Good morning. My name is Julie, and I will be your conference operator today. At this time, I would like to welcome everyone to the UGI Corporation and AmeriGas Third Quarter 2018 Conference Call and Webcast. [Operator Instructions] Thank you..

I would now like to turn the call over to Brendan Heck, Manager, Investor Relations. Brendan, you may begin. .

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

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 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.

John?.

Thanks, Brendan. Good morning, and welcome to our call. I hope that you've all had the opportunity to review our press releases reporting third quarter results for UGI and AmeriGas.

On the call this morning, I'll provide an overview of our financial performance and key activities in the third quarter, then turn it over to Ted, who joined us as CFO in May, who'll provide you with a more detailed review of UGI's financial performance.

Jerry will follow with an overview on AmeriGas, and I'll then wrap up with an update on our strategic initiatives..

Our financial results this quarter were in line with our expectations, and the underlying performance of our businesses remained strong. Ted will provide additional information on our financial results later in the call..

Our Q3 GAAP EPS was $0.30, while our adjusted EPS was $0.09. While our GAAP EPS was well above last year's Q3 GAAP EPS of an $0.11 loss, our adjusted EPS of $0.09 was equal to our Q3 fiscal '17 adjusted EPS. Both quarters have been adjusted for the mark-to-market valuation of unsettled hedges and other items that Ted will cover later..

Achievement of adjusted EPS equal to last year is noteworthy since adjusted EPS in fiscal '18 Q3 includes the impact of a $0.09 reserve in our Utilities business in connection with an order issued by the Pennsylvania PUC, directing the company to return the tax savings from January through June 2018 to our customers.

Excluding this $0.09 reserve, we delivered adjusted EPS that was roughly double our adjusted EPS in Q3 fiscal '17..

Based on strong year-to-date results, we expect our full year adjusted EPS to be within the current guidance range of $2.70, $2.80, which we announced on our last call. At the midpoint of that range, our fiscal '18 adjusted EPS would surpass the record adjusted fiscal '17 EPS of $2.29 by 20%.

These outstanding results reflect the strong underlying performance of our business units and the positive impact of tax reform on our nonutilities businesses..

One final critical point related to tax reform. As we look forward to fiscal '19 and beyond, the impacts of tax reform at UGI are significant, positive and ongoing. Our teams have done an outstanding job delivering superior financial results.

They've managed through the many challenges they face every day while maintaining a strong focus on safety, customer service and the development of emerging growth opportunities..

We're very pleased with the financial and operational performance of our businesses and with the continued contributions from our major new investments. Our outlook remains very positive for fiscal '19 and beyond..

I'll discuss progress on our long-term strategic opportunities later in the call, but first, I'd like to highlight several key achievements in the quarter. Our Utilities team continues to make great progress, executing our infrastructure replacement and upgrade program and growing our customer base across eastern and central Pennsylvania.

Our cast iron and bare steel replacement programs remain on track, and we've added over 11,000 new residential heating and commercial customers through the first 3 quarters of the fiscal year..

Results within our Midstream & Marketing business reflect the positive contributions from our Sunbury and Texas Creek projects. These 2 projects are among our portfolio of Midstream investments that we've executed over the past decade as we build out our asset network in the Marcellus.

Our existing network, which includes gathering, storage, pipeline and LNG assets, provides us with a range of Midstream transportation capabilities and options.

This supply versatility is particularly well suited to deliver value in the coming years due to the market uncertainty related to the timing [ in ] extent of additional pipeline capacity additions in the Mid-Atlantic and Northeast. I'll come back to that point later in the call..

Our team from AmeriGas saw the benefits of colder weather, particularly in the first few weeks of Q3. AmeriGas' adjusted EBITDA was up over 15% versus Q3 fiscal '17. We also continued to perform extremely well with our national accounts customers, while AmeriGas' scale and reach is a clear differentiator.

National accounts volumes in AmeriGas were up 11% over our Q3 fiscal '17 volumes..

UGI International delivered a very strong quarterly performance, with operating income well above fiscal '17. On a year-to-date basis, we've seen the very positive impact of contributions from DVEP and UniverGas.

We're extremely pleased with the performance of both of these businesses which we acquired late in fiscal '17 and early in fiscal '18, respectively. They are great examples of investments that enable UGI to push our boundaries by identifying attractive, new investment opportunities..

UniverGas pushed the boundaries of our European LPG business, representing our entry into Italy. DVEP pushed the boundaries of our energy marketing business in Europe by adding a significant power marketing and services capability and by establishing UGI International as a natural gas and power marketer in the Netherlands..

Our solid performance in Q3 and year-to-date clearly demonstrates the strength and resiliency of UGI's businesses. Our robust performance in the quarter gives us great confidence in our full year outlook and provides a strong foundation for fiscal '19 and beyond..

Before I turn the call over to Ted, I'd just like to say how pleased we are to have added a senior executive of Ted's caliber and capability to the UGI team. Ted's extensive experience as a senior financial executive, his general management experience and his years of living and working internationally makes him a great fit for our CFO role..

With that, I'll turn the call over to Ted, who will provide you with more details on our overall financial performance.

Ted?.

Thanks for the introduction, John. It's an exciting time to be at UGI, working with such an experienced and capable executive team. And now I'm learning first-hand the numerous opportunities this business has to continue its growth trajectory and build on its already impressive record of financial performance.

I'm really glad to be here and look forward to working with all of you in the future..

Turning to our financials. As you can see on Slide 7, the table lays out our GAAP and adjusted earnings per share for this quarter compared to the third quarter of last year. Adjusted results exclude the impact of mark-to-market changes and commodity hedging instruments, a gain of $0.21 this quarter versus a loss of $0.10 in the prior year.

We had a similar story with our foreign currency hedges, a gain of $0.10 this quarter versus a loss of $0.06 in the prior year. You can also see the integration expenses associated with the Finagaz acquisition and onetime tax impacts of the French Finance Bill and the Tax Cuts and Jobs Act.

The $0.08 adjustment is a result of the impairment of Heritage tradenames and trademarks that Jerry will discuss in greater detail..

Our adjusted earnings of $0.09 per share for the quarter are flat versus last year, largely due to the impact of the Pennsylvania PUC order concerning the Tax Cuts and Jobs Act. On the chart, we broke out the $0.09 reserve that we booked this quarter. I'll explain the impact in greater detail on the next slide.

Excluding the order, our businesses posted results that nearly doubled the third quarter of 2017. Cold weather early in the quarter led to increased volumes in our LPG businesses. AmeriGas and UGI International also benefited from higher unit margins.

The natural gas side of the house continues to benefit from our recent investments as well as customer growth at the utility..

Slide 9. On May 17, 2018, the Pennsylvania PUC required Pennsylvania utilities to establish a regulatory liability for tax benefits accrued from January 1 through June 30, resulting from the change in federal tax rate from 35% to 21%. In June, UGI Utilities reduced its revenue by $22.7 million and established a reserve.

This decreased adjusted EPS by $0.09 in the quarter. This table breaks down the EPS impact of the regulatory liability. As you can see, the after-tax impact recorded in Q3 was $16.2 million. This is in addition to the $900,000 previously recorded in March 2018. Of the $16.2 million, only $1.3 million or $0.01 relates to the fiscal third quarter.

The remaining reserve relates to the fiscal second quarter. The rate treatment of the reserve will be addressed in future proceedings..

Turning to Slide 10. Retail volume was up 4% at AmeriGas due to cold weather in April. Operating and administrative expenses from Q3 2017 include a $7.5 million manufactured gas plant accrual.

Excluding that accrual, operating and admin expenses increased by about 1% as expenses related to increased delivery activity were largely offset by lower self-insured and liability expense. Adjusted EBITDA was $67.2 million for the quarter, representing an increase of $8.8 million or 15% versus the third quarter of last year.

Jerry will spend some more time on AmeriGas in just a bit..

UGI International contributed $10.6 million in adjusted income before taxes, about a $9 million increase over last year. Volume increased 13.5% as the spillover result of late March cold weather in France and incremental gallons from the UniverGas acquisition.

Total margin increased 27% over last year due to higher retail unit margins, stronger euro and pound sterling and incremental margin from both UniverGas and DVEP..

Turning to expenses. OpEx increased year-over-year due to stronger FX rates, approximately $8.7 million of incremental costs from our recent acquisitions, slightly higher distribution costs and increased compliance costs associated with energy conservation and operational safety requirements.

The increase in OpEx was partially offset by expense synergies from the Finagaz integration as well as lower tank and cylinder repairs and maintenance. The $2.8 million increase in other income is largely the result of the gain on sale of assets and interest income.

As a reminder, foreign currency fluctuations impact individual financial statement line items but are largely offset by our FX hedging. The gains and losses from hedging are recorded in other income and expense. .

Midstream & Marketing income before taxes is up nearly $5 million to $8.2 million for the quarter. Total margin increased $15.4 million. Most of the increase was driven by our Midstream assets, particularly higher gathering margin from Sunbury and Texas Creek and improved leverage of our capacity.

Cold weather early in the quarter led to increased volumes sold and higher total margin from retail natural gas and power marketing..

OpEx increased $7.3 million, which was largely a result of higher compensation and benefits and higher expenses associated with increased peaking LNG and natural gas gathering activities. The decrease in other operating income was driven primarily by the absence of AFUDC income associated with the Sunbury pipeline that was recorded in Q3 2017..

Turning to Slide 13. Utilities is reporting a loss before taxes of $6.1 million, about $24 million lower than last year's quarter. As I've mentioned, Utilities results are impacted by the Pennsylvania PUC order. Revenues were reduced by $22.7 million. This impacted margin in the quarter.

But if you exclude the revenue reduction, total margin increased $15.4 million due to higher core market throughput and an increase in PNG base rates as well as higher large firm delivery service total margin.

The increase in OpEx was driven primarily by higher IT maintenance and consulting expense, higher uncollectible accounts expense and higher distribution systems expenses. Depreciation and amortization are up due to increased capital spending activity..

Lastly, the $6 million decrease in other income is due to the absence of a $5.8 million insurance settlement that was recorded in Q3 of 2017. The utility continues to have a strong year as their adjusted net income attributable to UGI is up about $25 million or $0.14 year-to-date versus last year..

With that, let me turn the call over to Jerry for his update on AmeriGas.

Jerry?.

Okay. Thanks a lot, Ted. Good morning, everyone. AmeriGas EBITDA for the third quarter was $67 million, as Ted mentioned, up 15% from the $58 million reported last year. Weather for the quarter was 9.6% colder than normal, with some significant fluctuations throughout the quarter.

April was very cold and wet, significantly colder than normal and last year. May and June have fewer degree days than April, but they remain important to finishing the heating season. And both May and June were significantly warmer than normal and warmer than last year, leading to a fairly abrupt end to the heating season..

Average propane prices in the quarter of Mont Belvieu were $0.87 or 39% above the prior year. Despite the significant rise in cost, we managed margins $0.02 above the prior year. Operating expenses were up 1%, primarily related to the 4% increase in volume and higher delivery activity in the quarter.

So year-to-date adjusted EBITDA for the 9 months ended June 30 was $570 million. Given the reasonably normal September weather coming up, Q4 attempts to come in around $40 million to $50 million in EBITDA. So we expect to finish the year with adjusted EBITDA in the range of $610 million to $620 million..

Now just turning to our growth trust. AmeriGas Cylinder Exchange volume for the quarter was flat with the prior year. The cold wet April, which provided more volume for the base business, did reduce grilling demand. However, ACE volume is up 7% year-to-date, and the total locations where you can buy an ACE cylinder are up 6% from this time last year..

Our national accounts volume, as John mentioned earlier, was up 11%, primarily due to the April weather. And year-to-date, our national accounts volume is up 12% versus last year. We also did close one acquisition in April, adding 3 million gallons annually..

Finally, just a couple comments on the tradenames that [ have been ] mentioned. Last quarter, I shared that we were rationalizing the many trade names we acquired in 2012 with the Heritage Propane acquisition, and at that time, we estimated the noncash charge of about $70 million would flow through the third quarter.

Now that the full analysis is complete, the actual noncash charge is $75 million and will be reflected in our Q3 P&L and will be adjusted out of EBITDA. The remaining tradename balance will be amortized over the next 3 years..

So that concludes my comments. I'll turn it back over to John. .

Okay. Thank you, Jerry. I'd like to briefly review progress on the strategic investments that will provide the foundation for our future growth..

Our Midstream & Marketing team continues to identify and develop a broad range of new investments that deliver attractive returns as individual projects and strengthen our network of assets within and adjacent to the Marcellus.

We continue to work with our PennEast partners as that critical infrastructure project moves through the state-level permitting processes. At this point, we are working through the details of gaining access to the remaining land parcels along the route in order to confirm field-level environmental data for our permits.

We will update the project timeline once we have clarity on completion dates for our state-level permitting. However, we do expect to commence construction [ in ] the project in late 2019..

The delays and uncertainty around new pipeline capacity addition have created -- have resulted in the emergence of new and very attractive investment opportunities. Nat gas demand remains very high, and we're focused on developing projects that could serve this increased demand.

One example of these emerging opportunities is the unprecedented demand for our LNG peaking services and supply capabilities throughout the Mid-Atlantic region and New England. In order to address that ramp in demand, we're planning to construct a new LNG storage and vaporization facility in Bethlehem, Pennsylvania.

This facility, which capitalizes on our close proximity to abundant and affordable Marcellus resources, will include 2 million gallons of LNG storage and new vaporization capacity to serve our peaking customers. This system is similar to our Steelton, Pennsylvania facility that came onstream earlier this year.

This is another key step in the build-out of our LNG network and positions UGI as a leader in LNG peaking services. This strengthening of our LNG network also provides us with additional capacity and delivery flexibility, which is critical during periods of market volatility when demand spikes and pipeline capacity is constrained..

As I noted earlier on the call, activity at our Gas Utility remains at an unprecedented level. In addition to the capital for infrastructure replacement and customer growth, we're also investing in enhanced tools and systems that will ensure that UGI remains at the forefront in terms of safety and customer service..

Our full year fiscal '18 capital spend for UGI Utilities will exceed $350 million, and we expect that our CapEx will continue at or above that level over the next 5 to 10 years.

We're excited about this opportunity to invest in our service territories in Pennsylvania and to serve the growing demand for natural gas across our residential, commercial and industrial segments..

AmeriGas continues to be the leader in the growth segments of the U.S. propane sector. In addition to our success with national accounts, which I referenced earlier, we are the leading innovator in Cylinder Exchange as we deploy next-generation vending systems with our high-volume retail partners.

These systems provide clear benefits to both the retailer and the consumer as they enable access to [ acylinders ] 24/7, 365 days a year..

In addition to delivering a very strong quarterly performance, our team at UGI International continues to enhance our position in European LPG distribution while developing an expanding position in natural gas and power marketing.

Our recent acquisitions, Preem and UniverGas in LPG and DVEP in gas and power marketing, are performing well, and we've added talented teams to our organization. Our future outlook for UGI International is very positive, and we're eager to develop more investments that will further push the boundaries of our strategy..

As I noted earlier, we're on track to deliver full year fiscal '18 adjusted EPS approximately 20% above our record adjusted fiscal '17 EPS. The midpoint of our adjusted EPS guidance for fiscal '18 represents a 70% increase from our fiscal '13 adjusted EPS.

That 5-year compound annual EPS growth rate of over 11% has been enabled by a series of acquisitions and new capital projects that have been executed over that time frame. These new investments, which are closely aligned with our core strategies for each business, provide a strong foundation for the future..

As we turn our attention to fiscal '19, we're very encouraged by the range of growth opportunities currently being developed by our teams, and we look forward to keeping you updated on our future calls..

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

[Operator Instructions] Your first question comes from Chris Sighinolfi with Jefferies. .

John, just a couple questions from me. You had -- I don't know, I joined the call a little bit late, and so I apologize if you covered this in your early -- the early part of your prepared remarks. But you had disclosed in the Q last quarter a filings to merge the utilities into one.

And so I was just curious if you could talk about sort of the motivations to doing that and then what we might see as a result of [ that ]. Does it change? Obviously, you're spending a lot of capital.

So I would imagine spreading that over a larger consolidated customer basis has some positive effects when it comes to sort of the cadence of rate cases and things of that nature, but I'm not sure if there's other things that motivated that are worth discussing. .

Yes, sure. You basically hit it, Chris, in terms of the motivation. Merging the utilities sort of simplifies the regulatory processes.

It enables us to more easily sort of optimize and manage capital spend across the larger entity, which, for us, is beneficial and also beneficial for the regulators in terms of assessing our activities and monitoring our execution of critical sort of infrastructure programs.

So it does sort of simplify and streamline the regulatory processes and from our standpoint, enables us to optimize capital spend and prioritize that spend across our entire service territory in the gas side. So that's the primary motivator. It will simplify the rate case cadence as well.

So that's beneficial for us and also beneficial for the regulators. .

Okay, okay. I thought that was the case but helpful to get your feedback on it. And then, I guess, Ted, one question with regard to the PUC action here and as it pertains, I guess, most specifically to how we think about fiscal '19. So if -- just, I guess, correct my understanding.

4Q -- or [ is it ] fiscal 1Q last year obviously was before any tax impacts, but really, it's just moving revenues, reducing revenues for the net effect of what the tax code change was. So we should anticipate that fiscal 1Q '19.

And then, I guess, in terms of just the interplay between fiscal 2Q and 3Q, you detailed in the slide presentation kind of what was attributable to each period.

So if we make that adjustment ourselves, it should be pretty clean year-over-year comparisons, is that an accurate way to think about it? Or is there anything else you would advise us to consider as we think about forecasting quarters for next year?.

No, I think, that's exactly how you should be thinking about it. I mean, given the PUC order, we're expecting to have any tax -- what would have been tax gains under the new act, that will be returned through revenue to consumers. As I said in my statements, we'll be looking at future proceedings for rate treatment on that.

But until we have any new decisions, yes, I think it's that straightforward. .

Okay, okay. And then, I guess, the final question from me, and it's maybe back to you, John. In regards to the international business, I mean, clearly, there's been a lot of things said on the political front when it comes to sort of U.S.

and its trading partners and the treatment that we have with one another, seems like [indiscernible] constant day-to-day change.

Obviously, as somebody who owns and operates businesses abroad and is also actively acquiring businesses abroad, has there been any change, I guess, in your appetite with that or the appetite of potential either partners or sellers to UGI International in light of the changed dynamic?.

Yes. No, Chris. No change from our appetite. I think one of the things that just reinforces something we do anyways is it's important for us as a distributor to have supply portfolio diversity because you never know what's going to happen in terms of availability or any kind of tariff or anything that could be imposed.

So whether we're talking about commodity itself, like propane, or we're talking about cylinders, it's important for us. And we do have a multitude of suppliers from various geographies and trade partners. So we really see this as having no impact.

And when you get to the core of the business, it's a domestic business in terms of the customers we serve within each geography and Europe. But I think the key when it comes to some of the uncertainty around trade is to have that continued application of a sourcing and supply strategy that we have, which is diversity is crucial. .

We have no further questions at this time. I will turn the call back over to John Walsh. .

Okay. Thank you, Julie, and thank you all for your time and attention this morning. We look forward to keeping you abreast of developments during the fourth quarter and look forward to our fourth quarter earnings call. Thanks. .

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