Fitch Affirms Spire Inc. and Subsidiaries' Ratings; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed the Long-Term Issuer-Default Rating (IDR) on Spire Inc. (Spire) at 'BBB+'. Fitch has also affirmed the Long-Term IDRs on Spire's regulated gas distribution subsidiaries: The Laclede Gas Company (LGC) and Alabama Gas Corp. (AGC), at 'BBB+' and 'A-', respectively. The Rating Outlook on each entity is Stable. Fitch also has affirmed LGC's Short-term IDR and Commercial Paper program at 'F2'.

Stable Rating Outlook: Spire Inc.'s ratings and Outlook reflect the stable earnings and cash flow of its regulated gas distribution utilities, large utility capex program focused on distribution investments, constructive regulatory environments in Missouri, Alabama and Mississippi and the expectation for future deleveraging at the parent, which will improve consolidated credit metrics toward the end of the forecast period.

Regulated Operations Drive Earnings: Spire's earnings and cash flows are primarily driven by its regulated gas local distribution companies (LDCs) including LGC, Missouri Gas Energy (MGE, not rated) and AGC, which comprised 97% of consolidated earnings for fiscal 2016.

KEY RATING DRIVERS

--Expectation for future deleveraging at the parent;

--Stable earnings and cash flows from regulated utilities;

--Large utility capex program focused on distribution investments.

High Leverage; Deleveraging Expected: Spire's adjusted debt/EBITDAR leverage ratio is high at 6x due to the AGC acquisition but Fitch expects that future deleveraging at the parent level will result in EBITDAR leverage strengthening to 4.4x by 2020, bringing leverage metrics back in line with the current rating category. Deleveraging will be a function of anticipated earnings growth, debt paydowns, and the conversion of $144 million of equity units in 2017. Fitch expects Spire's consolidated EBITDAR interest coverage ratio to approximate 5x to 5.5x through the forecast period.

Two Small Gas LDCs Acquired: Spire's recent acquisition of EnergySouth, Inc. (EnergySouth), the parent company of Mobile Gas and Willmut Gas, for a purchase price of $344 million plus working capital, is neutral to credit quality. Given the size of this transaction compared with Spire's $3.6 billion capitalization, the acquisition has a marginal impact on Spire's proforma credit metrics. The acquisition closed in September and was funded at the parent level through a balanced mix of debt and equity. EnergySouth is now a subsidiary of Spire.

Acquisitive Growth Strategy: The recent EnergySouth acquisition underscores Spire's acquisitive growth strategy, following the acquisition of AGC in 2014 and MGE in 2013. Alabama and Mississippi have credit-supportive regulatory environments and favorable rate recovery mechanisms. The acquisition is a good fit strategically, modestly expanding Spire's existing operations as the largest gas distribution company in Alabama while extending its service territory into southern Mississippi. Spire now owns five utilities in three states. Going forward, Fitch does not expect management to pursue any large acquisitions but may consider small bolt-on acquisitions of utilities within its service territory.

New STL Pipeline: Spire is moving forward with plans to construct the STL pipeline and Fitch expects Spire to file for FERC approval in January of 2017. The proposed STL pipeline is a new 70-mile lateral off of the Rockies Express Pipeline in Western Illinois that will provide LGC's utility customers with access to low-cost gas from the Marcellus and Utica Shale basins. The lateral would extend into LGC's service territory in Eastern Missouri with a capacity of 400 million cubic feet per day (MMcf/d), and LGC is expected to be a foundation shipper with a 350 MMcf/d commitment. The project is expected to cost $190 million to $210 million and has a projected in-service date in fiscal 2019.

Large Utility Capex Program: Spire plans to spend approximately $410 million on capex in 2017, roughly 40% more than last year, and $1.7 billion on capex through 2017 -- 2020. The capex is primarily focused on utility pipe replacement and gas distribution investments (roughly 85% of total) and investments associated with the proposed STL pipeline. Spire is projected to remain modestly FCF negative through 2020, and approximately two-thirds of total capital investment will be eligible for timely recovery under infrastructure riders, through either the infrastructure system replacement surcharge (ISRS) rider in Missouri or the rate stabilization and equalization (RSE) mechanism in Alabama.

LGC

Stable Earnings: LGC's stable earnings and cash flows reflect the regulated nature of its gas LDC operations, including those of MGE, its western Missouri operating division. LGC benefits from a purchased gas adjustment clause that limits commodity price exposure and an ISRS rider that provides timely recovery of investments. LGC's and MGE's authorized returns on equity (ROEs) are in line with industry averages and the utilities are allowed an authorized ROE and a pretax weighted average cost of capital of 9.7% and 9.75%,respectively, under their ISRS filings.

Solid Credit Metrics: LGC's credit metrics are expected to remain commensurate with its current rating category through the forecast period. LGC's EBITDAR interest coverage trended flat at 6.9x for 2016 as compared to 2015 and Fitch expects EBITDAR interest coverage to exceed 6.0x through 2020. LGC's adjusted debt/EBITDAR was 3.9x for 2016 and Fitch expects this leverage metric to remain around 4x through 2020.

New GRC Filings Expected: LGC's general rate case (GRC) moratorium in Missouri ended in October 2015, and Fitch expects LGC and its operating division MGE to file new GRCs in April 2017 for rates effective in mid-fiscal 2018. Fitch has assumed an authorized ROE of 9.75% for LGC throughout the forecast period.

New ISRS Rates: LGC and MGE recover distribution investments through their ISRS mechanism, which provides a timely return on investment and helps reduce regulatory lag between GRC proceedings. ISRS filings are made roughly every six months and are subject to approval by the Missouri Public Service Commission (MPSC). LGC and MGE recently filed to increase their ISRS revenues by $5 million and $3.4 million, respectively, and if approved annual ISRS rates would total $30.4 million for LGC and $13.7 million for MGE. Fitch expects a decision by the MPSC in the first quarter of 2017.

Distribution Investments Drive Growth: LGC plans to spend $261 million on pipe replacement and distribution investments in 2017, approximately 32% more than last year, and $1 billion on capex during 2017 - 2020. Fitch expects LGC to finance the majority of the capex spend through internal cash flows and to be modestly FCF negative through the forecast period with external financing needs to be funded with debt. Approximately 50% of the total capex spend will be recoverable under the ISRS rider, minimizing regulatory lag.

AGC

Constructive Regulation in Alabama: AGC and the smaller Mobile Gas operate under the RSE regulatory framework and are regulated by the Alabama Public Service Commission (APSC). Under the RSE framework, AGC is authorized to earn an ROE of 10.50% to 10.95%, with a midpoint of 10.80% based on an equity/total capitalization ratio of 56.5%. Mobile Gas is currently allowed a 10.8% ROE based on an equity/total capitalization ratio of 56.0% and benefits from timely recovery under a cast iron main replacement infrastructure rider. The current RSE framework for Mobile Gas and AGC will continue through Sept. 30 of 2017 and 2018, respectively, after which the APSC can vote to modify or end the RSE methodology. The authorized ROEs and equity components compare favorably with industry averages.

AGC and Mobile Gas can implement rates once a year effective Dec. 1, with any increase capped at 4% over the prior year's revenues. Reductions in rates can be made quarterly; however, to keep AGC and Mobile Gas within the targeted ROE. Fitch expects the regulatory environment in Alabama to remain constructive and has assumed an authorized ROE of 10.8% for AGC throughout the forecast period.

Strong Credit Metrics: AGC's credit metrics remain strong and are expected to remain commensurate with the rating category through the forecast period. AGC's EBITDAR interest coverage ratio was roughly 8x for 2016, and adjusted debt/EBITDAR was low at 2.5x for the same period. Fitch expects AGC's EBITDAR interest coverage to remain around 8x through 2020 adjusted debt/EBITDAR to remain under 3x through the same period.

Distribution Investments Drive Growth: Fitch anticipates AGC to spend $422 million on pipe replacement and distribution investments though 2017 - 2020, approximately 33% more than the preceding four year period. Fitch expects AGC to finance the majority of the capex spend through internal cash flows and to be modestly FCF negative through the forecast period with external financing needs to be funded with debt. However, Fitch expects future regulatory lag to be minimized due to timely recovery under the RSE mechanism.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Spire Inc. include:

--9.75% ROE for LGC and 10.8% ROE for AGC through the forecast period.

--Customer growth of 0.5%.

--Consolidated capex of $1.7 billion through 2020 focused on distribution investments.

--Long-term debt maturities totalling $570 million through 2020 as follows: $250 million in 2017, $100 million in 2018, and $180 million in 2019 and $40 million in 2020.

RATING SENSITIVITIES

Spire

Positive Rating Action: No positive rating actions are expected at this time given management's strategy to pursue growth through acquisitions.

Negative Rating Action: Higher than expected debt levels over the forecast period along with sustained adjusted debt/EBITDAR and FFO adjusted leverage metrics meaningfully greater than 4.5x and 5x, respectively, could cause negative rating actions.

LGC

Positive Rating Action: Sustained adjusted debt/EBITDAR under 3.25x could result in a positive rating action.

Negative Rating Action: An unexpected change in Missouri regulation that prevents LGC from earning an adequate and timely return on investments or sustained FFO adjusted leverage greater than 4.5x could result in a negative rating action.

AGC

Positive Rating Action: Given the current rating level no positive rating actions are expected at this time.

Negative Rating Action: An unexpected change in the RSE framework and or sustained adjusted debt/EBITDAR greater than 3.5x could cause a negative rating action.

LIQUIDITY

Spire has sufficient liquidity with approximately $356 million available under its consolidated unsecured revolving credit facilities as of Sept. 30, 2016, including $5 million of unrestricted cash and cash equivalents. Borrowings are concentrated during the winter heating season, which runs from November through April. Spire recently entered into a new consolidated $975 million credit facility to support its large capex program. The credit facility contains borrowing sub-limits for each entity including: $300 million at the parent, $475 million at LGC and $200 million at AGC. The credit facility also supports LGC's commercial paper program, contains a maximum debt/capitalization covenant of 70% and matures in September 2021. Spire was in compliance with all financial covenants under its credit facility as of Sept. 30, 2016, with a consolidated debt to capitalization ratio of 61%.

Spire's long-term debt maturities total $570 million through 2020 as follows: $250 million in 2017, $100 million in 2018, and $180 million in 2019 and $40 million in 2020. Fitch expects Spire to refinance these maturities on a timely basis.

FULL LIST OF RATING ACTIONS

Fitch affirms the following ratings with a Stable Rating Outlook:

Spire

--Long-Term IDR at 'BBB+' '

--Senior Unsecured Rating at 'BBB+'.

LGC

--Long-Term IDR at 'BBB+';

--First mortgage bonds at 'A';

--Short-Term IDR at 'F2';

--Commercial Paper Rating at 'F2'.

AGC

--Long-Term IDR 'A-';

--Senior Unsecured Rating 'A'.

Disclosure: There were no financial statement adjustments made that were material to the rating rationale outlined above.

Additional information is available on www.fitchratings.com

Applicable Criteria

Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)

https://www.fitchratings.com/site/re/885629

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