Spire Inc. Form 10-K Summary
Reporting period: Fiscal year ended September 30, 2017. The request metadata says “2016 Q4,” but the supplied filing is the FY2017 annual report; FY2016 comparative figures are included below. The combined filing covers Spire Inc., Spire Missouri Inc. and Spire Alabama Inc.
Business context
Spire is a regulated natural-gas utility holding company with Gas Utility and Gas Marketing segments. Its utilities serve Missouri, Alabama and Mississippi; the marketing business sells gas and related services on a non-regulated basis. Utility earnings are seasonal, concentrated in the November–April heating season. Spire acquired EnergySouth in September 2016, adding utilities in southern Alabama and south-central Mississippi; FY2017 includes a full year of those operations, while FY2016 includes them only from the acquisition date.
Financial results and key metrics
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Operating revenue | $1,740.7 million | $1,537.3 million | Up $203.4 million |
| Operating income | $321.7 million | $282.3 million | Up $39.4 million |
| Net income | $161.6 million | $144.2 million | Up $17.4 million |
| Diluted EPS | $3.43 | $3.24 | Up $0.19 |
| Net economic earnings (non-GAAP) | $167.6 million; $3.56/share | $149.1 million; $3.42/share | Up $18.5 million |
| Operating cash flow | $288.3 million | $328.3 million | Down $39.9 million |
| Capital expenditures | $438.1 million | $293.3 million | Up $144.8 million |
FY2017 revenue growth reflected the acquired utilities, higher gas costs passed through to customers, higher Missouri infrastructure surcharges and favorable Alabama regulatory adjustments. Gas Utility net income rose $21.5 million, led by EnergySouth, regulatory/margin growth and lower underlying O&M at Missouri and Alabama. Warmer weather reduced utility margins. Gas Marketing net income fell $3.7 million to $3.4 million, primarily because of unfavorable mark-to-market activity; non-GAAP segment earnings increased modestly.
Consolidated contribution margin, a non-GAAP measure, was $952.5 million, versus $864.3 million. O&M was $421.3 million, depreciation and amortization $154.1 million, total interest charges $89.1 million, and income tax expense $77.6 million. The effective tax rate was 32.4%, compared with 32.5%.
Debt, liquidity and capital
- At September 30, 2017, reported consolidated debt was $2,572.3 million, including $477.3 million of short-term borrowings and $2,095.0 million of long-term debt including current portion. Long-term debt principal, before unamortized discounts and issuance costs, was $2,112.0 million.
- Cash and cash equivalents were $7.4 million. The company had a $975.0 million revolving credit facility expiring in 2021, with no borrowings against it at year-end; commercial paper outstanding was $477.3 million.
- Debt was 56% of capitalization under the credit agreement definition, below the 70% covenant limit. Credit ratings were investment grade; management said it expected adequate capital-market access. No debt covenant defaults were reported.
- Cash from operations declined to $288.3 million, while investing cash outflow was $433.5 million, principally reflecting $438.1 million in capital expenditures. Financing cash inflow was $147.4 million. The company declared $2.10 per share in dividends, up from $1.96.
- Management estimated FY2018 capital expenditures of approximately $485 million, including about $415 million for utilities. Spire expected to refinance $100 million of Missouri bonds due in August 2018; Alabama planned to issue $75 million of long-term debt.
Outlook, regulatory matters and risks
- No consolidated EPS or earnings guidance is provided in the supplied filing text. Management’s stated investment priorities include utility infrastructure, acquisition integration, organic growth, and technology.
- Missouri’s East and West utilities filed general rate cases in April 2017 seeking net increases of $25.5 million and $34.0 million, respectively. A decision was expected by February 2018, subject to the statutory rate-effective deadline in March 2018. The requests and proposed returns are not approved outcomes.
- The proposed 65-mile Spire STL Pipeline, with planned capacity of up to 400,000 dekatherms per day and Spire Missouri as foundational shipper, remained subject to FERC and other approvals, land rights and construction. FERC’s September 2017 environmental assessment found no significant impact with mitigation; the company anticipated a final order by year-end 2017.
- Alabama recorded a $10.7 million FY2017 Cost Control Measure benefit, expected to affect rates from December 2017. It also recorded a $2.7 million RSE revenue reduction. Approximately $12.3 million of customer refunds remained under the negative-salvage rider.
- Important risks include regulatory rate decisions and cost recovery, weather and climate effects, gas supply and pipeline availability, commodity-price and collateral needs, higher interest costs, acquisition integration and goodwill impairment, pipeline-project delays or rejection, environmental and pipeline-safety obligations, pension funding and investment risk, counterparty credit exposure, cybersecurity, and access to financing.
- Contingencies include former manufactured-gas-plant investigations and remediation, three remaining odorant-related lawsuits involving Spire Gulf, a CERCLA matter involving Spire Alabama, and lawsuits related to a 2013 fatal incident at an Alabama apartment complex. Management stated it did not expect the described matters to have a material financial effect, but some future environmental costs remain uncertain.
- Unusual items included $4.0 million of acquisition, divestiture and restructuring costs and $6.0 million of unrealized losses on energy-related derivatives, which are excluded from management’s non-GAAP net economic earnings measure. Pension settlement and curtailment losses were $17.9 million.
Most important facts for investors to verify
- Confirm the intended reporting period: this filing reports FY2017, not FY2016 Q4.
- Review the final outcomes of Missouri’s rate cases, the ISRS eligibility appeal, and the regulatory recovery of infrastructure investment.
- Track FERC and other approvals, project costs, land acquisition and construction progress for the Spire STL Pipeline.
- Assess whether EnergySouth integration benefits and cost savings are realized, and monitor goodwill impairment assumptions.
- Evaluate the company’s ability to fund the elevated capital program while managing $477.3 million of short-term borrowings, upcoming maturities and dividend commitments.
- Review the detailed notes for environmental exposure, incident-related litigation, pension obligations, derivative fair values and the quality of non-GAAP adjustments.
Deloitte issued unqualified opinions on the financial statements and Spire’s internal control over financial reporting; management also concluded the controls were effective as of September 30, 2017.