AmeriGas Partners' (APU) Q2 2014 Results - Earnings Call Transcript

May. 8.14 | About: AmeriGas Partners (APU)

AmeriGas Partners, L.P. (NYSE:APU)

Q2 2014 Earnings Conference Call

May 8, 2014 09:00 PM ET

Executives

Daniel J. Platt – Treasurer and Head-Investor Relations

John L. Walsh – Vice Chairman

Kirk R. Oliver – Chief Financial Officer

Jerry E. Sheridan – President, Chief Executive Officer and Director

Analysts

Carl L. Kirst – BMO Capital Markets

Christopher P. Sighinolfi – Jefferies LLC

Theresa Chen – Barclays Capital, Inc.

Brian Brazinski – Bank of America Merrill Lynch

Roger G. Young – Miller/Howard Investments, Inc.

Eddie H. Rowe – Raymond James & Associates, Inc.

Eric Shiu – Wells Fargo Securities LLC

Operator

Good morning and welcome to the UGI AmeriGas Second Quarter 2014 Earnings Conference Call. Please note that this call is being recorded today May 8, 2014 at 9.00 a.m. Eastern Time. After the presentation, we will conduct a question-and-answer session; instructions will be provided at that time.

I would now like to turn the meeting over to Dan Platt, Treasurer of UGI Corporation. You may begin.

Daniel J. Platt

Thanks Ryan. Good morning and thank you for joining us. As we begin, let me remind you that our comments today will include certain forward-looking statements, which managements of UGI and AmeriGas believe to be reasonable as of today’s date only. Actual results may differ significantly because of risks and uncertainties that are difficult to predict and many of which are beyond management's control.

You should read our Annual Reports on Form 10-K for a more extensive list of factors that could affect results, but among them are adverse weather conditions, cost volatility and availability of all energy products, increased customer conservation measures, the impact of pending and future legal proceedings, domestic and international political, regulatory and economic conditions, currency exchange rate fluctuations, the timing of development of Marcellus Shale gas production, the timing and success of our commercial initiatives and investments to grow our business and our ability to successfully integrate acquired businesses and achieve anticipated synergies. UGI and AmeriGas undertake no obligation to release revisions to their forward-looking statements to reflect events or circumstances occurring after today.

In addition, our remarks will reference certain non-GAAP financial measures that management believes provide useful information to investors to more effectively evaluate the year-over-year results of operations of the companies. These non-GAAP financial measures are not comparable to measures used by other companies and should be considered in conjunction with performance measures such as cash flow from operating activities.

With me today are Hugh Gallagher, CFO of AmeriGas Propane; Kirk Oliver, CFO of UGI Corporation, Jerry Sheridan, President and CEO of AmeriGas Propane; and your host, President and CEO of UGI Corporation, John Walsh. John.

John L. Walsh

Thanks Dan. Good morning and welcome to our call. I trust that you've all had a chance to review our press releases reporting strong second quarter results for UGI and AmeriGas. It was an exceptional quarter for the company and for the energy sector, particularly for companies like ours with a significant concentration of assets, resources and customers in the Mid Atlantic region.

I will comment on our key activities in the second quarter and then I'll turn it over to Kirk who'll provide you with a more detailed review of UGI's financial performance. Jerry, will follow with an overview on AmeriGas. And I'll wrap up with an update on our strategic initiatives.

Our Q2 GAAP EPS was a $1.84, while our adjusted EPS, which reflects a $0.06 mark-to-market adjustment in our Midstream & Marketing business was a $1.90. This result compares very favorably with our adjusted EPS of $1.51 in the second quarter of FY13. Accordingly, we increased our fiscal 2014 guidance range to $2.95 to $3.05 from the previously stated range of $2.60 to $2.70. Kirk will comment in more detail on guidance in our second quarter performance in a few minutes.

Turning back to Q2, these very strong results with adjusted net income up 28% reflects the positive impact of colder weather in most of our service territories strong operational performance and more critically the return of significant volatility across the natural gas and electricity sectors in the Mid-Atlantic and North East. It is worth noting that we delivered the strong quarterly performance despite extremely warm weather in Europe where several of our markets experienced the warmest winter on record. While weather as we all know so well varies year-to-year, the factors impacting pipeline capacity values and delivered gas costs particularly on peak days are more fundamental and far reaching. Kirk will share more details on the movement of capacity values in a few minutes, but I would like to comment briefly on the fundamental changes underway in the markets we serve. While the cold weather in January extenuated local volatility in the mid-Atlantic and Northeast. The more critical factor from a strategic perspective was the increasingly high level of natural gas demand and the strain that demand has placed on the regions natural gas infrastructure.

We saw the benefits of that strong demand for capacity in our Midstream business in Q2, and we believe that the market will remain capacity constrain for a number of years as demand increases due to an improving economy and continued customer conversions to natural gas. Our unique integrated asset portfolio in the region which includes pipelines, pipeline capacity contracts, gathering systems, natural gas storage, LNG, and a large base of customer demand provides us with an exceptional opportunity to deliver value during periods of volatility.

I will comment further on the importance of this opportunity for UGI when I discuss our strategic initiatives later in the call. Q2 was a noteworthy quarter in many respects as cold weather and winter storms provided our teams with numerous challenges as we focused on meeting enhanced customer demand. Some highlights from the quarter.

Our Auburn II pipeline had its first full quarter in service and quickly ramped up exceeding our throughput goal for Q2. We are very pleased with the financial performance of this project and see it as a clear validation of our strategy to own and operate assets which connects the abundant resources in the Marcellus with the major market hubs in the mid-Atlantic region.

Our gas utility remained focused on delivering growth despite the challenge of severe winter weather. New customer additions year-to-date are running 10% ahead of last years record pace. We are also making steady progress on our infrastructure replacement program for both cast-iron and bare steel, which is moving forward on pace with our commitments.

Our supply field services and delivery teams at AmeriGas utilities and Midstream did an extraordinary job, serving our customers during the periods of peak demand in January and February. We recognized the importance of delivering on our commitments to customers and our teams personified that commitment.

We are very fortunate to have such a dedicated team and greatly appreciated their unwavering customer commitments. The one final point I would like to reiterate on the second quarter is the growing demand for natural gas. This demand is coming from our traditional residential and small commercial customer base as well as some large industrial and municipal users. The market is also seeing unprecedented gas demand from the power generation sector.

As we demonstrated this quarter, this strong demand benefits both our utilities and midstream businesses. It also highlights the need for additional pipeline and storage capacity to serve the mid-Atlantic and Northeast regions. We hope this increased recognition of an infrastructure gap on the part of both producers and consumers will enhance and accelerate our efforts to develop new capacity infrastructure project by virtue of its proximity to our markets the Marcellus will play a significant role as we execute our strategy. I will return to that thing later on the call when I comment on our strategic initiatives, but I like to turn it over to Kirk at this point for the financial review. Kirk?

Kirk R. Oliver

Thanks, John and good morning everyone. John mentioned that it was much colder than normal winter for most of the U.S. this quarter, but this chart demonstrates it was really a tale of two continents from a global perspective. While temperatures in North America were on average much colder than normal, temperatures in Europe were much warmer than normal, in many cases setting new records for warmth. You will notice that even in the U.S. the utility with its Northeastern footprint experienced colder temperature than AmeriGas did with its national footprint. While weather for most of the country was much colder than normal on number of western states including California, experienced a very warm winter season. Jerry will go into more detail on the operations for AmeriGas in the quarter, so I’ll just summarize the financial performance here.

We are reporting operating income at AmeriGas of $285 million, an increase of $18 million over the last year. Total margin increased by $37 million reflecting a modest increase in unit margins and higher retail volume sold offset somewhat by lower ancillary sales and services margin.

Operating expenses increased by $20 million driven by increased retail volume, incremental distribution cost associated with supply shortages in certain regions and a greater accrual for uncollectible accounts associated with the higher revenue. We managed our pricing in this high cost environment to achieve EBITDA of $0.70 per gallon, an increase of $0.03 over the prior year.

Operating expenses in the prior year period included $5 million of transition expenses associated with the integration of Heritage Propane. Finally, I would also like to point out that effective April 2014, our propane just what we reported as mark-to-market hedges. Existing hedges which have qualified per hedge accounting will runoff over time. Going forward we will highlight any mark-to-market impacts to our financial statements.

Income before taxes at UGI International was $56 million for the quarter, down $18 million from the prior year period. As previously noted, our European operations experienced record warm temperatures during this winter heating season. Temperatures at Antargaz averaged 16.5% warmer than normal, while temperatures at Flaga were more than 18% warmer than normal. By contrast temperatures in the prior year period were colder than normal at both business units. The UGI International management team did a great job managing the base LPG business through this warm winter season. As a point of reference we went back and look at 2012, which was also very warm weather year.

Income before taxes this winter season year-to-date is up over $9 million versus the winter of 2012, despite the fact that our weather in 2014 was actually warmer than in 2012, 5% warmer at Antargaz and 12% warmer at Flaga.

Volumes for the quarter were 8.5% lower than in the prior period reflecting the warm weather and partially offset by incremental retail gallons associated with the BP Poland acquisition we closed in September 2013. The decrease in total margin is driven principally from the lower margin at Antargaz due in large prior to the extremely warm weather.

In spite of the much warmer weather at Flaga total margin there was only slightly lower reflecting incremental margin from the Poland acquisition. Total margin at AvantiGas was slightly higher than the prior period. Operating expenses decreased reflecting lower expenses at Antargaz offset somewhat by higher operating expenses at Flaga from the incremental effects of BP Poland. The average euro to dollar translation rate for the current quarter was approximately $1.37 per euro compared with the $1.32 for the prior period.

Turning to Slide 10, the gas utilities reporting income before taxes of a $126 million up $30 million are almost 31% versus last year’s quarter. Throughput to core customers increased nearly 20% reflecting the effects of colder weather. As John alluded to earlier we believe that in addition to the effects of the colder weather, there is also been an increase in the base demand for natural gas.

The utility experienced a new record throughput day in January at a mean temperature of seven degrees Fahrenheit, which was 10 degrees warmer than its design peak day. Total margin increased by $29 million or 17% reflecting higher core market margin of $23 million and greater firm delivery service margin of about $6 million. Costs were up less than $2 million this quarter, primarily driven by higher uncollectible accounts and maintenance expenses, offset by lower pension and benefits expenses.

Midstream and marketing posted an exceptionally strong quarter reporting income before taxes of a $120 million, an increase of $76 million over the prior year quarter. Total margin increased to $82 million in the quarter reflecting significantly higher capacity management and peaking margin of $59 million, higher electric generation margin of $9 million and greater retail gas marketing margin from a colder weather.

Natural gas gathering margin also increased by about $4 million in this period reflecting incremental margin from the Auburn pipeline extension, which was placed in service during the first quarter.

The increases in expenses reflect the increased gathering expenses associated with Auburn higher uncollectible accounts. Higher electric generation expenses and $1.4 million charge relating to the write-off of differed pipeline development cost. Our Midstream & Marketing business benefits from increased volatility in the mid-Atlantic region of the United States. This chart shows the spot price comparison for natural gas in Texas Eastern Zone 3 for the six most recent winter heating seasons prior to this season.

The bold red line shows prices for the 2007, 2008 season demonstrating that until this year, as I will show on the next slide. Prices and volatility have been declining reaching their low point in the 2011, 2012 heating season. Please note the scale for this graph where the highest price shown on a vertical access is $80 per MCF. As we switched to a graph of the same zone with this winter added.

So turning now to this winter, you can see that we experienced exceptional volatility with daily prices in the same zone reaching highs of over $80 per MCF as a result of capacity shortages in the region. During this time, our supply point pricing remained relatively stable. Interruptions by numerous LDCs and operational flow orders were quite extensive and power generators who typically rely on interruptible capacity were bidding up values because they had to run.

This all came together to resolve an exceptionally strong results for our Midstream & Marketing business in the quarter. While we do not expect this kind of volatility to repeat itself anytime soon, we do expect to return the more normal our pre-recession pipeline capacity values.

Looking now at liquidity in cash resources, we used the combination of bank facilities and cash-on-hand to meet our liquidity needs. Total liquidity by business in the form of cash-on-hand and available credit capacity are laid on the table on this slide. You can see from this table that the businesses have sufficient capacity to meet their liquidity needs.

Finally, as John mentioned earlier, we are revising our adjusted EPS guidance for fiscal 2014 up to $2.95 to $3.05 per share, and these increase of $0.35 across the range. And as I am sure you’ve seen we’ve raised that annual dividend from a $1.13 to $1.18 per share. This marks the 130 consecutive year of dividend payments and the 27 consecutive year of dividend increases.

That completes my prepared remarks and I’ll now turn the call over to Jerry for his report on AmeriGas.

Jerry E. Sheridan

Thanks very much, Kirk. EBITDA for the second quarter was $331 million for AmeriGas, or 7% above the $309 million earned last year on higher volume and margins offset somewhat by higher expenses. We have raised the low end of our guidance by $15 million with a new range of $660 million to $675 million EBITDA for the year. At these levels our new AmeriGas is literally delivering earnings almost doubled that of AmeriGas prior to the Heritage Propane acquisition.

Volume for the quarter was 475 million gallons or 2.3% above last year. Temperatures were 9.7% colder than last year. And although the news headlines for the quarter included reports of colder than normal winter weather, the actual weather was very different from the eastern and western halves of the country. Cold weather in the eastern half of the country was a contrast to the Western U.S. which experienced warmer than normal temperatures during the quarter.

In fact a large part of California and Arizona where we had significant operation to experience the warmest January to March periods since 1895. Our Western operations represent nearly one third of our business. Although the cold eastern and Midwest weather is always welcomed for our business, the much publicized shortage of propane and a 51% increase in average propane cost at Mont Belvieu from the same period last year created a difficult work environment from many of our locations.

Customers anxious about propane supply and the higher cost created additional customer service challenges for our field teams. Although this is only the second winter operating as a new company following the Heritage acquisition, we are pleased with how the operation team responded to this challenge. Our integrated operation shared resources and moved propane to where it was totally needed. This included activating our AmeriGas Airborne Division a program that enables us to send experience delivery personal into areas of acute need during winter months.

This quarter we were able to move drivers from the western states to assist with the extraordinary challenges we are facing in the East and Midwest. Join on these resources and our relationships with suppliers they want the AmeriGas to outperform many of our competitors who simply ran out of propane for periods during this winter. This performance came at a cost however, I would like to comment on the fact that this was a very expensive quarter for us to do business.

Propane supply costs were up significantly as well our distribution cost, with higher cost comes higher pricing requirements as we strive to recover these loss. Higher revenue and increased sales result in higher levels of uncollectible accounts expense. The harsh winter also takes a toll on equipment creating a material increase in vehicle, plan, and customer equipment repair and maintenance cost.

Finally, we experienced significant over time in labor costs, as we needed to deliver to our customers seven days a week in many cases. Despite these challenges, our adjusted EBITDA for gallons stood at $0.70 versus $0.67 last year. Therefore, overall we managed our pricing in line with these very high costs. Some good news on cost however, Mont Belvieu now stands at about $1.4 per gallon and that is 25% below the average cost in our second quarter, which is great news for our customers.

Turning to growth, ACE, our AmeriGas Cylinder Exchange program, increased volume by 16% in the quarter, as the ACE team continues to grow this convenience channel for propane. National accounts had a very strong quarter with volume up significantly on both the colder weather and new business. Our national accounts team added over 20 new accounts this year, representing over $2 million additional annual gallons. We closed two small acquisitions this year and our corporate development team continues to review numerous opportunities as we exit the winter season and enter the more traditional acquisition season.

We are also pleased that our Board of Directors approved a distribution increase to $0.88 per quarter, or $3.52 annualized. This represents the 10 consecutive year that AmeriGas has increased the distribution and the eighth consecutive year the distribution has increased 5% or greater, keeping with our stated objective to increase the distribution 5% per year.

Finally, I very much admire and thank our field teams for demonstrating great stamina through this very challenging winter season.

And now let me turn the call back over to John.

John L. Walsh

Thanks, Jerry. I would like to briefly review progress on the strategic investments and programs are critical to our future. Our Midstream strategy is progressing rapidly with significant potential for additional investment to address the infrastructure gap created by the ramp up in natural gas demand. Earlier this week, we announced two additional phases for Auburn pipeline project and another project in Northeast Pennsylvania as well. When completed in late 2015 these investments that Auburn nearly doubled the capacity of the system and raised the total capital invested on the Auburn project to roughly $230 million. We are excited by the opportunity to further expand our Midstream network in the Marcellus and we are actively pursuing a range of new investments.

The Gas Utility received approval from the Pennsylvania public utility commission for our get gas program. These growth extension tariffs enable us to economic we serve, previously unserved or underserved municipalities within our existing service territory. The program calls for a $75 million spend over the first five years. The initial response for the program has been tremendous and we are launching the execution phase for the first wave of main extensions.

As Jerry just noted in his remarks AmeriGas had a strong quarter with adjusted EBITDA of 7% despite significant challenges related to the propane shortage in the Eastern and Midwest states. We are continuing to see very strong performance from our National Accounts and a cylinder exchange segments were our ability to serve major regional and national customers as a clear differentiator.

Well, our domestic business has benefitted from cold weather our European team was faced with some of the warmest weather in recorded history. Weather in France was 16.5% warmer than normal, were weather across Flaga was 18% warmer than normal. As Kirk noted in this remarks our performance in Europe compared very favorably with our most recent warm European winter season in fiscal 2012. Overall our European business has delivered a very solid performance in this ultra warm weather environment.

Finally, I would like to conclude by commenting on our updated guidance and the future prospects for UGI. Over the past few years we’ve often refer to the earnings capacity of UGI’s balanced portfolio of businesses. That earnings capacity was clearly evident in Q2. The capital investment program in a midstream business and our strategic propane acquisitions in the U.S. and Europe have pushed UGI’s strategic boundaries while we also remained focused on reinforcing our traditional strength as an energy marketer and distributor.

Well, extraordinary weather which is non-recurring was the most significant factor in driving our increased guidance. It’s also important to note that the positive impact of increased volatility and delivered gas cost due to the infrastructure gap in the Mid-Atlantic and Northeast was also an important factor. This infrastructure gap is likely to be enduring. And we’ll provide positive momentum to new UGI infrastructure projects, while enhancing the value of existing network of Midstream assets strategically deployed in the region. Needless to say we’re excited about the opportunities that lie ahead for us and look forward to keeping you updated on our future calls.

With that I’ll turn the call back over to Ryan, who will open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Carl Kirst from BMO Capital. Your line is open.

Carl L. Kirst – BMO Capital Markets

Thanks good morning, everybody. Congrats on a great quarter. John, obviously want to focus little bit on the Midstream and marketing and some of the themes you hit as far as the enduring infrastructure gap sustainability not withstanding the severity of the cold weather. And I guess one of things I’m trying to grapple with a little bit is how much of this is for instance bases oriented versus the significant demand that we’ve seen in this past quarter and perhaps maybe the best way to ask the question is that we continue to see very wide basis today in the Marcellus at least relative to Gulf Coast. And so as we roll forward the normal optimization activities that are ongoing. Are you seeing a significant structural uplift as we go into the fiscal third quarter relative to the same time last year, or is this primarily going to be when there are opportunities to really take advantage and then outperform if you will that it’s going to be in these peak demand stress periods.

John L. Walsh

Yes, as you know Carl, it’s a complicated equation; you get a lot of variable, so there is no sort of absolute view. I think that the charts that Kirk showed, particularly the one that show the years leading up to this year and kind of reinforced or highlighted the fact, we’d really been in a dormant period as we went through the recession in terms of volatility, and values, and certainly we see that coming back on the back of significant demand. I do think, our view as I mentioned in the comments is that it’s going to be enduring, it will be variable, and there will be volatility, but what’s been striking to us and we’ve commented on a number of times in calls is the strength of demand.

So I think there is new capacity that’s coming on stream that will certainly help in meeting the requirements as they exist today. But we also see continuing strength in demand that will be a little bit of moving target in terms of having sufficient infrastructure to satisfy that demand. So that what’s gives us a lot of confidence in seeing continuing value from the existing network of assets that we have, but also in the fact that it’s going to be ongoing opportunities for investment. So from our standpoint and again we’re a historically a marketing and distribution company, so we are tied pretty closely to the demand side of the equation.

For the last three or four years, we’ve been really impressed and sort of impacted by the strength of demand. So I think in my mind that’s the thing that’s most often under estimated, is just how much that demand is increasing and the impact that that has on infrastructure, and then obviously the values of that infrastructure. And it’s particularly enhanced in the mid-Atlantic and Northeast and it’s going to take time to address it in terms of investments in projects, across the industry that will fulfill the need and normalize again.

Carl L. Kirst – BMO Capital Markets

That’s very helpful. So I mean basically even as there are some regional debottlenecking projects coming via constitution or some of others, you think what the market potentially is missing is just the demand component, that is really that need to serve if you will is going to be the enduring piece.

Jerry E. Sheridan

Yes, I think what was pretty striking this winter and we did have I mean it was quite cold in periods, but it wasn’t sort of design cold as Kirk noted from a utility standpoint, it was cold, but it was not the extreme that you plan for. But what was striking was the combination of sort of fundamental demand to serve our customers need, which is primarily for heating coupled with this ramping demand on the power generation side, to provide power. So you have this winter peak now that’s a pretty intense which is – so you saw that coupled with almost every utility in the Eastern United States announcing a record throughput and records that were not 1% above the prior records, but like ours where we were at 12% above, and that we were not unique.

So you see again the strength of demand across a large portion of the Eastern and Midwest U.S., that is pretty intense and it’s a great thing, we are excited about it, but certainly there is a need for a lot more infrastructure to serve the demand which I think is will be ongoing for several years, a number of years.

Carl L. Kirst – BMO Capital Markets

If I could ask one another question and it relates to the potential investment, the potential for additional infrastructure investment that you cited and certainly congratulations on Auburn III always good to kind of see that continuing. And so I guess really my question on that is as you see opportunities are perhaps even coming out of this winter and having renewed conversions with producers, do you see the additional pathways that you all can provide a services you all can provide primarily being more in that upstream camp like expanding Auburn or does that even potentially put the longer mileage pipeline systems that you guys have visited in the past back up in play.

John L. Walsh

Yes, we would be looking at larger projects and projects that would enable us to serve other portions of our territory obviously we bring that customer demand. And I think so we’ll be looking at additional pipeline solutions and opportunities that would enable us to address the need across the reminder of our territories and elsewhere in the region. And I think one thing that this winter did was heightened the focus among producers. And among sort of the customer side and the distribution side heightened the focus on the need for clarity around your solution for capacity. So that’s helpful from a project development standpoint to have that heightened awareness. And focus because it’s after this winter I don’t think it’s clear to anybody in the market that, it’s clear that the capacity may not be there. So they can assume the capacity is going to available because, clearly this winter they saw that trying to access capacity at the peak was extremely costly.

Carl L. Kirst – BMO Capital Markets

Great, I appreciate all the color. Thanks guys.

John L. Walsh

Thank you, Carl.

Operator

Your next question comes from the line of Chris Sighinolfi from Jefferies. Your line is open.

Christopher P. Sighinolfi – Jefferies LLC

Hi, John good morning.

John L. Walsh

Good morning, how are you Chris?

Christopher P. Sighinolfi – Jefferies LLC

Thanks for these slides, its helpful to understand the magnitude of the relative deltas and drivers to appreciate that. Just one quick question maybe for Jerry first on APU guidance, obviously appreciate its tough to forecast the future. But if I just look at sort of the trailing 12 month fourth quarter number EBITDA generation from APU, I find myself above the high end of the new guidance range. So I’m just wondering you did highlight some equipment repairs and maintenance issues maybe spending from the challenges this winter. But I was wondering if you could just spend a little bit more time on maybe, the cautious stands year-on-year with the back half of the year?

Jerry E. Sheridan

Yes, I think what you’re going to find is Q3 will be the delta from last year we’ve already seen. Now that April is complete, that weather in April year-over-year is 12% warmer. So we really did have a terrific spring last year that seems to be unrepeatable. And we do have the flop overall, the things I described with the collections processed and fixing our equipment. So really I think its Q3 give us concern.

Christopher P. Sighinolfi – Jefferies LLC

Okay. And then in terms of I know that there was the need to short fill some customers. And do somethings like that just based on constrained supplies and inventories over the course of the winter. Does that mean I guess do you have a sense of sort of where maybe customer inventory balances reside now and does that leave an opportunity for maybe the first quarter of next year?

Jerry E. Sheridan

Yes, great question we talk about this all the time whether customers were at the point where they are very low in the field inventory and we don’t have complete visibility to that or not. I’m hopeful though that we could in fact have a very good Q4 if that is the case. But we’re not because I think for the most part our customers are reasonably happy that the heating season is over because of the larger dose that they face. We really just don’t have their visibility as to weather there’s going to be a big pop in Q4 or not.

So not knowing it, I really can’t project it. I’d say the only thing that’s really good at this point is that cost has stabilized, and the winter is starting to become a (indiscernible) same for most of our customer’s recollections are strong. And I really believe once we get into summer that the winter will be something that’s somewhat forgotten by lot of our customers and we’ll be ready for next year.

Christopher P. Sighinolfi – Jefferies LLC

Okay, great. Jerry, one more from me for you, that’s all right, when we have visited the size of it and obviously over we’re talking about sort of a pilot program on the technology side that you guys might be looking to implement, probably that took the back burn and I’d imagine over the winter, but as you move through the spring anything to update on that initiative.

Jerry E. Sheridan

Are you talking about the tank monitoring or…

Christopher P. Sighinolfi – Jefferies LLC

Yes, what you are doing in terms of the driver behavior and iPads and things like that.

Jerry E. Sheridan

We are not slowing that down at all. What we are doing is going systematically through the country and we’ve got a rollout is almost complete of our underlying SAP enterprise software. Once the district has SAP and distribution on SAP we move to rollout iPads of the drivers. The drivers love it. It gives us great visibility to what they are doing, control over routes and so forth. So really it just a matter of how quick physically can we roll this out. So it’s going to be a multiyear, but we made great progress I think by the end of this year we’ll have half of our locations fully iPad it out with drivers.

Christopher P. Sighinolfi – Jefferies LLC

Great, okay. That's phenomenal. Thanks so much, Jerry. John, one question, I guess, to dovetail off the back of Carl's questions. Obviously, the weather is great when we can get it and pads the results and, I imagine, the cash flows, as well. We'll see when the Q comes. But just wondering, given that sort of the use of proceeds at this point – maybe not proceeds but use of cash at this point given this strength from the winter, obviously we saw the additions of Auburn Loop and the Midstream projects, but you did have last fall the authorization on share repurchase. So I'm just wondering how things stack up maybe now that you have a little bit more cash than we anticipated given the weather?

John L. Walsh

Yes, I’ll comment briefly and maybe Jerry or Kirk who can comment on the share repurchase activity briefly we consider the share repurchase is fundamentally just part of an overall capital allocation program, we have in the company. The good news for us and it sort of highlighting our comments, we’ve got a great range of potential opportunities out there with everything that’s happening. So we feel like, we have avenues we can pursue in terms of putting this cash to good use which is I think primarily the what our shareholders expect of us and with all the changes happening and the evolution that we see in the energy market particularly in the Northeast and Mid-Atlantic we’re excited about putting a lot of that capital that work in the market on high quality projects.

But we’re also utilizing as you noted in a share repurchase program is part of that capital allocation process I’ll let Kirk to give just brief update on that.

Kirk R. Oliver

Yes, Chris we’ve repurchased about 110,000 shares at the end of the quarter. And we just keep kind of slowly buying demand we might be more opportunistic down the road if we feel like it’s a good idea. But we don’t have any plans to be more or less aggressive than what we’ve been so far.

John L. Walsh

As always with us, it’s just a balance view on capital allocation, we want to make sure we’re making good decisions. And using that cash wisely it’s great for us that with the results we have this year, we got a strong major opportunity in terms of incremental cash flows coming in and work just as hard to put that cash to good use.

Christopher P. Sighinolfi – Jefferies LLC

Okay, great. And I guess to just feed off of that with one quick additional, John, as we think about - you guys have spent or deployed quite a bit of capital over the last several years sort of beefing up and building out the European LPG distribution business. I'm just curious, as it pertains to some of the things we see occurring in Eastern Europe now, does that change - from a political standpoint, does that change at all your view, the Board's view, as to incremental investments on the continent, or is this just headline risk that you're not seeing has any impact on the actual operations or appetite to continue growing there?

John L. Walsh

Yes, it’s a good question. We’re still very focused on opportunities for future or further investment in Europe. We have see no impact today in terms of any of the issues that occurring in Ukraine or Crimea region one of things we’ve said over the years about Europe that is important to us is supply diversity, so that scenario will focus on – its the flip side of kind of the U.S. export question, is looking at it from the European perspective in the more supply diversity we have in Europe from our standpoint is distributed the better. So, we will continue to look at our sort of supply portfolio, look at smart ways to diversify and then plan accordingly for any potential disruptions that could occur in supply chains, but we have seen nothing to date, there is nothing that we see looking ahead, that would indicate there is going to be disruptions, but like a lot of things we do, you plan for alternatives and you over the long-term look to diversify and spread in terms of any kind of sourcing strategy. So that’s a fundamental direction in Europe as well.

Christopher P. Sighinolfi – Jefferies LLC

Guys, I really appreciate all the added color this morning. Thanks.

John L. Walsh

Thanks, Chris, yes.

Operator

Your next question comes from the line of Theresa Chen from Barclays Capital. Your line is open.

Theresa Chen – Barclays Capital, Inc.

Good morning. I have a couple questions on AmeriGas. Now that the winter is behind us, can you give us some color on what you saw in terms of customer conservation, their response to price increases, and if there was any difference between residential versus commercial?

Jerry E. Sheridan

Well, we do a pretty in depth conservation study, but we usually let the whole month of April go by. So we haven’t done that, so I don’t have hard data to give you, certainly the winter did create on the residential side some anxiousness around, by our customers and if you short fill and its cold outside, customers are concerned, you are not going to come back, it was a great opportunity for AmeriGas. So I think it demonstrate to our customers, that we just have more resources the most of the smaller independent marketers were able to get our hands on propane number one. But also bring drivers from other parts of the country and make sure that we were in fact fully in business and keeping them warm through the winter. Hard data, but I think probably in our next quarter call, whether you have a good sense for whether we really did see year-over-year decrement in consumption it will be a tough one this year, just because of what you mentioned.

Theresa Chen – Barclays Capital, Inc.

Got it. And in terms of the margin outlook, have you worked through passing most of the higher wholesale costs through, or should we see some more work to be done in the later quarters? Is that what you were referring to in terms of the collection process?

Jerry E. Sheridan

Well collection is just really just bring the cash in, we laid out all the cash for the propane, we delivered it, we need to get paid, that is going extremely well, actually. I mean it’s been very routine for us to collect $25 million to $30 million a day, so it’s been a good spring for us cash flow wise. So I’m not concerned of all about the collection side of things. Customers are paying and we’re following up. And as I said on the previous question, it’s feeling to us like this whole winter event is becoming a rear-view mirror event for a lot of our customers as we talk to them about signing up for next year.

Theresa Chen – Barclays Capital, Inc.

Got it. And, lastly, given the difficult operating environment over the winter, do you think this has accelerated some consolidation in the industry? Have smaller players put themselves up for sale at better prices, or is it still too early to see that?

Jerry E. Sheridan

We are seeing activity I wouldn’t call it unusual. Usually coming out of the spring, there’s many marketers, whether it’s a retirement event or they found the business to be difficult offer themselves up to be bought. But I wouldn’t say the quantity of targets is any larger than we’ve seen any random year-over the last five.

Theresa Chen – Barclays Capital, Inc.

Great. Thank you very much.

Operator

(Operator Instructions) Your next question comes from the line of Brian Brazinski from Bank of America. Your line is open.

Brian Brazinski – Bank of America Merrill Lynch

Hi guys, congratulations on the quarter.

Jerry E. Sheridan

Thank you.

Brian Brazinski – Bank of America Merrill Lynch

So, John, you've talked a lot about the infrastructure gap and how enduring it could be. I was wondering if you think it provides sufficient-enough growth potential for UGI that you'd revise up the 6% to 10% annual EPS growth target?

John L. Walsh

Well, we look at that every year. So, obviously as we come out on the fall, we will be able to update that guidance. It’s intentionally a pretty wide range the 6% to 10%. So it sort of assumes ramp up in growth and change. So, no, we wouldn’t comment on that at all. Then it will get a hard look this summer and will update all of you in the fall when we talk about our guidance for FY2015.

Brian Brazinski – Bank of America Merrill Lynch

Okay, understood. Shifting a little bit, just if you could touch on repatriation. Does the weaker-than-expected quarter in Europe affect your plans at all or how you see that going forward?

Jerry E. Sheridan

No, it doesn’t change our plan in terms of repatriation there, we tend to bring the cash, we tend to leave the cash there. Unless we have some need for it here. So we’re building some cash in Europe right now, but the performance doesn’t really affect the decision making on that.

Brian Brazinski – Bank of America Merrill Lynch

Okay. And then the last thing for me, given your guys' targeted payout ratio and the dividend or potential for dividend increase is at 4% or above, given the windfall from this winter, can you discuss the potential for dividend increase? And I know you touched on capital allocation a little bit in regards to share buybacks, but from the dividend side, as well, if you could just discuss that?

Jerry E. Sheridan

Yes, we will step back as we do every year and talk to our board about sort of the outlook for the business, we have our targeted payout ratio in our current dividend policy, that all gets reviewed as part of our annual budget and planning cycle that we undertake in the summer. So it will be reviewed in detail, we look at future prospects which as we noted positive and that certainly will make that assessment. And doing so the board will be looking for us for a mid to long-term perspective in view in terms of the company’s performance, so that will all be taken to account as they review and assess the recommended approach on dividend payout ratios et cetera.

Brian Brazinski – Bank of America Merrill Lynch

Okay, great. I appreciate the color.

Jerry E. Sheridan

Okay, thanks Brian.

Operator

Your next question comes from the line of Roger Young from Miller/Howard Investments. Your line is open.

Roger G. Young – Miller/Howard Investments, Inc.

Thank you. Could you update us on the relationship with Tenaska and the opportunities there? And, secondly, how much capital involved in the Auburn loop-in?

Jerry E. Sheridan

Yes, in terms of Tenaska, that relationship is ongoing. We have both the – it's a relatively small investment, but an important one, important relationship for us. We're working with them, and they are driving the production schedule. Obviously, as natural gas values move up, the view – the future view on production levels is impacted, and they're also looking at timing of when their second set of dedicated acreage will ramp up in terms of production. On that acreage, that's where we have the gathering contract to supply the gathering services. So we'll look at that. And on Auburn, we announced the total spend of $80 million. About three-quarters of that is the Auburn project, the Auburn portion of the project, yes.

Roger G. Young – Miller/Howard Investments, Inc.

Speaking of the infrastructure gap how valuable is UGIs right away and its total gross consumption in natural gas and your getting into deals.

Jerry E. Sheridan

The way we think about our position or opportunities, we think that balanced set of capability, the position we have in the region I think of the two items you mentioned the demand – customer demand is the more critical one, the rights of way for the most part, we are securing, we are acquiring those rights of way, as we put projects in place. So of the two pieces, the demand we serve as is very important and fundamentally what we have done for the Northeast portion of our service territory now through these investments is convert that customer base from long haul supply from the Gulf to Marcellus supply on a short haul pipe, in a much lower cost, so it’s a great solution for our customers, and it has turned into a very attractive project for us.

And we’d like to continue to develop project that enable us to develop a new investment opportunity for the company and provide an attractive solution for customers. So that is what makes that customer demand side so critical for us, in terms of us executing our strategies.

Roger G. Young – Miller/Howard Investments, Inc.

Thank you.

John L. Walsh

Thanks.

Operator

Your next question comes from the line of Edward Rowe from Raymond James. Your line is open.

Eddie H. Rowe – Raymond James & Associates, Inc.

Good morning, guys.

John L. Walsh

Good morning.

Eddie H. Rowe – Raymond James & Associates, Inc.

A quick question on UGI, and this has probably been asked before but wanted to get some further insights. We've seen a trend of the so-called movement toward MLPs and value enhancement from C Corp. utilities using a carve-out of pipelines and Midstream assets and carving them out into MLP vehicles. Can you share with us maybe your thoughts on some of the strength and weaknesses on using this strategy for some of the pipeline or Midstream assets in order to maybe get some uplift in valuations and use the MLP vehicle as a monetization for some of your growth projects?

John L. Walsh

We have – certainly as UGI given the relationship with AmeriGas as a corporation we are very comfortable with that structure, we’ve been associated with AmeriGas MLP for since its inception, in the Mid 90s. So its we think we fully understand kind of the benefits out and the attractiveness of the MLP structure, we don’t have a stated intent, to – we haven’t said that we have an intent to create a Midstream MLP, we look at it as one option that we have as a company, in terms of if its attractive and enhancing our ability to access capital at an attractive rate, it would certainly be looked at, the good news for us at the present time is we’re busily developing projects. We have exceptionally good cash generation as a company. We can fund a lot of our projects with no debt just from cash we generate from operations. So that’s the good news and we have attractive projects coming our way. So we tend to focus primarily on the fundamentals of the project and the projects and the investment opportunities, but having said that we will look at any option that makes sense for us. As I noted we’re very familiar with the MLP structure. And it is there as an option and we would consider that in conjunction with the board if it made sense for us.

Roger G. Young – Miller/Howard Investments, Inc.

Great. Thanks on that. And the second question, just kind of a macro kind of question in regards to Northeast and NGLs. With no really wide-grade takeaway capacity coming online within that region and the cold winter has brought propane inventories down, but now we're seeing inventories in Pad 1 trend at an accelerated rate upwards, are you guys seeing an increased demand from producers on using trucking within the region? And how do you guys think that's going to ultimately play out within the Northeast? Thanks.

John L. Walsh

Yes, I’ll comment briefly and certainly Jerry can comment with a lot more detail knowledge than I on the propane side. But just in general this is from the UGI’s perspective on both natural gas and propane, even though logistics obviously are quite different – having significant demand whether its for natural gas or propane, adjacent to or basically on top of the significant production levels is quite important and generates opportunities for us to enhance margin reduce costs et cetera by sourcing effectively. So its one of the strengths of the company in general, we focused a lot of attention on supply, supply strategies and making sure we’re linking our operational execution to our supply position. And over the last three or four years now, we’ve seen a huge change in our supply environment and the great thing about it is the new sources that are coming on stream are right adjacent to significant demand for UGI or AmeriGas. So that’s a great thing and the key for us is then sort of executing on those opportunities. And we’re doing that in both the natural gas side of the house and on the AmeriGas side. Now I’ll turn it over to Jerry who can comment on the AmeriGas specifically.

Jerry E. Sheridan

Sure, yes we’re talking to all of our suppliers now about next winter and there does seem to be almost an sensasable demand to push propane outside the country as fast as they can do with the prognosis they decided that they can do it as fast as they would like to. We’re hopeful that there is going to be some standard propane going into next season which will just give us great stability on the price itself and absent of that they kind of crop drying crises that we had last winter I don’t see that there is any reason why we experienced another sorted situation as long as we’re smart about getting our storage filled to going into the season, but I think we’re hopeful that this kind of standard situation is only going to help us the propane under a dollar.

Operator

Your last question comes from the line of Eric Shiu from Wells Fargo. Your line is open.

Eric Shiu – Wells Fargo Securities LLC

Hey, good morning guys.

John L. Walsh

Good morning.

Eric Shiu – Wells Fargo Securities LLC

Just had two quick questions on AmeriGas. First, can you quantify the incremental OpEx that was required to procure the additional propane supplies? And then, second, the quarter reflected higher uncollectibles. Can you provide your expectations for the balance of the year?

Jerry E. Sheridan

Okay. Well, as you saw, there was a – I mean we're a middle man, right? So we don't make the propane; we just resell it. So the market price for propane grew by 50% in the quarter. So I mean that's the kind of easy quantification of our cost. And as you saw in our EBITDA per gallon, we had to recover not only that cost, but the additional operating expenses, which really you could point to as being completely represented by over time, which was working seven days a week, the bad debt that you mentioned, and all the repair and maintenance items that I cited. But our OpEx quarter-to-quarter was up about 6%, it was about $14 million, and we were able to price accordingly.

Eric Shiu – Wells Fargo Securities LLC

Okay, great. And then just your expectations for the balance of the year on uncollectibles?

Jerry E. Sheridan

Okay, I’m sorry. The uncollectibles has been very strong as I said the last few weeks have been terrific, we had during the winter season itself as I mentioned we did have anxious customers acquired the prices going up as they did and we have to explain that the cost were up 50%, we were simply past it on. So that’s often hard for customers to understand, but once we’re able to at least describe it and maybe lucky for us it was in the news now that they understood we’ve been able to I think to solve that problem is very virtual in fact that the customers are in fact doing well.

Eric Shiu – Wells Fargo Securities LLC

Okay, great. Thank you.

Operator

We have no further questions in queue. I would now like to turn our call back to the presenters.

John L. Walsh

Okay, thanks very much. I appreciate all your time in the call this morning and we look forward to talking to you next quarter on the call. Thank you.

Operator

This concludes today’s conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!