<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 March 31, 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 April 30, 1999, there were 31,595,012 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 March 31, 1999,
September 30, 1998 and March 31, 1998 1
Condensed Consolidated Statements of Income for the three,
six and twelve months ended March 31, 1999 and 1998 2
Condensed Consolidated Statements of Cash Flows for the
six and twelve months ended March 31, 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 4. Submission of Matters to a Vote of Security Holders 30 - 31
Item 5. Other Information 31
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>
March 31, September 30, March 31,
1999 1998 1998
-------- -------- --------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 128.2 $ 66.6 $ 78.4
Short-term investments, at cost which approximates market value 21.7 81.8 70.0
Accounts receivable (less allowances for doubtful accounts of
$10.2, $7.9 and $13.1, respectively) 166.5 81.8 167.5
Accrued utility revenues 14.4 6.7 13.8
Inventories 47.6 77.9 62.2
Deferred income taxes 19.5 14.7 24.5
Prepaid expenses and other current assets 25.8 21.1 20.8
-------- -------- --------
Total current assets 423.7 350.6 437.2
Property, plant and equipment, at cost (less accumulated depreciation
and amortization of $494.5, $465.5 and $436.5, respectively) 999.9 999.0 992.6
Intangible assets (less accumulated amortization of $153.7, $141.5 and
$129.3, respectively) 621.1 630.7 669.1
Utility regulatory assets 59.9 59.3 48.7
Other assets 44.4 35.0 36.6
-------- -------- --------
Total assets $2,149.0 $2,074.6 $2,184.2
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt - Propane $ 5.2 $ 6.1 $ 6.7
Current maturities of long-term debt - Utilities 7.1 7.1 7.1
Current maturities of long-term debt - other 0.4 0.4 0.4
Current portion of UGI Utilities redeemable preferred stock -- -- 15.2
Bank loans - Propane 5.0 10.0 --
Bank loans - Utilities 72.8 68.4 42.9
Accounts payable 80.1 80.1 75.9
Other current liabilities 187.8 149.7 205.3
-------- -------- --------
Total current liabilities 358.4 321.8 353.5
Long-term debt - Propane 714.7 702.9 695.2
Long-term debt - Utilities 180.0 180.1 187.2
Long-term debt - other 7.6 7.8 8.0
Deferred income taxes 158.0 154.4 156.9
Other noncurrent liabilities 78.8 84.0 75.8
Commitments and contingencies
Minority interest in AmeriGas Partners 247.6 236.5 275.8
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) 394.3 394.3 393.8
Retained earnings (accumulated deficit) 13.5 (17.7) 22.4
-------- -------- --------
407.8 376.6 416.2
Treasury stock, at cost (23.9) (9.5) (4.4)
-------- -------- --------
Total common stockholders' equity 383.9 367.1 411.8
-------- -------- --------
Total liabilities and stockholders' equity $2,149.0 $2,074.6 $2,184.2
======== ======== ========
</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 Six Months Ended Twelve Months Ended
March 31, March 31, March 31,
----------------------- ----------------------- -------------------------
1999 1998 1999 1998 1999 1998
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Propane $ 304.9 $ 306.2 $ 542.7 $ 609.1 $ 848.0 $ 955.6
Utilities 167.7 152.3 280.5 287.8 415.0 441.6
Energy marketing 26.6 29.8 49.7 62.6 90.1 98.3
---------- ---------- ---------- ---------- ---------- ----------
499.2 488.3 872.9 959.5 1,353.1 1,495.5
---------- ---------- ---------- ---------- ---------- ----------
Costs and expenses:
Propane cost of sales 128.8 146.8 233.3 310.0 367.1 489.9
Utilities - gas, fuel and purchased power 87.5 80.7 142.8 153.2 204.2 228.6
Energy marketing cost of sales 25.1 28.2 46.9 59.8 85.4 93.8
Operating and administrative expenses 123.5 117.0 236.2 226.0 447.9 438.7
Depreciation and amortization 22.6 21.9 44.3 43.5 88.6 85.9
Other income, net (2.3) (4.0) (6.1) (8.3) (10.5) (19.3)
---------- ---------- ---------- ---------- ---------- ----------
385.2 390.6 697.4 784.2 1,182.7 1,317.6
---------- ---------- ---------- ---------- ---------- ----------
Operating income 114.0 97.7 175.5 175.3 170.4 177.9
Interest expense (20.9) (21.5) (42.1) (42.9) (83.6) (83.5)
Minority interest in AmeriGas Partners (23.2) (17.7) (30.6) (28.8) (10.7) (10.2)
---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes and
subsidiary preferred stock dividends 69.9 58.5 102.8 103.6 76.1 84.2
Income taxes (32.0) (26.6) (46.5) (46.2) (34.7) (37.0)
Dividends on UGI Utilities Series
Preferred Stock (0.4) (0.7) (0.8) (1.4) (1.6) (2.8)
---------- ---------- ---------- ---------- ---------- ----------
Net income $ 37.5 $ 31.2 $ 55.5 $ 56.0 $ 39.8 $ 44.4
========== ========== ========== ========== ========== ==========
Earnings per share:
Basic $ 1.15 $ 0.95 $ 1.69 $ 1.70 $ 1.21 $ 1.35
========== ========== ========== ========== ========== ==========
Diluted $ 1.14 $ 0.94 $ 1.69 $ 1.69 $ 1.21 $ 1.34
========== ========== ========== ========== ========== ==========
Average common shares outstanding:
Basic 32.733 33.059 32.795 32.992 32.873 32.979
========== ========== ========== ========== ========== ==========
Diluted 32.773 33.248 32.855 33.183 32.958 33.139
========== ========== ========== ========== ========== ==========
Dividends declared per share $ 0.365 $ 0.36 $ 0.73 $ 0.72 $ 1.46 $ 1.44
========== ========== ========== ========== ========== ==========
</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>
Six Months Ended Twelve Months Ended
March 31, March 31,
---------------- -------------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 55.5 $ 56.0 $ 39.8 $ 44.4
Reconcile to net cash provided by operating activities:
Depreciation and amortization 44.3 43.5 88.6 85.9
Minority interest in AmeriGas Partners 30.6 28.8 10.7 10.2
Deferred income taxes, net (3.2) (1.9) 8.8 (1.2)
Other, net 6.0 4.4 6.5 8.9
------ ------ ------ ------
133.2 130.8 154.4 148.2
Net change in:
Accounts receivable and accrued utility revenues (96.6) (68.6) (6.0) 31.6
Inventories and prepaid propane purchases 31.1 55.4 14.7 (5.0)
Deferred fuel costs 12.2 11.7 (5.3) 2.4
Accounts payable 0.1 (27.7) 4.3 (5.8)
Other current assets and liabilities 13.8 12.2 (3.6) 4.4
------ ------ ------ ------
Net cash provided by operating activities 93.8 113.8 158.5 175.8
------ ------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment (32.6) (31.3) (70.5) (68.3)
Net proceeds from disposals of assets 2.2 3.8 6.3 10.1
Acquisitions of businesses, net of cash acquired (3.0) (5.6) (5.5) (14.5)
Investments in joint venture partnerships (4.9) -- (6.9) --
Short-term investments (increase) decrease 60.1 (4.6) 48.3 (47.4)
Other, net (5.4) (3.5) (4.2) 38.9
------ ------ ------ ------
Net cash provided (used) by investing activities 16.4 (41.2) (32.5) (81.2)
------ ------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends on Common Stock (24.0) (23.7) (47.9) (47.4)
Distributions on Partnership public Common Units (19.5) (19.5) (39.0) (38.9)
Issuance of long-term debt 73.0 48.0 83.0 69.2
Repayment of long-term debt (62.7) (12.8) (72.2) (21.9)
Propane bank loans increase (decrease) (5.0) (28.0) 5.0 (7.0)
UGI Utilities bank loans increase (decrease) 4.4 (24.1) 29.9 (52.1)
Issuance of treasury stock 2.1 6.0 4.6 11.5
Redemption of UGI Utilities preferred stock -- -- (15.5) --
Repurchases of Common Stock (16.9) (4.1) (24.1) (15.5)
------ ------ ------ ------
Net cash used by financing activities (48.6) (58.2) (76.2) (102.1)
------ ------ ------ ------
Cash and cash equivalents increase (decrease) $ 61.6 $ 14.4 $ 49.8 $ (7.5)
====== ====== ====== ======
Cash and cash equivalents:
End of period $128.2 $ 78.4 $128.2 $ 78.4
Beginning of period 66.6 64.0 78.4 85.9
------ ------ ------ ------
Increase (decrease) $ 61.6 $ 14.4 $ 49.8 $ (7.5)
====== ====== ====== ======
</TABLE>
During the twelve months ended March 31, 1999 and 1998, UGI Utilities, Inc. paid
cash dividends to UGI of $34.0 and $12.6, respectively. During the twelve months
ended March 31, 1999 and 1998, AmeriGas, Inc. paid cash dividends to UGI of
$49.6 and $56.5, respectively. During those same periods, UGI paid cash
dividends to holders of Common Stock of $47.9 and $47.4, 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."
We also conduct an energy marketing business principally through our
second-tier subsidiary, UGI Energy Services, Inc., a wholly owned
subsidiary of UGI Enterprises, Inc. (Enterprises). Through other
subsidiaries, Enterprises participates in propane joint-venture
projects in Romania and China.
Our condensed consolidated financial statements include the accounts of
UGI and its majority-owned subsidiaries, together referred to as "we"
or "the Company." We eliminate all significant intercompany accounts
and transactions when we consolidate. We report the public unitholders'
interest in AmeriGas Partners' results of operations and net assets as
minority interest in the condensed consolidated statements of income
and balance sheets. We have reclassified certain prior-period balances
to conform with the current period presentation.
The accompanying condensed consolidated financial statements are
unaudited and have been prepared in accordance with the rules and
regulations of the U.S. Securities and Exchange Commission. They
include all adjustments which we consider necessary for a fair
statement of the results for the interim periods presented. Such
adjustments consisted only of normal recurring items unless otherwise
disclosed. These financial statements should be read in conjunction
with the financial statements and the related notes included in our
Annual Report on Form 10-K, as amended, for the year ended September
30, 1998. Due to the seasonal nature of our businesses, the results of
operations for interim periods are not necessarily indicative of the
results to be expected for a full year.
-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.
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 together.
Accordingly, these operations are combined for segment reporting
purposes.
The accounting policies of the four segments are the same as those
described in the Significant Accounting Policies note contained in our
Annual Report on Form 10-K for the year ended September 30, 1998. We
evaluate each segment's performance principally based on its earnings
before interest expense, income taxes, depreciation and amortization
(EBITDA). Although EBITDA is used internally to evaluate segment
performance, it should not be considered as an alternative to net
income (as an indicator of operating
-5-
<PAGE> 8
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars, except per share amounts)
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 MARCH 31, 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 $ 499.2 $ (0.5) $ 304.9 $ 147.6 $ 20.1 $ 26.6 $ -- $ 0.5
Segment profit (loss):
EBITDA $ 136.6 $ 2.7 $ 89.0 $ 44.0 $ 5.0 $ 0.6 $ (3.1) $ (1.6)
Depreciation and amortization (22.6) -- (16.7) (4.8) (1.1) -- -- --
-----------------------------------------------------------------------------------------
Operating income (loss) 114.0 2.7 72.3 39.2 3.9 0.6 (3.1) (1.6)
Interest expense (20.9) -- (16.4) (3.8) (0.6) -- -- (0.1)
Minority interest (23.2) -- (23.2) -- -- -- -- --
-----------------------------------------------------------------------------------------
Income (loss) before income taxes $ 69.9 $ 2.7 $ 32.7 $ 35.4 $ 3.3 $ 0.6 $ (3.1) $ (1.7)
Segment assets (at period end) $2,149.0 $ (15.3) $1,261.0 $ 636.3 $ 97.9 $ 19.6 $ 119.4 $ 30.1
=========================================================================================
Investment in equity method investees $ 6.3 $ -- $ -- $ -- $ -- $ -- $ -- $ 6.3
=========================================================================================
</TABLE>
THREE MONTHS ENDED MARCH 31, 1998:
<TABLE>
<CAPTION>
Reportable Segments
Inter- -------------------------------------------
segment Gas Electric Energy All
Total Elims. Propane utility utility marketing Corporate other
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 488.3 $ (0.8) $ 306.2 $ 133.2 $ 19.1 $ 29.8 $ -- $ 0.8
Segment profit (loss):
EBITDA $ 119.6 $ 2.8 $ 75.8 $ 37.2 $ 4.3 $ 0.9 $ (1.4) $ --
Depreciation and amortization (21.9) -- (16.3) (4.6) (1.0) -- -- --
------------------------------------------------------------------------------------
Operating income (loss) 97.7 2.8 59.5 32.6 3.3 0.9 (1.4) --
Interest expense (21.5) -- (16.8) (3.8) (0.6) -- -- (0.3)
Minority interest (17.7) -- (17.7) -- -- -- -- --
------------------------------------------------------------------------------------
Income (loss) before income taxes $ 58.5 $ 2.8 $ 25.0 $ 28.8 $ 2.7 $ 0.9 $ (1.4) $ (0.3)
====================================================================================
Segment assets (at period end) $2,184.2 $ (15.9) $1,333.9 $ 618.1 $ 87.8 $ 21.1 $ 115.3 $ 23.9
====================================================================================
Investment in equity method investees $ 1.4 $ -- $ -- $ -- $ -- $ -- $ -- $ 1.4
====================================================================================
</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)
SIX MONTHS ENDED MARCH 31, 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 $ 872.9 $ (1.0) $ 542.7 $ 242.2 $ 38.3 $ 49.7 $ -- $ 1.0
Segment profit (loss):
EBITDA $ 219.8 $ 5.2 $ 139.8 $ 70.2 $ 9.7 $ 1.3 $ (4.0) $ (2.4)
Depreciation and amortization (44.3) -- (32.8) (9.4) (1.9) (0.1) -- (0.1)
---------------------------------------------------------------------------------
Operating income (loss) 175.5 5.2 107.0 60.8 7.8 1.2 (4.0) (2.5)
Interest expense (42.1) -- (33.0) (7.6) (1.2) -- -- (0.3)
Minority interest (30.6) -- (30.6) -- -- -- -- --
---------------------------------------------------------------------------------
Income (loss) before income taxes $ 102.8 $ 5.2 $ 43.4 $ 53.2 $ 6.6 $ 1.2 $ (4.0) $ (2.8)
=================================================================================
Segment assets (at period end) $2,149.0 $(15.3) $1,261.0 $ 636.3 $ 97.9 $ 19.6 $ 119.4 $ 30.1
=================================================================================
Investment in equity method investees $ 6.3 $ -- $ -- $ -- $ -- $ -- $ -- $ 6.3
=================================================================================
</TABLE>
SIX MONTHS ENDED MARCH 31, 1998:
<TABLE>
<CAPTION>
Reportable Segments
Inter- -------------------------------------------
segment Gas Electric Energy All
Total Elims. Propane utility utility marketing Corporate other
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 959.5 $ (1.7) $ 609.1 $ 250.1 $ 37.7 $ 62.6 $ -- $ 1.7
Segment profit (loss):
EBITDA $ 218.8 $ 5.4 $ 135.9 $ 69.0 $ 8.1 $ 1.4 $ (2.6) $ 1.6
Depreciation and amortization (43.5) -- (32.4) (9.0) (1.9) -- -- (0.2)
-------------------------------------------------------------------------------------
Operating income (loss) 175.3 5.4 103.5 60.0 6.2 1.4 (2.6) 1.4
Interest expense (42.9) -- (33.8) (7.6) (1.1) -- -- (0.4)
Minority interest (28.8) -- (28.8) -- -- -- -- --
-------------------------------------------------------------------------------------
Income (loss) before income taxes $ 103.6 $ 5.4 $ 40.9 $ 52.4 $ 5.1 $ 1.4 $ (2.6) $ 1.0
=====================================================================================
Segment assets (at period end) $2,184.2 $ (15.9) $1,333.9 $ 618.1 $ 87.8 $ 21.1 $ 115.3 $ 23.9
=====================================================================================
Investment in equity method investees $ 1.4 $ -- $ -- $ -- $ -- $ -- $ -- $ 1.4
=====================================================================================
</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 MARCH 31, 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 $1,353.1 $ (2.3) $ 848.0 $ 342.3 $ 72.7 $ 90.1 $ -- $ 2.3
Segment profit (loss):
EBITDA $ 259.0 $ 10.5 $ 157.2 $ 84.2 $ 15.2 $ 2.0 $ (6.3) $ (3.8)
Depreciation and amortization (88.6) -- (65.8) (18.6) (3.9) (0.2) -- (0.1)
------------------------------------------------------------------------------------
Operating income (loss) 170.4 10.5 91.4 65.6 11.3 1.8 (6.3) (3.9)
Interest expense (83.6) -- (65.3) (15.3) (2.4) -- -- (0.6)
Minority interest (10.7) -- (10.7) -- -- -- -- --
------------------------------------------------------------------------------------
Income (loss) before income taxes $ 76.1 $ 10.5 $ 15.4 $ 50.3 $ 8.9 $ 1.8 $ (6.3) $ (4.5)
====================================================================================
Segment assets (at period end) $2,149.0 $ (15.3) $1,261.0 $ 636.3 $ 97.9 $ 19.6 $ 119.4 $ 30.1
====================================================================================
Investment in equity method investees $ 6.3 $ -- $ -- $ -- $ -- $ -- $ -- $ 6.3
====================================================================================
</TABLE>
TWELVE MONTHS ENDED MARCH 31, 1998:
<TABLE>
<CAPTION>
Reportable Segments
Inter- --------------------------------------------
segment Gas Electric Energy All
Total Elims. Propane utility utility marketing Corporate other
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $1,495.5 $ (3.4) $ 955.6 $ 370.1 $ 71.5 $ 98.3 $ -- $ 3.4
Segment profit (loss):
EBITDA $ 263.8 $ 11.7 $ 154.9 $ 81.7 $ 14.2 $ 2.0 $ (6.2) $ 5.5
Depreciation and amortization (85.9) -- (64.5) (16.9) (4.1) -- (0.1) (0.3)
--------------------------------------------------------------------------------------
Operating income (loss) 177.9 11.7 90.4 64.8 10.1 2.0 (6.3) 5.2
Interest expense (83.5) -- (65.8) (14.5) (2.4) -- -- (0.8)
Minority interest (10.2) -- (10.2) -- -- -- -- --
--------------------------------------------------------------------------------------
Income (loss) before income taxes $ 84.2 $ 11.7 $ 14.4 $ 50.3 $ 7.7 $ 2.0 $ (6.3) $ 4.4
======================================================================================
Segment assets (at period end) $2,184.2 $ (15.9) $1,333.9 $ 618.1 $ 87.8 $ 21.1 $ 115.3 $ 23.9
======================================================================================
Investment in equity method investees $ 1.4 $ -- $ -- $ -- $ -- $ -- $ -- $ 1.4
======================================================================================
</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 $48 million at March 31, 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. UGI 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 for a stock-for-stock transaction. Under the merger
agreement, Unisource would be merged with a wholly owned subsidiary of
UGI and UGI would exchange 0.566 common shares of UGI common stock for
each common share of Unisource. It is estimated that UGI would issue up
to approximately 40 million shares of UGI common stock in the merger.
The acquisition of Unisource is subject to the approval of Unisource's
shareholders. The issuance of UGI common stock to effect the merger is
subject to the approval of UGI shareholders. In addition, the merger is
subject to customary regulatory approvals. In
-11-
<PAGE> 14
UGI CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Millions of dollars, except per share amounts)
connection with the merger, UGI announced its intention to sell UGI
Utilities; reduce its annual dividend to $.75 per common share from
$1.46; and repurchase up to 6.6 million shares of UGI Common Stock.
On May 10, 1999, Unisource announced that it had received an
unsolicited written proposal from Georgia-Pacific Corporation
(Georgia-Pacific) to acquire Unisource at a price of $12.00 per share
in cash and that the Unisource board of directors had authorized
management to begin discussions with Georgia-Pacific concerning its
proposal. The UGI-Unisource merger transaction is pending.
-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 March 31, 1999 (1999 three-month period) with the three months
ended March 31, 1998 (1998 three-month period); (2) the six months ended March
31, 1999 (1999 six-month period) with the six months ended March 31, 1998 (1998
six-month period); and (3) the twelve months ended March 31, 1999 (1999
twelve-month period) with the twelve months ended March 31, 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 did not change the
operating segments we disclose, certain of our segments' operating results now
include billed UGI corporate overhead costs.
1999 THREE-MONTH PERIOD COMPARED WITH 1998 THREE-MONTH PERIOD
PROPANE
<TABLE>
<CAPTION>
Increase
Three Months Ended March 31, 1999 1998 (Decrease)
- ----------------------------------------------------------------------------
(Millions of dollars)
<S> <C> <C> <C> <C>
Retail gallons sold - millions 284.8 265.7 19.1 7.2%
Heating degree days - % warmer
than normal (11.0) (14.0) -- --
Revenues $304.9 $306.2 $ (1.3) (.4)%
Total margin $176.1 $159.4 $ 16.7 10.5%
Operating income $ 72.3 $ 59.5 $ 12.8 21.5%
EBITDA (a) $ 89.0 $ 75.8 $ 13.2 17.4%
- ----------------------------------------------------------------------------
</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 due to slightly colder weather and growth in our customer base. 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 March 31, 1999 was 11.0% warmer than normal but 3.5%
colder than the same period last year.
Total revenues from retail propane sales decreased $.8 million to $259.5 million
during the 1999 three-month period reflecting a $19.6 million decrease in
average retail propane selling prices
-13-
<PAGE> 16
UGI CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
partially offset by an $18.8 million increase as a result of the higher volumes
sold. Wholesale propane revenues declined $2.5 million to $24.8 million during
the three months ended March 31, 1999 due to a $5.1 million decrease from lower
average selling prices partially offset by a $2.6 million increase from greater
volumes sold. The lower average retail and wholesale selling prices reflect
lower propane product costs. Other revenues increased $2.0 million to $20.6
million principally due to higher terminal and appliance sales revenues.
Total margin increased $16.7 million in the 1999 three-month period primarily as
a result of the greater retail propane volumes sold and, to a lesser extent,
higher average retail propane unit margin. The higher average retail unit margin
reflects lower propane product costs during the three months ended March 31,
1999.
The increases in EBITDA and operating income during the 1999 three-month period
principally reflect the increase in total margin partially offset by moderately
higher operating expenses. Operating expenses of the Partnership were $88.7
million during the 1999 three-month period compared with $85.6 million in the
same period last year. The increase in operating expenses principally resulted
from higher payroll costs, a portion of which is associated with the increase in
retail volumes sold.
UTILITIES
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999 1998 Increase
- -------------------------------------------------------------------------------------
(Millions of dollars)
<S> <C> <C> <C> <C>
GAS UTILITY:
Natural gas system throughput - bcf 29.1 25.9 3.2 12.4%
Heating degree days - % warmer
than normal (8.4) (24.0) -- --
Revenues $147.6 $133.2 $ 14.4 10.8%
Total margin (a) $ 63.2 $ 56.2 $ 7.0 12.5%
Operating income $ 39.2 $ 32.6 $ 6.6 20.2%
EBITDA (b) $ 44.0 $ 37.2 $ 6.8 18.3%
ELECTRIC UTILITY:
Electric sales - gwh 255.2 237.2 18.0 7.6%
Revenues $ 20.1 $ 19.1 $ 1.0 5.2%
Total margin (a) $ 10.2 $ 9.3 $ .9 9.7%
Operating income $ 3.9 $ 3.3 $ .6 18.2%
EBITDA (b) $ 5.0 $ 4.3 $ .7 16.3%
- -------------------------------------------------------------------------------------
</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 area in the 1999 three-month
period was 8.4% warmer than normal but 20.6% colder than in the comparable
prior-year period. Total system throughput increased 3.2 bcf (12.4%) including a
2.0 bcf (16.3%) increase in throughput to our firm- residential, commercial and
industrial (collectively, "core market") customers and a 1.3 bcf increase in
delivery service volumes. Part of the increase in firm delivery service
throughput resulted from some of our industrial core market customers switching
to firm delivery service. Under delivery service tariffs, we record revenues for
the transportation of gas through our distribution system but not for the gas
itself.
The increase in Gas Utility's total revenues in the 1999 three-month period is
due principally to a $13.5 million increase in core market revenues. These
increases were primarily a result of the higher volumes sold to our core market
residential and commercial customers. Cost of gas sold was $78.4 million in the
1999 three-month period, an increase of $6.7 million over the 1998 three-month
period, principally reflecting the increase in core market sales.
Gas Utility total margin for the 1999 three-month period increased $7.0 million
(12.5%) resulting from (1) a $5.7 million increase in margin from core market
customers and (2) a $2.0 million increase in margin from firm delivery service
customers. Total margin from our interruptible customers, who have the ability
to switch to alternate fuels, principally oil, decreased $.7 million. The lower
interruptible margins in the 1999 three-month period were a result of oil prices
declining relative to natural gas prices.
As a result of the higher core market and delivery service total margin, Gas
Utility operating income and EBITDA for the 1999 three-month period increased
$6.5 million and $6.8 million, respectively. Operating and administrative
expenses (excluding revenue-related taxes which are included in the analysis of
margin above) were comparable with the prior-year period.
ELECTRIC UTILITY. Total electric sales in the 1999 three-month period increased
18.0 gwh (7.6%) reflecting the impact of colder weather in the Electric Utility
service territory. Although the terms of our Electric Utility Restructuring
Order permit all of our customers to choose their electricity supplier effective
January 1, 1999, less than 5% of our sales during the 1999 three-month period
represents electricity we distributed for alternate suppliers.
-15-
<PAGE> 18
UGI CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
In accordance with its June 19, 1998 Restructuring Order, in January 1999
Electric Utility began charging customers unbundled rates for generation,
transmission and distribution services, and a competitive transition charge
(CTC) for the recovery of stranded costs. The increase in Electric Utility
revenues reflects the higher 1999 three-month period total sales partially
offset by lower revenues from customers who purchased electricity from other
suppliers. Because these customers buy their electricity from others, we record
revenues for distributing the electricity over our wires but we do not record
revenues related to the electricity itself. Electric Utility cost of sales was
$9.0 million in the 1999 three-month period, virtually unchanged from the
prior-year period, as the impact of the higher sales was offset by lower per
unit purchased power costs.
Electric Utility's total margin increased $.9 million reflecting (1) the impact
of the higher sales and (2) lower per unit purchased power costs. Electric
Utility operating income and EBITDA increased during the 1999 three-month period
as a result of the higher total margin partially offset by slightly higher
operating expenses.
ENERGY MARKETING
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999 1998 Decrease
- ----------------------------------------------------------------------
(Millions of dollars)
<S> <C> <C> <C> <C>
Revenues $26.6 $29.8 $(3.2) (10.7)%
Total margin $ 1.5 $ 1.6 $ (.1) (6.3)%
Operating income $ .6 $ .9 $ (.3) (33.3)%
EBITDA $ .6 $ .9 $ (.3) (33.3)%
- ----------------------------------------------------------------------
</TABLE>
Total revenues from energy marketing in the 1999 three-month period decreased
principally as a result of lower average gas prices. Billed volumes were
slightly higher in the 1999 three-month period due in part to cooler weather.
Operating income and EBITDA decreased $.3 million from the 1998 three-month
period as a result of higher operating and administrative expenses and slightly
lower total margin.
CORPORATE AND OTHER
Corporate expenses, net, which consists of corporate overhead expenses net of
interest income, were $(3.1) million during the 1999 three-month period compared
with $(1.4) million during the 1998 three-month period. The increase in net
corporate expenses is a result of expenses related to UGI's proposed merger with
Unisource Worldwide, Inc. (Unisource).
Other activities' operating loss was $(1.6) million in the 1999 three-month
period. The 1999 three-month period loss primarily reflects due diligence
expenses associated with international propane business opportunities and
start-up costs of Enterprises' retail hearth products business.
-16-
<PAGE> 19
UGI CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
As a result of our proposed merger with Unisource, we suspended our
international propane due diligence activities.
1999 SIX-MONTH PERIOD COMPARED WITH 1998 SIX-MONTH PERIOD
PROPANE
<TABLE>
<CAPTION>
Increase
Six Months Ended March 31, 1999 1998 (Decrease)
- ----------------------------------------------------------------------------
(Millions of dollars)
<S> <C> <C> <C> <C>
Retail gallons sold - millions 505.5 514.3 (8.8) (1.7)%
Heating degree days - % warmer
than normal (11.0) (7.5) -- --
Revenues $542.7 $609.1 $(66.4) (10.9)%
Total margin $309.4 $299.1 $ 10.3 3.4%
Operating income $107.0 $103.5 $ 3.5 3.4%
EBITDA $139.8 $135.9 $ 3.9 2.9%
- ----------------------------------------------------------------------------
</TABLE>
Retail volumes of propane sold were slightly lower in the 1999 six-month period
primarily as a result of a significant decline in agricultural gallons, due to a
dry autumn which reduced demand for crop drying, and the effects of warmer
heating-season weather. Based upon degree day information provided by NOAA for
335 airports in the continental U.S., weather during the six months ended March
31, 1999 was 11.0% warmer than normal and 3.8% warmer than the same period last
year. The decrease in retail volumes resulting from the lower agricultural sales
and the warmer weather was partially offset by the effects of an increase in the
number of customers we serve. Wholesale volumes sold during the 1999 six-month
period decreased primarily from reduced sales of storage inventories.
Total revenues from retail propane sales declined $47.4 million to $453.2
million during the 1999 six-month period reflecting (1) a $38.8 million decrease
as a result of lower average retail propane selling prices and (2) an $8.6
million decrease from the lower retail volumes sold. Wholesale propane revenues
decreased $21.4 million to $43.2 million reflecting (1) a $12.9 million decrease
from lower volumes sold and (2) an $8.5 million decrease as a result of lower
average wholesale selling prices. The decline in average retail and wholesale
selling prices resulted from lower propane product costs. Other revenues
increased $2.4 million to $46.3 million in the 1999 six-month period principally
due to greater appliance sales, terminal revenues and various fees.
Total margin increased $10.3 million in the 1999 six-month period,
notwithstanding the lower volumes sold, principally due to (1) higher average
retail propane unit margin and (2) greater margin from other sales and services
including appliance sales and terminal operations. Average retail propane unit
margin was greater during the six months ended March 31, 1999 as a result of
-17-
<PAGE> 20
UGI CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
the lower propane product costs and, to a lesser extent, a greater proportion of
higher margin residential heating gallons.
EBITDA and operating income increased during the six months ended March 31, 1999
principally reflecting the increase in total margin partially offset by higher
operating expenses. Operating and administrative expenses of the Partnership
were $172.3 million during the 1999 six-month period compared with $166.4
million in the prior-year period. The increase in operating expenses is
principally due to (1) higher compensation and benefit expenses, (2) an increase
in vehicle repair and lease expense and (3) higher expenses associated with
acquisitions and new business activities. These increases were partially offset
by a reduction in general liability insurance expense.
UTILITIES
<TABLE>
<CAPTION>
Increase
Six Months Ended March 31, 1999 1998 (Decrease)
- --------------------------------------------------------------------------------------
(Millions of dollars)
<S> <C> <C> <C> <C>
GAS UTILITY:
Natural gas system throughput - bcf 49.4 48.5 .9 1.9%
Heating degree days - % warmer
than normal (12.0) (14.8) -- --
Revenues $242.2 $250.1 $ (7.9) (3.2)%
Total margin $106.4 $104.8 $ 1.6 1.5%
Operating income $ 60.8 $ 60.0 $ .8 1.3%
EBITDA $ 70.2 $ 69.0 $ 1.2 1.7%
ELECTRIC UTILITY:
Electric sales - gwh 478.4 464.9 13.5 2.9%
Revenues $ 38.3 $ 37.7 $ .6 1.6%
Total margin $ 20.0 $ 18.2 $ 1.8 9.9%
Operating income $ 7.8 $ 6.2 $ 1.6 25.8%
EBITDA $ 9.7 $ 8.1 $ 1.6 19.8%
- --------------------------------------------------------------------------------------
</TABLE>
GAS UTILITY. Weather in Gas Utility's service territory in the 1999 six-month
period was 12.0% warmer than normal compared with weather that was 14.8% warmer
than normal in the prior-year period. As a result of the slightly colder weather
and an increase in total customers, system throughput increased .9 bcf (1.9%).
The decrease in Gas Utility revenues in the 1999 six-month period is principally
due to decreases in revenues from off-system sales, core-market industrial
customers, and retail interruptible customers. These decreases were partially
offset by an increase in revenues from firm delivery
-18-
<PAGE> 21
UGI CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
service customers. Gas Utility's cost of gas was $126.1 million, a decrease of
$9.2 million from the prior-year period, reflecting the decline in off-system
sales and lower purchased gas cost rates.
The increase in the 1999 six-month period total margin principally resulted from
(1) a $2.3 million increase in margin from core market residential and
commercial customers and (2) a $2.2 million increase in margin from firm
delivery service customers. These margin increases were partially reduced by (1)
a $1.6 million decline in margin from core market industrial customers (due in
large part to customers switching to firm delivery service) and (2) a $1.2
million decrease in margin from interruptible customers. The decline in margin
from interruptible customers resulted from a decline in oil prices relative to
natural gas prices.
Gas Utility operating income and EBITDA were slightly higher in the 1999
six-month period reflecting the increase in total margin. Total operating and
administrative expenses, excluding revenue-related taxes, were essentially
unchanged from the prior-year period. Operating expenses in the 1999 six-month
period reflect lower accruals for uncollectible accounts and medical benefits
while operating expenses in the 1998 six-month period are net of $1.6 million of
income from an insurance recovery.
ELECTRIC UTILITY. Total electric sales were 13.5 gwh (2.9%) higher in the 1998
six-month period on weather that was 2.0% colder than last year. Notwithstanding
the colder weather, temperatures were 6.5% warmer than normal in the 1999
six-month period.
Electric Utility revenues increased $.6 million in the 1999 six-month period as
a result of the higher total sales. The increase in total revenues resulting
from the greater total sales was partially reduced by lower revenues from
Electric Utility customers who purchase the electric generation portion of their
electric service from other suppliers. Electric Utility cost of sales was $16.7
million, a decline of $1.2 million from the prior-year period, as the impact of
the higher sales was more than offset by lower per unit purchased power costs.
Electric Utility's total margin increased $1.8 million (9.9%) in the 1999
six-month period reflecting the impact of (1) the lower per unit purchased power
costs and (2) the higher sales. Operating income and EBITDA were also higher
principally due to the increase in total margin.
-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
Six Months Ended March 31, 1999 1998 (Decrease)
- ------------------------------------------------------------------
(Millions of dollars)
<S> <C> <C> <C> <C>
Revenues $49.7 $62.6 $(12.9) (20.6)%
Total margin $ 2.8 $ 2.7 $ .1 3.7%
Operating income $ 1.2 $ 1.4 $ (.2) (14.3)%
EBITDA $ 1.3 $ 1.4 $ (.1) (7.1)%
- ------------------------------------------------------------------
</TABLE>
Total revenues from energy marketing in the 1999 six-month period decreased
principally as a result of lower average gas prices and a decline in billed
volumes. The decrease in billed volumes reflects the effects of warmer weather
during the 1999 six-month period. Operating income and EBITDA from energy
marketing during the 1999 six-month period decreased slightly from the
prior-year period reflecting higher operating and administrative expenses.
CORPORATE AND OTHER
Corporate expenses, net, were $(4.0) million in the 1999 six-month period
compared with $(2.6) million in the 1998 six-month period. The increase in net
corporate expenses principally reflects expenses associated with UGI's proposed
merger with Unisource.
Other activities' operating loss was $(2.5) million in the 1999 six-month period
compared with other activities' operating income of $1.4 million in the
prior-year period. The operating loss in the 1999 six-month period reflects due
diligence expenses related to international propane business opportunities and
start-up costs of Enterprises' retail hearth products business. As a result of
our proposed merger with Unisource, we suspended our international propane due
diligence activities. Other operating income in the 1998 six-month period
includes a $1.2 million pretax gain from the sale of UTI Energy Corp. (UTI)
common stock.
-20-
<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 March 31, 1999 1998 (Decrease)
- -----------------------------------------------------------------------------
(Millions of dollars)
<S> <C> <C> <C> <C>
Retail gallons sold - millions 776.5 802.4 (25.9) (3.2)%
Heating degree days - % warmer
than normal (11.7) (4.9) -- --
Revenues $848.0 $955.6 $(107.6) (11.3)%
Total margin $480.9 $465.7 $ 15.2 3.3%
Operating income $ 91.4 $ 90.4 $ 1.0 1.1%
EBITDA $157.2 $154.9 $ 2.3 1.5%
- -----------------------------------------------------------------------------
</TABLE>
We sold fewer retail gallons of propane in the 1999 twelve-month period due to
the effects of warmer temperatures. Based upon degree day information provided
by NOAA for 335 airports in the continental U.S., temperatures during the 1999
twelve-month period were 11.7% warmer than normal and 7.1% warmer than the 1998
twelve-month period. Wholesale volumes of propane sold were lower in the 1999
twelve-month period due to reduced sales of storage inventories.
Total retail propane revenues declined $75.7 million to $698.7 million in the
twelve months ended March 31, 1999. The decrease reflects (1) a $50.7 million
decrease as a result of lower average retail propane selling prices and (2) a
$25.0 million reduction due to the lower volumes of propane sold. Wholesale
propane revenues declined $33.3 million to $67.2 million in the 1999
twelve-month period due to (1) a $19.9 million reduction from the lower volumes
sold and (2) a $13.4 million decrease as a result of lower average wholesale
selling prices. The lower average retail and wholesale selling prices reflect
significantly lower propane product costs. Other revenues increased $1.3 million
to $82.1 million in the 1999 twelve-month period.
Total margin increased $15.2 million in the 1999 twelve-month period,
notwithstanding the decline in retail volumes, principally due to (1) higher
average retail unit margins and (2) higher margins from other sales and services
including appliance sales, terminal operations and various fees.
The increase in EBITDA and operating income for the 1999 twelve-month period
primarily reflects the increase in total margin partially offset by (1) an $8.0
million increase in operating and administrative expenses and (2) a $4.0 million
decrease in other income. Operating and administrative expenses of the
Partnership were $326.1 million during the 1999 twelve-month period compared
with $318.1 million in the same period last year. The increase in operating
expenses primarily reflects (1) an increase in compensation and benefits
expenses, (2) higher
-21-
<PAGE> 24
UGI CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
incremental expenses associated with acquisitions and new business activities
(including start-up locations and our PPX Prefilled Propane Xchange(R) program),
and (3) higher vehicle lease costs. These increases were partially offset by
lower accruals for uncollectible accounts. The Partnership's other income in the
1999 twelve-month period includes a $4.0 million loss from two interest rate
protection agreements associated with an anticipated refinancing of the
Operating Partnership's Acquisition Facility in late fiscal 1998. When we
postponed the refinancing due to volatility in the corporate debt markets in the
fourth quarter of fiscal 1998, we recorded a loss on the interest rate
protection agreements because they no longer qualified for hedge accounting
treatment.
UTILITIES
<TABLE>
<CAPTION>
Increase
Twelve Months Ended March 31, 1999 1998 (Decrease)
- --------------------------------------------------------------------------------------
(Millions of dollars)
<S> <C> <C> <C> <C>
GAS UTILITY:
Natural gas system throughput - bcf 75.8 76.3 (.5) (.7)%
Heating degree days - % warmer
than normal (13.8) (11.5) -- --
Revenues $342.3 $370.1 $(27.8) (7.5)%
Total margin $158.7 $160.7 $ (2.0) (1.2)%
Operating income $ 65.6 $ 64.8 $ .8 1.2%
EBITDA $ 84.2 $ 81.7 $ 2.5 3.1%
ELECTRIC UTILITY:
Electric sales - gwh 889.9 861.1 28.8 3.3%
Revenues $ 72.7 $ 71.5 $ 1.2 1.7%
Total margin $ 35.7 $ 35.2 $ .5 1.4%
Operating income $ 11.3 $ 10.1 $ 1.2 11.9%
EBITDA $ 15.2 $ 14.2 $ 1.0 7.0%
- --------------------------------------------------------------------------------------
</TABLE>
GAS UTILITY. Weather in Gas Utility's service territory was 13.8% warmer than
normal in the 1999 twelve-month period, slightly warmer than the 11.5% warmer
than normal temperatures experienced in the 1998 twelve-month period. As a
result, total system throughput declined a modest .5 bcf (.7%).
The decrease in Gas Utility's revenues principally reflects (1) a $17.3 million
decrease in revenues from core market customers, principally industrial
customers, (2) a $10.4 million decrease in revenues from off-system sales and
(3) a $3.0 million decrease in revenues from interruptible retail customers.
These decreases were partially offset by a $3.0 million increase in revenues
from firm delivery service customers. Cost of gas sold for the 1999 twelve-month
period was $170.5
-22-
<PAGE> 25
UGI CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
million, a decrease of $24.8 million. The decline is a result of the lower
off-system sales and lower sales to core market customers.
The decrease in 1999 twelve-month period total margin reflects (1) a $2.8
million decline in margin from our core market industrial customers due in large
part to customers switching to delivery service and (2) a $2.1 million decline
in total margin from interruptible customers reflecting a less favorable spread
between natural gas and oil prices. These decreases were partially offset by (1)
a $2.5 million increase in total margin from firm delivery service customers and
(2) slightly higher core market residential margin.
Operating income and EBITDA in the 1999 twelve-month period were higher than in
the 1998 twelve-month period, notwithstanding the lower total margin, reflecting
(1) lower operating and administrative costs and (2) a $.6 million increase in
other income. Gas Utility's operating and administrative expenses, excluding
revenue-related taxes, were $3.7 million lower in the 1999 twelve-month period
reflecting (1) the absence of charges for environmental matters recorded in the
1998 twelve-month period, (2) lower distribution system maintenance expenses,
and (3) lower accruals for uncollectible accounts. Operating expenses in the
1998 twelve-month period are net of $1.6 million of income from an insurance
recovery.
ELECTRIC UTILITY. Total electric sales during the 1999 twelve-month period were
higher than the prior year reflecting the effects of (1) slightly colder
heating-season weather, (2) the warmer summer's effect on electricity used for
air conditioning, and (3) an increase in customers. Electric Utility revenues
increased $1.2 million as the effect of the higher sales was partially offset by
the impact of customers choosing alternate suppliers for the electric generation
component of their electric service.
Electric Utility cost of sales was $33.8 million in the 1999 twelve-month
period, an increase of $.6 million, reflecting the increase in total sales
partially offset by lower per unit purchased power costs. Electric Utility
operating income and EBITDA were also higher in the 1999 twelve-month period
reflecting the higher total margin and higher other income.
ENERGY MARKETING
<TABLE>
<CAPTION>
Increase
Twelve Months Ended March 31, 1999 1998 (Decrease)
- ----------------------------------------------------------------------
(Millions of dollars)
<S> <C> <C> <C> <C>
Revenues $90.1 $98.3 $(8.2) (8.3)%
Total margin $ 4.7 $ 4.5 $ .2 4.4%
Operating income $ 1.8 $ 2.0 $ (.2) (10.0)%
EBITDA $ 2.0 $ 2.0 $-- --%
- ----------------------------------------------------------------------
</TABLE>
-23-
<PAGE> 26
UGI CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Total revenues from energy marketing in the 1999 twelve-month period decreased
$8.2 million principally as a result of lower average gas prices. Operating
income decreased $.2 million in the 1999 twelve-month period as the slightly
higher total margin was more than offset by an increase in depreciation and
operating expenses.
CORPORATE AND OTHER
Corporate expenses, net, were $(6.3) million in the 1999 and 1998 twelve-month
periods. Higher 1999 twelve-month period expenses related to UGI's proposed
merger with Unisource were offset by lower corporate expenses and higher
interest income on temporary cash investments.
Other activities' operating loss was $(3.9) million in the 1999 twelve-month
period compared to other activities' operating income of $5.2 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 $4.7 million in pretax gains from the sale of UTI
common stock.
FINANCIAL CONDITION AND LIQUIDITY
FINANCIAL CONDITION
The Company's debt outstanding totaled $992.8 million at March 31, 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 six months ended March 31, 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 and December 31, 1998. The MQD for the quarter ended March 31, 1999 will be
paid on May 18, 1999 to holders of record on May 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 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
-24-
<PAGE> 27
UGI CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 generation based requirements are
met. All of the Partnership's Subordinated Units are held by AmeriGas Propane,
Inc., general partner of AmeriGas Partners (General Partner), and its wholly
owned subsidiary, Petrolane. Because the required cash generation based
objectives were achieved at March 31, 1999, a total of 9,891,074 Subordinated
Units will convert to Common Units on May 18, 1999. The remaining 9,891,072
Subordinated Units 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 $149.9 million at March
31, 1999 compared with $148.4 million at September 30, 1998. These amounts
include $111.4 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 six months ended March 31, 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 six
months ended March 31, 1999 totaled $93.8 million compared with $113.8 million
during the prior-year period. Changes in operating working capital during the
six months ended March 31, 1999 required $39.4 million of operating cash flow
while changes in operating working capital during the six months ended March 31,
1998 required $17.0 million of operating cash flow. Cash flow from operating
activities before changes in operating working capital was $133.2 million in the
six months ended March 31, 1999 compared with $130.8 million of cash flow in the
prior-year period.
INVESTING ACTIVITIES. Cash provided by investing activities during the six
months ended March 31, 1999 totaled $16.4 million compared with net cash used by
investing activities of $(41.2) million in the prior-year period. Cash from
changes in short-term investments was $60.1 million in the 1999 six-month period
compared with $(4.6) million in the prior-year period. We spent $32.6 million
for property, plant and equipment during the six months ended March 31, 1999
compared with $31.3 million in the same period last year. During the 1999
six-month period, we invested $4.9 million in our propane joint venture in
China.
FINANCING ACTIVITIES. During the six months ended March 31, 1999 and 1998, we
paid cash dividends on Common Stock of $24.0 million and $23.7 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 the six months
ended March 31, 1999 and 1998, the Company received proceeds of $2.1 million and
$6.0 million, respectively, from issuances of its Common Stock in conjunction
with dividend reinvestment and employee plans. During the six months ended March
31, 1999, UGI repurchased
-25-
<PAGE> 28
UGI CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
$16.9 million of its Common Stock. During the six months ended March 31, 1998,
UGI repurchased $4.1 million of its Common Stock.
During the six months ended March 31, 1999, we repaid $60.0 million of
borrowings under the Operating Partnership's Acquisition Facility. In the 1998
six-month period, we made long-term debt repayments totaling $12.8 million. 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 six months ended March 31, 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 six months ended March 31, 1999 and 1998, the Operating Partnership
made net repayments of $5 million and $28 million, respectively, under its
Revolving Credit Facility. During the six months ended March 31, 1999, UGI
Utilities had net borrowings of $4.4 million under its revolving credit
agreements compared with net repayments of $24.1 million in the same period a
year ago.
PROPOSED NATURAL GAS CUSTOMER CHOICE LEGISLATION
In March of 1999, proposed legislation was introduced in both houses of the
Pennsylvania General Assembly which would extend to all Pennsylvania gas
customers the right to choose their natural gas supplier. Senate Bill No. 601
(introduced on March 15, 1999) and House Bill No. 937 (introduced on March 17,
1999) (collectively, the "Competition Bills") contain identical language crafted
by a legislative collaborative conducted under the auspices of the Governor of
Pennsylvania. The Company was an active participant in this collaborative
process and supports the legislation if it is passed in conjunction with
companion bills that would repeal Pennsylvania's gross receipts tax on natural
gas service. The Company believes that it is likely that natural gas customer
choice legislation will be enacted by the Pennsylvania General Assembly in the
summer of 1999.
The Competition Bills would give all Pennsylvania natural gas consumers the
right to choose their natural gas commodity supplier by November 1, 1999. The
Pennsylvania Public Utility Commission (PUC) would have the right to extend this
deadline for a period of up to eight months. Each Pennsylvania local
distribution company (LDC) would be required to file a restructuring plan with
the PUC which would be acted upon no later than nine months after the filing
date.
The Competition Bills avoid the need for recovery of stranded costs associated
with interstate pipeline contracts. The Competition Bills would permit each LDC
to require energy marketers serving customers on its system to accept an
assignment of an appropriate amount of the LDC's interstate pipeline capacity.
After July 1, 2002, an energy marketer could petition the PUC to avoid such an
assignment, but the PUC could not grant the request unless the LDC is assured of
full recovery of interstate pipeline capacity costs. Energy marketers and
customers would be given
-26-
<PAGE> 29
UGI CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
the opportunity to replace expiring contracts or to meet increased system
requirements. Approximately 75% of the Company's existing pipeline contract
capacity commitments will expire by the end of 2003.
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. In addition, the PUC ordered that all Pennsylvania utilities' mission
critical systems must be Y2K compliant by March 31, 1999.
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.
As of March 31, 1999, 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 except for Electric
Utility's System Control and Data Acquisition (SCADA) system. We anticipate
replacing this system with a Y2K compliant system by July 31, 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-
-27-
<PAGE> 30
UGI CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 developing 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 contingency plans.
AmeriGas Partners anticipates that its contingency plans will be completed by
June 30, 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.
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 for a
stock-for-stock transaction. Under the merger agreement, Unisource would be
merged with a wholly owned subsidiary of UGI and UGI would exchange 0.566 common
shares of UGI common stock for each common share of Unisource. It is estimated
that UGI would issue up to approximately 40 million shares of UGI common stock
in the merger. The acquisition of Unisource is subject to the approval of
Unisource's shareholders. The issuance of UGI common stock to effect the merger
is subject to the approval of UGI shareholders. In addition, the merger is
subject to customary regulatory approvals. In connection with the merger, UGI
announced its intention to sell UGI Utilities; reduce its annual dividend to
$.75 per common share from $1.46; and repurchase up to 6.6 million shares of UGI
Common Stock.
-28-
<PAGE> 31
UGI CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
On May 10, 1999, Unisource announced that it had received an unsolicited written
proposal from Georgia-Pacific Corporation (Georgia-Pacific) to acquire Unisource
at a price of $12.00 per share in cash and that the Unisource board of directors
had authorized management to begin discussions with Georgia-Pacific concerning
its proposal. The UGI-Unisource merger transaction is pending.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risk exposures are market prices for natural gas and propane
and changes in interest rates.
Price risk associated with fluctuations in the prices our nonregulated
businesses pay for natural gas and propane is principally a result of market
forces reflecting changes in supply and demand. The Partnership's profitability
is sensitive to changes in propane supply costs and the Partnership generally
seeks to pass on increases in such costs to customers. There is no assurance,
however, that the Partnership will be able to do so. In order to manage propane
market price risk, we use contracts for the forward purchase of propane, propane
fixed-price supply agreements, and derivative commodity instruments such as
price swap and option contracts. In order to manage market price risk relating
to substantially all of UGI Energy Services' firm commitments to sell natural
gas, we purchase exchange-traded natural gas futures contracts. Although we use
derivative financial and commodity instruments to reduce market price risk
associated with firm commitments or forecasted transactions, we do not use
derivative financial and commodity instruments for trading purposes.
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 the level of
borrowings outstanding under these agreements at March 31, 1999, an increase in
short-term interest rates of 50 basis points (0.5%) would increase annual
interest expense by less than $.5 million. Due to the seasonal nature of our
businesses, the level of borrowings outstanding at March 31, 1999 is not
necessarily indicative of the level of borrowings throughout the year.
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.
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<PAGE> 32
UGI CORPORATION AND SUBSIDIARIES
Although Gas Utility is subject to changes in the price of natural gas, the
current regulatory framework allows Gas Utility to recover prudently incurred
gas costs from its customers. Consequently, there is limited commodity price
risk associated with Gas Utility due to the current rate-making.
Because the sources and costs of our electric power vary from period to period
and because we no longer defer the difference between actual power costs and
amounts included in our rates, Electric Utility's quarterly results may be more
volatile in the future. In addition, future financial results will likely depend
upon a number of factors including the number of our customers who choose
alternative electricity suppliers and our success in producing or purchasing
electricity at competitive market prices. If our costs to produce or purchase
power exceed the amounts we are able to charge our customers (including an
allocable portion of our CTC revenues), Electric Utility's results would be
adversely affected.
At March 31, 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 on Form 10-K. We expect that any losses from market risk
sensitive instruments used to manage commodity or interest rate market risk
would be substantially offset by gains on the associated underlying
transactions.
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On February 23, 1999, the Annual Meeting of Shareholders of UGI was
held. The shareholders elected all seven nominees to the Board of Directors, and
ratified the appointment of Arthur Andersen LLP as independent certified public
accountants. No other matters were considered at the meeting.
The number of votes cast for and withheld from election of each nominee
is set forth below. There were no votes against, abstentions or broker non-votes
in the election of directors.
ELECTION OF DIRECTORS:
<TABLE>
<CAPTION>
FOR WITHHELD
--- --------
<S> <C> <C>
James W. Stratton 27,046,510 262,991
David I. J. Wang 27,046,368 263,133
Richard C. Gozon 27,065,425 244,076
Stephen D. Ban 27,070,947 238,554
Lon R. Greenberg 27,053,189 256,312
</TABLE>
-30-
<PAGE> 33
UGI CORPORATION AND SUBSIDIARIES
<TABLE>
<S> <C> <C>
Marvin O. Schlanger 27,040,550 268,951
Thomas F. Donovan 27,037,557 271,944
</TABLE>
The number of votes cast for and against, and the number of abstentions
in the ratification of the appointment of Arthur Andersen LLP is as follows:
For, 27,094,944; Against, 80,835; Abstain, 134,172. There were no broker
non-votes.
ITEM 5. OTHER
As previously disclosed, on March 1, 1999 UGI Corporation and Unisource
Worldwide, Inc. announced that they had entered into a merger agreement for a
stock-for-stock merger transaction. In connection with the merger, UGI announced
its intention to sell its utility subsidiary, UGI Utilities, Inc. and to reduce
its annual dividend to $.75 from $1.46. UGI also announced that its Board of
Directors had authorized the repurchase of up to 6.6 million shares of its
common stock.
On May 10, 1999, Unisource announced that it had received an
unsolicited written proposal from Georgia-Pacific Corporation to acquire
Unisource at a price of $12.00 per share in cash and that the Unisource board of
directors had authorized management to begin discussions with Georgia-Pacific
concerning its proposal. The UGI-Unisource merger transaction is pending.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits:
10 Agreement and Plan of Merger among Unisource
Worldwide, Inc., UGI Corporation and Vulcan
Acquisition Corp. dated as of February 28, 1999,
incorporated by reference to Exhibit 2 to the
Company's Registration Statement No. 333-75089 on
Form S-4.
27 Financial Data Schedule
(b) The Company filed a Current Report on Form 8-K dated March 1,
1999, reporting the proposed merger 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: May 14, 1999 By: A. J. Mendicino
- ------------------- ----------------------------------------------
A. J. Mendicino, Vice President - Finance and
Chief Financial Officer
Date: May 14, 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 Agreement and Plan of Merger among Unisource
Worldwide, Inc., UGI Corporation and Vulcan
Acquisition Corp. dated as of February 28, 1999,
incorporated by reference to Exhibit 2 to the
Company's Registration Statement No. 333-75089 on
Form S-4.
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT OF UGI CORPORATION AND
SUBSIDIARIES AS OF AND FOR THE SIX MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS INCLUDED IN UGI
CORPORATION'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31,
1999.
</LEGEND>
<CIK> 0000884614
<NAME> UGI CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 128,200
<SECURITIES> 21,700
<RECEIVABLES> 191,100
<ALLOWANCES> 10,200
<INVENTORY> 47,600
<CURRENT-ASSETS> 423,700
<PP&E> 1,494,400
<DEPRECIATION> 494,500
<TOTAL-ASSETS> 2,149,000
<CURRENT-LIABILITIES> 358,400
<BONDS> 902,300
20,000
0
<COMMON> 394,300
<OTHER-SE> (10,400)
<TOTAL-LIABILITY-AND-EQUITY> 2,149,000
<SALES> 872,900
<TOTAL-REVENUES> 872,900
<CGS> 423,000
<TOTAL-COSTS> 423,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 4,580
<INTEREST-EXPENSE> 42,100
<INCOME-PRETAX> 102,800
<INCOME-TAX> 46,500
<INCOME-CONTINUING> 55,500
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 55,500
<EPS-PRIMARY> 1.69
<EPS-DILUTED> 1.69
</TABLE>
