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Edited Transcript of APU earnings conference call or presentation 6-Feb-19 2:00pm GMT

Q1 2019 Amerigas Partners LP and UGI Corp Earnings Call

KING OF PRUSSIA Feb 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Amerigas Partners LP earnings conference call or presentation Wednesday, February 6, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brendan Heck

UGI Corporation - Manager of IR

* Hugh J. Gallagher

AmeriGas Partners, L.P. - President, CEO & Director of Amerigas Propane, Inc.

* John Lawrence Walsh

UGI Corporation - President, CEO & Director

* Thaddeus J. Jastrzebski

UGI Corporation - CFO

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Conference Call Participants

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* Christopher Paul Sighinolfi

Jefferies LLC, Research Division - Senior Equity Research Analyst, Master Limited Partnerships

* Dennis Paul Coleman

BofA Merrill Lynch, Research Division - Global Head of High Grade Debt Research and MD

* Sharon Lui

Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst

* Shneur Z. Gershuni

UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst

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Presentation

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Operator [1]

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Good morning. My name is Denise, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the UGI Corporation AmeriGas Fiscal 2019 First Quarter Results Conference Call. (Operator Instructions).

Brendan Heck, Director of Investor Relations, you may begin your conference.

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Brendan Heck, UGI Corporation - Manager of IR [2]

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Thanks, Denise. Good morning, everyone, and thank you for joining us. With me today are Ted Jastrzebski, CFO of UGI Corporation; Hugh Gallagher, President and CEO of AmeriGas Propane; and John Walsh, President and CEO of UGI.

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. We assume no duty to update or revise forward-looking statements to reflect events or circumstances that are different from expectations. We'll also describe our business using certain non-GAAP financial measures. Reconciliations of these measures to the comparable GAAP measures are available in the appendix of our presentation.

Now let me turn the call over to John.

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John Lawrence Walsh, UGI Corporation - President, CEO & Director [3]

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Thanks, Brendan. Good morning, and welcome to our call. I hope that you've all had a chance to review our press releases reporting first quarter results for UGI and AmeriGas. UGI and AmeriGas delivered a solid Q1 performance, while facing some challenging operating conditions. Weather was somewhat colder than prior year for each of our domestic businesses but significantly warmer than prior year for UGI International. In addition to the weather challenges in Europe, we did see a recurrence of the severe cold weather in the Mid-Atlantic that closed out Q1 fiscal '18. That severe cold last year resulted in volatility that enabled us to deliver incremental capacity margins that didn't reoccur in the first quarter this year.

I'll review our key activities in Q1 then turn it over to Ted, who will provide you with a detailed overview on UGI's financial performance in the quarter. Hugh will follow -- will review Q1 for AmeriGas, and I'll wrap up with an update on our strategic initiatives.

Our Q1 GAAP EPS was $0.36, while our adjusted EPS was $0.81. Our adjusted EPS fell short of the record adjusted Q1 fiscal '18 EPS of $1.01. Both quarters have been adjusted for the mark-to-market valuation of unsettled hedges and other items, which Ted will cover later.

The shortfall in adjusted EPS versus our record performance last year has attributed to onetime favorable tax impacts in Q1 fiscal '18, the challenging weather conditions in Europe and the lack of incremental capacity margin opportunities in our Midstream business.

Before I turn the call over to Ted, I'd like to comment on the noteworthy progress we've made on a number of projects and activities. Our teams maintained their focus on meeting critical commitments to our customers and the communities we serve, while also ensuring that our new capital projects and acquisitions meet or exceed their performance targets. There were major developments in a number of fronts in Q1 that provide a strong foundation for future growth.

Our new Steelton LNG storage and vaporization facility is fully online for fiscal '19 season. We're continuing to see strong LNG demand in the Mid-Atlantic and New England, driven by increased peak-day demand for most gas LDCs. These LDCs face significant challenges due to capacity constraints in the East and Northeast. Our growing LNG network positions us well for future growth, and I'll come back to that network investment later in the call.

Our Energy Services team closed on the acquisition of South Jersey Energy's gas marketing business. This business was a great fit with our existing gas marketing activities in the Mid-Atlantic and expanded our commercial and small industrial customer base in this very attractive market. We're really pleased with the team from South Jersey that has joined UGI, and they work closely with our UGI team to ensure a very smooth the transition for the South Jersey Energy customers.

Our Utility had a productive quarter, adding about 4,500 new heating customers, while executing a broad range of infrastructure replacement and reinforcement projects across our service territories.

Our infrastructure replacement program for cast iron and bare steel remains on schedule, with roughly 62 miles of pipeline replaced during calendar year of 2018. The combined focus on infrastructure replacement and customer growth has resulted in record levels of capital spend. We expect CapEx for the Utilities to be close to $400 million in fiscal '19.

AmeriGas had a strong quarter with adjusted EBITDA up 8.5% year-on-year. We benefited from colder weather than Q1 fiscal '18, improved unit margins and continued strong volume growth in ACE and National Accounts. Hugh will comment in much more on AmeriGas's Q1 performance in a few minutes.

Our International business was faced with weather that was substantially warmer than last year. Weather in Europe has been warmer than normal for the past 9 months and the summer was unusually dry. Q1 volumes for International were approximately 9% below prior year due to the warmer weather and much lower seasonal demand for grain drying. We're encouraged by the improving more seasonal weather pattern that has now moved across Europe and by the drop in LPG costs over the past 60 days. The timing of that drop and commodity cost should support our unit margin performance in Q2. We continue to be pleased with the contributions from Preem, UniverGas and DVEP, the LPG and marketing acquisitions that we've added over the past 18 months.

I'll return later in the call to comment on our strategic initiatives, but I'd like to turn the call over to Ted at this point for the financial review. Ted?

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Thaddeus J. Jastrzebski, UGI Corporation - CFO [4]

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Thanks, John. As John mentioned, the results this quarter were solid but fell short of our record earnings last year. Adjusted earnings per share were $0.81 versus $1.01 in Q1 of 2018. This table lays out our GAAP and adjusted earnings per share for the first quarter of fiscal 2019 compared to the first quarter of fiscal 2018. 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, a loss of $0.46 this year versus a gain of $0.03 last year.

This quarter, we had $0.03 of unrealized gains on our foreign currency derivative instruments versus a loss of less than $0.01 in 2018. You can also see that we no longer have Finagaz integration expenses, as this acquisition has been fully integrated.

Lastly, there is a $0.02 loss on the extinguishment of debt. Our International team refinanced approximately EUR 1 billion of its existing capital structure in the quarter, which includes EUR 350 million of 3.25% senior notes due in 2025, a EUR 300 million term loan and a EUR 300 million revolving credit facility.

Turning to the bridge. Adjusted earnings per share decreased $0.20 versus Q1 of 2018. For our LPG businesses, AmeriGas benefited from colder weather, while our International business continued to face warmer weather conditions and was the largest contributor to the year-over-year decline at $0.11.

For our Natural Gas businesses, both Midstream & Marketing and Utilities saw declines in adjusted EPS of $0.04 and $0.06, respectively. Less volatile weather in the Midstream & Marketing business limited capacity management margin and in Utilities, a prior nonrecurring benefit from tax reform decreased comparative results.

On the individual businesses, AmeriGas reported adjusted EBITDA of $210.7 million, a 9% increase over first quarter of fiscal 2018 on weather that was 6% colder for the same period. Total margin was up $20.5 million due to a combination of higher retail unit margins and 2% higher retail volume.

Operating and administrative expenses increased $4.8 million, primarily due to higher labor and overtimes to deliver increased volume and the higher vehicle expenses. Hugh will discuss AmeriGas results in more detail in a few minutes.

UGI International reported adjusted income before taxes of $53.6 million. Weather for the quarter was 8% warmer than normal and 7% warmer than the first quarter last year.

Furthermore, December marked 9 consecutive months of warmer than normal weather. Total retail gallons sold decreased by 9%, driven by a combination of the warm-heating season and a dry summer that significantly reduced crop drying volume.

Margin was down $37.3 million, primarily reflecting lower retail volumes sold, the translation effects of a weaker euro and British pound sterling and to a lesser extent slightly lower LPG unit margins. Operating and administrative expenses were essentially flat with compliance costs associated with energy conservation and costs related to strategic projects offset by the translation effects of the weaker euro and British pound sterling and lower cylinder repair costs. Although both margin and operating expenses were impacted by the slightly weaker euro and British pound sterling currencies, the impact on net income was substantially offset by net gains on foreign currency exchange contracts.

Midstream & Marketing reported income before taxes of $42.1 million, total margin decreased $7.1 million compared to Q1 of last year on weather that was 5% colder. Although the weather for the quarter was colder, a warmer, less volatile and extreme December limited capacity management opportunities driving the margin decrease. To a lesser extent, lower electric generation from lower off-peak volumes also reduced margin. Partially offsetting these were higher peaking and natural gas gathering margin. Operating expenses increased $3.6 million from higher compensation and expenses associated with new investments placed into service and increased activities with peaking, LNG and natural gas gathering. Planned maintenance at the Conemaugh electric generating station also contributed.

Depreciation was $1.4 million greater than last year due to the continued expansion of our LNG and peaking assets.

UGI Utilities reported income before taxes of $65.7 million. Core market throughput increased 4% as a result of weather that was 1.5% colder than last year, and we saw continued customer growth in excess of 2%.

Total margin decreased $8.1 million compared to Q1 of last year primarily due to the May Pennsylvania PUC order, requiring a reduction of $13.5 million in revenues in the most recent quarter to reflect the give back of tax savings from the Tax Cuts and Jobs Act. Excluding this reduction, total margin increased $5.4 million due to higher total margin from gas utility core market customers and electric utility margin.

Operating and administrative expenses were up $8.3 million, primarily due to the absence of the favorable payroll tax adjustment in the prior-year period, higher uncollectible accounts expense, higher IT maintenance and consulting expense. Depreciation increased $2.1 million from increased distribution system in IT capital investments.

That concludes my remarks, and I'll now turn the call over to Hugh for his report on AmeriGas. Hugh?

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Hugh J. Gallagher, AmeriGas Partners, L.P. - President, CEO & Director of Amerigas Propane, Inc. [5]

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Thanks, Ted. Adjusted EBITDA for the first quarter of fiscal '19 was $211 million compared to $194 million in the first quarter of last year, a 9% increase. This marks our strongest first quarter in 5 years as the business bounced back on more seasonable weather, strong execution of our growth thrust, combined with operating discipline and solid expense management.

Weather in the first quarter was 5% colder than the 15-year norm and 6% colder than last year, primarily driven by a colder fall. The month of December was 6% warmer than normal and 9% warmer than last year, which had a dampening effect on the strong fall results.

Retail volume for the first quarter was up about 2% year-over-year. Retail unit margins increased about 4% from last year. And although our average cost was relatively comparable to last year, we did experience a declining wholesale propane cost environment through our Q1 and costs have remained stable into Q2. Operating expenses were up slightly about 2%, primarily related to higher payroll and vehicle cost. Operating expense per gallon was essentially flat with last year. On our growth thrust, both ACE -- both our National Accounts and our AmeriGas solar exchange program, had a solid quarter. Volumes in both areas were up around 10%.

We're also making excellent progress on the integration of the home delivery business we acquired last year as we continue to develop the home cylinder delivery concept. We expect the rollout of a pilot in several cities later this year. This is a tangible example of how we seek to address the needs of our customers through innovative thinking and the deployment of technology.

AmeriGas is a nationwide company. We have the resources and assets required to ensure safe and efficient transport of propane in all 50 states. We're also a local company and a key part of the communities in which we operate. This combination of deep resources and local focus enable us to serve our customers day in and day out with the highest levels of execution when our customers need it most, which is usually in the dead of winter.

I want to thank our people, both on the frontlines and in support roles for their continued commitment to our customers.

Finally, I wanted to add a brief comment on the operational aspects of the strategic review process underway at AmeriGas. We've conducted several sessions with the AmeriGas leadership team, with John, Ted and Roger Perreault and with our board. We're focused on leveraging technology and our scale to advance our customer-facing capabilities and generate business efficiencies that will lower our cost. I'm pleased with the process we -- the progress we are making to position the business for ongoing success.

With that, I'll turn the call back to John for his closing remarks.

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John Lawrence Walsh, UGI Corporation - President, CEO & Director [6]

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Thank you. I'd now like to spend a few minutes reviewing our progress on the strategic projects and initiatives that are crucial to our long-term success. From that perspective, the first quarter was noteworthy in several respects. The PennEast partnership received approval in Q1 to proceed with the bulk of the remaining property surveys in Pennsylvania and New Jersey. The surveys in Pennsylvania are substantially complete, and we have filed our Pennsylvania DEP application. We expect to complete the majority of our New Jersey survey work in the coming weeks.

Our final piece of survey work relates to the state-owned properties in New Jersey where we're awaiting a federal judge's ruling on access. We'll then be in a position to submit our New Jersey DEP permit application for this much-needed pipeline project. We're excited to move to this critical phase of activities on PennEast, which will involve close collaboration with the state and local agencies in Pennsylvania and New Jersey. We expect construction of PennEast to commence by the end of 2019 with the pipeline in service by the end of 2020.

As I noted earlier, our LNG asset network has been an important growth driver over the past decade. In addition to bringing the new Steelton LNG unit onstream last year, we received approval to build a new LNG storage and vaporization facility in Bethlehem, Pennsylvania. This unit strategically located in an area of significant peak demand, will come on stream for the winter of fiscal '21.

This expansion of our LNG capacity is driven by the increasing demand for peaking services as gas LDCs in the Eastern U.S. respond to increasing customer demand due to system growth. Our investments in LNG liquefaction and storage over the past decade have positioned us as a leader in LNG peaking services in the Northeast U.S. The Auburn gathering system expansion is going well. Phase I of the expansion went into service in November, and Phase II of the project is in construction and on target to go into service in the first quarter of fiscal '20. The expanded system will increase the capacity of the Auburn gathering system by approximately 150,000 decatherms per day, bringing the total capacity of the system to 620,000 decatherms per day.

Just last week, UGI Utilities filed the first combined rate case for our merged Gas Utility. As you may recall, the Pennsylvania PUC approved our request to combine our 3 gas utilities in October 2018. This first combined rate case request totaled $71.1 million. We look forward to working with Pennsylvania PUC and all the rate case constituents in the coming months. We're assuming that this process will conclude by the fall and new rates will go into effect in October of this year. Our growth and infrastructure programs at UGI Utilities continue to ramp up. As I noted earlier, we're likely to approach $400 million in capital expenditures for Utilities this year.

Looking further out, we expect our total capital spend at utilities to exceed $1.6 billion over the next 4 years, a substantial increase over the preceding 4 years.

Our goal is to ensure the long-term safety and integrity of our 12,000 miles of infrastructure, provide continued access to low-cost natural gas for our core customers and enable access to natural gas service in previously unserved areas of the Commonwealth. Lastly, we have focused considerable time and attention on the AmeriGas strategic review that we announced at our Investor Day in early December. We've made good progress in a number of operational, structural and financial areas and are advancing our discussions as a result. We will obviously share the outcome of this review as soon as we complete the process.

These long-term strategic investments that I've described are indicative of the quality of the growth investments in our portfolio. We're excited about the opportunities that lie ahead for the company. As I've noted several times in recent years, we're benefiting greatly from the diversity of growth opportunities that our teams are pursuing and our path forward has never been clearer. We're also excited about the return to more normal weather -- winter weather conditions that we've seen in Mid-Atlantic and in Europe over the past few weeks. As we've demonstrated in the past, our teams are well equipped to take advantage of the opportunities provided by favorable market conditions.

With that, I'll turn the call back over to Denise, who will open it up for your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Shneur Gershuni with UBS.

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Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [2]

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Just to start off, I was just kind of curious, when we think about UGI's CapEx expectations, when we think about its funding for its dividend and so forth, and we contrast that with cash flows from AmeriGas, both on the distribution and on the IDR side, how dependent is AmeriGas' cash flows to UGI for funding the expected growth projects and dividend for the upcoming years? Is it material or is there a way for you to take on more leverage? I'm just wondering if you can sort of talk about how you think with those cash flows.

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John Lawrence Walsh, UGI Corporation - President, CEO & Director [3]

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Sure. AmeriGas similar to UGI International with the 2 propane businesses, both are significant cash generation units for us. And so we certainly utilize the cash flow from those 2 propane distribution businesses, which are substantial as well as the organic cash flow from our natural gas businesses to fund our overall growth and investment. One of the things at UGI we've always done is maintain the balance sheet capacity and flexibility. We -- as you know, we have no debt at the UGI Corp. level. We have very solid balance sheets across all of our businesses and all the debt is located at that level. So we have a pretty resilient base in terms of our capital structure, our balance sheets and our cash flows. So we are not overly dependent on any one business unit in any given year to generate significant cash, but our plans are based on consistent long-term cash generations by the business units but underpinned and reinforced by a very sort of solid and consistent approach to balance sheet management as well.

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Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [4]

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Great. And just as a -- 2 quick follow-ups. You sort of mentioned the structural review and it's proceeding and so forth. Can you talk about the different options that you're thinking about? Or should we be thinking about a roll-up of APU into UGI? Should we be thinking about an IDR restructure or distribution kind of APU? Just kind of wondering what you're thinking about especially since you've got results that are more normal, and as you've noted, is one of your best results in 5 years. So it's kind of -- the metrics kind of stand as where they are versus where your targets. Just wondering if you can talk to that a little bit.

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John Lawrence Walsh, UGI Corporation - President, CEO & Director [5]

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Sure. I won't comment on specific options other than to say, at UGI, we always think broadly. So there's a full kind of spectrum of options that exist -- structural options that exist. And as we step back and now move through this process, we're looking at those full range of options. So the spectrum is open in terms of that spectrum of options, that's part of this process. So I won't comment on specific options other than to say that we're taking this time to think broadly and think long term. And in doing so you tend -- you do look at and consider and review a broad set of potential structural changes and review those full range of options.

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Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [6]

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Okay. And one final question just specifically on the results, specifically in the Midstream & Marketing segment. You sort of mentioned in your prepared remarks that weather was less volatile or less extreme and so forth. Should we be thinking about the results in the most recent quarter as kind of the -- a more normalized number? Or do you believe that it didn't perform as well as expectations? Just wondering if you can sort of give us some color with respect to how you would think about it would operate in a normal operating environment.

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John Lawrence Walsh, UGI Corporation - President, CEO & Director [7]

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Sure. I think the -- I touched on it. I think Ted mentioned as well. The most difficult aspect of Midstream & Marketing forecast is the margins that come from marketing of capacity, capacity margin. In this last quarter, we did see what we would consider to be typical volatility. We've had quarters in the past where that same set of events occurred, so you have sort of dampened volatility. Last year, we had severe cold at the end of December. This year, we had moderating temperatures at the end of December. So I wouldn't say that this is the new norm. The norm for that part of our business is that it's volatile because it's reflecting whether or not this volatility in the market for that capacity, whether the values are volatile, and we can access margin by marketing that.

So I wouldn't say it's the new norm. It's -- as I said, it's the most difficult part of our business to forecast. It kind of ebbs and flows over time. The great point for us is that over time we'll still look to secure those opportunities when they arise, but we have an increasing margin contribution from fee-based activities such as peaking contracts and some of the gathering system revenues and margins that we referenced in our remarks as well. So not necessarily a new norm. It just reflected market conditions in the quarter, and we'll continue to be responsive to any opportunities that arise for that incremental margin, while at the same time looking to invest in projects, as I talked about that generate long-term, fee-based and, in many cases, fixed-fee margins.

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Operator [8]

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Your next question comes from Sharon Lui with Wells Fargo.

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Sharon Lui, Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst [9]

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Just wondering if you could provide the debt balance at AmeriGas? And maybe just touch on the leverage metrics relative to the covenants.

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Hugh J. Gallagher, AmeriGas Partners, L.P. - President, CEO & Director of Amerigas Propane, Inc. [10]

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Sure, Sharon. This is Hugh. Right now, our debt at the end of the quarter was around $2.9 billion. Last year, we were at $2.8 billion. The difference is high revolver usage. When you look at leverage, it's hard to compare leverage at the end of December to leverage at the end of September because of the seasonal nature of the business and the usage of the revolver. But from a leverage ratio standpoint, last year, we were at 5.1x at the end of the first quarter. And now we're at 4.7x. And interest coverage is better.

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Sharon Lui, Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst [11]

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Okay, great. And I guess with regards to the PennEast, given the recent update, is there any change in terms of the cost of the project or expected returns?

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John Lawrence Walsh, UGI Corporation - President, CEO & Director [12]

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No. No, there is limited change in terms of the cost of the project. In terms of expected returns, no, it's -- our expected returns on PennEast have not changed materially at all. It's fundamentally the same returns we were looking at when we first developed the project with our partners.

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Operator [13]

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Your next question comes from Dennis Coleman with Bank of America Merrill Lynch.

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Dennis Paul Coleman, BofA Merrill Lynch, Research Division - Global Head of High Grade Debt Research and MD [14]

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I guess, if I can just segue off the PennEast question. I guess you had some reroutes that you filed for in Pennsylvania with your filing there. I wonder if you might just talk a little bit about that. And then with regard, would you expect the same in New Jersey? And then finally on PennEast and New Jersey, any timeline for when you might expect a decision from the judge on the state land?

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John Lawrence Walsh, UGI Corporation - President, CEO & Director [15]

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Sure. In terms of the filings, the filings that were done, for example, in Pennsylvania, are really just finalizing a submission by virtue of gaining access to properties where, up to this point, we haven't had access to do the survey work. We -- if you go way back -- if you go back a substantial period of time, there was some rerouting as we went through the process of finalizing the route and work with the various agencies. But the recent submissions, both in -- the one that has occurred in Pennsylvania and the upcoming submission in New Jersey, are essentially finalizing the package for submission to the state DEPs in both cases, just updating it for the actual surveys of the properties where we haven't had access prior to this recent ruling. So no changes in the route reflected in these filings.

In terms of the timeline for the judge's ruling, that's not something that is finite. The judge can rule when the judge has reached a point to issue a ruling, so we really can't comment on the judge's timeline other than we did receive the majority of the rulings related to these partials in December. It's a smaller set of parcels that's involved in this upcoming ruling. So we're hopeful that we would get that in the new future, but it's completely up to the judge in terms of when the judge issues that ruling.

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Dennis Paul Coleman, BofA Merrill Lynch, Research Division - Global Head of High Grade Debt Research and MD [16]

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Okay. Just maybe if we can hit Europe for a second. Obviously, a pretty significant weather impact. I'm just wondering, anything to do there strategically to sort of moderate these kind of swings? Or is it just the nature of the business and we have to be used to that?

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John Lawrence Walsh, UGI Corporation - President, CEO & Director [17]

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I think we -- a couple of things we have done. We've diversified in Europe. It's still predominantly an LPG distribution business, but we have begun over the last 5 years to add a marketing business there, which over time will moderate or have a moderating impact in terms of results. I think we're also on both sides of the business always looking for opportunities to introduce fee-based charges into the business where they make sense and where we can communicate to customers and attach those fees to specific activities we do on behalf of our customers. So that's another step we take in that business -- with regard to sort of dampening weather impact on margins in that business. So there's a number of steps we're taking, and just good margin management is always part of that equation as well.

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Dennis Paul Coleman, BofA Merrill Lynch, Research Division - Global Head of High Grade Debt Research and MD [18]

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Okay. I know it's -- the weather is the weather. And then lastly for me, on Slide 12, if I can. Some pretty big impacts here from a number of different things, a little bit of cold weather but mostly the tax issues. I guess the simple question is should we think about the 1Q '19 number as a better run rate going forward?

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John Lawrence Walsh, UGI Corporation - President, CEO & Director [19]

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Yes. I'll let Ted comment on that.

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Thaddeus J. Jastrzebski, UGI Corporation - CFO [20]

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Yes, I think -- so we had a couple of outsized costs in the quarter that we don't expect to be seeing in the future. There was an absence of the tax adjustments that we had last year was kind of the major piece explained the operating and admin expense hit. But we also, as a result of a new ERP system installation, we saw an uptick against our historical uncollectibles as we worked through some of the new system's changes. That's now reconciled, and we're looking at clawing some of that money back and expect to go back to historical uncollectible levels. Those are the biggest impacts. And so we don't expect to see those kind of cost upcharges in the future.

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Dennis Paul Coleman, BofA Merrill Lynch, Research Division - Global Head of High Grade Debt Research and MD [21]

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Any order of magnitude that you could give us on the uncollectible, Ted, please?

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Thaddeus J. Jastrzebski, UGI Corporation - CFO [22]

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It's under $2 million. So the amount itself is not that huge. But again, it's a systems-related issue, so it's something we spend a lot of time working on. And as a result of that, we've also increased our spending on IT maintenance and consulting to make sure we've got that problem under control.

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Operator [23]

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Your next question comes from Chris Sighinolfi with Jefferies.

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Christopher Paul Sighinolfi, Jefferies LLC, Research Division - Senior Equity Research Analyst, Master Limited Partnerships [24]

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I wanted to follow up on Dennis' questions in Europe. I guess to better understand both the distribution of weather there, we -- I guess from former disclosures would understand that probably the biggest area of volume concentration is in France and the Benelux region. But it's always a difficulty for us to calibrate across so many different countries and maybe different regions within Europe how weather is tracking and, also, to understand sort of the margin profile by region.

I guess as you think about what transpired last quarter versus maybe the year-ago period or what you would consider a normalized environment, were there -- any help you could offer us in terms of things we should look for, weather degree days based on different locations and weighting them a certain way or thinking about margins in different regions to help us better anticipate, I guess, outsized weather moves like we saw?

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John Lawrence Walsh, UGI Corporation - President, CEO & Director [25]

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Sure, Chris. Yes, I think as you noted, the most significant contributor in terms of margin in UGI International is France -- the business in France. So if you're looking at margin contribution from regions, Western Europe, and then specifically, France is the more significant weather impact. And this year, we had a relatively warm first quarter. And as noted on the call, we had a run-up to that that was warm and dry.

And the reason the dry part of that statement is important is that, in France in particular -- elsewhere in Europe, but France specifically has a pretty significant grain drying business, where if you have a wetter summer, there's actually significant amounts of LPG used for grain drying. So that -- this year was material in terms of the lack of the limited amount of grain drying, the lack of grain drying that occurred because of it being so warm and very dry over the course of the summer.

That's true in multiple markets. But once again, most critical from a margin standpoint in France, which is our largest market for that as well. So the rest of Europe is certainly important and contributes. Weather in sort of Northern Europe for us, which is the Nordics and the U.K. is relevant. Eastern Europe and, particularly, Poland are relevant. But if you're going to focus and look at the best leading indicator to capture weather impact on us, it would be looking at the weather in France.

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Christopher Paul Sighinolfi, Jefferies LLC, Research Division - Senior Equity Research Analyst, Master Limited Partnerships [26]

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Okay. And I know that there were political disruptions in the country in the fall with protests and whatnot in terms of new gasoline taxes that made the news here. I'm just wondering if that provided any uptick and maybe disruptions on an operational front that might be transitory in nature? Or is that just really immaterial relative to the weather?

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John Lawrence Walsh, UGI Corporation - President, CEO & Director [27]

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Well, the protest around -- the yellow vest protest and the other disruptions and other events and disruptions that occurred, we were very fortunate in terms of our facilities and our -- vast majority of our people not being impacted by that in terms of our ability to execute our operations. We had 1 or 2 instances where access to supply points of third parties were limited for short periods of times, but it was not a major factor.

The one area that did impact, that affected our cost base, cost of serving customers, is an increasing cost associated with what are called white certificates around mandated energy efficiency programs in France where, as an energy provider, ourselves and every other energy distribution company, there is a mechanism that requires us, similar to some of the utility-based firms in the U.S., to deliver energy efficiency certificates based on the volume of energy we deliver to customers.

So that's an increasing cost to serve customers that did impact us in the quarter. We're working hard to make sure we're recovering all those costs through our pricing and other programs that we have. It's not the same thing as the gasoline tax, but it's another example of the government in France focusing on energy efficiency, carbon reduction -- carbon emission reduction, et cetera. So that did affect our business in the quarter, and there's a lot of work that the team in France under Roger's leadership is focused on.

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Christopher Paul Sighinolfi, Jefferies LLC, Research Division - Senior Equity Research Analyst, Master Limited Partnerships [28]

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Okay. That's really helpful. I guess switching to the domestic front. Hugh, I appreciate the color on fiscal 1Q performance and the dynamic there. I know a year ago, Jerry had talked about the challenges of a bit of a yo-yoing weather pattern, which it appears like, just based on anecdotally what's happened in New York from last week to this week, might be transpiring here in the fiscal second quarter. And so I'm just wondering sort of on a quarter-to-date basis here in fiscal 2Q, is that a repeat of conditions from a year ago? And are you guys acting differently to try and accommodate that?

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Hugh J. Gallagher, AmeriGas Partners, L.P. - President, CEO & Director of Amerigas Propane, Inc. [29]

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No. I mean, weather swings are -- Chris, weather swings are normal in the business. It has been a little bit different than last year. Last year, we had the warm build up and then intense cold leading into the very end of the year. And you could see the impact of that not only at AmeriGas but even at our Utility and Energy services in their results this year. But yes, it got warm at the end of December, that carried a little bit into January and then the weather got really cold and then really warm.

I will say this, these fluctuations as long as they're not long-term extremes either way are sort of par for the course in the business. And from a standpoint of supply and how the industry is reacting, it has been a reasonably sound operating environment. It is nothing like the polar vortex of 5 years ago where we had supply shortages everywhere. So you can see a relatively stable price environment. The supply environment is pretty solid, and it's been -- you deal with the fluctuations, but we know how to operate in these conditions. So we'll just -- we take it as it comes.

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Christopher Paul Sighinolfi, Jefferies LLC, Research Division - Senior Equity Research Analyst, Master Limited Partnerships [30]

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Okay, fantastic. If I could quickly just follow up on 2 prior questions, just for my own edification and clarification. When you talk about the leverage at the end of the period, if my understanding is correct, the winter time is a period of elevated borrowing and then you'll get receivables collected and cash in the door, and we should see some tempering in that just on a natural cadence in the spring. Is that correct?

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Hugh J. Gallagher, AmeriGas Partners, L.P. - President, CEO & Director of Amerigas Propane, Inc. [31]

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Yes, Chris. Especially if you're comparing to where we were at year-end at September, right? You will always have -- the way the balance sheet works at AmeriGas, it builds up in Q1 and Q2 and liquefies down -- you end up with a liquidation of receivables and inventory in Q3 and 4. So I always try to do the comparison to the same point last year, and our revolver borrowings are a little bit higher than last year but our earnings are substantially stronger. So on a trailing 12 basis, we're at 4.7x versus 5.1x. That 4.7x is probably higher than we were at year-end. That entire delta from where we were at year-end is the fact that we have higher-revolver borrowings than we had at year-end.

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Christopher Paul Sighinolfi, Jefferies LLC, Research Division - Senior Equity Research Analyst, Master Limited Partnerships [32]

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Right, right. For receivables -- presumably for things that would be received.

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Hugh J. Gallagher, AmeriGas Partners, L.P. - President, CEO & Director of Amerigas Propane, Inc. [33]

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Yes, exactly. As you build up, you build up -- the balance sheet builds up and then it liquifies down.

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Christopher Paul Sighinolfi, Jefferies LLC, Research Division - Senior Equity Research Analyst, Master Limited Partnerships [34]

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Yes, okay. And then the other point of clarification on an earlier question. I think, John this is for you or for Ted. In terms of just how cash moves within UGI, my understanding was always that the independent subsidiary entities operate in effect as independent entities with their own balance sheets, financing their own growth and then are making dividend decisions back up to the holdco. Where because APU is a publicly traded entity and has a quarterly payout on a distribution to the public and to UGI, it's rendered arguably the most stable source of cash into the holdco as a result of that fact.

I just want -- when you were talking to Shneur about the dynamics of cash into UGI proper and how that is used either from a retention perspective, I think there was $200 million of entity-level cash at the end of the fiscal year, or it gets redistributed across the businesses. Is that the correct -- is my understanding the correct understanding of how mechanically cash is moving within the company?

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John Lawrence Walsh, UGI Corporation - President, CEO & Director [35]

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Yes, you're correct, Chris, on the mechanics. My comments were just more broadly about -- the mechanics are different with the other business units, but the goal and the performance over time are similar. But AmeriGas, we're getting distributions in IDR fees which is a structured set of cash flows. The other cash flows are part of the normal operating processes of the company but aren't fixed the way the AmeriGas cash flows are.

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Operator [36]

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There are no further questions queued up at this time. I'll turn the call back over to Mr. John Walsh.

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John Lawrence Walsh, UGI Corporation - President, CEO & Director [37]

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Okay. Thank you very much, and thanks, everyone for your time and attention this morning. And we look forward to keeping you up to date in the coming months. We'll talk to you soon.

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Operator [38]

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