EXHIBIT 99.1
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
UGI Corporation is a distributor and marketer of energy products and
services. We have two primary business lines: we are a domestic and
international distributor of propane, and we are also a provider of natural gas,
electricity and related services through regulated distribution utilities as
well as through non-utility electric generation, commodity marketing and heating
and cooling installation and service businesses.
We conduct our domestic propane distribution business through AmeriGas
Partners, L.P., ("AmeriGas Partners" or the "Partnership"), which is the
nation's largest retail propane distributor. AmeriGas Partners conducts its
business through its direct and indirect subsidiaries, AmeriGas Propane, L.P.
("AmeriGas OLP") and AmeriGas Eagle Propane, L.P. ("Eagle OLP," and together
with AmeriGas OLP, the "Operating Partnership"). Eagle OLP has a less-than-one
percent minority limited partner. The Partnership's sole general partner is our
subsidiary, AmeriGas Propane, Inc. ("AmeriGas Propane" or the "General
Partner"). The common units of AmeriGas Partners represent limited partner
interests in a Delaware limited partnership; they trade on the New York Stock
Exchange under the symbol "APU." We have an effective 48% ownership interest in
the Partnership; the remaining interest is publicly held. See Note 1 to the
Company's Consolidated Financial Statements.
Our subsidiary UGI Utilities, Inc. ("UGI Utilities," or "Utilities")
owns and operates a natural gas distribution utility ("Gas Utility") and an
electric distribution utility ("Electric Utility") in eastern Pennsylvania. It
serves approximately 292,000 natural gas customers and approximately 61,600
electric customers.
UGI Enterprises, Inc. ("Enterprises") conducts domestic and
international energy-related businesses through subsidiaries. UGI Energy
Services, Inc. ("ESI") markets natural gas, oil and electricity in the eastern
region of the United States under the trade name GASMARK(R). ESI also owns and
operates liquefied natural gas and propane peak-shaving plants. UGI Development
Company ("UGID"), a subsidiary of ESI, owns and operates interests in
Pennsylvania-based electric generation assets. UGI HVAC Enterprises, Inc.
operates a heating and cooling installation and service business in the
Mid-Atlantic region.
Enterprises conducts its international propane distribution business
through wholly-owned subsidiaries and joint ventures. It owns FLAGA GmbH, the
largest retail propane distributor in Austria and one of the largest suppliers
in the Czech Republic and Slovakia. In March 2001, Enterprises acquired an
approximate 20% interest in Elf Antargaz, S.A. ("Antargaz"), one of the largest
distributors of propane in France. Enterprises also participates in a propane
distribution joint venture in China.
UGI was incorporated in Pennsylvania in 1991. UGI Corporation is not
subject to regulation by the Pennsylvania Public Utility Commission ("PUC"). It
is also exempt from registration as a holding company and not otherwise subject
to the Public Utility Holding
Company Act of 1935, except for Section 9(a)(2), which regulates the acquisition
of voting securities of an electric or gas utility company. Our executive
offices are located at 460 North Gulph Road, King of Prussia, Pennsylvania
19406, and our telephone number is (610) 337-1000. In this report, the terms
"Company" and "UGI," as well as the terms "our," "we," and "its," are sometimes
used as abbreviated references to UGI Corporation or, collectively, UGI
Corporation and its consolidated subsidiaries. Similarly, the terms "AmeriGas
Partners" and the "Partnership" are sometimes used as abbreviated references to
AmeriGas Partners, L.P. or, collectively, AmeriGas Partners, L.P. and its
subsidiaries, including the Operating Partnership.
BUSINESS STRATEGY
Since 1999, our strategic direction has focused on growing our existing
natural gas, electric and propane businesses while seeking additional related
and complementary growth opportunities. We are employing our core competencies
from our existing businesses, as well as using our national scope, international
experience, extensive asset base and access to customers, to accelerate growth
in related and complementary businesses, both domestic and international. During
fiscal year 2003, we completed a number of transactions in pursuit of this
strategy.
AMERIGAS PROPANE BUSINESS
Our domestic propane distribution business is conducted through
AmeriGas Partners. Upon completion of the Columbia Propane acquisition described
below, we became the largest retail propane distributor in the United States,
based on retail volume. As of September 30, 2003, the Partnership operated from
approximately 650 district locations in 46 states. AmeriGas Propane manages the
Partnership. Although our consolidated financial statements include 100% of the
Partnership's revenues, assets and liabilities, our net income reflects only our
48% effective interest in the income or loss of the Partnership, due to the
publicly-owned limited partner interest. See Note 1 to the Company's
Consolidated Financial Statements.
On August 21, 2001, AmeriGas OLP acquired the propane distribution
businesses of Columbia Energy Group. These businesses were conducted through
Columbia Propane Corporation and its approximate 99% owned subsidiary, Columbia
Propane, L.P. Prior to the acquisition, Columbia Propane, based in Richmond,
Virginia, was the seventh largest retail propane marketer in the United States,
selling approximately 308 million gallons annually from 186 locations in 29
states. Following the acquisition, Columbia Propane, L.P. changed its name to
AmeriGas Eagle Propane, L.P. and Columbia Propane Corporation changed its name
to AmeriGas Eagle Propane, Inc. Both entities do business under the trade name
AmeriGas(R). AmeriGas OLP and AmeriGas Eagle Holding, Inc. own more than 99% of
Eagle OLP and an unaffiliated third party retains the remaining interest.
On October 1, 2003, AmeriGas OLP acquired substantially all of the
retail propane distribution assets and business of Horizon Propane LLC ("Horizon
Propane") for approximately $31 million. During its 2003 fiscal year, Horizon
Propane sold over 30 million gallons of propane from ninety locations in twelve
states.
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GENERAL INDUSTRY INFORMATION
Propane is separated from crude oil during the refining process and
also extracted from natural gas or oil wellhead gas at processing plants.
Propane is normally transported and stored in a liquid state under moderate
pressure or refrigeration for economy and ease of handling in shipping and
distribution. When the pressure is released or the temperature is increased, it
is usable as a flammable gas. Propane is colorless and odorless; an odorant is
added to allow its detection. Propane is clean burning, producing negligible
amounts of pollutants when properly consumed.
The primary customers for propane are residential, commercial,
agricultural, motor fuel and industrial users to whom natural gas is not readily
available. Propane is typically more expensive than natural gas, competitive
with fuel oil when operating efficiencies are taken into account and, in most
areas, cheaper than electricity on an equivalent energy basis.
PRODUCTS, SERVICES AND MARKETING
As of September 30, 2003, the Partnership distributed propane to
approximately 1.3 million customers from approximately 650 district locations in
46 states. The Partnership also sells, installs and services propane appliances,
including heating systems. In certain markets, the Partnership also installs and
services propane fuel systems for motor vehicles. Typically, district locations
are found in suburban and rural areas where natural gas is not available.
Districts generally consist of an office, appliance showroom, warehouse and
service facilities, with one or more 18,000 to 30,000 gallon storage tanks on
the premises. As part of its overall transportation and distribution
infrastructure, the Partnership operates as an interstate carrier in 48 states
throughout the United States. It is also licensed as a carrier in Canada.
The Partnership sells propane primarily to five markets: residential,
commercial/industrial, motor fuel, agricultural and wholesale. Approximately 84%
of the Partnership's fiscal year 2003 sales (based on gallons sold) were to
retail accounts and approximately 16% were to wholesale customers. Sales to
residential customers in fiscal 2003 represented approximately 42% of retail
gallons sold; industrial/commercial customers 34%; motor fuel customers 11%; and
agricultural customers 7%. Transport gallons, which are large-scale deliveries
to retail customers other than residential, accounted for 6% of 2003 retail
gallons. No single customer accounts for 5% or more of the Partnership's
consolidated revenues.
In the residential market, which includes both conventional and
manufactured housing, propane is used primarily for home heating, water heating
and cooking purposes. Commercial users, which include motels, hotels,
restaurants and retail stores, generally use propane for the same purposes as
residential customers. The Partnership continues to expand its PPX Prefilled
Propane Xchange program ("PPX(R)"). At September 30, 2003, PPX was available at
approximately 20,000 retail locations throughout the United States. Sales of our
PPX grill cylinders to retailers are included in the commercial/industrial
market. The PPX program enables
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consumers to exchange their empty 20-pound propane grill cylinders for filled
cylinders at various retail locations such as home centers, mass merchandisers
and grocery and convenience stores. During fiscal year 2002, the Partnership
introduced PPX Plus. PPX Plus cylinders are equipped with a special overfill
protection device ("OPD") required by the National Fire Protection Association
("NFPA").
Industrial customers use propane to fire furnaces, as a cutting gas and
in other process applications. Other industrial customers are large-scale
heating accounts and local gas utility customers who use propane as a
supplemental fuel to meet peak load deliverability requirements. As a motor
fuel, propane is burned in internal combustion engines that power over-the-road
vehicles, forklifts and stationary engines. Agricultural uses include tobacco
curing, chicken brooding and crop drying. In its wholesale operations, the
Partnership principally sells propane to large industrial end-users and other
propane distributors.
Retail deliveries of propane are usually made to customers by means of
bobtail and rack trucks. Propane is pumped from the bobtail truck, which
generally holds 2,400 to 3,000 gallons of propane, into a stationary storage
tank on the customer's premises. The Partnership owns most of these storage
tanks and leases them to its customers. The capacity of these tanks ranges from
approximately 120 gallons to approximately 1,200 gallons.
The Partnership also delivers propane to retail customers in portable
cylinders with capacities of 4 to 24 gallons. Some of these deliveries are made
to the customer's location, where empty cylinders are either picked up for
replenishment or filled in place.
PROPANE SUPPLY AND STORAGE
The Partnership has over 200 domestic and international sources of
supply, including the spot market. Supplies of propane from the Partnership's
sources historically have been readily available. During the year ended
September 30, 2003, over 90% of the Partnership's propane supply was purchased
under supply agreements with terms of 1 to 3 years. Approximately 79% of the
volumes purchased under those agreements were from 10 suppliers, including BP
Products North America Inc. and its affiliate BP Marketing Inc. (approximately
20%); Dynegy Midstream Services (approximately 18%); and Enterprise Products
Operating LP and its affiliate Canadian Enterprises Gas Products Ltd.
(approximately 15%). The availability of propane supply is dependent upon, among
other things, the severity of winter weather and the price and availability of
competing fuels such as natural gas and crude oil. Although no assurance can be
given that supplies of propane will be readily available in the future,
management currently expects to be able to secure adequate supplies during
fiscal year 2004. If supply from major sources were interrupted, however, the
cost of procuring replacement supplies and transporting those supplies from
alternative locations might be materially higher and, at least on a short-term
basis, margins could be affected. Aside from BP, Dynegy and Enterprise Products,
no single supplier provided more than 10% of the Partnership's total propane
supply in fiscal year 2003. In certain market areas, however, some suppliers
provide 70% to 80% of the Partnership's requirements.
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Disruptions in supply in these areas could also have an adverse impact on the
Partnership's margins.
During fiscal year 2003, 92% of the Partnership's supply contracts
provided for pricing based upon posted prices at the time of delivery or index
formulas based on the current prices established at major storage points such as
Mont Belvieu, Texas, or Conway, Kansas. In addition, some agreements provided
maximum and minimum seasonal purchase volume guidelines. The percentage of
contract purchases, and the amount of supply contracted for at fixed prices,
will vary from year to year as determined by the General Partner. The
Partnership uses a number of interstate pipelines, as well as railroad tank
cars, delivery trucks and barges, to transport propane from suppliers to storage
and distribution facilities. The Partnership stores propane at facilities in
Arizona, Pennsylvania, Virginia and several other states.
Because the Partnership's profitability is sensitive to changes in
wholesale propane costs, the Partnership generally seeks to pass on increases in
the cost of propane to customers. There is no assurance, however, that the
Partnership will always be able to pass on product cost increases fully,
particularly when product costs rise rapidly. Product cost increases can be
triggered by periods of severe cold weather, supply interruptions, or other
unforeseen events. The General Partner has adopted supply acquisition and
product price risk management practices to reduce the effect of price volatility
on product costs. These practices currently include the use of summer storage,
forward purchases and derivative commodity instruments such as options and
propane price swaps. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Market Risk Disclosures."
The following graph shows the average prices of propane on the propane
spot market during the last five fiscal years at Mont Belvieu, Texas and Conway,
Kansas, two major storage areas.
AVERAGE PROPANE SPOT MARKET PRICES
[AVERAGE PROPANE SPOT MARKET PRICES LINE GRAPH]
Mont Belvieu Conway
Oct-96 51.57 51.53
Nov-96 58.05 63.41
Dec-96 61.04 84.29
Jan-97 47.45 63.39
Feb-97 38.71 39.02
Mar-97 38.50 37.26
Apr-97 34.88 35.26
May-97 35.31 36.48
Jun-97 34.43 35.86
Jul-97 34.91 34.63
Aug-97 37.03 36.53
Sep-97 38.68 37.95
Oct-97 39.83 37.32
Nov-97 35.95 35.00
Dec-97 33.57 31.36
Jan-98 30.07 28.21
Feb-98 29.79 28.32
Mar-98 27.39 27.84
Apr-98 29.06 29.47
May-98 27.42 27.82
Jun-98 24.42 24.84
Jul-98 24.54 24.55
Aug-98 24.12 23.87
Sep-98 24.83 24.04
Oct-98 25.72 24.57
Nov-98 24.79 23.20
Dec-98 20.89 18.72
Jan-99 21.75 19.61
Feb-99 22.43 20.58
Mar-99 24.10 23.40
Apr-99 28.26 27.58
May-99 28.31 26.88
Jun-99 30.95 28.68
Jul-99 37.26 34.62
Aug-99 40.51 37.56
Sep-99 43.18 42.40
Oct-99 45.46 43.39
Nov-99 43.44 38.78
Dec-99 42.83 35.10
Jan-00 56.11 42.32
Feb-00 59.72 47.26
Mar-00 51.13 47.65
Apr-00 46.88 43.64
May-00 51.31 50.81
Jun-00 55.47 56.22
Jul-00 54.88 56.29
Aug-00 58.54 63.52
Sep-00 64.21 70.95
Oct-00 61.82 64.05
Nov-00 60.71 60.45
Dec-00 77.63 79.75
Jan-01 77.27 83.03
Feb-01 59.39 63.03
Mar-01 54.94 57.12
Apr-01 54.37 60.26
May-01 51.20 56.90
Jun-01 43.17 47.70
Jul-01 38.87 43.27
Aug-01 41.54 45.71
Sep-01 41.67 46.53
Oct-01 39.48 44.19
Nov-01 33.04 35.19
Dec-01 30.43 30.34
Jan-02 29.05 26.60
Feb-02 31.20 27.92
Mar-02 37.95 35.93
Apr-02 41.52 40.07
May-02 40.69 38.09
Jun-02 37.51 35.25
Jul-02 37.19 35.47
Aug-02 41.49 41.53
Sep-02 47.17 45.93
Oct-02 47.95 47.12
Nov-02 47.26 48.01
Dec-02 52.40 52.32
Jan-03 60.38 57.70
Feb-03 77.30 73.03
Mar-03 62.77 57.09
Apr-03 50.42 50.28
May-03 54.09 55.41
Jun-03 55.98 59.71
Jul-03 53.01 58.90
Aug-03 54.84 63.63
Sep-03 52.00 59.44
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COMPETITION
Propane competes with other sources of energy, some of which are less
costly for equivalent energy value. Propane distributors compete for customers
against suppliers of electricity, fuel oil and natural gas, principally on the
basis of price, service, availability and portability. Electricity is a major
competitor of propane, but propane generally enjoys a competitive price
advantage over electricity for space heating, water heating and cooking. Fuel
oil is also a major competitor of propane and is generally less expensive than
propane. Operating efficiencies and other factors such as air quality and
environmental advantages, however, generally make propane competitive with fuel
oil as a heating source. Furnaces and appliances that burn propane will not
operate on fuel oil, and vice versa, and, therefore, a conversion from one fuel
to the other requires the installation of new equipment. Propane serves as an
alternative to natural gas in rural and suburban areas where natural gas is
unavailable or portability of product is required. Natural gas is generally a
less expensive source of energy than propane, although in areas where natural
gas is available, propane is used for certain industrial and commercial
applications and as a standby fuel during interruptions in natural gas service.
The gradual expansion of the nation's natural gas distribution systems has
resulted in the availability of natural gas in some areas that previously
depended upon propane. However, natural gas pipelines are not present in many
regions of the country where propane is sold for heating and cooking purposes.
In the motor fuel market, propane competes with gasoline and diesel
fuel as well as electric batteries and fuel cells. Wholesale propane
distribution is a highly competitive, low margin business. Propane sales to
other retail distributors and large-volume, direct-shipment industrial end-users
are price sensitive and frequently involve a competitive bidding process.
The retail propane industry is mature, with only modest growth in total
demand for the product foreseen. Therefore, the Partnership's ability to grow
within the industry is dependent on its ability to acquire other retail
distributors and to achieve internal growth, which includes expansion of the
PPX(R) program (through which consumers can exchange an empty propane grill
cylinder for a filled one) and strategic accounts program (formerly called
"national accounts," through which the Partnership encourages large,
multi-location propane users to enter into a supply agreement with it rather
than with many small suppliers), as well as the success of its sales and
marketing programs designed to attract and retain customers. The failure of the
Partnership to retain and grow its customer base would have an adverse effect on
its results.
The domestic propane retail distribution business is highly
competitive. The Partnership competes in this business with other large propane
marketers, including other full-service marketers, and thousands of small
independent operators. In recent years, some rural electric cooperatives and
fuel oil distributors have expanded their businesses to include propane
distribution and the Partnership competes with them as well. The ability to
compete effectively depends on providing high quality customer service,
maintaining competitive retail prices and controlling operating expenses.
Based on the most recent annual survey by the American Petroleum
Institute, the 2002 domestic retail market for propane (annual sales for other
than chemical uses) was approximately 11.9 billion gallons and, based on LP-GAS
magazine rankings, 2002 sales volume of the ten largest propane companies
(including AmeriGas Partners) represented approximately 32% of domestic retail
sales. Management believes the Partnership's 2003 retail volume represents 9% of
the domestic retail market.
PROPERTIES
As of September 30, 2003, the Partnership owned approximately 87% of
its district locations. In addition, the Partnership subleases three one-million
barrel underground storage caverns in Arizona to store propane and butane for
itself and third parties. The Partnership also owns a 600,000 barrel
refrigerated, above-ground storage facility located on leased property in
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California, which could be used in connection with waterborne imports or exports
of propane or butane. The California facility, which the Partnership operates,
is currently leased to several refiners for the storage of butane. In Virginia,
the Partnership has a 50% indirect equity interest in a 476,000 barrel
refrigerated, above-ground import terminal.
The transportation of propane requires specialized equipment. The
trucks and railroad tank cars utilized for this purpose carry specialized steel
tanks that maintain the propane in a liquefied state. As of September 30, 2003,
the Partnership operated a transportation fleet with the following assets:
APPROXIMATE QUANTITY & EQUIPMENT TYPE % OWNED % LEASED
400 Trailers 90 10
200 Tractors 45 55
150 Railroad tank cars 0 100
2,500 Bobtail trucks 20 80
350 Rack trucks 25 75
2,200 Service and delivery trucks 25 75
Other assets owned at September 30, 2003 included approximately 900,000
stationary storage tanks with typical capacities of 121 to 2,000 gallons and
approximately 2.4 million portable propane cylinders with typical capacities of
1 to 120 gallons. The Partnership also owned approximately 6,100 large volume
tanks which are used for its own storage requirements. AmeriGas OLP has debt
secured by liens and mortgages on its real and personal property. AmeriGas OLP
owns approximately 67% of the Partnership's property, plant and equipment.
TRADE NAMES, TRADE AND SERVICE MARKS
The Partnership markets propane principally under the "AmeriGas(R),"
"America's Propane Company(R)" and "PPX Prefilled Propane Xchange(R)" trade
names and related service marks. UGI owns, directly or indirectly, all the
right, title and interest in the "AmeriGas" and related trade and service marks.
The General Partner owns all right, title and interest in the "America's Propane
Company" and "PPX Prefilled Propane Xchange" trade names and related service
marks. The Partnership has an exclusive (except for use by UGI, AmeriGas, Inc.
and the General Partner), royalty-free license to use these names and trade and
service marks. UGI and the General Partner each have the option to terminate its
respective license agreement (on 12 months prior notice in the case of UGI),
without penalty, if the General Partner is removed as general partner of the
Partnership other than for cause. If the General Partner ceases to serve as the
general partner of the Partnership for cause, the General Partner has the option
to terminate its license agreement upon payment of a fee equal to the fair
market value of the licensed trade names. UGI has a similar termination option,
however, UGI must provide 12 months prior notice in addition to paying the fee.
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SEASONALITY
Because many customers use propane for heating purposes, the
Partnership's retail sales volume is seasonal, with approximately 59% of the
Partnership's fiscal year 2003 retail sales volume occurring during the
five-month peak heating season from November through March. As a result of this
seasonality, sales are concentrated in the Partnership's first and second fiscal
quarters (October 1 through March 31). Cash receipts are greatest during the
second and third fiscal quarters when customers pay for propane purchased during
the winter heating season.
Sales volume for the Partnership traditionally fluctuates from
year-to-year in response to variations in weather, prices, competition, customer
mix and other factors, such as conservation efforts and general economic
conditions. For historical information on national weather statistics, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
GOVERNMENT REGULATION
The Partnership is subject to various federal, state and local
environmental, safety and transportation laws and regulations governing the
storage, distribution and transportation of propane. These laws include, among
others, the Resource Conservation and Recovery Act, the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA" or, the
"Superfund Law"), the Clean Air Act, the Occupational Safety and Health Act, the
Homeland Security Act of 2002, the Emergency Planning and Community Right to
Know Act, the Clean Water Act and comparable state statutes. CERCLA imposes
joint and several liability on certain classes of persons considered to have
contributed to the release or threatened release of a "hazardous substance" into
the environment without regard to fault or the legality of the original conduct.
Propane is not a hazardous substance within the meaning of federal and state
environmental laws. However, the Partnership owns and operates real property
where such hazardous substances may exist. See Notes 1 and 12 to the Company's
Consolidated Financial Statements.
All states in which the Partnership operates have adopted fire safety
codes that regulate the storage and distribution of propane. In some states
these laws are administered by state agencies, and in others they are
administered on a municipal level. The Partnership conducts training programs to
help ensure that its operations are in compliance with applicable governmental
regulations. With respect to general operations, NFPA Pamphlets No. 54 and No.
58, which establish a set of rules and procedures governing the safe handling of
propane, or comparable regulations, have been adopted as the industry standard
in a majority of the states in which the Partnership operates. Effective April
1, 2002, NFPA Pamphlet No. 58 requires portable propane cylinders to be equipped
with an OPD. Although NFPA Pamphlet No. 58 has not yet been adopted in all
states, the Partnership complies with the OPD requirements throughout the United
States. Effective July 2004, NFPA Pamphlet No. 58 requires stationary cylinders
that are filled in place to be re-qualified periodically. The Partnership
maintains various permits under environmental laws that are necessary to operate
certain of its facilities, some of which may be material to the operations of
the Partnership. Management believes that the
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procedures currently in effect at all of its facilities for the handling,
storage and distribution of propane are consistent with industry standards and
are in compliance in all material respects with applicable environmental, health
and safety laws.
With respect to the transportation of propane by truck, the Partnership
is subject to regulations promulgated under the Federal Motor Carrier Safety Act
and the Homeland Security Act of 2002. These regulations cover the security of
and transportation of hazardous materials and are administered by the United
States Department of Transportation ("DOT"). The Natural Gas Safety Act of 1968
required the DOT to develop and enforce minimum safety regulations for the
transportation of gases by pipeline. The DOT's pipeline safety code applies to,
among other things, a propane gas system which supplies 10 or more customers
from a single source and a propane gas system any portion of which is located in
a public place. The code requires operators of all gas systems to provide
training and written instructions for employees, establish written procedures to
minimize the hazards resulting from gas pipeline emergencies, and keep records
of inspections and testing.
EMPLOYEES
The Partnership does not directly employ any persons responsible for
managing or operating the Partnership. The General Partner provides these
services and is reimbursed for its direct and indirect costs and expenses,
including all compensation and benefit costs. At September 30, 2003, the General
Partner had approximately 6,200 employees, including approximately 400 temporary
and part-time employees, working on behalf of the Partnership. UGI also performs
certain financial and administrative services for the General Partner on behalf
of the Partnership and is reimbursed by the Partnership for its direct and
indirect costs and expenses.
UTILITY OPERATIONS
Our utility business is conducted by UGI Utilities, Inc., a wholly
owned subsidiary. Utilities operates its business through two divisions, the gas
division ("Gas Utility") and the electric division ("Electric Utility"). Until
June 2003, Utilities also owned interests in electric generating facilities in
Pennsylvania, through its subsidiary, UGID. In June 2003, ownership of UGID was
transferred to ESI.
GAS UTILITY
NATURAL GAS CHOICE AND COMPETITION ACT
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 was 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 distribution companies ("LDCs")
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like Gas Utility may continue to sell gas to customers, and such sales of gas,
as well as distribution services provided by LDCs, continue to be subject to
price regulation by the PUC.
Generally, Pennsylvania 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. The Gas Competition Act requires
energy marketers seeking to serve customers of LDCs to accept assignment of a
portion of the LDC's interstate pipeline capacity and storage contracts at
contract rates, thus avoiding the creation of stranded costs.
On October 1, 1999, Gas Utility filed its restructuring plan with the
PUC pursuant to the Gas Competition Act. On June 29, 2000, the PUC entered its
order ("Gas Restructuring Order") approving Gas Utility's restructuring plan
substantially as filed. Gas Utility designed its restructuring plan to ensure
reliability of gas supply deliveries to Gas Utility on behalf of residential and
small commercial and industrial customers. In addition, the plan changed Gas
Utility's base rates for firm customers. It also changed the calculation of
purchased gas cost rates. See "Utility Regulation and Rates."
Since October 1, 2000, all of Gas Utility's customers have had the
option to purchase their gas supplies from an alternative gas supplier. Large
commercial and industrial customers of Gas Utility have been able to purchase
their gas from other suppliers since 1982. During fiscal year 2003, two
third-party suppliers qualified to serve residential or small commercial and
industrial customers in Gas Utility's service territory. Together, they are
serving approximately 4,500 customers. Management believes none of the Gas
Competition Act, the Gas Restructuring Order, or commodity sales to residential
and small commercial and industrial customers by third-party suppliers will have
a material adverse impact on the Company's financial condition or results of
operations.
SERVICE AREA; REVENUE ANALYSIS
Gas Utility distributes natural gas to approximately 292,000 customers
in portions of 15 eastern and southeastern Pennsylvania counties through its
distribution system of approximately 4,800 miles of gas mains. The service area
consists of approximately 3,000 square miles and includes the cities of
Allentown, Bethlehem, Easton, Harrisburg, Hazleton, Lancaster, Lebanon and
Reading, Pennsylvania. Located in Gas Utility's service area are major
production centers for basic industries such as specialty metals, aluminum and
glass.
System throughput (the total volume of gas sold to or transported for
customers within Gas Utility's distribution system) for the 2003 fiscal year was
approximately 83.8 billion cubic feet ("bcf"). System sales of gas accounted for
approximately 43% of system throughput, while gas transported for residential,
commercial and industrial customers (who bought their gas from others) accounted
for approximately 57% of system throughput. Based on industry data for 2001,
residential customers account for approximately 34% of total system throughput
by LDCs in the United States. By contrast, for the 2003 fiscal year, Gas
Utility's residential customers represented 26% of its total system throughput.
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SOURCES OF SUPPLY AND PIPELINE CAPACITY
Gas Utility meets its service requirements by utilizing a diverse mix
of natural gas purchase contracts with producers and marketers, and storage and
transportation service contracts. These arrangements enable Gas Utility to
purchase gas from Gulf Coast, Mid-Continent, Appalachian and Canadian sources.
For the transportation and storage function, Utilities has agreements with a
number of pipeline companies, including Texas Eastern Transmission Corporation,
Columbia Gas Transmission Corporation and Transcontinental Gas Pipeline
Corporation.
GAS SUPPLY CONTRACTS
During fiscal year 2003, Gas Utility purchased approximately 37 bcf of
natural gas for sale to customers. Approximately 88% of the volumes purchased
were supplied under agreements with ten major suppliers. The remaining 12% of
gas purchased was supplied by approximately 25 producers and marketers. Gas
supply contracts are generally no longer than one year.
In fiscal years 2002 and 2003, as a result of changing market
conditions following the bankruptcy of Enron Corp., a number of suppliers with
which Utilities formerly did business exited the wholesale trading market. This
development did not significantly impact Utilities' ability to secure gas
supplies.
SEASONAL VARIATION
Because many of its customers use gas for heating purposes, Gas
Utility's sales are seasonal. Approximately 60% of fiscal year 2003 throughput
occurred during the winter season from November through March.
COMPETITION
Natural gas is a fuel that competes with electricity and oil, and to a
lesser extent, with propane and coal. Competition among these fuels is primarily
a function of their comparative price and the relative cost and efficiency of
fuel utilization equipment. Electric utilities in Gas Utility's service area are
seeking new load, primarily in the new construction market. Fuel oil dealers
compete for customers in all categories, including industrial customers. Gas
Utility responds to this competition with marketing efforts designed to retain
and grow its customer base.
In substantially all of its service territory, Gas Utility is the only
regulated gas distribution utility having the right, granted by the PUC or by
law, to provide gas distribution services. Under the Gas Competition Act, retail
customers may purchase their natural gas from a supplier other than Gas Utility.
Commercial and industrial customers in Gas Utility's service territory have been
able to do this since 1982. As of October 2003, two marketers have qualified to
serve residential and small commercial and industrial customers. Together they
serve approximately 4,500
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customers. Gas Utility provides transportation services for residential and
small commercial and industrial customers who purchase natural gas from others.
A number of Gas Utility's commercial and industrial customers have the
ability to switch to an alternate fuel at any time and, therefore, are served on
an interruptible basis under rates which are competitively priced with respect
to their alternate fuel. Gas Utility's profitability from these customers,
therefore, is affected by the difference, or "spread," between the customers'
delivered cost of gas and the customers' delivered alternate fuel cost. See
"Utility Regulation and Rates - Gas Utility Rates." Commercial and industrial
customers representing 18% of total system throughput have locations which
afford them the opportunity, although none has exercised it, of seeking
transportation service directly from interstate pipelines, thereby bypassing Gas
Utility. The majority of customers in this group are served under transportation
contracts having three- to twenty-year terms. Included in these two groups are
Utilities' ten largest customers in terms of annual volume. All of these
customers have contracts with Utilities, nine of which extend beyond fiscal year
2004. No single customer represents, or is anticipated to represent, more than
5% of the total revenues of Gas Utility.
OUTLOOK FOR GAS SERVICE AND SUPPLY
Gas Utility anticipates having adequate pipeline capacity and sources
of supply available to it to meet the full requirements of all firm customers on
its system through fiscal year 2004. Supply mix is diversified, market priced,
and delivered pursuant to a number of long- and short-term firm transportation
and storage arrangements, including transportation contracts held by some of
Utilities' larger customers.
During fiscal year 2003, Gas Utility supplied transportation service to
two major cogeneration installations and three electric generation facilities.
Gas Utility continues to pursue opportunities to supply natural gas to electric
generation projects located in its service territory. Gas Utility also continues
to seek new residential, commercial and industrial customers for both firm and
interruptible service. In the residential market sector, Gas Utility connected
approximately 9,600 residential heating customers during fiscal year 2003, which
represented a record annual increase. Of those new customers, new home
construction accounted for over 7,300 heating customers. Customers converting
from other energy sources, primarily oil and electricity, and existing
non-heating gas customers who have added gas heating systems to replace other
energy sources, accounted for the balance of the additions. The number of new
commercial and industrial customers was over 1,100.
Utilities continues to monitor and participate extensively in
rulemaking and individual rate and tariff proceedings before the Federal Energy
Regulatory Commission ("FERC") affecting the rates and the terms and conditions
under which Gas Utility transports and stores natural gas. Among these
proceedings are those arising out of certain FERC orders and/or pipeline filings
which relate to (i) the pricing of pipeline services in a competitive energy
marketplace; (ii) the flexibility of the terms and conditions of pipeline
service tariffs and
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contracts; and (iii) pipelines' requests to increase their base rates, or change
the terms and conditions of their storage and transportation services.
Gas Utility's objective in negotiations with interstate pipeline and
natural gas suppliers, and in proceedings before regulatory agencies, is to
assure availability of supply, transportation and storage alternatives to serve
market requirements at the lowest cost possible, taking into account the need
for security of supply. Consistent with that objective, Gas Utility negotiates
the terms of firm transportation capacity on all pipelines serving Gas Utility,
arranges for appropriate storage and peak-shaving resources, negotiates with
producers for competitively priced gas purchases and aggressively participates
in regulatory proceedings related to transportation rights and costs of service.
ELECTRIC UTILITY
ELECTRICITY GENERATION CUSTOMER CHOICE AND COMPETITION ACT
On January 1, 1997, Pennsylvania's Electricity Generation Customer
Choice and Competition Act ("ECC Act") became effective. The ECC Act permits all
Pennsylvania retail electric customers to choose their electric generation
supplier. Pursuant to the Act, all electric utilities were required to file
restructuring plans with the PUC which, among other things, included unbundled
prices for electric generation, transmission and distribution and a competitive
transition charge (CTC) for the recovery of "stranded costs" which would be paid
by all customers receiving distribution service. Stranded costs generally are
electric generation-related costs that traditionally would be recoverable in a
regulated environment but may not be recoverable in a competitive electric
generation market. Under the ECC Act, Electric Utility is obligated to provide
energy to customers who do not choose alternate suppliers. Electric Utility will
continue to be the only regulated electric utility having the right, granted by
the PUC or by law, to distribute electric energy in its service territory.
On June 19, 1998, the PUC entered its Opinion and Order (the
"Restructuring Order") in Electric Utility's restructuring proceeding under the
ECC Act. The Electric Restructuring Order authorized Electric Utility to recover
from its customers approximately $32.5 million in stranded costs (on a full
revenue requirements basis, which includes all income and gross receipts taxes)
over an estimated four-year period which commenced January 1, 1999 through a
CTC, together with carrying charges on unrecovered balances of 7.94%. Under the
terms of the Restructuring Order, Electric Utility generally could not increase
the generation component of prices during the period that stranded costs were
being recovered through the CTC. Electric Utility's recovery of stranded costs
through the CTC was completed during fiscal year 2003.
SERVICE AREA; SALES ANALYSIS
Electric Utility supplies electric service to approximately 61,600
customers in portions of Luzerne and Wyoming Counties in northeastern
Pennsylvania through a system consisting of approximately 2,100 miles of
transmission and distribution lines and 14 transmission substations.
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For fiscal year 2003, about 53% of sales volume came from residential customers,
36% from commercial customers and 11% from industrial customers. Electricity
transported for customers who purchased their power from others pursuant to the
ECC Act represented approximately 1% of fiscal year 2003 sales volume.
SOURCES OF SUPPLY
Electric Utility has third-party generation supply contracts in place
for substantially all of its expected energy requirements for fiscal year 2004.
Electric Utility distributes both electricity that it purchases from others and
electricity that customers purchase from other suppliers. At September 30, 2003,
alternate suppliers served customers representing less than 1% of system load.
Electric Utility expects to continue to provide energy to the great majority of
its distribution customers for the foreseeable future.
UTILITY REGULATION AND RATES
PENNSYLVANIA PUBLIC UTILITY COMMISSION JURISDICTION
Utilities' gas and electric utility operations, which exclude electric
generation, are subject to regulation by the PUC as to rates, terms and
conditions of service, accounting matters, issuance of securities, contracts and
other arrangements with affiliated entities, and various other matters. UGID has
FERC authority to sell power at market-based rates. Generally, UGID is not
subject to regulation by the PUC.
FERC ORDERS 888 AND 889
In April 1996, FERC issued Orders No. 888 and 889, which established
rules for the use of electric transmission facilities for wholesale
transactions. FERC has also asserted jurisdiction over the transmission
component of electric retail choice transactions. In compliance with these
orders, the PJM Interconnection, LLC ("PJM"), of which Utilities is a member,
has filed an open access transmission tariff with the FERC establishing
transmission rates and procedures for transmission within the PJM control area.
Under the PJM tariff and associated agreements, Electric Utility is entitled to
receive certain revenues when its transmission facilities are used by third
parties.
GAS UTILITY RATES
The Gas Restructuring Order included an increase in firm-residential,
commercial and industrial ("retail core-market") base rates, effective October
1, 2000. The increase, calculated in accordance with the Gas Competition Act,
was designed to generate approximately $16.7 million in additional annual
revenues. The Order also provided that Gas Utility reduce its purchased gas cost
rates by an annualized amount of $16.7 million for the first 14 months following
the base rate increase.
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Effective December 1, 2001, Gas Utility was required to reduce its
purchased gas cost rates to retail core-market customers by an amount equal to
the margin it receives from customers served under interruptible rates to the
extent they use capacity contracted for by Gas Utility for retail core-market
customers. As a result of these changes in its regulated rates, since December
1, 2001, Gas Utility's operating results have been more sensitive to heating
season weather and less sensitive to the market prices of alternative fuel.
BASE RATES
As stated above, Gas Utility's current base rates went into effect
October 1, 2000 pursuant to The Gas Restructuring Order. See Note 3 to the
Company's Consolidated Financial Statements.
PURCHASED GAS COST RATES
Gas Utility's gas service tariff contains Purchased Gas Cost ("PGC")
rates which provide for annual increases or decreases in the rate per thousand
cubic feet ("mcf") which Gas Utility charges for natural gas sold by it, to
reflect Utilities' projected cost of purchased gas. PGC rates may also be
adjusted quarterly, or, under certain conditions monthly, to reflect purchased
gas costs. Each proposed annual PGC rate is required to be filed with the PUC
six months prior to its effective date. During this period the PUC holds
hearings to determine whether the proposed rate reflects a least-cost fuel
procurement policy consistent with the obligation to provide safe, adequate and
reliable service. After completion of these hearings, the PUC issues an order
permitting the collection of gas costs at levels which meet that standard. The
PGC mechanism also provides for an annual reconciliation. Utilities has two PGC
rates. PGC (1) is applicable to small, firm, core-market customers consisting of
the residential and small commercial and industrial classes; PGC (2) is
applicable to firm, contractual, high-load factor customers served on three
separate rates. In addition, residential customers maintaining a high load
factor may qualify for the PGC (2) rate. As described above, the Gas
Restructuring Order provided for ongoing adjustments to Gas Utilities' PGC
rates, commencing December 1, 2001, to reflect margins, if any, from
interruptible rate customers who do not obtain their own pipeline capacity.
ELECTRIC UTILITY RATES
The PUC approved a settlement establishing rules for Electric Utility's
Provider of Last Resort ("POLR") service on March 28, 2002, and a separate
settlement that modified these rules on June 13, 2002 (collectively, the "POLR
Settlement") under which Electric Utility terminated stranded cost recovery
through its CTC and is no longer subject to the statutory generation rate caps
as of August 1, 2002 for commercial and industrial ("C&I") customers and as of
November 1, 2002 for residential customers. Charges for generation service (1)
were initially set at a level equal to the rates paid by Electric Utility
customers for POLR service under the statutory rate caps; (2) may be raised at
certain designated times by up to 5% of the total rate for distribution,
transmission and generation through December 2004; and (3) may be set at market
rates thereafter. Electric Utility may also offer multiple year POLR contracts
to its customers. The POLR Settlement provides for annual shopping periods
during which customers may elect to
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remain on POLR service or choose an alternate supplier. Customers who do not
select an alternate supplier will be obligated to remain on POLR service until
the next shopping period. Residential customers who return to POLR service at a
time other than during the annual shopping period must remain on POLR service
until the date of the second open shopping period after returning. C&I customers
who return to POLR service at a time other than during the annual shopping
period must remain on POLR service until the next open shopping period, and may,
in certain circumstances, be subject to generation rate surcharges. Consistent
with the terms of the POLR Settlement, Electric Utility's POLR rates will
increase beginning January 2004 for commercial and industrial customers, and
June 2004 for residential customers.
Additionally, pursuant to the requirements of the ECC Act, the PUC is
currently developing post-rate cap POLR regulations that are expected to further
define post-rate cap POLR service obligations and pricing. As of September 30,
2003, fewer than 1% of Electric Utility's customers have chosen an alternative
electricity generation supplier.
STATE TAX SURCHARGE CLAUSES
Utilities' gas and electric service tariffs contain state tax surcharge
clauses. The surcharges are recomputed whenever any of the tax rates included in
their calculation are changed. These clauses protect Utilities from the effect
of increases in most of the Pennsylvania taxes to which it is subject.
UTILITY FRANCHISES
Utilities holds certificates of public convenience issued by the PUC
and certain "grandfather rights" predating the adoption of the Pennsylvania
Public Utility Code and its predecessor statutes which it believes are adequate
to authorize it to carry on its business in substantially all the territory to
which it now renders gas and electric service. Under applicable Pennsylvania
law, Utilities also has certain rights of eminent domain as well as the right to
maintain its facilities in streets and highways in its territories.
OTHER GOVERNMENT REGULATION
In addition to regulation by the PUC, the gas and electric utility
operations of Utilities are subject to various federal, state and local laws
governing environmental matters, occupational health and safety, pipeline safety
and other matters. Certain of Utilities' activities involving the interstate
movement of natural gas, the transmission of electricity, transactions with
non-utility generators of electricity, and other matters, are also subject to
the jurisdiction of FERC.
Utilities is subject to the requirements of the federal Resource
Conservation and Recovery Act, CERCLA and comparable state statutes with respect
to the release of hazardous substances on property owned or operated by
Utilities. See ITEM 3. "LEGAL PROCEEDINGS - Environmental Matters-Manufactured
Gas Plants."
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EMPLOYEES
At September 30, 2003, Utilities had approximately 1,000 employees.
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UGI ENTERPRISES, INC.
Through its subsidiaries, Enterprises develops energy-related
businesses for us in the United States and abroad as described below. We expect
Enterprises to continue to evaluate and develop new related and complementary
business opportunities for us.
DOMESTIC BUSINESSES
NATURAL GAS AND ELECTRICITY MARKETING
ESI conducts a non-utility energy marketing business under the trade
names GASMARK(R) and POWERMARK(R). GASMARK(R) sells natural gas directly to
approximately 5,000 commercial and industrial customers in Pennsylvania, New
Jersey, New York, Delaware, Maryland, Virginia, Ohio, North Carolina and the
District of Columbia through the transportation systems of 35 utility systems.
Energy Services also sells fuel oil and has the ability to sell electricity to
commercial and industrial customers in Pennsylvania, New Jersey and Maryland.
During fiscal year 2003, ESI significantly increased its size by acquiring the
northeastern gas marketing operations of a subsidiary of TXU Corp. This
acquisition added approximately 1,000 customers to ESI's customer base and
increased its natural gas sales volume approximately 60%.
The gas marketing business is a high revenue, low margin business. A
majority of GASMARK(R)'s commodity sales are made under fixed price agreements.
ESI manages supply cost volatility related to these agreements by entering into
exchange-traded natural gas futures contracts and fixed-price supply
arrangements with a diverse group of natural gas producers and holders of
interstate pipeline capacity. Exchange-traded natural gas futures contracts are
guaranteed by the New York Mercantile Exchange ("NYMEX") and have nominal credit
risk. ESI also bears the risk for balancing and delivering natural gas to its
customers under various pipelines and LDC tariffs. Failure to meet these
guidelines can result in additional expense in the form of penalties, which can
be substantial in relation to ESI's results of operations.
Credit is another risk factor in the commodity marketing business. ESI
bears the risks of customer defaults and supplier non-performance on commodity
and pipeline capacity contracts. ESI seeks to mitigate risk of supplier defaults
by diversifying its supply and pipeline transportation purchases across a number
of suppliers. ESI also requires credit support from customers in higher-risk
transactions. This credit support can take the form of prepayments, bonds and
letters of credit. ESI also maintains credit insurance. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations-Market
Risk Disclosures."
ESI also operates a natural gas liquefaction, storage and vaporization
facility in Temple, Pennsylvania and propane storage and propane-air mixing
stations in Bethlehem, Reading and Steelton, Pennsylvania. These plants were
formerly owned by Utilities. Utilities has a call on a majority of the winter
capacity of these facilities through March 2004 at a PUC-approved formula price.
ESI is able to make opportunistic off-peak sales of LNG from these facilities at
market prices.
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ELECTRIC GENERATION
During fiscal year 2003, UGID was transferred to ESI. In June 2003,
UGID increased its ownership interest in the Conemaugh generating station
("Conemaugh") from 1.11% to approximately 6% (102 megawatts). Conemaugh is a
1,711 megawatt, coal-fired generation station located near Johnstown,
Pennsylvania. It is owned by a consortium of energy companies and operated by a
unit of Reliant Resources, Inc. In addition, UGID is the indirect, 50% owner of
Hunlock Creek Energy Ventures ("Energy Ventures"). The generation assets of
Energy Ventures consist of the 48 megawatt, coal-fired Hunlock generating
station, located near Kingston, Pennsylvania, and a 44 megawatt, gas-fired
turbine generator at the same site. A subsidiary of Allegheny Energy, Inc. is
the other general partner in Energy Ventures. Under the joint venture agreement,
UGID has the right to purchase one-half the output of Energy Ventures'
generation at cost. It also has the right to require an affiliate of Allegheny
Energy, Inc. ("Allegheny") to purchase UGID's ownership interest in Energy
Ventures. Allegheny has a corresponding call right on UGID's interest in Energy
Ventures. These "put" and "call" rights are effective for a 90-day period
commencing January 1, 2006. UGID is a non-utility company, wholly-owned by ESI.
UGID markets the electric generation it controls to third parties. The output
from these plants is sold in the spot market and under fixed-term contracts.
Energy Ventures' operation of Hunlock Station complies with the air
quality standards of the Pennsylvania Department of Environmental Protection
("DEP") with respect to stack emissions. Under the Federal Water Pollution
Control Act, Hunlock station has a permit from the DEP to discharge water into
the North Branch of the Susquehanna River. The Federal Clean Air Act Amendments
of 1990 (the "Clean Air Act Amendments") impose emissions limitations for
certain compounds, including sulfur dioxide and nitrous oxides. Both the
Conemaugh Station and the Hunlock Station are in material compliance with these
emission standards.
HVAC SERVICE
UGI HVAC Enterprises, Inc. ("HVAC") was acquired by Enterprises in
September 2000. Together with its subsidiary, McHugh Service Company, HVAC
conducts a heating, ventilation air-conditioning and refrigeration service
business serving portions of Utilities' gas service area and adjacent eastern
market areas, including Philadelphia suburbs and portions of New Jersey and
northern Delaware. It serves more than 100,000 customers in residential,
commercial, industrial and new construction markets. During fiscal year 2003,
HVAC generated approximately $46 million in revenues and employed approximately
350 people.
INTERNATIONAL BUSINESSES
FLAGA GMBH
In September 1999, subsidiaries of Enterprises acquired all of the
stock of Flaga GmbH, a privately-held company founded in 1947. FLAGA distributes
propane, butane and propane/butane mix (collectively, "LPG") in Austria, the
Czech Republic and Slovakia for residential, commercial, industrial and autogas
applications. During fiscal year 2003, FLAGA
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distributed approximately 34 million gallons of LPG. FLAGA operates from 6
distribution locations in Austria, 1 in the Czech Republic and 2 in Slovakia. In
addition, FLAGA has 7 sales offices in the Czech Republic. As of September 30,
2003, FLAGA had a total of 321 employees of which 165 were located in Austria,
120 in the Czech Republic and 36 in Slovakia.
FLAGA has the largest propane distribution market position in Austria
with an estimated 34% retail market share, serving residential, commercial and
industrial customers. The retail propane industry in Austria is mature, with
only modest growth in propane demand foreseen. Residential customers generally
commit to prepaid tank rental agreements. Competition for renewals and for new
customer installations is based on the terms and conditions of tank leases as
well as on product prices. Much of FLAGA's Austrian cylinder business is
conducted through approximately 600 neighborhood resellers with whom FLAGA has a
long business relationship. FLAGA competes with other propane marketers and with
other sources of energy, principally natural gas and wood.
The Czech market for LPG, which currently represents about 30% of
FLAGA's total volume, is growing approximately 2% to 4% per year. FLAGA entered
the Czech market in 1994 when it purchased a portion of the formerly state-run
LPG company from the Czech government as part of its privatization plan. FLAGA's
main facility in the Czech Republic is its bulk storage and cylinder filling and
repair plant in Hustopece, located in the southeast quadrant of the Czech
Republic. FLAGA estimates its market share in the Czech Republic at
approximately 15%, ranking it third in the country.
The Slovak market for LPG has been growing significantly in the area of
autogas sales volume in the last three years. FLAGA estimates that its share of
the LPG market in Slovakia is 24%, ranking it second in the country.
ANTARGAZ
In March 2001, UGI France, Inc., together with Paribas Affaires
Industrielles ("PAI") and Medit Mediterranea GPL, S.r.l. ("Medit"), acquired the
stock and certain related assets of Antargaz, one of the largest distributors of
LPG in France. We acquired an approximate 20% interest, PAI an approximate 68%
interest, Medit an approximate 10% interest and certain members of Antargaz
management, the remaining interest. PAI is a leading private equity fund manager
in Europe with strong management and financial skills and Medit is a supplier of
logistics services to the LPG industry in Europe, primarily Italy. During fiscal
year 2003, Antargaz sold approximately 344 million gallons of LPG. Due, in part,
to our membership on the Board of Directors of Antargaz, we believe we have
significant influence over the company's operating and financial policies.
Antargaz has an approximate 24% market share in France. The French LPG
market is characterized by modest growth, about 1% per year, and stable market
conditions. Antargaz serves nearly one million customers using a logistical
system that includes ten major import/storage facilities, 30 bulk storage depots
and 16 cylinder filling plants. Antargaz's customer base consists of
residential, commercial, agricultural and motor fuel accounts who use
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LPG for space heating, cooking, water heating, process heat and transportation.
Antargaz has approximately 1,350 employees.
CHINAGAS PARTNERS
During 1998, Enterprises formed ChinaGas Partners, L.P. ("ChinaGas")
with affiliates of Energy Transportation Group, Inc. to develop, build and
operate LPG projects in the People's Republic of China. On October 28, 1998,
ChinaGas and its wholly owned subsidiary together acquired 50% of the shares of
an existing Chinese company known as the Nantong Huayang LPG Port Co., Ltd.
("Port Company") which operated an integrated LPG business, including an import
terminal and distribution business, serving the provinces along the lower and
middle reaches of the Yangtze River. On August 1, 2002, the shareholders of the
Port Company agreed to split the company into two separate companies: a terminal
company owned completely by China National Chemical Supply & Sales Corporation
and a retail distribution company owned by ChinaGas. The separation became
effective in December 2002. The terminal company is currently pursuing bulk
chemical storage business but continues to support the retail distribution
company through a long-term LPG storage lease. Enterprises owns 50% of the
distribution business.
BUSINESS SEGMENT INFORMATION
The table stating the amounts of revenues, operating income (loss) and
identifiable assets attributable to each of UGI's business segments for the
2003, 2002 and 2001 fiscal years appears in Note 21 to the Consolidated
Financial Statements contained in our 2003 Annual Report to Shareholders and is
incorporated in this Report by reference.
EMPLOYEES
At September 30, 2003, UGI and its subsidiaries had approximately 8,200
employees.
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