UGI Corp (UGI) 2015 Q2 法說會逐字稿

Good morning. My name is Shawn and I will be your conference operator today. At this time, I would like to welcome everyone to the UGI AmeriGas Second Quarter 2015 Earnings Conference Call. (Operator Instructions). Treasurer of UGI, Mr. Dan Platt, you may begin your conference.

Thank you, Shawn. Good morning, and thank you for joining us. As we begin, let me remind you that our comments today will include certain forward-looking statements which management of UGI and AmeriGas believe to be reasonable as of today's date only. Actual results may differ significantly because of risks and uncertainties that are difficult to predict and many of which are beyond management's control. You should read our annual reports on Form 10-K for a more extensive list of factors that could affect results but among them are adverse weather conditions, cost volatility and availability of all energy products, increased customer conservation measures, the impact of pending and future legal proceedings, domestic and international political and regulatory and economic conditions, currency exchange rate fluctuations, the timing of development of Marcellus Shale gas production, the timing and success of our commercial initiatives and investments to grow our business, and our ability to successfully integrate acquired businesses and achieve anticipated synergies. UGI and AmeriGas undertake no obligation to release revisions to their forward-looking statements to reflect events or circumstance occurring after today.

In addition, our remarks will reference certain non-GAAP financial measures that management believes provide useful information to investors to more effectively evaluate the year over year results of operations of the companies. These non-GAAP financial measures are not comparable to measures used by other companies and should be considered in conjunction with performance measures such as cash flow from operating activities. With me today are Hugh Gallagher, CFO of AmeriGas propane, Kirk Oliver, CFO of UGI Corporation, Jerry Sheridan, President and CEO of AmeriGas Propane, and your host, President and CEO of UGI Corporation, John Walsh. John?

Thanks, Dan. Good morning and welcome to our call. I hope that you all have had a chance to review our press releases reporting a very strong second quarter results for UGI and AmeriGas. While we didn't see the extremes of the polar vortex winter of fiscal 2014, we did experience favorable market conditions in Q2, particularly in terms of colder weather in the Eastern and Mid Atlantic US and increased pipeline capacity values in the Mid Atlantic. Our businesses delivered an exceptional performance and we clearly showed the strength of our diversified operations.

The US energy sector continues to develop at a rapid rate and we see significant growth opportunities for companies like ours with a concentration of assets, resources and customers in the Mid Atlantic region. I will comment on our financial performance as well as our major accomplishments in the second quarter and then turn it over to Kirk, who will provide you with a more detailed review of UGI's financial performance. Jerry will follow with an overview on AmeriGas and I will wrap up with an update on our strategic initiatives.

Our Q2 GAAP EPS was $1.40 while our adjusted EPS which reflects total mark to market adjustments of $0.17 was $1.23. The adjusted EPS includes the impact of approximately $0.03 related to transaction expenses for the pending Totalgaz acquisition. This falls just lightly below our record adjusted EPS of $1.27 in the second quarter of fiscal 2014 and represents the second highest adjusted quarterly EPS in the history of the company. Based on this strong Q2 performance and solid outlook for the balance the year we've increased our fiscal 2015 guidance range to $2.00 to $2.10 from the previously stated range of $1.88 to $1.98. In both cases, the guidance excludes the impact of the Total acquisition. Kirk will comment in more detail on guidance and our second quarter performance in a few minutes.

We were pleased with our performance in the quarter as we delivered adjusted net income just 3% below the record net income achieved in fiscal 2014. We saw strength across our business as Utilities, AmeriGas and International Propane showed year on year improvement in operating income, while Midstream and Marketing delivered a very strong quarter that fell below the unprecedented earnings of Q2 of fiscal 2014.

To put our Midstream and marketing performance in perspective, Q2 operating income was 16% below Q2 fiscal 2014 but over 130% above our Q2 earnings in 2013. Our strong performance reflects the positive impact of colder weather in most of our service territories, continued volatility across the natural gas sector in the Mid Atlantic and Northeast, and strong operational performance by all of our business units. As I have noted on several of our recent calls, the factors impacting pipeline capacity values and delivered gas costs particularly on peak days are fundamental and far reaching. Although we didn't see the extreme peaks of last winter, the volatility experienced this winter was more sustained.

Before I turn it over to Kirk, I would like to comment briefly on the fundamental changes underway in the markets we serve. Market conditions in Q2 highlighted the continued ramping of demand for natural gas. This increased demand has been outpacing the new pipeline capacity that has been brought online in the Mid Atlantic and Northeast U.S. creating infrastructure gap that we have been highlighting for the past two to three years. We benefited from that strong demand for capacity in our Midstream business in Q2. We believe the infrastructure gap, which has created significant opportunities for UGI, will continue for the foreseeable future with pipeline capacity in the markets we serve remaining very constrained. Our unique integrated asset portfolio in the region, which includes pipeline, pipeline capacity contracts, gathering systems, natural gas storage, our recently expanded LNG facility and a large base of customer demand, provides us with an exceptional opportunity to deliver value during periods of volatility.

With the strong performance of our Midstream business was one of the highlights in Q2, the quarter was noteworthy due to strong performance across all of our businesses. Some highlights from the quarter. Our European propane business had a solid quarter as colder weather in western Europe, effective unit margin management, and good expense control helped offset the impact of very warm weather in eastern Europe. Operating profit, excluding the Total related expenses, increased approximately 14% versus Q2 fiscal 2014. One of the positive developments in Europe over the past year has been the significant drop in LPG costs. Our propane and butane costs in Europe have dropped approximately 40% relative to the same period last year which is very positive development for the company and for our customers.

Our utility business delivered the highest quarterly operating income in its history with our Q2 fiscal 2015 operating income of $139.3 million, exceeding the previous quarterly record set in Q2 of last year by 3.6%. Our gas utility continued to see strong customer growth with nearly 11,000 new heating customers gained over the first half of the fiscal year. Customer interest in conversions remains strong despite the narrowing of the natural gas versus fuel oil differential. The other major focus area for utilities in the quarter was our infrastructure replacement program for both cast iron and bare steel which is moving forward on pace with our commitments.

AmeriGas had a strong Q2 with record quarterly EBITDA of $342 million which was 3% above last year despite weather that was 7% warmer. Strong unit margins and effective expense controls were the key in the quarter. Jerry will provide you with details on AmeriGas' performance during his remarks. I will return to discuss progress on major new projects and the Totalgaz acquisition later on the call, but I would like to turn it over to Kirk at this point for the financial review. Kirk?

Thank you, John. And good morning, everyone. This chart shows a reconciliation of GAAP to adjusted earnings per share for this year's second quarter versus the second quarter of last year. The only adjustment in each quarter is for the unrealized portion of mark-to-market gains or losses on commodity hedges. Also, we had $0.03 of transaction expense this quarter in connection with our pending acquisition of Hypnotel LPG business in France. Adjusting for this transaction expense would take the quarter to $1.26 per share, only a penny off the record $1.27 reported last year. We experienced colder weather than last year in every business except for AmeriGas where it was 7% warmer than last year. The gas utility experienced weather that was 22% colder than normal. The international businesses were a bit mixed with weather at Antargaz close to normal and at Flaga, although colder than last year, still over 10% warmer than normal.

In summary, we had a very strong quarter, driven largely by high peaking and capacity management margins in the Midstream and marketing business, record high throughput and margins at utilities and strong unit margins in the international businesses and successful cost management at AmeriGas. I will summarize the performance of all of the businesses later but I wanted to point out here that although the Midstream and marketing segments had very strong results they were off slightly from the record results we experienced last year. This graph shows the basis differential between (inaudible) and Texas Eastern for the second fiscal quarter over the last four years. You can see how on the blue line we experienced some extremely high peaks last year in January. The red line shows that this year we did not experience the extremely high price spikes of last year but we did see strong prices over more days in the quarter. While the margin for January and the quarter were higher than last year, the margin for February and March were higher this year, resulting in the business posting its second best quarter. Q2 last year was the best quarter recorded to date.

As I mentioned earlier, AmeriGas experienced weather that was 7% warmer than last year, which put downward pressure on volumes and total margin. However, significant cost management measures on the part of Jerry's team reduced operating expenses by $24 million this year and AmeriGas was able to post operate income of $297 million, up $12 million versus last year. The international business reported earnings before taxes of about $59 million, up $2.5 million over last year. The negative impact of the declining Euro to dollar exchange rate was largely offset the by the higher margins achieved in the businesses in their respective local currencies.

Similarly, operating costs benefit from the change in foreign exchange rates. Also, the international operations posted this increase in earnings in spite of approximately $8 million of transaction costs at Antargaz for the Total acquisition. Given the recent change in foreign exchange rates I wanted to touch briefly on our approach to currency hedging. We feather in our hedges over a three year period. But generally by the time we get to the end of fiscal year 2016, for example, we will have hedged the majority of fiscal year 2017, about two thirds of fiscal year 2018 and one third of fiscal year 2019 planned earnings. As a result the bulk of planned earnings for this fiscal year was hedged which has mitigated the impact of foreign exchange rates on our Q2 results.

The gas utility experienced very cold weather driving higher throughput. The combination of higher throughput and continued customer growth increased margin by over $8 million this quarter. The colder weather also drives modestly higher operating expenses associated with system maintenance. In addition, our ongoing pipe replacement program will continue to result in increased depreciation expense.

Midstream and marketing earnings before taxes were down $19 million versus last year's record quarter. As I showed earlier, we saw significant peaking and capacity margin opportunity in this quarter, just not as much as we saw in last year's second quarter. Our total margin of $128 million is $18 million below last year's margin. Natural gas marketing margin was down $13 million, reflecting lower unit margins largely due to timing of basis margin associated with fixed price customers. Peaking and capacity management margin was down $10 million, reflecting lower gas prices and less year over year volatility resulting in lower pricing differentials between Marcellus and non-Marcellus delivery points.

This chart provides a snapshot of our cash and liquidity resources at the end of the quarter. As you can see, we have plenty of liquidity. UGI Corp had access to over $200 million of cash as of the end of the quarter. Each business unit is responsible for managing its own working capital and as of today all of the businesses have zero borrowings on their revolvers. Finally, as John mentioned earlier, we are increasing our adjusted earnings guidance by $0.12 for the full fiscal year to a new range of $2.00 to $2.10 per share. That finishes my prepared remarks, and I will now turn the call over to Jerry Sheridan for his comments on AmeriGas. Jerry?

Okay. Thank you, Kirk. For AmeriGas adjusted EBITDA for the second quarter was $342 million, a record quarter for the company, $11 million above the $331 million earned year. Lime for the quarter was 448 million gallons. 6% below last year on weather that was 7% warmer than last year. The business performed quite well nationally with strong volumes in the eastern and midwest parts of the country where weather was colder than normal but slightly warmer than last year.

Once again, our operations in the West were faced with very warm weather in the quarter, weather averaged about 15% warmer than last year. Propane costs at Mount Bellevue averaged $0.53 in Q2, which was $0.23 below Q1 and $0.78 below the second quarter last year. We were also able to work through the high cost inventory that negatively affected our cost of gas in Q1 and spilled over into January and February. This lower price deck for propane allowed our customers to enjoy lower costs as our average selling prices decreased over 20%. The declining cost environment enabled slightly higher margins and we finished Q2 with margins $0.05 above last year's Q2. Operating expenses were also a good story with expenses down 9% or $24 million due primarily to lower bad debt expense, reduced vehicle fuel and repair costs and lower payroll and benefit costs as our field teams managed the overtime quite well. Overall, a good quarter.

Now, turning to our growth thrusts. ACE or AmeriGas Cylinder Exchange program increased volume by 3% in the third quarter. And we are looking forward to the spring summer grilling season. AmeriGas Cylinder Exchange markets from over 47,000 outlets nationwide. Our national accounts program volume increased by 14%, which was very positive given the warmer weather relative to the prior year. The growth has been organic with national accounts adding 29 new accounts this year. We also completed five small-scale acquisitions year to date and see a growing pipeline into the spring. Given our solid performance in the quarter and expectations for the second half we are maintaining full year guidance at $635 million to $665 million in adjusted EBITDA for fiscal 2015.

Finally, we were pleased that our Board of Directors approved a 4.5% distribution increase to $0.92 per quarter for $3.68 annualized, and this represents the 11th consecutive year AmeriGas has increased the distribution and the compound average growth rate of the distribution has averaged over 5% for the last five years. In addition to our distribution growth we've also been consistent in providing solid returns to unit holders with the compound average unit holder return for the last three, five, and ten year periods of 4%, 11%, and 13% respectively. That concludes my comments and I will turn the call back over to John.

Thanks, Jerry. I would like to close by briefly reviewing progress on the strategic investments that are so critical to our future. The PennEast pipeline project is progressing through the FERC preapproval process. There have been a series of FERC meetings in the areas that will be served by the new pipeline to share information on the project and gather feedback from all constituencies. The feedback from the meetings will provide input as we finalize our FERC filing. The project is expected to be on stream late in calendar 2017. In addition to the PennEast project we announced two new pipeline projects in Q2 that will serve the expanding natural gas demand for power generation in Pennsylvania.

Our Energy Services team announced a $160 million project to supply a new 1,000 megawatt plant in Sunbury, Pennsylvania, while our Utility Team announced a pipeline project to serve the new Invenergy 1300 megawatt unit in Jessup, PA. In addition to these two new projects, which we expect to bring onstream in late 2017, the Utilities Team is nearing completion of a $25 million project that will serve a new Panda Energy 1,000 megawatt plant in Clinton Township, Pennsylvania. Each of these projects represents an attractive investment opportunity for UGI and enable the buildout of much needed buildout of gas fired power generation capacity in locations across Central and Eastern Pennsylvania, that can access local Marcellus gas. Our proposed acquisition of Total's LPG distribution business in France continues to progress through the regulatory review phase with the AGLC, the French competition authority. While the closing date will be largely determined by the regulatory process, we believe the closing will occur during the current quarter. During the interim period leading up to closing, our teams have been working on detailed project plans that will be executed once we have completed the regulatory review process.

Finally, I would like to conclude by commenting on our updated guidance and the future prospects for UGI. One of our common themes with investors is the strength and earnings capacity of UGI's balanced portfolio of businesses. We once again demonstrated that earnings capacity in Q2 while also making significant progress on new opportunities, both capital projects and acquisitions which will provide a strong foundation for future earnings growth. We remain focused on reinforcing traditional strengths as an energy marketer and distributor.

The colder weather in the East was certainly the most significant contributor to our increased fiscal 2015 guidance but as we noted last winter the positive impact of increased volatility and delivered gas cost due to the infrastructure gap in the Mid Atlantic and Northeast was also a major contributing factor. This infrastructure gap will be with us for quite some time and will provide opportunities for new UGI infrastructure investments while enhancing the value of our existing network of Midstream assets strategically deployed in the region. We look forward to updating you on our progress on our existing slate of projects and on emerging opportunities for new investments. With that, I will open the call up to Shawn who will open it up for your questions. Shawn?

(Operator Instructions). Your first question come from the line of Carl Kirst from BMO Capital. Your line is open.

Thank you. Good morning, everybody. And nice results. Maybe if I could start with a couple of questions on the Midstream side. And, you know, John, I don't know, is it possible to, you know, and I appreciate the waterfall as far as the delta in the changes year over year. Is it possible to take the $100 million of operating income and break that down to rough contribution, what was coming from gas, what was coming from peaking, et cetera? Or is that too much of a competitive disclosure?

We show the changes in that from quarter to quarter in the-.

Well, I tell you what I'm trying to get to and maybe this might be a better way to answer the question is, you know, is the say, for instance, the peaking capacity or the disconnect for instance between lighting Zone three is that something that you all are using as simply one of the many factors kind of illustrative of the current volatility or is this a primary factor where that sustained disconnect, for instance, perhaps made up, you know, half of the operating income? Meaning that should be one of the single biggest factors we should be looking at going forward?

Carl, when we think about it we kind of step back and look big picture at all of the elements. So in any given year you have a variety of factors. What we see happening, as Kirk's slide noted, you see the peaks where you have opportunities on certain days or for certain periods to take advantage of some quite significant differentials which are great and this year as we noted what we saw is that volatility, while not achieving the same peaks, was much mar sustained and illustrative of a trend that we commented on which is that volatility in the market has returned after being dormant in the 2010, 2011, 2012 period. It definitely has returned and is now being impacted by rapidly increasing demand as power generation ramps up and we see the core demand for heating also increasing. So those are factors. So the impact of volatility in that differential is one factor. It is not the overriding factor because what is happening in the business what has been happening over the last few years is the core of the business has been, the foundation of the business is being built up because we see increased demand for mid to long-term peaking contracts as entities our own utility and other entities looking to secure long-term ability to supply their peak.

So, what we see is a foundation for a long-term earning delivery being built while at the same time we see these more opportunistic developments and it evolves. This year our performance is more reflective of that building foundation which is more peaking contracts, that go over multiple years, higher demand that we are serving, the increased consideration from fixed fees from new projects like Auburn that have come onstream. So, energy, Midstream and marketing is definitely a combined impact and we provide some detail in our earnings release and in the Q. I think the key point for us is that, is this building of foundation the foundation for long-term earnings performance and delivery and that is something that we certainly see happening as we and our customers respond to the infrastructure gap that we have been talking about. It is translating into, last year was driven more by some of the opportunistic peaking. This Year that was a factor and contributed but we see this sort of foundation being built that is much more mid and long term in terms of earnings capacity.

That (inaudible) to Texas Eastern is an example of one, you know, one place where we have that kind of opportunity. That is happening in other parts of the system as well.

Certainly. I appreciate all the color. I wanted to make sure that we didn't get too myopic on just that one differential for instance. I appreciated the color. And John, it sounds like because you really sort of helped to answer sort of one of my other questions but with sort of building that more sustained foundation that, you know, simply as we look in the change in guidance, for instance, this year you know as you guys noted moving up $0.12 at the midpoint but I think, given that the first half has already been now achieved, it looks like the midpoint of guidance would suggest something like maybe $0.16 being earned you know the back half of this year versus only $0.02 last year and obviously not being seasonal events. Is high level most of that uplift coming from what you might call the sustained base that you are putting into Midstream?

Yes, thanks, Carl. If you look at the second half of the year, as you noted, it is a relatively strong second half. If you take midpoint versus where we sit today and you correct for those the Total expenses it is $0.12 roughly in the second half of the year if you use the midpoint. I think there are multiple factors impacting. One is what we were just talking about, the increased value of capacity, even in shoulder periods, with the asset networks that we have in our Midstream business. That is a factor that is contributing. The other factor that is contributing across our LPG businesses is you get some parachute effect with the costs having dropped and that is a positive. And the last factor, which is a long-term factor, is you are starting to see or we are starting to see the impact of more of the Midstream and marketing business being generated related to fee-based and in most cases take or pay fee-based revenue streams. All of those factors are contributing to a really solid second half of the year for us.

Great. Appreciate the color, guys.

Thanks, Carl.

The next question comes from the line of Chris Sighinolfi from Jefferies. Your line is open.

Hey, John, how are you?

Hey, good.

Wanted to follow up on Carl's question regarding guidance. Just a point of clarification. With regard to the guidance, I understand it excludes any impact from Total, but I was curious my assumption is that it excludes or I'm sorry, includes the cost associated with that acquisition, the $0.03, for example, in the second quarter? Is that $0.03 charge in the guidance or in the guidance number?

It is completely out. So the, any costs including the year-to-date $0.04 for Total is out.

Okay. Okay. That is helpful. And then you mentioned some elements in your prepared remarks about what remains to be done in an approval process on that. But could you just elaborate in terms of it has always been your contention that you would close this in the first half of the calendar year. There is probably, what, six or seven weeks left. Just curious if we could get sort a more full update on where things stand there? I assume it sits with the French regulator what with you see as sort of the conditions to move that forward?

Yeah, it is, obviously I won't delve into too much detail since it is the regulator is driving that process. But, you know, today we are confident that we will close, we expect to close but we recognize that it is a regulatory body the ADLC that needs to reach a conclusion and communicate that. What we are conveying today in terms of the timing is our best informed view of when it will close and that process has been ongoing, which gives us the basis to make the statements that we have made. That is probably all I can say given that the regulator is assessing it as we speak.

Okay. Understood. Understood. I guess two other questions for me, John. With regard to the utilities, I think last time we had sat down you talked about the potential given the amount of capital outlay at the Legacy UGI Utility the opportunity in the not too distant future for perhaps the first rate case filing in quite some time there. Understood that the weather dynamic likely helped or certainly helped the results of the utility and may have delayed that for some time. But just curious the latest thoughts on what sort of a potential deficiency might be at UGI Utilities and the timing around any sort of potential rate filing?

I don't have an update in terms of timing and obviously we, it is in sort of, it is on the radar, in the foreseeable future given the level of investment. As always with us it has been tempered by continued growth, which has put us in the 20 year period since the last rate case, but we can definitely see it. We haven't reached any conclusion and we will use this year's results and a forward projection to assess that and then new projects discussions or communicate with the PUC with regard to timing so nothing new. We will probably know more when we come out and talk about next year and at that time might have a clearer view as we look a this year's results and level of investment on timing. So we can see it, but we are not at a point yet where we would come out with any definitive view on timing of a filing for UGI Gas.

Okay. And then, I guess a final question for me, just circling back on Midstream opportunities. You know, we saw obviously some additional projects filter out here in the last couple of months, pipelines, intrastate pipelines in Pennsylvania. Just curious, as it pertains to the infrastructure gap and the opportunities from an asset perspective to leverage some of the volatility that occur, the 50% liquefaction capacity add at Temple, wondering that has obviously become a pretty significant asset for you guys. Wondering if there is opportunity for further expansion there or if there is another site where something like that could be replicated? I think when we toured it one of the major attributes that you guys spoke about s the proximity to the major interstate pipe and the pressure differential that is created coming off the system. And I just wondering within your sort of area of operation if there is an opportunity for something similar to be created?

Yeah, thanks, Chris. On in terms of LNG, we are really excited to be bringing on that additional 50% the increase in our liquefaction capacity. We would have loved to have had that additional liquidity at the start of this winter rather than in the spring but that wasn't in the plan. The plan was always to bring it on at this point. It does a number of things for us. That additional capacity. Provides us with more liquidity to be used to serve some of these significant opportunities that arise during periods of constraint. So that will be great. It also enables us to continue to develop our position serving emerging segments for LNG around transport and distributed generation. So it gives us an enhanced liquefaction capacity which then positions us to continue to develop peaking and sort of non-peaking LNG segments and one critical point to make about LNG and peaking is that for ourselves and for virtually every gas utility in the Eastern and Northeast, Mid Atlantic US this past winter you saw announcements in terms of record throughputs and in many cases record peaks.

So we see the need for gas at peak to be increasing that reflects the underlying growth in customer with lots of conversions and other increasing demand coupled with the demand for gas-fired generation I talked about earlier. So there is a significant demand for LNG. We are bringing the additional liquid to mark at a great time because there is not a lot of LNG available and we would certainly look hard at other opportunities to expand our footprint or capacity of LNG. So yes, that remains a focus for us because it has really been a great asset for us. A European and sort of core asset for us in terms of our Midstream business. So with the liquefaction we are augmenting it but we then look at opportunities, potentially, to further expand and enhance our position on the LNG side to continue to serve peaking demand which is increasing in a pretty material way, and the other emerging segments that I referenced.

Great. Thanks again for the time this morning. Appreciate it.

Thank you.

The next question from Sharon Lui with Wells Fargo. Your line is open.

Good morning.

Good morning, Sharon.

This question is for Jerry on AmeriGas. Just given, I guess, that the higher priced inventory was sold in the second quarter, just wondering what your expectations for propane margins are for the balance of the year?

We are glad that we were able to get some weather and get the high cost inventory out. Things have stabilized now. So we're basically at the same differentials that we typically are at. The propane cost has been stable, which is wonderful not only for us but the whole industry. The customers are enjoying lower prices. So I would expect our margin expansion that we experienced in the quarter to continue for the rest of the year.

Okay. That is helpful. And I guess regarding the propane acquisition market, maybe if you can comment on whether activity levels and multiples have been tracking in line with expectations and weather you think, I guess, potential opportunities could ramp up for the balance of the year?

I think they will. I mean our pipeline is pretty good right now. And this is the season when most of the independents that have chosen to sell think hard about it in the spring. We have had years, now, where multiples really haven't expanded so we are still seeing five to six multiples. That just hasn't changed. It has been very stable. But the amount of opportunities has also been quite stable. So it should be a good spring for us.

Okay. That's helpful. And then, I guess, on the UGI side given your significant project backlog, just wondering if you have seen any reductions to date on material costs such as pipe or contracting costs that could improve your returns on those types of investments?

Sharon, I would say no, we haven't seen any material changes, you know, the most significant, the material costs are certainly an important element on a number of these projects. The actual construction field labor costs are more significant and we have been pleased that we have been able to develop really attractive projects, you know, with the challenge that all of us face in the Marcellus in terms of finding staffing and executing around projects and that has gone really well for us. And I think one of the things that our Midstream marketing team has done really well, and the utilities team, is to enhance our resources, staff up and align with the major contractors that enable us to execute a range of projects for UGI that are well above any range of projects, capital projects that we have executed in our history. So we have been pleased that the costs have been sort of well managed and understood but we haven't seen any significant changes in our costs to execute projects.

Okay. Thanks for the color.

Thank you.

The next question come from the line of Nathan Judge from Janney. Your line is open.

Good morning. Just wanted to inquire a little bit more about-.

Good morning.

Good morning. A little bit more about the foreign exchange head wind this looks to be coming. Can you just, I know you rateably hedge, but could you give us a bit better idea of what as far as the head wind could be if you actually quantified that? And will we see any change as it relates to the inclusion of Total?

We haven't quantified, you know, in terms of a dollar amount the head wind. We, you know, if you think about it, I mean you could try to estimate, we typically get the hedging done by the end of the second quarter of the year we are in. And we fetter in it as I described so you can kind of look at where rates are and average them in and kind of come up with something there if you wanted to try to estimate that. With Total, we haven't hedged anything yet but transaction hasn't closed but once we close the acquisition we will use the same policy with respect to the earnings there.

We wouldn't be specific in terms of next year FY 2016 but I can say on a broad basis that based on the hedging policy that Kirk referenced, we are not looking at a 4X being or currency being a significant factor as we look at our targets for next year largely because it is hedged and it is hedged at a weighted value that is not that dissimilar from this year basically. It is not a significant or material event for us now because, over three years you sort of get to, you know, you have a soft landing over three years but, you know, who knows where the market is going go but for next year we are in a, you know, we know where we are going to be and it is not a material change from this year.

Very well. And just a follow-up on weather, clearly some of the weather in the first quarter wasn't as robust as it was in the second. Can you give us an idea of what the net impact of weather would have been this year relative to normal?

Yes, we typically don't do that, Nathan. I mean, you can look at each business and look at weather and throughput and margin and it tends to flow. It tends to flow pretty clearly if you look at AmeriGas and we providing now, the slides that we provide with the earnings you can sort of see the volume impact, impact largely is weather related and then we do our best in the businesses which can respond to unit margin management to counter act that but that combination of volume which is largely weather impacted offset by how we do in our unit margin management sort of is a good proxy for weather. The hardest one to characterize because it is multiple factors with weather being one, is around the Midstream business and the impact of weather and other operational factors on volatility and margin from pipeline capacity. That one is difficult. We explain it as best we can. It is, and weather, cold weather is one of the key enablers of volatility but that is a harder one specifically call out.

Okay. Thank you. Just finally, you know, talking about having a better second half than you have historically as far as contribution from earnings. When you look out in future periods, do you see comparable level of higher earnings, sounds like when you talk about the projects and uplift to the sustainable cash flows from these businesses that you are looking for better back half of the years going forward. Is that fair?.

I think, you know, each year is unique. But some of the things that I referenced a few things. Certainly the build of our take or pay fee-based revenue streams will contribute to earning consistently rateably throughout the year. I think what is going on in terms of the pipeline capacity markets does tend to help us even in shoulder months so that again is a positive contributor towards, you know, reducing to some limited extent the weather volatility we see in our earnings and helping us in the second half of the year. Something like the parachute effect that I referenced depends on factors and is sort of available to us in years where costs move in a certain direction with certain timing. That is one that is not necessarily, I'm sure we will repeat in some future years but I wouldn't see that as a trend. That is just an event. But the other two I think are positive trends that are helpful in terms of second half earnings for the company.

Thank you very much.

Okay. Thanks, Nathan.

The next question comes from the line of Ben Brownlow from Raymond James. Your line is open.

Good morning.

Good morning.

Jerry, I know you don't like to give so much comments or, you know, on the quarterly kind of guidance, but with guidance assuming normal weather and business in the second half of this year and I think the latter half of last year, slightly unfavorable particularly in the fiscal third quarter so just taking guidance a step further, is it fair to assume you are looking for volume growth in the second half of this year?

We will have slightly higher volumes in the summer mostly because of the national accounts first that I mentioned. National accounts is great because it is more of a commercial less weather sensitive business and, of course, the cylinder exchange business as well. But I wouldn't say it is a material jump in volume.

Okay. That is helpful. And on the distribution growth of sequentially $0.04, which is what you have historically done over the past two years, but obviously over time that represented a little bit of a slowdown in the growth rate from about 5% to 4.5%. How should we think about longer term growth objective and the distribution?

Well, we have continued to maintain that we are growing earnings 3% to 4% and increasing the distribution 5% over time. I think we always said in cold years don't look for a big jump above 5% and in warm years don't expect a drop well below 5% but as I said, you know, we want kind of the average over time for our unit holders who hang on to AmeriGas to expect 5% over time.

Okay. And then just last one for me. Just kind of thinking about the industry from a longer term structural standpoint of kind averaged multi year time frame, how should I think about AmeriGas' ability to capture higher propane margins to help offset some of the conservation that you are seeing in the industry?

Well, I mean we have to find ways to grow the volume organically so that is kind of the magic of the cylinder exchange business and national accounts is they actually grow volume and in commercial businesses in the U.S. and use of propane for auto gas is a growing segment, but I think the really nice thing about AmeriGas as a large-scale rollup is that there is over 3,000 acquisition candidates out there. So it will be a very, very long time before that runs out. Even in secular declining industries the rollup strategy is great when you have that many choices.

And I would add a comment on earnings. One of the things that Jerry and the whole team at AmeriGas did a great job of in this quarter is expense, control expense management. So in terms as we think about future you drive the top line certainly and look for growth opportunities and we have always done that. But you know focusing on operational efficiency is also critically important and I think the team did a great job this quarter in terms of driving operational efficiency. That came through when you look at OpEx and earnings.

Great. Congrats on the quarter. Thanks.

Thank you.

Thanks.

The next question comes from the line of Mark Barnett from Morningstar. Your line is open.

Good morning, everyone.

Good morning.

Question for Jerry. Obviously it was a great quarter as you mentioned on the OpEx efficiency and whatnot and I'm wondering, looking over the course of the rest of the year and what have you, was most of this stuff kind of one time management in nature given the conditions or did you see any kind of longer term cost savings that you will be recognizing?

I mean a lot of work here. This year obviously when we got lower propane price it results because we are a margin-based business lower top line which is not a bad thing, we are still making more money but our customers are getting lower bills. That really takes bad debt down. We are enjoying lower diesel costs to run the trucks. Last year was a very expensive year to do business with all the polar vortex activity. We had huge bills that were related to repair and maintenance, a lot of overtime because we had to short fill through the shortage of propane. All of that is gone. So we have had a pretty good run that should continue when year-over-year comps, whether it is overtime, bad debt, diesel, et cetera. So I think the rest of the year, certainly, we will see expenses better than last year.

Great. Thanks a lot.

Yes. Thank you.

Your last question comes from the line of Carl Kirst from BMO Capital Market. Your line is open.

Hey. Thank you, guys. Appreciate the time. Just had a couple of quick follow-ups. The first really on the Totalgaz acquisition. I guess it is to the extent are there any biases to the return, for instance, that we should be thinking of? John, you mentioned not necessarily the parachute effect but just that prices are down 40%. Is that stimulating demand or to the extent that we are seeing things take maybe to the outer part of the envelope for closing has that clipped anything? Just wanted to touch base on it.

Sure. Carl, I would say at a high level there is the opportunity with Total looks very much the way it looked when we first talked about it late last summer or early last fall. With the change in the exchange rate between the dollar and the Euro, it has gotten a little cheaper for us and will translate earnings back at a different rate but the fundamentals of the investment remain exactly the same. One thing I would point out is the funding of the capital markets remain very attractive so we are really pleased with the funding opportunities, the way we are going to fund this, you know, the rates remain very attractive that is a positive.

And just in general whether we are talking about Antargaz, Total or AmeriGas having lower commodity costs is a great thing as a distributor. It relieves any strain on our balance sheet and Kirk talked about us being out of the revolvers across all of our companies and, probably most critically, it relieves the burden on our customers and as a distributor that is what you want. You want less burden on your customers because you want them encouraged to consume. So we feel good about lower commodity costs. I would say it doesn't have a material effect on the financial model for the investment, but it is a positive development.

Great. I appreciate that. And then last question. You know, going back to Midstream and certainly appreciating all of the color that you had given about sort of the sustainable foundation being up and you had even mentioned at one point seeing, you know, some cases fee-based some cases take or pay fee-based. I was wondering if it is possible at this time to give what an annualized fee-based or take or pay based component is to Midstream.

That is not something that we have communicated. We have shown some sort of longer term sort of historical view and future view with fee-based element to it where moving forward we are going to see fee-based the fee-based percentage of fee-based revenue and energy services moving from what historically has been about 30% to if you project forward two or three years about 55% so it is quite a significant move. And for most of our revenues when we talk about fee-based revenues most of those are take or pays.

So, you know, which from our standpoint is very attractive because they are clearly lower risk and you are not subject to, you know, the volume risk, the variability around volume and the other key factor there is again when we look at our revenue stream around take or pay fees the quality of the counter parties in our take or pay agreements is quite high in each quarter is the other key factor. You got to make sure when you are signing a five, seven, or 30 year contract with somebody for take or pay fees that they will be around to deliver on that commitment . So we have very credit-worthy counter parties which is the other key for us. We shared some detail on that in terms of the movement and certainly we will try to make sure that we do our best to provide information that will enable you to kind of see in a little because it is more detailed evolution of that business because it is an important evolution for us.

Absolutely. Great. Thank you so much.

Okay. Thank you, Carl.

There are no further questions at this time, presenters. I turn the call back to you.

Okay. That's it. Thank you very much. We look forward to keeping you abreast and we will talk to you soon. Take care.

This concludes today's conference call. You may now disconnect.