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Executives

Scott Dudley, Jr.

Mary Caola Kullman - Chief Administrative Officer, Senior Vice President and Corporate Secretary

Mark D. Waltermire - Chief Financial Officer and Executive Vice President

Steven P. Rasche - Senior Vice President of Finance & Accounting and Principal Accounting Officer

Suzanne Sitherwood - Chief Executive Officer, President, Director, Member of Capital Funds Committee and Member of Investment Review Committee

Michael R. Spotanski - Chief Integration & Innovation Officer and Senior Vice President

Steven L. Lindsey - Chief Operating Officer, Executive Vice President and President of Laclede Gas Company

Analysts

Daniel M. Fidell - U.S. Capital Advisors LLC, Research Division

Selman Akyol - Stifel, Nicolaus & Co., Inc., Research Division

Timothy M. Winter - Gabelli & Company, Inc.

The Laclede Group (LG) Q1 2013 Earnings Call February 5, 2013 10:00 AM ET

Operator

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. Please go ahead.

Scott Dudley, Jr.

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

On the call today are Suzanne Sitherwood, President and CEO of The Laclede Group; and Mark Waltermire, Executive Vice President and Chief Financial Officer, who will each have some remarks on the quarter. Due to Suzanne being a bit under the weather this morning, Mary Kullman, our Senior Vice President and Chief Administrative Officer, will deliver the remarks that Suzanne prepared for today's call. Also in the room with us are Steve Lindsey, Executive Vice President and Chief Operating Officer of Distribution Operations; Mike Spotanski, Senior Vice President and Chief Integration and Innovation Officer; and Steve Rasche, Senior Vice President of Finance and Accounting.

Before we begin, let me cover our Safe Harbor statement and use of a non-GAAP earnings measure. Today's earnings conference call, including responses during the Q&A session, may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Our forward-looking statements speak only as of today, and we assume no duty to update them. Although our forward-looking statements are based on reasonable assumptions, various uncertainties and risk factors may cause future performance or results to be different than those anticipated. A description of the uncertainties and risk factors can be found in our annual report on Form 10-K and our quarterly report on Form 10-Q, which will be filed later today. In our comments on the call today, we will be discussing financial results in terms of net economic earnings, a non-GAAP measure used by management when evaluating the company's performance. Net economic earnings exclude from net income the after-tax impacts of fair value accounting and timing adjustments associated with energy-related transactions and costs related to acquisition. A full explanation of the adjustments and a reconciliation of net income to net economic earnings are contained in the news release we issued this morning. With that, I will turn the call over to Mary.

Mary Caola Kullman

Thank you, Scott, and let me add my welcome to those who've joined us this morning. Earlier today, we announced improved operating results for our fiscal 2013 first quarter, which ended December 31. I'm pleased to note that overall, we posted a good quarter to start off the year, achieving higher earnings on both a net income and net economic earnings basis compared to last year. Our gas utility results were up, thanks to more normal weather and lower expenses. And gas marketing continued to deliver solid performance despite market conditions that remained somewhat challenging.

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

At last week's annual meeting, I had the opportunity to update shareholders on our achievements and progress in moving the company onward as we pursue the many opportunities ahead of us. Since becoming CEO just over a year ago, my message has been consistent. As a company, we will be focused on the things that matter. Serving our customers well, reliably and safely, growing our company, delivering solid financial performance and positioning the Laclede Group to be even more successful in the future. On our earnings call last quarter, I talked about our strategic imperatives. I know we've outlined them before, but I want to reiterate them today because it is important to view our performance and achievements through the lens of the priorities we established: developing and investing in emerging technologies; achieving organic growth through investments in our infrastructure; acquiring businesses that fit our operating model; and leveraging our competencies.

As I probably noted at the annual meeting, we have been successful in delivering against our strategy over the last year. We are very pleased by what we have accomplished so far and are equally excited by the opportunities we have to achieve further growth while improving our operating performance and service levels. In terms of impact, the most significant strategic imperative we have delivered on is acquisition. In December, we announced agreements to acquire 2 gas utilities to which we can apply our business model and leverage our competencies.

As we said at the time, we announced our acquisition of Missouri Gas Energy or MGE and New England Gas Company or Negasco, which is a transformative transaction that doubles our size. We are confident in our ability to obtain the necessary approvals to secure financing and successfully integrate the utilities we are acquiring. We continue to expect to close the transaction by the end of our 2013 fiscal year, which is September 30.

We are working to ensure completion of the deal, including seeking approvals and arranging permanent financing. In that regard, I would note that subsequent to our announcement of the transaction, the purchase and sale agreement for MGE was assigned to Laclede Gas. We have already received antitrust clearance from under the Hart-Scott-Rodino Act. Last month, we filed for state regulatory approvals in both Missouri, for the purchase of MGE, and in Massachusetts, for the purchase of Negasco.

Meanwhile, Mike Spotanski, our Chief Integration and Innovation Officer, is organizing teams that will tackle the important work of integrating our organizations in a way that delivers operating efficiencies, enhanced service to customers and improved performance. We view MGE and Negasco as different companies as they operate in different geographic markets under different regulatory environments. We are approaching integration with that in mind. Since MGE is the largest and most similar company to Laclede Gas, our initial integration efforts are more focused on them. We are fully immersed in the initial phases of integration, including already meeting the employees in Missouri and scheduling a visit in Massachusetts for later this month.

We are engaging teams of employees to identify and address the opportunities we have in bringing our organizations together, and there is a lot of energy around this effort.

It is still too early to talk about specific cost savings in dollar terms, but we know from our due diligence work, with the help of outside advisors, that there are opportunities to operate more efficiently on a combined basis. We are being deliberate and thoughtful as we go through the process to identify efficiencies, and we will have more to share with you as we get deeper into our assessment and analysis. This acquisition is transformative in scale for our company, but it also lays the foundation for growth in new markets with new customers. Going forward, growth could include additional gas utility acquisitions, as well as other natural gas market opportunities in which Laclede can exercise strategic advantage. These opportunities could include regulated pipelines that connect to a supply source, the first mile of pipe, or where they connect to a strategic customer, the last mile of pipe.

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

Mark D. Waltermire

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

First, let's turn to our operating results for the first quarter of fiscal 2013. You'll see in our news release and in our Form 10-Q to be filed later today that we have simplified the descriptions of our 2 main business segments. Our Gas Utility segment, formerly the Regulated Gas Distribution business, includes the utility operations of Laclede Gas at present and, going forward, will include the post-closing results of MGE and Negasco.

Our other major segment has been renamed Gas Marketing. It includes our non-regulated gas marketing operations of Laclede Energy Resources, or LER. We believe these designations more clearly reflect the operations of our 2 main business segments and how we think about them.

Turning to our results for the first quarter. The Laclede Group posted net income of $25.6 million or $1.14 per share -- per diluted share, up from $25.2 million or $1.12 per share last year. Excluding acquisition costs and fair value accounting adjustments, we posted consolidated net economic earnings of $1.25 per share this year, up 13% from last year. This improved performance was driven by increased earnings from the gas utility.

During the quarter, we incurred pretax costs associated with our pending acquisition totaling $3.6 million, which had an after-tax impact of $0.10 per share. These costs were principally related to due diligence and professional fees associated with our successful bid to acquire MGE and Negasco that we announced in December. Acquisition-related costs are required to be expensed each period, but have been added back to arrive at our net economic earnings, as noted in the earnings release.

As you might expect, we will continue to incur these costs as we work towards closing the transactions and anticipate that up to close we'll incur an additional $15 million to $20 million of such costs.

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

Gas Marketing net economic earnings for the quarter were $3.3 million, essentially equal to the $3.4 million earned last year as LER continued to deliver solid performance. It's important to note that Gas Marketing's reported operating revenues and expenses for the first quarter this year are substantially below those of last year. As we mentioned last quarter, tighter basis differentials in the marketplace have resulted in a greater percentage of LER's transactions being reported as trading activities, where the margin on the sale is recorded on a net basis in revenues rather than as gross revenues and gross costs. While this has no impact on the earnings of this business unit, it does make the revenue and expense lines a bit harder to compare across periods.

In addition to improved overall earnings, cash flow in the quarter was also higher. For the first quarter of fiscal 2013, net cash provided by operating activities was $4 million compared to net cash used of $50 million a year ago. The increase was primarily due to the timing of gas recoveries under our purchase gas adjustment or PGA Clause and lower pension funding. Excluding these changes in working capital requirements, operating cash flows increased to $37.5 million from $35.2 million a year ago. This positive cash flow supported our capital spend of nearly $28 million during the quarter, which was up from $18 million a year ago.

The increase reflects our continued investment in both the upgrade of our information technology platforms and the ongoing accelerated replacement of Laclede Gas' distribution pipeline, and our capital spending remains on track for a full year level of $115 million.

Turning to the balance sheet, our equity capitalization remains strong at 63% as of December 31, 2012. Short-term debt outstanding decreased to $83 million at the end of the first quarter, down $30 million from a year ago. This capitalization reflects the maturity of $25 million of 6.5% debt at Laclede Gas last October, and it also reflects the forward settlement of $25 million in Laclede Group 10-year notes at just over 3.3% in December as part of a private placement commitment we entered into last fall. Our remaining commitment is for $100 million of debt to be issued by Laclede Gas, which will be settled in March of this year.

Let's now turn to a quick update on our regulatory activity during the first quarter. As we noted on our previous earnings call in late October, we filed with the Missouri Public Service Commission to lower the gas cost component of customer builds under the PGA Clause. This reduction, which became effective for this winter's heating season on November 16, reduced the average residential customer's bill by 6%, resulting in the lowest monthly gas bills in 9 years.

On December 21, Laclede Gas filed its first general rate case in 3 years, seeking a net increase in revenues of $48.4 million, which is exclusive of interest revenues already being collected today. As a reminder, the Missouri Public Service Commission must render a decision on our rate request within 11 months from the date of filing, although we have generally been able to successfully settle our cases in a shorter time frame.

And finally, on January 11 of this year, we filed for an additional $5.6 million increase in interest revenues to recover investments and pipeline replacements made over the previous 8 months. Assuming a normal review process, this filing will likely become effective sometime in mid-March and would bring total business revenues to $15.6 million.

I will conclude my remarks this morning with an update on the financing for our acquisitions. As we have discussed previously, the closing of the transaction is supported by a $1 billion bridge facility with Wells Fargo. That bridge facility has now been fully syndicated to 9 financial institutions, including 5 firms with deep experience in equity and debt offerings in the utility space. We are currently working with that team to complete our plans for permanent financing as we work towards close.

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

Mary Caola Kullman

Thank you, Mark. Last quarter, I spoke about work underway to pursue another of our growth strategies, investing in emerging technologies with an initial focus on natural gas fueling stations. Last Thursday, we announced the launch of an exciting initiative called Spire to deliver natural gas fueling solutions. This is a homegrown enterprise based on thorough analysis and a wide range of customer input.

In collaboration with Siemens, a global powerhouse in the energy industry, we have built a business model that meets the needs of fleet customers pursuing a natural gas fuel alternative to diesel or gasoline. Spire will have its start right here in St. Louis. We are nearing final approval of a contract to build a fueling station at Lambert Airport that will serve both commercial fleet customers and the public. Siemens will provide the design, build and engineering expertise. Laclede will own, operate, maintain and provide the fuel for the station. This initial project will serve as a springboard for other investments in NGV fueling solutions, both in St. Louis and in national markets.

We are focused in this area because we believe the opportunity is big. Nationally, natural gas is beginning to be recognized as the country's fuel of choice for a number of reasons. First, natural gas is far and away the cleanest fossil fuel there is. Second, it is more affordable than other fueling options with more than 100 years of supply. And because natural gas is sourced domestically, it offers us national security. Finally, our industry enjoys an enviable record for worker and consumer safety. We are also focused on NGV fueling solutions because it leverages the expertise Laclede Gas has gained for more than 150 years in the natural gas business, including more than 3 decades of experience with natural gas vehicles. Laclede Gas has operated a fueling station for 15 years and has a fleet of CNG vehicles that will number about 50 this year.

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

So we are off to a great start in fiscal 2013 as we deliver improved financial and operating performance and we make good on our plans to pursue growth through our strategic imperatives. First, acquisition. Our pending acquisition is moving forward, with work well underway to secure approvals and financing and begin the integration process. As we think about key goals for the year, completing and integrating the acquisition is at the top of our list, and we are confident in our ability to get it done. Second, emerging technology. We have launched our natural gas fueling solutions enterprise, Spire, and are pursuing a large market opportunity for investment in emerging technology. And finally, infrastructure investment. We are achieving organic growth through investment in our existing core gas utility business while pursuing other investments in natural gas infrastructure.

Meanwhile, we are making excellent strides in our ongoing efforts to improve the safety, reliability and quality of our service and to deliver stronger bottom line results and value for our shareholders. We are now ready to open the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Dan Fidell at U.S. Capitol Advisors.

Daniel M. Fidell - U.S. Capital Advisors LLC, Research Division

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

Steven P. Rasche

This is Steve. The interest impact for the quarter was a little bit over $1 million, $1.3 million, and the weather was just a little bit less than that, about $1.1 million compared year-on-year, which I think is what you're asking.

Daniel M. Fidell - U.S. Capital Advisors LLC, Research Division

Exactly, yes. All right. And then I guess just in more of a general question in terms of the regulatory process. Can you talk a little bit about -- just initially, I know we're only a few weeks in, but just the general reception you're seeing from regulators in both Missouri and Massachusetts and sort of how the meshing of the rate case along with the acquisition approval, how those 2 are kind of meshed together during this process? Is there -- is that kind of a unique way to go through this?

Suzanne Sitherwood

This is Suzanne. I'll take a stab as long as I have a voice, how about that? From a -- the regulatory approval process, as you noted, we filed at the Missouri PSC on January 14 and the Massachusetts Commission on January 24. We also have had initial constructive discussions with those commissions, and we thought those meetings, I guess, they were constructive. In terms of how they mesh, the filing in terms of the rate case filing, as you know, we'd have to file that case at least every 3 years, so that was just coincident of the timing. And so we don't see -- we've had that filing before. We don't see any distractions regarding the acquisition filing itself. We've filed other interest filings in the past, and the commission -- and the company has dealt with those collectively.

Daniel M. Fidell - U.S. Capital Advisors LLC, Research Division

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

Suzanne Sitherwood

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

Daniel M. Fidell - U.S. Capital Advisors LLC, Research Division

Great. And then maybe just a last question or 2 from me and I'll turn it over, I guess. Can you give us a little bit more color on the CNG JV with Siemens? I think very interesting moving forward, that certainly agree with your take on things in terms of the expansion opportunity here. Can you just give a little bit more color in terms of near-term impact, both from a CapEx standpoint and what you see in terms of an earnings impact kind of near term and longer term?

Suzanne Sitherwood

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

Michael R. Spotanski

We, as we've announced, we are working towards a final approval on that Lambert station. This is infrastructure, so it does require a capital investment upfront. There will be some capital requirements, although there are some equipment lead times that will lag that capital investment somewhat. So we anticipate slow but continued growth initially. We've got a couple other prospects that we're looking at currently that we're not ready to talk about yet. But in terms of earnings, the earnings will come a little bit later in the station life, as initially we take care of some of those first expenses right out -- the first year out of the box. Again, it's dependent upon how quickly we grow and how much we grow. We'll look at a relative slow, measured growth initially as we get the collaboration set up.

Suzanne Sitherwood

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

Daniel M. Fidell - U.S. Capital Advisors LLC, Research Division

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

Michael R. Spotanski

Yes, it is.

Operator

[Operator Instructions] And our next question comes from Selman Akyol at Stifel.

Selman Akyol - Stifel, Nicolaus & Co., Inc., Research Division

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

Steven P. Rasche

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

Selman Akyol - Stifel, Nicolaus & Co., Inc., Research Division

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

Steven L. Lindsey

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

Selman Akyol - Stifel, Nicolaus & Co., Inc., Research Division

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

Mark D. Waltermire

The Lambert station we expect some time during the first half of fiscal 2014.

Selman Akyol - Stifel, Nicolaus & Co., Inc., Research Division

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

Steven P. Rasche

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

Selman Akyol - Stifel, Nicolaus & Co., Inc., Research Division

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

Suzanne Sitherwood

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

Operator

Mr. Winter, please go ahead with your question.

Timothy M. Winter - Gabelli & Company, Inc.

On the regulatory front, the merger filing, I was wondering if you guys addressed synergies at all in that filing, and if so, how?

Suzanne Sitherwood

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

Timothy M. Winter - Gabelli & Company, Inc.

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

Steven P. Rasche

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

Operator

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

Scott Dudley, Jr.

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

Operator

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

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