UGI Corp (UGI) 2016 Q2 法說會逐字稿

At this time, I would like to welcome everyone to the UGI AmeriGas second-quarter 2016 conference call.

(Operator Instructions)

Thank you. Mr. Will Ruthrauff, Director of Investor Relations, you may begin your conference.

Thank you, Tracy. Good morning, everyone and thank you for joining us. With me today are Hugh Gallagher, CFO of AmeriGas Propane; Kirk Oliver, CFO of UGI Corporation; Jerry Sheridan, President and CEO of AmeriGas; and John Walsh, President and CEO of UGI.

Before we begin, let me remind you that our comments today will include certain forward-looking statements which Management 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. Please read our earnings release and our annual report on Form 10-K for an extensive list of factors that could affect results. We assume no duty to update or revise forward-looking statements to reflect events or circumstances that are different from expectations.

We will also describe our business using certain non-GAAP financial measures. Reconciliations to the comparable GAAP measures are available in the appendix of our presentation.

Now, let me turn the call over to John. John?

Thanks, Will. Good morning and welcome to our call. I hope that you've all had a chance to review our press releases reporting second-quarter results and the updated guidance for UGI and AmeriGas.

To say the least, this was a dynamic quarter for us, filled with challenges, particularly the unseasonably warm winter across our service territories, but also noteworthy for the progress made on major investments and emerging new opportunities as the landscape changes across the energy sector. Our financial performance in the quarter demonstrates the resiliency of our businesses in the face of extremely warm weather. Over the years, we've consistently highlighted the benefits of diversification when discussing UGI's performance. Those benefits were quite evident in Q2, as very strong contributions from our international business, and growth of our midstream and marketing fee-based businesses, which are less weather dependent, helped lessen the impact of the warm-weather challenges.

On the call today, I will comment on our financial performance and key activities in the second quarter. I will 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'll wrap up with an update on our strategic initiatives.

Our Q2 GAAP EPS was $1.33, while our adjusted EPS, which reflects a $0.12 adjustment for mark-to-market gains on commodity derivatives and a $0.03 adjustment for Finagaz transition expenses, was $1.24. This is just slightly below our adjusted EPS of $1.26 in the second quarter of FY15, despite weather that was much warmer in our key service territories. We're very pleased with the underlying performances of our business in this very challenging environment. Our major new investments, such as the Finagaz acquisition in France and our new midstream projects, delivered results that exceeded our expectations.

With the conclusion of Q2 and the winter heating season, we're now in a position to revise our guidance for FY16. We've reduced our FY16 guidance range to $1.95 to $2.05 from the previously stated range of $2.15 to $2.30. This reduction is related to the impact of very warm weather in both Q1 and Q2. As we've seen over the past three years, weather patterns come and go, but the underlying strength of our businesses holds the key to long-term performance. As you will see later when Kirk compares our FY16 performance to FY12, a similar year from a weather perspective, our net income grew at a compounded annual growth rate in excess of 10% over that four-year period.

Our outlook remains very positive for FY17 and beyond. I will comment on our outlook later in the call. Kirk will provide more detail on guidance and our second quarter performance in a few minutes.

Turning back to Q2, our solid results with adjusted net income down less than 2% versus FY15 despite very warm weather and limited pipeline capacity volatility in the mid-Atlantic region, reflect the major impact of strategic investments made over the past three to four years, effective expense management in our utilities and LPG businesses, and solid unit margin management in AmeriGas and UGI International. As I noted earlier, Q2 was a dynamic and challenging quarter. However, unlike FY14 and FY15, when the challenges were related to colder than normal weather, FY16 brought the challenges of very warm weather in all of our major service areas. Although volumes in our businesses reflected the decline in heating-related demand, our underlying weather-adjusted demand continues to be very strong.

Our natural gas and LPG customers appreciate the very low commodity costs and we see strong demand from AG new projects. Demand for natural gas in the underserved areas of the mid-Atlantic and Northeast regions remains quite strong and there is a substantial need for new pipeline capacity to serve that demand. Our integrated Marcellus asset portfolio, which includes pipelines, pipeline capacity contracts, gathering systems, natural gas storage, LNG, and a large base of customer demand, positions us well for opportunities to enhance our existing asset base and opportunities to expand our network with major new investments.

I'll return later in the call to discuss our progress on those strategic opportunities, but first I'd like to highlight several key achievements in the quarter. UGI Gas, our LDC serving about 389,000 customers in Pennsylvania, filed its first rate case in over 20 years. The $58 million request is moving through the Pennsylvania PUC regulatory process and we are confident that we'll successfully conclude that process by Q1 of FY17. Our infrastructure upgrade and growth programs remain on track at utilities and our capital expenditures will once again hit record levels in FY16. Despite the warm winter weather, our midstream and marketing business has seen strong demand growth for peaking services and LNG supply to support those services. Our new liquefaction unit in Temple, Pennsylvania, is fully loaded, as most LDCs in the mid-Atlantic and Northeast are experiencing increases in their projected peak day demands. These increased peaks for gas LDCs are underpinned by core customer growth and a migration of many large customers from interruptible to firm service.

Our team in France has done an outstanding job implementing our plan to align and integrate our critical business activities as we near the one-year anniversary of the Finagaz acquisition. We are delighted with the progress achieved to date. Our team is executing our detailed project plan, including the key social obligations to our employees in France. We are confident that we will deliver the investment case while also enhancing service levels and broadening our product and service offerings for our expanded customer base across France.

The one final point I'd like to reiterate on the second quarter is the benefit from our diversified set of businesses. We consistently highlight the importance of diversification in the execution of UGI's balanced growth and income strategy. We can clearly see those benefits when we compare our FY16 performance to our previous record warm year of FY12. We are a larger, stronger, and more diversified Company than we were just four years ago, and that strength is particularly critical when we are challenged by weather and other adverse market conditions.

Kirk will now provide you with more details on that theme as well as our overall financial performance. Kirk?

Thanks, John.

This table lays out our GAAP and adjusted earnings per share for this quarter compared to the same for Q2 of last year. As you can see, adjusted results exclude the impact of mark-to-market changes in commodity hedging instruments, gains of $0.12 and $0.17, and acquisition and transition costs associated with the integration of Finagaz, $0.03 in each quarter. Our adjusted earnings of $1.24 per share for the quarter are down only $0.02 from last year, in spite of nearly record warm temperatures in all of our service territories.

As you can see from this slide, we experienced warmer than normal weather in all of our businesses this quarter. Weather in our utility and midstream and marketing service territories was about 25% warmer than last year. Weather for AmeriGas was 13% warmer than last year, and weather in France was about 7% warmer. The warmer weather resulted in negative variances to earnings in the US businesses, but was measurably offset by strong results in Europe, largely due to the accretive acquisition of Finagaz in France.

As mentioned, AmeriGas experienced much warmer weather this quarter. Volume was down 14% on weather that was 13% warmer than last year, resulting in operating income of $250 million for the quarter. This represents a decrease of $47 million versus the second quarter of last year, where we experienced weather that was 2% colder than normal. Operating and administrative expenses decreased by $19 million, down 7.4% versus last year, primarily due to lower compensation and benefit expenses, lower vehicle fuel cost, and lower uncollectible account expense. UGI International contributed $105 million in income before taxes, a $46 million increase over last year, driven largely by the acquisition of Finagaz LPG business in France. Weather in France was 7% warmer than last year.

Retail volumes sold for all of International were up 50 million gallons, or 26%, due primarily to the addition of Finagaz and, to a much lesser extent, smaller acquisitions in Austria, Hungary, and the United Kingdom. Unit margins were also up as wholesale prices for propane and butane in Europe remained low at 32% below last year. Operating and administrative expenses and depreciation expenses are up significantly, primarily reflecting the effects of the Finagaz acquisition. Operating and administrative expenses include Finagaz transition expenses, which are broken out for you at the bottom of the table on this slide.

Turning to Slide 11, the gas utility reported income before taxes of $105 million, down $27 million, or 20% versus last year's quarter. As I mentioned earlier, utilities experienced weather that was about 25% warmer than last year. Throughput to core customers was down 23%. Total margin decreased by about $37 million, or 17%, reflecting the effects of warm weather on volumes. Partially offsetting this weather-driven decline in margin, were operating and administrative expenses of about $14 million less than last year. The decline in expenses includes the capitalization of previously incurred IT expenses that we expect to recover in rates, lower uncollectible accounts, and lower system maintenance expenses.

Finally on January 19, we filed a rate request with Pennsylvania Public Utility Commission for a $58.6 million base rate increase. We expect the process with the PUC to conclude in early FY17.

Midstream and marketing income before taxes declined by about $21 million to $77.3 million for the quarter. Total margin declined by $25 million or almost 19%, reflecting lower margin from capacity management, retail gas and power marketing, and electric generation. All of these segments were impacted by the extremely warm weather, which reduced year-over-year spreads in capacity management and lower demand for gas and electricity. The lower margin in these segments was partially offset by higher margins in our asset and fee-based businesses. Gathering margin on our Auburn III and Union Dale assets and higher peaking services activity contributed $14 million of incremental margin versus last year. The lower capacity management margins reflect lower spreads and locational basis differentials and less volatility and capacity values between Marcellus and non-Marcellus delivery points, due in large part to the very warm weather and the resulting decline in demand.

I would now like to turn your attention to a brief comparison of the fiscal year to date for the same period in 2012. FY12 was another year where we experienced extremely warm weather during the heating season in all of our businesses. Here we show the earnings performance of the businesses in 2016 versus the comparably warm year of 2012. This chart shows, as John mentioned earlier, the long-term impact of successful investment and how it has more than offset the impact of much warmer weather. Just stepping through each of the business units, at AmeriGas, weather this year was up about the same as in FY12 and yet the contribution to UGI earnings per share is up $0.08, primarily reflecting the acquisition of Heritage in January of 2012. At the utility, the weather was also about the same as in FY12, and earnings are higher this year in spite of significant growth in capital expenditures over the time period. Utility has invested approximately $750 million since the beginning of FY12 without seeking rate relief. This significant growth in capital expenditures led to UGI gas division's first rate case filing in 21 years. The gas division accounts for about 60% of utility's total gas customers.

At UGI International, even given the negative impact of weather in France, which was about 7% warmer than in 2012, earnings are up $0.21 per share due to growth through acquisition since 2012 -- most notably, the acquisition of Finagaz last year.

Finally, our midstream and marketing business has benefited greatly from the expansion of our Marcellus asset network over the past four years. The significant growth in stable asset base margin due to the investment in our midstream business has significantly offset the impact of extremely warm weather there. Net income is up over $38 million, adding earnings of $0.22 per share to the bottom line, an increase of over 120% since FY12. In total, net income from growth investments in the 2012 to 2016 period contributed over $100 million in incremental income, an increase of $0.55 per share over the four-year period. Said another way, on a weather-normalized basis with weather actually warmer in France, EPS is up over 45% versus 2012.

All of our businesses are strong generators of cash flow with access to plenty of liquidity. We finished the quarter with a cash balance of $466 million. All of our business segments also have access to credit facilities with adequate capacity to meet their working capital and liquidity needs. Also in March, the utility priced a $400 million private placement with a delayed draw feature. The proceeds from the draws on this financing will be used to refinance existing maturities and to fund future capital expenditures. Finally, as John mentioned earlier, due to the very warm weather, we are adjusting our earnings guidance down for the full fiscal year to a new range of $1.95 to $2.05 per share.

That completes my prepared remarks and I will now turn the call over to Jerry for his report on AmeriGas.

Okay. Thanks, Kirk. Very similar story for AmeriGas.

Extremely warm weather had a significant impact on our financial performance not only over the quarter, for the year-to-date period, but actually over the last 12 months. Before I go into details for the quarter, I'd like to share just a few weather statistics. The 12 months ended March 31, 2016, were the warmest on record according to NOAA, and that's 121 years of history. The six months ended March 31, our fiscal year-to-date period, was also the warmest October through March period on record. Q2 weather was the second warmest on record, with nationwide degree days coming in at 12% warmer than normal and 13% warmer than last year. And the month of March alone was 21% warmer than normal.

This extremely warm weather created a significant volume headwind, starting in December and continuing through the second quarter. As a result, our retail volumes sold during the quarter were 62 million gallons, or about 14% below last year's quarter on weather that was 13% warmer than last year. Propane costs in Mont Belvieu averaged $0.39 for the quarter, which was $0.14 below the second quarter last year. Unit margins for the quarter averaged about $0.03 above last year, as we were able to keep a portion of the low costs in an effort to offset the impact of the volume shortfall. In warm years, operating expense discipline in this business is an absolute necessity as we seek to offset the impact of lower volumes. And we were pleased with our expense performance during the quarter, given the extreme weather challenges.

Operating expenses for Q2 were down about $19 million, or 7% from last year, due to solid management of payroll costs and lower vehicle and collection expenses. Expenses in margin management have enabled us to offset nearly $30 million of the earnings shortfall brought about by the lower volume. And adjusted EBITDA for the second quarter was $295 million, or 14% below Q2 last year. Primarily as a result of the record warm weather experienced thus far this year, we are now revising our guidance, as you've seen, for the full-year to $575 million to $600 million in adjusted EBITDA for FY16.

One other comparison worth sharing is, as Kirk had done: the year-to-date earnings for FY16 to the same six-month period in 2012. Both years experienced record warm weather at approximately 15% warmer than normal nationally. When we compare the 2012 results pro forma with a full six months of the Heritage propane business included, the adjusted EBITDA for 2012 was $414 million versus $473 million this year, a $59 million or 14% improvement in similar weather conditions.

Now, just some comments on our growth thrusts. AmeriGas Cylinder Exchange did see a modest decline in volume that was warm-weather related -- principally patio heater utilization was down in restaurants and resorts that we serve. However, we have rolled out now the new 2,500 locations that I referenced on the last call, now bringing the total number of ACE outlets to nearly 51,000 nationally.

Our national accounts program volume was also down 8.4% on the warm weather; however, so far this year, the national accounts team has done a great job adding 31 new accounts and renewing 23 contracts. No acquisitions were completed in Q2; however, year to date we've closed on three propane acquisitions, adding six million gallons annually. And we expect to complete several additional deals in the spring and summer.

Now, just a couple comments on our distribution. We were pleased to report recently that our Board of Directors approved a distribution increase of 2.2% to $3.76 annually. This marks the 12th consecutive year that we've increased our distribution. We believe this distribution increase demonstrates the confidence Management and the Board have in the long-term prospects of the business, but also strikes the appropriate long-term balance between distribution growth and distribution coverage. We are committed to returning to grow the distribution for all of our unitholders while targeting a long-term distribution coverage ratio in the range of 1.2 times. We are increasing our distribution while at the same time maintaining a strong balance sheet, a solid liquidity position, and leverage ratios that are consistent with our debt rating.

So thank you, and now I'll turn the call back over to John.

Thanks, Jerry.

I'd like to briefly review progress on the strategic investments in programs that are so critical for our future growth. Our midstream team is making good progress on their three major projects. We received a FERC certificate for the Sunbury pipeline project on April 29, just last week, and we're preparing for the field execution phase of that $160 million project. We expect Sunbury to be online early in 2017.

PennEast also cleared a critical FERC milestone with the issuance of its schedule for environmental review. The FERC set December 16, 2016, as the completion date for that process. Based on this newly confirmed milestone date, we now anticipate an in-service date for PennEast in the second half of 2018. Our third major active project in midstream is our new LNG liquefaction unit in Manning, Pennsylvania. The project is now in the site construction phase, and it is on track to meet its targeted in-service date of January 2017.

Our gas utility is deploying capital at record levels to support the continued growth of our residential, commercial, and industrial customer base, and our intensive infrastructure replacement and upgrade program. We expect to invest upwards of $1 billion in capital in our utility business over the next four years. Our teams are focused on meeting the challenge. We're confident that we have the resources and capabilities to execute these far-reaching capital programs.

As Jerry described to you, our team at AmeriGas did a great job of handling our warm weather challenges. In addition to taking the actions necessary to control expenses and generate cash, we remain focused on developing the growth opportunities that will drive future performance. One area of note that I'd like to reinforce, is our ACE business, where we won a series of major accounts; and, as Jerry noted, we've exceeded the 50,000 outlet milestone across the US. AmeriGas also announced the distribution increase for a 12th consecutive year, which is a major accomplishment in today's MLP marketplace.

Finally, I'd like to comment on our progress in Europe. As I noted earlier, we had an exceptionally strong quarter in spite of the warm weather. Our team in France did an outstanding job, maintaining very high customer service levels and consistently strong safety performance, while delivering outstanding financial results and achieving all of our key integration milestones. Although the scale was considerably smaller, we have similar strong results in Hungary, where we're integrating the business we acquired from Total late last year. We are very pleased with our performance in Europe and our experienced European leadership team is busy assessing new investment opportunities that align with UGI's core capabilities.

I'd like to close by commenting on our updated guidance and the future prospects for UGI. Our reduced guidance for FY16 is the result of the extraordinarily warm winter. This follows two straight years where we raised guidance due to colder than normal weather. Our solid results year to date clearly demonstrate the earnings capacity of UGI's balanced portfolio of businesses. Our major investments are delivering and we're well-positioned for the future.

The capital investment program in our midstream business and our strategic propane acquisition program in Europe continue to push UGI strategic boundaries. As we invest and grow, we remain focused on reinforcing our traditional strengths as an energy marketer and distributor. While the mild winter in FY16 dampened pipeline capacity volatility in the mid-Atlantic and Northeast regions, we strongly believe that underlying demand for natural gas will stress the existing infrastructure network. This infrastructure gap is likely to be enduring and will provide us with new investment opportunities and will also enhance the value of our existing network of midstream assets, strategically deployed in the region.

As we turn the page on the winter of 2015-2016, we're excited about the opportunities that lie ahead for us and look forward to keeping you updated on our future calls.

With that, I'd like to turn the call back over to Tracy, who will open it up for your questions. Tracy?

(Operator Instructions)

Ben Brownlow, Raymond James.

Hello, good morning.

Quick question, Jerry, on the expense management. Congratulations on that. That's very well managed in a difficult weather environment. That $19 million, or $18.9 million reduction year-over-year, how much of that was weather reaction versus sustainable? Is 100% of that just in alignment with lower volume?

To keep it really simple, I would say roughly half of it had to do with management action and the rest had to do with two things primarily. Lower vehicle fuel, because diesel's just cheaper year-over-year. And our collection expenses are down because revenue comes down on the lower price deck as you know. We're a margin-based business. But the rest was really managing overtime well, if we had to postpone certain repair and maintenance and those sorts of things. So about half management action, the rest was natural.

That was really helpful. Then just one more for me. There weren't any acquisitions in the quarter, but when you look historically and you get these unseasonably warm quarters, how does that affect the M&A opportunity in the pipeline that you see in terms of M&A?

Traditionally, it hasn't had a big impact. You would think that this might cause some individuals to sell. This year may be a little different. We're starting to see a growing pipeline. I don't know how much it is connected to the weather or just coincidence but the pipeline looks very good. And these are all smaller scale deals. I think we are going to have good spring summer.

This one additional comment I would make on that is I think one of the key things in M&A in the propane segment in the US is the work that AmeriGas does in terms of continuity. Jerry's team has an ongoing for decades program to maintain strong relationships with distributors that we believe would be strong additions to our network. And we are consistently in contact -- regularly in contact with them. And that's really crucial in terms of continuity. Whenever a seller reaches the point where they are considering a sale of their business, that continuity plays a key role in terms of confidence in working with us.

Great, thank you for the color. And just to reaffirm one more thing, you are reiterating long-term distribution growth outlook of that 5%?

In this case we really believe and investors have told us that in this environment, a tilt toward distribution coverage would be appropriate. So we are not committing to 2% or any number. I think our commitment is that we're going to continue to increase the distribution as we have for 12 consecutive years. So it is a good track record that I think you can rely on. But in this environment, there seems to be a call for coverage and that's what we did this round.

That's fair. Great. Thank you.

(Operator Instructions)

Chris Sighinolfi, Jefferies.

Hey, good morning, John.

Just a couple clarification questions, if I could start there with regard to some of the detail the slides, thanks for the slide deck. It is helpful. Starting on -- if we could go to slide 12 where you talk about midstream and marketing. And you would note that the total margin down about $25 million from last year despite the inclusion of about $14 million in contribution from new assets.

What we're even talking about this in prior years, but the opportunity that you have to make capacity margins. Can we just assume that was -- your comments would indicate there was lack of opportunity, given a lack of basis spread. Can we assume that was somewhere near zero? Or how do we think about -- that business would've been down $40 million without the contribution of the assets. Is that primarily or almost entirely just a decline in capacity payments that you made, or margin opportunity that you made last year?

There's a couple of key pieces, Chris. That's one of them, that margin that's created when you have that significant basis differential driven by extended cold periods. You also have the margin, the contribution from gas marketing, which is impacted by warmer weather. So, it's -- both of those are material terms of contributing to the margin shortfall, and we did see some -- I think one of the key points to make is even though this was an extremely warm winter, we did have just a few days and it was actually over a weekend in the early part of the second quarter, where we had some colder than normal weather

And in that period we saw market volatility. So we did generate some margins. The fact that it was on a weekend tends to dampen demand a little bit versus a weekday cold peak. But, that just me underpinned the fact that demand is there, cold weather will obviously create a considerable draw. The peaks are actually getting higher, which is what we see in our peaking business, and the infrastructure gap filling is moving very slowly.

We believe we will continue to see significant basis differentials in the mid-Atlantic and Northeast with cold weather in next year and beyond. But in terms, coming back to the margin question, it is both the natural gas and power marketing piece contributed to that shortfall due to the warmer weather, and we saw significantly less or materially less opportunity for that opportunistic margin generation on capacity.

Okay. So if I were to take what you've told us previously with the additions on LNG and the ability of the utilities to take more locally sourced gas, you still think -- let's say we roll into next winter and there are those margin opportunities, you actually think the UGI business is better able to capture them? Just you have to have the opportunity to be able to do so?

You have to have the opportunity, and we are adding assets to the portfolio in the region. So a big part of our strategy is the concentration of the assets that could be networked to utilize as market volatility occurs and it doesn't occur uniformly. It shows itself in different points and locations depending on what else is happening across the overall natural gas grid.

We are better placed than ever given the range of assets that we have. We have more LNG than ever. We are managing more pipeline capacity and we own more of our own asset network. So we have more tools or capabilities to deploy when those peak days occur.

Okay. Perfect.

If I could switch real quick then? It's another cleanup question on the previous slide, slide 11 when you are referencing the utilities. There's was a -- the $14 million improvement in O&M expense and I thought Kirk had mentioned, and maybe I just heard it wrong, that you were -- part of that is a capitalization of previously incurred expenses? So is that a reversal of prior period or is that -- can you just better help me understand what exactly that line item is?

Yes, Chris, that was expenses that were capitalized in a prior period. But because we are going to get rate recovery for that, the regulatory accounting calls for capitalizing it and putting into rate base.

Okay. Tethered to the rate case process.

Yes, that was about $5.8 million.

Okay. That's helpful.

Then Kirk, can we just talk about the corporate and other segment? I read the descriptions again at the end of your release about what is contained within that segment description. When you say commodity-driven, are the interest rate hedges on your euro exposure in there, as well?

Those get hedge accounting, so they don't have -- they are in AOCI. What's in there is the commodity hedges. So each one of the segments, Chris, are presented almost on an adjusted basis and then we take the mark-to-market on all the commodities in each segment and put it in corporate and other.

Okay. But even if we normalize for that, if we strip off the mark-to-markets that you gave us in your adjusted earnings figure, they are still a fairly meaningful contribution from corporate and other. And so, thinking about HVAC and the electric utilities being moved out, what is still residing in there? I know it is a lot of inter-company cancellations, but on a total contribution basis, the last two years, it is been rather significant in the second quarter. I'm just trying to better understand how we should think about modeling it?

Yes, I think it is mostly inter-company. It's pretty tough to model. I think it is mostly inter-company eliminations and some of that is tax-related and other things. We could try to go through and see if there's a way we could help you with modeling it, but offline.

Yes, maybe I'll --

I was going to say just one key point, Chris, on that. We first started reporting on a mark-to-market basis in FY15, on terms of a full-year basis. So when you compare the 2015 and 2016 to any year prior to it, you're not going to see those mark-to-market adjustments showing up in corporate and other.

So that's a big change when you just look at those headline numbers in the period leading up through 2014, if you compare that to 2015 and 2016. Certainly the most significant change in that category is the mark-to-market adjustments flowing through that specific segment.

Okay. Kirk, maybe I will follow up with you a little later offline about how to think about some of the drivers that might shape that on a quarter or year-over-year basis.

That would be great.

Okay. The final question for me, and then I will get back in the queue, is I cannot help but see across the peer group of companies, you operate weather sensitive businesses, you hit yourself for the actual impacts of weather. Not every peer company of yours does that. Some companies, even though they don't have any regulatory mechanisms to actually protect them from weather, they report non-GAAP financials that strip out the effects of weather. And it seems like investors are just willing to go along with that and give them credit for it. So my question is, have you ever thought about doing that yourself?

We've seen that other companies do it, Chris. We don't really try ourselves to quantify accurately quantify the weather impact. So we tend to do it like we did today, where we go back and look at a comparable period and look at how we did versus that period. We have a lot of different business units with different customer bases, so it would be quite an exercise for us to do something that is that involved.

We have talked about it. The other thing is that there's been some more pronouncements lately about maybe pushing back against some of these adjustments for reporting purposes

I read that with regard to our MLP coverage.

We try to highlight in a way that is as straightforward as we can, which is the comparison to 2012 is handy because it is a very similar weather year. And we certainly reference weather.

It does get fairly complicated because you do have some offsetting factors, commodity costs typically that aren't always, but typically, drop when demand lessens. Therefore, you get in some cases, a parachute effect on margins.

There's a lot of different factors, so we try to do it in a way that is as straightforward as we can make it without any speculation or making too many assumptions on our end. We find that works best.

And also it reflects the attitude we have in the Company, which is our business teams need to work hard, particularly in the non-regulated businesses that have more flexibility, work hard to offset as much of the impact of weather as possible. So we don't want to -- we certainly don't want to shield our internal teams from having to deal with whatever the weather brings us. Our external communication reflects that attitude, as well.

Yes, okay. Thanks for the time. Appreciate it.

Nathan Judge, Janney.

Good morning.

Just wanted to ask on the International business, there was a pretty nice increase in margin year-on-year. Just obviously, there's been some lower LPG prices. But how sustainable is that margin, especially if we have an environment where oil prices do recover? And just thinking about the cultural change in how pricing has happened over there more specifically?

Sure.

I think the unit margins in Europe, as you point out, had a healthy increase this year. And there's multiple factors, three that I can think of that did contribute to that. One is certainly what you mentioned. We had a drop in the underlying commodity cost, which provides a parachute effect. And that was contributing to our margin increase, which we see during periods when underlying commodity costs drop, particularly during the winter season.

The other two factors are business-based, based on activity. We saw the effect of the Finagaz acquisition. We significantly increased the scale of our Business in France and unit margins in France are higher on average than they are across the rest of Europe. So you have that business mix change that contributed to an upward movement in average unit margin.

And lastly, we made some decisions in terms of our participation in the auto gas segment in certain markets, which is a high-volume, low-margin segment, and we shed some of that business, which also -- so that's a product effect, product mix effect, that also had the impact of increasing our average unit margin. So I'd draw on all three.

Typically, two of those are long-lasting. We've increased our position in France, which is a higher unit margin. We've shed some of the low margin business that we felt was less attractive. Typically, with the parachute effect, that would tend to normalize over time, but our goal is to move margins up with inflation. So, it would normalize at a level that's above our historical levels. We look to retain some of that parachute in the form of higher ongoing unit margins that would enable us to continue to stay on that path of keeping up with underlying inflation rates.

The basis spread between Europe and the US has no significant lay, but there still is a fair amount of new ships coming in. Just give us a little bit of idea on if in a stable commodity price environment, what that basis differential, what you think it will do in the next 12 months or so?

It is a good question. We all have opinions, but we don't act on those. So in terms of the way the business will perform and the way we -- our supply strategies, we'll continue to assume that we don't know where the underlying costs will go, nor do we know what will happen with that differential. Because it is a pretty complex set of factors that drive it.

But absolutely, your point is correct. The differential between the [landed] cost in Europe and the US has narrowed considerably and it has also over the last two winters, become much more stable. I think it is somewhere around the equivalent of $0.20 a gallon, between $0.15 and $0.20, which is where it was historically if we go way back. But that had gotten I think as high as $0.60 to $0.80 a gallon.

I think in general terms because what's happened to the supply market, the global supply chain has changed considerably based on higher production of NGLs in the US in particular. So, I think that over time is going to result in a diminished differential like we've seen. I'm sure we will see some volatility, but it is a much more global supply market than it was even three years ago, which from our standpoint as a major European distributor, is a really positive development.

Because as a distribution Company, the last thing you want to see is significant volatility in your delivered LPG cost. This dampening effect of enhanced supply around shale gas development is a real positive for us. I would think we will see far less volatility in that differential and we see the differential much lower than it was, say in the 2011, or 2010 to 2014 period, where it kind of blew out. I would think it would be modified in a significant way, and not nearly as volatile.

Thank you.

And just finally on the PennEast project. Just wanted to understand what impact the Delaware River Basin Commission can have in the permitting process now that they've decided to have their own hearings. And is it possible to have that more or less that last mile perhaps delayed and the rest of the project continue to head on time? Or is it all one project that needs to be completed?

Nathan, the way we think about it is, it's one project and certainly, our partners are the New Jersey-based utilities along with Spectra. But speaking of the New Jersey-based partners, obviously they are very eager to get access to supply for their customer base. So we look at it as one process so that river crossing is important.

That's a process that certainly we will participate in that process. It is an opportunity for us to communicate and supply information to the DRBC. We work on an ongoing basis with various entities within Pennsylvania and with various Ribbon River Basin Commission, so we are very comfortable and familiar.

We believe we have good insights into what they would be looking for in terms of information on the projects and also good information and support in terms of what our own experience has been as we have executed major river crossings on our other projects.

We had a major river crossing on the Auburn project, as an example. So we can point to that and bring that experience to those discussions as that process moves forward.

Thank you very much.

There are no further questions at this time. Mr. John Walsh, I turn the call over to you.

Okay, thank you very much. Thanks for your time and attention this morning and we look forward to speaking with you next quarter. We will talk to you soon.

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