Q3 2023 Spire Inc Earnings Call
Hello, and welcome to the spire third quarter earnings Conference call, all participants will be in listen only mode.
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I would now like to turn the call over to Scott Dudley head of Investor Relations. Please go ahead.
Good morning, welcome to spires first called 2023 third quarter earnings call.
We issued an earnings news release this morning, and you may access it on our website aspire energy dot com under newsroom.
There is a slide presentation that accompanies our webcast and you may download it from either the webcast site or from our website under investors and then events and presentations.
Before we begin let me cover our safe Harbor statement and use of non-GAAP earnings measures.
Today's call, including responses to questions may contain forward looking statements within the meaning of the private Securities Litigation Reform Act of $19 95.
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 the slide presentation.
On the call today is Suzanne <unk>, President and CEO .
Steve Lindsey Executive Vice President and Chief operating Officer.
And Steve Rasche, Executive Vice President and CFO .
Also in the room today is Adam Woodard, Vice President and Treasurer, and CFO of our gas utilities.
With that I'll turn the call over to Suzanne.
Thank you Scott and good morning, everyone, Hey, I like to provide an update on his first quarterly performance recent developments and outlook let.
Let me start with third quarter results, we reported a loss of <unk> 42 per share for the quarter well below last year's results and our expectations.
<unk> first quarter reflect quite a few moving parts, including lower demand and the impact of milder weather this year as well as high costs in the current inflationary environment.
Stephen Steve will speak more about our herself for all our businesses and operational and financial.
It's important to point out that our spire employees continue to do what they do best every day, serving our one 7 million homes and businesses.
And that spirit noted that we continue our efforts great paths for more efficient and sustainable regulatory recovery.
During we provide safe cost effective and reliable energy for our customers and communities.
Additionally, we are well positioned for a strong rebound in 2024.
Interest rates moderate cost structure management progressive and usage related margin interest store.
We continue to execute our midstream strategy through expansion and acquisition.
Our storage facilities and pipeline systems.
Our strategy is centered around highly contracted utility supply focus assets that produce steady and consistent earnings.
Like our gas utilities.
These businesses also bring our longer term growth opportunities that take advantage of the increasing demand for natural gas.
We believe our future is bright spry here, it's a strong well positioned company with a proven growth strategy we.
We have confidence in that strategy and the ability of our experienced management team and employees to successfully execute our plan well into the future.
We also have a skilled and experienced board of directors to guide us.
Last week, we announced the election of two additional directors to our board increasing the size to 11, adding former executive she will build upon the strong oversight and governance fire has enjoyed in the past.
He Ferrara brings extensive financial industry experience, having served in various roles at Edward Johns, including Chief operating Officer and C. I O.
Paul Koonce retired in 2020 after a 38 year career in the energy sector, leading two decades at Dominion energy, where he was most recently served as the president CEO of Dominion's power generation.
Now I'll pass the call to Steve Lindsey.
Thank you Suzanne let me start with an update on our gas utilities.
First and foremost we continue to deliver for our customers, providing them safe and reliable energy with excellent service.
Employee stay focused on our key operating metrics targets.
So dillon, while also diligently managing costs.
Financial results for our gas utilities in the quarter a loss of $12 3 million reflects the benefits from new rates in both Missouri, and Alabama, albeit during a seasonally lower volume periods.
More than offset by mild weather and the other items that Steve Rasche, who will cover.
Across our service areas, the weather was 18% warmer than normal.
This drove lower usage it was only partially offset by weather mitigation mechanisms in Alabama.
In addition, our interest expense is up significantly year over year more than 400 basis point increase in short term interest rates over last year.
Our gas cost balances continued to decline.
Back to recover our pre 2023 deferrals by the end of the calendar year.
This combined with lower commodity costs positions us well heading into next winter.
Continue to pursue timely recovery of pipeline upgrade investments in Missouri via interests.
It was last quarter spire, Missouri was granted $7 $7 million of new business revenues effective may six 2023.
Our Missouri filed on June 20th for an additional $14 $2 million and interest cover and infrastructure upgrade investments from March to August time period.
We continue to be very focused on controlling our O&M cost claw back some of our margin shortfall this year.
Turning to our midstream segment I'm pleased to note that the expansion of the spire storage west our facility in southwest Wyoming remains on track.
The total project spend is $195 million to expand capacity of 16 Bcf to a total of 39 Bcf over the season and next.
Given the current pacing of construction activity the timing of our midstream investment is shifting with $20 million moving out of fiscal 2023 and enter fiscal 2024.
Integration of spire Salt Plains with 10 Bcf storage facility in Northern Oklahoma that we acquired in April for $37 million is proceeding according to plan.
In late May we announced the planned acquisition of Mo gas and Omega pipeline systems for $175 million.
As a reminder, Mo gas consists of a 263 mile Interstate natural gas pipeline to serve spire, Missouri customers via an interconnect with the spire STL pipeline.
Well, they get 75 mile distribution system effectively an LDC serves fort Leonard Wood, and South Central Missouri under a long term contract.
The acquisition is expected to close around the end of the calendar year.
One final comment on midstream our spire STL pipeline continues to prove its significant value with a strong and reliable operations I'm pleased to note. The FERC certificate for our STL pipeline is now permanent with no further challenges or appeals being allowed to be brought.
Turning to our capital investment for the first three quarters of fiscal 2023 as far as total capex was $483 million with more than 90% invested in our gas utilities.
Year over year utility spend increased more than 12% collecting over $300 million for upgrading our distribution pipeline infrastructure and connecting more homes and businesses to safe reliable and affordable natural gas service.
The next 10 years.
Our expected total spend remains $7 billion with more than 80% of our utility spend recovered with minimal lag reflected in earnings through new business investment.
We'll continue our focus on infrastructure upgrades to support system safety and reliability, while reducing methane emissions.
Well also maintain robust levels of investment in customer additions as well as innovation and technology.
Vance meters and enhances safety customer service and experience.
We've upgraded 440000 meters across our footprint since we began the program three years ago.
Given our pace construction, so far we expect our gas utility spend to increase a $20 million. This year essentially filling the gap for the $20 million of midstream spend that's going to be shifted into fiscal 2024 that I mentioned earlier.
As a result, our capital investment target for fiscal 2023 remaining $700 million.
With that I'll turn it over Steve for IFC for a financial review and update Steve.
Thanks, Steve and good morning, everyone.
I'll review, a few key points from our fiscal third quarter.
400, a consolidated loss on our net economic earnings basis, just under $19 million or <unk> 42, a share.
The earnings of $4 million or one last year.
And while the earnings Delta of $23 million is much bigger than we would like it is important to note that roughly $10 million of that difference relates to regulatory adjustments in Missouri, and Alabama, we've discussed in previous quarters.
Taking a quick look at the segments.
Gas utilities lost $12 million compared to earnings of $4 million in the prior year quarter.
The decline of roughly $6 million after regulatory adjustments at.
That decline reflects new rates offset by the impacts of mild weather at higher cost.
Gas marketing and our midstream businesses posted lower results, reflecting less favorable market conditions.
And we continue to see higher interest expense and corporate costs.
Looking a bit deeper into our results, starting with revenues and margins and focusing on the net rents after adjustment column.
Revenues were down almost 7% due to lower spire marketing commodity cost.
And you can see a similar reduction in natural gas cost.
Contribution margins were also lower by $5 million with gas utility margins representing half of that shortfall.
In Missouri margins were up by $4 1 million as higher rates were only partially offset by lower usage.
These margins were below last year by $6 $6 million with a few factors contributing to the shortfall.
First lower year over year cost control measure or CCM benefit aspire, Alabama.
Note that this is due in large part to the timing of prior year timing of recognition of the benefit booked in the third quarter and chewed up in last year's fourth quarter.
So even though we've got the right cadence of the CCM benefit by the end of last year, we had some noise between Q3 and Q4 it.
It has no impact on our 2023 results on an adversely impacts the comparison to the prior year this quarter by nearly $8 million. So excluding this prior year timing adjustment.
South East margins were higher over last year by $1 million.
The increase results from higher rates and in fact this year.
However, those rate increases were more than offset by milder weather this quarter that resulted in lower residential usage at spire golf and.
And lower margins due to ineffective weather mitigation as fire, Alabama.
Turning to our other businesses gas marketing margins were lower by $3 $2 million, reflecting market conditions as well as higher demand charges and storage costs as begin positioning.
Sure.
Midstream margins were up slightly on an FTE basis after removing the results of Salt plains, our newly acquired storage facilities that will be fully included in net economic earnings in fiscal year 'twenty.
Looking at other variances on slide nine and focusing again on the net variance column.
Yes, you're totally O&M expenses were up $8 million with roughly $6 billion in that variance due to Missouri regulatory recovery of overhead cost.
Called that these costs were deferred in the prior year, but our expense this year.
The remaining $2 million increase in O&M was driven by higher third party expenses offset by lower employee related costs and bad debt expense.
As we continue to exercise expense control gas utility O&M cost net of bad debts of Missouri overheads.
Roughly two 9% from last year.
Other O&M expenses are trending as we would expect the underlying businesses.
Interest expense remained elevated up $17 million from last year, driven by higher long term debt balances as well as higher short term interest rates.
Other income was a turnaround from last year of $10 million driven by higher investment earnings paring cost credits.
And finally, lower income tax expense tied to lower pretax income and an effective tax rate of 18, 2% year to date.
I would note that we expect that rates of decline in Q4 due to the recognition of certain tax benefits.
Cash flow for the year remains strong with EBITDA up 15% and our short term debt at the gas utilities down this quarter by $49 million driven by recoveries of gas cost and repayment of the spire, Missouri term loan as planned.
Non utility balances increased by $39 million, reflecting principally the acquisition salt plains and expenditures around the expansion spire storage west.
Turning to our outlook, we remain confident in our long term net economic earnings per share growth target range of 5% to 7% as well as our rate base growth target, 7% to 8%.
As you know our current rate design concentrates our gas utility recoveries in the winter heating season.
Margins for the winter were below our expectations due to lower usage and in effect of weather mitigation.
We saw that trend continue in the shoulder months of April .
So even with continued cost control for the balance of this year, we don't anticipate that we can make up all of that margin shortfall.
As a result.
Our gas utility segment earnings range by $5 million and reducing our 2023 net economic earnings per share target range by a nickel to $4 15.
The $4 25 per share.
That's for sure.
<unk> well positioned for a good rebound in fiscal year 'twenty four as we regained demand.
<unk> reduced our deferred gas cost balances.
In short term debt and control costs.
Turning quickly to our financing forecast, we've rolled in our forward sale of common equity, which totals roughly $150 million at quarter end.
Disposition satisfies our equity needs for the rest of the calendar year.
The physicians will settle no later than December .
And as you can see here, our overall financing requirements drop off as we move into fiscal year 'twenty four 'twenty five.
So in summary.
We're lowering our expectations a bit this year, we're on track for a rebound in 2024 and beyond.
Let me turn it back over to you Suzanne.
Thank you, Steve and clothing, we are well positioned to continue growing and delivering stronger overall performance for our customers communities and investors.
We're now ready to take your questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys.
To withdraw from the question queue. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Today's first question comes from Richard Sunderland with Jpmorgan. Please go ahead.
Hi, Good morning can you hear me.
Yeah.
Rich.
Thank you for the time today.
Starting with the guidance revision in just a couple mechanical questions here first and foremost the nickel lower on the range.
But I think on gas utility net economic earnings is more of a <unk> delta on the on a segment basis.
Curious if there are other offsets within there that you see or if this is in consideration of kind of where you are in the calendar and then similarly is that that $4 15 midpoint of original guidance still the base for the 5% to 7% earnings CAGR.
Hey, Rich this is Steve good questions and good morning, I'll ask the last question is yes. The <unk> is still the base for them long term earnings guidance target.
On the revision of guidance you're spot on we continue to exercise all the controls we can in the time. We have left this year you know that we earn our margins and recovery during the winter and early spring and so that that ship is largely sales. So we do expect to see our O&M.
<unk> cost to continue to stay in a narrow range and it shouldn't be lost on anyone that if you look at.
The quarterly results. After you take out the noise from regulatory adjustments that were bending that curve down down at two 9% year over year versus a lot higher percentage increase earlier quarters. This year.
Understood very helpful color, there and then diving into the results a little more closely.
The weather impact is is that a similar kind of degree day calculation issue that you've referenced in Alabama in the past and I'm curious kind of what the path is to addressing that you expect to.
You'll have conversations around that in the near term or any other considerations around getting some of that volatility out of results.
Hey, rich it's Adam Yes that is it is a similar dynamic there and we do.
It tend to address that.
To address that with.
With the team and with the regulators in Alabama.
Got it.
Is that something that could be addressed in advance of 24 or is this a longer term process.
It is we do go through annual our annual budgeting process it will be a topic of discussion.
Got it understood I'll leave it there thank you.
The next question comes from David Arcaro with Morgan Stanley . Please go ahead.
Hey, good morning, Thanks for taking my questions.
No.
Let's see I wanted to check just as the original 2023 gas utility earnings power of $2 25 to $2 35 is that a fair baseline.
Off of which you could grow going forward, assuming that weather kind of comes back to normal.
Or are there other structural.
Headwinds that'll be need to be worked through in terms of inflation being higher than expected or interest costs still being an incremental drag versus that.
Yeah. David This is Steve it's great question I think at this juncture. The answer is yes, because we have all of the mechanisms and the initiatives that we referenced.
In our prepared remarks, we really do get US back we will clearly as we get to the end of the year and we get to typically are here on their earnings call and in November we will be based on everything including.
Reintroduced what our expectations are for all of our business lines going forward, but I would readily.
Interest continues to be a headwind and rates are going to be a little bit higher for a little bit longer eurobank and most of the folks say that and we will have to factor that in and then what we can do on the other side in order to offset that that headwind.
Got it okay. That's helpful. Thanks and.
I was wondering if you could touch on the Mo gas and Omega acquisition.
Could you run through the financing.
Plans for making that acquisition what level of accretion that.
You might be expecting from it and then would you expect there to be growth investments on the back end going forward.
Sure.
Sure David It's Adam.
Yes, we did.
An announcement, we did say that we would expect to finance on a on a balanced basis.
And in fact did go out and.
Escalate our or.
Bring forward some of our equity players for the for the year.
Uh huh.
Effectively financed the equity side of the.
The ledger on the transaction already.
Prior to closing so we're we do expect it to be accretive.
We I don't think we've addressed exactly how much how accretive it would be we do see longer term growth.
Out of the this specific asset but.
They get a little premature we have not we've not closed the transaction yet.
And the one piece I would add is in addition to the pipeline as most people think about it. It also comes with Omega, which is an LDC like opportunity, which is at the southern end, but that's not a long term contract. So we look for opportunities to continue to grow that piece of the business as well.
Okay got it makes sense just last quick question I saw that equity needs. It looked like ticked up slightly for 2024, just wondering what was driving that.
Yes, so we.
In the quarter, we move forward.
As I just mentioned on Oh who've moved up our equity because of the acquisition and really pretty much exhausted, our ATM authorization for the year and don't expect to be back in the market until early next year.
That was not quite enough for our.
Totally satisfy our plans 443, so that extra bit in 'twenty four is really that's just moving.
Some of that remainder over into the next year.
Okay, Great. That's helpful. Thanks, so much.
Thank you.
The next question comes from Jason Fernandez with Bank of America. Please go ahead.
Mr. Fernandez Your line is open.
Your next question comes from Julien Dumoulin Smith with Bank of America. Please go ahead.
Hi, Good morning, it's Julien here can you hear me.
Hey, Julien.
Hey, good morning, guys.
Alright, I apologize that I don't know what that was but Uh huh.
We got that resolved here.
But with that said I. Thank you guys very much. This time, let me just follow up here on.
A couple of different details here first off high level.
Further interest in gas pipelines or LDC here at this point, obviously watching the moga update here in the last couple of months just want to understand how you think strategically about the direction of the company. Let me start there you got a few.
Bob.
Yeah, Joanna that Ed. Thank you for your question as Youre aware, because you and I have worked together since my arrival.
Since 2011.
Well that was brought here to grow the company and grow our natural gas company.
Hey, Brian .
As you can carry around there do acquisitions.
Ladies gas utility companies in that center.
<unk> and the efficiencies we get from these companies and also flying technology I'm, bringing their operations and so first of all on that.
Also as a natural gas company there are some strategic pipes at time of storage facilities.
Make sense to us and it's our job to tell that story to you of course, so we always stand ready.
Steady in the market.
As you know we have a very disciplined approach and we only do that.
See that in terms of acquiring and then we think it makes sense to the company.
Okay Ourself, our E&P company, we're acquiring and of course, our shareholders. So again as you know we take it.
Upon the purchase on the kinds of things and yes, we are in the natural gas business. We're predominantly a utility company a gas utility company and I think thats, what youll see many years to come.
Yeah, absolutely just wanted to clarify that.
Probably update I mean, excuse me then since you mentioned it I mean as we've known each other for over a dozen years here.
And through your leadership have you guys come to any further resolution or any sense of the timeline on succession announcements and reshuffling.
Yeah, Yeah, thanks for that as well as you know I'm on the board here, it's fires and what are the primary responsibility of the board of directors is yes.
And governance and some other environments and say, yes. It has taken a very methodical approach in terms of the search process and as we've stated are internal candidates as well as external candidates and the board just wanted to make sure that they are managing their process.
Yes, effective manner and back.
Retiring at the end of the year, so I suspect there'll be some maybe for a year.
Sure.
Yeah.
Got it excellent and if I can follow up on that.
Thank you again for Suzanne.
For everything over the year, but if I can follow up here on just a couple of nuances here you guys alluded the second or go to some of the <unk>.
This expense headwinds for 'twenty four you talked about rebounding can you just elaborate a little bit I know this is probably a little bit of a moving target, but can you just as best you understand right now maybe talk about what youre seeing in terms of that headwind here.
And then maybe talk at the same time about them.
Your episode of debt expectations about where you get by year end and in the 24 period.
Hi, Julien this is Steve Yes, if you think about it.
Interest rates, so it's really a tale of two pieces it's rates.
Yes.
And everybody else, yeah, we make our predictions and it looks like it could be higher for longer and we'll see how that goes on that's the that's the uncertainty that will continue to manage what we can manage is the amounts that were financing and as we outlined in.
In the deck, we are seeing great traction in paying down our deferred gas costs and bringing our short term debt into into line with our expectations. So we will continue to manage that component of it which you would expect us to and then we will react to the market as as the interest rate environment and the outlook.
<unk> is a little bit Adam on the <unk> electric Yeah, we do Julian we still continue to see us tracking towards our target by the end of 'twenty four.
Good progress coming out of the deferred position that we're in.
So cash flow has been strong, we obviously need to lower the denominator a bit.
That metric as well and that will come with with further recovery.
We do see that tracking into the end of <unk> 44 was when we would see a city hitting that target.
Yeah, and that target being 15%, 16% right Adam.
That's right.
Awesome. Thank you guys very much all the best Thank you Susan.
Sure Julie.
As a reminder to ask a question you May Press Star then one.
The next question comes from Christopher Jeffrey with Mizuho. Please go ahead.
Hi, Good morning, everyone just wanted to touch on the lower of CCM benefit.
And it looks like that might be true it up and for Q, a little bit just kind of wondering is that something that we should expect going forward as far as potential timing consideration through the through the quarters.
Yes, Chris This is Steve it's a great question all of the discussion in CCM dealt with 22, if we're comparing year over year and what we saw and it was well documented in all of our.
Our disclosures last year is that we are.
After and in discussions with the Alabama.
Alabama Public service Commission and looking at the customer bills, we all agreed to spread CCM benefit, which we used to recover in a very short period of time over a number of years I believe it was over five years and originally it was shorter than that so that that agreement, which was the right answer for our customers resulted in us.
Changing the recognition of the CCM benefit in the fourth quarter of last year. So you've got you have some scratchy timing stopped when you compare year over year. It has no bearing whatsoever on the CCM benefits, which we like and it really does help us align with our customers in terms of keeping.
Costs are under control she is going to be one of those scratchy comparisons year over year this quarter and next quarter Youll see a reversal in the other direction and we will make sure to highlight it.
Great. Thanks, Steve and then maybe just an update on your guys thinking about.
Additional R&D projects to the ones you have.
Yes.
We continue to work on projects.
Have have an interconnect working are coming on online are expected to come online.
Early next year.
In eastern Missouri.
Have a project that we're.
Close to talk more about on.
On the west side of Missouri here in the next few months.
We continue to examine and.
Developed projects across specifically, Missouri.
And really under the and continue to do that under the regulatory umbrella.
Okay.
Great. Thanks, Adam Thanks, everyone.
Okay.
This concludes our question and answer session I would now like to turn the call back over to management for closing remarks.
Thank you all once again for joining us will be around throughout the day for any follow ups and we look forward to catching up with you then.
Great Day Goodbye.
The conference has now concluded. Thank you for your participation you may now disconnect.
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