Business context and reporting period
This combined, unaudited Form 10-Q covers Spire Inc. and its subsidiaries Spire Missouri Inc. and Spire Alabama Inc. for the quarter and six months ended March 31, 2019. Although the request metadata says “2018 Q2,” the filing is for fiscal 2019 Q2. Spire’s core business is regulated natural-gas distribution; it also operates a non-regulated gas-marketing segment and natural-gas storage and pipeline businesses. Earnings are seasonal and typically concentrated in the November–April heating season.
Financial results and key metrics
| Spire Inc. consolidated | Three months ended March 31, 2019 | Three months ended March 31, 2018 | Six months ended March 31, 2019 | Six months ended March 31, 2018 |
|---|---|---|---|---|
| Operating revenue | $803.5 million | $813.4 million | $1,405.5 million | $1,375.2 million |
| Operating income | $209.5 million | $150.1 million | $314.6 million | $254.1 million |
| Net income | $154.6 million | $98.2 million | $221.9 million | $214.2 million |
| Diluted EPS | $3.04 | $2.03 | $4.36 | $4.42 |
| Net economic earnings, non-GAAP | $147.9 million | $137.2 million | $213.8 million | $195.1 million |
| Net economic earnings per diluted share, non-GAAP | $2.90 | $2.83 | $4.20 | $4.02 |
- Quarterly operating margin was approximately 26.1%, compared with 18.5% in the prior-year quarter; six-month operating margin was approximately 22.4%, compared with 18.5%. These percentages are calculated from reported operating income and revenue.
- For the six months, operating cash flow was $297.5 million, versus $309.6 million. Capital expenditures were $376.8 million, versus $215.8 million; net cash used in investing was $386.6 million. Financing provided $78.8 million, compared with $65.9 million used in the prior-year period. Cash and cash equivalents were $11.1 million at March 31, 2019.
- At March 31, 2019, long-term debt including its current portion was $2,256.9 million and commercial paper borrowings were $512.0 million. The company reported debt at 54% of total capitalization under its credit-facility covenant definition. The $975 million revolving credit facility had no borrowings outstanding; reported cash was modest, and short-term borrowing needs are seasonal.
- Spire reported total assets of $7,273.6 million and shareholders’ equity of $2,406.0 million at March 31, 2019. Quarterly dividends declared were $0.5925 per share.
Material changes versus the prior comparable period
- Quarterly revenue declined $9.9 million, while operating income rose $59.4 million and net income rose $56.4 million. The prior-year quarter included $38.4 million of Missouri rate-case write-offs; current-quarter results also benefited from Missouri’s revised rate design and improved gas-marketing derivative results.
- Quarterly Gas Utility contribution margin, a non-GAAP measure, increased $22.6 million to $366.7 million, mainly from Missouri rate-case resets. Gas Marketing net economic earnings declined to $6.2 million from $10.2 million as unusually favorable prior-year weather-driven market conditions normalized.
- Six-month net income rose only $7.7 million, despite stronger operating income, in part because the prior-year period included a $54.0 million tax benefit from the Tax Cuts and Jobs Act (TCJA). Six-month net economic earnings increased $18.7 million. The filing also cites prior-year Missouri rate-case write-offs of $38.4 million pre-tax.
- Consolidated interest charges increased $3.7 million for the six months, reflecting debt issuance and higher short-term borrowing rates and balances. Average short-term borrowing rates were 2.8% versus 1.8% a year earlier.
- Spire issued $190 million of long-term debt in the six-month period, compared with $75 million in the prior-year period. This included a $100 million Spire Missouri term loan and $90 million of Spire Alabama 4.64% senior notes due 2049.
Outlook, risks, contingencies and unusual items
- Management expected fiscal 2019 capital expenditures of approximately $740 million. Spire STL Pipeline construction was underway, with completion anticipated by fiscal year-end; Spire Missouri is its foundational shipper. The filing does not provide a quantified earnings forecast.
- Management said the company and its utility subsidiaries had adequate access to capital markets and sufficient resources for anticipated needs. Debt ratings were investment grade with stable outlooks. The company also entered an at-the-market equity distribution agreement permitting up to $150 million of share sales.
- Missouri rate regulation remains a key uncertainty. Spire Missouri requested review by the Missouri Supreme Court after an appellate court denied its appeal of certain rate-case disallowances. New ISRS applications sought annual revenues of $7.4 million each for the East and West territories; hearings occurred in April 2019, with an order expected by May 14.
- FERC approved combining Spire Storage’s adjacent Wyoming facilities under one market-based tariff. FERC staff protested the proposed related pipeline project on April 26, 2019, citing missing documentation concerning historic-preservation compliance; the filing says the protest could cause the matter to proceed as a traditional application.
- Environmental matters include former manufactured-gas-plant sites and an EPA Superfund-site claim involving Spire Alabama. Spire Missouri’s site remediation costs to date were described as not material, but future costs are uncertain and could be material. The company also disclosed pending lawsuits tied to a 2013 Spire Alabama incident and remaining claims relating to a 2008 odorant spill; management did not expect these matters to materially affect results.
- Management identified weather and catastrophic events, gas-price and supply volatility, regulatory and legal outcomes, capital-market access, customer retention, cybersecurity and employee-benefit costs among risks that could affect results. Spire Marketing has counterparty concentration exposure and uses credit review, collateral and netting arrangements to manage it.
- ASC 606 adoption had no significant financial impact. The six-month results include fair-value changes in energy derivatives; non-GAAP net economic earnings exclude specified fair-value, timing and unusual items. These measures should be considered alongside, not instead of, GAAP results.
Important facts for investors to verify
- Confirm the correct reporting period: this filing covers fiscal 2019 Q2, not 2018 Q2.
- Review the reconciliation of GAAP net income to non-GAAP net economic earnings, particularly the effect of gas-marketing derivative valuations and the prior-year TCJA benefit and Missouri write-offs.
- Track Missouri rate-case appeals and ISRS decisions, as well as the recovery of utility infrastructure investment through customer rates.
- Monitor Spire STL Pipeline and Spire Storage construction, regulatory approvals, spending and expected returns against the capital-expenditure plan.
- Assess seasonal liquidity and funding needs, including commercial paper balances, debt maturities, interest costs and any equity issuance under the at-the-market agreement.
- Follow environmental and litigation developments, potential insurance recoveries, and the extent to which regulators permit costs to be deferred and recovered from customers.