SPIRE INC annual report, FY2018

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Spire Inc. — FY2019 Form 10-K Summary

Reporting period: Year ended September 30, 2019. Although the request metadata refers to “2018 Q4,” the supplied filing is a fiscal 2019 annual report, not a standalone 2018 fourth-quarter filing. The combined filing covers Spire Inc., Spire Missouri Inc. and Spire Alabama Inc.

Business context

Spire is a natural gas utility holding company with regulated Gas Utility operations and non-regulated Gas Marketing activities. Nearly all earnings are generated by the utility segment. The Utilities serve approximately 1.7 million customers in Missouri, Alabama and Mississippi; earnings are seasonal and typically concentrated in the November–April heating season.

Financial results and liquidity

  • Revenue: Consolidated operating revenue was $1,952.4 million, down $12.6 million from $1,965.0 million.
  • Profit and EPS: GAAP net income was $184.6 million versus $214.2 million; diluted EPS was $3.52 versus $4.33. Non-GAAP net economic earnings rose to $195.1 million ($3.73 per diluted share) from $183.7 million ($3.72 per share).
  • Operating results: Operating income increased to $302.3 million from $294.1 million. Non-GAAP contribution margin was $1,012.8 million, up $17.9 million. Gas Utility contribution margin increased $19.6 million to $967.1 million; Gas Marketing contribution margin fell $5.7 million to $35.6 million.
  • Cash flow and investment: Operating cash flow was $450.9 million, compared with $456.6 million. Investing cash outflow was $838.3 million, including $823.3 million of capital expenditures, up from $499.4 million in 2018. Financing cash inflow was $371.8 million. Year-end cash was $5.8 million.
  • Debt and liquidity: Long-term debt principal, including current maturities, was $2,137.0 million; notes payable were $743.2 million. A $975 million revolving credit facility had no direct borrowings at year-end. Management reported debt at 53% of total capitalization under the credit-facility definition; ratings remained investment grade with stable outlooks.
  • Capital structure and dividends: Spire issued $242.0 million net proceeds from 5.90% perpetual preferred stock and $14.4 million net proceeds from common shares under its at-the-market program. Common dividends declared were $2.37 per share, up from $2.25.
  • Other balance-sheet measures: Total assets were $7,619.2 million, up from $6,843.6 million. Shareholders’ equity was $2,543.0 million; total current liabilities were $1,468.8 million.

Material changes versus FY2018

  • GAAP net income declined $29.6 million, principally because FY2018 included a $60.1 million benefit from the Tax Cuts and Jobs Act (TCJA), while FY2019 included a $12.2 million pre-tax provision related to Missouri infrastructure-surcharge rulings. These effects were partly offset by the prior-year $38.4 million pre-tax Missouri rate-case write-offs.
  • Excluding these items, management reported net income growth of $16.2 million, primarily from utility rate-design changes, higher infrastructure surcharges, higher volumes and customer growth.
  • Missouri utility revenue increased modestly, while Spire Alabama revenue declined $35.2 million, mainly due to lower gas-cost recoveries and weather/usage effects. Spire Alabama net income rose to $60.3 million from $1.3 million, largely reflecting the absence of the prior-year TCJA-related deferred-tax revaluation expense.
  • Gas Marketing net income fell to $18.5 million from $24.9 million; the prior year benefited from unusually favorable market conditions and derivative fair-value marks. FY2019 revenue also reflected higher volumes and a favorable derivative mark-to-market adjustment.

Outlook, commentary, risks and unusual items

  • Capital spending: Management estimated FY2020 capital expenditures of approximately $590 million, including $520 million for the Utilities and $70 million for Spire Storage and completion expenditures on the STL Pipeline.
  • Missouri ISRS appeal: On November 19, 2019, after fiscal year-end, the Missouri Court of Appeals ruled certain 2016–2018 investments ineligible for recovery through the Infrastructure System Replacement Surcharge (ISRS) and ordered refunds. Spire Missouri disagrees and intends to pursue its appeal. The company recorded a $12.2 million regulatory liability, reducing FY2019 net income by $9.3 million, or $0.18 per diluted share. The final refund and regulatory process remained unresolved at filing.
  • Pipeline and storage: The 65-mile Spire STL Pipeline received final FERC authorization and entered service in November 2019. Spire Storage generated a $15.4 million loss in FY2019; management expected additional investment through the 2019–2020 winter season as it worked toward reliable operations and sustained profitability.
  • Key risks: Regulatory decisions and cost recovery, gas supply and pipeline availability, severe weather and weather-related demand, natural gas price and collateral requirements, access to capital and credit ratings, safety and environmental obligations, cybersecurity, counterparty exposure in Gas Marketing, and pension funding and market assumptions.
  • Contingencies and controls: Management said other litigation outcomes were not expected to materially affect results, while noting uncertainty in claims and environmental remediation costs. Deloitte issued unqualified opinions on the financial statements and Spire Inc.’s internal controls; management reported effective controls for all three registrants.

Important facts for investors to verify

  • How the Missouri ISRS appeal proceeds, what refunds are ultimately required, and whether the $12.2 million provision needs adjustment.
  • Whether the STL Pipeline sustains expected operations and contractual economics, and whether Spire Storage reaches profitability without materially higher investment.
  • Execution of the FY2020 capital plan and funding needs, including the effect of short-term borrowing, debt issuance and preferred dividends on common-shareholder returns.
  • Underlying utility earnings and cash generation after separating weather, gas-cost pass-throughs, regulatory adjustments and one-time tax or legal items from GAAP results.
  • Regulatory recovery of utility investments and costs, and the continued availability of investment-grade financing and credit facilities.