Spire, Inc. (NYSE:SR) Q2 2022 Earnings Conference Call May 6, 2022 11:00 AM ET
Scott Dudley - MD, IR
Steven Lindsey - EVP & COO
Scott Carter - President & Director
Adam Woodard - Treasurer
Steven Rasche - EVP & CFO
Conference Call Participants
Jamieson Ward - Guggenheim Securities
Richard Sunderland - JPMorgan Chase & Co.
Julien Dumoulin-Smith - Bank of America Merrill Lynch
Christopher Jeffrey - Mizuho Securities
Andrew Levi - Hite Hedge Asset Management
Vedula Murti - Hudson Bay Capital Management
Good morning, and welcome to Spire's Second Quarter Earnings call. [Operator Instructions]/ Please note, this event is being recorded.
I would now like to turn the conference over to Scott Dudley, Managing Director of Investor Relations. Please go ahead.
Good morning, and welcome to Spire's Fiscal 2022 Second Quarter Earnings Call. We issued an earnings news release this morning, and you may access it on our website at spireenergy.com under Newsroom. There's a slide presentation that accompanies our webcast, and you may download it from either the webcast site or from our website under Investors and then Events & Presentations.
Before we begin, let me cover our safe harbor statement and use of non-GAAP earnings measures. Today's call, including responses to questions, may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although our forward-looking statements are based on reasonable assumptions, there are various uncertainties and risk factors that may cause future performance or results to be different than those anticipated. These risks and uncertainties are outlined in our quarterly and annual filings with the SEC.
In our comments, we will be discussing net economic earnings, which is a non-GAAP measure used by management when evaluating our performance and results of operations. An explanation and reconciliation of this measure to its GAAP counterpart is contained in both our news release and slide presentation.
On the call today is Steve Lindsey, Executive Vice President and Chief Operating Officer; Steve Rasche, Executive Vice President and CFO; and Scott Carter, President of Spire Missouri. Also in the room with us is Adam Woodard, Vice President and Treasurer and also CFO of our Gas Utilities.
With that, I will turn the call over to Steve Lindsey.
Thank you, Scott, and good morning to those participating on the call. I know many of you are wondering why Suzanne Sitherwood isn't kicking off the call today? Due to scheduling conflicts, she simply wasn't able to join us. Rest assured, she's very much looking forward to connecting with all of you at the AGA Financial Forum in less than 2 weeks.
I want to start by acknowledging our employees who continue their focus on maintaining safe and reliable gas delivery operations and outstanding service to our customers. Your efforts and dedication are especially important during the winter heating season that just concluded. Also, we're extremely proud that earlier this week, a group of our employees received a Meritorious Service Award at the AGA Operations Conference. This annual award is in recognition of their brave actions in saving 2 infants and a young mother trapped in her apartment fire. We cannot be more proud of these team members.
As you know, at Spire, everything begins and ends with our mission, answer every challenge, advance every community and enrich every life through the strength of our energy. We're using that in energy to make a positive measurable impact on the world around us. Our energy keeps us stepping forward, advancing and innovating, and energizing the future.
Despite some near-term regulatory matters that we are working to address, we remain steadfast in delivering our long-term strategic priorities and commitments that support our growth while working toward an innovative, resilient and sustainable energy future. We continue to invest a significant amount of capital into our utilities for upgrading infrastructure, gaining new business by adding customer connections and furthering our innovation through technology. We're doing this while enhancing all aspects of our operating performance from customer service to safety and system reliability, including reductions in methane emissions as we move forward on our commitment to be a carbon-neutral company by mid-century.
As we announced this morning, we delivered solid financial results for our fiscal second quarter, including higher earnings for our gas utilities. Steve Rasche will cover our results in more detail.
Another good things is if you have been following closely our regulatory matters in Missouri after our most recent rate order. Scott Carter will discuss the steps we are taking as we continue pursuing a fair and reasonable regulatory outcome. And lastly, I have a few comments on the operating certificate for Spire STL Pipeline.
With that, I'll let Scott Carter hit on the Missouri regulatory matters.
Thank you, Steve. As you all know, our last Missouri rate case order left open significant issues that the commission noted could only be addressed in context of another general rate case, particularly those issues were the rate of return and the return of nonoperational overhead costs. While we never intended to file another case immediately after the conclusion of the most recent one, it is essential that our rates reflect the full actual cost of service and that allow us to earn a reasonable rate of return.
On April 1, we filed a new case to address these matters, requesting $152 million in additional revenue. The pie chart on this slide breaks down the major pieces of our ask. The largest pieces are related to the 2 items I just mentioned, rate of return and recovery of overheads. Those 2 items combined represent 55% of the requested revenue increase. We have filed for what we believe to be a fair and reasonable overall return on rate base of 7.5% based on the ROE and equity layer shown on this slide.
The other 45% of the request is tied to cost of service, including a return on a $3.4 billion rate base as well as higher depreciation and cost of service updates, including the impact of inflation. The test period for this case is calendar year 2021. And as a reminder, the test period is generally updated during the case to a point closer to the decision. We've included an estimate for that true-up in our overall request.
We have been working with other parties in the case to develop a procedural schedule for consideration by the Missouri PSC. The company continues to advocate for an accelerated schedule given the recency of our last fully litigated case. We should note that schedule by mid-May.
Turning to overheads. The Missouri PSC originally ordered that capitalization of nonoperational overhead cease starting with the effective date of the order, which was December 23, pending a study and audit by the commission staff to determine our compliance with the first uniform system of accounts. I would note that the prudency of these overhead costs were never questioned or challenged. The study has been completed and staff submitted its report on March 18.
The report recommended that Spire Missouri be allowed to defer the overheads in question into a regulatory asset to be recovered in a future rate proceeding. On April 13, the commission issued an order authorizing accounting treatment for those costs. As I just described, recovery of overhead is a major part of the revenue request in our 2022 rate case.
Overheads are split into 2 buckets if you will. There are amounts that are to be capitalized to plant in accordance with the study, and there are amounts that are expected to be expensed. Based on the orders we have received from the Missouri PSC related to both buckets, these amounts are deferred into a regulatory asset starting December 23 of last year.
As this table shows, the study-based capitalized amount to be deferred in fiscal year 2022 are expected to total $21 million, including $6.6 million deferred in our second quarter. For overheads that will no longer be capitalized based on the study, the costs are expected to total $15 million for FY '22 with $5.9 million already booked in Q2.
I would like to also highlight that the Missouri Public Service Commission recently approved an interest revenue increase of $8.5 million effective May 7, including in this order is $5 million of overheads that were deferred as part of that settlement. So we have these overhead costs identified and compartmentalized with the last step remaining to receive final clarification from the commission on how and when these costs will be recovered from customers. That will be addressed in the context of this rate case. With these actions, we're taking positive steps towards regaining momentum in Missouri.
Now I'll pass the call back to Steve Lindsey.
Thank you, Scott. Let me turn to an update on our capital expenditures program. Spire's planned spend continues to be focused on our gas utilities with most of the dollars earmarked for upgrades to our distribution network through pipeline replacement as well as new business. For the first half of fiscal 2022, our CapEx totaled $276 million with $265 million dedicated to our gas utilities. We invested nearly $130 million in infrastructure upgrades and $67 million for new business.
Another important aspect of our spend, as we've noted, is for technology. We've invested tens of millions of dollars for the purchase and installation of advanced meters this year, continuing our program that's been underway for several years. In fact, through the end of April, we've installed more than 193,000 ultrasonic meters across our utilities since the program began.
There are many benefits associated with newer meter technology for both our customers and our utilities. For example, the new meters provide auto shut off to enhance safety, and they're more reliable, more accurate and provide enhanced data that can be used to better serve our customers.
Our forecast for this year has been revised to $540 million from $570 million previously. The reduction largely reflects that about $21 million of overhead costs will be deferred into the regulatory asset, as Scott Carter noted earlier.
Our 5-year capital plan through 2026 remains $3.1 billion with more than 98% to be invested in our utilities. Again, the focus is on our long-term pipeline replacement programs which have good recovery mechanisms plus new business, technology and innovation. This investment drives annual rate base growth at 7% to 8%.
Next month, Spire will publish its fourth annual report on sustainability reflecting our continued progress in measuring performance and impact as we strive to become more sustainable. In that regard, I'm pleased to note that with our 2021 report, we will be nearly 100% compliant with the Global Reporting Initiative, or GRI, disclosures and will be including full reporting on the metrics related to our industry subcategory for the Sustainability Accounting Standards Board, or SASB reporting framework.
Let me cover a few highlights of the report, starting with protecting the environment. As the top chart on this slide shows, in 2021, our Gas Utilities achieved a 46% reduction in methane emissions since 2005, meeting our target for the year. Much of the credit for achieving the reduction goes to our pipeline upgrade program, but we also have other initiatives such as damage prevention programs, pipeline safety management systems, distribution integrity management programs that specifically target leak production. Over the last 5 years, we reduced our leaks per 1,000 system aisles by over 2/3.
We've enhanced our environmental focus, establishing an internal team to oversee our commitment. The team has already successfully created a baseline for Scope 1 and 2 emissions. Our sustainability report also highlights how we care for people. This includes further strengthening our safety culture for the benefit of our employees and those they serve.
Our employee safety, as measured by the OSHA DART rate, continue to improve in 2021, representing a more than 50% decline in the rate of employee injuries over the past 5 years. At the same time, we're focused on building a greater diversity across our company, including our workers as well as suppliers, continue to expand our outreach activities to support our customers and our communities.
Over the year, Spire has built a reputation for strong corporate governance. We further enhanced our governance by formally assigning oversight for sustainability to committees of our Board of Directors. I would note that the Spire Board continues to be independent, diverse and highly qualified.
Let me conclude my remarks with a status update on the Spire STL Pipeline. As you'll recall, early last December, the pipeline was issued a new open-ended temporary operating certificate by the firm. This was a timely and important action that provides certainty of gas supply for the St. Louis region during the winter. It also allowed the pipeline to stay in operation indefinitely while the FERC continues to address a new permanent certificate as part of the remaining process that's underway. Remand will include an environmental impact statement, or EIS, to be prepared by the FERC. The EIS is supplemental to the environmental assessment completed as part of the original certification for the project. Based on expected issuance of the EIS late this fall, we expect the remand to conclude in early 2023.
With that, I'll turn it over to Steve Rasche for a financial review and update. Steve?
Thanks, Steve, and good morning, everyone. Let's start with a brief review of our results for our second fiscal quarter. We posted net economic earnings of $181 million or $3.42 per share. Compare this to the prior year income with a reminder that this time last year, we were dealing with the unusual, perhaps once-in-a-lifetime event, Winter Storm Uri. Isolating these impacts as best we can, our current year earnings would have been nearly $175 million, up $4.6 million or $0.09 a share from last year.
Let's look at the results at our business segments. Gas Utilities had earnings of $169 million, $9.5 million ahead of last year as growth from new rates in Missouri and Alabama more than offset the benefits of Winter Storm Uri last year that did not recur. We also saw a continuation of warm weather, especially in Alabama, where temperatures were roughly 16% warmer than normal compared to the return of more normal temperatures in Missouri. As a reminder, while we do have weather mitigation in our residential loan, no mitigation mechanism is perfect, and the timing of temperature changes as well as lower commercial demand did adversely impact us this quarter, especially in the Southeast.
Gas Marketing posted earnings of $14 million, down significantly from last year, as expected, given the tough comp from Uri. I would point out that current quarter earnings do include the benefit of favorable resolution of customer disputes totaling just over $6 million after tax. Overall market conditions have remained challenging this year as we have not seen wider basis differentials or storage spreads despite higher and more volatile commodity costs.
Looking at a few other variances here on Slide 12. Operation and maintenance expenses were lower across the board. Gas utility expenses as reported were equal to last year. However, after removing Missouri regulatory adjustments and the reclassification of pension costs and deferral, as outlined here on the slide, O&M costs were $5 million below last year.
Higher marketing and other O&M costs were lower due to principally Winter Storm Uri expenses incurred last year. We are also seeing higher depreciation and property tax expenses consistent with our utility rate base growth.
Turning to our outlook. We continue to be confident in our long-term growth prospects, driven by our $3.1 billion capital spending plan over the next 5 years. Our per share earnings growth target remains 5% to 7% and while our current year will fall short of that target due largely to regulatory headwinds, we do anticipate growth above the range in fiscal year 2023 and '24, assuming a reasonable outcome in the Missouri rate case. And we see continued growth within the target range beyond 2024, driven by our projected rate base growth.
As Scott outlined earlier, with the deferral of our Missouri overhead cost, we have refined our fiscal year '22 earnings target to a range of $3.75 to $3.95 per share. Here's how we arrive at that range. As we discussed last quarter, let's start with our run rate from 2021 after removing our estimate of Uri benefits and regulatory adjustments. Later, we ended the reduced Missouri rate of return and then add back annual growth expectations consistent with our long-term targets. Finally, adjust our forecast based upon our first half results. We reduced Gas Marketing's forecast by $0.05 per share, given the less than favorable market conditions with perhaps the opportunity to reclaim some of that shortfall given continued volatility demand from LNG and gas-fired generation this summer.
And while our Gas Utilities delivered a strong quarter, we have lowered our forecast to reflect the impacts of 3 headwinds: first, warmer weather in the Southeast; second, a higher run rate of depreciation and property tax expenses, offset in part by continued cost control on the O&M line; and finally, recognition of the cadence or seasonality of rate recovery, which has pushed more of our recovery to the winter heating season just ended and out for the back half of the year.
And while we may see some utility pickup from cooler weather that we've seen so far this spring, it's unlikely to offset the year-to-date shortfall. Combination and interplay of these factors are reflected in our updated guidance range, which we also narrowed given the reduction in regulatory uncertainty in Missouri.
Turning briefly to our financing guidance. Our liquidity remains solid and our long-term financing plan remains largely unchanged. I would note that our Board reauthorized our ATM program at $200 million for the next 3 years. And we'll continue to use this program to finance our capital needs while maintaining a balanced capital structure and support our credit metrics.
With that, let me turn it back over to you, Steve.
Thank you, Steve. In summary, we are on track with our plans for the year as we work to resolve regulatory matters in Missouri via a new general rate review. We're focused on achieving a fair and reasonable outcome. We remain committed to our capital plan and advancing our ESG profile. And we are very much looking forward to connecting with you in person at the AGA Financial Forum of Miami, a little less than 2 weeks.
Thank you for your continued interest and investment in Spire, and we're now ready to take your questions.
[Operator Instructions]. Our first question comes from Shar Pourreza with Guggenheim Partners.
It's actually Jamieson Ward on for Shar. So having seen the results of the staff report and then, of course, the audit come out, can you just touch on the overhead cost allocations and your guidance for the year? When you said a moment ago that your guidance update included a reduction to regulatory uncertainty in Missouri, does that mean that whatever portion of the $0.20 to $0.35 you excluded from 2022 guidance back in November has now been fully included going forward? Or should we anticipate any further adjustments?
Jamieson this is Steve. Great question. No, as far as we're concerned, based upon the feedback and guidance we've gotten from the regulators in Missouri, we're deferring all those costs, so they wouldn't hit the P&L. So the range does not include any impact. And as Scott Carter mentioned, we'll address that in the rate case that we filed not too long ago.
Perfect. Very clear. Understood. And then a second question. We've seen some other utilities in Missouri reach some reasonable outcomes in recent rate cases, which is promising given European case here, an ongoing one. Have you been perhaps looking at some of the strategies or approaches that the other companies might have taken? And do you think there's anything that you might perhaps approach differently or things you might incorporate in order to ensure that you get a result more consistent with what you're looking for and what some of those companies have achieved this time around?
James, this is Scott Carter. You certainly be a student of what's going on in the jurisdiction and regulation more generically. But the short answer is yes. You think about the timing of the last case. So a lot of the information in a rate case to audit is already there. Certainly looking at the way we index ourselves relative to the outcomes in those cases, and then posturing our case around previous accelerated cases in Missouri. So we've taken all that into account.
We'll continue to work with parties. I think we've gotten good encouragement from the commission to move this thing along and reach a reasonable resolution, and we'll continue to work that through this case.
Our next question comes from Richard Sunderland with JPMorgan.
Maybe starting with this $0.20 impact of the utility. Could you break that down to the component pieces, I guess, really in terms of weather versus the depreciation and property taxes?
Yes. No, Rich, it's Adam. Yes, I think a large portion of that is -- as Steve mentioned, is weather-related in the Southeast, in particular. We did see more normal weather in Missouri this last quarter, but a lot of that was Southeast related. I don't have the property tax component of that handy, but we can get that back to you.
Just thinking of the weather impacts here, I mean, is this something in terms of the imperfect weather mitigation and then the commercial usage that you expect to remain in the results going forward? Or it's something you can address at some point in time, curious about just your thinking there, if it's fair to think about this as versus normal, meaning fully reverting next year? Just any of those thoughts at a high level.
As Steve mentioned, the -- while we have weather normalization, and this is similar to a lot of our peers, it doesn't cover every class of service and so there is some variability still left in there. It is effective as designed, but there is some variability in it when you have a warmer or colder season.
And Richard, the way that the calculation works in Alabama -- it's Steve -- it's really based upon individual temperature as it plays out each day. So although the average temperature overall might be minus 16%, which it was for the quarter versus normal. If we had 2 cold days and then a warm day and a cold day and a warm day, it's the interplay of the individual days that causes that calculation to be ineffective.
We've seen that cut both directions, depending on which year. This year just because of the way in which the temperatures played out, it actually cut against us. But right where Adam, is that overall, the mechanism is largely effective. We just have to deal with the intricacies of the weather we've dealt with this year versus what a more normal cadence of weather going through the Southeast would generate.
Got it. That's helpful. And maybe turning to the rate case real quick. You alluded to this briefly before in terms of the appetite for an accelerated schedule. Could you just speak a little bit more to kind of what you're hearing from folks on that matter, given that you were in a rate case last year.
And then I guess thinking kind of similarly on that front, how accelerated could a "accelerating" schedule be?
Yes, Richard, it's Scott Carter. I'll take that. And I mentioned that we've been trying to work with parties on that acceleration. And again, the commission had mentioned this in their order as well as from the bench, the desire or the interest and the possibility of moving this case along more expeditiously.
Keep in mind, Missouri has one of the longer review windows in the country. And so with the recency of the case, we really do feel like that that process can move along quicker. So the question is, as far as too slowly comes into twofold, can we accelerate the schedule? And then -- yes. So if not, how willing are other parties come to the table to reach resolution in a more timely manner. So those are the 2 elements that we're working one of the other.
There's some resistance to accelerating the schedule, just frankly from people giving themselves full opportunity to fully consider a case. I mean Missouri is kind of built around that 11-month schedule, but I think there is an interest of parties to accelerate resolution of this. So we'll work both of those and really looking to try to land this prior to the end of calendar year.
Our next question comes from Julien Dumoulin-Smith with Bank of America.
So just to clarify, the capitalized overhead has an estimated $20 million to $30 million impact to expenses annually, as you guys have said. So on top of the rate as to return to kind of a more normalized structure, et cetera, et cetera, you need to seek recovery of these further costs through cost of service. I know the commission has some discretion, but how are you thinking about the impact to customer bills mechanism? And frankly, any offsets that further impact too?
Yes. Thanks, Julien. It's Scott Carter. That's been kind of the heart of what we're trying to address around this issue. We follow the capitalization methodology that's been accepted by Missouri for decades. And the benefit that that provided was to lower the current period cost and then build that into capital. We do a lot of internal capital work, so it made sense to follow that.
And frankly, the outcome of that study and the new way that the commission staff and the commission want to look at it, accelerate the cost and accelerate that cost recovery. So you're right about the 2 components. One is the shift. So we're going to have to reset something north of $20 million just to get the $20 million to $23 million just to get the period recovery, and then with the deferred asset, we're building up a backlog. And so every day that goes by, and again, this is another reason to accelerate the case to get consideration. The bigger that backlog is, the bigger the recovery has to be on it.
So the issue that will play out there, I think, is the timing of it. So we've put in the case a 2-year recovery window for that to try to match it up to the way they want to treat it from a current cost standpoint. We can adjust that amortization period and that will adjust the rate impact to customers. So we'll work through that in the pendency of the case.
Got it. Is there an ability to settle this case in to or sort of a holistic way to address some of these various issues here?
Yes. We're fully hopeful of that. Again, we just came through a full case. There's not a ton of new issues. The roll forward is pretty simple and straightforward. The business hasn't changed. And I think everyone understands the importance of these issues. So I believe that is the case. Now obviously, all the parties have to come to the table in good faith and go through that process. We believe that opportunity exists, and we will seek that opportunity as we proceed.
Got it. Excellent. And just last little detail here. You were able to collect $6 million from customer claims falling early here in 2Q. What is the remaining customer claims that are outstanding? And presumably, this is actually outside the guidance, right?
You're talking about the resolution of some disputes at marketing?
Yes. No, at this point, Julien, as we do at every point, we make our best estimate of what we believe the actual settlement will be. And a couple of those things traded in our favor this quarter. But what's left, we think is a fair estimate of what is left in -- Ideally, we'd like to get that all resolved. We'd love to have it all resolved since we're now 1 year plus, but those things take their own path and their own timing. So no other adjustment is factored into the forecast nor would we expect factored to be any going forward.
Right. So any further resolution will be upside?
If it's result outside of what our estimate is.
[Operator Instructions]. Our next question comes from Christopher Jeffrey with Mizuho Securities.
Just wanted to ask about higher gas costs and potential impact on customer bills for the upcoming heating season. And if you could remind us the mechanism for recovering, maybe some of the bad debt expense related to the costs and what the plan would be for that?
Chris, I'll -- Scott Carter. I'll start and then maybe Adam has some add-ons to it. But gas costs are obviously higher. We do have a mechanism to have some mitigation of that through physical storage, which creates a hedge opportunity and then actually having some instruments in place in Missouri to mitigate that and do some forward purchases that kind of do dollar cost averaging, which helps bring that down.
So we're working through that. It is a concern as we go into the winter to make sure we maintain that affordability while we're still dealing with Winter Storm Uri cost. And so we think that's all in the range of the manageability, but it is a concern that we'll continue to focus on and look for ways to mitigate that overall cost impact.
As far as the way it works on bad debt, we try to factor that in as the gas costs have gone up. We've been monitoring the bad debt components, and we seem to be staying in a manageable range with that. We haven't seen a huge uptick in the arrearage. So watching that obviously. But again, it seems to be in the range of manageability at this point.
And the one thing I'll add -- this is Steve Lindsey, is that in Missouri, we did go to the commission and proposed a 3-year deferral of the Uri costs, and that was approved. So that will help spread some of the costs over a longer period of time, which I think will help ease the commodity portion of the customers' bill.
Got it. But just to clarify the -- any bad debt related to gas would have to be settled at the next ISRS or rate case?
So in Missouri, it said the rate case, and so we'll have the opportunity to update that. Alabama has more of a real-time recovery mechanism around this RSE setting. So that gets adjusted annually, and we see those true-ups, so it's more of a real-time opportunity to adjust. So again, it should be in the range of the manageable and not something that's creating an outsized risk for us on that front.
Got it. And then I think we'll probably see more in the Q, but just curious as far as the $50 million to $100 million in equity financing for '22, with the shares seeing a bit more strength recently, just the cadence around that and if there's any desire to kind of pull through from future years as well?
Yes, Chris, you're right. We have seen some strength in the share price. We -- our intent, as we've said, is to use our ATM program, which was just reauthorized and I think you can expect us to continue to do that periodically through our forecast period.
And Chris, we raised just over $23 million worth of equity through the ATM program in the first quarter. You'll see that in the Q that we'll file as soon as the call is over.
Our next question comes from Vedula Murti with Hudson Bay Capital.
Can you hear me?
I want to make sure I kind of understand in terms of the treatment of capitalized overheads based on the audit. How much does the 2022 earnings per share benefit in terms of how much accrues to the income statement as a consequence of the audit and the outcome there?
Zero because all of it has now been deferred on the balance sheet.
Okay. So would you say because actually, if we had the $3.70 to $4 original guidance. The inference was with a positive outcome on the rate accounting that $0.20 to $0.35 or some portion of that would be coming back to you and would you look for doing the income statement, which you're saying that that didn't happen?
That's true. And there's as much art as there is science in the significant uncertainty that we were dealing with when we put our original range out, and truth be told, and you're seeing it, there wasn't -- we at the top end of the range, we anticipated that the NIC would be minimal at the bottom end of the range, it would be more significant. And we had to make an estimate on what we thought of that pot of either $0.20 to $0.35 was going to be impacting us.
But I think that the key is if you go back to the slide deck and you look at the waterfall, you look at the results of operation in our forecast for the year, and we brought down our forecast from our own expectations against the normal growth and marketing a little bit, but really at the utility driven by a combination of what's happening down in Alabama, which is probably 1/2 to 2/3 of the total reduction, what's happening to Missouri from a cost run. And then you have to play that against the recovery mechanism in Missouri because the recovery mechanism is so much more seasonal. Our biggest recovery periods are behind us in the rearview mirror, those costs flat line, especially depreciation and property taxes through the year.
So it's really the interplay of those, and it's the development of the actual businesses for this year against that original forecast, which kind of bridge the gap between the math you're doing in your head and where our forecast is now.
Okay. Because maybe I missed it, but I think in maybe some private conversations, there was the potential that as a consequence of the audit and the proof from PSC of this overhead that in fact, they would be restored to the income statement rather than being -- rather than going to the balance sheet. Was that something that kind of evolved over the period before final conclusion?
Well, if you think about it in those mechanical terms, the risk of the overheads went away. So that got added to the range and the operating results and prospects for the year took away from the range. So the answer is yes and yes.
So that means everything else being equal come next year with rate case, you also will then, depending on the outcome of rate case, be -- start being able to realize again not including the income statement, the historical treatment of the capitalized overheads, correct?
Yes. And that will all be dependent upon, as Scott Carter mentioned earlier, the timing of the rate case when new rates go into effect and what's the recovery mechanism that will ultimately be included in either the settlement or the full case once we get through that process.
[Operator Instructions]. Our next question comes from Andrew Levi with Hite Hedge.
Very simple question. Just your thoughts on the SGI transaction? And how it may or may not relate to you guys?
Yes. Andy, we were well aware of the SGI transaction and also the valuation that private buyers are putting on the announced deals versus what we're seeing in the public market. I think we're encouraged by the fact that -- and especially if you look at it, I know you do, the trading ranges for us and our peers over the last 2 to 3 months that we're now bridging that gap between what we believe is an unfair valuation in the public markets and where the private markets would value.
So we -- I won't speak specifically to the SGI transaction that's -- there's a lot of moving parts underneath that headline number. But we very much appreciate the affirmation from the private markets on the underlying value of our sector and our company, but also the long-term value of natural gas. And I think that's the other thing that the private side is seeing and the public side is now seeing because let's face it, 6 or 8 weeks ago, energy security wasn't on the top 5 list of things that countries or companies were thinking about. It has clearly come to the front page as a result of what we're seeing over in Europe.
And I -- and we've known that for many years of being in the industry. And although I would prefer to have gotten that recognition through more normalized means than a conflict over in Europe. It does point out that, let's face it, the future for power worldwide and in North America is going to be a balanced portfolio of all sources, and that includes natural gas.
Let me ask you a follow-up there. So if there was a fund that was out there that was in interest in Spire and it makes sense for your company, your shareholders, your customers and your state, and the premium was attractive. Would that be something that you think the Spire Board would entertain?
Well, that's a theoretical question, Andy. And you know, you've been doing this for an extremely long time, as Scott Dudley is smiling right now. As a public company, we always have to be extremely educated on what our value is and what's the value of our underlying plan and ability to grow and drive value to our shareholders. And any Board, whether it be ours or any public company board, would have to evaluate their options because that's their charter as members of the Board.
So I -- we're not aware of anything in domain of your specific question, but I can assure you we are very well-versed in what the values of our business are under the plan that we have and will have going forward to continue to grow and provide shareholder value.
[Operator Instructions]. This concludes our question-and-answer session. I would now like to turn the conference back over to Scott Dudley for any closing remarks.
Thank you all for joining us today. We'll be around throughout the day for any follow-ups. And again, we look forward very much to seeing all of you down in Miami in less than 2 weeks.
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