<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 1-1398

                               UGI UTILITIES, INC.
             (Exact name of registrant as specified in its charter)

         Pennsylvania                                             23-1174060
(State or other jurisdiction of                                (I.R.S. Employer
 incorporation or organization)                              Identification No.)

                               UGI UTILITIES, INC.
                         100 Kachel Boulevard, Suite 400
                    Green Hills Corporate Center, Reading, PA
                    (Address of principal executive offices)
                                      19607
                                   (Zip Code)
                                 (610) 796-3400
              (Registrant's telephone number, including area code)

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes X  No

         At July 31, 1999, there were 26,781,785 shares of UGI Utilities, Inc.
Common Stock, par value $2.25 per share, outstanding, all of which were held,
beneficially and of record, by UGI Corporation.
<PAGE>   2
                               UGI UTILITIES, INC.

                                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 - 11

      Item 2.    Management's Discussion and Analysis of Financial
                     Condition and Results of Operations                               12 - 20


      Item 3.    Quantitative and Qualitative Disclosures About Market Risk            20 - 21


PART II OTHER INFORMATION

      Item 6.    Exhibits and Reports on Form 8-K                                        21

      Signatures                                                                         22
</TABLE>


                                      -i-
<PAGE>   3
                          PART I FINANCIAL INFORMATION
                               UGI UTILITIES, INC.

                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                   (unaudited)
                             (Thousands of dollars)

<TABLE>
<CAPTION>
                                                                               June 30,   September 30,   June 30,
                                                                                 1999         1998          1998
                                                                               --------   -------------   --------
<S>                                                                            <C>        <C>             <C>
ASSETS
     Current assets:
          Cash and cash equivalents                                            $  1,432     $  4,720      $  3,038
          Accounts receivable (less allowances for doubtful accounts
               of $1,852, $1,373 and $3,419, respectively)                       32,717       20,258        32,663
          Accrued utility revenues                                                5,773        6,745         5,986
          Inventories                                                            21,376       28,460        20,434
          Deferred income taxes                                                   7,249        4,070         9,046
          Prepaid expenses and other current assets                               7,047        6,556         6,904
                                                                               --------     --------      --------
               Total current assets                                              75,594       70,809        78,071

     Property, plant and equipment, at cost (less accumulated depreciation
          and amortization of $267,365, $253,608 and $251,214, respectively)    551,278      543,913       536,329

     Regulatory assets                                                           59,449       59,318        58,792
     Other assets                                                                17,782       16,277        16,503
                                                                               --------     --------      --------
          Total assets                                                         $704,103     $690,317      $689,695
                                                                               ========     ========      ========


LIABILITIES  AND  STOCKHOLDERS'  EQUITY
     Current liabilities:
          Current maturities of long-term debt                                 $  7,143     $  7,143      $  7,143
          Bank loans                                                             59,600       68,400        50,700
          Accounts payable                                                       30,485       38,847        28,949
          Other current liabilities                                              47,657       29,720        48,657
                                                                               --------     --------      --------
               Total current liabilities                                        144,885      144,110       135,449

     Long-term debt                                                             180,042      180,027       187,166
     Deferred income taxes                                                      111,034      105,734       105,073
     Other noncurrent liabilities                                                25,786       29,204        28,140

     Commitments and contingencies

     Redeemable preferred stock                                                  20,000       20,000        20,000

     Common stockholder's equity:
          Common Stock, $2.25 par value (authorized - 40,000,000 shares;
               issued and outstanding - 26,781,785 shares)                       60,259       60,259        60,259
          Additional paid-in capital                                             68,559       68,559        68,249
          Retained earnings                                                      93,538       82,424        85,359
                                                                               --------     --------      --------
               Total common stockholder's equity                                222,356      211,242       213,867
                                                                               --------     --------      --------
          Total liabilities and stockholders' equity                           $704,103     $690,317      $689,695
                                                                               ========     ========      ========
</TABLE>


The accompanying notes are an integral part of these financial statements.


                                      -1-
<PAGE>   4
                               UGI UTILITIES, INC.

                   CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                                   (unaudited)
                             (Thousands of dollars)


<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                                        $  77,338    $  74,342    $ 357,800    $ 362,139    $ 417,944    $ 427,681
                                                ---------    ---------    ---------    ---------    ---------    ---------

Costs and expenses:
     Gas, fuel and purchased power                 33,816       35,109      176,601      188,267      202,965      219,448
     Operating and administrative expenses         27,260       26,560       84,651       83,476      112,350      112,390
     Operating and administrative expenses
          - related parties                         1,258        1,160        3,727        3,549        5,015        5,274
     Depreciation and amortization                  5,800        5,547       17,189       16,408       22,824       20,961
     Other income, net                             (1,595)      (1,852)      (3,793)      (3,858)      (4,928)      (4,494)
                                                ---------    ---------    ---------    ---------    ---------    ---------
                                                   66,539       66,524      278,375      287,842      338,226      353,579
                                                ---------    ---------    ---------    ---------    ---------    ---------

Operating income                                   10,799        7,818       79,425       74,297       79,718       74,102
Interest expense                                    4,238        4,290       13,000       12,996       17,587       17,125
                                                ---------    ---------    ---------    ---------    ---------    ---------
Income before income taxes                          6,561        3,528       66,425       61,301       62,131       56,977
Income taxes                                        2,485        1,636       25,149       23,202       23,403       22,085
                                                ---------    ---------    ---------    ---------    ---------    ---------
Net income                                          4,076        1,892       41,276       38,099       38,728       34,892
Dividends on preferred stock                          388          390        1,163        1,772        1,551        2,463
                                                ---------    ---------    ---------    ---------    ---------    ---------
Net income after dividends on preferred stock   $   3,688    $   1,502    $  40,113    $  36,327    $  37,177    $  32,429
                                                =========    =========    =========    =========    =========    =========
</TABLE>


The accompanying notes are an integral part of these financial statements.


                                      -2-
<PAGE>   5
                               UGI UTILITIES, INC.

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (unaudited)
                             (Thousands 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                                                        $ 41,276    $ 38,099    $ 38,728    $ 34,892
    Adjustments to reconcile net income to net cash provided
       by operating activities:
          Depreciation and amortization                                 17,189      16,408      22,824      20,961
          Deferred income taxes, net                                       148       1,122       4,494       5,359
          Other, net                                                     1,220       2,872       4,334       2,749
                                                                      --------    --------    --------    --------
                                                                        59,833      58,501      70,380      63,961
          Net change in:
             Accounts receivable and accrued utility revenues          (14,014)     (9,241)     (2,878)      4,034
             Inventories                                                 7,084      10,211        (942)     (2,097)
             Deferred fuel costs                                         6,870       4,893      (3,764)     (3,464)
             Accounts payable                                           (8,362)    (16,418)      1,536      (2,083)
             Other current assets and liabilities                        9,634      (2,117)      1,042      (7,314)
                                                                      --------    --------    --------    --------
          Net cash provided by operating activities                     61,045      45,829      65,374      53,037
                                                                      --------    --------    --------    --------


CASH  FLOWS  FROM  INVESTING  ACTIVITIES:
    Expenditures for property, plant and equipment                     (25,014)    (24,025)    (38,208)    (37,458)
    Net proceeds (costs) of property, plant and equipment disposals       (357)       (366)        320        (757)
                                                                      --------    --------    --------    --------
       Net cash used by investing activities                           (25,371)    (24,391)    (37,888)    (38,215)
                                                                      --------    --------    --------    --------

CASH  FLOWS  FROM  FINANCING  ACTIVITIES:
    Payment of dividends                                               (30,162)    (24,406)    (30,849)    (25,096)
    Issuance of long-term debt                                             -        35,000         -        35,000
    Repayment of long-term debt                                            -       (10,000)     (7,143)    (18,980)
    Bank loans increase (decrease)                                      (8,800)    (16,300)      8,900       7,500
    Redemption of Series Preferred Stock                                   -       (15,507)        -       (15,507)
                                                                      --------    --------    --------    --------
       Net cash used by financing activities                           (38,962)    (31,213)    (29,092)    (17,083)
                                                                      --------    --------    --------    --------

    Cash and cash equivalents decrease                                $ (3,288)   $ (9,775)   $ (1,606)   $ (2,261)
                                                                      ========    ========    ========    ========

CASH  AND  CASH  EQUIVALENTS:
    End of period                                                     $  1,432    $  3,038    $  1,432    $  3,038
    Beginning of period                                                  4,720      12,813       3,038       5,299
                                                                      --------    --------    --------    --------
       Decrease                                                       $ (3,288)   $ (9,775)   $ (1,606)   $ (2,261)
                                                                      ========    ========    ========    ========
</TABLE>


The accompanying notes are an integral part of these financial statements.


                                      -3-
<PAGE>   6
                              UGI UTILITIES, INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (unaudited)
                             (Thousands of dollars)


1.       BASIS OF PRESENTATION

         The accompanying condensed consolidated financial statements include
         the accounts of UGI Utilities, Inc. (UGI Utilities) and its wholly
         owned subsidiaries (collectively, "the Company" or "we"). We eliminate
         all significant intercompany accounts and transactions when we
         consolidate. UGI Utilities is a wholly owned subsidiary of UGI
         Corporation (UGI) and operates a natural gas distribution utility (Gas
         Utility) in parts of eastern and southeastern Pennsylvania and an
         electric utility (Electric Utility) in northeastern Pennsylvania.

         The accompanying condensed consolidated financial statements are
         unaudited and have been prepared in accordance with the rules and
         regulations of the U.S. Securities and Exchange Commission. They
         include all adjustments which we consider necessary for a fair
         statement of the results for the interim periods presented. Such
         adjustments consisted only of normal recurring items unless otherwise
         disclosed. These financial statements should be read in conjunction
         with the financial statements and the related notes included in our
         Annual Report on Form 10-K for the year ended September 30, 1998
         (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.

         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. SFAS 130 also requires reclassification of financial
         statements of earlier periods provided for comparative purposes. UGI
         Utilities' comprehensive income was the same as 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


                                      -4-
<PAGE>   7
                              UGI UTILITIES, INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  (unaudited)
                             (Thousands of dollars)


         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 internally for making operating decisions and
         assessing business performance. Because our gas utility and electric
         utility operations are organized and managed as strategic business
         units offering different products and services, we have determined that
         UGI Utilities has two reportable segments comprising Gas Utility and
         Electric Utility.

         Although Electric Utility's June 1998 Restructuring Order provides for
         the unbundling of prices for electric generation, transmission and
         distribution services, we currently manage and evaluate our electric
         generation, transmission and distribution operations on a combined
         basis. Accordingly, these operations are combined for segment
         presentation purposes.

         The accounting policies of our two reportable 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 upon 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 the total revenues of
         either Gas Utility or Electric Utility. Financial information by
         business segment follows:


                                      -5-
<PAGE>   8
                              UGI UTILITIES, INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  (unaudited)
                             (Thousands of dollars)

2.      SEGMENT INFORMATION   (continued)

        THREE MONTHS ENDED JUNE 30, 1999:

<TABLE>
<CAPTION>
                                                                        Reportable Segments
                                                                       ---------------------
                                                            Inter-
                                                           segment        Gas       Electric      All
                                              Total      Eliminations   utility     utility      other
                                            -----------------------------------------------------------
<S>                                         <C>          <C>           <C>          <C>         <C>
Segment revenues                            $  77,338    $     -       $  60,392    $ 16,946    $    -
                                            ===========================================================
Segment profit (loss):
        EBITDA                              $  16,599    $     -       $  11,314    $  5,296    $   (11)
        Depreciation and amortization          (5,800)         -          (4,768)     (1,032)        -
                                            -----------------------------------------------------------
        Operating income (loss)                10,799          -           6,546       4,264        (11)
        Interest expense                       (4,238)         -          (3,523)       (715)        -
                                            -----------------------------------------------------------
        Income (loss) before income taxes   $   6,561    $     -       $   3,023    $  3,549    $   (11)
                                            ===========================================================
Segment assets (at period end)              $ 704,103    $    (85)     $ 608,550    $ 95,407    $   231
                                            ===========================================================
</TABLE>


        THREE MONTHS ENDED JUNE 30, 1998:

<TABLE>
<CAPTION>
                                                                      Reportable Segments
                                                                     ---------------------
                                                          Inter-
                                                          segment       Gas       Electric      All
                                              Total    Eliminations   utility     utility      other
                                            --------------------------------------------------------
<S>                                         <C>          <C>         <C>          <C>         <C>
Segment revenues                            $  74,342    $   -       $  57,892    $ 16,450    $   -
                                            ========================================================
Segment profit (loss):
        EBITDA                              $  13,365    $   -       $  10,617    $  2,768    $  (20)
        Depreciation and amortization          (5,547)       -          (4,549)       (998)       -
                                            --------------------------------------------------------
        Operating income (loss)                 7,818        -           6,068       1,770       (20)
        Interest expense                       (4,290)       -          (3,752)       (538)       -
                                            --------------------------------------------------------
        Income (loss) before income taxes   $   3,528    $   -       $   2,316    $  1,232    $  (20)
                                            ========================================================
Segment assets (at period end)              $ 689,695    $  203      $ 593,642    $ 95,655    $  195
                                            ========================================================
</TABLE>


                                      -6-
<PAGE>   9
                              UGI UTILITIES, INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  (unaudited)
                             (Thousands of dollars)


2.      SEGMENT INFORMATION   (continued)

        NINE MONTHS ENDED JUNE 30, 1999:

<TABLE>
<CAPTION>
                                                                      Reportable Segments
                                                                     ---------------------
                                                          Inter-
                                                          segment       Gas       Electric      All
                                              Total    Eliminations   utility     utility      other
                                            --------------------------------------------------------
<S>                                         <C>          <C>         <C>          <C>         <C>
Segment revenues                            $ 357,800    $   -       $ 302,593    $ 55,207    $  -
                                            ========================================================
Segment profit (loss):
        EBITDA                              $  96,614    $   -       $  81,604    $ 15,038    $ (28)
        Depreciation and amortization         (17,189)       -         (14,212)     (2,977)      -
                                            --------------------------------------------------------
        Operating income (loss)                79,425        -          67,392      12,061      (28)
        Interest expense                      (13,000)       -         (11,097)     (1,903)      -
                                            --------------------------------------------------------
        Income (loss) before income taxes   $  66,425    $   -       $  56,295    $ 10,158    $ (28)
                                            ========================================================
Segment assets (at period end)              $ 704,103    $  (85)     $ 608,550    $ 95,407    $ 231
                                            ========================================================
</TABLE>

        NINE MONTHS ENDED JUNE 30, 1998:


<TABLE>
<CAPTION>
                                                                      Reportable Segments
                                                                     ---------------------
                                                          Inter-
                                                          segment       Gas       Electric      All
                                              Total    Eliminations   utility     utility      other
                                            --------------------------------------------------------
<S>                                         <C>          <C>         <C>          <C>         <C>

Segment revenues                            $ 362,139    $   -       $ 307,949    $ 54,190    $  -
                                            ========================================================
Segment profit:
        EBITDA                              $  90,705    $   -       $  79,624    $ 10,884    $ 197
        Depreciation and amortization         (16,408)       -         (13,540)     (2,868)      -
                                            --------------------------------------------------------
        Operating income                       74,297        -          66,084       8,016      197
        Interest expense                      (12,996)       -         (11,317)     (1,679)      -
                                            --------------------------------------------------------
        Income before income taxes          $  61,301    $   -       $  54,767    $  6,337    $ 197
                                            ========================================================
Segment assets (at period end)              $ 689,695    $  203      $ 593,642    $ 95,655    $ 195
                                            ========================================================
</TABLE>


                                       -7-
<PAGE>   10
                              UGI UTILITIES, INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  (unaudited)
                             (Thousands of dollars)


2.      SEGMENT INFORMATION   (continued)

        TWELVE MONTHS ENDED JUNE 30, 1999:


<TABLE>
<CAPTION>
                                                                      Reportable Segments
                                                                     ---------------------
                                                          Inter-
                                                          segment       Gas       Electric      All
                                              Total    Eliminations   utility     utility      other
                                            --------------------------------------------------------
<S>                                         <C>          <C>         <C>          <C>         <C>
Segment revenues                            $ 417,944    $   -       $ 344,798    $ 73,146    $  -
                                            ========================================================
Segment profit (loss):
        EBITDA                              $ 102,542    $   -       $  84,917    $ 17,714    $ (89)
        Depreciation and amortization         (22,824)       -         (18,837)     (3,987)      -
                                            --------------------------------------------------------
        Operating income (loss)                79,718        -          66,080      13,727      (89)
        Interest expense                      (17,587)       -         (15,049)     (2,538)      -
                                            --------------------------------------------------------
        Income (loss) before income taxes   $  62,131    $   -       $  51,031    $ 11,189    $ (89)
                                            ========================================================
Segment assets (at period end)              $ 704,103    $  (85)     $ 608,550    $ 95,407    $ 231
                                            ========================================================
</TABLE>

        TWELVE MONTHS ENDED JUNE 30, 1998:

<TABLE>
<CAPTION>
                                                                      Reportable Segments
                                                                     ---------------------
                                                          Inter-
                                                          segment       Gas       Electric      All
                                              Total    Eliminations   utility     utility      other
                                            --------------------------------------------------------
<S>                                         <C>          <C>         <C>          <C>         <C>
Segment revenues                            $ 427,681    $   -       $ 356,280    $ 71,401    $   -
                                             =======================================================
Segment profit:
        EBITDA                              $  95,063    $   -       $  80,894    $ 13,944    $  225
        Depreciation and amortization         (20,961)       -         (16,907)     (4,054)       -
                                            --------------------------------------------------------
        Operating income                       74,102        -          63,987       9,890       225
        Interest expense                      (17,125)       -         (14,819)     (2,306)       -
                                            --------------------------------------------------------
        Income before income taxes          $  56,977    $   -       $  49,168    $  7,584    $  225
                                            ========================================================
Segment assets (at period end)              $ 689,695    $  203      $ 593,642    $ 95,655    $  195
                                            ========================================================
</TABLE>


                                      -8-
<PAGE>   11
                              UGI UTILITIES, INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  (unaudited)
                             (Thousands of dollars)


3.       COMMITMENTS AND CONTINGENCIES

         The gas distribution business has been one of UGI Utilities' main
         businesses since it began in 1882. Prior to the construction of major
         natural gas pipelines in the 1950s, gas used for lighting and heating
         was produced at manufactured gas plants (MGPs) from processes involving
         coal, coke or oil. Some constituents of coal tars produced from this
         process are today considered hazardous substances under the Superfund
         Law and may be located at these sites.

         Several private parties have made claims against UGI Utilities to
         recover costs of investigation or remediation of several MGP sites. In
         addition, we have identified environmental contamination at several of
         our properties and have undertaken investigation and, as appropriate,
         remediation of these sites in cooperation with appropriate
         environmental agencies or private parties. At sites where a former
         subsidiary of UGI Utilities operated an MGP, we believe that UGI
         Utilities should not have significant liability because UGI Utilities
         generally is not legally liable for the obligations of its
         subsidiaries. Under certain circumstances, however, a court could find
         a parent company liable for environmental damage at sites owned by a
         subsidiary company when the parent company either (1) itself operated
         the facility causing the environmental damage or (2) otherwise so
         controlled the subsidiary that the subsidiary's separate corporate form
         should be disregarded. There could be, therefore, significant future
         costs of an uncertain amount associated with environmental damage
         caused by MGPs that UGI Utilities owned or directly operated, or that
         were owned or operated by former subsidiaries of UGI Utilities, if a
         court were to conclude that the subsidiary's separate corporate form
         should be disregarded. In many circumstances where UGI Utilities may be
         liable, we may not be able to reasonably quantify expenditures because
         of a number of factors. These factors include the various costs
         associated with potential remedial alternatives, the unknown number of
         other potentially responsible parties involved and their ability to
         contribute to the costs of investigation and remediation, and changing
         environmental laws and regulations.

         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 $11,000 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


                                      -9-
<PAGE>   12
                              UGI UTILITIES, INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  (unaudited)
                             (Thousands of dollars)


         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 our operating results or
         cash flows in future periods depending on the nature and timing of
         future developments with respect to these matters and the amounts of
         future operating results and cash flows.

4.       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.


                                      -10-
<PAGE>   13
                              UGI UTILITIES, INC.

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  (unaudited)
                             (Thousands of dollars)


         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.


                                      -11-
<PAGE>   14
                               UGI UTILITIES, INC.

ITEM 2.              MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS


                        ANALYSIS OF RESULTS OF OPERATIONS

The following analyses compare our results of operations for (1) the three
months ended 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 the Condensed Consolidated
Financial Statements. Although the adoption of SFAS 131 on October 1, 1998 did
not change the operating segments we disclose, Gas Utility and Electric Utility
results for all periods presented now include billed UGI corporate overhead
costs.

1999 THREE-MONTH PERIOD COMPARED WITH 1998 THREE-MONTH PERIOD

<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       $   57.9         $  2.5          4.3%
     Total margin (a)                                     $   30.0       $   28.9         $  1.1          3.8%
     EBITDA (b)                                           $   11.3       $   10.6         $  0.7          6.6%
     Operating income                                     $    6.5       $    6.1         $  0.4          6.6%

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                                     $    4.3       $    1.8         $  2.5        138.9%
--------------------------------------------------------------------------------------------------------------
</TABLE>

         bcf - billions of cubic feet.  gwh - millions of kilowatt hours.

(a)      Gas and Electric utilities' total margin represents total revenues less
         cost of sales and revenue-related taxes.


                                      -12-
<PAGE>   15
                               UGI UTILITIES, INC.

                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
            FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)


(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 $2.5 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 $0.7
million and $0.4 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.

Electric Utility's total margin increased during the 1999 three-month period
reflecting the previously mentioned lower average purchased power costs and a
$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.


                                      -13-
<PAGE>   16
                               UGI UTILITIES, INC.

                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
            FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)


1999 NINE-MONTH PERIOD COMPARED WITH 1998 NINE-MONTH PERIOD

<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       $   79.6        $   2.0          2.5%
     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                                     $   12.1       $    8.0        $   4.1         51.3%
--------------------------------------------------------------------------------------------------------------
</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 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


                                      -14-
<PAGE>   17
                               UGI UTILITIES, INC.

                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
            FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)


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.


                                      -15-
<PAGE>   18
                               UGI UTILITIES, INC.

                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
            FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)


1999 TWELVE-MONTH PERIOD COMPARED WITH 1998 TWELVE-MONTH PERIOD

<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                                               $ 344.8        $ 356.3      $ (11.5)      (3.2)%
     Total margin                                           $ 159.8        $ 157.3      $   2.5        1.6%
     EBITDA                                                 $  84.9        $  80.9      $   4.0        4.9%
     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        $  13.9      $   3.8       27.3%
     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.

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


                                      -16-
<PAGE>   19
                               UGI UTILITIES, INC.

                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
            FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)


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.

                        FINANCIAL CONDITION AND LIQUIDITY

CAPITAL STRUCTURE

The Company's debt outstanding at June 30, 1999 totaled $246.8 million compared
with $255.6 million at September 30, 1998. Included in these amounts are bank
loans of $59.6 million and $68.4 million, respectively. Under our revolving
credit agreements, we may borrow up to $97 million.

CASH FLOWS

The Company's cash flows from operating activities are seasonal and are
generally greatest during the second and third fiscal quarters when customers
pay bills incurred during the heating season and are generally lowest during the
first and fourth fiscal quarters. Accordingly, cash flows from operations for
the nine months ended June 30, 1999 are not necessarily indicative of cash flows
to be expected for a full year.


                                      -17-
<PAGE>   20
                               UGI UTILITIES, INC.

                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
            FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)


OPERATING ACTIVITIES. Cash provided by operating activities was $61.0 million
during the nine months ended June 30, 1999. In the prior-year period, operating
activities provided $45.8 million of cash. Changes in operating working capital
during the nine months ended June 30, 1999 provided $1.2 million of operating
cash flow while changes in operating working capital during the nine months
ended June 30, 1998 used $12.7 million of operating cash flow. Cash generated by
operating activities before changes in operating working capital totaled $59.8
million during the nine months ended June 30, 1999, slightly higher than the
$58.5 million generated in the prior-year period.

INVESTING ACTIVITIES. We spent $25.0 million for property, plant and equipment
in the nine months ended June 30, 1999 compared with $24.0 million in the nine
months ended June 30, 1998. The increase reflects slightly higher capital
expenditures in both the Gas Utility and Electric Utility.

FINANCING ACTIVITIES. Cash flows from financing activities for the 1999
nine-month period include dividends on preferred stock of $1.2 million compared
with $1.8 million of such dividends in the 1998 nine-month period. The lower
preferred stock dividends in the current-year period resulted from the
redemption of $15 million face value of Series Preferred Stock in April 1998.
During the 1999 nine-month period, we paid $29.0 million of dividends to our
parent company, UGI. In the prior-year nine-month period, we paid $22.6 million
of dividends to UGI.

Net repayments under UGI Utilities revolving credit agreements totaled $8.8
million in the 1999 nine-month period compared with net repayments of $16.3
million in the prior-year period. During the nine months ended June 30, 1998,
UGI Utilities issued $35 million of notes under its Series B Medium-Term Note
program. There were no issuances of long-term debt during the 1999 nine-month
period.

UGI STRATEGIC INITIATIVES

On July 28, 1999, the parent company of UGI Utilities, UGI Corporation,
announced several strategic and financial initiatives designed to increase
shareholder value and position UGI for growth, including a focus on long-term
value creation through growth of UGI's existing propane, natural gas and
electric businesses. Concurrently, it announced the termination of 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 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


                                      -18-
<PAGE>   21
                              UGI UTILITIES, INC.

                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)


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 Gas Competition Act, see Note 4 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 systems, financial systems and 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.

We have successfully completed the modification and testing of all our 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-


                                      -19-
<PAGE>   22
                               UGI UTILITIES, INC.

                     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 utility company
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 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.

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.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our primary market risk exposures are market prices for natural gas and electric
power and changes in interest rates.

Although Gas Utility is subject to changes in the price of natural gas, the
current regulatory framework allows Gas Utility to recover prudently incurred
gas costs from its customers. 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 currently is limited commodity
price risk associated with Gas Utility due to the current and projected
rate-making structure.

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 more than 50
percent of its power needs, under power supply arrangements with other producers


                                      -20-
<PAGE>   23
                               UGI UTILITIES, INC.


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 currently capped during the period that stranded
costs are being recovered through the CTC (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.

We have interest rate exposure associated with borrowings under our revolving
credit agreements. These agreements provide for interest rates on borrowings
which are indexed to short-term market interest rates. Based upon the average
level of borrowings outstanding 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 have increased annual interest expense by approximately $0.3
million.


                            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 incorporated by reference to Exhibit 10
                           to UGI Corporation Quarterly Report on Form 10-Q for
                           quarter ended June 30, 1999

                  12.1     Computation of ratio of earnings to fixed charges

                  12.2     Computation of ratio of earnings to combined fixed
                           charges and preferred stock dividends

                  27       Financial Data Schedule


         (b)      The Company filed a Current Report on Form 8-K dated May 25,
                  1999, reporting the suspension of the sale of the Registrant
                  in Items 5 and 7.


                                      -21-
<PAGE>   24
                                   SIGNATURES

         Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


                                         UGI Utilities, Inc.
                                            (Registrant)



Date:  August 13, 1999                   By:  J. C. Barney
----------------------                   ---------------------------------------
                                         J. C. Barney, Senior Vice President -
                                         Finance
                                         (Principal Financial Officer)


                                      -22-
<PAGE>   25
                      UGI UTILITIES, INC. AND SUBSIDIARIES


                                  EXHIBIT INDEX



10       Summary of Terms of UGI Corporation 1999 Restricted Stock Awards
         incorporated by reference to Exhibit 10 to UGI Corporation Quarterly
         Report on Form 10-Q for quarter ended June 30, 1999

12.1     Computation of ratio of earnings to fixed charges

12.2     Computation of ratio of earnings to combined fixed charges and
         preferred stock dividends

27       Financial Data Schedule