Spire Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2018; comparative period is the quarter ended December 31, 2017. The filing contains separate information for Spire Inc., Spire Missouri Inc., and Spire Alabama Inc. Figures below are for consolidated Spire unless stated otherwise. Amounts are in millions except per-share data.
Business context and reporting period
Spire is principally a regulated natural gas utility, with a smaller non-regulated Gas Marketing business and other activities that include pipeline and storage development. Utility earnings are seasonal and typically concentrate in the November–April heating season; this quarter’s results are not necessarily indicative of full-year performance.
Financial performance and position
| Metric | Quarter ended Dec. 31, 2018 | Prior-year quarter |
|---|---|---|
| Operating revenue | $602.0 | $561.8 |
| Operating income | $105.1 | $104.0 |
| Net income | $67.3 | $116.0 |
| Diluted EPS | $1.32 | $2.39 |
| Net economic earnings (non-GAAP) | $65.9 | $57.9 |
| Net cash from operating activities | $70.4 | $17.9 |
| Capital expenditures | $206.8 | $110.8 |
- Operating margin was approximately 17.5% of revenue, versus 18.5% in the prior-year quarter. Net income fell 42% year over year, while non-GAAP net economic earnings rose about 14%.
- Gas Utility revenue was $573.8; Gas Marketing and other revenue was $28.2. Consolidated contribution margin, a non-GAAP measure, increased to $275.4 from $262.5.
- At December 31, total assets were $7,232.2 and shareholders’ equity was $2,284.6. Cash was $8.4; current assets were $905.3 and current liabilities $1,563.4.
- Long-term debt, including its current portion, was $2,167.0; commercial paper/short-term borrowings were $626.1. Total debt on this basis was approximately $2,793.1. The company reported debt at 55% of total capitalization under its credit-facility covenant definition, below the 70% limit.
- Operating cash flow exceeded the prior-year quarter, but investing outflows increased with capital spending. Financing provided $132.8, including $100.0 of long-term debt issuance and $72.5 of net short-term borrowing; dividends paid were $28.8.
Material changes versus the prior comparable period
- Revenue increased $40.2, primarily reflecting colder weather and higher usage, rate changes, gas-cost recoveries, and customer growth. Utility territories were 10% colder than normal; the comparable prior-year quarter was essentially normal overall.
- Net income was $48.7 lower, chiefly because the prior-year quarter included a $59.9 tax benefit related to the Tax Cuts and Jobs Act (TCJA). The current-period effective tax expense and prior-period tax benefit make reported earnings less comparable; management’s non-GAAP measure excludes the TCJA item.
- Utility contribution margin increased only $2.0: favorable usage and rate-case effects were partly offset by $14.0 of customer rate reductions reflecting tax reform, which management said was largely offset by lower income tax expense.
- Gas Marketing net economic earnings rose to $8.3 from $3.6, helped by geographic expansion, colder weather, market volatility, wider regional basis differentials, and increased transportation and storage activity.
- Capital expenditures rose $96.0 year over year. O&M and depreciation also increased, reflecting benefit and employee-related costs and continued infrastructure investment. Interest charges increased $1.5, with higher short-term borrowing levels and rates among the drivers.
Outlook, management commentary, risks and unusual items
- Management expected fiscal 2019 capital expenditures of approximately $650. The filing provides no clear consolidated earnings or EPS guidance.
- Liquidity sources include a $975.0 syndicated revolving credit facility expiring October 2023 and a $975.0 commercial-paper program. No revolver borrowings were outstanding at quarter-end. Management stated that capital-market access and resources were adequate for anticipated requirements; seasonal gas purchases and customer collections can drive short-term borrowing needs.
- Spire Missouri borrowed $100.0 under a floating-rate term loan in December 2018, due December 2021. After quarter-end, Spire Alabama issued $90.0 of 4.64% senior notes due 2049, using proceeds to repay short-term debt and for general corporate purposes.
- Regulatory matters include ongoing appeals concerning Missouri rate-case disallowances and infrastructure surcharge eligibility. In January 2019, Spire Missouri filed new surcharge applications seeking $7.4 for its East division and $8.4 for its West division, subject to regulatory action. Alabama’s 2019 annual RSE increase of $8.7 became effective December 1, 2018; a subsequent estimated $4.1 reduction was recorded for the January quarterly test.
- The 65-mile Spire STL Pipeline and Spire Storage are development and operating exposures. FERC approved combining two Wyoming storage facilities into one certificate with a market-based tariff on January 25, 2019. Management identified regulatory, legal, operational, and other obstacles as potential risks to the pipeline project.
- Risks cited include weather and catastrophic events, gas-price and supply volatility, pipeline availability, regulatory decisions, litigation, access to financing, customer retention and collections, debt-covenant compliance, environmental and safety matters, cyber/IT disruption, and employee-benefit costs. The filing describes environmental and other litigation matters, including former manufactured-gas sites and pending Alabama claims; management did not expect the identified matters to have a material financial effect, while noting uncertainty in some claims.
- The company adopted ASC 606 in the quarter with no significant financial impact. Its interim financial statements are unaudited. Management reported effective disclosure controls and no material quarter-period changes in internal control over financial reporting.
Important facts for investors to verify
- How much of the year-over-year earnings comparison reflects the prior-period $59.9 TCJA benefit, and how GAAP earnings compare with non-GAAP net economic earnings.
- Whether colder weather and seasonal demand persist, and how rate design and weather-normalization mechanisms affect utility margins.
- Outcomes and timing of Missouri rate-case and ISRS appeals/applications, and Alabama’s RSE adjustments.
- Execution and funding of the approximately $650 fiscal 2019 capital program, including pipeline and storage development, and the resulting debt and interest costs.
- Commercial-paper funding needs, interest-rate exposure, and progress in converting short-term borrowings to longer-term financing.
- Developments in environmental and litigation matters, and any changes in estimated costs, insurance recoveries, or regulatory recovery.