UGI

UGI Corporation 10-K Summary: Fiscal Year Ended September 30, 2003

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended September 30, 2003, for UGI Corporation, a distributor and marketer of energy products. The company operates through three primary segments: AmeriGas Propane (domestic and international propane distribution), Utility and Electric Operations (regulated natural gas and electric distribution in Pennsylvania), and UGI Enterprises (energy marketing, generation, and HVAC services). UGI holds an effective 48% ownership interest in AmeriGas Partners, L.P., the nation's largest retail propane distributor.

Key Financial Metrics

Note: Cash flow figures are not explicitly detailed in the provided text, though the Parent Company Schedule indicates net cash provided by operating activities of $97.2 million for the year.

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 36.7% to $3,026.1 million, driven largely by the acquisition of TXU Corp.'s northeastern gas marketing operations (increasing ESI volume by ~60%) and the acquisition of Horizon Propane LLC.
• Profitability: Net income rose 31% to $98.9 million, with diluted earnings per share increasing to $2.29.
• Capital Structure: Total debt decreased by approximately $51.4 million to $1,280.1 million. Common stockholders' equity more than doubled to $569.8 million, reflecting retained earnings and a 3-for-2 stock split effective April 1, 2003.
• Acquisitions: Completed the acquisition of Horizon Propane for approximately $31 million and significantly expanded the energy marketing segment via the TXU acquisition.

Outlook, Risks, and Contingencies

Management Commentary: The company continues to pursue a strategy of growing existing natural gas, electric, and propane businesses while seeking complementary opportunities. Management expects adequate propane supplies for fiscal 2004 but notes that profitability is sensitive to wholesale cost changes and weather conditions.

Risks and Contingencies:

• Environmental Litigation: UGI Utilities is involved in litigation regarding former Manufactured Gas Plants (MGPs). Notable cases include claims by Consolidated Edison (Westchester County, NY) with potential remediation costs exceeding $70 million, and claims by the City of Bangor, Maine, with remedial proposals ranging from $5 million to $50 million. Management believes it has good defenses.
• Class Action: A class action lawsuit (Swiger et al.) regarding underground propane line installation depths is pending. While individual claims were settled in 2003, the class action remains active.
• Market Risk: The company faces risks related to commodity price volatility (propane, natural gas, electricity) and credit risk in its marketing operations. It utilizes derivatives and hedging strategies to mitigate these risks.
• Regulatory: Operations are subject to regulation by the Pennsylvania Public Utility Commission (PUC) and FERC. Recent regulatory changes in Pennsylvania regarding gas and electric competition have altered rate structures and customer choice options.

Investor Verification Checklist

• Acquisition Integration: Verify the financial performance and integration progress of the Horizon Propane and TXU gas marketing acquisitions.
• Environmental Liabilities: Monitor the status of MGP litigation (ConEd, Bangor, Atlanta Gas Light) and potential remediation cost accruals.
• Propane Margins: Assess the impact of wholesale propane price volatility on AmeriGas margins, particularly given the seasonal nature of the business (59% of sales occur Nov-Mar).
• Debt Covenants: Review debt levels ($1.28 billion) and ensure compliance with covenants, noting the significant debt held by AmeriGas Propane ($927.3 million).
• Regulatory Rate Cases: Track upcoming PUC rate proceedings for UGI Utilities, specifically regarding the transition to post-rate cap Provider of Last Resort (POLR) service.