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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2018
Commission file number 1-11071
UGI CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania
 
23-2668356
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
460 North Gulph Road, King of Prussia, PA 19406
(Address of Principal Executive Offices) (Zip Code)
(610) 337-1000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of each Exchange
on Which Registered
Common Stock, without par value
 
New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
 
Accelerated filer o
 
Non-accelerated filer o
Smaller reporting company o
 
Emerging growth company o
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
The aggregate market value of UGI Corporation Common Stock held by non-affiliates of the registrant on March 31, 2018 was $7,648,020,563.
At November 13, 2018, there were 173,846,575 shares of UGI Corporation Common Stock issued and outstanding.
Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held on January 30, 2019 are incorporated by reference into Part III of this Form 10-K.
 


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FORWARD-LOOKING INFORMATION

Information contained in this Annual Report on Form 10-K may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such statements use forward-looking words such as “believe,” “plan,” “anticipate,” “continue,” “estimate,” “expect,” “may,” or other similar words. These statements discuss plans, strategies, events or developments that we expect or anticipate will or may occur in the future.

A forward-looking statement may include a statement of the assumptions or bases underlying the forward-looking statement. We believe that we have chosen these assumptions or bases in good faith and that they are reasonable. However, we caution you that actual results almost always vary from assumed facts or bases, and the differences between actual results and assumed facts or bases can be material, depending on the circumstances. When considering forward-looking statements, you should keep in mind our Risk Factors included in Item 1A herein and the following important factors that could affect our future results and could cause those results to differ materially from those expressed in our forward-looking statements: (1) weather conditions resulting in reduced demand; (2) cost volatility and availability of propane and other liquefied petroleum gases (“LPG”), electricity, and natural gas and the capacity to transport product to our customers; (3) changes in domestic and foreign laws and regulations, including safety, tax, consumer protection, environmental, and accounting matters; (4) inability to timely recover costs through utility rate proceedings; (5) the impact of pending and future legal proceedings; (6) competitive pressures from the same and alternative energy sources; (7) failure to acquire new customers or retain current customers thereby reducing or limiting any increase in revenues; (8) liability for environmental claims; (9) increased customer conservation measures due to high energy prices and improvements in energy efficiency and technology resulting in reduced demand; (10) adverse labor relations; (11) customer, counterparty, supplier, or vendor defaults; (12) liability for uninsured claims and for claims in excess of insurance coverage, including those for personal injury and property damage arising from explosions, terrorism, natural disasters and other catastrophic events that may result from operating hazards and risks incidental to generating and distributing electricity and transporting, storing and distributing natural gas and LPG; (13) transmission or distribution system service interruptions; (14) political, regulatory and economic conditions in the United States, Europe and other foreign countries, including the current conflicts in the Middle East, and foreign currency exchange rate fluctuations, particularly the euro; (15) capital market conditions, including reduced access to capital markets and interest rate fluctuations; (16) changes in commodity market prices resulting in significantly higher cash collateral requirements; (17) reduced distributions from subsidiaries impacting the ability to pay dividends; (18) changes in Marcellus Shale gas production; (19) the availability, timing and success of our acquisitions, commercial initiatives and investments to grow our businesses; (20) our ability to successfully integrate acquired businesses and achieve anticipated synergies; (21) the interruption, disruption, failure or malfunction of our information technology systems, including due to cyber attack; and (22) continued analysis of recent tax legislation.

These factors are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors could also have material adverse effects on future results. We undertake no obligation to update publicly any forward-looking statement whether as a result of new information or future events except as required by the federal securities laws.

PART I:

ITEMS 1. AND 2. BUSINESS AND PROPERTIES
CORPORATE OVERVIEW

UGI Corporation (the “Company”) is a holding company that, through subsidiaries and affiliates, distributes, stores, transports and markets energy products and related services. In the United States, we (1) are the general partner and own limited partner interests in a retail propane marketing and distribution business, (2) own and operate natural gas and electric distribution utilities, and (3) own and operate an energy marketing, midstream infrastructure, storage, natural gas gathering, natural gas production, electricity generation and energy services business. Internationally, we distribute LPG and market other energy products and services in Europe. Our subsidiaries and affiliates operate principally in the following four business segments:

AmeriGas Propane
UGI International
Midstream & Marketing
UGI Utilities


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The AmeriGas Propane segment consists of the propane distribution business of AmeriGas Partners, L.P. (“AmeriGas Partners” or the “Partnership”). In addition to distributing propane, the Partnership also sells, installs, and services propane appliances, including heating systems. The Partnership conducts its propane distribution business through its principal operating subsidiary, AmeriGas Propane, L.P., and is the nation’s largest retail propane distributor. 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 and trade on the New York Stock Exchange under the symbol “APU.” We have an effective 26% ownership interest in the Partnership and the remaining interest is publicly held. See Note 1 to Consolidated Financial Statements.

The UGI International segment consists of LPG distribution businesses conducted by our subsidiaries and affiliates in France, Poland, Austria, Hungary, the Czech Republic, Slovakia, Switzerland, Romania, Belgium, the Netherlands, Luxembourg, the United Kingdom, Italy, Finland, Denmark, Norway and Sweden. In addition, UGI International conducts an energy marketing business in France, Belgium, the Netherlands and the United Kingdom. Based on volumes distributed, UGI International believes that it is the largest distributor of LPG in France, Austria, Belgium, Denmark, Luxembourg and Hungary and one of the largest distributors of LPG in Poland, the Czech Republic, Slovakia, Norway, the Netherlands and Sweden. These businesses are conducted principally through our subsidiaries, UGI France SAS, Flaga GmbH, AvantiGas Limited, UniverGas Italia S.r.l. (“UniverGas”) and DVEP Investeringen B.V. (“DVEP”).

The Midstream & Marketing segment consists of energy-related businesses conducted by our wholly-owned subsidiary, UGI Energy Services, LLC (“Energy Services”), a subsidiary of UGI Enterprises, LLC (“Enterprises”). These businesses (i) conduct energy marketing in the Mid-Atlantic region of the United States, (ii) operate and own natural gas liquefaction, storage and vaporization facilities and propane-air mixing assets, (iii) manage natural gas pipeline and storage contracts, and (iv) develop, own and operate pipelines, gathering infrastructure and gas storage facilities primarily in the Marcellus Shale region of Pennsylvania and own all or portions of electricity generation facilities. The Midstream & Marketing segment also includes a subsidiary of Enterprises that conducts a heating, ventilation, air conditioning, refrigeration, mechanical and electrical contracting, and project management service business in portions of eastern and central Pennsylvania.

The UGI Utilities segment consists of the regulated natural gas distribution businesses (“Gas Utility”) of our subsidiary, UGI Utilities, Inc. (“UGI Utilities”), and prior to their merger with and into UGI Utilities effective October 1, 2018 (the “Utilities Merger”), UGI Penn Natural Gas, Inc. (“PNG”) and UGI Central Penn Gas, Inc. (“CPG”). The UGI Utilities segment also consists of UGI Utilities’ regulated electric distribution business in Pennsylvania (“Electric Utility”). Gas Utility serves more than 642,000 customers in eastern and central Pennsylvania and more than 500 customers in portions of one Maryland county. UGI Utilities’ natural gas distribution utility is referred to as “UGI Gas.” Electric Utility serves approximately 62,000 customers in portions of Luzerne and Wyoming counties in northeastern Pennsylvania. Gas Utility is regulated by the Pennsylvania Public Utility Commission (“PAPUC”) and, with respect to its several hundred customers in Maryland, the Maryland Public Service Commission (“MDPSC”). Electric Utility is regulated by the PAPUC.

Business Strategy

Our business strategy is to grow the Company by focusing on our core competencies of distributing, storing, transporting and marketing energy products and services. We are utilizing our core competencies from our existing businesses and our national scope, international experience, extensive asset base and access to customers to accelerate both internal growth and growth through acquisitions in our existing businesses, as well as in related and complementary businesses. During Fiscal 2018, we completed a number of transactions in pursuit of this strategy and made progress on larger internally generated capital projects, including infrastructure projects to further support the development of natural gas in the Marcellus Shale region of Pennsylvania. A few of these transactions and projects are described below.

In October 2017, our Midstream & Marketing business enhanced its natural gas infrastructure assets with the acquisition of approximately 60 miles of natural gas gathering lines in northern Pennsylvania, and in March 2018, it acquired an additional 3.6 miles of natural gas gathering lines in Clinton County, Pennsylvania. Also, in Fiscal 2018, Energy Services placed the Steelton LNG peak shaving facility into service, which is designed to provide 65,000 dekatherms per day of peaking capacity and two million gallons of LNG storage.

In addition, Energy Services made progress on the PennEast Pipeline project, the development of an approximately 120-mile pipeline from Luzerne County, Pennsylvania to the Trenton-Woodbury interconnection in New Jersey. Energy Services owns a 20% interest in the PennEast Pipeline project and serves as the project manager. When completed, the PennEast Pipeline will transport approximately 1 billion cubic feet of low cost natural gas to residential and commercial customers each day. In January 2018, the Federal Energy Regulatory Commission (“FERC”) issued a Certificate of Public Convenience and Necessity for the PennEast Pipeline project.

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In Fiscal 2018, UGI International expanded its LPG distribution business into Italy through the acquisition of Totalgaz Italia S.r.l. (now known as UniverGas). UniverGas serves customers in the northern and central regions of Italy. In addition, UGI International completed the integration of Finagaz, a May 2015 acquisition that nearly doubled our LPG distribution business in France.
UGI Utilities continued to execute on its infrastructure replacement and system betterment program, with record capital expenditures in Fiscal 2018.  For example, UGI Utilities made progress toward its goal of replacing the cast iron portions of its gas mains by March 2027 and the bare steel portion of its gas mains by September 2041.  Effective October 20, 2017, new base rates went into effect for PNG resulting in an approximate $11.3 million increase in annual base rate revenues.  In addition, in January 2018, Electric Utility filed a request with the PAPUC to increase its base operating revenues for residential, commercial, and industrial customers and, on October 25, 2018, the PAPUC issued a final order permitting Electric Utility to make a tariff filing to increase its annual base distribution rates by $3.2 million, effective October 27, 2018. 

Corporate Information

UGI Corporation was incorporated in Pennsylvania in 1991. The Company is not subject to regulation by the PAPUC and it is a “holding company” under the Public Utility Holding Company Act of 2005 (“PUHCA 2005”). PUHCA 2005 and the implementing regulations of the FERC give FERC access to certain holding company books and records and impose certain accounting, record-keeping, and reporting requirements on holding companies. PUHCA 2005 also provides state utility regulatory commissions with access to holding company books and records in certain circumstances. Pursuant to a waiver granted in accordance with FERC’s regulations on the basis of UGI Corporation’s status as a single-state holding company system, UGI Corporation is not subject to certain of the accounting, record-keeping, and reporting requirements prescribed by FERC’s regulations.

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,” “us,” 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, and the term “UGI Utilities” is sometimes used as an abbreviated reference to UGI Utilities, Inc. or, collectively, UGI Utilities, Inc. and its subsidiaries. The terms “Fiscal 2019,” “Fiscal 2018,” “Fiscal 2017” and “Fiscal 2016” refer to the fiscal years ended September 30, 2019, September 30, 2018, September 30, 2017, and September 30, 2016, respectively.

The Company’s corporate website can be found at www.ugicorp.com. Information on our website is not intended to be incorporated into this report. The Company makes available free of charge at this website (under the “Investor Relations - Financial Reports - SEC Filings and Proxy” caption) copies of its reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, including its Annual Reports on Form 10-K, its Quarterly Reports on Form 10-Q and its Current Reports on Form 8-K. The Company’s Principles of Corporate Governance, Code of Ethics for the Chief Executive Officer and Senior Financial Officers and Code of Business Conduct and Ethics for Directors, Officers and Employees are available on the Company’s website under the caption “Investor Relations - Corporate Governance.” The Company’s charters of the Corporate Governance, Audit, Compensation and Management Development, and Safety, Environmental and Regulatory Compliance Committees of the Board of Directors are available on the Company’s website under the caption “Investor Relations - Corporate Governance - Committees.” All of these documents are also available free of charge by writing to Treasurer, UGI Corporation, P.O. Box 858, Valley Forge, PA 19482.


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AMERIGAS PROPANE

Products, Services and Marketing

Our domestic propane distribution business is conducted through AmeriGas Partners. AmeriGas Propane is responsible for managing the Partnership. The Partnership serves over 1.7 million customers in all 50 states from approximately 1,900 propane distribution locations. In addition to distributing propane, the Partnership also sells, installs and services propane appliances, including heating systems and propane-powered generators. Typically, the Partnership’s propane distribution locations are in suburban and rural areas where natural gas is not readily available. Our local offices generally consist of a business office and propane storage. As part of its overall transportation and distribution infrastructure, the Partnership operates as an interstate carrier in all states throughout the continental U.S.

The Partnership sells propane primarily to residential, commercial/industrial, motor fuel, agricultural and wholesale customers. The Partnership distributed over 1.1 billion gallons of propane in Fiscal 2018. Approximately 95% of the Partnership’s Fiscal 2018 sales (based on gallons sold) were to retail accounts and approximately 5% were to wholesale and supply customers. Sales to residential customers in Fiscal 2018 represented approximately 36% of retail gallons sold; commercial/industrial customers 38%; motor fuel customers 18%; and agricultural customers 4%. Transport gallons, which are large-scale deliveries to retail customers other than residential, accounted for 4% of Fiscal 2018 retail gallons. No single customer represents, or is anticipated to represent, more than 5% of the Partnership’s consolidated revenues.

The Partnership continues to expand its AmeriGas Cylinder Exchange (“ACE”) program. At September 30, 2018, ACE cylinders were available at over 59,000 retail locations throughout the U.S. Sales of our ACE cylinders to retailers are included in commercial/industrial sales. The ACE program enables consumers to purchase or exchange propane cylinders at various retail locations such as home centers, gas stations, mass merchandisers and grocery and convenience stores. In addition, in Fiscal 2018, the ACE program continued to roll-out its 24/7 automated self-serve vending machines, enabling customers to purchase and exchange ACE cylinders at various retail locations at any time of day. We also supply retailers with large propane tanks to enable retailers to replenish customers’ propane cylinders directly at the retailer’s location.

Residential and commercial customers use propane primarily for home heating, water heating and cooking purposes. Commercial users include hotels, restaurants, churches, warehouses, and retail stores. 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 school buses and other over-the-road vehicles, forklifts, and stationary engines. Agricultural uses include tobacco curing, chicken brooding, crop drying, and orchard heating. 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 in portable cylinders, including ACE and motor fuel cylinders. Some of these deliveries are made to the customer’s location, where cylinders are either picked up or replenished in place.

During Fiscal 2018, we continued to make significant investments in technology to reduce operational costs while improving our customers’ experience. For example, (i) following the successful implementation of the AmeriMobile distribution platform to all district locations to more efficiently deploy our drivers in making deliveries to customers, we began to roll out the platform to our service technicians for service scheduling, job routing, and billing, and (ii) we continue to promote a customer service culture through enhancements to our on-line customer experience, enabling customers to transact with us after hours, to sign up as a new customer and to seek customer support through live on-line chat.

Propane Supply and Storage

The United States propane market has over 250 domestic and international sources of supply, including the spot market. Supplies of propane from the Partnership’s sources historically have been readily available. Volatility in the U.S. propane market stabilized in Fiscal 2017, following record high levels reached in Fiscal 2016 and the fiscal year ended September 30, 2015, and the propane industry continued to experience normal inventory levels in Fiscal 2018. The availability and pricing of propane supply is dependent upon, among other things, the severity of winter weather, the price and availability of competing fuels such as natural gas and crude oil, and the amount and availability of exported supply and, to a much lesser extent, imported supply. In recent years, there has been an increase in overseas demand for U.S. propane exports as the U.S. continues to have low cost reliable sources of

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propane. We utilized our extensive distribution and logistics channels to minimize disruption to our customers due to supply chain interruptions resulting from severe cold weather events in January 2018 as well as the delay of critical supply imports into the New England area.

During Fiscal 2018, approximately 98% of the Partnership’s propane supply was purchased under supply agreements with terms of one to three years. 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 2019. 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 adversely affected. Plains Marketing, L.P. supplied approximately 18% of the Partnership’s Fiscal 2018 propane supply. No other single supplier provided more than 10% of the Partnership’s total propane supply in Fiscal 2018. In certain geographic areas, however, a single supplier provides more than 50% of the Partnership’s requirements. Disruptions in supply in these areas could also have an adverse impact on the Partnership’s margins.

The Partnership’s supply contracts typically provide for pricing based upon (i) index formulas using the current prices established at a major storage point such as Mont Belvieu, Texas, or Conway, Kansas, or (ii) posted prices at the time of delivery. In addition, some agreements provide 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 various storage facilities and terminals located in strategic areas across the U.S.

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, or keep pace with such increases, particularly when product costs rise rapidly. Product cost increases can be triggered by periods of severe cold weather, supply interruptions, increases in the prices of base commodities such as crude oil and natural gas, or other unforeseen events. The General Partner has adopted supply acquisition and product cost risk management practices to reduce the effect of volatility on selling prices. These practices currently include the use of summer storage, forward purchases and derivative commodity instruments, such as 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, both major storage areas.
Average Propane Spot Market Prices
apugraphjpeg.jpg

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 for its detection. Propane is considered a clean alternative

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fuel under the Clean Air Act Amendments of 1990, producing negligible amounts of pollutants when properly consumed.

Competition

Propane competes with other sources of energy, some of which are less costly for equivalent energy value. Propane distributors compete for customers with suppliers of electricity, fuel oil and natural gas, principally on the basis of price, service, availability and portability. Electricity is generally more expensive than propane on a British thermal unit (“Btu”) equivalent basis, but the convenience and efficiency of electricity make it an attractive energy source for consumers and developers of new homes. Fuel oil is also a major competitor of propane but is currently more expensive than propane as well as a less environmentally attractive energy source. Historically, however, fuel oil has been less expensive than propane. 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 significantly 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 areas of the country where propane is sold for heating and cooking purposes.

For motor fuel customers, propane competes with gasoline, diesel fuel, electric batteries, fuel cells and, in certain applications, LNG and compressed natural gas. 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.

Retail propane industry volumes have been declining for several years and no or modest growth in total demand is foreseen in the next several years. 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 ACE program and the National Accounts program (through which the Partnership encourages multi-location propane users to enter into a single AmeriGas Propane supply agreement rather than agreements with multiple 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 long-term 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. Some farm cooperatives, rural electric cooperatives and fuel oil distributors include propane distribution in their businesses 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. The Partnership also offers customers various payment and service options, including guaranteed price programs, fixed price arrangements and pricing arrangements based on published propane prices at specified terminals.

In Fiscal 2018, the Partnership’s retail propane sales totaled more than 1.0 billion gallons. Based on the most recent annual survey by the American Petroleum Institute, 2016 domestic retail propane sales (annual sales for other than chemical uses) in the U.S. totaled approximately 8.2 billion gallons. Based on LP-GAS magazine rankings, 2016 sales volume of the ten largest propane distribution companies (including AmeriGas Partners) represented approximately 36% of domestic retail sales.

Properties

As of September 30, 2018, the Partnership owned approximately 80% of its nearly 640 local offices throughout the country. 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, 2018, the Partnership operated a transportation fleet with the following assets:
Approximate Quantity & Equipment Type
% Owned
% Leased
920
Trailers
75%
25%
350
Tractors
4%
96%
510
Railroad tank cars
0%
100%
3,000
Bobtail trucks
26%
74%
400
Rack trucks
29%
71%
3,700
Service and delivery trucks
35%
65%

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Other assets owned at September 30, 2018 included approximately 1 million stationary storage tanks with typical capacities of more than 120 gallons, approximately 4.2 million portable propane cylinders with typical capacities of 1 to 120 gallons, 22 terminals and 12 transflow units.

Trade Names, Trade and Service Marks
The Partnership markets propane and other services principally under the “AmeriGas®,” “America’s Propane Company®,” “Driving Every DaySM” “Heritage Propane®,” and “Relationships Matter®,” trade names and related service marks. The Partnership also markets propane under various other trade names throughout the United States. UGI owns, directly or indirectly, all the right, title and interest in the “AmeriGas” name and related trade and service marks. The General Partner owns all right, title and interest in the “America’s Propane Company” trade name and related service marks. The Partnership has an exclusive (except for use by UGI, AmeriGas, Inc., AmeriGas Polska Sp. z.o.o. and the General Partner), royalty-free license to use these trade names and related service marks. UGI and the General Partner each have the option to terminate its respective license agreement (except its licenses with permitted transferees and on 12 months prior notice in the case of UGI), without penalty, if the General Partner is removed as general partner of the Partnership for cause. If the General Partner ceases to serve as the general partner of the Partnership other than for cause, the General Partner has the option to terminate its license agreement upon payment of a fee to AmeriGas Propane, L.P. 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 to AmeriGas Propane, L.P. UGI and the General Partner each also have the right to terminate its respective license agreement in order to settle any claim of infringement, unfair competition or similar claim or if the agreement has been materially breached without appropriate cure.

Seasonality

Because many customers use propane for heating purposes, the Partnership’s retail sales volume is seasonal. During Fiscal 2018, approximately 65% of the Partnership’s retail sales volume occurred, and substantially all of the Partnership’s operating income was earned, during the peak heating season from October through March. As a result of this seasonality, sales are typically higher in the Partnership’s first and second fiscal quarters (October 1 through March 31). Cash receipts are generally 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 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, health, safety and transportation laws and regulations governing the storage, distribution and transportation of propane and the operation of bulk storage propane terminals.

Environmental

Generally, the applicable environmental laws impose limitations on the discharge of pollutants, establish standards for the handling of solid and hazardous substances, and require the investigation and cleanup of environmental contamination. These laws include, among others, the federal Resource Conservation and Recovery Act, the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA” or the “Superfund Law”), the Clean Air Act, the Clean Water Act, the Homeland Security Act of 2002, the Emergency Planning and Community Right-to-Know Act, comparable state statutes and any applicable amendments. The Partnership incurs expenses associated with compliance with its obligations under federal and state environmental laws and regulations, and we believe that the Partnership is in material compliance with all of its obligations. The Partnership maintains various permits that are necessary to operate its facilities, some of which may be material to its operations. The Partnership continually monitors its operations with respect to potential environmental issues, including changes in legal requirements.

The Partnership is investigating and remediating contamination at a number of present and former operating sites in the United States, including sites where its, predecessor entities operated manufactured gas plants. CERCLA and similar state laws impose 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 CERCLA.



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Health and Safety
The Partnership is subject to the requirements of OSHA and comparable state laws that regulate the protection of the health and safety of our workers. These laws require the Partnership, among other things, to maintain information about materials, some of which may be hazardous or toxic, that are used, released, or produced in the course of our operations. Certain portions of this information must be provided to employees, federal and state and local governmental authorities and responders, commercial and industrial customers and local citizens in accordance with applicable federal and state Emergency Planning and Community Right-to-Know Act requirements. The Partnership’s operations are also subject to the safety hazard communication requirements and reporting obligations set forth in federal workplace standards.

All states in which the Partnership operates have adopted fire safety codes that regulate the storage, distribution, and use 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, the Partnership is subject in all jurisdictions in which it operates to rules and procedures governing the safe handling of propane, including those established by National Fire Protection Association Pamphlets No. 54 and No. 58, various state, local and international codes (including international fire, building and fuel gas codes), and OSHA fall protection standards. Management believes that the policies and procedures currently in effect at all of its facilities for the handling, storage, distribution and use of propane, as well as its fall protection standards, are consistent with industry standards and are in compliance, in all material respects, with applicable laws and regulations.

With respect to the transportation of propane by truck, the Partnership is subject to regulations promulgated under federal legislation, including the Federal Motor Carrier Safety Act, the Hazardous Materials & Transportation Act and the Homeland Security Act of 2002. Regulations under these statutes cover the security and transportation of hazardous materials, including propane for purposes of these regulations, and are administered by the Pipeline and Hazardous Materials Safety Administration of the U.S. 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 regulations apply, among other things, to a propane gas system that supplies 10 or more residential customers or two or more commercial customers from a single source and to a propane gas system any portion of which is located in a public place. The DOT’s pipeline safety regulations require operators of all gas systems to provide operator qualification standards and training and written instructions for employees and third party contractors working on covered pipelines and facilities, establish written procedures to minimize the hazards resulting from gas pipeline emergencies, and conduct and keep records of inspections and testing. Operators are subject to the Pipeline Safety Improvement Act of 2002. Management believes that the procedures currently in effect at all of the Partnership’s facilities for the handling, storage, transportation and distribution of propane are consistent with industry standards and are in compliance, in all material respects, with applicable laws and regulations.

Climate Change

There continues to be concern, both nationally and internationally, about climate change and the contribution of greenhouse gas (“GHG”) emissions, most notably carbon dioxide, to global warming. Because propane is considered a clean alternative fuel under the federal Clean Air Act Amendments of 1990, the Partnership anticipates that this will provide it with a competitive advantage over other sources of energy, such as fuel oil and coal, to the extent new climate change regulations become effective. At the same time, increased regulation of GHG emissions, especially in the transportation sector, could impose significant additional costs on the Partnership, its suppliers and its customers. In recent years, there has been an increase in state initiatives aimed at regulating GHG emissions. For example, the California Environmental Protection Agency established a Cap & Trade program that requires certain covered entities, including propane distribution companies, to purchase allowances to compensate for the GHG emissions created by their business operations. Compliance with these types of regulations may increase our operating costs if we are unable to pass these costs to our customers.

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, 2018, the General Partner had approximately 7,700 employees, including over 250 part-time, seasonal and temporary 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.


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UGI INTERNATIONAL

UGI International, through subsidiaries and affiliates, conducts (i) an LPG distribution business in 17 countries throughout Europe (France, Poland, Austria, Hungary, the Czech Republic, Slovakia, Switzerland, Romania, Belgium, the Netherlands, Luxembourg, the United Kingdom, Italy, Finland, Denmark, Norway and Sweden), and (ii) an energy marketing business in France, Belgium, the Netherlands and the United Kingdom. Based on Fiscal 2018 volumes, UGI International believes that it is the largest distributor of LPG in France, Austria, Belgium, Denmark, Luxembourg and Hungary and one of the largest distributors of LPG in Poland, the Czech Republic, Slovakia, Norway, the Netherlands and Sweden.
Products, Services and Marketing
LPG Distribution Business
During Fiscal 2018, UGI International sold approximately 1 billion gallons of LPG throughout Europe. UGI International operates under seven distinct LPG brands, and its customer base primarily consists of residential, commercial, industrial, agricultural, wholesale and automobile fuel (‘‘autogas’’) customers that use LPG for space heating, cooking, water heating, motor fuel, leisure activities, crop drying, irrigation, construction, power generation, manufacturing and as an aerosol propellant. For Fiscal 2018, approximately 38% of UGI International’s LPG volume was sold to commercial and industrial customers, approximately 24% was sold to residential, approximately 8% was sold to agricultural and approximately 30% was sold to wholesale and other customers (including autogas). UGI International supplies LPG to its customers in small, medium and large bulk tanks at their locations. In addition to bulk sales, UGI International sells LPG in cylinders through retail outlets, such as supermarkets, individually owned stores and gas stations. Sales of LPG are also made to service stations to fuel vehicles that run on LPG. Approximately 62% of Fiscal 2018 LPG sales (based on volumes) were attributed to bulk, 17% to cylinder, 13% to wholesale and 8% to autogas. For Fiscal 2018, no single customer represented more than 5% of UGI International’s revenues.
Bulk
UGI International classifies its bulk customers as small, medium or large bulk, depending on tank size at the customer locations. Small bulk customers are primarily residential and small business users such as restaurants that use LPG mainly for heating and cooking. Medium bulk customers consist mainly of large residential housing developments, hospitals, hotels, municipalities, medium-sized industrial enterprises and poultry brooders. Large bulk customers include agricultural customers (including crop drying) and companies that use LPG in their industrial processes. At September 30, 2018, UGI International had over 550,000 bulk LPG customers and sold approximately 627 million gallons of bulk LPG during Fiscal 2018.
Cylinder
UGI International sells LPG in both steel and composite cylinders and typically owns the cylinders in which the LPG is sold. The principal end-users of cylinders are residential customers who use LPG for domestic applications, such as cooking and heating. Non-residential uses include fuel for forklift trucks, road construction and welding. At September 30, 2018, UGI International had approximately 19 million cylinders in circulation and sold approximately 170 million gallons of LPG in cylinders during Fiscal 2018. UGI International also delivers LPG to wholesale and retail customers in cylinders, including through the use of vending machines.
Wholesale, Autogas and Other Services
Approximately 13% of UGI International’s Fiscal 2018 LPG sales were to wholesale customers (including small competitors, large industrial customers and aerosol customers), and approximately 8% of Fiscal 2018 LPG sales were to autogas customers. UGI International also provides logistics, storage and other services to third-party LPG distributors.
Energy Marketing Business
UGI International markets and supplies natural gas and electricity to small and medium enterprises, schools and municipalities through third party distribution systems. UGI International started developing its energy marketing business organically in 2012 and completed the acquisition of DVEP in the Netherlands in August 2017. UGI International sold approximately 28 billion cubic feet of natural gas and 3,850 gigawatt hours of electricity during Fiscal 2018.
LPG Supply, Storage and Transportation
In Fiscal 2017, UGI International centralized its European supply function. UGI International is typically party to term contracts, with approximately 50 different suppliers, including producers and international oil and gas trading companies, to meet LPG supply requirements throughout Europe. LPG supply is transported via rail and sea, and by road for shorter distances. Agreements are generally one- to two-year term agreements with pricing based on internationally quoted market prices. Additionally, LPG is

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purchased on the domestic spot markets to manage supply needs. In certain geographic areas (the United Kingdom and Italy), a single supplier may provide approximately 50% or more of UGI International’s requirements. Because UGI International’s profitability is sensitive to changes in wholesale LPG costs, UGI International generally seeks to pass on increases in the cost of LPG to its customers. There can be no assurance, however, that UGI International will always be able to pass on product cost increases fully, or keep pace with such increases, particularly when product costs rise rapidly. Product cost increases can be triggered by periods of severe cold weather, supply interruptions, increases in the prices of base commodities such as crude oil and natural gas, or other unforeseen events.
UGI International stores LPG at various storage facilities and terminals located across Europe and has interests in 10 primary storage facilities and over 70 secondary storage facilities. LPG stored in primary storage facilities is transported to smaller storage facilities by rail and road. At secondary storage facilities, LPG is loaded into cylinders or trucks equipped with tanks and then delivered to customers. UGI International also manages an extensive logistics and transportation network and has access to seaborne import facilities.
UGI International transports LPG to customers primarily through outsourced transportation providers to serve both bulk and cylinder markets. UGI International has long-term relationships with many providers of logistics and transportation services in most of its markets and is not dependent on the services of any single transportation provider.
Competition and Seasonality
The LPG markets in western and northern Europe are mature, with modest declines in total demand due to competition with other fossil fuels and other energy sources, conservation and macroeconomic conditions. In the Eastern European countries in which UGI International operates, the demand for LPG is expected to grow in certain segments. Sales volumes are affected principally by the severity of the weather and customer migration to alternative energy forms, including natural gas, electricity, heating oil and wood. High LPG prices also may result in slower than expected growth due to customer conservation and customers seeking less expensive alternative energy sources. In addition, government policies and incentives that favor alternative energy sources, such as wind and solar, can result in customers migrating to energy sources other than LPG. In addition to price, UGI International competes for customers in its various markets based on contract terms. UGI International competes locally as well as regionally in many of its service territories. Additionally, particularly in France, although UGI International supplies certain supermarket chains, it also competes with some of these supermarket chains that affiliate with LPG distributors to offer their own brands of cylinders. UGI International seeks to increase demand for its LPG cylinders through marketing and product innovations.
In its energy marketing business, UGI International competes against small- and medium-sized enterprise providers of natural gas and electricity in four countries in Europe where the markets have been deregulated for at least ten years. The markets are generally stable, developed and growing and competition can be local, regional or pan-European.
Because many of UGI International’s customers use LPG for heating, sales volume is affected principally by the severity of the temperatures during the heating season months and traditionally fluctuates from year-to-year in response to variations in weather, prices and other factors, such as conservation efforts and the economic environment. Demand for LPG is higher during the colder months of the year. For historical information on weather statistics for UGI International, see ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations.’’
Government Regulation
UGI International’s business is subject to various laws and regulations at the country and local levels, as well as at the European Union (‘‘EU’’) level, with respect to matters such as protection of the environment, the storage, transportation and handling of hazardous materials and flammable substances (including the Seveso II Directive), regulations specific to bulk tanks, cylinders and pipe networks, competition, pricing, regulation of contract terms, anti-corruption (including the U.S. Foreign Corrupt Practices Act, Sapin II and the U.K. Bribery Act), data privacy and protection, and the safety of persons and property.
Environmental
Environmental laws and regulations may require expenditures over a long timeframe to control environmental effects. Estimates of liabilities for environmental response costs are difficult to determine with precision because of the various factors that can affect their ultimate level. These factors include, but are not limited to, the following: (i) the complexity of the site; (ii) changes in environmental laws and regulations; (iii) the number of regulatory agencies or other parties involved; (iv) new technology that renders previous technology obsolete or experience with existing technology that proves ineffective; (v) the level of remediation required; and (vi) variation between the estimated and actual period of time required to respond to an environmentally-contaminated site.

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Data Privacy
The EU adopted the General Data Protection Regulation (‘‘GDPR’’), which became effective in May of 2018. The GDPR expands the current EU data protection laws to all companies processing data of EU residents. It primarily focuses on unifying and strengthening the regulations dealing with the collection, processing, use and security of personal and sensitive data.
Properties
In addition to regional headquarter locations and sales offices throughout its service territory, UGI International has interests in 10 primary storage facilities and over 70 secondary storage facilities.
Employees
At September 30, 2018, UGI International had approximately 2,900 employees.



MIDSTREAM & MARKETING

Retail Energy Marketing

Our retail energy marketing business is conducted through Energy Services and sells natural gas, liquid fuels and electricity to over 12,500 residential, commercial and industrial customers at approximately 35,500 locations. Energy Services serves customers in all or portions of Pennsylvania, New Jersey, Delaware, New York, Ohio, Maryland, Massachusetts, Virginia, North Carolina, South Carolina, Rhode Island and the District of Columbia. Energy Services distributes natural gas through the use of the distribution systems of 41 local gas utilities. It supplies power to customers through the use of the transmission lines of 20 utility systems.

Historically, a majority of Energy Services’ commodity sales have been made under fixed-price agreements, which typically contain a take-or-pay arrangement that permits customers to purchase a fixed amount of product for a fixed price during a specified period, and requires payment even if the customer does not take delivery of the product. However, a growing number of Energy Services’ commodity sales are currently being made under requirements contracts, under which Energy Services is typically an exclusive supplier and will supply as much product at a fixed price as the customer requires. Energy Services manages supply cost volatility related to these agreements by (i) entering into fixed-price supply arrangements with a diverse group of suppliers, (ii) holding its own interstate pipeline transportation and storage contracts to efficiently utilize gas supplies, (iii) entering into exchange-traded futures contracts on the New York Mercantile Exchange (“NYMEX”) and Intercontinental Exchange (“ICE”), (iv) entering into over-the-counter derivative arrangements with major international banks and major suppliers, (v) utilizing supply assets that it owns or manages, and (vi) utilizing financial transmission rights to hedge price risk against certain transmission costs. Energy Services also bears the risk for balancing and delivering natural gas and power to its customers under various gas pipeline and utility company tariffs. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Market Risk Disclosures.”

Midstream Assets

Our Midstream assets, which are owned by Energy Services and its subsidiaries, comprise a natural gas liquefaction, storage and vaporization facility in Temple, Pennsylvania, a liquefaction and storage facility in Mehoopany, Pennsylvania, and propane storage and propane-air mixing stations in Bethlehem, Reading, Hunlock Creek, and White Deer, Pennsylvania. Energy Services and its subsidiaries also operate propane storage, rail transshipment terminals and propane-air mixing stations in Steelton and Williamsport, Pennsylvania. These assets are used in Midstream & Marketing’s energy peaking business that provides supplemental energy, primarily LNG and propane-air mixtures, to gas utilities at times of high demand (generally during periods of coldest winter weather). In addition, Energy Services sells LNG to customers for use by trucks, drilling rigs, other motor vehicles and facilities located off the gas grid. Our Midstream & Marketing segment also manages natural gas pipeline and storage contracts for UGI Utilities and Frontier Natural Gas.

In Fiscal 2018, our Midstream & Marketing segment continued making investments to expand its energy peaking and LNG fuels business. Energy Services placed the Steelton LNG peak shaving facility into service in Fiscal 2018, which is designed to provide 65,000 dekatherms per day of peaking capacity and two million gallons of LNG storage. Energy Services also purchased portable LNG peak shaving equipment, which includes skid mounted LNG vaporizers, storage and LNG transport trailers, designed to provide up to 15,000 dekatherms per day of peaking. These units were deployed to sites near Mt. Carmel and Reading, Pennsylvania.

A wholly-owned subsidiary of Energy Services owns and operates underground natural gas storage and related high pressure

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pipeline facilities, which have FERC approval to sell storage services at market-based rates. The storage facilities are located in the Marcellus Shale region of north-central Pennsylvania and have a total storage capacity of 15 million dekatherms and a maximum daily withdrawal quantity of 224,000 dekatherms. In Fiscal 2018, Energy Services leased more than 85% of the firm capacity at its underground natural gas facilities to third parties.

Energy Services also operates a gathering system in the Marcellus Shale region of northeastern Pennsylvania with a total system capacity of 470,000 dekatherms per day, which will be expanded to a total system capacity of 620,000 dekatherms per day in late 2019. The gathering system delivers into both the Tennessee Gas and Transcontinental Gas pipelines. In Fiscal 2018, Energy Services completed the acquisition of 60 miles of natural gas gathering lines, dehydration and compression facilities located in Bradford, Tioga and Lycoming Counties, Pennsylvania, as well as 3.6 miles of natural gas gathering lines located in Clinton County, Pennsylvania.

In Fiscal 2018, our Midstream & Marketing segment also made progress on its participation in the PennEast Pipeline project to develop an approximately 120-mile pipeline from Luzerne County, Pennsylvania to the Transco pipeline interconnection in Mercer County, New Jersey. When completed, the pipeline will transport approximately 1 billion cubic feet of low cost natural gas to residential and commercial customers each day. In January 2018, FERC issued a Certificate of Public Convenience and Necessity for the PennEast Pipeline project and we expect to commence construction on the project in late 2019.

Future planned investments are expected to cover a range of midstream asset opportunities, including interstate pipelines, local gathering systems and gas storage facilities and complementary and related investments.

Electricity Generation Assets

Midstream & Marketing’s electricity generation assets consist of electric generation facilities conducted by Energy Services’ wholly-owned subsidiary, UGI Development Company (“UGID”). UGID has an approximate 5.97% (approximately 102 megawatt) ownership interest in the Conemaugh generation station (“Conemaugh”), a 1,711-megawatt, coal-fired electricity generation station located near Johnstown, Pennsylvania. Conemaugh is owned by a consortium of energy companies and operated by a unit of NRG Energy. UGID also owns and operates the Hunlock Station located near Wilkes-Barre, Pennsylvania, a 130-megawatt natural gas-fueled electricity generating station, and owns and operates a landfill gas-fueled generation plant near Hegins, Pennsylvania, with gross generating capacity of 11 megawatts. The plant qualifies for renewable energy credits. In Fiscal 2018, UGID completed the acquisition of Hunlock Energy, LLC, a 44 megawatt natural gas-fired peaking turbine in Luzerne County, Pennsylvania. This turbine is adjacent to UGID’s existing Hunlock generation facility and, accordingly, the operation, fuel supply and dispatch activities for the turbine will be conducted by UGID. Additionally, UGID owns and operates 13.5 megawatts of solar-powered generation capacity in Pennsylvania, Maryland and New Jersey.

HVAC Business

Our Midstream & Marketing segment also conducts a heating, ventilation, air conditioning, mechanical & electrical contracting, and project management service business through its HVAC business unit, which serves portions of eastern and central Pennsylvania. This business serves customers in residential, commercial, industrial and new construction markets.

Competition

Our Midstream & Marketing segment competes with other midstream operators to sell gathering, compression, storage and pipeline transportation services. Our Midstream & Marketing segment competes in both the regulated and non-regulated environment against interstate and intrastate pipelines that gather, compress, process, transport and market natural gas. Our Midstream & Marketing segment sells midstream services primarily to producers, marketers and utilities on the basis of price, customer service, flexibility, reliability and operational experience. The competition in the midstream segment is significant and has grown recently in the northeast U.S. as more competitors seek opportunities offered by the development of the Marcellus and Utica Shales.

Our Midstream & Marketing segment also competes with other marketers, consultants and local utilities to sell natural gas, liquid fuels, electric power and related services to customers in its service area principally on the basis of price, customer service and reliability. Midstream & Marketing’s midstream asset business has faced an increase in competition in recent years with the consolidation of companies that have resulted in large, national competitors that can offer a suite of services across all customer segments.

Our electricity generation assets compete with other generation stations on the interface of PJM Interconnection, LLC (“PJM”), a regional transmission organization that coordinates the movement of wholesale electricity in certain states, including the states

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in which we operate, and bases sales on bid pricing. Generally, each power generator has a small share of the total market on PJM.

Government Regulation

FERC has jurisdiction over the rates and terms and conditions of service of wholesale sales of electric capacity and energy, as well as the sales for resale of natural gas and related storage and transportation services.  Energy Services has a tariff on file with FERC pursuant to which it may make power sales to wholesale customers at market-based rates. Energy Services also has market-based rate authority for power sales to wholesale customers, to the extent that Energy Services purchases power in excess of its retail customer needs.  Two subsidiaries of Energy Services currently operate natural gas storage facilities under FERC certificate approvals and offer services to wholesale customers at FERC-approved market-based rates. Two other Energy Services subsidiaries operate natural gas pipelines that are subject to FERC regulation. UGI Mt. Bethel Pipeline Company, LLC operates a 12.5-mile, 12-inch pipeline located in Northampton County, Pennsylvania, and UGI Sunbury, LLC operates the Sunbury Pipeline, a 35-mile, 20-inch diameter pipeline located in central Pennsylvania that was placed into service on January 1, 2017. Energy Services and its subsidiaries undertake various activities to maintain compliance with the FERC Standards of Conduct with respect to pipeline operations. Energy Services is also subject to FERC reporting requirements, market manipulation rules and other FERC enforcement and regulatory powers with respect to its wholesale commodity business.

Midstream & Marketing’s midstream assets include natural gas gathering pipelines and compression in northeastern Pennsylvania that are regulated under the Pipeline Safety Improvement Act of 2002 and subject to operational oversight by both the Pipeline and Hazardous Materials Safety Administration and the PAPUC.

Certain of our Midstream & Marketing businesses are subject to various federal, state and local environmental, safety and transportation laws and regulations governing the storage, distribution and transportation of propane and the operation of bulk storage LPG terminals. These laws include, among others, the Resource Conservation and Recovery Act, CERCLA, the Clean Air Act, OSHA, 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. With respect to the operation of natural gas gathering and transportation pipelines, Energy Services also is required to comply with the provisions of the Pipeline Safety Improvement Act of 2002 and the regulations of the U.S. DOT.

Our Midstream & Marketing’s electricity generation assets own electric generation facilities that are within the control area of PJM and are dispatched in accordance with a FERC-approved open access tariff and associated agreements administered by PJM. UGID receives certain revenues collected by PJM, determined under an approved rate schedule.  Like Energy Services, UGID has a tariff on file with FERC pursuant to which it may make power sales to wholesale customers at market-based rates, and FERC recently extended UGID’s market-based rate authority through 2019. UGID is also subject to FERC reporting requirements, market manipulation rules and other FERC enforcement and regulatory powers.

Employees

At September 30, 2018, Midstream & Marketing had over 600 employees, including nearly 300 employees in its HVAC business and approximately 20 employees at UGID.

UGI UTILITIES

GAS UTILITY

Gas Utility consists of the regulated natural gas distribution businesses of our subsidiary, UGI Utilities, which prior to October 1, 2018, was comprised of UGI Utilities and two separate, wholly owned natural gas distribution utility subsidiaries, PNG and CPG. UGI Utilities, PNG and CPG have been consolidated by merger effective October 1, 2018, with UGI Utilities as the surviving entity. Gas Utility serves more than 642,000 customers in eastern and central Pennsylvania and more than 500 customers in portions of one Maryland county. Gas Utility is regulated by the PAPUC and, with respect to its customers in Maryland, the MDPSC.

Service Area; Revenue Analysis

Gas Utility provides natural gas distribution services to more than 642,000 customers in certificated portions of 44 eastern and central Pennsylvania counties through its distribution system. Contemporary materials, such as plastic or coated steel, comprise

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approximately 90% of Gas Utility’s 12,300 miles of gas mains, with bare steel pipe comprising approximately 8% and cast iron pipe comprising approximately 2% of Gas Utility’s gas mains. In accordance with Gas Utility’s agreement with the PAPUC, Gas Utility will replace the cast iron portion of its gas mains by March 2027 and the bare steel portion of its gas mains by September 2041. The service area includes the cities of Allentown, Bethlehem, Easton, Harrisburg, Hazleton, Lancaster, Lebanon, Reading, Scranton, Wilkes-Barre, Lock Haven, Pittston, Pottsville and Williamsport, Pennsylvania, and the boroughs of Honesdale and Milford, Pennsylvania. Located in Gas Utility’s service area are major production centers for basic industries such as specialty metals, aluminum, glass, paper product manufacturing, and several power generation facilities. Gas Utility also distributes natural gas to more than 500 customers in portions of one Maryland county.

System throughput (the total volume of gas sold to or transported for customers within Gas Utility’s distribution system) for Fiscal 2018 was approximately 264 billion cubic feet (“bcf”). System sales of gas accounted for approximately 23% of system throughput, while gas transported for residential, commercial and industrial customers who bought their gas from others accounted for approximately 77% of system throughput.

Sources of Supply and Pipeline Capacity

Gas Utility is permitted to recover prudently incurred costs of natural gas it sells to its customers. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Market Risk Disclosures” and Note 8 to Consolidated Financial Statements. Gas Utility meets its service requirements by utilizing a diverse mix of natural gas purchase contracts with marketers and producers, along with storage and transportation service contracts. These arrangements enable Gas Utility to purchase gas from Marcellus, Gulf Coast, Mid-Continent, and Appalachian sources. For its transportation and storage functions, Gas Utility has long-term agreements with a number of pipeline companies, including Texas Eastern Transmission, LP, Columbia Gas Transmission, LLC, Transcontinental Gas Pipeline Company, LLC, Dominion Transmission, Inc., ANR Pipeline Company and Tennessee Gas Pipeline Company, L.L.C.

Gas Supply Contracts

During Fiscal 2018, Gas Utility purchased approximately 92.8 bcf of natural gas for sale to retail core-market customers (principally comprised of firm- residential, commercial and industrial customers that purchase their gas from Gas Utility (“retail core-market”)) and off-system sales customers. Nearly 94% of the volumes purchased were supplied under agreements with 10 suppliers. The remaining 6% of gas purchased by Gas Utility was supplied by 10 producers and marketers. Gas supply contracts for Gas Utility are generally no longer than 12 months. Gas Utility also has long-term contracts with suppliers for natural gas peaking supply during the months of November through March.

Seasonality

Because many of its customers use gas for heating purposes, Gas Utility’s sales are seasonal. For Fiscal 2018, approximately 59% of Gas Utility’s sales volume was supplied, and approximately 96% of Gas Utility’s operating income was earned, during the peak heating season from October 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 the equipment. Natural gas generally benefits from a competitive price advantage over oil, electricity and propane, although the price gap between natural gas and oil narrowed in recent years. Fuel oil dealers compete for customers in all categories, including industrial customers. Gas Utility responds to this competition with marketing and sales efforts designed to retain, expand, and grow its customer base.

In substantially all of its service territories, Gas Utility is the only regulated gas distribution utility having the right, granted by the PAPUC or by law, to provide gas distribution services. All of Gas Utility’s customers, including core-market customers, have the right to purchase gas supplies from entities other than natural gas distribution utility companies.

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 that are competitively priced with respect to the alternate fuel. Margin from these customers, therefore, is affected by the difference or “spread” between the customers’ delivered cost of gas and the customers’ delivered cost of the alternate fuel, the frequency and duration of interruptions, and alternative firm service options. See “Gas Utility Regulation and Rates - Pennsylvania Public Utility Commission Jurisdiction and Gas Utility Rates.”

Approximately 42% of Gas Utility’s annual throughput volume for commercial and industrial customers includes non-interruptible

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customers with firm rates with locations that afford them the opportunity of seeking transportation service directly from interstate pipelines, thereby bypassing Gas Utility. In addition, nearly 17% of Gas Utility’s annual throughput volume for commercial and industrial customers is from customers who are served under interruptible rates and are also in a location near an interstate pipeline. Gas Utility has 38 such customers, 35 of which have transportation contracts extending beyond Fiscal 2019. The majority of these customers are served under transportation contracts having 3- to 20-year terms and all are among the largest customers for Gas Utility in terms of annual volumes. No single customer represents, or is anticipated to represent, more than 5% of Gas Utility’s total revenues.

Outlook for Gas Service and Supply

Gas Utility anticipates having adequate pipeline capacity, peaking services and other sources of supply available to it to meet the full requirements of all firm customers on its system through Fiscal 2019. Supply mix is diversified, market priced and delivered pursuant to a number of long-term and short-term primary firm transportation and storage arrangements, including transportation contracts held by some of Gas Utility’s larger customers.

During Fiscal 2018, Gas Utility supplied transportation service to 10 electric generation facilities and installed new service to three co-generation facilities. Gas Utility continues to seek new residential, commercial, and industrial customers for both firm and interruptible service. In Fiscal 2018, Gas Utility connected approximately 1,900 new commercial and industrial customers. In the residential market sector, Gas Utility added over 12,000 residential heating customers during Fiscal 2018. Approximately 54% of these customers converted to natural gas heating from other energy sources, mainly oil and electricity. New home construction and existing non-heating gas customers who added gas heating systems to replace other energy sources primarily accounted for the other residential heating connections in Fiscal 2018.

UGI Utilities continues to monitor and participate, where appropriate, in rulemaking and individual rate and tariff proceedings before 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 that 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 contracts, and (iii) pipelines’ requests to increase their base rates, or change the terms and conditions of their storage and transportation services.

UGI Utilities’ objective in negotiations with providers of gas supply resources, and in proceedings before regulatory agencies, is to ensure availability of supply, transportation and storage alternatives to serve market requirements at the lowest cost possible, taking into account the need for security with guaranteed deliverability and reliability of supply. Consistent with that objective, UGI Utilities negotiates the terms of firm transportation capacity on all pipelines serving it, 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.


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Gas Utility Regulation and Rates

UGI Gas Merger

On March 8, 2018, UGI Utilities and its wholly owned subsidiaries, PNG and CPG, filed an application with the PAPUC for permission (i) to merge PNG and CPG with and into UGI Gas and (ii) for UGI Utilities to adopt the preexisting PNG and CPG tariffs, rates and terms and conditions of service for inclusion in the UGI Gas tariff, and (iii) thereafter operate as the UGI South (encompassing the former service territory of UGI Gas), UGI North rate district (formerly PNG) and UGI Central rate district (formerly CPG) rate districts of UGI Utilities, respectively. The authority to merge was granted in a September 20, 2018 PAPUC Opinion and Order, and the merger became effective October 1, 2018. The merger was also separately approved by the MDPSC.

Pennsylvania Public Utility Commission Jurisdiction and Gas Utility Rates

Gas Utility is subject to regulation by the PAPUC as to rates, terms and conditions of service, accounting matters, issuance of securities, contracts and other arrangements with affiliated entities, gas safety and various other matters. Rates that Gas Utility may charge for gas service come in two forms: (i) rates designed to recover purchased gas costs (“PGCs”); and (ii) rates designed to recover costs other than PGCs. Rates designed to recover PGCs are reviewed in PGC proceedings. Rates designed to recover costs other than PGCs are primarily established in general base rate proceedings.

In January 2016, UGI Utilities filed a request with the PAPUC for its first base rate increase in over 21 years. On October 14, 2016, the PAPUC approved a settlement that was effective October 19, 2016 and resulted in a $27.0 million increase in annual base rate revenues. The settlement permitted UGI Gas to establish new reconcilable surcharges to permit the timely recovery of the costs of universal service programs designed to assist low income customers, and costs associated with a new energy efficiency and conservation program. UGI Gas was also permitted to implement a new Technology and Economic Development Rider to provide additional flexibility in establishing the rates of smaller volume commercial and industrial customers to encourage cost-effective load growth.

On January 19, 2017, PNG (now known as the UGI North rate district) filed a rate request with the PAPUC to increase PNG’s base operating revenues for residential, commercial, and industrial customers by $21.7 million annually. On August 31, 2017, the PAPUC approved a settlement that permitted PNG to increase its annual base distribution rates by $11.3 million, effective October 20, 2017. The settlement also permitted PNG to recover costs associated with a new energy efficiency and conservation program and, similar to UGI Gas, also permitted PNG to implement a new Technology and Economic Development Rider to provide additional flexibility in establishing the rates of smaller volume commercial and industrial customers to encourage cost-effective load growth.

On February 20, 2014, the PAPUC entered an order approving a Growth Extension Tariff (“GET Gas”) program under which UGI Gas, PNG, and CPG may invest up to $5 million per year for five years, or $75 million in the aggregate for all three utilities, to extend natural gas utility pipelines to provide service to unserved and underserved areas within their respective territories. Under the GET Gas program, customers utilizing the extended pipeline to receive natural gas will pay a monthly surcharge over a 10-year period to cover the cost of the extension. Gas Utility began connecting customers under the GET Gas program in October 2014.

In February 2012, Act 11 of 2012 (“Act 11”) became effective. Among other things, Act 11 authorized the PAPUC to permit electric and gas distribution companies, between base rate cases and subject to certain conditions, to recover reasonable and prudent costs incurred to repair, improve or replace eligible property through a Distribution System Improvement Charge (“DSIC”) assessed to customers. DSICs are subject to quarterly adjustment, are capped at five percent of total customer charges absent a PAPUC-granted exception, may only be sought if a base rate case has been filed within the last five years, and are subject to certain earnings tests. In addition, Act 11 requires affected utilities to obtain approval of long-term infrastructure improvement plans (“LTIIP”) from the PAPUC. Act 11 also authorized electric and gas distribution companies to utilize a fully forecasted future test year when establishing rates in base rate cases before the PAPUC.

Prior to the merger effective October 1, 2018, the PAPUC approved LTIIPs for UGI Gas, PNG, and CPG in 2014, and on June 30, 2016, approved a revised LTIIP for these entities that increased the projected spend on DSIC-eligible property for the 2016-2018 period from approximately $266.3 million to $402.8 million. On August 2, 2018, the PAPUC approved one year extensions through December 31, 2019 to the existing UGI Gas, PNG and CPG LTIIPs. The modified LTIIPs provide for approximately $185.0 million of projected spend on DSIC-eligible property during calendar year 2019. The PAPUC also approved DSIC mechanisms for PNG and CPG in September 2014 and July 2015, respectively. On March 31, 2016, PNG and CPG filed petitions with the PAPUC seeking to increase the cap on their DSIC rate mechanisms from five percent to ten percent of billed distribution

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revenues. On May 10, 2017, the PAPUC issued a final Order to approve an increase of the maximum allowable DSIC to 7.5% of billed distribution revenues effective July 1, 2017, for PNG and CPG, pending reconsideration of each company’s LTIIP filing.

On November 9, 2016, UGI Gas received PAPUC approval to establish a DSIC tariff mechanism effective January 1, 2017, subject to refund and recoupment based on the PAPUC’s final resolution of certain matters set aside for hearing before an Administrative Law Judge.  Those matters were subsequently resolved in a PAPUC Order entered on July 13, 2017, and UGI Gas commenced collections under its natural gas DSIC on July 1, 2018.

Currently, UGI South and UGI Central are collecting DSIC revenues, while UGI North will resume DSIC revenue collection once the UGI North rate district places into service a threshold level of DSIC eligible plant agreed upon in the settlement of its more recent base rate case.

The tariffs of UGI Gas’ rate districts include PGC rates applicable to firm retail rate schedules for customers who do not obtain natural gas supply service from an alternative supplier. These PGC rates permit recovery of substantially all of the prudently incurred costs of natural gas that UGI Gas sells to its customers. PGC rates are reviewed and approved annually by the PAPUC. UGI Gas’ rate districts may request quarterly or, under certain conditions, monthly adjustments to reflect the actual cost of gas. Quarterly adjustments become effective on one day’s notice to the PAPUC and are subject to review during the next annual PGC filing. Each proposed annual PGC rate is required to be filed with the PAPUC six months prior to its effective date. During this period, the PAPUC 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 PAPUC issues an order permitting the collection of gas costs at levels that meet such standard. The PGC mechanism also provides for an annual reconciliation and for the payment or collection of interest on over and under collections. UGI Gas’ rate districts may release or sell to and recover from alternative natural gas suppliers the costs of gas supply contracts and transportation capacity acquired to serve the needs of smaller volume customers who elect to receive their natural gas supply service from an alternative supplier.

On April 28, 2017, UGI Gas, PNG and CPG filed the Gas Delivery Enhancement Rider (“GDE”) with the PAPUC. The GDE provides a tariff mechanism to recover from certain non-choice transportation customers a portion of the costs associated with temporary mobile sources of gas supply and interstate pipeline demand charge enhancements (collectively, “GDE Charges”) that are incurred to achieve least-cost timely solutions to system reinforcement needs or for pipeline integrity management activities. GDE Charges exclude costs that are recovered through existing PGC rate mechanisms as established in each company’s annual 66 Pa.C.S. § 1307(f) PGC proceeding. On August 31, 2017, the PAPUC entered an order approving the GDE Rider for all three companies.

On June 23, 2016, Act 47 of 2016 was enacted. Act 47 revised the interest rates that are applied to PGC over and under collections, removed the requirement that over and under collections be assessed to customers who leave default service to obtain natural gas from an alternative supplier by way of a so-called migration rider, provided additional assurance of cost recovery for PGC costs, and granted natural gas distribution companies the right to recover the reasonable costs incurred to implement customer choice on a full and current basis through a reconcilable rate mechanism. Gas Utility implemented the interest rate revision and migration rider provisions of Act 47 in December 2016.

FERC Market Manipulation Rules and Other FERC Enforcement and Regulatory Powers

UGI Utilities is subject to Section 4A of the Natural Gas Act, which prohibits the use or employment of any manipulative or deceptive devices or contrivances in connection with the purchase or sale of natural gas or natural gas transportation subject to the jurisdiction of FERC, and FERC regulations that are designed to promote the transparency, efficiency, and integrity of gas markets. UGI Utilities is also subject to Section 222 of the Federal Power Act, which prohibits the use or employment of any manipulative or deceptive devices or contrivances in connection with the purchase or sale of electric energy or transmission service subject to the jurisdiction of FERC, and FERC regulations that are designed to promote the transparency, efficiency, and integrity of electric markets.

State Tax Surcharge Clauses

UGI Utilities’ gas 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 UGI Utilities from the effects of increases in most of the Pennsylvania taxes to which it is subject.


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Utility Franchises

UGI Utilities, PNG and CPG each hold certificates of public convenience issued by the PAPUC and certain “grandfather rights” predating the adoption of the Pennsylvania Public Utility Code and its predecessor statutes, which each of them believes are adequate to authorize them to carry on their business in substantially all of the territories to which they now render gas service. Under applicable Pennsylvania law, UGI Utilities, PNG and CPG also have certain rights of eminent domain as well as the right to maintain their facilities in streets and highways in their territories.

Other Government Regulation

In addition to regulation by the PAPUC and FERC, Gas Utility is subject to various federal, state and local laws governing environmental matters, occupational health and safety, pipeline safety and other matters. Gas Utility is subject to the requirements of the Resource Conservation and Recovery Act, CERCLA, and comparable state statutes with respect to the release of hazardous substances. See Note 15 to Consolidated Financial Statements.

Employees

At September 30, 2018, Gas Utility had approximately 1,600 employees.

ELECTRIC UTILITY

Electric Utility supplies electric service to approximately 62,000 customers in portions of Luzerne and Wyoming counties in northeastern Pennsylvania through a system consisting of over 2,200 miles of transmission and distribution lines and 13 substations. At September 30, 2018, UGI Utilities’ electric utility operations had 70 employees.

Electric Utility is permitted to recover prudently incurred electricity costs, including costs to obtain supply to meet its customers’ energy requirements, pursuant to a supply plan filed and approved by the PAPUC. On January 26, 2018, Electric Utility filed a request with the PAPUC for its first base rate increase in over 22 years. On October 25, 2018, the PAPUC entered an Opinion and Order authorizing a $3.2 million increase in annual base distribution rates effective October 27, 2018. The PAPUC also authorized Electric Utility to establish a new reconcilable surcharge to permit the timely recovery of the costs of universal service programs designed to assist low income customers and required Electric Utility to refund approximately $0.21 million of tax benefits and associated interest relating to the Tax Cuts and Jobs Act (the “TCJA”) through a one-time bill credit.

Electric Utility’s tariff includes rates, applicable to so-called “default service” customers who do not obtain electric generation service from an alternative supplier, incurred pursuant to a PAPUC-approved supply plan. These default service rates are reconcilable, may be adjusted quarterly, and are designed to permit Electric Utility to recover the full costs of providing default service in a full and timely manner. Electric Utility has received PAPUC approval of its current default service rules and supply plan through May 31, 2021. Electric Utility’s default service rates include recovery of costs associated with compliance with the Alternative Energy Portfolio Standards Act (“AEPS Act”), which requires Electric Utility to directly or indirectly acquire certain percentages of its supplies from designated alternative energy sources. On August 16, 2017, Electric Utility filed a Petition for Approval of its initial LTIIP with the PAPUC for the 2018-2022 time period, which was approved by a PAPUC Opinion and Order entered on December 21, 2017. Electric Utility’s projected annual investment in distribution infrastructure replacement was approximately $7.6 million in Fiscal 2018, and will increase to $8.3 million by the fiscal year ending September 30, 2022. With the completion of its base rate case, Electric Utility is now eligible to file for permission to implement a DSIC.

FERC has jurisdiction over the rates and terms and conditions of service of electric transmission facilities used for wholesale or retail choice transactions. Electric Utility owns electric transmission facilities that are within the control area of PJM and are dispatched in accordance with a FERC-approved open access tariff and associated agreements administered by PJM. PJM is a regional transmission organization that regulates and coordinates generation supply and the wholesale delivery of electricity. Electric Utility receives certain revenues collected by PJM, determined under a formulary rate schedule that is adjusted in June of each year to reflect annual changes in Electric Utility’s electric transmission revenue requirements, when its transmission facilities are used by third parties. FERC has jurisdiction over the rates and terms and conditions of service of wholesale sales of electric capacity and energy. Electric Utility has a tariff on file with FERC pursuant to which it may make power sales to wholesale customers at market-based rates.

Under provisions of the Energy Policy Act of 2005 (“EPACT 2005”), Electric Utility is subject to certain electric reliability standards established by FERC and administered by an Electric Reliability Organization (“ERO”). Electric Utility anticipates that substantially all the costs of complying with the ERO standards will be recoverable through its PJM formulary electric transmission rate schedule.

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EPACT 2005 also granted FERC authority to impose substantial civil penalties for the violation of any regulations, orders or provisions under the Federal Power Act and Natural Gas Act and clarified FERC’s authority over certain utility or holding company mergers or acquisitions of electric utilities or electric transmitting utility property valued at $10 million or more.

BUSINESS SEGMENT INFORMATION

The table stating the amounts of revenues, operating income and identifiable assets attributable to each of UGI’s reportable business segments, and to the geographic areas in which we operate, for Fiscal 2018, Fiscal 2017 and Fiscal 2016 appears in Note 21 to Consolidated Financial Statements included in Item 15 of this Report and is incorporated herein by reference.

EMPLOYEES

At September 30, 2018, UGI and its subsidiaries had approximately 13,000 employees.

ITEM 1A. RISK FACTORS

There are many factors that may affect our business and results of operations. Additional discussion regarding factors that may affect our business and operating results is included elsewhere in this Report.

Our holding company structure could limit our ability to pay dividends or debt service.

We are a holding company whose material assets are the stock of our subsidiaries. Our ability to pay dividends on our common stock and to pay principal and accrued interest on our debt, if any, depends on the payment of dividends to us by our principal subsidiaries, AmeriGas, Inc., UGI Utilities, and Enterprises (including UGI International). Payments to us by those subsidiaries, in turn, depend upon their consolidated results of operations and cash flows. The operations of our subsidiaries are affected by conditions beyond our control, including weather, local regulations, competition in national and international markets we serve, the costs and availability of propane, butane, natural gas, electricity, and other energy sources and capital market conditions. The ability of our subsidiaries to make payments to us is also affected by the level of indebtedness of our subsidiaries, which is substantial, and the restrictions on payments to us imposed under the terms of such indebtedness.

Supplier defaults may have a negative effect on our operating results.

When the Company’s subsidiaries enter into fixed-price sales contracts with customers, they typically enter into fixed-price purchase contracts with suppliers. Depending on changes in the market prices of products compared to the prices secured in our contracts with suppliers of LPG, natural gas and electricity, a default of one or more of our suppliers under such contracts could cause us to purchase those commodities at higher prices, which would have a negative impact on our operating results.

We are dependent on our principal propane and LPG suppliers, which increases the risks from an interruption in supply and transportation.

During Fiscal 2018, AmeriGas Propane purchased approximately 87% of its propane needs from twenty suppliers. If supplies from these sources were interrupted, 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, our earnings could be affected. Additionally, in certain geographic areas, a single supplier may provide more than 50% of AmeriGas Propane’s propane requirements. Disruptions in supply in these geographic areas could also have an adverse impact on our earnings. Our international businesses are similarly dependent upon their LPG suppliers. For example, during Fiscal 2018, UGI International’s business in the United Kingdom purchased over 90% of its LPG needs from two suppliers and, in Italy, over 50% of UGI International’s supply was sourced from a single supplier. If supplies from UGI International’s principal LPG sources are interrupted, then the cost of procuring replacement supplies and transporting those supplies from alternative locations might be materially higher and our earnings could be adversely affected. There is no assurance that our international businesses will be able to continue to acquire sufficient supplies of LPG to meet demand at prices or within time periods that would allow them to remain competitive.

Our ability to grow our businesses will be adversely affected if we are not successful in making acquisitions or integrating the acquisitions we have made.

One of our strategies is to grow through acquisitions in the U.S. and in international markets. We may choose to finance future acquisitions with debt, equity, cash or a combination of the three. We can give no assurances that we will find attractive acquisition

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candidates in the future, that we will be able to acquire such candidates on economically acceptable terms, that we will be able to finance acquisitions on economically acceptable terms, that any acquisitions will not be dilutive to earnings or that any additional debt incurred to finance an acquisition will not affect our ability to pay dividends. Moreover, acquisitions may require antitrust and other regulatory clearances. We may have to offer commitments (such as agreements not to compete for certain businesses) or divest assets to obtain clearance, which may adversely affect the overall economics of the transaction.

In addition, the restructuring of the energy markets in the U.S. and internationally, including the privatization of government-owned utilities and the sale of utility-owned assets, is creating opportunities for, and competition from, well-capitalized competitors, which may affect our ability to achieve our business strategy.

To the extent we are successful in making acquisitions, such acquisitions involve a number of risks. These risks include, but are not limited to, the assumption of material liabilities, environmental liabilities, the diversion of management’s attention from the management of daily operations to the integration of operations, difficulties in the assimilation and retention of employees and difficulties in the assimilation of different cultures and practices and internal controls, as well as in the assimilation of broad and geographically dispersed personnel and operations. The failure to successfully integrate acquisitions could have an adverse effect on our business, financial condition and results of operations.

Regulators may not approve the rates we request and existing rates may be challenged, which may adversely affect our results of operations.

In our UGI Utilities segment, our distribution operations are subject to regulation by the PAPUC. The PAPUC, among other things, approves the rates that UGI Utilities may charge its utility customers, thus impacting the returns that UGI Utilities may earn on the assets that are dedicated to its operations. We expect that UGI Utilities will periodically file requests with the PAPUC to increase base rates charged to customers. If UGI Utilities is required in a rate proceeding to reduce the rates it charges its utility customers, or is unable to obtain approval for timely rate increases from the PAPUC, particularly when necessary to cover increased costs, UGI Utilities’ revenue growth will be limited and earnings may decrease.

We are subject to operating and litigation risks that may not be covered by insurance.

Our business operations in the U.S. and other countries are subject to all of the operating hazards and risks normally incidental to the handling, storage and distribution of combustible products, such as LPG, propane and natural gas, and the generation of electricity. These risks could result in substantial losses due to personal injury and/or loss of life, and severe damage to and destruction of property and equipment arising from explosions and other catastrophic events, including acts of terrorism. As a result of these and other incidents, we are sometimes a defendant in legal proceedings and litigation arising in the ordinary course of business, including regulatory investigations, claims, lawsuits and other proceedings. Additionally, environmental contamination could result in future legal proceedings. There can be no assurance that our insurance coverage will be adequate to protect us from all material expenses related to pending and future claims or that such levels of insurance would be available in the future at economical prices. Moreover, defense and settlement costs may be substantial, even with respect to claims and investigations that have no merit. If we cannot resolve these matters favorably, our business, financial condition, results of operations and future prospects may be materially adversely affected.

Our operations, capital expenditures and financial results may be affected by regulatory changes and/or market responses to global climate change.

Increased regulation of GHG emissions, such as propane and methane, could impose significant additional costs on us, our suppliers and our customers. Some states have adopted laws and regulations regulating the emission of GHGs for some industry sectors. For example, the California Environmental Protection Agency established a Cap & Trade program that requires certain covered entities, including propane companies, to purchase allowances to compensate for the GHG emissions created by their business operations. In September 2009, the EPA issued a final rule establishing a system for mandatory reporting of GHG emissions. In November 2010, the EPA expanded the reach of its GHG reporting requirements to include the petroleum and natural gas industries, which include certain facilities of our natural gas distribution business. These subject facilities have been required to monitor emissions since January 2011 and to submit detailed annual reports beginning in March 2012. In October 2015, the EPA promulgated the Carbon Pollution Emission Guidelines for Existing Stationary Sources: Electric Utility Generating Units (the “Clean Power Plan”), which provides standards and guidelines for reducing existing power plants’ GHG emissions and related pollutants by 2030. However, in October 2017, the EPA announced its proposal to repeal the Clean Power Plan in its entirety on the grounds that it exceeds the EPA’s delegated authority under the Clean Air Act.

At the international level, many nations have agreed to limit emissions of GHGs pursuant to the United National Framework Convention on Climate Change, also known as the ‘‘Kyoto Protocol.’’ Further, as a result of commitments made at the UN

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climate conference in Durban, South Africa in December 2011, certain members of the international community negotiated a treaty at the December 2015 Conference of Parties in Paris. The Paris Agreement, which entered into force in November 2016, requires developed countries to set targets for emissions reductions once the Paris Agreement is adopted by those countries within their respective national or federal law.

In the EU, there is a commitment to cut CO2 emissions by at least 40% by 2030 and EU member states have implemented a range of subsidies and incentives to achieve the EU’s climate change goals. Further, emissions are regulated via a number of means, including the European Union Emissions Trading System (‘‘EU ETS’’). The EU ETS is a trading system across the EU for industrial emissions. The EU ETS is expected to become progressively more stringent over time, including by reducing the number of allowances to emit GHGs. Further, in the EU, legislative proposals were made in 2017 to further reduce emissions from new cars. The proposed target is a 30% reduction by 2030.

In recent years, a number of jurisdictions have also imposed or discussed imposing bans on internal combustion engines in motor vehicles for the purpose of reducing GHG emissions, and these bans could expand to additional jurisdictions in the future. In the EU, legislative proposals were made in 2017 to further reduce emissions from new cars. The proposed target is a 30% reduction by 2030. The proposed scheme would also provide incentives for accelerating the uptake of zero- and low-emission vehicles. Manufacturers achieving a share of zero- and low-emission vehicles, exceeding the proposed benchmark level of 15% in 2025 and 30% in 2030, would be rewarded. Such proposals and the general push for electrification could reduce demand for LPG powered vehicles, although they have lower emissions than vehicles powered by gasoline and diesel.

Significant increases in cost of compliance for environmental certifications could materially impact our financial condition and results of operations.

At this time, we cannot predict the effect that climate change regulation may have on our business, financial condition or operations in the future.

Our international operations could be subject to increased risks, which may negatively affect our business results.

We currently operate LPG distribution and energy marketing businesses in Europe through our subsidiaries and we continue to explore the expansion of our international businesses. As a result, we face risks in doing business abroad that we do not face domestically. Certain aspects inherent in transacting business internationally could negatively impact our operating results, including:

costs and difficulties in staffing and managing international operations;
potentially adverse tax consequences, including restrictions on repatriating earnings, potential increases to corporate income taxes and the threat of “double taxation”;
fluctuations in currency exchange rates, which can affect demand for our products, increase our costs and adversely affect our profitability and reported results;
regulatory requirements and changes in regulatory requirements, including European competition laws that may adversely affect the terms of contracts with customers, including with respect to exclusive supply rights, and stricter regulations applicable to the storage and handling of LPG;
new and inconsistently enforced industry regulatory requirements, which can have an adverse effect on our competitive position;
tariffs and other trade barriers;
difficulties in enforcing contractual rights;
longer payment cycles;
local political and economic conditions;
internal control and risk management practices and policies; and
potential violations of federal regulatory requirements, including anti-bribery, anti-corruption, and anti-money laundering law, economic sanctions, the Foreign Corrupt Practices Act of 1977, as amended, and EU regulatory requirements, including the GDPR and Sapin II.

In particular, certain legal and regulatory risks are associated with international business operations. We are subject to various anti-corruption, economic sanctions and trade compliance laws, rules and regulations. For example, the U.S. government imposes restrictions and prohibitions on transactions in certain foreign countries, including restrictions directed at oil and gas activities in Russia, imposed in 2014 and amended in 2017. U.S. laws also prohibit the improper offer, payment, promise to pay, or authorization of the payment of money or anything of value to any foreign official or political party, or to any person, knowing that all or a portion of it will be used to influence a foreign official in his or her official duties or to secure an improper advantage. Ensuring compliance with all relevant laws, rules and regulations is a complex task. Violation of one or more of these laws, rules or

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regulations could lead to loss of import or export privileges, civil or criminal penalties for us or our employees, or potential reputational harm, which could have a material adverse effect on earnings, cash flows and financial condition.

Changes in data privacy and data protection laws and regulations, particularly in Europe, or any failure to comply with such laws and regulations, could adversely affect our business and financial results.

There has been increased public attention regarding the use of personal information and data transfer, accompanied by legislation and regulations intended to strengthen data protection, information security and consumer and personal privacy. The law in these areas continues to develop and the changing nature of privacy laws in the U.S., the EU and elsewhere could impact our processing of personal and sensitive information of our employees, vendors and customers. The EU adopted the GDPR, which became effective in May of 2018. The GDPR expands the current EU data protections laws to all companies processing data of EU residents.
The GDPR requires companies to satisfy strict new requirements regarding the handling of personal and sensitive data, including its use, protection and the ability of persons whose data is stored to correct or require deletion of data about themselves. Although there is a consistency mechanism in the GDPR, data protection authorities from different EU member states may interpret and apply the GDPR somewhat differently, and the GDPR also permits EU member states to create supplemental national laws, which increases the complexity of compliance. Failure to comply with GDPR requirements could result in penalties of up to €20 million or 4% of worldwide revenue, whichever is greater, for serious breaches. While we have invested significant time and resources in preparing for and complying with the GDPR, the GDPR and other similar laws and regulations (including potential new data privacy laws and regulations in the U.S.), as well as any associated inquiries or investigations or any other government actions, may be costly to comply with, result in negative publicity, increase our operating costs, require significant management time and attention, and subject us to remedies that may harm our business, including fines, demands or orders that we modify or cease existing business practices.
Expanding our midstream asset business by constructing new facilities subjects us to risks.

We seek to grow our midstream asset business by constructing new pipelines and gathering systems. These construction projects involve numerous regulatory, environmental, political and legal uncertainties beyond our control and require the expenditure of significant amounts of capital. These projects may not be completed on schedule, or at all, or at the anticipated costs. Moreover, our revenues may not increase immediately upon the expenditure of funds on a particular project. We may construct facilities to capture anticipated future growth in production and demand in an area in which anticipated growth and demand does not materialize. As a result, there is the risk that new and expanded facilities may not be able to attract enough customers to achieve our expected investment returns, which could have a material adverse effect on our business, financial condition and results of operations.

Decreases in the demand for our energy products and services because of warmer-than-normal heating season weather or unfavorable weather conditions may adversely affect our results of operations.

Because many of our customers rely on our energy products and services to heat their homes and businesses, and for agricultural purposes such as crop drying, our results of operations are adversely affected by warmer-than-normal heating season weather. Weather conditions have a significant impact on the demand for our energy products and services for both heating and agricultural purposes. Accordingly, the volume of our energy products sold is at its highest during the peak heating season of October through March and is directly affected by the severity of the winter weather. For example, historically, approximately 60% to 70% of AmeriGas Partners’ annual retail propane volume, 60% to 70% of the annual retail LPG volume of UGI International’s operations in France, and 60% to 70% of Gas Utility’s natural gas throughput (the total volume of gas sold to or transported for customers within our distribution system) has typically been sold during these months. There can be no assurance that normal winter weather in our market areas will occur in the future.

In addition, our agricultural customers use LPG for purposes other than heating, including for crop drying, and unfavorable weather conditions, such as lack of precipitation, may impact the demand for LPG. Moreover, harsh weather conditions may at times impede the transportation and delivery of LPG, or restrict our ability to obtain LPG from suppliers. Spikes in demand caused by weather or other factors can stress the supply chain and limit our ability to obtain additional quantities of LPG. Changes in LPG supply costs are normally passed through to customers, but time lags (between when we purchase the LPG and when the customer purchases the LPG) may result in significant gross margin fluctuations that could adversely affect our results of operations.

Energy efficiency and technology advances, as well as price induced customer conservation, may result in reduced demand for our energy products and services.

The trend toward increased conservation and technological advances, including installation of improved insulation and the development of more efficient furnaces and other heating devices, may reduce the demand for energy products. Prices for LPG

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and natural gas are subject to volatile fluctuations in response to changes in supply and other market conditions. During periods of high energy commodity costs, our prices generally increase, which may lead to customer conservation and attrition. A reduction in demand could lower our revenues and, therefore, lower our net income and adversely affect our cash flows. State and/or federal regulation may require mandatory conservation measures, which would reduce the demand for our energy products. Additionally, EU and local laws and regulations may require mandatory conservation measures, which would reduce the demand for our energy products. The EU is in the process of revising a directive on energy performance of buildings, with the goal to create a clear path towards a low and zero-emission building stock in the EU by 2050, which is underpinned by national roadmaps to decarbonize buildings. The EU is also adopting further measures to decarbonize electricity generation in order to reduce dependence on fossil fuel imports and achieve its climate change objectives. Over time, these various measures will impact fossil fuel consumption in Europe. We cannot predict the materiality of the effect of future conservation measures or the effect that any technological advances in heating, conservation, energy generation or other devices might have on our operations.

Changes in commodity market prices may have a significant negative effect on our liquidity.
Depending on the terms of our contracts with suppliers as well as our use of financial instruments to reduce volatility in the cost of LPG and natural gas, changes in the market price of LPG and natural gas can create margin payment obligations for us and expose us to an increased liquidity risk. In addition, increased demand for domestically produced LPG and natural gas overseas may, depending on production volumes in the U.S., result in higher domestic LPG prices and expose us to additional liquidity risks.

Our potential to increase revenues may be affected by the decline in retail volumes of LPG and our ability to retain and grow our customer base.

The retail LPG distribution industry in the U.S. and many of the European countries in which we operate is mature and has been declining over the past several years, with no or modest growth (or decline) in total demand foreseen in the next several years. Accordingly, we expect that year-to-year industry volumes will be principally affected by weather patterns. Therefore, our ability to grow within the LPG industry is dependent on our ability to acquire other retail distributors and to achieve internal growth, which includes expansion of the domestic ACE and National Accounts programs in the U.S. and expansion in Europe, as well as the success of our sales and marketing programs designed to attract and retain customers. A failure to retain and grow our customer base would have an adverse effect on our results. Acquisitions in the U.S. and Europe may require merger control filings with the Federal Trade Commission and the European Commission, as applicable, and commitments or divestments of assets may be required to obtain clearance. Such commitments or divestments may influence the overall economics of the transaction.

UGI Utilities’ transmission and distribution systems may not operate as planned, which may increase expenses or decrease UGI Utilities’ revenues and, thus, have an adverse effect on our financial results.

Our ability to manage operational risk with respect to UGI Utilities’ transmission and distribution systems is critical to our financial results. The business also faces several risks, including the breakdown or failure of or damage to equipment or processes (especially due to severe weather or natural disasters), accidents and other factors, including as a result of overpressurization of or damage to natural gas pipelines. Operation of UGI Utilities’ transmission and distribution systems below our expectations may result in lost revenues or increased expenses, including higher maintenance costs, civil litigation and the risk of regulatory penalties.

The risk of natural disasters and catastrophic events, including terrorism, may adversely affect the economy and the price and availability of LPG, other refined fuels and natural gas.

Natural disasters and catastrophic events, such as fires, earthquakes, explosions, floods, tornadoes, hurricanes, terrorist attacks, political unrest and other similar occurrences, may adversely impact the price and availability of LPG (including propane), other refined fuels and natural gas, which could adversely impact our financial condition and results of operations, our ability to raise capital and our future growth. The impact that the foregoing may have on our industries in general, and on us in particular, is not known at this time. A natural disaster or an act of terror could result in disruptions of crude oil or natural gas supplies and markets (the sources of LPG), cause price volatility in the cost of LPG, fuel oil and natural gas, and our infrastructure facilities could be direct or indirect targets. A natural disaster or terrorist activity may also hinder our ability to transport LPG and other refined fuels if our means of supply transportation, such as rail or pipeline, become damaged as a result of an attack. A lower level of economic activity could result in a decline in energy consumption, which could adversely affect our revenues or restrict our future growth. Instability in the financial markets as a result of a natural disaster or terrorism could also affect our ability to raise capital. We have opted to purchase insurance coverage for natural disasters and terrorist acts within our property and casualty insurance programs, but we can give no assurance that our insurance coverage would be adequate to fully compensate us for any losses to our business or property resulting from natural disasters or terrorist acts.

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If we are unable to protect our information technology systems against service interruption, misappropriation of data, or breaches of security resulting from cyber security attacks or other events, or we encounter other unforeseen difficulties in the operation of our information technology systems, our operations could be disrupted, our business and reputation may suffer, and our internal controls could be adversely affected.

In the ordinary course of business, we rely on information technology systems, including the Internet and third-party hosted services, to support a variety of business processes and activities and to store sensitive data, including (i) intellectual property, (ii) our proprietary business information and that of our suppliers and business partners, (iii) personally identifiable information of our customers and employees, and (iv) data with respect to invoicing and the collection of payments, accounting, procurement, and supply chain activities.  In addition, we rely on our information technology systems to process financial information and results of operations for internal reporting purposes and to comply with financial reporting, legal, and tax requirements.  Despite our security measures, our information technology systems may be vulnerable to attacks by hackers or breached due to employee error, malfeasance, sabotage, or other disruptions.  A loss of our information technology systems, or temporary interruptions in the operation of our information technology systems, misappropriation of data, or breaches of security could have a material adverse effect on our business, financial condition, results of operations, and reputation.  In addition, a cyber security attack could provide a cyber intruder with the ability to control or alter our pipeline operations.  Such an act could result in critical pipeline failures.
 
Moreover, the efficient execution of the Company’s businesses is dependent upon the proper functioning of its internal systems, such as the information technology systems that support the Company’s underlying business processes.  Any significant failure or malfunction of such information technology systems may result in disruptions of our operations.  In addition, the effectiveness of our internal controls could be adversely affected if we encounter unforeseen problems with respect to the operation of our information technology systems. While we have purchased cyber security insurance, there are no assurances that the coverage would be adequate in relation to any incurred losses.

Our operations may be adversely affected by competition from other energy sources.

Our energy products and services face competition from other energy sources, some of which are less costly for equivalent energy value. In addition, we cannot predict the effect that the development of alternative energy sources might have on our operations.

Our LPG distribution businesses compete for customers against suppliers of electricity, fuel oil and natural gas. Electricity is a major competitor of LPG but, except in France, is generally more expensive than LPG on a Btu equivalent basis for space heating, water heating and cooking. However, in Europe and elsewhere, climate change policies favoring electricity from renewable energy sources (“RES”) may cause changes in current relative price relationships. Moreover, notwithstanding cost, the convenience and efficiency of electricity make it an attractive energy source for consumers and developers of new homes. In addition, due to the prevalence of nuclear electric generation in France, the cost of electricity is generally less expensive than that of LPG, particularly when the cost to install new equipment to convert to LPG is considered. Fuel oil is also a major competitor of LPG but is currently more expensive than LPG as well as a less environmentally attractive energy source. Historically, however, fuel oil has been less expensive than LPG. Furnaces and appliances that burn LPG 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. Our customers generally have an incentive to switch to fuel oil only if fuel oil becomes significantly less expensive than LPG. Except for certain industrial and commercial applications, LPG is generally not competitive with natural gas in areas where natural gas pipelines already exist because natural gas is generally a significantly less expensive source of energy than LPG. The gradual expansion of natural gas distribution systems in our service areas has resulted, and may continue to result, in the availability of natural gas in some areas that previously depended upon LPG. As long as natural gas remains a less expensive energy source than LPG, our LPG business will lose customers in each region into which natural gas distribution systems are expanded.

Our natural gas businesses compete primarily with electricity and fuel 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. There can be no assurance that our natural gas revenues will not be adversely affected by this competition.

Our need to comply with, and respond to industry-wide changes resulting from, comprehensive, complex, and sometimes unpredictable governmental regulations, including regulatory initiatives aimed at increasing competition within our industry, may increase our costs and limit our revenue growth, which may adversely affect our operating results.

While we generally refer to our UGI Utilities segment as our “regulated segment,” there are many governmental regulations that have an impact on all of our businesses. Currently, we are subject to extensive and changing international, federal, state, and local safety, health, transportation, tax, and environmental laws and regulations governing the marketing, storage, distribution, and

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transportation of our energy products. Moreover, existing statutes and regulations may be revised or reinterpreted and new laws and regulations may be adopted or become applicable to the Company that may affect our businesses in ways that we cannot predict.

New regulations, or a change in the interpretation of existing regulations, could result in increased expenditures. In addition, for many of our operations, we are required to obtain permits from regulatory authorities and, in some cases, such regulatory permits could subject our operations to additional regulations and standards of conduct. Failure to obtain or comply with these permits or applicable regulations and standards of conduct could result in civil and criminal fines or the cessation of the operations in violation. Governmental regulations and policies in the U.S. and Europe may provide for subsidies or incentives to customers who use alternative fuels instead of carbon fuels. The EU has committed to cut CO2 emissions by at least 40% by 2030 and EU member states have implemented a range of subsidies and incentives to achieve the EU’s climate change goals. These subsidies and incentives may result in reduced demand for our energy products and services.

We are investigating and remediating contamination at a number of present and former operating sites in the U.S., including former sites where we or our former subsidiaries operated manufactured gas plants. We have also received claims from third parties that allege that we are responsible for costs to clean up properties where we or our former subsidiaries operated a manufactured gas plant or conducted other operations. Costs we incur to remediate sites outside of Pennsylvania cannot currently be recovered in PAPUC rate proceedings, and insurance may not cover all or even part of these costs. Our actual costs to clean up these sites may exceed our current estimates due to factors beyond our control, such as:

the discovery of presently unknown conditions;
changes in environmental laws and regulations;
judicial rejection of our legal defenses to third-party claims; or
the insolvency of other responsible parties at the sites at which we are involved.

Moreover, if we discover additional contaminated sites, we could be required to incur material costs, which would reduce our net income.

We also may be unable to timely respond to changes within the energy and utility sectors that may result from regulatory initiatives to further increase competition within our industry. Such regulatory initiatives may create opportunities for additional competitors to grow their business or enter our markets and, as a result, we may be unable to maintain our revenues or continue to pursue our current business strategy.

Our profitability is subject to LPG pricing and inventory risk.

The retail LPG business is a “margin-based” business in which gross profits are dependent upon the excess of the sales price over LPG supply costs. LPG is a commodity, and, as such, its unit price is subject to fluctuations in response to changes in supply or other market conditions. We have no control over supplies, commodity prices or market conditions. Consequently, the unit price of the LPG that our subsidiaries and other distributors and marketers purchase can change rapidly over a short period of time. Most of our domestic LPG product supply contracts permit suppliers to charge posted prices at the time of delivery or the current prices established at major U.S. storage points such as Mont Belvieu, Texas or Conway, Kansas. Most of our international LPG supply contracts are based on internationally quoted market prices. We also purchase a portion of our supplies in the spot market. Because our subsidiaries’ profitability is sensitive to changes in wholesale LPG supply costs, it will be adversely affected if we cannot pass on increases in the cost of LPG to our customers, or if there is a delay in passing on such cost increases. Due to competitive pricing in the industry, our subsidiaries may not fully be able to pass on product cost increases to our customers when product costs rise, or when our competitors do not raise their product prices in a timely manner. Finally, market volatility may cause our subsidiaries to sell LPG at less than the price at which they purchased it, which would adversely affect our operating results.

We offer our customers various fixed-price LPG programs, and a significant number of our customers utilize our fixed-price programs. In order to manage the price risk from offering these services, we utilize our physical inventory position, supplemented by forward commodity transactions with various third parties having terms and volumes substantially the same as our customer’s contracts, but there can be no assurance that such measures will be effective. In periods of high LPG price volatility, the fixed-price programs create exposure to over or under-supply positions as the demand from customers may significantly exceed or fall short of supply procured. In addition, if LPG prices decline significantly subsequent to customers signing up for a fixed-price program, there is a risk that customers will default on their commitments, adversely affecting our results of operations.


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Economic recession, volatility in the stock market and the low interest rate environment may negatively impact our pension liability.

Economic recession, volatility in the stock market and the low interest rate environment have had a significant impact on our pension liability and funded status. Declines in the stock or bond market and valuation of stocks or bonds, combined with continued low interest rates, could further impact our pension liability and funded status and increase the amount of required contributions to our pension plans.

The adoption of financial reform legislation by the United States Congress and related regulations may have an adverse effect on our ability to use derivative instruments to hedge risks associated with our business.

Congress adopted the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Act”) in 2010, which contains comprehensive financial reform legislation. Our derivative hedging activities are subject to Title VII of the Act, which regulates the over-the-counter derivatives market and entities that participate in that market. The Act requires the Commodity Futures Trading Commission (“CFTC”) and other regulators to implement the Act’s provisions, including rules regarding mandatory clearing, trade execution and margin requirements. We expect to qualify for and rely upon an end-user exception from mandatory clearing and trade execution requirements for swaps entered into to hedge our commercial risks. Separately, unclear swap margin requirements do not apply to entities benefiting from the end-user exception. While most rules and regulations required to be issued by the CFTC under the Act have been finalized, there are some additional rules and regulations that have yet to be adopted. It is possible that the rules and regulations under the Act may increase our cost of using derivative instruments to hedge risks associated with our business or may reduce the availability of such instruments to protect against risks we encounter. While costs imposed directly on us due to regulatory requirements for derivatives under the Act, such as reporting recordkeeping and electing the end-user exception from mandatory clearing, are relatively minor, costs imposed upon our counterparties may increase the cost of our doing business in the derivatives markets to the extent such costs are passed on to us.

Position limits also may be imposed that could further limit our ability to hedge risks and may impose compliance and reporting obligations on us. The CFTC has re-proposed position limits for certain futures and option contracts in the major energy markets and for swaps that are their economic equivalents, although certain bona fide hedging transactions would be exempt from these position limits provided that various conditions are satisfied. The CFTC has also finalized a related aggregation rule that requires market participants to aggregate their positions with certain other persons under common ownership and control, unless an exemption applies, for purposes of determining whether the position limits have been exceeded. If adopted, the revised position limit rule and its finalized companion rule on aggregation may have an impact on our ability to hedge exposure to price fluctuation of certain commodities. In addition to the CFTC federal position limit regime, designated contract markets also have established position limit and accountability regimes. We may have to modify trading decisions or liquidate positions to avoid exceeding such limits or at the direction of the exchange to comply with accountability levels. Further, any such position limit regime, whether imposed at the federal level or at the DCM level may impose added operating costs to monitor compliance with such position limit levels, addressing accountability level concerns and maintaining appropriate exemptions, if applicable.

Accordingly, our business and operating results may be adversely affected if, as a result of the Act and the rules and regulations promulgated under the Act, we are forced to reduce or modify our current use of derivatives.

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Volatility in credit and capital markets may restrict our ability to grow, increase the likelihood of defaults by our customers and counterparties and adversely affect our operating results.

Volatility in credit and capital markets may create additional risks to our businesses in the future. We are exposed to financial market risk (including refinancing risk) resulting from, among other things, changes in interest rates and conditions in the credit and capital markets. Developments in the credit markets during the past few years increase our possible exposure to the liquidity, default and credit risks of our suppliers and vendors, counterparties associated with derivative financial instruments and our customers. Although we believe that current financial market conditions, if they were to continue for the foreseeable future, will not have a significant impact on our ability to fund our existing operations, less favorable market conditions could restrict our ability to grow through acquisitions, limit the scope of major capital projects if access to credit and capital markets is limited, or adversely affect our operating results.

We may not be able to collect on the accounts of our customers.

We depend on the viability of our customers for collections of accounts receivable and notes receivable. Moreover, our businesses sell LPG to numerous retail customers, and as we grow our businesses through acquisitions, our retail customer base is expected to significantly expand. There can be no assurance that our customers will not experience financial difficulties in the future or that we will be able to collect all of our outstanding accounts receivable or notes receivable and any such nonpayment by our customers could adversely affect our business.

We depend on our intellectual property and failure to protect that intellectual property could have an adverse effect on us.

We seek trademark protection for our brands in each of our businesses, and we invest significant resources in developing our business brands. Failure to maintain our trademarks and brands could adversely affect our customer-facing businesses and our operational results.

Our ability to obtain sufficient quantities of LPG is dependent on transportation facilities and providers.

Spikes in demand caused by weather or other factors can limit our access to port terminals and other transportation and storage facilities, disrupt transportation and limit our ability to obtain sufficient quantities of LPG. A significant increase in port and similar fees and fuel prices may also adversely affect our transportation costs and business. Transportation providers (rail and truck) in some circumstances have limited ability to provide additional resources in times of peak demand. Moreover, our transportation providers maintaining a staff of qualified truck drivers is critical to the success of our business. Regulatory requirements and an improvement in the economy could reduce the number of eligible drivers or require us to pay higher transportation fees as our transportation providers seek to pass on additional labor costs associated with attracting and retaining drivers.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 3. LEGAL PROCEEDINGS

With the exception of those matters set forth in Note 15 to Consolidated Financial Statements included in Item 15 of this Report, no material legal proceedings are pending involving the Company, any of its subsidiaries, or any of their properties, and no such proceedings are known to be contemplated by governmental authorities other than claims arising in the ordinary course of business.

ITEM 4. MINE SAFETY DISCLOSURES

None.
EXECUTIVE OFFICERS

Information regarding our executive officers is included in Part III of this Report and is incorporated in Part I by reference.


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PART II:

ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information

Our Common Stock is traded on the New York Stock Exchange under the symbol “UGI.” The following table sets forth the high and low sales prices for the Common Stock on the New York Stock Exchange Composite Transactions tape as reported in The Wall Street Journal for each full quarterly period within the two most recent fiscal years.

2018 Fiscal Year
 
High
 
Low
4th Quarter
 
$
55.94

 
$
50.31

3rd Quarter
 
$
52.49

 
$
43.60

2nd Quarter
 
$
48.04

 
$
42.51

1st Quarter
 
$
49.77

 
$
46.43


2017 Fiscal Year
 
High
 
Low
4th Quarter
 
$
51.11

 
$
46.59

3rd Quarter
 
$
52.00

 
$
45.91

2nd Quarter
 
$
50.38

 
$
45.03

1st Quarter
 
$
46.66

 
$
41.79


Dividends

Quarterly dividends per common share on our Common Stock were paid in Fiscal 2018 and Fiscal 2017 as follows:
2018 Fiscal Year
 
Amount
4th Quarter
 
$
0.2600

3rd Quarter
 
$
0.2500

2nd Quarter
 
$
0.2500

1st Quarter
 
$
0.2500


2017 Fiscal Year
 
Amount
4th Quarter
 
$
0.2500

3rd Quarter
 
$
0.2375

2nd Quarter
 
$
0.2375

1st Quarter
 
$
0.2375


Record Holders

On November 13, 2018, UGI had 6,165 holders of record of Common Stock.


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Unregistered Sales of Equity Securities and Use of Proceeds
The following table sets forth information with respect to the Company’s repurchases of its Common Stock during the quarter ended September 30, 2018.
Period
 
(a) Total Number of Shares Purchased
 
(b) Average Price Paid per Share (or Unit)
 
(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs (1)
 
(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
July 1, 2018 to July 31, 2018
 
0
 
-
 
0
 
7,400,000
August 1, 2018 to August 31, 2018
 
135,000
 
$54.00
 
135,000
 
7,265,000
September 1, 2018 to September 30, 2018
 
165,000
 
$54.42
 
165000
 
7,100,000
Total
 
300,000
 
$54.23
 
300,000
 
 
(1) Shares of UGI Corporation Common Stock are repurchased through an extension of a previous share repurchase program announced by the Company on January 25, 2018. The UGI Board of Directors authorized the repurchase of up to 8 million shares of UGI Corporation Common Stock over a four-year period expiring in January 2022.







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ITEM 6.
SELECTED FINANCIAL DATA
 
 
Year Ended September 30,
(Millions of dollars, except per share amounts)
 
2018 (a)
 
2017
 
2016
 
2015
 
2014
FOR THE PERIOD:
 
 
 
 
 
 
 
 
 
 
Income statement data:
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
7,651.2

 
$
6,120.7

 
$
5,685.7

 
$
6,691.1

 
$
8,277.3

Net income including noncontrolling interests
 
$
822.4

 
$
523.8

 
$
488.8

 
$
414.0

 
$
532.6

Deduct net income attributable to noncontrolling interests, principally in AmeriGas Partners
 
(103.7
)
 
(87.2
)
 
(124.1
)
 
(133.0
)
 
(195.4
)
Net income attributable to UGI Corporation
 
$
718.7

 
$
436.6

 
$
364.7

 
$
281.0

 
$
337.2

Earnings per common share attributable to UGI stockholders:
 
 
 
 
 
 
 
 
 
 
Basic
 
$
4.13

 
$
2.51

 
$
2.11

 
$
1.62

 
$
1.95

Diluted
 
$
4.06

 
$
2.46

 
$
2.08

 
$
1.60

 
$
1.92

Cash dividends declared per common share
 
$
1.020

 
$
0.975

 
$
0.930

 
$
0.890

 
$
0.791

AT PERIOD END:
 
 
 
 
 
 
 
 
 
 
Balance sheet data:
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
11,980.9

 
$
11,582.2

 
$
10,847.2

 
$
10,514.2

 
$
10,062.7

Capitalization:
 
 
 
 
 
 
 
 
 
 
Debt:
 
 
 
 
 
 
 
 
 
 
Short-term debt:
 
 
 
 
 
 
 
 
 
 
AmeriGas Propane
 
$
232.0

 
$
140.0

 
$
153.2

 
$
68.1

 
$
109.0

UGI International
 
1.4

 
17.9

 
0.5

 
0.6

 
8.0

Midstream & Marketing
 
2.0

 
39.0

 
25.5

 
49.5

 
7.5

UGI Utilities
 
189.5

 
170.0

 
112.5

 
71.7

 
86.3

Long-term debt (including current maturities):
 
 
 
 
 
 
 
 
 
 
AmeriGas Propane
 
2,569.6

 
2,572.3

 
2,333.6

 
2,261.9

 
2,266.1

UGI International
 
748.5

 
838.8

 
779.6

 
774.2

 
562.8

UGI Utilities
 
838.0

 
751.1

 
671.5

 
619.8

 
639.5

Other
 
9.2

 
9.9

 
10.8

 
11.5

 
12.1

Total debt
 
4,590.2

 
4,539.0

 
4,087.2

 
3,857.3

 
3,691.3

UGI Corporation stockholders’ equity
 
3,681.4

 
3,163.3

 
2,844.1

 
2,685.2

 
2,659.1

Noncontrolling interests, principally in AmeriGas Partners
 
418.6

 
577.6

 
750.9

 
880.4

 
1,004.1

Total capitalization
 
$
8,690.2

 
$
8,279.9

 
$
7,682.2

 
$
7,422.9

 
$
7,354.5

Ratio of capitalization:
 
 
 
 
 
 
 
 
 
 
Total debt
 
52.8
%
 
54.8
%
 
53.2
%
 
52.0
%
 
50.2
%
UGI Corporation stockholders’ equity
 
42.4
%
 
38.2
%
 
37.0
%
 
36.2
%
 
36.2
%
Noncontrolling interests, principally in AmeriGas Partners
 
4.8
%
 
7.0
%
 
9.8
%
 
11.8
%
 
13.6
%
 
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
(a)
Fiscal 2018 results include impacts from the Tax Cuts and Jobs Act (“TCJA”) in the U.S. See Notes 6 and 8 to Consolidated Financial Statements for additional information.
 

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Year Ended September 30,
(Millions of dollars, except per share amounts)
 
2018
 
2017
 
2016
 
2015
 
2014
Non-GAAP Reconciliation:
 
 
 
 
 
 
 
 
 
 
Adjusted net income attributable to UGI Corporation:
 
 
 
 
 
 
 
 
 
 
Net income attributable to UGI Corporation
 
$
718.7

 
$
436.6

 
$
364.7

 
$
281.0

 
$
337.2

Net (gains) losses on commodity derivative instruments not associated with current-period transactions (net of tax of $26.7, $31.9, $13.5, $(30.9) and $(4.5), respectively) (a) (b)
 
(68.1
)
 
(51.2
)
 
(29.9
)
 
53.3

 
6.6

Unrealized (gains) losses on foreign currency derivative instruments (net of tax of $9.3, $(9.9), $0, $0 and $0) (a)
 
(19.6
)
 
13.9

 

 

 

Loss on extinguishments of debt (net of tax of $0, $(6.1), $(5.0), $0 and $0, respectively) (a)
 

 
9.6

 
7.9

 

 

Integration and acquisition expenses associated with Finagaz acquired on May 29, 2015 (net of tax of $(12.0), $(13.7), $(10.6), $(7.7) and $(2.2), respectively) (a)
 
18.5

 
26.2

 
17.3

 
14.9

 
4.3

Impairment of Partnership tradenames and trademarks (net of tax of $(5.8), $0, $0, $0 and $0, respectively) (a)
 
14.5

 

 

 

 

Impact from change in French tax rate
 
(12.1
)
 
(29.0
)
 

 

 

Remeasurement impact from TCJA
 
(166.3
)
 

 

 

 

Costs associated with extinguishment of debt (net of tax of $0, $0, $0, $(5.7) and $0, respectively) (a) (c)
 

 

 

 
4.6

 

Impact of retroactive change in French tax law
 

 

 

 

 
5.7

Adjusted net income attributable to UGI Corporation (d)
 
$
485.6

 
$
406.1

 
$
360.0

 
$
353.8

 
$
353.8

Adjusted diluted earnings per share:
 
 
 
 
 
 
 
 
 
 
UGI Corporation earnings per share - diluted
 
$
4.06

 
$
2.46

 
$
2.08

 
$
1.60

 
$
1.92

Net (gains) losses on commodity derivative instruments not associated with current-period transactions (b)
 
(0.39
)
 
(0.29
)
 
(0.17
)
 
0.30

 
0.04

Unrealized (gains) losses on foreign currency derivative instruments
 
(0.11
)
 
0.08

 

 

 

Loss on extinguishments of debt
 

 
0.05

 
0.04

 

 

Integration and acquisition expenses associated with Finagaz acquired on May 29, 2015
 
0.10

 
0.15

 
0.10

 
0.08

 
0.03

Impairment of Partnership tradenames and trademarks
 
0.08

 

 

 

 

Impact from change in French tax rate
 
(0.07
)
 
(0.16
)
 

 

 

Remeasurement impact from TCJA
 
(0.93
)
 

 

 

 

Costs associated with extinguishment of debt
 

 

 

 
0.03

 

Impact of retroactive change in French tax law
 

 

 

 

 
0.03

Adjusted diluted earnings per share (d)
 
$
2.74

 
$
2.29

 
$
2.05

 
$
2.01

 
$
2.02


(a)
Income taxes associated with pre-tax adjustments determined using statutory business unit tax rates.
(b)
Includes the effects of rounding.
(c)
Costs associated with extinguishment of debt in Fiscal 2015 are included in “Interest expense” on the Consolidated Statements of Income.
(d)
Management uses "adjusted net income attributable to UGI" and "adjusted diluted earnings per share," both of which are non-GAAP financial measures, when evaluating UGI's overall performance. Adjusted net income attributable to UGI is net income attributable to UGI after excluding (1) net after-tax gains and losses on commodity and certain foreign currency derivative instruments not associated with current-period transactions (principally comprising changes in unrealized gains and losses

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on such derivative instruments); (2) Finagaz integration and acquisition expenses; (3) losses on extinguishments of debt; (4) impairment of Partnership tradenames and trademarks; and (5) remeasurement impacts on deferred income tax balances resulting from the TCJA in the U.S. and changes in French tax rates and tax law.

Non-GAAP financial measures are not in accordance with, or an alternative to, GAAP and should be considered in addition to, and not as a substitute for, the comparable GAAP measures. Management believes that these non-GAAP measures provide meaningful information to investors about UGI’s performance because they eliminate the impact of gains and losses on commodity and certain foreign currency derivative instruments not associated with current-period transactions and other significant discrete items that can affect the comparison of period-over-period results.

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ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) discusses our results of operations for Fiscal 2018, Fiscal 2017 and Fiscal 2016, and our financial condition. MD&A should be read in conjunction with our Items 1 & 2, “Business and Properties,” our Item 1A, “Risk Factors,” and our Consolidated Financial Statements in Item 8 below including “Segment Information” included in Note 21 to Consolidated Financial Statements.
Because most of our businesses sell or distribute energy products used in large part for heating purposes, our results are significantly influenced by temperatures in our service territories, particularly during the peak heating-season months of October through March. Accordingly, our results of operations, after adjusting for the effects of gains and losses on derivative instruments not associated with current period transactions as further discussed below under “Non-GAAP Financial Measures - Adjusted Net Income Attributable to UGI and Adjusted Diluted Earnings Per Share,” are significantly higher in our first and second fiscal quarters.
UGI management uses “adjusted net income attributable to UGI Corporation” and “adjusted diluted earnings per share,” both of which are financial measures not in accordance with accounting principles generally accepted in the United States of America (“GAAP”), when evaluating UGI’s overall performance. Management believes that these non-GAAP measures provide meaningful information to investors. Adjusted net income attributable to UGI Corporation excludes (1) net after-tax gains and losses on commodity and certain foreign currency derivative instruments not associated with current-period transactions and (2) other significant discrete items that management believes affect the comparison of period-over-period results (as such items are further described below). UGI does not designate its commodity and certain foreign currency derivative instruments as hedges under GAAP. Volatility in net income attributable to UGI Corporation as determined in accordance with GAAP can occur as a result of gains and losses on commodity and certain foreign currency derivative instruments not associated with current-period transactions. These gains and losses result principally from recording changes in unrealized gains and losses on these derivative instruments. However, because these derivative instruments economically hedge anticipated future purchases or sales of energy commodities or, in the case of certain foreign currency derivatives, reduce volatility in anticipated future earnings associated with our foreign operations, we expect that such gains and losses will be largely offset by gains or losses on anticipated future energy commodity transactions or mitigate the volatility in anticipated future earnings associated with our European operations. For further information, see “Non-GAAP Financial Measures - Adjusted Net Income Attributable to UGI and Adjusted Diluted Earnings Per Share” below and Note 21 to Consolidated Financial Statements.

Executive Overview
Net Income Attributable to UGI Corporation by Business Unit (GAAP)
 
 
2018 (a)
 
2017
 
2016
(Dollars in millions)
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% of
Total
AmeriGas Propane
 
$
174.7

 
24.3
%
 
$
44.6

 
10.2
%
 
$
43.2

 
11.8
%
UGI International
 
138.6

 
19.3
%
 
158.6

 
36.3
%
 
111.6

 
30.6
%
Midstream & Marketing
 
196.8

 
27.4
%
 
86.9

 
19.9
%
 
97.4

 
26.7
%
UGI Utilities
 
148.9

 
20.7
%
 
116.0

 
26.6
%
 
87.1

 
23.9
%
Corporate & Other (b)
 
59.7

 
8.3
%
 
30.5

 
7.0
%
 
25.4

 
7.0
%
Net income attributable to UGI Corporation
 
$
718.7

 
100.0
%
 
$
436.6

 
100.0
%
 
$
364.7

 
100.0
%
(a)
Fiscal 2018 net income attributable to UGI Corporation by business unit reflects the impacts of the TCJA in the U.S., and UGI International’s Fiscal 2018 and Fiscal 2017 net income also reflects the impacts of tax legislation in France. See “Impact of Tax Reform” below and Note 6 to Consolidated Financial Statements.
(b)
Corporate & Other includes net after-tax gains on commodity derivative instruments not associated with current-period transactions of $68.1 million, $51.2 million and $29.9 million in Fiscal 2018, Fiscal 2017 and Fiscal 2016, respectively. Corporate & Other also includes after-tax unrealized gains (losses) on certain foreign currency derivative instruments of $19.6 million and $(13.9) million in Fiscal 2018 and Fiscal 2017, respectively. See Note 21 to Consolidated Financial Statements for a discussion of amounts included in Corporate & Other.

Fiscal 2018 Financial Review
Our Fiscal 2018 operating results reflect temperatures based upon heating degree days that were normal, or slightly warmer than normal, in each of our business units’ service territories. Compared to Fiscal 2017, average temperatures in our domestic business units were significantly colder, while temperatures in our UGI International business in Europe were slightly warmer. After two

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consecutive years of significantly warmer-than-normal weather in the U.S., the return of more normal weather in Fiscal 2018 enabled us to demonstrate the earnings potential of our existing businesses and our recent acquisitions and investments. Our Fiscal 2018 net income attributable to UGI also reflects the enactment of the TCJA.
Our net income attributable to UGI as determined in accordance with GAAP was $718.7 million, equal to $4.06 per diluted share, compared with $436.6 million, equal to $2.46 per diluted share, in Fiscal 2017. The significantly higher GAAP net income attributable to UGI and diluted earnings per share reflects, among other things, the remeasurement impacts on our deferred income tax assets and liabilities from the TCJA and changes in French income tax rates enacted in early Fiscal 2018. The higher Fiscal 2018 GAAP net income attributable to UGI and diluted earnings per share also reflect higher net gains on certain derivative instruments not associated with current-period transactions. Our adjusted net income attributable to UGI for Fiscal 2018 was $485.6 million, equal to $2.74 per diluted share, a 20% increase over Fiscal 2017’s adjusted net income and adjusted diluted earnings per share. Our Fiscal 2018 GAAP and adjusted net income attributable to UGI and GAAP and adjusted diluted earnings per share were records for the Company. For further information on our non-GAAP financial measures “adjusted net income attributable to UGI Corporation” and “adjusted diluted earnings per share,” including reconciliations of these measures to the most directly comparable GAAP measures, see “Non-GAAP Financial Measures - Adjusted Net Income Attributable to UGI and Adjusted Diluted Earnings Per Share” below. While the 20% increase in our adjusted results reflects the beneficial effects of the more favorable weather and the current-year benefits of the lower U.S. federal tax rate, it also reflects contributions from recent natural gas infrastructure investments relating to our growing network in the Marcellus Shale in Pennsylvania, growth initiatives at each of our business units and a base rate increase at UGI Utilities.
While average weather at each of our business units in Fiscal 2018 was normal, or slightly warmer than normal, each of our businesses responded well to significant variability in weather patterns during the Fiscal 2018 heating season. In our domestic operations, cold weather arrived later than normal with temperatures in October and November averaging nearly 10% warmer than normal. Extremely cold weather arrived in late December and early January in the U.S. This cold weather resulted in record peak day sendout at our Gas Utility for several consecutive days during the first week in January. In addition, our Midstream & Marketing business saw the return of price volatility and cold weather opportunities which favorably impacted capacity management and peaking margin. February temperatures in the U.S. were significantly warmer than normal but turned colder in mid-March through April, with April 2018 being the coldest in more than 20 years. At our UGI International business in Europe, retail LPG volumes early in Fiscal 2018 were reduced by an unfavorable fall crop drying season and temperatures that were warmer than normal. Our UGI International volumes benefited later in the heating season as a result of extremely cold weather in February and March, as many parts of Europe experienced cold and snow not experienced in decades.
As previously mentioned, our Fiscal 2018 results also include incremental earnings from recent investments, business acquisitions and organic growth. These incremental earnings include the full-year operation of the Sunbury Pipeline, incremental earnings from our Texas Creek natural gas gathering system, increases in peaking contracts and higher electricity generation volumes and unit margins at Midstream & Marketing; customer growth and the PNG rate case at UGI Utilities; continued growth in our ACE and National Accounts programs at AmeriGas Propane; and the DVEP and UniverGas acquisitions at UGI International.
Impact of Tax Reform
Our Fiscal 2018 results reflect the impacts of two significant tax law changes: the TCJA in the U.S. and December 2017 tax legislation in France (the “December 2017 French Finance Bills”). Among other things, the TCJA reduces the U.S. federal income tax rate from 35% to 21% effective January 1, 2018, creates a territorial tax system with a one-time mandatory “toll tax” on previously un-repatriated foreign earnings, and allows for immediate capital expensing of certain qualified property, which for UGI Utilities and certain FERC-regulated assets will be eliminated beginning in Fiscal 2019. The December 2017 French Finance Bills increased the Fiscal 2018 corporate income tax rate in France to 39.4% from 34.4%, but includes measures to reduce the corporate income tax rate, over time, to 25.8% effective for fiscal years starting after January 1, 2022 (Fiscal 2023).
As a result of the TCJA and the December 2017 French Finance Bills, during Fiscal 2018 we adjusted our deferred income tax assets and liabilities to remeasure our existing U.S. and French deferred income tax assets and liabilities at the new tax rates in the U.S. and France. The net adjustment to our deferred income tax assets and liabilities resulting from the TCJA reduced our Fiscal 2018 income tax expense by $166.3 million equal to $0.93 per diluted share. Due to the effects of utility ratemaking, most of the reduction in UGI Utilities’ deferred income tax assets and liabilities was not recognized immediately in income tax expense but has been reflected in regulatory assets and liabilities in accordance with utility ratemaking. The net adjustment to our deferred income tax assets and liabilities in France resulting from the December 2017 French Finance Bills reduced our Fiscal 2018 income tax expense by $12.1 million equal to $0.07 per diluted share. On a combined basis, these remeasurement adjustments to our deferred income tax assets and liabilities reduced our Fiscal 2018 income taxes, and increased our net income attributable to UGI, by $178.4 million or $1.01 per diluted share. Although these remeasurement adjustments decreased our income tax expense and increased our GAAP net income, we have eliminated these remeasurement adjustments from our non-GAAP adjusted results.

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In addition to the remeasurement adjustments related to our U.S. and French income tax assets and liabilities, our income tax expense for Fiscal 2018 was further reduced by approximately $52.1 million (equal to $0.30 per diluted share) principally as a result of our lower Fiscal 2018 blended U.S. income tax rate of 24.5% compared to 35% previously. However, the impact of this decrease in income taxes was partially offset by the after-tax reduction in UGI Utilities’ revenues resulting from a May 2018 PAPUC Order. In accordance with this Order, UGI Utilities reduced its revenues by $24.1 million, and established an associated regulatory liability, related to $17.1 million (equal to $0.10 per diluted share) of tax benefits resulting from the change in the federal tax rate from 35% to 21% for the period January 1, 2018 through June 30, 2018. After adjusting for this reduction in UGI Utilities’ revenues, the impact of the TCJA increased Fiscal 2018 earnings (excluding the remeasurement effects previously mentioned) by $35.0 million (equal to $0.20 per diluted share). This Fiscal 2018 current-period benefit from the TCJA in the U.S. was reduced by a modest $0.6 million increase in Fiscal 2018 current-period income taxes in France resulting from the higher Fiscal 2018 French income tax rate.
In addition to the requirement to establish a regulatory liability for the tax benefits resulting from the TCJA for the period January 1, 2018 to June 30, 2018, the PAPUC also ordered each regulated utility currently not in a general base rate case proceeding to reduce their rates through a reconcilable negative surcharge applied to bills rendered on or after July 1, 2018. The negative surcharge will remain in place until the effective date of new rates established in the utility’s next general base rate proceeding. This negative surcharge effectively offsets the effects of the TCJA on income taxes at UGI Utilities until such effects are considered in future rate proceedings. The impact of the negative surcharge on net income for the period July 1, 2018 to September 30, 2018, was not material.
For further information on the TCJA, the December 2017 French Finance Bills, the regulatory impacts on UGI Utilities resulting from the TCJA and the actions of the PAPUC, see Notes 6 and 8 to Consolidated Financial Statements.
Strategic Initiatives
During Fiscal 2018, we continued to make significant strategic and operational progress in support of our long-term goals. AmeriGas Propane continued to drive costs out of the business through operating efficiencies, the application of technology solutions, and organizational management initiatives. Through continued expansion and enhancement of technology initiatives, AmeriGas Propane continued to reduce distribution costs and optimize delivery routing to increase the efficiency of its distribution model. AmeriGas Propane experienced a significant increase in the number of customer accounts registered for online capabilities and has developed and deployed other technology-enabled methods to communicate with customers. Volumes from the ACE cylinder program in Fiscal 2018 were the highest on record reflecting an increase in the number of retail locations including locations offering 24/7 automated self-service vending machines, and the National Account program’s performance in Fiscal 2018 benefited from double-digit volume growth due in large part to more normal winter weather and customer growth.
During Fiscal 2018, UGI International completed the integration of Finagaz acquired in May 2015 on time, achieving higher-than-expected synergies. In addition, UGI International integrated three smaller businesses acquired in late Fiscal 2017 and early Fiscal 2018, including LPG distribution businesses in Sweden and Italy as well as DVEP, a leading energy marketer in the Netherlands. In addition, UGI International centralized its European supply and commodity hedging functions in France, continued to build-out its cylinder distribution model including vending machines and expansion of retail chain customers, and executed the start-up of a natural gas marketing business in the United Kingdom. We also made significant progress on the implementation of the newly enacted European data privacy regulation, the Global Data Protection Regulation, across our European operations.
During Fiscal 2018, Midstream & Marketing acquired a midstream gas gathering system, Texas Creek, which included 60 miles of natural gas gathering lines, and acquired the Endless Mountain natural gas gathering system. Both of these gathering systems operate in the Marcellus Shale in northern Pennsylvania. Midstream & Marketing also acquired a 44 megawatt natural gas turbine adding capacity to the Hunlock site. In addition to these and other strategic asset acquisitions, Midstream & Marketing completed the Steelton LNG storage and vaporization unit, which is an important component of satisfying growing peak-day demand, and achieved several important milestones on the PennEast pipeline project including receipt of the FERC certificate of public convenience and necessity in January 2018.
UGI Utilities added over 14,000 new residential and commercial heating customers during Fiscal 2018 with conversions accounting for the majority of the additions. In January, UGI Utilities filed a base rate request for the Electric Division. New rates for Electric Utility went into effect in late October 2018. UGI Utilities continued to invest in its distribution system deploying nearly $340 million in capital, including approximately $185 million for replacement and betterment, and received regulatory approval for the merger of UGI Utilities’ three utility companies effective October 1, 2018. During Fiscal 2018, UGI Utilities also completed the design of UNITE Phase 2, its Enterprise Resource Planning (“ERP”) system, and made substantial progress on the build phases of the project. UGI Utilities also made significant progress toward the completion of its new corporate headquarters building, which is expected to be completed in the spring of Fiscal 2019.

36

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At the UGI Corporation level, we implemented the first phase of a global human resource management tool for our domestic entities, made significant progress on a new enterprise performance management and reporting tool; and developed a global IT security framework.
Financing Transactions and Liquidity
In October 2017, UGI Utilities entered into a $125 million unsecured variable-rate term loan due through October 2022 with a group of banks. Proceeds from the Utilities Term Loan were used by UGI Utilities to repay revolving credit agreement borrowings and for general corporate purposes. We have entered into an interest rate swap that will fix the underlying interest rate on this debt at approximately 3% beginning September 30, 2019. In December 2017, AmeriGas Propane, L.P. (“AmeriGas OLP”) entered into the Second Amended and Restated Credit Agreement that provides for borrowings up to $600 million (including a $150 million sublimit for letters of credit) and expires in December 2022. Also in December 2017, UGI International, LLC entered into a secured multicurrency revolving facility with a group of banks providing for borrowings up to €300 million through 2020. As further described below, this revolving facility was replaced with a new revolving credit facility in October 2018 as part of the UGI International refinancing transaction.
On October 25, 2018, UGI International, LLC, a wholly owned second-tier indirect subsidiary of UGI Corporation, completed a significant refinancing transaction and (i) issued €350 million of 3.25% bonds due November 2025 through an underwritten private placement, (ii) borrowed €300 million under its 2018 UGI International Credit Facilities Agreement term loan facility, and (iii) entered into a €300 million multicurrency revolving credit facility. The €300 million term loan is due, and the new multicurrency revolving facility expires, in October 2023. The proceeds from the term loan and the 3.25% bonds plus cash on hand were used to repay UGI France’s and Flaga’s term loans ahead of schedule. For additional information on this refinancing, see “Financial Condition and Liquidity” below and Note 5 to Consolidated Financial Statements.
We believe each of our business units has sufficient liquidity to fund business operations during Fiscal 2019 (see “Financial Condition and Liquidity” below).
Non-GAAP Financial Measures - Adjusted Net Income Attributable to UGI and Adjusted Diluted Earnings Per Share
Adjusted Net Income Attributable to UGI Corporation by Business Unit (Non-GAAP)
 
 
2018
 
2017
 
2016
(Dollars in millions)
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% of
Total
AmeriGas Propane
 
$
76.3

 
15.7
 %
 
$
54.2

 
13.3
 %
 
$
51.1

 
14.2
 %
UGI International
 
153.1

 
31.5
 %
 
155.8

 
38.4
 %
 
128.9

 
35.8
 %
Midstream & Marketing
 
126.7

 
26.1
 %
 
86.9

 
21.4
 %
 
87.1

 
24.2
 %
UGI Utilities
 
140.9

 
29.0
 %
 
116.0

 
28.6
 %
 
97.4

 
27.1
 %
Corporate & Other
 
(11.4
)
 
(2.3
)%
 
(6.8
)
 
(1.7
)%
 
(4.5
)
 
(1.3
)%
Net income attributable to UGI Corporation
 
$
485.6

 
100.0
 %
 
$
406.1

 
100.0
 %
 
$
360.0

 
100.0
 %
As previously mentioned, UGI management uses “adjusted net income attributable to UGI Corporation” and “adjusted diluted earnings per share,” both of which are non-GAAP financial measures, when evaluating UGI’s overall performance. Adjusted net income attributable to UGI Corporation is net income attributable to UGI after excluding (1) net after-tax gains and losses on commodity and certain foreign currency derivative instruments not associated with current-period transactions (principally comprising changes in unrealized gains and losses on such derivative instruments); (2) Finagaz integration expenses; (3) losses on extinguishments of debt; (4) impairments of Partnership tradenames and trademarks; and (5) remeasurement impacts on income tax balances resulting from the enactments of the TCJA and French Finance Bills.
UGI does not designate its commodity and certain foreign currency derivative instruments as hedges under GAAP. Volatility in net income attributable to UGI Corporation as determined in accordance with GAAP can occur as a result of gains and losses on commodity and certain foreign currency derivative instruments not associated with current-period transactions. These gains and losses result principally from recording changes in unrealized gains and losses on unsettled commodity and certain foreign currency derivative instruments and, to a much lesser extent, certain realized gains and losses on settled commodity derivative instruments that are not associated with current-period transactions. However, because these derivative instruments economically hedge anticipated future purchases or sales of energy commodities, or in the case of certain foreign currency derivatives reduce volatility

37

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in anticipated future earnings associated with our foreign operations, we expect that such gains or losses will be largely offset by gains or losses on anticipated future energy commodity transactions or mitigate volatility in anticipated future earnings. For further information on the Company’s accounting for commodity and certain foreign currency derivative instruments, see Notes 2 and 17 to Consolidated Financial Statements.
Non-GAAP financial measures are not in accordance with, or an alternative to, GAAP and should be considered in addition to, and not as a substitute for, the comparable GAAP measures. Management believes that these non-GAAP measures provide meaningful information to investors about UGI’s performance because they eliminate the impact of gains and losses on commodity and certain foreign currency derivative instruments not associated with current-period transactions and other significant discrete items that can affect the comparison of period-over-period results.
The following tables reconcile net income attributable to UGI Corporation, the most directly comparable GAAP measure, to adjusted net income attributable to UGI Corporation and reconcile diluted earnings per share, the most comparable GAAP measure, to adjusted diluted earnings per share, to reflect the adjustments referred to above for Fiscal 2018, Fiscal 2017 and Fiscal 2016.

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Year Ended September 30, 2018
 
Total
 
AmeriGas Propane
 
UGI International
 
Midstream
& Marketing
 
UGI Utilities
 
Corporate & Other
Adjusted net income attributable to UGI Corporation (millions):
 
 
 
 
 
 
 
 
 
 
 
 
Net income attributable to UGI Corporation
 
$
718.7

 
$
174.7

 
$
138.6

 
$
196.8

 
$
148.9

 
$
59.7

Net gains on commodity derivative instruments not associated with current-period transactions (net of tax of $26.7) (a)
 
(68.1
)
 

 

 

 

 
(68.1
)
Unrealized gains on foreign currency derivative instruments (net of tax of $9.3) (a)
 
(19.6
)
 

 

 

 

 
(19.6
)
Integration expenses associated with Finagaz (net of tax of $(12.0)) (a)
 
18.5

 

 
18.5

 

 

 

Impairment of Partnership tradenames and trademarks (net of tax of $(5.8)) (a)
 
14.5

 
14.5

 

 

 

 

Impact from December 2017 French Finance Bills
 
(12.1
)
 

 
(12.1
)
 

 

 

Remeasurement impact from TCJA
 
(166.3
)
 
(112.9
)
 
8.1

 
(70.1
)
 
(8.0
)
 
16.6

Adjusted net income (loss) attributable to UGI Corporation
 
$
485.6

 
$
76.3

 
$
153.1

 
$
126.7

 
$
140.9

 
$
(11.4
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjusted diluted earnings per share:
 
 
 
 
 
 
 
 
 
 
 
 
UGI Corporation earnings per share - diluted
 
$
4.06

 
$
0.99

 
$
0.78

 
$
1.11

 
$
0.84

 
$
0.34

Net gains on commodity derivative instruments not associated with current-period transactions (b)
 
(0.39
)
 

 

 

 

 
(0.39
)
Unrealized gains on foreign currency derivative instruments
 
(0.11
)
 

 

 

 

 
(0.11
)
Integration expenses associated with Finagaz
 
0.10

 

 
0.10

 

 

 

Impairment of Partnership tradenames and trademarks
 
0.08

 
0.08

 

 

 

 

Impact from December 2017 French Finance Bills
 
(0.07
)
 

 
(0.07
)
 

 

 

Remeasurement impact from TCJA (b)
 
(0.93
)
 
(0.64
)
 
0.06

 
(0.39
)
 
(0.04
)
 
0.08

Adjusted diluted earnings (loss) per share
 
$
2.74

 
$
0.43

 
$
0.87

 
$
0.72

 
$
0.80

 
$
(0.08
)


39

Table of Contents

Year Ended September 30, 2017
 
Total
 
AmeriGas Propane
 
UGI International
 
Midstream & Marketing
 
UGI Utilities
 
Corporate & Other
Adjusted net income attributable to UGI Corporation (millions):
 
 
 
 
 
 
 
 
 
 
 
 
Net income attributable to UGI Corporation
 
$
436.6

 
$
44.6

 
$
158.6

 
$
86.9

 
$
116.0

 
$
30.5

Net gains on commodity derivative instruments not associated with current-period transactions (net of tax of $31.9) (a)
 
(51.2
)
 

 

 

 

 
(51.2
)
Unrealized losses on foreign currency derivative instruments (net of tax of $(9.9)) (a)
 
13.9

 

 

 

 

 
13.9

Loss on extinguishments of debt (net of tax of $(6.1)) (a)
 
9.6

 
9.6

 

 

 

 

Integration expenses associated with Finagaz (net of tax of $(13.7)) (a)
 
26.2

 

 
26.2

 

 

 

Impact from December 2016 French Finance Bills
 
(29.0
)
 

 
(29.0
)
 

 

 

Adjusted net income (loss) attributable to UGI Corporation
 
$
406.1

 
$
54.2

 
$
155.8

 
$
86.9

 
$
116.0

 
$
(6.8
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjusted diluted earnings per share:
 
 
 
 
 
 
 
 
 
 
 
 
UGI Corporation earnings per share – diluted
 
$
2.46

 
$
0.25

 
$
0.89

 
$
0.49

 
$
0.66

 
$
0.17

Net gains on commodity derivative instruments not associated with current-period transactions
 
(0.29
)
 

 

 

 

 
(0.29
)
Unrealized losses on foreign currency derivative instruments
 
0.08

 

 

 

 

 
0.08

Loss on extinguishments of debt
 
0.05

 
0.05

 

 

 

 

Integration expenses associated with Finagaz
 
0.15

 

 
0.15

 

 

 

Impact from December 2016 French Finance Bills
 
(0.16
)
 

 
(0.16
)
 

 

 

Adjusted diluted earnings (loss) per share
 
$
2.29

 
$
0.30

 
$
0.88

 
$
0.49

 
$
0.66

 
$
(0.04
)

40

Table of Contents

Year Ended September 30, 2016
 
Total
 
AmeriGas Propane
 
UGI International
 
Midstream & Marketing
 
UGI Utilities
 
Corporate & Other
Adjusted net income attributable to UGI Corporation (millions):
 
 
 
 
 
 
 
 
 
 
 
 
Net income attributable to UGI Corporation
 
$
364.7

 
$
43.2

 
$
111.6

 
$
87.1

 
$
97.4

 
$
25.4

Net gains on commodity derivative instruments not associated with current-period transactions (net of tax of $13.5) (a)
 
(29.9
)
 

 

 

 

 
(29.9
)
Loss on extinguishments of debt (net of tax of $(5.0)) (a)
 
7.9

 
7.9

 

 

 

 

Integration expenses associated with Finagaz (net of tax of $(10.6)) (a)
 
17.3

 

 
17.3

 

 

 

Adjusted net income (loss) attributable to UGI Corporation
 
$
360.0

 
$
51.1

 
$
128.9

 
$
87.1

 
$
97.4

 
$
(4.5
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjusted diluted earnings per share:
 
 
 
 
 
 
 
 
 
 
 
 
UGI Corporation earnings per share - diluted
 
$
2.08

 
$
0.25

 
$
0.64

 
$
0.50

 
$
0.55

 
$
0.14

Net gains on commodity derivative instruments not associated with current-period transactions (b)
 
(0.17
)
 

 

 

 

 
(0.17
)
Loss on extinguishments of debt
 
0.04

 
0.04

 

 

 

 

Integration expenses associated with Finagaz
 
0.10

 

 
0.10

 

 

 

Adjusted diluted earnings per share
 
$
2.05

 
$
0.29

 
$
0.74

 
$
0.50

 
$
0.55

 
$
(0.03
)
(a)
Income taxes associated with pre-tax adjustments determined using statutory business unit tax rates.
(b)
Includes the effects of rounding.


41

Table of Contents

Results of Operations
The following analyses compare the Company’s results of operations for (1) Fiscal 2018 with Fiscal 2017 and (2) Fiscal 2017 with Fiscal 2016.
Fiscal 2018 Compared with Fiscal 2017
Consolidated Results
Net Income Attributable to UGI Corporation by Business Unit:
 
 
2018
 
2017
 
Variance - Favorable
(Unfavorable)
(Dollars in millions)
 
Amount (a)
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% Change
AmeriGas Propane (b)(c)
 
$
174.7

 
24.3
%
 
$
44.6

 
10.2
%
 
$
130.1

 
291.7
 %
UGI International (d)(e)
 
138.6

 
19.3
%
 
158.6

 
36.3
%
 
(20.0
)
 
(12.6
)%
Midstream & Marketing
 
196.8

 
27.4
%
 
86.9

 
19.9
%
 
109.9

 
126.5
 %
UGI Utilities (f)
 
148.9

 
20.7
%
 
116.0

 
26.6
%
 
32.9

 
28.4
 %
Corporate & Other (g)(h)
 
59.7

 
8.3
%
 
30.5

 
7.0
%
 
29.2

 
N.M.

Net income attributable to UGI Corporation
 
$
718.7

 
100.0
%
 
$
436.6

 
100.0
%
 
$
282.1

 
64.6
 %
(a)
Fiscal 2018 net income attributable to UGI Corporation includes income (loss) from remeasurement adjustments to tax-related accounts as a result of the enactment of the TCJA as follows:
AmeriGas Propane
$
112.9

UGI International
(8.1
)
Midstream & Marketing
70.1

UGI Utilities
8.0

Corporate & Other
(16.6
)
Net income attributable to UGI Corporation
$
166.3


In addition to the remeasurement adjustments above, Fiscal 2018 income tax expense was reduced by an additional $52.1 million principally due to a lower federal income tax rate in Fiscal 2018 as a result of the TCJA.
(b)
Fiscal 2018 includes after-tax impairment charge of $14.5 million as a result of the plan to discontinue use of certain Partnership tradenames and trademarks.
(c)
Fiscal 2017 includes net after-tax loss of $9.6 million from extinguishments of debt.
(d)
Fiscal 2018 includes beneficial impact of a $12.1 million remeasurement adjustment to net deferred income tax liabilities associated with the enactment of the December 2017 French Finance Bills. Fiscal 2017 includes beneficial impact of a $29.0 million remeasurement adjustment to net deferred income tax liabilities associated with a change in French income tax rate and an income tax settlement refund of $6.7 million, plus interest, in France. In addition to these remeasurement adjustments, Fiscal 2018 also reflects the current-year negative impact of the December 2017 French Finance Bills which decreased Fiscal 2018 net income attributable to UGI by approximately $0.6 million.
(e)
Includes after-tax integration expenses associated with Finagaz of $18.5 million and $26.2 million for Fiscal 2018 and Fiscal 2017, respectively.
(f)
Fiscal 2018 includes reduction in net income of $17.1 million to reflect the establishment of a regulatory liability and associated deferred income taxes from tax savings incurred during the period January 1, 2018 to June 30, 2018 as a result of the TCJA.
(g)
Includes net after-tax gains on commodity derivative instruments not associated with current-period transactions of $68.1 million and $51.2 million for Fiscal 2018 and Fiscal 2017, respectively. Also includes after-tax unrealized gains (losses) on certain foreign currency derivative instruments of $19.6 million and $(13.9) million for Fiscal 2018 and Fiscal 2017, respectively.
(h)
Fiscal 2017 includes a $7.1 million after-tax loss associated with the impairment of a cost basis investment.
N.M. — Variance is not meaningful.



42

Table of Contents

AmeriGas Propane
 
2018
 
2017
 
Increase (Decrease)
(Dollars in millions)
 
 

 
 
 
 
 
 
Revenues
 
$
2,823.0

 
$
2,453.5

 
$
369.5

 
15.1
 %
Total margin (a)
 
$
1,508.3

 
$
1,450.6

 
$
57.7

 
4.0
 %
Partnership operating and administrative expenses (b)
 
$
923.1

 
$
915.1

 
$
8.0

 
0.9
 %
Impairment of Partnership tradenames and trademarks (c)
 
$
75.0

 
$

 
$
75.0

 
N.M.

Partnership Adjusted EBITDA (d)(e)
 
$
605.5

 
$
551.3

 
$
54.2

 
9.8
 %
Operating income (e)(f)(g)
 
$
347.2

 
$
355.3

 
$
(8.1
)
 
(2.3
)%
Retail gallons sold (millions)
 
1,081.3

 
1,046.9

 
34.4

 
3.3
 %
Degree days – % colder (warmer) than normal (h)
 
0.3
%
 
(11.3
)%
 

 

(a)
Total margin represents total revenues less total cost of sales. Total margin for Fiscal 2018 and Fiscal 2017 excludes net pre-tax gains of $12.5 million and $31.1 million, respectively, on commodity derivative instruments not associated with current-period transactions.
(b)
Operating and administrative expenses in Fiscal 2017 include a $7.5 million environmental accrual associated with the site of a former manufactured gas plant (“MGP”) obtained in a prior-year acquisition (see Note 15 to Consolidated Financial Statements).
(c)
Fiscal 2018 reflects $75.0 million impairment charge associated with a plan to discontinue the use of certain Partnership tradenames and trademarks (see Note 11 to Consolidated Financial Statements).
(d)
Partnership Adjusted EBITDA should not be considered as an alternative to net income (loss) (as an indicator of operating performance) and is not a measure of performance or financial condition under GAAP. Management uses Partnership Adjusted EBITDA as the primary measure of segment profitability for the AmeriGas Propane segment (see Note 21 to Consolidated Financial Statements).
(e)
Fiscal 2017 reflects adjustments to correct previously recorded gains on sales of fixed assets ($8.8 million) and decreased depreciation expense ($1.1 million) relating to certain assets acquired with the Heritage Propane acquisition in 2012, which reduced Partnership Adjusted EBITDA by $8.8 million and reduced operating income by $7.7 million.
(f)
Amounts for Fiscal 2017 reflect an adjustment to correct depreciation expense associated with prior periods which reduced operating income by $7.5 million.
(g)
Operating income reflects certain operating and administrative expenses of the General Partner.
(h)
Deviation from average heating degree days for the 15-year period 2002-2016 based upon national weather statistics provided by the National Oceanic and Atmospheric Administration (“NOAA”) for 344 Geo Regions in the United States, excluding Alaska and Hawaii.
N.M. - Variance is not meaningful.

AmeriGas Propane’s retail gallons sold during Fiscal 2018 were 3.3% higher than in Fiscal 2017. Average temperatures based upon heating degree days during Fiscal 2018 were 0.3% colder than normal and 13.0% colder than Fiscal 2017.

AmeriGas Propane retail propane revenues increased $337.9 million during Fiscal 2018 reflecting the effects of higher average retail selling prices ($267.5 million) and higher retail volumes sold ($70.4 million). Wholesale propane revenues increased $24.4 million reflecting the effects of higher average wholesale selling prices ($13.5 million) and higher wholesale volumes sold ($10.9 million). Average daily wholesale propane commodity prices during Fiscal 2018 at Mont Belvieu, Texas, one of the major supply points in the U.S., were approximately 36% higher than such prices during Fiscal 2017. Other revenues in Fiscal 2018 were slightly higher than in the prior year principally reflecting higher service and ancillary revenues. AmeriGas Propane cost of sales increased $311.8 million principally reflecting the effects on propane cost of sales of higher average propane product costs ($266.1 million) and, to a much lesser extent, the effects of the higher retail and wholesale propane volumes sold ($39.6 million).

AmeriGas Propane total margin increased $57.7 million principally reflecting slightly higher retail propane total margin ($56.6 million) and slightly higher non-propane total margin ($1.1 million). The increase in retail propane total margin reflects the higher retail volumes sold and, to a much lesser extent, slightly higher average retail propane unit margins.

Partnership Adjusted EBITDA increased $54.2 million in Fiscal 2018 principally reflecting the effects of the higher total margin ($57.7 million) and higher other operating income ($12.5 million) partially offset by a $15.5 million increase in Partnership operating and administrative expenses (excluding the effects of the $7.5 million MGP accrual in the prior year). The increase in other operating income largely reflects the absence of an $8.8 million adjustment recorded in Fiscal 2017 to correct previously recorded gains on sales of fixed assets acquired with the Heritage Propane acquisition in 2012. The increase in Partnership operating and administrative expenses reflects, among other things, higher total compensation and benefits cost ($20.4 million), principally

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higher labor, overtime and incentive compensation costs associated with the increased activity and improved performance; higher vehicle expenses ($10.6 million); and higher outside services expense ($6.3 million). These increases in operating expenses were partially offset by lower general insurance and self-insured casualty and liability expense and, to a lesser extent, lower provisions for uncollectible accounts and travel and entertainment expenses.

AmeriGas Propane operating income decreased $8.1 million in Fiscal 2018 as the $57.7 million increase in Partnership total margin, the higher other operating income ($12.5 million) and a decrease in depreciation and amortization expense ($4.8 million) were more than offset by the $75.0 million impairment of Partnership tradenames and trademarks and an $8.0 million increase in operating and administrative costs (including the effects of the $7.5 million MGP accrual in the prior year).
 
During Fiscal 2017, AmeriGas Partners recognized a pre-tax loss of $59.7 million ($9.6 million after-tax loss attributable to UGI) associated with early extinguishments of debt. For further information, see Note 5 to Consolidated Financial Statements.
UGI International
 
2018
 
2017
 
Increase
(Dollars in millions)
 
 
 
 
 
 
 
 
Revenues
 
$
2,683.8

 
$
1,877.5

 
$
806.3

 
42.9
%
Total margin (a)
 
$
1,063.7

 
$
942.2

 
$
121.5

 
12.9
%
Operating and administrative expenses (b)
 
$
703.2

 
$
626.2

 
$
77.0

 
12.3
%
Operating income
 
$
223.1

 
$
195.7

 
$
27.4

 
14.0
%
Income before income taxes (c)
 
$
188.8

 
$
175.0

 
$
13.8

 
7.9
%
LPG retail gallons sold (millions)
 
886.3

 
827.9

 
58.4

 
7.1
%
UGI International degree days – % (warmer) colder than normal (d)
 
(5.3
)%
 
0.7
%
 

 

(a)
Total margin represents total revenues less total cost of sales. Total margin for Fiscal 2018 and Fiscal 2017 excludes net pre-tax gains of $92.8 million and $19.0 million, respectively, on commodity derivative instruments not associated with current-period transactions.
(b)
Reflects impacts of Finagaz integration expenses for Fiscal 2018 and Fiscal 2017 of $30.5 million and $39.9 million, respectively.
(c)
Income before income taxes for Fiscal 2018 and Fiscal 2017 excludes net pre-tax unrealized gains (losses) on certain foreign currency derivative contracts of $28.9 million and $(23.8) million, respectively.
(d)
Deviation from average heating degree days for the 15-year period 2002-2016 at locations in our UGI International service territories.

Average temperatures during Fiscal 2018 were approximately 5.3% warmer than normal and 5.9% warmer than Fiscal 2017. Total retail gallons sold during Fiscal 2018 were higher reflecting incremental LPG retail gallons sold from our October 2017 acquisition of UniverGas. Our existing businesses’ retail volumes were slightly lower than the prior year as slightly higher bulk sales late in the heating season were offset by the effects of warmer weather and lower crop-drying volumes early in Fiscal 2018. During Fiscal 2018, average wholesale prices for propane and butane in northwest Europe were approximately 23% and 19% higher than in Fiscal 2017, respectively.

UGI International base-currency results are translated into U.S. dollars based upon exchange rates experienced during the reporting periods. The functional currency of a significant portion of our UGI International results is the euro and, to a much lesser extent, the British pound sterling. During Fiscal 2018 and Fiscal 2017, the average unweighted euro-to-dollar translation rates were approximately $1.19 and $1.11, respectively, and the average unweighted British pound sterling-to-dollar translation rates were approximately $1.35 and $1.27, respectively. Although the euro and British pound sterling were stronger during Fiscal 2018 and affect the comparison of line item amounts presented in the table above, the beneficial impact of the stronger currencies on net income was substantially offset by net losses on foreign currency exchange contracts.

UGI International revenues increased $806.3 million during Fiscal 2018 reflecting approximately $439 million of combined incremental revenues from UniverGas and DVEP, higher LPG selling prices and the translation effects on our existing businesses’ revenues of the stronger euro and British pound sterling. The higher LPG selling prices reflect in large part the effects of higher LPG product costs. UGI International cost of sales increased $684.8 million during Fiscal 2018 reflecting approximately $381 million of incremental cost of sales associated with UniverGas and DVEP, the effects on cost of sales from the higher average LPG commodity costs, and the translation effects of the stronger euro and British pound sterling.


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The increase in total margin principally reflects the translation effects of the stronger euro and British pound sterling on margin (approximately $80 million), incremental margin from UniverGas and DVEP ($58 million), and slightly higher natural gas margin from our existing energy marketing business. These increases in margin were partially offset by slightly lower total margin from our existing retail LPG business reflecting in large part lower Fiscal 2018 income on foreign currency exchange contracts. Total margin from our existing natural gas business increased approximately $4.9 million reflecting higher subscription fee margin partially offset by lower average unit margins during Fiscal 2018.

The $27.4 million increase in UGI International operating income principally reflects the previously mentioned $121.5 million increase in total margin partially offset by a $77.0 million increase in operating and administrative expenses and a $23.2 million increase in depreciation and amortization expense. The increase in operating and administrative expenses principally reflects the translation effects of the stronger euro and British pound sterling on local currency expenses (approximately $45.0 million) and approximately $39 million of incremental expenses from UniverGas and DVEP. Our existing businesses’ local currency operating and administrative expenses, excluding Finagaz integration costs, were slightly lower than the prior year as lower compensation and benefits expense and lower tank and cylinder repair costs were largely offset by higher compliance costs associated with energy conservation and operational safety requirements and slightly higher distribution costs. Operating and administrative expenses in Fiscal 2018 and Fiscal 2017 include $30.5 million and $39.9 million of Finagaz integration costs, respectively. The increase in depreciation and amortization principally reflects incremental amounts associated with UniverGas and DVEP ($9.9 million) and the translation effects of the stronger currencies. UGI International income before income taxes increased $13.8 million principally reflecting the previously mentioned $27.4 million increase in UGI International operating income reduced by higher realized losses on foreign currency exchange contracts ($12.7 million) and slightly higher interest expense due to the effects of the stronger euro.

Midstream & Marketing
 
2018
 
2017
 
Increase
(Dollars in millions)
 
 
 
 
 
 
 
 
Revenues
 
$
1,421.7

 
$
1,121.2

 
$
300.5

 
26.8
%
Total margin (a)
 
$
330.9

 
$
264.5

 
$
66.4

 
25.1
%
Operating and administrative expenses
 
$
114.0

 
$
95.6

 
$
18.4

 
19.2
%
Operating income
 
$
173.9

 
$
139.2

 
$
34.7

 
24.9
%
Income before income taxes
 
$
176.3

 
$
141.4

 
$
34.9

 
24.7
%
(a)
Total margin represents total revenues less total cost of sales. Total margin for Fiscal 2018 and Fiscal 2017 excludes net pre-tax (losses) gains of $(1.4) million and $55.7 million, respectively, on commodity derivative instruments not associated with current-period transactions.

Temperatures across Midstream & Marketing’s energy marketing territory were approximately 1.5% warmer than normal during Fiscal 2018 but approximately 12.0% colder than Fiscal 2017. Midstream & Marketing’s Fiscal 2018 revenues were $300.5 million higher reflecting higher natural gas ($210.6 million) and retail power marketing ($15.0 million) revenues; higher revenues from midstream assets ($62.4 million), principally higher natural gas gathering, peaking, and capacity management revenues; and higher electric generation revenues ($13.1 million). The increase in