UNITED STATES
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 March 31, 2016
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)
19612
(Zip Code)
(610) 796-3400
(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 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 þ 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 April 30, 2016, 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
Page | |
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UGI UTILITIES, INC. AND SUBSIDIARIES
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(Thousands of dollars)
March 31, 2016 | September 30, 2015 | March 31, 2015 | |||||||||
ASSETS | |||||||||||
Current assets: | |||||||||||
Cash and cash equivalents | $ | 26,406 | $ | 3,099 | $ | 16,040 | |||||
Restricted cash | 3,909 | 6,602 | 5,578 | ||||||||
Accounts receivable (less allowances for doubtful accounts of $8,232, $5,599 and $11,889, respectively) | 102,125 | 55,659 | 183,046 | ||||||||
Accounts receivable — related parties | 1,271 | 1,271 | 2,709 | ||||||||
Accrued utility revenues | 24,052 | 12,051 | 42,056 | ||||||||
Inventories | 16,685 | 51,716 | 19,533 | ||||||||
Deferred income taxes | — | 24,694 | 25,168 | ||||||||
Income taxes receivable | — | 10,026 | — | ||||||||
Regulatory assets | 3,229 | 4,105 | 625 | ||||||||
Derivative instruments | 881 | 934 | 612 | ||||||||
Prepaid expenses & other current assets | 27,632 | 23,903 | 15,648 | ||||||||
Total current assets | 206,190 | 194,060 | 311,015 | ||||||||
Property, plant and equipment, at cost (less accumulated depreciation and amortization of $952,478, $929,130 and $911,289, respectively) | 1,900,806 | 1,824,369 | 1,753,197 | ||||||||
Goodwill | 182,145 | 182,145 | 182,145 | ||||||||
Regulatory assets | 344,983 | 300,103 | 251,945 | ||||||||
Other assets | 7,463 | 7,501 | 7,741 | ||||||||
Total assets | $ | 2,641,587 | $ | 2,508,178 | $ | 2,506,043 | |||||
LIABILITIES AND STOCKHOLDER’S EQUITY | |||||||||||
Current liabilities: | |||||||||||
Current maturities of long-term debt | $ | — | $ | 247,000 | $ | 92,000 | |||||
Short-term borrowings | 155,000 | 71,700 | 30,500 | ||||||||
Accounts payable | 42,681 | 58,135 | 54,612 | ||||||||
Accounts payable — related parties | 6,710 | 4,430 | 14,979 | ||||||||
Regulatory liability — deferred fuel and power refunds | 30,838 | 36,638 | 40,542 | ||||||||
Derivative instruments | 3,370 | 12,591 | 5,464 | ||||||||
Other current liabilities | 152,479 | 103,265 | 166,879 | ||||||||
Total current liabilities | 391,078 | 533,759 | 404,976 | ||||||||
Long-term debt | 550,000 | 375,000 | 550,000 | ||||||||
Deferred income taxes | 526,937 | 512,497 | 472,343 | ||||||||
Deferred investment tax credits | 3,429 | 3,597 | 3,765 | ||||||||
Pension and postretirement benefit obligations | 130,915 | 135,003 | 94,332 | ||||||||
Derivative instruments | — | — | 75 | ||||||||
Other noncurrent liabilities | 99,029 | 57,702 | 51,262 | ||||||||
Total liabilities | 1,701,388 | 1,617,558 | 1,576,753 | ||||||||
Commitments and contingencies (Note 7) | |||||||||||
Common stockholder’s 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 | 472,715 | 471,904 | 471,653 | ||||||||
Retained earnings | 436,788 | 372,143 | 404,516 | ||||||||
Accumulated other comprehensive loss | (29,563 | ) | (13,686 | ) | (7,138 | ) | |||||
Total common stockholder’s equity | 940,199 | 890,620 | 929,290 | ||||||||
Total liabilities and stockholder’s equity | $ | 2,641,587 | $ | 2,508,178 | $ | 2,506,043 | |||||
See accompanying notes to condensed consolidated financial statements.
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UGI UTILITIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(Thousands of dollars)
Three Months Ended | Six Months Ended | ||||||||||||||
March 31, | March 31, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Revenues | $ | 322,047 | $ | 500,573 | $ | 520,029 | $ | 787,879 | |||||||
Costs and expenses: | |||||||||||||||
Cost of sales — gas, fuel and purchased power (excluding depreciation shown below) | 137,434 | 278,336 | 212,873 | 421,388 | |||||||||||
Operating and administrative expenses | 45,125 | 58,917 | 93,152 | 105,465 | |||||||||||
Operating and administrative expenses — related parties | 3,798 | 4,138 | 5,978 | 6,920 | |||||||||||
Taxes other than income taxes | 4,448 | 4,803 | 8,217 | 8,907 | |||||||||||
Depreciation | 16,146 | 14,757 | 31,973 | 29,315 | |||||||||||
Amortization | 884 | 887 | 1,758 | 1,754 | |||||||||||
Other operating (income) loss, net | (269 | ) | (3,964 | ) | 3,301 | (4,209 | ) | ||||||||
207,566 | 357,874 | 357,252 | 569,540 | ||||||||||||
Operating income | 114,481 | 142,699 | 162,777 | 218,339 | |||||||||||
Interest expense | 9,270 | 10,611 | 18,764 | 21,260 | |||||||||||
Income before income taxes | 105,211 | 132,088 | 144,013 | 197,079 | |||||||||||
Income taxes | 41,917 | 52,499 | 57,368 | 78,651 | |||||||||||
Net income | $ | 63,294 | $ | 79,589 | $ | 86,645 | $ | 118,428 | |||||||
See accompanying notes to condensed consolidated financial statements.
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UGI UTILITIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
(Thousands of dollars)
Three Months Ended | Six Months Ended | ||||||||||||||
March 31, | March 31, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Net income | $ | 63,294 | $ | 79,589 | $ | 86,645 | $ | 118,428 | |||||||
Other comprehensive income (loss): | |||||||||||||||
Net losses on derivative instruments (net of tax of $13,348, $0, $12,016 and $0, respectively) | (18,820 | ) | — | (16,943 | ) | — | |||||||||
Reclassifications of net losses on derivative instruments (net of tax of $(253), $(278), $(529) and $(556), respectively) | 356 | 392 | 746 | 783 | |||||||||||
Benefit plans reclassifications of actuarial losses and prior service costs (net of tax of $(114), $(92), $(227) and $(183), respectively) | 160 | 129 | 320 | 260 | |||||||||||
Other comprehensive (loss) income | (18,304 | ) | 521 | (15,877 | ) | 1,043 | |||||||||
Comprehensive income | $ | 44,990 | $ | 80,110 | $ | 70,768 | $ | 119,471 | |||||||
See accompanying notes to condensed consolidated financial statements.
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UGI UTILITIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Thousands of dollars)
Six Months Ended | |||||||
March 31, | |||||||
2016 | 2015 | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES | |||||||
Net income | $ | 86,645 | $ | 118,428 | |||
Adjustments to reconcile net income to net cash from operating activities: | |||||||
Depreciation and amortization | 33,731 | 31,069 | |||||
Deferred income tax expense (benefit) | 48,905 | (13,888 | ) | ||||
Provision for uncollectible accounts | 5,572 | 8,979 | |||||
Other, net | 2,138 | 2,521 | |||||
Net change in: | |||||||
Accounts receivable and accrued utility revenues | (66,130 | ) | (154,515 | ) | |||
Inventories | 35,031 | 75,686 | |||||
Deferred fuel and power costs, net of changes in unsettled derivatives | (7,789 | ) | 55,760 | ||||
Accounts payable | (3,882 | ) | 8,013 | ||||
Other current assets | (2,529 | ) | (921 | ) | |||
Other current liabilities | 20,691 | 66,025 | |||||
Net cash provided by operating activities | 152,383 | 197,157 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES | |||||||
Expenditures for property, plant and equipment | (116,778 | ) | (102,020 | ) | |||
Net costs of property, plant and equipment disposals | (5,101 | ) | (3,694 | ) | |||
Decrease (increase) in restricted cash | 2,693 | (1,986 | ) | ||||
Net cash used by investing activities | (119,186 | ) | (107,700 | ) | |||
CASH FLOWS FROM FINANCING ACTIVITIES | |||||||
Payment of dividends | (22,000 | ) | (30,600 | ) | |||
Repayments of long-term debt | (72,000 | ) | — | ||||
Increase (decrease) in short-term borrowings | 83,300 | (55,800 | ) | ||||
Other | 810 | 582 | |||||
Net cash used by financing activities | (9,890 | ) | (85,818 | ) | |||
Cash and cash equivalents increase | $ | 23,307 | $ | 3,639 | |||
CASH AND CASH EQUIVALENTS | |||||||
End of period | $ | 26,406 | $ | 16,040 | |||
Beginning of period | 3,099 | 12,401 | |||||
Increase | $ | 23,307 | $ | 3,639 | |||
See accompanying notes to condensed consolidated financial statements.
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UGI UTILITIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars)
Note 1 — Nature of Operations
UGI Utilities, Inc. (“UGI Utilities”), a wholly owned subsidiary of UGI Corporation (“UGI”), and UGI Utilities’ wholly owned subsidiaries UGI Penn Natural Gas, Inc. (“PNG”) and UGI Central Penn Gas, Inc. (“CPG”), own and operate natural gas distribution utilities in eastern, northeastern and central Pennsylvania and in a portion of one Maryland county. UGI Utilities also owns and operates an electric distribution utility in northeastern Pennsylvania (“Electric Utility”). UGI Utilities’ natural gas distribution utility is referred to as “UGI Gas.” UGI Gas, PNG and CPG are collectively referred to as “Gas Utility.” Gas Utility is subject to regulation by the Pennsylvania Public Utility Commission (“PUC”) and, with respect to a small service territory in one Maryland county, the Maryland Public Service Commission, and Electric Utility is subject to regulation by the PUC. Gas Utility and Electric Utility are collectively referred to as “Utilities.” Prior to June 1, 2015, PNG also had a heating, ventilation and air-conditioning service business (“UGI Penn HVAC Services, Inc.”) which operated principally in the PNG service territory (“HVAC Business”). The assets of the HVAC business principally comprising customer contracts were sold on June 1, 2015.
The term “UGI Utilities” is used sometimes as an abbreviated reference to UGI Utilities, Inc., or to UGI Utilities, Inc. and its subsidiaries, including PNG and CPG.
Note 2 — Summary of Significant Accounting Policies
Basis of Presentation. 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.
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 that 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, 2015, condensed consolidated balance sheet data was 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 fiscal year ended September 30, 2015 (“the Company’s 2015 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.
Derivative Instruments
Derivative instruments are reported in the Condensed Consolidated Balance Sheets at their fair values, unless the derivative instruments qualify for the normal purchase and normal sale (“NPNS”) exception under GAAP and such exception has been elected. The accounting for changes in fair value depends upon the purpose of the derivative instrument and whether it is subject to regulatory ratemaking mechanisms or is designated and qualifies for hedge accounting.
Gains and losses on substantially all of the derivative instruments used by Gas Utility and Electric Utility (for which NPNS has not been elected) to hedge commodity prices are included in regulatory assets and liabilities in accordance with GAAP regarding accounting for rate-regulated entities. Certain of our derivative instruments are designated and qualify as cash flow hedges. For cash flow hedges, changes in the fair value of the derivative financial instruments are recorded in accumulated other comprehensive income (“AOCI”), to the extent effective at offsetting changes in the hedged item, until earnings are affected by the hedged item. We discontinue cash flow hedge accounting if the occurrence of the forecasted transaction is determined to be no longer probable. Hedge accounting is also discontinued for derivatives that cease to be highly effective. Certain other commodity derivative financial instruments, although generally effective as hedges, do not qualify for hedge accounting treatment. Changes in the fair values of these derivative instruments are reflected in net income. Cash flows from derivative financial instruments are included in cash flows from operating activities.
For a more detailed description of the derivative instruments we use, our accounting for derivatives, our objectives for using them and other information, see Note 10.
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UGI UTILITIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars)
Reclassifications. Certain prior period amounts have been reclassified to conform to current period presentation.
Use of Estimates. The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and costs. These estimates are based on management’s knowledge of current events, historical experience and various other assumptions that are believed to be reasonable under the circumstances. Accordingly, actual results may be different from these estimates and assumptions.
Note 3 — Accounting Changes
Adoption of New Accounting Standard
Presentation of Deferred Taxes. During the first quarter of Fiscal 2016, the Company adopted new accounting guidance regarding the classification of deferred taxes. The new guidance amends existing guidance to require that deferred income tax liabilities and assets be classified as noncurrent in a classified balance sheet, and eliminates the prior guidance which required an entity to separate deferred tax liabilities and assets into a current amount and a noncurrent amount in a classified balance sheet. We applied this guidance prospectively and, as such, the September 30, 2015 and March 31, 2015 Condensed Consolidated Balance Sheets included herein have not been adjusted.
Accounting Standards Not Yet Adopted
Share-Based Payments. In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09, "Improvements to Employee Share-Based Payment Accounting." This ASU simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The amendments in this ASU are effective for interim and annual periods beginning after December 15, 2016 (Fiscal 2018). Early adoption is permitted. The Company is in the process of assessing the impact on its financial statements from the adoption of the new guidance.
Leases. In February 2016, the FASB issued ASU No. 2016-02, "Leases." This ASU amends existing guidance to require entities that lease assets to recognize the assets and liabilities for the rights and obligations created by those leases on the balance sheet. The new guidance also requires additional disclosures about the amount, timing and uncertainty of cash flows from leases. The amendments in this ASU are effective for annual reporting periods beginning after December 15, 2018 (Fiscal 2020). Early adoption is permitted. Lessees must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company is in the process of assessing the impact on its financial statements from the adoption of the new guidance.
Debt Issuance Costs. In April 2015, the FASB issued ASU No. 2015-03, "Simplifying the Presentation of Debt Issuance Costs." This ASU amends existing guidance to require the presentation of debt issuance costs in the balance sheet as a direct deduction from the carrying amount of the related debt liability instead of a deferred charge. The amendments in this ASU are effective for annual reporting periods beginning after December 15, 2015 (Fiscal 2017). Early adoption is permitted. Entities will apply the new guidance retrospectively to all periods presented. The Company expects to adopt the new guidance effective September 30, 2016. The adoption of the new guidance is not expected to have a material impact on the Company’s financial statements.
Revenue Recognition. In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” The guidance provided under this ASU, as amended, supersedes the revenue recognition requirements in Accounting Standards Codification (“ASC”) No. 605, “Revenue Recognition,” and most industry-specific guidance included in the ASC. The standard requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance is effective for the Company for interim and annual periods beginning after December 15, 2017 (Fiscal 2019) and allows for either full retrospective adoption or modified retrospective adoption. We have not yet selected a transition method and are currently evaluating the impact of adopting this guidance on our consolidated financial statements.
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UGI UTILITIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars)
Note 4 — Inventories
Inventories comprise the following:
March 31, 2016 | September 30, 2015 | March 31, 2015 | |||||||||
Gas Utility natural gas | $ | 3,786 | $ | 37,510 | $ | 6,260 | |||||
Materials, supplies and other | 12,899 | 14,206 | 13,273 | ||||||||
Total inventories | $ | 16,685 | $ | 51,716 | $ | 19,533 | |||||
At March 31, 2016, UGI Utilities was a party to two principal storage contract administrative agreements (“SCAAs”) having terms of three years. One of the SCAAs was with UGI Energy Services, LLC (“Energy Services”), a second-tier, wholly owned subsidiary of UGI (see Note 12) and one of the SCAAs was with a non-affiliate. Pursuant to 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. The historical cost of natural gas storage inventories released under the SCAAs, which represents a portion of Gas Utility’s total natural gas storage inventories, and any exchange receivable (representing amounts of natural gas inventories used by the other parties to the agreement but not yet replenished for which UGI Utilities has the rights), are included in the caption “Gas Utility natural gas” in the table above.
The carrying value of gas storage inventories released under the SCAAs at March 31, 2016, September 30, 2015 and March 31, 2015, comprising 1.1 billion cubic feet (“bcf”), 9.0 bcf and 1.0 bcf of natural gas, was $2,593, $22,694 and $4,082, respectively. At March 31, 2016, September 30, 2015 and March 31, 2015, UGI Utilities held a total of $15,100, $17,700 and $17,700, respectively, of security deposits from its SCAA counterparties. These amounts are included in other current liabilities on the Condensed Consolidated Balance Sheets.
For additional information related to the SCAAs with Energy Services, see Note 12.
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UGI UTILITIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars)
Note 5 — Regulatory Assets and Liabilities and Regulatory Matters
For a description of the Company’s regulatory assets and liabilities other than those described below, see Note 4 in the Company’s 2015 Annual Report. UGI Utilities currently 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:
March 31, 2016 | September 30, 2015 | March 31, 2015 | |||||||||
Regulatory assets: | |||||||||||
Income taxes recoverable | $ | 118,160 | $ | 115,946 | $ | 111,441 | |||||
Underfunded pension and postretirement plans | 135,825 | 140,762 | 105,539 | ||||||||
Environmental costs (a) | 60,494 | 19,983 | 14,110 | ||||||||
Removal costs, net | 25,030 | 21,223 | 18,377 | ||||||||
Other | 8,703 | 6,294 | 3,103 | ||||||||
Total regulatory assets | $ | 348,212 | $ | 304,208 | $ | 252,570 | |||||
Regulatory liabilities: | |||||||||||
Postretirement benefits | $ | 19,307 | $ | 19,975 | $ | 19,323 | |||||
Deferred fuel and power refunds | 30,838 | 36,638 | 40,542 | ||||||||
State tax benefits — distribution system repairs | 14,158 | 13,266 | 10,621 | ||||||||
Other | 2,500 | 1,125 | 2,099 | ||||||||
Total regulatory liabilities (b) | $ | 66,803 | $ | 71,004 | $ | 72,585 | |||||
(a) | Environmental costs at March 31, 2016, include amounts probable of recovery recorded in conjunction with UGI Gas’ Consent Order and Agreement with the Pennsylvania Department of Environmental Protection (see Note 7). |
(b) | Regulatory liabilities, other than deferred fuel and power refunds, are recorded in other current and other noncurrent liabilities in the Condensed Consolidated Balance Sheets. |
Deferred fuel and power — costs and refunds. Gas Utility’s and Electric Utility’s tariffs contain clauses that permit recovery of all prudently incurred purchased gas and power costs through the application of purchased gas cost (“PGC”) rates in the case of Gas Utility and default service (“DS”) tariffs in the case of Electric Utility. The clauses provide for periodic adjustments to PGC and DS rates for differences between the total amount of purchased gas and electric generation supply costs collected from customers and recoverable costs incurred. Net undercollected costs are classified as a regulatory asset and net overcollections are classified as a regulatory liability.
Gas Utility uses derivative 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 instruments are included in deferred fuel costs or refunds. Net unrealized (losses) on such contracts at March 31, 2016, September 30, 2015, and March 31, 2015, were $(1,900), $(3,262) and $(3,381), respectively.
Electric Utility enters into forward electricity purchase contracts to meet a substantial portion of its electricity supply needs. Prior to March 1, 2015, we did not elect the NPNS exception under GAAP for these contracts. Therefore, we recognized the fair value of these contracts on the balance sheet with an associated adjustment to regulatory assets or liabilities because Electric Utility is entitled to fully recover its DS costs. At March 31, 2016, September 30, 2015, and March 31, 2015, the fair values of Electric Utility’s electricity supply contracts were (losses) of $(231), $(533) and $(1,168), respectively. These amounts are reflected in current and noncurrent derivative liabilities on the Condensed Consolidated Balance Sheets with equal and offsetting amounts reflected in deferred fuel and power costs and refunds in the table above. Effective with Electric Utility forward contracts entered into beginning March 1, 2015, Electric Utility has elected the NPNS exception under GAAP and, as a result, the fair values of such contracts are not recognized on the balance sheet (see Note 10).
In order to reduce volatility associated with a substantial portion of its electric transmission congestion costs, Electric Utility obtains financial transmission rights (“FTRs”). FTRs are derivative instruments that entitle the holder to receive compensation
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UGI UTILITIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars)
for electricity transmission congestion charges when there is insufficient electricity transmission capacity on the electric transmission grid. Because Electric Utility is entitled to fully recover its DS costs, realized and unrealized gains or losses on FTRs are included in deferred fuel and power costs or deferred fuel and power refunds. Unrealized gains or losses on FTRs at March 31, 2016, September 30, 2015, and March 31, 2015, were not material.
Preliminary Stage Information Technology Costs. During the three months ended March 31, 2016, it was determined that certain preliminary project stage costs associated with an ongoing information technology project at UGI Utilities were probable of future recovery in rates in accordance with GAAP related to regulated entities. As a result, during the three months ended March 31, 2016, we capitalized $5,830 of such project costs ($5,734 of which had been expensed in prior periods) and recorded associated increases to utility property, plant and equipment ($2,755) and regulatory assets ($3,075).
UGI Gas Base Rate Filing. On January 19, 2016, UGI Utilities filed a request with the PUC to increase UGI Gas base operating revenues for residential, commercial and industrial customers by $58,600 annually. The increased revenues would fund ongoing system improvements and operations necessary to maintain safe and reliable natural gas service and fund new programs designed to promote and reward customers’ efforts to increase efficient use of natural gas. UGI Utilities requested that the new gas rates become effective March 19, 2016. The PUC entered an Order dated February 11, 2016, suspending the effective date for the rate increase to allow for investigation and public hearings. Unless a settlement is reached sooner, this review process is expected to last approximately nine months from the date of filing; however, the Company cannot predict the timing or the ultimate outcome of the rate case review process.
Distribution System Improvement Charge. On April 14, 2012, legislation became effective enabling gas and electric utilities in Pennsylvania, under certain circumstances, to recover the cost of eligible capital investment in distribution system infrastructure improvement projects between base rate cases. The charge enabled by the legislation is known as a distribution system improvement charge (“DSIC”). The primary benefit to a company from a DSIC charge is the elimination of regulatory lag, or delayed rate recognition, that occurs under traditional ratemaking relating to qualifying capital expenditures. To be eligible for a DSIC, a utility must have filed a general rate filing within five years of its petition seeking permission to include a DSIC in its tariff, and not exceed certain earnings tests. Absent PUC permission, the DSIC is capped at five percent of the amount billed to customers. PNG and CPG received PUC approval on a DSIC tariff, initially set at zero, in 2014, while UGI Gas has not had a general rate filing within the required time period to be eligible. PNG and CPG began charging a DSIC at a rate other than zero beginning on April 1, 2015 and April 1, 2016, respectively. In March 2016, PNG and CPG filed petitions, seeking approval to increase the maximum allowable DSIC from five percent to ten percent of billed distribution revenues. Also in March 2016, UGI Gas sought PUC approval to initiate a DSIC effective November 2017 after rates from the pending rate case become effective, along with a petition, seeking approval to increase the maximum allowable DSIC from five percent to ten percent of billed distribution revenues. To date, no action has been taken by the PUC on any of these petitions. The Company cannot predict the timing or outcome of these petitions. The impact of the DSIC charge at PNG and CPG did not have a material effect on Gas Utility results of operations.
Note 6 — Debt
In April 2016, UGI Utilities entered into a Note Purchase Agreement (the “2016 Note Purchase Agreement”) which provides for the private placement of (1) $100,000 aggregate principal amount of 2.95% Senior Notes due June 30, 2026; (2) $200,000 aggregate principal amount of 4.12% Senior Notes due September 30, 2046; and (3) $100,000 aggregate principal amount of 4.12% Senior Notes due October 31, 2046. These Senior Notes are expected to be issued in June 2016, September 2016 and October 2016, respectively. These Senior Notes, when issued, will be unsecured and will rank equally with UGI Utilities’ existing outstanding senior debt. The Company expects to use the net proceeds from the issuance of the Senior Notes to refinance existing debt and for general corporate purposes. Because UGI Utilities intends to use a portion of the net proceeds from the issuance of $200,000 Senior Notes in September 2016 to repay UGI Utilities’ currently outstanding $175,000 principal amount of 5.75% Senior Notes due September 30, 2016, the 5.75% Senior Notes have been classified as long-term on the March 31, 2016, Condensed Consolidated Balance Sheet.
- 9 -
UGI UTILITIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars)
Note 7 — Commitments and Contingencies
Contingencies
Environmental Matters
From the late 1800s through the mid-1900s, UGI Utilities and its current and 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. 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 has also acquired two subsidiaries (CPG and PNG) which have similar histories of owning, and in some cases operating, MGPs in Pennsylvania.
UGI Utilities and its subsidiaries have entered into agreements with the Pennsylvania Department of Environmental Protection (“DEP”) to address the remediation of former MGPs in Pennsylvania. CPG is party to a Consent Order and Agreement (“CPG-COA”) with the DEP requiring CPG to perform a specified level of activities associated with environmental investigation and remediation work at certain properties in Pennsylvania on which MGP related facilities were operated (“CPG MGP Properties”) and to plug a minimum number of non-producing natural gas wells per year. In addition, PNG is a party to a Multi-Site Remediation Consent Order and Agreement (“PNG-COA”) with the DEP. The PNG-COA requires PNG to perform annually a specified level of activities associated with environmental investigation and remediation work at certain properties on which MGP-related facilities were operated (“PNG MGP Properties”). Under these agreements, environmental expenditures relating to the CPG MGP Properties and the PNG MGP Properties are capped at $1,800 and $1,100, respectively, in any calendar year. The CPG-COA is scheduled to terminate at the end of 2018. The PNG-COA terminates in 2019 but may be terminated by either party effective at the end of any two-year period beginning with the original effective date in March 2004. At March 31, 2016 and 2015, our accrued liabilities for environmental investigation and remediation costs related to the CPG-COA and the PNG-COA totaled $11,766 and $9,610, respectively. CPG and PNG have recorded associated regulatory assets for these costs because recovery of these costs from customers is probable (see Note 5).
UGI Utilities’ UGI Gas division has negotiated a Consent Order and Agreement (“UGI Gas-COA”) with the DEP and is awaiting execution thereof. The UGI Gas-COA would be effective October 1, 2016 and would be scheduled to terminate in September 2031. The UGI Gas-COA would require UGI Gas to perform a specified level of activities associated with environmental investigation and remediation work at certain properties in Pennsylvania on which MGP related facilities were operated (“UGI Gas MGP Properties”). Under this agreement, required environmental expenditures related to the UGI Gas MGP Properties would be capped at $2,500 in any calendar year. At March 31, 2016, our estimated accrued liabilities for environmental investigation and remediation costs related to the UGI Gas-COA totaled $43,767. UGI Gas has recorded associated regulatory assets for these costs because recovery of these costs from customers is probable (See Note 5).
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 (1) UGI Gas is currently permitted to include in rates, through future base rate proceedings, a five-year average of such prudently incurred remediation costs, and (2) CPG and PNG receive ratemaking recognition of estimated environmental investigation and remediation costs associated with their environmental sites. This ratemaking recognition balances the accumulated difference between historical costs and rate recoveries with an estimate of future costs associated with the sites. UGI Gas has proposed a similar environmental cost tracking mechanism that will address the costs incurred under the UGI Gas-COA.
From time to time, UGI Utilities is notified of sites outside Pennsylvania on which private parties allege MGPs were formerly owned or operated by UGI Utilities or owned or operated by its former subsidiaries. Such parties generally investigate the extent of environmental contamination or perform environmental remediation. 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. At March 31, 2016, neither the undiscounted nor the accrued
- 10 -
UGI UTILITIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars)
liability for environmental investigation and cleanup costs for UGI Gas MGP sites outside of Pennsylvania was material for UGI Utilities.
There are pending claims and legal actions arising in the normal course of our businesses. Although we cannot predict the final results of these pending claims and legal actions, we believe, after consultation with counsel, that the final outcome of these matters will not have a material effect on our consolidated financial position, results of operations or cash flows.
Note 8 — Defined Benefit Pension and Other Postretirement Plans
We sponsor a defined benefit pension plan for employees hired prior to January 1, 2009, of UGI, UGI Utilities, PNG, CPG and certain of UGI’s other domestic wholly owned subsidiaries (“Pension Plan”). Pension Plan benefits are based on years of service, age and employee compensation. We also 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 include the following components:
Pension Benefits | Other Postretirement Benefits | |||||||||||||||
Three Months Ended March 31, | 2016 | 2015 | 2016 | 2015 | ||||||||||||
Service cost | $ | 1,732 | $ | 1,740 | $ | 45 | $ | 49 | ||||||||
Interest cost | 5,818 | 5,628 | 117 | 118 | ||||||||||||
Expected return on assets | (7,168 | ) | (7,225 | ) | (149 | ) | (153 | ) | ||||||||
Amortization of: | ||||||||||||||||
Prior service cost (benefit) | 87 | 87 | (160 | ) | (160 | ) | ||||||||||
Actuarial loss | 2,393 | 2,198 | 25 | 31 | ||||||||||||
Net benefit cost (income) | 2,862 | 2,428 | (122 | ) | (115 | ) | ||||||||||
Change in associated regulatory liabilities | — | — | 876 | 938 | ||||||||||||
Net benefit cost after change in regulatory liabilities | $ | 2,862 | $ | 2,428 | $ | 754 | $ | 823 | ||||||||
Pension Benefits | Other Postretirement Benefits | |||||||||||||||
Six Months Ended March 31, | 2016 | 2015 | 2016 | 2015 | ||||||||||||
Service cost | $ | 3,464 | $ | 3,481 | $ | 91 | $ | 97 | ||||||||
Interest cost | 11,635 | 11,255 | 233 | 237 | ||||||||||||
Expected return on assets | (14,335 | ) | (14,449 | ) | (298 | ) | (306 | ) | ||||||||
Amortization of: | ||||||||||||||||
Prior service cost (benefit) | 174 | 174 | (320 | ) | (320 | ) | ||||||||||
Actuarial loss | 4,786 | 4,396 | 49 | 63 | ||||||||||||
Net benefit cost (income) | 5,724 | 4,857 | (245 | ) | (229 | ) | ||||||||||
Change in associated regulatory liabilities | — | — | 1,754 | 1,875 | ||||||||||||
Net benefit cost after change in regulatory liabilities | $ | 5,724 | $ | 4,857 | $ | 1,509 | $ | 1,646 | ||||||||
Pension Plan assets are held in trust and consist principally of publicly traded, diversified equity and fixed income mutual funds and, to a much lesser extent, smallcap common stocks and UGI Common Stock. It is our general policy to fund amounts for Pension Plan benefits equal to at least the minimum contribution required by ERISA. During the six months ended March 31, 2016 and 2015, the Company made contributions to the Pension Plan of $4,934 and $5,566, respectively. The Company expects to make additional discretionary cash contributions of approximately $5,000 to the Pension Plan during the remainder of Fiscal 2016.
UGI Utilities has established a Voluntary Employees’ Beneficiary Association (“VEBA”) trust to pay retiree health care and life insurance benefits by depositing into the VEBA the annual amount of postretirement benefits costs, if any, determined under GAAP. The difference between such amount and the amounts included in UGI Gas’ and Electric Utility’s rates is deferred for
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UGI UTILITIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars)
future recovery from, or refund to, ratepayers. There were no required contributions to the VEBA during the six months ended March 31, 2016 and 2015.
We also participate in an unfunded and non-qualified defined benefit supplemental executive retirement plan. Net benefit costs associated with this plan for all periods presented were not material.
Note 9 — Fair Value Measurements
Derivative Instruments
The following table presents on a gross basis our derivative assets and liabilities including both current and noncurrent portions, that are measured at fair value on a recurring basis within the fair value hierarchy, as of March 31, 2016, September 30, 2015 and March 31, 2015:
Asset (Liability) | |||||||||||||||
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
March 31, 2016: | |||||||||||||||
Assets: | |||||||||||||||
Commodity contracts | $ | 1,179 | $ | — | $ | — | $ | 1,179 | |||||||
Liabilities: | |||||||||||||||
Commodity contracts | $ | (3,281 | ) | $ | (387 | ) | $ | — | $ | (3,668 | ) | ||||
September 30, 2015: | |||||||||||||||
Assets: | |||||||||||||||
Commodity contracts | $ | 934 | $ | 373 | $ | — | $ | 1,307 | |||||||
Liabilities: | |||||||||||||||
Commodity contracts | $ | (4,560 | ) | $ | (1,388 | ) | $ | — | $ | (5,948 | ) | ||||
Interest rate contracts | $ | — | $ | (7,016 | ) | $ | — | $ | (7,016 | ) | |||||
March 31, 2015: | |||||||||||||||
Assets: | |||||||||||||||
Commodity contracts | $ | 612 | $ | 1 | $ | — | $ | 613 | |||||||
Liabilities: | |||||||||||||||
Commodity contracts | $ | (4,366 | ) | $ | (1,174 | ) | $ | — | $ | (5,540 | ) | ||||
The fair values of our Level 1 exchange-traded commodity futures and option derivative contracts are based upon actively-quoted market prices for identical assets and liabilities. The fair values of the remainder of our derivative financial instruments and electricity forward contracts, which are designated as Level 2, are generally based upon recent market transactions and related market indicators. There were no transfers between Level 1 and Level 2 during the periods presented.
Other Financial Instruments
The carrying amounts of other financial instruments included in current assets and current liabilities (except for current maturities of long-term debt) approximate their fair values because of their short-term nature. The carrying amount and estimated fair value of our long-term debt (including current maturities) at March 31, 2016, were $550,000 and $637,016, respectively. The carrying amount and estimated fair value of our long-term debt (including current maturities) at March 31, 2015, were $642,000 and $740,729, respectively. 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 types of debt (Level 2).
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UGI UTILITIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars)
Note 10 — 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 Utility’s tariffs contain clauses that permit recovery of all of the prudently incurred costs of natural gas it sells to retail core-market customers, including the cost of financial instruments used to hedge purchased gas costs. As permitted and agreed to by the PUC pursuant to Gas Utility’s annual PGC filings, Gas Utility currently uses New York Mercantile Exchange (“NYMEX”) natural gas futures and option contracts to reduce commodity price volatility associated with a portion of the natural gas it purchases for its retail core-market customers. At March 31, 2016 and 2015, the volumes of natural gas associated with Gas Utility’s unsettled NYMEX natural gas futures and option contracts totaled 10.0 million dekatherms and 9.7 million dekatherms, respectively. At March 31, 2016, the maximum period over which Gas Utility is economically hedging natural gas market price risk is 11 months. Gains and losses on natural gas futures contracts and any gains on natural gas option contracts are recorded in regulatory assets or liabilities on the Condensed Consolidated Balance Sheets because it is probable such gains or losses will be recoverable from, or refundable to, customers through the PGC recovery mechanism (see Note 5).
Electric Utility’s DS tariffs permit the recovery of all prudently incurred costs of electricity it sells to DS customers, including the cost of financial instruments used to hedge electricity costs. Electric Utility enters into forward electricity purchase contracts to meet a substantial portion of its electricity supply needs. For such contracts entered into prior to March 1, 2015, Electric Utility chose not to elect the NPNS exception under GAAP related to these derivative instruments and the fair values of these contracts are reflected in current and noncurrent derivative instrument liabilities on the accompanying Condensed Consolidated Balance Sheets. Associated gains and losses on these forward contracts are recorded in regulatory assets and liabilities on the Condensed Consolidated Balance Sheets in accordance with GAAP because it is probable such gains or losses will be recoverable from, or refundable to, customers through the DS mechanism (see Note 5). Effective with Electric Utility forward electricity purchase contracts entered into beginning March 1, 2015, Electric Utility has elected the NPNS exception under GAAP and, as a result, the fair values of such contracts are not recognized on the balance sheet. At March 31, 2016 and 2015, the volumes associated with Electric Utility’s forward electricity purchase contracts for which NPNS has not been elected were 23.6 million kilowatt hours and 384.4 million kilowatt hours, respectively. At March 31, 2016, the maximum period over which these contracts extend is 8 months.
In order to reduce volatility associated with a substantial portion of its electricity transmission congestion costs, Electric Utility obtains FTRs through an annual allocation process. Gains and losses on Electric Utility FTRs are recorded in regulatory assets or liabilities in accordance with GAAP because it is probable such gains or losses will be recoverable from, or refundable to, customers through the DS mechanism (see Note 5). At March 31, 2016 and 2015, the total volumes associated with FTRs totaled 69.2 million kilowatt hours and 58.1 million kilowatt hours, respectively. At March 31, 2016, the maximum period over which we are economically hedging electricity congestion is 2 months.
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.
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. On March 31, 2016,
- 13 -
UGI UTILITIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars)
concurrent with the pricing of the Senior Notes to be issued under the 2016 Note Purchase Agreement, UGI Utilities agreed to settle all of its then-existing IRPA contracts associated with such debt at a loss of $35,975 (which amount was paid in early April 2016 and is included in other current liabilities on the March 31, 2016 Condensed Consolidated Balance Sheet). Because these IRPA contracts qualified for and were designated as cash flow hedges, the loss recognized in connection with the settled IRPAs has been recorded in AOCI and will be recognized in interest expense as the associated future interest expense impacts earnings. See Note 6 for additional information on the 2016 Note Purchase Agreement. As of March 31, 2016 and 2015, we had no unsettled IRPAs. At March 31, 2016, the amount of net losses associated with IRPAs expected to be reclassified into earnings during the next twelve months is $3,073.
Derivative Instrument Credit Risk
Our commodity exchange-traded futures contracts generally require cash deposits in margin accounts. At March 31, 2016 and 2015, restricted cash in brokerage accounts totaled $3,909 and $5,578, respectively.
Offsetting Derivative Assets and Liabilities
Derivative assets and liabilities are presented net by counterparty on the Condensed Consolidated Balance Sheets if the right of offset exists. Our derivative instruments include both those that are executed on an exchange through brokers and centrally cleared and over-the-counter transactions. Exchange contracts utilize a financial intermediary, exchange or clearinghouse to enter, execute or clear the transactions. Over-the-counter contracts are bilateral contracts that are transacted directly with a third party. Certain over-the-counter and exchange contracts contain contractual rights of offset through master netting arrangements, derivative clearing agreements and contract default provisions. In addition, the contracts are subject to conditional rights of offset through counterparty nonperformance, insolvency or other conditions.
In general, most of our over-the-counter transactions and all exchange contracts are subject to collateral requirements. Types of collateral generally include cash or letters of credit. Cash collateral paid by us to our over-the-counter derivative counterparties, if any, is reflected in the table below to offset derivative liabilities. Cash collateral received by us from our over-the-counter derivative counterparties, if any, is reflected in the table below to offset derivative assets. Certain other accounts receivable and accounts payable balances recognized on the Condensed Consolidated Balance Sheets with our derivative counterparties are not included in the table below but could reduce our net exposure to such counterparties because such balances are subject to master netting or similar arrangements.
- 14 -
UGI UTILITIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars)
Fair Value of Derivative Instruments
The following table presents the Company’s derivative assets and liabilities, as well as the effects of offsetting, as of March 31, 2016 and 2015:
March 31, 2016 | March 31, 2015 | |||||||
Derivative assets: | ||||||||
Derivatives subject to PGC and DS mechanisms: | ||||||||
Commodity contracts | $ | 1,179 | $ | 613 | ||||
Total derivative assets - gross | 1,179 | 613 | ||||||
Gross amounts offset in the balance sheet | (298 | ) | (1 | ) | ||||
Total derivative assets - net | $ | 881 | $ | 612 | ||||
Derivative liabilities: | ||||||||
Derivatives subject to PGC and DS mechanisms: | ||||||||
Commodity contracts | $ | (3,466 | ) | $ | (5,168 | ) | ||
Derivatives not subject to PGC and DS mechanisms: | ||||||||
Commodity contracts | (202 | ) | (372 | ) | ||||
Total derivative liabilities - gross | (3,668 | ) | (5,540 | ) | ||||
Gross amounts offset in the balance sheet | 298 | 1 | ||||||
Total derivative liabilities - net | $ | (3,370 | ) | $ | (5,539 | ) | ||
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UGI UTILITIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars)
Effect of Derivative Instruments
The following table provides information on the effects of derivative instruments not subject to ratemaking mechanisms on the Condensed Consolidated Statements of Income and changes in AOCI for the three and six months ended March 31, 2016 and 2015:
Loss Recognized in AOCI | Loss Reclassified from AOCI into Income | Location of Loss Reclassified from AOCI into Income | ||||||||||||||||||
Three Months Ended March 31, | 2016 | 2015 | 2016 | 2015 | ||||||||||||||||
Cash Flow Hedges: | ||||||||||||||||||||
Interest rate contracts | $ | (32,168 | ) | $ | — | $ | (609 | ) | $ | (670 | ) | Interest expense | ||||||||
Loss Recognized in Income | Location of Loss Recognized in Income | |||||||||||||||||||
Three Months Ended March 31, | 2016 | 2015 | ||||||||||||||||||
Derivatives Not Subject to PGC and DS Mechanisms: | ||||||||||||||||||||
Gasoline contracts | $ | (55 | ) | $ | (4 | ) | Operating expenses/other operating income, net | |||||||||||||
Loss Recognized in AOCI | Loss Reclassified from AOCI into Income | Location of Loss Reclassified from AOCI into Income | ||||||||||||||||||
Six Months Ended March 31, | 2016 | 2015 | 2016 | 2015 | ||||||||||||||||
Cash Flow Hedges: | ||||||||||||||||||||
Interest rate contracts | $ | (28,959 | ) | $ | — | $ | (1,275 | ) | $ | (1,339 | ) | Interest expense | ||||||||
Loss Recognized in Income | Location of Loss Recognized in Income | |||||||||||||||||||
Six Months Ended March 31, | 2016 | 2015 | ||||||||||||||||||
Derivatives Not Subject to PGC and DS Mechanisms: | ||||||||||||||||||||
Gasoline contracts | $ | (120 | ) | $ | (526 | ) | Operating expenses/other operating income, net | |||||||||||||
We are also a party to a number of other 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 in the contract is based on an underlying that is directly associated with the price of the product or service being purchased or sold.
- 16 -
UGI UTILITIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars)
Note 11 — Accumulated Other Comprehensive Income
The tables below present changes in AOCI, net of tax, during the three and six months ended March 31, 2016 and 2015:
Postretirement Benefit Plans | Derivative Instruments | Total | ||||||||||
Three Months Ended March 31, 2016 | ||||||||||||
AOCI - December 31, 2015 | $ | (9,116 | ) | $ | (2,143 | ) | $ | (11,259 | ) | |||
Net losses on IRPAs | — | (18,820 | ) | (18,820 | ) | |||||||
Reclassifications of benefit plan actuarial losses and prior service cost | 160 | — | 160 | |||||||||
Reclassifications of net losses on IRPAs | — | 356 | 356 | |||||||||
AOCI - March 31, 2016 | $ | (8,956 | ) | $ | (20,607 | ) | $ | (29,563 | ) | |||
Three Months Ended March 31, 2015 | ||||||||||||
AOCI - December 31, 2014 | $ | (6,180 | ) | $ | (1,479 | ) | $ | (7,659 | ) | |||
Reclassifications of benefit plan actuarial losses and prior service cost | 129 | — | 129 | |||||||||
Reclassifications of net losses on IRPAs | — | 392 | 392 | |||||||||
AOCI - March 31, 2015 | $ | (6,051 | ) | $ | (1,087 | ) | $ | (7,138 | ) | |||
Postretirement Benefit Plans | Derivative Instruments | Total | ||||||||||
Six Months Ended March 31, 2016 | ||||||||||||
AOCI - September 30, 2015 | $ | (9,276 | ) | $ | (4,410 | ) | $ | (13,686 | ) | |||
Net losses on IRPAs | — | (16,943 | ) | (16,943 | ) | |||||||
Reclassifications of benefit plan actuarial losses and prior service costs | 320 | — | 320 | |||||||||
Reclassifications of net losses on IRPAs | — | 746 | 746 | |||||||||
AOCI - March 31, 2016 | $ | (8,956 | ) | $ | (20,607 | ) | $ | (29,563 | ) | |||
Six Months Ended March 31, 2015 | ||||||||||||
AOCI - September 30, 2014 | $ | (6,311 | ) | $ | (1,870 | ) | $ | (8,181 | ) | |||
Reclassifications of benefit plan actuarial losses and prior service costs | 260 | — | 260 | |||||||||
Reclassifications of net losses on IRPAs | — | 783 | 783 | |||||||||
AOCI - March 31, 2015 | $ | (6,051 | ) | $ | (1,087 | ) | $ | (7,138 | ) | |||
Note 12 — 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 on the Condensed Consolidated Statements of Income. In addition, UGI Utilities provides limited administrative services to UGI and certain of UGI’s subsidiaries under PUC affiliated interest agreements. Amounts billed to these entities by UGI Utilities for all periods presented were not material.
From time to time, UGI Utilities is a party to SCAAs with Energy Services which have terms of up to three years. Under the SCAAs, UGI Utilities has, among other things, released certain storage and transportation contracts (subject to recall for operational purposes) to Energy Services for the terms of the SCAAs. UGI Utilities also transferred certain associated storage inventories
- 17 -
UGI UTILITIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars)
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 $159 and $2,029 during the three and six months ended March 31, 2016, respectively, and $251 and $5,207 during the three and six months ended March 31, 2015, respectively. In conjunction with the SCAAs, UGI Utilities received security deposits from Energy Services. The amount of such security deposits, which are included in other current liabilities on the Condensed Consolidated Balance Sheets, was $8,100, $10,700, and $10,700 as of March 31, 2016, September 30, 2015 and March 31, 2015, respectively.
UGI Utilities reflects the historical cost of the gas storage inventories and any exchange receivable from Energy Services (representing amounts of natural gas inventories used but not yet replenished by Energy Services) on its balance sheet under the caption inventories. The carrying value of these gas storage inventories at March 31, 2016, September 30, 2015 and March 31, 2015, comprising approximately 0.9 bcf, 5.0 bcf and 0.9 bcf of natural gas, were $2,074, $12,889 and $3,391, respectively.
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 primarily during the heating season months of November through March. The aggregate amount of these transactions (exclusive of transactions pursuant to the SCAAs) during the three and six months ended March 31, 2016 totaled $31,691 and $59,055, respectively. During the three and six months ended March 31, 2015 such transactions totaled $19,286 and $43,033, respectively.
From time to time, the Company sells natural gas or pipeline capacity to Energy Services. During the three and six months ended March 31, 2016, revenues associated with such sales to Energy Services totaled $12,854 and $21,620, respectively. During the three and six months ended March 31, 2015, revenues associated with such sales to Energy Services totaled $46,227 and $62,417, respectively. Also from time to time, the Company purchases natural gas, pipeline capacity and electricity from Energy Services (in addition to those transactions already described above) and purchases a firm storage service from UGI Storage Company, a subsidiary of Energy Services, under one-year agreements. During the three and six months ended March 31, 2016, such purchases totaled $14,912 and $23,104, respectively. During the three and six months ended March 31, 2015, such purchases totaled $49,750 and $71,525, respectively.
Note 13 — Segment Information
We have determined that we have two reportable segments: (1) Gas Utility and (2) Electric Utility. Gas Utility revenues are derived principally from the sale and distribution of natural gas to customers in eastern, northeastern and central Pennsylvania. Electric Utility derives its revenues principally from the sale and distribution of electricity in two northeastern Pennsylvania counties. The HVAC Business, prior to its sale in June 2015, did not meet the quantitative thresholds for separate segment reporting under GAAP relating to business segment reporting and has been included in “Other” below.
The accounting policies of our reportable segments are the same as those described in Note 2 of the Company’s 2015 Annual Report. We evaluate the performance of our Gas Utility and Electric Utility segments principally based upon their income before income taxes.
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UGI UTILITIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars)
Financial information by business segment follows:
Three Months Ended March 31, 2016:
Reportable Segments | |||||||||||
Total | Gas Utility | Electric Utility | |||||||||
Revenues | $ | 322,047 | $ | 298,088 | $ | 23,959 | |||||
Cost of sales | $ | 137,434 | $ | 123,702 | $ | 13,732 | |||||
Depreciation and amortization | $ | 17,030 | $ | 15,822 | $ | 1,208 | |||||
Operating income | $ | 114,481 | $ | 111,004 | $ | 3,477 | |||||
Interest expense | $ | 9,270 | $ | 8,847 | $ | 423 | |||||
Income before income taxes | $ | 105,211 | $ | 102,157 | $ | 3,054 | |||||
Capital expenditures (including the effects of accruals) | $ | 48,113 | $ | 46,003 | $ | 2,110 | |||||
Three Months Ended March 31, 2015:
Reportable Segments | |||||||||||||||
Total | Gas Utility | Electric Utility | Other | ||||||||||||
Revenues | $ | 500,573 | $ | 468,000 | $ | 32,323 | $ | 250 | |||||||
Cost of sales | $ | 278,336 | $ | 258,155 | $ | 20,181 | $ | — | |||||||
Depreciation and amortization | $ | 15,644 | $ | 14,489 | $ | 1,155 | $ | — | |||||||
Operating income (loss) | $ | 142,699 | $ | 139,303 | $ | 3,510 | $ | (114 | ) | ||||||
Interest expense | $ | 10,611 | $ | 10,104 | $ | 507 | $ | — | |||||||
Income (loss) before income taxes | $ | 132,088 | $ | 129,199 | $ | 3,003 | $ | (114 | ) | ||||||
Capital expenditures (including the effects of accruals) | $ | 41,280 | $ | 39,202 | $ | 2,078 | $ | — | |||||||
Six Months Ended March 31, 2016:
Reportable Segments | |||||||||||
Total | Gas Utility | Electric Utility | |||||||||
Revenues | $ | 520,029 | $ | 475,030 | $ | 44,999 | |||||
Cost of sales | $ | 212,873 | $ | 187,931 | $ | 24,942 | |||||
Depreciation and amortization | $ | 33,731 | $ | 31,326 | $ | 2,405 | |||||
Operating income | $ | 162,777 | $ | 156,824 | $ | 5,953 | |||||
Interest expense | $ | 18,764 | $ | 17,913 | $ | 851 | |||||
Income before income taxes | $ | 144,013 | $ | 138,911 | $ | 5,102 | |||||
Capital expenditures (including the effects of accruals) | $ | 109,577 | $ | 105,273 | $ | 4,304 | |||||
As of March 31, 2016 | |||||||||||
Total assets (at period end) | $ | 2,641,587 | $ | 2,488,191 | $ | 153,396 | |||||
Goodwill (at period end) | $ | 182,145 | $ | 182,145 | $ | — | |||||
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UGI UTILITIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars)
Six Months Ended March 31, 2015:
Reportable Segments | |||||||||||||||
Total | Gas Utility | Electric Utility | Other | ||||||||||||
Revenues | $ | 787,879 | $ | 728,478 | $ | 58,746 | $ | 655 | |||||||
Cost of sales | $ | 421,388 | $ | 385,363 | $ | 36,025 | $ | — | |||||||
Depreciation and amortization | $ | 31,069 | $ | 28,769 | $ | 2,300 | $ | — | |||||||
Operating income | $ | 218,339 | $ | 211,149 | $ | 7,229 | $ | (39 | ) | ||||||
Interest expense | $ | 21,260 | $ | 20,234 | $ | 1,026 | $ | — | |||||||
Income before income taxes | $ | 197,079 | $ | 190,915 | $ | 6,203 | $ | (39 | ) | ||||||
Capital expenditures (including the effects of accruals) | $ | 96,309 | $ | 92,694 | $ | 3,615 | $ | — | |||||||
As of March 31, 2015 | |||||||||||||||
Total assets (at period end) | $ | 2,506,043 | $ | 2,359,060 | $ | 146,983 | $ | — | |||||||
Goodwill (at period end) | $ | 182,145 | $ | 182,145 | $ | — | $ | — | |||||||
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
Information contained in this Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such statements use forward-looking words such as “believe,” “plan,” “anticipate,” “continue,” “estimate,” “expect,” “may,” 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 that 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, consumer protection 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, and those factors set forth in Item 1A. Risk Factors in the Company’s 2015 Annual Report, 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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ANALYSIS OF RESULTS OF OPERATIONS
The following analyses compare our results of operations for the three months ended March 31, 2016 (“2016 three-month period”) with the three months ended March 31, 2015 (“2015 three-month period”) and the six months ended March 31, 2016 (“2016 six-month period”) with the six months ended March 31, 2015 (“2015 six-month period”). Our analyses of results of operations should be read in conjunction with the segment information included in Note 13 to the condensed consolidated financial statements.
2016 three-month period compared with 2015 three-month period
Three Months Ended March 31, | 2016 | 2015 | Increase (Decrease) | ||||||||||||
(Dollars in millions) | |||||||||||||||
Gas Utility: | |||||||||||||||
Revenues | $ | 298.1 | $ | 468.0 | $ | (169.9 | ) | (36.3 | )% | ||||||
Total margin (a) | $ | 174.4 | $ | 209.8 | $ | (35.4 | ) | (16.9 | )% | ||||||
Operating and administrative expenses | $ | 45.0 | $ | 57.1 | $ | (12.1 | ) | (21.2 | )% | ||||||
Operating income | $ | 111.0 | $ | 139.3 | $ | (28.3 | ) | (20.3 | )% | ||||||
Income before income taxes | $ | 102.2 | $ | 129.2 | $ | (27.0 | ) | (20.9 | )% | ||||||
System throughput — billions of cubic feet (“bcf”) | |||||||||||||||
Core market | 34.0 | 44.3 | (10.3 | ) | (23.3 | )% | |||||||||
Total | 72.1 | 81.0 | (8.9 | ) | (11.0 | )% | |||||||||
Heating degree days — % (warmer) colder than normal (b) | (9.7 | )% | 20.4 | % | — | — | |||||||||
Electric Utility: | |||||||||||||||
Revenues | $ | 24.0 | $ | 32.3 | $ | (8.3 | ) | (25.7 | )% | ||||||
Total margin (a) | $ | 8.9 | $ | 10.4 | $ | (1.5 | ) | (14.4 | )% | ||||||
Operating and administrative expenses | $ | 3.9 | $ | 5.6 | $ | (1.7 | ) | (30.4 | )% | ||||||
Operating income | $ | 3.5 | $ | 3.5 | $ | — | — | % | |||||||
Income before income taxes | $ | 3.1 | $ | 3.0 | $ | 0.1 | 3.3 | % | |||||||
Distribution sales — millions of kilowatt-hours (“gwh”) | 265.2 | 299.9 | (34.7 | ) | (11.6 | )% | |||||||||
(a) | Gas Utility’s total margin represents total revenues less total cost of sales. Electric Utility’s total margin represents total revenues less total cost of sales and revenue-related taxes, i.e. Electric Utility gross receipts taxes, of $1.3 million and $1.7 million during the three months ended March 31, 2016 and 2015, 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 2000-2014 based upon weather statistics provided by the National Oceanic and Atmospheric Administration for airports located within Gas Utility’s service territory. |
Gas Utility
Temperatures in Gas Utility’s service territory during the 2016 three-month period based upon heating degree days were 9.7% warmer than normal and 23.6% warmer than the 2015 three-month period. Core market volumes declined 10.3 bcf (23.3%) reflecting the effects of the significantly warmer weather. Total Gas Utility distribution system throughput decreased 8.9 bcf (11.0%) principally reflecting the lower core market volumes partially offset by higher interruptible delivery service volumes. Gas Utility’s core market customers comprise firm- residential, commercial and industrial (“retail core-market”) customers who purchase their gas from Gas Utility and, to a lesser extent, residential and small commercial customers who purchase their gas from alternate suppliers.
Gas Utility revenues decreased $169.9 million principally reflecting a decrease in core market revenues ($128.3 million), lower off-system sales revenues ($39.3 million), and, to a much lesser extent, lower delivery service revenues. The decrease in Gas Utility core market revenues reflects the effects of the lower core market throughput ($85.6 million) and lower average PGC rates ($42.7 million) during the 2016 three-month period. Because Gas Utility is subject to a reconcilable PGC recovery mechanism, increases or decreases in the actual cost of gas associated with customers who purchase their gas from Gas Utility impact revenues and cost of sales but have no direct effect on retail core-market margin (see Note 5 to condensed consolidated financial statements). Gas Utility cost of sales was $123.7 million in the 2016 three-month period compared with $258.2 million in the 2015 three-month
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period, a decrease of $134.5 million, principally reflecting the combined effects of the lower retail core-market volumes and lower average Gas Utility PGC rates ($96.3 million), and lower cost of sales associated with off-system sales ($39.3 million).
Gas Utility 2016 three-month period total margin decreased $35.4 million principally reflecting lower total margin from core market customers ($32.0 million) and lower total margin from delivery service customers. The decrease in Gas Utility core market margin reflects the lower core market throughput.
Gas Utility operating income and income before income taxes decreased $28.3 million and $27.0 million, respectively. The decreases in operating income and income before income taxes during the 2016 three-month period principally reflects the decrease in total margin ($35.4 million), higher depreciation expense ($1.3 million) and lower other operating income ($3.6 million) reflecting, among other things, lower margin from off-system sales and higher interest on deferred fuel overcollections. Partially offsetting these decreases in operating income was a $12.1 million decrease in operating and administrative expenses primarily reflecting lower preliminary stage expenses associated with a UGI Utilities information technology (“IT”) project and lower uncollectible accounts and system maintenance expenses. During the three months ended March 31, 2016, we determined that certain preliminary stage costs associated with the IT project were probable of future recovery in rates in accordance with GAAP related to rate regulated entities. As a result, Gas Utility capitalized $5.2 million of such IT costs that had been expensed in prior periods (including $1.2 million of such costs that had been expensed during the 2015 three-month period) and recorded associated increases to utility plant and regulatory assets (see Note 5 to condensed consolidated financial statements). The change in Gas Utility income before income taxes also reflects lower interest expense principally due to lower average long-term debt outstanding.
Electric Utility
Temperatures based upon heating degree days during the 2016 three-month period were approximately 12.1% warmer than normal and approximately 24.3% warmer than the prior-year period. Total kilowatt-hour sales decreased by 11.6% principally reflecting the impact of the warmer weather on heating-related sales. The lower Electric Utility revenues principally resulted from the lower sales volumes and lower DS rates in the 2016 three-month period. Because Electric Utility is subject to reconcilable DS recovery mechanisms, increases or decreases in the actual cost of electricity associated with customers who purchase their electricity from Electric Utility impact revenues and cost of sales but have no direct effect on Electric Utility margin. Electric Utility cost of sales decreased to $13.7 million in the 2016 three-month period from $20.2 million in the 2015 three-month period, reflecting the lower volumes sold and lower DS rates.
Electric Utility total margin decreased $1.5 million principally reflecting the lower volume sales as a result of the warmer 2016 three-month period weather.
Notwithstanding the decrease in total margin, Electric Utility operating income and income before income taxes in the 2016 three-month period were about equal to the prior-year period reflecting a decrease in operating and administrative expenses principally reflecting lower IT preliminary stage expenses. As previously mentioned, during the three months ended March 31, 2016, we determined that certain preliminary stage costs associated with the IT project were probable of future recovery in rates in accordance with GAAP related to rate regulated entities. As a result, Electric Utility capitalized $0.6 million of such IT costs that had been expensed in prior periods (including $0.1 million of such costs that had been expensed during the 2015 three-month period).
Interest Expense and Income Taxes
Our interest expense in the 2016 three-month period decreased principally reflecting lower average long-term debt outstanding. Our effective income tax rate for the three months ended March 31, 2016 was comparable with the prior-year three-month period.
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2016 six-month period compared with 2015 six-month period
Six Months Ended March 31, | 2016 | 2015 | Decrease | ||||||||||||
(Dollars in millions) | |||||||||||||||
Gas Utility: | |||||||||||||||
Revenues | $ | 475.0 | $ | 728.5 | $ | (253.5 | ) | (34.8 | )% | ||||||
Total margin (a) | $ | 287.1 | $ | 343.1 | $ | (56.0 | ) | (16.3 | )% | ||||||
Operating and administrative expenses | $ | 90.4 | $ | 102.1 | $ | (11.7 | ) | (11.5 | )% | ||||||
Operating income | $ | 156.8 | $ | 211.1 | $ | (54.3 | ) | (25.7 | )% | ||||||
Income before income taxes | $ | 138.9 | $ | 190.9 | $ | (52.0 | ) | (27.2 | )% | ||||||
System throughput — billions of cubic feet (“bcf”) | |||||||||||||||
Core market | 51.4 | 67.5 | (16.1 | ) | (23.9 | )% | |||||||||
Total | 122.0 | 137.8 | (15.8 | ) | (11.5 | )% | |||||||||
Heating degree days — % (warmer) colder than normal (b) | (16.1 | )% | 10.6 | % | — | — | |||||||||
Electric Utility: | |||||||||||||||
Revenues | $ | 45.0 | $ | 58.7 | $ | (13.7 | ) | (23.3 | )% | ||||||
Total margin (a) | $ | 17.6 | $ | 19.5 | $ | (1.9 | ) | (9.7 | )% | ||||||
Operating and administrative expenses | $ | 8.7 | $ | 9.6 | $ | (0.9 | ) | (9.4 | )% | ||||||
Operating income | $ | 6.0 | $ | 7.2 | $ | (1.2 | ) | (16.7 | )% | ||||||
Income before income taxes | $ | 5.1 | $ | 6.2 | $ | (1.1 | ) | (17.7 | )% | ||||||
Distribution sales — millions of kilowatt-hours (“gwh”) | 490.3 | 544.7 | (54.4 | ) | (10.0 | )% | |||||||||
(a) | Gas Utility’s total margin represents total revenues less total cost of sales. Electric Utility’s total margin represents total revenues less total cost of sales and revenue-related taxes, i.e. Electric Utility gross receipts taxes, of $2.4 million and $3.2 million during the six months ended March 31, 2016 and 2015, respectively. For financial statement purposes, revenue-related taxes are included in taxes other than income taxes on the Condensed Consolidated Statements of Income. |
(b) | Deviation from average heating degree days for the 15-year period 2000-2014 based upon weather statistics provided by the National Oceanic and Atmospheric Administration for airports located within Gas Utility’s service territory. |
Gas Utility
Temperatures in Gas Utility’s service territory during the 2016 six-month period based upon heating degree days were 16.1% warmer than normal and 23.4% warmer than the 2015 six-month period. In particular, Gas Utility temperatures in the critical heating-season month of December were 37% warmer than normal. Core market volumes declined 16.1 bcf (23.9%) reflecting the effects of the significantly warmer weather. Total Gas Utility distribution system throughput decreased 15.8 bcf (11.5%) principally reflecting the lower core market volumes.
Gas Utility revenues decreased $253.5 million principally reflecting a decrease in core market revenues ($200.3 million), lower off-system sales revenues ($48.7 million) and, to a much lesser extent, lower large firm delivery service revenues. The decrease in Gas Utility core market revenues reflects the effects of the lower core market throughput ($138.2 million) and lower average PGC rates during the 2016 six-month period ($62.0 million). Gas Utility cost of sales was $187.9 million in the 2016 six-month period compared with $385.4 million in the 2015 six-month period principally reflecting the combined effects of the lower Gas Utility retail core-market volumes sold and lower average Gas Utility PGC rates ($149.5 million) and lower cost of sales associated with off-system sales ($48.7 million).
Gas Utility 2016 six-month period total margin decreased $56.0 million principally reflecting lower Gas Utility total margin from core market customers ($50.8 million) and lower total margin from large firm delivery service customers. The decrease in Gas Utility core market margin reflects the lower core market throughput.
Gas Utility operating income and income before income taxes decreased $54.3 million and $52.0 million, respectively. The decreases in operating income and income before income taxes during the 2016 six-month period principally reflects the decrease in total margin ($56.0 million), higher depreciation expense ($2.6 million) and lower other operating income ($7.4 million) which includes, among other things, higher environmental matters expense ($3.9 million), higher interest on PGC overcollections and lower margin from off-system sales. Gas Utility operating and administrative expenses were $11.7 million lower than the prior-year period primarily reflecting lower preliminary stage expenses associated with a UGI Utilities IT project and, to a lesser extent,
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lower uncollectible accounts and system maintenance expenses. As previously mentioned, during the three months ended March 31, 2016, we determined that certain preliminary stage costs associated with the IT project were probable of future recovery in rates in accordance with GAAP related to rate regulated entities. As a result, during the six months ended March 31, 2016, Gas Utility capitalized $4.8 million of such IT costs that had been expensed in prior periods (including $2.1 million of such costs that had been expensed during the 2015 six-month period). Income before income taxes also reflects lower interest expense principally due to lower average long-term debt outstanding.
Electric Utility
Temperatures based upon heating degree days during the 2016 six-month period were approximately 18.4% warmer than normal and approximately 23.5% warmer than the prior-year period. Total kilowatt-hour sales decreased by 10.0% principally reflecting the impact of the warmer weather on heating-related sales. The lower Electric Utility revenues principally resulted from the lower sales and lower DS recovery mechanism rates in the 2016 six-month period. Because Electric Utility is subject to reconcilable DS recovery mechanisms, increases or decreases in the actual cost of electricity associated with customers who purchase their electricity from Electric Utility impact revenues and cost of sales but have no direct effect on Electric Utility margin. Electric Utility cost of sales decreased to $24.9 million in the 2016 six-month period from $36.0 million in the 2015 six-month period, reflecting the lower volumes sold and lower DS rates.
Electric Utility total margin, net of gross receipts taxes, decreased $1.9 million principally reflecting the lower volume sales as a result of the warmer 2016 six-month period weather.
Electric Utility operating income and income before income taxes in the 2016 six-month period each decreased $1.2 million and $1.1 million, respectively, reflecting the decrease in total margin partially offset by lower net operating and administrative expenses including lower preliminary stage expenses associated with an IT project. During the six months ended March 31, 2016, Electric Utility capitalized $0.5 million of such IT costs that had been expensed in prior periods (including $0.2 million of such costs that had been expensed during the 2015 six-month period).
Interest Expense and Income Taxes
Our interest expense in the 2016 six-month period decreased principally reflecting lower average long-term debt outstanding. Our effective income tax rate for the six months ended March 31, 2016 was comparable with the prior-year six-month period.
FINANCIAL CONDITION AND LIQUIDITY
We depend on both internal and external sources of liquidity to provide funds for working capital and to fund capital requirements. Our short-term cash requirements not met by cash from operations are generally satisfied with borrowings under credit facilities.
UGI Utilities’ total debt outstanding at March 31, 2016, was $705.0 million, which includes $155.0 million of short-term borrowings, compared with total debt outstanding of $693.7 million at September 30, 2015, which includes $71.7 million of short-term borrowings. Total long-term debt outstanding at March 31, 2016, comprises $450.0 million of Senior Notes and $100.0 million of Medium-Term Notes.
In April 2016, UGI Utilities entered into a Note Purchase Agreement (the “2016 Note Purchase Agreement”) which provides for the private placement of (1) $100 million aggregate principal amount of 2.95% Senior Notes due June 30, 2026; (2) $200 million aggregate principal amount of 4.12% Senior Notes due September 30, 2046; and (3) $100 million aggregate principal amount of 4.12% Senior Notes due October 31, 2046. These Senior Notes are expected to be issued in June 2016, September 2016 and October 2016, respectively. These Senior Notes, when issued, will be unsecured and will rank equally with UGI Utilities’ existing outstanding senior debt. The Company expects to use the net proceeds from the issuance of the Senior Notes to refinance existing debt and for general corporate purposes. Because UGI Utilities intends to use a portion of the net proceeds from the issuance of $200 million Senior Notes in September 2016 to repay UGI Utilities’ currently outstanding $175 million principal amount of 5.75% Senior Notes due September 30, 2016, the 5.75% Senior Notes have been classified as long-term on the March 31, 2016, Condensed Consolidated Balance Sheet.
On March 31, 2016, concurrent with the pricing of the Senior Notes to be issued under the 2016 Note Purchase Agreement, UGI Utilities agreed to settle all of its then-existing IRPA contracts associated with such debt at a loss of $36.0 million (which amount was paid in early April 2016 and is included in other current liabilities on the March 31, 2016 Condensed Consolidated Balance Sheet). Because these IRPA contracts qualified for and were designated as cash flow hedges, the loss recognized in connection with the settled IRPAs has been recorded in AOCI and will be recognized in interest expense as future interest expense impacts earnings.
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UGI Utilities has an unsecured revolving credit agreement (the “UGI Utilities 2015 Credit Agreement”) with a group of banks providing for borrowings up to $300 million (including a $100 million sublimit for letters of credit). Borrowings under the UGI Utilities 2015 Credit Agreement are classified as short-term borrowings on the Condensed Consolidated Balance Sheets. During the 2016 and 2015 six-month periods, average daily short-term borrowings under the UGI Utilities 2015 Credit Agreement and a predecessor agreement were $177.6 million and $108.9 million, respectively, and peak short-term borrowings totaled $232.0 million and $163.6 million, respectively. At March 31, 2016, UGI Utilities’ available borrowing capacity under the UGI Utilities 2015 Credit Agreement was $143 million. Peak short-term borrowings typically occur during the heating season months of December and January when UGI Utilities’ investment in working capital, principally accounts receivable and inventories, is generally greatest.
During the 2016 six-month period, UGI Utilities repaid $72 million of maturing Medium-Term Notes. UGI Utilities used borrowings under the UGI Utilities 2015 Credit Agreement and existing cash balances to fund such repayments.
We believe that we have sufficient liquidity in the forms of cash and cash equivalents on hand, cash expected to be generated from Gas Utility and Electric Utility operations, short-term borrowings available under the UGI Utilities 2015 Credit Agreement and the ability to refinance long-term debt as it matures to meet our anticipated contractual and projected cash commitments.
Cash Flows
Operating activities. Due to the seasonal nature of UGI Utilities’ businesses, cash flows from our operating activities are generally greatest 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 Company’s investment in working capital, principally accounts receivable and inventories, is generally greatest. UGI Utilities uses borrowings under the UGI Utilities 2015 Credit Agreement to manage seasonal cash flow needs.
Cash provided by operating activities was $152.4 million in the 2016 six-month period compared to $197.2 million in the prior-year period. Cash flow from operating activities before changes in operating working capital was $177.0 million in the 2016 six-month period compared to $147.1 million recorded in the prior-year period. Changes in operating working capital used $24.6 million of operating cash flow during the 2016 six-month period compared to $50.0 million of cash provided during the prior-year period. The lower cash used for changes in accounts receivable, and the lower cash provided by changes in accounts payable and inventories, reflects in large part the impact on these items from declines in natural gas costs and the lower volumes resulting from the warmer weather. In addition, changes in working capital include net refunds of UGI Utilities purchased gas and electricity costs of $7.8 million compared with net overcollections of such costs in the prior-year six-month period of $55.8 million. During the 2015 six-month period, changes in operating working capital also included higher cash flow from changes in accrued income taxes.
Investing activities. Cash used by investing activities was $119.2 million in the 2016 six-month period compared to $107.7 million in the 2015 six-month period. Total cash capital expenditures were $116.8 million in the 2016 six-month period compared with $102.0 million recorded in the prior-year period. The increase in cash capital expenditures during the 2016 six-month period principally reflects higher Gas Utility maintenance and betterment capital expenditures. Changes in restricted cash in futures brokerage accounts provided $2.7 million of cash in the 2016 six-month period compared with cash used of $2.0 million in the prior-year period.
Financing activities. Cash used by financing activities was $9.9 million in the 2016 six-month period compared with $85.8 million in the 2015 six-month period. Financing activity cash flows are primarily the result of net borrowings and repayments under revolving credit agreements, net borrowings and repayments of long-term debt and cash dividends paid to UGI. During the 2016 six-month period there were net credit agreement borrowings of $83.3 million compared with net credit agreement repayments of $55.8 million during the prior-year period. During the 2016 six-month period, UGI Utilities repaid $72.0 million of maturing Medium-Term Notes. UGI Utilities used borrowings under the UGI Utilities 2015 Credit Agreement and existing cash balances to fund these repayments. UGI Utilities expects to issue long-term debt under the 2016 Note Purchase Agreement later in Fiscal 2016 to refinance these and other scheduled debt repayments on a long-term basis. Cash dividends in the 2016 six-month period totaled $22.0 million compared to cash dividends of $30.6 million in the prior-year period.
REGULATORY MATTERS
Preliminary Stage Information Technology Costs. During the three months ended March 31, 2016, it was determined that certain preliminary project stage costs associated with an ongoing information technology project at UGI Utilities were probable of future recovery in rates in accordance with GAAP related to regulated entities. As a result, during the three months ended March 31,
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2016, we capitalized $5.8 million of such project costs, substantially all of which had been expensed in prior periods, and recorded associated increases to utility property, plant and equipment and regulatory assets (see Note 5 to condensed consolidated financial statements).
UGI Gas Base Rate Filing. On January 19, 2016, UGI Utilities filed a request with the PUC to increase UGI Gas base operating revenues for residential, commercial and industrial customers by $58.6 million annually. The increased revenues would fund ongoing system improvements and operations necessary to maintain safe and reliable natural gas service and fund new programs designed to promote and reward customers’ efforts to increase efficient use of natural gas. UGI Utilities requested that the new gas rates become effective March 19, 2016. The PUC entered an Order dated February 11, 2016, suspending the effective date for the rate increase to allow for investigation and public hearings. Unless a settlement is reached sooner, this review process is expected to last approximately nine months from the date of filing; however, the Company cannot predict the timing or the ultimate outcome of the rate case review process.
Distribution System Improvement Charge. On April 14, 2012, legislation became effective enabling gas and electric utilities in Pennsylvania, under certain circumstances, to recover the cost of eligible capital investment in distribution system infrastructure improvement projects between base rate cases. The charge enabled by the legislation is known as a distribution system improvement charge (“DSIC”). The primary benefit to a company from a DSIC charge is the elimination of regulatory lag, or delayed rate recognition, that occurs under traditional ratemaking relating to qualifying capital expenditures. To be eligible for a DSIC, a utility must have filed a general rate filing within five years of its petition seeking permission to include a DSIC in its tariff, and not exceed certain earnings tests. Absent PUC permission, the DSIC is capped at five percent of the amount billed to customers. PNG and CPG received PUC approval on a DSIC tariff, initially set at zero, in 2014, while UGI Gas has not had a general rate filing within the required time period to be eligible. PNG and CPG began charging a DSIC at a rate other than zero beginning on April 1, 2015 and April 1, 2016, respectively. In March 2016, PNG and CPG filed petitions, seeking approval to increase the maximum allowable DSIC from five percent to ten percent of billed distribution revenues. Also in March 2016, UGI Gas sought PUC approval to initiate a DSIC effective November 2017 after rates from the pending rate case become effective, along with a petition, seeking approval to increase the maximum allowable DSIC from five percent to ten percent of billed distribution revenues. To date, no action has been taken by the PUC on any of these petitions. The Company cannot predict the timing or outcome of these petitions. The impact of the DSIC charge at PNG and CPG did not have a material effect on Gas Utility results of operations.
UGI Gas Consent Order and Agreement. UGI Utilities’ UGI Gas division has negotiated a Consent Order and Agreement (“UGI Gas-COA”) with the DEP and is awaiting execution thereof. The UGI Gas-COA would be effective October 1, 2016 and would be scheduled to terminate in September 2031. The UGI Gas-COA would require UGI Gas to perform a specified level of activities associated with environmental investigation and remediation work at certain properties in Pennsylvania on which MGP related facilities were operated (“UGI Gas MGP Properties”). Under this agreement, required environmental expenditures related to the UGI Gas MGP Properties would be capped at $2.5 million in any calendar year. At March 31, 2016, our estimated accrued liabilities for environmental investigation and remediation costs related to the UGI Gas-COA totaled $43.8 million. UGI Gas has recorded associated regulatory assets for these costs because recovery of these costs from customers is probable (See Note 7 to condensed consolidated financial statements).
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risk exposures are (1) commodity price risk and (2) interest rate risk. 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.
Commodity Price Risk
Gas Utility’s tariffs contain clauses that permit recovery of all of the prudently incurred costs of natural gas it sells to its customers, including the cost of financial instruments used to hedge purchased gas costs. 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 our Gas Utility operations. Gas Utility uses derivative financial instruments including natural gas futures and option contracts traded on the NYMEX to reduce volatility in the cost of gas it purchases for its retail core-market customers. The cost of these derivative financial instruments, net of any associated gains or losses, is included in Gas Utility’s PGC recovery mechanism. The change in market value of natural gas futures contracts can require daily deposits of cash in futures accounts. At March 31, 2016 and 2015, the fair values of our natural gas futures and option contracts were losses of $1.9 million and $3.4 million, respectively.
Electric Utility’s DS tariffs contain clauses which permit recovery of all prudently incurred power costs, including the cost of financial instruments used to hedge electricity costs, through the application of DS rates. Because of this ratemaking mechanism, there is limited power cost risk, including the cost of FTRs and forward electricity purchase contracts, associated with our Electric Utility operations. At March 31, 2016 and 2015, the fair values of Electric Utility’s electricity supply contracts not accounted for as NPNS were losses of $0.2 million and $1.2 million, respectively. At March 31, 2016 and 2015, the fair values of FTRs were not material.
In addition, 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 operating expenses and other income.
At March 31, 2016, UGI Utilities had $3.9 million of restricted cash in commodity brokerage accounts. At March 31, 2015, UGI Utilities had $5.6 million of restricted cash in commodity brokerage accounts.
Interest Rate Risk
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 IRPAs. There were no unsettled IRPAs outstanding at March 31, 2016 and 2015.
ITEM 4. CONTROLS AND PROCEDURES
(a) | Evaluation of Disclosure Controls and Procedures |
The Company’s disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by the Company in reports filed or submitted under the Securities Exchange Act of 1934, as amended, is (i) recorded, processed, summarized, and reported within the time periods specified in the SEC’s 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 required disclosure. 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 effective at the reasonable assurance level.
(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.
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PART II OTHER INFORMATION
ITEM 1A. RISK FACTORS
In addition to the 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, 2015, 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):
Exhibit No. | Exhibit | Registrant | Filing | Exhibit |
4.1 | Form of Note Purchase Agreement dated April 22, 2016 between the Company and the purchasers listed as signatories thereto. | Utilities | Form 8-K (4/22/16) | 4.1 |
10.1 | Form of UGI Corporation 2013 Omnibus Incentive Compensation Plan Performance Unit Grant Letter for UGI Utilities Employees, dated January 1, 2016. | |||
10.2 | Form of UGI Corporation 2013 Omnibus Incentive Compensation Plan Nonqualified Stock Option Grant Letter for UGI Utilities Employees, dated January 1, 2016. | |||
12.1 | Computation of ratio of earnings to fixed charges | |||
31.1 | Certification by the Chief Executive Officer relating to the Registrant’s Report on Form 10-Q for the quarter ended March 31, 2016, 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, 2016, 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, 2016, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |||
101.INS | XBRL Instance | |||
101.SCH | XBRL Taxonomy Extension Schema | |||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase | |||
101.DEF | XBRL Taxonomy Extension Definition Linkbase | |||
101.LAB | XBRL Taxonomy Extension Labels Linkbase | |||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase | |||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
UGI Utilities, Inc. (Registrant) | ||||
Date: | May 6, 2016 | By: | /s/ Daniel J. Platt | |
Daniel J. Platt Vice President - Finance and Chief Financial Officer | ||||
Date: | May 6, 2016 | By: | /s/ Ann P. Kelly | |
Ann P. Kelly Controller | ||||
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EXHIBIT INDEX
10.1 | Form of UGI Corporation 2013 Omnibus Incentive Compensation Plan Performance Unit Grant Letter for UGI Utilities Employees, dated January 1, 2016. |
10.2 | Form of UGI Corporation 2013 Omnibus Incentive Compensation Plan Nonqualified Stock Option Grant Letter for UGI Utilities Employees, dated January 1, 2016. |
12.1 | Computation of ratio of earnings to fixed charges. |
31.1 | Certification by the Chief Executive Officer relating to the Registrant’s Report on Form 10-Q for the quarter ended March 31, 2016, 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, 2016, 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, 2016, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
101.INS | XBRL Instance |
101.SCH | XBRL Taxonomy Extension Schema |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase |
101.DEF | XBRL Taxonomy Extension Definition Linkbase |
101.LAB | XBRL Taxonomy Extension Labels Linkbase |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase |
Exhibit 10.1
Utilities Employees
UGI CORPORATION
2013 OMNIBUS INCENTIVE COMPENSATION PLAN
FORM OF PERFORMANCE UNIT GRANT LETTER
2013 OMNIBUS INCENTIVE COMPENSATION PLAN
FORM OF PERFORMANCE UNIT GRANT LETTER
This PERFORMANCE UNIT GRANT, dated January 1, 2016 (the “Date of Grant”), is delivered by UGI Corporation (“UGI”) to you (the “Participant”).
RECITALS
The UGI Corporation 2013 Omnibus Incentive Compensation Plan (the “Plan”) provides for the grant of performance units (“Performance Units”) with respect to shares of common stock of UGI (“Shares”). The Compensation and Management Development Committee of the Board of Directors of UGI (the “Committee”) has decided to grant Performance Units to the Participant. The Participant’s portal in the Morgan Stanley website for Plan participants (the “Grant Summary”) sets forth the number of Performance Units granted to the Participant with respect to this grant.
NOW, THEREFORE, the parties to this Grant Letter, intending to be legally bound hereby, agree as follows:
1.Grant of Performance Units. Subject to the terms and conditions set forth in this Grant Letter and in the Plan, the Committee hereby grants to the Participant a target award of the number of Performance Units specified in the Grant Summary (the “Target Award”). The Performance Units are contingently awarded and will be earned and payable if and to the extent that the Performance Goals (defined below) and other conditions of the Grant Letter are met. The Performance Units are granted with Dividend Equivalents (as defined in Section 7).
2. Performance Goals.
(a) The Participant shall earn the right to payment of the Performance Units if the Performance Goals are met for the Performance Period, and if the Participant continues to be employed by, or provide service to, the Company (as defined in Section 7) through December 31, 2018. The Performance Period is the period beginning January 1, 2016 and ending December 31, 2018. The Total Shareholder Return (“TSR”) goals and other requirements of this Section 2 are referred to as the “Performance Goals.”
(b) The Target Award level of Performance Units and Dividend Equivalents will be payable if UGI’s TSR equals the median TSR of the comparison group designated by the Committee (the “Peer Group”) for the Performance Period. The Peer Group is the group of companies that comprises the Russell Midcap Utilities Index, excluding telecommunications companies, as of the beginning of the Performance Period, as set forth on the attached Exhibit A, and as described herein. If a company is added to the Russell Midcap Utilities Index during the
Performance Period, that company is not included in the TSR calculation. A company that is included in the Russell Midcap Utilities Index at the beginning of the Performance Period will be removed from the TSR calculation only if the company ceases to exist as a publicly traded company during the Performance Period (including by way of a merger or similar transaction in which the company is not the surviving company), consistent with the methodology described in subsection (c) below. Companies that are designated at the beginning of the Performance Period as telecommunications companies in the Russell Midcap Utilities Index shall be excluded from the TSR calculation. The actual amount of the award of Performance Units may be higher or lower than the Target Award, or it may be zero, based on UGI’s TSR percentile rank relative to the companies in the Peer Group, as follows:
UGI’s TSR Rank Percentage of Target Award Earned
(Percentile)
(Percentile)
90th 200%
75th 162.5%
60th 125%
50th 100%
40th 70%
25th 25%
Less than 25th 0%
The award percentage earned will be interpolated between each of the measuring points.
(c) TSR shall be calculated by UGI using the comparative returns methodology used by Bloomberg L.P. or its successor at the time of the calculation. The share price used for determining TSR at the beginning and the end of the Performance Period will be the average price for the calendar quarter preceding the beginning of the Performance Period (i.e., the calendar quarter ending on December 31, 2015) and the calendar quarter ending on the last day of the Performance Period (i.e., the calendar quarter ending on December 31, 2018), respectively. The TSR calculation gives effect to all dividends throughout the three-year Performance Period as if they had been reinvested.
(d) The Target Award is the amount designated for 100% (50th TSR rank) performance. The Participant can earn up to 200% of the Target Award if UGI’s TSR percentile rank exceeds the 50th TSR percentile rank, according to the foregoing schedule.
(e) At the end of the Performance Period, the Committee will determine whether and to what extent the Performance Goals have been met and the amount to be paid with respect to the Performance Units. Except as described in Sections 3 and 6 below, the Participant must be employed by, or providing service to, the Company on December 31, 2018 in order for the Participant to receive payment with respect to the Performance Units.
3. Termination of Employment or Service.
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(a) Except as described below, if the Participant ceases to be employed by, or provide services to, the Company before December 31, 2018, the Performance Units and all Dividend Equivalents credited under this Grant Letter will be forfeited.
(b) If the Participant terminates employment or service on account of Retirement (as defined in Section 7), Disability (as defined in Section 7) or death, the Participant will earn a pro-rata portion of the Participant’s outstanding Performance Units and Dividend Equivalents, if the Performance Goals and the requirements of this Grant Letter are met. The prorated portion will be determined as the amount that would otherwise be paid after the end of the Performance Period, based on achievement of the Performance Goals, multiplied by a fraction, the numerator of which is the number of calendar years during the Performance Period in which the Participant has been employed by, or provided service to, the Company and the denominator of which is three. For purposes of the proration calculation, the calendar year in which the Participant’s termination of employment or service on account of Retirement, Disability, or death occurs will be counted as a full year.
(c) In the event of termination of employment or service on account of Retirement, Disability or death, the prorated amount shall be paid after the end of the Performance Period, pursuant to Section 4 below, except as provided in Section 6.
4. Payment with Respect to Performance Units. If the Committee determines that the conditions to payment of the Performance Units have been met, the Company shall pay to the Participant (i) Shares equal to the number of Performance Units to be paid according to achievement of the Performance Goals, up to the Target Award, provided that the Company may withhold Shares to cover required tax withholding in an amount equal to the minimum statutory tax withholding requirement in respect of the Performance Units earned up to the Target Award, and (ii) cash in an amount equal to the Fair Market Value (as defined in the Plan) of the number of Shares equal to the Performance Units to be paid in excess of the Target Award, subject to applicable tax withholding. Payment shall be made between January 1, 2019 and March 15, 2019, except as provided in Section 6 below.
5. Dividend Equivalents with Respect to Performance Units.
(a) Dividend Equivalents shall accrue with respect to Performance Units and shall be payable subject to the same Performance Goals and terms as the Performance Units to which they relate. Dividend Equivalents shall be credited with respect to the Target Award of Performance Units from the Date of Grant until the payment date. If and to the extent that the underlying Performance Units are forfeited, all related Dividend Equivalents shall also be forfeited.
(b) While the Performance Units are outstanding, the Company will keep records of Dividend Equivalents in a bookkeeping account for the Participant. On each payment date for a dividend paid by UGI on its common stock, the Company shall credit to the Participant’s account an amount equal to the Dividend Equivalents associated with the Target Award of Performance Units held by the Participant on the record date for the dividend. No interest will be credited to any such account.
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(c) The target amount of Dividend Equivalents (100% of the Dividend Equivalents credited to the Participant’s account) will be earned if UGI’s TSR rank is at the 50th TSR percentile rank for the Performance Period. The Participant can earn up to 200% of the target amount of Dividend Equivalents if UGI’s TSR percentile rank exceeds the 50th TSR rank, according to the schedule in Section 2 above. Except as described in Section 3(b) above, or Section 6, if the Participant’s employment or service with the Company terminates before December 31, 2018, all Dividend Equivalents will be forfeited.
(d) Dividend Equivalents will be paid in cash at the same time as the underlying Performance Units are paid, after the Committee determines that the conditions to payment have been met. Notwithstanding anything in this Grant Letter to the contrary, the Participant may not accrue Dividend Equivalents in excess of $1,000,000 during any calendar year under all grants under the Plan.
6. Change of Control.
(a) If a Change of Control occurs, the Performance Units and Dividend Equivalents shall not automatically become payable upon the Change of Control, but, instead, shall become payable as described in this Section 6. The Committee may take such other actions with respect to the Performance Units and Dividend Equivalents as it deems appropriate pursuant to the Plan. For Participants who are employees of UGI Utilities, Inc. (“Utilities”) or a subsidiary of Utilities, the term “Change of Control” shall mean (i) a Change of Control of UGI as defined in the Plan, or (ii) one of the events set forth on Exhibit B with respect to Utilities.
(b) If a Change of Control occurs during the Performance Period, the Committee shall calculate a Change of Control Amount as follows:
(i) The Performance Period shall end as of the closing date of the Change of Control (the “Change of Control Date”) and the TSR ending date calculation for the Performance Period shall be based on the 90 calendar day period ending on the Change of Control Date.
(ii) The Committee shall calculate a “Change of Control Amount” equal to the greater of (i) the Target Award amount or (ii) the amount of Performance Units that would be payable based on the Company’s achievement of the Performance Goals as of the Change of Control Date, as determined by the Committee. The Change of Control Amount shall include related Dividend Equivalents and, if applicable, interest as described below.
(iii) The Committee shall determine whether the Change of Control Amount attributable to Performance Units shall be (A) converted to units with respect to shares or other equity interests of the acquiring company or its parent (“Successor Units”), in which case Dividend Equivalents shall continue to be credited on the Successor Units, or (B) valued based on the Fair Market Value of the Performance Units as of the Change of Control Date and credited to a bookkeeping account for the Participant, in which case interest shall be credited on the amount so determined at a market rate for the period
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between the Change of Control Date and the applicable payment date. Notwithstanding the provisions of Section 4, all payments on and after a Change of Control shall be made in cash. If alternative (A) above is used, the cash payment shall equal the Fair Market Value on the date of payment of the number of shares or other equity interests underlying the Successor Units, plus accrued Dividend Equivalents. All payments shall be subject to applicable tax withholding.
(c) If a Change of Control occurs during the Performance Period and the Participant continues in employment or service through December 31, 2018, the Change of Control Amount shall be paid in cash between January 1, 2019 and March 15, 2019.
(d) If a Change of Control occurs during the Performance Period, and the Participant has a Termination without Cause or a Good Reason Termination upon or within two years after the Change of Control Date and before December 31, 2018, the Change of Control Amount shall be paid in cash within 30 days after the Participant’s separation from service, subject to Section 13 below.
(e) If a Change of Control occurs during the Performance Period, and the Participant terminates employment or service on account of Retirement, Disability or death upon or after the Change of Control Date and before December 31, 2018, the Change of Control Amount shall be paid in cash within 30 days after the Participant’s separation from service, subject to Section 13 below; provided that, if required by section 409A, if the Participant’s Retirement, Disability or death occurs more than two years after the Change of Control Date, payment will be made between January 1, 2019 and March 15, 2019, and not upon the earlier separation from service.
(f) If a Participant’s employment or service terminates on account of Retirement, death or Disability before a Change of Control, and a Change of Control subsequently occurs before the end of the Performance Period, the prorated amount in Section 3(b) shall be calculated by multiplying the fraction described in Section 3(b) by the Change of Control Amount. The prorated Change of Control Amount shall be paid in cash within 30 days after the Change of Control Date, subject to Section 13 below.
7. Definitions. For purposes of this Grant Letter, the following terms will have the meanings set forth below:
(a) “Company” means UGI and its Subsidiaries (as defined in the Plan).
(b) “Disability” means a long-term disability as defined in the Company’s long-term disability plan applicable to the Participant.
(c) “Dividend Equivalent” means an amount determined by multiplying the number of shares of UGI common stock subject to the target award of Performance Units by the per-share cash dividend, or the per-share fair market value of any dividend in consideration other than cash, paid by UGI on its common stock.
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(d) “Employed by, or provide service to, the Company” shall mean employment or service as an employee or director of the Company. The Participant shall not be considered to have a termination of employment or service under this Grant Letter until the Participant is no longer employed by, or performing services for, the Company.
(e) “Good Reason Termination” shall mean a termination of employment or service initiated by the Participant upon or after a Change of Control upon one or more of the following events:
(i) a material diminution in the authority, duties or responsibilities held by the Participant immediately prior to the Change of Control;
(ii) a material diminution in the Participant’s base salary as in effect immediately prior to the Change of Control; or
(iii) a material change in the geographic location at which the Participant must perform services (which, for purposes of this Agreement, means the Participant is required to report, other than on a temporary basis (less than 12 months), to a location which is more than 50 miles from the Participant’s principal place of business immediately before the Change of Control, without the Participant’s express written consent).
Notwithstanding the foregoing, the Participant shall be considered to have a Good Reason Termination only if the Participant provides written notice to the Company, pursuant to Section 15, specifying in reasonable detail the events or conditions upon which the Participant is basing such Good Reason Termination and the Participant provides such notice within 90 days after the event that gives rise to the Good Reason Termination. Within 30 days after notice has been provided, the Company shall have the opportunity, but shall have no obligation, to cure such events or conditions that give rise to the Good Reason Termination. If the Company does not cure such events or conditions within the 30-day period, the Participant may terminate employment or service with the Company based on Good Reason Termination within 30 days after the expiration of the cure period.
Notwithstanding the foregoing, if the Participant has in effect a Change in Control Agreement with the Company or an Affiliate, the term “Good Reason Termination” shall have the meaning given that term in the Change in Control Agreement.
(f) “Performance Unit” means a hypothetical unit that represents the value of one share of UGI common stock.
(g) Retirement” means the Participant’s retirement under the Retirement Income Plan for Employees of UGI Utilities, Inc., if the Participant is covered by that Retirement Income Plan. “Retirement” for other Company employees means termination of employment or service after attaining (i) age 55 with ten or more years of service with the Company or (ii) age 65 with five or more years of service with the Company.
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(h) “Termination without Cause” means termination of employment or service by the Company for the convenience of the Company for any reason other than (i) theft or misappropriation of funds or conduct that has an adverse effect on the reputation of the Company, (ii) conviction of a felony or a crime involving moral turpitude, (iii) material breach of the Company’s written code of conduct, or other material written employment policies, applicable to the Participant, (iv) breach of any written confidentiality, non-competition or non-solicitation covenant between the Participant and the Company, (v) gross misconduct in the performance of duties, or (vi) intentional refusal or failure to perform the material duties of the Participant’s position.
8. Withholding. All payments under this Grant Letter are subject to applicable tax withholding. The Participant shall be required to pay to the Company, or make other arrangements satisfactory to the Company to provide for the payment of, any federal (including FICA), state, local or other taxes that the Company is required to withhold with respect to the payments under this Grant Letter. The Company may withhold from cash distributions to cover required tax withholding, or may withhold Shares to cover required tax withholding in an amount equal to the minimum applicable tax withholding amount.
9. Grant Subject to Plan Provisions and Company Policies.
(a) This grant is made pursuant to the Plan, which is incorporated herein by reference, and in all respects shall be interpreted in accordance with the Plan. The grant and payment of Performance Units and Dividend Equivalents are subject to interpretations, regulations and determinations concerning the Plan established from time to time by the Committee in accordance with the provisions of the Plan, including, but not limited to, provisions pertaining to (i) the registration, qualification or listing of the Shares, (ii) adjustments pursuant to Section 5(d) of the Plan, and (iii) other requirements of applicable law. The Committee shall have the authority to interpret and construe the grant pursuant to the terms of the Plan, and its decisions shall be conclusive as to any questions arising hereunder.
(b) This Performance Unit grant and Shares issued pursuant to this Performance Unit grant shall be subject to the UGI Corporation Stock Ownership Policy as adopted by the Board of Directors of UGI and any applicable clawback and other policies implemented by the Board of Directors of UGI, as in effect from time to time.
10. No Employment or Other Rights. The grant of Performance Units shall not confer upon the Participant any right to be retained by or in the employ or service of the Company and shall not interfere in any way with the right of the Company to terminate the Participant’s employment or service at any time. The right of the Company to terminate at will the Participant’s employment or service at any time for any reason is specifically reserved.
11. No Shareholder Rights. Neither the Participant, nor any person entitled to receive payment in the event of the Participant’s death, shall have any of the rights and privileges of a shareholder with respect to the Shares related to the Performance Units, unless and until certificates for Shares have been distributed to the Participant or successor.
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12. Assignment and Transfers. The rights and interests of the Participant under this Grant Letter may not be sold, assigned, encumbered or otherwise transferred except, in the event of the death of the Participant, by will or by the laws of descent and distribution. If the Participant dies, any payments to be made under this Grant Letter after the Participant’s death shall be paid to the Participant’s estate. The rights and protections of the Company hereunder shall extend to any successors or assigns of the Company and to the Company’s parents, subsidiaries, and affiliates.
13. Compliance with Code Section 409A. Notwithstanding the other provisions hereof, this Grant Letter is intended to comply with the requirements of section 409A of the Internal Revenue Code of 1986, as amended, or an exception, and shall be administered accordingly. Any reference to a Participant’s termination of employment shall mean a Participant’s “separation from service,” as such term is defined under section 409A. For purposes of section 409A, each payment of compensation under this Grant Letter shall be treated as a separate payment. Notwithstanding anything in this Grant Letter to the contrary, if the Participant is a “key employee” under section 409A and if payment of any amount under this Grant Letter is required to be delayed for a period of six months after separation from service pursuant to section 409A, payment of such amount shall be delayed as required by section 409A and shall be paid within 10 days after the end of the six-month period. If the Participant dies during such six-month period, the amounts withheld on account of section 409A shall be paid to the personal representative of the Participant’s estate within 60 days after the date of the Participant’s death. Notwithstanding anything in this Grant Letter to the contrary, if a Change of Control is not a “change in control event” under section 409A, any Performance Units and Dividend Equivalents that are payable pursuant to Section 6 shall be paid to the Participant between January 1, 2019 and March 15, 2019, and not upon the earlier separation from service, if required by section 409A.
14. Applicable Law. The validity, construction, interpretation and effect of this Grant Letter shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania, without giving effect to the conflicts of laws provisions thereof.
15. Notice. Any notice to UGI provided for in this Grant Letter shall be addressed to UGI in care of the Corporate Secretary at UGI’s headquarters, and any notice to the Participant shall be addressed to such Participant at the current address shown on the payroll of the Company, or to such other address as the Participant may designate to the Company in writing. Any notice shall be delivered by hand, sent by telecopy or enclosed in a properly sealed envelope addressed as stated above, registered and deposited, postage prepaid, in a post office regularly maintained by the United States Postal Service.
16. Acceptance. By accepting this grant through the Morgan Stanley on-line system, the Participant (i) acknowledges receipt of the Plan incorporated herein, (ii) acknowledges that he or she has read the Grant Summary and Grant Letter and understands the terms and conditions of them, (iii) accepts the Performance Units described in the Grant Letter, (iv) agrees to be bound by the terms of the Plan, including the Grant Letter, and (v) agrees that all the decisions and determinations of the Board or the Committee shall be final and binding on the Participant and any other person having or claiming a right under this Grant.
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EXHIBIT A
UGI CORPORATION
PERFORMANCE UNIT PEER GROUP
RUSSELL MIDCAP UTILITIES
(EXCLUDING TELECOMS)
as of 1/1/2016
AES Corp/VA (AES) | ITC Holdings Corp (ITC) |
AGL Resources Inc (GAS) | MDU Resources Group Inc (MDU) |
Alliant Energy Corp (LNT) | National Fuel Gas Co (NFG) |
Ameren Corp (AEE) | NiSource Inc (NI) |
American Water Works Co Inc (AWK) | NRG Energy Inc (NRG) |
Aqua America Inc (WTR) | OGE Energy Corp (OGE) |
Atmos Energy Corp (ATO) | Pepco Holdings Inc (POM) |
Avangrid Inc (AGR) | Pinnacle West Capital Corp (PNW) |
Calpine Corp (CPN) | PPL Corp (PPL) |
CenterPoint Energy Inc (CNP) | Public Service Enterprise Group Inc (PEG) |
CMS Energy Corp (CMS) | Questar Corp (STR) |
Consolidated Edison Inc (ED) | SCANA Corp (SCG) |
DTE Energy Co (DTE) | Sempra Energy (SRE) |
Edison International (EIX) | TECO Energy Inc (TE) |
Entergy Corp (ETR) | UGI Corp (UGI) |
Eversource Energy (ES) | Vectren Corp (VVC) |
FirstEnergy Corp (FE) | WEC Energy Group Inc (WEC) |
Great Plains Energy Inc (GXP) | Westar Energy Inc (WR) |
Hawaiian Electric Industries Inc (HE) | Xcel Energy Inc (XEL) |
EXHIBIT B
Change of Control with Respect to Utilities
For Participants who are employees of UGI Utilities, Inc. (“Utilities”), or a subsidiary of Utilities, the term “Change of Control” shall include the events set forth in this Exhibit A with respect to Utilities, and the defined terms set forth used in this Exhibit B, if not defined in the Plan, shall have the following meanings:
1. “Change of Control” shall include any of the following events:
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(A) UGI and the UGI Subsidiaries fail to own more than fifty percent (50%) of the then outstanding shares of common stock of Utilities or more than fifty percent (50%) of the combined voting power of the then outstanding voting securities of Utilities entitled to vote generally in the election of directors; or
(B) Completion by Utilities of a reorganization, merger or consolidation (a “Business Combination”), in each case, with respect to which all or substantially all of the individuals and entities who were the respective Beneficial Owners of Utilities’ outstanding common stock and voting securities immediately prior to such Business Combination do not, following such Business Combination, Beneficially Own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination in substantially the same proportion as their ownership immediately prior to such Business Combination of Utilities’ outstanding common stock and voting securities, as the case may be; or
(C) Completion of a complete liquidation or dissolution of the Utilities or sale or other disposition of all or substantially all of the assets of Utilities other than to a corporation with respect to which, following such sale or disposition, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors is then owned beneficially, directly or indirectly, by all or substantially all of the individuals and entities who were the Beneficial Owners, respectively, of Utilities’ outstanding common stock and voting securities immediately prior to such sale or disposition in substantially the same proportion as their ownership of Utilities’ outstanding common stock and voting securities, as the case may be, immediately prior to such sale or disposition.
2. “Affiliate” and “Associate” shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Exchange Act.
3. A Person shall be deemed the “Beneficial Owner” of any securities: (i) that such Person or any of such Person’s Affiliates or Associates, directly or indirectly, has the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding (whether or not in writing) or upon the exercise of conversion rights, exchange rights, rights, warrants or options, or otherwise; provided, however, that a person shall not be deemed the “Beneficial Owner” of securities tendered pursuant to a tender or exchange offer made by such Person or any of such person’s Affiliates or Associates until such tendered securities are accepted for payment, purchase or exchange; (ii) that such Person or any of such Person’s Affiliates or Associates, directly or indirectly, has the right to vote or dispose of or has “beneficial ownership” of (as determined pursuant to Rule 13d-3 of the General Rules and Regulations under the Exchange Act), including without limitation pursuant to any agreement, arrangement or understanding, whether or not in writing; provided, however, that a Person shall not be deemed the “Beneficial Owner” of any security under this clause (ii) as a result of an oral or written agreement, arrangement or understanding to vote such security if such agreement, arrangement or understanding (A) arises solely from a revocable proxy given in
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response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable provisions of the General Rules and Regulations under the Exchange Act, and (B) is not then reportable by such Person on Schedule 13D under the Exchange Act (or any comparable or successor report); or (iii) that are beneficially owned, directly or indirectly, by any other Person (or any Affiliate or Associate thereof) with which such Person (or any of such Person’s Affiliates or Associates) has any agreement, arrangement or understanding (whether or not in writing) for the purpose of acquiring, holding, voting (except pursuant to a revocable proxy as described in the proviso to clause (ii) above) or disposing of any securities; provided, however, that nothing in this Section 1(c) shall cause a Person engaged in business as an underwriter of securities to be the “Beneficial Owner” of any securities acquired through such Person’s participation in good faith in a firm commitment underwriting until the expiration of forty (40) days after the date of such acquisition.
4. “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.
5. “Person” shall mean an individual or a corporation, partnership, trust, unincorporated organization, association, or other entity.
6. “UGI Subsidiary” shall mean any corporation in which UGI directly or indirectly, owns at least a fifty percent (50%) interest or an unincorporated entity of which UGI, as applicable, directly or indirectly, owns at least fifty percent (50%) of the profits or capital interests.
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Exhibit 10.2
Utilities Employees
UGI CORPORATION
2013 OMNIBUS INCENTIVE COMPENSATION PLAN
FORM OF NONQUALIFIED STOCK OPTION GRANT LETTER
This STOCK OPTION GRANT, dated January 1, 2016 (the “Date of Grant”), is delivered by UGI Corporation (“UGI”) to you (the “Participant”).
RECITALS
The UGI Corporation 2013 Omnibus Incentive Compensation Plan (the “Plan”), provides for the grant of options to purchase shares of common stock of UGI. The Compensation and Management Development Committee of the Board of Directors of UGI (the “Committee”) has decided to make a stock option grant to the Participant. The Participant’s portal in the Morgan Stanley website for Plan participants (the “Grant Summary”) sets forth the number of shares subject to the Option granted to the Participant in this grant.
NOW, THEREFORE, the parties to this Grant Letter, intending to be legally bound hereby, agree as follows:
1.Grant of Option. Subject to the terms and conditions set forth in this Grant Letter and in the Plan, the Committee hereby grants to the Participant a nonqualified stock option (the “Option”) to purchase the number of shares of common stock of UGI (“Shares”) specified in the Grant Summary at an exercise price of $33.76 per Share. The Option shall become exercisable according to Section 2 below.
2. Exercisability of Option. The Option shall become exercisable on the following dates, if the Participant is employed by, or providing service to, the Company (as defined below) on the applicable date:
Date | Shares for Which the Option is Exercisable |
January 1, 2017 | 33⅓% |
January 1, 2018 | 33⅓% |
January 1, 2019 | 33⅓% |
The exercisability of the Option is cumulative, but shall not exceed 100% of the Shares subject to the Option. If the foregoing schedule would produce fractional Shares, the number of Shares for which the Option becomes exercisable shall be rounded down to the nearest whole Share.
3. Term of Option.
(a) The Option shall have a term of ten years from the Date of Grant and shall terminate at the expiration of that period (5:00 p.m. EST on December 31, 2025), unless it is terminated at an earlier date pursuant to the provisions of this Grant Letter or the Plan.
(b) If the Participant ceases to be employed by, or provide service to, the Company, the Option will terminate on the date the Participant ceases such employment or service. However, if the Participant ceases to be employed by, or provide service to, the Company by reason of one of the following events, the Option held by the Participant will thereafter be exercisable pursuant to the following terms:
(i) Termination without Cause. If the Participant terminates employment or service on account of a Termination without Cause, the Option will thereafter be exercisable only with respect to that number of Shares with respect to which the Option is already exercisable on the date the Participant’s employment or service terminates, except as provided in subsection (v) below. Such portion of the Option will terminate upon the earlier of the expiration date of the Option or the expiration of the 13-month period commencing on the date the Participant ceases to be employed by, or provide service to, the Company.
(ii) Retirement. If the Participant ceases to be employed by, or provide service to, the Company on account of Retirement after June 30, 2016, the Option will thereafter become exercisable as if the Participant had continued to be employed by, or provide service to, the Company after the date of such Retirement. The Option will terminate if the Participant ceases to be employed by, or provide service to, the Company on account of Retirement on or before June 30, 2016. The Option will terminate upon the expiration date of the Option.
(iii) Disability. If the Participant ceases to be employed by, or provide service to, the Company on account of Disability, the Option will thereafter become exercisable as if the Participant had continued to provide service to the Company for 36 months after the date of such termination of employment or service. The Option will terminate upon the earlier of the expiration date of the Option or the expiration of such 36-month period.
(iv) Death. In the event of the death of the Participant while employed by, or providing service to, the Company, the Option will be fully and immediately exercisable and may be exercised at any time prior to the earlier of the expiration date of the Option or the expiration of the 12-month period following the Participant’s death. Death of the Participant after the Participant has ceased to be employed by, or provide service to, the Company will not affect the otherwise applicable period for exercise of the Option determined pursuant to subsections (i), (ii), (iii) or (v). After the Participant’s death, the Participant’s Option may be exercised by the Participant’s estate.
(v) Termination without Cause or Good Reason Termination upon or within two years after a Change of Control. Notwithstanding the foregoing, if the Participant’s
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employment or service terminates on account of a Termination without Cause or a Good Reason Termination upon or within two years after a Change of Control, the Option will be fully and immediately exercisable. The Option will terminate upon the earlier of the expiration date of the Option or the expiration of the 13-month period commencing on the date the Participant ceases to be employed by, or provide service to, the Company; provided that if the Participant is eligible for Retirement at the date of such termination of employment, the Option will terminate on the expiration date of the Option.
4. Exercise Procedures.
(a) Subject to the provisions of Sections 2 and 3 above, the Participant may exercise part or all of the exercisable Option through the Morgan Stanley website for Plan participants. Payment of the exercise price and any applicable withholding taxes must be made prior to issuance of the Shares. The Participant shall pay the exercise price (i) in cash, (ii) by “net exercise,” which is the surrender of shares for which the Option is exercisable to the Company in exchange for a distribution of Shares equal to the amount by which the then fair market value of the Shares subject to the exercised Option exceeds the applicable Option Price, (iii) by payment through a broker in accordance with procedures acceptable to the Committee and permitted by Regulation T of the Federal Reserve Board or (iv) by such other method as the Committee may approve. The Committee may impose such limitations as it deems appropriate on the use of Shares to exercise the Option.
(b) The obligation of UGI to deliver Shares upon exercise of the Option shall be subject to all applicable laws, rules, and regulations and such approvals by governmental agencies as may be deemed appropriate by the Committee, including such actions as UGI’s counsel shall deem necessary or appropriate to comply with relevant securities laws and regulations. UGI may require that the Participant (or other person exercising the Option after the Participant’s death) represent that the Participant is purchasing Shares for the Participant’s own account and not with a view to or for sale in connection with any distribution of the Shares, or such other representation as UGI deems appropriate.
(c) All obligations of UGI under this Grant Letter shall be subject to the rights of the Company as set forth in the Plan to withhold amounts required to be withheld for any taxes, if applicable.
5. Definitions. Whenever used in this Grant Letter, the following terms shall have the meanings set forth below:
(a) “Change of Control” shall (i) have the meaning given that term in the Plan, or (ii) mean one of the events set forth on Exhibit A with respect to UGI Utilities, Inc.
(b) “Company” means UGI and its Subsidiaries (as defined in the Plan).
(c) “Disability” means a long-term disability as defined in the Company’s long-term disability plan applicable to the Participant.
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(d) “Employed by, or provide service to, the Company” shall mean employment or service as an employee or director of the Company.
(e) “Good Reason Termination” shall mean a termination of employment or service initiated by the Participant upon or within two years after a Change of Control upon one or more of the following occurrences:
(i) a material diminution in the authority, duties or responsibilities held by the Participant immediately prior to the Change of Control;
(ii) a material diminution in the Participant’s base salary as in effect immediately prior to the Change of Control; or
(iii) a material change in the geographic location at which the Participant must perform services (which, for purposes of this Grant Letter, means the Participant is required to report, other than on a temporary basis (less than 12 months), to a location which is more than 50 miles from the Participant’s principal place of business immediately preceding the Change of Control, without the Participant’s express written consent).
Notwithstanding the foregoing, the Participant shall be considered to have a Good Reason Termination only if the Participant provides written notice to the Company, pursuant to Section 13, specifying in reasonable detail the events or conditions upon which the Participant is basing such Good Reason Termination and the Participant provides such notice within 90 days after the event that gives rise to the Good Reason Termination. Within 30 days after notice has been provided, the Company shall have the opportunity, but shall have no obligation, to cure such events or conditions that give rise to the Good Reason Termination. If the Company does not cure such events or conditions within the 30-day period, the Participant may terminate employment or service with the Company based on Good Reason Termination within 30 days after the expiration of the cure period.
Notwithstanding the foregoing, if the Participant has in effect a Change in Control Agreement with the Company or an Affiliate, the term “Good Reason Termination” shall have the meaning given that term in the Change in Control Agreement.
(f) “Retirement” means the Participant’s retirement under the Retirement Income Plan for Employees of UGI Utilities, Inc., if the Participant is covered by that Retirement Income Plan. “Retirement” for other Company employees means termination of employment or service after attaining (i) age 55 with ten or more years of service with the Company or (ii) age 65 with five or more years of service with the Company.
(g) “Termination without Cause” means termination of employment or service by the Company for the convenience of the Company for any reason other than (i) theft or misappropriation of funds or conduct that has an adverse effect on the reputation of the Company, (ii) conviction of a felony or a crime involving moral turpitude, (iii) material breach of the Company’s written code of conduct, or other material written employment policies,
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applicable to the Participant, (iv) breach of any written confidentiality, non-competition or non-solicitation covenant between the Participant and the Company, (v) gross misconduct in the performance of duties, or (vi) intentional refusal or failure to perform the material duties of the Participant’s position.
6. Change of Control. If a Change of Control occurs, the Committee may take such actions with respect to the Option as it deems appropriate pursuant to the Plan. The Option shall not automatically become exercisable upon a Change of Control but, instead, shall become exercisable as described in Sections 2 and 3 above.
7. Restrictions on Exercise. Except as the Committee may otherwise permit pursuant to the Plan, only the Participant may exercise the Option during the Participant’s lifetime and, after the Participant’s death, the Option shall be exercisable by the Participant’s estate, to the extent that the Option is exercisable pursuant to this Grant Letter.
8. Grant Subject to Plan Provisions and Company Policies.
(a) This grant is made pursuant to the Plan, which is incorporated herein by reference, and in all respects shall be interpreted in accordance with the Plan. The grant and exercise of the Option are subject to interpretations, regulations and determinations concerning the Plan established from time to time by the Committee in accordance with the provisions of the Plan, including, but not limited to, provisions pertaining to (i) the registration, qualification or listing of the Shares, (ii) changes in capitalization of the Company and (iii) other requirements of applicable law. The Committee shall have the authority to interpret and construe the Option pursuant to the terms of the Plan, and its decisions shall be conclusive as to any questions arising hereunder.
(b) All Shares issued pursuant to this Option grant shall be subject to the UGI Corporation Stock Ownership Policy. This Option grant and all Shares issued pursuant to this Option grant shall be subject to any applicable clawback and other policies implemented by the Board of Directors of UGI, as in effect from time to time.
9. No Employment or Other Rights. The grant of the Option shall not confer upon the Participant any right to be retained by or in the employ or service of the Company and shall not interfere in any way with the right of the Company to terminate the Participant’s employment or service at any time. The right of the Company to terminate at will the Participant’s employment or service at any time for any reason is specifically reserved.
10. No Shareholder Rights. Neither the Participant, nor any person entitled to exercise the Participant’s rights in the event of the Participant’s death, shall have any of the rights and privileges of a shareholder with respect to the Shares subject to the Option, until certificates for Shares have been issued upon the exercise of the Option.
11. Assignment and Transfers. The rights and interests of the Participant under this Grant Letter may not be sold, assigned, encumbered or otherwise transferred except, in the event of the death of the Participant, by will or by the laws of descent and distribution. The rights and
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protections of the Company hereunder shall extend to any successors or assigns of the Company and to the Company’s parents, subsidiaries, and affiliates.
12. Applicable Law. The validity, construction, interpretation and effect of this instrument shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania, without giving effect to the conflicts of laws provisions thereof.
13. Notice. Any notice to UGI provided for in this instrument shall be addressed to UGI in care of the Corporate Secretary at UGI’s headquarters, and any notice to the Participant shall be addressed to such Participant at the current address shown on the payroll of the Company, or to such other address as the Participant may designate to the Company in writing. Any notice shall be delivered by hand, sent by telecopy or enclosed in a properly sealed envelope addressed as stated above, registered and deposited, postage prepaid, in a post office regularly maintained by the United States Postal Service.
14. Acceptance. By accepting this grant through the Morgan Stanley on-line system, the Participant (i) acknowledges receipt of the Plan incorporated herein, (ii) acknowledges that he or she has read the Grant Summary and Grant Letter and understands the terms and conditions of them, (iii) accepts the Option described in the Grant Letter, (iv) agrees to be bound by the terms of the Plan, including the Grant Letter, and (v) agrees that all the decisions and determinations of the Board or the Committee shall be final and binding on the Participant and any other person having or claiming a right under this Grant.
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EXHIBIT A
Change of Control with Respect to Utilities
For Participants who are employees of UGI Utilities, Inc. (“Utilities”), or a subsidiary of Utilities, the term “Change of Control” shall include the events set forth in this Exhibit A with respect to Utilities, and the defined terms set forth used in this Exhibit A, if not defined in the Plan, shall have the following meanings:
1. “Change of Control” shall include any of the following events:
(A) UGI and the UGI Subsidiaries fail to own more than fifty percent (50%) of the then outstanding shares of common stock of Utilities or more than fifty percent (50%) of the combined voting power of the then outstanding voting securities of Utilities entitled to vote generally in the election of directors; or
(B) Completion by Utilities of a reorganization, merger or consolidation (a “Business Combination”), in each case, with respect to which all or substantially all of the individuals and entities who were the respective Beneficial Owners of Utilities’ outstanding common stock and voting securities immediately prior to such Business Combination do not, following such Business Combination, Beneficially Own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination in substantially the same proportion as their ownership immediately prior to such Business Combination of Utilities’ outstanding common stock and voting securities, as the case may be; or
(C) Completion of a complete liquidation or dissolution of the Utilities or sale or other disposition of all or substantially all of the assets of Utilities other than to a corporation with respect to which, following such sale or disposition, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors is then owned beneficially, directly or indirectly, by all or substantially all of the individuals and entities who were the Beneficial Owners, respectively, of Utilities’ outstanding common stock and voting securities immediately prior to such sale or disposition in substantially the same proportion as their ownership of Utilities’ outstanding common stock and voting securities, as the case may be, immediately prior to such sale or disposition.
2. “Affiliate” and “Associate” shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Exchange Act.
3. A Person shall be deemed the “Beneficial Owner” of any securities: (i) that such Person or any of such Person’s Affiliates or Associates, directly or indirectly, has the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding (whether or not in writing) or upon the exercise of
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conversion rights, exchange rights, rights, warrants or options, or otherwise; provided, however, that a person shall not be deemed the “Beneficial Owner” of securities tendered pursuant to a tender or exchange offer made by such Person or any of such person’s Affiliates or Associates until such tendered securities are accepted for payment, purchase or exchange; (ii) that such Person or any of such Person’s Affiliates or Associates, directly or indirectly, has the right to vote or dispose of or has “beneficial ownership” of (as determined pursuant to Rule 13d-3 of the General Rules and Regulations under the Exchange Act), including without limitation pursuant to any agreement, arrangement or understanding, whether or not in writing; provided, however, that a Person shall not be deemed the “Beneficial Owner” of any security under this clause (ii) as a result of an oral or written agreement, arrangement or understanding to vote such security if such agreement, arrangement or understanding (A) arises solely from a revocable proxy given in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable provisions of the General Rules and Regulations under the Exchange Act, and (B) is not then reportable by such Person on Schedule 13D under the Exchange Act (or any comparable or successor report); or (iii) that are beneficially owned, directly or indirectly, by any other Person (or any Affiliate or Associate thereof) with which such Person (or any of such Person’s Affiliates or Associates) has any agreement, arrangement or understanding (whether or not in writing) for the purpose of acquiring, holding, voting (except pursuant to a revocable proxy as described in the proviso to clause (ii) above) or disposing of any securities; provided, however, that nothing in this Section 3 shall cause a Person engaged in business as an underwriter of securities to be the “Beneficial Owner” of any securities acquired through such Person’s participation in good faith in a firm commitment underwriting until the expiration of forty (40) days after the date of such acquisition.
4. “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.
5. “Person” shall mean an individual or a corporation, partnership, trust, unincorporated organization, association, or other entity.
6. “UGI Subsidiary” shall mean any corporation in which UGI directly or indirectly, owns at least a fifty percent (50%) interest or an unincorporated entity of which UGI, as applicable, directly or indirectly, owns at least fifty percent (50%) of the profits or capital interests.
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UGI UTILITIES, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES - EXHIBIT 12.1
(Thousands of dollars)
Six Months Ended March 31, | |||||||||||||||||||
Year Ended September 30, | |||||||||||||||||||
2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||||||
Earnings: | |||||||||||||||||||
Earnings before income taxes | $ | 144,013 | $ | 200,539 | $ | 207,929 | $ | 171,010 | $ | 142,971 | |||||||||
Interest expense | 18,626 | 40,400 | 37,897 | 38,578 | 41,599 | ||||||||||||||
Amortization of debt discount and | |||||||||||||||||||
expense | 138 | 728 | 575 | 731 | 814 | ||||||||||||||
Estimated interest component of | |||||||||||||||||||
rental expense | 1,298 | 2,728 | 2,398 | 2,090 | 2,121 | ||||||||||||||
$ | 164,075 | $ | 244,395 | $ | 248,799 | $ | 212,409 | $ | 187,505 | ||||||||||
Fixed Charges: | |||||||||||||||||||
Interest expense | $ | 18,626 | $ | 40,400 | $ | 37,897 | $ | 38,578 | $ | 41,599 | |||||||||
Amortization of debt discount and | |||||||||||||||||||
expense | 138 | 728 | 575 | 731 | 814 | ||||||||||||||
Allowance for funds used during | |||||||||||||||||||
construction (capitalized interest) | 215 | 407 | 227 | 286 | 10 | ||||||||||||||
Estimated interest component of | |||||||||||||||||||
rental expense | 1,298 | 2,728 | 2,398 | 2,090 | 2,121 | ||||||||||||||
$ | 20,277 | $ | 44,263 | $ | 41,097 | $ | 41,685 | $ | 44,544 | ||||||||||
Ratio of earnings to fixed charges | 8.09 | 5.52 | 6.05 | 5.10 | 4.21 | ||||||||||||||
EXHIBIT 31.1
CERTIFICATION
I, Robert F. Beard, certify that:
1. | I have reviewed this periodic report on Form 10-Q of UGI Utilities, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: May 6, 2016
/s/ Robert F. Beard | ||
Robert F. Beard | ||
President and Chief Executive Officer | ||
EXHIBIT 31.2
CERTIFICATION
I, Daniel J. Platt, certify that:
1. | I have reviewed this periodic report on Form 10-Q of UGI Utilities, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: May 6, 2016
/s/ Daniel J. Platt | |
Daniel J. Platt | |
Vice President - Finance and Chief Financial Officer | |
EXHIBIT 32
Certification by the Chief Executive Officer and Chief Financial Officer
Relating to a Periodic Report Containing Financial Statements
I, Robert F. Beard, Chief Executive Officer, and I, Daniel J. Platt, Chief Financial Officer, of UGI Utilities, Inc., a Pennsylvania corporation (the “Company”), hereby certify that to our knowledge:
(1) | The Company’s periodic report on Form 10-Q for the period ended March 31, 2016 (the “Form 10-Q”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and |
(2) | The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company. |
CHIEF EXECUTIVE OFFICER | CHIEF FINANCIAL OFFICER | ||||
/s/ Robert F. Beard | /s/ Daniel J. Platt | ||||
Robert F. Beard | Daniel J. Platt | ||||
Date: | May 6, 2016 | Date: | May 6, 2016 | ||