Spire Inc. (SR) Q4 2015 Earnings Report, Transcript and Summary

Good morning and welcome to the Laclede Group Yearend Fiscal 2015 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. Please also note, this event is being recorded. I would now like to turn the conference over to Scott Dudley, Managing Director, Investor Relations. Please go ahead sir.

Thank you and good morning. Welcome to the Laclede earnings conference call for yearend fiscal 2015. We issued an earnings release this morning and you can access that from our website at thelacledegroup.com, and that's under the News Releases tab. There is also a slide presentation that accompanies our webcast this morning and that can be downloaded from our website or from the webcast viewing window. Today’s call is scheduled for about an hour and will include a discussion of our results and a Q&A session at the end. Prior to that session, the operator will provide instructions on how to join the queue to ask a question. Presenting on the call today are Suzanne Sitherwood, President and CEO; 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 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 we expect to file later today. In our comments, we will be discussing financial results in terms of net economic earnings and operating margin, which are non-GAAP measures used by management when evaluating the company’s performance. Net economic earnings exclude from net income, the after-tax impacts of fair value accounting and timing adjustments associated with energy-related transactions, as well as the impacts related to acquisition, divestiture and restructuring activities, including costs related to the acquisition and integration of Missouri Gas Energy and Alabama Gas Corporation. Operating margin adjusts operating income to include only those costs that are directly passed on to customers and collected through revenues, which are the wholesale cost of natural gas and propane and gross receipts taxes. A full explanation of the adjustments and a reconciliation of the non-GAAP measures to their GAAP counterparts are contained in the news release we issued this morning. So with that, I will turn the call now over to Suzanne.

Thank you, Scott, and welcome everyone. We're pleased to report another year of excellent performance, both in terms of serving our customers and delivering strong earnings growth. As I'll cover in more detail in a moment, we continue to successfully execute on our strategy and what drives our performance. On behalf of our 3100 employees, I am proud to report that our fiscal 2015 net economic earnings grew 11% to $3.19 per diluted share. This compares to $2.88 per share a year ago after adjusting for the benefit of unusually cold weather last year. For our fourth quarter, the results were consistent with our seasonal patterns and which we report a loss during the summer. The change in the loss year-over-year is due to the different distribution of our earnings, which we mentioned on previous calls. For the most part, the addition of Alagasco and the change in MGE's rate design to include a small variable usage component are the drivers of the change in distribution. Steve Rasche will discuss the details of our financial performance as well as our outlook. In addition to excellent fiscal year results, we continue to develop our investor relations efforts and are launching earnings guidance for fiscal 2016. I am pleased to be able to make this announcement. It is an important step and reflective of our hard work and confidence in our strategy and our long-term plan going forward. Based on Laclede's strong 2015 performance and our expected growth for 2016, our Board of Directors raised the dividend by 6.5% to $0.49 quarterly on annualized rate of a $1.96 per share. As you can see on Slide 5, the dividend grew by about 2.5% prior to 2013. It has since increased by 3.5% in 2014 and then 4.5% in 2015. The new dividend is payable on January 5 and 2016 will mark 13 years of consecutive increases and 71 years of continuous dividends paid. I would note that the new dividend level is in line with our targeted payout ratio, which remains 55% to 65%. Our strong performance is directly attributable to our ability to successfully execute on our growth strategy and that strategy summarized here on Slide 6 does not change. We have been consistent. First, we're growing our gas utility business through organic growth initiatives and we're making wise investments in infrastructure upgrades in both Missouri and Alabama. Second, we continue to drive value for our customers and our shareholders due to integration of our two accretive acquisitions. Third, we're evaluating our gas assets predominantly focusing on reliability, diversity and best cost to deliver value to our customers over the short and the long term. Finally, we're investing in innovation and emerging markets with our initial focus on CNG fueling solutions. Now turning to Slide 7, our organic growth initiatives are designed to increase our revenues and margins. Specifically, our organic growth team is taking a fresh look at efforts that are focused on adding and retaining customers. This includes building commercial and industrial loads and to improving line extension policies in our Missouri service areas. We've realigned our sales approach and support systems to improve market penetration. We've also improved our communications with customers, including better educating them on the value of our product offerings to drive retention. We're already seeing some early successes. Across our three utilities, we saw customer growth of nearly 1% in 2015 and as I mentioned last quarter, in Missouri we've converted several large industrial customers to natural gas from other fuels. Additionally, in Alabama, we continue to have a strong focus on economic development partnership. Regarding capital investment, we continue to make investments and infrastructure upgrades in Missouri and Alabama creating value for our customers and our communities. This investment has focused on infrastructure replacement to both enhance the safety and reliability of our system and to lower ongoing maintenance cost, all of with service to our customers in mind. As shown here on Slide 8, we invested a record $290 million in capital in 2015, an increase of 70% over 2014. This was driven by the addition of Alagasco and further ramp-up of investment in Missouri. I would note that more than two thirds of our total 2015 capital spend is recovered in rate with minimal regulatory lag due to the mechanisms and rate setting processes in Alabama and Missouri. Steve will cover this in more detail in just a moment. We replaced 235 miles of pipeline in 2015 which was fairly evenly split among our three utilities. In 2014 we replaced about 140 miles, which was for Laclede Gas and MGE. Now turning to the integration of our acquisitions on Slide 9, I’m pleased to report that we're fully on track at both Alagasco and MGE. Integration implementation is underway at Alagasco and our initial focus is on completing organizational design work and implementing our shared services model. The goal is to provide clarity to our employees and customers in terms of how we work and where we work, ultimately providing improved customer service for our customers. Realizing efficiencies across our organization is an important measure for our customers. In Alabama, we have a cost sharing mechanism that provides an incentive for us to control expenses. We were successful in generating savings in 2015 that were returned to customers in the form of reduced rate. At MGE in September, we completed an important information technology system integration involving our customer care and billing and our work management systems. As a result all of our Missouri customers are now on a common platform. In terms of the overall integration of MGE we've achieved a run rate saving that we said we're expected to realize in year three, which is fiscal 2016. Let me now turn to modernizing our gas supply transportation and storage asset. As I noted last quarter, we have undertaken a thorough evaluation of our assets in Eastern Missouri, to ensure we have diversity both in access to gas supply from various basins and the supporting transportation sources. Due to the introduction of Shell Gas and the resulting shift in pipeline services such evaluation should improve diversity and reliability for years to come. For Western Missouri and Alabama, we are early in the extensive analysis process. We're getting closer to talking about the outcomes from our evaluation and how that analysis points towards certain asset decisions, including potential future projects. We will provide more color on this topic at the Annual Shareholder Meeting in January. Now before I turn the call over to Steve, let me say something about our investment and innovation. Our Spire Natural Gas Fueling Solutions team continues to pursue opportunities to address customer led needs by providing end-to-end solutions that is designing, owning and operating stations that have an anchor customer. Our focus is on return to base fleets, especially Class 8 trailers. In addition to working with customers on their fueling solutions we're also working to remove market barriers by encouraging coordinated efforts along the value chain. Today we operate two stations, one in St. Louis at the Airport, which has been in operation for two years and one in Greater South Carolina, which opened last month. It serves a busy tractor-trailer traffic corridor at Interstate 85 and Highway 101. Both of these stations allowed us to work inside the value chain with customers creating real value. Despite the current price spread that CNG offers over diesel, compared to what it used to be, customer demand is still real. Now with that, let me turn the call over to Steve Rasche. Steve?

Thanks, Suzanne, and good morning, everyone. Let me review our operating results for the fiscal year 2015 and fourth quarter ended September 30, and give our outlook for 2016 and beyond. Starting on Slide 12, full year net economic earnings were $138 million for 2015 up 38% from 2014. Adjusting prior year results for the gas marketing benefit of the 2014 record cold winter, net earnings growth was actually 46%. Of course a good portion of that growth came from the first full year of Alagasco operating results. Even after factoring in the equity and debt issue to finance transaction, as you can see at the bottom of this chart, overall net economic earnings per share increased 11% to $3.19 per diluted share, up from $2.88 per share last year again removing the 2014 weather benefit of $5.6 million or $0.17 a share. This growth was driven by strong performance in our two main operating businesses. Our gas utilities earnings grew by 47% and earnings per share increased 11% with the EPS measure fully recognized in the shares issued to finance the Alagasco acquisition. Our gas marketing business saw adjusted earnings drop slightly by $400,000 to $4.2 million, good performance given the return of more normal and less favorable market conditions in 2015. Turning to Slide 13, let’s take a look at our financial results in a more traditional income statement format. Total operating revenues were almost $2 billion with the gas utility segment seeing revenues grow by 29% driven by the addition of Alagasco, offset in part by lower overall system volumes reflecting more normal weather in 2015. Operating margin or earnings contribution after gas cost and gross receipts taxes of $857 million was higher by 43% compared to last year. Looking at the components of operating margin, gas utility margins of $842 million were up 48% with most of that increase due to the addition of Alagasco. The Missouri utilities did see margin growth as higher ISRS revenues and the benefits of modest customer growth offset lower off system sales and capacity release as utilities took advantage of the favorable market conditions in 2014. As Suzanne mentioned, we experienced customer growth of roughly 1% across our utilities in 2015 adding a total of roughly 15,000 customers in Missouri and Alabama. Gas marketing generated operating margins of $13 million, about half the margin of the prior year reflective of the return of more normal weather combined with higher natural gas supply that suppressed price volatility and basis differentials. Continuing down the income statement, operating expenses of the gas utility segment were all higher due in large part to the addition of Alagasco. Of particular note, other operations and maintenance expenses of $391 million include the benefit of a $7.6 million non-recurring gain on sale of utility property related to the consolidation of our St. Louis offices. Excluding that third quarter gain run rate operating and maintenance expenses of $398 million reflect the addition of Alagasco and cost efficiencies at the Missouri utilities including the benefits of scale in areas like compensation, benefits and supplies as well as lower bad debt expenses and labor related cost offset in part by higher integration expenses. All other operating expenses were higher reflecting the addition of Alagasco offset by lower overall usage due to the difference in weather conditions between the two years. Interest expense for the year of just under $75 million was higher year-over-year by $28 million reflecting a full year of Alagasco related interest. Income tax expense for the year essentially doubled to $62 million due to higher pretax income and the full year effective tax rate that was 31.2% compared to 27.6% last year. The change in effective tax rate was due to a higher mix of Alagasco pretax income remembering that Alagasco carries an effective rate much closer to the marginal rate. Let me turn briefly to our fourth quarter results. As a reminder, the final quarter of our year is the hot summer season in our service territories and we have historically run a loss for that period. The net economic loss for the quarter was $16 million or $0.37 per share, a significant increase from last year. As we noted throughout the year, the magnitude of our loss is influenced by first the addition of Alagasco whose earnings patterns are much more seasonal than Laclede Gas and second the change in MGE’s rate design adding a variable usage based component. We expect our future earnings distributions will generally follow a similar seasonal pattern and I'll speak more about that in a couple of minutes. The quality of our earnings remains very high with cash flow from operating activities totaling $322 million more than double the level of a year ago that was driven by a $100 million contribution of Alagasco as well as higher Missouri based cash flow due to the timing of collections under our PGA clauses and lower natural gas inventory values. Similarly cash earnings or EBITDA shows a year-over-year growth of 64%. A portion of that growing cash flow supports our higher dividend that Suzanne mentioned a few minutes ago, another use is our capital expenditures. As shown here on Slide 17, cash expenditures for the year totaled $290 million 17% higher than last year due in part to the full year addition of Alagasco as well as higher spend in Missouri. As importantly, roughly $200 million of that spend or 67% are recovered in rates with minimal regulatory lag, either in the rate stabilization and equalization our RSE mechanism in Alabama and the infrastructure system replacement surcharge or ISRS in Missouri. And speaking on ISRS, while Laclede and MGE received approval for their later surcharge increases and our new annualized rates effective December 1 will be $19.6 million for Laclede Gas and $6.7 million for MGE. Our yearend balance sheet remains strong with solid long-term capitalization of essentially 50%-50% equity and debt, an improvement from 49% equity or 51% debt a year ago. These new metrics include the funding of Alagasco's 10-year notes in mid September and reflect our ongoing plan to deleverage at the Group level while we continue to invest at the operating companies. Our liquidity remains excellent and we have ample capacity on our credit facilities and commercial paper program as we head into the winter heating season. Now let's turn the page and look at fiscal 2016 and let me update you on our outlook. From a long-term perspective, our view has not changed. We remain comfortable with our long-term earnings per share growth target range of 4% to 6% and that growth will be driven by organic growth initiatives focused on capital spend, margin improvement and cost efficiencies at the gas utilities; more about capital in a moment. Looking at 2016 specifically, we anticipate our net economic earnings per share to fall within a range of $3.34 to $3.44 per share. This is an indicative growth of between 5% and 8% over actual 2015 results and we anticipate our earnings mix to remain fairly consistent with 2015 or approximately 97% to 98% of our earnings generated by the gas utility segment. Our EPS guidance assumes normal weather patterns of course and like most utilities, we work through most normal variations and weather by managing our discretionary spend when necessary. While we're largely weather mitigated over a full year cycle, weather may impact the timing of earnings between quarters. So far this fall, it has been a bit warmer than normal in Missouri and as a result, we anticipate, seeing a bit more of our earnings falling in the back half of 2016 than we saw last year. Roughly 3% to 4% of our total earnings shifting from the first and a bit of the second fiscal quarters through the summer season quarters three and primarily quarter four. Looking at income taxes we anticipate our effective book tax rate to continue to move up to the low 30% range in 2016 and this assumes no reauthorization of bonus depreciation for either 2015 or 2016. Turning to our capital expenditure plans, we anticipate capital spending to be approximately $315 million in 2016 up from $290 million this year. This increase is driven by the growth in the gas utility business, whose capital spend will likely be approximately $310 million, split is shown here on Slide 20. For 2016, we expect that close to 70% of our spend will be recovered in rates with minimal regulatory lag. In addition, another 10% of the planned spending is targeted to support new business in Missouri, which by its nature will deliver returns in the form of increased margins now and in the future. Looking at over the next five years including 2016, we've revised our long-term capital expenditure plan with a total targeted spend forecasted to rise to $1.6 billion roughly 7% higher than our previous guidance and the mix of spend with minimal regulatory lag and new business remains largely consistent with the expected mix for 2016. And we anticipate this spend will be financed with our growing cash flows and periodic access to the debt markets at our operating company level. So in summary, it's been another busy and successful year and we hit our targets yet again in terms of not only earnings, but also deleveraging the business, driving cash flow and capital spend and positioning ourselves well for 2016 and beyond. We thank you for your confidence and support and we look forward to sharing our successes as we progress through 2016. Now let me turn it back to you Suzanne.

Thank you, Steve. So to summarize, 2015 was a year of excellent performance as we again executed on our strategy and delivered higher earnings. We're delivering increased value through both earnings, higher earnings and a growing dividend. Heading into 2016 and beyond, we've made strong commitments to continue investing in our gas utilities business and driving further organic growth and we're pleased to provide earnings guidance for 2016 that shows the confidence we have in our ability to execute and meet our growth targets. We appreciate your investment in Laclede and your interest. My colleagues and I hope you have a wonderful Thanksgiving holiday with your family and friends and enjoy this period of the holiday. Operator, we're now ready to take questions.

Thank you, Ma’am. We'll now begin the question-and-answer session. [Operator Instructions] And our first question comes from Chris Turner of JPMorgan. Please go ahead.

Good morning, Suzanne and Steve.

Good morning.

I wanted to get a little bit more color on the underlying drivers for 2016, could you guys give us an idea of what you’re thinking for overall utility rate base growth and kind of give us a little bit more color on where you are in the synergy and cost cutting cycle at the Missouri utilities?

Yeah, hi, Chris this is Steve. I’ll take a shot at that. Since we have two different rate structures, one in Missouri and one in Alabama, the rate basis is kind of a difficult concept for us to translate into earnings growth because in Alabama it’s really current rate making and rates are based upon retained shareholders' equity. We did comment on the call that a vast majority of our expectations for earnings growth in '16 is coming from organic initiatives. In fact, all of it is, it’s of our line of sight stuff, and it is clearly driven not only by capital spent. Again the traditional model for utilities is just think about constructing more and driving value, but we really do focus on organic growth as retaining and growing our customer base, improving margins with those customers and finding new services to drive more value in our relationship with them and that’s really the secret sauce that we focus on. With regard to synergies, Suzanne made a comment in her prepared remarks that we are now in year three run rate from Missouri Gas Energy acquisition standpoint and we did hit our end point. We as you might recall had guided that we expected the ongoing synergies in year three, which will be 2016 to be between $25 million and $34 million on an annual run rate basis and we’re near the high end of that range for Missouri Gas Energy moving forward. And at this point, MGE is really operated as part of Laclede. We operate the Missouri Utilities in a largely consolidated fashion and so you'll hear us continue to reference to the Missouri Utilities. Do you want to comment a little bit more on that Suzanne?

Just one other comment, Chris, I've talked a lot over the last several quarters about the shared services model and so it is less now about “synergies”, relative to the few transaction but Steve Lindsey is here. We’re also very focused on continuing to get benefits from our shared services model. We’re also looking at business improvement processes now that we have to quote three gas companies. We’re looking at best practices approaches across the organizations to improve services, but also to be more efficient and make sure we’re managing our cost structure very, very well. So past synergies but now into business improvement processes, shared services model and best practices, so more to come there as well.

And Chris, this is Steve Lindsey, following up on Suzanne’s point, from a organic growth perspective in both of our jurisdictions, we are seeing some uplift in the new business construction market both in the St. Louis and Kansas City areas and we've changed some of our line extension policies to accommodate that. We've seen some large conversion opportunities. We've already taken advantage of and then in Alabama we're very focused on our strong economic development partnerships and we’re seeing some good results on that. So really in all of our areas, I think we're looking for some positive uplift in 2016.

Okay. Great. And then kind of is implied from your comments that even though you're at the top end of that synergy run rate in Missouri at least there is still some opportunities to keep cost contained versus an inflationary type rate in 2016 specifically?

Yeah, the synergy component as you're very well aware is getting the organizational structure in place and also deploying our technology platform across the organization and when those two pieces are in place and as for the most part, the synergy piece is completed and do create accretion, but that doesn’t mean we're finished in terms of cost saving and looking for opportunities drive down the cost structure of the company. Having now three gas companies common platform, shared services model, a lot of learning along the way. Several of us have been in the industry for over three decades and that’s just the continuum; that is now part of our culture, how do we improve the cost structure, but at the same time we’re also looking at how do we improve services for our customers and service offerings and become a better company for our customers as well.

Yeah, and Chris I would add that we’re hitting stride at the MGE service territory in terms of our infrastructure upgrades and as you know and we’ve seen this at Laclede that as we continue to replace that old pipe that drives down our hard operating cost of operating the system and we’ll continue to see those benefits and those continue over time. So, we have a long history of managing cost at Laclede and we’re going to take that discipline as we continue to manage the larger business.

Okay. Great and then you guys reiterated your 4% to 6% long-term normalized EPS growth rate and previously that had been kind off a 2014 weather adjusted base and then you said you’re going to exceed it probably in '15 and '16. Could you give us may be a little bit more color on how we should think about that number going forward if the base here is going to change and kind of reset to 2015 or 2016 now etcetera.

Great question. We do update our view of our long term forecast and you're right. The 4% to 6% remains and we’re very confident in our ability to achieve that over time. We have updated that so that as much as I would love to go back to '12 or '13 or whether adjusted '14, we’re in '16 now. So we’re using '15 as a basis, we look out into the future and it’s largely driven or almost exclusively driven by the organic growth initiatives that we outlined on the call and then some of the modernization of our gas supply assets that as we go forward.

Okay. Great. So there is no normalization to 2015 just as is that’s the base going forward.

Yes. We try to use that normalization word carefully and only selectively and '14 was a record year in our service territory from a winter standpoint, so we've always kind of set that one-off to the side. We started off to the side when the quarter happened. So that’s the only normalization.

Okay. Thanks very much guys.

Thank you, Chris.

[Operator Instructions] Our next question comes from Selman Akyol of Stifel. Please go ahead.

Thank you. Good morning.

Hey Selman good morning.

I appreciate the Thanksgiving well wishes and right back at you. As it relates to your 10% capital spend for new business, can you guys elaborate on that? Is that really just going after more industrial customers in and around Missouri?

Selman, hi, this is Steve Lindsey. As I mentioned, I think it’s a combination of several things. Initially again we’re seeing some uplift in the new business markets in both sides of the state and we’ve changed some of our line extension policies to allow us to accommodate even more than we were just in the past. Some of the opportunities I think are in some conversion opportunities with some larger commercial industrial customers. So I don't think it’s one specific thing, but we're just seeing some year-over-year uplift and again a lot of the focus from our organic growth initiative is to be out there and even do some things for example I think those water heaters with multi-families I think again the opportunities are broad as opposed to just a single issue.

And Selman you may recall and I lose track of quarters but we made an announcement that we hired a VP of Organic Growth that reports to Steve Lindsey and he has really taken a fresh look; especially having three gas companies when I would say a fresh look there are just some fundamental blocking and tackling like retain your customers, add new customers, but there are some new approaches about how to go about doing that and so Nick is working across the organization again taken sort of fresh look with all of that and we’re starting to see some of the benefits from just some of the again basic, what I call blocking and tackling and some more to come over the years because we're thinking about our technology and service offerings and variety of customers and are working to continuing to grow that number.

Got you. And then is there any update in just the outlook for acquiring municipal gas utilities? Is there anything that’s tightening out there that would bring more municipalities to wanting to reach the point of let's combine with Laclede.

Yeah, this is Steve Lindsey. I'll take the first at that. I think there is a couple things that could potentially drive that. One is just the infrastructure itself in that as OQ requirements are increasing from a federal regulatory and state regulatory perspective, I think some of these municipalities are looking to get out of the business from that particular reason. And other is the infrastructure in and of itself needs some capital improvements in companies such as Laclede can provide that source of capital to do that and then again I think just the opportunity for some of the municipalities from a financing perspective to go out and get out some of this money is a little more challenging. So I think there is several rational that would create some opportunities there and we’re working to make ourselves present in both jurisdictions to see if those opportunities are there. A lot of it is political and it depends on who is operating those municipalities, but we want to make sure that we’re reporting that opportunities so when it does emerge that we’re ready to get in and meet with municipalities.

And Selman part of the plan Steve just made to and I think it’s clear to everybody where we’re really looking an Alabama and Missouri, so we’re casting a wider net. It's within our state footprint.

Got you. Okay, that does it for me. Thanks.

Thanks Selman.

Thanks Selman. Have a nice holiday.

[Operator Instructions] Our next question comes from Joe Zhou of Avon Capital Advisors. Please go ahead.

Hi, good morning, guys. How are you?

Great Joe. How are you?

Happy holidays.

Thank you. This is our holiday call.

Yep, holiday call. So how should we look at the 2018 Missouri general rate case? How should like a test year and timing of it and also I want to ask whether and my second question is whether this has already contemplated into your 4% to 6% EPS CAGR going forward on your long term wheel? And third question is whether should I look after that 4% to 6% linear because you have like a large retail going ahead and at least '17 or '18 there is average dilution there. So can you share your thought on this?

Yeah, there is lot of questions embodied in that. So I'll sort of give you the high point and then ask my colleague to help me out of some of the more specific questions in case I missed something, but yes, there is a timeline for the rate case and I must say in filing next year I believe in April let’s say a response and the commission if its fully adjudicated for 11 months into '18. Yes we have it built into our plan. We don’t foreshadow what the outcome of those cases will be one way or the other. What we do know is as acquiring MGE we were asked to file a contemporary -- contemporary in this rate case with MGE and Laclede Gas and the intent was more to bring those companies together. And we were required to follow that rate case over that period of time in order to retain our pipeline replacement funding that we call ISRS that is a statute we're required to file at least every three years. So the timing of that case is driven by one the ISRS requirement and two because with again the MGE transaction we agreed to file them in a contemporary enhanced way. We see that as a good thing and in terms of following them at the same time because in terms of our cost structure and what is part of MGE. What is part of Laclede Gas, it can be taken up at one time. Again we don’t foreshadow what the commission well decide or not decide. We do know that we've filed ISRS required rate cases in the past and we basically have settled those and again we file ISRS with purposes and even Steve did I miss something.

Yeah, Joe let me -- this is Steve Rasche, let me see if I can cover off a couple other your points. Our 4% to 6% long term EPS growth target is long term. When we look at over four to five years it is kind of a horizon that we traditionally look at and I think we’re very comfortable that our strategy will continue to drive growth in that range and we’ll work real hard to get above that range as we did in 2015 and as we’re clearly expecting in 2016 based upon our earnings guidance. You're right, as we think about '17 and '18 there are a number of headwinds that we'll have to deal with, but those aren’t surprising to anyone Suzanne talked about the rate case in Missouri and that would hit mid fiscal 2018, so that’s really kind of '18 going into '19 year. And then a piece of the financing for Algasco was a unit mandatory and those equity forwards will liquidate or be cashed in for shares in mid-fiscal 2017. So we’ll see a part of the change in the earnings per share calculation hit in '17 and part in '18 but none of these are surprises to us and we’ve had them in our radar screen for a long time. What I would point out on the second point with the unit mandatory is given where we’re trading today, we will issue somewhere in the neighborhood of 600,000 less shares by using the unit mandatory structure than we would have issuing like amount of equity, which is what we would have done because we wanted to make sure to have a largely balanced capital structure that’s right for the business for the long-term. So I think we've kind of put all the pieces together and I think we’re very confident in that. I would add one thing that the accelerated upgrades to our infrastructure in Missouri due add a rate base and we’re getting recovery for an increasing part of that in ISRS writer, but at the same time there is that other 30% or 33% of spend that we'll wait patiently for the rate case to come and then be put in to rate base and that will include some of the IT spending that we completed this year with the MGE integration. All that comes into play in our Missouri rate case because that at that time, the rate base is reset and we're confident that we can land all those things and continue to meet our commitments.

Great. Well thank you very much and happy holidays again.

Thanks Joe. Same to you and your family, thanks.

Thank you.

And our next question comes from Dan Fidell of U.S. Capital Advisors. Please go ahead.

Good morning.

Hello Dan. Good morning.

Good morning, Dan.

Hi just a couple of hopefully very quick questions on my side. First, just on dividend policy, just wondering if you could kind of update us, sorry if I missed this, if this was in the scrip or not, but just in terms of nice very strong dividend hike here, is that certainly the Board looks at it every year, but just wondering if the latest type was meant to set a signal for maybe a higher kind of sustained rate going forward. Just any thoughts on dividend policy from here on out?

Yes we don’t present a dividend policy. Dan as you know, there is a range that we deliver our dividends and given our strong growth over the last three years, we’ve improved our dividend payout ratio our dividend payout along the same path as we’ve improved our earnings. And so here we don’t have a policy, but we watch it closely. The Board watches it closely as well and given our performance and given what Steve Rasche just went through in terms of our future growth and our plan and our confidence and ability to deliver, we thought it was the right decision at the right time.

Yes and Dan we wanted to make sure specifically looking at the payout ratio our range is still and remains 55% to 65%. Ideally we want to be in the middle of the range, which is maybe a bit more conservative than some of our peers or some of the utility industry from a lighter standpoint, but we're investing a lot of capital back in our business to grow for the long-term as we chatted about in the past. This increase keeps us above the minimum and gets us closer to where we want to be in the middle of our range and we think it’s the right way to share some of the value that we’re creating with our shareholders while at the same time preserving capital for investing back in the business.

Okay. Very helpful, thanks. And then just Suzanne I got to ask the -- I guess obligatory question on M&A. Certainly things have been very busy here lately some pretty high premiums paid for AGL and Piedmont and some others here recently. Just any thoughts you’ve got in terms of kind of what’s going on lately with the premiums being paid and just your general thought on M&A in the sector these days as it applies to maybe any plans you guys might have in a broader way beyond just kind of the smaller potential muni pickups around you?

Yes couple of points, obviously I know Tom and John very well and so I applaud them for their transactions and obviously very happy for them. I think about it more in the sense if you go back to last decade and half or even more, there is obviously been consolidation in our industry and of late we were a part of that consolidation and that we acquired as you know two gas companies both MGE and Alagasco and we’ve done very well with those acquisitions in terms of creating shareholder value, customer value and actually employee value and our organization is a different organization, a different culture and you know that, you know us well. So consolidation to me is what's occurring over time and again I applaud them for those two. We’re very happy with the two that we’ve done. I think and it’s showing up in the numbers. We've performed well and generally if natural gas industry right now is important not just as an industry, but for our country and as a result of that, we as an industry are getting a lot of attention. And what does that mean for us going forward nothing and I said in my opening remarks, nothing about our strategy has changed. We’ll continue to look at opportunities and will keep doing the good things that we’re doing.

Great, thanks very much. Appreciate the color and happy holidays to you guys as well.

Thank you very much.

[Operator Instructions] Our next question comes from Tim Winter of Gabelli and Company. Please go ahead.

Good morning. I just wanted to follow up on the rate case question, the Missouri rate cases, will you guys be looking to file for uniform rates with the two companies or combine the two companies in the filing? And then second part is what is the ROE for each of the companies for the 12 month period that just ended the Missouri companies?

Yes for me combination question, it’s a great question and to be frank we're not there yet. We haven't made those determinations. We’ve just completed as we reported out, we’ve just completed the synergy period with the final deployment of the technology platform and that’s something we’d have to take a hard look at because we’d have to understand customer impacts and administrative components and rewrite in those kinds of things. That being said, we have already begun to look at, at a high level. So things like standardizing our line extension policies and I mentioned that in my opening remark and Steve Lindsey mentioned the same. So in terms of in a rate case, there is also those rules if you will that are built into a tariff like a line extension policy. Those kinds of things we’re looking at now because to the extent we can standardized those rules or service offerings it's easier in terms of communication to customers across the state. So more work to come on that before we get to that case, so as we learn more obviously we’ll share more with you. In terms of the ROE typically we've black box settled those in terms of the cases themselves. The only component with them is risk calculation perspective and Steve Rasche has been presenting that from the case standpoint and that calculations.

Yeah, Tim if you look underneath those black box settlements, the ROE is in the 9%.7% to 10% range depending on which point you want to go to and which rate case between MGE and liquidity and I can say with confidence that we’re achieving our authorized ROE in Missouri. In Alabama it’s a lot easier to find because as you know we’re in real time rate environment and we adjust every quarter including the rate adjustments and we achieved our 10.85% ROE in Alabama, for fiscal '15 on an absolute ROE basis, but as you know there is a cost containment mechanism, which is actually a cost sharing mechanism to the extent that we that we are able to reduce cost and we were able to do that. So we will earn an additional $3.1 million and that’s net of tax for last year in Alabama and that’s really that half of the cost savings, that we achieved down in Alabama by operating Alagasco over the last year. So in an absolute sense, the earnings from Alagasco will be higher, but that’s really a separate component from the ROE, but we’re able to achieve not only the 10.8, but we got the extra five basis points kicker for being very high on customer stats and facts Steve, I think we won an award for some of our customer stats down in Alagasco.

In Alagasco for this past year, we won the JD Power Award for business customer satisfaction and actually all three of our utilities we saw increases year-over-year in our JD Power survey. So we’re really focused on that. One other point I'll make about the Missouri Utilities even if we don’t operate on the same tariffs as Suzanne mentioned, with the implementation of CCMB as well as our work management systems, we’re able to operate these companies very similar from an efficiency perspective and so we're going to get a lot of uplift regardless of how we proceed with the rate case. And so that was part of the integration that we were building on and so this opportunity to put those systems in place we really feel like we have good upside.

Okay. Great. Thank you.

Thanks Tim.

And this concludes our question-and-answer session. I would like to turn the conference back over to the Management Team for any closing remarks.

Well thank you very much everybody for spending some time with us today. Steve Rasche and I will be available for the rest of the day for any follow-ups and again have a safe and happy Thanksgiving. Thank you all.

And thank you sir. Today’s conference has now concluded and we thank you all for attending today’s presentation. You may now disconnect your lines and have a wonderful day.