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 1-1398
UGI UTILITIES, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1174060
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
UGI UTILITIES, INC.
100 Kachel Boulevard, Suite 400
Green Hills Corporate Center, Reading, PA
(Address of principal executive offices)
19607
(Zip Code)
(610) 796-3400
(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 26,781,785 shares of UGI Utilities, Inc.
Common Stock, par value $2.25 per share, outstanding, all of which were held,
beneficially and of record, by UGI Corporation.
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UGI UTILITIES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGES
-----
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 - 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9 - 19
PART II OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
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PART I FINANCIAL INFORMATION
UGI UTILITIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(Thousands of dollars)
June 30, September 30, June 30,
1998 1997 1997
---- ---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 3,038 $ 12,813 $ 5,299
Accounts receivable (less allowances for doubtful accounts
of $3,419, $3,333 and $4,152, respectively) 32,663 25,309 40,463
Accrued utility revenues 5,986 7,688 6,690
Inventories 20,434 30,645 18,337
Deferred income taxes 9,046 7,179 11,053
Prepaid expenses and other current assets 6,904 4,653 5,778
-------- -------- --------
Total current assets 78,071 88,287 87,620
Property, plant and equipment, at cost (less accumulated depreciation
and amortization of $251,214, $237,293 and $237,402, respectively) 536,329 528,355 518,986
Regulatory income tax asset 45,559 44,438 43,953
Other assets 29,736 20,298 20,587
-------- -------- --------
Total assets $689,695 $681,378 $671,146
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 7,143 $ 17,143 $ 17,143
Current portion of redeemable preferred stock -- 3,000 --
Bank loans 50,700 67,000 43,200
Accounts payable 28,949 45,367 31,032
Other current liabilities 48,657 43,591 60,038
-------- -------- --------
Total current liabilities 135,449 176,101 151,413
Long-term debt 187,166 152,151 161,126
Deferred income taxes 105,073 99,868 98,643
Other noncurrent liabilities 28,140 20,577 20,583
Commitments and contingencies
Redeemable preferred stock 20,000 32,187 35,187
Common stockholder's equity:
Common Stock, $2.25 par value (authorized - 40,000,000 shares;
issued and outstanding - 26,781,785 shares) 60,259 60,259 60,259
Additional paid-in capital 68,249 68,249 68,052
Retained earnings 85,359 71,986 75,883
-------- -------- --------
Total common stockholder's equity 213,867 200,494 204,194
-------- -------- --------
Total liabilities and stockholders' equity $689,695 $681,378 $671,146
======== ======== ========
The accompanying notes are an integral part of these financial statements.
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UGI UTILITIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(Thousands of dollars)
Three Months Ended Nine Months Ended Twelve Months Ended
June 30, June 30, June 30,
-------- -------- --------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
Revenues $ 74,342 $ 88,208 $ 362,139 $ 395,666 $ 427,681 $ 463,649
--------- --------- --------- --------- --------- ---------
Costs and expenses:
Gas, fuel and purchased power 35,109 44,174 188,267 207,797 219,448 241,423
Operating and administrative expenses 26,560 28,995 83,476 88,960 112,390 118,644
Operating and administrative expenses
- related parties 1,160 1,184 3,549 3,830 5,274 3,489
Depreciation and amortization 5,547 5,606 16,408 16,878 20,961 22,296
Miscellaneous income, net (1,852) (728) (3,858) (2,141) (4,494) (2,760)
--------- --------- --------- --------- --------- ---------
66,524 79,231 287,842 315,324 353,579 383,092
--------- --------- --------- --------- --------- ---------
Operating income 7,818 8,977 74,297 80,342 74,102 80,557
Interest expense 4,290 4,187 12,996 12,743 17,125 16,667
--------- --------- --------- --------- --------- ---------
Income before income taxes 3,528 4,790 61,301 67,599 56,977 63,890
Income taxes 1,636 1,820 23,202 25,681 22,085 24,411
--------- --------- --------- --------- --------- ---------
Net income 1,892 2,970 38,099 41,918 34,892 39,479
Dividends on preferred stock 390 691 1,772 2,073 2,463 2,764
--------- --------- --------- --------- --------- ---------
Net income after dividends on preferred stock $ 1,502 $ 2,279 $ 36,327 $ 39,845 $ 32,429 $ 36,715
========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of these financial statements.
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UGI UTILITIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Thousands of dollars)
Nine Months Ended Twelve Months Ended
June 30, June 30,
-------- --------
1998 1997 1998 1997
---- ---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 38,099 $ 41,918 $ 34,892 $ 39,479
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 16,408 16,878 20,961 22,296
Deferred income taxes, net 1,122 (3,688) 5,359 1,544
Other, net 2,872 1,776 2,749 1,340
-------- -------- -------- --------
58,501 56,884 63,961 64,659
Net change in:
Accounts receivable and accrued utility revenues (9,241) (15,676) 4,034 4,165
Inventories 10,211 11,698 (2,097) (392)
Deferred fuel adjustments 4,893 12,996 (3,464) 1,801
Accounts payable (16,418) (8,485) (2,083) (1,222)
Other current assets and liabilities (2,117) 4,859 (7,314) (1,781)
-------- -------- -------- --------
Net cash provided by operating activities 45,829 62,276 53,037 67,230
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment (24,025) (28,251) (37,458) (42,927)
Net costs of property, plant and equipment disposals (366) (493) (757) (898)
Other, net -- 500 -- 515
-------- -------- -------- --------
Net cash used by investing activities (24,391) (28,244) (38,215) (43,310)
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of dividends (24,406) (26,133) (25,096) (48,148)
Issuance of long-term debt 35,000 20,000 35,000 20,000
Repayment of long-term debt (10,000) (18,400) (18,980) (25,543)
Bank loans increase (decrease) (16,300) (7,300) 7,500 33,200
Redemption of Series Preferred Stock (15,507) -- (15,507) --
-------- -------- -------- --------
Net cash used by financing activities (31,213) (31,833) (17,083) (20,491)
-------- -------- -------- --------
Cash and cash equivalents increase (decrease) $ (9,775) $ 2,199 $ (2,261) $ 3,429
======== ======== ======== ========
CASH AND CASH EQUIVALENTS:
End of period $ 3,038 $ 5,299 $ 3,038 $ 5,299
Beginning of period 12,813 3,100 5,299 1,870
-------- -------- -------- --------
Increase (decrease) $ (9,775) $ 2,199 $ (2,261) $ 3,429
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
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UGI UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Thousands of dollars)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include
the accounts of UGI Utilities, Inc. (UGI Utilities) and its wholly
owned subsidiary UGI Development Company (collectively, "the Company").
All significant intercompany accounts and transactions have been
eliminated in consolidation. UGI Utilities is a wholly owned subsidiary
of UGI Corporation (UGI) 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.
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 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 UTILITIES, INC. AND SUBSIDIARIES
(unaudited)
(Thousands of dollars)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 Nine Months Twelve Months
Ended June 30, Ended June 30, Ended June 30,
------------------- ------------------- --------------------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
REVENUES
Gas utility $ 57,892 $ 71,638 $ 307,949 $ 340,733 $ 356,280 $ 391,681
Electric utility 16,450 16,570 54,190 54,933 71,401 71,968
--------- --------- --------- --------- --------- ---------
Total $ 74,342 $ 88,208 $ 362,139 $ 395,666 $ 427,681 $ 463,649
========= ========= ========= ========= ========= =========
OPERATING INCOME (LOSS)
Gas utility $ 7,042 $ 7,951 $ 69,082 $ 75,466 $ 68,406 $ 73,144
Electric utility 1,956 2,186 8,567 8,511 10,745 10,678
Other (20) 24 197 195 225 224
Corporate general (1,160) (1,184) (3,549) (3,830) (5,274) (3,489)
--------- --------- --------- --------- --------- ---------
Total $ 7,818 $ 8,977 $ 74,297 $ 80,342 $ 74,102 $ 80,557
========= ========= ========= ========= ========= =========
DEPRECIATION AND AMORTIZATION
Gas utility $ 4,549 $ 4,597 $ 13,540 $ 13,827 $ 16,907 $ 18,242
Electric utility 998 1,009 2,868 3,051 4,054 4,054
--------- --------- --------- --------- --------- ---------
Total $ 5,547 $ 5,606 $ 16,408 $ 16,878 $ 20,961 $ 22,296
========= ========= ========= ========= ========= =========
IDENTIFIABLE ASSETS
(at period end)
Gas utility $ 593,642 $ 582,387 $ 593,642 $ 582,387 $ 593,642 $ 582,387
Electric utility 95,655 85,614 95,655 85,614 95,655 85,614
Corporate general and other 398 3,145 398 3,145 398 3,145
--------- --------- --------- --------- --------- ---------
Total $ 689,695 $ 671,146 $ 689,695 $ 671,146 $ 689,695 $ 671,146
========= ========= ========= ========= ========= =========
OPERATING STATISTICS
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 UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Thousands of dollars)
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 $32,500 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 $8,692 for the
buy-out of a 1993 power purchase agreement with an independent power
producer. In June 1998, Electric Utility recorded a liability of $8,692
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.
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UGI UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Thousands of dollars)
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 - 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 the
Company's 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. COMMITMENTS AND CONTINGENCIES
UGI Utilities, 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, UGI Utilities 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.
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UGI UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Thousands of dollars)
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. 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 UTILITIES, INC. 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 the Condensed Consolidated Financial
Statements. 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.
1998 THREE-MONTH PERIOD COMPARED WITH 1997 THREE-MONTH PERIOD
- ---------------------------------------------------------------------------------------------------------
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 $ 57.9 $ 71.6 $ (13.7) (19.1)%
Total margin (a) $ 28.9 $ 32.3 $ (3.4) (10.5)%
Operating income $ 7.0 $ 8.0 $ (1.0) (12.5)%
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)%
CORPORATE GENERAL AND OTHER:
Corporate general expenses $ (1.2) $ (1.2) $ -- -%
- ---------------------------------------------------------------------------------------------------------
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.
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UGI UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 $13.7 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 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 $1.0 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
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UGI UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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.
CORPORATE GENERAL EXPENSES. Corporate general expenses, which represent an
allocated share of UGI corporate headquarters' expenses, were $1.2 million in
both the 1998 and 1997 three-month periods.
INTEREST EXPENSE AND INCOME TAXES. Interest expense during the 1998 three-month
period was $4.3 million, comparable with interest expense of $4.2 million
recorded in the prior-year period. The effective income tax rate for the 1998
three-month period was 46.4% compared with a rate of 38.0% in the three months
ended June 30, 1997. The increase in the 1998 tax rate resulted from the use of
a slightly higher year-to-date effective tax rate in June 1998 than was used in
March 1998.
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UGI UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
1998 NINE-MONTH PERIOD COMPARED WITH 1997 NINE-MONTH PERIOD
- ---------------------------------------------------------------------------------------------------------------
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 $ 340.7 $ (32.8) (9.6)%
Total margin (a) $ 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 (a) $ 25.7 $ 26.6 $ (.9) (3.4)%
Operating income $ 8.6 $ 8.5 $ .1 1.2%
CORPORATE GENERAL AND OTHER:
Corporate general expenses $ (3.5) $ (3.8) $ (.3) (7.9)%
Other operating income $ .2 $ .2 $ -- - %
- ---------------------------------------------------------------------------------------------------------------
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 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 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
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15
UGI UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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.
CORPORATE GENERAL. Corporate general expenses were $3.5 million in the 1998
nine-month period compared with $3.8 million in the 1997 nine-month period. The
decrease represents lower levels of UGI corporate headquarters' expenses.
INTEREST EXPENSE AND INCOME TAXES. Interest expense was $13.0 million during the
1998 nine-month period compared with $12.7 million in the 1997 nine-month
period. The increase in interest expense reflects higher average long-term debt
outstanding partially offset by lower average bank loans outstanding. The
effective income tax rate for the 1998 nine-month period was 37.8% compared with
a rate of 38.0% for the nine months ended June 30, 1997.
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16
UGI UTILITIES, INC. 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
- ----------------------------------------------------------------------------------------------------------------
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 $ 356.3 $ 391.7 $ (35.4) (9.0)%
Total margin (a) $ 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 $ 72.0 $ (.6) (.8)%
Total margin (a) $ 34.3 $ 35.0 $ (.7) (2.0)%
Operating income $ 10.7 $ 10.7 $ -- -- %
CORPORATE GENERAL AND OTHER:
Corporate general expenses $ (5.3) $ (3.5) $ 1.8 51.4 %
Other operating income $ .2 $ .2 $ -- -- %
- ----------------------------------------------------------------------------------------------------------------
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 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 $35.4 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.
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17
UGI UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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.
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 $.6 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.
CORPORATE GENERAL EXPENSES. Corporate general expenses were $5.3 million in the
1998 twelve-month period compared with $3.5 million in the 1997 twelve-month
period. The 1997 twelve-month period corporate expenses were lower as a result
of adjustments to incentive compensation accruals recorded in September 1996.
INTEREST EXPENSE AND INCOME TAXES. Interest expense was $17.1 million in the
1998 twelve-month period compared with $16.7 million in the 1997 twelve-month
period. The increase in interest expense during the 1998 twelve-month period is
principally due to higher levels of long-term debt outstanding partially offset
by lower levels of bank loans outstanding at slightly higher average interest
rates. The effective income tax rate for the 1998 twelve-month period was 38.8%
compared with a rate of 38.2% in the prior-year period.
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18
UGI UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
FINANCIAL CONDITION AND LIQUIDITY
CAPITAL STRUCTURE
The Company's debt outstanding at June 30, 1998 totaled $245.0 million compared
with $236.3 million at September 30, 1997. The increase is a result of the
issuance of an aggregate $35 million of notes under UGI Utilities' Series B
Medium-Term Note program offset by a $16.3 million decrease in bank loans
outstanding and $10 million in long-term debt repayments.
CASH FLOWS
The Company's cash flows from operating activities 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 cash flows to be expected for a full year.
OPERATING ACTIVITIES. Cash provided by operating activities was $45.8 million
during the nine months ended June 30, 1998 compared with $62.3 million in the
comparable prior-year period. Cash generated by operations before changes in
operating working capital totaled $58.5 million during the nine months ended
June 30, 1998 compared to $56.9 million in the prior-year period. Changes in
operating working capital during the nine months ended June 30, 1998 required
$12.7 million of operating cash flow principally from a $16.4 million decrease
in accounts payable and a $9.2 million seasonal increase in accounts receivable
and accrued utility revenues partially offset by a $10.2 million seasonal
decrease in inventories and $4.9 million in purchased gas cost overcollections.
In the nine months ended June 30, 1997, changes in operating working capital
generated $5.4 million of operating cash flow.
INVESTING ACTIVITIES. Cash expenditures for property, plant and equipment
totaled $24.0 million in the nine months ended June 30, 1998 compared with $28.3
million in the same period last year. The decrease reflects lower Gas Utility
capital expenditures.
FINANCING ACTIVITIES. 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. Cash flows from financing
activities for the 1998 nine-month period include dividends on preferred stock
of $1.8 million compared with $2.1 million in the 1997 nine-month period.
Dividends during the nine months ended June 30, 1998 and 1997 also include $22.6
million and $24.1 million, respectively, of dividend payments to UGI.
During the 1998 nine-month period, UGI Utilities issued $20 million of
twenty-year 7.25% notes and $15 million of three-year 6.17% notes under its
Series B Medium-Term Note program the proceeds of
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UGI UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
which were used to reduce bank loans. During the nine months ended June 30,
1998, UGI Utilities repaid $10 million of its 8.70% Notes. During the prior-year
period, UGI Utilities repaid $8.4 million of its Series First Mortgage Bonds and
$10 million of its 8.70% Notes. Net repayments under UGI Utilities' revolving
credit agreements totaled $16.3 million in the 1998 nine-month period compared
with $7.3 million in the prior-year period.
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 $32,500 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
$8,692 for the buy-out of a 1993 power purchase agreement with an independent
power producer. In June 1998, Electric Utility recorded a liability of $8,692
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 the Company's 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
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20
UGI UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
competitive prices for its customers in the future. For a more detailed
discussion of the Order, see Note 3 to condensed consolidated financial
statements.
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 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 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.
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21
UGI UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 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.
Although the Company has not generally used derivative instruments, 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
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.
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22
UGI UTILITIES, INC. AND SUBSIDIARIES
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits:
10 Amendment dated June 18, 1998 to Agency Agreement
dated August 1, 1996 between the Company and
Donaldson, Lufkin & Jenrette Securities Corporation
12.1 Computation of ratio of earnings to fixed charges
12.2 Computation of ratio of earnings to combined fixed
charges and preferred stock dividends
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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23
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 Utilities, Inc.
-------------------
(Registrant)
Date: August 12, 1998 By: J. C. Barney
- ---------------------- -------------------------------
J. C. Barney, Vice President -
Finance and Accounting
(Principal Financial Officer)
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24
UGI UTILITIES, INC. AND SUBSIDIARIES
EXHIBIT INDEX
10 Amendment dated June 18, 1998 to Agency Agreement dated August 1, 1996
between the Company and Donaldson, Lufkin & Jenrette Securities
Corporation
12.1 Computation of ratio of earnings to fixed charges
12.2 Computation of ratio of earnings to combined fixed charges and
preferred stock dividends
27 Financial Data Schedule