Spire Inc (SR) 2013 Q1 法說會逐字稿

Good morning and welcome to the Laclede Group First Quarter Earnings Conference Call. All participants will be in a listen-only mode. (Operator Instructions). Please note this event is being recorded.

I would now like to turn the conference over to Scott Dudley. Please go ahead.

Good morning and welcome to our earnings conference call for the first quarter of fiscal 2013. Earlier this morning we issued a news release announcing our financial results and that release is available on our website thelacledegroup.com, under the News Releases tab. Today's call is scheduled for about an hour and will include a discussion of our results followed by a question-and-answer session. Prior to opening the call to questions, the operator will repeat the instructions on how to join the queue to ask the question.

On the call today are Suzanne Sitherwood, President and CEO of the Laclede Group, and Mark Waltermire, Executive Vice President and Chief Financial Officer, who will each have some remarks on the quarter. Due to Suzanne being a bit under the weather this morning, Mary Kullman, our Senior Vice President and Chief Administrative Officer, will deliver the remarks that Suzanne prepared for today's call.

Also in the room with us are Steve Lindsey, Executive Vice President and Chief Operating Officer of Distribution Operations; Mike Spotanski, Senior Vice President and Chief Integration and Innovation Officer; and Steve Rasche, Senior Vice President of Finance and Accounting.

Before we begin, let me cover our Safe Harbor Statement and use of a non-GAAP earnings measure. Today's earnings conference call, including responses during the Q&A session, may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Our forward-looking statements speak only as of today and we assume no duty to update them. Although our forward-looking statements are based on reasonable assumptions, various uncertainties and risk factors may cause future performance or results to be different than those anticipated. A description of the uncertainties and risk factors can be found in our Annual Report on Form 10-K, and our Quarterly Report on Form 10-Q, which will be filed later today.

In our comments on the call today we will be discussing financial results in terms of net economic earnings, a non-GAAP measure used by management when evaluating the Company's performance. Net economic earnings exclude from net income the after-tax impacts of fair value accounting and timing adjustments associated with energy-related transactions and costs related to acquisition. A full explanation of the adjustments and a reconciliation of that income to net economic earnings are contained in the news release we issued this morning.

With that, I will turn the call over to Mary.

Thank you, Scott. And let me add my welcome to those who have joined us this morning.

Earlier today we announced improved operating results for our fiscal 2013 first quarter, which ended December 31st. I'm pleased to note that overall we posted a good quarter to start off the year, achieving higher earnings on both a net income and net economic earnings basis compared to last year. Our gas utility results were up thanks to more normal weather and lower expenses, and gas marketing continued to deliver solid performance despite market conditions that remain somewhat challenging.

I will ask Mark to cover our results and financial condition in more detail, but I would like to take a few moments to discuss our performance in the broader context of our overall strategy and operational focus.

At last week's annual meeting, I had the opportunity to update shareholders on our achievements and progress and moving the company onward as we pursue the many opportunities ahead of us. Since becoming CEO just over a year ago, my message has been consistent, as a company, we will be focused on the things that matter; serving our customers well reliably and safely, growing our company, delivering solid financial performance and positioning The Laclede Group to be even more successful in the future.

On our earnings call last quarter, I talked about our strategic imperatives. I know we've outlined them before, but I want to reiterate them today because it is important to view our performance and achievements through the lens of the priorities we established; developing and investing in emerging technologies, achieving organic growth through investments in our infrastructure, acquiring businesses that fit our operating model, and leveraging our competencies.

As I probably noted at the annual meeting, we have been successful in delivering against our strategy over the last year. We are very pleased by what we have accomplished so far and are equally excited by the opportunities we have to achieve further growth while improving our operating performance and service levels.

In terms of impact, the most significant strategic imperative we have delivered on is acquisition. In December, we announced agreements to acquire two gas utilities to which we can apply our business model and leverage our competencies. As we said at the time, we announced our acquisition of Missouri Gas Energy, or MGE, and New England Gas Company, or NEGasCo, which is the transformative transaction that doubles our size.

We are confident in our ability to obtain the necessary approvals, secure financing and successfully integrate the utilities we are acquiring. We continue to expect to close the transaction by the end of our 2013 fiscal year, which is September 30. We are working to ensure completion of the deal, including seeking approvals and arranging permanent financing. In that regard, I would note that subsequent to our announcement of the transaction, the purchase and sale agreement for MGE was assigned to Laclede Gas.

We have already received antitrust clearance from under the Hart-Scott-Rodino Act. Last month we filed for state regulatory approvals in both Missouri for the purchase of MGE, and in Massachusetts for the purchase of NEGasCo.

Meanwhile, Mike Spotanski, our Chief Integration and Innovation Officer, is organizing teams that will tackle the important work of integrating our organizations in a way that delivers operating efficiencies, enhanced service to customers and improved performance. We view MGE and NEGasCo as different companies, as they operate in different geographic markets under different regulatory environments. We are approaching integration with that in mind.

Since MGE is the largest and most similar company to Laclede Gas, our initial integration efforts are more focused on them. We are fully immersed in the initial phases of integration, including already meeting the employees in Missouri and scheduling a visit in Massachusetts for later this month. We are engaging teams of employees to identify and address the opportunities we have in bringing our organizations together and there is a lot of energy around this effort.

It is still too early to talk about specific costs savings in dollar terms, but we know from our due diligence work with the help of outside advisers, that there are opportunities to operate more efficiently on a combined basis. We are being deliberate and thoughtful as we go through the process to identify efficiencies. And we will have more to share with you as we get deeper into our assessment and analysis.

This acquisition is transformative in scale for our company, but it also lays the foundation for growth in new markets with new customers. Going forward, growth could include additional gas utility acquisitions, as well as other natural gas market opportunities in which Laclede can exercise strategic advantage. These opportunities could include regulated pipelines that connect to a supply source, the first mile of pipe, or that connect to a strategic customer, the last mile of pipe.

In a moment, I'll talk about the recent developments regarding another of our growth initiatives, investing in emerging technologies. But this is a good point to turn the call over to Mark for our financial update.

Thank you, Mary, and good morning, everyone. As we noted in our earnings release, we are indeed off to a positive start for fiscal 2013. And I want to review these results with you and provide an update on our recent regulatory filings and our progress in securing financing for our acquisitions of MGE and NEGasCo.

First let's turn to our operating results for the first quarter of fiscal 2013. You will see in our news release and in our Form 10-Q to be filed later today, that we have simplified the descriptions of our two main business segments; our Gas Utility segment, formerly the regulated gas distribution business, includes the utility operations of Laclede Gas at present, and going forward, will include the post-closing results of MGE and NEGasCo.

Our other major segment has been renamed Gas Marketing. It includes our non-regulated gas marketing operations of Laclede Energy Resources or LER. We believe these designations more clearly reflect the operations of our two main business segments and how we think about them.

Turning to our results for the first quarter, The Laclede Group posted net income of $25.6 million or $1.14 per share -- per diluted share, up from $25.2 million or $1.12 per share last year.

Excluding acquisition costs and fair value accounting adjustments, we posted consolidated net economic earnings of $1.25 per share this year, up 13% from last year. This improved performance was driven by increased earnings from the Gas Utility.

During the quarter, we incurred pre-tax costs associated with our pending acquisition totaling $3.6 million, which had an after-tax impact of $0.10 per share. These costs were principally related to due diligence and professional fees associated with our successful bid to acquire MGE and NEGasCo that we announced in December. Acquisition-related costs are required to be expensed each period but have been added back to arrive at our net economic earnings, as noted in the earnings release. As you might expect, we will continue to incur these costs as we work towards closing the transactions, and anticipate that up to close we'll incur an additional $15 million to $20 million of such costs.

Looking at our Gas Utility segment; net economic earnings increased from $21.1 million to $25.3 million due to higher interest revenues, improved weather, and lower overall expenses. As a reminder, ISRS, our infrastructure system replacement surcharge, is a monthly customer charge that enables Laclede Gas to begin recovering costs associated with mandated distribution system improvements and safety-related projects that are completed in between rate cases. These revenues were higher than last year due to our continued investment in our distribution system over the last year.

Gas Marketing net economic earnings for the quarter were $3.3 million, essentially equal to the $3.4 million earned last year, as LER continued to deliver solid performance.

It is important to note that Gas Marketing's reported operating revenues and expenses for the first quarter this year are substantially below those of last year. As we mentioned last year -- last quarter, tighter basis differentials in the marketplace have resulted in a greater percentage of LER's transactions being reported as trading activities, where the margin on the sale is recorded on a net basis in revenues rather than as gross revenues and gross costs. While this has no impact on the earnings of this business unit, it does make the revenue and expense lines a bit harder to compare across periods.

In addition to improved overall earnings, cash flow in the quarter was also higher. For the first quarter of fiscal 2013, net cash provided by operating activities was $4 million, compared to net cash used of $50 million a year ago. The increase is primarily due to the timing of gas recoveries under our purchase gas adjustment, or PGA clause, and lower pension funding. Excluding these changes in working capital requirements, operating cash flows increased to $37.5 million from $35.2 million a year ago.

This positive cash flow supported our capital spend of nearly $28 million during the quarter, which was up $18 million a year ago -- which was up from $18 million a year ago. The increase reflects our continued investment in both the upgrade of our information technology platforms and the ongoing accelerated replacement of Laclede Gas' distribution pipeline. And our capital spending remains on track for a full year level of $115 million.

Turning to the balance sheet; our equity capitalization remains strong at 63% as of December 31st, 2012. Short-term debt outstanding decreased to $83 million at the end of the first quarter, down $30 million from a year ago. This capitalization reflects the maturity of $25 million of 6.5% debt at Laclede Gas last October, and it also reflects the forward settlement of $25 million in Laclede Group tenured notes of just over 3.3% in December, as part of a private placement commitment we entered into last fall. Our remaining commitment is for $100 million of debt to be issued by Laclede Gas, which will be settled in March of this year.

Let's now turn to a quick update on our regulatory activity during the first quarter. As we noted on our previous earnings call in late October, we have filed with the Missouri Public Service Commission to lower the gas costs component of customer bills under the PGA clause. This reduction, which became effective for this winter's heating season on November 16th, reduced the average residential customer's bill by 6%, resulting in the lowest monthly gas bills in nine years.

On December 21st, Laclede Gas filed its first general rate case in three years, seeking a net increase in revenues of $48.4 million, which is exclusive of ISRS revenues already being collected today. As a reminder, the Missouri Public Service Commission must render a decision on our rate request within 11 months from the date of filing, although we have generally been able to successfully settle our cases in a shorter time frame.

And finally, on January 11th of this year, we filed for an additional $5.6 million increase in ISRS revenues to recover investments in pipeline replacements made over the previous eight months. Assuming a normal review process, this filing will likely become effective sometime in mid March and would bring total ISRS revenues to $15.6 million.

I will conclude my remarks this morning with an update on the financing for our acquisition. As we have discussed previously, the closing of the transaction is supported by a $1 billion bridge facility with Wells Fargo. That bridge facility has now been fully syndicated to nine financial institutions, including five firms with deep experience in equity and debt offerings in the utility space. We are currently working with that team to complete our plans for permanent financing as we work towards close.

So to summarize, we had solid earnings and cash flow in the quarter and we ended with a strong balance sheet, as we move ahead on securing permanent financing for our acquisitions. And we have also made a number of regulatory filings during the quarter that will enable us to recover our costs and investments in support of our continued growth.

Now let me turn the call back over to Mary.

Thank you, Mark. Last quarter I spoke about work underway to pursue another of our growth strategies, investing in emerging technologies, with an initial focus on natural gas fueling stations. Last Thursday, we announced the launch of an exciting initiative, called Spire, to deliver natural gas fueling solutions. This is a home-grown enterprise based on thorough analysis and a wide range of customer input. In collaboration with Siemens a global powerhouse in the energy industry, we have built a business model that meets the needs of fleet customers pursuing a natural gas vehicle alternative to diesel or gasoline.

Spire will have its start right here in St. Louis. We are nearing final approval of a contract to build a fueling station at Lambert Airport that will serve both commercial fleet customers and the public. Siemens will provide the design, build and engineering expertise. Laclede will own, operate, maintain and provide the fuel for the station.

This initial project will serve as a springboard for other investments in NGV fueling solutions, both in St. Louis and in national markets. We are focused in this area because we believe the opportunity is big.

Nationally, natural gas is beginning to be recognized as the country's fuel of choice for a number of reasons. First, natural gas is far and away the cleanest fossil fuel there is. Second, it is more affordable than other fueling options, with more than 100 years of supply. And because natural gas is sourced domestically, it offers us national security. Finally, our industry enjoys an enviable record for worker and consumer safety.

We are also focused on NGV fueling solutions, because it leverages the expertise Laclede Gas has gained from more than 150 years in the natural gas business, including more than three decades of experience with natural gas vehicles. Laclede Gas has operated a fueling station for 15 years and has a fleet of CNG vehicles that will number about 50 this year.

Regarding organic growth; in fiscal 2012 we made significant investments in our core utility business to improve safety, reliability and efficiency. We replaced an amazing 41 miles of pipeline and we have successfully implemented Phase 1 of our IT upgrade, a new financial and human resource information system. As Mark mentioned, these investments are continuing in fiscal 2013. Importantly, we are in the process of seeking regulatory recovery of our investments, which supports earnings growth.

So we are off to a great start in fiscal 2013 as we deliver improved financial and operating performance and we make good on our plans to pursue growth through our strategic imperatives; first, acquisitions. Our pending acquisition is moving forward with work well underway to secure approvals in financing and begin the integration process. As we think about key goals for the year, completing and integrating the acquisition is at the top of our list and we are confident in our ability to get it done.

Second; emerging technology. We have launched our natural gas fueling solutions enterprise, Spire, and are pursuing a large market opportunity for investment in emerging technology.

And finally, infrastructure investment. We are achieving organic growth through investment in our existing core gas utility business, while pursuing other investments in natural gas infrastructure. Meanwhile, we are making excellent strides in our ongoing efforts to improve the safety, reliability and quality of our service and to deliver stronger bottom-line results and value for our shareholders.

We are now ready to open the call to questions.

(Operator Instructions). And our first question comes from Dan Fidell at US Capital Advisors.

Good morning.

Good morning. How are you, Dan?

Very well, Thanks. How are you guys?

Good.

Great. I appreciate as always the call here and the color. Just a few follow-up questions on my side -- I guess the first few on a housekeeping point. Can you -- do you have the break out in terms of the impact for the quarter from ISRS separate from the weather impact? And do you have any kind of particulars, in terms of how much weather drove the gain for the quarter?

Hey, Dan. This is Steve. The ISRS impact for the quarter was a little bit over a million dollars -- $1.3 million. And the weather was just a little bit less than that, about $1.1 million --compared year-on-year, which I think is what you're asking.

Exactly right, yes. Thank you. And then in just a more of a general question, in terms of the regulatory process. Can you talk a little bit about -- just initially, I know we're only a few weeks in, but just the general reception you're seeing from regulators, in both Missouri and Massachusetts? And sort of how the meshing of the rate case, along with acquisition approval, how those two are kind of meshed together during this process? Is that kind of a unique way to go through this?

Hey Dan. This is Suzanne. I will take a stab as long as I have a voice. How about that?

Great. Thank you.

From the regulatory approval process -- as you noted, we filed a Missouri PSC on January 14th and the Massachusetts Commission on January 24th. We also have had initial constructive discussions with those commissions and we thought those meetings were constructive. In terms of how they mesh -- the filing in terms of the rate case filing, as you know, we have to file that case at least every three years. So that was just coincident of the timing and so we don't see -- we've had that filing before and we don't see any distractions regarding the acquisition filing itself. We filed other ISRS filings in the past and the Commission and the company have dealt with those collectively.

Great. Just in terms of the timing for the remaining piece of the approval process hearings and such; what are the -- kind of the next important dates as we move forward in the process, specifically in Missouri?

Yes. We don't have -- I'm looking at team, unless I missed something here, we don't have a docket defined with the procedural schedule as of yet, but as soon as we have that that would obviously be posted.

Great and then maybe just a last question or two for me, and I will turn it over. Can you give us a little bit more color on the CNG JV with Siemens? Very interesting moving forward. I certainly agree with your take on things, in terms of the expansion opportunity here. Can you just give a little bit more color in terms of near-term impact, both from a CapEx standpoint and what you see in terms of an earnings impact kind of near-term and longer term?

I will turn it over to Mike, but I want to first thank you for your introductory comments. We're pretty excited about Spire, not because it's just something to announce. It really because of the great work Mike and others at Siemens have done to really listen to our customers and pull a program together that's going to meet their needs. So that's a bit of my advertisement, I guess. I'm going to turn it over to Mike to -- who has the lead on that.

Good morning, Dan. How are you doing?

Good morning. Very well, Mike, thanks.

Good. Good to talk with you. As we've announced, we're working towards the final approval on that Lambert station. This is infrastructure so it does require a capital investment upfront. There will be some capital requirements, although there are some equipment lead times that will lag that capital investment somewhat. So we anticipate slow but continued growth, initially.

We've got a couple other prospects that we're looking at currently that we're not ready to talk about yet. But in terms of earnings, the earnings will come a little bit later in the station life, as initially we take care of some of those first expenses right out the first year out of the box. Again, it's dependent upon how quickly we grow and how much we grow. We'll look at relative slow measured growth initially as we get the collaboration set up.

Yes. I guess the other point, Mike, in terms of these stations, because they are fleet, we are looking for anchored tenants for those stations. And Mike mentioned other customers that they're looking at. So we don't plan on just going out and building stations and hope that they will come. We've got a very methodical process.

Sure. Was that kind of what you intimated in your -- the talking point about a potential large market opportunity that you're working on now?

Yes, it is.

Okay. Great. Well, Thanks very much. That's it for my questions. Appreciate as always the color, and Suzanne, certainly hope you're feeling better soon. Thanks.

Thank you very much.

(Operator Instructions). Our next question comes from Selman Akyol at Stifel.

Thank you. Good morning.

Morning.

Morning.

On your other operation expense line, it came down from the previous year, also came in below our estimates. And I was wondering if you could provide any color there?

Hey Selman. This is Steve. The operating results for the quarter are really a continuation of the trend that we've seen over the last couple of years, as we have been working real hard to improve our operating efficiency. Specific for this quarter, we saw a reduction in several key operating expense categories, some of the hard costs -- distribution and maintenance in total was down a little bit. In addition, our bad debt expense was down a little bit. That's reflective as much with the lower commodity costs as it is with the efforts we continue to deploy in that area. And then finally, I would add that the increased capital spend allows us to capitalize a little bit more of our overhead. And so that helps to reduce the overall OEM -- net OEM number that you're focusing on.

Thank you. On the $115 million for 2013, I think previously you had said roughly half of that you expected to be recovered under ISRS?

Yes. Actually about $62 million of $115 million, we would anticipate being recoverable under ISRS.

Okay. And then going back to Spire, first of all, when do you expect that station to come up and running?

The Lambert station, we expect sometime during the first half of fiscal 2014.

Okay. And then if you look about in moving it to other -- and I'm not necessarily sure markets, if that's correct -- would you continue to anticipate owning and operating all of these stations? Or would you just want to be a supplier of the natural gas? Can you talk a little bit about how you see -- ?

I'm sorry. I hate to cut you off. Our model -- business model is that to the extent that that's the customer's desire, that they want to preserve their capital, and we'll be willing to finance those stations for them as well as do the design build in our collaboration with Siemens. So we would propose, under that business model with the anchor tenant on the fleets that we're able to attain, that we would own and operate those stations.

Okay. And then I'm also intrigued about your comments, Suzanne, on the first or last mile of pipe coming in. Can you give me more discussions around that?

Yes, Selman. I would be happy to. Our belief is there are times that on the interstate pipeline grid that there's not necessarily desire to move certain supply into the grid or to run a piece of pipe to meet a certain customer's needs. It could be a power generator or a large manufacturing company or a small town, as an example. And so we're constantly evaluating those customers that have a potential to have natural gas delivered to them. And so if there is that opportunity, we are willing to run that economic analysis and provide that last mile of pipe, either to a customer or that first mile of pipe to get supply into the grid.

Alright. Thank you very much.

Thanks, Selman.

Mr. [Winter], please go ahead with your question.

Good morning. On the regulatory front, the merger filing; I was wondering if you guys addressed synergies at all in that filing? And, if so, how?

Yes. This is Suzanne and somebody else can chime in if they want to add any color to it, but we did not -- we are -- if it's very early in the process, so to try to analyze and put forward a specific number on synergies and the time of that is just not practical. We don't have enough data to be able to do that. Mike and his team -- they've -- he started the team developments and they're in the process now of starting to do some of that work. It's just too early yet, Tim.

Okay. And on the Missouri properties that you're acquiring, what sort of earned ROE are you seeing there, as of year-end?

Hey Tim, this is Steve. I'm not sure that the year-end numbers for MGE are yet available. But I will tell you that if you look back over the last couple of years, MGE has improved their earned ROE. And it was really close to their authorized ROE for the last fiscal year, which would have been calendar 2011, as I recall.

Okay. Thank you.

(Operator Instructions). Seeing no further questions, I would like to turn the conference back over to Mr. Dudley for closing remarks.

Great. Thank you everyone for joining us today. If you have any other follow-ups, we'll be in the office to take those questions. Thanks again.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.