<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 June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-11071
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 July 31, 1999, there were 31,740,504 shares of UGI Corporation
Common Stock, without par value, outstanding.
<PAGE> 2
UGI CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGES
-----
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1999,
September 30, 1998 and June 30, 1998 1
Condensed Consolidated Statements of Income for the three,
nine and twelve months ended June 30, 1999 and 1998 2
Condensed Consolidated Statements of Cash Flows for the
nine and twelve months ended June 30, 1999 and 1998 3
Notes to Condensed Consolidated Financial Statements 4 - 12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13- 29
Item 3. Quantitative and Qualitative Disclosures About Market Risk 29 - 30
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 31
Signatures 32
</TABLE>
-i-
<PAGE> 3
UGI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(Millions of dollars)
<TABLE>
<CAPTION>
June 30, September 30, June 30,
1999 1998 1998
------------- ------------- -------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 152.5 $ 66.6 $ 42.1
Short-term investments, at cost which approximates market value 5.4 81.8 101.9
Accounts receivable (less allowances for doubtful accounts of
$9.0, $7.9 and $12.2, respectively) 101.5 81.8 100.4
Accrued utility revenues 5.8 6.7 6.0
Inventories 55.3 77.9 75.7
Deferred income taxes 17.4 14.7 21.5
Prepaid expenses and other current assets 18.6 21.1 18.7
--------- --------- ---------
Total current assets 356.5 350.6 366.3
Property, plant and equipment, at cost (less accumulated depreciation
and amortization of $502.6, $465.5 and $450.2, respectively) 1,002.4 999.0 992.5
Intangible assets (less accumulated amortization of $159.6, $141.5 and
$135.3, respectively) 615.2 630.7 636.3
Utility regulatory assets 59.4 59.3 58.8
Other assets 45.4 35.0 36.0
--------- --------- ---------
Total assets $ 2,078.9 $ 2,074.6 $ 2,089.9
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt - Propane $ 15.8 $ 6.1 $ 6.3
Current maturities of long-term debt - Utilities 7.1 7.1 7.1
Current maturities of long-term debt - other 0.5 0.4 0.4
Bank loans - Propane 20.0 10.0 11.0
Bank loans - Utilities 59.6 68.4 50.7
Accounts payable 67.4 80.1 65.8
Other current liabilities 144.8 149.7 147.6
--------- --------- ---------
Total current liabilities 315.2 321.8 288.9
Long-term debt - Propane 706.2 702.9 693.9
Long-term debt - Utilities 180.0 180.1 187.2
Long-term debt - other 7.5 7.8 7.9
Deferred income taxes 160.0 154.4 156.7
Other noncurrent liabilities 79.9 84.0 83.9
Commitments and contingencies
Minority interest in AmeriGas Partners 231.8 236.5 259.1
UGI Utilities redeemable preferred stock 20.0 20.0 20.0
Common stockholders' equity:
Common Stock, without par value (authorized - 100,000,000 shares;
issued - 33,198,731 shares) 394.5 394.3 393.8
Retained earnings (accumulated deficit) 13.2 (17.7) 6.2
Unearned compensation (2.0) - -
--------- --------- ---------
405.7 376.6 400.0
Treasury stock, at cost (27.4) (9.5) (7.7)
--------- --------- ---------
Total common stockholders' equity 378.3 367.1 392.3
--------- --------- ---------
Total liabilities and stockholders' equity $ 2,078.9 $ 2,074.6 $ 2,089.9
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-1-
<PAGE> 4
UGI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(Millions, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended Twelve Months Ended
June 30, June 30, June 30,
----------------------- ----------------------- -------------------------
1999 1998 1999 1998 1999 1998
---------- ----------- ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Propane $ 162.0 $ 158.2 $ 704.7 $ 767.3 $ 851.8 $ 936.2
Utilities 77.3 74.3 357.8 362.1 418.0 427.6
Energy marketing 20.0 22.7 69.7 85.3 87.4 102.8
--------- ------- -------- -------- -------- --------
259.3 255.2 1,132.2 1,214.7 1,357.2 1,466.6
--------- ------- -------- -------- -------- --------
Costs and expenses:
Propane cost of sales 71.0 69.7 304.3 379.7 368.4 470.2
Utilities - gas, fuel and purchased power 33.8 35.1 176.6 188.3 202.9 219.5
Energy marketing cost of sales 18.3 21.5 65.2 81.3 82.2 98.2
Operating and administrative expenses 109.8 103.0 344.4 329.0 453.1 437.5
Depreciation and amortization 22.6 21.9 66.9 65.4 89.3 86.2
Other income, net (5.6) (4.6) (11.7) (12.9) (11.5) (18.4)
--------- ------- -------- -------- -------- --------
249.9 246.6 945.7 1,030.8 1,184.4 1,293.2
--------- ------- -------- -------- -------- --------
Operating income 9.4 8.6 186.5 183.9 172.8 173.4
Merger fee income and expenses, net 21.5 - 19.9 - 19.9 -
Interest expense (21.0) (20.7) (63.1) (63.6) (83.9) (83.9)
Minority interest in AmeriGas Partners 7.8 7.0 (22.8) (21.8) (9.9) (9.5)
--------- ------- -------- -------- ------- --------
Income (loss) before income taxes and
subsidiary preferred stock dividends 17.7 (5.1) 120.5 98.5 98.9 80.0
Income tax (expense) benefit (5.9) 1.6 (52.4) (44.6) (42.2) (35.8)
Dividends on UGI Utilities Series
Preferred Stock (0.4) (0.4) (1.2) (1.8) (1.6) (2.5)
--------- ------- -------- -------- -------- --------
Net income (loss) $ 11.4 $ (3.9) $ 66.9 $ 52.1 $ 55.1 $ 41.7
========= ======= ======== ======== ======== ========
Earnings (loss) per share:
Basic $ 0.36 $ (0.12) $ 2.06 $ 1.58 $ 1.69 $ 1.27
========= ======= ======== ======== ======== ========
Diluted $ 0.36 $ (0.12) $ 2.06 $ 1.57 $ 1.69 $ 1.26
========= ======= ======== ======== ======== ========
Average common shares outstanding:
Basic 31.672 33.017 32.420 33.001 32.538 32.976
========= ======= ======== ======== ======== ========
Diluted 31.711 33.017 32.474 33.176 32.597 33.147
========= ======= ======== ======== ======== ========
Dividends declared per share $ 0.365 $ 0.365 $ 1.095 $ 1.085 $ 1.46 $ 1.445
========= ======= ======== ======== ======== ========
</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>
Nine Months Ended Twelve Months Ended
June 30, June 30,
--------------------------- ---------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 66.9 $ 52.1 $ 55.1 $ 41.7
Reconcile to net cash provided by operating activities:
Depreciation and amortization 66.9 65.4 89.3 86.2
Minority interest in AmeriGas Partners 22.8 21.8 9.9 9.5
Deferred income taxes, net 0.1 6.8 3.4 6.6
Other, net 7.0 5.7 6.2 8.7
------ ------ ------ --------
163.7 151.8 163.9 152.7
Net change in:
Accounts receivable and accrued utility revenues (24.4) 4.4 (6.8) 16.0
Inventories and prepaid propane purchases 23.5 41.9 20.6 4.4
Deferred fuel costs 6.9 4.9 (3.8) (3.5)
Accounts payable (12.5) (37.8) 1.8 (5.9)
Other current assets and liabilities (13.5) (16.9) (1.8) (9.1)
------ ------ ------ --------
Net cash provided by operating activities 143.7 148.3 173.9 154.6
------ ------ ------ --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment (51.5) (46.4) (74.3) (67.9)
Net proceeds from disposals of assets 2.6 5.3 5.2 11.0
Acquisitions of businesses, net of cash acquired (3.2) (6.9) (4.4) (14.0)
Investments in joint venture partnerships (4.9) - (6.9) -
Short-term investments (increase) decrease 76.4 (36.5) 96.5 (58.7)
Other, net (5.4) (4.2) (3.5) (9.5)
------ ------ ------ -------
Net cash provided (used) by investing activities 14.0 (88.7) 12.6 (139.1)
------ ------ ------ -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends on Common Stock (36.4) (35.6) (48.4) (47.5)
Distributions on Partnership public Common Units (29.2) (29.2) (39.0) (38.9)
Issuance of long-term debt 75.8 48.0 85.8 48.1
Repayment of long-term debt (63.4) (14.5) (71.2) (22.1)
Propane bank loans increase (decrease) 10.0 (17.0) 9.0 4.0
UGI Utilities bank loans increase (decrease) (8.8) (16.3) 8.9 7.5
Issuance of treasury stock 3.4 7.0 4.9 11.5
Redemption of UGI Utilities preferred stock - (15.5) - (15.5)
Repurchases of Common Stock (23.2) (8.4) (26.1) (14.4)
------ ------ ------ -------
Net cash used by financing activities (71.8) (81.5) (76.1) (67.3)
------ ------ ------ -------
Cash and cash equivalents increase (decrease) $ 85.9 $(21.9) $110.4 $ (51.8)
====== ====== ====== =======
Cash and cash equivalents:
End of period $152.5 $ 42.1 $152.5 $ 42.1
Beginning of period 66.6 64.0 42.1 93.9
------ ------ ------ -------
Increase (decrease) $ 85.9 $(21.9) $110.4 $ (51.8)
====== ====== ====== =======
</TABLE>
During the twelve months ended June 30, 1999 and 1998, UGI Utilities, Inc. paid
cash dividends to UGI of $29.0 and $22.6, respectively. During the twelve months
ended June 30, 1999 and 1998, AmeriGas, Inc. paid cash dividends to UGI of $48.2
and $50.1, respectively. During those same periods, UGI paid cash dividends to
holders of Common Stock of $48.4 and $47.5, 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 distributions paid by the Partnership.
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."
At June 30, 1999, UGI, through subsidiaries, held an effective 2%
general partner interest and a 56.4% limited partner interest in the
Operating Partnership. We also conduct an energy marketing business
principally through our wholly owned second-tier subsidiary, UGI Energy
Services, Inc., a wholly owned subsidiary of UGI Enterprises, Inc.
(Enterprises). Through other subsidiaries, Enterprises participates in
propane joint-venture projects in Romania and China and is in the
process of developing a retail hearth products business.
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, as amended, for the year ended September
30, 1998 (Company's 1998 Annual Report). Due to the seasonal nature of
our businesses, the results of operations for interim periods are not
necessarily indicative of the results to be expected for a full year.
-4-
<PAGE> 7
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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.
On October 1, 1998, we adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income" (SFAS 130).
SFAS 130 establishes standards for reporting and displaying
comprehensive income and its components in financial statements.
Comprehensive income includes net income and all other nonowner changes
in equity. The Company's comprehensive income was not materially
different from its net income for all periods presented.
In June 1999, the Financial Accounting Standards Board deferred the
effective date of SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133) to fiscal years beginning after June
15, 2000. We expect to adopt SFAS 133 in fiscal 2001.
2. SEGMENT INFORMATION
On October 1, 1998, we adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS 131). SFAS 131
establishes standards for reporting information about operating
segments as well as related disclosures about products and services,
geographic areas, and major customers. In determining our reportable
segments under the provisions of SFAS 131, we examined the way we
organize our businesses 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 and electricity 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 on a combined
basis. Accordingly, these operations are combined for segment reporting
purposes.
-5-
<PAGE> 8
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars, except per share amounts)
The accounting policies of the four segments are the same as those
described in the Significant Accounting Policies note contained in the
Company's 1998 Annual Report. We evaluate each segment's performance
principally based on its earnings before interest expense, income
taxes, depreciation and amortization (EBITDA). Although we use EBITDA
to evaluate segment performance, it should not be considered as an
alternative to net income (as an indicator of operating performance) or
as an alternative to cash flow (as a measure of liquidity or ability to
service debt obligations) and is not a measure of performance or
financial condition under generally accepted accounting principles.
No single customer represents more than 5% of 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:
-6-
<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 June 30, 1999:
<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 $ 259.3 $ (0.8) $ 162.0 $ 60.4 $16.9 $20.0 $ -- $ 0.8
======== ====== ======== ====== ===== ===== ====== =====
Segment profit (loss):
EBITDA $ 32.0 $ 2.7 $ 14.3 $ 11.3 $ 5.3 $ 0.9 $ (1.7) $(0.8)
Depreciation and amortization (22.6) -- (16.6) (4.7) (1.1) -- -- (0.2)
-------- ------ -------- ------ ----- ----- ------ -----
Operating income (loss) 9.4 2.7 (2.3) 6.6 4.2 0.9 (1.7) (1.0)
Merger fee income and expenses, net 21.5 -- -- -- -- -- -- 21.5
Interest expense (21.0) -- (16.6) (3.6) (0.6) -- -- (0.2)
Minority interest 7.8 -- 7.8 -- -- -- -- --
-------- ------ -------- ------ ----- ----- ------ -----
Income (loss) before income taxes $ 17.7 $ 2.7 $ (11.1) $ 3.0 $ 3.6 $ 0.9 $ (1.7) $20.3
======== ====== ======== ====== ===== ===== ====== =====
Segment assets (at period end) $2,078.9 $(15.3) $1,202.5 $608.6 $95.4 $15.5 $143.1 $29.1
======== ====== ======== ====== ===== ===== ====== =====
Investment in equity method investees $ 6.1 $ -- $ -- $ -- $ -- $ -- $ -- $ 6.1
======== ====== ======== ====== ===== ===== ====== =====
</TABLE>
Three Months Ended June 30, 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 $ 255.2 $ (0.8) $ 158.2 $ 57.8 $16.5 $22.7 $ -- $ 0.8
======== ====== ======== ====== ===== ===== ====== =====
Segment profit (loss):
EBITDA $ 30.5 $ 2.4 $ 15.5 $ 10.7 $ 2.8 $ 0.5 $ (1.1) $(0.3)
Depreciation and amortization (21.9) -- (16.3) (4.6) (1.0) -- -- --
-------- ------ -------- ------ ----- ----- ------ -----
Operating income (loss) 8.6 2.4 (0.8) 6.1 1.8 0.5 (1.1) (0.3)
Interest expense (20.7) -- (16.3) (3.8) (0.5) -- -- (0.1)
Minority interest 7.0 -- 7.0 -- -- -- -- --
-------- ------ -------- ------ ----- ----- ------ -----
Income (loss) before income taxes $ (5.1) $ 2.4 $ (10.1) $ 2.3 $ 1.3 $ 0.5 $ (1.1) $(0.4)
======== ====== ======== ====== ===== ===== ====== =====
Segment assets (at period end) $2,089.9 $(17.2) $1,250.0 $593.6 $95.7 $ 6.6 $125.0 $26.2
======== ====== ======== ====== ===== ===== ====== =====
Investment in equity method investees $ 2.2 $ -- $ -- $ -- $ -- $ -- $ -- $ 2.2
======== ====== ======== ====== ===== ===== ====== =====
</TABLE>
- 7 -
<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)
Nine Months Ended June 30, 1999:
<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 $1,132.2 $ (1.6) $ 704.7 $302.6 $55.2 $69.7 $ -- $ 1.6
======== ======= ======== ====== ===== ===== ====== =====
Segment profit (loss):
EBITDA $ 253.4 $ 7.9 $ 154.1 $ 81.6 $15.0 $ 2.1 $ (4.1) $(3.2)
Depreciation and amortization (66.9) -- (49.4) (14.2) (3.0) -- -- (0.3)
-------- ------- -------- ------- ----- ----- ------ -----
Operating income (loss) 186.5 7.9 104.7 67.4 12.0 2.1 (4.1) (3.5)
Merger fee income and expenses, net 19.9 -- -- -- -- -- -- 19.9
Interest expense (63.1) -- (49.6) (11.1) (1.9) -- -- (0.5)
Minority interest (22.8) -- (22.8) -- -- -- -- --
-------- ------- -------- ------- ----- ----- ------ -----
Income (loss) before income taxes $ 120.5 $ 7.9 $ 32.3 $ 56.3 $10.1 $ 2.1 $ (4.1) $15.9
======== ======= ======== ====== ===== ===== ====== =====
Segment assets (at period end) $2,078.9 $(15.3) $1,202.5 $608.6 $95.4 $15.5 $143.1 $29.1
======== ======= ======== ====== ===== ===== ====== =====
Investment in equity method investees $ 6.1 $ -- $ -- $ -- $ -- $ -- $ -- $ 6.1
======== ======= ======== ====== ===== ===== ====== =====
</TABLE>
Nine Months Ended June 30, 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 $1,214.7 $ (2.5) $ 767.3 $307.9 $54.2 $85.3 $ -- $ 2.5
======== ======= ======== ====== ===== ===== ====== =====
Segment profit (loss):
EBITDA $ 249.3 $ 7.8 $ 151.4 $ 79.7 $10.9 $ 1.9 $ (3.7) $ 1.3
Depreciation and amortization (65.4) -- (48.7) (13.6) (2.9) -- -- (0.2)
-------- ------- -------- ------- ----- ----- ------ -----
Operating income (loss) 183.9 7.8 102.7 66.1 8.0 1.9 (3.7) 1.1
Interest expense (63.6) -- (50.1) (11.3) (1.7) -- -- (0.5)
Minority interest (21.8) -- (21.8) -- -- -- -- --
-------- ------- -------- ------- ----- ----- ------ -----
Income (loss) before income taxes $ 98.5 $ 7.8 $ 30.8 $ 54.8 $ 6.3 $ 1.9 $ (3.7) $ 0.6
======== ======= ======== ====== ===== ===== ====== =====
Segment assets (at period end) $2,089.9 $(17.2) $1,250.0 $593.6 $95.7 $16.6 $125.0 $26.2
======== ======= ======== ====== ===== ===== ====== =====
Investment in equity method investees $ 2.2 $ -- $ -- $ -- $ -- $ -- $ -- $ 2.2
======== ======= ======== ====== ===== ===== ====== =====
</TABLE>
- 8 -
<PAGE> 11
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 June 30, 1999:
<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 $1,357.2 $ (2.1) $ 851.8 $344.9 $ 73.1 $ 87.4 $ -- $ 2.1
======== ====== ======== ====== ======== ======== ====== =====
Segment profit (loss):
EBITDA 262.1 $ 10.9 $ 156.0 $ 84.9 $ 17.7 $ 2.3 $ (5.3) $(4.4)
Depreciation and amortization (89.3) -- (66.1) (18.8) (4.0) (0.1) -- (0.3)
-------- ------ -------- ------ -------- -------- ------ -----
Operating income (loss) 172.8 10.9 89.9 66.1 13.7 2.2 (5.3) (4.7)
Merger fee income and expenses, net 19.9 -- -- -- -- -- -- 19.9
Interest expense (83.9) -- (65.6) (15.1) (2.5) -- -- (0.7)
Minority interest (9.9) -- (9.9) -- -- -- -- --
-------- ------ -------- ------ -------- -------- ------ -----
Income (loss) before income taxes $ 98.9 $ 10.9 $ 14.4 $ 51.0 $ 11.2 $ 2.2 $ (5.3) $14.5
======== ====== ======== ====== ======== ======== ====== =====
Segment assets (at period end) $2,078.9 $(15.3) $1,202.5 $608.6 $ 95.4 $ 15.5 $143.1 $29.1
======== ====== ======== ====== ======== ======== ====== =====
Investment in equity method investees $ 6.1 $ -- $ -- $ -- $ -- $ -- $ -- $ 6.1
======== ====== ======== ====== ======== ======== ====== =====
</TABLE>
Twelve Months Ended June 30, 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 $1,466.6 $ (3.4) $ 936.2 $356.2 $ 71.4 $ 102.8 $ -- $ 3.4
======== ====== ======== ====== ======== ======== ====== =====
Segment profit (loss):
EBITDA $ 259.6 $ 11.5 $ 153.9 $ 80.8 $ 14.0 $ 1.8 $ (5.4) $ 3.0
Depreciation and amortization (86.2) -- (65.0) (16.8) (4.1) -- -- (0.3)
-------- ------ -------- ------ -------- -------- ------ -----
Operating income (loss) 173.4 11.5 88.9 64.0 9.9 1.8 (5.4) 2.7
Interest expense (83.9) -- (66.2) (14.8) (2.3) -- -- (0.6)
Minority interest (9.5) -- (9.5) -- -- -- -- --
-------- ------ -------- ------ -------- -------- ------ -----
Income (loss) before income taxes $ 80.0 $ 11.5 $ 13.2 $ 49.2 $ 7.6 $ 1.8 $ (5.4) $ 2.1
======== ====== ======== ====== ======== ======== ====== =====
Segment assets (at period end) $2,089.9 $(17.2) $1,250.0 $593.6 $ 95.7 $ 16.6 $125.0 $26.2
======== ====== ======== ====== ======== ======== ====== =====
Investment in equity method investees $ 2.2 $ -- $ -- $ -- $ -- $ -- $ -- $ 2.2
======== ====== ======== ====== ======== ======== ====== =====
</TABLE>
- 9 -
<PAGE> 12
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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 $45 million at June 30, 1999.
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
-10-
<PAGE> 13
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars, except per share amounts)
generally is not legally liable for the obligations of its
subsidiaries. Under certain circumstances, however, a court could find
a parent company liable for environmental damage at sites owned by a
subsidiary company when the parent company either (1) itself operated
the facility causing the environmental damage or (2) otherwise so
controlled the subsidiary that the subsidiary's separate corporate form
should be disregarded. There could be, therefore, significant future
costs of an uncertain amount associated with environmental damage
caused by MGPs that UGI Utilities owned or directly operated, or that
were owned or operated by former subsidiaries of UGI Utilities, if a
court were to conclude that the subsidiary's separate corporate form
should be disregarded. In many circumstances where UGI Utilities may be
liable, we may not be able to reasonably quantify expenditures because
of a number of factors. These factors include the various costs
associated with potential remedial alternatives, the unknown number of
other potentially responsible parties involved and their ability to
contribute to the costs of investigation and remediation, and changing
environmental laws and regulations.
UGI Utilities has filed suit against more than fifty insurance
companies alleging that the defendants breached contracts of insurance
by failing to indemnify UGI Utilities for certain environmental costs.
The suit seeks to recover more than $11 million in costs incurred by
UGI Utilities at various manufactured gas plant sites.
In addition to these environmental matters, there are other pending
claims and legal actions arising in the normal course of our
businesses. We cannot predict with certainty the final results of
environmental and other matters. However, it is reasonably possible
that some of them could be resolved unfavorably to us. Management
believes, after consultation with counsel, that damages or settlements,
if any, recovered by the plaintiffs in such claims or actions will not
have a material adverse effect on our financial position. However, such
damages or settlements could be material to operating results or cash
flows in future periods depending on the nature and timing of future
developments with respect to these matters and the amounts of future
operating results and cash flows.
4. PROPOSED MERGER WITH UNISOURCE WORLDWIDE, INC.
On March 1, 1999, UGI and Unisource Worldwide, Inc. (Unisource)
announced that their boards of directors had approved a definitive
merger agreement (Merger Agreement) for a stock-for-stock transaction.
On May 25, 1999, UGI announced that it was notified that the board of
directors of Unisource had decided to enter into a merger agreement
with Georgia-Pacific Corp. and that UGI would allow Unisource to
terminate the Merger Agreement with UGI. Pursuant to the terms of the
Merger Agreement, on May 25, 1999 UGI received from Unisource a merger
termination fee of $25 million which amount, net of related expenses,
is classified
-11-
<PAGE> 14
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars, except per share amounts)
as merger fee income and expenses, net, on the Condensed Consolidated
Statements of Income.
5. NATURAL GAS COMPETITION LEGISLATION
On June 22, 1999, Pennsylvania's Natural Gas Choice and Competition Act
(Gas Competition Act) was signed into law. The purpose of the Gas
Competition Act is to provide all natural gas consumers in Pennsylvania
with the ability to purchase their gas supplies from the supplier of
their choice. Under the Gas Competition Act, local gas distribution
companies (LDCs) may continue to sell gas to customers. However, such
sales are subject to price regulation by the Pennsylvania Public
Utility Commission (PUC). The Gas Competition Act, in conjunction with
a companion bill, effectively eliminates the gross receipts tax
(currently 5%) on sales of gas commencing January 1, 2000. Gas
distribution services provided by LDCs remain subject to rate
regulation.
Under the Gas Competition Act, all Pennsylvania natural gas consumers
will have the right to choose their natural gas commodity supplier no
later than July 1, 2000. Generally, LDCs will serve as the supplier of
last resort for all residential and small commercial and industrial
customers unless the PUC approves another supplier of last resort.
Natural gas distribution companies are required to make restructuring
filings pursuant to a schedule determined by the PUC. In such
restructuring filings, natural gas distribution companies may seek to
recover most costs resulting from the implementation of the Gas
Competition Act by requesting permission to capitalize and amortize
such costs over appropriate periods. Certain other costs incurred
before June 30, 2002 may be deferred for possible future recovery.
Notwithstanding the ultimate treatment of such costs resulting from the
implementation of the Gas Competition Act, LDCs are precluded from
increasing rates for the recovery of costs, other than gas costs, until
January 1, 2001.
In order to avoid stranded costs associated with interstate pipeline
capacity and storage contracts, the Gas Competition Act requires energy
marketers seeking to serve customers of LDCs to accept release or
assignment of a portion of the LDC's contracts (as well as contracts
for Pennsylvania gas supplies) at contract rates. After July 1, 2002, a
natural gas supplier may petition the PUC to avoid such contract
release or assignment. The PUC, however, could only grant such petition
if certain findings are made and the difference, if any, between
amounts recovered by the LDC in the secondary market for such contracts
and the cost of the contract is authorized for recovery.
The Company is currently evaluating the impact of the Gas Competition
Act on its operations and is in the process of developing its
restructuring filing. Based upon such evaluation to date, the Company
does not expect the Gas Competition Act will have a material adverse
impact on its financial condition or results of operations.
-12-
<PAGE> 15
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 June 30, 1999 (1999 three-month period) with the three months ended
June 30, 1998 (1998 three-month period); (2) the nine months ended June 30, 1999
(1999 nine-month period) with the nine months ended June 30, 1998 (1998
nine-month period); and (3) the twelve months ended June 30, 1999 (1999
twelve-month period) with the twelve months ended June 30, 1998 (1998
twelve-month period). Our results of operations should be read in conjunction
with the segment information included in Note 2 to Condensed Consolidated
Financial Statements. Although the adoption of SFAS 131 on October 1, 1998 did
not change the operating segments we disclose, certain of our segments'
operating results for all periods presented include billed UGI corporate
overhead costs.
1999 THREE-MONTH PERIOD COMPARED WITH 1998 THREE-MONTH PERIOD
PROPANE
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Increase
Three Months Ended June 30, 1999 1998 (Decrease)
- --------------------------------------------------------------------------------
(Millions of dollars)
<S> <C> <C> <C> <C>
Retail gallons sold - millions 140.5 135.9 4.6 3.4%
Heating degree days - % warmer
than normal (3.8) (8.4) -- --
Revenues $162.0 $158.2 $ 3.8 2.4%
Total margin $ 91.0 $ 88.5 $ 2.5 2.8%
EBITDA (a) $ 14.3 $ 15.5 $(1.2) 7.7%
Operating loss $ (2.3) $ (.8) $ 1.5 187.5%
- --------------------------------------------------------------------------------
</TABLE>
(a) 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 of propane sold during the 1999 three-month period
increased primarily due to the effects of slightly cooler spring weather and
growth in our customer base. In addition, sales under our expanding PPX
Prefilled Propane Xchange(R) program were higher than in the prior year. 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 June 30, 1999 was 3.8% warmer than normal but 5.1% colder
than the same period last year.
-13-
<PAGE> 16
UGI CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Total revenues from retail propane sales increased $1.6 million during the 1999
three-month period reflecting a $4.3 million increase as a result of higher
retail volumes sold partially offset by a $2.7 million decrease as a result of
lower average retail propane selling prices. Wholesale propane revenues
increased $0.5 million during the three months ended June 30, 1999 due to a 10%
increase in volumes sold. Other revenues increased $1.7 million to $19.5 million
principally due to greater hauling revenue and revenue from appliance sales.
Total margin increased $2.5 million in the 1999 three-month period primarily
reflecting the effects of the cooler weather as well as an increase in total
margin from our prefilled cylinder exchange program. Average retail unit margins
were comparable with the 1998 three-month period.
The lower EBITDA and higher operating loss during the 1999 three-month period,
notwithstanding the previously noted increase in total margin, principally
reflect higher operating expenses. Operating expenses of the Partnership were
$78.3 million during the 1999 three-month period compared with $74.8 million in
the same period last year. However, operating expenses in the 1998 three-month
period include the net benefit of $2.2 million from adjustments to
environmental, tax and benefit accruals. The slight increase in operating
expenses, excluding the impact of these items in the prior year, primarily
reflects higher payroll costs as well as costs associated with new business
initiatives.
UTILITIES
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Three Months Ended June 30, 1999 1998 Increase
- -------------------------------------------------------------------------------------------
(Millions of dollars)
<S> <C> <C> <C> <C>
GAS UTILITY:
Natural gas system throughput - bcf 14.7 14.5 0.2 1.4%
Heating degree days - % warmer
than normal (15.5) (23.7) - -
Revenues $ 60.4 $ 57.8 $2.6 4.5%
Total margin (a) $ 30.0 $ 28.9 $1.1 3.8%
EBITDA (b) $ 11.3 $ 10.7 $0.6 5.6%
Operating income $ 6.6 $ 6.1 $0.5 8.2%
ELECTRIC UTILITY:
Electric sales - gwh 198.2 197.7 0.5 0.3%
Revenues $ 16.9 $ 16.5 $0.4 2.4%
Total margin (a) $ 10.8 $ 7.5 $3.3 44.0%
EBITDA (b) $ 5.3 $ 2.8 $2.5 89.3%
Operating income $ 4.2 $ 1.8 $2.4 133.3%
- -------------------------------------------------------------------------------------------
</TABLE>
bcf - billions of cubic feet. gwh - millions of kilowatt hours.
-14-
<PAGE> 17
UGI CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(a) Gas and Electric utilities' total margin represents total revenues less
cost of sales and revenue-related taxes.
(b) EBITDA (earnings before interest expense, income taxes, depreciation
and amortization) should not be considered as an alternative to net
income (as an indicator of operating performance) or as an alternative
to cash flow (as a measure of liquidity or ability to service debt
obligations) and is not a measure of performance or financial condition
under generally accepted accounting principles.
GAS UTILITY. Weather in the Gas Utility service territory during the 1999
three-month period was 15.5% warmer than normal but 10.6% cooler than last year.
Total system throughput increased 0.2 bcf primarily as a result of the cooler
weather's effect on firm- residential and commercial customers who use natural
gas for space heating purposes.
The $2.6 million increase in Gas Utility's revenues during the 1999 three-month
period principally reflects a $2.9 million increase in revenues from off-system
sales partially offset by the impact on revenues from core market industrial
customers switching to delivery service. Gas Utility cost of gas was $28.3
million, an increase of $1.4 million from the prior year period, reflecting an
increase in gas costs associated with the higher off-system sales partially
offset by the impact on gas costs of core market industrial customers switching
to delivery service.
Gas Utility total margin during the 1999 three-month period was $1.1 million
higher than in the 1998 three-month period reflecting a $0.7 million increase in
margin from core market customers. In addition, total margin from delivery
service customers was higher in the 1999 three-month period reflecting higher
average delivery service rates and slightly higher volumes transported.
Gas Utility 1999 three-month period EBITDA and operating income increased $0.6
million and $0.5 million, respectively, as the higher total margin and greater
other income was partially offset by a $0.9 million increase in operating
expenses. The increase in operating expenses primarily reflects higher
distribution system maintenance expenses.
ELECTRIC UTILITY. Total electric sales in the 1999 three-month period were
slightly greater than last year. Although Electric Utility's Restructuring Order
pursuant to Pennsylvania's Customer Choice Act permits all customers to choose
their electricity generation supplier effective January 1, 1999, only
approximately 5% of our sales during the 1999 three-month period represents
electricity we distributed for alternate suppliers. Electric Utility revenues
were higher in the 1999 three-month period reflecting in part the slight
increase in sales. Electric Utility cost of sales was $5.5 million, a decline of
$2.7 million, reflecting (1) lower average purchased power costs and (2) the
benefit of $1.5 million resulting from the settlement of disputes arising under
a power supply agreement
-15-
<PAGE> 18
UGI CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Electric Utility's total margin increased during the 1999 three-month period
reflecting the previously mentioned lower average purchased power costs and the
$1.5 million benefit resulting from the power supply agreement settlement.
Electric Utility EBITDA and operating income also increased during the 1999
three-month period reflecting the higher total margin.
ENERGY MARKETING
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Increase
Three Months Ended June 30, 1999 1998 (Decrease)
- ------------------------------------------------------------------------------
(Millions of dollars)
<S> <C> <C> <C> <C>
Revenues $20.0 $22.7 $(2.7) (11.9)%
Total margin $ 1.7 $ 1.2 $ 0.5 41.7%
EBITDA $ 0.9 $ 0.5 $ 0.4 80.0%
Operating income $ 0.9 $ 0.5 $ 0.4 80.0%
- ------------------------------------------------------------------------------
</TABLE>
Total revenues from energy marketing in the 1999 three-month period decreased
principally as a result of lower billed volumes. Notwithstanding the lower
billed volumes, total margin was higher in the 1999 three-month period
reflecting higher average unit margins and income from the sale of pipeline
capacity. EBITDA and operating income each increased $0.4 million from the 1998
three-month period amounts reflecting the higher total margin partially offset
by higher operating and administrative expenses.
CORPORATE AND OTHER
Corporate expenses, net, which consists of corporate overhead expenses net of
interest income, was $(1.7) million during the 1999 three-month period compared
with $(1.2) million during the 1998 three-month period reflecting higher UGI
corporate expenses and slightly lower interest income. Other activities'
operating loss was $(1.0) million in the 1999 three-month period compared with
($0.3) million in the 1998 three-month period. The increase in the 1999
three-month period loss primarily reflects start-up costs of Enterprises' retail
hearth products business.
As a result of Unisource Worldwide's decision to enter into a merger agreement
with Georgia-Pacific Corp., the Company's Merger Agreement with Unisource was
terminated. A merger termination fee of $25 million, net of merger expenses of
$3.5 million incurred during the 1999 three-month period, has been reflected in
the Condensed Consolidated Statements of Income as "Merger fee income and
expenses, net."
-16-
<PAGE> 19
UGI CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
1999 NINE-MONTH PERIOD COMPARED WITH 1998 NINE-MONTH PERIOD
PROPANE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
Increase
Nine Months Ended June 30, 1999 1998 (Decrease)
- ----------------------------------------------------------------------------------
(Millions of dollars)
<S> <C> <C> <C> <C>
Retail gallons sold - millions 646.0 650.2 (4.2) (0.6)%
Heating degree days - % warmer
than normal (9.6) (7.4) -- --
Revenues $704.7 $767.3 $(62.6) (8.2)%
Total margin $400.4 $387.6 $ 12.8 3.3%
EBITDA $154.1 $151.4 $ 2.7 1.8%
Operating income $104.7 $102.7 $ 2.0 1.9%
- ----------------------------------------------------------------------------------
</TABLE>
Weather during the nine months ended June 30, 1999 was 9.6% warmer than normal
and 2.3% warmer than the 1998 nine-month period. Retail volumes of propane sold
were slightly lower in the 1999 nine-month period reflecting a 7.0 million
gallon decrease (11.7%) in agricultural volumes due largely to a dry autumn
which reduced demand for crop drying. Partially offsetting this decrease were
higher gallons sold by our pre-filled cylinder exchange program, higher engine
fuel sales, and slightly higher sales to residential customers. Wholesale
volumes sold during the 1999 nine-month period decreased primarily as a result
of reduced sales of storage inventories.
Total revenues from retail propane sales declined $45.8 million in the 1999
nine-month period reflecting (1) a $41.7 million decrease as a result of lower
average retail propane selling prices and (2) a $4.1 million decrease as a
result of the lower retail volumes sold. Wholesale propane revenues declined
$20.8 million reflecting (1) an $11.4 million decrease as a result of lower
volumes sold and (2) a $9.4 million decrease as a result of lower average
wholesale selling prices. The decline in both retail and wholesale selling
prices resulted from lower 1999-period propane product costs. Other revenues
increased $4.0 million to $65.7 million in the 1999 nine-month period
principally reflecting higher appliance sales, terminal operations revenue and
various customer fees.
Total margin increased $12.8 million in the 1999 nine-month period principally
due to slightly higher average retail unit margin per gallon and a $3.3 million
increase in total margin from ancillary sales and services including appliance
sales, income from terminal operations and various customer fees. Average retail
propane unit margin was greater in the 1999 nine-month period due in large part
to lower propane product costs.
EBITDA and operating income increased slightly during the nine months ended June
30, 1999 reflecting the increase in total margin offset by higher operating
expenses. Operating and
-17-
<PAGE> 20
UGI CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
administrative expenses of the Partnership were $250.6 million during the 1999
nine-month period compared with $241.3 million in the 1998 nine-month period.
Operating expenses in the 1998 nine-month period are net 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 the impact of these items
in the prior-year period, operating expenses increased a modest $4.7 million
(1.9%) principally due to (1) higher compensation and benefit costs; (2) higher
vehicle lease expense; and (3) expenses associated with new business
initiatives. These operating expense increases were partially offset by lower
general liability insurance expense.
UTILITIES
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Increase
Nine Months Ended June 30, 1999 1998 (Decrease)
- ----------------------------------------------------------------------------------------
(Millions of dollars)
<S> <C> <C> <C> <C>
GAS UTILITY:
Natural gas system throughput - bcf 64.1 63.0 1.1 1.7%
Heating degree days - % warmer
than normal (12.4) (15.8) - -
Revenues $302.6 $307.9 $(5.3) (1.7)%
Total margin $136.3 $133.8 $ 2.5 1.9%
EBITDA $ 81.6 $ 79.7 $ 1.9 2.4%
Operating income $ 67.4 $ 66.1 $ 1.3 2.0%
ELECTRIC UTILITY:
Electric sales - gwh 676.6 662.6 14.0 2.1%
Revenues $ 55.2 $ 54.2 $ 1.0 1.8%
Total margin $ 30.7 $ 25.7 $ 5.0 19.5%
EBITDA $ 15.0 $ 10.9 $ 4.1 37.6%
Operating income $ 12.0 $ 8.0 $ 4.0 50.0%
- ----------------------------------------------------------------------------------------
</TABLE>
GAS UTILITY. Weather in Gas Utility's service territory in the 1999 nine-month
period was 12.4% warmer than normal compared with weather that was 15.8% warmer
than normal in the prior-year period. As a result of the slightly cooler weather
and an increase in total customers, total system throughput increased 1.1 bcf
(1.7%).
The decrease in Gas Utility revenues is principally due to decreases in revenues
from (1) core-market industrial customers; (2) retail interruptible customers;
and (3) off-system sales. These decreases were partially offset by an increase
in revenues from firm delivery service (including customers previously served
under retail rates) and higher revenues from core market residential and
commercial customers as a result of higher volumes sold. Gas Utility's cost of
gas was $154.4
-18-
<PAGE> 21
UGI CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
million in the 1999 nine-month period, a decrease of $7.7 million from the
prior-year period, reflecting the decline in core market industrial and
off-system sales.
The increase in the 1999 nine-month period Gas Utility total margin principally
resulted from (1) a $3.4 million increase in margin from core market residential
and commercial customers and (2) a $2.9 million increase in margin from firm
delivery service customers. These margin increases were reduced by (1) a $2.0
million decline in margin from core market industrial customers (due in large
part to customers switching to firm delivery service); (2) a $1.2 million
decrease in margin from interruptible customers; and (3) a $0.6 million decrease
in other margin. The decline in margin from interruptible customers resulted
from a decline in oil prices relative to natural gas prices.
Gas Utility EBITDA and operating income were slightly higher in the 1999
nine-month period reflecting the increase in total margin. Total operating and
administrative expenses were $1.3 million higher in the 1999 nine-month period.
Operating expenses in the 1999 period reflect higher distribution system
maintenance expenses offset by lower accruals for uncollectible accounts and
medical benefits. Operating expenses in the 1998 nine-month period are net of
$1.6 million of income from an insurance recovery.
ELECTRIC UTILITY. Total electric sales were 14.0 gwh (2.1%) higher in the 1999
nine-month period on weather that was 2.9% colder than last year.
Notwithstanding the colder weather, temperatures were nearly 7% warmer than
normal.
Electric Utility revenues increased $1.0 million in the 1999 nine-month period
as a result of the higher sales. The increase in revenues resulting from the
higher sales was partially reduced by lower revenues from Electric Utility
customers who purchased the electric generation portion of their electric
service from other suppliers. Electric Utility cost of sales was $22.2 million,
a decrease of $3.9 million, as the impact of the higher sales was more than
offset by (1) the benefit of $1.5 million resulting from a power supply
agreement settlement entered into during the 1999 three-month period and (2)
lower average purchased power costs.
Electric Utility's total margin increased $5.0 million as a result of (1) lower
average purchased power costs; (2) the impact of the power supply agreement
settlement; and (3) the higher sales. Electric Utility EBITDA and operating
income increased as a result of the higher total margin partially offset by a
decrease in other income.
-19-
<PAGE> 22
UGI CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
ENERGY MARKETING
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
Increase
Nine Months Ended June 30, 1999 1998 (Decrease)
- ---------------------------------------------------------------------------------
(Millions of dollars)
<S> <C> <C> <C> <C>
Revenues $69.7 $85.3 $(15.6) (18.3)%
Total margin $ 4.5 $ 4.0 $ 0.5 12.5%
EBITDA $ 2.1 $ 1.9 $ 0.2 10.5%
Operating income $ 2.1 $ 1.9 $ 0.2 10.5%
- ---------------------------------------------------------------------------------
</TABLE>
Total revenues from energy marketing in the 1999 nine-month period decreased
principally as a result of lower average gas prices and, to a lesser extent, a
decline in billed volumes. Total margin increased in the 1999 nine-month period
reflecting higher average unit margins and income from the sale of pipeline
capacity. EBITDA and operating income during the 1999 nine-month period
increased slightly from the prior-year period reflecting the increase in margin
partially offset by higher operating and administrative expenses.
CORPORATE AND OTHER
Corporate expenses, net, was $(4.1) million in the 1999 nine-month period
compared with $(3.7) million in the 1998 nine-month period reflecting slightly
higher UGI corporate overhead expenses and a decrease in interest income as a
result of lower average interest rates. Other activities' operating loss was
$(3.5) million in the 1999 nine-month period compared with operating income of
$1.1 million in the prior-year period. The operating loss in the 1999 nine-month
period includes, among others, due diligence expenses related to international
propane business opportunities and start-up costs of Enterprises' retail hearth
products business. Other operating income in the 1998 nine-month period includes
a $1.2 million pre-tax gain from the sale of UTI Energy Corp. common stock.
The nine-month period ended June 30, 1999 includes $25 million of merger fee
income, net of merger expenses of $5.1 million, associated with the previously
mentioned May 1999 termination of the Company's Merger Agreement with Unisource.
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<PAGE> 23
UGI CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
1999 TWELVE-MONTH PERIOD COMPARED WITH 1998 TWELVE-MONTH PERIOD
PROPANE
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Increase
Twelve Months Ended June 30, 1999 1998 (Decrease)
- --------------------------------------------------------------------------------
(Millions of dollars)
<S> <C> <C> <C> <C>
Retail gallons sold - millions 781.1 792.9 (11.8) (1.5)%
Heating degree days - % warmer
than normal (11.2) (7.9) -- --
Revenues $851.8 $936.2 $(84.4) (9.0)%
Total margin $483.4 $466.0 $ 17.4 3.7%
EBITDA $156.0 $153.9 $ 2.1 1.4%
Operating income $ 89.9 $ 88.9 $ 1.0 1.1%
- --------------------------------------------------------------------------------
</TABLE>
Temperatures based upon heating degree days were 11.2% warmer than normal and
3.6% warmer than the 1998 twelve-month period. Retail gallons of propane sold
were slightly lower in the 1999 twelve-month period reflecting a 9.7 million
gallon decrease in agricultural gallons primarily related to lower crop drying
demand and the effects on heating-related volumes of the slightly warmer
temperatures. Wholesale gallons of propane sold were also lower primarily as a
result of lower sales of storage inventories.
Total retail propane revenues declined $59.0 million in the 1999 twelve-month
period. The decrease reflects (1) a $47.7 million decrease as a result of lower
average retail propane selling prices and (2) an $11.3 million reduction due to
the lower volumes sold. Wholesale propane revenues declined $28.5 million due to
(1) a $15.8 million reduction from the lower volumes sold and (2) a $12.7
million decrease as a result of lower average wholesale selling prices. The
lower average retail and wholesale selling prices reflect lower propane product
costs. Other revenues from propane operations during the 1999 twelve-month
period were $83.7 million, an increase of $3.0 million over the prior-year
period, reflecting higher appliance sales and hauling revenues.
Total margin increased $17.4 million in the 1999 twelve-month period due to (1)
higher average retail unit margin and (2) higher total margin from other sales
and services including appliance sales, terminal operations and various customer
fees. The higher average retail unit margin is principally a result of the lower
1999 twelve-month period propane product costs.
The slight increase in EBITDA and operating income for the 1999 twelve-month
period was the result of the higher total margin substantially offset by (1)
higher operating expenses and (2) a decrease in other income, net. Operating
expenses of the Partnership in the 1998 twelve-month period are net of $4.7
million from lower required accruals for environmental and property tax matters.
Excluding these items, operating expenses increased $5.9 million reflecting (1)
an
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<PAGE> 24
UGI CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
increase in compensation and benefit expenses, (2) higher expenses associated
with acquisitions and new business initiatives and (3) higher vehicle lease
expenses. These increases were partially offset by lower required accruals for
uncollectible accounts. Other income, net, in the 1999 twelve-month period
includes a $4.0 million loss from two interest rate protection agreements.
UTILITIES
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Increase
Twelve Months Ended June 30, 1999 1998 (Decrease)
- -------------------------------------------------------------------------------------
(Millions of dollars)
<S> <C> <C> <C> <C>
GAS UTILITY:
Natural gas system throughput - bcf 76.0 74.9 1.1 1.5%
Heating degree days - % warmer
than normal (12.9) (15.6) - -
Revenues $344.9 $356.2 $(11.3) (3.2)%
Total margin $159.8 $157.3 $ 2.5 1.6%
EBITDA $ 84.9 $ 80.8 $ 4.1 5.1%
Operating income $ 66.1 $ 64.0 $ 2.1 3.3%
ELECTRIC UTILITY:
Electric sales - gwh 890.4 863.8 26.6 3.1%
Revenues $ 73.1 $ 71.4 $ 1.7 2.4%
Total margin $ 39.0 $ 34.3 $ 4.7 13.7%
EBITDA $ 17.7 $ 14.0 $ 3.7 26.4%
Operating income $ 13.7 $ 9.9 $ 3.8 38.4%
- -------------------------------------------------------------------------------------
</TABLE>
GAS UTILITY. Weather in Gas Utility's service territory during the 1999
twelve-month period was 12.9% warmer than normal but 3.2% colder than the 1998
twelve-month period. As a result of the slightly colder weather and an increase
in our customer base, total system throughput increased 1.1 bcf (1.5%).
The decrease in Gas Utility's revenues principally reflects (1) an $8.6 million
decrease in revenues from core market industrial customers (due largely to
customers switching to delivery service); (2) a $5.2 million decrease in
revenues from off-system sales; and (3) a $2.8 million decrease in revenues from
interruptible retail customers. These decreases were offset by a $2.6 million
increase in revenues from delivery service customers and an increase in revenues
from core market residential customers resulting from the higher sales. Cost of
gas sold for the 1999 twelve-month period was $171.9 million, a decrease of
$13.6 million from the prior year twelve-month period. The decline is a result
of the lower off-system sales, lower average purchased gas costs, and the impact
of the lower sales to core market industrial customers.
-22-
<PAGE> 25
UGI CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The increase in Gas Utility's 1999 twelve-month period total margin includes a
$3.2 million increase in total margin from core market residential and
commercial customers and a $3.3 million increase in total margin from firm
delivery service customers. These increases were primarily reduced by a $2.4
million decline in margin from core market industrial customers and a $1.5
million reduction in margin from interruptible customers reflecting a less
favorable price spread between natural gas and oil.
EBITDA in the 1999 twelve-month period was higher than in the 1998 twelve-month
period reflecting the higher total margin, a $0.9 million increase in other
income, and slightly lower operating expenses due in part to lower expenses for
uncollectible accounts. Operating income also increased in the 1999 twelve-month
period reflecting the increase in EBITDA offset by higher charges for
depreciation.
ELECTRIC UTILITY. Total electric sales during the 1999 twelve-month period were
higher than during the prior year as a result of (1) slightly colder
heating-season weather; (2) warmer summer air conditioning weather; and (3) an
increase in the number of customers. Electric Utility revenues increased $1.7
million as the greater revenue from the higher sales was partially offset by the
decline in revenues from customers choosing alternate electric generation
suppliers.
Electric Utility cost of sales was $31.1 million in the 1999 twelve-month
period, a decrease of $2.9 million from the prior year, as the impact of the
higher sales was more than offset by the benefit of $1.5 million resulting from
the previously mentioned power supply agreement settlement and lower average
purchased power costs.
Electric Utility's total margin increased $4.7 million as a result of (1) lower
average purchased power costs; (2) the impact of the power supply agreement
settlement; and (3) the higher sales. Electric Utility EBITDA and operating
income increased as a result of the higher margin partially offset by a decrease
in other income.
ENERGY MARKETING
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
Increase
Twelve Months Ended June 30, 1999 1998 (Decrease)
- ------------------------------------------------------------------------
(Millions of dollars)
<S> <C> <C> <C> <C>
Revenues $87.4 $102.8 $(15.4) (15.0)%
Total margin $ 5.2 $ 4.6 $ 0.6 13.0%
EBITDA $ 2.2 $ 1.8 $ 0.4 22.2%
Operating income $ 2.2 $ 1.8 $ 0.4 22.2%
- ------------------------------------------------------------------------
</TABLE>
Total revenues from energy marketing in the 1999 twelve-month period decreased
$15.4 million principally as a result of lower average gas prices and, to a
lesser extent, lower volumes sold.
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<PAGE> 26
UGI CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
EBITDA and operating income each increased $0.4 million in the 1999 twelve-month
period as higher total margin was partially offset by an increase in operating
expenses.
CORPORATE AND OTHER
Corporate expenses, net, was $(5.3) million in the 1999 twelve-month period and
$(5.4) million in the 1998 twelve-month period. The benefit of lower corporate
expenses in the 1999 twelve-month period was offset by lower interest on
short-term investments.
Other activities' operating loss was $(4.7) million in the 1999 twelve-month
period compared to other activities' operating income of $2.7 million in the
prior-year period. The 1999 twelve-month period loss includes expenses related
to international propane business opportunities and start-up costs of
Enterprises' retail hearth products business. The 1998 twelve-month period
operating income includes $2.6 million in pre-tax gains from the sale of UTI
Energy Corp. common stock.
FINANCIAL CONDITION AND LIQUIDITY
FINANCIAL CONDITION
The Company's debt outstanding totaled $996.7 million at June 30, 1999 compared
with $982.8 million at September 30, 1998. The increase in debt principally
reflects the net effects of (1) the issuance of $70 million of Series D First
Mortgage Notes by the Operating Partnership and (2) the repayment of $60 million
of borrowings under the Operating Partnership's Acquisition Facility.
During the nine months ended June 30, 1999, the Partnership declared and paid
the minimum quarterly distribution of $.55 (the "MQD") on all limited partner
units and the general partner interests for the quarters ended September 30,
1998, December 31, 1998 and March 31, 1999. The MQD for the quarter ended June
30, 1999 will be paid on August 18, 1999 to holders of record on August 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 Amended and Restated Agreement of Limited Partnership of AmeriGas Partners
provides that a total of 4,945,537 of its Subordinated Units may convert into
Common Units on the first day after the distribution record date for any quarter
ending on or after March 31, 1998, and an additional 4,945,537 Subordinated
Units may convert on the first day after the distribution record date for any
quarter ending on or after March 31, 1999, if as of such quarterly dates certain
historical and projected cash
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<PAGE> 27
UGI CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
generation based requirements are met. Because the required cash generation
based objectives were achieved as of March 31, 1999, a total of 9,891,074
Subordinated Units held by the Company, through subsidiaries, were converted to
Common Units on May 18, 1999. The remaining 9,891,072 Subordinated Units held by
the Company are eligible to convert to Common Units on the first day after the
record date for any quarter ending on or after March 31, 2000 in respect of
which certain historical cash generation based requirements are met.
CASH FLOWS
Our consolidated cash and short-term investments totaled $157.9 million at June
30, 1999 compared with $148.4 million at September 30, 1998. These amounts
include $135.1 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 nine months ended June 30, 1999 are not necessarily indicative of the cash
flows to be expected for a full year.
OPERATING ACTIVITIES. Cash provided by operating activities during the nine
months ended June 30, 1999 totaled $143.7 million compared with $148.3 million
during the prior-year period. The Partnership's cash flow from operations during
the 1999 nine-month period was $73.1 million compared with operating cash flow
of $107.4 million in the prior-year period reflecting a decrease in cash flow
from changes in operating working capital. UGI Utilities' operating cash flow
for the 1999 nine-month period was $61.0 million compared with $45.8 million in
the prior year. Changes in consolidated operating working capital during the
nine months ended June 30, 1999 used $20.0 million of operating cash flow while
changes in consolidated operating working capital during the nine months ended
June 30, 1998 used $3.5 million of operating cash flow. Cash flow from operating
activities before changes in operating working capital was $163.7 million in the
nine months ended June 30, 1999 compared with $151.8 million of cash flow in the
prior-year period. The 1999 nine-month period amount includes the after-tax
benefit of the Unisource merger termination fee.
INVESTING ACTIVITIES. Cash provided by investing activities during the nine
months ended June 30, 1999 totaled $14.0 million compared with net cash used by
investing activities of $88.7 million in the prior-year period. Changes in
short-term investments provided $76.4 million of cash in the 1999 nine-month
period compared with a use of $36.5 million in the prior-year period. We spent
$51.5 million for property, plant and equipment during the nine months ended
June 30, 1999 compared with $46.4 million in the same period last year. The
increase is principally a result of a $3.8 million increase in Partnership
capital expenditures. During the 1999 nine-month period, we invested $4.9
million in our propane joint venture in China.
FINANCING ACTIVITIES. During the nine months ended June 30, 1999 and 1998, we
paid cash dividends on Common Stock of $36.4 million and $35.6 million,
respectively, and the Partnership paid the MQD on all publicly held Common Units
(as well as the Common and Subordinated units we own.) During
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<PAGE> 28
UGI CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
the nine months ended June 30, 1999 and 1998, the Company received proceeds of
$3.4 million and $7.0 million, respectively, from issuances of treasury stock in
conjunction with dividend reinvestment and employee plans. During the nine
months ended June 30, 1999, UGI repurchased $23.2 million of its Common Stock
compared with repurchases of $8.4 million in the prior-year nine-month period.
On March 31, 1999, the Operating Partnership issued $70 million of ten-year
Series D First Mortgage Notes the proceeds of which were used principally to
repay outstanding borrowings under its Acquisition and Revolving Credit
facilities. During the nine months ended June 30, 1998, we issued $48 million of
long-term debt including (1) $35 million of UGI Utilities' medium-term notes and
(2) $13 million under the Operating Partnership's Acquisition Facility.
During the nine months ended June 30, 1999, the Operating Partnership had net
borrowings of $10 million compared with net repayments of $17 million in the
1998 nine-month period. During the nine months ended June 30, 1999, UGI
Utilities had net repayments of $8.8 million under its revolving credit
agreements compared with net repayments of $16.3 million in the same period a
year ago.
PROPOSED MERGER WITH UNISOURCE WORLDWIDE
On March 1, 1999, UGI and Unisource announced that their boards of directors had
approved a definitive merger agreement for a stock-for-stock transaction. On May
25, 1999, UGI announced that it was notified that the board of directors of
Unisource had decided to enter into a merger agreement with Georgia-Pacific
Corp. and that UGI would allow Unisource to terminate its Merger Agreement with
UGI. Pursuant to the terms of the UGI-Unisource Merger Agreement, UGI received
from Unisource a merger termination fee of $25 million.
CORPORATE STRATEGIC INITIATIVES
On July 28, 1999, UGI announced a number of strategic and financial initiatives
to increase shareholder value and position the Company for future growth. Among
the initiatives were (1) an increase in the annual dividend rate to $1.50 a
share from $1.46 a share; (2) the repurchase of up to 4.5 million shares of UGI
Common Stock through a modified "Dutch auction" tender offer at a price no
greater than $26.00 a share and no less than $23.00 a share to be financed with
existing cash and short-term investment balances; and (3) a focus on growing
UGI's existing propane and utility businesses and related and complementary
businesses. The offer to repurchase shares will expire August 27, 1999, unless
extended by the Company, with the payment for such shares to occur shortly
thereafter. On July 28 1999, UGI also announced that it was terminating its
previously announced intention to sell UGI Utilities.
NATURAL GAS COMPETITION LEGISLATION
On June 22, 1999, Pennsylvania's Natural Gas Choice and Competition Act (Gas
Competition Act) was signed into law. The purpose of the Gas Competition Act is
to provide all natural gas consumers in
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<PAGE> 29
UGI CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Pennsylvania with the ability to purchase their gas supplies from the supplier
of their choice. Under the Gas Competition Act, all Pennsylvania natural gas
consumers will have the right to choose their natural gas commodity supplier by
July 1, 2000. Local gas distribution companies (LDCs) may continue to sell gas
to customers. However, such sales are subject to price regulation by the
Pennsylvania Public Utility Commission (PUC). The Gas Competition Act, in
conjunction with a companion bill, effectively eliminates the gross receipts tax
(currently 5%) on sales of gas commencing January 1, 2000. Gas distribution
services provided by LDCs remain subject to rate regulation.
The Company is currently evaluating the impact of the Gas Competition Act on its
operations and is in the process of developing its restructuring filing. Based
upon such evaluation to date, the Company does not expect the Gas Competition
Act will have a material adverse impact on its financial condition or results of
operations. For a more detailed discussion of the Gas Competition Act, see Note
5 to Condensed Consolidated Financial Statements.
YEAR 2000 MATTERS
The Year 2000 ("Y2K") issue is a result of computer programs being written using
two digits (rather than four) to identify and process a year in a date field.
Computer programs, computer-controlled systems and equipment with embedded
software may recognize date fields using "00" as the year 1900 rather than the
year 2000. If uncorrected, miscalculations and possible computer-based system
failures could result which might disrupt business operations. We are
designating the following information as our "Year 2000 Readiness Disclosure."
Recognizing the potential business consequences of the Y2K issue, we conducted a
detailed assessment of our critical, date sensitive, computer-based systems to
identify those systems that were not Y2K compliant and developed a program to
modify those systems that were not otherwise scheduled for replacement prior to
the year 2000. Our Y2K compliance efforts focused on our ability to continue to
perform three critical operating functions: (1) obtain products to sell; (2)
provide service to our customers; and (3) bill customers and pay our vendors and
employees.
Those systems that we assessed included (1) our information technology ("IT")
systems such as computer hardware and software we use in the operation of our
business and (2) our non-IT systems that contain embedded systems with
potentially date sensitive components such as micro-controllers contained in
various equipment and facilities. Among these systems are our customer
information and data systems; our financial systems including payroll and our
propane fuel accounting, supply and transportation system; and our Gas Utility
and Electric Utility distribution control systems. In order to identify and
modify those systems that we determined were not Y2K compliant, we used internal
resources as well as outside consultants and vendor representatives. In addition
to assessing, identifying and modifying our own systems, we developed and
implemented a program to attempt to determine the Y2K compliance status of third
parties, including our key suppliers and vendors, and certain of our customers.
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<PAGE> 30
UGI CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
AmeriGas Partners has successfully modified or replaced all of its critical IT
and non-IT systems that were not Y2K compliant. Gas Utility and Electric Utility
have successfully modified and tested all of their critical IT and non-IT
systems that were not Y2K compliant including Electric Utility's System Control
and Data Acquisition (SCADA) system. This system was installed during July 1999.
As previously mentioned, in addition to assuring our IT and non-IT systems are
Y2K compliant, we developed and implemented a program to assess the readiness of
our key suppliers and third-party providers, including suppliers of interstate
transportation capacity, natural gas producers and electricity interchange
providers. Although none of our products or services are of themselves date
sensitive, as a 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 have completed our program to
contact and inquire of the readiness of these key suppliers and vendors. We have
evaluated the responses received from our critical vendors and suppliers and to
the extent we were not satisfied with the responses, or have determined that the
responses indicate a lack of Y2K readiness, we have developed or are in the
process of finalizing the development of contingency plans. The major elements
of these contingency plans are based upon the use of manual back-up systems,
additional staffing, and alternative supply sources. These contingency plans
attempt to mitigate the potential impact of Y2K noncompliance by our key
suppliers and vendors. However, these plans cannot assure that business
disruptions that may be caused by key suppliers or third-party providers will
not have a material adverse impact on our operations. Gas Utility and Electric
Utility have completed their business contingency plans. AmeriGas Partners has
substantially completed its contingency plans and anticipates that such
contingency plans will be fully completed during the fourth quarter of fiscal
1999.
In addition, there are other Y2K risks which are beyond our control, any of
which could have a material adverse impact on our operations. Such risks
include, but are not limited to, the failure of utility and telecommunications
companies to provide service and the failure of financial institutions to
process transactions.
Incremental costs associated with our Y2K efforts, which we expense as incurred,
have not had a material effect on our results of operations. Because our Y2K
compliance program is substantially complete, we do not expect future costs will
be significant.
FORWARD-LOOKING STATEMENTS
Information contained above in this item and elsewhere in this Quarterly 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.
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<PAGE> 31
UGI CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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) political, regulatory and economic
conditions in foreign countries; (13) interest rate fluctuations and other
capital market conditions, including foreign currency rate fluctuations; (14)
reduced distributions from subsidiaries; and (15) the timing and success of the
Company's efforts to develop new business opportunities.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risk exposures are market prices for natural gas, electricity
and propane and changes in 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
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<PAGE> 32
UGI CORPORATION AND SUBSIDIARIES
commitments or forecasted transactions, we do not use derivative financial and
commodity instruments for trading purposes.
The Company has interest rate exposure associated with borrowings under the
Operating Partnership's Bank Credit Agreement and UGI Utilities' revolving
credit agreements. These agreements provide for interest rates on borrowings
which are indexed to short-term market interest rates. Based upon average
borrowings under these agreements during the twelve months ended June 30, 1999,
an increase in short-term interest rates of 50 basis points (0.5%) would
increase annual interest expense by less than $0.7 million. Additionally, 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. In addition, the Gas Competition Act permits LDCs
to recover prudently incurred costs of gas sold to customers including requiring
customers transferring to alternate natural gas suppliers to pay or receive
undercollections or overcollections of gas costs for an appropriate period of
time following such transfer. Consequently, there is limited commodity price
risk associated with Gas Utility due to the current and projected rate-making.
Because the sources and costs of our electric power vary from period to period
and because we discontinued regulatory accounting for the electric generation
portion of our business in June 1998, Electric Utility's quarterly results have
been, and future results are likely to be, more volatile. In addition, Electric
Utility purchases power it does not otherwise produce, representing slightly
more than 50% of its power needs, under power supply arrangements with other
producers and, to a much lesser extent, on the spot market. Spot market prices
for power can be volatile, especially during peak demand periods. Because
Electric Utility's generation rates are capped pursuant to the Restructuring
Order during the period stranded costs are being recovered (which period is
expected to extend until December 31, 2002), increases in costs to purchase or
produce its electric power needs will adversely impact Electric Utility's
results.
At June 30, 1999, 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 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. 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.
-30-
<PAGE> 33
UGI CORPORATION AND SUBSIDIARIES
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits:
10 Summary of Terms of UGI Corporation 1999 Restricted
Stock Awards
27 Financial Data Schedule
(b) The Company filed Current Reports on Form 8-K during the
quarter ended June 30, 1999 dated (1) April 28, 1999,
reporting developments in the proposed merger with Unisource
Worldwide, Inc. in Items 5 and 7, and (2) dated May 25, 1999,
reporting the termination of the Company's merger agreement
with Unisource Worldwide, Inc. in Items 5 and 7.
-31-
<PAGE> 34
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: August 13, 1999 By: A. J. Mendicino
- ---------------------- ------------------------------------------------
A. J. Mendicino, Vice President - Finance and
Chief Financial Officer
Date: August 13, 1999 By: M. J. Cuzzolina
- ---------------------- ------------------------------------------------
M. J. Cuzzolina, Vice President - Accounting and
Financial Control (Principal Accounting Officer)
-32-
<PAGE> 35
UGI CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
10 Summary of Terms of UGI Corporation 1999 Restricted Stock
Awards
27 Financial Data Schedule
<PAGE> 1
Exhibit 10
SUMMARY OF TERMS OF UGI CORPORATION 1999 RESTRICTED STOCK AWARDS
GENERAL
On June 4, 1999, the Board of Directors approved restricted stock awards for ten
individuals in the aggregate amount of 103,000 shares. Certificates for the
shares were issued in the name of each grantee. The certificates will be held by
the Company until the restriction period ends or the grantee forfeits the
shares. Each grantee has all rights of a shareholder of the Company, including
the right to vote the shares and the right to receive dividends. There is no
performance contingency attached to the grant, other than the rendering of
services to the Company or one of its subsidiaries until the restriction period
ends.
FORFEITURE
If the grantee's employment with the Company or its subsidiaries terminates for
any reason during the restriction period, other than due to death or disability,
the grantee will forfeit all restricted shares.
RESTRICTION PERIOD
The restriction period began June 4, 1999 and will terminate no later than June
3, 2003. The restricted shares may not be transferred during the restriction
period. After four years, all restrictions lapse and each grantee will receive
the shares. However, the restriction period will end immediately upon a change
of control of the Company. In addition, after June 3, 2001, the restriction
period will end whenever the average daily sales price of a share of UGI common
stock on the New York Stock Exchange exceeds $26 for a period of ten consecutive
trading days commencing on or after June 4, 2001.
June 4, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
CONDENSED CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT OF UGI CORPORATION AND
SUBSIDIARIES AS OF AND FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS INCLUDED IN UGI
CORPORATION'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1999.
</LEGEND>
<CIK> 0000884614
<NAME> UGI CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 152,500
<SECURITIES> 5,400
<RECEIVABLES> 116,300
<ALLOWANCES> 9,000
<INVENTORY> 55,300
<CURRENT-ASSETS> 356,500
<PP&E> 1,505,000
<DEPRECIATION> 502,600
<TOTAL-ASSETS> 2,078,900
<CURRENT-LIABILITIES> 315,200
<BONDS> 893,700
20,000
0
<COMMON> 394,500
<OTHER-SE> (16,200)
<TOTAL-LIABILITY-AND-EQUITY> 2,078,900
<SALES> 1,132,200
<TOTAL-REVENUES> 1,132,200
<CGS> 546,100
<TOTAL-COSTS> 546,100
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 5,910
<INTEREST-EXPENSE> 63,100
<INCOME-PRETAX> 120,500
<INCOME-TAX> 52,400
<INCOME-CONTINUING> 66,900
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 66,900
<EPS-BASIC> 2.06
<EPS-DILUTED> 2.06
</TABLE>
