<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-11071
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.)
UGI CORPORATION
460 North Gulph Road, King of Prussia, PA
(Address of principal executive offices)
19406
(Zip Code)
(610) 337-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
At January 31, 1999, there were 32,901,463 shares of UGI Corporation
Common Stock, without par value, outstanding.
<PAGE> 2
UGI CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
PAGES
-----
Condensed Consolidated Balance Sheets as of December 31, 1998,
September 30, 1998 and December 31, 1997 1
Condensed Consolidated Statements of Income for the three
and twelve months ended December 31, 1998 and 1997 2
Condensed Consolidated Statements of Cash Flows for the three
and twelve months ended December 31, 1998 and 1997 3
Notes to Condensed Consolidated Financial Statements 4-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-21
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22-23
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
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<PAGE> 3
UGI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(Millions of dollars)
<TABLE>
<CAPTION>
December 31, September 30, December 31,
1998 1998 1997
------------- ------------- -------------
ASSETS
Current assets:
<S> <C> <C> <C>
Cash and cash equivalents $ 80.5 $ 66.6 $ 78.8
Short-term investments, at cost which approximates market value 70.2 81.8 73.7
Accounts receivable (less allowances for doubtful accounts of
$8.0, $7.9 and $11.2, respectively) 131.3 81.8 180.7
Accrued utility revenues 21.7 6.7 23.1
Inventories 70.3 77.9 105.6
Deferred income taxes 14.7 14.7 20.4
Prepaid expenses and other current assets 16.5 21.1 12.7
-------------- -------------- ----------------
Total current assets 405.2 350.6 495.0
Property, plant and equipment, at cost (less accumulated depreciation
and amortization of $479.9, $465.5 and $422.7, respectively) 1,000.3 999.0 990.0
Intangible assets (less accumulated amortization of $147.6, $141.5 and
$122.9, respectively) 626.5 630.7 673.6
Utility regulatory assets 59.3 59.3 49.0
Other assets 36.2 35.0 36.4
-------------- -------------- ----------------
Total assets $ 2,127.5 $ 2,074.6 $ 2,244.0
============== ============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt - Propane $ 6.3 $ 6.1 $ 6.8
Current maturities of long-term debt - Utilities 7.1 7.1 17.1
Current maturities of long-term debt - other 0.4 0.4 0.4
Current portion of UGI Utilities redeemable preferred stock - - 3.0
Bank loans - Propane 62.0 10.0 75.0
Bank loans - Utilities 70.2 68.4 62.7
Accounts payable 97.7 80.1 105.8
Other current liabilities 139.9 149.7 173.7
-------------- -------------- ----------------
Total current liabilities 383.6 321.8 444.5
Long-term debt - Propane 693.6 702.9 696.3
Long-term debt - Utilities 180.0 180.1 172.2
Long-term debt - other 7.7 7.8 8.1
Deferred income taxes 156.0 154.4 154.9
Other noncurrent liabilities 78.3 84.0 74.3
Commitments and contingencies
Minority interest in AmeriGas Partners 234.2 236.5 267.9
UGI Utilities redeemable preferred stock 20.0 20.0 32.2
Common stockholders' equity:
Common Stock, without par value (authorized - 100,000,000 shares;
issued - 33,198,731 shares) 394.3 394.3 393.7
Retained earnings (accumulated deficit) (11.8) (17.7) 3.1
-------------- -------------- ----------------
382.5 376.6 396.8
Treasury stock, at cost (8.4) (9.5) (3.2)
-------------- -------------- ----------------
Total common stockholders' equity 374.1 367.1 393.6
-------------- -------------- ----------------
Total liabilities and stockholders' equity $ 2,127.5 $ 2,074.6 $ 2,244.0
============== ============== ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 4
UGI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(Millions, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Twelve Months Ended
December 31, December 31,
-------------------------------- ----------------------------------
1998 1997 1998 1997
-------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C>
Revenues:
Propane $ 237.8 $ 302.9 $ 849.3 $ 1,020.6
Utilities 112.8 135.5 399.6 462.5
Energy marketing 23.1 32.8 93.3 100.5
-------------- -------------- -------------- ----------------
373.7 471.2 1,342.2 1,583.6
-------------- -------------- -------------- ----------------
Costs and expenses:
Propane cost of sales 104.5 163.2 385.1 558.9
Utilities - gas, fuel and purchased power 55.3 72.5 197.4 242.2
Other cost of sales 21.8 31.6 88.5 96.9
Operating and administrative expenses 112.7 109.0 441.4 435.6
Depreciation and amortization 21.7 21.6 87.9 86.0
Other income, net (3.8) (4.3) (12.2) (23.9)
-------------- -------------- -------------- ----------------
312.2 393.6 1,188.1 1,395.7
-------------- -------------- -------------- ----------------
Operating income 61.5 77.6 154.1 187.9
Interest expense (21.2) (21.4) (84.2) (83.4)
Minority interest in AmeriGas Partners (7.4) (11.1) (5.2) (12.7)
-------------- -------------- -------------- ----------------
Income before income taxes and
subsidiary preferred stock dividends 32.9 45.1 64.7 91.8
Income taxes (14.5) (19.6) (29.3) (40.0)
Dividends on UGI Utilities Series
Preferred Stock (0.4) (0.7) (1.9) (2.8)
-------------- -------------- -------------- ----------------
Net income $ 18.0 $ 24.8 $ 33.5 $ 49.0
============== ============== ============== ================
Earnings per share:
Basic $ 0.55 $ 0.75 $ 1.02 $ 1.49
============== ============== ============== ================
Diluted $ 0.55 $ 0.75 $ 1.01 $ 1.48
============== ============== ============== ================
Average common shares outstanding:
Basic 32.855 32.927 32.953 32.995
============== ============== ============== ================
Diluted 32.939 33.081 33.081 33.101
============== ============== ============== ================
Dividends declared per share $ 0.365 $ 0.36 $ 1.455 $ 1.435
============== ============== ============== ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
-2-
<PAGE> 5
UGI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Millions of dollars)
<TABLE>
<CAPTION>
Three Months Ended Twelve Months Ended
December 31, December 31,
------------------------------ ----------------------------
1998 1997 1998 1997
------------ -------------- ------------ ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 18.0 $ 24.8 $ 33.5 $ 49.0
Reconcile to net cash provided (used) by operating activities:
Depreciation and amortization 21.7 21.6 87.9 86.0
Minority interest in AmeriGas Partners 7.4 11.1 5.2 12.7
Deferred income taxes, net 1.7 0.9 10.9 (3.1)
Other, net (4.8) (0.1) 0.2 4.5
------------- --------------- ------------- -----------
44.0 58.3 137.7 149.1
Net change in:
Accounts receivable and accrued utility revenues (66.2) (87.6) 43.4 25.2
Inventories and prepaid propane purchases 8.7 11.9 35.8 17.1
Deferred fuel costs - 2.4 (7.2) 4.4
Accounts payable 17.8 2.2 (7.9) (31.5)
Other current assets and liabilities (7.4) (2.1) (11.5) 8.6
------------- --------------- ------------- -----------
Net cash provided (used) by operating activities (3.1) (14.9) 190.3 172.9
------------- --------------- ------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment (16.2) (15.6) (69.8) (67.3)
Net proceeds from disposals of assets 0.9 3.1 3.7 16.8
Acquisitions of businesses, net of cash acquired (2.4) (1.4) (9.1) (12.1)
Short-term investments (increase) decrease 11.6 (8.4) 3.6 (41.4)
Other, net - (3.7) 1.4 (6.4)
------------- --------------- ------------- -----------
Net cash used by investing activities (6.1) (26.0) (70.2) (110.4)
------------- --------------- ------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends on Common Stock (12.0) (11.9) (47.7) (47.3)
Distributions on Partnership public Common Units (9.7) (9.7) (39.0) (38.8)
Issuance of long-term debt - 33.0 25.0 54.2
Repayment of long-term debt (10.0) (1.8) (30.6) (21.8)
Propane bank loans increase (decrease) 52.0 47.0 (13.0) (2.0)
UGI Utilities bank loans increase (decrease) 1.8 (4.3) 7.5 (6.6)
Issuance of Common Stock 1.0 4.9 4.6 15.3
Repurchases of Common Stock - (1.5) (9.7) (18.2)
Redemption of UGI Utilities Series Preferred Stock - - (15.5) -
------------- --------------- ------------- -----------
Net cash provided (used) by financing activities 23.1 55.7 (118.4) (65.2)
------------- --------------- ------------- -----------
Cash and cash equivalents increase (decrease) $ 13.9 $ 14.8 $ 1.7 $ (2.7)
============= =============== ============= ===========
Cash and cash equivalents:
End of period $ 80.5 $ 78.8 $ 80.5 $ 78.8
Beginning of period 66.6 64.0 78.8 81.5
------------- --------------- ------------- -----------
Increase (decrease) $ 13.9 $ 14.8 $ 1.7 $ (2.7)
============= =============== ============= ===========
</TABLE>
During the twelve months ended December 31, 1998 and 1997, UGI Utilities, Inc.
paid cash dividends to UGI of $10.0 and $36.7, respectively. During the twelve
months ended December 31, 1998 and 1997, AmeriGas, Inc. paid cash dividends to
UGI of $50.8 and $56.2, respectively. During those same periods, UGI paid cash
dividends to holders of Common Stock of $47.7 and $47.3, respectively. The
ability of UGI to declare and pay cash dividends on its Common Stock is
dependent upon its cash balances and the receipt of cash dividends from its
wholly owned subsidiaries, principally UGI Utilities, Inc. and AmeriGas, Inc.
AmeriGas's ability to pay dividends is dependent upon its receipt of Partnership
distributions.
The accompanying notes are an integral part of these financial statements.
-3-
<PAGE> 6
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------------------
(unaudited)
(Millions of dollars, except per share amounts)
1. BASIS OF PRESENTATION
UGI Corporation (UGI) is a holding company with three principal
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. We refer to AmeriGas Partners and the Operating
Partnership together as "the Partnership." We also conduct an energy
marketing business principally through our second-tier subsidiary,
UGI Energy Services, Inc., a wholly owned subsidiary of UGI
Enterprises, Inc. (Enterprises). Through other subsidiaries,
Enterprises is a participant in propane joint-venture projects in
Romania and China.
Our condensed consolidated financial statements include the accounts
of UGI and its majority-owned subsidiaries, together referred to as
"we" or "the Company." We eliminate all significant intercompany
accounts and transactions when we consolidate. We report the public
unitholders' interest in AmeriGas Partners' results of operations
and net assets as minority interest in the condensed consolidated
statements of income and balance sheets. We have reclassified
certain prior-period balances to conform with the current period
presentation.
The accompanying condensed consolidated financial statements are
unaudited and have been prepared in accordance with the rules and
regulations of the U.S. Securities and Exchange Commission. They
include all adjustments which we consider necessary for a fair
statement of the results for the interim periods presented. Such
adjustments consisted only of normal recurring items unless
otherwise disclosed. These financial statements should be read in
conjunction with the financial statements and the related notes
included in our Annual Report on Form 10-K for the year ended
September 30, 1998. Due to the seasonal nature of our businesses,
the results of operations for interim periods are not necessarily
indicative of the results to be expected for a full year.
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<PAGE> 7
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------------------------
(unaudited)
(Millions of dollars, except per share amounts)
Management makes estimates and assumptions when preparing financial
statements in conformity with generally accepted accounting
principles. These estimates and assumptions affect the reported
amounts of assets and liabilities, revenues and expenses, as well as
the disclosure of contingent assets and liabilities. Actual results
could differ from these estimates.
During the quarter ended December 31, 1998, we adopted Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income" (SFAS 130). SFAS 130 establishes standards for
reporting and displaying comprehensive income and its components in
financial statements. Comprehensive income includes net income and
all other nonowner changes in equity. The Company's comprehensive
income was not materially different from its net income for all
periods presented.
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<PAGE> 8
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------------------------
(unaudited)
(Millions of dollars, except per share amounts)
2. SEGMENT INFORMATION
During the quarter ended December 31, 1998, we adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related
Information" (SFAS 131). SFAS 131 establishes standards for
reporting information about operating segments as well as related
disclosures about products and services, geographic areas, and major
customers. In determining our reportable segments under the
provisions of SFAS 131, we examined the way we organize our
businesses for making operating decisions and assessing business
performance. Based upon the guidance provided by SFAS 131, we have
determined that the Company has four principal operating segments:
(1) a propane business which distributes propane and related
equipment and supplies to retail customers from locations in 46
states; (2) a gas utility operating in eastern Pennsylvania; (3) an
electric utility operation which generates and distributes
electricity to customers in two northeastern Pennsylvania counties;
and (4) an energy marketing business principally involved in
arranging the supply and transportation of natural gas to customers
located primarily in the Middle Atlantic states.
Although Electric Utility's June 1998 Restructuring Order provides
for the unbundling of prices for electric generation, transmission
and distribution services, we currently manage and evaluate our
electric generation, transmission and distribution operations
together. Accordingly, these operations are combined for segment
reporting purposes.
The accounting policies of the four segments are the same as those
described in the Significant Accounting Policies note contained in
our Annual Report on Form 10-K for the year ended September 30,
1998. We evaluate each segment's performance principally based on
its earnings before interest expense, income taxes, depreciation and
amortization (EBITDA). Although EBITDA is used internally to
evaluate segment performance, it should not be considered as an
alternative to net income (as an indicator of operating performance)
or as an alternative to cash flow (as a measure of liquidity or
ability to service debt obligations) and is not a measure of
performance or financial condition under generally accepted
accounting principles.
No single customer represents more than 5% of consolidated revenues.
In addition, virtually all of our reportable segments' revenues are
derived from sources within the U. S., and virtually all of our
reportable segments' long-lived assets are located in the U.S.
Although the Company holds investments in foreign joint-venture
projects, such investments are not significant. Financial
information by business segment follows:
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<PAGE> 9
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------------------------
(unaudited)
(Millions of dollars, except per share amounts)
2. SEGMENT INFORMATION (CONTINUED)
THREE MONTHS ENDED DECEMBER 31, 1998:
<TABLE>
<CAPTION>
Reportable Segments
Inter- --------------------------------------------
segment Gas Electric Energy All
Total Elims. Propane utility utility marketing Corporate other
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 373.7 $ ( 0.5) $ 237.8 $ 94.6 $ 18.2 $23.1 $ - $ 0.5
Segment profit (loss):
EBITDA $ 83.2 $ 2.5 $ 50.8 $ 26.2 $ 4.7 $ 0.7 $ (0.9) $ (0.8)
Depreciation and amortization (21.7) 0.0 (16.1) (4.6) (0.8) (0.1) - (0.1)
------------------------------------------------------------------------------------------
Operating income (loss) 61.5 2.5 34.7 21.6 3.9 0.6 (0.9) (0.9)
Interest expense (21.2) - (16.6) (3.8) (0.6) - - (0.2)
Minority interest (7.4) - (7.4) - - - - -
------------------------------------------------------------------------------------------
Income (loss) before income taxes $ 32.9 $ 2.5 $ 10.7 $ 17.8 $ 3.3 $ 0.6 $ (0.9) $ ( 1.1)
==========================================================================================
Segment assets (at period end) $2,127.5 $ ( 19.7) $1,264.6 $ 619.9 $ 96.8 $15.7 $125.6 $ 24.6
==========================================================================================
Investment in equity method investees $ 1.8 $ - $ - $ - $ - $ - $ - $ 1.8
==========================================================================================
</TABLE>
THREE MONTHS ENDED DECEMBER 31, 1997:
<TABLE>
<CAPTION>
Reportable Segments
Inter- ----------------------------------------------
segment Gas Electric Energy All
Total Elims. Propane utility utility marketing Corporate other
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 471.2 $ (0.8) $ 302.9 $ 116.9 $ 18.6 $ 32.8 $ - $ 0.8
Segment profit (loss):
EBITDA $ 99.2 $ 2.6 $ 60.1 $ 31.8 $ 3.8 $ 0.6 $ (1.2) $ 1.5
Depreciation and amortization (21.6) - (16.1) (4.4) (0.9) (0.1) - (0.1)
--------------------------------------------------------------------------------------------
Operating income (loss) 77.6 2.6 44.0 27.4 2.9 0.5 $ (1.2) 1.4
Interest expense (21.4) - (17.0) (3.7) (0.6) - - (0.1)
Minority interest (11.1) - (11.1) - - - - -
--------------------------------------------------------------------------------------------
Income (loss) before income taxes $ 45.1 $ 2.6 $ 15.9 $ 23.7 $ 2.3 $ 0.5 $ (1.2) $ 1.3
============================================================================================
Segment assets (at period end) $2,244.0 $ (19.0) $1,393.9 $ 620.9 $ 86.6 $ 23.0 $ 116.4 $ 22.2
============================================================================================
Investment in equity method investees $ 0.7 $ - $ - $ - $ - $ - $ - $ 0.7
============================================================================================
</TABLE>
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<PAGE> 10
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------------------------
(unaudited)
(Millions of dollars, except per share amounts)
2. SEGMENT INFORMATION (CONTINUED)
Twelve Months Ended December 31, 1998:
<TABLE>
<CAPTION>
Reportable Segments
-----------------------------------------
Inter-
segment Gas Electric Energy All
Total Elims. Propane utility utility marketing Corporate other
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $1,342.2 $ (2.3) $849.3 $327.9 $71.7 $93.3 $ - $ 2.3
Segment profit (loss):
EBITDA $ 242.0 $ 10.6 $ 144.0 $ 77.4 $14.5 $ 2.3 $ ( 4.6) $ ( 2.2)
Depreciation and amortization (87.9) - (65.4) (18.4) (3.8) (0.2) - (0.1)
--------------------------------------------------------------------------------------
Operating income (loss) 154.1 10.6 78.6 59.0 10.7 2.1 (4.6) (2.3)
Interest expense (84.2) - (65.7) (15.3) (2.4) - - (0.8)
Minority interest (5.2) - (5.2) - - - - -
--------------------------------------------------------------------------------------
Income (loss) before income taxes $ 64.7 $ 10.6 $ 7.7 $ 43.7 $ 8.3 $ 2.1 $ (4.6) $ (3.1)
======================================================================================
Segment assets (at period end) $2,127.5 $ (19.7) $1,264.6 $619.9 $96.8 $15.7 $ 125.6 $ 24.6
======================================================================================
Investment in equity method investees $ 1.8 $ - $ - $ - $ - $ - $ - $ 1.8
======================================================================================
</TABLE>
Twelve Months Ended December 31, 1997:
<TABLE>
<CAPTION>
Reportable Segments
------------------------------------------
Inter-
segment Gas Electric Energy All
Total Elims. Propane utility utility marketing Corporate other
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $1,583.6 $ ( 3.4) $1,020.6 $390.2 $72.3 $100.5 $ - $ 3.4
Segment profit (loss):
EBITDA $ 273.9 $ 12.1 $ 161.2 $ 86.8 $14.1 $ 1.5 $ ( 7.6) $ 5.8
Depreciation and amortization (86.0) - (64.4) (16.9) (4.2) (0.1) (0.1) (0.3)
----------------------------------------------------------------------------------------
Operating income (loss) 187.9 12.1 96.8 69.9 9.9 1.4 (7.7) 5.5
Interest expense (83.4) - (66.0) (14.3) (2.5) - - (0.6)
Minority interest (12.7) - (12.7) - - - - -
----------------------------------------------------------------------------------------
Income (loss) before income taxes $ 91.8 $ 12.1 $ 18.1 $ 55.6 $ 7.4 $ 1.4 $ ( 7.7) $ 4.9
========================================================================================
Segment assets (at period end) $2,244.0 $ ( 19.0) $1,393.9 $620.9 $86.6 $ 23.0 $ 116.4 $22.2
========================================================================================
Investment in equity method investees $ 0.7 $ - $ - $ - $ - $ - $ - $ 0.7
========================================================================================
</TABLE>
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<PAGE> 11
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------------------------
(unaudited)
(Millions of dollars, except per share amounts)
3. COMMITMENTS AND CONTINGENCIES
The Partnership has succeeded to certain lease guarantee obligations
of Petrolane Incorporated (Petrolane), a predecessor company of the
Partnership, relating to Petrolane's divestiture of nonpropane
operations before its 1989 acquisition by QFB Partners. Lease
payments under these leases total approximately $51 million at
December 31, 1998. 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 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 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
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<PAGE> 12
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------------------------
(unaudited)
(Millions of dollars, except per share amounts)
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 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.
-10-
<PAGE> 13
UGI CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
ANALYSIS OF RESULTS OF OPERATIONS
The following analyses compare our results of operations for (1) the three
months ended December 31, 1998 (1998 three-month period) with the three months
ended December 31, 1997 (1997 three-month period) and (2) the twelve months
ended December 31, 1998 (1998 twelve-month period) with the twelve months ended
December 31, 1997 (1997 twelve-month period). Our results of operations should
be read in conjunction with the segment information included in Note 2 to
Condensed Consolidated Financial Statements. Although the adoption of SFAS 131
did not change the operating segments we disclose, certain of our segment's
operating results now include billed UGI corporate overhead costs.
1998 THREE-MONTH PERIOD COMPARED WITH 1997 THREE-MONTH PERIOD
PROPANE
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
Three Months Ended December 31, 1998 1997 Decrease
-------------------------------------------------------------------------------------------------------------------------
(Millions of dollars)
<S> <C> <C> <C> <C>
Retail gallons sold - millions 220.7 248.6 (27.9) (11.2)%
Revenues $ 237.8 $ 302.9 $ (65.1) (21.5)%
Total margin $ 133.3 $ 139.7 $ (6.4) (4.6)%
Operating income $ 34.7 $ 44.0 $ (9.3) (21.1)%
EBITDA $ 50.8 $ 60.1 $ (9.3) (15.5)%
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
Retail volumes sold during the 1998 three-month period were lower than the
prior-year period due primarily to significantly warmer weather. Based upon
degree day information obtained from the National Oceanic and Atmospheric
Administration (NOAA) for 335 airports in the continental U.S., weather during
the three months ended December 31, 1998 was 11.0% warmer than normal and 12.2%
warmer than the same period last year. Although weather-sensitive heating
volumes declined the most, agricultural volumes were also down as a result of
the warmer than normal weather and a dry autumn which reduced demand for crop
drying. Wholesale volumes of propane sold were lower in the 1998 three-month
period due to reduced low margin sales of storage inventories and the effects of
the warmer weather.
Total revenues from retail propane sales decreased $46.5 million to $193.7
million during the 1998 three-month period reflecting (1) a $27.0 million
decrease as a result of the lower volumes sold and (2) a $19.5 million decrease
from a reduction in average selling prices. Wholesale revenues declined $18.9
million to $18.4 million during the 1998 three-month period due to (1) a $15.6
million reduction from the lower volumes sold and (2) a $3.3 million decrease
from lower average selling prices. The lower average retail and wholesale
selling prices were due to significantly lower propane product costs.
-11-
<PAGE> 14
UGI CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
---------------------------------------------------------
Total margin decreased $6.4 million in the 1998 three-month period as a result
of the lower retail volumes sold. The decline in total margin resulting from the
lower sales was partially offset by higher average retail unit margins. The
higher average retail unit margins reflect lower propane product costs during
the three months ended December 31, 1998.
The decrease in EBITDA and operating income in the 1998 three-month period
primarily reflects (1) the decline in total margin and (2) modestly higher
operating expenses. Operating expenses of the Partnership were $83.6 million
during the three months ended December 31, 1998 compared with $80.9 million in
the same period last year. The increase in operating expenses principally
resulted from (1) higher compensation and benefit expenses and (2) higher
vehicle repair and lease expense.
UTILITIES
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
Increase
Three Months Ended December 31, 1998 1997 (Decrease)
--------------------------------------------------------------------------------------------------------------------------
(Millions of dollars)
<S> <C> <C> <C> <C>
GAS UTILITY:
Natural gas system throughput - bcf 20.3 22.7 (2.4) (10.6)%
Degree days - % warmer than normal (17.1) (1.6) - -
Revenues $ 94.6 $ 116.9 $ (22.3) (19.1)%
Total margin (a) $ 43.2 $ 48.6 $ (5.4) (11.1)%
Operating income $ 21.6 $ 27.4 $ (5.8) (21.2)%
EBITDA $ 26.2 $ 31.8 $ (5.6) (17.6)%
ELECTRIC UTILITY:
Electric sales - gwh 223.2 227.8 (4.6) (2.0)%
Revenues $ 18.2 $ 18.6 $ (.4) (2.2)%
Total margin (a) $ 9.7 $ 8.9 $ .8 9.0%
Operating income $ 3.9 $ 2.9 $ 1.0 34.5%
EBITDA $ 4.7 $ 3.8 $ .9 23.7%
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
bcf - billions of cubic feet. gwh - millions of kilowatt hours.
(a) Gas and Electric utilities' total margin represents total revenues less
cost of sales and revenue-related taxes.
GAS UTILITY. Weather in Gas Utility's service territory was 17.1% warmer than
normal and 15.8% warmer than in the prior-year period. As a result of the warmer
temperatures, volumes we sold to our firm- residential, commercial and small
industrial customers (we refer to these customers as our "core market") declined
20% (2.1 bcf). The warmer weather also impacted, to a
-12-
<PAGE> 15
UGI CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
---------------------------------------------------------
much lesser extent, volumes we sold or transported to our large industrial and
commercial customers.
The decrease in Gas Utility's revenues in the 1998 three-month period is due to
(1) the decline in core market volumes and (2) lower off-system sales. Gas
Utility's cost of gas decreased $15.9 million reflecting (1) the previously
mentioned decrease in volumes sold to our core market customers and (2) the
lower off-system sales.
The decrease in Gas Utility's total margin principally resulted from (1) a $5.0
million decline in margin from core market customers and (2) a $.5 million
decline in margin from interruptible customers. The decline in core market
margin reflects the lower volumes sold while the decline in interruptible margin
was the result of a less favorable difference between natural gas prices and oil
prices.
Gas Utility operating income and EBITDA decreased in the 1998 three-month period
reflecting the lower total margin and slightly higher operating expenses. Total
operating expenses, excluding revenue-related taxes, were slightly higher in the
1998 three-month period because the 1997 three-month period expenses are net of
$1.6 million of income from an insurance recovery.
ELECTRIC UTILITY. Total electric sales were 2.0% lower in the 1998 three-month
period reflecting the impact of warmer weather. Temperatures were 9.1% warmer
than normal in 1998 compared to temperatures that were 7.3% colder than normal
in 1997. Electric Utility revenues decreased $.4 million in the 1998 three-month
period primarily due to the lower sales.
Electric Utility cost of sales decreased $1.3 million in the 1998 three-month
period reflecting (1) lower power costs and (2) the lower sales. In accordance
with the June 1998 Restructuring Order issued by the Pennsylvania Public Utility
Commission (PUC), our base rates reflect a fixed amount for electric generation
costs and we no longer recover a separate Energy Cost Rate (ECR). As a result,
we no longer defer the difference between our actual costs of electricity and
the amount of such costs included in our rates.
Electric Utility's total margin increased $.8 million in the 1998 three-month
period, notwithstanding the lower sales, reflecting lower power costs. The lower
power costs resulted in large part from lower cost power supply agreements.
Operating income and EBITDA increased principally as a result of the higher
total margin.
-13-
<PAGE> 16
UGI CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
---------------------------------------------------------
ENERGY MARKETING
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Increase
Three Months Ended December 31, 1998 1997 (Decrease)
- ----------------------------------------------------------------------------------------------------------------------
(Millions of dollars)
<S> <C> <C> <C> <C>
Revenues $ 23.1 $ 32.8 $ (9.7) (29.6)%
Total margin $ 1.3 $ 1.2 $ .1 8.3%
Operating income $ .6 $ .5 $ .1 20.0%
EBITDA $ .7 $ .6 $ .1 16.7%
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Total revenues from energy marketing in the 1998 three-month period decreased as
a result of lower average gas prices and a reduction in billed volumes. The
decrease in billed volumes was due principally to the effects of warmer weather
during the three months ended December 31, 1998. Total margin for the 1998
three-month period increased slightly from the 1997 three-month period.
Operating income and EBITDA from energy marketing were comparable with the
prior-year period amounts.
CORPORATE AND OTHER
Corporate operating loss, net, which consists of corporate overhead expenses net
of interest income, was $(.9) million during the 1998 three-month period
compared with $(1.2) million during the 1997 three-month period. The net
decrease in corporate operating loss is principally due to higher interest
income.
Other operating loss was $(.9) million in the 1998 three-month period compared
with operating income of $1.4 million in the 1997 three-month period. The 1998
three-month period includes higher development costs associated with
Enterprises' domestic and international new business activities. Operating
income in the 1997 three-month period includes $1.2 million from the sale of UTI
Energy Corp. (UTI) common stock.
-14-
<PAGE> 17
UGI CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
---------------------------------------------------------
1998 TWELVE-MONTH PERIOD COMPARED WITH 1997 TWELVE-MONTH PERIOD
PROPANE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Increase
Twelve Months Ended December 31, 1998 1997 (Decrease)
- ----------------------------------------------------------------------------------------------------------------------
(Millions of dollars)
<S> <C> <C> <C> <C>
Retail gallons sold - millions 757.4 804.3 (46.9) (5.8)%
Revenues $ 849.3 $ 1,020.6 $ (171.3) (16.8)%
Total margin $ 464.2 $ 461.7 $ 2.5 .5%
Operating income $ 78.6 $ 96.8 $ (18.2) (18.8)%
EBITDA $ 144.0 $ 161.2 $ (17.2) (10.7)%
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
The Partnership sold fewer retail gallons of propane in the 1998 twelve-month
period due to significantly warmer temperatures during the peak heating-season
months (comprising January through March and November through December). Based
upon degree day information provided by NOAA for 335 airports in the continental
U.S., temperatures during these peak heating-season months in the 1998
twelve-month period were 13.1% warmer than normal and 9.4% warmer than the same
period last year. Wholesale volumes of propane sold were lower in the 1998
twelve-month period due to reduced sales of storage inventories.
Total revenues from retail propane sales declined $122.9 million to $699.6
million in the twelve months ended December 31, 1998. The decrease reflects (1)
a $74.9 million decrease as a result of lower average retail propane selling
prices and (2) a $48.0 million reduction as a result of the lower volumes sold.
Wholesale revenues decreased $47.7 million to $69.6 million in the 1998
twelve-month period due to (1) a $31.4 million decrease resulting from the lower
volumes sold and (2) a $16.3 million decline from lower average selling prices.
The lower average retail and wholesale selling prices reflect significantly
lower propane product costs.
Total margin increased $2.5 million in the 1998 twelve-month period,
notwithstanding the decline in retail volumes, primarily due to higher average
retail unit margins. Average retail unit margins were greater during the 1998
twelve-month period principally as a result of the lower propane product costs.
Although total margin during the 1998 twelve-month period was greater than the
prior-year period, EBITDA and operating income declined primarily due to (1)
lower other income and (2) higher operating and administrative expenses. The
Partnership's other income in the 1998 twelve-month period includes a $4.0
million loss from two interest rate protection agreements. The Partnership
entered into these agreements to reduce interest rate exposure associated with
an anticipated refinancing of the Operating Partnership's Acquisition Facility
in late fiscal 1998.
-15-
<PAGE> 18
UGI CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
---------------------------------------------------------
When the Partnership postponed the refinancing due to volatility in the
corporate debt markets in the fourth quarter of fiscal 1998, we recorded a loss
on the interest rate protection agreements because they no longer qualified for
hedge accounting treatment. The Partnership's other income in the 1997
twelve-month period includes (1) $4.7 million of income from the sale of the
Partnership's 50% interest in Atlantic Energy, Inc., (2) higher customer finance
charges and (3) higher interest income. Operating and administrative expenses of
the Partnership were $322.9 million in the 1998 twelve-month period compared
with $313.7 million in the same period last year. The increase in operating
expenses is primarily due to (1) incremental expenses associated with
acquisitions and new business activities (including start-up locations and our
PPX Prefilled Propane Xchange(R) program) and (2) higher compensation and
benefit expenses.
UTILITIES
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
Increase
Twelve Months Ended December 31, 1998 1997 (Decrease)
---------------------------------------------------------------------------------------------------------------------------
(Millions of dollars)
<S> <C> <C> <C> <C>
GAS UTILITY:
Natural gas system throughput - bcf 72.6 78.3 (5.7) (7.3)%
Degree days - % warmer than normal (21.8) (4.2) - -
Revenues $ 327.9 $ 390.2 $ (62.3) (16.0)%
Total margin $ 151.8 $ 166.7 $ (14.9) (8.9)%
Operating income $ 59.0 $ 69.9 $ (10.9) (15.6)%
EBITDA $ 77.4 $ 86.8 $ (9.4) (10.8)%
ELECTRIC UTILITY:
Electric sales - gwh 871.8 872.5 (.7) (.1)%
Revenues $ 71.7 $ 72.3 $ (.6) (.8)%
Total margin $ 34.8 $ 35.3 $ (.5) (1.4)%
Operating income $ 10.7 $ 9.9 $ .8 8.1%
EBITDA $ 14.5 $ 14.1 $ .4 2.8%
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
GAS UTILITY. Weather in Gas Utility's service territory was 21.8% warmer than
normal during the 1998 twelve-month period compared to weather that was 4.2%
warmer than normal in the prior-year period. The decrease in total system
throughput primarily reflects a 20% (6.8 bcf) decline in core market volumes
partially offset by higher interruptible delivery service volumes.
The decrease in Gas Utility's revenues reflects the decline in core market
volumes resulting from the warmer weather as well as a reduction in revenues
from off-system sales. Cost of gas sold declined $44.5 million due to the lower
core market and off-system sales.
-16-
<PAGE> 19
UGI CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
---------------------------------------------------------
The decrease in Gas Utility's total margin principally reflects a $15.1 million
decline in margin from our core market customers. Operating income and EBITDA in
the 1998 twelve-month period declined reflecting the $14.9 million decrease in
total margin partially offset by (1) lower operating expenses and (2) a $1.1
million increase in other income. Gas Utility's operating expenses, excluding
revenue-related taxes, were $2.9 million lower in the 1998 twelve-month period
reflecting (1) the absence of charges for environmental matters and (2) lower
distribution system maintenance expenditures due in part to the mild
heating-season weather.
ELECTRIC UTILITY. Total electric sales during the 1998 twelve-month period were
comparable with the prior year as the effects of warmer heating-season weather
were mitigated by the warmer summer's effect on electricity used for air
conditioning and an increase in number of customers. Electric Utility revenues
declined $.7 million during the 1998 twelve-month period primarily due to the
impact of Electric Utility's Customer Choice Act Pilot Program which began
November 1, 1997. Because pilot program participants buy their electricity from
other suppliers, we record the revenues for distributing the electricity but we
do not record revenues (or costs) related to the electricity itself.
Electric Utility cost of sales decreased $.2 million principally reflecting the
impact of the pilot program. Electric Utility's total margin decreased $.5
million in the 1998 twelve-month period reflecting the lower sales and slightly
higher average power costs. The increase in operating income and EBITDA,
notwithstanding the lower total margin, reflects higher other income.
ENERGY MARKETING
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Increase
Twelve Months Ended December 31, 1998 1997 (Decrease)
- ---------------------------------------------------------------------------------------------------------------------
(Millions of dollars)
<S> <C> <C> <C> <C>
Revenues $ 93.3 $ 100.5 $ (7.2) (7.2)%
Total margin $ 4.8 $ 3.6 $ 1.2 33.3%
Operating income $ 2.1 $ 1.4 $ .7 50.0%
EBITDA $ 2.3 $ 1.5 $ .8 53.3%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Total revenues from energy marketing in the 1998 twelve-month period decreased
$7.2 million compared with revenues during the prior-year period primarily as a
result of lower average selling prices. Total margin was higher in the 1998
twelve-month period compared with the 1997 twelve-month period principally due
to higher average unit margins. Unit margins in the 1997 twelve-month period
were negatively impacted by the warm weather's effect on the value of pipeline
capacity. Operating income and EBITDA increased in the 1998 twelve-month period
as the benefit of the higher total margin in 1998 was partially offset by an
increase in operating expenses.
-17-
<PAGE> 20
UGI CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
---------------------------------------------------------
CORPORATE AND OTHER
Corporate operating loss, net, was $(4.6) million in the 1998 twelve-month
period compared with $(7.7) million in the same period last year. The decrease
in corporate operating loss reflects higher interest income on temporary cash
investments and lower corporate expenses.
Other operating loss was $(2.3) million in the 1998 twelve-month period while
other operating income was $5.5 million in the prior-year period. The 1998
twelve-month period includes higher expenses associated with Enterprises' new
business activities. The 1997 twelve-month period operating income includes $4.7
million in gains from the sale of UTI common stock.
FINANCIAL CONDITION AND LIQUIDITY
FINANCIAL CONDITION
The Company's debt outstanding totaled $1,027.3 million at December 31, 1998
compared with $982.8 million at September 30, 1998. The increase in debt
principally reflects a $43 million seasonal increase in net borrowings under the
Operating Partnership's Bank Credit Agreement.
During the three months ended December 31, 1998, the Partnership declared and
paid the minimum quarterly distribution of $.55 (the "MQD") on all limited
partner units outstanding and the distribution on the general partner interests
for the quarter ended September 30, 1998. The MQD for the quarter ended
December 31, 1998 will be paid on February 18, 1999 to holders of record on
February 10, 1999 of all Common and Subordinated units. The ability of the
Partnership to continue 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
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, provided that 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
-18-
<PAGE> 21
UGI CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
---------------------------------------------------------
reasonably possible that 9,891,074 Subordinated Units will convert into Common
Units during fiscal 1999.
CASH FLOWS
Our consolidated cash and short-term investments totaled $150.7 million at
December 31, 1998 compared with $148.4 million at September 30, 1998. These
amounts include $117.3 million and $120.5 million, respectively, of cash and
short-term investments held by UGI. Our cash flows are seasonal and are
generally greatest during the second and third fiscal quarters when customers
pay bills incurred during the heating season and are typically at their lowest
levels during the first and fourth fiscal quarters. Accordingly, cash flows from
operations during the three months ended December 31, 1998 are not necessarily
indicative of the cash flows to be expected for a full year.
OPERATING ACTIVITIES. Cash used by operating activities during the three months
ended December 31, 1998 totaled $(3.1) million compared with $(14.9) million
during the prior-year period. The decrease in cash used for operating activities
reflects the warmer weather's impact on cash needed to fund operating working
capital. Changes in operating working capital during the three months ended
December 31, 1998 required $47.1 million of operating cash flow while changes in
operating working capital during the three months ended December 31, 1997
required $73.2 million of operating cash flow. Cash flow from operating
activities before changes in operating working capital was $44.0 million in the
three months ended December 31, 1998 compared with $58.3 million in the
prior-year period. The decrease principally reflects a reduction in the
Partnership's and UGI Utilities' operating results.
INVESTING ACTIVITIES. Cash used by investing activities during the three months
ended December 31, 1998 totaled $(6.1) million compared with $(26.0) million in
the prior-year period. Cash from changes in short-term investments was $11.6
million in the 1998 three-month period compared with $(8.4) million in the prior
year period. During the three months ended December 31, 1997, cash used for
other investing activities included $3.7 million of loans issued to employees in
conjunction with our executive stock ownership policy.
FINANCING ACTIVITIES. During the three months ended December 31, 1998 and 1997,
we paid cash dividends on Common Stock of $12.0 million and $11.9 million,
respectively, and the Partnership paid the full MQD on all publicly held Common
Units (as well as the Common and Subordinated units we own.) During the three
months ended December 31, 1998 and 1997, the Company received proceeds of $1.0
million and $4.9 million, respectively, from issuances of its Common Stock in
conjunction with dividend reinvestment and employee plans.
During the three months ended December 31, 1998, we made $10.0 million of
long-term debt repayments principally reflecting prepayments of the Operating
Partnership's Acquisition Facility. During the three months ended December 31,
1997, we issued $33 million of long-term debt including
-19-
<PAGE> 22
UGI CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
---------------------------------------------------------
(1) $20 million of UGI Utilities' medium-term notes and (2) $13 million under
the Partnership's Acquisition Facility.
During the three months ended December 31, 1998, the Operating Partnership
borrowed $52 million under its Revolving Credit Facility principally to meet
seasonal working capital needs and to fund the Partnership's distribution
payments. During the 1997 three-month period, the Operating Partnership borrowed
$47 million under its Revolving Credit Facility and $13 million under its
Acquisition Facility.
YEAR 2000 MATTERS
The Year 2000 (Y2K) issue is a result of computer programs being written using
two digits (rather than four) to identify and process a year in a date field.
Computer programs, computer-controlled systems and equipment with embedded
software may recognize date fields using "00" as the year 1900 rather than the
year 2000. If uncorrected, miscalculations and possible computer-based system
failures could result which might disrupt business operations. We are
designating the following information as our "Year 2000 Readiness Disclosure."
Recognizing the potential business consequences of the Y2K issue, we are using
internal and external resources to conduct a detailed assessment of critical,
date sensitive computer-based systems and to identify and modify systems which
are not Y2K compliant. The scope of such efforts includes (1) our information
technology (IT) systems such as computer hardware and software we use in the
operation of our business; (2) non-IT systems that contain embedded computer
technology such as micro-controllers contained in various equipment, 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 or,
alternatively, the utility must file contingency plans with the PUC by that
date. 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 or replaced all of its critical IT
systems. Gas Utility and Electric Utility have successfully modified and unit
tested all of their critical IT and non-IT systems which are not being replaced.
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 except for Electric Utility's System Control and Data
Acquisition (SCADA) system which is scheduled for replacement with a Y2K
compliant system in April 1999. We began integrated testing of our Gas Utility
and Electric Utility IT systems in February 1999. We currently anticipate that
any required modification of AmeriGas Partners' or UGI Utilities' critical
non-IT systems will be
-20-
<PAGE> 23
UGI CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
---------------------------------------------------------
completed by March 31, 1999 except for the Electric Utility SCADA system which
will be Y2K compliant upon its replacement and testing in April 1999.
In addition to internal Y2K remediation activities, we are in the process of
assessing the readiness of our key suppliers and third-party providers. Although
none of our products or services are directly date sensitive, as a 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 backup 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.
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<PAGE> 24
UGI CORPORATION AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 nonregulated
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 rates of interest. 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 is limited commodity price
risk associated with Gas Utility due to the current rate-making.
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
aversely affected.
At December 31, 1998, the impact on the fair value of the Company's market risk
sensitive instruments resulting from (1) a 5 cent a gallon decline in the market
price of propane, (2) a 25
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<PAGE> 25
UGI CORPORATION AND SUBSIDIARIES
cent per dekatherm decline in the market price of natural gas, and (3) a 50
basis point decline in interest rates on U.S. treasury notes, would not be
materially different than that reported in the Company's 1998 Annual Report on
Form 10-K. 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.
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits:
27 Financial Data Schedule
(b) The Company did not file any Current Reports on Form 8-K
during the fiscal quarter ended December 31, 1998.
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<PAGE> 26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UGI Corporation
--------------------
(Registrant)
Date: February 11, 1999 By: A. J. Mendicino
- ------------------------ ---------------------------------------------
A. J. Mendicino, Vice President - Finance and
Chief Financial Officer
Date: February 11, 1999 By: M. J. Cuzzolina
- ------------------------ ------------------------------------------------
M. J. Cuzzolina, Vice President - Accounting and
Financial Control (Principal Accounting Officer)
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<PAGE> 27
UGI CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
condensed consolidated balance sheet and income statement of UGI Corporation and
subsidiaries as of and for the three months ended December 31, 1998 and is
qualified in its entirety by reference to such financial statements included in
UGI Corporation's quarterly report on Form 10-Q for the quarter ended
December 31, 1998.
</LEGEND>
<CIK> 0000884614
<NAME> UGI CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 80,500
<SECURITIES> 70,200
<RECEIVABLES> 161,000
<ALLOWANCES> 8,000
<INVENTORY> 70,300
<CURRENT-ASSETS> 405,200
<PP&E> 1,480,200
<DEPRECIATION> 479,900
<TOTAL-ASSETS> 2,127,500
<CURRENT-LIABILITIES> 383,600
<BONDS> 881,300
20,000
0
<COMMON> 394,300
<OTHER-SE> (20,200)
<TOTAL-LIABILITY-AND-EQUITY> 2,127,500
<SALES> 373,700
<TOTAL-REVENUES> 373,700
<CGS> 181,600
<TOTAL-COSTS> 181,600
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,967
<INTEREST-EXPENSE> 21,200
<INCOME-PRETAX> 32,900
<INCOME-TAX> 14,500
<INCOME-CONTINUING> 18,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,000
<EPS-PRIMARY> $.55
<EPS-DILUTED> $.55
</TABLE>
