Spire Inc Q3 FY2023 Earnings Call

Good morning. Welcome to Spire’s Fiscal 2023 Third Quarter Earnings Call. We issued an earnings news release this morning, and you may access it on our website at spireenergy.com under Newsroom. There is a slide presentation that accompanies our webcast and you may download it from either the webcast site or from our website under Investors and then Events and Presentations. Before we begin, let me cover our safe harbor statement and use of non-GAAP earnings measures. Today’s call, including responses to questions, may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Though our forward-looking statements are based on reasonable assumptions, there are various uncertainties and risk factors that may cause future performance or results to be different than those anticipated. These risks and uncertainties are outlined in our quarterly and annual filings with the SEC. In our comments, we will be discussing net economic earnings and contribution margin, which are both non-GAAP measures used by management in evaluating our performance and results of operations. Explanations and reconciliations of these measures to their GAAP counterparts are contained in both our news release and the slide presentation. On the call today is Suzanne Sitherwood, President and CEO; Steve Lindsey, Executive Vice President and Chief Operating Officer; and Steve Rasche, Executive Vice President and CFO. Also in the room today is Adam Woodard, Vice President and Treasurer and CFO of our Gas Utilities. With that, I’ll turn it over to Suzanne.

Thank you, Scott, and good morning, everyone. Today, I’d like to provide an update on Spire’s quarterly performance, recent developments, and outlook. Let me start with third quarter results. We reported a loss of $0.42 per share for the quarter, which is well below last year’s results and our expectations. The results this quarter reflect several factors, including lower demand, the impact of milder weather this year, and high costs in the current inflationary environment. Steve and Steve will provide more insights regarding our results across all our businesses, both operationally and financially. It is important to note that our Spire employees are committed to their work every day, serving our 1.7 million homes and businesses. Their dedication highlights our ongoing efforts to achieve more efficient and sustainable regulatory recovery, while ensuring we deliver safe, cost-effective, and reliable energy for our customers and communities. Furthermore, we are well-positioned for a robust rebound in 2024 as interest rates stabilize, cost management progresses, and we restore usage-related margin. We continue to execute our midstream strategy through the expansion and acquisition of storage facilities and pipeline systems. Our approach focuses on highly contracted utility supply-focused assets that yield steady and consistent earnings, similar to our Gas Utilities. These businesses also present long-term growth opportunities to meet the rising demand for natural gas. We believe our future is promising. Spire is a strong, well-positioned company with a proven growth strategy. We are confident in this strategy and in the capability of our experienced management team and employees to successfully implement our plan well into the future. We also have a knowledgeable and experienced Board of Directors to lead us. Last week, we announced the election of two additional directors to our Board, increasing its size to 11. Adding these executives will enhance the strong oversight and governance that Spire has maintained. Denny brings extensive experience in the financial industry, having held various roles at Edward Jones, including Chief Operating Officer and CIO. He retired in 2020 after a 38-year career in the energy sector, including two decades at Dominion Energy, where he most recently served as President and CEO of Dominion’s Power Generation. Now, I’ll pass the call to Steve Lindsey.

Thank you, Suzanne. Let me start with an update on our Gas Utilities. First and foremost, we continue to deliver to our customers, providing safe and reliable energy with excellent service. Our employees stay focused on our key operating metrics targets while also diligently managing costs. The financial results for our Gas Utilities in the quarter, a loss of $12.3 million, reflect the benefits from new rates in both Missouri and Alabama, albeit during a seasonally lower volume period that was more than offset by mild weather and other items that Steven Rasche will cover. Across our service areas, the weather was 18% warmer than normal. This drove lower usage that was only partially offset by weather mitigation mechanisms in Alabama. In addition, our interest expense is up significantly year-over-year due to a more than 400 basis point increase in short-term interest rates compared to last year. Our gas cost balances continue to decline, and we expect to recover our pre-2023 deferrals by the end of the calendar year. This, combined with lower commodity costs, positions us well heading into next winter. We continue to pursue timely recovery of pipeline upgrade investments in Missouri via ISRS. As noted last quarter, Spire Missouri was granted $7.7 million of new ISRS revenues effective May 6 of 2023. Spire Missouri filed on June 20 for an additional $14.2 million in interest, covering infrastructure upgrade investments for the March to August time period. We continue to be very focused on controlling our O&M costs to claw back some of our margin shortfall this year. Turning to our Midstream segment, I’m pleased to note that the expansion of Spire Storage West, our facility in Southwest Wyoming, remains on track. The total project spend is $195 million to expand capacity from 16 Bcf to a total of 39 Bcf over this season and next. Given the current pacing of construction activity, the timing of our Midstream investment is shifting, with $20 million moving out of fiscal 2023 and into fiscal 2024. Integration of Spire Salt Plains, a 10 Bcf storage facility in Northern Oklahoma that we acquired in April for $37 million, is proceeding according to plan. In late May, we announced the planned acquisition of MoGas and Omega Pipeline Systems for $175 million. As a reminder, MoGas consists of a 263-mile interstate natural gas pipeline that serves Spire Missouri customers via interconnect with Spire pipeline. Omega is a 75-mile distribution system effectively in LDC that serves Fort Leonard Wood in South Central Missouri under a long-term contract. The acquisition is expected to close around the end of the calendar year. One final comment on Midstream: Our Spire STL pipeline continues to prove its significant value with strong and reliable operations. I’m pleased to note the FERC certificate for our STL pipeline is now permanent, with no further challenges or appeals being allowed to be brought. Turning to our capital investment: For the first three quarters of fiscal 2023, Spire’s total CapEx was $483 million, with more than 90% invested in our Gas Utilities. Year-over-year utility spend increased more than 12%, reflecting over $300 million for upgrading our distribution pipeline infrastructure and connecting more homes and businesses to safe, reliable, and affordable natural gas service. Over the next 10 years, our expected total spend remains $7 billion, with more than 80% of our utility spend recovered with minimal lag, reflected in earnings through new business investment. We’ll continue our focus on infrastructure upgrades to support system safety and reliability while reducing methane emissions. We also maintain robust levels of investment in customer additions as well as innovation and technology, including advanced meters, to enhance safety, customer service, and experience. In fact, we’ve upgraded 440,000 meters across our footprint since we began the program three years ago. Given our pace of construction so far, we expect our Gas Utility spend to increase by $20 million this year, essentially filling the gap for the $20 million of Midstream spend that’s going to be shifted into fiscal 2024 that I mentioned earlier. As a result, our capital investment target for fiscal 2023 remains $700 million. With that, I’ll turn it over to Steve Rasche for a financial review and update.

Thanks, Steve, and good morning, everyone. Let’s review a few key points from our fiscal third quarter. We reported a consolidated loss on a net economic earnings basis of just under $19 million, or $0.42 a share, compared to earnings of $4 million or $0.01 last year. While an earnings delta of $23 million is much bigger than we would like, it’s important to note that roughly $10 million of that difference relates to regulatory adjustments in Missouri and Alabama that we’ve discussed in previous quarters. Taking a quick look at the segments, Gas Utilities lost $12 million compared to earnings of $4 million in the prior year, or a decline of roughly $6 million after regulatory adjustments. That decline reflects new rates, offset by the impacts of mild weather and higher costs. Both Gas Marketing and our Midstream businesses posted lower results, reflecting less favorable market conditions. We continue to see higher interest expense in corporate costs. Looking a bit deeper into our results, starting with revenues and margins and focusing on the net brands after adjustment column, revenues were down almost 7% due to lower Spire marketing and commodity costs, and you can see a similar reduction in natural gas costs. Contribution margins were also lower by $5 million, with Gas Utility margins representing half of that shortfall. In Missouri, margins were up by $4.1 million as higher rates were only partially offset by lower usage. Now these margins were below last year by $6.6 million, with a few factors contributing to the shortfall. First, lower year-over-year cost control measure or CCM benefit as Spire Alabama. Note that this is due in large part to the timing of the prior-year recognition of the benefit booked in the third quarter and trued up in last year’s fourth quarter. So even though we got the right cadence of the CCM benefit by the end of last year, we had some noise between Q3 and Q4. It has no impact on our 2023 results, but it adversely impacts the comparison to the prior year this quarter by nearly $8 million. So excluding this prior-year timing adjustment, Southeast margins were higher over last year by $1 million, resulting from higher rates in effect this year. However, those rate increases were more than offset by milder weather this quarter, which resulted in lower residential usage for Spire Gulf and lower margins due to ineffective weather mitigation in Spire Alabama. Turning to our other businesses, Gas Marketing margins were lower by $3.2 million, reflecting market conditions as well as higher demand charges and storage costs as we begin positioning for the upcoming season. Midstream margins were up slightly on an NEE basis after removing the results of Salt Plains, our newly acquired storage facility that will be fully included in net economic earnings in fiscal year 24. Looking at other variances on Slide 9 and focusing again on the net variance column, Gas Utility O&M expenses were up $8 million, with roughly $6 million of that variance due to Missouri regulatory recovery of overhead cost. Recall that these costs were deferred in the prior year but are expensed this year. The remaining $2 million increase in O&M was driven by higher third-party expenses, offset by lower employee-related costs and bad debt expense. As we continue to exercise expense control, Gas Utility O&M costs and bad debts on Missouri overheads rose roughly 2.9% from last year. Other O&M expenses are trending as we would expect in the underlying businesses. Interest expense remains elevated, up $17 million from last year, driven by higher long-term debt balances as well as higher short-term interest rates. Other income was a turnaround from last year, up $10 million driven by higher investment earnings and cost credits. Finally, lower income tax expense tied to lower pretax income and an effective tax rate of 18.2% year-to-date. I would note that we expect that rate to decline in Q4 due to the recognition of certain tax benefits. Cash flow for the year remained strong, with EBITDA up 15%, and our short-term debt at the Gas Utilities down this quarter by $49 million, driven by recoveries of gas costs and repayment of the Spire Missouri term loan as planned. Nonutility balances increased by $39 million, reflecting principally the acquisition of Salt Plains and expenditures around the expansion of Spire Storage West. Turning to our outlook, we remain confident in our long-term net economic earnings per share growth target range of 5% to 7%, as well as our rate base growth target of 7% to 8%. As you know, current rate design concentrates our Gas Utility recoveries in the winter heating season. Margins for the winter were below our expectations due to lower usage and ineffective weather mitigation. We saw that trend continue in the month of April. So even with continued cost control for the balance of this year, we don’t anticipate that we can make up all of that margin shortfall. As a result, we are lowering our Gas Utility segment earnings range by $5 million and reducing our 2023 net economic earnings per share target range by $0.05 to $4.15 to $4.25 per share. Rest assured, we remain well-positioned for a strong rebound in fiscal year 2024 as we regain demand and continue to reduce our deferred gas cost balances while controlling costs. Turning quickly to our financing forecast, we’ve rolled in our forward sale of common equity, which totals roughly $150 million at quarter-end. This position satisfies our equity needs for the rest of the calendar year, and the positions will settle no later than this December. As you can see here, our overall financing requirements drop off as we move into fiscal year 2024 and 2025. So in summary, while we’re lowering our expectations a bit this year, we’ll track for a rebound in 2024 and beyond. Let me turn it back over to you, Suzanne.

Thank you, Steve. In closing, we are well positioned to continue growing and delivering stronger overall performance for our customers, communities, and investors. We’re now ready to take your questions.

Today's first question comes from Richard Sunderland with JPMorgan.

Can you hear me? Starting with the guidance revision and just a couple of mechanical questions here. See, first and foremost, the $0.05 lower on the range, but I think on Gas Utility net economic earnings, it’s more of a $0.09 delta on a segment basis. Curious if there are other offsets within there that you’re seeing or if this is in consideration of kind of where you are in the calendar? And then similarly, is that midpoint original guidance still the base for the 5% to 7% earnings CAGR?

Rich, this is Steve. Good questions. The last question is, yes, that is still the base for the long-term earnings guidance target. On the revision of guidance, you’re spot on, we continue to exercise all the controls we can in the time we have left this year. You know that we earn our margins and recovery during the winter and early spring, and so that ship has largely sailed. So we do expect to see our O&M costs continue to stay in a narrow range. And it shouldn’t be lost on anyone that if you look at the quarterly results, after you take out the noise from regulatory adjustments, that we’re bending that curve down 2.9% year-over-year versus a lot higher percentage increase in earlier quarters this year.

Understood. That's very helpful information. Regarding the results, is the weather impact due to a similar degree day calculation issue you've mentioned previously in Alabama? I'm curious about the steps you plan to take to address this. Do you anticipate having discussions about this soon or have any other thoughts on reducing some of the volatility in the results?

Rich, it’s Adam. Yes, it is a similar dynamic there, and we do intend to address that or continue to address that with the team and with the regulators in Alabama.

Got it. Is that something that could be addressed in advance of ‘24? Or is this a longer-term process?

It is. We do go through an annual budgeting process that will be a topic of discussion.

The next question comes from David Arcaro with Morgan Stanley.

I wanted to ask if the original 2023 Gas Utility earnings power is a reasonable baseline for future growth, assuming normal weather returns. Are there other ongoing challenges that need to be addressed, such as higher-than-expected inflation or persistent interest costs that could pose additional difficulties?

Yes. David, this is Steve. It’s a great question. I think at this juncture, the answer is yes because all of the mechanisms and the initiatives that we referenced in our prepared remarks really do get us back. We will clearly, as we get into the year and we get to typically our earnings call in November, base everything, including reintroducing our expectations for all of our business lines going forward. I would readily admit, interest continues to be a headwind, and rates are going to be a little bit higher for a little bit longer, your bank and most of the folks say that, and we’ll have to factor that in, and then what we can do on the other side to offset that headwind.

Got it. Okay. That’s helpful. And I was wondering if you could touch on the MoGas and Omega acquisition. Could you run through the financing plans for making that acquisition? What level of accretion you might be expecting from it? And then, would you expect there to be growth investments on the back end going forward?

Sure, David. It's Adam. Yes, upon announcement, we indicated that we would aim for balanced financing and have indeed accelerated some of our equity plans for the year. As a result, we have effectively funded the equity portion of the transaction before closing. Therefore, we anticipate that it will be accretive. However, we haven't specified exactly how much accretion to expect. We do foresee long-term growth from this particular asset, but it's a bit early to make definitive statements as we have not yet closed the transaction.

And the one piece I would add is in addition to the pipeline, as most people think about it, it also comes with Omega, which is an LDC-like opportunity, which is at the southern end, and that’s on a long-term contract. So we look for opportunities to continue to grow that piece of the business as well.

Okay. Got it. Makes sense. Just last quick question. I saw that equity needs looked like it ticked up slightly for 2024. Just wondering, what was driving that?

Yes. In the quarter, we progressed by increasing our equity due to the acquisition and largely exhausted our ATM authorization for the year. We do not expect to return to the market until early next year. This was insufficient to fully meet our plans for 2023, so the additional amount in 2024 is simply carrying over some of that remainder into the next year.

Next question comes from Julien Dumoulin-Smith with Bank of America.

It’s Julien here. Can you hear me? Sorry, I apologize. I don’t know what that was, but we got that resolved here. But with that said, let me just follow up here on a couple of different details here. First off, high level, just a further interest in gas pipelines or LDC here at this point, obviously watching the MoGas update here in the last couple of months. Just want to understand how you think strategically about the direction of the company. Let me start there. I got a few follow-ups.

Julien, this is Suzanne. Thank you for the question. As you’re aware, because you and I have worked together since my arrival pretty much since 2011, 2012, I was brought here to grow the company and grow a natural gas company. Predominantly, we’ve grown, as you very well know, through acquisitions of utility companies, gas utility companies, and the synergies and the efficiencies we get from finding these companies and deploying technology and improving their operations. But also, as a natural gas company, there are some strategic bites at times in storage facilities that make sense to us, and it’s our job to tell that story to you, of course. So we always stand ready, and we’re always steady in the market. As you know, we have a very disciplined approach, and we only do that in terms of acquiring if we think it makes sense for the company, for ourselves, the company we’re acquiring, and, of course, our shareholders. So again, as you know, we take a disciplined approach on these kinds of things. Yes, we’re in the natural gas business; we’re predominantly a utility company, a gas utility company, and I think that’s what you’ll see in the years to come.

Absolutely. Just wanted to clarify that for the update. I mean, actually, since you mentioned, I mean, as we’ve known each other for over a dozen years here and through your leadership, have you guys come to any further resolution or any sense of timeline on succession announcements and reshuffling?

Yes. Yes, thanks for that as well. So as you know, I’m on the Board here at Spire. One of the primary responsibilities of the Board of Directors is the CEO position and governance and other environments. So yes, it has taken a very methodical approach in terms of the search process. As we’ve stated, there are internal candidates as well as external candidates, and the Board just wants to make sure that they’re managing their process in the most effective manner. And as you know, I’m retiring at the end of the year. So I suspect there will be some maybe for the year. Sure.

Got it. Excellent. Thank you again, Suzanne, for everything over the years. I would like to follow up on a couple of nuances. You mentioned interest expense headwinds for 2024 and discussed a potential rebound. Can you elaborate on that? I understand it may be a moving target, but could you share what you're currently seeing regarding that headwind? Additionally, could you discuss your expectations for FFO to debt and where you anticipate being by the end of 2024?

Julien, this is Steve. Yes, if you think about the interest rates, it’s really the tale of two pieces. Your bank and everybody else, we make our predictions, and it looks like it’d be higher for longer. We'll see how that goes. That’s the uncertainty that we’ll continue to manage. What we can manage is the amounts that we’re financing. As we outlined in the deck, we are seeing great traction in paying down our deferred gas costs and bringing our short-term debt into line with our expectations. So we’ll continue to manage that component of it, which you would expect us to, and then we’ll react to the market as the interest rate environment and outlook clarifies a little bit. Adam, on the FFO, I’ll let you talk.

Yes, Julien, we are still on track to meet our target by the end of ‘24. We have made good progress coming out of our deferred position. Cash flow has been strong. We also need to reduce the denominator in that metric, which will happen with further recovery. We expect to see this continue as we approach the end of ‘24, when we anticipate achieving our target.

Got it. And that target being 15% to 16%, right, Adam?

That’s right.

The next question comes from Christopher Jeffrey with Mizuho.

Just wanted to touch on the lower CCM benefit. And it looks like that might be trued up in Q4 a little bit. Just kind of wondering, is that something that we should expect, going forward, as far as potential timing consideration through the quarters?

Yes. Chris, this is Steve. It’s a great question. All of the discussion on CCM with ‘22, like we’re comparing year-over-year. What we saw, and it was well-documented in all of our disclosures last year, is that after discussions with the Alabama Public Service Commission and looking at the customer bills, we all agreed to spread the CCM benefit, which we used to recover in a very short period of time over a number of years. I believe it was over five years. Originally, it was shorter than that. So that agreement, which was the right answer for our customers, has resulted in us changing the recognition of the CCM benefit in the fourth quarter of last year. You have some timing discrepancies when you compare year-over-year. It has no bearing whatsoever on the CCM benefit, which we like, and it really does help us align with our customers in terms of keeping our costs under control. It’s just going to be one of those timing comparisons year-over-year this quarter. Next quarter, you’ll see it reverse in the other direction, and we’ll make sure to highlight it.

Great. And then maybe just an update on your guys’ thinking about additional RNG projects to the one you have.

Yes. No, we continue to work on projects and have an interconnect working in or coming online or expected to come online early next year in Eastern Missouri and have a project that we’re close to talking more about on the west side of Missouri here in the next few months. We continue to examine and develop projects specifically in Missouri and continue to do that under the regulatory umbrella.

This concludes our question-and-answer session. I would now like to turn the call back over to management for closing remarks.

Thank you all once again for joining us. We will be around throughout the day for any follow-ups. We look forward to catching up with you then. Great day. Goodbye.

The conference has now concluded. Thank you for your participation. You may now disconnect.