Spire Inc. (SR) Q4 2012 Earnings Report, Transcript and Summary

Good day, and welcome to The Laclede Group Fiscal 2012 Fourth Quarter and Full Year Earnings Conference Call and Webcast. [Operator Instructions] Please note this event is being recorded. I would now like to turn conference over to Mr. Scott Dudley, Director, Investor Relations. Mr. Dudley, the floor is yours, sir.

Good morning, and welcome to The Laclede Group earnings conference call for the fourth quarter and full year of fiscal 2012. Earlier this morning, we issued a news release announcing our financial results, and that release is available on our website at thelacledegroup.com, under the News Releases tab. Today's call is scheduled for about 1 hour and will include a discussion of our financial and operating results followed by a Q&A session. [Operator Instructions] On the call today are Suzanne Sitherwood, President and CEO of the Laclede Group; and Mark Waltermire, Executive Vice President and Chief Financial Officer, who will each have some remarks on our fiscal 2012 performance. Also in the room with us are Steve Lindsey, Executive Vice President and Chief Operating Officer of Distribution Operations; Mike Spotanski, Senior Vice President and Chief Integration and Innovation Officer; and Steve Rasche, Senior Vice President of Finance & Accounting. 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, which will be filed later today, and updated in our quarterly 10-Q filing. In our comments on the call today, we will be discussing financial results in terms of net economic earnings, a non-GAAP measure used by management when evaluating the company's performance. Net economic earnings exclude from net income the after-tax impacts of fair value accounting and timing adjustments associated with energy-related transactions and costs related to acquisition, divestiture and restructuring activities. A full explanation of the adjustments and a reconciliation of net income to net economic earnings are contained in the news release we issued this morning. With that, I will turn the call over to Suzanne.

Thank you, Scott, and let me add my welcome to those who have joined us this morning for our first ever earnings conference call. We appreciate your interest in the Laclede Group and look forward to continuing to build our dialogue with you going forward. Today's call is part of our broader effort to reach out to the financial community and all of our stakeholders, including our regulators, customers and employees. As we continue to pursue our strategy, enhanced communications will remain an important enabler of our success. Another critical element supporting our goals is the changes we have made in our organization and senior leadership beginning last May. As part of our senior leadership appointments, we named Mike Spotanski to the newly created position of Senior Vice President, Chief Integration and Innovation Officer. Mike will lead the efforts to integrate newly acquired as well as organically built businesses into The Laclede Group portfolio. He is also charged with development and investment in innovation and emerging technologies. Recently, we also announced an important addition to our already strong leadership team, bringing Steve Lindsey on board as Executive Vice President and Chief Operating Officer of Distribution Operations. Steve brings deep utility operating experience and leadership skills to Laclede. Having worked with Steve at AGL, I know he has the ability to ensure our core utility operation, continues to provide safe and reliable natural gas service along with top-notch customer care. His experience will also help us grow our business, and we are excited to have Steve join us as we move onward. Looking back at 2012, we had a solid year financially, and our key operating metrics showed improved trends. We've made good progress on our strategic initiative. I'll have more to say in a moment regarding our operating performance and strategic initiative. But first, let me turn the call over to Mark for a more detailed review of our financial results.

Thank you, and good morning, everyone. As Suzanne mentioned, The Laclede Group did indeed have a good fourth quarter that capped off a strong performance for fiscal 2012. In reviewing our performance, I first want to spend a little time talking about revenue trends. For the fiscal year, our operating revenues declined by $478 million or nearly 30% compared to 2011. In other industries, that decline would be alarming. But in our case, it was largely driven by lower commodity prices. For Laclede Gas Company, it's important to remember that a substantial portion, about 60% to 70% of our sales revenues, are tied directly to the cost of natural gas, which is passed through to our utility customers. Our revenues also declined, and sales volumes were down about 19% this year due in large part to an unseasonably warm winter. In fact, we had the warmest winter in more than 100 years. Despite these warm temperatures, our weather mitigation rate design allowed us to largely protect our margins. In Laclede Energy Resources, or LER, revenues were also down. This was due not only to the effects of lower commodity costs but also the result of LER taking advantage of marketplace opportunities to optimize its portfolio. It did this by filling its physical positions at certain delivery points with offset in purchases and sales at the same locations. As a result, LER was still able to satisfy its customers and supplier commitments without having to incur fuel costs to transport gas to a different location. We began recording these types of transactions on a net rather than a gross revenue basis in the second quarter of 2012. And while this resulted in lower recorded operating revenues, it had no effect on earnings. The impact of the change on operating revenues in 2012 compared to 2011 was approximately $173 million. Now let's turn our attention to fourth quarter earnings. Laclede Group posted consolidated net economic earnings of $0.02 per fully diluted share for the fourth quarter compared to a loss of $0.14 per share last year. This represents an improvement in the year-over-year performance of $3.5 million. This also marks the first time since 2007 that we have delivered positive net economic earnings in the fourth quarter, a period that is typically difficult from an earnings standpoint due to the low level of demand for natural gas during the summer months. This improved performance was primarily driven by a smaller seasonal loss of $3 million in our Regulated Gas Distribution segment as compared to a loss of $6 million in 2011. A large part of this improvement was due to increased revenues from our Infrastructure System Replacement Surcharge, or ISRS for short, lower maintenance and customer service expenses and higher other income. As a reminder, ISRS is a nominal monthly customer charge that enables the gas company to begin recovering some of its costs associated with mandated distribution system improvements and safety related projects that are completed in between rate cases. Quarterly net economic earnings for the Non-Regulated Gas Marketing segment, principally LER, were about $3 million, down just slightly from last year due to lower sales margins reflecting the current market environment. Now looking at our performance for the full year, our net economic earnings in 2012 of approximately $62 million or $2.79 per share matched that of the prior year. And as the table in the beginning of today's earnings release indicates, 2011 results included a $0.27 per share earnings benefit from a sale of propane inventory that did not recur in 2012. Year-over-year earnings growth excluding this sale was 11%. Both of our primary business segments contributed to this year's better performance. Regulated Gas Distribution grew its net economic earnings by approximately 3% to $48 million. This was mainly due to lower maintenance and customer service expenses and higher ISRS revenues, offset in part by higher benefit costs. Net economic earnings for the Non-Regulated Gas Marketing segment were $12 million, up 37% from 2011. This improvement was the result of lower fixed transportation charges, lower pipeline fuel costs and pipeline optimization activities. In addition to solid earnings, cash flows were also strong in 2012. We generated over $128 million of cash flow from operating activities. And while that amount was down from the prior year, the difference was largely reflective of changes in working capital requirements resulting from lower gas prices. This cash flow helped us support our 2012 capital spend, which totaled nearly $100 million, up from $68 million in 2011, as we replaced about 41 miles of pipeline, double the amount replaced last year. This reflects the continued ramp up over the last several years in the replacement of portions of our distribution system to ensure its continued safety and reliability. The increase in 2012 capital spend also included continued investments in our information technology, which Suzanne will discuss further in her remarks. Looking ahead to 2013, we anticipate that our capital spend will continue to increase to approximately $115 million, as a larger amount of investment in pipeline replacements more than offset the slight decline in IT spending. Turning to the balance sheet. We ended 2012 in a very solid financial position. Our year-end capitalization was strong, and we have ample liquidity, including lines of credit totaling $350 million, most of which have a 5-year term. During the fourth quarter, we announced several financing commitments, including private placements of medium-term debt totaling $125 million at fixed rates ranging from 3% to 3.4%. We were pleased to be able to take advantage of the very favorable financing environment and secure such historically low interest rates. These placements enable us to fund our planned capital expenditures and also help replace $25 million of 6.5% debt that we redeemed last month. To summarize, Laclede delivered good results for 2012 and has a strong balance sheet, and we are well positioned for continued success as we move forward into 2013. Now let me turn it back over to Suzanne.

Thank you, Mark. In addition to a solid financial and operating performance in 2012, we also made good progress on our operational and strategic goals. From an insider company and from an industry perspective, the safety and reliability of our system is of critical importance and remains our top focus. In the context of the broader industry, natural gas is the right fuel in the right place at the right time. With a safe, abundant, domestic supply, we've only just begun to tap the expanded potential for natural gas. As increased supplies continue to drive costs down and new technologies quickly emerge to safely and efficiently utilize natural gas, you will continue to see a tremendous growth in the natural gas sector. Given Laclede's competencies in this industry and in this region, it's natural that we would participate in this sector's success. Reflecting these industry trends of access and affordability, the Missouri Public Service Commission recently approved Laclede Gas Company's request to lower the commodity cost component of it's customer's rate. This will reduce an average residential customer's bill by 6%. It is the lowest that this rate has been in 9 years. From a company's perspective, we began several years ago to proactively modernize our distribution system. And as Mark outlined a few minutes ago, we plan to ramp up replacement again in 2013. Further, our pipeline safety and inspection program, which we manage in concert with the Missouri Public Service Commission, are far more robust than those required at the federal level. We have actively participated in leadership positions with American Gas Association and played active roles in the development of rules, policies and regulations with federal and state pipeline safety agencies. In addition to safety, we continue to focus on our growth initiatives that we outlined earlier this year. Those include developing and investing in emerging technologies, investing in infrastructure, acquiring businesses to which we can apply our operating model and leveraging our current business unit competencies. Let me begin by reviewing our achievements and activities around infrastructure and emerging technologies and infrastructure. First, with regard to emerging technologies, our initial focus has been on fueling solutions for natural gas vehicles. Laclede Gas has continuously operated a public access natural gas fueling station for over 15 years. Our experience and expertise, the abundance of clean natural gas available domestically and the growing availability of natural gas vehicles give us reason to be very excited about the prospects for growth. During the past year, we have worked to develop the business model that includes seeking strategic partners to provide an end-to-end solution for our customers. This begins with helping customers as requested to identify and acquire vehicles to meet their needs through engineering and construction of the facility and through acquisition and the ongoing ownership operations, maintenance of the fueling facility. We are pursuing a number of opportunities in this space, and I look forward to sharing more with you at the appropriate time. We also made significant progress on the multi-year upgrade of our IT platform. This includes implementing new applications to support finance, HR, work management and customer service functions. These upgrades are designed to make our company more efficient to better equip us to provide great service and to support our strategic initiative. As of today, we are substantially complete with the implementation of the first phase of this project, which included financial and human resource systems. The conversion went smoothly and without disruption to our organization or to our customers. These investments, built on our broader continuous improvement initiatives, include several designs to enhance our customer experience. Those initiatives continue to pay off in 2012 with higher overall customer satisfaction scores reported in third-party survey results. In conclusion, I'd like to underscore the bottom line: 2012 was a good the year. We saw growth in our key business segments, and we made progress on our strategic initiative. And we are well positioned to take advantage of the emerging technology opportunities available in our industry. We begin 2013 as a financially strong and operationally solid company that has the strategy, structure and resources to grow. We appreciate the confidence you have shown in The Laclede Group. The management team and all the employees are energized and ready to move forward in pursuit of another successful year in 2013. Operator, we are ready to take questions now.

[Operator Instructions] The first question we have comes from Tim Winter of Gabelli & Company.

I was wondering if you guys could sort of break out capital expenditures as we go forward, maybe at least some rough estimates between IT spend and infrastructure, the expenditures that would be eligible for the infrastructure surcharge.

As we talked about, you've been encouraging us as well as many others to have earnings call so we look forward to having the chance in the future. In 2012, approximately half of our spend was qualified for ISRS. It was actually about $51 million of the total amount that we spent last year. And as Mark mentioned, we do anticipate ramping up the pipeline replacement program a little bit further over where we were last year. In terms of how you should think about that, if we're looking at a total spend of about $115 million. I would say half or a little bit more than half would be qualified for ISRS recoverability, which allows us to recover those expenditures quicker than the next general rate case.

Next, we have Selman Akyol of Stifel, Nicolaus.

Just a quick question -- or let me start here. Did you say $115 million for next year, or $150 million?

$115 million.

Okay, 115. Got it. All right. And then you talked about the public access that you've had for over 15 years. Do you have any stats on sort of the usage, see any uptick in 2012 over previous years?

Can you repeat -- Just so we can understand your question, Selman. That was -- you're talking about the CNG conversation?

Correct. And you said you've had public access there for 15 years. And I was wondering do you capture any stats that show growing vehicle usage.

Selman, Mike Spotanski. Actually, yes, we have. We have a number of corporate customers that use that fueling facility and another private facility in the area. You may recall AT&T has made a commitment to increase its natural gas vehicle fleet, and they are using that facility at Shrewsbury as well. So we have seen increases over the last couple of years.

All right. And then last. Suzanne, you talked about the acquisition as being, I guess, one of the growth areas. Can you talk a little bit about what you're seeing in the market out there and how pricing is, et cetera?

As it's much like we've talked about before, you may look historically. We know there are generally 2 to 3 acquisitions a year. And so what we've done is organize our company and make sure that we've had -- have the wedge to run those evaluations. And we've got the group in place to do that, and we'll continue to exercise that as we go forward.

[Operator Instructions] Well, it appears that we have no further questions at this time. I will go ahead and conclude our question-and-answer session. I would now like to turn the conference back over to Scott Dudley for any closing remarks. Mr. Dudley?

Well, thanks, everyone, for joining us for our first earnings conference call. We look forward to continuing the dialogue with you. And if you have any follow-up questions, please feel free to give us a call today. Thank you so much. Bye-bye.

And we thank you, Mr. Dudley and to the rest of management for your time. The conference call has now concluded. We thank you all for attending today's presentation. At this time, you may disconnect your lines. Thank you, and have a great day.