Q2 2024 Spire Inc Earnings Call

Participants

Megan Mcphail; Investor Relations; Spire Inc

Steven Lindsey; President, Chief Executive Officer, Director; Spire Inc

Scott Doyle; Chief Operating Officer, Executive Vice President; Spire Inc

Steven Rasche; Chief Financial Officer, Executive Vice President; Spire Inc

Richard Sunderland; Analyst; JPMorgan

Jamieson Ward; Analyst; Guggenheim Partners

Christopher Jeffrey; Analyst; Mizuho Securities USA LLC

Presentation

Operator

Good day and welcome to the Spire fiscal 2024 second quarter earnings call. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Megan Mcphail, Managing Director of Investor Relations.

Megan Mcphail

Please go ahead morning and welcome to Spire's fiscal 2024 second quarter earnings call. We issued an earnings news release this morning. You may access it on our website at Spire energy.com under Newsroom and the slide presentation that accompanies our webcast may download either from the webcast site or from our website under Investors and then Events and Presentations before we begin, let me cover our safe harbor statements and use of non-GAAP operating 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 Steven Lindsey, President and CEO; Scott Doyle, Executive Vice President and COO; and Steven Rasche, Executive Vice President, CFO; also in the room today is Adam Woodard, Vice President and Treasurer. With that, I will turn the call over to Steve Lindsey.Steve?

Steven Lindsey

Thanks, Megan, and good morning, everyone. Thank you for joining us today for a review of 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 $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 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 focused on strong oversight and governance. Last month, we announced the election of Sherry cut as the newest addition to our Board, our extensive business experience and leadership in human resources along their background and Economics and Finance will be vital as we execute our strategy for 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 our 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, continued 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. So armed with strong and well-positioned company with a proven growth strategy. We have confidence in that strategy and in the ability of our experienced management team and employees to successfully lead us into the future.
With that, I'll now turn the call over to Scott.

Scott Doyle

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 part of the Spire team.
Turning now to an update on the gas utility side, 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 iSeries. Our semiannual capital recovery infrastructure rider. Last week, the Missouri Public Service Commission approved a $16.8 million in new revenues for recovery of system upgrade investments may September 2023 through February 2024, bringing our annualized interest revenue to $36.9 million rates are expected to be effective later this month. In Alabama, the rates that were effective January first were the result of working alongside the Public Service Commission staff during our annual rate-setting process.
As you may recall, our rates and Alabama percent using a forecasted budget for 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 as worse revenue during the quarter, we experienced warm temperatures across all of our service territories and Alabama temperatures were approximately 10% warmer than normal. I'm glad to say as a result of our efforts with the Alabama PSC to incorporate more accurate customer usage patterns into rates.
The weather normalization mechanism in Alabama continues to be effective. However, in our Missouri separate service territory service, severe fluctuations in temperatures throughout the quarter resulted in the weather normalization adjustment rider or WNA are being less effective than last year, and the lost weather related margins in our residential customer class during the quarter were only partially mitigate. 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 work cover lost weather related margin in the future as a reminder, the WNA our 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 increase in 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 and 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 5 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 at our gas utilities year over year. Our gas utility CapEx increased 7% to $311 million with an emphasis on upgrading distribution infrastructure and connecting more homes and business. We continue to install advanced meters for residential customers across our service territory. And 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 Utilities 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 projects.
I will now hand the call over to Steve Rasche to discuss this project in more detail and provide a financial update.

Steven Rasche

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 and integration as well as the solid performance of the system this winter. We've also updated our expansion plan in 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 recontracting 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 US, we were able to lock in rates well above our initial estimates and for contract terms, consistent with 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 was 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, reflected 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 million to $12 million and 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 known and only partial mitigation in Missouri. Our 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 is reflected in the second quarter results. Midstream also capture 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 8 provides detail on key variances hitting a couple of the highlights. As I just mentioned, gas utility margins were higher overall and the volume metric component net of weather mitigation was $10.3 million higher in Alabama and $8.6 million lower in Missouri Gas Marketing margins, 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 and 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 base 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 for approval of new storage rates and the value created during the winter and 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 sale settlement and then we had equity units conversion and our ATM program placed [$12 million] and 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 and our plan is largely tied to future refinancing activity.
I would also note that we blended the short term, $200 million loan in January, and this loan will be fully repaid in early May, and we continue to target FFO-to-debt of 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 AGA Financial Forum later this month.
Operator, we're now ready to take questions.

Question and Answer Session

Operator

(Operator Instructions) Richard Sunderland, JPMorgan.

Richard Sunderland

Hi, good morning. Can you hear me?

Steven Lindsey

We can Rich.

Richard Sunderland

Thank you for the time today. A couple of 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 the segment revisions?
I think Dan made some assets, maybe a 1% decline all 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-debt stands and currently given this weather headwind as well?

Steven Lindsey

Yes. Rich, let me let me start on that yet. You know, we have a range and I can 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 it's weather in the utility and a little bit of interest rates at the corporate. And that when I what I would say is that as you think about this half year and then play it forward as we think about next year that the beauty of the weather head winds, if there's any if there's any bright sides of that, that cloud that we've dealt with is that we would expect to get back to normalized weather and mitigation next year, which is essentially what we had in Missouri last year.
And that if you look at the material and we did again in the appendix during that presentation provide a lot more granular information on the whether it would point to a rebound of the 18% range. So if you think about how to model the rest of this year. But then what does that look like as you rebase this year going forward that we're very confident that we're still on track.

Steven Rasche

Yeah, Richard, I think that's a good good question. Ffo-to-debt connecting that to our weather pull through. But as you know, we've given our volume, 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. And so that target range that we do now expect that to happen after year end '24 on Monday, by the bright side, we do see deferred gas costs almost completely recovered here at the end of the quarter and hope to be I've completely recovered here shortly.

Richard Sunderland

Got it. Thank you. Very helpful color all around. And then I think you unpack 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 the what the degree days are. Is that 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, the weather impact in the results is actually really showing up this quarter. If you could help parse kind of 2Q versus one for you, that'd be helpful.

Scott Doyle

Hey, Richard, it's Scott Doyle.
Yes, hey, maybe I can help with that a little bit.
Maybe just start with the response and if that tie back to the quarter last year, we were at we were 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 again, it was variable weather so much so that there was no real consistent weather pattern across 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 the eight towards the HDDs, which show that 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 work we have to do with PSC 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 more closely with staffs, we work to enhance and improve that mechanism.

Richard Sunderland

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

Steven Lindsey

Yes, Rich, great question. We have continued to take a higher for longer tack and obviously the interest rate forecasts are moving as well. I think a lot of the fee extra interest expense receipt is more balanced based rather than interest rate base. So again, going back to that kind of the volumetric pull through that's probably having more of a kind of a stubborn stubbornly long impact there than actual our actual interest rates forecast.

Richard Sunderland

Got it. Got it tough while I'll leave it there. Thank you for the time today.

Operator

(Operator Instructions) Shar Pourreza, Guggenheim.

Jamieson Ward

Yes, hi, guys. It's Jamieson Ward on for Shar.
How are you?

Steven Lindsey

Good morning Jamieson.

Jamieson Ward

So on actually which had some good questions there. There are a couple of the ones I had, but I did have I wanted 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 mechanism. And then 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?
I'm just trying to get a sense of where we're at like is there a solution in mind and you're just waiting for the next rate case? Have you filed to kind of tack 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 and just kind of how we should think about and sort of the work to be done there in order to get them to match up. And then the follow-up would just be a timing of when we might see, I guess in this case asking about the case. But really the question is when we might see a new mechanism take effect.

Scott Doyle

Hey, Jamison, Scott Doyle Again, thank you for your question. I think the simple answer to your question is, is this something that does require a little more study 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 It was not a normal weather pattern and 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 and answer your question about the timing of the rate case as a result of us using that is risk 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're on. We have underway right now.

Jamieson Ward

Perfect. Very clear. I really appreciate the color. Thanks, guys.

Operator

(Operator Instructions) Christopher Jeffrey, Mizuho Securities.

Christopher Jeffrey

Thanks for the question on 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. I'm 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 fee is expected after the capacity expansion and '25 are those rated at? Are those kind of locked in at the current rates right now at Red.

Steven Rasche

Chris, this is Steve.
Let me take a shot at that. You had a number of things there. If I miss something just up, just ping me.
Yes, you know, if you think about the midstream business overall broadly split start abroad, we're going to step into the new scale that we currently operate and we are striving to get to as we finish the expansion, Spire Storage West and the back half of this year in '25 and '26.
And the reason for that and the reason why you should expect to see that kind of step-up over the next 2.5 years. Is that the physical dynamics of storage or that you bring the storage online? And then as the wells and the cavern sees that over time, the team and not only get comfortable with how the operations are, but then we get a better feel for how we can optimize the use of that of that cavern capacity over time.
It is pretty standard in the space, 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 just see that kind of step up over the next 2.5 years and we've given the guidance for this year for the midstream business. And we and we are we gave you a preview of how to think about the midstream business for '25. Will we continue to look for opportunities to optimize?
Absolutely. That's part of our job.
But remember, the midstream business is our business where the rates that we charge really are driven by the volatility in the commodity need. But the actual monetization that volatility in many ways is what is left for our customers, but it does support higher rates. And as we mentioned on the call in the prepared remarks, we have now completed the open season and the recontracting or the capacity that is online that actually just started injection in April, but will 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 there in the mid 20s range, which is kind of where the number that segment of the market is right now. We if you look at the market overall, the terms for contracts are between three and five years and our contracting falls right in that category. In fact, I think the average is right the middle at 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 and that has started a little bit about if you think about pie-in-the-sky. But right now, we are laser focused in making sure that once we complete the integration for for MoGas that we lock down and get everything operationalize their pumps, both waste and actually performing very well.
And lastly, that we complete the expansion, the SPAR stores west and those are really our current focus, and that will be our focus in what we can take a breath and get through the winter, not probably next winter because that's when the rubber meets the road for the SPAR stores, West facility then we'll start looking at where we are might other opportunities be. But at this juncture, I wouldn't want to 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 2.5 years.

Christopher Jeffrey

Great. Thank you, Steve. That's super helpful. And then maybe just last one for me. Just kind of in terms of the reiterated guidance for '24, if I kind of just denote 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. I'm 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?

Steven Rasche

Yes, that's a that's a pretty broad question. I have let me let me focus on the utility in the corporate and other segment because I think we've been pretty clear and what the drivers and movers are in both the midstream and the marketing segment.
Yes. If you remember, last year we had some outsized one-off costs and 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 on a one 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 are 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.
But also support the growth, and that's going to be an ongoing process. So that will be one of the tailwinds that will 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 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 cost recovered. The the headwinds on the balances in short-term debt should should mitigate quite a bit and maybe turn into a tailwind at all, though we have the same view that the market does this by a higher for longer, getting those balances down is another way in which we should be able to create a little bit of uplift when you compare this year versus last.

Christopher Jeffrey

Great. Thank you.

Operator

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

Megan Mcphail

Thank you for joining us on the call today, and we look forward to talking to you later today and in the coming weeks and AGM. Have a good day.

Operator

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