Good morning, welcome to the Spire second quarter earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, one on your telephone keypad. To withdraw your question, please press star, two. 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's second-quarter earnings call. We issued an earnings release this morning, you may access that on our website at spireenergy.com under Newsroom. There's also a slide presentation today that accompanies our webcast, you may download it from either the webcast site or from our website, you can find it under Investors, 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 Steven 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 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 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. With that, I will turn the call over to Suzanne.
Thank you, Scott, 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 had the energy needed to stay safe and warm through the bitter cold winter that covered much of the country. I'm 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've 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 seven years, my colleagues and I have led 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 has 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 in organic growth, infrastructure investments, and modernization and innovation in technology, all of which combine to drive our financial and operating performance, which includes growth in customers and higher margins. We continue to increase our capital investments in technology, both infrastructure and customer applications.
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. 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 to end 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 bases, 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'm happy to report that construction, which began in December, is well underway. We successfully completed the bores for the pipeline crossings of the Missouri and Mississippi Rivers, a major milestone of the project.
All the while, crews have continued to work across the entire 65-mile length of the project, carefully clearing the route and safely installing pipes, 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-$240 million. Turning to Spire Storage. We're refining our development plan for what was, prior to our purchase, two independent natural gas storage facilities in Wyoming. Our strategy is to integrate the facilities and operate them under one FERC 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 facilities, and the expanded working gas capacity that comes from being connected to five 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. From fiscal 2019 to date, our investment totals $74 million, including $56 million for base gas to support the operation of the facilities and $18 million for infrastructure improvements. Our total investment, including acquisition costs, 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 the quarterly dividend of $0.5925 per share, payable April 2nd.
We know that our dividend and the growth in the dividend is important to our investors, we're 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'd like to turn the call over to Steve Lindsey to share an update on how we're continuously improving performance for our Gas Utilities.
Thank you, Suzanne. I also want to acknowledge the outstanding efforts of our employees during the heart of our heating season. We're delivering a strong performance, great service for all of 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 and Hazardous Materials Safety Administration, to continue to oversee pipeline safety at the federal level. Reauthorization comes at a time when 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 on standards for replacement, aging infrastructure, overpressure protection, emergency shutoff protocols, damage prevention, and other critical matters.
At Spire, we've long had a laser focus on the safe and reliable operation of our system. Everything we do starts with safety, that's why we prioritize educating and training our employees and instilling a safety culture company-wide. Consistent with our safety culture, we have been accelerating the replacement of aging pipelines. Our increasing investment in infrastructure upgrades, paired with well-established policies and procedures, as well as a highly trained team in technology ensures the safe operation integrity of our system. Spire's growth is driven by the growth of our Gas Utilities. We're 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 Alabama, are key to the timely recovery to 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 for recovery of costs to replace plastic materials that we have requested in our previous filing, but were deemed not qualified under ISRS. The Missouri Public Service Commission staff has recommended these costs not be included in the ISRS recovery. By rule, new rates must be effective by May 14th, so we expect an order on our ISRS request shortly.
In Alabama, we have the Accelerated Infrastructure Modernization Rider or AIM, which incentivizes, via return on equity adder, accelerated replacement 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, we've been ramping up our commitment efforts in both these areas. Our investment in new business continues to increase, 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've recently received several approvals of Certificate of Convenience and Necessity, or CCNs, 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.
The 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 and day out rigor of controlling our costs through process improvements and leveraging technology. Turning to our capital investment, 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.
As we 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 meter installations that I mentioned earlier. On the operations 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 said earlier, at Spire, everything begins with safety, we are seeing lower employee injury rates and better safety overall. Modernizing our pipeline system is leading to enhanced 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 upward. With that, I'll 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. I normally don't comment on GAAP earnings, but we included it here on the slide since our comparables were 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 a 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 cost recoveries and demand. Contribution margin, as reported, was higher by nearly $39 million. That increase is impacted by a couple 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 the weather this quarter was about 1% colder than last year and 3% warmer than normal. 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. 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 reclassification of benefit costs 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 costs, higher volumes, and marginally higher operating expenses. Other expenses reflect the operating costs of 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.
Finally, income tax, which for the quarter and half year were at an 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 six 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 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 of 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 from $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. Let's turn to outlook. We reaffirm our long-term net economic earnings per share growth target range of 4%-7%, as well as our 2019 net economics guidance range of $3.70-$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've made in our gas-related businesses. 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'd 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 five-year period. This plan supports the growth across all of our businesses and reflects our expectation of overall rate base growth of roughly 6%, as well as high recoverability or earnings contribution with minimal regulatory lag. It also reflects the increase in our 2019 targets I just mentioned. In summary, we finished a strong first half of fiscal 2019, and we continue 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 levels. 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 three weeks. We're ready to take your questions.
We will now begin the question-and-answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our line. The first question will come from Michael Weinstein with Credit Suisse. Please go ahead.
Hi. Good morning, guys.
Morning, Michael.
Hey.
Maybe we could just start off with the marketing and storage business. What are your target contribution and business mix for this segment going forward? How much of the benefits that you're seeing this year from the expansion do you think are sustainable? We had a really good year last year, too, but that was kind of framed as a non-sustainable outcome. Now I'm wondering if more of this is sustainable going forward.
Michael. This is Suzanne. I'll start and then see if Steven Rasche would like to add anything. The question about percentage mix, we look at our business profile from a regulated, non-regulated aspect. Gas 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's some limitations, especially from the credit rating agencies, so we're very watchful about that and mindful about that. 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 much in the same way our utilities do.
From a customer profile of the marketing company and the storage company, Spire Storage, Spire Marketing, they're serving power generators and utilities and for the Gas Marketing side producers, but they're physically moving gas to a market need. Both of these businesses, we'll start understanding more around storage as we move forward in serving the Rockies and the West Coast. There's a base business with a marketing company and there's a base business with a storage company, we'll continue to bring more color into that as we move forward with these businesses. Also there's market opportunity depending on what's happening with weather and so forth. We will have a base business aspect and we organically grow those businesses and we expect them to.
We're also, as I mentioned at the beginning of this answer, we're mindful of what that business mix needs to look like from a regulated and non-regulated perspective. I don't know if Steve has anything to add.
No, well said.
Okay. Sustainability of results in this segment for this year going forward?
The Marketing Segment sustainability, because we've moved into new geographies and we've got a very talented team. As you know, we've moved the office to Houston. We feel very confident about the sustainability of the business. As you know, they again serve more geographical regions. We've expanded the employee base there to support the sustainability of the business. 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 you. Also on the CapEx plan, which increased about $200 million. I don't think there's any change there in the financing plan, especially on the equity side. 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?
Yeah, Michael, this is Steve. I think I can take this one. Yeah. As you know, we factor in the financing requirements for all of our businesses in our long-term growth target range. I think it adequately covers the expectations of what our financing needs will be. You're right, it includes both debt and equity, as we want to make sure that we're supporting our strong credit metrics right now and going into the future. Clearly the ATM is one of those components. As I mentioned, we do expect to use that in the back half of the year to add some more equity.
All right. Thank you very much.
Yeah. Thank you, Michael.
Thanks, Michael.
The next question comes from Phil Covello with ExodusPoint. Please go ahead.
Hey, good morning, guys.
Hey, Phil. Morning.
Just a couple of follow-ups on kind of the equity plan, just to get a little more specificity on that, if possible. Just to be clear, first of all, you haven't issued any equity yet through the first quarter or the last quarter, rather. With regard to the second half issuances under the ATM, is 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.
Yeah. Phil, this is Steve. I'll take a shot at it. The ATM, which we announced in February, is not yet active. No, we had no issuances during the period up through the end of the quarter and up through the call today. As I mentioned, we do expect to start issuing through that. It's a three-year, $150 million program. When we announced the program, and I think our view hasn't changed, we viewed that to meet our equity needs for at least the next two fiscal years. I think that stands based on our current forecast. We haven't really guided individual needs by time period, and we'll continue to consider that as time goes forward.
It might not necessarily be $50 million ratable over three years or
Yeah. Again, it's a three-year program. We view that it's going to meet our needs for at least the next two years.
Okay. Also, can you just provide any more specificity on the second half, like what might factor into when you would consider issuing that equity?
No, not at this point. I think that'd be leaning a bit too far forward.
Okay. Just looking at the stock price, just general thoughts here. Do you have an inclination to maybe front load that this year? Like looking at the overall $150 million budget, so to speak, that you have, or?
Yeah. Phil, there's 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 or capital that's going to be. 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're doing it in the right cadence for the business overall. 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. I think we've got the right cadence and balance in how to think about all those factors.
Okay. That's all I had. Thank you, guys.
Yeah. Thank you.
Again, if you have a question, please press star then one. The next question will come from Christopher Turnure with JPMorgan. Please go ahead.
Good morning. It's actually Rich Sedgell in on for Chris. How are you?
Hey, Rich.
Good morning.
Hey, Rich.
Do you mind walking through the storage accretion and what's changed around the message there?
I'm not sure that anything has changed in the message from the last quarter. Last quarter, we were consistent about it contributing to earnings as we go into 2020. If there's been any clarification, it's the back half. The way I tend to think about it, Rich, I know you have other businesses which are development or physical expansion businesses. When I think about those, you think about the development plan. You have to invest the money, get the team put together, get the contracts in place, 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. We've got a fairly refined view of how that's all going to play out. We're still working to finalize the development plan.
Our view is that development becomes a positive contributor in the back half of 2020.
Yeah. Rich, the only thing I would add to that, it's more of a reminder, I'm sure you're aware, if you just take the journey with us a bit. We acquired Bellevue in December of 2017, 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. At that point, we filed with the FERC to be able to combine these two facilities to create market-based rates. So basically treat the facilities as one. As part of that strategy was to have the ability to build the Rock Pipeline, which we're working on now. From a master strategy all along, that was our intent and desire, at least.
We didn't know whether or not we'd be able to execute to acquire Clear Creek, combine the two facilities, integrate them, and now build the Rock Pipeline. To get after a little bit what Steve's sharing with you, clearly, our development plan shifts based on our ability to acquire Clear Creek, build the Rock Pipeline, combine the two facilities, and serve customers in the Rockies and on the West Coast. 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 thus why 2020 back end in terms of earnings. That's the journey. Hopefully, that adds a little color.
Yes, certainly. 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?
Yeah.
Yeah. That's perfect.
Okay, great. Then just one final one here, the, 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 costs for the capital invested, yes.
Okay, great. Thank you very much.
No problem.
Yeah. Thank you. Appreciate it.
Once again, if you'd like to ask a question, please press star, then one. 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. We look forward very much to seeing you all in about three 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.