SPIRE INC. — FORM 10-Q SUMMARY
Business context and reporting period. This combined, unaudited filing covers the quarter ended December 31, 2016, Spire’s fiscal first quarter, and includes Spire Inc., Laclede Gas Company and Alabama Gas Corporation. Spire operates regulated natural gas utilities and a non-regulated gas marketing business. Earnings are seasonal and typically concentrated in the November–April heating season. The September 2016 EnergySouth acquisition affects year-over-year comparability.
Key financial results
| Spire consolidated ($ millions, except per-share data) | Q1 2016 | Q1 2015 |
|---|---|---|
| Operating revenues | $495.1 | $399.4 |
| Operating income | $89.1 | $87.0 |
| Net income | $45.2 | $46.9 |
| Diluted EPS | $0.99 | $1.08 |
| Dividends declared per share | $0.53 | $0.49 |
| Operating cash flow | $10.3 | $33.5 |
| Capital expenditures | $89.3 | $62.4 |
- Non-GAAP operating margin was $244.0 million, up from $226.0 million. Gas Utility margin increased $23.1 million to $243.2 million, principally reflecting $19.4 million from EnergySouth and higher infrastructure replacement surcharge revenue. Gas Marketing margin declined $5.2 million, including a negative $7.9 million mark-to-market effect.
- Net economic earnings, a non-GAAP measure, were $47.5 million, or $1.04 per diluted share, versus $45.1 million, or $1.04 per diluted share. Management attributes unchanged per-share earnings despite higher net economic earnings partly to shares issued in May 2016 to help fund EnergySouth.
- Spire’s cash and cash equivalents were $10.6 million at December 31. Short-term borrowings were $506.4 million; long-term debt, including current maturities, was $2,071.3 million. Current liabilities exceeded current assets by approximately $526.6 million.
- Cash used in investing activities was $85.9 million, largely reflecting capital expenditures. Financing activities provided $81.0 million, primarily through increased seasonal short-term borrowing. Operating cash flow fell year over year, mainly due to working-capital movements, including receivables.
Material changes and operating performance
- Revenue rose $95.7 million year over year, including $26.5 million from EnergySouth, higher gas costs passed through to customers, weather and usage, and higher off-system sales. Much of the gas-cost and off-system revenue increase was offset by related costs and did not materially increase margin.
- Net income declined $1.7 million. The $2.4 million increase in utility earnings was more than offset by lower Gas Marketing income and higher interest expense. Consolidated interest charges increased $3.1 million, mainly due to debt associated with EnergySouth and higher floating-rate costs.
- Gas Marketing reported a GAAP loss of $0.8 million versus income of $2.3 million a year earlier, primarily due to unfavorable derivative fair-value adjustments. Its net economic earnings improved to $1.4 million from a loss of $0.3 million.
- Weather remained warmer than normal in both Missouri and Alabama, although colder than the prior-year quarter. Management said the combined weather impact on utility margin was marginally lower year over year.
Liquidity, outlook, risks and unusual items
- On December 14, 2016, Spire and its utilities entered a five-year revolving credit agreement with a $975 million aggregate commitment. A December 21 commercial paper program also permits up to $975 million of notes; none were outstanding at quarter-end. Debt-to-capitalization covenant limits are 70%; reported ratios were 59% for Spire, 51% for Laclede Gas and 29% for Alagasco.
- Management stated it expects adequate access to capital markets and sufficient internal and external resources for anticipated capital needs. The filing provides no specific earnings or revenue guidance. Capital spending to date was described as consistent with expectations, with continued investment in infrastructure.
- Spire recognized a $11.2 million mark-to-market gain on interest-rate swaps intended to hedge anticipated 2017 or early-2018 debt issuance. The quarter’s comprehensive income also reflected net-of-tax other comprehensive income of $7.4 million.
- Regulatory developments include Missouri ISRS increases effective January 28, 2017, bringing annualized revenues to $29.5 million in eastern Missouri and $13.5 million for MGE. Spire STL Pipeline filed with FERC for a certificate to construct and operate a proposed 70-mile pipeline after quarter-end.
- Risks identified include weather and catastrophic events, natural-gas price volatility and supply access, regulatory and legislative actions, acquisition integration and benefits, litigation, financing access, customer retention, pension costs, and environmental and pipeline-safety requirements.
- Contingencies include former manufactured-gas-plant environmental matters, an EPA claim concerning a former Laclede site, Alagasco’s disputed potential liability at the 35th Avenue Superfund Site, lawsuits related to a 2013 Birmingham incident, and Mobile Gas odorant-spill litigation. Management did not expect these matters to materially affect financial results, but some exposures remain uncertain or not reasonably estimable.
- Management reported effective disclosure controls. The assessment excluded EnergySouth’s internal controls, which were being integrated following the acquisition.
Important facts for investors to verify
- How much of future revenue, earnings and cash generation is attributable to EnergySouth, and whether expected acquisition benefits are realized.
- Whether operating cash flow and working capital improve as seasonal receivables and gas-cost balances unwind, and how capital spending is funded.
- Gas Marketing’s derivative valuation exposure and the difference between GAAP results and management’s non-GAAP net economic earnings.
- Debt levels, seasonal short-term borrowing, interest-rate exposure, covenant headroom and the planned timing and terms of future debt issuance.
- Developments in Missouri rate proceedings, FERC review of the pipeline proposal, and the environmental and litigation matters described in the filing.