Business context and reporting period
Spire Inc. is a natural-gas utility holding company with regulated Gas Utility and nonregulated Gas Marketing segments. This unaudited Form 10-Q covers the three months ended December 31, 2017 (fiscal 2018 first quarter), compared with the three months ended December 31, 2016. Utility earnings are seasonal and typically concentrated in the November–April heating season.
Financial performance and position
Unless otherwise noted, amounts are in millions of dollars.
- Revenue and operating results: Revenue rose 13.5% to $561.8 from $495.1; operating income increased to $105.1 from $89.1. Gas Utility revenue was $541.9; Gas Marketing and other revenue was $19.9.
- Profit and EPS: Net income was $116.0 versus $45.2, and diluted EPS was $2.39 versus $0.99. The current quarter included a $59.9 net benefit from the Tax Cuts and Jobs Act (TCJA). Excluding the TCJA and other specified timing and nonrecurring items, non-GAAP net economic earnings were $57.9 ($1.19 per diluted share), up from $47.5 ($1.04).
- Margins: Non-GAAP contribution margin increased to $262.5 from $244.0, including Gas Utility contribution margin of $255.5 (up $12.3) and Gas Marketing contribution margin of $6.6 (up $6.4). Management cites more normal, colder weather than the prior-year quarter and stronger gas-marketing basis spreads and storage optimization.
- Cash flow and investment: Operating cash flow was $17.9, up from $10.3. Capital expenditures were $110.8, up from $89.3; investing cash outflow was $126.7. Financing provided $108.1, including $106.3 of net short-term debt issuance and $30.0 of long-term debt issuance. Cash ended at $6.7. Full-year fiscal 2018 capital expenditures were expected to be approximately $490, including approximately $415 for the Utilities.
- Debt and liquidity: At December 31, Spire had $583.6 of short-term debt and $2,135.5 of long-term debt, including current maturities. The $975.0 revolving credit facility had no borrowings outstanding; the commercial-paper program also had a $975.0 limit. Debt-to-capitalization ratios under the credit agreement were 57% for Spire, 50% for Spire Missouri and 35% for Spire Alabama, below the 70% covenant limit. Management said it expected adequate access to capital markets and resources for anticipated needs.
- Dividends: Spire declared $0.5625 per share, compared with $0.525 in the prior-year quarter.
Material changes versus the prior comparable period
- Reported earnings rose sharply, principally because of the TCJA’s $59.9 benefit; net economic earnings also improved, by $10.4.
- Temperatures across utility territories were 1% warmer than normal, versus 21% warmer than normal a year earlier. Higher utility usage helped contribution margin; Missouri ISRS charges also contributed.
- Gas Marketing contribution margin improved on regional basis differentials and storage optimization, despite lower reported segment revenue.
- Capital expenditures increased, and Spire acquired an 80% voting interest in Ryckman Creek Resources, a Wyoming natural-gas storage operator, for a stated value of $26.0 ($16.0 cash and a $10.0 promissory note). Its results were to be included beginning in fiscal Q2; first-quarter post-acquisition results were not material.
Outlook, commentary, risks and unusual items
- TCJA and rates: The tax-law changes reduced the federal corporate rate from 35% to 21%. Spire recorded estimated deferred-tax and regulatory adjustments in the quarter; these had no quarterly cash-flow impact and remained subject to refinement and regulatory action. The company was working with regulators on passing excess deferred taxes back to customers and reducing rates to reflect lower taxes.
- Regulatory matters: A Missouri general rate case was pending, with a decision expected in mid-February 2018 and new rates anticipated in March. A dispute over Missouri ISRS eligibility for replacement work involving interspersed plastic pipe had been reversed by an appeals court and was subject to further proceedings. Spire Alabama filed for a rate decrease effective February 1, 2018, in connection with tax reform. FERC action on the proposed Spire STL Pipeline was anticipated early in 2018; the project remained subject to regulatory, legal and other obstacles.
- Financing and market risks: Spire Alabama issued $30.0 of 4.02% senior notes due 2058 in December and issued a further $45.0 of 3.92% notes due 2048 in January 2018. Management identified weather, gas-price and supply volatility, regulatory decisions, litigation, access to capital, and acquisition and pipeline execution as risks. A 100-basis-point increase in average short-term borrowing rates was estimated to reduce annual pretax earnings and cash flow by about $5.5, partly subject to utility recovery mechanisms.
- Contingencies: The filing describes trademark litigation, remaining claims relating to a 2008 odorant spill, environmental matters including former manufactured-gas sites and an EPA Superfund inquiry, and lawsuits related to a fatal 2013 Alabama incident. Management did not expect these matters to have a material financial impact, but noted uncertainty in litigation outcomes and that future environmental costs could be material.
- Other items: Spire reported a $49.6 net loss at Spire Alabama, largely reflecting a $59.2 TCJA-related tax-expense adjustment, despite higher revenue. Management excludes the largely noncash TCJA impact and certain timing and acquisition items from its non-GAAP net economic earnings measure.
Important facts for investors to verify
- How much of the reported earnings increase is attributable to the one-time TCJA accounting benefit versus recurring operating performance.
- Final regulatory treatment of excess deferred taxes and the outcome and timing of the Missouri and Alabama rate proceedings.
- Capital-spending execution, cash generation relative to investment, and funding needs as seasonal working-capital requirements change.
- Progress, approvals, costs and expected returns for Ryckman Creek and the Spire STL Pipeline.
- Developments in the disclosed litigation and environmental matters, including any change to management’s assessment of potential losses.