UGI Corporation (UGI) Q2 2016 Earnings Report, Transcript and Summary

Good morning, my name is Tracy and I will be your conference operator today. At this time, I would like to welcome everyone to the UGI AmeriGas’ Second Quarter 2016 conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session [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. Reconcilations 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 s1 results and the updated guidance for UGI and AmeriGas. To say the least, this was a dynamic quarter for us though were 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 phase 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 marketing fee based businesses which are less weather dependant helped lessen the impact of the warm weather challenges. On the call today, I'll comment on our financial performance and key activities in the second quarter. I'll 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-too-market gains on commodity derivatives and $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 fiscal 2015 despite weather that was much warmer in our key service territories. We are 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 are now in a position to revise our guidance for fiscal 2016. We've reduced our fiscal 2016 guidance range to $1.95 to $205 from the previously stated range of 215 to 230. This reduction is related to the impact of very warm weather in both Q1 and Q2. As we have seen over the past three-years, weather patterns come and go, but the underlying strength of our businesses hold the key to long-term performance. As you will see later when Kirk compares our fiscal 2016 performance to fiscal 2012 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 fiscal 2017 and beyond. I'll 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 fiscal 2015, 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 fiscal 2014 and 2015, when the challenges were related to colder than normal weather, fiscal 2016 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 cost and we see strong demand for major 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 turn later on the call to discuss our progress on those strategic opportunities, but first I would like to highlight several key achievements in the quarter. UGI gas our LDC is 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 will successfully conclude that process by Q1 of fiscal 2017. Our infrastructure upgrade and growth program remain on-track utilities and our capital expenditures were once again hit record levels in fiscal 2016. 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 Tampa, Pennsylvania is fully loaded as most LDCs in the Mid-Atlantic and Northeast are experiencing increases in their projected peak day demands. These increase peaks for gas LDCs are underpinned by core customer growth and the migration of many large customers from interruptible to firm service. Our team in France has done an outstanding job implementing our plant to align and integrate our critical business activities as we near the one-year anniversary of the Finagaz acquisition, we are delighted with 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 offering for our expand the customer base across France. The one final point I would like to reiterate on the second quarter is the benefit from our diversified set of businesses. We consistently highlight the importance of diversification and the execution of UGIs balance growth and income strategy. We can clearly see those benefits when we compare our fiscal 2016 performance to our previous record warm year of fiscal 2012. 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 territory with above 25% warmer than last year. Weather for AmeriGas was 13% warmer than last year and weather in France up was above 7% warmer. The warmer weather resulted in negative variances to earnings in the U.S. 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 represent the 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 $46 million increase over last year driven largely by the acquisition of the 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 larger extent smaller acquisitions in Austria, Hungary and the United Kingdom. Unit margins were also up as wholesale prices for propane and butane in Europe remain low at 32% below last year. Operating and administrative expenses and depreciation expenses are up significantly, primarily reflecting the affects 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 the 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 whether 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 an 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 uncollectable accounts and lower system maintenance expenses. Finally on January 19, we filed a rate request with the Pennsylvania Public Utility Commission for $58.6 million base rate increased, we expect that process with the PUC to conclude in early fiscal year 2017. 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 spread and capacity management and lower demand for gas and electricity. The lower margin in these segments was partially offset by higher margins in our assets and fee-based businesses, gathering margin on our Auburn III and Uniondale assets and higher peaking services activity contributed $14 million of incremental margin versus last year. The lower capacity management margins reflect lower spreads in location basis differentials and less volatility in capacity values between Marcellus and non-Marcellus delivery points, due in large parts of very warm weather and resulting decline in demand. I would now like to turn your attention to a brief comparison of the fiscal year to-date, to the same period in 2012. Fiscal year 2012 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 fiscal year 2012 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 fiscal year 2012 and earnings are higher this year and despite a significant growth in capital expenditures over the time period. Utility has invested approximately $750 million since the beginning of fiscal year 2012 without seeking rate relief. This significant growth in capital expenditures led 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 gave a negative impact of weather in France, which is about 7% warmer than in 2012, earnings are up $0.21 per share due to growth through acquisitions 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, significant growth in stable asset based margin due to the investment in our midstream business had significantly offset the impact of extremely warm weather there. Net income was up over $38 million adding earnings of $0.22 per share to the bottom line an increase of over a 120% since fiscal year 2012. In total net income from growth investments in the 2012 to 2016 period contributed over a $100 million in incremental income, an increase of $0.55 per share over the four-year period. That 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 cash balance of $466 million. All of our business segments also have access to credit facilities with adequate capacity to meet the working capital and liquidity needs. Also in March the utility parsed 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're 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'll now turn the call over to Jerry for his reports 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 or the year-to-date period, but actually over the last 12-months. Before I go into details for the quarter, I would to share just a few weather statistics. The 12-months ended March 31, 2016 were the warmest on record according to NOVA and that’s a 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 cost at 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 cost in an effort to offset the impact of the volume shortfall. In warm years, operating expenses 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 of 7% from last year due to solid management of payroll cost and lower vehicle and collection expenses. Expenses in margin management have enabled to offset nearly $30 million of the earnings shortfall brought about by the lower volumes and adjusted EBITDA for the second quarter is $295 million or 14% low Q2 last year. Primarily as a result of the record warm weather experienced thus far this year, we are now revising our guidance as we’ve seen for the full-year to $575 million to $600 million in adjusted EBITDA for fiscal 2016. One other comparison worth sharing is as Kirk had done, the year-to-date earnings for fiscal 2016 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 thrust. AmeriGas cylinder exchange did see a modest decline in volume, as it was warm weather related principally Patio-heater utilization was down in Wisconsin resource that we serve. However, we have rolled out now the new 2500 locations that I referenced on the last call now bringing the total number of base outlets to nearly 51,000 nationally. Our national accounts program volume was also down 8.4% of 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 closed on 3 propane acquisitions adding six million gallons annually and we expect to complete several additional deals in the spring and summer. Now just a couple of comments on our distribution. We are pleased to report recently that our Board of Directors approved a distribution increase of 2.2%, to $3.76 annually. This marked the 12th consecutive year that we have 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 strokes the appropriate long-term balance between distribution growth and distribution coverage. We’re committed to continuing to grow the distribution for all our unit holders 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 would 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 our 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 that of its schedule for environmental review. The FERC set December 16, 2016 as a completion date for that process. Based on this newly confirmed milestone date, we know anticipate an in-service date for PennEast in the second half 2018. Our third major active project in midstream is our new LNG liquefaction unit in Manning, Pennsylvania. The project is now in the say construction phase and is on-track to meet its targeted in-service date of January 2017. Our gas utility is to 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 just 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 would like to reinforce is our ACE business where we won a series of major accounts and as Jerry noted, we have exceeded the 50,000 outlet milestone across the U.S. AmeriGas also announced a distribution increase for a 12th consecutive year, which is a major accomplishment in today's MLP marketplaces. Finally, I would 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 had similar strong results in Hungary where we're integrating the business we acquired from Total late last year. We're very pleased with our performance in Europe and our experienced Europe leadership team is busy assessing new investment opportunities that align with UGI's core capabilities. I would like to close by commenting on our updated guidance and the future prospects for UGI. Our reduced guidance for fiscal 2016 is a result of the extraordinary 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's strategic boundaries. As we invest and grow, we remain focused on reinforcing our traditional strength as an energy marketer and distributor. While the mild winter in fiscal 2016 dampened pipeline capacity volatility in the Mid-Atlantic and Northeast regions, we strongly believe that underlying demand for natural gas was stressed 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 would like to turn the call back over to Tracy, who will open it up for your questions. Tracy.

[Operator Instructions] And your first question comes from the line of Ben Brownlow from Raymond James. Your line is now open.

Hi good morning. Quick question Jerry on the expense management, congratulations on that. That's a 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 it 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, slower vehicle fuel because diesel is just cheaper year-over-year and our collection expenses are down, because revenue comes down on the lower price package or margin based business. But the rest is really managing over time well, if we had postpone certain repairs and maintenance and those sorts of things. So about half management action, the rest was natural.

That's really helpful and 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 as a 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 individual to sell. This year maybe a little different, we're starting to see a growing pipeline, I don't know how much its connected to the weather or just coincidence, but pipeline looks very good and these are all kind of smaller scale deals, but I think we're going to have a good spring, summer.

Just one additional comment I would make on that is that I think one of the key things in M&A in the propane segment in the U.S. 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're consistently in contact, regularly in contact with them and that's really crucial in terms of continuity. Whenever as seller reaches the point where they are considering 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 kind of a long-term distribution growth outlook of that 5%.

Well in this case, we really believe and investors have hold us that in this environment a tilt towards distribution coverage would be appropriate. So we're 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's 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 around.

That's fair. Great. Thank you, guys.

Thank you.

[Operator Instructions] Your next question comes from the line of Chris Sighinolfi from Jefferies. Your line is now open.

Hey good morning John.

Good morning.

Just a couple of clarification question, if I could start there with regard to some of the detail of the slides. Thanks for the slides deck that helpful. I guess starting on, if you could go to slide 12, where you talking about midstream and marketing and you were noting that total margin was down about $25 million from last year despite the inclusion of that $14 million and contribution new assets. I guess what you have been talking about this in prior years, but the opportunity that you have to make capacity margins. Can we just assume that that was - your comments sort of indicate there was lack of opportunity given a lack of base spread. But can we assume that that was somewhere near zero or how do we think about that business would have been down $40 million I guess without the contribution of the assets. Is that primarily or almost entirely just a decline in capacity repayments or margin opportunity that you made last year?

Well there is a couple of key pieces Chris. That’s one of them the sort of that margin that created when you have that significant basis differential difference driven by extended cold periods. You also have the margin - the contribution from gas marketing, which is impacted by warmer weather. So both of those are material in terms of contributing to the margin shortfall. 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 sort of cold peak. But that just to me underpin the fact that demand is there, cold weather will obviously bring 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. So we believe we’ll continue to see significant basis differentials in the Mid-Atlantic and Northeast with cold weather in next year and beyond. But in terms of coming back to the margins question, it’s both the natural gas and power marketing piece contributed to that shortfall due to the warmer weather and we certainly saw a significantly less and materially less opportunity for that opportunistic margin generation on capacity.

Okay. So, if I were to take what you have told us previously with the additions on LNG and the ability of the utilities to take more locally sourced gas. Do you still think that they will roll into next winter and there are those margin opportunities, do 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 a concentration of the assets that can be network to utilize as market volatility occurs and it doesn’t occur uniformly, it shows itself in different forms and locations depending on what else is happening across the overall natural gas grid. So we’re 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 to a sort of a clean-up on the previous slide, slide 11 when you were referencing the utilities. There is the $14 million improvement in O&M expense and I thought Kirk had mentioned and maybe I just heard it wrong that 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 we’re capitalizing in the prior year period, but because we’re going to get rate recovery for that the regulatory accounting calls for capitalizing it and putting it into rate base. That was about $5.8 million.

Okay. That’s helpful. And then Kirk, can we just talk about the corporate and other segment, I mean I read the descriptions again at the end of your release about what is contained within that segment description. When you say commodity derivative, are the interest rate hedges on your euro exposure in there as well?

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

Okay, but even if we normalize for that, if we strip off the mark-to-market that you guys gave us in your adjusted earnings figure. There is still a fairly meaningful contribution from corporate and other and since thinking about HVAC and the electric utility moved out, I mean what is still residing in there? I know it’s a lot of inner-company cancellations, but on a total contribution basis, the last two years it's 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's mostly inner-company, it's pretty tough to model. I think it's mostly inner-company eliminations and some of that is tax related and other things. Maybe we could try to go through and if there is a way we can help you with modeling it offline. Just one key point Chris on that. We first started reporting on a mark-to-market basis in fiscal 2015 on a full-year basis. So when you compare 2015 and 2016 to any year prior to it, you are not going to see those mark-to-market adjustments showing up in corporate and others. 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. It’s 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 offline on how to think about maybe some of the drivers that might shape on a quarter or year-over-year basis?

Yes. That would be great.

I guess the final question from me and I'll get back in the queue, is just, I can't help, but I would like to see across the peer group of companies. You guys 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 I guess my question is have you ever thought about doing that yourself?

I mean we've seen that other company do it Chris, we don’t really try our self to accurately quantify the weather impact. So we tend to do it like we did today, where you know we go back and we 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 basis, so it would be quite an exercise for us to do something that is that involved. I mean we have talked about it, the other thing is that there has been some more pronouncement lately about maybe pushing back against some of these adjustments for reporting purposes.

Yes, I have read that with regard to our MLP coverage.

We try to highlight in a way that is straightforward as we can, which is the comparison to 2012 is handy, because it’s very similar weather year and we certainly referenced weather. It does get fairly complicated, because we do have some offsetting factors, commodity costs typically that on always, but typically dropped when demand lessens therefore you get in some cases a parachute effect on margin. So there is a lot of different factors and so we try to do it in a way that’s straightforward as we can make it without any sort of speculation or making too many assumptions on our own. We find that works best and also, it kind of reflects the attitude we have in the company, which is our business teams need to work hard particularly in the non regulated businesses that they have more flexibility. Work hard to offset as much of the impact of weather is possible. So we certainly don’t want to shield our internal teams from having to deal with whatever the weather brings us. So our external communication kind of reflects that attitude as well.

Yes, okay well thanks for the time. I appreciate it.

Sure. Thanks Chris.

Thanks Chris.

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

Yes good morning.

Good morning Nathan.

Just wanted to ask on the international business, there was a pretty nice increase in margin year-on-year and just obviously there has 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 and how pricing has happened over there more specifically?

Sure I think unit margins in Europe as you pointed out, we had a healthy increase this year and there is 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 margin increase, which we see during periods wherein underlying commodity cost drop particularly during the winter season. The other two factors are business base based on activity, we saw the effect of the Finagaz gas 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. They have that business mix change that contributed to on 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 have the impact of increasing our average unit margins. I draw on all three typically two of those are long-lasting, we've increased our position at France, which is a higher unit margin, we've shed some of that 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 inflations. So it would normalize at a level that's above you know our historical level. So 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.

And the basis spread between Europe and U.S. has narrowed significant but there still is a fair amount of new shifts coming in. Could you 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 grow over the next 12-months or so?

It's a good question. We all have a opinions, but we don't act on those so in terms of the way the business will performing in the way our supply strategies. We will continue to assume that we don't know where the underlying costs will go nor that we know what will happen with that differential, because it's pretty complex that of factors that drive it. but absolutely your point is correct, the differential between the lending costs in the Europe and U.S. has narrowed considerably and has also over the last two winters become much more stable. I think it's somewhere around equivalent of $0.20 a gallon between $0.15 and $0.20 which is sort of where it was historically, if you 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 of what's happened to the supply market, the global supply chain has changed considerably based on higher production of NGLs in the U.S. in particular. So I think that over time is going to result in a diminished differential like we've seen. I'm sure we'll see some volatility, but it's 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. So this dampening effect of enhanced supply around shale gas developments is a real positive for us. So I would think, we'll see far or less volatility in that differential and we would see the differential much lower than it was say in that 2010 to 2014 period, we're kind of [indiscernible] I would think it would to 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 its expect to have their own hearing. And is it possible to have that more less that last mile perhaps delayed and the rest of project continued to head on time or is it all one project that needs to be completed?

Nathan the way we think about it is, 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 it as one process, so that river crossing is important. That's a process that certainly we'll participate in that process, it's 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 sort of 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've executed major river crossings on our other projects. We had a major river crossing on the Auburn project as a example. So we can point to that and bring that experience to those discussions as that process moves forward.

Thank you very much.

Okay. Thanks Nathan.

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

Okay, well 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.