Q3 2020 UGI Corp Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the UGI Corporation third quarter I fly 20 earnings call and webcast. At this time all participants are in a listen only mode. After the speakers presentation. There will be a question answer session.
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Please be advised that today's conference is being recorded.
If you require any further assistance. Please press star zero I would now like to hand, the conference over to your Speaker today Investor Relations manager Awana. The Hora. Thank you. Please go ahead.
Thank you good morning, everyone and thank you for joining up with me today, our tickets Jetski CFO you'd be I Corporation, Bob Beard Executive Vice President natural gas, Roger Parral Executive Vice President of Global LPG, and John Walsh, President and CEO of UGI I.
Before we begin let me remind you that our comments today include certain forward looking statements, which management believes to be reasonable as of today's date only actual results may differ significantly because of risks and uncertainties that are difficult to predict please read our earnings release and our annual report on form 10-K for an extensive list of factors that could affect.
Results.
Well no duty to update or revise forward looking statements to reflect events or circumstances that are different than expectation will often describe our business using certain non-GAAP financial measures.
So he sins of these measures to the comparable GAAP measures are available on slide 10 of our presentation.
Now, let me turn the call over to John.
Thanks, a lot a good morning, and welcome to our coal.
I hope that you all have the opportunity to review our press release reporting or third quarter results.
We're very pleased with our strong third quarter performance and increased or for your guidance to a range of $2.45 to $2 and 55. So.
This was a particularly significant quarter for us as we address the challenges of cobot 19 step forward with our efforts to help address systemic racism and maintained our focus on safe and secure operations. While much work remains we were encouraged with our progress in each of these critical areas in Q3.
Turning to our financial performance, we delivered strong results as a combination of colder than normal weather rigorous expense and margin management and the positive contributions of our LPG restructuring programs underpinned strong earnings cash flow and liquidity.
Our teams demonstrated their focus and resiliency as we address these major challenges in a quarter that was I'm like any quarter in our 138 year history.
Our results in Q3, very clearly demonstrate the strength and resiliency of our businesses.
Each of our Threed domestic businesses delivered increased operating income versus Q3 fiscal 19.
UGI International performed well despite the challenges of another very warm quarter.
In addition to strong earnings performance, our teams did an outstanding job delivering free cash flow, while closely managing capex and working capital.
On today's call I'll comment on key activities in market developments in the quarter and then turn it over to Ted who will provide you with an overview Abuja its financial performance.
Beard will provide an update on key activities across our natural gas business and Roger will follow with details of progress in our LPG business.
I'll wrap up with comments on our U.S.G. program and our outlook.
Our Q3, GAAP EPS was 41 cents and our adjusted EPS was eight cents.
That adjusted Q3, P.S. was five cents below our fiscal 19 Q3 adjusted EPS.
Due to our 100% ownership of Amerigas during this off season quarter and the impact of the pandemic.
Hi, Andrew I was extremely strong as we better U.S. The continued strength Abuja Appalachian midstream and continued growth in our cylinder exchange program at Amerigas.
One indicator of the strength of our Q3 performance is our EBIT of 80.4 million, which was well above our Q3 fiscal 19 EBIT of 52.6 million.
Our year to date performance is equally strong.
Our year to date gap bps is $2 in 50 cents in our year to date adjusted EPS is $2.81.
That adjusted EPS is 18% above fiscal 19 year to date adjusted EPS of $2 in 38 cents.
This quarter's have been adjusted for the Mark to Mark valuation of unsettled hedges and other items Ted will cover later.
Performance comes in a year when weather across all of our businesses has been warmer than normal and warmer than prior year.
We're really pleased with the commitment and resilience demonstrated by our teams as we focus on meeting the critical needs of our customers and communities. While also delivering very strong performance.
Based on the very strong Q3 results and benefits from foreign tax treatment, yes, inclusive of the cobot impact to be in the range of $2.45 to $2.
55 cents, Ted will increase in our guidance in his comments.
As I noted earlier one of the drivers for our Q3 performance was the continued strong contribution from your dry Appalachia.
We continue to see volume growth in Appalachia year to date versus last year and have benefited from the operational effectiveness of the Ujobai Appalachian team.
Most of it.
Marketing in Q3 can be attributed to you jambalaya.
Core element of our midstream business.
Amerigon has delivered a solid year on year increase in EBIT, despite the impact to the pandemic.
This strong performance was due to colder weather early in the quarter focus.
<unk> expense management and growth in cylinder exchange from our investment in vending and our new home delivery service.
In addition, while the pandemic reduced commercial and motor fuel volumes.
We received an additional uplift in our cylinder business as customers spent more time cooking at home.
Our utilities team had a very busy quarter as well our field teams did an outstanding job as we stopped all non essential customer facing activities for about two months and then restarted much of that activity late in the quarter.
We're executing our field work with new protocols that prioritize the safety of our employees our customers and the public.
We also move forward with the settlement that agreement with proposed rate increases of $20 million is under review first.
By the presiding administrative law judge and then by the PC and we expect a decision by addition to the rate increase the settlement includes a recovery mechanism for certain pandemic related costs, including any increased uncollectible expenses.
I will speak to the rate case in more detail in a few minutes.
There was limited activity in the quarter related to our Penn East project, we continue to work closely with our partners to gain the necessary approval to move forward.
We expect to gain additional clarity in the early fall when the U.S Supreme Court decides if they're going to hear our case.
We're encouraged by the firming of natural gas commodity values and believe that our existing network of midstream assets is ideally positioned to benefit from the improving commodity market.
We're nearing completion of the Bethlehem LNG storage and vaporization system.
This is an important expansion of our LNG network as we see LNG, peaking demand, increasing as pipeline expansion and greenfield projects or canceled or delayed.
We also continue to transport LNG to other regions in the mid Atlantic in the northeast as peak customer demand exceeds existing pipeline supply capacity.
I'll return later on the call to comment on our progress on MSG and.
But I'd like to turn it over to Ted at this point.
For the financial review Ted.
Thanks, John as John mentioned will.
Before we get into quarterly results I wanted to discuss our updated guidance $2.45 to $2.55 per share.
This is an increase from our previously stated range due to very strong April results.
EBIT coming in roughly 55% higher than our original projections.
The cold weather provided the tailwind in the quarter. We also benefited from disciplined expense management transformation investments in LPG and incremental margins I mean G. Felicia.
And our second quarter call, we projected coal that to create a 20 to 30 cents impact to our results and we still expect to be in that range for the full year.
Oh that created an earnings headwind of roughly 15 cents in the third quarter and we anticipate an additional 10 cents headwind in our fourth.
But did not updated guidance range.
Wabco.
Customers across all four businesses. It was partially mitigate aided by outsized domestic cylinder sales an ace result.
Furthermore, we expect that the recent D.C.J. reform to the global intangible low tax.
Income provisions known as guilty combined with the cares Act and the particular fact pattern of our international operations resulted in approximately 10 cents of incremental benefit for 2020.
Whether encoded amplifying our tax benefits this year and that is not clear that they will repeat to the same level next year.
In assessing the potential impact on future years, and will provide an update when we discuss fiscal year 2021 guidance next quarter.
And while we're on forward looking items, we want to share that for the next fiscal year, we will begin to finding normal weather as a 10 year average of heating degree day history. Instead of the 15 year average we've been using in recent years.
We believe this shift represents a better forward projection based on more recent whether clinics and while we must remain responsive in any one year to warmer than normal weather conditions. We believe this change will align with our strategic and long term approach to cost management business development.
And capital allocation that lessens the influence of the weather volatility.
This change will result in a decrease of EBIT of $13 million.
Your sense and PS next year will not make any adjustments to our long term financial guidance for EPS and dividends.
Liquidity.
Yeah, I continues to maintain a strong balance sheet and generates significant cash flow.
Serving us well with the continued uncertainty of the coded 19 situation.
Cash flows remained strong with year to date cash provided by operating activities and free cash flows both growing 4% and 19% respectively versus the same period a year ago.
On a consolidated basis UGI Corporation had $1.6 billion on available liquidity as of June Thirtyth up from the 1.2 billion dollar position at the close of Q2 distributed across all four of our businesses.
We closed the quarter with ample room against our debt covenants Lastly on July 21st our board of directors declared a quarterly dividend of 33 cents per share.
We delivered adjusted EPS of eight cents versus 13 cents in the prior year period.
Please note that the S figures for fiscal 2020, reflecting incremental 34.6 million shares issued in conjunction with the Amerigas merger.
Our reportable segments, EBIT was $18 million compared to 53 million last year.
This table lays out our GAAP and adjusted earnings per share for fiscal 2000 compared to fiscal 19.
As you can see our adjusted earnings exclude a number of items such as the impact of mark to market changes in commodity hedging instruments.
Gain a 55 cents this year versus a loss of 14 cents and third quarter fiscal 19.
This year, we had a two cents loss on foreign currency derivative instruments and no impact last year.
You can sealy adjusted out two cents of expenses associated with our LPG business transformation initiatives, bringing our year to date total to 14 cents.
Lastly, I wanted to point out the 18% impairment of assets held for sale.
This is related to the sale of our ownership interest in the Conemaugh generation station in Western Pennsylvania.
The sale of this non core asset generates a tremendous U.S.G. benefit for UGI Guy and Bob will describe.
Our domestic results benefited from cold weather, particularly in April which is more heating degree days than May and June combined.
In spite of cold in the business delivered strong results in May and June as well due to the previously mentioned expense management.
Our two LPG businesses face very different operating conditions in the quarter has amerigas benefited from whether that was 15% colder than last year, while our international business based another warm quarter, roughly 21% warmer than the prior period.
And natural gas businesses benefited from cold weather in incremental earnings from the acquisition of New JCI Appalachian.
More specifically on the Amerigas business.
The team delivered a strong quarter, despite currency headwinds, which impacted gallon sold mostly commercial customers.
Areas, where we experienced sharp volume declines include non essential services customers such as restaurants in other hospitality customers as well as auto gas customers witchcraft quickly as many school years ended in mid March.
Total margin increased $5 million predominantly driven by higher average retail unit margins and very strong cylinder sales significantly mitigating the adverse coded impact on commercial volumes.
As you can see Amerigas, opex declined 10% versus the prior year.
The team continues to do a nice job managing expenses and we're beginning to see the progress of the LPG transformation initiatives.
We remain on track to deliver $30 million PML savings for fiscal 20 and are well positioned to hit our target of $120 million by the end of fiscal 22.
Lastly, opex benefited from lower litigation expense in the quarter of roughly $10 million.
UGI International achieved EBIT of $20 million compared to $29 million in fiscal 2019 decrease is largely attributable to warm weather and a little bit impacted commercial and industrial segments.
Margin management, effectively offset some of the volume headwinds in the core.
Like Amerigas and UGI International team continues to deliver Opex savings, while making progress on the transformation initiatives.
We expect to realize the full 5 million euros and PML savings in fiscal plenty and are on track to deliver the full 30 million euros in the cost savings by the end of fiscal 22.
Turning to the natural gas side of the house midstream and marketing reporting EBIT of $20 million tend the quarter compared to $4 million in Q3 last year.
UGI I Appalachian was the main driver of the year over year improvement.
Total margin operating and administrative expenses depreciation and amortization and other income all reflect the impact of the acquisition.
Oh that impacted our commodity marketing business in the quarter, primarily in our commercial customers. The pandemic related volume headwinds contributed to a 2 million dollar decrease in commodity marketing margin compared to the prior year.
UGI utilities reported EBIT of $21 million and corridor, which is roughly flat compared to the third quarter 2019.
Total margin increased by $8 million, which was largely driven by the volume impact of cold weather and the increase in base rates, which became effective October 11 2019.
Opex was higher in the quarter due mostly to increases in uncollectible accounts expense related to the effects of coal trade.
18 maintenance in consulting and employee compensation and benefits related expenses.
In a moment Bob will share details on our expected rate case settlement, which includes the ability to create a regulatory assets for future recovery of covered related expenses, including related to uncollectable accounts, we didnt want to share. However, that's a P.C.S corridor prohibiting the term.
Combination of service impacted our allowance for doubtful accounts, whereby we had a record both our third and fourth quarter expenses in this quarter.
Lastly, our depreciation expense increased versus the prior year quarter due to continued distribution system in IP capital expenditure activity.
With that I'll turn the call over to Bob Bob.
Thanks Ted.
Q3 was a solid quarters for both energy services and utilities with both companies performing very well despite the challenges of the Cobrand buyers.
Combined Fytwenty third quarter EBIT for you guys natural gas businesses.
59% higher than Q3 drivers of this significant increase in EBIT for energy services, including continued strong performance at UGI, I, Felicia and whether that was 21% colder than normal.
Utilities experience, rather that was more than 12% Colby on customer usage.
Actively negated the effects of code.
Both natural gas comes when you did very well controlling discretion.
Every expenses, which also contributed to a strong Q3.
Core activities remain on track as we focus on growth opportunities both natural gas businesses.
Utilities, we continue to execute a large capital program that will see us invest nearly $2 billion over the next five years.
A large portion of our capital program is dedicated to replacing aging infrastructure.
Which helps reduce C O two we clearly missions.
Since 2009 utilities has reduced these emissions by more than 30% and we expect an additional 35% reduction over the next 10 years as a result of our facility replacement program.
At energy services construction continues on a Bethlehem LNG facility.
Which once complete will provide an additional 75000 dekatherms a day of capacity.
25% expansion of our LNG vaporization capability.
We expect this $60 million project to be completed this fall on time and within budget.
As I mentioned on prior earnings calls.
Energy services commenced service on our offered for projects in the first quarter this fiscal year.
This project has proven successful.
With fiscal year to date throughput through June on the Albers system, increasing by nearly 52 bcf or 91% over the same period last year.
This project is a good example are the energy services to.
Is delivering growth even during times of depressed natural gas pricing.
There were several recent notable events that I would like to cover.
First on July eight.
UGI energy services completed the acquisition of G.H.I. energy.
A renewable natural gas company operating in California.
G.H.I. provides compressed natural gas to transportation customers.
By doing so qualifies for Californias low carbon fuel standard credits.
And federal renewable identification number credits.
Considering the continued focus on emissions reduction we believe there is meaningful upside to this opportunity.
This acquisition is important to Eugene.
As it represents a growth opportunity and the renewable space that will benefit from our deep commodity marketing and customer service experience.
While the acquisition is very recent.
We are encouraged by what we have learned thus far and look forward to focusing on the gross opportunities presented by this business.
We recently announced the sale of Eugene is approximately 6% interest in the economy electric generating facility to Montour LLC.
Conemaugh is a 1700 megawatt coal fired generating facility located near Johnstown, Pennsylvania.
The sale of this noncore assets will reduce UGI direct CEO to equivalent admissions by more than 30%.
And is consistent with our focus on growing our midstream and utilities businesses as we intensified our SGN foods.
Finally, our utilities submitted to the Pennsylvania public utility Commission.
A joint petition for study that very of this year.
In terms of the settlement include an increase in base rates of $20 million, which includes an increase of $10 million effective January 2021.
And another increase of 10 million in July of 2002.
An important provision of this settlement agreement, but I would like to highlight is how bad debt would be addressed.
Going forward bad debt expense for our natural gas utility will be kept at our current planned levels.
Therefore, any covert related bad debt expense that exceeds this level.
We'll be treated as a regulatory asset.
Included in our next rate case, and amortize over 10 years, we view this as a very positive southern provision.
It mitigates PML risk due to the effects of cold.
Another important provision of this settlement allows us to implement a distribution system improvement charge based on a substantially lower net plant servers target and wouldn't normally you apply.
Based on our planned pace of construction over the next few years.
This will allow us to realize an additional source of revenue beginning in mid F. Why 21.
That will continue to grow incrementally up to a cap a 5% of distribution margin by the end of that flight 22.
The settlement also includes several provisions to benefit a low income and payment troubled customers.
Considering the current environment and being sensitive to the needs of our customers. We believe this settlement span.
The settlement remains subject to PA, you see approval, which we anticipate receiving in late summer early fall this year.
Now I will turn it over to Roger.
Thanks, Bob.
The global LPG business experienced a very solid third quarter with EBIT over prior year of roughly $12 million or up 42%.
This performance is with a backdrop of very warm weather in Europe, and lower commercial and industrial volumes driven by the covert endemic in both Europe, and the United States, partially offset by cooler weather in the U.S. and stronger cylinder volume.
Our teams did an excellent job controlling the controllables.
The benefits of our transformation efforts, both at UGI International and at Amerigas are becoming evident.
We continue to effectively manage expenses during the quarter, while the economy's began to open and our leadership began managing to return to the workplace in Europe.
In the U.S. the shutdowns were not a stringent does in Europe, but we did see significant year over year volume declines in commercial accounts and industrial segments.
Partially offset by our cylinder exchange program, an increase in our customers utilizing our homes cylinder delivery service branded a singe.
The cooler weather and the contribution from expense management and the transformation projects underway.
I'd like to take a moment to discuss or cylinder results in the quarter.
As John mentioned, our cylinder exchange program at Amerigas had a very strong quarter with volumes up 30% compared to the prior year.
The cobot pandemic I'm trying to light on some of our recent enhancements such as our vending machines and our home delivery service singe as consumers or change in their preferences.
Since now has over 57000 customers and roughly two thirds of them or new customers in our third quarter.
Since is currently offered and 10 cities and we plan to roll out the home delivery service in 30 more cities over the next two to three years.
Since is still new and small in terms of total volume, but it is another example of an innovative customer centric enhancement from the Amerigas business.
As a reminder, the previously announced transformation program at Amerigas included an investment of $175 million that we expect will provide permanent benefits to exceed $120 million by the end of fiscal year 22.
We are pleased to say that we continue to be on track and we will deliver over $30 million in fiscal year 20.
As we look forward, we remain on course to deliver the $120 million by the end of fiscal 2002.
This benefit will more than offset the impact of inflation structural conservation customer churn and the mix effect of our evolving business.
We are earmarking a portion of the benefits achieved from the program to be invested back into the business as we take a proactive approach could targeted customer retention and growth.
Focused on certain based business customers.
The sound investments and customers with high lifetime value will position us for growth and efficient operations.
We will provide more detail on this major strategic program on our Q4 call.
What we're expecting to invest about a third of our Amerigas 2.0 cost savings in this high value customer retention initiative.
The approach to a customer lifetime value pricing strategy. The continued focus on digitizing business processes.
And the continued drive for efficiencies were delivered an excellent customer experience and position Amerigas for long term growth end markets.
International.
Our year 19, several weeks earlier than in the USA and the recovery.
Has been evident as the economies continue pn teams were very responsive to the pandemic and continue to provide a great.
Mrs on how to adjust opera patients and start preparing for the eventual.
As mentioned during the last earnings.
Also focused on driving efficiencies and improving the customer experience with investments a 55 million euro.
That will deliver 5 million.
Heroes of savings in fiscal 20, and over 30 million euros by the end of fiscal 2002.
I am pleased to report these objectives are still on track and no slowdown has been experienced in Q3.
In closing.
Our third quarter performance continued to provide excellent insight on or action plans and validated our digital transformation initiative.
Our continued focus on operational efficiencies and cost management contributed to the solid results in the quarter that was significantly impacted by the covert pandemic.
The diversification of our LPG distribution business across the U.S. and the 17 European countries as resiliency and shareholder value.
Now I'll pass the call back over to John.
Thanks, Roger as I mentioned in my earlier remarks, Q3 was a particularly important quarter for us.
We work diligently to understand him address the challenges presented by the pandemic.
While also taking a hard look at the company's role in addressing the issue of racial inequality in our society.
Our teams have done an excellent job of engaging and addressing these critical long term issues, while staying focused and committed to the provision of our critical services to customers.
We also took some major steps this quarter with our SG program, which we believe demonstrates our commitment to be a leader in this critical area.
We're committed to significantly reducing the impact of our operations on our significant lead to the health and wellbeing of the communities, we serve and providing our customers with renewable affordable energy solutions.
Last month.
And committed to reduce our fugitive.
These by 92%.
By over 8 million metric tons.
We will meet both these commitments by 2030.
We entered into agreement to sell our ownership interest in the economy coal fired power generation station ourselves Conemaugh will reduce you guys total scope wanted.
Emissions by over 30%.
As Bob also noted on July nine we announced the acquisition of G.H.I. energy, a renewable natural gas company.
We're excited to expand our customer solutions to include the G.H.I. product offerings, and we look forward to investing in new projects to serve the growing demand for our Angie.
Utilities also install 360 kilowatts of solar electric generation for the company's internal use reducing greenhouse gases by 570 tons per year.
The solar generation, coupled with the onside combined heat and power system will subs for the newly constructed huge.
As we look forward to Q4.
Very encouraged by the strength of our perform.
We have demonstrated our resiliency and our ability to operate effectively even in the most challenging environments.
Aren't.
Chris guidance is one indicator of that strength and resilience.
As Ted noted, we're also adjusting school 21 and beyond by using the 10 year average as our new normal.
We believe this provides a better foundation for both financial and operational planning.
More detail on this when we provide fiscal 21 guidance on our Q4 earnings call.
But the move from 15 year to 10 year normal weather.
For will affect our budgeted volumes by 1% to 1.5% and our EPS by approximately four cents as Ted noted earlier.
Well there are still some challenges and questions that remain such as the potential for cobot impacts to linger into fiscal 21.
We're finished the year confident that we're well positioned financially and in terms of capabilities to address those challenges.
We will focus on delivering growth in our core businesses driving efficiency gains in our field and back office operations and pursuing emerging opportunities in renewable and low carbon energy solutions for our customers.
We will do all of this while committing to advocate for quality and contributing positively to the lives of our neighbors in the communities we serve.
With that I'll turn the call back over to the operator, who will open it up for questions.
Thank you.
A reminder to ask a question you want me to press Star one on your telephone to enjoy your question press the pound our house Keith Please standby well be compiled acuity roster.
Your first question comes from Shneur Gershuni, what Tvs Your line is open.
Hi, good morning, everyone. Good to everyone as well maybe to start off a little bit up I was wondering if you can give us a little bit more details around your guidance apples comparison to what you gate last time, if I recall correctly last time, you said it was a 20 to 30 cents impact for.
Oh go ahead.
I was just wondering if you can sort of tell us where that is tracking right now exclusion of exclusive of the 10 cents positive impact from the tax perspective, just kind of wondering how that's tracking in terms of your forecasts.
Sure. Good morning, Shneur. This is John I think were.
Basically tracking within that band sort of towards the middle or lower end of that 20% to 30% range. I think one thing that's a bit different is when we originally provided that you know our assumption was going to be we'd see the majority of that in.
In Q3 and less of it in Q4, that's turned out to be kind of.
By the nature of the recovery timing.
Across both the us in Europe.
It's spread much more across both quarters, but.
No big surprises there I'll, let Ted comment as well in terms of.
The cobot impact across the businesses.
Yes, so not much to add there I mean, we had we had talked about 20 to 30 cents.
All in a midpoint of 25 cents, that's about where we are in our forecast right now our actuals have about 15 cents.
That we've already seen from the impacts and and we're continuing to reflect continued impact in this last quarter of the year and we're expecting that to be about a dime.
Okay, Perfect and then two quick follow up questions.
With response, which in the margins that you're seeing both in the LPG business in the U.S. as well once in Europe.
How much of those reductions or sustainable versus how much is variable that will come back as the business rebounds.
Yeah, I'll I'll comment briefly on I'll turn it over to to Roger and there's a significant.
Element of this but is that as recurring clearly we have kind of the restructuring programs in both the U.S. in Europe.
Those efforts are ongoing and particularly in the U.S. as we go through next year and into fiscal 2002, there's there's more significant savings to come.
There is some element of expense that that will.
Oh come back associated with higher volumes.
As we get normal weather.
But I think what we're looking at and across our.
LPG business is a sort of a consistent drive for reducing our average delivered costs. So a lot of what we're seeing our significant proportion of what we're saying is sustainable and I'll, let Roger comment in more detail as well.
Yeah, maybe just a couple of additional points to add to what John just mentioned.
So when it comes to the transformation initiatives those are permanent cost takeout. So what we've seen year to date and we're very much on track as mentioned to deliver.
For the.
The $30 million here in the U.S. savings this fiscal year, we've now year to date, we've seen about 21 million of that and we will deliver the 30 plus by the end of the year overhead international with year to date, we've seen 4 million euros of savings will deliver the the over 5 million.
Euros of savings as mentioned.
When it comes to the other trying to control costs.
Some of that will flow back in as volumes start to materialize.
We're very cautious and careful in how we allow that extends to come back in.
But some of it we will work towards.
Obviously, minimizing how much of it will come back in overall, but clearly there's a relationship with the volumes as the they continue to.
The Incruse and that's what we're seeing right now at international with Cold bid.
Now starting to.
Back off somewhat.
We are starting to see some volumes increase.
Oh, Brad International.
Okay. So that makes sense. So there was a significant portion that will we will be maintained okay. Great. One final question I'm not sure if I heard it correctly in the in the prepared remarks, you were talking about the uncollectibles at the utility level <unk> were you, saying that you have to take the forecasted.
Collectibles, all in one quarter for two quarters worth of Uncollectibles is in my understanding that correctly I just want to make sure I heard that correctly.
You are showing our we were required by the P. you see to book two quarters marks in our Q3, so basically what we had for actuals in Q3, and our and our forecast for two years before.
And so you're seeing the step up in the size of our Uncollectibles because of that we are just as an aside we are ticking up a bit then on collectibles in utilities.
It's not dramatic but it is we're starting to see it ticked up and as Bob shared we do have the ability to create a regulatory asset for anything beyond what we had planned that's called the girl aided and be able to rate that through to customers.
Sure. So Ted if I, if I can paraphrase effectively all if nothing else changes from here Q4, technically would be lower because you've taken a larger hit in Q3 and do you have the ability to to create a regulatory asset Tonight and I get that right.
Yes.
Perfect. Thank you very much guys really appreciate the color today have a safety.
Thanks Shneur.
Thank you.
Your next question comes from Mark So, let's set out with Barclays. Your line is open.
Hi, good morning.
Following up on Shiners question.
How should we think about the 20 to 30 cents could impact in fiscal 20, when considering the margin benefit from higher and higher cylinder sales and some of the expense expense management that you referenced.
Yes, Oh this is John again, I'll, let Ted comment on it in terms of you know there are elements of that.
Incremental cylinder contribution that we're also considering in carpet impact it's actually positive that offsets so I'll, let Ted comment in more detail on that.
Yeah. It is the net impact of.
Oh benefits and negatives right.
So.
What we've seen.
Is a reduction in certain segments of volumes being kind of the key driver, but it wasnt mitigated by the increase in I've found ourselves under sales and and that's reflected in our forecast for the year 25 cents.
Got it okay.
And then as we look forward to fiscal 21, how should we think about the seasonality in your business.
And just the anticipated covert impacts for instance.
You indicated a 10 cents or projected tencent headwind in fiscal Fourq Q.
Hey end markets hypothetically remain where they are today would you expect a greater nominally pdps impact in the fiscal first half of your just given normal seasonal patterns.
I would say based on where we are today and that's.
That's a that's obviously the critical assessment of what we see across our business.
So is.
In this off season, a return to normal we're on a trajectory to return to normal.
We still haven't completely recovered or regained.
All those volume so as we sit here today, it's still recovering as opposed to being fully normal our assumption is that will continue on this path.
And.
For a 21 would be a normal year. If there were significant sort of re occurrences or flare ups that resulted in dramatic changes are significant changes to operations across our customer base.
And.
Then it would have an impact and obviously.
The impact in the winter months.
Have a.
Have a.
Closing.
Facilities would be more significant.
[music].
The impact as we sit here today in the summer just because of levels of demand, but but thats not what we're seeing based on the trends we.
We're observing as we look at the specific.
Segments that are impacted we see those segments recovering.
And depending on the geography in the U.S. you see.
More rapid recovery.
Or a slower recovery depending on.
The status of the pandemic in those specific markets, but a significant percentage of the markets we serve.
Which is which are the markets around in and around the mid Atlantic region of the U.S. and then across Europe are on a pretty consistent.
Half of recovery would sort a minor alterations as there are sort of very localized development.
And getting the only I would add is that when we give guidance for next year, one more closing our plan, we're sharing our results for the year.
We will be that much more informed on whether that trend continues or is changing and that will definitely be built into the guidance we provide.
Okay, Great. That's helpful. Thank you.
Your next question comes from Chris signal feet with Jefferies. Your line is open.
Hey, good morning, and one.
Good morning, good morning.
No as well I guess just to start Roger I'm curious about that the pace and the scope of the LPG transmission investment spending you targeted for the year I guess, particularly amounts you had anticipated would hit opex.
If I look back at your initial descriptions it it seems you're implying sort of $65 million to $70 million on opex hats across amerigas near nationalists here I see roughly 43 million accordingly.
So far this year, so that suggests either big allocation in the fourth quarter.
Or perhaps that spending was lower than you thought.
Or maybe it said that shift between Capex and.
And Expensed announce.
Yeah, I guess that the question as you know do you see it being you made comments at the benefits are tracking your initial expectations I'm just curious if the cost since the program's investments are going to be lower or if there's a mix shift between 20, and 21 or if there's a mix shift between opex and capex any update on that would be helpful.
Yeah sure Chris Thanks for the question.
There's.
The vast majority of the spend will be concluded by fiscal the end of fiscal year 21. So we are tracking as expected in it is a mix of what you highlighted the mix of Opex capex.
In both businesses, whether it be international or you're at a at Amerigas.
So we are tracking very much as we kind of have seen it where.
We would continue to have a bit more heavy weight spend in fiscal 20, and then continue that spend throughout fiscal year 21, and we will provide a lot more clarity on this and may be ended the fourth quarter exactly where we're landing on it.
But really no surprise continuing to execute the projects at the same rate, we had anticipated which is great news in a coal bid environment, where there were some concerns and our ability to continue to execute the digital projects. The realignment of the organization this dry for official.
Sees while continuing to also invest in.
How the customers interacting with us and.
With the real focus on how can we be easier to do business with all of those projects are at the appropriate cadence and again in line with what we've been talking about so no surprise no change, but there is a shift between capex opex and as mentioned.
We will be concluding the majority of spend by the end of next year.
Okay. So maybe next next time, usually just next time for maybe at a comprehensive update on all of that would be your guide Chuck fiscal 21, yes, absolutely.
Okay, and then rather you'd made some comments I think this was originally part of the plant as well about sort of sharing some of the benefits of the the success of this program I guess back with customers maybe to arrest the pace of volumetric decline and improve the experience make yourself more competitive perhaps against other fuel sources can you just talk a lot.
No, but about maybe the mechanisms of how that would happen is that should we see that just result in sort of maybe a margin compression or is that you know bonuses to sign up customers or I guess, what have you contemplated what does that program look like.
Yeah, and again, we'll continue to provide more color on that as well, Chris, but but essentially we're in the process of evaluating.
Different segments of our market, where we're looking at the elasticity of customers and and there's there's a real inefficiency that exists there where were bringing in new customers and.
Some customers are are leaving us so what we want to get after year is really.
Rebalance that and ensure that we are the more surgical on how we are pricing some of those more elastic customers. So that we effectively.
Build in that efficiency of stopping some of that churn that use that you highlight a lot of it will manifest itself in margin.
So that's where we're likely going to see some.
Some some compression and again this is an area that we're now in the process of of the values will be gave some guidance that we give kind of a high level view of how much we think we're gonna be.
Putting into that part of our transformation initiative and we will continue to add more detail out between outlet at the end of the the quarter for the next fiscal <unk>.
Okay I just I, just just add there the teams done a great job I think of using.
Enhanced tools and enhanced access to data the two segment our customers to make sure as Roger said, we can be kind of focused and surgical and the approach we take to it.
And really focus on kind of maximizing the lifetime value of our customers and that's what will drive our pricing and margin strategy and its coupled with also the.
A significant improvement in the.
The tools and sort of a digital.
Options that our customers have and will have to in terms of interacting with us and how we provide information to them, which we think will significantly differentiate us from from others.
So we're excited about kind of where we are and our ability to roll out these new tools and that the.
The take up of the tools by customers and actually.
Some of the challenges of the pandemic have accelerated the adoption of the tools by by our customers. So theres been some benefit to.
The the need for customers to interact more digitally and our offering those new tools. So we're excited to sort of be laying out. This path because we do believe it's going to have a really positive impact on.
Our service.
To those customers and then our long term retention of the high value customers.
Yeah, and Ed you haven't John It seems like these efforts you mentioned in any on a greater widespread adoption by the customer sat and then Ted's comments about moving the weather frameworks for your guidance for your forecasting to a short or shorter legacy time frame. It all just seems.
Trying to address that now like to see question about how to handle.
The weather variance in the business and.
Trying to control I guess, what you can control so good <unk> cost of customer acquisition and the pace of churn, obviously same right right to be addressed so.
Alright, well I wanted to pivot and John maybe this is for you I wanted to get a sense of how.
You and the team and the board think about the shifting energy landscape and think about investment that you make you've mentioned.
Yes, she numerous times on the call. This morning and in the earnings materials last night, you acquired G.H. high and are in the process of selling Conemaugh and you explanations for those actions appeared rely heavily on the improvements on making you guys emissions footprint.
We've seen you guys support environmentally focused investments not pass the conversion upon launch the landfill gas announcements the utility team's efforts over the years to convert fuel oil customers to natural gas those I'll stand out as examples.
But there's always been a very clear returns component to the things you've underwritten you know we see a wave now if companies wishing to rebrand themselves is cleaner renewable et cetera, you see BP last night that many in a couple of weeks ago, they're pursuing fullscale pivots. So I understand that the you know you m. tidal wave focused on MSG enhancing hydrocarbon in place.
Spent any incentive to participate in that but also appreciate that you're 138 your company to put a fantastic long term compound returns remain disciplined about the economics of things you underwrite. So I'm just wondering how.
If I get a sense of maybe to potential conflicts between those two things if there are conflicts between that spins.
Yeah, Chris I see it as much more aligned you know I think our history has been you know that that we're a company that.
Understands.
What's happening in our market with our customers first but then in our environment and then it looks for opportunities to identify and deliver solutions that are going to be.
Well received by customers.
And also make economic sense and the two specific investments that we talked about today or the two investment decisions we talked about today.
The the sale economy, which is a non core coal fired power generation facility.
And the acquisition of a G.H.I., which I see is closely aligned to our business. It's it it yeah.
We think provides us with an opportunity for a further growth in investment in an area that feels very close to us in terms of.
Supply portfolio management, incorporating new supply sources, and this case renewable natural gas into an overall supply portfolio, while meeting the needs of our customers who are looking for.
These new solutions and also addresses questions that regulators could can and do ask of us and investors, but I don't I say Gee G.H. I first and foremost as a really attractive investment for us because I think we're in a great position.
Operationally and from our commercial standpoint to develop got business.
Because theres a significant.
Operational aspect to the provision of renewable natural gas, which suits us really well in terms of our operations focus. So we're excited about the opportunity to invest in attractive projects.
To develop and deliver renewable natural gas and to be because oh.
Should for example different.
States and commissions.
Determine that.
Incentivize utilities to incorporate renewable natural gas into a supply portfolio, we think we're gonna be really.
Well positioned to participate in that and those will be extremely attractive investments. So.
I believe and we believe that these investments are really aligned with our core strategy and reflect the changing market environment, and we think we're really well position to deliver to deliver from an E.S.G. standpoint, but also to deliver from in terms of attractive investments over time.
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Okay. So I mean, I guess to put a finer point on it to return profile of the same as you might underwrite on this initiative, we shouldn't think about it.
Sort of eroding the return characteristics of the company historically.
No no we don't see that and that's key for us to find opportunities, where we can leverage.
Core core capabilities in some cases core assets and networks that exists already in the company because because that enables us to to deliver strong returns and certainly renewable natural gas fits that.
Okay, and I guess related point and I don't know if this is for you John or for Roger but hydrogens become a major focus in Europe as that continent works on a framework for electrification and renewable transmission and so.
Just curious about UGI eyes ability or appetite to participate and hydrogen related investments, maybe it's a distribution arm.
Yeah, and I'll comment very briefly Chris and then let Roger a comment.
I've got a little bit of experience with hydrogen in my past Rogers got a lot more experience with hydrogen than I do in his past a and definitely it's an area that is of interest to us if you look at.
Electrolytic hydrogen renewable hydrogen produced electrolytic Lee with renewable.
Renewable power driving that process is definitely of interest.
Again, it's sorta to the point I just made its an opportunity for us.
To leverage our infrastructure leverage our our core assets in our in our.
The connection we have to all the end users we serve.
To incorporate what would be sort of an alternative or supplement to our supply portfolio in this case.
Renewable hydrogen or green hydrogen, but all that.
Roger comment as well.
Yeah, not not a lot tied to what John has highlighted but maybe a couple of points here.
Hydrogen, it's certainly been an interest for decades and of the industrial gas companies have certainly been at the forefront of promoting hydrogen and we do see governments in Europe to the point you made Chris.
Want to embrace hydrogen as a as an alternative fuel.
A lot of things have to happen everything when you when you think of electrolytic hydrogen is produced.
It's a fairly capital intensive process, but more than capital intensity. It's also a very electricity hi, <unk> electric power demanding process, so and the electricity has to come from renewable.
So a lot depends on the conversion to more and more renewable power.
The cost of such power going into these fairly capital intensive plants.
And then there is all of the downstream.
Challenges and opportunities where infrastructure has to be adapted to hydrogen and there are limits to how much hydrogen one would injected in existing pipeline system without making some modifications.
Due to read only concerns et cetera, and then of course all of the safety aspects of managing it. So again, it's it's an encouraging.
Evolution it it's not new what's been happening for several decades, one that we will definitely be monitoring and looking at what's the best opportunity for us to participate because we will be able to leverage our infrastructure as this potential new molecule continues to come into the energy mix.
Great I I appreciate all the thoughts and comments this morning.
Thanks, Chris.
Your next question comes from Michael Gaugler with Janney Montgomery Scott Your line is open.
Good morning, everyone.
Good morning.
Congrats on the corner.
Thank you just wondering if you're seeing cnine volumes, we turning to pre covert levels. Do you think this does have bottomed out or are we still kind of in a trough period.
Oh, My God, Michael I'll comment really briefly and I'll, let Bob and Roger comment as well.
Certainly the bottomed out in our recovering.
And we see a touched on it really briefly we see sort of differing.
Sort of rates of recovery, but we see recovery across virtually every site.
Sub area. The only area I would say is is a call to assess right now.
As a LPG transport in the U.S. involving school bus fleets, which.
Typically see some of summer anyway. So.
It will be impacted as a different school district start up again in the fall or timing of that but overall, we were on a path.
A clear path of recovery with minor.
Impacts you know as a different geographies our.
Slowed four or five by virtue of.
Pandemic issues, but but.
Those are pretty localized if you look at.
The geographies, we serve and the vast majority of our concentration of activity.
In both the U.S. in Europe is in areas that at this point you know is significantly recovered from the impacts of cobot and continued to be relatively positive in terms of current.
Conditions, we'll keep an eye on that but but also let Bob and Roger offer any comments they have in terms of what they're saying.
Okay. Thanks, Sean Good morning, Michael This is Bob you as John indicated and what we call or rate and a small commercial customer.
Market, where we saw some declines.
It was a little bit tough to discern because equals weather was a little bit different than normal, but we're starting to see those.
Customers recovery, but interestingly, though we've seen some increase in customers, who are involved with food processing and consumer goods manufactured theme throughout the pandemics.
That those volumes are actually up so I'll just echo what John said that we're starting to see a recovery, but kind of in a wait and see pattern for this time in the areas of hospitality restaurants and such.
[noise] Yeah. My go then I'll I'll spend a couple of comments here I'd International we see more recovery coming out of the cold endemic.
We've seen some flare up in cold they didnt some parts of the job recent has not impacted the recoveries that we've been seeing as far as volume evolution in particular in commercial.
And industrial accounts.
When we move over to the U.S. and we look at where we are at Amerigas I would quantify that we're still in that trough. We there is some recovery, but we're still in that low period, where auto gas has done some recovery, but we have not seen school bus is of course startup yet so that's an area that well have to wait.
And see what happens with the reopening schools.
And then the commercial area as well, we continue to see especially in that.
Restaurant segment, and other commercial hotel et cetera, we still continue to see that being a very low demand relative to prior periods.
Okay. That's a that's helpful.
Just one more.
Maybe you could give us an update.
On phase one of painting pennies any outstanding issues and potential timelines specific to that that portion of the line.
Sure Michael Yeah. The is the most recent development on pennies was the release of this week of Oh on environmental assessment by FERC, which was a positive assessment. The so that's a step forward and we continue to having gotten that we'll continue to look too.
Secure.
Commitments Oh, the current plan for phase one of 'em.
Penn East would would have that coming into service at the and the very end of calendar.
2021 so.
We just as I said, we just received that environmental assessment. So we're we're sort of taking that end, but it's a favorable assessment.
And we'll move forward from there and continue to work on the commercial side.
Those are.
Phase one commitments.
Okay. That's that's all I had gentlemen, thank you very much great.
Thank you.
And no further questions at this time I will now turn the call back over to John Walsh for closing remarks.
Okay. Thank you very much. Thanks for your time. This morning, we look forward to Ah being in touch with you on our next call and look forward to updating you on that call on our fiscal 21 guidance. Thank you stay safe.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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