ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in millions, except per share amounts)
This section analyzes the financial condition and results of operations of Spire Inc. (Spire or the Company), Laclede Gas Company (Laclede Gas), and Alabama Gas Corporation (Alagasco). Spire was formerly known as The Laclede Group, Inc., which changed its name to Spire Inc. effective April 28, 2016. Laclede Gas and Alagasco are wholly owned subsidiaries of the Company. Collectively, Laclede Gas and Alagasco are referred to as the Utilities. This section includes management’s view of factors that affect the respective business of the Company, Laclede Gas, and Alagasco, explanations of past financial results including changes in earnings and costs from the prior periods, and the effects of such factors on the Company's, Laclede Gas' and Alagasco's overall financial condition and liquidity.
Certain matters discussed in this report, excluding historical information, include forward-looking statements. Certain words, such as “may,” “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “seek,” and similar words and expressions identify forward-looking statements that involve uncertainties and risks. Future developments may not be in accordance with our current expectations or beliefs and the effect of future developments may not be those anticipated. Among the factors that may cause results to differ materially from those contemplated in any forward-looking statement are:
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Weather conditions and catastrophic events, particularly severe weather in the natural gas producing areas of the country;
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•
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Volatility in gas prices, particularly sudden and sustained changes in natural gas prices, including the related impact on margin deposits associated with the use of natural gas derivative instruments;
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•
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The impact of changes and volatility in natural gas prices on our competitive position in relation to suppliers of alternative heating sources, such as electricity;
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•
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Changes in gas supply and pipeline availability, including decisions by natural gas producers to reduce production in or shut producing natural gas wells, expiration of existing supply and transportation arrangements that are not replaced with contracts with similar terms and pricing, as well as other changes that impact supply for and access to the markets in which our subsidiaries transact business;
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•
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Acquisitions may not achieve their intended results, including anticipated cost savings;
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Legislative, regulatory and judicial mandates and decisions, some of which may be retroactive, including those affecting:
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▪
allowed rates of return,
▪
incentive regulation,
▪
industry structure,
▪
purchased gas adjustment provisions,
▪
rate design structure and implementation,
▪
regulatory assets,
▪
non-regulated and affiliate transactions,
▪
franchise renewals,
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▪
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environmental or safety matters, including the potential impact of legislative and regulatory actions related to climate change and pipeline safety,
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▪
taxes,
▪
pension and other postretirement benefit liabilities and funding obligations, or
▪
accounting standards;
•
The results of litigation;
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The availability and access, in general, of funds to meet our debt obligations prior to or when they become due and to fund our operations and necessary capital expenditures, either through (i) cash on hand, (ii) operating cash flow, or (iii) access to the capital markets;
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•
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Retention of, ability to attract, ability to collect from, and conservation efforts of, customers;
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•
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Our ability to comply with all covenants in our indentures and credit facilities any violations of which, if not cured in a timely manner, could trigger a default of our obligation;
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Capital and energy commodity market conditions, including the ability to obtain funds with reasonable terms for necessary capital expenditures and general operations and the terms and conditions imposed for obtaining sufficient gas supply;
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Discovery of material weakness in internal controls; and
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Employee workforce issues, including but not limited to labor disputes and future wage and employee benefit costs including changes in discount rates and returns on benefit plan assets.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company’s Condensed Consolidated Financial Statements and Laclede Gas' and Alagasco's Condensed Financial Statements and the Notes thereto.
RESULTS OF OPERATIONS
Overview
The Company has two reportable segments: Gas Utility and Gas Marketing. Spire’s earnings are primarily derived from its Gas Utility segment, which reflects the regulated activities of the Utilities. The Gas Utility segment consists of the regulated businesses of Laclede Gas and Alagasco. Due to the seasonal nature of the Utilities' business, earnings of Spire, Laclede Gas and Alagasco are typically concentrated during the heating season of November through April each fiscal year.
Gas Utility – Laclede Gas
Laclede Gas is Missouri’s largest natural gas distribution company and is regulated by the Missouri Public Service Commission (MoPSC). Laclede Gas serves St. Louis and eastern Missouri through Laclede Gas and serves Kansas City and western Missouri through MGE. Laclede Gas delivers natural gas to retail and transportation customers at rates and in accordance with tariffs authorized by the MoPSC. The earnings of Laclede Gas are primarily generated by the sale of heating energy. The rate design for both service territories lessens the impact of weather volatility on Laclede Gas' customers during cold winters and stabilizes its earnings.
Gas Utility – Alagasco
Alagasco is the largest natural gas distribution utility in the state of Alabama. Alagasco’s service territory is located in central and northern Alabama. Among the cities served by Alagasco are Birmingham, the center of the largest metropolitan area in Alabama, and Montgomery, the state capital. Alagasco is regulated by the Alabama Public Service Commission (APSC). Alagasco purchases natural gas through interstate and intrastate suppliers and distributes the purchased gas through its distribution facilities for sale to residential, commercial, and industrial customers and other end-users of natural gas. Alagasco also provides transportation services to large industrial and commercial customers located on its distribution system. These transportation customers, using Alagasco as their agent or acting on their own, purchase gas directly from marketers or suppliers and arrange for delivery of the gas into the Alagasco distribution system. Alagasco charges a fee to transport such customer-owned gas through its distribution system to the customers’ facilities.
Gas Marketing
Laclede Energy Resources, Inc. (LER) is engaged in the marketing of natural gas and related activities on a non-regulated basis and is reported in the Gas Marketing segment. LER markets natural gas to both on-system utility transportation customers and customers outside of Laclede Gas’ traditional service territory, including large retail and wholesale customers. LER’s operations and customer base are more subject to fluctuations in market conditions than the Utilities. LER has a contract for 1 Bcf of natural gas storage expiring August 1, 2023 and has contracts for an additional 3.75 Bcf of storage that expire at various times through March 31, 2019.
Other
In addition to the Gas Utility and Gas Marketing segments, the Company's business includes certain other non-utility activities reported as Other. Other includes:
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unallocated corporate costs, including certain debt and associated interest costs,
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Laclede Pipeline Company, a subsidiary of Spire which operates a propane pipeline under Federal Energy Regulatory Commission (FERC) jurisdiction, and
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Spire's subsidiaries that are engaged in compression of natural gas, oil production, real estate development, risk management, and financial investments in other enterprises, among other activities. All subsidiaries are wholly owned.
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EARNINGS
Net income reported by Spire, Laclede Gas and Alagasco are determined in accordance with accounting principles generally accepted in the United States of America (GAAP). Management also uses the non-GAAP measures of net economic earnings, net economic earnings per share and operating margin when internally evaluating and reporting results of operations. These non-GAAP operating metrics should not be considered as an alternative to, or more meaningful than, GAAP measures such as net income.
Non-GAAP Measures – Net Economic Earnings and Net Economic Earnings Per Share
Net economic earnings and net economic earnings per share are non-GAAP measures that exclude from net income the after-tax impacts of fair value accounting and timing adjustments associated with energy-related transactions as well as acquisition,
divestiture, and restructuring activities. These fair value and timing adjustments are made in instances where the accounting treatment differs from the economic substance of the underlying transaction, including the following:
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Net unrealized gains and losses on energy-related derivatives that are required by GAAP fair value accounting associated with current changes in the fair value of financial and physical transactions prior to their completion and settlement. These unrealized gains and losses result primarily from two sources:
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1)
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changes in the fair values of physical and/or financial derivatives prior to the period of settlement; and,
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2)
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ineffective portions of accounting hedges, required to be recorded in earnings prior to settlement, due to differences in commodity price changes between the locations of the forecasted physical purchase or sale transactions and the locations of the underlying hedge instruments;
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Lower of cost or market adjustments to the carrying value of commodity inventories resulting when the market price of the commodity falls below its original cost, to the extent that those commodities are economically hedged; and
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Realized gains and losses resulting from the settlement of economic hedges prior to the sale of the physical commodity.
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These adjustments eliminate the impact of timing differences and the impact of current changes in the fair value of financial and physical transactions prior to their completion and settlement. Unrealized gains or losses are recorded in each period until being replaced with the actual gains or losses realized when the associated physical transaction(s) occur. While management uses these non-GAAP measures to evaluate both the Utilities and LER, the net effect of adjustments on the Utilities' earnings are minimal. This is due to gains or losses on Laclede Gas' natural gas derivative instruments being deferred pursuant to its PGA clause, as authorized by the MoPSC.
Management believes that excluding the earnings volatility caused by recognizing changes in fair value prior to settlement and other timing differences associated with related purchase and sale transactions provides a useful representation of the economic effects of only the actual settled transactions and their effects on results of operations. In addition, management excludes the impact related to unique acquisition, divestiture, and restructuring activities when evaluating on-going performance, and therefore excludes these impacts from net economic earnings. Management believes that this presentation provides a useful representation of operating performance by facilitating comparisons of year-over-year results. The definition and measurement of net economic earnings provided above is consistent with that used by management and the Board of Directors in assessing the Company's, Laclede Gas' and Alagasco's performance as well as determining performance under the Company's, Laclede Gas' and Alagasco's incentive compensation plans. Further, the Company believes this better enables an investor to view the Company's, Laclede Gas' and Alagasco's performance in that period on a basis that would be comparable to prior periods.
Reconciliations of net economic earnings and net economic earnings per share to the Company's most directly comparable GAAP measures are provided on the following pages.
Non-GAAP Measure – Operating Margin
In addition to operating revenues and operating expenses, management also uses the non-GAAP measure of operating margin when evaluating results of operations, as shown in the table below. The Utilities pass to their customers (subject to prudence review by, as applicable, the MoPSC or APSC) increases and decreases in the wholesale cost of natural gas in accordance with their PGA clauses (Missouri Utilities) and GSA rider (Alabama Utility). The volatility of the wholesale natural gas market results in fluctuations from period to period in the recorded levels of, among other items, revenues and natural gas cost expense. Nevertheless, increases and decreases in (1) the cost of gas associated with system gas sales volumes and (2) gross receipts tax expense, which is calculated as a percentage of revenues, with the same amounts (excluding immaterial timing differences) included in revenues, have no direct effect on operating income. As these costs are included in revenue and operating expenses and management does not have any control over these amounts for the Utilities, management believes that beginning with operating margin provides a more useful measure. In addition, it is management's belief that separating operating margin from the remaining operating expenses that determine operating income is a more useful approach to assessing the Company's and the Utilities' performance, as management has more ability to influence control over these revenues and expenses.
THREE MONTHS ENDED MARCH 31, 2016
SPIRE
Net Income and Net Economic Earnings
The following tables reconcile the Company's net economic earnings to the most comparable GAAP number, net income.
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Gas Utility
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Gas Marketing
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Other
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Consolidated
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Per Diluted Share**
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Three Months Ended March 31, 2016
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Net Income (Loss) (GAAP)
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$
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102.4
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$
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1.5
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$
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(3.1
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)
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$
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100.8
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$
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2.31
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Unrealized loss on energy-related derivatives*
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0.1
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1.7
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—
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1.8
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0.04
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Lower of cost or market inventory adjustments*
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—
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0.2
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—
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0.2
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—
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Realized gain on economic hedges prior
to the sale of the physical commodity*
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—
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(0.4
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)
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—
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(0.4
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)
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(0.01
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)
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Acquisition, divestiture and restructuring activities*
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—
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—
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1.1
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1.1
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0.03
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Net Economic Earnings (Loss) (Non-GAAP)
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$
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102.5
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$
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3.0
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$
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(2.0
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)
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$
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103.5
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$
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2.37
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Three Months Ended March 31, 2015
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Net Income (Loss) (GAAP)
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$
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96.2
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$
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0.3
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$
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(2.1
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)
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$
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94.4
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$
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2.18
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Unrealized (gain) loss on energy-related derivatives*
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(0.1
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)
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2.7
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—
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2.6
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0.06
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Lower of cost or market inventory adjustments*
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—
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(1.0
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)
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—
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(1.0
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(0.02
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)
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Realized loss on economic hedges prior
to the sale of the physical commodity*
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—
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0.1
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—
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0.1
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—
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Acquisition, divestiture and restructuring activities*
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0.4
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—
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1.1
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1.5
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0.03
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Net Economic Earnings (Loss) (Non-GAAP)
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$
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96.5
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$
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2.1
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$
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(1.0
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$
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97.6
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$
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2.25
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*
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Amounts presented net of income taxes. Income taxes are calculated by applying federal, state, and local income tax rates applicable to ordinary income to the amounts of the pre-tax reconciling items.
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**
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Net economic earnings per share is calculated by replacing consolidated net income with consolidated net economic earnings in the GAAP diluted earnings per share calculation.
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Consolidated
Spire’s net income was
$100.8
for the
three months ended March 31, 2016
, compared with
$94.4
for the
three months ended March 31, 2015
. Basic and diluted earnings per share for the
three months ended March 31, 2016
were
$2.32
and
$2.31
, respectively, compared with basic and diluted earnings per share of
$2.18
for the
three months ended March 31, 2015
. Net income increased $6.4, driven by higher operating income in both the Gas Utility and Gas Marketing segments, as described below. Spire's net economic earnings were
$103.5
(
$2.37
per diluted share) for the
three months ended March 31, 2016
, an increase of $5.9 from the
$97.6
(
$2.25
per diluted share) reported for the same period last year. The increase is primarily attributable to stronger results delivered by the Gas Utility segment, as described below.
Gas Utility
For the
three months ended March 31, 2016
, Gas Utility net income increased by
$6.2
, and net economic earnings increased by
$6.0
, versus the prior-year quarter. Lower bad debt expenses and other operating expenses more than offset higher depreciation expense and income taxes in the current quarter. The changes in operating margin and operating expenses are further described below.
Gas Marketing
The Gas Marketing segment reported net income totaling
$1.5
for the
three months ended March 31, 2016
, $1.2 higher than the prior year, primarily due to natural gas storage results. Net economic earnings for the
three months ended March 31, 2016
increased
$0.9
compared with the
three months ended March 31, 2015
, reflecting the impact of excluding changes in fair value measurements that are included in net income, as noted in the discussion of operating revenues below.
Operating Revenues and Operating Expenses
Reconciliations of the Company's operating margin to the most directly comparable GAAP measure are shown below.
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Gas Utility
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Gas Marketing
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Other
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Eliminations
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Consolidated
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Three Months Ended March 31, 2016
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Operating revenues
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$
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612.7
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$
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8.0
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$
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0.9
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$
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(12.3
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)
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$
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609.3
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Natural and propane gas expense
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273.0
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4.0
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—
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(12.0
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)
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265.0
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Gross receipts tax expense
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32.2
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0.1
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—
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—
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32.3
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Operating margin (non-GAAP)
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307.5
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3.9
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0.9
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(0.3
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)
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312.0
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Depreciation and amortization
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33.8
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—
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0.1
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—
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33.9
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Other operating expenses
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106.3
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1.4
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3.0
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(0.3
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)
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110.4
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Operating income (loss) (GAAP)
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$
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167.4
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$
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2.5
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$
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(2.2
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)
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$
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—
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$
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167.7
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Three Months Ended March 31, 2015
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Operating revenues
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$
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849.0
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$
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44.1
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$
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0.9
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$
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(16.6
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)
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$
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877.4
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Natural and propane gas expense
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499.1
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42.0
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0.1
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(16.3
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)
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524.9
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Gross receipts tax expense
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44.1
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—
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—
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—
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44.1
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Operating margin (non-GAAP)
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305.8
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2.1
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0.8
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(0.3
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)
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308.4
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Depreciation and amortization
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32.2
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0.1
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0.2
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—
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32.5
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Other operating expenses
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115.6
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1.4
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1.5
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(0.3
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)
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118.2
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Operating income (loss) (GAAP)
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$
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158.0
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$
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0.6
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$
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(0.9
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)
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$
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—
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$
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157.7
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Consolidated
Spire reported operating revenues of
$609.3
for the
three months ended March 31, 2016
compared with
$877.4
for the same period last year, with decreases in both Gas Utility and Gas Marketing, as discussed below. Spire's operating margin increased
$3.6
for the
three months ended March 31, 2016
compared with the same period last year due primarily to increases in the Gas Utility and Gas Marketing segments, as discussed below. Depreciation and amortization expenses were
$33.9
for the
three months ended March 31, 2016
, compared with
$32.5
for the same period last year. Other operating expenses were
$110.4
for the
three months ended March 31, 2016
, compared with
$118.2
for the same period last year. The decrease was primarily the result of lower expenses at the Missouri Utilities, as discussed below.
Gas Utility
Operating Revenues
–
Gas Utility operating revenues for the
three months ended March 31, 2016
were
$612.7
, or
$236.3
less than the same period last year. The decrease in Gas Utility operating revenues was attributable to the following factors:
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Lower wholesale gas costs passed on to customers
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$
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(142.6
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)
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Lower system sales volumes
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(76.8
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)
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Lower off-system sales and capacity release
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(12.2
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)
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Lower gross receipts taxes (GRT)
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(12.5
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)
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Missouri Utilities
–
Higher Infrastructure System Replacement Surcharge (ISRS)
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3.9
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Alagasco
–
Lower Rate Stabilization and Equalization (RSE) revenue reduction
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3.9
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Total Variation
|
$
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(236.3
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)
|
As shown, the decrease was primarily attributable to lower revenues reflecting the decline in natural gas pricing due to overall market conditions and lower volumes due to warmer weather (lower degree days). Gross receipts taxes (GRT) are a function of sales revenue, and therefore also decreased. These decreases were partially offset by higher ISRS charges within the Missouri Utilities and the effect of adjustments under the RSE rate-setting process. Under the RSE, the APSC conducts quarterly reviews of the expected rate of return on average common equity at the end of the year, and reductions in rates can be made quarterly to bring the projected return to within the allowed range. The net reduction recorded in the second quarter of fiscal 2016 was $3.9 smaller than in last year's second quarter.
Operating Margin
– Gas Utility operating margin was
$307.5
for the
three months ended March 31, 2016
, a
$1.7
increase over the same period last year. The increase was attributable to the following factors:
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Variance
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Lower system sales volumes
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$
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(16.0
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)
|
Missouri Utilities
–
Higher Infrastructure System Replacement Surcharge (ISRS)
|
3.9
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|
Alagasco
–
Lower Rate Stabilization and Equalization (RSE) revenue reduction
|
3.9
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Other variations, including timing of gas cost recoveries
|
9.9
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Total Variation
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$
|
1.7
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The increase in operating margin was primarily attributable to favorable timing of gas cost recovery at Alagasco, $3.9 higher ISRS charges within the Missouri Utilities for the current quarter, and Alagasco's RSE adjustment that was $3.9 lower than in the prior year. These favorable impacts were partly offset by lower sales volumes resulting from the lower degree days, as described above under Operating Revenues. While lower gas costs and GRT negatively impact revenues, their impact on operating margin is minimal due to the related pass-through mechanisms, including the PGA clause for the Missouri Utilities and the GSA rider for the Alabama Utility.
Operating Expenses
– Depreciation and amortization expenses for the
three months ended March 31, 2016
increased $1.6 from last year, primarily due to the higher levels of capital expenditures undertaken over the last twelve months. Other operating expenses for the
three months ended March 31, 2016
are
$9.3
lower than the same period in the prior year, largely due to the impact of warmer weather, especially on bad debt expense and employee-related costs, and, to a lesser extent, to cost efficiencies and the favorable timing of expenses.
Gas Marketing
Operating Revenues
– Operating revenues decreased
$36.1
versus the prior year period, due primarily to lower general pricing levels and lower basis differentials (price volatility between regions), as well as an increase in the amount of expenses associated with trading activities, partially offset by the effects of higher volumes. Average pricing for the quarter ended March 31, 2016 was approximately $2.130/MMBtu versus approximately $3.177/MMBtu for the quarter ended March 31, 2015.
Operating Margin
– Gas Marketing operating margin during the
three months ended March 31, 2016
increased
$1.8
from the same period last year. The increase in operating margin is primarily due to the net favorable impact of storage services in the current quarter, partially offset by the effects of current market conditions (tighter basis differentials and lower price volatility).
Interest Charges
Consolidated interest charges during the
three months ended March 31, 2016
increased by $0.2 from the same period last year. For the
three months ended March 31, 2016
and 2015, average short-term borrowings were $345.9 and $377.5, respectively, and the average interest rates on these borrowings were 1.0% and 0.7%, respectively.
Income Taxes
Consolidated income tax expense during the
three months ended March 31, 2016
increased $3.5 versus the prior year as a result of the increase in pre-tax book income.
LACLEDE GAS
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
Operating revenues
|
$
|
446.7
|
|
|
$
|
615.7
|
|
Natural and propane gas expense
|
242.8
|
|
|
402.7
|
|
Gross receipts tax expense
|
24.7
|
|
|
33.3
|
|
Operating margin (non-GAAP)
|
179.2
|
|
|
179.7
|
|
Depreciation and amortization
|
21.9
|
|
|
20.5
|
|
Other operating expenses
|
70.3
|
|
|
78.6
|
|
Operating income (GAAP)
|
$
|
87.0
|
|
|
$
|
80.6
|
|
Net Income
|
$
|
54.3
|
|
|
$
|
49.9
|
|
Operating revenues for the
three months ended March 31, 2016
decreased $169.0 from the same period last year primarily due to $107.9 in lower wholesale gas costs passed on to customers and $43.6 in lower system sales volumes resulting from the delay in seasonal customer connections and lower degree days due to warmer weather. Operating revenues were also reduced by a $12.2 decline in off-system sales and capacity release and a $9.2 decline in gross receipts taxes, partially offset by a $3.9 increase in ISRS charges. Operating margin for the
three months ended March 31, 2016
decreased $0.5 from the same period last year. Other operating expenses for the
three months ended March 31, 2016
decreased $8.3 versus the prior year quarter, largely attributable to the warmer weather, including favorable bad debt experience and lower employee-related expenses. Resulting net income for the
three months ended March 31, 2016
increased $4.4 from the same period last year.
Temperatures in Laclede Gas’ service areas during the
three months ended March 31, 2016
were 18.0% warmer than the same period last year, resulting in lower gas usage and operating revenues on a year-over-year comparative basis, and 15% warmer than normal. The Missouri Utilities' total system therms sold and transported were 758.7 million for the three months ended March 31, 2016, compared with 877.3 million for the same period last year, including a 12.9 million decrease in off-system sales. Total off-system therms sold and transported were 86.9 million for the three months ended March 31, 2016, compared with 99.8 million for the same period last year.
ALAGASCO
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
Operating revenues
|
$
|
166.0
|
|
|
$
|
233.3
|
|
Natural gas expense
|
30.2
|
|
|
96.4
|
|
Gross receipts tax expense
|
7.5
|
|
|
10.8
|
|
Operating margin (non-GAAP)
|
128.3
|
|
|
126.1
|
|
Depreciation and amortization
|
11.9
|
|
|
11.7
|
|
Other operating expenses
|
36.0
|
|
|
37.0
|
|
Operating income (GAAP)
|
$
|
80.4
|
|
|
$
|
77.4
|
|
Net Income
|
$
|
48.1
|
|
|
$
|
46.3
|
|
Operating revenues for the
three months ended March 31, 2016
decreased $67.3 from the same period last year. The decrease was driven by $34.7 lower gas prices passed through to customers, the $33.2 effect of reduced customer usage, and $3.3 lower gross receipts taxes. These decreases were partially offset by a $3.9 reduction in RSE adjustments compared to the prior year quarter. Operating margin increased $2.2 as the effect of lower customer usage was more than offset by favorable timing of gas cost recovery and the lower RSE adjustments. Depreciation and amortization expenses for the
three months ended March 31, 2016
were comparable to the same period last year. Other operating expenses were $1.0 lower, primarily due to lower employee costs related to lower than planned headcount. Net income during the
three months ended March 31, 2016
increased $1.8 from the same period last year, primarily due to the factors discussed above.
Temperatures in Alagasco's service area during the three months ended March 31, 2016 were 27% warmer than the same period last year, and 20% warmer than normal. Alagasco's total system therms sold and transported were 188.6 million for the three months ended March 31, 2016, compared with 216.3 million for the same period last year.
For further information on the GSA and RSE mechanisms, please see Note 1, Summary of Significant Accounting Policies, and Note 15, Regulatory Matters, of Alagasco's Annual Report on Form 10-K for the period ended September 30, 2015.
SIX MONTHS ENDED MARCH 31, 2016
SPIRE
Net Income and Net Economic Earnings
The following tables reconcile the Company's net economic earnings to the most comparable GAAP number, net income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas Utility
|
|
Gas Marketing
|
|
Other
|
|
Total
|
|
Per Diluted Share **
|
Six Months Ended March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) (GAAP)
|
$
|
151.7
|
|
|
$
|
3.8
|
|
|
$
|
(7.8
|
)
|
|
$
|
147.7
|
|
|
$
|
3.39
|
|
|
Unrealized gain on energy-related derivatives*
|
—
|
|
|
(1.2
|
)
|
|
—
|
|
|
(1.2
|
)
|
|
(0.03
|
)
|
|
Lower of cost or market inventory adjustments*
|
—
|
|
|
0.5
|
|
|
—
|
|
|
0.5
|
|
|
0.01
|
|
|
Realized gain on economic hedges prior
to the sale of the physical commodity*
|
—
|
|
|
(0.4
|
)
|
|
—
|
|
|
(0.4
|
)
|
|
(0.01
|
)
|
|
Acquisition, divestiture and restructuring activities*
|
0.8
|
|
|
—
|
|
|
1.2
|
|
|
2.0
|
|
|
0.05
|
|
|
Net Economic Earnings (Loss) (Non-GAAP)
|
$
|
152.5
|
|
|
$
|
2.7
|
|
|
$
|
(6.6
|
)
|
|
$
|
148.6
|
|
|
$
|
3.41
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended March 31, 2015
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) (GAAP)
|
$
|
145.8
|
|
|
$
|
2.5
|
|
|
$
|
(6.8
|
)
|
|
$
|
141.5
|
|
|
$
|
3.26
|
|
|
Unrealized gain on energy-related derivatives*
|
(0.1
|
)
|
|
(0.3
|
)
|
|
—
|
|
|
(0.4
|
)
|
|
(0.01
|
)
|
|
Lower of cost or market inventory adjustments*
|
—
|
|
|
0.2
|
|
|
—
|
|
|
0.2
|
|
|
0.01
|
|
|
Realized loss on economic hedges prior
to the sale of the physical commodity*
|
—
|
|
|
0.1
|
|
|
—
|
|
|
0.1
|
|
|
—
|
|
|
Acquisition, divestiture and restructuring activities*
|
0.6
|
|
|
—
|
|
|
1.3
|
|
|
1.9
|
|
|
0.05
|
|
|
Net Economic Earnings (Loss) (Non-GAAP)
|
$
|
146.3
|
|
|
$
|
2.5
|
|
|
$
|
(5.5
|
)
|
|
$
|
143.3
|
|
|
$
|
3.31
|
|
|
|
*
|
Amounts presented net of income taxes. Income taxes are calculated by applying federal, state, and local income tax rates applicable to ordinary income to the amounts of the pre-tax reconciling items.
|
|
|
**
|
Net economic earnings per share is calculated by replacing consolidated net income with consolidated net economic earnings in the GAAP diluted earnings per share calculation.
|
Consolidated
Spire’s net income was
$147.7
for the
six months ended March 31, 2016
, compared with
$141.5
for the
six months ended March 31, 2015
. Basic and diluted earnings per share for the
six months ended March 31, 2016
were
$3.40
and
$3.39
, respectively, compared with basic and diluted earnings per share of
$3.27
and
$3.26
, respectively, for the
six months ended March 31, 2015
. Net income increased $6.2, driven by higher operating income in both the Gas Utility and Gas Marketing segments, as described below. Similarly, net economic earnings were
$148.6
(
$3.41
per diluted share) for the
six months ended March 31, 2016
, up from
$143.3
(
$3.31
per diluted share) for the same period last year.
Gas Utility
Gas Utility net income and net economic earnings increased by
$5.9
and
$6.2
, respectively, for the
six months ended March 31, 2016
, compared with the
six months ended March 31, 2015
. As discussed in more detail below, the increase was primarily due to lower other operating expenses more than offsetting lower operating margin and higher income taxes.
Gas Marketing
The Gas Marketing segment reported GAAP net income totaling
$3.8
, an increase of $1.3 compared with the same period last year. Net economic earnings for the
six months ended March 31, 2016
increased $0.2 compared with the
six months ended March 31, 2015
. The increases in net income and net economic earnings were primarily attributable to an increase in operating margin, with the impact to net economic earnings relative to GAAP net income being partly offset by less favorable mark-to-market activity in the current year, as discussed below.
Operating Revenues and Operating Expenses
Reconciliations of the Company's operating margin to the most directly comparable GAAP measure are shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas Utility
|
|
Gas Marketing
|
|
Other
|
|
Eliminations
|
|
Consolidated
|
Six Months Ended March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
$
|
1,012.2
|
|
|
$
|
20.8
|
|
|
$
|
1.7
|
|
|
$
|
(26.0
|
)
|
|
$
|
1,008.7
|
|
|
Natural and propane gas expense
|
434.9
|
|
|
11.4
|
|
|
—
|
|
|
(25.4
|
)
|
|
420.9
|
|
|
Gross receipts tax expense
|
49.7
|
|
|
0.1
|
|
|
—
|
|
|
—
|
|
|
49.8
|
|
|
Operating margin (non-GAAP)
|
527.6
|
|
|
9.3
|
|
|
1.7
|
|
|
(0.6
|
)
|
|
538.0
|
|
|
Depreciation and amortization
|
67.3
|
|
|
—
|
|
|
0.3
|
|
|
—
|
|
|
67.6
|
|
|
Other operating expenses
|
208.9
|
|
|
3.0
|
|
|
4.4
|
|
|
(0.6
|
)
|
|
215.7
|
|
|
Operating income (loss) (GAAP)
|
$
|
251.4
|
|
|
$
|
6.3
|
|
|
$
|
(3.0
|
)
|
|
$
|
—
|
|
|
$
|
254.7
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended March 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
$
|
1,431.4
|
|
|
$
|
106.3
|
|
|
$
|
1.8
|
|
|
$
|
(42.5
|
)
|
|
$
|
1,497.0
|
|
|
Natural and propane gas expense
|
828.9
|
|
|
99.1
|
|
|
0.2
|
|
|
(42.0
|
)
|
|
886.2
|
|
|
Gross receipts tax expense
|
71.0
|
|
|
0.1
|
|
|
—
|
|
|
—
|
|
|
71.1
|
|
|
Operating margin (non-GAAP)
|
531.5
|
|
|
7.1
|
|
|
1.6
|
|
|
(0.5
|
)
|
|
539.7
|
|
|
Depreciation and amortization
|
64.2
|
|
|
0.2
|
|
|
0.3
|
|
|
—
|
|
|
64.7
|
|
|
Other operating expenses
|
224.1
|
|
|
2.7
|
|
|
3.7
|
|
|
(0.5
|
)
|
|
230.0
|
|
|
Operating income (loss) (GAAP)
|
$
|
243.2
|
|
|
$
|
4.2
|
|
|
$
|
(2.4
|
)
|
|
$
|
—
|
|
|
$
|
245.0
|
|
Consolidated
Spire reported operating revenues of
$1,008.7
for the
six months ended March 31, 2016
compared with
$1,497.0
for the same period last year. Spire's operating margin decreased $1.7 for the
six months ended March 31, 2016
compared with the same period last year due to lower Gas Utility operating margin offsetting higher Gas Marketing results, as discussed below. Depreciation and amortization expenses were
$67.6
for the
six months ended March 31, 2016
, compared with
$64.7
for the same period last year. Other operating expenses were
$215.7
for the
six months ended March 31, 2016
, compared with
$230.0
for the same period last year. The decrease was primarily due to lower operating expenses within the Missouri Utilities, as discussed below.
Gas Utility
Operating Revenues –
Gas Utility operating revenues for the
six months ended March 31, 2016
were
$1,012.2
, or
$419.2
less than the same period last year. The decrease in Gas Utility operating revenues was attributable to the following factors:
|
|
|
|
|
|
Variance
|
Lower wholesale gas costs passed on to customers
|
$
|
(234.5
|
)
|
Lower system sales volumes
|
(149.8
|
)
|
Lower off-system sales and capacity release
|
(24.5
|
)
|
Lower gross receipts taxes (GRT)
|
(22.3
|
)
|
Alagasco
–
Lower Rate Stabilization and Equalization (RSE) revenue reduction
|
6.9
|
|
Missouri Utilities
–
Higher Infrastructure System Replacement Surcharge (ISRS)
|
6.5
|
|
Other variations
|
(1.5
|
)
|
Total Variation
|
$
|
(419.2
|
)
|
As shown (and as discussed in more detail for the three months ended March 31, 2016 above), the decrease was primarily attributable to the decline in natural gas pricing, lower sales volumes due to warmer weather, and the related decrease in gross receipts taxes. These decreases were partially offset by higher ISRS charges within the Missouri Utilities and lower RSE adjustments at Alagasco.
Operating Margin
– Gas Utility operating margin was
$527.6
for the
six months ended March 31, 2016
, a
$3.9
decrease over the same period last year. The decrease was attributable to the following factors:
|
|
|
|
|
|
Variance
|
Lower system sales volumes
|
$
|
(29.1
|
)
|
Alagasco – Lower Rate Stabilization and Equalization (RSE) revenue reduction
|
6.9
|
|
Missouri Utilities
–
Higher Infrastructure System Replacement Surcharge (ISRS)
|
6.5
|
|
Other variations, including timing of gas cost recoveries
|
11.8
|
|
Total Variation
|
$
|
(3.9
|
)
|
The decrease was primarily attributable to lower system volumes due to the warmer weather. The favorable impacts of the timing of gas cost recoveries, Alagasco's lower RSE adjustments, and the Missouri Utilities' ISRS charges mitigated the negative volume impact. Since gas costs and GRT are passed through to customers, their impact on operating margin is minimal.
Operating Expenses
– Depreciation and amortization expenses for the
six months ended March 31, 2016
increased
$3.1
from the same period last year due to the increased capital investments over the past year. Other operating expenses for the
six months ended March 31, 2016
decreased
$15.2
from last year, partially attributable to the warmer weather, with lower employee-related expenses at both the Missouri and Alabama Utilities and lower bad debt expense in the current year.
Gas Marketing
Operating Revenues
– Gas Marketing operating revenues during the
six months ended March 31, 2016
decreased
$85.5
from the same period last year due to lower average pricing in the current year, combined with lower regional basis differentials. Overall commodity pricing in the current year is $1.40/MMBtu below the prior year. The prior year period also included a $1.8 higher benefit from mark-to-market impact on derivatives.
Operating Margin
– Gas Marketing operating margin during the
six months ended March 31, 2016
increased
$2.2
from the same period last year. The increase in operating margin is primarily due to the net favorable impact of storage services in the second quarter of this year, partially offset by the effects of current market conditions (tighter basis differentials and lower price volatility).
Interest Charges
Consolidated interest charges during the
six months ended March 31, 2016
are flat from the same period last year. Interest expense reductions from the refinancing of $115.0 in Alagasco long-term debt in September and December of 2015 were offset by higher charges on short-term borrowings. For the
six months ended March 31, 2016
and 2015, average short-term borrowings were $360.2 and $358.0, respectively, and the average interest rates on these borrowings were 0.9% and 0.6%, respectively.
Income Taxes
Consolidated income tax expense during the
six months ended March 31, 2016
increased $3.6 from the same period last year primarily as a result of higher pre-tax book income.
LACLEDE GAS
|
|
|
|
|
|
|
|
|
|
Six Months Ended March 31,
|
($ Millions)
|
2016
|
|
2015
|
Operating revenues
|
$
|
763.9
|
|
|
$
|
1,078.1
|
|
Natural and propane gas expense
|
392.6
|
|
|
686.1
|
|
Gross receipts tax expense
|
38.2
|
|
|
54.4
|
|
Operating margin (non-GAAP)
|
333.1
|
|
|
337.6
|
|
Depreciation and amortization
|
43.7
|
|
|
40.7
|
|
Other operating expenses
|
137.3
|
|
|
151.5
|
|
Operating income (GAAP)
|
$
|
152.1
|
|
|
$
|
145.4
|
|
Net Income
|
$
|
93.7
|
|
|
$
|
88.9
|
|
Operating revenues during the
six months ended March 31, 2016
decreased $314.2 from the same period last year primarily due to $183.7 lower wholesale gas costs passed on to customers, a $93.9 volume decrease related to the current year warmer weather, $24.5 lower off-system sales and capacity release and lower gross receipts tax collections of $17.2. These impacts were only slightly offset by ISRS charges totaling $6.5. Operating margin decreased $4.5 primarily due to lower volume, offset partly by higher ISRS charges. Other operating expenses during the
six months ended March 31, 2016
decreased $14.2 from the same period last year, partly offset by higher depreciation. The decrease in other operating expenses were driven by lower employee-related costs and lower bad debts. Income tax expense in the current year increased $1.8 due to higher pre-tax book income. Net income increased $4.8, primarily due to the factors discussed above.
Temperatures in Laclede Gas’ service areas during the
six months ended March 31, 2016
were 22.0% warmer than the same period last year, resulting in lower gas usage and operating revenues on a year-over-year comparative basis, and 20% warmer than normal. The Missouri Utilities' total system therms sold and transported were 1,253.2 million for the six months ended March 31, 2016, compared with 1,495.9 million for the same period last year, including a 10.6 decrease in off-system sales. Total off-system therms sold and transported were 164.5 million for the
six months ended March 31, 2016
, compared with 175.1 million for the same period last year.
ALAGASCO
|
|
|
|
|
|
|
|
|
|
Six Months Ended March 31,
|
($ Millions)
|
2016
|
|
2015
|
Operating revenues
|
$
|
248.3
|
|
|
$
|
353.3
|
|
Natural gas expense
|
42.3
|
|
|
142.8
|
|
Gross receipts tax expense
|
11.5
|
|
|
16.6
|
|
Operating margin (non-GAAP)
|
194.5
|
|
|
193.9
|
|
Depreciation and amortization
|
23.6
|
|
|
23.5
|
|
Other operating expenses
|
71.6
|
|
|
72.6
|
|
Operating income (GAAP)
|
$
|
99.3
|
|
|
$
|
97.8
|
|
Net Income
|
$
|
58.0
|
|
|
$
|
56.9
|
|
Operating revenues for the
six months ended March 31, 2016
decreased $105.0 from the same period last year. The primary drivers were the impact of lower cycle customer usage of $55.9 due to the warmer weather experienced in the current year, lower natural gas prices passed onto customers of $50.8, lower gross receipts taxes of $5.1, offset partly by RSE adjustments. Operating margin increased $0.6 versus the prior period due to RSE adjustments offsetting the impacts of the lower volume. Other operating expenses for the
six months ended March 31, 2016
decreased $1.0 from the same period last year primarily driven by decreases in labor and employee-related expenses. Net income during the
six months ended March 31, 2016
increased $1.1 from the same period last year, primarily due to the factors discussed above.
Temperatures in Alagasco's service area during the
six months ended March 31, 2016
were 34% warmer than the same period last year, and 24% warmer than normal. Alagasco's total system therms sold and transported were 482.4 million for the six months ended March 31, 2016, compared with 540.0 million for the same period last year.
For further information on the GSA and RSE mechanisms, please see Note 1, Summary of Significant Accounting Policies, and Note 3, Regulatory Matters, of Alagasco's Annual Report on Form 10-K for the year ended September 30, 2015.
REGULATORY AND OTHER MATTERS
Please see the
Environmental Matters
section for information relative to environmental matters. Spire, Laclede Gas and Alagasco are involved in other litigation, claims, and investigations arising in the normal course of business. Management, after discussion with counsel, believes that the final outcomes of these matters will not have a material effect on the consolidated financial position, results of operations, or cash flows of the Company, Laclede Gas or Alagasco.
Laclede Gas
On November 12, 2015, the MoPSC approved an incremental ISRS amount of $4.4 for Laclede Gas' eastern Missouri service territory and $1.9 for MGE, effective December 1, 2015, bringing total annualized ISRS revenue to $19.6 for Laclede Gas' eastern Missouri service territory and $6.7 for MGE's service territory. On January 15, 2016, the Missouri Office of the Public Counsel filed an appeal to Missouri’s Western District Court of Appeals of the Commission’s decision permitting Laclede Gas to update its ISRS applications during the pendency of the case. Laclede Gas believes the Commission’s decision was lawful and reasonable, and intends to vigorously oppose the appeal. On February 1, the Missouri Utilities filed to increase their ISRS revenues related to investments from September 2015 through February 2016. On April 1, 2016, the MoPSC staff filed recommendations that supported an incremental increase of $5
.
4 for Laclede Gas' eastern Missouri service territory and $3.6 for MGE, with an effective date no earlier than May 23, 2016. On April 11, 2016, the Missouri Office of the Public Counsel filed a motion for evidentiary hearing for issues and arguments the same or similar to the appeal.
On October 28, 2015, Laclede Gas’ eastern Missouri service territory and MGE both filed for PGA reductions that were approved and became effective November 6, 2015, which decreased the average residential customers’ bill by 9% and 5%, respectively. On March 4, 2016, Laclede Gas’ eastern Missouri service territory and MGE both filed for PGA reductions that were approved and became effective March 21, 2016, which decreased the average residential customers’ bill by 3.5% and 3.3%, respectively.
Laclede Gas had authority from the MoPSC to issue long-term debt securities and preferred stock, including on a private placement basis, as well as to issue common stock, receive paid-in capital, and enter into capital lease agreements, all for a total of up to $518.0. This authority was scheduled to expire, so Laclede Gas filed for a new financing authorization in the amount of $550.0. On February 10, 2016, the MoPSC issued an order authorizing Laclede Gas long-term financing authority for $300.0 for financings placed any time before September 30, 2018. Laclede Gas filed an application for rehearing, which was denied on March 9, 2016. On March 31, 2016, Laclede Gas filed an appeal with the Western District Court of Appeals to reconsider the level of authority.
On April 26, 2016, the Office of Public Counsel (OPC) filed a complaint to address whether the gas rates of the Missouri Utilities are just and reasonable. The OPC alleged that the Missouri Utilities were overearning based on an unadjusted return on equity for fiscal 2015. We believe that complaint lacks merit and is flawed in several respects, and we will vigorously defend our position that our rates are just and reasonable.
Alagasco
Alagasco is subject to regulation by the APSC which established the Rate Stabilization and Equalization (RSE) rate-setting process in 1983 (see the 2015 Form 10-K for more detail). Reductions in rates can be made quarterly to bring the projected return within the allowed range; increases, however, are allowed only once each rate year, effective December 1, and cannot exceed 4% of prior-year revenues. The quarterly point of test reductions from rate year 2015 went into effect October 1, 2015 for $4.4 and December 1, 2015 for $12.2. Alagasco filed a $4.6 reduction for rate year 2016, effective December 1, 2015. There was no RSE reduction for the January 31, 2016 quarterly point of test. As of March 31, 2016, Alagasco recorded an estimated $5.5 RSE reduction to operating revenues to bring the expected rate of return on average common equity at the end of the year to within the allowed range of return.
The inflation-based Cost Control Mechanism (CCM), established by the APSC, allows for annual increases to operations and maintenance (O&M) expense, with savings below a defined level shared 50/50 with the customer and three-quarters of costs above a defined level returned to customers (see the 2015 Form 10-K for more detail). A CCM benefit to the company for such cost saving of $4.7 related to, and accrued in, fiscal 2015 went into rates effective December 1, 2015.
On June 28, 2010, the APSC approved a reduction in depreciation rates, effective June 1, 2010, and a regulatory liability set up for Alagasco. Refunds from such will be passed back to eligible customers on a declining basis through rate year 2019 pursuant to the terms of this Negative Salvage Rebalancing (NSR) rider (see the 2015 Form 10-K for more detail). Through March 31, 2016, $7.6 of the customer refund has been returned to customers, and $19.4 is remaining to be refunded to customers.
Alagasco’s rate schedules for natural gas distribution charges contain a Gas Supply Adjustment (GSA) rider, established in 1993, which permits the pass-through to customers of changes in the cost of gas supply. Alagasco’s tariff provides a Temperature Adjustment Rider mechanism, also included in the GSA, which is designed to moderate the impact of departures from normal
temperatures on Alagasco’s earnings (see the 2015 Form 10-K for more detail). Effective December 1, 2015, adjustments to the GSA will provide customers a refund of approximately $13.0 on an annualized basis. As of March 31, 2016, a $23.9 temperature adjustment has been booked to the GSA account to reflect actual weather that has been 23.8% warmer than normal.
On March 25, 2016, Alagasco filed an application with the APSC for an intercompany revolving credit agreement allowing Alagasco to borrow from Spire in a principal amount not to exceed $200.0 at any time outstanding in combination with its bank line of credit, and to loan to Spire in a principal amount not to exceed $25.0 at any time outstanding. Borrowings may be used for the following purposes: (a) increasing working capital requirements; (b) financing construction requirements related to additions, extensions, and replacements of the distribution systems; and (c) financing other expenditures that may arise from time to time in the normal course of business. The application was approved by APSC order dated April 5, 2016.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition, results of operations, liquidity, and capital resources is based upon our financial statements, which have been prepared in accordance with GAAP. GAAP requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. Our critical accounting policies used in the preparation of our financial statements are described in Item 7 of the Company's, Laclede Gas' and Alagasco's Annual Reports on Form 10-K for the fiscal year ended September 30, 2015 and include the following:
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•
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Employee benefits and postretirement obligations,
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•
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Revenue recognition, and
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•
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Asset retirement obligations.
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Additionally, goodwill is a critical accounting policy also included in the Company's and Laclede Gas' Annual Reports on Form
10-K for the fiscal year ended September 30, 2015.
There were no significant changes to these critical accounting policies during the
three months ended March 31, 2016
.
For discussion of other significant accounting policies, see
Note 1
of the Notes to Financial Statements included in this Form 10-Q as well as Note 1 of the Notes to Financial Statements included in the Company’s, Laclede Gas', and Alagasco's Annual Reports on Form 10-K for the fiscal year ended September 30, 2015.
ACCOUNTING PRONOUNCEMENTS
The Company, Laclede Gas and Alagasco have evaluated or are in the process of evaluating the impact that recently issued accounting standards will have on the companies' financial position or results of operations upon adoption. For disclosures related to the adoption of new accounting standards, see the New Accounting Pronouncements section of
Note 1
of the Notes to Financial Statements.
FINANCIAL CONDITION
Cash Flows
Spire
The Company’s short-term borrowing requirements typically peak during colder months when the Utilities borrow money to cover the lag between purchases of natural gas and customer payments for that gas. Changes in the wholesale cost of natural gas (including cash payments for margin deposits associated with the Missouri Utilities’ use of natural gas derivative instruments), variations in the timing of collections of gas cost under the Missouri Utilities’ PGA clauses and Alagasco's GSA rider, the seasonality of accounts receivable balances, and the utilization of storage gas inventories cause short-term cash requirements to vary during the year and from year to year, and can cause significant variations in the Utilities' cash provided by or used in operating activities.
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Six Months Ended
March 31,
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Cash Flow Summary
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2016
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2015
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Net cash provided by operating activities
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$
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243.0
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$
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279.9
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Net cash used in investing activities
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(122.5
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)
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(138.5
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)
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Net cash used in financing activities
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(125.6
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)
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(110.6
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)
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Net cash provided by operating activities was
$243.0
for the
six months ended March 31, 2016
, compared with
$279.9
for the
six months ended March 31, 2015
. The change is primarily due to fluctuations in working capital, as mentioned above, largely driven by the relative weather conditions during the periods.
For the
six months ended March 31, 2016
, net cash used in investing activities was $16.0 lower than the same period in the prior year, primarily as a result of an $8.6 payment last year for the final reconciliation amount associated with the Alagasco acquisition. Capital expenditures, which were slightly lower in the first half of fiscal 2016 than in the first half of fiscal 2015, are expected to total approximately $320 for the year ending September 30, 2016.
For the
six months ended March 31, 2016
, net cash used in financing activities was $15.0 higher than for the
six months ended March 31, 2015
. This change primarily reflects an increase in short-term borrowing repayments and an increase in dividends paid.
LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Equivalents
None of Spire, Laclede Gas, or Alagasco had any short-term investments as of or in the
six months ended March 31, 2016
.
Bank deposits were used to support working capital needs of the business
.
Short-term Debt
The Utilities' short-term borrowing requirements typically peak during the colder months. These short-term cash requirements can be met through the sale of commercial paper supported by lines of credit with banks or through direct use of the lines of credit. At
March 31, 2016
, Laclede Gas had a syndicated line of credit of $450.0 in place with nine banks that matures on September 3, 2019. The largest portion provided by a single bank under the line is 15.6%. The Laclede Gas line of credit includes a covenant limiting total debt, including short-term debt, to no more than 70% of total capitalization. As defined in the line of credit, total debt was 47% of total capitalization on
March 31, 2016
.
On September 2, 2014, Alagasco entered into a $150.0 syndicated line of credit with twelve banks and extinguished the line that was in place prior to its acquisition by Spire. The largest portion provided by a single bank is 10%. The line of credit, which matures on September 2, 2019, has a covenant limiting total debt to 70% of Alagasco's total capital. As defined in the line of credit, total debt was 25% of total capitalization on
March 31, 2016
.
Short-term cash requirements outside of the Utilities have generally been funded by internally generated funds or borrowings by Spire under its $150.0 syndicated line of credit with nine banks maturing on September 3, 2019, with the largest portion provided by a single bank being 15.6%. The line of credit has a covenant limiting the total consolidated debt of Spire to no more than 70% of its total consolidated capitalization. As defined in the line of credit, this ratio stood at 56% on
March 31, 2016
.
Spire
Information about Spire's consolidated short-term borrowings (excluding any current portion of long-term debt) during the
six months ended March 31, 2016
and as of
March 31, 2016
, is presented below:
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Spire
Bank Line
Borrowings
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Laclede Gas
Short-Term
Borrowings
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Alagasco
Bank Line
Borrowings
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Total
Short-Term
Borrowings
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Six Months Ended March 31, 2016
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Weighted average borrowings outstanding
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$62.8
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$258.7
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$38.7
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$360.2
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Weighted average interest rate
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1.6%
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0.6%
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1.4%
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0.9%
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Range of borrowings outstanding
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$42.0 – $74.0
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$159.2 – $307.2
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$19.0 – $61.0
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$253.6 – $427.2
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As of March 31, 2016
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Borrowings outstanding at end of period
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$43.0
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$169.6
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$41.0
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$253.6
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Weighted average interest rate
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1.7%
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0.8%
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1.5%
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1.1%
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Based on average short-term borrowings for the
six months ended March 31, 2016
, an increase in the average interest rate of 100 basis points would decrease the Company's pre-tax earnings and cash flows by approximately $3.6 on an annual basis, portions of which may be offset through the application of PGA carrying costs.
Long-term Debt and Equity
Spire
At
March 31, 2016
, excluding unamortized discounts and net hedging gains, Spire had fixed-rate long-term debt totaling $1,603.8 and floating rate debt totaling $250.0, of which $810.0 was issued by Laclede Gas and $250.0 was issued by Alagasco. With the exception of the $250.0 floating rate senior notes issued by Spire in August 2014, the long-term debt issues are fixed-rate and are subject to changes in their fair value as market interest rates change. However, increases or decreases in fair value would impact earnings and cash flows only if the Company were to reacquire any of these issues in the open market prior to maturity. Under GAAP applicable to the Utilities' regulated operations, losses or gains on early redemptions of long-term debt have been deferred as regulatory assets or regulatory liabilities and amortized over a future period. Of the Company's $1,710.0 senior long-term debt, $25.0 has no call options, $710.0 has make-whole call options, $725.0 is callable at par one to six months prior to maturity and $250.0 is callable at par one year prior to maturity. The remainder of the Company's long-term debt is $143.8 of junior subordinated notes associated with its equity units. None of the debt has any put options.
Spire has a shelf registration statement on Form S-3 on file with the SEC for the issuance and sale of up to 168,698 shares of its common stock under its Dividend Reinvestment and Direct Stock Purchase Plan. There were 117,339 and 112,596 shares at
March 31, 2016
and April 30, 2016, respectively, remaining available for issuance under its Form S-3. Spire also has a shelf registration statement on Form S-3 on file with the SEC for the issuance of equity and debt securities, which expires August 6, 2016. The amount, timing, and type of additional financing to be issued under this shelf registration will depend on cash requirements and market conditions.
Consolidated capitalization at
March 31, 2016
consisted of 47.6% of Spire common stock equity and 52.4% of long-term debt, compared to 47.0% of Spire common stock equity and 53.0% of long-term debt at September 30, 2015.
Laclede Gas
Of Laclede Gas' $810.0 in long-term debt, $25.0 has no call option, $435.0 has make-whole call options, and $350.0 are callable at par one to six months prior to maturity. None of the debt has any put options.
Laclede Gas has authority from the MoPSC to issue debt securities and preferred stock, including on a private placement basis, as well as to issue common stock, receive paid-in capital, and enter into capital lease agreements, all for a total of up to $300.0, through September 30, 2018. This authority became effective March 11, 2016, but is under appeal by Laclede Gas, as discussed under Regulatory and Other Matters above. Laclede Gas has not issued securities under this new authorization.
Laclede Gas has a shelf registration on Form S-3 on file with the SEC for issuance of first mortgage bonds, unsecured debt, and preferred stock, which expires August 6, 2016. The amount, timing, and type of additional financing to be issued under this shelf registration will depend on cash requirements and market conditions, as well as future MoPSC authorizations.
Laclede Gas capitalization at
March 31, 2016
consisted of 57.4% of common stock equity and 42.6% of long-term debt compared to 56.2% of common stock equity and 43.8% of long-term debt at September 30, 2015.
Alagasco
All of Alagasco's $250.0 long-term debt issues have make-whole call options. None of the debt has any put options.
Alagasco has no standing authority to issue long-term debt and must petition the APSC for each planned issuance. On February 3, 2015, Alagasco received authorization and approval from the APSC to borrow $80.0 for the purpose of refinancing $80.0 of existing debt scheduled to mature on December 1, 2015. Pursuant to this authorization and an earlier authorization for a $35.0 debt issuance, Alagasco entered into a master note purchase agreement on June 5, 2015 with certain institutional purchasers pursuant to which Alagasco committed to issue $115.0 unsecured notes in the private placement market: $35.0 at a rate of 3.21% for 10 years which settled on September 15, 2015, and $80.0 at a rate of 4.31% for 30 years which settled on December 1, 2015. Alagasco used the net proceeds of the private placements to refinance existing indebtedness and for general corporate purchases.
Alagasco's capitalization at
March 31, 2016
consisted of 78.0% of common stock equity and 22.0% of long-term debt compared to 83.7% of common stock equity and 16.3% of long-term debt at September 30, 2015.
The Company’s, Laclede Gas' and Alagasco's access to capital markets, including the commercial paper market, and their respective financing costs, may depend on the credit rating of the entity that is accessing the capital markets. The credit ratings of the Company, Laclede Gas and Alagasco are considered to be investment grade, but are subject to review and change by the rating agencies.
It is management’s view that the Company, Laclede Gas, and Alagasco have adequate access to capital markets and will have sufficient capital resources, both internal and external, to meet anticipated capital requirements, which primarily include capital expenditures, interest payments of long-term debt, scheduled maturities of long-term debt, short-term seasonal needs, and dividends.
CONTRACTUAL OBLIGATIONS
During the
six months ended March 31, 2016
, there were no material changes outside the ordinary course of business to the estimated contractual obligations from the disclosure provided in the Company's, Laclede Gas' and Alagasco's Form 10-K for the period ended September 30, 2015.
MARKET RISK
There were no material changes in the Company's commodity price risk or counterparty credit risk as of
March 31, 2016
relative to the corresponding information provided as of September 30, 2015 in the Company's Annual Report on Form 10-K.
During the second quarter of fiscal 2016, Spire entered into five-year interest rate swap transactions with a fixed interest rate of 1.776% and a notional amount of $105.0 to protect itself against adverse movement in interest rates in anticipation of the issuance of long-term debt in 2017. As a result, a $1.8 mark-to-market loss was recognized for the quarter ended March 31, 2016.
The fair values of related derivative instruments are shown in
Note 5
, Fair Value Measurements, and information on concentrations of credit risk, including how LER manages these risks, is included in
Note 6
, Concentrations of Credit Risk, of the Notes to Financial Statements under Item 1. Information about the Company's short-term and long-term debt is included under the heading "Liquidity and Capital Resources" in this Item 2.
ENVIRONMENTAL MATTERS
The Missouri Utilities and Alagasco own and operate natural gas distribution, transmission and storage facilities, the operations of which are subject to various environmental laws, regulations, and interpretations. While environmental issues resulting from such operations arise in the ordinary course of business, such issues have not materially affected the Company’s, Laclede Gas' or Alagasco's financial position and results of operations. As environmental laws, regulations, and their interpretations change, however, Laclede Gas and Alagasco may be required to incur additional costs. For information relative to environmental matters, see
Note 9
, Commitments and Contingencies, of the Notes to Financial Statements included in Item 1.
OFF-BALANCE SHEET ARRANGEMENTS
At
March 31, 2016
, the Company had no off-balance-sheet financing arrangements, other than operating leases entered into in the ordinary course of business. The Company does not expect to engage in any significant off-balance-sheet financing arrangements in the near future.