Good day, and welcome to the Spire Q3 Earnings Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Scott Dudley. Please go ahead..

Good morning, everyone, and welcome to our third quarter earnings call. We issued our earnings news release this morning, and you may access it on our website at Spire Energy.

There's a slide presentation that accompanies our webcast, and you may download it either from the webcast site or from our website, under Investors and then Events & Presentations.

Presenting on the call today are Suzanne Sitherwood, President and CEO; Steve Lindsey, Executive Vice President and Chief Operating Officer; and Steve Rasche, Executive Vice President and CFO. Before we begin, let me briefly 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 net economic earnings, contribution margin, adjusted EBITDA and adjusted long-term capitalization, which, among others, are 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 our news release and in the slide presentation. So with that, I will turn the call over to Suzanne..

Thank you, Scott, and good morning to everyone joining us for our third quarter update. First, I'd like to say that I hope you're safe and healthy. So many of us as well as our family members, friends and colleagues are working through new challenges and adapting to those challenges each and every day.

With the global pandemic that's not over yet and racial and social justice on our hearts and minds, it's important to have perspective and pay attention to the world around us.

It's also important during difficult times to look inward, reflecting on our own beliefs, values and behaviors, everything that makes us who we are because it's these moments of self-reflection that inspire outward action.

At Spire, knowing who we are, helped us answer the many challenges of a quickly changing work environment while still delivering safe, reliable energy to the people and communities who count on us. For example, in the midst of ongoing changes related to the Coronavirus, is why we did the most Spire-like thing imaginable.

We stopped and ask ourselves, how can we immediately show we care for each other and care for the communities we serve? So we quickly got to work to adjust and focus on current needs. I'd like to provide you just a few examples.

We expanded employee communications including creating a mobile Internet channel dedicated to Coronavirus news, shifted to work-from-home environment wherever possible and offer Coronavirus-specific leave for all Spire field employees; held ongoing educational calls for Spire leaders on business operations, safety guidelines and how the team is connected; covered shifts for each other to ensure seamless service for our customers; temporarily suspended late fees and disconnection for customers; matched new and increased donations to our DollarHelp program that provides bill assistance for customers struggling to make the ends meet; donated through the Spire Foundation to fund local food relief programs across five states.

And Spire employees have been volunteering their time to help the communities we serve through our Day for Good program.

And when the world shifted again and calls for justice echoed throughout our communities, we further elevated our inclusion work, gathering all Spire leaders in a virtual forum to focus on closing the distance between people while creating an inclusive environment for all.

We did all this because our beliefs, values and behaviors, our culture is clearly defined. And no matter what, we always know who we are. As an essential service, designated by government authorities, we're part of our nation's vital energy infrastructure.

And that comes with a certain level of responsibility, whether we safely and reliably delivering energy to homes and businesses are doing our part and preventing the spread of virus.

Through it all, I'm proud to say that our incredible Spire employees have stepped up and make the adjustments necessary to ensure that our customers and communities are being well served, supported and kept safe and healthy as possible.

They've done this while actively embracing safety guidelines that add extra layers to an already full schedule, and they've done this while also staying uber-focused on delivering business results. With many thanks to our employees, I'll now turn to our third quarter results.

Our net economic earnings were $0.07 per share as higher gas utility earnings and better contributions from our midstream business were offset by lower results from gas marketing. I'm pleased to note that we're ready to provide earnings guidance for fiscal 2020, now that we have clarity on the Missouri pipeline replacement program.

We expect our net economic earnings this year to be in the range of $3.70 to $3.75 per share, reflecting our year-to-date results and the impact of Coronavirus and ISRS settlements. Steve Rasche will have more to say about our earnings guidance range for this year.

With that, I'll turn the call over to Steve Lindsey for an update on several important topics.

First, he will speak to regulatory and legislative initiatives in Missouri regarding ISRS, then the revisions to our Spire Storage development plan; and finally, the continued acceleration of our capital investment program which provides even safer, more reliable systems, while also resulting in better environmental performance.

Steve?.

Thank you, Suzanne. I want to begin by acknowledging the outstanding efforts of our employees during the difficult times brought on by the Coronavirus and resulting economic shutdown.

We are providing great service for our customers while taking extra care to ensure their health, safety and well-being as well as your own and helping support our communities in this time of need. Thank you all very much. I'll begin my remarks with an update on the significant progress we've made with the Missouri ISRS.

The regulatory mechanism that allows for accelerated recovery, capital invested in infrastructure upgrades. Since our last earnings call, the legislation pending in the Missouri legislature to clarify the ISRS statute has been enacted into law effective August 28.

Clarification was to remove the worn out or deteriorated standard and to specifically enable the recovery of intermittent plastics when cast iron and bare steel pipe is being replaced.

Past challenges we've encountered from the Office of Public Counsel or OPC, centered on plastics and providing evidence that cast iron, bare steel pipes were worn out or deteriorated.

The legislation also sets the time frame for the Missouri Public Service Commission to render a decision of 180 days, which reflects a more reasonable amount of time to adjudicate ISRS cases. We still have the opportunity to file two ISRS cases for calendar year.

We also settled our 2016, 2017 and 2018 ISRS cases that were subject to the adverse appeals court rulings last November, calling for refunds of certain amounts collected and for the cases to be remanded back to the Missouri Public Service Commission. Under the settlement, we will continue to collect the amounts that were under dispute in the appeals.

However, we will be making a refund of $15 million in the form of a onetime customer bill credit in august. Meanwhile, we're continuing to work through our two 2019 cases that are at the Missouri Court of Appeals, where we expect the appeals process to extend through the end of this calendar year.

In our February 2020 ISRS filing, we reached a settlement with the Missouri Public Service Commission staff and OPC. Under this settlement, which was approved by the commission, our ISRS collection increased by an annualized $11.1 million effective May 25. Latest increase, our annual ISRS run rate is $40.3 million.

Finally, we filed a new ISRS request yesterday for $8.7 million, including plastics. Overall, we are encouraged by the positive momentum we have in resolving the ISRS overhang we've been dealing with for some time. Turning to our capital program to drive growth. We have, again, increased our fiscal 2020 estimated spend.

We now expect our total for the year to be $10 million higher at $650 million compared to our update last quarter, with over 85% earmarked for our gas utilities. Our year-to-date spend totals $475 million, reflecting continued investment in infrastructure upgrades and new business at our gas utilities.

And as you can see, our CapEx for our gas-related businesses is quite a bit lower due to the completion of the Spire STL Pipeline, which went into service last November. In addition to driving growth, the other important results of our investment in infrastructure upgrades, the better environmental performance that we achieved.

Specifically, we're continuing to drive lower methane emissions, which are already down 39% since 2005. And as we noted in our latest corporate social responsibility report, we're targeting a 53% reduction by 2025. We've also achieved a 66% reduction in leaks per 1,000 system miles of distribution pipeline over the last five years.

In addition to the environmental benefit, a lower leak rate results in improved safety, reliability and a reduction in O&M expenses. Lastly, let me review our revised development plan for Spire Storage that we announced in early July. First, I want to emphasize that we are fully committed to serving our current and future storage customers.

In fact, the plans we have are designed to enable us to serve them even better in the future. Our revised plan, which reflects analysis and input from nationally recognized experts on gas markets and storage engineering, calls for a longer time horizon to optimize and position the facility to serve the western U.S.

energy markets, which continue to evolve. We are seeking commercial validation for our plan to ensure that there is demand for our services before we commit to the required capital.

We will make a 7(c) filing with FERC by early next fiscal year that will outline our development path and prove of the need for the expanded gas storage services we are contemplating. As you may recall, we went through the 7(c) process in advance of building the Spire STL Pipeline.

In the interim, we expect to invest $20 million over the remainder of fiscal 2020 and 2021. Overall, we believe it will take two to three years to obtain regulatory approval and commercial validation, while continuing to demonstrate its operating performance.

As we announced earlier, our revised development plan resulted in a $140.8 million write-down Spire Storage's asset value in our third quarter. With that, I'll turn it over to Steve Rasche for a financial review and update.

Steve?.

Thanks, Steve, and good afternoon, everyone. And let me add my well wishes for good health and safety to everybody who's joining us on the call today or who will listen afterwards. Let's review our quarterly results and then discuss our earnings and capital spend and forward guidance. Today, let me start with GAAP results.

The net loss for the quarter was $92 million, reflecting impairment charges totaling just under $149 million. This noncash charge includes two pieces. First, as Steve just discussed, the write-down of our storage assets totaling just under $141 million.

And secondly, a roughly $8 million write-down of our commercial compressed natural gas or CNG fueling stations, principally the location in Greer, South Carolina.

As we evaluated this venture, it became apparent that the demand for CNG fueling is continuing to lag ours and market expectations due in large part to persistently low diesel prices, which make the conversion of Class eight trucks less financially attractive. We've begun an orderly process to exit the Greer facility in the next 12 months.

Results for the quarter also included the true-up to bring GAAP and net economic earnings results in line with the $15 million ISRS settlement we announced last month. Net economic earnings for the quarter were $7.3 million, up $2.3 million from last year.

Results were $0.07 per share in both periods, reflecting the impact of preferred and common stock issued over the last 12 months. Let's take a look at the business segments on slide 11. Gas utilities posted earnings of $8.4 million, up $800,000 from last year. Key drivers include higher margins and lower expenses.

Contribution margins were up $2.9 million as higher net ISRS revenues, demand and customer growth more than offset net COVID impacts of $2.5 million this quarter. Operation and maintenance expenses were also lower, and I'll touch on that in more detail in just a second.

Quarterly results also reflect significant improvement in other, driven by earnings from both the Spire STL Pipeline and a smaller loss at Spire Storage as planned.

Gas marketing earnings were down $3.2 million from last year, reflecting both less favorable current market conditions as well as higher costs as we take advantage of that market going forward. Let me explain both in a bit more detail.

Beginning in March, the market has seen a drop in natural gas demand as COVID impacted not only domestic demand but also trigger a significant drop in LNG shipments internationally.

While we have also seen contractions at the wellhead, and we are now seeing a drop in flowing gas, the impact today is significantly lower spot prices or summer prices and lower volatility. This reduced opportunities we had for asset optimization this quarter.

Uncertainty regarding natural gas production, demand and weather have kept the forward price curve high for the winter heating season, creating a seasonal price differential that was well over $1 per MMBtu until just recently. In fact, only the last few days.

As a result of these market dynamics, storage is now at a premium, both to address excess flowing gas as well as to take advantage of that seasonal price differential and Spire marketing is taking advantage of that situation. We have almost doubled our storage commitment going into winter, locking in that seasonal price differential.

This positions us well for next winter, but it does push up our cost for fixed storage and the fixed storage cost this quarter, and those will continue until we draw the natural gas this winter. There are two other variances I want to touch on this quarter, O&M expenses and other income. Total O&M expenses, as reported, were up $2.5 million.

But similar to last quarter, the classification of pension costs and the benefit of regulatory deferrals show up on different lines in the income statement. Excluding this $9.5 million reclassification, net run rate O&M expenses were actually lower by $7 million and a bit more than that in our gas utilities.

These cost savings stem from the realization of operational efficiencies, timing, and prior year costs that did not recur this year. And these savings more than offset the higher COVID-related expenses that I'll talk about in a second. The other key variance is in other income.

With a run rate decrease this quarter of $2.9 million due to prior year AFUDC from the Spire STL Pipeline. Remember, it's now in service, so its results show up in the other category above in the P&L. Note that there are additional analysis of cost variances, contribution margin and year-to-date results in the appendix for your reference.

Turning to slide 13. We have reduced our fiscal year 2020 estimated financial impact of Coronavirus to $6.2 million or $0.09 per share, reducing it by roughly $0.02 from our initial estimates last quarter. Looking at the components. Actual loss late fees for the quarter were $1.8 million, bringing total impact for the year to $2.3 million.

Margins were down for the quarter by $700,000 as lower commercial and industrial demand were partially offset by higher residential margins. This is an area we continue to watch closely, especially the small commercial customers who are bearing the brunt of continuing operating restrictions.

We are also seeing an increase in past due balances, and our bad debt expense has risen this quarter by $3.8 million. We expect a further increase in the fourth quarter as we roll out enhanced payment options for our customers.

And finally, other expenses, where we've seen a net savings for the quarter of $400,000 and forecast annual savings of roughly $1 million. We also continue to pursue regulatory relief.

In Missouri, we have filed an AAO, Accounting Authority Order, to enable us to defer for future recovery, certain impacts of coronavirus, including loss fees, bad debts and net O&M costs or savings. Alabama already has existing mechanisms that could potentially provide relief if the level of impact rises about certain levels.

Finally, let me turn to guidance. As Suzanne mentioned, we reaffirm our long-term net economics per share growth target range of 4% to 7%. And with the clarity around ISRS recovery in Missouri, we can now initiate earnings guidance for fiscal 2020 at $3.70 to $3.75 per share.

This range fully reflects our year-to-date results as well as the forecasted COVID-19 impacts I just talked about.

Our five-year capital plan remains $2.8 billion, with a reminder that our plan is well diversified across the service territory and supported by programs with long lives and regulatory mechanisms that ensure minimal regulatory lag for over 80% of our spend. This plan reflects underlying utility rate base growth of 7% to 8%.

Our financing plans remain on track, including modest equity needs for the remainder of fiscal 2020. So in summary, we're in solid shape. And working through this most unusual year, I might say, but we remain focused on delivering for all our stakeholders. With that, let me turn it back over to you, Suzanne..

Thank you, Steve. Clearly, this has been a challenging year. However, we are up to the challenge. Our mission calls us to answer challenges. As you can see in our third quarter results, Spire employees are focused and working hard each and every day.

We look forward to reporting year-end results in November, until then, we'll stay focused on taking care of our employees, serving our customers and communities with care and compassion and being a vital part of our nation's energy infrastructure. Now we're ready to take your questions..

[Operator Instructions] Our first question will come from Michael Weinstein with Credit Suisse. Please go ahead..

Hi, good afternoon guys..

Hey, Michael..

So the 4% to 7% growth rate states to look at the 2020 guidance as the baseline for that?.

Yes. Michael, this is Steve. Let me take a shot at that, anticipated the question. It's funny. As we sit here, I bet you're in your house. We're actually here together today, but most of the time we're working from home, and we're wondering when we're going to come back into the office.

And the big question that I think we're all wrestling with is what does 2021 look like and beyond? As we launched our guidance and looked at our compound growth rate, we looked at it a couple of different ways. We could try to calculate run rate 2020.

I'm struggling a little bit with what's run rate and what's not run rate when I don't really know what is 2021. Now we could simply add back all of the one-offs this year, which as some folks will want to do and add back 100% of the coronavirus impacts.

But I would make the observation, that means in two months, and a couple of day or three months and a couple of days, on October 1, that the market is going to completely changed, and we're going to be back to where we were free of coronavirus. And I'm not sure that we're willing to sign up for that. And again, that's just our view of the world.

But there are clearly things like ISRS settlement and all that, which aren't going to recur next year. What we did do is we're always looking at a five- or six-year time frame.

And so if I go back and we did as a team and look at where we were in 2019 and then run it forward through our five-year plan, it clearly supports our compound growth rate of 4% to 7%. So I think we have great comfort that we're still true to how we're growing the business overall.

How we end up run rating 2020 is an exercise that we'll think about as we get to the year-end call when we start talking about specifically 2021 guidance, but I could be all over the map and honestly, analysts and investors are all over the map on how much to add back from a run rate basis.

But I think we've been true to the fact that on a nominal basis, when you look at 2021 over 2020, the growth rate is going to be higher than it normally would because we are carrying some additional impacts to all negative this year going into next and we would acknowledge that.

But when we look at a long-term CAGR, we want to try to isolate all that. So I think we've kind of triangulated enough that we're comfortable with 4% to 7%. And if you need a baseline, think of it as last year because that was before everything hit, and we'll update our thoughts as we get to our year-end conference call..

Michael, yes, just to add to what Steve is saying, is we have a long track record in terms of our performance of their utilities and specifically relative to the capital that has been deployed year-over-year and our operational costs. So that also gives us a greater degree of confidence that wrapped around what Steve Rasche just went through..

Yes. It's kind of easy when you have rate base growth in utilities of 7% to 8% to get comfortable with our compound growth rate at the bottom line..

Right. All right. Yes, that makes sense.

On the other hand Spire Storage, could you just remind us what's the remaining book value at this point? What are your expectations for returns on that book value going forward? And where and also, I guess, if things are already starting to turn around this year or at least a little better than you expected, when do you expect that to become earnings positive and EBITDA positive?.

Yes, Michael, let me start on that. Yes, as we talked about in early July, the net book value for the business was just over $180 million. So we're at about $40 million net asset value after you take off the impairment charge. So that's right about what we expected in the middle of the range that we talked about.

And our view has not changed about the contribution of the business where it stands right now without expanding it further after investing the nearly $20 million that we'll invest over the next 15 months, so to speak. And that is it will be EBITDA positive.

In fact, we are still on track to have positive EBITDA next quarter, which was always the target that we have told the market. And from an earnings perspective, it's going to be right around breakeven. It might be within $1 million, one way or the other of zero. And again, that isn't the thing to focus on.

What we need to focus on is what we're going to do between now and the time where we decide what our next step is in Spire Storage, and especially as we prove up where the demand would be..

And I'll -- this is Steve Lindsey. Really, our short-term goals coming into this year were really to solidify our operations through the winter, which we did and deliver on our customer commitments, which we did.

So I think we accomplished those things and then as we alluded to, really over the next two to three years and looking forward, it's to obtain that commercial validation and to get more clarity around the evolving energy markets in the west and to go through some regulatory approval.

So I think in the short term, we accomplished what we were out to do this year, and we're going to look forward for those opportunities. But still, there's a little bit of a longer time line than we originally thought. And so that's where the a little bit of the pause as we look forward..

Michael, if you do and everyone on the call for that matter. If you recall, we brought in a seasoned storage executive prior to the winter months. So given that executive runway to get his head wrapped around the operations and so forth, and they really did a nice job, which you've seen that in the math in terms of the operation this past year.

And it really is a series of events. You proved it out operationally on storage, as you know, before you start highly engaging customers. We have many customers that are using the facility, but to move that forward and think about that capital plan deployed over time, where the customers come in and the types of services they're looking for.

And our executive need a bit of runway and we're offering him that runway. They're doing a really nice job. The piece I'll end on this topic is he's also hired recently a plant manager that is very experienced.

So that gives him now more capacity to go out and do more of the customer side of the work now that he's satisfied himself around the operation of the facility as well as that capital plan that he helped build..

One last question on the same subject.

Are you still looking at California as a major opportunity there? The Aliso Canyon situation, and at some point, will that is that the major opportunity for Spire Storage? Or are there other opportunities that are even larger than that or?.

It is one of the opportunities. As Steve Lindsey mentioned, besides our internal resources in terms of our market knowledge, we hired sort of a group, a very well-known group that looks at the gas industry holistically across the United States.

And then we hired another one that's much more tactical in flows and uses and also somebody who really understands etiology. And so that's a broad way of saying the uses of that facility are more than just California.

Obviously, California is significant, especially as new power generation facilities that are added and how they're added, and the intermittent uses of those and storage will play a significant role in how that works for Midwest and the western part of the country.

And so we feel like with a long view on storage, it will play a key role in the way that gas flows in the western side of the country. And as we talked about earlier on our prepared remarks, storage is a valuable asset relative to the gas industry today in North America..

Thank you very much and congratulations on getting all of the ISRS or getting ISRS resolved and legislation passed..

Great, thank you..

Our next question will come from Richard Ciciarelli with Bank of America. Please go ahead..

Hey guys, This is actually Harry Pollans on for Richie. Just a few quick questions.

How are you thinking about the pending 2019 ISRS appeal now that legislation has been signed and are you expecting any headwinds or refunds? Or could this kind of be a windfall opportunity given what you're currently booking?.

Yes. Well, and first of all, clearly, the legislation that was passed that will go into effect August 28 is forward-looking, so it's perspective, but we think it does provide a little bit of legislative intent as well as regulatory guidance as to how this should be approached. Again, we're still going through the process with the appeal.

So I think it's early for us to be speaking to anything relative to that, briefs are being filed. And as I mentioned, that those will play through probably till the end of the calendar year. I think we were very pleased, again, to get the three put in the past, to get the 2020 settled and to get the legislation passed.

So I think we need to let the process play out for 2019, but I think we're very comfortable with the, I would just call it, positive momentum that we're starting to see relative to definitions and the way the program really should be administered for our customers..

Got it. That makes sense.

And then on the storage front, with regards to the year was down, impacting your debt to cap, do you guys anticipate any incremental equity needs to kind of right size the balance sheet?.

No. This is Steve. None really. Anything that we would need would have already been contemplated in our financing guidance, and that hasn't really changed as a result of the developments this quarter..

Got it. Okay. If I could squeeze one more in, just to kind of clarify an earlier question. We should be using 2019 for the long-term EPS growth CAGR.

Correct?.

What I said was we're not I'm not going to play the base game, but I also kind of completely understand that you can do it up a run rate 2020, which I would have a real tough time figuring out where run rate is because that forms an opinion on 2021 and not any of us have, first of all, clear enough to understand specifically with COVID and the economic impacts.

How much of it is one-off and how much of it is something that has fundamentally changed when our view is going forward. And I think we've been pretty clear about that. But I did say that you can go back before this in 2019 and run it as we have, and it clearly supports our long-term growth rate.

So if that if you want to call that basing it of 2019, I'm fine because the numbers were in the books, I think we'll continue to work at it. And rest assured, in our year-end earnings call when we launch 2020 guidance, we'll have a little bit better view.

I'm still not sure to be honest with you, how I get to a run rate 2020 without forming an opinion going forward about the economy, but we'll do our best to make sure that everybody understands how we view what our prospects are in 2021 and beyond..

Perfect. Understood. Thank you..

Thank you..

Our next question will come from Richard Sunderland with JPMorgan. Please go ahead..

Hi, thanks for taking my questions..

Sure..

Just starting with the commentary on marketing, could you speak to a little bit more around the costs incurred this quarter versus the position expected to benefit 2021? And any way to think about what is locked in for next year?.

Yes. Richard, this is Steve. We obviously have a fairly good and detailed view of where we are and what's locked in. I try not to get to that level of operational detail, you have to give us the opportunity to actually work. But I would try to answer it this way.

If you look at the difference between earnings this quarter in Spire Marketing and last year, the vast majority of that shortfall is really the cost of the storage positions, a little bit of hedging loss associated with putting the gas in the ground.

Aside from that positioning, we would have been at or near the same earnings level that we had last year.

Now if you think forward to how storage actually plays out, we will incur the storage cost for the fourth quarter and probably for a good bit of first quarter next year before we would start withdrawing during the winter heating season, which will actually start about November, but I would suspect that the meet of that withdrawal is going to be in the January and February time frame.

So that as you think about the cost run rate, that at least gives you a better view of how to think about the cost.

In terms of the value that we're creating, we wouldn't have entered the transaction had we not done the full analysis to show what the seasonal differential, which is now below $1, but and that's really a phenomenon over the last four trading days. Henry Hub is up $0.25, maybe even $0.30 now versus where it was four days ago.

That may be technical, but it may just be the start of a bigger move. But that seasonal differential was between $1 and $1.40 per MMBTu for the better part of the quarter.

So we have a fairly significant amount of value that we've created that when we look at it end-to-end, we're going to take the cost over the next two quarters or so, 2.5 quarters, but we're going to create fairly significant value during the winter. And it is a very, very advantageous trade that we're not the only ones doing it.

There's not a lot of storage available right now, and I suspect we're going to get pretty close to as they say, the tank tops on oil, we're going to get pretty close to record levels of natural gas and storage this year for all the reasons I talked about in the prepared remarks.

And we do believe we're going to create a fairly significant value, which may make Spire Marketing's earnings a bit more seasonal this year than what you may have seen in the past.

But again, we have to take advantage of the market when the market gives us these chances, and this is where the market opportunity is, at least for the first half of 2021..

Got it. I appreciate the color there. And then I just wanted to revisit the table on slide 13 on COVID impacts. And if I'm reading this correctly, there are several items that appear will be going in your favor next quarter. I guess, somewhat of a reversal.

Just curious if you could provide a little bit more color around those and if that's dependent on any of the regulatory release?.

Yes. And Rich, it's a great question. So if you look at on slide 13, there's really four lines. The loss fees is done. We are now back in a more normal operations mode. So you don't see any change between the first three quarters and the full year.

We do expect that we will see a gentle uptick in residential margins in the fourth quarter, which will more than offset the exposure that we believe we see especially in the small commercial and industrial sector. But as I said in our prepared remarks, that's still an outstanding question.

And as you know, the economy for those guys and gals really does depend upon where their jurisdictions are and are they being restricted and how many people they can have in the restaurant. But our best estimate is that we should be able to get a little bit of benefit of that in the fourth quarter.

Bad debt I spoke to on the call, we do expect those to go up as we get better information, especially on our arrearages. And then you're right. We continue to see some other costs naturally reduce. And you can see that, that turns around and actually as it claw back as we get to the end of the year versus what we've seen so far this year.

And that's if you think about that, we incurred a lot of the cost early on in March and April as we were ramping up and protecting our customers and our employees. And the it gave us a little bit of runway to get our arms around other costs, some of which just naturally are going to be lower, like travel and entertainment.

We're not doing a lot of that right now and probably we'll not be doing it for the balance of this calendar year as most of our peers are also saying. So that will create an opportunity for us to offset a little bit more. And if you step back, our estimates down, the impact is down about 20% over where it was last year.

And that is really in the offset of direct cost and then a little bit more favorable view of what the overall margin impact is going to be. And that's offset a little bit by a bit higher bad debt expense..

Thanks, Steve and Suzanne..

Our next question will come from Selman Akyol with Stifel. Please go ahead..

Thank you. I just wanted to follow up on that last question in relationship to your table there.

And so I guess, how much of that do you expect to be recovered under the AAO in Alabama as we think about things going forward?.

Yes. Selman, I'm reticent to estimate that. We are in Missouri, as we talked about, where we have filed for the AAO. We're in active discussions with the various parties who would want to weigh in, and we'll have to wait and see how that all plays out.

And if you step back from the question on us and kind of look at it more broadly for the utilities overall because I do have a chance to chat with a lot of our peers, getting recovery of a net cost increases is probably the easiest one for both us and regulators across North America to get their heads around because it's very easily definable.

And I think those have the highest opportunity. I think margins are a really tough area for utilities broadly to get recovery on. And I'm not sure that we would expect to get that in Missouri. Now I would say in Alabama, the mechanisms above certain thresholds. So we have to have an adverse impact of a certain amount.

But above those thresholds, we actually do get some recovery on loss margins. We are not at that level yet, and we're not sure whether we'll get there or not. And then the loss fees is really kind of in between the two. I don't want to handicap that.

We clearly can show specific identification for those loss fees, which are mostly in Missouri, and we're confident that we should be able to get some recovery of those.

And now whether we get those immediately, and you would see that benefit in the fourth quarter or whether we would be able to defer them and then consider them in our next rate case is another discussion that we'll have once we're further along in the process in Missouri..

The only thing I would add, Selman, maybe from an Alabama perspective because you had asked specifically about that. As Steve said, there are certain thresholds because we basically have two utilities in Alabama, who we've got Birmingham Montgomery, Alagasco, and then we've got the Mobile piece. So there's different set points for both of those.

But the real point I wanted to make. As you recall, we have the RSC in Alabama, and it goes through an annual reset. So all those observations are made to reset those companies and the place they need to be and then prospectively, we manage the company. And that's a tried and true process over decades. So yes, I just want to add that bit..

I appreciate that.

And let me just ask in terms of the bad debt expense, and I know difficult looking into 2021, but wouldn't we expect that to continue to accelerate as we kind of go into your peak revenue season?.

It's a great question. And then I think, Selman, that gets to the view of economic activity in 2021 and our customers' abilities to pay. It would sure feel like to us that the run rate bad debt expenses, which may have been at a lower level in 2019 and prior have probably moved up to a different level.

But a lot of that is going to be determined by things that are way outside of our control, including federal stimulus packages and support for unemployment, things that we have no say on whatsoever.

But I would say, if we had to do a plus minus, we clearly it looks like our bad debt expense run rate will be at a level that's higher than it was before we even knew what COVID stood for five months ago..

And the thing I would add so the thing I would add is, as Suzanne hit on this early in her remarks, was some of the things we've really tried to do proactively for our customers, whether it's energy assistance, working on payment arrangements, we've really tried to step up what we can do because we know that not only are these very difficult times for the folks that normally are in those situations, there's a lot of new people that have come into this scenario.

And so we're trying to do some things, help educate and help people through the process, probably in a more advanced way than we've even done in the past..

Thank you for that. I want to go back to storage for a minute and just make sure I'm thinking about this correctly. And I appreciate it you're getting to breakeven, and you're going to invest another $20 million or so over the next 15 months.

So by the time you get to $60 million, do you still expect to be at breakeven? Or do we expect to start to see the asset contribute, albeit something small?.

Yes. It's going to be it will move the needle a little bit. It's still going to be around breakeven when you look at the net income impact. We clearly would expect the EBIT contribution to improve because what that $20 million allows us to do is to firm up the capacity that we can sell to our customers.

And we've seen significant demand from our customers for the storage services that we provide. We have kept it at a level that we are comfortable delivering on our customers at. And the $20 million will allow us to incrementally increase that comfort level just a little bit. So it does help improve operating results.

It's such a small piece of our overall portfolio of businesses, Selman. I wouldn't want to hang a lot on it either way until we decide what we want to do in the longer term with our development plan..

Understood. And then I guess just one last question here. Can you guys and I'm just hearing about this from other places that I wouldn't have normally suspected.

So can you guys comment on hydrogen at all? And are you guys talking about that? Are you getting anything out there as you look out 20 years at all and think about your system, et cetera.?.

Yes. It's a great question. We've all read a lot about that. And so obviously, we're intrigued about what we're reading. As far as Spire and that being one of our strategic imperatives, obviously, that's not showing up on our list at least not yet, who knows what the future holds, but it's not on our list currently.

We've stayed focused this year on all the different pieces that we've been talking about on this earnings call. So that has clearly been our focus for this year and going into next year..

Understood. Thank you so much..

Thank you..

Our last question today will come from Brian Russo with Sidoti. Please go ahead..

Hi, good afternoon. .

Good afternoon, Brian. .

Most of my questions have been asked and answered.

I was just curious, the last rate case that was settled, was that an all-party settlement?.

Are you talking about Missouri rate case?.

Yes, Missouri..

Yes. We had that by definition, when you settle a rate case, which we settled in the April time frame of 2018, we got to agreement with all the parties involved.

But -- that answer your question? Or do you have a follow-on?.

No, that answers my question. I just wanted to know was the OPC part of the settlement..

They are always part of the settlement and the discussions..

Okay. And then just remind us what the strategy is with the HoldCo debt.

I think you want it to be less than 20% of total debt, but where it is now?.

You know what? That's a great question. Give me a second here, and I'll see if I can get the most current number. It's about 25% right now. And that will hold steady. We do have some retirements holding company that will come up in the next couple of years that will allow us to drive that down. And then that's working on the numerator.

We'll work on the denominator, too, because as we go forward and continue to invest $500 million every year in the utilities.

We'll have a pretty regular amount of operating company debt that we will go to market for in the operating companies, which will bring that percentage down by growing in the bottom half of the calculation versus reducing the amount..

And just in the settlement in the last Missouri rate case, was the cap structure disclosed?.

A cap structure was decided in the last rate case and they the Missouri Commission opted for the operating companies via Missouri cap structure, which was 54.2% equity, if I remember correctly. And that was an actual calculation as of the company and you're in..

Okay, great, thank you very much..

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

Great. Thank you all for joining us. I know it's a busy earnings day. We always appreciate the chance to talk with you and answer your questions. We will be around for the rest of the day for any follow-ups. Have a great day. Be safe..

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