SPIRE INC. — Form 10-Q Summary
Reporting period: Quarter and six months ended March 31, 2017; filed May 3, 2017. Although the request metadata says “2016 Q2,” the filing covers fiscal 2017 Q2. This combined filing includes Spire Inc., Laclede Gas Company and Alabama Gas Corporation. Figures below are in millions of dollars unless noted.
Business context and reporting period
Spire is a regulated natural-gas utility holding company with Gas Utility and Gas Marketing segments. Utility earnings are seasonal and typically concentrated in the November–April heating season. EnergySouth, acquired September 12, 2016, is included in current-period results but not the full prior-year comparison, affecting comparability.
Key financial metrics
| Spire consolidated | Three months 2017 | Three months 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Operating revenue | $663.4 | $609.3 | $1,158.5 | $1,008.7 |
| Operating income | $180.4 | $167.7 | $269.5 | $254.7 |
| Net income | $108.0 | $100.8 | $153.2 | $147.7 |
| Diluted EPS | $2.36 | $2.31 | $3.34 | $3.39 |
| Net economic earnings, non-GAAP | $109.0 | $103.5 | $156.5 | $148.6 |
| Contribution margin, non-GAAP | $334.1 | $312.0 | $578.1 | $538.0 |
- Cash flow, six months: Operating cash flow was $226.1, versus $243.0; capital expenditures were $187.3, versus $121.8; investing cash outflow was $182.9. Cash increased $14.4 to $19.6.
- Debt and liquidity at March 31, 2017: Long-term debt, net of current portion, was $1,925.3; commercial paper/short-term debt was $567.4. Cash was $19.6. A syndicated revolving credit facility provides $975.0 of aggregate commitments and expires in December 2021. Debt was 57% of capitalization under the facility’s covenant definition, below its 70% limit.
- Margins and segments: Gas Utility contribution margin rose to $334.0 for the quarter and $577.2 for six months. Gas Marketing recorded a $1.0 quarterly net loss and a $1.8 six-month net loss.
- Other reported entities: Laclede Gas net income was $57.0 for the quarter and $95.0 for six months; Alagasco net income was $47.6 and $57.9, respectively.
Material changes versus comparable periods
- Quarterly Spire net income increased $7.2; six-month net income increased $5.5. Utility earnings growth, including EnergySouth, was the main driver.
- Quarterly revenue rose $54.1 and six-month revenue rose $149.8. The acquisition contributed materially; utility gas-cost recoveries also lifted reported revenue but generally flow through expenses and do not directly increase operating income.
- Six-month diluted EPS declined to $3.34 from $3.39 despite higher net income, reflecting higher weighted-average shares, including 2.185 million shares issued in May 2016 to help finance EnergySouth.
- Weather constrained utility results: the Missouri service areas were 23% warmer than normal in the quarter; Alagasco’s area was 37% warmer than normal. Gas Marketing results weakened because of storage-optimization timing and lower market volatility.
- Operating cash flow fell $16.9 year over year, while capital expenditures increased $65.5. Management attributed operating cash flow variation mainly to working capital, weather and gas prices.
Outlook, commentary, risks and unusual items
- Management expected fiscal 2017 capital expenditures of approximately $445, including approximately $415 for the Utilities, focused on infrastructure upgrades and EnergySouth.
- Management stated that Spire and its utilities expected adequate access to capital markets and sufficient resources for anticipated needs. Credit ratings remained investment grade, but are subject to agency review.
- After quarter-end, Laclede Gas filed Missouri rate cases seeking net base-rate increases of $28.5 for eastern Missouri and $37.0 for western Missouri. The filing says new rates are required within 11 months; no procedural schedule had been set.
- Spire STL Pipeline sought FERC authorization for a proposed 65-mile pipeline. The project remained subject to regulatory review and interventions; an amended route application was filed April 21, 2017.
- Spire redeemed $250.0 of floating-rate notes and issued $100.0 of 3.93% senior notes due 2027 during the quarter. On April 3, 2017, it issued approximately 2.5 million shares under equity-unit purchase contracts, received approximately $142.0 net proceeds and used them to repay short-term debt.
- Quarterly pension accounting included $11.5 of Laclede Gas settlement loss and $0.4 of Alagasco settlement loss; the filing says settlement gains and losses were offset by regulatory adjustments and did not affect income.
- Risks include weather and catastrophic events, gas-price and supply volatility, regulatory decisions, access to financing, litigation, environmental obligations and execution of acquisitions. Environmental matters include former manufactured-gas-plant sites, an EPA CERCLA matter involving Alagasco, and Mobile Gas odorant-spill litigation; management did not expect these matters to materially affect results, though some exposures remain uncertain.
Important facts for investors to verify
- How much reported growth reflects EnergySouth versus underlying comparable utility performance.
- Progress and final outcomes of the Missouri rate cases, ISRS proceedings and Spire STL Pipeline FERC review.
- Capital spending, operating cash flow and short-term borrowing needs through the remainder of the heating season and fiscal year.
- Gas Marketing performance and exposure to market volatility, storage optimization and counterparty credit risk.
- Potential changes in environmental, litigation and pension exposures, and whether management’s estimates remain supportable.