Spire Inc.

Good day, and welcome to the SPIRE Fiscal 2024 Second Quarter Earnings 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 a touch-tone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Megan McPhail, Managing Director of Investor Relations. Please go ahead.

Good morning and welcome to SPIRE's fiscal 2024 second 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. You may download it either from the webcast site or from our website at 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 net economic earnings and contribution margin, which are both non-GAAP measures used by management when 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 slide presentation. On the call today is Steve Lindsay, President and CEO Scott Doyle, Executive Vice President and COO, and Steve Rasche, Executive Vice President and CFO. Also in the room today is Adam Woodard, Vice President and Treasurer. With that, I will turn the call over to Steve Lindsay. Steve?

Thanks, Megan, and good morning, everyone. Thank you for joining us today to review our second quarter performance and an update on recent developments and outlook. Let's start with our quarterly results. This morning, we reported fiscal second quarter net economic earnings of $3.45 per share compared to NEE of $3.70 per share a year ago. The year-over-year decrease was driven by a few key items, including lower usage in Missouri due to significantly warmer than normal weather and higher interest expense. Scott and Steve will discuss our results in more detail in a moment. Our results reflect our dedication and commitment to serve our customers and communities safe and reliable energy. And we continue to execute on our strategy to grow our businesses, invest in infrastructure, and drive continuous improvement to deliver value over the long term. Having a diverse portfolio of natural gas businesses enhances our ability to provide value. Further, consistent with our board of directors' focus on strong oversight and governance, last month we announced the election of Sherri Cook as the newest addition to our board. Her extensive business experience and leadership in human resources along with our background in economics and finance, will be vital as we execute our strategy. Her presence and involvement throughout our Alabama service territory further ensures we remain connected to our communities we serve, and I look forward to working closely with her in the future. Before I wrap up, I would like to highlight the important role that natural gas plays and will continue to play as part of America's sustainable energy future. Approximately 200 million Americans and businesses use natural gas because it's affordable, reliable, and safe. In fact, according to the American Gas Association, households that use natural gas for heating, cooking, and clothes drying save over $1,100 on average per year compared to homes using electricity. Together, natural gas utilities across the country, including Aspire, continue to invest billions of dollars of capital each year to enhance the natural gas distribution and transmission systems. As an industry, we can be proud of the important work we've done in modernizing infrastructure and deploying technology that has led to increased safety, efficiency, and reliability for natural gas customers. To sum up, we are well positioned for success in the second half of fiscal year 24 and over the long term as we execute on our robust capital investment plan to support the growth and performance of our utilities and our gas-related businesses. As far as a strong and well-positioned company with a proven growth strategy, We have confidence in that strategy and in the ability of our experience management team and employees to successfully lead us into the future. With that, I'll now turn the call over to you, Scott. Thank you, Steve, and good morning, everyone. I'd like to begin by thanking our employees for their hard work and continued focus maintaining safe and reliable natural gas service to our customers through the winter heating season. I am extremely grateful and proud to be a part of the Spire team. turning now to an update on the gas utility segment. Our commitment to strong operations and continued modernization of our system was visible when we were well-positioned to deliver safe, reliable, and affordable natural gas energy for our customers and communities who depend on this resource as a critical energy need. We remain focused on driving efficiencies throughout the organization, including streamlining systems and processes, and maintaining an unwavering commitment to operational excellence. On the regulatory front in Missouri, we were pleased with the constructive outcome in our recent filing for an updated ISRIS, our semi-annual capital recovery infrastructure rider. Last week, the Missouri Public Service Commission approved $16.8 million in new revenues for recovery of system upgrade investments made September 2023 through February 2024. bringing our annualized ISRIS revenue to $36.9 million. Rates are expected to be effective later this month. In Alabama, the rates that were effective January 1st were the result of working alongside the Public Service Commission staff during our annual rate-setting process. As you may recall, our rates in Alabama are set using a forecasted budget. Our second quarter results reflect the benefits of these constructive regulatory mechanisms we have in each state as earnings benefited from new rates in Alabama and previously approved Missouri ISRIS revenues. During the quarter, we experienced warm temperatures across all of our service territories. In Alabama, temperatures were approximately 10% warmer than normal. I'm glad to say as a result of our efforts with the Alabama PSE to incorporate more accurate customer usage patterns into rates, the weather normalization mechanism in Alabama continues to be effective. However, in our Missouri service territory, severe fluctuations in temperatures throughout the quarter resulted in the weather normalization adjustment rider, or WNAR, being less effective than last year. and the lost weather-related margins in our residential customer class during the quarter were only partially mitigated. Overall, weather for the quarter was 15% warmer than normal. However, combined, the months of February and March were nearly 32% warmer than normal. During these months, we saw periods of extremely warm days followed by periods of more normal temperatures. These significant fluctuations in weather can cause usage to be lower than what the degree days would imply. We look forward to working with the Missouri PSC staff to evaluate how to better recover lost weather related margin in the future. As a reminder, the WNAR does not apply to the less weather sensitive commercial, industrial, and transportation customer classes. Slides 15 and 16 in our appendix include further information on weather and customer usage for the quarter and year to date. During the quarter, interest costs increased and O&M costs were also slightly higher than last year's second quarter, increasing $2.3 million, or approximately 2%. However, year to date, our O&M expenses remain below last year. Let me assure you, we are laser-focused on navigating these headwinds. On the cost side, we continue to control our O&M expenses. We believe that going forward, controlling O&M increases will enable our utility financial performance to further improve fiscal 2024. We are working to improve efficiencies and reduce costs across the organization. We are targeting elements of our cost structure that can be reduced based on enhancements in technology that have occurred or will occur in the coming years. In addition, we are working to ensure our shared services are efficiently aligned and supportive of our capital investment programs. Moving to slide five and an update on our capital investment plan. We continue to invest significant amounts of capital focused on modernizing our gas utilities. Fiscal year to date, our capex totaled $409 million, which was primarily in our gas utility. Year over year, our gas utility CapEx increased 7% to $311 million, with an emphasis on upgrading distribution infrastructure and connecting more homes and businesses. We continue to install advanced meters for residential customers across our service territory. In fiscal year to date, we have installed over 120,000 advanced meters, bringing the total number of customers benefiting from this technology to 660,000. Investment in our midstream segment totaled $98 million fiscal year to date, largely for the expansion of Spire Storage West. Looking ahead, the expected fiscal year 24 capital investment at the gas utility segment remains unchanged. However, we are increasing our total fiscal year 24 capital investment target by $35 million to $800 million in support of our storage expansion project. I will now hand the call over to Steve Rasche to discuss this project in more detail and provide a financial update.

Thanks, Scott, and good morning, everyone. Let's start with our midstream segment. As you know, we closed the acquisition of MoGas and Omega in January of this year, and we are pleased with both our progress in integration as well as the solid performance of the system this winter. We've also updated our expansion plan at Spire Storage West. supporting our targeted completion in fiscal year 25. Here are a few key points. During the quarter, we completed our open season and re-contracting activities for the capacity that is coming online in fiscal years 24 and 25. Consistent with the higher demand we've been seeing in the western U.S., we were able to lock in rates well above our initial estimates and for contract terms consistent with the current market of three to five years. We also increased our total targeted investment by $55 million to $250 million, with $35 million of that investment falling in fiscal year 24. This increase is driven by expanded scope of the project, including enhancing the power supply, line heating, and maintenance capabilities, higher drilling costs for the injection and withdrawal wells, and increased construction costs, especially for electrical, equipment, and labor, reflecting the high demand across the energy sector and the market overall. Combining these factors, the returns on the project have improved from our original target. To put this in perspective, the total impact of the Spire Storage West expansion and a full year of MOGAS is expected to increase our midstream earnings by $10 to $12 million in fiscal year 25. Now turning to our results. Earlier today we reported fiscal second quarter net economic earnings of $197 million, down $2.6 million from last year. Looking at the segments, our gas utility had earnings of $188 million, an increase of $4 million from last year. As Scott just touched on, higher rates and effective weather mitigation in Alabama were offset in large part by lower usage and only partial mitigation in Missouri. Both gas marketing and midstream had very tough comps from the prior year, and as we guided earlier, we did not expect those highly favorable market conditions to recur this year. We did benefit from the cold snap in January, and both segments were well positioned to capture value. For marketing, that value was reflected in the second quarter results. Midstream also captured value, and we anticipate seeing that showing up in the back half of this year. And lastly, lower corporate costs were offset by higher interest expense. On a per share basis, we reported net economic earnings of $3.45 per share compared to $3.70 last year, with most of the decline attributed to the impact of higher share count this year as a result of our forward sale that settled in December and the equity unit conversion in March. Slide eight provides detail on key variances, hitting a couple of the highlights As I just mentioned, gas utility margins were higher overall, and the volumetric component net of weather mitigation was $10.3 million higher in Alabama and $8.6 million lower in Missouri. Gas marketing margins and net of fair value adjustments were lower, as I just touched on, and midstream was higher as a result of the addition of MOGAS and salt plains. Looking at operations and maintenance expenses, Gas utility expenses increased by $2.3 million, as lower operational costs and third-party spend were offset by higher employee-related costs. I would also echo the point that for the first half of our fiscal year, our utility O&M costs are actually down $900,000 compared to last year. Marketing and midstream costs moved up, consistent with the underlying business drivers. An interest expense was higher by $5 million, driven mostly by higher long-term and short-term interest rates this quarter. Turning to our outlook, we remain confident in our long-term net economic earnings per share growth target of 5% to 7%, starting from the midpoint of our fiscal year 24 guidance range. Our growth is driven by our utility rate-based investments, a key component of our 10-year CapEx target of $7.3 billion. Despite the headwinds faced in the first half of the year, we are reaffirming our fiscal year 24 net economic earnings range of $4.25 to $4.45 per share. We are updating our business segment targets to reflect our first half results and expectations for the rest of the year. We are lowering our gas utility range by $10 million as we expect to offset some of the headwinds we discussed earlier by cost management. We've raised the range for gas marketing by $5 million on stronger than expected earnings in the first half of the year. We've also increased the range for midstream by $4 million to reflect the pull-through of new storage rates and the value created during the winter. Corporate costs move up by $2 million to reflect higher interest expense. Moving to slide 10, our three-year financing plan is unchanged from last quarter, and this year's financing needs are now largely complete. On the equity side, we completed both the forward sales settlement and the equity units conversion, and our ATM program placed $12 million in forward settlements this quarter. This leaves very modest equity needs through 2026. And with the $350 million note placement by Spire, Inc., our long-term debt needs are also largely satisfied. And the remaining long-term debt financing in our plan is largely tied to future refinancing activity. I would also note that we funded a short-term $200 million loan in January, and this loan will be fully repaid in early May. And we continue to target FFO debt at 15% to 16% on a consolidated basis. So in summary, We are well positioned to continue growing and delivering strong overall performance for our customers, communities, and investors. Thank you for your continued interest in SPIRE, and we look forward to seeing many of you at the HEA Financial Forum later this month. Operator, we're now ready to take questions.

We will now begin the question and answer session. To ask a question, you may press star and then one on your touchtone phone. To draw your question, please press star and then two. Please note this event is being recorded. The first question comes from Richard Sunderland with JP Morgan. Please go ahead.

Hi, good morning. Can you hear me? Yeah, we can. All right, thank you for the time today. Couple ones on the weather to start. I guess looking across the business and given these weather headwinds, where are you trending in the guidance range off these segment revisions? I think on my dumb math, it's maybe a 1% decline old to new. So is it fair that that's putting you in the bottom half of the range? And then I'm also curious kind of where FFO to that stands currently given this weather headwind as well. Yeah, Rich, let me start on that.

Yeah, you know, we have a range, and I can't argue with the logic that you put forward. If you look at the individual business units, it would show a little bit of degradation in total and its weather in the utility and a little bit of interest rates at the corporate end. What I would say is that, you know, as you think about this half year and then play it forward as we think about next year, you know, The beauty of the weather headwinds, if there's any bright sides of that cloud that we've dealt with, is that we would expect to get back to normalize weather and mitigation next year, which is essentially what we had in Missouri last year. If you look at the material, and we did in the appendix to the presentation provide a lot more granular information on the weather, it would point to a rebound of 18 cent range. So if you think about how to model the rest of this year, but then what does that look like as you rebate this year going forward? We're very confident that we're still on track.

Yeah, Rich, and I think that's a good question on FFO to debt, connecting that to our weather pull-through. As you know, given the volumes that we count on for cash flow, that that has those lower volumes have negatively impacted that cash flow growth trajectory. So we do, while we still see very steady progress to that target range, we do now expect that to happen after year end 24. On the bright side, we do see deferred gas costs almost completely recovered here at the end of the quarter and hope to be completely recovered here shortly.

Got it. Got it. Thank you. Very helpful color all around. And then I think you unpacked this in the script but did want to revisit in terms of how this weather impact is showing up. You were mentioning extreme fluctuations and then there's a greater usage impact relative to what the degree days are. Is that effectively the difference between your 2Q results now and 1Q? I'm just trying to think about where the degree days were light on both sides, but the weather impact in your results is actually really showing up this quarter. If you could help parse kind of 2Q versus 1Q, that would be helpful.

Hey, Richard, this is Scott Doyle. Yeah, hey, maybe I can help with that a little bit. Maybe just start with the response and tie back to the quarter last year. This quarter, we were 2% warmer than the quarter last year. And so if you just look at last year, we had good weather mitigation with the same mechanism in place. When you look at this quarter, really February, March were much warmer than normal, and it was variable weather, so much so that there was no real consistent weather pattern across the those two months. What we saw as we've been analyzing the data is that the customer usage is off significantly during those months and are not correlated to what the HDDs would show for that same time period. So on balance, what that tells us is there's some work we need to do relative to that mechanism to get better correlation. That's work we have to do with the PSE staff. The timing of that will be in a rate case is the form which that takes place, but dialogue and certainly take place in advance of that as well. So look for that, for us to dig more deeply into that and work closely with staff as we work to enhance and improve that mechanism.

Understood, understood. And then just one last one, if I could. I know you reiterated the growth outlook here. We've also had, I guess, a couple quarters now with some interest rate commentary and rate impacts and results. Just curious what you're assuming now on a four basis for interest rates. You've given kind of the latest market backdrop and then your relative to your plan outlook here.

Yeah, no, Rich, great question. We have continued to take a higher for longer tack. Obviously, the interest rate forecasts are moving as well. I think a lot of the the extra interest expense we're seeing is more balance-based rather than interest rate-based. So, again, going back to the kind of the volumetric pull-through, that's probably having more of a kind of a stubbornly long impact there than our actual interest rate forecast.

Got it. Got it. Well, I'll leave it there. Thank you for the time today. Thanks, Rich.

The next question comes from Char Parisa with Guggenheim.

Please go ahead. Hi, guys. It's Jameson Ward on for Char. How are you?

Hey, Jameson.

Hey. So, Rich had some good questions there, a couple of the ones I had, but I did have one to just delve a little bit more into on the weather. You mentioned, so rate case will be the proper avenue to go about making adjustments to the mechanism. And that there's a lack of correlation in Missouri between degree days and the amount of mitigation. Just sort of wondering, has the cause of that been identified? Is it something that needs to be studied? Just trying to get a sense of where we're at. Is there a solution in mind and you're just waiting for the next rate case to be filed to kind of tack it on to that? Or is it something that requires maybe a bit more modeling to figure out why they're not connecting the way that you would expect them to and the way they are working properly in other jurisdictions that you have? Just kind of how we should think about sort of the work to be done there in order to get them to match up. And then the follow-up would just be timing of

know when we might see I guess in this case asking about a case but really the question is when we might see a new mechanism take effect hey Jamison Scott Doyle again thank you for your question I think you know the simple answer your question is is this something that does require a little more study the and more modeling just to see if there's an opportunity to correlate this particular weather pattern just recall this weather pattern was unique in its that it was not a normal weather pattern. It doesn't follow the norms, perhaps, within the mechanism. And so we just need to take a deeper dive look at that alongside the PSC staff as we do that. In answer to your question about the timing of the rate case, as a result of us using the ISRIS mechanism, we have a must-file date by May of 2026, but expect our rate case to be filed sooner than that as we work to reduce regulatory lag associated with our significant capital investment program that we have underway right now.

Perfect. Very clear. Really appreciate the color. Thanks, guys. Thanks, James.

If you have a question, please press star and then 1. Our next question comes from Christopher Jeffrey with Mizuho Securities. Please go ahead.

Hi, everyone. Thanks for the question. Maybe turning to the midstream and the storage in particular, Looks like the guidance there was raised for the new storage rates like Steve was talking about. Just curious how we should think about is there any more room for expansion, any spare capacity there, and kind of how we should think about the fees expected after the capacity expansion in 25. Are those kind of locked in at the current rates right now? Thanks.

Chris, this is Steve. Let me take a shot at that. You had a number of things there. If I missed something, just ping me. Yeah, you know, if you think about the midstream business overall broadly, let's start abroad, we're going to step into the new scale that we currently operate and or are striving to get to as we finish the expansion of Spire Storage West and the back end of this year in 2025 and 2026. And the reason for that and the reason why you should expect to see that kind of step up over the next two and a half years is that the physical dynamics of storage are that you bring the storage online and then as the wells and the caverns season over time, the team not only gets comfortable with how the operations are, but then we get a better feel for how we can optimize the use of that cavern capacity over time. And this is pretty standard in the space. It takes a couple of years at least to kind of work our way through that. So if you think about the midstream segment broadly, you should expect to see that kind of step up over the next two and a half years. And we've given the guidance for this year for the midstream business, and we gave you a preview of how to think about the midstream business for 2025. Will we continue to look for opportunities to optimize? Absolutely. That's part of our job. But remember, the midstream business is a business where the rates that we charge really are driven by the volatility and the commodity, but the actual monetization of that volatility in many ways is left for our customers, but it does support higher rates, and as we mentioned on the column that prepared remarks, we have now completed the open season and the recontracting for the capacity that is online that actually just started injection in April, but We'll come online as we get into the next winter and an injection season next spring. And we are extremely pleased that the rates that we got were well above what we had estimated. They're in the mid-20s range, which is kind of where that segment of the market is right now. If you look at the market overall, the terms for contracts are between three and five years. And our... our contracting falls right in that category. In fact, I think the average is right in the middle of four years. So from that standpoint, while we will have some of our legacy contracts roll as we go through the next couple of years, we're in a very good position in terms of capturing the fixed storage value, getting it under contract, and being able to operate it for a while. I think your last question was additional expansion opportunities. It's something that Frankly, the team has thought a little bit about it if you think about pie in the sky, but right now we are laser focused in making sure that one, we complete the integration for MoGas that we lock down and get everything operationalized there. South Plains is actually performing very well. And lastly, that we complete the expansion of Spire Storage West. And those are really our current focus, and that will be our focus. And once we can take a breath and get through the winter, probably next winter, because that's when the rubber meets the road for the Spire Storage West facility, then we'll start looking at where our Where might other opportunities be? But at this juncture, I wouldn't want to tell you to model anything in, but we do have a good path to see some step growth over the next two and a half years.

Great. Thank you, Steve. That's super helpful. And then maybe this last one from me, just kind of in terms of the reiterated guidance for 24, if I kind of just, you know, compare that expectation for the second half of the year compared to last year's second half, kind of implies a decent amount of improvement. Just wondering, in that context of year over year, kind of what are you expecting to kind of be the driver of that trend improvement?

Yeah, it's a pretty broad question. Let me focus on the utility and the corporate and other segment because I think we've been pretty clear in what the drivers and movers are in both the midstream and the marketing segment. If you remember last year, we had some outsized one-off costs. in the corporate side in the last fiscal quarter of last year. We obviously don't expect any of that to recur this year. So from a cost perspective, you should expect to see our overall O&M cost be a lot lower. And as Scott mentioned in his prepared remarks, we are focused a lot on how we can get our costs in line and keep those in line over time. Now, we have a long history of doing this. And doing this successfully, it shouldn't be lost on you or anybody else that our actual costs in the utility are lower than they were last year. And we're going to continue to make sure that we have the right cost structure that meet our customers' needs and support the growth. And that's going to be an ongoing process. So that will be one of the tailwinds that you will see when you compare this year versus last year. And then secondly, as Adam mentioned, now that we have largely recovered all of our deferred gas costs, and I think we can expect with April bills and as they flow through, we'll get the rest of that deferred gas costs recovered, the headwinds on the balances in short-term debt should mitigate quite a bit and maybe turn into a tailwind. And although we have the same view that the market does that it's probably higher for longer, getting those balances down is another way in which we should be able to to create a little bit of uplift when you compare this year versus last.

Great. Thank you. That's all from me.

This concludes our question and answer session. I would like to turn the conference back over to Megan McPhail for any closing remarks.

Thank you for joining us on the call today. We look forward to talking to you later today and in the coming weeks at AGA. Have a good day.

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