Spire - Q4 2023

Transcript

Operator (participant)

Good day, and welcome to the Spire Year-End Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key, followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touchtone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn this conference over to Scott Dudley with Spire Investor Relations. Please go ahead.

Scott Dudley (Managing Director, Investor Relations)

Morning, and welcome to Spire's Fiscal 2023 Year-End Earnings Call. We issued an earnings release this morning, and you may access it on our website at spireenergy.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 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. Though 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 in 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. 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, who recently joined Spire as Managing Director of Investor Relations. Megan brings 15 years of experience in the utility industry, including 5 years in investor relations. She is taking the reins as I will be retiring on March first of next year. With that, I will turn the call over to Steve Lindsey.

Steve Lindsey (President and CEO)

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 and outline 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, who has driven the successful execution of our strategic priorities to grow and transform our company. Under her 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. 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 execution of our plans remains. While FY 2023 presented challenges and headwinds, including regulatory outcomes, weather, inflation, higher commodity costs, and rising interest rates, we were able to meet our capital plan, focused on our gas utilities and marketing, was well-positioned to take advantage of market opportunities. We also advanced our midstream segment. We announced the acquisition of MoGas and the purchase of Salt Plains storage facility. We're positioned for success in FY 2024 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.

We remain squarely focused on the basics of strong execution, which includes driving greater efficiency through streamlining systems and processes, maintaining an unwavering commitment to operational excellence. At the 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 achieve this through our strong focus on providing safe, reliable, cost-effective energy with excellent service, while advancing our commitment to become a carbon neutral company by mid-century. For FY 2023, we reported Net Economic Earnings of $4.05 per share, reflecting higher earnings in gas marketing midstream, offset by lower earnings from our gas utilities. Steve will discuss our financial results in more detail in a moment.

In FY 2024, today, we are launching earnings guidance of $4.25-$4.45 per share and reiterating our long-term annual earnings growth target of 5%-7%. Base for that growth is the midpoint of our FY 2024 guidance range, $4.35 per share. You know, the long-term driver of our earnings growth is capital investment in our gas utilities. In FY 2023, our capital investment totaled $663 million, with nearly 90% invested in our gas utilities. Of that amount, we invested $290 million in upgrades to our pipeline infrastructure, an additional $110 million to connect more homes and businesses to safe, reliable, and affordable natural gas service. Our midstream segment, CapEx, totaled $73 million, largely for the expansion of Spire Storage West.

I would note that our cash spend in midstream came in below our forecast this year due to timing. Project remains on schedule and on budget. Looking to FY 2024, we expect to increase our utility capital investment to $660 million, reflecting increases in infrastructure and new business, as well as further deployment of advanced meters. We'll also be making an initial investment in an RNG project that Spire Missouri is developing in partnership with Kansas City Water Department. And 70% of our gas utility spend this year will be invested in system reliability and safety, and another 16% is dedicated to customer growth. Midstream CapEx is expected to be $105 million, reflecting the timing and construction of equipment purchases for our storage expansion project that I just mentioned.

Recognizing our performance in 2023, as well as confidence 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. Steve?

Steve Rasche (EVP and CFO)

Thanks, Steve, and good morning, everyone. Let's start with a brief review of results, and then I'll share our expectations as we look into 2024 and beyond. For our fiscal year ended September 30, 2023, we reported net economic earnings of $228 million, 5.5% 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 fourth quarter loss of $38 million, or $0.78 per share, reflecting the seasonality of our business. Full analysis of 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 earned just over $200 million, down 1% from last year, as new customer rates in both Missouri and Alabama were more than offset by higher interest expense and the impacts of warm weather. Gas marketing was well positioned to take advantage of commodity price volatility last winter and posted earnings of just under $48 million, an increase of more than 75% compared to last year. Midstream delivered earnings of $14 million, up $3 million from last year, reflecting our growing scale and optimization. And finally, higher interest expense and corporate costs. Looking a 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 million, 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%, reflecting principally new rates in Missouri and Alabama, including ISRS filings in Missouri. Marketing contribution margin was also higher, as they created significant value from their transportation and storage positions as a result of favorable market conditions. Midstream margin was up $13 million, reflecting our growing operations and optimization of injection and withdrawal commitments. This increase also reflects the addition of Salt Plains in our fiscal third quarter.

This storage business is performing well against our expectation, 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 fiscal year 2023. As I'll touch on shortly, Salt Plains will be fully included in our net economic earnings in fiscal 2024 and beyond. Looking at a couple 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 million in Missouri overhead costs that were expensed in 2023, but deferred in 2022. The remaining run rate expenses were up just over $10 million, or 2.5%, as our cost controls helped offset higher on payroll expenses.

O&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. Interest expense for the year was up nearly $66 million, driven equally by two factors. First, long-term debt balances that were higher by approximately $475 million, net of refinancings. Second, higher short-term interest rates, up roughly 390 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 the investment income from our benefit plans, plus roughly $14 million in higher Missouri carrying cost credits. Now, turning to our outlook.

We anticipate our Net Economic Earnings per share for fiscal year 2024 to be between $4.25 and $4.45 per share, as Steve mentioned. We are also reconfirming our long-term earnings per share growth target beyond 2024 of 5% to 7%, using the midpoint of our fiscal year 2024 range for $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 plan to fiscal year 2033 and raised the target to $7.2 billion.... Turning to slide 10, here are our business unit earnings ranges for fiscal year 2024. Let me hit on a few points.

We anticipate our gas utilities to earn between $230 million and $240 million 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. Gas Marketing is anticipated to earn $19 million-$23 million, a slight increase in our baseline expectations, driven by customer growth. Midstream expects to earn between $21 million and $27 million, 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 2024 as we begin operating the first tranche of new storage capacity at Spire Storage West.

Corporate and other, principally interest cost, is anticipated to be in the range of -$18 million to -$22 million, down significantly from last year based upon lower corporate costs and lower interest costs, including the impacts of interest rate hedging. Speaking of interest and financing, we've also updated our 3-year financing plan, as outlined here on slide 11. 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 $113 million. That's expected to settle by the end of the calendar year. It also reflects the $175 million-dollar conversion of equity units on March 1st.

We'll look to our ATM program for the remaining equity needs in fiscal year 2024, and we expect very modest equity needs in 2025 and 2026. Turning to debt financing, we expect to refinance $150 million debt maturity at Spire, Inc., as well as complete the remarketing of the debt component of our equity units. In addition, we expect to issue an incremental $50-$100 million of new long-term debt to support the MoGas acquisition. We have no planned issuance beyond the refinancing and 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%-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. We are well positioned to deliver both operationally and financially. With that, let me turn it back over to you, Steve.

Steve Lindsey (President and CEO)

Thanks, Steve. In fiscal 2023, we delivered solid financial and operating performance, including strong results for Spire Marketing. We'll execute on our capital investment plan, supporting the growth of our gas utilities and the expansion of Spire Storage. Building on this momentum, we are squarely focused on executing to achieve our performance targets for FY 2024 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 (participant)

Thank you. We will now begin the question-and-answer session. To ask a question, you may press star, then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Richard Sunderland with JP Morgan. Please go ahead.

Richard Sunderland (Equity Research, North American Utilities and Power)

Hi, good morning. Am I coming through clearly?

Steve Rasche (EVP and CFO)

We are. Good morning, Richard.

Richard Sunderland (Equity Research, North American Utilities and Power)

Great, thank you. Can you unpack 2023 relative to the 3Q outlook, particularly what landed in the 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.

Steve Rasche (EVP and CFO)

Yeah, Rich, this is Steve. Let me take a shot, and I'm sure that Adam or Steve want to weigh in. Yeah, 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. It really was corporate cost. 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.

Richard Sunderland (Equity Research, North American Utilities and Power)

Got it. Understood. 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 at the utility, since you talked about the corporate one-offs.

Steve Rasche (EVP and CFO)

Yeah. Let me start on the cost management, which you saw in the back half of this last fiscal year, and it should—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 bad debt. 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've got a number of initiatives that get us off on the right foot starting out. If you kind of run down the big movers, bad debt was one that traded against us last year.

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

Those would be some of the key items that we're working on.

Steve Lindsey (President and CEO)

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, is really drive value throughout the utilities. 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 materials from a supply chain perspective or the fleet. I think we're set up well to do that, as, as well as really starting to, to reap the benefits of the capital investments that we've been making on infrastructure. If you think about one of the metrics that we follow very closely, our leaks per thousand system mile is down over 60% over the last five years.

Those are O&M costs that in the future will not occur. I think all those things together really give us a strong foundation for managing, you know, our expenses, not only in the near term, but really more for the long term.

Steve Rasche (EVP and CFO)

Yeah, and then, Rich, you had asked a question on the other line, which is coming down pretty dramatically, that the biggest mover there is going to be interest rates. We've, our, our level of borrowing is down, and we're managing interest rates. We are fairly active in, interest rate hedging, which provides benefits going forward. We actually see interest costs, at the whole core level, which is what comes up in corporate and other down from, from the run rate that we've seen, in 2023. Those one-off costs aren't going to recur. Our cost control isn't just at the operating businesses, it's really in how we manage at the, you know, at the shared services level, and we're seeing some great benefits there.

Richard Sunderland (Equity Research, North American Utilities and Power)

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

Operator (participant)

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

Gabriel Moreen (Managing Director and Senior Equity Research Analyst)

Good morning, everyone. Maybe if I can just keep on the gas cost and slash interest expense outlook. Can you just talk about maybe starting with the latter, the interest expense hedges and the lack of sensitivity to short-term rates in 2024? 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? You're making your own assumptions on gas costs. Just curious about that.

Steve Lindsey (President and CEO)

We're actively hedging gas costs as well for the benefit of the customer, but the interest rate program is ongoing, so we're it is more of a dynamic program, so I wouldn't speak to any specific aging of hedges. Obviously feel pretty good about our sensitivity to rates in the front year. 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.

Gabriel Moreen (Managing Director and Senior Equity Research Analyst)

Okay, and then maybe if I can ask about the storage project and some of the CapEx slippage. Can you just 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 around there?

Steve Lindsey (President and CEO)

Gabe, this, Steve Lindsey here, and, and thanks for that question. It is timing. Some of it is around material, some of it is around equipment. We continue to project that for the full, life of the project, that we will be on time and on budget. Obviously, there are some challenges as you get into winter in terms of what you can do, but we're actually going to be doing some things inside some facilities, to continue to work forward on that. We were very pleased with the initial open season that we had. We got a lot of strong interest there. We anticipate the same, with the next open season. From the overall project perspective, I would just anchor back to we're, we're on time and on budget.

Steve Rasche (EVP and CFO)

Yeah. Gabe, if you look at our longer-term forecast, you can see that $20 million-$30 million move from what actually happened in 2023 to 2024 and 2025. That's more the 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 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 out the door.

Gabriel Moreen (Managing Director and Senior Equity Research Analyst)

Thanks, guys. And 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 your 2024 guidance?

Steve Lindsey (President and CEO)

I would not, Gabe, I would not characterize it as a swing factor in our 2024 guidance. I'd have to go. 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 assumptions. There's several that go into that, but.

Steve Rasche (EVP and CFO)

Yeah, and Gabe, if you're focusing on the miscellaneous income line, we do have some non-qualified benefits where the funds that we use to fund those programs are subject to market returns, and we've seen that swing negative in 2022, was positive in 2023. 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. You'll see a little volatility there. It was masked this year because of the $14 million of interest rate credits that we got as part of our recovery in Missouri for the short-term interest costs, but.

Steve Lindsey (President and CEO)

Understood. Helpful. Thanks, guys.

Operator (participant)

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 you doing?

Steve Rasche (EVP and CFO)

Hey, Tanner.

Steve Lindsey (President and CEO)

Hi, Tanner.

Speaker 7

Hi. Can you further disaggregate your midstream 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?

Steve Rasche (EVP and CFO)

Yeah, we set up the Midstream segment this year, so we could actually isolate what's going to be a growing piece of our business, just recognizing the investments that we've already made. When you think about what's happening as you go from 2023 to 2024 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 million 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 or fiscal Q2, and we're seeing that earnings pull through as we go through the balance of the year.

Lastly, we do see a little bit of pull-through at the margin line on Spire Storage West. We talked about this when we launched the project, that we're seeing some of that, which is offsetting the financing cost. It doesn't get to full run rate until 2025, 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.

We would expect it with a pretty narrow range, as 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 million at the midpoint, and this year for FY 2024, you're guiding to the midpoint of $235 million. Taking each one as normalized, that implies something like low single-digit growth year-over-year. Is there some conservatism built into that estimate, or are you perhaps seeing flags dipping in Missouri? Just wanted some color there, if you could provide it.

Adam Woodard (VP)

Yeah, 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 you know, we didn't get to where we initially wanted to be this year in the utility. A lot of that, you know, some of that is just pull through both in Alabama and Missouri, but we do see that on a two-year basis, looking like it would meet our expectations. I wouldn't characterize it as conservative or aggressive.

Speaker 7

Understood. Great. Thank you very much, guys.

Operator (participant)

Again, if you'd like to ask a question, please press star then one at this time. Seeing no further questions, I would like to turn the conference back over to Scott Dudley for any closing remarks.

Scott Dudley (Managing Director, Investor Relations)

Thank you all for joining us. We'll be around for the rest of the day for any follow-ups. Thanks for being with us.

Operator (participant)

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