Ultrapar Participações (UGP) 20-F2022 FY Annual report (foreign)

PART I

Not applicable.

Not applicable.

D.   Risk factors

Investing in our shares and ADSs involves a high degree of risk. You should carefully consider the risks described below and the other information contained in this annual report in evaluating an investment in our shares or ADSs. Our businesses, results of operations, cash flow, liquidity and financial condition could be harmed if any of these risks materializes and, as a result, the trading price of the shares or the ADSs could decline and you could lose a substantial part or even all your investment.

We have included information in these risk factors concerning Brazil based on information that is publicly available. Other risks that we do not presently know about or deem as immaterial could also cause adverse effects on our businesses, operations, financial condition and results of operations.

Summary of risk factors

Risks relating to Ultrapar and its industries

• Petrobras is the main supplier of LPG and oil-based fuels in Brazil. Fuel and LPG distributors in Brazil, including Ipiranga and Ultragaz, have formal contracts with Petrobras for the supply of oil-derivatives. Any material delay or interruption in the supply of LPG or oil-based fuels from Petrobras would immediately affect Ultragaz’s or Ipiranga’s ability to provide LPG and oil-based fuels to their customers. In addition, Petrobras’ current divestment plan may have an adverse effect in our businesses;
• Intense competition is generally inherent to distribution markets, including the LPG and the fuel distribution markets and may affect our operating margins;
• Anticompetitive practices in the fuel distribution sector may distort market prices;
• LPG and oil-based fuels compete with alternative sources of energy. Competition with and the development of alternative sources of energy in the future may adversely affect the LPG and oil-based fuels market;
• Our businesses would be materially adversely affected if operations at our transportation and distribution facilities experienced significant events outside of our control;
• We may be adversely affected by changes to specific laws and regulations in our operating sectors;
• Any change in our senior management and any difficulty in retaining, attracting and replacing qualified personnel could affect our ability to grow and could have an adverse effect on our activities, financial condition and results of operations;
• Our level of indebtedness may require us to use a significant portion of our cash flow to service such indebtedness;
• Higher LPG, fuels and other raw material costs could increase cost of products sold and decrease gross margin, adversely affecting our total operating result. Our exposure to cost volatility and other events related to these products could have a material adverse effect on our businesses, financial condition, and results of operations;
• Our businesses may be materially and adversely affected by the outbreak of communicable diseases, such as the COVID-19 pandemic, or other epidemics or pandemics;
• We are subject to extensive federal and state legislation and regulation by governmental agencies responsible for implementing environmental and health laws and policies in Brazil;
• Our businesses, financial condition and results of operations may be materially and adversely affected by a general economic downturn and by instability and volatility in the financial markets, including as a result of the conflict between Ukraine and Russia;
• Our insurance coverage may be insufficient to cover losses that we might incur;

• The suspension, cancellation or non-renewal of certain tax benefits may adversely affect our results of operations;
• No single shareholder or group of shareholders holds more than 50% of our capital stock, which may increase the opportunity for alliances between shareholders and other events that may occur as a result thereof;
• As a result of acquisitions, Ultrapar has assumed and may assume in the future certain liabilities related to the businesses acquired or to be acquired. Additionally, Ultrapar has assumed and may assume certain risks associated with acquisitions and divestments, including regulatory risks;
• The founding family and part of our senior management, through their ownership interest in Ultra S.A. and Parth, own a significant portion of our shares and may influence the management, direction and policies of Ultrapar, including the outcome of any matter submitted to the vote of shareholders;
• Our status as a holding company may limit our ability to pay dividends on the shares and consequently, on the ADSs;
• Failure to comply with, obtain or renew the licenses and permits required for each of the sectors in which we operate may have a material adverse effect on us;
• Our governance and compliance processes may fail to prevent regulatory penalties and reputational harm;
• Information technology failures, including those that affect the privacy and security of personal data, as a result of cyber-attacks or other causes, could adversely affect our businesses and the market price of our shares and ADSs; and
• The production, storage and transportation of LPG and other fuels are inherently hazardous.

Risks relating to Brazil

• The Brazilian government has exercised, and continues to exercise, significant influence over the Brazilian economy. Brazilian political and economic conditions, including ongoing political instability and perceptions of these conditions in the international markets, could adversely affect our businesses and the market price of our shares and ADSs;
• Inflation and certain governmental measures to curb inflation, including as a result of the COVID-19 pandemic, may contribute significantly to economic uncertainty in Brazil and could harm our businesses and the market value of the ADSs and our shares;
• Exchange rate instability may adversely affect our financial condition, results of operations and the market price of the ADSs and our shares;
• Economic and market conditions in other countries, including in the United States and emerging market countries, may materially and adversely affect the Brazilian economy and, therefore, our financial condition and the market price of the shares and ADSs;
• Holders of our ADSs may face difficulties in serving process on or enforcing judgments against us and other relevant persons;
• Due to concerns about the risks of climate change, a number of countries, including Brazil, have adopted or are considering adopting regulatory frameworks which could adversely affect our businesses, financial condition and results of operations;
• We may be adversely affected by the imposition and enforcement of more stringent environmental laws and regulations, including as a result of rising climate change concerns, that may result in increased costs of operation and compliance, as well as a decrease in demand for our products; and
• Floods, storms, windstorms, rise in sea level and other climate change events could bring harm to our facilities, thus affecting our financial position and results of our operations.

Risks relating to our common shares and ADSs

• Asserting limited voting rights as a holder of ADSs may prove more difficult than for holders of our common shares;
• Holders of our shares or ADSs may not receive dividends;
• Holders of our shares may be unable to exercise preemptive rights with respect to the shares;
• If shareholders exchange ADSs for shares, they may lose certain foreign currency remittance and Brazilian tax advantages;
• Changes in Brazilian tax laws may have an adverse impact on the taxes applicable to a disposition of our ADSs;
• Substantial sales of our shares or our ADSs could cause the price of our shares or our ADSs to decrease; and
• There may be adverse U.S. federal income tax consequences to U.S. holders if we are or become a PFIC under the Code.

Risks relating to Ultrapar and its industries

Petrobras is the main supplier of LPG and oil-based fuels in Brazil. Fuel and LPG distributors in Brazil, including Ipiranga and Ultragaz, have formal contracts with Petrobras for the supply of oil-derivatives. Any material delay or interruption in the supply of LPG or oil-based fuels from Petrobras would immediately affect Ultragaz’s or Ipiranga’s ability to provide LPG and oil-based fuels to their customers. In addition, Petrobras’ current divestment plan may have an adverse effect in our businesses.

Prior to 1995, Petrobras held a constitutional monopoly for the production and importation of petroleum products in Brazil. Although this constitutional monopoly was formally terminated pursuant to an amendment to the Brazilian constitution enacted in 1995, Petrobras effectively remains the main provider of LPG and oil-based fuels in Brazil. In 2022, 86% of all the LPG purchased by Ultragaz was supplied by Petrobras and 14% was supplied by other companies.

With respect to fuel distribution, Petrobras also supplied the majority of Ipiranga and other distributors’ oil-based fuel requirements in 2022. Petrobras’ supply to Ipiranga is governed by an annual contract, under which the supply volume is established based on the volume purchased in the previous year. For further information, see “Item 4.B. Information on the Company—Business overview—Industry and regulatory overview—C. Fuel distribution—Ipiranga—Supply of fuels.”

Significant interruptions or delays of LPG and oil-based fuel supply from Petrobras could occur in the future. Any interruption in the supply of LPG or oil-based fuels from Petrobras would immediately affect Ultragaz or Ipiranga’s respective ability to provide LPG or oil-based fuels to its customers, and material delays in the supply could also impact our operations.

Additionally, Petrobras announced in 2021 that it would cease to guarantee the supply of fuels to the Brazilian market and informed distributors that a portion of their fuel purchase orders would not be fully met. As a result, fuel distribution companies, including Ipiranga, were required to purchase part of their fuels needs in the international market. Although Petrobras has adopted a pricing policy of pegging domestic fuel prices to international rates, during some periods the prices at which our products are imported or bought from other companies might be materially different from those charged by Petrobras. If we are not able to obtain an adequate volume of LPG or oil-based fuel at competitive prices or pass on the increase in costs to our customers, our operating margins, market share, financial condition and results of our operations may be adversely affected.

Moreover, Petrobras has made several changes to the composition of its management team and has undertaken a long-term divestment plan. We may be impacted by the privatization of some of the refineries owned by Petrobras, which could result in the adoption of different pricing and more restrictive supply policies, limiting our access to oil derivatives or affecting our costs, gross margins, and sales volumes. The current divestment plan suggests that Petrobras is scaling back its positions in refining and logistics, which may cause disruption in logistics services, changes to distribution policies and adversely affect the competitiveness of fuel distributors. It is not clear how these changes or any future changes in management may impact price adjustment policy and change the structure and long-term outlook of the fuel market. In addition, we cannot predict how the new elected government of Brazil will change the divestment plan implemented during the prior government.

Our businesses would be materially adversely affected if operations at our transportation and distribution facilities experienced significant events outside of our control.

The distribution of LPG and fuels is subject to inherent risks, including interruptions or disturbances in the distribution system which may be caused by accidents or force majeure events, such as the COVID-19 pandemic. Our operations are dependent upon the uninterrupted operation of our terminals, storage and distribution facilities and various means of transportation. We are also dependent upon the uninterrupted operation of certain facilities owned or operated by our suppliers. Operations at our facilities and at the facilities owned or operated by our suppliers could be partially or completely shut down, temporarily or permanently, as the result of any number of circumstances that are not within our control, such as:

• Catastrophic events, including hurricanes and floods;
• Social and economic conflicts, terrorist events and wars, such as the ongoing conflict between Russia and Ukraine;
• Epidemics and pandemics, such as the COVID-19 pandemic (see “—Our businesses may be materially and adversely affected by the outbreak of communicable diseases, such as the COVID-19 pandemic, or other epidemics or pandemics”);
• Environmental matters (including environmental licensing processes or environmental incidents, contamination, and others);
• Labor difficulties (including work stoppages, strikes and other events); and
• Disruptions in our means of transportation, affecting the supply of our products.

Any significant interruption at these facilities or inability to transport products to or from these facilities or to our customers for any reason could subject us to liability in judicial, administrative, or other proceedings, including for disruptions caused by events outside of our control, which could materially affect our businesses and results.

Our businesses are also subject to stoppages and blockades of highways and other public roads, such as the Brazilian truck drivers’ strike in May 2018, when truck drivers started a nationwide strike demanding the reduction in taxes levied on diesel and changes to the fuel prices policy adopted by Petrobras. The stoppages and blockages of highways and other public roads may impact our businesses and financial results.

We may be adversely affected by changes to specific laws and regulations in our operating sectors.

We are subject to extensive federal, state and local legislation and regulation by government agencies and sector associations in the industries we operate. Rules related to quality of products, product storage, staff working hours, among others, may become more stringent or be amended overtime, and require new investments or the increase in expenses so our operations are in compliance with the applicable rules. Changes in specific laws and regulations in the sectors we operate may adversely affect the conditions under which we operate in ways that could have a materially negative effect on our businesses and our results.

Any change in our senior management and any difficulty in retaining, attracting and replacing qualified personnel could affect our ability to grow and could have an adverse effect on our activities, financial condition and results of operations.

Our success depends, in part, on the efforts and skills of our senior management and key personnel. The loss or failure to retain one or more of our key personnel could adversely affect our businesses. Our success also depends, in part, on our continued ability to identify, hire, attract, train, develop and retain other highly qualified employees. Competition for these employees can be intense and we may not be able to attract and retain them. If we are unable to attract or retain qualified professionals to manage and expand our operations, we may not be able to conduct our businesses and, as a result, our operating and financial results may be adversely affected.

Our level of indebtedness may require us to use a significant portion of our cash flow to service such indebtedness.

As of December 31, 2022, our consolidated Gross Debt was R$13,274.1 million (US$2,542.9 million) and our net cash provided by operating activities from continuing operations totaled R$1,974.1 million (US$382.2 million). The level and composition of our indebtedness could have significant consequences for us, including requiring a portion of our cash flow from operations to be committed to the payment of principal and interest on our indebtedness, thereby reducing the available cash to finance our working capital and investment.

Higher LPG, fuels and other raw material costs could increase cost of products sold and decrease gross margin, adversely affecting our total operating result. Our exposure to cost volatility and other events related to these products could have a material adverse effect on our businesses, financial condition, and results of operations.

LPG, fuels and the main raw materials used in the distribution of our main products are subject to substantial price fluctuations, particularly those whose prices are denominated in foreign currency. Such fluctuations could have a material adverse effect on our businesses, financial condition, and results of operations. The prices of LPG, fuels and other raw materials are influenced by several factors over which we have little or no control, including, but not limited to, weather, agricultural production, international and national political and economic conditions, transportation and processing costs, regulations and government policies, and the relationship between world supply and demand. In addition, we may not be able to pass through to our customers, in due course, increases in LPG, fuels and other raw material costs and other operating costs related to the distribution of our products, which could decrease our profit margin and cause a material adverse effect in our activities, financial condition, and operating results.

Our businesses may be materially and adversely affected by the outbreak of communicable diseases, such as the COVID-19 pandemic, or other epidemics or pandemics.

Historically, some regional or global epidemics and outbreaks, such as the one caused by the Zika virus, the one caused by the Ebola virus, the H5N5 virus (popularly known as avian flu), the foot-and-mouth disease, the H1N1 virus (influenza A, popularly known as swine flu), the Middle East Respiratory Syndrome (MERS) and the Severe Acute Respiratory Syndrome (SARS) have affected certain sectors of the economy in countries where these diseases have spread. On March 11, 2020, the World Health Organization declared a pandemic, due to the global spread of COVID-19, a disease caused by the coronavirus (Sars-Cov-2). In response, the Brazilian Ministry of Health and the state and municipal governments have implemented policies designed to prevent or delay the spread of the disease, such as the restriction on circulation of people and social isolation, including the closing of commerce, parks and common areas. As a result, our businesses were materially and adversely affected by the COVID-19 pandemic and may be materially and adversely affected by the outbreak of other communicable diseases, including epidemics and pandemics.

The enactment of government policies and restrictions on the circulation of people and/or the operations of certain sectors of the economy led to a strong decline on demand (especially in 2020) and disruptions in the supply and value chains. The dissemination of COVID-19 also made us change our businesses’ practices, including additional hygienic practices for workplaces and employees and the adoption of remote working, considering the best interests and safety of our workforce, customers, and business partners. In addition, the COVID-19 pandemic has affected business and economic sentiment, causing significant volatility in global capital and commodity markets, and affecting the outlook of the economy of Brazil and other countries.

The implemented measures of social distancing, restrictions on the mobility of people and the operation of certain businesses due to the COVID-19 pandemic affected economic activity in Brazil over the last few years; however, these negative impacts were mitigated as local governments gradually lifted such restrictions in response to the increase in COVID-19 vaccinations. No significant effects were observed on the operations of the Company and its subsidiaries for the year ended December 31, 2022.

A global pandemic can also precipitate or exacerbate the other risks described in this annual report, which in turn could further materially and adversely affect our businesses, financial condition, results of operations, cash flows, prospects and the market price of our securities, including in ways not currently known or considered by us to present material risks.

We are subject to extensive federal and state legislation and regulation by governmental agencies responsible for implementing environmental and health laws and policies in Brazil.

Like other similar companies, our subsidiaries must obtain permits for its industrial facilities from the appropriate environmental agencies, which may create additional regulations for our operations by prescribing specific environmental standards in their operating licenses.

Changes in these laws and regulations, or in their enforcement, may adversely affect the Company by increasing its compliance and operating costs. Furthermore, additional new laws and regulations, as well as more stringent interpretation of existing laws and regulations, may require additional investments for the Company to maintain its operations in compliance with legislation, which could increase costs and adversely affect results.

In addition to regulatory issues, our environmental risks are mainly related to the use of water (especially in areas of water scarcity), the generation and disposal of waste and the contamination of soil and water.

In our operations, water is mainly used in emergencies involving fires. Our operations also generate waste, such as contaminated waste, civil construction waste, and others. Finally, soil and water contamination can occur due to leaks from products stored and transported by the group's companies. The occurrence of such events could result in fines, loss of operating licenses and reputational harm, consequently affecting our results and financial position.

Our businesses, financial condition and results of operations may be materially and adversely affected by a general economic downturn and by instability and volatility in the financial markets, including as a result of the conflict between Ukraine and Russia.

The turmoil of the global financial markets and the scarcity of credit in the past led to lack of consumer confidence, increased market volatility and widespread reduction of business activity. An economic downturn could materially and adversely affect the liquidity, businesses and/or financial conditions of our customers, which could in turn result not only in decreased demand for our products, but also increased delinquencies in our accounts receivable.

On February 24, 2022, a full-scale military invasion of Ukraine by Russian troops was reported. Since then, global markets have been experiencing volatility and disruption following the escalation of geopolitical tensions and the start of the military conflict between these countries. Although the length and impact of the ongoing military conflict are highly unpredictable, the conflict in Ukraine has led and could further lead to market disruptions, including significant volatility in commodity prices, including crude oil and natural gas, which could impact the prices of LPG and oil-based fuel, and demand in the markets in which we operate. Additionally, governments in the United States and many other countries have imposed economic sanctions on certain Russian individuals, including politicians, and Russian corporate and banking entities. These sanctions, or even the threat of further sanctions, could result in Russia taking countermeasures or retaliatory actions which may lead to further market disruptions and an increase in crude oil and natural gas prices globally, which could negatively impact our businesses and operations.

Moreover, an eventual new global financial crisis could have a negative impact on our cost of borrowing and on our ability to obtain future borrowings. The disruptions in the financial markets could also lead to a reduction in available trade credit, due to counterparties’ liquidity concerns. If we experience a decrease in demand for our products or an increase in delinquencies in our accounts receivable, or if we are unable to obtain borrowings our businesses, financial condition and results of operations could be materially adversely affected.

Our insurance coverage may be insufficient to cover losses that we might incur.

The specialized distribution and retail, as well as the operations of logistics of oil, LPG and fuels involve substantial risks of property damage and personal injury and may result in material costs and liabilities. Although we maintain insurance policies, the occurrence of losses or other liabilities that are not covered by insurance or that exceed the limits of our insurance coverage could result in significant unexpected additional costs.

The suspension, cancellation or non-renewal of certain tax benefits may adversely affect our results of operations.

Currently, we are entitled to tax benefits providing for income tax reduction for our activities in the Northeast region of Brazil, subject to certain conditions. Conversely, if the corresponding tax authorities understand that we have not complied with any of the tax benefit requirements or if the current tax programs from which we benefit are modified, suspended, cancelled, not renewed or renewed under terms that are substantially less favorable than expected, we may become liable for the payment of related taxes at the full tax rates and our results of operations may be adversely affected. Income tax exemptions amounted to R$93.4 million, R$47.1 million and R$46.1 million, for the years ended December 31, 2022, 2021 and 2020, respectively. See “Item 4.B. Information on the Company—Business overview—Industry and regulatory overview—A. Distribution of liquefied petroleum gas—Ultragaz—Income tax exemption status” and “Item 4.B. Information on the Company—Business overview—Industry and regulatory overview—B. Storage services for liquid bulk —Ultracargo—Income tax exemption status.”

No single shareholder or group of shareholders holds more than 50% of our capital stock, which may increase the opportunity for alliances between shareholders and other events that may occur as a result thereof.

No single shareholder or group of shareholders holds more than 50% of our capital stock. Due to the absence of a controlling shareholder, we may be subject to future alliances or agreements between shareholders, which may result in the exercise of a relevant influence over our Company by them. In the event a controlling group is formed and decides to exercise its influence over our Company, we may be subject to unexpected changes in our corporate governance and strategies, including the replacement of key executive officers. Any unexpected change in our management team, business policy or strategy, any dispute between our shareholders, or any attempt to acquire control of our Company may have an adverse impact on us. The term of office of our current Board of Directors, the members of which were elected at the Annual and Extraordinary General Shareholders’ Meeting held on April 19, 2023, will expire in the Annual General Shareholders’ Meeting to be held in 2025. Consequently, a new composition of the Board of Directors might be elected by our shareholders.

As a result of acquisitions, Ultrapar has assumed and may assume in the future certain liabilities related to the businesses acquired or to be acquired. Additionally, Ultrapar has assumed and may assume certain risks associated with acquisitions and divestments, including regulatory risks.

Ultrapar has assumed certain liabilities of previously acquired businesses; therefore, certain existing financial obligations, legal liabilities or other known and unknown contingent liabilities or risks of the businesses acquired have become Ultrapar’s responsibility. Ultrapar may acquire new businesses in the future and, as a result, it may be subject to additional liabilities, obligations and risks. See “Item 4.A. Information on the Company—History and development of the Company” for more information in connection with these acquisitions.

In addition, Ultrapar is subject to risks relating to acquisitions and divestments that it enters into from time to time. Such risks include that the approval of such transactions may ultimately be refused by the relevant regulatory bodies, including CADE.

These liabilities may cause Ultrapar to be required to make payments (including indemnifications and future claims in judicial and arbitral proceedings), incur charges or take other actions that may adversely affect our financial position and results of operations and the price of our shares.

For example, the sale of Oxiteno to Indorama was closed on April 1, 2022, and the sale of Extrafarma to Pague Menos was closed on August 1, 2022. Thus, these two companies ceased to be consolidated as subsidiaries of Ultrapar and we no longer control their management or operations since then. However, under the applicable sale agreements, we will remain liable for certain previously existing financial obligations, legal liabilities or other known and unknown contingent liabilities or risks associated with Oxiteno and Extrafarma that may, if materialized, adversely affect our businesses, operations and/or results. In addition, as of December 31, 2022, the payment installments due by Indorama and Pague Menos amounted to US$150.0 million (equivalent to R$783.0 million as of December 31, 2022) and two installments of R$182.7 million, respectively. If Indorama and/or Pague Menos fail to make these payments, we would be adversely affected.

The founding family and part of our senior management, through their ownership interest in Ultra S.A. and Parth, own a significant portion of our shares and may influence the management, direction and policies of Ultrapar, including the outcome of any matter submitted to the vote of shareholders.

Although there is no controlling shareholder of Ultrapar, the founding family and part of our senior management, through their ownership interest in Ultra S.A., beneficially own 25.1% of our outstanding common stock. Ultra S.A., together with Parth, another branch of the Igel family, entered into a shareholders’ agreement on May 2, 2018 relating to their Ultrapar shares. On August 18, 2020, Ultra S.A. and Parth entered into the 2020 Shareholders’ Agreement to include Pátria, in its capacity as Ultra S.A.'s shareholder then holding a 20% stake in Ultra S.A.'s capital stock, as consenting intervening party, therefore bound by the provisions of the 2020 Shareholders' Agreement. The 2020 Shareholders’ Agreement replaced the 2018 Shareholders’ Agreement in its entirety, and the terms and conditions remain substantially the same of the latter. On September 28, 2021, Ultra S.A. informed the Company that Mr. Marcos Marinho Lutz, our Chief Executive Officer, had become a shareholder of Ultra S.A., holding 2.4% of its capital stock, and also had become a consenting intervening party of the 2020 Shareholders’ Agreement. A total of 34.7% of the Company’s capital stock is bound by the 2020 Shareholder’s Agreement as of April 14, 2023. 

See “Item 4.A. Information on the Company—History and development of the Company”, “Item 7.A. Major shareholders and related party transactions—Major shareholders—Shareholders’ Agreements” and “Exhibit 2.10—Shareholders’ Agreement dated August 18, 2020.” Accordingly, these shareholders, acting together through Ultra S.A. and Parth, may exercise significant influence over all matters requiring shareholder approval, including the election of our directors.

Our status as a holding company may limit our ability to pay dividends on the shares and consequently, on the ADSs.

As a holding company, we have no significant operating assets other than the ownership of shares of our subsidiaries. Substantially all of our operating income comes from our subsidiaries, and therefore we depend on the distribution of dividends or interest on shareholders’ equity from our subsidiaries. Consequently, our ability to pay dividends depends solely upon our dividends and other cash flows from our subsidiaries.

Failure to comply with, obtain or renew the licenses and permits required for each of the sectors in which we operate may have a material adverse effect on us.

The Company's subsidiaries are in a constant process of obtaining or renewing the required permits to operate. Our subsidiaries must obtain and maintain such licenses and permits from different public bodies for the continuity of their activities. If the Company's subsidiaries are unable to obtain or renew all licenses and permits necessary to conduct their businesses and operations, the absence of such licenses could materially and adversely affect the Company's businesses, financial condition, and results of operations.

Our governance and compliance processes may fail to prevent regulatory penalties and reputational harm.

Our governance and compliance processes, which include reviewing internal controls over financial reporting, may not prevent future violations of applicable legal, anti-corruption, antitrust and conflicts of interest laws and regulations, accounting or governance standards. We may be subject to legal and regulatory violations and to breaches of our Code of Ethics, anti-corruption policies and commercial conduct protocols, and to instances of fraudulent behavior, corrupt, anticompetitive and unethical practices and dishonesty by our employees, contractors or other agents. In the recent past, anticompetitive practices have been one of the main problems affecting fuels and LPG distributors in Brazil, including Ipiranga and Ultragaz. There are allegations of cartels involved in price fixing in the fuel distribution and LPG sectors, and CADE has been targeting players of these sectors in different regions of Brazil. CADE has been actively investigating these sectors and a negative outcome of the ongoing investigations, administrative proceedings and lawsuits could have a material adverse effect on Ipiranga and Ultragaz. Our failure to comply with applicable laws and other standards could subject us to, among others, litigation, investigations, expenses, fines, loss of operating licenses and reputational harm. For more information about ongoing proceedings, see “Item 8.A. Financial information—Consolidated statements and other financial information—Legal proceedings.”

In addition, our management is responsible for establishing and maintaining adequate internal controls over financial reporting as defined under the Exchange Act. During our assessment of our internal controls over financial reporting as of December 31, 2022, we identified a material weakness. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected on a timely basis. For more information, see “Item 15. Controls and Procedures”. If our efforts to remedy any identified inconsistencies and/or weaknesses are not sufficient, we could continue to experience material weaknesses in our internal controls in future periods which could result in a material misstatement in our consolidated financial statements.

Information technology failures, including those that affect the privacy and security of personal data, as a result of cyber-attacks or other causes, could adversely affect our businesses and the market price of our shares and ADSs.

We increasingly rely on information technology systems to process, transmit, and store electronic information. A significant portion of the communication between our personnel, customers, and suppliers depends on information technology. In addition, our billing systems relies heavily on technology infrastructure. As with all large systems, our information systems may be vulnerable to a variety of interruptions, due to events beyond our control including, but not limited to, natural disasters, terrorist attacks, telecommunications failures, computer viruses, hacker attacks, human errors or other security issues.

We depend on information technology to enable us to operate efficiently and interface with customers, as well as to maintain in-house management and control. We also collect and store non-public personal information that customers provide to purchase products or services, including personal information and payment information.

In addition, the concentration of processes in shared services centers means that any technology disruption could impact a large portion of our businesses within the operating regions we serve. Any transition of processes to, from or within shared services centers as well as other transformational projects, could lead to businesses’ disruptions. If we do not allocate, and effectively manage, the resources necessary to build and sustain the proper technology infrastructure, we could be subject to transaction errors, processing inefficiencies, loss of customers, operations disruptions, or the loss of or damage to intellectual property caused by security breach. As with all information technology systems, our system could also be penetrated by outside parties with the purpose of extracting information, corrupting information, or disrupting businesses’ processes.

In Brazil, we are subject to laws and regulations regarding data protection and privacy, including Brazilian Law No. 13,709/18 (Brazilian General Data Protection Law) or LGPD, which came into force on September 18, 2020. Inspired by the General Data Protection Regulation of the European Union, the LGPD sets forth a comprehensive set of rules on how companies, organizations and public authorities collect, use, process and store personal data when carrying out their activities.

The LGPD sets out a legal framework for the processing of personal data and provides, among others, for the rights of data subjects, the legal bases applicable to the protection of personal data, the requirements for obtaining consent, the obligations and requirements related to data breaches, requirements for international data transfers, among others. The LGPD also created the Autoridade Nacional de Proteção de Dados (National Data Protection Authority), or ANPD, responsible for enforcing the law. Most provisions of the LGPD entered into effect on September 18, 2020, while the provisions relating to administrative sanctions came into effect on August 1, 2021. On October 29, 2021, the Regulation on Supervision and Sanctioning Procedures approved by the ANPD was published, which governs, among other things, how the administrative sanctions provided for in the LGPD should be applied.

LGPD requires mandatory breach notification in case of relevant risk or damage to data holders and authorizes regulatory investigations that could lead to fines and other sanctions in case of non-compliance. As of the date of this annual report, we are not aware of any ongoing regulatory investigations affecting us. However, we cannot assure that we will not be subject to any such investigations and any resulting sanctions in the future, should any breaches take place.

LGPD, as well as any other changes to existing personal data protection laws, may subject us to, among other measures, additional costs and expenses, which would require costly changes to our businesses practices and security systems, policies, procedures and practices.

Our protections may be compromised as a result of third-party security breaches, burglaries, cyberattack, errors by employees or employees of third-party vendors, contractors, misappropriation of data by employees, vendors or unaffiliated third parties, or other irregularities that may result in persons obtaining unauthorized access to company data or otherwise disrupting our businesses.

For example, on January 11, 2021, an unauthorized party disrupted access to our IT systems, which caused a temporary interruption to our operations and resulted in the theft of certain proprietary data. On January 14, 2021, we began restoring the systems that were affected by this incident and all critical information systems have been fully operational since February 2021. No material impacts were incurred by the Company as a result of this event.

As of the date of this annual report, the Company does not carry insurance against cyber incidents. Therefore, similar interruptions, data breaches or any noncompliance with LGPD could have an adverse effect on our businesses, reputation, results of operations, cash flows or financial condition, or result in proceedings or actions against us, including the imposition of fines.

The production, storage and transportation of LPG and other fuels are inherently hazardous activities.

The operations performed by Ultrapar's businesses involve safety and other operational risks, including the handling, production, storage and transportation of highly flammable, explosive and toxic materials. These risks can result in bodily injury or death, damage to or destruction of facilities or equipment, and environmental damage. A sufficiently large accident at one of the service stations or storage facilities could force temporary suspension of activities at the site, resulting in significant remediation costs, lost revenues, and contingent liabilities. In addition, insurance coverage may not be available in a timely manner or may be insufficient to cover all losses. Equipment breakdowns, natural disasters and delays in obtaining imported products or spare parts or equipment could also affect the production process and, consequently, the results of operations and our reputation.

Risks relating to Brazil

The Brazilian government has exercised, and continues to exercise, significant influence over the Brazilian economy. Brazilian political and economic conditions, including ongoing political instability and perceptions of these conditions in the international markets, could adversely affect our businesses and the market price of our shares and ADSs.

The Brazilian government frequently intervenes in the Brazilian economy and occasionally makes substantial changes in policy and regulations. The Brazilian government’s actions to control inflation and affect other policies and regulations have involved price and wage controls, currency devaluations, capital controls, strong fiscal adjustments, and limits on imports, among other measures. Our businesses, financial condition and results of operations may be adversely affected by changes in policy or regulations involving or affecting tariffs, exchange controls and other matters, as well as factors such as:

• Currency fluctuations;
• Inflation;
• Interest rates;
• Exchange rate policies;
• Liquidity available in the domestic capital, credit and financial markets;
• Oil and gas sector regulations, including price policies;
• Payment business regulations;
• The impact of epidemics and pandemics; 
• Price instability;
• Social and political instability;
• Energy and water shortages and rationing;
• Liquidity of domestic capital and lending markets;
• Fiscal policy;
• Overturning of final judicial rulings on tax cases; and
• Other political, economic, social, trade and diplomatic developments in or affecting Brazil.

Uncertainty over whether the Brazilian government may implement changes in policy, including with respect to the oil and gas industry, or regulation affecting these or other factors in the future may contribute to economic uncertainty in Brazil and to heightened volatility in the Brazilian securities markets and securities issued abroad by Brazilian issuers, as well as heightened volatility in the Real. These and other future developments in the Brazilian economy or government policies may adversely affect us and our businesses as well as our results of operations and may adversely affect the trading price of our ADSs and shares. Furthermore, the Brazilian government may enact new regulations that may adversely affect our businesses and us.

Uncertainty regarding whether the Brazilian government will implement policy and regulatory changes may be compounded by political instability. Historically, Brazilian politics have affected the performance of the Brazilian economy. Political crises have affected and continue to affect the confidence of investors and the general public and have historically resulted in economic deceleration and heightened volatility in the securities issued by Brazilian companies. Additionally, political instability in Brazil has been growing in recent years, which has contributed to a decline in market confidence in the Brazilian economy as well as to a deteriorating political environment.

In the aftermath of the 2022 election results, there were mass protests and demonstrations throughout Brazil highlighting a deeply polarized electorate amidst a political climate characterized by uncertainty as the country awaited definition regarding the political and economic agenda of the new administration, which contributed to increased macroeconomic and political instability. Furthermore, on January 8, 2023, protesters stormed government buildings in Brasília, Brazil’s capital, including the Congress, the Supreme Court and the Presidential Palace, which prompted the Supreme Court to order participants and certain politicians to be imprisoned and resulted in new investigations. It is unclear whether this heightened state of political and social tension will dissipate or intensify in coming months, which could contribute to increased macroeconomic and political instability.

Further, in recent years some of Brazil’s leading politicians were targets of inquiries involving corruption, misconduct of public management, including through a Parliamentary Committee Inquiry (or “CPI”, Comissão Parlamentar de Inquérito) which focused on the handling of the COVID-19 pandemic, as well as the potential misuse of government funds. The potential outcome of these and other inquiries, as well as potential new inquiries involving Brazilian politicians that may arise are uncertain, but they had, and still may have a negative impact on the general perception of the Brazilian economy and consequently have adversely affected and may continue to affect our businesses, financial condition, and results of operations, as well as the market price of our common shares.

In addition, we cannot predict the scope, nature and impact of any policy changes or reforms (or reversals thereof) that the president-elect’s new administration will implement, which could result in further political and economic instability and negatively impact the regulatory framework in which we operate, which in turn could adversely affect our businesses, financial condition and operating results.

Since 2014, Brazil’s federal budget has been in primary deficit, with 2022 being the only exception. Similarly, the governments of Brazil’s constituent states are also facing fiscal concerns due to their high debt burdens, declining revenues and inflexible expenditures.

A failure by the Brazilian government to implement necessary reforms may result in diminished confidence in the Brazilian government’s budgetary condition and fiscal stance, which could result in downgrades of Brazil’s sovereign foreign credit rating by credit rating agencies and the rise of risk premium, negatively impacting Brazil’s economy, and leading to further depreciation of the Real and an increase in inflation and interest rates, adversely affecting our businesses, financial condition and results of operations.

We cannot predict which policies will be adopted by the Brazilian government, including with respect to the oil and gas industry. Moreover, in the past, the Brazilian economy has been affected by the country’s political events, which have also affected the confidence of investors and the public in general, thereby adversely affecting the performance of the Brazilian economy. Furthermore, any indecisiveness by the Brazilian government in implementing changes to certain policies or regulations may contribute to economic uncertainty in Brazil and heightened volatility for the Brazilian securities markets and securities issued abroad by Brazilian companies. We are not able to fully estimate the impact of global and Brazilian political and macroeconomic developments on our businesses. In addition, there is substantial uncertainty regarding future economic policies, and we cannot predict which policies will be adopted by the Brazilian government and whether these policies will negatively affect the economy or our businesses or financial performance. Recent economic and political instability has led to a negative perception of the Brazilian economy and higher volatility in the Brazilian securities markets, which also may adversely affect our securities and us. Any continued economic instability and political uncertainty which results in reduced availability of credit and reduced economic growth may materially and adversely affect our businesses.

Further, on February 8, 2023, the STF decided that final judicial rulings on individual tax cases can be overturned, thus allowing for situations in which companies that had obtained the right not to pay certain taxes may become liable for their payment, including for the payment of back taxes, if the STF later finds that the tax is legal. We cannot predict whether any tax benefit or tax that we obtained the right not to pay will be charged or even charged retroactively, which in turn could adversely affect our businesses, financial condition, results of operations and cash flows. For more information about this decision, see “Item 4.A. Information on the Company—History and development of the Company—Recent developments.”

Inflation and certain governmental measures to curb inflation, including as a result of the COVID-19 pandemic, may contribute significantly to economic uncertainty in Brazil and could harm our businesses and the market value of the ADSs and our shares.

Since the introduction of the Real in 1994, Brazil’s inflation rate has been substantially lower than that in previous periods. However, during the recent past, the economy has experienced increasing inflation rates and actions taken in an effort to curb inflation, coupled with economic and political impacts derived from COVID-19 crisis and speculation about possible future governmental actions, have contributed to economic uncertainty in Brazil and heightened volatility in the Brazilian securities market. According to the IGP-M, an inflation index, the Brazilian general price inflation rate was 5.5% in 2022, 17.8% in 2021 and 23.1% in 2020. According to the IPCA, an inflation index to which Brazilian government’s inflation targets are linked, inflation in Brazil was 5.8% in 2022, 10.1% in 2021 and 4.5% in 2020. Brazil may experience high levels of inflation in the future. Our operating expenses are substantially in Reais and tend to increase with Brazilian inflation. Inflationary pressures, due to low interest rates and exchange rate depreciation may also hinder our ability to access foreign financial markets or may lead to further government intervention in the economy, including the introduction of government policies that could harm our businesses or adversely affect the market value of our shares and, as a result, our ADSs.

Exchange rate instability may adversely affect our financial condition, results of operations and the market price of the ADSs and our shares.

A significant portion of the products that we distribute, including LPG and fuels, have prices linked to commodity prices denominated in U.S. dollars. Therefore, we are exposed to foreign exchange rate risks that could adversely affect our businesses, financial condition and results of operations as well as our capacity to service our debt. See “Item 11. Quantitative and Qualitative Disclosures about Market Risk.”

During the last decades, the Brazilian government has implemented various economic plans and a number of exchange rate policies, including sudden devaluations, periodic mini-devaluations during which the frequency of adjustments has ranged from daily to monthly, floating exchange rate systems, exchange controls and dual exchange rate markets. Although over long periods depreciation of the Brazilian currency has been generally correlated with the rate of inflation in Brazil, there have historically been observed shorter periods of significant fluctuations in the exchange rate between the Real and the U.S. dollar and other currencies, in particular in the last 10 years.

In 2020, the Real depreciated 29% against the U.S. dollar, mainly due to the low interest rate environment in Brazil coupled with local and international market conditions, including the economic, political and other impacts of the COVID-19 pandemic. In 2021, the Real depreciated 7% against the U.S. dollar, mainly due to the slow recovery of Brazil from the economic downturn, the increase in global inflation and fiscal risks in the country. In 2022, the reopening of the economy after the restrictions imposed by the coronavirus pandemic in 2021, added to the stimulus packages, the evolution of public accounts and financial support policies for the population contributed to the improvement of the economy’s performance and resulted in the appreciation of 7% of the Real against the U.S. dollar.

There are no guarantees that the exchange rate between the Real and the U.S. dollar will stabilize at current levels, and the Real and the U.S. dollar exchange rate may be adversely impacted by the economic and fiscal scenario. Although we have contracted hedging instruments with respect to part of our existing U.S. dollar debt obligations, in order to reduce our exposure to fluctuations in the U.S. dollar/Real exchange rate, we cannot guarantee that such instruments will be adequate to fully protect us against further devaluation of the Real, and we could in the future experience monetary losses as a result. See “Item 11. Quantitative and Qualitative Disclosures about Market Risk” for information about our foreign exchange risk hedging policy.

Depreciations of the Real relative to the U.S. dollar can create additional inflationary pressures in Brazil that may negatively affect us. Depreciations generally curtail access to foreign financial markets and may prompt government intervention, including recessionary governmental policies. Depreciations also reduce the U.S. dollar value of distributions and dividends on the ADSs and the U.S. dollar equivalent of the market price of our shares and, as a result, the ADSs. On the other hand, appreciation of the Real against the U.S. dollar may lead to a deterioration of the country’s current account and the balance of payments, as well as to a dampening of export-driven growth.

Economic and market conditions in other countries, including in the United States and emerging market countries, may materially and adversely affect the Brazilian economy and, therefore, our financial condition and the market price of the shares and ADSs.

The market for securities issued by Brazilian companies is influenced by economic and market conditions in Brazil, and to varying degrees, market conditions in other countries, including the United States, other Latin American and emerging market countries. Although economic conditions are different in each country, the reaction of investors to developments in one country may cause the capital markets in other countries to fluctuate. Developments or conditions in other countries, including the United States and other emerging market countries, have at times significantly affected the availability of credit in the Brazilian economy and resulted in considerable outflows of funds and declines in the amount of foreign currency invested in Brazil, as well as limited access to international capital markets, all of which may materially and adversely affect our ability to borrow funds at an acceptable interest rate or to raise equity capital when and if we should have such a need.

In 2022, 2021 and 2020, the Brazilian market remained volatile due to, among other factors, uncertainties about the increasing risk aversion to emerging market countries, the COVID-19 pandemic, and the uncertainties regarding Brazilian macroeconomic and political conditions. These uncertainties adversely affected us and the market value of our securities. In addition, we continue to be exposed to disruptions and volatility in the global financial markets because of their effects on the financial and economic environment, particularly in Brazil, such as a slowdown in the economy, an increase in the unemployment rate, a decrease in the purchasing power of consumers and the lack of credit availability.

Disruption or volatility in the global financial markets, including as a result of the military conflict between Russia and Ukraine, could further increase negative effects on the financial and economic environment in Brazil, which could have a material adverse effect on our businesses, results of operations and financial condition.

Holders of our ADSs may face difficulties in serving process on or enforcing judgments against us and other relevant persons.

We are a company incorporated under the laws of Brazil. All members of our Board of Directors, executive officers and experts named in this annual report are residents of Brazil or have business address in Brazil. All or a substantial part of the assets pertaining to these individuals and to Ultrapar are located outside the United States. As a result, it is possible that investors may not be able to effect service of process upon these individuals or us in the United States or other jurisdictions outside Brazil or enforce judgments against us or these other persons obtained in the United States or other jurisdictions outside Brazil, including for civil liability based upon United States federal securities laws or otherwise. In addition, because judgments of United States courts for civil liabilities based upon the United States federal securities laws may only be enforced in Brazil if certain conditions are met, holders may face greater difficulties in protecting their interests in the case of actions against us or our Board of Directors or executive officers than would shareholders of a United States corporation.

Due to concerns about the risks of climate change, a number of countries, including Brazil, have adopted or are considering adopting regulatory frameworks which could adversely affect our businesses, financial condition and results of operations.

New laws and regulatory frameworks adopted by countries in response to concerns about climate change include the adoption of cap and trading carbon market system, taxes on carbon emissions, increased efficiency standards, bans on vehicles running on petroleum-based fuels, and incentives or requirements for the use of renewable energy. Such requirements can reduce the demand for hydrocarbon fuels at different rates and levels in each of the regions where our customers are located, as well as lead to a replacement of their demand with lower carbon sources. In addition, many governments are offering tax breaks and providing other subsidies and guidelines to make alternative energy sources more competitive with oil and gas, which may discourage the sale of certain products supplied by the Company’s subsidiaries.

Governments around the world have been encouraging the development of new technologies and companies have also been promoting research to reduce the cost and increase the scale of production of alternative energy sources, which could reduce demand for the Company’s products. In addition, current regulations on GHG, or regulations that may eventually be approved, could substantially increase the Company’s compliance costs and thus increase the prices of the products that it produces or distributes.

Furthermore, discussions about carbon pricing, whether by emissions trading or taxation, are gaining momentum in Brazil. In 2022, the Brazilian government approved the Federal Decree 11,075/22, which establishes the procedures for the preparation of sectoral plans for the mitigation of climate change and creates the Sistema Nacional de Redução de Emissões de Gases Estufa (national system for reduction of GHG emissions). We cannot predict the scope, nature and impact of any policy changes or reforms related to the carbon market, which could result in higher costs, lower operational margins and, in turn, could adversely affect our businesses, financial condition and operating results.

We may be adversely affected by the imposition and enforcement of more stringent environmental laws and regulations, including as a result of rising climate change concerns, that may result in increased costs of operation and compliance, as well as a decrease in demand for our products.

In December 2016, the Ministry of Mines and Energy (MME), seeking to fulfill the commitments made at the 2014 United Nations Climate Change Conference (COP 21), launched RenovaBio, a program aimed at reducing carbon emissions and encouraging the production of biofuels in Brazil, such as ethanol, biodiesel, biogas and aviation biofuel. Under this program, biofuel producers and importers duly certified by the ANP issue CBios based on their sales and purchase invoices, while fossil fuel distributors receive annual decarbonization targets based on the proportion of fossil fuels they sell, which can only be met by purchasing CBios.

CBios are traded freely on B3, and their prices are set by market supply and demand, which can be influenced, among other factors, by unexpected regulatory changes, such as the postponement of the CBios purchase targets announced by the Brazilian government in July 2022. Because CBios prices can be highly volatile and targets increase annually, we cannot predict whether we will be able to successfully pass through the costs of our CBios to resellers, which could adversely affect our operations, market share, financial condition, and results. The possible unavailability of CBios or our inability to meet these targets may result in administrative penalties and the blocking of operating licenses. In addition, the Brazilian government is reviewing the RenovaBio’s guidelines, and we cannot predict how these possible changes may affect us.

If we do not invest in research and development of new, less carbon intensive solutions and adapt our operating structure to operate with cleaner energy sources, we may incur higher compliance and operating costs, which may have an adverse effect on our competitiveness and revenues.

In addition, if we violate environmental laws and regulations, we may face reputational damage with consumers, our business customers, investors, the communities in which we operate and other stakeholders, which could adversely affect our access to capital, revenues, and ability to obtain the necessary permits to conduct our operations.

Floods, storms, windstorms, rise in sea level and other climate change events could bring harm to our facilities, thus affecting our financial position and results of our operations.

Floods, storms, and windstorms can cause production stoppages, interrupt supplies, and damage physical structures. The rise in sea levels is also a risk to our operations since our companies have assets in coastal regions and ports.

Risks relating to the shares and the american depositary shares

Asserting limited voting rights as a holder of ADSs may prove more difficult than for holders of our common shares.

Under the Brazilian Corporate Law, only shareholders registered as such in our corporate books may attend shareholders’ meetings. All common shares underlying the ADSs are registered in the name of the depositary bank. A holder of ADSs, accordingly, is not entitled to attend shareholders’ meetings. A holder of ADSs is entitled to instruct the depositary bank as to how to exercise the voting rights of its common shares underlying the ADSs in accordance with procedures provided for in the Deposit Agreement, but a holder of ADSs will not be able to vote directly at a shareholders’ meeting or appoint a proxy to do so. In addition, a holder of ADSs may not have sufficient or reasonable time to provide such voting instructions to the depositary bank in accordance with the mechanisms set forth in the Deposit Agreement and custody agreement, and the depositary bank will not be held liable for failure to deliver any voting instructions to such holders.

Holders of our shares or ADSs may not receive dividends.

Under the Brazilian Corporate Law and our Bylaws, unless otherwise proposed by the Board of Directors and approved by the voting shareholders at our Annual General Shareholders’ Meeting, we must pay our shareholders a mandatory distribution equal to at least 25% of our adjusted net profit, after the allocation of 5% of the net profit to the legal reserve. However, our net income may be used to increase our capital stock, used to set off losses and/or otherwise retained in accordance with the Brazilian Corporate Law and may not be available for the payment of dividends, including in the form of interest on shareholders’ equity. Therefore, whether you receive a dividend or not depends on the amount of the mandatory distribution, if any, and whether the Board of Directors and the voting shareholders exercise their discretion to suspend these payments. See “Item 8.A. Financial information—Consolidated statements and other financial information—Dividends and Distribution Policy—Dividend Policy” for a more detailed discussion of mandatory distributions.

Holders of our shares may be unable to exercise preemptive rights with respect to the shares.

In the event that we issue new shares pursuant to a capital increase or offer rights to purchase our shares, shareholders would have preemptive rights to subscribe for the newly issued shares or rights, as the case may be, corresponding to their respective interest in our share capital, allowing them to maintain their existing shareholder percentage.

However, our Bylaws establish that the Board of Directors may exclude preemptive rights to the current shareholders or reduce the time our shareholders have to exercise their rights, in the case of an offering of new shares to be sold on a registered stock exchange or otherwise through a public offering.

The holders of our shares or ADSs may be unable to exercise their preemptive rights in relation to the shares represented by the ADSs, unless we file a registration statement for the offering of rights or shares with the SEC pursuant to the United States Securities Act or an exemption from the registration requirements applies. We are not obliged to file registration statements in order to facilitate the exercise of preemptive rights and, therefore, we cannot assure ADS holders that such a registration statement will be filed. As a result, the equity interest of such holders in our Company may be diluted. If the rights or shares, as the case may be, are not registered as required, the depositary will try to sell the preemptive rights held by holder of the ADSs and you will have the right to the net sale value, if any. However, the preemptive rights will expire without compensation to you should the depositary not succeed in selling them.

 If shareholders exchange ADSs for shares, they may lose certain foreign currency remittance and Brazilian tax advantages.

The ADSs benefit from the depositary’s certificate of foreign capital registration, which permits the depositary to convert dividends and other distributions with respect to the shares into foreign currency and remit the proceeds abroad. In order to surrender ADSs for the purpose of withdrawing the shares represented thereby, investors are required to comply with National Monetary Council (“CMN”) Resolution 4,373 of September 29, 2014 (“CMN Resolution 4,373”), which requires, among other things, that investors appoint a legal representative in Brazil. If the investors fail to comply with CMN Resolution 4,373, or the legal representative appointed by the investors fails to comply with CMN Resolution 4,373 or to take action when required to do so, it could affect the investors’ ability to receive dividends or distributions relating to our shares or the return of their capital in a timely manner. Investors that are registered as CMN Resolution 4,373 investors may buy and sell their shares on the Brazilian stock exchanges without obtaining separate certificates of registration. If investors do not qualify under CMN Resolution 4,373, they will generally be subject to less favorable tax treatment on distributions with respect to the shares. The depositary’s certificate of registration or any certificate of foreign capital registration obtained by the investor may be affected by future legislative or regulatory changes, and additional Brazilian law restrictions applicable to their investment in the ADSs may be imposed in the future. For a more complete description of Brazilian tax regulations, see “Item 10.E. Additional information—Taxation—Brazilian tax considerations.”

Changes in Brazilian tax laws may have an adverse impact on the taxes applicable to a disposition of our ADSs.

According to Article 26 of Brazilian Law No. 10,833/03, if a holder not deemed to be domiciled in Brazil for Brazilian tax and regulatory purposes, or a non-Brazilian holder, disposes of assets located in Brazil, the transaction will be subject to taxation in Brazil, even if such disposition occurs outside Brazil or if such disposition is made to another non-Brazilian holder. A disposition of our ADSs involves the disposal of a non-Brazilian asset, which in principle should not be subject to taxation in Brazil. Nevertheless, in the event that the disposal of assets is interpreted to include a disposal of our ADSs, this tax law could result in the imposition of the withholding income tax on a disposal of our ADSs between non-residents of Brazil. See “Item 10.E. Additional information—Taxation—Brazilian tax considerations—Taxation of gains.”

Substantial sales of our shares or our ADSs could cause the price of our shares or our ADSs to decrease.

The shareholders of Ultra S.A. and Parth, which together owned 33.5% of our outstanding shares (excluding shared held in treasury) as of April 14, 2023, have the right to exchange their shares of Ultra S.A. and Parth for shares of Ultrapar and freely trade them in the market as more fully described under “Item 7.A. Major shareholders and related party transactions—Major shareholders—Shareholders’ Agreements.” Other shareholders, who may freely sell their respective shares, hold a substantial portion of our remaining shares. A sale of a significant number of shares could negatively affect the market value of the shares and ADSs. The market price of our shares and the ADSs could drop significantly if the holders of shares or the ADSs sell them or the market perceives that they intend to sell them.

There may be adverse U.S. federal income tax consequences to U.S. holders if we are or become a PFIC under the Code.

If we were characterized as a PFIC, in any year during which a U.S. holder holds our shares or ADSs, certain adverse U.S. federal tax income consequences could apply to that person. Based on the manner in which we currently operate our businesses, the projected composition of our income and valuation of our assets, and the current interpretation of the PFIC rules, including the Commodity Exception, we do not believe that we were a PFIC in 2022 and we do not expect to be a PFIC in the foreseeable future. However, because PFIC classification is a factual determination made annually and is subject to change and differing interpretations, there can be no assurance that we will not be considered a PFIC for the current taxable year or any subsequent taxable year. U.S. holders should carefully read “Item 10.E. Additional information—Taxation—U.S. federal income tax considerations” for a description of the PFIC rules and consult their tax advisors regarding the likelihood and consequences of us being treated as a PFIC for U.S. federal income tax purposes.

Ultrapar is a Brazilian company with its origins in 1937 when Ernesto Igel founded Ultragaz. Since then, Ultrapar has become one of the largest business groups of Brazil, with an outstanding position in the energy and infrastructure segments through Ipiranga, Ultragaz and Ultracargo. On December 31, 2021, our former wholly owned subsidiaries, Oxiteno and Extrafarma, were classified as assets and liabilities held for sale and discontinued operations, due to signing of a share purchase agreement with Indorama in August 2021 and with Pague Menos in May 2021, respectively. The sales of Oxiteno and Extrafarma were closed on April 1, 2022 and on August 1, 2022, respectively, and as a result these companies are no longer part of Ultrapar’s business portfolio as of these dates. For more information on our continuing and discontinued operations, please see "Item 4.A. History and development of the Company —A.1. Continuing operations” and “—A.2. Discontinued operations.”

The following chart simplifies our organizational structure as of the date of this annual report, showing our main businesses. For more detailed information about our current organizational structure, see “Item 4.C. Information on the Company—Organizational Structure.”

Our strengths

Relevant market positions across our main businesses

Ultragaz is a pioneer and a leader in LPG distribution in Brazil, one of the largest markets worldwide, and the growth of LPG is mainly driven by population growth, income and GDP. Ultragaz operates in Brazil directly or through resellers with professionals visiting several customers daily. According to ANP, Ultragaz’s market share in 2022 was 23.1%, having served approximately 59 thousand business customers in the bulk segment, 583 thousand customers of Individual Billing and more than 11 million households in the bottled segment through a network of approximately 5.8 thousand independent retailers. For the year ended December 31, 2022, Ultragaz’s total volume of LPG sold was 1.7 million tons. We believe the strength of its nationally recognized brand, consumer last-mile expertise and the close relationship with its customers enables Ultragaz to identify opportunities to expand its product offering, not only related to LPG, but other energy solutions as well.

Ultragaz is strengthening its presence in the North and Northeast regions of Brazil by focusing on expanding to states where it previously did not have significant operations in the bottled segment.

For the bulk segment, Ultragaz strategy is focused on two areas. The first area is offering its clients mainly in industrial and agribusiness segments new applications and services for LPG. As a result, Ultragaz aims at expanding its market share in LPG used for home and personal care and localized heating, such as preheating of industrial furnaces, especially in steel, lead, asphalt manufacturing and metallurgical plants; and in new applications in agribusiness, such as drying grains and seeds, with greater operational and economic efficiency. We believe that some of Ultragaz’s new applications and services provide environmental benefits and cost savings such as reduction in energy consumption and emission of carbon dioxide and pollutants. The second area is to invest in the expansion of the bulk LPG distribution to small-and-medium-sized businesses, such as laundry shops, restaurants, bakeries, and residential condominiums, through agile and convenience services.

Expand our bulk storage capacity while maintaining operational efficiency

Over the last few years, Ultracargo has expanded its installed capacity and diversified its geographic position with gains of scale. Meanwhile, Ultracargo developed processes improvement programs, such as Soul and Conecta, aimed at enhancing its productivity and operational efficiency to ensure a more efficient deployment of the company’s resources. For more information about these initiatives, see “Item 4. Industry and regulatory overview—B. Storage services for liquid bulk —Ultracargo—Storage facilities.”

Key financial information

Net revenue from sales and services

The table below sets forth the net revenue from sales and services for our segments:

Gross Debt and Net Debt

The information in the table below presents a reconciliation of Gross Debt and Net Debt, a non-GAAP financial measure, to the most directly comparable IFRS financial measure. Our calculation of Gross Debt and Net Debt may differ from the calculation of similarly titled measures used by other companies. Our management believes that the disclosure of Gross Debt and Net Debt is useful to potential investors as it helps to give them a clearer understanding of our financial liquidity. However, Gross Debt and Net Debt are not measures under IFRS and should not be considered as a substitute for measures of indebtedness determined in accordance with IFRS. For more information, see "Presentation of financial information—non-GAAP financial measures."

The table below presents a reconciliation from Gross Debt to Net Debt measure to the most directly comparable measure derived from IFRS financial measures:

The Brazilian regulations require LPG distributors to obtain operating permits from the environmental agencies, from municipal authorities and from the fire department. In order to obtain and maintain the validity of such permits, distributors must satisfy regulatory authorities that the operation of facilities are in compliance with regulations and are not prejudicial to the environment and the community. In addition, regulations establish standard procedures for transporting, delivering and storing LPG and for testing and requalification of LPG bottles. Civil, administrative and criminal sanctions, including fines and the revocation of licenses, may apply to violations of regulations. Under applicable law, distributors are strictly and jointly liable for environmental damages.

The LPG industry and market are also subject to occupational health and safety standards, including labor laws, social security laws and consumer protection laws. In addition, the company also has a sustainability policy that describes the best management practices for health, safety and the environment (HSE).

In 2016, as a part of the “Atitude Segura” (Safe Attitude) initiative, Ultragaz began to implement an extensive HSE plan focused on further enhancing the safety of its operations through best practices. Ultragaz carried out a behavioral and process diagnosis on health and safety, and, in 2022, developed a plan to build a collaborative safety culture among their employees by raising awareness of the importance of preserving their own safety and that of their peers. Ultragaz continuously seeks to improve its safety behavior culture by intensifying the activities of safety technicians and by developing senior leadership, including directors and managers that act as agents of change in their respective teams.

Also in 2022, Ultragaz has advanced in providing its resellers with training in safe driving techniques to avoid accidents. In addition, an accident prevention action plan was implemented in the bottle loading and unloading phase of the filling process.

Ultragaz’s lost time injury frequency rate was 2.10 in 2022 compared to 2.51 in 2021, a decrease of 16%. The process accident frequency rate with Ultragaz’s own employees (Tier 1 and 2) was 0.75 in 2022 compared to 0.31 in 2021, an increase of 141%.

Ultragaz

As of December 31, 2022, Ultragaz was the leading company in the Brazilian bulk LPG market and the second largest in total volumes, according to ANP. Founded in 1937, Ultragaz was the first LPG distributor in Brazil, when wood stoves and, to a lesser extent, alcohol, kerosene and coal stoves were used. For more information about Ultragaz’s history, see “Item 4.A. Information on the Company—History and development of the Company—A.1. Continuing operations—Ultragaz.”

Ultragaz is comprised of the following operating subsidiaries:

Furthermore, on February 1, 2023, Ultragaz closed the acquisition of all shares of NEOgás. This acquisition marks Ultragaz's entry into the compressed natural gas distribution segment and, in addition, Ultragaz believes that NEOgás is an ideal platform to enable biomethane distribution opportunities. This transaction reinforces Ultragaz’s strategy of expanding the energy solutions it offers to its industrial customers, making use of its capillarity, commercial strength and brand. For more information see “Item 4.A. Information on the Company—History and development of the Company—A.1 Continuing operations—Ultragaz.”

Markets and marketing. When Ultragaz began its operations, it served only the Southeast region of Brazil. Currently, Ultragaz is present in almost all of Brazil’s significant population centers. In recent years, Ultragaz strengthened its presence in the North and Northeast of Brazil, where it did not have significant operations. Distribution of bottled LPG includes mainly retail stores, carried out by Ultragaz’s dealership network, mainly using 13 kg ANP approved bottles. In the case of Ultragaz, the bottles are painted blue. Ultragaz’s operating margins for bottled LPG vary from region to region and reflect the distribution channel in the region.

Before Shell Gás’ acquisition, Ultragaz’s sales strategy for bottled LPG delivery was to increase market share through geographical expansion as well as protecting and incrementing market participation in regions where it already operated. With the acquisition of Shell Gás, Ultragaz became the Brazilian market leader in LPG, and the focus of its marketing strategy evolved to protecting market share and strengthening its position in certain regions where it does not have a significant presence. The LPG bottled market in Brazil is mature and Ultragaz believes that growth in demand in the long term will be a function of an increasing number of households consuming the product as well as an increasing level of household income.

Distribution of bulk LPG is largely carried out through 190 kg storage tanks installed on the clients’ premises. Since 1995, Ultragaz operates small-and-medium-sized bulk delivery facilities with bob-tail trucks, which deliver LPG in bulk mainly to residential buildings, commercial and industrial clients. Ultragaz’s clients in the commercial sector include shopping centers, hotels, residential buildings, restaurants, laundries, and hospitals. Ultragaz’s trucks supply clients’ stationary tanks using a system that is quick, safe, and cost effective.

Ultragaz’s bulk sales include large industrial clients, such as companies in the food, metallurgical, steel and home and personal care sectors. In the case of large volume consumers, Ultragaz is competing with other highly competitive energy sources such as natural gas, diesel, wood, fuel oil and electricity.

Ultragaz’s strategy for the bulk LPG distribution is to continue its process of product and service innovation. Ultragaz has a team to identify the needs of each bulk LPG client and to develop technical solutions for using LPG as an energy source. Furthermore, in 2015, Ultragaz started operating under a new concept for the small and medium business clients, named Ultrapronto. As an innovative concept in the LPG industry, Ultrapronto represents a more agile and complete service to the client, including prospecting of clients, setup of equipment, logistics and after-sale services. It permeates the entire value chain of the bulk segment, based on: (i) differentiated value proposition for the client, (ii) standardization of processes, and (iii) rationalization of the installation process.

The table below shows Ultragaz’s sales of LPG to clients of bottled and bulk LPG:  

(1)  Includes residential deliveries and distribution through retailers’ stores.

Residential delivery has evolved during the last years from primarily door-to-door to a scheduled, order by phone or app.

LPG distribution is a dynamic retail market where consumers’ habits change constantly, thus creating opportunities for the company. In order to track market developments more closely and differentiate itself from its competitors, Ultragaz has developed and enhanced sales channels and payment methods. In the last decade, the company expanded the participation of Disk Gás (sale of LPG bottles by telephone) and, more recently, introduced ordering through a website (Pedido Online), cell phone messages (Whatsapp) and through a smartphone app (Ultragaz app), which reached 3.7 million downloads at the end of 2022. Ultragaz entered into sales partnerships with apps from companies such as iFood, RecargaPay, abastece aí, Cartão de Todos, and is currently implementing a vending machine for LPG cylinders, called Ultragaz 24h, which works 24/7 and accept varied payment methods. These initiatives provide customers with greater convenience, add further value, and generate logistic optimization to Ultragaz. The same principles have been extended to the bulk segment, in which Ultragaz is a pioneer and has a leading position.

Ultragaz has been developing new technologies for different markets, such as industrial, agribusiness, small and medium businesses, residential buildings, and household customers. For segments, such as the industrial laundries, Ultragaz has developed a new system to control the whole seed drying process using Internet of Things (IoT) to optimize LPG consumption. Ultragaz has also expanded LPG uses portfolio to agribusiness, such as a solution for grain and seed drying, increasing productivity. Finally, tracking consumption trends in the bulk segment, Ultragaz has created a food recycler solution, which converts 80% of a typical restaurant waste into fertilizer through a fully automated process.

In May 2021, Ultragaz launched its new brand image. The new visual identity addressed its purpose of contributing to changing people’s lives. With an eye to the future, and in the spirit of its new motto “Somando energias” (Combining energies), Ultragaz is employing its vast experience together with technology to create energy solutions that focus on its customers’ needs, helping them to better manage the energy usage in their homes and businesses.

Contracts. Ultragaz supplies its bulk clients based on contracts with terms ranging typically from two to five years. The contract also requires that any tank supplied by Ultragaz may only be filled up with LPG delivered by the company. By having customers in contract, Ultragaz is able to build a closer relationship and identify opportunities for expanding the consumption of LPG and for energy transition.

Environmental, social and governance initiatives

In 2022, Ultragaz consolidated its ESG initiatives under one banner, ESG Journey – Ultragaz More Sustainable, which is grounded in four drivers for the company, broken down into ten strategic objectives. These drivers are the energies that guide its actions: Ethical Energy (value for investors and society), Human Energy (value for employees), Energy to Innovate (value for suppliers, customers, partner resellers and the planet) and Citizen Energy (value for communities). Some highlights of each of such energies are:

Ethical energy

Ultragaz reinforced the awareness and the culture of integrity with the creation of the Ethical Contact initiative, which consists of content prepared for its leadership to use in conversations with teams, taking examples that promote a more practical look at ethical issues on daily life. Additionally, an Integrity Campaign was developed, which addressed topics such as harassment, competition, prejudice, relationship with suppliers, corruption, and discrimination, based on testimonials from the company’s own employees, bringing up personal situations that each one has already experienced. The competitive aspect was also reinforced through training carried out with the internal public and with resellers’ partners.

Energy to innovate

Energy transition. Ultragaz acquired Stella in September 2022 and NEOgás in November 2022, initiatives that increase the energy solutions offering of Ultragaz to its consumers. Ultragaz also adhered to the Climate Commitment program, promoted by the Ekos Institute, to encourage the development of a low-carbon economy.

Eco-efficient operations. Ultragaz developed the standard base concept, seeking to standardize the infrastructure of all its bases, prioritizing efficiency and sustainability. The last two new operational bases in the North and Northeast regions, in Belém (state of Pará) and Fortaleza (state of Ceará), have already been built considering sustainability aspects, with state-of-the-art technologies, such as the reduction of heat islands, reduction of water use, prevention of damage to the environment and storage and collection of recyclable materials. In addition, Ultragaz made progress in the disposal of waste generated in operations, reducing the amount sent to landfills by approximately 50% in 2022.

In logistics, the vehicles that make up Ultragaz's light fleet gradually began to be filled up with ethanol. Also looking for cleaner and more sustainable energy alternatives for supplying bottle transport trucks, Ultragaz started pilot projects with two electric, smaller and lighter VUC trucks and with a truck powered by gas.

Ultragaz has also acquired the I-RECs, proving that 100% of its energy comes from renewable sources, zeroing its indirect GHG emissions from the purchase of electricity (scope 2 emissions).

Value chain. Ultragaz advanced in the relationship with its resellers’ partners, reorganizing the service model for this public. Ultragaz's Lapidar Challenge, a partner qualification program that values and rewards the journey of each reseller, showed better qualification of resellers in 2022. To further strengthen the relationship with resellers, some meetings were held in the regions of Brazil where the partners’ network is present. At these meetings, Ultragaz showcased its initiatives, latest innovations and its ESG journey, reinforcing the company's strategy. In addition, Ultragaz also carried out workshops with suppliers selected for the supply chain engagement program Carbon Disclosure Project (CDP), resulting in greater adherence to the program. For more information on Lapidar Challenge, see “—Independent Resellers.”

Human energy

Inclusive culture and diversity. Ultragaz disclosed its efforts in diversity and inclusion, with its strategic priorities and pillars of action. In terms of training, Ultragaz offered mentorships to women in leadership positions in operations and sales, and training for leaders in unconscious biases, person with disabilities, gender equity and toxic masculinity. In addition, in order to welcome diversity since the attraction of new talents, Ultragaz has strengthened its recruitment and selection guidelines, considering race, disabilities and women in its operation through prioritization actions on the selection processes.

Health and safety. Ultragaz has been investing on several fronts to guarantee a safe environment in its operations. In 2022, the company expanded the monitoring of the loading and unloading process, reinforced internal procedures and those with its service providers, and is testing new automation of its processes. The digitalization of the relationship with its customers and greater logistical efficiency also reduced the number of trips, reducing exposure to accidents. Moreover, Ultragaz revisited its Safety Program, reinforcing the pillar of safety behavior. In health management, Ultragaz, through the Valoriza Program, has been encouraging its employees, especially in the risk group, to adhere to health and quality of life programs.

Ultragaz is a signatory of the UN Global Compact since 2009. In 2022, Ultragaz participated in Innova 2030, an intrapreneurial program promoted by UN Global Compact Brazil and Fundação Dom Cabral, a renowned Brazilian university, aiming at promoting the entrepreneurial mindset of its employees.

Citizen energy

Business solution providing social impact. In 2022, Ultragaz was selected by recognized Brazilian NGOs and movements for having developed the digital Vale Gás, a secure and traceable solution, with guaranteed distribution capacity all over Brazil, to carry out the initiative promoted by Petrobras in the donation of LPG bottles to families in socially vulnerable situations. This initiative enabled thousands of families to benefit from a cleaner fuel, the LPG.

Social programs. Moreover, Ultragaz invested in education projects for children and teenagers, such as Escola de Música da Rocinha, Pluga Cuca, Alavanca Associação Santo Agostinho (ASA) and Recriarte, positively impacting people in socially vulnerable situations. Ultragaz also delivered items including gallons of mineral water, food and hygiene and cleaning products to the population that suffered from torrential rains in Pernambuco, benefiting families in the region. In Bahia, also due to the critical situation caused by heavy rains, Ultragaz mobilized resellers throughout the state as collection points for non-perishable food and hygiene and cleaning items to donate to flood victims in the region, at which time it also distributed basic food baskets to the affected communities in the municipalities of Jaguará, Eunápolis, Jequié and Itabuna.

Volunteering program. With the active participation of its employees, Ultragaz has revised its Corporate Volunteering Program and included new volunteering activities that resonate with its corporate purpose. Some of the volunteering activities performed in 2022 include (i) “Ler é Presente” (To Read is a Gift) Program that aims to develop the creativity and imagination of children from public institutions and schools, through voluntary reading; (ii) the donation of books and toys to vulnerable children on National Children’s day, (iii) a beach clearance day, whereby some of our employees were educated on the importance of keeping the beaches clean and collected waste out of the Santos’ beach; and (iv) Social Acceleration Program, organized by Ultrapar, which supported 13 NGOs in their management challenges, aiming at maximizing their social impact.

Distribution infrastructure. Ultragaz’s distribution strategy includes having its own infrastructure for bulk LPG, given that the proximity to customers is a significant success factor. Ultragaz also maintains a large independent reseller network for bottled LPG. Deliveries for both bottled and bulk LPG are made by a staff wearing Ultragaz uniforms and driving vehicles with Ultragaz’s logo. Ultragaz has also invested in information technology for improving its process, such as logistics optimization and production efficiency, and has established a partnership to produce electric tricycles, which will be offered to Ultragaz’s resellers for delivering LPG to the end customer, thus contributing to the reduction of GHG. Ultragaz delivers bottled LPG, using a distribution network, which included 5.8 thousand independent resellers and a fleet of 111 vehicles for the delivery of gas bottles and 304 vehicles for bulk delivery as of December 31, 2022.

Bottled sales capacity derives from the number of bottles bearing Ultragaz’s brands. As of December 31, 2022, there were 25.0 million 13 kg bottles stamped with Ultragaz’s brands in the market.

Independent resellers. Ultragaz’s independent distribution network ranges from large resellers, which carry out extensive home deliveries, to single retail stores, which sell small quantities of LPG bottles. ANP Resolution 51/16, as amended, sets that the independent resellers must be registered with ANP and comply with a list of prerequisites, as well as those required by law for the storage of bottles up to 90 kg. Also, each municipality sets forth its own safety regulations, including a minimum distance from certain locations, such as schools. For the year ended December 31, 2022, 96% of Ultragaz’s bottled LPG sales were made through resellers. The agreements entered between Ultragaz and independent resellers require the use of the Ultragaz brand and the display of the Ultragaz logo in the delivery vehicles and on the uniforms worn by delivery personnel. Proprietary rights of the trademark and the logo are retained by Ultragaz and are duly registered with INPI – Instituto Nacional de Propriedade Industrial (the National Institute of Industrial Property). All contracted resellers are Ultragaz’s exclusive representatives. Under the terms of the respective contracts, each dealer agrees not to deliver non-Ultragaz LPG bottles.

Ultragaz understands that investing in the efficiency of its reseller network is key for staying ahead of competition and at the same time aligned with market demand for LPG. Accordingly, Ultragaz has developed several programs aimed at improving resellers’ management quality and standards.

The main program is the Lapidar Challenge (exclusive excellence program for resellers), which seeks to standardize the best management practices of Ultragaz’s resellers, through the pillars of customer experience, business management, teams and resale structure, with focus on strict compliance with the laws applicable to the sector. Through a continuous evaluation process with annual cycles, resellers are classified into categories allowing participants to verify their performance against Ultragaz standards of excellence and stimulating constant improvement. In 2020, Ultragaz reviewed the entire program to turn it more attractive, contributing to an evolution in its dealer network continuously and bringing excellence in execution and a better customer experience.

In 2020, Ultragaz created a digital relationship channel with its resellers called MAP – Meu Aplicativo Parceiro (my partner app), which currently has 6 thousand connected partners. In this app resellers have access to resources that improve their work process. Through MAP, the reseller also accesses a marketplace platform, namely Portal Ultragaz, where they can purchase several items.

In 2020, Ultragaz also developed the Amigu app, the company’s last-mile tool that identifies the closest Ultragaz’s delivery person to the customer location. Currently, the app has more than 10 thousand downloads with deliverymen connected in more than 900 cities across Brazil.

Distribution channels to bulk consumers. Bulk distribution is made directly to customers by delivering LPG to storage tanks located at customers' facilities. Both large and small bulk distribution are mainly made by bobtail trucks and, in some cases, third-party tanker trucks.

Ultragaz has improved the digitization of its processes and sales channels by offering an omnichannel solution to customers. This digital service channel offers greater security, transparency, and agility in service.

Ultragaz’s logistics strategy is also focused on the customer journey. The investments in routing systems, demand planning and last-mile solutions are intended to provide high-level delivery and information services to the client. In addition to improving the customer experience, Ultragaz raises its own operational efficiency.

Payment terms. Ultragaz’s sales through its retail stores and through home delivery are made mainly on a cash basis. Ultragaz’s sales to independent resellers and to industrial and commercial users have payment terms of 18 days on average.

Bottle swapping centers. Pursuant to the ANP Resolution 49/16, as amended, distributors have established 9 operating swapping centers to facilitate the return of the bottles to the appropriate distributor. Under the ANP Resolution 49/16, as amended, LPG distributors were not permitted to refill third-party bottles, although they may pick up any empty LPG bottle tendered by costumers in exchange for a full LPG bottle, regardless of whether such empty bottle was put in circulation by that distributor. Accordingly, LPG distributors may deliver third-party bottles to a swapping center where such bottles may be exchanged for bottles placed in circulation by such LPG distributor.

Requalification of bottles. The lifetime of a bottle depends on several factors, the most important being the exposure of the bottle to corrosion from the atmosphere and whether the bottle has been damaged. The ANP Resolution 49/16, as amended, provides that all bottles must be requalified after their first 15 years of use, and every ten years thereafter. Each bottle is visually inspected for damage and corrosion to determine if it can be requalified or if it should be scrapped. In the case of bottles which pass the quality and safety checks, several procedures are followed before the bottles are stamped with the year of requalification and the next term in which they are due for requalification.

Supply of LPG. Currently, the main LPG supplier to Ultragaz is Petrobras. In 2019, Petrobras entered into an agreement with CADE aimed at promoting the competition in the natural gas market in Brazil, including the sale of shareholdings in companies operating thereof as a means of encouraging the entry of new players into the LPG supply network. In 2022, 14% of Ultragaz’s overall supply needs were met by private suppliers, other than Petrobras.

Prices of LPG. From 2008 to 2016, Petrobras increased LPG refinery prices for commercial and industrial usage only sporadically. Since June 2017, LPG refinery prices generally reflected international pricing levels and exchange rate variations, although there have been periods when oil derivatives prices in Brazil did not immediately reflect international due to Petrobras’ pricing guidelines, which softened the effects of price volatility in the international market on domestic prices. From 2017 to 2019, LPG refinery prices were adjusted more frequently.

In November 2019, after a change in its pricing policy, Petrobras ended the price differentiation for bulk and bottled segments, and both were converted into one single price.

During 2022, 2021 and 2020, Petrobras’ pricing policy followed international commodity prices and, due to greater volatility in international LPG prices, mainly caused by the COVID-19 pandemic and, more recently by the conflict between Russia and Ukraine, the frequency of price adjustments increased.

The following table shows Petrobras’ monthly LPG price adjustments for the last three years.

The following table shows a comparison between Petrobras’ average prices and international parity prices (R$ per ton) on yearly basis:

Storage of LPG. On December 31, 2022, Ultragaz’s storage capacity was approximately 20.8 thousand tons, including Utingás’ storage capacity. Based on its 2022 average LPG sales, Ultragaz could store approximately 3.7 days of LPG supply.

Ultragaz stores its LPG in large tanks at each of its filling plants located throughout the regions in which it operates. Primary filling plants receive LPG directly from refineries and processing units by pipeline; secondary filling plants are supplied by truck; and satellite plants primarily hold LPG which is used to fill bob-tail trucks for small bulk distribution to customers that are not located near a primary or secondary filling plant. See “Item 4.B. Information on the Company—Business overview—Industry and regulatory overview—A. Distribution of liquefied petroleum gas” and “Item 4.D. Information on the Company—Property, plant and equipment.”

Competition. Ultragaz’s main competitors are:

• Copa Energia, a group created in 2021 that owns the LPG distributors Liquigás and Copagaz;
• Nacional Gás, a Brazilian LPG distributor, which has been present in the market for more than 60 years; and
• Supergasbrás, a company controlled by SHV Energy (a major multinational LPG distributor), formed by the merger of Minasgás S.A. and Supergasbrás S.A.

The following table sets forth the market share of Ultragaz and its LPG competitors in terms of volume, according to ANP:

Since per capita consumption is small, low distribution cost is a critical factor in dictating profitability. Therefore, LPG distributors largely compete based on efficiencies in distribution and delivery as all LPG distributors currently purchase most part of their LPG requirements from Petrobras, and as Petrobras’ refinery price charged to the distributors is the same to all LPG distributors. Ultragaz’s main markets, including the cities of São Paulo, Salvador and Recife, are highly populated areas and, therefore, distribution to these markets can be carried out with great economies of scale, resulting in lower distribution costs. Additionally, Ultragaz benefits from low bulk LPG distribution costs.

In addition to competing with other LPG distributors, Ultragaz competes with companies that offer alternative energy sources to LPG, such as natural gas, wood, diesel, fuel oil and electricity. While fuel oil is less expensive, LPG has performance and environmental advantages in most uses. As a result, natural gas is currently the main source of energy Ultragaz compete with.

The natural gas segment has become increasingly more competitive relative to LPG over the last years, especially in the South and Southeast regions of Brazil, as a result of increased investments in the natural gas infrastructure grid in these regions. Going forward, we expect the natural gas market to receive further investments and witness the entry of new players following the agreement entered into between Petrobras and CADE to promote competition in the sector. For example, in July 2022, Petrobras sold its 51% stake in Gaspetro (currently Commit Gás S.A.), a holding company with a stake in piped gas distribution companies located in different states of Brazil, to Compass Gás e Energia S.A., a company controlled by Cosan.

Besides the grid development, current investments in Liquified Natural Gas (LNG) terminals will increase the supply of natural gas, which will likely facilitate small-scale operations. This type of operation competes against LPG in areas where the natural gas grid/pipes do not reach. The natural gas sector, in general, is a threat for LPG, especially for industries in the bulk segment.

In 2022, the Brazilian LPG market decreased 0.8% compared to 2021. The bottled segment decreased 1.9%, compared to 2021 mainly due to lower market demand. At the same time, the bulk segment increased 2.6% compared to 2021, due to the easing of COVID-19 restrictions and higher economic activity. In 2021, the Brazilian LPG market decreased 1.1% compared to 2020 while the bottled segment decreased by 3.3%, due to the lift of many COVID-19 restrictions and an ease on lockdowns. On the other hand, the bulk segment increased 7.1% in 2021 as compared to 2020, mainly due to the economic recovery.

The following graph shows LPG sales volume for the Brazilian market and Ultragaz for the periods indicated.

Source: ANP

Quality. Ultragaz is the first Brazilian LPG distributor to receive ISO (International Standards Organization) certification for excellence in quality management system and to receive Prêmio Paulista de Qualidade (the state of São Paulo Quality Award), recognized as the best company in management system.

In order to keep improving operations, Ultragaz launched in 2021 the SOU Program (Ultragaz Operation System Program), a strategic initiative focused on cost management that applies a lean methodology to standardize and improve the efficiency and quality of its processes.

Moreover, Ultragaz continually invests to improve the painting process at its LPG filling plants – every bottle is repainted before it is shipped to consumers. Investments in this area have been focused on modernizing the painting systems and equipment to achieve higher performance and lower carbon emissions. In this regard, Ultragaz has been using for several years solvents free of aromatic hydrocarbons and, more recently, experimenting "Bio-Paint" made of renewable plant inputs, which, we expect, should considerably reduce volatile organic compounds and CO2 emissions into the atmosphere, and therefore be more environmentally friendly.

In 2022, Ultragaz created the “Aterro Zero” (Zero Landfill) Program, which targets to end the disposal of waste generated by the company in landfills by 2030. In 2022, 23% of all waste was disposed of in landfills while in 2021 the total disposal of waste in landfills was 46%. This important reduction was the result of raising awareness with employees, in addition to the implementation of proper segregation and disposal of organic and recyclable materials and the acquisition of recycling machines for some bases, as well as the qualification of new suppliers. To enhance the initiatives to decrease waste disposed in waste, Ultragaz started the “Zero Copo” (Zero Cup) campaign, focused on replacing disposable cups with reusable alternatives (bottles and mugs).

Regarding the improvement of water and energy use, Ultragaz reinforces the rational use of resources among its employees, through guidelines, actions, revisions of standards and monitoring of strategic indicators aimed at reducing waste. For example, Ultragaz is currently implementing a plan to replace the use of lighting lamps with LED lamps, which are more durable and contribute to saving energy.

Since 2021, as part of its corporate maintenance strategy, Ultragaz has conducted predictive maintenance techniques alongside a specialized company, aiming to reduce compressed air waste from its filling operations by identifying air leakages through acoustic emission tools. Energy savings from the air compressors and enhanced safety processes are additional benefits of this initiative. Several inspections were carried out in our compressed air lines resulting in 314 leakages detected in 2022 as compared to 168 leakages in 2021.

Income tax exemption status. Brazilian legislation provides a 75% income tax reduction for businesses located in the Northeast region of Brazil, which depends on SUDENE’s formal and previous approval. Ultragaz is entitled to this tax benefit at its filling plants located at Mataripe, Caucaia, Juazeiro, Aracaju and Suape until 2024, 2025, 2026, 2027 and 2027, respectively. The total amount of SUDENE’s income tax exemption for the Ultragaz segment for the years ended December 31, 2022, 2021 and 2020, was R$56.4 million, R$19.7 million and R$23.1 million, respectively. For further information, see Note 10.c to our Consolidated Financial Statements.

B. Storage services for liquid bulk

C. Fuel distribution

The Brazilian fuel market comprises the distribution and marketing of diesel, gasoline (including aviation gasoline), ethanol, fuel oil, kerosene (including aviation kerosene) and natural gas for vehicles (NGV). In 2022, diesel represented 48% of the volume of fuel distributed in Brazil, followed by gasoline and ethanol, each of which represented 33% and 12%. 

Fuel demand in Brazil is mainly segregated into demand for Otto cycle fuel (which comprises gasoline, ethanol and NGV), intended for light vehicles and diesel, intended mainly for heavy-duty vehicles.

Historically, a high positive correlation is observed between the behavior of the diesel market and the Brazilian GDP. This has been the primary indicator for consumption projections, also considering the possibility of increase in the biofuel blend on gasoline and diesel and the long-term impacts of other decarbonization initiatives.

The expansion of Otto cycle fuel demand is related to the growth of the light vehicle fleet and, consequently, to the availability of credit and disposable income for the purchase of new vehicles, as well as the country's economic activity.

The amount of credit for vehicle financing and leasing grew by almost 12% in 2022, although new credit concessions increased by 5% for companies and decreased by 3% for families. In 2022, Brazilian families were responsible for 69% of total vehicle financing debt.

According to ANFAVEA, approximately 2.0 million new light vehicles were registered in Brazil in 2022, a decrease of 1% compared to 2021, influenced by the increase in the prices of new vehicles, driven by the shortage of semiconductors and by global inflation. Last year, flex-fuel vehicles - which have engines adapted to run on gasoline, ethanol, or any combination of the two - accounted for 83% of the country's vehicle registrations, followed by diesel-powered light commercial vehicles (12%), electric or hybrid vehicles (3%) and gasoline-only passenger cars (2%).

Moreover, recent changes to legislation and inspection in the fuel distribution sector have helped to progressively curb unfair competition, creating a level playing field. These improvements should benefit the formal market by capturing the volume from the grey market.

According to ANP, the distribution of fuels (gasoline, ethanol, and diesel) is made mainly through three channels, as follows:

• Service stations, which serve final retail consumers;
• Large consumers, mainly industries and fleets; and
• Retail—wholesale resellers—TRR, specialized resellers that distribute diesel to medium and small volume end-users. 

Ipiranga

Ipiranga was established in 1937 and is one of the largest fuel distributors in Brazil, according to ANP, with 18.4% market share in 2022 in terms of diesel, gasoline, and ethanol sales volume. Ipiranga distributes diesel, gasoline, ethanol, NGV, fuel oil, kerosene, ARLA 32 (liquid agent to reduce nitrogen oxides emissions from heavy vehicles), lubricants, and greases nationwide through its network of 6,771 service stations and 88 storage terminals as of December 31, 2022.

Ipiranga has implemented a differentiation strategy by offering a broad range of products and services throughout its service station network. This strategy has led to the development of a convenience store business, branded AmPm, as well as lubricant servicing businesses, Jet Oil and the consolidation of other related products and services.

Ipiranga’s fuel distribution

Ipiranga operates in the retail segment of the fuel distribution market through a network of service stations operating under the Ipiranga brand throughout Brazil and, to a significantly lesser extent, through spot sales to un-branded (white flag) service stations. Sales volumes from the service stations network accounted for 76% of Ipiranga’s total sales in 2022. Ipiranga also operates in the business-to-business (B2B) segment with almost 7 thousand customers, such as state and municipal governments, industries, and cargo and passenger transportation fleet owners. Distribution to B2B accounted for 24% of Ipiranga's sales in 2022.

In 2022, the volume of fuel sold by Ipiranga increased by 3%, while diesel sales increased by 3%. The volume of gasoline, ethanol, and NGV was 2% higher than the previous year, with a reduction of 13% and 2% in ethanol and NGV, respectively, and an increase of 8% in gasoline.

The table below shows Ipiranga’s sales of fuels by-products:

(1)       Includes NGV, fuel oil, kerosene and ARLA 32.

Network of service stations. Responsible for 76% of total sales in 2022, the retail segment of the fuel distribution market had, as of December 31, 2022, a network of 6,771 service stations operating under the Ipiranga brand throughout Brazil, of which 772 were located on land owned by or leased to Ipiranga, while 5,999 were located on lands owned by third parties. In 2022, 90% of these stations were in urban areas, whereas the remaining 10% were on highways.

B2B – Business to business. Ipiranga operates in the B2B segment with almost 7 thousand clients, such as state and municipal governments, industries and cargo and passenger transportation fleet owners, TRRs and others. In 2022, Ipiranga’s ten largest clients in B2B segment accounted for 18% of its revenues and no single customer accounted for more than 4%. Distribution to B2B represented 24% of Ipiranga’s sales in 2022.

Ipiranga has implemented a differentiation strategy in the B2B segment, offering a variety of premium products and technological services to provide better customer experience and promote customer retention. Ipiranga’s goal is to continue to develop new products and services to meet the needs of its B2B clients in the various segments in which it operates and become the first choice of corporative consumers. To achieve this, Ipiranga’s B2B team relies on a group of highly skilled and experienced professionals dedicated to multiple projects designed to provide new solutions to the B2B market.

Contracts. The relationship between Ipiranga and its clients is generally governed by exclusive supply contracts with terms ranging from 1 to 5 years. The types of contracts change according to the distribution channel. For service stations, contracts usually have terms of 3 to 5 years. Our commercial strategy includes the concession of bonuses agreements, which can be paid upfront (received on the signing of the contract) and/or post-paid (through the achievement of certain targets defined in contract). For the B2B segment, Ipiranga sells fuels under exclusive supply contracts, with the terms ranging from 1 to 3 years on average, or in the spot market. Ipiranga has been working to increase the percentage of supply of fuels in the B2B segment under exclusive supply contracts by providing additional services and generating value to its clients.

Supply of fuels. Currently, Ipiranga purchase most oil-derivative fuels from Petrobras under a formal supply contract that establishes the volume and the terms of supply. The contract with Petrobras is renewed annually. The procedures for ordering and purchasing fuels from Petrobras are generally common to all distributors, including Ipiranga. In 2022, 76% of oil derivatives were supplied by local refineries and the remaining 24% was imported. Ipiranga began importing fuels in 2016 and, since then, strengthened its infrastructure in the main Brazilian ports and expanded its importing capillarity to ensure its capacity to supply its resellers.

The ethanol fuel market in Brazil consists of corn and sugarcane mills, producing sugar, ethanol, and Dried Distillers Grains (DDG). Ethanol production from sugarcane occurs approximately eight months per year and ethanol from corn runs through the whole year. A portion of the production is stored in the distilleries to meet demand during the inter-harvest season. Distilleries produce two types of ethanol: (i) anhydrous ethanol, which must be blended with gasoline “A” and (ii) hydrated ethanol, which is essentially used for flex fuel vehicles.

Ethanol in Brazil is substantially based on sugarcane that can either be used to produce ethanol or sugar. There are also six corn-based ethanol plants currently operating in the Midwest region of Brazil. From an ethanol producer’s perspective, the production ratio between ethanol and sugar is determined based on the prices of ethanol and sugar in the Brazilian and international markets. Although ethanol production is subject to favorable climate conditions, the risk of interruptions in supply is mainly restricted to the end of the harvest.

Storage of fuels. Ipiranga stores its fuels in large tanks at each of its facilities located throughout the regions in which it operates. Primary facilities receive fuels directly from Petrobras by pipeline and from distilleries by railroad and road transportation, while secondary facilities are supplied by railroad and trucks. See “Item 4.B. Information on the Company—Business overview—Industry and regulatory overview—C. Fuel distribution.” In 2022, Ipiranga’s storage capacity was 903 thousand m³. Based on its 2022 average sales, Ipiranga can store approximately 10 days of fuel supply. Accordingly, an interruption in the production of oil-based fuels for longer than that time could result in shortages.

In 2021, we had the start-up of the operations of the SPEs of Cabedelo and Belém (BEL2A), in addition to the beginning of the operations of the shared base of Miritituba, which has 21 thousand m³ of static capacity and in which Ipiranga, Vibra and Raízen hold equal stakes. In the second half of 2021, Ipiranga started the construction of a shared base in Fortaleza, which started operating in February 2023, and has a total static capacity of 21 thousand m³, with Ipiranga holding 60% of it. In December 2021, Ipiranga also started contracting a static capacity of 25 thousand m³ at Ultracargo’s terminal in Vila do Conde.

AmPm

AmPm convenience store is the seventh largest franchise network in the country, according to ABF’s ranking in 2022, with 1,598 stores, a penetration of 24% in the total service stations as of December 31, 2022.

Through its AmPm convenience stores, Ipiranga has been developing initiatives to increase product offerings. In 2010, we announced the launch of private label products, including energy drinks and snacks, and the expansion of the AmPm bakeries, providing to resellers an additional source of income, as well as strengthening the AmPm brand. In 2020, we expanded the bakery foodservice mix and items related to grocery, home, and personal care categories, following our new product mix management policy.

With nationwide presence, our bakeries serve fresh products, such as bread, coffee, snacks, and hot meals through more than 150 items, including AmPm branded products. A convenience store with a bakery has the potential to substantially increase revenues compared to a regular AmPm by offering more products of daily consumption and increasing the flow of costumers in the store. Ipiranga ended 2022 with 762 bakeries.

In 2014, Ipiranga launched a new beer purchase experience through its Beer Cave, which is a walk-in refrigerated area that stores more than 100 premium brands of beer. Ipiranga ended 2022 with 407 Beer Caves.

In order to strengthen the AmPm convenience stores’ product offerings and operations, Ipiranga launched in 2014 its own supply solution. The AmPm Suprimentos concentrates logistics, sales, and customer service of the convenience store main products in just one structure serving approximately 1.5 thousand stores. This initiative aims to streamline the AmPm convenience store’s operation, increase the competitiveness of franchisees and ensure higher-quality product range and higher standardization of products assortment and availability. This model allows the entry of a wider range of suppliers, who are unable to deliver to each store individually, and eliminates the effort required for franchisees to keep their stores stocked.

At the end of 2022, AmPm Suprimentos operated four distribution centers located in Rio de Janeiro, São Paulo, Paraná, and Rio Grande do Sul states, which supply the stores in those states with the main categories of products, except tobacco and ice cream.

In January 2020, AmPm released a new store model, developed with what we believe to be the most up-to-date concepts in the global C-Store market. This new store focuses on providing ​​a more fluid and less frictional consumer journey, emphasizing food service. As a result, the first stores using this concept show an average growth in sales of food category products. We believe this new store concept changes the way customers shop in AmPm by allowing customers to be closer to walk-in coolers, the Beer Cave format, and to have a digital experience, including the possibility of shopping in the main marketplaces in Brazil, such as iFood and Rappi. As of December 31, 2022, AmPm had 300 stores in the new concept, being 101 company-operated stores and 199 franchises. We expect to implement this new omnichannel concept as part of our plan to achieve operational excellence in our AmPm stores.

In order to expand our franchise network, we also started operating our own AmPm stores. AmPm ended 2022 with 229 units and expects to further expand the number of company-operated stores going forward. AmPm's company-owned operations are intended to (i) strengthen the franchise model, (ii) achieve operational excellence, (iii) boost the profit of the business model, (iv) test the business model, and (v) work as a transitional operation model when franchisees withdraw or until we believe the franchise model is sufficient to lead to critical mass and turnover in the region where own stores are located.

The company-operated stores have a management model focused on business results, efficient management controls and a specialized team with experience in retail management. The location choices are determined by an expansion committee that analyzes the trade with indicators and decide whether to go ahead with the venue in question. This allows the Company to accelerate the expansion of AmPm in a more strategic and secure way with the goal of improving financial return of each business.

The table below shows the highlights of AmPm stores:

(1) Calculated based on the number of AmPm’s stores in relation to the number of Ipiranga’s gas stations

AmPm revenues include a fixed franchising fee and a percentage of total revenues, which generally range between 4% and 8%. We also receive merchandising fees linked to contracts with suppliers, which establish trade agreements for the convenience stores.

We believe the service stations convenience stores sector has potential for continued growth, mainly due to the shifts in cultural and household habits, such as (i) higher participation of women in the labor market, (ii) the increase of single-person households and smaller apartments, (iii) urbanization, increasing population density and logistical complexity, among others.

The convenience proposal increasingly adapts to the needs of consumers who seek practicality and speed in their routine, trying to solve their demands in a single stop. Thus, convenience stores fit the ideal model, adapting a complete service in one place.

These strategic differentiation initiatives implemented by Ipiranga resulted in a better value proposition for customers and resellers, generating benefits for the whole chain – the consumer gets access to differentiated products and services, the reseller earns higher revenues, and the service station obtains a differentiated positioning, turning Ipiranga into a convenience business platform for facilitating people’s daily routine and mobility.

Jet Oil

The Jet Oil business unit, Ipiranga’s lubricant-changing and automotive specialized service network, is the 14º in ABF ranking among all kind of franchises. Jet Oil ended 2022 with 1,134 franchises.

More than 7,730 oil changes were made at Jet Oil units per day and 75.4% of the products sold were premium products in 2022. Jet Oil units offer an oil change service that features technology and safety, unifying quality products and expert services. These attributes translate Jet Oil’s slogan for consumers: “The full care that your car deserves.” 

Competition

Ipiranga’s main competitors in 2022 were:

• Vibra, a former subsidiary of Petrobras, which has been operating in the Brazilian fuel distribution sector since 1971. Vibra is the Brazilian market leader and operates throughout the entire country. In 2017, Vibra concluded its initial public offering, listing the shares on B3. Since 2021, as disclosed by Vibra, Petrobras is no longer its shareholder; and
• Raízen, a joint-venture between Cosan and Shell International Petroleum Company Limited (“Shell”), a subsidiary of Royal Dutch Shell. Cosan, through its subsidiaries, is the largest producer of sugar and ethanol in Brazil, having entered into the fuel distribution market in 2008, when it acquired Esso’s fuel distribution business in Brazil. Raízen consummated its IPO in August 2021, listing its shares on B3.

In addition, several small local and regional distributors entered into the Brazilian fuel distribution market in the late 1990’s, after the market was deregulated, which further increased competition in such market. Moreover, in 2018, some important international players entered the Brazilian fuel distribution market: (i) Glencore Oil Participações Ltda., a Swiss company, through the acquisition of 78% of Alesat Combustíveis S.A. (further expanded to 100%); (ii) TotalEnergies SE., a French company, through the acquisition of 100% of Zema Cia. de Petróleo; (iii) PetroChina Company Limited, a Chinese company, through the acquisition of 30% of Tt Work Participacoes S.A. As of the date of this annual report, there were 179 fuel distributors authorized by ANP to operate in Brazil.

The following table sets forth the market share of Ipiranga and its main competitors based on volume of gasoline, ethanol and diesel sold, according to ANP and IBP data:

(1)       Volume sold of gasoline, ethanol and diesel.

The retail market for gasoline, diesel and ethanol in Brazil is highly competitive, with similar products and relatively low margins. Therefore, our strategy is to differentiate ourselves in the market by offering value-added services to complement our main products, aiming to be the preferred choice of customers. The following graphs show sales volumes for the Brazilian market and Ipiranga for the periods indicated:

Sources: diesel, gasoline and ethanol: ANP and IBP; Information provided by ANP and IBP are subject to retroactive adjustments and, therefore, can differ from the information contained herein.

Environmental, social and governance initiatives

Ipiranga has sustainability as one of its strategic initiatives and works on increasingly incorporating a sustainability culture into the routines of its entire team and on ensuring the integration of sustainability into decision-making.

Ipiranga annually publishes its Sustainability Report, prepared in accordance with the standards of the Global Reporting Initiative (GRI), showing projects and actions taken during the year. The material themes that guide Ipiranga’s ESG actions are: i) governance and integrity, ii) energy transition, iii) health and safety, iv) eco-efficient operations, v) proximity to the network and consumers, vi) value chain, vii) inclusive culture and diversity and viii) responsibility for the surrounding communities.

Governance and integrity. Ipiranga has a structured Integrity Program that is guided by best practices in fighting against corruption, preventing anti-competitive conduct, mitigating conflicts of interest, and maintaining an environment that is free of harassment and discrimination, with processes and controls aimed at increasingly strengthening the company's culture of integrity. In 2022, the company rolled out new ethics and anti-corruption training for all employees, also implementing training groups for the internal public and resellers.

Energy transition. Ipiranga has been implementing actions aimed at energy efficiency and, for more than 10 years, has had an exclusive and independently audited program to manage its GHG emissions. The “Carbono Zero” Program (Zero Carbon) includes actions to measure, reduce and offset GHG emissions and follows recognized international guidelines. Also, as part of this program, since 2014 Ipiranga has offset 100% of its direct (scope 1) and indirect (scope 2) emissions by purchasing carbon credits.

Ipiranga is also one of the largest biofuels distributors in Brazil and seeks to expand the development of new products and services that are less carbon intensive, such as electric mobility initiatives and additive products, which improve engine efficiency and, thus, reduce fuel consumption. The company was also the first fuel distributor to make electric chargers available in its service stations. As of the date of this annual report, Ipiranga had 44 chargers in urban areas, in a partnership with BMW, and 6 chargers on highways, in a partnership with BMW and EDP.

Health and safety. Ipiranga bases its safety management on actions that ensure adequate technology, facility integrity, efficient processes, people training and engagement, continuous procedure improvement, and the setting of guidelines that all the value chain must follow. Its main objective is to strengthen the health and safety culture and further include safety in the decision-making process.

To strengthen its safety culture, Ipiranga has a program that seeks to ensure adequate physical conditions, efficient procedures, and safety behavior in its operations. Its safety program has a structured investment plan for asset reliability, engagement, and training of stakeholders, in order to make them agents of change. In 2021, the Safety Culture Diagnosis was carried out in the first semester, which considered the perceptions of employees, including leadership and administrative and operational employees.

In 2022, the actions of the Safety Evolution Plan were implemented. The plan aims to strengthen the safety culture through the improvement of Ipiranga’s processes, including a set of training and engagement actions designed to further internalize its safety culture as part of the decision-making process of all functions and activities. Also in 2022, Ipiranga launched its Golden Rules, which established mandatory safety principles that must be rigorously followed by both the company’s own employees and third-party service providers.

Eco-efficient operations. Ipiranga has adopted its own environmental management system through a program named SIGA+ (Ipiranga’s management system applied to health, safety, environment, quality, and social responsibility), which applies the highest international standards to its policies and practices. Through SIGA+, Ipiranga monitors and manages the units' performance indicators to ensure alignment with the reference standards for integrated management and continuous improvement. The data are audited annually to categorize the performance of the operating units into five levels. In 2022, new guidelines and actions were also implemented seeking to prioritize waste reduction (for example, increasing reuse/recycling processes), reduce landfill waste disposal and minimize the environmental impacts resulting from the generation of waste.

The GHG emissions inventory is externally verified and complies with the international guidelines of the GHG Protocol. In 2022, for the 10th consecutive year, we were granted the Gold Seal of the Brazilian GHG Protocol Program, recognition given to companies for disclosing the audited GHG inventory in the Public Emissions Registry. For the second year, Ipiranga acquired I-RECs coming from wind generation for every volume of power consumed in the organization.

Proximity to the network and consumers. In 2022, Ipiranga invested in training to the resellers, managers, and VIPs through “Escola de Varejo" (Retail School). Also in 2022, all the contracts with critical suppliers were reviewed to ensure the inclusion of clauses on anti-corruption, information security, human rights, social and labor responsibility, environmental, health and safety practices and other previously assessed compliance requirements. They are also subject to audits during the term of the contract.

Value chain. In 2022, focused on disseminating best ESG practices among its suppliers, Ipiranga revised its Supplier Policy and Booklet on Sustainability for Suppliers, which set out social and environmental guidelines that must be followed by all its business partners. Also in 2022, as part of the plan to improve logistics efficiency, Ipiranga launched the “Mover” program (To move), which aims to increase the efficiency and safety levels of the company’s operations and transport partners in an integrated manner. By carrying out a comprehensive evaluation of the partners’ operation using safety, efficiency and productivity criteria, Ipiranga encourages them to adopt the best technological practices in the sector, better managing transport risks and its vehicle fleet as a whole. Based on this evaluation, partners are ranked in four categories (diamond, gold, silver and bronze) and those who do not achieve minimum requirements are not admitted in Ipiranga’s value chain.

Inclusive culture and diversity. In addition to talent development and employee engagement, Ipiranga promotes actions that reaffirm its commitment to make its environment increasingly diverse and inclusive. For example, in 2022 Ipiranga: i) started a mentoring program aiming at accelerating the female leadership pipeline, ii) launched the “Construa” training program (To build), aimed exclusively at people with disabilities, to promote the development of administrative consultants, iii) half of the internship program positions were destined for black and brown-skinned candidates.

Responsibility for the surrounding communities. In 2022, the risks of all fuel storage bases and pools were mapped aiming to identify and manage potential social, environmental, and safety risks to stakeholders. Ipiranga’s focus for the coming years will be on the development of education, employment, and income generation of the communities where it operates.

Furthermore, Ipiranga developed its own programs for greater responsibility for the surrounding communities. For example: i) “Operação Mulher” (Woman Operation), which goal is to train women around its operations, aiming to boost the employability of women in the industry, ii) Volunteering Program – “Gente Ipiranga Gera Gentileza” (Ipiranga’s People Generate Kindness), that carried out a number of initiatives, including presentations to schools on safety, donation of toys and warm clothes, mentoring for young people, and a blood donation campaign, iii) Humanitarian actions contributions in the event of emergency crises, like the donation of basic food baskets and iv) “Saúde na Estrada” Program (Health in the Highways), that brings health to truckers, drivers, travelers, and communities attending Brazilian cities into a collaboration with the Ministry of Health.

D. Digital platform for mobility

abastece aí is a digital platform, created in 2020, to leverage the benefits of the loyalty program Km de Vantagens and the abastece aí app that were previously offered by Ipiranga. The company offers a unified ecosystem of advantages and benefits to clients, especially car drivers, integrated with a digital payment solution and great capillarity, including adoption by other business partners outside service stations.

Km de Vantagens was created in 2009, pioneering the customer loyalty program within the fuel industry, allowing customers and resellers to redeem rewards and benefits in areas of entertainment, tourism, magazines, airline tickets, car rental, among others. With over 37 milllion participants in December 2022, Km de Vantagens has served as an important platform, strengthening the relationship with Ipiranga’s customers. In 2022, more than 30 million transactions were redeemed at Km de Vantagens.

Ipiranga developed and launched abastece aí in 2016, a mobile payment service app, that seeks to maximize advantages from the integration of platforms to offer even greater convenience and benefits to customers. Through the abastece aí app, customers can obtain discounts in exchange for Km de Vantagens points. In addition, they can receive rewards of their preference and finalize the fueling process by using a unique Km de Vantagens password in a safe payment method. In 2022, approximately 1 million digital accounts have been created.

Context and market

Digital wallets are a global trend that involve a very diverse range of businesses. Between 2018 and 2020, the number of users of digital wallets grew by 30%, reaching more than 2 billion active users worldwide. According to a recent study by Bain & Company, “e-wallets” will represent 28% of total payments made in the world and almost 50% of all payments made in the sphere of e-commerce by 2022. In Brazil, this market is still very young, with great space for growth and development. The highly regulated and concentrated national banking system is the main obstacle to the current low participation of digital portfolios. However, due to recent changes in legislation, reduced technological costs, the entry of major international players in the market and the democratization of access to technology, digital wallets are expected to have an accelerate growth over the next few years.

The difficult and bureaucratic access to banks, combined with the mass use of smartphones, also contributes to the rise of digital wallets. Consequently, e-wallets emerge as a viable option to take care of people's financial organization, by offering a low cost and high efficiency service.

In 2020, the Central Bank of Brazil announced a new instant payment system with the potential to profoundly transform the country's payment industry. The PIX is a tool that allows the transaction of resources in a few seconds at any time of the day and all days of the year. In addition, PIX have a much lower transaction cost when compared to other payment methods such as Bank slip, TED or DOC. In order to use it, it is not necessary to have a bank account, just register it in any of the institutions approved by the Central Bank to offer this service, which includes abastece aí. Thus, by eliminating the need for intermediaries in the transfer process, we believe that PIX intensify the strengthening of digital wallets. It is extremely important to mention that the PIX is not only a substitute for traditional forms of payment, but it is also a mean to meet other financial demands, with the possibility of making payments in commercial establishments. As of December 31, 2022, PIX had already been registered by more than 141 million users, handling a volume of approximately R$1.2 trillion.

Operation

abastece aí is a relevant ecosystem of advantages for vehicles’ drivers, integrated with a financial platform that expands the purchasing power of its users. The application offers a varied range of services for its clients, such as: cashbacks on purchases from partner companies, payment of slips, transfers, functions of cash in/cash out on digital wallet and various financial products. The main revenue stream for abastece aí derives from Ipiranga service stations. When filling your car using the app at Ipiranga, the customer has the possibility to reverse a portion of the amount spent on several benefits, including: the accumulation of kilometers of advantage, cashback reversed in the portfolio, among others. Currently, abastece aí has partnerships with other companies operating in various sectors, such as TAM Linhas Aéreas S/A (LATAM), Movida Locação de Veículos S.A., among others.

In 2022, the strategy of abastece aí was concentrated around the revenues from the association fee with partner companies, being the main partnership with Ipiranga, operating more than 39 million transactions, totaling more than R$5.7 billion TPV.

Marketplace model. It is a virtual shopping mall, where partner companies advertise their products by paying an association fee. The partner exposes its products to a larger number of people, the consumer can access products from various segments and the company providing the marketplace receives a percentage of each transaction.

Cashback model. Through this model, when the user makes a purchase through the application, they receive a percentage of the money spent back. abastece aí works as the payment method and as a platform through which partners announce their products.

Work methodology. The abastece aí operation is based on three main pillars: technological know-how, data intelligence and agile culture. The first involves the entire user experience of the application, its functionality, and facilities. The company works to maintain an application with simple and intuitive interface, constantly improving the user’s experience.

In data intelligence, the company promotes the activation and growth of the customer base, identifying the main suggestions and criticisms to the functioning of the app. Also, it is critical to improve statistical and artificial intelligence models to personalize promotional campaigns, recognize potential customers and activate old users.

Industry and overview of our discontinued operations

1. Petrochemicals and chemicals

Ultrapar used to operate in the petrochemical industry through Oxiteno. On August 16, 2021, Ultrapar entered into a share purchase agreement for the sale of all shares of Oxiteno to Indorama. The sale was closed on April 1, 2022 and, as a result, Oxiteno is no longer part of Ultrapar’s business portfolio as of this date. For more information, see “Item 4.A. Information on the Company—History and development of the Company—A.2. Discontinued operations—Oxiteno.”

The petrochemical industry transforms crude oil or natural gas into widely used consumer and industrial goods. The Brazilian petrochemical industry is generally divided in three sectors, depending on the stage of transformation of the petrochemical raw materials. The companies that operate in these different stages are known as first, second and third-generation companies.

Brazil’s first-generation companies, which are referred to as “crackers”, break down or “crack” naphtha (a by-product of the oil refining process), their principal feedstock, into basic petrochemicals, including olefins, primarily ethylene, propylene and butadiene, and aromatics, such as benzene, toluene, and xylenes. Second-generation companies process the basic petrochemicals produced by the crackers to obtain intermediate petrochemicals, such as (i) polyethylene, ethylene oxide, polystyrene and polyvinyl chloride (PVC), each produced from ethylene; (ii) polypropylene, oxo-alcohols and acrylonitrile, each produced from propylene; (iii) caprolactam, produced from benzene; and (iv) purified terephthalic acid (PTA), produced from p-xylene. The intermediate petrochemicals are produced in solid form (as plastic pellets or powders) and in liquid form and are transported through roads, railroads or by ship to third-generation companies, which transform them into final products, including polyester, plastics, elastomers, acrylic fibers, and nylon.

Oxiteno

As of March 31, 2022, Oxiteno was a second-generation company, which processes basic petrochemicals produced by the crackers to obtain intermediate petrochemicals. While operated by Ultrapar, Oxiteno was the only producer of ethylene oxide, ethylene glycols, ethanolamines, glycol ethers and methyl-ethyl-ketone in Brazil, as well as the only producer of fatty alcohol in Latin America and the only ethylene oxide producer in South America. Its products were used in a broad range of industrial sectors, such as cosmetics, detergents, crop solutions, polyester, packaging, coatings, and oil industry. During the year ended December 31, 2021 and the three months period ended March 31, 2022, right before the conclusion of its sale, Oxiteno sold 779 thousand and 177 thousand tons of chemical and petrochemical products, respectively.

Products and markets. While operated by Ultrapar, Oxiteno’s products could be divided into two main groups for ease of understanding: (i) commodity chemicals, which are generally higher-volume products, with standard specifications, and (ii) specialty chemicals, which tend to be lower-volume products sold based on chemical features and suitability to meet a particular end-use requirement. Oxiteno’s main commodity chemicals were ethylene oxide and ethylene glycol whereas its main specialty chemicals included a wide variety of products that were used as surfactants, softeners, dispersants, emulsifiers, and hydraulic fluids.

Specialty chemicals. The following table sets forth Oxiteno’s main specialty chemical products and their main uses and markets while operated by us.

Commodity products. The following were Oxiteno’s main commodity products, and their principal uses and markets:

Ethylene oxide. Ethylene oxide is a colorless and highly flammable gas at room temperature and atmospheric pressure. Ethylene oxide is produced in a continuous production process by gaseous phase catalytic partial oxidation of ethylene by oxygen at high temperature and pressure.

Ethylene glycols. The main ethylene glycol produced by Oxiteno was mono-ethylene glycol, known as MEG. Oxiteno also produced di- and tri-ethylene glycol. Mono-ethylene glycol is a clear, non-flammable, non-volatile liquid at room temperature and atmospheric pressure. Ethylene glycols are produced in a continuous process from an ethylene oxide solution and principally sold to chemical companies for the manufacture of polyester fibers and polyethylene terephthalate, known as PET, with the remainder sold for use in the production of antifreeze, brake fluids, solvent, and other chemicals.

The Brazilian petrochemicals industry seeks to prioritize demand from the domestic market, where there is greater value added, although sales are also made to the international market. While operated by Ultrapar, Oxiteno sold the larger part of its commodities and specialty chemicals in Brazil, with production capacity exceeding domestic market demand, with Oxiteno exporting surplus production to more than 50 countries in Asia, America, Europe, Africa, and Oceania. Oxiteno maintained its production capacity above local demand for strategic reasons. For the three months period ended March 31, 2022, right before the conclusion of Oxiteno’s sale and the year ended December 31, 2021, 36% and 34% of its net revenue from sales and services, respectively, were from sales outside Brazil. For the three months period ended March 31, 2022 and the year ended December 31, 2021, 31% and 29%, respectively, of Oxiteno’s sales volume were from sales outside Brazil.

The following table shows Oxiteno’s sales volume by market group for the period indicated:

(1)  For the period between January 1, 2022, and March 31, 2022.

(1)  For the period between January 1, 2022, and March 31, 2022.

B. Retail pharmacy

Ultrapar used to operate in the retail pharmacy sector through Extrafarma. On May 18, 2021, Ultrapar entered into a share purchase agreement for the sale of all shares of Extrafarma to Pague Menos. The sale was closed on August 1, 2022 and, as a result, Extrafarma is no longer part of Ultrapar’s business portfolio as of this date. For more information, see “Item 4.A. Information on the Company—History and development of the Company—A.2. Discontinued operations—Extrafarma.”

The retail pharmacy business is a highly regulated industry. In Brazil, the regulation of the sector is executed by the federal government, states and municipalities. The federal government enacts laws and regulations of general applicability, which are enforced and complemented by actions of the states and municipalities. At the federal level, the health and pharmaceutical sectors are regulated and supervised by the Ministry of Health, through ANVISA.

The retail pharmacy business in Brazil is responsible for the purchase, distribution, and resale of medicines to end consumers through drugstores. It is also a common practice in this industry to sell beauty and personal care products as well as certain convenience products at drugstores. Its main suppliers are pharmaceutical producers and beauty and personal care producers.

The main types of pharmaceutical products sold in Brazil are listed below:

Branded medicine. Innovative products, registered at the federal agency responsible for sanitary surveillance and marketed in the country whose efficacy, safety and quality have been scientifically proven by the federal competent body upon registration.

Generic medicine. Contain the same active ingredient, in the same strength and dosage form, being administered by the same route and with the same therapeutic indication as the reference drug in the country, showing the same safety as the reference drug in the country.

Similar medicine. Contain the same active ingredients, has the same concentration, pharmaceutical form, method of administration, dosage, and therapeutic instructions, and is equivalent to a medicine registered with the Federal Agency responsible for sanitary surveillance, differing only as regard the characteristics of size and form of the product, period of validity, packaging, labelling, excipients and vehicle.

OTC medicines. Over the Counter (“OTC”) medicines that do not need a prescription to be sold.

Extrafarma

As of July 31, 2022, Extrafarma operated 399 drugstores in ten states of Brazil (121 in Pará, 11 in Amapá, 3 in Tocantins, 91 in Ceará, 57 in Maranhão, 34 in Pernambuco, 20 in Bahia, 16 in Rio Grande do Norte, 4 in Paraíba and 42 in São Paulo). Extrafarma operated four distribution centers: Benevides, in the state of Pará; Aquiraz, in the state of Ceará; Guarulhos, in the state of São Paulo and São Luís, in the state of Maranhão, which were responsible for supplying all stores.

As of July 31, 2022, Extrafarma operated both in the retail and wholesale of pharmaceutical products. For the seven months period ended July 31, 2022, right before the conclusion of its sale, Extrafarma’s gross revenues from sales and services reached R$1.3 billion, of which retail products represented 95% and wholesale products represented 5%.

Within the retail business, Extrafarma’s product mix consisted of all the main types of pharmaceutical products (branded medicine, generic medicine, similar medicine, and OTC), in addition to personal care products and convenience products. For the seven months period ended July 31, 2022, out of Extrafarma’s revenues in the retail business, branded medicines represented 35%, generic/similar medicines represented 16%, OTC 14%, personal care products represented 16% and convenience products represented 17%.

On the wholesale side, Extrafarma operated as a distributor of both pharmaceutical and personal care products. It purchased the products from manufacturers and sold them to other drugstore chains and independent retailers, which were serviced through Extrafarma’s own and leased truck fleet.

Insurance

We maintain insurance policies covering all the facilities of our wholly owned subsidiaries, which we consider appropriate to cover the risks to which we believe we are exposed, including but not limited to loss and damage from fire, lightning, explosion of any nature, windstorm, plane crash and electrical damage. The maximum compensation values based on the maximum possible loss that could result from a specific location as of December 31, 2022 are shown below:

(*)  In millions. In accordance with our policies terms and conditions.

We maintain general liability insurance that covers all our wholly-owned subsidiaries with a maximum coverage of US$250.0 million (R$1,304.4 million as of December 31, 2022) for losses and damage incurred by third parties as a result of any accidents that occur in connection with our commercial/industrial operations and/or the distribution and sale of our products and services.

We maintain Directors & Officers Liability insurance policies to indemnify members of the Board of Directors, Fiscal Council and executives of Ultrapar and its subsidiaries (insured persons) in the total amount of US$80.0 million (R$417.4 million as of December 31, 2022), which covers any insured liabilities resulting from wrongful acts, including any act or omission or any matter claimed against them solely by reason of his or her serving in such capacity, except if the act, omission or the claim is consequence of gross negligence or willful misconduct.

In addition, we also take out group life and personal accident, national and international transportation, and other insurance policies.

We believe that our insurance covers, in all material respects, the risks to which we are exposed and is in line with industry standards. However, the occurrence of losses or other liabilities that are not covered by insurance or that exceed the limits of our insurance coverage could result in significant unexpected additional costs.

          C. Organizational structure

The following chart shows our organizational structure for our main subsidiaries as of December 31, 2022:

We conduct our LPG distribution business through Ultragaz, composed by Cia. Ultragaz and Ultragaz Energia. Cia. Ultragaz comprises three main companies: i) Ultragaz (the original company), ii) Bahiana and iii) Utingás. Ultragaz operates in the business of LPG distribution, primarily in the South, Southeast and Midwest regions of Brazil. Bahiana operates in the business of LPG distribution, primarily in the Northeast region of Brazil. Utingás is an LPG storage company, with facilities in the states of São Paulo and Paraná. In addition, in 2022, we announced the acquisitions of Stella and of NEOgás, which mark Ultragaz's entry into the electricity and the compressed natural gas distribution segments, expanding its offer of energy solutions to its customers and enhancing its capillarity, commercial strength and brand.

We conduct our fuel distribution business through Ipiranga, represented by our wholly owned subsidiary Ipiranga. Ipiranga covers the distribution and marketing of petroleum products, ethanol and NGV throughout Brazil. Ipiranga, through its subsidiaries, owns AmPm brand in Brazil, and Tropical, which provides transportation services for Ipiranga and other fuel distributors. Ipiranga also owns 56% of Iconic, which is a joint venture with Chevron, that owns the remaining 44% of it.

We conduct liquid bulk storage business through our wholly owned subsidiary, Ultracargo, which operates through its subsidiary Ultracargo Logística that maintains storage facilities at six terminals, close to the main Brazilian port terminals, railroad junctions and roads. In April 2019, Ultracargo won the concession of VDC12 area at the Vila do Conde port, in Barcarena, state of Pará, with a minimum storage capacity of 59 thousand m³. In December 2021, Ultracargo started its operations at this new terminal, with a total storage capacity of 110 thousand m³.

We conduct a digital payment platform business through the brand abastece aí, which was created in 2020, combining the abastece aí app and the loyalty program Km de Vantagens, both of which became a new subsidiary of Ultrapar.

Until April 1, 2022, we conducted petrochemical and chemical activities through our then-wholly owned subsidiary, Oxiteno. In August 2021, Ultrapar entered into a share purchase agreement for the sale of all of its shares in Oxiteno to Indorama. On April 1, 2022, the transaction was closed and, as a result, Oxiteno is no longer part of Ultrapar’s business portfolio as of this date. For more information, see “Item 4.A. Information on the Company—History and development of the Company—A.2. Discontinued operations—Oxiteno.”

Until August 1, 2022, we conducted retail and wholesale pharmacy businesses through our then-wholly owned subsidiary, Extrafarma. In May 2021, Ultrapar entered into a share purchase agreement for the sale of all of its shares in Extrafarma to Pague Menos. On August 1, 2022, the transaction was closed and, as a result, Extrafarma is no longer part of Ultrapar’s business portfolio as of this date. For more information see “Item 4.A. Information on the Company—History and development of the Company—A.2. Discontinued operations—Extrafarma.”

As of the date hereof, all our material subsidiaries are incorporated under the laws of Brazil. For further information, see “Item 4.A. Information on the Company—History and development of the Company.”

For more information about our organizational structure, see Note 1.a.2 to our Consolidated Financial Statements for the year ended December 31, 2022.

D.      Property, plant and equipment

Ultragaz

Ultragaz’s LPG distribution network includes 19 filling plants. LPG is carried to the filling plants either via gas pipelines from Petrobras’ facilities or by tanker trucks. When LPG transportation is made via gas pipelines, the bases are known as primary and when transportation is made via tanker trucks, the bases are known as secondary.

Ultragaz also operates storage bases for LPG, known as satellite bases, for supplying our bulk trucks. These storage facilities are strategically located in order to keep supplies close to Ultragaz’s customer base, thus reducing transportation costs. As of December 31, 2022, Ultragaz had 9 primary plants, 10 secondary plants and 20 satellite bases located in the Southeast, Midwest, and Northeast regions of Brazil.

LPG is stored in the filling plants in large LPG storage tanks with an average of 60 tons per tank. In the case of LPG to be delivered in bulk, LPG is pumped directly from the storage tanks into the bulk tankers. In the case of LPG to be delivered in bottles, LPG is pumped from storage tanks into several filling heads, which fill the LPG bottles.

As of December 31, 2022, Ultragaz had a total storage capacity of 21 thousand tons, including the storage capacity indirectly held through its stake in Utingás. In addition, Ultragaz maintains its headquarters in the city of São Paulo and regional offices in the areas in which it operates.

Beyond the risks discussed in “Item 3.D. Key information—Risk factors”, there were no specific environmental issues that could affect Ultragaz’s utilization of these facilities.

Ultragaz is planning to invest R$428 million in 2023, R$190 million of which will be invested in the expansion of its operations and R$238 million in maintenance and other investments in upkeep. Expansion investments are mainly focused on continuously capturing new customers in the bulk segment, on revitalizing and opening points of sale, and on projects related to optimizing storage infrastructure and to energy diversification. The portion focused on maintenance will be directed to the sustaining of the businesses and includes mainly investments in maintenance of assets, safety and the renovation and remodeling of points of sale. 

Ultracargo

The following table sets forth the main products stored at and the storage capacity operated by Ultracargo’s facilities as of December 31, 2022.

Beyond the risks discussed in “Item 3.D. Key information—Risk factors”, there were no specific environmental issues that could affect Ultracargo’s utilization of these facilities. 

Ultracargo is planning to invest R$317 million in 2023, of which R$204 million will be invested in the expansion of its operations and R$113 million in maintenance and other investments in upkeep. The expansion investments will be focused on continuing the expansion of the IQI13 area in the Itaqui port (concession granted in 2021), on the grant of the Vila do Conde terminal (state of Pará), and on the acquisition of land for the construction of a railway branch in Santos. The portion focused on maintenance will be directed to the sustaining of the businesses and includes mainly investments in maintenance of assets and safety.

Ipiranga

As of December 31, 2022, Ipiranga distributed fuels through 88 storages terminals, which are strategically located to provide fast and efficient delivery of its products. There are two types of storage terminals: primary, which are usually located near the coast and large cities and are supplied by refineries through pipelines, and secondary storage terminals, mainly located inland and supplied by primary storage terminals through railways or road transportation at locations not serviced by railway systems. Large customers and TRRs are also serviced by primary storage terminals. As of December 31, 2022, Ipiranga had 51 primary storage terminals and 37 secondary storage terminals.

Distributors may own their storage terminals, lease space in third parties’ storage terminals or participate in pools via jointly operated terminals that serve two or more distributors. As of December 31, 2022, the total capacity of Ipiranga’s storage terminals was 903 thousand m³, out of each 31% were owned, 44% were related to third party agreements and 25% were related to jointly operated terminals.

Beyond the risks discussed in “Item 3.D. Key information—Risk factors”, there were no specific environmental issues that could affect Ipiranga’s utilization of these facilities.

Ipiranga is planning to invest R$1,376 million in 2023, of which R$585 million will be invested in the expansion of its operations and R$791 million in maintenance and other investments in upkeep. Expansion investments will mainly be directed to the branding of service stations with higher levels of throughput and, to a lesser extent, the expansion of capacity and logistics infrastructure on existing bases. The portion focused on maintenance will be directed to the sustaining of the businesses and includes mainly investments in maintenance of assets, safety and information technology.

None.

A.      Operating results

You should read this discussion together with our Consolidated Financial Statements, including the notes thereto and other financial information included elsewhere in this annual report. This annual report contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors including, without limitation, those set forth in “Cautionary Statement Regarding Forward-Looking Information” and the matters set forth in this annual report generally.

In 2021 and 2022, Ultrapar conducted a portfolio rationalization process and, as a result, it entered into share purchase agreements for the sale of Extrafarma, ConectCar and Oxiteno. The sale of Ipiranga’s interest in ConectCar was closed in October 2021. On December 31, 2021, Oxiteno and Extrafarma were classified as assets and liabilities held for sale and discontinued operations, due to signing of a share purchase agreement with Indorama in August 2021 and with Pague Menos in May 2021, respectively. The sales of Oxiteno and Extrafarma were closed on April 1, 2022 and on August 1, 2022, respectively, and as a result these companies are no longer part of Ultrapar’s business portfolio as of these dates. In 2022, Ultrapar has ceased to present abastece aí as a separate segment, due to the small relevance of this business relative to the overall results of the Company.

Overview

Ultrapar’s origins date back to 1937 when Ernesto Igel founded Ultragaz, which pioneered the use of LPG as cooking gas. Ultrapar is one of the largest business groups of Brazil, with an outstanding position in the energy and infrastructure segments through Ultragaz, Ultracargo and Ipiranga:

• Ultragaz: a pioneer and a leader in LPG distribution in Brazil, Ultragaz is a reference in innovation and has been expanding the energy solutions it offers to its customers. Ultragaz operates in Brazil directly or through resellers with professionals visiting several customers daily. In 2022, Ultragaz served approximately 59 thousand business customers in the bulk segment, 583 thousand customers of Individual Billing and more than 11 million households in the bottled segment through a network of approximately 5.8 thousand independent retailers;
• Ultracargo: the leading company in the independent liquid bulk storage terminals sector in Brazil, Ultracargo is present in the country’s main ports with modern terminals for the storage and handling of different products, such as fuels, ethanol, chemicals, corrosives and vegetable oils; and
• Ipiranga: one of the largest Brazilian fuel and lubricant distribution companies and one of the most valuable brands in the country, with a network of more than 6.7 thousand service stations, in addition to 1.6 thousand AmPm stores, the largest convenience store franchise in Brazil.

Brazilian economic background

Since our continuing operating businesses are located in Brazil, we are significantly affected by Brazil’s economic and social conditions, including, but not limited to, GDP, growth rates, credit availability and disposable incomes, the domestic rate of inflation and exchange rate fluctuations.

GDP. In 2020, as a result of the COVID-19 pandemic, Brazilian GDP contracted 3.9%. Our operations suffered the effects of such contraction, especially regarding LPG sales to commercial and industrial customers, diesel sales and Ultracargo’s logistics operations. In 2021, GDP grew 4.6% driven by a 4.7% and 4.5% growth in the service and industry sectors, respectively. In comparison to 2020, 2021 was a year of recovery, the first since the outbreak of COVID-19 pandemic, mainly due to the progress of the vaccination process, which had a direct impact on family consumption. The increase in fiscal uncertainty and inflation drove the increase in the Selic rate, from 2.00% at the beginning of the year to 9.25% on December 31, 2021. The beginning of 2022 was marked by volatility in the capital markets, rising prices of commodities and rising inflation around the world, mainly due to another wave of COVID-19 and the conflict between Russia and Ukraine, factors that resulted in interest rate increases and greater risk perception by investors. In 2022, Brazilian GDP grew 2.9%, mainly driven by the reopening of the economy after the restrictions imposed by the COVID-19 pandemic in 2021, added to the stimulus packages, the evolution of public accounts and the financial support policies for the population.

As a result of the uncertainties with respect to both the domestic and international outlook, including as a result of the ongoing military conflict between Ukraine and Russia and the general elections held in Brazil in October 2022, the market perspective as of the date of this annual report was of a stagnant economy, with both inflation and high interest rates. Additionally, in the aftermath of the 2022 election results, there were mass protests and demonstrations throughout Brazil highlighting a deeply polarized electorate amidst a political climate, which could contribute to increased macroeconomic and political instability. For more information, see “Item 3.D. Key information—Risk factors—The Brazilian government has exercised, and continues to exercise, significant influence over the Brazilian economy. Brazilian political and economic conditions, including ongoing political instability and perceptions of these conditions in the international markets, could adversely affect our businesses and the market price of our shares and ADSs.”

Inflation and currency fluctuations. Our cash operating activities are substantially in Reais and tend to increase with inflation. However, some of our costs of sales and services sold are linked to the U.S. dollar and are not substantially affected by the Brazilian inflation rate. In addition, some of our Real-denominated debt is indexed to the rate of inflation. In 2020, the Real depreciated 28.9% against the U.S. dollar, mainly due to (i) the impact of the COVID-19 pandemic; (ii) uncertainties in the U.S. political landscape in view of its presidential elections and (iii) the worsening of risks in the Brazilian fiscal debt. The IGP-M index was 23.1%, impacted mainly by the devaluation of the Real against the U.S. dollar that affects directly the prices of raw material and others industrial inputs. The IPCA index rate closed 2020 at 4.5%. In 2021, the Real depreciated 7.4% against the U.S. dollar, mainly due to the increase in global inflation coupled with high fiscal risks and low growth rate in Brazil. The IGP-M index was 17.8% and the IPCA index rate ended 2021 at 10.1%. In 2022, the Real appreciated 6.5% against the U.S. dollar, mainly due to the reopening of the economy after the restrictions imposed by the COVID-19 pandemic in 2021, added to the stimulus packages, the evolution of public accounts and the financial support policies for the population. The IGP-M index was 5.5% and the IPCA index rate ended 2022 at 5.8%.

The main foreign exchange risk we face arises from certain U.S. dollar denominated costs and expenses. Although a part of our debt is U.S. dollar-denominated, it is currently hedged against currency devaluation through the use of various derivative instruments or matching assets in the same currency. Additionally, a significant part of our raw materials is also denominated or indexed to the U.S. dollar. Hence, we are exposed to foreign exchange rate risks which could negatively impact our businesses, financial situation and operating results as well as our capacity to service our debt.

The table below shows the inflation rate for the periods indicated, as well as the devaluation (or appreciation) of the Real against the U.S. dollar.