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Exelon’s (EXC) CEO Chris Crane on Q4 2015 Results – Earnings Call Transcript

Operator Good morning. My name is LaShanta and I will be your conference operator today. At this time I’d like to welcome everyone to the Exelon Corporation Q4 2016 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be question-and-answer session. [Operator Instructions] Thank you. I will now turn the conference over to Mr. Francis Idehen. Please go ahead, sir. Francis Idehen Thank you, LaShanta. Good morning, everyone, and thank you for joining our fourth quarter 2015 earnings conference call. Leading the call today are Chris Crane, Exelon’s President and Chief Executive Officer, and Jack Thayer, Exelon’s Chief Financial Officer. They are joined by other members of Exelon’s senior management team who will be available to answer your questions following our prepared remarks. We issued our earnings release this morning along with the presentation, each of which can be found in the Investor Relations section of Exelon’s website. The earnings release and other matters, which we discuss during today’s call contain forward-looking statements and estimates that are subject to various risks and uncertainties. Actual results could differ from our forward-looking statements based on factors and assumptions discussed in the earnings release, today’s material, comments made during this call and in the risk factors section of the 2014 10-K and the third-quarter 10-Q. Please refer to today’s 8-K and the 10-K and the 10-Q and Exelon’s other filings for a discussion of factors that may cause results to differ from management’s projections, forecast and expectations. Today’s presentation also includes references to adjusted operating earnings and other non-GAAP measures. Please refer to the information contained in the appendix of our presentation and our earnings release for a reconciliation between the non-GAAP measures to the nearest equivalent GAAP measures. We’ve scheduled 45 minutes for today’s call. I will now turn the call over to Chris Crane, Exelon’s CEO. Chris Crane Thanks, Francis, and good morning to everybody. Thank you for joining us on our fourth quarter call. Before I go into the results I want to take a moment to thank our crews who worked hard to restore power for our customers in Baltimore and Philadelphia affected by the January storms. BGE and PECO were able to restore approximately 22,000 customers throughout the weather event, keeping the average restoration times to less than three hour, which is a remarkable accomplishment given the challenges associated with traveling and the working conditions as the storm intensified. I’ll start off by reiterating our strategy and our capital allocation philosophy. The balance sheet strength is a priority that guides every strategic decision. It allows us to deliver stable growth, sustainable earnings and an attractive dividend for our shareholders. Our strategy for delivering these objectives is to harvest free cash flow from the Genco, to invest primarily in the utilities for the benefit of our customers, invest in long-term contracted assets, which meet our return requirements and return capital to the shareholders. Consistent with this capital allocation policy, we’re announcing today an evolution in our dividend policy. Our board has approved a policy to raise our dividend by 2.5% each year for the next three years beginning with the June 2016 dividend. The dividend increase shows our commitment to provide an attractive total return proposition for our shareholders and reflects the shift in focus towards our regulated utility and long-term contract businesses. Our balance sheet and our cash flow profile support the shift in the dividend policy and maintain a high credit quality and investment grade rating remains a top priority. We continue to de-risk the Company by growing our regulated business. This has allowed us to generate earnings with a lower risk profile. We remain as focused as ever on careful disciplined use of capital. Let’s turn now to 2015 results in each of our businesses and our goals for 2016. Despite a difficult year in the markets we delivered earnings of $2.49 a share in 2015 demonstrating once again our ability to run businesses well and manage through even the most challenging environments. At our utilities, 2015 was a record year for us in many respects and growing regulated business continues to thrive. We achieved a major earnings milestone: our utilities earned over $1 billion in net income, delivering the highest utility earnings on record. We invested nearly $3.7 billion in needed improvements for our customers across the utilities including the AMI and the grid modernization investments, significant gas and electric infrastructure and innovative technology and customer-oriented systems. Our track record for reliability and customer service has allowed us to earn solid returns. Our utility earnings on aggregate across Exelon is at 9.5% in 2015. Our returns reflect the constructive regulatory relationship in our territories. PECO received a unanimous approval for both its $127 million rate case settlement and a $275 million long-term infrastructure improvement plan. BGE received approval for recovery of more than $200 million of energy efficiency and gas infrastructure replacement investments. And at ComEd, we achieved our fourth consecutive year of constructive outcomes in our formula rate filing. This year we filed a rate reduction at ComEd, showing our ability to contain cost and limit the impact of capital investments on our customers’ bill even during the current Smart Grid investment cycle. The utilities continue to drive high operational performance and that performance is getting better each year. Of the 26 metrics we track, 21 of them were best or second-best ever in 2015 including reliability and customer satisfaction. As for our goals in the utility business in 2016, our first primary goal is closing the PHI transaction at which point we will begin the important job of integrating PHI into the Exelon family of utilities. We will bring our management model to PHI Utilities in order to improve the experience of the customers in the region. We will work diligently to develop and implement an effective regulatory strategy for PHI. We will invest approximately $4 billion in our existing utilities to refurbish and modernize the grid to improve service for our customers. That is part of the $18 billion we will invest in our existing utilities over the next five years. We will work to maintain first quartile operational and customer satisfaction numbers while continuing to focus on productivity and cost management. Finally, we expect a decision in our November 2015 BGE rate case in June and we’ll file our annual formula rate update at ComEd in April. By executing on these goals, we will deliver one of the most compelling utility earnings growth stories. Our generation business had a solid year. Operationally in 2015, Constellation performed well even in the face of weak markets. Nuclear capacity factor was 93.7%. Refueling outage performance was very strong. Average refueling outage duration was 22 days. That’s the lowest average since 2002. Our gas and hydro plants outperformed the dispatch match targets. Our solar and wind assets did the same for the energy capture targets. Our power business went 15 months without an employee OSHA recordable incident. It’s the best safety performance ever. At Constellation, our generation to load matching strategy contributed meaningfully to the earnings. Our load serving business experienced growth in both power and gas. In 2015, we served 195 terawatt hours of wholesale and retail load, materially growing that platform from 155 terawatt hours the prior year. We continue to have high customer win and renewal rates. We are now a top 10 marketer of natural gas and it has significantly increased our delivery of retail gas to 720 Bcf last year. In 2016, at Exelon Generation, we will continue to operate world-class fleet of assets at the highest level of performance while continuing to execute our strategy of growing the contracted generation business with 350 megawatts of wind projects in development. At Constellation, we will achieve our targets of serving 210 terawatt hours of load across our wholesale and retail base, using our commercial platform as both a risk management vehicle and an earnings driver. Each of our businesses is well-positioned to continue strong performance in 2016 operationally and financially. We have some important priorities we are targeting in 2016. We will continue our broad advocacy efforts to ensure that our unique class of nuclear assets are properly valued for their clean, safe and reliable attributes. Developments in New York for a clean energy standard are constructive. The leadership of the governor in New York has been very positive, but more work needs to be done and we will engage with key stakeholders in the state. We continue with our specific efforts with legislators and stakeholders in Illinois on the low-carbon portfolio standard. We provided ample time to reach the resolution on the nuclear assets, suffering significant losses in the process. If we don’t see significant results, we will make the economically rational decision. We continue to engage with MISO on a constructive reform to address the issues in Zone 4. We will work in the states in which we operate to develop compliance plans for the clean power pool. This has been a challenging period for our sector. We are tackling those challenges aggressively. We are reducing our costs by $350 million. We will continue to shift our business mix to more regulated exposure both organically with our $18 billion capital into our existing utilities over the next five years and through our strategic acquisition of Pepco which will raise that number of capital investment to $25 billion over the next five years. The Company remains on a solid footing and our balance sheet remains strong. And we continue to run the businesses at the highest operational levels. With that, I will turn the call over to Jack for the financial details. Jack Thayer Thank you, Chris, and good morning everyone. As Chris stated, we had a strong year financially and operationally across the Company. For the full year, we delivered earnings of $2.49 per share and $0.38 per share for the fourth quarter. If bonus had not been extended, we would have delivered earnings of $2.58 per share, meaningfully exceeding the midpoint of our guidance range. The appendix contains details on our fourth-quarter financial results by operating Company on slides 21 and 22. My remarks today will focus on 2016 earnings and O&M guidance, our credit profile, the cost management initiative and an update of our gross margin disclosures. Turning to slide 6, we expect to deliver 2016 full-year adjusted operating earnings of $2.40 to $2.70 and $0.60 to $0.70 per share for the first quarter. While we anticipate closing the Pepco holdings deal in the first quarter, our guidance is a standalone figure that assumes the equity and debt issued for the PHI deal is unwound during the year. The impact of the extension of bonus depreciation is included in the guidance. Our growing utilities earnings primarily reflect increased capital investment in distribution and transmission to improve reliability and customer service at ComEd as well as increased rates from PECO’s recent distribution rate case, partially offset by higher O&M at PECO and BGE related to storm and bad debt costs. Our strong operating performance at our utilities is fostering a positive regulatory environment in all our jurisdictions and is evident in the transformation and allowed and earned returns that we’ve achieved at BGE since the Constellation merger. BGE has improved reliability and customer satisfaction in every year as compared to 2012, the year of the merger, which in turn has led to improved regulatory outcomes and earned ROEs over that same period. Last November, BGE filed an electric and gas distribution rate case with the Maryland Public Service Commission requesting revenue requirement increases of $121 million and $80 million through its electric and gas distribution rates respectively. The requested rates of return on equity in the application are 10.6% for electric distribution and 10.5% for gas distribution. We expect the Maryland PSC to rule on the rate case in the June timeframe with the new rates going into effect shortly after the final order. The revenue requirement increases reflect the continued investment including Smart Grid being made at BGE to improve reliability and customer service. Constellation had a record year in 2015 driven by higher realized margins that benefited from a lower cost to serve our load and strong performance in our portfolio management group. In 2016, we expect a more normalized cost to serve load and portfolio management performance, which we expect will have a negative impact on our earnings relative to an extraordinary 2015. Overall, at Exelon Generation the earnings impact from normalized margins and higher decommissioning costs, partially offset by fewer nuclear outages and cost management efforts, results in a forecast decrease in ExGen’s earnings range versus last year. Our cost management initiative savings in 2016 should largely offset the impact of inflation at ExGen where labor and wage inflation are significant components of O&M. For reference, more detail on the year-over-year drivers by operating Company can be found in the appendix on slides 23 through 26. Moving to slide 7, as we’ve said in the past bonus depreciation has a negative impact on earnings, but a positive impact on cash. In 2016 it creates a rounded $0.09 earnings drag at the consolidated level with a $0.06 impact at Exelon Generation and a $0.03 impact at ComEd. On the cash front it increases cash flow by $625 million in 2016. Despite the negative earnings impact of bonus depreciation in 2016 through 2018 we are affirming the CAGR of 3% to 5% for the enterprise and 7% to 9% for the utilities through 2018 that we disclosed at EEI. In addition the extension of bonus depreciation will likely have a further effect on Exelon as a whole after the closing of the Pepco holdings deal. Once the merger is completed and we begin the integration of PHI’s operating, planning and regulatory functions we will provide an update on PHI’s forecast and the resulting accretion impact on Exelon’s forecasts. On slide 8, our top financial priority remains maintaining our investment grade credit rating and ensuring the strength of our balance sheet. The five-year extension of bonus depreciation improves the free cash flow position at ExGen, which has a positive impact on our FFO to debt metrics. ExGen free cash flow over the 2016 to 2018 period is now projected to be $5.35 billion or $3.2 billion after taking into account committed growth capital. Since our EEI disclosure Exelon Generation has commenced developing a further 350 megawatts of long-term contracted wind projects in Michigan and Oklahoma. As you’ll note on the slide, given our strong cash flow outlook ExGen has a declining debt to EBITDA ratio starting at 3.2 in 2016 and decreasing to 2.3 times debt to EBITDA by 2018. Bottom line, we’re growing durable earnings and shrinking debt. Turning to slide 9, I will provide an update on the cost management initiative that we announced towards the end of last year. We recently finalized the savings initiatives in January and have incorporated them in our current long-range plan. As we mentioned at EEI, the total identified savings are in the $350 million range with savings split equally between Exelon Generation and our corporate shared services organization. $100 million of the savings of the shared services organization will be achieved within our information technology function with the remainder coming from various corporate function such as finance, legal, human resources, and supply. The corporate savings will be allocated roughly equally between Exelon Generation and the utilities. Overall, this means that roughly three-quarters of the total cost savings for the Company will hit the bottom line in Exelon Generation, while the remaining quarter of the savings will be realized at the utilities and ultimately passed on to our customers. As a result, we expect a run rate earnings benefit from our cost management initiative of $0.13 to $0.18 per share beginning in 2018 with approximately 35% of the run rate savings achieved by the end of this year. Our proven track record of cutting cost and running our business efficiently gives us confidence we will be able to achieve or exceed these savings. Slide 10 shows our 2016 O&M forecast relative to 2015. We project O&M for 2016 to be flat to 2015 and we expect a slightly negative O&M CAGR across the enterprise over the 2015 to 2018 period and a negative 1% CAGR at Exelon Generation. ExGen’s year-over-year decrease is driven by a combination of factors: fewer planned nuclear outages compared to 2015, lower pension cost and the impacts of the cost management initiative. The year-over-year increase at PECO and BGE is due to inflation and budgeting for normal storm and bad debt costs, which results in incremental year-over-year O&M growth. Slide 11 provides our fourth-quarter gross margin update. This quarter’s gross margin update now includes the impact of the Ginna RSSA to 2016 and 2017 total gross margin. As we saw both power prices and heat rates for 2017 increased by the end of the quarter, we reduced our deviation to ratable. For 2017, we ended the quarter with a power position of 5% to 8% behind ratable on a total portfolio basis when considering our cross-commodity hedges. We are even further behind ratable in the Midwest approximately 13% to 16% when considering cross-commodity hedges. We continue to align our hedging strategy with our views on the market. In 2016 total gross margin is flat to our last disclosure. As you know, we’re highly hedged in 2016, which combine with the inclusion of the Ginna RSSA allowed us to offset the impacts of lower prices in 2016. During the quarter, we also executed on $50 million of both power new business and non-power new business. Total gross margin increased by $50 million in both 2017 and 2018. The increase in 2017 is partially driven by the Ginna RSSA, which mitigates losses, while the increase in 2018 is driven by higher power prices across most of the regions, most notably in NiHub with around-the-clock prices increasing by $0.64 per megawatt hour. During the quarter, we also executed on $50 million of non-power new business for both 2017 and 2018. As a reminder, the appendix includes several schedules that will help you in your modeling efforts. That concludes our prepared remarks. And we will now open up the line for questions. Question-and-Answer Session Operator [Operator Instructions] Your first question comes from the line of Greg Gordon with Evercore ISI. Greg Gordon Thanks, good morning guys. Great presentation. Thank you. A couple of questions. Can you talk in a little bit more detail about what your plan is and what the milestones are for making a decision in Illinois on the uneconomic units? And can you refresh our memory on where we stand in terms of profit and loss on the three units that you had initially a year and a half or two years ago identified as impaired? Chris Crane Sure. As you know we were successful and PJM was successful on the capacity market redesigns that gave some upside to the fleet in NiHub. Greatly helped Byron and added help to Quad cities, but since then as you’ve seen the downturn in the forwards Quad cities continues to be challenged and more neutral on cash flows and earnings, while maintaining the risk of operation. We continue to work on Clinton. Clinton is negative. We have two initiatives underway, one working with MISO on Zone 4 reforms and we’d like the design to be more like the new PJM capacity market design. But that in itself will not save Clinton. As you know there’s a lot of work going on in Springfield with the administration and the legislature. And we have had a very strong support from the leadership of the legislature and the administration on coming to a resolution on the energy outlook for Illinois. It’s not only the Clean Energy Standard, but there is an environmental jobs, agreeing jobs bill and there’s a utility of the future bill that have to be negotiated together. There’s been progress made in that dialogue, but it is critical that we have, that we’re able to present to the legislature this spring a combined package that ensures the financial viability of our assets as they contribute highly in reliability, in environmental or we will have to make the rational economic decision. It’s our job to get the stakeholders together. We’re working hard on that and to bring the leadership what is a consensus package that’s good for all of Illinois and its customers. So we’re in this spring time in Illinois and we’re hopeful that we can have reasonable heads prevail and negotiate a balanced outcome and as I said present that to the leadership so they can provide the continued support. Greg Gordon Okay, so Quad because of the further decline in gas prices and power prices since the CPE results has gone back out of the money. So is that a fair summary? Chris Crane It is. It is. With these forwards it is. Greg Gordon Okay. And the second question is, so you guys are going to, based on your cash flow slide on page 37 you’re going to end the year with a pretty substantial cash balance. And if I look at the cash flow profile you project through 2018 that should continue to grow all things equal. Your debt to EBITDA is going to be sub-3, by my measure you’re trading at under 4.5 times EVD to EBITDA on the implied valuation of the nuclear business. That basically implies that the nuclear is a wasting asset write, that with $8.5 billion of debt on the balance sheet that you should be amortizing debt because these plants are going away in 10 years. I mean what can you do to convince investors that this low gas price environment doesn’t ultimately drive these assets out of business? Because if they are 20- or 30-year assets and not 10-year assets the stock is undervalued. Chris Crane Yes, first of all there’s more than 10 years on these assets. We had license renewal at Braidwood. It goes into the late 2040s. The money producing plants are the larger dual unit sites that will run into the 2040s. That’s Byron Braidwood, LaSalle, Limerick, Peach Bottom and they are positioned well in the markets. Peach Bottom is in the 30s I think, but the others are in the 40s. So we’ve got a long run left on these profitable plants. If the smaller units or the single site units cannot be profitable and we can’t get a market design they will be retired and there is an upside based off of that retirement on free cash flow and earnings. We will remove the drag. As Jack described, we’re very focused on the debt to EBITDA ratios at the GenCo, and over this period of time we will be reducing over $3 billion of debt at the GenCo and continuing to manage that, matching our assets with our debt. We feel very comfortable where we’re at. But it is a misnomer that is out there that these are 10-year assets with a large debt profile on them. Jack, you want to -. Jack Thayer No, I think you covered it Chris. I mean the goal is to create that fortress balance sheet to do the right things around our assets and sustain the profitability of the long lived plants. Greg Gordon All right, thanks guys. Operator Your next question comes from Dan Eggers with Credit Suisse. Dan Eggers Hey, good morning guys. If we go look at the dividend increase in the 2.5% a year for the next three years, can you maybe, Chris, share how the Board thought about using capital to raise the dividend considering you already have a pretty healthy yield? And then what was the thought process behind 2.5% a year for those three years? Chris Crane Sure. We had, as we talked back three years ago now when we had to restructure the dividend, we had grown the dividend at Exelon based off of the earnings and cash flow on a very volatile business, the GenCo. We had to make the shift and take the pain at the time to refocus the payout and where that reliable cash flow would come from. We set out at that time after the merger with Constellation, improving the performance for the customers and the reliability of BGE and along with that improving the profitability. ComEd has done a phenomenal job improving reliability, making prudent investments and as our shareholders have seen, as you have seen, the strategic plan we laid out a few years ago is paying off. And it can be seen, it’s transparent that by 2018 theoretically the utilities would be covering the dividend. In discussion with shareholders and feedback at the end of the year the certainty and our confidence in the business needed to be fully displayed. In dialogue with the Board, we thought that we can make these increases. We’ve talked about the free cash flow, we talked about the balance sheet and we’re committed to that through 2018. I think it’s a positive sign in the right direction that we feel confident in our strategy going forward. Dan Eggers Okay, got it. And then on the Pepco deal, I guess you have kind of down to one month of room for the commission to make a decision. I guess A, have you heard anything or is there anything indicative of where the commission could make a decision? And B, if the deal does not get approved how do we think about the full return of the previously raised equity and the debt retirement? Chris Crane So the commission did state that they would take this matter up before our March 4 date. And that’s our only commitment is to try this till March 4 and if we can’t get it by March 4 then we have to fold up and then start to execute on the debt reduction and the buyback of the equity issued. And that would start immediately. The plans, the contingency plans are in place by Jack and Stacy and the team. And that execution would then start at that point. Jack Thayer And Dan, just for modeling convention, what we’ve assumed is it takes us roughly five months to buy back the equity and that has a $0.06 drag associated with it during 2016 on our standalone plan. And we would assume we’d retire the majority of the debt associated with Pepco in March, which has a $0.01 drag. So all-in on a standalone basis there’s about $0.07 of drag in our EPS associated with PHI closing that out if we end up on a standalone basis. Dan Eggers And I think that the disclosure in the back of the $1.6 billion or whatever buyback that you have in the appendix, that’s based on just buying back the same number of shares you originally issued, although the notional amount is obviously less than you raised. And is there a possibility you guys could buy back the amount you raised rather than the number of shares? Jack Thayer To your point what we’ve modeled is buying back the 57.5 million shares that we issued for the transaction. I think our balance sheet strength and where we see that orienting from a debt-to-EBITDA basis provides a lot of flexibility. And we’ll review what’s the best means of creating value for shareholders. Dan Eggers Got it. Thank you, guys. Chris Crane Operator Your next question comes from Steve Fleishman with Wolfe Research. Steve Fleishman Yeah, hi, good morning. Just on the dividend strategy change I just wanted to confirm that that’s the plan kind of with or without Pepco? Chris Crane It is. Steve Fleishman Okay. And secondly, what are your thoughts on the use of the bonus depreciation cash? And it sounds like you haven’t included that in the impact of bonus or you’re just taking the hit but not including reinvestment. What might you reinvest in? Chris Crane We have significant investment in the utilities. We are putting debt on the holding company. We would anticipate less debt issuance to infuse the equity into the utilities as part of that. And there we would look at other opportunities to for further regulated or contracted investment if they met our hurdle rates. Steve Fleishman Okay. And then the $1.350 billion that you’re putting into contracted generation at ExGen, is that all renewables projects? Jack Thayer There’s a contracted peaker up in New England that’s a modest part of that. But the bulk of that is contracted wind or contracted distributed generation. Steve Fleishman Okay, and argue assuming – are you including any debt financing on those assets or are you assuming for purposes here you’re just funding all of it? And could you add debt to those projects? Jack Thayer Steve, we’re assuming that because of their contracted nature that we’ll be able to secure project financing, which would get some measure of off credit treatment to minimize the impact on the overall balance sheet. Steve Fleishman Okay. And so the $1.350 billion is just your equity investment in these? Jack Thayer The $1.350 billion is just cash. Steve Fleishman Cash. Okay. Jack Thayer So that can be either project financed or equity financed, some combination of both. Steve Fleishman Okay, great. Thank you very much. Chris Crane Sure. Operator Your next question comes from Jonathan Arnold with Deutsche Bank. Jonathan Arnold Hi, good morning guys. Chris Crane Good morning. Jack Thayer Good morning. Just a quick one on a similar topic. Does the projection you show for ExGen net debt to EBITDA stepping down to 2.3 by 2018, how much of your free cash flow are you assuming you are going to reinvest? Or is all of it just rolling into the net debt calculation in that upper slide? Chris Crane Jonathan, the major drivers of that are we have a $700 million maturity in 2017 that we pay down. We pay down about $1.2 billion of CP and then a growing cash position, which ultimately takes you from that 3.2 down to 2.3 times. Jonathan Arnold So is it fair to say the 3.2 of free cash flow is kind of all rolled into the debt projection or not entirely? Chris Crane It’s rolled into the debt projection. It’s financing or funding the dividend increase. It’s basically insulating the balance sheet to a very strong position. Jonathan Arnold Great. That was my other things got asked, so thank you very much. Chris Crane Thank you. Operator And your next question comes from Praful Mehta with Citigroup. Praful Mehta Hi guys. Chris Crane Good morning. Praful Mehta Actually going back to this debt question at ExGen, I just want to understand given the goal is to harvest cash from ExGen as you’ve pointed out and to reinvest that cash, and we’ve talked about the lifetime of assets for the nuclear as well, is there a level of just debt, as in currently the debt balances let’s say $9 billion, is there a level of debt that you see if the right debt grows that number that you see at ExGen, is it between the 2018, 2019 time frame? Are you targeting a certain number? Jack Thayer We’re retiring about $3.6 billion over the next five years at ExGen. And I think that provides us, rather than targeting a specific number I think more importantly it provides us with a considerable amount of flexibility and insulation and allows us to position from a point of strength our merchant fleet to compete on a long-term basis. It’s clearly differentiated from the balance sheets of some of our competition. And we think that that will be a competitive advantage as we proceed through the coming years. Praful Mehta Got you. Thank you. And then secondly in terms of the dividend, if the Pepco transaction weren’t to close as you grow your dividend by the 2.5% as you’ve talked about, how are you looking at the payout ratio relative to just the utility earnings by 2018 and is there a target level that you’re comfortable with in terms of payout relative to just utility earnings? Jack Thayer So from a dividend standpoint, in effect what we do is we set a minimum from a payout ratio at the utilities, but we’ve got a lot of flexibility in how we can fund that growth. So rather than targeting a specific payout ratio in aggregate what we’re really looking at is a minimum payout ratio at the utilities of 65% to 70%. And then we look at where best to fund the dividend as well as fund the investment in the utilities to grow the regulated earnings stream of the company at 7% to 9%. Praful Mehta Got you. So there is an area where the payout from just the utility business or I guess the total payout relative to the utility earnings could go higher than the 70% if in case the Pepco transaction doesn’t close? Chris Crane That’s a possibility. But if you look at, go back to what Jack said, a payout ratio of 65% to 70% by 2018 theoretically with our earnings profile, the utilities would cover that dividend. And that’s a theoretic position we wanted to be in because we need to make decisions on further capital infusions for necessary projects to drive customer satisfaction and reliability. Praful Mehta Got you. Thank you. Operator Your next question comes from Barbara Chapman with BNP. Barbara Chapman Hi. Jack Thayer Hey, Barbara. Barbara Chapman How are you guys doing? Jack Thayer Good. Barbara Chapman Good. If somebody could speak to your sources and uses slide on 27 please and help answer a couple of questions. One, the issuance needed at Baltimore Gas & Electric just seems larger than what we’ve dealt with. So I’m just kind of curious what’s going on there as far as an investment standpoint. But also on the corporate issuance, it doesn’t appear there is a placeholder for the reissuance of the debt that was not exchanged and therefore called last year. So if you could explain if the Potomac merger goes through are we done now with the permanent debt financing for that? Jack Thayer So Barbara, let me start with your second question first. This is on a standalone basis, so you’ll note under the debt retirements that we have a further $1.875 billion of retirements here. If PHI goes through then clearly we would look to fill the gap of what we called during the fourth quarter of 2015 through a further financing at the holding company and on a pro forma basis, this sources and uses table would show the impact of that. With respect to BGE, we’re retiring $300 million there. We’re issuing $750 million, so the net $450 million you’ll recall we have a significant gas program there where we are hardening and replacing infrastructure within our gas utility as well as we have significant investments in reliability on the distribution and transmission side. Barbara Chapman Okay. So we are back – we’re still on the original thought that closing Potomac you will be out with to refinance what had to be called then? Jack Thayer Absolutely. Barbara Chapman Okay, because it’s confusing the way this is written on that issue. Okay. Jack Thayer And then Barbara, just the difference this time obviously is we would issue on the other side of the transaction completing. So we have sources of funding that we can use to bridge. And then we would do a large holdco issuance to replace that short-term financing. Barbara Chapman Okay. And then on the Potomac merger, you are not on the agenda for today’s meeting, correct? A – Jack Thayer No. Q – Barbara Chapman And they canceled one of the February meetings. So are there only two meetings left for them to opine? A – Chris Crane Let me let Darryl Bradford address that. A – Darryl Bradford Hi, Barbara. The commission has historically called a special meeting. They do that on 48 hours notice, so they could do it at one of their scheduled meetings. I think they moved back their meeting in February because of a conflict with [meruit]. But we wouldn’t be surprised at all if the decision whether to approve the merger is not heard at one of their scheduled meetings but rather would be set on 48 hours notice at a special meeting. Q – Barbara Chapman Okay. And so there would be a posted notice that there’s a special meeting then? A – Darryl Bradford Yes, 48 hours ahead of time is what their regulations require. Q – Barbara Chapman Okay, thanks for clearing that up. Thank you. Operator And your final question comes from the line of Shahriar Pourreza with Guggenheim Partners. Shahriar Pourreza Good morning, everyone. A – Darryl Bradford Hi, Shah. Shahriar Pourreza So just looking at slide 8, is there a scenario that could essentially see some of your ratios including your debt to EBITDA essentially south of 2.3 especially if we continue in a sort of a prolonged low gas price environment? Jack Thayer I think obviously there is a measure of commodity sensitivity within our ExGen business. We think we’re at I would characterize it as a trough in the cycle and we are showing debt pay down and the reduction of 2.3 times to the extent that our fundamental view comes into play. And we are able to benefit from our behind ratable strategy, that will give us even more balance sheet flexibility. Q – Shahriar Pourreza Okay, that’s helpful. And then just on the dividend policy, when you think about your second leg of growth, should we assume like step functions to get you closer to what your consolidated growth is or should we assume maybe another large increase post-2018? Chris Crane So, we would analyze the best shareholder capital return policy. We’d be looking at are there further investments that can be made that create stronger and continuing growth in our investment in the regulated utilities. But it will be analyzed and as I said we theoretically hit a target of a payout in 2018. We will take into consideration the best uses of capital allocation at that point and we would anticipate some growth continuing after 2018. There’s a lot of infrastructure and technology advancements that are coming along that will benefit the customers and benefit reliability and drive much more productivity within our workforce. So it’s something that we’ll look at and we’re heading in the right direction. Shahriar Pourreza Excellent, excellent. And just one last question. Just around maybe you could touch on the New York Clean Energy Fund that’s being proposed, sort of the outlook for Ginna post the RSSA and then is there any impact to the put option with EDF? Chris Crane I will let Joe Dominguez cover this. Joe Dominguez Sure. Good morning. As Chris said at the top of the call, it’s not the Clean Energy Fund but it’s a zero-emission credit program that benefits nuclear. As Chris said at the top of the call, it’s been a constructive development for us in New York. We still have quite a ways to go. But as a threshold political matter, having a governor with the prominence of Governor Cuomo step forward and propose to compensate nuclear fairly to keep it in business is important. If we get the details right I would go so far as to say it’s kind of a watershed event for the industry. But we don’t have the compensation details sorted out yet. The RSSA at Clinton will expire in March 2017, so practically speaking we need to see the details for the New York program this year. Once we see those details obviously it could provide incremental revenue that would factor into the put if that put in fact occurs. But we don’t have important details right now on the level of compensation or how the procurement mechanism would work. So it’s all speculative until we do the work over the next three or four months and nail this down. Chris Crane In my conversations with the leadership at EDF, they are very comfortable with our operations on the nuclear side and in this market environment they are not looking at exercising the put at this time. So we will continue to work on the regulatory side and drive strong operational performance. And we have a little time on Ginna to the end of the RSSA into 2017, and like Joe said we’ve got a very supportive administration that recognizes the clean benefits of nuclear and that’s really appreciated. Shahriar Pourreza Congrats on the results. Chris Crane Thanks. Operator Thank you. Ladies and gentlemen, this concludes today’s conference call. You may now disconnect. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited. THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. 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Active Power: An Analyst Catalyst Candidate?

ACPW reported an impressive Q2 which put the finishing touches on a further impressive 1H. The analyst community has taken notice. With changing estimate trend lines is ACPW an Analyst Catalyst candidate? Seeking Alpha readers who follow my writings understand just how lucrative identifying this can be. It looks like analysts are beginning to see a good story and a story in which they are collectively getting more and more confident in when it comes to Active Power (NASDAQ: ACPW ). After the company’s Q2/15 reporting confirmed what is shaping up to be an inflection point for operations analysts have come to modeling Active Power more bullish than prior and, importantly, more bullish in trend than prior. This matters in a big, big way for getting some volume into the name and for getting some valuation multiple expansion. I detailed the Active Power quarter reported in an initiation note in which I concluded the same as apparently what is now becoming a very consensus analyst opinion -Active Power is finally on its way to healthier income statement performances. Still, to see analysts turn estimate trends positive is encouraging and could, with a quarter or two of further execution, turn into the phenomenon I’ve called the Analyst Catalyst. I’ve detailed this before for Seeking Alpha readers in other names near inflection points of several varieties (growth rates, cash flow positive, EBITDA positive, etc.). It’s been a long, long time since Active Power was the recipient of such faith from the markets and that is reflected in its share price. A change would be welcomed by shareholders and is something that shareholders should pay close attention to. Active Power is currently modeled for steady increases to revenue, EBITDA, and fully diluted EPS to end full year 2015. Through 1H/15 the company remains well on pace to hit these marks. These would be higher highs put in for the noted metrics after the company bottomed in each category in full year 2014. Full year 2014 marked Active Power’s third consecutive year of posting lower lows for the line items – something that drove its stock price lower, investor sentiment to all-time lows, and analyst faith to a point of non-existence. Obviously the modeling change to growth in these categories for full year 2015 and for full year 2016 speaks to the turnaround at the company in progress: You can see in the table above that Active Power is expected to achieve the all-important EBITDA breakeven at full year 2015 reporting with the company going on to report its first EBITDA positive year in four years at full year 2016 reporting. That will be a huge milestone for the company and one that I think will open the name up to significant investment from institutions and other asset managers that can’t or choose not to invest in non-EBITDA positive names. This is more common than most understand. Also, it’s excellent to see that Active Power is modeled to reach near breakeven for EPS in full year 2016 reporting. Again though, maybe the best part of all this is that Active Power has now established positive estimate trends across these categories. In beating estimates, Active Power has essentially validated the reporting analysts’ models – which makes them look smart, which they like. As a natural consequence of both, analysts have had to positively revise estimates at each quarter reported based on the previous beat. I believe these positive revisions, which take place early to mid-quarter, help propel volume and upward share price movement between quarterly reporting. This cumulative effect of analysts powering shares higher at early or mid-quarter AND company quarterly reporting powering shares higher works to create a constant cycle of volume and higher pricing. In general I refer to this as the Analyst Catalyst. You can see in the charts below Active Power might be on the brink of such a bullish cycle: (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) I believe that we should see a continued Analyst Catalyst take shape at Active Power as the company continues to impress at quarterly reporting. Active Power is showing excellent trend lines for income statement line items and for key metrics reported as a result of its maturing sales team (which the cumulative effect of this is hard to model) and its growing more well-known value prop. Both should make sure that Active Power continues in its turnaround success and in reshaping its total income statement. I’ll provide updates as I see estimates positively or negatively revise. Good luck everybody. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Laclede Group’s (LG) CEO Suzanne Sitherwood on Q3 2015 Results – Earnings Call Transcript

Laclede Group, Inc. (NYSE: LG ) Q3 2015 Earnings Conference Call August 5, 2015 9:00 AM ET Executives Scott Dudley – Director-Investor Relations Suzanne Sitherwood – President and Chief Executive Officer Steve Rasche – Executive Vice President and Chief Financial Officer Analysts Dan Eggers – Credit Suisse Spencer Joyce – Hilliard Lyons Selman Akyol – Stifel Operator Ladies and gentlemen, thank you for standing by. And welcome to the Laclede Group’s Third Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I will now turn the call over to Scott Dudley, Managing Director, Investor Relations. You may begin your conference. Scott Dudley Thank you and good morning, welcome to the Laclede Group earnings conference call for the third quarter of fiscal 2015. We announced our financial results this morning and you may access the news release on our website at thelacledegroup.com, and you can find that under the News Releases tab. Today’s call is scheduled for up to an hour and will include discussion of our results, and question-and-answer session. Prior to opening up the call for questions, the operator will provide instructions on how you may join the queue to ask a 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 is, Steve Lindsey, Executive Vice President and Chief Operating Officer of Distribution Operations. Before we start, let me cover our Safe Harbor statement and discussion of our use of non-GAAP earnings measures. Today’s earnings conference call, including responses during the Q&A session, may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Our forward-looking statements speak only as of today and we assume no duty to update them. Although our forward-looking statements are based on reasonable assumptions, various uncertainties and risk factors may cause future performance or results to be different than those anticipated. A description of the uncertainties and risk factors can be found in our 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, as well as 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’ll turn the call now over to Suzanne. Suzanne Sitherwood Thank you, Scott, and welcome everyone. I’m proud to report we turned in another quarter of solid performance, as we continue to execute on our growth initiative. I’ll begin with the quick summary of our results and then I will provide an update of other items related to achieving our strategic objectives. Steve Rasche will follow me with a more detailed discussion of our operating results and financial position, as well as some commentary on our outlook. This morning, we reported net economic earnings at $0.25 per share for the third quarter and $3.56 [ph] per share for the nine-month period. Steve will discuss the details in a moment, but I’m pleased to note that these results are in line with our expectations and we remain on track to achieve our growth target for the year. At the AGA Financial Forum in May, we had an opportunity to meet with many of you to discuss our achievements relative to our strategic growth initiatives. I like to spend a few minutes recapping that discussion and providing a few updates. We remain focused on transforming our business and continuing to deliver long-term growth by executing on the four pillars of our strategy. First, we are growing our core Gas Utility business through investment and further pipeline infrastructure upgrades and organic growth initiatives. Second, as we demonstrated, we are growing to acquire another gas utility 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 in natural gas transportation, source and supply assets across both our regulated gas facilities and our gas marketing business. And fourth, we are investing in innovation and emerging market. I’ll start with our initiatives to grow our Gas Utility business. As you know, a significant driver of growth for our Gas Utility businesses is capital investment, particularly for upgrade to our distribution infrastructure. In 2015, we have continued to ramp up our pipeline replacement efforts across both Missouri and Alabama. Our commitment to prudent investment in our infrastructure is designed to improve safety and reliability, while lowering operating cost. As far this year, we have invested more than $200 million in capital and we remain on track for approximately $300 million we spent for the full year with a little more than half of this total dedicated to infrastructure upgrade. Our 2015 plan in perspective, for fiscal 2014, our capital expenditures were about $170 million and the very [ph] the Infrastructure System Replacement Surcharge or ISRS provides us with a more timely regulatory recovery of our prudent infrastructure investment. Effective May 22, the Missouri Public Service Commission approved an annual increase in ISRS of $5.4 million for Laclede Gas and $2.8 million for MGE. On Monday of this week we filed for additional ISRS to cover our investments for the period running from March 1 to August 31. The filing requests $4.3 million from a fleet gas and $1.8 million for MGE. We expect that approved amount to be effective later this calendar year. We are also seeing results from our organic growth initiative, targeting increasing revenue and margins while also improving our cost efficiency. We have been testing the growth potential on the various markets we serve, starting with St. Louis and Kansas City, and learning from Alagasco’s experiences. In LA, we are getting back to the basics [ph] of understanding our customers and their energy needs and identifying opportunities to better serve them. In doing that we are striving to grow our customer base and [indiscernible] and improve the retention of existing customers in both traditional and creative ways. Our initial focus area has been to deal commercial and industrial loans conversion from alternate fuel. While I can’t state to specific customer, I’m proud to say we are running success in converting several industrial customers to natural gas, representing a meaningful amount of incremental margin. And I would note that we are seeing modest customer growth across our entire gas facility footprints. We are also now pursuing service extensions within our franchising areas and acquiring integrating gas facility. As we work to grow revenues and margins, we are offset for greater cost efficiency and how we serve our customers. We are deploying enhanced technology and communications tool to improve the quality of the interactions we have with our customers and to ultimately deliver service more effectively. We are also leveraging our shared services model and looking for and stocking process improvement across our organization. These initiatives are tied in part to our integration efforts for MGE and Alagasco. As I mentioned last quarter, we’re nearly complete with the integration at MGE with final item, system implementation next month and our integration work at Alagasco is well under way. Now let me turn to optimizing gas supply assets. As I narrated last quarter, we have undertaken a thorough evaluation of our mix with natural gas stores, transportation, and supply assets to ensure we have diversity to access to gas supply from various states and transportation sources. Due to the introduction of Shell Gas, such an evaluation should improve diversity and the liability for years to come. We started this effort in Eastern Missouri evaluating access to Shell Gas in the Northeast supply basin and Western Missouri and Alabama are earlier in the process. However, by the end of the calendar year, we expect to be in a position to outline some initial step we will take to realize value both for our customers and shareholders. Now, I’d like to close on positive merits. Last week, Laclede Board of Directors declared a common stock dividend of $0.46 per share, payable October 2. This is the same quarterly rate declared since the annualized dividend was increased 4.5%, effective January 2. We are proud of our track record applied in consecutive years, I mean keeping dividend, as we continue to make good on commitments to deliver a shareholder value. With that, now let me turn the call over to Steve Rasche to review our third quarter results. Steve? Steve Rasche Thanks, Suzanne. Good morning, everyone. We announced three quarter earnings earlier this morning that came in to the top end of our expectations, due to timing and a slight improvement in our income tax rate. Let me take a few minutes to review those results with you and talk a little bit about the rest of this year and 2016. Starting with the third quarter results, total operating revenues were just over $275 million, up 14% from last year. Operating margins or earnings contribution after gas cost and gross receipt taxes of $177 million was 36% higher than last year. Our business segment, Gas Utility margins of $173 million were up $50 million from last year, as the addition of Alagasco contributed $54 million in margin, while the operating margin of our Missouri utilities, declined by $4 million. This decline reflects interest revenues that were higher in the quarter, but they were more than offset by the change in Missouri Gas Energy’s rate design. As we noted in previous quarters, MGE’s rates now include a variable user space component, which has shifted the margin into the first and second quarters of the fiscal year and decreased margins in the third and fourth quarters. Gas marketing delivery operating margins of $3.1 million down from $6.5 million last year, this decline reflects the return of normal weather and market conditions in the Midwest, as compared to the higher volatility and wider price differentials prevalent in the prior year. Remember that last year the overall market was recovering from the record cold winter of 2014 and the market dynamics were still working to return to the new normal, so to speak, that we are seeing again this year. Returning to the income statement, other operations and maintenance expenses of just under $91 million include the benefit of $7.6 million nonrecurring gain on sale of utility’s property, related to the consolidation of our St. Louis offices. Excluding that gain, run rate operating and maintenance expenses of approximately $98 million or $25 million higher than last year, reflecting; first, the addition of Alagasco, which added roughly $36.5 million to O&M cost and second, lower expenses at Missouri utilities, driven by lower bad debt expense, lower labor costs, offset in part by higher integration expenses. Depreciation and amortization of $32 million was up $14 million from last year, with $12 million attributable to the addition of Alagasco and the remainder reflecting the higher level of capital spent in the last 12 months. Taxes other than income of $26 million were up $4 million, reflecting mainly the addition of Alagasco, offset in part by lower Missouri gross receipt taxes. Interest expense for the quarter of $18 million was higher year-on-year by just under $7 million and reflects the debt assumed and issued in conjunction with the Alagasco acquisition. Income tax expense was $4.6 million, compared to a net tax benefit in 2014. The effective rate for the current year now stands at 31.6%. And the provision for the quarter reflects the year-to-date change to that new run rate. During the quarter we filed our annual income tax returns and recognized the onetime benefit associated with the retroactive components of the tax extenders that were passed in late 2014. We anticipate our full-year effective tax rate to remain close to this run rate. The resulting GAAP net income for the quarter was approximately $14 million or $0.33 per diluted share. Net economic earnings for the quarter were $11.1 million, down from $14.5 million last year. As noted in our press release, our net economic earnings this quarter, excludes that gain on sale of property and after tax benefit of $4.7 million, to provide a truer picture of our run rate earnings. Looking at the earnings by segment the Gas Utility segment delivered net economic earnings of $16.5 million, compared to $13.3 million, a year ago. This increase reflects the additional earnings from Alagasco and the increase in [indiscernible] revenues offset in part by the impact of MGE’s rate design change. Gas marketing earnings are $0.5 million, down from $1.9 million last year reflect the change in market conditions I noted a minute ago. Other net cost in 2015 of $5.9 million reflect primarily the interest cost associated with the lead group debt issued to finance the portion of the Alagasco acquisition. On a per share basis, third quarter net economic earnings were $0.25 per diluted share, compared to $0.44 per share last year. This comparison reflects the change in the quarterly distribution of earnings, as well as the weighted average impact of the additional 10.4 million shares issued to finance the Alagasco acquisition, last year. Let me turn briefly to our year-to-date results. Overall net economic earnings for the first nine months of our fiscal year were just over $154 million or $3.56 per share. This compares to the prior year earnings of $102 million or $3.12 per share. This increase of nearly $52 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 than the last prior year period due to more favorable weather and market conditions in the prior year. Switching to cash flow statement, cash provided by operating activities for the first nine months of 2015 essentially doubled from a year ago to $366 million. Alagasco added $120 million of that operating cash flow and the remainder reflects favorable timing of collections the Missouri cost under our purchase gas adjustment cost, as well as lower inventory values. And as Suzanne mentioned, year-to-date capital expense was nearly $203 million up more than $93 million from last year with approximately $57 million of that increase attributable to Alagasco and we remain on track for our targeted capital spend $300 million this year. Our balance sheet at June 30 remains very strong with solid long-term capitalization of 51% equity and 49% debt. And short-term borrowings were approximately $211 million down from last quarter, reflecting our ongoing plans delever the business. Our liquidity remains excellent and we have ample capacity in our credit facilities and commercial paper program. During the quarter, we finalized our private placement of two tranches of Alagasco senior notes. These notes will fund later this calendar year to better match our seasonal cash dues [ph] with $35 million in ten-year notes with an effective interest rate of 3.2% funding on September 15, essentially replacing a similar north of high rate notes that we called in January of this year. In addition, we will plan $80 million in 30-year notes and an effective rate of 4.1% on December 1, and current with the maturity of life amount of debt that carries an interest rate of approximately 5.4%. In both instances our customers in Alabama will benefit from the lower interest rates since interest expenses recovered currently and trued up quarterly. Looking out to the rest of the year, our results continue to demonstrate the success of our growth strategies and we remain on track to meet our full year 2015 earnings targets. As a reminder, due to the change in MGE’s rate design, and the acquisition of Alagasco, our distribution of earnings becomes more seasonal and as a result we anticipate an operating loss in the fourth quarter, hot summer season in our service territories. We anticipate our fourth quarter loss being higher than last year and a little above the top end of the 9% to 11% range of full year net economic earnings per share we first introduced last fall. These expectations reflect the adjustments I noted earlier for a slightly lower effective tax rate and the timing of operating and maintenance expenses in the fourth quarter. Again, putting all this together, we remain on track for meeting our commitment of growth in 2015 above 6% after moving last year’s gas marketing weather benefit. And we’re already well into preparing for fiscal 2016, especially our budget and long range of plan. All are on track with our long-term EPS growth target up 4% to 6% and the expectation that 2016 will again be above that range. I would also note that as part of that detailed planning process we are assessing the launch of more formal, annual earnings guidance. More later as we complete the hard work internal with our team to get our 2016 plans in place. Now, let me turn it back over to you Suzanne. Suzanne Sitherwood Thanks, Steve. So summarize, we continue to execute on our strategy and delivered results in line with our expectations, including our earnings per share growth target. We are executing well and we continue to transform Laclede to effectively integrating and bringing together our utility companies and improving the business models of our non-regulated businesses. This transformation includes the shift in our corporate culture to reflect where we are today, a larger, growing company, to serve gas utility customers across two states and provide other gas services across the Midwest and other parts of the country. We continue work to build stronger connections and communications at all of our constituencies, sharing our changes and our plans. Our recent AGA presentation had simplified they’re reflected truly are the company. The slide depicts the community with a description, the description is energy exists to help to live their lives, relative businesses, advance the community. This is simple idea that had won the heart of our business. In that spirit I offer things are more than 3,000 employees for their commitments through our simple idea. And months ahead, you can expect that we will continue our efforts to focus and solidify our emerging messages to our stakeholders, and continue to deliver on our product. Operator, we are now ready to take questions. Thank you. Question-and-Answer Session Operator [Operator Instructions] Your first question comes from Dan Eggers with Credit Suisse. Dan Eggers Hey, good morning guys. Hey, good morning, sorry about that. Just a couple of questions, Suzanne you’ve made mentioned to the Muni system acquisitions or something about Muni’s in your prepared remarks. I just wanted if you could just, maybe elaborate a little bit more on that or tell me if I just misheard you? Suzanne Sitherwood Here I’ve given a little bit more expansion regarding organic growth. We’ve shared just a couple of calls ago, we had hired our Vice President of Organic Growth, and he’s done a lot of preliminary work in terms of areas that we should be focused on. And one of those areas on the resistible [ph] and also with the acquisition of Alagasco, there’s several municipals [ph] on that scale, as well as even some in Missouri too. We are just focused right now on understanding who they are and we also think about it in terms of all the pipeline regulations and Steve Lindsey is at the table and he can talk a little bit more that if you’d like but some of these municipals are actually reaching out to gas company because they have a stronger need in understanding what [indiscernible] and Steve if you want to add. Steve Rasche I think we’re [indiscernible] exactly where we’re really seeing a trend nationally that has enhanced pipeline safety regulation moving at the place. Some of these near to operators are looking for business either in the operation or exist in more perhaps concluding divesting our existing system. So we are out in market, we’re making ourselves available to have discussions with those long [indiscernible] and we do these as part of our organic growth. Dan Eggers Again we’ve in the water space where it makes tremendous amount of sense for the communities probably to be selling their systems because of the capital obligations and operational challenges, yet they seem not to show a whole lot of willingness to do it. As you guys are kind of looking into this, are you seeing interest either from the communities [ph] or the people in the communities would suggest, this is something you guys get yourself more actively involved in? Steve Rasche Well, yes, I think again as you mentioned some of the operational characteristics of the system have changed, as well as leadership looking at different municipalities. So I think again, our overall work right now is to evaluate where those opportunities to exist, have those discussions, and if those opportunities present themselves be ready and take a little bit more of a proactive approach that we have in the plans. Suzanne Sitherwood And you know what are the plans is, capital constrains, some of the communities have, especially coming out of the sort of the 2008 recession period and then you layer on this additional on Federal regulation. I still have the volume capacity and other capital resources to terms to you. So that’s part of what’s driving interest to your point. Steve Lindsey Do you think this is – is there an opportunity to kind of be a manager of their systems instead you get paid in a little capital way, you pay their management fee effectively to run it for them without having to do a lot of balance sheet work necessarily? Suzanne Sitherwood I guess I repeat we keep our mind open to you what the interest about, if we go to municipalities and for the Public Service Commission. I think if you will the commission really transactions in different way that we will keep our minds regardless taking the liabilities to the help of that system and our ability to evaluate with the extremely important. And then, secondly how we work with the regulators to get the – it’s a right way to transition that principle into the gas company that works for customers and our shareholders, and there [indiscernible], but we’ve done a lot of homework and we feel pretty confident about our approach. Dan Eggers This is Andy, I think this is the fiscal year 2016 event where we’ll start to see something converter how long [indiscernible] take to make sense of this from our perspective? Suzanne Sitherwood I think the few line items on organic growth, I’m trying to give into the [indiscernible] in terms of mix evaluation clearly wanted to the pillars and we’ve done a lot of analysis regarding to municipals that are in Missouri as well as Alabama and we have – they are working out in the field. So, I guess, time will tell that definitely something that we studied well and we are out looking. Dan Eggers And I guess, probably on the organic front you made mention of kind of looking at your share for shale related infrastructure and that sort of thing. Can you just maybe explain a little bit what the thought process is there? And I guess the timing is you give an update at the end of next quarter’s call up your fiscal year end? Suzanne Sitherwood It’s correctly. You did hear that correctly. So we embarked under my guide by heart leadership as Senior Vice President of Corporate Development Strategy. We started evaluating all the upstream asset that are prior actually to closing Alagasco for our considering utility and we were looking at the historical supply, transportation and stores contracts and sources for serving our customers. So we started evaluation process on how long they service regarding the liability for our customers on the short term and the long-term. As you know again with the introduction of shell gas in the various basement and there is attributes for these basements. As you know that changed the market, as well as the pipeline respond to those supply basements. So I believe and my colleagues believe the responsibility for us to embark on this evaluation, we started in eastern part of the state and we split up for a lot of the modeling therefore physical and logical modeling are now starting to same sort of western side of the state in Alabama and because we’ve started earlier with eastern side in more sophisticated, I mean reliability and then you layer on commercial availability you want some of their supply transportation services pipeline and go forward it. And that some of what you will hear an update for the end of next quarter. Dan Eggers Okay, great. Thank you guys. Suzanne Sitherwood Thank you. Operator Your next question comes from the line of Spencer Joyce with Hilliard Lyons. Spencer Joyce Steve, Suzanne, and Scott good morning, how are you? Steve Lindsey [Indiscernible]. Suzanne Sitherwood Good morning. Spencer Joyce Steve. I like that teaser on the guidance. We are all eagerly weighted queue for now. Steve Lindsey [Indiscernible]. Spencer Joyce Just a quick one here. Steve refreshes on the timing for that reallocation of the earnings kind of across the quarters, those rate structure changes will have anniversary like as of Q4, is that right. So we should have a pretty clean year kind of in the rear view mirror as of next quarter. Steve Lindsey We should but Alagasco will not have been in the mix last year cause you might recall close on that at the end of August. So we kept it out of our net earnings for the full year or so, if that and Alagasco is more seasonal due mainly to the fact of the geographies that it’s providing a natural gas. And so the fourth quarter will still be a little bit kinky, what I would suggest, Spencer is go back to the guidance that we talked about earlier in the year and I did talk about on the call and talk about on the call and we kind of give ranges of the earnings by quarter and that range that we gave for the fourth quarter was a loss of between 9% and 11%. And as I just mentioned, we expect to be a little bit above that range. So a little bit higher than 11%, I mean the loss for the quarter and that’s really timing of expenses as much as it is the change in the seasonality. But I would say that once we get beyond this year that I think we should have a reasonable cadence to work through, as you look at 2016 and beyond. Spencer Joyce Okay, great. So maybe one more kind of noisy or kinky quarter there and that we should be pretty clean? Steve Lindsey Yes, it is real hard. Not to make it noisy and comfortable for you. So – Spencer Joyce Yes, well, I know you all did a great job closing those acquisitions right at the end of the year, which made it nice to work with. Turning up to the income statement, the gain on sale from this quarter was that baked into the O&M line, was that a offset O&M expense or was that in the other income line? Steve Lindsey That was in the O&M expense line and you’d want to take out that $7.6 million essentially reduction in operating expenses in order to get to a better run rate. Spencer Joyce Okay, perfect that’s – and I think that was in the release. I just want to make sure I was understanding that right, that’s kind of a large item. Finally for me, on the corporate overhead and sort of the other unallocated expense or earnings line, we’ve obviously seen some wider losses this year, but I’m assuming that should peak somewhat for full year fiscal 2015, and then perhaps draw down a little bit moving forward. Is that kind of, I guess qualitatively the right way to think about those, the other segment, if you will? Steve Lindsey Yes, the other – the magical all other categories is everything that doesn’t set it nice and uniquely into a segment. And you’re right, the vast majority of those expenses are interest expense on the Group debt that we should financially, Alagasco transactions. So, and those are all, mostly at fixed rate some at variable rate, but short-term variable rate, so I until we start retiring that debt, that will be a fairly static number by quarter-to-quarter basis. There is a small amount of what I’ll call unallocated corporate costs that would also fall in that category. Those don’t generally vary much on a quarter-to-quarter basis, a little bit more this quarter because of some integration costs but we would pull those out for an economic earnings purposes. So, I think over time Spencer, as we start delivering the business and we know that in 2017, we delever the business with the – unit mandatory’s, liquidating at least the equity forward component those liquidating. That will definitely see change and the interest component in that other category. Aside from that is probably has a bit more flattish going into 2016. Spencer Joyce Okay. Perfect. So now – a potential drawdown talking point in 2017, but before that you’re looking kind of flattish. Steve Lindsey Yes. Spencer Joyce All right. Nice quarter, that’s all I have. Steve Lindsey Thanks, Spencer. Operator Your next question comes from the line of Selman Akyol with Stifel. Selman Akyol Thank you, good morning. Suzanne Sitherwood Hey, good morning. Selman Akyol A couple of quick questions. On your acquisition related expenses from Alagasco, how much longer do you expect those to be running through? Should we expect to see this continue to bleeding to 2016 as well? Steve Lindsey Yes, we do. We typically look on a broad brush Selman, when we look at integration. It’s generally a two to three-year program, if we look at MGE and that’s a really good marker to take a look at. We do anticipate there being some cost next year which would be the third year of that acquisition. Remember, we’re only coming up on the first anniversary of Alagasco. And as Suzan mentioned in our prepared remarks, we are now implementing the integration plans. So, we would clearly expect those integration cost to continue through 2016 and then perhaps some into 2017 at Alagasco. At that point, probably not much from MGE going forward. Selman Akyol All right. And then I think you said before that MGE was a good marker and maybe up to $20 million of integration expenses there, am I remembering that correctly? Steve Lindsey You are, and that was our original transaction cost guidance and we came in well underneath that. Our integration costs for MGE are running at a level significantly below that. In fact, if you give me just a second here because we do disclose that information every quarter, I’m not sure if I’m going to get it to – I will get it to you separately if I could – Selman Akyol Okay, we can follow-up offline Steve Lindsey Yes. Selman Akyol But so I’m just taking back 2016 in terms of Alagasco, should we expect sort of similar run rates to 2015 or is the bulk behind that is very just kind of quantify that? Steve Lindsey I would suspect that just as with MGE, you’re going to see a fairly consistent run of cost, they run into different categories, depending upon what’s driving them. So I would suspect we’ll see a similar level as we go through 2016 and that embraced our tailing off as we get to 2017. Selman Akyol Great, I appreciate that. And then just looking at the CapEx expenses, I clearly understand what’s being spent in Missouri, can you go through with the $56 million, where that’s being spent for Alagasco? Steve Lindsey Over a half of it was pipeline replacement and that’s clearly what our goal is in fact if you look into 2016 and beyond, we would expect that number to even go a little bit higher. So in terms of the fully 50 – 30 or almost two-thirds of that amount is either pipeline replacement or other things that would be directly associated with pipes or new customers. And then this year, and we see the same thing happening in St Louis or in Missouri, as we do have some facilities costs that are coming in this year, that’s about $10 million at Alagasco this year which we wouldn’t expect to recur next year. From our pipeline replacement perspective, all the three utilities will be at or above the level they were at last year. So we are managing holistically and at Alagasco, there is one large infrastructure expansion and as a surprise or improvement that this year, so that in other major pieces, what’s going on in 2015 Selman Akyol All right. Last one for me on still on the CapEx, $300 million for this year, roughly split two-thirds between Missouri and one-third for Alagasco? Steve Lindsey Yes, sir. Selman Akyol Got it. All right. Thank you very much. Suzanne Sitherwood Thanks, Selman. Steve Lindsey Thanks, Selman. [Operator Instructions] At this time we have no further questions. Management, I’m turning this back to you for closing remarks. Scott Scott Dudley Great, thank you all for joining us and will be available throughout the day for any follow-ups. Thanks for joining us. Operator This concludes today’s conference call. You may now disconnect.