<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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-1398
UGI UTILITIES, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1174060
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
UGI UTILITIES, INC.
100 Kachel Boulevard, Suite 400
Green Hills Corporate Center, Reading, PA
(Address of principal executive offices)
19607
(Zip Code)
(610) 796-3400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
At January 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 December 31,
1998, September 30, 1998 and December 31, 1997 1
Condensed Consolidated Statements of Income for the three
and twelve months ended December 31, 1998 and 1997 2
Condensed Consolidated Statements of Cash Flows for the
three and twelve months ended December 31, 1998 and 1997 3
Notes to Condensed Consolidated Financial Statements 4-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
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PART I FINANCIAL INFORMATION
UGI UTILITIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(Thousands of dollars)
<TABLE>
<CAPTION>
December 31, September 30, December 31,
1998 1998 1997
-------- -------- --------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,567 $ 4,720 $ 2,862
Accounts receivable (less allowances for doubtful accounts
of $1,349, $1,373 and $3,084, respectively) 33,926 20,258 49,691
Accrued utility revenues 21,687 6,745 23,052
Inventories 27,016 28,460 26,843
Deferred income taxes 4,119 4,070 7,887
Prepaid expenses and other current assets 2,887 6,556 1,319
-------- -------- --------
Total current assets 93,202 70,809 111,654
Property, plant and equipment, at cost (less accumulated depreciation
and amortization of $257,963, $253,608 and $241,632, respectively) 547,127 543,913 531,385
Regulatory assets 59,314 59,318 49,035
Other assets 17,079 16,277 16,142
-------- -------- --------
Total assets $716,722 $690,317 $708,216
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 7,143 $ 7,143 $ 17,143
Current portion of redeemable preferred stock -- -- 3,000
Bank loans 70,200 68,400 62,700
Accounts payable 43,802 38,847 40,614
Other current liabilities 35,861 29,720 55,255
-------- -------- --------
Total current liabilities 157,006 144,110 178,712
Long-term debt 180,032 180,027 172,156
Deferred income taxes 106,456 105,734 101,816
Other noncurrent liabilities 29,342 29,204 19,967
Commitments and contingencies
Redeemable preferred stock 20,000 20,000 32,187
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 68,559 68,559 68,249
Retained earnings 95,068 82,424 74,870
-------- -------- --------
Total common stockholder's equity 223,886 211,242 203,378
-------- -------- --------
Total liabilities and stockholders' equity $716,722 $690,317 $708,216
======== ======== ========
</TABLE>
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)
<TABLE>
<CAPTION>
Three Months Ended Twelve Months Ended
December 31, December 31,
-------------------------- --------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $ 112,770 $ 135,464 $ 399,589 $ 462,518
--------- --------- --------- ---------
Costs and expenses:
Gas, fuel and purchased power 55,336 72,497 197,470 242,180
Operating and administrative expenses 26,454 27,075 110,554 116,613
Operating and administrative expenses
- related parties 1,172 1,098 4,911 5,407
Depreciation and amortization 5,477 5,351 22,169 21,218
Other income, net (1,121) (886) (5,228) (3,033)
--------- --------- --------- ---------
87,318 105,135 329,876 382,385
--------- --------- --------- ---------
Operating income 25,452 30,329 69,713 80,133
Interest expense 4,438 4,321 17,700 16,951
--------- --------- --------- ---------
Income before income taxes 21,014 26,008 52,013 63,182
Income taxes 7,981 9,800 19,637 24,448
--------- --------- --------- ---------
Net income 13,033 16,208 32,376 38,734
Dividends on preferred stock 388 691 1,857 2,764
--------- --------- --------- ---------
Net income after dividends on preferred stock $ 12,645 $ 15,517 $ 30,519 $ 35,970
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 5
UGI UTILITIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Thousands of dollars)
<TABLE>
<CAPTION>
Three Months Ended Twelve Months Ended
December 31, December 31,
------------------------ ------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 13,033 $ 16,208 $ 32,376 $ 38,734
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Depreciation and amortization 5,477 5,351 22,169 21,218
Deferred income taxes, net 839 484 5,823 69
Other, net (106) 878 5,002 5,039
-------- -------- -------- --------
19,243 22,921 65,370 65,060
Net change in:
Accounts receivable and accrued utility revenues (29,430) (40,745) 13,210 (4,975)
Inventories 1,444 3,802 (173) 1,583
Deferred fuel costs (64) 2,377 (8,182) 4,402
Accounts payable 4,955 (4,753) 3,188 (645)
Other current assets and liabilities 9,874 12,523 (13,358) 307
-------- -------- -------- --------
Net cash provided (used) by operating activities 6,022 (3,875) 60,055 65,732
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment (8,539) (8,465) (37,293) (40,555)
Net proceeds (costs) of property, plant and equipment disposals (48) 13 250 (825)
-------- -------- -------- --------
Net cash used by investing activities (8,587) (8,452) (37,043) (41,380)
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of dividends (388) (13,324) (12,157) (39,456)
Issuance of long-term debt -- 20,000 15,000 40,000
Repayment of long-term debt -- -- (17,143) (18,980)
Bank loans increase (decrease) 1,800 (4,300) 7,500 (6,600)
Redemption of Series Preferred Stock -- -- (15,507) --
-------- -------- -------- --------
Net cash provided (used) by financing activities 1,412 2,376 (22,307) (25,036)
-------- -------- -------- --------
Cash and cash equivalents increase (decrease) $ (1,153) $ (9,951) $ 705 $ (684)
======== ======== ======== ========
CASH AND CASH EQUIVALENTS:
End of period $ 3,567 $ 2,862 $ 3,567 $ 2,862
Beginning of period 4,720 12,813 2,862 3,546
-------- -------- -------- --------
Increase (decrease) $ (1,153) $ (9,951) $ 705 $ (684)
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 6
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 subsidiary UGI Development Company (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. 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.
During the quarter ended December 31, 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. UGI Utilities' comprehensive income was the
same as its net income for all periods presented.
2. SEGMENT INFORMATION
During the quarter ended December 31, 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
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<PAGE> 7
UGI UTILITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Thousands of dollars)
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 together.
Accordingly, these operations are combined for segment reporting
purposes.
The accounting policies of the two segments are the same as those
described in the Significant Accounting Policies note contained in our
Annual Report on Form 10-K for the year ended September 30, 1998. We
evaluate each segment's performance principally based upon its earnings
before interest expense, income taxes, depreciation and amortization
(EBITDA). Although EBITDA is used internally 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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<PAGE> 8
UGI UTILITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Thousands of dollars)
2. SEGMENT INFORMATION (continued)
THREE MONTHS ENDED DECEMBER 31, 1998:
<TABLE>
<CAPTION>
Reportable Segments
--------------------------
Inter-
segment Gas Electric All
Total Eliminations utility utility other
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Segment revenues $ 112,770 $ -- $ 94,578 $ 18,192 $ --
Segment profit (loss):
EBITDA $ 30,929 $ -- $ 26,245 $ 4,693 $ (9)
Depreciation and amortization (5,477) -- (4,667) (810) --
-----------------------------------------------------------------------------
Operating income (loss) 25,452 -- 21,578 3,883 (9)
Interest expense (4,438) -- (3,845) (593) --
-----------------------------------------------------------------------------
Income (loss) before income taxes $ 21,014 $ -- $ 17,733 $ 3,290 $ (9)
=============================================================================
Segment assets (at period end) $ 716,722 $ (101) $ 619,861 $ 96,768 $ 194
=============================================================================
</TABLE>
THREE MONTHS ENDED DECEMBER 31, 1997:
<TABLE>
<CAPTION>
Reportable Segments
--------------------------
Inter-
segment Gas Electric All
Total Eliminations utility utility other
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Segment revenues $ 135,464 $ -- $ 116,831 $ 18,633 $ --
Segment profit (loss):
EBITDA $ 35,680 $ -- $ 31,841 $ 3,851 $ (12)
Depreciation and amortization (5,351) -- (4,475) (876) --
-----------------------------------------------------------------------------
Operating income (loss) 30,329 -- 27,366 2,975 (12)
Interest expense (4,321) -- (3,771) (550) --
-----------------------------------------------------------------------------
Income (loss) before income taxes $ 26,008 $ -- $ 23,595 $ 2,425 $ (12)
=============================================================================
Segment assets (at period end) $ 708,216 $ 324 $ 620,933 $ 86,604 $ 355
=============================================================================
</TABLE>
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<PAGE> 9
UGI UTILITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
(Thousands of dollars)
2. SEGMENT INFORMATION (continued)
TWELVE MONTHS ENDED DECEMBER 31, 1998:
<TABLE>
<CAPTION>
Reportable Segments
--------------------------
Inter-
segment Gas Electric All
Total Eliminations utility utility other
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Segment revenues $ 399,589 $ -- $ 327,901 $ 71,688 $ --
Segment profit:
EBITDA $ 91,882 $ -- $ 77,341 $ 14,402 $ 139
Depreciation and amortization (22,169) -- (18,357) (3,812) --
-----------------------------------------------------------------------------
Operating income 69,713 -- 58,984 10,590 139
Interest expense (17,700) -- (15,343) (2,357) --
-----------------------------------------------------------------------------
Income before income taxes $ 52,013 $ -- $ 43,641 $ 8,233 $ 139
=============================================================================
Segment assets (at period end) $ 716,722 $ (101) $ 619,861 $ 96,768 $ 194
=============================================================================
</TABLE>
TWELVE MONTHS ENDED DECEMBER 31, 1997:
<TABLE>
<CAPTION>
Reportable Segments
--------------------------
Inter-
segment Gas Electric All
Total Eliminations utility utility other
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Segment revenues $ 462,518 $ -- $ 390,123 $ 72,395 $ --
Segment profit:
EBITDA $ 101,351 $ -- $ 87,066 $ 14,101 $ 184
Depreciation and amortization (21,218) -- (17,122) (4,096) --
-----------------------------------------------------------------------------
Operating income 80,133 -- 69,944 10,005 184
Interest expense (16,951) -- (14,408) (2,543) --
-----------------------------------------------------------------------------
Income before income taxes $ 63,182 $ -- $ 55,536 $ 7,462 $ 184
=============================================================================
Segment assets (at period end) $ 708,216 $ 324 $ 620,933 $ 86,604 $ 355
=============================================================================
</TABLE>
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<PAGE> 10
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 a 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.
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 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 but 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.
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<PAGE> 11
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 December 31, 1998 (1998 three-month period) with the three months
ended December 31, 1997 (1997 three-month period) and (2) the twelve months
ended December 31, 1998 (1998 twelve-month period) with the twelve months ended
December 31, 1997 (1997 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
did not change the operating segments we disclose, Gas Utility and Electric
Utility results now include billed UGI corporate overhead costs.
1998 THREE-MONTH PERIOD COMPARED WITH 1997 THREE-MONTH PERIOD
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Increase
Three Months Ended December 31, 1998 1997 (Decrease)
- --------------------------------------------------------------------------------------
(Millions of dollars)
<S> <C> <C> <C> <C>
GAS UTILITY:
Natural gas system throughput - bcf 20.3 22.7 (2.4) (10.6)%
Degree days - % warmer than normal (17.1) (1.6) -- --
Revenues $ 94.6 $116.8 $(22.2) (19.0)%
Total margin (a) $ 43.2 $ 48.6 $ (5.4) (11.1)%
Operating income $ 21.6 $ 27.4 $ (5.8) (21.2)%
EBITDA $ 26.2 $ 31.8 $ (5.6) (17.6)%
ELECTRIC UTILITY:
Electric sales - gwh 223.2 227.8 (4.6) (2.0)%
Revenues $ 18.2 $ 18.6 $ (.4) (2.2)%
Total margin (a) $ 9.7 $ 8.9 $ .8 9.0%
Operating income $ 3.9 $ 3.0 $ .9 30.0%
EBITDA $ 4.7 $ 3.9 $ .8 20.5%
- --------------------------------------------------------------------------------------
</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 was 17.1% warmer than
normal and 15.8% warmer than in the prior-year period. As a result of the warmer
temperatures, volumes we
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<PAGE> 12
UGI UTILITIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
sold to our firm- residential, commercial and small industrial customers (we
refer to these customers as our "core market") declined 20% (2.1 bcf). The
warmer weather also impacted, to a much lesser extent, volumes we sold or
transported to our large industrial and commercial customers.
The decrease in Gas Utility's revenues in the 1998 three-month period is due to
(1) the decline in core market volumes and (2) lower off-system sales. Gas
Utility's cost of gas decreased $15.9 million reflecting (1) the previously
mentioned decrease in volumes sold to our core market customers and (2) the
lower off-system sales.
The decrease in Gas Utility's total margin principally resulted from (1) a $5.0
million decline in margin from core market customers and (2) a $.5 million
decline in margin from interruptible customers. The decline in core market
margin reflects the lower volumes sold while the decline in interruptible margin
was the result of a less favorable difference between natural gas prices and oil
prices.
Gas Utility operating income and EBITDA decreased in the 1998 three-month period
reflecting the lower total margin and slightly higher operating expenses. Total
operating expenses, excluding revenue-related taxes, were slightly higher in the
1998 three-month period because the 1997 three-month period expenses are net of
$1.6 million of income from an insurance recovery.
ELECTRIC UTILITY. Total electric sales were 2.0% lower in the 1998 three-month
period reflecting the impact of warmer weather. Temperatures were 9.1% warmer
than normal in 1998 compared to temperatures that were 7.3% colder than normal
in 1997. Electric Utility revenues decreased $.4 million in the 1998 three-month
period primarily due to the lower sales.
Electric Utility cost of sales decreased $1.3 million in the 1998 three-month
period reflecting (1) lower power costs and (2) the lower sales. In accordance
with the June 1998 Restructuring Order issued by the Pennsylvania Public Utility
Commission (PUC), our base rates reflect a fixed amount for electric generation
costs and we no longer recover a separate Energy Cost Rate (ECR). As a result,
we no longer defer the difference between our actual costs of electricity and
the amount of such costs included in our rates.
Electric Utility's total margin increased $.8 million in the 1998 three-month
period, notwithstanding the lower sales, reflecting lower power costs. The lower
power costs resulted in large part from lower cost power supply agreements.
Operating income and EBITDA increased principally as a result of the higher
total margin.
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<PAGE> 13
UGI UTILITIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
1998 TWELVE-MONTH PERIOD COMPARED WITH 1997 TWELVE-MONTH PERIOD
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
Increase
Twelve Months Ended December 31, 1998 1997 (Decrease)
- ------------------------------------------------------------------------------------
(Millions of dollars)
<S> <C> <C> <C> <C>
GAS UTILITY:
Natural gas system throughput - bcf 72.6 78.3 (5.7) (7.3)%
Degree days - % warmer than normal (21.8) (4.2) -- --
Revenues $327.9 $390.1 $(62.2) (15.9)%
Total margin (a) $151.8 $166.7 $(14.9) (8.9)%
Operating income $ 59.0 $ 69.9 $(10.9) (15.6)%
EBITDA $ 77.3 $ 87.1 $ (9.8) (11.3)%
ELECTRIC UTILITY:
Electric sales - gwh 871.8 872.5 (.7) (.1)%
Revenues $ 71.7 $ 72.4 $ (.7) (1.0)%
Total margin (a) $ 34.8 $ 35.3 $ (.5) (1.4)%
Operating income $ 10.6 $ 10.0 $ .6 6.0%
EBITDA $ 14.4 $ 14.1 $ .3 2.1%
- ------------------------------------------------------------------------------------
</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 was 21.8% warmer than
normal during the 1998 twelve-month period compared to weather that was 4.2%
warmer than normal in the prior-year period. The decrease in total system
throughput primarily reflects a 20% (6.8 bcf) decline in core market volumes
partially offset by higher interruptible delivery service volumes.
The decrease in Gas Utility's revenues reflects the decline in core market
volumes resulting from the warmer weather as well as a reduction in revenues
from off-system sales. Cost of gas sold declined $44.5 million due to lower core
market and off-system sales.
The decrease in Gas Utility's total margin principally reflects a $15.1 million
decline in margin from our core market customers. Operating income and EBITDA in
the 1998 twelve-month period declined reflecting the $14.9 million decrease in
total margin partially offset by (1) lower operating expenses and (2) a $1.1
million increase in other income. Gas Utility's operating expenses, excluding
revenue-related taxes, were $2.9 million lower in the 1998 twelve-month
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<PAGE> 14
UGI UTILITIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
period reflecting (1) the absence of charges for environmental matters and (2)
lower distribution system maintenance expenditures due in part to the mild
heating-season weather.
ELECTRIC UTILITY. Total electric sales during the 1998 twelve-month period were
comparable with the prior year as the effects of warmer heating-season weather
were mitigated by the warmer summer's effect on electricity used for air
conditioning and an increase in number of customers. Electric Utility revenues
declined $.7 million during the 1998 twelve-month period primarily due to the
impact of Electric Utility's Customer Choice Act Pilot Program which began
November 1, 1997. Because pilot program participants buy their electricity from
other suppliers, we record the revenues for distributing the electricity but we
do not record revenues (or costs) related to the electricity itself.
Electric Utility cost of sales decreased $.2 million principally reflecting the
impact of the pilot program. Electric Utility's total margin decreased $.5
million in the 1998 twelve-month period reflecting the lower sales and slightly
higher average power costs. The increase in operating income and EBITDA,
notwithstanding the lower total margin, reflects higher other income.
FINANCIAL CONDITION AND LIQUIDITY
CAPITAL STRUCTURE
The Company's debt outstanding at December 31, 1998 totaled $257.4 million
compared with $255.6 million at September 30, 1998. Included in these amounts
are bank loans outstanding totaling $70.2 million and $68.4 million,
respectively. We may borrow up to $97 million under our revolving credit
agreements.
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 during
the three months ended December 31, 1998 are not necessarily indicative of cash
flows to be expected for a full year.
OPERATING ACTIVITIES. Cash provided by operating activities was $6.0 million
during the three months ended December 31, 1998. In the prior-year period,
operating activities used $3.9 million of cash. The improvement in operating
cash flow in the 1998 three-month period was principally the result of the
warmer weather's impact on cash needed to fund working capital. Changes in
operating working capital during the three months ended December 31, 1998
required $13.2 million of operating cash flow while changes in operating working
capital during the three months ended December 31, 1997 required $26.8 million
of operating cash flow. Cash generated by operating activities before changes in
-12-
<PAGE> 15
UGI UTILITIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
operating working capital totaled $19.2 million during the three months ended
December 31, 1998 compared to $22.9 million in the prior-year period.
INVESTING ACTIVITIES. We spent $8.5 million for property, plant and equipment in
each of the three month periods ended December 31, 1998 and 1997.
FINANCING ACTIVITIES. Cash flows from financing activities for the 1998
three-month period include dividends on preferred stock of $.4 million compared
with $.7 million of such dividends in the 1997 three-month period. The lower
preferred stock dividends resulted from the redemption of $15 million face value
of Series Preferred Stock in April 1998. In the prior-year three-month period,
we paid $12.6 million of dividends to our parent company, UGI Corporation.
UGI Utilities' borrowed a net $1.8 million under its revolving credit agreements
in the 1998 three-month period compared with net repayments of $4.3 million in
the prior-year period. During the three months ended December 31, 1997, UGI
Utilities issued $20 million of notes under its Series B Medium-Term Note
program.
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 are using
internal and external resources to conduct a detailed assessment of critical,
date sensitive computer-based systems and to identify and modify systems which
are not Y2K compliant. The scope of such efforts includes (1) our information
technology ("IT") systems such as computer hardware and software we use in the
operation of our business; (2) non-IT systems that contain embedded computer
technology such as micro-controllers contained in various equipment and
facilities; and (3) the readiness of third parties, including our suppliers and
key vendors, and certain of our customers. We have directed our Y2K compliance
efforts toward ensuring that we will be able 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. In
addition, the PUC has ordered that all Pennsylvania utilities' mission critical
systems must be Y2K compliant by March 31, 1999 or, alternatively, the utility
must file contingency plans with the PUC by that date. We have completed the
assessment phase of our IT and non-IT systems.
We have successfully modified and unit tested all of our critical IT and non-IT
systems including our customer information systems, financial systems and
distribution control systems, except for
-13-
<PAGE> 16
UGI UTILITIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Electric Utility's System Control and Data Acquisition (SCADA) system which is
scheduled for replacement with a Y2K compliant system in April 1999. We began
integrated testing of the remediated systems in February 1999. We currently
anticipate that all IT and non-IT systems critical to the operations of our
business will be Y2K compliant and tested by March 31, 1999 except for the SCADA
system which will be Y2K compliant upon its replacement and testing in April
1999.
In addition to internal Y2K remediation activities, we are in the process of
assessing the readiness of our key suppliers and third-party providers. Although
none of our products or services are directly date sensitive, as a utility
company we are dependent upon other companies whose IT and non-IT systems may
not be Y2K compliant. We rely on these companies for the supply and
transportation of natural gas and the generation of electricity beyond that
which we generate ourselves. If key third parties cannot provide products or
services because of their own Y2K problems, it could have a material adverse
impact on our operations. The extent of such impact would depend upon the
duration of disruption and our costs to find alternative sources of products and
services, among others. We expect to complete our evaluation of key supplier and
third-party readiness by March 31, 1999.
While we have directed our focus on resolving our Y2K issues and expect our
critical IT and non-IT systems to be Y2K compliant by March 31, 1999, we are in
the process of developing contingency plans. We anticipate the major elements of
these contingency plans will be based upon the use of manual back-up systems,
additional staffing, and alternative supply sources. These contingency plans
attempt to mitigate the impact of third-party Y2K noncompliance. However, they
cannot assure that business disruptions caused by key suppliers or third party
providers will not have a material adverse impact on our operations. We expect
the business contingency plans to be completed by March 31, 1999. In addition to
the business risks noted above, 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 the failure of utility and telecommunication companies to
provide service and the failure of financial institutions to process
transactions.
Incremental costs associated with our Y2K efforts have not had a material effect
on our results of operations. Estimated future costs to modify IT and non-IT
systems are expected to be less than $.5 million and will be financed through
internally generated funds. We expense Y2K costs as incurred.
-14-
<PAGE> 17
UGI UTILITIES, INC.
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 long-term 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. Consequently, there currently is limited commodity
price risk associated with Gas Utility due to the current rate-making structure.
Because the sources and costs of our electric power vary from period to period
and because we no longer defer the difference between actual power costs and
amounts included in our rates, Electric Utility's quarterly results may be more
volatile in the future. In addition, future financial results will likely depend
upon a number of factors including the number of our customers who choose
alternative electricity suppliers and our success in producing or purchasing
electricity at competitive market prices. If our costs to produce or purchase
power exceed the amounts we are able to charge our customers, Electric Utility's
results would be adversely affected.
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, 1998.
-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 11, 1999 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, -------------------------------------------------
1998 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
EARNINGS:
Earnings before income taxes $21,014 $57,007 $63,275 $61,717 $39,759
Interest expense 4,384 17,383 16,696 15,921 16,632
Amortization of debt discount and expense 54 200 176 173 206
Interest component of rental expense 335 1,624 1,887 1,838 1,604
------- ------- ------- ------- -------
$25,787 $76,214 $82,034 $79,649 $58,201
======= ======= ======= ======= =======
FIXED CHARGES:
Interest expense $ 4,384 $17,383 $16,696 $15,921 $16,632
Amortization of debt discount and expense 54 200 176 173 206
Allowance for funds used during
construction (capitalized interest) 7 39 114 107 65
Interest component of rental expense 335 1,624 1,887 1,838 1,604
------- ------- ------- ------- -------
$ 4,780 $19,246 $18,873 $18,039 $18,507
======= ======= ======= ======= =======
Ratio of earnings to fixed charges 5.39 3.96 4.35 4.42 3.14
======= ======= ======= ======= =======
</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, -------------------------------------------------
1998 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
EARNINGS:
Earnings before income taxes $21,014 $57,007 $63,275 $61,717 $39,759
Interest expense 4,384 17,383 16,696 15,921 16,632
Amortization of debt discount and expense 54 200 176 173 206
Interest component of rental expense 335 1,624 1,887 1,838 1,604
------- ------- ------- ------- -------
$25,787 $76,214 $82,034 $79,649 $58,201
======= ======= ======= ======= =======
COMBINED FIXED CHARGES AND PREFERRED
STOCK DIVIDENDS:
Interest expense $ 4,384 $17,383 $16,696 $15,921 $16,632
Amortization of debt discount and expense 54 200 176 173 206
Allowance for funds used during
construction (capitalized interest) 7 39 114 107 65
Interest component of rental expense 335 1,624 1,887 1,838 1,604
Preferred stock dividend requirements 388 2,160 2,764 2,765 2,778
Adjustment required to state preferred stock
dividend requirements on a pretax basis 238 1,304 1,754 1,685 1,164
------- ------- ------- ------- -------
$ 5,406 $22,710 $23,391 $22,489 $22,449
======= ======= ======= ======= =======
Ratio of earnings to combined fixed charges
and preferred stock dividends 4.77 3.36 3.51 3.54 2.59
======= ======= ======= ======= =======
</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.
AS OF AND FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 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, 1998.
</LEGEND>
<CIK> 0000100548
<NAME> UGI UTILITIES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,567
<SECURITIES> 0
<RECEIVABLES> 56,962
<ALLOWANCES> 1,349
<INVENTORY> 27,016
<CURRENT-ASSETS> 93,202
<PP&E> 805,090
<DEPRECIATION> 257,963
<TOTAL-ASSETS> 716,722
<CURRENT-LIABILITIES> 157,006
<BONDS> 180,032
20,000
0
<COMMON> 60,259
<OTHER-SE> 163,627
<TOTAL-LIABILITY-AND-EQUITY> 716,722
<SALES> 112,770
<TOTAL-REVENUES> 112,770
<CGS> 55,336
<TOTAL-COSTS> 55,336
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 820
<INTEREST-EXPENSE> 4,438
<INCOME-PRETAX> 21,014
<INCOME-TAX> 7,981
<INCOME-CONTINUING> 13,033
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,033
<EPS-PRIMARY> 0<F1>
<EPS-DILUTED> 0<F1>
<FN>
<F1>THERE ARE NO PUBLICLY HELD SHARES OUTSTANDING.
</FN>
</TABLE>
