Earnings Call: Q4 2018

Nov 15, 2018

Good day, and welcome to the Year End Fiscal 2018 Earnings Conference Call for Spire Incorporated. All participants will be in listen only mode. Please note, this event is being recorded. I would now like to turn the conference over to Mr. Scott Dudley, Managing Director of Investor Relations. Please go ahead. Thank you. Good morning, and welcome to Spire's year end earnings call. We issued an earnings news release this morning, and you may access it from our website at spireenergy.com under Newsroom. The slide presentation that accompanies our webcast today may be downloaded from either the webcast site or from our website 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 Operating Officer of Distribution Operations and Steve Rasche, Executive Vice President and CFO. Also in the room with us today is Mike Geiselhart, SVP of Strategy and Corporate Development. Before we begin, let me cover our Safe Harbor statement and use of non GAAP 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 risk factors are described in our periodic filings with the SEC. In our comments, we will be discussing net economic earnings and contribution margin, which are non GAAP measures used by management when evaluating our financial performance and results of operations. Explanations of these non GAAP measures to their GAAP counterparts are contained in our news release. With that, I will turn the call over to Suzanne. Thank you, Scott, and a warm welcome to everyone joining us on this very cold morning in St. Louis. As we end fiscal year 2018 and begin 2019, I'm extremely proud to continue to share our story, live our mission, serve our customers, and deliver for our shareholders. When I arrived here 7 years ago, the Board of Directors empowered me to build a team to grow the company. They asked me to build upon McLeaf's solid historical foundation to create a better natural gas company. Right away, we launched our growth strategy and ever since, we've held true to our 4 strategic imperatives to guide everything we do, growing organically, investing in infrastructure, acquiring and integrating, innovation and technology. Over time, we purposely built the company we are today, a strong growing company that has articulated a clear vision, successfully acquired and integrated 4 utilities and 2 storage companies, expanded and moved our marketing company Houston, navigated an interstate pipeline project and quadrupled the value of our company based on equity capitalization. Through it all, we always act with a long view for our employees, customers and shareholders, and we will continue to do that well into the future. In that spirit, about a year ago, we announced a new order for our 4 strategic imperatives based on our larger scale, our broader geographic reach and current market conditions. Now, our entire team is focused on growing organically. To grow organically, we must keep the customers we have, gain new customers while developing products and services, and efficiently managing costs. That applies to our utility companies, but also to our gas related businesses including Spire Marketing, Spire STL Pipeline and Spire Storage. The only way to do that is to be laser focused and with leadership in place to lead the way. And so I'm pleased to announce that we've aligned our leadership team to create or solidify the role of President for each business unit. Let's start with our utility President. The president of SPIRE for Alabama and Mississippi Utilities is Joe Hampton. Joe has been in the natural gas industry for more than 2 decades. He started as a University of Alabama Engineering intern at Alagasco while completing his 2 degrees in electrical engineering and physics. Joe has an extensive experience in field operation and business development and since 2015 has served as Spire's Vice President of Operations from Missouri West. The President of Spire Missouri is Scott Carter. Scott came to the natural gas industry nearly 20 years ago following several years at Deloitte where he was a senior auditor and energy industry consultant. Scott spent 15 years in operations and leadership roles at AGL Resources, ultimately serving as Senior Vice President of Commercial Operations and the Chief Regulatory Officer. Scott came to Speyer 2 years ago and has been serving in senior leadership roles with distribution operations. Both Joe and Scott report directly to Steve and Lindsey. Now moving to our gas related businesses, I'm pleased to affirm and announce 2 presidents. The President of Spire Marketing is Pat Strange. Pat joined our company in early 2018 as we restructured our gas marketing business for the move to Houston. Pat has spent nearly 3 decades in natural gas trading and marketing, serving in leadership positions for several major gas marketing firms, including utility affiliates. The President of Spire STL Pipeline as well as Spire Storage is Scott Dzhaskoviak. Scott has been with our company for 33 years and has held leadership positions in engineering, gas supply and gas marketing, including nearly a decade of leading Spire marketing. Both Pat and Scott report directly to our Head of Strategy and Corporate Development, Mike Geiselhart. Exceptional leadership is vital for a growing company and these 4 leaders are just that, strategic, collaborative and caring people who are committed to Spire's mission. As we evolve and position Spire for future growth, we'll continue to follow our strategic imperatives and we'll do it in a way that inspires the best in people, ourselves, our employees, our vendors, our customers and our investors. Because we believe that energy exists to help people and we believe that how we do our work matters. I'm pleased to say that the distinction of how we do our work, Spire's defining quality, is the inspiration that continues to move us forward. And so, in a challenging year with uncertainty and regulatory resets in all of our utilities, I'm very proud of how we did our jobs and how we continue to lay the foundation for future success. In that spirit, we would like to report on fiscal year 2018 results. While working through the complexity of multiple regulatory resets in 2018, we are proud to report that we delivered net economic earnings of $3.72 per share. Let me pause for a moment to underscore that the year that we just completed fiscal 2018 was pivotal. Never in my 38 year career have I experienced another time when every utility in a company's portfolio had a regulatory reset. Only the best and brightest teams could manage that extremely well and that we did. Now emerging from 2018, we have gained significant certainty for the long view to grow our business and build on our customer focused initiatives. Steve Lindsey will provide more color on the particulars for each gas company in addition to operating results. As a reminder, these outcomes included the impact of tax reform, which we took on early in order to quickly flow the benefits of tax reform to our customers while we navigated the regulatory reset. Steve Rasche will cover the details of our 2018 financial performance and how that sets us up for 2019 and beyond. Our ability to hit the mark on our earnings reflects execution on our strategic priorities, including growing Spire Marketing, progressing on our Spire SEL pipeline and investing in our Spire storage facilities. So let's turn to those updates now. Our future growth is driven by our core business, gas utilities, but we expect all our gas related businesses to grow organically and we continue to invest in these businesses. I'm pleased to note that we are further progressing on our Spire STL Pipeline Immediately following our Q3 earnings call and back the day after, FERC approved the project. On November 5, FERC issued a notice to proceed giving us the authority to begin construction. Working with our contractor, we have completed our construction schedule and are ready to mobilize. We are targeting an in service date in the second half of calendar twenty nineteen pending the timely completion of land acquisition. The estimated total project cost remains $210,000,000 to $225,000,000 We're continuing to advance our other gas related businesses too. We're positioning Spire Marketing for continued growth and success. As the marketing team settles into the new business center in Houston, they are hard at work building the team and expanding the geographic reach to increase our customer base. Thanks to the strategic pivot to Houston and favorable market conditions, Spire Marketing had a very strong year in fiscal 'eighteen. At Spire Storage, we completed the acquisition of 2 adjacent facilities in Wyoming, including a minority interest in the first facility. We continue to invest in operational and physical improvements as we integrate the 2 facilities to expand capacity and improve our service offerings. We started to introduce these offerings to a broad range of customers. Our facilities integration efforts and investments which now totals 56,000,000 dollars are larger in scope and will take more time since we have 2 facilities to bring together. As a result, we expect a small contribution from storage this year, more to come as we refine our development and commercial plan. As I discussed a few minutes ago, the good news from the regulatory resets of all of our utilities is that we have the certainty to grow our utility businesses for years to come. With that in mind, we can affirm our long term earnings per share growth target of 4% to 7%. And today, we are establishing guidance for fiscal 2019 net economic earnings per share of 3.70 to 3.80 which is consistent with those targets. Also reflecting our combined strong performance and future growth prospects, our Board of Directors has raised the common stock dividend by 5.3% to an annual rate of 2 point $3.7 that is effective with the January 3 payment. We are proud of our track record spanning 16 years of consecutive increases and 74 years of continuous payment, all while maintaining our conservative but competitive payout ratio of 55% to 67%. With that, let me turn the call over to Steve Rasche to cover our financial performance and our outlook. Steve? Thanks, Suzanne, and good morning, everyone. As far as putting the wraps on another year of strong company wide performance, let's take a quick look at our financial results for fiscal 2018 and then look forward into 2019 and beyond. Starting on Slide 12, full year net economic earnings were nearly $184,000,000 up roughly 10% from last year. We saw growth in both of our business segments with Gas Marketing delivering outstanding earnings this year due in part to very favorable market conditions that were aided by cold winter weather. Gas Utilities saw earnings grow by $1,600,000 as we were able to offset the impacts of Missouri regulatory resets with higher contribution margin and lower tax rates. Earnings per share of $3.72 was higher by 4.5%, reflecting the impact of our successful Maine equity offering. Taking a quick look at the details beginning here on the next slide. Revenues were up 13%, driven by higher demand and commodity costs. Contribution margin was up 4% with the growth in gas utilities driven by demand and customer growth, which more than offset customer rate reductions during the year and changes in the Missouri rate design. Gas marketing margins benefited from increased trading, transportation and storage optimization. Moving on to Slide 14, our expense trends have been pretty consistent this year. Utility fuel costs and taxes other than income reflect higher demand. Utility operating and maintenance expenses as reported were nearly $51,000,000 higher than last year, with most of that delta reflective of 2 Missouri rate case related expenses. First, the one off largely non cash write offs of $600,000 as we discussed earlier this year. And secondly, roughly $7,000,000 of new amortization costs coming out of those rate cases. After removing these items, our run rate O and M, so to speak, increased by $7,000,000 or less than 2%, due primarily to higher employee and bad debt expense is typical from colder weather. Depreciation and amortization was higher reflecting higher capital spend. Gas marketing operating expenses were down nearly $32,000,000 but that includes just over $20,000,000 of derivative gains that were mark to market. Excluding that fair value adjustment, expenses were down modestly due to lower commodity costs. Other expenses were higher, reflecting Spire Storage operating, transaction and restructuring costs, as well as higher corporate expenses. And interest expense was higher reflecting long term debt issued over the last 12 months at both Spire Missouri and Spire Alabama as well as higher short term rates that were offset in part by lower average short term borrowing levels. And finally, on the next slide, income taxes. Income taxes has had a lot of focus around the industry and in our prior calls, and hopefully this summary helps us to illustrate the components of our GAAP expense, especially the $60,000,000 non cash benefit from the revaluation of our net deferred tax liabilities due to tax reform. Stripping out that adjustment, as we have done for our net economic earnings calculations, I might add, our pro form a full year effective tax rate for 2018 was 18.6%, reflecting lower federal rates, as well as a partial year amortization of ADIT or excess accumulated deferred income taxes that are being returned to customers in the form of lower rates. For 2019, we expect our effective tax rate to be between 17% 18% with the reduction from the 2018 run rate essentially being a full year impact of ADIT amortization. Taking a quick look at the Q4, we reported a loss of $0.52 per share as losses in our gas utilities were offset in part by continued strong results from gas marketing. As a reminder, seasonal losses are typical this quarter for gas utilities due to lower summer demand. Our loss this year was magnified by the change in our Missouri rate design that pushed more of our earnings out of the summer months that includes this quarter and into the winter heating season. Over a 12 month cycle, it all evens out. But this year, with rates that went into effect in April, we bear the headwinds of the lower recovery first. But as a reminder, we also now benefit from weather normalization across Missouri, which reduces overall recovery risk. Turning to slide 17, we continue to strengthen our financial position with adjusted EBITDA of $493,000,000 and long term capitalization that now stands at just over 52 percent equity, up 3.50 basis points from last year. Our current liquidity is in good shape heading into the winter season and we just completed an extension of our credit facility to a full 5 years. We also have long term debt offerings planned at both Spire Missouri and Spire Alabama over the next few months, which will provide additional seasonal borrowing capacity. So we're in great shape. And finally, Spire Missouri received its new $500,000,000 3 year financing authority from the Missouri Public Service Commission this quarter, as requested. Now stepping back for a moment, we're in solid financial shape. And as we noted earlier this year, we're in a strong capital position as a result of our May offering. And any equity needs beyond that, whether through our current DRIP program or other means, are already factored into our guidance and growth rate targets, and I'll get to those in just a minute. Before we turn to our outlook, let me review the progress we made this quarter to gain regulatory certainty, as Suzanne mentioned. And as we discussed, remember coming into 2018, in addition to the 2 Missouri rate cases, we were also due to reset the rate stabilization and equalization or RSC mechanism in Alabama. We completed a similar reset for Spire Gulf earlier this year and last month we reached agreement on changes to the RSC parameters for Spire Alabama, as you can see on this table here on slide 18. Overall, the changes were consistent with our expectations and directionally what we saw at Spire Gulf. Specifically, return on equity was set at an adjusting point of 10.4%, down 40 basis points from the prior mark. Our capital structure was harmonized across the state at 55.5%. Our cost sharing mechanism or CCM was updated to our current expense run rate with a 3 year phase in beginning in 2019. Remember, CCM is an incentive where we and our customers share equally to the extent we can control cost. We have a great track record of doing just that and keeping our customer bills low as a result. It's natural for the cost baseline to be reset and the 3 year play in period allows us time to benefit from cost control going forward. In total, these changes do create a bit of a headwind as we move into 2019, but that's largely consistent with our expectations and still supportive of the best in class regulatory rating for the state of Alabama. Steve Lindsey will touch on the growth opportunities we have going forward in a few minutes. With increased regulatory certainty, we've updated our capital investment forecast. Our 5 year plan through 2022 is now $2,600,000,000 up approximately $100,000,000 from the last update. For 2019, our capital spend target is $650,000,000 up from an actual spend in 2018 of 499,000,000 dollars The increase in both targets are driven by higher utility spend for upgrades and new business, as well as recognizing the progress we've made in both Spire STL Pipeline and storage. I would also note our utility spend is well diversified across our footprint and supported by long term upgrade programs of up to 20 years. More importantly, 85% of that spend is recovered with minimal regulatory lag or driving higher margins. Turning to our earnings outlook. We reaffirm our long term net economic earnings per share growth target rate of 4% to 7%. We measure that growth from a base run rate of 2018 earnings that removes $0.17 of Spire marketing performance in 2018 tied to weather and market conditions that we do not expect to recur this year. This growth is supported by greater regulatory certainty as I discussed, as well as our strong rate base and organic growth initiatives across the utilities. It also reflects growth in our other natural gas related businesses. Consistent with that long term growth target, we are initiating 2019 earnings guidance of $3.70 to $3.80 per share. And as you can see here on Slide 21, starting with our run rate 2018 earnings, here's how we build to the midpoint of that range. First, we have the headwinds of our regulatory resets of roughly $0.14 Remember, we set rates in Missouri at the end of April this year 2018 and the incremental full year impact of that change for full year 2019 is roughly $0.03 The remaining $0.11 is our best estimate of the impacts of the Spire Alabama RC reset that will go into effect next month. From that baseline, we expect our utilities to grow organically and through capital investments, more than overcoming the regulatory headwinds, delivering an estimated $0.24 in 2019. Now, we expect all our businesses to grow and the additional contribution from the Spire STL Pipeline, a small contribution from Spire Storage and growth in Spire Marketing are anticipated to deliver roughly $0.12 of earnings. And finally, the full year impact of the equity dilution from our May offering is largely offset by lower corporate cost, interest expense and tax rates. As you can see, we have many levers to get us to our guidance range of $3.70 to $3.80 per share and we can now look confidently into the future with a strong financial position, more regulatory certainty and definitive growth plans across our businesses. We're also in a strong position operationally. Let me hand it over to Steve Lindsey, who will give you an update on our progress in our gas utilities and speak a bit more about our growth expectations going forward. Steve? Thank you, Suzanne and Steve. I want to acknowledge the outstanding efforts of our employees this year who continue to demonstrate the highest levels of commitment to serving our customers while delivering on our system performance and growth goals. Thanks to their efforts, we achieved strong and improved operating performance across our system, including safety, which is the foundational core value for our company. After our rollout of new technology last spring to better connect with and serve our customers, we've made further enhancements to improve the overall customer experience. Once again achieved growth in customers and improved margins at our gas utilities, reflecting organic growth efforts and increased investment in infrastructure upgrades, new business and technology. In addition to driving growth and improving our customer service, investment in our gas utilities drives improved safety, system integrity and field service for our customers. We saw improved employee safety metrics this year with an 18% year over year reduction in our employee injury rate. We also achieved historic records across all our utilities and other areas related to safety and system integrity. We further decreased our leak response times at all of our utilities. We reduced leaks per 1,000 system miles with every company achieving double digit percentage improvements over last year. Our focus on damage prevention led to an 11% company wide reduction in damage rates over the previous year. And while we are working to make our system even safer and more reliable, we also continue to raise the bar when it comes to taking care of our customers' needs, including keeping our promises on when we'll arrive to perform work. Very pleased to note that we achieved an appointment attainment rates of over 98% across our utilities in 2018. As Suzanne noted, gaining regulatory certainty has been important as we move forward with our growth plans. We were successful in not only addressing the impacts of tax reform, but in completing rate setting matters in Missouri and Alabama. I'm proud to note that Spire was one of the first utilities in the country to address tax reform through the regulatory process, lowering customer rates across all of our utilities. As you know, we completed our 2 Missouri rate cases back in March. Important parameters were set in these cases, including ROE, cap structure, rate base and allowed expenses. Of note, we got a higher return and improved equity capitalization, both of which will support our ISRS investment. We were also able to gain full weather normalization for residential customers, which will mitigate our margin exposure. And we recently received approval to increase our ISRS revenues by $8,000,000 annually effective October 8. This is our 1st ISRS filing increase since completing the Missouri rate cases. In Alabama, we reached agreement with the Public Service Commission on the rate setting parameters under the rate stabilization and equalization mechanism or RSE. We're pleased to have these regulatory resets completed, which on balance were reasonable, reflecting the generally constructive regulatory jurisdictions in which we operate. We now have the certainty we need to move forward confidently in pursuit of long term growth. We were also able to gain some additional regulatory outcomes that we believe will help support growth at all of our companies. In Missouri, we now have an economic development rider and a negotiated gas service rider that will allow us to be more responsive and competitive for commercial and industrial opportunities. We also enhanced our ability to expand natural gas service into underserved areas. In addition, we were able to establish improved customer programs for energy assistance and energy efficiency. In Alabama, we worked with the commission to develop a reasonable and comprehensive program known as AIM to encourage the prioritized and strategic replacement of cast iron and bare steel pipes. In Mississippi, we extended our supplemental growth rider, which supports economic development by allowing us to provide attractive rates for industrial growth. As Suzanne mentioned, we recently named utility presidents to remain laser focused on our efforts regarding organic growth, infrastructure investments and continued customer experience enhancements by improving processes and investing in technology. We believe these regulatory enhancements will support these efforts. Turning to organic growth, I'm pleased to report that we once again increased the number of homes and business as we serve, marking the 4th year in a row of overall customer growth. This growth reflects that we increased our new business capital investment by 44% to $85,000,000 in 2018. That investment will lead to new meter growth in future years. In 2018, we added more than 11,000 new meters, a 2% increase over the prior year's record pace. In addition, we contracted over 4,600 multifamily units, more than 3 times last year's levels. This is largely the result of our strong focus on this market segment, which has traditionally been a challenge in our service territories. Our investment in new business to drive customer growth contributed to another year of higher contribution in margin for our utilities. And while our efforts have been successful in driving top line growth, we've also been focused on controlling our operating costs. As you can see, our O and M costs per customer have been trending down over the last several years. The completion of the Missouri rate cases or costs per customer have risen, reflecting the increase amortization for certain regulatory assets, as Stephen noted earlier. Going forward, we will continue to leverage our investment in technology and our shared services model to drive cost efficiencies. Our achievements this year set us up for further growth in 2019. We've been building our business and economic development teams and equipping them with tools and technology they need to be successful. In particular, we're using tools like salesforce.com, Tableau and data analytics to identify and track opportunities and measure our performance. We're also further ramping up our capital investment plan, including for new business as I'll discuss next. Fiscal 2018, our utility capital spend was $456,000,000 which was up 10% over the prior year. As Steve noted in his remarks, this capital is distributed rather evenly across our companies. We invested nearly $280,000,000 in infrastructure upgrades, including the replacement of 3.82 miles of pipelines across our 5 utilities, which is a 7% increase over last year. As I mentioned, our investment in new business increased by 44% and is also fairly evenly distributed. This year, our utility capital expenditures will increase again by about 4% to $475,000,000 Approximately 85% of that will be recovered with minimal regulatory lag or reflected in our earnings. As we shared last quarter, our investment is driving long term growth in our rate base of 6%. Increasing our rate base serves as the foundation of our utility earnings growth. With that review of operations, let me turn the call back over to Suzanne. Thank you, Steve and Steve. In closing, I'd like to touch on our 4th and final strategic imperative, innovation and technology. This is an important part of our investment strategy, one that we are actively deploying across our company. It's one that goes beyond integrating and modernizing our technology technology. Here are a few highlights. We've made important investments in technology that help us connect with and serve our customers so that it's easier and faster to do business with us. We're using machine learning and iterative forecasting to identify and target future areas of growth. Technology is inspiring innovation across our company as we find ways to bring people and energy together to make us better than we were before. And yesterday, to further support our innovation imperative, our Board of Directors elected Steve Schwartz as Spire's newest Board member. Steve brings an extensive leadership experience as Chief Executive Officer of Brooks Automation, a public company driving innovation and technology in the manufacturing space. As you've heard today, fiscal 2018 was another year of answering a challenge, advancing communities and enriching people's lives by delivering strong results for all of our stakeholders. It was a successful year with improved overall performance. And importantly, it was a year that brought us the certainty that positioned us well for future growth. I'd like to join Steve and Steve in thanking our more than 3,300 employees across Alabama, Mississippi, Missouri, Texas and Wyoming for their hard work and commitment to serving our customers and communities. Now, we're ready to take your questions. We will now begin the question and answer Our first question comes from Michael Weinstein with Credit Suisse. Please go ahead. Hi. Actually, it's cutting for Michael. Thanks for taking our questions. So first of all, just wanted to ask, can you remind us around the financing assumption for the increased CapEx player? Yes. Hey, Con, this is Steve. Thanks for joining us today. I think the way in which we've approached it in the last year or 2 is a pretty good indication of how we think about the financing going forward. And as we talked about on the call, we have fairly strong cash flow, including growing EBITDA, which is clearly going to be the primary way in which we finance the CapEx. I did mention that over the next 3 months or so that we will be taking out some medium term or longer term debt at both Spire Alabama and Spire Missouri. And that's really part of our long term process of making sure that we have our borrowing at the operating company level, where we're making most of our investments as Steve Lindsey mentioned. From an equity standpoint, when we look at the capital structures, the YOPCO, we're managing each of those to get to the right level that makes sense from a rate structure standpoint and we manage that pretty closely, mostly by growing the earnings of those companies over the years. So I think at that level, you continue to watch us manage those for the individual utilities in concert with the rate structures. And then when you bubble that up overall, when we did the equity offering in May, we stated with confidence that the equity proceeds, which was about $153,000,000 net, was sufficient proceeds to meet our needs for the next 12 months and the capital spend that we're laying out now is not inconsistent with what our views were back when we talked about that at that point. And as I mentioned, when we get beyond that point, we clearly expect that over time that we'll have additional equity raises. We have a DRIP program. In my past life, I've used ATMs. We don't have one currently here, but those are all options that are available and pretty standard in the marketplace. And I think you'll find that over time, we will find the right way a period of time to get to the cap structure that makes sense, because we just went through our reset with the rating agencies where A- or B plus depending on which level you want to look at and which type of debt, which is the right place to for the utility. We're in the middle of our swim lanes where we need to be and all the appropriate metrics. So we're really doing that from a position of strength. Yes. Thank you. So just another follow-up on the now STL pipeline under construction. What are your thoughts about the next kind of big projects along that line? This is Suzanne. We're actually very happy with our position right now. As I mentioned in my remarks, we were able to acquire 2 adjacent facilities. So, we are now very much involved in bringing those 2 facilities together and also talk about how we go into the market which is a little bit of what I talked about earlier in my opening remarks. And that's relative to storage. I thought you asked about storage. Did you ask about storage or the pipeline? The pipeline. Yes. So the pipeline, as you know and we've talked about before, we went through great analysis on the eastern side of the state of Missouri in terms of our upstream supply portfolio, which includes transportation, storage and supply. And we came to the conclusion one of the best options for the St. Louis region given how it's grown over the last 100 years and how we see its growth into the future. The Spire STL Pipeline bringing shale gas through REX into the region was very good for our customers from a service and reliability perspective. And so we're very focused on completing the execution of that pipeline. And as I've mentioned before, we're also looking at the western side of the state and Alabama to see if there are similar types of projects as we evaluate all the up in it was the day after the last earnings call or we would have reported it to you then. And so we're well on our way with the Spire STL Pipeline and feel good about the timing as well as the cost structure of that facility. Okay, great. Thank you so much. Thanks, Scott. Our next question comes from Christopher Turnure with JPMorgan. Please go ahead. Good morning, guys. Good morning, Chris. If I'm doing my calculations correctly and I look at $2,800,000,000 of rate base for 2018 on a $54,000,000 or $55,000,000 equity layer, it looks like you earned close to 12% at your utilities on an ROE basis. Am I doing my math correct for 2018? And then what's your assumption for 2019? And is there any tax noise within there? Yes. Chris, let me take a shot not having the numbers in front of me that you're looking at. I'd point out a couple of things. First, and let's do it by jurisdiction because it probably makes more sense that way, the major jurisdictions. In Missouri, we definitely have tax noise in the numbers for the year because of especially the non cash benefit that we were able to take and most every utility took, as a result of the revaluation of deferred tax assets and the That's non recurring. I tend to kind of think about that with a different part of my brain than our return on investment. I think you'd find overall that our ROE in the rate case. And we don't really deal with a lot of regulatory lag in Missouri because the USFRIS mechanism really does its job of keeping us pretty current in getting return on and return on those investments. When you get down to Alabama, there's really 2 different calculations. There's the calculation of our return on rate base, which we just filed with the Alabama Public Service Commission as we do annually for rate reset and our actual rate of return in Alabama for last year was 10.54%. That's a fact that's out in the market. And that calculation is included in that calculation. Now in addition to that, and this is the beauty of the CCM mechanism is we get to share in the benefits of maintaining or managing the cost over a long period of time. That was just under $10,000,000 worth of benefit this last year. And that adds to the financial return that we would see in Alabama, but it's separate and distinct from the ROE, but that would generally get us from a percentage return basis when you do the financial calculation into the 12% range. Okay. And then on the deferred tax revaluation, I think that would not impact your net economic earnings. So that 12% earned ROE number that I was calculating would exclude that. How much was the other piece of the benefit in Missouri last year and what is that impact, if anything, this year? $10,000,000 Yes, give or take, I'd say off the top of my head, I'd say it's about $10,000,000 And so that's clearly not going to recur next year. And as you might recall, when we chatted about this a quarter or 2 ago, and you took really all of the noise, for lack of a better term, that's a technical term, for the Missouri rate reset, which includes the change in the rate design, which we saw come back in space this quarter exactly as we told everybody that it would, they really did kind of net away to nothing. And with the reason why we built the waterfall that you saw in our slide deck and in my prepared remarks was to really get everybody reset for if we take 2018 and where it is and then we look at what our headwinds and what our tailwinds are as we go into 2019 to build up our earnings guidance. That really does factor in all of those views, including the one off items that aren't largely going to recur, which include tax reform, write offs of rate base from in Missouri. And then the change in the cost structure, which Steve Lindsey mentioned, especially the amortization of employee benefit costs, which is the reason primarily why you saw the O and M per customer tick up a little bit, but that's okay. It gives us a new base to start from. Okay. And then, I calculate nearly 5% more shares on average in 2019 versus before you did the equity issuance. So if I just take that 5% and I apply it to your 2018 EPS, that's almost $0.17 But on Slide 21, it shows share dilution and other of only $0.02 So I'm wondering what else is in that category that's offsetting all the dilution? Yes. You might go and look at your equity dilution calculation. I think the straight up calculation because we did do it in May. So we had 5 ish months of the dilution in 2018. So the net impact of that for the full year 2019 is in the order of about $0.13 So there's $0.04 right there. And that is offset largely, as I mentioned in my prepared remarks, by lower corporate costs. And all the other things, none of them material enough to talk about, but generally in the corporate category, including a little bit lower interest cost and the benefit of lower tax rates. All of that does net to that net $0.03 haircut that we showed is the last piece of the waterfall in that slide. Okay. So just on a recurring basis, you have a cost center at corporate that's not allocated down to the utilities or down to the other marketing OpCo? Yes, we do. And that's that other category or the all other category that you see in our breakdown of our business segments. And it encompasses not only corporate development costs and things like that, that wouldn't normally be allocated to utility. And then also some of our insurance programs and our insurance captive, there's a number of costs and other businesses that all fall in that category. Okay. And then just real quick last one for me. Other than interest expense, do you have that corporate cost drag for 2019? We will, although we saw some unusual expenses this year, especially in some developments in insurance costs that we don't expect to recur and a few other things. So we did have some headwinds that we took in 2018 that we don't expect to recur in 2019. So on balance, those are trading in our favor. And also we've taken a hard look at our corporate expenses and we're trying to manage those knowing full well as we were starting to look at 2019 that we had to offset the equity dilution from the offering in May. And I think we've done a good job of balancing those 2 up. Okay, got it. Thanks, Steve. Steve. Our next question comes from Selwyn Akyol with Stifel. Please go ahead. Thank you. Good morning. Very much appreciate the bridge on Slide 21. Just wanted to ask you a couple of quick questions along the marketing pipelines and storage. So can you break out that $0.12 at all among the 3? Selman, this is Steve. Of course, I could. Will I do it? No, to be honest with you. I think at this point, it's a small piece of our overall puzzle. If you think about the percentage of overall earnings, it's going to be sub 10%. And as Suzanne mentioned, we're still in the process of building up, Spire Marketing now that we've relocated it down to Houston and we're still in the process of standing up storage. So I think this year it makes the focus on the main part of our business, which is the gas utilities. But I take on your question and we know that at the right point as these businesses mature that we'll start splitting them out. And you can also the other thing I would point out, Selman, is, given the cost expectations for the SPAR SCL pipeline, you can do the calculation of the AFUDC and you'll find that that's a chunk of that $0.12 which makes sense because we expect that spend to largely be spent during our fiscal year given our targeted in service date. Okay. And then just one more question around that area. So you had expenses associated with storage that you excluded from your net economic earnings. And given that you're still sort of rolling it out, should we still expect more expenses in storage that will be excluded from net economic earnings in 2019? No, we are not. And if you look at and I touched on it briefly in the prepared remarks, if you look at the other expenses, in the expense line, it's up fairly significantly, I $19,500,000 A good chunk of that is the normal operating expenses of the storage operation, which you're right, is not included in net economic earnings, but it is showing up on our GAAP financials and we always want to tie back to the GAAP financials. As we go into next year, all of that is in our net economic earnings calculation because we own that business now and expect to drive it to profitability as we get late into the calendar year. Order of magnitude, the operating expenses were in the mid teens, all in. And we would expect, as we now will own it for a full year and we're driving toward operation, that we'd expect those expenses to go up a little bit when you look at that individual line item, but it will all be included in net economic earnings. All right. Thanks very much. Our next call comes from Rodney Ribello with Cannon Asset Management. Please go ahead. Hey, guys. Thanks for taking the question. I guess sort of building off the prior question, I appreciate you given the waterfall chart on Slide 21. But just given the strength of the contribution in gas marketing so far this year, dollars 0.46 You talked about $0.17 of weather, your move for the base year, but it seems like Q3 Q4 were also higher year over year. So just as we build like sort of a normal run rate for 2019 onwards, I know you've been making investments in gas marketing and expanding that business. But is, I guess, sort of the year over year help 3Q and 4Q, is that representative of gas marketing going forward? And then I guess as it ties into that $0.12 which is sort of now you have 3 categories of things representing that $0.12 marketing, which is could be a big year over year variance in pipeline and storage to better shape to shape our estimates and modeling assumptions? Hey, Rodney, this is Suzanne. Just more broadly, the way that we think about the business and moving it to Houston, as I mentioned, we've hired a very talented team. We believe in the business long term. And I've also talked about the customers are generally power generators, utilities, the type of customers we serve through our utility companies and it really is an extension and that's why we call it a gas related business. That being said, by moving it there and this new complement of employees and we do acknowledge the $0.17 of weather. We're really building that base business and we'll be paying special attention to that over the next 3 years. But as far as to tell you what that base business looks like, we're actually developing that. We feel really good about the business and how it's performed and the quality of the customers that we have. And as I said, it's under the leadership of Mike Geiselhart and he's at the table as well. But we'll be providing you, as Steve Rasche mentioned, more information as we learn more about that base business. But let me assure you that the customers like I said are those much like we do in our utility customers, they're industrial customers, there's some pipeline and again, power generators and other utilities. So, we feel good about the customer complement. Yes. And Rodney, I would add that you're right. In terms of volatility and generally on the positive side because we do manage that business and control it pretty closely that the marketing is a bit harder to put a pin in the wall, so to speak, than some of our other businesses. And that's the we're very comfortable with that. And if market conditions remain strong and give us the opportunity to create value, you can expect that we will, but we'll do it in a responsible way. And as we know that, we'll talk to the market about it. In the final analysis, when I look at the marketing business, we are investing more. We're building that team, moving them to Houston. So the cost to operate that business will go up a little bit. They've got a little bit of a headwind that we fully expect that they're going to be able to create value from. That's the reason why we've done the things that we're doing. But as we go forward, think about the marketing business. If market conditions remain strong, again for the full year, because we have to think about this in more than just a 1 month timeframe, that's a great opportunity for us to create the opportunity for capital to invest across our entire business. Got it. Okay. Thanks guys. And then just on the storage side. So in your release, you cite the $56,000,000 sort of investment so far in that business. When you first acquired the business, I guess you were working through some things and it seems as if you're still sort of holding off on talking about the explicit contribution. But is it sort of rate based math type approach to looking at that? I noticed there was a filing made at FERC to change sort of the rate structure. So I'm just trying to better understand it because I guess for most of us it's fairly new. So just and you talked about some contribution in 2019. So just trying to get a sense for the magnitude of the contribution and then how to shape that going forward? Let me give you a little bit around the strategy with the facility and then Steve or even Mike for that matter would like to add something. As Steve mentioned strategically we brought those 2 facilities together. They are adjacent, so we brought them together physically. As a result of that, the filing acknowledges that bringing together and moving our request is to move it to market based rates. And market based rates enables us to be able to provide different services to be at utility companies in the region all the way over to the West Coast, some of the connecting pipelines, power generations and also because of the changing in the way that power is generated on the West Coast with things like wind and solar, there's more intermittent needs. So market base rates enable us to provide these different types of services to these different types of customers. And again, we can only effectuate that by bringing it together and then having market based rate helps us serve those customers and their needs. We as Steve Rasheed just spoke through, obviously we're very early in. We're physically doing the work on-site. Like I mentioned, the remaining facilities together, we feel very good about where we are. We've had conversations on the commercial side with the types of customers that I've mentioned. So there will absolutely be more to come, but we operate storage currently either by way of contract or physically on our systems in Alabama and here, so we're very comfortable with the team that we have from an operational perspective at fire and as well as fire storage actually at the facility itself. Yes. And Rodney, you're right. And we wanted to make sure to be transparent and let everybody know what our investment is so far in Inspire Storage. And that includes the buyout of the minority interest, which we were able to complete right after the end of our fiscal year. It's all rolled into that number. So, getting the full 100 percent ownership of the entity was important for our medium and long term strategic plans. We see some great opportunities. We're going to invest a bit more as we go forward this year. And we're starting to go to market now to attract those customers that you want us to contract with overall. We still expect it to be an adder in terms of earnings, clearly in terms of EBITDA as we go through the year. But I think it's going to be a little bit slower ramp this year, but that's okay, because we're doing it the right way. And ultimately, we have our eye on that asset and what it's going to deliver in value over the 3 year to 5 year horizon, which we're always focused on. And Mike and his team are laser focused in making sure that we can achieve both the near term targets and the longer term realization of the benefits. Got it. Okay. Thanks. And then last one for me and I'll let someone else jump on. But, so STL Pipeline, you guys obviously get the FERC certificate and then just a couple of days ago, a couple of weeks ago, you got the notice to proceed. In the release, you talked about, I guess, how the pending time of completion of land acquisitions. Could you just talk about what's remaining at this point, given that you have the notice to proceed? I know, yes. Yes, I'm going to that's one reason I have Mike in the room because we thought we might get this question. So I'm going to ask Mike to just walk you through or everyone listening a bit of the timeline. Sure. Good morning, everyone. Where we are with respect to land acquisition is, unfortunately, we had a couple of groups of landowners that were represented by parties that really sought an amount in terms of an easement payment that was completely unreasonable and would have effectively kind of blown our budget, if you will, on the project. So, we were forced to condemn those parties. Once we received the FERC certificate in August, we started those condemnation proceedings. We don't necessarily need all of that land to commence construction, but we need a good bit of it. And so right now, we have condemnation proceedings underway in 3 federal jurisdictions. And within the next 30 days, we're optimistic that we'll get so called quick take and be able to commence construction immediately. But standing here today, that's not assured. It's likely, but not assured. Okay. And the only thing I would add to that is when you think about pipelines and pipeline construction, this is all part of the process. It's very standard there and we've done in my view, we've done an excellent job in terms of our critical path of getting the primary steps like the FERC certificate, like the other FERC approval that I mentioned, permission to proceed. And so the land acquisitions, traditionally follow except for those independent land owners that want to come in early and go ahead and negotiate their arrangement. So it is standard fair for these collective groups represented by attorneys to wait till after those per commission decisions are made, but then to start this work. So it's not out of the norm at all. And in fact we expected it. So we're in process and which is why in my opening remarks, we kept the timeline as we stated with you before in the range of costs. Yes. Okay. And then so just a little bit more on that. So when do you expect to begin major construction activities just as we shape our modeling assumptions for 2019? You talked about the marketing side and storage and the pipeline side as you build the construction work in progress balance as you accrue it through the quarters, when do you expect to begin construction, I guess, sometime later, I mean, in November, December or safe to say that you just wait until, I mean, maybe early spring? We've talked about sort of the construction issues that you have or the potential issues that you have if you start construction in the winter with the ground and everything like that? Rodney, it's a great question. And I think you've positioned it right. If you think about step back and think about the entirety of the construction project, there are competing forces that we have to manage along with our contractor in terms of the cost and the cost differential at various times of the year. And the other risk that any construction project has, which starts with access to land, and I think we've been pretty clear about that's the next step in the process that every pipeline has to go through. And then when is the right time to start construction to mitigate other risks, which could include things like rainy spring and all those things that they have to manage for every construction project. We stand ready to begin the construction and there is every logic to accelerating certain pieces of rivers that are part of the project and have been all along because that actually de risks the project overall, because it takes away some or mitigates some of the risk of there being an extended flooding season or unusual season. I think we have a good handle on all of those. And it really, if you think about the hurdle rates, the next hurdle that we need to get over is to get the access to the key parcels of land that Mike talked about. And then we can begin construction in an orderly fashion in order to make sure we can meet our in service target, which is the back half of 2019. And as time goes on and the balance of this month and this year, we'll have other marks that we will hit to know whether or not we need to hit the accelerator or we need to pause for a little bit longer. We've built those contingencies into our construction at this point. But again, this is real time. We want to give you the updates when it's appropriate. I think from your standpoint, as you're thinking about the modeling, as we stand today, we generally have between a 4 6 week timeline from the time we hit go until the time we're actually starting to write big checks and move. So from that standpoint, if we stand here today, if we were to get an answer today or tomorrow, 6 weeks from now puts us near the end of the year. So you need to think about it as probably Q1 would be the earliest that we would start construction in some of those key pieces. But you can expect that that will ramp up as we get clearly through the winter and into the spring and the summer. Does that help a little bit? Yes, it does. I appreciate the transparency on these things and might save me a few calls to Scott. So I appreciate that and thanks guys. I'll hop in the queue. Yes. Thanks, Matt. Appreciate it. This now concludes the question and answer session. I would like to turn the conference back over to Scott Dudley for any closing remarks. Thank you all for joining us this morning, and we'll be available throughout the day for any follow ups. Thank you. The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.