SPIRE INC quarterly report, Q2 FY2015

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Spire Inc. Form 10-Q Summary

Period clarification: The supplied filing is for the quarter ended March 31, 2016 (Spire’s fiscal second quarter), with six-month results through that date. It does not cover 2015 Q2 as indicated in the request. The filing is unaudited and is a combined report for Spire, Laclede Gas Company, and Alabama Gas Corporation. Spire was formerly The Laclede Group and changed its name effective April 28, 2016.

Business context and reporting period

Spire is a utility holding company whose results are primarily generated by regulated natural-gas distribution in Missouri and Alabama. Its non-regulated Gas Marketing segment includes Laclede Energy Resources. Utility earnings are seasonal and typically concentrated in the November–April heating season.

Financial performance and position

  • Second quarter: Operating revenue was $609.3 million versus $877.4 million a year earlier; operating income was $167.7 million versus $157.7 million; net income was $100.8 million versus $94.4 million. Diluted EPS was $2.31 versus $2.18. Non-GAAP net economic earnings were $103.5 million, or $2.37 per diluted share, versus $97.6 million, or $2.25.
  • First six months: Revenue was $1,008.7 million versus $1,497.0 million; operating income was $254.7 million versus $245.0 million; net income was $147.7 million versus $141.5 million. Diluted EPS was $3.39 versus $3.26. Non-GAAP net economic earnings were $148.6 million, or $3.41 per diluted share, versus $143.3 million, or $3.31.
  • Operating margin: The company’s non-GAAP operating margin was $312.0 million for the quarter versus $308.4 million, and $538.0 million for six months versus $539.7 million. Management attributes the six-month decline mainly to lower utility sales volumes, partly offset by rate mechanisms, timing of gas-cost recovery, and higher Gas Marketing margin.
  • Cash flow: Six-month operating cash flow was $243.0 million versus $279.9 million. Capital expenditures were $121.8 million; investing cash outflow was $122.5 million. Financing cash outflow was $125.6 million, including $41.6 million of dividends paid. Cash declined $5.1 million to $8.7 million.
  • Debt and liquidity: At March 31, 2016, Spire reported $1,851.6 million of long-term debt and $253.6 million of short-term borrowings. Total capitalization was $3,533.0 million, including $1,681.4 million of equity. The utilities and parent had committed credit lines; debt-to-capitalization ratios under the respective credit agreements were 47% for Laclede Gas, 25% for Alagasco, and 56% for Spire. Management said access to capital was adequate; all three entities were investment grade, subject to rating-agency review.
  • Dividends: Spire declared $0.49 per share for the quarter versus $0.46 a year earlier; six-month declared dividends were $0.98 per share versus $0.92.

Material changes and management commentary

  • Lower natural-gas prices passed through to customers and warmer weather substantially reduced reported revenue. Management said these pass-through gas costs generally have little direct effect on utility operating margin.
  • Weather was materially warmer year over year and than normal: Missouri service areas were 22% warmer than the prior-year six-month period and 20% warmer than normal; Alagasco’s area was 34% warmer year over year and 24% warmer than normal. Lower volumes weighed on utility margin, while lower bad-debt and employee-related expenses supported earnings.
  • Gas Marketing revenue fell with lower commodity prices and regional basis differentials, but its operating margin rose on favorable storage results. Non-GAAP earnings exclude certain derivative timing and fair-value effects and acquisition, divestiture, and restructuring items.
  • Management expects fiscal 2016 capital expenditures of approximately $320 million. The filing provides no specific earnings or EPS guidance.
  • On April 26, 2016, Spire announced an agreement to acquire EnergySouth, parent of Mobile Gas in Alabama and Willmut Gas in Mississippi, for $344 million. Including working-capital adjustments and assumption of $67 million of debt, expected cash consideration was $323 million; closing was expected in 2016.

Outlook, risks, contingencies, and unusual items

  • Key risks identified include weather and catastrophic events, natural-gas price and supply volatility, pipeline availability, regulatory and legislative changes, litigation, access to financing, customer retention and conservation, and pension and employee-benefit costs.
  • Missouri regulators approved prior infrastructure surcharge increases; further increases were under review. The Office of Public Counsel appealed aspects of the surcharge process and separately filed a complaint alleging the Missouri utilities were overearning; Spire disputed the allegations. Laclede Gas also appealed a reduction in its authorized financing amount.
  • Alagasco recorded an estimated $5.5 million RSE revenue reduction through March 31. A temperature adjustment of $23.9 million was booked to its gas-supply adjustment account to reflect warmer-than-normal weather. These mechanisms affect customer rates and utility earnings.
  • Environmental matters include former manufactured-gas-plant sites in Missouri and Alabama. Recorded Missouri site estimates were described as not material, but future remediation costs are uncertain and could be material. Alagasco is a named potential responsible party at the 35th Avenue Superfund site and says it cannot yet determine potential liability.
  • Alagasco faces lawsuits arising from a 2013 apartment-complex incident that involved a fatality, injuries, and property damage. The NTSB issued its report on March 30, 2016, with no safety recommendations. Management stated that pending litigation liabilities were not considered material based on currently available information, while noting uncertainty.
  • Spire entered into $105 million of five-year interest-rate swaps at a fixed rate of 1.776% in anticipation of long-term debt issuance in 2017; it recognized a $1.8 million mark-to-market loss for the quarter.
  • Alagasco recognized a $2.2 million pension settlement gain after lump-sum payments of $11.8 million. Laclede Gas recorded special termination-benefit charges related to voluntary early-retirement packages.

Important facts for investors to verify

  • Confirm the intended comparison period: the supplied filing covers fiscal Q2 2016, not 2015 Q2.
  • Track the EnergySouth acquisition’s closing, final consideration, financing, and integration assumptions.
  • Review progress and outcomes in the Missouri surcharge and rate complaint proceedings, and Alagasco’s RSE and weather-related adjustments.
  • Monitor operating cash flow, seasonal borrowing, capital spending, and funding needs, particularly in light of the planned acquisition.
  • Follow developments in Alagasco’s incident-related lawsuits and environmental matters, including the 35th Avenue site and Missouri remediation estimates.