Business context and reporting period
Period mismatch: Although the request identifies “2017 Q3,” the supplied filing is Spire Inc.’s unaudited Form 10-Q for the quarter ended June 30, 2018 (fiscal 2018 third quarter), filed August 3, 2018. It also contains separate financial statements for Spire Missouri Inc. and Spire Alabama Inc. Spire is a regulated natural-gas utility holding company with Gas Utility and Gas Marketing segments; results are seasonal, with earnings typically concentrated in November–April.
Key financial metrics
Spire consolidated; dollars in millions except per-share amounts.
| Metric | Three months ended June 30, 2018 | Three months ended June 30, 2017 | Nine months ended June 30, 2018 | Nine months ended June 30, 2017 |
|---|---|---|---|---|
| Operating revenue | $350.6 | $323.5 | $1,725.8 | $1,482.0 |
| Operating income | $52.4 | $50.3 | $299.3 | $319.8 |
| Net income | $25.9 | $21.7 | $240.1 | $174.9 |
| Diluted EPS | $0.52 | $0.45 | $4.91 | $3.75 |
| Net economic earnings, non-GAAP | $15.2 | $21.6 | $210.3 | $178.1 |
| Net economic earnings per diluted share, non-GAAP | $0.31 | $0.44 | $4.30 | $3.82 |
For the quarter, operating income was approximately 15.0% of revenue, versus 15.5% a year earlier; for the nine-month period it was approximately 17.3%, versus 21.6%. These are calculated ratios. Revenue growth largely reflected higher utility gas-cost recoveries and colder weather; such pass-through gas costs generally do not represent equivalent margin growth.
Cash flow and liquidity: Nine-month operating cash flow was $511.3, investing cash outflow was $371.3, and financing cash outflow was $140.5. Capital expenditures were $334.3; operating cash flow less capital expenditures was $177.0. Cash at June 30 was $6.9. Short-term commercial paper outstanding was $191.0, and the revolving facility had no borrowings; its aggregate commitment was $975.0, subject to borrower sublimits. Debt was 51% of total capitalization under the credit agreement’s definition; the company reported compliance with the 70% covenant limit.
Debt and dividends: Long-term debt carrying value, including current portion, was approximately $2,180.0, with $191.0 of short-term debt outstanding. Spire issued 2.3 million shares in May for net proceeds of $153.0. Dividends declared were $0.5625 per share for the quarter, compared with $0.525 a year earlier.
Material changes versus the prior comparable period
- Quarter: Net income rose $4.2, but non-GAAP net economic earnings fell $6.4. Gas Marketing benefited from improved market conditions and unrealized derivative gains; utility earnings were pressured by Missouri’s new rate design and Alabama customer rate reductions related to tax reform.
- Nine months: Net income increased $65.2 and net economic earnings increased $32.2. Growth reflected near-normal weather versus unusually warm prior-year conditions, stronger Gas Marketing results, and lower tax expense following the Tax Cuts and Jobs Act (TCJA). GAAP net income also included a $54.0 TCJA-related benefit excluded from non-GAAP net economic earnings.
- Missouri rate case: New tariffs took effect April 19, 2018. The Missouri Public Service Commission (MoPSC) approved base-rate increases but reset infrastructure surcharges to zero and incorporated tax savings returned to customers. The order also disallowed certain costs; Spire recorded $38.4 of charges for the nine months ($23.6 after tax, or $0.49 per share). Appeals are pending.
- Weather and costs: Utility territories were near normal for the nine-month period, compared with temperatures 20% warmer than normal a year earlier. The quarter was unusually cold relative to the prior-year quarter. Higher utility depreciation reflected continued capital investment, and operating and maintenance costs also increased.
- Segment contrast: Spire Alabama’s nine-month net income declined to $12.3 from $65.3, while Spire Missouri’s rose to $139.3 from $110.5. The filing attributes Alabama’s reported results in part to TCJA-related deferred-tax effects; review the tax and regulatory accounting details when assessing underlying performance.
Outlook, commentary, risks, contingencies and unusual items
- Management expected fiscal 2018 capital expenditures of approximately $500, including approximately $440 for the Utilities. Spending supports infrastructure upgrades, customer growth and the Spire STL Pipeline project.
- The proposed 65-mile Spire STL Pipeline remained subject to regulatory, legal and other approvals. FERC’s environmental assessment found no significant impact with mitigation, but approval and project execution were not assured. A construction contract entered in April 2018 had estimated project costs of approximately $100, with principal construction planned for 2019; termination requires payment for work performed and costs incurred.
- Spire acquired interests in two Wyoming natural-gas storage facilities in December 2017 and May 2018 for cash consideration totaling $28.1. A July 2018 FERC application sought to combine the facilities under a market-based tariff.
- TCJA reduced the federal corporate tax rate from 35% to 21%. For regulated operations, deferred-tax changes can create regulatory assets or liabilities and customer refunds or rate changes; estimates remained subject to regulatory action. Spire reported that $1.9 of excess accumulated deferred taxes was returned to customers in the quarter.
- Key risks cited include weather and catastrophic events, gas-price and supply volatility, pipeline availability, regulatory decisions, litigation, environmental and pipeline-safety obligations, access to capital, and pension costs. Management said it expected adequate access to capital markets, while credit ratings remained subject to agency review.
- Natural-gas storage, transportation and supply contracts had estimated minimum payments of $1,240.5 for Spire, recoverable utility costs generally being subject to purchased-gas adjustment mechanisms. Environmental matters include former manufactured-gas sites and pending claims; management did not expect the identified matters to have a material financial impact, but noted that future remediation costs are uncertain.
- Other unusual items included pension settlement losses and a $1.6 mark-to-market gain on an interest-rate swap for the nine months. Management’s non-GAAP measures exclude specified tax, regulatory, acquisition and energy-derivative timing effects and should not be treated as substitutes for GAAP results.
Important facts for investors to verify
- Confirm the period: the supplied filing reports fiscal Q3 2018, not 2017 Q3.
- Review the MoPSC rate-case disallowances, the pending appeals, and the earnings and cash-flow consequences of the new Missouri tariffs.
- Separate recurring operating performance from the $54.0 TCJA-related benefit, the $38.4 Missouri charges, and Gas Marketing’s derivative-related volatility.
- Track the timing and amount of tax savings returned to customers, including estimates and regulatory true-ups.
- Assess the pipeline’s FERC approval, construction cost and schedule, and the financing needs implied by the capital plan.
- Monitor short-term borrowing, seasonal working-capital needs, capital spending, and the company’s ability to maintain credit-covenant headroom.
- Follow environmental, litigation and pension exposures, including outcomes that management currently considers unlikely to be material.