Business context and reporting period
Spire Inc. (formerly The Laclede Group) filed this combined Form 10-K for the fiscal year ended September 30, 2016—not fiscal 2015 Q4. Spire is a regulated natural-gas utility holding company with a smaller non-regulated Gas Marketing business. Its utilities serve Missouri, Alabama and Mississippi; earnings are seasonal and typically concentrated in the November–April heating season.
On September 12, 2016, Spire acquired EnergySouth, parent of Mobile Gas and Willmut Gas, for $319.7 million cash net of cash acquired and debt assumed. The acquired utilities’ results are included only from the acquisition date. Spire also issued 2.185 million shares and $165 million of notes to help fund the transaction.
Key financial results
Unless noted otherwise, figures are in millions of dollars. Fiscal 2016 is compared with fiscal 2015.
| Metric | FY2016 | FY2015 |
|---|---|---|
| Operating revenue | $1,537.3 | $1,976.4 |
| Operating income | $282.3 | $272.5 |
| Net income | $144.2 | $136.9 |
| Diluted EPS | $3.24 | $3.16 |
| Net economic earnings (non-GAAP) | $149.1 | $138.3 |
| Net cash from operating activities | $328.3 | $322.4 |
| Capital expenditures | $293.3 | $289.8 |
| Total assets | $6,077.4 | $5,290.2 |
- Consolidated operating margin, a company-defined non-GAAP measure, increased to $864.3 million from $857.2 million. Operating margin is not the same as GAAP operating income.
- Revenue fell $439.1 million, primarily because lower gas prices passed through to customers and lower utility sales volumes reduced reported revenue. Utility operating revenue declined $436.4 million, while lower gas costs also reduced gas expense.
- Net income increased $7.3 million. Utility net income rose $5.7 million, helped by higher Missouri infrastructure surcharges and favorable Alabama regulatory adjustments; Gas Marketing net income rose $3.0 million. Other activities recorded a larger loss, chiefly from higher interest expense.
- Weather was materially warmer: temperatures in Laclede Gas and Alagasco service areas were 19.7% and 30% warmer than the prior year, respectively. The utility segment’s lower-volume impact on operating margin was $18.0 million.
- Operating cash flow less capital expenditures was approximately $35.0 million before acquisition spending. Investing cash outflow was $612.7 million, including $317.7 million for EnergySouth; financing cash inflow was $275.8 million.
- At year-end, cash was $5.2 million. Short-term borrowings were $398.7 million; long-term debt, including current maturities, was $2,083.7 million. Total indebtedness was reported as $2,482.4 million. Spire had $150 million of its own credit-line capacity, alongside $450 million for Laclede Gas and $150 million for Alagasco; year-end utilization and seasonal working-capital needs should be considered in assessing liquidity.
- Spire’s equity was 49.1% and long-term debt 50.9% of capitalization. Annual common dividends declared rose to $1.96 per share from $1.84.
Material changes versus the prior comparable period
- EnergySouth added Mobile Gas and Willmut Gas, expanded the utility customer base, and contributed $3.3 million of revenue and $2.2 million of operating margin after acquisition. Its brief post-close contribution is not representative of a full-year run rate.
- Spire’s share count increased following the 2.185 million-share offering used in part to finance EnergySouth; year-end shares were approximately 45.7 million versus 43.3 million a year earlier.
- Goodwill increased to $1,164.9 million from $946.0 million, including $218.9 million from EnergySouth. The EnergySouth goodwill allocation and certain acquired asset and liability values remained provisional.
- Operating income improved despite lower revenue, reflecting gas-cost pass-through effects, slightly higher operating margin and lower other operating expenses; depreciation and amortization increased by $6.7 million with continued infrastructure investment.
- Spire reported a $6.0 million Alagasco legal-settlement gain in other income, offset by a corresponding revenue adjustment, with no net-income effect.
Outlook, commentary, risks and contingencies
- Management estimated fiscal 2017 capital expenditures of approximately $410 million, including approximately $370 million for gas utilities, to support infrastructure upgrades and EnergySouth investment. This is a forecast, not a guarantee.
- Management said it expected adequate access to capital markets and sufficient resources for anticipated needs, and expected to generate or refinance funds to meet debt service. The filing provides no formal earnings guidance.
- Rate recovery and regulation are central risks: purchased-gas adjustments and Alabama rate mechanisms generally pass gas costs through to customers, subject to regulatory review. Missouri ISRS appeals and a pending surcharge request could affect recovery; Alagasco recorded RSE reductions and filed a further $1.3 million reduction for rate year 2017.
- Key exposures include unusually warm weather, customer conservation and fuel switching, gas supply or pipeline disruptions, commodity-price and collateral volatility, interest rates, refinancing and credit ratings, acquisition integration and expected savings, regulatory decisions, and pipeline safety, cybersecurity and environmental obligations.
- Spire reported $2.5 billion of contractual obligations, including $2.1 billion of debt principal and $1.6 billion of natural-gas purchase obligations. Natural-gas contract costs are generally recoverable through utility tariffs, subject to prudence review and timing differences.
- Environmental matters include former manufactured-gas-plant sites, a Superfund-site inquiry involving Alagasco, and ongoing remediation work. Mobile Gas also faces three remaining lawsuits related to an alleged 2008 odorant spill; the filing says management does not expect these matters to have a material impact, but outcomes remain uncertain. Separately, Alagasco faces lawsuits arising from a 2013 apartment-complex incident that caused a fatality and injuries.
- The Spire STL Pipeline was in FERC pre-filing review; it was proposed as a 70-mile project capable of delivering up to 400,000 dekatherms per day. Construction, permitting, cost and timing remain subject to approvals and execution.
- Management and Deloitte reported effective internal control over financial reporting; the assessment and audit excluded EnergySouth because of its recent acquisition. Deloitte issued an unqualified opinion on Spire’s consolidated financial statements.
Important facts for investors to verify
- Review the full-year pro forma effects and integration progress for EnergySouth, including provisional purchase accounting, goodwill impairment testing and actual cost savings.
- Track Missouri surcharge appeals and the pending ISRS request, Alabama RSE updates, and any changes to authorized returns or cost-recovery mechanisms.
- Assess debt maturities, seasonal short-term borrowing, credit-line availability, ratings and the planned financing needs for capital spending; $250 million of Spire debt was classified as current and due in 2017.
- Compare future weather-normalized utility margins and volumes with FY2016’s unusually warm conditions, and assess whether regulatory mechanisms continue to mitigate weather effects.
- Monitor capital spending, FERC approvals and execution risks for the Spire STL Pipeline, and evaluate whether projected infrastructure investment earns timely recovery in rates.
- Follow litigation, environmental remediation, pension funding and other contingencies for developments that could change the company’s stated assessment of materiality.
- When evaluating performance, distinguish GAAP net income and EPS from management’s non-GAAP net economic earnings and operating margin, including the adjustments and share-count exclusions used in those measures.