Business context and reporting period
Spire Inc. is a natural-gas utility holding company with regulated Gas Utility and non-regulated Gas Marketing segments; nearly all earnings are generated by Gas Utility operations. This unaudited Form 10-Q covers the quarter and six months ended March 31, 2018 (fiscal 2018 Q2). The request metadata says “2017 Q2,” but the filing itself is for 2018 Q2.
Results are seasonal, with earnings typically concentrated in the November–April heating season. The filing presents separate financial statements for Spire Inc., Spire Missouri Inc. and Spire Alabama Inc.; figures below are consolidated Spire unless identified otherwise.
Financial performance and position
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Operating revenue | 2018: $813.4 million; 2017: $663.4 million | 2018: $1,375.2 million; 2017: $1,158.5 million |
| Operating income | 2018: $141.8 million; 2017: $180.4 million | 2018: $246.9 million; 2017: $269.5 million |
| Net income | 2018: $98.2 million; 2017: $108.0 million | 2018: $214.2 million; 2017: $153.2 million |
| Diluted EPS | 2018: $2.03; 2017: $2.36 | 2018: $4.42; 2017: $3.34 |
| Net economic earnings, non-GAAP | 2018: $137.2 million ($2.83 per diluted share); 2017: $109.0 million ($2.38) | 2018: $195.1 million ($4.02 per diluted share); 2017: $156.5 million ($3.42) |
For the six-month period, operating cash flow was $309.6 million, investing cash outflow was $233.3 million, and financing cash outflow was $65.9 million. Cash ended at $17.8 million. Capital expenditures were $215.8 million in the first half.
At March 31, 2018, consolidated long-term debt was $2,073.9 million, current long-term debt was $105.5 million, and commercial paper/notes payable was $391.7 million. The $975 million revolving credit facility had no borrowings outstanding. Debt was 54% of total capitalization under the credit agreement definition, versus a 70% covenant limit. Reported equity was $2,153.5 million.
Management forecast fiscal 2018 capital expenditures of approximately $500 million, including approximately $425 million for the Utilities. The filing does not provide a specific earnings or EPS forecast.
Material changes versus the prior comparable period
- Quarterly net income declined $9.8 million and diluted EPS fell from $2.36 to $2.03. The main stated factor was a $23.6 million after-tax charge related to Missouri rate-case recovery disallowances; improved weather-related utility results, gas marketing and tax benefits partly offset it.
- Six-month net income increased $61.0 million, while non-GAAP net economic earnings rose $38.6 million. Colder weather versus the prior year and improved Gas Marketing conditions contributed; tax-law effects also materially affected reported results.
- The Missouri Public Service Commission disallowed certain recoveries. Spire recorded $38.4 million of pre-tax charges, primarily in O&M; management’s non-GAAP reconciliation excludes $30.6 million of specified long-standing pension and building-related items. Appeals were pending.
- Gas Utility revenue growth included higher gas-cost pass-throughs and usage; these items generally do not translate dollar-for-dollar into margin. Six-month contribution margin, a company-defined non-GAAP measure, increased $32.8 million.
- The Tax Cuts and Jobs Act lowered the federal corporate tax rate from 35% to 21%. Spire recorded deferred-tax and regulatory adjustments, including a $54.0 million net benefit to six-month GAAP income that was excluded from net economic earnings. Spire Alabama’s six-month net income fell to $6.0 million from $57.9 million, with tax expense of $83.7 million; this unusually large tax impact warrants review.
Outlook, commentary, risks and unusual items
- The Missouri rate order approved base-rate revenue increases, but reset annualized ISRS surcharges to zero. Tariffs took effect April 19, 2018; the combined adjustments included tax-related reductions and returns of excess deferred taxes to customers. Specified disallowed costs were written down, and an appeal was pending.
- Alabama rates were reduced by $12.8 million effective February 1, 2018, reflecting tax reform. The filing also describes tax-related customer rate reductions in other service territories.
- Spire acquired an 80% voting interest in Ryckman Creek Resources, a Wyoming natural-gas storage facility, in December 2017. The transaction was valued at $24.8 million, subject to customary adjustments; purchase accounting remained tentative.
- Spire STL Pipeline remained subject to regulatory approvals. A construction contract signed April 27, 2018 estimated project value at approximately $95 million, with $12.5 million of upfront payments and a planned primary construction period in the second half of calendar 2018. The pipeline’s FERC approval was still pending.
- Management cited risks including weather and gas-price volatility, gas supply and pipeline availability, regulatory and legislative decisions, litigation, environmental and safety matters, access to capital, and pension costs. Environmental remediation and certain lawsuits remain potential contingencies; management did not expect the described matters to have a material financial effect, while noting future remediation costs are uncertain.
- Spire Marketing faces counterparty credit concentrations. The filing reports $16.1 million of net accounts receivable exposure to its five largest counterparties. Gas-related derivatives and fair-value accounting can also create earnings volatility.
Important facts for investors to verify
- Confirm the reporting-period discrepancy: the filing is for the quarter ended March 31, 2018, not 2017 Q2.
- Review the Missouri rate-case disallowances, the $38.4 million recorded charge, the smaller amount excluded from non-GAAP earnings, and the status and potential effect of the appeal.
- Separate recurring performance from TCJA deferred-tax remeasurement and other unusual items; investigate the effect of the $83.7 million tax expense and $6.0 million six-month net income at Spire Alabama.
- Assess funding needs against the $500 million fiscal 2018 capital-expenditure estimate, commercial paper borrowings, debt maturities, and pipeline commitments and approval conditions.
- Check subsequent developments in the Missouri rate order, pipeline authorization and construction, Ryckman Creek purchase accounting, and environmental and litigation matters.