Spire Inc. is working on the right mix of rate stability and long-term investments to overcome challenges brought by an unfavorable regulatory environment in Missouri and the recently enacted corporate tax changes, executives said Feb. 1.
During the gas utility company's fiscal first-quarter earnings call, Spire leaders lamented the restrictive nature of Missouri regulation, which as of May 2017 was ranked "below average" by S&P Global Market Intelligence's Regulatory Research Associates, with returns on equity adopted by the Missouri Public Service Commission over the past year falling slightly below prevailing industry averages.
The company expressed disappointment and concern over the direction the PSC is taking on discussions about the utility's pending rate case that was filed in April 2017 to obtain approval for a $59 million increase to recover investments on infrastructure and technology. In the rate case, Spire also proposed a number of actions to improve Missouri's regulatory ranking and noted that its cost efficiency and growth investments contributed to the state's natural gas bills being lower than they were a decade ago.
However, based on recent deliberations, the commission is likely to reject many of Spire's proposals, which the utility believes would affect its credit rating, resulting in increased costs for the company and higher rates for customers in the long run, Spire President and CEO Suzanne Sitherwood said.
With a lack of support from Missouri's regulators, Spire is relying on its long-term infrastructure upgrade and customer growth programs to help cut costs by reducing ongoing and future operations and maintenance expenses and spread costs over a broader population. Improved safety and reliability also bring in more profit for the company, especially during winter. "That grows the business, adds additional customers and meters. And that really helps from a long-term perspective," said Steven Lindsey, executive vice president and COO of distribution operations.
Another issue is the effect of the tax changes on Spire's bottom line. The challenge comes with finding the appropriate rate adjustments to return the benefits of corporate rate cuts to customers while minimizing business impacts. Based on initial evaluations, the tax law did not have a material impact on cash flows, but it is expected to reduce future cash flows when Spire lowers its customer bills.
Decreased cash flows may impact credit metrics as well, according to CFO Steven Rasche. The company is still exploring options on how to pass the tax benefits to customers with utility commissions in its service territories of Alabama, Mississippi and Missouri.
Still, Spire foresees an economic boost, higher business investment and the elimination of bonus depreciation, which would encourage rate base growth. "We are evaluating those opportunities while striking the right balance in terms of capital structure, debt and equity financing activities and credit metrics," Rasche said.
Overall, Spire intends to pursue negotiations both in the regulatory sphere and with rating agencies to bolster its credit metrics in the face of these challenges. "I'm confident that we are going to find the right combination of ... regulatory relief and also the other tools that we and every public company has in our toolbox, to make sure that we can get inside the metrics that make sense, to support our current credit metrics," Rasche said.
In its fiscal first quarter, Spire posted adjusted net income of $57.9 million, or $1.19 per share, up from $47.5 million, or $1.04 per share, a year ago.
