Spire Inc

NYSE:SR

Good morning, and welcome to Spire's Fiscal 2025 First 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, Investor Relations. Please go ahead.

Good morning, and welcome to Spire's Fiscal 2025 First 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 is a slide presentation that accompanies our webcast, which can be downloaded from our website under Investors and then Events and Presentations.

Before we begin, let me cover our safe harbor statement and use of non-GAAP earnings measures. Today's call, including responses to questions may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 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 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 releases and slide presentation.

On the call today is Scott Doyle, Executive Vice President, COO and acting CEO; and Adam Woodard, Executive Vice President and CFO. With that, I will turn the call over to Scott Doyle. Scott?

Thank you, Megan, and good morning, everyone. Thank you for joining us today for a review of our fiscal first quarter results and an update on recent developments and outlook.

Before we dive into results, we were pleased to announce earlier this week that Steve Lindsey, Spire's President and Chief Executive Officer will return to work on February 10 after taking a leave of absence. He's eager to get back to the office, and we're looking forward to his return next week.

I would also like to take this opportunity to thank our employees for their continued effort and dedication to maintaining safe and reliable gas delivery service for our customers as we enter the winter heating season. While we experienced a warmer-than-normal first quarter in both Missouri and Alabama, we began to see much colder, sustained weather patterns in early January. In fact, this past January was among the coldest in recent years throughout our service territories. The preparedness of our employees and past investments in our systems ensure reliable energy delivery for the communities we serve.

Turning now to our first quarter results. This morning, we announced adjusted earnings of $1.34 per share compared to $1.47 per share a year ago. Our results reflect growth in our gas utility and midstream segments and lower earnings in our Gas Marketing segment. Key drivers of our results include our investments to modernize our natural gas infrastructure and our continued focus on cost management. Adam will provide more detail on our results and outlook in a moment.

Turning to regulatory matters, starting with Missouri. Last November, we filed a rate case with the Public Service Commission, or PSC, for new rates effective by October of this year. In addition, in January, we filed a new infrastructure system replacement surcharge or ISRS, request with the PSC for additional revenues of $19 million. This is our fifth request since our last general rate case and includes the timely recovery of eligible investment for the September 2024 through February 2025 period. New rates are anticipated to be effective by July 2025, and if approved, the increase would bring our revenues in the rider to an annualized rate of $72.6 million.

Moving to our Alabama operations. The fiscal 2025 budgets for Spire Alabama and Spire Gulf were approved by the Alabama Public Service Commission and rates are now effective under the rate stabilization and equalization mechanism or RSE. This annual rate setting framework is very constructive as we are granted recovery of our costs based on a forecasted budget and earn a return upon our average common equity.

Our goal is to achieve consistent and constructive regulatory outcomes in all of our jurisdictions, leading to a more sustainable financial performance trajectory.

Looking ahead, our 10-year CapEx plan remains $7.4 billion. We are also reaffirming our long-term EPS growth target of 5% to 7% and our fiscal 2025 earnings guidance of $4.40 to $4.60 per share. As we indicated on the call in November, we anticipate improving our earned returns in Missouri in FY 2026 to help us achieve our targeted growth rate.

We are committed to achieving our financial and operational goals as we execute our strategy to grow organically, invest in infrastructure and drive continuous improvement.

Turning to Page 5 for an update on capital investments. During the first quarter, our CapEx totaled $260 million, with the majority of the spend taking place at our Gas Utilities. Year-over-year utility CapEx increased nearly 25% with an emphasis on upgrading distribution infrastructure and connecting more homes and businesses to safe, reliable and affordable natural gas. During fiscal 2025, we plan to invest a total of $790 million with a focus on reliability, system modernization, new service connections and advanced meter installations. Remember, approximately 98% of our 10-year capital expenditure plan is targeted utility spend, driving our growth in rate base.

Moving to Page 6. In late November 2024, we filed a request with the Missouri PSC to increase revenues [ $289.5 ] million. The drivers of our requested increase include significant capital investments in our delivery system as well as the inflationary impacts on our cost of service since our last rate case, which was completed in December 2022. The request includes a 10.5% return on equity, a 55% equity ratio and an estimated rate base of $4.4 billion with a May 31 true-up date. This filing is also inclusive of discrete adjustments of known and measurable items that will occur beyond the true update, but before new base rates are implemented. We believe this represents a more accurate snapshot of our costs when new rates take effect. These updates include items such as capital investments and changes to leases, payroll and call center expenses, for example.

We are also seeking to improve recovery of volumetric revenue, including the impacts of both weather and conservation. If approved, as requested, when rates become effective, the average customer bill is expected to increase approximately 15% or $14 per month. However, when paired with the PGA decrease approved and implemented in November 2024, average customer bills are expected to be lower or unchanged compared to average bills in 2024 when final rates are approved. The Missouri PSC approved the procedural schedule last month, and we expect an order and new rates effective by October.

I'll now turn the call over to Adam for a financial review and update on guidance and outlook. Adam?

Thanks, Scott, and good morning, everyone. I'll begin by addressing our quarterly results, which are detailed on Pages 7 and 8 of our presentation.

During the first quarter, we reported adjusted earnings of $81.1 million or $1.34 per share compared to $82.7 million or $1.47 per share a year ago. The results were driven by earnings growth at the Gas Utility and Midstream segments offset by lower earnings at marketing and other. Gas Utility earnings were higher, reflecting increased earnings at Spire Alabama and Spire Gulf partially offset by lower Spire Missouri earnings. Contribution margin increased across all utilities. We benefited from higher ISRS revenues in Missouri and new rates and usage at Spire Alabama net of weather mitigation offset in part by lower Missouri usage, which was not fully mitigated. Utility earnings also reflected lower run rate O&M expense and higher depreciation expense.

We saw strong earnings growth in our Midstream segment, driven by new contracts on additional capacity and higher rates on contract renewals of existing capacity at Spire Storage and the acquisition of MoGas in January of last year.

Our Marketing segment was lower than the prior year due to reduced market volatility combined with higher transportation and storage fees. I would like to note that we expect marketing to deliver within its originally expected guidance range during the fiscal year.

Lastly, other corporate costs were higher primarily due to the absence of a $6.3 million after-tax benefit of an interest rate hedge settlement that occurred in the prior year, coupled with higher interest expense this year.

I will briefly touch on a couple of drivers of our results. We experienced another warm start to the winter in both Missouri and Alabama. From a heating degree day perspective, Missouri was 18% warmer than normal. Although this was in line with last year, usage by residential customers was down approximately 4%, resulting in lower volumetric margins of $3.4 million. Alabama was 25% warmer than normal and also warmer than last year. However, temperature-sensitive margins were effectively mitigated.

We remain focused on cost management, and we expect run rate operation and maintenance expense at the Gas Utility remained flat relative to fiscal 2024 levels. During the quarter, utility run rate O&M expense was lower by $1.6 million when compared to last year.

Turning now to our growth outlook on Page 9. As Scott mentioned, we are reaffirming our long-term adjusted earnings per share growth target of 5% to 7%. This growth is supported by 7% to 8% rate base growth in our largest utilities, Spire Missouri and continued timely recovery of investments eligible for ISRS. Continued equity growth in the Southeast, coupled with annual [ RSC ] resets, our 10-year CapEx plan of $7.4 billion and a consistent focus on cost management. We remain committed to executing on our strategy and are affirming our FY 2025 adjusted earnings guidance range of $4.40 to $4.60 per share.

Moving to Slide 10. Our 3-year financing plan remains unchanged from what we laid out in November. We expect our ATM program to fulfill our remaining equity needs through 2027. At the beginning of this fiscal year, we had a total of $75 million of outstanding forward sales agreements. We settled $32 million at the end of December, and we plan to settle the remaining $43 million by the end of March. Our long-term debt financing plan through 2027 includes issuances for the refinancing of maturities and incremental debt of approximately $600 million to fund our capital plan. Our FFO to debt and dividend payout ratio targets remain unchanged.

In summary, we are executing in line with our plans and continue to feel positive about our financial position going forward. With that, let me turn it back over to you, Scott.

Thank you, Adam. To wrap up, I want to remind everyone of our fiscal 2025 priorities to build a more resilient, efficient and sustainable company that delivers value for our customers and shareholders.

First and foremost, we are committed to delivering natural gas safely and reliably. During the year, we expect to achieve our capital plan. We are engaging with key stakeholders to realize constructive regulatory outcomes for customers and shareholders. Furthermore, we're focused on delivering on our fiscal 2025 EPS guidance range and maintaining the strength of our balance sheet. Executing on these objectives remains a priority in fiscal 2025 and beyond.

This concludes our prepared remarks, and we're now ready to take questions.

[Operator Instructions] The first question comes from Gabe Moreen with Mizuho.

First of all, Scott, sorry to hear your moment in the spotlight here might be a little bit shorter than you anticipated, but mostly just really glad that Steve is coming back soon. But with that, let me just ask about the weather impact for the quarter. Is there any way you make up some of the warmer than normal weather and the impact on customer classes, whether it's residential or C&I with a colder than normal 2Q, obviously, you mentioned the weather in January. So I'm just curious whether that might have reversed a little bit in 2Q?

No. Gabe, I think you pointed out, we are early in winter, and I think that's a fair thing. We did include quite a bit of detail on -- in the appendix on Page 18 around the different classes and the performance over the quarter, but it's the first quarter. We're not even in the heart of winter yet. So to your point, there's a lot of winter to go, and I think your observation is a good one and you are correct.

Thanks, Adam. And then maybe if I can just follow up. You mentioned, Adam, that you still are confident that marketing can hit its guidance for the year despite, I guess, the 1Q results. Can you just talk about how marketing has been doing, given some of the volatility that we've seen here in wholesale markets in January? And also, to what extent some of that volatility may or may not have extended also to the storage segment as well?

Absolutely. And -- we don't think of marketing is having a completely normalized run rate on a quarter-to-quarter basis. So not anything we're -- we -- as we said in our prepared remarks, we're very comfortable with where they're at to your observation. The second quarter really started out with a constructive backdrop. So we feel very comfortable about where they're headed. Yes, there would be -- we continue to see where midstream is operating and are hopeful there. We're liking the pull-through that we see there as those assets have come online and we're getting a full year under our belt, but that's -- we were very comfortable with the guidance range and where we're moving from here.

The next question comes from Richard Sunderland with JPMorgan.

I also want to say great to hear that Steve's coming back, and thank you for the time today. Picking up some of the guidance questions. So if marketing returns to its original trajectory as you kind of laid out with the January cold snap, are kind of across factors here, are you looking at still trending towards the midpoint? I guess I'm trying to parse the utility weather and how much you need to recapture there after 1Q to hit the midpoint of guidance?

Yes. I don't want to leave an impression that we need extra weather for marketing to hit its goals. We feel very comfortable regardless of where weather is at any given month that -- we're comfortable with the plan that we laid out and the segment guidance that we gave. So that's I just want to leave that there for [indiscernible] that's a question. But to the overall kind of recapture, clearly, we lost a little margin in Missouri in the first quarter. And -- but I would regard that as something that is -- as we talked about, with Gabe's question, I think that's something that's achievable and retrievable over the course of the year.

Understood. And then turning to the rate case, how are you thinking about strategy overall, given this new element of pursuing discrete adjustments beyond the true-up period. I don't know if there's any way to rank order priorities or just how your strategy around settlement and whatnot could be impacted by somewhat of a different look to this case?

Rich, thank you. So maybe just take it up a level from maybe that specificity and just say, we're pleased with the progress on the rate case as it's moving along, it's moving along as expected. We have a couple of good things that have occurred of late. One is the procedural schedule being laid out that has rates being effective in October -- contemplated being effective in October of this year. And then to your point about discrete adjustments, we're encouraged by the order that has been placed in this case that allows for the proposal of discrete adjustments. And just as a reminder to those listening, the discrete adjustments are balanced and that they are above puts and takes as we update capital, but we also update the depreciation expense associated with it, and we have certain costs that are going up, certain costs that will be moderated during that period. So it works to balance those out. And we see that as a positive as we move forward in the case.

So all in, too early to call out strategy or settlement parameters or anything like that. It really is progressing as it should. And we look forward to the continued efforts in that case.

The next question comes from Shar Pourreza with Guggenheim Partners.

So just real quick on the rate case question. I guess if we're looking for a settlement, should we be looking for a settlement prior to the August hearings. Is that kind of the data point we should be looking at?

No. I would just look to the procedural schedule and just key off of the dates that are in there for key waypoints along the path, too early to have any discussions around that.

Got it. So the -- I guess what I'm trying to ask is if there isn't a settlement announced before the August hearings, there still could be a settlement post the hearings?

Yes. Yes. No, there's -- those -- within the context of the rate case, there's always opportunity to talk.

Got it. Okay. And then just real quick on Missouri legislation. Just any updated thoughts there? How are you thinking about some of the more utility-focused bills and -- can you speak a little bit more broadly on how that could impact the current case? I have to make an assumption it doesn't. But how are you focused on the utility side of it, including forward test years?

Yes. Sure, Shar. So maybe a little bit of update that's recent as of yesterday afternoon -- yesterday evening. So maybe just to answer your first question around impacts to this case. It has no impact on this case, this legislation that we have that's proposed. And maybe just to level set the legislation that's proposed is around future test year, it would not take effect or would not be effective until July of 2026 for rate cases filed after that date. So a lot of rulemaking that would need to be put in place as it's currently proposed for that to be something that we would be able to utilize in the context of a rate case.

But maybe just a little bit of what's happening in the legislature. Yesterday, the bill was brought to the Senate floor and the kind of the style of the bill has been modified from its original proposal, which we have proposed in Senate Bill 4. It's now being combined with other utility legislation, all of the wording that was in the original Senate Bill 4 has survived inside of what is now a Senate substitute bill 4. There was some floor debate. We're looking forward to some additional debate a couple of weeks from now for that bill to continue moving forward.

So maybe a way to think about that is that we're pleased with the progress to date and look forward to the continued dialogue with parties as we help move that further along. But if you're tracking a particular bill, the new build to track now is the Senate Substitute Bill 4.

Got it. And then just lastly on this, and there's a perception that this is an electric issue and the electrics are taking the lead, how vested does Spire in this process?

Yes, fully vested. Spire is fully vested in the process. And the future test here is what's our component or at least the gas utility component. Electric has some other issues that are non future test year, but have some -- maybe some similarities associated with it, whether it's [indiscernible] for plant service associated with our gas plants. But if you read through to the bill, there are specific provisions in it that are unique to gas utilities, and that's what we're advocating for in there.

[Operator Instructions] The next question comes from David Arcaro with Morgan Stanley.

Great to hear the news about Steve. Really wish him all the best. Great to see him coming back in action. A question for me on the rate case. I was just wondering if you could frame the size of the customer bill increase that is being requested here? And maybe more broadly, kind of how you think that might trend over time after this onetime bump. Obviously, this reflects multiple years since your last base rate case, but how do you see that evolving maybe beyond just this increase?

Yes. So maybe as we shared in our remarks, the customer impact is $14, $15 on a monthly basis, on an average bill. However, that's the all-in increase based on our proposal. As we mentioned late in the year -- calendar year last year, we lowered rates as a result of our gas costs coming down, that reduction allows for -- if these rates are to be implemented, we basically return average customer bills to what they were prior to the reduction in gas costs.

So a different way to think about it is our customers are receiving the benefit now of lower gas costs over the time period of the rate case being contemplated. So we feel really good about kind of how this is impacting our customers. Worked hard to maintain our O&M flat. That's how we're trending so far this year as well.

When you think about future projections, this is really a function of the modernization program that we have in place associated with our capital investment and our systems and serving our customers more reliably and safely as we make those investments in those -- that's what will have the impact on customer bills going forward.

Yes. Okay. Great. And then I was just wondering if you could update us on what -- on the level of inflationary pressures you're seeing on O&M, confidence in keeping O&M flat for this year, maybe just given we're seeing inflation kind of stickier in the broader economic backdrop?

Sure. No, we're -- we're certainly seeing some continued cost pressures, but having -- I think we're having -- showing a pretty good run rate of keeping that under control as well. So it's something that we're focused on continually, but certainly, things came and we don't expect it to be necessarily a quarter-to-quarter phenomenon, but we continue to feel very comfortable with our guide around O&M being flat at the utilities for the year. .

David, thank you for your comments about Steve and others as well. We're excited about him coming back. So we're looking forward to that.

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

I'd like to thank you for joining the call this morning and appreciate your interest in Spire. Have a great day.

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