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TECO Energy (TE) Q4 2014 Results – Earnings Call Transcript

TECO Energy (NYSE: TE ) Q4 2014 Earnings Call February 09, 2015 10:00 am ET Executives Mark M. Kane – Director of Investor Relations Sandra W. Callahan – Chief Financial Officer, Chief Accounting Officer and Senior Vice President of Finance & Accounting John B. Ramil – Chief Executive Officer, President, Director and Member of Finance Committee Analysts Ali Agha – SunTrust Robinson Humphrey, Inc., Research Division Paul Zimbardo – UBS Investment Bank, Research Division Paul T. Ridzon – KeyBanc Capital Markets Inc., Research Division Andrew Bischof – Morningstar Inc., Research Division Scott Senchak Operator Good morning. My name is Keisha, and I will be your conference operator today. At this time, I would like to welcome everyone to TECO Energy’s Fourth Quarter Results and 2015 Outlook Conference Call. [Operator Instructions] I would now like to turn the call over to Mr. Mark Kane, Director of Investor Relations. You may begin, sir. Mark M. Kane Thank you, Keisha. Good morning, everyone, and welcome to the TECO Energy Fourth Quarter 2014 Results Conference Call. Our earnings, along with unaudited financial statements, were released and filed with the SEC earlier this morning. This presentation is being webcast; and our earnings release, financial statements and slides for this presentation are available on our website at tecoenergy.com. The presentation will be available for replay through the website approximately 2 hours after the conclusion of our presentation and will be available for 30 days. In the course of our remarks today, we will be making forward-looking statements about our expectations for 2015 and beyond and our integration of New Mexico Gas Company and the sale of TECO Coal. There are number of factors that could cause actual results to differ materially from those that we’ll discuss today. For a more complete discussion of these factors, we refer you to the risk factor discussion in our annual report on Form 10-K for the period ended December 31, 2013, and an updated and subsequent filings with the SEC. In the course of today’s presentation, we will be using non-GAAP results. There is a reconciliation between these non-GAAP measures and the closest GAAP measure in the Appendix to today’s presentation. The host for our call today is Sandy Callahan, TECO Energy’s Chief Financial Officer. Also with us today is John Ramil, TECO Energy’s CEO, to assist in answering your questions. Now let me turn it over to Sandy. Sandra W. Callahan Thank you, Mark. Good morning, everyone, and thank you for joining us today. We appreciate your flexibility with the revised date for our call, which was necessary in order to work through the accounting impact of amending our agreement to sell the coal company. We were in discussions with the purchaser, and it became clear that a revision to the selling price was necessary. And since the appropriate accounting was to reflect that impact in the fourth quarter, we rescheduled the call in order to make the required changes to our financial statements. Today, I’ll cover our financial results, what we’re seeing in the Florida and New Mexico economies, the sale of TECO Coal and 2015 guidance as well as the longer-term outlook. As usual, the Appendix to this presentation contains graphs on the Florida and New Mexico economies and reconciliations of non-GAAP to GAAP measures. In the fourth quarter, non-GAAP results from continuing operations were $45 million or $0.19 per share compared with $0.18 last year. GAAP net income was $10.8 million, which includes a loss in discontinued operations of $16.6 million reflecting impairment charges of $11.6 million and the operating results of TECO Coal. Net income from continuing operations were $27.4 million in 2014 and includes $17.6 million of charges, consisting of transaction and integration costs of $3 million related to the New Mexico Gas acquisition and the $14.6 million adjustment to deferred state income taxes related to the pending sale of TECO Coal. Excluding these items, the non-GAAP results for continuing operations were $0.19 per share. For the full year, non-GAAP results from continuing operations were $1.03 per share, 11% higher than 2013’s $0.91. GAAP net income of $130.4 million or $0.58 includes a loss in discontinued operations of $76 million, which largely reflects value impairments at TECO Coal. Net income from continuing operations was $206.4 million or $0.92 and includes $23.3 million of charges and net tax adjustments related to acquisition and sale activities. Excluding these items yields the non-GAAP results of $229.7 million or $1.03 per share. Tampa Electric reported slightly lower net income in the fourth quarter. While customer growth was a strong 1.6% and we had 1 additional month of higher revenues from a 2013 rate settlement, energy sales were lower due to milder weather resulting in fourth quarter revenues in 2014 about the same as the prior year. AFUDC increased this quarter with higher investment balances in the Polk conversion project and the related water project; and O&M expense was lower. The quarter-over-quarter increase in depreciation expense represented more than just the normal increase from additions to facilities. That’s because in 2013, fourth quarter depreciation had included the benefit of a full 12 months of lower amortization costs to retroactively reflect the change in software life agreed to a November 2013 rate case settlement. Weather patterns resulted in retail net energy per load in the fourth quarter that was 2.8% below 2013. Looking at degree days, which were 10% below normal and 12% below last year, you might expect energy sales to be off more than they were even with the customer growth we saw. In Tampa, we actually have both heating and cooling degree days in the fourth quarter. In this quarter, heating degree days were about normal and cooling degree days were well below normal, and that combination produced a milder impact on energy usage than the 10% and 12% degree days variances would suggest. Peoples Gas experienced strong customer growth of 2.3% in the fourth quarter, which was higher than our full year estimates. That was due to robust growth in several of the southwest Florida markets that had been the most impacted in the economic downturn, as well as substantial growth in northeast Florida. We saw higher therm sales to all customer segments, residential, commercial and industrial, as a result of the periods of cold weather in the quarter, as well as continued economic growth. On the expense side, O&M was lower in 2014 while depreciation was up. New Mexico Gas fourth quarter results benefited from customer growth and the start of the winter heating season even though it was actually milder than normal and milder than 2013. New Mexico Gas is much more seasonal than Peoples Gas, and the fourth quarter is a very strong quarter for them, which resulted in about $0.03 of accretion to our consolidated fourth quarter earnings. The other net segment is what we used to refer to as parent other. The net cost in this segment was higher in the fourth quarter compared to last year driven by interest expense at New Mexico Gas Intermediate, which is a parent of New Mexico Gas Company; and the interest that we no longer allocated to TECO Coal following its classification as a discontinued operation. The Florida economy continues to be a good story. Statewide unemployment at the end of the fourth quarter was 5.6%, an improvement of 7/10 from a year ago. At the same time, the state has added more than 233,000 new jobs over the past year, with the largest number of new jobs occurring in business services, trade transport and utilities and leisure and hospitality. The biggest percentage gain occurred again this quarter in the construction sector, which has posted 8% to 10% employment gains every quarter this year. Hillsborough County, Tampa Electric’s primary service territory, also continues to do well. We appear to be back to the pattern that was normal before the economic downturn, with Tampa area unemployment being better than both the state and national level. The employment rate in local area is down to 5.2%, 6/10 below where it was a year ago, and it is not a function of people leaving the workforce, as workforce grew by 0.5% in the same time frame. Over the past year, the Tampa-St. Pete area added more than 14,000 jobs, with the largest gains in business services followed by trade transport and utilities. Supported by the oil and gas industries and the large presence of governmental facilities in the state, the unemployment rate in New Mexico never came close to the levels we saw in Florida, where job losses in the construction and financial services sectors were severe due to the housing market crash. The largest gains in New Mexico’s 2014 job growth of 13,000 came in trade transport and utilities and education and health services. To put some perspective on the job numbers here, it’s interesting to note that the population of New Mexico of about 2.1 million was actually less than the population of the Tampa-St. Pete MSA, which has a population of about 2.8 million. Taxable sale, both in Florida and in Hillsborough County, continue to grow at the strong pace we’ve seen pretty consistently over the last 4 years. We don’t have that statistics here for New Mexico, as we haven’t yet found a ready source of similar information. On the housing front, more than 5,000 single-family building permits were issued in Tampa Electric service territory in 2014, and existing homes continue to sell at a strong pace. The January Case-Shiller report shows that selling prices in the Tampa market increased 6.8% year-over-year, which doesn’t seem to have dampened sales, and the housing inventory remains at a healthy level of 4 months. The New Mexico housing market saw 5,500 building permits issued statewide in 2014, which was an 8% increase over 2013. In Albuquerque, the state’s largest metro area, existing home resales have trended up steadily although slowly since the downturn, and the housing inventory is about 6 months. You can see all of these trends on the graphs in the Appendix. I’m not going to cover all of the details on the New Mexico Gas acquisition, but I do want to point to a few important takeaways. Consistent with the outlook we provided in our third quarter call, the acquisition was accretive to fourth quarter earnings by $0.03; and for the full year, $0.01. You’ll recall that it diluted EPS $0.02 in the third quarter as we had the associated shares outstanding in the entire quarter and 1 month of ownership during the typical seasonal loss period. With our 2015 business plans in place and with the rapid progress implementing our integration plan, we expect the acquisition to be accretive to full year 2015 earnings, and that’s earlier than we originally anticipated. Last October, we announced that we had entered into an agreement to sell TECO Coal to Cambrian Coal Corporation, a subsidiary of Booth Energy, a central Appalachian coal producer with operations in the same general areas as TECO Coal. The sale was contingent upon the purchasers obtaining financing. The coal markets have continued to weaken for several months now. And last week, we amended the agreement to adjust the selling price to reflect market condition and to extend the closing date to March 13. Under the amended agreement, we will receive $80 million at closing and have the opportunity to receive an additional $60 million over the next 5 years if benchmark coal prices reach certain levels. The purchaser launched financing activities last week after the amended agreement was executed. In the third quarter, we classified TECO Coal’s operations as discontinued operation and its assets as assets held for sale. At that time, we recorded noncash impairment charges of $64.8 million after-tax. We recorded additional impairment of $11.6 million in the fourth quarter, and the $16.6 million fourth quarter loss in discontinued operations includes that additional charge and the operating result of TECO Coal. Those operating results were impacted by costs related to preparing the company for the sale, such as severance and other employee termination costs. As we’ve disclosed previously, the actual closing of the sale will trigger an additional liability-related charge, which we estimate at $7 million. Turning to guidance. We expect 2015 earnings from continuing operations in a range of $1.08 to $1.11 excluding non-GAAP charges or gain. This is a tighter range than we’ve provided in the past, and that’s because our business mix is now all regulated utilities. And while weather is always a variable that can affect utility performance, our operating companies have typically been successful responding to weather variation within a reasonably normal range. We expect Tampa Electric to earn in the upper half of its allowed ROE range. That’s driven by customer growth that we expect will be in line with 2014; energy sales to retail customers other than phosphate, off an estimated 1%; higher AFUDC as we enter a peak spending year for the full conversion project; and an additional $7.5 million of higher base rate that became effective November 1 last year. On the expense side, continued investment in facilities to serve customers will drive higher depreciation and interest costs. We’re projecting lower O&M expense, however, in part, as we realize benefits from acquisition-related synergies and also from lower employee-related expenses including pension and retiree medical costs. 2015 changes to the retiree medical program and growth in planned assets are among the factors contributing to the lower expense. And because the acquisition of New Mexico Gas and sale of TECO Coal caused us to remeasure pension expense last year, that remeasurement captured the negative impact of lower discount rates and mortality improvement in 2014. We expect Peoples Gas also to earn above its allowed mid-point return, which is 10 3/4%. Like Tampa Electric, we expect the customer growth trends we saw last year to continue into 2015 and expect continued interest in vehicle fleet conversion to compress natural gas as well. Although current gasoline prices are helpful, the economics are still favorable, and there are environmental benefits that users like to promote. At the end of 2014, Peoples Gas had 31 CNG filling stations on its system, and the annual volume was the equivalent of about 60,000 Florida residential customers. We expect that number to grow again in 2015. And finally, the Peoples Gas expense profile should be similar to what I described for Tampa Electric. 2015 will represent our first full year of ownership of New Mexico Gas Company. And as I said, we expect it to be accretive in that first full year. And I’d like to be clear that there’s no creative math in that statement as I’m taking into account the performance of the regulated company, NMGI interest costs and the shares we issued. We expect customer growth to start the year at about the same levels as 2014 and trend up through the course of the year with growth in therm sales largely in line with customer growth. We expect lower O&M from acquisition synergies, and we also have the REIT credit of $2 million in the first 12 months post-closing and $4 million in each subsequent 12-month period, which have the effect of sharing some of the synergies with customers. Since we only have 4 months of ownership with New Mexico Gas in 2014, the slide shows some information on previous years to provide some full year context. The Form 2 filed with the New Mexico Commission reported New Mexico Gas Company net income of $23.7 million in 2013, which was a strong weather year with heating degree days about 5% above normal; and $18 million in 2012, when heating degree days were well below normal; and higher rates approved by the commission became effective after the January peak load that already occurred. This slide is just to remind us to show the normal seasonal earnings pattern we expect from NMGC. They make their money in the cold weather in the first and fourth quarters, a fairly normal pattern for a gas LDC that’s heavily residential. It actually complements our existing earnings pattern nicely as Tampa Electric’s strongest quarters are typically the second and third quarters with summer air-conditioning load. The segment we refer to us Other net includes interest at the unrelated finance company, interest at NMGI, certain unallocated corporate level expenses and consolidated tax impacts and smaller operating companies, the only one of note being TECO’s pipeline. We anticipate that the net cost in 2015 will be slightly higher than last year because of a full year of interest expense at New Mexico Gas Intermediate. Although we won’t be allocating any interest expense to TECO Coal as we have in the past, the negative impact from that will be offset by the benefit of refinancing a maturing note series that has a coupon of 6.75%. I would summarize our longer-term outlook in this way. Our regulated businesses are investing in infrastructure to serve customers in our growing rate base 5% to 7%. Our target is to deliver ratable earnings growth that’s in line with rate base growth. The challenges in 2016, recognizing that Tampa Electric’s rate base growth is heavily influenced by full conversion projects while an additional $110 million of annual revenue will become effective when that project goes into service at the beginning of ’17, the base rate increase that benefits 2016 is only $5 million. So a key to delivering earnings growth in 2016 will be effective management of cost across the organization. You can see this on the graphic representation of Tampa Electric’s rate base, which shows it stepping up significantly in ’17 when Polk goes in service. The base revenue pattern is very aligned with the rate base growth you see here. The 2013 rate settlement provided additional base revenues of $57.5 million effective November 1, 2013, which coincided with 2014 rate base growth; $7.5 million at November 1, 2014; $5 million at the same date in ’15; and then $110 million when Polk goes in service in ’17. This graph shows average rate base, and it excludes the assets that we earn on separately through the environmental cost recovery clause and the construction work in progress that earns AFUDC above a threshold amount that is included in rate base. As a reference point, at the end of September of ’14, actual average rate base was $4.1 billion, the environmental assets were about $400 million and that clip was about $200 million. Also, with our upcoming Investor communications schedule, we expect to file our 10-K at the end of this month, and we will be at the UBS and Morgan Stanley conferences the following week and at the Barclays conference in Atlanta in the middle of March. And now I will turn it over to the operator to open up the lines for your questions. Question-and-Answer Session Operator [Operator Instructions] And your first question comes from the line of Ali Agha with SunTrust. Ali Agha – SunTrust Robinson Humphrey, Inc., Research Division A couple of questions. One is, you recently raised your dividend by 2.3%. And I wanted to just get a sense of what is the philosophy on the dividend and growth going forward. I know we’ve talked previously about the NOLs, but they’ll go away in a few years. So can you just remind us again how you’re looking at the dividend? And ultimately what’s the payout ratio, and when do you expect to be in that payout ratio? John B. Ramil This is John Ramil, and I appreciate you asking that question. When we look at our payout ratio versus our guidance for next year, it’s a little bit above 80% as opposed to our kind of normalized target of 60% to 70%. And we expect over time with the 5% to 7% earnings per share growth, coupled with a modest dividend growth that we will work ourselves back into that more normalized range as we work ourselves out of the NOL position, and that’s expected to be in about 2019. Ali Agha – SunTrust Robinson Humphrey, Inc., Research Division Understood. Great effort. Second question, John, as you, I think, pointed out on the coal sale, the buyer, I guess, started their financing plans last week as well. Any concern at all about their ability to raise the financing? I know that’s the contingency left to close this. John B. Ramil Well, you’re right, they did kick off their financing on Friday of last week, and we’ve been working very closely with them on where they are in their financing, what the markets are doing and in working with them with the objective of getting this deal closed and moving the coal business out of our portfolio. That’s why we agreed to an amended deal to really strengthen the ability for them to get the financing for this transaction to close. Ali Agha – SunTrust Robinson Humphrey, Inc., Research Division Okay, and you’re very confident that, that financing will close. I mean, there’s no — I mean, from your perspective as the seller, any concerns? John B. Ramil All the indications we have and the advice that we’re getting is where we’re at in pricing and where the markets are expected to be, that transaction can close. Ali Agha – SunTrust Robinson Humphrey, Inc., Research Division And my last question. On New Mexico, as we think about calendar 2015, you were talking about your expectations for Tampa Electrics on the ROE and Peoples Gas on the ROE. How should we think about New Mexico’s on the ROE? I believe their authorize is 10%, if memory serves me right. So how should we think about what — where — roughly where they should be earning in the order of magnitude? John B. Ramil That’s correct. And with all of our people doing very, very good cost control work, as you can see, that is continued in 2014. And with the synergies that all of our utilities are seeing from the integration, it’s helping improve all the ROEs. And New Mexico Gas has been low — earning closer to 9% ROE, and we expect to keep moving that up towards that 10%. Ali Agha – SunTrust Robinson Humphrey, Inc., Research Division Okay. Somewhere between 9% and 10% should be the expectation for ’15? John B. Ramil That’s correct. Operator And your next question comes from the line of Paul Zimbardo with UBS. Paul Zimbardo – UBS Investment Bank, Research Division I just had a question about what your thoughts are on possibility of rate base gas and solar opportunities. nexAir has talked about it on some of the recent calls. And just how do you think about that going forward for you? John B. Ramil Well, we’re watching what’s happening with Florida Power and Light very closely. They reached — got some approvals along the way, and there’s still more things to happen there. And with the proper regulatory treatment, it’s a reasonable investment for utilities to make. So we’re keeping our eyes closely on it. We’re also very interested in large-scale solar. We expect that over time, that’s going to make more and more sense. We think that the commission is receptive to the right projects. In fact, last year, late in the year, I think it was during the fourth quarter, we announced the plans to install a larger scale solar facility at the Tampa International Airport. So we’re moving in that direction. We looked ahead to our next capacity need after the Polk expansion, being in about 2020, and while we have that kind of penciled in as a combustion turbine at this point, we think it’s likely that through some combination of various size solar projects, we’d see that CT replaced with solar capacity. And we think that the commission, the economics and the realities of additional environmental requirements will make that good decision. Paul Zimbardo – UBS Investment Bank, Research Division Okay, so no real plans to do anything in the next 3, 4 years, take advantage of ITC or anything like that? John B. Ramil Well, I just mentioned we announced a project in the Tampa International Airport, and that will go into service in that time period. But beyond that, I mean, our immediate need is being met by the Polk expansion, which is driving our growth through 2016 — I’m sorry, through 2017. Paul Zimbardo – UBS Investment Bank, Research Division Okay, got it. And then one other last question. On the current refinancing of the 6.75% notes, are you able to quantify the magnitude if you plan on letting any of that roll off? Or will it just be a straight refinancing? Sandra W. Callahan We will likely refinance the whole maturing amount. Operator And your next question comes from the line of Paul Ridzon with KeyBanc. Paul T. Ridzon – KeyBanc Capital Markets Inc., Research Division If parent companies in Cambrian have issues, kind of can you talk about Plan B? John B. Ramil Sure. We’ve been working with them for quite a while. We have had other expressions of interest but feel that they are the most likely candidate to get this transaction done. If, for some reason, that doesn’t happen, we will look to others as possible buyers, and we’ll also look at other ways of selling the asset. Paul T. Ridzon – KeyBanc Capital Markets Inc., Research Division And given the lower economics, does that impact equity needs at all? John B. Ramil No. Paul T. Ridzon – KeyBanc Capital Markets Inc., Research Division Okay. And then lastly, can you kind of give the next couple of years’ CapEx schedule? Sandra W. Callahan Well, we will be filing a revised capital spending forecast in our 10-K. Paul T. Ridzon – KeyBanc Capital Markets Inc., Research Division At the end of this month? Sandra W. Callahan At the end of this month, right. Operator And your next question comes from the line of Andy Bischof with MorningStar. Andrew Bischof – Morningstar Inc., Research Division LI know the total potential future consideration came down as part of the amended coal deal. But can you speak to whether or not the benchmark pricing come down at all? John B. Ramil The future consideration actually went up to $60 million and the benchmark number stayed the same. Operator And your next question comes from the line of Scott Senchak with Cannon. Scott Senchak Just you have some debt maturities also in ’16 and ’17. I was just wondering what your plans were there. John B. Ramil Scott, would you repeat that? I’m not sure exactly what you asked. Scott Senchak Sorry, you have some debt maturities in 2016 and 2017. I was just wondering what your plans are for those as well. Should we expect a straight refinancing there or what the plan is there? Sandra W. Callahan For the most part, Scott, probably refinancing, but we may retire some portion of those maturities in those years. Operator [Operator Instructions] At this time, there are no further questions. I would like to turn the call back over to Mr. Mark Kane. Mark M. Kane Thank you, Keisha. Thank you, all, for joining us today. We know there are other activities occurring in this morning, so we appreciate you taking your time to join us on our call. And we look forward to seeing you at various Investor conferences in the future. This concludes our call. Thank you. Operator Thank you, all, for your time and participation. This does conclude today’s conference call. You may now disconnect.

Star Gas Partners: A Deeply Undervalued Beneficiary Of Low Oil Prices Offering 40% To 90% Upside

Summary Star Gas Partners is the largest distributor of home heating oil in the United States, serving residential and commercial customers in fourteen states throughout the Northeastern U.S. and Mid‐Atlantic. At the current valuation the Company is selling at an 18% cash flow yield based on our expectations for $68 million in distributable cash flow in 2015. When valuing SGU at close to a 30% discount to its peer EV/ EBITDA multiples the stock is worth over 90% more than the current share price. Star Gas Partners (NYSE: SGU ) is the largest distributor of home heating oil in the United States, serving residential and commercial customers in fourteen states throughout the Northeastern U.S. and Mid‐Atlantic. The Company has a market value of just $375 million, yet in 2014 generated $1.96 billion in revenues and $103 million in EBITDA. SGU’s revenues are highly recurring, with 97% of customers on automatic delivery schedules. The market for home heating oil is mature but extremely fragmented; Although, SGU has a market share that is likely under 5% it is still 200x larger than its average competitor. The heating oil industry also features attractive financial characteristics, with recurring cash flows and contractually determined gross profit per gallon. Star Gas’s gross profit is largely fixed at $1.00/gallon and the Company constantly hedges its exposure. Considering Star Gas has net debt of approx. $75 million (net debt is adjusted after making changes to working capital to reflect receivable collections) the market is drastically undervaluing the Company. At the current share price of $6.55 the Company is selling at an 18% cash flow yield based on our expectations for $68 million in distributable cash flow in 2015. Essentially, if one were to buy the Company outright at the current price they would net an 18% annual cash return before Capex (Capex is running at approx. $10 million per year). The question one might ask is how can such a high return investment be available in the current low return environment we are in? The answer lies in the following non-fundamental issues that have caused investors to bypass making an investment In SGU: SGU has an inefficient corporate structure- Star Gas was formed as an MLP, yet should ideally be structured as a corporation. Star Gas acts as a partnership, which owns Petro Holdings, which acts as the heating oil corporation. Although Petro Holdings is taxed at the corporate level, any cash moved out of the holdings and into the partnership for either dividends or share repurchases may also be taxable to unit holders as dividends. Therefore, shareholders may be obligated to pay a dividend tax without ever receiving a dividend if funds were used to repurchase shares. Although, the current structure is by no means efficient it is not material enough to justify the current discount of the Company’s shares. Low dividend yield- Although Star Gas generates over $60 million in distributable cash flow it pays out less than $20 million in dividends, which implies a 5% yield. MLP peers typically payout over 80% of their cash flow and at higher yields. Highly seasonal business leads earnings to appear volatile- Because Star Gas makes money in the winter season the Company generates all of its earnings during half the year and loses money during the other half. This presents an appearance of inconsistent earnings from quarter to quarter. Declining business due to competition- The main competition for heating oil distributors is customer conversion to natural gas, which is generally significantly cheaper than heating oil. However, for many heating oil users, the local utility has no gas main capable of reaching their homes. For others, however, once their oil burner requires replacement (estimated cost: $2,000‐$3,000) the economics can be compelling. Conversion costs average $10,000, so the incremental costs of converting can be $7,000 to $8,000. Yet, over the past five years, the loss to natural gas conversion has ranged from 1.5%‐2.0% and the Company’s overall net attrition stood at just 0.9% in 2014. All the above issues have existed now for some time, yet Star Gas continues to increase both profits and shareholder value. Since 2010 the Company has increased annual EBITDA by 44% and reduced shares outstanding by 23% from 75 million shares to 57.2 million shares. Thus, on a per share basis the Company has increased EBITDA from $1.02 to $1.79 or by 75% over the last 4 years. The market also fails to realize that Star Gas is a beneficiary of low oil prices. As heating oil prices have gone down Star Gas’s business has received a major tailwind. The company is now able to buy the same quantity of heating oil while using significantly less working capital therefore minimizing borrowing costs and working capital needs. Furthermore, as a result of lower heating bills the Company’s customers are now less likely to switch to natural gas as conversion economics have come down substantially. This tailwind was evident in their most recent Q1 2015 earnings as the company increased EBITDA by 25% to $45 million. Assuming YOY growth remains flat for the remainder of the year, Star Gas should be able to generate $70 million in cash flow and $60 million in Free Cash Flow for 2015. This should allow the company to either significantly increase its dividend or buyback program. To put things in perspective, Star Gas has a distribution coverage ratio of over 3x their current dividend. If their distribution coverage was similar to that of their MLP peers (1.1x to 1.2x) the company would have a current dividend yield of well over 10%. When we compare Star Gas to larger propane and fuel delivery MLPs the investment looks even more compelling. Company Mkt Cap (In millions) P/E Ratio EV/EBITDA P/CF Dvd Yld Average $ 3,163 20.3x 11.17x 9.87x 7.68% SUBURBAN PROPANE PARTNERS LP (NYSE: SPH ) $ 2,721 20.3x 11.1x 9.6x 7.8% FERRELLGAS PARTNERS-LP (NYSE: FGP ) $ 1,937 23.2x 11.8x 10.2x 8.6% AMERIGAS PARTNERS-LP (NYSE: APU ) $ 4,831 17.4x 10.7x 9.8x 6.7% STAR GAS PARTNERS L.P. $375 11.5x 4.8x 6.3x 5.35% As the larger comps clearly have more diversified stable businesses we do not believe Star Gas should trade at a similar multiple. However, we firmly believe the company should trade at a multiple between 6x to 8x EBITDA. Using that range, Star Gas shares would be worth anywhere from $9.15 to $12.50 per share. This implies potential upside of 40% on the low end to over 90% on the high end. Disclosure: The author is long SGU. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Laclede Group’s (LG) CEO Suzanne Sitherwood on Q1 2015 Results – Earnings Call Transcript

Laclede Group, Inc. (NYSE: LG ) Q1 2015 Earnings Conference Call February 4, 2015 10:00 AM ET Executives Scott Dudley – Director of Investor Relations Suzanne Sitherwood – President and Chief Executive Officer Steven Rasche – Executive Vice President, Chief Financial Officer Steven Lindsey – Executive Vice President, Chief Operating Officer of Distribution Operations Analysts Daniel Eggers – Credit Suisse Stephen Byrd – Morgan Stanley Sarah Akers – Wells Fargo Securities LLC Selman Akyol – Stifel Nicolaus Felix Carmen – Visium Asset Management Operator Good day, and welcome to today’s webinar entitled The Laclede Group First Quarter Fiscal 2015 Earnings Webcast. My name is Caroline, and I will be your web event specialist today. At the end of today’s presentation, we will have a question-and-answer session, and questions will be taken over the telephone conference. [Operator Instructions] Additional instructions will follow at that time. It is now my pleasure to turn today’s webcast over to Scott Dudley, Managing Director of Investor Relations. Scott, the floor is yours. Scott Dudley Well, thank you and good morning, and welcome to our earnings conference call for the first quarter of fiscal 2015. We issued a news release this morning announcing our financial results. And you may access that release on our website at thelacledegroup.com, and that will be under the News Releases tab. Today’s call is scheduled for one hour and will include a discussion of our results, and as mentioned the question-and-answer session at the end. Prior to opening up the call for questions, the operator will again 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 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, including costs related to 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 we issued this morning. So with that, I will turn the call over to Suzanne. Suzanne Sitherwood Thank you, Scott. And I welcome those who’ve joined us this morning. After completing a very successful year in 2014, including executing on our growth strategy and delivering on the commitments we made to our investors and other stakeholders, we are off to a solid start in Fiscal 2015. We continue to implement our growth strategy by completing two transformative acquisitions and doing the other things we said we would do. So let’s take a minute – few minutes to update everyone on our progress to date. Steve Rasche will follow me with a more detailed discussion of our operating results and financial position as well as a review of our outlook for this year and beyond. This morning, we reported first quarter net economic earning of $1.6 per share, compared to a $1.11 per share last year. The change from last year reflects the shift and the quarterly distribution of our earnings per share. That shift is due to the addition of Alagasco. The additional shares outstanding issued to finance the deal, and a change in MGE’s rate design to include a small usage base component. Despite, all these moving parts, let me confirm upfront, we are on track for achieving our full year earnings target and we remain confident in our about ability to deliver long-term growth of 4% to 6% annually and exceeding that range this year and next. Also as a reminder, our growth strategy includes investing in pipeline replacement and infrastructure, organically growing our existing businesses, acquiring other gas utilities and assets, and developing and investing in CNG fueling and other emerging technologies. As I take a moment here to update you on each of these initiatives, I want to also note some refinements we have made to our leadership team, to ensure continued success in executing our strategy. With regard to pipeline replacement, we’re coming off of a strong year in 2014 in which we replaced the total of a 139 miles of our distribution infrastructure. That effort included a 20% increase at Laclede Gas compared to 2013 and more miles replaced to MGE in 2014, than the prior three years combined. As we mentioned many times, investing in the safety and reliability of our pipeline infrastructure continues to be an important driver of our business. Our efforts this year includes further ramping up the infrastructure replacement in Missouri and developing our plan in Alabama that builds on and enhances Alagasco’s current replacement program. We are on the right pace to meet our targets to the year at all of our utilities. As you know, in Missouri, we have an Infrastructure System Replacement Surcharge or ISRS, a regulatory mechanism that allows for more timely recovery of our investment and pipeline replacement. Last Friday, both MGE and Laclede Gas filed with the Missouri Public Service Commission to increase their ISRS cost recovery based upon the construction completed since our last billing. Laclede Gas filed for an additional $5.3 million and MGE filed for $2.6 million. If approved, the existing ISRS cost recovery of $9.8 million annually for Laclede Gas and $2 million for MGE would increase by the above amount. Value for shareholders and customers is, as I just described, achieved by investing in utility, pipeline replacement, and infrastructure, and it also is achieved by investing in strategic infrastructure, including the right transportation, storage, and supply assets and investing in relationships in the up-stream and mid-stream markets. As we mentioned before, we are continuing our analysis of how best to invest in assets, and use our expertise to create additional value for customers and shareholders. Given the shift over the years in market fundamentals, system reliability is the primary objective of our analysis. I should note here that the analysis that’s being conducted under the direction of Mike Geiselhart, who – he was recently promoted to Senior Vice President, Strategic Planning and Corporate Development. In addition to his planning and development duties that include leading our M&A team for both of our acquisitions, Mike now also has responsibility for integrations. Reporting to Mike and leading the integration effort is a newly promoted Vice President who has been the team lead on our integration effort as a Managing Director. Now, with regard to organic growth in the utilities, Steve Lindsey recently announced a Vice President level role to lead this effort. The executive will start mid-February bringing with him industry experience as well as customer intelligence and marketing analysis expertise from his current experience with AIG. We look forward to his contributions to our organic growth efforts. In addition to growing organically, a major component of our growth strategy has obviously been our two successful gas utility acquisitions. While we will continue our disciplined evaluation of opportunities to acquire other gas utilities and assets, we are heavily focused on completing the MGE integration plans and continuing to move through our integration model and process for Alagasco. So, let met cover Alagasco first. The functional integration team, which include members from both Laclede and Alagasco, have been hard at work on the detailed integration planning and design since early last September and their efforts will continue through the first half of calendar 2015. This approach in many ways is very similar to how we manage the integration of MGE. First, we plan our work, and then we work our plan. However, the pacing of our process in Alabama is different than MGE, due in large part to Alagasco’s history as a strong standalone gas company. It’s deep understanding of the rate setting construct in Alabama and the structure of the acquisition itself. Our goal in both instances is the same to identify efficiencies, implement best practices across our utility footprint and improve safety and customer service quality. With regard to the MGE integration, as we discussed last quarter we achieved several milestones last year and actually ended 2014 ahead of plan. I’m pleased to note that the process continues to go extremely well. The main focus right now is the integration of the customer care and billing systems as well as the work in asset management system. We are on track to complete these information technology integration milestones this summer as planned. Given we have integrated MGE into Laclede, and a 39-year veteran of MGE is retiring, we are also pleased to promote a leader from Alagasco with 20 years of gas industry experience to Vice President over MGE’s Field Operation. This promotion demonstrates our commitment to leveraging expertise and best practice knowledge wherever it exists across our broader organization. Now, let me turn to Spire, our initiative to provide fueling solutions for compressed natural gas vehicles. Our first Spire station at Lambert-St. Louis. International Airport celebrated its first year of operations last December. We have been very pleased with the performance of this station, which has far surpassed our expectation. Last quarter, we announced ground breaking on our second Spire station located in Greer, South Carolina. The station to be a collocated with the QuikTrip travel center will serve tractor-trailers in a busy traffic corridor at the intersection of Interstate 85 and Highway 101. We expect the station to be in commercial operation sometime in the summer. And we look forward to welcoming a new set of customers to Laclede to via Spire. Before I turn the call over to Steve, I want to note just a couple of other items. Last Thursday, Laclede held its annual shareholder meeting and the board of directors held its regular quarterly meeting. At the annual meeting, Chairman William Nasser announced his retirement from the board. We are deeply grateful for the 21 years of leadership and expertise that Bill has provided us, including the last three as Chairman. His guidance has helped us achieve outstanding growth and success as a company, while staying focused on the demands of running a natural gas enterprise safely, efficiently, and profitably. At his meeting, the board appointed Ed Glotzbach as Chairman. Ed has served on The Laclede board for 10 years, most recently as a member of the Audit Committee and Chairman of the Compensation Committee. We look forward to working with Ed and the rest of the board as we continue to execute our growth strategy and deliver a shareholder value. And one of the key ways we deliver shareholder value is through dividends. As announced last week, the board declared a common stock dividend of $0.46 per share payable in April. This is the same rate declared last quarter, when the annualized dividend was increased to 4.5%, making 2015 the 12th consecutive year of increasing dividends. On that note, let me now turn the call over to Steve Rasche to review our fiscal 2015 first quarter results. Steve? Steven Rasche Thanks, Suzanne, and good morning, everyone. Let me review our operating results for the first fiscal quarter of 2015 and give a few other updates. I’ll start with our first quarter income statement. Total operating revenues were $620 million. Operating margin or earnings contribution after gas cost and gross receipts tax of $231 million was $75 million or 48% higher than last year. By business segment, Gas Utility margins of $226 million were up $72 million from the prior year, with approximately $68 million of that increase due to the addition of Alagasco. The remaining $4 million was the result of higher MGE margins, incremental ISRS revenues and modest customer growth, offset in part by lower asset optimization activity compared to last year. Gas marketing generated a quarterly operating margin of $5.1 million, up $2.9 million from a year ago. All of this increase was due to fair value accounting adjustments. And removing those adjustments, LERs margins decreased $700,000 in the quarter. This decline reflects current market conditions of low price volatility and regional basis differentials, as well as the expiration of a supply contract in late 2013. Operating and maintenance expenses of $97 million were up $35 million, $32.6 million of that increase is the addition of Alagasco. The remaining increase reflects higher customer service expenses and professional fees, offset in part by lower salary and benefit costs as a result of the warmer weather we experienced in the first quarter compared to last year. Depreciation and amortization of $32 million was up $12 million from last year, essentially the addition of Alagasco. And similarly, taxes and other income of $38 million was higher by $9.4 million of which $8.8 million was Alagasco. Interest expense for the quarter of $19.2 million was higher year-over-year by $8.7 million, reflecting the debt assumed and issued in order to complete the Alagasco deal. Income tax expense for the quarter was $22 million, compared to $18.5 million last year, due to higher pre-tax earnings. And the effective tax rate for the quarter was 32.2%, down 200 basis points from first quarter last year and consistent with our guidance for the 2015 effective tax rate. The resulting GAAP net income was $47.1 million. Net economic earnings for the quarter was $45.7 million, up 26% from the $36.3 million last year. Looking at net economic earnings by segment, the Gas Utility segment delivered net economic earnings of $49.8 million compared to $35.8 million a year ago. This increase reflects the additional earnings from Alagasco and as we discussed at year-end, the change in the quarterly earnings distribution of our new larger Gas Utility business. The principle driver of this change is the higher concentration of Alagasco earnings falling in the quarter ending March 31, as a result of rate design and the timing of the heating season in Alabama. This comparison with last year also recognizes that MGE’s rate design after our 2014 rate case now more closely tracked to the design at Laclede Gas with a small portion of its overall cost recovery tied to usage. The net effect of these factors is to increase the percentage of earnings in our fiscal second quarter and decrease the percentage than the other three fiscal quarters. Gas Marketing’s net economic earnings were $400,000, down from $800,000 last year as lower margins were offset in part by lower operating costs. And while not a business unit, our other segment reported net after-tax expenses of $4.5 million representing group interest related to the Alagasco acquisition. On a per share basis first quarter net economic earnings were $1.06 for fully diluted share compared to $1.11 per share last year. This comparison reflects a change in the distribution of our earnings as well as the addition of $10.4 million shares and group debt issued to finance the Alagasco deal last August. It is important to reiterate that the delta from prior year is really about resetting our earnings pattern to our new larger business and we remain on track for our full-year earnings targets including delivering accretion anticipated from the Alagasco acquisition. Switching to the cash flow statement of balance sheets, cash flow used by operating activity for the first quarter, was $34.1 million, up from $15.7 million a year ago. The increase was driven by seasonally high customer billings and the timing of gas purchases and collections under our purchase gas adjustment clause in Missouri. These increases were offset in part by reductions in other working capital accounts, higher net income, and depreciation. Capital spend for the first quarter was $60 million, up $25.4 million from a year ago, with the addition of Alagasco making up $15.5 million of that increase and the remaining $9.9 million reflecting added capital spend in Missouri. Our balance sheet at December 31 remains very strong with solid long-term capitalization that improved from last quarter and stand essentially at 50-50 long-term debt and equity. Short-term borrowings did increase this quarter by $110 million as the end of our calendar year generally represents our peak working capital needs. Even with that increase, we have excellent liquidity with overall capacity in our credit facilities and commercial paper program of approximately $350 million and from this position of strength we are actively pursuing ways to take advantage of the current interest rate environment. In January, we called nearly $35 million of high rate Alagasco debt. And earlier this week, the Alabama Public Service Commission approved our application to hedge our interest rate risk for this future offering as well as the $80 million of Alagasco debt maturing later this year. So, stepping back and looking at the first quarter, our operating results reflect our significant progress in our integration of both MGE and Alagasco. As we progress, we continue to refine our view of the distribution of our quarterly earnings per share. In our year-end conference call, we offered estimated percentage ranges by quarter for 2015. Now, with a quarter behind us, our updated view is that, we will fall just below the ranges we established for both Q1 and Q2 earnings per share, with those earnings shifting to the second half, principally as a lower loss in our fourth fiscal quarter. As mentioned earlier, this change better reflects our understanding of the rate design and regulatory processes at our new utilities. As a further point of clarification, we are comfortable with the first column being estimated for the quarter ending March 31, as the midpoint of a range are plus or minus couple of cents. And again to reiterate, we remain on track for our earnings targets for the fiscal year. And we will certainly get there at a different path than last year, as this winter’s weather appears to be much closer to normal, perhaps a bit warmer than normal, which enables us to better manage operating and maintenance expenses to offset any margin we might lose on off-system sales capacity release or at LAR. These purchasing pulls are no unusual, there are the operating challenges that we and our industry successfully tackle every year. All other aspects of our 2015 outlook remain unchanged from last quarter, including our long-term earnings per share growth target and the fact that after adjusting for LAR’s weather benefit this year or last year, we should grow above that range this year and in fiscal 2016. We remain on track with our capital spend target of $300 million for this year, supporting our 5-year capital forecast of $1.5 billion. Rest assured, we remain focused on delivering against our goals for the year and we look forward to updating you on our progress next quarter. Let me turn it back over to you, Suzanne. Suzanne Sitherwood Thank you, Steve. We are, indeed, off to a solid start in 2015, and are executing well against our growth objectives for the year, including hitting our milestone for the MGE and Alagasco integration. I also announced last quarter that in order to accommodate our growth, we would be relocating our offices in Downtown, St. Louis. This is both a newly renovated space and a different kind of space for Laclede. One fosters creativity, collaboration, and efficiency, as we work to deliver on our strategy, and it’s consistent with our shared services model. I’m pleased to report that our relocation will be largely completed in the month of February. We are excited about our new home and believe it will further enable us to work better for the sake of our customers and our shareholders. We’re now ready to take questions. Question-and-Answer Session Operator Thank you. And at this time, we would like to take any questions that you might have for us today. [Operator Instructions] Your first question comes from Dan Eggers with Credit Suisse. Daniel Eggers Hey. Good morning, guys. Suzanne Sitherwood Hey, Dan. Steven Rasche Good morning, Dan. Daniel Eggers Hey, Suzanne I guess first question kind of on the, can you give a little more color on the Alagasco process for kind of laying out the synergies and how you are looking at doing it? can you just –what processes are going on between now and say the summer when you guys think you have your plan and then how you are going to talk to us on the Street, as far as what those numbers look like and how you are going to achieve them? Suzanne Sitherwood Yes, sure. As I mentioned before, it’s similar process, really the same process that we took with MGE and we pulled together implementation teams with co-leads from both side utilities, and basically, they take their current work processes at both companies and map those out. Then they look for best practices and technology deployment to improve efficiencies as well as improving business metrics, if you will, around customer services and then safety and that sort of thing. So they really are working through their existing processes and then they overlay what are the best practice processes. So that’s what we call the design phase, that should be wrapped up around the end of March, and we started all that in September. And then we go through really consolidating those plans and Q1 master plan. And so, as we get towards the end of the summer, we’ll know pretty well what the trajectory is in terms of the way that we plan on implementing those individual plans to create what I call the master plan. That’s the process that we took with MGE and that’s when I referenced the MGE integration plan and that we are on plan, in fact, we exceeded our plans last year with MGE in terms of our target and as well the timing of our implementation. So again, it’s similar. And as I mentioned in my formal remarks, Alagasco is a standalone utility, where MGE put an asset purchase, so they were more the activity that ET and Sag were here again at standalone, so mapping those processes take a little bit more time. And – but we are very comfortable, in fact, I meant – I use the word confident, I’m confident where we are with those proposals and meeting our objectives. It’s a little longwinded, but I thought a little color might help. Daniel Eggers No, that’s good. I guess if we were going to translate that down to what you guys are thinking about for an O&M cost inflation outlook maybe for 2015, or maybe 2015, 2016, 2017, or some time horizon, where do you guys think you can manage costs? Suzanne Sitherwood Yes. For Alagasco, when you are specifically talking about integration, I have to bring you back really to the RSE structure there and us managing based on the 30-year investment model that Alabama has in place, it creates rate stability. We will manage Alagasco consistent with that RSE program and that way that it’s been managed in the past. And then at a group level, as Steve Rasche has shared and I’ve talked about the 4% to 6% earnings target – net economic earnings target over time and leading into the high-end of that in the short-term in the next couple of years is the way to think about that. Now, I’ll ask Steve, anything to add… Steven Rasche Yes. Dan, I don’t think I can add anything except to clarify that the RSE mechanism in Alabama gives us a clear path to how if we can keep the O&M cost out, how we can share the benefit of those lower costs with our shareholders and with the customers in Alabama. And that taking that regulatory question off the table makes it a lot easier as we go through our planning, both integration now and as we plan for the future over the next few years. Daniel Eggers Got it, thanks. I guess just on the – Steve, maybe on the quarterly allocation of earnings and the mix is going to come out a little bit different this year than maybe you thought coming into the year, this new pattern you are discussing now, should we assume that’s kind of the normalized view, or do you think we are going to take 2015 as a learning experience with Alagasco to figure out what the right combination of quarterly contribution is going to be? Steven Rasche Great question, and it is a learning year, this year. And I think when we entered the year, we knew that there was going to be a shift in earnings, and it was largely going to benefit the second quarter, the quarter ended March, and to take away from earnings in the other three quarters. And I think as we’ve gone through especially the integration process this quarter, we learned a few things that don’t change our view of the accretion of the year overall, or of the attractiveness of either the MGE or the Alagasco deal, but it does change how we think about the earnings falling in the individual quarters. And we’ll – I think we’ve got a good view of what a normal year would look like with normal weather in each of the four quarters, and hopefully, we’ve clarified that with everybody this morning. The only caveat I always say and anybody in our industry would say that is, the big question is always weather. We always manage through that, as a company and as an industry, both when it’s really, really cold like it was a year ago, or when it was really, really warm, as it was in 2012, and we just have a way of managing the puts and takes. And as we look at the rest of this year, we see that the takes being a little bit less opportunity to sell excess molecules in the market, because there is not a lot of value for excess gas this year, for all the reasons that have been well documented in the industry. But at the same time, we’ve got a much better line of sight in O&M costs and we’ve been able to manage those down a little bit better. Daniel Eggers I guess, one last one, Suzanne, just on the Spire expansion in South Carolina project, what are you seeing as far as additional stations to be built? Are we going to have more announcements this year and kind of what is your goal from a deployment perspective? Suzanne Sitherwood Yes, we don’t have quote a goal of X number of stations by a time certain. We are being very slow on the particle to make sure that we can, one, that we’re conducting the right analysis on these stations. Two, that we exceed expectations in terms of the volume, if you will, that are running through those stations. So the other piece on the customer side is, we want to make sure that we are engineering and operating and managing those stations in a way that it meets our customer expectations. We’ve had a lot of great learning from both stations, in fact, to the point of customers tell us in essence all the stations they use, they like these the best, they’re fast fulfilled, they are always operating. And at the Spire station alone we’ve far exceeded our expectations, in fact, in year two we got to our fifth year level of expected volumes. And we are seeing some of the same interest at the Greer station too. I think it’s important to our company and our industry to be focused on natural gas vehicle applications, which is why it’s one of our growth pillars. But we don’t have stations – X number of stations by a time certain, our approach is more as I described. Daniel Eggers Great. Thank you very much. Steven Rasche Thanks, Dan. Operator Your next question comes from Stephen Byrd with Morgan Stanley. Stephen Byrd Good morning. Steven Rasche Good morning, Stephen. Suzanne Sitherwood Good morning, Stephen. Stephen Byrd I wanted to just cover a couple of topics, just at Alagasco, as you look at the business and think about the integration process, I think, you’ve given a lot of very good color around that. I’m just curious, your impressions so far in terms of certain areas where you might want to emphasize more in terms of greater spending whether that be on pipeline replacement or anything else, just I know you are still in the process, but just any initial impressions as you, at this point in the process? Suzanne Sitherwood Yes. Well, from a pipeline replacement perspective and investment Steven Lindsey is here, and in talking to him, because he has done a lot of homework on that, I think he can quickly get to the response you are looking for? Steven Lindsey Sure. Really I think we are taking the same approach that we’ve had here in Missouri. As we noted in the earlier comments, we had a 20% increase at Laclede, and really at MGE in our first year of operation, we replaced more pipes than the previous three years combined. So I think in Alabama, they’ve being doing a good job of replacing pipe, but I think there is opportunity there. We’ve met with their operational management team and there is a lot of projects that they have in the queue. So I think a capital deployment plan there is exactly similar to what we looked at in Missouri, so very good opportunity there. Stephen Byrd Okay, that’s great. I wanted to switch over to just the gas price and volatility outlook. I’m just curious, you all live in this world in this business and know it better than we do. I’m just curious of your impressions in terms of volatility that we’ve seen, volatility has fallen. Do you expect that to change, or is this the sort of new normal we are in? What could kind of change that volatility or the price dynamics down the road? Suzanne Sitherwood I assume you are asking the question from an LER perspective? Stephen Byrd Yes. Suzanne Sitherwood And yes, we’ve talked about their – it is just about – it’s the new norms, if you will. And from LER perspective, I think they’ve sort of rolled out of the history and now they have a current business model they are operating under and it’s very service oriented to customers. They are pretty sophisticated at what they do and not all customers are as sophisticated and so oftentimes they can see a customer’s need in the market and they take advantage of that. But it is very service oriented, it’s matching a physical assets with a commodity and providing that service that could be either daily, monthly or what have you. They are generally power generators, manufacturers helping on the supply side with – those are the time you get those supply to market, those types of services. And so we are satisfied that we are happy as to where they are and they play a significant role here as you’ve heard me talk about in the past. Stephen Byrd Okay, great. And just lastly, just given the kind of growth that you are experiencing and the outlook looks quite good over the next couple of years, any general commentary on the dividend policy and growth in the dividend given the kind of growth that you are experiencing? Steven Lindsey Hi, Stephen, this is Steve. I think you can look back over the last couple of years and what we’ve done in the dividend, and we were percolating along a couple of years ago at about a 2.5% growth every year and we’ve stepped that up by a 4%, 100 basis points every year, as we continue to chart our future and as we continue to improve our growth profile. So I think you can look at that trend and rest assured that we understand that investors when they look at investing in Laclede look at not only the growth profile, but they also look at the dividend yield and the growth in the dividend, and we have a great track record of 12 years now of increasing our dividend 4.5% last year. And I think it was important from our board’s perspective, and it was important for us to send the right message to our investors to increase that dividend and step into that increase a little bit more and it shouldn’t be lost that that increase now falls, at least, in the bottom end of that range of our long-term growth guidance. And we will continue to look at that, we don’t make those dividend decisions in a vacuum one-year at time, we look over our long-term plan, and we want to make the right steps that we feel we can honor consistently going forward. In terms of how we think about the dividend mechanically, we always look to the utilities as the support for that dividend, LER and our other non-regulated businesses are great businesses to be in, but they’re not dividend paying entities and we want to take whatever capital they generate and be able to invest that back in the business. And we like where we are in terms of our payout ratio. Historically, we’ve been 55% to 65% payout ratio. We are right and about the middle of that range right now, which is a good strong place to be. It’s not something that’s going to put anything at risk from a cash flow standpoint, but gives us plenty of headroom and upside, as we continue to go forward. Stephen Byrd Great. That’s very helpful. Thank you very much. Suzanne Sitherwood Thank you. Operator: Your next question comes from Sarah Akers with Wells Fargo. Sarah Akers Good morning. Suzanne Sitherwood Hey, Sarah. Steven Rasche Hi, Sarah. Sarah Akers A question on the supply chain analysis. When do you expect to conclude that study, and then based on what you’ve done to-date, do you think there will be new infrastructure projects coming out of that? Suzanne Sitherwood So the quote supply analysis just for a little bit more clarity as supply storage and transportation, we are not talking about supply chain. Although, we do have a supply chain analysis going on with our integration, but we should finish that early summer in terms of getting a holistic look and we are starting with the Missouri analysis for a system reliability. And so late spring, early summer we should have that analysis completed. And that analysis will help us answer your very question, Sarah. So what makes sense given the changing market dynamics. And given that we’ve got Laclede Gas and MGE, 90% of the customers in the state. And what are the right combinations of supply sources and storage for peaking purposes, and of course the transportation services as well. There is more to come on that, I’ve just been trying to shadow a little bit for everybody that we are working on that project and you can expect more conversation on it, as we move forward. Sarah Akers Great. And then shifting to Missouri, with the current legislative session, are you aware of any bills, or do you anticipate any proposals that might impact Laclede there? Suzanne Sitherwood Yes, we – as you know, it was a bill that was introduced a couple of years ago and it failed, and I think that’s what you are referencing. We are still highly supportive of a change in the ISRS current structure to five years. We think it makes sense to stay out of rate cases for as long as possible. We are holding down our cost structure. It’s expensive and time consuming to protect rate cases, it’s a little bit inefficient for management, obviously because they’re very focused on that, and that is occurring. But most importantly, it holds the cost down for customers, because it takes the expense of conducting those cases. And if you look nationally, there is few states that you can turn to require rate cases every three years. So we just think it makes sense to keep the cost to customer stable and stay out again to a longer period of time. Sarah Akers Great. And then last question, what are you seeing these days in terms of customer growth and sales growth in Missouri? Suzanne Sitherwood Yes, because Steve Lindsey is so proud of this, I’m going to let him talk about that we are excited to see that last year on a go-forward, we are seeing some growth and, of course, Steve has made an announcement recently too, so… Steven Lindsey Hey, Sarah, this is Steve Lindsey, thanks for the question. This past year, we actually did see positive net growth in all of our jurisdictions. And we are staying very closely in touch with our builders, developers, both residential and commercial and starting to see some good signs from those builders and developers. As a matter of fact, we were even talking earlier this week around some of our construction crews are actually having to make some decisions between cash earning replacement and new business, which are very good decisions they have to make though. And as Suzanne mentioned, we are going to have a very strong focus on organic growth in our existing businesses. And so that’s the traditional type growth we talk about with residential, commercial, but also expanding service offerings to our customers, both at a commercial and industrial level, and also looking at the potential for some small municipal acquisitions. So we’re trying to put together a larger portfolio of how we grow our existing businesses, but I think, we are pretty optimistic that the future looks good for us. Sarah Akers Great. Thanks a lot. Steven Rasche Thanks, Sarah. Suzanne Sitherwood Thanks, Sarah. Operator Your next question comes from Selman Akyol with Stifel. Selman Akyol Thank you. Good morning. Suzanne Sitherwood Good morning. Steven Rasche Good morning. Selman Akyol On the CapEx for $300 million, can you talk about how much of that is going to be recoverable under ISRS mechanisms? Steve Rasche Yes, Selman, this is Steve. About 50% of our annual spend will be recoverable through ISRS mechanisms and the other caveat I would make is, when you think about Alabama, it’s really – it’s a different recovery mechanism essentially, because we’re in a jurisdiction with forward rate making. All of the spend is factored into the rate. So in some ways a 100% of that is recoverable in the rates down in Alabama. But when you talk about Missouri, it’s about half of the spend that comes out of Missouri is going to be pipeline replacement and other expenditures that are qualified for ISRS recovery. Selman Akyol All right. Can you also breakdown the $300 million between the three utilities? Steve Rasche Yes, I can. The – got to think about it for a second here. If you look at it right now down in Alabama, about $85 million of the total $300 million is going to be Alagasco related. About $10 million of it is non-regulated businesses, which would be NGV fueling stations and other items. And so the remaining amount of just over $200 million, about $205 million is Laclede. So roughly about $100 million of that you could ring-fence for ISRS recoverability. Selman Akyol Got you. And then, not that it’s huge here, but just in terms of Spire, is lower oil prices a challenge for you guys? Is it changing any of the tenure of the conversations you are having at this point? Suzanne Sitherwood No, not really, to be frank and we talk to a lot of customers all the time and mostly the focus is on diesel conversion and sort of point to point tractor trailer and return to base diesel. And which the per gallon equivalent is higher on a diesel conversion and plus there is the air quality aspect and just a longer line of sight on that. So who has got the crystal ball on when prices will start flipping and going out, in fact, all of us heard on the news this morning the news went the other way today, so and the market is reacting. So we’ve got a long line of sight on that and it’s definitely the economics have to work for the customer, but they are still working at these prices. Selman Akyol All right. And then just given you are still digesting two acquisitions, has anything changed, or is your outlook hunger strong, as it is, your ability to integrate, can you do another one at this point I mean? Suzanne Sitherwood Well, you said it and I said it in my opening remarks. We are manically focused on integrating and executing our plans on these two acquisitions. In 2014, we did very well with MGE and that we are on track with Alagasco and I feel very confident where we are. And I’ve also shared, in fact, Mike Geiselhart I mentioned in my opening remarks, he manages that group and we have a model and database and exercise it, and all the time, so that we stand based on public information, so we stand ready, but we’re very focused on integrating these two acquisitions. And I guess time will tell, what’s available in the market, but regardless, if it’s not strategic and multiple levers to create value then we move on. So that’s just how we think about it. Selman Akyol All right. Thank you very much. Steve Rasche Thanks, Selman. Operator [Operator Instructions] Your next question comes from Felix Carmen with Visium Asset Management. Felix Carmen Good morning. Steven Rasche Good morning, Felix. Suzanne Sitherwood Good morning. Felix Carmen Steve, do you mind just providing a little bit more clarity on the allocation of earnings? Are you seeing the second quarter come in more around 65%, or what does the new distribution look like? Can you provide some more clarity on that? Steven Rasche Thanks, Felix. Let me give you a view on the first couple of quarters. And again the important caveat is, we’re still comfortable with the main estimate, our first call for the year. So nothing has changed, it’s really about how you ship between the various quarters. And if you look at the first quarter, we probably traded about a 0.5% below the bottom of the range, we gave a range of 34% to 36%, we probably traded less than a point below that range. So good enough for horseshoes, but we certainly want to get better about that. As I look at the second quarter, we’re probably trading down by about 1.5 point at the bottom of the range, and we’ve given a range of 69% to 71%. So that would give you a good feel for the second quarter. And then the last two quarters and really the fourth quarter is what’s going to benefit from the shift in earnings. And that’s really related to, as I talked about earlier to the rate design in Alabama and Missouri and our deeper knowledge of how that the earnings actually fall in a quarter-by-quarter basis. Felix Carmen And as you look out into 2016 and beyond, do you envision this allocation’s thing this new way or do you look at a kind of the way you initially guided? Steven Rasche Great question, I think based on where we stand today, I think the new allocation between the quarters makes more sense, just based upon rate design, which doesn’t change. And again, always within that you have the caveat of weather and the way weather generally works in our industry. And most of the folks on the phone know that is it impacts margin first and then it also gives us the opportunity to manage our O&M cost. And you just have to go back a couple of years to 2012, which was the warmest winter on record than anybody cares to keep records on over 100 years. And our margin shortfall that year was well in excess of $10 million in the deep winter quarter and we were able to make all that up by reducing our operating expenses. And part of that is just logical, because if it’s warmer there is less stress on the system, there is less leaks, and less of the maintenance cost that we have to perform on the system, which gives us more opportunity to manage those costs, less overtime, less unproductive time, and more time to do construction work, which is ultimately what’s going to help us keep our O&M cost down. And Felix, one other point, and again I mentioned it on the – in the prepared remarks, if you look at the quarter and especially if you look at the second quarter and I understand where you all are from the standpoint of trying to model a year and this is a new bigger company, so there is some complexity with having three different utilities and not a lot of history. So that’s why we anchored back to the mean estimate for the second quarter as a good point and which to put in the middle of your range if you want to think about it in a dollars per share standpoint. As another way to kind of test your models is you think about how the earning is going to fall on a quarter-by-quarter basis. Felix Carmen Okay. Thank you. And I’m sorry if you’d mentioned this before. What was the weather impact for the quarter? Steven Rasche We didn’t really talk about the weather impact per se. I think as we look at the first two quarters, it’s clear that we’re going to have – well, we’re going to have a warmer winter than last year. But at that – that’s an easy comparison. But it looks at least so far like it’s a little bit warmer than normal. We didn’t call it out specifically, because I’m not sure that in the grand scheme of things, that normal weather variations say inside the 10% plus or minus range isn’t what we deal with that every day. But I think what you’ll see is, as you look at the numbers for the quarter and then you think about the second quarter is, so clearly some of the margins that were driven from off system sales capacity release in LER will be under some stress, because there is not a lot of value in excess molecules. This year those have no value, last year they had tremendous value. But we’re also very confident in our ability to manage the O&M costs, so that when you get to the bottom-line, we still get to the same answer. Felix Carmen Okay. Thank you, guys. Suzanne Sitherwood Thank you. Operator [Operator Instructions] There are no further questions. Scott Dudley Okay. Great. Well, thank you all for joining us. I know it’s a busy earnings day in the sector. So I appreciate your time and look forward to catching up with you later today. If you have any questions please feel free to give us a call. Thanks so much, bye-bye. Operator Ladies and gentlemen, thank you to all of our participants for joining today. This does conclude our webcast. And you may now disconnect. Have a good day.