Spire Q4 2023 Earnings Call Transcript

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Provided by Quartr
November 16, 2023

There are 8 speakers on the call.

Operator

Good day, and welcome to the Spire Year End Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Scott Dudley with Spire Investor Relations.

Operator

Please go ahead.

Speaker 1

You may access it on our website at inspireenergy.comundernewsroom. There is a slide presentation that accompanies our webcast. You may download it from either the webcast site or from our website for investors and then events and presentations. Before we begin, let me cover our Safe Harbor statement and the 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.

Speaker 1

While 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 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 evaluating Presenting on the call today is Steve Lindsey, President and CEO Steve Rasche, Executive Vice President and CFO. Also in the room today is Adam Woodard, Vice President, Treasurer And CFO of our Gas Utilities. I also want to formally introduce Megan McPhail, recently joined Spire Managing Director of Investor Relations.

Speaker 1

Megan brings 15 years of experience in the utility industry, including 5 years in Investor Relations. He is taking the reins as I will be retiring on March 1 next year. With that, I will turn the call over to Steve Lindsey.

Speaker 2

Thank you, Scott, and good morning, everyone. I'm pleased to have this opportunity as CEO to update you on our performance for last year, Now on our priorities, plans and outlook this year and beyond. I want to start by acknowledging the vision and leadership of Suzanne Sitherwood, our CEO, over the last dozen years, It has driven the successful execution of our strategic priorities to grow and transform our company. At HERS stewardship, we attained the scale and foundation that Positioned us to organically grow our gas utilities, expand our gas marketing operations and strategically invest in midstream. Today, Spire is a financially strong and expanding natural gas company that is well positioned as a leader in the industry.

Speaker 2

I'm honored to build on this strong foundation and lead Spire into the future. In doing so, I want to emphasize that our strategy will not change. We remain committed to the same priorities, growing our businesses, investing in infrastructure, and driving continuous improvement. And our focus on strong operations and successful While FY 'twenty three presented challenges and headwinds, including regulatory outcomes, weather, inflation, Our commodity costs and rising interest rates were able to meet our capital plan focused on our gas utilities and marketing was well positioned to take advantage of market opportunities. To also advance our midstream segment, we announced acquisition of MoGas and the purchase of Salt Plains storage facility.

Speaker 2

We're positioned for success in FY 'twenty four and beyond as we continue delivering on our growth strategy. We have a robust 10 year CapEx plan centered on pipeline upgrades and new business for our gas utilities remain squarely focused The basics of strong execution, which includes driving greater efficiency through streamlining systems and processes, maintaining an unwavering commitment to operational excellence. Same time, we'll work to further advance our marketing midstream businesses building on recent expansion and growth. I'm confident in our ability to deliver value over the long term for customers, communities, employees and shareholders. We'll For FY 'twenty three, we reported net economic earnings of $4.05 per share, reflecting Higher earnings and gas marketing midstream offset by lower earnings from our gas utilities.

Speaker 2

Steve will discuss our financial results in more detail in a moment. In FY 'twenty four, today we are launching earnings guidance of $4.25 to $4.45 per share and reiterating our long term annual earnings growth target of 5% to 7%. Thanks for that growth is the midpoint of our FY 24 guidance range, dollars 4.35 per share. You know, the long term driver of our earnings growth is capital investment in our gas utilities. For FY 'twenty three, our capital investment totaled $663,000,000 with nearly 90% invested in our gas utilities.

Speaker 2

Of that amount, we invested $290,000,000 in upgrades or pipeline infrastructure and additional $110,000,000 to connect more homes and businesses to safe, Reliable and affordable natural gas service. The midstream segment CapEx totaled $73,000,000 largely for the expansion of Spire Storage West. I would note that our cash spend in midstream came in below our forecast for the year due to timing. However, the project remains on schedule and on budget. Looking to FY 'twenty four, we expect to increase our utility capital investment to $660,000,000 reflecting increases in infrastructure and the business, while as further deployment of advanced meters.

Speaker 2

We'll also be making an initial investment in an RNG project, as Spire Missouri is developing a partnership with Kansas City Water 70% of our gas utility spend this year, we invested system reliability and safety and another 16% dedicated to customer growth. Midstream CapEx is expected to be $105,000,000 reflecting the timing And construction equipment purchases for our storage expansion project that I just mentioned. Recognizing our performance in 2023 as well as In our long term growth plans, our Board of Directors recently increased Spire's common dividend by 4.9% with an annualized rate of $3.02 per share. This is the 21st consecutive year of dividend increases, which we have continuously paid since 1946. With that, I'll turn it over to Steve Rasche for a financial review and update on our guidance and outlook.

Speaker 2

Steve?

Speaker 3

Thanks, Steve, and good morning, everyone. Let's start with a brief review And then I'll share our expectations as we look into 2024 and beyond. For our fiscal year ended September 30, 2020 We reported net economic earnings of $228,000,000 5.5 percent ahead of last year. On a per share basis, our earnings of $4.05 were $0.19 ahead of last year. These full year results incorporate our 4th quarter loss $38,000,000 or $0.78 per share, reflecting the seasonality of our business.

Speaker 3

Full analysis Our quarter is included in the appendix to this presentation and I will focus my remarks today on the full fiscal year. Looking at our business segments, our gas utilities are just over $200,000,000 down 1% from last year as new customer rates in both Missouri and Alabama And more than offset by higher interest expense and the impacts of warm weather. As marketing was well positioned Take advantage of commodity price volatility last winter and posted earnings of just under $48,000,000 an increase of more than 75% compared to last year. Midstream delivered earnings of $14,000,000 up $3,000,000 from last year, reflecting our growing scale and optimization. And finally, higher interest expense and corporate costs.

Speaker 4

Looking a

Speaker 3

bit deeper into our results, starting with revenues and margins here on Slide 7. Revenues were up 21% this year with our gas utility revenues up $511,000,000 reflecting higher gas costs, including both the higher commodity costs from last winter as well as deferred gas costs from the previous year. As a reminder, gas costs are a pass through on our customer bill and netting out those costs, the gas utility contribution margin grew by 8%, Marketing contribution margin was also higher as they created significant value from the transportation and storage positions as a result of favorable Midstream margin was up $13,000,000 reflecting our growing operations and optimization of injection and withdrawal commitments. This increase also reflects the addition of Salt Plains in our fiscal Q3. This storage business is performing well against our expectation.

Speaker 3

And while its revenues and margins are included here in this analysis based on GAAP financials, its earnings are excluded from the consolidated net economic earnings in As I touch on shortly, Salt Plains will be fully included in our net economic earnings in fiscal 2024 and beyond.

Speaker 4

Looking at a couple

Speaker 3

of other key variances on the next slide and focusing on the net variance column. Gas utility operations and maintenance expenses reflect higher bad debts and the $24,000,000 of Missouri overhead costs that were expensed in 2023 But deferred in 2022. The remaining run rate expenses were up just over $10,000,000 or 2.5% as our cost controls helped offset higher on payroll expenses. O and M costs for our marketing and midstream segments reflect growth in those businesses. Corporate costs were higher this year primarily due to one time consulting and professional services fees not anticipated to recur in 2024.

Speaker 3

Interest expense for the year was up nearly $66,000,000 driven equally by two factors. First, long term debt balances that were higher by approximately $475,000,000 net of refinancings. 2nd, our short term interest rates, up Roughly 3.90 basis points over last year. We continue to make progress in collecting our deferred gas cost balances and expect to substantially recover them by the end of the heating season. Other income reflects income from our benefit plans, plus roughly $14,000,000 in higher Missouri carrying cost credits.

Speaker 3

Now, turning to our outlook. We anticipate our net economic earnings per share for fiscal year 2024 to be between $4.25 and 4 7% using the midpoint of our fiscal year 'twenty four range or $4.35 as a base. As a reminder, Our long term target is calibrated to balance safety, reliability and affordability with our cost of capital recovery mechanisms. Steve mentioned earlier, We've updated and extended our capital spend plans fiscal year 30 3 and raised the target to $7,200,000,000 Turning to Slide 10, here are our business unit earnings ranges for fiscal year 'twenty four. Let me hit on a few points.

Speaker 3

We anticipate our gas utilities to earn between $230,000,000 $240,000,000 next year, reflecting the combined benefits of A full year of new Missouri rates as well as ISRS filings, new Alabama rates and lower interest expense and cost management. Yes. Marketing is anticipated to earn $19,000,000 to $23,000,000 a slight increase in our baseline expectations driven by customer growth. Stream expects to earn between $21,000,000 $27,000,000 reflecting the addition of Salt Plains and the expected closing of the MoGas acquisition. In addition, see the earnings pull through in the back half of fiscal year 'twenty four as we begin operating the first tranche of new storage capacity at Spire Corporate and other, principally interest cost is anticipated to be in the range of negative $18,000,000 to negative $22,000,000 Down significantly from last year based upon lower corporate cost and lower interest cost, including the impacts of the interest rate hedging.

Speaker 3

Speaking of interest and financing, we've also updated our 3 year financing plan as outlined here on Slide 11. I I am pleased to say that we have locked in approximately 80% of our equity needs for fiscal year 2024. This includes the forward sales agreement from earlier this year of roughly 100 and $13,000,000 that's expected to settle by the end of the calendar year. It also reflects the $175,000,000 conversion of equity units on March 1. Bill, look to our ATM program for the remaining equity needs in fiscal year 2024 and we expect very modest equity needs in 20252026.

Speaker 3

Turning to debt financing, we expect to refinance $150,000,000 debt maturity at as well as complete the remarketing of the debt component for our equity units. In addition, we expect Issue an incremental $50,000,000 to $100,000,000 of new long term debt to support the MoGas acquisition. We have no planned issuance beyond the refinancing of maturing debt in fiscal years 2025 and 2026 and remain well positioned relative to future interest rates. We continue to target FFO to debt at 15% to 16% on a consolidated basis and expect to be in this range in 2025. In summary, we are executing in line with our plans as we turn the page to fiscal year 2024.

Speaker 3

We are well positioned to deliver both operationally and financially. Pat, let me turn it back over to you, Steve.

Speaker 2

Thanks, Steve. In fiscal 'twenty three, we delivered solid financial and operating performance, including Strong results for Spire market. We will execute on our capital investment plan, supporting the growth of our gas utilities and the expansion of Spire Moving on this momentum, we are squarely focused on executing to achieve our performance targets for FY 'twenty four and beyond. We look forward to updating you on our performance and progress throughout the year. Thank you for joining us today and now we're ready to take questions.

Operator

Thank you. We will now begin the question and answer session. At this time, we will pause momentarily to assemble our roster. Our first question comes from Richard Sunderland with JPMorgan. Please go ahead.

Speaker 5

Hi, good morning. Am I coming through clearly?

Speaker 3

You are. Good morning, Richard. Great.

Speaker 5

Thank you. Could you unpack 2023 relative to the 3Q outlook, particularly what landed in utility results versus plan? I'm curious if any of this is work to de risk 2024 that's showing up as, say, expenses in 2023?

Speaker 3

Yes, Rich, this is Steve. Let me take a shot and I'm sure that Adam or Steven want to weigh in. Yes, if you look at our Q4 Against our guidance, interest expense came in a little bit hotter, as you might recall. Short term rates went up a little bit Beyond what the market, including your firm had predicted, and so we had to offset that. And then it really was corporate cost.

Speaker 3

A lot of those are one off professional fees and things that we don't expect to recur, which is why you See the corporate costs coming back in line next year. Those were really the big drivers. Everybody else came in reasonably, in line with the plan that we would have expected.

Speaker 5

Got it. Understood. And then you touched on this a little bit to the previous question, but What are you assuming in 2024 cost management? Curious where those efforts stand in your overall line of sight to 2024 expenses? I guess mostly with utilities since you talked about the corporate one offs.

Speaker 3

Yes. Let me start on the cost management, which You saw in the back half of this last fiscal year and it shouldn't be lost on anyone that we started the year as many folks did Pretty hot in the run rate of expenses and we ended up bringing those back down to below the 4% that we had guided after you pull out I'll add that. So the efforts that we continue to have in place, which start with How we operate efficiently involving technology and innovation really are continuing into next year. We have got a number of initiatives that get us off on the right foot starting out. If you kind of If you kind of run down the big movers, bad debt was one that traded against us last year.

Speaker 3

That was more reflective of the higher commodity costs last We have a really solid collection program. I don't suspect given where commodity costs are now And we'll see that as an adverse move. It probably moves back in the right direction. We continue to manage not only our the cost We can control in a big way, which would be the cost that we incur operating the businesses, but also our 3rd party cost. And you know That there were a lot of headwinds in 3rd party costs this year and it's not just us.

Speaker 3

You've heard it from the industry and the cost of locates, Some professional fees and we see those moderating as we've seen overall inflation rates coming back down to a more reasonable level. So those would be some of the key items that we're working on.

Speaker 2

And Thanks, Rich. This is Steve Lindsey. And I think just to follow-up on that, what we're really looking to do going forward and it started this year, like Steve mentioned, has really drive value throughout the utilities. We We are on common platforms now, which makes a lot of difference when you think about it from a logistics perspective, whether it's around managing the people, managing the from a supply chain perspective or the fleet. So I think we're set up well-to-do that, as well as really starting to reap the benefits of the capital investments that we've been making on infrastructure.

Speaker 2

If you think about If you think about one of the metrics that we follow very closely, our leasing per 1,000 system mile is down over 60% over the last 5 years. Those are O and M costs that in the future It will not occur. So I think all those things together really give us a strong foundation for managing our expenses, not only in the near term, really more for the long term.

Speaker 3

Yes. And then, Rich, you had asked a question on other on the other line, which is coming down pretty dramatically. The biggest mover there This can be interest rates. We've our level of borrowing is down and we're managing interest rates. As you know, we are fairly active in interest rate So we actually see interest cost at the Holdco level, which is what comes up in corporate Now they're down from the run rate that we've seen in 'twenty three.

Speaker 3

And then those one off costs aren't going to recur. So our cost control isn't just At the operating businesses, it's really in how we manage at the shared services level and we're seeing some great benefits there.

Speaker 5

Great. Thanks for all the color there. I'll pass it along.

Operator

Your next question comes from Gabe Moreen with Mizuho. Please go ahead.

Speaker 4

Good morning, everyone. Maybe if

Speaker 6

I can just keep on the gas costinterest expense outlook. Can you just talk about, maybe starting with the latter, the interest expense hedges and the lack of sensitivity to Term rates in 'twenty four. Were those hedges you had entered into a while ago? Are those relatively recent? And then also on the gas cost, maybe you can just talk about, I guess, is this just a question of the forward curve?

Speaker 6

You're making your own assumptions on gas costs? Just curious about that.

Speaker 4

Yes. So we actively are hedging gas costs as well for the benefit of the customer, but The interest rate program is ongoing, so it is more of a dynamic program. So I'm not I wouldn't speak to any specific aging of hedges, but feel obviously feel pretty good about Our sensitivity to rates in the front year, but we do see the deferred balances declining Throughout the year, as Steve mentioned, and really getting to kind of a more normalized deferral state by the end of the winter.

Speaker 5

Okay. And then maybe if I

Speaker 6

can ask about the storage project and some of the CapEx slippage. Is there Can you just talk a little bit about more that about talk a little bit about that more? Is it just a question of timing? Is there any cost inflation? Any specifics on what the slippage is

Speaker 2

Dave, Steve Lindsey here. And thanks for that question. And it is timing. Some of it is round material, some of it is round equipment. We continue to project that for the full life of the project that we will be on time and on budget.

Speaker 2

Obviously, there are some challenges as you get into winter in terms of what you We're actually going to be doing some things inside some facilities to continue to work forward on that. So we were very pleased with the initial open season that we had. We had a lot of strong interest there. We The same with the next open season. And so from the overall project perspective, I would just anchor back to we're on time and on budget.

Speaker 3

And Gabe, if you look at our longer term forecast, you can see that $20,000,000 or $30,000,000 moved from

Speaker 2

what

Speaker 3

actually happened in 'twenty three to 'twenty four, That's more cash spend on the project. As you know, construction season is now largely over in Wyoming with the beginning of The snow, but that we benefited from the weather in October and so we were going headlong. So some of that activity, which we considered in the construction season that was the And season that was the summer actually leaked over into the next fiscal year, but you shouldn't read anything more into that and then just fine tuning how the cash is actually going up.

Speaker 6

Thanks, guys. If I could just squeeze in one last one on pension expense and the assumptions, I think last year was a benefit, what you're Assuming for next year and to the degree it's a swing factor in our 'twenty four guidance?

Speaker 4

Gabe, I would not characterize it as a swing factor in our In our 44 guidance, I'd have to go back the K will be out here in a couple of hours, but I'd have to go back to take a look at the exact assumption. There are several that go into that, but

Speaker 3

yes, and Gabe, if you're focusing on the miscellaneous income line, we do have Some non qualified benefits where the funds that we've used to fund those programs do are subject to Market returns and we've seen that swing negative in 'twenty two, it was positive in 'twenty three. Our expectation is always kind of benign in terms of just Reasonable, but not excessive market returns, but we'll continue to report on that every quarter. So you'll see a little volatility there. It was masked this year because of the $14,000,000 of interest rate credits that we got as part of our recovery in Missouri for the short term interest cost.

Speaker 6

Understood. Helpful. Thanks, guys.

Operator

Our next question comes from Julien Dumoulin Smith with Bank of America. Please go ahead.

Speaker 7

Hi, good morning, team. This is Tanner on for Julian. How are

Speaker 2

you doing? Hi, Tanner. Hi, Tanner.

Speaker 7

Hi. Can you further disaggregate your mid Stream guide for fiscal year 2024 between the individual pieces there and kind of share your expectations for how we should look at run rate growth across each?

Speaker 4

Yes.

Speaker 3

We set up the midstream segment this year, so we can actually isolate That's going to be a growing piece of our business just recognizing the investments that we've already made. So when you think about What's happening as you go from 23 to 24 at the midpoint of the range, it really is the recognition of Salt Plains and no, we're not going to get into the individual property details. It was a $47,000,000 acquisition, but we had Every expectation of above utility rate returns and we're, as we mentioned in our prepared remarks, seeing those. We also expect that the MoGas acquisition will close early in the next calendar year, our fiscal Q2, And we're seeing that earnings pull through as we go through the balance of the year. And then lastly, we do see a little bit A pull through at the margin line on Spire Storage West and we talked about this when we launched the project that we're seeing some of that which It's offsetting the financing cost.

Speaker 3

It doesn't get to full run rate until 'twenty five, but it does add a bit to the earnings, really offsetting the earnings drag that we willingly took on in the last fiscal year as we were investing to expand that facility. That would be as you think about the storage side of the business and a little bit of pipeline from MoGas perspective. Spire STL Pipeline just continues to operate And we would expect that we have pretty narrow ranges and with most pipelines unless there's some expansion project and we aren't speaking to anything At this point, it's just going to continue to drive the kind of earnings that we've seen in prior years. Hopefully that helps.

Speaker 7

No, it does. Thank you. And then on the utility, your initial 2023 net economic earnings guidance was About $230,000,000 at the midpoint. And this year for FY 'twenty four, you're guiding to the midpoint of $235,000,000 Taking each one as normalized, that implies something like low single digit growth year over year. Is there some conservatism built into that estimate?

Speaker 7

Or are you perhaps seeing lag Just wanted some color there, if you could provide it.

Speaker 4

Yes, Tanner, this is Adam. I would look back to 2022 and see the pull through over a couple of years. Obviously, we came out of Back to back cases in Missouri, and so it's a little it gets a little obscured, but we didn't get to where We initially wanted to be this year in the utility. A lot of that some of that is just pull through both in Alabama and Missouri. But we do see that on a 2 year basis Looking like it was would meet our expectations, but I wouldn't characterize it as conservative or aggressive.

Speaker 7

Understood. Great. Thank you very much, guys.

Operator

Any closing remarks.

Speaker 2

Thank you all for joining us. We'll be around for the rest

Speaker 1

of the day for any follow ups. Thanks for being with us.

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