24 January 2017 Americas/United States Equity Research Gas Utilities
Spire Inc. (SR) Rating NEUTRAL Price (20-Jan-17, US$) 64.65 INITIATION Target price (US$) 68.00 52-week price range (US$) 70.84 - 59.84 Market cap (US$ m) 2,952 Reaching Beyond Missouri Target price is for 12 months. Research Analysts ■ Initiating at Neutral: We initiate coverage of SR with a Neutral rating and $68 price target. Although the stock currently trades at a 9% 2018 P/E Michael Weinstein 212 325 0897 discount to peer gas utilities, we see this as appropriate considering a major [email protected] pending ratecase filing for Missouri set for April 2017, where 63% of ratebase Khanh Nguyen, CFA now resides. SR has made strides diversifying beyond its Missouri base in 212 538 3524 [email protected] recent years, albeit through some high-priced M&A activity in Alabama and Radi Sultan Mississippi. High levels of operating company equitization among all its 212 538 8137 utilities present an opportunity to de-lever the parent, invest in infrastructure [email protected] such as the STL Pipeline, and grow EPS 4%-6% over the long-term. ■ Missouri ratecase downside is mitigated: We see ~$0.10 of EPS or less at risk in the April 2017 ratecase, focusing on an appropriate equity ratio and the clawback of merger savings. The utility is now supported by ~56% equity but if the authorized level is reduced below this, we expect the impact to be mitigated with increased utility debt for reinvestment or parent debt reduction. ■ Election outcome is positive: A largely Republican sweep in Missouri could improve prospects for regulatory and energy reform legislation after HB 2689, the 21st Century Grid Modernization and Security Act and the Net Metering and Easy Connection Act failed to pass in 2016. The Republican Governor-elect Eric Greitens is also expected to appoint a Republican Chairman to the commission before the ratecase begins (a positive), with a majority Republican commission after Stoll’s (D) term expires in Dec. 2017. ■ Catalysts: Upcoming catalysts are the Missouri GRC Filing (April) and the FERC final order on the STL Pipeline (expected Nov. 2017). ■ Risks: Primary risks to our thesis are unfavorable regulatory outcomes at the upcoming Missouri GRC and the Alabama RSE review. ■ Estimates and Valuation: We forecast an EPS of $3.58, $3.70, and $3.86 for FY 2017-2019, respectively. Our $68 PT represents an 18.5x 2018 P/E representing an implied upside of 5% and an implied yield of 2.9%. Share price performance Financial and valuation metrics
7 5 Year 9/16A 9/17E 9/18E 9/19E EPS (CS adj.) (US$) 3.43 3.58 3.70 3.86 7 0 Prev. EPS (US$) 6 5 P/E (x) 18.9 18.1 17.5 16.8 6 0 P/E rel. (%) 95.8 92.9 100.4 108.0 5 5 EBITDA (US$ m) 429 476 495 535 A p r - 1 6 Ju l- 1 6 O ct - 1 6 Jan - 1 7 EV/EBITDA (current) 12.7 11.4 11.0 10.2 Net debt (US$ m) 2,477 2,501 2,685 2,899 SR.N S& P 5 0 0 IN D EX FFO/Interest 3.7 3.9 4.0 3.7 On 20-Jan-2017 the S&P 500 INDEX closed at 2271.31 FFO/Total Debt 0.12 0.13 0.13 0.12
Daily Jan25, 2016 - Jan20, 2017, 01/25/16 = US$58.88 Number of shares (m) 46 BV/Share (Next Qtr., US$) - Quarterly EPS Q1 Q2 Q3 Q4 Net debt (Next Qtr., US$ m) - Dividend (current, US$) - 2016A 1.04 2.38 0.33 -0.31 Net debt/tot eq (Next Qtr., %) - Dividend yield (%) 3.10 2017E - - - - Source: Company data, Thomson Reuters, Credit Suisse estimates 2018E - - - -
DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. 24 January 2017
Spire Inc. (SR) Price (20 Jan 2017): US$64.65; Rating: NEUTRAL; Target Price: US$68.00; Analyst: Michael Weinstein Income Statement 9/16A 9/17E 9/18E 9/19E Company Background Revenue (US$ m) 1,537.3 1,690.4 1,734.4 1,813.9 EBITDA 429 476 495 535 Depr. & amort. (137) (151) (159) (168) Blue/Grey Sky Scenario EBIT (US$) 292 325 336 366 Net interest exp (77) (82) (84) (95) PBT (US$) 219 249 264 276 Income taxes (70) (81) (86) (90) Profit after tax 149 168 178 186 Minorities - - - - Reported net income (US$) 149 168 178 186 Other NPAT adjustments 0 0 0 0 Adjusted net income 149 168 178 186 Cash Flow 9/16A 9/17E 9/18E 9/19E EBIT 292 325 336 366 Net interest (77) (82) (84) (95) Change in working capital (27) 0 0 0 CAPEX (293) (410) (440) (485) Free cashflow to the firm 35 (69) (80) (105) Aquisitions - - - - Divestments 0 0 0 0 Cash flow from investments (613) (410) (440) (485) Cashflow from financing activities (17) 45 (104) (110) Changes in Net Cash/Debt (302) (24) (184) (215) Balance Sheet (US$) 9/16A 9/17E 9/18E 9/19E Assets Cash & cash equivalents 5 5 5 5 Total current assets 570 570 570 570 Total assets 6,077 6,336 6,617 6,934 Our Blue Sky Scenario (US$) 76.00 Liabilities In this scenario we assume favorable regulatory outcomes in both Total current liabilities 1,161 1,161 1,161 1,161 Missouri in the upcoming ratecase and in Alabama in the upcoming Total liabilities 4,309 4,354 4,561 4,801 RSE review. We also assume Spire's ability to successfully execute Total liabilities and equity 6,077 6,336 6,617 6,934 on the STL pipeline successfully and on-time. In this scenario we Net debt 2,477 2,501 2,685 2,899 arrive at our $76 price target using a 20.4x P/E multiple for Missouri utility, a 21.4x P/E for other utilities, and 13x for gas marketing. Per share 9/16A 9/17E 9/18E 9/19E No. of shares (wtd avg) 44 47 48 48 CS adj. EPS 3.43 3.58 3.70 3.86 Our Grey Sky Scenario (US$) 62.00 Prev. EPS (US$) In this scenario we assume unfavorable regulatory outcomes in both Dividend (US$) 1.96 2.10 2.21 2.34 Missouri in the upcoming ratecase and in Alabama in the upcoming Free cash flow per share 0.80 (1.47) (1.65) (2.17) RSE review. We also assume Spire faces difficulty executing on the Earnings 9/16A 9/17E 9/18E 9/19E STL pipeline that ultimately delays the project and results in Sales growth (%) (22.2) 10.0 2.6 4.6 unrecoverable costs for the company. We model a 16.4x 2018 P/E EBIT growth (%) 4.1 11.2 3.6 8.9 multiple for Missouri, 18.4x P/E for other utilities, and 11x for gas Net profit growth (%) 2.6 12.9 6.1 4.3 marketing to arrive at our $62 price target. EPS growth (%) 2.0 4.6 3.3 4.2 EBITDA margin (%) 27.9 28.2 28.5 29.5 Share price performance EBIT margin (%) 19.0 19.2 19.4 20.2 Pretax margin (%) 14.2 14.7 15.2 15.2 7 5 Net margin (%) 9.7 10.0 10.3 10.3 Valuation 9/16A 9/17E 9/18E 9/19E 7 0 EV/Sales (x) 3.53 3.23 3.25 3.23 6 5 EV/EBITDA (x) 12.7 11.4 11.0 10.2 EV/EBIT (x) 18.6 16.8 16.8 16.0 6 0 P/E (x) 18.9 18.1 17.5 16.8 Price to book (x) 1.6 1.5 1.5 1.5 5 5 Asset turnover 0.3 0.3 0.3 0.3 A p r - 1 6 Ju l- 1 6 O ct - 1 6 Jan - 1 7 Returns 9/16A 9/17E 9/18E 9/19E ROE stated-return on (%) 8.9 9.0 8.8 8.9 SR.N S& P 5 0 0 IN D EX ROIC (%) 0.0 0.0 0.0 0.0
Gearing 9/16A 9/17E 9/18E 9/19E On 20-Jan-2017 the S&P 500 INDEX closed at 2271.31 Net debt/equity (%) 140.1 126.2 130.6 135.9 Daily Jan25, 2016 - Jan20, 2017, 01/25/16 = US$58.88 Interest coverage ratio (X) 3.8 4.0 4.0 3.9 Quarterly EPS Q1 Q2 Q3 Q4 2016A 1.04 2.38 0.33 -0.31 2017E - - - - 2018E - - - - Source: Company data, Thomson Reuters, Credit Suisse estimates
Spire Inc. (SR)2 24 January 2017
Table of contents
Focus Charts 5
Investment Thesis – More than Missouri 6 (1) Missouri ratecase on deck for 2017; only see less than $0.10 of EPS at risk ....6 (2) Election outcome a positive indicator for both Missouri legislation and the ratecase...... 6 (3) Raised guidance shows management confidence, buttressed with pipeline project and merger accretion...... 6 (4) Alabama and Mississippi are investor-friendly...... 7 Summary of Estimates and Credit Metrics...... 8 Catalysts and Events to Monitor ...... 8
Company Overview 10
Key Topics 11 1. FY 2016 results beat SR’s long-term EPS growth target, but see headwinds into 2018/19 11 2. Expect 70% of capital investment plan to be recoverable with minimal regulatory lag 12 3. STL Pipeline project underway; 7(c) application to be filed in January 12 4. M&A strategy has more than doubled the original Laclede ratebase since 2013, albeit at some premium multiples 13 5. Missouri ratecase likely to focus on parent debt imputation and clawback of O&M savings. See less than $0.10 eps at risk, but debt recap could mitigate 14 6. Less of an impact when calculating off ratebase – see less than $0.10 EPS at risk. 16 7. What about merger savings 18 8. Missouri legislation to reduce regulatory lag failed in 2016 session; bad timing and an upcoming election 18
Regulatory Overview 20 Missouri...... 20 Alabama ...... 21 Mississippi...... 22
Valuation 23 The Base Case ...... 23 The Blue Sky Case ...... 24 The Downside (Grey Sky) Case...... 25
Spire Inc. (SR)3 24 January 2017
Risks 26
HOLT® Analysis 27
Management, Compensation & Governance 28
Questions for Management 30
Financial Appendix 31
Spire Inc. (SR)4 24 January 2017
Focus Charts
Figure 1: SR EPS Growth
5.00 0.01 4.00 0.00 0.16 0.10 0.15 0.17 0.16
S 3.00 P E 2.00 3.45 3.46 3.53 3.54 3.68 1.00
- (0.17) (0.12) (0.10) (1.00) 2015 2016 2017 2018 2019
Core Marketing Other
Source: Company data, Credit Suisse estimates
Figure 2: '18 Regulated Gas Group P/E Multiples Figure 3: '17 Regulated Gas Group Div. Yield
25.0x 4.50% 24.0x 4.00% 23.0x Group Average 22.0x 3.50% Group Average: 3.0% 21.0x 19.8x 3.00% 20.0x 19.0x 2.50% 18.0x 2.00% 17.0x 16.0x 1.50% 15.0x 1.00% 14.0x 0.50% 13.0x 12.0x 0.00% I I I I L L R R R R P P X X G G O O J J N N N N J J S S G G F F T T S S N N W W W W N N A A N N C C W S W S N N
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 4: SR Ratebase Growth (2016-2019)
10% % % % % 4 8% 4 3 % . . % 1 . % . 7 6 6 5 % 6 % . % . 3 6 . 9 9 5 7 5 . . % . 6% 5 4 4 1 4 . 4% 4
2%
0% * E S E S R C K D D O H T E S E X U S M W K D E D C N B * BKH: based on our projections for 2015-18
Source: Company data, Credit Suisse estimates
Spire Inc. (SR)5 24 January 2017
Investment Thesis – More than Missouri We initiate on Spire with a Neutral rating and a $68 PT, emphasizing growing diversification outside of its principal Missouri jurisdiction in recent years through an M&A strategy focused on Alabama and Mississippi, two of the most investor-friendly states in the country. Although the stock currently trades at a 9% 2018 P/E discount to peer gas utilities, we see this as appropriate considering a major pending ratecase filing for Missouri set for April 2017, where 63% of ratebase now resides. The company recently rebased its 4%-6% long-term EPS growth target off 2016 $3.42, effectively a $0.12 increase vs prior guidance, but continues to forecast headwinds in 2018/19 from a combination of ratecase risk and the issuance of ~2.5M shares in April 2017 in connection with a $144M convertible that was used to help finance the acquisition of Alagasco in 2014. (1) Missouri ratecase on deck for 2017; only see less than $0.10 of EPS at risk With ~$1.8B of Missouri ratebase at yearend 2016 (vs $2.4B total), we expect the mandatory April 2017 ratecase filing (a condition of the MGE acquisition) to focus on an appropriate equity ratio and the incorporation of merger savings into customer rates. The utility balance sheet sits at ~56% equity but on a consolidated basis, Spire is at 50%/50% (including the $144M convert as equity). At the 56% level, we calculate 2015 ROE in the high 9%’s, in line with both Staff and the company and in disagreement with the Office of the Public Counsel (OPC)’s complaint that the utility has been significantly overearning the allowed 9.72% ROE (blended). However, a reset of the equity ratio down to 50% would raise the calculated ROE ~1%, a -$0.20 impact if ROEs were lowered back to the high 9%’s. Should regulators choose to reduce the equity layer, we see something more moderate as likely– and note that at 53%, only -$0.10 would be at risk, for which we expect management to mitigate by increasing utility leverage and sending cash to the parent for debt reduction, which could result in ~$0.02-$0.03 of parent interest savings. We also expect regulators to claw back up to ~$30M of savings from the merger of predecessor utilities Laclede and MGE. (2) Election outcome a positive indicator for both Missouri legislation and the ratecase. Following the failure in 2016 to pass HB 2689, the 21st Century Grid Modernization and Security Act and the Net Metering and Easy Connection Act, we are now incrementally encouraged for the prospects of bill passage in 2017 after a Republican sweep in the recent Nov. elections. Republicans gained control of the governorship and maintained their majority in the state House and Senate. We view this recent development as a significant positive for the prospects of legislative reform in the state after the gridlock experienced last year. We also see Governor-elect Eric Greitens as picking a Republican chairman in the commission prior to the ratecase, which would create a Republican 3-2 majority once Commissioner Stoll’s (D) term ends in Dec 2017. (3) Raised guidance shows management confidence, buttressed with pipeline project and merger accretion. Management’s long-term EPS growth target remains 4%-6%, but was recently rebased off 2016A $3.42, which is an effective long-term raise of ~$0.12 vs the previous 2015A $3.16 base. Major drivers include the $190M-$210M STL pipeline project (subject to FERC approval) and accretion from the recent EnergySouth acquisition (Mobile Gas and Willmut Gas), expected to impact earnings in 2018.
Spire Inc. (SR)6 24 January 2017
(4) Alabama and Mississippi are investor-friendly Both states employ alternative ratemaking methods and while Alabama does have a structure for traditional rate cases, the process around them is irrelevant as no traditional rate cases have been filed in the past 20 years. The state currently uses a process called the Rate Stabilization and Equalization (RSE) method; which utilizes a forward test-year to determine rates. Under the RSE process, rate increases are capped at 5% annually and the average increase in any two consecutive years cannot exceed 4%. Alagasco also has a Cost Control Mechanism in place (CCM) which allows for annual increases in O&M expenses. In Mississippi, utilities have the option of filing for traditional rate cases or operating under an alternative rate plan (ARP). Willmut Gas' ARP utilizes a historic test year and provides for rate stabilization adjustments (RSA) with asymmetric sharing above/below the allowed ROE.
Spire Inc. (SR)7 24 January 2017
Summary of Estimates and Credit Metrics
Figure 5: Summary of Estimates and Credit Metrics FY2016 FY2017 FY2018 FY2019 FY2020 Missouri 2.20 2.28 2.24 2.31 2.42 Alabama 1.26 1.07 1.10 1.16 1.23 Mobile Gas 0.00 0.17 0.18 0.19 0.20 Willmut Gas 0.00 0.02 0.02 0.02 0.02 Marketing 0.15 0.17 0.16 0.16 0.16 Corporate & Other (0.17) (0.12) 0.00 0.01 (0.01) ______Total EPS 3.44 3.58 3.70 3.86 4.03 % growth 4.1% 3.3% 4.2% 4.6% Consensus EPS 3.58 3.71 3.82
Earned ROEs Missouri Utility 9.3% 10.1% 9.7% 9.5% 9.4% Alabama Utility 12.4% 11.1% 11.1% 11.1% 11.2% Mobile Gas 8.1% 9.2% 9.5% 9.8% 10.1% Willmut Gas 7.6% 8.8% 9.0% 9.2% 9.4%
Dividend/ sh 1.96 2.10 2.21 2.34 2.46 % growth 7.1% 5.5% 5.5% 5.5% Consensus Dividend/ sh 1.99 2.11 2.22 Payout Ratio 57.0% 58.6% 59.9% 60.6% 61.1%
Shares Outstanding 44 47 48 48 48 Consensus Shares Outstanding 46
Equity Issuance / Repurchase 137 144 3 3 3 Debt Issuance / Repurchase 245 24 184 215 122 Net Debt 2,079 2,102 2,286 2,501 2,623 Consensus Net Debt 2,490 2,569 2,746 2,902 % Corporate Debt 45.7% 41.7% 42.2% 43.3% 42.2%
Net Debt / Cap 54% 52% 53% 54% 54% FFO / Debt 10% 16% 16% 15% 15% FFO Interest Coverage 3.0x 4.4x 4.3x 4.0x 3.8x Debt/ EBITDA 4.9x 4.4x 4.6x 4.7x 4.6x EBITDA/ Interest Expense 6.4x 6.1x 5.9x 5.6x 5.4x
Source: Company data, Credit Suisse estimates Catalysts and Events to Monitor STL Pipeline Milestone; Submit 7(c) – Jan. 2017 . SR expects to submit the 7(c) application for the STL pipeline to FERC for project approval in Jan. 2017. Missouri General Rate Case (GRC) Filing – April 2017 . SR expects to file its mandatory GRC in Missouri in April of 2017 following the MGE acquisition; this will be the first rate case in Missouri for the combined company.
Spire Inc. (SR)8 24 January 2017
Mobile Gas 4-year review of RSE Filing – Oct. 2017 . Mobile's RSE review should conclude around Oct. 2017 with the new rates becoming effective in FY 2018. STL Pipeline Milestone; FERC Final Order – Nov. 2017 . SR expects a FERC final order on its STL pipeline project around Nov. 2017.
Spire Inc. (SR)9 24 January 2017
Company Overview
Figure 6: Spire Corporate Structure
Spire Energy, Parent
Gas Utility Gas Marketing
Alagasco Laclede Gas MGE Mobile Gas Wilmut Gas LER
Regulated Business
Source: Company data, Credit Suisse estimates
Spire is a SMID-cap regulated gas utility, based out of St. Louis, Missouri, serving 1.7 million customers across Missouri, Alabama and Mississippi. The company was originally founded as Laclede Gas in 1857 (one of the earliest companies to be listed on the NYSE in 1889), the predecessor to the Laclede group which formed in 2000 and served as the public holding company for Laclede Gas. The company operates across two segments: Gas Utilities and Gas Marketing. Gas Utilities is the primary revenue driver, generating $1.5B of revenue in 2016 (95% of FY 2016 Revenue). The gas utility segment contains Spire's five fully regulated gas companies: Alagasco, Missouri Gas Energy (MGE), Laclede Gas, Mobile Gas, and Willmut Gas. The company also has an unregulated and fully-owned subsidiary, Laclede Energy Resources (LER), which makes up the Gas Marketing segment and houses all other unregulated operations. This segment is not the company's primary focus, generating only a small portion of revenue; $80M in 2015 (5% of FY 2016 Revenue). A majority of SR's gas companies were obtained through a sequence of acquisitions over the past several years: acquiring MGE in 2013, Alagasco in 2014, and Mobile and Willmut Gas in 2016.
Figure 7: Spire Service Territory Figure 8: Spire Service Territory
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Spire Inc. (SR) 10 24 January 2017
Key Topics 1. FY 2016 results beat SR’s long-term EPS growth target, but see headwinds into 2018/19. Management’s long-term EPS growth target remains 4%- 6%, but was recently rebased off 2016A $3.42, which is an effective raise of ~$0.12 vs the previous 2015A $3.16 base. 2016A $3.42 was at the top end of prior guidance $3.34- $3.44 and was 8% above 2015A. Recently initiated 2017E guidance of $3.50-$3.60 was in-line with consensus at $3.55 and represents a 5%-7% CAGR over 2015A (although only 2%-5% over 2016A). Of the company’s two main operating segments, the gas utility is expected to run 97%-98% of total earnings, with gas marketing making up the remainder. On a quarterly basis, we expect seasonal distribution of earnings to be largely similar to 2016, although the recently acquired Mobile and Willmut utilities may be expected to contribute a penny or two more in 2Q during heating season. The company’s projected effective tax rate for 2017 is 32%-34% vs 2016 at 32.5% (a little higher in Alabama) and its projected dividend for 2017E of $2.10 is 7.1% higher than 2016 and represents a 59% payout ratio, slightly below the midpoint of their 55%-65% target range and 5%-8% below peers. The below-average payout ratio is reflective of the company’s focus on organic growth projects and de-levering the holdco after several major acquisitions since 2013. Beyond 2016, management has described the Missouri ratecase (filing required by April 1, 2017) and the April 1, 2017 mandatory conversion of $144M equity units from the Alagasco acquisition as “headwinds” for 2018/19 (albeit under the terms of the mandatory convert, only 2.5M shares would be issued at the prices above $57.81 vs 600k shares more at prices below $46.25).
Figure 9: EPS Growth Guidance Comparison
SR EPS Growth 4%-6%, Current vs. Prior Guidance 4.40
4.20
4.00
3.80
3.60 3.55 3.42 3.40
3.20 3.16
3.00 E E E E A A 7 8 9 0 5 6 1 1 1 2 1 1 0 0 0 0 0 0 2 2 2 2 2 2
6% growth (latest guidance) 4% growth (latest guidance) 6% growth (previous guidance) 4% growth (previous guidance) Midpoint of actual 2017 guidance range $3.50-$3.60
Source: Company data, Credit Suisse estimates
Spire Inc. (SR) 11 24 January 2017
2. Expect 70% of capital investment plan to be recoverable with minimal regulatory lag. SR expects to invest over $2B from 2016-2020, of which nearly 70% would be recoverable in rates with minimal regulatory lag as a result of infrastructure trackers such as the Infrastructure Service Replacement Surcharge (ISRS) in Missouri and the Rate Stabilization and Equalization (RSE) clause in Alabama. The recent additions of Mobile and Willmut Gas add about $20M of annual capex and the $190M-$210M St Louis Pipeline (STL) contributes to 2016-2019 spending as well. About 10% of capex for 2016 was slated for new business in Missouri, and we expect something similar (perhaps 8%- 10%) in 2017.
Figure 10: Capex Plan Total, Total %, Capex plan, 2014A-2020E ($M; Nov 2016E- 2016E- 2016) 2013A 2014A 2015A 2016A 2017E 2018E 2019E 2020E 2020E 2020E Utility (minimal reg lag) $68 $99 $194 $223 $275 $280 $295 $305 $1,378 68% Other Utility and non-utility 63 72 96 68 95 90 90 90 433 21% Non-utility - - - - 5 5 5 5 Spire St Louis Pipeline (STL) - - - 2 35 65 95 - 197 10% Total $131 $171 $290 $293 $410 $440 $485 $400 $2,028 Prior forecast (Aug 2016) * $131 $171 $290 $310 $382 $387 $452 $352 $1,883 * Increase from $20M/yr at Mobile and Willmut, $15M cumulative from STL Pipeline, and the remainder at Alagasco and MGE.
Source: Company data, Credit Suisse estimates
As illustrated below, regular rate filings have increased the ISRS for Laclede and MGE (combined) to a $35.3M run rate since 2014
Figure 11: ISRS Rider History Increase Total Run Missouri ISRS Increase Date ($M) Rate ($M) 4/12/2014 7.0 7.0 5/22/2015 8.2 15.2 10/18/2015 4.8 20.0 12/1/2015 6.3 26.3 5/31/2016 9.0 35.3
Source: Company data, Credit Suisse estimates
The latest ISRS filing is currently in process, with rates effective by Jan 28, 2017. This is filed no more than twice a year (but not required). 3. STL Pipeline project underway; 7(c) application to be filed in January. On July 22, 2016 Spire announced its proposal to build and operate a pipeline connecting the St. Louis, MS area to the Rockies express pipeline under a new subsidiary, Spire STL Pipeline LLC (100% ownership interest). The pipeline will be 70 miles long and have a capacity of 400MMcf/d, with an expected contractual commitment of 350 MMcf/d. The company's total proposed investment in the project is $190M-$210M and the pipeline is expected to be in service in fiscal 2019. Management has indicated flexibility toward project financing, which could include taking on an equity partner if desirable vs other capital choices.
Spire Inc. (SR) 12 24 January 2017
Figure 12: Spire STL Pipeline Construction Timeline Objective Date Pre-Filing Process Begins Jul. 2016 Open Season Aug. 2016 Open Houses Aug. 2016 FERC Scoping Meetings Sep. 2016 Submit 7(c) Application Jan. 2017 Requested Date for FERC Final Order Nov. 2017 FERC Notice to Proceed Dec. 2017 Anticipated Construction Start Feb. 2018 Target In-Service Date Nov. 2018
Source: Company data, Credit Suisse estimates 4. M&A strategy has more than doubled the original Laclede ratebase since 2013, albeit at some premium multiples. On further M&A, the company now sees a more pricey market than in the past, although one in which LDCs are still consolidating and management remains alert to new opportunities provided they create value. In any case, SR stresses that its 4%-6% growth plan does not require further acquisitions, nor are they actively looking for an acquirer to help execute their plan. As illustrated in the tables below, SR has paid $2.6B for $1.4B of incremental ratebase since 2013, financing these acquisitions with about 60% debt at forward 2-year P/E multiples ranging from 24x-30x, by our estimates. While these acquisitions are all projected to be accretive, we note sequentially higher P/Es and tighter ROIC’s with each deal, ranging from 4.1%-3.3%. Most recently, SR purchased Sempra Energy’s EnergySouth gas utilities Mobile Gas and Willmut and the company expects the transaction to be about neutral to net economic EPS in 2017 and accretive in 2018 (our calculation essentially confirms this, with slight dilution assuming a modest 5% annualized improvement in EPS through 2018). Management also emphasizes the deal as supportive of its 4%-6% long-term EPS growth target. We illustrate below how the original Laclede Gas began the M&A process in 2013 with an above-average 62% equity ratio within its long-term capital structure, applying parent leverage in the acquisitions of MGE and Alagasco to reduce the consolidated ratio to 49% by late-2014. Leverage was also applied in the EnergySouth acquisition ($165M at the holdco) to take advantage of low rates, which brought the consolidated equity ratio down to its most recent 49.5% level. This calculation includes a 420-bps boost from the April 2017 reclassification of $144M of mandatorily convertible 2% Remarketable Junior Subordinated Notes that were issued in support of the Alagasco transaction. It also excludes seasonal short-term debt typically used for gas purchase and resale. As we discuss further below, the MGE merger settlement required Laclede Gas to reduce ratebase by $125M (returned over 10 years) even as the company took on $210M of Missouri-jurisdictional goodwill and agreed not to seek recovery of the acquisition premium and transaction costs. Laclede/MGE is required to file a joint ratecase in April 2017, although the Missouri Public Service Commission (MPSC) has agreed to take testimony and held hearings this winter for an ROE overearnings complaint from the Office of Public Counsel (OPC). In contrast, the Alagasco and Mobile/Willmut transactions did not require Missouri approval and were approved by Alabama and Mississippi without such conditions.
Spire Inc. (SR) 13 24 January 2017
Figure 13: Spire Acquisitions and Permanent Financing Spire Acquisitions and permanent MGE Alagasco Mobile & Total financing, 2013-2016 ($M) Willmut
Date 9/3/2013 9/2/2014 9/12/2016 Ratebase $551 $730 $158 $1,439 Stock transfer $0 $0 $0 $0 Cash from equity $445 $479 $138 $1,062 Cash from mand converts (4/1/17) $144 $144 Cash from debt $450 $625 $165 $1,240 Cash on hand/revolver $80 $102 $17 $199 Assumed debt $0 $250 $67 $317 Transfer working cap ($43) ($43) Sale of New England Gas rights ($11) ($11) NPV tax benefits ($260) ($260) Net purchase price $964 $1,340 $344 $2,648 2015 Net Income ($M, ex-1x gains) $40 $48 $10 2016E at 5% growth $50 2018E at 5% growth $11 Purchase P/E on fwd 2-yr NI 24.1x 26.6x 30.4x ROIC 4.1% 3.8% 3.3% CS est 2-year fwd EPS accretion 0.08 0.10 (0.01) Balance sheet effect: Equity % financing of transction with $144M convert 45.6% 38.9% 40.1% 41.3%
Consolidated equity ratio before transaction 62.3% 53.4% 51.0% Consolidated equity ratio after transaction 52.8% 49.2% 49.5% Goodwill from transaction $210 $728 Where is goodwill? Missouri Parent
Source: Company data, Credit Suisse estimates 5. Missouri ratecase likely to focus on parent debt imputation and clawback of O&M savings. See less than $0.10 eps at risk, but debt recap could mitigate. We illustrate below that the company likely has less than ~$0.10 of EPS at risk in the case. As a condition of the merger between Laclede Gas and MGE in 2013, the combined utility is required to file a full ratecase in April 2017. The Missouri jurisdiction balance sheet had a 56.22% equity ratio at yearend 2015, notably higher than the consolidated 50.08% at yearend 2016E (including the conversion of $144M equity convertibles due in 2017) and the current authorized levels of 53.00% and 51.55% for Laclede and MGE, respectively. The state’s previous history with Aquila Inc.’s bankruptcy under the weight of holdco debt (and the Enron-related energy market collapse) over a decade ago has left regulators with a lingering concern over parent leverage. However, management notes that their utilities are ringfenced from parent debt responsibility and that their level of parent leverage is both reasonable and was used to expand into other regulated utilities rather than a volatile business such as unregulated energy trading. Furthermore, the commission has generally declined to impute parent leverage in its final decisions for other utilities in the state. In any event, management appears ready to consider increasing its Missouri jurisdictional operating company leverage should a final decision produce an authorized equity ratio below the ~56% currently on the combined utility’s balance sheet. Such a move would dovetail with the Spire Inc. (SR) 14 24 January 2017
company’s previous issuance of opco debt at highly-equitized Alagasco and a broader strategy to de-lever the holding company over time by paying down debt with cash from tax savings and a lower-than-average dividend payout ratio. We also expect the ratecase to result in the clawback of merger synergies through the 2016 test year (see below for a more detailed discussion of projected synergies). OPC complaint on overearning had sought to accelerate Missouri rate review, but will now be included within the next ratecase. In Aug 2016, the MPSC agreed to consider an April 2016 complaint (GC-2016-0297) from the Missouri Office of the Public Counsel (OPC) alleging that Laclede and MGE earned a 10.45% ROE in 2015, “unreasonably” higher than the average US natural gas utility authorized ROE of 9.6% and the 9.75% ROE specified in Laclede’s most recent ISRS stipulation (GR-2013-0171). OPC also argued that the utilities’ 56% equity ratio is unreasonably high as well. The commission had agreed to hear the complaint on an accelerated schedule, but OPC has agreed to drop the complaint for now and roll it into the next ratecase. We further note that the MPSC had previously emphasized that the complaint is “OPC’s to prove if it can.” What’s the right ROE? Probably in the high 9%’s. Recall that in May, Staff itself had asked the MPSC to deny the complaint’s request for an investigation, stating that “OPC has not adequately supported its claims of overearning by [the combined] Laclede and MGE”. Staff also argued that OPC improperly overstated the company’s earned 2015 ROE at 10.45% by applying the equity balance at the beginning of the period (Oct 1, 2014) rather than an average for 2015 that yields a 10.05%. Instead, Staff arrives at a 9.60% ROE using yearend 2015 equity while excluding a 1x $7.6M gain ($4.7M after tax) on the sale of property (Forest Park). We’ve duplicated these calculations in the table below (arriving at 9.69% using Staff’s method), which are all notably based on the utility’s actual capital structure rather than an updated ratebase figure. Separately, we take note of the high equity level for Alagasco, which produces a low calculated ROE. However, as we illustrate in the sections below, the latest version of Alagasco’s Rate Stabilization and Equalization (RSE) clause in 2014 specifies a 56.5% authorized equity ratio that we estimate results in an ROE more than double the 5.49% below.
Figure 14: Subsidiary ROE Breakout Total Consolidated Spire Balance sheet and ROE calculations Laclede Gas Missouri Gas Total Missouri Alagasco Mobile Willmut Utility - Total Gas Parent - Total FY 2015A Mid-2016E Bal Energy (MGE) Gas Gas other Utilities Marketing other Spire FY reclassify $144M Sheet with $144M 2015A mand convert * mand convert ** FY 2014 Equity (yearend $M) $1,008 $850 $78 $11 $1,946 . . $1,508 $1,652 FY 2015 Equity (yearend $M) $1,038 $875 $78 $12 $2,002 . . $1,574 $1,717 $1,946 FY 2015 Long-term Debt (yearend $M) $808 $250 $62 $7 $1,127 . . $1,852 $1,708 $1,940 FY 2015 Equity/Total Long-term Cap 56.22% 77.77% 55.82% 61.99% 63.98% . . 45.94% 50.14% 50.08% FY 2015 Short-term Debt (yearend $M) $233 $31 $0 $0 $264 . . $338 $338 $98 . . 2015A Net Income $65 $40 $105 $48 $9 $1 ($8) $155 . . 1x Property gains (after tax) $5 $0 $5 $0 $0 $0 $0 $5 . . 2015A Net Economic Earnings ($M; non- GAAP ex-1x gains) $61 $40 $101 $48 $9 $1 ($8) $150 $4 ($16) $138 $138 ROE on yearend 2014 equity with prop gain (OPC method) 10.44% ROE on 2015 average equity (Staff method) 9.83% 5.57% 11.20% 8.91% 8.97% 8.21% ROE on yearend 2015 equity (Mgmt method) 9.69% 5.49% 11.19% 8.53% 8.79% 8.05%
However, this capital structure also supports goodwill and the company has agreed not to seek recovery of the acquisition premium in Missouri. Goodwill on books from acquisitions $210 $736 $946 Equity portion at 56.22% $118 FY 2015 Equity without goodwill portion (yearend $M) $920 ROE on yearend 2015 equity without goodwill (Mgmt method) 10.93% EPS sensitivity to -50 bps ROE ($0.10) Also: after-tax interest at 3% on debt portion supporting goodwill ($0.04) * Mandatory $143.8M convert issued in 2014 for acquisition of Alagasco; due April 1, 2017. Jun 2016 Bal sheet includes $138M equity issued for purchase of Mobile and Willmut Gas. ** Includes $138M new equity, $67M of assumed debt, and $165M of new debt for the Mobile Gas and Willmut acquisitions.
Source: Company data, Credit Suisse estimates
At the bottom of the table, we perform an alternative ROE calculation of 10.93% where we remove 56% of $210M of the goodwill sitting on Laclede’s books that is being supported by this capital structure that regulators and the company agree is unrecoverable per the Spire Inc. (SR) 15 24 January 2017
MGE merger agreement that precludes recovery of any acquisition premium. EPS sensitivity is $0.10 for every 50 bps ROE. Under this scenario, regulators would also presumably reduce the revenue requirement for interest expense on the remaining 44% debt supporting the goodwill (about -$0.04 EPS), although this impact could be mitigated if they assume some of Laclede’s cheaper short-term debt supports the goodwill as well. While this may be one of the more punitive scenarios, we think the ratecase will turn on a lower-impact ratebase calculation approach, as we detail in the next section. 6. Less of an impact when calculating off ratebase – see less than $0.10 EPS at risk. In the next table, we estimate that Laclede and MGE have added a combined $273M of ratebase since the merger through Sept 2016, with an additional $41M from the 10-year amortization of MGE’s $125M “ratebase offset” that was agreed to in July 2013 to normalize taxes. This leaves the Missouri jurisdiction at about $1.8B of ratebase at yearend 2016.
Figure 15: Estimated Net Ratebase Additions in Missouri Since 2012 Capex (FERC Form 2) Laclede MGE Laclede & MGE Alagasco Total Capex in Presentation 2013 $123 $40 $163 $131 2013 - Laclede only 2014 $163 $171 2014 - Laclede & MGE are combined 2015 $199 $86 $290 2015 - Laclede & MGE & Alagasco 2016 $200 $87 $293 2016 - Laclede & MGE & Alagasco Total incremental * $725
Depreciation (FERC Form 2) Laclede MGE Laclede & MGE 2013 $40 $30 $70 2014 $69 2015 $73 2016 $73 Total incremental * ($285)
Def Taxes (FERC Form 2) Laclede MGE Laclede & MGE 2013 $16 $33 $49 2014 $36 2015 $46 2016 $46 Total incremental * ($176)
10-year amortization of MGE's $125M "ratebase offset" Laclede & MGE 2013 $3 2014 $13 2015 $13 2016 $13 Total incremental * $41
Total estimated incremental ratebase* $305 Plus ratebase at 9/2012 $1,495 CS Estimated ratebase at 9/2016 $1,800
* CS estimated incremental amounts since filed in Laclede Gas (Case No. GR-2013-0171) and MGE (Case No. GR-2014-0007).
Source: Company data, Credit Suisse estimates
At 0% earnings growth in 2016E (simply applying 2015A), this leads to a 9.94% ROE when applying the 56.22% actual cap structure at yearend 2015 (10.43% ROE at 5% earnings growth for 2016E). Each 50 bps of ROE is equivalent to about $5M of net income or $0.10 EPS and we see less than -$0.10 at risk under this scenario. Now, in the event that the MPSC decides to apply the parent cap structure of only 50.1% equity, this would result in a higher 11.12% ROE. To be fair however, if regulators seek to reduce the cost of capital for parent leverage, we think it would be appropriate to allow the recovery of goodwill that was created by it for the benefit of ratepayers through synergies creation. Under this scenario, we show that incorporating $210M of goodwill into the ratebase would bring the ROE back down to 9.96%.
Spire Inc. (SR) 16 24 January 2017
Finally, we also illustrate the effect of reducing the authorized equity ratio to 53%. The resulting ROE would recalculate to 10.54% (11.07% at 5% growth for 2016E), again putting about $0.10 EPS at risk in our view. However, we would also expect management to issue ~$58M of utility-level debt and dividend the cash up to the parent to recapitalize to the new 53% level. The reduction of parent debt would then save about $0.02 EPS in this scenario.
Figure 16: Utility Portfolio Utility Portfolio Laclede Gas Missouri Gas Total Missouri at Total Missouri at Alagasco Mobile Willmut Energy (MGE) 0% NI growth vs 5% NI growth vs Gas Gas 2015A 2015A Customers ('000) 647 501 1,148 420 85 19 Employees 1,614 555 2,169 909 219 45 Pipe Miles ('000) 16 14 30 23 4 1 Last Official Ratebase ($M) * $944 $551 $1,495 $730 $140 $18 Authorized Equity Ratio 53.00% 51.55% 52.47% 56.50% 56.00% Last Authorized ROE ** 9.70% 9.75% 9.72% 10.85% 10.80% 9.23% Last Test Year (year-end) 9/30/2012 4/30/2013 9/30/2015 9/30/2015 6/30/2015 Capex since last test year ($M) $725 $87 $14 $5 Add back 10-year amort of $125M MGE "ratebase offset" since 2013 (see below) $41 Depreciation since last test year ($M) ($285) ($47) ($9) ($1) Deferred taxes since last test year ($M) ($176) ($29) ($1) ($1) CS projected ratebase 9/2016 ($M) $1,800 $1,800 $741 $144 $20 2016E NEE ($M) at 0% & 5% growth off 2015A $101 $106 $50 $9 $1 CS assumed next auth equity ratio 56.22% 56.22% 56.50% 56.00% 56.00% ROE applying 2016E NI on 9/2016 projected ratebase 9.94% 10.43% 12.04% 11.42% 9.16% OPC complaint to be heard Winter 2016/17, while Missouri ratecase to be filed in April 2017.
What if apply parent equity ratio? 50.08% 50.08% ROE applying 2016E NI on 9/2016 projected ratebase 11.16% 11.71% However, if parent leverage is included in the calc, the utility could credibly argue for recovery of the acquisition premium. Goodwill at Laclede Gas from the 2013 MGE merger $210 $210 Ratebase with goodwill included $2,010 $2,010 ROE with 50.08% parent equity ratio and recovery of goodwill 9.99% 10.49%
What if apply a 53% equity ratio instead? 53.00% 53.00% ROE applying 2016E NI on 9/2016 projected ratebase 10.54% 11.07% EPS sensitivity to -50 bps ROE ($0.10) Amount of additional Opco debt at lower equity ratio - dividend cash to parent for debt paydown there ($M) $58
Potential parent interest savings @ 3% from recap under a lower auth equity ratio (EPS) $0.02
* As filed, Laclede Gas (Case No. GR-2013-0171) and MGE (Case No. GR-2014-0007). Per the merger settlement approved in July 2013, MGE was required to record a $125M "ratebase offset", to be amortized over 10 years and is prohibited from recovering any acquisition premium and transaction-related costs. * For Alagasco and Mobile Gas, Rate Stabilization and Equalization (RSE) uses year-end capitalization rather than rate base for ratemaking purposes as of 9/30/15. * Willmut rate base for Rate Stabilization Adjustment (RSA) purposes at 6/30/15. ** Alagasco ROE includes 5 basis-point incentive for achievement of customer satisfaction ratings. MGE pre-tax rate of return and Laclede Gas ROE for Infrastructure Service Replacement Surcharge (ISRS) filing purposes only.
Source: Company data, Credit Suisse estimates
Regarding the level of earnings that we expect Laclede/MGE to record for the 2016 test year heading into the April 2017 filing, management has noted that they see the ratecase (and the $144M equity mandatory convert in April 2017) as “headwinds” for 2018/19. Given the company’s 2016A result of $3.42, we estimate 2016 utility earnings at least 5% higher than 2015A and in our calculations; we show ROE outcomes for both 0% growth and 5% earnings growth in 2016E. As such, at 5% growth, this incremental $0.10 EPS for 2016E would also be at risk at an allowed ROE ~10% heading into 2018E.
Spire Inc. (SR) 17 24 January 2017
7. What about merger savings? At the time of announcement, Laclede expected the MGE transaction to be EPS neutral in the first full year after close and accretive thereafter. As indicated above, we calculate about $0.08 accretion to 2015 results. Management had also stated a goal for achieving net synergies of $25M-$34M by FY2016 (year-3 post close), with those net synergies ramping up during the next two years. As we illustrate in the table/chart below, we roughly calculate about $30M of annualized savings in 2015 (~$100M in the first four years), mostly in the administrative & general area versus a pre-merger “baseline” O&M level inflated at 1%. These savings provide the company the opportunity to mitigate the need for revenue increases.
Figure 17: Cost Savings, 2014A-2017E CS Estimate of Laclede/MGE Non- Operation Maint A&G Total Laclede Gas O&M 2012 (pre-merger) $73 $23 $72 $168 2013 (pre-merger) $67 $24 $91 $182 2014 year 1 post close $79 $25 $71 $175 2015 year 2 post-close $78 $21 $59 $159
MGE O&M 2012 (pre-merger) $36 $20 $61 $118 2013 (pre-merger, reported only 9 mos) $35 $17 $36 $87 2014 year 1 post close $37 $22 $42 $100 2015 year 2 post-close $39 $19 $44 $101
Inflate 2012 baseline Apparent annual Laclede/MGE combined OA&cMtual O&M, A&G @ 1% savings vs baseline % from A&G 2012 (pre-merger baseline) $286 $286 $0 2013 (pre-merger, reported only 9 mos) $287 2014 yr 1 $275 $289 $13 100% 2015 yr 2 $260 $290 $30 100% 2016E yr 3 run rate $30 2017E yr 4 run rate $30
Source: Company data, Credit Suisse estimates 8. Missouri legislation to reduce regulatory lag failed in 2016 session; bad timing and an upcoming election. A bill that would address the issue of regulatory lag was shot down in the senate earlier this year. The primary aspects of the bill, HB 2689, are the institution of the 21st Century Grid Modernization and Security Act and the Net Metering and Easy Connection Act, which would up the wattage allowed on certain customer generators and would require net metering to be made available in certain cases. The proposal would also have capped increases in utility revenue to 2% for each of the first two years and to 4.75% for each year after that, with a rolling average (revenue increase) cap at 3.5%. The bill was authored by Rep Rocky Miller (R) and sponsored by Senator Ryan Silvey (R, Kansas City); primary opposition to the bill came from Senator Rob Schaaf (R) and Gary Romine (R) who spearheaded the opposition efforts. Due to the fact that the percentage caps are set on the annual increases to overall utility revenue, opponents cited that it could result in an increase in costs for smaller customers. The environment in the 2016 Missouri legislature was also very unfavorable towards making any progress, with the highly controversial religious freedom bill (SJ39), as well as the Voter ID and Ethics Reform bills in high focus and heavily debated. On top of this, the elections for the entire house (163 seats) and more than half of the senate (18 of 34 seats) occurred in the Missouri general election in November this year, which made it particularly difficult to make material progress on passage of HB 2689 last Summer. Constructive on the long-term prospects of regulatory reform, but will any progress be made in 2017? Regulatory reform is currently being studied to address the problem by a senate interim committee and PSC working session. While this is a sign of progress, the Spire Inc. (SR) 18 24 January 2017
most recent senate interim committee hearing in August showed virtually no signs of progress, with both sides refusing to shift their position and no progress being made towards an agreement. Both parties essentially appear to be at a stalemate with no concrete indications of progress on an agreement. Given these most recent developments, we are not optimistic that HB2689 or a bill of similar breadth will be passed in its entirety in the 2017 legislative session. However, we believe a more narrow-focused bill with a more limited breadth could have a better chance of seeing passage in the upcoming year. We are further encouraged on the prospects of bill passage in 2017, with the recent republican sweep in the November 2016 elections in Missouri. Republicans gained control of the governorship and maintained their majority in the state house and the state senate, creating a clear path to republican control of the PSC. We view this recent development as a significant positive for the prospects of legislative reform in the state. Missouri legislation would overhaul regulatory construct–significantly improving outlook. The Missouri Economic and Development and Infrastructure Investment Act (SB 190) was pre-filed December 7, has been read on the House floor and is currently pending. The bill includes several key regulatory changes that would allow better cost recovery and reduce the amount of regulatory lag by doing the following: . Adjustment to Fuel Adjustment Clause (FAC): Adds transmissions charges and revenue to the fuel adjustment clause already in place, and would allow utilities to amend rate schedules to begin recovery without filing a rate case. . Additional Cost Trackers: Creates and implements a property tax and physical & cyber security cost tracker. . Biomass to be classified as a renewable: Adds biomass fiber fuel to the definition of a renewable resource and would calculate each kwh generated from biomass at 1.50 kwh for calculation purposes. . Deferral of Property Taxes and O&M (added to revenue requirement over 20 years): Require utilities to defer any difference in property taxes and O&M to a regulatory asset/liability account to be included in the utility’s revenue requirement and requires the PSC to adjust rate base to reflect any unamortized regulatory asset/liability balances. . Infrastructure Replacement: Allows the PSC to utilize rate adjustment mechanisms to promote infrastructure replacement. . ….And Everything Else: The bill also allows the PSC (where the PSC would have been previously prevented by statue) to use forecasted test years, true- ups of revenue requirement components, tracking mechanisms, interim rates, grid modernization incentives, decoupling and pre-approval of construction projects. . Expedite Approval for Renewable Projects less than 1 MW: Eliminates the requirement to obtain a certificate of convenience and necessity for Renewable projects under 1MW. . Economic Development Riders: Allows certain large electric customers who meet usage criteria to receive special lower rates, with the difference being borne by all other customers equally.
Spire Inc. (SR) 19 24 January 2017
Regulatory Overview Missouri The Missouri Public Service Commission (PSC) is currently made up of five commissioners: Daniel Hall, who serves as chairman, Stephen Stoll, Bill Kenney, Scott Rupp, and Maida Coleman. Eric Greitens (R) recently won the governorship, succeeding Jay Nixon (D) in Jan. 2017.
Figure 18: Missouri Regulators Commisioner Party Term Begins Term End Daniel Hall, Chair D Sep-13 Sep-19 Stephen Stoll D Jun-12 Dec-17 Bill Kenney R Jan-13 Jan-19 Scott Rupp R Apr-14 Apr-20 Maida Coleman D Aug-15 Aug-21
Governor Party Term Begins Term End Eric Greitens R Jan-17 Jan-21 Former: Jay Nixon D Jan-09 Jan-17
Source: Company data, Credit Suisse estimates, SNL
. Rate Base: Historic TY with year-end original cost, adjusted for KMCs. . The most recent rate decision regarding gas utilities by the Missouri PSC authorized a 10% ROE for Liberty Utilities (Midstates Natural Gas) in December 2014. The most recent rate decisions for SR authorized a 10% ROE for SR’s subsidiary, Missouri Gas Energy (MGE), in 2010, and a 9.7% ROE for Laclede Gas in 2013. These ROEs also form the basis for adjustments under the company’s infrastructure service replacement surcharge (ISRS) rider. . Fuel Adjustment Clause (FAC): Submitted as a part of a general rate case. The FAC remain in place for a maximum of four years, and must be reviewed every 18 months; subject to a true-up. . Purchased Gas Adjustment Clause (PGA): Allows local gas distribution companies (LDCs) to recover changes in gas costs, up to four adjustment per year, with a true-up recoverable over the next year.
Figure 19: Recent Rate Cases – Missouri Increase Requested Increase Authorized Company Parent Case Identification Service Case Type Date Rate Return on Common Equity Rate Base Date Decision Rate Return on Common Equity Test Year Rate Base Company Increase Equity /Total Cap ($M) Type Increase Equity /Total Cap End ($M) Ticker ($M) (%) (%) ($M) (%) (%) KCP&L GXP C-ER-2016-0156 Electric Vertically 2/23/2016 59.3 9.90 54.83 1,906.00 9/28/2016 Settled 3.0 NA NA NA NA Greater (MPS/L&P) Integrated Missouri Op Co Liberty AQN C-GO-2016-0206 Natural Limited- 2/19/2016 0.2 NA NA 4.50 5/11/2016 Fully 0.2 NA NA 01/2016 4.50 Utilities (ISRS) Gas Issue Rider Litigated (Midstates) Laclede Gas SR C-GO-2016-0196 Natural Limited- 2/1/2016 5.0 NA NA 168.80 5/19/2016 Fully 5.4 NA NA 02/2016 168.80 Co. (ISRS) Gas Issue Rider Litigated Missouri Gas SR C-GO-2016-0197 Natural Limited- 2/1/2016 3.6 NA NA 75.90 5/19/2016 Fully 3.6 NA NA 02/2016 75.90 Energy (ISRS) Gas Issue Rider Litigated Empire EDE C-ER-2016-0023 Electric Vertically 10/16/2015 33.4 9.90 49.01 1,368.11 8/10/2016 Settled 20.4 NA NA 06/2015 NA District Integrated Electric Co.
Source: Company data, Credit Suisse estimates, SNL
Spire Inc. (SR) 20 24 January 2017
Alabama The Alabama PSC is made up of three commissioners: Twinkle Andress Cavanaugh, who also serves as president, Jeremy Oden, and Chip Beeker. The commissioners are elected every four years in statewide elections. The governor of Alabama is Robert J. Bentley (R), who has held his current office since 2010 and will continue to serve in his role until 2018 and will not be eligible for re-election.
Figure 20: Alabama Regulators Commisioner Party Term Begins Term End Twinkle Cavanaugh, Chair R Nov-10 Nov-20 Jeremy Oden R Dec-12 Nov-18 Chip Beeker R Nov-14 Nov-18
Governor Party Term Begins Term End Robert Bentley R Jan-11 Jan-19
Source: Company data, Credit Suisse estimates, SNL
The state currently uses a process called the Rate Stabilization and Equalization (RSE) method; which utilizes a forward test-year to determine rates. Under the RSE process, rate increases are capped at 5% annually and the average increase in any two consecutive years cannot exceed 4%. The RSE framework specifies an ROE range and an adjusting point (current base ROE), which is reviewed quarterly and must fall within the specified range. . Alagasco’s RSE specifies an authorized ROE range of 10.5% to 10.95% with a 10.8% adjusting point and an equity ratio of 56.5%; Alagasco's current allowed ROE is 10.85% which includes a performance based rider (+0.05%). SR filed its latest update for Alagasco’s RSE structure on Oct 26, with rates effective Dec 1, 2016. A full 4-year review is due Dec 1, 2018. RSE rates can be reviewed whenever the interest rate on 30-year treasury bonds increases by more than 3% or decreases by more than 2%. . Mobile Gas’s RSE specifies an authorized ROE range of 10.45% to 10.95% with a 10.7% adjusting point and an equity cap of 56.0%; Mobile Gas' current allowed ROE is 10.8% which includes a cast iron main replacement rider (+0.10%). SR filed its latest update on Oct 26, with rates effective Dec 1, 2016. The next full 4- year review of the mechanism is scheduled for Fall 2017, with rates effective on Dec 1, 2017. . PGA and GSA Clauses: Alagasco and Mobile Gas currently have Purchased Gas Adjustment (PGA) clauses and Gas Supply Adjustment (GSA) riders in effect, which take into account essentially all gas-related cost changes with a true- up. . Cost Control Mechanism (CCM): Alagasco has a CCM in place which allows for an annual increase in O&M expenses. The CCM is based off Alagasco's 2007 actual O&M expense and is then adjusted for inflation; if Alagasco's annual O&M expense falls within the range of the inflation adjusted O&M +/- 1.75% no adjustment is made. If the actual O&M expense is under the range, 75% of the difference is refunded to customers through rate adjustments and if the actual O&M expense is over the range then Alagasco receives half of the difference through future rate adjustments.
Spire Inc. (SR) 21 24 January 2017
. Regulatory M&A Stance: Very favorable; official policy is "must be consistent with the public interest", must also receive a certificate of convenience and necessity. The most recent acquisition in the utilities space was Spire's acquisition of Alabama Gas from Energen in 2014, where PSC approved the deal unanimously (without any significant restrictions). Mississippi The Mississippi PSC is made up of three commissioners; one commissioner is elected from each of the three judicial districts: Northern, Southern and Central Mississippi. Commissioners are elected to four year terms with no term limits. The current commissioners are: Brandon Presley (Chairman), Cecil Brown (Vice Chairman), and Sam Britton. The chairman is selected by a majority vote of the commissioners; all of the commissioners are up for re-election in 2019 (with terms ending in December of 2019).
Figure 21: Mississippi Regulators Commisioner Party Term Begins Term End Brandon Presley, Chair D Jan-08 Dec-19 Cecil Brown, Vice Chair D Jan-16 Dec-19 Sam Britton R Jan-16 Dec-19
Governor Party Term Begins Term End Phil Bryant R Jan-12 Jan-20
Source: Company data, Credit Suisse estimates, SNL
. Utilities have the option of filing for traditional rate cases or operating under an alternative rate plan (ARP). Traditional rate cases utilize a forward test year and must be decided within 4 months or are implemented as requested. The majority of the utilities in the state, however, operate under an ARP, which utilizes either a historic or forward test-year and provides for an annual review. . Willmut Gas' ARP utilize a historic test year and currently sets its allowed ROE at 9.23% and equity cap at 50%; the ARP also provides for rate stabilization adjustments (RSA) which are based on a historic test year (end June 30th) and filed September 15th every year with the new rates becoming effective the 1st of November. The RSA rider asymmetrically corrects for ROE +/- 100 bps above or below the allowed ROE, with 50% sharing above +100 bps and 75% sharing below -100 bps.
Figure 22: Recent Rate Cases – Mississippi Increase Requested Increase Authorized Company Parent Case Identification Service Case Type Date Rate Return on Common Equity Rate Base Date Decision Rate Return on Common Equity Test Year Rate Base Company Increase Equity /Total Cap ($M) Type Increase Equity /Total Cap End ($M) Ticker ($M) (%) (%) ($M) (%) (%) Entergy ETR D-2014-UN-0132 Electric Vertically 6/10/2014 204.5 10.59 NA 2,022.49 12/11/201 Settled 177.7 10.07 NA 12/2015 2,014.33 Mississippi Integrated 4 Inc. Mississippi SO D-2015-UN-0080 Electric Limited- 5/15/2015 272.9 10.20 49.42 2,355.67 12/3/2015 Settled 126.1 9.23 49.73 05/2016 476.45 Power Co. Issue Rider Mississippi SO D-2013-UN-0014 Electric Limited- 1/25/2013 170.5 9.70 49.95 1,757.41 7/7/2015 Fully 0.0 NA NA NA NA Power Co. Issue Rider Litigated Mississippi SO D-2011-UN-0135 Electric Limited- 11/15/2011 58.6 10.43 47.51 863.51 6/22/2012 Fully NA NA NA NA NA Power Co. Issue Rider Litigated
Source: Company data, Credit Suisse estimates, SNL
Spire Inc. (SR) 22 24 January 2017
Valuation Our $68 PT for SR was derived using a forward P/E multiple methodology which we feel is the most appropriate valuation metric for our coverage universe. We examine a range of valuations of SR with the three scenarios detailed below. The Base Case SR is currently trading at a discount to the group in both 2017 and 2018 with 2.8x and 1.9x discounts in 2017 and 2018 respectively as shown in Figure 22.
Figure 23: P/E Multiples
Source: Company data, Credit Suisse estimates
Given the uncertainty that will come with the ratecase to be filed in Missouri, we are giving the Missouri segment a 1.0x discount vs the group average P/E multiple of 19.4 We are awarding the other segments a 0.5x premium given the more favorable regulatory constructs in those jurisdictions. Furthermore, as discussed above, we also see that there is at most $0.10 risk to the Missouri segment's earnings if the ROE is lowered by 50 bps in the rate case. We assigned a 50% probability to this risk and subtract it out from our valuation. Finally, we apply a 12x P/E multiple to the non-regulated business and arrive at a $68 TP for SR or ~7% upside for SR as shown in Figure 24.
Spire Inc. (SR) 23 24 January 2017
Figure 24: Base Case Valuation
BASE CASE Blue Sky
2018 EPS Probability Prem / Disc Effective P/E Equity Equity / Sh Missouri Utility $ 2.24 -1.0x 18.4x $ 1,990 $ 41.24 ROE low ered by -50bps in rate case ($ 0.10) 50% 18.4x ($ 44) ($ 0.92) Alabama Utility $ 1.10 0.5x 19.9x $ 1,057 $ 21.90 Mobile Gas $ 0.18 0.5x 19.9x $ 168 $ 3.49 Willmut Gas $ 0.02 0.5x 19.9x $ 18 $ 0.38 Marketing $ 0.16 12.0x $ 94 $ 1.95 Corporate $ 0.00 0.5x 19.9x $ 0 $ 0.01 ______Total EPS $ 3.60 $ 3,284 $ 68.00
Diluted Shares Outstanding 48.3
Dividend $ 1.96 Implied Yield 2.9% Current Yield 3.0%
Implied P/E 18.9x Prem / (Disc) To Group (2.6%)
Upside/ (Dow nside) to Current Price 5.2%
Note: for every 10 bps in ROE in Missouri rate case is ~$0.02 or ~$0.37 in valuation
Source: Company data, Credit Suisse estimates The Blue Sky Case A positive outcome with the regulatory process, especially in Missouri, and SR's ability to deploy the STL pipeline's investment successfully will allow the stock to trade at an 1x premium over the average group multiple for the Missouri segment while the other segments will trade at 2.0x premium to the group average P/E. We also assume that there is no risk to the 50 bps lower in ROE. Under this scenario, the stock is valued at $76 or ~18% upside vs. current stock price (Figure 25).
Figure 25: Blue Sky Valuation
Blue Sky
2018 EPS Probability Prem / Disc Effective P/E Equity Equity / Sh Missouri Utility $ 2.24 1.0x 20.4x $ 2,206 $ 45.72 ROE low ered by -50bps in rate case ($ 0.10) 0% 20.4x $ - $ - Alabama Utility $ 1.10 2.0x 21.4x $ 1,136 $ 23.55 Mobile Gas $ 0.18 2.0x 21.4x $ 181 $ 3.75 Willmut Gas $ 0.02 2.0x 21.4x $ 20 $ 0.41 Marketing $ 0.16 13.0x $ 102 $ 2.11 Corporate $ 0.00 2.0x 21.4x $ 0 $ 0.01 ______Total EPS $ 3.60 $ 3,646 $ 76.00
Diluted Shares Outstanding 48.3
Dividend $ 1.96 Implied Yield 2.6% Current Yield 3.0%
Implied P/E 21.1x Prem / (Disc) To Group 8.8%
Upside/ (Dow nside) to Current Price 17.6%
Source: Company data, Credit Suisse estimates
Spire Inc. (SR) 24 24 January 2017
The Downside (Grey Sky) Case In this scenario, we assume that the Missouri segment is valued at a 3.0x discount to the group and the other segments are valued at a 1.0x discount to the group. This could be the case if SR faces an unfavorable outcome in Missouri and encounters difficulty in carrying out its investment plan in the STL pipeline. We also applied an 11x P/E multiple to the gas marketing segment's estimate. In this case, SR is valued at $62 or ~4% downside to the current stock price (Figure 26).
Figure 26: Grey Sky Valuation
Grey Sky BASE CASE
2018 EPS Probability Prem / Disc Effective P/E Equity Equity / Sh Missouri Utility $ 2.24 -3.0x 16.4x $ 1,774 $ 36.76 ROE low ered by -50bps in rate case ($ 0.10) 25% 16.4x ($ 20) ($ 0.41) Alabama Utility $ 1.10 -1.0x 18.4x $ 977 $ 20.25 Mobile Gas $ 0.18 -1.0x 18.4x $ 156 $ 3.23 Willmut Gas $ 0.02 -1.0x 18.4x $ 17 $ 0.35 Marketing $ 0.16 11.0x $ 86 $ 1.79 Corporate $ 0.00 -1.0x 18.4x $ 0 $ 0.01 ______Total EPS $ 3.60 $ 2,990 $ 62.00
Diluted Shares Outstanding 48.3
Dividend $ 1.96 Implied Yield 3.2% Current Yield 3.0%
Implied P/E 17.2x Prem / (Disc) To Group (11.2%)
Upside/ (Dow nside) to Current Price (4.1%)
Source: Company data, Credit Suisse estimates
Spire Inc. (SR) 25 24 January 2017
Risks Regulatory and Legislative Risk–Regulatory outcomes at the upcoming Missouri GRC and the Alabama RSE review: SR’s natural gas utilities are regulated by the Missouri Public Service Commission (MPSC), the Alabama PSC, the Mississippi PSC, and the Federal Energy Regulatory Commission (FERC). The company is subject to regulatory risks including, but not limited to, ratecase litigation, ROE and cost of capital allowances, rider approval, recovery of fuel, purchased power, and other deferred expenses. It is also subject to possible changes in federal and state laws within its operating jurisdictions. . Missouri remains a core base of SR's business and the upcoming Missouri GRC puts earnings from the state at risk. We estimate ~$0.10 of EPS at risk, and any downside, or downside beyond our estimates coming from the GRC would negatively impact our thesis. . The upcoming RSE review in Alabama is subject to regulatory approval/confirmation any negative outcome would have a negative impact on earnings. Commodity, Interest Rate, Derivatives, Load, and Weather Risk: Although regulatory recovery mechanisms are intended to mitigate many of these risks, the company remains directly and indirectly exposed to the impact of market fluctuations in the liquidity and price of natural gas commodities and changes in interest rates as a result of purchased gas requirements, public bond issuances, bank debt, and the collection of revenue through volumetrically-based rates that may be affected by weather conditions. Severe weather in gas production areas of the country may also affect commodity prices. Environmental and Climate Change Risk: As the operator and/or owner gas transportation and distribution assets, SR’s utilities are subject to various environmental control rules from the US Environmental Protection Agency (EPA) and the various state environmental agencies within its franchise territories and beyond. The utilities are also subject to pipeline safety and system integrity laws and regulations that may require significant expenditures or significant increases in operating costs. Physical Infrastructure and Cybersecurity Risk: The company’s physical plant and any internet-connected equipment may be subject to damage from either weather or manmade interference. While we would expect most of these risks (and advance preparations) to be covered by a combination of insurance and regulatory recovery in rates, there is no assurance that full recovery will be approved.
Spire Inc. (SR) 26 24 January 2017
HOLT® Analysis
Figure 27: HOLT Analysis
SPIRE INC (SR)
Current Price: USD 65.30 Warranted Price: USD 65.81 Valuation date: 18-Jan-17 HOLT perspective of operating projections implied by Research forecast CFROI & Discount Rate (in %) Sales Growth (in %) 5 70 60 4 50 40 4 30 20 3 10 3 0 -10 2 -20 -30 2 -40 1 2012 2014 2016 2018 2020 1 Historical Forecast based on Research projection Extrapolation 0 2012 2014 2016 2018 2020 EBITDA Margin (in %) Historical Forecast based on Research projection 35
a Extrapolation Discount Rate
t 30 a 25 D
o 20 i
r Asset growth (inflation adjusted, in %) 15 a
n 70 10 e
c 60 5 S
0 t 50
s 2012 2014 2016 2018 2020 y l 40 Historical Forecast based on Research projection Extrapolation a n
A 30 Asset Turns (x) e
s 20 0.5 s i 0.4
u 10 0.4 S
t 0 0.3 i 0.3
d 2012 2014 2016 2018 2020
e 0.2 r Historical Forecast based on Research projection Extrapolation 0.2 C
0.1 -
0.1 0.0 T Warranted upside/downside sensitivity to growth and margins
L 2012 2014 2016 2018 2020
O Long term sales growth Historical Forecast based on Research projection Extrapolation
H USD 1.6% 2.6% 3.6% 4.6% 5.6% Summary of CS Research projections and key operating drivers
s 28.0% 49.69 53.35 57.43 61.83 66.65 n
i Sep 15A Sep 16A Sep 17E Sep 18E Sep 19E g r
a Sales Growth, % 21.5 -22.2 9.9 2.7 4.4 29.0% 53.42 57.31 61.62 66.28 71.38 m
A D
T EBITDA Mgn, % 19.8 27.9 28.1 28.5 29.4 I 30.0% 57.13 61.26 65.81 70.72 76.08 B
E Asset Turns, x 0.27 0.2 0.2 0.2 0.2
m r
e 31.0% 60.84 65.19 69.98 75.14 80.77 t
g CFROI®, % 3.8 3.9 4.1 4.1 4.1 n
o Disc Rate, % 4.2 3.7 3.8 3.8 3.8 L 32.0% 64.54 69.11 74.13 79.55 85.45 Asset Grth, % 1.0 9.3 3.9 3.7 4.0
More than Value/Cost, x 1.2 1.2 1.2 1.2 1.1 More than 10% Within 10% Economic PE, x 31.0 31.7 28.2 28.7 28.2 10% upside downside Leverage, % 50.7 49.6 49.5 50.5 52.4
Source: Credit Suisse HOLT®
Source: Credit Suisse HOLT®. CFROI and HOLTare trademarks or registered trademarks of Credit Suisse Group AG or its affiliates in the United States and other countries.
Source: Company data, Credit Suisse estimates, HOLT
Spire Inc. (SR) 27 24 January 2017
Management, Compensation & Governance ■ Suzanne Sitherwood, President and CEO: Ms. Sitherwood has held her current position since 2012. Prior to her current position she was the president of three utilities at AGL Resources. Ms. Sitherwood has held a variety of executive-level positions across several companies, she has over 30 years of the experience in the natural gas industry. Ms. Sitherwood holds a B.S. in Industrial Engineering Technology from the Southern College of Technology and an M.B.A. from Brenau University. ■ Steve Lindsey, EVP and COO of Distribution: Mr. Lindsey has held his current position since 2012, which is when he joined the company. He also serves as CEO and President of Laclede Gas and Missouri Gas Energy and also serves as CEO of Alabama Gas Corporation. Mr. Lindsey has spent 23 years in the natural gas utility industry. Mr. Lindsey holds a B.S. in Mechanical Engineering from the Georgia Institute of Technology. ■ Steven P. Rasche, EVP and CFO: Mr. Rasche has held his current position since 2012. Prior to this he served as SVP of Finance and Accounting. Mr. Rasche joined the company in 2009 as VP of Finance at Laclede Gas. Prior to joining Spire, Mr. Rasche served as CFO of TLC Vision Corporation. Mr. Rasche holds a B.S. in Accounting from the University of Missouri and a Master’s in Finance and Marketing from the Kellogg School at Northwestern University; Mr. Rasche is also a CPA. ■ Michael C. Geiselhart, SVP, Strategic Planning and Corporate Development: Mr. Geiselhart has held his current position since 2015. Mr. Geiselhart joined the company in 2006 as VP of Strategic Development and Planning. Mr. Geiselhart holds a B.S. in Accounting from Siena College and an M.B.A. in Finance from the University of North Carolina.
Corporate Governance & Compensation Structure We believe the board structure is well-aligned with shareholder interests, with 7 of the 8 board members being independent and with all of the members with significant executive-level experience both in the industry and in a variety of other industries.
Figure 28: Board Composition Name Independent? Experience Audit Compensation Governance Investment Strategy Tenure Review Brenda D. Newberry Yes Former: Chairman, The Newberry Group x x x 2007 Suzanne Sitherwood No CEO, Spire (Laclede) x x 2011 Mary Ann Van Lokeren Yes Former: Chairman & CEO, Krey Distributing x x C 2000 Edward L. Glotzbach Yes Former: Vice Chairman, M&A, Information Services Group x C x 2005 W. Stephen Maritz Yes Chairman, Maritz Holdings x x 2000 John P. Stupp Jr. Yes President, Stupp Bros., Inc C x x 2005 Mark A. Borer Yes Former: CEO, DCP Midstream Partners x x C 2014 Maria V. Fogarty Yes Former: SVP, NextEra Energy x x 2014 Anthony V. Leness Yes Former: Managing Director - Global Power & Energy, Merrill Lynch x C x 2006
Source: Company data, Credit Suisse estimates
The compensation structure is composed of base salary, annual/short-term incentive award, and long-term incentive award. It is part of the company’s policy that the company does not offer employment agreements, does not offer tax gross-ups, does not offer dividends on unvested stock, and does not allow the pledging or hedging of company stock.
Spire Inc. (SR) 28 24 January 2017
The annual incentive award is paid out as a percentage of base salary and is calculated using several factors that vary in weighting depending on the individual. The three factors are corporate, business unit and individual. The corporate metric is EPS, the business unit metric is unit operating income and the individual metric varies based on position and is subjective based on performance. The CEO’s annual incentive award was calculated using corporate performance – EPS (85%) and individual performance (15%). The long-term incentive award is paid out in performance RSUs (75%) and time-based RSUs (25%). The time-based RSUs cliff vest in three years while the performance RSUs vest when the performance period is complete (i.e. reviewed annually). The two factors taken into account to determine the long-term incentive award are the company’s total shareholder return relative to their peers (50%) and cumulative net earnings in the three year period (50%). The award is then calculated based off preset thresholds relative to actual performance in both categories.
Figure 29: Management Compensation Name and Position Year Salary Bonus Stock Awards Non-Equity Pension Value & Nonqualified All Other Total Incentive Plan Deferred Comepnsation Suzanne Sitherwood 2015 $738,269 $297,914 $1,158,348 $702,086 $158,531 $84,268 $3,139,416 President & CEO 2014 $641,250 - $1,099,521 $751,005 $128,877 $13,253 $2,633,906 2013 $573,366 - $1,003,631 $438,234 $95,380 $14,857 $2,125,468
Steven P. Rasche 2015 $336,585 $100,000 $408,614 $220,348 $60,819 $26,220 $1,152,586 EVP & CFO 2014 $310,616 - $337,646 $240,895 $52,465 $25,733 $967,355 2013 ------
Steve Lindsey 2015 $346,523 $100,000 $445,499 $222,172 $44,235 $38,702 $1,197,131 EVP & COO, Distribution 2014 $315,670 - $449,258 $216,889 $47,346 $16,350 $1,045,513 2013 $301,154 $110,000 $889,536 $176,715 $49,289 $201,742 $1,728,436
Mark Darrell 2015 $337,216 $80,000 $342,768 $177,765 $90,252 $43,810 $1,071,811 SVP, General Counsel, Chief Compliance 2014 $310,816 - $353,000 $201,662 $128,154 $47,772 $1,041,394 2013 $295,916 - $336,469 $161,004 $109,220 $32,018 $934,627
L. Craig Dowdy 2015 $276,058 $60,000 $245,537 $143,687 $80,759 $159,716 $965,757 SVP, External Affairs, Corporate Communications 2014 $206,250 $150,000 $524,426 $95,057 - $81,802 $1,057,535 and Marketing 2013 ------
Source: Company data, Credit Suisse estimates
Spire Inc. (SR) 29 24 January 2017
Questions for Management . Discuss the impact of the recent elections on the makeup of the MO Public Service Commission. Who do you think will be the new Chairman and how will this affect the upcoming ratecase? . Has the Republican sweep in the state legislature improved the chances for regulatory reform legislation in the 2017 session? Which bills do you view as most likely to pass in the upcoming session? . Discuss the interplay that you see between Staff, OPC, and the commissioners themselves. Which members appear to be most knowledgeable on the issues? . If the PSC reduces the MO utility’s authorized equity layer, discuss the steps you would take to mitigate the impact. If increased opco leverage is an option, what would you do with the proceeds? Which parent debt issues could be paid down? . What are the factors that drove a $15M increase in STL pipeline cost in the last update? . Is there potential for further expansion opportunities at the STL pipeline once it's built? How much additional capacity and capex would an expansion entail roughly? . What factors drove the increase in utility capital spending in the last update? . Considering the high P/E paid for the EnergySouth acquisition, how much growth do you expect to achieve with Mobile Gas and Willmut Gas? Will you begin to add opco leverage here? . What is your target opco debt level for Alagasco? . Do you plan to grow the dividend at the same rate as EPS or faster given the below-average payout ratio? . Describe your appetite for further M&A and your view of consolidation amongst gas utilities and electric utilities? . Discuss the details of the FERC-regulated propane pipeline? Is there any intention of expanding this? What are the prospects for the propane business? . One of your stated goals is growth through acquisitions/integration of companies– in the current market environment (of high P/E premiums) do you have avenues of growth that do not involve M&A if premiums remain high? . Which region–MS, MO, or AL–are you most focused on in terms of growing your customer base? . Discuss which aspects of the Missouri legislation would apply to you and what you would still like to accomplish from a legislative perspective (that has or has not been proposed already)?
Spire Inc. (SR) 30 24 January 2017
Financial Appendix
Spire Inc. (SR) 31 Spire Inc. (SR) Spire Inc. 32 Figure 30: SR Income Statement Spire Inc FY2013A FY2014A FY2015A 1FQ16A 2FQ16A 3FQ16A 4FQ16A FY2016A FY2017E FY2018E FY2019E
______Gross Margin 409 646 935 236 342 197 149 924 1,016 1,043 1,091
O&M 186 261 383 90 93 92 96 370 404 408 412 Other Taxes 60 112 142 28 44 27 26 125 136 140 144 Other Taxes as a % of GM 15% 17% 15% 12% 13% 14% 17% 14% 13% 13% 13% ______EBITDA 164 273 410 118 206 78 28 429 476 495 535
D&A 48 82 130 34 34 34 35 137 151 159 168 ______Operating Income 115 190 281 84 172 44 (8) 292 325 336 366
Other Income 2 (3) 1 1 1 (3) 5 4 7 12 4 Interest Expense 29 43 65 17 17 17 17 68 77 84 95 Convert Interest Expense 0 4 10 2 2 2 2 10 5 (0) (0) Interest Rate 6.3% 3.7% 3.6% 5.0% 5.0% 5.0% 5.0% 3.5% 5.0% 5.0% 5.0% Effective Interest Rate 5.3% 3.1% 3.5% 3.6% 3.7% 3.7% 3.6% 3.4% 4.0% 3.9% 4.1% ______Pre-tax Income 89 141 207 67 153 21 (22) 219 249 264 276
Taxes 24 41 62 22 50 7 (8) 70 81 86 90 27.1% 28.9% 29.9% 32.3% 32.5% 31.9% 37.1% 31.9% 32.5% 32.5% 32.5%
______Net Income 65 100 145 45.1 103.5 14.5 (14.1) 149.0 168 178 186 Adj. Diluted EPS 2.89 3.06 3.36 1.04 2.38 0.33 (0.31) 3.43 3.58 3.70 3.86
Source: Company data, Credit Suisse estimates 24 January 2017 Spire Inc. (SR) Spire Inc. 33 Figure 31: SR Balance Sheet Balance Sheet FY2013A FY2014A FY2015A 1FQ16A 2FQ16A 3FQ16A 4FQ16A FY2016A FY2017E FY2018E FY2019E
Cash and Cash Equivalents 53 16 14 5 9 5 5 5 5 5 5 Accounts Receivables 171 217 211 225 265 216 221 221 221 221 221 Delayed Customer Billings - - 3 9 10 4 2 2 2 2 2 Inventories 199 270 215 204 124 144 202 202 202 202 202 Other 52 102 88 195 96 85 140 140 140 140 140 ______Total Current Assets 476 605 530 636 504 453 570 570 570 570 570
Total Gross PP&E 2,271 3,928 4,235 4,221 4,271 4,340 4,794 4,794 5,204 5,644 6,129 Accum Depr 495 1,169 1,307 1,267 1,286 1,312 1,506 1,506 1,658 1,816 1,985 ______Net PP&E 1,777 2,760 2,928 2,953 2,985 3,028 3,287 3,287 3,546 3,827 4,144
Non-Utility Property 8 9 14 14 14 14 14 14 14 14 14 Goodw ill 247 938 946 946 946 946 1,165 1,165 1,165 1,165 1,165 Other Investments 58 60 60 61 61 62 62 62 62 62 62 ______Total Property and Investments 2,090 3,767 3,947 3,974 4,006 4,050 4,528 4,528 4,787 5,068 5,384
Reg Assets & Deferred Charges 560 702 813 801 810 807 980 980 980 980 980 ______Total Assets 3,125 5,074 5,290 5,411 5,320 5,311 6,077 6,077 6,336 6,617 6,934
Current Portion of Long-term Debt - - 80 - - - 250 250 250 250 250 Notes Payable 74 287 338 377 254 98 399 399 399 399 399 Accounts Payable 140 177 147 160 127 136 211 211 211 211 211 Advance Customer Billings 24 32 44 59 32 53 70 70 70 70 70 Accrued Liabilities and Other 115 287 245 252 206 205 232 232 232 232 232 ______Total Current Liabilities 353 783 854 848 619 492 1,161 1,161 1,161 1,161 1,161
Deferred Income Taxes 379 384 482 495 564 574 607 607 629 652 677 Pension and Postretirement Benefits 229 245 253 251 255 247 304 304 304 304 304 Regulatory Liabilities 85 126 119 129 111 106 131 131 131 131 131 Asset Retirement Obligations and Other 120 177 237 237 238 238 273 273 273 273 273 Long-term debt 913 1,851 1,772 1,852 1,852 1,852 1,834 1,834 1,857 2,041 2,256 ______Total Liabilities 2,079 3,566 3,717 3,811 3,638 3,509 4,309 4,309 4,354 4,561 4,801
Common Stock 627 1,073 1,081 1,082 1,084 1,219 1,222 1,222 1,365 1,368 1,371 Retained Earnings 420 438 494 520 599 589 551 551 621 692 766 Accumulated other comprehensive loss (1) (2) (2) (2) (2) (5) (4) (4) (4) (4) (4) ______Total Liabilities and Equity 3,125 5,074 5,290 5,411 5,320 5,311 6,077 6,077 6,336 6,617 6,934
Source: Company data, Credit Suisse estimates 24 January 2017 Spire Inc. (SR) Spire Inc. 34 Figure 32: SR Cash Flow Statement Cash Flow Statement FY2013A FY2014A FY2015A 1FQ16A 2FQ16A 3FQ16A 4FQ16A FY2016A FY2017E FY2018E FY2019E
Net Income 58 85 137 47 101 11 (14) 144 168 178 186 D&A 49 83 131 34 34 34 36 138 151 159 168 Deferred income taxes and investment tax credits 22 31 66 22 49 7 (9) 69 22 23 25 Changes in Working Capital 39 (82) (17) (70) 47 42 (46) (27) - - - Other - net (4) 5 6 1 (21) 20 5 5 - - - ______Operating Cash Flow 164 122.6 322 34 210 114 (29) 328 341 360 380
Capital Expenditures (131) (171) (290) (62) (59) (74) (98) (293) (410) (440) (485) Asset Sales ------Asset Purchases (975) (1,270) (8) - - - (318) (318) - - - Other Investments (3) 4 (1) (0) (0) (1) (0) (2) - - - ______Investing Cash Flow (1,108) -1437.6 (299) (63) (60) (74) (416) (613) (410) (440) (485)
Changes in Short Term Debt 59 198 51 39 (124) (156) 301 61 - - - Changes in Long Term Debt 550 625 0 80 - - 165 245 24 184 215 Debt Repayment Obligations (25) (80) - (80) - - - (80) - - - Net Preferred Issuance - 144 ------Net Common Issuance 432 460 3 1 1 134 1 137 144 3 3 Common Dividends (43) (62) (79) (20) (22) (21) (22) (85) (99) (107) (113) Preferred Dividends ------Other (3) (7) (1) (0) (2) (0) 0 (2) - - - ______Financing Cash Flow 970 1,278 (26) 20 (146) (43) 445 276 69 80 105
Beginning Cash 27 52.981 16 14 5 9 5 14 5 5 5 Net Change in Cash 26 -36.9 (2) (9) 4 (4) 0 (9) - - - ______Ending Cash 53 16.08 14 5 9 4.9 5.2 5 5 5 5
Source: Company data, Credit Suisse estimates 24 January 2017 24 January 2017
Companies Mentioned (Price as of 20-Jan-2017) Atmos Energy (ATO.N, $74.71) CenterPoint Energy Inc (CNP.N, $25.6) Delta Nat Gas (DGAS.OQ, $26.7) EQT Corporation (EQT.N, $62.86) Natl Fuel Gas (NFG.N, $57.75) New Jersey Rsrce (NJR.N, $36.45) NiSource Inc. (NI.N, $22.51) Northwest Gas (NWN.N, $58.6) Sempra Ener (SRE.N, $102.44) South Jersey Ind (SJI.N, $32.08) Southern Co. (SO.N, $49.06) Southwest Holdg (SWX.N, $77.97) Spire Inc. (SR.N, $64.65, NEUTRAL, TP $68.0) WGL Holdings (WGL.N, $79.03)
Disclosure Appendix Analyst Certification I, Michael Weinstein, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
3-Year Price and Rating History for Spire Inc. (SR.N)
SR.N Closing Price Target Price Target Price Closing Price SR.N Date (US$) (US$) Rating 75 17-Dec-14 51.59 57.00 O * 04-Feb-15 54.66 59.00 02-Mar-16 65.63 NR 65 * Asterisk signifies initiation or assumption of coverage. 55
45 01- Jan- 2015 01- Jul- 2015 01- Jan- 2016 01- Jul- 2016 01- Jan- 2017
O U T PERFO RM N O T RA T ED The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products. Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:
Spire Inc. (SR) 35 24 January 2017
Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors. Credit Suisse's distribution of stock ratings (and banking clients) is:
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Target Price and Rating Valuation Methodology and Risks: (12 months) for Spire Inc. (SR.N) Method: We arrive at our $68 price target for SR by applying an 18.4x 2018 P/E multiple to the Missouri utility or a 1.0x discount to the peer group average to reflect the uncertainty associated with the impending rate case, and a 0.5x premium is given to the other gas utility businesses given more favorable regulatory prospect. For the gas marketing business, we apply a 12x 2018 P/E multiple reflecting the increased risk and volatility of the marketing business relative to the gas utility business. Our Neutral rating reflects a forecasted total return in line with the group average. Risk: Risks to our $68 price target and the Neutral rating for SR are: 1) ROE risk related to the upcoming Missouri General Rate Case at Laclede Gas and MGE 2) FERC and other necessary approvals for the STL pipeline, 3) commodity risk, 4) interest rate risk, 5) derivative risk, 6) load growth risk, 7) weather risk, 8) environmental and climate change risk, 9) physical infrastructure and cybersecurity risk.
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Spire Inc. (SR) 36 24 January 2017
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Spire Inc. (SR) 37 24 January 2017
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Spire Inc. (SR) 38