Spire Inc. 10-Q Summary
Business context and reporting period
Spire Inc. and subsidiaries reported the three months ended December 31, 2020, the first quarter of fiscal 2021. Spire operates regulated natural gas utilities in Missouri, Alabama and other areas, alongside a non-regulated Gas Marketing business. Earnings are typically concentrated in the November–April heating season. The interim financial statements are unaudited.
Financial performance
| Spire consolidated metric | Q1 FY2021 | Q1 FY2020 |
|---|---|---|
| Operating revenue | $512.6 million | $566.9 million |
| Operating income | $132.9 million | $102.3 million |
| Net income | $88.9 million | $67.0 million |
| Net income available to common shareholders | $85.1 million | $63.2 million |
| Diluted EPS | $1.65 | $1.24 |
| Net economic earnings, non-GAAP | $76.9 million ($1.42 per diluted share) | $71.8 million ($1.33 per diluted share) |
| Contribution margin, non-GAAP | $309.7 million | $280.4 million |
| Operating cash flow | $7.6 million | $64.5 million |
| Capital expenditures | $163.6 million | $192.3 million |
- Revenue declined $54.3 million, primarily reflecting lower gas costs passed through to customers, warmer weather and lower Gas Marketing revenue. Operating income rose $30.6 million, while net income increased $21.9 million.
- GAAP earnings included a favorable $16.0 million pre-tax fair-value and timing adjustment, principally in Gas Marketing. Excluding adjustments, net economic earnings increased $5.1 million year over year. Gas Utility net economic earnings rose $7.3 million; Gas Marketing net economic earnings fell $2.8 million.
- Gas Utility contribution margin was $272.2 million, up $7.6 million. Higher Missouri ISRS revenue, customer growth and weather-related factors were partly offset by unfavorable Alabama RSE adjustments.
- Operating cash flow was low versus earnings, principally due to working-capital and regulatory timing, including a $169.6 million use of cash from accounts receivable changes. Investing cash outflow was $163.6 million; financing provided $155.4 million.
- At December 31, Spire had $3.5 million of cash, $696.1 million of short-term notes payable, and $2,628.4 million of long-term debt including current maturities. Its combined revolving credit commitment is $975 million, expiring in October 2023. Each borrower was below the 70% debt-to-capitalization covenant limit; management reported investment-grade ratings and adequate access to capital.
- Spire Alabama issued $150 million of 2.04% senior notes due 2030 and used proceeds to repay short-term debt. Spire’s long-term consolidated capitalization was approximately 50% equity.
Material changes and management commentary
- Management attributed improved utility results mainly to higher Missouri infrastructure replacement surcharge revenues, customer growth and lower O&M costs. Utility revenues fell as lower wholesale gas costs flowed through customer bills; warmer-than-normal weather also reduced usage.
- Gas Marketing GAAP results benefited from favorable derivative activity and fair-value measurements. Its underlying net economic earnings were lower, reflecting narrower location basis differentials, milder regional weather, and incremental storage and transportation costs.
- Spire Missouri filed a general rate case on December 11, 2020, seeking a $64.2 million net base-rate increase, in addition to $47.3 million already being recovered through ISRS, for a stated total request of $111.5 million. The request uses a $2.780 billion rate base, 54.25% common equity ratio and 9.95% return on equity; the MoPSC has up to 11 months to consider it. These are requested terms, not approved rates.
- Management expects fiscal 2021 capital expenditures of approximately $590 million. No full-year earnings or EPS guidance is provided in the supplied filing text.
- COVID-19 effects included increased expected credit losses, lost late-payment fees during the 2020 moratorium, and modest commercial and industrial volume impacts. Spire Missouri has regulatory approval to defer certain pandemic costs; recovery and ratemaking remain subject to a future rate case. Management warned that a prolonged downturn or significant changes in commodity costs or policy could adversely affect demand, collections, liquidity and results.
Risks, contingencies and unusual items
- Key risks include weather and catastrophic events, COVID-19 effects, gas-price and supply volatility, regulatory and rate-case outcomes, customer collections, access to capital, litigation, environmental obligations, pension costs, and operational or cybersecurity disruptions.
- Spire Missouri’s appeal concerning certain costs disallowed in a prior rate case remained pending before the Missouri Supreme Court. Appeals challenging FERC authorization of the Spire STL Pipeline also remained pending. Spire Storage had filed for FERC approval to expand storage capacity and pipeline connectivity.
- Former manufactured-gas-plant and other environmental matters remain potential liabilities. Management said recorded estimates for Spire Missouri MGP matters were not material and did not expect identified remediation matters to materially affect financial condition or results; actual future costs remain uncertain.
- Spire Alabama recorded a $3.4 million negative RSE adjustment in the quarter. A HUD determination in December 2020 found no reasonable cause for a discrimination complaint concerning a 2008 odorant release.
- Spire recorded a cumulative net liability of $37.0 million on open interest-rate swaps at December 31, 2020; it recognized $17.2 million of mark-to-market gains on swaps during the quarter.
Important facts for investors to verify
- Track the Missouri rate case’s proposed revenue recovery, final rate base, allowed return and timing of any decision.
- Reconcile GAAP net income and EPS with non-GAAP net economic earnings, especially the effect of Gas Marketing fair-value and timing adjustments.
- Assess operating cash-flow seasonality and working-capital needs against the $590 million capital-expenditure expectation and available borrowing capacity.
- Monitor customer receivables, credit-loss allowances, COVID-related deferrals and collection trends.
- Follow the pending pipeline and environmental proceedings, and review potential financial exposure as facts and regulatory decisions develop.