Q1 2023 Spire Inc Earnings Call

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Good morning, and welcome to the spire for first 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 a touchtone 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 Scott.

Dudley. Please go ahead.

Thank you good morning, and welcome just buyers.

For 2023 first quarter earnings call.

We issued our news release this morning, and you can access access that on our website at aspire energy Dot 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 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, 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.

Slide presentation.

Yeah.

On the call today, inspires president and CEO , Suzanne said or what.

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 Susie answered it with Suzanne.

Scott and good morning, everyone. It's our pleasure once again to provide our quarterly update on virus performance.

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 and ensuring a sustainable reliable and affordable energy future.

As many of you may know this year I've taken on the wall as chair of the American Gas Association.

Honor to lead a G. At this critical time in our industry as the debate over energy policy and climate change intensified.

It's a debate I welcome against our industry the opportunity to share the remarkable story of natural gas in the long term viability at 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 in the planet and picture and the potential for natural gas.

During my years chair, we are focused on ensuring that policymakers understand the unique and critical well natural.

Natural gas plays in driving our economy, ensuring energy security and providing safe reliable and affordable energy to 187 million American Wow, achieving a cleaner energy future for our nation.

And that natural gas is the best way to deliver affordability and reliability today and emission reductions tomorrow.

And then industry, we are confident in achieving our vision based on the abundance of natural gas in this country and the extensive and advanced infrastructure. If we continue to invest in that will deliver a central energy at affordable prices for decades to come.

Customers need reliable energy to fuel their lives and businesses in 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 throughout homes and businesses come to understand all the benefits from using us abundant domestic resource.

Every minute another customer signed up to receive natural gas service from an H a member company.

One in 5.7 million businesses already use natural gas and realize the incredible savings over other energy sources.

Yeah like 30000, new business sign up did you have natural gas each year.

As increasing energy costs, and overall inflation impacts consumer is important more than ever that people have the right to choose the most reliable and affordable source that's natural gas.

Bob households that use natural gas for heating and cooking and close right save over $1000 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 system, even safer and more reliable wow, what's interesting emissions.

This investment totals more than $95 million every single day.

At fire, we also remain committed to safety reliability and service quality, while protecting our planet and supporting our customers and communities.

These are a commitment we take seriously.

The one thing I've seen flashy will have more to say about as far as operations and finances in a moment.

Sure what we're doing to minimize the impact of Ekati cost and customer Bill I'll provide more assistance to those who need it.

A lot of people 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.

All regulatory perspective.

Based on the strong first quarter earnings.

<unk> 55 per share driven by outperformance at our nonregulated gas marketing business, we are raising our guidance range for the full year.

Yeah, I'll pass the call he's living.

Thank you Suzanne.

Again 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 our central energy belonged to the homes and businesses.

Keep them warm.

Our ability to consistently and reliably reliably serve our customers on the coldest days, it's no accident.

All the advanced supply planning, 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.

The first quarter, our capex totaled $155 million with 95% go into one of our utilities.

So some upgrades accounted for about half of that utility spend another 25% attributable to extending natural gas service traditional homes and businesses.

For FY 'twenty, three our expected capital investment remains $700 million.

The increase in gas utility spend focus on safety reliability and emissions reduction as Suzanne noted.

Well, it's early in the year, we're already seeing the benefits of these investments in our key operating metrics.

We're going to continue our robust investment in new business, well with innovation and technology most notably.

A lot of advanced meters.

Placed over 300000 meters across our footprint today.

I would note separate as much more than just swapping out the old leader for a new one.

Acknowledging the advanced meters provides a number of benefits to enhance safety improve deficiencies and the ability to use data to better serve our customers.

As we've noted previously our expected fiscal 2023 spend inclusive of substantial investment and the expansion of the spire storage, which remains on plan.

Yeah.

Suzanne mentioned, we concluded a number of regulatory matters last year and that is substantially cleared the deck, so to speak allowing us to focus our time and effort on our businesses and serving customers.

Can you provide a quick recap.

As you know, we recently concluded our Missouri rate review the settlement amounting to $78 million in additional revenue.

This includes $19 million of instrument revenues already being collected the new rates were effective December 26.

In addition to recovery updated call some investments the rates of them also resolved the treatment of overhead costs and these costs being expensed or capitalized effective October one in accordance with our study.

And collecting the amounts previously differed starting December 26.

One important element and the settlement was the approval of our request for increased funding and expand eligibility for customer financial assistance, including inspires dollar health program.

This allows us to provide greater support for more households impacted by higher natural gas costs.

We've deferred a substantial amount of gas calls in order to lessen the impact to our customers.

We're now set to recover these costs pursuant to effective gas cost riders in both Missouri and Alabama we.

Spectrum recover these costs over the next 12 18 months.

We filed a new request for $8 $8 million upon the conclusion of an interest rate regime.

This filing includes recovery of his first eligible investment on system upgrades, where they ought.

Tober to February period.

We're far Alabama inspire golf reminder, that the reset of the RSV parameters was completed late last year and new rates based on their 2023 budgets effective January one.

And finally, as previously announced spire STL pipeline received a new permanent operating certificate from FERC in December .

With that I'll turn it over to Steve or asking for financial review and update.

Thanks, Dave 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 and a half million dollars over last year, driven by strong results from spire marketing, which was well positioned this quarter to take advantage of basis differentials to optimize the storage and transportation positions.

I mean, it's really business also delivered results that happened last year as storage was able to optimize its operations and withdrawal commitments.

Yes, you're totally earnings lagged last year as higher demand was more than offset by the timing of new rates and higher cost.

Slide eight provides more detail on key variances for the quarter, putting a couple of the highlights.

Yes. She told me margins were higher as we benefited from the full year impact of last year's rate increases.

Important to remember that our most recent rate increases in both Missouri, and Alabama had little impact this quarter given their effectiveness in late December and January 1st respectively.

You said it was also higher this quarter as temperatures were colder than last year.

Margins for marketing and midstream or higher for the reasons I spoke to a second ago.

And looking at operations and maintenance expenses.

Gas utility expenses were up.

Pension reclassification by $14 $6 million due to first a roughly $6 million in Missouri overhead costs that were deferred in the prior year, but expense this year.

Second higher bad debt expense was about $2 $6 million, reflecting higher commodity cost.

And lastly, higher non employee cost, especially third party contractor expenses as we focus on high customer service levels. This winter.

Overall gas utility O&M cost 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.

Our marketing costs were also higher representing mostly cost 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 expense either of new rates in Alabama, Arthur 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 <unk>, we remain confident in our long term net economic earnings per share growth target of 5% to 7%.

Starting from the midpoint of our initial fiscal year 'twenty three guidance range of $1 15 per share.

This growth was driven by our utility rate base growth and we also reaffirmed both our current year and 10 year Capex targets.

We are raising our twenty-three guidance range by 10 cents to $4.15 to $4 35 per share, giving gas marketing's Q1 results combined with a 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 our 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 projects impact and we have reflected that in our 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 were 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 will be cheering for them at the Super Bowl.

With that let me turn it back over to you Suzanne.

Thank you Steve.

In closing we're off to a good start in 2020 three we're poised to grow and deliver stronger performance for our customers communities and investors.

Always I would like to express my gratitude for each and every employee.

Send my thanks to all who work in this remarkable industry.

And to updating you at the ear for classes until then we thank you for your continued interest and investment in spire and we're now ready to take your questions.

We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone, if you're 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 two at this time we will.

Pause momentarily to assemble our roster.

Yeah.

Our first question comes from Richard Sunderland with J P. Morgan. Please go ahead.

Hi, good morning, Thanks for taking my questions today.

Rich.

Just to start off with the guidance revision and the commentary around spire storage.

Just to change for 'twenty three in terms of how you're reflecting smart storage and the results are or is that a move to.

Food storage in 2024 as well and then just alongside that is just to be clear so that the tencent changes both marketing outperformance net of the spire storage change and then everything else is kind of on track with our original expectations.

Yeah, Hey, Rich this is Steve let me take a shot yeah. After after refining our calculation the impact this year, which is roughly a third of what we had originally guided we originally guided nine cents.

Really made the number so immaterial as to not really wanted to deal with it as an adjustment to net economic earnings and that is a final decision that will impact all years going all quarters in all years going forward.

And you can expect the dilution in the out years to go down just a little bit also I won't speak to the next year as we get through this year unless at least get through the winter heating season. This year it will impact.

The bottom line as I said this quarter storage to had no impact whatsoever in our results of operations because the capitalized interest the interest was the only one and it was capitalized. So there was no particular impact and as we go forward, especially into 'twenty four we will see some pull through.

For margins, we'll see the full impact of the dilution of the equity that would be will raise in order to keep a 50 50 cap structure on on the project and I and I think those all balance out, but they balance out in a much better spot than we had originally estimated.

Got it understood what.

What are the drivers behind those revised expectations for storage and.

Could you just walk through I guess, the financing side and how that's changed versus.

I don't know construction schedule or a revenue timing expectations.

Nothing has changed on the project in terms of its timing.

Total spend at $185 million or how we would rollout the capacity as we get through the project. So that's all that's all very good news what has changed is the our ability to fully capitalize the interest component of the financing.

Test, which took off about half of the dilution. This year as we talked about earlier before we came to that realization. We also took a really hard look at the underlying cash flows for the business the timing of the actual spend and when we would.

Ultimately issue the equity to finance.

The equity component of the overall project and that trade it in our favor. In addition to our shares trading at a little bit different range than they were when we were making the initial estimates.

Last summer.

Okay understood. That's very helpful. Just one last one for me you mentioned some of the O&M trends if I followed your commentary there it sounds like the chocolate expectations expect from it.

Except for bad debt is in such a case of just how much of a headwind is that.

But.

Yeah.

Yeah, you know at this juncture, it's hard to tell Ratchets really all driven by gas cost and if you like like everyone else in AR and the gas space, our customer bills have gone up fairly significantly because of the higher gas costs, which is a major component of their bill so as a matter of caution and mechanics, when do you see higher.

Higher amounts of receivables, yeah, we generally raise our bad debt reserves and in potential anticipation of there being more bad debts at the same time and Steve Lindsey mentioned it we're doubling down on our assistance to our customers. So I wouldn't I wouldn't take that data and draw a line up into that.

Get into the stratosphere, but given where we are not we want I mean remain conservatively positioned and well continue to monitor that as we get through the heating season didn't really through.

The spring season, which is when a lot of the collections come in that maybe hung up, especially if we have some cold weather late in the winter heating season.

Understood very helpful. Thanks for the time.

Hmm.

Our next question comes from David <unk> with Morgan Stanley . Please go ahead.

Oh, Hey, good morning, Thanks, so much for taking my question.

I was wondering what are you seeing in terms of market conditions in the second quarter here for the marketing business I'm wondering if there's more opportunity for for strong marketing contributions.

Hey, David This is Steve I'll take a shot at that yeah that the conditions that we saw in the first quarter continued into January .

You can look at that at the very basis differentials in the markets that we operate in.

Equally though if you look at the price of natural gas, which traded at the Henry hub in the mid twos yesterday and had spend down in that level here for a little while we haven't seen that level in a long time. It does present, a little bit of caution from our standpoint, especially as we exit the heating season and you start thinking.

About what the back half of the year is gonna be from two standpoints, one what will the demand for gas fired electric generation being it's impossible to tell that now, but there's always a small bit of demand that we get the opportunity to serve their LNG and that continues to be an area that we're watching closely especially the operations of the LNG facilities.

And then lastly, how we look at the next winter, Yes believe it or not we're already starting to think about the winter of 'twenty three 'twenty four and how do we position ourselves for the next winter, which could present some.

Economic drag as we get to the latter part of the year, especially if we ramp up storage, but all of that is in the opportunity set that we haven't yet looked at so right now our focus is on as it is in the utility to focus on serving our customers and optimizing everything we can do this winter and when we get to that March.

April time frame, then we really start turning our focus to the remainder of the year to make sure that.

We're positioned not only to serve our customers in the summer, but also position ourselves for the next heating season.

Great. Thanks, that's helpful color and I was just curious it maybe following on to that it was such a strong quarter in terms of results and it sounds like the spire storage drag is it's quite a bit smaller I know you've baked that into the 'twenty three guidance here for the <unk>.

For the segment, but I was just wondering is there any natural offset I would've expected the.

Full year to be higher just based on how strong. This this quarter was so is that partly conservatism or are there natural offsets natural potential losses or reversals I'm coming in the rest of the year in the are in the marketing business.

Well, there clearly are or could be natural offsets depending upon how we see the summer play out how the market actually plays out because we've enjoyed a period geographic volatility and basis price differentials that we've been able to capitalize on but those can go away fairly quickly depending upon the flows of gas.

Man the pipeline capacity and a bunch of other factors that we cannot control. So yeah. It is something we're gonna have to watch.

The way we view our marketing business is we know what our base level of expectations for that business should be and if we're well positioned like we were this quarter. We can capture a lot of value, which ultimately we can recycle into investments in the utility and reduce our equity needs and we will clearly provide an update when we get through the.

Winter.

And if that means that we were able to create more value will will upgrade our forecast there, but take a holistic look at the entire rest of the business.

Okay, great. Thanks, so much.

Our next question comes from Christopher Jeffrey with Mizuho Securities. Please go ahead.

Hey, good morning. Thanks, everyone. I was just wondering if we could turn to the kind of episode that number.

The general sense of where you are their outlook for the year and where are the short term debt is kind of playing into that I think we've talked about before is it.

Like some of that might roll off but in the near term is going to sit on that.

Yeah, Chris This is Adam right right now our calc on that their photo data and you know there's always some puts and takes in that in that calc is about 13 and a half at the.

Rise level, we do.

See us trending into our target range in 2024.

As Steve mentioned.

Steve mentioned.

We have a recovery in place on those gas costs that should boost.

Whose cash flow substantially here, starting this quarter and feel like we have a pretty good path forward on that.

Yeah.

Yeah.

Great. Thanks, and then more of just a confirmation, but the 6 million expense versus deferred this quarter is that kind of the outlier to this quarter because there was that.

This timing differential of the rate case, where should we kind of expect a similar cadence.

Throughout the year.

Are you talking about the $6 million.

The overhead yes. That's started yet that is that is now in rates. So we would not expect that to reoccur.

Got it.

Thanks, that's it for me.

Thanks, Chris.

Again, if you have a question. Please press Star then one our next question comes from Shar <unk> with Guggenheim Partners. Please go ahead.

Hey, guys good morning.

Sure.

Just real quick just maybe shifting to the 5% to 7% CAGR, obviously look the rate cases kind of behind you guys. You guys have grown in the transportation and storage segment. There's some pushes and takes there's obviously some macro pressures I guess, how do we think about the profile of the five to seven should we assume.

Jim kind of the mid point of the CAGR, so something more linear as we're modeling forward or there's just some items that may impact the shape of the growth in the near term.

I'm sorry, Steve Thanks for the question Yeah, Yeah, hopefully that the base for our growth is clear not with everybody. After all the discussions.

And as much as we would love to be able to claim absolute linear growth I think that would be that would be pollyannish, given our scale and our jurisdictions, we strive to meet.

Italy to.

Tack on growth year over year, but as you know the regulatory compact that would create some some variances year over year, we're dealing with high commodity costs. This year not sure whether we're going to deal with that next year. So that creates some ripples and who knows what other things will will be in our in our sights going forward, including inflation.

I think we've got a plan to address all of those so I think we are very comfortable that the drivers of our growth.

Our and begin with as they should our gas utility businesses and rate base growth of seven 8% and we're lock stop on that Steve mentioned, our capital plan for this year and I and our 10 year plan, which should give you and the investors a lot of comfort in our ability to grow the business. They are clearly always going to be pluses and minuses are around the edges.

That's the stuff we have to deal with.

Every day and we'll do the best we can and the only thing that is certain as we will continue to inform you in the market of what those pushes and pulls are so you can fully understand how we're driving the business.

Perfect and then yes, and I'll Echo the comments that are growing off the twenty-three original midpoint is very well received and obviously very constructive so kudos there.

Just on the STL pipeline, well first because obviously given you a permanent operating certificate it looks as though Etfs. They tried to take the matter to the circuit courts do you anticipate any kind of protracted legal battles and appeals court or is there a reason to believe the matter could soon be finished once it.

They're all just a little bit of it.

Date there thanks.

Good morning, Shar This is mark Darrell.

Barstool legal officer.

No at this point EDF has just asked for a rehearing at the FERC. So I think I would just wait and see what eds or what the FERC ultimately does with C. B S.

Petition for rehearing and then we'll see what eds those after that Ah I don't know I can't predict at this point, whether there would be.

Litigation in the court of appeals, yet or not we just don't know.

And does this do you want to just on the operation I would go back and reiterate the value of the pipeline. We've now gone through multiple winters are we just saw with this recent winter event, we were able to deliver both reliable services as well as excess commodity that we didn't have years ago on the eastern side of the state. So I think anything that goes on.

And we continue to have more evidence of the value just by bond for the customers on the east side of it there.

Perfect. Thanks, guys. Congrats on the execution very good thank you.

Yes sure.

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

Thank you all for joining us will be around the rest of the day for any follow ups take care stay warm.

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

Yeah.

Yeah.