Business Context and Reporting Period
This combined unaudited Form 10-Q covers Spire Inc. (formerly The Laclede Group, renamed April 28, 2016), Laclede Gas Company and Alabama Gas Corporation. The actual reporting period is the fiscal third quarter ended June 30, 2016, with year-to-date results for the nine months ended that date. This differs from the request metadata, which says “2015 Q3.” Spire is primarily a regulated natural-gas utility holding company, with a nonregulated gas-marketing business.
Utility earnings are seasonal and typically concentrated in the November–April heating season. Results for this quarter should not be treated as indicative of full-year performance.
Key Financial Metrics
All amounts are in millions of dollars, except per-share data. Comparisons are with the same 2015 periods.
| Spire consolidated | Three months ended June 30, 2016 | Three months ended June 30, 2015 | Nine months ended June 30, 2016 | Nine months ended June 30, 2015 |
|---|---|---|---|---|
| Operating revenue | $249.3 | $275.2 | $1,258.0 | $1,772.2 |
| Operating income | $35.3 | $36.0 | $290.0 | $281.0 |
| Net income | $10.7 | $14.1 | $158.4 | $155.6 |
| Diluted EPS | $0.24 | $0.32 | $3.60 | $3.59 |
| Operating margin, non-GAAP | $177.3 | $176.6 | $715.3 | $716.3 |
| Net economic earnings, non-GAAP | $14.6 | $11.1 | $163.2 | $154.4 |
For the nine months, net economic earnings per diluted share were $3.74 versus $3.56. Management’s non-GAAP measures exclude certain derivative fair-value and timing effects, inventory adjustments, and acquisition, divestiture and restructuring items.
- Cash flow: Nine-month operating cash flow was $356.9, investing cash outflow was $196.8, and financing cash outflow was $169.0, compared with $366.3, $211.9 and $164.8, respectively, in 2015. Capital expenditures were $195.3 versus $202.9.
- Debt and liquidity: At June 30, 2016, Spire reported long-term debt of $1,851.7, short-term notes payable of $97.6 and cash of $4.9. Management reported investment-grade credit ratings and access to capital markets. Separate revolving credit facilities were in place for Spire, Laclede Gas and Alagasco; reported debt-to-capital covenant ratios were below their 70% limits.
- Shareholder returns and capital: Spire declared dividends of $0.49 per share for the quarter, compared with $0.46 a year earlier. It issued 2.185 million shares in May, generating $133.2 net proceeds, primarily to fund the planned EnergySouth acquisition.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue declined $25.9, largely reflecting lower wholesale gas prices passed through to customers and reduced gas-marketing revenue. Because utility gas costs are generally passed through under regulatory mechanisms, lower gas prices had limited direct effect on utility operating margin.
- Quarterly net income fell $3.4, partly because the prior-year quarter included a $4.7 after-tax gain on property sale. Quarterly net economic earnings increased $3.5, reflecting stronger utility and gas-marketing results on that adjusted basis.
- Nine-month revenue fell $514.2, primarily because of lower gas prices, warmer weather and lower sales volumes. Net income nevertheless increased $2.8, and net economic earnings increased $8.8.
- Nine-month operating cash flow declined $9.4. Management attributed the change mainly to working-capital fluctuations, including weather-related effects.
- Spire’s May equity issuance increased share count and equity funding; the company also arranged $165.0 of private-placement notes to fund part of the pending acquisition.
Outlook, Commentary, Risks and Contingencies
- Capital spending: Management expected fiscal 2016 capital expenditures of approximately $310, roughly $20 above fiscal 2015. The filing does not provide a clear earnings or EPS guidance range.
- Acquisition: Spire agreed to acquire EnergySouth, parent of Mobile Gas and Willmut Gas, for $344 before working-capital adjustments and assumed debt; expected total cash consideration was $323 after those items. Closing remained subject to required approvals, including Mississippi regulatory approval.
- Weather and regulation: Warmer-than-normal year-to-date weather reduced utility volumes. Missouri ISRS surcharges and Alabama’s RSE, GSA and temperature-adjustment mechanisms affected revenues and margin. Alagasco recorded an estimated $4.5 RSE revenue reduction at June 30.
- Operating and financial risks: Management identified weather and catastrophic events, gas-price volatility, supply and pipeline access, regulatory and legislative changes, litigation, financing access, customer retention, benefit costs and acquisition execution as risks. Gas-marketing results are more exposed to market conditions and derivative valuation changes.
- Legal and environmental matters: Alagasco faces lawsuits arising from a 2013 apartment-complex incident that caused one fatality; the NTSB report issued in March 2016 contained no safety recommendations, fines or penalties. Alagasco also disputes its identification as a potentially responsible party at the 35th Avenue Superfund site. Missouri utilities have former manufactured-gas-plant matters; recorded estimates were described as not material, but future remediation costs are uncertain.
- Regulatory proceedings: Appeals were pending concerning Missouri ISRS decisions, and an OPC complaint alleged that Missouri utility rates were excessive. Management disputed the allegations. Spire STL Pipeline entered the FERC pre-filing process in July 2016.
- Management stated that other ordinary-course litigation and environmental matters were not expected to have a material effect, while acknowledging that outcomes and future remediation costs remain uncertain. Management also stated disclosure controls were effective.
Important Facts for Investors to Verify
- Confirm the intended period: the supplied filing is for the quarter ended June 30, 2016, not 2015 Q3.
- Review the acquisition’s remaining approvals, closing conditions, final consideration and financing.
- Track utility regulatory proceedings, including Missouri ISRS appeals and the overearning complaint, and Alabama RSE/GSA adjustments.
- Assess whether warmer weather, customer volumes, gas-marketing spreads and derivative fair-value movements continue to affect results.
- Review seasonal borrowing needs, covenant headroom, planned capital spending and the funding required for the acquisition and pipeline investments.
- Monitor the Alagasco incident-related lawsuits, Superfund matter and utility environmental remediation exposure.