UGI Corporation

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UGI Corporation

460 North Gulph Road
P.O. Box 858
Valley Forge, Pennsylvania 19482
U.S.A.
(610) 337–1000
Fax: (610) 768–7696

Public Company
Incorporated: 1882 as United Gas Improvement Co.
Employees: 5,789
Total Assets: $2.1 billion
Stock Exchanges: New York Philadelphia
SICs: 4911 Electric Services; 4924 Natural Gas Distribution;
5984 LP Gas (Propane) Dealer

UGI Corporation is a holding company with two principal subsidiaries. UGI Utilities, Inc. owns and operates natural gas and electric utilities in 14 counties of eastern and central Pennsylvania. AmeriGas Partners, L.P. distributes propane gas in 43 states. Between 1987 and 1991, UGI was the nation’s tenth most profitable energy–gas distributor, averaging an annual return of 11.7 percent on equity.

UGI is the oldest public–utility holding company in the United States, having been incorporated in 1882 as the United Gas Improvement Co. The company was founded by Philadelphia businessmen to introduce a new process for the manufacture of “water gas”—made by combining air and steam with coal—in place of the older method of making illuminating gas from the distillation of coal. The new Lowe process exposed water–gas vapors to a thin stream of petroleum naphtha, enriching the gas with hydrocarbons from the oil and producing almost twice the candle power of coal gas at less cost. United Gas Improvement manufactured, sold, and installed equipment needed for the Lowe process. The company also leased the production and distribution facilities of existing gas works, operated the plants, and sold the gas.

Within its first year of operation, United Gas Improvement began acquiring interests in local gas works in various parts of the country, in what was perhaps the first attempt to bring several independent and geographically separated public utilities under one management. United Gas Improvement (or UGI, as it became known) also acquired extensive interests in electric utilities and electric street railways, particularly in New York, Connecticut, northern New Jersey, and eastern Pennsylvania.

The establishment of UGI initially required some rather complex business transactions; the stocks of the gas companies acquired were placed in the hands of a trustee, since Pennsylvania law did not allow one corporation to hold the securities of another. To simplify this cumbersome process, UGFs founders acquired the charter of the Union Co. Formerly known as the Union Contract Co., this company had been granted a charter in 1870 by a special act of the Pennsylvania legislature and was thereby allowed to purchase and own the securities of other corporations. The name of the Union Co. was changed to The United Gas Improvement Co. in 1888, and, the following year, the new company acquired the assets of the old United Gas Improvement Co. By 1902, the company held interests in 45 firms providing gas, electric, and railway service across the country.

In 1897, UGI secured a 30–year lease from Philadelphia to run the city gas works. UGI would continue to lease and manage Philadelphia’s gas works until the early 1970s, when it was replaced by a city–owned nonprofit corporation. By that time, the works was the largest municipally owned gas operation in the United States.

In 1925, UGI merged with the American Gas Co., and, two years later, it acquired the Philadelphia Electric Co. The company diversified into heavy construction during this time, forming, through United Engineers & Constructors, Inc., the largest general engineering and construction firm in the United States. UGI also held a minority interest in Samuel Insull’s Midland Utilities, which operated in more than 5,000 communities in over 32 states. By the end of 1934, UGI directly or indirectly had interests in 55 subsidiary companies, stretching from New Hampshire to Arizona. Most of these companies were fully owned by UGI.

Thanks to conservative management, the utility holding company suffered relatively little from the Great Depression. Dividends paid by its utility subsidiaries fell only 10.6 percent between 1931 and 1938. However, according to some critics at the time, UGI was doing too well. Writing in The Nation, Isidor Feinstein alleged that “The same group sits on both sides of the table in fixing management fees, construction costs, and financing charges,” and that without federal regulation the consumer was paying “a premium on inefficient operation, costly management, and a bloated capital structure.” UGI’s various subsidiaries, Feinstein noted, were providing the parent company with average annual returns ranging from 11 percent to as high as 84 percent.

In 1935, the U.S. Congress passed the Public Utility Holding Company Act, which required utility holding companies to register with the Securities and Exchange Commission (SEC). The act also gave the Federal Power Commission and the Federal Trade Commission authority to regulate interstate transmission of electric power and gas, respectively, and restricted electric and gas holding companies to single and concentrated systems confined to a single area. Contending that the act was unconstitutional, UGI management sought injunctions to restrain the government from enforcing it.

Although UGI eventually lost its court battle, the company continued to grow and, by the end of 1940, was at the peak of its power. Operating in 11 states, UGI held investments in four sub–holding companies, 38 gas and electric utilities, and 48 nonutility companies, including water, transit, ice, and cold–storage firms. It had 120,000 stockholders and assets of $846 million.

In 1941, the SEC directed UGI to divest itself of properties in Arizona, Connecticut, Illinois, Indiana, Michigan, New Hampshire, New Jersey, Ohio, and Tennessee. As a result, UGI was restricted to one compact property largely intrastate in character. In 1943, UGFs subsidiaries were selling electricity or gas to more than five million customers in seven states, but, by the end of 1953, these operations were limited to eastern Pennsylvania. Ironically, when the company’s government–mandated divestiture plan was filed in 1942, investors decided that less was more; UGFs common stock jumped from $4 to $6 per share and reached $9.88 in 1943, before UGI distributed to shareholders stock representing some two–thirds of its assets.

In 1952, the SEC approved a plan to reorganize UGI by dissolving the holding company structure, merging its remaining subsidiaries into UGI, which became a Pennsylvania public–utility operating company, dissolving its nonutility subsidiaries, and disposing of its stock in nonsubsidiary companies. On the last day of 1952, seven Pennsylvania public–utility subsidiaries, including management of the city–owned Philadelphia Gas Works Co., were merged into the new UGI. The company’s assets of $75 million were less than one–tenth of its prewar total; even its Philadelphia Electric subsidiary had been stripped. The name of the parent company was officially changed to UGI Corporation on July 1, 1968.

The UGI system converted from manufactured gas to natural gas during the 1950s. Most of UGFs customers were residential, with industrial sales accounting for only 15 percent of gas consumption in 1955. To promote greater industrial use of natural gas, the company instituted a special summer industrial rate to drum up business during the slack season. At the same time, UGI was striving to convince homeowners to convert to gas heat as well as to win business from buyers of new homes. Only 11 percent of all homeowners in the company’s area of operation had gas heat in 1956, excluding the territory of the Philadelphia gas works, where most households were cooking and heating with manufactured gas. UGFs efforts were so successful that between 1955 and 1971 its gas sales increased fivefold.

A majority–owned UGI subsidiary called Ugite Gas, Inc. entered the unregulated liquefied petroleum (LP) gas business in 1959 by acquiring three companies serving communities in eastern Pennsylvania and Maryland. Operations soon were extended to western Pennsylvania and eastern Ohio as well. By 1973, Ugite had expanded its “bottled gas” service to 35 locations in eight states, including Kentucky and Tennessee. Between 1974 and 1976, the subsidiary acquired more LP–gas properties in Florida, Alabama, and Georgia, adding annual volume of nine million gallons to its propane sales.

The principal LP gases, propane and butane, were separated from natural gas at processing plants and from crude oil at refineries. Stored and transported in a liquid state, propane vaporized to a clean–burning gas with properties similar to natural gas. The retail segment of the propane business was attractive to UGI because it was a distribution business similar to that of a local natural gas company and one with the same types of customers, who used the fuel primarily for heating. Moreover, unlike a natural–gas utility, the retail sale of propane was unregulated and free to spread geographically. Perhaps most importantly, however, it required only small capital investment. In 1977, additional propane distribution and storage facilities in New York, Pennsylvania, and North Carolina brought sales up to approximately 78 million gallons of propane.

During this time, Ugite was the company’s LP–Gas Division and a holding company for UGFs expansion in compressed gases. Newly acquired SEC Corp. of El Paso, Texas, a producer and distributor of carbon dioxide and other gases in 16 states, became the Carbon Dioxide Division. In 1977, a new subsidiary, AmeriGas, was established, succeeding Ugite as the parent of the LP–Gas and Carbon Dioxide Divisions. A year later, AmeriGas acquired Northern Gases and Manitowoc Gases, the only producers of industrial gases in Wisconsin; this acquisition formed the new Industrial Gases Division, a producer and distributor of oxygen, nitrogen, argon, and acetylene. AmeriGas also produced and sold welding equipment and supplies.

UGI responded to the energy crisis by forming a division to explore for natural gas. It acquired oil and gas rights on 75,000 acres in western and central Pennsylvania and began exploratory drilling in 1974. Three years later, UGI formed a joint venture with Amoco Production Co. to search for oil and gas on more than a million acres of southwestern Pennsylvania. In 1979, all of the company’s oil and gas activities were transferred to a new wholly owned subsidiary, UGI Development Co., the consolidation of which was completed in 1981. Gas production began in 1977, and four drilling rigs were operating in 1980.

By 1980, UGI was shifting its focus from its core gas and electric distribution to substantial interests in a half–dozen energy–related activities. Company president Thomas Lefevre related that UGI intended to shift its income ratio from three–fourths regulated utility business to half utility and half nonutility business within three to four years. Propane and industrial gases appeared to be a lucrative field for expansion, with operating income from AmeriGas having risen 48 percent during the period between mid–1979 and mid–1980, compared to eight percent from natural gas and electric utilities.

By the end of 1981 UGI was the leading supplier of carbon dioxide to the nation’s oilfields, where it was used to stimulate well production. AmeriGas was producing carbon dioxide from eight production plants and two natural wells. The company also expected other industrial gases to enjoy rapid growth in the upcoming years. It completed an air–separation plant in 1981 to produce nitrogen for oilwell stimulation and had begun construction on a second plant.

The early 1980s were a period of rapid expansion for UGI, as it acquired several companies that serviced oilfields. However, by the mid–1980s the oil and gas drilling activity stimulated by the hikes in energy prices during the 1970s had collapsed, forcing UGI to make cuts. In 1983, UGI sold half of its LP–Gas Division and formed AP Propane, Inc., a joint venture with the Prudential Insurance Company. In mid–1986 only five UGI oil and gas drilling and supplying companies in three markets were still operating, as compared to 12 in seven markets at the end of 1985. Moreover, UGFs oil and gas work force was cut from 1,130 to less than 500. The company took a $45.7 million writedown of oil and gas assets and other investments in 1985 and reported a rare annual loss.

Between 1986 and 1987 UGI Development Co. discontinued all its oil and gas activities, including selling a significant portion of its oilfield service operations to UTI Energy Corp. In 1987, as part of UGFs strategy of focused growth in propane, AmeriGas, through the AP Propane joint venture, acquired Cal Gas Corporation and instantly became the nation’s fourth largest propane marketer. At the time, Cal Gas was three times the size of the AmeriGas propane operations. Over the next few years, AmeriGas withdrew from the industrial gases industry in a series of seven transactions, selling practically all the operating assets of its industrial gases and carbon dioxide divisions to the BOC Group, Inc. for about $146 million. James A. Sutton, chair and chief executive officer, told shareholders at UGFs 1990 annual meeting that its divestiture of oil and gas and industrial gases businesses since 1986 had “transformed the company from one operating in four distinct industries through over 20 separate businesses into a company focused in two industries with three businesses.”

In 1990 AmeriGas took total control of the joint venture established with Prudential in 1983, buying Prudential’s 49 percent stake in AP Propane Inc. for $63 million. This company was then merged into AmeriGas Propane. The following year, UGI was reincorporated in Pennsylvania, emerging as a restructured holding company by the same name. The former UGI Corporation was renamed UGI Utilities, Inc. This subsidiary operated the regulated Pennsylvania electric and gas utilities, while AmeriGas, Inc. conducted propane distribution through AmeriGas Propane, Inc., its wholly owned subsidiary.

In 1993, UGI acquired a significant interest in and management of debt–laden Petrolane, Inc., one of the nation’s largest marketers of propane, through a prepackaged plan of reorganization under Chapter 11 of the U.S. Bankruptcy Code. The company hoped to turn Petrolane around financially and to combine it with its AmeriGas Propane operations. By early 1994 Amerigas and UGI had acquired 35 percent of Petrolane. UGI also announced plans to acquire the remaining 65 percent in 1995 and to form a master limited partnership in which AmeriGas would hold a majority interest.

During fiscal 1994,48 percent of UGI’s revenue and 57 percent of its operating income came from propane. Forty–four percent and eight percent of revenues, and 47 percent and seven per–cent of operating income came from gas and electric utilities, respectively. The electric utility was serving 60,000 customers in parts of two northeastern Pennsylvania counties (Luzerne and Wyoming), from a generating plant near Kingston, Pennsylvania, in operation since 1959. The natural gas utility was serving 14 counties in eastern and south–central Pennsylvania, with about 238,000 customers receiving natural gas in 1994 through a distribution system of 3,965 miles of gas mains. Moreover, AmeriGas and Petrolane constituted the nation’s largest propane marketing network, serving 890,000 customers from 572 district locations in 43 states. Propane Transport, Inc., an AmeriGas subsidiary, also transported ammonia and propane for other companies.

In April 1995 UGI completed the acquisition of the remaining 65 percent of Petrolane and combined the operations of Petrolane and AmeriGas Propane into one entity—AmeriGas Partners, L.P., a master limited partnership—owner and operator of the nation’s largest retail propane marketing organization. AmeriGas then owned 59 percent of the partnership. The remaining partnership units were publicly held and traded on the New York Stock Exchange under the symbol APU. The purchase of the unowned equity in Petrolane, the initial public offering of the partnership units and related financings had an aggregate value of $1.2 billion.

James A. Sutton, UGFs chairperson and chief executive officer, stated that the UGI–and AmeriGas–led transactions had strengthened the balance sheet of the combined propane business by reducing its debt from approximately 76 percent of total capital to 53 percent. Sutton also noted that consolidation of AmeriGas Partners’s assets with UGI’s made UGI a $2 billion company with approximately 70 percent of its assets in the unregulated propane industry.