Spire Inc (SR) 2015 Q4 法說會逐字稿

Good morning, and welcome to The Laclede Group year-end FY15 earnings conference call.

(Operator Instructions)

Please also note, this event is being recorded. I would now like to turn the conference over to Scott Dudley, Managing Director, Investor Relations. Please go ahead, sir.

Thank you, and good morning. Welcome to the Laclede earnings conference call for year-end FY15. We issued an earnings release this morning, and you can access that from our website at TheLacledeGroup.com, and that's under the news releases tab. There's also a slide presentation that accompanies our webcast this morning, and that can be downloaded from our website or from the webcast viewing window.

Today's call is scheduled for about an hour, and will include a discussion of our results and add a Q&A session at the end. Prior to that session, the operator will provide instructions on how to join the queue to ask a question.

Presenting on the call today are Suzanne Sitherwood, President and CEO; 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 begin, let me cover our Safe Harbor statement and 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, which we expect to file later today.

In our comments, we will be discussing finance 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 are the wholesale cost of natural gas and propane, and gross receipts taxes. A full explanation of the adjustments and a reconciliation of the 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 over to Suzanne.

Thank you, Scott, and welcome, everyone. We are pleased to report another year of excellent performance, both in terms of serving our customers and delivering strong earnings growth. As I will cover in more detail in a moment, we continue to successfully execute on our strategy and what drives our performance.

On behalf of our 3,100 employees, I am proud to report that our FY15 net economic earnings grew 11% to $3.19 per diluted share. This compares to $2.88 per share a year ago, after adjusting for the benefit of unusually cold weather last year.

For our fourth quarter, the results were consistent with our seasonal pattern, in which we report a loss during the summer. The change in the loss year over year is due to the different distribution of our earnings, which we've mentioned on previous calls. For the most part, the addition of Alagasco and the change in MGE's rate design to include a small variable usage component are the drivers of the change in distribution.

Steve Rasche will discuss the details of our financial performance, as well is our outlook. In addition to our excellent fiscal year results, we continue to develop our Investor Relations efforts, and are launching earnings guidance for FY16. I am pleased to be able to make this announcement. It is an important step, and reflective of our hard work and confidence in our strategy and our long-term plan going forward.

Based on Laclede's strong 2015 performance and our expected growth for 2016, our Board of Directors raised the dividend by 6.5% to $0.49 quarterly, or an annualized rate of $1.96 per share. As you can see on slide 5, the dividend grew by about 2.5% prior to 2013. It has since increased by 3.5% in 2014, and then 4.5% in 2015.

The new dividend is payable on January 5, and 2016 will mark 13 years of consecutive increases and 71 years of continuous dividends paid. I would note that the new dividend level is in line with our targeted payout ratio, which remains 55% to 65%.

Our strong performance is directly attributable to our ability to successfully execute on our growth strategy. And that strategy, summarized here on slide 6, has not changed. We have been consistent. First, we are growing our Gas Utility business through organic growth initiatives, and we are making wise investments in infrastructure upgrades in both Missouri and Alabama.

Second, we continue to drive value for our customers and our shareholders through the integration of our two accretive acquisitions. Third, we are evaluating our gas assets, predominantly focusing on reliability, diversity and best cost to deliver value to our customers over the short and the long term. Finally, we are investing in innovation and emerging markets with our initial focus on CNG fueling solutions.

Now turning to slide 7, our organic growth initiatives are designed to increase our revenues and margins. Specifically, our organic growth team is taking a fresh look at efforts that are focused on adding and retaining customers. This includes building commercial industrial loads and through improving line extension policies in our Missouri service areas.

We have realigned our sales approach and support systems to improve market penetration. We've also improved our communications with customers, including better-educating them on the value of our product offerings, to drive retention.

We are already seeing some early successes. Across our three utilities, we saw customer growth of nearly 1% in 2015. And as I mentioned last quarter, in Missouri, we have converted several large industrial customers to natural gas from other fuels. Additionally, in Alabama, we continue to have a strong focus on economic development partnerships.

Regarding capital investment, we continue to make investments in infrastructure upgrades in Missouri and Alabama, creating value for our customers and our communities. This investment has focused on infrastructure replacement to both enhance the safety and reliability of our system, and to lower ongoing maintenance costs -- all with service to our customers in mind.

As shown here on slide 8, we invested a record $290 million in capital in 2015, an increase of 70% over 2014. This was driven by the addition of Alagasco and further ramp-up of investment in Missouri. I would note that more than two-thirds of our total 2015 capital spend is recovered in rates with minimal regulatory lag, due to the mechanisms and rate-setting processes in Alabama and Missouri. Steve will cover this in more detail in just a moment.

We replaced 235 miles of pipeline in 2015, which was fairly even split among our three utilities. In 2014, we replaced about 140 miles, which was for Laclede Gas and MGE.

Now turning to the integration of our acquisitions on slide 9, I'm pleased to report that we're fully on track at both Alagasco and MGE. Integration implementation is underway at Alagasco, and our initial focus is on completing organizational design work and implementing our shared services model.

The goal is to provide clarity to our employees and customers in terms of how we work and where we work, ultimately providing improved customer service for our customers. Realizing efficiencies across our organization is an important measure for our customers.

In Alabama, we have a cost-sharing mechanism that provides an incentive for us to control expenses. We were successful in generating savings in 2015 that will return to customers in the form of a reduced rate. At MGE in September, we completed an important information technology system integration involving our customer care and billing, and our work management systems. As a result, all of our Missouri customers are now on a common platform.

In terms of the overall integration of MGE, we have achieved the run rate savings that we said we expected to realize in year three, which is FY16.

Let me now turn to modernizing our gas supply transportation and storage assets. As I noted last quarter, we have undertaken a thorough evaluation of our assets in eastern Missouri to ensure we have diversity, both in access to gas supply from various basins and the supporting transportation sources. Due to the introduction of shale gas and the resulting shift in pipeline services, such evaluation should improve diversity and reliability for years to come.

For western Missouri and Alabama, we're early in the extensive analysis process. We are getting closer to talking about the outcomes from our evaluation and how that analysis points towards certain asset decisions, including potential future projects. We will provide more color on this topic at the annual shareholder meeting in January.

Now before I turn the call over to Steve, let me say something about our investment in innovation. Our Spire natural gas fueling solutions team continues to pursue opportunities to address customer-led needs by providing end-to-end solutions. That is, designing, owning and operating stations that have an anchor customer.

Our focus is on return to base suites, especially Class 8 trailers. In addition to working with customers on their fueling solutions, we are also working to remove market barriers by encouraging coordinated efforts along the value chain.

Today we operate two stations, one in St. Louis at the airport, which has been in operation for two years, and one in Greer, South Carolina, which opened last month. It serves a busy tractor-trailer traffic corridor at Interstate 85 and Highway 101. Both of these stations allowed us to work inside the value chain with customers, creating real value.

Despite the current price spread that CNG offers over diesel, compared to what it used to be, customer demand is still real. Now with that, let me turn the call over to Steve Rasche. Steve?

Thanks, Suzanne, and good morning, everyone. Let me review our operating results for the FY15 and fourth quarter ended September 30, and give our outlook for 2016 and beyond. Starting on slide 12, full-year net economic earnings were $138 million for 2015, up 38% from 2014.

Adjusting prior results for the Gas Marketing benefit of the 2014 record cold winter, net earnings growth was actually 46%. Of course, a good portion of that growth came from the first full year of Alagasco operating results. Even after factoring in the equity and debt issued to finance the transaction, as you can see the bottom of this chart, overall net economic earnings per share increased 11% to $3.19 per diluted share, up from $2.88 per share last year, again, removing the 2014 weather benefit of $5.6 million or $0.17 a share.

This growth was driven by strong performance in our two main operating businesses. Our Gas Utilities earnings grew by 47%, and earnings per share increased 11%, with the EPS measure fully recognized in the shares issued to finance the Alagasco acquisition.

Our Gas Marketing business saw adjusted earnings drop slightly by $400,000, to $4.2 million. Good performance, given the return of more normal and the less favorable market conditions in 2015.

Turning to slide 13, let's take a look at our financial results in a more traditional income statement format. Total operating revenues were almost $2 billion, with the Gas Utility segment seeing revenues grow by 29%, driven by the addition of Alagasco, offset in part by lower overall system volumes reflecting more normal weather in 2015.

Operating margin, or earnings contribution after gas costs and gross receipts taxes of $857 million was higher by 43% compared to last year. Looking at the components of operating margin, Gas Utility margins of $842 million were up 48%, with most of that increase due to the addition of Alagasco.

The Missouri Utilities did see margin growth, as higher ISRS revenues and the benefits of modest customer growth offset lower off-system sales and capacity release, as the utilities took advantage of the favorable market conditions in 2014. As Suzanne mentioned, we experienced customer growth of roughly 1% across our utilities in 2015, adding a total of roughly 15,000 customers in Missouri and Alabama.

Gas Marketing generated operating margins of $13 million, about half the margin of the prior year, reflective of the return of more normal weather, combined with higher natural gas supply that suppressed price volatility and basis differentials.

Continuing down the income statement, operating expenses of the Gas Utility segment were all higher, due in large part to the addition of Alagasco. Of particular note, other operations and maintenance expenses of $391 million include the benefit of a $7.6 million non-recurring gain on sale of utility property related to the consolidation of our St. Louis offices.

Excluding net third-quarter gains, run rate operating and maintenance expenses of $398 million reflect the addition of Alagasco and cost efficiencies at the Missouri Utilities, including the benefits of scale in areas like compensation, benefits and supplies, as well as lower bad debt expenses and labor-related costs, offset in part by higher integration expenses. All other operating expenses were higher, reflecting the addition of Alagasco, offset by lower overall usage, due to the difference in weather conditions between the two years.

Interest expense for the year of just under $75 million was higher year over year by $28 million, reflecting a full year of Alagasco-related interest. Income tax expense for the year essentially doubled to $62 million, due to higher pretax income and a full-year effective tax rate that was 31.2% compared to 27.6% last year. The change in effective tax rate was due to higher mix of Alagasco pretax income, remembering that Alagasco carries an effective rate much closer to the marginal rate.

Let me turn briefly to our fourth-quarter results. As a reminder, the final quarter of our year is the hot summer season in our service territories, and we have historically run a loss for that period. The net economic loss for the quarter was $16 million or $0.37 per share, a significant increase from last year.

As we noted throughout the year, the magnitude of our losses influenced by, first, the addition of Alagasco, whose earnings patterns are much more seasonal then Laclede Gas; and second, the change in MGE's rate design, adding a variable usage base component.

We expect our future earnings distributions will generally follow a similar seasonal pattern, and I will speak more about that in a couple minutes. The quality of our earnings remains very high, with cash flow from operating activities totaling $322 million, more than double the level of a year ago. That was driven by a $100 million contribution of Alagasco, as well as higher Missouri-based cash flow, due to the timing of collections under our PGA clauses and lower natural gas inventory values. Similarly, cash earnings, or EBITDA, shows a year-over-year growth of 64%.

A portion of that growing cash flow supports our higher dividend that Suzanne mentioned a few minutes ago. Another use is our capital expenditures. As shown here on slide 17, cash expenditures for the year totaled $290 million, 70% higher than last year, due in part to the full-year addition of Alagasco, as well as higher spend in Missouri.

As importantly, roughly $200 million of that spend, or 67%, are recovered in rates with minimal regulatory lag -- either in the Rate Stabilization and Equalization, or RSE, mechanism in Alabama, and the Infrastructure System Replacement Surcharge, or ISRS, in Missouri. And speaking of ISRS, both Laclede and MGE received approval for their later surcharge increases, and our new annualized rates, effective December 1, will be $19.6 million for Laclede Gas and $6.7 million for MGE.

Our year-end balance sheet remains strong, with solid long-term capitalization of essentially 50/50 equity and debt, an improvement from 49% equity or 51% debt, a year ago. These new metrics include the funding of Alagasco's 10-year notes in mid-September, and reflect our ongoing plan to deleverage at the Group level, while we continue to invest at the operating Companies. Our liquidity remains excellent, and we have ample capacity on our credit facilities and commercial paper program as we head into the winter heating season.

Now let's turn the page and look at FY16, and let me update you on our outlook and guidance. From a long-term perspective, our view has not changed. We remain comfortable with our long-term earnings-per-share growth target range of 4% to 6%. And that growth will be driven by organic growth initiatives focused on capital spend, margin improvement and cost efficiencies at the gas utilities. More about capital in a moment.

Looking at 2016 specifically, we anticipate our net economic earnings per share to fall within a range of $3.34 to $3.44 per share. This is an indicative growth of between 5% and 8% over actual 2015 results. And we anticipate our earnings mix to remain fairly consistent with 2015, or approximately 97% to 98% of our earnings generated by the Gas Utility segment.

Our EPS guidance assumes normal-weather patterns, of course. And like most utilities, we worked through most normal variations in weather by managing our discretionary spend when necessary. While we are largely weather-mitigated over a full-year cycle, weather may impact the timing of earnings between quarters.

So far this fall, it has been a bit warmer than normal in Missouri. And as a result, we anticipate seeing a bit more of our earnings falling in the back half of 2016 than we saw last year, roughly 3% to 4% of our total earnings shifting from the first and a bit of the second fiscal quarters to the summer season, quarters three, and primarily quarter four.

Looking at income taxes, we anticipate our effective book tax rate to continue to move up to the low 30% range in 2016. And this assumes no re-authorization of bonus depreciation for either 2015 or 2016.

Turning to our capital expenditure plans, we anticipate capital spending to be approximately $315 million in 2016, up from $290 million this year. This increase is driven by the growth in the Gas Utility business, whose capital spend will likely be approximately $310 million, split as shown here on slide 20.

For 2016, we expect that close to 70% of our spend will be recovered in rates, with minimal regulatory lag. In addition, another 10% of the planned spending is targeted to support new business in Missouri, which by its nature, will deliver returns in the form of increased margins now and in the future.

Looking out over the next five years, including 2016, we have revised our long-term capital expenditure plan, with total targeted spend forecasted to rise to $1.6 billion, roughly 7% higher than our previous guidance. And the mix of spend, with minimal regulatory lag and new business, remains largely consistent with the expected mix for 2016. We anticipate this spend will be financed with our growing cash flows and periodic access to the debt markets at our operating Company level.

So in summary, it has been another busy and successful year. And we hit our targets, yet again, in terms of not only earnings, but also de-leveraging the business, driving cash flow and capital spend, and positioning ourselves well for 2016 and beyond.

We thank you your confidence and support, and we look forward to sharing our successes as we progress through 2016. Now let me turn it back to you, Suzanne.

Thank you, Steve. To summarize, 2015 was year of excellent performance, as we again executed on our strategy and delivered higher earnings. We are delivering increased value through both higher earnings and growing dividends.

Heading into 2016 and beyond, we have made strong commitments to continue investing in our Gas Utilities business and driving further organic growth. And we are pleased to provide earnings guidance for 2016 that shows the confidence we have in our ability to execute and meet our growth targets.

We appreciate your investment in Laclede and your interest. My colleagues and I hope you have a wonderful Thanksgiving holiday with your family and friends, and enjoy the spirit of the holiday. Operator, we are now ready to take questions.

(Operator Instructions)

Chris Turnure, JPMorgan.

Good morning, Suzanne and Steve.

Good morning.

I wanted to get a little bit more color on the underlying drivers for 2016. Could you give us an idea of what you are thinking for overall utility rate-base growth? And give us a little bit more color on where you are in the synergy and cost-cutting cycle at the Missouri Utilities?

Yes, hi, Chris. This is Steve. I will take a shot at that. Since we have two different rate structures -- one in Missouri and one in Alabama -- that rate base is kind of a difficult concept for us to translate into earnings growth. Because in Alabama, it is really current rate-making, and rates are based upon retained shareholders' equity.

We did comment on the call that a vast majority of our expectations for earnings growth in 2016 is coming from organic initiatives. In fact, all of it is; it is all of our line-of-sight stuff. And it is clearly driven not only by capital spend -- again, the traditional model for utilities is to think about constructing more and driving value.

But we really do focus on organic growth, as in retaining and growing our customer base, improving margins with those customers, and finding new services to drive more value in our relationship with them. And that's really the secret sauce that we focus on.

With regard to synergies, Suzanne made a comment in her prepared remarks that we are now in year-three run rate from a Missouri Gas Energy acquisition standpoint, and we did hit our endpoint. We, as you might recall, had guided that we expected that the ongoing synergies in year-three, which would be 2016, to be between $25 million and $34 million on an annual run rate basis. And we are near the high end of that range for Missouri Gas Energy moving forward.

At this point, MGE is really operated as part of Laclede. We operate the Missouri Utilities in a largely consolidated fashion, and so you will hear us continue to reference to the Missouri Utilities. Do you want to comment a little bit more on that, Suzanne?

Just one other comment, Chris. I've talked a lot over the last several quarters about the shared services model. And so it is less now about, quote -- synergies -- close quote, relative to those two transactions.

But Steve Lindsey is here. We are also very focused on continuing to get benefits from our shared services model. We are also looking at business improvement processes now that we have, quote, three gas companies.

We're looking at best-practices approaches across the organization to improve services, but also to be more efficient and make sure we are managing our cost structure very well. So past synergies, but now into business improvement processes, shared services model and best practices. So more to come there as well.

Chris, this is Steve Lindsey. Following up on Suzanne's point, from an organic growth perspective, in both our jurisdictions, we are seeing some uplift in the new business construction market, both in the St. Louis and Kansas City areas. And we've changed some of our line extension policies to accommodate that.

We've seen some large conversion opportunities that we've already taken advantage of. And then in Alabama, we're very focused on our strong economic development partnerships, and we are seeing some good results on that. So really, in all of our areas, I think we're looking for some positive uplift in 2016.

Okay, great. And then it is implied from your comments that, even though you're at the top end of that synergy run rate, in Missouri at least, there's still some opportunities to keep costs contained versus an inflationary-type rate, in 2016 specifically?

Yes, because the synergy component, as you are very well aware, is getting the organizational structure in place, and also deploying our technology platform across the organization. And when those two pieces are in place, in essence, for the most part, the synergy piece is completed, and do create accretion. But that does not mean we're finished in terms of cost savings and looking for opportunities to drive down the cost structure of the Company.

Having now three gas companies, common platforms, shared services model, a lot of learning along the way, several of us being in the industry for over three decades. That's just a continuum. That's now part of our culture.

How do we improve the cost structure? But at the same time, we are also looking at -- how do we improve services for our customers and service offerings, and become a better Company for our customers, as well?

And Chris, I would add that we're hitting stride at the MGE service territory, in terms of our infrastructure upgrades. And as you know, and we've seen this at Laclede, that as we continue to replace that old pipe, that drives down our hard operating cost of operating the system.

And we will continue to see those benefits, and those continue over time. So we have a long history of managing cost at Laclede, and we're going to take that discipline as much as we need to, to manage the larger business.

Okay, great. Then you reiterated your 4% to 6% long-term normalized EPS growth rate, and previously that had been off a 2014 weather-adjusted base. And then you said you were going to exceed it probably in 2015 and 2016. Could you give us maybe a little bit more color on how we should think about that number going forward, if the base year is going to change and reset to 2015 or 2016 now, et cetera?

Great question. We do update our view of our long-term forecast. And you are right -- the 4% to 6% remains. We're very confident in our ability to achieve that over time. We have updated that, so that, as much is I would love to go back to 2012 or 2013, or weather-adjusted 2014, we are in 2016 now.

So we are using 2015 as a base as we look out into the future. And it is largely driven -- or almost exclusively driven by the organic growth initiatives that we outlined on the call, and then some of the modernization of our gas supply assets as we go forward.

Okay, great. So there's no normalization to 2015 just as is -- that's the base going forward?

Yes, we try to use that normalization word carefully and only selectively. And 2014 was a record year in our service territory, from a winter standpoint. So we've always set that one off to the side. We set it off to the side when the quarter happened. So that's the only normalization.

Okay, thanks very much, guys.

Thank you, Chris.

(Operator Instructions)

Selman Akyol, Stifel.

Thank you. Good morning.

Hey, Selman, good morning.

Appreciate the Thanksgiving well wishes, and right back at you. As it relates to your 10% capital spend for new business, can you guys elaborate on that? Is that really just going after more industrial customers in and around Missouri?

Selman, this is Steve Lindsey. As I mentioned, I think it is a combination of several things. Initially -- again, we are seeing some uplift in the new business markets in both sides of the state. And we have changed some of our line extension policies to allow us to accommodate even more than we were just in the past.

Some of the opportunities, I think, are in some conversion opportunities with some larger commercial industrial customers. So I don't think it is one specific thing, but we're just seeing some year-over-year uplift. And again, a lot of the focus from our organic growth initiative is to be out there, and even do some things, for example, with tankless water heaters with multi-families. So I think, again, the opportunities are broad, as opposed to just a single issue.

And Selman, you may recall -- and I lose track of quarters -- but we made an announcement that we hired a VP of Organic Growth that reports to Steve Lindsey. And he has really taken a fresh look, especially having gas companies -- and I say a fresh look. There's just some fundamental blocking and tackling, like retain your customers, add new customers.

But there are some new approaches about how to go about doing that. So Nick is working across the organization, again, taking a fresh look with all of that. And we are starting to see some of the benefits from just some of the, again, basic, what I call blocking and tackling. So more to come over the years, because, again, we are thinking about our technology and service offerings and variety of customers, and are working to continuing to grow that number.

Got you. And then is there any update -- in just the outlook for acquiring municipal gas utilities, is there anything that's tightening out there that would bring more municipalities to wanting to reach the point of -- hey, let's combine with Laclede?

This is Steve Lindsey. I will take the first shot at that. I think there's a couple things that could potentially drive that. One is just the infrastructure itself, in that, as OQ requirements are increasing from a federal regulatory and state regulatory perspective, I think some of these municipalities are looking to get out of the business, from that particular reason.

Another is the infrastructure in and of itself needs some capital improvements, and companies such as Laclede can provide that source of capital to do that. And then again, I think just the opportunity for some of the municipalities, from a financing perspective, to go out and get some of this money, is a little more challenging.

So I think there's several rationales that would create some opportunities there. And we are working to make ourselves present in both jurisdictions, to see if those opportunities are there.

A lot of it is political, and it depends on who's operating those municipalities. But we want to make sure that we are affording that opportunity, so that when it does emerge, that we're ready to get in and meet with municipalities.

And Selman, part of the point Steve just made too, and I think it is clear to everybody, we're really looking in Alabama, Missouri. So we're not casting a wider net. It is within our state footprint.

Got you. Okay, that does it for me, thanks.

Thanks, Selman. Have a nice holiday.

(Operator Instructions)

Joe Zhou, Avon Capital Advisors.

Good morning, how are you?

Great, Joe, how are you?

Happy holidays.

Thank you. This is our holiday call.

Yes, holiday call. So how should we look at the 2018 Missouri general rate case? How should we look at [test year] and timing of it? And also I want to ask whether -- and my second question is whether this has already contemplate into your 4% to 6% EPS CAGR going forward on your long-term wheel?

And third question is whether -- should I look at that 4% to 6% linear? Because you have a large rate case going ahead in late 2017 and 2018, there's equity dilution there. So can you share your thought on this?

Yes, there's a lot of questions embodied in that, so I will give you the high point, and then ask my colleagues to help me out on some of the more specific questions, in case I miss something. But yes, there is a timeline for the rate case. And it's a filing next year, I believe in April, with a response from the Commission, if it is fully adjudicated, for 11 months, into 2018. Yes, we have it built into our plan.

We don't foreshadow what the outcome of those cases will be one way or the other. What we do know is, acquiring MGE, we were asked to file a contemporaneous rate case with MGE and Laclede Gas. And the intent was more to bring those Companies together.

And we were required to file that rate case at that period of time, in order to retain our pipeline replacement funding that we call ISRS. That is a statute. We're required to file at least every three years. So the timing of that case is driven by, one, the ISRS requirement, and two, because when we began the MGE transaction, we agreed to file them in a contemporaneous way.

We think that as a good thing, in terms of filing them at the same time. Because in terms of our cost structure and what is a part of MGE and what is part of Laclede Gas, it can be taken up at one time. Again, we don't foreshadow what the commission will decide or not decide.

We do know that we have filed ISRS-required rate cases in the past, and we basically have settled those. And again, we file them for ISRS purposes. Steve and Steve, did I miss something?

Joe, this is Steve Rasche. Let me see if I can cover off a couple of your points. Our 4% to 6% long-term EPS growth target is long-term. We look out over four to five years as the horizon that we traditionally look at, and I think we are very comfortable that our strategy will continue to drive growth in that range.

And we will work real hard to get above that range, as we did in 2015, and as we are clearly expecting in 2016, based on our earnings guidance. You are right. As we think about 2017 and 2018, there are a number of headwinds that we will have to deal with, but those are not surprising to anyone.

Suzanne talked about the rate case in Missouri, and that would hit mid-FY18, so that's really the 2018 going into 2019 year. And then a piece of the financing for Alagasco was a unit mandatory, and those equity forwards will liquidate or be cashed in for shares in mid-FY17.

So we will see a part of the change in the earnings-per-share calculation hit in 2017, and part in 2018. But none of these are surprises to us; we've had them on our radar screen for a long time.

What I would point out on the second point with the unit mandatory is, given where we are trading today, we will issue somewhere in the neighborhood of 600,000 less shares by using the unit mandatory structure than we would have issuing a like amount of equity, which is what we would have done, because we wanted to make sure to have a largely balanced capital structure that's right for the business for the long term.

So I think we've kind of put all the pieces together, and I think we're very confident in that. I would add one thing, that the accelerated upgrades to our infrastructure in Missouri do add to rate base. And we are getting recovery for an increasing part of that in our ISRS rider. But at the same time, there's that other 30% or 33% of spend that will wait patiently for the rate case to come, and then be put into rate base. And that will include some of the IT spending that we completed this year with the MGE integration.

All that comes into play in the Missouri rate case, because at that time, the rate base is re-set. And we are confident that we can land all those things and continue to meet our commitments.

Great. Thank you very much, and happy holidays again.

Thanks, Joe. Same to you and your family. Thanks.

Thank you.

Dan Fidell, US Capital Advisors.

Good morning.

Hello, Dan, good morning.

Just a couple up hopefully very quick questions on my side. First, just on dividend policy. Just wondering if you could update us -- sorry if I missed it, if this was in the script or not. But I just, in terms of a nice, very strong dividend hike here. Is that -- certainly the Board looks at it every year.

But just wondering if the latest hike was meant to send a signal for maybe a higher sustained rate going forward? Just any thoughts on dividend policy from here on out?

We don't personally have a dividend policy, Dan. As you know, there's a range that we deliver our dividends in. And given our strong growth over the last three years, we've improved our dividend payout ratio -- our dividend payout, along the same path as we've improved our earnings.

So we don't have a policy, but we watch it closely. The Board watches it closely, as well. And given our performance, and given what Steve Rasche just went through in terms of our future growth our plan and our confidence and ability to deliver, we thought it was the right decision at the right time.

And Dan, we wanted to make sure, specifically looking at the payout ratio, our range is still and remains 55% to 65%. We ideally want to be the middle of that range, which is maybe bit more conservative than some of our peers or some of the utility industry from a wider standpoint. But we are investing a lot of capital back in our business to grow for the long term, as we've chatted about in the past.

This increase keeps us above the minimum, and gets us closer to where we want to be in the middle of our range. And we think it is the right way to share some of the value that we are creating, with our shareholders, while at the same time preserving capital for investing back in the business.

Okay, very helpful, thanks. And then just, Suzanne, I've got to ask the obligatory question on M&A. Certainly things have been very busy here lately, some pretty high premiums paid for [AGL] and Piedmonts and others here recently.

Just any thoughts you've got in terms of what's going on lately, the premiums being paid and just your general thought on M&A in the sector these days as it applies to any plans you guys might have, in a broader way, beyond just the smaller potential muni pick-ups around you?

A couple points. Obviously I know Tom and John very well, and so I applaud them for their transactions and I'm obviously very happy for them. I think about it more in the sense of, if you go back the last decade and half, or even more, there has obviously been consolidation in our industry. And of late, we are were a part of that consolidation, in that we acquired, as you know, two gas companies, both MGE and Alagasco.

And we've done very well with those acquisitions in terms of creating shareholder value, customer value and actually employee value, and our organization is a different organization, a different culture. And you know that, as well. So consolidation to me is what's occurring over time. And again, I applaud them for those two.

We are very happy with the two that we've done, I think, and it is showing up in the numbers. We've performed well. And generally, natural gas industry right now is important, not just as an industry, but for our country. And as result of that, we as an industry are getting a lot of attention.

What does that mean for us going forward? Nothing -- and I said it in my opening remarks -- nothing about our strategy has changed. We'll continue to look at opportunities, and we will keep doing the good things that we're doing.

Great, thanks very much. Appreciate the color, and happy holidays to you guys, as well.

Thank you very much.

(Operator Instructions)

Tim Winter, Gabelli & Company.

Good morning. I just wanted to follow up on the rate case question, the Missouri rate cases. Will you guys be looking to file for uniform rates with the two companies, or combine the two companies in the filing?

And then the second part is, what is the ROE for each of the companies for the 12-month period that just ended -- the Missouri companies?

From a combination question, it is a great question. And to be frank, we are not there yet. We have not made those determinations. We've just completed -- as we reported out, we've just completed the synergy period with the final deployment of the technology platform.

And that's something we would have to take a hard look at, because we would have to understand customer impacts and administrative components, and rewrites of [ISRS] and those kinds of things. That being said, we have already begun to look at it high-level. So things like standardizing our line extension policies, and I mentioned that in my opening remark, and Steve Lindsey mentioned the same.

So in terms of -- in a rate case, there is also those rules, if you will, that are built into a tariff, like a line extension policy. Those kinds of things we are looking at now, because to the extent we can standardize those rules or service offerings, it is easier in terms of communication to customers across the state.

So more work to come on that before we get to that case. So as we learn more, obviously we will share more with you.

In terms of the ROE, typically, we've black box settled those, in terms of the cases themselves. The only component was from an ISRS calculation perspective, and Steve Rasche has been presenting that from the case standpoint, and the calculations. Steve, I don't know --

Yes, Tim, and if you look underneath those black box settlements, the ROEs in the 9.7% to 10% range, depending on which point you want to go to, and which rate case between MGE and Laclede. And I can say with confidence that we are achieving our authorized ROE in Missouri.

In Alabama, it is a lot easier to find. Because as you know, we are in realtime rate environment, and we adjust every quarter, including the year-end adjustment. And we achieved our 10.85% ROE in Alabama for FY15, and on an absolute ROE basis. But as you know, there is a cost-containment mechanism, which is actually a cost-sharing mechanism, to the extent that we are able to reduce costs, and we were able to do that. So we will earn an additional $3.1 million -- and that's net of tax -- for last year in Alabama.

That's really that half of the cost savings that we achieved down in Alabama by operating Alagasco over the last year. So in an absolute sense, the earnings from Alagasco will be higher, but that's really a separate component from the ROE.

But we were able to achieve not only the 10.8%, but we got the extra 5-basis point kicker for being very high on customer stats. In fact, Steve, I think we were -- we won an award for some of our customer stats down in Alagasco.

In Alagasco for this past year, we won the J.D. Power Award for Business Customer Satisfaction. And actually, in all three of our utilities, we saw increases year over year in our J.D. Power survey. So we are really focused on that.

And one other point I will make about the Missouri utilities. Even if we don't operate on the same tariff, as Suzanne mentioned, with the of implementation of CC&B, as well as our work management systems, we are able to operate these Companies very similar, from an efficiency perspective. And so we're going to get a lot of uplift, regardless of how we proceed with the rate case.

So that was part of the integration that we were building on. And so at this opportunity to put those systems in place, we really feel like we have good upside.

Okay, great, thank you.

Thanks, Tim.

This concludes our question-and-answer session. I'd like to turn the conference back over to the management team for any closing remarks.

Well, thank you very much, everybody, for spending some time with us today. Steve Rasche and I will be available the rest of the day for any follow-ups. And again, have a safe and happy Thanksgiving. Thank you all.

Thank you, sir. Today's conference has now concluded, and we thank you all for attending today's presentation. You may now disconnect your lines. And have a wonderful day.