1
EXHIBIT 13.1
FINANCIAL REVIEW
BUSINESS OVERVIEW
PROPANE
The Company's propane business is conducted through AmeriGas Partners, L.P. and
its operating subsidiary, AmeriGas Propane, L.P. (collectively referred to as
"the Partnership"). The Operating Partnership, in which the Company holds a
58.5% equity interest, is the largest retail propane marketer in the U.S. It
serves residential, commercial, industrial, motor fuel and agricultural
customers from locations in 45 states, including Alaska and Hawaii.
UTILITIES
The Company's utility business is conducted through UGI Utilities, Inc. (UGI
Utilities) which operates a natural gas distribution utility in parts of eastern
and southeastern Pennsylvania and an electric utility in northeastern
Pennsylvania (collectively, "Utilities"). Utilities is subject to regulation by
the Pennsylvania Public Utility Commission (PUC) and, with respect to certain
activities including the interstate movement of natural gas, the transmission of
electricity, and transactions with nonutility generators of electricity, the
Federal Energy Regulatory Commission.
Gas Utility sells gas to residential, commercial and industrial
(collectively, "core market") customers and provides firm transportation service
to large commercial and industrial customers. Gas Utility also sells and
transports gas under interruptible rates to customers who have alternate fuel
capability. Interruptible rates are competitively priced with respect to the
prices of alternative fuels, primarily oil.
Electric Utility distributes electricity it generates and purchases from
others. The Electricity Generation Customer Choice and Competition Act (the
"Customer Choice Act") became law in early fiscal 1997. The Customer Choice Act
establishes competition and customer choice in the Pennsylvania electric
generation market. Under the Customer Choice Act, local electric utilities will
continue to have exclusive rights to provide distribution services. For a
discussion of the Customer Choice Act's impact on Electric Utility, see
"Customer Choice Act" on page 17.
ENERGY MARKETING
UGI also owns an energy marketing business which is conducted through UGI
Enterprises, Inc. and its principal operating subsidiary, UGI Energy Services,
Inc. (UGI Energy Services). UGI Energy Services sells and manages the delivery
of natural gas to commercial and industrial customers under the tradename
"GASMARK."
UGI CORPORATION 10 1997 ANNUAL REPORT
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GASMARK purchases natural gas for many of Gas Utility's commercial and
industrial customers as well as customers of other gas utilities in the
Mid-Atlantic and Northeast regions. Enterprises' newly formed POWERMARK business
is participating in Pennsylvania's Customer Choice Act pilot program.
Enterprises is also involved in joint venture projects in Romania and China and
is pursuing other joint venture opportunities for providing energy and related
services in developing markets outside the U.S.
RESULTS OF OPERATIONS
GENERAL
All retail propane distribution businesses are affected by a number of common
factors. The retail propane business is very competitive and consists of a
number of large national and regional marketers, and thousands of small
independent marketers. Propane also competes with other sources of energy such
as electricity, fuel oil and natural gas. Weather significantly impacts demand
for propane and profitability because many customers use propane for heating
purposes. Geographic weather variations can significantly affect retail volumes
and profitability because of regional differences in weather-sensitive volumes
and unit margins. Demand for propane can also be affected by regional economic
conditions, particularly in commercial and industrial markets.
The retail propane business is sensitive to changes in wholesale propane
prices. The cost of propane can change significantly over short periods of time.
It is not always possible to pass on to customers rapid increases in the
wholesale cost of propane due to a number of factors including competitive
market conditions. When increased product costs are not passed on, margins
decline. In order to manage price risk associated with a portion of its propane
supply requirements, the Partnership enters into fixed-price supply arrangements
and, to a lesser extent, derivative commodity instruments. Because the retail
propane industry is relatively mature, low growth in existing markets is
expected for the foreseeable future.
Gas Utility results, and to a lesser extent Electric Utility results, are
also influenced by weather and economic conditions. Gas Utility's sizable
commercial and industrial throughput is less weather sensitive which helps to
mitigate the effects of weather extremes. However, much of this throughput is to
customers with alternate fuel capability, principally oil, and margins are
affected by differences between the cost of natural gas and the cost of the
alternate fuels.
GASMARK's results are affected by the volumes of gas sold and the
difference between its selling prices and the costs at which it can purchase and
deliver the supply requirements of its customers. Volumes and margin can be
affected by weather, economic conditions, competition from other marketers and,
with respect to customers having alternate fuel capabilities, the prices of
alternate fuels.
The following analysis of the results of operations includes the
consolidated results of the Company and each of its principal business segments.
Although the operating income of propane contributed approximately 59% and 51%
of the Company's consolidated operating income in 1997 and 1996, respectively,
its contribution to net income in both years was considerably less due to the
Partnership's significant minority interest, higher relative interest charges
and a higher effective income tax rate associated with the Partnership's pre-tax
income. Comparisons of the Company's 1996 and 1995 propane operating results are
complicated by the April 19, 1995 formation of AmeriGas Partners. In order to
permit a more meaningful analysis, fiscal 1995 propane results are presented on
a pro forma basis as if the formation of AmeriGas Partners had occurred as of
the beginning of the fiscal year.
UGI Corporation 11 1997 Annual Report
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FINANCIAL REVIEW (CONTINUED)
1997 COMPARED WITH 1996
CONSOLIDATED RESULTS
Year Ended September 30, 1997 1996 Increase
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(Millions of dollars, except per share)
Revenues $ 1,642.0 $ 1,557.6 $ 84.4 5.4%
Total margin $ 684.9 $ 652.4 $ 32.5 5.0%
Operating income $ 199.9 $ 159.7 $ 40.2 25.2%
Net income $ 52.1 $ 39.5 $ 12.6 31.9%
Net income
per share $ 1.57 $ 1.19 $ .38 31.9%
The Company's results in 1997 reflect a significant improvement in AmeriGas
Partners' performance. In addition, net income in 1997 includes $2.3 million
from the sale of UTI Energy Corp. common stock.
PROPANE
Increase
Year Ended September 30, 1997 1996 (Decrease)
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(Millions of dollars)
Retail gallons sold--
millions 807.4 855.4 (48.0) (5.6)%
Degree days--% colder
(warmer) than normal (5.2) 1.4 -- --
Revenues $1,077.8 $1,013.2 $ 64.6 6.4%
Total margin $ 477.4 $ 443.5 $ 33.9 7.6%
Operating income $ 117.1 $ 80.8 $ 36.3 44.9%
EBITDA(1) $ 181.4 $ 144.9 $ 36.5 25.2%
(1) EBITDA (earnings before interest expense, income taxes, depreciation and
amortization) should not be considered as an alternative to net income (as an
indicator of operating performance) or as an alternative to cash flow (as a
measure of liquidity or ability to service debt obligations) and is not a
measure of performance or financial condition under generally accepted
accounting principles.
PROPANE. Retail sales of propane decreased in the year ended September 30,
1997 reflecting, in part, the effects of warmer heating-season weather. In
addition, significantly higher and more volatile propane market prices during
the first half of the fiscal 1997 heating season resulted in customer
conservation efforts. Wholesale volumes of propane sold decreased 91.1 million
gallons to 218.6 million gallons in 1997 principally due to reduced low-margin
sales of storage inventories.
Total revenues from retail propane sales increased $81.3 million to $868.2
million reflecting a $125.5 million increase as a result of higher average
retail propane selling prices partially offset by a $44.2 million decrease as a
result of the lower volumes sold. The higher prices resulted principally from
higher propane product costs experienced by the Partnership early in fiscal
1997. The spot price of propane at Mont Belvieu, Texas, a major U.S. storage and
distribution hub, increased dramatically during much of the last quarter of
fiscal 1996 and the first quarter of fiscal 1997, rising to a high of 75 cents a
gallon on December 16, 1996. Wholesale propane revenues decreased $11.9 million
to $126.0 million reflecting the lower wholesale volumes sold partially offset
by higher average wholesale prices. Other revenues decreased $4.8 million to
$83.6 million primarily as a result of lower hauling and appliance sales and
service revenues.
Total propane margin was greater in 1997 because of higher average retail
unit margins partially offset by lower volumes of propane sold. Although the
Partnership's propane product costs were significantly higher in 1997, the
Partnership benefitted from favorable fixed-price supply arrangements and, to a
lesser extent, derivative commodity contracts entered into as part of its 1997
propane supply strategy. The higher 1997 average retail unit margin also
reflects the fact that retail unit margins in the prior-year period were
adversely impacted by certain sales and marketing programs.
The increase in 1997 operating income and EBITDA is the result of higher
total margin, greater miscellaneous income, and a decrease in operating
expenses. Total operating expenses of the Partnership were $316.4 million in
1997 compared with $317.4 million in 1996. The 1996 operating expenses are net
of $4.4 million from a refund of insurance premium deposits and $3.3 million
from a reduction in accrued environmental costs. Excluding the impact of these
items in 1996, operating expenses declined $8.7 million reflecting in large part
lower expenses related to sales and marketing programs and lower required
accruals for general and automobile liability and workers' compensation costs.
Miscellaneous income increased $2.9 million in 1997 reflecting $4.7 million of
income from the sale of the Partnership's 50% interest in Atlantic Energy, Inc.
(Atlantic Energy), which owns and operates a liquefied petroleum gas storage
terminal in Chesapeake, Virginia. The Partnership sold its interest in Atlantic
Energy after determining that it was not a strategic asset.
UTILITIES
Increase
Year Ended September 30, 1997 1996 (Decrease)
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(Millions of dollars)
GAS UTILITY:
Natural gas system
throughput--bcf 80.2 85.4 (5.2) (6.1)%
Degree days--% colder
(warmer) than normal (4.8) 4.2 -- --
Revenues $389.1 $391.0 $ (1.9) (.5)%
Total margin $168.7 $169.7 $ (1.0) (.6)%
Operating income $ 74.8 $ 72.9 $ 1.9 2.6%
ELECTRIC UTILITY:
Electric sales--gwh 868.5 884.7 (16.2) (1.8)%
Revenues $ 72.1 $ 69.5 $ 2.6 3.7%
Total margin $ 35.2 $ 33.0 $ 2.2 6.7%
Operating income $ 10.7 $ 8.6 $ 2.1 24.4%
bcf-billions of cubic feet. gwh-millions of kilowatt hours. Total margin
represents revenues less cost of sales and revenue-related taxes.
GAS UTILITY. Weather in Gas Utility's service territory was 4.8% warmer than
normal in 1997 compared to 4.2% colder than normal in 1996. Total system
throughput decreased 6.1% during 1997 principally reflecting the warmer
weather's effect on core market sales as well as a decrease in low-margin
interruptible delivery service volumes associated with the shut-down of a
gas-fired cogeneration facility.
Gas Utility revenues were $1.9 million lower in 1997 as a $27.2 million
increase in core market revenues principally due to higher average purchased gas
cost (PGC) rates was offset by a $21.2 million decrease in core market revenues
from lower sales and an $8.1 million decrease in revenues from off-system sales.
Cost of gas sold by Gas Utility decreased $1.1 million to $205.2 million
reflecting the lower off-system and core market sales offset by higher average
PGC rates.
UGI Corporation 12 1997 Annual Report
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The decrease in Gas Utility total margin principally reflects a $6.3 million
decrease in total margin from core market customers resulting from the warmer
weather partially offset by a $5.5 million increase in total margin from
interruptible customers.
Although total margin was slightly lower in 1997, Gas Utility operating
income increased $1.9 million principally as a result of a $1.5 million decrease
in operating and administrative expenses and higher miscellaneous income.
Operating and administrative expenses during 1997 decreased $1.5 million
principally as a result of a decrease in distribution system expenses, lower
accruals for uncollectible accounts, and lower general and administrative
expenses partially offset by higher costs associated with environmental matters.
ELECTRIC UTILITY. Electric Utility sales decreased during 1997 reflecting
weather which was 5.6% warmer than in the prior-year period. Electric Utility
base rate revenues increased $1.7 million as a $2.8 million increase resulting
from higher base rates was partially offset by a $1.1 million decrease resulting
from the lower sales. In addition, Electric Utility revenues include a $.9
million increase in energy cost recoveries. Cost of sales increased to $33.8
million in 1997 from $33.4 million in the prior-year period as a result of the
higher energy cost recoveries partially offset by the lower sales.
Electric Utility total margin and operating income increased during 1997
principally as a result of the higher base rates. Electric Utility operating and
administrative expenses in 1997 were essentially unchanged from the prior-year
period.
ENERGY MARKETING
Increase
Year Ended September 30, 1997 1996 (Decrease)
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(Millions of dollars)
Revenues $103.0 $ 83.9 $ 19.1 22.8%
Total margin $ 3.6 $ 6.2 $ (2.6) (41.9)%
Operating income $ 1.7 $ 4.4 $ (2.7) (61.4)%
ENERGY MARKETING. Total revenues from energy marketing in 1997 increased
significantly as a result of higher billed volumes principally from increased
sales and higher natural gas prices. Notwithstanding the increase in billed
volumes, total margin for 1997 was lower than in the prior-year period due to
the warmer winter weather's effect on natural gas prices and the value of
pipeline capacity. Operating income from energy marketing was $1.7 million in
1997 compared with $4.4 million in the prior-year period principally as a result
of the lower total margin.
1996 COMPARED WITH 1995
CONSOLIDATED RESULTS
Year Ended September 30, 1996 1995 Increase
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(Millions of dollars, except per share)
Revenues $ 1,557.6 $ 877.6 $ 680.0 77.5%
Total margin $ 652.4 $ 426.1 $ 226.3 53.1%
Operating income $ 159.7 $ 78.3 $ 81.4 104.0%
Income from
continuing operations $ 39.5 $ 7.9 $ 31.6 400.0%
Net income (loss) $ 39.5 $ (8.4) $ 47.9 N.M.
Net income (loss)
per share $ 1.19 $ (.26) $ 1.45 N.M.
N.M.-Not Meaningful.
The Company's results in 1996 reflect the full-year consolidation of the
Partnership, colder heating-season weather, and the full-year impact of Gas
Utility's 1995 base rate increase. Results in 1995 include after-tax charges of
$24.9 million associated with the formation of AmeriGas Partners (see Note 14 to
Consolidated Financial Statements) and $3.1 million from a change in accounting
for postemployment benefits (see Note 6 to Consolidated Financial Statements).
PROPANE
Year Ended September 30, 1996 1995 Increase
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(Millions of dollars)
ACTUAL:
Retail gallons sold--
millions 855.4 468.6 386.8 82.5%
Revenues $1,013.2 $ 511.7 $ 501.5 98.0%
Total margin $ 443.5 $ 250.7 $ 192.8 76.9%
Operating income $ 80.8 $ 21.8 $ 59.0 270.6%
EBITDA(1) $ 144.9 $ 62.6 $ 82.3 131.5%
PRO FORMA:
Retail gallons sold--
millions 855.4 788.0 67.4 8.6%
Degree days--% colder
(warmer) than normal 1.4 (12.1) -- --
Revenues $1,013.2 $ 878.6 $ 134.6 15.3%
Total margin $ 443.5 $ 419.6 $ 23.9 5.7%
Operating income $ 80.8 $ 73.7 $ 7.1 9.6%
EBITDA(1) $ 144.9 $ 138.0 $ 6.9 5.0%
(1) EBITDA (earnings before interest expense, income taxes, depreciation and
amortization) should not be considered as an alternative to net income (as an
indicator of operating performance) or as an alternative to cash flow (as a
measure of liquidity or ability to service debt obligations) and is not a
measure of performance or financial condition under generally accepted
accounting principles.
PRO FORMA PROPANE. Retail volumes of propane sold increased 67.4 million
gallons in 1996 reflecting the effects of colder weather, acquisitions and
volume growth. Regional temperature differences in 1996 were significant with
the western U.S. experiencing substantially warmer than normal temperatures and
lower retail sales, and the eastern and midwestern U.S. experiencing colder than
normal temperatures and higher retail sales. Wholesale volumes of propane sold
were significantly higher reflecting an increase in sales of low-margin excess
storage inventories.
Total revenues from retail propane sales increased $94.2 million to $786.9
million during 1996 reflecting a $59.2 million increase as a result of the
greater volumes sold and a $35.0 million increase as a result of higher average
retail propane selling prices. Total cost of sales increased $110.7 million as a
result of the higher volumes of propane sold and higher average propane product
costs. The Partnership's propane product cost averaged approximately five cents
a gallon higher in 1996 than in pro forma 1995. The spot price of propane at
Mont Belvieu, Texas, increased dramatically in August and September 1996, rising
to 50.5 cents per gallon on September 30, 1996 compared to 31.63 cents per
gallon a year earlier.
Total propane margin was higher in 1996 as a result of the greater volumes of
propane sold. However, average retail unit margins in 1996 were slightly lower,
notwithstanding an increase in average retail selling price, reflecting the
impact of higher average propane product costs which were not completely passed
through to customers.
UGI Corporation 13 1997 Annual Report
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FINANCIAL REVIEW (continued)
The increases in 1996 operating income and EBITDA reflect principally the
increase in total propane margin partially offset by higher operating and
administrative expenses. Operating expenses in 1996 are net of $4.4 million from
a refund of insurance premium deposits and $3.3 million from reductions to
reserves for environmental matters recorded in the quarter ended March 31.
Operating expenses in pro forma 1995 include $4.3 million in accruals for
management reorganization activities. Operating expenses of the Partnership,
exclusive of these items, increased $27.8 million reflecting higher employee
compensation expenses associated with the Partnership's new management
structure; higher vehicle and distribution expenses due in part to the higher
retail volumes and severe eastern U.S. winter weather; higher expenses
associated with sales and marketing programs; increased customer equipment
repairs and maintenance expenses; and incremental costs associated with
acquisitions and new district locations.
UTILITIES
Increase
Year Ended September 30, 1996 1995 (Decrease)
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(Millions of dollars)
GAS UTILITY:
Natural gas system
throughput--bcf 85.4 82.4 3.0 3.6%
Degree days--% colder
(warmer) than normal 4.2 (5.4) -- --
Revenues $391.0 $291.3 $ 99.7 34.2%
Total margin $169.7 $140.9 $ 28.8 20.4%
Operating income $ 72.9 $ 51.9 $ 21.0 40.5%
ELECTRIC UTILITY:
Electric sales--gwh 884.7 860.9 23.8 2.8%
Revenues $ 69.5 $ 66.1 $ 3.4 5.1%
Total margin $ 33.0 $ 32.1 $ .9 2.8%
Operating income $ 8.6 $ 9.1 $ (.5) (5.5)%
GAS UTILITY. Weather in Gas Utility's service territory in 1996 was colder
than normal and also colder than in 1995. The increase in total system
throughput includes a 5.4 bcf increase in sales to core market customers and a
.7 bcf increase in throughput to interruptible customers. Partially offsetting
these increases was a decrease in firm delivery service volumes as a result of
customer switching to interruptible delivery service.
The increase in Gas Utility total revenues reflects a $68.4 million increase
in revenues from core market customers (reflecting higher sales and the
full-year effect of higher base rates), greater off-system sales, and lower
refunds of producer settlement charges. Cost of gas sold was $206.3 million
during 1996, an increase of $67.7 million from 1995, reflecting principally the
greater sales to core market customers, higher off-system sales, and lower
refunds of producer settlement charges.
The increase in Gas Utility total margin in 1996 reflects a $34.5 million
increase in total margin from core market customers as a result of the colder
weather and higher base rates. However, partially offsetting the increase in
core market margin was a decrease in total margin from interruptible customers,
principally as a result of higher 1996 gas costs, and a decrease in total margin
from firm delivery service customers due in large part to the lower volumes.
Gas Utility operating income in 1996 benefitted from the increase in total
margin. However, the benefit was partially offset by higher operating and
administrative expenses and higher charges for depreciation.
ELECTRIC UTILITY. Electric Utility sales increased during 1996 principally
from colder heating-season weather. The $3.4 million increase in Electric
Utility revenues reflects a $1.7 million increase in base revenues and a $1.7
million increase in energy cost recoveries. Electric Utility cost of sales was
$33.4 million, an increase of $2.3 million from the prior year. The increase in
the cost of sales resulted from higher sales and higher energy cost recoveries.
Electric Utility total margin increased as a result of the increased sales
and higher base rates effective in July. However, operating income declined as
the increase in Electric Utility total margin was more than offset by higher
distribution system maintenance expenses, general and administrative expenses,
and depreciation.
ENERGY MARKETING
Year Ended September 30, 1996 1995 Increase
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(Millions of dollars)
Total margin $ 6.2 $ 2.4 $ 3.8 158.3%
Operating income $ 4.4 $ 1.8 $ 2.6 144.4%
ENERGY MARKETING. Total margin and operating income from energy marketing
activities were significantly higher in 1996 reflecting higher billed volumes
from an increase in sales outside the Gas Utility service territory. Unit
margins also were significantly higher in 1996 due to favorable gas supply
purchases.
FINANCIAL CONDITION AND LIQUIDITY
CAPITALIZATION AND LIQUIDITY
The Company's consolidated cash and short-term investments totaled $129.4
million at September 30, 1997 compared with $97.1 million at September 30, 1996.
These amounts include $94.8 million and $74.5 million, respectively, of cash and
short-term investments held by UGI. As a holding company, the sources of UGI's
cash and short-term investment balances are cash dividends from its principal
operating subsidiaries, AmeriGas and UGI Utilities. AmeriGas's ability to pay
dividends is dependent upon distributions paid by the Partnership. During 1997,
1996 and 1995, AmeriGas and UGI Utilities paid cash dividends to UGI as follows:
Year Ended September 30,1997 1996 1995
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(Millions of dollars)
AmeriGas $51.7 $61.9 $ 7.6
UGI Utilities 24.1 32.9 14.5
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Total dividends to UGI $75.8 $94.8 $22.1
AMERIGAS PARTNERS. The Partnership's principal sources of funds are those
generated by its operations and borrowings under its Bank Credit Agreement. Cash
generated by operating activities in 1997 was sufficient to fund maintenance
capital expenditures (which represent capital expenditures to maintain the
operating capacity of the capital assets of the Partnership) and the Minimum
Quarterly Distribution (MQD) of $.55 for each quarter on all Partnership units.
UGI Corporation 14 1997 Annual Report
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Effective September 15, 1997, the Operating Partnership amended and restated
its Bank Credit Agreement. The Bank Credit Agreement consists of a Revolving
Credit Facility and an Acquisition Facility. Obligations under the Bank Credit
Agreement are collateralized by substantially all of the Operating Partnership's
assets.
The Operating Partnership's Revolving Credit Facility provides for borrowings
of up to $100 million (including a $35 million sublimit for letters of credit).
The Revolving Credit Facility may be used to fund working capital, capital
expenditures, and interest and distribution payments. The Revolving Credit
Facility expires September 15, 2002 but may, under certain conditions, be
extended. The Operating Partnership's bank loans outstanding totaled $28 million
at September 30, 1997 compared with $15 million at September 30, 1996. At
September 30, 1997, the Partnership had $72 million available under the
Revolving Credit Facility. The Partnership's cash needs are generally greatest
during the first fiscal quarter due to increased working capital needs and
interest and distribution payments.
The Bank Credit Agreement also includes a $75 million Acquisition Facility to
finance propane business acquisitions. This facility operates as a revolving
facility through September 15, 2000 at which time amounts then outstanding will
convert to a quarterly amortizing four-year term loan. At September 30, 1997,
borrowings under the Acquisition Facility totaled $37 million.
The ability of the Operating Partnership to borrow under the Bank Credit
Agreement is subject to provisions which require, among other things, minimum
interest coverage and maximum debt to EBITDA ratios, as defined. Based upon the
calculation of such ratios as of September 30, 1997, the Operating Partnership
had the ability to borrow the maximum amount available.
The Operating Partnership also has a revolving credit agreement with the
General Partner under which it may borrow up to $20 million to fund working
capital, capital expenditures, and interest and distribution payments. The
General Partner Facility is coterminous with, and generally comparable to, the
Revolving Credit Facility except that borrowings under the General Partner
Facility are unsecured and subordinated to all senior debt of the Operating
Partnership. UGI has agreed to contribute on an as needed basis through its
subsidiaries up to $20 million to the General Partner to fund such borrowings.
Management believes that the Partnership's cash flow from operations and
available borrowings under credit facilities will be sufficient to meet the
Partnership's liquidity needs for the foreseeable future.
The Partnership has assumed certain lease guarantees and scheduled claim
obligations relating to certain former businesses of Petrolane Incorporated
(Petrolane), a predecessor company of the Partnership. The Partnership succeeded
to Petrolane's agreements with third parties for payment indemnification
relating to such obligations. At September 30, 1997, the lease guarantee
obligations totaled approximately $67 million and scheduled claims of at least
$68 million were pending. To date, the Partnership has not paid any amounts
under the lease guarantee and scheduled claim obligations (for a more detailed
description, see Note 11 to Consolidated Financial Statements).
UGI UTILITIES. UGI Utilities' principal sources of funds are those generated
by its operations and borrowings under its revolving credit agreements. In
addition, UGI Utilities has a shelf registration for the issuance, from time to
time, of up to $75 million of debt securities of which $20 million of 7.17%
ten-year notes was issued during 1997. UGI Utilities' revolving credit
agreements provide for borrowings of up to $82 million under committed lines
through June 30, 2000. At September 30, 1997, borrowings under these credit
agreements totaled $67 million. Certain of UGI Utilities' debt agreements
contain limitations with respect to incurring additional debt, require the
maintenance of consolidated net tangible worth of at least $125 million, and
restrict the amount of payments for investments, redemptions of capital stock,
prepayments of subordinated indebtedness, and dividends.
Management believes that UGI Utilities' cash flow from operations and
available borrowings under its shelf registration and credit facilities will be
sufficient to meet UGI Utilities' liquidity needs for the foreseeable future.
UGI Corporation 15 1997 Annual Report
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FINANCIAL REVIEW (continued)
CASH FLOWS
OPERATING ACTIVITIES. Cash flow from operating activities was $172.0 million in
1997 compared with $111.2 million in 1996. Cash flow from operating activities
before changes in operating working capital was $158.4 million in 1997 compared
with $138.3 million in 1996. During 1997, AmeriGas Partners and UGI Utilities
provided $109.9 million and $64.1 million, respectively, of operating cash flow
before changes in working capital compared with $68.4 million and $71.7 million,
respectively, in 1996. The significant increase in AmeriGas Partners' 1997
operating cash flow before changes in working capital reflects the Partnership's
improved results. Changes in operating working capital in 1997 reflect net cash
inflows of $13.6 million principally from an increase in accounts payable and
accrued income taxes partially offset by an increase in inventories and accounts
receivable. In 1996, changes in operating working capital required $27.1 million
in operating cash flows.
INVESTING ACTIVITIES. Expenditures for property, plant and equipment totaled
$68.8 million in 1997 compared with $62.7 million in 1996. The increase in
capital expenditures reflects a $2.1 million increase in Gas Utility capital
expenditures and a $4.1 million increase in propane capital expenditures. During
1997, the Company paid an aggregate $11.6 million for propane business
acquisitions. The Company also increased its short-term investments $42.3
million in 1997.
FINANCING ACTIVITIES. During 1997, the Company paid cash dividends of $47.2
million compared with $46.4 million in the prior year. In addition, the
Partnership paid distributions of $38.8 million to public unitholders (and $54.1
million to the General Partner) representing the MQD on all Partnership units.
Net borrowings during 1997 under UGI Utilities' and the Operating Partnership's
working capital facilities were $16.5 million and $6 million, respectively.
During 1997, UGI Utilities issued $20 million of notes under its Series B
Medium-Term Note program and the Partnership borrowed $7 million under its
Acquisition Facility. Pursuant to its stock buy-back program, UGI repurchased
$19.2 million of its Common Stock.
DIVIDENDS AND DISTRIBUTIONS
In April 1997, 1996 and 1995, UGI increased the annual dividend rate on its
Common Stock to $1.44, $1.42 and $1.40, respectively. The ability of UGI to
declare and pay cash dividends is substantially dependent upon its cash balances
and the receipt of cash dividends from its wholly owned operating subsidiaries.
The Company's 58.5% effective interest in the Partnership comprises 4.3
million Common Units, 19.8 million Subordinated Units and a 2% general partner
interest. The remaining 41.5% effective interest, comprising 17.7 million Common
Units, is publicly held. The Partnership makes distributions to its partners
approximately 45 days after the end of each fiscal quarter in an amount equal to
its Available Cash (as defined in the Amended and Restated Agreement of Limited
Partnership) for such quarter, subject to limitations under its loan agreements.
(For a description of Available Cash and the priority of its distribution to
unitholders, see Note 3 to Consolidated Financial Statements). During 1997, 1996
and 1995, the Partnership paid the MQD on all limited partner units outstanding.
The amount of Available Cash needed during 1997 to distribute the MQD on all
such units as well as the distribution on the 2% general partner interest was
approximately $93.9 million ($48.5 million for the Common Units; $43.5 million
for the Subordinated Units; and $1.9 million for the general partner interests).
A reasonable estimate of the amount of distributable cash actually generated by
the Partnership can be determined by subtracting cash interest expense and
maintenance capital expenditures from the Partnership's EBITDA. Distributable
cash flow is not a measure of performance or financial condition under generally
accepted accounting principles. Distributable cash flow as calculated during the
Partnership's two full fiscal years since its inception is as follows:
Year Ended September 30, 1997 1996
- --------------------------------------------------------------
(Millions of dollars)
EBITDA $172.4 $134.5
Cash interest expense (66.8) (63.6)
Maintenance capital expenditures (10.0) (7.9)
- --------------------------------------------------------------
Distributable cash flow $ 95.6 $ 63.0
Although the level of distributable cash generated in 1996 was less than the
full MQD, the Partnership had cash and short-term investment balances of $48.6
million at the beginning of the year. Due to the seasonality of its operating
cash flows and working capital needs, the Partnership uses the Revolving Credit
Facility on a short-term basis to fund a portion of distribution payments. The
UGI Corporation 16 1997 Annual Report
8
ability of the Partnership to continue to pay the full MQD on its Subordinated
Units will depend upon a number of factors including the level of Partnership
earnings, the cash needs of the Partnership's operations (including cash needed
for maintenance and growth capital), and the Partnership's ability to finance
externally such cash needs. Some of these factors are affected by conditions
such as weather, competition in the markets served by the Partnership, and the
cost of propane, which are beyond the control of the Partnership.
As further described in Note 3 to Consolidated Financial Statements, the
Subordinated Units' period of subordination will generally extend until the
first day of any quarter beginning on or after April 1, 2000 in respect of which
certain cash performance and distribution measurements are attained. In
addition, if the Partnership attains certain cash performance and distribution
measurements, 4.9 million Subordinated Units may convert to Common Units on or
after March 31, 1998 and an additional 4.9 million Subordinated Units may
convert on or after March 31, 1999. Based upon such cash performance
measurements to date, it is unlikely that the cash performance measurements
required for conversion will be attained during fiscal 1998.
CAPITAL EXPENDITURES
The following table presents capital expenditures (other than acquisitions) by
business segment for 1997, 1996 and 1995, as well as expected amounts for fiscal
1998. The Company expects to finance 1998 capital expenditures with internally
generated cash and borrowings under UGI Utilities' and the Partnership's credit
facilities.
Year Ended September 30, 1998 1997 1996 1995
- -----------------------------------------------------------------------
(Millions of dollars)(estimate)
Propane $33.0 $27.0 $22.9 $17.2
Gas Utility 37.3 36.7 34.6 45.3
Electric Utility 5.9 5.0 5.0 6.0
Other .6 .1 .2 .3
- -----------------------------------------------------------------------
$76.8 $68.8 $62.7 $68.8
YEAR 2000 MATTERS
The Company has a number of information system improvement initiatives under way
that will require increased expenditures during the next several years. These
initiatives include the modification of certain computer software systems to be
Year 2000 compliant. Although final cost estimates to modify current systems
have yet to be determined, the Company does not expect such costs, which will be
expensed when incurred, will have a material effect on the Company's results of
operations.
UTILITY BASE RATES
During the three-year period ended September 30, 1997, the following Gas and
Electric utility base rate increases became effective:
Increase in Annual Revenues
---------------------------
Division Effective Date Requested Granted
- ------------------------------------------------------------------------
(Millions of dollars)
Electric Utility July 19, 1996 $ 6.2 $ 3.1
Gas Utility August 31, 1995 41.3 19.5
CUSTOMER CHOICE ACT
On January 1, 1997, the Customer Choice Act became effective. The Customer
Choice Act permits all Pennsylvania retail electric customers to choose their
electric generation supplier over a three-year phase-in period commencing
January 1, 1999. The Customer Choice Act requires all electric utilities to file
restructuring plans with the PUC which, among other things, include unbundled
prices for electric generation, transmission and distribution and a competitive
transition charge (CTC) for the recovery of "stranded costs" which would be paid
by all customers receiving transmission and distribution service. "Stranded
costs" generally are electric generation-related costs that traditionally would
be recoverable in a regulated environment but may not be recoverable in a
competitive electric generation market. Under the Customer Choice Act, Electric
Utility's rates for transmission and distribution services provided through June
30, 2001 are capped at levels in effect on January 1, 1997. In addition,
Electric Utility generally may not increase the generation component of prices
as long as stranded costs are being recovered through the CTC. Electric Utility
will continue to be the only regulated electric utility having the right,
granted by the PUC or by law, to distribute electric energy in its service
territory.
On August 7, 1997, Electric Utility filed its restructuring plan with the
PUC. The restructuring plan includes a claim for the recovery of $34.4 million
for stranded costs during the period January 1, 1999 through December 31, 2002.
The claim is primarily for the recovery of: (1) plant investments in excess of
estimated competitive market value and electric generation facility retirement
costs; (2) potential costs associated with existing power purchase agreements;
and (3) regulatory assets (principally income taxes) recoverable from ratepayers
under current regulatory practice. The claim also seeks to establish a recovery
mechanism that would permit the recovery of up to an additional $28 million of
costs associated with the buyout or implementation of a December 1993 agreement
to purchase power from an independent power producer. The PUC is expected to
take action on Electric Utility's filing in May 1998.
Given the changing regulatory environment in the electric utility industry,
the Company continues to evaluate its ability to apply the provisions of
Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the
Effects of Certain Types of Regulation" (SFAS 71), as it relates to its electric
generation operations. SFAS 71 permits the recording of costs (regulatory
assets) that have been, or are expected to be, allowed in the ratesetting
process in a period different from the period in which such costs would be
charged to expense by an unregulated enterprise. The Company believes its
electric generation assets and related regulatory assets continue to satisfy the
criteria of SFAS 71. If such electric generation assets no longer meet the
criteria of SFAS 71, any related regulatory assets would be written off unless
some form of transition cost recovery is established by the PUC which would meet
the requirements under generally accepted accounting principles for continued
accounting as regulatory assets during such recovery period. Any
generation-related, long-lived fixed and intangible assets would be evaluated
for impairment under the provisions of SFAS 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
Based upon an evaluation of the various factors and conditions affecting
future cost recovery, the Company does not expect the Customer Choice Act to
have a material adverse effect on its financial condition or results of
operations.
UGI Corporation 1997 Annual Report
17
9
FINANCIAL REVIEW (continued)
On March 27, 1997, proposed gas customer choice legislation was introduced in
the Pennsylvania General Assembly that would, among other things, extend the
availability of gas transportation service to residential and small commercial
customers of local gas distribution companies. It would permit all customers of
natural gas distribution utilities to transport their natural gas supplies
through the distribution systems of Pennsylvania gas utilities by April 1, 1999
and would also require Pennsylvania gas utilities to exit the merchant function
of selling natural gas. Legislative committees have conducted public hearings on
the proposed legislation and the Company has provided testimony on such issues
as the recovery of costs associated with its existing gas supply assets and the
need for standards to assure reliability of future gas supplies. The Company
will continue to monitor the proposed legislation.
MANUFACTURED GAS PLANTS
The gas distribution business has been one of UGI Utilities' principal lines of
business since its inception in 1882. Prior to the construction of major natural
gas pipelines in the 1950s, gas for lighting and heating was produced at
manufactured gas plants (MGPs) from processes involving coal, coke or oil. Some
constituents of coal tars produced from the manufactured gas process are today
considered hazardous substances under the Comprehensive Environmental Response,
Compensation and Liability Act (Superfund Law) and may be located at those
sites.
One of the ways UGI Utilities initially expanded its business was by entering
into agreements with other gas companies to operate their businesses. After
1888, the principal means by which UGI Utilities expanded its gas business was
to acquire all or a portion of the stock of companies engaged in this business.
UGI Utilities also provided management and administrative services to some of
these companies. UGI Utilities grew to become one of the largest public utility
holding companies in the U.S. Pursuant to the Public Utility Holding Company Act
of 1935, by 1954 UGI Utilities divested all of its utility operations other than
those which now constitute Gas Utility and Electric Utility.
The Company has been notified of several sites outside Pennsylvania where
MGPs were operated by UGI Utilities or owned or operated by its former
subsidiaries, and environmental agencies or private parties are investigating
the extent of environmental contamination and the necessity of environmental
remediation. If UGI Utilities were found liable as a "responsible party" as
defined in the Superfund Law (or comparable state statutes) with respect to any
of these sites, it would have joint and several liability with other responsible
parties for the full amount of the cleanup costs. A "responsible party" under
that statute includes the current owner of the affected property and each owner
or operator of a facility during the time when hazardous substances were
released on the property.
Management believes that UGI Utilities should not have significant liability
in those instances in which a former subsidiary operated a MGP because UGI
Utilities generally is not legally liable for the obligations of its
subsidiaries. Under certain circumstances, however, courts have found parent
companies liable for environmental damage caused by subsidiary companies when
the parent company exercised substantial control over the subsidiary. There
could be, therefore, significant future costs of an uncertain amount associated
with environmental damage caused by MGPs that UGI Utilities owned or directly
operated, or that were owned or operated by former subsidiaries of UGI
Utilities, if a court were to conclude that UGI Utilities exercised substantial
control over such subsidiaries.
Management believes, after consultation with counsel, that future costs of
investigation and remediation, if any, will not have a material adverse effect
on the Company's financial position but could be material to operating results
and cash flows depending on the nature and timing of future developments and the
amounts of future operating results and cash flows. For a more detailed
discussion of environmental matters related to MGP sites, see Note 11 to
Consolidated Financial Statements.
ACCOUNTING PRINCIPLES NOT YET ADOPTED
The Financial Accounting Standards Board recently issued SFAS No. 128, "Earnings
Per Share" (SFAS 128) and SFAS No. 130, "Reporting Comprehensive Income" (SFAS
130). SFAS 128 establishes standards for computing and presenting earnings per
share and simplifies the previous standards for computing earnings per share
found in Accounting Principles Board Opinion No. 15. SFAS 128 is effective for
financial statements issued for periods ending after December 15, 1997. SFAS 130
establishes standards for reporting and displaying comprehensive income and its
components in financial statements. SFAS 130 is effective for fiscal years
beginning after December 15, 1997. In addition, the American Institute of
Certified Public Accountants issued Statement of Position No. 96-1,
"Environmental Remediation Liabilities" (SOP 96-1) in October 1996. SOP 96-1
provides guidance on the recognition, measurement, display and disclosure of
environmental remediation liabilities. SOP 96-1 is effective for fiscal years
beginning after December 15, 1996. The adoption of these standards is not
expected to have a material effect on the Company's financial position or
results of operations.
IMPACT OF INFLATION
Inflation impacts the Company's propane operations in the prices it pays for
operating and administrative services and, to some extent, propane gas.
Competitive pressures may limit the Company's ability to recover fully propane
product cost increases.
Inflation also impacts the Company's gas and electric utility operations
primarily in the prices they pay for labor, materials and services. Because
Electric Utility's base rates are capped and Gas Utility's base rates can be
adjusted only through general rate filings with the PUC, increased costs, absent
timely rate relief, can have a significant impact on the utilities' results.
Under current tariffs, Gas Utility is permitted, after annual PUC review, to
recover certain costs of purchased gas, fuel and power which comprise a
substantial portion of Gas Utility's costs and expenses.
The Company attempts to limit the effects of inflation on its results of
operations through cost control efforts, productivity improvements and, with
respect to Gas Utility, timely rate relief.
FORWARD-LOOKING STATEMENTS
This Report contains forward-looking statements that are subject to risks and
uncertainties. The factors that could cause actual results to differ materially
include those discussed herein as well as those listed in Exhibit 99 to the
Company's Annual Report on Form 10-K for the year ended September 30, 1997.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this Report. The Company
undertakes no obligation to publicly release any revision to these
forward-looking statements to reflect events or circumstances after the date of
this Report.
UGI Corporation 18 1997 Annual Report
10
REPORT OF MANAGEMENT
The Company's consolidated financial statements and other financial information
contained in this Annual Report are prepared by management, which is responsible
for their fairness, integrity and objectivity. The consolidated financial
statements and related information were prepared in accordance with generally
accepted accounting principles and include amounts that are based on
management's best judgments and estimates.
The Company maintains a system of internal controls. Management believes the
system provides reasonable assurance that assets are safeguarded and that
transactions are executed in accordance with management's authorization and are
properly recorded to permit the preparation of reliable financial information.
There are limits in all systems of internal control, based on the recognition
that the cost of the system should not exceed the benefits to be derived. We
believe that the Company's internal control system is cost effective and
provides reasonable assurance that material errors or irregularities will be
prevented or detected within a timely period. The internal control system and
compliance therewith are monitored by the Company's internal audit staff.
The Audit Committee of the Board of Directors is composed of three members,
none of whom is an employee of the Company. This Committee is responsible for
reviewing the adequacy of corporate financial reporting and accounting systems
and controls, for overseeing the external and internal auditing functions and
for recommending to the Board of Directors the independent accountants to
conduct the annual audit of the Company's consolidated financial statements. The
Committee maintains direct channels of communication between the Board of
Directors and both the independent accountants and internal auditors.
The independent accountants, who are appointed by the Board of Directors and
ratified by the shareholders, perform certain procedures, including an
evaluation of internal controls to the extent required by generally accepted
auditing standards, in order to express an opinion on the consolidated financial
statements and to obtain reasonable assurance that such financial statements are
free of material misstatement.
/s/ Lon R. Greenberg /s/ Charles L. Ladner /s/ Michael J. Cuzzolina
- ----------------------- ----------------------- -------------------------
Lon R. Greenberg Charles L. Ladner Michael J. Cuzzolina
Chief Executive Officer Chief Financial Officer Chief Accounting Officer
INDEX TO FINANCIAL AND OTHER INFORMATION
UGI CORPORATION AND SUBSIDIARIES
REPORT OF MANAGEMENT ..................... 19
SEGMENT INFORMATION ...................... 20
CONSOLIDATED STATEMENTS OF INCOME ........ 21
CONSOLIDATED BALANCE SHEETS .............. 22
CONSOLIDATED STATEMENTS OF CASH FLOWS .... 24
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY ................... 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 26
REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS 39
FINANCIAL STATISTICS ..................... 40
OPERATING STATISTICS ..................... 42
SHAREHOLDER INFORMATION .................. 44
UGI Corporation 19 1997 Annual Report
11
SEGMENT INFORMATION
(Millions of dollars)
UGI CORPORATION AND SUBSIDIARIES
Year Ended
September 30,
- -------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------
REVENUES Propane $ 1,077.8 $ 1,013.2 $ 511.7
Gas utility 389.1 391.0 291.3
Electric utility 72.1 69.5 66.1
Energy marketing (a) 103.0 83.9 8.5
- -------------------------------------------------------------------------------------
Total consolidated operations $ 1,642.0 $ 1,557.6 $ 877.6
Petrolane (b) -- -- 372.1
- -------------------------------------------------------------------------------------
OPERATING Propane $ 117.1 $ 80.8 $ 21.8
INCOME Gas utility 74.8 72.9 51.9
(LOSS) Electric utility 10.7 8.6 9.1
Energy marketing 1.7 4.4 1.8
Petrolane management fee -- -- 6.8
Corporate general and other (4.4) (7.0) (13.1)
- -------------------------------------------------------------------------------------
Total consolidated operations $ 199.9 $ 159.7 $ 78.3
Petrolane (b) -- -- 41.5
- -------------------------------------------------------------------------------------
IDENTIFIABLE Propane $ 1,335.6 $ 1,388.3 $ 1,446.1
ASSETS Gas utility 593.7 561.1 553.7
Electric utility 86.2 83.9 86.6
Energy marketing 10.0 13.5 6.2
Corporate general and other 126.2 86.2 59.7
- -------------------------------------------------------------------------------------
Total consolidated operations $ 2,151.7 $ 2,133.0 $ 2,152.3
- -------------------------------------------------------------------------------------
DEPRECIATION Propane -- depreciation $ 38.6 $ 38.3 $ 23.8
AND Propane -- amortization 25.7 25.8 17.0
AMORTIZATION Gas utility 17.1 17.6 16.1
Electric utility 4.3 4.0 3.7
Corporate general and other .4 .3 .3
- -------------------------------------------------------------------------------------
Total consolidated operations $ 86.1 $ 86.0 $ 60.9
Petrolane -- depreciation (b) -- -- 13.1
Petrolane -- amortization (b) -- -- 14.3
- -------------------------------------------------------------------------------------
CAPITAL Propane $ 27.0 $ 22.9 $ 17.2
EXPENDITURES Gas utility 36.7 34.6 45.3
Electric utility 5.0 5.0 6.0
Corporate general and other .1 .2 .3
- -------------------------------------------------------------------------------------
Total consolidated operations $ 68.8 $ 62.7 $ 68.8
Petrolane (b) -- -- 7.3
- -------------------------------------------------------------------------------------
(a) Subsequent to July 31, 1995, the Company's energy marketing
business records separately the revenues and related cost of
sales associated with its billed volumes. Prior to August 1,
1995, net margin from the Company's energy marketing business
was reflected as a component of miscellaneous income.
(b) Includes 100% of amounts for Petrolane through April 19, 1995.
The results of operations of Petrolane are reflected in the
consolidated financial statements on the equity method of
accounting through April 19, 1995.
UGI Corporation 20 1997 Annual Report
12
CONSOLIDATED STATEMENTS OF INCOME
(Millions of dollars, except per share amounts)
UGI CORPORATION AND SUBSIDIARIES
Year Ended
September 30,
- --------------------------------------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
REVENUES Propane $ 1,077.8 $ 1,013.2 $ 511.7
(note 1) Utilities 461.2 460.5 357.4
Energy marketing 103.0 83.9 8.5
- --------------------------------------------------------------------------------------------------------------
1,642.0 1,557.6 877.6
- --------------------------------------------------------------------------------------------------------------
COSTS AND Propane cost of sales 600.4 569.7 261.0
EXPENSES Utilities -- gas, fuel and purchased power (note 1) 239.0 239.7 169.7
Energy marketing cost of sales 99.4 77.7 8.0
Operating and administrative expenses 439.8 437.5 331.6
Depreciation and amortization (note 1) 86.1 86.0 60.9
Petrolane fee income (note 15) -- -- (20.5)
Miscellaneous income, net (note 13) (22.6) (12.7) (11.4)
- --------------------------------------------------------------------------------------------------------------
1,442.1 1,397.9 799.3
- --------------------------------------------------------------------------------------------------------------
OPERATING INCOME 199.9 159.7 78.3
Interest expense (83.1) (79.5) (59.3)
Minority interest in AmeriGas Partners (note 1) (18.3) (4.3) 19.7
- --------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES, SUBSIDIARY PREFERRED
STOCK DIVIDENDS AND EQUITY IN PETROLANE 98.5 75.9 38.7
Income taxes (notes 1, 5 and 14) (43.6) (33.6) (22.7)
Dividends on UGI Utilities Series Preferred Stock (2.8) (2.8) (2.8)
Equity in Petrolane (notes 1, 14 and 15) -- -- (5.3)
- --------------------------------------------------------------------------------------------------------------
INCOME BEFORE EXTRAORDINARY LOSS
AND ACCOUNTING CHANGE 52.1 39.5 7.9
Extraordinary loss -- propane debt restructuring (note 14) -- -- (13.2)
Change in accounting for postemployment
benefits (note 6) -- -- (3.1)
- --------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 52.1 $ 39.5 $ (8.4)
- --------------------------------------------------------------------------------------------------------------
EARNINGS
(LOSS) Earnings before extraordinary loss
PER COMMON and accounting change $ 1.57 $ 1.19 $ .24
SHARE Extraordinary loss -- propane debt restructuring -- -- (.40)
Change in accounting for postemployment benefits -- -- (.10)
- --------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 1.57 $ 1.19 $ (.26)
- --------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
UGI Corporation 21 1997 Annual Report
13
CONSOLIDATED BALANCE SHEETS
(Millions of dollars)
UGI CORPORATION AND SUBSIDIARIES
ASSETS September 30,
-------------------------------
1997 1996
- ------------------------------------------------------------------------------------------------------------
CURRENT Cash and cash equivalents (note 1) $64.0 $ 74.0
ASSETS Short-term investments, at cost which approximates market value 65.4 23.1
Accounts receivable (less allowances for
doubtful accounts of $11.3 and $10.6, respectively) 110.6 113.3
Accrued utility revenues (note 1) 7.7 8.6
Inventories (notes 1 and 7) 95.6 99.9
Prepaid propane purchases (note 1) 21.7 13.3
Deferred income taxes (notes 1 and 5) 20.3 17.4
Insurance indemnification receivable 2.4 19.0
Prepaid expenses and other current assets 16.2 12.1
- ------------------------------------------------------------------------------------------------------------
Total current assets 403.9 380.7
- ------------------------------------------------------------------------------------------------------------
PROPERTY, Propane 620.6 602.0
PLANT AND Utilities 765.6 729.9
EQUIPMENT Other 11.1 10.9
------------------------------------------------------------------------------------------------
(notes 1
and 4) 1,397.3 1,342.8
Less accumulated depreciation and amortization 410.1 368.2
------------------------------------------------------------------------------------------------
Net property, plant and equipment 987.2 974.6
- ------------------------------------------------------------------------------------------------------------
OTHER Intangible assets (less accumulated amortization
ASSETS of $116.7 and $94.9, respectively) (note 1) 677.9 692.5
Regulatory income tax asset (notes 1 and 5) 44.4 42.9
Other assets (note 1) 38.3 42.3
- ------------------------------------------------------------------------------------------------------------
Total assets $2,151.7 $2,133.0
- ------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
UGI Corporation 22 1997 Annual Report
14
LIABILITIES AND STOCKHOLDERS' EQUITY September 30,
- -------------------------------------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------------------------------------
CURRENT Current maturities of long-term debt -- Propane (note 4) $ 6.7 $ 5.2
LIABILITIES Current maturities of long-term debt -- Utilities (note 4) 17.1 25.5
Current maturities of long-term debt -- other (note 4) .4 .4
Current portion of UGI Utilities Series Preferred Stock (note 8) 3.0 --
Bank loans -- Propane (note 4) 28.0 15.0
Bank loans -- Utilities (note 4) 67.0 50.5
Accounts payable 103.2 94.7
Employee compensation and benefits accrued 27.8 32.4
Dividends and interest accrued 43.2 44.8
Income taxes accrued 27.4 14.4
Insured property and casualty liability 1.0 19.0
Refunds and deposits 24.0 17.7
Other current liabilities 55.7 48.7
- -------------------------------------------------------------------------------------------------------------
Total current liabilities 404.5 368.3
- -------------------------------------------------------------------------------------------------------------
DEBT AND Long-term debt -- Propane (note 4) 684.4 687.3
OTHER Long-term debt -- Utilities (note 4) 152.2 149.3
LIABILITIES Long-term debt -- other (note 4) 8.2 8.6
Deferred income taxes (notes 1 and 5) 152.5 148.6
Deferred investment tax credits (notes 1 and 5) 10.4 10.8
Other noncurrent liabilities 64.7 62.9
Commitments and contingencies (note 11)
- -------------------------------------------------------------------------------------------------------------
MINORITY
INTEREST Minority interest in AmeriGas Partners (note 1) 266.5 284.4
- -------------------------------------------------------------------------------------------------------------
PREFERRED
AND UGI Utilities Series Preferred Stock Subject to
PREFERENCE Mandatory Redemption, without par value (note 8) 32.2 35.2
STOCK Preference Stock, without par value (note 9)
(authorized -- 5,000,000 shares) -- --
- -------------------------------------------------------------------------------------------------------------
COMMON Common Stock, without par value (notes 9 and 10)
STOCKHOLDERS' (authorized -- 100,000,000 shares; issued -- 33,198,731 shares) 393.7 391.9
EQUITY Accumulated deficit (9.2) (12.8)
----------------------------------------------------------------------------------------------
384.5 379.1
Less treasury stock, at cost (note 10) 8.4 1.5
- -------------------------------------------------------------------------------------------------------------
Total common stockholders' equity 376.1 377.6
- -------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 2,151.7 $ 2,133.0
- -------------------------------------------------------------------------------------------------------------
UGI Corporation 23 1997 Annual Report
15
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of dollars)
UGI CORPORATION AND SUBSIDIARIES
Year Ended
September 30,
-------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
CASH FLOWS Net income (loss) $ 52.1 $ 39.5 $ (8.4)
FROM Reconcile to net cash provided by operating activities:
OPERATING Depreciation and amortization 86.1 86.0 60.9
ACTIVITIES Minority interest in AmeriGas Partners 18.3 4.3 (19.7)
Deferred income taxes, net (2.2) 12.0 5.1
Extraordinary loss -- -- 13.2
Change in accounting -- -- 3.1
Equity in Petrolane -- -- 5.3
Other, net 4.1 (3.5) 7.4
-----------------------------------------------------------------------------------------------
158.4 138.3 66.9
Net change in:
Receivables and accrued utility revenues (6.8) (37.1) 7.1
Inventories and prepaid propane purchases (3.6) (10.2) (14.3)
Deferred fuel adjustments 4.6 (10.7) (.1)
Pipeline transition and producer settlement
recoveries (costs), net (1.8) 1.1 (7.6)
Accounts payable 8.5 25.1 2.6
Other current assets and liabilities 12.7 4.7 22.2
-----------------------------------------------------------------------------------------------
Net cash provided by operating activities 172.0 111.2 76.8
- -----------------------------------------------------------------------------------------------------------
CASH FLOWS Expenditures for property, plant and equipment (68.8) (62.7) (68.8)
FROM Acquisitions of businesses, net of cash acquired (11.6) (28.0) (4.1)
INVESTING Acquisitions of Petrolane Class B shares,
ACTIVITIES net of $18.7 of cash acquired -- -- (90.9)
Short-term investments increase (42.3) (12.1) (11.0)
Proceeds from disposals of assets 14.4 4.2 1.6
Other, net (2.2) (.3) 1.0
-----------------------------------------------------------------------------------------------
Net cash used by investing activities (110.5) (98.9) (172.2)
- -----------------------------------------------------------------------------------------------------------
CASH FLOWS Dividends on Common Stock (47.2) (46.4) (45.2)
FROM Distributions on Partnership public Common Units (38.8) (38.7) (7.9)
FINANCING Issuance of long-term debt 28.9 57.1 48.0
ACTIVITIES Repayment of long-term debt (29.4) (59.7) (20.0)
Propane bank loans increase 6.0 15.0 --
Utilities bank loans increase 16.5 8.5 25.0
Issuance of Common Stock 11.7 11.3 10.1
Repurchases of Common Stock (19.2) (7.1) --
Issuance of AmeriGas Partners Common Units -- -- 346.4
Issuance of long-term debt associated with
Partnership Formation -- -- 208.5
Repayment of long-term debt and related interest
associated with Partnership Formation -- -- (408.9)
Partnership Formation fees and expenses -- -- (16.3)
-----------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (71.5) (60.0) 139.7
-----------------------------------------------------------------------------------------------
Cash and cash equivalents increase (decrease) $ (10.0) $ (47.7) $ 44.3
===========================================================================================================
CASH AND End of period $ 64.0 $ 74.0 $ 121.7
CASH Beginning of period 74.0 121.7 77.4
EQUIVALENTS -----------------------------------------------------------------------------------------------
Increase (decrease) $ (10.0) $ (47.7) $ 44.3
===========================================================================================================
The accompanying notes are an integral part of these financial statements.
UGI Corporation 24 1997 Annual Report
16
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Millions of dollars, except per share amounts)
UGI CORPORATION AND SUBSIDIARIES
Retained
Earnings
Common (Accumulated Treasury
Stock Deficit) Stock
- ------------------------------------------------------------------------------------------
YEAR ENDED Balance September 30, 1994 $ 376.0 $ 48.4 $ (.1)
SEPTEMBER 30, Net loss (8.4)
1995 Cash dividends on Common Stock
($1.39 per share) (45.5)
Common Stock issued (note 10):
Employee and director plans .8
Dividend reinvestment plan 9.3
- ------------------------------------------------------------------------------------------
YEAR ENDED Balance September 30, 1995 386.1 (5.5) (.1)
SEPTEMBER 30, Net income 39.5
1996 Cash dividends on Common Stock
($1.41 per share) (46.7)
Common Stock issued (note 10):
Employee and director plans 3.6 (.1) 3.1
Dividend reinvestment plan 2.2 2.6
Common Stock repurchased (7.1)
- ------------------------------------------------------------------------------------------
YEAR ENDED Balance September 30, 1996 391.9 (12.8) (1.5)
SEPTEMBER 30, Net income 52.1
1997 Cash dividends on Common Stock
($1.43 per share) (47.3)
Common Stock issued (note 10):
Employee and director plans .7 (1.2) 9.2
Dividend reinvestment plan 3.1
Stock-based compensation expense 1.1
Common Stock repurchased (19.2)
- ------------------------------------------------------------------------------------------
Balance September 30, 1997 $ 393.7 $ (9.2) $ (8.4)
- ------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
UGI Corporation 25 1997 Annual Report
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Millions of dollars, except per share amounts and where indicated otherwise)
UGI CORPORATION AND SUBSIDIARIES
NOTE 1. ORGANIZATION AND SIGNIFICANT
ACCOUNTING POLICIES................26
NOTE 2. UTILITY REGULATORY MATTERS.........28
NOTE 3. PARTNERSHIP DISTRIBUTIONS..........29
NOTE 4. DEBT...............................29
NOTE 5. INCOME TAXES.......................31
NOTE 6. PENSION PLANS AND OTHER
POSTEMPLOYMENT BENEFITS............31
NOTE 7. INVENTORIES........................33
NOTE 8. SERIES PREFERRED STOCK.............33
NOTE 9. PREFERENCE STOCK PURCHASE RIGHTS...33
NOTE 10. COMMON STOCK AND INCENTIVE
STOCK AWARD PLANS..................34
NOTE 11. COMMITMENTS AND CONTINGENCIES......35
NOTE 12. FINANCIAL INSTRUMENTS..............36
NOTE 13. MISCELLANEOUS INCOME...............37
NOTE 14. FORMATION OF AMERIGAS PARTNERS.....37
NOTE 15. INVESTMENT IN PETROLANE............37
NOTE 16. SEGMENT INFORMATION................38
NOTE 17. QUARTERLY DATA (UNAUDITED).........38
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION. UGI Corporation (UGI) is a holding company with two principal
businesses. UGI's utility business is conducted through a wholly owned
subsidiary, UGI Utilities, Inc. (UGI Utilities), which owns and operates a
natural gas distribution utility (Gas Utility) in parts of eastern and
southeastern Pennsylvania and an electric utility (Electric Utility) in
northeastern Pennsylvania (together referred to herein as "Utilities").
Commencing with the April 19, 1995 Partnership Formation (see Note 14), UGI
conducts a national propane distribution business through AmeriGas Partners,
L.P. (AmeriGas Partners) and its operating subsidiary, AmeriGas Propane, L.P.
(the "Operating Partnership"), both of which are Delaware limited partnerships.
The Operating Partnership is the largest retail propane distributor in the
United States serving residential, commercial, industrial, motor fuel and
agricultural customers from locations in 45 states, including Alaska and Hawaii.
UGI also conducts an energy marketing business principally through its wholly
owned subsidiary, UGI Energy Services, Inc. (UGI Energy Services).
At September 30, 1997, UGI, through wholly owned subsidiaries, held an
effective 2% general partner interest and a 56.5% limited partnership interest
in the Operating Partnership. This limited partner interest is evidenced by
AmeriGas Partners Common Units (Common Units) and AmeriGas Partners Subordinated
Units (Subordinated Units) representing limited partner interests in AmeriGas
Partners. The remaining 41.5% effective interest in the Operating Partnership
comprises publicly held Common Units. AmeriGas Partners and the Operating
Partnership are collectively referred to as "the Partnership." A wholly owned
second-tier subsidiary of UGI (the "General Partner") serves as the general
partner of AmeriGas Partners and the Operating Partnership. The Company does not
receive management fees or other compensation in connection with its management
of the Partnership but is reimbursed at cost for direct and indirect expenses
incurred on behalf of the Partnership, including a portion of UGI employee
compensation and overhead costs. Although operating income of the Partnership
comprised more than half of UGI's fiscal 1997 consolidated operating income, its
impact on consolidated net income was considerably less due to the Partnership's
significant minority interest, higher relative interest charges and a higher
effective income tax rate associated with the Partnership's pre-tax income.
Prior to the Partnership Formation, UGI's AmeriGas, Inc. subsidiary (AmeriGas)
conducted a national propane distribution business principally through its
wholly owned subsidiaries AmeriGas Propane, Inc. and AmeriGas Propane-2, Inc.
(collectively, "AmeriGas Propane") and its 35%-owned equity investee Petrolane
Incorporated (Petrolane).
UGI is exempt from registration as a holding company and is not otherwise
subject to regulation under the Public Utility Holding Company Act of 1935
except for acquisitions under Section 9(a)(2). UGI is not subject to regulation
by the Pennsylvania Public Utility Commission (PUC).
CONSOLIDATION PRINCIPLES. The consolidated financial statements include the
accounts of UGI and its majority-owned subsidiaries (collectively, the
"Company"). All significant intercompany accounts and transactions have been
eliminated in consolidation. The public unitholders' interest in AmeriGas
Partners is reflected as minority interest in the consolidated financial
statements. The Company's investment in Petrolane through April 19, 1995 was
accounted for by the equity method. The Company's consolidated propane
operations are hereinafter referred to as Propane.
RECLASSIFICATIONS. Certain prior-period balances have been reclassified to
conform with the current period presentation.
USE OF ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and revenues and expenses during the reporting period. Actual
results could differ from these estimates.
REGULATED UTILITY OPERATIONS. Gas Utility and Electric Utility are subject to
regulation by the PUC. Gas Utility and Electric Utility account for their
regulated operations in accordance with Statement of Financial Accounting
Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of
Regulation" (SFAS 71), as amended and supplemented by subsequently issued
standards. SFAS 71, as amended and supplemented, requires, among other things,
that financial statements of a regulated enterprise reflect the actions of
regulators, where appropriate. The economic effects of regulation can result in
regulated enterprises recording costs that have been or are expected to be
allowed in the ratesetting process in a period different from the period in
which the costs would be charged to expense by an unregulated enterprise. When
this occurs, costs are deferred as assets in the balance sheet (regulatory
assets) and recorded as expenses as those amounts are reflected in rates.
Additionally, regulators can impose liabilities upon a regulated enterprise for
amounts previously collected from customers and for recovery of costs that are
expected to be incurred in the future (regulatory liabilities). The Company
continually monitors the regulatory and competitive environments in which it
operates to determine that its regulatory assets are probable of recovery.
Given the changing regulatory environment in the electric utility industry
(see Note 2), the Company continues to evaluate its ability to apply the
provisions of SFAS 71 as it relates to its electric generation operations. The
Company believes its electric generation assets and related regulatory assets
continue to satisfy the criteria of SFAS 71. If
UGI Corporation 26 1997 Annual Report
18
such electric generation assets no longer meet the criteria of SFAS 71, any
related regulatory assets would be written off unless some form of transition
cost recovery is established by the PUC which would meet the requirements under
generally accepted accounting principles for continued accounting as regulatory
assets during such recovery period. Any generation-related, long-lived fixed and
intangible assets would be evaluated for impairment under the provisions of SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" (SFAS 121).
DERIVATIVE INSTRUMENTS. The Company utilizes derivative commodity instruments,
including futures contracts, to reduce market risk associated with fluctuations
in the price of natural gas sold under firm commitments with certain of its
customers. The Company also utilizes derivative commodity instruments including
price swap agreements, call and put option contracts and futures contracts, to
manage market risk associated with a portion of its anticipated propane supply
requirements. Additionally, the Company, from time to time, utilizes a managed
program of derivative instruments including natural gas and oil futures
contracts to preserve margin associated with certain of the Company's customer
segments, which margin otherwise could be affected by major commodity price
movements.
Gains or losses on derivative commodity instruments associated with firm
commitments are recognized as an adjustment to cost of sales when the associated
transactions affect earnings. Gains or losses on derivative instruments
associated with forecasted transactions are recognized when such forecasted
transactions affect earnings. If a derivative instrument is terminated early
because it is probable that a transaction or forecasted transaction will not
occur, any gain or loss as of such date is immediately recognized in earnings.
If such derivative instrument is terminated early for other economic reasons,
any gain or loss as of the termination date is deferred and recorded when the
associated transaction or forecasted transaction affects earnings.
CONSOLIDATED STATEMENTS OF CASH FLOWS. Cash equivalents include all highly
liquid investments with maturities of three months or less when purchased and
are recorded at cost plus accrued interest, which approximates market value.
Interest paid during 1997, 1996 and 1995 was $85.3 million, $79.8 million and
$39.4 million, respectively. Income taxes paid during 1997, 1996 and 1995 were
$32.0 million, $20.3 million and $22.0 million, respectively. On April 19, 1995,
the Company acquired the approximately 65% of Petrolane common shares it did not
already own for $109.6 million. In conjunction with this acquisition,
proportionate liabilities in the amount of $535.1 million were assumed.
REVENUE RECOGNITION. Revenues from the sale of propane are recognized
principally as product is shipped or delivered to customers. Utilities' revenues
are recorded for service provided to the end of each month but not yet billed.
Rate increases or decreases are reflected in revenues from effective dates
permitted by the PUC. Subsequent to July 31, 1995, the Company's energy
marketing business is conducted by UGI Energy Services which records separately
the revenues and related cost of sales associated with its billed volumes. Prior
to August 1, 1995, net margin from energy marketing activities, which were
conducted by a subsidiary of UGI Utilities, was reflected as miscellaneous
income.
INVENTORIES AND PREPAID PROPANE PURCHASES. Inventories are stated at the lower
of cost or market. Cost is determined principally on an average or first-in,
first-out (FIFO) method except for appliances for which the specific
identification method is used.
The Partnership also enters into contracts with certain of its suppliers under
which it prepays the purchase price of a fixed volume of propane for future
delivery. The amount of such prepayments is included in the consolidated balance
sheets as "prepaid propane purchases."
INCOME TAXES. AmeriGas Partners and the Operating Partnership are not directly
subject to federal and state income taxes. Instead, their taxable income or loss
is allocated to the individual partners, including the Company. The Operating
Partnership does, however, have certain subsidiaries which operate in corporate
form and are subject to federal and state income taxes.
Deferred income tax provisions of UGI Utilities resulting from the use of
accelerated depreciation methods are recorded in the Consolidated Statements of
Income based upon amounts recognized for ratemaking purposes. UGI Utilities also
recognizes a deferred tax liability for tax benefits that are flowed through to
ratepayers when temporary differences originate and establishes a corresponding
regulatory asset (regulatory income tax asset) for the probable increase in
future revenues that will result when the temporary differences reverse.
Investment tax credits related to UGI Utilities' plant additions have been
deferred and are being amortized over the service lives of the related property.
UGI Utilities reduces its deferred tax liability for the future tax benefits
that will occur when the deferred investment tax credits, which are not taxable,
are amortized, and also reduces the regulatory asset for the probable reduction
in future revenues that will result when such deferred investment tax credits
amortize.
EARNINGS (LOSS) PER COMMON SHARE. Primary earnings (loss) per common share are
computed by dividing net income (loss) by the weighted average number of common
and dilutive common equivalent shares outstanding during each period. Common
equivalent shares included in the computations represent shares issuable upon
assumed exercise of stock options. Shares used in the earnings (loss) per common
share computations were 33,132,000, 33,142,000 and 32,710,000 for 1997, 1996 and
1995, respectively. Fully diluted earnings (loss) per share are not materially
different from primary earnings (loss) per share and therefore are not
presented.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share" (SFAS 128). SFAS 128 establishes standards for
computing and presenting earnings per share and simplifies the previous
standards for computing earnings per share found in Accounting Principles Board
(APB) Opinion No. 15. SFAS 128 is effective for financial statements issued for
periods ending after December 15, 1997. After the effective date, prior-period
earnings per share data presented must be restated. The adoption of SFAS 128 is
not expected to have a material effect on the Company's computation of earnings
per share.
PROPERTY, PLANT AND EQUIPMENT AND RELATED DEPRECIATION. Property, plant and
equipment is stated at cost. Amounts assigned to property, plant and equipment
of acquired businesses are based upon estimated fair value at date of
acquisition. The original cost of UGI Utilities' retired plant, together with
the net cost of removal, is charged to accumulated depreciation for financial
accounting purposes. Removal costs of UGI Utilities' plant and equipment are
deducted currently for income tax purposes. When plant and equipment other than
UGI Utilities' plant and equipment are retired or otherwise disposed of, the
cost and accumulated depreciation are removed from the accounts and any gains or
losses are reflected in current operations.
Depreciation of Utilities' plant and equipment is computed using the
straight-line method over the estimated average remaining lives of the various
classes of depreciable property. Depreciation as a percentage of the related
average depreciable base for 1997, 1996 and 1995 was 2.7%, 2.9% and 2.8%; and
3.6%, 3.6% and 3.4%, for Gas Utility and Electric Utility, respectively.
Depreciation of Propane plant and equipment is computed using the straight-line
method over estimated service lives ranging from two to 40 years.
Depreciation expense during 1997, 1996 and 1995 was $59.8 million, $59.4
million and $43.1 million, respectively.
UGI Corporation 27 1997 Annual Report
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Millions of dollars, except per share amounts and where indicated otherwise)
INTANGIBLE ASSETS. Intangible assets comprise the following at September 30:
- ------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------
Goodwill (less accumulated amortization of
$79.4 million and $64.1 million, respectively) $538.2 $546.2
Excess reorganization value (less accumulated
amortization of $35.9 million and
$27.4 million, respectively) 135.1 143.4
Other (less accumulated amortization of
$1.4 million and $3.4 million, respectively) 4.6 2.9
- ------------------------------------------------------------------------------
Total intangible assets $677.9 $692.5
- ------------------------------------------------------------------------------
Goodwill recognized as a result of business combinations accounted for as
purchases is being amortized on a straight-line basis over 40 years. Excess
reorganization value (which represents reorganization value in excess of amounts
allocable to identifiable assets of Petrolane resulting from Petrolane's July
15, 1993 reorganization under Chapter 11 of the United States Bankruptcy Code)
is being amortized on a straight-line basis over the 20-year period commencing
July 15, 1993. Other intangible assets are being amortized over the estimated
periods of benefit which do not exceed ten years. Amortization expense of
intangible assets during 1997, 1996 and 1995 was $24.5 million, $24.6 million
and $16.1 million, respectively.
The Company evaluates the impairment of long-lived assets, including
intangibles, whenever events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable. Recoverability is
evaluated based upon undiscounted future cash flows expected to be generated by
such assets.
STOCK-BASED COMPENSATION. The Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123) in 1997. SFAS 123 encourages, but does not
require, companies to recognize compensation expense for grants of stock, stock
options, and other equity instruments to employees based upon fair value.
Alternatively, it permits them to continue to apply the existing accounting
rules contained in APB No. 25, "Accounting for Stock Issued to Employees" (APB
25). Companies choosing not to adopt the expense recognition provisions of SFAS
123 are required to disclose certain pro forma net income and earnings per share
data as if such provisions had been applied (see Note 10). The Company has
elected to continue to account for stock-based compensation in accordance with
APB 25.
OTHER ASSETS. Included in other assets at September 30, 1997 and 1996 are net
deferred financing costs of $13.7 million and $15.0 million, respectively. These
costs are being amortized over the term of the related debt.
DEFERRED FUEL ADJUSTMENTS. Gas Utility's tariffs contain, and prior to January
1, 1997, Electric Utility's tariffs contained, clauses which permit recovery of
certain gas, fuel and purchased power costs in excess of the level of such costs
included in base rates. The clauses provide for a periodic adjustment for the
difference between the total amount collected under each clause and the
recoverable costs incurred. Accordingly, the difference between amounts
recognized in revenues and the applicable gas, fuel and purchased power costs
incurred is deferred until subsequently billed or refunded to customers.
In accordance with the provisions of the Customer Choice Act (see Note 2), the
rates Electric Utility can charge its customers, including amounts pertaining to
the recovery of fuel and purchased power costs, were capped effective January 1,
1997. The difference between amounts collected and costs actually incurred as of
January 1, 1997 is being considered by the PUC in conjunction with Electric
Utility's Customer Choice Act restructuring plan. Such amount was not material.
2. UTILITY REGULATORY MATTERS
ELECTRICITY GENERATION CUSTOMER CHOICE AND COMPETITION ACT. On January 1, 1997,
the Electricity Generation Customer Choice and Competition Act (Customer Choice
Act) became effective. The Customer Choice Act permits all Pennsylvania retail
electric customers to choose their electric generation supplier over a
three-year phase-in period commencing January 1, 1999. The Customer Choice Act
requires all electric utilities to file restructuring plans with the PUC which,
among other things, include unbundled prices for electric generation,
transmission and distribution and a competitive transition charge (CTC) for the
recovery of stranded costs which would be paid by all customers receiving
transmission and distribution service. Stranded costs generally are electric
generation-related costs that traditionally would be recoverable in a regulated
environment but may not be recoverable in a competitive electric generation
market. Under the Customer Choice Act, Electric Utility's rates for transmission
and distribution services provided through June 30, 2001 are capped at levels in
effect on January 1, 1997. In addition, Electric Utility generally may not
increase the generation component of prices as long as stranded costs are being
recovered through the CTC. Electric Utility will continue to be the only
regulated electric utility having the right, granted by the PUC or by law, to
distribute electric energy in its service territory.
On August 7, 1997, Electric Utility filed its restructuring plan with the PUC.
The restructuring plan includes a claim for the recovery of $34.4 million for
stranded costs during the period January 1, 1999 through December 31, 2002. The
claim is primarily for the recovery of: (1) plant investments in excess of
estimated competitive market value and electric generation facility retirement
costs; (2) potential costs associated with existing power purchase agreements;
and (3) regulatory assets (principally income taxes) recoverable from ratepayers
under current regulatory practice. The claim also seeks to establish a recovery
mechanism that would permit the recovery of up to an additional $28 million of
costs associated with the buyout or implementation of a December 1993 agreement
to purchase power from an independent power producer. The PUC is expected to
take action on Electric Utility's filing in May 1998.
Based upon an evaluation of the various factors and conditions affecting
future cost recovery, the Company does not expect the Customer Choice Act to
have a material adverse effect on its financial condition or results of
operations.
BASE RATE CASES. On January 27, 1995, Gas Utility filed with the PUC for a
$41.3 million increase in base rates to be effective March 28, 1995. In
accordance with normal PUC practice, the effective date was suspended pending
further investigation. On August 31, 1995, the PUC approved a settlement of this
proceeding (Gas Utility Base Rate Settlement) authorizing a $19.5 million
increase in annual revenues. The increase in base rates became effective on
August 31, 1995.
On January 26, 1996, Electric Utility filed with the PUC for a $6.2 million
increase in base rates. On July 18, 1996, the PUC approved a settlement of this
proceeding authorizing a $3.1 million increase in annual revenues, effective
July 19, 1996.
REGULATORY ASSETS (LIABILITIES). The following regulatory assets (liabilities)
are included in the accompanying balance sheets at September 30:
- -------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------
Regulatory income tax asset $44.4 $42.9
Other postretirement benefits 3.8 4.3
Refundable state taxes (3.1) (4.2)
Deferred fuel costs (recoveries) (3.6) 1.1
Deferred producer settlement and
pipeline transition recoveries (3.8) (5.9)
Deferred environmental costs .7 .7
- -------------------------------------------------------------------
UGI Corporation 28 1997 Annual Report
20
3. PARTNERSHIP DISTRIBUTIONS
The Partnership makes distributions to its partners approximately 45 days after
the end of each fiscal quarter in an aggregate amount equal to its Available
Cash for such quarter. Available Cash generally means, with respect to any
fiscal quarter of the Partnership, all cash on hand at the end of such quarter
plus all additional cash on hand as of the date of determination resulting from
borrowings after the end of such quarter less the amount of cash reserves
established by the General Partner in its reasonable discretion. These reserves
may be retained for the proper conduct of the Partnership's business and for
distributions during the next four quarters. In addition, reserves for the
payment of debt principal and interest are required under the provisions of
certain of the Partnership's debt agreements.
Distributions in an amount equal to 100% of the Partnership's Available Cash
will generally be made 98% to the Common and Subordinated unitholders, including
such units held by the Company, and 2% to the General Partner, subject to the
payment of incentive distributions in the event Available Cash exceeds the
Minimum Quarterly Distribution (MQD) of $.55 on all units. To the extent there
is sufficient Available Cash, the holders of Common Units have the right to
receive the MQD, plus any arrearages, prior to the distribution of Available
Cash to holders of Subordinated Units. Common Units will not accrue arrearages
for any quarter after the Subordination Period (as defined below), and
Subordinated Units will not accrue any arrearages for any quarter.
The Subordination Period will generally extend until the first day of any
quarter beginning on or after April 1, 2000 in respect of which (a)
distributions of Available Cash from Operating Surplus (generally defined as $40
million plus $42.9 million of cash on hand as of April 19, 1995 plus all
operating cash receipts less all operating cash expenditures and cash reserves)
equal or exceed the MQD on each of the outstanding Common and Subordinated units
for each of the four consecutive four-quarter periods immediately preceding such
date; (b) the Adjusted Operating Surplus (generally defined as Operating Surplus
adjusted to exclude working capital borrowings, reductions in cash reserves and
$40 million plus $42.9 million of cash on hand as of April 19, 1995 and to
include increases in reserves to provide for distributions resulting from
Operating Surplus generated during such period) generated during both (i) each
of the two immediately preceding four-quarter periods and (ii) the immediately
preceding sixteen-quarter period, equals or exceeds the MQD on each of the
Common and Subordinated units outstanding during those periods; and (c) there
are no arrearages on the Common Units.
Prior to the end of the Subordination Period but not before March 31, 1998,
4,945,537 Subordinated Units will convert into Common Units for any quarter
ending on or after March 31, 1998, and an additional 4,945,537 Subordinated
Units will convert into Common Units for any quarter ending on or after March
31, 1999, if (a) distributions of Available Cash from Operating Surplus on each
of the outstanding Common and Subordinated units equal or exceed the MQD for
each of the three consecutive four-quarter periods immediately preceding such
date; (b) the Adjusted Operating Surplus generated during the immediately
preceding twelve-quarter period equals or exceeds the MQD on all of the Common
and Subordinated units outstanding during that period; (c) the General Partner
makes a good faith determination that the Partnership will, with respect to the
four-quarter period commencing with such date, generate Adjusted Operating
Surplus in an amount equal to or exceeding the MQD on all of the outstanding
Common and Subordinated units; and (d) there are no arrearages on the Common
Units.
4. DEBT
Long-term debt comprises the following at September 30:
- ----------------------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------------------
Propane:
First Mortgage Notes:
Series A, 9.34%-11.71%, due April 2000
through April 2009 (including unamortized
premium of $14.8 and $16.0, respectively,
calculated at an 8.91% effective rate) $222.8 $224.0
Series B, 10.07%, due April 2001 through
April 2005 (including unamortized
premium of $11.5 and $13.1, respectively,
calculated at an 8.74% effective rate) 211.5 213.1
Series C, 8.83%, due April 2003
through April 2010 110.0 110.0
AmeriGas Partners Senior Notes,
10.125%, due April 2007 100.0 100.0
Acquisition Facility 37.0 30.0
Special Purpose Facility - 7.0
Other 9.8 8.4
- ----------------------------------------------------------------------------
Total Propane 691.1 692.5
- ----------------------------------------------------------------------------
Utilities:
First Mortgage Bonds:
7.85% Series due November 1996 - 8.4
Other long-term debt:
7.17% Series B Medium-Term Notes, due June 2007 20.0 -
7.37% Medium-Term Notes, due October 2015 22.0 22.0
6.73% Medium-Term Notes, due October 2002 26.0 26.0
6.62% Medium-Term Notes, due May 2005 20.0 20.0
6.50% Senior Notes, due August 2003
(less unamortized discount of
$.1 and $.2, respectively) 49.9 49.8
8.70% Notes, due March 1997 and 1998 in
annual installments of $10.0 10.0 20.0
9.71% Notes, due through September 2000
in annual installments of $7.1 21.4 28.6
- ----------------------------------------------------------------------------
Total Utilities 169.3 174.8
- ----------------------------------------------------------------------------
Other:
7.83% Senior Secured Notes,
due through March 2008 8.6 9.0
- ----------------------------------------------------------------------------
Total long-term debt 869.0 876.3
Less current maturities (24.2) (31.1)
- ----------------------------------------------------------------------------
Total long-term debt due after one year $844.8 $845.2
- ----------------------------------------------------------------------------
Long-term debt maturities during the fiscal years 1998 to 2002 follow:
- --------------------------------------------------------------------
1998 1999 2000 2001 2002
- --------------------------------------------------------------------
Propane $ 6.7 $ 5.6 $16.6 $71.2 $72.6
Utilities 17.1 7.1 7.1 - -
Other .4 .4 .5 .5 .5
- --------------------------------------------------------------------
Total $24.2 $13.1 $24.2 $71.7 $73.1
- --------------------------------------------------------------------
PROPANE
AMERIGAS PARTNERS' SENIOR NOTES. The 10.125% Senior Notes of AmeriGas Partners
contain covenants which restrict the ability of the Partnership to, among other
things, incur additional indebtedness, incur liens, issue preferred interests,
and effect mergers, consolidations and sales of assets. The Senior Notes are not
redeemable prior to April 15, 2000. Thereafter, AmeriGas Partners has the option
to redeem the Senior Notes, in whole or in part, at a premium. In addition,
AmeriGas Partners may, under certain circumstances following the disposition of
assets, be required to prepay the Senior Notes. Pursuant to the Indenture under
which the Senior Notes were issued, AmeriGas
UGI Corporation 29 1997 Annual Report
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Millions of dollars, except per share amounts and where indicated otherwise)
Partners is generally permitted to make cash distributions in an amount equal to
available cash, as defined, as of the end of the immediately preceding quarter,
as long as no event of default exists or would exist upon making such
distributions and if the Partnership's consolidated fixed charge coverage ratio,
as defined, is at least 1.75-to-1. If such ratio is not met, cash distributions
may be made in an aggregate amount not to exceed $24 million less the aggregate
of all distributions made during the immediately preceding 16 fiscal quarters.
At September 30, 1997, such ratio was 2.57-to-1.
FIRST MORTGAGE NOTES. The Operating Partnership's obligations under the First
Mortgage Notes, as amended, are collateralized by substantially all of its
assets. The General Partner and Petrolane are co-obligors of the First Mortgage
Notes. The Operating Partnership may, at its option, and under certain
circumstances following the disposition of assets be required to, prepay the
First Mortgage Notes, in whole or in part. Certain of these prepayments will be
at a premium.
BANK CREDIT AGREEMENT. Effective September 15, 1997, the Operating
Partnership amended and restated its bank credit agreement (Bank Credit
Agreement). At September 30, 1997, the credit facilities under the Bank Credit
Agreement consist of a Revolving Credit Facility and an Acquisition Facility.
The Operating Partnership's obligations under the Bank Credit Agreement are
collateralized by substantially all of its assets. The General Partner and
Petrolane are co-obligors of the bank credit facilities.
The Revolving Credit Facility provides for borrowings of up to $100 million
(including a $35 million sublimit for letters of credit). The Revolving Credit
Facility expires September 15, 2002, but may be extended, upon timely notice,
for additional one-year periods with the consent of the participating banks
representing at least 80% of the commitments thereunder. The Revolving Credit
Facility permits the Operating Partnership to borrow at the Base Rate, defined
as the higher of the Federal Funds Rate plus .50% per annum or the agent bank's
reference rate (6.31% and 8.50%, respectively, at September 30, 1997), or at
prevailing one-, two-, three-, or six-month offshore interbank borrowing rates,
plus a margin (.50% per annum as of September 30, 1997). The applicable margin
on such offshore interbank borrowing rates, and the Revolving Credit Facility
commitment fee rate (.20% per annum as of September 30, 1997), are dependent
upon the Operating Partnership's ratio of funded debt to earnings before
interest, income taxes, depreciation and amortization (EBITDA), each as defined
in the Bank Credit Agreement. The Operating Partnership is also required to pay
letter of credit fees on the undrawn amount of outstanding letters of credit
equal to the applicable margin on offshore interbank borrowings under the
Revolving Credit Facility and on the face amount of outstanding letters of
credit equal to .125% per annum. At September 30, 1997 and 1996, borrowings
under the Revolving Credit Facility totaled $28 million and $15 million,
respectively, and are classified as bank loans. The weighted-average interest
rates on the Operating Partnership's bank loans outstanding as of September 30,
1997 and 1996 were 6.44% and 6.00%, respectively. Issued outstanding letters of
credit under the Revolving Credit Facility totaled $2.3 million at September 30,
1996. There were no issued outstanding letters of credit under the Revolving
Credit Facility at September 30, 1997.
The Acquisition Facility provides the Operating Partnership with the ability
to borrow up to $75 million to finance propane business acquisitions. The
Acquisition Facility operates as a revolving facility through September 15, 2000
at which time any amount then outstanding will convert to a quarterly amortizing
four-year term loan. The Acquisition Facility permits the Operating Partnership
to borrow at the Base Rate or prevailing one-, two-, three-, or six-month
offshore interbank borrowing rates, plus a margin (.50% as of September 30,
1997). The applicable margin on such offshore interbank borrowing rates, and the
Acquisition Facility commitment fee rate (.20% per annum at September 30, 1997),
are dependent upon the Operating Partnership's ratio of funded debt to EBITDA,
as defined. The weighted-average interest rates on the Operating Partnership's
Acquisition loans outstanding as of September 30, 1997 and 1996 were 6.32% and
6.34%, respectively.
Prior to September 15, 1997, the Bank Credit Agreement included a Special
Purpose Facility comprising a $30 million nonrevolving line of credit to be used
for the payment of certain liabilities of the Operating Partnership. On
September 15, 1997, borrowings under the Special Purpose Facility of $7 million
were converted to borrowings under the Revolving Credit Facility.
RESTRICTIVE COVENANTS. The Bank Credit Agreement and the First Mortgage Notes
contain restrictive covenants which include restrictions on the incurrence of
additional indebtedness and restrictions on certain liens, guarantees, loans and
advances, payments, mergers, consolidations, sales of assets and other
transactions. They also require the ratio of total indebtedness, as defined, to
EBITDA, as defined (and as calculated on a rolling four-quarter basis or
eight-quarter basis divided by two), to be less than or equal to 5.25-to-1. In
addition, the Bank Credit Agreement requires that the Operating Partnership
maintain a ratio of EBITDA to interest expense, as defined, of at least
2.25-to-1 on a rolling four-quarter basis. Generally, as long as no default
exists or would result, the Operating Partnership is permitted to make cash
distributions not more frequently than quarterly in an amount not to exceed
available cash, as defined, for the immediately preceding calendar quarter.
GENERAL PARTNER FACILITY. The Operating Partnership also has a revolving
credit agreement with the General Partner under which it may borrow up to $20
million to fund working capital, capital expenditures, and interest and
distribution payments. This agreement is coterminous with, and generally
comparable to, the Operating Partnership's Revolving Credit Facility except that
borrowings under the General Partner Facility are unsecured and subordinated to
all senior debt of the Partnership. Interest rates on borrowings are based upon
one-month offshore interbank borrowing rates. Facility fees are determined in
the same manner as fees under the Revolving Credit Facility. UGI has agreed to
contribute on an as needed basis through its subsidiaries up to $20 million to
the General Partner to fund such borrowings.
UTILITIES
REVOLVING CREDIT AGREEMENTS. At September 30, 1997, UGI Utilities had revolving
credit agreements with five banks providing for borrowings of up to $102 million
through December 1997 and $82 million through June 2000. The commitments
expiring in June 2000 may be extended for one-year periods, upon timely notice,
unless the banks elect not to renew. The agreements provide UGI Utilities with
the option to borrow at various prevailing interest rates, including the prime
rate. A commitment fee at an annual rate of 3/16 of 1% is payable quarterly on
the unused available committed credit lines. At September 30, 1997 and 1996,
borrowings under these agreements totaled $67 million and $50.5 million,
respectively, and are classified as bank loans. The weighted-average interest
rates on UGI Utilities' bank loans at September 30, 1997 and 1996 were 6.26% and
5.93%, respectively.
RESTRICTIVE COVENANTS. Certain of UGI Utilities' debt agreements contain
limitations with respect to incurring additional debt, require the maintenance
of consolidated tangible net worth of at least $125 million, and restrict the
amount of payments for investments, redemptions of capital stock, prepayments of
subordinated indebtedness and dividends.
The mortgage collateralizing UGI Utilities First Mortgage Bonds constitutes a
first lien on UGI Utilities' plant.
UGI Corporation 30 1997 Annual Report
22
5. INCOME TAXES
The provisions for income taxes consist of the following:
- ------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------
Current:
Federal $36.7 $16.6 $14.0
State 9.1 5.0 3.6
- ------------------------------------------------------------------------------
45.8 21.6 17.6
Deferred (1.8) 12.4 5.5
Investment credit amortization (.4) (.4) (.4)
- ------------------------------------------------------------------------------
$43.6 $33.6 $22.7
- ------------------------------------------------------------------------------
A reconciliation from the statutory federal tax rate to the effective tax
rate is as follows:
1997 1996 1995
- ------------------------------------------------------------------------------
Statutory federal tax rate 35.0% 35.0% 35.0%
Difference in tax rate due to:
State income taxes, net of
federal benefit 6.1 6.6 8.8
Nondeductible amortization of
goodwill 4.9 6.5 9.7
Adjustment to Utilities deferred
state income taxes - - (11.0)
Adjustment to deferred tax
benefits resulting from
Partnership Formation - - 15.3
Other, net (1.7) (3.8) .9
- ------------------------------------------------------------------------------
Effective tax rate 44.3% 44.3% 58.7%
- ------------------------------------------------------------------------------
Deferred tax liabilities (assets) comprise the following at September 30:
1997 1996
- ------------------------------------------------------------------------------
Excess book basis over tax basis of property,
plant and equipment $158.4 $154.6
Regulatory income tax asset 18.4 17.8
Other 8.8 9.8
- ------------------------------------------------------------------------------
Gross deferred tax liabilities 185.6 182.2
- ------------------------------------------------------------------------------
Self-insured property and casualty liability (11.2) (8.2)
Employee-related benefits (9.3) (10.6)
Premium on long-term debt (6.0) (6.7)
Deferred investment tax credits (4.3) (4.5)
Environmental accrual (4.0) (2.8)
Allowance for doubtful accounts (3.2) (3.2)
Other (15.6) (15.3)
- ------------------------------------------------------------------------------
Gross deferred tax assets (53.6) (51.3)
- ------------------------------------------------------------------------------
Deferred tax assets valuation allowance .2 .3
- ------------------------------------------------------------------------------
Net deferred tax liabilities $132.2 $131.2
- ------------------------------------------------------------------------------
In February 1996, the General Partner completed AmeriGas Partners' and the
Operating Partnership's federal income tax returns for the Partnership's initial
period of operation. As a part of this process, a final determination was made
as to how to allocate the tax basis of certain of the assets contributed to the
Partnership by the General Partner and Petrolane pursuant to the Partnership
Formation. The completion of the allocation process resulted in reductions in
the deferred income tax liabilities of the General Partner and Petrolane
existing at the date of the Partnership Formation which had been recorded in
connection with the Petrolane Merger and the Partnership Formation. As a result,
the Company recorded a $37.0 million reduction in deferred income tax
liabilities and a corresponding reduction in goodwill which adjustments are
reflected in the accompanying Consolidated Balance Sheet at September 30, 1996.
Additional adjustments may be required to reflect the resolution of other tax
issues of Petrolane existing at the date of the Partnership Formation.
During 1995, UGI Utilities recorded a regulatory income tax asset of $12.6
million related to $11.3 million of existing deferred state income taxes
expected to be recovered in the future through the ratemaking process. Pursuant
to the Gas Utility Base Rate Settlement, UGI Utilities recorded a regulatory
liability of $5.3 million associated with a five-year flowback to ratepayers of
approximately $4.8 million in previously recovered deferred state income taxes.
The net effect of these adjustments increased 1995 income from continuing
operations by $4.3 million or $.13 per share.
As of September 30, 1997 and 1996, UGI Utilities had recorded approximately
$30.3 million and $29.6 million, respectively, of deferred tax liabilities
pertaining to utility temporary differences, principally a result of accelerated
tax depreciation, the tax benefits of which previously were or will be flowed
through to ratepayers. These deferred tax liabilities have been reduced by
deferred tax assets of $4.3 million and $4.5 million at September 30, 1997 and
1996, respectively, pertaining to utility deferred investment tax credits. As of
September 30, 1997 and 1996, UGI Utilities had recorded a regulatory income tax
asset related to these net deferred taxes of $44.4 million and $42.9 million,
respectively, representing future revenues expected to be recovered through the
ratemaking process. This regulatory income tax asset will be recognized in
deferred tax expense as the corresponding temporary differences reverse and
additional income taxes are incurred.
6. PENSION PLANS AND OTHER POSTEMPLOYMENT BENEFITS
The Retirement Income Plan for Employees of UGI Utilities, Inc. (UGI Utilities
Plan) is a noncontributory defined benefit pension plan covering substantially
all employees of UGI and UGI Utilities. Benefits under the UGI Utilities Plan
are generally based on years of service and employee compensation during the
last years of employment.
The components of net pension income for the UGI Utilities Plan include the
following:
1997 1996 1995
- -----------------------------------------------------------------------------------
Service cost -- benefits earned
during the period $ 2.8 $ 3.1 $ 2.4
Interest cost on projected
benefit obligation 10.6 10.2 10.0
Actual return on plan assets (40.3) (16.3) (28.1)
Net amortization and deferral 25.8 2.5 15.3
- -----------------------------------------------------------------------------------
Net pension income $ (1.1) $ (.5) $ (.4)
- -----------------------------------------------------------------------------------
The following table sets forth the funded status of the UGI Utilities Plan
and amounts recognized in the consolidated balance sheet at September 30:
1997 1996
- ---------------------------------------------------------------------------
Projected benefit obligation:
Vested benefits $(118.2) $(106.9)
Nonvested benefits (6.7) (5.9)
- ---------------------------------------------------------------------------
Accumulated benefit obligation (124.9) (112.8)
Effect of projected future salary levels (24.2) (21.4)
- ---------------------------------------------------------------------------
Projected benefit obligation (149.1) (134.2)
Plan assets at fair value 189.5 157.3
- ---------------------------------------------------------------------------
Excess of plan assets over projected
benefit obligation 40.4 23.1
Unrecognized net gain (26.9) (9.6)
Unrecognized prior service cost 6.0 6.7
Unrecognized transition asset (11.1) (12.8)
- ---------------------------------------------------------------------------
Prepaid pension cost $ 8.4 $ 7.4
- ---------------------------------------------------------------------------
UGI Corporation 31 1997 Annual Report
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Millions of dollars, except per share amounts and where indicated otherwise)
The major actuarial assumptions used in determining the funded status of the UGI
Utilities Plan as of September 30, 1997, 1996 and 1995, and net pension income
for each of the years then ended, are as follows:
1997 1996 1995
- ---------------------------------------------------------------------------------------
Funded status at September 30:
Discount rate 7.4% 8.0% 7.5%
Rate of increase in salary levels 4.5 4.75 4.5
Net pension income for the year:
Discount rate 8.0 7.5 8.7
Rate of increase in salary levels 4.75 4.5 5.0
Expected return on plan assets 9.5 9.5 9.5
- ---------------------------------------------------------------------------------------
UGI Utilities Plan's assets at September 30, 1997 consist principally of
equity and fixed income mutual funds and investment-grade corporate and U.S.
Government obligations.
The Company also has unfunded nonqualified retirement benefit plans for
certain key employees. At September 30, 1997 and 1996, the projected benefit
obligations of these nonqualified plans were not material. During 1997, 1996 and
1995, the Company recorded expense for these plans of $1.6 million, $1.1 million
and $1.2 million, respectively.
During 1997, 1996 and 1995, substantially all employees of Propane were
eligible to participate in 401(k) savings plans (Propane Savings Plans).
Participants in these plans could contribute a portion of their compensation on
a before-tax basis. Effective October 1, 1996, employee contributions are
matched on a dollar-for-dollar basis up to 5% of eligible compensation. Prior to
October 1, 1996, the Company, in its sole discretion, could match a portion of
employees' contributions. In addition, prior to October 1, 1996, substantially
all employees of Propane participated in noncontributory defined contribution
pension plans (Propane Pension Plans). Company contributions to the Propane
Pension Plans represented a percentage of each covered employee's salary.
Effective October 1, 1996, the Company ceased to contribute to the Propane
Pension Plans and the assets were merged into the Propane Savings Plans. UGI
Utilities sponsors a 401(k) savings plan (Utilities Savings Plan) for eligible
employees of UGI Utilities and UGI. Generally, participants in the Utilities
Savings Plan may contribute a portion of their compensation on a before-tax and
after-tax basis. The Company may, at its discretion, match a portion of
participants' contributions to the Utilities Savings Plan. The cost of benefits
under the Propane Pension Plans, the Propane Savings Plans and the Utilities
Savings Plan totaled $5.8 million, $5.9 million and $5.2 million in 1997, 1996
and 1995, respectively.
The Company provides postretirement health care benefits to certain retirees
and a limited number of active employees meeting certain age and service
requirements as of January 1, 1989 and also provides limited postretirement life
insurance benefits to substantially all active and retired employees.
The components of net periodic postretirement benefit cost are as follows:
1997 1996 1995
- -----------------------------------------------------------------------------------
Service cost -- benefits earned
during the period $ .1 $ .1 $ .1
Interest cost on accumulated
postretirement benefit obligation 1.9 2.2 2.1
Actual return on assets (.1) - -
Net amortization and deferral 1.2 1.6 1.2
- -----------------------------------------------------------------------------------
Net periodic postretirement
benefit cost 3.1 3.9 3.4
Decrease (increase) in regulatory asset .5 (.1) (1.0)
- -----------------------------------------------------------------------------------
Net expense $3.6 $3.8 $ 2.4
- -----------------------------------------------------------------------------------
The following table sets forth the actuarial present value and funded status
of the Company's postretirement health care and life insurance benefit plans at
September 30:
1997 1996
- --------------------------------------------------------------------------------
Accumulated postretirement benefit obligation:
Retirees $(21.0) $(22.7)
Fully eligible active participants (2.8) (5.0)
Other active participants (1.9) (1.6)
- --------------------------------------------------------------------------------
(25.7) (29.3)
Plan assets at fair value 3.5 1.9
Unrecognized net gain (3.4) (4.3)
Unrecognized prior service cost - 2.2
Unrecognized transition obligation 19.3 23.1
- --------------------------------------------------------------------------------
Accrued postretirement benefit cost $ (6.3) $ (6.4)
- --------------------------------------------------------------------------------
The major actuarial assumptions used in determining the funded status of the
Company's postretirement health care and life insurance benefit plans at
September 30, 1997, 1996 and 1995, and net periodic postretirement benefit costs
for the years then ended, are as follows:
1997 1996 1995
- -----------------------------------------------------------------------------
Funded status at September 30:
Discount rate 7.4% 8.0% 7.5%
Health care cost trend rate 6.0-5.5 6.5-5.5 7.0-5.5
Net periodic postretirement benefit
cost for the year:
Discount rate 8.0 7.5 8.7
Health care cost trend rate 6.5-5.5 7.0-5.5 10.0-5.5
- -----------------------------------------------------------------------------
The ultimate health care cost trend rate of 5.5% in the table above is
assumed for all years after 2007. Increasing the health care cost trend rate one
percent increases the September 30, 1997 and 1996 accumulated postretirement
benefit obligations by $1.8 million and $2.4 million, respectively, and
increases the net periodic postretirement benefit costs for 1997, 1996 and 1995
by $.1 million, $.2 million and $.1 million, respectively.
UGI Utilities has established an Employee Benefit Trust (VEBA) to pay retiree
health care and life insurance benefits and to fund the UGI Utilities'
postretirement benefit liability. At September 30, 1997, the VEBA balance
totaled $3.5 million and was primarily invested in money market funds.
Effective August 31, 1995, Gas Utility is permitted to recover in its rates
approximately $2.4 million in ongoing annual costs incurred under the provisions
of SFAS No. 106, "Employers Accounting for Postretirement Benefits Other Than
Pensions" (SFAS 106). Gas Utility is required to defer the difference between
the amount of SFAS 106 costs included in rates and the actuarially determined
annual SFAS 106 costs for recovery or refund to ratepayers in future rate
proceedings. Also effective August 31, 1995, Gas Utility was permitted the
recovery over 17.25 years of approximately $4.0 million in deferred excess SFAS
106 costs. These deferred costs represent the difference between costs incurred
under SFAS No. 106, comprising principally deferred transition obligation
amortization, and costs incurred on a pay-as-you-go basis for periods prior to
August 31, 1995. Gas Utility's 1995 Base Rate Settlement, however, reserved the
right of any party to challenge the prospective recovery of these deferred
excess SFAS 106 costs in future rate proceedings. The Company continues to
monitor administrative and judicial proceedings involving deferred excess SFAS
106 costs and recognizes that, based on applicable law, it is possible that in
future rate proceedings Utilities could prospectively be denied recovery of some
or all of its deferred excess SFAS 106 costs. Electric Utility's rates generally
permit the recovery of costs determined under the provisions of SFAS 106.
UGI Corporation 32 1997 Annual Report
24
Effective October 1, 1994, the Company adopted SFAS No. 112, "Employers'
Accounting for Postemployment Benefits" (SFAS 112). SFAS 112 requires, among
other things, the accrual of benefits provided to former or inactive employees
(who are not retirees) and to their beneficiaries and covered dependents. Prior
to the adoption of SFAS 112, the Company accounted for these postemployment
benefits on a pay-as-you-go basis. The cumulative effect of SFAS 112 on the
Company's results of operations for periods prior to October 1, 1994 of $5.2
million pre-tax ($3.1 million after-tax) has been reflected in the 1995
Consolidated Statement of Income as "Change in accounting for postemployment
benefits."
7. INVENTORIES
Inventories comprise the following at September 30:
1997 1996
- ----------------------------------------------------------------
Propane gas $47.6 $47.8
Utility fuel and gases 26.0 26.0
Materials, supplies and other 15.4 18.4
Appliances for sale 6.6 7.7
- ----------------------------------------------------------------
$95.6 $99.9
- ----------------------------------------------------------------
8. SERIES PREFERRED STOCK
The UGI Series Preferred Stock, including both series subject to and series not
subject to mandatory redemption, has 5,000,000 shares authorized for issuance.
There were no shares of UGI Series Preferred Stock outstanding at September 30,
1997 or 1996.
UGI Utilities Series Preferred Stock, including both series subject to and
series not subject to mandatory redemption, has 2,000,000 shares authorized for
issuance. The holders of shares of UGI Utilities Series Preferred Stock have the
right to elect a majority of UGI Utilities' Board of Directors (without
cumulative voting) if dividend payments on any series are in arrears in an
amount equal to four quarterly dividends. This election right continues until
the arrearage has been cured. Cash dividends have been paid at the specified
annual rates on all outstanding UGI Utilities Series Preferred Stock.
UGI Utilities Series Preferred Stock subject to mandatory redemption
comprises the following at September 30:
1997 1996
- ------------------------------------------------------------------------------------------
$1.80 Series, stated at involuntary liquidation
value of $23.50 per share, cumulative (issued and
outstanding -- 7,963 shares) $ .2 $ .2
$8.00 Series, stated at involuntary liquidation
value of $100 per share, cumulative (issued and
outstanding -- 150,000 shares) 15.0 15.0
$7.75 Series, stated at involuntary liquidation
value of $100 per share, cumulative (issued and
outstanding -- 200,000 shares) 20.0 20.0
- ------------------------------------------------------------------------------------------
Total UGI Utilities Series Preferred Stock
subject to mandatory redemption 35.2 35.2
Less current portion (3.0) -
- ------------------------------------------------------------------------------------------
Total UGI Utilities Series Preferred Stock due
after one year $32.2 $35.2
- ------------------------------------------------------------------------------------------
UGI Utilities is required to purchase shares of its $1.80 Series Preferred
Stock tendered at a purchase price of $23.50 per share. After January 1, 1998,
UGI Utilities may call any untendered $1.80 Series shares at a redemption price
of $23.50 per share.
UGI Utilities is required to establish a sinking fund to redeem on April 1 in
each year, commencing April 1, 1998, 30,000 shares of its $8.00 Series Preferred
Stock at a price of $100 per share. The $8.00 Series is redeemable, in whole or
in part, at the option of UGI Utilities at a price of $103.56 per share
commencing April 2, 1997, decreasing by equal amounts on April 2 of each
subsequent year through 2001.
UGI Utilities is required to establish a sinking fund to redeem on October 1
in each year, commencing October 1, 2004, 10,000 shares of its $7.75 Series
Preferred Stock at a price of $100 per share. The $7.75 Series Preferred Stock
is redeemable, in whole or in part, at the option of UGI Utilities on or after
October 1, 2004, at a price of $100 per share. All outstanding shares of $7.75
Series Preferred Stock are subject to mandatory redemption on October 1, 2009 at
a price of $100 per share.
Mandatory sinking fund requirements on UGI Utilities Series Preferred Stock
during each of the fiscal years 1998 to 2002 is $3 million.
9. PREFERENCE STOCK PURCHASE RIGHTS
Holders of UGI Common Stock own one-half of one right, as further described, for
each outstanding share of Common Stock. As amended on April 17, 1996, each right
entitles the holder to purchase one one-hundredth of a share of First Series
Preference Stock, without par value, at an exercise price of $120 per one
one-hundredth of a share, subject to adjustment or, under the circumstances
summarized below, to purchase the common stock described in the following
paragraph. The rights are exercisable only if a person or group, other than
certain underwriters, acquires 20% or more of the Company's Common Stock
(Acquiring Person) or announces or commences a tender offer for 30% or more of
the Common Stock. The Company is entitled to redeem the rights at five cents per
right at any time before the earlier of the expiration of the rights in April
2006 or, subject to the concurrence of a majority of continuing directors, ten
days after a person or group has acquired 20% of the Common Stock and in certain
circumstances thereafter.
If an Acquiring Person merges with the Company or engages in certain other
transactions with the Company, or if a person acquires 40% or more of the Common
Stock, each holder of a right, other than the acquirer, is entitled to purchase,
at the exercise price of the right, Common Stock having a market value of twice
the exercise price of the right. In addition, after the first date of public
announcement by the Company or an Acquiring Person that an Acquiring Person has
become such, if the Company engages in a merger or other business combination
transaction in which the Company is not the surviving corporation, or in which
the Company is the surviving corporation, but in which its Common Shares are
changed or exchanged, or if 50% or more of the Company's assets or earning power
are sold or transferred, each holder of a right is entitled to purchase, at the
exercise price of the right, common stock of the acquiring company having a
market value of twice the exercise price of the right. The rights have no voting
or dividend rights and, until exercisable, have no dilutive effect on the
earnings of the Company.
UGI Corporation 33 1997 Annual Report
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Millions of dollars, except per share amounts and where indicated otherwise)
10. COMMON STOCK AND INCENTIVE STOCK AWARD PLANS
Common Stock share activity for 1995, 1996, and 1997 follows:
Issued Treasury Outstanding
- ---------------------------------------------------------------------------------------
Balance September 30, 1994 32,397,740 (4,366) 32,393,374
Issued:
Employee and director plans 41,918 - 41,918
Dividend reinvestment plan 482,172 - 482,172
- ---------------------------------------------------------------------------------------
Balance September 30, 1995 32,921,830 (4,366) 32,917,464
Issued:
Employee and director plans 164,961 143,385 308,346
Dividend reinvestment plan 111,940 120,175 232,115
Reacquired - (321,700) (321,700)
- ---------------------------------------------------------------------------------------
Balance September 30, 1996 33,198,731 (62,506) 33,136,225
Issued:
Employee and director plans - 396,378 396,378
Dividend reinvestment plan - 130,313 130,313
Reacquired - (800,900) (800,900)
- ---------------------------------------------------------------------------------------
Balance September 30, 1997 33,198,731 (336,715) 32,862,016
- ---------------------------------------------------------------------------------------
1997 STOCK OPTION AND DIVIDEND EQUIVALENT PLAN (1997 PLAN). On February 25,
1997, the Company's shareholders approved the 1997 Plan, effective December 10,
1996. Under the 1997 Plan, the Company may grant options to acquire shares of
Common Stock to key employees. The number of shares of Common Stock which may be
made the subject of options under the 1997 Plan may not exceed 1,500,000.
Generally, all options are fully vested and immediately exercisable on the date
of grant. Options can be exercised no later than ten years from the date of
grant. The exercise price for options granted under the 1997 Plan may not be
less than the fair market value of the Common Stock on the date of grant. The
1997 Plan will remain in effect until all stock subject to it has been purchased
pursuant to the exercise of options or until all options have terminated without
exercise. No options may be granted after December 31, 2006. At September 30,
1997, 985,000 shares under the 1997 Plan were available for future option
grants. In addition, the 1997 Plan provides for the crediting of dividend
equivalents to optionees' accounts during a specified three-year period. Actual
payment of the dividend equivalents is contingent upon the Company's total
shareholder return as compared to that of a group of peer companies during the
specified three-year period.
1992 STOCK OPTION AND DIVIDEND EQUIVALENT PLAN (1992 PLAN). As a result of
the adoption of the 1997 Plan, the 1992 Plan was terminated for all purposes
except the exercise of options previously granted. Under the 1992 Plan, the
Company could grant options to acquire shares of Common Stock to key employees.
Upon the completion of one year of service after the date of grant and on each
anniversary of that date, options were exercisable in proportion to the number
of years expired after the date of grant within a specified five-year period.
Options can be exercised no later than ten years from the date of grant. The
exercise price for options granted under the 1992 Plan could be more or less
than the fair market value of the Common Stock on the date of grant. The 1992
Plan also provided for the payment of dividend equivalents to optionees
contingent upon the Company's total shareholder return as compared to that of a
group of peer companies during the five-year period ended December 31, 1996. No
such payments were made pursuant to the 1992 Plan.
UGI CORPORATION DIRECTORS' EQUITY COMPENSATION PLAN (1997 DIRECTORS' PLAN).
On February 25, 1997, the Company's shareholders approved the 1997 Directors'
Plan, effective January 1, 1997. The 1997 Directors' Plan provides for annual
awards to each of the Company's nonemployee Board Directors of (i) 630 Units,
each representing an interest equivalent to one share of Common Stock, and (ii)
Common Stock in lieu of cash for a portion of their annual retainer fee.
Participants may also elect to receive any portion of their meeting fees and the
cash portion of their annual retainer in the form of Units. Directors with
accrued benefits under the former Retirement Plan for Outside Directors, which
was terminated effective December 31, 1996, were awarded a total of 36,140 Units
on January 1, 1997 equal in value to such accrued benefits. In addition, the
1997 Directors' Plan provides for the crediting of dividend equivalents to Unit
holders' accounts which amounts are converted to Units at the end of each
calendar year based upon the fair market value of Common Stock on that date. All
Units and dividend equivalents are fully vested when credited to a Director's
account. Generally, Units will be converted to shares of Common Stock upon
retirement or termination of service. During 1997, the Company awarded 7,255
Units under the 1997 Directors' Plan relating to annual awards and deferred
compensation.
1992 DIRECTORS' STOCK PLAN (1992 DIRECTORS' PLAN). The 1992 Directors' Plan
expired December 31, 1996 for all purposes except the exercise of options
previously granted. Under the 1992 Directors' Plan, an option to purchase 1,000
shares of Common Stock was granted to each of the Company's nonemployee Board
Directors during the years 1992 to 1996. The exercise price for options granted
was the fair market value of the Common Stock on the date of grant. Options
expire no later than ten years from the date of grant and may, in certain
circumstances, expire earlier. One-fifth of each Director's options are
exercisable for each full year of service as a Director, whether before, at or
after the date of grant. In addition, Common Stock was paid to nonemployee
Directors in lieu of a portion of their annual retainer fees.
1992 NON-QUALIFIED STOCK OPTION PLAN (1992 NON-QUALIFIED PLAN). Under the
1992 Non-Qualified Plan, as amended effective December 10, 1996, the Company may
grant options to acquire Common Stock to key employees who do not participate in
the 1992 Plan or the 1997 Plan. The number of shares of Common Stock which may
be made the subject of options under the 1992 Non-Qualified Plan may not exceed
500,000. The exercise price for options granted under the 1992 Non-Qualified
Plan is the fair market value of the Common Stock on the date of grant. For
options granted prior to December 10, 1996, one-fifth of an optionee's options
are exercisable for each full year of service completed after the date of grant.
Generally, options granted on and after December 10, 1996, are fully vested and
immediately exercisable. Options can be exercised no later than ten years from
the date of grant. At September 30, 1997, 136,825 shares of Common Stock were
available for future option grants under the 1992 Non-Qualified Plan.
1997 AMERIGAS PROPANE, INC. LONG-TERM INCENTIVE PLAN (1997 PROPANE PLAN). On
October 28, 1996, the General Partner adopted the 1997 Propane Plan, effective
October 1, 1996. Under the 1997 Propane Plan, the General Partner may grant to
key employees the right to receive AmeriGas Partners Common Units, or cash
generally equivalent to the fair market value of such Common Units, on the
payment date. In addition, the 1997 Propane Plan provides for the crediting of
distribution equivalents to participants' accounts from the grant date through
the date of payment. Distribution equivalents will be paid in cash, and such
payment may, at the participant's request, be deferred. The number of Common
Units which may be made the subject of grants under the 1997 Propane Plan may
not exceed 500,000. Generally, each grant, to the extent it has not previously
been paid, will terminate when the participant ceases to be employed by the
General Partner.
UGI Corporation 34 1997 Annual Report
26
The actual number of Common Units (or their cash equivalent) that may be
delivered pursuant to the 1997 Propane Plan, as well as the amount of the
distribution equivalent, are contingent upon the date on which the requirements
for early conversion of Subordinated Units are met. If the requirements for
early conversion are not met by September 30, 2001, no payments under the 1997
Propane Plan will be made. During 1997, 84,500 Common Units were made the
subject of grants under the 1997 Propane Plan. At September 30, 1997, 415,500
Common Units were available for future grants.
FAIR VALUE INFORMATION. The per share weighted-average fair value of stock
options granted under all stock plans during fiscal years 1997 and 1996 was
$2.96 and $2.67, respectively. These amounts were determined using the
Black-Scholes option pricing model which values options based on the stock price
at the grant date, the expected life of the option, the estimated volatility of
the stock, expected dividend payments, and the risk free interest rate over the
expected life of the option. The assumptions used for option grants during 1997
and 1996 are as follows:
1997 1996
- ----------------------------------------------------------------
Expected life of option 6 YEARS 6 years
Expected volatility 16.6% 19.2%
Expected dividend yield 6.5% 6.3%
Risk free interest rate 6.0% 5.9%
- ----------------------------------------------------------------
The Company applies APB 25 and related interpretations in accounting for its
stock-based employee compensation plans. Total stock-based compensation expense
(income) recognized under the provisions of APB 25 was $3.6 million, $(3.7)
million and $1.5 million during 1997, 1996 and 1995, respectively. If
compensation cost had been determined under the fair value method prescribed by
SFAS 123, net income and earnings per share for 1997 and 1996 would have been as
follows:
1997 1996
- ----------------------------------------------------------------
Net earnings:
As reported $52.1 $39.5
Pro forma 51.7 39.5
Earnings per share:
As reported 1.57 1.19
Pro forma 1.56 1.19
- ----------------------------------------------------------------
STOCK OPTION ACTIVITY. Stock Option transactions under all plans for 1995,
1996, and 1997 follow:
Shares Average Option Price
- -----------------------------------------------------------------------
Shares under option --
September 30, 1994 1,172,534 $20.218
- -----------------------------------------------------------------------
Granted 62,667 20.317
Exercised (16,200) 20.125
Forfeited (8,000) 21.125
- -----------------------------------------------------------------------
Shares under option --
September 30, 1995 1,211,001 20.225
- -----------------------------------------------------------------------
Granted 31,000 20.673
Exercised (274,700) 20.123
Forfeited (90,000) 20.125
- -----------------------------------------------------------------------
Shares under option --
September 30, 1996 877,301 20.307
- -----------------------------------------------------------------------
Granted 653,750 22.686
Exercised (348,050) 20.131
Forfeited (8,000) 21.422
- -----------------------------------------------------------------------
Shares under option --
September 30, 1997 1,175,001 21.670
- -----------------------------------------------------------------------
Options exercisable 1995 677,980 20.289
Options exercisable 1996 647,868 20.326
Options exercisable 1997 1,140,958 21.432
- -----------------------------------------------------------------------
For options outstanding as of September 30, 1997, the exercise prices range
from $18.625 to $26.250. The weighted-average remaining contractual life of
these options is 7.3 years.
11. COMMITMENTS AND CONTINGENCIES
The Company leases various buildings and transportation, data processing and
office equipment under operating leases. Certain of the leases contain renewal
and purchase options and also contain escalation clauses. The aggregate rental
expense for such leases was $27.8 million, $27.1 million and $21.9 million
during 1997, 1996 and 1995, respectively.
Minimum future payments under operating leases having initial or remaining
noncancelable terms in excess of one year are as follows:
After
1998 1999 2000 2001 2002 2002
- -------------------------------------------------------------------------------------
Propane $20.7 $16.8 $13.0 $10.2 $6.4 $15.3
Utilities 4.2 3.5 2.9 2.4 2.1 1.6
Other .1 .1 - - - -
- -------------------------------------------------------------------------------------
$25.0 $20.4 $15.9 $12.6 $8.5 $16.9
- -------------------------------------------------------------------------------------
Gas Utility has gas supply agreements with producers and marketers that
expire at various dates through 2000 and has agreements for pipeline
transportation and storage capacity that expire at various dates through 2017
and 2014, respectively. In addition, Gas Utility has short-term gas supply
agreements which permit it to purchase certain of its gas supply needs at spot
prices.
Electric Utility has a power supply agreement with Pennsylvania Power and
Light, Inc. (PP&L) pursuant to which PP&L supplies all the electric power
required by Electric Utility, above that provided from other sources. The cost
of such electricity supplied by PP&L is based on PP&L's actual system costs.
During 1997, 1996 and 1995, approximately 53%, 52% and 50%, respectively, of
Electric Utility's total electric system output was supplied by PP&L. Electric
Utility has provided notice to PP&L of its intention to terminate this agreement
as of March 2001.
The Partnership enters into contracts to purchase propane and UGI Energy
Services enters into contracts to purchase natural gas to meet a portion of
their supply requirements. Generally, such contracts have terms of less than one
year and call for payment based on either fixed prices or market prices at date
of delivery.
The Partnership has succeeded to certain lease guarantee obligations of
Petrolane relating to Petrolane's divestiture of nonpropane operations prior to
its 1989 acquisition by QFB Partners. These leases are currently estimated to
aggregate approximately $67.0 million. The leases expire through 2010, and some
of them are currently in default. The Partnership has succeeded to the indemnity
agreement of Petrolane by which Texas Eastern Corporation (Texas Eastern), a
prior owner of Petrolane, agreed to indemnify Petrolane against any liabilities
arising out of the conduct of businesses that do not relate to, and are not a
part of, the propane business, including lease guarantees. To date, Texas
Eastern has directly satisfied defaulted lease obligations without the
Partnership's having to honor its guarantee. The Partnership believes the
probability that it will be required to directly satisfy such lease obligations
is remote.
In addition, the Partnership has succeeded to Petrolane's agreement to
indemnify Shell Petroleum N.V. (Shell) for various scheduled claims that were
pending against Tropigas de Puerto Rico (Tropigas). This indemnification
agreement had been entered into by Petrolane in conjunction with Petrolane's
sale of the international operations of Tropigas to Shell in 1989. The
Partnership also succeeded to Petrolane's right to seek indemnity on these
claims first from International Controls Corp., which sold Tropigas to
Petrolane, and
UGI Corporation 35 1997 Annual Report
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Millions of dollars, except per share amounts and where indicated otherwise)
then from Texas Eastern. To date, neither the Partnership nor Petrolane has paid
any sums under this indemnity, but several claims by Shell, including claims
related to certain antitrust actions aggregating at least $68 million, remain
pending.
The Company, along with other companies, has been named as a potentially
responsible party (PRP) in several administrative proceedings for the cleanup of
various waste sites, including some Superfund sites. Also, certain private
parties have filed, or threatened to file, suit against the Company to recover
costs of investigation and, as appropriate, remediation of several waste sites.
In addition, the Company has identified environmental contamination at several
of its properties and has voluntarily undertaken investigation and, as
appropriate, remediation of these sites in cooperation with appropriate
environmental agencies or private parties.
With respect to a manufactured gas plant site in Concord, New Hampshire,
EnergyNorth Natural Gas, Inc. (EnergyNorth) filed suit against UGI Utilities
alone seeking UGI Utilities' allocable share of response costs associated with
remediating gas plant related contaminants at that site. In September 1997, UGI
Utilities reached a settlement pursuant to which it agreed to pay EnergyNorth a
portion of its remediation costs. The settlement did not materially affect the
Company's results of operations.
At a manufactured gas plant site in Burlington, Vermont, the United States
Environmental Protection Agency has named 19 parties, including UGI Utilities,
as PRPs for gas plant contamination that resulted from the operations of a
former subsidiary of UGI Utilities. In September 1997, after several years of
study, a coordinating council of community groups and PRPs recommended a
remedial plan consisting of capping and monitoring the site. In December 1997,
Green Mountain Power Company, the lead PRP at the site, agreed in principle to
relieve UGI Utilities of any liability at the site on terms that would not
materially affect the Company's results of operations.
At sites in which a former subsidiary of UGI Utilities operated a
manufactured gas plant, UGI Utilities should not have significant liability
because UGI Utilities generally is not legally liable for the obligations of its
subsidiaries. Under certain circumstances, however, courts have found parent
companies liable for environmental damage caused by subsidiary companies when
the parent company exercised such substantial control over the subsidiary that
the court concluded that the parent company either (i) itself operated the
facility causing the environmental damage or (ii) otherwise so controlled the
subsidiary that the subsidiary's separate corporate form should be disregarded.
There could be, therefore, significant future costs of an uncertain amount
associated with environmental damage caused by manufactured gas plants that UGI
Utilities owned or directly operated, or that were owned or operated by former
subsidiaries of UGI Utilities, if a court were to conclude that the level of
control exercised by UGI Utilities over the subsidiary satisfies the standard
described above. In many circumstances where UGI Utilities may be liable,
expenditures may not be reasonably quantifiable because of a number of factors,
including various costs associated with potential remedial alternatives, the
unknown number of other potentially responsible parties involved and their
ability to contribute to the costs of investigation and remediation, and
changing environmental laws and regulations.
The Company's policy is to accrue environmental investigation and cleanup
costs when it is probable that a liability exists and the amount or range of
amounts can be reasonably estimated. The Company intends to pursue recovery of
any incurred costs through all appropriate means, including regulatory relief,
although such recovery cannot be assured. Under the terms of the Gas Utility
Base Rate Settlement, Gas Utility is permitted to amortize as removal costs
site-specific environmental investigation and remediation costs, net of related
third-party payments, associated with Pennsylvania sites. Gas Utility will be
permitted to include in rates, through future base rate proceedings, a five-year
average of such prudently incurred removal costs.
In addition to these environmental matters, there are various other pending
claims and legal actions arising in the normal course of the Company's
businesses. The final results of environmental and other matters cannot be
predicted with certainty. However, it is reasonably possible that some of them
could be resolved unfavorably to the Company. Management believes, after
consultation with counsel, that damages or settlements, if any, recovered by the
plaintiffs in such claims or actions will not have a material adverse effect on
the Company's financial position but could be material to operating results or
cash flows in future periods depending on the nature and timing of future
developments with respect to these matters and the amounts of future operating
results and cash flows.
12. FINANCIAL INSTRUMENTS
The carrying amounts reported in the consolidated balance sheets for cash and
cash equivalents, short-term investments, accounts receivable, accounts payable
and bank loans approximate fair value because of the immediate or short-term
maturity of these financial instruments. The estimated fair values and related
carrying amounts of the Company's long-term debt and UGI Utilities Series
Preferred Stock at September 30 are as follows:
Carrying Estimated
Amount Fair Value
- --------------------------------------------------------------------------
1997:
Long-term debt:
Propane $691.1 $737.0
Utilities 169.3 173.0
Other 8.6 9.2
UGI Utilities Series Preferred Stock 35.2 36.0
1996:
Long-term debt:
Propane $692.5 $720.0
Utilities 174.8 174.0
Other 9.0 9.0
UGI Utilities Series Preferred Stock 35.2 37.0
- --------------------------------------------------------------------------
The estimated fair values of long-term debt included in the table above are
based upon current market prices and discounted present value methods calculated
using borrowing rates available for debt with similar credit ratings, terms and
maturities. The estimated fair values of UGI Utilities Series Preferred Stock
are based upon the fair values of redeemable preferred stock with similar credit
ratings and redemption features.
Financial instruments which potentially subject the Company to concentrations
of credit risk consist principally of short-term investments and trade accounts
receivable. The Company invests available cash in investment-grade commercial
paper of industrial and other companies and in obligations of the U.S.
Government. The risk associated with trade accounts receivable is limited due to
the Company's large customer base and its dispersion across many different U.S.
markets. At September 30, 1997 and 1996, the Company had no significant
concentrations of credit risk.
UGI Energy Services utilizes natural gas futures contracts to manage price
risk associated with fluctuations in the price of natural gas. At September 30,
1997, UGI Energy Services held futures contracts representing hedges of 6.4
million dekatherms of natural gas sold under firm commitments expiring through
March 1999. The unrealized gain on such contracts totaled $2.1 million at
September 30, 1997.
UGI Corporation 36 1997 Annual Report
28
13. MISCELLANEOUS INCOME
Miscellaneous income comprises the following:
1997 1996 1995
- ----------------------------------------------------------------
Interest income $ 6.3 $ 4.0 $ 5.2
Gain on sales of investments 8.2 - -
Gain on sales of fixed assets 1.1 1.9 .7
Gas brokerage income - - 1.4
Other 7.0 6.8 4.1
- ----------------------------------------------------------------
$22.6 $12.7 $11.4
- ----------------------------------------------------------------
14. FORMATION OF AMERIGAS PARTNERS
On April 19, 1995, a wholly owned subsidiary of AmeriGas acquired by merger (the
"Petrolane Merger") the approximately 65% of Petrolane common shares outstanding
not already owned by UGI and AmeriGas. Under the terms of the Petrolane Merger
approved by Petrolane's Class B Common Stock (Class B Stock) shareholders (other
than UGI), the 6,850,562 shares of Petrolane's Class B Stock not held by UGI
were converted into the right to receive $16 per share in cash. The Petrolane
Merger consideration of approximately $109.6 million was financed with the
proceeds of a private placement of $110 million of First Mortgage Notes of the
Operating Partnership. On April 19, 1995, immediately after the Petrolane
Merger, the Company combined the propane distribution businesses of Petrolane,
AmeriGas Propane and AGP-2 into the Operating Partnership. On April 19, 1995 and
May 17, 1995, as part of an initial public offering, AmeriGas Partners sold to
the public a total of 17,602,000 Common Units at a price of $21.25 a unit.
AmeriGas Partners' capital at September 30, 1997 consists of 22,060,407 Common
Units and 19,782,146 Subordinated Units representing limited partner interests,
and a 1% general partner interest. The Company owns 4,347,272 Common Units, all
19,782,146 Subordinated Units, and an aggregate 2% general partner interest in
the Partnership.
The net proceeds of approximately $307.0 million from the sale on April 19,
1995 of 15,452,000 Common Units and the net proceeds from the issuance of $100
million face value of AmeriGas Partners' Senior Notes, along with existing cash
balances of AmeriGas Propane and Petrolane, were used to repay Petrolane's
revolving credit loan, term loans and accrued interest and fees which were
assumed by the Operating Partnership. In addition, certain senior indebtedness
of Petrolane and AmeriGas Propane with a combined face value of $408 million was
assumed by the Operating Partnership and immediately exchanged for First
Mortgage Notes. As a result of this exchange, in April 1995 the Company recorded
an extraordinary loss of $21.8 million pre-tax ($13.2 million after-tax). In
addition, the Company expensed $5.9 million of net deferred tax benefits of
AmeriGas Propane and $5.8 million of net deferred tax benefits of Petrolane
(which amount is reflected in "Equity in Petrolane" in the 1995 Consolidated
Statement of Income) representing the Company's share of such tax benefits no
longer realizable by the Company as a result of the sale of Common Units to the
public. The write-off of tax benefits reduced 1995 income from continuing
operations by $11.7 million or $.36 per share.
The following unaudited pro forma condensed consolidated financial
information of the Company for 1995 was derived from the historical financial
information of the Company and Petrolane and was prepared to reflect the effects
of the Petrolane Merger (which merger was treated as a purchase acquisition by
the Company in the form of a treasury stock acquisition by Petrolane) and the
Partnership Formation as if these transactions had taken place at the beginning
of fiscal 1995. The following unaudited pro forma condensed consolidated
financial information does not purport to present the results of operations of
the Company had the transactions described above actually been completed as of
the beginning of fiscal 1995 nor does it necessarily indicate results to be
expected in the future.
1995
- ------------------------------------------------------------------
(Unaudited)
Revenues $1,244.5
Cost of sales (636.7)
Depreciation and amortization (84.4)
Other costs and expenses (400.0)
- ------------------------------------------------------------------
Operating income 123.4
Interest expense (80.3)
Minority interest in AmeriGas Partners (.3)
Income taxes (19.5)
Dividends on UGI Utilities Series Preferred Stock (2.8)
- ------------------------------------------------------------------
Income from continuing operations $ 20.5
- ------------------------------------------------------------------
Earnings per share from continuing operations $ .63
- ------------------------------------------------------------------
Significant pro forma adjustments reflected in the data above include (a) the
consolidation of the operations of Petrolane for periods prior to April 19, 1995
and the elimination of intercompany revenues and expenses; (b) a net reduction
in amortization expense resulting from the longer-term (40-year) amortization of
the excess purchase price over fair value of 65% of the net identifiable assets
of Petrolane, compared with the amortization of 65% of Petrolane's excess
reorganization value over 20 years; (c) an adjustment to interest expense
resulting from the retirement of approximately $377 million of Petrolane term
loans, the restructuring of Petrolane and AmeriGas Propane senior debt, and the
issuance of an aggregate $210 million face value of notes of AmeriGas Partners
and the Operating Partnership; (d) an adjustment to income taxes to reflect
income taxes on the Company's share of the Partnership's taxable income; and (e)
an adjustment to reflect the public unitholders' interest in the results of the
Partnership as minority interest.
15. INVESTMENT IN PETROLANE
The following table includes summarized condensed consolidated financial
information of Petrolane for the period September 24, 1994 to April 19, 1995:
September 24, 1994
to April 19, 1995
- -------------------------------------------------------------------------
Revenues $ 372.1
Cost of sales (203.2)
Depreciation and amortization (27.4)
Other costs and expenses (100.0)
- -------------------------------------------------------------------------
Operating income 41.5
Interest expense (30.0)
Income taxes (10.1)
- -------------------------------------------------------------------------
Income before change in accounting 1.4
Change in accounting for postemployment benefits (.9)
- -------------------------------------------------------------------------
Net income $ .5
- -------------------------------------------------------------------------
UGI Corporation 37 1997 Annual Report
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Millions of dollars, except per share amounts and where indicated otherwise)
Prior to the Partnership Formation, AmeriGas Propane and Petrolane were
parties to a customer services agreement (Customer Services Agreement) pursuant
to which AmeriGas Propane served customers of closed Petrolane districts and
Petrolane served customers of closed AmeriGas Propane districts. These districts
were closed in order to achieve cost reductions and operational efficiencies in
overlapping geographical markets served by AmeriGas Propane and Petrolane. Fees
billed by Petrolane to AmeriGas Propane under the Customer Services Agreement
totaled $6.9 million in 1995 and are included in operating and administrative
expenses. Fees billed to Petrolane totaled $5.3 million in 1995 and are included
in Petrolane fee income.
Prior to the Partnership Formation, UGI provided Petrolane with certain
financial, accounting, human resources, risk management, insurance, legal,
corporate communications, investor relations, treasury and corporate development
services. During 1995, UGI recorded management fee income of $6.8 million for
such services which amount is included in Petrolane fee income.
Prior to the Partnership Formation, AmeriGas Management Company (AMC) and
AmeriGas Transportation Management Company (ATMC), first-tier subsidiaries of
UGI, provided general management, supervisory, administrative and transportation
services to Petrolane and AmeriGas Propane. For such services, AMC and ATMC each
received monthly fees from Petrolane in amounts which, together with fees
received from AmeriGas Propane, effectively reimbursed AMC and ATMC for costs
incurred to provide such services. During 1995, the Company recorded fee income
under these agreements of $8.4 million which amount is included in Petrolane fee
income.
16. SEGMENT INFORMATION
Reference is made to the schedule on page 20 for information on revenues,
operating income, identifiable assets, depreciation and amortization, and
capital expenditures for the Company's business segments for 1997, 1996 and
1995.
17. QUARTERLY DATA (UNAUDITED)
The following quarterly information includes all adjustments (consisting only of
normal recurring adjustments with the exception of those indicated below) which
the Company considers necessary for a fair presentation of such information.
Quarterly results fluctuate because of the seasonal nature of the Company's
businesses.
December 31, March 31, June 30, September 30,
1996 1995 1997(a) 1996(b) 1997(c) 1996 1997(d) 1996(e)
- ----------------------------------------------------------------------------------------------------------------------------------
Revenues $529.6 $426.9 $576.4 $582.6 $284.1 $283.9 $251.9 $264.2
Operating income (loss) 89.6 62.7 107.7 111.7 13.1 3.8 (10.5) (18.5)
Net income (loss) 27.9 18.2 35.8 37.6 (1.2) (3.7) (10.4) (12.6)
Net income (loss) per share .84 .55 1.08 1.13 (.04) (.11) (.32) (.38)
- ----------------------------------------------------------------------------------------------------------------------------------
(a) Includes gain from the sale of the Partnership's 50% equity interest in
Atlantic Energy, Inc., which owns and operates a liquefied petroleum gas
storage terminal in Chesapeake, Virginia. The gain increased operating
income by $4.7 million and net income by $1.6 million or $.05 per share.
(b) Includes reductions in operating expenses of $4.4 million from the refund
of insurance premium deposits and $3.3 million from a reduction in accrued
environmental costs which increased net income by $2.7 million or $.08 per
share.
(c) Includes gain from sale of UTI Energy Corp. Common Stock which increased
operating income by $2.1 million and decreased net loss by $1.4 million or
$.04 per share.
(d) Includes gain from sale of UTI Energy Corp. Common Stock which decreased
operating loss by $1.4 million and net loss by $.9 million or $.03 per
share.
(e) Includes income from adjustments to incentive compensation accruals of $4.0
million which decreased net loss by $2.1 million or $.06 per share.
UGI Corporation 38 1997 Annual Report
30
REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
UGI Corporation
We have audited the accompanying consolidated balance sheet of UGI Corporation
and subsidiaries as of September 30, 1997 and the related consolidated
statements of income, stockholders' equity and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
UGI Corporation and subsidiaries as of September 30, 1997 and the results of
their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.
[Arthur Anderson LLP LOGO]
Chicago, Illinois
November 14, 1997
- -------------------------------------------------------------------------------
To the Board of Directors and Stockholders of
UGI Corporation
We have audited the accompanying consolidated balance sheet of UGI Corporation
and subsidiaries as of September 30, 1996 and the related consolidated
statements of income, stockholders' equity and cash flows for the years ended
September 30, 1996 and 1995. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits. We did not audit the
consolidated financial statements of AmeriGas Propane, Inc. and subsidiaries, as
of September 30, 1996 and for the year ended September 30, 1996 and the period
from April 19, 1995 to September 30, 1995, which statements reflect total assets
constituting 65 percent, and total revenues constituting 65 and 31 percent,
respectively, of the related consolidated totals. Those statements were audited
by other auditors whose report has been furnished to us, and our opinion,
insofar as it relates to the amounts included for AmeriGas Propane, Inc. and
subsidiaries for those periods, is based solely on the report of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of UGI Corporation and
subsidiaries as of September 30, 1996 and the consolidated results of their
operations and their cash flows for the years ended September 30, 1996 and 1995,
in conformity with generally accepted accounting principles.
As discussed in Note 6 to the consolidated financial statements, the Company
changed its method of accounting for postemployment benefits in 1995.
[COOPERS & LYBRAND L.L.P. LOGO]
Philadelphia, Pennsylvania
November 22, 1996
UGI Corporation 39 1997 Annual Report
31
Appendix to Exhibit 13.1 - Description of Graphic Material
Financial Review - page 10
Photograph of Mr. Charles L. Ladner, Senior Vice President Finance, UGI
Corporation.
Financial Review - page 10
Organizational Chart of UGI Corporation and subsidiaries representing UGI
Corporation and its three wholly owned subsidiaries AmeriGas, Inc. (AmeriGas),
UGI Enterprises, Inc. (Enterprises), and UGI Utilities, Inc. (which is
comprised of Gas Utility and Electric Utility).
The chart also reflects AmeriGas' wholly owned subsidiary, AmeriGas Propane,
Inc. (General Partner) and the General Partner's 58% ownership interest in
AmeriGas Partners, L.P. (AmeriGas Partners) the remaining 42% of which is
publicly owned. The General Partner serves as general partner for
AmeriGas Partners.
AmeriGas Partners has a 99% limited partner interest in AmeriGas Propane, L.P.
(Operating Partnership) and the General Partner holds a 1% general partner
interest in the Operating Partnership.
The chart also reflects Enterprises' wholly owned subsidiary, UGI Energy
Services, Inc. (UGI Energy Services).
Financial Review - page 11
Quotation of Mr. Charles L. Ladner
"To best build shareholder value, UGI's historic record of strong cash flows
and dividend growth must be accompanied by increased earnings. This goal was
achieved in 1997--and it remains our focus for the future."
Financial Review - page 15
Pie Chart of AmeriGas Partners capitalization reflecting the following
proportions:
Long-term debt - 61.6% of total capitalization;
Partners' capital - 35.9% of total capitalization;
Bank loans - 2.5% of total capitalization.
Financial Review - page 15
Pie Chart of UGI Utilities capitalization reflecting the following proportions:
Long-term debt - 35.8% of total capitalization;
Common equity - 42.5% of total capitalization;
Bank loans - 14.2% of total capitalization;
Preferred stock - 7.5% of total capitalization.
32
Financial Review - page 16
Pie Chart of sources of cash for UGI Corporation reflecting in millions:
cash provided by operations of $172.0;
cash provided by debt issue of $51.4;
cash provided by disposals of assets of $14.4;
cash provided by common stock issued of $11.7.
Financial Review - page 16
Pie Chart of uses of cash for UGI Corporation reflecting in millions:
cash used for dividends and distributions of $86.0;
cash used for capital expenditures of $68.8;
cash used for short-term investments of $42.3;
cash used for debt repayments of $29.4;
cash used for common stock repurchased of $19.2;
cash used for acquisitions of $11.6;
cash used for other uses of $2.2.