Spire Inc. — Form 10-K Summary
Reporting period: Fiscal year ended September 30, 2018. The request metadata says “2017 Q4,” but the supplied filing is the 2018 Form 10-K, not a 2017 quarterly filing. Dollar amounts are in millions unless stated otherwise.
Business context
Spire is a natural-gas utility holding company with regulated distribution operations in Missouri, Alabama and Mississippi, plus a non-regulated gas marketing business and other activities, including gas storage and the planned Spire STL Pipeline. Utilities served approximately 1.69 million customers. Results are seasonal, with earnings typically concentrated in the November–April heating season.
Financial performance and condition
| Metric | FY2018 | FY2017 |
|---|---|---|
| Operating revenues | $1,965.0 | $1,740.7 |
| Operating income | $279.7 | $321.7 |
| Net income | $214.2 | $161.6 |
| Diluted EPS | $4.33 | $3.43 |
| Net economic earnings, non-GAAP | $183.7; $3.72/share | $167.6; $3.56/share |
| Operating cash flow | $456.6 | $288.3 |
| Capital expenditures | $499.4 | $438.1 |
Revenue rose 12.9%, largely from higher gas costs passed through to customers and higher weather-related usage. Operating income fell despite revenue growth, reflecting higher operating expenses, including Missouri rate-case disallowances. Operating margin was approximately 14.2%, versus 18.5% in FY2017. Non-GAAP contribution margin increased to $994.9 from $952.5; it excludes natural-gas costs and gross-receipts taxes.
Net income increased 32.6%, but included a $60.1 benefit from the Tax Cuts and Jobs Act (TCJA) and was reduced by a $38.4 pretax charge for Missouri rate-case-related disallowances and write-offs (a $23.6 after-tax earnings impact). The effective tax rate was negative 14.1%, compared with 32.4% in FY2017. Net economic earnings, which exclude specified unusual and timing items, rose 9.6%.
Gas Utility net income declined $36.1 to $144.4; segment net economic earnings increased $1.6 to $183.1. Gas Marketing net income increased $21.5 to $24.9, benefiting from colder, more volatile weather and stronger storage and transportation optimization. Other activities reported net income of $44.9, principally reflecting the TCJA benefit.
Operating cash flow improved by $168.3, primarily from higher net income and lower working-capital use. Investing cash flow was negative $531.7, including $499.4 of capital spending and $28.1 for storage acquisitions; financing provided $89.1. Cash and cash equivalents were $4.4 at year-end (cash, cash equivalents and restricted cash in the cash-flow statement totaled $21.4).
At September 30, 2018, Spire reported $2,092.0 of long-term debt principal, including current maturities, and $553.6 of short-term borrowings. A $975.0 revolving credit facility and commercial-paper program were available, subject to borrower sublimits and covenants. Debt-to-capitalization covenant ratios were 54% for Spire, 49% for Spire Missouri and 37% for Spire Alabama, against a 70% limit. Credit ratings remained investment grade with stable outlooks. The declared dividend was $2.25 per share, up from $2.10.
Material changes, outlook and risks
- Missouri rate-case tariffs took effect April 19, 2018. The MoPSC approved base-rate increases but reset existing infrastructure surcharges, producing a net revenue decrease; it also disallowed certain costs and assets. Spire Missouri appealed selected rulings. Separate disputes over eligible costs in infrastructure surcharges remained pending.
- FY2018 temperatures were near normal overall, compared with 28% warmer-than-normal conditions in the prior year; colder weather increased utility volumes. Weather-normalization mechanisms reduce, but do not eliminate, weather exposure.
- Management estimated FY2019 capital expenditures of approximately $650, including $475 for the Utilities and $175 for the STL Pipeline and Spire Storage. The filing provides no earnings or EPS guidance.
- FERC issued the STL Pipeline certificate in August 2018 and a Notice to Proceed in November 2018. The planned 65-mile pipeline is designed for capacity of up to 4 million therms per day; Spire Missouri contracted for 3.5 million therms per day. Construction, permitting, land rights, interconnection and regulatory or legal challenges remain execution risks.
- Spire acquired and began integrating two Wyoming storage facilities in FY2018. Storage operations carry geologic, operational, market-pricing and third-party pipeline risks.
- Key broader risks include regulatory decisions and delayed cost recovery, gas-supply and pipeline availability, weather and commodity-price volatility, counterparty credit exposure in Gas Marketing, rising interest rates, cybersecurity, environmental liabilities and pension funding. Management said ordinary-course litigation was not expected to materially affect results; certain environmental and personal-injury matters remain pending.
- The independent auditor issued an unqualified opinion on the financial statements. Management and the auditor concluded internal control over financial reporting was effective as of September 30, 2018.
Important facts for investors to verify
- Reconcile GAAP net income and EPS to net economic earnings, particularly the TCJA benefit and Missouri rate-case charges.
- Track the outcome of Missouri appeals and surcharge proceedings, and the resulting allowed recovery of costs and infrastructure investment.
- Assess FY2019 capital-spending execution, funding needs, debt maturities and seasonal short-term borrowing against the $975.0 credit commitment.
- Monitor STL Pipeline construction, remaining approvals and land rights, contracted utilization, and integration and performance of Spire Storage.
- Review the sustainability of utility margins under changing weather, customer usage, rates and tax-related customer refunds, as well as Gas Marketing’s market and counterparty exposures.