UGI

UGI Corp. 10-Q Summary: Period Ended June 30, 2004

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2004, and the nine months ended June 30, 2004, for UGI Corporation, a holding company operating natural gas and electric utilities, electricity generation, retail propane distribution, and energy marketing businesses. A significant event during this period was the March 31, 2004, acquisition of the remaining 80.5% ownership interest in AGZ Holding (parent of Antargaz), a leading French LPG distributor, which was consolidated into results beginning April 1, 2004.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 32.1% for the three months and 21.4% for the nine months compared to the prior year periods, driven primarily by the consolidation of Antargaz and higher energy product prices.
• Profitability: Net income for the three months improved from a loss of $2.0 million in 2003 to $8.3 million in 2004. For the nine months, net income rose 9.3% to $114.2 million from $104.5 million.
• Balance Sheet Expansion: Total assets increased significantly from $2,771.7 million (June 30, 2003) to $4,172.4 million (June 30, 2004), largely due to the Antargaz acquisition. Goodwill increased from $665.1 million to $1,174.8 million.
• Debt Levels: Long-term debt increased to $1,670.2 million (including current maturities) from $1,223.5 million at the end of the prior fiscal year, reflecting debt assumed in the Antargaz acquisition.
• Segment Performance: The International Propane segment saw a dramatic increase in operating income due to Antargaz consolidation. AmeriGas Propane Partnership EBITDA increased 27.8% for the quarter despite warmer weather reducing retail volumes.

Guidance, Outlook, and Risks

Management Commentary: Management attributes improved results to the Antargaz acquisition and favorable margin performance across segments, despite challenges from warmer-than-normal weather and high energy costs. The company raised its quarterly common stock dividend to $0.3125 per share.

Outlook and Liquidity: The company maintains significant liquidity with $185.4 million in cash and short-term investments and access to revolving credit facilities. AmeriGas Partners and UGI Utilities have active shelf registrations for future debt and equity issuances.

Risks and Contingencies:

• Environmental Liabilities: UGI Utilities faces multiple claims regarding remediation costs for former Manufactured Gas Plants (MGPs) in Maine, Florida, New York, and Connecticut. Potential costs cited by plaintiffs range from $8 million to over $180 million, though management believes it has strong defenses.
• Market Risks: Significant exposure to commodity price volatility (propane, natural gas, electricity) and foreign currency exchange rates (Euro vs. USD), particularly regarding the Antargaz and FLAGA operations.
• Legal Proceedings: Antargaz is involved in litigation with French tax authorities regarding business tax on customer tanks, though indemnification from former owners covers a portion of the liability.

Investor Verification Checklist

• Verify the final purchase price allocation for the Antargaz acquisition, as the preliminary allocation is subject to revision.
• Monitor the status of environmental litigation claims against UGI Utilities regarding MGP sites, specifically the Northeast Companies claim in Connecticut and KeySpan claim in New York.
• Assess the impact of warmer weather trends on AmeriGas Propane's retail volumes and margins in upcoming heating seasons.
• Review the company's hedging strategies for commodity prices and foreign currency exposure given the increased international footprint.
• Confirm the funding source for the upcoming October 1, 2004, redemption of UGI Utilities Series Preferred Stock.