Company Quick10K Filing
Quick10K
UGI Utilities
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-Q 2018-12-31 Quarter: 2018-12-31
10-K 2018-09-30 Annual: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-Q 2017-12-31 Quarter: 2017-12-31
10-K 2017-09-30 Annual: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-Q 2016-12-31 Quarter: 2016-12-31
10-K 2016-09-30 Annual: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-Q 2015-12-31 Quarter: 2015-12-31
10-K 2015-09-30 Annual: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-Q 2014-12-31 Quarter: 2014-12-31
10-K 2014-09-30 Annual: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-Q 2013-12-31 Quarter: 2013-12-31
8-K 2019-08-05 Earnings, Exhibits
8-K 2019-06-27 Enter Agreement, Leave Agreement, Off-BS Arrangement, Exhibits
8-K 2019-05-06 Earnings, Exhibits
8-K 2019-02-05 Earnings, Exhibits
8-K 2018-12-21 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-11-12 Earnings, Exhibits
8-K 2018-09-21 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-08-01 Earnings, Exhibits
8-K 2018-05-02 Earnings, Exhibits
8-K 2018-01-31 Earnings, Exhibits
BROG Black Ridge Oil & Gas 4,894
SILK Silk Road Medical 1,280
SNMX Senomyx 63
FMFG Farmers & Merchants Bancshares 52
MXSG Mexus Gold 19
HLTY Nature's Best Brands 10
FHLBD Federal Home Loan Bank of Dallas 0
WWIN Wewin Group 0
PAY Verifone 0
RHIS Reliant Holdings 0
UGU 2019-06-30
Part I Financial Information
Item 1. Financial Statements
Note 1 - Nature of Operations
Note 2 - Summary of Significant Accounting Policies
Note 3 - Accounting Changes
Note 4 - Revenue From Contracts with Customers
Note 5 - Inventories
Note 6 - Income Tax Reform
Note 7 - Regulatory Assets and Liabilities and Regulatory Matters
Note 8 - Debt
Note 9 - Commitments and Contingencies
Note 10 - Defined Benefit Pension and Other Postretirement Plans
Note 11 - Fair Value Measurements
Note 12 - Derivative Instruments and Hedging Activities
Note 13 - Accumulated Other Comprehensive Income
Note 14 - Related Party Transactions
Note 15 - Segment Information
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II Other Information
Item 1A. Risk Factors
Item 6. Exhibits
EX-31.1 ex311-6x30x19ugiutilit.htm
EX-31.2 ex312-6x30x19ugiutilit.htm
EX-32 ex32-6x30x19ugiutiliti.htm

UGI Utilities Earnings 2019-06-30

UGU 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Document
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Table of Contents

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 1-1398
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.)
One UGI Drive, Denver, PA 17517
(Address of principal executive offices) (Zip Code)

(610796-3400
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None
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 No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
Accelerated filer
 
Non-accelerated filer
þ
Smaller reporting company
 
Emerging growth company
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
At July 31, 2019, 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.
 
 
 
 
 


Table of Contents

UGI UTILITIES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



- i -

Table of Contents

GLOSSARY OF TERMS AND ABBREVIATIONS

Terms and abbreviations used in this Form 10-Q are defined below:

UGI Utilities, Inc. and Related Entities

Company - UGI Utilities or collectively UGI Utilities and its subsidiaries
CPG - UGI Central Penn Gas, Inc., a wholly owned subsidiary of UGI Utilities prior to the Utility Merger
Energy Services - UGI Energy Services, LLC, a wholly owned subsidiary of UGI and affiliate of UGI Utilities
Electric Utility - UGI Utilities’ regulated electric distribution utility
Gas Utility - UGI Utilities’ regulated natural gas distribution businesses, comprising the natural gas utility businesses owned and operated by UGI Utilities and, prior to the Utility Merger, PNG and CPG
PNG - UGI Penn Natural Gas, Inc., a wholly owned subsidiary of UGI Utilities prior to the Utility Merger
UGI - UGI Corporation, parent company of UGI Utilities
UGI Central - The natural gas rate district of CPG subsequent to the Utility Merger
UGI Gas - UGI Utilities’ natural gas utility
UGI North - The natural gas rate district of PNG subsequent to the Utility Merger
UGI South - The natural gas rate district of UGI Gas subsequent to the Utility Merger
UGI Utilities - UGI Utilities, Inc., a wholly owned subsidiary of UGI
Other Terms and Abbreviations
2018 Annual Report - UGI Utilities Annual Report on Form 10-K for the fiscal year ended September 30, 2018

2018 nine-month period - Nine-month period ended June 30, 2018

2018 three-month period - Three-month period ended June 30, 2018

2019 nine-month period - Nine-month period ended June 30, 2019

2019 three-month period - Three-month period ended June 30, 2019
4.55% Senior Notes - A private placement of $150 million principal amount of senior notes issued by UGI Utilities due February 2049
AOCI - Accumulated other comprehensive income (loss)
ASC - Accounting Standards Codification
ASC 605 - ASC 605, “Revenue Recognition”
ASC 606 - ASC 606, “Revenue from Contracts with Customers”
ASC 740 - ASC 740, “Income Taxes”
ASU - Accounting Standards Update
Bcf - Billions of cubic feet
BIE - Pennsylvania Public Utility Commission Bureau of Investigation and Enforcement

1

Table of Contents

COA - Consent order and agreement
Core market - Comprises (1) firm residential, commercial and industrial customers to whom UGI Utilities has a statutory obligation to provide service who purchase their natural gas or electricity from UGI Utilities; and (2) residential, commercial and industrial customers to whom UGI Utilities has a statutory obligation to provide service who purchase their natural gas or electricity from others
DS - Default service
DSIC - Distribution System Improvement Charge
ERISA - Employee Retirement Income Security Act of 1974
Exchange Act - Securities Exchange Act of 1934, as amended
FASB - Financial Accounting Standards Board
FERC - Federal Energy Regulatory Commission
FTR - Financial transmission rights
GAAP - U.S. generally accepted accounting principles
Gwh - Millions of kilowatt hours
IRPA - Interest rate protection agreement
IT - Information technology
LIBOR - London Inter-bank Offered Rate
MDPSC - Maryland Public Service Commission
MGP - Manufactured gas plant
NOAA - National Oceanic and Atmospheric Administration
NPNS - Normal purchase and normal sale
NTSB - National Transportation Safety Board
NYMEX - New York Mercantile Exchange
PADEP - Pennsylvania Department of Environmental Protection
PAPUC - Pennsylvania Public Utility Commission
Pension Plan - Defined benefit pension plan for employees hired prior to January 1, 2009 of UGI, UGI Utilities, CPG, PNG and certain of UGI’s other domestic wholly owned subsidiaries

PGC - Purchased gas costs
PJM - PJM Interconnection, LLC
Retail core-market - Comprises firm residential, commercial and industrial customers to whom UGI Utilities has a statutory obligation to provide service that purchase their natural gas from Gas Utility
SCAA - Storage contract administrative agreements
SEC - U.S. Securities and Exchange Commission

TCJA - Tax Cuts and Jobs Act


2

Table of Contents

UGI Utilities 2019 Credit Agreement - An unsecured revolving credit agreement entered into by UGI Utilities in June 2019 providing for borrowings up to $350 million, including a letter of credit subfacility of up to $100 million

Utility Merger - The merger, effective October 1, 2018, of CPG and PNG with and into UGI Utilities

VEBA - Voluntary Employees’ Beneficiary Association


3

Table of Contents



UGI UTILITIES, INC. AND SUBSIDIARIES
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(Thousands of dollars)
 
June 30,
2019
 
September 30,
2018
 
June 30,
2018
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
3,057

 
$
10,314

 
$
23,181

Restricted cash
4,255

 
1,190

 
805

Accounts receivable (less allowances for doubtful accounts of $15,967, $9,760 and $16,261, respectively)
94,106

 
71,507

 
107,966

Accounts receivable — related parties
437

 
2,273

 
1,682

Accrued utility revenues
14,575

 
13,977

 
14,425

Inventories
32,263

 
52,413

 
34,663

Prepaid income taxes
127

 
53,857

 
41

Regulatory assets
3,549

 
7,475

 
2,180

Derivative instruments
851

 
3,004

 
1,874

Prepaid expenses
6,754

 
9,006

 
10,224

Other current assets
6,702

 
8,003

 
8,832

Total current assets
166,676

 
233,019

 
205,873

Property, plant and equipment, at cost (less accumulated depreciation of $1,115,273, $1,074,521 and $1,069,070, respectively)
2,709,194

 
2,541,768

 
2,430,893

Goodwill
182,145

 
182,145

 
182,145

Regulatory assets
297,128

 
293,527

 
357,881

Other assets
20,479

 
16,117

 
17,233

Total assets
$
3,375,622

 
$
3,266,576

 
$
3,194,025

LIABILITIES AND STOCKHOLDER’S EQUITY
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Current maturities of long-term debt
$
8,494

 
$
9,001

 
$
9,474

Short-term borrowings
76,000

 
189,500

 
118,500

Accounts payable
44,665

 
87,861

 
56,297

Accounts payable — related parties
7,203

 
9,585

 
14,385

Regulatory liabilities
51,777

 
40,131

 
49,664

Other current liabilities
116,695

 
114,256

 
119,196

Total current liabilities
304,834

 
450,334

 
367,516

Long-term debt
972,716

 
828,995

 
830,982

Deferred income taxes
421,855

 
400,939

 
336,035

Pension and postretirement benefit obligations
71,946

 
81,590

 
133,235

Regulatory liabilities
324,393

 
350,044

 
362,787

Other noncurrent liabilities
66,855

 
61,386

 
63,665

Total liabilities
2,162,599

 
2,173,288

 
2,094,220

Commitments and contingencies (Note 9)

 

 

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
473,580

 
473,580

 
473,580

Retained earnings
705,724

 
579,778

 
590,321

Accumulated other comprehensive loss
(26,540
)
 
(20,329
)
 
(24,355
)
Total common stockholder’s equity
1,213,023

 
1,093,288

 
1,099,805

Total liabilities and stockholder’s equity
$
3,375,622

 
$
3,266,576

 
$
3,194,025

See accompanying notes to condensed consolidated financial statements.

4

Table of Contents

UGI UTILITIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(Thousands of dollars)
 
Three Months Ended
 
Nine Months Ended
 
June 30,
 
June 30,
 
2019
 
2018
 
2019
 
2018
Revenues
$
163,893

 
$
159,934

 
$
916,210

 
$
966,300

Costs and expenses:
 
 
 
 
 
 
 
Cost of sales — gas and purchased power (excluding depreciation shown below)
61,021

 
72,537

 
438,516

 
481,613

Operating and administrative expenses
56,525

 
57,656

 
179,397

 
175,475

Operating and administrative expenses — related parties
2,861

 
4,325

 
11,571

 
10,780

Depreciation
23,141

 
21,414

 
67,956

 
62,926

Other operating expense (income), net
20

 
(481
)
 
1,505

 
(1,618
)
 
143,568

 
155,451

 
698,945

 
729,176

Operating income
20,325

 
4,483

 
217,265

 
237,124

Pension and other postretirement plans non-service income (expense)
440

 
(569
)
 
1,247

 
(1,788
)
Interest expense
(12,325
)
 
(10,003
)
 
(36,294
)
 
(32,033
)
Income (loss) before income taxes
8,440

 
(6,089
)
 
182,218

 
203,303

Income tax (expense) benefit
(1,767
)
 
3,066

 
(42,797
)
 
(48,839
)
Net income (loss)
$
6,673

 
$
(3,023
)
 
$
139,421

 
$
154,464

See accompanying notes to condensed consolidated financial statements.











5

Table of Contents

UGI UTILITIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
(Thousands of dollars)
 
Three Months Ended
 
Nine Months Ended
 
June 30,
 
June 30,
 
2019
 
2018
 
2019
 
2018
Net income (loss)
$
6,673

 
$
(3,023
)
 
$
139,421

 
$
154,464

Other comprehensive income (loss):
 
 
 
 
 
 
 
Net losses on derivative instruments (net of tax of $486, $0, $1,225 and $0, respectively)
(1,197
)
 

 
(3,016
)
 

Reclassifications of net losses on derivative instruments (net of tax of $(252), $(279), $(755) and $(838), respectively)
620

 
592

 
1,859

 
1,776

Reclassifications of benefit plan actuarial losses and net prior service benefits (net of tax of $(53), $(104), $(161) and $(312), respectively)
132

 
220

 
397

 
660

Other comprehensive (loss) income
(445
)
 
812

 
(760
)
 
2,436

Comprehensive income (loss)
$
6,228

 
$
(2,211
)
 
$
138,661

 
$
156,900

See accompanying notes to condensed consolidated financial statements.


6

Table of Contents

UGI UTILITIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Thousands of dollars)
 
Nine Months Ended
 
June 30,
 
2019
 
2018
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
139,421

 
$
154,464

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
67,956

 
62,926

Deferred income tax expense (benefit), net
10,455

 
(6,024
)
Provision for uncollectible accounts
13,297

 
16,462

Regulatory liability arising from tax reform

 
24,098

Other, net
2,799

 
(1,635
)
Net change in:
 
 
 
Accounts receivable and accrued utility revenues
(34,658
)
 
(70,726
)
Inventories
20,150

 
18,646

Deferred fuel and power costs, net of changes in unsettled derivatives
(19,311
)
 
39,657

Accounts payable
(9,981
)
 
3,655

Other current assets
61,210

 
(2,650
)
Other current liabilities
3,399

 
16,725

Net cash provided by operating activities
254,737

 
255,598

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Expenditures for property, plant and equipment
(267,403
)
 
(217,901
)
Net costs of property, plant and equipment disposals
(4,487
)
 
(5,682
)
Net cash used by investing activities
(271,890
)
 
(223,583
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Payment of dividends
(15,000
)
 
(45,000
)
Decrease in short-term borrowings
(113,500
)
 
(51,500
)
Issuances of long-term debt, net of issuance costs
149,211

 
124,404

Repayments of long-term debt
(7,018
)
 
(44,182
)
Other, net
(732
)
 

Net cash provided (used) by financing activities
12,961

 
(16,278
)
Cash, cash equivalents and restricted cash (decrease) increase
$
(4,192
)
 
$
15,737

CASH AND CASH EQUIVALENTS
 
 
 
Cash, cash equivalents and restricted cash at end of period
$
7,312

 
$
23,986

Cash, cash equivalents and restricted cash at beginning of period
11,504

 
8,249

Cash, cash equivalents and restricted cash (decrease) increase
$
(4,192
)
 
$
15,737

See accompanying notes to condensed consolidated financial statements.


7

Table of Contents

UGI UTILITIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY
(unaudited)
(Thousands of dollars)
 
Three Months Ended
 
Nine Months Ended
 
June 30,
 
June 30,
 
2019
 
2018
 
2019
 
2018
Common stock, $2.25 par value
 
 
 
 
 
 
 
Balance, beginning of period
$
60,259

 
$
60,259

 
$
60,259

 
$
60,259

Balance, end of period
$
60,259

 
$
60,259

 
$
60,259

 
$
60,259

 
 
 
 
 
 
 
 
Retained earnings
 
 
 
 
 
 
 
Balance, beginning of period
$
704,051

 
$
608,344

 
$
579,778

 
$
480,857

Cumulative effect of change in accounting principle - ASC 606

 

 
(3,926
)
 

Reclassification of stranded income tax effects related to TCJA

 

 
5,451

 

Net income (loss)
6,673

 
(3,023
)
 
139,421

 
154,464

Cash dividends — Common Stock
(5,000
)
 
(15,000
)
 
(15,000
)
 
(45,000
)
Balance, end of period
$
705,724

 
$
590,321

 
$
705,724

 
$
590,321

 
 
 
 
 
 
 
 
Additional paid-in capital
 
 
 
 
 
 
 
Balance, beginning of period
$
473,580

 
$
473,580

 
$
473,580

 
$
473,580

Balance, end of period
$
473,580

 
$
473,580

 
$
473,580

 
$
473,580

 
 
 
 
 
 
 
 
Accumulated other comprehensive income (loss)
 
 
 
 
 
 
 
Balance, beginning of period
$
(26,095
)
 
$
(25,167
)
 
$
(20,329
)
 
$
(26,791
)
Reclassification of stranded income tax effects related to TCJA

 

 
(5,451
)
 

Net losses on derivative instruments
(1,197
)
 

 
(3,016
)
 

Reclassifications of net losses on derivative instruments
620

 
592

 
1,859

 
1,776

Reclassifications of benefit plans actuarial losses and net prior service credits
132

 
220

 
397

 
660

Balance, end of period
$
(26,540
)
 
$
(24,355
)
 
$
(26,540
)
 
$
(24,355
)
 
 
 
 
 
 
 
 
Total UGI Utilities common stockholder's equity
$
1,213,023

 
$
1,099,805

 
$
1,213,023

 
$
1,099,805

See accompanying notes to condensed consolidated financial statements.

8

Table of Contents
UGI UTILITIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars, except where indicated otherwise)



Note 1 — Nature of Operations

UGI Utilities owns and operates Gas Utility, a natural gas distribution utility business in eastern and central Pennsylvania and in a portion of one Maryland county directly and, prior to the Utility Merger on October 1, 2018, through PNG and CPG. Gas Utility is subject to regulation by the PAPUC and the FERC and, with respect to a small service territory in one Maryland county, the MDPSC. UGI Utilities also owns and operates Electric Utility, an electric distribution utility located in northeastern Pennsylvania. Electric Utility is subject to regulation by the PAPUC and the FERC.

Note 2 — Summary of Significant Accounting Policies

Basis of Presentation. Our condensed consolidated financial statements include the accounts of UGI Utilities and its subsidiaries. We eliminate 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 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, 2018, Condensed Consolidated Balance Sheet was derived from audited financial statements but does not include all footnote disclosures from the annual financial statements.

These financial statements should be read in conjunction with the Company’s 2018 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.

Revenue Recognition. Effective October 1, 2018, the Company adopted ASU No. 2014-09, “Revenue from Contracts with Customers,” which, as amended, is included in ASC 606. This new accounting guidance supersedes previous revenue recognition requirements in ASC 605. ASC 606 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. We adopted this new accounting guidance using the modified retrospective transition method to those contracts which were not completed as of October 1, 2018. Periods prior to October 1, 2018, have not been restated and continue to be reported in accordance with ASC 605. The Company recorded a $3,926 reduction to opening retained earnings as of October 1, 2018, to reflect the cumulative effect of ASC 606 on certain contracts not complete as of the date of adoption. Although the adoption of ASC 606 did not, and is not expected to, have a material impact on the amount or timing of our revenue recognition and on our consolidated net income, cash flows or financial position, beginning October 1, 2018, certain performance obligations primarily associated with the release of capacity contracts are reflected on a gross, rather than net, basis and revenues from certain other negotiated rate contracts are reflected on a straight-line basis over the length of the contract, rather than as invoiced. The amount of revenues reflected on a gross, rather than net, basis for the three and nine months ended June 30, 2019, was approximately $7,000 and $39,000, respectively, with no impact on net income.

Certain revenues such as revenue from leases, financial instruments and other revenues are not within the scope of ASC 606 because they are not from contracts with customers. Such revenues, if any, are accounted for in accordance with other GAAP. Revenue-related taxes collected on behalf of customers and remitted to taxing authorities, principally sales and use taxes, are not included in revenues. Electric Utility’s gross receipts taxes are presented on a gross basis. The Company has elected to use the practical expedient to expense the costs to obtain contracts when incurred as such amounts are generally not material.
See Note 4 for additional disclosures regarding the Company’s revenue from contracts with customers.
Restricted Cash. Restricted cash principally represents those cash balances in our commodity futures brokerage accounts that are restricted from withdrawal. Upon adoption of revised accounting guidance in October 2018 (see Note 3), changes in restricted cash is no longer reflected as a separate investing activity but included in cash, cash equivalents and restricted cash when reconciling the beginning and end of period total amounts in the Company’s Condensed Consolidated Statements of Cash Flows. The guidance required retrospective application, which resulted in adjustments to the previously reported cash flows from investing activities for the nine months ended June 30, 2018, increasing net cash used by investing activities by $2,241.


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UGI UTILITIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars, except where indicated otherwise)


The following table provides a reconciliation of the total cash, cash equivalents and restricted cash reported on the Company’s Condensed Consolidated Balance Sheets to the corresponding amounts reported on the Condensed Consolidated Statements of Cash Flows.
 
 
Cash, Cash Equivalents and Restricted Cash
 
 
June 30,
2019
 
June 30,
2018
 
September 30, 2018
 
September 30, 2017
Cash and cash equivalents
 
$
3,057

 
$
23,181

 
$
10,314

 
$
5,203

Restricted cash
 
4,255

 
805

 
1,190

 
3,046

Cash, cash equivalents and restricted cash
 
$
7,312

 
$
23,986

 
$
11,504

 
$
8,249



Derivative Instruments. Derivative instruments are reported on the Condensed Consolidated Balance Sheets at their fair values, unless the NPNS exception is elected. The accounting for changes in fair value depends upon the purpose of the derivative instrument, whether it is subject to regulatory ratemaking mechanisms or if it qualifies and is designated as a hedge for accounting purposes.
Gains and losses on substantially all of the derivative instruments used by UGI Utilities to hedge commodity prices (for which NPNS has not been elected) are included in regulatory assets and liabilities because it is probable such gains or losses will be recoverable from or refundable to customers. From time to time we enter into derivative instruments that qualify and are designated as cash flow hedges. For cash flow hedges, changes in the fair values of the derivative financial instruments are recorded in 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 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 on the Condensed Consolidated Statements of Cash Flows.
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 12.
Income Taxes. Our results for the three and nine months ended June 30, 2018 were significantly affected by the enactment of the TCJA. For additional information regarding the effects of the TCJA and associated regulatory effects, see Notes 6 and 7.
Use of Estimates. The preparation of financial statements 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.

Reclassifications. Certain amounts for the three and nine months ended June 30, 2018, have been reclassified as a result of the adoption of revised accounting guidance pertaining to certain net periodic pension and other postretirement benefit costs and restricted cash (see Note 3). In addition, certain other prior-period amounts have been reclassified to conform to the current-period presentation.

Note 3 — Accounting Changes
New Accounting Standards Adopted Effective October 1, 2018

Revenue Recognition. Effective October 1, 2018, the Company adopted new accounting guidance regarding revenue recognition. See Notes 2 and 4 for a detailed description of the impact of the new guidance and related disclosures.

Cloud Computing Implementation Costs. In August 2018, the FASB issued ASU No. 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” The new guidance requires a customer in a cloud computing arrangement that is a service contract to capitalize certain implementation costs as if the arrangement was an internal-use software project. These deferred implementation costs are expensed over the fixed, noncancelable term of the

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UGI UTILITIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars, except where indicated otherwise)


service arrangement plus any reasonably certain renewal periods. The new guidance also requires the entity to present the expense related to the capitalized implementation costs in the same income statement line as the hosting service fees; to classify payments for capitalized implementation costs in the statement of cash flows in the same manner as payments for hosting service fees; and to present the capitalized implementation costs in the balance sheet in the same line item in which prepaid hosting service fees are presented. The new guidance can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We adopted this ASU effective October 1, 2018, and applied the guidance prospectively to all implementation costs associated with cloud computing arrangements that are service contracts incurred beginning October 1, 2018. The adoption of the new guidance did not have a material impact on our results of operations for the three and nine months ended June 30, 2019.

Stranded Tax Effects in Accumulated Other Comprehensive Income. In February 2018, the FASB issued ASU No. 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” This ASU provides that the stranded tax effects in AOCI resulting from the remeasurement of deferred income taxes associated with items included in AOCI due to the enactment of the TCJA may be reclassified to retained earnings, at the election of the entity, in the period the ASU is adopted. We adopted this ASU effective October 1, 2018. In connection with the adoption of this guidance, we reclassified a benefit of $5,451 from AOCI to opening retained earnings as of October 1, 2018, to reflect the reduction in the federal income tax rate, and the federal benefit of state income taxes, on the components of AOCI.

Pension and Other Postretirement Benefit Costs. In March 2017, the FASB issued ASU No. 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” This ASU requires entities to disaggregate the service cost component from the other components of net periodic benefit costs and present it with compensation costs for related employees in the income statement. The other components are required to be presented elsewhere in the income statement and outside of income from operations. The amendments in this ASU permit only the service cost component to be eligible for capitalization, when applicable. For entities subject to rate regulation, including UGI Utilities, the ASU recognized that in the event a regulator continues to require capitalization of all net periodic benefit costs prospectively, the difference would result in the recognition of a regulatory asset or liability.

The guidance became effective for the Company beginning October 1, 2018, with retrospective adoption for the presentation of pension and postretirement expense on the income statement and a prospective adoption for capitalization. The Company’s Condensed Consolidated Statement of Income for the three and nine months ended June 30, 2018, has been recast to reflect the retrospective adoption for the presentation of the non-service cost component of net periodic pension and other postretirement benefit costs, net of estimated amounts capitalized, as “Pension and other postretirement plans non-service income (expense)” on the Condensed Consolidated Statements of Income. Previously, the non-service cost components were reflected in “Operating and administrative expenses.”

The amount of income (expense) comprising the non-service cost components of our pension and postretirement benefit plans, net of amounts capitalized, presented in "Pension and other postretirement plans non-service income (expense)” on the Condensed Consolidated Statements of Income, totaled $440 and $1,247, respectively, for the three and nine months ended June 30, 2019 and $(569) and $(1,788), respectively, for the three and nine months ended June 30, 2018.

Statement of Cash Flows - Restricted Cash. In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows: Restricted Cash.” The guidance in this ASU requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, as well as restricted cash or restricted cash equivalents. As a result, amounts generally described as restricted cash and restricted cash equivalents are included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts on the statement of cash flows. The amendments in the ASU are required to be adopted on a retrospective basis. We adopted this ASU effective October 1, 2018. Adoption of this new guidance resulted in a change in presentation of restricted cash on the Condensed Consolidated Statements of Cash Flows; otherwise, this guidance did not have a significant impact on our Condensed Consolidated Statements of Cash Flows and disclosures (see Note 2, “Restricted Cash”).

Accounting Standards Not Yet Adopted

Pension and Other Postretirement Benefit Costs Disclosures. In August 2018, the FASB issued ASU No. 2018-14, “Changes to the Disclosure Requirements for Defined Benefit Plans.” This ASU modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans by removing and adding certain disclosures for these plans. The amendments in this ASU are effective for interim and annual periods beginning October 1, 2020 (Fiscal 2021). The guidance shall be adopted

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UGI UTILITIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars, except where indicated otherwise)


retrospectively for all periods presented in the financial statements. Early adoption is permitted. The Company expects to adopt the new guidance in the fourth quarter of Fiscal 2019. The adoption of the new guidance is not expected to have a material impact on the Company’s financial statements.

Fair Value Measurements Disclosures. In August 2018, the FASB issued ASU No. 2018-13, “Changes to the Disclosure Requirements for Fair Value Measurement.” This ASU modifies the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. The amendments in this ASU are effective for annual periods beginning October 1, 2020 (Fiscal 2021). The guidance regarding removing and modifying disclosures will be adopted on a retrospective basis and the guidance regarding new disclosures will be adopted on a prospective basis. Early adoption is permitted. The Company expects to adopt the new guidance in the fourth quarter of Fiscal 2019. The adoption of the new guidance is not expected to have a material impact on the Company’s financial statements.

Derivatives and Hedging. In August 2017, the FASB issued ASU No. 2017-12, “Targeted Improvements to Accounting for Hedging Activities.” This ASU amends and simplifies existing guidance to allow companies to more accurately present the economic effects of risk management activities in the financial statements. The amendments in this ASU are effective for the Company for interim and annual periods beginning October 1, 2019 (Fiscal 2020). Early adoption is permitted. For cash flow and net investment hedges as of the adoption date, the guidance requires a modified retrospective approach. The amended presentation and disclosure guidance is required prospectively. The Company expects to adopt the new guidance in the first quarter of Fiscal 2020. The adoption of the new guidance is not expected to have a material impact on the Company’s financial statements.

Credit Losses. In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments. This ASU requires entities to estimate lifetime expected credit losses for financial instruments not measured at fair value through net income, including trade and other receivables, net investments in leases, financial receivables, debt securities, and other financial instruments, which may result in earlier recognition of credit losses. Further, the new current expected credit loss model may affect how entities estimate their allowance for loss for receivables that are current with respect to their payment terms. ASU 2016-13 is effective for the Company for interim and annual periods beginning October 1, 2020 (Fiscal 2021). 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 and determining the period in which the new guidance will be adopted.

Leases. In February 2016, the FASB issued ASU No. 2016-02, "Leases." This ASU, as subsequently updated, 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 the Company for interim and annual periods beginning October 1, 2019 (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 unless an entity chooses the transition option in ASU 2018-11, “Leases: Targeted Improvements” which, among other things, provides entities with a transition option to recognize the cumulative-effect adjustment from the modified retrospective application to the opening balance of retained earnings in the period of adoption. We will adopt ASU No. 2016-02, as updated, effective October 1, 2019 and expect to adopt the transition option which would allow the Company to maintain historical presentation for periods before October 1, 2019. The Company has completed a preliminary assessment for evaluating the impact of the guidance and anticipates that its adoption will result in a significant amount of right-of-use assets and lease liabilities for leases in effect at the adoption date. The Company has begun implementation activities including accumulating contracts and lease data in formats compatible with a new lease management system that will assist with the initial adoption and future reporting required by the standard.

Note 4 — Revenue from Contracts with Customers

The Company recognizes revenue when control of promised goods or services is transferred to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. The Company generally has the right to consideration from a customer in an amount that corresponds directly with the value to the customer for our performance completed to date. As such, we have elected to recognize revenue in the amount to which we have a right to invoice except in the case of certain large delivery service customers for which we recognize revenue on a straight-line basis over the term of the contract, consistent with when the performance obligations are satisfied by the Company.


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UGI UTILITIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars, except where indicated otherwise)


We do not have significant financing terms in our contracts because we generally receive payment shortly before, at, or shortly after the transfer of control of the good or service. Because the period between the time the performance obligation is satisfied and payment is received is one year or less, the Company has elected to apply the significant financing component practical expedient and no amount of consideration has been allocated as a financing component.
UGI Utilities supplies natural gas and electricity and provides distribution services of natural gas and electricity to residential, commercial, and industrial customers who are generally billed at standard regulated tariff rates approved by the PAPUC through the ratemaking process. Tariff rates include a component that provides for a reasonable opportunity to recover operating costs and expenses and to earn a return on net investment, and a component that provides for the recovery, subject to reasonableness reviews, of PGC and DS costs.
Customers may choose to purchase their natural gas and electricity from Gas Utility or Electric Utility, or, alternatively, may contract separately with alternate suppliers. Accordingly, our contracts with customers comprise two promised goods or services: (1) delivery service of natural gas and electricity through the Company’s utility distribution systems and (2) the natural gas or electricity commodity itself for those customers who choose to purchase the natural gas or electricity directly from the Company. Revenue is not recorded for the sale of natural gas or electricity to customers who have contracted separately with alternate suppliers. For those customers who choose to purchase their natural gas or electricity from the Company, the performance obligation includes both the supply of the commodity and the delivery service.
The terms of our core market customer contracts are generally considered day-to-day as customers can discontinue service at any time without penalty. Performance obligations are generally satisfied over time as the natural gas or electricity is delivered to customers, at which point the customers simultaneously receive and consume the benefits provided by the delivery service and, when applicable, the commodity. Amounts are billed to customers based upon the reading of a customer’s meter which occurs on a cycle basis throughout each reporting period. An unbilled amount is recorded at the end of each reporting period based upon estimated amounts of natural gas or electricity delivered to customers since the date of the last meter reading. These unbilled estimates consider various factors such as historical customer usage patterns, customer rates and weather.
UGI Utilities has certain fixed-term contracts with large commercial and industrial customers to provide natural gas delivery services at contracted rates and at volumes generally based on the customer’s needs. The performance obligation to provide the contracted delivery service for these large commercial and industrial customers is satisfied over time and revenue is generally recognized on a straight-line basis.
UGI Utilities makes off-system sales whereby natural gas delivered to our system in excess of amounts needed to fulfill our distribution system needs is sold to other customers, primarily other distributors of natural gas, based on an agreed-upon price and volume between the Company and the counterparty. Gas Utility also sells excess capacity whereby interstate pipeline capacity in excess of amounts needed to meet our customer obligations is sold to other distributors of natural gas based upon an agreed-upon rate. Off-system sales and capacity releases are generally entered into one month at a time and comprise the sale of a specific volume of gas or pipeline capacity at a specific delivery point or points over a specific time. As such, performance obligations associated with off-system sales and capacity release customers are satisfied, and associated revenue is recorded, when the agreed upon volume of natural gas is delivered or capacity is provided, and title is transferred, in accordance with the contract terms.
Electric Utility provides transmission services to PJM by allowing PJM to access Electric Utility’s electricity transmission facilities. In exchange for providing access, PJM pays Electric Utility consideration determined by a formula-based rate approved by FERC. The formula-based rate, which is updated annually, allows recovery of costs incurred to provide transmissions services and return on transmission-related net investment. We recognize revenue over time as we provide transmission service.
Other revenues represent revenues from other ancillary services provided to customers and are generally recorded as the service is provided to customers.
Contract Balances
The timing of revenue recognition may differ from the timing of invoicing to customers or cash receipts. Contract assets represent our right to consideration after the performance obligations have been satisfied when such right is conditioned on something other than the passage of time. Contract assets were not material at June 30, 2019. All of our receivables are unconditional rights to consideration and are included in “Accounts receivable” and “Accrued utility revenues” on the Condensed Consolidated Balance Sheets. Amounts billed are generally due within the following month.

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UGI UTILITIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars, except where indicated otherwise)


Contract liabilities arise when payment from a customer is received before the performance obligations have been satisfied and represent the Company’s obligations to transfer goods or services to a customer for which we have received consideration. The balances of contract liabilities were $6,915 and $5,897 at June 30, 2019 and October 1, 2018, respectively, and are included in “Other current liabilities” and “Other noncurrent liabilities” on the Condensed Consolidated Balance Sheets. Revenue recognized for the nine months ended June 30, 2019 from the amount included in contract liabilities at October 1, 2018 was not material.
Revenue Disaggregation
The following table presents our disaggregated revenues by reportable segment for the three and nine months ended June 30, 2019:
 
 
Three Months Ended
June 30, 2019
 
Nine Months Ended
June 30, 2019
 
 
Total
 
Gas Utility
 
Electric Utility
 
Total
 
Gas Utility
 
Electric Utility
Revenues from contracts with customers:
 
 
 
 
 
 
 
 
 
 
 
 
Core Market:
 
 
 
 
 
 
 
 
 
 
 
 
Residential
 
$
78,103

 
$
66,390

 
$
11,713

 
$
494,110

 
$
445,675

 
$
48,435

Commercial & industrial
 
34,274

 
28,717

 
5,557

 
202,534

 
184,504

 
18,030

Large delivery service
 
27,857

 
27,857

 

 
111,442

 
111,442

 

Off-system sales and capacity releases
 
14,115

 
14,115

 

 
98,649

 
98,649

 

Other (a)
 
8,992

 
6,810

 
2,182

 
7,717

 
970

 
6,747

Total revenues from contracts with customers
 
163,341

 
143,889

 
19,452

 
914,452

 
841,240

 
73,212

Other revenues (b)
 
552

 
552

 

 
1,758

 
1,758

 

Total revenues
 
$
163,893

 
$
144,441

 
$
19,452

 
$
916,210

 
$
842,998

 
$
73,212



(a)
Gas Utility includes an unallocated negative surcharge revenue increase (reduction) of $3,299 and $(11,325) for the three and nine months ended June 30, 2019, respectively, as a result of a PAPUC Order issued May 17, 2018, related to the TCJA (see Note 7).
(b)
Represents certain revenues not from contracts with customers that are not within the scope of ASC 606 and accounted for in accordance with other GAAP.

Remaining Performance Obligations
The Company has elected to use practical expedients as allowed in ASC 606 to exclude disclosures related to the aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied for core market customers and off-system sales and capacity releases as of the end of the reporting period because these contracts have an initial expected term of one year or less. Certain contracts with large delivery service customers contain minimum future performance obligations through 2053. At June 30, 2019, the Company expects to record approximately $193,000 of revenues related to the minimum future performance obligations over the remaining terms of the related contracts.
Note 5 — Inventories
Inventories comprise the following:
 
June 30, 2019
 
September 30, 2018
 
June 30, 2018
Gas Utility natural gas
$
15,465

 
$
37,287

 
$
18,608

Materials, supplies and other
16,798

 
15,126

 
16,055

Total inventories
$
32,263

 
$
52,413

 
$
34,663



At June 30, 2019, UGI Utilities was party to four principal SCAAs with terms of up to three years. All four of the SCAAs were with Energy Services (see Note 14). Pursuant to the SCAAs, UGI Utilities has, among other things, released certain natural gas storage and transportation contracts for the terms of the SCAAs. UGI Utilities also transferred certain associated natural gas storage

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UGI UTILITIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars, except where indicated otherwise)


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 values of gas storage inventories released under the SCAAs at June 30, 2019, September 30, 2018 and June 30, 2018, comprising 3.3 bcf, 9.0 bcf and 4.7 bcf of natural gas, were $8,234, $23,136 and $11,944, respectively. At June 30, 2019, September 30, 2018 and June 30, 2018, UGI Utilities held a total of $7,640, $13,840 and $13,840, respectively, of security deposits received 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 14.

Note 6 — Income Tax Reform

On December 22, 2017, the TCJA was enacted into law. The significant changes resulting from the law that impacted UGI Utilities include a reduction in the U.S. federal income tax rate from 35% to 21%, effective January 1, 2018 (resulting in a blended rate of 24.5% for Fiscal 2018) and the elimination of bonus depreciation on regulated utility property beginning in Fiscal 2019.
In accordance with GAAP as determined by ASC 740, we are required to record the effects of tax law changes in the period enacted. As further discussed below, our results for the three and nine months ended June 30, 2018, contained provisional estimates of the impact of the TCJA. These amounts were considered provisional because they used estimates for which tax returns had not yet been filed and because estimated amounts could have been impacted by future regulatory and accounting guidance if and when issued. We adjusted provisional amounts as further information became available and as we refined our calculations. As permitted by SEC Staff Bulletin No. 118, these adjustments occurred during the reasonable “measurement period” defined as twelve months from the date of enactment. During the three months ended December 31, 2018, adjustments to provisional amounts recorded in prior periods were not material.

As a result of the TCJA, during the three months ended December 31, 2017, we reduced our net deferred income tax liabilities by $223,660 due to the remeasurement of existing federal deferred income tax assets and liabilities from 35% to 21%. Because a significant amount of the reduction related to our regulated utility plant assets, most of the reduction to our deferred income taxes was not recognized immediately in income tax expense. During the nine months ended June 30, 2018, the amount of the reduction in deferred income taxes that reduced income tax expense totaled $9,254.

In order for utility assets to continue to be eligible for accelerated tax depreciation, current law requires that excess deferred federal income taxes resulting from the remeasurement of deferred income taxes on regulated utility plant be amortized no more rapidly than over the remaining lives of the assets that gave rise to the excess deferred income taxes. In December 2017, we recorded a regulatory liability of $216,098 associated with the excess deferred federal income taxes related to our regulated utility plant assets. The regulatory liability was increased, and a federal deferred income tax asset was recorded, in the amount of $87,803 to reflect the tax benefit generated by the amortization of the excess deferred federal income taxes.

For the three and nine months ended June 30, 2019 and 2018, we included the estimated impacts of the TCJA in determining our estimated annual effective income tax rates. We were subject to a blended U.S. federal tax rate of 24.5% for Fiscal 2018 because our fiscal year contained the effective date of the rate change from 35% to 21%. We are subject to a 21% U.S. federal tax rate in Fiscal 2019. As a result, our annual effective tax rates used for the three and nine months ended June 30, 2019 were based upon a federal income tax rate of 21%, and our annual effective tax rates used for the three and nine months ended June 30, 2018, were based upon a federal income tax rate of 24.5%. Our estimated annual effective tax rate was not impacted by any regulatory action taken by the PAPUC.

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UGI UTILITIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars, except where indicated otherwise)


Note 7 — 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 2018 Annual Report. Other than removal costs, UGI Utilities does not recover a rate of return on its regulatory assets listed below. The following regulatory assets and liabilities associated with UGI Utilities are included on the Condensed Consolidated Balance Sheets:
 
June 30, 2019
 
September 30, 2018
 
June 30, 2018
Regulatory assets:
 
 
 
 
 
Income taxes recoverable
$
123,901

 
$
110,129

 
$
130,024

Underfunded pension and postretirement plans
81,791

 
87,106

 
132,239

Environmental costs
56,561

 
58,836

 
59,808

Removal costs, net
29,339

 
32,025

 
30,987

Other
9,085

 
12,906

 
7,003

Total regulatory assets
$
300,677

 
$
301,002

 
$
360,061

Regulatory liabilities:
 
 
 
 
 
Postretirement benefits
$
16,481

 
$
17,781

 
$
16,895

Deferred fuel and power refunds
12,416

 
36,723

 
44,500

State tax benefits — distribution system repairs
25,176

 
22,611

 
20,677

PAPUC temporary rates order
25,414

 
24,430

 
24,098

Excess federal deferred income taxes
282,735

 
285,221

 
301,151

Other
13,948

 
3,409

 
5,130

Total regulatory liabilities
$
376,170

 
$
390,175

 
$
412,451



Deferred fuel and power 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 PGC rates in the case of Gas Utility and DS tariffs in the case of Electric Utility. These 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 retail core-market customers. Realized and unrealized gains or losses on natural gas derivative instruments are included in deferred fuel and power costs or refunds. Net unrealized (losses) gains on such contracts at June 30, 2019, September 30, 2018, and June 30, 2018, were $(2,141), $2,856 and $1,863, respectively.

PAPUC temporary rates order. On May 17, 2018, the PAPUC ordered each regulated utility currently not in a general base rate case proceeding, including UGI Gas, PNG and CPG, to reduce their rates to credit customers any tax savings as a result of TCJA through the establishment of a negative surcharge applied to bills rendered on or after July 1, 2018. In accordance with the terms of the temporary rates order, the initial temporary negative surcharge was reconciled at the end of Fiscal 2018 to reflect the difference in the amount of bill credit received by customers and the amount of benefits received by the Company through the fiscal year end period and updated negative surcharges were placed in effect on January 1, 2019 at rates of 4.71%, 2.87% and 6.34%, respectively, for the UGI South, UGI North and UGI Central rate districts (as described below). These negative surcharges will remain in place until the effective date of new rates established in Gas Utility’s current general base rate proceeding filed January 28, 2019.
In its May 17, 2018 Order, the PAPUC also required Pennsylvania utilities to establish a regulatory liability for tax benefits that accrued during the period January 1, 2018 through June 30, 2018, resulting from the reduced federal tax rate. The rate treatment of this regulatory liability is addressed in Gas Utility’s base rate proceeding filed January 28, 2019 (see “Base Rate Filings” below). In its initial filing, Gas Utility has proposed a 4.5% negative surcharge applicable to all customer distribution service bills to return $24,029 of tax benefits experienced by UGI Utilities over the period January 1, 2018 to June 30, 2018, plus applicable interest, thereby satisfying a requirement to make a proposal for distributing those benefits within three years of the May 17, 2018, Order.

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UGI UTILITIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars, except where indicated otherwise)


As proposed, the negative surcharge would become effective for a twelve-month period beginning on the effective date of the new base rates.
For Pennsylvania utilities that were in a general base rate proceeding, including Electric Utility, no negative surcharge applied. The tax benefits that accrued during the period January 1, 2018 through October 26, 2018, the date before Electric Utility’s base rate case became effective (see below), were refunded to Electric Utility ratepayers through a one-time bill credit.

Excess federal deferred income taxes. This regulatory liability is the result of remeasuring UGI Utilities’ federal deferred income tax liabilities on utility plant due to the enactment of the TCJA on December 22, 2017 (see Note 6). In order for our utility assets to continue to be eligible for accelerated tax depreciation, current law requires that excess federal deferred income taxes resulting from the remeasurement be amortized no more rapidly than over the remaining lives of the assets that gave rise to the excess federal deferred income taxes, ranging from 1 year to approximately 65 years. This regulatory liability has been increased to reflect the tax benefit generated by the amortization of the excess deferred federal income taxes and is being amortized and credited to tax expense.
Other Regulatory Matters

Utility Merger. On March 8, 2018 and March 13, 2018, UGI Utilities filed merger authorization requests with the PAPUC and MDPSC, respectively, to merge PNG and CPG into UGI Utilities. After receiving all necessary FERC, MDPSC, and PAPUC approvals, CPG and PNG were merged with and into UGI Utilities, effective October 1, 2018. Consistent with the MDPSC order issued July 25, 2018, and the PAPUC order issued September 26, 2018, the former CPG, PNG and UGI Utilities, Inc. Gas Division service territories became the UGI Central, UGI North and UGI South rate districts of the UGI Utilities, Inc. Gas Division, respectively, without any ratemaking change. UGI Utilities’ obligations under the settlement approved by the PAPUC include various non-monetary conditions requiring UGI Utilities to maintain separate accounting-type schedules for limited future ratemaking purposes.

Base Rate Filings. On January 28, 2019, Gas Utility filed a request with the PAPUC to increase its operating revenues for residential, commercial and industrial customers by $71,090 annually. The requested rate increase applies to the consolidated UGI Central, UGI North and UGI South rate districts. 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. Additionally, Gas Utility has proposed a 4.5% negative surcharge applicable to all customer distribution service bills to return $24,029 of tax benefits experienced by UGI Utilities over the period January 1, 2018 to June 30, 2018, plus applicable interest. As proposed, the negative surcharge would become effective for a twelve-month period beginning on the effective date of the new base rates. Gas Utility requested that the new gas rates become effective March 29, 2019. The PAPUC entered an Order dated February 28, 2019, suspending the effective date for the rate increase to allow for investigation and public hearings. On July 22, 2019, a Joint Petition for Approval of Settlement of all issues supported by all active parties was filed with the PAPUC. The Joint Petition is subject to receipt of a recommended decision by a PAPUC administrative law judge and an order of the PAPUC approving the settlement. Unless the PAPUC issues a final order prior to the end of the statutory suspension period, October 28, 2019, the initial proposed rate increase will become effective the next day, subject to refund and a subsequent PAPUC order. The Company cannot predict the timing or the ultimate outcome of the rate case review process.

On January 26, 2018, Electric Utility filed a rate request with the PAPUC to increase its annual base distribution revenues by $9,200, which was later reduced by the Company to $7,700 to reflect the impact of the TCJA and other adjustments. The increased revenues would fund ongoing system improvements and operations necessary to maintain safe and reliable electric service. On October 25, 2018, the PAPUC approved a final order providing for a $3,201 annual base distribution rate increase for Electric Utility effective October 27, 2018. As part of the final order, Electric Utility provided customers with a one-time $210 billing credit associated with 2018 TCJA tax benefits. On November 26, 2018, the Pennsylvania Office of Consumer Advocate filed an appeal to the Pennsylvania Commonwealth Court challenging the PAPUC’s acceptance of the Company’s use of a fully projected future test year and handling of consolidated federal income tax benefits. The Company cannot predict the ultimate outcome of this appeal.

On January 19, 2017, PNG (now the UGI North rate district of Gas Utility) filed a rate request with the PAPUC to increase PNG’s annual base operating revenues for residential, commercial and industrial customers by $21,700 annually. The increased revenues would fund ongoing system improvements and operations necessary to maintain safe and reliable natural gas service. On June 30, 2017, all active parties supported the filing of a Joint Petition for Approval of Settlement of all issues with the PAPUC providing

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UGI UTILITIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars, except where indicated otherwise)


for an $11,250 PNG annual base distribution rate increase. On August 31, 2017, the PAPUC approved the Joint Petition and the increase became effective on October 20, 2017.

Manor Township, Pennsylvania Natural Gas Incident Complaint. In connection with a July 2, 2017, explosion in Manor Township, Lancaster County, Pennsylvania, that resulted in the death of one Company employee and injuries to two Company employees and one sewer authority employee, and destroyed two residences and damaged several other homes, BIE filed a formal complaint at the PAPUC in which BIE alleged that the Company committed multiple violations of federal and state gas pipeline regulations in connection with its emergency response leading up to the explosion, and it requested that the PAPUC order the Company to pay approximately $2,100 in civil penalties, which is the maximum allowable fine. On November 16, 2018, the Company filed its formal written answer contesting the BIE complaint. The matter remains pending before the PAPUC. See additional discussion in Note 9.

Note 8 — Debt

On February 1, 2019, UGI Utilities issued in a private placement $150,000 of 4.55% Senior Notes due February 1, 2049. The 4.55% Senior Notes were issued pursuant to a Note Purchase Agreement dated December 21, 2018, between UGI Utilities and certain note purchasers. The 4.55% Senior Notes are unsecured and rank equally with UGI Utilities’ existing outstanding senior debt. The net proceeds from the sale of the 4.55% Senior Notes were used to reduce short-term borrowings and for general corporate purposes. The 4.55% Senior Notes include the usual and customary covenants for similar type notes including, among others, maintenance of existence, payment of taxes when due, compliance with laws and maintenance of insurance. The 4.55% Senior Notes require UGI Utilities not to exceed a ratio of Consolidated Debt to Consolidated Total Capital, as defined, of 0.65 to 1.00.

On June 27, 2019, UGI Utilities entered into the UGI Utilities 2019 Credit Agreement with a group of banks providing for borrowings up to $350,000 (including a $100,000 sublimit for letters of credit). The Company may request an increase in the amount of loan commitments under the UGI Utilities 2019 Credit Agreement to a maximum aggregate amount of $150,000. Concurrently with entering into the UGI Utilities 2019 Credit Agreement, the Company terminated its existing $450,000 revolving credit agreement dated March 27, 2015. Under the UGI Utilities 2019 Credit Agreement, UGI Utilities may borrow at various prevailing market interest rates, including LIBOR and the banks’ prime rate, plus a margin. The margin on such borrowings ranges from 0.0% to 1.75% and is based upon the credit ratings of certain indebtedness of UGI Utilities. The UGI Utilities 2019 Credit Agreement requires UGI Utilities not to exceed a ratio of Consolidated Debt to Consolidated Total Capital, as defined, of 0.65 to 1.0. The UGI Utilities 2019 Credit Agreement is currently scheduled to expire in June 2020, but will be extended to June 2024 if on or before June 25, 2020, UGI Utilities satisfies certain requirements relating to approval by the PAPUC. UGI Utilities is currently seeking such PAPUC approval.

Note 9 — Commitments and Contingencies

Contingencies

From the late 1800s through the mid-1900s, UGI Utilities and its current and former subsidiaries owned and operated a number of 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 South and Electric Utility. Beginning in 2006 and 2008, UGI Utilities also owned and operated two acquired subsidiaries (CPG and PNG), which now constitute UGI North and UGI Central, with similar histories of owning, and in some cases operating, MGPs in Pennsylvania. CPG and PNG merged into UGI Utilities effective October 1, 2018.
Prior to the Utility Merger, each of UGI Utilities and its subsidiaries, CPG and PNG, were subject to COAs with the PADEP to address the remediation of specified former MGP sites in Pennsylvania. In accordance with the COAs, as amended to recognize the Utility Merger, UGI Utilities, as the successor to CPG and PNG, is required to either obtain a certain number of points per calendar year based on defined eligible environmental investigatory and/or remedial activities at the MGPs and in the case of one COA, an additional obligation to plug specific natural gas wells, or make expenditures for such activities in an amount equal to an annual environmental cost cap (i.e. minimum expenditure threshold). The cost cap of the three COAs, in the aggregate, is

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UGI UTILITIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars, except where indicated otherwise)


$5,350. The three COAs are currently scheduled to terminate at the end of 2031, 2020 and 2020. At June 30, 2019, September 30, 2018 and June 30, 2018, our aggregate estimated accrued liabilities for environmental investigation and remediation costs related to the COAs totaled $47,560, $50,970, and $52,231, respectively. UGI Utilities has recorded associated regulatory assets for these costs because recovery of these costs from customers is probable (see Note 7).

UGI Utilities does not expect the costs for investigation and remediation of hazardous substances at Pennsylvania MGP sites to be material to its results of operations because UGI Utilities receives ratemaking recovery of actual environmental investigation and remediation costs associated with the sites covered by the COAs. This ratemaking recognition reconciles the accumulated difference between historical costs and rate recoveries with an estimate of future costs associated with the sites.

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 a former subsidiary. 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 a former subsidiary 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 June 30, 2019, September 30, 2018 and June 30, 2018, neither the undiscounted nor the accrued liability for environmental investigation and cleanup costs for UGI Utilities’ MGP sites outside Pennsylvania was material.

Other Matters

Manor Township, Pennsylvania Natural Gas Explosion. On July 2, 2017, an explosion occurred in Manor Township, Pennsylvania which resulted in the death of one Company employee and injuries to two other Company employees and an employee of the local sewer authority, and significant property damage. Prior to the tolling of the statute of limitations on July 2, 2019, the Company received lawsuits alleging that the Company and other unrelated parties are responsible for the value of property damage resulting from the explosion. The Company also resolved a number of claims through settlement. On the regulatory side, on February 25, 2019, the NTSB issued a Pipeline Accident Brief of its investigation into the incident, in which it concluded that the explosion resulted from gas that migrated from an incorrectly installed mechanical tapping tee connecting the Company’s distribution main and service line to the home that exploded. In its report, the NTSB also restated its four recommendations that it issued in a June 25, 2018 preliminary report concerning the mechanical tapping tee manufacturer’s installation instructions and the oversight of mechanical tapping tees by the Pipeline and Hazardous Materials Safety Administration. With the issuance of the NTSB report, the one remaining regulatory matter arising from the incident is the BIE formal complaint before the PAPUC in which the BIE alleged that the Company committed multiple violations of federal and state gas pipeline regulations in connection with its emergency response leading up to the explosion and requested that the PAPUC order the Company to pay approximately $2,100 in civil penalties, which is the maximum allowable fine. On November 16, 2018, the Company filed its formal written answer contesting the BIE complaint.
The Company maintains workers’ compensation insurance and liability insurance for personal injury, property and casualty damages and anticipates that third-party claims associated with the explosion, in excess of the Company’s deductible, will be recovered through the Company’s insurance. Although the Company cannot predict the result of these pending or future claims, we believe that claims and expenses associated with the explosion will not have a material impact on our consolidated financial statements.
In addition to the matters described above, there are other 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 statements.

Note 10 — 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 benefits are based on years of service, age and employee compensation. We also provide limited postretirement health care benefits to certain retirees and postretirement life insurance benefits to certain active and retired employees.

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UGI UTILITIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Thousands of dollars, except where indicated otherwise)



The service cost component of our pension and other postretirement plans, net of amounts capitalized, are reflected in “Operating and administrative expenses” on the Condensed Consolidated Statements of Income. The non-service cost component, net of amounts capitalized, are reflected in “Pension and other postretirement plans non-service income (expense)” on the Condensed Consolidated Statements of Income. Net periodic pension expense and other postretirement benefit costs include the following components:
<
 
 
Pension Benefits
 
Other Postretirement Benefits
Three Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Service cost
 
$
1,637

 
$
1,882

 
$
31

 
$
66

Interest cost
 
6,050

 
5,766

 
109

 
111

Expected return on assets
 
(8,140
)
 
(7,776
)
 
(185
)
 
(178
)
Amortization of:
 
 
 
 
 
 
 
 
Prior service cost (benefit)
 
63

 
61

 
(109
)
 
(110
)
Actuarial loss
 
1,721

 
2,984

 
17

 
23

Net benefit cost (benefit)
 
1,331

 
2,917

 
(137
)
 
(88
)
Change in associated regulatory liabilities
 

 

 
(343
)
 
(122
)
Net benefit cost (benefit) after change in regulatory liabilities
 
$
1,331

 
$
2,917

 
$
(480
)
 
$
(210
)
 
 
 
 
 
 
 
 
 
 
 
Pension Benefits
 
Other Postretirement Benefits
Nine Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Service cost
 
$
4,912

 
$
5,644

 
$
94

 
$
200

Interest cost
 
18,151