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, 1999
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, 1999, 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.
TABLE OF CONTENTS
PAGES
-----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1999,
September 30, 1998 and June 30, 1998 1
Condensed Consolidated Statements of Income for the three, nine
and twelve months ended June 30, 1999 and 1998 2
Condensed Consolidated Statements of Cash Flows for the
nine and twelve months ended June 30, 1999 and 1998 3
Notes to Condensed Consolidated Financial Statements 4 - 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12 - 20
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20 - 21
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
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PART I FINANCIAL INFORMATION
UGI UTILITIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(Thousands of dollars)
June 30, September 30, June 30,
1999 1998 1998
-------- ------------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 1,432 $ 4,720 $ 3,038
Accounts receivable (less allowances for doubtful accounts
of $1,852, $1,373 and $3,419, respectively) 32,717 20,258 32,663
Accrued utility revenues 5,773 6,745 5,986
Inventories 21,376 28,460 20,434
Deferred income taxes 7,249 4,070 9,046
Prepaid expenses and other current assets 7,047 6,556 6,904
-------- -------- --------
Total current assets 75,594 70,809 78,071
Property, plant and equipment, at cost (less accumulated depreciation
and amortization of $267,365, $253,608 and $251,214, respectively) 551,278 543,913 536,329
Regulatory assets 59,449 59,318 58,792
Other assets 17,782 16,277 16,503
-------- -------- --------
Total assets $704,103 $690,317 $689,695
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 7,143 $ 7,143 $ 7,143
Bank loans 59,600 68,400 50,700
Accounts payable 30,485 38,847 28,949
Other current liabilities 47,657 29,720 48,657
-------- -------- --------
Total current liabilities 144,885 144,110 135,449
Long-term debt 180,042 180,027 187,166
Deferred income taxes 111,034 105,734 105,073
Other noncurrent liabilities 25,786 29,204 28,140
Commitments and contingencies
Redeemable preferred stock 20,000 20,000 20,000
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 68,559 68,559 68,249
Retained earnings 93,538 82,424 85,359
-------- -------- --------
Total common stockholder's equity 222,356 211,242 213,867
-------- -------- --------
Total liabilities and stockholders' equity $704,103 $690,317 $689,695
======== ======== ========
The accompanying notes are an integral part of these financial statements.
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UGI UTILITIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(Thousands of dollars)
Three Months Ended Nine Months Ended Twelve Months Ended
June 30, June 30, June 30,
---------------------- ---------------------- ----------------------
1999 1998 1999 1998 1999 1998
--------- --------- --------- --------- --------- ---------
Revenues $ 77,338 $ 74,342 $ 357,800 $ 362,139 $ 417,944 $ 427,681
--------- --------- --------- --------- --------- ---------
Costs and expenses:
Gas, fuel and purchased power 33,816 35,109 176,601 188,267 202,965 219,448
Operating and administrative expenses 27,260 26,560 84,651 83,476 112,350 112,390
Operating and administrative expenses
- related parties 1,258 1,160 3,727 3,549 5,015 5,274
Depreciation and amortization 5,800 5,547 17,189 16,408 22,824 20,961
Other income, net (1,595) (1,852) (3,793) (3,858) (4,928) (4,494)
--------- --------- --------- --------- --------- ---------
66,539 66,524 278,375 287,842 338,226 353,579
--------- --------- --------- --------- --------- ---------
Operating income 10,799 7,818 79,425 74,297 79,718 74,102
Interest expense 4,238 4,290 13,000 12,996 17,587 17,125
--------- --------- --------- --------- --------- ---------
Income before income taxes 6,561 3,528 66,425 61,301 62,131 56,977
Income taxes 2,485 1,636 25,149 23,202 23,403 22,085
--------- --------- --------- --------- --------- ---------
Net income 4,076 1,892 41,276 38,099 38,728 34,892
Dividends on preferred stock 388 390 1,163 1,772 1,551 2,463
--------- --------- --------- --------- --------- ---------
Net income after dividends on preferred stock $ 3,688 $ 1,502 $ 40,113 $ 36,327 $ 37,177 $ 32,429
========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of these financial statements.
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UGI UTILITIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Thousands of dollars)
Nine Months Ended Twelve Months Ended
June 30, June 30,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 41,276 $ 38,099 $ 38,728 $ 34,892
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 17,189 16,408 22,824 20,961
Deferred income taxes, net 148 1,122 4,494 5,359
Other, net 1,220 2,872 4,334 2,749
-------- -------- -------- --------
59,833 58,501 70,380 63,961
Net change in:
Accounts receivable and accrued utility revenues (14,014) (9,241) (2,878) 4,034
Inventories 7,084 10,211 (942) (2,097)
Deferred fuel costs 6,870 4,893 (3,764) (3,464)
Accounts payable (8,362) (16,418) 1,536 (2,083)
Other current assets and liabilities 9,634 (2,117) 1,042 (7,314)
-------- -------- -------- --------
Net cash provided by operating activities 61,045 45,829 65,374 53,037
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment (25,014) (24,025) (38,208) (37,458)
Net proceeds (costs) of property, plant and equipment disposals (357) (366) 320 (757)
-------- -------- -------- --------
Net cash used by investing activities (25,371) (24,391) (37,888) (38,215)
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of dividends (30,162) (24,406) (30,849) (25,096)
Issuance of long-term debt - 35,000 - 35,000
Repayment of long-term debt - (10,000) (7,143) (18,980)
Bank loans increase (decrease) (8,800) (16,300) 8,900 7,500
Redemption of Series Preferred Stock - (15,507) - (15,507)
-------- -------- -------- --------
Net cash used by financing activities (38,962) (31,213) (29,092) (17,083)
-------- -------- -------- --------
Cash and cash equivalents decrease $ (3,288) $ (9,775) $ (1,606) $ (2,261)
======== ======== ======== ========
CASH AND CASH EQUIVALENTS:
End of period $ 1,432 $ 3,038 $ 1,432 $ 3,038
Beginning of period 4,720 12,813 3,038 5,299
-------- -------- -------- --------
Decrease $ (3,288) $ (9,775) $ (1,606) $ (2,261)
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
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UGI UTILITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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 subsidiaries (collectively, "the Company" or "we"). We eliminate
all significant intercompany accounts and transactions when we
consolidate. 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 we consider necessary for a fair
statement of the results for the interim periods presented. Such
adjustments consisted only of normal recurring items unless otherwise
disclosed. These financial statements should be read in conjunction
with the financial statements and the related notes included in our
Annual Report on Form 10-K for the year ended September 30, 1998
(Company's 1998 Annual Report). Due to the seasonal nature of our
businesses, the results of operations for interim periods are not
necessarily indicative of the results to be expected for a full year.
Management makes estimates and assumptions when preparing financial
statements in conformity with generally accepted accounting principles.
These estimates and assumptions affect the reported amounts of assets
and liabilities, revenues and expenses, as well as the disclosure of
contingent assets and liabilities. Actual results could differ from
these estimates.
On October 1, 1998, we adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income" (SFAS 130).
SFAS 130 establishes standards for reporting and displaying
comprehensive income and its components in financial statements.
Comprehensive income includes net income and all other nonowner changes
in equity. SFAS 130 also requires reclassification of financial
statements of earlier periods provided for comparative purposes. UGI
Utilities' comprehensive income was the same as its net income for all
periods presented.
In June 1999, the Financial Accounting Standards Board deferred the
effective date of SFAS No. 133 "Accounting for Derivative Instruments
and Hedging Activities" (SFAS
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UGI UTILITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Thousands of dollars)
133) to fiscal years beginning after June 15, 2000. We expect to adopt
SFAS 133 in fiscal 2001.
2. SEGMENT INFORMATION
On October 1, 1998, we adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS 131). SFAS 131
establishes standards for reporting information about operating
segments as well as related disclosures about products and services,
geographic areas, and major customers. In determining our reportable
segments under the provisions of SFAS 131, we examined the way we
organize our businesses internally for making operating decisions and
assessing business performance. Because our gas utility and electric
utility operations are organized and managed as strategic business
units offering different products and services, we have determined that
UGI Utilities has two reportable segments comprising Gas Utility and
Electric Utility.
Although Electric Utility's June 1998 Restructuring Order provides for
the unbundling of prices for electric generation, transmission and
distribution services, we currently manage and evaluate our electric
generation, transmission and distribution operations on a combined
basis. Accordingly, these operations are combined for segment
presentation purposes.
The accounting policies of our two reportable segments are the same as
those described in the Significant Accounting Policies note contained
in the Company's 1998 Annual Report. We evaluate each segment's
performance principally based upon its earnings before interest
expense, income taxes, depreciation and amortization (EBITDA). Although
we use EBITDA to evaluate segment performance, it 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.
No single customer represents more than 5% of the total revenues of
either Gas Utility or Electric Utility. Financial information by
business segment follows:
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UGI UTILITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Thousands of dollars)
2. SEGMENT INFORMATION (continued)
THREE MONTHS ENDED JUNE 30, 1999:
Reportable Segments
---------------------
Inter-
segment Gas Electric All
Total Eliminations utility utility other
-----------------------------------------------------------
Segment revenues $ 77,338 $ - $ 60,392 $ 16,946 $ -
===========================================================
Segment profit (loss):
EBITDA $ 16,599 $ - $ 11,314 $ 5,296 $ (11)
Depreciation and amortization (5,800) - (4,768) (1,032) -
-----------------------------------------------------------
Operating income (loss) 10,799 - 6,546 4,264 (11)
Interest expense (4,238) - (3,523) (715) -
-----------------------------------------------------------
Income (loss) before income taxes $ 6,561 $ - $ 3,023 $ 3,549 $ (11)
===========================================================
Segment assets (at period end) $ 704,103 $ (85) $ 608,550 $ 95,407 $ 231
===========================================================
THREE MONTHS ENDED JUNE 30, 1998:
Reportable Segments
---------------------
Inter-
segment Gas Electric All
Total Eliminations utility utility other
--------------------------------------------------------
Segment revenues $ 74,342 $ - $ 57,892 $ 16,450 $ -
========================================================
Segment profit (loss):
EBITDA $ 13,365 $ - $ 10,617 $ 2,768 $ (20)
Depreciation and amortization (5,547) - (4,549) (998) -
--------------------------------------------------------
Operating income (loss) 7,818 - 6,068 1,770 (20)
Interest expense (4,290) - (3,752) (538) -
--------------------------------------------------------
Income (loss) before income taxes $ 3,528 $ - $ 2,316 $ 1,232 $ (20)
========================================================
Segment assets (at period end) $ 689,695 $ 203 $ 593,642 $ 95,655 $ 195
========================================================
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UGI UTILITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Thousands of dollars)
2. SEGMENT INFORMATION (continued)
NINE MONTHS ENDED JUNE 30, 1999:
Reportable Segments
---------------------
Inter-
segment Gas Electric All
Total Eliminations utility utility other
--------------------------------------------------------
Segment revenues $ 357,800 $ - $ 302,593 $ 55,207 $ -
========================================================
Segment profit (loss):
EBITDA $ 96,614 $ - $ 81,604 $ 15,038 $ (28)
Depreciation and amortization (17,189) - (14,212) (2,977) -
--------------------------------------------------------
Operating income (loss) 79,425 - 67,392 12,061 (28)
Interest expense (13,000) - (11,097) (1,903) -
--------------------------------------------------------
Income (loss) before income taxes $ 66,425 $ - $ 56,295 $ 10,158 $ (28)
========================================================
Segment assets (at period end) $ 704,103 $ (85) $ 608,550 $ 95,407 $ 231
========================================================
NINE MONTHS ENDED JUNE 30, 1998:
Reportable Segments
---------------------
Inter-
segment Gas Electric All
Total Eliminations utility utility other
--------------------------------------------------------
Segment revenues $ 362,139 $ - $ 307,949 $ 54,190 $ -
========================================================
Segment profit:
EBITDA $ 90,705 $ - $ 79,624 $ 10,884 $ 197
Depreciation and amortization (16,408) - (13,540) (2,868) -
--------------------------------------------------------
Operating income 74,297 - 66,084 8,016 197
Interest expense (12,996) - (11,317) (1,679) -
--------------------------------------------------------
Income before income taxes $ 61,301 $ - $ 54,767 $ 6,337 $ 197
========================================================
Segment assets (at period end) $ 689,695 $ 203 $ 593,642 $ 95,655 $ 195
========================================================
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UGI UTILITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Thousands of dollars)
2. SEGMENT INFORMATION (continued)
TWELVE MONTHS ENDED JUNE 30, 1999:
Reportable Segments
---------------------
Inter-
segment Gas Electric All
Total Eliminations utility utility other
--------------------------------------------------------
Segment revenues $ 417,944 $ - $ 344,798 $ 73,146 $ -
========================================================
Segment profit (loss):
EBITDA $ 102,542 $ - $ 84,917 $ 17,714 $ (89)
Depreciation and amortization (22,824) - (18,837) (3,987) -
--------------------------------------------------------
Operating income (loss) 79,718 - 66,080 13,727 (89)
Interest expense (17,587) - (15,049) (2,538) -
--------------------------------------------------------
Income (loss) before income taxes $ 62,131 $ - $ 51,031 $ 11,189 $ (89)
========================================================
Segment assets (at period end) $ 704,103 $ (85) $ 608,550 $ 95,407 $ 231
========================================================
TWELVE MONTHS ENDED JUNE 30, 1998:
Reportable Segments
---------------------
Inter-
segment Gas Electric All
Total Eliminations utility utility other
--------------------------------------------------------
Segment revenues $ 427,681 $ - $ 356,280 $ 71,401 $ -
=======================================================
Segment profit:
EBITDA $ 95,063 $ - $ 80,894 $ 13,944 $ 225
Depreciation and amortization (20,961) - (16,907) (4,054) -
--------------------------------------------------------
Operating income 74,102 - 63,987 9,890 225
Interest expense (17,125) - (14,819) (2,306) -
--------------------------------------------------------
Income before income taxes $ 56,977 $ - $ 49,168 $ 7,584 $ 225
========================================================
Segment assets (at period end) $ 689,695 $ 203 $ 593,642 $ 95,655 $ 195
========================================================
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UGI UTILITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Thousands of dollars)
3. COMMITMENTS AND CONTINGENCIES
The gas distribution business has been one of UGI Utilities' main
businesses since it began in 1882. Prior to the construction of major
natural gas pipelines in the 1950s, gas used for lighting and heating
was produced at manufactured gas plants (MGPs) from processes involving
coal, coke or oil. Some constituents of coal tars produced from this
process are today considered hazardous substances under the Superfund
Law and may be located at these sites.
Several private parties have made claims against UGI Utilities to
recover costs of investigation or remediation of several MGP sites. In
addition, we have identified environmental contamination at several of
our properties and have undertaken investigation and, as appropriate,
remediation of these sites in cooperation with appropriate
environmental agencies or private parties. At sites where a former
subsidiary of UGI Utilities operated an MGP, we believe that 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, a court could find
a parent company liable for environmental damage at sites owned by a
subsidiary company when the parent company either (1) itself operated
the facility causing the environmental damage or (2) 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 MGPs that UGI Utilities owned or directly operated, or that
were owned or operated by former subsidiaries of UGI Utilities, if a
court were to conclude that the subsidiary's separate corporate form
should be disregarded. In many circumstances where UGI Utilities may be
liable, we may not be able to reasonably quantify expenditures because
of a number of factors. These factors include the 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.
UGI Utilities has filed suit against more than fifty insurance
companies alleging that the defendants breached contracts of insurance
by failing to indemnify UGI Utilities for certain environmental costs.
The suit seeks to recover more than $11,000 in costs incurred by UGI
Utilities at various manufactured gas plant sites.
In addition to these environmental matters, there are other pending
claims and legal actions arising in the normal course of our
businesses. We cannot predict with certainty the final results of
environmental and other matters. However, it is reasonably possible
that some of them could be resolved unfavorably to us. Management
believes, after
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UGI UTILITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Thousands of dollars)
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 our financial position. However, such
damages or settlements could be material to our 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.
4. NATURAL GAS COMPETITION LEGISLATION
On June 22, 1999, Pennsylvania's Natural Gas Choice and Competition Act
(Gas Competition Act) was signed into law. The purpose of the Gas
Competition Act is to provide all natural gas consumers in Pennsylvania
with the ability to purchase their gas supplies from the supplier of
their choice. Under the Gas Competition Act, local gas distribution
companies (LDCs) may continue to sell gas to customers. However, such
sales are subject to price regulation by the Pennsylvania Public
Utility Commission (PUC). The Gas Competition Act, in conjunction with
a companion bill, effectively eliminates the gross receipts tax
(currently 5%) on sales of gas commencing January 1, 2000. Gas
distribution services provided by LDCs remain subject to rate
regulation.
Under the Gas Competition Act, all Pennsylvania natural gas consumers
will have the right to choose their natural gas commodity supplier no
later than July 1, 2000. Generally, LDCs will serve as the supplier of
last resort for all residential and small commercial and industrial
customers unless the PUC approves another supplier of last resort.
Natural gas distribution companies are required to make restructuring
filings pursuant to a schedule determined by the PUC. In such
restructuring filings, natural gas distribution companies may seek to
recover most costs resulting from the implementation of the Gas
Competition Act by requesting permission to capitalize and amortize
such costs over appropriate periods. Certain other costs incurred
before June 30, 2002 may be deferred for possible future recovery.
Notwithstanding the ultimate treatment of such costs resulting from the
implementation of the Gas Competition Act, LDCs are precluded from
increasing rates for the recovery of costs, other than gas costs, until
January 1, 2001.
In order to avoid stranded costs associated with interstate pipeline
capacity and storage contracts, the Gas Competition Act requires energy
marketers seeking to serve customers of LDCs to accept release or
assignment of a portion of the LDC's contracts (as well as contracts
for Pennsylvania gas supplies) at contract rates. After July 1, 2002, a
natural gas supplier may petition the PUC to avoid such contract
release or assignment. The PUC, however, could only grant such petition
if certain findings are made and the difference, if any, between
amounts recovered by the LDC in the secondary market for such contracts
and the cost of the contract is authorized for recovery.
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UGI UTILITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Thousands of dollars)
The Company is currently evaluating the impact of the Gas Competition
Act on its operations and is in the process of developing its
restructuring filing. Based upon such evaluation to date, the Company
does not expect the Gas Competition Act will have a material adverse
impact on its financial condition or results of operations.
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UGI UTILITIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ANALYSIS OF RESULTS OF OPERATIONS
The following analyses compare our results of operations for (1) the three
months ended June 30, 1999 (1999 three-month period) with the three months ended
June 30, 1998 (1998 three-month period); (2) the nine months ended June 30, 1999
(1999 nine-month period) with the nine months ended June 30, 1998 (1998
nine-month period); and (3) the twelve months ended June 30, 1999 (1999
twelve-month period) with the twelve months ended June 30, 1998 (1998
twelve-month period). Our results of operations should be read in conjunction
with the segment information included in Note 2 to the Condensed Consolidated
Financial Statements. Although the adoption of SFAS 131 on October 1, 1998 did
not change the operating segments we disclose, Gas Utility and Electric Utility
results for all periods presented now include billed UGI corporate overhead
costs.
1999 THREE-MONTH PERIOD COMPARED WITH 1998 THREE-MONTH PERIOD
- --------------------------------------------------------------------------------------------------------------
Three Months Ended June 30, 1999 1998 Increase
- --------------------------------------------------------------------------------------------------------------
(Millions of dollars)
GAS UTILITY:
Natural gas system throughput - bcf 14.7 14.5 0.2 1.4%
Heating degree days - % warmer
than normal (15.5) (23.7) - -
Revenues $ 60.4 $ 57.9 $ 2.5 4.3%
Total margin (a) $ 30.0 $ 28.9 $ 1.1 3.8%
EBITDA (b) $ 11.3 $ 10.6 $ 0.7 6.6%
Operating income $ 6.5 $ 6.1 $ 0.4 6.6%
ELECTRIC UTILITY:
Electric sales - gwh 198.2 197.7 0.5 0.3%
Revenues $ 16.9 $ 16.5 $ 0.4 2.4%
Total margin (a) $ 10.8 $ 7.5 $ 3.3 44.0%
EBITDA (b) $ 5.3 $ 2.8 $ 2.5 89.3%
Operating income $ 4.3 $ 1.8 $ 2.5 138.9%
- --------------------------------------------------------------------------------------------------------------
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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(b) 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.
GAS UTILITY. Weather in the Gas Utility service territory during the 1999
three-month period was 15.5% warmer than normal but 10.6% cooler than last year.
Total system throughput increased 0.2 bcf primarily as a result of the cooler
weather's effect on firm- residential and commercial customers who use natural
gas for space heating purposes.
The $2.5 million increase in Gas Utility's revenues during the 1999 three-month
period principally reflects a $2.9 million increase in revenues from off-system
sales partially offset by the impact on revenues from core market industrial
customers switching to delivery service. Gas Utility cost of gas was $28.3
million, an increase of $1.4 million from the prior year period, reflecting an
increase in gas costs associated with the higher off-system sales partially
offset by the impact on gas costs of core market industrial customers switching
to delivery service.
Gas Utility total margin during the 1999 three-month period was $1.1 million
higher than in the 1998 three-month period reflecting a $0.7 million increase in
margin from core market customers. In addition, total margin from delivery
service customers was higher in the 1999 three-month period reflecting higher
average delivery service rates and slightly higher volumes transported.
Gas Utility 1999 three-month period EBITDA and operating income increased $0.7
million and $0.4 million, respectively, as the higher total margin and greater
other income was partially offset by a $0.9 million increase in operating
expenses. The increase in operating expenses primarily reflects higher
distribution system maintenance expenses.
ELECTRIC UTILITY. Total electric sales in the 1999 three-month period were
slightly greater than last year. Although Electric Utility's Restructuring Order
pursuant to Pennsylvania's Customer Choice Act permits all customers to choose
their electricity generation supplier effective January 1, 1999, only
approximately 5% of our sales during the 1999 three-month period represents
electricity we distributed for alternate suppliers. Electric Utility revenues
were higher in the 1999 three-month period reflecting in part the slight
increase in sales. Electric Utility cost of sales was $5.5 million, a decline of
$2.7 million, reflecting (1) lower average purchased power costs and (2) the
benefit of $1.5 million resulting from the settlement of disputes arising under
a power supply agreement.
Electric Utility's total margin increased during the 1999 three-month period
reflecting the previously mentioned lower average purchased power costs and a
$1.5 million benefit resulting from the power supply agreement settlement.
Electric Utility EBITDA and operating income also increased during the 1999
three-month period reflecting the higher total margin.
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UGI UTILITIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
1999 NINE-MONTH PERIOD COMPARED WITH 1998 NINE-MONTH PERIOD
- --------------------------------------------------------------------------------------------------------------
Increase
Nine Months Ended June 30, 1999 1998 (Decrease)
- --------------------------------------------------------------------------------------------------------------
(Millions of dollars)
GAS UTILITY:
Natural gas system throughput - bcf 64.1 63.0 1.1 1.7%
Heating degree days - % warmer
than normal (12.4) (15.8) - -
Revenues $ 302.6 $ 307.9 $ (5.3) (1.7)%
Total margin $ 136.3 $ 133.8 $ 2.5 1.9%
EBITDA $ 81.6 $ 79.6 $ 2.0 2.5%
Operating income $ 67.4 $ 66.1 $ 1.3 2.0%
ELECTRIC UTILITY:
Electric sales - gwh 676.6 662.6 14.0 2.1%
Revenues $ 55.2 $ 54.2 $ 1.0 1.8%
Total margin $ 30.7 $ 25.7 $ 5.0 19.5%
EBITDA $ 15.0 $ 10.9 $ 4.1 37.6%
Operating income $ 12.1 $ 8.0 $ 4.1 51.3%
- --------------------------------------------------------------------------------------------------------------
GAS UTILITY. Weather in Gas Utility's service territory in the 1999 nine-month
period was 12.4% warmer than normal compared with weather that was 15.8% warmer
than normal in the prior-year period. As a result of the slightly cooler weather
and an increase in total customers, total system throughput increased 1.1 bcf
(1.7%).
The decrease in Gas Utility revenues is principally due to decreases in revenues
from (1) core-market industrial customers; (2) retail interruptible customers;
and (3) off-system sales. These decreases were partially offset by an increase
in revenues from firm delivery service (including customers previously served
under retail rates) and higher revenues from core market residential and
commercial customers as a result of higher volumes sold. Gas Utility's cost of
gas was $154.4 million in the 1999 nine-month period, a decrease of $7.7 million
from the prior-year period, reflecting the decline in core market industrial and
off-system sales.
The increase in the 1999 nine-month period Gas Utility total margin principally
resulted from (1) a $3.4 million increase in margin from core market residential
and commercial customers and (2) a $2.9 million increase in margin from firm
delivery service customers. These margin increases were reduced by (1) a $2.0
million decline in margin from core market industrial customers (due in large
part to customers switching to firm delivery service); (2) a $1.2 million
decrease in margin from interruptible customers; and (3) a $0.6 million decrease
in other margin. The decline in
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UGI UTILITIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
margin from interruptible customers resulted from a decline in oil prices
relative to natural gas prices.
Gas Utility EBITDA and operating income were slightly higher in the 1999
nine-month period reflecting the increase in total margin. Total operating and
administrative expenses were $1.3 million higher in the 1999 nine-month period.
Operating expenses in the 1999 period reflect higher distribution system
maintenance expenses offset by lower accruals for uncollectible accounts and
medical benefits. Operating expenses in the 1998 nine-month period are net of
$1.6 million of income from an insurance recovery.
ELECTRIC UTILITY. Total electric sales were 14.0 gwh (2.1%) higher in the 1999
nine-month period on weather that was 2.9% colder than last year.
Notwithstanding the colder weather, temperatures were nearly 7% warmer than
normal.
Electric Utility revenues increased $1.0 million in the 1999 nine-month period
as a result of the higher sales. The increase in revenues resulting from the
higher sales was partially reduced by lower revenues from Electric Utility
customers who purchased the electric generation portion of their electric
service from other suppliers. Electric Utility cost of sales was $22.2 million,
a decrease of $3.9 million, as the impact of the higher sales was more than
offset by (1) the benefit of $1.5 million resulting from a power supply
agreement settlement entered into during the 1999 three-month period and (2)
lower average purchased power costs.
Electric Utility's total margin increased $5.0 million as a result of (1) lower
average purchased power costs; (2) the impact of the power supply agreement
settlement; and (3) the higher sales. Electric Utility EBITDA and operating
income increased as a result of the higher total margin partially offset by a
decrease in other income.
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18
UGI UTILITIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
1999 TWELVE-MONTH PERIOD COMPARED WITH 1998 TWELVE-MONTH PERIOD
- -----------------------------------------------------------------------------------------------------------
Increase
Twelve Months Ended June 30, 1999 1998 (Decrease)
- -----------------------------------------------------------------------------------------------------------
(Millions of dollars)
GAS UTILITY:
Natural gas system throughput - bcf 76.0 74.9 1.1 1.5%
Heating degree days - % warmer
than normal (12.9) (15.6) - -
Revenues $ 344.8 $ 356.3 $ (11.5) (3.2)%
Total margin $ 159.8 $ 157.3 $ 2.5 1.6%
EBITDA $ 84.9 $ 80.9 $ 4.0 4.9%
Operating income $ 66.1 $ 64.0 $ 2.1 3.3%
ELECTRIC UTILITY:
Electric sales - gwh 890.4 863.8 26.6 3.1%
Revenues $ 73.1 $ 71.4 $ 1.7 2.4%
Total margin $ 39.0 $ 34.3 $ 4.7 13.7%
EBITDA $ 17.7 $ 13.9 $ 3.8 27.3%
Operating income $ 13.7 $ 9.9 $ 3.8 38.4%
- -----------------------------------------------------------------------------------------------------------
GAS UTILITY. Weather in Gas Utility's service territory during the 1999
twelve-month period was 12.9% warmer than normal but 3.2% colder than the 1998
twelve-month period. As a result of the slightly colder weather and an increase
in our customer base, total system throughput increased 1.1 bcf (1.5%).
The decrease in Gas Utility's revenues principally reflects (1) an $8.6 million
decrease in revenues from core market industrial customers (due largely to
customers switching to delivery service); (2) a $5.2 million decrease in
revenues from off-system sales; and (3) a $2.8 million decrease in revenues from
interruptible retail customers. These decreases were offset by a $2.6 million
increase in revenues from delivery service customers and an increase in revenues
from core market residential customers resulting from the higher sales. Cost of
gas sold for the 1999 twelve-month period was $171.9 million, a decrease of
$13.6 million from the prior year twelve-month period. The decline is a result
of the lower off-system sales, lower average purchased gas costs, and the impact
of the lower sales to core market industrial customers.
The increase in Gas Utility's 1999 twelve-month period total margin includes a
$3.2 million increase in total margin from core market residential and
commercial customers and a $3.3 million increase in total margin from firm
delivery service customers. These increases were primarily reduced by a $2.4
million decline in margin from core market industrial customers and a $1.5
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19
UGI UTILITIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
million reduction in margin from interruptible customers reflecting a less
favorable price spread between natural gas and oil.
EBITDA in the 1999 twelve-month period was higher than in the 1998 twelve-month
period reflecting the higher total margin, a $0.9 million increase in other
income, and slightly lower operating expenses due in part to lower expenses for
uncollectible accounts. Operating income also increased in the 1999 twelve-month
period reflecting the increase in EBITDA offset by higher charges for
depreciation.
ELECTRIC UTILITY. Total electric sales during the 1999 twelve-month period were
higher than during the prior year as a result of (1) slightly colder
heating-season weather; (2) warmer summer air conditioning weather; and (3) an
increase in the number of customers. Electric Utility revenues increased $1.7
million as the greater revenue from the higher sales was partially offset by the
decline in revenues from customers choosing alternate electric generation
suppliers.
Electric Utility cost of sales was $31.1 million in the 1999 twelve-month
period, a decrease of $2.9 million from the prior year, as the impact of the
higher sales was more than offset by the benefit of $1.5 million resulting from
the previously mentioned power supply agreement settlement and lower average
purchased power costs.
Electric Utility's total margin increased $4.7 million as a result of (1) lower
average purchased power costs; (2) the impact of the power supply agreement
settlement; and (3) the higher sales. Electric Utility EBITDA and operating
income increased as a result of the higher margin partially offset by a decrease
in other income.
FINANCIAL CONDITION AND LIQUIDITY
CAPITAL STRUCTURE
The Company's debt outstanding at June 30, 1999 totaled $246.8 million compared
with $255.6 million at September 30, 1998. Included in these amounts are bank
loans of $59.6 million and $68.4 million, respectively. Under our revolving
credit agreements, we may borrow up to $97 million.
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 generally lowest during the
first and fourth fiscal quarters. Accordingly, cash flows from operations for
the nine months ended June 30, 1999 are not necessarily indicative of cash flows
to be expected for a full year.
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20
UGI UTILITIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
OPERATING ACTIVITIES. Cash provided by operating activities was $61.0 million
during the nine months ended June 30, 1999. In the prior-year period, operating
activities provided $45.8 million of cash. Changes in operating working capital
during the nine months ended June 30, 1999 provided $1.2 million of operating
cash flow while changes in operating working capital during the nine months
ended June 30, 1998 used $12.7 million of operating cash flow. Cash generated by
operating activities before changes in operating working capital totaled $59.8
million during the nine months ended June 30, 1999, slightly higher than the
$58.5 million generated in the prior-year period.
INVESTING ACTIVITIES. We spent $25.0 million for property, plant and equipment
in the nine months ended June 30, 1999 compared with $24.0 million in the nine
months ended June 30, 1998. The increase reflects slightly higher capital
expenditures in both the Gas Utility and Electric Utility.
FINANCING ACTIVITIES. Cash flows from financing activities for the 1999
nine-month period include dividends on preferred stock of $1.2 million compared
with $1.8 million of such dividends in the 1998 nine-month period. The lower
preferred stock dividends in the current-year period resulted from the
redemption of $15 million face value of Series Preferred Stock in April 1998.
During the 1999 nine-month period, we paid $29.0 million of dividends to our
parent company, UGI. In the prior-year nine-month period, we paid $22.6 million
of dividends to UGI.
Net repayments under UGI Utilities revolving credit agreements totaled $8.8
million in the 1999 nine-month period compared with net repayments of $16.3
million in the prior-year period. During the nine months ended June 30, 1998,
UGI Utilities issued $35 million of notes under its Series B Medium-Term Note
program. There were no issuances of long-term debt during the 1999 nine-month
period.
UGI STRATEGIC INITIATIVES
On July 28, 1999, the parent company of UGI Utilities, UGI Corporation,
announced several strategic and financial initiatives designed to increase
shareholder value and position UGI for growth, including a focus on long-term
value creation through growth of UGI's existing propane, natural gas and
electric businesses. Concurrently, it announced the termination of its
previously announced intention to sell UGI Utilities.
NATURAL GAS COMPETITION LEGISLATION
On June 22, 1999, Pennsylvania's Natural Gas Choice and Competition Act (Gas
Competition Act) was signed into law. The purpose of the Gas Competition Act is
to provide all natural gas consumers in Pennsylvania with the ability to
purchase their gas supplies from the supplier of their choice. Under the Gas
Competition Act, all Pennsylvania natural gas consumers will have the right to
choose their natural gas commodity supplier by July 1, 2000. Local gas
distribution companies (LDCs) may continue to sell gas to customers. However,
such sales are subject to price regulation by the Pennsylvania Public Utility
Commission (PUC). The Gas Competition Act, in conjunction with a
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UGI UTILITIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
companion bill, effectively eliminates the gross receipts tax (currently 5%) on
sales of gas commencing January 1, 2000. Gas distribution services provided by
LDCs remain subject to rate regulation.
The Company is currently evaluating the impact of the Gas Competition Act on its
operations and is in the process of developing its restructuring filing. Based
upon such evaluation to date, the Company does not expect the gas Competition
Act will have a material adverse impact on its financial condition or results of
operations. For a more detailed discussion of Gas Competition Act, see Note 4 to
Condensed Consolidated Financial Statements.
YEAR 2000 MATTERS
The Year 2000 ("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, computer-controlled systems and equipment with embedded
software may recognize date fields using "00" as the year 1900 rather than the
year 2000. If uncorrected, miscalculations and possible computer-based system
failures could result which might disrupt business operations. We are
designating the following information as our "Year 2000 Readiness Disclosure."
Recognizing the potential business consequences of the Y2K issue, we conducted a
detailed assessment of our critical, date sensitive, computer-based systems to
identify those systems that were not Y2K compliant and developed a program to
modify those systems that were not otherwise scheduled for replacement prior to
the year 2000. Our Y2K compliance efforts focused on our ability to continue to
perform three critical operating functions: (1) obtain products to sell; (2)
provide service to our customers; and (3) bill customers and pay our vendors and
employees.
Those systems that we assessed included (1) our information technology ("IT")
systems such as computer hardware and software we use in the operation of our
business and (2) our non-IT systems that contain embedded systems with
potentially date sensitive components such as micro-controllers contained in
various equipment and facilities. Among these systems are our customer
information systems, financial systems and distribution control systems. In
order to identify and modify those systems that we determined were not Y2K
compliant, we used internal resources as well as outside consultants and vendor
representatives. In addition to assessing, identifying and modifying our own
systems, we developed and implemented a program to attempt to determine the Y2K
compliance status of third parties, including our key suppliers and vendors, and
certain of our customers.
We have successfully completed the modification and testing of all our critical
IT and non-IT systems that were not Y2K compliant including Electric Utility's
System Control and Data Acquisition (SCADA) system. This system was installed
during July 1999.
As previously mentioned, in addition to assuring our IT and non-IT systems are
Y2K compliant, we developed and implemented a program to assess the readiness of
our key suppliers and third-
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UGI UTILITIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
party providers, including suppliers of interstate transportation capacity,
natural gas producers and electricity interchange providers. Although none of
our products or services are of themselves date sensitive, as a utility company
we are dependent upon other companies whose IT and non-IT systems may not be Y2K
compliant. We have completed our program to contact and inquire of the readiness
of these key suppliers and vendors. We have evaluated the responses received
from our critical vendors and suppliers and to the extent we were not satisfied
with the responses, or have determined that the responses indicate a lack of Y2K
readiness, we have developed contingency plans. The major elements of these
contingency plans are based upon the use of manual back-up systems, additional
staffing, and alternative supply sources. These contingency plans attempt to
mitigate the potential impact of Y2K noncompliance by our key suppliers and
vendors. However, these plans cannot assure that business disruptions that may
be caused by key suppliers or third-party providers will not have a material
adverse impact on our operations. Gas Utility and Electric Utility have
completed their contingency plans.
In addition, there are other Y2K risks which are beyond our control any of which
could have a material adverse impact on our operations. Such risks include, but
are not limited to, the failure of utility and telecommunications companies to
provide service and the failure of financial institutions to process
transactions.
Incremental costs associated with our Y2K efforts, which we expense as incurred,
have not had a material effect on our results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risk exposures are market prices for natural gas and electric
power and changes in interest rates.
Although Gas Utility is subject to changes in the price of natural gas, the
current regulatory framework allows Gas Utility to recover prudently incurred
gas costs from its customers. In addition, the Gas Competition Act permits LDCs
to recover prudently incurred costs of gas sold to customers including requiring
customers transferring to alternate natural gas suppliers to pay or receive
undercollections or overcollections of gas costs for an appropriate period of
time following such transfer. Consequently, there currently is limited commodity
price risk associated with Gas Utility due to the current and projected
rate-making structure.
Because the sources and costs of our electric power vary from period to period
and because we discontinued regulatory accounting for the electric generation
portion of our business in June 1998, Electric Utility's quarterly results have
been, and future results are likely to be, more volatile. In addition, Electric
Utility purchases power it does not otherwise produce, representing more than 50
percent of its power needs, under power supply arrangements with other producers
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23
UGI UTILITIES, INC.
and, to a much lesser extent, on the spot market. Spot market prices for power
can be volatile, especially during peak demand periods. Because Electric
Utility's generation rates are currently capped during the period that stranded
costs are being recovered through the CTC (which period is expected to extend
until December 31, 2002), increases in costs to purchase or produce its electric
power needs will adversely impact Electric Utility's results.
We have interest rate exposure associated with borrowings under our revolving
credit agreements. These agreements provide for interest rates on borrowings
which are indexed to short-term market interest rates. Based upon the average
level of borrowings outstanding under these agreements during the twelve months
ended June 30, 1999, an increase in short-term interest rates of 50 basis points
(0.5%) would have increased annual interest expense by approximately $0.3
million.
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits:
10 Summary of Terms of UGI Corporation 1999 Restricted
Stock Awards incorporated by reference to Exhibit 10
to UGI Corporation Quarterly Report on Form 10-Q for
quarter ended June 30, 1999
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 filed a Current Report on Form 8-K dated May 25,
1999, reporting the suspension of the sale of the Registrant
in Items 5 and 7.
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24
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 13, 1999 By: J. C. Barney
- ---------------------- ---------------------------------------
J. C. Barney, Senior Vice President -
Finance
(Principal Financial Officer)
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25
UGI UTILITIES, INC. AND SUBSIDIARIES
EXHIBIT INDEX
10 Summary of Terms of UGI Corporation 1999 Restricted Stock Awards
incorporated by reference to Exhibit 10 to UGI Corporation Quarterly
Report on Form 10-Q for quarter ended June 30, 1999
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