Scott Dudley - Director, IR Suzanne Sitherwood - President and CEO Steve Rasche - EVP, CFO Steve Lindsey - EVP, COO of Distribution Operations.

Dan Eggers - Credit Suisse Spencer Joyce - Hilliard Lyons Tim Winter - Felix Carmen - Visium Asset Management.

Good morning. My name is Patrick and I will be your conference operator today. At this time I would like to welcome everyone to the 2015 Q2 Earnings Conference Call. [Operator Instructions] Thank you. I would now like to turn the call over to Scott Dudley, Managing Director, Investor Relations. Scott, please go ahead sir..

Thank you and good morning, welcome to our earnings conference call for the second 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 can find that under the News Releases tab.

Today's call is scheduled for about an hour and will include a discussion of our results, as well as the question-and-answer session. And prior to opening up the call for questions, the operator will repeat the instructions for you can join the queue to ask a question.

Presenting on the call today are Suzanne Sitherwood, President and CEO; and Steve Rasche, Executive Vice President and CFO. Also joining us in the room this morning is Steve Lindsey, Executive Vice President and Chief Operating Officer of Distribution Operations.

Before we begin, let me cover our Safe Harbor statement and use of non-GAAP earnings measures. Today's earnings conference call, including responses during the Q&A session, may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

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

A description of the uncertainties and risk factors can be found in our Annual Report on Form 10-K, and 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, divestiture and restructuring activities, and those include costs associated with the acquisition and integration of Missouri Gas Energy and Alabama Gas Corporation.

Operating margin adjusts operating income to include only those costs that are directly passed on to customers and collected through revenues, which are the wholesale cost of natural gas and propane and gross receipts taxes.

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

Thank you, Scott. And I welcome those who've joined us this morning. We are off to a solid start in the first half of fiscal 2015. We continue to implement our growth strategy by integrating to transformative and accretive acquisitions, while pursuing the other growth initiatives we’ve outlined previously.

I would like to take a few minutes to review the headlines of our results and achievements to-date. Steve Rasche will follow me with a more detailed discussion of our operating results and financial conditions as well as our expectation for this year and beyond.

This morning we reported second quarter net economic earning of $2.25 per share, up more than 40% of a $1.58 per share last year. For the first half of fiscal 2015, net economic earnings were 3.31 per share up from 2.68 per share a year ago.

These significant increases in first year earnings reflect the growth of our Gas Utility business largely from addition of Alagasco and fiscal 2015, and also from growth and cost efficiencies at our Missouri utilities between gas and the Missouri Gas Energy.

With this strong year-to-date performance, we remain on track for achieving our full year 2015 earning goals, as well as our long term growth deposits. Our strategy has been and remains to transform our business and perceive growth in four areas.

First, we have consistently worked to grow our core Gas Utility business through pipeline infrastructure investment and organic growth initiatives. Second, as we've demonstrated we are growing to acquire other gas utilities and successfully integrating them to create value for investors, customers, and the communities we serve.

Third, we are working to further leverage our natural gas industry expertise to optimize our current and future investments and gas supply assets across both our regulated utilities and our gas marketing business. And fourth, we’re investing in innovation and emerging markets.

Let me take a moment to update you on our progress on several of these initiatives starting with growing our Gas Utility business.

Following a strong year in 2014 for our pipeline replacement program and continuing to wrap up our efforts across both Missouri and Alabama in 2015, we are committed to investing in our pipeline infrastructure from pre-safety safety and reliability, lower operating cost and growth of our Gas Utility business.

So far this year, we have invested $130 million in capital and we remain on track for $300 million we spent for the full year with a little more than half of this total amount tied to investment in pipeline replacement. Our total spend is up significantly from about $170 million last year.

In Missouri, the Infrastructure System Replacement Surcharge or ISRS, allows for more timely regulatory recovery of our investment and pipeline replacement. On April 17, both MGE and Laclede Gas filed with the Missouri Public Service Commission to collect additional revenue for construction completed since our last filing.

Laclede Gas reflected a $5.5 million increase and MGE cost for $2.9 million. If approved, these investments will be added to existing ISRS cost recovery in place and Laclede Gas and MGE.

In addition to our pipeline replacement program, we continue to focus on growing our utility margin not only by adding two and retaining our customers but also by identifying opportunities to meet more of our customers needs. As I mentioned last year, we added a Vice President of Organic Growth, he was responsible for and focused on topline growth.

Not only does he bring natural gas industry experience, he also brings customer's intelligence and marketing analysis experience. Under his leadership, we will have an executive responsible for traditional organic growth of adding new meters and burner tips with new and existing residential, commercial, and industrial customers.

He will also be responsible for non-traditional margin growth by attending our service areas in the state reserve and developing products and service offerings our customers would enjoy.

Rounding out our organic growth strategy, Steve Lindsey and others will continue to make our gas companies more cost efficient, leveraging not only our recent acquisitions but also the discipline on private management, project improvements and enhanced technology deployment and our new larger footprint.

Our focus is evidenced in our financial results and our primary focus will continue to be on the successful integration of our gas companies insured services.

With regard to Alagasco, our functional integration teams, which include members from both Laclede and Alagasco have largely completed our detailed integration plan and they began to focus on realizing the cost efficiencies identified by also sharing best practices wherever they may reside.

We ought to focus on the final phase of MGE integration including the conversion of the customer care billing systems and the work in asset management systems which will be completed this summer. Needless to say, we are very pleased with our progress backed with the hard work of every Laclede employee and our partners.

Rest assured we all remain focused on our new larger utility business. To accommodate our growth, we have now completed the relocation of our shared services team to a new work space in Downtown, St. Louis. And I must say we are very energized in our new home.

This newly renovated space is sponsoring creativity, collaboration and efficiency as we continue to deliver on our strategy and fully implement our shared services model. Turning to gas supply asset optimization, I would note this is something we have discussed in more recent quarters. Optimization or gas supply assets is not new to us.

Since inspection, our gas marketing business has leveraged transportation, storage assets and supply contracts, along with its market relationships to profitably serve a variety of wholesale customers.

On the Gas Utility side, although time our regulated customers has always been our top priority, we have historically taken advantage of opportunities to make offset in sales and to release our new pipeline capacity, when weather conditions and market dynamics allow.

More recently while maintaining our core focus on the reliability and cost to deliver gas supply to our utility customers, we’ve undertaken a thorough market analysis of how potentially drive more total value for customers and shareholders. Let me close with the final comments on creative value.

As we work to deliver shareholder value through the execution of our strategy, we're ever mindful of the products and dividends. As announced last week, the Board declared a common stock dividend of $0.46 per share payable July 2.

This is the same for the rate declared to annualized dividend that increased 4.5% effective January 2 and in 2015 the 12 consecutive years of increasing dividends. With that, let me now turn the call over to Steve Rasche to review our second quarter results.

Steve?.

Thanks Suzanne and good morning everyone. Let's start with the review of our operating results for the second quarter of fiscal year 2015.

Looking at the income statement, total operating revenues were $877 million, operating margin or earnings contribution after gas cost and gross receipts tax of $308 million was $116 million or 60% higher than last year.

Our business segment, Gas Utility margins of $306 million were up $131 million in the prior year, with approximately $126 million of that total due to the addition of Alagasco.

The remaining $5 million was the result of higher MGE margins reflecting the usage base component added to the rate design, as well as incremental business revenues at both Laclede and MGE and modest customer growth. These pluses were offset in part by lower asset optimization margins.

Weather was definitely a factor in understanding these operating results, as this quarter was about 10% warmer than last year's record cold, a still 6% colder than normal. Gas marketing generated a quarterly operating margin of $2.1 million down from $16.8 million a year ago.

This decline reflects a return to closer to normal weather and market conditions in the Midwest reducing industry wide price volatility and basis differential, that is price differences between supply in consuming regions. Moving down to P&L, operating and maintenance expenses of $104 million were up $32 million from last year.

That increase is principally due to the addition of Alagasco which added $34 million and that increase was partially offset by lower operating expenses across the rest of the company reflecting the benefit of cost savings initiatives and the timing of certain expenses.

Depreciation and amortization of $30 million was up $12 million from last year essentially the addition of Alagasco and similarly taxes other than income of just under $56 million were $14 million higher most of which was Alagasco related.

Interest expense for the quarter of $19 million was higher year-over-year by just under $10 million reflecting the debt assumed or issued in conjunction with the Alagasco acquisition. Income tax expense was $45 million compared to $25 million last year due to higher pretax earnings.

The effective tax rate for the quarter was 32.2% consistent with our full year 2015 guidance. The resulting GAAP net income was $94 million. Net economic earnings for the quarter were $97.6 million up 89% from the $51.7 million last year.

Looking at earnings by segment, the Gas Utilities segment delivered net economic earnings of $96.5 million compared to $44.7 a year ago. That increase reflects the addition of Alagasco, the shift in MGE’s earnings distribution and the timing of expenses offset in part by warmer weather compared to last year as I noted a second ago.

Gas marketing's net economic earnings were $2.1 million down from $7.1 million last year reflecting weather and marketing conditions. On a first year basis, second quarter net economic earnings were $2.25 per fully diluted share compared to $1.58 per share last year.

This comparison reflects the change in the distribution of our earnings, as well as the addition of 10.4 million shares issued to finance the Alagasco acquisition last June. I should note that although our second quarter earnings came in a bit above our expectations that is largely driven by the timing of expenses, and the colder than normal weather.

But weather cuts both directions and April has been roughly 30% warmer than normal, so on balance we remain on track with our full year targets. Let me take a brief look at our year-to-date results. Overall net economic earnings for the first six months of our fiscal year were $143 million or $3.31 per share.

This compares with prior year earnings of $88 million or $2.68 per share. This increase of more than $55 million is due to growth in our Gas Utilities segment reflecting not only the addition of Alagasco but also growth of our Missouri Utilities.

Gas marketing earnings were lower compared to the last prior year due to weather and as I noted also the exploration of favorable gas supply contracts in the first quarter of last year. Switching to cash flow, cash flow provided by operating activities for the first six months was $280 million up from $143 million a year ago.

$89 million of that increase was generated by Alagasco. The remaining increase reflects normal seasonal changes in accounts receivable and natural gas inventory, as levels the timing of gas purchases and collections under our purchase gas adjustment clause in Missouri.

And as Suzanne mentioned earlier, year-to-date capital expenditures were nearly $130 million, up roughly 90% from the first half of fiscal 2014. With that increase pretty evenly split between the addition of Alagasco and higher capital spend in Missouri.

Our balance sheet on March 31 remains very strong with a solid long-term capitalization that improved from last quarter and now stands at 48.8% debt or conversely just over 51% equity.

Short term borrowings were $248 million lower by nearly $40 million in the first half of this fiscal year and down almost $150 million in the last quarter, reflecting both the seasonal reduction and working capital. Our liquidity remains excellent and we have ample capacity in our credit facilities and commercial paper program.

And from this position of strength, we are taking the advantage of current market conditions including calling nearly $35 million of high rate Alagasco debt in January and preparing to refinance that debt along with another $80 million of Alagasco debt that matures in December and we have already largely had our interest rate exposure on both projects.

So taking a step back, our first half results demonstrate continued success in our growth strategy, as we saw benefits from organic growth and the addition of both Missouri Gas Energy and Alagasco.

As I noted earlier, we remain on track to meet our full year 2015 earnings targets of greater than 6% EPS growth after moving last year's gas marketing weather benefit.

Clearly the colder than normal weather and the timing expenses benefited our second quarter results and as I mentioned a minute ago, we will see that come back as a result of warmer weather in April and in the timing of operating and maintenance expenses in the back half of the year.

All other aspects of our 2015 outlook remain unchanged from the last quarter including our long term EPS growth targets of 4% to 6% and the fact that we should grow above that range during fiscal 2016, in addition to this year.

We also remain on track for our capital spend targets of $300 million this year supporting our five year target of $1.5 billion. So as we put the last part of the heating season behind us, we remain focused on delivering against our short term goals and our long-term targets. Let me turn it back over to you, Suzanne..

Thank you, Steve. Before going to questions, I want to mention a couple of important leadership changes. First at Laclede Group, one of our senior leaders had made the decision to retire. Mary Kullman, our Senior Vice President and Chief Administrative Officer and Corporate Secretary has announced that she will retire effective June 1.

Mary has been with Laclede for 25 years and has served as Corporate Secretary for 17 of those years. In 2013 she had given responsibility for Human Resources, in addition to her other duties including audit, enterprise with management, facility, governance and corporate standards.

On behalf of all of us in the Laclede family, I want to acknowledge Mary's leadership and contribution to our company and to wish her all the best in her future endeavors. But please know we have a strong succession plan in place to ensure us new transition of Mary's role going forward.

Second, as we announced in the news release back in February, Dudley Reynolds retired as President and Chief Operating Officer of Alagasco on March 31. Dudley served Alagasco with distinction over a 35 year career including as President and COO since 2003.

On behalf of our employees and the entire leadership team, we thank Dudley for his outstanding service to Alagasco and our customers. On March 11, we announced Ken Smith a 34 year Veteran of Alagasco was named President.

Ken’s background and experience including serving as an officer over the last 17 years make him a very qualified person to lead Alagasco. We look forward to his contribution to the company’s further growth and future success.

In conclusion, we are indeed off to a great start in the first half of fiscal 2015, we continue to transform our company and pursue growth integration of our acquisition, pipeline infrastructure investments and other organic growth initiatives. Gas supply asset optimization and investments and innovations in emerging market.

And we continue to deliver results in line with our great target. We look forward to seeing many of you at the AGA Financial Forum later this month and to continuing our dialog. And with that thought, we are now ready for questions..

[Operator Instructions] Your first question comes from the line of Dan Eggers, Credit Suisse..

Good morning guys. .

Good morning..

I was wondering if you could kind of follow-up unfortunately there were couple of accidents industrywide this year both in urban and Suburban settings.

When you guys look at your capital program, are you seeing more call or more need to maybe accelerate even beyond what you’re doing right now just as you’ve seen some of these incidents across the industry?.

Dan I will let Steve Lindsey talk about that because he's taken a very strong leadership position on national front – and the leadership more broadly and tightly tied into your question..

Thanks Dan, this is Steve Lindsey. I think the focus that we have on safety and all of our distribution systems is not laboring. So I think the approach we are taking is the right approach.

It is a risk based approach that talks about from a replacement perspective, it’s not just about miles of pipe, but the types of pipes that we’re replacing as well as the maintenance history on those pipes. So I think our program is good. I think we will continue to accelerate.

I think we have opportunities in Alabama, other areas that we’re focusing on around this pipeline safety in general are leaks per mile average leak response time. So I think it’s broader than just pipeline replacement but I think our focus is right and you will continue to see that type of acceleration as we move forward of our three utilities..

Dan, this is Steve Rasche, I would add that in our as we think about our longer-term capital plan there is clearly headroom in even the $300 million annually that we can spend to increase our pipeline replacement program and we’re pretty much running at a good pace at Laclede.

We’ve been at that for a number of years, we continue to ramp up a little bit more MGE and we’re working with folks on in Alabama to get to the right pace in Alabama.

It will take us a little bit to get there because there is a lot of engineering and hard work that goes behind the scenes to make sure that we got the right approach that can sustainable for a number of years..

And one final data point I guess I will give you in the first year of our ownership of MGE we replaced more miles in that first year than the previous three years combined. So I think that’s a pretty good indication of our focus on..

It’s such an important topic for our industry and I would like to also close with a comment.

I know from purposes of capital investment, it’s very important that I will also say under Steve Lindsey’s leadership over the last couple of years and we significantly improved our safety metrics and we’ve taken an approach that is our first priority and our industry as a first priority and we’ve seen significant movements in our metrics as Steve Lindsey has taken the position.

I'm very proud of that fact. I have to brag a little bit..

Maybe I will ask the Steve's collectively one more question on this if you think about $300 million and respectively more to be done in Alabama, does that mean that there is prospectively upside to the annual CapEx budget or is this is more Alabama’s rising Laclede may be catching a more normal stride?.

It’s a great question, if you think about the $300 million for this year there is probably 20 odd million dollars of spend which is directly related to several facility relocations which will not recur and also some integration capital as we bring MGE into the Laclede IT platform.

So we clearly create some headroom as we go into fiscal 2016 to replace that with pipeline replacement. But then I would agree and I think we’ve been very clear in how we approach, how we operate all our utilities that if we see a clear path to accelerate the capital on pipeline replacement program further.

We clearly have the ability to do that, it’s really a matter of getting the plan in place and making sure that we can mitigate it well to our folks inside the company as well as to our communities..

And relative to a year-over-year comparison if you will just as two Missouri utility, we’ll spend roughly about $20 million more dollars on pipeline replacement, which is about a 17% increase from last year so that kind of just scale perspective as our increase just in the Missouri Utilities alone..

Okay, got it. I guess one other question just with the integration studies you’re coming to a close on Alagasco.

Can you just maybe discuss what you guys were surprised to the positive and to the negative towards would have expected before you did the acquisition and how are those opportunities scaling up in total versus which you guys had originally expected?.

Yes I guess maybe not a surprise but to get to your positive point and well what we’ve found is from a cultural standpoint the Alagasco employees and the way that they go about their work is consistent with the way that we think about doing our work and our culture in Missouri.

So pulling these two teams together and having total under these functional areas they have been very well managed and the teams have quickly went about their work and that’s not always the case.

When you’re trying to pull two companies together and our process again is to have coverage and to find that factored solution for our customers and so again it’s not and that is why surprised I think, I found that to be very positive and that was across all the team. And from a challenge perspective honestly there have been no surprises.

I think we mentioned before that Steve Lindsey and I knew that company pretty well from the industry and working next door for a long time. There will be milestone opportunities around technology and so forth that we'll have to work our way through.

But for that teams are often running and the plans are coming as we expect as pluses and minuses across all of them, but generally speaking they are hitting the mark and leadership team here all have to make determination and we’ve really started implementing some and we will have to make determination of what’s round two, what’s round three, what’s round four.

More to come there..

And one other thing I’ll add Dan is, this is Steve Lindsey. I think one of the things not again as Suzanne mentioned not surprising was the strong focus I think a recent example of that was Alagasco ordered the JD Power business study for the south which says very strongly about their commitments to customers at all levels.

As well as the employees I think one of the things we found is that you have a strong level of employees throughout the organization and a very strong bench, which again is not a surprise, but it’s a nice thing to have..

Very, good thank you guys..

Thanks Dan..

Thank you, Dan..

[Operator Instructions] Our next question is from Spencer Joyce of Hilliard Lyons..

Good morning folks. Thanks for taking my call..

Good morning Spencer..

First off nice quarter here, I think Alagasco seems to be going fairly well for you. Steve first one for you and I apologize to get down here kind of in the minutia right of the bat, but can you give us that gross receipt tax number I think you may have mentioned it very early in your comments and I was distracted here for a second.

Just that tax number, we should net out to get a better gross margin number for the utility?.

Yes Spencer if you go back, if you have our press release and you go back to the final page of the press release, there’s a reconciliation of the operating margin to GAAP and that gross receipt tax number for the quarter, which I think is what you’re asking for is $44.1 million..

Okay, perfect, perfect. And sorry I missed that there in the release.

On the CapEx side, I know you all reiterated the $300 million is that still split kind of 85 Alabama, 205 Missouri, and then maybe 10 on the non-reg side?.

Yes I think that’s still a pretty good split, we continue to actively manage that Steve and I have manage the whole group and we meet regularly looking at it both individual projects and where opportunities are.

But I think that’s a fair depiction we may shift there is probably a little bit of shift inside Missouri maybe a little bit more and at Laclede, a little bit less at MGE this year. But that's really, you would expect us to kind of look at the opportunities and move the capital around wherever it makes sense..

Absolutely. Finally on the O&M that may have been delayed a bit in Q2.

Can you give us kind of round sense of the quantity there, I mean you were thinking maybe $1 million to $2 million over the back half of the fiscal year here or maybe closer to 3, 4, 5?.

Yes, let me answer the question a little bit differently, because clearly there was some timing in O&M.

If you look at the run rate for the first six months of the year, we've been averaging about $100 million a quarter in O&M and in the back half of the year, I think that that range or maybe a $1 million or $2 million higher is the right way to think about a run rate.

So the run rate of expenses aren't going to change and normally if you were to look at other periods for legacy liquid, you would see a little bit more of a seasonality in the expenses. So I think they are going to be a little bit flattish, maybe tick up $1 million or $2 million on average per quarter over the last few quarters.

And that really kind of covers the seasonality or about the timing of some of those expenses..

Okay. Perfect, yes, that works. That's all I had. Thanks, good quarter..

At this time, we have no further questions in queue - I’m sorry, we do have one question, it just came in from Tim Winter..

Good morning guys and congratulations on a great quarter.

I just wanted to follow up on the yesterday's filings, I just reading the releases, is there any issue there you resubmitted request was there, was the background there?.

This is Steve Lindsey. I don’t think they were any issues other than just the normal process that you go through with the Public Service Commission staff and LPC. So, we continue to be confident that the borrowings that we recently resubmitted will be approved and moved forward.

In addition, it’s an example of - as we continue to move forward how we are making that part of our normal business both sides of the state.

And then from a second perspective on ISRS, we do have some legislation that we are working on currently to try to extend the period of the filing requirement and that’s moving forward in both sides of the chambers as the Missouri legislature and we’re hopeful that we’ll have some type of bill out of into this session..

Okay.

So when do you expect the resubmitted request to be approved and when did you originally expected to be approved?.

The Missouri staff has made a recommendation to approve this at the beginning of this month early May. So again we're working with the LPC to resolve a few issues and we hope to have that into effect probably sometime late this month..

And Tim probably 30 to 45 days slide from what we would have normally expected but again nothing that. I think on balance it isn't going to impact us much because we're able to clarify and crystallize the capital. So we slit a little bit in timing but we picked up a little bit more in absolute dollars, so in all kind of net sales..

Okay. And then I just wondered if you could give us some sort of guidance given the rate redesign and the acquisitions for compared quarters versus historical and you are in a very strong $3.31 right now for the six months.

How should we think about the rest of the fiscal year?.

Tim this is Steve. I can take that. We spoke about this the last couple of quarters and I don’t think our view of the timing of earning has changed a lot with the rate adjustment at MGE adding a little bit of usage basis, still largely fixed but a little bit of usage and then Alagasco which is a much more seasonal pattern.

We would expect to have above level of earnings in the third quarter and then a loss in the fourth quarter. The last time that we talked about - talked about the earnings in particular, we gave a range for the third quarter between 4% and 6% of full year earnings with a loss of between 9% and 11% in the fourth quarter.

So you're right, if you do the math, we're at 3.31 and so on balance we will be a little bit in the red in the back six months of the year that will all be focused at least as best as we can tell.

In the fourth quarter and that's because in our service territories that's - as you know, is a pretty warrant period, so the actual gas usage is fairly low..

Great, Steve. Thank you so much..

Our next question comes from Felix Carmen from Visium Asset Management..

Thank you. Congratulations on a great quarter, very strong quarter. Just a quick follow up question, looks like in the other segment we had a tax benefit.

Can you guys just quantify what that tax benefit was and if that was part of the initial expectation to form second quarter?.

Yes, I will handle that Felix. The tax adjustment in the other category which is really not the business segment, it's really the accumulation of everything else. It was cumulative six month adjustment to make sure that the income tax impacts benefits of the interest were in the right business segment.

So, instead of focusing on the quarter, I would encourage you to look at the six month numbers that really gives you a better true picture of how to think about the other segment over the six month period rather than looking at the various in the first three and the second three months..

Okay. Got it. Thank you..

And presenters at this time, there are no further questions in the audio queue..

Thank you. And we look forward to seeing everyone at the AGA..

Thanks everyone..

And this does conclude today's conference call. All lines may disconnect at this time. Thank you for joining..