<PAGE> 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 December 31, 1997
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 January 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.
<PAGE> 2
UGI UTILITIES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGES
-----
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 1997,
September 30, 1997 and December 31, 1996 1
Condensed Consolidated Statements of Income for the
three and twelve months ended December 31, 1997 and 1996 2
Condensed Consolidated Statements of Cash Flows for the
three and twelve months ended December 31, 1997 and 1996 3
Notes to Condensed Consolidated Financial Statements 4 - 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9 - 15
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
</TABLE>
-i-
<PAGE> 3
PART I FINANCIAL INFORMATION
UGI UTILITIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(Thousands of dollars)
<TABLE>
<CAPTION>
December 31, September 30, December 31,
1997 1997 1996
------------ -------------- ------------
<S> <C> <C> <C>
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 2,862 $ 12,813 $ 3,546
Accounts receivable (less allowances for doubtful accounts
of $3,084, $3,333 and $3,585, respectively) 49,691 25,309 49,821
Accrued utility revenues 23,052 7,688 22,443
Inventories 26,843 30,645 28,426
Deferred income taxes 7,887 7,179 6,193
Prepaid expenses and other current assets 1,319 4,653 173
------------ ----------- ----------
Total current assets 111,654 88,287 110,602
Property, plant and equipment, at cost (less accumulated depreciation
and amortization of $241,632, $237,293 and $227,832, respectively) 531,385 528,355 511,288
Regulatory income tax asset 44,828 44,438 43,257
Other assets 20,349 20,298 21,565
------------ ----------- ----------
Total assets $ 708,216 $ 681,378 $ 686,712
============ =========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------
Current liabilities:
Current maturities of long-term debt $ 17,143 $ 17,143 $ 17,143
Current portion of redeemable preferred stock 3,000 3,000 -
Bank loans 62,700 67,000 69,300
Accounts payable 40,614 45,367 41,259
Other current liabilities 55,255 43,591 49,812
------------ ----------- ----------
Total current liabilities 178,712 176,101 177,514
Long-term debt 172,156 152,151 151,116
Deferred income taxes 101,816 99,868 96,742
Other noncurrent liabilities 19,967 20,577 21,218
Commitments and contingencies
Redeemable preferred stock 32,187 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 74,870 71,986 76,624
------------ ----------- ----------
Total common stockholder's equity 203,378 200,494 204,935
------------ ----------- ----------
Total liabilities and stockholders' equity $ 708,216 $ 681,378 $ 686,712
============ =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 1 -
<PAGE> 4
UGI UTILITIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(Thousands of dollars)
<TABLE>
<CAPTION>
Three Months Ended Twelve Months Ended
December 31, December 31,
------------------------- -------------------------
1997 1996 1997 1996
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues $135,464 $134,154 $462,518 $472,409
---------- ---------- ----------- ----------
Costs and expenses:
Gas, fuel and purchased power 72,497 69,295 242,180 249,059
Operating and administrative expenses 27,075 28,336 116,613 119,426
Operating and administrative expenses
- related parties 1,098 1,246 5,407 3,596
Depreciation and amortization 5,351 5,564 21,218 21,858
Miscellaneous income, net (886) (630) (3,033) (1,972)
---------- ---------- ----------- ----------
105,135 103,811 382,385 391,967
---------- ---------- ----------- ----------
Operating income 30,329 30,343 80,133 80,442
Interest expense 4,321 4,242 16,951 16,092
---------- ---------- ----------- ----------
Income before income taxes 26,008 26,101 63,182 64,350
Income taxes 9,800 9,916 24,448 24,477
---------- ---------- ----------- ----------
Net income 16,208 16,185 38,734 39,873
Dividends on preferred stock 691 691 2,764 2,765
---------- ---------- ----------- ----------
Net income after dividends on preferred stock $ 15,517 $ 15,494 $ 35,970 $ 37,108
========== ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 2 -
<PAGE> 5
UGI UTILITIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Thousands of dollars)
<TABLE>
<CAPTION>
Three Months Ended Twelve Months Ended
December 31, December 31,
--------------------------- -------------------------
1997 1996 1997 1996
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 16,208 $ 16,185 $ 38,734 $ 39,873
Adjustments to reconcile net income to net cash provided (used)
by operating activities:
Depreciation and amortization 5,351 5,564 21,218 21,858
Deferred income taxes, net 484 964 69 5,711
Other, net 878 (739) 5,039 2,498
---------- ----------- ---------- -----------
22,921 21,974 65,060 69,940
Net change in:
Accounts receivable and accrued utility revenues (40,745) (38,171) (4,975) (5,564)
Inventories 3,802 1,609 1,583 (9,590)
Deferred fuel adjustments 2,197 1,225 5,611 (9,502)
Pipeline transition and producer settlement
recoveries (costs), net 180 (380) (1,209) 2,022
Accounts payable (4,753) 1,742 (645) 3,119
Other current assets and liabilities 12,523 11,878 307 4,632
---------- ----------- ---------- -----------
Net cash provided (used) by operating activities (3,875) (123) 65,732 55,057
---------- ----------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment (8,465) (9,594) (40,555) (39,149)
Net proceeds (costs) of property, plant and equipment disposals 13 (46) (825) (1,146)
Other, net - 500 - 740
---------- ----------- ---------- -----------
Net cash used by investing activities (8,452) (9,140) (41,380) (39,555)
---------- ----------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of dividends (13,324) (691) (39,456) (24,089)
Issuance of long-term debt 20,000 - 40,000 -
Repayment of long-term debt - (8,400) (18,980) (15,543)
Bank loans increase (decrease) (4,300) 18,800 (6,600) 24,800
Redemption of Series Preferred Stock - - - (15)
---------- ----------- ---------- -----------
Net cash provided (used) by financing activities 2,376 9,709 (25,036) (14,847)
---------- ----------- ---------- -----------
Cash and cash equivalents increase (decrease) $ (9,951) $ 446 $ (684) $ 655
========== =========== ========== ===========
CASH AND CASH EQUIVALENTS:
End of period $ 2,862 $ 3,546 $ 2,862 $ 3,546
Beginning of period 12,813 3,100 3,546 2,891
---------- ----------- ---------- -----------
Increase (decrease) $ (9,951) $ 446 $ (684) $ 655
========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 3 -
<PAGE> 6
UGI UTILITIES, INC. AND SUBSIDIARIES
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 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.
- 4 -
<PAGE> 7
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:
<TABLE>
<CAPTION>
Three Months Ended Twelve Months Ended
December 31, December 31,
------------------------- --------------------------
1997 1996 1997 1996
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
REVENUES
- --------
Gas utility $ 116,831 $ 115,772 $ 390,123 $ 401,618
Electric utility 18,633 18,382 72,395 70,791
------------ ---------- ------------ ------------
Total $ 135,464 $ 134,154 $ 462,518 $ 472,409
============ ========== ============ ============
OPERATING INCOME (LOSS)
- -----------------------
Gas utility $ 28,305 $ 28,582 $ 74,513 $ 74,517
Electric utility 3,134 2,980 10,843 9,438
Other (12) 27 184 83
Corporate general (1,098) (1,246) (5,407) (3,596)
------------ ---------- ------------ ------------
Total $30,329 $ 30,343 $ 80,133 $ 80,442
============ ========== ============ ============
DEPRECIATION AND AMORTIZATION
- -----------------------------
Gas utility $ 4,475 $ 4,547 $ 17,122 $ 17,823
Electric utility 876 1,017 4,096 4,034
Corporate general and other - - - 1
------------ ---------- ------------ ------------
Total $ 5,351 $ 5,564 $ 21,218 $ 21,858
============ ========== ============ ============
IDENTIFIABLE ASSETS
- -------------------
(at period end)
Gas utility $ 620,933 $ 596,070 $ 620,933 $ 596,070
Electric utility 86,604 86,391 86,604 86,391
Corporate general and other 679 4,251 679 4,251
------------ ---------- ------------ ------------
Total $ 708,216 $ 686,712 $ 708,216 $ 686,712
============ ========== ============ ============
OPERATING STATISTICS
- --------------------
Natural gas system throughput -
billions of cubic feet 22.7 24.6 78.3 84.9
Electric sales - millions of kilowatt hours 227.8 223.7 872.5 883.6
</TABLE>
- 5 -
<PAGE> 8
UGI UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Thousands of dollars)
3. ELECTRICITY GENERATION CUSTOMER CHOICE AND COMPETITION ACT
On August 7, 1997, Electric Utility filed with the Pennsylvania Public
Utility Commission (PUC) its restructuring plan pursuant to the
Electricity Generation Customer Choice and Competition Act (Customer
Choice Act). The restructuring plan includes a claim for the recovery
of $34,426 for stranded costs during the period January 1, 1999
through December 31, 2002. The claim is primarily for the recovery of:
(1) plant investments in excess of estimated competitive market value
and electric generation facility retirement costs; (2) potential costs
associated with existing power purchase agreements; and (3) regulatory
assets (principally income taxes of approximately $500) recoverable
from ratepayers under current regulatory practice. The claim also
seeks to establish a recovery mechanism that would permit the recovery
of up to an additional $28,000 of costs associated with the buyout or
implementation of a December 1993 agreement to purchase power from an
independent power producer. The PUC is expected to take action on
Electric Utility's filing in June 1998.
The Customer Choice Act also authorized the PUC to implement pilot
customer choice programs for up to five percent of the peak load of
each customer class. In accordance with PUC directives, Electric
Utility implemented such a pilot program effective November 1, 1997.
The implementation of the pilot program did not have a material effect
on Electric Utility's results of operations.
Given the changing regulatory environment in the electric utility
industry, the Company continues to evaluate its ability to apply the
provisions of Statement of Financial Accounting Standards (SFAS) No.
71, "Accounting for the Effects of Certain Types of Regulation" (SFAS
71) as it relates to its electric generation operations. SFAS 71
permits the recording of costs (regulatory assets) that have been, or
are expected to be, allowed in the ratesetting process in a period
different from the period in which such costs would be charged to
expense by an unregulated enterprise. The Company believes its
electric generation assets and related regulatory assets continue to
satisfy the criteria of SFAS 71. If such electric generation assets no
longer meet the criteria of SFAS 71, any related regulatory assets
would be written-off unless some form of transition cost recovery is
established by the PUC which would meet the requirements under
generally accepted accounting principles for continued accounting as
regulatory assets. Any generation-related, long-lived fixed and
intangible assets would be evaluated for impairment under the
provisions of SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
- 6 -
<PAGE> 9
UGI UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Thousands of dollars)
Based upon an evaluation of the various factors and conditions
affecting future cost recovery, the Company does not expect the
Customer Choice Act to have a material adverse effect on its financial
condition or results of operations.
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 caused by subsidiary companies when the parent company
exercised such substantial control over the subsidiary that the court
concluded that the parent company either (i) itself operated the
facility causing the environmental damage or (ii) otherwise so
controlled the subsidiary that the subsidiary's separate corporate
form should be disregarded. There could be, therefore, significant
future costs of an uncertain amount associated with environmental
damage caused by manufactured gas plants that UGI Utilities owned or
directly operated or that were owned or operated by former
subsidiaries of UGI Utilities, if a court were to conclude that the
level of control exercised by UGI Utilities over the subsidiary
satisfies the standard described above. In many circumstances where
UGI Utilities may be liable, expenditures may not be reasonably
quantifiable because of a number of factors including various costs
associated with potential remedial alternatives, the unknown number of
other potentially responsible parties involved and their ability to
contribute to the costs of investigation and remediation, and changing
environmental laws and regulations.
The Company's policy is to accrue environmental investigation and
cleanup costs when it is probable that a liability exists and the
amount or range of amounts can be reasonably estimated. The Company
intends to pursue recovery of any incurred costs through all
appropriate means, including regulatory relief, although such recovery
cannot be assured. 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.
- 7 -
<PAGE> 10
UGI UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Thousands of dollars)
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.
- 8 -
<PAGE> 11
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 December 31, 1997 (1997 three-month period) with the three
months ended December 31, 1996 (1996 three-month period) and the twelve months
ended December 31, 1997 (1997 twelve-month period) with the twelve months ended
December 31, 1996 (1996 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.
1997 THREE-MONTH PERIOD COMPARED WITH 1996 THREE-MONTH PERIOD
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Increase
Three Months Ended December 31, 1997 1996 (Decrease)
- ---------------------------------------------------------------------------------------------------------
(Millions of dollars)
<S> <C> <C> <C> <C>
GAS UTILITY:
Natural gas system throughput - bcf 22.7 24.6 (1.9) (7.7)%
Degree days - % warmer than normal (1.6) (3.2) - -
Revenues $116.8 $115.8 $ 1.0 .9%
Total margin (a) $ 48.6 $ 50.6 $ (2.0) (4.0)%
Operating income $ 28.3 $ 28.6 $ (.3) (1.0)%
ELECTRIC UTILITY:
Electric sales - gwh 227.8 223.7 4.1 1.8%
Revenues $ 18.6 $ 18.4 $ .2 1.1%
Total margin (a) $ 8.9 $ 8.8 $ .1 1.1%
Operating income $ 3.1 $ 3.0 $ .1 3.3%
CORPORATE GENERAL EXPENSES $ (1.1) $ (1.2) $ (.1) (8.3)%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
bcf - billions of cubic feet. gwh - millions of kilowatt hours.
(a) Gas and Electric utilities' total margin represents total revenues
less cost of sales and revenue-related taxes.
GAS UTILITY. Weather in the Gas Utility service area during the three months
ended December 31, 1997 was 1.6% warmer than normal but 1.6% colder than
weather in the prior-year period.
- 9 -
<PAGE> 12
UGI UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Notwithstanding the colder weather, total system throughput decreased 7.7%
during the 1997 three-month period principally reflecting a decrease in
low-margin interruptible delivery service volumes resulting from the January
1997 shut-down of a gas-fired cogeneration facility. Volumes of gas sold to
firm-residential, firm-commercial and firm-industrial (collectively, "core
market") customers were comparable with the prior year.
The increase in Gas Utility's total revenues during the 1997 three-month period
is due principally to a $1.4 million increase in revenues from sales to
customers outside Gas Utility's distribution system (off-system sales) and a
$.8 million increase in core market revenues (resulting primarily from higher
purchased gas cost (PGC) rates) partially offset by a decrease in revenues from
interruptible customers. Cost of gas sold by the Gas Utility was $63.6 million
during the 1997 three-month period, an increase of $3.0 million from the
prior-year period, reflecting the increase in off-system sales and higher PGC
rates.
Gas Utility total margin during the 1997 three-month period was $2.0 million
lower than in the prior-year period principally reflecting a $1.7 million
decrease in total margin from interruptible customers. Total margin from Gas
Utility core market customers during the 1997 three-month period was virtually
unchanged from the prior year.
Although 1997 three-month period total margin decreased $2.0 million from the
prior-year period, Gas Utility operating income decreased only $.3 million
principally as a result of lower operating expenses and slightly higher
miscellaneous income. Operating and administrative expenses decreased $1.3
million during the 1997 three-month period primarily as a result of income from
an expected insurance recovery as well as a decrease in distribution system
maintenance expenses partially offset by higher gas supply expenses.
ELECTRIC UTILITY. Electric Utility sales increased slightly during the 1997
three-month period on weather which was 4.3% colder than last year. Electric
Utility revenues and cost of sales increased $.2 million reflecting the effects
of the higher sales. Pursuant to the provisions of the Customer Choice Act,
Electric Utility's rates were capped at levels in effect on January 1, 1997.
Consequently, the rates Electric Utility could charge customers were the same
in both periods.
Electric Utility total margin and operating income were essentially equal with
the prior-year period. Although Electric Utility's rates, including rates
associated with the recovery of energy costs, have been capped as of January 1,
1997, such rate caps did not materially affect Electric Utility results during
the 1997 three-month period. In addition, the implementation of Electric
Utility's pilot program pursuant to the Customer Choice Act did not have a
material effect on Electric Utility's results of operations.
CORPORATE GENERAL EXPENSES. Corporate general expenses, which represent an
allocated share of UGI corporate headquarters' expenses, were $1.1 million in
the 1997 three-month period
- 10 -
<PAGE> 13
UGI UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
compared with $1.2 million in the 1996 three-month period. The decrease
reflects lower levels of UGI corporate headquarters' expenses.
INTEREST EXPENSE AND INCOME TAXES. Interest expense during the 1997
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 1997 three-month period was 37.7% compared with a rate of 38.0% in the
three months ended December 31, 1996.
1997 TWELVE-MONTH PERIOD COMPARED WITH 1996 TWELVE-MONTH PERIOD
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Increase
Twelve Months Ended December 31, 1997 1996 (Decrease)
- ---------------------------------------------------------------------------------------------------------
(Millions of dollars)
<S> <C> <C> <C> <C>
GAS UTILITY:
Natural gas system throughput - bcf 78.3 84.9 (6.6) (7.8)%
Degree days - % colder (warmer)
than normal (4.2) .9 - -
Revenues $390.1 $401.6 $(11.5) (2.9)%
Total margin (a) $166.7 $171.0 $ (4.3) (2.5)%
Operating income $ 74.5 $ 74.5 $ - -%
ELECTRIC UTILITY:
Electric sales - gwh 872.5 883.6 (11.1) (1.3)%
Revenues $ 72.4 $ 70.8 $ 1.6 2.3%
Total margin (a) $ 35.3 $ 33.8 $ 1.5 4.4%
Operating income $ 10.8 $ 9.4 $ 1.4 14.9%
CORPORATE GENERAL EXPENSES $ (5.4) $ (3.6) $ 1.8 50.0%
- ------------------------------------------------------------------------------------------------------
</TABLE>
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 1997
twelve-month period was warmer than in the 1996 twelve-month period. Total
system throughput declined principally as a result of the effects of the warmer
weather on core market sales as well as a decrease in low-margin interruptible
delivery service volumes associated with the January 1997 shut-down of a
gas-fired cogeneration facility.
- 11 -
<PAGE> 14
UGI UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Gas Utility revenues were $11.5 million lower in the 1997 twelve-month period
as a result of a $20.0 million increase in core market revenues principally due
to higher average PGC rates that was more than offset by a $21.4 million
decrease in core-market revenues from lower sales, an $8.5 million decrease in
revenues from off-system sales, and lower revenues from interruptible
customers. Cost of gas sold was $208.2 million during the 1997 twelve-month
period, a decrease of $6.9 million from the same period in 1996, principally
reflecting the reduced off-system and core market sales partially offset by the
effects of higher average PGC rates.
Gas Utility total margin decreased in the twelve months ended December 31, 1997
principally reflecting a $5.6 million decrease in total margin from core market
customers and a $1.6 million decrease in total margin from off-system sales
partially offset by a $2.7 million increase in total margin from interruptible
customers.
Although total margin was $4.3 million lower in the 1997 twelve-month period,
Gas Utility operating income was virtually unchanged principally as a result of
a $2.6 million decrease in operating expenses, a $.7 million decrease in
depreciation and amortization, and higher miscellaneous income. The decrease in
operating expenses includes lower distribution system expenses, lower general
and administrative expenses and income from an expected insurance recovery
partially offset by higher costs associated with environmental matters.
ELECTRIC UTILITY. Electric Utility sales were lower during the twelve months
ended December 31, 1997 than in the prior-year period due in part to warmer
heating-season weather. The increase in Electric Utility revenues is
principally a result of an increase in base rate revenues subsequent to July
19, 1996. Electric Utility cost of sales was $34.0 million, essentially
unchanged from the prior-year period.
Electric Utility total margin during the 1997 twelve-month period increased
principally as a result of the full year effect of higher base rates effective
July 19, 1996. The increase in operating income reflects the increase in total
margin.
CORPORATE GENERAL EXPENSES. Corporate general expenses were $5.4 million in
the 1997 twelve-month period compared with $3.6 million in the 1996
twelve-month period. The 1996 twelve-month period allocated UGI 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 $17.0 million in the
1997 twelve-month period compared with $16.1 million in the 1996 twelve-month
period. The increase in interest expense during the 1997 twelve-month period is
principally due to higher levels of bank loans outstanding at slightly higher
average interest rates partially offset by lower levels of long-term debt
outstanding at lower average interest rates. The effective income tax rate for
the 1997 twelve-month period was 38.7% compared with a rate of 38.0% in the
prior-year period.
- 12 -
<PAGE> 15
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 December 31, 1997 totaled $252.0 million
compared with $236.3 million at September 30, 1997. The increase is a result of
the issuance of $20 million of 7.25% notes under UGI Utilities' Series B
Medium-Term Note program.
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 three months ended December 31, 1997 are not
necessarily indicative of cash flows to be expected for a full year.
OPERATING ACTIVITIES. Cash used by operating activities was $(3.9) million
during the three months ended December 31, 1997 compared with $(.1) million in
the comparable prior-year period. Cash generated by operations before changes
in operating working capital totaled $22.9 million during the three months
ended December 31, 1997 compared with $22.0 million in the prior-year period.
Changes in operating working capital during the three months ended December 31,
1997 required $26.8 million of operating cash flow principally from a $40.7
million seasonal increase in accounts receivable and accrued utility revenues
partially offset by increases in accrued liabilities, principally accrued
income taxes, and to a lesser extent, changes in inventories and purchased gas
overcollections. In the three months ended December 31 1996, changes in
operating working capital required $22.1 million of operating cash flow.
INVESTING ACTIVITIES. Cash expenditures for property, plant and equipment
totaled $8.5 million in the three months ended December 31, 1997 compared with
$9.6 million in the same period in 1996. The decrease reflects lower Gas
Utility capital expenditures.
FINANCING ACTIVITIES. Cash flows from financing activities for each of the
three month periods ended December 31, 1997 and 1996 include dividends on
preferred stock of $.7 million. Dividends during the three months ended
December 31, 1997 also include $12.6 million of dividend payments to UGI. There
were no dividend payments to UGI during the three months ended December 31,
1996.
Net repayments under UGI Utilities' revolving credit agreements totaled $4.3
million in the 1997 three-month period compared with net borrowings of $18.8
million in the prior-year period. During the 1997 three-month period, UGI
Utilities issued $20 million of 7.25% notes under its Series B Medium-Term Note
program the proceeds of which were used to reduce bank loans. During the three
months ended December 31, 1996, UGI Utilities repaid $8.4 million of its Series
First Mortgage Bonds.
- 13 -
<PAGE> 16
UGI UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
ELECTRICITY GENERATION CUSTOMER CHOICE AND COMPETITION ACT
On August 7, 1997, Electric Utility filed with the PUC its restructuring plan
pursuant to the Customer Choice Act. The restructuring plan includes a claim
for the recovery of $34.4 million for stranded costs during the period January
1, 1999 through December 31, 2002. The claim is primarily for the recovery of:
(1) plant investments in excess of estimated competitive market value and
electric generation facility retirement costs; (2) potential costs associated
with existing power purchase agreements; and (3) regulatory assets (principally
income taxes of approximately $.5 million) recoverable from ratepayers under
current regulatory practice. The claim also seeks to establish a recovery
mechanism that would permit the recovery of up to an additional $28 million of
costs associated with the buyout or implementation of a December 1993 agreement
to purchase power from an independent power producer. The PUC is expected to
take action on Electric Utility's filing in June 1998.
Given the changing regulatory environment in the electric utility industry,
the Company continues to evaluate its ability to apply the provisions of SFAS
71, "Accounting for the Effects of Certain Types of Regulation" as it relates
to its electric generation operations. SFAS 71 permits the recording of costs
(regulatory assets) that have been, or are expected to be, allowed in the
ratesetting process in a period different from the period in which such costs
would be charged to expense by an unregulated enterprise. The Company believes
its electric generation assets and related regulatory assets continue to
satisfy the criteria of SFAS 71. If such electric generation assets no longer
meet the criteria of SFAS 71, any related regulatory assets would be
written-off unless some form of transition cost recovery is established by the
PUC which would meet the requirements under generally accepted accounting
principles for continued accounting as regulatory assets. Any
generation-related, long-lived fixed and intangible assets would be evaluated
for impairment under the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
Based upon an evaluation of the various factors and conditions affecting future
cost recovery, the Company does not expect the Customer Choice Act to have a
material adverse effect on its financial condition or results of operations.
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.
- 14 -
<PAGE> 17
UGI UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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. The Company will continue to monitor
developments and participate, as appropriate, in the legislative process.
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits:
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 December 31, 1997.
- 15 -
<PAGE> 18
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: February 13, 1998 By: J. C. Barney
- ------------------------ ------------------------------
J. C. Barney, Vice President -
Finance and Accounting
(Principal Financial Officer)
- 16 -
<PAGE> 19
UGI UTILITIES, INC. AND SUBSIDIARIES
EXHIBIT INDEX
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
<PAGE> 1
UGI UTILITIES INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES - EXHIBIT 12.1
(Thousands of dollars)
<TABLE>
<CAPTION>
Three
Months
Ended Year Ended September 30,
December 31, -------------------------------------------------------------
1997 1997 1996 1995 1994
------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
EARNINGS:
Earnings before income taxes $ 26,008 $ 63,275 $ 61,717 $ 39,759 $ 41,244
Interest expense 4,273 16,696 15,921 16,632 16,482
Amortization of debt discount and expense 48 176 173 206 187
Interest component of rental expense 410 1,887 1,838 1,604 1,344
------------- ------------ ------------- ------------ ------------
$ 30,739 $ 82,034 $ 79,649 $ 58,201 $ 59,257
============= ============ ============= ============ ============
FIXED CHARGES:
Interest expense $4,273 $ 16,696 $ 15,921 $ 16,632 $ 16,482
Amortization of debt discount and expense 48 176 173 206 187
Allowance for funds used during
construction (capitalized interest) 10 114 107 65 136
Interest component of rental expense 410 1,887 1,838 1,604 1,344
------------- ------------ ------------- ------------ ------------
$ 4,741 $ 18,873 $ 18,039 $ 18,507 $ 18,149
============= ============ ============= ============ ============
Ratio of earnings to fixed charges 6.48 4.35 4.42 3.14 3.27
============= ============ ============= ============ ============
</TABLE>
<PAGE> 1
UGI UTILITIES INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS - EXHIBIT 12.2
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Three
Months
Ended Year Ended September 30,
December 31, --------------------------------------------------------
1997 1997 1996 1995 1994
------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
EARNINGS:
Earnings before income taxes $ 26,008 $ 63,275 $ 61,717 $ 39,759 $ 41,244
Interest expense 4,273 16,696 15,921 16,632 16,482
Amortization of debt discount and expense 48 176 173 206 187
Interest component of rental expense 410 1,887 1,838 1,604 1,344
------------ ----------- ----------- ----------- -----------
$ 30,739 $ 82,034 $ 79,649 $ 58,201 $ 59,257
============ =========== =========== =========== ===========
COMBINED FIXED CHARGES AND PREFERRED
STOCK DIVIDENDS:
Interest expense $ 4,273 $ 16,696 $ 15,921 $ 16,632 $ 16,482
Amortization of debt discount and expense 48 176 173 206 187
Allowance for funds used during
construction (capitalized interest) 10 114 107 65 136
Interest component of rental expense 410 1,887 1,838 1,604 1,344
Preferred stock dividend requirements 691 2,764 2,765 2,778 1,356
Adjustment required to state preferred stock
dividend requirements on a pretax basis 418 1,754 1,685 1,164 1,018
------------ ----------- ----------- ----------- -----------
$ 5,850 $ 23,391 $ 22,489 $ 22,449 $ 20,523
============ =========== =========== =========== ===========
Ratio of earnings to combined fixed charges
and preferred stock dividends 5.25 3.51 3.54 2.59 2.89
============ =========== =========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT OF UGI UTILITIES, INC.
AND SUBSIDIARIES AS OF AND FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS INCLUDED IN
UGI UTILITIES' QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31,
1997.
</LEGEND>
<CIK> 0000100548
<NAME> UGI UTILITIES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,862
<SECURITIES> 0
<RECEIVABLES> 75,827
<ALLOWANCES> 3,084
<INVENTORY> 26,843
<CURRENT-ASSETS> 111,654
<PP&E> 773,017
<DEPRECIATION> 241,632
<TOTAL-ASSETS> 708,216
<CURRENT-LIABILITIES> 178,712
<BONDS> 172,156
32,187
0
<COMMON> 60,259
<OTHER-SE> 143,119
<TOTAL-LIABILITY-AND-EQUITY> 708,216
<SALES> 135,464
<TOTAL-REVENUES> 135,464
<CGS> 72,497
<TOTAL-COSTS> 72,497
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,321
<INCOME-PRETAX> 26,008
<INCOME-TAX> 9,800
<INCOME-CONTINUING> 16,208
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,208
<EPS-PRIMARY> 0<F1>
<EPS-DILUTED> 0<F1>
<FN>
<F1>There are no publicly held shares outstanding.
</FN>
</TABLE>
