Spire Inc.

Good day and welcome to the SPIRE, Inc. Third Quarter Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one, on your touch-tone phone. To withdraw your question, please press star, then two. Please know this event is being recorded. I would now like to turn the conference over to Mr. Scott Dudley, head of investor relations. Please go ahead.

Good afternoon and welcome to SPIRE's fiscal 2022 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's a slide presentation that accompanies our webcast and you may download it either from 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. Although 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 the economic earnings, which is a non-GAAP measure used by management when evaluating our performance and results of operations. An explanation and reconciliation of this measure to its GAAP counterpart is contained in both our news release and slide presentation. On our call today is Suzanne Sutherwood, President and Chief Executive Officer, Steve Lindsey, Executive Vice President and Chief Operating Officer, and Steve Rasche, Executive Vice President and CFO. Also in the room with us is Scott Carter, President of Spire Missouri, and Adam Woodard, Vice President and Treasurer and CFO of Gas Utilities. With that, I will turn the call over to Suzanne.

Thank you, Scott, and good afternoon, everyone. As we all know, the U.S. energy industry is changing. As customer expectations and the energy technologies that serve them continue to evolve, there are differing philosophies on the future of our industry. Our philosophy is whatever path the energy transition ultimately takes, natural gas is vital to a sustainable energy future. In that spirit, our mission has guided us to build a strong, resilient natural gas company that's grounded in serving people through changing time, answer every challenge, advance every community, and enrich every life through the strength of our energy. That strength showed up in a big way over the last 10 years as we built a solid foundation and successfully executed on our strategy to grow and transform our company. We did it through acquisitions and organic growth, as well as infrastructure investment and innovation that has enabled us to continually raise the bar for how we serve our customers and communities. The next 10 years calls upon the strength of our energy to continue that growth while balancing the needs of those people and the planet. So, we are increasingly focused on environmental sustainability and elevated customer experience for millions of people and 1.7 million homes and businesses. In addition, the next 10 years requires our industry as a whole to think differently about service. As you know, I've been in the natural gas business more than 40 years, and if there's something I'm committed to above all else, it's changing the paradigm around the concept of a rate payer. Rate payer is a word and a mindset that's a relic of an industry that believed it was in the regulated utility business. We are not. We are in the business of providing essential energy to people. And while the businesses we operate work inside a regulated structure, the service we provide to people is not meant to be encumbered with broad and restrictive customer classes, like residential or commercial and industrial. We don't serve rate payers. We enrich the lives of people, people who have different needs, interests, and means. That's why we're focused on leveraging technology and innovation to create more personalized services and experiences for our customers, and to rethink and differentiate how people pay for those services. Technology has provided a good starting point for the changes we envision. We've already enhanced our billing and overall customer experience while deploying ultrasonic meters that will provide real-time information that's beneficial to both buyers and, more importantly, our customers. We'll have more to say about all of this in the months and years ahead, but I'm excited for what the future holds as we work to advance energy solutions and deliver on our promise of being energy that champions people. Because our natural gas businesses are a vital part of America's energy future, we remain squarely focused on our long-term strategic priorities and commitments as we address some near-term regulatory matters. We continue to invest significant amounts of capital to upgrade our system, drive new businesses, and advance our technology, all of which keeps us moving toward an innovative, resilient, and sustainable energy future. As we announced this morning, our operating results and capital deployment through the first three quarters of the year keep us on pace with the expectations we've set for the full year. I know you've been closely following our rate case in Missouri and the remand proceedings at BERT regarding SPIRE STL Pipeline Certificate. We continue to progress in each of these matters, as Steve Lindsay will discuss. In early June, we issued our 2021 Sustainability Report and held a conference call a few weeks later, which many of you attended. We described the significant progress we've made in measuring and reporting on our overall sustainability performance. Based on the questions we received, We know you are especially interested in our environmental sustainability, particularly reducing methane emissions, and how renewable and alternative energy can support our long-term carbon neutral commitment. So, let me take a moment to recap how we are advancing our environmental sustainability. Becoming a carbon neutral company by mid-century means that we have committed to reducing and offsetting greenhouse gas emissions from our operations to neutralize our impact on the planet we love. I'm happy to report that we're on target to reduce gas utility methane emissions 59% by 2025 and 73% by 2035, as compared to 2005. To make sure that we have very clear goals and measurements around this, we have a dedicated team leading our company-wide environmental efforts, including defining the strategy, and the roadmap. I'm pleased to note that the team has now established scope one and scope two emissions, setting a baseline on our overall carbon footprint, covering both direct and indirect emissions. To date, our efforts to reduce emissions have been focused on pipeline replacement to lower the methane emissions from gas utility operations. But we know over the longer term, it will take more than infrastructure upgrades to achieve our greenhouse gas targets. That's why we're evaluating renewable energy resources, including renewable natural gas, or RNG, as well as alternative resources like hydrogen. In considering RNG opportunities, we're exploring methane capture from a variety of sources, including landfills and animal waste from agricultural operations. However, in the near term, we are primarily focused on wastewater treatment plants where we see the most promise. As we noted previously, we supported the passage of legislative bills in Missouri to allow the recovery of RNG procurement and investment costs, and are working with the Missouri Commission on Rulemaking to implement the RNG Enabling Law. As fire marketing, we recently announced that we completed a multi-year agreement to purchase Responsibly Sourced Gas, or RSG, from Ascent Resources, one of the largest private producers of natural gas with operations located in the Utica Shell. The agreement allows buyer marketing to meet the demands from customers seeking gas that's certified for low-emission attributes and is produced in an environmentally responsible manner. Now, I'll pass the call to Steve Lindsay.

Thank you, Suzanne. Let me begin with an update on the progress we continue to make on regulatory matters in Missouri and at the FERC level regarding SPIRE STL pipelines and SPIRE storage. Starting with our Missouri rate case, as you know, we filed a new general rate case on April 1st, seeking full recovery of the updated cost of service, including deferred overhead costs, as well as higher capital investment and a reasonable rate of return. We talked many times about what we filed for, but for your reference, this information is included in the appendix to the slide presentation. On May 18th, Missouri Public Service Commission issued a procedural schedule in the case. Key upcoming dates include the filing of testimony by third parties to the case, including Missouri Public Service Commission staff, Office of Public Counsel and others, on August 31st and September 9th. Public hearings are scheduled to take place in mid-October, followed by Missouri Public Service Commission hearings right after Thanksgiving and into the first week or so of December. we believe there will be an opportunity to have substantive settlement discussions once intervener testimony is filed. As reported last quarter, we received an $8.5 million annual increase in ISTRS, effective May 7th. Following that, we filed a new ISTRS request on June 3rd, seeking $11.9 million for recovery of infrastructure upgrades spent for the January 1st through June 30th period this year. Regarding the SPIRE STL pipeline, As you know, the pipeline continues to operate under a temporary certificate while FERC considers approval of a new permanent certificate under a court-ordered remand. As part of the remand, the FERC staff issued a Draft Environmental Impact Statement, or EIS, on June 16, finding that operation of the pipeline had insignificant impacts on the environment. The final EIS is expected to be issued in October and, while FERC's timing is not certain, We expect the remand to conclude in early 2023. Part of the annual prudency review of utility gas supply costs, the staff of the Missouri Public Service Commission issued this report on May 27, finding that the decision to build SPIRA-STL pipeline was reasonable and prudent. We have filed this report with BERT in support of their ongoing certificate review. Fire storage has also recently received favorable outcomes regarding the proposed expansion and development of the facility. On May 19th, the Spire Storage Clear Creek facility received approval of its 7C application, and on June 21st was granted a notice to proceed. We continue to evaluate our development plans. Let me turn to an update on our capital expenditures program. For the first nine months of fiscal 2022, our CapEx was just over $400 million, with almost all of that invested in our gas utilities. including $196 million for pipeline replacement and nearly $90 million on new business. We also continued our investment in technology, including the further rollout of ultrasonic meters. Our five-year capital plan through 2026 remains $3.1 billion, with more than 98% to be invested in our utilities. Again, the focus is on our long-term infrastructure upgrade programs, which have good recovery mechanisms, plus new business, technology, and innovation. This investment drives annual rate-based growth 7 to 8 percent, while also supporting system reliability and our commitment to environmental sustainability. With that, I'll turn it over to Steve Rasche for financial review and update. Steve?

Steve Rasche Thanks, Steve, and good afternoon, everyone. Let me touch on a few highlights for the third quarter. We delivered consolidated net economic earnings of $4.1 million, or one cent a share, down $2.8 million, or 5 cents, from last year. Our gas utilities earned just over $4 million, down to $8 million from the prior year. As we discussed last quarter, with the last Missouri rate case, the cadence of our recovery changed, shifting a greater share to our first and second fiscal quarters. For our fiscal third quarter, this shift reduced our earnings by roughly $6 million. Quarter results also reflect higher margins from rate increases in Alabama and Missouri, offset by higher costs tied to our pipeline upgrade investments, which I'll touch on more in a second. Gas marketing posted earnings of $400,000 compared to a loss last year. This quarter, we were well positioned to capture some of the price volatility we've seen in the market over the last several months. As a reminder, last year's results were also weighed down by some costs we incurred post-winter storm period. Plot 9 summarizes other key variances for the quarter. Hitting a few of the highlights, operation and maintenance expenses, net of pension reclass, were lowered by $5 million or 4%, driven by lower employee-related costs. These cost savings were more than offset by higher depreciation and property tax expenses consistent with their utility rate-based growth. Interest expense was also higher, reflecting higher debt levels and higher short-term interest rates. and other income was also lower, reflecting losses on investments in non-qualified employee benefit plans. I would note that these are all unrealized losses and all plans are adequately funded. Turning to our outlook, we remain confident in our long-term growth prospects driven by our $3.1 billion capital spending plan over the next five years. Our per share earnings growth target remains 5% to 7%, and our fiscal 22 earnings target remains $3.75 to $3.95 per share. We anticipate growth to accelerate next year with a reasonable outcome in the Missouri rate case. Our financing guidance remains unchanged, and our capital raises for this fiscal year are now complete, reflecting the equity raised in our ATM program and the net operating company debt, including financing for URI excess gas cost in Missouri. Our liquidity remains strong, and I would note that we just closed on an expanded and extended credit facility in July, which provides us access to $1.3 billion through 2027. So, in closing, we are on track, operationally and financially, and we look forward to updating you later this year. And, as always, we appreciate the time you spent with us today and your continued interest in SPIRE. Let me turn it back over to you, Suzanne.

Thank you, Steve. In closing, we're on track with our plans for the year, including our capital investment that supports rate-based growth and drives 5% to 7% earnings for share growth over the long term. We continue to progress on a Missouri rate case and the FERC remand process to secure a new permanent certificate for SPIRE FDL pipeline. And, as always, we are thankful for our 37 million employees who make sure that people have safe and reliable natural gas every day. Thank you for your continued interest in Investments Inspire. We're now ready to take your questions. Thank you.

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. Please hold while we gather the query requests. The first question comes from Julian Dumoulin-Smith with Bank of America.

Hey, it's actually Cody Clark on for Julian. Thanks for the time.

Hey, Cody. Hey, Cody.

So first wondering if you can talk through your expectations within the guidance range for the remainder of 22. Results have been helped by gas marketing. So just wondering how we're thinking about the main drivers of that 375 to 395 into the final quarter. And also curious if the impact of the market of the non-qualified benefit plans were considered in that guidance.

Let me take a shot at that, Cody, and good afternoon. Yeah, you know, our guidance for the year's unchanged, and as you know, it's driven by the performance of the utility. And the fourth quarter, as it is in our service territories, is a loss given the lack of demand. So you can do the math, but everything we've seen squarely points to that. Spire Marketing, you know, we're in the wheelhouse of where we expected the business to be. We have clearly seen an uptick in price volatility, and we were well positioned to take advantage of some of that in the market. And if that continues, you know, that might provide a little bit of tailwinds to help us push further into the range, although at this time of the year, given the demand, it's not nearly anywhere close to the demand we see during the wintertime. That's when Spire Marketing makes most of its money. So if it moves by a penny or two, that would be a good thing. And I think we're well positioned going into the end of the year. With regard to the mark-to-market unrealized losses in our non-qualified plans, we don't plan for plus or minus in those. And clearly, and you've seen it with some of our peers on this quarter, both the fixed income and the equity markets through June 30 traded against a lot of us. And so we're all reporting losses on that line. I will tell you we've seen a rebound in both of those markets as we've gone into this quarter. But it doesn't really taint our view of how we think about the full year. And should we have any unusual moves one way or another, we'll highlight it as we go forward. But frankly, we focus our guidance on the operating results of the utilities first and then SPAR marketing second.

Understood. Thanks for that. I'm wondering if you can talk about financing here as we look out the next couple of years and wondering how you're thinking about the impact of higher interest rates and also if you have any swaps or hedges locked in at this point.

Hey Cody, it's Adam. As we've chatted, we do go out and forecast expected financing and we do have a pretty significant hedge position that was locked in at much lower markets on long-term. So, yeah, I think we'll stick to the guidance that we've provided thus far. We'll probably step it up a year next quarter as we look at an extra year, but we are planning ahead, and we do regularly hedge those debt offerings.

Got it. Thanks for that. And the average rate on those hedges?

It's, I would say they're quite a bit below where we're where the current market is. But it's a series of hedges, it'd be tough to get to specifically to an average rate. And they're across, they're across multiple planned offerings, too.

Okay, understood. Thanks for that. I'll jump back in the queue.

Thanks, Cody.

The next question comes from Rich Thunderland with JPMorgan.

Hi, good afternoon. Thanks for the time today. Starting on the RNG side, curious what the timeline is for the PSC rulemaking process, and is that more of just a technical matter in terms of laying out how the utilities will functionally take advantage of that legislation? Are there any key items to watch in that?

Yeah, Rich. Scott Carter. When you think about that, the legislation passed, the PSC typically goes through a rulemaking to kind of put more definition to it. The idea is certainly never to change the legislation. The legislation is very enabling, and we see a great opportunity out of that, rather than just make sure that the rules are set in a way. So we're working through that now with the commission staff who's putting together kind of the primary rulemaking on that. And we'll certainly participate in that process to make sure it matches up with the opportunity that we see to bring that R&D opportunity to our customers.

And just any sense on how long the process takes?

Hey, Rich, it's Adam. I think we expect that process to extend into 23, although at the same time, it's not holding us up from developing some of those opportunities that Suzanne mentioned and Scott just mentioned. as well. So, you know, more to come on that, but the finer points of the rulemaking will probably extend into 23.

Okay, got it. Very helpful, caller. Just another broad one for me. The next seeding season, the bill outlook there, could just speak a little bit to your expectations at this point and you know, maybe what your positioning is relative to supply at this point, you know, how much that could change into the fall?

Yeah, this is Scott again. I'll start it and Adam may add on to it. But, you know, what we're, we've, especially in Missouri, we had to, we stretched out the URI call. So we're still amortizing that over like a three-year time frame. And we're monitoring gas costs. The good thing is we have a significant hedge position between physical volumes in storage, as well as financial hedges in place. So that should help mitigate, and then we are watching obviously the forward movement in that market. And while it's being a little persistently high right now, the market does prove or show that it's gonna mitigate in the future. So we're looking at how we can take advantage of that. Alabama has less hedging to it, but it typically looks out 24 months, so it's looking into that forward market and pricing it accordingly. So we're seeing bill impacts, but they seem to be in the manageable range, and we're looking to take advantage of the market, make sure we're appropriately positioned in this more volatile than usual market, and making sure our hedges are working effectively in that case.

Yeah, the only thing I'd add, Rich, is we also are smoothing through and deferring some of those costs in Alabama as well, which is kind of a regular thing for them.

Once again, if you have a question, please press star then 1. The next question comes from Christopher Jeffrey with Mizuho Securities LLC.

Hi, everyone. Good afternoon. Actually, just picking up in Alabama in the south, I was kind of wondering if there's any – updates on regulatory milestones coming that we should be aware of, maybe in particular about incremental weather adjustment or combining the jurisdictions if that's still a desire.

Thanks. Yeah, Christopher, nothing, nothing specific to report yet. We'll be coming into the year end, we'll We'll be working through and laying out new budgets. Both Alabama and Gulf are forward rate-making jurisdictions, and so we'll have resets there in our forward budgets. So I think we'll speak to forward expectations more specifically on the next call.

And, Chris, the other part, I think the second part of your question as to combining the jurisdictions, that would be the ultimate goal so that we can have one consistent operating platform across the entire state. I think that gets the scale of the customers and helps us do some things, again, for both parts of the state that would be a little more consistent than perhaps we've been operating in the past.

Great, thanks. And then maybe just on storage, so it seems like you've got some more regulatory green lights. Could you just remind us what the capex attributable to that would be and, If it's in the plan right now and if it was to be put in the plan, what kind of timeline we'd be looking at?

Yeah, Chris, there's nothing in the plan right now. And you can go back to the 7C for what the total absolute maximum that could be spent if we pursued the expansion as outlined in the 7C. And as a reminder, that's a long process. You asked for everything in the kitchen sink. because you only get that consideration and approval one time. But we've got to step back. There's nothing in the plan because we're still in the process of evaluating what our go-forward plan and development is going to be. And once we've made that call, we'll make sure to update the market. I would expect to be a good update in our year-end earnings call with this calendar year.

Great. Thank you.

Once again, if you wish to ask a question, please press star, then 1. Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to Mr. Scott Dudley for any closing remarks.

Thank you all for joining us. I know this is an extremely busy earnings day and week. We will be here throughout the rest of the day for any follow-ups. Thanks again for your interest. Have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.