Spire Inc (SR) 2017 Q3 法說會逐字稿

Good morning, and welcome to the Spire Third Quarter Earnings Call.

(Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Scott Dudley, Head of Investor Relations. Please go ahead.

Good morning, everyone, and welcome to our Third Quarter Earnings Call.

We issued an earnings news release this morning; and you can access that on our website at spireenergy.com, under News. There's also a slide presentation that accompanies our webcast today, and that can be downloaded either from our website or from the webcast site. Today's call is scheduled for about an hour and will include a question-and-answer session.

Presenting on the call today are Suzanne Sitherwood, President and CEO; and Steve Rasche, Executive Vice President and CFO. Also in the room with us is Steve Lindsey, Executive Vice President and Chief Operating Officer of Distribution Operations.

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. Our forward-looking statements speak only as of today, and we assume no duty to update them. 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. For a more complete description of these uncertainties and risk factors, see our Form 10-Q for the third quarter ended June 30, which we plan to file later today.

In our comments, we will be discussing financial results in terms of net economic earnings and contribution margin, which are both non-GAAP measures used by management when evaluating our performance and results of operations. Net economic earnings exclude from net income the after-tax impacts of fair value accounting and timing adjustments associated with energy-related transactions; also the after-tax impacts related to acquisition, divestiture and restructuring activities. Contribution margin adjust revenue to remove costs that are directly passed on to customers and collected through revenues, which is a wholesale cost to natural gas and gross receipts' taxes. A full explanation of the adjustments and a reconciliation of non-GAAP measures to their GAAP counterparts are contained in our news release.

So with that, I will turn the call over to Suzanne.

Thank you, Scott. And welcome to everyone joining us this morning.

I'm pleased to have this opportunity to update you on how we continue to deliver on our promises and earn your trust. Our overarching promise to our investors is to grow the company in a way that the we can best serve our customers, and we have done that. With another solid performance in the third quarter, you can see that we continued to deliver on that commitment, thanks to the hard work and dedication of our 3,300 Spire employees across Alabama, Mississippi and Missouri. These employees give their best to our customers every day; and continue to raise the bar in result, including strong customer satisfaction ratings, continuously improving operating and safety metrics and strong financial performance. It's all about executing on our strategy, a consistent 4-part strategy that has kept us laser focused on growing our company over the last 5 years. It's about what we've all committed to doing. And it's also about how well we execute against that strategy, which means we need to be able to be -- be able to flex our priorities to respond to market opportunities while understanding new opportunities that come along from being a bigger company.

Our 4 growth strategies are fundamentally the same as they were 4 years ago. What's changed is the maturity of each strategy and how we prioritize them: first, growing our company and business organically; secondly, investing in infrastructure; thirdly, acquisitions and integration; and finally, supporting growth through innovation and technology.

Let's start at the top on Slide 5. Organic growth means driving growth at the top line and efficiently managing the cost structure over time. We continue to achieve increased customer growth for our gas companies across our 3-state footprint. As you'll see in our numbers, our increased scale help drives better cost management through our shared services structure, including business improvements and efficiencies, all of which is enabled with technology where we've invested in the right systems and the right way to grow; and seek benefits for our employees, customers and shareholders. As you have seen over the last few years, we are significantly upgrading our infrastructure and investing for the future to support our growth and to manage operating costs. Our year-to-date capital expenditures are up more than 50% over last year. To put this in perspective: This year, we expect to replace over 325 miles of pipe across our 5 utilities. That's over 200 miles more than was replaced 5 years ago. And while the vast majority of our investments are in our gas utilities, we are also investing in projects like Spire STL Pipeline, which I'll talk about in a moment.

As we turn to acquiring and integrating. You know that we've increased our scale through smart, value-add acquisitions. That's our promise to you. Integration is all about bringing people and technology together in a way that adds value for both our customers and our shareholders. It's about working smarter by using technology better and by taking good care of the people who take care of our customers. In that spirit, I'm pleased to say that we're on track with the integration of EnergySouth, so much so that we are ready to include Mobile Gas and Willmut Gas in the change to the Spire brand this fall. At that point, we will have integrated the systems and the people; and we will be one team operating the business under one brand, one brand focused on our business and financial objectives year after year. And I'll tell you more about how we're becoming Spire in my closing comments.

Finally, as examples of how across the organization we're using tech tools to better serve people, I'll share 2 data points. This fall, we will debut a new, modern customer technology platform that will simplify and enhance the ways our customers are able to manage their accounts on the go. It will be a fresh, easy and seamless solution for our growing company connecting the vast majority of our customers' systems on one platform. In addition, we just launched a multiyear company-wide effort to standardize our information technology platform, which will greatly simplify and enhance workflow, create new opportunities to learn from synchronized analytics and overall enable us to run our business better.

Before I leave the discussion of our strategy, I'd like to give you a little more color around our thoughts on future acquisitions. We get asked this a lot, so I want to make sure you know how we think about it. As you know, we have successfully grown through utility acquisitions over the last few years, and we now have the scale necessary to serve as a platform for our broader growth ambitions. We all know that we're in a consolidating industry where valuations are up, regulatory outcomes are less certain and financing costs have increased. As we have seen the market changing, we have shifted our thinking. While we believe there may be opportunities for future utility consolidation, at this point in time, our position is that these market conditions do not support utility acquisitions for Spire. That said, rest assured that we do not need future utility acquisitions to achieve our long-term growth targets. We do see other opportunities, such as in the midstream space, for investment in infrastructure, like we are doing with our Spire STL Pipeline.

So let's turn to Slide 6 for our pipeline update.

As we reported last time, in April, we filed an amended application with FERC to change the STL pipeline preferred route to include a 6-mile newbuild segment rather than modifications to an existing Laclede Gas pipeline. Right now, we're completing the necessary steps to keep the project on track, including finishing work on environmental assessments and obtaining land rights. In terms of construction, we've purchased the pipes for the project and currently evaluating construction bids. And we're still on track with our expected fiscal 2019 in-service date and our investment in the range of $190 million to $210 million. Lastly and normal course, we're managing our Missouri rate case proceedings. Everything is on schedule and consistent with the information we've posted.

With that, Steve Rasche will review our results, including the strong quarter we announced this morning. Steve?

Thanks, Suzanne. And good morning, everyone.

As Suzanne just touched on, we finished a strong quarter, and our outlook for the year has improved. Let's review both, starting with the third quarter results on Slide 7.

Net economic earnings were $21.6 million, up $7 million or 48% from a year ago, driven by growth in our Gas Utility segment which benefited from higher infrastructure investment and customer growth. Gas Marketing earnings were also up by $0.5 million. And other corporate costs were lower than last year by $1.2 million.

Net economic earnings per share of $0.44 was $0.11 or 33% higher than last year, with the current-year calculation factoring in the 4.7 million share increase due to the 2 recent equity offerings that I'll touch on in a moment.

With that as backdrop, let's review the income statement, turning to the next slide.

For the quarter, total operating revenues were nearly $324 million, up 30% from last year due principally to higher commodity cost and the addition of EnergySouth. Contribution margin was up 18% overall and 13% or nearly $24 million for the Gas Utility segment. EnergySouth accounted for just under $13 million of that increase, meaning that the margin for the remaining utilities was $11 million or 6% higher than last year. That increase reflects higher Missouri ISRS revenues of $4 million as well as lower Alabama regulatory adjustments of $5 million for quarterly RSE true-ups and the sharing of cost savings. Gas Marketing operating revenues for the quarter were up $3.1 million, as both higher volumes and higher commodity prices were partially offset by a higher mix of trading activity which was recorded net of costs. Contribution margin was higher by $7.8 million primarily due to greater spreads and increased asset optimization.

Looking at our operating expenses. All categories are higher this year, with most of the increases, except for fuel costs, reflecting the addition of EnergySouth. I'll focus my comments on variances after that addition. Gas Utility operations and maintenance expenses increased slightly, $1.2 million, as higher professional services and employee-related costs in Missouri were offset in part by lower Alagasco expenses. Higher capital spending over the last year drove net increases in both depreciation and amortization expense as well as the property tax component of taxes other than income. Gas Marketing operating expenses were lower by $4.4 million, as a higher mix of trading activity more than offset that higher volumes and commodity prices. ISRS expense was up $700,000, reflecting higher rates on short-term debt. And finally, income tax expense was higher, reflecting higher pretax income. Importantly, the effective tax rate was a bit lower this quarter due to both return-to-provision adjustments typical of this quarter each year and to record the onetime tax benefit of roughly $1 million on equity compensation. Note that our year-to-date effective tax rate remains within guidance, as expected, in the low- to mid-30% range.

On Slide 10, you'll see the results for the first 9 months for our fiscal year. Net economic earnings were up nearly $15 million or 9%. And per share earnings of $3.82 a share was up 8% from last year -- or $0.08 from last year even with the increase in shares.

Gas Utility earnings increased nearly $17 million or 10%, driven by the addition of EnergySouth as well as higher earnings from both our Missouri utilities and Alagasco. We achieved this increase despite adverse weather during the winter heating season that reduced our contribution margin by nearly $20 million compared to normal weather or $10 million compared to last year. This impact was more than offset by the benefits of higher ISRS in Missouri and lower regulatory adjustments in Alabama. Gas Marketing earnings were down $800,000 from last year, reflecting lower contribution margin primarily due to lower storage optimization; and other corporate costs, which reflect higher interest expense principally from the addition of EnergySouth.

The quality of our earnings remains very high with earnings before interest, income tax, depreciation and amortization up 11% from last year to $440 million, as shown here on Slide 11. Our long-term capitalization at the end of the third quarter was 51.3% equity, representing a 150 basis point improvement since the end of our last fiscal year. This improvement reflects the capital markets activity that I discussed last quarter, which resulted in a $142 million increase in equity and a nearly $144 million decrease in long-term debt. And as a reminder, Laclede Gas has committed to fund $170 million in first mortgage bonds later this quarter. We will use those proceeds to pay down short-term debt. We also have ample liquidity from our credit facilities and our commercial paper program. At quarter end, our short-term debt stood at $451 million. This level will decrease with the proceeds from the Laclede Gas debt, leaving overall unused capacity of roughly 71%, about typical for this time of year and comparable to last year.

As you know, one of the important uses of our cash flow is for our dividend. I'm pleased to report that our Board of Directors declared the next quarterly dividend of $0.525 per share, payable on October 3. We're in our 14th consecutive year of increasing dividends. And this year's annualized dividend is 7% above last year's run rate.

As Suzanne noted, we continued to execute on our growth plans. And as part of those plans, infrastructure upgrades remains a top priority. As you can see here on Slide 12, we continue to ramp up our capital investments, which increased to nearly $300 in the first 9 months of the year, up $104 million or 53% from last year. Our spend continued to be driven by infrastructure upgrades and new business at our Missouri utilities and Alagasco as well as the incremental spend added by EnergySouth and the Spire STL Pipeline. In fact, if we consider our regulatory recovery mechanisms, the margins associated with new business and the AFUDC from our pipeline investment, nearly 90% of our spend so far this year is being recovered with minimal regulatory lag or is adding to earnings in the near term. Our targeted capital investment for 2017 remains $445 million, and over the 5-year period to 2021, we anticipate spending $2.3 billion. Most of that spend is being driven by infrastructure upgrade programs at our utilities, programs that will stretch for roughly 20 years. We also have good regulatory recovery mechanisms that will ensure that roughly 85% of our spend is expected to be recovered with minimal regulatory lag or reflected in earnings.

Turning to Slide 13, a quick update on our Missouri rate proceedings. As a reminder: We filed 2 concurrent rate cases in April with net increases to customers of just over $25 million or 4% for Laclede Gas and $34 million or 8% for MGE. These net amounts reflect the most recent ISRS rates effective June 1. And as proposed, our customers on both sides of the state would have bills lower than 10 years ago. The filings also reflects the significant progress both from a company and a customer perspective, as we upgraded our infrastructure, deployed technology and streamlined processes. It also sets the stage to more closely align our 2 Missouri utilities and offers the opportunity to begin modernizing Missouri's rate-setting approach.

Our filed rate bases are just over $2 billion, represent compound annual growth rates of between 6.4% at Laclede and 9.6% at MGE. And our filing is based upon the Laclede Gas capital structure, which we anticipate being roughly 54% equity at the end of the September update period. Here at the bottom of Slide 14 is the procedural schedule based on the full 11-month process. As you can see, we are currently in the discovery phase, during which we respond to information requests from the Missouri Public Service Commission staff and other parties as they prepare to file their testimony in September.

Now turning to our outlook.

First, we reaffirm our 2017 earnings range of $3.50 to $3.60 per share. In fact, given our strong third quarter results, we now expect to land in the upper half of that range. Our guidance fully reflects the impact of the increase in shares from a recent equity offerings, both the 2.5 million share offering we issued in April of this year from the conversion of our equity units and the 2.2 million shares we issued last May to support the EnergySouth acquisition. Our long-term earnings per share growth target remains 4% to 6%, a target that reflects, as Suzanne mentioned, our organic growth and investment growth initiatives and is not predicated on additional utility acquisitions. That growth is supported by a 5-year capital investment program totaling $2.3 billion. And as you can see here on Slide 15, our capital spend is fairly evenly split between our 2 Missouri utilities and Alabama; and again, supported by long-term upgrade programs of roughly 20 years in length.

One more thought about guidance. Over the last 5 years, we've seen a pretty dramatic improvement in our ability to deliver both timely and useful information to our investors. We launched earnings calls and short-term capital investment guidance. Along the way, we added long-term growth and capital spend targets. And in November 2014, we launched formal annual earnings guidance. As we look forward to this November, we think it's best to delay launching earnings per share guidance for fiscal year 2018 given the timing of our Missouri rate cases. We'll plan to pick it up again after the proceedings are complete, likely in our fiscal second quarter.

So in summary, we delivered a strong third quarter and we've upgraded our view for the current year. We remain on track with our infrastructure investment plans, and our financial position remains strong.

With that, Suzanne, I'll turn it back over to you.

Thanks, Steve.

It's remarkable to see how far we've come since our journey started in 2012. We're now operating 5 natural gas utilities in 3 states. We've quadrupled our enterprise value. And to better reflect the growth and transformation of our company, The Laclede Group became Spire in April 2016. It's hard to believe that was over a year ago. Today, we are moving forward with our plan to bring the gas companies together and transition them to the Spire brand. This September, our 1.7 million customers will start seeing changes, beginning with new fleet graphics, building signage and tech tools, to name a few. The most personal change for our employees happens on September 25, which we're calling "go orange day" at Spire. That's the day the uniforms will change across the company. While we have trickled this over -- out over several weeks, our employees want to share a moment when all 3,300 of us would step into Spire together. Yes, that includes me. I'll be wearing my best orange that day, September 25. This transition is about much more than a color change or a name change. It's about a promise to bring people and energy together by delivering energy that inspires. It's about answering challenges in a rapidly changing industry. It's about adding value and working smarter. It's about enriching lives, but mostly, it's about using our combined strength to create a better experience in 3 ways: service, savings and support.

One very visible way we're bring into life our commitment to our communities is through a new initiative that's going on right now. It's a program that engages Spire employees across 3 states in a day of community service: volunteering to work in food pantries; soup kitchens; animal shelters; community gardens and parks, schools and more to offer a helping hand wherever needed. We're calling this initiative day for good because I can't think of no better way to share the heart and soul of who we are as a company with the people of Birmingham, Hattiesburg, Kansas City, Mobile, St. Louis and everywhere in-betweens; and to do what we do best, serve others. With all of our employees wearing their orange "Spire serves" volunteer shirts, day for good is a very visible sign that our gas utilities are becoming Spire. With all the good that brings, it's just one more way we're communicating our transition to Spire.

If you want to learn more about how we're becoming Spire, visit the website of the individual gas utilities. And then visit again on go orange day, September 25, to see a whole new online experience that makes it easy for our customers to join us on a journey of transformation and growth.

Thank you for your time today and for your continued interest and investment in Spire. We are much appreciative.

And operator, we're now ready to take questions.

(Operator Instructions) First question comes from Insoo Kim with RBC Capital Markets.

Just maybe starting off with the quarterly results and kind of the updated guidance for the year. Besides, I guess, the tax item that you guys mentioned, what are some of the main things that you didn't really anticipate last quarter, when you guided to the low end of the range, that's now changed your outlook to guide at the higher end?

Insoo, this is Steve. I'll take a shot at that. Actually, the performance in the utilities and also in Gas Marketing are what drove our improved outlook for the year. The actual -- the income tax benefit which came to before this quarter, we actually had in our sites. And we did actually talk about it in the earnings call last quarter, so that was actually baked in. It's really some improved market opportunities at Spire Marketing, so we've seen their performance move a little bit closer to what our expectations were for the year; and then better performance of both across all 3 of our utilities, which includes both the Missouri and also down in Alabama. We're actually at the point now in Alabama where this quarter is -- this will be included in the Form 10-Q which will be released here later on this morning, where we're projecting a RSE give-back for the quarter. We weren't in that position in the earlier quarters this year, which is unusual. That's reflective of that headwind for the winter weather that we talked about last quarter.

Got it. Apologies for missing the tax discussion on last quarter.

Of course...

Got it. In terms of CapEx, do you see CapEx pretty much maxed out through '19 at this point, maybe with moderate upside? And I know we have mentioned fairly recently that AMI and other modernizing-the-grid investments to provide upside but more in the 2020 and beyond. Is that still the case? Or is there opportunity for that to be more near term?

Insoo, this is Steve Lindsey. I'll take that one. So on the infrastructure, as Steve mentioned during his remarks, we are getting to a pretty solid run rate really across the 3 utilities. And as he mentioned, that's probably looking at a 20-year run rate relative to those 3. One of the other pieces that we are strongly focused on is in our growth area, and part of our organic growth is growing new business. In Missouri, we're up 30% year-over-year relative to CapEx, and in Alabama we're up over 50%. So clearly, that focus is really starting to take some hold. And then on the AMR, AMI that you mentioned, we're looking at an overall strategy across our footprint. So here at Laclede, we're moving to purchase the devices that we currently lease. We're doing upgrades at MGE. And then in Mobile and Willmut, we're looking at an opportunity there for AMR and AMI, so clearly there is more to go there. And then at MGE, we have a -- literally a 10- to 15-year master plan that's going to be very similar to what we've done here at Laclede relative to upgrading our infrastructure and backbone of our system. So there are some opportunities there, as well as the IT platforms that Steven mentioned. So I think there's a long line of sight on capital. And what we're doing now and again the 5-year forecast that we've given you, I think, really is a long-term approach to what we've got across our entire footprint.

And Insoo, this is Steve Rasche. I'd add that the other opportunity that wouldn't yet be in our forecast would be if there's any other investment opportunities in the western side in Missouri or down in Alabama, similar to what we're doing with the Spire STL Pipeline. As we've talked about in the past, we're evaluating the systems and where we expect them to be in the future and what options that presents for us. We haven't yet reached a conclusion, so it'd be a bit premature to be adding those dollars to the capital plan, but as we firm up our plans, we'll certainly be talking to you all about that.

Understood. And then finally for me, looking at dividend policy. I know the recent increase is a 7% increase on a year-over-year basis. And you're talking about long-term any per share growth of 4% to 6%; hopefully, in that upper half the range that you guys mentioned. Just taking that math, it seems like that 55% to 65% payout ratio will definitely start to creep up in the 60% to 65% range in the next few years. How do you think about your dividend policy or as it relates to payout ratio longer term or dividend growth longer term?

Yes, great question. We did guide that we expect our dividend growth to be at the top end or maybe even above the long-term growth target range for earnings per share because, as you mentioned, we're in the lower half of our target payout ratio range. And we would love to get at least to the middle of the range, which if you think about and do the math, that would mean we'd have to continue to grow the dividend, like last year. We grew it at 7%, and it was 7% the year before. So I think you can expect over the next several years that, if we stay true to that goal that we want to get at least to middle of the range, that the dividend growth will be at or a little bit above the earnings growth, that's how the math would work. And I think, in context if you take one step back and you look at the broader industry, the payout ratios for our peer set is probably 200 to 300 basis points above the midpoint of our range. And for the electrics, it's probably another 200 basis points above that. We believe -- right now, we allocate our capital in a number of ways. One of those is dividends. The other one is investing back in the business to drive growth. And we've talked a lot about how we're investing in capital spending, getting good recovery on and off those. And then also we tend to delever the business at an overall perspective and certainly at the holding company. And so we actively manage those big-bucket uses of capital. And we think that, that payout ratio in the middle of our ranges is the right spot right now, but it's something that we evaluate with the board on an annual basis based upon what our forward view is of where capital is needed and where it's going to drive the most value for our investors.

The next question comes from Gabe Moreen with Bank of America.

Wondering if I could follow up on Suzanne's comments about further midstream investments, ex M&A, potentially helping meet or -- meet the long-term growth guidance. Can you just maybe elaborate a little bit more in terms of what you have in mind beyond the STL pipeline; and if there's a specific, I guess, CapEx amount that you've kind of had in mind that you think would be comfortable for Spire to pursue?

Sure. I'll start with the latter part of your question, around the capital investments for other projects like Spire STL. It really connects back to what Steve Rasche was describing. And Gabe, you'll probably recall me talking in the last few years over about a project whereby we've started evaluating the infrastructure in the St. Louis region. And when I talk about the infrastructure, not just the distribution infrastructure and how we receive gas from the Interstate pipelines but also the Interstate pipelines and also where we're sourcing gas and storage facilities. We take a fresh look, a "blank sheet of paper" look at, if we were to build these upstream assets today to accommodate the growth in the regions, shale gas, the way pipelines are operating today versus the way they were in a legacy way many decades ago, what would that look like? And what would that look like in terms of bringing the best service, the best reliability and the best cost to our customers? And that body of work in the St. Louis region is how we got to the Spire STL Pipeline. Well, that -- in that analysis -- and Steve Lindsey has talked about the capital deployed for pipeline replacement, but we just don't take a piece of pipe out of the ground and put another piece in. His engineering group actually rebuilds the header or the receipt points, the backbone for the distribution system in the regions. And so that's how we think about making those choices and thus, again, the Spire STL Pipeline. As we've gotten going on our construction work, we've been evaluating the Kansas City region, if you will. And we're evaluating projects right now in that area, and as Steve alluded to, we haven't landed on what projects we think make the most sense. We're on the engineering analysis and cost analysis right now. And then we'll begin that work, that same body of work in the Alabama area, so more to come, as Steve mentioned, on that. From an M&A perspective and the color that I was adding because many of you have asked about sort of our views on that and as I've mentioned, a lot of the more recent acquisitions have been, I know a lot of people like to use the word, frothy, on the amount of the premiums and those sorts of things and how do they get financed and the regulatory activities around that. We have invested so much on acquisitions over the years and now have this bigger enterprise, and we've always been focused on organic growth. And you may recall, 3 years ago, we hired an executive to report to Steve Lindsey, to assist with that. We have been spending a lot of time building the technology infrastructure, the people infrastructure to better connect to our communities and customers; and you're hearing it showing up in the numbers. Steve Lindsey mentioned it. And how do -- we talk about 1.7 million customers, but the reality is those are premises. And behind those premises, be it a home or small business, larger business, manufacturing, are people, meaning more people than a 1.7 million premise count. And how do you connect and retain them and add burner chips and work with builders and developers in future products and services and what they're building? And we have a very large focus in that area. And we're seeing results because we've heavily invested, like I said, people and technology, through -- it's a bit of a resorting that we've acquired companies of larger scale. And it's really I've been talking about it since the day I arrived. It's also incumbent upon us to grow those companies organically after we acquire and after we integrate the systems and the people.

And maybe if I could just follow up and press you a little bit on sort of, let's say, the Kansas City market review. Is that something we're heading the rise of associated gas coming out of the mid-comp from the SCOOP and STACK? Is that where you're kind of seeing the opportunities potentially relative to where that territory has been supplied traditionally?

Yes, I would say we're seeing it more broadly because we've got -- we've evaluated REX to the north side and will that pipeline function bidirectional. What's storages are we using? How flexible are they, those storages? What are the incumbent pipelines in the area? How they serve; working closely again with Steve Lindsey group's, where we need to receive gas. Because regions sprawled. They were very tight from an urban perspective and how these systems were originally designed. And then regions sprawled, higher growth further out; supply basins, to your point. But you also want to think about how do you diversify and create -- unless a mini hub because, if you diversify, you derisk around pipeline usage and supply basins and optimize that. Because you're really building these systems for decades to come. So yes, I don't want to identify any particular region. And all of that cost structure, if you will, gets managed through the purchased gas adjustment, as a lot of people like to call it, or PGA, which is 60% on average of a customer or premise bill versus the 40% that everyone sees in the rate case. So it's a very important analysis and attributes for customers not just for now but really for decades to come because they're large-scale commitments.

Got it. And then just one last one for me on the STL pipeline. In terms of further permits, does it matter whether the FERC gets quorum, or not? And if you -- maybe you can talk about kind of state permits you're still waiting on potentially. And dates do you expect those to be issued?

Yes, we -- I actually had a discussion on that yesterday, in fact. And our analysis is we're still on schedule. Yes, we would like to see FERC sooner than later get a quorum, but right now, based on our construction schedules since before, we're keep moving. We're working with the staff in its process right now. So we do hope they get a quorum, like I said, sooner than later, but we're fine in terms of the schedule and announced -- the announced completion date that we've guided to. So we'll keep moving and, hopefully, by next quarter, by the time I talk to you, we'll be able to talk about a quorum.

I hope so as well.

Next question comes from Mike Weinstein with Crédit Suisse.

I was wondering if you could comment a little bit about your appetite for M&A and where that stands in the -- in your priority list of growth options going forward.

Well, thanks. I appreciate it. That's a little bit of what I was trying to get to, two of the discussion. And a -- but if you go back with us in time a bit and you look at the 4 strategic pillars that we've laid out, we used to have utility M&A as the top priority. And part of the reason for that is because we needed to grow and grow scale and grow diversity in our investment community, better analyst coverage and so forth before we can start some of the other investments in technology and so forth that I've talked about. So now if you look at the list and to cut to the chase, you'll see that we've dropped it to third on our priority list, if you will. And we've dropped the word utility and just have it genuinely generically M&A. And the reason for that is what I just was describing to Gabe and also in my opening comments, the reasons that we've dropped it. Plus, we're a much -- to my point, we're at from a scale perspective, we're a much larger enterprise. We have 1.7 million premises. We have 3,300 employees. We have enterprise technology systems with technology that we're adding on to better serve customers. We've stood up an organic growth team with Salesforce.com and other tools to better connect to builders, developers, engineers, architects in those premises. And so we -- #1 on the list, now that we have this larger utility organization because, again, we're 98% gas company, we're using these tools to better deploy and create stronger organic growth for this. If you harken back to what many of the utilities -- and I'll just generalize. If you go back to certainly 2008 forward, most utilities were in a negative growth rate from an organic growth perspective. And pipeline replacement was spoken to as organic growth. We're in a position now, given what I just talked about in terms of our investments and our larger scale -- is to retain customers, add new burner chips and add new customers, especially as we're seeing new premises go up and as conversion opportunities. And so that's where -- what Steve Lindsey earlier was talking about, 30% growth year-over-year and 50% growth year-over-year in Alabama. That's where you're starting to see some of that investment of resources that we've developed the last few years show up in the map.

Yes. And Mike, I'll follow up a little bit on that. This is Steve Lindsey. As Suzanne mentioned on here, organic growth piece, the CapEx is clearly up. And we're starting to see those results. Just year-over-year, we're up over 10% in our new meters, which is a great outcome. And the capital that we're putting in now has future opportunity. Also, we're focusing and taking a different approach on economic development in all 3 states, and we're really trying to work with state leaders to help the states that we operate in, to really try to bring business to those states as well as retention that Suzanne mentioned. Signing up new customers is great, but if you don't keep them, it's not great. And we're really focused on things such as energy efficiency programs, appliance rebates and energy assistance programs with our customers that are challenged to pay their bills; taking a different approach as to how we interact with those customers. We're looking at expansions into underserved areas, and we've seen some great outcomes in the western side of the state with MGE and in Alabama. And then one final piece is municipal opportunities. While that seems small, if you think about 5,000 to 10,000 customer opportunities, those are very large organic growth opportunities that aren't really considered acquisitory, but we view those as really something that helps build our platform in each of our different jurisdictions. So I think, when you put all that together, even if we don't have a utility acquisition, we're really focusing on growing the businesses that we have.

Which I have to then close this-- this part of the conversation I should say with all of that is part of the reason that we're rolling out Spire master brand. Because to deploy those technologies, those services and those programs; and view that as one master brand Spire, where we all show up in the same way through our technology, through our people, the way that we talk to and connect to people, a master brand is a much powerful way to accomplish all the objectives that I've spoken to and that Steve has spoken to. To for -- in our view, to do that with more vulcanized brand is much harder to communicate and connect. It can be done, but it's much harder to communicate and connect and get the outcomes that we're expecting from an organic growth perspective.

That's very helpful. And I'm just looking at the -- like the '20 -- after the STL pipeline drops off in 2020 from the CapEx plan. Maybe you can talk just a little bit about the timing of when you think you might be able to grow up earnings faster than 4% to 6% perhaps or at least to update that forecast in the later years of the program.

Mike, this is Steve. I'll take that one. We evaluate -- or we're actually always exercising our 5-year plan. We formally evaluate it twice a year. I would say, as you think -- as you get to 2020, using, going with your timing, that's when some of the decisions that Steve alluded to earlier in terms of AMR deployment, especially at Laclede Gas -- clearly, we will have made some fundamental decisions by then, which could be an increase. And then if you think about the stuff that Suzanne spoke to a second ago in terms of other investments that helped take advantage of our position in the natural gas food chain, I think both of those will give us plenty of opportunity to continue to drive growth. We also have and we continue to manage what's the right level of capital spend at our utilities. And we like the run rate that we're at now, that we finally achieved this year. We've been talking about that for a while. That is much more than putting numbers on a worksheet. There's a lot of logistics and coordination that goes into getting our programs in place. We continue to look at those. And we always have the opportunity to change those plus or minus, and it's something we do actively in response to where the other opportunities to invest are. So I think, yes, you can take our commitment. We understand. We're managing this business for 3 to 5 years out, so we're already thinking about how we fill up the funnel for years 3, 4 and 5 because that's the long-tail nature of our business.

(Operator Instructions) The next question comes from Brian Russo with Ladenburg Thalmann.

Just the Missouri rate cases. There seems to be limited history of settlements, at least on the electrics side, and I just wanted to get your thoughts. Is it a goal to reach a settlement? Or are there some items in a rate case that likely will have to go to hearings?

Brian, Suzanne. So I'll start with that sort of the higher plan, I guess. So the rate case proceeding, as Steve went through the calendar on a earlier slide, sort of is what it is. And we're working through that. We have not gotten yet, and you'll see on the schedule the timing of that, the intervenors' testimony. So from your question about positions and concerns and those sorts of things, leave that in dated request land. And then the staff and OPC and others that have intervened will file their testimony, and so we'll have a better handle on what those concerns might be. The schedule, obviously we can go to hearing. And I can't foreshadow one way or the other whether or not we will go into -- we will always go into settlement discussions, whether or not it comes out into a formal settlement that's offered to the commission. It's a different question, and I can't foreshadow that. We just have to work through that process and see what happens, but you are correct, if you just look at history and just look at data, that historically we have settled. And the reason for that is generally you hope to get to where you're just arguing about a few things at the end, and they're the smaller things because you deal with that froth with the bigger items. So we don't know. This is really 2 cases in 1. We've got the eastern side of the state and the western side of the state. And we agreed and I've mentioned before that we've filed both of those cases contemporaneously so the commission can see the overall business structure on outcomes for the state. And so we agreed to do that. And so again we're just going to follow the schedule. And we're working very hard at it, as well as the commission. And more to come as we learn more and we get the testimony back from the intervenors.

Okay, great. And then just to clarify: The 4% to 6% EPS annual growth rate. That can be achieved with the current capital budget, correct?

With the forecast that we've laid out over the 5-year period, yes.

Okay. And then lastly, your comments earlier on consolidation and M&A, is it that the multiples are too robust for you to transact? Or are you just not seeing opportunities to transact irrespective of any sort of bid-ask spread?

Let me say it this way. We've acquired 3 companies in a bit of -- well, in a sequential way. And so we've integrated them from a system and people perspective. And we've gone through our capital plans. And we've laid out a lot of the work that we're doing and our ability to meet our 3- to 5-year plan, as Steve has said, but we have seen transactions that have high premiums attached to them, some regulatory concerns. And I never -- I've been at this 37 years, and I never try to predict what the market will do and what the future is. We just know the more recent transactions. And we have more than enough work ahead of us and opportunities ahead of us. And so we're not -- we don't need to do another utility transaction, if you will. So that's where we are right now. And we're actually in a very good place, as Steve said. And I thought -- I think that was Steve Rasche's ending point, is we're on target to deliver on our 3- to 5-year plan in that growth range. I don't know, Steve, if you want to add anything to it.

No. Brian, I will just -- I would echo that, but if you kind of look at the last set of transactions over the last, say, 12 months announced, that it always starts with valuation. And valuations have escalated, in our mind, far beyond the underlying value with the utilities. And as a result, that causes regulatory pushback, and then the financing has to be more highly levered in order to make the metrics work. It kind of starts with valuation, but it quickly spawns into a number of things, which is why as you know, because we follow the space, we've seen pushback from regulators, pushback from investors, pushback from rating agencies that, "Do these make sense?" And it starts with that valuation, but then it's the things that companies have to do. We've always approached things in a balanced way. We don't over-lever. We try to lever in the right way. We keep our capital structure overall at a good, balanced place. And we have a plan that drive growth after we close the deal. And in order to do that, you got to buy at the right value. And we just -- we don't see the values anywhere near what would make sense for us. I would argue don't make sense, but we'll stick with it and keep it personal, "It don't make sense for us."

And Brian, to close on Suzanne's point on the rate proceedings. As she mentioned, this is a combined case concurrent with both MGE and Laclede. And we're required to do that from the ISRS requirement, which is legislative, but also I think it's noted that, if as Steve mentioned the proposed request goes into place, customers' total bills will still be less than they were 10 years ago. I think that's a credit to the growth in the company, the way we manage our business and the fact that we do take this very seriously. And so as we go through this, we're looking at other opportunities such as revenue stabilization, performance measurements relative to our business metrics around customer service and operational metrics, economic development opportunities. So this is a different kind of rate case than we've had traditionally in the past, but I think it's moving us more towards a modern -- a more modernized rate design. And hopefully, the outcomes will reflect that. So we view this as a very good opportunity for our customers as well as the company, and we're looking forward to moving forward with the process.

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 your time and interest in Spire. We'll be around throughout the day for any follow-ups, and we look forward to connecting with you then.

Thanks so much. Have a good day.

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