Document
Table of Contents

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2017
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from  ________ to ________            
Commission file number 1-11071
UGI CORPORATION
(Exact name of registrant as specified in its charter)
 
Pennsylvania
 
23-2668356
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
460 North Gulph Road, King of Prussia, PA
 
19406
(Address of principal executive offices)
 
(Zip Code)
(610) 337-1000
(Registrant’s telephone number, including area code)
______________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
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 ý    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
ý
 
Accelerated filer
¨
 
Non-accelerated filer
¨
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  ý
At July 31, 2017, there were 173,373,824 shares of UGI Corporation Common Stock, without par value, outstanding.
 
 
 
 
 


Table of Contents

UGI CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
54 
 
 
 
 
 

- i -

Table of Contents
UGI CORPORATION AND SUBSIDIARIES

PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(Millions of dollars)
 
 
June 30,
2017
 
September 30,
2016
 
June 30,
2016
ASSETS
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
Cash and cash equivalents
 
$
604.3

 
$
502.8

 
$
909.2

Restricted cash
 
6.7

 
15.6

 
9.6

Accounts receivable (less allowances for doubtful accounts of $33.0, $27.3 and $32.1, respectively)
 
628.2

 
551.6

 
607.0

Accrued utility revenues
 
5.9

 
12.8

 
10.1

Inventories
 
216.1

 
210.3

 
184.2

Utility regulatory assets
 
7.8

 
3.2

 
3.3

Derivative instruments
 
13.3

 
30.9

 
39.4

Prepaid expenses and other current assets
 
85.0

 
96.6

 
116.7

Total current assets
 
1,567.3

 
1,423.8

 
1,879.5

Property, plant and equipment, at cost (less accumulated depreciation and amortization of $3,337.5, $3,107.3 and $3,037.9, respectively)
 
5,422.1

 
5,238.0

 
5,108.2

Goodwill
 
3,032.3

 
2,989.0

 
2,981.3

Intangible assets, net
 
571.2

 
580.3

 
587.9

Utility regulatory assets
 
391.0

 
391.9

 
342.0

Derivative instruments
 
3.1

 
6.5

 
10.6

Other assets
 
259.4

 
217.7

 
194.4

Total assets
 
$
11,246.4

 
$
10,847.2

 
$
11,103.9

LIABILITIES AND EQUITY
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
Current maturities of long-term debt
 
$
119.1

 
$
29.5

 
$
379.6

Short-term borrowings
 
163.9

 
291.7

 
144.0

Accounts payable
 
359.0

 
391.2

 
337.0

Derivative instruments
 
20.1

 
48.5

 
26.0

Other current liabilities
 
617.5

 
681.1

 
700.1

Total current liabilities
 
1,279.6

 
1,442.0

 
1,586.7

Long-term debt
 
4,014.6

 
3,766.0

 
3,737.0

Deferred income taxes
 
1,279.8

 
1,216.2

 
1,210.4

Deferred investment tax credits
 
3.0

 
3.3

 
3.3

Derivative instruments
 
15.6

 
21.9

 
13.2

Other noncurrent liabilities
 
812.7

 
796.0

 
716.6

Total liabilities
 
7,405.3

 
7,245.4

 
7,267.2

Commitments and contingencies (Note 9)
 

 

 

Equity:
 
 
 
 
 
 
UGI Corporation stockholders’ equity:
 
 
 
 
 
 
UGI Common Stock, without par value (authorized — 450,000,000 shares; issued — 173,960,691, 173,894,141 and 173,875,641 shares, respectively)
 
1,187.8

 
1,201.6

 
1,201.3

Retained earnings
 
2,151.9

 
1,840.9

 
1,925.8

Accumulated other comprehensive loss
 
(135.9
)
 
(154.7
)
 
(156.6
)
Treasury stock, at cost
 
(27.1
)
 
(36.9
)
 
(21.3
)
Total UGI Corporation stockholders’ equity
 
3,176.7

 
2,850.9

 
2,949.2

Noncontrolling interests, principally in AmeriGas Partners
 
664.4

 
750.9

 
887.5

Total equity
 
3,841.1

 
3,601.8

 
3,836.7

Total liabilities and equity
 
$
11,246.4

 
$
10,847.2

 
$
11,103.9

See accompanying notes to condensed consolidated financial statements.

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Table of Contents
UGI CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(Millions of dollars, except per share amounts)
 
 
Three Months Ended
June 30,
 
Nine Months Ended
June 30,
 
 
2017
 
2016
 
2017
 
2016
Revenues
 
$
1,153.5

 
$
1,130.8

 
$
5,006.8

 
$
4,709.5

Costs and expenses:
 
 
 
 
 
 
 
 
Cost of sales (excluding depreciation shown below)
 
618.5

 
433.0

 
2,337.1

 
1,943.9

Operating and administrative expenses
 
445.7

 
445.5

 
1,396.7

 
1,390.6

Utility taxes other than income taxes
 
3.7

 
4.0

 
12.3

 
12.2

Depreciation
 
89.6

 
82.8

 
258.1

 
251.9

Amortization
 
14.5

 
15.3

 
43.4

 
47.5

Other operating income, net
 
(15.7
)
 
(5.5
)
 
(17.4
)
 
(13.2
)
 
 
1,156.3

 
975.1

 
4,030.2

 
3,632.9

Operating (loss) income
 
(2.8
)
 
155.7

 
976.6

 
1,076.6

Income (loss) from equity investees
 
0.9

 

 
3.0

 
(0.1
)
Loss on extinguishments of debt
 
(4.4
)
 
(37.1
)
 
(59.7
)
 
(37.1
)
Losses on foreign currency contracts, net
 
(16.2
)
 

 
(16.1
)
 

Interest expense
 
(56.8
)
 
(56.4
)
 
(168.0
)
 
(171.6
)
(Loss) income before income taxes
 
(79.3
)
 
62.2

 
735.8

 
867.8

Income tax benefit (expense)
 
17.1

 
(33.6
)
 
(195.3
)
 
(263.3
)
Net (loss) income including noncontrolling interests
 
(62.2
)
 
28.6

 
540.5

 
604.5

Add net loss (deduct net income) attributable to noncontrolling interests, principally in AmeriGas Partners
 
43.2

 
32.1

 
(108.9
)
 
(196.0
)
Net (loss) income attributable to UGI Corporation
 
$
(19.0
)
 
$
60.7

 
$
431.6

 
$
408.5

(Loss) earnings per common share attributable to UGI Corporation stockholders:
 
 
 
 
 
 
 
 
Basic
 
$
(0.11
)
 
$
0.35

 
$
2.49

 
$
2.36

Diluted
 
$
(0.11
)
 
$
0.34

 
$
2.44

 
$
2.33

Weighted average common shares outstanding (thousands):
 
 
 
 
 
 
 
 
Basic
 
173,742

 
173,395

 
173,625

 
172,954

Diluted
 
173,742

 
175,974

 
177,125

 
175,260

Dividends declared per common share
 
$
0.2500

 
$
0.2375

 
$
0.7250

 
$
0.6925

See accompanying notes to condensed consolidated financial statements.


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Table of Contents
UGI CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
(Millions of dollars)
 
 
Three Months Ended
June 30,
 
Nine Months Ended
June 30,
 
 
2017
 
2016
 
2017
 
2016
Net (loss) income including noncontrolling interests
 
$
(62.2
)
 
$
28.6

 
$
540.5

 
$
604.5

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Net (losses) gains on derivative instruments (net of tax of $3.4, $(3.4), $(2.3) and $10.9, respectively)
 
(6.6
)
 
7.8

 
5.2

 
(15.1
)
Reclassifications of net (gains) losses on derivative instruments (net of tax of $(0.2), $(0.4), $4.4 and $5.5, respectively)
 
(0.2
)
 
0.6

 
(10.1
)
 
(9.0
)
Foreign currency adjustments
 
75.5

 
(35.4
)
 
22.4

 
(18.9
)
Benefit plans (net of tax of $0.0, $(0.3), $(0.9) and $(0.7), respectively)
 
(0.1
)
 
0.3

 
1.3

 
1.0

Other comprehensive income (loss)
 
68.6

 
(26.7
)
 
18.8

 
(42.0
)
Comprehensive income including noncontrolling interests
 
6.4

 
1.9

 
559.3

 
562.5

Add comprehensive loss (deduct comprehensive income) attributable to noncontrolling interests, principally in AmeriGas Partners
 
43.2

 
32.1

 
(108.9
)
 
(196.0
)
Comprehensive income attributable to UGI Corporation
 
$
49.6

 
$
34.0

 
$
450.4

 
$
366.5

See accompanying notes to condensed consolidated financial statements.


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Table of Contents
UGI CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Millions of dollars)
 
 
Nine Months Ended
June 30,
 
 
2017
 
2016
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
Net income including noncontrolling interests
 
$
540.5

 
$
604.5

Adjustments to reconcile net income including noncontrolling interests to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
301.5

 
299.4

Deferred income taxes
 
46.9

 
76.9

Provision for uncollectible accounts
 
19.3

 
18.3

Change in unrealized gains on derivative instruments
 
(29.0
)
 
(133.0
)
Loss on extinguishments of debt
 
59.7

 
37.1

Settlement of UGI Utilities interest rate protection agreements
 


(36.0
)
Other, net
 
37.8

 
12.3

Net change in:
 
 
 
 
Accounts receivable and accrued utility revenues
 
(86.7
)
 
(15.6
)
Inventories
 
(4.4
)
 
54.6

Utility deferred fuel and power costs, net of changes in unsettled derivatives
 
(12.5
)
 
(11.5
)
Accounts payable
 
5.1

 
(67.8
)
Other current assets
 
3.1

 
(8.9
)
Other current liabilities
 
(35.3
)
 
32.7

Net cash provided by operating activities
 
846.0

 
863.0

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
 
Expenditures for property, plant and equipment
 
(471.9
)
 
(370.6
)
Acquisitions of businesses, net of cash acquired
 
(52.8
)
 
(60.3
)
Decrease in restricted cash
 
8.9

 
59.7

Other, net
 
(15.9
)
 
4.1

Net cash used by investing activities
 
(531.7
)
 
(367.1
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
Dividends on UGI Common Stock
 
(125.6
)
 
(119.6
)
Distributions on AmeriGas Partners publicly held Common Units
 
(195.8
)
 
(192.3
)
Issuances of debt, net of issuance costs
 
1,307.1

 
1,432.8

Repayments of debt, including redemption premiums
 
(1,056.2
)
 
(1,027.0
)
Decrease in short-term borrowings
 
(132.6
)
 
(26.5
)
Receivables Facility net borrowings (repayments)
 
4.5

 
(19.5
)
Issuances of UGI Common Stock
 
11.0

 
13.0

Repurchases of UGI Common Stock
 
(28.7
)
 
(24.7
)
Other
 
(0.8
)
 
12.4

Net cash (used) provided by financing activities
 
(217.1
)
 
48.6

EFFECT OF EXCHANGE RATE CHANGES ON CASH
 
4.3

 
(5.0
)
Cash and cash equivalents increase
 
$
101.5

 
$
539.5

CASH AND CASH EQUIVALENTS
 
 
 
 
End of period
 
$
604.3

 
$
909.2

Beginning of period
 
502.8

 
369.7

Increase
 
$
101.5

 
$
539.5

See accompanying notes to condensed consolidated financial statements.

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Table of Contents
UGI CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(unaudited)
(Millions of dollars)
 
Nine Months Ended
June 30,
 
2017
 
2016
Common stock, without par value
 
 
 
Balance, beginning of period
$
1,201.6

 
$
1,214.6

Common Stock issued in connection with employee and director plans (including losses on treasury stock transactions), net of tax withheld
(26.4
)
 
(35.3
)
Excess tax benefits realized on equity-based compensation

 
12.4

Equity-based compensation expense
11.2

 
9.6

Gain on sale of treasury stock
1.4

 

Balance, end of period
$
1,187.8

 
$
1,201.3

Retained earnings
 
 
 
Balance, beginning of period
$
1,840.9

 
$
1,636.9

Cumulative effect of change in accounting for employee share-based payments
5.0

 

Net income attributable to UGI Corporation
431.6

 
408.5

Cash dividends on Common Stock
(125.6
)
 
(119.6
)
Balance, end of period
$
2,151.9

 
$
1,925.8

Accumulated other comprehensive income (loss)
 
 
 
Balance, beginning of period
$
(154.7
)
 
$
(114.6
)
Net gains (losses) on derivative instruments
5.2

 
(15.1
)
Reclassification of net gains on derivative instruments
(10.1
)
 
(9.0
)
Benefit plans
1.3

 
1.0

Foreign currency adjustments
22.4

 
(18.9
)
Balance, end of period
$
(135.9
)
 
$
(156.6
)
Treasury stock
 
 
 
Balance, beginning of period
$
(36.9
)
 
$
(44.9
)
Common stock issued in connection with employee and director plans, net of tax withheld
44.7

 
72.9

Repurchases of Common Stock
(28.7
)
 
(24.7
)
Reacquired common stock — employee and director plans
(6.4
)
 
(24.6
)
Sale of treasury stock
0.2

 

Balance, end of period
$
(27.1
)
 
$
(21.3
)
Total UGI Corporation stockholders’ equity
$
3,176.7

 
$
2,949.2

Noncontrolling interests
 
 
 
Balance, beginning of period
$
750.9

 
$
880.4

Net income attributable to noncontrolling interests, principally in AmeriGas Partners
108.9

 
196.0

Dividends and distributions
(195.8
)
 
(192.3
)
Other
0.4

 
3.4

Balance, end of period
$
664.4

 
$
887.5

Total equity
$
3,841.1

 
$
3,836.7

See accompanying notes to condensed consolidated financial statements.


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Table of Contents
UGI CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Currency in millions, except per share amounts)


Note 1 — Nature of Operations

UGI Corporation (“UGI”) is a holding company that, through subsidiaries and affiliates, distributes, stores, transports and markets energy products and related services. In the United States, we (1) are the general partner and own limited partner interests in a retail propane marketing and distribution business; (2) own and operate natural gas and electric distribution utilities; (3) own all or a portion of electricity generation facilities; and (4) own and operate an energy marketing, midstream infrastructure, storage, natural gas gathering, natural gas production and energy services business. Internationally, we market and distribute propane and other liquefied petroleum gases (“LPG”) in Europe. We refer to UGI and its consolidated subsidiaries collectively as “the Company,” “we” or “us.”

We conduct a domestic propane marketing and distribution business through AmeriGas Partners, L.P. (“AmeriGas Partners”). AmeriGas Partners is a publicly traded limited partnership that conducts a national propane distribution business through its principal operating subsidiary AmeriGas Propane, L.P. (“AmeriGas OLP”). AmeriGas Partners and AmeriGas OLP are Delaware limited partnerships. UGI’s wholly owned second-tier subsidiary, AmeriGas Propane, Inc. (the “General Partner”), serves as the general partner of AmeriGas Partners and AmeriGas OLP. We refer to AmeriGas Partners and its subsidiaries together as the “Partnership” and the General Partner and its subsidiaries, including the Partnership, as “AmeriGas Propane.” At June 30, 2017, the General Partner held a 1% general partner interest and a 25.3% limited partner interest in AmeriGas Partners and held an effective 27.1% ownership interest in AmeriGas OLP. Our limited partnership interest in AmeriGas Partners comprises AmeriGas Partners Common Units (“Common Units”). The remaining 73.7% interest in AmeriGas Partners comprises Common Units held by the public. The General Partner also holds incentive distribution rights that entitle it to receive distributions from AmeriGas Partners in excess of its 1% general partner interest under certain circumstances as further described in Note 14 of our Annual Report on Form 10-K for the fiscal year ended September 30, 2016 (the “Company’s 2016 Annual Report”). Incentive distributions received by the General Partner during the nine months ended June 30, 2017 and 2016 were $32.2 and $27.7, respectively.

Our wholly owned subsidiary, UGI Enterprises, Inc. (“Enterprises”), through subsidiaries, conducts an LPG distribution business principally in France, the United Kingdom, and central, northern and eastern Europe. These businesses are conducted principally through our subsidiaries, UGI France SAS, Flaga GmbH and AvantiGas Limited. We also conduct a natural gas marketing business principally in France. In March 2016, we sold our LPG business located in the Nantong region of China. We refer to the foreign operations collectively as “UGI International.”

UGI Energy Services, LLC (“Energy Services, LLC”), a wholly owned subsidiary of Enterprises, conducts directly and through subsidiaries energy marketing, midstream transmission, liquefied natural gas (“LNG”), storage, natural gas gathering, natural gas production, electricity generation and energy services businesses primarily in the Mid-Atlantic and Northeast U.S. Energy Services, LLC’s wholly owned subsidiary, UGI Development Company (“UGID”), owns all or a portion of electricity generation facilities principally located in Pennsylvania. A first-tier subsidiary of Enterprises also conducts heating, ventilation, air-conditioning, refrigeration and electrical contracting businesses in the Mid-Atlantic region (“HVAC”). Energy Services, LLC and its subsidiaries’ storage, LNG and portions of its midstream transmission operations are subject to regulation by the Federal Energy Regulatory Commission (“FERC”). We refer to the businesses of Energy Services, LLC and its subsidiaries and HVAC as “Midstream & Marketing.”

UGI Utilities, Inc. (“UGI Utilities”) conducts a natural gas distribution utility business (“Gas Utility”) directly and through its wholly owned subsidiaries UGI Penn Natural Gas, Inc. (“PNG”) and UGI Central Penn Gas, Inc. (“CPG”). UGI Utilities, PNG and 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.” 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. Electric Utility is subject to regulation by the PUC. UGI Utilities is used herein as an abbreviated reference to UGI Utilities, Inc. or, collectively, UGI Utilities, Inc. and its subsidiaries.


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Table of Contents
UGI CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Currency in millions, except per share amounts)

Note 2 — Summary of Significant Accounting Policies

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, 2016, condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”).

These financial statements should be read in conjunction with the financial statements and related notes included in the Company’s 2016 Annual Report. Due to the seasonal nature of our businesses, the results of operations for interim periods are not necessarily indicative of the results to be expected for a full year.

Earnings Per Common Share. Basic earnings per share attributable to UGI Corporation stockholders reflect the weighted-average number of common shares outstanding. Diluted earnings per share attributable to UGI Corporation include the effects of dilutive stock options and common stock awards.
 
Shares used in computing basic and diluted earnings per share are as follows: 
 
 
Three Months Ended
June 30,
 
Nine Months Ended
June 30,
 
 
2017
 
2016
 
2017
 
2016
Denominator (thousands of shares):
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding — basic
 
173,742

 
173,395

 
173,625

 
172,954

Incremental shares issuable for stock options and awards (a)
 

 
2,579

 
3,500

 
2,306

Weighted-average common shares outstanding — diluted
 
173,742

 
175,974

 
177,125

 
175,260

(a)
See “Adoption of New Accounting Standard Employee Share-based Payments” below for a description of the impact on the calculation of diluted shares for the nine months ended June 30, 2017, resulting from the adoption of new accounting guidance regarding share-based payments. For the three months ended June 30, 2017, incremental shares of 3,556 have been excluded as such incremental shares would be antidilutive due to the net loss for the period.

Derivative Instruments. Derivative instruments are reported on 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. The accounting for changes in fair value depends upon the purpose of the derivative instrument and whether it is designated and qualifies for hedge accounting.

Certain of our derivative instruments are designated and qualify as cash flow hedges and from time to time we also enter into net investment hedges. For cash flow hedges, changes in the fair values of the derivative instruments are recorded in accumulated other comprehensive income (loss) (“AOCI”) or noncontrolling interests, 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. Gains and losses on net investment hedges that relate to our foreign operations are included in AOCI until such foreign net investment is sold or liquidated. Unrealized gains and losses on substantially all of the commodity derivative instruments used by UGI Utilities (for which NPNS has not been elected) are included in regulatory assets or liabilities because it is probable such gains or losses will be recoverable from, or refundable to, customers.

Beginning October 1, 2016, in order to reduce the volatility in net income associated with our foreign operations, principally as a result of changes in the U.S. dollar exchange rate between the euro and British pound sterling, we enter into forward foreign currency exchange contracts. Because these contracts do not qualify for hedge accounting treatment, realized and unrealized gains and losses on these contracts are recorded in “Losses on foreign currency contracts, net” on the Condensed Consolidated Statements of Income.


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Table of Contents
UGI CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Currency in millions, except per share amounts)

Cash flows from derivative instruments, other than net investment hedges and certain cross-currency swaps, if any, are included in cash flows from operating activities on the Condensed Consolidated Statements of Cash Flows. Cash flows from net investment hedges, if any, are included in cash flows from investing activities on the Condensed Consolidated Statements of Cash Flows. Cash flows from the interest portion of our cross-currency hedges, if any, are included in cash flow from operating activities while cash flows from the currency portion of such hedges, if any, are included in cash flow from financing 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 12.

Impairment of Cost Basis Investments. We reduce the carrying values of our cost basis investments when we determine that a decline in fair value is other than temporary. During the second quarter of Fiscal 2017, we recorded a pre-tax loss of $7.0 associated with an other-than-temporary impairment of our investment in a private equity partnership that invests in renewable energy companies. This loss is reflected in “Other operating income, net” on the Condensed Consolidated Statements of Income. At June 30, 2017, the carrying amount of this investment was $11.0.

Deferred Debt Issuance Costs. During the fourth quarter of Fiscal 2016, we adopted new accounting guidance regarding the classification of deferred debt issuance costs. Deferred debt issuance costs associated with long-term debt are reflected as a direct deduction from the carrying amount of such debt. Deferred debt issuance costs associated with line of credit facilities continue to be classified as “Other assets” on our Condensed Consolidated Balance Sheets. As a result of the retrospective application of the new accounting guidance, the Company has reflected $40.3 of such costs as a reduction to long-term debt, including current maturities, on the June 30, 2016, Condensed Consolidated Balance Sheet. Previously, these costs were presented within “Prepaid expenses and other current assets” and “Other assets.”

Income Taxes. UGI’s consolidated effective income tax rate, defined as total income taxes as a percentage of income (loss) before income taxes, includes amounts associated with noncontrolling interests in the Partnership, which principally comprises AmeriGas Partners and AmeriGas OLP.  AmeriGas Partners and AmeriGas OLP are not directly subject to federal income taxes. As a result, UGI’s consolidated effective income tax rate is affected by the amount of income (loss) before income taxes attributable to noncontrolling interests in the Partnership not subject to income taxes.

In December 2016, the French Parliament approved the Finance Bill for 2017 and amended the Finance Bill for 2016 (collectively, the “Finance Bills”). The Finance Bills, among other things, will reduce UGI France’s corporate income tax rate from the current 34.43% to 28.92%, effective for fiscal years starting after January 1, 2020 (Fiscal 2021). As a result of the future income tax rate reduction, during the first quarter of Fiscal 2017, the Company reduced its net deferred income tax liabilities and recognized an estimated deferred tax benefit of $27.4 (equal to $0.15 per basic and diluted share).

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.

Adoption of New Accounting Standard Employee Share-based Payments. Effective October 1, 2016, the Company adopted new accounting guidance issued to simplify several aspects of 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. Among other things, excess tax benefits and tax deficiencies associated with employee share-based awards that vest or are exercised are recognized as income tax benefit or expense and treated as discrete items in the reporting period in which they occur. In addition, assumed proceeds under the treasury stock method used for computing diluted shares outstanding no longer include windfall tax benefits in the diluted shares calculation.

In accordance with the required prospective method of transition relating to excess tax benefits, the Company recognized income tax benefits of $2.6 and $9.6 related to excess tax benefits for share-based awards that were exercised or vested during the three and nine months ended June 30, 2017, respectively. These amounts are reflected in “Income tax benefit (expense)” on the Condensed Consolidated Statements of Income. In addition, as of October 1, 2016, the Company recorded a $5.0 cumulative adjustment to increase retained earnings and decrease deferred income tax liabilities for excess tax benefits related to prior period unrecognized excess state tax benefits. The Company elected to use the prospective method of transition for classifying excess tax benefits as a cash flow from operating activity on the Condensed Consolidated Statements of Cash Flows and prior periods were not adjusted.

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Table of Contents
UGI CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Currency in millions, except per share amounts)

The Company has historically presented employee taxes paid for net settled awards as a financing activity on the Condensed Consolidated Statements of Cash Flows and therefore there is no transition impact from this requirement. In addition, as provided by the new guidance, the Company has elected to account for forfeitures of share-based payments when they occur.

Reclassifications. Certain prior period amounts have been reclassified to conform to the current-period presentation.

Note 3 — Accounting Changes

Adoption of New Accounting Standards

Employee Share-based Payments. Effective October 1, 2016, the Company adopted new accounting guidance regarding share-based payments. See Note 2 for a detailed description of the impact of the new guidance.
Equity Method Accounting. Effective October 1, 2016, the Company adopted new accounting guidance regarding the accounting for an investment that qualifies for use of the equity method as a result of an increase in an investor’s level of ownership or influence. The guidance requires that the equity method investor add the cost of acquiring an additional interest to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date such investment qualifies for equity method accounting. The new guidance eliminates the previous requirement in such circumstances to apply the effects of the equity method of accounting retrospectively. The guidance is required to be applied prospectively. The adoption of the new guidance did not impact our consolidated financial statements.
Accounting Standards Not Yet Adopted

Pension and Other Postretirement Benefit Costs. In March 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("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 operating income. The amendments in this ASU permit only the service cost component to be eligible for capitalization when applicable. The amendments in this ASU are effective for interim and annual periods beginning after December 15, 2017 (Fiscal 2019). Early adoption is permitted. The amendments in the ASU should generally be adopted on a retrospective basis. 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.

Goodwill Impairment. In January 2017, the FASB issued ASU No. 2017-04, “Simplifying the Test for Goodwill Impairment.” Under the new accounting guidance, an entity will no longer determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Instead, an entity will perform its goodwill impairment tests by comparing the fair value of a reporting unit with its carrying amount. An entity will recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value but not to exceed the total amount of the goodwill of the reporting unit. In addition, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment, if applicable. The provisions of the new accounting guidance are required to be applied prospectively. The new accounting guidance is effective for the Company for goodwill impairment tests performed in fiscal years beginning after December 15, 2019 (Fiscal 2021). Early adoption is permitted for goodwill impairment tests performed after January 1, 2017. The Company expects to adopt the new guidance in the fourth quarter of Fiscal 2017.

Cash Flow Classification. In August 2016, the FASB issued ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments.” This ASU provides guidance on the classification of certain cash receipts and payments in the statement of cash flows. The amendments in this ASU are effective for interim and annual periods beginning after December 15, 2017 (Fiscal 2019). Early adoption is permitted. The amendments in the ASU should generally be adopted on a retrospective basis. 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.

In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows: Restricted Cash.” This ASU provides guidance on the classification of restricted cash in the statement of cash flows. The amendments in this ASU are effective for interim and

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Table of Contents
UGI CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Currency in millions, except per share amounts)

annual periods beginning after December 15, 2017 (Fiscal 2019). Early adoption is permitted. The amendments in the ASU are required to be adopted on a retrospective basis. 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 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 and determining the period in which the new guidance will be adopted but anticipates an increase in the recognition of right-of-use assets and lease liabilities.

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. The Company has not yet selected a transition method and is in the process of assessing the impact on its financial statements from the adoption of the new guidance.

Note 4 — Inventories

Inventories comprise the following: 
 
 
June 30,
2017
 
September 30,
2016
 
June 30,
2016
Non-utility LPG and natural gas
 
$
135.4

 
$
129.8

 
$
107.9

Gas Utility natural gas
 
21.8

 
29.2

 
13.5

Materials, supplies and other
 
58.9

 
51.3

 
62.8

Total inventories
 
$
216.1

 
$
210.3

 
$
184.2


At June 30, 2017, UGI Utilities was a party to five principal storage contract administrative agreements (“SCAAs”) having terms ranging from one to three years. 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.

As of June 30, 2017, UGI Utilities had SCAAs with Energy Services, LLC and a non-affiliate. The carrying value of gas storage inventories released under the SCAAs with the non-affiliate at June 30, 2017, September 30, 2016 and June 30, 2016, comprising 1.1 billion cubic feet (“bcf”), 3.5 bcf and 1.8 bcf of natural gas, was $3.5, $7.6 and $3.3, respectively.


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Table of Contents
UGI CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Currency in millions, except per share amounts)

Note 5 — Goodwill and Intangible Assets

Goodwill and intangible assets comprise the following: 
 
 
June 30,
2017
 
September 30,
2016
 
June 30,
2016
Goodwill (not subject to amortization)
 
$
3,032.3

 
$
2,989.0

 
$
2,981.3

Intangible assets:
 
 
 
 
 
 
Customer relationships, noncompete agreements and other
 
$
801.6

 
$
773.5

 
$
778.1

Accumulated amortization
 
(362.8
)
 
(324.8
)
 
(321.3
)
Intangible assets, net (definite-lived)
 
438.8

 
448.7

 
456.8

Trademarks and tradenames (indefinite-lived)
 
132.4

 
131.6

 
131.1

Total intangible assets, net
 
$
571.2

 
$
580.3

 
$
587.9

The changes in goodwill and intangible assets are primarily due to acquisitions and the effects of currency translation. Amortization expense of intangible assets was $12.6 and $13.4 for the three months ended June 30, 2017 and 2016, respectively. Amortization expense of intangible assets was $37.5 and $41.4 for the nine months ended June 30, 2017 and 2016, respectively. Amortization expense included in “Cost of sales” on the Condensed Consolidated Statements of Income was not material. The estimated aggregate amortization expense of intangible assets for the remainder of Fiscal 2017 and for the next four fiscal years is as follows: remainder of Fiscal 2017$12.6; Fiscal 2018$49.8; Fiscal 2019$47.9; Fiscal 2020$46.5; Fiscal 2021$44.6.

Note 6 — Utility 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 8 in the Company’s 2016 Annual Report. Other than removal costs, UGI Utilities currently does not recover a rate of return on its regulatory assets. The following regulatory assets and liabilities associated with UGI Utilities are included in our accompanying Condensed Consolidated Balance Sheets:
 
 
June 30,
2017
 
September 30,
2016
 
June 30,
2016
Regulatory assets:
 
 
 
 
 
 
Income taxes recoverable
 
$
122.7

 
$
115.7

 
$
119.6

Underfunded pension and postretirement plans
 
171.8

 
183.1

 
133.4

Environmental costs
 
61.6

 
59.4

 
60.7

Deferred fuel and power costs
 
7.0

 
0.1

 

Removal costs, net
 
29.4

 
27.9

 
22.4

Other
 
6.3

 
8.9

 
9.2

Total regulatory assets
 
$
398.8

 
$
395.1

 
$
345.3

Regulatory liabilities (a):
 
 
 
 
 
 
Postretirement benefits
 
$
16.7

 
$
17.5

 
$
19.7

Deferred fuel and power refunds
 
12.6

 
22.3

 
34.4

State tax benefits — distribution system repairs
 
16.7

 
15.1

 
14.6

Other
 
2.7

 
0.7

 
1.2

Total regulatory liabilities
 
$
48.7

 
$
55.6

 
$
69.9

(a)
Regulatory liabilities are recorded in “Other current liabilities” and “Other noncurrent liabilities” on the Condensed Consolidated Balance Sheets.

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 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

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Table of Contents
UGI CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Currency in millions, except per share amounts)

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) gains on such contracts at June 30, 2017September 30, 2016 and June 30, 2016 were $(0.1), $4.3 and $5.5, respectively.

Electric Utility enters into forward electricity purchase contracts to meet a substantial portion of its electricity supply needs. At June 30, 2017, September 30, 2016 and June 30, 2016, all Electric Utility forward electricity purchase contracts were subject to the NPNS exception (see Note 12).

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 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 June 30, 2017September 30, 2016, and June 30, 2016, were not material.

Base Rate Filings. On January 19, 2017, PNG filed a rate request with the PUC to increase PNG’s base operating revenues for residential, commercial and industrial customers by $21.7 annually. The increased revenues would fund ongoing system improvements and operations necessary to maintain safe and reliable natural gas service. PNG requested that the new gas rates become effective March 20, 2017. The PUC entered an Order dated February 9, 2017, suspending the effective date for the rate increase to allow for investigation and public hearings. On June 30, 2017, all active parties supported the filing of a Joint Petition for Approval of Settlement of all issues with the PUC. Under the terms of the Joint Petition, UGI Utilities will be permitted, effective October 20, 2017, to increase PNG’s annual base distribution rates by $11.3. On July 25, 2017, the PUC administrative law judge recommended that the settlement be adopted without modification. Although the Company expects to receive the final order from the PUC approving the settlement by October 2017, the Company cannot predict the timing or the ultimate outcome of the rate case review process.

On October 14, 2016, the PUC approved a previously filed Joint Petition for Approval of Settlement of all issues providing for a $27.0 annual base distribution rate increase for UGI Gas. The increase became effective on October 19, 2016.

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 5% of distribution charges billed to customers.

PNG and CPG received PUC approval on a DSIC tariff, initially set at zero, in 2014. 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 5% to 10% of billed distribution revenues. On May 10, 2017, the PUC issued a final Order to approve an increase of the maximum allowable DSIC to 7.5% of billed distribution revenues effective July 1, 2017, for PNG and CPG, pending reconsideration at the Company’s Long-term Infrastructure Improvement Plan filing in 2018.

On November 9, 2016, UGI Gas received PUC approval to establish a DSIC tariff mechanism, capped at 5% of distribution charges billed to customers, effective January 1, 2017. Revenue collected pursuant to the mechanism will be subject to refund and recoupment based on the PUC’s final resolution of certain matters set aside for hearing before an administrative law judge. UGI Gas will be permitted to recover revenue under the mechanism for the amount of DSIC-eligible plant placed into service in excess of the threshold amount of DSIC-eligible plant agreed upon in the settlement of its recent base rate case. Achievement of that threshold is not likely to occur prior to September 30, 2017.


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Table of Contents
UGI CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Currency in millions, except per share amounts)

Note 7 — Energy Services Accounts Receivable Securitization Facility

Energy Services, LLC has an accounts receivable securitization facility (“Receivables Facility”) with an issuer of receivables-backed commercial paper currently scheduled to expire in October 2017. The Receivables Facility provides Energy Services with the ability to borrow up to $150 of eligible receivables during the period November to April and up to $75 of eligible receivables during the period May to October. Energy Services, LLC uses the Receivables Facility to fund working capital, margin calls under commodity futures contracts, capital expenditures, dividends and for general corporate purposes.

Under the Receivables Facility, Energy Services, LLC transfers, on an ongoing basis and without recourse, its trade accounts receivable to its wholly owned, special purpose subsidiary, Energy Services Funding Corporation (“ESFC”), which is consolidated for financial statement purposes. ESFC, in turn, has sold and, subject to certain conditions, may from time to time sell, an undivided interest in some or all of the receivables to a major bank. Amounts sold to the bank are reflected as “Short-term borrowings” on the Condensed Consolidated Balance Sheets. ESFC was created and has been structured to isolate its assets from creditors of Energy Services, LLC and its affiliates, including UGI. Trade receivables sold to the bank remain on the Company’s balance sheet and the Company reflects a liability equal to the amount advanced by the bank. The Company records interest expense on amounts owed to the bank. Energy Services, LLC continues to service, administer and collect trade receivables on behalf of the bank, as applicable. Losses on sales of receivables to the bank during the three and nine months ended June 30, 2017 and 2016, which are included in “Interest expense” on the Condensed Consolidated Statements of Income, were not material.

Information regarding the trade receivables transferred to ESFC and the amounts sold to the bank for the nine months ended June 30, 2017 and 2016, as well as the balance of ESFC trade receivables at June 30, 2017, September 30, 2016 and June 30, 2016, is as follows:
 
 
Nine Months Ended June 30,
 
 
2017
 
2016
Trade receivables transferred to ESFC during the period
 
$
848.3

 
$
615.3

ESFC trade receivables sold to the bank during the period
 
$
186.0

 
$
167.5


 
 
June 30, 2017
 
September 30, 2016
 
June 30, 2016
ESFC trade receivables - end of period (a)
 
$
51.6

 
$
35.7

 
$
40.4

(a)
At June 30, 2017 and September 30, 2016, the amounts of ESFC trade receivables sold to the bank were $30.0 and $25.5, respectively, and are reflected as “Short-term borrowings” on the Condensed Consolidated Balance Sheets. At June 30, 2016, there were no ESFC trade receivables sold to the bank.

Note 8 — Debt

UGI Utilities

Pursuant to a Note Purchase Agreement, in October 2016, UGI Utilities issued $100 aggregate principal amount of 4.12% Senior Notes due October 2046 (the “UGI Utilities’ 4.12% Senior Notes”). The net proceeds of the issuance of the UGI Utilities’ 4.12% Senior Notes were used (1) to provide additional financing for UGI Utilities’ infrastructure replacement and betterment capital program and information technology initiatives and (2) for general corporate purposes. The UGI Utilities’ 4.12% Senior Notes are unsecured and rank equally with UGI Utilities’ existing outstanding senior debt.

AmeriGas Propane

In December 2016, AmeriGas Partners issued $700 principal amount of 5.50% Senior Notes due May 2025 (the “AmeriGas Partners’ 5.50% Senior Notes”). The AmeriGas Partners’ 5.50% Senior Notes rank equally with AmeriGas Partners’ existing outstanding senior notes. The net proceeds from the issuance of the AmeriGas Partners’ 5.50% Senior Notes were used in December 2016 for (1) the early repayment, pursuant to a tender offer, of a portion of AmeriGas Partners’ 7.00% Senior Notes having an aggregate principal balance of $500.0 plus accrued and unpaid interest and early redemption premiums; (2) the reduction of short-term borrowings; and (3) general corporate purposes.

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Table of Contents
UGI CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Currency in millions, except per share amounts)


In February 2017, AmeriGas Partners issued $525 principal amount of 5.75% Senior Notes due May 2027 (the “AmeriGas Partners’ 5.75% Senior Notes”). The AmeriGas Partners’ 5.75% Senior Notes rank equally with AmeriGas Partners’ existing outstanding senior notes. The net proceeds from the issuance of the AmeriGas Partners’ 5.75% Senior Notes were used in February 2017 for (1) the early repayment, pursuant to a tender offer, of a portion of AmeriGas Partners’ 7.00% Senior Notes having an aggregate principal balance of $378.3 plus accrued and unpaid interest and early redemption premiums; (2) the repayment of short-term borrowings; and (3) general corporate purposes.

In May 2017, AmeriGas Partners repaid the remaining AmeriGas Partners’ 7.00% Senior Notes not previously tendered, having an aggregate principal balance of $102.5, plus early redemption premiums and accrued and unpaid interest.

In connection with the early repayments of AmeriGas’ Senior Notes, during the three and nine months ended June 30, 2017 and 2016, the Partnership recognized pre-tax losses which are reflected in “Loss on extinguishments of debt” on the Condensed Consolidated Statements of Income and comprise the following:
 
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Early redemption premiums
 
$
3.6

 
$
30.4

 
$
51.3

 
$
30.4

Write-off of unamortized debt issuance costs
 
0.8

 
6.7

 
8.4

 
6.7

Loss on extinguishments of debt
 
$
4.4

 
$
37.1

 
$
59.7

 
$
37.1


Note 9 — Commitments and Contingencies

Environmental Matters

UGI Utilities

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 also has two acquired subsidiaries (CPG and PNG) with similar histories of owning, and in some cases operating, MGPs in Pennsylvania.
Each of UGI Utilities and its subsidiaries, CPG and PNG, has entered into an agreement with the Pennsylvania Department of Environmental Protection (“DEP”) to address the remediation of former MGPs in Pennsylvania (each, a “COA”). The COAs require UGI Gas, CPG and PNG 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 previously operated (“MGP Properties”) and, in the case of CPG, to plug a minimum number of non-producing natural gas wells per year. Under these agreements, in any calendar year, required environmental expenditures relating to the MGP Properties and, with respect to CPG, the natural gas wells, are capped at $2.5, $1.8, and $1.1, for UGI Gas, CPG and PNG, respectively. The COAs for UGI Gas, CPG and PNG are scheduled to terminate at the end of 2031, 2018, and 2019, respectively, but each COA may be terminated by either party at the end of any two-year period beginning with the original effective date of the COA. At June 30, 2017, September 30, 2016 and June 30, 2016, our estimated accrued liabilities for environmental investigation and remediation costs related to the COAs for UGI Gas, CPG and PNG totaled $55.2, $55.1 and $56.0, respectively. UGI Gas, CPG, and PNG have recorded associated regulatory assets for these costs because recovery of these costs from customers is probable (see Note 6).

We do not expect the costs for investigation and remediation of hazardous substances at Pennsylvania MGP sites to be material to UGI Utilities’ results of operations because UGI Gas, CPG and PNG receive 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.


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Table of Contents
UGI CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Currency in millions, except per share amounts)

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 June 30, 2017, September 30, 2016 and June 30, 2016, neither the undiscounted nor the accrued liability for environmental investigation and cleanup costs for UGI Utilities’ MGP sites outside of Pennsylvania was material.

AmeriGas Propane

AmeriGas OLP Saranac Lake. By letter dated March 6, 2008, the New York State Department of Environmental Conservation (“DEC”) notified AmeriGas OLP that DEC had placed property purportedly owned by AmeriGas OLP in Saranac Lake, New York on its Registry of Inactive Hazardous Waste Disposal Sites. A site characterization study performed by the DEC disclosed contamination related to a former MGP. At that time, AmeriGas OLP reviewed the preliminary site characterization prepared by the DEC and researched the history of the site, including the extent of AmeriGas OLP’s ownership of the site. In its written response to the DEC in early 2009, AmeriGas OLP disputed DEC’s contention it was a potentially responsible party (“PRP”) as it did not operate the MGP and appeared to only own a portion of the site. The DEC did not respond to the 2009 communication. In March 2017, the DEC communicated to AmeriGas OLP that the DEC had performed significant testing at the site and had drafted three Records of Decision (“RODs”) related to the site and requested additional information related to AmeriGas OLP’s purported ownership of the site.  The DEC has estimated that its selected remediation plan will cost approximately $27.0. AmeriGas OLP is in the process of responding to the DEC’s request for ownership information and continues to assert defenses based on the nature of its ownership and use of the site. AmeriGas believes it has identified other PRPs and is reviewing the appropriateness of the DEC’s remediation plan, which could affect the amount and allocation of financial responsibility. To AmeriGas OLP’s knowledge, the DEC has not commenced implementation of the remediation plan and has not indicated when such remediation will start.  Based upon currently available information, the Partnership is unable to estimate the ultimate outcome and timing with respect to the resolution of this matter.  The Partnership is working with outside counsel and its environmental consultants to determine the potential exposure and liability due to AmeriGas OLP’s purported ownership of the site.  Based on our preliminary evaluation of the available information, during the third quarter of Fiscal 2017, the Partnership accrued an environmental remediation liability of $7.5 related to the site, which amount is included in “Operating and administrative expenses” on the Condensed Consolidated Statements of Income. Our share of the actual remediation costs could be significantly more or less than the accrued amount.

Other Matters

Class Action Judgment.  In connection with the Partnership’s 2012 acquisition of the subsidiaries of Energy Transfer Partners, L.P. (“ETP”) that operated ETP’s propane distribution business (“Heritage Propane”), the Partnership became party to a class action lawsuit that was filed against Heritage Operating, L.P. in 2005 by Alfred L. Williams, II, on behalf of himself and all others similarly situated. The class action lawsuit alleged, among other things, wrongful collection of tank rental payments from legacy customers of People’s Gas, which was acquired by Heritage Propane in 2000. In 2010, the Florida District Court certified the class and in January 2015, the Florida District Court awarded the class approximately $18.0. In April 2016, the Partnership appealed the verdict to the Florida Second District Court of Appeals (the “Second DCA”) and, in September 2016, the Second DCA affirmed the verdict without opinion. Prior to the Second DCA’s action in the case, we believed that the likelihood of the Second DCA affirming the Florida District Court’s decision was remote. As a result of the Second DCA’s actions, in September 2016, the Partnership recorded a $15.0 adjustment to its litigation accrual to reflect the full amount of the judgment plus associated interest. In October 2016, the Partnership filed a Motion for Written Opinion and for Rehearing En Banc with the Second DCA. Following denial of such motion, the Partnership satisfied such judgment.

Purported Class Action Lawsuits. Between May and October of 2014, more than 35 purported class action lawsuits were filed in multiple jurisdictions against the Partnership/UGI Corporation and a competitor by certain of their direct and indirect customers.  The class action lawsuits allege, among other things, that the Partnership and its competitor colluded, beginning in 2008, to reduce the fill level of portable propane cylinders from 17 pounds to 15 pounds and combined to persuade their common customer, Walmart Stores, Inc., to accept that fill reduction, resulting in increased cylinder costs to retailers and end-user customers in violation of

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Table of Contents
UGI CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Currency in millions, except per share amounts)

federal and certain state antitrust laws.  The claims seek treble damages, injunctive relief, attorneys’ fees and costs on behalf of the putative classes. 

On October 16, 2014, the United States Judicial Panel on Multidistrict Litigation transferred all of these purported class action cases to the Western Division of the United States District Court for the Western District of Missouri (“District Court”).  In July 2015, the District Court dismissed all claims brought by direct customers. In June 2017, the United States Court of Appeals for the Eighth Circuit (“Eighth Circuit”) ruled en banc to reverse the dismissal by the District Court, which had previously been affirmed by a panel of the Eighth Circuit.  We are considering the filing of a Petition for a Writ of Certiorari to the U.S. Supreme Court appealing the decision of the Eighth Circuit.   

In July 2015, the District Court also dismissed all claims brought by the indirect customers other than those for injunctive relief.  The indirect customers filed an amended complaint with the District Court claiming injunctive relief and state law claims under Wisconsin, Maine and Vermont law.  In September 2016, the District Court dismissed the amended complaint in its entirety.  The indirect customers appealed this decision to the Eighth Circuit; such appeal was subject to a stay pending the en banc review of the direct purchasers’ claims.  In light of the Eighth Circuit decision with respect to the direct purchaser claims, the briefing schedule in respect of the indirect purchaser appeal will now resume.  On July 21, 2016, several new indirect customer plaintiffs filed an antitrust class action lawsuit against the Partnership in the Western District of Missouri.  The new indirect customer class action lawsuit was dismissed in September 2016 and certain indirect customer plaintiffs appealed the decision, consolidating their appeal with the indirect customer appeal still pending in the Eighth Circuit.

We are unable to reasonably estimate the impact, if any, arising from such litigation. We believe we have strong defenses to the claims and intend to vigorously defend against them.

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 financial statements.

Note 10 — Defined Benefit Pension and Other Postretirement Plans

In the U.S., 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 (“U.S. Pension Plan”). We also provide postretirement health care benefits to certain retirees and postretirement life insurance benefits to nearly all U.S. active and retired employees. In addition, employees of UGI France SAS and its subsidiaries are covered by certain defined benefit pension and postretirement plans.
 

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Table of Contents
UGI CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Currency in millions, except per share amounts)

Net periodic pension expense and other postretirement benefit costs include the following components:
 
 
Pension Benefits
 
Other Postretirement Benefits
Three Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Service cost
 
$
3.0

 
$
2.6

 
$
0.3

 
$
0.2

Interest cost
 
6.2

 
6.7

 
0.2

 
0.2

Expected return on assets
 
(8.4
)
 
(8.0
)
 
(0.2
)
 
(0.2
)
Amortization of:
 
 
 
 
 
 
 
 
Prior service cost (benefit)
 
0.1

 

 
(0.2
)
 
(0.1
)
Actuarial loss
 
4.2

 
2.7

 
0.1

 

Net benefit cost
 
5.1

 
4.0

 
0.2

 
0.1

Change in associated regulatory liabilities
 

 

 
(0.1
)
 
0.9

Net benefit cost after change in regulatory liabilities
 
$
5.1

 
$
4.0

 
$
0.1

 
$
1.0

 
 
 
 
 
 
 
 
 
Pension Benefits
 
Other Postretirement Benefits
Nine Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Service cost
 
$
9.0

 
$
7.6

 
$
0.7

 
$
0.6

Interest cost
 
18.5

 
19.9

 
0.6

 
0.7

Expected return on assets
 
(25.0
)
 
(24.0
)
 
(0.5
)
 
(0.5
)
Amortization of:
 
 
 
 
 
 
 
 
Prior service cost (benefit)
 
0.2

 
0.2

 
(0.5
)
 
(0.4
)
Actuarial loss
 
12.5

 
8.1

 
0.2

 

Net benefit cost
 
15.2

 
11.8

 
0.5

 
0.4

Change in associated regulatory liabilities
 

 

 
(0.4
)
 
2.6

Net benefit cost after change in regulatory liabilities
 
$
15.2

 
$
11.8

 
$
0.1

 
$
3.0


The U.S. Pension Plan’s assets are held in trust and consist principally of publicly traded, diversified equity and fixed income mutual funds and, to a much lesser extent, UGI Common Stock. It is our general policy to fund amounts for U.S. Pension Plan benefits equal to at least the minimum required contribution set forth in applicable employee benefit laws. During the nine months ended June 30, 2017 and 2016, the Company made cash contributions to the U.S. Pension Plan of $8.5 and $7.4, respectively. The Company expects to make additional discretionary cash contributions of approximately $2.8 to the U.S. Pension Plan during the remainder of Fiscal 2017.

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 amounts included in UGI Gas’ and Electric Utility’s rates, if any, is deferred for future recovery from, or refund to, ratepayers. There were no required contributions to the VEBA during the nine months ended June 30, 2017 and 2016.

We also sponsor unfunded and non-qualified supplemental executive defined benefit retirement plans. Net periodic costs associated with these plans for the three and nine months ended June 30, 2017 and 2016, were not material.

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Table of Contents
UGI CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Currency in millions, except per share amounts)

Note 11 — Fair Value Measurements

Recurring Fair Value Measurements

The following table presents on a gross basis our financial 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 June 30, 2017September 30, 2016 and June 30, 2016:  
 
 
Asset (Liability)
 
 
Level 1
 
Level 2
 
Level 3
 
Total
June 30, 2017:
 
 
 
 
 
 
 
 
Derivative instruments:
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Commodity contracts
 
$
29.3

 
$
10.5

 
$

 
$
39.8

Foreign currency contracts
 
$

 
$
11.3

 
$

 
$
11.3

Liabilities:
 
 
 
 
 
 
 
 
Commodity contracts
 
$
(25.6
)
 
$
(17.3
)
 
$

 
$
(42.9
)
Foreign currency contracts
 
$

 
$
(24.3
)
 
$

 
$
(24.3
)
Interest rate contracts
 
$

 
$
(2.2
)
 
$

 
$
(2.2
)
Cross-currency contracts
 
$

 
$
(0.9
)
 
$

 
$
(0.9
)
Non-qualified supplemental postretirement grantor trust investments (a)
 
$
35.8

 
$

 
$

 
$
35.8

September 30, 2016:
 
 
 
 
 
 
 
 
Derivative instruments:
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Commodity contracts
 
$
28.9

 
$
26.0

 
$

 
$
54.9

Foreign currency contracts
 
$

 
$
17.8

 
$

 
$
17.8

Liabilities:
 
 
 
 
 
 
 
 
Commodity contracts
 
$
(76.8
)
 
$
(21.8
)
 
$

 
$
(98.6
)
Foreign currency contracts
 
$

 
$
(2.4
)
 
$

 
$
(2.4
)
Interest rate contracts
 
$

 
$
(3.9
)
 
$

 
$
(3.9
)
Cross-currency contracts
 
$

 
$
(0.5
)
 
$

 
$
(0.5
)
Non-qualified supplemental postretirement grantor trust investments (a)
 
$
33.0

 
$

 
$

 
$
33.0

June 30, 2016:
 
 
 
 
 
 
 
 
Derivative instruments:
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Commodity contracts
 
$
39.9

 
$
30.3

 
$

 
$
70.2

Foreign currency contracts
 
$

 
$
18.6

 
$

 
$
18.6

Cross-currency contracts
 
$

 
$
0.3

 
$

 
$
0.3

Liabilities:
 
 
 
 
 
 
 
 
Commodity contracts
 
$
(47.1
)
 
$
(24.3
)
 
$

 
$
(71.4
)
Foreign currency contracts
 
$

 
$
(0.8
)
 
$

 
$
(0.8
)
Interest rate contracts
 
$

 
$
(3.8
)
 
$

 
$
(3.8
)
Non-qualified supplemental postretirement grantor trust investments (a)
 
$
32.0

 
$

 
$

 
$
32.0

(a)
Consists primarily of mutual fund investments held in grantor trusts associated with non-qualified supplemental retirement plans.
 
The fair values of our Level 1 exchange-traded commodity futures and option contracts and non-exchange-traded commodity futures and forward contracts are based upon actively quoted market prices for identical assets and liabilities. The remainder of our derivative instruments are designated as Level 2. The fair values of certain non-exchange-traded commodity derivatives

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Table of Contents
UGI CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Currency in millions, except per share amounts)

designated as Level 2 are based upon indicative price quotations available through brokers, industry price publications or recent market transactions and related market indicators. For commodity option contracts designated as Level 2 that are not traded on an exchange, we use a Black Scholes option pricing model that considers time value and volatility of the underlying commodity. The fair values of our Level 2 interest rate contracts, foreign currency contracts and cross-currency contracts are based upon third-party quotes or indicative values based on recent market transactions. The fair values of investments held in grantor trusts are derived from quoted market prices as substantially all of the investments in these trusts have active markets. 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. We estimate the fair value of long-term debt by using current market rates and by discounting future cash flows using rates available for similar type debt (Level 2). The carrying amount and estimated fair value of our long-term debt (including current maturities but excluding unamortized debt issuance costs) at June 30, 2017, September 30, 2016 and June 30, 2016 were as follows:
 
June 30, 2017
 
September 30, 2016
 
June 30, 2016
Carrying amount
$
4,175.3

 
$
3,832.3

 
$
4,156.9

Estimated fair value
$
4,267.0

 
$
4,052.3

 
$
4,312.0


Financial instruments other than derivative instruments, such as short-term investments and trade accounts receivable, could expose us to concentrations of credit risk. We limit credit risk from short-term investments by investing only in investment-grade commercial paper, money market mutual funds, securities guaranteed by the U.S. Government or its agencies and FDIC insured bank deposits. The credit risk arising from concentrations of trade accounts receivable is limited because we have a large customer base that extends across many different U.S. markets and a number of foreign countries. For information regarding concentrations of credit risk associated with our derivative instruments, see Note 12. Our investment in a private equity partnership is measured at fair value on a non-recurring basis. Generally this measurement uses Level 3 fair value inputs because the investment does not have a readily available market value. See Note 2 for additional information on this cost basis investment.

Note 12 — 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; (2) interest rate risk; and (3) foreign currency exchange 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. Although our commodity derivative instruments extend over a number of years, a significant portion of our commodity derivative instruments economically hedge commodity price risk during the next twelve months.

Commodity Price Risk

Regulated Utility Operations

Natural Gas

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. Gains and losses on Gas Utility’s natural gas futures contracts and 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 6).


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Table of Contents
UGI CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Currency in millions, except per share amounts)

Electricity

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. At June 30, 2017, September 30, 2016 and June 30, 2016, all Electric Utility forward electricity purchase contracts were subject to the NPNS exception.

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 on the Condensed Consolidated Balance Sheets because it is probable such gains or losses will be recoverable from, or refundable to, customers through the DS mechanism (see Note 6).

Non-utility Operations

LPG

In order to manage market price risk associated with the Partnership’s fixed-price programs, the Partnership uses over-the-counter derivative commodity instruments, principally price swap contracts. In addition, the Partnership, certain other domestic businesses and our UGI International operations also use over-the-counter price swap and option contracts to reduce commodity price volatility associated with a portion of their forecasted LPG purchases. The Partnership from time to time enters into price swap and put option agreements to reduce the effects of short-term commodity price volatility. Also, Midstream & Marketing uses NYMEX futures contracts to economically hedge the gross margin associated with the purchase and anticipated later near-term sale of propane.

Natural Gas

In order to manage market price risk relating to fixed-price sales contracts for natural gas, Midstream & Marketing enters into NYMEX and over-the-counter natural gas futures and forward contracts and Intercontinental Exchange (“ICE”) natural gas basis swap contracts. In addition, Midstream & Marketing uses NYMEX futures contracts to economically hedge the gross margin associated with the purchase and anticipated later near-term sale of natural gas.

Electricity

In order to manage market price risk relating to fixed-price sales contracts for electricity, Midstream & Marketing enters into electricity futures and forward contracts. Midstream & Marketing also uses NYMEX and over-the-counter electricity futures contracts to economically hedge the price of a portion of its anticipated future sales of electricity from its electric generation facilities. From time to time, Midstream & Marketing purchases FTRs to economically hedge electricity transmission congestion costs associated with its fixed-price electricity sales contracts and from time to time also enters into New York Independent System Operator (“NYISO”) capacity swap contracts to economically hedge the locational basis differences for customers it serves on the NYISO electricity grid.

Interest Rate Risk

UGI France SAS’s and Flaga GmbH’s long-term debt agreements have interest rates that are generally indexed to short-term market interest rates. UGI France SAS and Flaga GmbH have each entered into pay-fixed, receive-variable interest rate swap agreements to hedge the underlying euribor rates of interest on their variable-rate term loans.

Our domestic businesses’ long-term debt is typically 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 interest rate swaps and IRPAs as cash flow hedges. At June 30, 2017, the amount of net losses associated with interest rate hedges (excluding pay-fixed, receive-variable interest rate swaps) expected to be reclassified into earnings during the next twelve months is $3.5.

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Table of Contents
UGI CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Currency in millions, except per share amounts)


Foreign Currency Exchange Rate Risk

Forward Foreign Currency Exchange Contracts

In order to reduce exposure to foreign exchange rate volatility related to our foreign LPG operations, through September 30, 2016, we entered into forward foreign currency exchange contracts to hedge a portion of anticipated U.S. dollar-denominated LPG product purchases primarily during the heating-season months of October through March. We account for these foreign currency exchange contracts associated with anticipated purchases of U.S. dollar-denominated LPG as cash flow hedges. At June 30, 2017, the amount of net gains associated with currency rate risk expected to be reclassified into earnings during the next twelve months based upon current fair values is $2.4.

Beginning October 1, 2016, in order to reduce the volatility in net income associated with our foreign operations, principally as a result of changes in the U.S. dollar exchange rate between the euro and British pound sterling, we enter into forward foreign currency exchange contracts. The fair value of these forward foreign currency contracts are recorded as assets or liabilities on the Condensed Consolidated Balance Sheets. Changes in the fair value of these foreign currency exchange contracts are recorded in “Losses on foreign currency contracts, net,” on the Condensed Consolidated Statements of Income.

From time to time we also enter into forward foreign currency exchange contracts to reduce the volatility of the U.S. dollar value of a portion of our International Propane euro-denominated net investments.

Cross-currency Swaps

From time to time, Flaga GmbH enters into cross-currency swaps to hedge its exposure to the variability in expected future cash flows associated with the foreign currency and interest rate risk of U.S. dollar-denominated debt. These cross-currency hedges include initial and final exchanges of principal from a fixed euro denomination to a fixed U.S. dollar-denominated amount, to be exchanged at a specified rate, which was determined by the market spot rate on the date of issuance. These cross-currency swaps also include interest rate swaps of a floating U.S. dollar-denominated interest rate to a fixed euro-denominated interest rate. We designate these cross-currency swaps as cash flow hedges.

At June 30, 2017, the amount of net losses associated with such cross-currency swaps expected to be reclassified into earnings during the next twelve months is not material.

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Table of Contents
UGI CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Currency in millions, except per share amounts)

Quantitative Disclosures Related to Derivative Instruments

The following table summarizes by derivative type the gross notional amounts related to open derivative contracts as of June 30, 2017, September 30, 2016 and June 30, 2016, and the final settlement date of the Company's open derivative transactions as of June 30, 2017, excluding those derivatives that qualified for the NPNS exception:
 
 
 
 
 
 
Notional Amounts
(in millions)
Type
 
Units
 
Settlements Extending Through
 
June 30, 2017
 
September 30, 2016
 
June 30, 2016
Commodity Price Risk:
 
 
 
 
 
 
 
 
 
 
Regulated Utility Operations
 
 
 
 
 
 
 
 
 
 
Gas Utility NYMEX natural gas futures and option contracts
 
Dekatherms
 
September 2018
 
12.7

 
18.4

 
13.4

FTRs
 
Kilowatt hours
 
May 2018
 
139.4

 
58.3

 
80.6

Non-utility Operations
 
 
 
 
 
 
 
 
 
 
LPG swaps & options
 
Gallons
 
September 2019
 
284.9

 
396.9

 
406.4

Natural gas futures, forward and pipeline contracts
 
Dekatherms
 
December 2021
 
55.5

 
71.1

 
79.6

Natural gas basis swap contracts
 
Dekatherms
 
March 2021
 
113.2

 
118.3

 
106.3

NYMEX natural gas storage
 
Dekatherms
 
March 2019
 
1.6

 
1.9

 
1.8

NYMEX propane storage
 
Gallons
 
March 2018
 
0.3

 

 

Electricity long forward and futures contracts
 
Kilowatt hours
 
May 2021
 
686.3

 
761.2

 
558.0

Electricity short forward and futures contracts
 
Kilowatt hours
 
April 2021
 
471.4

 
264.6

 
344.7

Interest Rate Risk:
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
Euro
 
October 2020
 
645.8

 
645.8

 
645.8

Foreign Currency Exchange Rate Risk:
 
 
 
 
 
 
 
 
 
 
Forward foreign currency exchange contracts
 
USD
 
September 2020
 
$
467.4

 
$
314.3

 
$
316.8

Cross-currency swaps
 
USD
 
September 2018
 
$
59.1

 
$
59.1

 
$
59.1


Derivative Instrument Credit Risk

We are exposed to risk of loss in the event of nonperformance by our derivative instrument counterparties. Our derivative instrument counterparties principally comprise large energy companies and major U.S. and international financial institutions. We maintain credit policies with regard to our counterparties that we believe reduce overall credit risk. These policies include evaluating and monitoring our counterparties’ financial condition, including their credit ratings, and entering into agreements with counterparties that govern credit limits or entering into netting agreements that allow for offsetting counterparty receivable and payable balances for certain financial transactions, as deemed appropriate. Certain of these agreements call for the posting of collateral by the counterparty or by the Company in the forms of letters of credit, parental guarantees or cash. Additionally, our commodity exchange-traded futures contracts generally require cash deposits in margin accounts. At June 30, 2017, September 30, 2016 and June 30, 2016, restricted cash in brokerage accounts totaled $6.7, $15.6 and $9.6, respectively. Although we have concentrations of credit risk associated with derivative instruments, the maximum amount of loss we would incur if these counterparties failed to perform according to the terms of their contracts, based upon the gross fair values of the derivative instruments, was not material at June 30, 2017. Certain of the Partnership’s derivative contracts have credit-risk-related contingent features that may require the posting of additional collateral in the event of a downgrade of the Partnership’s debt rating. At June 30, 2017, if the credit-risk-related contingent features were triggered, the amount of collateral required to be posted would not be material.


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Table of Contents
UGI CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Currency in millions, except per share amounts)

Offsetting Derivative Assets and Liabilities

Derivative assets and liabilities (and cash collateral received and pledged) 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.


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Table of Contents
UGI CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Currency in millions, except per share amounts)

Fair Value of Derivative Instruments
 
The following table presents the Company’s derivative assets and liabilities by type, as well as the effects of offsetting, as of June 30, 2017, September 30, 2016 and June 30, 2016:
 
 
June 30,
2017
 
September 30,
2016
 
June 30,
2016
Derivative assets:
 
 
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
 
 
Foreign currency contracts
 
$
5.2

 
$
17.8

 
$
18.6

Cross-currency contracts
 

 

 
0.3

 
 
5.2

 
17.8

 
18.9

Derivatives subject to PGC and DS mechanisms:
 
 
 
 
 
 
Commodity contracts
 
1.2

 
4.5

 
5.7

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
Commodity contracts
 
38.6

 
50.4

 
64.5

Foreign currency contracts
 
6.1

 

 

 
 
44.7

 
50.4

 
64.5

Total derivative assets — gross
 
51.1

 
72.7

 
89.1

Gross amounts offset in the balance sheet
 
(34.6
)
 
(35.0
)
 
(36.8
)
Cash collateral received
 
(0.1
)
 
(0.3
)
 
(2.3
)
Total derivative assets — net
 
$
16.4

 
$
37.4

 
$
50.0

Derivative liabilities:
 
 
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
 
 
Foreign currency contracts
 
$
(2.1
)
 
$
(2.4
)
 
$
(0.8
)
Cross-currency contracts
 
(0.9
)
 
(0.5
)
 

Interest rate contracts
 
(2.2
)
 
(3.9
)
 
(3.8
)
 
 
(5.2
)
 
(6.8
)
 
(4.6
)
Derivatives subject to PGC and DS mechanisms:
 
 
 
 
 
 
Commodity contracts
 
(1.2
)
 
(0.5
)
 
(0.6
)
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
Commodity contracts
 
(41.7
)
 
(98.1
)
 
(70.8
)
Foreign currency contracts
 
(22.2
)
 

 

 
 
(63.9
)
 
(98.1
)
 
(70.8
)
Total derivative liabilities — gross
 
(70.3
)
 
(105.4
)
 
(76.0
)
Gross amounts offset in the balance sheet
 
34.6

 
35.0

 
36.8

Total derivative liabilities — net
 
$
(35.7
)
 
$
(70.4
)
 
$
(39.2
)


- 24 -

Table of Contents
UGI CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Currency in millions, except per share amounts)

Effect of Derivative Instruments

The following tables provide information on the effects of derivative instruments on the Condensed Consolidated Statements of Income and changes in AOCI for the three and nine months ended June 30, 2017 and 2016:
Three Months Ended June 30,:
 
 
 
 
 
 
 
 
 
 
 
 
Gain (Loss)
Recognized in
AOCI
 
Gain (Loss)
Reclassified from
AOCI into Income
 
Location of Gain (Loss) Reclassified from
AOCI into Income
Cash Flow Hedges:
 
2017
 
2016
 
2017
 
2016
 
Foreign currency contracts
 
$
(10.2
)
 
$
11.5

 
$
0.8

 
$
0.2

 
Cost of sales
Cross-currency contracts
 
0.3

 
0.3

 
0.1

 
0.1

 
Interest expense/other operating income, net
Interest rate contracts
 
(0.1
)
 
(0.6
)
 
(0.9
)
 
(1.3
)
 
Interest expense
Total
 
$
(10.0
)
 
$
11.2

 
$

 
$
(1.0
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gain (Loss)
Recognized in Income
 
Location of Gain (Loss)
Recognized in Income
 

Derivatives Not Designated as Hedging Instruments:
 
2017
 
2016
 
 
 
Commodity contracts
 
$
(25.2
)
 
$
44.8

 
Cost of sales
 

Commodity contracts
 
0.6

 
0.1

 
Revenues
 
 
Foreign currency contracts
 
(16.2
)
 

 
Losses on foreign currency contracts, net
 

Total
 
$
(40.8
)
 
$
44.9

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended June 30,:
 
 
 
 
 
 
 
 
 
 
 
 
Gain (Loss)
Recognized in
AOCI
 
Gain (Loss)
Reclassified from
AOCI into Income
 
Location of Gain (Loss) Reclassified from
AOCI into Income
Cash Flow Hedges:
 
2017
 
2016
 
2017
 
2016
 
Foreign currency contracts
 
$
5.3

 
$
6.2

 
$
17.6

 
$
17.4

 
Cost of sales
Cross-currency contracts
 
0.5

 

 
(0.2
)
 
0.3

 
Interest expense/other operating income, net
Interest rate contracts
 
1.7

 
(32.2
)
 
(2.9
)
 
(3.2
)
 
Interest expense
Total
 
$
7.5

 
$
(26.0
)
 
$
14.5

 
$
14.5

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gain (Loss)
Recognized in Income
 
Location of Gain (Loss)
Recognized in Income
 
 
Derivatives Not Designated as Hedging Instruments:
 
2017
 
2016
 
 
 
Commodity contracts
 
$
105.3

 
$
(7.4
)
 
Cost of sales
 
 
Commodity contracts
 
1.5

 
1.9

 
Revenues