Note 7 — 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 2017 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, 2018		September 30, 2017		June 30, 2017
Regulatory assets:
Income taxes recoverable	$	130.0	$	121.4	$	122.7
Underfunded pension and postretirement plans	132.2		141.3		171.8
Environmental costs	59.8		61.6		61.6
Deferred fuel and power costs	0.2		7.7		7.0
Removal costs, net	31.0		31.0		29.4
Other	6.9		5.9		6.3
Total regulatory assets	$	360.1	$	368.9	$	398.8
Regulatory liabilities (a):
Postretirement benefits	$	16.9	$	17.5	$	16.7
Deferred fuel and power refunds	44.5		10.6		12.6
State tax benefits — distribution system repairs	20.7		18.4		16.7
PUC Temporary Rates Order (b)	24.1		—		—
Excess federal deferred income taxes (c)	301.2		—		—
Other	5.1		2.7		2.7
Total regulatory liabilities	$	412.5	$	49.2	$	48.7


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


(b)	Balance at June 30, 2018, comprises tax savings for the period January 1, 2018 to June 30, 2018 resulting from the enactment of the TCJA (see “PUC Temporary Rates Order” below and Note 5).


(c)	Balance at June 30, 2018, comprises excess federal deferred income taxes resulting from the enactment of the TCJA (see “Excess federal deferred income taxes” below and Note 5).

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 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 gains (losses) on such contracts at June 30, 2018, September 30, 2017 and June 30, 2017 were $1.9, $0.1 and $(0.1), respectively.

In order to reduce volatility associated with a substantial portion of its electric transmission congestion costs, Electric Utility, from time to time, 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 September 30, 2017 and June 30, 2017, were not material. There were no open FTR positions as of June 30, 2018.

PUC Temporary Rates Order. By Secretarial Letter dated January 12, 2018, the PUC initiated a review into whether public utility rates should be adjusted to reflect the tax savings from the change in the federal income tax rate from 35% to 21% for the period beginning January 1, 2018. Thereafter, on March 15, 2018, the PUC entered a Temporary Rates Order that converted commission-approved rates of most large Pennsylvania public utilities, including Gas Utility, into “temporary rates” for a period of no more than 12 months while the PUC reviewed the data and comments in response to the Secretarial Letter.

On May 17, 2018, the PUC ordered each regulated utility currently not in a general base rate case proceeding, including UGI Gas, PNG and CPG, to reduce their rates through the establishment of a negative surcharge applied to bills rendered on or after July 1, 2018. The temporary negative surcharge will be reconciled at the end of each fiscal year to actual tax savings realized. The negative surcharge will remain in place until the effective date of new rates established in the utility’s next general base rate proceeding. For UGI Gas, PNG and CPG, such negative surcharge will reduce base rate revenues by 5.78%, 3.90% and 8.19%, respectively.

In its May 17, 2018 Order, the PUC also required Pennsylvania utilities to establish a regulatory liability for tax benefits that accrued during the period beginning January 1, 2018 through June 30, 2018, resulting from the reduced federal tax rate. For UGI Gas, PNG and CPG, during the three months ended June 30, 2018, UGI Utilities reduced its combined utility revenues by $22.7 (which is in addition to a $1.4 reduction previously recorded in March 2018), and recorded a regulatory liability in an equal amount. The total reduction in revenues for the nine months ended June 30, 2018 reflects (1) $17.1 of tax benefits accrued during the previously mentioned six-month period plus (2) $7.0 to reflect tax benefits expected to be generated by the future amortization of the regulatory liability. The rate treatment of this regulatory liability, including accrued interest, for each of UGI Gas, PNG and CPG will be addressed in a future proceeding. Like other similarly situated utilities, if UGI Gas, PNG or CPG have not filed a general base rate proceeding within three years of the Temporary Rates Order, UGI Gas, PNG and CPG will be required to file a petition to propose how to distribute the balance of these regulatory liabilities.

For Pennsylvania utilities currently in a general base rate proceeding, including Electric Utility, no negative surcharge will apply, and such tax benefits will be handled through that proceeding, including the benefits that accrue during the period beginning January 1, 2018 until the effective date of new base rates established in the proceeding. At June 30, 2018, such amount for Electric Utility was not material.

Excess federal deferred income taxes. This regulatory liability is the result of remeasuring UGI Utilities’ federal deferred income tax liabilities on utility plant due to the enactment of the TCJA on December 22, 2017 (see Note 5). In order for our utility assets to continue to be eligible for accelerated tax depreciation, current law requires that excess federal deferred income taxes resulting from the remeasurement be amortized no more rapidly than over the remaining lives of the assets that gave rise to the excess federal deferred income taxes, ranging from 1 year to approximately 65 years. This regulatory liability has been increased to reflect the tax benefit generated by the amortization of the excess deferred federal income taxes and will be amortized and credited to tax expense.

Other Regulatory Matters

Base Rate Filings. On January 26, 2018, Electric Utility filed a rate request with the PUC to increase its annual base distribution revenues by $9.2, which was later reduced by the Company to $7.7 to reflect the impact of the TCJA and other adjustments. The increased revenues would fund ongoing system improvements and operations necessary to maintain safe and reliable electric service. Electric Utility requested that the new electric rates become effective March 27, 2018. The PUC entered an Order dated March 1, 2018, suspending the effective date for the rate increase to allow for investigation and public hearings in a review process that is expected to last up to nine months from the date of filing. The matter is currently pending before two PUC administrative law judges who are expected to issue a recommended decision that will be the subject of a final decision by the PUC. Although the Company expects to receive a final decision from the PUC in October 2018, the Company cannot predict the timing or the ultimate outcome of the rate case review process.

On August 31, 2017, the PUC approved a previously filed Joint Petition for Approval of Settlement of all issues providing for an $11.3 annual base distribution rate increase for PNG. The increase became effective on October 20, 2017.

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. State legislation permits gas and electric utilities in Pennsylvania to recover a distribution system improvement charge (“DSIC”) on eligible capital investments as an alternative ratemaking mechanism providing for a more timely cost recovery of qualifying capital expenditures between base rate cases.

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 May 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 each company’s Long-Term Infrastructure Improvement Plan filing. PNG’s DSIC has been reset to zero as a result of its most recent base rate case. The DSIC rate for PNG will resume upon exceeding the threshold amount of DSIC-eligible plant in service agreed upon in the settlement of its most recent base rate case.

In November 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. UGI Gas began recovering revenue under the mechanism effective July 1, 2018, for the amount of DSIC-eligible plant placed into service as it exceeded the threshold amount of DSIC-eligible plant agreed upon in the settlement of its recent base rate case during the third quarter of Fiscal 2018.

Utilities Merger Request. On March 8, 2018 and March 13, 2018, UGI Utilities filed merger authorization requests with the PUC and MD PSC, respectively, to merge PNG and CPG into UGI Utilities, with a targeted effective date of October 1, 2018. There are no expected changes to annual base distribution rates for the combined utilities or to existing regulatory assets and liabilities as a result of the proposed merger. On July 20, 2018, UGI Utilities filed a Joint Petition for Settlement among the parties to the proceeding for approval by two administrative law judges by recommended decision that will be the subject of a final decision by the PUC. On July 25, 2018 the MD PSC issued an order approving UGI Utilities’ merger request. UGI Utilities cannot predict the timing or the ultimate outcome of the PUC review of the merger request. On August 3, 2018, FERC approved requests made by CPG, PNG, and UGI Utilities in May 2018 relating to the transfer of certain FERC authorizations from PNG and CPG to UGI Utilities, to ensure continuity of certain interstate gas transportation services currently conducted by CPG and PNG after the effective date of the proposed merger. With the receipt of these FERC approvals, the approval of an application to transfer CPG’s service territory designation to UGI Utilities remains the only FERC approval yet to be received in connection with the proposed merger.