Yahoo Finance Spire Inc. (NYSE:SR) Q2 2024 Earnings Call Transcript
Spire Inc. (NYSE:SR) Q2 2024 Earnings Call Transcript May 1, 2024
Spire Inc. misses on earnings expectations. Reported EPS is $3.45 EPS, expectations were $3.86. Spire Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day and welcome to the Spire Fiscal 2024 Second Quarter Earnings Call. All participants will be in listen-only mode. [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. Please go ahead.
Megan McPhail: Good morning and welcome to Spire's fiscal 2024 second quarter earnings call. We issued an earnings news release this morning. And you may access it on our website at spireenergy.com, under Newsroom. There's a slide presentation that accompanies our webcast. You may download it either from the webcast site; or from the -- our website, under investors and then Events & Presentations. Before we begin, let me quickly 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 upon reasonable assumptions, there are various uncertainties and risk factors that may cause future performance or results to be different than those anticipated.
These risks and uncertainties are outlined in our quarterly and annual filings with the SEC. In our comments, we will be discussing net economic earnings and contribution margin, which are both non-GAAP measures used by management when evaluating our performance and results of operations. Explanations and reconciliations of these measures to their GAAP counterparts are contained in both our news release and slide presentation. On the call today is Steve Lindsey, President and CEO; Scott Doyle, Executive Vice President and COO; and Steve Rasche, Executive Vice President and CFO. Also in the room today is Adam Woodard, Vice President and Treasurer. With that, I will turn the call over to Steve Lindsey. Steve?
Steve 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 NEE of $3.70 per share a year ago. The year-over-year decrease was driven by a few key items, including lower usage in Missouri due to significantly warmer-than-normal weather and higher interest expense. Scott and Steve will discuss our results in more detail in a moment. Our results reflect our dedication and commitment to serve our customers and communities safe and reliable energy. And we continue to execute on our strategy to grow our businesses, invest in infrastructure and drive continuous improvement to deliver value over the long term.
Having a diverse portfolio of natural gas businesses enhances our ability to provide value. Further, consistent with our Board of Directors' focus on strong oversight and governance, last month, we announced the election of Sheri Cook as the newest addition to our Board. Her extensive business experience and leadership in human resources, along with her background in economics and finance, will be vital as we execute our strategy. Her presence and involvement throughout our Alabama service territory further ensures we remain connected to our communities we serve. And I look forward to working closely with her in the future. Before I wrap up, I would like to highlight the important role that natural gas plays and will continue to play as part of America's sustainable energy future.
Approximately 200 million Americans and businesses use natural gas, because it is 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 Spire, continue to invest billions of dollars of capital each year to enhance the natural gas distribution and transmission systems. As an industry, we can be proud of the important work we've done in modernizing infrastructure and deploying technology that have 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.
Spire is a 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 you, 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 on maintaining safe and reliable natural gas service to our customers through the winter heating season. I am extremely grateful and proud to be a part of the Spire team. Turning now to an update on the Gas Utility segment. Our commitment to strong operations and continued modernization of our system was visible when we were well positioned to deliver safe, reliable and affordable natural gas energy for our customers and communities who depend on this resource as a critical energy need. We remained 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 ISRS, our semiannual capital recovery infrastructure rider. Last week, the Missouri Public Service Commission approved $16.8 million in new revenues for recovery of system upgrade investments made September 2023 through February 2024, bringing our annualized ISRS revenue to $36.9 million. Rates are expected to be effective later this month. In Alabama, the rates that were effective January 1st were the result of working alongside the public service commission staff during our annual rate-setting process. As you may recall, our rates in Alabama are set using a forecasted budget. Our second quarter results reflect the benefits of these constructive regulatory mechanisms we have in each state, as earnings benefited from new rates in Alabama and previously approved Missouri ISRS revenues.
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 service territory, service severe fluctuations in temperatures throughout the quarter resulted in the weather normalization adjustment rider or WNAR being less effective than last year. And the lost weather-related margins in our residential customer class during the quarter were only partially mitigated. Overall, weather for the quarter was 15% warmer than normal.
However, combined the months of February and March were nearly 32% warmer than normal. During these months, we saw periods of extremely warm days followed by periods of more normal temperatures. These significant fluctuations in weather can cause usage to be lower than what the degree days would imply. We look forward to working with the Missouri PSC staff to evaluate how to better recover lost weather-related margin in the future. As a reminder, the WNAR does not apply to the less weather-sensitive commercial, industrial and transportation customer classes. Slides 15 and 16 in our appendix include further information on weather and customer usage for the quarter and year-to-date. During the quarter, interest costs increased. And O&M costs were also slightly higher than last year's second quarter, increasing $2.3 million or approximately 2%.
However, year-to-date, our O&M expenses remain below last year. Let me assure you, we are laser focused on navigating these headwinds. On the cost side, we continue to control our O&M expenses. We believe that, going forward, controlling O&M increases will enable our utility financial performance to further improve fiscal 2024. We are working to improve efficiencies and reduce costs across the organization. We are targeting elements of our cost structure that can be reduced based on enhancements in technology that have occurred or will occur in the coming years. In addition, we are working to ensure our shared services are efficiently aligned and supportive of our capital investment programs. Moving to Slide 5 and an update on our capital investment plan.
We continued 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 businesses. 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 Utility segment remains unchanged.
However, we are increasing our total fiscal year '24 capital investment target by $35 million to $800 million in support of our storage expansion project. I will now hand the call over to Steve Rasche to discuss this project in more detail and provide a financial update.
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 at Spire Storage West, supporting our targeted completion in fiscal year '25. Here are a few key points. During the quarter, we completed our open season and re-contracting activities for the capacity that is coming online in fiscal years '24 and '25. Consistent with the higher demand we've been seeing in the Western U.S., we were able to lock in rates well above our initial estimates and for contract terms consistent with the current market of three to five years.
We also increased our total targeted investment by $55 million to $250 million, with $35 million of that investment falling in fiscal year '24. This increase 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, reflecting the high demand across the energy sector and the market overall. Combining these factors, the returns on the project have improved from our original target. To put this in perspective, the total impact of the Spire Storage West expansion and a full-year of MoGas is expected to increase our Midstream earnings by $10 million to $12 million in fiscal year '25.
Now turning to our results. Earlier today, we reported fiscal second quarter net economic earnings of $197 million, down $2.6 million from last year. Looking at the segments. Our Gas Utility had earnings of $188 million, an increase of $4 million from last year. As Scott just touched on, higher rates and effective weather mitigation in Alabama were offset in large part by lower usage and only partial mitigation in Missouri. Both Gas Marketing and Midstream had very tough comps from the prior year, and as we guided earlier, we did not expect those highly favorable market conditions to recur this year. We did benefit from the cold snap in January, and both segments were well positioned to capture value. For marketing, that value is reflected in the second quarter results.
Midstream also captured value, and we anticipate seeing that showing up in the back half of this year. And lastly, lower corporate costs were offset by higher interest expense. On a per share basis, we reported net economic earnings of $3.45 per share compared to $3.70 last year, with most of the decline attributed to the impact of higher share count this year as a result of our forward sale that settled in December and the equity unit conversion in March. Slide 8 provides detail on key variances. Hitting a couple of the highlights. As I just mentioned, gas utility margins were higher overall. And the volumetric component, net of weather mitigation, was $10.3 million higher in Alabama and $8.6 million lower in Missouri. Gas marketing margins, 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-through of new storage rates and the value created during the winter.
And corporate costs moved 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 a forward sale settlement and an equity units conversion. And our ATM program placed $12 million in forward settlements this quarter. This leaves very modest equity needs through 2026. And with the $350 million note placement by Spire Inc., our long-term debt needs are also largely satisfied. And the remaining long-term debt financing in our plan is largely tied to future refinancing activity. I would also note that we funded a short-term $200 million loan in January, and this loan will be fully repaid in early May.
And we continue to target FFO-to-debt at 15% to 16% on a consolidated basis. So in summary. We are well positioned to continue growing and delivering strong overall performance for our customers, communities and investors. Thank you for your continued interest in Spire. And we look forward to seeing many of you at the AGA Financial Forum later this month. Operator, we're now ready to take questions.
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