AND SUBSIDIARIES
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Atlanta Gas Light Company v. UGI Utilities, Inc. By letter dated July 29, 2003,
Atlanta Gas Light Company ("AGL") served UGI Utilities with a complaint filed in
the United States District Court for the Middle District of Florida in which AGL
alleges that UGI Utilities is responsible for 20% of approximately $8 million
incurred by AGL in the investigation and remediation of a former MGP site in St.
Augustine, Florida. UGI Utilities formerly owned stock of the St. Augustine Gas
Company, the owner and operator of the MGP. In March 2005, the court granted UGI
Utilities' motion for summary judgment and dismissed AGL's complaint. AGL has
appealed.
South Coast Air Quality Management District Matter. On February 21, 2005,
AmeriGas Propane, L.P. ("AmeriGas OLP"), a principal operating subsidiary of
AmeriGas Partners, L.P. ("AmeriGas Partners"), received notice from the South
Coast (of California) Air Quality Management District ("SCAQMD") that it
intended to seek civil penalties totaling $0.1 million for five violations of
air emissions regulations at AmeriGas OLP's LPG terminal in San Pedro,
California. After an inspection of the San Pedro terminal by SCAQMD on April 15,
2005, AmeriGas Partners expects SCAQMD to issue additional notices of violation
of regulations related to the installation of emission reduction equipment at
the facility that may involve monetary penalties of $0.1 million or more.
AmeriGas Partners is working with SCAQMD to assure that the facility is in
compliance with applicable regulations and we believe that the resolution of
this matter will not have a material effect on our results of operations or
financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On February 23, 2005, the Annual Meeting of Shareholders of UGI was held.
The Shareholders (i) reelected the eight nominees from the existing Board of
Directors to another term, and (ii) ratified the appointment of
PricewaterhouseCoopers LLP as independent public accountants.
The number of votes cast for and withheld from election of each director
nominee is set forth below. There were no abstentions or broker non-votes in the
election of directors.
DIRECTOR NOMINEES FOR WITHHELD
- ----------------- --- --------
James W. Stratton 45,375,439 1,186,390
Richard C. Gozon 45,896,548 665,281
Stephen D. Ban 46,046,606 515,223
Lon R. Greenberg 46,025,052 536,777
Marvin O. Schlanger 46,137,092 424,737
Thomas F. Donovan 46,108,517 453,312
Anne Pol 46,145,611 416,218
Ernest E. Jones 46,166,519 395,310
The number of votes cast for and against, and the number of abstentions in
the ratification of the appointment of PricewaterhouseCoopers LLP is as follows:
For: 46,109,635; Against: 318,118; Abstain: 134,075. There were no broker
non-votes.
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UGI CORPORATION AND SUBSIDIARIES
ITEM 6. EXHIBITS
10.1 AmeriGas Propane, Inc. Supplemental Executive Retirement Plan
Amended and Restated as of March 1, 2005.
10.2 Form of Confidentiality and Post-Employment Activities
Agreement between AmeriGas and Robert H. Knauss.
31.1 Certification by the Chief Executive Officer relating to the
Registrant's Report on Form 10-Q for the quarter ended March
31, 2005, pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 Certification by the Chief Financial Officer relating to the
Registrant's Report on Form 10-Q for the quarter ended March
31, 2005, pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32 Certification by the Chief Executive Officer and the Chief
Financial Officer relating to the Registrant's Report on Form
10-Q for the quarter ended March 31, 2005, pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
-38-
UGI CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UGI Corporation
----------------
(Registrant)
Date: May 6, 2005 By: /s/ Anthony J. Mendicino
----------------------------------
Anthony J. Mendicino
Senior Vice President-Finance and
Chief Financial Officer
Date: May 6, 2005 By: /s/ Michael J. Cuzzolina
---------------------------------
Michael J. Cuzzolina
Vice President-Accounting and
Financial Control and
Chief Risk Officer
-39-
UGI CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
10.1 AmeriGas Propane, Inc. Supplemental Executive Retirement Plan Amended and
Restated as of March 1, 2005.
10.2 Form of Confidentiality and Post-Employment Activities Agreement between
AmeriGas and Robert H. Knauss.
31.1 Certification by the Chief Executive Officer relating to the Registrant's
Report on Form 10-Q for the quarter ended March 31, 2005, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification by the Chief Financial Officer relating to the Registrant's
Report on Form 10-Q for the quarter ended March 31, 2005, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certification by the Chief Executive Officer and the Chief Financial
Officer relating to the Registrant's Report on Form 10-Q for the quarter
ended March 31, 2005, pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.