Good morning and welcome to the Spire Second Quarter 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..

Thank you. Good morning, everyone. Welcome to Spire second quarter earnings call. We issued an earnings release this morning and you may access that on our website at spireenergy.com under Newsroom.

There is also a slide presentation today that accompanies our webcast and you may download it from either the webcast site or from our website and you can find it under Investors and then Events and Presentations.

Presenting on the call today are Suzanne Sitherwood, President and CEO; Steve Lindsey, Executive Vice President and Chief Executive Officer of Gas Utilities and Distribution Operations; and Steve Rasche, Executive Vice President and CFO. 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 risks 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 economic earnings and contribution margin, which are both non-GAAP measures used by management when evaluating our performance and results of operations. Explanations and reconciliations of these non-GAAP measures to their GAAP counterparts are contained in our news release and 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 second quarter update as we close out the winter and move into the second half of our fiscal year.

Last quarter, I recognized the outstanding efforts of our employees in making sure every customer we serve have the energy needed to stay safe and warm through the bitter cold winter that covers much of the country.

I am proud to once again acknowledge the Spire team for taking such good care of our customers and communities, especially in the heart of the winter heating season. I have had the good fortune to work in the natural gas industry for more than 38 years, serving customers and communities, large and small.

During the past 7 years, my colleagues and I have led the Spire’s journey of transformation, by staying true to our mission and strategic priorities and consistently executing our growth plan. Our focus, business scale and diversity of geography and gas related businesses have driven positive momentum that continues to manifest in fiscal 2019.

Consistent with our strategy, I’m pleased to report that we delivered another strong quarter of performance. Second quarter net economic earnings were $2.90 per share, up from $2.83 last year. The higher earnings reflect growth at our gas utilities, following last year’s regulatory resets and solid performance by Spire Marketing.

Across our service areas, we continue to make significant investments and organic growth, infrastructure settlements and modernization and innovation in technology, all of which combined to drive our financial and operating performance, which includes growth in customers and higher margins.

And we continue to increase our capital investments in technology, both infrastructure and customer application.

While more than 90% of our earnings come from our gas company, serving 1.9 million homes and businesses, we also have gas related businesses that are consistently delivering on our mission, and strategically serving customers and communities.

So before I turn the call over to Steve Lindsey to talk about the growth and operating performance of our gas company, I’d like to take a few minutes to share an update on our gas related businesses. At Spire Marketing, over the last year, we positioned the business for long term growth and success by building an even stronger team.

As I shared last quarter, the team has extended its longstanding business model of managing the logistics of moving gas for customers, including utilities, power generators and producers, by creating a larger geographic footprint, growing its customer space and increasing its volumes.

As a reminder, our marketing growth strategy is focused on physically connecting natural gas and users. We’re doing this, while serving our growing customer base and leveraging our expertise to optimize our portfolio of supply, transportation and storage assets, based on market conditions, including weather, regional basis and price volatility.

Reflecting the growth of the team and geographic expansion of our business, Spire Marketing delivered strong performance in the first half of the year, with net economic earnings of $0.28 per share. Regarding the Spire STL Pipeline, I am happy to report the construction, which began in December, is well underway.

We successfully completed the bores for the pipeline crossing of the Missouri and Mississippi rivers, a major milestone of the project. All the while, crews will continue to work across the entire 65-mile length of the project carefully, clearing the route and safely installing pipe, meter stations and other ancillary equipment.

Based on the progress to date, we’re planning for Spire STL pipeline to be in service by the end of the fiscal year. Reflecting our actual spend to-date, we expect the total project cost to increase to a range of $230 million to $240 million.

Now turning to Spire Storage, we are refining our development plan for what was prior to our purchased two independent natural gas storage facilities in Wyoming. Our strategy is to integrate the facilities and operate them under one birth certificate.

Our plan includes investing in infrastructure and resources to position Spire Storage to offer new services and enhance reliability to a broader and more diverse group of customers, from utilities and power generators to producers.

Specifically, we’re targeting an increase in injection and withdrawal capabilities, enhanced connections between the facility and the expanded working gas capacity that comes from being connected to 5 interstate pipelines.

As a reminder, our efforts are designed to enable Spire Storage to take advantage of the expanding market opportunities in the Rockies and Western U.S. Our investment in Spire Storage continued in the second quarter.

For fiscal 2019 to-date, our investment totaled $74 million, including $56 million for base gas that support the operation of facilities and $18 million for infrastructure improvements. Our total investment including acquisition cost is $130 million. We expect Spire Storage to contribute to earnings in the back half of fiscal 2020.

In closing, I’m pleased to report that our Board has declared a quarterly dividend of $0.5925 per share, payable April 2.

We know that our dividend and the growth in the dividend is important to our investors and we are very proud of our track record, 74 years of uninterrupted dividend payments and increases for 16 years in a row, including a 5.3% this year.

With that summary, I would like to turn the call over to Steve Lindsey to share an update on how we are continuously improving performance for our gas utility..

Thank you, Suzanne. I also want to acknowledge the outstanding efforts of our employees during the heart of our heating season we are delivering a strong performance, great service for all our customers, all while keeping themselves and our community safe.

I want to begin by talking about safety and system integrity, which are both very important topics for Spire and our entire industry. As you may know, the Pipeline Safety Act is up for renewal this year, which Congress would reauthorize PHMSA, Pipeline Hazardous Materials Safety Administration to continue to oversee pipeline safety at federal level.

Reauthorization comes at a time there have been several incidents across the country that have put a spotlight on our industry. As a result, with this reauthorization, there will be increasing focus, standards for replacement, aging infrastructure, overpressure protection, emergency shutoff protocols, damage prevention and other critical matters.

At Spire, we have long had a laser focus on the safe and reliable operation of our system. Everything we do starts with safety and that’s why we prioritize educating and training our employees and still in a safety culture, company wide. Consistent with our safety culture, we’ve been accelerating the replacement of aging pipeline.

Our increasing investment infrastructure upgrades paired with well-established policies and procedures as well as a highly trained team and technology, ensures the safe operation, integrity of our system. Spire’s growth is driven by the growth of our gas utilities.

For growing our gas utilities primarily through increasing capital investment, that emphasizes the replacement of older pipe in our system, I’ll speak to this in just a moment.

The regulatory mechanisms we have including incentives to accelerate system upgrades in Missouri and Alabama, and real-time rate making in Alabama, are key to timely recovery and the support infrastructure modernization and earnings growth.

In Missouri, we filed earlier this year for an additional $18 million in annual revenues under the infrastructure system replacement surcharge or ISRS. Included in our filing is $3.2 million recovery of cost to replace plastic materials that we have requested in our previous filing, that were deemed not qualified under ISRS.

The Missouri Public Service Commission staffs recommended these costs not be included in the ISRS recovery. By rule, new rates must be affected by May 14, so we expect an order on our ISRS’ request shortly.

In Alabama, we have the accelerated infrastructure modernization rider or AIM, which incentivizes the return on equity rider, accelerated replacement of remaining cast iron and bare steel distribution lines. Driving organic growth is the other important way we grow our gas utilities.

We are focused on new business and economic development initiatives and we’ve been ramping up our commitment efforts in both these areas. Our investment in new business continues to increase and as a result we are seeing further growth in new premise activations ahead of last year’s record pace.

We also have had success extending our service to reach new customers beyond our current franchise area in Missouri. We recently received several approvals of certificate, convenience necessities or CCN from the Missouri Public Service Commission.

These CCNs will allow us to extend service to poultry and agricultural customers in the Southwest part of the state. Benefit of this type of new business is many of these customers are conversion opportunities that translate into immediate margin upon completion of the projects.

Finally, we support growth through the day in, day out, rigor of controlling our costs through process improvements and leveraging technology. Turning to our capital investments, Spire has increased its estimated spend for FY ‘19 by $90 million to $740 million.

The utility portion is $490 million, which is up about 3% over our previous forecast due to higher infrastructure upgrade spend. This year, we are targeting $82 million for new business. And as we have stated before, about 80% of our utility spend is recovered with minimal regulatory lag or reflected in earnings in the case of new business investment.

Year-to-date in FY ‘19, utility spend is in line with our plan, including more than $135 million in pipeline replacement as well as more than $50 million in new business, which supports the growth in the new major installations that I mentioned earlier.

In the operation side of our gas utilities, we continue to see improving performance driven by the investments we make in infrastructure, technology and our people. As I have said earlier, at Spire, everything begins with safety and we are seeing lower employee injury rate and better safety overall.

Modernizing our pipeline system is leading to enhance system integrity, with overall reductions in leaks and better leak response times. We’re also having success in reducing third party damages to our system. Thanks to a number of programs that promote safe excavation practices across our entire footprint.

Finally, our service levels and performance in field continue to build on last year’s successes, with customer satisfaction scores for our field technicians and appointment attainment rates, both continuing to trend upwards. With that, I will turn it over to Steve Rasche for a financial review and update..

Thanks, Steve and good morning everyone. Let’s review our results starting here on Slide 13. We delivered higher earnings again this quarter, with consolidated net economic earnings of nearly $148 million, up 8% from last year, with increases in both segments. Gas utility posted earnings of nearly $147 million, up $15 million from last year.

Gas marketing’s earnings of $6.2 million were down $4 million as expected. All other businesses and corporate expenses were up marginally to $5 million. Net economic earnings were $2.90 per diluted share, up $0.07 from last year, reflecting the higher share count from our equity offering last spring.

Now, I normally don’t comment on GAAP earnings, but we included it here on the slide since our comparables are impacted by a lot of noise last year, principally the write offs related to our Missouri rate cases and the adjustments from tax reform.

As a reminder, we excluded those largely non-cash items from our net economic earnings last year and we believe the comparison of NEE is fair view of our performance overall.

Turning to the details, starting on the next slide, total operating revenues of $804 million were down nearly $10 million from last year, reflecting our 2018 rate resets as well as lower gas costs recoveries and demand.

Contribution margin as reported was higher by nearly $39 million, but that increase was impacted by a couple of key items once you look at the details. Gas utility margins posted an increase of nearly $23 million, but that was driven mainly by the change in Missouri rate structure and rate resets last year, totaling approximately $20 million.

Excluding those items, margins were up roughly $3 million, reflecting modest customer growth. Note that weather this quarter was about 1% colder than last year, and 3% warmer than normal, but with residential rates that are largely weather mitigated, the actual weather impact on our margins was small.

Gas marketing margins as reported were higher by over $17 million, but that includes fair value accounting adjustments of $20.7 million, resulting in margins that were lower than last year by $3.6 million. This decrease reflects the benefits of our geographic expansion, as Suzanne mentioned, that were offset as expected by less market opportunities.

Recall, the winter weather patterns a year ago created significant pricing volatility and wide basis differentials. This year, the market still presents good opportunities to optimize our supply, transportation and storage portfolio, just not at the levels of last year.

Looking at gas utility operating expenses, utility fuel costs were down due to lower gas recoveries and lower volumes, consistent with revenue.

Operating and maintenance expenses as reported included the noise of not only prior year rate case adjustments, but also the re-classification of benefit cost to other income, resulting from new GAAP guidance, with no bottom line impact as shown here on the slide, I might add.

Excluding those impacts, O&M was higher by $3 million reflecting the increase in amortization from our Missouri rate cases of $4 million, offset by lower other expenses. Gas marketing expenses increased by 4%, as favorable fair value adjustments were offset by higher commodity cost, higher volumes and marginally higher operating expenses.

Other expenses reflect the operating cost at Spire Storage, which totaled $6 million this quarter, up $3.2 million from last year, offset in part by lower other corporate expenses. Miscellaneous income and interest expense had variances consistent with past trends and market activity this quarter.

And finally, income tax which for the quarter and half year, were at – effective rate of 17.8%, down from last year, and consistent with our guidance due to the amortization of excess accumulated deferred income tax or ADIT and a drop in Missouri income tax rates.

Our year-to-date performance is highlighted here on Slide 17, with net economic earnings up nearly $19 million, with trends consistent with our quarterly results. Gas utilities were up $22 million on rate design changes and organic growth.

Gas marketing as Suzanne mentioned, was $700,000 higher for the first 6 months, as the benefit of our business expansion more than offset the change in market conditions.

Other expenses were up $3.9 million, reflecting the $7.4 million loss on storage, amounts that were excluded from net economic earnings last year, I might add, offset by higher AFUDC from Spire STL Pipeline. We continue to grow our cash flow and maintain a strong financial position, with the year-to-date adjusted EBITDA, up 12% to $413 million.

We also maintain ample liquidity coming out of our peak working capital period, and our capitalization strengthened again this quarter. We now have long term capitalization at 51.6% equity, an improvement of 180 basis points from our fiscal year end.

We stand in a strong position and we do expect to take steps to strengthen our balance sheet further, including adding some incremental equity through our at the market program in the back half of this year.

Turning to Slide 19, year-to-date capital spend stands at $377 million, up $161 million from last year, reflecting increased spend across our gas utilities, as Steve mentioned, for the construction of the Spire STL pipeline and to support our continued development of Spire Storage.

Given our progress so far this year, we have updated our full year capital spend target to $740 million, with increases coming from higher spend across all of our businesses. Now, let’s turn to outlook.

We reaffirm our long-term net economic earnings per share growth target range of 4% to 7% as well as our 2019 net economics guidance range of $3.70 to $3.80 per share. Earnings growth is supported by our solid operating results for the first half of the fiscal year and the progress we have made in our gas-related businesses.

And as a reminder, our new Missouri rate design and to a lesser extent, our common stock offering last May have made year-over-year comparisons difficult at best for the last three quarters I think you would agree. We have one more quarter of transition since both those events kicked off partway through our fiscal third quarter last year.

As a result, our fourth quarter 2018 results are likely the better benchmark when thinking about the quarterly cadence of our earnings per share for the back half of the year.

As Suzanne mentioned at the start, we also rolled forward our long-term capital spend forecast, with our target for 2019 through 2023 increasing to $2.8 billion, up from $2.6 billion for the last 5-year period.

This plan supports the growth across all of our businesses and reflects our expectation of overall rate based growth of roughly 6% as well as high recoverability or earnings contribution with minimal regulatory lag.

So in summary, we have finished a strong first half of fiscal 2019 and we are continuing to invest for long-term success across our businesses. With that, let me turn it back over to you, Suzanne for some final comments..

Thank you, Steve and Steve. In closing our second quarter earnings update, I would like to again thank every single one of our Spire employees, who safely and reliably served our customers and communities during the winter heating season. Your dedication to safety, service and excellence inspires us every day.

In summary, we delivered another strong quarter of performance, with increased earnings and improved service level. Thanks to our focused efforts to invest in and grow our business.

We do appreciate your interest and investment in Spire and look forward to continuing the conversation at the American Gas Association Financial Forum in a little less than 3 weeks. Now, we are ready to take your questions..

We will now begin the question-and-answer session. [Operator Instructions] The first question will come from Michael Weinstein with Credit Suisse. Please go ahead..

Hi, good morning guys..

Good morning, Michael..

Good morning, Michael..

Hey, maybe we could just start off with the marketing and storage business, what are your target contribution in business mix for this segment going forward and how much of the benefits that you are seeing this year from the expansion, do you think are sustainable? I mean, we had a really good year last year too but that was kind of framed as a non-sustainable outcome and now I am wondering if more of this is sustainable going forward?.

Hey, Michael, this is Suzanne. I will start and then see if Steve Rasche would like to add anything. So, the question about percentage mix, we look at our business profile from a regulated and non-regulated aspect. Marketing is non-regulated.

Clearly, our pipeline is regulated, our utilities are regulated and to a great degree, our storage facility is regulated. We know that in the market there is some limitations especially from the credit rating agencies, so we are very watchful about that and mindful about that.

So in terms of the storage and marketing business, the way I look at it and why I call them gas related businesses is because they are serving customers and communities, that’s much in the same way our utilities do.

And from a customer profile of the marketing company and the storage company, by our stores, by our marketing, they are serving power generators and utilities, and for the marketing side, producers, but they are physically moving gas to a market need.

Both of these businesses and we will start understanding more around storage as we move forward in serving the Rockies and the West Coast, but there is a base business with a marketing company and there is a base business with the storage company and we will continue to bring more color into that as we move forward with these businesses, but also there is market opportunities depending on what’s happening with weather and so forth.

So we will have a base business aspect and we organically grow those businesses and we expect them to, but we are also as I mentioned at the beginning of this answer, we are mindful of what that business needs to look like from a regulated and non-regulated perspective. I don’t know if Steve would like to add..

No, well said..

Okay.

And sustainability of results in this segment for this year going forward?.

I mean, the marketing segment sustainability because we have moved into new geographies and we have got a very talented team, as you know that we have moved the office to Houston. We feel very confident about the sustainability of the business.

As you know, against our more geographical regions, we have expanded the employee base there to support the sustainability of the business and again, we expect them to organically grow again creating that base business, but knowing that there will be times depending on weather patterns and movements quite frankly both in the winter and the summer that we may be able to extract opportunities depending on those weather conditions..

Got it.

And also on the CapEx plan, which increased about $200 million, I don’t think there was any change there in the financing plans, especially on the equity side and it’s still the ATM that’s open, is there any additional need for financing as a result of higher CapEx or is it somehow internally funded?.

Yes, Michael, this is Steve. I think I can take this one. Yes, we as you know, we factor in the financing requirements for all of our businesses in our long-term growth target range and I think it adequately covers the expectations of what our financing needs will be.

And you are right, it includes both debt and equity as we want to make sure that we are supporting our strong credit metrics right now and going into the future. So clearly, the ATM is one of those components since I mentioned. We do expect to use that in the back half of the year to add some more equity..

Alright. Thank you very much..

Yes, thank you, Michael..

The next question comes from Phil Covello with ExodusPoint. Please go ahead..

Hey, good morning guys. Just a couple of follow-ups on kind of equity plan just to get a little more specificity on that if possible, just to be clear, so first of all, you haven’t issued any equity yet through the first quarter or the last quarter rather. And with regard to the second half, issuance is under the ATM.

Is it the right way to think about that, basically the whole $50 million in the second half of the year, could it be more or less than that, just whatever color you can give there?.

I mean, yes, Phil, this is Steve. I will take a shot at it. The ATM which we announced in February is not yet active, so no, we had no issuances during the period up through the end of the quarter and up through the call today. And as I mentioned, we do expect to start issuing through that. It’s a 3-year, $150 million program.

And when we announced the program and I think our view hasn’t changed. We view that to meet our equity needs for at least the next two fiscal years and I think that that stands based on our current forecast. We haven’t really guided individual needs by time period and we will continue to consider that as time goes forward..

Okay. So it might not necessarily be $50 million ratable over 3 years or….

Yes, again, it’s a 3-year program and we view that it’s going to meet our needs for at least the next 2 years..

Okay.

And also can you just provide any more specificity on the second half whether like what might factor into when you would consider issuing that equity?.

No, not at this point, I think that would be leaning a bit too far forward..

Okay. And just looking at the stock process, general thoughts here like do you have an inclination to maybe frontload that this year like looking at the overall $150 million budget, so to speak that you have or….

Yes, Phil, there is a number of factors that we look at when we decide what type of capital we need to raise, where we need to raise it in our capital structure and what flavor of capital that’s going to be and clearly, the share price at the Spire Inc. level is one of the many considerations.

I tend to think about starting with the business and what does the business need and make sure that we are doing it in the right cadence for the business overall. And we tend to take a long-term view of our business and we want to make sure we have the right capital at the right time to continue to invest and grow the business.

And I think we have got the right cadence and balance in how to think about all those factors..

Okay, that’s all I had. Thank you, guys..

Yes, thank you..

[Operator Instructions] The next question will come from Christopher Turnure with JPMorgan. Please go ahead..

Good morning. It’s actually Rich Sunderland on for Chris.

How are you?.

Hi, Rich..

Good morning..

Do you mind walking through the storage accretion and what’s changed around the message there?.

I am not sure that anything has changed in the message from the last quarter. Last quarter, we were consistent about it – like it’s contributing to earnings as we go into 2020.

If there has been any clarification, it’s the back half and the way I tend to think about it and Rich, I know you have other businesses which are development or are physical expansion businesses.

When I think about those, when you think about the development plan, you have to invest the money, get the team put together, get the contracts in place and then you work your way through on a periodic basis, contribution for EBITDA, EBIT and then ultimately earnings and earnings per share as a public company.

And we have got a fairly refined view, that’s all going to play out. We are still working to finalize the development plan, but our view is that, that development becomes a positive contributor in the back half of 2020..

Yes, Rich certainly, I would add to that, it’s more of a reminder, I am sure you are aware, but if you just take the journey with us a bit, we acquired Bellevue in December of ‘17, not knowing even though our strategy was designed around our ability to acquire Clear Creek and we were able to do that in 2018 and closed in May and so at that point we filed with the FERC to be able to combine these two facilities to create market based rate, so basically treat the facilities as one.

Also a part of that strategy then was to have the ability to build the Rock pipeline which we are working on now. And from a master strategy all along, that was our intent and desire at least. We didn’t know whether or not we would be able to execute to acquire Clear Creek, combine the two facilities, integrate them and now build the Rock pipeline.

So, to get after a little bit of what Steve is sharing with you, clearly our development plan shift based on our ability to acquire Clear Creek, build the Rock pipeline, combine the two capabilities and serve customers in the Rockies and on the West Coast.

So, that’s why we expect now that we have those pieces and we still need to go through the FERC process on the Rock pipeline as well as Steve said, refine the capital plan to support the facilities and that’s why 2020 back then in terms of earnings too that’s the journey. Hopefully, that adds a little color..

Yes, certainly.

So with the back half of 2020, that’s more just clarity on your end with the path forward that you have now versus kind of saying 2020 before, does that make sense?.

Yes, certainly..

Yes, that’s fair. Yes..

Okay, great.

And then just one final one here, I think it was $6 million of expenses on the quarter for storage, does that include financing costs?.

That would include an allocation of financing cost for the capital invested, yes..

Okay, great. Thank you very much..

Yes, thank you. Appreciate it..

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

Well, thank you all for joining us and we look forward very much to seeing you all in about 3 weeks at the AGA Financial Forum. Talk to you then. Have a great day..

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