1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-11071
UGI CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2668356
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
UGI CORPORATION
460 North Gulph Road, King of Prussia, PA
(Address of principal executive offices)
19406
(Zip Code)
(610) 337-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
At July 31, 1998, there were 32,911,893 shares of UGI Corporation Common
Stock, without par value, outstanding.
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UGI CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
PAGES
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1998,
September 30, 1997 and June 30, 1997 1
Condensed Consolidated Statements of Income for the three,
nine and twelve months ended June 30, 1998 and 1997 2
Condensed Consolidated Statements of Cash Flows for the
nine and twelve months ended June 30, 1998 and 1997 3
Notes to Condensed Consolidated Financial Statements 4 - 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12 - 30
PART II OTHER INFORMATION
Item 1. Legal Proceedings 30
Item 6. Exhibits and Reports on Form 8-K 31
Signatures 32
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UGI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(Millions of dollars)
June 30, September 30, June 30,
1998 1997 1997
---- ---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 42.1 $ 64.0 $ 93.9
Short-term investments, at cost which approximates market value 101.9 65.4 43.2
Accounts receivable (less allowances for doubtful accounts of
$12.2, $11.3 and $12.0, respectively) 100.4 110.6 126.1
Accrued utility revenues 6.0 7.7 6.7
Inventories 75.7 95.6 79.7
Deferred income taxes 21.5 20.3 22.3
Prepaid expenses and other current assets 18.7 40.3 13.9
-------- -------- --------
Total current assets 366.3 403.9 385.8
Property, plant and equipment, at cost (less accumulated depreciation
and amortization of $450.2, $410.1 and $401.7, respectively) 992.5 987.2 978.7
Intangible assets (less accumulated amortization of $135.3, $116.7 and
$110.4, respectively) 636.3 677.9 677.8
Regulatory income tax asset 45.6 44.4 44.0
Other assets 49.2 38.3 36.4
-------- -------- --------
Total assets $2,089.9 $2,151.7 $2,122.7
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt - Propane $ 6.3 $ 6.7 $ 12.2
Current maturities of long-term debt - Utilities 7.1 17.1 17.1
Current maturities of long-term debt - other 0.4 0.4 0.4
Current portion of UGI Utilities redeemable preferred stock -- 3.0 --
Bank loans - Propane 11.0 28.0 --
Bank loans - Utilities 50.7 67.0 43.2
Accounts payable 65.8 103.2 71.3
Other current liabilities 147.6 179.1 171.0
-------- -------- --------
Total current liabilities 288.9 404.5 315.2
Long-term debt - Propane 693.9 684.4 685.0
Long-term debt - Utilities 187.2 152.2 159.3
Long-term debt - other 7.9 8.2 8.3
Deferred income taxes 156.7 152.5 153.7
Other noncurrent liabilities 83.9 75.1 77.9
Commitments and contingencies
Minority interest in AmeriGas Partners 259.1 266.5 288.6
UGI Utilities redeemable preferred stock 20.0 32.2 35.2
Common stockholders' equity:
Common Stock, without par value (authorized - 100,000,000 shares;
issued - 33,198,731 shares) 393.8 393.7 392.7
Retained earnings (accumulated deficit) 6.2 (9.2) 13.6
-------- -------- --------
400.0 384.5 406.3
Less treasury stock, at cost 7.7 8.4 6.8
-------- -------- --------
Total common stockholders' equity 392.3 376.1 399.5
-------- -------- --------
Total liabilities and stockholders' equity $2,089.9 $2,151.7 $2,122.7
======== ======== ========
The accompanying notes are an integral part of these financial statements.
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UGI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(Millions, except per share amounts)
Three Months Ended Nine Months Ended Twelve Months Ended
June 30, June 30, June 30,
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
Revenues:
Propane $ 158.2 $ 177.6 $ 767.3 $ 908.9 $ 936.2 $ 1,086.0
Utilities 74.3 88.3 362.1 395.7 427.6 463.7
Energy marketing 22.7 18.2 85.3 85.5 102.8 104.6
--------- --------- ---------- ---------- ---------- ----------
255.2 284.1 1,214.7 1,390.1 1,466.6 1,654.3
--------- --------- ---------- ---------- ---------- ----------
Costs and expenses:
Propane cost of sales 69.7 89.4 379.7 509.9 470.2 611.4
Utilities - gas, fuel and purchased power 35.1 44.2 188.3 207.8 219.5 241.5
Other cost of sales 21.5 17.1 81.3 82.5 98.2 101.2
Operating and administrative expenses 103.0 104.2 329.0 331.3 437.5 441.0
Depreciation and amortization 21.9 21.6 65.4 65.3 86.2 86.9
Miscellaneous income, net (4.6) (5.5) (12.9) (17.1) (18.4) (19.6)
--------- --------- ---------- ---------- ---------- ----------
246.6 271.0 1,030.8 1,179.7 1,293.2 1,462.4
--------- --------- ---------- ---------- ---------- ----------
Operating income 8.6 13.1 183.9 210.4 173.4 191.9
Interest expense (20.7) (20.3) (63.6) (62.8) (83.9) (82.7)
Minority interest in AmeriGas Partners 7.0 6.3 (21.8) (30.6) (9.5) (15.5)
--------- --------- ---------- ---------- ---------- ----------
Income (loss) before income taxes and
subsidiary preferred stock dividends (5.1) (0.9) 98.5 117.0 80.0 93.7
Income tax (expense) benefit 1.6 0.4 (44.6) (52.4) (35.8) (41.0)
Dividends on UGI Utilities Series
Preferred Stock (0.4) (0.7) (1.8) (2.1) (2.5) (2.8)
--------- --------- ---------- ---------- ---------- ----------
Net income (loss) $ (3.9) $ (1.2) $ 52.1 $ 62.5 $ 41.7 $ 49.9
========= ========= ========== ========== ========== ==========
Earnings (loss) per share:
Basic $ (0.12) $ (0.04) $ 1.58 $ 1.89 $ 1.27 $ 1.51
========== ========== ========== ========== ========== ==========
Diluted $ (0.12) $ (0.04) $ 1.57 $ 1.88 $ 1.26 $ 1.50
========== ========== ========== ========== ========== ==========
Average common shares outstanding:
Basic 33.017 33.031 33.001 33.098 32.976 33.105
========== ========== ========== ========== ========== ==========
Diluted 33.017 33.031 33.176 33.206 33.147 33.216
========== ========== ========== ========== ========== ==========
Dividends declared per share $ 0.365 $ 0.36 $ 1.085 $ 1.07 $ 1.445 $ 1.43
========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
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UGI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Millions of dollars)
Nine Months Ended Twelve Months Ended
June 30, June 30,
----------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 52.1 $ 62.5 $ 41.7 $ 49.9
Reconcile to net cash provided by operating activities:
Depreciation and amortization 65.4 65.3 86.2 86.9
Minority interest in AmeriGas Partners 21.8 30.6 9.5 15.5
Deferred income taxes, net 6.8 (2.0) 6.6 6.6
Other, net 5.7 1.1 8.7 (6.6)
------- ------- ------- -------
151.8 157.5 152.7 152.3
Net change in:
Accounts receivable and accrued utility revenues 4.4 (18.4) 16.0 (8.1)
Inventories and prepaid propane purchases 41.9 33.9 4.4 4.2
Deferred fuel adjustments 4.9 13.0 (3.5) 1.8
Accounts payable (37.8) (23.4) (5.9) 5.5
Other current assets and liabilities (16.9) 3.1 (9.1) 7.8
------- ------- ------- -------
Net cash provided by operating activities 148.3 165.7 154.6 163.5
------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment (46.4) (47.3) (67.9) (66.5)
Net proceeds from disposals of assets 5.3 8.7 11.0 9.7
Acquisitions of businesses, net of cash acquired (6.9) (4.5) (14.0) (23.3)
Short-term investments (increase) decrease (36.5) (20.1) (58.7) 2.0
Other, net (4.2) 3.1 (9.5) 3.1
------- ------- ------- -------
Net cash used by investing activities (88.7) (60.1) (139.1) (75.0)
------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends on Common Stock (35.6) (35.3) (47.5) (47.1)
Distributions on Partnership public Common Units (29.2) (29.1) (38.9) (38.7)
Issuance of long-term debt 48.0 28.8 48.1 51.8
Repayment of long-term debt (14.5) (21.8) (22.1) (29.5)
Propane bank loans increase (decrease) (17.0) (15.0) 4.0 --
UGI Utilities bank loans increase (decrease) (16.3) (7.3) 7.5 33.2
Issuance of Common Stock 7.0 7.2 11.5 10.3
Redemption of UGI Utilities Series Preferred Stock (15.5) -- (15.5) --
Repurchases of Common Stock (8.4) (13.2) (14.4) (15.3)
------- ------- ------- -------
Net cash used by financing activities (81.5) (85.7) (67.3) (35.3)
------- ------- ------- -------
Cash and cash equivalents increase (decrease) $ (21.9) $ 19.9 $ (51.8) $ 53.2
======= ======= ======= =======
Cash and cash equivalents:
End of period $ 42.1 $ 93.9 $ 42.1 $ 93.9
Beginning of period 64.0 74.0 93.9 40.7
------- ------- ------- -------
Increase (decrease) $ (21.9) $ 19.9 $ (51.8) $ 53.2
======= ======= ======= =======
During the twelve months ended June 30, 1998 and 1997, UGI Utilities, Inc. paid
cash dividends to UGI of $22.6 and $45.4, respectively. During the twelve months
ended June 30, 1998 and 1997, AmeriGas, Inc. paid cash dividends to UGI of $50.1
and $48.3, respectively. During those same periods, UGI paid cash dividends to
holders of Common Stock of $47.5 and $47.1, respectively. The ability of UGI to
declare and pay cash dividends on its Common Stock is dependent upon its cash
balances and the receipt of cash dividends from its wholly owned subsidiaries,
principally UGI Utilities, Inc. and AmeriGas, Inc. AmeriGas's ability to pay
dividends is dependent upon distributions paid by the Partnership.
The accompanying notes are an integral part of these financial statements.
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UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars, except per share amounts)
1. BASIS OF PRESENTATION
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"). 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 through its wholly owned subsidiary, UGI Enterprises, Inc. (UGI
Enterprises).
At June 30, 1998, UGI, through wholly owned subsidiaries, held an
effective 2% general partner interest and a 56.6% limited partnership
interest in the Operating Partnership. This limited partner interest is
evidenced by common units (Common Units) and subordinated units
(Subordinated Units) representing limited partner interests in AmeriGas
Partners. The remaining 41.4% effective interest in the Operating
Partnership is publicly held. AmeriGas Partners and the Operating
Partnership are collectively referred to herein as the Partnership. A
second-tier subsidiary of UGI serves as the general partner of AmeriGas
Partners and the Operating Partnership.
The condensed 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'
results of operations and net assets is reflected as minority interest in
the condensed consolidated statements of income and balance sheets.
Certain prior-period balances have been reclassified to conform with the
current period presentation.
The accompanying condensed consolidated financial statements are unaudited
and have been prepared in accordance with the rules and regulations of the
U.S. Securities and Exchange Commission. They include all adjustments
which the Company considers necessary for a fair statement of the results
for the interim periods presented. Such adjustments consisted only of
normal recurring items unless otherwise disclosed. These financial
statements should be read in conjunction with the financial statements and
the
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UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Millions of dollars, except per share amounts)
notes thereto included in the Company's Annual Report on Form 10-K for the
year ended September 30, 1997. Due to the seasonal nature of the Company's
businesses, the results of operations for interim periods are not
necessarily indicative of the results to be expected for a full year.
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.
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UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Millions of dollars, except per share amounts)
2. SEGMENT INFORMATION
Information on revenues, operating income (loss), depreciation and
amortization, identifiable assets and certain operating statistics by
business segment for the periods presented follows:
Three Months Ended Nine Months Ended Twelve Months Ended
June 30, June 30, June 30,
----------------------- ----------------------- -----------------------
1998 1997 1998 1997 1998 1997
-------- -------- -------- -------- -------- --------
REVENUES
Propane $ 158.2 $ 177.6 $ 767.3 $ 908.9 $ 936.2 $1,086.0
Gas utility 57.8 71.7 307.9 340.8 356.2 391.8
Electric utility 16.5 16.6 54.2 54.9 71.4 71.9
Energy marketing 22.7 18.2 85.3 85.5 102.8 104.6
-------- -------- -------- -------- -------- --------
Total $ 255.2 $ 284.1 $1,214.7 $1,390.1 $1,466.6 $1,654.3
======== ======== ======== ======== ======== ========
OPERATING INCOME (LOSS)
Propane $ 0.5 $ 2.0 $ 107.0 $ 128.9 $ 95.2 $ 109.3
Gas utility 7.1 8.0 69.1 75.5 68.4 73.1
Electric utility 2.0 2.2 8.6 8.5 10.8 10.7
Energy marketing 0.5 0.7 1.9 1.8 1.8 1.8
Corporate general and other (1.5) 0.2 (2.7) (4.3) (2.8) (3.0)
-------- -------- -------- -------- -------- --------
Total $ 8.6 $ 13.1 $ 183.9 $ 210.4 $ 173.4 $ 191.9
======== ======== ======== ======== ======== ========
DEPRECIATION AND AMORTIZATION
Propane - depreciation $ 9.9 $ 9.6 $ 29.2 $ 28.9 $ 38.9 $ 38.6
Propane - amortization 6.4 6.2 19.5 19.1 26.1 25.5
Gas utility 4.6 4.7 13.6 13.9 16.8 18.3
Electric utility 1.0 1.0 2.9 3.1 4.1 4.1
Corporate general and other -- 0.1 0.2 0.3 0.3 0.4
-------- -------- -------- -------- -------- --------
Total $ 21.9 $ 21.6 $ 65.4 $ 65.3 $ 86.2 $ 86.9
======== ======== ======== ======== ======== ========
IDENTIFIABLE ASSETS
(at period end)
Propane $1,240.0 $1,324.4 $1,240.0 $1,324.4 $1,240.0 $1,324.4
Gas utility 593.0 581.8 593.0 581.8 593.0 581.8
Electric utility 95.7 85.6 95.7 85.6 95.7 85.6
Energy marketing 15.4 13.4 15.4 13.4 15.4 13.4
Corporate general and other 145.8 117.5 145.8 117.5 145.8 117.5
-------- -------- -------- -------- -------- --------
Total $2,089.9 $2,122.7 $2,089.9 $2,122.7 $2,089.9 $2,122.7
======== ======== ======== ======== ======== ========
OPERATING STATISTICS
Propane sales - millions of gallons:
Retail 135.9 145.4 650.2 664.7 792.9 814.0
Wholesale 29.2 34.5 172.7 176.6 214.7 225.4
Natural gas system throughput -
billions of cubic feet 14.5 15.9 63.0 68.4 74.9 81.4
Electric sales -
millions of kilowatt hours 197.7 195.0 662.6 667.3 863.8 868.2
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UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Millions of dollars, except per share amounts)
3. ELECTRIC UTILITY RESTRUCTURING ORDER
On June 19, 1998, the Pennsylvania Public Utility Commission (PUC) entered
its Opinion and Order in Electric Utility's restructuring proceeding (the
"Order") pursuant to Pennsylvania's Electricity Generation Customer Choice
and Competition Act (Customer Choice Act). The Order essentially adopts
the terms included in a comprehensive settlement agreement (the
"Settlement Agreement") previously entered into by UGI Utilities and the
active parties to the restructuring proceeding, except Pennsylvania Power
and Light Company (PP&L). Under the terms of the Order, commencing January
1, 1999 Electric Utility is authorized to recover $32.5 million in
stranded costs (on a full revenue requirements basis which includes all
income and gross receipts taxes) over a four-year period through a
Competitive Transition Charge (CTC) (together with carrying charges on
unrecovered balances of 7.94%) and to charge unbundled rates for
generation, transmission and distribution services. Stranded costs 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. Electric Utility's recoverable stranded costs
include $8.7 million for the buy-out of a 1993 power purchase agreement
with an independent power producer. In June 1998, Electric Utility
recorded a liability of $8.7 million for the buy-out of the 1993 power
purchase agreement and also recorded a corresponding CTC regulatory asset.
In Electric Utility's restructuring proceeding, PP&L claimed certain
stranded costs associated with a 1992 power supply agreement for the
wholesale sale of power by PP&L to Electric Utility. The PUC denied PP&L's
claim in the Order. On July 20, 1998, PP&L appealed the PUC's decision to
the Commonwealth Court of Pennsylvania.
Under the terms of the Order and in accordance with the Customer Choice
Act, Electric Utility's rates for transmission and distribution services
are capped through July 1, 2001. In addition, Electric Utility generally
may not increase the generation component of prices as long as stranded
costs are being recovered through the CTC. For Electric Utility, this
generation rate cap is expected to extend through December 31, 2002. All
of Electric Utility's customers will be permitted to select an alternative
generation supplier as of January 1, 1999. Customers choosing an
alternative supplier will on average receive a generation "shopping
credit" developed from system-wide generation rates of 3.67 cents per kwh
in 1999 and 2000, and 4.3 cents per kwh in 2001 and 2002. The Settlement
Agreement gives Electric Utility the right, subject to prior PUC approval,
to transfer its electric generation assets to a non-regulated affiliate.
The Company's management believes that, upon filing the necessary
documents with the PUC, Electric Utility will receive such approval.
The Financial Accounting Standards Board's (FASB's) Emerging Issues Task
Force (EITF) in 1997 issued its statement 97-4, "Deregulation of the
Pricing of Electricity -
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UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Millions of dollars, except per share amounts)
Issues Related to the Application of FASB Statements 71 and 101." EITF
97-4 concluded that utilities should discontinue application of SFAS 71
"Accounting for the Effects of Certain Types of Regulation" for the
generation portion of their business when a restructuring plan is in place
and its terms are known. Pursuant to such guidance, in June 1998 Electric
Utility discontinued the application of SFAS 71 as it relates to the
electric generation portion of its business, which assets comprise less
than 5% of UGI Utilities' consolidated assets. The discontinuance of SFAS
71 did not have a material effect on the Company's financial position or
results of operations for the three months ended June 30, 1998.
4. UNUSUAL ITEMS
In June 1998, the Company revised its estimate of the tax basis of certain
assets contributed to the Partnership in conjunction with the
Partnership's formation on April 19, 1995. The change in estimate resulted
in adjustments to the June 30, 1998 condensed consolidated balance sheet
as follows: (1) a $17.9 million decrease in goodwill; (2) a $9.6 million
decrease in excess reorganization value; (3) a $20.8 million decrease in
accrued income taxes and (4) a $6.7 million increase in deferred income
tax benefits.
5. COMMITMENTS AND CONTINGENCIES
The Partnership has succeeded to certain lease guarantee obligations of
Petrolane Incorporated (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 $57 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
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 then from Texas Eastern. To
date, neither the Partnership nor Petrolane has paid any sums
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UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Millions of dollars, except per share amounts)
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 and private
party recovery actions for the cleanup or recovery of costs associated
with cleanup of various waste sites, including some Superfund 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.
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 at
sites owned by subsidiary companies when 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
subsidiary's separate corporate form should be disregarded. 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. Gas Utility
is currently 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.
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UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Millions of dollars, except per share amounts)
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.
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UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Millions of dollars, except per share amounts)
5. EARNINGS PER SHARE
The Company adopted SFAS No. 128, "Earnings Per Share" (SFAS 128) during the
quarter ended December 31, 1997. SFAS 128 establishes standards for
computing and presenting earnings per share and simplifies the previous
standards for computing earnings per share contained in Accounting
Principles Board Opinion No. 15. SFAS 128 requires restatement of all
prior-period earnings per share data presented. The following table reflects
the reconciliation of the numerators and the denominators of the basic and
diluted earnings per share computations for the periods presented:
Three Months Ended Nine Months Ended Twelve Months Ended
June 30, June 30, June 30,
-------------------- ------------------ ------------------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
Numerator:
Net income (loss) (applicable to
basic and diluted earnings per share) $ (3.9) $ (1.2) $ 52.1 $ 62.5 $ 41.7 $ 49.9
======== ======== ======== ======== ======== ========
Denominator (millions of shares):
Basic earnings per share 33.017 33.031 33.001 33.098 32.976 33.105
Incremental shares issuable upon
exercise of stock options and other
stock-based compensation -- -- 0.175 0.108 0.171 0.111
-------- -------- -------- -------- -------- --------
Diluted earnings per share 33.017 33.031 33.176 33.206 33.147 33.216
======== ======== ======== ======== ======== ========
Basic earnings (loss) per common share $ (0.12) $ (0.04) $ 1.58 $ 1.89 $ 1.27 $ 1.51
======== ======== ======== ======== ======== ========
Diluted earnings (loss) per common share $ (0.12) $ (0.04) $ 1.57 $ 1.88 $ 1.26 $ 1.50
======== ======== ======== ======== ======== ========
-11-
14
UGI CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ANALYSIS OF RESULTS OF OPERATIONS
The following analyses compare the Company's results of operations for the three
months ended June 30, 1998 (1998 three-month period) with the three months ended
June 30, 1997 (1997 three-month period); the nine months ended June 30, 1998
(1998 nine-month period) with the nine months ended June 30, 1997 (1997
nine-month period); and the twelve months ended June 30, 1998 (1998 twelve-month
period) with the twelve months ended June 30, 1997 (1997 twelve-month period).
The Company's results of operations should be read in conjunction with the
segment information included in Note 2 to Condensed Consolidated Financial
Statements. Due to the seasonality of the Company's businesses, the results of
operations for interim periods are not necessarily indicative of results to be
expected for a full year.
1998 THREE-MONTH PERIOD COMPARED WITH 1997 THREE-MONTH PERIOD
CONSOLIDATED RESULTS
- --------------------------------------------------------------------------------
Increase
Three Months Ended June 30, 1998 1997 (Decrease)
- --------------------------------------------------------------------------------
(Millions of dollars, except per
share)
Revenues $255.2 $284.1 $(28.9) (10.2)%
Total margin $126.1 $130.0 $ (3.9) (3.0)%
Operating income $ 8.6 $ 13.1 $ (4.5) (34.4)%
Net loss $ (3.9) $ (1.2) $ 2.7 225.0%
Net loss per share - diluted $ (.12) $ (.04) $ .08 200.0%
- --------------------------------------------------------------------------------
The Company's net loss in the 1998 three-month period reflects the effects of
warmer spring weather on the Partnership's and Gas Utility's results. Net income
in the 1997 three-month period benefitted from a $1.4 million after-tax gain
from the sale of UTI Energy Corp. (UTI) common stock.
PROPANE
- -------------------------------------------------------------------------------
Increase
Three Months Ended June 30, 1998 1997 (Decrease)
- -------------------------------------------------------------------------------
(Millions of dollars)
Retail gallons sold - millions 135.9 145.4 (9.5) (6.5)%
Revenues $158.2 $177.6 $(19.4) (10.9)%
Total margin $ 88.5 $ 88.2 $ .3 .3%
Operating income $ .5 $ 2.0 $ (1.5) (75.0)%
EBITDA(a) $ 16.8 $ 17.8 $ (1.0) (5.6)%
- -------------------------------------------------------------------------------
-12-
15
UGI CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS(CONTINUED)
(a) 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.
Retail volumes of propane sold during the 1998 three-month period decreased due
in large part to warmer weather in April and May 1998. Based upon degree day
information provided by the National Oceanic and Atmospheric Administration
(NOAA) for 335 airports in the continental U.S., weather during the 1998
three-month period was approximately 8% warmer than normal and 21% warmer than
the same period of 1997. Wholesale volumes of propane sold were 5.3 million
gallons (15.4%) lower in the 1998 three-month period also due to the warmer
weather and lower purchases by independent retailers.
Total revenues from retail propane sales decreased $15.1 million to $128.2
million during the 1998 three-month period reflecting (1) a $9.4 million
decrease as a result of the lower volumes sold and (2) a $5.7 million decrease
as a result of lower average retail propane selling prices. The lower average
retail propane selling prices reflect lower 1998 three-month period propane
product costs. Wholesale propane revenues decreased $4.4 million to $12.1
million due to the previously mentioned lower wholesale volumes sold as well as
lower average wholesale propane selling prices. Other revenues, principally
reflecting terminal and storage revenues and sales of appliances, were
essentially unchanged in the 1998 three-month period.
Notwithstanding the lower propane volumes sold, total margin increased $.3
million in the 1998 three-month period. Retail unit margins were higher in 1998
as the Partnership benefitted from lower industry-wide propane product costs.
The decrease in wholesale volumes did not have a material impact on the change
in total margin because wholesale unit margins are typically very small.
The decrease in EBITDA during the 1998 three-month period principally resulted
from higher operating expenses. Operating expenses of the Partnership in the
1998 three-month period include net benefits of $2.2 million comprising (1) $2.0
million from lower required accruals for property taxes, (2) $1.7 million from
lower required accruals for environmental matters and (3) a $1.5 million
increase in accrued disability benefits. Excluding these items, operating and
administrative expenses increased $3.1 million principally reflecting higher
expenses associated with Partnership acquisitions and new business development
activities.
-13-
16
UGI CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS(CONTINUED)
UTILITIES
- --------------------------------------------------------------------------------
Increase
Three Months Ended June 30, 1998 1997 (Decrease)
- --------------------------------------------------------------------------------
(Millions of dollars)
GAS UTILITY:
Natural gas system throughput -
bcf 14.5 15.9 (1.4) (8.8)%
Degree days - % colder (warmer)
than normal (23.7) 15.9 -- --
Revenues $ 57.8 $ 71.7 $(13.9) (19.4)%
Total margin (a) $ 28.9 $ 32.3 $ (3.4) (10.5)%
Operating income $ 7.1 $ 8.0 $ (.9) (11.3)%
ELECTRIC UTILITY:
Electric sales - gwh 197.7 195.0 2.7 1.4%
Revenues $ 16.5 $ 16.6 $ (.1) (.6)%
Total margin (a) $ 7.5 $ 8.4 $ (.9) (10.7)%
Operating income $ 2.0 $ 2.2 $ (.2) (9.1)%
- --------------------------------------------------------------------------------
bcf - billions of cubic feet. gwh - millions of kilowatt hours.
(a) Gas and Electric utilities' total margin represents total revenues less
cost of sales and revenue-related taxes.
GAS UTILITY. Weather in the Gas Utility service territory during the 1998
three-month period was 23.7% warmer than normal compared with weather that was
15.9% colder than normal in the prior-year period. Total system throughput
decreased 8.8% during the 1998 three-month period principally reflecting the
warmer weather's effect on firm-residential, firm-commercial and firm-industrial
(collectively, "core market") sales.
The $13.9 million decrease in Gas Utility's total revenues during the 1998
three-month period is due principally to (1) a $10.8 million decrease in core
market revenues resulting from the lower volumes sold and (2) a $2.3 million
decrease from lower off-system sales. Cost of gas sold by the Gas Utility was
$26.9 million during the 1998 three-month period, a decrease of $9.8 million
from the prior-year period, principally reflecting the decrease in off-system
and core market sales.
Gas Utility total margin during the 1998 three-month period was $3.4 million
lower than in the 1997 three-month period principally reflecting a $3.2 million
decrease in total margin from core market customers. Total margin from Gas
Utility interruptible customers during the 1998 three-month period was $.6
million lower than the prior-year period, notwithstanding an increase in
interruptible throughput, as the price of alternative fuels, principally oil,
declined relative to gas
-14-
17
UGI CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS(CONTINUED)
prices, resulting in lower interruptible transportation rates. The decline in
core market and interruptible margins was partially offset by slightly higher
firm delivery service margins.
Although total margin during the three months ended June 30, 1998 decreased $3.4
million, Gas Utility operating income decreased only $.9 million principally as
a result of (1) lower costs associated with environmental matters, (2) lower
distribution system maintenance expenses, (3) a decrease in general and
administrative expenses and (4) slightly higher miscellaneous income.
ELECTRIC UTILITY. Electric Utility sales increased 1.4% during the 1998
three-month period. Notwithstanding the higher sales, Electric Utility revenues
decreased principally as a result of customers purchasing electricity from other
providers under the pilot program. In accordance with the Customer Choice Act,
Electric Utility implemented a pilot program effective November 1, 1997 for up
to five percent of the peak load of each customer class. For those customers
participating in the pilot program, Electric Utility bills only for the
distribution of electricity but not for the electricity itself. Electric Utility
cost of sales increased $.8 million as a result of higher generation and
purchased power costs. As a result of Electric Utility's restructuring Order,
its Energy Cost Rate (ECR) was combined with its base rates. Because the sources
and costs of Electric Utility's power needs vary from period to period and its
generation rates are capped until December 31, 2002, the elimination of the ECR
may increase the volatility of Electric Utility's future quarterly results.
During the 1998 three-month period, Electric Utility total margin decreased $.9
million from the prior-year period primarily as a result of the previously
mentioned increase in generation and purchased power costs. Operating income was
$2.0 million during the 1998 three-month period compared with $2.2 million in
the same period last year. The decrease reflects the net effects of (1) lower
total margin, (2) higher legal expenses associated with the Electric Utility
restructuring and (3) higher miscellaneous income. Miscellaneous income was $1.0
million in the 1998 three-month period compared with $.1 million in the 1997
three-month period. The increase in miscellaneous income principally resulted
from adjustments to reserves associated with accrued Electric Utility revenues
as a result of the restructuring Order.
ENERGY MARKETING
- -------------------------------------------------------------------------------
Increase
Three Months Ended June 30, 1998 1997 (Decrease)
- -------------------------------------------------------------------------------
(Millions of dollars)
Revenues $22.7 $18.2 $ 4.5 24.7%
Total margin $ 1.2 $ 1.1 $ .1 9.1%
Operating income $ .5 $ .7 $ (.2) (28.6)%
- -------------------------------------------------------------------------------
-15-
18
UGI CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS(CONTINUED)
Total revenues from energy marketing in the 1998 three-month period increased as
a result of higher average gas prices and higher billed volumes. The increase in
billed volumes was due principally to an increase in volume from customers
outside Gas Utility's distribution system. Total margin for the 1998 three-month
period increased slightly from the 1997 three-month period. Operating income
from energy marketing was $.5 million in the 1998 three-month period compared
with $.7 million in the prior-year period principally reflecting the impact of
higher operating expenses and lower miscellaneous income.
CORPORATE GENERAL AND OTHER
Operating income (loss) from corporate general and other, net, consisting of
expenses incurred by UGI corporate headquarters net of other miscellaneous
income, was $(1.5) million in the 1998 three-month period compared with $.2
million in the prior-year period. The 1997 three-month period includes a $2.1
million pre-tax gain from the sale of UTI common stock received in conjunction
with the mid-1980's disposition of the Company's oilfield service businesses.
INTEREST EXPENSE AND INCOME TAXES
Interest expense increased to $20.7 million in the 1998 three-month period from
$20.3 million in the prior-year period principally as a result of higher levels
of debt outstanding under the Partnership's Revolving Credit and Acquisition
facilities. The effective income tax rate on the pre-tax loss for the three
months ended June 30, 1998 was 31.4% compared with a rate of 44.4% for the three
months ended June 30, 1997. The lower 1998 three-month period tax rate reflects
the effect of a slight increase in the estimated annual effective income tax
rate applied to year-to-date pre-tax income.
1998 NINE-MONTH PERIOD COMPARED WITH 1997 NINE-MONTH PERIOD
CONSOLIDATED RESULTS
- -------------------------------------------------------------------------------
Nine Months Ended June 30, 1998 1997 Decrease
- -------------------------------------------------------------------------------
(Millions of dollars, except per
share)
Revenues $1,214.7 $1,390.1 $(175.4) (12.6)%
Total margin $ 551.1 $ 573.8 $ (22.7) (4.0)%
Operating income $ 183.9 $ 210.4 $ (26.5) (12.6)%
Net income $ 52.1 $ 62.5 $ (10.4) (16.6)%
Net income per share - diluted $ 1.57 $ 1.88 $ (.31) (16.5)%
- -------------------------------------------------------------------------------
-16-
19
UGI CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS(CONTINUED)
The decrease in the Company's results in the 1998 nine-month period principally
reflects lower Partnership and Gas Utility total margin as a result of warmer
heating-season weather, and lower Partnership other income.
PROPANE
- ------------------------------------------------------------------------------
Nine Months Ended June 30, 1998 1997 Decrease
- ------------------------------------------------------------------------------
(Millions of dollars)
Retail gallons sold - millions 650.2 664.7 (14.5) (2.2)%
Revenues $767.3 $908.9 $(141.6) (15.6)%
Total margin $387.6 $399.0 $ (11.4) (2.9)%
Operating income $107.0 $128.9 $ (21.9) (17.0)%
EBITDA (a) $155.7 $176.9 $ (21.2) (12.0)%
- ------------------------------------------------------------------------------
(a) 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.
Retail volumes of propane sold were slightly lower during the 1998 nine-month
period. Based upon degree day information provided by NOAA for 335 airports in
the continental U.S., weather during the peak heating-season months November
1997 through March 1998 was 9% warmer than normal and 5% warmer than the prior
year. In particular, the period comprising January and February 1998 was the
warmest in more than 100 years.
Total revenues from retail propane sales decreased $108.9 million to $628.8
million during the 1998 nine-month period reflecting (1) a $92.8 million
decrease as a result of lower average retail propane selling prices and (2) a
$16.1 million decrease as a result of the lower retail volumes sold. Wholesale
propane revenues decreased $29.8 million to $76.8 million due principally to
lower 1998 nine-month period selling prices. The lower average retail and
wholesale selling prices resulted from significantly lower propane product
costs. Other revenues declined $2.9 million to $61.7 million reflecting in large
part lower terminal and storage revenues and lower appliance sales revenues.
Total margin declined $11.4 million in the 1998 nine-month period principally
reflecting the impact of lower retail volumes sold. Although average retail
propane unit margins for the 1998 nine-month period were comparable with the
prior-year period, the Partnership recorded significantly lower retail unit
margins early in the 1998 nine-month period (compared to the same period of the
prior year) and higher retail unit margins later in the period. Retail unit
margins early
-17-
20
UGI CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS(CONTINUED)
in the prior-year period were higher due to fuel supply and pricing strategies
that were especially effective during the unique market conditions
(characterized by a rapid increase in propane spot-market prices) that existed
at the time. Retail unit margins in the later part of the 1998 nine-month period
benefitted from significantly lower propane product costs.
The decrease in operating income and EBITDA during the 1998 nine-month period
principally reflects (1) the decrease in total margin, (2) lower miscellaneous
income and (3) slightly higher operating expenses. Miscellaneous income in the
prior-year nine-month period includes (1) $4.7 million of income from the sale
of the Partnership's 50% interest in Atlantic Energy, Inc. (Atlantic Energy),
(2) higher customer finance charges and (3) higher interest income on short-term
investments. Operating expenses of the Partnership increased $2.6 million in the
1998 nine-month period. Operating expenses in the 1998 nine-month period include
net benefits of $2.2 million comprising (1) $2.0 million from lower required
accruals for property taxes, (2) $1.7 million from lower required accruals for
environmental matters and (3) a $1.5 million increase in accrued disability
benefits. Excluding these items, operating and administrative expenses of the
Partnership increased $4.8 million principally reflecting higher expenses
associated with acquisitions and new business development activities.
UTILITIES
- --------------------------------------------------------------------------------
Increase
Nine Months Ended June 30, 1998 1997 (Decrease)
- --------------------------------------------------------------------------------
(Millions of dollars)
GAS UTILITY:
Natural gas system throughput -
bcf 63.0 68.4 (5.4) (7.9)%
Degree days - % warmer than
normal (15.8) (4.7) -- --
Revenues $ 307.9 $340.8 $ (32.9) (9.7)%
Total margin $ 133.8 $145.2 $ (11.4) (7.9)%
Operating income $ 69.1 $ 75.5 $ (6.4) (8.5)%
ELECTRIC UTILITY:
Electric sales - gwh 662.6 667.3 (4.7) (.7)%
Revenues $ 54.2 $ 54.9 $ (.7) (1.3)%
Total margin $ 25.7 $ 26.6 $ (.9) (3.4)%
Operating income $ 8.6 $ 8.5 $ .1 1.2%
- --------------------------------------------------------------------------------
GAS UTILITY. Weather in Gas Utility's service territory in the 1998 nine-month
period was 15.8% warmer than normal compared with weather that was 4.7% warmer
than normal in the prior-year period. Total system throughput decreased 7.9%
during the 1998 nine-month period principally reflecting the effect of the
warmer heating-season weather on core market sales as well as a
-18-
21
UGI CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS(CONTINUED)
decrease in low-margin interruptible delivery service volumes resulting from the
shut-down of a gas-fired cogeneration facility.
The decrease in Gas Utility's total revenues reflects a $30.7 million decrease
from lower sales to core market customers. Cost of gas sold by Gas Utility
decreased $19.7 million to $162.2 million during the 1998 nine-month period
principally reflecting the lower sales to core market customers.
The decrease in Gas Utility total margin principally reflects (1) a $9.3 million
decrease from core market customers resulting from the warmer weather and (2) a
$2.4 million decrease from interruptible customers resulting from lower
transportation rates due to declining oil prices relative to gas prices.
Gas Utility operating income decreased $6.4 million during the 1998 nine-month
period principally reflecting the lower total margin partially offset by lower
operating expenses and higher miscellaneous income. Operating and administrative
expenses during the 1998 nine-month period decreased $3.7 million principally as
a result of (1) income from an insurance recovery, (2) a decrease in
distribution system maintenance expenses, (3) lower costs associated with
environmental matters and (4) lower general and administrative expenses. These
decreases were partially offset by an increase in gas supply expenses.
ELECTRIC UTILITY. Electric Utility sales decreased during the 1998 nine-month
period on weather which was 11.4% warmer than in the 1997 nine-month period.
Electric Utility revenues decreased $.7 million reflecting the warmer weather
and the effects of Electric Utility's pilot program. Notwithstanding the
decrease in sales, cost of sales increased to $26.1 million in the 1998
nine-month period from $25.9 million in the prior-year period. The increase
reflects higher purchased power costs and the effect of the inclusion of the
former ECR in base rates.
Electric Utility total margin was $.9 million lower during the 1998 nine-month
period than the prior-year period. However, Electric Utility operating income
increased slightly during the nine months ended June 30, 1998 principally as a
result of higher miscellaneous income and lower charges for depreciation.
Miscellaneous income was $1.1 million in the 1998 nine-month period compared
with $.1 million in the 1997 nine-month period. The increase principally
resulted from adjustments to reserves associated with accrued Electric Utility
revenues as a result of the restructuring Order.
-19-
22
UGI CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS(CONTINUED)
ENERGY MARKETING
- ------------------------------------------------------------------------------
Increase
Nine Months Ended June 30, 1998 1997 (Decrease)
- ------------------------------------------------------------------------------
(Millions of dollars)
Revenues $85.3 $85.5 $ (.2) (.2)%
Total margin $ 4.0 $ 3.0 $ 1.0 33.3%
Operating income $ 1.9 $ 1.8 $ .1 5.6%
- ------------------------------------------------------------------------------
Total revenues from energy marketing in the 1998 nine-month period decreased
slightly compared with revenues during the prior-year period principally as a
result of lower contractual selling prices. Total margin for the 1998 nine-month
period was $1.0 million higher than in the same period last year reflecting
higher average unit margins. Unit margins during the nine months ended June 30,
1997 were negatively impacted by a decline in the value of excess pipeline
capacity. Operating income from energy marketing was $1.9 million in the 1998
nine-month period compared with $1.8 million in the prior-year period as the
higher total margin was substantially offset by higher operating expenses and
lower miscellaneous income.
CORPORATE GENERAL AND OTHER
Operating loss from corporate general and other, net, was $(2.7) million in the
1998 nine-month period compared with $(4.3) million in the 1997 nine-month
period. The decrease in operating loss from corporate general and other
principally reflects (1) higher interest income on temporary cash investments
and (2) lower levels of UGI corporate expenses.
INTEREST EXPENSE AND INCOME TAXES
Interest expense increased to $63.6 million in the 1998 nine-month period from
$62.8 million in the 1997 nine-month period principally as a result of higher
levels of debt outstanding under the Partnership's Acquisition Facility. The
effective income tax rate on pre-tax income for the nine months ended June 30,
1998 was 45.3% compared with 44.8% for the nine months ended June 30, 1997.
-20-
23
UGI CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS(CONTINUED)
1998 TWELVE-MONTH PERIOD COMPARED WITH 1997 TWELVE-MONTH PERIOD
CONSOLIDATED RESULTS
- -------------------------------------------------------------------------------
Twelve Months Ended June 30, 1998 1997 Decrease
- -------------------------------------------------------------------------------
(Millions of dollars, except per
share)
Revenues $1,466.6 $1,654.3 $(187.7) (11.3)%
Total margin $ 662.2 $ 681.8 $ (19.6) (2.9)%
Operating income $ 173.4 $ 191.9 $ (18.5) (9.6)%
Net income $ 41.7 $ 49.9 $ (8.2) (16.4)%
Net income per share - diluted $ 1.26 $ 1.50 $ (.24) (16.0)%
- -------------------------------------------------------------------------------
The decrease in the Company's results in the 1998 twelve-month period reflects
(1) lower operating income from the Partnership and Gas Utility due in large
part to the effects of warmer heating-season weather and (2) a decrease in
miscellaneous income of the Partnership.
PROPANE
- ----------------------------------------------------------------------------
Twelve Months Ended June 30, 1998 1997 Decrease
- ----------------------------------------------------------------------------
(Millions of dollars)
Retail gallons sold - millions 792.9 814.0 (21.1) (2.6)%
Revenues $ 936.2 $1,086.0 $(149.8) (13.8)%
Total margin $ 466.0 $ 474.6 $ (8.6) (1.8)%
Operating income $ 95.2 $ 109.3 $ (14.1) (12.9)%
EBITDA (a) $ 160.2 $ 173.4 $ (13.2) (7.6)%
- ----------------------------------------------------------------------------
(a) 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.
Retail and wholesale volumes of propane sold decreased in the 1998 twelve-month
period principally reflecting the effects of warmer heating season temperatures.
Based upon degree day information provided by NOAA for 335 airports in the
continental U.S., weather during the peak heating season months of November 1997
through March 1998 averaged 9% warmer than normal
-21-
24
UGI CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS(CONTINUED)
and 5% warmer than the prior year. In particular, the period comprising January
and February 1998 was the warmest in more than 100 years.
Total revenues from retail propane sales declined $112.3 million to $759.3
million reflecting (1) an $89.7 million decrease as a result of lower average
retail propane selling prices and (2) a $22.6 million decrease as a result of
the lower retail volumes sold. Wholesale propane revenues decreased $34.0
million to $96.2 million reflecting (1) a $27.8 million decrease as a result of
lower average selling prices and (2) a $6.2 million decrease as a result of the
lower volumes. The higher selling prices in the prior-year period were a result
of significantly higher propane spot-market prices. Other revenues decreased
$3.5 million to $80.7 million due to lower terminal and storage revenues and
lower appliance sales revenues.
Total margin in the 1998 twelve-month period was lower than the prior-year
period reflecting the impact of the lower propane volumes sold. Total margin
from other sales and services during the 1998 twelve-month period was slightly
lower than in the prior-year period.
EBITDA and operating income declined during the 1998 twelve-month period as a
result of (1) the previously mentioned lower total margin and (2) lower
miscellaneous income. Miscellaneous income in the 1997 twelve-month period
includes $4.7 million of income from the sale of the Partnership's 50% interest
in Atlantic Energy. Miscellaneous income in the prior-year period also includes
higher interest income and income from sales of fixed assets. Operating expenses
of the Partnership were $1.8 million lower during the 1998 twelve-month period
principally as a result of (1) lower required self-insurance reserves and costs
associated with general and automobile liability and workers' compensation and
(2) lower required accruals for environmental and property tax matters. These
decreases were partially offset by higher expenses associated with Partnership
acquisitions and new business development activities.
-22-
25
UGI CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS(CONTINUED)
UTILITIES
- --------------------------------------------------------------------------------
Increase
Twelve Months Ended June 30, 1998 1997 (Decrease)
- --------------------------------------------------------------------------------
(Millions of dollars)
GAS UTILITY:
Natural gas system throughput -
bcf 74.9 81.4 (6.5) (8.0)%
Degree days - % warmer than
normal (15.6) (4.9) - -
Revenues $ 356.2 $ 391.8 $(35.6) (9.1)%
Total margin $ 157.3 $ 168.8 $(11.5) (6.8)%
Operating income $ 68.4 $ 73.1 $ (4.7) (6.4)%
ELECTRIC UTILITY:
Electric sales - gwh 863.8 868.2 (4.4) (.5)%
Revenues $ 71.4 $ 71.9 $ (.5) (.7)%
Total margin $ 34.3 $ 35.0 $ (.7) (2.0)%
Operating income $ 10.8 $ 10.7 $ .1 .9%
- --------------------------------------------------------------------------------
GAS UTILITY. Weather in Gas Utility's service territory in the 1998 twelve-month
period was significantly warmer than in the 1997 twelve-month period. Total
system throughput declined principally as a result of the effects of the warmer
weather on core market sales and a decrease in low-margin interruptible delivery
service volumes resulting from the shut-down of a gas-fired cogeneration
facility.
Gas Utility revenues were $35.6 million lower in the 1998 twelve-month period as
a result of (1) a $30.7 million decrease in core market revenues due to the
lower volumes sold, (2) a $3.1 million decrease in revenues from off-system
sales and (3) lower revenues from interruptible customers. Cost of gas sold was
$185.5 million during the 1998 twelve-month period, a decrease of $22.2 million
from the same period in 1997, principally reflecting the reduced core market and
off-system sales partially offset by the effects of slightly higher average
purchased gas cost rates.
Gas Utility total margin decreased during the 1998 twelve-month period
principally reflecting a $9.7 million decrease in total margin from core market
customers and a $2.1 million decrease in total margin from interruptible
customers.
Gas Utility operating income decreased $4.7 million during the 1998 twelve-month
period as the lower total margin was partially offset by (1) a $4.4 million
decrease in operating expenses, (2) a $1.3 million decrease in depreciation and
amortization and (3) higher miscellaneous income. Operating and administrative
expenses decreased principally as a result of (1) income from an insurance
recovery and (2) a decrease in distribution system maintenance expenses.
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26
UGI CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS(CONTINUED)
ELECTRIC UTILITY. Electric Utility sales were lower during the twelve months
ended June 30, 1998 than in the prior-year period due in part to warmer
heating-season weather. Electric Utility revenues were $.5 million lower than
the prior-year period principally reflecting the effects of the warmer weather
and Electric Utility's pilot program. Notwithstanding the lower sales, Electric
Utility cost of sales increased $.2 million to $34.0 million during the 1998
twelve-month period as a result of higher purchased power costs and the effect
of the inclusion of the former ECR in base rates in June 1998.
Electric Utility total margin decreased $.7 million during the 1998 twelve-month
period principally as a result of the lower sales. Operating income during the
1998 twelve-month period was virtually unchanged from the prior-year period as
the lower total margin and slightly higher operating expenses were offset by
greater miscellaneous income. Miscellaneous income of Electric Utility was $1.1
million in the 1998 twelve-month period compared with $.2 million in the same
period last year. The increase principally resulted from adjustments to reserves
associated with accrued Electric Utility revenues as a result of the
restructuring Order.
ENERGY MARKETING
- ------------------------------------------------------------------------------
Increase
Twelve Months Ended June 30, 1998 1997 (Decrease)
- ------------------------------------------------------------------------------
(Millions of dollars)
Revenues $102.8 $104.6 $(1.8) (1.7)%
Total margin $ 4.6 $ 3.4 $ 1.2 35.3%
Operating income $ 1.8 $ 1.8 $ -- --%
- ------------------------------------------------------------------------------
Total revenues from energy marketing in the 1998 twelve-month period decreased
$1.8 million compared with revenues during the prior-year period as a result of
lower billed volumes partially offset by higher average selling prices. Total
margin was higher in the 1998 twelve-month period compared with the 1997
twelve-month period principally due to higher average unit margins. The lower
unit margins in the 1997 twelve-month period reflected the warm winter weather's
effect on the value of excess pipeline capacity. Operating income during the
1998 twelve-month period was essentially unchanged from the prior-year period as
the benefit of the higher total margin in 1998 was offset by an increase in
operating expenses and lower miscellaneous income.
CORPORATE GENERAL AND OTHER
Operating loss from corporate general and other, net, was $(2.8) million in the
1998 twelve-month period compared with $(3.0) million in the 1997 twelve-month
period. The decrease in operating loss from corporate general and other
principally reflects the net effects of (1) $2.6 million in pre-tax gains from
the sale of UTI common stock in the 1998 twelve-month period
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27
UGI CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS(CONTINUED)
compared with $2.1 million of such gains in the prior-year period, (2) higher
interest income on temporary cash investments and (3) higher levels of UGI
corporate general expenses. Corporate general expenses in the prior-year period
were lower reflecting adjustments of incentive accruals recorded in September
1996.
INTEREST EXPENSE AND INCOME TAXES
Interest expense increased to $83.9 million in the 1998 twelve-month period from
$82.7 million in the 1997 twelve-month period principally as a result of higher
levels of debt outstanding under the Partnership's Revolving Credit and
Acquisition facilities and greater amounts of UGI Utilities long-term debt
outstanding. The Company's effective income tax rate in the 1998 twelve-month
period was 44.8% compared with 43.8% in the 1997 twelve-month period. The higher
rate in 1998 reflects a higher effective income tax rate on propane operations.
FINANCIAL CONDITION AND LIQUIDITY
FINANCIAL CONDITION
The Company's debt outstanding at June 30, 1998 totaled $964.5 million,
comparable with the $964.0 million outstanding at September 30, 1997. The
Partnership's total debt outstanding at June 30, 1998 was $711.1 million, a
decrease of $7.7 million from September 30, 1997, reflecting a $17 million
decrease in borrowings under its Revolving Credit Facility and a $3.7 million
decrease in other long-term debt partially offset by the issuance of $13 million
under the Partnership's Acquisition Facility. UGI Utilities' debt was $245.0
million at June 30, 1998, an increase of $8.7 million from September 30, 1997,
reflecting the issuance of an aggregate $35 million of notes under its Series B
Medium-Term Note program partially offset by a $16.3 million decrease in
borrowings under its revolving credit agreements and $10 million in scheduled
long-term debt repayments.
In June 1998, the Company revised its estimate of the tax basis of certain
assets contributed to the Partnership in conjunction with the Partnership's
formation on April 19, 1995. The change in estimate resulted in adjustments to
the June 30, 1998 condensed consolidated balance sheet as follows: (1) a $17.9
million decrease in goodwill; (2) a $9.6 million decrease in excess
reorganization value; (3) a $20.8 million decrease in accrued income taxes and
(4) a $6.7 million increase in deferred income tax benefits.
During the nine months ended June 30, 1998, the Partnership declared and paid
the MQD on all limited partner units outstanding and the distribution on the
general partner interests for the quarters ended March 31, 1998, December 31,
1997 and September 30, 1997. The MQD for the quarter ended June 30, 1998 will be
paid on August 18, 1998 to holders of record on August 10, 1998 of all Common
and Subordinated units.
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28
UGI CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS(CONTINUED)
The ability of the Partnership to continue to pay the full MQD on all of its
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. The Partnership's EBITDA during the 1998 nine-month
period was $20.6 million lower than during the 1997 nine-month period. Given the
level of EBITDA to date, it is unlikely the Partnership will be able to fund
solely from cash generated from operations during fiscal 1998 payment of the
full distribution on its Subordinated Units for the remainder of calendar year
1998. While the Company believes the Partnership will have sufficient borrowing
capacity to fund all of its cash needs (including amounts for growth capital and
the full distribution on the Subordinated Units) during this period, no
assurance can be given that the General Partner will elect to utilize its
borrowing capacity to fund the full distribution on the Subordinated Units. The
Company expects that the Partnership will generate sufficient cash from
operations during fiscal 1998 to continue to fund the full distribution on the
Partnership's Common Units. Due to the expected receipt of both dividends from
UGI Utilities and distributions on the Partnership's Common Units held by the
Company, as well as UGI's substantial cash balances, a decision by the
Partnership not to pay the full distribution on its Subordinated Units in 1998
will not adversely affect UGI's ability to pay dividends on its Common Stock.
CASH FLOWS
The Company's consolidated cash and short-term investments totaled $144.0
million at June 30, 1998 compared with $129.4 million at September 30, 1997.
These amounts include $119.9 million and $94.8 million, respectively, of cash
and short-term investments held by UGI. The Company's cash flows are seasonal
and are generally greatest during the second and third fiscal quarters when
customers pay bills incurred during the heating season and are typically at
their lowest levels during the first and fourth fiscal quarters. Accordingly,
cash flows from operations during the nine months ended June 30, 1998 are not
necessarily indicative of the cash flows to be expected for a full year.
OPERATING ACTIVITIES. Cash flows from operating activities during the nine
months ended June 30, 1998 totaled $148.3 million compared with $165.7 million
in the comparable prior-year period. Cash flows from operations before changes
in operating working capital were $151.8 million in the nine months ended June
30, 1998 compared with $157.5 million in the prior-year period. The decrease
principally reflects a reduction in the Partnership's operating cash flows
before changes in working capital. Changes in operating working capital during
the nine months ended June 30, 1998 required $3.5 million of operating cash flow
principally from a $37.8 million decrease in accounts payable and a $16.9
million use of cash from changes in other current assets and liabilities
partially offset by a $41.9 million seasonal decrease in inventories and prepaid
propane purchases; $4.9 million in purchased gas cost overcollections; and $4.4
million in cash from a decrease in accounts receivable and accrued utility
revenues. Changes in operating working capital during the nine months ended June
30, 1997 generated $8.2 million of operating cash flow.
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29
UGI CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS(CONTINUED)
INVESTING ACTIVITIES. Cash expenditures for property, plant and equipment
totaled $46.4 million in the nine months ended June 30, 1998 compared with $47.3
million in the same period in 1997. The decrease principally reflects lower Gas
Utility capital expenditures partially offset by higher capital expenditures by
the Partnership. Proceeds from disposals of assets totaled $5.3 million during
the nine months ended June 30, 1998 compared with $8.7 million in the same
period last year. The 1997 nine-month period includes proceeds from the sale of
the Partnership's interest in Atlantic Energy. During the nine months ended June
30, 1998, the Partnership acquired several propane businesses for $6.9 million
in cash. During the nine months ended June 30, 1997, the Partnership made
acquisition-related cash payments of $4.5 million. Cash used for other investing
activities during the nine months ended June 30, 1998 includes $3.7 million of
loans issued to employees in conjunction with the Company's stock ownership
policy for executives and key employees.
FINANCING ACTIVITIES. During the nine months ended June 30, 1998, the Company
paid cash dividends on Common Stock of $35.6 million compared with $35.3 million
of cash dividends in the prior-year period. During the nine months ended June
30, 1998 and 1997, the Company issued $7.0 million and $7.2 million,
respectively, of its Common Stock in conjunction with dividend reinvestment and
employee and executive benefit plans. During the nine months ended June 30,
1998, the Company repurchased $8.4 million of its Common Stock compared with
$13.2 million in the same period in the prior year. Also during each of the
nine-month periods ended June 30, 1998 and 1997, the Partnership paid the MQD on
all limited partner units and the general partner interests. In April 1998, UGI
Utilities voluntarily redeemed 120,000 shares of its $8.00 Series Preferred
Stock at a redemption price of $102.667 per share and all 7,983 outstanding
shares of its $1.80 Series Preferred Stock at a redemption price of $23.50 per
share. UGI Utilities used borrowings under its revolving credit agreements to
fund such redemptions.
During the nine months ended June 30, 1998, the Company issued $48 million of
long-term debt. This amount includes $20 million of twenty-year 7.25% notes and
$15 million of three-year 6.17% notes issued under UGI Utilities' Series B
Medium-Term Note program (the proceeds of which were used to reduce bank loans).
It also includes $13 million issued under the Partnership's Acquisition
Facility. During the nine months ended June 30, 1998, the Company made $14.5
million of scheduled repayments of its long-term debt including $10 million of
UGI Utilities' long-term debt and $3.9 million of the Partnership's long-term
debt. In the prior-year nine-month period, the Company made long-term debt
repayments of $21.8 million.
The Partnership made net repayments of $17 million under its Revolving Credit
Facility during the nine months ended June 30, 1998 compared with $15 million of
net repayments in the same period in 1997. During the nine months ended June 30,
1998, UGI Utilities made net repayments of $16.3 million under its revolving
credit agreements compared with $7.3 million in the prior-year period.
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30
UGI CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS(CONTINUED)
ELECTRIC UTILITY RESTRUCTURING ORDER
On June 19, 1998, the PUC entered its Opinion and Order in Electric Utility's
restructuring proceeding pursuant to Pennsylvania's Customer Choice Act. Under
the terms of the Order, commencing January 1, 1999 Electric Utility is
authorized to recover $32.5 million in stranded costs (on a full revenue
requirements basis which includes all income and gross receipts taxes) over a
four-year period through a CTC (together with carrying charges on unrecovered
balances of 7.94%) and to charge unbundled rates for generation, transmission
and distribution services. Electric Utility's recoverable stranded costs include
$8.7 million for the buy-out of a 1993 power purchase agreement with an
independent power producer. In June 1998, Electric Utility recorded a liability
of $8.7 million for the buy-out of the 1993 power purchase agreement and also
recorded a corresponding CTC regulatory asset.
Under the terms of the Order and in accordance with the Customer Choice Act,
Electric Utility's rates for transmission and distribution services are capped
through July 1, 2001. In addition, Electric Utility generally may not increase
the generation component of prices as long as stranded costs are being recovered
through the CTC. For Electric Utility, this generation rate cap is expected to
extend through December 31, 2002. All of Electric Utility's customers will be
permitted to select an alternative generation supplier as of January 1, 1999.
Customers choosing an alternative supplier will on average receive a generation
"shopping credit" developed from system-wide generation rates of 3.67 cents per
kwh in 1999 and 2000, and 4.3 cents per kwh in 2001 and 2002. The Settlement
Agreement gives Electric Utility the right, subject to prior PUC approval, to
transfer its electric generation assets to a non-regulated affiliate. The
Company's management believes that, upon filing the necessary documents with the
PUC, Electric Utility will receive such approval.
As a result of the Order, in June 1998 Electric Utility discontinued the
application of SFAS 71 as it relates to the electric generation portion of its
business, which assets comprise less than 5% of UGI Utilities' consolidated
assets. The discontinuance of SFAS 71 did not have a material effect on the
Company's financial position or results of operations for the three months ended
June 30, 1998.
The Company continues to evaluate the future financial impact of the Order on
Electric Utility's results of operations. Ultimately, Electric Utility's future
financial results will depend upon a number of factors including, among others,
the number of customers who choose alternative electric generation suppliers and
the ability of Electric Utility to produce or purchase electricity at
competitive prices for its customers in the future. For a more detailed
discussion of the Order, see Note 3 to condensed consolidated financial
statements.
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31
UGI CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS(CONTINUED)
PROPOSED GAS UTILITY CUSTOMER CHOICE
On March 27, 1997, proposed 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. At the request
of the Governor of Pennsylvania, in December 1997 a collaborative group of
industry stakeholders was convened to attempt to further develop the proposed
legislation. To date, this group has failed to reach a consensus. The Company
expects the collaborative process to continue, and it will participate and
monitor developments, as appropriate.
YEAR 2000 MATTERS
The Company, in conjunction with outside consultants, has conducted a detailed
assessment of its critical computer-based systems in order to evaluate its Year
2000 ("Y2K") exposure. The Y2K issue is a result of computer programs being
written using two digits (rather than four) to identify and process a year in a
date field. Computer programs having date sensitive software may recognize date
fields using "00" as the year 1900 rather than the year 2000, resulting in
miscalculations and possible computer-based system failures. The Company has
also identified and is contacting major vendors on which it depends for products
or services in order to assess their Y2K compliance readiness and, if necessary,
to develop appropriate contingency plans.
The Company has a number of information system improvement initiatives under way
which include the installation of integrated financial system software that is
Y2K compliant. In addition, the Company, in conjunction with consultants, has
begun modifying its computer-based systems that are not currently Y2K compliant.
The Company anticipates that its critical computer-based systems will be Y2K
compliant by March 31, 1999.
The Company does not expect the costs to modify its computer-based systems,
which will be expensed as incurred, will have a material effect on its results
of operations or cash flows. However, in the event that the Company or its major
suppliers experience disruptions due to Y2K issues, the Company's operations
could be adversely affected.
ACCOUNTING PRINCIPLES NOT YET ADOPTED
In June 1998, the Financial Accounting Standards Boards (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS
133). SFAS 133
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32
UGI CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS(CONTINUED)
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities and measure the instruments at fair value. The
accounting for changes in fair value of a derivative depends upon the intended
use of such derivative. The Company expects to adopt the provisions of SFAS 133
in fiscal 2000.
The Company utilizes derivative commodity instruments, including futures
contracts, price swap agreements and option contracts, to manage market risk
associated primarily with 1) fluctuations in the price of natural gas sold under
firm commitments and 2) 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. The Company's price risk management policy does not
permit speculative trading of derivative instruments. To the extent such
derivative instruments qualify and are designated as hedges of forecasted
transactions, changes in the fair value will generally be reported as a
component of other comprehensive income and reclassified into earnings when the
forecasted transaction affects earnings. To the extent such derivative qualifies
as a hedge of a firm commitment, any gain or loss would generally be recognized
in earnings together with the offsetting gain or loss on the hedged item.
The impact of the adoption of SFAS 133 on the Company's future financial
condition and results of operations will depend upon a number of factors
including the extent to which the Company uses derivative instruments and the
designation and effectiveness of such derivatives as hedging market risk.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Foster Wheeler Penn Resources, Inc. v. UGI Utilities, Inc. Civil Action
No. 97CV4592. On July 14, 1997, Foster Wheeler Penn Resources, Inc. filed suit
against UGI Utilities, Inc. in United States District Court for the Eastern
District of Pennsylvania alleging, among other things, that UGI Utilities
breached an Agreement for the Sale and Purchase of Net Electrical Energy under
which UGI Utilities had agreed to purchase electricity from a generating
facility yet to be built by Foster Wheeler. On May 20, 1998, UGI Utilities and
Foster Wheeler entered into a settlement agreement whereby UGI Utilities agreed
to pay Foster Wheeler $8.7 million, plus interest, in equal quarterly
installments over the same four year period as the CTC recovery period
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33
UGI CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS(CONTINUED)
established by the Pennsylvania Public Utility Commission (PUC) in UGI
Utilities' electric restructuring proceeding. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Electric Utility
Restructuring Order" in Part I of this Report. The settlement agreement was
contingent upon an order of the PUC permitting UGI Utilities full recovery of
the settlement payments from its customers through the CTC. The PUC entered such
an order on June 19, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits:
10 UGI Corporation Supplemental Executive Retirement Plan
Amended and Restated Effective October 1, 1996
27 Financial Data Schedule
(b) The Company did not file any Current Reports on Form 8-K during the
fiscal quarter ended June 30, 1998.
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34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UGI Corporation
----------------------------------
(Registrant)
Date: August 12, 1998 By: C .L. Ladner
- ---------------------- -----------------------------------------
C. L. Ladner, Senior Vice President -
Finance
Date: August 12, 1998 By: M. J. Cuzzolina
- ---------------------- -----------------------------------------
M. J. Cuzzolina, Vice President -
Accounting and Financial Control
(Principal Accounting Officer)
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35
UGI CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
10 UGI Corporation Supplemental Executive Retirement Plan Amended
and Restated Effective October 1, 1996
27 Financial Data Schedule