Spire Inc.

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

Spire Inc. is a public utility company engaged in the purchase, retail distribution, and sale of natural gas, primarily serving customers in Missouri, Alabama, and Mississippi through its Spire Missouri, Spire Alabama, and Spire Marketing segments.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Spire’s core business is the regulated sale and distribution of natural gas, which is highly defensive in nature, with demand remaining relatively stable even during economic downturns. This stability provides some predictability to their financials and cash flows.

Business Overview

Spire operates primarily in three segments:

  1. Gas Utility: This segment represents the regulated operations for the delivery of natural gas to end-use customers in Missouri, and Alabama. It includes approximately 1.2 million customers across the two states. The revenue for this segment is primarily based on the volumetric sales of natural gas.

  2. Gas Marketing: The Gas Marketing segment’s activities are conducted in a nonregulated space, primarily selling natural gas in various regions of the United States and some parts of Canada. This segment is used to buy and sell excess natural gas under flexible, short-term contracts.

  3. Midstream: The Midstream segment operations include the ownership of the Spire STL Pipeline, a transmission pipeline that extends from Illinois to Missouri, as well as storage facilities in Wyoming and Missouri.

Industry Trends

The natural gas industry in the U.S. is undergoing a significant transition due to several factors:

  • Energy transition: The world is transitioning to renewable sources of energy to limit the impact of climate change. As a result, governments and companies are looking to reduce or eliminate the use of fossil fuels. The increase in popularity and governmental support of renewable energies could diminish the need for natural gas as a source of energy in the long term.
  • Volatility: The price of natural gas, while recently declining, can fluctuate wildly, influenced by many factors like the weather and the geopolitical situation. This has huge effects on utilities and the end consumers.
  • Infrastructure: Aging infrastructure is a major problem in the industry with many areas needing heavy investment. Modernizing the pipelines and storage facilities is crucial for maintaining their functionality and reducing methane emissions, but at a high cost.

Competitive Landscape

Spire operates in a regulated market, which makes competition different from traditional businesses. They enjoy a de facto regional monopoly for distribution, with their rates primarily determined by state public service commissions. However, they face some competition from other utilities and from alternatives to natural gas, such as other energy sources and fuels.

The regulatory nature of their business provides them with a barrier to entry. Their competitors are mostly other large utilities, like Ameren Corporation, CenterPoint Energy, One Gas, Inc., and Black Hills Corp., which operate in different regions.

What Makes Spire Different?

Spire’s differentiation comes from:

  • Geographic concentration: Spire has a focus on Missouri, Alabama, and Mississippi, which allows them to optimize and create expertise in those markets. However, it also makes them susceptible to those regions.
  • Integrated model: The mix of their regulated utility operations and their midstream and marketing segments (which they manage to optimize for profit and revenue stability), is something not every utility has.
  • Investment in infrastructure: the company is trying to modernize and improve its existing infrastructure, which could bring long-term benefits (although will hurt their earnings in the short-term).

Financial Analysis

Here’s an in-depth breakdown of Spire’s financials based on the latest documents.

  • Revenue and Profitability: The company’s revenue comes primarily from the Gas Utility segment. While a stable source of revenue, it’s also heavily influenced by weather and customer usage. In recent quarters, a shift in their revenue and cost mix has had impacts on the margins and profitability.

  • ROIC: Spire’s returns on invested capital have been on the lower side. In 2023, their ROIC was around 5%. While higher than their cost of capital for the time being, a consistent low ROIC, especially when coupled with high debt, is a red flag and a reason for concern.

  • Revenues: A major portion of their revenues are driven by gas utility and marketing segments which comprise around 90% of their total revenue. The rest of the revenues come from the midstream segment.

  • Profitability: Profitability has been inconsistent and low for the last many years. In 2022, the Company’s net income was $217.1M but went down to $114.9M in 2021. In 2023, it was $217.5 million with 3.59$ per diluted share, which is decent but much lower than the long term average ROIC of S&P 500 companies.

    • For the nine months ended June 30, 2024, Spire’s consolidated net income has decreased to $237.3 million from $277.7 million for the same period a year ago.
  • Margins: Contribution margins are affected by weather, rate design changes, and fluctuating prices, which creates volatility. In 2024, they have experienced lower volumes which has affected the profitability negatively. This is partly due to warmer winters. Their operating expenses are also seeing increases due to labor and personnel costs, maintenance and employee costs.
  • Debt: Spire carries a considerable amount of debt. Their debt-to-equity ratio is around 0.75, which is high and needs to be managed to make sure they have the flexibility to take on more debt without raising too many concerns from rating agencies. Most of their debt is fixed-rate which is good in some way but can be burdensome if interest rates come down in the future.
  • Liquidity: They have a revolving credit facility that helps them meet their short-term needs. Their cash balance as of June 30, 2023, is $1.2B. Overall the liquidity and access to capital seems decent and is enough for normal operations.

The company’s credit rating has also seen some changes. For example, Moody’s downgraded Spire’s unsecured credit rating to Baa3, which implies there is some increase in risk in investing in their bonds. However, given the low interest rate environment at the time of writing, these bonds can still be seen as a reasonably safe option, especially compared to much lower yields available in government bonds.

Moat Rating and Justification:

Moat Rating: 3/5

Spire’s moat derives from several factors, most notably their regulated nature. Here is a more detailed breakdown.

  • Regulated monopoly: The core gas utility business has a natural monopoly, with regulatory approvals and oversight creating a huge barrier to entry and a protected market share within a specific region. However, this regulation also caps profits and requires approval for price increases, limiting upside potential.
  • High customer switching costs: Once a customer is locked into a utility’s network for natural gas, it becomes bothersome for them to switch. Hence, customers often stick to the provider, irrespective of minute variations in fees.
  • Infrastructure and scale: Building a utility network requires significant upfront investment and can take a very long time to fully implement, this creates some kind of barrier to entry as not everyone has the financial strength or ability to accomplish this feat.

Despite those advantages, it’s not a very wide moat because regulations cap their profitability, they have to compete with other energy options, and there are other factors that can affect their margins and financial performance.

Risks to the Moat and Business Resilience

Here are some of the legitimate risks facing Spire that can damage its moat or make the company suffer:

  • Increased regulation: While regulation is a big source of Spire’s moat, it also carries the risk that regulatory agencies can make changes that can affect their profitability, for example, limiting their ability to pass on rising costs to their customers.
  • Competition from renewable energy: As mentioned, the rise of renewable energy options and the push for a carbon free economy can severely damage Spire’s operations and make it difficult for them to justify capital expenses in the future.
  • Technological disruptions: New technologies for delivering energy, such as newer forms of electricity generation, and newer means to generate heat, might make Spire obsolete, as well. This is probably a risk that they are willing to mitigate by their own investments into renewable energy, but this might not pay off.
  • Geographic concentration: Being reliant on a handful of regions makes them vulnerable to issues unique to those areas, such as weather, local economies, and local regulations. This can be a double-edged sword, with local expertise coming at the cost of diversification.
  • Economic downturns: As with every business, a significant economic downturn can lower demand for their services (which is still somewhat recession proof), and might make customers unable to pay their bills. This is something the company is aware of and monitors actively but cannot eliminate this risk.
  • Inability to recover costs: Regulatory mechanisms are not always timely or predictable which may cause a delay in the company’s ability to recoup investments and expenses. For example, delays in getting the approvals to pass higher fuel costs to the end consumers has hurt the company’s short term margins and profitability, and this can keep happening.
  • Failure to maintain or increase customer volume: If they can’t maintain or increase the usage and number of customers, they will have a difficult time achieving growth.
  • High debt: As previously noted, Spire carries a large amount of debt, which can be dangerous to any company, especially during economic downturns and when interest rates are high. If their revenue declines, servicing this debt becomes problematic.

Despite these risks, Spire demonstrates good resilience due to its core business model. The nature of natural gas demand is steady and resilient even during downturns, and the regional monopoly they enjoy protects them from more direct competition. Moreover, they have a decent level of liquidity and access to credit which helps them to survive any financial stress.

Understandability Rating and Justification:

Understandability: 3/5

The business of Spire can be understood by analyzing the different segments individually:

  1. The Gas Utility: The utility segment is fairly simple and easy to understand as most people understand the basics of this type of business. Its regulatory framework can be confusing, though.
  2. The Gas Marketing: This is a somewhat complex area of the business, involving buying and selling gas, taking advantage of pricing disparities, and managing contracts.
  3. The Midstream Segment: Although they operate a single pipeline, the intricacies of the business operations related to transportation and storage can be confusing as it is directly tied to the natural gas market and other companies’ operations.

The overall business is easy to understand for an average person, but the specific dynamics of their segments and their interaction together can be a little difficult to understand, that’s why we give it a 3. Their financial reports can also be quite complicated, because of their complex business nature.

Balance Sheet Health Rating and Justification:

Balance Sheet Health: 4/5

  • Liquidity: They have decent liquidity in the short term with over a billion dollars in cash and cash equivalents, but this is offset by the considerable long-term debt.
  • Solvency: Although the debt-to-equity ratio is on the higher side, they manage to easily service their debts which are also a mix of fixed rate and variable rate, creating stability. However, a significant portion of debt is due in a single year which makes them vulnerable if they cannot refinance it.
  • Leverage: This is a major area of concern as they have high leverage compared to many other companies. They should continue to de-leverage to achieve a better financial state.

Based on the above analysis, Spire has a good balance sheet, but needs to manage it much more conservatively to avoid risks in the future. Thus, a rating of 4 seems appropriate.