Spire Inc (SR) 2015 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to The Laclede Group Third Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). I will now turn the call over to Scott Dudley, Managing Director, Investor Relations. You may begin your conference.

Thank you and good morning. Welcome to the Laclede Group earnings conference call for the third quarter of fiscal 2015. We announced our financial results this morning and you may access the news release on our website at thelacledegroup.com and you can find that under the News Release tab.

Today's call is scheduled for up to an hour, and will include a discussion of our results and question-and-answer session. Prior to opening up the call for questions, the operator will provide instructions on how you may join the queue to ask a question.

Presenting on our call today are Suzanne Sitherwood, President and CEO and Steve Rasche, Executive Vice President and CFO. Also in the room with us is Steve Lindsey, Executive Vice President and Chief Operating Officer of Distribution Operations.

Before we start, let me cover our let me cover our Safe Harbor statement and a discussion of our use of non-GAAP earnings measures. 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 quarterly report on Form 10-Q, which will be filed later today.

In our comments, we will be discussing financial results in terms of net economic earnings and operating margin which are non-GAAP measures 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 as well as the impacts related to acquisition, divestiture and restructuring activities including costs related to the acquisition and integration of Missouri Gas Energy and Alabama Gas Corporation.

Operating margin adjusts operating income to include only those costs that are directly passed on to customers and collected through revenues, which is a wholesale cost of natural gas and propane as well as gross receipts taxes. A full explanation of the adjustments and a reconciliation of these non-GAAP measures to their GAAP counterparts are contained in the news release we issued this morning.

So with that, I will turn the call now over to Suzanne.

Thank you, Scott and welcome everyone. I'm proud to report we turned in another quarter of solid performance, as we continue to execute on our growth initiatives.

I'll begin with a quick summary of our results and then I will provide an update of other items related to achieving our strategic objectives. Steve Rasche will follow me with a more detailed discussion of our operating results and financial position as well some commentary on our outlook.

This morning, we reported net economic earnings at $0.25 per share for the third quarter and $3.56 per share for the nine-month period. Steve will discuss the details in a moment, but I'm pleased to note that these results are in line with our expectations and we remain on track to achieve our growth target for the year.

At the AGA Financial Forum in May, we had an opportunity to meet with many of you to discuss our achievements relative to our strategic growth initiatives. I'd like to spend a few minutes recapping that discussion and providing a few updates. We remain focused on transforming our business and continuing to deliver long-term growth by executing on the four pillars of our strategy.

First, we are growing our core Gas Utility business through investment and further pipeline infrastructure upgrades and organic growth initiatives. Second, as we demonstrated, we are growing to acquiring other gas utilities and successfully integrating them to create value for investors, customers and the communities we serve. Third, we are working to further leverage our natural gas industry expertise to optimize our current and future investments in natural gas transportation towards and supply assets across both our regulated gas utility and our gas marketing business. And fourth, we are investing in innovation and emerging market.

I'll start with our initiatives to grow our gas utility business. As you know, a significant driver of growth for our gas utility business is capital investment, particularly for upgrades to our distribution infrastructure. In 2015, we have continued to ramp up our pipeline replacement efforts across both Missouri and Alabama. Our commitment to prudent investment in our infrastructure is designed to improve safety and reliability while lowering operating cost.

So far this year, we have invested more than $200 million in capital and we remain on track for approximately $300 million [we spent] for the full year with a little more than half of this total dedicated to infrastructure upgrade. To put our 2015 plan spent in perspective, for fiscal 2014, our capital expenditures were about $170 million. In Missouri, the Infrastructure System Replacement Surcharge or ISRS provides us with a more timely regulatory recovery of our prudent infrastructure investment.

On May 22, the Missouri Public Service Commission approved an annual increase in ISRS of $5.4 million from Laclede Gas and $2.8 million for MGE. On Monday this week, we filed traditional ISRS to cover our investment for the period running from March 1 to August 31. The filing request $4.3 million from Laclede Gas and $1.8 million for MGE. We expect that approved amount to be effective later this calendar year.

We are also seeing results from our organic growth initiative targeting at an increase in revenue and margin while also improving our cost efficiency. We have been assessing the growth potential on the various markets we serve starting with St. Louis and Kansas City and learning from Alagasco's experiences. In a way, we are getting back to the basics of understanding our customers and their energy needs and identifying opportunities to better serve them. In doing that, we are striving to grow our customer base (inaudible) and improve the retention of existing customers in traditional and creative ways

Our initial focus area has been to build commercial and industrial (inaudible) conversion from alternate fuel. While I can't speak to the specific customer, I'm proud to say we are having success in converting several industrial customers to natural gas representing a meaningful amount of incremental margin. And I would note that we're seeing modest customer growth across our entire Gas Utility footprint.

We are also now pursuing service expansion within our franchise area and acquiring municipal gas utility. As we work to grow revenue and the margin, we are also focused on greater cost efficiency and how we serve our customers.

We are deploying enhanced technology and communications tool to improve the quality of the interactions we have with our customers and to ultimately deliver service more effectively. We are also leveraging our shared services model and looking for an [exciting profits] improvement across our organization.

These initiative are tied in part to our integration effort for MGE and Alagasco. As I mentioned last quarter, we are nearly complete with the integration at MGE with the final IT system and communication next month and our integration work at Alagasco is well underway.

Now, let me turn to optimizing gas supply assets. As I noted last quarter, we have undertaken a thorough evaluation of our mix of natural gas storage, transportation and supply assets to ensure we have diversity both in access to gas supply from various basins and transportation sources.

Due to the introduction of shale gas, such evaluation should improve diversity and reliability for years to come. We started this effort in Eastern Missouri, evaluating access to shale gas in the Northeast Supply Basin. In Western Missouri and Alabama, we are earlier in the process. However, by the end of the calendar year, we expect to be in a position to outline some initial steps we will take to realize value both for our customers and shareholders.

Now, I'd like to close on a positive note. Lastly week, Laclede Board of Directors declared a common stock dividend of $0.46 per share payable October 2. This is the same quarterly rate declared since the annualized dividend was increased 4.5% effective January 2. We are proud of our track record of 12 consecutive years of increasing dividend as we continue to make good on our commitment to delivering shareholder value.

With that, now let me turn the call over to Steve Rasche to review our third quarter results. Steve?

Thanks, Suzanne and good morning everyone. We announced third quarter earnings earlier this morning that came at the top end of our expectations due to timing and a slight improvement in our income tax rate. Let me take a few minutes to review those results with you and talk a little bit about the rest of this year and 2016.

Starting with our third quarter results, total operating revenues were just over $275 million, up 14% from last year. Operating margin or earnings contribution after gas costs and gross receipts taxes of $177 million was 36% higher than last year.

By business segment, Gas Utility margins of $173 million were up $50 million from last year, as the addition of Alagasco contributed $54 million in margin, while the operating margin of our Missouri Utilities declined by $4 million. This decline reflects ISRS revenues that were higher in the quarter, but they were more than offset by the change in Missouri Gas Energy's rate design.

As we noted in previous quarters, MGE's rates now include a variable usage base component, which has shifted the margins into the first and second quarters of the fiscal year and decreased margins in the third and fourth quarters.

Gas Marketing delivered operating margins of $3.1 million, down from $6.5 million last year. This decline reflects the return of normal weather and market conditions in the Midwest, as compared to the higher volatility and wider price differentials prevalent in the prior year. Remember that last year, the overall market was recovering from the record cold winter of 2014 and the market dynamics were still working to return to the new normal, so to speak, that we are seeing again this year.

Returning to the income statement, other operations and maintenance expenses of just under $91 million include the benefit of $7.6 million non-recurring gain on sale of utility property related to the consolidation of our St. Louis offices. Excluding that gain, run rate operating and maintenance expenses of approximately $98 million were $25 million higher than last year, reflecting; first, the addition of Alagasco which added roughly $36.5 million to O&M costs and second, lower expenses at the Missouri Utilities driven by lower bad debt expense, lower labor cost, offset in part by higher integration expenses.

Depreciation and amortization of $32 million was up $14 million from last year with $12 million attributable to the addition of Alagasco and the remainder reflecting the higher level of capital spend in the last 12 months. Taxes other than income of $26 million were up $4 million, reflecting mainly the addition of Alagasco offset in part by lower Missouri gross receipts taxes. Interest expense for the quarter of $18 million was higher year-on-year by just under $7 million and reflects the debt assumed and issued in conjunction with the Alagasco acquisition.

Income tax expense was $4.6 million compared to a net tax benefit in 2014. The effective rate for the current year now stands at 31.6% and the provision for the quarter reflects the year-to-date change to that new run rate. During the quarter, we filed our annual income tax returns and recognized the one-time benefit associated with the retroactive components of the tax extenders that were passed in late 2014. We anticipate our full year effective tax rate to remain close to this run rate.

The resulting GAAP net income for the quarter was approximately $14 million or $0.32 per diluted share. Net economic earnings for the quarter were $11.1 million, down from $14.5 million last year. As noted in our press release, our net economic earnings this quarter excludes that gain on sale of property and after-tax benefit of $4.7 million to provide a truer picture of our run rate earnings.

Looking at the earnings by segment, the Gas Utility segment delivered net economic earnings of $16.5 million compared to $13.3 million a year ago. This increase reflects the additional earnings from Alagasco and the increase in ISRS revenues offset in part by the impact of MGE's rate design change. Gas Marketing earnings are $0.5 million, down from $1.9 million last year, reflect the change in market conditions I noted a minute ago.

Other net cost in 2015 of $5.9 million reflect primarily the interest cost associated with the Laclede Group debt issued to finance a portion of the Alagasco acquisition. On a per share basis, third quarter net economic earnings were $0.25 per diluted share, compared to $0.44 per share last year. This comparison reflects the change in the quarterly distribution of earnings as well as the weighted average impact of the additional 10.4 million shares issued to finance the Alagasco acquisition last year.

Let me turn briefly to our year-to-date results. Overall net economic earnings for the first nine months of our fiscal year were just over $154 million or $3.56 per share. This compares with prior year earnings of $102 million or $3.12 per share. This increase of nearly $52 million is due to the growth in our Gas Utility segment reflecting not only the addition of Alagasco but also growth of our Missouri Utilities. Gas Marketing earnings were lower than the prior year period due to more favorable weather and market conditions in the prior year.

Switching to the cash flow statement, cash provided by operating activities for the first nine months of 2015 essentially doubled from a year ago to $366 million. Alagasco added $120 million of that operating cash flow and the remainder reflects favorable timing of collections of Missouri Gas costs under our purchase gas adjustment clause as well as lower inventory values. And as Suzanne mentioned, year-to-date capital spend was nearly $203 million, up more than $93 million from last year, with approximately $57 million of that increase attributable to Alagasco, and we remain on track for our targeted capital spend of $300 million this year.

Our balance sheet at June 30 remains very strong with solid long-term capitalization of 51% equity and 49% debt and short-term borrowings of approximately $211 million, down from last quarter, reflecting our ongoing plan to delever the business. Our liquidity remains excellent and we have ample capacity in our credit facilities and commercial paper program.

During the quarter, we finalized our private placement of two tranches of Alagasco senior notes. These notes will fund later this calendar year to better match our seasonal cash needs with $35 million in 10-year notes with an effective interest rate of 3.2% funding on September 15, essentially replacing a similar amount of high rate notes that we call in January of this year.

In addition, we will fund $80 million in 30-year notes at an effective rate of 4.1% on December 1, concurrent with the maturity of a like amount of debt that carries an interest rate of approximately 5.4%. In both instances, our customers in Alabama will benefit from the lower interest rates since interest expenses recovered currently and trued up quarterly.

Looking out to the rest of the year, our results continue to demonstrate the success of our growth strategies and we remain on track to meet our full year 2015 earnings targets. As a reminder, due to the change in MGEs rate design and the acquisition of Alagasco, our distribution of earnings becomes more seasonal and as a result, we anticipate an operating loss in the fourth quarter, a hot summer season in our service territories.

We anticipate our fourth quarter loss being higher than last year and a little above the top end of the 9% to 11% range of full year net economic earnings per share we first introduced last fall. These expectations reflect the adjustments I noted earlier for a slightly lower effective tax rate and the timing of operating and maintenance expenses in the fourth quarter.

Again, putting all this together, we remain on track for meeting our commitment of growth in 2015 above 6% after removing last year's gas marketing weather benefit. And we are already well into preparing for fiscal 2016, especially our budget and long-range plan. All are on track with our long-term EPS growth target of 4% to 6% and the expectation that 2016 will again be above that range.

I would also note that as part of that detailed planning process, we are assessing the launch of more formal annual earnings guidance. More later as we complete the [hard work internal] with our team to get our 2016 plans in place. Now, let me turn it back over to you, Suzanne.

Thanks, Steve. So, to summarize, we continue to execute on our strategy and deliver results in line with our expectations, including our earnings per share growth target. We are executing well and we continue to transform Laclede to effectively integrating and bringing together our utility companies and [bringing] the business model of our non-regulated businesses.

This transformation includes the shift in our corporate culture to reflect who we are today, a larger growing company that serve gas utility customers across two states and provides other gas services across the Midwest and other parts of the country. We continue the work to build stronger connections and communications with all our constituencies sharing our changes in our plan.

Our recent AGA Presentation had simplified [and reflected who we are as a company with a slide depict for] community with a description. The description reads: Energy exists to help people. To enrich their lives, grow their businesses, advance their communities. It's a simple idea, but it's one that's at the heart of our business.

In that spirit, I also thank our more than 20,000 employees for their commitment to our simple idea. In the months ahead, you can expect that we will continue our efforts to focus and solidify our image and messages to our stakeholders and continue to deliver on our products.

Operator, we're now ready to take questions. Thank you.

(Operator Instructions) Dan Eggers, Credit Suisse.

Just a couple of questions. Suzanne, you may have mentioned muni system acquisitions or something about munis in your prepared remarks. Just wanted to know if you could just maybe elaborate a little bit more on that or tell me if I just misheard you?

You didn't miss. Here, I have given a little bit more expansion regarding organic growth that we had shared I guess a couple of calls ago that we had hired a Vice President of organic growth and he's done a lot of preliminary work in terms of areas that we should be focused on and one of those areas are municipals and also with the acquisition of Alagasco, there's several municipals in that state as well as even some in Missouri. So, we're just focused on, right now, understanding who they are and we also think about it in terms of all the pipeline regulations. Steve Lindsey is at the table and he can talk a little more about that if he'd like but some of the municipals are actually reaching out to gas companies because they have a stronger need in understanding what those requirements are. And Steve, if you want to [hit it].

(inaudible) really seeing a trend nationally that has enhanced five-point safety regulations moving into play. Some of these municipal operators are looking for assistance either in the operations of system or perhaps completely divesting over that systems. So, we're out in the market. We're making ourselves available, having discussions with those municipalities and we view these as part of organic growth.

We've seen in the water space where it makes tremendous amount of sense for the munis probably to be selling their systems because of the capital obligations and operational challenges, yet they seem not to show a whole lot of willingness to do it. As you guys are kind of looking at this, are you seeing interest either from the munis or the people, the communities would suggest that this is something you guys get yourself more actively involved in?

Well, yes, I think, again, as you've mentioned, some of the operational characteristics of the system have changed as well as leadership within the different municipalities. So, I think again our [role] right now is to evaluate where those opportunities exist, have those discussions and if those opportunities present themselves, be ready, and take little bit more of a proactive approach than we had in the past.

[As you know], one of the points as well, the capital constrains that some of these munis have especially coming out of the sort of the 2008 recession period and then you layer on this additional federal regulation, they don't necessarily have the volume capacity and other capital resources that [turns you]. So, that's part of what's driving the interest to your point.

Do you think this is -- is there an opportunity to kind of be a manager of their systems instead where you could get paid? In a little capital way, you're paid a management fee effectively to run it for them without having to do a lot of [balance sheet work] necessarily?

I guess, as I said, we have to keep our mind open to what the interests of that particular municipality is and the Public Service Commission. Different states, if you will, the Commission review these transactions in different ways that we would keep our minds open but regardless, taking liabilities of the health of that system and our ability to evaluate it would be extremely important. And then, secondly how we work with the regulators to get the right way to transition that municipal into the gas company that works for customers and our shareholders. (inaudible) but we've done a lot of homework and we feel pretty confident about our approach.

Suzanne, do you think this is a fiscal year 2016 event where we'll start to see something convert or how long (inaudible) to make sense of this from our perspective?

We think there's a few line items on organic growth and I'm trying to give you [two of the high flyby]. In terms of mix evaluation, clearly one of the pillars and we've done a lot of analysis regarding to municipals that are in Missouri as well as Alabama and we have folks that are working out in the field. So, I guess, time will tell but it's definitely something that we've studied well and we're out working.

And I guess probably on the organic front you made mention of kind of looking at your share with shale-related infrastructure and that sort of thing. Can you just maybe explain a little bit what the thought process is there and I guess the timing is you would give an update at the end of next quarter's call because of your fiscal year end?

Correct. You did hear that correctly. So we embarked under Mike Geiselhart's leadership, he is our Senior Vice President, Corporate Development and Strategy. We started evaluating all the upstream asset that prior actually to closing Alagasco for our Missouri utility and we were looking at the historical supply, transportation and storage contracts and sources for serving our customers. So we started evaluation process on how well do they serve us regarding the liability for our customers on the short-term and the long-term.

And as you know, again, with the introduction of shale gas in these various basements and those different attributes for these basins, as you know, that changed the market as well as the pipeline response to those supply basins, so I believe and my colleagues believe that it was the responsibility for us to embark on this evaluation.

We started in the eastern part of the state and we split up a lot of the modeling and therefore physical and logical modeling are now starting the same for the western side of the state in Alabama. Because we've started earlier with eastern side, it was more sophisticated from a reliability and then you layer on commercial availability, want some of those supply transportation services might look like on going forward and that's some of what you will hear an update towards the end of next quarter.

Spencer Joyce, Hilliard Lyons.

Steve, I liked that teaser on the guidance. We'll all eagerly await the Q4 now.

Thanks, man.

Just a quick one here. Steve refreshes on the timing for that reallocation of the earnings kind of across the quarters. Those rate structure changes will have anniversaried like as of Q4, is that right? So we should have a pretty clean year kind of in the rearview mirror as of next quarter?

We should but Alagasco will not have been in the mix last year because as you might recall close on that at the end of August. And we kept it out of our net economic earnings for the full year. And Alagasco is more seasonal due mainly to the fact of the geographies that it's providing natural gas in. So the fourth quarter will still be a little bit hinky.

What I would suggest, Spencer, is go back to the guidance that we talked about earlier in the year and I did talk about it on the call and we kind of give ranges of earnings by quarter and that range that we gave for the fourth quarter was a loss of between 9% and 11%. And as I just mentioned, we expect to be a little bit above that range.

So, a little bit higher than 11%, the loss for the quarter and that's really timing of expenses as much as it is the change in the seasonality. But I would say that once we get beyond this year that I think we should have a reasonable cadence to work through as you look at 2016 and beyond.

So, maybe one more kind of noisy or kinky quarter there and then we should be pretty clean?

Yes, (technical difficulty) real hard not to make it noisy and uncomfortable for you.

Yes, I know you all did a great job closing those acquisitions right at the end of the year, which made it nice to work with. Turning up to the income statement, the gain on sale from this quarter, was that baked into the O&M line, was that a offset to O&M expense or was that in the other income line?

That was in the O&M expense line and you'd want to take out that $7.6 million essentially reduction in operating expenses in order to get to a better run rate.

Okay, perfect. And I think that was in the release. I just want to make sure I was understanding that right, that's kind of a large item. Finally for me, on the corporate overhead and sort of the other unallocated expense or earnings line, we've obviously seen some wider losses this year but I'm assuming that should peak somewhat for full year fiscal 2015 and then perhaps draw down a little bit moving forward. Is that kind of, I guess, qualitatively the right way to think about those, the other segment, if you will?

Yes, the other, the magical all other category is everything that doesn't fit in nice and neatly into a segment, and you're right, the vast majority of those expenses are interest expense on the Group debt (technical difficulty) should finance the Alagasco transaction. So, and those are all mostly at fixed rate, some at variable rate, but short term variable rate.

So, until we start retiring that debt, that will be a fairly static number on a quarter-to-quarter basis. There is a small amount of what I'll call unallocated corporate costs that would also fall in that category. Those don't generally vary much on a quarter-to-quarter basis. It's a little bit more this quarter because of some integration costs but we would pull those out for economic earnings purposes.

So, I think over time, Spencer, as we start delevering the business and we know that in 2017, we'll delever the business with the unit mandatories liquidating at least the equity forward component of those liquidating, that will definitely see a sea change in the interest component in that other category. Aside from that, it's probably going to stay a bit more flattish going into 2016.

A potential drawdown talking point in 2017 but before that, looking kind of flattish.

Yes.

All right. Nice quarter, that's all I have.

Thanks, Spencer.

Selman Akyol, Stifel Nicolaus.

Couple of quick questions. On your acquisition-related expenses from Alagasco, how much longer do you expect those to be running through? Should we expect to see those continue [breeding] into 2016 as well?

Yes, we do. We typically look on a broad brush, Selman. When we look at integration, it's generally a two year to three year program. If we look at MGE and that's a really good marker to take a look at, we do anticipate there being some cost next year which would be the third year of that acquisition. Remember, we're only coming up on the first anniversary of Alagasco. And as Susan mentioned in our prepared remarks, we are now implementing the integration plan. So, we would clearly expect those integration cost to continue through 2016 and then perhaps some into 2017 at Alagasco. At that point, probably not much from MGE going forward.

I think you said before that MGE was a good marker and maybe up to $20 million of integration expenses there, am I remembering that correctly?

You are, and that was our original transaction cost guidance and we came in well underneath that. Our integration costs for MGE are running at a level significantly below that. In fact, if you give me just a second here because we do disclose that information every quarter, I'm not sure if I'm going to get it to -- I will get it to you separately if I can.

Okay, we can follow-up offline, but so as I'm just taking back 2016 in terms of Alagasco, should we expect sort of similar run rates to 2015 or is the bulk behind us? Is there any way to just kind of quantify that?

I would suspect that just as with MGE, you're going to see a fairly consistent run of cost. They run into different categories depending upon what's driving them. So, I would suspect we'll see a similar level as we go through 2016 and that it may start tailing off when we get to 2017.

Great, I appreciate that. And then just looking at the CapEx expenses, I clearly understand what's being spent in Missouri, can you go through with the $56 million, where that's being spent for Alagasco?

Over half of it was pipeline replacement and that's clearly what our goal is. In fact, if you look into 2016 and beyond, we would expect that number to even go a little bit higher. So, in terms of the (inaudible) almost two-thirds of that amount is either pipeline replacement or other things that would be directly associated with pipes or new customers.

And then this year, and we see the same thing happening in St. Louis or in Missouri, as we do have some facilities costs that are coming in this year, that's about $10 million at Alagasco this year which we wouldn't expect to recur next year. From a pipeline replacement perspective, all the three utilities will be at or above the levels they were at last year. So, we are managing holistically and at Alagasco, there is one large infrastructure expansion (inaudible) improvement this year, so that's another major piece of what's going on in 2015.

All right. Last one for me and it's still along the CapEx. $300 million for this year, roughly split two-thirds between Missouri and one-third for Alagasco?

Yes, [sure].

(Operator Instructions) At this time we have no further questions. Management, I'm turning this back to you for closing remarks.

Great, thank you all for joining us and we'll be available throughout the day for any follow-ups. Thanks for joining us.

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