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Good morning. My name is Krista and I will be your conference operator today. At this time, I would like to welcome to the UGI Corporation and AmeriGas Partners’ First Quarter 2018 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. [Operator Instructions] Thank you.
I will now like to turn the call over to your host, Will Ruthrauff, Director of Investor Relations. You may begin.
Thanks, Krista. Good morning, everyone, and thank you for joining us. On the call today are Hugh Gallagher, CFO of AmeriGas Propane; Kirk Oliver, CFO of UGI Corporation; Jerry Sheridan, President and CEO of AmeriGas Propane; and John Walsh, President and CEO of UGI.
Before we begin, let me remind you that our comments today will include certain forward-looking statements, which management believes to be reasonable as of today’s date only. Actual results may differ significantly, because of risks and uncertainties that are difficult to predict. Please read our earnings release and our annual report on Form 10-K for an extensive list of factors that could affect results. We assume no duty to update or revise forward-looking statements to reflect events or circumstances that are different from expectations. We’ll also describe our business using certain non-GAAP financial measures. Reconciliations of these measures to the comparable GAAP measures are available in the appendix of our presentation.
Now let me turn the call over to John.
Thanks Will. Good morning and welcome to our call. I hope that you’ve all had a chance to review our press releases reporting first quarter results for UGI and AmeriGas. We had a strong Q1, as each of our domestic businesses contributed higher adjusted net income than in fiscal 2017. Weather was slightly warmer than normal in each of our businesses but Q1 domestic weather was colder than Q1 fiscal 2017.
Our strong performance can be attributed to the return of more normal weather in the U.S., the impact of tax reform and the continuing earnings contributions from our new investments and acquisitions. I’ll comment on our key activities and market developments in Q1 then I’ll turn it over to Kirk, who will provide you with a detailed overview of UGI’s financial performance including a review of the beneficial impact of Federal Tax Legislation. Jerry will review Q1 for AmeriGas and I’ll wrap up with an update on our strategic initiatives.
I am once again pleased to report record earnings for UGI. Our Q1 GAAP EPS was $2.07, while our adjusted EPS was $1.01. That adjusted EPS exceeded the prior record adjusted Q1 EPS of $0.91 which we reported last year. Both quarters have been adjusted for the mark-to-market valuation of unsettled hedges and other items most notably the one-time impact on accrued and deferred tax liabilities resulting from tax changes, which Kirk will cover later.
The impact of tax legislation was noteworthy in the quarter as the net impact of a significant and permanent positive change in our U.S. tax rate and a smaller temporary negative change in our tax rate of France contributed $0.09 to our EPS growth. These strong results reflect the impact of near normal weather in each of our key service areas and also demonstrate the underlying strength of our businesses.
In addition to the strong earnings performance in the first quarter, I’d like to comment on the significant progress we made on a number of strategic projects and activities. Our teams as always maintain their focus on meeting our critical commitments to our customers in the communities we serve, while also ensuring that our new capital projects and acquisitions meet or exceed their performance targets. I’m happy to report that we performed well on both fronts in Q1. We achieved several critical milestones on projects that will weigh the foundation for our future growth.
The PennEast partnership received its final FERC certificate on January 19 for the much needed pipeline project. PennEast will provide critical new pipeline capacity and enhanced access to affordable Marcellus gas to residential customers in eastern Pennsylvania and across the state of New Jersey. We’re excited to start the next phase of our activities, which will involve close collaborations with the state and local agencies in Pennsylvania and New Jersey. We expect construction of PennEast to commence by the end of 2018.
Our new Manning LNG liquefaction unit in northeast Pennsylvania which came on stream in July has been working at peak capacity from day one. Demand for LNG has never been stronger driven by increased peak day demand for most gas LDCs and the significant challenges faced by capacity constrained areas in the east and northeast were NLG has become an essential element of the supply portfolio. Our Manning investment was timely, it is important for consumers and it’s paying off during the strong start to the winter heating season.
Our utility continues to make great progress with its mission to replace and force critical infrastructure across our system while also investing in growth projects to extend our networks to unserved communities. We continue to grow the customer base at our gas utility with almost 3,800 new residential heating and commercial customers added in Q1. Our infrastructure replacement program for cast iron and bare steel remains on track with over 65 miles of pipeline replaced during the calendar year 2017 and a similar target for 2018. In addition this month we filed our first rate case for UGI Electric in 22 years.
AmeriGas had a solid quarter with adjusted EBITDA up year-on-year. The colder more normal weather underscores conditions with a scale and reach of AmeriGas is critically important as we quickly redeploy our extensive network of supply assets in our distribution teams to the impacted areas to ensure continuity of supply. Jerry will comment in much more detail on AmeriGas’ Q1 performs in a few minutes.
Our international team was faced with weather in Q1 that was 7% warmer than last year, while our Q1 earnings for international were below last year our performance represents an approximately 50% increase from the average Q1 adjusted net income reported for our European business in the prior five years that preceded our record FY 2017 earnings. This significant growth over the past five years can be attributed to our successful acquisition program in Europe and the strong execution focus by our teams, which has enabled us to deliver the targeted returns for those strategic investments. Speaking of strategic acquisitions, our integration of the Finagaz business remains on schedule and we expect the integration process to conclude this fiscal year.
I’ll return later on the call to comment on our strategic initiatives. But I’d like to turn it over to Kirk at this point for the financial review. Kirk?
Thanks, John and good morning everyone. As John mentioned, UGI had a strong earnings this quarter with adjusted EPS of $1.01 and GAAP EPS of $2.07. GAAP EPS included the significant one-time benefit related to U.S. tax reform, which I’ll discuss in just a moment.
On this slide, we’ve laid out the adjustments to GAAP results. Starting with GAAP EPS of $2.07, we back out $0.03 for unrealized gains on commodity derivatives and add back $0.01 of after tax integration expenses associated with the Finagaz acquisition. The two largest adjustments were to remove one-time benefits related to reductions in French and U.S. corporate tax rates, which I’ll address in more detail on the next slide.
The tax adjustments were due to new tax legislation that both the United States and France enacted in December. The U.S. the Tax Cuts and Jobs Act reduce the federal corporate income tax rate from 35% to 21% effective January 1 of 2018. Due to our September fiscal year end UGI’s current fiscal year will be subject to a blended rate of 24.5% and after this fiscal year will be subject to the 21% rate. In connection with this legislation we are estimating a one-time P&L benefit of $166 million or $0.94 per share due to the revaluation of our accrued deferred tax liabilities.
The French legislation increased our FY 2018 tax rate in France to 39.4% from 34.4% and reduce the rate to 25.8% beginning in our fiscal year 2023. In connection with this legislation, we revalued our deferred income tax assets and liabilities in France and realize a one-time income statement benefit of $17.3 million or $0.10 per share. Both of these one-time items have been excluded from our adjusted results. In addition to the impacts from the revaluation of deferred tax assets and liabilities the respective changes to corporate rates due to these tax reform measures will lower our fiscal 2018 income tax expense.
For the current quarter the lower U.S. rate reduced income tax expense by $20.4 million or $0.12 per share, while the higher French rate decreased net income by $3.9 million or $0.03 per share. As John mentioned, on a combined basis the net contribution to earnings this quarter was $0.09. For the full fiscal year of 2018 we estimate that the net benefit to adjusted EPS due to these tax changes will be approximately $0.15 to $0.25 per share. One key factor in understanding the likely impact will be getting more information from the Pennsylvania PUC as to how it expects to treat the benefits.
Before I get to the individual business unit results, I wanted to comment on the waterfall shown on Slide 9. This slide provides a walk forward from the prior year quarter. Shows the net impact of the significant tax items and breaks out the impact by business unit. Beginning with the prior year adjusted EPS of $0.91, we have a negative impact of $0.03 related to receiving a smaller tax refund in France in this quarter versus the prior year.
Moving to the right, you can see the $0.09 tax benefit related to the U.S. and French tax legislation that I discussed on the previous slide as well as the detail by business unit. The cumulative benefit attributable to AmeriGas, Midstream & Marketing, UGI Utilities and corporate and other up $0.12 as shown on the prior slide is offset by the $0.03 negative impact of the French tax legislation. Net of both of these tax items the core business operations of UGI drove a $0.04 increase over the prior year as shown in the second last column on the slide.
I’ll now run through the Q1 results for each of the businesses. Turning first to AmeriGas, volume was flat to last year as weather that was relatively normal but colder than last year was heavily weighted to the last week of the quarter, which pushed volume into the second quarter. Adjusted EBITDA was $194 million, which is higher than the prior year. The prior year results include a one-time non-cash charge for the correction of a previously recorded gain on asset sales that reduced the EBITDA by $8.8 million. Jerry will review AmeriGas in more detail in a few minutes.
UGI International contributed $84.5 million in adjusted income before taxes a $7.8 million decrease over last year as higher margin driven by the DVEP and UniverGas acquisitions was offset by weather that was 7% warmer than the prior year. As you can see the adjusted income before tax excludes costs associated with the integration of Finagaz. This quarter adjustment of approximately $2 million is significantly lower than the prior year as we’re nearing the completion of integrating the two businesses.
Turning now to the natural gas businesses. Midstream & Marketing posted income before taxes of $52.6 million about 7% higher than the prior year. Total margin is up approximately $11 million or 14% primarily reflecting higher natural gas gathering margin from our new Sunbury pipeline and peaking margin reflecting growth in that business and the benefit of weather that was 6% colder than the prior year.
Operating expenses increased reflecting higher employee related expenses and greater natural gas gathering and peaking activity, while depreciation was higher due to the expansion of our pipeline and peaking assets. The utilities is reporting income before taxes of $85.4 million about 18% higher than the prior year on weather that was 6% colder than last year.
Total margin increased $19.4 million primarily reflecting higher core market margin in addition to increased large firm delivery service margin. In addition to the weather core market margin benefited from higher base rates at our PNG utility which took effect on October 20, 2017 and higher large firm delivery margin. Operating expenses and appreciation increased about $5.5 million on a combined basis largely due to higher increased capital expenditures as well as higher distribution expenses.
That concludes my comments on the quarter and I’ll now turn the call over to Jerry for his update on AmeriGas.
Okay. Thank you, Kirk and good morning everyone. For AmeriGas adjusted EBITDA for the first quarter of fiscal 2018 was $194 million compared to $185 million in the first quarter of last year. Weather in Q1 was 10% colder than last year however this was not a full first quarter trend with extremely cold weather being very late in December, particularly in the east and southern regions of our nationwide footprint.
The first three weeks of December were actually 14% warmer than last year but the final week of December was 60% colder than last year with record temperatures in many areas. Excluding the last week of December weather for the quarter was 4% colder than last year. Retail volume for Q1 was essentially flat with last year 305 million gallons due to fairly uneven weather throughout the quarter. Customer call received by AmeriGas were essentially flat through the second half of December until December 29 and we saw a 40% spike in call volume compared to early December call volume.
I’m providing all those details because one would expect the colder temperatures in December to have significantly affected volume. But the timing of the weather was really to the benefit of January given the lag between customers placing orders and the actual deliveries.
Much of the country east of the Rocky Mountain has continued cold weather in January and we’re seeing volumes that are substantially higher than last year. The western part of the country has remained warm.
Average propane cost amount at Mont Belvieu increased 64% when compared to the first quarter of last year. However, it’s good to see propane costs remain stable throughout this period of extremely cold bouncing around the $0.90 to $0.99 range at Mont Belvieu. Currently propane is about $0.86.
Despite the higher propane costs overall margins were up slightly from last year, operating expenses were also up slightly from last year. Our service levels have been strong, so challenged in some geographies with rail car delays. However, our fleet of 250 transport trucks is allowing us to outperform many competitors in terms of service and customers and getting propane where it needs to be.
This graph shows you the AmeriGas transport fleet. Each green dot is a transport truck versus the northeast and second is the southeast. We’ve moved significant transport assets eastward to keep service levels high, while the west experiences more mild weather. We also have activated our AmeriGas Airborne driver fleet where we share drivers among our 650 locations. And as a result, we’ve added 70 additional drivers responding to neighboring geographies that need assistance.
Now turning to our growth drivers. Our AmeriGas cylinder exchange programs experiencing solid demand with volume up 8.9%, our national accounts program also experienced a solid quarter and added new business. Volume was up 6.5% quarter-over-quarter. We have made no acquisitions so far this year and we’re pleased to see the sustained cold weather pattern, which will significantly bolster January, February and the rest of Q2 results.
Finally, I’m personally thankful to our 8,500 AmeriGas colleagues who are working very hard in very difficult conditions to serve our customers keeping houses warm and business is running.
Now I’ll turn the call back over to John.
Thanks Jerry. As I mentioned in my earlier remarks we were pleased with our achievement of record earnings in Q1. In addition to our earnings performance the first quarter was noteworthy in several other respects. The cold weather experienced in the eastern half of the U.S. in very late December and early January resulted in record natural gas demand. The American Gas Association reported that a single day consumption record for natural gas of 147 billion cubic-feet was achieved on January 1, 2018. This was over 6% above the prior record single day consumption level set in January 2014.
UGI Utilities also experienced record send outs on January 4, 5 and 6. Send outs on these days were 7% to 14% above the record send outs achieved during the polar vortex of 2014. This unprecedented demand was recorded in spite of weather that was slightly warmer than the coldest days of the vortex. As a result of this peak demand pipeline capacity in the Mid-Atlantic and Northeast was strained.
While we were extremely pleased to see the strong natural gas demand in those peak periods the market impact of that demand was significant with spot gas and power prices rising dramatically. As an example delivered natural gas prices in New Jersey were over 30 times higher than supplies in the Pennsylvania production areas. During the 10 day period of extremely cold weather in later December and early January, the total cost differential between gas delivered in New Jersey and gas that PennEast could have accessed in the Marcellus totaled more than $300 million.
This volatility highlights the need for continued investments in natural gas infrastructure to support that continues growth and demand from the residential, commercial, industrial and power generation sectors. As the record peak days of early January demonstrate there is no slowing of demand growth for natural gas. For that reason we were pleased to receive the FERC certificate for PennEast, which will deliver incremental new pipeline capacity to areas that badly need that capacity.
We are also committed to seeking opportunities to expand our existing midstream system in the Marcellus. Our network of pipeline storage in LNG assets and our geographic location on the eastern ends of the Marcellus positions us to play a major long-term role in addressing this critical infrastructure need in the Mid-Atlantic and Northeast.
As I noted earlier, the timing of the recent extreme cold weather span from late December through early January, so our teams are often running in Q2. Our new assets including Manning LNG and the Texas Creek gathering systems which were acquired late in fiscal 2017 are performing very well and enabling us to take advantage of opportunities that arise during periods of volatility.
Our LNG capacity has been critical to our Midstream & Marketing portfolio and will be strengthening that network this quarter with the addition of the Steelton, Pennsylvania LNG storage in vaporization unit. This investment at Steelton increases our local peaking capacity and enhances the overall flexibility of our LNG network. We’ve been heavily utilizing that network over the past few weeks as demand has peaked in the northeast and we believe we’re well position to continue to benefit from our unique position in the months ahead.
The outlook for continued investment and growth remain strong for our Utilities business. We’re deploying record levels of capital to support our growth and infrastructure replacement programs. As I’ve noted on our prior calls, we expect our total capital spend at Utilities to exceed $1.2 billion over the next four years, a substantial increase over the preceding four years. Our goal is to ensure continued access to low cost natural gas for our core customers and provide access in previously unserved areas of the common world.
AmeriGas enters Q2 with a momentum from the strong demand generated by the turn to colder weather at the very end of Q1. Jerry and the team have done a great job of utilizing enhanced distribution, logistics and customer service tools to improve our customer service performance while reducing our cost to serve.
Looking at our most recent acquisitions in Europe, we’re very pleased with the performance of DVEP, the power and natural gas marketing unit in the Netherlands and UniverGas our initial investment in the Italian LPG market. We’re pleased with the strength of the businesses we acquired and the high-quality teams that have joined UGI International.
Our LPG businesses are crucial contributors to the strategic investment of UGI. They provide earnings growth and significant free cash flow for the company. In short, they help to fuel the growth engine that is powering UGI’s performance to record levels.
As Kirk highlighted in his remarks, the recent tax legislation will have a significant positive impact for UGI. We’ve provided you with an estimate of that impact in fiscal 2018 and we’re excited about the long-term positive impact of these changes. The changes in tax law benefit companies who consistently invest in growth opportunities and also reward companies that have been prudent in managing their balance sheet. UGI fits both of these descriptions and will benefit in a meaningful way from these changes.
We remain excited about the opportunities that lie ahead for the company. As I’ve noted several times in recent years, we’re benefiting greatly from the diversity of growth opportunities that our teams are pursuing and our path forward has never been clearer.
With that, I’ll turn the call back over to Krista, who’ll open it up for your questions.
[Operator Instructions] Your first question comes from the line of Merrick Buck from Citigroup. Please go ahead, your line is open.
HI, good morning everyone.
Good morning.
Regarding the new tax environment, do foresee any potential rate cases impacting your business in the future? Or do you have moratoriums in place from your recent rate cases and rate filings that protect you from anything like that?
We don’t have any moratoriums in place, and we have a cadence based on returns in the businesses for filing a rate cases. So as of right now, there’s no changes to that cadence, and really, we await guidance and feedback from the Pennsylvania PUC in terms of their perspective on the impact of the tax legislation.
Okay. And now shifting to PennEast. Has that in service date moved and all and now that you are working with – focusing with states and local agencies to move forward. What do you expect to spend on PennEast this year?
We are moving forward into that phase. The construction is expected to start by the end of the year. I don’t have at the top of my head, the number that we’ll spend in calendar 2018 on the project. We have to look at that and answer that question. Obviously, the significant spend will ramp in 2019, when we actually really get into the most significant stages of construction.
Okay. And the in-service date remains the same right now?
Yes. End of calendar 2019.
Okay. And just lastly on the AmeriGas Propane volumes remaining relatively flat despite colder weather. Can you give some more color around how customer tank levels were entering the season such as that they have higher tank levels entering, allowing them to push off refills into 2Q did that play part at all?
Yes. Very good question and certainly, yes. We look to that pretty carefully in fact the last two warm winters that have had us in two years consecutively, coming into the fiscal year with customer tank levels that were in fact higher. So your order pool is a little smaller. But as I mentioned, the cold weather really came in vengeance at the end of December and has led to some really good volume in January. The delay between customers ordering in the delivery cycle but just an example through last Friday the weather in January was about 13% colder than the prior year and our volumes will be approximately 20% higher than last year. So we’re almost kind of over earning in January but it’s the December hangover.
Okay, great. Okay. Thanks. That’s all from me.
Thank you.
Your next question comes from the line of Ben Brownlow from Raymond James. Please go ahead, your line is open.
Good morning. Can you talk about the historical monthly volume contribution to the March quarter?
Sorry, what’s the…
You mentioned volumes up 20%, basically, kind of through January year-over-year. Can you just talk about historically, where you see the monthly contribution and obviously, that varies very dramatically with weather. But just trying to get an idea of the monthly contribution or volume perspective.
I think roughly – this is rough numbers, I think January has about 40% of the degree days in the quarter. Say, January, February somewhat similar level in February and it tails off. So roughly 40% of the degree days, which is a good placeholder for volume impact is January.
February looks good, March is question mark. So we have to see how the whole quarter plays out.
Good. And on market share on Slide 5 Jerry, it appears you successfully reallocated assets in labor to geographically match demand. I understand one of your competitors reportedly had difficulty making timely deliveries. Can you just talk about how you think to market share shifted is that all in the quarter?
Yes, hard for us to judge that or speak to that. I think a lot of the industry struggled were blessed with all the assets that we do have that we’re able to move things around. We’re in a business where we’re competing against – kind of mom and pop independence, they just don’t have that kind of flexibility. So it’s times like this and John mentioned in his remarks that, our supply chain and control over really helps us in cold winters like this.
Great. And just one last one from me on the unit margin for propane. Can you talk about what you are seeing on the competitive landscape in terms of pricing and is there any sort of pricing or inventory dynamic in play that we shouldn’t anticipate that historical seasonal improvement sequentially in unit margin.
Yes. We’re really pleased with our pockets as I mentioned some rail car delays. But generally it – across the country we’re not seeing extreme shortages, it’s just have recurring in pockets. And the really good news is that propane cost has been pretty stable. So we’ve seen it bouncing around the $0.90 now it’s drop down into the $0.80. This is so different then the polar vortex where we saw the huge spikes and that created all kinds of pricing issues where customers don’t understand what’s going on with their bills when propane spikes happen, but since we’ve been pretty stable, I don’t think there is customer surprised with the pricing.
Okay. That’s it from me. Thank you.
Thank you.
Your next question comes from the line of Chris Sighinolfi from Jefferies. Please go ahead, your line is open.
Good morning, guys.
Hey, good morning.
Good morning, Chris.
John, really appreciate the way you guys laid this out in terms of the tax impacts, both non-recurring and recurring. We’ve got a bunch of companies who do that, and this was clearer than most. I do have two questions related to it though. First is sort following up on the first question about what assumption did you make, I guess, in the 2018 net impact with regard to any of the potential give back on the regulated assets? Are you assuming that, you don’t capture the delta there? Are you assuming that rate case action effectively bleeds that out or something other than that?
Well, the range that we provided sort of an indicator of uncertainty, and then also waiting sort of guidance and input from the PUC drove the fact that this is a range that we gave in terms of the impact as opposed to a specific number or a much tighter range. So we’re – we and the other Utilities in Pennsylvania will be speaking with the PUC, and discussing, how this impacts and getting their perspective and will go from there. But if you look at that range, you can sort of see what the impact will be depending on the action that PUC takes.
Okay. So the range itself is primarily driven by the delta and it now comes with the regulated Utilities?
That’s the most significant impact so far.
Yes. The first quarter, assumes the benefit at the utility. So we’re – we haven’t assumed any kind of refund or anything yet for the first quarter.
That’s helpful, Kirk. And then, I guess, with regard to your long-dated guidance with regard to dividend policies has been one around payout ratio, and I’ve looked and paid attention on this overtime. For you and for others, there’s been this delta between the cash tax rate you’re paying or have paid over, let’s say, the last five years versus what we’ve seen reported on the income statements. So I’m just wondering, how the change in tax policy both in United States and in France sort of affect the earnings line but also cash tax obligations? And then, I guess, the real question is just what that means in terms of how we should interpret a step up in EPS based on tax change versus maybe it how interfaces with the dividend policies?
Sure. So the timing of this is good. It’s in the spring of each year that we review policy – dividend policy with the board and look forward. So the tax team, as you can imagine, has been working very diligently over the past weeks here. And looking at both the earnings impact and the cash impact, and we’re still working on the cash impact. But over time, over the mid-term, certainly, this becomes cash positive. There’s some puts and takes in the shorter-term.
But that will all factor in. It’s a positive development it will all factor in to the discussions we’ll having in the spring with our board on dividend policy. As you know, overtime – as our position changes, we update and revise our dividend policy based on the changes conditions in the businesses. So we’ve got a lot of work still to do, particularly on the cash impact of this and then, we’ll be reviewing that with our board in the spring, and we’ll come out with our policy any updates shortly thereafter.
Okay. Understood. I have two other questions if I could. One just relates –you mentioned in the release, the recent rate case filing on the electric side? Obviously, we understand that you’ve had some changes on the gas side, as it pertains to some of the investments you’ve been doing on the infrastructure integrity and then just with customer growth. But can you talk at all, John, about maybe what drove you into the rate action on the electric. I know that business is quite small, but any flame up that will be helpful?
Well, it’s – I think, Chris, it’s just continued investment overtime, certainly, nowhere near the level of investments that we’re making in our gas business, because the Electric, Utilities is about 10% of the Utilities business really good customer accounts and things. But we’ve been doing the same thing in the electric division, investing in infrastructure overtime, it’s a great electric utility. If look at its operating performances – if you look at the metrics that are used in terms of service reliability, it’s an exceptionally strong operational performance and a lot of that’s been enabled by continued investment to reinforce our system.
And we’ve just had a point now after 22 years where we re-qualified or file a rate case to make sure we’re earning – properly earning on that capital that’s been invested over the last couple of decades. And also, filing the rate case now enables us to qualify for disk in the electric – to the electric utility, which is the last of our regulated units that isn’t utilizing the disk.
Okay. John, is there a timeline you guys – you expect the decision in regard that rate case is there anything sort of legislatively prescripted with PUC?
Yes. We typically file our rate cases right around this time every year, and the PUC will take action and obviously, they drive the timeline. In many cases, they’ll sort of suspend the rate case sort of speak for a period to allow the parties and the interveners to discuss and openly reach a settlement and typically, we’re looking towards the end of the fiscal year for that process to be completed and new rates to go into effect at the end or more commonly at the beginning of the new fiscal year. But again, the timing is entirely driven by the PUC, but that’s been our experience.
Okay. And one question for Jerry if I could. Jerry, I appreciate the comments on sort of the cadence of volumes tracking weather demand. You had mentioned briefly some rail car delay issues and sort of talking about the difference between this weather – this winter’s weather dynamics versus the polar vortex. But I guess, if I look at some of the EI days in terms of breaking the inventories regionally, there are some areas that look quite tight, and so I am just wondering if you are seeing anything that causes any concern across your business. Obviously, you guys have capacities at some of your peers don’t so. We saw you exercise some flexibility. Last time, no shortages, and I’m just wondering if there’s anything out there that we should be paying attention too?
Well, it’s a strange dynamic this year, because the west has been very warm, so you got a whole chunk of the country that isn’t consuming propane. So we’re moving it around. I can’t tell you that it’s easy. We’re scrambling and we’re keeping up with it. But when I mention pockets, it keeps moving around. So we’ve had problems in the Northeast. Now that settled down. Now we’re having problems in the Southeast. So we have to just keep pivoting and moving assets around, and it times costly to do so, because you’re incurring all the transportation. But job one is to make sure our customers are in propane and so far so good.
Okay. Great. Thanks a lot for your time guys. I know, I have asked so much questions. So I appreciate it.
Thanks, Chris.
Your next question comes from the line of [indiscernible]. Please go ahead, your line is open.
Hi, good morning, guys.
Good morning.
I had a question here related to the tax policies. So in 2018, you said, you are assuming for the U.S. tax 24.5% and then it drops to 21% in 2019. Is there another tax benefit step up that we should be thinking about fiscal 2019 in your earnings base?
No, I would think about the range we provided for 2019. There’s a lot of puts and takes as we go forward, so we’re not expecting any kind of big step up in 2019.
Right. Okay. And then in 2023, when the French tax goes from 39.8% to 25% or I’ll just get back number that you used. Is that a $0.09 step up in earnings on the base case because it reverts backdown from 39.8% to 25%.
We haven’t even attempted to try to quantify that yet in 2023.
I want to know your 2023 number, Kirk. Okay. And then 2014 you guys did a special kind of bigger step up in dividend and going back to I think what Chris was asking. Should we be thinking that you’re – when you’re looking at the dividend you might rebase the dividend at a higher level, other guys in the industry have been doing that. I was curious if you guys are, is that something that you might be bring to the board? If I remember correctly in 2014, you had that, higher than normal step up in divided to create a new floor.
Well, we would through the same processes each year, Steven, where we take the board kind of where we’re sitting today? What our payout ratios are? And what that projected to be? So that process will ramp up here over the next couple of months, leading up to the spring board meeting. So positive developments are a good thing, and it will be reflected in that discussion. I think the 2014 was unique in some aspects I wouldn’t just take what we did in 2014 and moving forward. Each year is a new process, but it’s great to have positive developments like this. This is a development that is positive from an earnings standpoint immediately, and clearly going to be a positive from a cash standpoint, if we look out a few years. So that will be part of that discussion and the board will weigh in. So I don’t want to jump ahead but we have some positive developments that we’ll be discussing with the board.
Okay. And then one final question. I was a little unclear. Most of the utilities that are talking about how this – the tax might impacts them. They might need a little bit more near-term cash because to fill in the refund most to us or giving back. But it’s actually not a negative for you guys in way for earnings that actually as you refund the cash, you actually increase your rate base dramatically because you have all that cash and free cash to invest in it. It should be actually raising your base case organic growth of the utility faster than what you have originally planned. Is that not the way I should be thinking about it.
Well, it will act to increase rate base over time, but the Pennsylvania PUC hasn’t come back and said that they want people to refund. It may just be something that comes in over time. So as you do rate cases going forward, you request a lower revenue requirement than you otherwise would related to taxes but on a higher rate base than you might otherwise have had. But the Pennsylvania PUC has not they’re looking at it and we haven’t really got any clarity yet on how their plant to treat it.
Yes. And your conclusion Steven about the company overall is correct. This is not in anyway materially negative development from a cash standpoint. The first couple of years of puts and takes but it’s not material either positive or negative and then it becomes materially positive and that reflects kind of the diversity of the company, and there’s a lot of significant positive developments. For example, as I mentioned in my remarks, the fact that we are executing a range of capital projects in the Midstream business, several of those projects will benefit that are in the construction phase, will benefit from the new tax legislation. We’re looking at enhanced project returns from projects that are recently completed or underway. So that’s a great thing as well.
So you are saying that you are not reflecting the 100% depreciation effect in new assets is that what you are – is that not in the numbers from a cash standpoint.
No. It is, but I’m talking about assets that aren’t even deployed yet. So if I’m looking at a new capital projects that has an IRR of X, it’s now X plus to be X plus – based on that – just as a generic example.
Okay. Thank you very much guys.
Thank you.
And we have no further questions in the queue at this time. Mr. Walsh, I’ll turn the call back over to you for closing remarks.
Okay. Thank you very much. Appreciate all of your time this morning. And we look forward to keeping you updated. And we’ll talk to you soon on our next call. Thank you.
This does conclude today’s conference call. Thank you for your participation and you may now disconnect.