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EX-32 - EXHIBIT 32 - UGI UTILITIES INC | c95322exv32.htm |
EX-31.2 - EXHIBIT 31.2 - UGI UTILITIES INC | c95322exv31w2.htm |
EX-31.1 - EXHIBIT 31.1 - UGI UTILITIES INC | c95322exv31w1.htm |
EX-12.1 - EXHIBIT 12.1 - UGI UTILITIES INC | c95322exv12w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2009
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-1398
UGI UTILITIES, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania | 23-1174060 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) |
UGI UTILITIES, INC.
2525 N. 12th Street, Suite 360
Reading, PA
(Address of principal executive offices)
2525 N. 12th Street, Suite 360
Reading, PA
(Address of principal executive offices)
19612
(Zip Code)
(610) 796-3400
(Registrants telephone number, including area code)
(Zip Code)
(610) 796-3400
(Registrants 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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes
o No
þ
At January 31, 2010, there were 26,781,785 shares of UGI Utilities, Inc. Common Stock, par
value $2.25 per share, outstanding, all of which were held, beneficially and of record, by UGI
Corporation.
UGI UTILITIES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGES | ||||||||
Part I Financial Information |
||||||||
Item 1. Financial Statements (unaudited) |
||||||||
1 | ||||||||
2 | ||||||||
3 | ||||||||
4 17 | ||||||||
18 22 | ||||||||
22 23 | ||||||||
23 | ||||||||
24 | ||||||||
24 | ||||||||
25 | ||||||||
Exhibit 12.1 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32 |
-i-
Table of Contents
UGI UTILITIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(Thousands of dollars)
December 31, | September 30, | December 31, | ||||||||||
2009 | 2009 | 2008 | ||||||||||
ASSETS |
||||||||||||
Current assets: |
||||||||||||
Cash and cash equivalents |
$ | 12,678 | $ | 13,523 | $ | 10,955 | ||||||
Restricted cash |
656 | | 72,672 | |||||||||
Accounts receivable (less allowances for doubtful accounts of $11,889,
$11,384 and $17,644, respectively) |
132,499 | 74,286 | 168,646 | |||||||||
Accounts receivable related parties |
8,417 | 3,378 | 3,551 | |||||||||
Accrued utility revenues |
84,395 | 20,980 | 90,246 | |||||||||
Inventories |
177,087 | 196,598 | 167,384 | |||||||||
Deferred income taxes |
27,162 | 24,905 | 21,336 | |||||||||
Regulatory assets |
10,344 | 19,584 | 46,953 | |||||||||
Derivative financial instruments |
874 | 867 | 1,004 | |||||||||
Prepaid expenses & other current assets |
4,590 | 5,167 | 4,492 | |||||||||
Total current assets |
458,702 | 359,288 | 587,239 | |||||||||
Property, plant and equipment, at cost (less accumulated depreciation and
amortization of $703,722, $692,082 and $669,751, respectively) |
1,365,441 | 1,364,795 | 1,343,833 | |||||||||
Goodwill |
180,145 | 180,145 | 182,723 | |||||||||
Regulatory assets |
121,646 | 121,960 | 103,458 | |||||||||
Other assets |
5,470 | 4,049 | 13,165 | |||||||||
Total assets |
$ | 2,131,404 | $ | 2,030,237 | $ | 2,230,418 | ||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||||||
Current liabilities: |
||||||||||||
Bank loans |
$ | 179,000 | $ | 154,000 | $ | 283,000 | ||||||
Accounts payable |
70,845 | 53,265 | 111,455 | |||||||||
Accounts payable related parties |
6,424 | 8,746 | 4,424 | |||||||||
Deferred fuel refunds |
40,343 | 30,846 | | |||||||||
Derivative financial instruments |
125 | | 58,675 | |||||||||
Other current liabilities |
127,755 | 110,966 | 154,043 | |||||||||
Total current liabilities |
424,492 | 357,823 | 611,597 | |||||||||
Long-term debt |
640,000 | 640,000 | 640,000 | |||||||||
Deferred income taxes |
184,641 | 168,830 | 136,004 | |||||||||
Deferred investment tax credits |
5,579 | 5,670 | 5,945 | |||||||||
Pension and postretirement benefit obligations |
151,561 | 150,499 | 137,503 | |||||||||
Other noncurrent liabilities |
60,278 | 61,372 | 55,376 | |||||||||
Total liabilities |
1,466,551 | 1,384,194 | 1,586,425 | |||||||||
Commitments and contingencies (note 8) |
||||||||||||
Common stockholders equity: |
||||||||||||
Common Stock, $2.25 par value (authorized 40,000,000 shares;
issued and outstanding 26,781,785 shares) |
60,259 | 60,259 | 60,259 | |||||||||
Additional paid-in capital |
467,160 | 467,160 | 466,888 | |||||||||
Retained earnings |
219,487 | 201,710 | 199,142 | |||||||||
Accumulated other comprehensive loss |
(82,053 | ) | (83,086 | ) | (82,296 | ) | ||||||
Total common stockholders equity |
664,853 | 646,043 | 643,993 | |||||||||
Total liabilities and stockholders equity |
$ | 2,131,404 | $ | 2,030,237 | $ | 2,230,418 | ||||||
See accompanying notes to condensed consolidated financial statements.
- 1 -
Table of Contents
UGI UTILITIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(Thousands of dollars)
Three Months Ended | ||||||||
December 31, | ||||||||
2009 | 2008 | |||||||
Revenues |
$ | 362,203 | $ | 446,692 | ||||
Costs and expenses: |
||||||||
Cost of sales gas, fuel and purchased power |
231,217 | 316,234 | ||||||
Operating and administrative expenses |
44,222 | 50,678 | ||||||
Operating and administrative expenses
related parties |
1,192 | 2,745 | ||||||
Taxes other than income taxes |
4,528 | 4,604 | ||||||
Depreciation |
12,681 | 12,031 | ||||||
Amortization |
607 | 481 | ||||||
Other income, net |
(1,517 | ) | (2,093 | ) | ||||
292,930 | 384,680 | |||||||
Operating income |
69,273 | 62,012 | ||||||
Interest expense |
10,637 | 11,380 | ||||||
Income before income taxes |
58,636 | 50,632 | ||||||
Income taxes |
23,473 | 19,498 | ||||||
Net income |
$ | 35,163 | $ | 31,134 | ||||
See accompanying notes to condensed consolidated financial statements.
- 2 -
Table of Contents
UGI UTILITIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Thousands of dollars)
Three Months Ended | ||||||||
December 31, | ||||||||
2009 | 2008 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net income |
$ | 35,163 | $ | 31,134 | ||||
Adjustments to reconcile net income to net cash from
operating activities: |
||||||||
Depreciation and amortization |
13,288 | 12,512 | ||||||
Deferred income taxes, net |
11,724 | (2,222 | ) | |||||
Provision for uncollectible accounts |
4,845 | 8,702 | ||||||
Other, net |
2,180 | 1,323 | ||||||
Net change in: |
||||||||
Accounts receivable and accrued utility revenues |
(131,512 | ) | (164,448 | ) | ||||
Inventories |
19,511 | 16,876 | ||||||
Deferred fuel costs |
18,737 | 10,129 | ||||||
Accounts payable |
15,258 | 33,256 | ||||||
Storage agreements security deposits |
3,500 | 40,500 | ||||||
Other current assets |
570 | (940 | ) | |||||
Other current liabilities |
13,414 | 31,614 | ||||||
Net cash provided by operating activities |
6,678 | 18,436 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Expenditures for property, plant and equipment |
(13,810 | ) | (22,811 | ) | ||||
Net costs of property, plant and equipment disposals |
(671 | ) | (389 | ) | ||||
Acquisition of CPG, net of cash acquired |
| (300,561 | ) | |||||
Proceeds from sale of CPG propane business assets |
| 33,621 | ||||||
Increase in restricted cash |
(656 | ) | (38,635 | ) | ||||
Net cash used by investing activities |
(15,137 | ) | (328,775 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Payment of dividends |
(17,386 | ) | (16,189 | ) | ||||
Issuance of long-term debt |
| 108,000 | ||||||
Increase in bank loans |
25,000 | 226,000 | ||||||
Net cash provided by financing activities |
7,614 | 317,811 | ||||||
Cash and cash equivalents (decrease) increase |
$ | (845 | ) | $ | 7,472 | |||
CASH AND CASH EQUIVALENTS: |
||||||||
End of period |
$ | 12,678 | $ | 10,955 | ||||
Beginning of period |
13,523 | 3,483 | ||||||
(Decrease) increase |
$ | (845 | ) | $ | 7,472 | |||
See accompanying notes to condensed consolidated financial statements.
- 3 -
Table of Contents
UGI UTILITIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars)
1. | Nature of Operations |
UGI Utilities, Inc., a wholly owned subsidiary of UGI Corporation (UGI), and its wholly
owned subsidiaries UGI Penn Natural Gas, Inc. (PNG) and UGI Central Penn Gas, Inc.
(CPG), own and operate natural gas distribution utilities primarily located in eastern,
northeastern and central Pennsylvania. UGI Utilities also owns and operates an electric
distribution utility in northeastern Pennsylvania (Electric Utility). UGI Utilities,
Inc.s natural gas distribution utility is referred to herein as UGI Gas; PNGs natural
gas distribution utility is referred to herein as PNG Gas; and CPGs natural gas
distribution utility is referred to herein as CPG Gas. UGI Gas, PNG Gas and CPG Gas are
collectively referred to as Gas Utility. PNG also has a heating, ventilation and
air-conditioning service business (UGI Penn HVAC Services, Inc.) which operates
principally in the PNG Gas service territory.
Gas Utility is subject to regulation by the Pennsylvania Public Utility Commission (PUC)
and the Maryland Public Service Commission, and Electric Utility is subject to regulation
by the PUC. The term UGI Utilities is used sometimes as an abbreviated reference to UGI
Utilities, Inc., or to UGI Utilities, Inc. and its subsidiaries. Our condensed consolidated
financial statements include the accounts of UGI Utilities and its subsidiaries
(collectively, we or the Company). We eliminate all significant intercompany accounts
when we consolidate.
2. | Significant Accounting Policies |
Basis of Presentation. 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, 2009 condensed consolidated balance sheet data were derived from audited
financial statements but do not include all disclosures required by accounting principles
generally accepted in the United States of America (GAAP). 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, 2009 (Companys 2009 Annual
Report). Due to the seasonal nature of our businesses, the results of operations for
interim periods are not necessarily indicative of the results to be expected for a full
year.
Comprehensive Income (Loss). The following table presents the components of comprehensive
income (loss) for the three months ended December 31, 2009 and 2008:
Three Months Ended | ||||||||
December 31, | ||||||||
2009 | 2008 | |||||||
Net income |
$ | 35,163 | $ | 31,134 | ||||
Other comprehensive income (loss) |
1,033 | (38,518 | ) | |||||
Comprehensive income (loss) |
$ | 36,196 | $ | (7,384 | ) | |||
- 4 -
Table of Contents
UGI UTILITIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars)
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars)
Other comprehensive income (loss) includes reclassifications of losses on interest rate
protection agreements and actuarial gains and losses on postretirement benefit plans, net of
reclassifications to net income. On December 31, 2008, we merged two of our defined benefit
pension plans that we sponsored. As a result of the merger, at December 31, 2008, the
Company was required under GAAP to remeasure the combined plans assets and obligations and
record the funded status in our Condensed Consolidated Balance Sheet. During the three
months ended December 31, 2008, we recorded an after-tax charge to other comprehensive
income of $38,688 associated with the merger of the pension plans.
Restricted Cash. Restricted cash represents those cash balances in our futures brokerage
accounts which are restricted from withdrawal.
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 GAAP. 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.
Income Taxes. As a result of settlements with tax authorities, in December 2009 and
December 2008 the Company adjusted its unrecognized tax benefits. The reduction decreased
income tax expense for the three months ended December 31, 2009 and 2008 by $290 and $490,
respectively.
Subsequent Events. The Companys management has evaluated the impact of subsequent events
through February 5, 2010, the date the financial statements were filed with the SEC, and the
effects of such evaluation have been reflected in the financial statements and related
disclosures.
3. | Accounting Changes |
Adoption of New Accounting Standards
Intangible Asset Useful Lives. On October 1, 2009, we adopted new accounting guidance which
amends the factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible asset under GAAP. The intent of
the new guidance is to improve the consistency between the useful life of a recognized
intangible asset under GAAP relating to intangible asset accounting and the period of
expected cash flows used to measure the fair value of the asset under GAAP relating to
business combinations and other applicable accounting literature. The new guidance must be
applied prospectively to intangible assets acquired
after the effective date. The adoption of the new guidance did not impact our financial
statements.
- 5 -
Table of Contents
UGI UTILITIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars)
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars)
Business Combinations. On October 1, 2009, we adopted new guidance on the accounting for
business combinations. The new guidance applies to all transactions or other events in which
an entity obtains control of one or more businesses. The new guidance establishes, among
other things, principles and requirements for how the acquirer (1) recognizes and measures
in its financial statements the identifiable assets acquired, the liabilities assumed, and
any noncontrolling interest in the acquiree; (2) recognizes and measures the goodwill
acquired in a business combination or gain from a bargain purchase; and (3) determines what
information with respect to a business combination should be disclosed. The new guidance
applies prospectively to business combinations for which the acquisition date is on or after
the date of adoption. Among the more significant changes in accounting for acquisitions are
(1) transaction costs will generally be expensed (rather than being included as costs of the
acquisition); (2) contingencies, including contingent consideration, will generally be
recorded at fair value with subsequent adjustments recognized in operations (rather than as
adjustments to the purchase price); and (3) decreases in valuation allowances on acquired
deferred tax assets will be recognized in operations (rather than decreases in goodwill).The
new guidance did not have an impact on our financial statements for the three months ended
December 31, 2009.
New Accounting Standards Not Yet Adopted
Enhanced Disclosures of Postretirement Plan Assets. In December 2008, the Financial
Accounting Standards Board (FASB) issued new guidance requiring more detailed disclosures
about employers postretirement plan assets, including employers investment strategies,
major categories of plan assets, concentrations of risk within plan assets, and valuation
techniques used to measure the fair value of plan assets. The provisions of this annual
disclosure guidance are effective for fiscal years ending after December 15, 2009 (Fiscal
2010). Because this new guidance relates to disclosure only, it will not impact the
financial statements.
4. | Segment Information |
We have two reportable segments: (1) Gas Utility and (2) Electric Utility. The accounting
policies of our two reportable segments are the same as those described in the Significant
Accounting Policies note contained in the Companys 2009 Annual Report. We evaluate each
segments profitability principally based upon its income before income taxes. No single
customer represents more than 10% of the total revenues of either Gas Utility or Electric
Utility. There are no significant intersegment transactions. In addition, all of our
reportable segments revenues are derived from sources within the United States.
UGI Penn HVAC Services, Inc. does not meet the quantitative thresholds for separate business
segment reporting under GAAP and has been included in Other.
- 6 -
Table of Contents
UGI UTILITIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars)
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars)
Financial information by business segment follows:
Three Months Ended December 31, 2009:
Reportable Segments | ||||||||||||||||
Gas | Electric | |||||||||||||||
Total | Utility | Utility | Other | |||||||||||||
Revenues |
$ | 362,203 | $ | 327,809 | $ | 33,999 | $ | 395 | ||||||||
Cost of sales |
$ | 231,217 | $ | 209,760 | $ | 21,457 | $ | | ||||||||
Depreciation and
amortization |
$ | 13,288 | $ | 12,299 | $ | 989 | $ | | ||||||||
Operating income |
$ | 69,273 | $ | 63,728 | $ | 5,359 | $ | 186 | ||||||||
Interest expense |
$ | 10,637 | $ | 10,246 | $ | 391 | $ | | ||||||||
Income before income taxes |
$ | 58,636 | $ | 53,482 | $ | 4,968 | $ | 186 | ||||||||
Total assets (at period end) |
$ | 2,131,404 | $ | 2,012,952 | $ | 115,846 | $ | 2,606 | ||||||||
Goodwill (at period end) |
$ | 180,145 | $ | 180,145 | $ | | $ | | ||||||||
Capital expenditures |
$ | 13,810 | $ | 13,040 | $ | 770 | $ | |
Three Months Ended December 31, 2008:
Reportable Segments | ||||||||||||||||
Gas | Electric | |||||||||||||||
Total | Utility | Utility | Other | |||||||||||||
Revenues |
$ | 446,692 | $ | 410,366 | $ | 35,921 | $ | 405 | ||||||||
Cost of sales |
$ | 316,234 | $ | 293,024 | $ | 23,210 | $ | | ||||||||
Depreciation and
amortization |
$ | 12,512 | $ | 11,549 | $ | 963 | $ | | ||||||||
Operating income |
$ | 62,012 | $ | 56,885 | $ | 5,047 | $ | 80 | ||||||||
Interest expense |
$ | 11,380 | $ | 10,975 | $ | 405 | $ | | ||||||||
Income before income taxes |
$ | 50,632 | $ | 45,910 | $ | 4,642 | $ | 80 | ||||||||
Total assets (at period end) |
$ | 2,230,418 | $ | 2,114,385 | $ | 115,101 | $ | 932 | ||||||||
Goodwill (at period end) |
$ | 182,723 | $ | 182,723 | $ | | $ | | ||||||||
Capital expenditures |
$ | 22,811 | $ | 21,657 | $ | 1,154 | $ | |
5. | Inventories |
Inventories comprise the following:
December 31, | September 30, | December 31, | ||||||||||
2009 | 2009 | 2008 | ||||||||||
Gas Utility natural gas |
$ | 170,235 | $ | 189,747 | $ | 160,108 | ||||||
Materials, supplies and other |
6,852 | 6,851 | 7,276 | |||||||||
Total inventories |
$ | 177,087 | $ | 196,598 | $ | 167,384 | ||||||
From time to time UGI Utilities enters into storage contract administrative agreements
(SCAAs) pursuant to which it has, among other things, released certain storage and
transportation contracts for the terms of the storage agreements. At December 31, 2009, UGI
Utilities had three SCAAs, two of which are scheduled to expire in October 2010 and one that
is scheduled to expire in October 2012 (see Note 9).
- 7 -
Table of Contents
UGI UTILITIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars)
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars)
Pursuant to the SCAAs, UGI Utilities has, among other things, released certain storage and
transportation contracts for the terms of the SCAAs. UGI Utilities also transferred certain
associated storage inventories upon commencement of the SCAAs, will receive a transfer of
storage inventories at the end of the SCAAs, and makes payments associated with refilling
storage inventories during the terms of the SCAAs.
UGI Utilities reflects the historical cost of natural gas storage inventories released under
these agreements, which represent a portion of Gas Utilitys total natural gas storage
inventories, and any exchange receivable (representing amounts of natural gas inventories
used by the other parties to the agreements but not yet replenished) are included in the
caption Gas Utility natural gas in the table above. The carrying value of gas storage
inventories released under these agreements at December 31, 2009, September 30, 2009 and
December 31, 2008, comprising 11.4 billion cubic feet (bcf), 9.0 bcf, and 9.3 bcf of
natural gas, was $95,911, $77,948 and $78,437, respectively. In conjunction with the SCAAs,
at December 31, 2009, September 30, 2009 and December 31, 2008, UGI Utilities held a total
of $22,500, $19,000 and $40,500, respectively, of security deposits received from its SCAAs
counterparties which amounts are included in other current liabilities on the Condensed
Consolidated Balance Sheets.
6. | Regulatory Assets and Liabilities and Regulatory Matters |
For a description of the Companys regulatory assets and liabilities other than those
described below, see Note 5 to the Companys 2009 Annual Report. UGI Utilities does not
recover a rate of return on its regulatory assets. The following regulatory assets and
liabilities associated with Gas Utility and Electric Utility are included in our
accompanying Condensed Consolidated Balance Sheets:
December 31, | September 30, | December 31, | ||||||||||
2009 | 2009 | 2008 | ||||||||||
Regulatory assets: |
||||||||||||
Income taxes recoverable |
$ | 80,524 | $ | 79,492 | $ | 74,676 | ||||||
Postretirement benefits |
2,336 | 2,473 | 4,118 | |||||||||
CPG Gas pension and
postretirement plans |
8,572 | 8,572 | 9,068 | |||||||||
Environmental costs |
25,812 | 26,877 | 9,128 | |||||||||
Deferred fuel costs |
10,344 | 19,584 | 46,953 | |||||||||
Other |
4,402 | 4,546 | 6,468 | |||||||||
Total regulatory assets |
$ | 131,990 | $ | 141,544 | $ | 150,411 | ||||||
Regulatory liabilities: |
||||||||||||
Postretirement benefits |
$ | 9,538 | $ | 9,310 | $ | 9,248 | ||||||
Environmental overcollections |
8,392 | 8,720 | 9,713 | |||||||||
Deferred fuel refunds |
40,343 | 30,846 | | |||||||||
Total regulatory liabilities |
$ | 58,273 | $ | 48,876 | $ | 18,961 | ||||||
- 8 -
Table of Contents
UGI UTILITIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars)
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars)
Deferred fuel costs and refunds. Gas Utilitys tariffs contain clauses which permit recovery
of certain purchased gas costs through the application of purchased gas cost (PGC) rates.
The clauses provide for periodic adjustments to PGC rates for differences between the total
amount of purchased gas costs collected from customers and recoverable costs incurred. Net
undercollected gas costs are classified as a regulatory asset and net overcollections are
classified as a regulatory liability. Gas Utility uses derivative financial instruments to
reduce volatility in the cost of gas it purchases for firm- residential, commercial and
industrial (retail core-market) customers. Realized and unrealized gains or losses on
natural gas derivative financial instruments are included in deferred fuel refunds or costs.
Unrealized losses on such contracts at December 31, 2009 and 2008 were $125 and $58,073,
respectively. There were no such unrealized gains or losses at September 30, 2009.
7. | Defined Benefit Pension and Other Postretirement Plans |
We currently sponsor two defined benefit pension plans (Pension Plans) for employees hired
prior to January 1, 2009 of UGI Utilities, PNG, CPG, UGI, and certain of UGIs other wholly
owned domestic subsidiaries. In addition, we provide postretirement health care benefits to
certain retirees and postretirement life insurance benefits to nearly all active and retired
employees.
Net periodic pension expense and other postretirement benefit costs relating to our
employees include the following components:
Pension Benefits | Other Postretirement Benefits | |||||||||||||||
Three Months Ended | Three Months Ended | |||||||||||||||
December 31, | December 31, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Service cost |
$ | 1,745 | $ | 1,381 | $ | 40 | $ | 64 | ||||||||
Interest cost |
5,284 | 5,454 | 212 | 260 | ||||||||||||
Expected return on assets |
(5,858 | ) | (6,106 | ) | (126 | ) | (130 | ) | ||||||||
Amortization of: |
||||||||||||||||
Prior service cost (benefit) |
9 | 7 | (102 | ) | (87 | ) | ||||||||||
Actuarial loss |
1,333 | 173 | 89 | 30 | ||||||||||||
Net benefit cost |
2,513 | 909 | 113 | 137 | ||||||||||||
Change in associated
regulatory liabilities |
| | 736 | 803 | ||||||||||||
Net expense |
$ | 2,513 | $ | 909 | $ | 849 | $ | 940 | ||||||||
Pension Plans assets are held in trust and consist principally of equity and fixed
income mutual funds. It is our general policy to fund amounts for pension benefits equal to
at least the minimum contribution required by ERISA. The Company does not believe it will be
required to make any contributions to the Pension Plans during the year ending September 30,
2010 (Fiscal 2010) for ERISA funding purposes that will have a material effect on its
liquidity. Pursuant to orders previously issued by the PUC, UGI Utilities has established a
Voluntary Employees Beneficiary Association (VEBA) trust to fund and pay UGI Gas and
Electric Utilitys postretirement health care and life insurance benefits
referred to above by depositing into the VEBA the annual amount of postretirement benefit
costs determined under GAAP for postretirement benefits other than pensions. The difference
between the annual amount calculated and the amount included in UGI Gas and Electric
Utilitys rates is deferred for future recovery from, or refund to, ratepayers. Amounts
contributed to the VEBA by UGI Utilities were not material during the three months ended
December 31, 2009, nor are they expected to be material for all of Fiscal 2010.
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UGI UTILITIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars)
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars)
We also sponsor an unfunded and non-qualified defined benefit supplemental executive
retirement income plan. Net benefit costs associated with this plan for all periods
presented were not material.
8. | Commitments and Contingencies |
From the late 1800s through the mid-1900s, UGI Utilities and its former subsidiaries owned
and operated a number of manufactured gas plants (MGPs) prior to the general availability
of natural gas. Some constituents of coal tars and other residues of the manufactured gas
process are today considered hazardous substances under the Superfund Law and may be present
on the sites of former MGPs. Between 1882 and 1953, UGI Utilities owned the stock of
subsidiary gas companies in Pennsylvania and elsewhere and also operated the businesses of
some gas companies under agreement. Pursuant to the requirements of the Public Utility
Holding Company Act of 1935, by the early 1950s UGI Utilities divested all of its utility
operations other than certain Pennsylvania operations, including those which now constitute
UGI Gas 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 UGI
Gas is currently permitted to include in rates, through future base rate proceedings, a
five-year average of such prudently incurred remediation costs. At December 31, 2009,
neither the undiscounted nor the accrued liability for environmental investigation and
cleanup costs for UGI Gas was material to UGI Utilities.
UGI Utilities has been notified of several sites outside Pennsylvania on which private
parties allege MGPs were formerly owned or operated by it or owned or operated by its former
subsidiaries. Such parties are investigating the extent of environmental contamination or
performing environmental remediation. UGI Utilities is currently litigating three claims
against it relating to out-of-state sites.
Management believes that under applicable law UGI Utilities should not be liable in those
instances in which a former subsidiary owned or operated an MGP. There could be, however,
significant future costs of an uncertain amount associated with environmental damage caused
by MGPs outside Pennsylvania that UGI Utilities directly operated, or that were owned or
operated by former subsidiaries of UGI Utilities if a court were to conclude that (1) the
subsidiarys 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 subsidiarys
MGP.
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UGI UTILITIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars)
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars)
South Carolina Electric & Gas Company v. UGI Utilities, Inc. On September 22, 2006, South
Carolina Electric & Gas Company (SCE&G), a subsidiary of SCANA Corporation, filed a
lawsuit against UGI Utilities in the District Court of South Carolina seeking contribution
from UGI Utilities for past and future remediation costs related to the operations of a
former MGP located in Charleston, South Carolina. SCE&G asserts that the plant operated from
1855 to 1954 and alleges that through control of a subsidiary that owned the plant UGI
Utilities controlled operations of the plant from 1910 to 1926 and is liable for
approximately 25% of the costs associated with the site. SCE&G asserts that it has spent
approximately $22,000 in remediation costs and paid $26,000 in third-party claims relating
to the site and estimates that future response costs, including a claim by the United States
Justice Department for natural resource damages, could be as high as $14,000. Trial took
place in March 2009 and the courts decision is pending.
Frontier Communications Company v. UGI Utilities, Inc. et al. In April 2003, Citizens
Communications Company, now known as Frontier Communications Company (Frontier), served a
complaint naming UGI Utilities as a third-party defendant in a civil action pending in the
United States District Court for the District of Maine. In that action, the City of Bangor,
Maine (City) sued Frontier to recover environmental response costs associated with MGP
wastes generated at a plant allegedly operated by Frontiers predecessors at a site on the
Penobscot River. Frontier subsequently joined UGI Utilities and ten other third-party
defendants alleging that the third-party defendants are responsible for an equitable share
of any costs Frontier would be required to pay to the City for cleaning up tar deposits in
the Penobscot River. Frontier alleged that through ownership and control of a subsidiary,
Bangor Gas Light Company, UGI Utilities and its predecessors owned and operated the plant
from 1901 to 1928. Frontier made similar allegations of control against another third-party
defendant, CenterPoint Energy Resources Corporation (CenterPoint), whose predecessor owned
the Bangor subsidiary from 1928 to 1944. Frontiers third-party claims were stayed pending a
resolution of the Citys suit against Frontier, which was tried in September 2005. On June
27, 2006, the court issued an order finding Frontier responsible for 60% of the cleanup
costs, which were estimated at $18,000. On February 14, 2007, Frontier and the City entered
into a settlement agreement pursuant to which Frontier agreed to pay $7,600. Frontier
subsequently filed the current action against the original third-party defendants, repeating
its claims for contribution. On September 22, 2009, the court granted summary judgment in
favor of co-defendant CenterPoint. UGI Utilities believes that it also has good defenses and
has filed a motion for summary judgment with respect to Frontiers claims.
Sag Harbor, New York Matter. By letter dated June 24, 2004, KeySpan Energy (KeySpan)
informed UGI Utilities that KeySpan has spent $2,300 and expects to spend another $11,000 to
clean up an MGP site it owns in Sag Harbor, New York. KeySpan believes that UGI Utilities is
responsible for approximately 50% of these costs as a result of UGI Utilities alleged
direct ownership and operation of the plant from 1885 to 1902. By letter dated June 6, 2006,
KeySpan reported that the New York Department of Environmental Conservation has approved a
remedy for the site that is estimated to cost approximately $10,000. KeySpan believes that
the cost could be as high as $20,000. UGI
Utilities is in the process of reviewing the information provided by KeySpan and is
investigating this claim.
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Table of Contents
UGI UTILITIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars)
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars)
Yankee Gas Services Company and Connecticut Light and Power Company v. UGI Utilities, Inc.
On September 11, 2006, UGI Utilities received a complaint filed by Yankee Gas Services
Company and Connecticut Light and Power Company, subsidiaries of Northeast Utilities
(together the Northeast Companies), in the United States District Court for the District
of Connecticut seeking 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 through control of former subsidiaries that owned
the MGPs. The Northeast Companies estimated that remediation costs for all of the sites
could total approximately $215,000 and asserted that UGI Utilities is responsible for
approximately $103,000 of this amount. The Northeast Companies subsequently withdrew their
claims with respect to three of the sites and UGI Utilities acknowledged that it had
operated one of the sites, Waterbury North, pursuant to a lease. In April 2009, the court
conducted a trial to determine whether UGI Utilities operated any of the nine remaining
sites that were owned and operated by former subsidiaries. On May 22, 2009, the court
granted judgment in favor of UGI Utilities with respect to all nine sites. In a second phase
of the trial scheduled for early 2010, the court will determine what, if any, contamination
at Waterbury North is related to UGI Utilities period of operation. The Northeast Companies
estimate that remediation costs at Waterbury North could total $25,000.
We cannot predict with certainty the final results of any of the environmental claims or
legal actions described above. However, it is reasonably possible that some of them could be
resolved unfavorably to us and result in losses in excess of recorded amounts. We are unable
to estimate any possible losses in excess of recorded amounts. Although we currently
believe, after consultation with counsel, that damages or settlements, if any, recovered by
the plaintiffs in such claims or actions will not have a material adverse effect on our
financial position, damages or settlements could be material to our operating results or
cash flows in future periods depending on the nature and timing of future developments with
respect to these matters and the amounts of future operating results and cash flows. In
addition to the matters described above, there are other pending claims and legal actions
arising in the normal course of our businesses. While the results of these other pending
claims and legal actions cannot be predicted with certainty, we believe, after consultation
with counsel, the final outcome of such other matters will not have a significant effect on
our consolidated financial position, results of operations or cash flows.
9. | Related Party Transactions |
UGI provides certain financial and administrative services to UGI Utilities. UGI bills UGI
Utilities monthly for all direct expenses incurred by UGI on behalf of UGI Utilities and an
allocated share of indirect corporate expenses incurred or paid with respect to services
provided to UGI Utilities. The allocation of indirect UGI corporate expenses to UGI
Utilities utilizes a weighted, three-component formula comprising revenues, operating
expenses and net assets employed and considers UGI Utilities relative
percentage of such items to the total of such items for all UGI operating subsidiaries for
which general and administrative services are provided. Management believes that this
allocation method is reasonable and equitable to UGI Utilities and this allocation method
has been accepted by the PUC in past rate case proceedings and management audits as a
reasonable method of allocating such expenses. These billed expenses are classified as
operating and administrative expenses related parties in the Condensed Consolidated
Statements of Income. In addition, UGI Utilities provides limited administrative services to
UGI and certain of UGIs subsidiaries, principally payroll-related services. Amounts billed
to these entities by UGI Utilities for all periods presented were not material.
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UGI UTILITIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars)
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars)
From time to time, UGI Utilities is a party to SCAAs with UGI Energy Services, Inc., a
second-tier wholly owned subsidiary of UGI (Energy Services). At December 31, 2009, UGI
Utilities was a party to a three-year SCAA with Energy Services expiring October 31, 2012 and, during the periods covered by the financial statements, was a party to other one-year SCAAs with Energy Services. Under the SCAAs, UGI Utilities has, among other things, and
subject to recall for operational purposes, released certain storage and transportation
contracts to Energy Services for the terms of the SCAAs. UGI Utilities also transferred
certain associated storage inventories upon the commencement of the SCAAs, receives a
transfer of storage inventories at the end of the SCAAs, and makes payments associated with
refilling storage inventories during the term of the SCAAs. Energy Services, in turn,
provides a firm delivery service and makes certain payments to UGI Utilities for its various
obligations under the SCAAs. UGI Utilities incurred costs associated with Energy Services
SCAAs totaling $7,484 and $14,582 during the three months ended December 31, 2009 and 2008,
respectively. In conjunction with the SCAAs, UGI Utilities received security deposits from
Energy Services. The amount of such security deposits, which amounts are included in other
current liabilities on the Condensed Consolidated Balance Sheets, was $7,500, $15,000 and
$15,000 as of December 31, 2009, September 30, 2009 and December 31, 2008, respectively.
The volumes and carrying amounts of gas storage inventories released under Energy Services
SCAAs at December 31, 2009, September 30, 2009 and December 31, 2008 are as follows: at
December 31, 2009, gas storage inventories comprising approximately 4.0 bcf of natural gas
totaling $32,855; at September 30, 2009, gas storage inventories comprising approximately
7.7 bcf of natural gas totaling $67,436; and at December 31, 2008, gas storage inventories
comprising approximately 7.8 bcf of natural gas totaling $66,485.
UGI Utilities has gas supply and delivery service agreements with Energy Services pursuant
to which Energy Services provides certain gas supply and related delivery service to Gas
Utility during the months of November through March. In addition, from time to time, Gas
Utility purchases natural gas or pipeline capacity from Energy Services. The aggregate
amount of these transactions (exclusive of transactions pursuant to the SCAAs) during the
three months ended December 31, 2009 and 2008 totaled $16,282 and $15,986, respectively.
From time to time, the Company sells natural gas or pipeline capacity to Energy Services.
During the three months ended December 31, 2009 and 2008, revenues associated with such
sales to Energy Services totaled $9,244 and $7,987, respectively. Also from time to time,
the Company purchases natural gas or pipeline capacity from Energy Services (in addition to
the transactions already described above). During the three months ended December 31, 2009
and 2008, such purchases totaled $5,977 and $5,845, respectively. These transactions did not
have a material effect on the Companys financial position, results of operations or cash
flows.
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UGI UTILITIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars)
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars)
10. | Fair Value Measurements |
The following table presents our financial assets and financial liabilities that are
measured at fair value on a recurring basis for each of the fair value hierarchy levels,
including both current and noncurrent portions, as of December 31, 2009 and 2008:
Quoted | ||||||||||||||||
Prices in | ||||||||||||||||
Active | ||||||||||||||||
Markets for | Significant | |||||||||||||||
Identical | Other | |||||||||||||||
Assets and | Observable | Unobservable | ||||||||||||||
Liabilities | Inputs | Inputs | ||||||||||||||
(Level 1) | (Level 2) | (Level 3) | Total | |||||||||||||
December 31, 2009: |
||||||||||||||||
Derivative financial instruments: |
||||||||||||||||
Assets |
$ | 233 | $ | 641 | $ | | $ | 874 | ||||||||
Liabilities |
$ | (125 | ) | $ | | $ | | $ | (125 | ) | ||||||
December 31, 2008: |
||||||||||||||||
Derivative financial instruments: |
||||||||||||||||
Assets |
$ | | $ | 1,004 | $ | | $ | 1,004 | ||||||||
Liabilities |
$ | (58,675 | ) | $ | | $ | | $ | (58,675 | ) |
11. | Disclosures About Derivative Instruments, Hedging Activities and Financial
Instruments |
Derivative Instruments and Hedging Activities
We are exposed to certain market risks related to our ongoing business operations.
Management uses derivative financial and commodity instruments, among other things, to
manage these risks. The primary risks managed by derivative instruments are (1) commodity
price risk and (2) interest rate risk. Although we use derivative financial and commodity
instruments to reduce market risk associated with forecasted transactions, we do not use
derivative financial and commodity instruments for speculative or trading purposes. The use
of derivative instruments is controlled by our risk management and credit policies which
govern, among other things, the derivative instruments we can use, counterparty credit
limits and contract authorization limits. Because most of our commodity derivative
instruments are generally subject to regulatory ratemaking mechanisms, we have limited
commodity price risk associated with our Gas Utility or Electric Utility operations.
Commodity Price Risk
Gas Utilitys tariffs contain clauses that permit recovery of all of the prudently incurred
costs of natural gas it sells to retail core-market customers. As permitted and agreed to by
the PUC pursuant to Gas Utilitys annual PGC filings, Gas Utility currently uses New York
Mercantile Exchange (NYMEX) natural gas futures contracts to reduce commodity price
volatility associated with a portion of the natural gas it purchases for its retail
core-market customers.
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UGI UTILITIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars)
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars)
In order to reduce volatility associated with a substantial portion of its electric
transmission congestion costs, Electric Utility obtains FTRs through an annual PJM
Interconnection (PJM) allocation process and by purchases of FTRs at monthly PJM auctions.
FTRs are derivative financial instruments that entitle the holder to receive compensation
for electricity transmission congestion charges that result when there is insufficient
electricity transmission capacity on the electric transmission grid. PJM is a regional
transmission organization that coordinates the movement of wholesale electricity in all or
parts of 14 eastern and midwestern states.
At December 31, 2009, the volume of natural gas associated with our unsettled NYMEX natural
gas futures contracts was not material. The volume of transmission congestion that is
subject to FTRs at December 31, 2009 totaled 730.0 million kilowatt-hours and the maximum
period over which we are currently hedging electricity congestion with FTRs is 17 months
with a weighted average term of 4 months.
With respect to natural gas futures contracts associated with Gas Utility, gains and losses
on unsettled natural gas futures contracts are recorded in deferred fuel costs on the
Condensed Consolidated Balance Sheets in accordance with the FASBs guidance in Accounting
Standards Codification (ASC) 980 related to rate-regulated entities and reflected in cost
of sales through the PGC mechanism. At December 31, 2009 and 2008, Gas Utility had recorded
current liabilities of $125 and $58,073, respectively, representing the fair values of
unsettled natural gas futures contracts as of those dates and associated regulatory assets
of equal amount. Because Electric Utility is entitled to fully recover its default service
costs commencing January 1, 2010 pursuant to a January 22, 2009 settlement of its default
service rate filing with the PUC, FTRs associated with periods beginning January 1, 2010 are
recorded at fair value with changes in fair value recorded in regulatory assets or
liabilities in accordance with ASC 980. Electric Utility FTRs associated with periods prior
to January 1, 2010 are recorded at fair value with changes in fair value reflected in cost of
sales.
In order to reduce operating expense volatility, UGI Utilities from time to time enters into
NYMEX gasoline futures and swap contracts for a portion of gasoline volumes expected to be
used in the operation of its vehicles and equipment. The volumes of gasoline under these
contracts were not material for all periods presented.
Interest Rate Risk
Our long-term debt typically is issued at fixed rates of interest. As these long-term debt
issues mature, we typically refinance such debt with new debt having interest rates
reflecting then-current market conditions. In order to reduce market rate risk on the
underlying benchmark rate of interest associated with near- to medium-term forecasted
issuances of fixed-rate debt, from time to time we enter into interest rate protection
agreements (IRPAs). We account for IRPAs as cash flow hedges. Changes in the fair values
of IRPAs are recorded in AOCI, to the extent effective in offsetting changes in the
underlying interest rate risk, until earnings are affected by the hedged interest expense.
At
December 31, 2009 there were no unsettled IRPA contracts outstanding. The amount of net
losses associated with IRPAs expected to be reclassified into earnings during the next
twelve months is $1,165.
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UGI UTILITIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars)
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars)
Derivative Financial Instrument Credit Risk
Our natural gas exchange-traded futures contracts are guaranteed by the NYMEX and have
limited credit risk. These contracts generally require cash deposits in margin accounts. At
December 31, 2009 and 2008, Gas Utilitys restricted cash in brokerage accounts totaled $656
and $72,672, respectively. We generally do not have credit-risk-related contingent features
in our derivative contracts.
The following table provides information regarding the balance sheet location and fair
values of derivative assets and liabilities existing as of December 31, 2009:
Derivative Assets | Derivative (Liabilities) | |||||||||||||||
Balance Sheet | Fair | Balance Sheet | Fair | |||||||||||||
As of December 31, 2009 | Location | Value | Location | Value | ||||||||||||
Derivatives Accounted for Under ASC 980: |
||||||||||||||||
Natural gas futures contracts |
Derivative financial instruments | $ | 3 | Derivative financial instruments | $ | (125 | ) | |||||||||
FTRs |
Derivative financial instruments | 641 | ||||||||||||||
Total Derivatives Accounted for
Under ASC 980: |
644 | (125 | ) | |||||||||||||
Derivatives Not Designated as
Hedging Instruments: |
||||||||||||||||
Gasoline futures contracts |
Derivative financial instruments | 230 | ||||||||||||||
Total Derivatives |
$ | 874 | $ | (125 | ) | |||||||||||
During the three months ended December 31, 2009, the amount of IRPA net losses included
in AOCI that were reclassified into net income, and the impact on net income from changes in
the fair value of FTRs not accounted for under ASC 980 and gasoline futures and swap
contracts, were not material.
We are also a party to a number of contracts that have elements of a derivative instrument.
These contracts include, among others, binding purchase orders, contracts which provide for
the purchase and delivery of natural gas and electricity, and service contracts that require
the counterparty to provide commodity storage, transportation or capacity service to meet
our normal sales commitments. Although many of these contracts have the requisite elements
of a derivative instrument, these contracts qualify for normal purchase and normal sale
exception accounting under GAAP because they provide for the delivery of products or
services in quantities that are expected to be used in the normal course of operating our
business and the price based on the contract underlying is directly associated with the
price or value of a service.
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Table of Contents
UGI UTILITIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars)
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars)
Financial Instruments
The carrying amounts of financial instruments included in current assets and current
liabilities (excluding unsettled derivatives and current maturities of long-term debt)
approximate their fair values because of their short-term nature. The carrying amounts and
estimated values of our remaining financial instruments assets and (liabilities) at December
31, 2009 (including unsettled derivative instruments) are as follows:
Asset (Liability) | ||||||||
Carrying | Estimated | |||||||
Amount | Fair Value | |||||||
Derivative financial instruments |
$ | 749 | $ | 749 | ||||
Long-term debt |
$ | (640,000 | ) | $ | (697,137 | ) |
We estimate the fair value of long-term debt by using current market rates and by
discounting future cash flows using rates available for similar type debt.
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Table of Contents
UGI UTILITIES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements
Information contained in this Managements Discussion and Analysis of Financial Condition and
Results of Operations and elsewhere in this Quarterly Report may contain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Such statements use forward-looking words such as believe, plan,
anticipate, continue, estimate, expect, may, will, or other similar words. These
statements discuss plans, strategies, events or developments that we expect or anticipate will or
may occur in the future.
A forward-looking statement may include a statement of the assumptions or bases underlying the
forward-looking statement. We believe that we have chosen these assumptions or bases in good faith
and that they are reasonable. However, we caution you that actual results almost always vary from
assumed facts or bases, and the differences between actual results and assumed facts or bases can
be material, depending on the circumstances. When considering forward-looking statements, you
should keep in mind the following important factors which could affect our future results and could
cause those results to differ materially from those expressed in our forward-looking statements:
(1) adverse weather conditions resulting in reduced demand; (2) price volatility and availability
of oil, electricity and natural gas and the capacity to transport them to market areas; (3) changes
in laws and regulations, including safety, tax and accounting matters; (4) inability to timely
recover costs through utility rate proceedings; (5) the impact of pending and future legal
proceedings; (6) competitive pressures from the same and alternative energy sources; (7) liability
for environmental claims; (8) customer conservation measures due to high energy prices and
improvements in energy efficiency and technology resulting in reduced demand; (9) adverse labor
relations; (10) large customer, counterparty or supplier defaults; (11) increased uncollectible
accounts expense; (12) liability for personal injury and property damage arising from explosions
and other catastrophic events, including acts of terrorism, resulting from operating hazards and
risks incidental to generating and distributing electricity and transporting, storing and
distributing natural gas, including liability in excess of insurance coverage; (13) political,
regulatory and economic conditions in the United States; (14) capital market conditions, including
reduced access to capital markets and interest rate fluctuations; and (15) changes in commodity
market prices resulting in significantly higher cash collateral requirements.
These factors are not necessarily all of the important factors that could cause actual results to
differ materially from those expressed in any of our forward-looking statements. Other unknown or
unpredictable factors could also have material adverse effects on future results. We undertake no
obligation to update publicly any forward-looking statement whether as a result of new information
or future events except as required by the federal securities laws.
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UGI UTILITIES, INC. AND SUBSIDIARIES
ANALYSIS OF RESULTS OF OPERATIONS
The following analyses compare our results of operations for the three months ended December 31,
2009 (2009 three-month period) with the three months ended December 31, 2008 (2008 three-month
period). Our analyses of results of operations should be read in conjunction with the segment
information included in Note 4 to the condensed consolidated financial statements.
2009 three-month period compared with 2008 three-month period
Increase | ||||||||||||||||
Three Months Ended December 31, | 2009 | 2008 | (Decrease) | |||||||||||||
(Millions of dollars) | ||||||||||||||||
Gas Utility: |
||||||||||||||||
Revenues |
$ | 327.8 | $ | 410.4 | $ | (82.6 | ) | (20.1 | )% | |||||||
Total margin (a) |
$ | 118.0 | $ | 117.3 | $ | 0.7 | 0.6 | % | ||||||||
Operating income |
$ | 63.7 | $ | 56.9 | $ | 6.8 | 12.0 | % | ||||||||
Income before income taxes |
$ | 53.5 | $ | 45.9 | $ | 7.6 | 16.6 | % | ||||||||
System throughput bcf |
42.3 | 44.0 | (1.7 | ) | (3.9 | )% | ||||||||||
Heating degree days % colder
than normal (b) |
0.4 | % | 7.1 | % | | | ||||||||||
Electric Utility: |
||||||||||||||||
Revenues |
$ | 34.0 | $ | 35.9 | $ | (1.9 | ) | (5.3 | )% | |||||||
Total margin (a) |
$ | 10.7 | $ | 10.7 | $ | | 0.0 | % | ||||||||
Operating income |
$ | 5.4 | $ | 5.0 | $ | 0.4 | 8.0 | % | ||||||||
Income before income taxes |
$ | 5.0 | $ | 4.6 | $ | 0.4 | 8.7 | % | ||||||||
Distribution sales gwh |
242.4 | 252.8 | (10.4 | ) | (4.1 | )% |
bcf billions of cubic feet. |
||
gwh millions of kilowatt-hours. |
||
(a) | Gas Utilitys total margin represents total revenues less total cost of sales. Electric
Utilitys total margin represents total revenues less total cost of sales and revenue-related
taxes, i.e. Electric Utility gross receipts taxes, of $1.9 million and $2.0 million during the
three-month periods ended December 31, 2009 and 2008, respectively. For financial statement
purposes, revenue-related taxes are included in Taxes other than income taxes in the
Condensed Consolidated Statements of Income. |
|
(b) | Deviation from average heating degree days for the 15-year period 1990-2004 based upon
weather statistics provided by the National Oceanic and Atmospheric Administration (NOAA)
for airports located within Gas Utilitys service territory. |
Gas Utility. Temperatures in the Gas Utility service territory based upon heating degree days were
essentially normal in the 2009 three-month period compared with temperatures that were 7.1% colder than normal in the prior-year
period. Total distribution system throughput decreased 1.7 bcf in the 2009 three-month period
principally reflecting the effects of the warmer weather on core-market customers. Gas Utilitys
core-market customers are comprised of firm- residential, commercial and industrial (retail
core-market) customers who purchase their gas from Gas Utility and, to a much lesser extent,
residential and small commercial customers who purchase their gas from alternate suppliers.
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UGI UTILITIES, INC. AND SUBSIDIARIES
Gas Utility revenues decreased $82.6 million during the 2009 three-month period principally
reflecting a decline in revenues from retail core-market customers and, to a much lesser extent,
lower revenues from low-margin off-system sales. The decrease in retail core-market revenues
principally resulted from lower average purchased gas cost (PGC) rates and lower retail
core-market volumes partially offset by the effects of PNG Gas and CPG Gas base rate operating
revenue increases that became effective August 28, 2009. Under Gas Utilitys PGC recovery
mechanism, Gas Utility records the cost of gas associated with sales to retail core-market
customers at amounts included in PGC rates. The difference between actual gas costs and the amounts
included in rates is deferred on the balance sheet as a regulatory asset or liability and
represents amounts to be collected from or refunded to customers in a future period. As a result of
this PGC recovery mechanism, increases or decreases in the cost of gas associated with retail
core-market customers have no direct effect on retail core-market margin. Gas Utilitys cost of gas
was $209.8 million in the 2009 three-month period compared with $293.0 million in the prior-year
period principally reflecting the lower average PGC rates and to a much lesser extent the lower
retail core-market and off-system sales.
Notwithstanding the decrease in core-market volumes, Gas Utility total margin increased
$0.6 million in the 2009 three-month period. The increase reflects the impact of PNG Gas and CPG
Gas base operating revenue increases.
Gas Utility operating income during the 2009 three-month period increased $6.8 million principally
reflecting lower operating and administrative costs and the previously mentioned slight increase in
total margin. The 2009 three-month period operating and administrative costs include, among other things, lower provisions for
uncollectible accounts, lower charges associated with environmental matters and lower UGI corporate
allocated expenses. These decreases in operating and administrative expenses were partially offset
by higher pension expense due in large part to the amortization of actuarial losses experienced by
the pension plans during Fiscal 2009. The increase in income before income taxes reflects the
previously mentioned higher operating income and lower interest expense associated with bank loan
borrowings due to lower average bank loan borrowings and lower average interest rates.
Electric Utility. Electric Utilitys kilowatt-hour sales in the 2009 three-month period were lower
than in the prior year. The decline in sales principally reflects lower sales to commercial and
industrial customers as a result of the deterioration in general economic activity over the last
year and the effects of a warmer 2009 three-month period on heating-related sales volumes.
Temperatures based upon heating degree days were approximately 3.9% warmer than in the prior-year
period. Electric Utility revenues decreased $1.9 million principally as a result of the lower sales
partially offset by slightly higher Provider of Last Resort (POLR) revenues. Electric Utility
increased its POLR rates effective January 1, 2009, which increased the average cost to a
residential heating customer by approximately 1.5% over such costs in effect during calendar year
2008. Electric Utility cost of sales declined to $21.5 million in the 2009 three-month period
compared to $23.2 million in the 2008 three-month period principally reflecting the effects of the
lower volume sales and changes in the fair value of FTRs partially offset by higher transmission
costs.
Electric Utility total margin was equal to the prior year, notwithstanding the decrease in
revenues, principally reflecting the lower total cost of sales and slightly lower gross receipts
taxes.
Electric Utility operating income and income before income taxes in the 2009 three-month period
were $0.4 million higher than such amounts in the prior-year period reflecting lower distribution
system maintenance and uncollectible accounts expenses.
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UGI UTILITIES, INC. AND SUBSIDIARIES
FINANCIAL CONDITION AND LIQUIDITY
Financial Condition
The Companys total debt outstanding at December 31, 2009 was $819 million compared to
total debt outstanding of $794 million at September 30, 2009. The increase in total
debt reflects an increase in bank loan borrowings primarily to fund higher seasonal
working capital investments in accounts receivable.
UGI Utilities has a $350 million Revolving Credit Agreement which expires in August 2011. At
December 31, 2009 and 2008, UGI Utilities had $179 million and $283 million of borrowings
outstanding under its Revolving Credit Agreement, respectively. Borrowings under the Revolving
Credit Agreement are classified as bank loans on the Condensed Consolidated Balance Sheets. During
the three months ended December 31, 2009 and 2008, average daily bank loan borrowings were
$161.2 million and $242.8 million, respectively, and peak bank loan borrowings totaled $203 million
and $304 million, respectively. Peak bank loan borrowings typically occur during the peak heating
season months of December and January when UGI Utilities investment in working capital,
principally accounts receivable and inventories, is greatest. Revolving Credit Agreement borrowings
were higher in the prior-year period due in large part to increases in margin deposits associated
with natural gas futures contracts as a result of declines in wholesale natural gas prices.
Cash Flows
Operating activities. Due to the seasonal nature of UGI Utilities businesses, cash flows from our
operating activities are generally strongest during the second and third fiscal quarters when
customers pay for natural gas and electricity consumed during the peak heating season months.
Conversely, operating cash flows are generally at their lowest levels during the first and fourth
fiscal quarters when the Companys investment in working capital, principally accounts receivable
and inventories, is generally greatest. UGI Utilities uses borrowings under its Revolving Credit
Agreement to manage seasonal cash flow needs.
Cash flow provided by operating activities decreased to $6.7 million during the 2009 three-month
period from $18.4 million in the prior-year three-month period. Cash flow from operating activities
before changes in operating working capital increased to $67.2 million in the 2009 three-month
period from $51.5 million in the prior-year three-month period. The increase reflects the higher
net income and greater noncash charges for deferred income taxes. Changes in operating working
capital used $60.5 million of operating cash flow during the 2009 three-month period compared with
$33.0 million used during the prior-year three-month period. Cash flow provided by changes in
operating working capital in the 2009 three-month period includes $3.5 million of cash from changes
in SCAA security deposits compared to $40.5 million of such cash received in the 2008 three-month
period.
Investing activities. Cash used by investing activities was $15.1 million in the 2009 three-month
period compared to $328.8 million in the 2008 three-month period. The 2008 three-month period
reflects net cash paid in conjunction with the acquisition of CPG (CPG Acquisition) of
$300.6 million less $33.6 million of net cash received from the sale of the propane assets of a CPG
subsidiary. In addition, changes in restricted cash associated with our commodity futures brokerage
accounts used $0.7 million of cash in the 2009 three-month period compared with $38.6 million of
such cash used in the prior-year period. The significantly greater increase in the prior-year
three-month period restricted cash reflects the effects of declining natural gas prices on margin
deposit requirements during that period. Capital expenditures were lower in the 2009 three-month
period due in large part to lower 2009 three-month period Gas Utility growth capital expenditures.
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UGI UTILITIES, INC. AND SUBSIDIARIES
Financing activities. Cash provided by financing activities was $7.6 million in the 2009
three-month period compared with $317.8 million in the 2008 three-month period. Financing activity
cash flows are primarily the result of issuances and repayments of long-term debt, net borrowings
and repayments under our Revolving Credit Agreement, cash dividends paid to UGI, and capital
contributions from UGI. We paid cash dividends to UGI totaling $17.4 million and $16.2 million
during the 2009 and 2008 three-month periods, respectively. During the 2009 three-month period, net
bank loan borrowings totaled $25 million compared with net bank loan borrowings of $226 million in
the prior-year three-month period. The significantly higher net cash from bank loan borrowings
in the prior-year three-month period was due in large part to the timing and use of cash
contributions made by UGI on September 25, 2008 to fund the CPG Acquisition on October 1, 2008. A
$120 million cash contribution made by UGI on September 25, 2008 was temporarily used by UGI
Utilities in September 2008 to reduce bank loan borrowings. This amount was then reborrowed on
October 1, 2008, along with additional bank loan borrowings, to fund a portion of the CPG
Acquisition. The greater 2008 three-month period bank loan borrowings also reflect, in part,
greater cash needed to fund the higher natural gas futures margin deposits. During the 2008
three-month period, UGI Utilities issued $108 million of 6.375% Senior Notes due 2013 the proceeds
of which were used to fund a portion of the CPG Acquisition. There were no long-term debt
transactions during the 2009 three-month period.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Gas Utilitys tariffs contain clauses that permit recovery of all of the prudently incurred costs
of natural gas it sells to its customers. The recovery clauses provide for periodic adjustments 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 Gas Utility operations. Gas Utility uses derivative financial
instruments including natural gas futures contracts traded on the New York Mercantile Exchange
(NYMEX) to reduce volatility in the cost of gas it purchases for its retail core-market
customers. The fair value of natural gas futures contracts at December 31, 2009 was a loss of $0.1
million. The cost of natural gas derivative financial instruments, net of any associated gains or
losses, is included in Gas Utilitys PGC recovery mechanism. The change in market value of natural
gas futures contracts can require daily deposits of cash in futures accounts. At December 31, 2009
Gas Utility had approximately $0.7 million of restricted cash associated with natural gas and other
futures accounts with brokers.
Electric Utility purchases its electric power needs from electricity suppliers under fixed-price
energy contracts and, to a much lesser extent, on the spot market. Wholesale prices for electricity
can be volatile especially during periods of high demand or tight supply. Electric Utility has
diversified its purchases across several suppliers and entered into bilateral collateral
arrangements with certain of them. Changes in electricity prices could require Electric Utility to
provide cash collateral to its supply counterparties.
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UGI UTILITIES, INC. AND SUBSIDIARIES
Electric Utility also obtains financial transmission rights (FTRs) through an annual PJM
Interconnection (PJM) auction process and, to a lesser extent, by purchases at monthly PJM
auctions. FTRs are financial instruments that entitle the holder to receive compensation for
electricity transmission congestion charges that result when there is insufficient electricity
transmission capacity on the electricity transmission grid. PJM is a regional transmission
organization that coordinates the movement of wholesale electricity in all or parts of 14 eastern
and midwestern states. At December 31, 2009, the fair value of Electric Utilitys FTRs was
$0.6 million.
On January 22, 2009, the PUC approved a settlement of a rate filing that provides for Electric
Utility to fully recover its default service costs beginning January 1, 2010. Because of this
default service ratemaking, beginning January 1, 2010 there is limited electricity price and
transmission congestion price risk associated with our Electric Utility operations.
Gas Utility and Electric Utility from time to time enter into exchange-traded gasoline futures and
swap contracts for a portion of gasoline volumes expected to be used in their operations. These
gasoline futures and swap contracts are recorded at fair value with changes in fair value reflected
in other income. The amount of unrealized gains on these contracts and associated volumes under
contract at December 31, 2009 were not material.
Our variable-rate debt includes our bank loan borrowings. These agreements provide for interest
rates on borrowings that are indexed to short-term market interest rates. Our long-term debt is
typically issued at fixed rates of interest based upon market rates for debt having similar terms
and credit ratings. As these long-term debt issues mature, we expect to refinance such debt with
new debt having interest rates reflecting then-current market conditions. In order to reduce
interest rate risk associated with near or medium term issuances of fixed-rate debt, from time to
time we enter into interest rate protection agreements.
Our unsettled derivative instruments at December 31, 2009 comprised Electric Utilitys FTRs and
exchange-traded gasoline futures and swap contracts.
ITEM 4T. CONTROLS AND PROCEDURES
(a) | Evaluation of Disclosure Controls and Procedures |
|
The Companys management, with the participation of the Companys Chief Executive Officer
and Chief Financial Officer, evaluated the effectiveness of the Companys 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
Companys disclosure controls and procedures as of the end of the period covered by this
report were designed and functioning effectively to provide reasonable assurance that the
information required to be disclosed by the Company in reports filed under the Securities
Exchange Act of 1934, as amended, is (i) recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commissions rules and forms, and
(ii) accumulated and communicated to our management, including the Chief Executive Officer
and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure. |
||
(b) | Change in Internal Control over Financial Reporting |
|
No change in the Companys internal control over financial reporting occurred during the
Companys most recent fiscal quarter that has materially affected, or is reasonably likely
to materially affect, the Companys internal control over financial reporting. |
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UGI UTILITIES, INC. AND SUBSIDIARIES
PART II OTHER INFORMATION
ITEM 1A. RISK FACTORS
In addition to the other information presented in this report, you should carefully consider the
factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the
fiscal year ended September 30, 2009, which could materially affect our business, financial
condition or future results. The risks described in our Annual Report on Form 10-K are not the
only risks facing the Company. Other unknown or unpredictable factors could also have material
adverse effects on future results.
ITEM 6. EXHIBITS
The exhibits filed as part of this report are as follows (exhibits incorporated by reference are
set forth with the name of the registrant, the type of report and last date of the period for which
it was filed, and the exhibit number in such filing):
Incorporation by Reference
Exhibit | ||||||||||||
No. | Exhibit | Registrant | Filing | Exhibit | ||||||||
10.1 | Amendment 2009-1 to the UGI
Corporation
Supplemental
Executive
Retirement Plan and
Supplemental
Savings Plan as Amended and
Restated effective
January 1, 2009
|
UGI | Form 10-Q (12/31/09) | 10.1 | ||||||||
10.2 | UGI Corporation
2009 Supplemental
Executive
Retirement Plan For New Employees
|
UGI | Form 10-Q (12/31/09) | 10.2 | ||||||||
12.1 | Computation of
ratio of earnings
to fixed charges |
|||||||||||
31.1 | Certification by
the Chief Executive
Officer relating to
the Registrants
Report on Form 10-Q
for the quarter
ended December 31,
2009, pursuant to
Section 302 of the
Sarbanes-Oxley Act
of 2002 |
|||||||||||
31.2 | Certification by
the Chief Financial
Officer relating to
the Registrants
Report on Form 10-Q
for the quarter
ended December 31,
2009, 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 Registrants
Report on Form 10-Q
for the quarter
ended December 31,
2009, pursuant to
Section 906 of the
Sarbanes-Oxley Act
of 2002 |
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UGI UTILITIES, INC. 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 Utilities, Inc. (Registrant) |
||||
Date: February 5, 2010 | By: | /s/ John C. Barney | ||
John C. Barney | ||||
Senior Vice President Finance and Chief Financial Officer |
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UGI UTILITIES, INC. AND SUBSIDIARIES
EXHIBIT INDEX
12.1 | Computation of ratio of earnings to fixed charges |
|||
31.1 | Certification by the Chief Executive Officer relating to the Registrants
Report on Form 10-Q for the quarter ended December 31, 2009, pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 |
|||
31.2 | Certification by the Chief Financial Officer relating to the Registrants
Report on Form 10-Q for the quarter ended December 31, 2009, 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 Registrants Report on Form 10-Q for the quarter ended December 31,
2009, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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