SR - NYSE

Good morning, and welcome to the Spire Q3 FY '25 Earnings Conference 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 Third Quarter Earnings Call. On the call with me today is Scott Doyle, President and CEO; and Adam Woodard, Executive Vice President and CFO. 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 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. Now here's Scott, who will start on Page 4 of the presentation.

Thank you, and good morning. We are pleased to have you join us today on our fiscal third quarter earnings conference call for an update on recent developments and a review of our quarterly performance outlook. Before we dive into results, I want to take a moment to recognize and thank our employees for their unwavering commitment to safety and service throughout the quarter, especially in the aftermath of the devastating tornadoes that struck the St. Louis community on May 16. Our team rose to the occasion in extraordinary ways. We received nearly 1,300 emergency calls and responded to more than 620 emergency orders during the days that followed. Beyond restoring service, our employees supported disaster response and recovery efforts by volunteering their time and talents to ensure neighborhoods were safe and accessible. Through our customer relief initiatives, assistance programs and community support, we demonstrated what it means to care for the people and places we serve. I'm incredibly proud of what we accomplished together, and I want to thank each of you for your dedication, resilience and compassion. Our commitment to service and operational excellence also positions us for long-term growth. A clear example is our recently announced acquisition of the Piedmont Natural Gas Tennessee business from Duke Energy, a strategic investment I'll expand on shortly. But first, let's discuss our quarterly results on Page 4. This morning, we announced adjusted earnings of $0.01 per share compared to a loss of $0.14 per share a year ago. The year-over- year increase reflects growth across all of our business segments. Our performance was driven by infrastructure investments to modernize our natural gas systems, coupled with our ongoing commitment to disciplined cost management. We continue to make meaningful progress managing our expenses through a focused cost reduction and efficiency initiative while capturing O&M benefits from capital investments. These efforts are delivering benefits to our customers, and we remain focused on unlocking additional value on their behalf. Adam will provide a more detailed breakdown of our results in his remarks. Now for an update on regulatory matters. We have continued to work closely with key stakeholders in our Missouri rate case. We are pleased to report that a unanimous stipulation and agreement has been filed for an annual revenue increase of $210 million. This resolves all aspects of the case and is pending approval by the Missouri Public Service Commission. In addition, in May, the PSC approved a $19 million revenue increase in our Infrastructure System Replacement Surcharge, or ISRS, request, bringing total annualized revenues recovered through the rider to $72.6 million. These revenues are included in the recently settled rate case. After new base rates take effect this October, the ISRS rider will be available again to recover investments in system modernization. We remain focused on achieving consistent and constructive regulatory outcomes in all of our jurisdictions, leading to a more sustainable financial performance trajectory. In Alabama, we are pleased to welcome President Almond as the new President of the state's Public Service Commission and look forward to collaborating with her and the entire commission and staff in the future. We extend our sincere thanks to President Cavanaugh for her dedicated service to the commission. Her leadership and commitment to fair regulation have made a lasting impact on Alabama's energy future. Looking ahead, we are reaffirming our long-term EPS growth target of 5% to 7%. This is supported by our 10-year $7.4 billion capital investment plan, and we expect to deliver within our fiscal 2025 earnings guidance of $4.40 to $4.60 per share. We will provide updates to our 10-year capital investment plan and long-term EPS expectations incorporating Tennessee on our year-end call in November. We are committed to delivering strong results in fiscal 2025 and beyond and are well positioned to achieve our financial and operational goals as we work to grow organically, invest in infrastructure and drive continuous improvement. Let's turn now to Page 5 and our recently announced acquisition of the Piedmont Natural Gas business in Tennessee. This is a strategic and accretive acquisition that meaningfully increases our scale and expands our regulated utility footprint into a high-quality, high-growth jurisdiction. Tennessee offers a constructive regulatory environment that supports long-term investment in natural gas infrastructure and aligns well with our disciplined growth strategy. The transaction enhances our business mix by adding a new service territory, further diversifying our regulated utility portfolio and reducing overall business risk while remaining squarely within our core competency of regulated gas distribution. We bring a strong track record of successfully integrating other companies, having completed 3 prior gas utility acquisitions. Leveraging our mature shared services platform, we're confident in our ability to integrate this business efficiently. The Tennessee business will add an incremental $900 million to our 5-year capital plan for a combined $4.4 billion of investment opportunities focused on system modernization, customer growth and infrastructure resilience. From a financing perspective, we've secured a bridge facility to fund the transaction and are pursuing a permanent capital structure that includes a balanced mix of debt, equity and hybrid securities. We are also evaluating the sale of nonutility assets such as natural gas Storage facilities as a potential source of funds. Our approach is designed to maintain credit quality while supporting long-term adjusted EPS growth of 5% to 7% and continued dividend growth, reinforcing our commitment to delivering sustainable value for shareholders. The map on the right side of the page illustrates our expanded footprint, including the newly acquired Tennessee territory adjacent to our existing infrastructure in Missouri, Alabama and Mississippi. As you can see, this is a natural fit within our existing utility footprint. We expect to file for regulatory approval with the Tennessee Public Utility Commission within 45 days of the announcement and anticipate closing in the first quarter of calendar 2026. Let's turn to Page 6 for an update on our Missouri rate case. Following a collaborative and constructive regulatory process, we are pleased with the unanimous stipulation and agreement reached yesterday with all parties involved. This agreement supports an annual revenue increase of $210 million, of which $72.6 million are already being recovered through the ISRS. The increase is based on a $4.4 billion rate base, though the agreement does not specify an allowed return on equity or capital structure. Key objective of this case is the refinement of our weather normalization adjustment mechanism, or WNAR. The agreement incorporates an updated 30- year weather period and revised coefficients to more accurately reflect weather-driven usage. Additionally, the small general service class has now been included in the WNAR mechanism, further strengthening its effectiveness. We are confident that these updates will materially reduce the impact of weather on our volumetric revenues we've experienced since our last rate case. The stipulation and agreement is pending approval by the Missouri Public Service Commission. If approved, new rates will take effect on October 24, 2025. The outcome of this case underscores our continued focus on regulatory transparency, customer affordability and long-term investment in safe, reliable infrastructure. 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 start with a review of our quarterly results, which are detailed on Pages 7 and 8 of our presentation. During the third quarter, we reported adjusted earnings of $4.1 million, an increase of over $8 million compared to last year. The Gas Utility segment had an adjusted loss of $10 million in the third quarter, $1 million better than prior year. This reflects higher contribution margin at Spire Missouri, driven by an increase in ISRS revenues, partially offset by lower Spire Missouri usage net of weather mitigation. Utility earnings also reflected higher O&M expense and higher depreciation expense. On a year-to-date basis, our O&M run rate is less than 1% higher than the prior year period. Earnings in the Gas Marketing segment were higher by over $4 million as the business was well positioned to create value. During the quarter, we continued to see strong earnings growth in our Midstream segment, driven by additional capacity and asset optimization at Spire Storage, partially offset by higher operating costs from higher activity. Lastly, other corporate costs were slightly lower, primarily due to higher returns on nonqualified benefit plans, partially offset by higher interest expense. Turning to Page 9. We continue to make capital investments to improve reliability, resiliency and safety for the benefit of our customers. Year-to-date, our CapEx has totaled $700 million, with the majority of the spending taking place at our gas utilities. Year- over-year, utility CapEx increased nearly 20% as we focus on upgrading distribution infrastructure and connecting more homes and businesses to safe, reliable and affordable natural gas. Investment in our Midstream segment totaled $99 million year-to-date, largely for the expansion of Spire Storage West. The expansion is now complete and the returns on the project are exceeding our expectations. Our capital investment target for fiscal 2025 has increased to $875 million, reflecting a $10 million increase in Midstream and a $25 million increase in Spire Missouri. As a reminder, our long-term investment plan is focused on organic growth at the utilities. Approximately 98% of our 10-year capital expenditure plan is targeted utility spend, driving our growth in rate base. Turning now to our growth outlook on Page 10. We are confident in our long-term adjusted earnings per share growth target of 5% to 7%. This is reinforced by 7% to 8% rate base growth at Spire Missouri and steady sustained equity growth at Spire Alabama, coupled with efficient recovery mechanisms. We remain committed to executing on our strategy and are affirming our fiscal 2025 adjusted earnings guidance range of $4.40 to $4.60 per share. Our adjusted earnings targets by segment remain the same as provided on the call last quarter. Incorporating results from the third quarter, we expect utility earnings to be lower in the range and Midstream earnings to be higher in the range. Further, our dividend growth is supported by our long-term adjusted EPS growth targets, and we fulfilled our equity needs for fiscal 2025. Looking ahead, we'll provide an update on our long-term financing strategy during our year-end call in November. At that time, we'll introduce our fiscal 2026 earnings guidance and provide an update on our long-term adjusted earnings per share growth expectations. We expect to close on the acquisition of the Piedmont Natural Gas Tennessee business in the first calendar quarter of 2026. As a result of closing midyear, we expect to exclude net income related to the business from 2026 adjusted earnings and adjusted earnings per share. Importantly, with new rates in Missouri and the ability to earn closer to our allowed return on equity, we anticipate adjusted earnings at our Utility segment to be meaningfully higher in 2026 compared to recent years. This reflects the strength of our regulatory framework and our continued focus on delivering sustainable earnings growth. With that, let me turn it back over to you, Scott.

Thanks, Adam. As we look to the remainder of fiscal 2025, our priorities are clear. Operationally, our top priority remains delivering safe, reliable natural gas service to our customers. We're executing on our $875 million capital plan, which is focused on system modernization and long-term infrastructure resilience. At the same time, we're maintaining a strong focus on customer affordability through disciplined cost management. On the regulatory front, we're working to achieve constructive outcomes across our jurisdictions. Strengthening our regulatory recovery mechanisms remains essential to ensuring timely cost recovery and supporting continued investment in our systems. From a financial perspective, we are reaffirming our full year adjusted EPS guidance of $4.40 to $4.60 per share. We remain committed to maintaining a strong balance sheet, which supports both our growth strategy and our long- term shareholder value proposition. And finally, we're making progress on our recently announced acquisition of the Tennessee Piedmont Natural Gas business. We're actively pursuing regulatory approvals and advancing integration planning. Together, these priorities position us to deliver strong operational performance, financial discipline and long-term growth. We're confident in our path forward and excited about the opportunities ahead. Thank you for your continued support and interest in Spire.

[Operator Instructions] The first question comes from Richard Sunderland with JPMorgan.

Just one for me. I'm curious about the FFO to debt targets you previously outlined of 15% to 16%. Is that still the right framework to think about going forward?

Rich, it's Adam. Those definitely are still the right targets to keep in mind, probably a little bit through the transition period of the acquisition, probably a little bit slower to get to those targets, but that's still what we're aiming for.

The next question comes from Christopher Jeffrey from Mizuho Securities.

Congratulations on the strong quarter. Just a point of clarification. Just wondering in the Midstream results, how much of that is -- how much is the expansion of Storage reflected in the full quarter? And maybe kind of just going forward, should we think of this quarter as a reasonable run rate for the business?

Yes. Chris, it's Adam. We did -- on the Midstream segment, in particular, we did see very strong year-over-year growth, obviously, with Storage coming on. About 90% of the increase in Storage year-over-year was attributable in Midstream is attributable to Storage. That would cut on a net income basis, 75% to 25% Storage to pipeline.

Okay. Great. And then maybe just sticking on the Midstream, just curious more on the pipeline side, just maybe given some trends we're seeing in Missouri comments from the electric utilities there in terms of load growth, is Spire seeing any opportunities just in terms of capacity on various pipelines?

Yes, Chris, this is Scott. Yes, that -- as we see what's taking place in Missouri, particularly around the IRPs associated with the electric businesses, those are creating some opportunities for us that are in future years. Our ability to serve them is good and low CapEx needs associated with serving those needs at this time.

Great. And maybe just one more, if I could. Just maybe any color on the strong marketing results in the quarter? And maybe as we think of 4Q, can we expect the same seasonal strong end of the fiscal year there? Or should we kind of think of those results as being pulled into 3Q a bit?

Chris, it's Adam again. The -- I think they were very well positioned coming into this quarter. It tends to be a little quieter quarter as we get into the summer. Really no comment on what we see going into the fourth quarter, but we feel pretty good about the operations of that business and what they're doing and hitting the -- hitting the targets that we've outlined for year-end.

[Operator Instructions] The next question comes from Dylan Lipner from Ladenburg Thalmann.

Congrats on a really good quarter. I just want to kind of piggyback off of one of Chris' questions about the Storage segment. Maybe if you guys can discuss the year-over-year changes in margins at the Storage business that might be driving revenue up for you guys?

Yes. Dylan, it's Adam. A lot of that's just the expansion that's coming online there. And we are seeing similar as we talked about last quarter, not only a realization of that expansion, but also some additional optimization on top of that. But that's really the story. We do include some more specific information in the Q as it will be filed shortly.

Got you. And then when it just comes to even on the pipes from last year in 2024, should we assume that they're kind of unchanged going forward into 2025 for the Midstream business in the pipeline?

Yes. No, it should be pretty straightforward. Good observation.

The next question comes from [ Barry Klein ] from Macquarie.

I just wanted to be clear here. Does your long-term 5% to 7% growth rate include the impacts of the recent Missouri rate case settlement and future test year legislation that's been enacted?

Barry, it's Adam. So the 5% to 7% is really keyed off of our capital deployment. I think there's a realization on the fact that we had been behind on our recovery in Missouri. And so there would certainly be some catch-up there that would be in addition to the 5% to 7%. But the 5% to 7% really keys off of our rate base -- long-term rate base growth.

Okay. So not -- doesn't have anything to do with if you're able to improve the returns?

No, that's right.

The next question comes from Selman Akyol from Stifel.

Just real quick for me. On the O&M, you guys have done a great job. And I'm just kind of curious how you see that line evolving going forward?

Selman, Thank you. Yes, our target is to be at or below the rate of inflation in any given year. And just really maybe the headline for us year-to-date is we are below 1% year-to-date on O&M. In the quarter, there was a comparison there from this quarter versus last quarter. There was a onetime benefit in the quarter last year and a onetime expense in the quarter of this year that traded against us along with some other things. But all in, we feel good about where we're headed on O&M story.

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

Thank you for joining us on the call today. We look forward to speaking with many of you in the near future. Have a good day.