UGI Corporation (UGI) Q4 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the UGI Corporation Fiscal 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation there will be a question-and-answer session. [Operator Instructions]. Please be advised that today’s conference is being recorded. [Operator Instructions]. I would now like to hand the conference to your speaker today, Alanna Zahora, Manager of Investor Relations. Please go ahead ma’am.

Thanks Joan. Good morning everyone and thank you for joining us. With me today are Ted Jastrzebski, CFO of UGI Corporation; Bob Beard, Executive Vice President, Natural Gas; Roger Perreault, Executive Vice President of Global LPG; 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 will also describe our business using certain non-GAAP financial measures. Reconciliations of these measures to the comparable GAAP measures are available on Slide 10 of our presentation. Now, let me turn the call over to John.

Thanks Alanna. Good morning and welcome to our call. I hope that you have all had a chance to review our press release reporting UGI’s full year results. On today's call I'll comment on our major achievements over the course of fiscal 2020 and review our guidance for fiscal 2021. I will then turn it over to Ted who will provide more detail on UGI’s financial performance. Roger Perreault and Bob Beard will review critical developments across our businesses and I will then conclude by providing an update on our ESG activities and UGI's strategic positioning for growth in renewable energy solutions. We reported full year fiscal 2020 GAAP EPS of $2.54 while our adjusted EPS was $2.67. Our adjusted EPS was roughly 17% above our fiscal 2019 adjusted EPS of $2.28. We're very pleased with the results delivered in fiscal 2020. Those results reflect a strong performance of the UGI Appalachia Systems acquired last year and the full year impact of the AmeriGas buy-in which closed in Q4 fiscal 2019. While we faced significant challenges due to the pandemic and warmer weather across all of our operations, we responded quickly and effectively to those challenges. Our results reflect our strong emphasis on expense and cash flow management as well. We also significantly benefited from tax legislation that was part of the CARES Act. Ted will provide more details on our financial performance during his comments. As we look to our fiscal 2021 guidance, we took a number of key factors into account. As noted on our Q3 earnings call, we have decided to use 10-year average weather as our basis for fiscal 2021. We believe this weather assumption provides a better foundation for both financial and operational planning. We have assumed that we'll see certain of our customer segments impacted by the COVID pandemic through Q1. We also took tax benefits specific to fiscal 2020 into account. Those CARES Act tax benefits total approximately $0.17. Our fiscal 2021 guidance range which now factors in the 10-year normal weather, the Q1 volume impact from COVID, and removes the $0.17 CARES Act tax benefits specific to fiscal 2020 is $2.65 to $2.95. The mid-point of our guidance is approximately 12% above our fiscal 2020 tax adjusted EPS of $2.50. Ted will provide further details on our EPS guidance later in the call. We were extremely pleased with our overall performance in fiscal 2020 as we address the many challenges presented by warmer weather and the pandemic, while also focusing significant attention on the needs of our communities. We'll provide you with much more information on our financial performance throughout the call, so I'd like to spend a few minutes discussing UGI's important role in the communities we serve. There is no doubt that those communities have suffered greatly over the past nine months as the pandemic made critical issues such as food insecurity and homelessness even more urgent. Those same communities were also severely impacted by the burden of racial injustice as we saw a number of tragic, avoidable events impacting those communities. In response, our leadership team, our Board, and all of our employees stepped up to provide financial and volunteer support to food banks such as Philabundance, emergency services organizations such as the American Red Cross and the Salvation Army, and critical educational teams such as Reading is Fundamental. We also achieved record levels of support for our long-term partner, the United Way. We strive to be a force for good and a voice for change in our communities, but it is clear that we need to do more. For that reason we have significantly enhanced those efforts during the past year and intend to continue to strengthen and expand those efforts in the coming months. We're also committing to change within UGI as we strive to ensure that UGI is a leader in terms of diversity and inclusion. We recently created a belonging, inclusion, diversity, and equity or BIDE initiative to ensure that our entire team knows that they truly belong at UGI and the diversity of thought, perspective, and experience they bring to us is vitally important to our future success. We'll be providing updates on these critical social activities in the coming months. I'd like to highlight a few quick points before I hand over to Ted. Our first full operating year for UGI Appalachia was a strong one. EBIT and cash flow from the systems we acquired exceeded our expectations and demonstrated the value of systems located on well-developed acreage supported by long-term take or pay contracts. Throughput volumes on those systems were up almost 6% versus prior year, despite the challenge of lower commodity pricing during the first half of fiscal 2020. We're excited about the opportunities that will emerge with more attractive natural gas pricing environment, particularly for systems such as ours serving proven acreage where production can be efficiently expanded. We completed construction of our Bethlehem LNG Storage and Vaporization System, and that plan is in service as we approach the fiscal 2021 winter season. The Bethlehem System is an important addition to our LNG network and supports our significant portfolio of long-term peaking contracts. Peaking services is a critical business for UGI generating almost 90 million of EBIT annually, with virtually all of the EBIT generated by long-term take or pay contracts. The network that we have developed over the past decade to serve our peaking demand is also utilized to serve other segments such as transportation and distributed generation. Our commitment to consistent expansion of our LNG network has positioned UGI as a leader in both peaking services and commercial LNG supply in the mid-Atlantic and Northeast. Utilities had another busy year as we deployed near record levels of capital while addressing the critical challenges of the pandemic. Our consistent investment in infrastructure replacement is evident in our operational and environmental performance. We see a clear trend in reduced methane emissions and fewer leak system wide as we move to eliminate cast iron and bare steel segments in our networks. We also continue to grow our customer base in utilities as we added over 12,000 new commercial and residential heating customers. We also concluded a rate case in the latter part of fiscal 2020 with the first of a two phase rate increase going into effect in January. AmeriGas had another very strong year of growth in our ACE and National Accounts programs. Our Ace volumes were up almost 18% as we saw the combined impact of our expanding customer base and strong COVID related demand in the spring and summer. Our National Accounts program grew volumes this year despite the impact of COVID on some key customer groups, such as school bus fleets and the hospitality sector. National Accounts is well positioned for growth as these impacted customers return to normal demand levels in fiscal 2021. UGI International had an outstanding year with the combined impact of operating efficiencies and effective margin management, enabling us to deliver record adjusted EBIT of $259 million. This was despite weather that was considerably warmer than normal and warmer than prior year, as well as stringent March through June COVID lockdowns in many of our European countries, including France. Bob Beard and Roger Perreault will provide more details on our operating performance in a few minutes. I'd like to turn it over to Ted at this point for the financial review. Ted.

Thanks, John. As John mentioned, we're pleased to report a very strong year, but before we get into full year results, I wanted to reconcile a few moving parts that took place in our fourth quarter. On our third quarter earnings call, we provided an updated guidance range of $2.45 to $2.55, which included an estimate of roughly $0.10 of additional tax benefit. The new high tax legislation or GILTI, came out just days before that call and when taken together with the CARES Act and our particular net operating loss position provided considerably higher than anticipated compounding benefits as we carried losses back full five years. The resulting tax benefit for the quarter was an additional $0.10 or fully $0.20 for the full year. The remainder of the difference from our guidance reflected lower COVID impacts and better performance at the businesses. Looking ahead to our guidance for 2021, we're including approximately $0.10 COVID headwind for the year and minimal tax benefit related to the new legislation. Our fiscal 2021 guidance range keeps us well positioned to deliver on our long-term annual growth commitment of 6% to 10%. As mentioned earlier, we delivered adjusted EPS of $2.67 versus $2.28 in the prior year. This table lays out our GAAP and adjusted earnings per share for fiscal 2020 compared to fiscal 2019. Our adjusted earnings exclude a number of items such as the impact of mark-to-market changes in commodity hedging instruments, a gain of $0.39 this year versus a loss of $0.82 in fiscal 2019. This year, we had a $0.12 loss on foreign currency derivative instruments compared to a $0.13 gain in the prior year. As you can see, we adjusted out $0.21 of expenses associated with our LPG business transformation initiatives. Both AmeriGas and UGI International exceeded their commitments to realize $30 million and €5 million respectively of permanent annual benefits. Roger will touch on targets for fiscal 2021 a bit later in the call. Lastly, I wanted to point out the $0.18 loss related to the disposition of both the Conemaugh and HVAC businesses. We touched on the ESG drivers of the Conemaugh sale on previous calls. The HVAC business was identified as a non-core asset during our regular strategic reviews and sold as we continued to focus on the strengthening and expansion of our core business portfolio. As John mentioned earlier, 2020 was a challenging year, but our business did an excellent job executing on the fundamentals, making progress on key initiatives, and expanding our business in key areas like natural gas infrastructure and renewable natural gas. As you can see, all of our businesses experienced warmer weather than last year, but still delivered adjusted earnings per share growth of 17%. Primary drivers of the year-over-year growth include the full year impact of the UGI Appalachia acquisition, new bass rates of the utilities, ACE and National Accounts growth at AmeriGas, and margin management at UGI International. Consistent with our discussions on recent calls, our increased focus on a more agile approach to cost management was able to offset a considerably larger proportion of the warm weather impact we experienced this year as compared to historical norms. Our transformation initiatives and continued expansion of cost improvement capabilities will only further improve our ability to mitigate the impact of warmer than expected weather in the future. UGI has now initiated the transformation project for our support functions including finance, procurement, HR, and IT. This transformation, which began in fiscal year 2020 will review, redesign, and establish processes within each of these departments using a global lens to standardize activities across our global platform, incorporate best practices leveraging technology, increase efficiency and connectivity between our businesses, and provide more employee development opportunities. This is the start of an important centralization and efficiency project that we will manage over the next three years and we anticipate will provide a foundation for years to come. We expect non-recurring investment costs of $40 million over the next two to three years, roughly half of which will be attributable to OPEX to result in going annual savings of $15 million. Turning to the AmeriGas business, EBIT decreased 8% versus last year. Retail volume declined 6% primarily due to the impact of weather that was 5% warmer than 2019, the COVID-19 impact on commercial and industrial volumes and other residential volume loss. Some of the volume impact on margin was offset by record ACE and National Accounts total margin and slightly higher base business unit margins. While ACE only accounts were a small portion of total volumes, we did see a tailwind from COVID and a 23% uptick in the second half of the year compared to 2019 volumes. Slightly higher unit margins primarily related to the customer mix, offset a portion of the impact from lower overall volume. The $39 million of lower operating expenses at AmeriGas are due to a number of items, including progress on the LPG transformation initiatives, which Roger will discuss in a few minutes. UGI International's EBIT increased 11% compared to last year. The international team delivered very strong results despite another year of warm weather and the impact of COVID-19. Total margin decreased slightly compared to last year as strong margin management efforts and lower LPG costs helped to offset the impact of lower volumes. As you can see, operating and administrative expenses decreased $38 million, largely due to lower compensation and distribution expenses. Our hedging strategy, which is intended to offset the impact of foreign currency changes worked as anticipated and the year-over-year improvement at the EBIT level in dollars and euros are roughly equal. Turning to the natural gas side of the house, midstream and marketing reported EBIT of $168 million in 2020, compared to $114 million last year. The acquisition of UGI Appalachia was the main driver of the 47% year-over-year improvement. Total margin, operating and administrative expenses, depreciation and amortization, and other income all reflect the impact of the acquisition. Other income is being driven by higher equity income from the Pennant system that was acquired as part of UGI Appalachia. UGI Utilities reported EBIT of $229 million in 2020, which was slightly higher than 2019. Core market volume decreased 6% due to the warm weather and COVID-19. Total margin for the year increased by $14 million, which was largely driven by the increase in base rates which became effective October 11, 2019. On that topic, we're pleased to report that the order for our new base rates was adopted and entered on October 8th. Bob, speak to this more in a moment. Like other businesses, the utilities had lower OPEX compared to the prior year. This result was driven by decreases in contractor costs and transportation expenses and partially offset by higher IT maintenance and consulting expenses. Lastly, we had higher depreciation expense versus last year as a result of our ongoing distribution system and IT CAPEX activity. I want to finish up by talking about our liquidity position. UGI continues to maintain a strong balance sheet position, serving us well to deal with the continued uncertainty of the COVID-19 situation. On a consolidated basis, UGI Corporation had $1.5 billion in available liquidity as of fiscal year end up from the $1.1 billion position at the close of fiscal 2019. Staying on the balance sheet, we have seen a reduction in our consolidated leverage in fiscal 2020, despite the impact of COVID-19. We expect this trend to continue with earnings growth, assuming normal weather and as we continue to pay down debt. With that, I'll turn the call over to Bob. Bob?

Thanks, Ted. Q4 was a good quarter for our natural gas businesses with the teams at both energy services and utilities performing very well while managing the effects of the COVID-19 pandemic. Despite FY 2020 weather that was 6% warmer at both utilities and energy services versus the prior year, the natural gas businesses saw a year-over-year increase in EBIT of nearly 16%. The primary drivers of this growth in EBIT are the contribution of UGI Appalachia, the adoption of new base rates at utilities, and the efforts of the natural gas teams to control operating expenses. As John mentioned, energy services recently completed the Bethlehem LNG facility, which will deliver 70,000 dekatherms per day of reliable, on system supply into the UGI utilities distribution system. This $62 million project came in on budget and on schedule, and much credit should be given to the energy services team for executing so well during such challenging times. Our midstream business continues to do very well as we see UGI Appalachia meet or exceed our business case assumptions, even with low commodity pricing for most of FY 2020. We remain encouraged with the outlook for the midstream business as we expect demand for natural gas to remain strong. We're focused on opportunities in the renewable energy space and we continue to see significant activity in this area. We've been very pleased with the performance of GHI, the renewable natural gas company we acquired in August and believe GHI will be a platform for continued growth in the renewable natural gas space for UGI. Just earlier this week, we took another important step in this process as energy services entered into a definitive agreement to make a small investment in utility scale RNG in Idaho. The new project consists of an acquisition and upgrade to an existing dairy digester facility commissioned in 2012 that is currently generating renewable electricity. The upgrade involves a new gas processing plant, upgrades to the existing processing equipment, and a pipeline and compressor station to move the RNG to interstate market. Once it is expanded to reach full production in 2022, the plan is expected to generate several hundred million cubic feet of RNG annually and initial RNG production is expected to commence in late 2021. On the regulated front our utility is pursuing more than a dozen RNG projects throughout our service territory as we work with developers to bring their gas to market. As we can continue to see the demand for renewable energy grow and considering our deep commodity marketing and customer service experience, I believe UGI is well positioned to serve as a significant enabler of a cleaner, more sustainable energy grid. A few other items of note I'd like to mention include, utility CAPEX. Utility had another strong year of capital deployment, investing more than $348 million. Of particular note is the mileage of aged pipeline retired in FY 2020. Utilities retired nearly 72 miles of bare steel and cast iron mains exceeding our annual commitment to the regulator. Replacing aged infrastructure has enabled UGI to significantly reduce CO2 emissions. Since 2009, utilities has reduced these emissions by more than 30% and we expect an additional 35% reduction over the next 10 years as a result of our facility replacement program. Customer growth, despite the headwind of the COVID-19 pandemic, over the past few months we have seen meaningful increases in new construction stores, including in the commercial market as we continue to see strong demand for natural gas across our service territory. Conemaugh, during our third quarter call we announced the sale of UGI’s approximately 6% interest in the Conemaugh electric generating facility to Montour LLC. The sale of this non-core asset will reduce UGI’s direct CO2 emissions by more than 30% and is consistent with our focus on our midstream and gas utility business as we intensify our ESG efforts. Auburn IV, energy services commenced service on Auburn IV project during Q1 of FY 2020. As a result of this expansion, volume through the Auburn system increased almost 66 bcf year-over-year or 90%. Annual margins from the Auburn system in FY 2020 was $34.6 million and importantly nearly all of that margin is fixed fee. This project is a good example of how the energy services team is driving growth even during times of low natural gas prices. Utilities rate case, on October 8th, the Pennsylvania Public Utility Commission formally approved UGI Utilities gas rate case. In addition to an increase in base rates, an important provision of this rate case is how bad debt will be addressed as we continue to navigate the effects of the COVID-19 pandemic. Going forward, bad debt expense for our natural gas utility will be capped at our current plan level. Therefore, any COVID related bad debt expense that exceeds this bundle will be treated as a regulatory asset included in our next rate case and amortized over 10 years. We view this as a very positive settlement provision as it mitigates P&L and cash flow risk due to the effects of COVID. Lastly, PennEast is working cooperatively with all of the regulatory agencies that have some purview for Phase one, including the Pennsylvania Department of Environmental Protection, the U.S. Army Corp of Engineers, as well as [indiscernible]. The agencies are conducting the appropriate due diligence and we expect to know more in the near future. Now, I'll turn it over to Roger.

Thanks, Bob. The global LPG businesses delivered very strong results in the fourth quarter, despite lower commercial and industrial volumes driven by COVID in both Europe and the United States. Even with the challenges of significantly warmer than normal weather and COVID, AmeriGas and UGI International delivered full fiscal year EBIT roughly in line with last year. We're pleased with this result as it demonstrates the value of our diversified portfolio of customers, applications, geographies, and our ability to manage expense and margin to offset the effects of warm weather. During the last quarter, our teams continued to execute on our transformation efforts underway at AmeriGas and UGI International. These efforts provided financial benefits that exceeded our commitments, with AmeriGas realizing over $40 million and International realizing over €7 million in fiscal year 2020. Our dedicated professionals across AmeriGas and International faced our business challenges head on through expense and pricing management, generating an additional $45 million in expense reduction and $30 million in additional margin in fiscal 2020, which helped compensate for the volume shortfalls. We remain confident that global LPG businesses are well positioned to deliver strong results despite the uncertainties of the pandemic and warm weather. In addition to carefully managing expenses and margins, our team has demonstrated their commitment to our communities by providing reliable energy solutions to our customers throughout the historic hurricane season in our service territory in the Southeast and wildfires in the Western USA. The U.S. team also handled increased demand in our home delivery service brand at Cynch and increased demand in our cylinder exchange businesses in both the U.S. and Europe while remaining focused on the safety of our customers and employees. Now, let's move to more specifics at AmeriGas. As a reminder, the previously announced transformation program at AmeriGas includes a total investment of $175 million that we expect will provide annual benefits in excess of $120 million by the end of fiscal 2022. As we look forward, we expect to exceed our initial estimate and deliver approximately $140 million at a slightly higher investment of $200 million. This benefit will more than offset the impacts of inflation, structural conservation, customer churn, and the mix effect of our evolving business. As mentioned on our third quarter call, we have earmarked a portion of the benefits achieved from the program for investment in the business to support a proactive approach to targeted customer retention and growth focused on high value customers. As such, we are allocating approximately one third of the savings towards strategic initiatives to drive improved customer retention and growth in our core business. The approach to a customer lifetime value pricing strategy, the focus on digitizing business processes, and the continued drive for efficiencies will deliver an exceptional customer experience and position AmeriGas for long-term growth and market share gain. I would like to highlight a few additional items that will be beneficial in the coming year. Cynch has been rolled out in 17 cities across the USA and we will continue to roll out two additional cities to reach a total of 40 over the coming two years. Our National Accounts program continues to see solid growth despite the near-term challenges of the pandemic. Our reengineering of key processes and systems that are part of the transformation efforts are now operational. In fact, this new fiscal year will be managed with a centralized customer engagement services center, state of the art customer management tools, a new routing and logistics tool, and most importantly, a mindset of satisfying our customers in the most efficient way possible. We're excited about the work that has been achieved and we look forward to continuously improving the various customer touch points with new digital tools. As demonstrated in fiscal 2020, our teams will continue the diligent management of discretionary expenses to offset the lingering effects of COVID and unpredictable weather patterns. Now moving on to our international business. As mentioned in previous earnings calls, our international team is also focused on driving efficiencies and improving the customer experience with investments of €55 million euros that will deliver over €30 million of annual benefits by the end of fiscal 2022. I am pleased to report that these objectives are still very much on track. In addition to the laser focus on driving efficiencies, our international team demonstrated tremendous resilience in fiscal 2020 and offset nearly all of the headwind generated by significantly warmer than normal weather. Our recent investments and transformation initiatives provide a path for continued strong EBIT performance. Another component of our transformation effort is organizational design. We have established two centers of excellence that are now fully in place and delivering value. The first brings operational excellence, this center is focused on the sharing and implementation of best practices between our various operating entities, including AmeriGas. The other center of excellence is focused on commercial excellence, which includes renewable solutions. We're excited about having the renewable team in place. This effort is instrumental in leveraging our existing assets and capabilities as we continue to de-fossilize our supply infrastructure. Inclosing fiscal year 2020 brought unprecedented challenges to our operations in the U.S. and Europe, and yet our performance demonstrated the high level of commitment of our employees while also validating our transformation efforts. Our continued focus on operational efficiencies and cost management contributed to the solid results in a year that was significantly impacted by the COVID pandemic and warm weather. Our strategy of geographic diversification across 18 countries and multiple customer segments proved successful yet again. And all of this was underpinned by the dedication to safety, customer, and community of our 10,000 plus employees. Now back to John.

Thanks Roger. I'd now like to spend a few minutes looking ahead and sharing our thoughts about the strength of UGI’s position at a time when new challenges and opportunities have emerged due to the significant change underway in the energy distribution sector. UGI has always focused on the environmental, social, and governance commitments we make to our employees, customers, investors and the communities we serve. We have provided significant detail on those efforts in our ESG reports and stated our commitment to accelerate those efforts. I commented earlier about the importance of our social programs and our focus on making a difference in our communities, particularly where we can support individuals and families who have been impacted by the pandemic and racial injustice. Turning to the environmental and climate changes we're all facing today, we're equally focused on our commitments to reduce UGI’s carbon footprint while also identifying and developing attractive investment opportunities that will drive future growth. Those growth opportunities are beginning to come into focus for us. This past summer, we announced the acquisition of GHI, a renewable natural gas company primarily serving transportation customers in California with RNG sourced across the U.S. We're committed to building on this platform to offer a range of renewable energy solutions. As Bob mentioned, just this week, we announced an RNG feedstock project in Idaho that aligns perfectly with this commitment. We're actively exploring a number of additional RNG opportunities involving both distribution and RNG feedstock infrastructure. We believe that UGI is particularly well positioned to develop investment opportunities in this rapidly emerging market. Our experience in project development, project execution, gas transportation and storage, and energy marketing are directly applicable to our RNG feedstock management. From an environmental standpoint, RNG is an outstanding solution since it is a zero carbon or negative carbon solution depending on the feedstock. We're also actively developing bio LPG sources to augment our existing bio LPG source in Sweden. Similar to RNG, the range of growth opportunities in bio LPG includes potential investments in feedstock infrastructure. The addition of RNG and bio LPG to our supply portfolio is particularly attractive for our customers and our communities. We can utilize our existing natural gas and LPG distribution infrastructure to deliver RNG and bio LPG to the 3 million plus customers directly served by UGI. These renewable solutions can be brought to our customers with no additional local infrastructure, no incremental investments by our customers, and no community disruption related to infrastructure build out. We're excited about the significant growth potential of these renewable solutions as we address the fundamental needs of our communities for affordable, reliable, resilient, and renewable energy solutions. We see RNG and bio LPG as the areas of most significant potential in the short-term, but we're also exploring the opportunities around renewable hydrogen, battery storage, and other promising technologies. We found many of the companies developing new solutions are eager to work with us. They recognize that our physical connection to over 3 million customers and our large team of field service personnel serving those customers can provide crucial support when commercializing new solutions. We'll provide much more detail on our renewable solutions activities that are Investor Day next month. We're excited about our progress to date and believe these emerging opportunities will enable us to achieve several strategic objectives. First, accelerate the rebalancing of UJI's business mix with LPG continuing to play an important role, but almost all growth capital invested in natural gas and renewables, create a new renewable solutions team to accelerate the development of new growth opportunities. Those efforts will leverage our existing natural gas and LPG infrastructure and resources, but expand our reach well beyond our existing footprint and position UGI as a leader in sourcing and delivering carbon free and negative carbon energy solutions to residential, commercial, industrial, and transport customers across the U.S. and Europe. After that brief look to our future, I'd like to return to fiscal 2021 and comment on the outlook for the year. Our guidance of $2.65 to $2.95 assumes our new normal 10-year weather and some lingering COVID volume impact mainly in Q1, which will impact EPS by roughly $0.10. The midpoint of our fiscal 2020 guidance represents a 12% increase in EPS over our tax adjusted fiscal 2020 performance of $2.50. As Ted noted, we remain very well positioned to continue to meet our long-term annual EPS growth commitment of 6% to 10%. We're excited about our expanding portfolio of growth opportunities and strengthened by the exceptional work performed by our teams over the past year. I can say with confidence that we're in an outstanding position to deliver on our commitments for future earnings growth, positively impacting the quality of life in our communities as we deliver low carbon and renewable carbon solutions. We're looking forward to keeping you updated on our progress throughout the year with the first opportunity being our Investor Day on December 7th. With that, I'll turn the call back over to the operator, who will open it up for your questions.

Thank you. [Operator Instructions]. Our first question comes from Shneur Gershuni with UBS. Your line is now open.

Hi, good morning everyone. Good to see that everyone is safe and well. I was wondering if maybe we can start with the thought process around the guidance for fiscal 2021. You are sort of having a COVID impact just for 1Q and so forth. Wondering if you can sort of talk about that for a little bit, is there potential, obviously with where cases are could there be an impact to 2Q that you would then have to adjust or alternatively, are there some other pluses and minuses, like an extended cylinder exchange season due to restaurants using lamps that’s you are sort of thinking is kind of an offset, just wondering if you can sort of give us the kind of the thought process and the sensitivities we need to be thinking about as we watch cases globally?

Sure, thanks Shneur. In terms of estimating the COVID impact as we enter the fiscal year, as you point out it has sort of a differential impact on different customer segments or demand segments in our business. Without a doubt, we see incremental demand in the cylinder segment, we have seen it since the beginning of the pandemic, which sort of continues to the general growth that we're seeing in that part of our business. We also see very strong demand among residential customers because most families are home as opposed to being in school full time and working. So the core residential demand is quite strong. And then offsetting that, we see the hospitality segment and some of the transportation segments impacted as well. So the estimate is based on that sort of balanced view. Our view is that, we're likely to see that through Q1 and begin to work through it. The situation is fluid, but having the experience that we have now after approximately nine months working with this and looking at the core demand that we're seeing, we feel like we've done the absolute best job we can in terms of incorporating that into our guidance. But it's very much a mixed bag with different sectors of demand, different segments, customer segments being impacted in different ways. We were relatively accurate in terms of what we estimated for FY 2020, in terms of how we saw that impact. And that's why we felt we could provide some specificity around the impact as we move into FY 2021.

Great, so basically people are at home still and they still need keep demand effectively. Okay, and then just to transition a little bit here, when I sort of think about your guidance for this year and I sort of think about where your CAPEX might end up, obviously your EBITDA is going up, which changes your leverage calculation. But at same time it appears that you're going to be in a free cash flow positive after dividends type of situation, which, obviously can bring leverage down further. When you hit whatever target that you'd like to achieve, does that put you in a position to have a material step up in the dividend or pursue buybacks and or is there some other approach that you're thinking about, I was just wondering if you can talk about that fortunate situation that you see yourself in?

Sure. I'll comment briefly and then I'll certainly let Ted comment as well. Fundamentally, we're fortunate to have the cash generation capabilities across our businesses that we have. So as you noted, that puts us in a really strong position in terms of being able to address the priorities, which for us are in the short-term are paying down debt. And as we move forward and execute on that strategy, it then opens up a range of alternatives in terms of how we apply that incremental cash. So we have a range of options moving forward. I think our priorities are clear in the short term, but I'll turn it over to Ted at this point to comment as well, Shneur.

Yeah, just to build on those things, Shneur, as we've talked in the past we want to get AmeriGas debt levels down to that lower kind of four multiple, four to four and a quarter. We're not there yet. We see that as a pay down that we'll be doing over the next couple of years. And also, as we've been fairly consistent in sharing, we'd like to clear most of the debt off of the corporate books that we have now that we took on as we did the UGI Appalachia acquisition and the AmeriGas buy in. And some of that will be shifting debt directly to some of the business units so it won't all just go away for the entire corporation. But we see that as the focus for the next several years. I guess if everything otherwise stayed static over the next three or four years, yeah, what you're suggesting absolutely starts to become true. We will start to really generate a lot of cash. We won't have the debt pay down facing us the way we will over the next couple of years. We'll have to revisit what potentially our dividend strategy looks like at that point. But that's a couple of years out.

Well perfect, really appreciate that. Maybe just a couple of small clarifications, if you can remind us first of all, you changed the 15-year weather to 10-year weather. If I remember correctly, from a prior call, that was about a negative $0.04 impact when we are sort of comparing apples to apples. And you've got two different transformations going on and so forth. Are there any OPEX related charges that are contemplated in fiscal 2021, either for the APU business transformation or what you're doing at the corporate level?

Shneur this is John. Just on the weather, you're right on the weather impact. On the third quarter call we talked about that change and it was roughly $0.04. On your question on the transformations, there will certainly be through FY 2021 and into 2022 additional charges related to those transformations because they're ongoing and certainly we will provide more detail on that at Investor Day as well. But I can let Roger comment as well in terms of sort of the ongoing transformation efforts, both domestically with AmeriGas and across Europe.

Thanks, John and good morning, Shneur. Yeah, as John mentioned, we certainly are continuing to execute the transformation efforts and there is OPEX that we will be spending in fiscal 2021 and we estimate that to be approximately 56 million to 57 million of OPEX and then the rest being CAPEX. As we've highlighted by the end of fiscal 2021, we will have executed our transformation initiatives and then the benefits of the initiatives will continue to roll in throughout 2021 and 2022.

Alright.

And I would add Shneur that with the support function transformation, we will be making investments through 2023 on that. In total, the investments will be about $40 million and about half of that will be OPEX.

Yeah, that's effectively what I was trying to figure out, like I knew you have to spend some money on it what was classified as CAPEX versus OPEX. And I saw that your size is just trying to wondering if that was kind of like a negative on that's being incorporated into your guidance that you're assuming these OPEX charges related to these transformations, perfect. So ex that, that would not be ongoing once you finished the transformation, then you would remove that OPEX essentially, correct?

We would remove that OPEX from so we're adjusting for that one-time investment, right, and once we've made those investments, we will no longer be making adjustments for it. I mean, these are onetime non-recurring investment costs, right, that are made up of capital and OPEX and the OPEX portion we're pulling out.

Right, no, that's exactly what I wanted to understand, that there's an OPEX charge that isn't necessarily recurring over the long run. So that was super helpful. Thank you, guys. Really appreciate the color.

Great, thanks Shneur.

Thank you. Our next question comes from Mark Solecitto with Barclays. Your line is now open.

Hi, good morning. Just one -- just a point of clarification on your 2021 guidance, what are you guys assuming as far as savings related to the transformation initiatives, like what are you guys baking in?

Why don’t I let Roger comment on that, certainly the most significant transformations of the two ongoing at AmeriGas and UGI International.

Thanks, John. Yeah, I was mentioning, we're in a full ramp up of reaching 140 million at International and reaching a €30 million euros -- sorry, 140 million at AmeriGas and 30 million at International. In fiscal 2021, we think it's going to be about 85 million that will be generated in the fiscal year at AmeriGas and €7 million at International.

Great, and then I think in the past you guys have mentioned that you'll be sharing some of those benefits with your customers so just curious that, I guess, to your P&L like how should we think about what you're factoring in in your guidance?

Yeah, so as we mentioned, we're taking about a third of the benefits and really applying it to a segment of our market that we look at where the churn level is quite high. And that's really in the small commercial and residential segment here in the U.S. where there's very competitive landscape and with our advanced analytics, we've been able to identify if we had different programs across those segments, we could likely reduce that churn. Therefore, there's a good rate of return on that investment. That's an area that we're going to continue to develop and we'll continue to provide color as we go forward as to what the benefit we're seeing is from that investment that we're making to help improve that efficiency when it comes to customer churn.

Got it, okay. And then shifting gears a little bit just on PennEast, I wonder if you could provide an update on that, what the path forward is for that project, both in terms on the regulatory front and also on the commercial side?

Yeah, this is John, I'll comment briefly and I will let Bob comment. Essentially on PennEast at this time, we're working through a case and awaiting feedback on a Supreme Court case that's been filed. And essentially that's a key driver in terms of next steps for the project. We're looking for input from the Solicitor General in the very near future and we'll have feedback following that from this. We expect feedback from the Supreme Court as to whether they will hear the case. So that's a really important milestone in the project that we're hoping is upcoming. But I will also let Bob comment on that as well.

No, that's right John. We also continue to work with the regulatory agencies, who will be issuing permits and working with us on construction scheduling, what have you. And as far as the commercial front, we continue to work the project. We continue to talk to potential shippers. And as John said, we await the decision by the Supreme Court as to whether or not they're going to take up the case.

Great. Thank you.

Thank you, Mark.

Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to John Walsh for closing remarks.

Okay, thank you very much for your time this morning. We look forward to keeping you updated on our progress with the next opportunity being our Investor Day on the afternoon of December 7th. So look forward to seeing all of you then. Take care.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.