Ladies and gentlemen, thank you for standing by, and welcome to the UGI Corporation Third Quarter FY 'twenty Earnings Call and Webcast. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Investor Relations Manager, Alana Zahora. Thank you.
Please go ahead.
Thank you. 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 Perrault, 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 ks 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.
Thanks, Elana. Good morning, and welcome to our call. I hope that you've all had the opportunity to review our press release reporting our 3rd quarter results. We're very pleased with our strong Q3 performance and increased our full year guidance to a range of $2.45 to $2.55 This was a particularly significant quarter for us as we addressed the challenges of COVID-nineteen, stepped forward with our efforts to help address systemic racism and maintained our focus on safe and secure operations. While much work remains, we were encouraged with our progress in each of these critical areas in Q3.
Turning to our financial performance, we delivered strong results as a combination of colder than normal weather, rigorous expense and margin management and the positive contributions of our LPG restructuring programs underpinned strong earnings, cash flow and liquidity. Our teams demonstrated their focus and resiliency as we address these major challenges in a quarter that was unlike any quarter in our 138 year history. Our results in Q3 very clearly demonstrate the strength and resiliency of our businesses. Each of our 3 domestic businesses delivered increased operating income versus Q3 fiscal 2019. UGI International performed well despite the challenges of another very warm quarter.
In addition to strong earnings performance, our teams did an outstanding job delivering free cash flow while closely managing CapEx and working capital. On today's call, I'll comment on key activities and market developments in the quarter and then turn it over to Ted, who will provide you with an overview of UGI's financial performance. Bob Beard will provide an update on key activities across our natural gas business, and Roger will follow with details of progress in our LPG business. I'll wrap up with comments on our ESG program and our outlook. Our Q3 GAAP EPS was $0.41 and our adjusted EPS was 0 point 0 $8 That adjusted Q3 EPS was $0.05 below our fiscal 2019 Q3 adjusted EPS due to our 100 percent ownership of AmeriGas during this off season quarter and the impact of the pandemic.
The underlying performance of our business was extremely strong as we benefited from cooler weather in the Eastern U. S, the continued strength of UGI Appalachia Midstream and continued growth in our cylinder exchange program in AmeriGas. One indicator of the strength of our Q3 performance is our EBIT of $80,400,000 which was well above our Q3 fiscal 2019 EBIT of $52,600,000 Our year to date performance is equally strong. Our year to date GAAP EPS is $2.50 and our year to date adjusted EPS is $2.81 That adjusted EPS is 18% above fiscal 2019 year to date adjusted EPS of $2.38 These quarters have been adjusted for the mark to mark valuation of unsettled hedges and other items Ted will cover later. That performance comes in a year when weather across all of our businesses has been warmer than normal and warmer than prior year.
We're really pleased with the commitment and resilience demonstrated by our teams as we focus on meeting the critical needs of our customers and communities, while also delivering very strong performance. Based on the very strong Q3 results and benefits from foreign tax treatment, we now expect our full year EPS, inclusive of the COVID impact, to be in the range of $2.45 to $2.55 Ted will provide more detail on the significant increase in our guidance in his comments. As I noted earlier, one of the drivers for our Q3 performance was the continued strong contribution from UGI Appalachia. We continue to see volume growth in Appalachia year to date versus last year and have benefited from the operational effectiveness of the UGI Appalachia team. Most of the improvement in operating income from midstream marketing in Q3 can be attributed to UGI Appalachia.
We're very pleased to have these systems as a core element of our midstream business. AmeriGas delivered a solid year on year increase in EBIT despite the impact of the pandemic. This strong performance was due to colder weather early in the quarter, focused expense management and growth in cylinder exchange from our investment in vending and our new home delivery service. In addition, while the pandemic reduced commercial and motor fuel volumes, we received an additional uplift in our cylinder business as customers spent more time cooking at home. Our utilities team had a very busy quarter as well.
Our field teams did an outstanding job as we stopped all non essential customer facing activities for about 2 months and then restarted much of that activity late in the quarter. We're executing our field work with new protocols that prioritize the safety of our employees, our customers and the public. We also move forward with a settlement agreement for our rate case. That agreement with proposed rate increases of $20,000,000 is under review, first by the presiding administrative law judge and then by the PUC, and we expect a decision by early fall. In addition to the rate increase, the settlement includes a recovery mechanism for certain pandemic related costs, including any increased uncollectible expenses.
Bob will speak to the rate case in more detail in a few minutes. There was limited activity in the quarter related to our PennEast project. We continue to work closely with our partners to gain the necessary approval to move forward. We expect to gain additional clarity in the early fall when the Supreme Court decides if they're going to hear our case. We're encouraged by the firming of natural gas commodity values and believe that our existing network of midstream assets is ideally positioned to benefit from the improving commodity market.
We're nearing completion of the Bethlehem LNG storage and vaporization system. This is an important expansion of our LNG network as we see LNG peaking demand increasing as pipeline expansion and greenfield projects are canceled or delayed. We also continue to transport LNG to other regions in the Mid Atlantic and the Northeast as peak customer demand exceeds existing pipeline supply but 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 quarter. But before we get into quarterly results, I wanted to discuss our updated guidance of $2.45 to $2.55 per share. This is an increase from our previously stated range due to very strong April results with EBIT coming in roughly 55% higher than our original projections. The cold weather provided a tailwind in the quarter, but we also benefited from disciplined expense management, transformation investments in LPG and incremental margin from UGI Appalachia.
On our Q2 call, we projected COVID to create a $0.20 to $0.30 impact to our results and we still expect to be in that range for the full year. COVID created an earnings headwind of roughly $0.15 in the 3rd quarter, and we anticipate an additional $0.10 headwind in our 4th quarter, which is already included in our updated guidance range. While COVID reduced demand for our commercial customers across all four businesses, it was partially mitigated by outsized domestic cylinder sales and ACE results in the quarter. Furthermore, we expect that the recent TCJA reform to the global intangible low taxed income provisions known as GILTI combined with the CARES Act and the particular fact pattern of our international operations, result in approximately $0.10 of incremental benefit for 2020. Weather and COVID are amplifying our tax benefits this year and it is not clear that they will repeat to the same level next year.
We are assessing the potential impact on future years and will provide an update when we discuss fiscal year 2021 guidance next quarter. And while we're on forward looking items, we want to share that for the next fiscal year, we will begin defining normal weather as a 10 year average of heating degree day history instead of the 15 year average we've been using in recent years. We believe this shift represents a better forward projection based on more recent weather trends. And while we must remain responsive in any 1 year to warmer than normal weather conditions, we believe this change will align with our strategic and long term approach to cost management, business development and capital allocation that lessens the influence of weather volatility. This change will result in a decrease of EBIT of $13,000,000 or $0.04 in EPS next year.
We'll not make any adjustments to our long term financial guidance for EPS and dividend growth. Liquidity. UGI continues to maintain a strong balance sheet and generate significant cash flow, serving us well with the continued uncertainty of the COVID-nineteen situation. Our cash flows remain strong with year to date cash provided by operating activities and free cash flows both growing 4% and 19%, respectively, versus the same period a year ago. On a consolidated basis, UGI Corporation had 1 point $6,000,000,000 in available liquidity as of June 30, up from the $1,200,000,000 position at the close of Q2 distributed across all four of our businesses.
We closed the quarter with ample room against our debt covenants. Lastly, on July 21st, our Board of Directors declared a quarterly dividend of $0.33 per share. We delivered adjusted EPS of $0.08 versus $0.13 in the prior year period. Please note that the EPS figures for fiscal 2020 reflect an incremental 34,600,000 shares issued in conjunction with the AmeriGas merger. Our reportable segment's EBIT was $80,000,000 compared to $53,000,000 last year.
This table lays out our GAAP and adjusted earnings per share for fiscal 2020 compared to fiscal 2019. As you can see, our adjusted earnings excluded a number of items such as the impact of mark to market changes in commodity hedging instruments, a gain of $0.55 this year versus a loss of $0.14 in the Q3 of fiscal 2019. This year, we had a $0.02 loss on foreign currency derivative instruments and no impact last year. You can see we adjusted out $0.02 of expenses associated with our LPG business transformation initiatives, bringing our year to date total to 0 point $0.18 impairment of assets held for sale. This is related to the sale of our ownership interest in the Conemaugh Generation Station in Western Pennsylvania.
The sale of this non core asset generates a tremendous ESG benefit for UGI, as Bob will describe. Our domestic results benefited from cold weather, particularly in April, which has more heating degree days than May June combined. In spite of COVID, the business delivered strong results in May June as well due to the previously mentioned expense management. Our 2 LPG businesses face very different operating conditions in the quarter as AmeriGas benefited from weather that was 15% colder than last year, while our international business faced another warm quarter, roughly 21% warmer than the prior period. The natural gas businesses benefited from cold weather and incremental earnings from the acquisition of UGI Appalachia.
More specifically on the AmeriGas business. The team delivered a strong quarter despite COVID headwinds, which impacted gallons sold, mostly commercial customers. Areas where we experienced sharp volume declines include non essential service customers such as restaurants and other hospitality customers as well as auto gas customers which dropped quickly as many school years ended in mid March. Total margin increased $5,000,000 predominantly driven by higher average retail unit margins and very strong cylinder sales, significantly mitigating the adverse COVID impact on commercial volumes. As you can see, AmeriGas OpEx declined 10% versus the prior year.
The team continues to do a nice job managing expenses and we're beginning to see the progress of the LPG transformation initiatives. We remain on track to deliver $30,000,000 of P and L savings for fiscal 2020 and are well positioned to hit our target of 100 and $20,000,000 by the end of fiscal expense in the quarter of roughly $10,000,000 UGI International achieved EBIT of $20,000,000 compared to $29,000,000 in fiscal 2019. The decrease is largely attributable to warm weather in the COVID impacted Commercial and Industrial segments. Margin management effectively offset some of the volume headwinds in the quarter. Like AmeriGas, UGI International team continues to deliver OpEx savings while making progress on the transformation initiatives.
We expect to realize the full €5,000,000 in P and L savings in fiscal 2020 and are on track to deliver the full €30,000,000 in cost savings by the end of fiscal 2022. Turning to the natural gas side of the house, Midstream and Marketing reported EBIT of $20,000,000 in the quarter compared to $4,000,000 in Q3 last year. UGI Appalachia was the main driver of the year over year improvement. Total margin, operating and administrative expenses, depreciation and amortization and other income all reflect the impact of the acquisition. COVID impacted our commodity marketing business in the quarter, primarily our commercial customers.
The pandemic related volume headwind contributed to a $2,000,000 decrease in commodity marketing margin compared to the prior year. UGI Utilities reported EBIT of $21,000,000 in the quarter, which is roughly flat compared to the Q3 of 2019. Total margin increased by $8,000,000 which was largely driven by the volume impact of cold weather and the increase in base rates, which became effective October 11, 2019. OpEx was higher in the quarter due mostly to increases in uncollectible accounts expense related to the effects of COVID, IT maintenance and consulting and employee compensation and benefits related expenses. In a moment, Bob will share details on our expected rate case settlement, which includes the ability to create a regulatory asset for future recovery of COVID related expenses, including related uncollectible accounts.
We did want to share, however, that the PUC's order prohibiting the termination of service impacted our allowance for doubtful accounts, whereby we had to record both our 3rd and 4th quarter expenses in this quarter. Lastly, our depreciation expense increased versus the prior year quarter due to continued distribution system and IT capital expenditure activity. With that, I'll turn the call over to Bob. Bob?
Thanks, Ted. Q3 was a solid quarter for both Energy Services and Utilities with both companies performing very well despite the challenges of the COVID virus. Combined FY 2020 3rd quarter EBIT for UGI's natural gas businesses was 59% higher than Q3 of FY 2019. Drivers of this significant increase in EBIT for Energy Services included continued strong performance at UGI Appalachia and weather that was 21% colder than normal. Utilities experienced weather that was more than 12% colder than normal, which coupled with strong customer usage effectively negated the effects of COVID.
Both natural gas companies did very well controlling discretionary expenses, which also contributed to a strong Q3. Core activities remain on track as we focus on growth opportunities at both natural gas businesses. At Utilities, we continue to execute a large capital program that will see us invest nearly $2,000,000,000 over the next 5 years. A large portion of our capital program is dedicated to replacing aged infrastructure, which helps reduce CO2 equivalent emissions. Since 2,009, 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.
At Energy Services, construction continues on our Bethlehem LNG facility, which once complete will provide an additional 75,000 dekatherms a day of capacity, a 25% expansion of our LNG vaporization capability. We expect this $60,000,000 project to be completed this fall on time and within budget. As I mentioned on a prior earnings call, Energy Services commenced service on our Auburn 4 project in the Q1 of this fiscal year. This project has proven successful with fiscal year to date throughput through June on the Auburn system increasing by nearly 52 Bcf or 91% over the same period last year. This project is a good example of how the energy services team is delivering growth even during times of depressed natural gas pricing.
There were several recent notable events that I would like to cover. 1st, on July 8, UGI Energy Services completed the acquisition of GHI Energy, a renewable natural gas company operating in California. GHI provides compressed natural gas to transportation customers and by doing so qualifies for California's low carbon fuel standard credits and federal renewable identification number credits. Considering the continued focus on emissions reduction, we believe there is meaningful upside to this opportunity. This acquisition is important to UGI as it represents a growth opportunity in the renewable space that will benefit from our deep commodity marketing and customer service experience.
While the acquisition is very recent, we are encouraged by what we have learned thus far and look forward to focusing on the gross opportunities presented by this business. We recently announced the sale of UGI's approximately 6% interest in the Conemaugh Electric Generating Facility to Montour LLC. Conemaugh is a 1700 megawatt coal fired generating facility located near Johnstown, Pennsylvania. 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 growing our Midstream and Utilities businesses as we intensify our ESG efforts. Finally, on August 3, UGI Utilities submitted to the Pennsylvania Public Utility Commission a joint petition for settlement in the rate case filed in January of this year.
Terms of the settlement include an increase in base rates of $20,000,000 which includes an increase of $10,000,000 effective January 2021 and another increase of $10,000,000 in July of 2021. An important provision of this settlement agreement that I would like to highlight is how bad debt would be addressed. 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 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 and L risk due to the effects of COVID.
Another important provision of this settlement allows us to implement a distribution system improvement charge based on a substantially lower net plant and service target than would normally apply. Based on our planned pace of construction over the next few years, this will allow us to realize an additional source of revenue beginning in mid FY 2021 that will continue to grow incrementally up to a cap of 5% of distribution margin by the end of FY 2022. The settlement also includes several provisions to benefit our low income and payment troubled customers. Considering the current environment and being sensitive to the needs of our customers, we believe this settlement is fair. The settlement remains subject to PAPUC approval, which we anticipate receiving in late summer or early fall of this year.
Now, I will turn it over to Roger.
Thanks, Bob. The global LPG business experienced a very solid Q3 with EBIT over prior year of roughly $12,000,000 or up 42%. This performance is with a backdrop of very warm weather in Europe and lower commercial and industrial volumes driven by the COVID pandemic in both Europe and the United States, partially offset by cooler weather in the U. S. And stronger cylinder volumes.
Our teams did an excellent job at controlling the controllable. The benefits of our transformation efforts both at UGI International and at AmeriGas are becoming evident. We continue to effectively manage expenses during the quarter, while the economies began to open and our leadership began managing the return to the workplace in Europe. In the U. S, the shutdowns were not as stringent as in Europe, but we did see significant year over year volume declines in Commercial Accounts and Industrial segments, partially offset by our cylinder exchange program, an increase in our customers utilizing our home cylinder delivery service branded as Cynch, the cooler weather and the contribution from expense management and the transformation projects underway.
I'd like to take a moment to discuss our cylinder results in the quarter. As John mentioned, our cylinder exchange program at AmeriGas had a very strong quarter with volumes up 30% compared to the prior year. The COVID pandemic has shined a light on some of our recent enhancements such as our vending machines and our home delivery service, Cynch, as consumers are changing their preferences. Cinch now has over 57,000 customers and roughly 2 thirds of them were new customers in our Q3. Cinch is currently offered in 10 cities and we plan to roll out the home delivery service in 30 more cities over the next 2 to 3 years.
Cinch is still new and small in terms of total volume, but it is another example of an innovative customer centric enhancement from the AmeriGas business. As a reminder, the previously announced transformation program at AmeriGas included an investment of $175,000,000 that we expect will provide permanent benefits to exceed $120,000,000 by the end of fiscal year 2022. We are pleased to say that we continue to be on track and we will deliver over $30,000,000 in fiscal year 2020. As we look forward, we remain on course to deliver the $120,000,000 by the end of fiscal 2022. This benefit will more than offset the impacts of inflation, structural conservation, customer churn and the mix effect of our evolving business.
We are earmarking a portion of the benefits achieved from the program to be invested back into the business as we take a proactive approach to targeted customer retention and growth focused on certain base business customers. These sound investments in customers with high lifetime value will position us for growth and efficient operations. We will provide more detail on this major strategic program on our Q4 call, but we're expecting to invest about a third of our AmeriGas 2.0 cost savings in this high value customer retention initiative. The approach to a customer lifetime value pricing strategy, the continued focus on digitizing business processes and the continued drive for efficiencies will deliver an excellent customer experience and position AmeriGas for long term growth and market share gain. Now a few additional words about UGI International.
Our European activities were impacted by COVID-nineteen several weeks earlier than in the USA and the recovery has been evident as the economies continue to open. Our European teams were very responsive to the pandemic and continue to provide a great deal of insight to our U. S.-based businesses on how to adjust operations and start preparing for the eventual return to normal. As mentioned during the last earnings call, our international team is also focused on driving efficiencies and improving the customer experience with investments of €55,000,000 that will deliver €5,000,000 of savings in fiscal 2020 and over €30,000,000 by the end of fiscal 2022. I am pleased to report these objectives are still on track and no slowdown has been experienced in Q3.
In closing, our Q3 performance continued to provide excellent insight on our action plans and validated our digital transformation initiatives. Our continued focus on operational efficiencies and cost management contributed to the solid results in the quarter that was significantly impacted by the COVID pandemic. The diversification of our LPG distribution business across the U. S. And the 17 European countries as resiliency and shareholder value.
Now I'll pass the call back over to John.
Thanks, Roger. As I mentioned in my earlier remarks, Q3 was a particularly important quarter for us. We worked diligently to understand and address the challenges presented by the pandemic, while also taking a hard look at the company's role in addressing the issue of racial inequality in our society. Our teams have done an excellent job of engaging and addressing these critical long term issues, while staying focused and committed to the provision of our critical services to customers. We also took some major steps this quarter with our ESG program, which we believe demonstrates our commitment to be a leader in this critical area.
We're committed to significantly reducing the impact of our operations on our environment, contributing significantly to the health and well-being of the communities we serve and providing our customers with renewable, affordable energy solutions. Last month, we issued our 2nd ESG report and committed to reduce our fugitive methane emissions at UGI Utilities by 92% and our greenhouse gas emissions by over 8,000,000 metric tons. We will meet both these commitments by 2,030. On July 21, as Bob noted, we entered into an agreement to sell our ownership interest in the Conama coal fired power generation station. Our sale of Conama will reduce UGI's total Scope 1 emissions by over 30%.
As Bob also noted, on July 9, we announced the acquisition of GHI Energy, a renewable natural gas company. We're excited to expand our customer solutions to include the GHI product offerings and we look forward to investing in new projects to serve the growing demand for RNG. Utilities also installed 3 60 kilowatts of solar electric generation for the company's internal use, reducing greenhouse gases by 5.70 tons per year. This solar generation coupled with the on-site combined heat and power system will supply nearly all of the electricity needs for the newly constructed utilities building. As we look forward to Q4 and fiscal 2021, we're very encouraged by the strength of our performance thus far in fiscal 'twenty.
We have demonstrated our resiliency and our ability to operate effectively even in the most challenging environments. Our increased guidance is one indicator of that strength and resilience. As Ted noted, we're also adjusting the basis for our weather assumption for fiscal 2021 and beyond by using the 10 year average as our new normal. We believe this provides a better foundation for both financial and operational planning. We'll share much more detail on this when we provide fiscal 'twenty one guidance on our Q4 earnings call, but the move from 15 year to 10 year normal weather will affect our budgeted volumes by 1% to 1.5% and our EPS by approximately $0.04 as Ted noted earlier.
While there are still some challenges and questions that remain, such as the potential for COVID impacts to linger into fiscal 2021, we'll finish the year confident that we're well positioned financially and in terms of capabilities to address those challenges. We will focus on delivering growth in our core businesses, driving efficiency gains in our field and back office operations and pursuing emerging opportunities in renewable and low carbon energy solutions for our customers.
We will do
all of this while committing to advocate for quality and contributing positively to the lives of our neighbors in the communities we serve. With that, I'll turn the call back over to the operator, who will open it up for questions.
Thank you. Your first question comes from Shneur Gershuni with UBS. Your line is open.
Hi, good morning, everyone. Good to hear everyone as well. Maybe to start off a little bit, I was wondering if you can give us a little bit more details around your guidance and if we can do an apples to apples comparison to what you gave last time. If I recall correctly, last time you said there was a $0.20 to $0.30 impact for COVID. I was just wondering if you can sort of tell us where that is tracking right now, exclusive of the $0.10 positive impact from the tax perspective.
Just kind of wondering how that's tracking in terms of your forecast?
Sure. Good morning, Shneur. This is John. Yes, I think we're basically tracking within that band sort of towards the middle or lower end of that $0.20 to $0.30 range. I think one thing that's a bit different is when we originally provided that, our assumption was going to be we'd see the majority of that in Q3 and less of it in Q4.
It's turned out to be kind of by the nature of the recovery timing across both the U. S. And Europe, it's spread much more across both quarters, but no big surprises there. I'll let Ted comment as well in terms of the COVID impact across the businesses.
Yes. So not much to add there. I mean, we had talked about $0.20 to $0.30 call it a midpoint of $0.25 That's about where we are in our forecast right now. Our actuals have about $0.15 that we've already seen from the impacts and we're continuing to reflect continue impact in this last quarter of the year and we're expecting that to be about a dime.
Okay, perfect. And then, two quick follow-up questions. With respect to the expense reduction in margins that you're seeing both in the LPG business in the U. S. As well as in Europe, how much of those reductions are sustainable versus how much is variable that will come back as the business rebounds?
Yes. I'll comment briefly and then I'll turn it over to Roger. And there is a significant element of this that is recurring. Clearly, we have kind of the restructuring programs in both the U. S.
And Europe. Those efforts are ongoing and particularly in the U. S. As we go through next year and into fiscal 2022, there's more significant savings to come. There is some element of expense that will come back associated with higher volumes as we get normal weather.
But I think what we're looking at across our LPG businesses is a sort of a consistent drive for reducing our average delivered costs. So a lot of what we're seeing or a significant proportion of what we're seeing is sustainable, and I'll let Roger comment in more detail as well.
Yes. Maybe just a couple of additional points to add to what John just mentioned. So when it comes to the transformation initiatives, those are permanent cost takeout. So what we've seen year to date and we're very much on track as mentioned to deliver the $30,000,000 here in the U. S.
Of savings this fiscal year. We've now year to date we've seen about $21,000,000 of that and we will deliver the €30,000,000 plus by the end of the year. Over at international, year to date, we've seen €4,000,000 of savings and we'll deliver the over €5,000,000 of savings as mentioned. When it comes to the other activities and really trying to control cost, some of that will flow back in as volumes start to materialize. We are very cautious and careful in how we allow that expense to come back in.
But some of it we will work towards obviously minimizing how much of it will come back in overall, but clearly there's a relationship with the volumes as they continue to improve. And that's what we're seeing right now at international. With COVID now starting to back off somewhat, we are starting to see some volumes increase over at international.
Okay. So that makes sense. So there is a significant portion that will be maintained. Okay, great. One final question, I'm not sure if I heard it correctly in the prepared remarks.
You were talking about the uncollectibles at the utility level. Were you saying that you have to take the forecasted uncollectibles all in 1 quarter for 2 quarters worth of uncollectibles? Am I understanding that correctly? I just want to make sure I heard that correctly.
You are, Shneur. We were required by the PUC to book 2 quarters' worth in our Q3. So basically what we had for actuals in Q3 and our forecast for Q4. And so you're seeing the step up in the size of our uncollectibles because of that. We are just as an aside, we are ticking up a bit in uncollectibles and utilities.
It's not dramatic, but it is we're starting to see it tick up. And as Bob shared, we do have the ability to now create a regulatory asset for anything beyond what we had planned, that's COVID related and be able to rate that through to customers.
So Ted, if I can paraphrase, effectively all if nothing else changes from here, Q4 technically would be lower because you've taken a larger hit in Q3 and you have the ability to create a regulatory asset. Did I get that right?
Yes.
Perfect. Thank you very much guys. Really appreciate the color today and have a safe day.
Thanks, Shneur.
Thank you.
Your next question comes from Mark Solisito with Barclays. Your line is open.
Hi, good morning. Good morning. Following up on Shneur's question, how should we think about the $0.20 to $0.30 COVID impact in fiscal 2020 when considering the margin benefit from higher cylinder sales and some of the expense management that you referenced?
Yes. This is John again. I'll let Ted comment on it in terms of there are elements of that incremental cylinder contribution that we're also considering in COVID impacts. It's actually positive that offsets. So I'll let Ted comment in more detail on that.
Yes. It is a net impact of benefits and negatives, right? So what we've seen is a reduction in certain segments of volume being kind of the key driver, but it was mitigated by the increase in our cylinder sales and that's reflected in our forecast for the year of $0.25
Got it. Okay. And then as we look forward to fiscal 2021, how should we think about the seasonality in your business and the anticipated COVID impact? For instance, you indicated a $0.10 a projected $0.10 headwind in fiscal 4Q. And if end markets hypothetically remain where they are today, would you expect a greater nominal EPS impact in the fiscal first half
of the year just given normal seasonal patterns?
I would say based on where we are today and that's obviously the critical assessment. What we see across our businesses is in this off season a return to normal. We're on a trajectory to return to normal. We still haven't completely recovered or regained all those volumes. So as we sit here today, it's still recovering as opposed to being fully normal.
Our assumption is that we'll continue on this path and FY 2021 would be a normal year. If there were significant sort of recurrences or flare ups that resulted in dramatic changes or significant changes to operations across our customer base, then it would have an impact. And obviously, the impact in the winter months of a closing of facilities would be more significant than the impact as we sit here today in the summer just because of levels of demand. But that's not what we're seeing based on the trends we were observing. As we look at the specific segments that are impacted, we see those segments recovering.
And depending on the geography in the U. S, you see a more rapid recovery or a slower recovery depending on the status of the pandemic in those specific markets. But a significant percentage of the markets we serve, which are the markets in and around the Mid Atlantic region of the U. S. And then across Europe are on a pretty consistent path of recovery with sort of minor alterations as there are sort of very localized developments.
And the only thing I would add is that when we give guidance for next year when we're closing our when we're sharing our results for the year, we'll be that much more informed on whether that trend continues or is changing and that will definitely be built into the guidance we provide.
Okay, great. That's helpful. Thank you.
Your next question comes from Chris Sighinolfi with Jefferies. Your line is open.
Hey, good morning everyone.
Good morning, Chris.
Good morning.
Hope everyone is well. I guess just to start, Roger, I'm curious about the pace and the scope of the LPG transformation investment spending you targeted for the year, I guess particularly amounts you had anticipated would hit OpEx. If I look back at your initial descriptions, it seems you were implying sort of $65,000,000 to $70,000,000 in OpEx hits across AmeriGas and International this year. I see roughly $43,000,000 recorded so far this year. So that suggests either a big allocation in the Q4 or perhaps that spending is lower than you thought or maybe it's a shift between CapEx and expensed amounts.
I guess the question is, do you see it being you made comments that the benefits are tracking your initial expectations. I'm just curious if the cost of programs, investments are going to be lower or if there's a mix shift between 2020 2021 or if there's a mix shift between OpEx and CapEx. Any update on that would be helpful.
Yes, sure, Chris. Thanks for the question. There's the vast majority of the spend will be concluded by the end of fiscal year 2021. So we are tracking as expected. It is a mix of what you highlighted.
It's a mix of OpEx, CapEx in both businesses, whether it be international or here at AmeriGas. So we are tracking very much as we kind of had seen it, where we would continue to have a bit more heavyweight spend in fiscal 2020 and then continue that spend throughout fiscal year 2021. And we'll provide a lot more clarity on this in the at the end of the Q4 exactly where we're landing on it. But really no surprise. Continuing to execute the projects at the same rate we had anticipated, which is great news.
In a COVID environment where there were some concerns in our ability to continue to execute the digital project, the realignment of the organization, this drive for efficiencies while continuing to also invest in how the customer is interacting with us and with a real focus on how can we be easier to do business with. So all of those projects are at the appropriate cadence and again in line with what we've been talking about. So no surprise, no change. But there is a shift between CapEx, OpEx and as mentioned, we will be concluding the majority of the spend by the end of next year.
Okay. So maybe next time you're suggesting next time for maybe a comprehensive update on all of that would be your guide for fiscal 2021?
Yes. Okay.
And then Roger, you've made some comments, I think this is originally part of the plan as well about sort of sharing some of the benefits of the success of this program, I guess, back with customers maybe to arrest the pace of volumetric decline and improve the experience, make yourself more competitive perhaps against other fuel sources. Can you just talk a little bit about maybe the mechanisms of how that would happen? Is that should we see that just result in sort of maybe a margin compression or is that bonuses to sign up customers or I guess what have you contemplated? What does that program look like?
Yes. And again, we'll continue to provide more color on that as well, Chris. But essentially, we're in the process of evaluating different segments of our market where we're looking at the elasticity of customers. And there's a real inefficiency that exists there, where we're bringing in new customers and some customers are leaving us. So what we want to get after here is really rebalance that and ensure that we are being more surgical on how we are pricing some of those more elastic customers so that we effectively build in that efficiency of stopping some of that churn that you highlighted.
A lot of it will manifest itself in margin. So that's where we're likely going to see some compression. And again, this is an area that we're now in the process of evaluating. So we gave some guidance, but then we gave kind of a high level view of how much we think we're going to be putting into that part of our transformation initiative. And we'll continue to add more detail between that at the end of the quarter for the next fiscal.
And I'd
just add, the team's done a great job, I think, of using enhanced tools and enhanced access to data to segment our customers to make sure, as Roger said, we can be kind of focused in surgical and the approach we take to it and really focus on kind of maximizing the lifetime value of our customers and that's what will drive our pricing and margin strategy. And it's coupled with also a significant improvement in the tools and sort of the digital options that our customers have and will have in terms of interacting with us and how we provide information to them, which we think will significantly differentiate us from others. So we're excited about kind of where we are and our ability to roll out these new tools and the take up of the tools by customers. And actually, some of the challenges of the pandemic have accelerated the adoption of the tools by our customers. So there's been some benefit to the need for customers to interact more digitally and are offering those new tools.
So we're excited to sort of be laying out this path because we do believe it's going to have a really positive impact on our service to those customers and then our long term retention of the high value customers.
Yes. And I mean, John, it seems like these efforts, you mentioned a greater widespread adoption by the customer set and then Ted's comments about moving the weather frameworks for your guide for your forecasting to a shorter legacy timeframe. It all just seems trying to address that legacy question about how do you handle the weather variance in the business and try and control, I guess, what you can control. So cost of customer acquisition and the pace of churn obviously seem right to be addressed.
All
right. Well, I want to pivot and John, maybe this is for you. I want to get a sense of how you and the team and the Board think about the shifting energy landscape and think about investments that you make? You've mentioned ESG numerous times on the call this morning and in the earnings materials last night, you acquired GHI and are in the process of selling Conama and the explanations for those actions appear to rely heavily on the improvements they'll make in UGI's emissions footprint. We've seen you guys support environmentally focused investments in the past, the conversion of HanLok, the landfill gas investments, the utility team's efforts over the years to convert fuel oil customers to natural gas, those all stand out as examples.
But there's always been a very clear returns component to the things you've underwritten. We see a wave now of companies wishing to rebrand themselves as clean or renewable, etcetera. You see BP last night, Dominion a couple of weeks ago, they're pursuing full scale pivots. So I understand that the AUM, Tidal Wave focused on ESG and anti hydrocarbon investments and the incentive to participate in that. But I also appreciate that you're a 138 year old company, it's put a fantastic long term compound returns, remain disciplined about the economics of things you underwrite.
So I'm just wondering how if I get a sense of maybe the potential conflicts between those two things, if there are conflicts between those two things?
Yes. Chris, I see it as much more aligned. I think our history has been that we're a company that understands what's happening in our market with our customers first, but then in our environment and then looks for opportunities to identify and deliver solutions that are going to be well received by customers and also make economic sense. And the 2 specific investments that we talked about today or the 2 investment decisions that we talked about today, the sale of Conama, which is a non core coal fired power generation facility and the acquisition of GHI, which I see is closely aligned to our business. It we think provides us with an opportunity for further growth and investment in an area that feels very close to us in terms of supply portfolio management incorporating new supply sources, in this case, renewable natural gas into an overall supply portfolio, while meeting the needs of our customers who are looking for these new solutions and also addresses questions that regulators could can and do ask of us and investors.
But I don't I see GHI 1st and foremost as a really attractive investment for us because I think we're in a great position operationally and from a commercial standpoint to develop that business. There's a significant operational aspect to the provision of renewable natural gas, which suits us really well in terms of our operations focus. So we're excited about the opportunity to invest in attractive projects to develop and deliver renewable natural gas and to be positioned as the market evolves should, for example, different states and commissions determine that they want to incentivize utilities to incorporate renewable natural gas into a supply portfolio, we think we're going to be really well positioned to participate in that and those will be extremely attractive investments. So I believe and we believe that these investments are really aligned with our core strategy and reflect the changing market and environment And we think we're really well positioned to deliver, to deliver from an ESG standpoint, but also to deliver from an in terms of attractive investments over time.
Okay. So I mean I guess to put a finer point on, so return profile of the things you might underwrite on this initiative, we shouldn't think about it sort of eroding the return characteristics of the company historically?
No, no. We don't see that. And it's key for us to find opportunities where we can leverage core capabilities and in some cases core assets and networks that exist already in the company because that enables us to deliver strong returns. And certainly renewable natural gas fits that.
Okay. And I guess a related point and I don't know if this is for you John or for Roger, but hydrogen has become a major focus in Europe as that continent works on a framework for electrification and renewable transition. And so just curious about UGI's ability or appetite to participate in hydrogen related investments maybe as a distribution arm?
Yes. And I'll comment very briefly, Chris, and then let Roger comment. I've got a little bit of experience with hydrogen in my past. Roger has got a lot more experience with hydrogen than I do in his past. And definitely, it's an area that is of interest to us.
If you look at electrolytic hydrogen, renewable hydrogen produced electrolytically with renewable power, driving that process is definitely of interest. Again, it's sort of to the point I just made, it's an opportunity for us to leverage our infrastructure, leverage our core assets and our the connection we have to all the end users we serve to incorporate what would be sort of an alternative or a supplement to our supply portfolio, in this case, renewable hydrogen or green hydrogen. But I'll let Roger comment as well.
Yes. Not a lot to add to what John has highlighted, but maybe a couple of points here. Hydrogen has certainly been an interest for decades. And the industrial gas companies have certainly been at the forefront of promoting hydrogen. And we do see governments in Europe to the point you made, Chris, want to embrace hydrogen as an alternative fuel.
A lot of things have to happen. Everything when you think of electrolytic hydrogen, it's produced it's a fairly capital intensive process, but more than capital intensity, it's also a very electricity, high power demanding process. So and the electricity has to come from renewable. So a lot depends on the conversion to more and more renewable power. The cost of such power going into these fairly capital intensive plants.
And then there's all of the downstream challenges and opportunities where infrastructure has to be adapted to hydrogen. And there are limits to how much hydrogen one would inject an existing pipeline system without making some modifications due to embrittlement concerns, etcetera. And then of course, all of the safety aspects managing it. So again it's an encouraging evolution. It's not new.
It's been happening for several decades. One that we will definitely be monitoring and looking at what's the best opportunity for us to participate because we will be able to leverage our infrastructure as this potential new molecule continues to come into the energy mix.
Great. I appreciate all the thoughts and comments this morning.
Thanks, Chris.
Your next question comes from Michael Gogler with Janney Montgomery Scott. Your line is open.
Good morning, everyone.
Good morning.
Congrats on the quarter.
Thank you.
Just wondering if you're seeing C and I volumes returning to pre COVID levels. Do you think those have bottomed out? Or are we still kind of in a trough period?
Mike, I'll comment really briefly, and I'll let Bob and Roger comment as well. Certainly, they've bottomed out and are recovering. And we see I touched on it really briefly. We see sort of differing sort of rates of recovery, but we see recovery across virtually every sub area. The only area I would say is difficult to assess right now is LPG transport in the U.
S. Involving school bus fleets, which typically cease in the summer anyway. So that will be impacted as different school districts start up again in the fall and the timing of that. But overall, we're on a path, a clear path of recovery with minor impacts as different geographies are slowed by virtue of pandemic issues. But those are pretty localized if you look at the geographies we serve.
And the vast majority of our concentration of activity in both the U. S. And Europe is in areas that at this point is significantly recovered from the impacts of COVID and continued to be relatively positive in terms of current conditions. We'll keep an eye on that, but I'll also let Bob and Roger offer any comments they have in terms of what they're seeing.
Okay. Thanks, John. Good morning, Michael. This is Bob. As John indicated in what we call our rate and the small commercial customer market, where we saw some decline.
It was a little bit tough to discern because April's weather was a little bit different than normal, but we're starting to see those customers recover. Interestingly though, we've seen some increase in customers who are involved with food processing and consumer good manufacturing. We've seen throughout the pandemic that those volumes are actually up. So I'll just echo what John said that we're starting to see a recovery, but we're kind of in a wait and see pattern for this time in the areas of hospitality, restaurants and such.
Yes, Michael. Then I'll just add a couple of comments here. At international, we've seen more recovery coming out of the COVID pandemic. We've seen some flare ups in COVID in some parts of the geographies. It has not impacted the recoveries that we've been seeing as far as volume evolution, in particular in commercial and industrial accounts.
When we move over to the U. S. And we look at where we are at AmeriGas, I would quantify that we're still in that trough where there is some recovery, but we're still in that low period where Auto Gas has done some recovery, but we have not seen school buses of course start up yet. So that's an area that we'll have to wait and see what happens with the reopening of schools. And then the commercial area as well, we continue to see especially in that restaurant segment and other commercial hotels, etcetera, we still continue to see that being very low demand relative to prior periods.
Okay. That's helpful. And then just one more. Maybe you could give us an update on Phase 1 of PennEast. Any outstanding issues and potential timelines specific to that portion of the line?
Sure, Michael. Yes, the most recent development on PennEast was the release this week of an environmental assessment by FERC, which was a positive assessment. So that's a step forward. And we continue to having gotten that, we'll continue to look to secure commitments. The current plan for Phase 1 of PennEast would have that coming into service at the end the very end of calendar 2021.
So we just as I said, we just received that environmental assessment. So we're sort of taking that in, but it's a favorable assessment. And we'll move forward from there and continue to work on the commercial side on those Phase 1 commitments.
There are no further questions at this time. I will now turn the call back over to John Walsh for closing remarks.
Okay. Thank you very much. Thanks for your time this morning. We look forward to being in touch with you on our next call and look forward to updating you on that call on our fiscal 2021 guidance. Thank you.
Stay safe.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.