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UGI Corp (NYSE:UGI)
Q4 2020 Earnings Call
Nov 19, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the UGI Corporation Fiscal 2020 Earnings Conference Call. [Operator Instructions].

I would now like to hand the conference dear speaker today, Alanna Zahora, Manager of Investor Relations. Please go ahead ma'am.

Alanna Zahora -- Manager, Investor Relations

Thanks Joelle. 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'll 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.

John L. Walsh -- President and Chief Executive Officer UGI Corporation, Vice Chair of AmeriGas Propane Inc.

Thanks Alanna. Good morning and welcome to our call. I hope that you've 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 '20, and review our guidance for fiscal '21. I'll 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 '20 GAAP EPS of $2.54, while our adjusted EPS was $2.67. Our adjusted EPS was roughly 17% above our fiscal '19 adjusted EPS of $2.28. We're very pleased with the results delivered in fiscal '20. Those results reflect the 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 '19. While we face 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 '21 guidance, we took a number of key factors into account. As noted on our Q3 earnings call, we've decided to use 10-year average weather as our basis for fiscal '21. We believe this weather assumption provides a better foundation for both financial and operational planning. We've 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 '20 into account. Those CARES act tax benefits total approximately $0.17. Our fiscal '21 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 Benefit specific to fiscal '20 is $2.65 to $2.95. The midpoint of our guidance is approximately 12% above our fiscal '20 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 '20, 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 will 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 and security 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 it 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 '20. 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 plant is in service, as we approach the fiscal '21 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've 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 leaks systemwide, 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 '20, 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 '21.

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?

Ted J. Jastrzebski -- Chief Financial Officer

Thanks John. As John mentioned, we're pleased to report a very strong year. But before we get into the 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 in our particular net operating loss position, provided considerably higher than anticipated compounding benefits, as we carried losses back fully 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 '20 compared to fiscal '19. 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 '19. This year, we had a $0.12 loss on foreign currency derivative instruments, compared to a 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 EUR5 million respectively of permanent annual benefits. Roger will touch on targets for fiscal '21 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 continue 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 base rates at the utilities, ACE and National Accounts growth at AmeriGas, and margin management at UGI International.

Consistent with our discussions on recent calls, are 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 comparative 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 transformation project for our support functions, including Finance Procurement, HR, and IT. This transformation, which began in fiscal year '20 will review, redesign and established 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 opportunity. 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 for 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 & 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 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 an October 8th. Bob will 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 off 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?

Robert F. Beard -- Executive Vice President, Natural Gas and Chief Executive Officer UGI Utilities Inc.

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 '20 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, was 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 '20. We remain encouraged with the outlook for our 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 base 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 the utility-scale RNG project 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 the 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 R&D 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 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 '20. Utilities retired nearly 72 miles of bare steel and cast iron main, exceeding our annual commitment to the regulator. Replacing the aged infrastructure has enabled UGI to significantly reduce CO2 equivalent 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 starts, 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 equivalent emissions by more than 30%, and is consistent with our focus on our Midstream & Gas Utility business, as we intensify our ESG efforts.

Auburn IV; Energy Services commenced service on our Auburn IV project during Q1 of FY '20. As a result of this expansion, volume through the Auburn system increased almost 66 Bcf year-over-year or 90%. Annual margin from the Auburn system in FY '20 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 on our current plan level. Therefore, any COVID related bad debt expense that exceeds this level, 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-1, including the Pennsylvania Department of Environmental Protection, the U.S. Army Corps of Engineers, as well as FERC. 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.

Roger Perreault -- Executive Vice President, Global LPG President UGI International, LLC

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 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 under way at AmeriGas and UGI International. These efforts provided financial benefits, that exceeded our commitments with AmeriGas realizing over $40 million and International realizing over EUR7 million in fiscal year '20. 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 '20, 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 teams demonstrated their commitment to our communities by providing reliable energy solutions to our customers throughout the historic hurricane season and 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, branded as Cynch, and increased demand in our cylinder exchange businesses, in both 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 '22. 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 toward 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 rollout to 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 touchpoints with new digital tools. As demonstrated in fiscal '20, 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 EUR55 million, that will deliver over EUR30 million of annual benefits by the end of fiscal '22. 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 '20, and offset nearly all of the headwind generated by significantly warmer than normal weather. Our recent investments in 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 defossilize our supply infrastructure.

In closing, fiscal year '20 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.

John L. Walsh -- President and Chief Executive Officer UGI Corporation, Vice Chair of AmeriGas Propane Inc.

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 under way 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've 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 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 find 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 at our 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 UGI's business mix, with LPG continuing to play an important role, with almost all growth capital invested in nat gas and renewables. Create a new renewable solutions team to accelerate the development of new growth opportunities. Those efforts will leverage our existing nat 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 '21 and comment on the outlook for the year. Our guidance of $2.65 to $2.95 assumes our new normal of 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 '20 guidance, represents a 12% increase in EPS over our tax adjusted fiscal '20 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 are 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 7.

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

Questions and Answers:

Operator

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

Shneur Gershuni -- UBS -- Analyst

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 '21. You sort of had 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 for? Alternatively, are there some other pluses and minuses like an extended cylinder exchange season, due to restaurants using lamps, that you're 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?

John L. Walsh -- President and Chief Executive Officer UGI Corporation, Vice Chair of AmeriGas Propane Inc.

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, have seen it since the beginning of the pandemic, which sort of continues 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 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 '20, 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 '21.

Shneur Gershuni -- UBS -- Analyst

Great. So basically people are at home still, and they still need keeping 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 the same time, it appears that you're going to be net 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, 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?

John L. Walsh -- President and Chief Executive Officer UGI Corporation, Vice Chair of AmeriGas Propane Inc.

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.

Ted J. Jastrzebski -- Chief Financial Officer

Yeah hi. 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 -- 4 to 4.25. 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 get 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 no way 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 paydown facing us the way we will over the next couple of years. We will have to revisit what potentially our dividend strategy looks like at that point. But that's a couple of years out.

Shneur Gershuni -- UBS -- Analyst

Perfect. Really appreciate that. And maybe just a couple of small clarifications; if you can remind us -- first of all, like 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, little more 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 '21, either for the APU business transformation or what you're doing at the corporate level?

John L. Walsh -- President and Chief Executive Officer UGI Corporation, Vice Chair of AmeriGas Propane Inc.

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 '21 and into '22, 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.

Roger Perreault -- Executive Vice President, Global LPG President UGI International, LLC

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 '21, and we estimate that to be approximately $56 million, $57 million of opex and then the rest being capex. As we've highlighted, by the end of fiscal '21, we will have executed our transformation initiatives, and that the benefits of the initiatives will continue to roll in, throughout '21 and '22.

Shneur Gershuni -- UBS -- Analyst

All right.

Ted J. Jastrzebski -- Chief Financial Officer

And I would add Shneur that with the support function transformation, we will be making investments through '23 on that. In total, the investments will be about $40 million and about half of that will be opex.

Shneur Gershuni -- UBS -- Analyst

Yeah that's what 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 in your slides, I was just trying to -- wondering if that was kind of like a negative on that 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 have finished the transformation then, you would remove that opex essentially, correct?

Ted J. Jastrzebski -- Chief Financial Officer

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.

Shneur Gershuni -- UBS -- Analyst

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.

Ted J. Jastrzebski -- Chief Financial Officer

Correct.

Shneur Gershuni -- UBS -- Analyst

So that was super helpful. Thank you, guys. Really appreciate the color.

John L. Walsh -- President and Chief Executive Officer UGI Corporation, Vice Chair of AmeriGas Propane Inc.

Great, thanks Shneur.

Operator

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

Marc Solecitto -- Barclays -- Analyst

Hi, good morning.

John L. Walsh -- President and Chief Executive Officer UGI Corporation, Vice Chair of AmeriGas Propane Inc.

Good morning.

Marc Solecitto -- Barclays -- Analyst

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?

John L. Walsh -- President and Chief Executive Officer UGI Corporation, Vice Chair of AmeriGas Propane Inc.

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

Roger Perreault -- Executive Vice President, Global LPG President UGI International, LLC

Thanks John. Yeah, so I was mentioning, we're in a full ramp up of reaching $140 million at International and reaching the EUR30 million -- sorry, $140 million at AmeriGas and EUR30 million at International. In fiscal '21, we think it's going to be about $85 million that will be generated in the fiscal year at AmeriGas and EUR7 million at International.

Marc Solecitto -- Barclays -- Analyst

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, net, I guess, to your P&L, like how should we think about what you're factoring in, in your guidance?

Roger Perreault -- Executive Vice President, Global LPG President UGI International, LLC

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.

Marc Solecitto -- Barclays -- Analyst

Got it, OK. 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?

John L. Walsh -- President and Chief Executive Officer UGI Corporation, Vice Chair of AmeriGas Propane Inc.

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 has 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 will 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.

Robert F. Beard -- Executive Vice President, Natural Gas and Chief Executive Officer UGI Utilities Inc.

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.

Marc Solecitto -- Barclays -- Analyst

Great. Thank you.

John L. Walsh -- President and Chief Executive Officer UGI Corporation, Vice Chair of AmeriGas Propane Inc.

Thank you, Marc.

Operator

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.

John L. Walsh -- President and Chief Executive Officer UGI Corporation, Vice Chair of AmeriGas Propane Inc.

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.

Operator

[Operator Closing Remarks].

Duration: 55 minutes

Call participants:

Alanna Zahora -- Manager, Investor Relations

John L. Walsh -- President and Chief Executive Officer UGI Corporation, Vice Chair of AmeriGas Propane Inc.

Ted J. Jastrzebski -- Chief Financial Officer

Robert F. Beard -- Executive Vice President, Natural Gas and Chief Executive Officer UGI Utilities Inc.

Roger Perreault -- Executive Vice President, Global LPG President UGI International, LLC

Shneur Gershuni -- UBS -- Analyst

Marc Solecitto -- Barclays -- Analyst

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