Spire Inc (SR) 2016 Q1 法說會逐字稿

Good morning and welcome to The Laclede Group first-quarter earnings conference call.

(Operator Instructions)

Please 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.

Well thank you and good. Welcome to our earnings conference call for the first quarter of fiscal 2016.

We issued our earnings news release this morning and it's available on our website at the Lacledegroup.com under the news releases tab. Today's call is scheduled for about an hour and will include a discussion of our results and a Q&A session at the end. And the operator will refresh the instructions on how you can get into the queue for a question.

Presenting on the 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 begin let me cover our Safe Harbor statement and our use of non-GAAP 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 risks factors can be found in our Form 10-K for the fiscal year ended September 30 and our Form 10-Q for our fiscal 2016 first quarter ended December 31 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 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, 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 costs of natural gas and propane and 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 over to Suzanne.

Thank you, Scott, and welcome everyone. As we announced in our earnings release earlier this morning, Laclede is off to a solid start in fiscal 2016 as we continue to achieve our strategic objectives and while achieving a high level of customer service.

In our annual report for 2015 we discussed our strong performance and described the journey we have been on to transform our Company. While our energy sector is transitioning itself in response to unprecedented changes in the global energy market we are responding by keeping our promise to our customers and to our shareholders.

And we are responding with a transformation of our own. Over the last several years we have tripled our enterprise value, expanded our geographical footprint and added nearly 1 million customers through two accretive, transformative acquisitions. And we continue to pursue business opportunities that are grounded in our growth strategy.

Over the past two years we have reimagined The Laclede Group to better reflect the Company we are becoming because as the Company evolves so too must our story. We are proud of our commitment to deliver safe and reliable service every day.

But what matters to us more is the people we serve. That's the real heart of what we do. Every time we talk with an investor, work with a customer or reach out to a new community we want to tell the story of how we challenge ourselves to enrich the lives of those we serve.

We are continuing on our transformational journey in 2016. Every step we've taken on this journey has been part of a well articulated growth strategy: growing our gas utility business organically including through investment and structure upgrades, increasing the scale of our business through acquiring and effectively integrating other gas utilities, modernizing our gas assets and investing in innovation in emerging markets with a current focus on CNG filling solutions.

As you know, we have been studying and analyzing how best to provide a better, more diverse portfolio of gas supply assets. Our goal has been to improve reliability and resiliency of our transportation and storage portfolio while also providing diverse access to gas supplies from multiple basins in order to deliver the best possible cost.

Given the abundance and low cost of shale gas and the shift in pipeline flows we believe that there are opportunities across our footprint. Our initial focus has been to modernize our gas supply portfolio into Eastern Missouri service territory.

At the same time we want to take advantage of the shift in gas flows heading west out of the Marcellus and Utica basins. I'm pleased to report that we have defined a pipeline project that will provide compelling benefit to our customers while achieving these goals.

As you can see on the map shown on slide 7, this north-south pipeline shown in red will connect to the Rockies Express or REX pipeline which traverses the Midwest between the Rockies and the Northeast. As you may know, this pipeline more recently has become a key component of takeaway capacity from the Marcellus and Utica. It would connect on the south end with our Laclede gas service territory.

Our current plan is to construct an approximately 60 mile 24 inch pipeline off of REX to Western Illinois. This lateral would likely have a capacity of 400 Mmcf per day and we expect that Laclede Gas would be a foundation shipper. While we're not in a position to discuss our investment in detail, including the ownership structure for the project, I can say that we expect the total project cost to be in the range of $170 million to $200 million.

As is typical of pipeline builds of this scope, we expect it to be in service 30 to 36 months from the time we formally announce the project which would coincide with the commencement of the open season. The benefits of the project to our customers are compelling. It allows us to achieve our goals of improved physical resiliency, reliability and diversity of supply while accessing lower-cost shale gas.

Based on our analysis we are confident that adding this pipeline to our portfolio is the right choice both for our customers and shareholders. And we will continue to explore similar asset modernization opportunities across our footprint.

With that let me cover a few highlights for the quarter before turning the call over to Steve Rasche to cover financials. We are indeed off to a solid start in 2016. We are continuing to transform our Company through achieving our strategic growth objectives.

We have been squarely focused on growing our gas utilities, including through organic growth initiatives, and our efforts are continuing to deliver results. We are seeing customer growth so far in fiscal 2016 of close to 1%. Our work to add customers through line extensions and reinforcement of our systems and customer conversions is also bearing fruit and builds on our momentum from last year.

And Laclede Energy Resources, our gas marketing business, remains focused on finding ways to create value in the midst of a market that is still characterized by an abundance of supply at this low price. The integration of Alagasco remains on track with our plans as we realign our new larger organization and continue to implement our shared services model across the Company.

Our Spire Natural Gas Fueling Solutions business is pursuing additional opportunities in keeping with their focus on return to base fleets and tractor-trailer operations. Given fuel market dynamics between CNG and diesel leadtimes have lengthened but Spire is maintaining its effort to help develop the market for CNG fueling. Despite much warmer than normal weather we posted first-quarter net economic earnings per share of $1.04 and we remain squarely on target to achieve our full-year range of $3.34 to $3.44 per share as we guided last quarter.

With that I will turn the call over to Steve.

Thanks, Suzanne, and good morning everyone. Let me review our operating results for the quarter ended December 31, our first quarter of fiscal 2016, and review the outlook for the rest of the year.

Starting on slide 9, first-quarter net economic earnings were $45.1 million or $1.04 per share, down about 1% from $45.7 million or $1.06 a year ago. Net economic earnings for the gas utility segment of $50 million were slightly higher than last year. And gas marketing saw its earnings decline approximately $700,000.

Both results were impacted by the unseasonably warm weather and the current market dynamics of expanding gas supply and low price volatility and basis differential. These headwinds were almost completely offset by lower operating costs.

With that as a backup lets walk down the income statement. Turning to slide 10, total operating revenues were $399 million, down 36% from last year with most of the dollar decline coming from the gas utility segment. Remember that operating revenues are a poor measure of performance for a gas utility since it reflects the pass-through of natural gas commodity cost.

In fact, roughly half of the utility revenue declines from lower gas cost and most of the rest from lower overall demand due to weather. A better measure of our top-line performance is operating margin, or earnings contribution to gas cost and gross receipts taxes.

For the quarter operating margin of $226 million was lower than prior year by 2% or $5.4 million. Looking at the components, gas utility margins of $220 million were down 3% or $5.7 million due to the unseasonably warm weather across our service territories. In fact, compared to our first quarter a year ago degree days this year were down 32% overall with Missouri seeing year-over-year declines of approximately 28% and Alabama 49%.

And while we have weather mitigation across our utilities, the unseasonably warm weather did drive lower system volumes due to delayed connections for seasonal customers and lower overall demand. These margin headwinds were offset in part by first favorable movement of our quarterly Alagasco rate adjustment of $3 million; secondly, a $2.6 million increase in the infrastructure system replacement surcharge or ISRS for the Missouri utilities tied to our infrastructure upgrades; and third, as Suzanne mentioned, modest customer growth of just under 1% across our utilities during the quarter.

Gas marketing generated an operating margin of $5.4 million compared to $5.1 million last year. However, if we remove the fair value and mark-to-market adjustments in both periods the market was actually down by just over $1 million year over year, reflecting the more difficult market conditions I mentioned a second ago.

Weather cuts both ways so though. While it pulled down our operating margins a bit it provided some benefit to our operating expenses.

Gas utility operating expenses decreased $5.5 million due to lower salaries and benefits driven in part by a higher level of vacancies that we anticipate filling this quarter. These cost savings were partially offset by an increase in depreciation and amortization expenses of $1.5 million due to our higher capital spend over the last year. The other gas utility operating expenses, namely commodities and taxes, were also lower due to reduced volumes and commodity prices.

Similarly, gas marketing's operating expenses show a decline of just over $50 million for the quarter as the benefit of higher volumes were unable to overcome the significant reductions in commodity cost and a higher level of trading activity. Interest expense and income taxes were largely in line with last quarter, with interest benefiting from a net reduction in debt over the last 12 months.

The quality of our earnings remains very high with cash flow from operating activities as shown here on slide 12 totaling nearly $34 million compared to a use of cash of roughly the same magnitude in the prior year. This change was driven by lower working capital requirements compared to last year due in part again to lower commodity cost and volumes, partially offset by a decrease in collections under the Purchased Gas Adjustment clause in Missouri.

Cash earnings or EBITDA remained strong and was up 1% to $122 million. A portion of the growing cash flow supports capital expenditures. As shown here on slide 13, CapEx totaled just over $62 million, 4% higher than last year and reflective of the continued ramp-up in infrastructure upgrades.

We remain on track for our 2016 capital expenditure target of $315 million as well as at least $1.6 billion over the next five years. And we're on track for roughly two-thirds of our full-year capital spend being recovering rates with minimal regulatory lack. Additionally, new business capital of roughly 10% of our overall planned capital for the year is off to a strong start and by its nature will help grow margins as those customers come online.

I would also point out that our latest ISRS became effective December 1 with the Missouri utilities now recovering an annualized $26.3 million and on Monday of this week we filed for an additional $8.6 million. These filings are subject to regulatory review which we expect to be completed later in the spring.

Another portion of our cash flow is devoted to our growing dividend which now stands at an annualized rate of $1.96 per share, up 6.5% from last year. Our current dividend yield is approximately 3.3% with a conservative payout ratio.

Our quarter-end balance sheet remains strong with solid long-term capitalization of 50.5% equity and 49.5% debt, an improvement of 40 basis points since last quarter. Similarly, our liquidity remains excellent and we have ample capacity in our credit facilities and commercial paper program midway through the winter heating season.

Turning to slide 16 as Suzanne noted at the outset, we remain comfortable with our fiscal 2016 net economic earnings guidance of $3.34 to $3.44 per share or 5% to 8% growth from last year. Our outlook assumes reasonably normal weather for the remainder of the winter heating season. And as I mentioned last quarter the timing of earnings between quarters has been impacted by our overall weather with now roughly 5% of our total annual earnings shifting from the first half of the year into the back half with the fourth quarter the likely big beneficiary.

And as I mentioned a few minutes ago our capital spend remains on track for our current-year and five-year targets. I would also point out that these targets do not include potential supply pipeline investment. And once we finalize those details we'll update our targets.

And finally, from a long-term perspective, our view has not changed. And we remain comfortable with our long-term earnings-per-share growth target range of 4% to 6%.

So in summary we're off to a solid start in 2016. We continue to effectively execute our plans, including managing our cost and capital plans and strengthening our already solid financial position.

Suzanne, let me turn it back over to you.

Thank you, Steve. Let me finish today's call with a few remarks and then we'll open it up for questions.

As I look back over the last four years we've been on a journey most couldn't imagine. Building from a solid foundation we launched and then began working our strategic growth plan. Along the way we have significantly grown and improved our Company for all stakeholders and customers and expanded the customers that we serve.

We have transformed the way in which we share our vision and plans with our investors in the same way we have transformed the way we engaged our employees, our regulators and our community and the way we serve our customers. Today we hit another milestone on our continuing journey as we continue to deliver towards our financial targets for the year and unveiled with a bit more clarity some of the opportunities that have come from our extensive review of our gas supply in Eastern Missouri.

Our Board, leadership team and now 3,100 employees continue to transform our Company and we value your support and confidence as we continue that journey. As the year unfolds we expect to unveil additional initiatives and more clarity on specific topics and projects that will support our growth now and into the future.

Operator, we are now ready to take questions.

(Operator Instructions) Dan Eggers, Credit Suisse.

Hey, good morning everybody. Just on this pipeline update, can you just maybe walk us through a little more detail as to what's going to be the process for setting the open season, how you're going to seek out partners and kind of when do you think we'll start that clock on the plus 30 to 36 months to develop?

Yes, Dan, just a little bit of highlight here. When we were conducting our analysis and we've talked several times to you about that process we ran a variety of scenarios of what a transaction might look like in terms of partner, percentages, all the different assumptions that you might imagine.

Because we wanted to make sure this project was solid under any scenario. And it is, quite frankly.

So the next step is for us to do just what you asked, is take those scenarios, make a determination as to what is the best process in creating that partnership, making that announcement which immediately then goes to open season which is then a 30, 36 month process. I will tell you that our work is solid, our Board is informed and our team is ready to go. So more to come on that I would say on the next earnings call if you will.

Do you guys need a partner to do this project or is this something kind of given the fact it's servicing your territory in Missouri, there's not necessarily an obvious benefit for other people to be involved?

Yes, that's a great question. When I mentioned we've ran a variety of scenarios we've ran a scenario with us having complete ownership and full capital investment to scenarios where we were a small part of the project and everything in between.

And like I said the project works regardless of the scenario. But that being said, it's a strong project and we obviously have the financial strength to support the project. So we want to really find out from the market who's interested and what that interest might look like before we make any determinations.

I guess from a dumb accounting perspective would you guys reflect AFUDC or CWIP in your numbers during this construction? Or is this going to be no earnings contribution until in-service just from where it sits within the corporate structure?

Had, Dan, this is Steve. It would likely be the latter scenario, little if any impact to earnings until such time as the project would come online. There's always a little bit of work at the very, very front-end that would fall through but that would be so immaterial as not to be of a concern.

So this could change the shape of the earnings growth a little bit if you had to carry the cost of the project but the end payoff was pretty significant.

Yes.

That's fair.

Okay. One other question, just kind of with the weather being particularly mild in New York City, almost 60 degrees today which is obviously not where you guys are, but --

No.

Yes, no kidding. How are you guys going to manage this quarter?

Is the O&M savings that you saw in the first quarter, can you replicate that in the second quarter? And just remind us again a little bit on the weather, the volumetric protections in the two states.

Just a couple of highlights. Then I will turn it over to Steve Lindsey.

But just as a reminder, the way that we manage the business if it's colder than normal or warmer than normal there is a range there, we have several levers and we operate the Company relative to those levers. And in terms of being weather agnostic which is what you're getting to with the regulatory mechanisms are, in Alabama of course we have the RSC, that progressive structure, so it's agnostic within the RSC if you will.

In Missouri they are similar on the eastern side of the state as well as the western side of the state. But there is a little bit more volumetric behavior in the early part of the season and in the latter part of the season but mostly in the colder months we're agnostic to weather. But that being said from an O&M perspective and managing the Company Steve and his team actually do a great job.

Sure and this is Steve Lindsey. One of the things we're clearly able to do in that first quarter October through December with the warmer weather is increase our focus on our capital work and our infrastructure investments.

That also puts less of a strain on our system which has some additional overtime requirements from an O&M perspective. And we're also able to increase our productive time and actually pull some compliance work forward in the year that we would normally have scheduled later because we are unable to do that during typical weather conditions. So I think this has given us a good opportunity to balance the entire year and put us in a good position for the final three months -- excuse me, the three quarters of the year.

Yes, and Dan, I would add that we did a great job. We knew upfront, it's been long chronicled that El Nino was likely going to impact the weather. So we started the year strong to make sure that we got out in front of some of it and I think you're seeing the benefit of that in our quarterly results.

But you only have to go back a few years, I think it's 2013, where the warm weather hit late in the heating season. And even in that year we were able to offset the lost margin with managing our O&M especially when you get into the summer months.

So I think we stand confident that we should be able to manage within the rails for anything but it's super outside of the norm of weather. And I think we've proven we can do that in the past and we'll do that going forward.

And given the way that weather impacts our business, this being our first-quarter results, we like the idea of having three quarters to go because the levers that Steve Lindsey talked about, those levers are how we manage the business. So there's nothing there that we don't know how to do. So we like the idea of having the three quarters remaining to continue to manage the Company to get to our fiscal end result.

Great. Thank you, guys.

Selman Akyol, Stifel.

Thank you, good morning. So first question just going back to the lateral, clearly it looks like you're running it through Illinois down into Missouri which would make it a FERC-regulated pipe as opposed to just keeping it all in Missouri which would then have been intrastate pipe, so I guess from two different regulatory aspects from that side. So is there any I guess -- did you prefer FERC regulation from that standpoint?

It wasn't as much a, quote, preference one way or the other. It's actually a great question there. It's more about the way that REX operates their pipeline.

If you recall when REX was originally built it was a bullet pipeline from the western side of the country to the Eastern -- Northeastern market, gas heading east. Because of the shale gas play in the Northeast what's happened is REX is now operating directionally west to a certain node point that really rests in Illinois. So the idea would be to get that lateral around that node point from gas flowing from the east to west and then into the state.

And as a result of running -- to your point is running through two states, it's de facto a FERC-regulated pipeline which is fine. We understand the process one would go through and the time that it takes to do that and so forth. But yes, it would be a FERC-regulated pipeline for that reason.

All right, thank you. And then on the Alagasco adjustment, it turned out to be smaller than you guys I guess were anticipating. Is there any commentary around that or additional details?

This is Steve. It's really the year-over-year adjustment.

As you might recall RSC has a quarterly adjustment mechanism because we're truing up rates real-time based upon the cost run of the business and generally that is a reduction in rates period on period. A year ago that adjustment was significantly greater, meaning it was a much larger reduction than in the current year as we refine our budgeting and get closer to actual operating performance. So it's really a year-over-year benefit when you are looking at the variance year on year, much more so than a fundamental change in the way in which we get rates in Alabama.

Got you. And then other operating expenses were down and it sounded like from some of your commentary that maybe some of that was timing because you're going to do some additional hiring here in I guess the second quarter and going forward. Is there any color on how much of that we should be expecting not to get back or --

Yes, you know, part of it is vacancies and really a part of that was really tied toward the integration process for Alagasco which we completed right after the holidays this year. So we're now staffing up in the areas where we've assessed that we need to add resources in order to achieve our growth objectives.

As you think about the rest of the year and you look at the four quarters worth of run rate for O&M last year and we definitely have a seasonal nature to that with the fourth quarter being the lowest, or the first quarter being the lowest and the second quarter the one that we're physically in now being the highest. And if you look at that we would clearly expect our overall expenses to be a little bit lower than they were last year on a quarter-to-quarter basis. I think they are going to revert more to that same pattern as we go forward through Q2, Q3 and Q4.

All right, thank you very much.

Sarah Akers, Wells Fargo.

Hi, good morning. Just a couple of questions on the extension of bonus depreciation.

First, is there any impact on the Alagasco rate components under the RSC? And then second, what are the cash flow and balance sheet implications that you see for LG over the next few years?

This is Steve, Sarah I will try to take that. Be no impact whatsoever on Alabama. Again its real-time ratemaking and we true-up to the authorized ROE which we've been able to historically do.

And we did again last year. So it doesn't really impact the rates in Alabama. And frankly it doesn't really impact our rates or expectations in Missouri either.

It does, bonus depreciation does have an impact in the ISRS filings. But I have to tell you that as we were planning for this year and planning out over the longer horizon we took a view that some level of bonus depreciation was going to be available going forward. So we stand pat on our expectations going forward.

From a balance sheet perspective it is a good question because bonus depreciation does filter a little bit more cash so it does put a little bit less pressure on the need for us to tug on to our credit facilities or ultimately to go out into the market for long-term debt to support our capital plan. But again I would call that a nuance rather than a sea change in how we think about the balance sheets going forward.

Thanks. And then can you comment on the gas ISRS-related legislation that's pending in Missouri? Just any sense as to the level of support in the state and when that might move forward?

We're actively obviously involved in that. And in fact Steve was in Jeff City yesterday so I'll toss it over to him.

Sure. Thanks for the question.

There's actually two bills that are being heard. Yesterday in the Senate commerce committee there was a bill on RSM which is a revenue stabilization. You can think of that a little bit like the weather normalization and this is for water and gas in Missouri.

And then the one you're asking about which is we characterize as the rate case reduction bill is in essence to move the rate case requirement from three to five years in order to be at the continue to collect the ISRS component. That will be heard next week in the Senate commerce committee.

So we still feel optimistic that the points we made actually in the last couple of sessions are still in play and that we need to continue to push forward. There are 39 states that have these type of mechanisms. Only five require rate case requirements and then of that only two have three-year requirements.

So we continue to think that we need to get a little more modern with our mechanism here. But again the ISRS has done really well for us.

And to put a little bit of flavor on our capital spend as Steve mentioned earlier, this year just in the first quarter year over year we're 25% higher in the ISRS spend. So while our capital plan is on track, actually year over year we're making great progress. So this mechanism will help us continue to do that in the years going forward.

And Sarah obviously we can't predict political outcomes but I can tell you that I was there last week for another matter because it's one of the boards that I serve on in the region. And I can tell you from a leadership perspective everyone was very well schooled on the various bills that Steve just went through. So it is topical.

Thanks a lot.

Joe Zhou, Avon Capital Advisors.

Thank you, good morning. Just a quick question on the merger and acquisition front.

You know that [Empire] districts has recently put themselves for sale. How would you like their assets and would it be a good fit in LG's family? Thank you.

Thanks for the question, Joe. We did hear a little rumor that that was available.

As you know our process, we're very strong in terms of the modeling side and sticking to our strategic initiatives. And the way that we evaluate what's available, we look for various strategic levers in terms of how we can create value for our shareholders on the short-term and long-term.

And we have been very specific around the natural gas industry and I suspect that's our focus at the moment. So I guess I just want to end the conversation there.

But we're very focused on our strategic levers. We model various acquisition opportunities and make a determination really again on the short-term and long-term whether or not there is value for our shareholders.

Great. Thank you.

(Operator Instructions) Tim Winter, Gabelli & Co.

Good morning. Suzanne, I was wondering if you could just maybe follow up a little bit on Joe's question, maybe not specifically to Empire but all the consolidation going around Duke buying Piedmont Southern and AGL and then we've got Dominion and Questar this week. Do you see any benefit for a gas utility to team up with an electric utility maybe as it relates to building a pipeline or what's driving these partnerships in your opinion?

Yes, I mean that's a great question, Tim. The way that we, me and my colleagues and I as we look at all this consolidation has been going on for 10 to 15 years now in our industry.

And clearly natural gas is now a stronger part of the conversation, especially when you think about power generation in the Mid-Continent and the Southeast. So these transactions haven't surprised me at all because they provide access to some of these supply basins as well as pipeline capacity. And so they make sense for those companies.

For us the way that you asked the reverse question, would a gas company be interested in an electric? And you asked specifically to a pipeline project, there certainly could be some, quote, synergies with a gas company and an electric company in terms of building pipeline infrastructure if that electric company needs access to gas supplies to replace a coal-fired facility for example.

That's a good example where an electric and a gas can come to gather and create both create value. Those things happen.

But from a gas company perspective and Laclede Gas specifically we're very confident in our plan. Consolidation over the last 15 years, we've been an acquirer as you know so we been a part of that consolidation. Again we're confident in our plan.

Even our announcement this morning of the pipeline project I think validates the original strategies that we've laid out. And so we just continue to work to execute and create value and evaluate what's in the market. We continue to evaluate the gas supply portfolios that we're currently managing and also to continue to make sure that we've got our eye on our customers in terms of organic growth, growing those gas companies, managing costs, doing the things that you expect us to do right as well as the regulators.

Great, thanks, Suzanne.

(Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over to Scott Dudley for any closing remarks.

Well thank you everyone for spending some time with us today. We will be around and available throughout the day if you have any follow-ups. Look forward to catching up with you then.

Thanks so much. Bye-bye.

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