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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998
Commission file number 1-11071
UGI CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Pennsylvania 23-2668356
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
460 North Gulph Road, King of Prussia, PA 19406
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(610) 337-1000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF CLASS ON WHICH REGISTERED
Common Stock, without par value New York Stock Exchange, Inc.
Philadelphia Stock Exchange, Inc.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
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 .
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO
THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K. [X]
The aggregate market value of UGI Corporation Common Stock held by nonaffiliates
of the registrant on December 1, 1998 was $803,660,293.
At December 1, 1998 there were 32,861,834 shares of UGI Corporation Common Stock
issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Annual Report to
Shareholders for the year ended September 30, 1998 are incorporated by reference
into Parts I and II of this Form 10-K. Portions of the Proxy Statement for the
Annual Meeting of Shareholders to be held on February 23, 1999 are incorporated
by reference into Part III of this Form 10-K.
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TABLE OF CONTENTS
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PART I BUSINESS PAGE
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Items 1 and 2 Business and Properties.......................................1
Propane Business..............................................2
Utility Operations...........................................11
UGI Enterprises, Inc.........................................20
Item 3 Legal Proceedings............................................22
Item 4 Submission of Matters to a Vote of
Security Holders.............................................25
PART II SECURITIES AND FINANCIAL INFORMATION
Item 5 Market for Registrant's Common Equity
and Related Stockholder Matters..............................25
Item 6 Selected Financial Data......................................27
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations................28
Item 7A Quantitative and Qualitative Disclosure About Market Risk....28
Item 8 Financial Statements and Supplementary Data..................28
Item 9 Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure...........28
PART III UGI MANAGEMENT AND SECURITY HOLDERS
Item 10 Directors and Executive Officers of the Registrant...........29
Item 11 Executive Compensation.......................................29
Item 12 Security Ownership of Certain Beneficial
Owners and Management........................................29
Item 13 Certain Relationships and Related Transactions...............29
PART IV ADDITIONAL EXHIBITS, SCHEDULES AND REPORTS
Item 14 Exhibits, Financial Statement Schedules
and Reports on Form 8-K......................................32
Signatures...................................................38
Index to Financial Statements and
Financial Statement Schedules...............................F-2
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PART I: BUSINESS
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
UGI Corporation is a holding company that operates propane distribution,
gas and electric utility and energy marketing businesses through subsidiaries.
Our majority-owned subsidiary, AmeriGas Partners, L.P., a Delaware limited
partnership ("AmeriGas Partners" or the "Partnership"), conducts the nation's
largest retail propane distribution business through its 98.99% owned subsidiary
AmeriGas Propane, L.P. (the "Operating Partnership"). We have been in the retail
propane distribution business for almost 40 years, operating through various
subsidiaries. The Partnership's sole general partner is our subsidiary, AmeriGas
Propane, Inc. ("AmeriGas Propane" or the "General Partner"). The common units of
AmeriGas Partners, which represent limited partner interests, are traded on the
New York Stock Exchange under the symbol "APU." We have a 58.6% combined
ownership interest in the Partnership and the Operating Partnership. The
remaining interest is publicly held.
Our subsidiary UGI Utilities, Inc. ("Utilities") owns and operates a
natural gas distribution utility and an electric utility in eastern
Pennsylvania. Utilities is the successor to a business founded in 1882.
Utilities supplies 258,000 natural gas customers and 61,000 electric customers.
Our subsidiary UGI Enterprises, Inc. ("Enterprises") conducts a retail
gas and electric marketing business, and is currently engaged in two
international energy-related joint ventures through subsidiaries. Black Sea
LPG, L.P. is developing an energy import and distribution business in
Romania. ChinaGas Partners, L.P. is developing an integrated propane import,
storage and distribution business in China. We expect Enterprises to
continue to evaluate and develop new international and domestic business
opportunities for us.
UGI was incorporated in Pennsylvania in 1991 as part of the restructuring
of Utilities into a holding company system. UGI is not subject to regulation by
the Pennsylvania Public Utility Commission ("PUC"). It is also exempt from
registration as a holding company and not otherwise subject to the Public
Utility Holding Company Act of 1935, except for Section 9(a)(2), which regulates
the acquisition of voting securities of an electric or gas utility company. Our
executive offices are located at 460 North Gulph Road, King of Prussia,
Pennsylvania 19406, and our telephone number is (610) 337-1000. In this report,
the terms "Company" and "UGI," as well as the terms "our," "we," and "its," are
sometimes used as abbreviated references to UGI Corporation or, collectively,
UGI Corporation and its consolidated subsidiaries. Similarly, the terms
"AmeriGas Partners" and the "Partnership" are sometimes used as abbreviated
references to AmeriGas Partners, L.P. or, collectively, AmeriGas Partners, L.P.
and its subsidiaries, including the Operating Partnership.
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PROPANE BUSINESS
Our domestic propane distribution business is conducted through AmeriGas
Partners. The Partnership is the largest retail propane distributor in the
United States, based on fiscal year 1998 retail volume of 785 million gallons.
The Partnership operates from approximately 600 district locations in 46 states.
AmeriGas Propane manages the Partnership. Although our consolidated financial
statements include 100% of the Partnership's revenues and assets, our net income
reflects only our 58.6% share in the income or loss of the Partnership, due to
the publicly-owned limited partner interest.
GENERAL INDUSTRY INFORMATION
Propane is separated from crude oil during the refining process and also
extracted from natural gas or oil wellhead gas at processing plants. Propane is
normally transported and stored in a liquid state under moderate pressure or
refrigeration for economy and ease of handling in shipping and distribution.
When the pressure is released or the temperature is increased, it is usable as a
flammable gas. Propane is colorless and odorless; an odorant is added to allow
its detection. Propane is clean burning, producing negligible amounts of
pollutants when properly consumed.
The primary customers for propane are residential, commercial,
agricultural, engine fuel and industrial users to whom natural gas is not
readily available. Propane is typically more expensive than natural gas,
competitive with fuel oil when operating efficiencies are taken into account
and, in most areas, cheaper than electricity on an equivalent energy basis.
Several states have adopted or are considering proposals that would
substantially deregulate the electric utility industry and thereby permit retail
electric customers to choose their electric supplier. While proponents of
electric utility deregulation believe that competition will ultimately reduce
the cost of electricity, we are unable to predict the extent to which the price
of electricity may drop. Therefore, we cannot predict the ultimate impact that
electric utility deregulation may have on propane's existing competitive price
advantage over electricity.
PRODUCTS, SERVICES AND MARKETING
As of September 30, 1998, the Partnership distributed propane to
approximately 956,000 customers from approximately 600 district locations in 46
states. The Partnership's operations are located primarily in the Northeast,
Southeast, Great Lakes and West Coast regions of the United States. The
Partnership also sells, installs and services propane appliances, including
heating systems. In certain markets, the Partnership also installs and services
propane fuel systems for motor vehicles. Typically, district locations are found
in suburban and rural areas where natural gas is not available. Districts
generally consist of an office, appliance showroom, warehouse and service
facilities, with one or more 18,000 to 30,000 gallon storage tanks on the
premises. As part of its overall transportation and distribution infrastructure,
the Partnership operates as an
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interstate carrier in 48 states throughout the United States. It is also
licensed as a carrier in Canada.
The Partnership sells propane primarily to five markets: residential,
commercial/industrial, motor fuel, agricultural and wholesale. Approximately 79%
of the Partnership's 1998 fiscal year sales (based on gallons sold) were to
retail accounts (32% to residential customers, 29% to industrial/commercial
customers, 11% to motor fuel customers and 7% to agricultural customers), and
approximately 21% were to wholesale customers. Sales to residential customers in
fiscal 1998 represented approximately 40% of retail gallons sold and 51% of the
Partnership's total propane margin. No single customer accounts for 1% or more
of the Partnership's consolidated revenues.
In the residential market, which includes both conventional and mobile
homes, propane is used primarily for home heating, water heating and cooking
purposes. Commercial users, which include motels, hotels, restaurants and retail
stores, generally use propane for the same purposes as residential customers. As
a motor fuel, propane is burned in internal combustion engines that power
over-the-road vehicles, forklifts and stationary engines. Industrial customers
use propane to fire furnaces, as a cutting gas and in other process
applications. Other industrial customers are large-scale heating accounts and
local gas utility customers who use propane as a supplemental fuel to meet peak
load deliverability requirements. Agricultural uses include tobacco curing and
crop drying.
Retail deliveries of propane are usually made to customers by means of
bobtail and rack trucks. Propane is pumped from the bobtail truck, which
generally holds 2,400 to 3,000 gallons of propane, into a stationary storage
tank on the customer's premises. The Partnership owns most of these storage
tanks and leases them to its customers. The capacity of these tanks ranges from
approximately 100 gallons to approximately 1,200 gallons.
The Partnership also delivers propane to retail customers in portable
cylinders with capacities of 5 to 30 gallons. Some of these deliveries are made
to the customer's location, where empty cylinders are either picked up for
replenishment or filled in place. During fiscal year 1998, the Partnership
expanded its prefilled cylinder exchange program, called PPX Prefilled Propane
Xchange(TM). The PPX(TM) program enables customers to exchange their empty
20-pound propane cylinders at various retail locations. PPX(TM) is available
at over 5,000 retail locations throughout the country. In its wholesale
operations, the Partnership principally sells propane to large industrial
end-users and other propane distributors.
PROPANE SUPPLY AND STORAGE
Supplies of propane from the Partnership's sources historically have been
readily available. During the year ended September 30, 1998, the Partnership
purchased over 70% of its propane from 10 suppliers, including the Shell Oil
companies (approximately 18%), Dynergy (approximately 17%), and the Amoco
companies (approximately 15%). Management believes that if supplies from these
sources were interrupted, the Partnership would be able to secure
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adequate propane supplies from other sources without a material disruption of
its operations; however, the cost of procuring replacement supplies might be
materially higher and, at least on a short-term basis, margins could be
affected. Aside from Shell, Dynergy and Amoco, no single supplier provided more
than 10% of the Partnership's total propane supply in fiscal year 1998. In
certain market areas, however, some suppliers provide 70% to 80% of the
Partnership's requirements. Disruptions in supply in these areas could also have
an adverse impact on the Partnership's margins.
The Partnership has over 200 sources of supply, and it also makes
purchases on the spot market. The Partnership purchases its propane supplies
from domestic and international suppliers. Approximately 70% of propane
purchases by the Partnership in the 1998 fiscal year were on a contractual basis
under one-year agreements subject to annual renewal. More than half of the
supply contracts provide for pricing based upon posted prices at the time of
delivery or the current prices established at major storage points such as Mont
Belvieu, Texas, or Conway, Kansas. In addition, some agreements provide maximum
and minimum seasonal purchase volume guidelines. The percentage of contract
purchases, and the amount of supply contracted for at fixed prices, will vary
from year to year as determined by the General Partner. The Partnership uses a
number of interstate pipelines, as well as railroad tank cars, delivery trucks
and barges to transport propane from suppliers to storage and distribution
facilities. The Partnership stores propane at facilities in Arizona, Michigan,
Mississippi, Rhode Island, Utah and several other locations.
Because the Partnership's profitability is sensitive to changes in
wholesale propane costs, the Partnership generally seeks to pass on increases in
the cost of propane to customers. There is no assurance, however, that the
Partnership will always be able to pass on product cost increases fully,
particularly when product costs rise rapidly. In fiscal year 1997, when the Mont
Belvieu price per gallon of propane more than doubled between April 1, 1996
($.34625) and December 16, 1996 ($.75), the Partnership was able to maintain its
profitability through the use of risk management techniques designed to control
product costs, and by passing product cost increases through to end users.
The Partnership expects to be able to secure adequate product supply for
its customers during fiscal year 1999. Periods of severe cold weather, supply
interruptions, or other unforeseen events, however, could result in rapid
increases in product cost. The General Partner has adopted supply acquisition
and product price risk management practices to reduce the effect of price
volatility on product costs. Current strategies include the use of summer
storage, prepaid contracts for future product delivery and derivative commodity
instruments such as options and propane price swaps. See "Management's
Discussion and Analysis of Results of Operations - Market Risk Disclosures."
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The following graph shows the average prices of propane on the propane
spot market during the last five fiscal years at Mont Belvieu, Texas and Conway,
Kansas, two major storage areas.
[Average Propane Spot Market Prices Graph]
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Mont Belvieu Conway
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1993 October Avg. Oct-93 29.566 33.821
1993 November Avg. Nov-93 27.763 32.138
1993 December Avg. Dec-93 24.726 25.994
1994 January Avg. Jan-94 26.613 25.708
1994 February Avg. Feb-94 29.349 27.724
1994 March Avg. Mar-94 28.467 26.875
1994 April Avg. Apr-94 28.819 28.788
1994 May Avg. May-94 29.619 28.732
1994 June Avg. Jun-94 28.790 27.943
1994 July Avg. Jul-94 29.244 27.981
1994 August Avg. Aug-94 30.060 29.462
1994 September Avg. Sep-94 30.113 29.833
1994 October Avg. Oct-94 32.595 29.530
1994 November Avg. Nov-94 34.606 30.694
1994 December Avg. Dec-94 33.435 30.161
1995 January Avg. Jan-95 32.834 29.551
1995 February Avg. Feb-95 31.869 28.925
1995 March Avg. Mar-95 32.837 30.011
1995 April Avg. Apr-95 32.313 30.041
1995 May Avg. May-95 32.753 31.229
1995 June Avg. Jun-95 31.842 31.496
1995 July Avg. Jul-95 30.811 31.383
1995 August Avg. Aug-95 31.343 33.172
1995 September Avg. Sep-95 31.361 32.477
1995 October Avg. Oct-95 30.946 32.778
1995 November Avg. Nov-95 30.953 32.741
1995 December Avg. Dec-95 35.322 38.172
1996 January Avg. Jan-96 36.000 36.242
1996 February Avg. Feb-96 40.856 37.769
1996 March Avg. Mar-96 37.229 36.012
1996 April Avg. Apr-96 35.574 34.107
1996 May Avg. May-96 34.923 34.477
1996 June Avg. Jun-96 34.925 36.353
1996 July Avg. Jul-96 35.634 37.268
1996 August Avg. Aug-96 38.440 37.977
1996 September Avg. Sep-96 47.016 44.784
1996 October Avg. Oct-96 51.573 51.527
1996 November Avg. Nov-96 58.049 63.411
1996 December Avg. Dec-96 61.045 84.292
1997 January Avg. Jan-97 47.455 63.392
1997 February Avg. Feb-97 38.711 39.020
1997 March Avg. Mar-97 38.500 37.256
1997 April Avg. Apr-97 34.875 35.261
1997 May Avg. May-97 35.310 36.476
1997 June Avg. Jun-97 34.429 35.863
1997 July Avg. Jul-97 34.906 34.628
1997 August Avg. Aug-97 37.027 36.527
1997 September Avg. Sep-97 38.679 37.952
1997 October Avg. Oct-97 39.826 37.321
1997 November Avg. Nov-97 35.948 35.004
1997 December Avg. Dec-97 33.571 31.364
1998 January Avg. Jan-98 30.066 28.206
1998 February Avg. Feb-98 29.786 28.324
1998 March Avg. Mar-98 27.389 27.838
1998 April Avg. Apr-98 29.057 29.470
1998 May Avg. May-98 27.419 27.823
1998 June Avg. Jun-98 24.421 24.841
1998 July Avg. Jul-98 24.540 24.548
1998 August Avg. Aug-98 24.116 23.866
1998 September Avg. Sep-98 24.830 24.042
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COMPETITION
Propane competes with other sources of energy, some of which are less
costly for equivalent energy value. Propane distributors compete for customers
against suppliers of electricity, fuel oil and natural gas, principally on the
basis of price, service, availability and portability. Electricity is a major
competitor of propane, but propane generally enjoys a competitive price
advantage over electricity for space heating, water heating and cooking. As
previously stated, we are unable to predict the ultimate impact that electric
utility deregulation may have on propane's current competitive price advantage.
Since the 1970s, many new homes have been built to use electrical heating
systems and appliances. Fuel oil is also a major competitor of propane and is
generally less expensive than propane. Operating efficiencies and other factors
such as air quality and environmental advantages, however, generally make
propane competitive with fuel oil as a heating source. Furnaces and appliances
that burn propane will not operate on fuel oil, and vice versa, and, therefore,
a conversion from one fuel to the other requires the installation of new
equipment. Propane serves as an alternative to natural gas in rural and suburban
areas where natural gas is unavailable or portability of product is required.
Natural gas is generally a less expensive source of energy than propane,
although in areas where natural gas is available, propane is used for certain
industrial and commercial applications and as a standby fuel during
interruptions in natural gas service. The gradual expansion of the nation's
natural gas distribution systems has resulted in the availability of natural gas
in some areas that previously
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depended upon propane. However, natural gas pipelines are not present in many
regions of the country where propane is sold for heating and cooking purposes.
The domestic propane retail distribution business is highly competitive.
The Partnership competes in this business with other large propane marketers,
including other full-service marketers, and thousands of small independent
operators. In recent years, some rural electric cooperatives and fuel oil
distributors have expanded their businesses to include propane distribution and
the Partnership competes with them as well. Based on the most recent annual
survey by the American Petroleum Institute, the 1996 domestic retail market for
propane (annual sales for other than chemical uses) was approximately 10.4
billion gallons and, based on LP-GAS magazine rankings, 1997 sales volume of the
ten largest propane companies (including AmeriGas Partners) represented
approximately 40% of domestic sales. The Partnership's retail volume of 785
million gallons in fiscal 1998 represented approximately 8% of the 1996 domestic
retail market. The ability to compete effectively depends on supplying customer
service, maintaining competitive retail prices and controlling operating
expenses.
Competition can intensify in response to a variety of factors, including
significantly warmer-than-normal weather, higher prices resulting from
extraordinary increases in the cost of propane, and recessionary economic
factors. The Partnership may experience greater than normal customer losses in
certain years when competitive conditions reflect any of these factors.
In the motor fuel market, propane competes with gasoline and diesel fuel.
When gasoline prices are high relative to propane, propane competes effectively.
Wholesale propane distribution is a highly competitive, low margin business.
Propane sales to other retail distributors and large-volume, direct-shipment
industrial end users are price sensitive and frequently involve a competitive
bidding process.
PROPERTIES
As of September 30, 1998, the Partnership owned approximately 76% of its
district locations. In addition, the Partnership subleases three one-million
barrel underground storage caverns in Arizona to store propane and butane for
itself and third parties. The Partnership also leases a 600,000 barrel
refrigerated, above-ground storage facility in California, which could be used
in connection with waterborne imports or exports of propane or butane. The
California facility, which the Partnership operates, is currently subleased to
several refiners for the storage of butane. In Rhode Island, the Partnership
leases storage with a 400,000 barrel capacity.
The transportation of propane requires specialized equipment. The trucks
and railroad tank cars utilized for this purpose carry specialized steel tanks
that maintain the propane in a liquefied state. As of September 30, 1998, the
Partnership owned a fleet of approximately 150 transport trucks; it leased
approximately 350 transport trailers and 500 railroad tank cars. In addition,
the Partnership fleet included over 2,400 bobtail and rack trucks, and over
2,000 other delivery and service vehicles. Approximately 46% of these vehicles
were owned. The Partnership owned more than 800,000 stationary storage tanks
with typical capacities of 100 to 1,000 gallons
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and over 1,000,000 portable propane cylinders with typical capacities of 5 to
100 gallons. The Partnership also owns more than 2,100 large volume tanks which
are used for its own storage requirements. Most of the Partnership's debt is
secured by liens and mortgages on the Partnership's real and personal property.
TRADE NAMES, TRADE AND SERVICE MARKS
The Partnership markets propane principally under the "AmeriGas,"
"America's Propane Company" and "PPX Prefilled Propane Xchange(TM)" trade
names and related service marks. UGI owns, directly or indirectly, all the
right, title and interest in the "AmeriGas" and "Petrolane" trade names and
related trade and service marks. The General Partner owns all right, title and
interest in the "America's Propane Company" trade name and related service mark.
The Partnership has an exclusive (except for use by AmeriGas, Inc. and the
General Partner), royalty-free license to use these names and trade and service
marks. UGI, Petrolane Incorporated and the General Partner each has the option
to terminate its respective license agreement on 12 months prior notice
(immediately in the case of the General Partner), without penalty, if the
General Partner is removed as general partner of the Partnership other than for
cause. If the General Partner ceases to serve as the general partner of the
Partnership for cause, Petrolane and the General Partner each has the option to
terminate its license agreement upon payment of a fee equal to the fair market
value of the licensed trade names. UGI has a similar termination option,
however, UGI must provide 12 months prior notice in addition to paying the fee.
The General Partner has discontinued widespread use of the "Petrolane"
trade name and conducts Partnership operations almost exclusively under the
"AmeriGas," "America's Propane Company" and "PPX Prefilled Propane
Xchange(TM)" trade names and related service marks. The General Partner has
filed applications with the United States Patent and Trademark Office to
register the mark "PPX Prefilled Propane Xchange(TM)" for use in connection
with the Partnership's cylinder exchange business.
SEASONALITY
Because many customers use propane for heating purposes, the Partnership's
retail sales volume is seasonal, with approximately 57% of the Partnership's
fiscal year 1998 retail sales volume and approximately 82% of its earnings
before interest expense, income taxes, depreciation and amortization occurring
during the five-month peak heating season from November through March. As a
result of this seasonality, sales are concentrated in the Partnership's first
and second fiscal quarters (October 1 through March 31). Cash receipts are
greatest during the second and third fiscal quarters when customers pay for
propane purchased during the winter heating season.
Sales volume for the Partnership traditionally fluctuates from
year-to-year in response to variations in weather, prices, competition, customer
mix and other factors, such as conservation efforts and general economic
conditions. For historical information on national weather statistics, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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GOVERNMENT REGULATION
The Partnership is subject to various federal, state and local
environmental, safety and transportation laws and regulations governing the
storage, distribution and transportation of propane. These laws include, among
others, the Resource Conservation and Recovery Act, the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"), the Clean Air
Act, the Occupational Safety and Health Act, the Emergency Planning and
Community Right to Know Act, the Clean Water Act and comparable state statutes.
CERCLA, also known as the "Superfund" law, imposes joint and several liability
on certain classes of persons considered to have contributed to the release or
threatened release of a "hazardous substance" into the environment without
regard to fault or the legality of the original conduct. Propane is not a
hazardous substance within the meaning of federal and state environmental laws.
However, the Partnership owns and operates real property where such hazardous
substances may exist. See Notes 1 and 11 to the Company's Consolidated Financial
Statements.
All states in which the Partnership operates have adopted fire safety
codes that regulate the storage and distribution of propane. In some states
these laws are administered by state agencies, and in others they are
administered on a municipal level. The Partnership conducts training programs to
help ensure that its operations are in compliance with applicable governmental
regulations. The Partnership maintains various permits under environmental laws
that are necessary to operate certain of its facilities, some of which may be
material to the operations of the Partnership. Management believes that the
procedures currently in effect at all of its facilities for the handling,
storage and distribution of propane are consistent with industry standards and
are in compliance in all material respects with applicable environmental, health
and safety laws.
With respect to the transportation of propane by truck, the Partnership is
subject to regulations promulgated under the Federal Motor Carrier Safety Act.
These regulations cover the transportation of hazardous materials and are
administered by the United States Department of Transportation ("DOT"). With
respect to general operations, National Fire Protection Association Pamphlets
No. 54 and No. 58, which establish a set of rules and procedures governing the
safe handling of propane, or comparable regulations, have been adopted as the
industry standard in a majority of the states in which the Partnership operates.
The Natural Gas Safety Act of 1968 required the DOT to develop and enforce
minimum safety regulations for the transportation of gases by pipeline. The
DOT's pipeline safety code applies to, among other things, a propane gas system
which supplies 10 or more customers from a single source and a propane gas
system any portion of which is located in a public place. The code requires
operators of all gas systems to provide training and written instructions for
employees, establish written procedures to minimize the hazards resulting from
gas pipeline emergencies, and keep records of inspections and testing.
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On December 13, 1996, the Research and Special Programs Administration
("RSPA"), a division of the DOT, issued an advisory notice that alerted persons
involved in the design, manufacture, assembly, maintenance or transportation of
hazardous materials in certain cargo tank motor vehicles, including the type of
vehicles used by the Partnership, of a problem with emergency discharge systems.
On February 19, 1997, RSPA issued an emergency interim final rule indicating
that the emergency discharge control systems on the affected vehicles may not
function as required by federal regulations under all operating conditions. The
interim final rule specified the conditions under which the affected vehicles
could continue to be operated. On August 18, 1997, after conducting a series of
public hearings and workshops, RSPA issued an interim final rule which sets
forth the requirements that must be satisfied to continue operating such
vehicles. The interim final rule requires, among other things, that in the event
of an unintentional release of product, the person attending the unloading
operation must be able to promptly activate the internal self-closing stop valve
on the motor vehicle and shut down all power equipment. The interim final rule
provides alternative ways to comply with this requirement and permits the use of
radio-controlled systems that are capable of stopping the transfer of propane by
use of a transmitter carried by a qualified person who also satisfies the
attendance requirements contained in the regulations. The Partnership is in the
process of installing a radio-controlled emergency shut-down system on its
bobtail vehicles.
As a result of a civil action filed by five major multi-state propane
marketers (not including the Partnership), the U.S. District Court for the
Western District of Missouri issued a preliminary injunction against the DOT,
staying and postponing certain provisions of the interim final rule. In
addition, a parallel civil action brought by the propane industry's trade
association, the National Propane Gas Association ("NPGA"), is pending in Texas.
In June 1998, RSPA responded to these actions by beginning a Negotiated
Rulemaking Proceeding under the Negotiated Rulemaking Act of 1990. In such a
negotiated rulemaking proceeding, representatives of interests that will be
affected by a regulation meet to discuss the safety issues and to identify
potential solutions. In this particular proceeding, the group must reach
unanimity on the proposed solution and prepare a notice of proposed rulemaking
for publication by the agency in early 1999.
The goal of the proceeding is to develop a regulatory framework relating
to the safe unloading of propane from cargo tank motor vehicles. The General
Partner is participating in the process and believes that the radio-controlled
shut-off systems which it is installing on its bobtail trucks will be part of
the final solution to the safety issues presented in the civil actions and the
Negotiated Rulemaking with respect to these delivery vehicles. As to the
Partnership's large vehicles known as transports, the General Partner is waiting
for DOT to approve a final rule relating to emergency shutdown requirements. In
the interim, the General Partner plans to investigate and test several different
transport systems.
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EMPLOYEES
The Partnership does not directly employ any persons responsible for
managing or operating the Partnership. The General Partner provides these
services and is reimbursed for its direct and indirect costs and expenses,
including all compensation and benefit costs. At September 30, 1998, the General
Partner had 5,107 employees, including 287 temporary and part-time employees.
UGI also performs certain financial and administrative services for the General
Partner on behalf of the Partnership and is reimbursed by the Partnership for
its direct and indirect costs and expenses.
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UTILITY OPERATIONS
Our utility business is conducted by UGI Utilities, Inc. a wholly owned
subsidiary. Utilities operates its business through two divisions, the gas
division ("Gas Utility") and the electric division ("Electric Utility"). The
business conducted by each of these divisions is described below.
GAS UTILITY
SERVICE AREA; REVENUE ANALYSIS
Gas Utility distributes natural gas to approximately 258,000 customers in
portions of 14 eastern and southeastern Pennsylvania counties through its
distribution system of approximately 4,400 miles of gas mains. The service area
consists of approximately 3,000 square miles and includes the cities of
Allentown, Bethlehem, Easton, Harrisburg, Hazleton, Lancaster, Lebanon and
Reading, Pennsylvania. Located in Gas Utility's service area are major
production centers for basic industries such as specialty metals, aluminum and
glass. For the fiscal years ended September 30, 1998, 1997 and 1996, revenues of
Gas Utility accounted for approximately 24%, 24%, and 25%, respectively, of our
total consolidated revenues.
System throughput (the total volume of gas sold to or transported for
customers within Gas Utility's distribution system) for the 1998 fiscal year was
approximately 74.9 billion cubic feet ("bcf"). System sales of gas accounted for
approximately 42% of system throughput, while gas transported for commercial and
industrial customers (who buy their gas from others) accounted for approximately
58% of system throughput. Based on industry data for 1997, residential customers
account for approximately 38% of total system throughput by local gas
distribution companies in the United States. By contrast, for the 1998 fiscal
year, Gas Utility's residential customers represented 22% of its total system
throughput.
SOURCES OF SUPPLY AND PIPELINE CAPACITY
Gas Utility meets its service requirements by utilizing a diverse mix of
natural gas purchase contracts with producers and marketers, storage and
transportation services from pipeline companies, and its own propane-air and
liquefied natural gas peak-shaving facilities. Purchases of natural gas in the
spot market are also made to reduce costs and manage storage inventory levels.
These arrangements enable Gas Utility to purchase gas from Gulf Coast,
Mid-Continent, Appalachian and Canadian sources. For the transportation and
storage function, Utilities has agreements with a number of pipeline companies,
including Texas Eastern Transmission Corporation, Columbia Gas Transmission
Corporation, ANR Pipeline Company, Columbia Gulf Transmission Company, CNG
Transmission Corporation, National Fuel Gas Supply Corporation, Transcontinental
Gas Pipeline Corporation, Trunkline Gas Company, Texas Gas Transmission
Corporation, Panhandle Eastern Pipe Line Company and Tennessee Gas Pipeline Co.
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GAS SUPPLY CONTRACTS
During the 1998 fiscal year, Gas Utility purchased approximately 30.8 bcf
of natural gas and sold approximately 31.3 bcf to customers. Approximately 25
bcf or 81% of the volumes purchased were supplied under agreements with six
major suppliers of natural gas. The remaining 5.8 bcf or 19% of gas purchased
was supplied by producers and marketers under other arrangements, including
multi-month agreements at spot prices. Certain gas supply contracts require
minimum gas purchases, however, each of these agreements either terminates in
fiscal year 1999, or includes provisions that entitle Utilities to terminate the
agreement if it is not market responsive.
STORAGE AND PEAK SHAVING
Gas Utility contracts for 9.5 bcf of seasonal storage with several
interstate pipelines. Gas is injected in storage during the summer and delivered
during the winter at combined peak day capacities of approximately 0.16 bcf. In
Harrisburg, Reading and Bethlehem, Pennsylvania, Gas Utility operates
peak-shaving facilities capable of producing 0.06 bcf of gas per day from
propane-air and liquefied natural gas facilities. These facilities are used to
meet winter peak service requirements.
SEASONAL VARIATION
Because many of its customers use gas for heating purposes, Gas Utility's
sales are seasonal, with approximately 57% of fiscal year 1998 throughput and
approximately 76% of earnings before interest expense, income taxes,
depreciation and amortization occurring during the winter season from November
through March.
COMPETITION
Natural gas is a fuel that competes with electricity and oil, and to a
lesser extent, with propane and coal. Competition among these fuels is primarily
a function of their comparative price and the relative cost and efficiency of
fuel utilization equipment. Electric utilities in Gas Utility's service area are
aggressively seeking new load, primarily in the new construction market.
Competition with fuel oil dealers is focused on industrial customers. Gas
Utility responds to this competition with marketing efforts designed to retain
and grow its customer base.
In substantially all of its service territory, Gas Utility is the only
regulated gas distribution utility having the right, granted by the PUC or by
law, to provide transportation services. While unregulated gas marketers have
been selling gas to commercial and industrial customers in Gas Utility's service
territory for over 13 years, Gas Utility provides transportation services for
those sales. Pennsylvania is considering legislation which would require a
customer choice option for retail purchasers of natural gas.
See "Utility Regulation and Rates."
Customers representing approximately 41% of Gas Utility's transportation
system throughput (22% of transportation revenues) have the ability to switch to
an alternate fuel at any
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time and, therefore, are served under flexible, interruptible rates which are
competitively priced with respect to their alternate fuel. Gas Utility's margins
from these customers, therefore, are affected by the difference, or "spread,"
between the customers' delivered cost of gas and the customers' delivered
alternate fuel cost. In addition, other customers representing 33% of
transportation system throughput (19% of transportation revenues) have locations
which afford them the option, although none has exercised it, of seeking
transportation service directly from interstate pipelines, thereby bypassing Gas
Utility. The majority of customers in the latter group are served under
transportation contracts having three- to ten-year terms. Included in these two
groups are the ten Utilities' customers with the highest volume of system
throughput. Three of the top five customers have entered into long-term
agreements with Utilities. No single customer represents, or is anticipated to
represent, more than 1% of the total revenues of Gas Utility.
OUTLOOK FOR GAS SERVICE AND SUPPLY
Gas Utility anticipates having adequate pipeline capacity and sources of
supply available to it to meet the full requirements of all firm customers on
its system through fiscal year 1999. Supply mix is diversified, market priced,
and delivered pursuant to a number of long- and short-term firm transportation
and storage arrangements.
During the 1998 fiscal year, Gas Utility supplied transportation service
to three major cogeneration installations. Gas Utility continues to pursue
opportunities to supply natural gas to electric generation projects located in
its service territory. Gas Utility also continues to seek new residential,
commercial and industrial customers for both firm and interruptible service. In
the residential market sector, Gas Utility connected 6,955 additional
residential heating customers during the 1998 fiscal year, a modest increase
from the previous year. Of those new customers, new home construction accounted
for a record 4,905 heating customers, an increase of approximately 14% from the
prior year. Customers converting from other energy sources, primarily oil, and
existing non-heating gas customers who have added gas heating systems to replace
other energy sources, accounted for the balance of the additions. The total
number of new commercial and industrial customers was 1,246, up from 1,068 in
fiscal year 1997.
Utilities continues to monitor and participate extensively in third-party
proceedings before the Federal Energy Regulatory Commission ("FERC") affecting
the rates and the terms and conditions under which Gas Utility transports and
stores natural gas. Among these proceedings are those arising out of certain
FERC orders and/or pipeline filings which relate to (i) the relative pricing of
pipeline services in a competitive energy marketplace; (ii) the flexibility of
the terms and conditions of pipeline service contracts; and (iii) pipelines'
requests to increase their base rates, or change the terms and conditions of
their storage and transportation services.
Gas Utility's objective in negotiations with interstate pipeline and
natural gas suppliers, and in litigation before regulatory agencies, is to
assure availability of supply, transportation and storage alternatives to serve
market requirements at the lowest cost possible, taking into account the need
for security of supply. Consistent with that objective, Gas Utility negotiates
the terms of firm transportation capacity on all pipelines serving Gas Utility,
arranges for appropriate storage and peak-shaving resources, negotiates with
producers for competitively priced gas purchases and
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aggressively participates in regulatory proceedings related to transportation
rights, costs of service and gas costs.
ELECTRIC UTILITY
ELECTRICITY GENERATION CUSTOMER CHOICE AND COMPETITION ACT
On January 1, 1997, Pennsylvania's Electricity Generation Customer Choice
and Competition Act (Customer Choice Act) became effective. The Customer Choice
Act permits all Pennsylvania retail electric customers to choose their electric
generation supplier over a three-year phase-in period commencing January 1,
1999. The Customer Choice Act required all electric utilities to file
restructuring plans with the PUC which, among other things, included unbundled
prices for electric generation, transmission and distribution and a competitive
transition charge (CTC) for the recovery of "stranded costs" which would be paid
by all customers receiving distribution service. Stranded costs generally are
electric generation-related costs that traditionally would be recoverable in a
regulated environment but may not be recoverable in a competitive electric
generation market. Under the Customer Choice Act, Electric Utility's rates for
transmission and distribution services provided through June 30, 2001 are capped
at levels in effect on January 1, 1997. In addition, Electric Utility generally
may not increase prices for electric generation as long as stranded costs are
being recovered through the CTC. In accordance with the restructuring
proceedings discussed below, Utilities expects to collect a CTC from all
distribution customers from January 1, 1999 until December 31, 2002. Electric
Utility will continue to be the only regulated electric utility having the
right, granted by the PUC or by law, to distribute electric energy in its
service territory.
On June 19, 1998, the PUC entered its Opinion and Order (the
"Restructuring Order") in Electric Utility's restructuring proceeding under the
Customer Choice Act. The Restructuring Order approved a settlement agreement
among all parties to Utilities' proceeding except Pennsylvania Power & Light
Company ("PP&L"). Under the terms of the Restructuring Order, commencing January
1, 1999 Electric Utility is authorized to recover from its customers
approximately $32.5 million in stranded costs (on a full revenue requirements
basis, which includes all income and gross receipts taxes) over a four-year
period through a CTC, together with carrying charges on unrecovered balances of
7.94%. Electric Utility's recoverable stranded costs include approximately $8.7
million for the termination of a 1993 power purchase agreement with Foster
Wheeler Penn Resources, Inc., an independent power producer. The Restructuring
Order also provides that Electric Utility may extend the CTC period to recover
additional amounts it may be ordered to pay as a result of a contract dispute
with PP&L. See "Sources of Supply" below. All of Electric Utility's customers
will be permitted to select an alternative electric generation supplier as of
January 1, 1999. Customers choosing another supplier will on average receive a
generation "shopping credit" developed from system-wide generation rates of 3.67
cents per kilowatt hour ("kwh") in calendar years 1999 and 2000, and 4.3 cents
per kwh in calendar years 2001 and 2002. As noted above, Electric Utility's
power generation rates are capped until December 31, 2002. Because the sources
and costs of Electric Utility's electric power vary from period to period and
because Electric Utility no longer defers the difference
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between its actual power costs and amounts included in its rates, Electric
Utility's quarterly results may become more volatile in the future. Results will
also be affected by the number of customers who choose to purchase their power
from other suppliers during any given time period. Utilities has applied to the
PUC for approval to transfer its electric generation assets to a non-regulated
subsidiary as provided for in the settlement agreement approved by the
Restructuring Order. Utilities' management believes that the PUC will approve
this request.
SERVICE AREA; REVENUE ANALYSIS
Electric Utility supplies electric service to approximately 61,000
customers in portions of Luzerne and Wyoming Counties in northeastern
Pennsylvania through a system consisting of approximately 2,100 miles of
transmission and distribution lines and 14 transmission substations. For the
1998 fiscal year, about 51% of sales volume came from residential customers, 34%
from commercial customers and 13% from industrial customers. The remaining 2%
represents electricity transported for customers who purchased their power from
others during the pilot program phase of the Customer Choice Act. For the 1998,
1997 and 1996 fiscal years, revenues of Electric Utility accounted for
approximately 5%, 4%, and 4%, respectively, of our total consolidated revenues.
SOURCES OF SUPPLY
Electric Utility distributes both electricity that it generates or
purchases from others and, since November 1, 1997, electricity that customers
purchase from other suppliers. Utilities owns and operates Hunlock generating
station located near Kingston, Pennsylvania ("Hunlock Station"), and has a 1.11%
ownership interest in the Conemaugh generating station located near Johnstown,
Pennsylvania ("Conemaugh Station"), which is operated by another utility. These
two coal-fired stations can generate up to 69 megawatts of electric power for
Electric Utility and provided approximately 46% of its energy requirements
during the 1998 fiscal year.
Utilities has short-term, fixed-price, power supply agreements to purchase
the total output, 32 megawatts of electric power, from the Montgomery County
(Maryland) Resource Recovery Facility (the "Montgomery Facility"). The
Montgomery Facility output is expected to replace higher cost power under the
PP&L contract through calendar year 1999.
Utilities has a long-term power supply agreement with PP&L. Under this
agreement, PP&L supplies all the electric power required by Electric Utility
above that provided from certain other sources, including Hunlock Station and
the Montgomery Facility. The cost of electricity supplied by PP&L is based on
PP&L's actual system costs. As a result of the availability and projected cost
of alternative supplies, Utilities provided PP&L with notice of its intent to
stop purchasing power under their power supply agreement as of March 2001. In
addition, if certain conditions are met, the power supply agreement may
terminate at an earlier date.
There currently is a dispute between Utilities and PP&L over the effect of
customer choice on Utilities' obligations under the agreement. Utilities filed
an action in the Court of Common Pleas of Luzerne County, Pennsylvania seeking a
declaration of the rights and responsibilities of
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the parties to the agreement, including a declaration that Utilities is
obligated to purchase only the amount of energy required to serve its customers
who do not elect to purchase energy from alternate suppliers. On August 31, 1998
the Court granted Utilities' motion for partial judgment on the pleadings,
holding that Utilities' purchase obligation does not include energy for
customers who have chosen alternative suppliers. Utilities expects PP&L to
appeal this decision at the conclusion of the case. In addition, PP&L disputes
Utilities' right to displace PP&L power with power purchased from the Montgomery
Facility. The Restructuring Order provides that Utilities may extend the CTC
period to recover any additional stranded costs it may incur if it is ultimately
determined that Utilities must pay PP&L for power that is no longer needed to
serve customers.
In a regulated utility environment, Hunlock Station could be expected to
operate until the end of its useful life in 2004. As a result of electric
deregulation, however, Hunlock Station may cease operations earlier, depending
on a number of factors, including customer load, contract purchase obligations,
the availability and cost of replacement power and the ability to market Hunlock
Station's output. Utilities estimates that the cost of electricity supplied by
Hunlock Station is higher than projected market rates, but lower than the cost
of electricity purchased under the current PP&L contract. Utilities' decisions
regarding the operation of Hunlock Station will be highly dependent on the
maturation of the emerging deregulated energy market in Pennsylvania.
ENVIRONMENTAL FACTORS
The operation of Hunlock Station complies with the air quality standards
of the Pennsylvania Department of Environmental Resources ("DER") with respect
to stack emissions. Under the Federal Water Pollution Control Act, Utilities has
a permit from the DER to discharge water from Hunlock Station into the North
Branch of the Susquehanna River.
The Federal Clean Air Act Amendments of 1990 (the "Clean Air Act
Amendments") impose emissions limitations for certain compounds, including
sulfur dioxide and nitrous oxides. Both the Conemaugh Station and the Hunlock
Station are in material compliance with these emission standards.
More stringent regulation of nitrous oxide emissions at both Hunlock and
Conemaugh Stations may be required due to the actions of the Northeast Ozone
Transport Commission. The Commission was created by the Clean Air Act Amendments
to provide a plan to reduce ground level ozone in the Northeast to a level
acceptable to the U.S. Environmental Protection Agency. Future actions of the
Commission may cause the DER to modify its regulations for nitrous oxides and
thereby affect the compliance plans of Hunlock and Conemaugh Stations.
SEASONALITY
Sales and distribution of electricity for residential heating purposes
accounted for approximately 21% of the total sales of Electric Utility during
the 1998 fiscal year. Electricity competes with natural gas, oil, propane and
other heating fuels in this use. Approximately 53% of volume occurred during
November through April, the six coldest months of the 1998 fiscal year,
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demonstrating modest seasonality favoring winter due to the use of electricity
for residential heating purposes.
UTILITIES' PROPERTIES
Utilities' Mortgage and Deed of Trust constitutes a first lien on
substantially all real and personal property of Utilities.
UTILITY REGULATION AND RATES
REGULATORY ENVIRONMENT
Since December 1982, Gas Utility has provided transportation service for
commercial and industrial customers who purchase their gas from others. As
previously reported, this unbundled service accounted for approximately 58% of
Gas Utility's system throughput in fiscal year 1998. Certain states, including
Pennsylvania, are considering whether transportation service options should be
extended to residential and small commercial customers. 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 stop selling natural gas. Legislative
committees have conducted public hearings on the proposed legislation and
Utilities has provided testimony on such issues as the need for standards to
assure reliability of future gas supplies and the recovery of costs associated
with existing gas supply assets. At the request of the Governor of Pennsylvania,
in December 1997 a collaborative group of industry stakeholders was convened to
attempt to further develop the proposed legislation. To date, this group has
failed to reach a consensus. We expect the collaborative process to continue,
and we will participate as appropriate. Independently, Utilities is considering
a number of options for addressing the provision of unbundled transportation
services to residential and small commercial customers.
FERC ORDERS 888 AND 889
In April 1996, FERC issued Orders No. 888 and 889 which established rules
for the use of electric transmission facilities for wholesale transactions. FERC
has also asserted jurisdiction over the transmission component of electric
retail choice transactions. In compliance with these orders, the PJM
Interconnection, LLC ("PJM"), of which Utilities is a member, has filed an open
access transmission tariff with the FERC establishing transmission rates and
procedures for transmission within the PJM control area. Under the PJM tariff
and associated agreements, Electric Utility is entitled to receive certain
revenues when its transmission facilities are used by third parties.
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PENNSYLVANIA PUBLIC UTILITY COMMISSION JURISDICTION
Utilities' gas and electric utility operations are subject to regulation
by the PUC as to rates, terms and conditions of service, accounting matters,
issuance of securities, contracts and other arrangements with affiliated
entities, and various other matters.
PURCHASED GAS COST RATES
Gas Utility's gas service tariff contains Purchased Gas Cost ("PGC") rates
which provide for annual increases or decreases in the rate per thousand cubic
feet ("mcf") which Gas Utility charges for natural gas sold by it, to reflect
Utilities' projected cost of purchased gas. In accordance with regulations
adopted by the PUC on June 14, 1995, PGC rates may also be adjusted quarterly to
reflect purchased gas costs. Each proposed PGC rate is required to be filed with
the PUC six months prior to its effective date. During this period the PUC holds
hearings to determine whether the proposed rate reflects a least-cost fuel
procurement policy consistent with the obligation to provide safe, adequate and
reliable service. After completion of these hearings, the PUC issues an order
permitting the collection of gas costs at levels which meet that standard. The
PGC mechanism also provides for an annual reconciliation. Utilities has two PGC
rates. PGC (1) is applicable to small, firm, core market customers consisting of
the residential and small commercial and industrial classes; PGC (2) is
applicable to firm, contractual, high-load factor customers served on three
separate rates. In addition, residential customers maintaining a high load may
qualify for the PGC(2) rate. In accordance with the schedule established by law
and PUC regulations, Gas Utility will file a new PGC tariff on June 1, 1999, to
be effective December 1, 1999. When filed, the proposed tariff will reflect
estimated PGC over-collections and under-collections through November 30, 1999.
ENERGY COST RATES
In accordance with provisions of the Customer Choice Act, the PUC approved
Electric Utility's application to roll its energy cost rate ("ECR") into its
base rates effective as of May 2, 1997, at a combined level not to exceed the
rate cap established as of January 1, 1997. Before January 1, 1997, the ECR
permitted Electric Utility to adjust customers' monthly charges to reflect
annual changes in the cost of purchased power, fuel, interchange power and the
cost of transmitting power purchased from external sources. Electric Utility may
no longer adjust customer charges to reflect changes in such costs.
GAS RATE CASE
On January 27, 1995, Gas Utility filed with the PUC for a $41.3 million
increase in base rates. The PUC approved a $19.5 million settlement of this
proceeding, effective August 31, 1995.
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ELECTRIC RATE CASE
On January 26, 1996, Electric Utility filed with the PUC for a $6.2
million increase in its base rates. On July 18, 1996, the PUC approved a
settlement of this proceeding authorizing a $3.1 million increase in annual
revenues. This increase in base rates became effective on July 19, 1996.
STATE TAX SURCHARGE CLAUSES
Utilities' gas and electric service tariffs contain state tax surcharge
clauses. The surcharges are recomputed whenever any of the tax rates included in
their calculation are changed. These clauses protect Utilities from the effect
of increases in most of the Pennsylvania taxes to which it is subject, however,
any increase in Electric Utility's state tax surcharge is generally subject to
the rate caps discussed above.
UTILITY FRANCHISES
Utilities holds certificates of public convenience issued by the PUC and
certain "grandfather rights" predating the adoption of the Pennsylvania Public
Utility Code and its predecessor statutes which it believes are adequate to
authorize it to carry on its business in substantially all the territory to
which it now renders gas and electric service. Under applicable Pennsylvania
law, Utilities also has certain rights of eminent domain as well as the right to
maintain its facilities in streets and highways in its territories.
OTHER GOVERNMENT REGULATION
In addition to regulation by the PUC, the gas and electric utility
operations of Utilities are subject to various federal, state and local laws
governing environmental matters, occupational health and safety, pipeline safety
and other matters. Certain of Utilities' activities involving the interstate
movement of natural gas, the transmission of electricity, transactions with
non-utility generators of electricity and other matters, are also subject to the
jurisdiction of FERC.
Utilities is subject to the requirements of the federal Resource
Conservation and Recovery Act, CERCLA and comparable state statutes with respect
to the release of hazardous substances on property owned or operated by
Utilities. See ITEM 3. "LEGAL PROCEEDINGS-Environmental Matters-Manufactured Gas
Plants." The electric generation activities of Utilities are also subject to the
Clean Air Act Amendments, the Federal Water Pollution Control Act and comparable
state statutes and regulations. See "UTILITY OPERATIONS - Generation and
Distribution of Electricity-Environmental Factors."
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UGI ENTERPRISES, INC.
UGI Enterprises, Inc. is a wholly owned subsidiary of UGI that was
formed in 1994. Through its subsidiaries, Enterprises is developing the
domestic and international energy businesses described below.
NATURAL GAS AND ELECTRICITY MARKETING
In 1995, the gas marketing business previously conducted by a subsidiary
of Utilities was transferred to UGI Energy Services, Inc. ("Energy Services"), a
wholly owned subsidiary of Enterprises. Energy Services conducts this business
under the trade names GASMARK(R) and POWERMARK. GASMARK(R) sells natural gas
directly to more than 900 commercial and industrial customers in the
Mid-Atlantic region and Ohio through the transportation systems of 15 utility
systems and recently it began to market electricity to retail customers in
Pennsylvania. Another Enterprises subsidiary, UGI Power Supply, Inc., has FERC
authority to engage in wholesale electric power sales.
INTERNATIONAL ENERGY-RELATED JOINT VENTURES
During 1996, Enterprises formed a joint venture with affiliates of Energy
Transportation Group, Inc. ("ETG") and North American World Trade, Ltd. to
develop, build and operate a liquefied petroleum gas ("LPG") import project in
Romania. ETG has extensive experience in the transportation of liquefied natural
gas, and North American World Trade, Ltd. is a consulting firm with Romanian
expertise. The joint venture is known as Black Sea LPG, L.P. The project will
include construction of a marine LPG import terminal and propane-air mixing
plants to deliver propane to Bucharest, Romania's capital. Enterprises has
funded the initial development of the joint venture through its subsidiary, UGI
Black Sea Enterprises, Inc. Black Sea LPG, L.P. will develop the project and UGI
Black Sea Enterprises, Inc. will operate the terminal and the propane-air
plants. On December 11, 1997, affiliates of Enterprises and ETG entered into an
agreement creating a Romanian joint venture known as Black Sea LPG Romania, S.A.
for the purpose of financing and constructing the project. The Romanian partners
in this venture are Regia Autonoma a Gazelor Naturale "Romgaz" Medias, the
Romanian national gas utility; Regia Autonoma de Electricitate "Renel", the
Romanian national electric utility; and Rompetrol, S.A., a privately-held energy
services company. The current economic climate in Romania has slowed development
of the project.
During 1998, Enterprises formed a joint venture known as ChinaGas
Partners, L.P. ("ChinaGas") with affiliates of ETG to develop, build and operate
LPG projects in the People's Republic of China. On October 28, 1998, ChinaGas
acquired 50% of the shares of an existing Chinese company known as the Nantong
Huayang LPG Port Co., Ltd. ("Port Company") which operates an integrated LPG
business, including an import terminal and distribution business, serving the
provinces along the lower and middle reaches of the Yangtze River. The other
shareholders in the Port Company are China National Chemical Supply & Sales
Corporation and two of its affiliates. Three of our experienced employees have
been placed in key management positions within the Port Company, including the
position of General Manager. These employees
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will guide the introduction of our propane operating techniques and lead the
expansion of the business.
In addition, on October 31, 1998, ChinaGas signed a Cooperation Agreement
with the Hainan Minsheng Gas Corporation to develop an integrated LPG company,
including import facilities and distribution businesses, to serve parts of
southwest China.
BUSINESS SEGMENT INFORMATION
The table stating the amounts of revenues, operating income (loss) and
identifiable assets attributable to each of UGI's business segments for the
1998, 1997 and 1996 fiscal years appears on page 22 of UGI's 1998 Annual Report
to Shareholders and is incorporated in this Report by reference.
EMPLOYEES
At September 30, 1998, UGI and its subsidiaries had 6,381 employees.
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ITEM 3. LEGAL PROCEEDINGS
With the exception of the matters set forth below, no material legal
proceedings are pending involving UGI, any of its subsidiaries or any of their
properties, and no such proceedings are known to be contemplated by governmental
authorities.
ENVIRONMENTAL MATTERS - MANUFACTURED GAS PLANTS
Prior to the general availability of natural gas, in the 1800s through the
mid-1900s, manufactured gas was a chief source of gas for lighting and heating
nationwide. The process involved heating certain combustibles such as coal, oil
and coke in a low-oxygen atmosphere. Methods of production included coal
carbonization, carbureted water gas and catalytic cracking. These methods were
employed at many different sites throughout the country. The residue from gas
manufacturing, including coal tar, was typically stored on site, burned in the
gas plant, or sold for commercial use. Some constituents of coal tars produced
from the manufactured gas process are today considered hazardous substances
under the Superfund Law.
The gas distribution business has been one of Utilities' principal lines
of business since its inception in 1882. One of the ways Utilities initially
expanded its business in its early years was by entering into agreements with
other gas companies to operate their businesses. After 1888, the principal means
by which Utilities expanded its gas business was to acquire all or a portion of
the stock of companies engaged in this business. Utilities also provided
management and administrative services to some of these companies. Utilities
grew rapidly by means of stock acquisitions and became one of the largest public
utility holding companies in the country. Pursuant to the requirements of the
Public Utility Holding Company Act of 1935, Utilities divested all of its
utility operations other than those which now constitute the Gas Utility and the
Electric Utility.
The manufactured gas process was once used by Utilities in connection with
providing gas service to its customers. In addition, virtually all of the gas
companies that Utilities operated or to which it provided services, or in which
Utilities held stock, utilized a manufactured gas process. Utilities has been
notified of several sites outside Pennsylvania on which (i) gas plants were
formerly operated by it or owned or operated by its former subsidiaries and (ii)
either environmental agencies or private parties are investigating the extent of
environmental contamination and the necessity of environmental remediation.
Utilities is currently litigating a claim against it relating to an out-of-state
site. If Utilities were found liable as a "responsible party" as defined in the
Superfund Law (or comparable state statutes) with respect to this site, it would
have joint and several liability with other responsible parties for the full
amount of the cleanup costs. A "responsible party" under that statute includes
(i) the current owner of the affected property and (ii) each owner or operator
of a facility during the time when hazardous substances were released on the
property.
Management believes that Utilities should not have significant liability
in those instances in which a former subsidiary operated a manufactured gas
plant because Utilities generally is not
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legally liable for the obligations of its subsidiaries. Under certain
circumstances, however, a court could find a parent company liable for
environmental damage caused by a subsidiary company when the parent company
either (i) itself operated the facility causing the environmental damage or (ii)
otherwise so controlled the subsidiary that the subsidiary's separate corporate
form should be disregarded. There could be, therefore, significant future costs
of an uncertain amount associated with environmental damage caused by
manufactured gas plants that Utilities owned or directly operated, or that were
owned or operated by former subsidiaries of Utilities, if a court were to
conclude that the subsidiary's separate corporate form should be disregarded.
Utilities believes that there are approximately 40 manufactured gas plant
sites in Pennsylvania where either (i) Utilities formerly operated the plant or
(ii) Utilities owns or at one time owned the site. Most of the sites are no
longer owned by Utilities and the gas plants formerly operated at these 40 sites
have all been out of operation since at least the early 1950s. Utilities or
other parties are currently conducting investigative or remedial activities at
nine of the 40 sites. Based on the 1995 settlement agreement with the PUC
relating to Gas Utilities' 1995 base rate increase filing, rate relief will be
permitted for certain remediation expenditures on environmentally contaminated
sites located in Pennsylvania. Because of this, Utilities does not expect its
costs for Pennsylvania sites to be material to its results of operations.
The following is a short description of the status of certain matters
involving Utilities related to manufactured gas plants located in other states.
See also Notes 1 and 11 to the Company's Consolidated Financial Statements.
OUT OF STATE GAS PLANT SITES
1. Halladay Street, Jersey City, New Jersey. By letter dated April 12,
1993, Public Service Electric and Gas Company ("PSE&G") informed Utilities that
PSE&G had been named as a defendant in a civil action pending in the United
States District Court for the District of New Jersey, seeking damages as a
result of contamination relating to the former manufactured gas plant operations
at Halladay Street in Jersey City, New Jersey. The Halladay Street gas plant
operated from approximately 1884 until 1950. PSE&G asserted that Utilities is
liable for that portion of the costs associated with operations of the plant
between 1886 and 1899. PPG Industries, Inc. has also been named as a defendant
in the action for costs associated with chemical contamination at the site
unrelated to gas plant operations. In July 1993, PSE&G served Utilities with a
complaint naming Utilities as a third-party defendant in this civil action.
PSE&G subsequently amended the complaint to allege additional theories of
liability for the period from 1899 to 1940. To date, that action has focused on
the chemical contamination allegedly associated with PPG Industries' activities
and there have been no developments concerning liability for gas plant related
contamination. Investigations of the site conducted to date are insufficient to
establish the extent of environmental remediation necessary, if any. Hence,
Utilities is unable to estimate the total cost of cleanup associated with
manufactured gas plant wastes at this site.
-23-
<PAGE> 26
2. Savannah, Georgia. On March 2, 1992, Atlanta Gas Light Company ("AGL")
informed Utilities that it was investigating contamination that appears to be
related to manufactured gas plant operations at a site owned by AGL in Savannah,
Georgia. AGL believes that Utilities may be liable for investigative and
remedial costs as a result of having operated the gas plant through a subsidiary
company in the early 1900s. AGL has stated its intention to bring suit against
Utilities. AGL estimates that total costs to remediate the site may exceed $5
million. Management believes that Utilities has substantial defenses to any
action that may arise out of the activities of its former subsidiary at this
site.
-24-
<PAGE> 27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the last
fiscal quarter of the 1998 fiscal year.
EXECUTIVE OFFICERS
Information regarding our executive officers is included in Part III of
this Report and is incorporated in Part I by reference.
PART II: SECURITIES AND FINANCIAL INFORMATION
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Our Common Stock is traded on the New York and Philadelphia stock
exchanges under the symbol "UGI". The following table sets forth the high and
low sales prices for the Common Stock on the New York Stock Exchange Composite
Transactions tape as reported in The Wall Street Journal for each full quarterly
period within the two most recent fiscal years:
<TABLE>
<CAPTION>
1998 FISCAL YEAR HIGH LOW
<S> <C> <C>
4th Quarter $25.813 $20.500
3rd Quarter 28.750 23.750
2nd Quarter 29.750 27.000
1st Quarter 30.125 25.125
</TABLE>
<TABLE>
<CAPTION>
1997 FISCAL YEAR HIGH LOW
<S> <C> <C>
4th Quarter $28.000 $22.125
3rd Quarter 24.375 21.625
2nd Quarter 25.375 21.750
1st Quarter 24.125 20.875
</TABLE>
-25-
<PAGE> 28
DIVIDENDS
Quarterly dividends on our Common Stock were paid in the 1998 and 1997
fiscal years as follows:
<TABLE>
<CAPTION>
1998 FISCAL YEAR AMOUNT
<S> <C>
4th Quarter $.365
3rd Quarter .360
2nd Quarter .360
1st Quarter .360
</TABLE>
<TABLE>
<CAPTION>
1997 FISCAL YEAR AMOUNT
<S> <C>
4th Quarter $.360
3rd Quarter .355
2nd Quarter .355
1st Quarter .355
</TABLE>
HOLDERS
On December 1, 1998, UGI had 13,007 holders of record of Common Stock.
-26-
<PAGE> 29
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended
September 30,
-----------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(Millions of dollars, except per share amounts)
<S> <C> <C> <C> <C> <C>
FOR THE PERIOD:
Income statement data:
Revenues $ 1,439.7 $ 1,642.0 $ 1,557.6 $ 877.6 $ 762.2
========= ========= ========= ========= =========
Income from:
Continuing operations $ 40.3 $ 52.1 $ 39.5 $ 7.9 $ 37.4
Discontinued operations -- -- -- -- 7.6
--------- --------- --------- --------- ---------
Income before extraordinary loss
and change in accounting 40.3 52.1 39.5 7.9 45.0
Extraordinary loss - debt restructuring -- -- -- (13.2) --
Change in accounting for
postemployment benefits -- -- -- (3.1) --
--------- --------- --------- --------- ---------
Net income (loss) $ 40.3 $ 52.1 $ 39.5 $ (8.4) $ 45.0
========= ========= ========= ========= =========
Diluted earnings per share:
Earnings from continuing operations $ 1.22 $ 1.57 $ 1.19 $ 0.24 $ 1.16
Earnings from discontinued operations -- -- -- -- 0.23
--------- --------- --------- --------- ---------
Earnings before extraordinary loss
and change in accounting 1.22 1.57 1.19 0.24 1.39
Extraordinary loss - debt restructuring -- -- -- (0.40) --
Change in accounting for
postemployment benefits -- -- -- (0.10) --
--------- --------- --------- --------- ---------
Net earnings (loss) $ 1.22 $ 1.57 $ 1.19 $ (0.26) $ 1.39
========= ========= ========= ========= =========
Cash dividends declared $ 1.45 $ 1.43 $ 1.41 $ 1.39 $ 1.36
========= ========= ========= ========= =========
Total assets $ 2,074.6 $ 2,151.7 $ 2,133.0 $ 2,152.3 $ 1,182.2
========= ========= ========= ========= =========
Capitalization:
Debt:
Bank loans - Propane $ 10.0 $ 28.0 $ 15.0 $ -- $ --
Bank loans - Utilities 68.4 67.0 50.5 42.0 17.0
Long-term debt
(including current maturities):
Propane 709.0 691.1 692.5 658.5 210.3
Utilities 187.2 169.3 174.8 206.3 175.6
Other 8.2 8.6 9.0 9.3 9.6
--------- --------- --------- --------- ---------
Total debt 982.8 964.0 941.8 916.1 412.5
========= ========= ========= ========= =========
Minority interest in AmeriGas Partners 236.5 266.5 284.4 318.9 --
UGI Utilities preferred stock subject
to mandatory redemption 20.0 35.2 35.2 35.2 35.2
Common stockholders' equity 367.1 376.1 377.6 380.5 424.3
--------- --------- --------- --------- ---------
Total capitalization $ 1,606.4 $ 1,641.8 $ 1,639.0 $ 1,650.7 $ 872.0
========= ========= ========= ========= =========
Ratio of capitalization:
Total debt 61.2% 58.7% 57.5% 55.5% 47.3%
Minority interest 14.7% 16.3% 17.4% 19.3% --
UGI Utilities preferred stock 1.2% 2.1% 2.1% 2.1% 4.0%
Common stockholders' equity 22.9% 22.9% 23.0% 23.1% 48.7%
--------- --------- --------- --------- ---------
100.0% 100.0% 100.0% 100.0% 100.0%
========= ========= ========= ========= =========
</TABLE>
-27-
<PAGE> 30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations, entitled "Financial Review" and contained on pages 13 through 21 of
UGI's 1998 Annual Report to Shareholders, is incorporated in this report by
reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Quantitative and Qualitative Disclosure about market risk is contained in
Management's Discussion and Analysis of Financial Condition and Results of
Operations under the caption "Market Risk Disclosures" on page 20 and 21 of the
UGI 1998 Annual Report to Shareholders and is incorporated in this report by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Financial Statement Schedules referred to in
the Index contained on pages F-2 and F-3 of this Report are incorporated in this
Report by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
During fiscal year 1997, UGI engaged a new independent auditor, Arthur
Andersen LLP. The information required by Item 9 is incorporated in this Report
by reference to UGI's Amendment No. 1 on Form 8-K/A to its Current Report on
Form 8-K dated July 11, 1997.
-28-
<PAGE> 31
PART III: UGI MANAGEMENT AND SECURITY HOLDERS
ITEMS 10 THROUGH 13.
In accordance with General Instruction G(3), and except as set forth
below, the information required by Items 10, 11, 12 and 13 is incorporated in
this Report by reference to the following portions of UGI's Proxy Statement,
which will be filed with the Securities and Exchange Commission by January 28,
1999:
CAPTIONS OF PROXY STATEMENT
INFORMATION INCORPORATED BY REFERENCE
----------- -------------------------
Item 10. Directors and Executive Election of Directors - Nominees
Officers of Registrant.
Item 11. Executive Compensation. Compensation of Executive Officers
Compensation of Directors
Item 12. Security Ownership of Securities Ownership of Management
Certain Beneficial
Owners and Management.
Item 13. Certain Relationships Compensation of Executive Officers-
and Related Transactions. Stock Ownership Policy and
Indebtedness of Management
The information concerning the Company's executive officers required by
Item 10 is set forth below.
EXECUTIVE OFFICERS
NAME AGE POSITION
---- --- --------
Lon R. Greenberg 48 Chairman, Director, President
and Chief Executive Officer
Brendan P. Bovaird 50 Vice President and General Counsel
Michael J. Cuzzolina 53 Vice President - Accounting
and Financial Control
Bradley C. Hall 45 Vice President - New Business Development
-29-
<PAGE> 32
Anthony J. Mendicino 50 Vice President - Finance
and Chief Financial Officer
Richard L. Bunn 62 President and Chief Executive
Officer, UGI Utilities, Inc.
All officers are elected for a one-year term at the organizational
meetings of the respective Boards of Directors held each year.
There are no family relationships between any of the officers or between
any of the officers and any of the directors.
The following is a summary of the business experience of the executive
officers listed above during at least the last five years. For purposes of the
summary of business experience set forth below, references to "the Company,"
"UGI" and "the Board" prior to February 19, 1992 refer to Utilities (formerly,
UGI Corporation) or the Board of Directors of Utilities, respectively.
Lon R. Greenberg
Mr. Greenberg was elected Chairman of UGI effective August 1, 1996, having
been elected Chief Executive Officer effective August 1, 1995. He was elected
Director and President of UGI and a Director of UGI Utilities in July 1994. Mr.
Greenberg was Senior Vice President - Legal and Corporate Development (1989 to
1994), and also served as Vice President - Legal and Corporate Development (1987
to 1989). Previously, he was Vice President Legal (1984 to 1987), General
Counsel (1983 to 1994) and Secretary (1982 to 1988). He joined the Company in
1980 as Corporate Development Counsel. Mr. Greenberg is also a director on the
Mellon PSFS Advisory Board.
Brendan P. Bovaird
Mr. Bovaird is Vice President and General Counsel of UGI (since April
1995). He is also Vice President and General Counsel of UGI Utilities, Inc.,
and AmeriGas Propane, Inc. (since April 1995). Mr. Bovaird previously served
as Division Counsel and Member of the Executive and Operations Committees of
Wyeth-Ayerst International Inc. (1992 to 1995) and Senior Vice President,
General Counsel and Secretary of Orion Pictures Corporation (1990 to 1991).
Michael J. Cuzzolina
Mr. Cuzzolina is Vice President - Accounting and Financial Control of the
Company (since 1984). He joined the Company in 1974 and has previously served as
Treasurer and Assistant Controller of the Company and as Vice President -
Finance of AmeriGas.
-30-
<PAGE> 33
Bradley C. Hall
Mr. Hall was elected Vice President - New Business Development on
October 25, 1994, having been Vice President - Marketing and Rates, UGI
Utilities, Inc. Gas Division. He also serves as President of UGI
Enterprises, Inc. (since 1994). He joined the Company in 1982 and held
various positions in Gas Utility.
Anthony J. Mendicino
Mr. Mendicino was elected Vice President - Finance and Chief Financial
Officer on September 8, 1998. He previously served as President and Chief
Operating Officer (July 1997 to June 1998) and as Senior Vice President (January
1997 to June 1997) of Eastwind Group, Inc., a holding company formed to acquire
and consolidate middle-market manufacturing businesses. Mr. Mendicino was Senior
Vice President and Chief Financial Officer and a director (1987 to 1996) of UTI
Energy Corp., a diversified oil field service company. From 1980 to 1986 Mr.
Mendicino held various positions with UGI, including Treasurer from 1984 to
1987.
Richard L. Bunn
Mr. Bunn is President and Chief Executive Officer of UGI Utilities,
Inc., (since May 1992). Mr. Bunn began his career with UGI as an engineer in
Electric Utility (1958).
-31-
<PAGE> 34
PART IV: ADDITIONAL EXHIBITS, SCHEDULES AND REPORTS
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF THIS REPORT:
(1), (2) The financial statements and financial statement schedules
incorporated by reference or included in this report are listed in
the accompanying Index to Financial Statements and Financial
Statement Schedules set forth on pages F-2 through F-3 of this
report, which is incorporated herein by reference.
(3) LIST OF EXHIBITS:
The exhibits filed as part of this report are as follows (exhibits
incorporated by reference are set forth with the name of the
registrant, the type of report and registration number or last date
of the period for which it was filed, and the exhibit number in such
filing):
-32-
<PAGE> 35
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
INCORPORATION BY REFERENCE
EXHIBIT NO. EXHIBIT REGISTRANT FILING EXHIBIT
- --------------------- --------------------------------------------- ------------------ --------------------- --------------
<S> <C> <C> <C> <C>
3.1 (Second) Amended and Restated Articles of UGI Amendment No. 1 on 3.(3)(a)
Incorporation of the Company Form 8 to Form 8-B
(4/10/92)
*3.2 Bylaws of UGI as in effect since October
27, 1998
4 Instruments defining the rights of
security holders, including
indentures. (The Company agrees to
furnish to the Commission upon request
a copy of any instrument defining the
rights of holders of its long-term
debt not required to be filed pursuant
to Item 601(b)(4) of Regulation S-K)
4.1 Rights Agreement, as amended as of UGI Form 8-K (4/17/96) 4.1
April 17, 1996, between the Company
and Mellon Bank, N.A., successor to
Mellon Bank (East) N.A., as Rights
Agent, and Assumption Agreement dated
April 7, 1992
4.2 The description of the Company's Common UGI Form 8-B/A (4/17/96) 3.(4)
Stock contained in the Company's
registration statement filed under the
Securities Exchange Act of 1934, as amended
4.3 UGI's (Second) Amended and Restated
Articles of Incorporation and Bylaws
referred to in 3.1 and 3.2 above
4.4 Utilities' Articles of Incorporation Utilities Form 8-K (9/22/94) 4(a)
4.5 Note Agreement dated as of April 12, 1995 AmeriGas Form 10-Q 10.8
among The Prudential Insurance Company of Partners, L.P.
America, Metropolitan Life Insurance (3/31/95)
Company, and certain other institutional
investors and AmeriGas Propane, L.P., New
AmeriGas Propane, Inc. and Petrolane
Incorporated
4.6 First Amendment dated as of September 12, AmeriGas Form 10-K (9/30/97) 4.5
1997 to Note Agreement dated as of April Partners, L.P.
12, 1995
4.7 Second Amendment dated as of September 15, AmeriGas Form 10-K (9/30/98) 4.6
1998 to Note Agreement dated as of April Partners, L.P.
12, 1995
</TABLE>
-33-
<PAGE> 36
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
INCORPORATION BY REFERENCE
EXHIBIT NO. EXHIBIT REGISTRANT FILING EXHIBIT
- --------------------- --------------------------------------------- ------------------ --------------------- --------------
<S> <C> <C> <C> <C>
10.1 Service Agreement (Rate FSS) dated as UGI Form 10-K (9/30/95) 10.5
of November 1, 1989 between Utilities
and Columbia, as modified pursuant to
the orders of the Federal Energy
Regulatory Commission at Docket No.
RS92-5-000 reported at Columbia Gas
Transmission Corp., 64 FERC P. 61,060
(1993), order on rehearing, 64 FERC
P. 61,365 (1993)
10.2 Service Agreement (Rate FTS) dated June 1, Utilities Form 10-K (12/31/90) (10)o.
1987 between Utilities and Columbia, as
modified by Supplement No. 1 dated October
1, 1988; Supplement No. 2 dated November 1,
1989; Supplement No. 3 dated November 1,
1990; Supplement No. 4 dated November 1,
1990; and Supplement No. 5 dated January 1,
1991, as further modified pursuant to the
orders of the Federal Energy Regulatory
Commission at Docket No. RS92-5-000
reported at Columbia Gas Transmission
Corp., 64 FERC P. 61,060 (1993), order on
rehearing, 64 FERC P. 61,365 (1993)
10.3 Transportation Service Agreement (Rate Utilities Form 10-K (12/31/90) (10)p.
FTS-1) dated November 1, 1989 between
Utilities and Columbia Gulf
Transmission Company, as modified
pursuant to the orders of the Federal
Energy Regulatory Commission in Docket
No. RP93-6-000 reported at Columbia
Gulf Transmission Co., 64 FERC
P. 61,060 (1993), order on rehearing, 64
FERC P. 61,365 (1993)
10.4 Amended and Restated Sublease Agreement UGI Form 10-K (9/30/94) 10.35
dated April 1, 1988 between Southwest Salt
Co. and AP Propane, Inc. (the "Southwest
Salt Co. Agreement")
10.5 Letter dated September 26, 1994 pursuant to UGI Form 10-K (9/30/94) 10.36
Article 1, Section 1.2 of the Southwest
Salt Co. Agreement re: option to renew for
period of June 1, 1995 to May 31, 2000
10.6** UGI Corporation Directors Deferred UGI Form 10-K (9/30/94) 10.39
Compensation Plan dated August 26, 1993
10.7** UGI Corporation 1992 Stock Option and UGI Form 10-Q (6/30/92) (10)ee
Dividend Equivalent Plan, as amended May
19, 1992
</TABLE>
-34-
<PAGE> 37
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
INCORPORATION BY REFERENCE
EXHIBIT NO. EXHIBIT REGISTRANT FILING EXHIBIT
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
10.8** UGI Corporation Annual Bonus Plan dated UGI Form 10-Q (6/30/96) 10.4
March 8, 1996
10.9** UGI Corporation Directors' Equity UGI Form 10-Q (3/31/97) 10.1
Compensation Plan
10.10** UGI Corporation 1997 Stock Option and UGI Form 10-Q (3/31/97) 10.2
Dividend Equivalent Plan
10.11** UGI Corporation 1992 Directors' Stock Plan UGI Form 10-Q (6/30/92) (10)ff
10.12** UGI Corporation Senior Executive Employee UGI Form 10-K (9/30/97) 10.12
Severance Pay Plan effective January 1, 1997
10.13** Change of Control Agreement between UGI UGI Form 10-K (9/30/97) 10.13
Corporation and Lon R. Greenberg
10.14** Form of Change of Control Agreement between UGI Form 10-K (9/30/97) 10.14
UGI Corporation and Mr. Bunn
10.15** Form of Change of Control Agreement between UGI Form 10-K (9/30/97) 10.15
UGI Corporation and each of Messrs.
Bovaird, Cuzzolina, Hall and Mendicino
10.16** 1997 Stock Purchase Loan Plan UGI Form 10-K (9/30/97) 10.16
10.17** UGI Corporation Supplemental Executive UGI Form 10-Q (6/30/98) 10
Retirement Plan Amended and Restated
effective October 1, 1996
10.18 Amended and Restated Credit Agreement dated AmeriGas Form 10-K 10.1
as of September 15, 1997 among AmeriGas Partners, L.P.
Propane, L.P., AmeriGas Propane, Inc., (9/30/97)
Petrolane Incorporated, Bank of America
National Trust and Savings Association, as
Agent, First Union National Bank, as
Syndication Agent and certain banks
10.19 First Amendment dated as of September 15, AmeriGas Form 10-K (9/30/98) 10.2
1998 to Amended and Restated Credit Partners, L.P.
Agreement
</TABLE>
-35-
<PAGE> 38
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
INCORPORATION BY REFERENCE
EXHIBIT NO. EXHIBIT REGISTRANT FILING EXHIBIT
- --------------------- --------------------------------------------- ------------------ --------------------- --------------
<S> <C> <C> <C> <C>
10.20 Intercreditor and Agency Agreement dated as AmeriGas Form 10-Q (3/31/95) 10.2
of April 19, 1995 among AmeriGas Propane, Partners, L.P.
Inc., Petrolane Incorporated, AmeriGas
Propane, L.P., Bank of America National
Trust and Savings Association ("Bank of
America") as Agent, Mellon Bank, N.A. as
Cash Collateral Sub-Agent, Bank of America
as Collateral Agent and certain creditors
of AmeriGas Propane, L.P.
10.21 General Security Agreement dated as of AmeriGas Form 10-Q (3/31/95) 10.3
April 19, 1995 among AmeriGas Propane, Partners, L.P.
L.P., Bank of America National Trust
and Savings Association and Mellon
Bank, N.A.
10.22 Subsidiary Security Agreement dated as of AmeriGas Form 10-Q (3/31/95) 10.4
April 19, 1995 among AmeriGas Propane, Partners, L.P.
L.P., Bank of America National Trust and
Savings Association as Collateral Agent and
Mellon Bank, N.A. as Cash Collateral Agent
10.23 Restricted Subsidiary Guarantee dated as of AmeriGas Form 10-Q (3/31/95) 10.5
April 19, 1995 by AmeriGas Propane, L.P. Partners, L.P.
for the benefit of Bank of America National
Trust and Savings Association, as
Collateral Agent
10.24 Trademark License Agreement dated April 19, AmeriGas Form 10-Q (3/31/95) 10.6
1995 among UGI Corporation, AmeriGas, Inc., Partners, L.P.
AmeriGas Propane, Inc., AmeriGas Partners,
L.P. and AmeriGas Propane, L.P.
10.25 Trademark License Agreement, dated April AmeriGas Form 10-Q (3/31/95) 10.7
19, 1995 among AmeriGas Propane, Inc., Partners, L.P.
AmeriGas Partners, L.P. and AmeriGas
Propane, L.P.
10.26 Agreement dated as of May 1, 1996 between AmeriGas Form 10-K (9/30/97) 10.2
TE Products Pipeline Company, L.P. and Partners, L.P.
AmeriGas Propane, L.P.
*13.1 Pages 13 through 43 of 1998 Annual Report
to Shareholders
*13.2 Amendment No. 1 on Form 8-K/A to Form 8-K
dated July 11, 1997
</TABLE>
-36-
<PAGE> 39
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
INCORPORATION BY REFERENCE
EXHIBIT NO. EXHIBIT REGISTRANT FILING EXHIBIT
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
*21 Subsidiaries of the Registrant
*23.1 Consent of Arthur Andersen LLP re:
Financial Statements of UGI Corporation
*23.2 Consent of Arthur Andersen LLP re:
Financial Statements of AmeriGas Propane,
Inc.
*23.3 Consent of PricewaterhouseCoopers LLP
*27 Financial Data Schedule
</TABLE>
* Filed herewith.
** As required by Item 14(a)(3), this exhibit is identified as a
compensatory plan or arrangement.
(b) Reports on Form 8-K:
During the last quarter of the 1998 fiscal year, the Company did not file
any Current Reports on Form 8-K.
-37-
<PAGE> 40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
UGI CORPORATION
Date: December 15, 1998 By: Anthony J. Mendicino
------------------------------
Anthony J. Mendicino
Vice President - Finance
and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below on December 15, 1998, by the following persons on
behalf of the Registrant in the capacities indicated.
SIGNATURE TITLE
- --------- -----
Lon R. Greenberg Chairman, President
- ------------------- and Chief Executive Officer
Lon R. Greenberg (Principal Executive Officer)
and Director
Anthony J. Mendicino Vice President -
- ------------------- Finance and Chief Financial
Anthony J. Mendicino Officer (Principal
Financial Officer)
Michael J. Cuzzolina Vice President -
- ------------------- Accounting and
Michael J. Cuzzolina Financial Control
(Principal Accounting
Officer)
Stephen D. Ban Director
- -------------------
Stephen D. Ban
Thomas F. Donovan Director
- -------------------
Thomas F. Donovan
-38-
<PAGE> 41
SIGNATURE TITLE
- --------- -----
Richard C. Gozon Director
- --------------------
Richard C. Gozon
Marvin O. Schlanger Director
- --------------------
Marvin O. Schlanger
James W. Stratton Director
- --------------------
James W. Stratton
David I. J. Wang Director
- --------------------
David I. J. Wang
-39-
<PAGE> 42
UGI CORPORATION AND SUBSIDIARIES
FINANCIAL INFORMATION
FOR INCLUSION IN ANNUAL REPORT ON FORM 10-K
YEAR ENDED SEPTEMBER 30, 1998
Title F-1
<PAGE> 43
UGI CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The consolidated financial statements and supplementary data of UGI Corporation
and subsidiaries, together with the report thereon of Arthur Andersen LLP dated
November 13, 1998, listed in the following index, are included in UGI's 1998
Annual Report to Shareholders and are incorporated in this Form 10-K Annual
Report by reference. With the exception of the pages listed in this index and
information incorporated in Items 1, 2, 5, 7 and 8, the 1998 Annual Report to
Shareholders is not to be deemed filed as part of this Report.
<TABLE>
<CAPTION>
Reference
---------------------------------
Annual
Report to
Form 10-K Shareholders
(page) (page)
--------- ------------
<S> <C> <C>
Reports of Independent Public Accountants:
On Consolidated Financial Statements 43
On Financial Statement Schedules F-4
On Consolidated Financial Statements and Financial
Statement Schedule F-5
Report of Independent Public Accountants on the Consolidated Financial
Statements of AmeriGas Propane, Inc. and subsidiaries for the
fiscal year ended September 30, 1996 F-6
Financial Statements:
Consolidated Balance Sheets, September 30,
1998 and 1997 24 to 25
For the years ended September 30, 1998, 1997 and 1996:
Consolidated Statements of Income 23
Consolidated Statements of Cash Flows 26
Consolidated Statements of Stockholders'
Equity 27
</TABLE>
Index F-2
<PAGE> 44
UGI CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES (CONTINUED)
<TABLE>
<CAPTION>
Reference
---------------------------------
Annual
Report to
Form 10-K Shareholders
(page) (page)
<S> <C> <C>
Notes to Consolidated Financial
Statements 28 to 42
Supplementary Data (unaudited):
Quarterly Data for the years ended
September 30, 1998 and 1997 42
Financial Statement Schedules:
For the years ended September 30, 1998, 1997 and 1996:
I - Condensed Financial
Information of Registrant
(Parent Company) S-1 to S-3
II - Valuation and Qualifying
Accounts S-4 to S-5
</TABLE>
Annual Reports on Form 10-K/A
Annual Reports on Form 10-K/A for the UGI Utilities, Inc. and AmeriGas
Propane, Inc. savings plans will be filed by amendment within the time
period specified by Rule 15d-21(b).
We have omitted all other financial statement schedules because the required
information is either (1) not present; (2) not present in amounts sufficient to
require submission of the schedule; or (3) the information required is included
elsewhere in the financial statements or related notes.
F-3
<PAGE> 45
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
UGI Corporation:
We have audited, in accordance with generally accepted auditing standards, the
consolidated financial statements included in UGI Corporation's annual report to
shareholders for the year ended September 30, 1998, incorporated by reference in
this Form 10-K, and have issued our report thereon dated November 13, 1998. Our
audits were made for the purpose of forming an opinion on those consolidated
financial statements taken as a whole. The schedules listed in the Index on
pages F-2 and F-3 are the responsibility of UGI Corporation's management and are
presented for purposes of complying with the Securities and Exchange
Commission's rules and are not part of the basic financial statements. The
information for the years ended September 30, 1998 and 1997 included on these
schedules has been subjected to the auditing procedures applied in the audits of
the basic financial statements and, in our opinion, fairly state in all material
respects the financial data required to be set forth therein in relation to the
basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois
November 13, 1998
F-4
<PAGE> 46
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
UGI Corporation
We have audited the accompanying consolidated statements of income,
stockholders' equity and cash flows of UGI Corporation and subsidiaries for the
year ended September 30, 1996. We have also audited the related financial
statement schedules for the year ended September 30, 1996 listed in the index on
pages F-2 and F-3 inclusive, of this Form 10-K. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and financial statement schedules based
on our audit. We did not audit the consolidated financial statements of AmeriGas
Propane, Inc. and subsidiaries, for the year ended September 30, 1996, which
statements reflect total revenues constituting 65 percent of the related
consolidated totals. Those statements were audited by other auditors whose
report has been furnished to us, and our opinion, insofar as it relates to the
amounts included for AmeriGas Propane, Inc. and subsidiaries for those periods,
is based solely on the report of the other auditors.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other auditors, the
consolidated financial statements and financial statement schedules referred to
above present fairly, in all material respects, the consolidated results of
operations and cash flows of UGI Corporation and subsidiaries for the year ended
September 30, 1996, in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Philadelphia, Pennsylvania
November 22, 1996
F-5
<PAGE> 47
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of AmeriGas Propane, Inc.:
We have audited the consolidated balance sheet of AmeriGas Propane, Inc. (a
Pennsylvania corporation and a wholly owned subsidiary of AmeriGas, Inc.) and
subsidiaries as of September 30, 1996, and the related consolidated statements
of operations, stockholder's equity and cash flows for the year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
AmeriGas Propane, Inc. and subsidiaries as of September 30, 1996, and the
results of their operations and their cash flows for the year then ended, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
November 22, 1996
F-6
<PAGE> 48
UGI CORPORATION AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY)
BALANCE SHEETS
(Millions of dollars)
<TABLE>
<CAPTION>
September 30,
ASSETS 1998 1997
------ ------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 15.2 $ 20.1
Accounts receivable 0.5 0.5
Deferred income taxes 0.2 0.2
Prepaid expenses and other current assets 0.5 0.1
------ ------
Total current assets 16.4 20.9
Investments in subsidiaries 375.1 376.2
Other assets 2.1 4.0
------ ------
Total assets $393.6 $401.1
====== ======
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Current liabilities:
Accounts and notes payable $ 10.3 $ 10.3
Accrued liabilities 13.1 13.2
------ ------
Total current liabilities 23.4 23.5
Noncurrent liabilities 3.2 1.5
Common stockholders' equity:
Common Stock, without par value (authorized - 100,000,000 shares;
issued - 33,198,731 shares) 394.3 393.7
Accumulated deficit (17.7) (9.2)
------ ------
376.6 384.5
Less treasury stock, at cost (9.6) (8.4)
------ ------
Total common stockholders' equity 367.0 376.1
------ ------
Total liabilities and common stockholders' equity $393.6 $401.1
====== ======
</TABLE>
S-1
<PAGE> 49
UGI CORPORATION AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY)
STATEMENTS OF INCOME
(Millions of dollars, except per share amounts)
<TABLE>
<CAPTION>
Year Ended
September 30,
----------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Revenues $ -- $ -- $ --
Costs and expenses:
Operating and administrative expenses 10.7 12.2 10.1
Miscellaneous income, net (10.4) (14.8) (13.4)
------ ------ ------
0.3 (2.6) (3.3)
------ ------ ------
Operating income (loss) (0.3) 2.6 3.3
Interest income -- -- 0.1
------ ------ ------
Income (loss) before income taxes (0.3) 2.6 3.4
Income taxes (0.1) 1.1 1.4
------ ------ ------
Income (loss) before equity in income
of unconsolidated subsidiaries (0.2) 1.5 2.0
Equity in income
of unconsolidated subsidiaries 40.5 50.6 37.5
------ ------ ------
Net income $ 40.3 $ 52.1 $ 39.5
====== ====== ======
Earnings per common share:
Basic $ 1.22 $ 1.58 $ 1.19
====== ====== ======
Diluted $ 1.22 $ 1.57 $ 1.19
====== ====== ======
</TABLE>
S-2
<PAGE> 50
UGI CORPORATION AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY)
STATEMENTS OF CASH FLOWS
(Millions of dollars)
<TABLE>
<CAPTION>
Year Ended
September 30,
-------------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
NET CASH PROVIDED BY OPERATING
ACTIVITIES (a) $77.8 $77.5 $96.6
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in unconsolidated subsidiaries (34.8) (74.6) (1.1)
Other 2.5 20.6 (21.1)
----- ----- -----
Net cash used by investing activities (32.3) (54.0) (22.2)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of dividends on Common Stock (47.6) (47.2) (46.4)
Issuance of Common Stock 8.5 11.7 11.3
Purchase of Common Stock (11.3) (19.2) (7.1)
----- ----- -----
Net cash used by financing activities (50.4) (54.7) (42.2)
----- ----- -----
Cash and cash equivalents increase (decrease) $(4.9) $(31.2) $32.2
===== ===== =====
Cash and cash equivalents:
End of period $15.2 $20.1 $51.3
Beginning of period 20.1 51.3 19.1
----- ----- -----
Increase (decrease) $(4.9) $(31.2) $32.2
===== ===== =====
</TABLE>
(a) Includes dividends received from unconsolidated subsidiaries of $77.6,
$75.8 and $95.2, respectively, for the years ended September 30, 1998,
1997 and 1996.
S-3
<PAGE> 51
UGI CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(Millions of dollars)
<TABLE>
<CAPTION>
Charged
Balance at (credited) Balance at
beginning to costs and end of
of year expenses Other year
----- ----- ----- -----
<S> <C> <C> <C> <C>
YEAR ENDED SEPTEMBER 30, 1998
Reserves deducted from assets in
the consolidated balance sheet:
Allowance for doubtful accounts $11.3 $ 8.4 $(11.8)(1) $ 7.9
===== =====
Allowance for amortization of deferred
financing costs - Propane $ 3.8 $ 1.6 $ -- $ 5.4
===== =====
Allowance for amortization of
other deferred costs - Propane $ 3.9 $ 0.7 $ -- $ 4.6
===== =====
Other reserves:
Self-insured property and casualty liability $48.5 $11.7 $(11.7)(2) $48.5
===== =====
Insured property and casualty liability $ 1.8 $ 2.9 $ (0.4)(2) $ 4.3
===== =====
Environmental, litigation and other $22.6 $(4.0) $ (4.7)(2) $13.9
===== =====
YEAR ENDED SEPTEMBER 30, 1997
Reserves deducted from assets in
the consolidated balance sheet:
Allowance for doubtful accounts $10.6 $11.3 $(10.6)(1) $11.3
===== =====
Allowance for amortization of deferred
financing costs - Propane $ 2.2 $ 1.6 $ -- $ 3.8
===== =====
Allowance for amortization of
other deferred costs - Propane $ 2.8 $ 1.1 $ -- $ 3.9
===== =====
Other reserves:
Self-insured property and casualty liability $47.7 $11.3 $(10.5)(2) $48.5
===== =====
Insured property and casualty liability $19.0 $ 3.3 $(20.5)(2) $ 1.8
===== =====
Environmental, litigation and other $16.1 $ 7.6 $ (1.1)(2) $22.6
===== =====
</TABLE>
S-4
<PAGE> 52
UGI CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (CONTINUED)
(Millions of dollars)
<TABLE>
<CAPTION>
Charged
Balance at (credited) Balance at
beginning to costs and end of
of year expenses Other year
----- ----- ----- -----
<S> <C> <C> <C> <C>
YEAR ENDED SEPTEMBER 30, 1996
Reserves deducted from assets in
the consolidated balance sheet:
Allowance for doubtful accounts $ 7.3 $10.5 $(7.2)(1) $10.6
===== =====
Allowance for amortization of deferred
financing costs - Propane $ 0.7 $ 1.5 $ -- $ 2.2
===== =====
Allowance for amortization of
other deferred costs - Propane $ 1.8 $ 1.0 $ -- $ 2.8
===== =====
Other reserves:
Self-insured property and casualty liability $48.5 $14.0 $(14.8)(2) $47.7
===== =====
Insured property and casualty liability $11.7 $ 6.8 $ 0.5 (3) $19.0
===== =====
Environmental, litigation and other $26.1 $(7.1) $(2.9)(2) $16.1
===== =====
</TABLE>
(1) Uncollectible accounts written off, net of recoveries.
(2) Payments.
(3) Other adjustments.
S-5
<PAGE> 53
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.2 Bylaws of UGI as in effect since October 27, 1998
13.1 Pages 13 to 43 of 1998 Annual Report to Shareholders
13.2 Amendment No. 1 on Form 8-K/A to Form 8-K dated July 11, 1997
21 Subsidiaries of the Registrant
23.1 Consent of Arthur Andersen LLP re: Financial Statements of UGI
Corporation
23.2 Consent of Arthur Andersen LLP re: Financial Statements of
AmeriGas Propane, Inc.
23.3 Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 3.2
BYLAWS
OF
UGI CORPORATION
(A PENNSYLVANIA REGISTERED CORPORATION)
ARTICLE I
OFFICES AND FISCAL YEAR
SECTION 1.01. REGISTERED OFFICE. The registered office of the corporation
in the Commonwealth of Pennsylvania shall be at 460 North Gulph Road, King of
Prussia, Montgomery County, Pennsylvania 19406, until otherwise established by
an amendment of the articles of incorporation (the "articles") or by the board
of directors and a record of such change is filed with the Department of State
in the manner provided by law.
SECTION 1.02. OTHER OFFICES. The corporation may also have offices at such
other places within or without the Commonwealth of Pennsylvania as the board of
directors may from time to time appoint or the business of the corporation may
require.
SECTION 1.03. FISCAL YEAR. The fiscal year of the corporation shall begin
on the first day of October in each year.
ARTICLE II
NOTICE-WAIVERS-MEETINGS GENERALLY
SECTION 2.01. MANNER OF GIVING NOTICE.
(a) General Rule. Whenever written notice is required to be given to
any person under the provisions of the Business Corporation Law or by the
articles or these bylaws, it may be given to the person either personally or by
sending a copy thereof by first class or express mail, postage prepaid, or by
telegram (with messenger service specified), telex or TWX (with answerback
received) or courier service, charges prepaid, or by facsimile transmission, to
the address (or to the telex, TWX, facsimile or telephone number) of the person
appearing on the books of the corporation or, in the case of directors, supplied
by the director to the corporation for the purpose of notice. A notice of
meeting shall specify the place, day and hour of the meeting and any other
information required by any other provision of the Business Corporation Law, the
articles or these bylaws. If the notice is sent by mail, telegraph or courier
service, it shall be deemed to have been given to the person entitled thereto
when deposited in the United States mail or with a telegraph office or courier
service for delivery to that person or, in the case of telex or TWX, when
dispatched or, in the case of facsimile transmission, when received.
<PAGE> 2
(b) Bulk Mail. If the corporation has more than 30 shareholders,
notice of any regular or special meeting of the shareholders, or any other
notice required by the Business Corporation Law or by the articles or these
bylaws to be given to all shareholders or to all holders of a class or series of
shares, may be given by any class of postpaid mail if the notice is deposited in
the United States mail at least 20 days prior to the day named for the meeting
or any corporate or shareholder action specified in the notice.
(c) Adjourned Shareholder Meetings. When a meeting of shareholders is
adjourned, it shall not be necessary to give any notice of the adjourned meeting
or of the business to be transacted at an adjourned meeting, other than by
announcement at the meeting at which the adjournment is taken, unless the board
fixes a new record date for the adjourned meeting in which event notice shall be
given in accordance with Section 2.03.
SECTION 2.02. NOTICE OF MEETINGS OF BOARD OF DIRECTORS. Notice of a
regular meeting of the board of directors need not be given. Notice of every
special meeting of the board of directors shall be given to each director by
telephone or in writing at least 24 hours (in the case of notice by telephone,
telex, TWX or facsimile transmission) or 48 hours (in the case of notice by
telegraph, courier service or express mail) or five days (in the case of notice
by first class mail) before the time at which the meeting is to be held. Every
such notice shall state the time and place of the meeting. Neither the business
to be transacted at, nor the purpose of, any regular or special meeting of the
board need be specified in a notice of the meeting.
SECTION 2.03. NOTICE OF MEETINGS OF SHAREHOLDERS.
(a) General Rule. Except as otherwise provided in Section 2.01(b) or
in the articles, written notice of every meeting of the shareholders shall be
given by, or at the direction of, the secretary or other authorized person to
each shareholder of record entitled to vote at the meeting at least (1) ten days
prior to the day named for a meeting (and, in case of a meeting called to
consider a merger, consolidation, share exchange or division, to each
shareholder of record not entitled to vote at the meeting) called to consider a
fundamental change under 15 Pa.C.S. Chapter 19 or (2) five days prior to the day
named for the meeting in any other case. If the secretary neglects or refuses to
give notice of a meeting, the person or persons calling the meeting may do so.
In the case of a special meeting of shareholders, the notice shall specify the
general nature of the business to be transacted.
(b) Notice of Action by Shareholders on Bylaws. In the case of a
meeting of shareholders that has as one of its purposes action on the bylaws,
written notice shall be given to each shareholder that the purpose, or one of
the purposes, of the meeting is to consider the adoption, amendment or repeal of
the bylaws. There shall be included in, or enclosed with, the notice a copy of
the proposed amendment or a summary of the changes to be effected thereby.
(c) Notice of Action by Shareholders on Fundamental Change. In the
case of a meeting of the shareholders that has as one of its purposes action
with respect to any fundamental change under 15 Pa.C.S. Chapter 19, each
shareholder shall be given, together with written notice of the meeting, a copy
or summary of the amendment or plan to be considered at the meeting in
compliance with the provisions of Chapter 19.
-2-
<PAGE> 3
(d) Notice of Action by Shareholders Giving Rise to Dissenters
Rights. In the case of a meeting of the shareholders that has as one of its
purposes action that would give rise to dissenters rights under the provisions
of 15 Pa.C.S. Subchapter 15D, each shareholder, to the extent entitled thereto
under the Business Corporation Law, shall be given, together with written notice
of the meeting:
(1) a statement that the shareholders have a right to dissent and
obtain payment of the fair value of their shares by complying with the
provisions of Subchapter 15D (relating to dissenters rights); and
(2) a copy of Subchapter 15D.
SECTION 2.04. WAIVER OF NOTICE.
(a) Written Waiver. Whenever any written notice is required to be
given under the provisions of the Business Corporation Law, the articles or
these bylaws, a waiver thereof in writing, signed by the person or persons
entitled to the notice, whether before or after the time stated therein, shall
be deemed equivalent to the giving of the notice. Neither the business to be
transacted at, nor the purpose of, a meeting need be specified in the waiver of
notice of the meeting.
(b) Waiver by Attendance. Attendance of a person at any meeting shall
constitute a waiver of notice of the meeting except where a person attends a
meeting for the express purpose of objecting, at the beginning of the meeting,
to the transaction of any business because the meeting was not lawfully called
or convened.
SECTION 2.05. MODIFICATION OF PROPOSAL CONTAINED IN NOTICE. Whenever the
language of a proposed resolution is included in a written notice of a meeting
required to be given under the provisions of the Business Corporation Law or the
articles or these bylaws, the meeting considering the resolution may without
further notice adopt it with such clarifying or other amendments as do not
enlarge its original purpose.
SECTION 2.06. EXCEPTION TO REQUIREMENT OF NOTICE.
(a) General Rule. Whenever any notice or communication is required to
be given to any person under the provisions of the Business Corporation Law or
by the articles or these bylaws or by the terms of any agreement or other
instrument or as a condition precedent to taking any corporate action and
communication with that person is then unlawful, the giving of the notice or
communication to that person shall not be required.
(b) Shareholders Without Forwarding Addresses. Notice or other
communications need not be sent to any shareholder with whom the corporation has
been unable to communicate for more than 24 consecutive months because
communications to the shareholder are returned unclaimed or the shareholder has
otherwise failed to provide the corporation with a current address. Whenever the
shareholder provides the corporation with a current address, the corporation
shall commence sending notices and other communications to the shareholder in
the same manner as to other shareholders.
-3-
<PAGE> 4
SECTION 2.07. USE OF CONFERENCE TELEPHONE AND SIMILAR EQUIPMENT. Any
director may participate in any meeting of the board of directors, and the board
of directors may provide by resolution with respect to a specific meeting or
with respect to a class of meetings that one or more persons may participate in
a meeting of the shareholders of the corporation, by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other. Participation in a meeting
pursuant to this section shall constitute presence in person at the meeting.
ARTICLE III
SHAREHOLDERS
SECTION 3.01. PLACE OF MEETING. All meetings of the shareholders of the
corporation shall be held at the registered office of the corporation unless
another place is designated by the board of directors in the notice of a
meeting.
SECTION 3.02. ANNUAL MEETING. The board of directors may fix and designate
the date and time of the annual meeting of the shareholders, but if no such date
and time is fixed and designated by the board, the meeting for any calendar year
shall be held on the first Tuesday in March in such year, if not a legal holiday
under the laws of Pennsylvania, and, if a legal holiday, then on the next
succeeding business day, not a Saturday, at 10:00 o'clock A.M., and at said
meeting the shareholders then entitled to vote shall elect directors and shall
transact such other business as may properly be brought before the meeting. If
the annual meeting shall not have been called and held within six months after
the designated time, any shareholder may call the meeting at any time
thereafter.
SECTION 3.03. SPECIAL MEETINGS. Special meetings of the shareholders may
be called at any time by the chief executive officer or by resolution of the
board of directors, who may fix the date, time and place of the meeting. If the
chief executive officer or the board does not fix the date, time or place of the
meeting, it shall be the duty of the secretary to do so. A date fixed by the
secretary shall not be more than 60 days after the date of the receipt of the
request from the chief executive officer or adoption of the resolution of the
board calling the special meeting.
SECTION 3.04. QUORUM AND ADJOURNMENT.
(a) General Rule. A meeting of shareholders of the corporation duly
called shall not be organized for the transaction of business unless a quorum is
present. The presence of shareholders entitled to cast at least a majority of
the votes that all shareholders are entitled to cast on a particular matter to
be acted upon at the meeting shall constitute a quorum for the purposes of
consideration and action on the matter. Shares of the corporation owned,
directly or indirectly, by it and controlled, directly or indirectly, by the
board of directors of this corporation, as such, shall not be counted in
determining the total number of outstanding shares for quorum purposes at any
given time.
-4-
<PAGE> 5
(b) Withdrawal of a Quorum. The shareholders present at a duly
organized meeting can continue to do business until adjournment notwithstanding
the withdrawal of enough shareholders to leave less than a quorum.
(c) Adjournments Generally. Any regular or special meeting of the
shareholders, including one at which directors are to be elected and one which
cannot be organized because a quorum has not attended, may be adjourned for such
period and to such place as the shareholders present and entitled to vote shall
direct.
(d) Electing Directors at Adjourned Meeting. Those shareholders
entitled to vote who attend a meeting called for the election of directors that
has been previously adjourned for lack of a quorum, although less than a quorum
as fixed in this section, shall nevertheless constitute a quorum for the purpose
of electing directors.
(e) Other Action in Absence of Quorum. Those shareholders entitled to
vote who attend a meeting of shareholders that has been previously adjourned for
one or more periods aggregating at least 15 days because of an absence of a
quorum, although less than a quorum as fixed in this section, shall nevertheless
constitute a quorum for the purpose of acting upon any matter set forth in the
notice of the meeting if the notice states that those shareholders who attend
the adjourned meeting shall nevertheless constitute a quorum for the purpose of
acting upon the matter.
SECTION 3.05. ACTION BY SHAREHOLDERS. Except as otherwise provided in the
Business Corporation Law or the articles or these bylaws, whenever any corporate
action is to be taken by vote of the shareholders of the corporation, it shall
be authorized upon receiving the affirmative vote of a majority of the votes
cast by all shareholders entitled to vote thereon and, if any shareholders are
entitled to vote thereon as a class, upon receiving the affirmative vote of a
majority of the votes cast by the shareholders entitled to vote as a class.
Except when acting by unanimous consent to remove a director or directors, the
shareholders of the corporation may act only at a duly organized meeting.
SECTION 3.06. ORGANIZATION. At every meeting of the shareholders, the
chairman of the board, if there be one, or, in the case of vacancy in office or
absence of the chairman of the board, one of the following persons present in
the order stated: the vice chairman of the board, if there be one, the
president, the vice presidents in their order of rank and seniority, or a person
chosen by vote of the shareholders present, shall act as chairman of the
meeting. The secretary or, in the absence of the secretary, an assistant
secretary, or, in the absence of both the secretary and assistant secretaries, a
person appointed by the chairman of the meeting, shall act as secretary of the
meeting.
SECTION 3.07. VOTING RIGHTS OF SHAREHOLDERS. Unless otherwise provided in
the articles, every shareholder of the corporation shall be entitled to one vote
for every share standing in the name of the shareholder on the books of the
corporation.
-5-
<PAGE> 6
SECTION 3.08. VOTING AND OTHER ACTION BY PROXY.
(a) General Rule.
(1) Every shareholder entitled to vote at a meeting of share-
holders may authorize another person to act for the shareholder by proxy.
(2) The presence of, or vote or other action at a meeting of
shareholders by a proxy of a shareholder shall constitute the presence of, or
vote or action by the shareholder.
(3) Where two or more proxies of a shareholder are present, the
corporation shall, unless otherwise expressly provided in the proxy, accept as
the vote of all shares represented thereby the vote cast by a majority of them
and, if a majority of the proxies cannot agree whether the shares represented
shall be voted or upon the manner of voting the shares, the voting of the shares
shall be divided equally among those persons.
(b) Execution and Filing. Every proxy shall be executed in writing by
the shareholder or by the duly authorized attorney-in-fact of the shareholder
and filed with the secretary of the corporation. A telegram, telex, cablegram,
datagram or similar transmission from a shareholder or attorney-in-fact, or a
photographic, facsimile or similar reproduction of a writing executed by a
shareholder or attorney-in-fact:
(1) may be treated as properly executed for purposes of this sub-
section; and
(2) shall be so treated if it sets forth a confidential and
unique identification number or other mark furnished by the corporation to the
shareholder for the purposes of a particular meeting or transaction.
(c) Revocation. A proxy, unless coupled with an interest, shall be
revocable at will, notwithstanding any other agreement or any provision in the
proxy to the contrary, but the revocation of a proxy shall not be effective
until written notice thereof has been given to the secretary of the corporation.
An unrevoked proxy shall not be valid after three years from the date of its
execution unless a longer time is expressly provided therein. A proxy shall not
be revoked by the death or incapacity of the maker unless, before the vote is
counted or the authority is exercised, written notice of the death or incapacity
is given to the secretary of the corporation.
(d) Expenses. The corporation shall pay the reasonable expenses of
solicitation of votes, proxies or consents of shareholders by or on behalf of
the board of directors or its nominees for election to the board, including
solicitation by professional proxy solicitors and otherwise.
SECTION 3.09. VOTING BY FIDUCIARIES AND PLEDGEES. Shares of the
corporation standing in the name of a trustee or other fiduciary and shares held
by an assignee for the benefit of creditors or by a receiver may be voted by the
trustee, fiduciary, assignee or receiver. A shareholder whose shares are pledged
shall be entitled to vote the shares until the shares have been transferred into
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the name of the pledgee, or a nominee of the pledgee, but nothing in this
section shall affect the validity of a proxy given to a pledgee or nominee.
SECTION 3.10. VOTING BY JOINT HOLDERS OF SHARES.
(a) General Rule. Where shares of the corporation are held jointly or
as tenants in common by two or more persons, as fiduciaries or otherwise:
(1) if only one or more of such persons is present in person or
by proxy, all of the shares standing in the names of such persons shall be
deemed to be represented for the purpose of determining a quorum and the
corporation shall accept as the vote of all the shares the vote cast by a joint
owner or a majority of them; and
(2) if the persons are equally divided upon whether the shares
held by them shall be voted or upon the manner of voting the shares, the voting
of the shares shall be divided equally among the persons without prejudice to
the rights of the joint owners or the beneficial owners thereof among
themselves.
(b) Exception. If there has been filed with the secretary of the
corporation a copy, certified by an attorney at law to be correct, of the
relevant portions of the agreement under which the shares are held or the
instrument by which the trust or estate was created or the order of court
appointing them or of an order of court directing the voting of the shares, the
persons specified as having such voting power in the document latest in date of
operative effect so filed, and only those persons, shall be entitled to vote the
shares but only in accordance therewith.
SECTION 3.11. VOTING BY CORPORATIONS.
(a) Voting by Corporate Shareholders. Any corporation that is a
shareholder of this corporation may vote at meetings of shareholders of this
corporation by any of its officers or agents, or by proxy appointed by any
officer or agent, unless some other person, by resolution of the board of
directors of the other corporation or a provision of its articles or bylaws, a
copy of which resolution or provision certified to be correct by one of its
officers has been filed with the secretary of this corporation, is appointed its
general or special proxy in which case that person shall be entitled to vote the
shares.
(b) Controlled Shares. Shares of this corporation owned, directly or
indirectly, by it and controlled, directly or indirectly, by the board of
directors of this corporation, as such, shall not be voted at any meeting and
shall not be counted in determining the total number of outstanding shares for
voting purposes at any given time.
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SECTION 3.12. DETERMINATION OF SHAREHOLDERS OF RECORD.
(a) Fixing Record Date. The board of directors may fix a time prior
to the date of any meeting of shareholders as a record date for the
determination of the shareholders entitled to notice of, or to vote at, the
meeting, which time, except in the case of an adjourned meeting, shall be not
more than 90 days prior to the date of the meeting of shareholders. Only
shareholders of record on the date fixed shall be so entitled notwithstanding
any transfer of shares on the books of the corporation after any record date
fixed as provided in this subsection. The board of directors may similarly fix a
record date for the determination of shareholders of record for any other
purpose. When a determination of shareholders of record has been made as
provided in this section for purposes of a meeting, the determination shall
apply to any adjournment thereof unless the board fixes a new record date for
the adjourned meeting.
(b) Determination When a Record Date is Not Fixed. If a record date
is not fixed:
(1) The record date for determining shareholders entitled to
notice of or to vote at a meeting of shareholders shall be at the close of
business on the day next preceding the day on which notice is given.
(2) The record date for determining shareholders for any other
purpose shall be at the close of business on the day on which the board of
directors adopts the resolution relating thereto.
(c) Certification by Nominee. The board of directors may adopt a pro-
cedure whereby a shareholder of the corporation may certify in writing to the
corporation that all or a portion of the shares registered in the name of the
shareholder are held for the account of a specified person or persons. Upon
receipt by the corporation of a certification complying with the procedure, the
persons specified in the certification shall be deemed, for the purposes set
forth in the certification, to be the holders of record of the number of shares
specified in place of the shareholder making the certification.
SECTION 3.13. VOTING LISTS.
(a) General Rule. The officer or agent having charge of the transfer
books for shares of the corporation shall make a complete list of the
shareholders entitled to vote at any meeting of shareholders, arranged in
alphabetical order, with the address of and the number of shares held by each.
The list shall be produced and kept open at the time and place of the meeting
and shall be subject to the inspection of any shareholder during the whole time
of the meeting for the purposes thereof except that, if the corporation has
5,000 or more shareholders, in lieu of the making of the list the corporation
may make the information therein available at the meeting by any other means.
(b) Effect of List. Failure to comply with the requirements of this
section shall not affect the validity of any action taken at a meeting prior to
a demand at the meeting by any shareholder entitled to vote thereat to examine
the list. The original share register or transfer book, or a duplicate thereof
kept in the Commonwealth of Pennsylvania, shall be prima facie evidence as to
who are the shareholders entitled to examine the list or share register or
transfer book or to vote at any meeting of shareholders.
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SECTION 3.14. JUDGES OF ELECTION.
(a) Appointment. In advance of any meeting of shareholders of the
corporation, the board of directors may appoint judges of election, who need not
be shareholders, to act at the meeting or any adjournment thereof. If judges of
election are not so appointed, the presiding officer of the meeting may, and on
the request of any shareholder shall, appoint judges of election at the meeting.
The number of judges shall be one or three. A person who is a candidate for an
office to be filled at the meeting shall not act as a judge.
(b) Vacancies. In case any person appointed as a judge fails to
appear or fails or refuses to act, the vacancy may be filled by appointment made
by the board of directors in advance of the convening of the meeting or at the
meeting by the presiding officer thereof.
(c) Duties. The judges of election shall determine the number of
shares outstanding and the voting power of each, the shares represented at the
meeting, the existence of a quorum, and the authenticity, validity and effect of
proxies, receive votes or ballots, hear and determine all challenges and
questions in any way arising in connection with nominations by shareholders or
the right to vote, count and tabulate all votes, determine the result and do
such acts as may be proper to conduct the election or vote with fairness to all
shareholders. The judges of election shall perform their duties impartially, in
good faith, to the best of their ability and as expeditiously as is practical.
If there are three judges of election, the decision, act or certificate of a
majority shall be effective in all respects as the decision, act or certificate
of all.
(d) Report. On request of the presiding officer of the meeting or of
any shareholder, the judges shall make a report in writing of any challenge or
question or matter determined by them, and execute a certificate of any fact
found by them. Any report or certificate made by them shall be prima facie
evidence of the facts stated therein.
SECTION 3.15. MINORS AS SECURITY HOLDERS. The corporation may treat a
minor who holds shares or obligations of the corporation as having capacity to
receive and to empower others to receive dividends, interest, principal and
other payments or distributions, to vote or express consent or dissent and to
make elections and exercise rights relating to such shares or obligations
unless, in the case of payments or distributions on shares, the corporate
officer responsible for maintaining the list of shareholders or the transfer
agent of the corporation or, in the case of payments or distributions on
obligations, the treasurer or paying officer or agent has received written
notice that the holder is a minor.
ARTICLE IV
BOARD OF DIRECTORS
SECTION 4.01. POWERS; PERSONAL LIABILITY.
(a) General Rule. Unless otherwise provided by statute, all powers
vested by law in the corporation shall be exercised by or under the authority
of, and the business and affairs of the corporation shall be managed under the
direction of, the board of directors.
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(b) Personal Liability of Directors.
(1) A director shall not be personally liable, as such, for
monetary damages (including, without limitation, any judgment, amount paid in
settlement, penalty, punitive damages or expense of any nature (including,
without limitation, attorneys' fees and disbursements)) for any action taken, or
any failure to take any action, unless:
(i) the director has breached or failed to perform the
duties of his or her office under Subchapter 17B of the Business Corporation Law
or any successor provision; and
(ii) the breach or failure to perform constitutes self-
dealing, willful misconduct or recklessness.
(2) The provisions of paragraph (1) shall not apply to the re-
sponsibility or liability of a director pursuant to any criminal statute, or the
liability of a director for the payment of taxes pursuant to local, State or
Federal law.
(The provisions of this subsection (b) were first adopted by the
shareholders of the corporation on December 20, 1991.)
(c) Notation of Dissent. A director of the corporation who is present
at a meeting of the board of directors, or of a committee of the board, at which
action on any corporate matter is taken on which the director is generally
competent to act, shall be presumed to have assented to the action taken unless
his or her dissent is entered in the minutes of the meeting or unless the
director files his or her written dissent to the action with the secretary of
the meeting before the adjournment thereof or transmits the dissent in writing
to the secretary of the corporation immediately after the adjournment of the
meeting. The right to dissent shall not apply to a director who voted in favor
of the action. Nothing in this section shall bar a director from asserting that
minutes of the meeting incorrectly omitted his or her dissent if, promptly upon
receipt of a copy of such minutes, the director notifies the secretary, in
writing, of the asserted omission or inaccuracy.
SECTION 4.02. QUALIFICATIONS AND SELECTION OF DIRECTORS.
(a) Qualifications. Each director of the corporation shall be a
natural person of full age, provided that no person of age 70 years or more
shall be eligible for election as a director. Directors need not be residents of
the Commonwealth of Pennsylvania or shareholders of the corporation.
(b) Notice of Certain Nominations Required. Nominations for election
of directors may be made by any shareholder entitled to vote for the election of
directors if written notice (the "Notice") of the shareholder's intent to
nominate a director at the meeting is given by the shareholder and received by
the secretary of the corporation in the manner and within the time specified in
this section. The initial Notice shall be delivered to the secretary of the
corporation not less than 45 days prior to the anniversary of the mailing date
of the corporation's proxy statement for its previous meeting of the
shareholders called for the election of directors. In lieu of delivery to the
secretary, the Notice may be mailed to the secretary by certified mail, return
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receipt requested, but shall be deemed to have been given only upon actual
receipt by the secretary. The requirements of this subsection shall not apply to
a nomination for directors made to the shareholders by the board of directors.
(c) Contents of Notice. The Notice shall be in writing and shall
contain or be accompanied by:
(1) the name and residence address of the nominating shareholder;
(2) a representation that the shareholder is a holder of record
of voting stock of the corporation and intends to appear in person or by proxy
at the meeting to nominate the person or persons specified in the Notice;
(3) such information regarding each nominee as would have been
required to be included in a proxy statement filed pursuant to Regulation 14A of
the rules and regulations established by the Securities and Exchange Commission
under the Securities Exchange Act of 1934 (or pursuant to any successor act or
regulation) had proxies been solicited with respect to such nominee by the
management or board of directors of the corporation;
(4) a description of all arrangements or understandings among the
shareholder and each nominee and any other person or persons (naming such person
or persons) pursuant to which the nomination or nominations are to be made by
the shareholder; and
(5) the consent of each nominee to serve as a director of the
corporation if so elected.
(d) Determination of Compliance. If a judge or judges of election
shall not have been appointed pursuant to these bylaws, the presiding officer of
the meeting may, if the facts warrant, determine and declare to the meeting that
any nomination made at the meeting was not made in accordance with the
procedures of this section and, in such event, the nomination shall be
disregarded. Any decision by the presiding officer of the meeting made in good
faith shall be conclusive and binding upon all shareholders of the corporation
for any purpose.
(e) Election of Directors. In elections for directors, voting need
not be by ballot, unless required by vote of the shareholders before the voting
for the election of directors begins. The candidates receiving the highest
number of votes from each class or group of classes, if any, entitled to elect
directors separately up to the number of directors to be elected by the class or
group of classes shall be elected. If at any meeting of shareholders, directors
of more than one class are to be elected, each class of directors shall be
elected in a separate election.
SECTION 4.03. NUMBER AND TERM OF OFFICE.
(a) Number. The board of directors shall consist of such number of
directors, as may be determined from time to time by resolution of the board of
directors.
(b) Term of Office. Each director shall hold office until the
expiration of the term for which he or she was selected and until a successor
has been selected and qualified or until his or
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her earlier death, resignation or removal. A decrease in the number of directors
shall not have the effect of shortening the term of any incumbent director.
(c) Resignation. Any director may resign at any time upon written
notice to the corporation. The resignation shall be effective upon receipt
thereof by the corporation or at such subsequent time as shall be specified in
the notice of resignation.
SECTION 4.04. VACANCIES.
(a) General Rule. Vacancies in the board of directors, including
vacancies resulting from an increase in the number of directors, may be filled
by a majority vote of the remaining members of the board though less than a
quorum, or by a sole remaining director, and each person so selected shall be a
director to serve until the next selection of the class for which such director
has been chosen, and until a successor has been selected and qualified or until
his or her earlier death, resignation or removal.
(b) Action by Resigned Directors. When one or more directors resign
from the board effective at a future date, the directors then in office,
including those who have so resigned, shall have power by the applicable vote to
fill the vacancies, the vote thereon to take effect when the resignations become
effective.
SECTION 4.05. REMOVAL OF DIRECTORS.
(a) Removal by the Shareholders. The entire board of directors, or
any class of the board, or any individual director may be removed from office by
vote of the shareholders entitled to vote thereon only for cause. In case the
board or a class of the board or any one or more directors are so removed, new
directors may be elected at the same meeting. The repeal of a provision of the
articles or bylaws prohibiting, or the addition of a provision to the articles
or bylaws permitting, the removal by the shareholders of the board, a class of
the board or a director without assigning any cause shall not apply to any
incumbent director during the balance of the term for which the director was
selected.
(b) Removal by the Board. The board of directors may declare vacant
the office of a director who has been judicially declared of unsound mind or who
has been convicted of an offense punishable by imprisonment for a term of more
than one year or if, within 60 days after notice of his or her selection, the
director does not accept the office either in writing or by attending a meeting
of the board of directors.
SECTION 4.06. PLACE OF MEETINGS. Meetings of the board of directors may be
held at such place within or without the Commonwealth of Pennsylvania as the
board of directors may from time to time appoint or as may be designated in the
notice of the meeting.
SECTION 4.07. ORGANIZATION OF MEETINGS. At every meeting of the board of
directors, the chairman of the board, if there be one, or, in the case of a
vacancy in the office or absence of the chairman of the board, one of the
following officers present in the order stated: the vice chairman of the board,
if there be one, the president, the vice presidents in their order of rank and
seniority, or a person chosen by a majority of the directors present, shall act
as chairman of the meeting.
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The secretary or, in the absence of the secretary, an assistant secretary, or,
in the absence of the secretary and the assistant secretaries, any person
appointed by the chairman of the meeting, shall act as secretary of the meeting.
SECTION 4.08. REGULAR MEETINGS. Regular meetings of the board of directors
shall be held at such time and place as shall be designated from time to time by
resolution of the board of directors.
SECTION 4.09. SPECIAL MEETINGS. Special meetings of the board of directors
shall be held whenever called by the chief executive officer or by two or more
of the directors.
SECTION 4.10. QUORUM OF AND ACTION BY DIRECTORS.
(a) General Rule. A majority of the directors in office of the
corporation shall be necessary to constitute a quorum for the transaction of
business and the acts of a majority of the directors present and voting at a
meeting at which a quorum is present shall be the acts of the board of
directors.
(b) Action by Written Consent. Any action required or permitted to be
taken at a meeting of the directors may be taken without a meeting if, prior or
subsequent to the action, a consent or consents thereto by all of the directors
in office is filed with the secretary of the corporation.
(c) Notation of Dissent. A director who is present at a meeting of
the board of directors, or of a committee of the board, at which action on any
corporate matter is taken shall be presumed to have assented to the action taken
unless his or her dissent is entered in the minutes of the meeting or unless the
director files a written dissent to the action with the secretary of the meeting
before the adjournment thereof or transmits the dissent in writing to the
secretary of the corporation immediately after the adjournment of the meeting.
The right to dissent shall not apply to a director who voted in favor of the
action. Nothing in this section shall bar a director from asserting that minutes
of the meeting incorrectly omitted his or her dissent if, promptly upon receipt
of a copy of such minutes, the director notifies the secretary, in writing, of
the asserted omission or inaccuracy.
SECTION 4.11. EXECUTIVE AND OTHER COMMITTEES.
(a) Establishment and Powers. The board of directors may, by resolu-
tion adopted by a majority of the directors in office, establish one or more
committees to consist of one or more directors of the corporation. Any
committee, to the extent provided in the resolution of the board of directors,
shall have and may exercise all of the powers and authority of the board of
directors except that a committee shall not have any power or authority as to
the following:
(1) The submission to shareholders of any action requiring
approval of shareholders under the Business Corporation Law.
(2) The creation or filling of vacancies in the board of
directors.
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(3) The adoption, amendment or repeal of these bylaws.
(4) The amendment or repeal of any resolution of the board that
by its terms is amendable or repealable only by the board.
(5) Action on matters committed by a resolution of the board of
directors to another committee of the board.
(b) Alternate Committee Members. The board may designate one or more
directors as alternate members of any committee who may replace any absent or
disqualified member at any meeting of the committee or for the purposes of any
written action by the committee. In the absence or disqualification of a member
and alternate member or members of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not
constituting a quorum, may unanimously appoint another director to act at the
meeting in the place of the absent or disqualified member.
(c) Term. Each committee of the board shall serve at the pleasure of
the board.
(d) Committee Procedures. The term "board of directors" or "board,"
when used in any provision of these bylaws relating to the organization or
procedures of or the manner of taking action by the board of directors, shall be
construed to include and refer to any executive or other committee of the board.
SECTION 4.12. COMPENSATION. The board of directors shall have the
authority to fix the compensation of directors for their services as directors
and a director may be a salaried officer of the corporation.
ARTICLE V
OFFICERS
SECTION 5.01. OFFICERS GENERALLY.
(a) Number, Qualifications and Designation. The officers of the
corporation shall be a president, one or more vice presidents, a secretary, a
treasurer, and such other officers as may be elected in accordance with the
provisions of Section 5.03. Officers may but need not be directors or
shareholders of the corporation. The president and secretary shall be natural
persons of full age. The treasurer may be a corporation, but if a natural person
shall be of full age. The board of directors may elect from among the members of
the board a chairman of the board and a vice chairman of the board who may be
officers of the corporation. Any number of offices may be held by the same
person.
(b) Bonding. The corporation may secure the fidelity of any or all of
its officers by bond or otherwise.
(c) Standard of Care. In lieu of the standards of conduct otherwise
provided by law, officers of the corporation shall be subject to the same
standards of conduct, including standards
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of care and loyalty and rights of justifiable reliance, as shall at the time be
applicable to directors of the corporation. An officer of the corporation shall
not be personally liable, as such, to the corporation or its shareholders for
monetary damages (including, without limitation, any judgment, amount paid in
settlement, penalty, punitive damages or expense of any nature (including,
without limitation, attorneys' fees and disbursements)) for any action taken, or
any failure to take any action, unless the officer has breached or failed to
perform the duties of his or her office under the articles of incorporation,
these bylaws, or the applicable provisions of law and the breach or failure to
perform constitutes self-dealing, willful misconduct or recklessness. The
provisions of this subsection shall not apply to the responsibility or liability
of an officer pursuant to any criminal statute or for the payment of taxes
pursuant to local, state or federal law.
SECTION 5.02. ELECTION, TERM OF OFFICE AND RESIGNATIONS.
(a) Election and Term of Office. The officers of the corporation
(except those elected by delegated authority pursuant to Section 5.03 or filled
pursuant to Section 5.05) shall be elected annually by the board of directors,
and each such officer shall hold office for a term of one year and until a
successor has been selected and qualified or until his or her earlier death,
resignation or removal.
(b) Resignations. Any officer may resign at any time upon written
notice to the corporation. The resignation shall be effective upon receipt
thereof by the corporation or at such subsequent time as may be specified in the
notice of resignation.
SECTION 5.03. SUBORDINATE OFFICERS, COMMITTEES AND AGENTS. The board of
directors may from time to time elect such other officers and appoint such
committees, employees or other agents as the business of the corporation may
require, including one or more assistant secretaries, and one or more assistant
treasurers, each of whom shall hold office for such period, have such authority,
and perform such duties as are provided in these bylaws, or as the board of
directors may from time to time determine. The board of directors may delegate
to any officer or committee the power to elect subordinate officers and to
retain or appoint employees or other agents, or committees thereof, and to
prescribe the authority and duties of such subordinate officers, committees,
employees or other agents.
SECTION 5.04. REMOVAL OF OFFICERS AND AGENTS. Any officer or agent of the
corporation may be removed by the board of directors with or without cause. The
removal shall be without prejudice to the contract rights, if any, of any person
so removed. Election or appointment of an officer or agent shall not of itself
create contract rights.
SECTION 5.05. VACANCIES. A vacancy in any office because of death,
resignation, removal, disqualification, or any other cause, may be filled by the
board of directors or the board of directors may delegate to any officer or
committee the power to fill a vacancy in such office or to create a new such
office, subject to ratification by the board of directors, and if the office is
one for which these bylaws prescribe a term, shall be filled for the unexpired
portion of the term.
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SECTION 5.06. AUTHORITY.
(a) General Rule. All officers of the corporation, as between them-
selves and the corporation, shall have such authority and perform such duties in
the management of the corporation as may be provided by or pursuant to
resolutions or orders of the board of directors or, in the absence of
controlling provisions in the resolutions or orders of the board of directors,
as may be determined by or pursuant to these bylaws.
(b) Chief Executive Officer. The chairman of the board or the
president, as designated from time to time by the board of directors, shall be
the chief executive officer of the corporation.
SECTION 5.07. THE CHAIRMAN AND VICE CHAIRMAN OF THE BOARD. The chairman of
the board or in the absence of the chairman, the vice chairman of the board,
shall preside at all meetings of the shareholders and of the board of directors,
and shall perform such other duties as may from time to time be requested by the
board of directors.
SECTION 5.08. THE CHIEF EXECUTIVE OFFICER. The chief executive officer
shall be the chief executive officer of the corporation and shall have general
supervision over the business of the corporation. The chief executive officer
shall have the general powers and shall perform the duties which by law and
general usage appertain to the office, subject, however, to the control of the
board of directors. The chief executive officer shall sign, execute and
acknowledge, in the name of the corporation, deeds, mortgages, bonds, contracts
and other instruments authorized by the board of directors, except in cases
where the signing and execution thereof shall be expressly delegated by the
board of directors, or by these bylaws, to some other officer or agent of the
corporation.
SECTION 5.09. THE PRESIDENT. The president shall perform such duties as
from time to time may be assigned by the board of directors or the chief
executive officer (unless the president shall be the chief executive officer, in
which case the president's duties shall be those specified in Section 5.08).
SECTION 5.10. THE VICE PRESIDENTS. The vice presidents shall perform the
duties of the president in the absence of the president and such other duties as
may from time to time be assigned to them by the board of directors or the
president.
SECTION 5.11. THE SECRETARY. The secretary or an assistant secretary shall
attend all meetings of the shareholders and of the board of directors and all
committees thereof and shall record all the votes of the shareholders and of the
directors and the minutes of the meetings of the shareholders and of the board
of directors and of committees of the board in a book or books to be kept for
that purpose; shall see that notices are given and records and reports properly
kept and filed by the corporation as required by law; shall be the custodian of
the seal of the corporation and see that it is affixed to all documents to be
executed on behalf of the corporation under its seal; and, in general, shall
perform all duties incident to the office of secretary, and such other duties as
may from time to time be assigned by the board of directors or the president.
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SECTION 5.12. THE TREASURER. The treasurer or an assistant treasurer shall
have or provide for the custody of the funds or other property of the
corporation; shall collect and receive or provide for the collection and receipt
of moneys earned by or in any manner due to or received by the corporation;
shall deposit all funds in his or her custody as treasurer in such banks or
other places of deposit as the board of directors may from time to time
designate; shall, whenever so required by the board of directors, render an
account showing all transactions as treasurer, and the financial condition of
the corporation; and, in general, shall discharge such other duties as may from
time to time be assigned by the board of directors or the president.
SECTION 5.13. SALARIES. The salaries of the officers elected by the board
of directors shall be fixed from time to time by the board of directors or by
such officer as may be designated by resolution of the board. The salaries or
other compensation of any other officers, employees and other agents shall be
fixed from time to time by the officer or committee to which the power to elect
such officers or to retain or appoint such employees or other agents has been
delegated pursuant to Section 5.03. No officer shall be prevented from receiving
such salary or other compensation by reason of the fact that the officer is also
a director of the corporation.
ARTICLE VI
CERTIFICATES OF STOCK, TRANSFER, ETC.
SECTION 6.01. SHARE CERTIFICATES.
(a) Form of Certificates. Certificates for shares of the corporation
shall be in such form as approved by the board of directors, and shall state
that the corporation is incorporated under the laws of the Commonwealth of
Pennsylvania, the name of the person to whom issued, and the number and class of
shares and the designation of the series (if any) that the certificate
represents. If the corporation is authorized to issue shares of more than one
class or series, certificates for shares of the corporation shall set forth upon
the face or back of the certificate (or shall state on the face or back of the
certificate that the corporation will furnish to any shareholder upon request
and without charge), a full or summary statement of the designations, voting
rights, preferences, limitations and special rights of the shares of each class
or series authorized to be issued so far as they have been fixed and determined
and the authority of the board of directors to fix and determine the
designations, voting rights, preferences, limitations and special rights of the
classes and series of shares of the corporation.
(b) Share Register. The share register or transfer books and blank
share certificates shall be kept by the secretary or by any transfer agent or
registrar designated by the board of directors for that purpose.
SECTION 6.02. ISSUANCE. The share certificates of the corporation shall be
numbered and registered in the share register or transfer books of the
corporation as they are issued. They shall be executed in such manner as the
board of directors shall determine. Where a certificate is signed by a transfer
agent or a registrar, the signature of any corporate officer upon the
certificate may be a facsimile, engraved or printed. In case any officer who has
signed, or whose facsimile signature has been placed upon, any share certificate
shall have ceased to be such officer because of death, resignation or otherwise,
before the certificate is issued, it may be issued with the same
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<PAGE> 18
effect as if the officer had not ceased to be such at the date of its issue. The
provisions of this Section 6.02 shall be subject to any inconsistent or contrary
agreement in effect at the time between the corporation and any transfer agent
or registrar.
SECTION 6.03. TRANSFER. Transfers of shares shall be made on the share
register or transfer books of the corporation upon surrender of the certificate
therefor, endorsed by the person named in the certificate or by an attorney
lawfully constituted in writing. No transfer shall be made inconsistent with the
provisions of the Uniform Commercial Code, 13 Pa.C.S. (S)(S)8101 et seq., and
its amendments and supplements.
SECTION 6.04. RECORD HOLDER OF SHARES. The corporation shall be entitled
to treat the person in whose name any share or shares of the corporation stand
on the books of the corporation as the absolute owner thereof, and shall not be
bound to recognize any equitable or other claim to, or interest in, such share
or shares on the part of any other person.
SECTION 6.05. LOST, DESTROYED OR MUTILATED CERTIFICATES. The holder of any
shares of the corporation shall immediately notify the corporation of any loss,
destruction or mutilation of the certificate therefor, and the board of
directors may, in its discretion, cause a new certificate or certificates to be
issued to such holder, in case of mutilation of the certificate, upon the
surrender of the mutilated certificate or, in case of loss or destruction of the
certificate, upon satisfactory proof of such loss or destruction and, if the
board of directors shall so determine, the deposit of a bond in such form and in
such sum, and with such surety or sureties, as it may direct.
ARTICLE VII
INDEMNIFICATION OF DIRECTORS, OFFICERS AND
OTHER AUTHORIZED REPRESENTATIVES
(The provisions of this Article VII were first adopted by the shareholders
of the corporation on December 20, 1991.)
SECTION 7.01. SCOPE OF INDEMNIFICATION.
(a) General Rule. The corporation shall indemnify an indemnified
representative against any liability incurred in connection with any proceeding
in which the indemnified representative may be involved as a party or otherwise
by reason of the fact that such person is or was serving in an indemnified
capacity, including, without limitation, liabilities resulting from any actual
or alleged breach or neglect of duty, error, misstatement or misleading
statement, negligence, gross negligence or act giving rise to strict or products
liability, except:
(1) where such indemnification is expressly prohibited by
applicable law;
(2) where the conduct of the indemnified representative has been
finally determined pursuant to Section 7.06 or otherwise:
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<PAGE> 19
(i) to constitute willful misconduct or recklessness within
the meaning of 15 Pa.C.S. (S)1746(b) or any superseding provision of law
sufficient in the circumstances to bar indemnification against liabilities
arising from the conduct; or
(ii) to be based upon or attributable to the receipt by the
indemnified representative from the corporation of a personal benefit to which
the indemnified representative is not legally entitled; or
(3) to the extent such indemnification has been finally deter-
mined in a final adjudication pursuant to Section 7.06 to be otherwise unlawful.
(b) Partial Payment. If an indemnified representative is entitled to
indemnification in respect of a portion, but not all, of any liabilities to
which such person may be subject, the corporation shall indemnify such
indemnified representative to the maximum extent for such portion of the
liabilities.
(c) Presumption. The termination of a proceeding by judgment, order,
settlement or conviction or upon a plea of nolo contendere or its equivalent
shall not of itself create a presumption that the indemnified representative is
not entitled to indemnification.
(d) Definitions. For purposes of this Article:
(1) "indemnified capacity" means any and all past, present and
future service by an indemnified representative in one or more capacities as a
director, officer, employee or agent of the corporation, or, at the request of
the corporation, as a director, officer, employee, agent, fiduciary or trustee
of another corporation, partnership, joint venture, trust, employee benefit plan
or other entity or enterprise;
(2) "indemnified representative" means any and all directors and
officers of the corporation and any other person designated as an indemnified
representative by the board of directors of the corporation (which may, but need
not, include any person serving at the request of the corporation, as a
director, officer, employee, agent, fiduciary or trustee of another corporation,
partnership, joint venture, trust, employee benefit plan or other entity or
enterprise);
(3) "liability" means any damage, judgment, amount paid in
settlement, fine, penalty, punitive damages, excise tax assessed with respect to
an employee benefit plan, or cost or expense of any nature (including, without
limitation, attorneys' fees and disbursements); and
(4) "proceeding" means any threatened, pending or completed
action, suit, appeal or other proceeding of any nature, whether civil, criminal,
administrative or investigative, whether formal or informal, and whether brought
by or in the right of the corporation, a class of its security holders or
otherwise.
SECTION 7.02. PROCEEDINGS INITIATED BY INDEMNIFIED REPRESENTATIVES.
Notwithstanding any other provision of this Article, the corporation shall not
indemnify under this Article an indemnified representative for any liability
incurred in a proceeding initiated (which shall not be deemed to include counter
claims or affirmative defenses) or participated in as an intervenor or
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<PAGE> 20
amicus curiae by the person seeking indemnification unless such initiation of or
participation in the proceeding is authorized, either before or after its
commencement, by the affirmative vote of a majority of the directors in office.
This section does not apply to reimbursement of expenses incurred in
successfully prosecuting or defending an arbitration under Section 7.06 or
otherwise successfully prosecuting or defending the rights of an indemnified
representative granted by or pursuant to this Article.
SECTION 7.03. ADVANCING EXPENSES. The corporation shall pay the expenses
(including attorneys' fees and disbursements) incurred in good faith by an
indemnified representative in advance of the final disposition of a proceeding
described in Section 7.01 or the initiation of or participation in which is
authorized pursuant to Section 7.02 upon receipt of an undertaking by or on
behalf of the indemnified representative to repay the amount if it is ultimately
determined pursuant to Section 7.06 that such person is not entitled to be
indemnified by the corporation pursuant to this Article. The financial ability
of an indemnified representative to repay an advance shall not be a prerequisite
to the making of such advance.
SECTION 7.04. SECURING OF INDEMNIFICATION OBLIGATIONS. To further effect,
satisfy or secure the indemnification obligations provided herein or otherwise,
the corporation may maintain insurance, obtain a letter of credit, act as
self-insurer, create a reserve, trust, escrow, cash collateral or other fund or
account, enter into indemnification agreements, pledge or grant a security
interest in any assets or properties of the corporation, or use any other
mechanism or arrangement whatsoever in such amounts, at such costs, and upon
such other terms and conditions as the board of directors shall deem
appropriate. Absent fraud, the determination of the board of directors with
respect to such amounts, costs, terms and conditions shall be conclusive against
all security holders, officers and directors and shall not be subject to
voidability.
SECTION 7.05. PAYMENT OF INDEMNIFICATION. An indemnified representative
shall be entitled to indemnification within 30 days after a written request for
indemnification has been delivered to the secretary of the corporation.
SECTION 7.06. ARBITRATION.
(a) General Rule. Any dispute related to the right to indemnifica-
tion, contribution or advancement of expenses as provided under this Article,
except with respect to indemnification for liabilities arising under the
Securities Act of 1933 that the corporation has undertaken to submit to a court
for adjudication, shall be decided only by arbitration in the county in which
the principal executive offices of the corporation are located at the time, in
accordance with the commercial arbitration rules then in effect of the American
Arbitration Association, before a panel of three arbitrators, one of whom shall
be selected by the corporation, the second of whom shall be selected by the
indemnified representative and the third of whom shall be selected by the other
two arbitrators. In the absence of the American Arbitration Association, or if
for any reason arbitration under the arbitration rules of the American
Arbitration Association cannot be initiated, and if one of the parties fails or
refuses to select an arbitrator or the arbitrators selected by the corporation
and the indemnified representative cannot agree on the selection of the third
arbitrator within 30 days after such time as the corporation and the indemnified
representative have each been notified of the selection of the other's
arbitrator, the necessary arbitrator or arbitrators shall be selected by the
presiding judge of the court of general jurisdiction in such county.
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<PAGE> 21
(b) Qualifications of Arbitrators. Each arbitrator selected as pro-
vided herein is required to be or have been a director or executive officer of a
corporation whose shares of common stock were listed during at least one year of
such service on the New York Stock Exchange or the American Stock Exchange or
quoted on the National Association of Securities Dealers Automated Quotations
System.
(c) Burden of Proof. The party or parties challenging the right of an
indemnified representative to the benefits of this Article shall have the burden
of proof.
(d) Expenses. The corporation shall reimburse an indemnified
representative for the expenses (including attorneys' fees and disbursements)
incurred in successfully prosecuting or defending such arbitration.
(e) Effect. Any award entered by the arbitrators shall be final,
binding and nonappealable and judgment may be entered thereon by any party in
accordance with applicable law in any court of competent jurisdiction, except
that the corporation shall be entitled to interpose as a defense in any such
judicial enforcement proceeding any prior final judicial determination adverse
to the indemnified representative under Section 7.01(a)(2) in a proceeding not
directly involving indemnification under this Article. This arbitration
provision shall be specifically enforceable.
SECTION 7.07. CONTRIBUTION. If the indemnification provided for in this
Article or otherwise is unavailable for any reason in respect of any liability
or portion thereof, the corporation shall contribute to the liabilities to which
the indemnified representative may be subject in such proportion as is
appropriate to reflect the intent of this Article or otherwise.
SECTION 7.08. MANDATORY INDEMNIFICATION OF DIRECTORS, OFFICERS, ETC. To
the extent that an authorized representative of the corporation has been
successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in Sections 1741 or 1742 of the Business Corporation Law
or in defense of any claim, issue or matter therein, such person shall be
indemnified against expenses (including attorneys' fees and disbursements)
actually and reasonably incurred by such person in connection therewith.
SECTION 7.09. CONTRACT RIGHTS; AMENDMENT OR REPEAL. All rights under this
Article shall be deemed a contract between the corporation and the indemnified
representative pursuant to which the corporation and each indemnified
representative intend to be legally bound. Any repeal, amendment or modification
hereof shall be prospective only and shall not affect any rights or obligations
then existing.
SECTION 7.10. SCOPE OF ARTICLE. The rights granted by this Article shall
not be deemed exclusive of any other rights to which those seeking
indemnification, contribution or advancement of expenses may be entitled under
any statute, agreement, vote of shareholders or disinterested directors or
otherwise, both as to action in an indemnified capacity and as to action in any
other capacity. The indemnification, contribution and advancement of expenses
provided by or granted pursuant to this Article shall continue as to a person
who has ceased to be an indemnified
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<PAGE> 22
representative in respect of matters arising prior to such time, and shall inure
to the benefit of the heirs, executors, administrators and personal
representatives of such a person.
SECTION 7.11. RELIANCE ON PROVISIONS. Each person who shall act as an
indemnified representative of the corporation shall be deemed to be doing so in
reliance upon the rights of indemnification, contribution and advancement of
expenses provided by this Article.
SECTION 7.12. INTERPRETATION. The provisions of this Article are intended
to constitute bylaws authorized by 15 Pa.C.S. (S)1746.
ARTICLE VIII
MISCELLANEOUS
SECTION 8.01. CORPORATE SEAL. The corporation shall have a corporate seal
in the form of a circle containing the name of the corporation, the year of
incorporation and such other details as may be approved by the board of
directors. The affixation of the corporate seal shall not be necessary to the
valid execution, assignment or endorsement by the corporation of any instrument
or other document.
SECTION 8.02. CHECKS. All checks, notes, bills of exchange or other
similar orders in writing shall be signed by such one or more officers or
employees of the corporation as the board of directors may from time to time
designate.
SECTION 8.03. CONTRACTS. Except as otherwise provided in the Business
Corporation Law in the case of transactions that require action by the
shareholders, the board of directors may authorize any officer or agent to enter
into any contract or to execute or deliver any instrument on behalf of the
corporation, and such authority may be general or confined to specific
instances.
SECTION 8.04. INTERESTED DIRECTORS OR OFFICERS; QUORUM.
(a) General Rule. A contract or transaction between the corporation
and one or more of its directors or officers or between the corporation and
another corporation, partnership, joint venture, trust or other enterprise in
which one or more of its directors or officers are directors or officers or have
a financial or other interest, shall not be void or voidable solely for that
reason, or solely because the director or officer is present at or participates
in the meeting of the board of directors that authorizes the contract or
transaction, or solely because his, her or their votes are counted for that
purpose, if:
(1) the material facts as to the relationship or interest and as
to the contract or transaction are disclosed or are known to the board of
directors and the board authorizes the contract or transaction by the
affirmative votes of a majority of the disinterested directors even though the
disinterested directors are less than a quorum;
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<PAGE> 23
(2) the material facts as to his or her relationship or interest
and as to the contract or transaction are disclosed or are known to the
shareholders entitled to vote thereon and the contract or transaction is
specifically approved in good faith by vote of those shareholders; or
(3) the contract or transaction is fair as to the corporation as
of the time it is authorized, approved or ratified by the board of directors or
the shareholders.
(b) Quorum. Common or interested directors may be counted in deter-
mining the presence of a quorum at a meeting of the board which authorizes a
contract or transaction specified in subsection (a).
SECTION 8.05. DEPOSITS. All funds of the corporation shall be deposited
from time to time to the credit of the corporation in such banks, trust
companies or other depositaries as the board of directors may approve or
designate, and all such funds shall be withdrawn only upon checks signed by such
one or more officers or employees of the corporation as the board of directors
shall from time to time designate.
SECTION 8.06. CORPORATE RECORDS.
(a) Required Records. The corporation shall keep complete and
accurate books and records of account, minutes of the proceedings of the
incorporators, shareholders and directors and a share register giving the names
and addresses of all shareholders and the number and class of shares held by
each. The share register shall be kept at either the registered office of the
corporation in the Commonwealth of Pennsylvania or at its principal place of
business wherever situated or at the office of its registrar or transfer agent.
Any books, minutes or other records may be in written form or any other form
capable of being converted into written form within a reasonable time.
(b) Right of Inspection. Every shareholder shall, upon written
verified demand stating the purpose thereof, have a right to examine, in person
or by agent or attorney, during the usual hours for business for any proper
purpose, the share register, books and records of account, and records of the
proceedings of the incorporators, shareholders and directors and to make copies
or extracts therefrom. A proper purpose shall mean a purpose reasonably related
to the interest of the person as a shareholder. In every instance where an
attorney or other agent is the person who seeks the right of inspection, the
demand shall be accompanied by a verified power of attorney or other writing
that authorizes the attorney or other agent to so act on behalf of the
shareholder. The demand shall be directed to the corporation at its registered
office in the Commonwealth of Pennsylvania or at its principal place of business
wherever situated.
SECTION 8.07. AMENDMENT OF BYLAWS. Except as otherwise provided in the
express terms of any series of the shares of the corporation:
(a) The shareholders shall have the power to amend or repeal these
bylaws, or to adopt new bylaws, only with the approval of the board of
directors. A direction by the board that a shareholder proposal with respect to
the bylaws shall be submitted to the shareholders for action thereon, or the
sufferance by the board that such a proposal shall be so submitted, shall not
constitute approval by the board of directors of the amendment, repeal or new
bylaws.
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<PAGE> 24
(b) These bylaws may be amended or repealed, or new bylaws may be
adopted, by vote of a majority of the board of directors of the corporation in
office at any regular or special meeting of directors, including in
circumstances otherwise reserved by statute exclusively to the shareholders, the
board of directors of the corporation having under the articles of incorporation
the full authority conferred by law upon the shareholders of the corporation to
adopt, amend or repeal these bylaws. Any bylaw adopted by the board of directors
under this paragraph shall be consistent with the articles of incorporation.
As amended through October 27, 1998.
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<PAGE> 1
Exhibit 13.1
FINANCIAL REVIEW
[PICTURE ANTHONY J. MENDICINO]
Anthony J. Mendicino
Vice President - Finance
and Chief Financial Officer
INTRODUCTION
In this section, we (1) explain our operating results and financial condition by
business segment, (2) describe the sources and uses of our cash, and (3)
describe significant factors and conditions currently affecting our businesses
and those that may affect them in the future. As you read Financial Review, it
will be helpful to refer to our consolidated financial statements and notes on
pages 22-42 of this Annual Report to Shareholders.
BUSINESS OVERVIEW
Our domestic propane business is conducted through AmeriGas Partners, L.P.
(AmeriGas Partners) and its operating subsidiary, AmeriGas Propane, L.P. (the
"Operating Parnership"). We refer to AmeriGas Partners and the Operating
Partnership together as the Partnership. We hold an effective 58.6% equity
interest in the Operating Partnership comprising Common Units and Subordinated
Units of AmeriGas Partners and our general partner interests. Our domestic
propane business is managed by our subsidiary AmeriGas Propane, Inc. (General
Partner). Our utility business is conducted through UGI Utilities, Inc. (UGI
Utilities) which operates a natural gas distribution utility (Gas Utility) in
parts of eastern and southeastern Pennsylvania and an electric utility (Electric
Utility) in northeastern Pennsylvania (together referred to as "Utilities"). We
also conduct an energy marketing business through a subsidiary of UGI
Enterprises, Inc. (Enterprises), UGI Energy Services, Inc. (UGI Energy
Services). UGI Energy Services sells and markets natural gas directly to
commercial and industrial customers, including customers of Gas Utility, and
also manages its delivery. Enterprises, through subsidiaries, is also a
participant in joint venture projects in China and Romania and is evaluating
opportunities for providing energy and related services in other markets outside
of the U.S.
RESULTS OF OPERATIONS
1998 COMPARED WITH 1997
CONSOLIDATED RESULTS
<TABLE>
<CAPTION>
Year Ended September 30, 1998 1997 Decrease
- --------------------------------------------------------------------------------------------
(Millions of dollars, except per share)
<S> <C> <C> <C> <C>
Revenues $ 1,439.7 $ 1,642.0 $ (202.3) (12.3)%
Total margin $ 666.5 $ 684.9 $ (18.4) (2.7)%
Operating income $ 170.2 $ 199.9 $ (29.7) (14.9)%
Net income $ 40.3 $ 52.1 $ (11.8) (22.6)%
Net income per share --
diluted $ 1.22 $ 1.57 $ (.35) (22.3)%
- --------------------------------------------------------------------------------------------
</TABLE>
Our consolidated results decreased in 1998 mainly because of (1) the impact of
warmer heating-season weather on Gas Utility and Partnership results and (2)
lower other income of the Partnership.
PROPANE
<TABLE>
<CAPTION>
Year Ended September 30, 1998 1997 Decrease
- -------------------------------------------------------------------------------------------
(Millions of dollars)
<S> <C> <C> <C> <C>
Retail gallons sold --
millions 785.3 807.4 (22.1) (2.7)%
Degree days -- % warmer
than normal (a) (8.7)% (1.2)% -- --
Revenues $ 914.4 $1,077.8 $ (163.4) (15.2)%
Total margin $ 470.6 $ 477.4 $ (6.8) (1.4)%
Operating income $ 93.8 $ 117.1 $ (23.3) (19.9)%
EBITDA (b) $ 159.2 $ 181.4 $ (22.2) (12.2)%
- -------------------------------------------------------------------------------------------
</TABLE>
(a) Based upon national weather statistics provided by the National Oceanic
and Atmospheric Administration (NOAA) for 335 airports in the continental
U.S.
(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.
Retail and wholesale volumes sold in 1998 were lower than in 1997 due to warmer
heating-season weather. Because many of our customers use propane for heating
purposes, our sales are affected by temperatures during the heating season.
Based upon degree day information we obtained from NOAA, weather in 1998 was
8.7% warmer than normal compared to weather that was 1.2% warmer than normal in
1997. In particular, the critical heating-season period of January and February
was the warmest in more than 100 years.
Total revenues from our retail propane sales were $746.1 million in 1998, a
decrease of $122.1 million from 1997. The decrease includes $98.3 million from a
reduction in average selling prices and $23.8 million from the lower retail
volumes sold. Our wholesale propane revenues in 1998 decreased $37.5 million to
$88.5 million due to lower 1998 selling prices and lower volumes. The lower
average retail and wholesale selling prices were due to significantly lower
propane product costs. Other revenues were $79.8 million in 1998, a decrease of
$3.8 million, due in large part to reduced terminal and storage revenues and
lower appliance sales revenues.
Total margin, representing total revenues less cost of sales, declined $6.8
million in 1998 due to the lower retail volumes sold. The decline in 1998 total
margin resulting from the lower sales was partially offset by slightly higher
average retail margin per gallon, or unit margin. The higher average unit margin
in 1998 principally resulted from the lower propane product costs.
The decrease in 1998 operating income and EBITDA reflects (1) lower other
income, (2) a decrease in total propane margin, and (3) slightly higher
operating expenses. Other income, net, in 1998 includes a $4.0 million loss from
two interest rate protection agreements. We entered into these agreements to
reduce interest rate exposure associated with an anticipated refinancing of the
Operating Partnership's Acquisition Facility in late 1998. Like many companies
planning debt refinancings, the Partnership postponed its refinancing in
response to volatility in the corporate debt markets during the fourth quarter
of fiscal 1998. The Partnership's strong cash flows in 1998, due in large part
to improved working capital management and lower propane product costs, gave us
the flexibility needed to delay the refinancing. When we postponed the
refinancing, we recorded a loss on the
UGI CORPORATION 1998 ANNUAL REPORT
13
<PAGE> 2
FINANCIAL REVIEW, CONTINUED
interest rate protection agreements because they no longer qualified for hedge
accounting treatment. We expect the corporate debt markets to stabilize which
should result in lower future interest expense when the refinancing occurs.
Other income in 1997 includes (1) $4.7 million from the sale of the
Partnership's 50% interest in Atlantic Energy, Inc. (Atlantic Energy), (2)
higher customer finance charges, and (3) higher interest income. We sold our
interest in Atlantic Energy in 1997 after determining that its storage terminal
facilities in Chesapeake, Virginia were not strategic to our business. Operating
expenses of the Partnership were $320.2 million in 1998 compared to $316.4
million in 1997. Operating expenses in 1998 include the benefit of (1) $2.7
million from lower required accruals for environmental matters and (2) $2.0
million from lower required accruals for property taxes. Excluding these items,
operating expenses of the Partnership in 1998 were $8.5 million higher, an
increase of 2.7%, primarily due to incremental expenses associated with (1)
acquisitions and (2) new business activities including start-up locations and
our PPX Prefilled Propane Xchange(TM) program. Excluding the impact of these new
business activities, our base business total expenses were essentially
unchanged.
UTILITIES
<TABLE>
<CAPTION>
Increase
Year Ended September 30, 1998 1997 (Decrease)
- ---------------------------------------------------------------------------------------
(Millions of dollars)
<S> <C> <C> <C> <C>
GAS UTILITY:
System throughput -- bcf 74.9 80.2 (5.3) (6.6)%
Degree days -- % warmer
than normal (16.3)% (4.8)% -- --
Revenues $350.2 $389.1 $(38.9) (10.0)%
Total margin $157.2 $168.7 $(11.5) (6.8)%
Operating income $ 68.9 $ 74.8 $ (5.9) (7.9)%
ELECTRIC UTILITY:
Sales -- gwh 876.4 868.5 7.9 .9%
Revenues $ 72.1 $ 72.1 $ -- --%
Total margin $ 34.0 $ 35.2 $ (1.2) (3.4)%
Operating income $ 10.4 $ 10.7 $ (0.3) (2.8)%
- ---------------------------------------------------------------------------------------
</TABLE>
bcf - billions of cubic feet. gwh - millions of kilowatt hours. Total
margin represents revenues less cost of sales and revenue-related taxes.
GAS UTILITY. Weather in Gas Utility's service territory was 16.3% warmer than
normal in 1998 compared with weather that was 4.8% warmer than normal in 1997.
Our total system throughput decreased 6.6% in 1998 primarily because the warmer
weather resulted in a 5.1 bcf reduction (14.5%) in sales to our firm-
residential, commercial and industrial (collectively, "core market") customers.
The decrease in Gas Utility's revenues in 1998 was primarily due to the lower
volumes sold to our core market customers. Our cost of gas sold decreased $25.5
million to $179.6 million in 1998 also reflecting the lower sales to core market
customers.
The decrease in Gas Utility's total margin includes (1) a $9.9 million decrease
in margin from our core market customers and (2) a $2.7 million decrease in
margin from our interruptible customers. Interruptible margin in 1998 was
impacted by lower interruptible transportation rates. Gas Utility reduced its
rates to alternate-fuel interruptible customers in order to remain competitive
with declining oil prices.
Gas Utility operating income decreased $5.9 million in 1998 reflecting lower
total margin partially offset by lower operating expenses and higher other
income. Gas Utility's operating expenses during 1998 decreased $5.4 million
principally as a result of (1) $1.6 million of income from an insurance
recovery, (2) a $2.1 million decrease in distribution system maintenance
expenses, and (3) lower charges relating to environmental matters.
ELECTRIC UTILITY. Pennsylvania's Electricity Generation Customer Choice and
Competition Act (Customer Choice Act) and the associated Restructuring Order
issued by the PUC (see "Customer Choice Act" on page 19) did not have a
significant effect on Electric Utility's 1998 results. Total electric sales were
higher in 1998 reflecting the warmer summer weather's effect on air conditioning
use and an increase in the number of customers. Electric Utility revenues in
1998 were equal to 1997 reflecting higher total sales offset by the effects of
our Customer Choice Act pilot program. Our Customer Choice Act pilot program
allowed a limited number of our customers the chance to choose another supplier
of electricity beginning November 1, 1997. Because pilot program participants
buy their electricity from others, we record revenues for distributing the
electricity over our wires but we do not record revenues related to the
electricity itself.
Our cost of sales increased to $35.0 million in 1998 from $33.8 million in 1997.
The increase was due to slightly higher costs to generate electricity and
purchase power under our power supply agreement. In accordance with the June
1998 Restructuring Order, 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 decreased $1.2 million in 1998 due to higher
generation and purchased power costs. The decrease in operating income reflects
the net effects of (1) lower total margin, (2) legal expenses associated with
Restructuring Order activities, and (3) higher other income.
ENERGY MARKETING
<TABLE>
<CAPTION>
Year Ended September 30, 1998 1997 Increase
- ------------------------------------------------------------------
(Millions of dollars)
<S> <C> <C> <C> <C>
Revenues $103.0 $103.0 -- --
Total margin $ 4.7 $ 3.6 $1.1 30.6%
Operating income $ 2.0 $ 1.7 $0.3 17.6%
- ------------------------------------------------------------------
</TABLE>
Although volumes sold were slightly higher in 1998, revenues were equal with
1997 due to lower average selling prices. Total margin in 1998 was $1.1 million
higher primarily because the prior year's margins were negatively impacted by a
decline in the value of pipeline capacity caused by the warmer-than-normal
weather. Operating income from our energy marketing business was higher than the
prior year reflecting the increase in total margin partially offset by lower
other income and higher operating expenses.
UGI CORPORATION 1998 ANNUAL REPORT
14
<PAGE> 3
1997 COMPARED WITH 1996
CONSOLIDATED RESULTS
<TABLE>
<CAPTION>
Year Ended September 30, 1997 1996 Increase
- -----------------------------------------------------------------------------------------
(Millions of dollars, except per share)
<S> <C> <C> <C> <C>
Revenues $ 1,642.0 $ 1,557.6 $ 84.4 5.4%
Total margin $ 684.9 $ 652.4 $ 32.5 5.0%
Operating income $ 199.9 $ 159.7 $ 40.2 25.2%
Net income $ 52.1 $ 39.5 $ 12.6 31.9%
Net income per share --
diluted $ 1.57 $ 1.19 $ .38 31.9%
- -----------------------------------------------------------------------------------------
</TABLE>
Our results in 1997 reflect a significant improvement in AmeriGas Partners'
performance. In addition, net income in 1997 includes $2.3 million from the sale
of UTI Energy Corp. common stock.
PROPANE
<TABLE>
<CAPTION>
Increase
Year Ended September 30, 1997 1996 (Decrease)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(Millions of dollars)
Retail gallons sold --
millions 807.4 855.4 (48.0) (5.6)%
Degree days -- % colder
(warmer) than normal (a) (1.2)% 1.7% -- --
Revenues $1,077.8 $1,013.2 $ 64.6 6.4%
Total margin $ 477.4 $ 443.5 $ 33.9 7.6%
Operating income $ 117.1 $ 80.8 $ 36.3 44.9%
EBITDA (b) $ 181.4 $ 144.9 $ 36.5 25.2%
- --------------------------------------------------------------------------------------------
</TABLE>
(a) Based upon national weather statistics provided by the National Oceanic
and Atmospheric Administration (NOAA) for 335 airports in the continental
U.S.
(b) EBITDA (earnings before interest expense, income taxes, depreciation and
amortization) should not be considered as an alternative to operating
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.
We sold fewer retail gallons of propane in 1997 due in part to warmer
heating-season weather. Weather in the continental U.S. during 1997 as
determined by NOAA averaged 1.2% warmer than normal compared to weather that was
1.7% colder than normal in 1996. In addition, significantly higher and more
volatile propane market prices during the first half of the fiscal 1997 heating
season encouraged customers to conserve. Wholesale volumes of propane sold
decreased 91.1 million gallons to 218.6 million gallons in 1997 principally due
to reduced low-margin sales of storage inventories.
Total 1997 revenues from our retail propane sales increased $81.3 million to
$868.2 million. The increase includes a $125.5 million increase from higher
average selling prices partially offset by a $44.2 million decrease from the
lower retail volumes sold. The higher average prices resulted from significantly
higher propane product costs early in fiscal 1997. Our wholesale propane
revenues in 1997 decreased $11.9 million to $126.0 million reflecting the lower
wholesale volumes sold partially offset by higher average wholesale prices.
Other revenues declined $4.8 million to $83.6 million due to lower hauling,
appliance and service revenues.
Total propane margin was greater in 1997 because of higher average retail unit
margins. Although our propane product costs were significantly higher in 1997,
we benefitted from favorable fixed-price supply arrangements and derivative
commodity contracts entered into as part of our 1997 propane supply strategy.
The higher 1997 average retail unit margin also reflects the fact that our
retail unit margins in the prior-year period were adversely impacted by certain
sales and marketing programs.
The increase in our 1997 operating income and EBITDA is the result of (1) the
higher total margin, (2) greater other income, and (3) a decrease in operating
expenses. Total operating expenses of the Partnership were $316.4 million in
1997 compared with $317.4 million in 1996. The 1996 operating expenses, however,
are net of (1) $4.4 million from a refund of insurance premium deposits and (2)
$3.3 million from a reduction in accrued environmental costs. Excluding the
impact of these items on 1996 operating expenses, operating expenses in 1997
declined $8.7 million mainly reflecting (1) lower expenses related to sales and
marketing programs and (2) lower required accruals for general and automobile
liability and workers' compensation costs. Other income increased $2.9 million
in 1997 reflecting a pre-tax gain of $4.7 million from the sale of the
Partnership's 50% interest in Atlantic Energy.
UTILITIES
<TABLE>
<CAPTION>
Increase
Year Ended September 30, 1997 1996 (Decrease)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(Millions of dollars)
GAS UTILITY:
System throughput -- bcf 80.2 85.4 (5.2) (6.1)%
Degree days -- % colder
(warmer) than normal (4.8)% 4.2% -- --
Revenues $389.1 $391.0 $ (1.9) (.5)%
Total margin $168.7 $169.7 $ (1.0) (.6)%
Operating income $ 74.8 $ 72.9 $ 1.9 2.6%
ELECTRIC UTILITY:
Sales -- gwh 868.5 884.7 (16.2) (1.8)%
Revenues $ 72.1 $ 69.5 $ 2.6 3.7%
Total margin $ 35.2 $ 33.0 $ 2.2 6.7%
Operating income $ 10.7 $ 8.6 $ 2.1 24.4%
- --------------------------------------------------------------------------------------
</TABLE>
GAS UTILITY. Weather in Gas Utility's service territory was 4.8% warmer than
normal in 1997 compared with weather that was 4.2% colder than normal in 1996.
Total system throughput decreased 6.1% during 1997 due to (1) the warmer
weather's effect on our core market sales and (2) a decrease in low-margin
interruptible delivery service volumes associated with the shut-down of a
gas-fired cogeneration facility.
Gas Utility's revenues were $1.9 million lower in 1997 as a $27.2 million
increase in core market revenues due mainly to higher average purchased gas cost
(PGC) rates was offset by (1) a $21.2 million decrease in core market revenues
from lower sales and (2) an $8.1 million decrease in revenues from off-system
sales. Our cost of gas sold decreased $1.1 million to $205.2 million in 1997
reflecting the lower off-system and core market sales partially offset by higher
average PGC rates.
The decrease in Gas Utility's total margin principally reflects a $6.3 million
decrease in total margin from core market
UGI CORPORATION 1998 ANNUAL REPORT
15
<PAGE> 4
FINANCIAL REVIEW, CONTINUED
customers resulting from the warmer weather. This decrease was partially offset
by a $5.5 million increase in total margin from our interruptible customers.
Although total margin was slightly lower in 1997, Gas Utility operating income
increased $1.9 million because of (1) a $1.5 million decrease in operating
expenses and (2) higher other income. Operating expenses in 1997 declined $1.5
million due to (1) a decrease in distribution system expenses, (2) lower
accruals for uncollectible accounts, and (3) lower general and administrative
expenses. These decreases were partially offset by higher costs associated with
environmental matters.
ELECTRIC UTILITY. Electric Utility sales decreased during 1997 on weather which
was 5.6% warmer than in 1996. Electric Utility base rate revenues increased $1.7
million in 1997 as a $2.8 million increase resulting from higher base rates was
partially offset by a $1.1 million decrease resulting from the lower sales. In
addition, Electric Utility revenues include a $.9 million increase in energy
cost recoveries. Our cost of sales increased to $33.8 million in 1997 from $33.4
million in 1996 due to higher energy cost recoveries partially offset by the
lower sales.
Electric Utility total margin and operating income increased during 1997
principally as a result of the higher base rates. Total operating and
administrative expenses in 1997 and 1996 were comparable.
ENERGY MARKETING
<TABLE>
<CAPTION>
Increase
Year Ended September 30, 1997 1996 (Decrease)
- -----------------------------------------------------------------------
(Millions of dollars)
<S> <C> <C> <C> <C>
Revenues $103.0 $83.9 $ 19.1 22.8%
Total margin $ 3.6 $ 6.2 $ (2.6) (41.9)%
Operating income $ 1.7 $ 4.4 $ (2.7) (61.4)%
- -----------------------------------------------------------------------
</TABLE>
Revenues from energy marketing in 1997 increased due to (1) higher billed
volumes and (2) higher natural gas prices. Total margin, however, was lower in
1997 due to the warmer winter weather's downward effect on (1) natural gas
prices and (2) the value of pipeline capacity. Operating income from our energy
marketing business was $1.7 million in 1997 compared with $4.4 million in 1996
principally as a result of the lower total margin.
FINANCIAL CONDITION AND LIQUIDITY
CAPITALIZATION AND LIQUIDITY
Our cash and short-term investments totaled $148.4 million at September 30,
1998. This amount includes $120.5 million of cash and short-term investments
held by UGI. The primary sources of UGI's cash and short-term investments are
the cash dividends it receives from AmeriGas, Inc. and UGI Utilities. AmeriGas's
ability to pay dividends to UGI is dependent upon its receipt of Partnership
distributions. During 1998, 1997 and 1996, AmeriGas, Inc. and UGI Utilities paid
cash dividends to UGI as follows:
<TABLE>
<CAPTION>
Year Ended September 30, 1998 1997 1996
- ---------------------------------------------------------------
(Millions of dollars)
<S> <C> <C> <C>
AmeriGas, Inc. $55.2 $51.7 $61.9
UGI Utilities 22.6 24.1 32.9
- ---------------------------------------------------------------
Total dividends to UGI $77.8 $75.8 $94.8
- ---------------------------------------------------------------
</TABLE>
AMERIGAS PARTNERS. The Operating Partnership's primary cash sources have been
(1) cash generated by operations and (2) borrowings under its Bank Credit
Agreement.
The Operating Partnership's Bank Credit Agreement consists of (1) a Revolving
Credit Facility and (2) an Acquisition Facility. The Operating Partnership may
borrow up to $100 million (including $35 million for letters of credit) under
the Revolving Credit Facility. The Revolving Credit Facility may be used for (1)
working capital, (2) capital expenditures, and (3) interest and distribution
payments. Revolving Credit Facility loans were $10 million at September 30, 1998
and $28 million at September 30, 1997. The Operating Partnership's borrowing
needs are typically greatest during the fall and early winter months due to the
need to fund working capital. The Operating Partnership may borrow up to $75
million under its Acquisition Facility to finance the purchase of propane
businesses or propane business assets. The Acquisition Facility operates like a
revolving facility until September 15, 2000. At that time, the total amount
outstanding converts to a quarterly amortizing four-year term loan. Acquisition
Facility loans were $60 million at September 30, 1998 and $37 million at
September 30, 1997.
The Partnership must maintain certain financial ratios in order to borrow under
the Bank Credit Agreement. These include a minimum interest coverage ratio and a
maximum debt to EBITDA ratio, each as defined in the Bank Credit Agreement. The
Partnership's ratios calculated as of September 30, 1998 permit it to borrow up
to the maximum amount available.
The Operating Partnership also has a credit agreement with the General Partner.
The Operating Partnership may borrow up to $20 million from the General Partner
to fund (1) working capital, (2) capital expenditures, and (3) interest and
distribution payments. The terms of this facility are generally comparable to
those of the Revolving Credit Facility. The major difference, however, is that
borrowings from the General Partner are unsecured and subordinated to all senior
debt of the Operating Partnership. UGI has agreed to contribute up to $20
million to the General Partner to fund such borrowings. The Operating
Partnership did not borrow under this facility in 1998.
The Partnership's management believes that, given near normal weather, its cash
flow from operations and its credit facility borrowings will satisfy its
liquidity needs, including paying the minimum quarterly distribution of $.55
(MQD) to all unitholders, for the foreseeable future.
UGI UTILITIES. UGI Utilities' primary cash sources have been (1) cash generated
by operations and (2) borrowings under its revolving credit agreements. UGI
Utilities also can issue up to an additional $52 million of unsecured debt under
its shelf registration.
UGI CORPORATION 1998 ANNUAL REPORT
16
<PAGE> 5
UGI Utilities may borrow up to $97 million under its revolving credit
agreements. Borrowings under these agreements totaled $68.4 million at September
30, 1998 and $67 million at September 30, 1997. The revolving credit agreements
contain financial covenants with respect to interest coverage ratios and minimum
tangible net worth. These covenants also restrict payments for investments,
redemptions of capital stock, prepayments of debt and dividends. At September
30, 1998, UGI Utilities could borrow up to the maximum amount available.
Management believes that UGI Utilities' cash flow from operations and borrowings
under its shelf registration and bank credit facilities will satisfy UGI
Utilities' cash needs for the foreseeable future.
CASH FLOWS
OPERATING ACTIVITIES. Although our operating results were lower in 1998, cash
flow from operating activities increased $6.5 million over 1997. Included in the
1998 amount is $26.5 million of cash from changes in operating working capital
(which consists of customer accounts receivable, inventories, accounts payable
and other current assets and liabilities used in the operations of our
businesses). Changes in operating working capital provided $13.6 million of cash
in 1997.
Although the Partnership contributed slightly more than half of the 1998
operating cash flow before working capital changes, it contributed nearly
three-quarters of our total operating cash flow. This was due to a $52.7 million
decrease in the Partnership's inventory, accounts receivable and prepaid propane
purchases due to improved working capital management and lower propane product
costs. UGI Utilities' operating working capital changes required $18.9 million
of cash principally due to a decrease in deferred fuel overcollections and
changes in accounts payable and accrued income taxes.
INVESTING ACTIVITIES. We spent $69.2 million for property, plant and equipment
in 1998 compared with $68.8 million in 1997 (see table on page 18 for
expenditures by business segment). During 1998, we paid $8.1 million for propane
business acquisitions compared to $11.6 million in 1997.
FINANCING ACTIVITIES. We paid cash dividends on our Common Stock of $47.6
million in 1998 compared with $47.2 million in 1997. In addition, the
Partnership paid distributions to public unitholders of $39.0 million in 1998
and $38.8 million in 1997. These amounts represent the MQD on all of the public
Common Units. In addition, the Partnership paid the full MQD on the Common and
Subordinated units we own. UGI Utilities borrowed a net $1.4 million under its
revolving credit facilities in 1998 compared with $16.5 million in 1997. During
1998, UGI Utilities issued $35 million of notes under its Medium-Term Note
program. The Partnership, due to its strong operating cash flows in late 1998,
repaid $18 million of borrowings under its revolving credit facility in 1998.
This compares with net borrowings of $6 million in 1997. The Partnership
borrowed $23 million under its Acquisition Facility during 1998 compared to $7
million during 1997. We repurchased $11.3 million of Common Stock under our
stock buy-back programs in 1998 compared to repurchases of $19.2 million in
1997. In addition, UGI Utilities redeemed $15.2 million face value of its Series
Preferred Stock in April 1998.
[PIE CHARTS OMITTED]
<TABLE>
<CAPTION>
SOURCES OF CASH - 1998
- ------------------------------------------------------------
(Millions of dollars)
<S> <C>
Operations $178.5
Debt Issued $ 59.4
Proceeds from Disposals of Assets $ 7.9
Common Stock Issued $ 8.5
- ------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
USES OF CASH - 1998
- --------------------------------------------------------------------
(Millions of dollars)
<S> <C>
Debt Repaid $ 40.3
Dividends and Distributions $ 86.6
Other $ 2.3
Investments in Joint Venture Partnerships $ 2.0
Short-term Investments $ 16.4
Acquisitions $ 8.1
Common Stock Repurchased $ 11.3
Redemption of UGI Utilities Preferred Stock $ 15.5
Capital Expenditures $ 69.2
- --------------------------------------------------------------------
</TABLE>
DIVIDENDS AND DISTRIBUTIONS
During each of the last three fiscal years, we increased our annual dividend
rate by 1.4%. Our annual dividend rate as of September 30, 1998 is $1.46.
Our 58.6% effective interest in the Partnership consists of
(1) 4.4 million Common Units, (2) 19.8 million Subordinated Units, and (3) a 2%
general partner interest. The remaining 41.4% effective interest consists of
17.7 million publicly held Common Units. Approximately 45 days after the end of
each fiscal quarter, the Partnership distributes all of its Available Cash (as
defined in the Amended and Restated Agreement of Limited Partnership) relating
to such fiscal quarter. Common Unitholders receive the MQD, plus any arrearages,
before a distribution of Available Cash can be made on the Subordinated Units.
Since its formation in 1995, the Partnership has paid the MQD on all limited
partner units outstanding. The amount of Available Cash needed in 1998 to pay
the MQD on all units and the general partner interests was approximately $94
million. The amount of cash available for distribution that is generated by the
Partnership can be estimated by subtracting (1) cash interest expense and (2)
capital expenditures needed to maintain operating capacity, from the
Partnership's EBITDA. Distributable cash as calculated for 1998, 1997 and 1996
is as follows:
UGI CORPORATION 1998 ANNUAL REPORT
17
<PAGE> 6
FINANCIAL REVIEW, CONTINUED
<TABLE>
<CAPTION>
Year Ended September 30, 1998 1997 1996
- -----------------------------------------------------------------------------------
(Millions of dollars)
<S> <C> <C> <C>
EBITDA $151.1 $172.4 $134.5
Cash interest expense (a) (67.6) (66.8) (63.6)
Maintenance capital expenditures (10.3) (7.9) (7.2)
- -----------------------------------------------------------------------------------
Distributable cash flow $ 73.2 $ 97.7 $ 63.7
- -----------------------------------------------------------------------------------
</TABLE>
(a) Interest expense adjusted for noncash items.
Although distributable cash is a reasonable estimate of the amount of cash
generated by the Partnership, it does not reflect changes in working capital
which can significantly affect cash available for distribution. Distributable
cash is not a measure of performance or financial condition under generally
accepted accounting principles. Although the level of distributable cash in 1998
was less than the full MQD, the additional cash generated from changes in the
Partnership's working capital was more than sufficient to permit it to pay the
full MQD. The ability of the Partnership to pay the MQD on all units depends
upon a number of factors. These factors include (1) the level of Partnership
earnings, (2) the cash needs of the Partnership's operations (including cash
needed for maintaining and growing operating capacity), (3) changes in operating
working capital, and (4) the Partnership's ability to borrow. Some of these
factors are affected by conditions beyond our control including weather,
competition in markets we serve, and the cost of propane.
CONVERSION OF SUBORDINATED UNITS
As more fully described in Note 10 to Consolidated Financial Statements, the
subordination period applicable to the Subordinated Units of AmeriGas Partners
will extend until the first day of any quarter beginning on or after April 1,
2000 in which certain cash performance and distribution requirements are met.
However, 4,945,537 Subordinated Units may convert into Common Units on the first
day after the record date for distributions based upon any quarter ending on or
after March 31, 1998, and an additional 4,945,537 may convert on the first day
after the record date for distributions based upon any quarter ending on or
after March 31, 1999, if certain cash performance and distribution requirements
are met. The cash performance requirements for conversion have not been met to
date. They are dependent upon many factors including highly seasonal operating
results, changes in working capital, asset sales and debt refinancings.
Management believes, however, that it is reasonably possible that 9,891,074
Subordinated Units will convert into Common Units during fiscal 1999.
CAPITAL EXPENDITURES
In the following table, we present capital expenditures by business segment for
1998, 1997 and 1996. We also provide amounts we expect to spend in fiscal 1999.
We expect to finance a substantial portion of 1999 capital expenditures through
cash generated by our operations and the remainder from borrowings under UGI
Utilities' and the Partnership's credit facilities.
<TABLE>
<CAPTION>
Year Ended September 30, 1999 1998 1997 1996
- ----------------------------------------------------------------------
(Millions of dollars) (estimate)
<S> <C> <C> <C> <C>
Propane $ 33.0 $ 31.9 $ 27.0 $ 22.9
Gas Utility 40.5 32.0 36.7 34.6
Electric Utility 4.5 5.2 5.0 5.0
Other 2.9 .1 .1 .2
- ----------------------------------------------------------------------
Total $ 80.9 $ 69.2 $ 68.8 $ 62.7
- ----------------------------------------------------------------------
</TABLE>
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 having date-sensitive 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 businesses; (2) non-IT systems that contain embedded computer
technology such as micro-controllers contained in various equipment, facilities
and vehicles; 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. AmeriGas
Partners and UGI Utilities are addressing their Y2K issues separately. UGI
Utilities and AmeriGas Partners have completed the assessments of their IT and
non-IT systems.
AmeriGas Partners has successfully modified all of its critical IT systems that
are not in the process of being replaced. Gas Utility and Electric Utility have
successfully modified and unit tested all of their critical IT and non-IT
systems. These systems include our customer information and data systems; our
financial systems including payroll and the propane fuel accounting supply and
transportation system; and our Gas Utility and Electric Utility distribution
control systems. We plan to begin integrated testing of our Gas Utility and
Electric Utility IT systems in February 1999. AmeriGas Partners is in the
process of installing integrated financial system software that is already Y2K
compliant. We anticipate that the installation of this software and any
modification of AmeriGas Partners' critical non-IT systems will be completed by
March 31, 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
UGI CORPORATION 1998 ANNUAL REPORT
18
<PAGE> 7
services are directly date sensitive, as a diversified energy distribution
company with operations throughout the United States, 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 propane and natural gas and
for the generation of electricity beyond that which we generate ourselves.
Additionally, we depend on other companies to supply us with propane tanks and
cylinders, fuel for our vehicles, as well as other products and services we need
to operate our businesses. 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 other factors. We expect to complete our evaluation of key
supplier and third-party provider Y2K readiness by March 31, 1999.
We are in the process of developing contingency plans to address, to the extent
reasonably possible, disruptions arising from Y2K related failures of key
suppliers and third-party providers. We anticipate the major elements of these
contingency plans will be based upon the use of manual back-up systems,
alternative supply sources, higher critical inventory levels, and additional
staffing. 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 anticipate the business contingency plans for
AmeriGas Partners will be completed by June 30, 1999. We expect such plans for
Gas Utility and Electric Utility will 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 telecommunications
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 existing IT and
non-IT systems are expected to be less than $1 million. We expense Y2K costs as
incurred. Costs associated with information system improvement initiatives are
expensed or capitalized in accordance with our accounting policy for software
development costs.
CUSTOMER CHOICE ACT
On June 19, 1998, the PUC entered its Opinion and Order (the "Restructuring
Order") in Electric Utility's restructuring proceeding. The Restructuring Order
was issued pursuant to the Customer Choice Act which required all Pennsylvania
electric utilities to "unbundle" rates for generation, transmission and
distribution services and to open electric sales to permit competitors to sell
electricity to our customers. Under the terms of the Restructuring Order,
beginning January 1, 1999 we will begin recovering $32.5 million in stranded
costs (including all related income taxes and gross receipts taxes) over a
four-year period. We will recover these costs through a Competitive Transition
Charge (CTC) that we will charge all of our distribution customers. We will also
recover interest costs on the unrecovered balances at an annual rate of 7.94%.
"Stranded costs" are costs that we would have recovered under prior ratemaking
but may not be recoverable in the new competitive electric generation
marketplace.
Under the terms of the Restructuring Order, Electric Utility's rates for the
transmission and distribution of electricity through our wires are capped
through July 1, 2001. Electric Utility generally may not increase the generation
component of prices as long as stranded costs are being recovered through the
CTC. This generation rate cap is expected to extend through December 31, 2002.
All of our Electric Utility customers have the opportunity to purchase
electricity from other suppliers beginning January 1, 1999. We will give those
customers who choose an alternate supplier a "shopping credit" averaging about
3.67 cents a kilowatt-hour in calendar 1999 and 2000, and 4.3 cents a
kilowatt-hour in calendar 2001 and 2002.
As a result of the Restructuring Order, we discontinued regulatory accounting
for the electric generation portion of our business in June 1998. The
discontinuance did not have a material effect on our financial condition or
results of operations. For a further discussion of the Customer Choice Act, see
Note 2 to Consolidated Financial Statements.
We continue to evaluate the potential impact of the Customer Choice Act and the
Restructuring Order on Electric Utility's future financial results. 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 (including an allocable portion of
our CTC revenues), Electric Utility's results would be adversely affected.
PROPOSED GAS CUSTOMER CHOICE LEGISLATION
On March 27, 1997, proposed gas customer choice legislation was introduced in
the Pennsylvania General Assembly. The proposed legislation 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 purchase gas from
suppliers of their choice by April 1, 1999. It would also require Pennsylvania
gas utilities to stop selling natural gas. Legislative committees have conducted
public hearings on the proposed legislation and we have provided testimony on
issues such as the recovery of costs associated with our existing gas supply
assets and the need for standards to assure reliability of future gas supplies.
At the request of the Governor of Pennsylvania, in December 1997 a collaborative
group of industry stakeholders was convened to attempt to further develop the
proposed legislation. To date, this group has failed to reach a consensus. We
expect the collaborative
UGI CORPORATION 1998 ANNUAL REPORT
19
<PAGE> 8
FINANCIAL REVIEW, CONTINUED
process to continue, and we will participate and monitor developments, as
appropriate. Gas Utility is considering a number of options for addressing the
provision of unbundled transportation to residential and small commercial
customers.
MANUFACTURED GAS PLANTS
The gas distribution business has been one of UGI Utilities' main businesses
since it began in 1882. Prior to the 1950s construction of major natural gas
pipelines, 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 Comprehensive Environmental Response, Compensation and Liability Act
(Superfund Law) and may be located at those sites.
One of the ways UGI Utilities expanded its business in its early years was by
entering into agreements with other gas companies to operate their businesses.
After 1888, the principal means of expansion was by acquiring all or a portion
of the stock of companies engaged in this business. UGI Utilities also provided
management and administrative services to some of these companies. UGI Utilities
grew rapidly to become one of the largest public utility holding companies in
the U.S. Pursuant to the Public Utility Holding Company Act of 1935, UGI
Utilities divested all of its utility operations other than those which now
constitute Gas Utility and Electric Utility.
UGI Utilities has been notified of several sites outside Pennsylvania on which
(1) MGPs were formerly operated by it or owned or operated by its former
subsidiaries and (2) either environmental agencies or private parties are
investigating the extent of environmental contamination and the necessity of
environmental remediation. UGI Utilities is currently litigating a claim against
it relating to an out-of-state site. If UGI Utilities were found liable as a
"responsible party" as defined in the Superfund Law or in comparable state
statutes, it would have joint and several liability with other responsible
parties for the full amount of the cleanup costs. A "responsible party" under
the Superfund Law includes the current owner of the property and each owner or
operator of the facility during the time hazardous substances were released on
the property. In addition, UGI Utilities has identified environmental
contamination at several of its properties and has voluntarily investigated and,
as appropriate, remediated these sites in cooperation with 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.
We believe, after consultation with counsel, that future costs of investigation
and remediation, if any, will not have a material adverse effect on our
financial position but could be material to our operating results and cash flows
depending on the nature and timing of future developments and the amounts of
future operating results and cash flows. For a further discussion of
environmental matters, see Notes 1 and 11 to Consolidated Financial Statements.
MARKET RISK DISCLOSURES
Our primary market risk exposures are market prices for natural gas and propane
and changes in long-term interest rates.
Price risk associated with fluctuations in the prices our non-regulated
businesses pay for natural gas and propane is principally a result of market
forces reflecting changes in supply and demand. The Partnership's profitability
is sensitive to changes in propane supply costs and the Partnership generally
seeks to pass on increases in such costs to customers. There is no assurance,
however, that the Partnership will be able to do so. In order to manage propane
market price risk, we use contracts for the forward purchase of propane, propane
fixed-price supply agreements, and derivative commodity instruments such as
price swap and option contracts. In order to manage market price risk relating
to substantially all of UGI Energy Services' firm commitments to sell natural
gas, we purchase exchange-traded natural gas futures contracts. Although we use
derivative financial and commodity instruments to reduce market price risk
associated with firm commitments or forecasted transactions, we do not use
derivative financial and commodity instruments for trading purposes.
We use long-term debt as a primary source of capital. These debt instruments are
typically issued at fixed interest rates. When these debt instruments mature, we
refinance such debt at then-existing market interest rates which may be more or
less than the interest rates on the maturing debt. In addition, we may attempt
to reduce interest rate risk associated with a forecasted issuance of new debt.
In order to reduce interest rate risk associated with these transactions, we
occasionally enter into interest rate protection agreements.
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.
The following table summarizes the fair value of our market risk sensitive
instruments by market risk at September 30, 1998. It also includes the change in
fair value that would result if (1) the market price of propane declined 5 cents
a gallon, (2) the market price of natural gas declined 25 cents a dekatherm, and
(3) interest rates on ten-year U.S. treasury notes declined 50 basis points:
UGI CORPORATION 1998 ANNUAL REPORT
20
<PAGE> 9
<TABLE>
<CAPTION>
Change in
September 30, 1998 Fair Value Fair Value
- ----------------------------------------------------------------
(Millions of dollars)
<S> <C> <C>
Propane commodity price risk $ (.6) $(3.8)
Natural gas commodity price risk $ .2 $(2.9)
Interest rate risk $(2.4) $(2.0)
- ----------------------------------------------------------------
</TABLE>
We expect that any losses from market risk sensitive instruments used to manage
commodity or interest rate market risk would be substantially offset by gains on
the associated underlying transactions.
ACCOUNTING PRINCIPLES NOT YET ADOPTED
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income" (SFAS 130), and SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information" (SFAS 131). 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 131 establishes standards for reporting
information about operating segments as well as related disclosures about
products and services, geographic areas, and major customers. We will adopt SFAS
130 and SFAS 131 in fiscal 1999. In addition, in March 1998 the American
Institute of Certified Public Accountants issued Statement of Position No. 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" (SOP 98-1). SOP 98-1 requires companies to capitalize the cost of
computer software developed or obtained for internal use once certain criteria
have been met. We will adopt SOP 98-1 in fiscal 2000. We do not expect the
adoptions of SFAS 130 and SOP 98-1 will have a material effect on our financial
position or results of operations. In addition, we do not expect the initial
application of SFAS 131 will affect the operating segments we disclose.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133 establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivative instruments as either assets or
liabilities and measure them at fair value. The accounting for changes in fair
value depends upon the purpose of the derivative instrument and whether it is
designated and qualifies for hedge accounting. To the extent derivative
instruments qualify and are designated as hedges of forecasted transactions,
changes in fair value will generally be reported as a component of other
comprehensive income and be reclassified into net income when the forecasted
transaction affects earnings. To the extent such derivative instrument qualifies
as a hedge of a firm commitment, any gain or loss would generally be recognized
in earnings when the firm commitment affects earnings. We will adopt SFAS 133 in
fiscal 2000.
We are currently evaluating the potential impact of SFAS 133 on our future
financial condition and results of operations. The impact of SFAS 133 will
likely depend upon the extent to which we use derivative instruments and their
designation and effectiveness as hedges of market risk.
IMPACT OF INFLATION
Inflation impacts our propane operations in the prices we pay for operating and
administrative services and, to some extent, propane gas. Inflation also impacts
our gas and electric utility operations primarily in the prices we pay for
labor, materials and services. Because Electric Utility's base rates are
currently capped and Gas Utility's base rates can be adjusted only through
general rate filings with the PUC, increased costs, absent timely rate relief,
can have a significant impact on their results. Under current tariffs, Gas
Utility is permitted, after annual PUC review, to recover certain costs of
purchased gas, fuel and power which comprise a substantial portion of Gas
Utility's costs and expenses.
We attempt to limit the effects of inflation on our results of operations
through cost control efforts, productivity improvements and, as permitted by the
PUC, timely rate relief.
FORWARD-LOOKING STATEMENTS
Information contained above in this Financial Review and elsewhere in this
Annual Report with respect to expected financial results and future events is
forward-looking, based on our estimates and assumptions and subject to risks and
uncertainties. For those statements, we claim the protection of the safe harbor
for forward-looking statements contained in the Private Securities Litigation
Reform Act of 1995.
The following important factors could affect our future results and could cause
those results to differ materially from those expressed in our forward-looking
statements:
(1) adverse weather conditions resulting in reduced demand; (2) price volatility
and availability of propane, oil, electricity and natural gas and the capacity
to transport to market areas; (3) changes in laws and regulations, including
safety, tax and accounting matters; (4) competitive pressures from the same and
alternative energy sources; (5) liability for environmental claims; (6)
improvements in energy efficiency and technology resulting in reduced demand;
(7) labor relations; (8) large customer defaults; (9) operating hazards and
risks incidental to generating and distributing electricity and transporting,
storing and distributing natural gas and propane including the risk of
explosions and fires resulting in personal injury and property damage; (10)
regional economic conditions; (11) the success of the company and its suppliers
in achieving Year 2000 compliance; (12) economic and political conditions in
international markets; (13) interest rate fluctuations and other capital market
conditions, including foreign currency rate fluctuations; and (14) reduced
distributions from subsidiaries.
These factors are not necessarily all of the important factors that could cause
actual results to differ materially from those expressed in any of our
forward-looking statements. Other unknown or unpredictable factors could also
have material adverse effects on future results. We undertake no obligation to
update publicly any forward-looking statement whether as a result of new
information or future events.
UGI CORPORATION 1998 ANNUAL REPORT
21
<PAGE> 10
SEGMENT INFORMATION
(Millions of dollars)
<TABLE>
<CAPTION>
Year Ended September 30, 1998 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Propane $ 914.4 $1,077.8 $1,013.2
Gas utility 350.2 389.1 391.0
Electric utility 72.1 72.1 69.5
Energy marketing 103.0 103.0 83.9
- -------------------------------------------------------------------------------------------
Total $1,439.7 $1,642.0 $1,557.6
- -------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS)
Propane $ 93.8 $ 117.1 $ 80.8
Gas utility 68.9 74.8 72.9
Electric utility 10.4 10.7 8.6
Energy marketing 2.0 1.7 4.4
Corporate general and other (4.9) (4.4) (7.0)
- -------------------------------------------------------------------------------------------
Total $ 170.2 $ 199.9 $ 159.7
- -------------------------------------------------------------------------------------------
IDENTIFIABLE ASSETS
Propane $1,225.8 $1,335.6 $1,388.3
Gas utility 593.4 593.7 561.1
Electric utility 95.6 86.2 83.9
Energy marketing 12.6 10.0 13.5
Corporate general and other 147.2 126.2 86.2
- -------------------------------------------------------------------------------------------
Total $2,074.6 $2,151.7 $2,133.0
- -------------------------------------------------------------------------------------------
DEPRECIATION AND AMORTIZATION
Propane -- depreciation $ 39.7 $ 38.6 $ 38.3
Propane -- amortization 25.7 25.7 25.8
Gas utility 18.2 17.1 17.6
Electric utility 3.9 4.3 4.0
Corporate general and other .3 .4 .3
- -------------------------------------------------------------------------------------------
Total $ 87.8 $ 86.1 $ 86.0
- -------------------------------------------------------------------------------------------
CAPITAL EXPENDITURES
Propane $ 31.9 $ 27.0 $ 22.9
Gas utility 32.0 36.7 34.6
Electric utility 5.2 5.0 5.0
Corporate general and other .1 .1 .2
- -------------------------------------------------------------------------------------------
Total $ 69.2 $ 68.8 $ 62.7
===========================================================================================
</TABLE>
UGI CORPORATION 1998 ANNUAL REPORT
22
<PAGE> 11
CONSOLIDATED STATEMENTS OF INCOME
(Millions of dollars, except per share amounts)
<TABLE>
<CAPTION>
Year Ended September 30, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
REVENUES (note 1)
<S> <C> <C> <C>
Propane $ 914.4 $ 1,077.8 $ 1,013.2
Utilities 422.3 461.2 460.5
Energy marketing 103.0 103.0 83.9
- -----------------------------------------------------------------------------------------------------------------------
1,439.7 1,642.0 1,557.6
- -----------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES
Propane cost of sales 443.8 600.4 569.7
Utilities -- gas, fuel and purchased power (note 1) 214.6 239.0 239.7
Energy marketing cost of sales 98.3 99.4 77.7
Operating and administrative expenses 437.7 439.8 437.5
Depreciation and amortization (note 1) 87.8 86.1 86.0
Other income, net (note 13) (12.7) (22.6) (12.7)
- -----------------------------------------------------------------------------------------------------------------------
1,269.5 1,442.1 1,397.9
- -----------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 170.2 199.9 159.7
Interest expense (84.4) (83.1) (79.5)
Minority interest in AmeriGas Partners (note 1) (8.9) (18.3) (4.3)
- -----------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND SUBSIDIARY
PREFERRED STOCK DIVIDENDS 76.9 98.5 75.9
Income taxes (notes 1 and 4) (34.4) (43.6) (33.6)
Dividends on UGI Utilities Series Preferred Stock (2.2) (2.8) (2.8)
- -----------------------------------------------------------------------------------------------------------------------
Net Income $ 40.3 $ 52.1 $ 39.5
- -----------------------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE
Basic $ 1.22 $ 1.58 $ 1.19
Diluted $ 1.22 $ 1.57 $ 1.19
AVERAGE COMMON SHARES OUTSTANDING (MILLIONS)
Basic 32.971 33.049 33.058
Diluted 33.123 33.132 33.142
=======================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
UGI CORPORATION 1998 ANNUAL REPORT
23
<PAGE> 12
CONSOLIDATED BALANCE SHEETS
(Millions of dollars)
<TABLE>
<CAPTION>
ASSETS
September 30, 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents (note 1) $ 66.6 $ 64.0
Short-term investments, at cost which approximates market value 81.8 65.4
Accounts receivable (less allowances for
doubtful accounts of $7.9 and $11.3, respectively) 81.8 110.6
Accrued utility revenues (note 1) 6.7 7.7
Inventories (notes 1 and 6) 77.9 95.6
Prepaid propane purchases (note 1) .8 21.7
Deferred income taxes (notes 1 and 4) 14.7 20.3
Prepaid expenses and other current assets 20.3 18.6
- --------------------------------------------------------------------------------------------------------
Total current assets 350.6 403.9
- --------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT (note 1)
Propane 655.8 620.6
Utilities 797.5 765.6
Other 11.2 11.1
- --------------------------------------------------------------------------------------------------------
1,464.5 1,397.3
Accumulated depreciation and amortization (465.5) (410.1)
- --------------------------------------------------------------------------------------------------------
Net property, plant and equipment 999.0 987.2
- --------------------------------------------------------------------------------------------------------
OTHER ASSETS
Intangible assets (less accumulated amortization
of $141.5 and $116.7, respectively) (note 1) 630.7 677.9
Utility regulatory assets (notes 1, 2 and 4) 59.3 48.9
Other assets (note 1) 35.0 33.8
- --------------------------------------------------------------------------------------------------------
Total assets $2,074.6 $2,151.7
========================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
UGI CORPORATION 1998 ANNUAL REPORT
24
<PAGE> 13
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Current maturities of long-term debt -- Propane (note 3) $ 6.1 $ 6.7
Current maturities of long-term debt -- Utilities (note 3) 7.1 17.1
Current maturities of long-term debt -- other (note 3) .4 .4
Current portion of UGI Utilities Series Preferred Stock (note 7) -- 3.0
Bank loans -- Propane (note 3) 10.0 28.0
Bank loans -- Utilities (note 3) 68.4 67.0
Accounts payable 80.1 103.2
Employee compensation and benefits accrued 29.5 27.8
Dividends and interest accrued 44.7 43.2
Income taxes accrued .3 27.4
Refunds and deposits 30.7 24.0
Other current liabilities 44.5 56.7
- --------------------------------------------------------------------------------------------------------------------
Total current liabilities 321.8 404.5
- --------------------------------------------------------------------------------------------------------------------
DEBT AND OTHER LIABILITIES
Long-term debt -- Propane (note 3) 702.9 684.4
Long-term debt -- Utilities (note 3) 180.1 152.2
Long-term debt -- other (note 3) 7.8 8.2
Deferred income taxes (notes 1 and 4) 154.4 152.5
Deferred investment tax credits (notes 1 and 4) 10.0 10.4
Other noncurrent liabilities 74.0 64.7
Commitments and contingencies (note 11)
- --------------------------------------------------------------------------------------------------------------------
MINORITY INTEREST
Minority interest in AmeriGas Partners (note 1) 236.5 266.5
- --------------------------------------------------------------------------------------------------------------------
PREFERRED AND PREFERENCE STOCK
UGI Utilities Series Preferred Stock Subject to
Mandatory Redemption, without par value (note 7) 20.0 32.2
Preference Stock, without par value (note 8)
(authorized -- 5,000,000 shares) -- --
- --------------------------------------------------------------------------------------------------------------------
COMMON STOCKHOLDERS' EQUITY
Common Stock, without par value (notes 8 and 9)
(authorized -- 100,000,000 shares; issued -- 33,198,731 shares) 394.3 393.7
Accumulated deficit (17.7) (9.2)
- --------------------------------------------------------------------------------------------------------------------
376.6 384.5
Treasury stock, at cost (note 9) (9.5) (8.4)
- --------------------------------------------------------------------------------------------------------------------
Total common stockholders' equity 367.1 376.1
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $2,074.6 $2,151.7
====================================================================================================================
</TABLE>
UGI CORPORATION 1998 ANNUAL REPORT
25
<PAGE> 14
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of dollars)
<TABLE>
<CAPTION>
Year Ended September 30, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 40.3 $ 52.1 $ 39.5
Reconcile to net cash provided by operating activities:
Depreciation and amortization 87.8 86.1 86.0
Minority interest in AmeriGas Partners 8.9 18.3 4.3
Deferred income taxes, net 10.1 (2.2) 12.0
Other, net 4.9 4.1 (3.5)
- ------------------------------------------------------------------------------------------------------------------
152.0 158.4 138.3
Net change in:
Receivables and accrued utility revenues 22.0 (6.8) (37.1)
Inventories and prepaid propane purchases 39.0 (3.6) (10.2)
Deferred fuel costs (5.8) 2.8 (9.6)
Accounts payable (23.5) 8.5 25.1
Other current assets and liabilities (5.2) 12.7 4.7
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 178.5 172.0 111.2
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment (69.2) (68.8) (62.7)
Acquisitions of businesses, net of cash acquired (8.1) (11.6) (28.0)
Short-term investments increase (16.4) (42.3) (12.1)
Proceeds from disposals of assets 7.9 14.4 4.2
Investments in joint venture partnerships (2.0) -- (1.0)
Other, net (2.3) (2.2) .7
- ------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (90.1) (110.5) (98.9)
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends on Common Stock (47.6) (47.2) (46.4)
Distributions on Partnership public Common Units (39.0) (38.8) (38.7)
Issuance of long-term debt 58.0 28.9 57.1
Repayment of long-term debt (22.3) (29.4) (59.7)
Propane bank loans increase (decrease) (18.0) 6.0 15.0
Utilities bank loans increase 1.4 16.5 8.5
Issuance of Common Stock 8.5 11.7 11.3
Repurchases of Common Stock (11.3) (19.2) (7.1)
Redemption of UGI Utilities Series Preferred Stock (15.5) -- --
- ------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (85.8) (71.5) (60.0)
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents increase (decrease) $ 2.6 $ (10.0) $ (47.7)
===================================================================================================================
CASH AND CASH EQUIVALENTS
End of period $ 66.6 $ 64.0 $ 74.0
Beginning of period 64.0 74.0 121.7
- ------------------------------------------------------------------------------------------------------------------
Increase (decrease) $ 2.6 $ (10.0) $ (47.7)
==================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
UGI CORPORATION 1998 ANNUAL REPORT
26
<PAGE> 15
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Millions of dollars, except per share amounts)
<TABLE>
<CAPTION>
Common Accumulated Treasury
Stock Deficit Stock
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE SEPTEMBER 30, 1995 $386.1 $ (5.5) $ (.1)
Net income 39.5
Cash dividends on Common Stock
($1.41 per share) (46.7)
Common Stock issued (note 9):
Employee and director plans 3.6 (.1) 3.1
Dividend reinvestment plan 2.2 2.6
Common Stock repurchased (7.1)
- ---------------------------------------------------------------------------------------------------------
BALANCE SEPTEMBER 30, 1996 391.9 (12.8) (1.5)
Net income 52.1
Cash dividends on Common Stock
($1.43 per share) (47.3)
Common Stock issued (note 9):
Employee and director plans .7 (1.2) 9.2
Dividend reinvestment plan 3.1
Stock-based compensation expense 1.1
Common Stock repurchased (19.2)
- ---------------------------------------------------------------------------------------------------------
BALANCE SEPTEMBER 30, 1997 393.7 (9.2) (8.4)
Net income 40.3
Cash dividends on Common Stock
($1.45 per share) (47.8)
Common Stock issued (note 9):
Employee and director plans .5 (.7) 6.3
Dividend reinvestment plan 2.8
Acquisition .1 1.1
Redemption of UGI Utilities Series Preferred Stock (.3)
Common Stock repurchased (11.3)
- ---------------------------------------------------------------------------------------------------------
Balance September 30, 1998 $394.3 $(17.7) $ (9.5)
=========================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
UGI CORPORATION 1998 ANNUAL REPORT
27
<PAGE> 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Millions of dollars, except per share amounts and where indicated otherwise)
<TABLE>
<CAPTION>
<S> <C> <C>
NOTE 1. ORGANIZATION AND SIGNIFICANT
ACCOUNTING POLICIES........................ 28
NOTE 2. UTILITY REGULATORY MATTERS................. 31
NOTE 3. DEBT....................................... 32
NOTE 4. INCOME TAXES............................... 34
NOTE 5. EMPLOYEE RETIREMENT PLANS.................. 35
NOTE 6. INVENTORIES................................ 36
NOTE 7. SERIES PREFERRED STOCK..................... 36
NOTE 8. PREFERENCE STOCK PURCHASE RIGHTS........... 37
NOTE 9. COMMON STOCK AND INCENTIVE
STOCK AWARD PLANS.......................... 37
NOTE 10. PARTNERSHIP DISTRIBUTIONS.................. 39
NOTE 11. COMMITMENTS AND CONTINGENCIES.............. 40
NOTE 12. FINANCIAL INSTRUMENTS...................... 41
NOTE 13. OTHER INCOME, NET.......................... 42
NOTE 14. SEGMENT INFORMATION........................ 42
NOTE 15. QUARTERLY DATA (UNAUDITED)................. 42
</TABLE>
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION. UGI Corporation (UGI) is a holding company with three businesses.
Our utility business is conducted through a wholly owned subsidiary, UGI
Utilities, Inc. (UGI Utilities). UGI Utilities owns and operates a natural gas
distribution utility (Gas Utility) in parts of eastern and southeastern
Pennsylvania and an electric utility (Electric Utility) in northeastern
Pennsylvania (together we refer to them as "Utilities"). We conduct a national
propane distribution business through AmeriGas Partners, L.P. (AmeriGas
Partners) and its operating subsidiary, AmeriGas Propane, L.P. (the "Operating
Partnership"), both of which are Delaware limited partnerships. At September 30,
1998, UGI held, through wholly owned subsidiaries, an effective 2% general
partner interest and a 56.6% limited partnership interest in the Operating
Partnership. We refer to AmeriGas Partners and the Operating Partnership
together as "the Partnership." The Operating Partnership is the largest retail
propane distributor in the United States serving residential, commercial,
industrial, motor fuel and agricultural customers from locations in 46 states,
including Alaska and Hawaii. We also conduct an energy marketing business
principally through our wholly owned subsidiary, UGI Energy Services, Inc. (UGI
Energy Services), a wholly owned subsidiary of UGI Enterprises, Inc.
(Enterprises). Enterprises is also currently involved in propane joint-venture
projects in Romania and China and is evaluating other international propane
business opportunities.
Our limited partner interest in AmeriGas Partners comprises 4,392,858 Common
Units and 19,782,146 Subordinated Units. The remaining 41.4% effective interest
in the Partnership comprises 17,713,135 publicly held Common Units representing
limited partner interests. Our wholly owned second-tier subsidiary, AmeriGas
Propane, Inc. (the "General Partner"), serves as the general partner of AmeriGas
Partners and the Operating Partnership. AmeriGas Partners and the Operating
Partnership have no employees. Employees of the General Partner conduct, direct
and manage the activities of the Partnership. The General Partner does not
receive management fees or other compensation in connection with its management
of the Partnership, but it is reimbursed for direct and indirect expenses
incurred on behalf of the Partnership, including all General Partner employee
compensation expenses and a portion of UGI employee compensation and overhead
costs. Although the Partnership's operating income comprises a significant
portion of consolidated operating income, its impact on consolidated net income
is considerably less due to (1) the Partnership's significant minority interest;
(2) higher relative interest charges; and (3) a higher effective income tax rate
associated with the Partnership's pre-tax income.
UGI is exempt from registration as a holding company and is not otherwise
subject to regulation under the Public Utility Holding Company Act of 1935
except for acquisitions under Section 9(a)(2). UGI is not subject to regulation
by the Pennsylvania Public Utility Commission (PUC).
CONSOLIDATION PRINCIPLES. Our consolidated financial statements include the
accounts of UGI and its majority-owned subsidiaries. We eliminate all
significant intercompany accounts and transactions when we consolidate. We
report the public unitholders' interest in AmeriGas Partners as minority
interest in the consolidated financial statements.
RECLASSIFICATIONS. We have reclassified certain prior-period balances to conform
with the current period presentation.
USE OF ESTIMATES. 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.
REGULATED UTILITY OPERATIONS. Gas Utility and Electric Utility are subject to
regulation by the PUC. We account for their regulated operations in accordance
with Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for
the Effects of Certain Types of Regulation" (SFAS 71). Generally, SFAS 71
requires that financial statements of a regulated enterprise reflect the actions
of regulators, where appropriate. Under SFAS 71, regulated enterprises defer
costs and credits on the balance sheet as regulatory assets and liabilities when
it is probable that those costs and credits will be allowed in the ratesetting
UGI CORPORATION 1998 ANNUAL REPORT
28
<PAGE> 17
process in a period different from the period in which they would have been
reflected in income by an unregulated enterprise. These regulatory assets and
liabilities are then reflected in the income statement in the period in which
the same amounts are included in rates. If a separable portion of Utilities'
business no longer meets the provisions of SFAS 71, we may be required to write
off certain regulatory assets unless some form of transition cost recovery is
established by the appropriate regulatory body which would meet the requirements
under generally accepted accounting principles for continued accounting as
regulatory assets during such recovery period. We continually monitor the
regulatory and competitive environments to determine that regulatory assets are
probable of recovery.
In June 1998, the PUC approved Electric Utility's restructuring plan which we
submitted pursuant to Pennsylvania's Electricity Generation Customer Choice and
Competition Act (Customer Choice Act) (see Note 2). In accordance with the
Financial Accounting Standards Board's (FASB's) Emerging Issues Task Force
(EITF) Statement 97-4, "Deregulation of the Pricing of Electricity -- Issues
Related to the Application of FASB Statements 71 and 101" (EITF 97-4), we
discontinued the application of SFAS 71 as it relates to the electric generation
portion of Electric Utility's business in June 1998.
DERIVATIVE INSTRUMENTS. We use derivative instruments, including futures
contracts, price swap agreements and option contracts, to hedge exposure to
market risk associated with (1) fluctuations in the prices of natural gas we
sell under firm commitments and (2) fluctuations in propane prices associated
with a portion of our anticipated propane purchases. Additionally, on occasion
we enter into interest rate protection agreements to reduce interest rate risk
associated with anticipated issuances of debt.
We defer gains or losses on futures contracts associated with natural gas sold
under firm commitments and record them in cost of sales when the associated
transactions affect earnings. We recognize gains or losses on derivative
instruments associated with forecasted purchases of propane or issuances of debt
when such transactions affect earnings. If it is probable that the original
forecasted transaction will not occur, we immediately recognize in earnings any
gain or loss on the related derivative instrument. If such derivative instrument
is terminated early for other economic reasons, we defer any gain or loss as of
the termination date until such time as the forecasted transaction affects
earnings.
CONSOLIDATED STATEMENTS OF CASH FLOWS. We define cash equivalents as all highly
liquid investments with maturities of three months or less when purchased. We
record cash equivalents at cost plus accrued interest, which approximates market
value.
We paid interest totaling $83.5 million in 1998, $85.3 million in 1997, and
$79.8 million in 1996. We paid income taxes totaling $29.8 million in 1998,
$32.0 million in 1997, and $20.3 million in 1996.
REVENUE RECOGNITION. We recognize revenues from the sale of propane principally
as product is shipped or delivered to customers. We record Utilities' revenues
for service provided to the end of each month. We reflect Utilities' rate
increases or decreases in revenues from effective dates permitted by the PUC.
Our energy marketing business records revenues when product is delivered to
customers.
INVENTORIES AND PREPAID PROPANE PURCHASES. Our inventories are stated at the
lower of cost or market. We determine cost principally on an average or
first-in, first-out (FIFO) method except for appliances for which we use the
specific identification method.
We also enter into contracts with certain of our suppliers under which we prepay
all or a portion of the purchase price of a fixed volume of propane for future
delivery. We report these prepayments in the Consolidated Balance Sheets as
"prepaid propane purchases."
INCOME TAXES. AmeriGas Partners and the Operating Partnership are not directly
subject to federal and state income taxes. Instead, their taxable income or loss
is allocated to the individual partners. We record income taxes on our share of
(1) the Partnership's current taxable income or loss and (2) the difference
between the book and tax basis of the Partnership's assets and liabilities. The
Operating Partnership does, however, have subsidiaries which operate in
corporate form and are subject to federal and state income taxes.
UGI Utilities records deferred income taxes in the Consolidated Statements of
Income resulting from the use of accelerated depreciation methods. These
deferred income taxes are based upon amounts recognized for ratemaking purposes.
UGI Utilities also recognizes a deferred tax liability for tax benefits that are
flowed through to ratepayers when temporary differences originate and
establishes a corresponding regulatory income tax asset for the probable
increase in future revenues that will result when the temporary differences
reverse.
We are amortizing deferred investment tax credits related to UGI Utilities'
plant additions over the service lives of the related property. UGI Utilities
reduces its deferred income tax liability for the future tax benefits that will
occur when the deferred investment tax credits, which are not taxable, are
amortized. We also reduce the regulatory income tax asset for the probable
reduction in future revenues that will result when such deferred investment tax
credits amortize.
EARNINGS PER COMMON SHARE. In 1998 we adopted SFAS No. 128, "Earnings Per Share"
(SFAS 128). SFAS 128 establishes two methods for calculating earnings per share,
basic and diluted, and simplifies the previous standards for computing earnings
per share. Basic earnings per share are based on the weighted-average number of
common shares outstanding. Diluted earnings per share include the effect of
stock options and awards. SFAS 128 requires restatement of all prior-period
earnings per share data presented. In the following table, we
UGI CORPORATION 1998 ANNUAL REPORT
29
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Millions of dollars, except per share amounts and where indicated otherwise)
present the shares used in computing basic and diluted earnings per share for
1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Denominator (millions of shares):
Average common shares
outstanding for basic
computation 32.971 33.049 33.058
Incremental shares issuable
for stock options and awards .152 .083 .084
- ----------------------------------------------------------------------------
Average common shares
outstanding for diluted
computation 33.123 33.132 33.142
- ----------------------------------------------------------------------------
</TABLE>
PROPERTY, PLANT AND EQUIPMENT AND RELATED DEPRECIATION. We record property,
plant and equipment at cost. The amounts we assign to property, plant and
equipment of acquired businesses are based upon estimated fair value at date of
acquisition. We charge to accumulated depreciation the original cost of
Utilities' retired plant, together with the net cost of removal, for financial
accounting purposes. When we retire or dispose of other plant and equipment, we
remove from the accounts the cost and accumulated depreciation and include in
income any gains or losses.
We compute depreciation of Utilities' plant and equipment using the
straight-line method over the estimated average remaining lives of the various
classes of depreciable property. Depreciation as a percentage of the related
average depreciable base for Gas Utility was 2.7% in 1998, 2.7% in 1997, and
2.9% in 1996. Depreciation as a percentage of the related average depreciable
base for Electric Utility was 3.2% in 1998, 3.6% in 1997, and 3.6% in 1996. We
compute depreciation on plant and equipment associated with our propane
operations using the straight-line method over estimated service lives which
range from two to 40 years.
Depreciation expense was $61.4 million in 1998, $59.8 million in 1997, and $59.4
million in 1996.
INTANGIBLE ASSETS. Intangible assets comprise the following at September 30:
<TABLE>
<CAPTION>
1998 1997
- -----------------------------------------------------------------------
<S> <C> <C>
Goodwill (less accumulated
amortization of $94.7 million and
$79.4 million, respectively) $508.9 $538.2
Excess reorganization value (less
accumulated amortization of
$44.4 million and $35.9 million,
respectively) 117.1 135.1
Other (less accumulated amortization
of $2.4 million and $1.4 million,
respectively) 4.7 4.6
- -----------------------------------------------------------------------
Total intangible assets $630.7 $677.9
- -----------------------------------------------------------------------
</TABLE>
We amortize goodwill recognized as a result of business combinations accounted
for as purchases on a straight-line basis over 40 years. We amortize excess
reorganization value (resulting from wholly owned subsidiary Petrolane
Incorporated's (Petrolane's) July 15, 1993 reorganization under Chapter 11 of
the U.S. Bankruptcy Code) on a straight-line basis over 20 years. We amortize
other intangible assets over the estimated periods of benefit which do not
exceed ten years. Amortization expense of intangible assets was $24.9 million in
1998, $24.5 million in 1997, and $24.6 million in 1996.
In June 1998, we revised our estimate of the tax basis of certain assets
contributed to the Partnership in conjunction with the Partnership's formation
on April 19, 1995. The change in estimate resulted in the following adjustments
to the Consolidated Balance Sheet: (1) a $17.9 million decrease in goodwill; (2)
a $9.6 million decrease in excess reorganization value; (3) a $20.2 million
decrease in accrued income taxes, and (4) a $7.3 million increase in deferred
income tax benefits.
We evaluate the impairment of long-lived assets, including intangibles, whenever
events or changes in circumstances indicate that the carrying amount of such
assets may not be recoverable. We evaluate recoverability based upon
undiscounted future cash flows expected to be generated by such assets.
STOCK-BASED COMPENSATION. As permitted by SFAS No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123), we apply the provisions of Accounting
Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to
Employees," in recording compensation expense for grants of stock, stock
options, and other equity instruments to employees. We disclose certain pro
forma net income and earnings per share data as if the fair value provisions of
SFAS 123 had been applied (see Note 9).
OTHER ASSETS. Included in other assets are net deferred debt issuance costs of
$12.2 million at September 30, 1998 and $13.7 million at September 30, 1997. We
are amortizing these costs over the term of the related debt.
UGI CORPORATION 1998 ANNUAL REPORT
30
<PAGE> 19
ACCOUNTING FOR COMPUTER SOFTWARE COSTS. We include in property, plant and
equipment external and incremental internal costs associated with computer
software we develop for use in our businesses. We begin capitalizing these costs
when the preliminary stage of the project is completed. We amortize these costs
on a straight-line basis over a period of three to seven years once the
installed software is ready for its intended use.
DEFERRED FUEL COSTS. Gas Utility's tariffs contain clauses which permit recovery
of certain gas costs in excess of the level of such costs included in base
rates. The clauses provide for a periodic adjustment for the difference between
the total amount collected from customers under each clause and the recoverable
costs incurred. We defer the difference between amounts recognized in revenues
and the applicable gas costs incurred until they are subsequently billed or
refunded to customers.
Prior to January 1, 1997, Electric Utility's rates were subject to an Energy
Cost Rate (ECR) designed to recover or refund the difference between the actual
fuel and purchased power costs and the amount included in base rates. In
accordance with the provisions of the Customer Choice Act, the rates Electric
Utility can charge its customers, including amounts pertaining to the recovery
of fuel and purchased power costs, are subject to rate caps effective January 1,
1997. We expect the generation rate cap to extend through December 31, 2002 (see
Note 2).
ENVIRONMENTAL LIABILITIES. Our 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. We do not discount to present
value the costs of future expenditures for environmental liabilities. We intend
to pursue recovery of any incurred costs through all appropriate means,
including regulatory relief. Gas Utility is 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.
ACCOUNTING PRINCIPLES NOT YET ADOPTED. In June 1997, the FASB issued SFAS No.
130, "Reporting Comprehensive Income" (SFAS 130), and SFAS No. 131, "Disclosures
About Segments of an Enterprise and Related Information" (SFAS 131). 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 131 establishes standards for
reporting information about operating segments as well as related disclosures
about products and services, geographic areas, and major customers. We will
adopt SFAS 130 and SFAS 131 in fiscal 1999. In addition, in March 1998 the
American Institute of Certified Public Accountants issued Statement of Position
No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use" (SOP 98-1). SOP 98-1 requires companies to capitalize the cost
of computer software developed or obtained for internal use once certain
criteria have been met. We will adopt SOP 98-1 in fiscal 2000.
We do not expect the adoptions of SFAS 130 and SOP 98-1 will have a material
effect on our financial position or results of operations. In addition, we do
not expect the initial application of SFAS 131 will affect the operating
segments we disclose.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133 establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivative instruments as either assets or
liabilities and measure them at fair value. The accounting for changes in fair
value depends upon the purpose of the derivative instrument and whether it is
designated and qualifies for hedge accounting. To the extent derivative
instruments qualify and are designated as hedges of forecasted transactions,
changes in fair value will generally be reported as a component of other
comprehensive income and be reclassified into net income when the forecasted
transaction affects earnings. To the extent such derivative instrument qualifies
as a hedge of a firm commitment, any gain or loss would generally be recognized
in earnings when the firm commitment affects earnings. We will adopt SFAS 133 in
fiscal 2000. We are currently evaluating the potential impact of SFAS 133 on our
future financial condition and results of operations. The impact of SFAS 133
will likely depend upon the extent to which we use derivative instruments and
their designation and effectiveness as hedges of market risk.
2. UTILITY REGULATORY MATTERS
ELECTRIC UTILITY RESTRUCTURING ORDER. On June 19, 1998, the PUC entered its
Opinion and Order (the "Restructuring Order") in Electric Utility's
restructuring proceeding pursuant to Pennsylvania's Customer Choice Act. The
Restructuring Order essentially adopts the terms included in a comprehensive
settlement agreement (the "Settlement Agreement") previously entered into by UGI
Utilities and the active parties to the restructuring proceeding, except
Pennsylvania Power and Light Company (PP&L). Under the terms of the
Restructuring Order, commencing January 1, 1999, Electric Utility is authorized
to recover $32.5 million in stranded costs (on a full revenue requirements basis
which includes all income and gross receipts taxes) over a four-year period
through a Competitive Transition Charge (CTC) (together with carrying charges on
unrecovered balances of 7.94%) and to charge unbundled rates for generation,
transmission and distribution services. Stranded costs are electric
generation-
UGI CORPORATION 1998 ANNUAL REPORT
31
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Millions of dollars, except per share amounts and where indicated otherwise)
related costs that traditionally would be recoverable in a regulated environment
but may not be recoverable in a competitive electric generation market.
Electric Utility's recoverable stranded costs include $8.7 million for the
buy-out of a 1993 power purchase agreement with an independent power producer.
In June 1998, Electric Utility recorded a liability of $8.7 million for the
buy-out of the 1993 power purchase agreement and also recorded a corresponding
regulatory asset.
Under the terms of the Restructuring Order and in accordance with the Customer
Choice Act, Electric Utility's rates for transmission and distribution services
are capped through July 1, 2001. In addition, Electric Utility generally may not
increase the generation component of prices as long as stranded costs are being
recovered through the CTC. This generation rate cap is expected to extend
through December 31, 2002. All of Electric Utility's customers will be permitted
to select an alternative generation supplier as of January 1, 1999. Customers
choosing an alternative supplier will on average receive a generation "shopping
credit" developed from system-wide generation rates of 3.67 cents per kilowatt
hour (kwh) in calendar 1999 and 2000, and 4.3 cents per kwh in calendar 2001 and
2002. The Settlement Agreement gives Electric Utility the right, subject to
prior PUC approval, to transfer its electric generation assets to a
non-regulated affiliate. We believe that, upon filing the necessary documents
with the PUC, Electric Utility will receive such approval.
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 1998 results of operations.
The EITF in 1997 issued EITF 97-4 which concluded that utilities should
discontinue application of SFAS 71 for the generation portion of their business
when a restructuring plan is in place and its terms are known. Based on such
guidance, in June 1998 Electric Utility discontinued the application of SFAS 71
as it relates to the electric generation portion of its business, which assets
comprise less than 25% of Electric Utility's identifiable assets. The
discontinuance of SFAS 71 did not have a material effect on our financial
position or results of operations.
REGULATORY ASSETS AND LIABILITIES. The following regulatory assets and
liabilities are included in our accompanying balance sheets at September 30:
<TABLE>
<CAPTION>
1998 1997
- ----------------------------------------------------------------
<S> <C> <C>
Regulatory assets:
Income taxes recoverable $46.5 $44.4
Power agreement buy-out 8.7 -
Other postretirement benefits 3.3 3.8
Deferred environmental costs .8 .7
- ----------------------------------------------------------------
Total regulatory assets $59.3 $48.9
- ----------------------------------------------------------------
Regulatory liabilities:
Refundable state taxes $ 2.0 $ 3.1
Deferred fuel costs 1.7 7.4
Other postretirement benefits 1.4 -
- ----------------------------------------------------------------
Total regulatory liabilities $ 5.1 $10.5
- ----------------------------------------------------------------
</TABLE>
3. DEBT
Long-term debt comprises the following at September 30:
<TABLE>
<CAPTION>
1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Propane:
AmeriGas Partners Senior Notes,
10.125%, due April 2007 $100.0 $100.0
First Mortgage Notes:
Series A, 9.34%-11.71%, due April
2000 through April 2009 (including
unamortized premium of $13.5 and
$14.8, respectively, calculated at
an 8.91% effective rate) 221.5 222.8
Series B, 10.07%, due April 2001
through April 2005 (including
unamortized premium of $9.8 and
$11.5, respectively, calculated at
an 8.74% effective rate) 209.8 211.5
Series C, 8.83%, due April 2003
through April 2010 110.0 110.0
Acquisition Facility 60.0 37.0
Other 7.7 9.8
- ------------------------------------------------------------------------------
Total Propane 709.0 691.1
- ------------------------------------------------------------------------------
Utilities:
Medium-Term Notes:
7.25% Notes, due October 2017 20.0 -
7.17% Notes, due June 2007 20.0 20.0
6.17% Notes, due January 2001 15.0 -
7.37% Notes, due October 2015 22.0 22.0
6.73% Notes, due October 2002 26.0 26.0
6.62% Notes, due May 2005 20.0 20.0
6.50% Senior Notes, due August 2003
(less unamortized discount of $.1) 49.9 49.9
8.70% Notes, due March 1998 - 10.0
9.71% Notes, due through September
2000 in annual installments of $7.1 14.3 21.4
- ------------------------------------------------------------------------------
Total Utilities 187.2 169.3
- ------------------------------------------------------------------------------
Other:
7.83% Senior Secured Notes, due
through March 2008 8.2 8.6
- ------------------------------------------------------------------------------
Total long-term debt 904.4 869.0
Less current maturities (13.6) (24.2)
- ------------------------------------------------------------------------------
Total long-term debt due after one year $890.8 $844.8
- ------------------------------------------------------------------------------
</TABLE>
UGI CORPORATION 1998 ANNUAL REPORT
32
<PAGE> 21
Long-term debt due in fiscal years 1999 to 2003 follows:
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003
- ----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Propane $ 6.1 $18.3 $77.3 $78.5 $ 74.4
Utilities 7.1 7.1 15.0 - 76.0
Other .4 .4 .5 .5 .5
- ----------------------------------------------------------------
Total $13.6 $25.8 $92.8 $79.0 $150.9
- ----------------------------------------------------------------
</TABLE>
PROPANE
AMERIGAS PARTNERS SENIOR NOTES. The 10.125% Senior Notes of AmeriGas Partners
are not redeemable prior to April 15, 2000. Thereafter, AmeriGas Partners has
the option to redeem the Senior Notes, in whole or in part. A redemption premium
applies until April 15, 2004. In addition, AmeriGas Partners may, under certain
circumstances following the disposition of assets or a change of control, be
required to offer to prepay the Senior Notes.
FIRST MORTGAGE NOTES. The Operating Partnership's First Mortgage Notes are
collateralized by substantially all of its assets. The General Partner and its
wholly owned subsidiary Petrolane are co-obligors of the First Mortgage Notes.
The Operating Partnership may prepay the First Mortgage Notes, in whole or in
part. These prepayments include a make whole premium. Following the disposition
of assets or a change of control, the Operating Partnership may be required to
offer to prepay the First Mortgage Notes, in whole or in part.
BANK CREDIT AGREEMENT. The Operating Partnership's bank credit agreement (Bank
Credit Agreement) consists of a Revolving Credit Facility and an Acquisition
Facility. The Operating Partnership's obligations under the Bank Credit
Agreement are collateralized by substantially all of its assets. The General
Partner and Petrolane are co-obligors of the bank credit facilities.
Under the Revolving Credit Facility, the Operating Partnership may borrow up to
$100 million (including a $35 million sublimit for letters of credit). The
Revolving Credit Facility expires September 15, 2002, but may be extended for
additional one-year periods with the consent of the participating banks
representing at least 80% of the commitments thereunder. The Revolving Credit
Facility permits the Operating Partnership to borrow at various prevailing
interest rates, including the Base Rate, defined as the higher of the Federal
Funds Rate plus .50% or the agent bank's reference rate (8.50% at September 30,
1998), or at two-week, one-, two-, three-, or six-month offshore interbank
offering rates (IBOR), plus a margin. The margin on IBOR borrowings (which
ranges from .20% to 1.00%) and the Revolving Credit Facility commitment fee rate
are dependent upon the Operating Partnership's ratio of funded debt to earnings
before interest, income taxes, depreciation and amortization (EBITDA), each as
defined in the Bank Credit Agreement.
The Operating Partnership had borrowings under the Revolving Credit Facility
totaling $10 million at September 30, 1998 and $28 million at September 30,
1997, which we classify as bank loans. The weighted-average interest rates on
the bank loans outstanding were 6.22% as of September 30, 1998 and 6.44% as of
September 30, 1997. Issued outstanding letters of credit under the Revolving
Credit Facility at September 30, 1998 totaled $.5 million.
The Acquisition Facility provides the Operating Partnership with the ability to
borrow up to $75 million to finance the purchase of propane businesses or
propane business assets. The Acquisition Facility operates as a revolving
facility through September 15, 2000, at which time it converts to a quarterly
amortizing four-year term loan. The Acquisition Facility permits the Operating
Partnership to borrow at the Base Rate or at two-week, one-, two-, three-, or
six-month IBOR, plus a margin. The margin on IBOR borrowings and the Acquisition
Facility commitment fee rate are dependent upon the Operating Partnership's
ratio of funded debt to EBITDA, as defined. The weighted-average interest rates
on Acquisition Facility loans outstanding were 6.18% as of September 30, 1998
and 6.32% as of September 30, 1997.
RESTRICTIVE COVENANTS. The 10.125% Senior Notes of AmeriGas Partners restrict
the ability of the Partnership to, among other things, incur additional
indebtedness, incur liens, issue preferred interests, and effect mergers,
consolidations and sales of assets. Under the Senior Notes Indenture, AmeriGas
Partners is generally permitted to make cash distributions equal to available
cash, as defined, as of the end of the immediately preceding quarter, if certain
conditions are met. These conditions include:
1. no event of default exists or would exist upon making such distributions and
2. the Partnership's consolidated fixed charge coverage ratio, as defined, is
greater than 1.75-to-1.
If the ratio in item 2 above is less than or equal to 1.75-to-1, the Partnership
may make cash distributions in a total amount not to exceed $24 million less the
total amount of distributions made during the immediately preceding 16 fiscal
quarters. At September 30, 1998, such ratio was 2.27-to-1.
The Bank Credit Agreement and the First Mortgage Notes restrict the incurrence
of additional indebtedness and also restrict certain liens, guarantees, loans
and advances, payments, mergers, consolidations, sales of assets and other
transactions. They also require the ratio of total indebtedness, as defined, to
EBITDA, as defined (calculated on a rolling four-quarter basis or eight-quarter
basis divided by two), to be less than or equal to 5.25-to-1. In addition, the
Bank Credit Agreement requires that the Operating Partnership maintain a ratio
of EBITDA to interest expense, as defined, of at least 2.25-to-1 on a rolling
four-quarter basis. Generally, as long as no default exists or would result, the
Operating Partnership is permitted to make cash distributions not more
frequently than quarterly in an amount not to exceed available cash, as defined,
for the immediately preceding calendar quarter.
UGI CORPORATION 1998 ANNUAL REPORT
33
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Millions of dollars, except per share amounts and where indicated otherwise)
GENERAL PARTNER FACILITY. The Operating Partnership also has a revolving credit
agreement with the General Partner under which it may borrow up to $20 million
to fund working capital, capital expenditures, and interest and distribution
payments. This agreement is coterminous with, and generally comparable to, the
Operating Partnership's Revolving Credit Facility except that borrowings under
the General Partner Facility are unsecured and subordinated to all senior debt
of the Partnership. Interest rates on borrowings are based upon one-month IBOR.
Commitment fees are determined in the same manner as fees under the Revolving
Credit Facility. UGI has agreed to contribute on an as needed basis through its
subsidiaries up to $20 million to the General Partner to fund such borrowings.
UTILITIES
REVOLVING CREDIT AGREEMENTS. At September 30, 1998, UGI Utilities had revolving
credit agreements with four banks providing for borrowings of up to $97 million
through June 2001. These agreements may be extended for one-year periods, upon
timely notice, unless the banks elect not to renew. UGI Utilities may borrow at
various prevailing interest rates, including LIBOR. UGI Utilities pays quarterly
commitment fees on these credit lines. UGI Utilities had borrowings under these
agreements totaling $68.4 million at September 30, 1998 and $67 million at
September 30, 1997, which we classify as bank loans. The weighted-average
interest rates on bank loans were 5.90% at September 30, 1998 and 6.26% at
September 30, 1997.
RESTRICTIVE COVENANTS. Certain of UGI Utilities' debt agreements restrict the
incurrence of additional debt, require consolidated tangible net worth of at
least $125 million, and restrict the amount of payments for investments,
redemptions of capital stock, prepayments of subordinated indebtedness and
dividends.
4. INCOME TAXES
The provisions for income taxes consist of the following:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $19.6 $36.7 $16.6
State 4.7 9.1 5.0
- ---------------------------------------------------------------
24.3 45.8 21.6
Deferred 10.5 (1.8) 12.4
Investment credit amortization (.4) (.4) (.4)
- ---------------------------------------------------------------
Total income tax expense $34.4 $43.6 $33.6
- ---------------------------------------------------------------
</TABLE>
A reconciliation from the statutory federal tax rate to our effective tax rate
is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal tax rate 35.0% 35.0% 35.0%
Difference in tax rate due to:
State income taxes, net of
federal benefit 6.1 6.1 6.6
Nondeductible amortization
of goodwill 6.2 4.9 6.5
Other, net (2.6) (1.7) (3.8)
- ----------------------------------------------------------------
Effective tax rate 44.7% 44.3% 44.3%
- ----------------------------------------------------------------
</TABLE>
Deferred tax liabilities (assets) comprise the following at September 30:
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------------
<S> <C> <C>
Excess book basis over tax basis
of property, plant and equipment $162.3 $158.4
Regulatory assets 24.6 20.3
Other 7.4 6.9
- ---------------------------------------------------------------
Gross deferred tax liabilities 194.3 185.6
- ---------------------------------------------------------------
Self-insured property and
casualty liability (11.0) (11.2)
Employee-related benefits (11.6) (9.3)
Premium on long-term debt (5.3) (6.0)
Deferred investment tax credits (4.1) (4.3)
Power purchase agreement liability (3.6) -
Environmental accrual (2.2) (4.0)
Allowance for doubtful accounts (2.4) (3.2)
Other (14.4) (15.6)
- ---------------------------------------------------------------
Gross deferred tax assets (54.6) (53.6)
- ---------------------------------------------------------------
Deferred tax assets valuation allowance - .2
- ---------------------------------------------------------------
Net deferred tax liabilities $139.7 $132.2
- ---------------------------------------------------------------
</TABLE>
UGI Utilities had recorded deferred tax liabilities of approximately $31.3
million as of September 30, 1998 and $30.3 million as of September 30, 1997
pertaining to utility temporary differences, principally a result of accelerated
tax depreciation, the tax benefits of which previously were or will be flowed
through to ratepayers. These deferred tax liabilities have been reduced by
deferred tax assets of $4.1 million at September 30, 1998 and $4.3 million at
September 30, 1997, pertaining to utility deferred investment tax credits. UGI
Utilities had recorded a regulatory income tax asset related to these net
deferred taxes of $46.5 million as of September 30, 1998 and $44.4 million as of
September 30, 1997. This regulatory income tax asset represents future revenues
expected to be recovered through the ratemaking process. We will recognize this
regulatory income tax asset in deferred tax expense as the corresponding
temporary differences reverse and additional income taxes are incurred.
UGI CORPORATION 1998 ANNUAL REPORT
34
<PAGE> 23
The amount of federal operating loss carryforwards which were generated by a
subsidiary prior to its acquisition totaled $11.6 million at September 30, 1998.
These operating loss carryforwards expire through the year 2010. The use of
pre-acquisition operating loss carryforwards is subject to Internal Revenue Code
limitations. We do not believe these limitations will affect our ability to
utilize these carryforwards prior to their expiration.
5. EMPLOYEE RETIREMENT PLANS
DEFINED BENEFIT PENSION PLANS
We sponsor a defined benefit pension plan (UGI Utilities Plan) for employees of
UGI, UGI Utilities, and certain of UGI's other wholly owned subsidiaries.
Benefits under the UGI Utilities Plan are generally based on years of service
and employee compensation during the last years of employment.
The components of net pension income for the UGI Utilities Plan include the
following:
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------
<S> <C> <C> <C>
Service cost -- benefits earned
during the period $ 3.4 $ 2.8 $ 3.1
Interest cost on projected
benefit obligation 10.9 10.6 10.2
Actual return on plan assets (2.1) (40.3) (16.3)
Net amortization and deferral (14.1) 25.8 2.5
- -----------------------------------------------------------------
Net pension income $ (1.9) $ (1.1) $ (.5)
- -----------------------------------------------------------------
</TABLE>
The following table sets forth the funded status of the UGI Utilities Plan and
amounts recognized in our consolidated balance sheets at September 30:
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------
<S> <C> <C>
Projected benefit obligation:
Vested benefits $(128.9) $(118.2)
Nonvested benefits (8.1) (6.7)
- -------------------------------------------------------------------------
Accumulated benefit obligation (137.0) (124.9)
Effect of projected future salary levels (27.8) (24.2)
- -------------------------------------------------------------------------
Projected benefit obligation (164.8) (149.1)
Plan assets at fair value 183.3 189.5
- -------------------------------------------------------------------------
Excess of plan assets over projected
benefit obligation 18.5 40.4
Unrecognized net gain (3.9) (26.9)
Unrecognized prior service cost 5.3 6.0
Unrecognized transition asset (9.5) (11.1)
- -------------------------------------------------------------------------
Prepaid pension cost $ 10.4 $ 8.4
- -------------------------------------------------------------------------
</TABLE>
The major actuarial assumptions used in determining the funded status of the UGI
Utilities Plan as of September 30, 1998, 1997, and 1996, and net pension income
for each of the years then ended, are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Funded status at September 30:
Discount rate 6.9% 7.4 % 8.0 %
Rate of increase in salary levels 4.5 4.5 4.75
Net pension income for the year:
Discount rate 7.4 8.0 7.5
Rate of increase in salary levels 4.5 4.75 4.5
Expected return on plan assets 9.5 9.5 9.5
- -------------------------------------------------------------------------
</TABLE>
UGI Utilities Plan's assets at September 30, 1998 consist principally of equity
and fixed income mutual funds and investment-grade corporate and U.S. Government
obligations.
We also sponsor unfunded retirement benefit plans for certain key employees. At
September 30, 1998 and 1997, the projected benefit obligations of these plans
were not material. We recorded expense for these plans of $2.4 million in 1998,
$1.6 million in 1997, and $1.1 million in 1996.
DEFINED CONTRIBUTION PLANS
We sponsor a 401(k) savings plan for eligible employees of UGI, UGI Utilities,
and certain of UGI's other wholly owned subsidiaries (Utilities Savings Plan).
Generally, participants in the Utilities Savings Plan may contribute a portion
of their compensation on a before-tax and after-tax basis. We may, at our
discretion, match a portion of participants' contributions.
We also sponsor a 401(k) savings plan for eligible employees of the General
Partner (AmeriGas Propane Savings Plan). Participants in the AmeriGas Propane
Savings Plan may contribute a portion of their compensation on a before-tax
basis. In 1998 and 1997, we matched employee contributions on a
dollar-for-dollar basis up to 5% of eligible compensation. In 1996, employee
contributions were not matched. In 1996, we also sponsored a noncontributory
defined contribution pension plan for eligible employees of the General Partner
(AmeriGas Propane Pension Plan). Our contributions to the AmeriGas Propane
Pension Plan represented a percentage of each covered employee's salary.
Effective October 1, 1996, we ceased contributing to the AmeriGas Propane
Pension Plan and the assets were merged into the AmeriGas Propane Savings Plan.
The cost of benefits under the AmeriGas Propane Pension Plan and both of our
savings plans totaled $5.1 million in 1998, $5.8 million in 1997, and $5.9
million in 1996.
POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS
We provide postretirement health care benefits to certain retirees and a limited
number of active employees meeting certain age and service requirements. We also
provide limited postretirement life insurance benefits to nearly all active and
retired employees.
UGI CORPORATION 1998 ANNUAL REPORT
35
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Millions of dollars, except per share amounts and where indicated otherwise)
The components of net periodic postretirement benefit cost are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------
<S> <C> <C> <C>
Service cost -- benefits earned
during the period $ .1 $ .1 $ .1
Interest cost on accumulated
postretirement benefit
obligation 1.2 1.9 2.2
Actual return on assets (.2) (.1) -
Net amortization and deferral .6 1.2 1.6
- ---------------------------------------------------------------
Net periodic postretirement
benefit cost 1.7 3.1 3.9
Change in regulatory assets
and liabilities 1.9 .5 (.1)
- ---------------------------------------------------------------
Net expense $3.6 $3.6 $3.8
- ---------------------------------------------------------------
</TABLE>
The following table sets forth the actuarial present value and funded status of
our postretirement health care and life insurance benefit plans at September 30:
<TABLE>
<CAPTION>
1998 1997
- -----------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit
obligation:
Retirees $(12.4) $(21.0)
Fully eligible active participants (2.4) (2.8)
Other active participants (2.1) (1.9)
- -----------------------------------------------------------------------
(16.9) (25.7)
Plan assets at fair value 4.9 3.5
Unrecognized net gain (6.0) (3.4)
Unrecognized transition obligation 12.3 19.3
- -----------------------------------------------------------------------
Accrued postretirement benefit cost $ (5.7) $ (6.3)
- -----------------------------------------------------------------------
</TABLE>
The decrease in the accumulated postretirement benefit obligation at September
30, 1998 is due to (1) a change in health care provider provisions and (2) a
change in expected health care utilization rates.
The major actuarial assumptions used in determining the funded status of our
postretirement health care and life insurance benefit plans at September 30,
1998, 1997, and 1996, and net periodic postretirement benefit costs for the
years then ended, are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Funded status at September 30:
Discount rate 6.9% 7.4% 8.0%
Health care cost trend rate 6.0-5.5 6.0-5.5 6.5-5.5
Net periodic postretirement
benefit cost for the year:
Discount rate 7.4 8.0 7.5
Health care cost trend rate 6.0-5.5 6.5-5.5 7.0-5.5
Expected return on
trust assets 6.0 6.0 -
- ---------------------------------------------------------------------------
</TABLE>
The ultimate health care cost trend rate of 5.5% in the table above is assumed
for all years after 2007. Increasing the health care cost trend rate one percent
increases the accumulated postretirement benefit obligations by $.8 million at
September 30, 1998 and $1.8 million at September 30, 1997, and increases the net
periodic postretirement benefit costs by $.1 million in 1998, $.1 million in
1997, and $.2 million in 1996.
UGI Utilities has established an Employee Benefit Trust (VEBA) to pay retiree
health care and life insurance benefits and to fund the UGI Utilities'
postretirement benefit liability. VEBA investments, comprising money market
funds, totaled $4.9 million at September 30, 1998 and $3.5 million at September
30, 1997.
6. INVENTORIES
Inventories comprise the following at September 30:
<TABLE>
<CAPTION>
1998 1997
- ----------------------------------------------------------------
<S> <C> <C>
Propane gas $34.8 $47.6
Utility fuel and gases 24.5 26.0
Materials, supplies and other 14.2 15.4
Appliances for sale 4.4 6.6
- ----------------------------------------------------------------
Total inventories $77.9 $95.6
- ----------------------------------------------------------------
</TABLE>
7. SERIES PREFERRED STOCK
The UGI Series Preferred Stock, including both series subject to and series not
subject to mandatory redemption, has 5,000,000 shares authorized for issuance.
We had no shares of UGI Series Preferred Stock outstanding at September 30, 1998
or 1997.
UGI Utilities Series Preferred Stock, including both series subject to and
series not subject to mandatory redemption, has 2,000,000 shares authorized for
issuance. The holders of shares of UGI Utilities Series Preferred Stock have the
right to elect a majority of UGI Utilities' Board of Directors (without
cumulative voting) if dividend payments on any series are in arrears in an
amount equal to four quarterly dividends. This election right continues until
the arrearage has been cured. We have paid cash dividends at the specified
annual rates on all outstanding UGI Utilities Series Preferred Stock.
UGI Utilities Series Preferred Stock subject to mandatory redemption comprises
the following at September 30:
<TABLE>
<CAPTION>
1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C>
$7.75 Series, stated at involuntary
liquidation value of $100 per share,
cumulative (200,000 shares
outstanding) $20.0 $20.0
$1.80 Series, stated at involuntary
liquidation value of $23.50 per share,
cumulative (7,963 shares redeemed
April 1998) - .2
$8.00 Series, stated at involuntary
liquidation value of $100 per share,
cumulative (150,000 shares redeemed
April 1998) - 15.0
- -----------------------------------------------------------------------------
Total UGI Utilities Series Preferred Stock
subject to mandatory redemption 20.0 35.2
Less current portion - (3.0)
- -----------------------------------------------------------------------------
Total UGI Utilities Series Preferred Stock
due after one year $20.0 $32.2
- -----------------------------------------------------------------------------
</TABLE>
UGI CORPORATION 1998 ANNUAL REPORT
36
<PAGE> 25
In April 1998, UGI Utilities (1) voluntarily redeemed 120,000 shares of its
$8.00 Series Preferred Stock at a redemption price of $102.667 per share and (2)
redeemed 30,000 shares of its $8.00 Series Preferred Stock through a mandatory
sinking fund at a price of $100 per share. Also in April 1998, UGI Utilities
voluntarily redeemed all 7,963 outstanding shares of its $1.80 Series Preferred
Stock at a redemption price of $23.50 per share.
UGI Utilities is required to establish a sinking fund to redeem on October 1 in
each year, commencing October 1, 2004, 10,000 shares of its $7.75 Series
Preferred Stock at a price of $100 per share. The $7.75 Series Preferred Stock
is redeemable, in whole or in part, at the option of UGI Utilities on or after
October 1, 2004, at a price of $100 per share. All outstanding shares of $7.75
Series Preferred Stock are subject to mandatory redemption on October 1, 2009,
at a price of $100 per share.
8. PREFERENCE STOCK PURCHASE RIGHTS
Holders of our Common Stock own one-half of one right (as described below) for
each outstanding share of Common Stock. Each right entitles the holder to
purchase one one-hundredth of a share of First Series Preference Stock, without
par value, at an exercise price of $120 per one one-hundredth of a share or,
under the circumstances summarized below, to purchase the common stock described
in the following paragraph. The rights are exercisable only if a person or
group, other than certain underwriters:
1. acquires 20% or more of our Common Stock (Acquiring Person) or
2. announces or commences a tender offer for 30% or more of our Common Stock.
We are entitled to redeem the rights at five cents per right at any time before
the earlier of:
1. the expiration of the rights in April 2006 or
2. ten days after a person or group has acquired 20% of our Common Stock if a
majority of continuing Directors concur and, in certain circumstances,
thereafter.
Each holder of a right, other than an Acquiring Person, is entitled to purchase,
at the exercise price of the right, Common Stock having a market value of twice
the exercise price of the right if:
1. an Acquiring Person merges with UGI or engages in certain other transactions
with us or
2. a person acquires 40% or more of our Common Stock.
In addition, if, after we (or an Acquiring Person) publicly announce that an
Acquiring Person has become such, UGI engages in a merger or other business
combination transaction in which:
1. we are not the surviving corporation, or
2. we are the surviving corporation, but our Common Stock is changed or
exchanged, or
3. 50% or more of our assets or earning power is sold or transferred,
then each holder of a right is entitled to purchase, at the exercise price of
the right, common stock of the acquiring company having a market value of twice
the exercise price of the right.
The rights have no voting or dividend rights and, until exercisable, have no
dilutive effect on our earnings.
9. COMMON STOCK AND INCENTIVE
STOCK AWARD PLANS
Common Stock share activity for 1996, 1997, and 1998 follows:
<TABLE>
<CAPTION>
Issued Treasury Outstanding
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
September 30, 1995 32,921,830 (4,366) 32,917,464
Issued:
Employee and director plans 164,961 143,385 308,346
Dividend reinvestment plan 111,940 120,175 232,115
Reacquired - (321,700) (321,700)
- ---------------------------------------------------------------------------------------------
September 30, 1996 33,198,731 (62,506) 33,136,225
Issued:
Employee and director plans - 396,378 396,378
Dividend reinvestment plan - 130,313 130,313
Reacquired - (800,900) (800,900)
- ---------------------------------------------------------------------------------------------
September 30, 1997 33,198,731 (336,715) 32,862,016
Issued:
Employee and director plans - 243,915 243,915
Dividend reinvestment plan - 108,353 108,353
Acquisition - 42,078 42,078
Reacquired - (433,100) (433,100)
- ---------------------------------------------------------------------------------------------
September 30, 1998 33,198,731 (375,469) 32,823,262
- ---------------------------------------------------------------------------------------------
</TABLE>
STOCK OPTION AND DIVIDEND EQUIVALENT PLANS (SODEP).
Under the 1997 SODEP, we may grant options to acquire a total of 1,500,000
shares of Common Stock to key employees. Generally, all options under the 1997
SODEP are fully vested and immediately exercisable on the date of grant. Under
its predecessor plan, the 1992 SODEP, options vested ratably over a specified
period. Options under both plans can be exercised no later than ten years from
the date of grant. The exercise price for options granted under the 1997 SODEP
may not be less than the fair market value of the Common Stock on the date of
grant. In addition, the SODEP plans provide for the crediting of dividend
equivalents to optionees' accounts during a specified period. Actual payment of
dividend equivalents under the 1997 SODEP is contingent upon our total
shareholder return relative to that of a group of peer companies during a
specified three-year performance period ending December 31, 1999. No dividend
equivalents were payable under the 1992 SODEP.
DIRECTORS' COMPENSATION PLANS. The 1997 UGI Corporation Directors' Equity
Compensation Plan (1997 Directors' Plan) provides for annual awards to each of
our nonemployee Board of Directors of (1) 630 Units, each representing an
interest equivalent to one share of Common Stock, and (2) Common Stock in lieu
of cash for a portion of their annual retainer fee.
37
UGI CORPORATION 1998 ANNUAL REPORT
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Millions of dollars, except per share amounts and where indicated otherwise)
Participants may also elect to receive any portion of their meeting fees and the
cash portion of their annual retainer in the form of Units. Directors who had
accrued benefits under the former Retirement Plan for Outside Directors, which
plan was terminated effective December 31, 1996, were awarded a total of 36,140
Units on January 1, 1997 equal in value to such accrued benefits. The 1997
Directors' Plan provides for the crediting of dividend equivalents to Unit
holders' accounts, which amounts are converted to Units at the end of each
calendar year based upon the fair market value of Common Stock on that date. All
Units and dividend equivalents are fully vested when credited to a Director's
account. Generally, Units will be converted to shares of Common Stock upon
retirement or termination of service. We awarded 7,043 Units in 1998 and 7,225
Units in 1997 under the 1997 Directors' Plan relating to annual awards and
deferred compensation.
Prior to January 1, 1997, nonemployee Directors participated in the 1992
Directors' Stock Plan (1992 Directors' Plan). Under the 1992 Directors' Plan,
each year we granted an option to purchase 1,000 shares of Common Stock to each
of our nonemployee Board Directors. In addition, we issued Common Stock to
nonemployee Directors in lieu of a portion of their annual retainer fees.
1992 NON-QUALIFIED STOCK OPTION PLAN (1992 NON-QUALIFIED PLAN). Under the 1992
Non-Qualified Plan, as amended effective December 31, 1996, we may grant options
to acquire a total of 500,000 shares of Common Stock to key employees who do not
participate in the 1997 SODEP. The exercise price for options granted under the
1992 Non-Qualified Plan is the fair market value of the Common Stock on the date
of grant. Generally, options granted on and after the amendment date of the plan
are fully vested and immediately exercisable. For options granted prior to the
amendment date, one-fifth of an optionee's options are exercisable for each full
year of service completed after the date of grant. Options can be exercised no
later than ten years from the date of grant.
1997 AMERIGAS PROPANE, INC. LONG-TERM INCENTIVE PLAN (1997 PROPANE PLAN). On
October 28, 1996, the General Partner adopted the 1997 Propane Plan, effective
October 1, 1996. Under the 1997 Propane Plan, the General Partner may grant the
right to receive a total of 500,000 AmeriGas Partners Common Units to key
employees, or cash generally equivalent to the fair market value of such Common
Units, on the payment date. In addition, the 1997 Propane Plan provides for the
crediting of Partnership distribution equivalents to participants' accounts.
Distribution equivalents will be paid in cash, and such payment may, at the
participant's request, be deferred. Generally, each grant, unless paid, will
terminate when the participant ceases to be employed by the General Partner.
The actual number of Common Units (or their cash equivalent) that may be
delivered under the 1997 Propane Plan, as well as the amount of the distribution
equivalent, are contingent upon the date on which the requirements for early
conversion of Subordinated Units are met. If the requirements for early
conversion are not met by September 30, 2001, the General Partner will not make
any payments under the 1997 Propane Plan. The number of Common Units made the
subject of grants under the 1997 Propane Plan was 88,200 at September 30, 1998
and 84,500 at September 30, 1997. At September 30, 1998, 411,800 Common Units
were available for future grants.
FAIR VALUE INFORMATION. The per share weighted-average fair value of stock
options granted under all of our stock plans was $1.98 during 1998, $2.96 during
1997, and $2.67 during 1996. These amounts were determined using the
Black-Scholes option pricing model which values options based on the stock price
at the grant date, the expected life of the option, the estimated volatility of
the stock, expected dividend payments, and the risk-free interest rate over the
expected life of the option. The assumptions we used for option grants during
1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------
<S> <C> <C> <C>
Expected life of option 6 years 6 years 6 years
Expected volatility 16.2% 16.6% 19.2%
Expected dividend yield 6.0% 6.5% 6.3%
Risk-free interest rate 4.6% 6.0% 5.9%
- ----------------------------------------------------------------
</TABLE>
We apply APB 25 and related interpretations in accounting for our stock-based
employee compensation plans. We recognized, under the provisions of APB 25,
total stock-based compensation expense (income) of $1.0 million in 1998, $3.6
million in 1997, and $(3.7) million in 1996. If we had determined compensation
cost under the fair value method prescribed by SFAS 123, net income and diluted
earnings per share for 1998, 1997 and 1996 would have been as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------
<S> <C> <C> <C>
Net earnings:
As reported $40.3 $52.1 $39.5
Pro forma 40.2 51.7 39.5
Diluted earnings per share:
As reported 1.22 1.57 1.19
Pro forma 1.21 1.56 1.19
- ----------------------------------------------------------------
</TABLE>
UGI CORPORATION 1998 ANNUAL REPORT
38
<PAGE> 27
STOCK OPTION ACTIVITY. Stock option transactions under all of our plans for
1996, 1997, and 1998 follow:
<TABLE>
<CAPTION>
Shares Average Option Price
- ------------------------------------------------------------------------
<S> <C> <C>
Shares under option --
September 30, 1995 1,211,001 $20.225
- ------------------------------------------------------------------------
Granted 31,000 20.673
Exercised (274,700) 20.123
Forfeited (90,000) 20.125
- ------------------------------------------------------------------------
Shares under option --
September 30, 1996 877,301 20.307
- ------------------------------------------------------------------------
Granted 653,750 22.686
Exercised (348,050) 20.131
Forfeited (8,000) 21.422
- ------------------------------------------------------------------------
Shares under option --
September 30, 1997 1,175,001 21.670
- ------------------------------------------------------------------------
Granted 54,583 22.469
Exercised (198,121) 20.650
Forfeited (1,708) 23.962
- ------------------------------------------------------------------------
Shares under option --
September 30, 1998 1,029,755 21.905
- ------------------------------------------------------------------------
Options exercisable 1996 647,868 20.326
Options exercisable 1997 1,140,958 21.432
Options exercisable 1998 1,014,755 21.921
- ------------------------------------------------------------------------
</TABLE>
For options outstanding as of September 30, 1998, the exercise prices range from
$18.625 to $26.250. The weighted-average remaining contractual life of these
options is 6.9 years. At September 30, 1998, 1,068,242 shares of Common Stock
were available for future option grants under all of our stock option plans.
Effective October 1, 1997, we implemented a stock ownership policy (Stock
Ownership Policy) for executives and key employees. Under the terms of the Stock
Ownership Policy, executives and certain key employees are required to own
Common Stock having a fair value equal to 40% to 450% of their base salaries.
Participants have from three months to three years to comply with the Stock
Ownership Policy. We offer full recourse, interest-bearing loans to employees in
order to assist them in meeting the ownership requirements. The loans bear
interest at an annual rate of 4%. Each loan may not exceed ten years and is
collateralized by the Common Stock purchased. At September 30, 1998, loans
outstanding totaled $3.7 million.
10. PARTNERSHIP DISTRIBUTIONS
The Partnership makes distributions to its partners approximately 45 days after
the end of each fiscal quarter in a total amount equal to its Available Cash for
such quarter. Available Cash generally means:
1. all cash on hand at the end of such quarter,
2. plus all additional cash on hand as of the date of determination resulting
from borrowings after the end of such quarter,
3. less the amount of cash reserves established by the General Partner in its
reasonable discretion.
The General Partner may establish reserves for the proper conduct of the
Partnership's business and for distributions during the next four quarters. In
addition, certain of the Partnership's debt agreements require reserves be
established for the payment of debt principal and interest.
Distributions of Available Cash will generally be made 98% to the Common and
Subordinated unitholders and 2% to the General Partner. The Partnership may pay
an incentive distribution if Available Cash exceeds the Minimum Quarterly
Distribution (MQD) of $.55 on all units. If there is sufficient Available Cash,
the holders of Common Units have the right to receive the MQD, plus any
arrearages, before the distribution of Available Cash to holders of Subordinated
Units. Common Units will not accrue arrearages for any quarter after the
Subordination Period (as defined below), and Subordinated Units will not accrue
arrearages for any quarter.
The Subordination Period will generally extend until the first day of any
quarter beginning on or after April 1, 2000 where:
1. distributions of Available Cash from Operating Surplus (generally defined as
$40 million plus $42.9 million of cash on hand as of April 19, 1995, the
formation date of the Partnership, plus all operating cash receipts less all
operating cash expenditures and cash reserves) equal or exceed the MQD on
each of the outstanding Common and Subordinated units for each of the four
consecutive non-overlapping four-quarter periods immediately preceding such
date;
2. the Adjusted Operating Surplus (generally defined as Operating Surplus
adjusted to exclude working capital borrowings, decreases in cash reserves,
and $40 million plus $42.9 million of cash on hand as of April 19, 1995, and
to include increases in reserves to provide for distributions resulting from
Operating Surplus generated during such period) generated during both (i)
each of the two immediately preceding non-overlapping four-quarter periods
and (ii) the immediately preceding sixteen-quarter period, equals or exceeds
the MQD on each of the Common and Subordinated units outstanding during those
periods; and
3. there are no arrearages on the Common Units.
UGI CORPORATION 1998 ANNUAL REPORT
39
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Millions of dollars, except per share amounts and where indicated otherwise)
Prior to the end of the Subordination Period, 4,945,537 Subordinated Units may
convert into Common Units on the first day after the record date for
distributions based upon any quarter ending on or after March 31, 1998, and an
additional 4,945,537 Subordinated Units may convert into Common Units on the
first day after the record date for distributions based upon any quarter ending
on or after March 31, 1999, if:
1. distributions of Available Cash from Operating Surplus on each of the
outstanding Common and Subordinated units equal or exceed the MQD for each of
the three consecutive four-quarter periods immediately preceding such date;
2. the Adjusted Operating Surplus generated during the immediately preceding
twelve-quarter period equals or exceeds the MQD on all of the Common and
Subordinated units outstanding during that period;
3. the Audit Committee of the Board of Directors of the General Partner approves
management's good faith determination that the Partnership will, with respect
to the four-quarter period commencing with such date, generate Adjusted
Operating Surplus in an amount equal to or exceeding the MQD on all of the
outstanding Common and Subordinated units; and
4. there are no arrearages on the Common Units.
The cash performance requirements for conversion have not been met to date. They
are dependent upon many factors including highly seasonal operating results,
changes in working capital, asset sales and debt refinancings. Management
believes, however, that it is reasonably possible that the 9,891,074
Subordinated Units eligible for early conversion will convert into Common Units
during fiscal 1999.
11. COMMITMENTS AND CONTINGENCIES
We lease various buildings and transportation, data processing and office
equipment under operating leases. Certain of our leases contain renewal and
purchase options and also contain escalation clauses. Our aggregate rental
expense for such leases was $33.5 million in 1998, $27.8 million in 1997, and
$27.1 million in 1996.
Minimum future payments under operating leases that have initial or remaining
noncancelable terms in excess of one year are as follows:
<TABLE>
<CAPTION>
After
1999 2000 2001 2002 2003 2003
- ----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Propane $25.4 $20.2 $17.1 $12.9 $ 9.6 $19.4
Utilities 4.2 3.5 3.0 2.8 2.4 3.0
Other .1 .1 .1 .1 - -
- ----------------------------------------------------------------
Total $29.7 $23.8 $20.2 $15.8 $12.0 $22.4
- ----------------------------------------------------------------
</TABLE>
Gas Utility has gas supply agreements with producers and marketers that expire
at various dates through 2000. Gas Utility also has agreements for firm pipeline
transportation and storage capacity which Gas Utility may terminate at various
dates through 2015. In addition, Gas Utility has short-term gas supply
agreements which permit it to purchase certain of its gas supply needs on a firm
or interruptible basis at spot market prices.
Electric Utility has a power supply agreement with PP&L under which PP&L
supplies all the electric power required by Electric Utility, above that
provided from other sources. The cost of electricity supplied by PP&L is based
on PP&L's actual system costs. The percentage of Electric Utility's total
electric system output supplied by PP&L was approximately 54% in 1998, 53% in
1997, and 52% in 1996. Electric Utility has provided notice to PP&L of its
intention to terminate this agreement as of March 2001. Electric Utility also
has short-term, fixed price power supply agreements to purchase all of the
output of the 32-megawatt Montgomery County Resource Recovery Facility through
December 31, 1999.
The Partnership enters into contracts to purchase propane and UGI Energy
Services enters into contracts to purchase natural gas to meet a portion of
their supply requirements. Generally, such contracts have terms of less than one
year and call for payment based on either fixed prices or market prices at date
of delivery.
The Partnership has succeeded to certain lease guarantee obligations of
Petrolane relating to Petrolane's divestiture of nonpropane operations before
its 1989 acquisition by QFB Partners. Lease payments under these leases total
approximately $54.0 million. The leases expire through 2010, and some of them
are currently in default. The Partnership has succeeded to the indemnity
agreement of Petrolane by which Texas Eastern Corporation (Texas Eastern), a
prior owner of Petrolane, agreed to indemnify Petrolane against any liabilities
arising out of the conduct of businesses that do not relate to, and are not a
part of, the propane business, including lease guarantees. To date, Texas
Eastern has directly satisfied defaulted lease obligations without the
Partnership's having to honor its guarantee. The Partnership believes the
probability that it will be required to directly satisfy such lease obligations
is remote.
In addition, the Partnership has succeeded to Petrolane's agreement to indemnify
Shell Petroleum N.V. (Shell) for various scheduled claims that were pending
against Tropigas de Puerto Rico (Tropigas). Petrolane had entered into this
indemnification agreement in conjunction with its sale of the international
operations of Tropigas to Shell in 1989. The Partnership also succeeded to
Petrolane's right to seek indemnity on these claims first from International
Controls Corp., which sold Tropigas to Petrolane, and then from Texas Eastern.
To date, neither the Partnership nor Petrolane has paid any sums under this
indemnity, but several claims by Shell, including claims related to certain
antitrust actions aggregating at least $68 million, remain pending.
We, along with other companies, have 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
UGI CORPORATION 1998 ANNUAL REPORT
40
<PAGE> 29
sites, including some Superfund sites. In addition, we have identified
environmental contamination at several of our properties and have voluntarily
undertaken investigation and, as appropriate, remediation of these sites in
cooperation with appropriate environmental agencies or private parties.
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. 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.
12. FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments included in current assets and
current liabilities (excluding current maturities of long-term debt) approximate
their fair values because of their short-term nature. The carrying amounts and
estimated fair values of our long-term debt and UGI Utilities Series Preferred
Stock at September 30 are as follows:
<TABLE>
<CAPTION>
Carrying Estimated
Amount Fair Value
- ---------------------------------------------------------------------
<S> <C> <C>
1998:
Long-term debt:
Propane $709.0 $772.0
Utilities 187.2 193.0
Other 8.2 9.1
UGI Utilities Series Preferred Stock 20.0 24.0
1997:
Long-term debt:
Propane $691.1 $737.0
Utilities 169.3 173.0
Other 8.6 9.2
UGI Utilities Series Preferred Stock 35.2 36.0
- ---------------------------------------------------------------------
</TABLE>
We estimate the fair value of long-term debt by using current market prices and
by discounting future cash flows using rates available for similar type debt.
The estimated fair value of UGI Utilities Series Preferred Stock is based on the
fair value of redeemable preferred stock with similar credit ratings and
redemption features.
We have financial instruments such as short-term investments and trade accounts
receivable which could expose us to concentrations of credit risk. We limit our
credit risk from short-term investments by investing only in investment-grade
commercial paper and in U.S. Government securities. The credit risk from trade
accounts receivable is limited because we have a large customer base which
extends across many different U.S. markets. At September 30, 1998 and 1997, we
had no significant concentrations of credit risk.
In order to reduce interest rate risk associated with the anticipated
refinancing of existing long-term debt, during 1998 the Partnership entered into
an interest rate protection agreement covering $50 million of long-term debt to
be issued in fiscal 2001. The counterparty to this agreement is a large
financial institution. To the extent this agreement continues to qualify as a
hedge of the forecasted transaction, any gains or losses on the agreement will
be included in the basis of the long-term debt issued which will adjust the
effective interest rate. The estimated fair value of this agreement was $(2.4)
million at September 30, 1998.
UGI Energy Services uses exchange traded natural gas futures contracts to manage
price risk associated with fluctuations in the price of natural gas that we sell
to our customers under firm commitments. At September 30, 1998, UGI Energy
Services held natural gas futures contracts with a total notional amount of
$28.6 million maturing through March 2000. At September 30, 1997, UGI Energy
Services held futures contracts with a total notional amount of $15.1 million.
Net deferred gains on such contracts totaled $.2 million at September 30, 1998
and $2.1 million at September 30, 1997.
The Partnership is a party to propane price swap and option agreements with
private counterparties maturing through March 1999. We use these agreements to
manage price risk associated with a portion of our propane supply needs. At
September 30, 1998, the Partnership was a party to price swap agreements with a
total notional amount of $11.7 million.
UGI CORPORATION 1998 ANNUAL REPORT
41
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Millions of dollars, except per share amounts and where indicated otherwise)
In addition, the Partnership held zero-cost collars for propane having a total
notional ceiling amount of $11.8 million and a total notional floor amount of
$9.3 million. The estimated fair value of these agreements was not material.
13. OTHER INCOME, NET
Other income, net, comprises the following:
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------
<S> <C> <C> <C>
Interest income $ (6.9) $ (6.3) $ (4.0)
Loss on Partnership's interest
rate protection agreements 4.0 - -
Gain on sales of investments (2.3) (8.2) -
Gain on sales of fixed assets (2.0) (1.1) (1.9)
Other (5.5) (7.0) (6.8)
- -------------------------------------------------------------------
Total other income, net $(12.7) $(22.6) $(12.7)
- -------------------------------------------------------------------
</TABLE>
14. SEGMENT INFORMATION
Please refer to the schedule on page 22 for information on revenues, operating
income, identifiable assets, depreciation and amortization, and capital
expenditures for our business segments for 1998, 1997 and 1996.
15. QUARTERLY DATA (UNAUDITED)
The following quarterly data includes all adjustments (consisting only of normal
recurring adjustments with the exception of those indicated below) which we
consider necessary for a fair presentation. Our quarterly results fluctuate
because of the seasonal nature of our businesses.
<TABLE>
<CAPTION>
December 31, March 31, June 30, September 30,
1997 1996 1998 1997(a) 1998 1997(b) 1998(c) 1997(d)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $471.2 $529.6 $488.3 $576.4 $255.2 $284.1 $225.0 $251.9
Operating income (loss) 77.6 89.6 97.7 107.7 8.6 13.1 (13.7) (10.5)
Net income (loss) 24.8 27.9 31.2 35.8 (3.9) (1.2) (11.8) (10.4)
Net income (loss)
per share -- diluted .75 .84 .94 1.08 (.12) (.04) (.36) (.32)
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes gain from the sale of the Partnership's 50% equity interest in
Atlantic Energy, Inc. which owns and operates a liquefied petroleum gas
storage terminal in Chesapeake, Virginia. The gain increased operating
income by $4.7 million and net income by $1.6 million or $.05 per share.
(b) Includes gain from sale of UTI Energy Corp. Common Stock which increased
operating income by $2.1 million and decreased net loss by $1.4 million or
$.04 per share.
(c) Includes loss from the Partnership's interest rate protection agreements
which increased operating loss by $4.0 million and net loss by $1.4 million
or $.04 per share. We entered into these agreements in 1998 to reduce
interest rate exposure associated with an anticipated debt refinancing. Due
to unusual conditions in the corporate debt markets, we postponed the
refinancing and recorded a loss on these agreements because they no longer
qualified for hedge accounting treatment.
(d) Includes gain from sale of UTI Energy Corp. Common Stock which decreased
operating loss by $1.4 million and net loss by $.9 million or $.03 per
share.
UGI CORPORATION 1998 ANNUAL REPORT
42
<PAGE> 31
REPORT OF MANAGEMENT
The Company's consolidated financial statements and other financial information
contained in this Annual Report are prepared by management, which is responsible
for their fairness, integrity and objectivity. The consolidated financial
statements and related information were prepared in accordance with generally
accepted accounting principles and include amounts that are based on
management's best judgments and estimates.
The Company maintains a system of internal controls. Management believes the
system provides reasonable assurance that assets are safeguarded and that
transactions are executed in accordance with management's authorization and are
properly recorded to permit the preparation of reliable financial information.
There are limits in all systems of internal control, based on the recognition
that the cost of the system should not exceed the benefits to be derived. We
believe that the Company's internal control system is cost effective and
provides reasonable assurance that material errors or irregularities will be
prevented or detected within a timely period. The internal control system and
compliance therewith are monitored by the Company's internal audit staff.
The Audit Committee of the Board of Directors is composed of two members,
neither of whom is an employee of the Company. This Committee is responsible for
reviewing the adequacy of corporate financial reporting and accounting systems
and controls, for overseeing the external and internal auditing functions and
for recommending to the Board of Directors the independent public accountants to
conduct the annual audit of the Company's consolidated financial statements. The
Committee maintains direct channels of communication between the Board of
Directors and both the independent public accountants and internal auditors.
The independent public accountants, who are appointed by the Board of Directors
and ratified by the shareholders, perform certain procedures, including an
evaluation of internal controls to the extent required by generally accepted
auditing standards, in order to express an opinion on the consolidated financial
statements and to obtain reasonable assurance that such financial statements are
free of material misstatement.
/s/ Lon R. Greenberg
Lon R. Greenberg
Chief Executive Officer
/s/ Anthony J. Mendicino
Anthony J. Mendicino
Chief Financial Officer
/s/ Michael J. Cuzzolina
Michael J. Cuzzolina
Chief Accounting Officer
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
UGI Corporation
We have audited the accompanying consolidated balance sheets of UGI Corporation
and subsidiaries as of September 30, 1998 and 1997, and the related consolidated
statements of income, stockholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. The consolidated statements of income,
stockholders' equity and cash flows of UGI Corporation and subsidiaries for the
year ended September 30, 1996, were audited by other auditors whose report dated
November 22, 1996, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of UGI
Corporation and subsidiaries as of September 30, 1998 and 1997, and the results
of their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Chicago, Illinois
November 13, 1998
UGI CORPORATION 1998 ANNUAL REPORT
43
<PAGE> 32
Appendix to Exhibit 13 - Description of Graphic Material
Financial Review - page 13
Photograph of Mr. Anthony J. Mendicino, Vice President-Finance and Chief
Financial Officer, UGI Corporation.
Financial Review - page 17
Pie Chart of sources of cash for UGI Corporation reflecting in millions:
cash provided by operations of $178.5;
cash provided by debt issued of $59.4;
cash provided by disposals of assets of $7.9;
cash provided by common stock issued of $8.5.
<PAGE> 33
Financial Review - page 17
Pie Chart of uses of cash for UGI Corporation reflecting in millions:
cash used for dividends and distributions of $86.6;
cash used for capital expenditures of $69.2;
cash used for debt repayments of $40.3;
cash used for short-term investments of $16.4;
cash used for redemption of UGI Utilities Preferred Stock of $15.5;
cash used for common stock repurchased of $11.3;
cash used for acquisitions of $8.1;
cash used for other uses of $2.3;
cash used for investments in joint venture partnerships of $2.0.
<PAGE> 1
EXHIBIT 13.2
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1 TO
CURRENT REPORT DATED JULY 11, 1997
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
JULY 11, 1997
(DATE OF REPORT)
UGI CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
PENNSYLVANIA 1-11071 23-2668356
<S> <C> <C>
(STATE OR OTHER JURISDICTION (COMMISSION FILE (I.R.S. EMPLOYER
OF INCORPORATION) NUMBER) IDENTIFICATION NO.)
</TABLE>
460 N. GULPH ROAD
KING OF PRUSSIA, PENNSYLVANIA 19406
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(610) 337-1000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
<PAGE> 2
UGI Corporation Form 8-K/A
Page 2 July 11, 1997
ITEM 4. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT
In May 1996, Coopers & Lybrand L.L.P. ("C&L") was appointed by the
Audit Committee of the Board of Directors as the Company's independent public
accountants for the year ending September 30, 1997. That appointment was
approved by the Board of Directors and subsequently ratified by the Company's
shareholders at the Annual Meeting of Shareholders on February 25, 1997.
In May 1997, the staff of the Securities and Exchange Commission (the
"Commission"), notified the Company that for the year ending September 30, 1997,
the Company's principal auditor must audit and assume the responsibility for
reporting on at least 50% of the assets and revenues of the Company on a
consolidated basis. As stated in their reports on the consolidated financial
statements of UGI Corporation and subsidiaries for each of the two most recent
fiscal years, C&L did not audit the consolidated financial statements of
AmeriGas Propane, Inc. and subsidiaries ("AmeriGas Propane") as of September 30,
1996 and 1995 and for the year ended September 30, 1996 and the period from
April 19, 1995 to September 30, 1995, which statements reflected total assets
and revenues constituting 65 and 68 percent, and 65 and 31 percent,
respectively, of the related consolidated totals of the Company. Those AmeriGas
Propane financial statements were audited by Arthur Andersen LLP ("AA"). AA
furnished its reports on those financial statements to C&L. C&L's reports on the
Company's consolidated financial statements for the two most recent fiscal
years, in so far as they relate to amounts included for AmeriGas Propane, are
based solely on the reports of AA. The reports contained no adverse opinion and
were not qualified or modified as to uncertainty, audit scope, or accounting
principles. Relying on the reports of AA, C&L was satisfied that it was
qualified to act as the Company's principal auditor.
In response to the comments of the staff of the Commission, management engaged
AA as the Company's independent public accountant (principal auditor),
effective July 11, 1997, to examine and report on the consolidated financial
statements of the Company for fiscal year 1997, and the prior engagement of C&L
as the Company's independent auditor was terminated. The decision to change
accountants was not recommended or approved by the Audit Committee of
the Board of Directors, however, it was ratified by the Board of Directors at
the July 29, 1997 Board meeting.
The Company is not aware of any disagreements with C&L during the
Company's two most recent fiscal years and through the date of this
report on any matters of accounting principles or practices, financial
statement disclosures, or auditing scope and procedures which, if not resolved
to the satisfaction of C&L, would have caused C&L to make reference to the
matters in their reports.
During the Company's two most recent fiscal years and through the date
of this report, the Company has had no reportable events as defined in Item 304
(a) (1)(v) of Regulation S-K.
<PAGE> 3
UGI Corporation Form 8-K/A
Page 3 July 11, 1997
The Company has requested that C&L furnish it with a letter addressed
to the Securities and Exchange Commission stating whether C&L agrees with the
above statements. A copy of that letter dated August 1, 1997 is filed as Exhibit
16 to this Amendment No. 1 on Form 8-K/A.
During the Company's two most recent fiscal years ended September 30,
1996 and September 30, 1995 and through the date of engagement of AA, the
Company has not consulted with AA regarding any of the matters specified in Item
304 (a) (2) of Regulation S-K.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(c) Exhibits
(16) Letter to the Securities and Exchange Commission from Coopers &
Lybrand L.L.P., dated August 1, 1997.
<PAGE> 4
UGI Corporation Form 8-K/A
Page 4 July 11, 1997
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 hereunto duly authorized.
UGI CORPORATION
(REGISTRANT)
By: /s/ Brendan P. Bovaird
-------------------------------------
Brendan P. Bovaird
Vice President and General Counsel
Date: August 4, 1997
<PAGE> 5
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
(16) Letter to the Securities and
Exchange Commission from
Coopers & Lybrand L.L.P. dated
August 1, 1997
</TABLE>
A-1
<PAGE> 6
EXHIBIT 16
Coopers & Lybrand L.L.P. 101 East Kennedy Boulevard telephone (813)229-0221
Suite 1500
Tampa, Florida 33602-5194 facsimile (813)229-3646
a professional services firm
August 1, 1997
Securities and Exchange Commission
450 5th Street, N.W.
Washington, DC 20549
Gentlemen:
We have read the statements made by UGI Corporation (copy attached), which we
understand will be filed with the Commission, pursuant to Item 4 of Form 8-K,
as part of the Company's Report on Form 8-K/A dated July 11, 1997. We agree
with the statements concerning our Firm in such Form 8-K/A.
Very truly yours,
/s/ Coopers & Lybrand L.L.P.
<PAGE> 1
EXHIBIT 21
UGI CORPORATION
SUBSIDIARIES
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
STATE OF
SUBSIDIARY OWNERSHIP INCORPORATION
<S> <C> <C>
- -------------------------------------------------------------------------------
AMERIGAS, INC. 100% PA
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FOUR FLAGS DRILLING COMPANY, INC. 100% PA
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Four Flags Holding Company 100% DE
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AMERIGAS PROPANE, INC.* 100% PA
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AmeriGas Partners, L.P. (1) DE
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AmeriGas Finance Corp. 100% DE
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AmeriGas Propane, L.P. 98.9899% DE
limited partner interest
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AmeriGas Propane Parts
& Service, Inc. 100% PA
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Petrolane Offshore Limited 100% BM
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AmeriGas Technology Group, Inc. 100% PA
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Petrolane Incorporated 100% PA
- -------------------------------------------------------------------------------
ASHTOLA PRODUCTION COMPANY 100% PA
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CRYOTEX, INCORPORATED 100% DE
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
UGI ETHANOL DEVELOPMENT CORPORATION 100% PA
- -------------------------------------------------------------------------------
NORTHFIELD HOLDING COMPANY 100% DE
- -------------------------------------------------------------------------------
UGI ENTERPRISES, INC. 100% PA
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Eastfield International Holdings, Inc. 100% DE
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
UGI ENERGY SERVICES, INC. 100% PA
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Energy Services Holding Company 100% DE
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
UGI POWER SUPPLY, INC. 100% PA
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
UGI INTERNATIONAL ENTERPRISES, INC. 100% PA
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
UGI BLACK SEA ENTERPRISES, INC. 100% PA
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
UGI INTERNATIONAL (ROMANIA), INC. 100% PA
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
UGI ROMANIA, INC. 100% PA
- -------------------------------------------------------------------------------
</TABLE>
<PAGE> 2
UGI CORPORATION
SUBSIDIARIES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
STATE OF
SUBSIDIARY OWNERSHIP INCORPORATION
<S> <C> <C>
- --------------------------------------------------------------------------------
UGI INTERNATIONAL (CHINA), INC. 100% DE
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
UGI CHINA, INC. 100% DE
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ChinaGas Partners, L.P. (2) DE
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nantong LPG Company, LLC 100% DE
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
UGI SOUTHWEST CHINA DEVELOPMENT COMPANY, LLC 100% DE
- --------------------------------------------------------------------------------
HEARTH USA, INC. 100% DE
- --------------------------------------------------------------------------------
UGI PROPERTIES, INC. 100% PA
- --------------------------------------------------------------------------------
UGI UTILITIES, INC. 100%* PA
UGI DEVELOPMENT COMPANY 100% PA
- --------------------------------------------------------------------------------
UNITED VALLEY INSURANCE COMPANY 100% VT
- --------------------------------------------------------------------------------
</TABLE>
(1) AmeriGas Propane, Inc. and its subsidiary, Petrolane Incorporated, hold a
combined 58.6% interest in AmeriGas Partners, L.P. and its subsidiary
AmeriGas Propane, L.P.
(2) General partner interest held by UGI International (China), Inc.; limited
partner interest held by UGI China, Inc.
* Sole General Partner of each of AmeriGas Partners, L.P. and AmeriGas
Propane, L.P.
<PAGE> 1
Exhibit (23.1)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports dated November 13, 1998, on the consolidated financial statements and
financial statement schedules of UGI Corporation and subsidiaries for the years
ended September 30, 1998 and 1997, included (or incorporated by reference) in
UGI Corporation's Annual Report on Form 10-K for the fiscal year ended September
30, 1998, into UGI Corporation's previously filed S-8 Registration Statement No.
33-47319; Form S-3 Registration Statement No. 33-78776; and Form S-8
Registration Statement Nos. 33-61722, 333-22305 and 333-37093.
Arthur Andersen LLP
Chicago, Illinois
December 22, 1998
<PAGE> 1
Exhibit (23.2)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated November 22, 1996, on the consolidated financial statements of
AmeriGas Propane, Inc. and subsidiaries for the fiscal year ended September 30,
1996, included in UGI Corporation's Annual Report on Form 10-K for the fiscal
year ended September 30, 1998, into UGI Corporation's previously filed S-8
Registration Statement No. 33-47319; Form S-3 Registration Statement No.
33-78776; and Form S-8 Registration Statement Nos. 33-61722, 333-22305 and
333-37093.
Arthur Andersen LLP
Chicago, Illinois
December 22, 1998
<PAGE> 1
Exhibit (23.3)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
UGI Corporation on Form S-8 (File No. 33-47319), Form S-3 (File No. 33-78776),
Form S-8 (File No. 33-61722), Form S-8 (File No. 333-22305) and Form S-8 (File
No. 333-37093) of our report dated November 22, 1996, on our audit of the
consolidated financial statements and financial statement schedules of UGI
Corporation and subsidiaries for the year ended September 30, 1996, which report
is included in UGI Corporation's Annual Report on Form 10-K for the year ended
September 30, 1998.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
December 22, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT OF UGI CORPORATION AND
SUBSIDIARIES AS OF AND FOR THE YEAR ENDED SEPTEMBER 30, 1998, AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS INCLUDED IN UGI
CORPORATION'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED SEPTEMBER 30, 1998.
</LEGEND>
<CIK> 0000884614
<NAME> UGI CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 66,600
<SECURITIES> 81,800
<RECEIVABLES> 89,700
<ALLOWANCES> 7,900
<INVENTORY> 77,900
<CURRENT-ASSETS> 350,600
<PP&E> 1,464,500
<DEPRECIATION> 465,500
<TOTAL-ASSETS> 2,074,600
<CURRENT-LIABILITIES> 321,800
<BONDS> 890,800
20,000
0
<COMMON> 394,300
<OTHER-SE> (27,200)
<TOTAL-LIABILITY-AND-EQUITY> 2,074,600
<SALES> 1,439,700
<TOTAL-REVENUES> 1,439,700
<CGS> 756,700
<TOTAL-COSTS> 756,700
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 8,400
<INTEREST-EXPENSE> 84,400
<INCOME-PRETAX> 76,900
<INCOME-TAX> 34,400
<INCOME-CONTINUING> 40,300
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 40,300
<EPS-PRIMARY> 1.22
<EPS-DILUTED> 1.22
</TABLE>
