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 or the Missouri Utilities), and Alabama Gas Corporation (Alagasco). Laclede Gas, Alagasco, and EnergySouth, Inc. (EnergySouth) are wholly owned subsidiaries of the Company. Laclede Gas, Alagasco and the subsidiaries of EnergySouth, are collectively referred to as the Utilities. The subsidiaries of EnergySouth are Mobile Gas Service Corporation (Mobile Gas) and Willmut Gas & Oil Company (Willmut Gas). This section includes management’s view of factors that affect the respective businesses of the Company, Laclede Gas, and Alagasco, explanations of 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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•
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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 or shut in 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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•
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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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•
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The availability of and access to, in general, 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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•
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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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•
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Discovery of material weakness in internal controls; and
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•
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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, Alagasco and the subsidiaries of EnergySouth. 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 Missouri Gas Energy (MGE). Laclede Gas delivers natural gas to retail 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 each service territory serves to lessen the impact of weather volatility on its customers during cold winters and stabilize Laclede Gas’ 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
Spire’s primary non-utility business, Spire Marketing Inc. (Spire Marketing), which changed its name from Laclede Energy Resources, Inc. on December 12, 2016, is engaged in the marketing of natural gas and related activities on a non-regulated basis. Spire Marketing markets natural gas across the country with the core of its footprint located in and around the central United States (US). It holds firm transportation and storage contracts in order to effectively manage its customer base, which consists of producers, pipelines, power generators, storage operators, municipalities, utility companies, and large commercial and industrial customers.
Other
In addition to the Gas Utility and Gas Marketing segments, other non-utility activities of the Company include:
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•
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unallocated corporate costs, including certain debt and associated interest costs;
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•
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Spire STL Pipeline LLC, a subsidiary of Spire planning construction of a proposed 65-mile Federal Energy Regulatory Commission (FERC) regulated pipeline to deliver natural gas into eastern Missouri; and
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•
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Spire’s subsidiaries engaged in the operation of a propane pipeline, compression of natural gas and risk management, among other activities. All subsidiaries are wholly owned.
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EARNINGS
Net income reported by Spire, Laclede Gas and Alagasco is determined in accordance with accounting principles generally accepted in the United States of America (GAAP). Management also uses the non-GAAP financial measures of net economic earnings, net economic earnings per share and contribution margin when internally evaluating and reporting results of operations. These non-GAAP measures should not be considered as alternatives to, or more meaningful than, GAAP measures such as net income, earnings per share and operating income. Reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are provided on the following pages.
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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•
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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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•
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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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•
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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 transactions occur. While management uses these non-GAAP measures to evaluate both the Utilities and non-utility businesses, the net effect of adjustments on the Utilities’ earnings is minimal because gains or losses on their natural gas derivative instruments are deferred pursuant to state regulation.
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.
Non-GAAP Measure – Contribution Margin
In addition to operating revenues and operating expenses, management also uses the non-GAAP measure of contribution margin when evaluating results of operations. The Utilities pass to their customers (subject to prudence review by, as applicable, the MoPSC, APSC, or MSPSC) increases and decreases in the wholesale cost of natural gas in accordance with their Purchased Gas Adjustment (PGA) clauses or Gas Supply Adjustment (GSA) rider. 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 the cost of gas associated with system gas sales volumes and gross receipts tax expense, which are calculated as a percentage of revenues, with the same amount, excluding immaterial timing differences, included in revenues, has 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 contribution margin is a useful supplemental measure. In addition, it is management’s belief that contribution margin and the remaining operating expenses that calculate operating income are useful in assessing the Company’s and the Utilities’ performance as management has more ability to influence control over these revenues and expenses.
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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Total
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Per Diluted Share**
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Three Months Ended June 30, 2017
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Net Income (Loss) (GAAP)
|
$
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23.0
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$
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3.7
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$
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(5.0
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)
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$
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21.7
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$
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0.45
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Adjustments, pre-tax:
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Unrealized loss (gain) on energy-related derivatives
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0.1
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(2.3
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)
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—
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(2.2
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)
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(0.05
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)
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Acquisition, divestiture and restructuring activities
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0.2
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—
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1.7
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1.9
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0.04
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Income tax effect of adjustments*
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—
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0.9
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(0.7
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)
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0.2
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—
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Net Economic Earnings (Loss) (Non-GAAP)**
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$
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23.3
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$
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2.3
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$
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(4.0
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)
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$
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21.6
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$
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0.44
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Three Months Ended June 30, 2016
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Net Income (Loss) (GAAP)
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$
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17.9
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$
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(1.0
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)
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$
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(6.2
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)
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$
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10.7
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$
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0.24
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Adjustments, pre-tax:
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Unrealized loss on energy-related derivatives
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—
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4.9
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—
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4.9
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0.11
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Lower of cost or market inventory adjustments
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—
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(0.1
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)
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—
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(0.1
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)
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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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(0.3
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)
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—
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(0.3
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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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0.2
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—
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1.6
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1.8
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0.04
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Income tax effect of adjustments*
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(0.1
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)
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(1.7
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)
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(0.6
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)
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(2.4
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)
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(0.06
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)
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Weighted average shares adjustment
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—
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—
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—
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—
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0.01
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Net Economic Earnings (Loss) (Non-GAAP)**
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$
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18.0
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$
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1.8
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$
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(5.2
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)
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$
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14.6
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$
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0.33
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*
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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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Fiscal 2016 net economic earnings per share exclude the impact of the May 2016 equity issuance to fund a portion of the EnergySouth acquisition. The weighted average diluted shares used in the net economic earnings per share calculation for the three months ended June 30, 2016 was 43.5 million compared to 44.6 million in the GAAP diluted EPS calculation. Fiscal 2017 net economic earnings per share is calculated by replacing consolidated net income with consolidated net economic earnings in the GAAP diluted EPS calculation.
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Consolidated
Spire’s net income was
$21.7
for the
three months ended June 30, 2017
, compared with
$10.7
for the
three months ended June 30, 2016
. Basic and diluted earnings per share for the
three months ended June 30, 2017
were
$0.45
, compared with basic and diluted earnings per share of
$0.24
, for the
three months ended June 30, 2016
. Net income increased
$11.0
due to the
$5.1
increase in Utilities earnings combined with the
$4.7
earnings increase in Gas Marketing and
$1.2
lower expenses in Other. Spire’s net economic earnings were
$21.6
(
$0.44
per diluted share) for the
three months ended June 30, 2017
, an increase of
$7.0
from the
$14.6
(
$0.33
per diluted share) reported for the same period last year. The increase in net economic earnings is primarily attributable to stronger results delivered by the Gas Utility segment, as described below. Net economic earnings per share reflects the 2,185,000 shares issued in May 2016 to help finance the EnergySouth acquisition and the 2,504,700 shares issued on April 3, 2017 resulting from the conversion of equity units issued in 2014.
Gas Utility
For the
three months ended June 30, 2017
, Gas Utility net income and net economic earnings increased
$5.1
and
$5.3
, respectively, versus the prior-year quarter, primarily due to growth in net income at both Alagasco (up $3.4) and the Missouri Utilities (up $1.6). Alagasco’s net income increase was driven by a $6.7 increase in contribution margin, primarily the result of favorable regulatory adjustments, and was offset by higher depreciation expense and income taxes.
Gas Marketing
The Gas Marketing segment reported net income totaling
$3.7
for the
three months ended June 30, 2017
, versus a net loss of
$1.0
in the prior-year quarter. Net economic earnings for the quarter increased
$0.5
compared with the prior-year period. The primary driver of the increase in net income was favorable fair value mark-to-market adjustments, while both net income and net economic earnings benefited from increased value from spreads and asset optimization in the current year quarter versus the prior-year quarter.
Operating Revenues and Operating Expenses
Reconciliations of the Company’s contribution 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
|
Three Months Ended June 30, 2017
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Operating Income (Loss)
|
$
|
47.1
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$
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5.9
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$
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(2.7
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)
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$
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—
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$
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50.3
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Operation and maintenance expenses
|
101.9
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|
1.5
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4.5
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(1.3
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)
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106.6
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Depreciation and amortization
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38.4
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|
0.1
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|
0.1
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|
—
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38.6
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Taxes, other than income taxes
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30.5
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|
0.1
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|
0.1
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—
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30.7
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Less: Gross receipts tax expense
|
(17.3
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)
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—
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—
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—
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(17.3
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)
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Contribution Margin (Non-GAAP)
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200.6
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7.6
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2.0
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(1.3
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)
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208.9
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Natural and propane gas costs
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88.7
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|
10.3
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|
0.1
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|
(1.8
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)
|
|
97.3
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|
Gross receipts tax expense
|
17.3
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|
|
—
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|
—
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—
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|
17.3
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|
Operating Revenues
|
$
|
306.6
|
|
|
$
|
17.9
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|
|
$
|
2.1
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|
$
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(3.1
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)
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$
|
323.5
|
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Three Months Ended June 30, 2016
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Operating Income (Loss)
|
$
|
38.7
|
|
|
$
|
(1.6
|
)
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|
$
|
(1.8
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)
|
|
$
|
—
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|
$
|
35.3
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|
Operation and maintenance expenses
|
91.9
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|
|
1.1
|
|
|
2.6
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(0.3
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)
|
|
95.3
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|
Depreciation and amortization
|
34.2
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|
|
0.1
|
|
|
0.1
|
|
|
—
|
|
|
34.4
|
|
|
Taxes, other than income taxes
|
27.4
|
|
|
0.2
|
|
|
—
|
|
|
—
|
|
|
27.6
|
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|
Less: Gross receipts tax expense
|
(15.3
|
)
|
|
—
|
|
|
—
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|
|
—
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|
|
(15.3
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)
|
|
Contribution Margin (Non-GAAP)
|
176.9
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|
|
(0.2
|
)
|
|
0.9
|
|
|
(0.3
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)
|
|
177.3
|
|
|
Natural and propane gas costs
|
61.1
|
|
|
2.5
|
|
|
—
|
|
|
(6.9
|
)
|
|
56.7
|
|
|
Gross receipts tax expense
|
15.3
|
|
|
—
|
|
|
—
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|
|
—
|
|
|
15.3
|
|
|
Operating Revenues
|
$
|
253.3
|
|
|
$
|
2.3
|
|
|
$
|
0.9
|
|
|
$
|
(7.2
|
)
|
|
$
|
249.3
|
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Consolidated
As shown in the table above, Spire reported an operating revenue increase 0f
$74.2
for the
three months ended June 30, 2017
compared with the same period last year, with increases in both Gas Utility and Gas Marketing.
Spire’s contribution margin increased
$31.6
compared with last year due to increases in the Gas Utility segment reflecting $12.6 from the EnergySouth acquisition and an increase of $6.7 from Alagasco and $4.4 from the Missouri Utilities. The Gas Marketing contribution margin increase of $7.8 stemmed from favorable fair value mark-to-market adjustments and higher storage optimization. Depreciation and amortization expenses were up in the Gas Utility segment, reflecting the EnergySouth acquisition and higher overall capital investments. Operation and maintenance (O&M) expenses in the quarter were $10.0 higher than the prior-year quarter, due to $7.8 in additional costs resulting from the EnergySouth acquisition and $2.8 higher expenses in the Missouri Utilities offsetting slightly lower costs at Alagasco. These fluctuations are described in more detail below.
Gas Utility
Operating Revenues
–
Gas Utility operating revenues for the
three months ended June 30, 2017
were
$306.6
, or
$53.3
higher than the same period last year. The increase in Gas Utility operating revenues was attributable to the following factors:
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|
|
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|
EnergySouth acquisition
|
$
|
17.6
|
|
Missouri Utilities – Higher PGA gas cost recoveries
|
12.2
|
|
Alagasco – Higher GSA gas cost recoveries
|
11.2
|
|
Alagasco – Lower Rate Stabilization and Equalization (RSE) revenue reduction and higher Cost Control Mechanism (CCM) benefit
|
5.0
|
|
Missouri Utilities – Higher Infrastructure System Replacement Surcharge (ISRS)
|
4.0
|
|
Missouri Utilities – Off-system sales and capacity release
|
2.8
|
|
Missouri Utilities and Alagasco – Higher gross receipt taxes
|
1.6
|
|
Missouri Utilities and Alagasco – Weather / volumetric usage
|
(2.0
|
)
|
All other factors
|
0.9
|
|
Total Variation
|
$
|
53.3
|
|
As shown, the increase was primarily attributable to higher revenues reflecting the EnergySouth acquisition, higher gas cost recoveries of $23.4 between the Alagasco and Missouri Utilities, higher ISRS charges within the Missouri Utilities, and the adjustments under the Alabama RSE rate-setting mechanism.
Contribution Margin
– Gas Utility contribution margin was
$200.6
for the
three months ended June 30, 2017
, a
$23.7
increase over the same period last year. The net increase was attributable to the following factors:
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|
|
|
|
EnergySouth contribution margin
|
$
|
12.6
|
|
Alagasco – Lower RSE revenue adjustment and higher CCM benefit
|
5.0
|
|
Missouri Utilities – Higher ISRS
|
4.0
|
|
Missouri Utilities – Weather / volumetric usage
|
(1.7
|
)
|
Missouri Utilities – Customer growth
|
1.0
|
|
All other factors
|
2.8
|
|
Total Variation
|
$
|
23.7
|
|
As shown, the increase in contribution margin was primarily attributable to the margin contributed by the EnergySouth acquisition, the positive impacts of higher ISRS at the Missouri Utilities, and the favorable regulatory adjustments for Alagasco in the current quarter. These favorable impacts more than offset the effect of warmer weather. The Missouri Utilities experienced significantly milder weather this quarter with degree days 22% warmer than normal and 10% warmer than the prior year. In the Alagasco territory, weather was 30% warmer than normal this year, and 3% warmer than in the prior year.
Operating Expenses
– Depreciation and amortization expenses for the
three months ended June 30, 2017
increased
$4.2
from last year, primarily due to $2.6 from the EnergySouth acquisition and higher levels of capital expenditures by the Missouri Utilities and Alagasco. O&M expenses for the
three months ended June 30, 2017
were
$10.0
higher than the same period in the prior year, largely due to the $7.8 attributable to the EnergySouth acquisition and a $2.8 increase at the Missouri Utilities more than offsetting the slight decline at Alagasco. The Missouri Utilities’ O&M expense increase was driven primarily by increased employee-related costs and higher professional services and fees.
Gas Marketing
Operating Revenues
– Operating revenues increased
$15.6
versus the prior-year period as a result of higher total volume and general pricing levels, along with the effect of changes in trading activities. Under GAAP, revenues associated with trading activities are presented net of related costs. Average pricing for the
three months ended June 30, 2017
was approximately $2.927/MMBtu versus approximately $2.031/MMBtu for the quarter ended June 30, 2016.
Contribution Margin
– Gas Marketing contribution margin during the
three months ended June 30, 2017
increased
$7.8
from the same period last year. The increase in contribution margin is primarily due to greater spreads and increased asset optimization in the current-year quarter versus the prior year.
Interest Charges
Consolidated interest charges during the
three months ended June 30, 2017
increased by
$2.0
from the same period last year. The increase was primarily driven by the debt incurred and assumed as a result of the EnergySouth acquisition, combined with marginally higher interest rates on the senior notes issued in March of this year that were used to retire $250.0 of floating rate debt. For the
three months ended June 30, 2017
and 2016, average short-term borrowings were $428.2 and $208.5, respectively, and the average interest rates on these borrowings were 1.3% and 0.9%, respectively.
Income Taxes
Consolidated income tax expense during the
three months ended June 30, 2017
was
$1.9
higher versus the prior-year quarter primarily as a result of higher pre-tax book income.
LACLEDE GAS
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
2017
|
|
2016
|
Operating Income
|
$
|
30.5
|
|
|
$
|
29.4
|
|
Operation and maintenance expenses
|
61.2
|
|
|
58.4
|
|
Depreciation and amortization
|
23.2
|
|
|
22.3
|
|
Taxes, other than income taxes
|
21.7
|
|
|
21.2
|
|
Less: Gross receipts tax expense
|
(12.4
|
)
|
|
(11.5
|
)
|
Contribution Margin (non-GAAP)
|
124.2
|
|
|
119.8
|
|
Natural and propane gas costs
|
61.9
|
|
|
48.0
|
|
Gross receipts tax expense
|
12.4
|
|
|
11.5
|
|
Operating Revenues
|
$
|
198.5
|
|
|
$
|
179.3
|
|
Net Income
|
$
|
15.5
|
|
|
$
|
13.9
|
|
Operating revenues for the
three months ended June 30, 2017
increased
$19.2
from the same period last year primarily due to $12.2 higher gas cost recoveries, a $4.0 increase in ISRS charges and $2.8 in higher off-system sales that was only partly offset by a $2.0 negative impact of warmer weather. Contribution margin for the
three months ended June 30, 2017
increased
$4.4
from the same period last year, largely due to the $4.0 increase in ISRS charges and the off-system sales impact, partly offset by a $1.7 impact of warmer than normal weather. O&M expenses for the
three months ended June 30, 2017
increased
$2.8
, largely attributable to higher employee-related costs and higher professional services and fees. Depreciation and amortization increased
$0.9
in the current quarter versus the prior-year quarter due to higher capital investments. Resulting net income for the
three months ended June 30, 2017
increased
$1.6
from the same period last year.
Temperatures in Laclede Gas’ service areas during the
three months ended June 30, 2017
were 10% warmer than the same period last year, resulting in lower usage on a year-over-year comparative basis. Further, temperatures versus normal (the basis of Laclede Gas’ rate design) were 22% warmer, which continued to constrain margins. The Missouri Utilities’ total system therms sold and transported were 236.6 million for the
three months ended June 30, 2017
, compared with 237.3 million for the same period last year. Total off-system therms sold and transported were 14.4 million for the
three months ended June 30, 2017
, compared with 15.5 million for the same period last year.
ALAGASCO
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
2017
|
|
2016
|
Operating Income
|
$
|
15.5
|
|
|
$
|
9.3
|
|
Operation and maintenance expenses
|
32.9
|
|
|
33.5
|
|
Depreciation and amortization
|
12.6
|
|
|
11.9
|
|
Taxes, other than income taxes
|
7.0
|
|
|
6.2
|
|
Less: Gross receipts tax expense
|
(4.2
|
)
|
|
(3.8
|
)
|
Contribution Margin (Non-GAAP)
|
63.8
|
|
|
57.1
|
|
Natural and propane gas costs
|
22.5
|
|
|
13.1
|
|
Gross receipts tax expense
|
4.2
|
|
|
3.8
|
|
Operating Revenues
|
$
|
90.5
|
|
|
$
|
74.0
|
|
Net Income
|
$
|
7.4
|
|
|
$
|
4.0
|
|
Operating revenues for the
three months ended June 30, 2017
increased
$16.5
from the same period last year. The change was principally driven by an $11.2 increase in gas cost recoveries and a higher net increase to revenue due to RSE and CCM adjustments in the current year versus the prior year. Contribution margin increased
$6.7
, primarily due to the net increase to revenue related to RSE and CCM adjustments of $5.0. Depreciation and amortization expenses for the
three months ended June 30, 2017
were slightly higher than the same period last year. O&M expenses were
$0.6
lower, primarily due to lower employee-related costs. Net income during the
three months ended June 30, 2017
increased
$3.4
from the same period last year, primarily due to the higher contribution margins, offset partly by higher income tax expense.
Temperatures in Alagasco’s service area during the
three months ended June 30, 2017
were 3% warmer than a year ago, and 30% above normal. Alagasco’s total system therms sold and transported were 204.1 million for the
three months ended June 30, 2017
, compared with 191.3 million for the same period last year.
For further information on the GSA, CCM 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 year ended September 30, 2016.
NINE MONTHS ENDED JUNE
30, 2017
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**
|
Nine Months Ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) (GAAP)
|
$
|
187.0
|
|
|
$
|
1.9
|
|
|
$
|
(14.0
|
)
|
|
$
|
174.9
|
|
|
$
|
3.75
|
|
|
Adjustments, pre-tax:
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on energy-related derivatives
|
0.1
|
|
|
3.1
|
|
|
—
|
|
|
3.2
|
|
|
0.07
|
|
|
Realized gain on economic hedges prior
to the sale of the physical commodity
|
—
|
|
|
(0.2
|
)
|
|
—
|
|
|
(0.2
|
)
|
|
—
|
|
|
Acquisition, divestiture and restructuring activities
|
0.3
|
|
|
—
|
|
|
1.8
|
|
|
2.1
|
|
|
0.04
|
|
|
Income tax effect of adjustments*
|
(0.1
|
)
|
|
(1.1
|
)
|
|
(0.7
|
)
|
|
(1.9
|
)
|
|
(0.04
|
)
|
|
Net Economic Earnings (Loss) (Non-GAAP)
|
$
|
187.3
|
|
|
$
|
3.7
|
|
|
$
|
(12.9
|
)
|
|
$
|
178.1
|
|
|
$
|
3.82
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) (GAAP)
|
$
|
169.6
|
|
|
$
|
2.8
|
|
|
$
|
(14.0
|
)
|
|
$
|
158.4
|
|
|
$
|
3.60
|
|
|
Adjustments, pre-tax:
|
|
|
|
|
|
|
|
|
|
|
Unrealized (gain) loss on energy-related derivatives
|
(0.1
|
)
|
|
3.0
|
|
|
—
|
|
|
2.9
|
|
|
0.07
|
|
|
Lower of cost or market inventory adjustments
|
—
|
|
|
0.6
|
|
|
—
|
|
|
0.6
|
|
|
0.01
|
|
|
Realized gain on economic hedges prior
to the sale of the physical commodity
|
—
|
|
|
(0.9
|
)
|
|
—
|
|
|
(0.9
|
)
|
|
(0.02
|
)
|
|
Acquisition, divestiture and restructuring activities
|
1.6
|
|
|
—
|
|
|
3.5
|
|
|
5.1
|
|
|
0.12
|
|
|
Income tax effect of adjustments*
|
(0.6
|
)
|
|
(1.0
|
)
|
|
(1.3
|
)
|
|
(2.9
|
)
|
|
(0.07
|
)
|
|
Weighted average shares adjustment
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.03
|
|
|
Net Economic Earnings (Loss) (Non-GAAP)
|
$
|
170.5
|
|
|
$
|
4.5
|
|
|
$
|
(11.8
|
)
|
|
$
|
163.2
|
|
|
$
|
3.74
|
|
|
|
*
|
Income taxes are calculated by applying applicable federal, state, and local income tax rates applicable to ordinary income to the amounts of the pre-tax reconciling items.
|
|
|
**
|
Fiscal 2016 net economic earnings per share exclude the impact of the May 2016 equity issuance to fund a portion of the EnergySouth acquisition. The weighted average diluted shares used in the net economic earnings per share calculation for the nine months ended June 30, 2016 was 43.5 million compared to 43.8 million in the GAAP diluted EPS calculation. Fiscal 2017 net economic earnings per share is calculated by replacing consolidated net income with consolidated net economic earnings in the GAAP diluted EPS calculation.
|
Consolidated
Spire’s net income was
$174.9
for the
nine months ended June 30, 2017
, compared with
$158.4
for the
nine months ended June 30, 2016
. Basic and diluted earnings per share for the
nine months ended June 30, 2017
were
$3.76
and
$3.75
, respectively, compared with basic and diluted earnings per share of
$3.62
and
$3.60
, respectively, for the
nine months ended June 30, 2016
. Net income increased
$16.5
, driven by $17.4 higher income in the Gas Utility segment more than offsetting the decline of $0.9 experienced by Gas Marketing. Net economic earnings were
$178.1
(
$3.82
per diluted share) for the
nine months ended June 30, 2017
, up from
$163.2
(
$3.74
per diluted share) for the same period last year, as improvements for Gas Utility more than offset the
$0.8
net economic earnings decline experienced by Gas Marketing. These fluctuations are described in more detail below.
Gas Utility
Gas Utility net income and net economic earnings increased by
$17.4
and
$16.8
, respectively, for the
nine months ended June 30, 2017
, compared with the
nine months ended June 30, 2016
. As discussed in more detail below, improvements in both measures were primarily due to the inclusion of EnergySouth results in the current year, improvements in results at the Missouri Utilities and Alagasco, offset by milder weather.
Gas Marketing
The Gas Marketing segment reported net income totaling
$1.9
for the
nine months ended June 30, 2017
, versus net income of
$2.8
during the same period last year due to lower storage optimization and price volatility in the current year, primarily the result of an extremely warm winter. Net economic earnings for the
nine months ended June 30, 2017
were
$3.7
, a decrease of
$0.8
from the same period last year due to the timing of storage optimization.
Operating Revenues and Operating Expenses
Reconciliations of the Company’s contribution margin to the most directly comparable GAAP measure are shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas Utility
|
|
Gas Marketing
|
|
Other
|
|
Eliminations
|
|
Consolidated
|
Nine Months Ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
$
|
320.3
|
|
|
$
|
2.9
|
|
|
$
|
(3.4
|
)
|
|
$
|
—
|
|
|
$
|
319.8
|
|
|
Operation and maintenance expenses
|
301.7
|
|
|
4.4
|
|
|
8.4
|
|
|
(3.9
|
)
|
|
310.6
|
|
|
Depreciation and amortization
|
114.0
|
|
|
0.1
|
|
|
0.3
|
|
|
—
|
|
|
114.4
|
|
|
Taxes, other than income taxes
|
112.2
|
|
|
0.3
|
|
|
0.2
|
|
|
—
|
|
|
112.7
|
|
|
Less: Gross receipts tax expense
|
(70.4
|
)
|
|
(0.1
|
)
|
|
—
|
|
|
—
|
|
|
(70.5
|
)
|
|
Contribution Margin (Non-GAAP)
|
777.8
|
|
|
7.6
|
|
|
5.5
|
|
|
(3.9
|
)
|
|
787.0
|
|
|
Natural and propane gas costs
|
578.8
|
|
|
54.1
|
|
|
0.2
|
|
|
(8.6
|
)
|
|
624.5
|
|
|
Gross receipts tax expense
|
70.4
|
|
|
0.1
|
|
|
—
|
|
|
—
|
|
|
70.5
|
|
|
Operating Revenues
|
$
|
1,427.0
|
|
|
$
|
61.8
|
|
|
$
|
5.7
|
|
|
$
|
(12.5
|
)
|
|
$
|
1,482.0
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
$
|
290.1
|
|
|
$
|
4.7
|
|
|
$
|
(4.8
|
)
|
|
$
|
—
|
|
|
$
|
290.0
|
|
|
Operation and maintenance expenses
|
278.4
|
|
|
4.1
|
|
|
7.1
|
|
|
(0.9
|
)
|
|
288.7
|
|
|
Depreciation and amortization
|
101.5
|
|
|
0.1
|
|
|
0.4
|
|
|
—
|
|
|
102.0
|
|
|
Taxes, other than income taxes
|
99.5
|
|
|
0.3
|
|
|
(0.1
|
)
|
|
—
|
|
|
99.7
|
|
|
Less: Gross receipts tax expense
|
(65.0
|
)
|
|
(0.1
|
)
|
|
—
|
|
|
—
|
|
|
(65.1
|
)
|
|
Contribution Margin (Non-GAAP)
|
704.5
|
|
|
9.1
|
|
|
2.6
|
|
|
(0.9
|
)
|
|
715.3
|
|
|
Natural and propane gas costs
|
496.0
|
|
|
13.9
|
|
|
—
|
|
|
(32.3
|
)
|
|
477.6
|
|
|
Gross receipts tax expense
|
65.0
|
|
|
0.1
|
|
|
—
|
|
|
—
|
|
|
65.1
|
|
|
Operating Revenues
|
$
|
1,265.5
|
|
|
$
|
23.1
|
|
|
$
|
2.6
|
|
|
$
|
(33.2
|
)
|
|
$
|
1,258.0
|
|
Consolidated
As shown in the table above, Spire’s operating revenues for the
nine months ended June 30, 2017
increased at both Gas Utility and Gas Marketing. The Gas Utility increase was due principally to the current year revenues relating to the EnergySouth acquisition and higher revenues at the Missouri Utilities and Alagasco. The Gas Marketing increase was due to the impact of higher prices and volumes. Spire’s contribution margin increased
$71.7
compared with the same nine-month period last year due primarily to Gas Utility growth attributable to the EnergySouth acquisition ($59.5), the Missouri Utilities (up $10.6) and Alagasco (up $3.2), partially offset by a $
1.5
decrease from Gas Marketing. Depreciation and amortization expenses were higher in the Gas Utility segment, due to the EnergySouth acquisition and higher capital investments in both the Missouri Utilities and Alagasco. O&M expenses increased, primarily due to the expenses associated with the EnergySouth acquisition. These fluctuations are described in more detail below.
Gas Utility
Operating Revenues –
Gas Utility operating revenues for the
nine months ended June 30, 2017
were
$1,427.0
, or
$161.5
higher than the same period last year. The increase in Gas Utility operating revenues was attributable to the following factors:
|
|
|
|
|
EnergySouth acquisition
|
$
|
81.7
|
|
Missouri Utilities – Higher PGA gas cost recoveries
|
40.6
|
|
Alagasco – Higher GSA gas cost recoveries
|
30.2
|
|
Missouri Utilities – Off-system sales, capacity release
|
17.4
|
|
Missouri Utilities – Higher ISRS
|
10.8
|
|
Alagasco – Lower RSE revenue reduction and higher CCM benefit
|
10.8
|
|
Missouri Utilities and Alagasco – Higher gross receipt taxes
|
3.1
|
|
Missouri Utilities and Alagasco – Weather / volumetric usage
|
(33.0
|
)
|
All other factors
|
(0.1
|
)
|
Total Variation
|
$
|
161.5
|
|
As shown, the increase was primarily attributable to the EnergySouth acquisition, higher PGA and GSA gas cost recoveries, higher ISRS charges within the Missouri Utilities, and favorable regulatory adjustments at Alagasco. These favorable revenue drivers were offset partly by the impact of warmer weather.
Contribution Margin
– Gas Utility contribution margin was
$777.8
for the
nine months ended June 30, 2017
, a
$73.3
increase over the same period last year. The increase was attributable to the following factors:
|
|
|
|
|
EnergySouth acquisition
|
$
|
59.5
|
|
Missouri Utilities – Higher ISRS
|
10.8
|
|
Alagasco – Lower RSE revenue reduction and higher CCM benefit
|
10.8
|
|
Missouri Utilities – Higher off-system sales
|
1.1
|
|
Missouri Utilities and Alagasco – Weather / volumetric usage
|
(10.3
|
)
|
All other factors
|
1.4
|
|
Total Variation
|
$
|
73.3
|
|
The negative contribution impact that resulted from the warmer weather in the current year was mitigated by the inclusion of EnergySouth results in the current year, favorable impacts from the Missouri Utilities’ ISRS charges, and Alagasco’s favorable RSE and CCM adjustments.
Operating Expenses
– Depreciation and amortization expenses for the
nine months ended June 30, 2017
increased
$12.5
from the same period last year, with $7.9 attributable to the EnergySouth acquisition and the remainder due to higher levels of capital investment over the past year at both the Missouri Utilities and Alagasco. O&M expenses for the
nine months ended June 30, 2017
increased
$23.3
from last year, as the inclusion of $26.9 of EnergySouth expenses and a slight $0.5 increase at the Missouri Utilities offset $4.1 lower O&M expenses at Alagasco. The constrained expense growth at the Missouri Utilities and expense reductions at Alagasco were partially attributable to the warmer weather, with lower employee-related expenses at both the Missouri and Alabama Utilities in the current year only being partly offset by higher property tax expense at the Missouri Utilities.
Gas Marketing
Operating Revenues
– Gas Marketing operating revenues during the
nine months ended June 30, 2017
increased
$38.7
from the same period last year, principally due to higher total volume and general pricing levels, along with the effect of changes in trading activities. Overall commodity pricing in the current year was $0.836/MMBtu higher than the prior year.
Contribution Margin
– Gas Marketing contribution margin during the
nine months ended June 30, 2017
decreased
$1.5
from the same period last year. The decrease is primarily due to lower storage optimization. These negative impacts were only partially offset by the favorable impact of higher overall volumes and increased asset optimization.
Interest Charges
Consolidated interest charges during the
nine months ended June 30, 2017
were
$8.5
higher than the same period last year. The increase was primarily driven by debt incurred and assumed as a result of the EnergySouth
acquisition, combined with marginally higher interest rates on floating rate debt in the first six months of the year and higher interest rates on the senior notes issued in March of this year that were used to retire the $250.0 of floating rate debt. Also, for the
nine months ended June 30, 2017
and 2016, average short-term borrowings were $477.6 and $297.9, respectively, and the average interest rates on these borrowings were 1.2% and 0.9%, respectively.
Income Taxes
Consolidated income tax expense during the
nine months ended June 30, 2017
increased
$6.6
from the same period last year primarily as a result of higher pre-tax book income. The effective tax rate for the current year of 32.5% is slightly less than the 32.9% rate for the prior year.
LACLEDE GAS
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30,
|
|
2017
|
|
2016
|
Operating Income
|
$
|
185.2
|
|
|
$
|
181.5
|
|
Operation and maintenance expenses
|
179.2
|
|
|
178.7
|
|
Depreciation and amortization
|
68.9
|
|
|
66.0
|
|
Taxes, other than income taxes
|
81.6
|
|
|
76.4
|
|
Less: Gross receipts tax expense
|
(51.4
|
)
|
|
(49.7
|
)
|
Contribution Margin (Non-GAAP)
|
463.5
|
|
|
452.9
|
|
Natural and propane gas costs
|
494.4
|
|
|
440.6
|
|
Gross receipts tax expense
|
51.4
|
|
|
49.7
|
|
Operating Revenues
|
$
|
1,009.3
|
|
|
$
|
943.2
|
|
Net Income
|
$
|
110.5
|
|
|
$
|
107.6
|
|
Operating revenues during the
nine months ended June 30, 2017
increased
$66.1
from the same period last year primarily due to $40.6 h
igher
wholesale gas costs passed on to customers, off-system sales of $17.4, ISRS charge increases of $10.8, offset primarily by the $5.0 decrease related to the current year’s warmer weather. Contribution margin increased
$10.6
primarily due to the $10.8 higher ISRS charges being slightly offset by the negative weather impact. O&M expenses during the
nine months ended June 30, 2017
increased
$0.5
from the same period last year, and depreciation increased by $2.9 due to continuing increases in the levels of capital investment. The increase in O&M expenses was driven by bad debts and higher property taxes, partly offset by lower employee-related costs. Net income increased
$2.9
, primarily due to the factors discussed above.
Temperatures in Laclede Gas’ service areas during the
nine months ended June 30, 2017
were 1% lower than the same period last year, and 20% warmer than normal. The Missouri Utilities’ total system therms sold and transported were 1,488.2 million for the nine months ended June 30, 2017 compared with 1,490.4 million for the same period last year, including a 6.1 million decrease in off-system sales. Total off-system therms sold and transported were 173.9 million for the
nine months ended June 30, 2017
, compared with 180.0 million for the same period last year.
ALAGASCO
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30,
|
|
2017
|
|
2016
|
Operating Income
|
$
|
114.2
|
|
|
$
|
108.6
|
|
Operation and maintenance expenses
|
95.6
|
|
|
99.7
|
|
Depreciation and amortization
|
37.2
|
|
|
35.5
|
|
Taxes, other than income taxes
|
23.9
|
|
|
23.1
|
|
Less: Gross receipts tax expense
|
(16.1
|
)
|
|
(15.3
|
)
|
Contribution Margin (Non-GAAP)
|
254.8
|
|
|
251.6
|
|
Natural and propane gas costs
|
65.1
|
|
|
55.4
|
|
Gross receipts tax expense
|
16.1
|
|
|
15.3
|
|
Operating Revenues
|
$
|
336.0
|
|
|
$
|
322.3
|
|
Net Income
|
$
|
65.3
|
|
|
$
|
62.0
|
|
Operating revenues for the
nine months ended June 30, 2017
increased
$13.7
from the same period last year. The primary drivers were $30.2 in higher GSA gas cost recoveries and a $10.8 benefit to revenue due to RSE and CCM adjustments in the current year, offset by a $28.0 impact due to weather and lower base rates for revenue and margin. Contribution margin increased
$3.2
versus the prior period, primarily the result of the $10.8 beneficial RSE adjustments offsetting the $7.6 reduction resulting from the warmer weather and lower base rates for margin, and gas cost recovery. O&M expenses for the
nine months ended June 30, 2017
decreased
$4.1
from the same period last year primarily driven by decreases in employee-related expenses. Net income for the
nine months ended June 30, 2017
was $3.3 higher than the same period last year due to the higher contribution margin and lower O&M expenses, offset partly by higher income taxes.
Temperatures in Alagasco’s service area during the nine months ended June 30, 2017 were 15% warmer than the same period last year and 35% warmer than normal. Alagasco’s total system therms sold and transported were 704.3 million for the
nine months ended June 30, 2017
, compared with 673.7 million for the same period last year.
For further information on the GSA, CCM 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, 2016.
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 May 19, 2016, the MoPSC approved an incremental ISRS amount of $5.4 for Laclede Gas’ eastern Missouri service territory and $3.6 for MGE, effective May 31, 2016. On June 30, 2016, the Missouri Office of the Public Counsel (OPC) filed an appeal to Missouri’s Western District Court of Appeals of the MoPSC’s decision permitting Laclede Gas to update its ISRS applications during the pendency of the case. On March 28, 2017, the Court affirmed the MoPSC’s decision approving Laclede Gas’ ISRS update process. On June 27, 2017, the Missouri Supreme Court declined to hear the case, bringing the appeal to conclusion.
On September 30, 2016, Laclede Gas filed to increase its ISRS revenues, by $5.0 for Laclede Gas’ eastern Missouri service territory and $3.4 for MGE, related to ISRS investments from March 2016 through October 2016. On November 29, 2016, MoPSC staff recommended $4.5 for Laclede Gas’ eastern Missouri service territory and $3.4 for MGE based on updates filed by the company. On January 3, 2017, the MoPSC held a hearing to decide two issues raised by the OPC pertaining to the ISRS eligibility of hydrostatic testing done by MGE and the replacement of plastic interspersed with the cast iron. On January 18, 2017, the MoPSC found in favor of the Missouri Utilities on the interspersed plastics issue, but against MGE on hydrostatic testing, and issued an order setting the ISRS increases at $4.5 and $3.2, respectively, bringing total annualized ISRS revenue to $29.5 for Laclede Gas’ eastern Missouri service territory and $13.4 for MGE’s service territory. Rates were effective January 28, 2017. On March 3, 2017, the OPC filed an appeal to Missouri’s Western District Court of Appeals of the MoPSC’s decision permitting Laclede Gas to include the replacement of interspersed plastic pipe in its ISRS.
On February 3, 2017, Laclede Gas filed to increase its ISRS revenues, by $3.3 for Laclede Gas’ eastern Missouri service territory and $2.9 for MGE, related to ISRS investments from November 2016 through February 2017. Following the submission of updated information, on April 4, 2017 MoPSC staff submitted its recommendation for an increase in rates of $3.1 for Laclede Gas’ eastern Missouri service territory and $3.0 for MGE, for a cumulative of $32.6 and $16.4, respectively. On that same date, the OPC again raised an objection to the ISRS eligibility of replacing plastic portions of main interspersed within cast iron main. On April 18, 2017, the parties filed with the MoPSC a unanimous stipulation and agreement proposing to apply the judicial outcome of the OPC’s March 3, 2017 appeal on the plastics issue to both the ISRS cases on appeal and the current ISRS cases. The agreement was approved by the MoPSC on April 26, 2017. ISRS rates for each of the two service territories were increased by the MoPSC staff-recommended amounts, effective June 1, 2017.
On April 15, 2015, Laclede Gas applied to the MoPSC for a new authorization of long-term financing in the amount of $550.0. On February 10, 2016, the MoPSC issued an order, by a 3-2 vote, authorizing Laclede Gas financing authority of $300.0 for long-term 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 Missouri’s Western District Court of Appeals concerning this matter. The parties filed briefs and oral arguments were heard on November 17, 2016. On May 30, 2017, Missouri’s Western District Court of Appeals issued a decision upholding the MoPSC’s February 10, 2016 Order granting Laclede Gas $300.0 million. On July 5, 2017, the Court denied Laclede Gas’ request to transfer the case to the Missouri Supreme Court. Laclede Gas’ appeal directly to the Missouri Supreme Court is pending. Laclede Gas has not yet issued securities under this authorization, but on March 20, 2017, Laclede Gas entered into a bond purchase agreement for $170.0 that will be funded prior to September 15, 2017, and applied against the $300.0 authorization.
On April 11, 2017, both Laclede Gas’ eastern and western Missouri service territories filed for a general rate case, and did so concurrently as agreed to in GM-2013-0254, as part of the acquisition of MGE by Laclede Gas. The request for Laclede Gas’ eastern Missouri territory represents a net rate increase of $25.5. With the $32.6 already being billed in ISRS, the total base rate increase request was $58.1. For the western Missouri territory, MGE’s request represents a net rate increase of $34.0. With the $16.4 already being billed in ISRS, the total base rate increase request was $50.4. The rates were premised upon a 10.35% ROE and the details of the filing can be found in GR-2017-0215 for the eastern Missouri territory, and GR-2017-0216 for the western Missouri territory. An evidentiary hearing has been set for December 4 through 15, 2017, with a MoPSC decision expected by February 2018. Missouri statutes require new rates to be effective within 11 months of the filing, or by March 11, 2018.
Alagasco
Alagasco is subject to regulation by the APSC which established the Rate Stabilization and Equalization (RSE) rate-setting process in 1983. Alagasco’s current RSE order has a term extending beyond September 30, 2018, unless the APSC enters an order to the contrary in a manner consistent with law. In the event of unforeseen circumstances, whether physical or economic, of the nature of force majeure and including a change in control, the APSC and Alagasco will consult in good faith with respect to modifications, if any. Effective January 1, 2014, Alagasco’s allowed range of return on average common equity is 10.5% to 10.95% with an adjusting point of 10.8%. Alagasco is eligible to receive a performance-based adjustment of 5 basis points to the return on equity adjusting point, based on meeting certain customer satisfaction criteria. Under RSE, the APSC conducts quarterly reviews to determine whether Alagasco’s return on average common equity at the end of the rate year will be within the allowed range of return. 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 RSE reduction for the July 31, 2016 quarterly point of test was $4.8 and went into effect October 1, 2016, and for the quarterly point of test at September 30, 2016, Alagasco recorded a $2.7 RSE reduction effective December 1, 2016. As part of the annual update for RSE, on November 30, 2016, Alagasco filed a reduction for rate year 2017 of
$2.5 that also became effective December 1, 2016. There was no RSE reduction for the January 31, 2017 and April 30, 2017 points of test. As of June 30, 2017, Alagasco recorded an estimated $1.5 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 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 2016 Form 10-K for more detail). For GAAP purposes, as of June 30, 2017, Alagasco had accrued an estimated CCM benefit of $7.7 for nine months of Rate Year 2017.
On June 28, 2010, the APSC approved a reduction in depreciation rates, effective June 1, 2010, and a regulatory liability recorded for Alagasco. Refunds from such negative salvage liability will be passed back to eligible customers on a declining basis through lower tariff rates through rate year 2019 pursuant to the terms of the Negative Salvage Rebalancing (NSR) rider (see the 2016 Form 10-K for more detail). For the period December 1, 2016 through June 30, 2017, $6.3 of the customer refund has been returned to customers. As of June 30, 2017, $12.3 is remaining to be refunded to customers.
Spire
In addition to the matters described above, the following regulatory matters affect Spire.
On July 22, 2016, the proposed project of Spire STL Pipeline LLC, a wholly owned subsidiary of Spire, was accepted into the pre-filing process at the FERC. The proposal outlined the plan to build, own, operate, and maintain a pipeline interconnecting with the Rockies Express pipeline to deliver natural gas to the St. Louis, Missouri area. As an interstate project, the Spire STL Pipeline will be reviewed for siting and permitting by the FERC, which will be the lead agency for other federal, state, and local permitting authorities. A precedent agreement between Spire STL Pipeline and Laclede Gas was executed on January 25, 2017. On January 26, 2017, Spire STL Pipeline filed an application with the FERC requesting issuance of a certificate of convenience and necessity authorizing it to construct, own, and operate an interstate pipeline. Several parties have filed interventions and comments regarding the Spire STL Pipeline project. The company is monitoring these closely and has responded where appropriate.
On April 21, 2017, Spire STL Pipeline filed an amended certificate application to adjust the preferred route to include a new six-mile segment rather than an existing line. The change would offer a number of benefits including eliminating potential supply disruption risk for Laclede Gas during construction, eliminating uncertainty regarding upgrade costs, and reducing long-term integrity management costs.
CRITICAL ACCOUNTING ESTIMATES
Our discussion and analysis of our financial condition, results of operations, liquidity, and capital resources are 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 estimates 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, 2016 and include regulatory accounting, goodwill, and employee benefits and postretirement obligations. There were no significant changes to these critical accounting estimates during the
nine months ended June 30, 2017
.
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, 2016.
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 in
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 when they purchase natural gas and when their customers pay for that gas. Changes in the wholesale cost of natural gas (including cash payments for margin deposits associated with Laclede Gas’ use of natural gas derivative instruments), variations in the timing of collections of gas cost under the Utilities’ PGA clauses and GSA riders, 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 may cause significant variations in the Company’s cash provided by or used in operating activities.
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
June 30,
|
Cash Flow Summary
|
2017
|
|
2016
|
Net cash provided by operating activities
|
$
|
320.7
|
|
|
$
|
356.9
|
|
Net cash used in investing activities
|
(293.7
|
)
|
|
(196.8
|
)
|
Net cash used in financing activities
|
(23.9
|
)
|
|
(169.0
|
)
|
For the
nine months ended June 30, 2017
, net cash provided by operating activities declined $36.2 from the corresponding period of fiscal 2016. The change is primarily due to fluctuations in working capital, as mentioned above, largely driven by the relative weather conditions and gas prices during the periods. Cash was provided primarily by increases in net income, depreciation, accounts payable and insurance recoveries. These benefits were more than offset by net increases in advance customer billings and accounts receivable and a smaller decrease in inventory levels compared to the prior year.
For the
nine months ended June 30, 2017
, net cash used in investing activities was $96.9 more than for the same period in the prior year, driven by a $103.3 increase in capital expenditures. The higher spending to this point in the fiscal year is consistent with the Company’s capital expenditure expectations, and reflects the continued focus on infrastructure upgrades and the addition of EnergySouth. Total capital expenditures for the full fiscal year 2017 are expected to be approximately $445, with approximately $420 in the Utilities.
Lastly, for the
nine months ended June 30, 2017
, net cash used in financing activities was $145.1 lower than for the
nine months ended June 30, 2016
. This change primarily reflects the effect of a $91.8 net repayment of short-term and long-term debt this year compared with a $240.4 net repayment last year. Stock issuances in fiscal 2017, which included the conversion of equity units issued in 2014, provided $10.3 more cash than last year, which included the offering to help fund the EnergySouth acquisition. These net cash inflows were partially offset by higher dividend payments and other financing activities this year.
LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Equivalents
None of Spire, Laclede Gas, or Alagasco had any short-term investments as of or for the
nine months ended June 30, 2017
.
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, while the Company’s needs are less seasonal. 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.
On December 14, 2016, Spire, Laclede Gas, and Alagasco entered into a new syndicated revolving credit facility pursuant to a loan agreement with 11 banks, expiring December 14, 2021. The largest portion provided by a single bank under the line is 12.3%. The loan agreement replaces Spire’s and Laclede Gas’ existing loan agreements dated as of September 3, 2013 and amended September 3, 2014, which were set to expire on September 3, 2019, and Alagasco’s existing loan agreement dated September 2, 2014, which was set to expire September 2, 2019. All three agreements were terminated on December 14, 2016.
The loan agreement has an aggregate credit commitment of $975.0, including sublimits of $300.0 for Spire, $475.0 for Laclede Gas, and $200.0 for Alagasco. These sublimits may be reallocated from time to time among the three borrowers within the $975.0 aggregate commitment. Spire may use its line to provide for the funding needs of various subsidiaries. Spire, Laclede Gas, and Alagasco expect to use the loan agreement for general corporate purposes, including short-term borrowings and letters of credit. The agreement also contains financial covenants limiting each borrower’s consolidated total debt, including short-term debt, to no more than 70% of its total capitalization. As defined in the line of credit, on
June 30, 2017
, total debt was
54%
of total capitalization for the consolidated Company,
48%
for Laclede Gas, and
29%
for Alagasco.
On December 21, 2016, Spire established a commercial paper program (Program) pursuant to which Spire may issue short-term, unsecured commercial paper notes (Notes). Amounts available under the Program may be borrowed, repaid, and re-borrowed from time to time, with the aggregate face or principal amount of the Notes outstanding under the Program at any time not to exceed $975.0. The Notes may have maturities of up to 365 days from date of issue. The net proceeds of the issuances of the Notes are expected to be used for general corporate purposes, including to provide working capital for both utility and non-utility subsidiaries. As of June 30, 2017, Notes outstanding under the Program totaled $450.7.
Information regarding Spire’s consolidated short-term borrowings is presented below. Based on weighted average short-term borrowings outstanding, a 100-basis-point increase in the weighted average interest rate would decrease pre-tax earnings and cash flows by approximately $4.8 on an annual basis, a portion of which may be offset through the Utilities’ application of PGA and GSA carrying costs.
|
|
|
|
|
|
|
Spire
Short-term
Borrowings
1
|
Laclede Gas
Commercial Paper
Borrowings
2
|
Alagasco
Bank Line
Borrowings
|
Total
Short-term
Borrowings
|
Nine Months Ended June 30, 2017
|
|
|
|
|
Weighted average borrowings outstanding
|
$321.5
|
$118.3
|
$37.8
|
$477.6
|
Weighted average interest rate
|
1.3%
|
0.9%
|
1.6%
|
1.2%
|
Range of borrowings outstanding
|
$73.0 - $675.6
|
$0.0 - $329.7
|
$0.0 - $102.5
|
$395.5 - $675.6
|
As of June 30, 2017
|
|
|
|
|
Borrowings outstanding
|
$450.7
|
$—
|
$—
|
$450.7
|
Weighted average interest rate
|
1.5%
|
—%
|
—%
|
1.5%
|
|
|
1
|
Spire Short-term Borrowings includes bank line borrowings and, since January 1, 2017, commercial paper. Of Spire’s $450.7 borrowings outstanding as of June 30, 2017, $423.0 was lent to its subsidiaries, including Laclede Gas ($260.2), Alagasco ($114.9), EnergySouth and subsidiaries ($6.6), Spire STL Pipeline LLC ($9.4), and others ($31.9).
|
|
|
2
|
The commercial paper program for Laclede Gas terminated February 2, 2017.
|
Long-term Debt and Equity
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 remain at 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 on long-term debt, scheduled maturities of long-term debt, short-term seasonal needs, and dividends.
Spire
At
June 30, 2017
, including the current portion but excluding unamortized discounts, debt issuance costs, and net hedging gains, Spire had fixed-rate long-term debt totaling $1,942.0, of which $810.0 was issued by Laclede Gas and $250.0 was issued by Alagasco. 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 would typically be deferred as regulatory assets or regulatory liabilities and amortized over a future period. Of the Company’s $1,942.0 senior long-term debt, $25.0 has no call options, $1,037.0 has make-whole call options, $875.0 is callable at par one to six months prior to maturity and $5.0 is callable at par currently. None of the debt has any put options.
On March 10, 2017, Spire redeemed in full at par its $250.0 floating rate notes due August 15, 2017, plus accrued and unpaid interest.
On March 15, 2017, Spire completed the issuance and sale of $100.0 in aggregate principal amount of Senior Notes due March 15, 2027. The notes bear interest at the rate of 3.93% per annum, payable semi-annually. The notes are senior unsecured obligations of the Company. The Company used the proceeds from the sale of the notes for the repayment of other debt.
In 2014, Spire issued 2.875 million equity units as a portion of the Alagasco acquisition financing. The equity units were originally issued at $50 per unit pursuant to the Purchase Contract and Pledge Agreement (purchase contract) dated as of June 11, 2014 between Spire and U.S. Bank National Association, as purchase contract agent, collateral agent, custodial agent and securities intermediary. These units consisted of $143.8 aggregate principal amount of 2014 Series A 2.00% remarketable junior subordinated notes due 2022 (the Junior Notes) and the purchase contract obligating the holder to purchase common shares at a future settlement date (anticipated to be three years in the future and prior to the Junior Notes maturity). The equity unit investments were effectively replaced as planned in a series of transactions outlined below:
|
|
–
|
On February 22, 2017, the selling securityholders (as defined below) agreed to purchase the Junior Notes in connection with the remarketing of the junior subordinated notes that comprised a component of the equity units.
|
|
|
–
|
On the same day, Spire entered into two related agreements: (1) a Securities Purchase and Registration Rights Agreement (the SPRRA), among Spire and the several purchasers named therein (the selling securityholders), obligating the selling securityholders to sell the Junior Notes to Spire in exchange for $143.8 aggregate principal amount of Spire’s 3.543% Senior Notes due 2024 (the Senior Notes) and a cash payment, and (2) an underwriting agreement with the selling securityholders and the several underwriters named therein in connection with the public offering of $150.0 aggregate principal amount of Senior Notes consisting of $6.2 principal amount of the Senior Notes issued and sold by Spire and $143.8 principal amount of the Senior Notes sold by the selling securityholders. The SPRRA granted the selling securityholders the right to offer the Senior Notes to the public in secondary public offerings.
|
|
|
–
|
The public offering was completed on February 27, 2017. Spire used its net proceeds from its sale of the Senior Notes to repay short-term debt. Spire did not receive any proceeds from the sale of the Senior Notes by the selling securityholders.
|
|
|
–
|
On April 3, 2017, Spire settled the purchase contracts underlying its 2.875 million equity units by issuing up to 2,504,700 shares of its common stock at a purchase price of $57.3921 per share. Fractional shares were settled in cash at $67.50 per share. The purchase price was funded with the proceeds from the Junior Notes. Under the contract terms, the equity units were converted to common stock at the rate of 0.8712, with a corresponding adjustment to purchase price. Spire received net cash proceeds of approximately $142.0, which it used to repay short-term debt incurred the previous month to redeem the floating rate notes.
|
On March 20, 2017, Laclede Gas entered into a bond purchase agreement, described more fully under
Laclede Gas
below, pursuant to which Laclede Gas has committed to issue in a private placement a total of $170.0 of its first mortgage bonds in 15-, 30- and 40-year tranches. The bonds will close on a date of Laclede Gas’ choosing, no later than September 15, 2017. The interest rates on the bonds are dependent on the exact closing date, as described below.
Spire filed a shelf registration statement on Form S-3 with the SEC on June 15, 2017 for the issuance and sale of up to 250,000 shares of its common stock under its Dividend Reinvestment and Direct Stock Purchase Plan. There were 249,836 and 245,346 shares at
June 30, 2017
and July 31, 2017, respectively, remaining available for issuance under this 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 September 23, 2019. 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
June 30, 2017
consisted of
51.3%
of Spire common stock equity and
48.7%
of long-term debt, compared to 49.3% of Spire common stock equity and 50.7% of long-term debt at September 30, 2016.
Laclede Gas
Of Laclede Gas’ long-term debt (totaling $810.0 principal amount), $25.0 has no call option, $435.0 has make-whole call options, and $350.0 is callable at par one to six months prior to maturity.
On March 20, 2017, Laclede Gas entered into a bond purchase agreement among Laclede Gas and certain institutional purchasers (Bond Purchasers) pursuant to which Laclede Gas has committed to issue in a private
placement a total of $170.0 of its first mortgage bonds: (i) $50.0 due September 15, 2032 (2032 Bonds), (ii) $70.0 due September 15, 2047 (2047 Bonds) and (iii) $50.0 due September 15, 2057 (2057 Bonds and, together with the 2032 Bonds and 2047 Bonds, the Bonds). Laclede Gas will give the Bond Purchasers at least five (5) business days’ prior written notice of a closing date, which shall occur no later than September 15, 2017. Depending on the closing date, the 2032 Bonds will bear interest at a rate of 3.65% or 3.68% per annum, the 2047 Bonds at a rate of 4.21% or 4.23% per annum and the 2057 Bonds at a rate of 4.36% or 4.38% per annum. The interest on the Bonds is payable semi-annually. Laclede Gas will use the proceeds from the sale of the Bonds to refinance existing indebtedness and for other general corporate purposes.
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. This authority became effective March 11, 2016, and will expire September 30, 2018. After the settlement of the $170.0 in Bonds discussed above, Laclede Gas will have $130.0 of this authorization remaining.
Laclede Gas filed a shelf registration on Form S-3 with the SEC on September 23, 2016, for issuance of first mortgage bonds, unsecured debt, and preferred stock, which expires on September 23, 2019. 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
June 30, 2017
consisted of
59.2%
of common stock equity and
40.8%
of long-term debt compared to 57.1% of common stock equity and 42.9% of long-term debt at September 30, 2016.
Alagasco
All of Alagasco’s long-term debt ($250.0 principal amount) has make-whole call options.
Alagasco’s capitalization at
June 30, 2017
consisted of
78.1%
of common stock equity and
21.9%
of long-term debt compared to 77.8% of common stock equity and 22.2% of long-term debt at September 30, 2016.
CONTRACTUAL OBLIGATIONS
During the
nine months ended June 30, 2017
, there were no material changes outside the ordinary course of business to the estimated contractual obligations from the disclosure provided in the Company’s Form 10-K for the fiscal year ended September 30, 2016.
MARKET RISK
There were no material changes in the Company’s commodity price risk or counterparty credit risk as of
June 30, 2017
relative to the corresponding information provided as of September 30, 2016 in the Company’s Annual Report on Form 10-K. Information on concentrations of credit risk, including how Spire Marketing manages these risks, is included in
Note 7
, Concentrations of Credit Risk, of the Notes to Financial Statements under Item 1.
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. During the third quarter of 2016, the Company entered into seven-year swap transactions with an average fixed interest rate of 1.501% and a notional amount of $120.0 to hedge additional debt expected to be issued in 2017. All of these hedge positions were settled during the second quarter of 2017, resulting in a gain of $7.3 which will be amortized over the hedged periods. Also during the second quarter of 2017, Spire entered into a ten-year interest rate swap with a fixed interest rate of 2.658% and a notional amount of $60.0 to protect itself against adverse movements in interest rates on future interest rate payments. The Company recorded a $0.6 mark-to-market loss on these swaps for the nine months ended June 30, 2017. The fair values of related derivative instruments are shown in
Note 6
, Fair Value Measurements. 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 Utilities own and operate natural gas distribution, transmission and storage facilities, the operations of which are subject to various environmental laws and regulations, along with their 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 interpretations change, however, the Utilities may be required to incur additional costs. For information relative to environmental matters, see
Note 10
, Commitments and Contingencies, of the Notes to Financial Statements included in Item 1.
OFF-BALANCE SHEET ARRANGEMENTS
At
June 30, 2017
, the Company had no off-balance-sheet financing arrangements, other than operating leases and letters of credit 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.