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.