Spire Inc. (SR) Earnings Call Transcript

Good day, and welcome to the Spire Inc. Third Quarter Fiscal Year 2026 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 of Investor Relations. Please go ahead.

Good morning, and welcome to Spire's Fiscal 2026 Third Quarter Earnings Call. On the call today are Scott Doyle, President and Chief Executive Officer; and Adam Woodard, Executive Vice President and CFO. We issued an earnings news release this morning that can be accessed on our website at spireenergy.com, along with a slide presentation that accompanies our webcast. 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 Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. These statements include, among others, statements regarding our expectations, plans and objectives for future performance, future operating results, earnings guidance, capital investment plans and the expected timing and benefits of risk associated with acquisitions, dispositions and related integration and transition activities. Our forward-looking statements on today's call speak only as of today, and we assume no duty to update them unless required by law. Although our forward-looking statements are based on estimates and assumptions that we believe are reasonable, there are various uncertainties and risk factors that may cause future performance or results to be different than those anticipated. These risks and uncertainties are outlined in our quarterly and annual filings with the SEC. In our comments, we will be discussing non-GAAP measures used by management when evaluating our performance and results of operations. Explanations and reconciliations of these measures to their GAAP counterparts are contained in both our news release and slide presentation. With that, I will now turn the call over to Scott.

Good morning, and thank you for joining us. Over the past year, we've taken significant steps to position Spire into a stronger, more focused company. Through the acquisition of Spire Tennessee and the divestiture of our non-core businesses, we have completed our transformation to a fully regulated company, enhancing our earnings quality and improving visibility of our long-term growth. As we look ahead, we believe we are well positioned to benefit from the growing importance of natural gas in the nation's energy future. The EIA recently forecasted that both U.S. natural gas production and demand will reach record levels in 2026, reinforcing the critical role natural gas plays in providing reliable, affordable energy to homes, businesses and communities across the country and the world. Today, we'll discuss our third quarter results, the progress we've made advancing our strategy and the opportunities we see to continue creating long-term value for our customers, communities and shareholders. Turning now to our performance for the quarter on Slide 4. This quarter marked another important step forward in executing our strategy. From a financial perspective, adjusted earnings per share from continuing operations improved to a loss of $0.26 per share compared to a loss of $0.29 per share in the prior year quarter, representing an improvement of $0.03 per share. More importantly, we continue to safely and reliably serve our customers while maintaining our focus on affordability, operational excellence and disciplined cost management. Strategically, this was a very significant quarter for Spire. We completed the divestitures of Spire Marketing and Spire Storage, further simplifying the company and sharpening our focus on our regulated utility operations. At the same time, integration of Spire Tennessee continues to progress well, and we remain on track to achieve key milestones to exit transition services in fiscal 2027. On the regulatory front, we continue to make progress across all of our jurisdictions. Spire Alabama and Spire Gulf have renewal hearings for the rate stabilization and equalization or RSE mechanism scheduled later this week on August 6 and 7. In Missouri, last week, we reached a settlement in the accounting authority order proceeding. And as a reminder, Spire Tennessee filed its annual review mechanism with the Tennessee Public Utility Commission in May. Adam will provide more details on each activity during his remarks. Finally, I'm pleased to reaffirm our fiscal 2026 and 2027 adjusted EPS guidance ranges as well as our long-term adjusted EPS growth target of 5% to 7%. Moving to Slide 5. Our priorities remain unchanged and centered on operational excellence and customer affordability, constructive regulatory execution, financial discipline and the successful integration of Spire Tennessee. These priorities continue to guide our actions and support our long-term growth strategy. With the completion of the marketing and storage divestitures, we're now operating as a fully regulated company. Moving to Slide 6. Spire is now positioned around a mix of gas utilities in a FERC-regulated pipeline with the expected sale of Spire Mississippi still targeted to close in the first quarter of fiscal 2027. The exit of the storage and marketing businesses reduces earnings volatility and enhances predictability, representing an important shift. Our earnings outlook is now supported by rate base growth, constructive regulatory mechanisms and a more straightforward business model with a clear path to deliver predictable earnings growth and long-term value creation. With that, I'll now turn the call over to Adam.

Thanks, Scott, and good morning, everyone. I'll begin on Slide 7 with our third quarter results, which were in line with our expectations and support our outlook for the remainder of the year. For the quarter, we reported an adjusted loss of $15 million or $0.26 per share compared to an adjusted loss of $13 million or $0.29 per share in the prior year quarter. Fiscal 2025 results included $0.06 per share of preferred dividend expense that did not recur this year following the redemption of our preferred shares. The Gas Utilities segment reported an adjusted loss of $3 million in the quarter, improving from a $10 million loss in the prior year. The improvement was primarily driven by new rates in Missouri and Alabama, including ISRS rates implemented in Missouri this spring and the CCM mechanism in Alabama. Higher customer usage net of weather mitigation in Alabama was partially offset by lower usage net of weather mitigation in Missouri. O&M expense increased by approximately $4 million, primarily due to higher bad debt expense. Utility run rate O&M continues to track below the rate of inflation. Results were also affected by higher depreciation, taxes other than income taxes and interest expense, reflecting updated amortization schedules, higher long-term debt balances and other investments supporting our utility operations. And finally, other activities reported an adjusted loss of $12 million compared to a loss of $3 million in the prior year, reflecting higher corporate costs and higher interest expense in the current year. Spire's earnings from discontinued operations were $253.8 million during the third fiscal quarter, which includes an after-tax gain on sale of $254.6 million. Turning to Slide 8. We're reaffirming our 5% to 7% long-term adjusted EPS growth target using the original fiscal 2027 guidance midpoint of $5.75 as the base. This growth outlook is supported by approximately 7% rate base growth and our $11.2 billion 10-year capital plan. For fiscal 2026, we are reaffirming adjusted EPS guidance from continuing operations of $3.90 to $4.10 per share. That guidance excludes a full year of storage, marketing and Tennessee, but includes Mississippi. For fiscal 2027, we are reaffirming adjusted EPS guidance of $5.40 to $5.60 per share. Our Gas Utility and Corporate and other expected earnings ranges remain unchanged from our call in May. Moving to Slide 9. In the first nine months of the year, we invested nearly $600 million in capital expenditures driven by system upgrades, infrastructure modernization and new business connections at the gas utilities. We continue to expect full year 2026 capital expenditures of approximately $800 million across our utilities, consistent with our 10-year $11.2 billion capital plan. These investments support rate base growth of 7% in Missouri and 7.5% in Tennessee with 6% regulated equity growth in Alabama and Gulf, underpinning our confidence in delivering 5% to 7% adjusted EPS growth over time. Turning to our financing plan on Slide 10. We expect to substantially fund our capital expenditure program with operating company debt and cash from operations, thus requiring limited annual equity issuance. Importantly, to help alleviate pressure from rising interest rates, we have a $375 million interest rate hedge portfolio that helps mitigate exposure to higher borrowing costs. Following the reduction in business risk from our recent portfolio actions, our FFO to debt target is 14% to 15%, which we expect to reach by the end of 2028. While admittedly, 2026 is a transition year for our credit metrics with businesses being both acquired and divested. Our current FFO to debt stands at 13% after factoring in trailing 12 months funds from operations, inclusive of Spire Tennessee. Our gain on sale of divested businesses pushes this metric even higher through this transition period. Turning now to an update on regulatory matters, starting with Alabama on Slide 11. The RSE renewal process began earlier this year and is progressing as expected. As a reminder, the RSE is a formula-based rate-setting mechanism that allows rates to be adjusted annually within an approved ROE range, providing a more streamlined alternative to frequent general rate cases. Every three to four years, the mechanism is renewed, allowing key elements such as the authorized ROE, ROE range, capital structure and other key provisions to be reviewed and approved by the Alabama Public Service Commission. Hearings for RSE renewals are scheduled for August 6 for Spire Alabama and August 7 for Spire Gulf. The proceedings are focused on a limited number of items, including the ROE, ROE range, term of the RSE, the cost control mechanism and the customer charge. We have requested an adjusting point ROE of 10.5% for Spire Alabama and 10.75% for Spire Gulf. The Alabama regulatory environment remains constructive. The RSE framework supports predictable regulatory outcomes and timely recovery of investments for the benefit of customers. Turning to Missouri on Slide 12. We continue to make progress on several important regulatory initiatives. First, we're pleased to have reached a settlement in the accounting authority order proceeding last week. The settlement recognizes the need to enhance the existing weather normalization adjustment rider or WNAR, and provides a path for collaboration to develop improvements or consider a potential alternative in our next rate case. This is an important step towards improving revenue recovery and reducing earnings volatility while helping protect customers through more stable and predictable bills. In addition to this settlement, we filed a request in May to recover approximately $21 million of interest revenues associated with continued infrastructure investments across our Missouri service territory. We expect those new rates to become effective in November. Finally, we remain on track to file our first Missouri future test year rate case in early November 2026. This filing will represent an important milestone and is expected to further align rates with our ongoing investments while supporting the safe and reliable service our customers depend on. Turning now to Slide 13. Less than two months after closing of the acquisition, Spire Tennessee filed its first annual review mechanism on May 20, 2026, requesting a $14 million revenue increase. The filing reflects an authorized ROE of 9.8%, a capital structure of 49% equity and 51% debt and a rate base of $1.5 billion as of December 31, 2025. New rates are expected to be effective October 1, 2026. To sum up our remarks today, Spire is operating from a position of greater focus with a fully regulated business profile, constructive regulatory frameworks and a disciplined capital investment strategy. We remain confident in our ability to deliver 5% to 7% long-term EPS growth, supported by our $11.2 billion capital plan while continuing to create long-term value for shareholders. Thank you for joining us today. Now we're ready to take your questions.

[Operator Instructions] The first question today comes from Julien Dumoulin-Smith with Jefferies.

Luke Fenker on for Julien. I just wanted to ask on Alabama. You disclosed requests for higher allowed ROEs at both Alabama and Gulf. Can you talk about the key factors supporting that? And how you think about the upcoming renewal hearings? Can you maybe like help frame which elements of the structure are more relevant, the term, customer charge or control mechanisms?

Luke, Adam and I will tag team this. Maybe just kind of ground everybody, the process that's unfolding in Alabama, it's very similar to the process we've used to update attributes associated with that mechanism for many years, but now has the addition of a more formalized or transparent public hearing. And so historically, we've negotiated that renewal every three to four years with an agreement reached and then presented to the commission. And so just from a process standpoint, we look forward to wrapping up the hearings that are scheduled later this week and then expect a decision from the commission later in September. But let me let Adam speak to kind of the underpinnings of the ROE request and then just maybe make sure we clarify the elements that are under consideration this week. Adam?

Yes, Luke, we did reach an agreement on several issues. So it's only a limited number of issues that are going to hearing later this week. But on the ROE, some of it is an observation that certainly, the conditions underlying the request or recommendation are higher than they were when we reset it last time. And so that's baked into that as well. But besides the ROE and the range, we do think a little bit wider range will be in the benefit of both us and the customer. But the cost control mechanism has been very valuable for customers as far as delivering O&M savings back to customers over the last several years and certainly want to preserve that ability to do that.

And Luke, this is Scott again. I'd just comment again on ROE. Go back to the legislative session, one of the key points that you made about ROEs, particularly in Alabama is setting them close to the average for the region. We are solidly in that range and feel comfortable with both our request and where we sit today.

Awesome. And then maybe on Missouri, the AAO settlement recognizes the need to enhance weather normalization. Can you discuss how you anticipate addressing weather and usage variability in the upcoming future test year case? What kind of changes could better align with recovery and customer usage patterns going forward?

Yes. Good question. Primarily, I think a lot of the best ways to address that is through decoupling mechanisms and rate design that helps remove some of the variability associated with recovery, particularly here in Missouri, where we have a pretty good wide range of weather patterns, not only just throughout the year, but even within the winter weather months. Our desire there is to put in place a mechanism that both protects the company, but also protects the customer as well. And I think that's where, as we've been talking with the commission, with staff and other interveners is a strong desire to collaborate on a solution that's durable and permanent. And so in that context, as you mentioned, the rate case is the place where we can get that ultimately finalized. This settlement that we've reached allows us to meet in advance of the rate case filing and work towards a solution perhaps that can be resolved in time for the actual future test year filing so that we can then turn everyone's attention and focus on the future test year implementation.

The next question comes from Constantine Lednev with Wells Fargo.

Just in terms of maybe capital allocation on a forward basis with kind of the more streamlined business mix that you're highlighting and the improving regulatory constructs, in particular with Missouri, do you anticipate more incremental capital or pull forward into jurisdictions with lower ROE lag? And maybe just framing that as would that be accretive within the 5% to 7% growth target post '27?

Constantine, good question. We've been fairly direct and public about as we get ready to file this case and we think about the future test year, it's not about a pull forward of capital as far as an acceleration of capital, but it's managing affordability for our customers, the pacing of capital and having it squarely within the earnings growth range that we've described for the market. So I think that's what you're asking when you talk about pulling forward capital, we're not looking to upsize capital, if that's the question.

Okay. Understood. Maybe just a quick follow-up on the renewal process in Alabama. Are there any net positives that you would highlight from the proceeding kind of like the wider ROE band opportunity and maybe how that scales versus the assumptions that are embedded in the current '27 guidance?

Yes. I think the primary way to look at this proceeding in Alabama is it's just a much more public process to what's been undertaken, as I was mentioning earlier, for many years. This mechanism has worked very well from a planning standpoint, both for the company and for a clarity to the commission as to how the company is spending its resources and how it's investing its capital across the plan year. And as everyone knows on the call, this is a forward-looking mechanism. And so we've set rates based on a budget. And as a result, there's a lot of transparency, both in the spend and an understanding of how the money is spent throughout the year as we have routine check-ins or points of test with the commission in which all those results are reviewed. So when I think about like just -- thinking about upside associated with the outcomes, I don't look to that as being a material driver necessarily in how this is unfolding at the commission. It's primarily as it's historically been just getting all the factors correct that underpin the actual way that rates are set in Missouri -- I'm sorry, in Alabama.

Okay. Understood. And maybe one kind of housekeeping item, just on the annual review in Tennessee. Just maybe your thoughts on kind of potential to settle and just the kind of deadlines that are set and just the general kind of engagement with stakeholders, any kind of feedback that you'll be able to provide?

Yes. I think it's unfolding as expected. I would not look to an acceleration of the schedule at this time. This is our first time to file. And as you can imagine, there are -- we filed using historical costs that were a part of the previous owner of that system. And so as we walk through it, we don't expect a lot of controversy associated with that. But Tennessee, our experience has been they follow the time lines, and that's what we would expect in this process as well.

The next question comes from Paul Fremont with Ladenburg.

I guess my first question would really relate to the Missouri settlement. Can you -- was it a unanimous settlement? And if not, which parties signed on to the settlement?

Paul, this is Adam. No, the settlement was between us and staff and the Office of Public Counsel. I believe there was one other party that didn't -- was not a signatory, but we feel like it was the conclusion of the discussions that we were having.