Scott Dudley Suzanne Sitherwood - Chief Executive Officer, President, Director, Member of Investment Review Committee and Chief Executive Officer of Laclede Gas Company Steven P. Rasche - Chief Financial Officer and Executive Vice President.

Daniel M. Fidell - U.S. Capital Advisors LLC, Research Division Sarah Akers - Wells Fargo Securities, LLC, Research Division.

Good day, and welcome to today's webcast. My name is Mandy, and I'll be your web event specialist today. [Operator Instructions] It is now my pleasure to turn the webcast over to Scott Dudley, Managing Director of Investor Relations. Mr. Dudley, the floor is yours..

Thank you. Good morning, and welcome to the earnings conference call for our second quarter of fiscal 2014. We issued a news release this morning announcing our financial results, and you may access the release on our website at thelacledegroup.com, and that will be under the News Releases tab.

Our call today's is scheduled for about 1 hour and will include a discussion of our results and a question-and-answer session. Prior to opening up the call for questions, the operator will provide instructions on how to join the queue to ask a question.

On the call today are Suzanne Sitherwood, President and CEO; and Steve Rasche, Executive Vice President and CFO. Also in the room with us are Steve Lindsey, Executive Vice President and Chief Operating Officer of Distribution Operations; and Mike Spotanski, Senior Vice President and Chief Integration and Innovation Officer.

Before we begin, let me cover our Safe Harbor statement and the 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 quarterly report on Form 10-Q, which will be filed later today.

In our comments, we'll be discussing financial results in terms of net economic earnings, operating margin, and operating cash flow, which are 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, as well as the impacts related to the acquisition, divesture and restructuring activities, including one-time cost related to the integration of MGE and cost related to the acquisition of Alabama Gas Corporation.

Operating margin adjust 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.

Operating cash flows exclude the effects of temporary changes in working capital, such as timing differences in the regulatory recovery of certain costs and the timing of cash payments for income taxes.

A full explanation of the adjustments and a reconciliation of these non-GAAP measures to their GAAP counterparts is contained in the news release we issued this morning. So with that, I will now turn the call over to Suzanne..

Thank you, Scott. Let me add my welcome to those who have joined this morning. Steve Rasche will follow me and will review our operating results and update you on the other financial matters in a moment. I would like to begin where we left off last quarter by discussing the successes we continue to have in the pursuit of our strategic imperatives.

As you know, one of the most impactful strategies contributing to our growth is the acquisitions of other gas companies. We have already began to realize that growth through the acquisition and integration of Missouri Gas Energy or MGE. I will update you on how well the MGE integration is going.

But first, I would like to say a few words about our second transaction announced 3 weeks ago to acquire Alabama Gas Corporation, or Alagasco from Energen Corp. Since the announcement, we've spoken with many members of the financial community, analysts, investors, rating agencies and others.

We are pleased to have the opportunity to discuss the details of the acquisition, including the compelling strategic rationale. Throughout the conversations, we heard consistent support for, and a positive reaction to, the deal to acquire Alagasco.

I have often said that Laclede isn't interested in growth for growth's sake, but rather we want to create value through the acquisitions and investments we make. We clearly saw great value in acquiring Alagasco and we have been pleased that others share that viewpoint. As with the MGE acquisition, the strategic rationale for Alagasco was compelling.

Let me briefly cover the 4 key reasons why this is such an attractive deal. First, it fits our growth strategy to expand in the area we know best, natural gas local distribution companies. It leverages our core competencies and regional expertise, while adding to the scale of our regulated business in a meaningful way.

Second, it is strongly accretive and supports our long-term 4% to 6% growth target for net economic earnings per share. Steve Rasche will speak to this in more detail in his remarks. Third, it supports additional dividend growth at a sustainable payout ratio.

And lastly, it brings the benefits of geographic and regulatory diversity, including the addition of a constructive and highly rated regulatory environment in Alabama. We expect the transaction to close in 2014, and the timing will be paced by the regulatory approval process in Alabama. We have already taken the first step to get the process started.

On April 14, just a week after the deal was announced, Laclede and Energen jointly filed an initial request for approval with the Alabama Public Service Commission. We will continue to work with the commission and its staff to facilitate the process.

For utility acquisitions in Alabama, the approval standard is that the acquisition must be in the public interest. That is, does the acquiring company have a financial, managerial and technical wherewithal to operate the company in the public interest.

Laclede is a financially strong, well-managed gas company with more than 150 years of experience in the industry and so we're confident we meet that standard. We will work with the Alabama Public Service Commission to demonstrate that during the approval process.

In addition to state regulatory approval, we will also need to secure the expiration or termination of the applicable waiting period under Hart-Scott-Rodino Antitrust Improvements Act and we intend to make that filing today. Now, let me turn to the MGE integration.

This process has been underway for about 8 months now, and it continues on track with our detailed plans, both in terms of schedule and the targeted synergies we expect to achieve in 2014.

As I mentioned last quarter, our integration planning focused on 3 key areas, MGE's general rate case; MGE's normal labor, bringing in labor matters; and the integration of information technology platforms. We have essentially checked the box on addressing or resolving all 3 matters.

As mentioned in our news release today, I'm pleased to note that last week The Missouri Public Service Commission approved a stipulation and agreement in MGE's rate case.

MGE filed its general rate case last September as legally required in order to retain its ability to file for recovery of investment and pipeline replacement due to infrastructure system replacement surcharge or interest. All parties to the case either supported or expressed no opposition to the agreement.

Under the agreement, MGE's annual base revenues will increase by $7.8 million, effective May 1, replacing a like amount collected through interest. So, the agreement results in customers paying about the same as they did before. The outcome of this case is consistent with the expectations we had when we filed it.

With regard to MGE labor matters, we have been working with our unions to reach agreement on new contracts to replace existing ones that expire April 30. Last week, we reached tentative agreement with members of locals covering both our field and clerical union employees.

The agreements cover normal issues, including compensation and benefits and staffing levels for various job functions. The agreements are subject to ratification this week. On our last earnings call, I mentioned also the importance of information technology and helping deliver value for the acquisition and to our customers and employees.

On April 1, we completed the integration of MGE's finance, supply chain and human resource systems into The Laclede platform. The successful cutover is the result of nearly 8 years work by dedicated teams from both Laclede and MGE.

The teams have begun the process to achieve the next major system transparent [ph], the integration of the customer care and billing function, which is targeted for the summer of 2015. Bottom line, the IT portion of the integration is in great shape.

Our functional integration teams are also continuing to execute on plans to bring Laclede and MGE together as one. They're driving other technological enhancements and adopting best practices based on past operating approaches of both companies, as well as current industry-leading practices.

We very much look forward to beginning the integration planning process with Alagasco. As with MGE, we expect to capitalize on the combined talent and expertise of employees across each of the companies. Before moving to a discussion of results, I will cover one other regulatory matter that was settled recently.

On April 2, the Missouri Public Service Commission approved an ISRS to Laclede Gas a $7 million annually, effective April 12. Reflecting the new ISRS, the monthly bill for the average residential customer increases by $0.86. Steve Rasche will discuss our second quarter results in more detail, but let me quickly review the headlines.

Overall, we posted a strong quarter that was well ahead of our plan, reflecting the unusually cold winter season that we estimate benefited our net economic earnings by $0.20 per share. The majority of that benefit came through our Gas Marketing segment, which was well positioned to take advantage of market opportunities.

For that reason, this business continues to be valuable to our company. Now, let me turn the call over to Steve to provide a financial update..

Thanks, Suzanne, and good morning, everyone. Let's review the operating results for our fiscal second quarter ended March 31, and give you a few updates on other initiatives.

But before diving into the financial statements, let me also pick up on the point that Suzanne just mentioned, the impact of weather on our quarterly financial results and our outlook for the year.

It is no surprise that we just completed a very cold winter, the 10th coldest in the last 120 years in Missouri and this cold weather presented opportunities for our Gas Marketing business due to increased price volatility and widening basis differentials that occurred as the winter progressed and industry-wide gas inventories declined.

The winter also produced some opportunities and some challenges for our Gas Utility. Not in terms of operations, as our system and our teams showed its resilience in the face of the waves of Artic air, but in terms of higher operating cost for repairs and maintenance work and higher bad debt expenses.

As I walk through the operating results, I'll highlight particular areas that were impacted by the unusual weather this quarter. And as Suzanne mentioned, we estimate the overall lift in the quarter to be approximately $6.6 million or $0.20 per fully diluted share.

With that said, looking at our second quarter income statement, total operating revenues were nearly $695 million, with Gas Utility revenues up 79%, due largely to the addition of Missouri Gas Energy and weather. Gas Marketing volumes were up more than 21%.

Operating margin, which looks at earnings contribution of revenue after gas costs and gross receipts tax, showed similar increases. Consolidated operating margin for the quarter was $192 million, up $78 million from last year.

This increase was driven by a 60% growth in utility margins, and a nearly fourfold increase in weather driven results at Gas Marketing. Walking down the rest of the income statement, operating and maintenance expenses of $72 million were also higher, up $30.8 million over the previous year. This increase was due to 3 factors.

$25.6 million of that increase was due to adding MGE this year. Approximately $5 million of the increase was directly caused by the unusual winter weather, principally due to higher repair, maintenance and compliance work, as well as higher bad debt expenses due to higher usage.

And finally, approximately $1 million of the cost related to the integration of MGE and Laclede Gas. Depreciation and amortization was higher by $8.9 million, of which $7.7 million is due to MGE.

Taxes other than income were higher by $20 million, of which $17.5 million is due to MGE and the reminder reflects higher gross receipts tax at Laclede due to volumes. Interest expense was higher year-over-year reflecting the debt issued to support the MGE acquisition. The resulting GAAP net income was $52.2 million, up from $30.2 million last year.

On a net economic earnings basis, quarterly earnings were $51.7 million, up 59% year-over-year from $32.5 million last year. And on a per-share basis, net economic earnings were $1.58 per fully diluted share compared to $1.44 per share of last year. A couple of points about this comparison.

First, the 2014 per share amounts reflect the full increase in our equity outstanding to approximately $32.6 million common shares, roughly 45% higher than last year. Secondly, as we discussed last quarter, the seasonality of our earnings has changed a bit with the addition of Missouri Gas Energy.

In 2014, we anticipate a higher percentage of our earnings in the second half of our fiscal year, the spring and summer seasons, as compared to Laclede Gas alone.

As a result, our consolidated earnings pattern is expected to smooth out a bit, with between 80% and 85% of our earnings coming during the first half of the fiscal year, and the remainder spread over last 2 quarters. And that seasonality does not take into the account the benefit of unusually cold weather this winter.

That benefit definitely impacts our earnings timing this year and pushed the earnings mix in the first half to between 85% to 90%. But we anticipate earnings returning to a more normal pattern along with the weather in future years. Now let's take a quick look at the operating results of our 2 segments.

Gas Utility operating margins were up $65.6 million in the second quarter, with $56 million of that increase attributed to MGE. Weather favorably impacted margins by $6.5 million due to the utilities ability to monetize excess natural gas inventories, and pipeline capacity not needed for customers.

The remaining increase was due to higher consumption and modest customer growth. Margins were offset, in part, by higher depreciation and amortization expenses and higher Other operating expenses that I mentioned a moment ago. Resulting net economic earnings for the quarter improved to $44.7 million, up $14.5 million or 48% from last year.

Gas Marketing, principally Laclede Energy Resources, saw operating margins of $16.8 million, a fourfold increase over last year, with the unusual winter contributing approximately $9 million of that increase, resulting net economic earnings of $7.1 million compared to $2.4 million last year. Let me touch briefly on the year-to-date results.

Overall, net economic earnings for the first 6 months of our fiscal year were $88 million or $2.68 per share. This compares with prior year earnings of $60.7 million or $2.69 per share. This increase of just over $27 million is due to the favorable impact of weather of approximately $6.6 million I just discussed.

Growth in our Gas Utility segment of approximately $24 million due to MGE, synergies and continued growth at Laclede Gas. And finally, the reduction in run rate Gas Marketing earnings of approximately $3.3 million after removing the unusual weather impact.

This decrease reflects less favorable market conditions in the first quarter, as well as the loss of 2 key supply contracts. Turning next to the balance sheet at March 31, most of the increases in utility plan are tied to our capital spending, which for the first 6 months totaled $68.2 million.

Working capital balances reflect normal seasonal movements and higher customer usage due to the unusually cold weather. And goodwill at the end of the quarter declined to just over $216 million, reflecting the $23.9 million purchase price adjustment paid by Southern Union Company to Laclede this quarter.

At quarter end, our short-term borrowings were $36 million, down more than half from the beginning of the year despite the January redemption of $80 million in long-term debt. Overall, The Laclede Group remains in strong financial position with long-term capitalization at just over 57% equity.

And looking quickly at cash flows, year-to-date cash flow, provided by operating activities, was steady year-over-year. And for the quarter, it was over $158 million or $20 million higher than last year. Now turning to the rest of fiscal 2014 and beyond. Let me touch on a couple of points.

As Suzanne mentioned, the MGE integration remains on track, one time integration cost in the second quarter were just under $2.1 million gross, or approximately $1 million net after deferring 50% of those costs for future recovery. For the fiscal year-to-date, those amounts accumulate to $3.3 million gross and $1.6 million net.

In addition, we will incur Alagasco transaction related costs, including due diligence expenses, professional and advisory fees and cost associated with our bridge financing. For the quarter, those costs totaled $1.8 million and we anticipate total cost to be in the range of $18 million to $22 million. Looping back to our earnings targets.

In our call earlier this month, we introduced our long-term earnings per share growth target range of 4% to 6%. This is truly a long-range target, and we anticipate annual performance will be lumpy due to the impacts of weather, synergy attainment, investment and rate case cycles.

This growth rate uses fiscal 2013 net economic earnings per share as the base year to track progress, since our per share earnings for that period represent the run rate of The Laclede Group before the MGE acquisition. For fiscal 2014, we anticipate our consolidated net economic earnings per share to be equal of 2013 results.

Further, the 2014 earnings contribution from our regulated business is anticipated to grow due to the accretion from the MGE acquisition.

We stand by that forecast for the run rate business with the acknowledgment that the impact of the unusual weather this winter will add to the total reported earnings, give or take a few cents for costs to be incurred later this year.

Looking forward, we anticipate that our earnings per share for the next several years will be stronger than our target range due to the accretion from the Alagasco acquisition.

In fact, assuming that we can get the Alagasco deal closed by the end of our fiscal year, we anticipate year-on-year growth to be above the long-term range in each of the next 2 years, or 2015 and 2016. Finally, let me finish my remarks this morning with an update on the financing for the Alagasco deal.

As we discussed earlier this month, the closing of the transaction is supported by a $1.35 billion bridge facility. Yesterday, we completed the syndication of that facility and now have a total of 13 financial institutions on board. Each of them has deep experience in equity and debt offerings in the utility space.

That team includes funds that helped us successfully complete the financing for the MGE acquisition last year, as well as several that maintained long-term relationships with Alagasco. It is a strong team and it positions us well for capital raises later this year.

In addition, we've already hedged approximately 70% of our interest-rate exposure to take advantage of current market conditions, and to mitigate our interest rate risk. So in summary, we finished the first half of 2014 in great shape, with strong earnings and cash flow and a solid financial position.

Even setting aside the unusually cold weather, we remain on track for meeting or exceeding our commitment for 2014, and successfully securing the permanent financing for the Alagasco acquisition later this year. Now, let me turn it back over to you, Suzanne..

Thank you, Steve. As we hit the halfway point in fiscal 2014, including the critical winter heating season that just ended, I'm pleased with our performance and operating results and our achievements in a number of areas tied to our strategy and objectives for the year.

Clearly, the acquisition of Alagasco is significant, and we're excited to move forward with gaining approvals, financing the transaction and closing the deal. We've reached a fair and reasonable agreement in our MGE rate case in a timely way without having go through an 11-month fully litigated process.

The integration of MGE continues according to plan, and we are achieving the cost synergies and other operating efficiencies we targeted at the beginning of the process. We are continuing to pursue opportunities in emerging technologies, and are actively working with a number of potential clients for our Spire natural gas vehicle fueling solutions.

Meanwhile, our flagship station at Lambert-St. Louis Airport, which began commercial operations in December, continues to experience growth in volumes and traffic that has even exceeded our expectations.

Our investment and pipeline replacement continues and is expected to ramp up in the second half of the year as we endeavor to catch up, if you will, for the construction delays caused by cold weather. And, overall we're on track to meet our original earnings guidance for 2014.

And as we shared, we believe there is good visibility into the path to achieve or exceed our targeted earnings growth rate. Now, we're ready to take questions..

[Operator Instructions] And your first question comes from the line of Dan Fidell with U.S. Capital Advisors..

Just a few questions on my side. I guess, first, just on Alagasco.

Can you just kind of give us the way forward a little bit in terms of next steps? Certainly know the timing, you're hoping to get this thing closed obviously as soon as possible, but can you tell us what should be looking out for here in the next several months?.

Yes, sure, Dan. I don't think that anything has really changed since the last time we talked about it. We do expect to close in 2014, and we're working hard to make that a September end close. But we did make the filing and -- so that the pace will continue as described..

Okay, great. Just wondering, separately on the CapEx spend, noticed it was overall up a bit with the accelerated pipe spend at MGE which was expected.

Can you just talk a little bit about now that the pass [ph] the MGE rate case -- sorry, your expectations for the pipe spend at both MGE and Laclede going forward?.

Dan, this is Steve. In our plan for the year for capital spend, which is $185 million, still remains on plan, and we would expect that you will see a ramp up of that spending during the next 2 quarters, which are really the good months for us to do a lot of that -- a lot of that construction.

And you are right that it will be the pipeline replacement, both at Laclede, which is at a run rate, and also at MGE, which we are ramping up that will drive that spend this year. And we still expect roughly 60% of that total spend to be ISRS recoverable..

Great. And just last question for me. I don't know if you're able to answer or not, but better to ask you anyway. You had mentioned the union settlement going on right now, that you think you have, maybe, an agreement that's being looked at now by the unions.

I guess, just -- can you give us any additional color on kind of what's involved in that settlement? What your expectations are for -- how this will play out and the potential impact to you guys?.

Now, Dan, as I mentioned in my opening remarks, the MGE rate case and the union negotiations were part of what we built into our integration planning, and you are right.

I'm not really at liberty to talk about the particulars of that, but I would like to reiterate that our philosophy, in terms of benefit and compensation, is to be consistent with all of our employees, and that's very important to us that we went into those negotiations with that premise..

You next question comes from the line of Sarah Akers with Wells Fargo..

As we think about full year EPS, do you have any plans to use the weather benefit as an opportunity to pull forward some O&M spend into 2014?.

Sarah, this is Steve, great question. Clearly, we're looking at the back half of the year and reacting as we normally do to weather.

As you might recall, a couple of years ago, when we had the warmest winter on record, we did a good job of managing our O&M spend to make sure that we could recover whatever we lost in terms of operating margin in the Gas Utility.

And I think that we're clearly looking at the back half of the year and as Dan asked a second ago, one of the things that we clearly want to recover is the pace on our capital spend. So we're clearly redeploying resources to do that.

And as you would expect, we're always looking at our spend for the rest of the year and we're modifying it, changing plans as we get the opportunity. It's important to remember that summer weather does impact our business.

If it's extremely hot, that clearly impacts the commodity market, but it also impacts our construction schedule, as would a wet summer.

So we continue to be very flexible to make sure that we can meet our commitments and meet our longer-term plan, which is to manage our cost to keep them under control, which we've been able to do last couple of years and meet our accelerated pipeline replacement program..

Got it. And then a follow up to Dan's questions on Alagasco.

When do you expect you'll have a chance to do more of a deep dive on the synergy and investment opportunities at Alagasco?.

Sarah, as you know, it's hard to believe it's only been a short period of time since we made that announcement and so I guess as we move forward and learn more, we will provide more information. But at this point in time, it's just not available. We will provide more for sure..

And operator, do we have any further questions on the phone?.

There are no further questions..

Okay, great. Thank you all for joining us today, and we will be available throughout the day for any follow-up questions or discussions. Thanks for participating. Bye, bye..

Thanks again to all of our participants for joining us today. We hope you found this webcast presentation informative. This concludes our webcast, and you may now disconnect. Have a great day..