Scott Dudley, Jr. - 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.

Sarah Akers - Wells Fargo Securities, LLC, Research Division Brian Brungardt - Stifel, Nicolaus & Company, Incorporated, Research Division.

Today's webcast by the Laclede Group entitled Third Quarter Fiscal 2014 Earnings. My name is Jameson, 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, Investor Relations. Scott, the floor is yours..

Thank you, and good morning, and welcome to the earnings conference call for our third quarter. We issued a news release this morning announcing our financial results, and you may access that release on our website at thelacledegroup.com, and you'll find that under the News Releases tab.

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

Presenting on our call today are Suzanne Sitherwood, President and CEO; and Steve Rasche, Executive Vice President and CFO. Also in the room with us today 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 our use of non-GAAP earnings measures. Today's earnings conference call, including responses during the Q&A session, may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Our forward-looking statements speak only as of today, and we assume no duty to update them. Although our forward-looking statements are based on reasonable assumptions, various uncertainties and risk factors may cause future performance or results to be different than those anticipated.

A description of the uncertainties and risk factors can be found in our quarterly report on Form 10-Q, which will be filed later today. In our comments, we will be discussing financial results in terms of net economic earnings and operating margin, which are non-GAAP measures used by management when evaluating the company's performance.

Net economic earnings exclude from net income the after-tax impacts of fair value accounting and timing adjustments associated with energy-related transactions, as well as the impacts related to acquisition, divesture and restructuring activities, including one-time costs related to the integration of MGE and costs related to the acquisition of 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 these non-GAAP measures to their GAAP counterparts is contained in the news release that we issued this morning. So with that, let me turn the call over to Suzanne..

Labor matters, its general rate case and the integration of information technology platforms. Let me recap what where we are on these 3 matters. With regard to MGE labor matters, I am pleased to note that agreements were ratified on April 29 and May 31 with our clerical and field union employees, delivering fair and reasonable outcomes overall.

Importantly, we achieved greater consistency around wages and benefits among The Laclede Group companies and expanded participation in our company-wide incentive program. We are excited to have reached this milestone in MGE since we have seen the incentive program align our teams and drive improved results at Laclede Gas.

Regarding MGE's rate case, we reached agreement with the Missouri Public Service Commission to increase annual base revenues by $7.8 million effective May 1, essentially replacing amounts collectible through the infrastructure system replacement surcharge or ISRS. With the resolution of the MGE rate case, the ISRS surcharge for MGE was reset to 0.

On July 25, MGE filed with the Missouri Public Service Commission to establish a new ISRS rider amounting to $2.8 million, reflecting pipeline investments since January this year. Laclede Gas also filed on July 25 to increase its ISRS by $3.1 million from investments beginning March of this year.

As a reminder, Laclede Gas previously received authorization to increase its ISRS by $7 million annually, effective April 12, reflecting investments over the previous 13 months. Continuing to invest in the safety and reliability of our pipeline infrastructure is an important element of our overall plan for organic growth.

We expect to end the year on target with our goals for miles of pipeline replaced at both Laclede and MGE. As we've noted before, the integration of information technology is a key value driver. We completed the integration of MGE's finance, supply chain and human resources system into the Laclede platform, as planned in April.

Meanwhile, work is proceeding according to plan on the integration of the customer care and billing system, as well as the work in asset management systems. These systems integration milestones are targeted for completion in the summer of 2015.

While IT integration is a key part of the broader MGE integration, we also continue to execute very well on the rest of our detailed functional integration plans.

As required in the agreement approving the MGE acquisition, Laclede's senior management met with the Missouri Public Service Commission on May 27 to provide a formal update on the integration process and additionally providing an update on the Alagasco acquisition.

This report provided general updates on areas such as customer service, gas supply, pipeline replacement and continuing service agreements. We anticipate providing another update in December. Also, we remain on track with our schedule and we should finish ahead of our synergies plan this year.

Overall, we are on pace to achieve savings that we targeted for year 3 annual run rate of $25 million to $34 million. Now let me turn the call over to Steve Rasche to review our third quarter results.

Overall, we posted a strong quarter, featuring growth in Gas Utility earnings as expected, driven by the addition of MGE and higher Gas Marketing earnings year, as favorable market conditions from the cold winter carried over into the third quarter.

Steve?.

First, growth in our Gas Utility segment of approximately $31.5 million due to MGE and modest customer growth; and two, a favorable impact of weather of approximately $9 million or $0.17 per share in the Gas Marketing segment, offset by the reduction in run rate Gas Marketing earnings of approximately $7 million due to overall less favorable market conditions, as well as the expiration of 2 key supply contracts.

Stopping quickly at the cash flow statements and balance sheets. Year-to-date cash flow provided by operating activity of $185 million was up $18 million or 11% from the same period last year. Capital spend for the first 9 months of $109.5 million reflects the increased spend at MGE this year, as we continued to ramp up pipeline replacement.

This capital spend is the primary driver for the increase in utility plant on the balance sheet. And a couple of other balance sheet highlights. Working capital balances at June 30 reflect higher accounts receivable tied to higher usage and volumes, offset in part by lower inventories.

We had no short-term debt at the end of the third quarter, which is typical for this time of year. And not surprisingly, the long-term capitalization side of our balance sheet has changed quite a bit from last quarter.

As you know, we completed 2 very successful equity offerings in mid-June with total net cash proceeds of $600 million, amounts which are now reflected in the capitalization and cash balances at the end of the quarter. First, we issued 10.35 million shares of Laclede Group common stock, with cash proceeds of approximately $461 million.

This offering was well received and significantly oversubscribed, and the resulting share price of $46.25 was essentially equal to our share price the day before we announced the Alagasco deal. We also successfully issued 2,875,000 equity units, with net cash proceeds of approximately $139 million.

These units pay our Laclede group 8-year junior subordinated note with a 3-year equity forward. At the end of 3 years, the equity forward will be converted into new common shares with estimated new proceeds of approximately $144 million.

The number of shares issued to support that conversion will be between 2.5 million and 3.1 million shares, depending upon the share price on the date of conversion. This is a mandatory conversion, and the conversion premium tied to this unit is 25%, meaning that Laclede retains the first 25% appreciation in our share price over the next 3 years.

In the interim, the units carry a total return of 6.75%, of which 2% is the coupon interest on the underlying note, and the remaining 4.75% is a contract payment on the equity forward. These contract terms were better than our expectations going into the offering.

Putting all this together, our long-term debt balance at June 30 of approximately $977 million reflects the retirement of $80 million of Laclede Gas debt in January and the addition of the group notes I just talked about.

Overall, our financial position remains very strong, and we are on track to complete our debt offering and credit facility as planned to support the closing of the Alagasco acquisition. Subject to market conditions, our goal is to issue approximately $625 million of Laclede Group unsecured notes.

We are targeting 3 tranches, including 2 that are in debt [ph] eligible, with a portion of the offering in intermediate term notes to provide an opportunity to delever the business with a portion of the cash flow from our new larger business.

On the strength of the equity raise, we now anticipate our initial long-term capitalization at closing to be just under 51% debt or 49% equity, if you want to think about it that way, which beats, by a few basis points, the best end of our target range we announced in April.

As a reminder, we have also already hedged a significant portion of our interest-rate exposure on these notes, so we've been largely insulated from recent interest rate volatility. And based upon current market, we anticipate the weighted average all-in interest rate on our new debt to be approximately 3%.

We've also made good progress on our expanded credit facilities. We plan to replace Alagasco's existing credit facility with a new 5-year facility to support its working capital needs and anticipate closing this facility concurrent with the deal closing.

At the same time, we are seeking to exercise a 1-year extension of the group and Laclede Gas facilities, giving us a clear 5-year runway across the company. And a final comment on permanent financing. At this point, we retain $700 million of our bridge facility, down from the original $1.35 billion commitment.

Our current level reflects our strong cash position and successful equity offering and assuming we complete the long-term debt offering as planned, we expect to terminate the bridge commitment in its entirety without ever withdrawing upon it. Looking to the rest of 2014 and beyond, let me touch on a lot of points.

As Suzanne mentioned, the MGE integration remains on track. One-time integration costs in the third quarter were just under $1.2 million gross or approximately $600,000 net of the 30% of those costs that get deferred for future recovery. For the fiscal year-to-date, those amounts accumulate to $4.6 million gross and $2.3 million net.

We also incurred Alagasco transaction-related costs totaling $4.3 million for the quarter and $6.1 million year-to-date. We anticipate the total costs to be in the range of $18 million to $22 million, including the interest cost through September associated with the equity units and the long-term debt I just mentioned.

Our full year fiscal 2014 expectations have not changed, and we anticipate our run rate net economic earnings to be in line with 2013, acknowledging that the unusually cold winter weather will add another $0.17 per share to our reported net economic earnings in our Gas Marketing segment.

And as a reminder, 2014 economic earnings will exclude all the impacts of the Alagasco acquisition consistent with how we treated MGE last year.

Looking forward into 2015 and beyond, we remain very comfortable with our long-term earnings per share growth target of between 4% and 6% and our ability to grow above that range in the next 2 fiscal years or fiscal 2015 and 2016.

These earnings fully include the accretion from adding Alagasco to the Laclede family and the financing to support the acquisition, as well as the continued organic growth initiatives across the gas utilities.

So in summary, we continue to meet or exceed our commitments to our stakeholders regarding our operating results, deal accretion and a very strong equity offering. We stand ready to complete the debt [ph] financing for the Alagasco acquisition and do so in a way that meets our commitment to deliver a balanced, long-term capital structure at close.

We look forward to beginning fiscal year 2015 as a nearly $4 billion company, with 3 exceptional gas utilities, and we are well positioned to hit the ground running. We look forward to updating you on our progress along the way. And with that, let me turn it back over to you, Suzanne..

Mark Borer, and announced last week, Maria Fogarty. We look forward to their contributions and guidance as we continue on our path of meeting and exceeding our commitments to our shareholders and all of our stakeholders. We are now ready to take questions..

[Operator Instructions] And your first question is from the line of Sarah Akers with Wells Fargo..

Just a question on the balance sheet, and sorry if I missed this, but can you go over again the specific drivers that -- versus your original expectations that are causing your debt capitalization pro forma to be a little bit better than originally expected?.

Yes. Sarah, I think I can cover that. This is Steve. Clearly, the biggest driver is the successful equity offering on both sides -- both the common offering, as well as the equity units offering, which was significantly well-received. And as you know, we got better pricing than we had anticipated and also better terms.

And that was clearly the biggest driver that moved us from the middle of the range that we had originally guided, which was between 51% and 53%, so if we start at 52% and kind of work down from there, that was the biggest single piece that got us there.

We've also -- as we have been historically, and we have a history of doing this, we manage our cash very tightly and we've been able to overachieve our internal expectations as we've managed our legacy business, if you want call it that, Laclede and MGE, to generate some additional cash.

Our working capital balances are lower than we had thought they would be and sort of allows us to think a little bit more sharply about how we want to do our long-term versus our short-term capitalization.

But in all things, I mean, we're looking for the long term, and we're very comfortable with where we ended up or where we expect to end up with our capitalization with our debt offering.

And I think it gives us plenty of flexibility to continue to invest in the business to grow and all the areas that we would expect to grow to deliver on our commitments..

Great. And then you mentioned that excluding weather, you still expect flat results in '14.

With MGE synergies trending a little bit better than originally planned, why isn't that expectation a little bit better here?.

Yes. The synergies are trending a little bit better than planned, but ultimately, that gives us the opportunity to think smartly about how we're investing in the business to set ourselves up for the longer term.

And as I mentioned, the operating expenses associated with the winter have been a little bit higher at the Gas Utility than we had expected, and which is why that all-in winter weather impact is now $0.17. It was $0.17 to $0.20 last quarter. So we're taking a really hard to look at our run rate on expenses.

So I think ultimately, we're a little bit ahead on the synergies, but it wouldn't be enough to significantly move the needle. I think that the key you need to take away and the rest of the investors need to take away is that we're hitting our plan, and that's a multi-year plan.

We like being out in front of it as all of us would be in all the plans that we set. But we've got work to do over the full 3 years because when we talk about that $25 million to $34 million, that's a year 3 run rate. So we've got some work to do, but we're confident that we'll be able to achieve or overachieve that..

Got it. And then one modeling question.

For the July ISRS requests at MGE and Laclede, when would those become effective?.

Great question. If you look at the typical review period for the Public Service Commission and the staff on those orders, it would put those becoming effective right at the end of our fiscal year. So from your modeling prospective, I think you should think about that as a full impact for fiscal '15 and probably little, if any, impact this year..

[Operator Instructions] And your next question is from the line of Brian Brungardt with Stifel..

So as it relates to the MGE integration in the future, rate recoveries for the one-time charges, how much longer should we be looking for those charges? And what do you envision the total size to be when they're completed?.

Yes. It's a two-part question, and I'll start with the second part as to what we expect those to be. We have not guided on that number. I can tell you, we took a conservative approach in our modeling and that's why I mentioned that we expect the Alagasco transaction to meet our target.

What we did is we've used precedent transactions using Booz as a partner much like we did in the past, and we looked at those prior transactions and ranges of synergies. So in our model, we built in a conservative estimate for that.

And as I also mentioned in my opening comments, we've stayed focused on day 1 integration because of the short time period between announcement and close -- that 4 months that I referenced.

And so we're using the same process, but the focus has been on day 1 and it will -- as we get further into it, enable to engage at a higher level with our Energen partners. Our teams will start defining what those synergy numbers look like. So that was the synergy piece.

And I'm sorry, what was the first part of your question?.

For the MGE integration, how much longer should we be looking for kind of one-time charges on -- for recoveries to be continuing to flow?.

Yes. Alagasco has a what we call a nontraditional rate-making process. It's a rate stabilization process, and we file annual budgets before that year. And so in terms of the timing and so forth, it's all modeled into that rate stabilization mechanism..

Yes. And Brian, this is Steve. I would add that if you think about MGE, the other deal that we're in the process of integrating, we have the ability from the regulatory recovery mechanism to accumulate integration costs for up to 5 years.

I suspect, and our plan is that you'll see a vast majority of those costs in the first 3 years and really heavily weighted to the first 2 years as you would expect. Just from a logistical standpoint, we're making those integration decisions now.

And so those costs, which are generally associated with facilities and all the other things that are associated with integrating a business usually happen inside the first 3-year or 2-year window. So that's how I would tend to think about it as you're looking forward into '15 and beyond..

And then lastly, on the heels of the success with both the MGE and Alagasco, just curious on your thoughts on the current acquisition market.

Have you continued to evaluate potential assets? And kind of where do you guys think valuations are today?.

Yes. As far as other acquisitions, I've shared with everyone, we do have a market development team, and they're constantly analyzing what's in the market based on market data.

But where we are right now is everything that we just talked to you about on this call, is making sure that we're executing on our plans, both with MGE and Alagasco, as well as LER and Spire and so forth. So that's where we're focused right now.

But we do say -- in terms of the market department group, we are looking at data constantly just to stay smart about the market..

[Operator Instructions] At this time, there are no further questions..

Okay, great. Well, thank you all for joining us today. We'll be available throughout the day for any follow-ups. So we'll look forward to that. Thanks, again..

Thanks to all of our participants for joining us today. We hope you found this webcast presentation informative. This concludes the webcast. You may now disconnect. Have a good day..