Spire Inc. (NYSE:SR) Q1 2023 Earnings Call Transcript February 1, 2023

Operator: Good morning, and welcome to the Spire First Quarter Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity ask questions. Please note this event is being recorded. I would now like to turn the conference over to Scott Dudley. Please go ahead.

Scott Dudley: Thank you. Good morning, and welcome to Spire's fiscal 2023 first quarter earnings call. We issued our news release this morning and you can access that on our website at spireenergy.com under Newsroom. There's also a slide presentation that accompanies our webcast and you may download that from either the webcast site or from our website under investors and then Events & 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 we use 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 Spire's President and CEO, Suzanne Sitherwood; 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, Treasurer and CFO of our Gas Utilities. With that, I will turn the call over to Suzanne Sitherwood.

Suzanne?

Suzanne Sitherwood: Thank you, Scott, and good morning, everyone. It's our pleasure once again to provide our quarterly update on Spire's performance, recent developments and our outlook for the future of the industry and our company. Last quarter, I spoke to you about our long-term strategic priorities and commitments, while being mindful of the vital role natural gas plays in ensuring a sustainable, reliable and affordable energy future. As many of you may know, this year, I've taken on the role as Chair of the American Gas Association. I'm honored to lead AGA at this critical time in our industry as the debate over energy policy and climate change intensifies. It's the debate I welcome. It gives us -- our industry the opportunity to share the remarkable story of natural gas and the long-term viability of natural gas as a vital part of America's energy future.

The vision for our industry does not change, it's about protecting the people, preserving the planet and picturing a potential for natural gas. During my year as Chair, we are focused on ensuring that policymakers understand the unique and critical role natural gas plays in driving our economy, ensuring energy security and providing safe, reliable and affordable energy to 187 million Americans, while achieving a cleaner energy future for our nation. In fact, natural gas is the best way to deliver affordability and reliability today and emission reductions tomorrow. As an industry, we are confident in achieving our vision based on the abundance of natural gas in this country and the extensive and advanced infrastructure we continue to invest in that will deliver essential energy at affordable prices for decades to come.

Customers need reliable energy to fuel their lives and businesses and our industry works hard every day to ensure they have the energy they need when they need it. Reliance on natural gas continues to grow as more and more people (ph) homes and businesses come to understand all the benefits from using this abundant domestic resource. Every minute another customer signs up to receive natural gas service from an AGA member company. More than 5.7 million businesses already use natural gas and realize the incredible savings over other energy sources. Nearly 30,000 new business sign up to use natural gas each year. As increasing energy costs and overall inflation impacts consumers, it's important more than ever that people have the right to choose the most reliable and affordable source, and that's natural gas.

In fact, households that use natural gas for heating, cooking and clothes drying save over $1,000 per year compared to using electricity. Natural gas utilities in the U.S. make significant investments in infrastructure upgrades and energy efficiency innovations that make our systems even safer and more reliable, while reducing emissions. This investment totals more than $95 million every single day. At Spire, we also remain committed to safety, reliability and service quality, while protecting our planet and supporting our customers and communities. These are commitments we take seriously. Steve Lindsey and Steve Rasche will have more to say about Spire's operations and finances in a moment, plus they'll share what we're doing to minimize the impact of commodity costs on customer bills and provide more assistance to those who need it.

Steve Lindsey will also share more about this year's regulatory environment. I'm pleased to note that we have reset rates across our utility footprint and are entering a quiet period from an overall regulatory perspective. Based on the strong first quarter earnings of $1.55 per share, driven by outperformance at our non-regulated gas marketing business, we are raising our guidance range for the full year. Now, I'll pass the call to Steve Lindsey.

Steve Lindsey: Thank you, Suzanne. I'll begin by acknowledging the outstanding performance of our employees who continue their focus on maintaining safe and reliable gas delivery operations and excellent service to our customers. Their efforts and dedication are especially important and greatly appreciated during the winter heating season. I would note that during the severe cold weather in late December, which included an all-time peak day in the Kansas City region, we met customer demand and kept essential energy flowing to the homes and businesses that count on us to keep them warm. Our ability to consistently and reliably serve our customers on the coldest day is no accident. It reflects all the advanced supply plan we do to ensure we have the resources needed to deliver essential energy at peak demand times.

Let me start with an update on our capital investment. For the first quarter, our CapEx totaled $155 million, with 95% going toward our utilities. This (ph) accounted for about half of that utility spend, another 25% attributable to extending natural gas service to additional homes and businesses. For FY '23, our expected capital investment remains $700 million, reflecting an increase in gas utility spend, focused on safety, reliability and emissions reduction, as Suzanne noted. While it's early in the year, we're already seeing the benefits of these investments in our key operating metrics. We plan to continue our robust investment in new business as well as innovation and technology, most notably with further rollout of advanced meters. We've replaced over 300,000 meters across our footprint to date.

I'd note, this effort is much more than just swapping out an old meter for a new one. The technology in advanced meters provide a number of benefits, including enhanced safety, improved efficiencies and the ability to use data to better serve our customers. As we noted previously, our expected fiscal 2023 spend includes a substantial investment in the expansion of Spire Storage, which remains on plan. Suzanne mentioned, we concluded a number of regulatory matters last year and that has substantially cleared the deck so to speak, allowing us to focus our time and effort on our businesses and serving customers. Let me provide a quick recap. As you know, we recently concluded our Missouri rate review with the settlement amounting to $78 million in additional revenue.

This includes $19 million of ISRS revenues already being collected and new rates were effective December 26. In addition to recovering updated costs and investments, the rate settlement also resolved the treatment of overhead costs, and these costs being expensed or capitalized effective October 1st in accordance with our study. We began collecting the amounts previously deferred starting December 26. One important element in the settlement was the approval of our request to increase funding and expand eligibility for customer financial assistance, including Spire's DollarHelp program. This allows us to provide greater support for more households impacted by higher natural gas costs. We deferred a substantial amount of gas costs in order to lessen the impact to our customers.

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We are now set to recover these costs pursuant to effective gas cost providers in both Missouri and Alabama. We expect to recover these costs over the next 12 to 18 months. We filed a new ISRS request for $8.8 million upon the conclusion of our latest rate review. This finally includes recovery of ISRS eligible investment on system upgrades from the October to February period. (ph) Gulf, a reminder that the reset of the RSE parameters was completed late last year and new rates based on their 2023 budgets were effective January 1. And finally, as previously announced, Spire STL Pipeline received a new permanent operating certificate in the FERC in December. With that, I'll turn it over to Steve Rasche for financial review and update. Steve?

Steve Rasche: Thanks, Steve. Good morning, everybody, and thanks for joining us today. Let's start with a brief review of our quarterly results and then I'll update our outlook. For our fiscal first quarter, we reported net economic earnings of $85 million, an increase of $22.5 million over last year, driven by strong results in Spire Marketing, which was well positioned this quarter to take advantage of basis differentials to optimize storage and transportation positions. Our Midstream business also delivered results ahead of last year, as Storage was able to optimize its operations and withdrawal commitments. And Gas Utility earnings lagged to last year as higher demand was more than offset by the timing of new rates and higher costs.

Slide 8 provides more detail on key variances for the quarter. (ph) a couple of the highlights. Gas Utility margins were higher as we benefited from the full-year impact of last year's rate increases. It's important to remember that our most recent rate increases in both Missouri and Alabama had impact this quarter given their effectiveness in late December and January 1st, respectively. Usage was also higher this quarter as temperatures were colder than the last year. Margins for Marketing and Midstream were higher for the reasons I spoke to a second ago. And looking at operations and maintenance expenses. Gas Utility expenses were up, net of pension reclassification by $14.6 million due to: first, roughly $6 million in Missouri overhead costs that were deferred in the prior year, but expensed this year; second, higher bad debt expense by $2.6 million, reflecting higher commodity costs; and lastly, higher non-employee costs, especially third-party contractor expenses as we focus on high customer service levels this winter.

Overall, Gas Utility O&M costs, net of bad debts, are trending as we expected and we remain focused on opportunities to offset the headwinds of inflation the rest of this year. Spire Marketing costs were also higher, representing mostly costs driven by the higher margins, including employee-related costs. Interest expense reflects higher short-term debt levels, driven by gas costs and higher interest rates. As a reminder, we do get recovery on most of our utility interest expenses, either in new rates in Alabama or through credits in Missouri, which show up in the income statement in the other income line. I would also point out that a portion of the higher interest expense supported our Marketing and Midstream businesses that had a strong quarter.

Turning to our outlook. We remain confident in our long-term net economics earnings per share growth target of 5% to 7%, starting from the midpoint of our initial fiscal year '23 guidance range of $4.15 per share. This growth is driven by our utility rate base growth and we also reaffirmed both our current year and 10-year CapEx targets. We are raising our '23 guidance range by $0.10 to $4.15 to $4.35 per share given Gas Marketing's Q1 results combined with the change in how we report the impact of Spire Storage West expansion. Looking at the segments, we are raising Gas Marketing range to between $25 million and $30 million due to strong results this quarter. We are adjusting our full-year Midstream earnings range to reflect both: first, Q1 results; and secondly, the impact on the Spire Storage West expansion project.

This project had no impact this quarter due to capitalized interest. And its forecasted impact for the full year has been revised downward as we refined our estimates for capitalized interest and overall project cash flows and funding. As a result, we will not adjust our net economic earnings calculations for the project's impact and we've reflected that in the forecast, the impact for the revised range for the Midstream business. We will continue to provide project and earnings impacts each quarter. A couple of quick observations on financing. We have ample liquidity as we hit our peak borrowing. And to supplement that capacity, we funded a nine-month term loan for $250 million in January. As Steve mentioned earlier, we have a clear path to recovery of the underlying gas cost over the next 12 to 18 months, which will also provide a big boost to our cash flow beginning this quarter, our second fiscal quarter.

We have not changed our long-term financing forecast, but I would observe that we're a bit lower than the target range for equity due to the higher earnings from Gas Marketing. So, in summary, we have started the year well, much like our Kansas City Chiefs, I'd be remiss if I didn't mention that. We congratulate the team and the Chiefs Kingdom and we will be cheering for them in the Super Bowl. With that, let me turn it back over to you, Suzanne.

Suzanne Sitherwood: Well. Thank you, Steve. In closing, we're off to a good start in 2023. We are poised to grow and deliver stronger overall performance for our customers, communities and investors. As always, I would like to express my gratitude for each and every Spire employee as well as extend my thanks to all who work in this remarkable industry. We look forward to updating you as the year progresses. Until then, we thank you for your continued interest and investment in Spire. And we're now ready to take your questions.

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