Business context and reporting period
Spire Inc. is a regulated natural-gas utility holding company, with Gas Utility and Gas Marketing segments. This combined Form 10-Q also presents separate filings for Laclede Gas Company and Alabama Gas Corporation. The reporting period ended June 30, 2017: the three months are the fiscal third quarter, and the nine-month results cover the year to date. Although the request metadata says “2016 Q3,” the filing itself is for 2017 Q3. Results include EnergySouth, acquired in September 2016, so comparisons with 2016 are not fully like-for-like. The interim financial statements are unaudited; utility earnings are seasonal and generally concentrated in November-April.
Financial performance and condition
| Spire consolidated | Three months ended June 30, 2017 | Three months ended June 30, 2016 | Nine months ended June 30, 2017 | Nine months ended June 30, 2016 |
|---|---|---|---|---|
| Operating revenue | $323.5 million | $249.3 million | $1,482.0 million | $1,258.0 million |
| Operating income | $50.3 million | $35.3 million | $319.8 million | $290.0 million |
| Net income | $21.7 million | $10.7 million | $174.9 million | $158.4 million |
| Diluted EPS | $0.45 | $0.24 | $3.75 | $3.60 |
| Dividends declared per share | $0.53 | $0.49 | $1.58 | $1.47 |
- Quarterly net income rose $11.0 million; management attributed the increase to $5.1 million higher utility earnings, a $4.7 million improvement in Gas Marketing, and $1.2 million lower expenses in Other. Nine-month net income rose $16.5 million, with utility growth more than offsetting lower Gas Marketing earnings.
- Management’s non-GAAP net economic earnings were $21.6 million, or $0.44 per diluted share, for the quarter, versus $14.6 million, or $0.33, a year earlier. For nine months, they were $178.1 million, or $3.82 per diluted share, versus $163.2 million, or $3.74. These measures exclude specified energy-transaction timing effects and acquisition, divestiture, and restructuring items.
- Reported revenue includes gas-cost recoveries passed through to customers and can fluctuate with commodity prices. Revenue growth therefore should not be read as equivalent to margin growth. Gas Utility contribution margin, a non-GAAP measure, increased $23.7 million in the quarter and $73.3 million year to date; EnergySouth contributed $12.6 million and $59.5 million, respectively.
- For the quarter, Laclede Gas net income was $15.5 million versus $13.9 million; Alagasco net income was $7.4 million versus $4.0 million. Favorable Alagasco regulatory adjustments and Missouri infrastructure surcharges supported results; warmer-than-normal weather constrained utility margins.
Cash flow and balance sheet: In the nine months, operating cash flow was $320.7 million versus $356.9 million; capital expenditures were $298.6 million versus $195.3 million; investing cash use was $293.7 million; and financing cash use was $23.9 million. Cash ended June 30 at $8.3 million. Management cited working-capital fluctuations for the lower operating cash flow and said higher capital spending reflected infrastructure investment and EnergySouth. At June 30, total assets were $6.298 billion, common equity $2.028 billion, long-term debt net of current portion $1.925 billion, and short-term notes payable $450.7 million. The $450.7 million of commercial paper was outstanding under a $975 million program. Total debt was 54% of capitalization under the credit-facility definition, below the 70% covenant limit. The $975 million revolving facility expires in December 2021. Cash was limited relative to short-term borrowing; the filing describes seasonal working-capital needs.
Material changes, outlook, risks and unusual items
- Drivers and weather: EnergySouth’s results were included in 2017 but not the comparable 2016 periods. Missouri and Alabama service areas experienced unusually warm weather; for the quarter, Missouri was 22% warmer than normal and Alagasco 30% warmer. Gas Marketing’s year-to-date results were affected by lower storage optimization following an unusually warm winter.
- Capital and financing: Full-year fiscal 2017 capital expenditures were expected to be approximately $445 million, including about $420 million for the Utilities. Spire redeemed $250 million of floating-rate notes and issued $100 million of 3.93% senior notes due 2027. It also issued approximately 2.5 million shares in April when equity units settled. Laclede Gas had committed to issue $170 million of first mortgage bonds by September 15, 2017, subject to the terms described in the filing.
- Rates and projects: Laclede Gas and MGE filed Missouri general rate cases seeking net increases of $25.5 million and $34.0 million, respectively; hearings were scheduled for December 2017, with a decision expected by February 2018. Spire STL Pipeline had filed for a FERC certificate and amended its proposed route; authorization and permitting remained outstanding. Alagasco’s RSE and CCM mechanisms affected current-period revenue and margin.
- Commitments and contingencies: Natural-gas storage, transportation and supply contracts had estimated minimum payments of $1.312 billion for Spire, $518.7 million for Laclede Gas and $296.5 million for Alagasco, with utility gas costs generally recoverable through regulatory mechanisms. Environmental matters include former manufactured-gas sites and an EPA Superfund-site PRP designation disputed by Alagasco. Mobile Gas also faced three remaining odorant-spill lawsuits involving about 270 plaintiffs, and Alagasco had lawsuits arising from a 2013 apartment-complex incident. Management did not expect these matters to have a material effect, but outcomes and potential future remediation costs remain uncertain.
- Other notable items: Pension lump-sum settlements produced $11.9 million of Laclede Gas losses and $0.4 million of Alagasco losses during the nine months; these were recorded with regulatory adjustments and did not affect income. No specific full-year earnings or EPS guidance is stated in the provided filing text. Management said investment-grade credit ratings remained in place and expected adequate access to capital, while noting ratings are subject to change.
- Risks highlighted by management: Weather and catastrophic events; gas-price volatility and related margin deposits; supply and pipeline availability; regulatory and legislative decisions; litigation and environmental obligations; access to capital and covenant compliance; customer retention and collections; and employee, pension and benefit costs. Management reported disclosure controls as effective; integration of EnergySouth’s controls was ongoing, and the acquired business was excluded from the stated internal-control assessment.
Important facts for investors to verify
- Confirm the filing period: the report is for the quarter ended June 30, 2017, notwithstanding the 2016 Q3 request metadata.
- Separate acquired EnergySouth contributions and gas-cost pass-through revenue from underlying utility margin when evaluating growth.
- Track the Missouri rate-case decisions, ISRS recovery, and Alagasco RSE/CCM adjustments and their durability.
- Monitor capital spending against the approximately $445 million fiscal 2017 estimate, funding needs, short-term borrowings, and debt-covenant headroom.
- Follow FERC review of the Spire STL Pipeline and developments in the environmental and personal-injury matters; the filing provides no clear quantified maximum exposure for these contingencies.