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), Spire Missouri Inc. (Spire Missouri or the Missouri Utilities), and Spire Alabama Inc. (Spire Alabama). Spire Missouri, Spire Alabama, and Spire EnergySouth Inc. (Spire EnergySouth) are wholly owned subsidiaries of the Company. Spire Missouri, Spire Alabama and the subsidiaries of Spire EnergySouth, are collectively referred to as the Utilities. The subsidiaries of Spire EnergySouth are Spire Gulf Inc. (Spire Gulf) and Spire Mississippi Inc. (Spire Mississippi). This section includes management’s view of factors that affect the respective businesses of the Company, Spire Missouri, and Spire Alabama, explanations of financial results including changes in earnings and costs from the prior periods, and the effects of such factors on the Company’s, Spire Missouri’s and Spire Alabama’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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•
|
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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The Spire STL Pipeline project may be hindered or halted by regulatory, legal, or other obstacles;
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•
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Legislative, regulatory and judicial mandates and decisions, some of which may be retroactive, including those affecting:
|
▪
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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▪
|
environmental or safety matters, including the potential impact of legislative and regulatory actions related to climate change and pipeline safety,
|
▪
taxes,
▪
pension and other postretirement benefit liabilities and funding obligations, or
▪
accounting standards;
•
The results of litigation;
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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 Spire Missouri’s and Spire Alabama’s Condensed Financial Statements and the notes thereto.
OVERVIEW
The Company has two reportable segments: Gas Utility and Gas Marketing. Nearly all of Spire’s earnings are derived from its Gas Utility segment, which reflects the regulated activities of the Utilities. The Gas Utility segment consists of the regulated businesses of Spire Missouri, Spire Alabama and the subsidiaries of Spire EnergySouth. Due to the seasonal nature of the Utilities’ business, earnings of Spire, Spire Missouri and Spire Alabama are typically concentrated during the heating season of November through April each fiscal year.
Gas Utility - Spire Missouri
Spire Missouri is Missouri’s largest natural gas distribution utility and is regulated by the Missouri Public Service Commission (MoPSC). Spire Missouri serves St. Louis and eastern Missouri through Spire Missouri East and serves Kansas City and western Missouri through Spire Missouri West. Spire Missouri delivers natural gas to retail customers at rates and in accordance with tariffs authorized by the MoPSC. The earnings of Spire Missouri 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 Spire Missouri’s earnings.
Gas Utility - Spire Alabama
Spire Alabama is the largest natural gas distribution utility in the state of Alabama. Spire Alabama’s service territory is located in central and northern Alabama. Among the cities served by Spire Alabama are Birmingham, the center of the largest metropolitan area in the state, and Montgomery, the state capital. Spire Alabama is regulated by the Alabama Public Service Commission (APSC). Spire Alabama 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. Spire Alabama also provides transportation services to large industrial and commercial customers located on its distribution system. These transportation customers, using Spire Alabama as their agent or acting on their own, purchase gas directly from marketers or suppliers and arrange for delivery of the gas into the Spire Alabama distribution system. Spire Alabama charges a fee to transport such customer-owned gas through its distribution system to the customers’ facilities.
Gas Utility - Spire EnergySouth
Spire Gulf and Spire Mississippi are utilities engaged in the purchase, retail distribution and sale of natural gas to 0.1 million customers in southern Alabama and south-central Mississippi. Spire Gulf is regulated by the APSC and Spire Mississippi is regulated by the Mississippi Public Service Commission (MSPSC).
Gas Marketing
Spire Marketing Inc. (Spire Marketing) is engaged in the marketing of natural gas and related activities on a non-regulated basis and is reported in the Gas Marketing segment. 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
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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•
|
Spire STL Pipeline LLC, a subsidiary of Spire planning construction and operation of a proposed 65-mile Federal Energy Regulatory Commission (FERC)-regulated pipeline to deliver natural gas into eastern Missouri;
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•
|
physical natural gas storage operations, include the acquisition of an
80%
voting interest in Ryckman Creek Resources, LLC, in December 2017; and
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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.
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NON-GAAP MEASURES
Net income, earnings per share and operating income reported by Spire, Spire Missouri and Spire Alabama are determined in accordance with accounting principles generally accepted in the United States of America (GAAP). We also provide the non-GAAP financial measures of net economic earnings, net economic earnings per share and contribution margin. Management and the Board of Directors use non-GAAP financial measures, in addition to GAAP financial measures, to understand and compare operating results across accounting periods, for financial and operational decision making, for planning and forecasting, to determine incentive compensation and to evaluate financial performance. These non-GAAP operating metrics should not be considered as alternatives to, or more meaningful than, the related GAAP measures. Reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are provided on the following pages.
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 impacts of fair value accounting and timing adjustments associated with energy-related transactions, the impacts of acquisition, divestiture and restructuring activities, and the largely non-cash impacts of other non-recurring or unusual items such as certain regulatory, legislative, or GAAP standard-setting actions. In fiscal 2018, these items include the revaluation of deferred tax assets and liabilities due to the federal Tax Cuts and Jobs Act and the write-off of certain long-standing assets as a result of disallowances in our Missouri rate proceedings. In addition, net economic earnings per share excludes the impact, in the fiscal year of issuance, of shares issued to finance acquisitions that have yet to be included in net economic earnings.
The fair value and timing adjustments are made in instances where the accounting treatment differs from what management considers 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)
|
changes in the fair values of physical and/or financial derivatives prior to the period of settlement; and,
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|
2)
|
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.
|
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. 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. While management uses these non-GAAP measures to evaluate both the Utilities and non-utility businesses, the net effect of these fair value and timing adjustments on the Utilities’ earnings is minimal because gains or losses on their natural gas derivative instruments are deferred pursuant to state regulation.
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. Contribution margin is defined as operating revenues less natural and propane gas costs and gross receipts tax expense. 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,
have no direct effect on operating income. Therefore, management believes that contribution margin is a useful supplemental measure, along with the remaining operating expenses, for assessing the Company’s and the Utilities’ performance.
EARNINGS – THREE MONTHS ENDED MARCH 31, 2018
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**
|
Three Months Ended March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) (GAAP)
|
$
|
102.5
|
|
|
$
|
0.3
|
|
|
$
|
(4.6
|
)
|
|
$
|
98.2
|
|
|
$
|
2.03
|
|
|
Adjustments, pre-tax:
|
|
|
|
|
|
|
|
|
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|
Missouri regulatory adjustments
|
30.6
|
|
|
—
|
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—
|
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|
30.6
|
|
|
0.63
|
|
|
Unrealized loss on energy-related derivatives
|
—
|
|
|
11.8
|
|
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—
|
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|
11.8
|
|
|
0.24
|
|
|
Realized gain on economic hedges prior
to the sale of the physical commodity
|
—
|
|
|
(0.2
|
)
|
|
—
|
|
|
(0.2
|
)
|
|
(0.01
|
)
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|
Acquisition, divestiture and restructuring activities
|
0.2
|
|
|
—
|
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|
1.8
|
|
|
2.0
|
|
|
0.04
|
|
|
Income tax effect of pre-tax adjustments*
|
(7.6
|
)
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|
(3.0
|
)
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|
(0.5
|
)
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|
(11.1
|
)
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|
(0.22
|
)
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|
Effects of the Tax Cuts and Jobs Act
|
6.0
|
|
|
1.3
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(1.4
|
)
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|
5.9
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|
|
0.12
|
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|
Net Economic Earnings (Loss) (Non-GAAP)**
|
$
|
131.7
|
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|
$
|
10.2
|
|
|
$
|
(4.7
|
)
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|
$
|
137.2
|
|
|
$
|
2.83
|
|
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|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2017
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|
|
|
|
|
|
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Net Income (Loss) (GAAP)
|
$
|
112.3
|
|
|
$
|
(1.0
|
)
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|
$
|
(3.3
|
)
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|
$
|
108.0
|
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|
$
|
2.36
|
|
|
Adjustments, pre-tax:
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|
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|
|
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|
Unrealized loss on energy-related derivatives
|
—
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|
1.6
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—
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1.6
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|
0.04
|
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|
Lower of cost or market inventory adjustments
|
—
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|
0.1
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—
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0.1
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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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(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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Acquisition, divestiture and restructuring activities
|
—
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|
—
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0.1
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|
0.1
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—
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Income tax effect of pre-tax adjustments*
|
(0.1
|
)
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|
(0.6
|
)
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—
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|
(0.7
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)
|
|
(0.02
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)
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|
Net Economic Earnings (Loss) (Non-GAAP)**
|
$
|
112.2
|
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|
$
|
—
|
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$
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(3.2
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)
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$
|
109.0
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$
|
2.38
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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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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
$98.2
for the
three months ended March 31, 2018
, compared with
$108.0
for the
three months ended March 31, 2017
. Basic and diluted earnings per share for the
three months ended March 31, 2018
, were
$2.03
, compared with basic and diluted earnings per share of
$2.36
, for the
three months ended March 31, 2017
. Net income decreased
$9.8
, driven primarily by a $23.6 after-tax expense in the Gas Utility segment relating to recovery disallowances resulting from the recent Missouri Utilities’ rate case, partly offset by benefits of lower tax rates from the passage of the federal Tax Cuts and Jobs Act (TCJA) in December 2017, which is described in
Note 11
of the Notes to Financial Statements in Item 1. Excluding these impacts, net income increased, reflecting the impact of the return to near-normal weather patterns in the current year which benefited the Gas Utility segment, and improving market conditions for the Gas Marketing segment, partly offset by higher Other expenses. Spire’s net economic earnings were
$137.2
(
$2.83
per diluted share) for the
three months ended March 31, 2018
, an increase of
$28.2
from the
$109.0
(
$2.38
per diluted share) reported for the same period last year. The principal drivers of the increase in net economic earnings were consistent with the tax reform and favorable weather patterns outlined above. These impacts are described in further detail below.
Gas Utility
For the
three months ended March 31, 2018
, net economic earnings for the Gas Utility segment increased
$19.5
from the second quarter last year, with all the Utilities showing improvement. As detailed below, the increase was driven primarily by higher contribution margin due to the return of near-normal weather patterns, partly offset by $7.8 in disallowed recoveries due to the recent rate case resolution in Missouri and higher depreciation and amortization expenses resulting from the continued infrastructure investment at all the Utilities. The segment also benefited from a lower tax rate resulting from the implementation of the TCJA, net of those amounts (beginning January 1, 2018 in Alabama and Mississippi and April 19, 2018 in Missouri) that have been or will be reflected in lower customer rates.
Gas Marketing
For the
three months ended March 31, 2018
, net economic earnings for the Gas Marketing segment increased
$10.2
compared with the second quarter last year. The segment benefited from improved market conditions resulting from colder weather and increased temperature volatility that contributed to increased value from regional basis differentials (spreads) and storage optimization versus the prior-year quarter.
Operating Revenues and Expenses and Contribution Margin
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 March 31, 2018
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|
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|
Operating Income (Loss)
|
$
|
142.7
|
|
|
$
|
1.1
|
|
|
$
|
(2.0
|
)
|
|
$
|
—
|
|
|
$
|
141.8
|
|
|
Operation and maintenance expenses
|
145.8
|
|
|
1.5
|
|
|
5.8
|
|
|
(2.6
|
)
|
|
150.5
|
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|
Depreciation and amortization
|
41.1
|
|
|
—
|
|
|
0.4
|
|
|
—
|
|
|
41.5
|
|
|
Taxes, other than income taxes
|
58.0
|
|
|
0.1
|
|
|
0.1
|
|
|
—
|
|
|
58.2
|
|
|
Less: Gross receipts tax expense
|
(43.5
|
)
|
|
(0.1
|
)
|
|
—
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|
—
|
|
|
(43.6
|
)
|
|
Contribution Margin (Non-GAAP)
|
344.1
|
|
|
2.6
|
|
|
4.3
|
|
|
(2.6
|
)
|
|
348.4
|
|
|
Natural and propane gas costs
|
403.2
|
|
|
18.6
|
|
|
0.1
|
|
|
(0.5
|
)
|
|
421.4
|
|
|
Gross receipts tax expense
|
43.5
|
|
|
0.1
|
|
|
—
|
|
|
—
|
|
|
43.6
|
|
|
Operating Revenues
|
$
|
790.8
|
|
|
$
|
21.3
|
|
|
$
|
4.4
|
|
|
$
|
(3.1
|
)
|
|
$
|
813.4
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
$
|
182.6
|
|
|
$
|
(1.7
|
)
|
|
$
|
(0.5
|
)
|
|
$
|
—
|
|
|
$
|
180.4
|
|
|
Operation and maintenance expenses
|
99.3
|
|
|
1.5
|
|
|
2.1
|
|
|
(1.4
|
)
|
|
101.5
|
|
|
Depreciation and amortization
|
37.9
|
|
|
—
|
|
|
0.1
|
|
|
—
|
|
|
38.0
|
|
|
Taxes, other than income taxes
|
48.3
|
|
|
0.1
|
|
|
—
|
|
|
—
|
|
|
48.4
|
|
|
Less: Gross receipts tax expense
|
(34.1
|
)
|
|
(0.1
|
)
|
|
—
|
|
|
—
|
|
|
(34.2
|
)
|
|
Contribution Margin (Non-GAAP)
|
334.0
|
|
|
(0.2
|
)
|
|
1.7
|
|
|
(1.4
|
)
|
|
334.1
|
|
|
Natural and propane gas costs
|
275.6
|
|
|
22.3
|
|
|
0.1
|
|
|
(2.9
|
)
|
|
295.1
|
|
|
Gross receipts tax expense
|
34.1
|
|
|
0.1
|
|
|
—
|
|
|
—
|
|
|
34.2
|
|
|
Operating Revenues
|
$
|
643.7
|
|
|
$
|
22.2
|
|
|
$
|
1.8
|
|
|
$
|
(4.3
|
)
|
|
$
|
663.4
|
|
Consolidated
As shown in the table above, Spire reported an operating revenue increase 0f
$150.0
for the
three months ended March 31, 2018
, compared with the same period last year, with the Gas Utility segment being the primary driver. Spire’s contribution margin increased
$14.3
compared with last year due to a $10.1 increase in the Gas Utility segment due to improvements at the Missouri Utilities and Spire Alabama, and a $2.8 increase from the Gas Marketing segment. Depreciation and amortization expenses were up in the Gas Utility segment, reflecting the higher overall capital investments across all utilities. Utilities operation and maintenance (O&M) expenses in the quarter were $46.5 higher than the prior-year quarter, driven primarily by Spire Missouri and Spire Alabama. These fluctuations are described in more detail below.
Gas Utility
Operating Revenues
–
Gas Utility operating revenues for the
three months ended March 31, 2018
, were
$790.8
, or
$147.1
higher than the same period last year. The increase in Gas Utility operating revenues was attributable to the following factors:
|
|
|
|
|
Missouri Utilities, Spire Alabama and Spire Gulf – Higher PGA/GSA gas cost recoveries
|
$
|
86.9
|
|
Missouri Utilities and Spire Alabama – Volumetric usage
|
67.7
|
|
Missouri Utilities and Spire Alabama – Higher gross receipts taxes
|
9.0
|
|
Missouri Utilities – Higher Infrastructure System Replacement Surcharge (ISRS)
|
2.2
|
|
Missouri Utilities – Customer growth
|
0.6
|
|
Missouri Utilities – Off-system sales and capacity release
|
(10.6
|
)
|
Spire Alabama and Spire Gulf – Customer rate reductions resulting from TCJA
|
(9.0
|
)
|
Spire Gulf – Rate Stabilization and Equalization (RSE)
|
(1.8
|
)
|
All other factors, net
|
2.1
|
|
Total Variation
|
$
|
147.1
|
|
As noted, $86.9 of the operating revenue increase was the result of the higher gas cost recoveries at both Spire Missouri and Spire Alabama. Further, $67.7 of the increase was attributable to higher volumetric usage, which was a function of the return of near-normal weather patterns experienced across all the Utilities’ service areas. Across all of the Utilities’ territories, temperatures were 5% warmer than normal this quarter versus 22% warmer than normal in the comparable prior year period. A $9.0 increase in gross receipts taxes, along with customer growth and higher Missouri ISRS charges, also contributed to the revenue growth. These positive impacts were partly offset by a $10.6 reduction in lower off-system sales and capacity release at the Missouri Utilities, $9.0 lower revenues at Spire Alabama and Spire Gulf resulting from rate reductions to customers due to tax savings from the TCJA, and a $1.8 RSE reduction at Spire Gulf.
Contribution Margin
– Gas Utility contribution margin was
$344.1
for the
three months ended March 31, 2018
, a
$10.1
increase over the same period last year. The net increase was attributable to the following factors:
|
|
|
|
|
Utilities – Volumetric usage
|
$
|
17.6
|
|
Missouri Utilities – Higher ISRS
|
2.2
|
|
Missouri Utilities – Customer growth
|
0.6
|
|
Missouri Utilities – Off-system sales and capacity release
|
0.3
|
|
Spire Alabama and Spire Gulf – Customer rate reductions resulting from TCJA
|
(9.0
|
)
|
Spire Gulf – RSE
|
(1.8
|
)
|
All other factors, net
|
0.2
|
|
Total Variation
|
$
|
10.1
|
|
The increase in contribution margin was primarily attributable to the return of near-normal weather patterns in the current year period. The Missouri Utilities experienced colder weather this quarter with degree days 3% colder than normal and 34% colder than the prior year. In the Spire Alabama territory, temperatures were 5% warmer than normal this year but 51% colder than in the prior year. Contribution margin was negatively impacted by a $1.8 RSE reduction at Spire Gulf and a $9.0 decrease at Spire Alabama and Spire Gulf, the result of customer rate reductions due to tax savings from the TCJA. The negative impact on contribution margin of these customer rate reductions was offset by a corresponding reduction in income tax in these jurisdictions.
Operating Expenses
– Depreciation and amortization expenses for the
three months ended March 31, 2018
, increased
$3.2
from last year, due to higher levels of capital expenditures across all of the Utilities. O&M expenses for the
three months ended March 31, 2018
, were
$46.5
higher than the same period in the prior year, largely due to $38.4 in charges incurred at the Spire Missouri Utilities relating to recoveries disallowed by the MoPSC during the latest rate case. Excluding this impact, O&M increased $7.6 at the Missouri Utilities and $2.6 at Spire Alabama, which more than offsetting the modest $2.1 decrease at the utilities of Spire EnergySouth. The increases at Spire Missouri and Spire Alabama were consistent with the return of near-normal weather patterns, resulting in higher employee-related costs and bad debt expense.
Gas Marketing
Operating Revenues
– Operating revenues decreased
$0.9
versus the prior-year period as a result of slightly lower volumetric gas sales, lower general pricing levels and 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 March 31, 2018
, was approximately $2.828/MMBtu versus approximately $2.987/MMBtu for the quarter ended March 31, 2017.
Contribution Margin
– Gas Marketing contribution margin during the
three months ended March 31, 2018
, increased
$2.8
from the same period last year. The segment benefited from improved market conditions that contributed to increased value from regional basis differentials (spreads) and storage optimization versus the prior-year quarter.
Interest Charges
Consolidated interest charges during the
three months ended March 31, 2018
, increased by
$2.7
from the same period last year. The increase was primarily driven by Spire Missouri’s issuance of $170.0 in long-term debt in September 2017, and Spire Alabama’s issuance of $75.0 of long-term debt: $30.0 on December 1, 2017, and $45.0 on January 12, 2018. In addition, the senior notes issued in March 2017 incurred marginally higher fixed interest this year relative to the interest incurred on the $250.0 floating rate debt redeemed that month. For the
three months ended March 31, 2018
and 2017, average short-term borrowings were $481.9 and $529.9, respectively, and the average interest rates on these borrowings were 2.05% and 1.1%, respectively.
Income Taxes
Consolidated income tax expense during the
three months ended March 31, 2018
, was
$34.4
lower than during the prior-year quarter, primarily as a result of the TCJA enacted in December 2017, combined with the effects of lower pre-tax book income. The TCJA is further described in
Note 11
of the Notes to Financial Statements in Item 1.
Spire Missouri
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2018
|
|
2017
|
Operating Income
|
$
|
52.1
|
|
|
$
|
90.2
|
|
Operation and maintenance expenses
|
103.5
|
|
|
57.5
|
|
Depreciation and amortization
|
25.2
|
|
|
23.0
|
|
Taxes, other than income taxes
|
41.2
|
|
|
35.3
|
|
Less: Gross receipts tax expense
|
(30.6
|
)
|
|
(24.9
|
)
|
Contribution Margin (non-GAAP)
|
191.4
|
|
|
181.1
|
|
Natural and propane gas costs
|
311.2
|
|
|
241.2
|
|
Gross receipts tax expense
|
30.6
|
|
|
24.9
|
|
Operating Revenues
|
$
|
533.2
|
|
|
$
|
447.2
|
|
Net Income
|
$
|
38.4
|
|
|
$
|
57.0
|
|
Operating revenues for the
three months ended March 31, 2018
, increased
$86.0
from the same period last year primarily due to $49.2 in volumetric/usage impacts resulting from the return of near-normal weather patterns, $39.0 higher gas cost recoveries, a $5.1 increase in gross receipts taxes and $2.2 higher ISRS charges that was only partly offset by a $10.6 negative impact of lower off-system sales. Contribution margin for the
three months ended March 31, 2018
, increased
$10.3
from the same period last year, largely due to the $7.5 increase attributable to volumes, and $0.6 resulting from customer growth. O&M expenses for the
three months ended March 31, 2018
increased
$46.0
, largely attributable to $38.4 in charges relating to recoveries disallowed by the MoPSC in the recent rate case. Excluding this impact, O&M was $7.6 in the current year quarter, driven by higher employee-related costs and bad debts. Depreciation and amortization increased
$2.2
in the current quarter versus the prior-year quarter due to higher capital investments. Due primarily to the regulatory disallowances being only partly offset by tax rate savings, net income for the
three months ended March 31, 2018
decreased $18.6 from the same period last year.
Temperatures in Spire Missouri’s service areas during the
three months ended March 31, 2018
, were 3% colder than normal and 34% colder than the same period last year, resulting in higher usage on a year-over-year comparative basis. Further, temperatures versus normal (the basis of Spire Missouri’s rate design) resulted in margins returning closer to historical norms. The Missouri Utilities’ total system therms sold and transported were 786.5 million for the
three months ended March 31, 2018
, compared with 607.7 million for the same period last year. Total off-system therms sold and transported were 37.0 million for the
three months ended March 31, 2018
, compared with 73.7 million for the same period last year, as a 29% increase in current year system demand reduced therm availability for off-system sales.
Spire Alabama
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2018
|
|
2017
|
Operating Income
|
$
|
78.2
|
|
|
$
|
78.9
|
|
Operation and maintenance expenses
|
34.1
|
|
|
31.5
|
|
Depreciation and amortization
|
13.1
|
|
|
12.3
|
|
Taxes, other than income taxes
|
14.4
|
|
|
10.3
|
|
Less: Gross receipts tax expense
|
(11.6
|
)
|
|
(7.7
|
)
|
Contribution Margin (Non-GAAP)
|
128.2
|
|
|
125.3
|
|
Natural and propane gas costs
|
78.5
|
|
|
25.8
|
|
Gross receipts tax expense
|
11.6
|
|
|
7.7
|
|
Operating Revenues
|
$
|
218.3
|
|
|
$
|
158.8
|
|
Net Income
|
$
|
55.6
|
|
|
$
|
47.6
|
|
Operating revenues for the
three months ended March 31, 2018
, increased
$59.5
from the same period last year. The change was principally driven by a $44.3 increase in gas cost recoveries versus the prior year, a $18.9 increase related to volumes, combined with higher gross receipts taxes of $3.9. These positive impacts were only partly offset by customer rate reductions of $7.8 resulting from lower federal income tax from the TCJA. Contribution margin increased
$2.9
, primarily due to the net increase to the volumetric/weather impact, partly offset by the customer rate reduction of $7.8 representing TCJA tax savings being returned to customers. Depreciation and amortization expenses for the
three months ended March 31, 2018
, were $0.8 higher than the same period last year, the result of continued infrastructure investment. O&M expenses were
$2.6
higher, primarily due to higher bad debts and employee-related costs. Net income during the
three months ended March 31, 2018
increased $8.0 versus the same period last year.
Temperatures in Spire Alabama’s service area during the
three months ended March 31, 2018
, were 5% warmer than normal and 51% colder than a year ago. Spire Alabama’s total system therms sold and transported were 333.7 million for the
three months ended March 31, 2018
, compared with 278.7 million for the same period last year.
EARNINGS – SIX MONTHS ENDED MARCH
31, 2018
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, 2018
|
|
|
|
|
|
|
|
|
|
|
Net Income (GAAP)
|
$
|
147.7
|
|
|
$
|
3.8
|
|
|
$
|
62.7
|
|
|
$
|
214.2
|
|
|
$
|
4.42
|
|
|
Adjustments, pre-tax:
|
|
|
|
|
|
|
|
|
|
|
Missouri regulatory adjustments
|
30.6
|
|
|
—
|
|
|
—
|
|
|
30.6
|
|
|
0.63
|
|
|
Unrealized loss on energy-related derivatives
|
—
|
|
|
12.6
|
|
|
—
|
|
|
12.6
|
|
|
0.26
|
|
|
Realized gain on economic hedges prior
to the sale of the physical commodity
|
—
|
|
|
(0.3
|
)
|
|
—
|
|
|
(0.3
|
)
|
|
(0.01
|
)
|
|
Acquisition, divestiture and restructuring activities
|
0.2
|
|
|
—
|
|
|
3.5
|
|
|
3.7
|
|
|
0.08
|
|
|
Income tax effect of adjustments*
|
(7.6
|
)
|
|
(3.2
|
)
|
|
(0.9
|
)
|
|
(11.7
|
)
|
|
(0.24
|
)
|
|
Effects of the Tax Cuts and Jobs Act
|
20.3
|
|
|
0.9
|
|
|
(75.2
|
)
|
|
(54.0
|
)
|
|
(1.12
|
)
|
|
Net Economic Earnings (Loss) (Non-GAAP)
|
$
|
191.2
|
|
|
$
|
13.8
|
|
|
$
|
(9.9
|
)
|
|
$
|
195.1
|
|
|
$
|
4.02
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) (GAAP)
|
$
|
164.0
|
|
|
$
|
(1.8
|
)
|
|
$
|
(9.0
|
)
|
|
$
|
153.2
|
|
|
$
|
3.34
|
|
|
Adjustments, pre-tax:
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on energy-related derivatives
|
—
|
|
|
5.4
|
|
|
—
|
|
|
5.4
|
|
|
0.12
|
|
|
Realized gain on economic hedges prior
to the sale of the physical commodity
|
—
|
|
|
(0.2
|
)
|
|
—
|
|
|
(0.2
|
)
|
|
—
|
|
|
Acquisition, divestiture and restructuring activities
|
0.1
|
|
|
—
|
|
|
0.1
|
|
|
0.2
|
|
|
0.01
|
|
|
Income tax effect of adjustments*
|
(0.1
|
)
|
|
(2.0
|
)
|
|
—
|
|
|
(2.1
|
)
|
|
(0.05
|
)
|
|
Net Economic Earnings (Loss) (Non-GAAP)
|
$
|
164.0
|
|
|
$
|
1.4
|
|
|
$
|
(8.9
|
)
|
|
$
|
156.5
|
|
|
$
|
3.42
|
|
|
|
*
|
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.
|
|
|
**
|
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
$214.2
for the
six months ended March 31, 2018
, compared with
$153.2
for the
six months ended March 31, 2017
. Basic and diluted earnings per share for the
six months ended March 31, 2018
, were
$4.43
and
$4.42
, respectively, compared with basic and diluted earnings per share of
$3.35
and
$3.34
, respectively, for the
six months ended March 31, 2017
. Net income increased
$61.0
, driven by lower federal tax rates resulting from the implementation of the TCJA net of amounts reflected in lower customer rates, and stronger core operating results of the Gas Utility segment attributable to the near-normal weather patterns in the current year. The Gas Marketing segment also experienced strong operating results, due to improved market conditions in the current year. These positive impacts were offset by $38.4 in pre-tax ($23.6 after-tax) charges at Spire Missouri, the result of the MoPSC disallowing certain recoveries in the recent rate case. Net economic earnings were
$195.1
(
$4.02
per diluted share) for the
six months ended March 31, 2018
, up from
$156.5
(
$3.42
per diluted share) for the same period last year, due to $27.2 in improvements for the Gas Utility and the
$12.4
net economic earnings increase experienced by Gas Marketing. These fluctuations are described in more detail below.
Gas Utility
Gas Utility net income decreased by
$16.3
and net economic earnings increased
$27.2
for the
six months ended March 31, 2018
, compared with the
six months ended March 31, 2017
. Both measures benefited from weather patterns that were significantly favorable to the prior year, with temperatures in the Utilities’ territories being 33% colder in the current year. However, net income was negatively impacted by the $23.6 after-tax charge related to certain recoveries for Spire Missouri being disallowed by the MoPSC in the recent rate case proceedings. Net income also was negatively impacted by the net tax changes related to the implementation of the TCJA which was passed in December 2017.
Gas Marketing
The Gas Marketing segment reported net income totaling
$3.8
for the
six months ended March 31, 2018
, versus a loss of
$1.8
during the same period last year. Net economic earnings for the
six months ended March 31, 2018
, were
$13.8
, an increase of
$12.4
from the same period last year. The increase was attributable to improved market conditions as a result of colder weather and increased temperature volatility that contributed to increased value from regional basis differentials (spreads) and 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
|
Six Months Ended March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
$
|
244.5
|
|
|
$
|
6.1
|
|
|
$
|
(3.7
|
)
|
|
$
|
—
|
|
|
$
|
246.9
|
|
|
Operation and maintenance expenses
|
245.6
|
|
|
3.1
|
|
|
10.1
|
|
|
(4.9
|
)
|
|
253.9
|
|
|
Depreciation and amortization
|
81.4
|
|
|
—
|
|
|
0.5
|
|
|
—
|
|
|
81.9
|
|
|
Taxes, other than income taxes
|
94.7
|
|
|
0.1
|
|
|
0.1
|
|
|
—
|
|
|
94.9
|
|
|
Less: Gross receipts tax expense
|
(66.6
|
)
|
|
(0.1
|
)
|
|
—
|
|
|
—
|
|
|
(66.7
|
)
|
|
Contribution Margin (Non-GAAP)
|
599.6
|
|
|
9.2
|
|
|
7.0
|
|
|
(4.9
|
)
|
|
610.9
|
|
|
Natural and propane gas costs
|
666.6
|
|
|
31.6
|
|
|
0.2
|
|
|
(0.8
|
)
|
|
697.6
|
|
|
Gross receipts tax expense
|
66.6
|
|
|
0.1
|
|
|
—
|
|
|
—
|
|
|
66.7
|
|
|
Operating Revenues
|
$
|
1,332.8
|
|
|
$
|
40.9
|
|
|
$
|
7.2
|
|
|
$
|
(5.7
|
)
|
|
$
|
1,375.2
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
$
|
273.2
|
|
|
$
|
(3.0
|
)
|
|
$
|
(0.7
|
)
|
|
$
|
—
|
|
|
$
|
269.5
|
|
|
Operation and maintenance expenses
|
199.8
|
|
|
2.9
|
|
|
3.9
|
|
|
(2.6
|
)
|
|
204.0
|
|
|
Depreciation and amortization
|
75.6
|
|
|
—
|
|
|
0.2
|
|
|
—
|
|
|
75.8
|
|
|
Taxes, other than income taxes
|
81.7
|
|
|
0.2
|
|
|
0.1
|
|
|
—
|
|
|
82.0
|
|
|
Less: Gross receipts tax expense
|
(53.1
|
)
|
|
(0.1
|
)
|
|
—
|
|
|
—
|
|
|
(53.2
|
)
|
|
Contribution Margin (Non-GAAP)
|
577.2
|
|
|
—
|
|
|
3.5
|
|
|
(2.6
|
)
|
|
578.1
|
|
|
Natural and propane gas costs
|
490.1
|
|
|
43.8
|
|
|
0.1
|
|
|
(6.8
|
)
|
|
527.2
|
|
|
Gross receipts tax expense
|
53.1
|
|
|
0.1
|
|
|
—
|
|
|
—
|
|
|
53.2
|
|
|
Operating Revenues
|
$
|
1,120.4
|
|
|
$
|
43.9
|
|
|
$
|
3.6
|
|
|
$
|
(9.4
|
)
|
|
$
|
1,158.5
|
|
Consolidated
As shown in the table above, Spire’s operating revenues for the
six months ended March 31, 2018
, increased by $212.4 at the Gas Utility segment and were $3.0 lower in the Gas Marketing segment. The Gas Utility increase was due principally to weather/volumetric impacts and higher gas cost recoveries at the Missouri Utilities and Spire Alabama. The Gas Marketing decrease was due to the impact of lower pricing offsetting higher volumes. Spire’s contribution margin increased
$32.8
compared with the same six-month period last year. The growth in contribution margin was primarily attributable to the Gas Utility segment, up $22.4, with the Missouri Utilities up $22.0 and Spire Alabama up $3.4, partially offset by a $3.0 decrease in the utilities of Spire EnergySouth. In addition, Gas Marketing’s contribution margin was up $
9.2
. Depreciation and amortization expenses were higher in the Gas Utility segment, due to higher capital investments in both the Missouri Utilities and Spire Alabama. Gas Utility O&M expenses increased $45.8, the result of the $38.4 charge in the second quarter for disallowed recoveries at Spire Missouri, and higher expenses at both the Missouri Utilities and Spire Alabama. These fluctuations are described in more detail below.
Gas Utility
Operating Revenues –
Gas Utility operating revenues for the
six months ended March 31, 2018
, were
$1,332.8
, or
$212.4
higher than the same period last year. The increase in Gas Utility operating revenues was attributable to the following factors:
|
|
|
|
|
Missouri Utilities and Spire Alabama – Higher PGA/GSA gas cost recoveries
|
$
|
116.5
|
|
Missouri Utilities and Spire Alabama – Volumetric usage
|
106.6
|
|
Missouri Utilities and Spire Alabama – Higher gross receipts taxes
|
12.5
|
|
Missouri Utilities – Higher ISRS
|
5.6
|
|
Missouri Utilities – Customer growth
|
0.9
|
|
Missouri Utilities – Off-system sales and capacity release
|
(27.4
|
)
|
Spire Alabama and Spire Gulf – Customer rate reductions resulting from TCJA
|
(9.0
|
)
|
Spire Gulf – RSE
|
(1.8
|
)
|
All other factors
|
(2.3
|
)
|
Total Variation
|
$
|
212.4
|
|
The increase in revenues was driven by $116.5 higher gas cost recoveries between Spire Missouri and Alabama, higher weather/volumetric impacts of $106.6, increases in gross receipt taxes of $12.5, and $5.6 higher ISRS from the Missouri Utilities. These positive impacts were offset by a $27.4 reduction in Spire Missouri off-system and capacity release, customer rate reductions of $9.0 for the customers of Spire Alabama and Spire Gulf resulting from the TCJA and a $1.8 RSE reduction at Spire Gulf.
Contribution Margin
– Gas Utility contribution margin was
$599.6
for the
six months ended March 31, 2018
, a
$22.4
increase over the same period last year. The increase was attributable to the following factors:
|
|
|
|
|
Missouri Utilities and Spire Alabama – Volumetric usage
|
$
|
25.9
|
|
Missouri Utilities – Higher ISRS
|
5.6
|
|
Missouri Utilities – Customer growth
|
0.9
|
|
Missouri Utilities – Off-system sales and capacity release
|
0.4
|
|
Spire Alabama and Spire Gulf – Customer rate reductions resulting from TCJA
|
(9.0
|
)
|
Spire Gulf – RSE
|
(1.8
|
)
|
All other factors
|
(1.4
|
)
|
Total Variation
|
$
|
22.4
|
|
The favorable contribution impact that resulted from the significantly colder weather in the current year combined with the impacts from the Missouri Utilities’ ISRS charges and customer growth more than offset the $9.0 contribution margin reduction due to lower customer rates at Spire Alabama and Spire Gulf as a result of the TCJA, and the $1.8 RSE adjustment at Spire Gulf.
Operating Expenses
– Gas Utility O&M expenses for the
six months ended March 31, 2018
, increased
$45.8
from last year, driven by $38.4 of disallowed recoveries at Spire Missouri resulting from the MoPSC rulings in the just-completed rate case. Excluding this charge, O&M increased $7.4, representing an increase of $7.4 at the Missouri Utilities and a $3.2 increase at Spire Alabama, partly offset by a $3.2 decrease at Spire EnergySouth. The O&M expense growth at the Missouri Utilities and Spire Alabama were attributable to the colder weather, with higher employee-related expenses and bad debts at both the Spire Missouri and Spire Alabama in the current year. Depreciation and amortization expenses for the
six months ended March 31, 2018
, increased
$5.8
from the same period last year as a result of higher levels of capital investment over the past year, with $4.3 attributable to Spire Missouri and $1.3 attributable to Spire Alabama.
Gas Marketing
Operating Revenues
– Gas Marketing operating revenues during the
six months ended March 31, 2018
, decreased
$3.0
from the same period last year, principally due to higher total volume being offset by lower general pricing levels, along with the effect of changes in trading activities. Overall commodity pricing in the current year was $0.162/MMBtu lower than the prior year.
Contribution Margin
– Gas Marketing contribution margin during the
six months ended March 31, 2018
, increased
$9.2
from the same period last year. The increase is primarily due to higher overall volumes, higher storage optimization, and increased value from regional basis differentials (spreads) in the current year, the result of improved market conditions.
Interest Charges
Consolidated interest charges during the
six months ended March 31, 2018
, were
$5.0
higher than the same period last year. The increase was primarily driven by Spire Missouri’s issuance of $170.0 in long-term debt in September 2017, and Spire Alabama’s issuance of $75.0 of long-term debt: $30.0 on December 1, 2017, and $45.0 on January 12, 2018. Marginally higher interest rates on the senior notes issued in March 2017 that were used to retire $250.0 of floating rate debt also contributed to the increase. Also, for the
six months ended March 31, 2018
and 2017, average short-term borrowings were $514.2 and $502.2, respectively, and the average interest rates on these borrowings were 1.8% and 1.2%, respectively.
Income Taxes
Consolidated income tax expense during the
six months ended March 31, 2018
, decreased
$89.8
, primarily as a result of the TCJA enacted in December 2017. Of the decrease, $54.0 is the result of the revaluation of deferred tax assets and liabilities on the balance sheet that were not reflected in net economic earnings. The remaining reduction is the result of a decrease in current year federal income tax rates due to the TCJA, combined with the effects of lower pre-tax book income. The TCJA is further described in
Note 11
of the Notes to Financial Statements in Item 1.
Spire Missouri
|
|
|
|
|
|
|
|
|
|
Six Months Ended March 31,
|
|
2018
|
|
2017
|
Operating Income
|
$
|
126.9
|
|
|
$
|
154.7
|
|
Operation and maintenance expenses
|
163.8
|
|
|
118.0
|
|
Depreciation and amortization
|
50.0
|
|
|
45.7
|
|
Taxes, other than income taxes
|
67.4
|
|
|
59.9
|
|
Less: Gross receipts tax expense
|
(46.8
|
)
|
|
(39.0
|
)
|
Contribution Margin (Non-GAAP)
|
361.3
|
|
|
339.3
|
|
Natural and propane gas costs
|
517.4
|
|
|
432.5
|
|
Gross receipts tax expense
|
46.8
|
|
|
39.0
|
|
Operating Revenues
|
$
|
925.5
|
|
|
$
|
810.8
|
|
Net Income
|
$
|
127.8
|
|
|
$
|
95.0
|
|
Operating revenues during the
six months ended March 31, 2018
, increased
$114.7
from the same period last year primarily due to a $66.2 increase attributable to volumetric impacts, $60.9 h
igher
wholesale gas costs passed on to customers, a $7.2 increase in gross receipts taxes, and ISRS charge increases of $5.6, offset primarily by lower off-system sales of $27.4. Contribution margin increased
$22.0
primarily due to the $14.8 increase attributable to higher volumes and weather, higher ISRS charges, and customer growth. O&M expenses during the
six months ended March 31, 2018
, increased
$45.8
from the same period last year. Excluding the $38.4 of disallowed recoveries at Spire Missouri resulting from the MoPSC rulings in the just-completed rate case, O&M expenses were $7.4 higher in the current year versus the prior year period. This increase was primarily attributable to higher weather-driven employee-related and bad debt expenses. Depreciation increased by $4.3 as a result of continuing increases in the levels of capital investment. Net income increased $32.8, as the increase in contribution margin and lower federal income tax rates from the TCJA, more than offset the after-tax impacts of the recovery disallowances.
Temperatures in Spire Missouri’s service areas during the
six months ended March 31, 2018
, were 25% colder than the same period last year and 1% colder than normal. The Missouri Utilities’ total system therms sold and transported were 1,312.9 million for the six months ended March 31, 2018, compared with 1,092.1 million for the same period last year. Total off-system therms sold and transported were 67.6 million for the
six months ended March 31, 2018
, compared with 159.5 million for the same period last year.
Spire Alabama
|
|
|
|
|
|
|
|
|
|
Six Months Ended March 31,
|
|
2018
|
|
2017
|
Operating Income
|
$
|
97.2
|
|
|
$
|
98.7
|
|
Operation and maintenance expenses
|
65.9
|
|
|
62.7
|
|
Depreciation and amortization
|
25.9
|
|
|
24.6
|
|
Taxes, other than income taxes
|
22.6
|
|
|
16.9
|
|
Less: Gross receipts tax expense
|
(17.2
|
)
|
|
(11.9
|
)
|
Contribution Margin (Non-GAAP)
|
194.4
|
|
|
191.0
|
|
Natural and propane gas costs
|
127.5
|
|
|
42.6
|
|
Gross receipts tax expense
|
17.2
|
|
|
11.9
|
|
Operating Revenues
|
$
|
339.1
|
|
|
$
|
245.5
|
|
Net Income
|
$
|
6.0
|
|
|
$
|
57.9
|
|
Operating revenues for the
six months ended March 31, 2018
, increased
$93.6
from the same period last year. The change was principally driven by a $55.6 increase in gas cost recoveries versus the prior year, a $40.4 increase related to volumes, combined with higher gross receipts taxes of $5.3. These positive impacts were only slightly offset by customer rate reductions of $7.8 resulting from tax savings from the TCJA. Contribution margin increased
$3.4
, due to the $11.1 increase due to the favorable volumetric/weather impact, partly offset primarily by the $7.8 customer rate reduction resulting from the TCJA. O&M expenses for the
six months ended March 31, 2018
, increased
$3.2
from the same period last year, primarily driven by increases in employee-related and bad debt expenses. Net income reflects these impacts and also includes the net tax rate change and deferred tax revaluation impacts resulting from the implementation of the TCJA.
Temperatures in Spire Alabama’s service area during the six months ended March 31, 2018, were 48% colder than the same period last year and only 4% warmer than normal. Spire Alabama’s total system therms sold and transported were 571.1 million for the
six months ended March 31, 2018
, compared with 500.2 million for the same period last year.
REGULATORY AND OTHER MATTERS
Please see the
Environmental Matters
section for information relative to environmental matters. Spire, Spire Missouri and Spire Alabama 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, Spire Missouri or Spire Alabama.
Spire Missouri
On September 30, 2016, Spire Missouri filed to increase its ISRS revenues by $5.0 for Spire Missouri East and $3.4 for Spire Missouri West, related to ISRS investments from March 2016 through October 2016. On November 29, 2016, MoPSC staff recommended $4.5 and $3.4 for Spire Missouri East and Spire Missouri West, respectively, based on updated filings. On January 3, 2017, the MoPSC held a hearing to decide two issues raised by the Missouri Office of the Public Counsel (OPC) pertaining to the ISRS eligibility of hydrostatic testing done by Spire Missouri West and of the replacement of cast iron main interspersed with portions of plastic pipe. On January 18, 2017, the MoPSC found in favor of the Missouri Utilities on the interspersed plastics issue, but against Spire Missouri West on hydrostatic testing, and issued an order setting the ISRS increases at $4.5 and $3.2 for Spire Missouri East and Spire Missouri West, respectively. 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 Spire Missouri to include in the ISRS the replacement of cast iron main interspersed with plastic pipe. On November 21, 2017, the Western District reversed the MoPSC’s decision on the plastics issue and remanded the case to the MoPSC for further proceedings. On January 3, 2018, Spire Missouri and the MoPSC applied for transfer of the case to the Missouri Supreme Court, which denied the application on March 6, 2018. On remand, the MoPSC directed the parties to make a recommendation on how to proceed by April 30, 2018.
On February 3, 2017, Spire Missouri filed to increase its ISRS revenues, by $3.3 for Spire Missouri East and $2.9 for Spire Missouri West, 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 approximately $3.0 each, for a cumulative total of $32.6 and $16.4 for Spire Missouri East and Spire Missouri West, respectively. On that same date, the OPC again raised an objection to the ISRS eligibility of replacing cast iron main interspersed with portions of plastic. 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 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 11, 2017, Spire Missouri East filed a general rate case docketed as GR-2017-0215, requesting a net rate increase of $25.5 (or $58.1 less $32.6 already being billed in ISRS). Concurrently Spire Missouri West filed general rate case GR-2017-0216, requesting a net rate increase of $34.0 (or $50.4 less current ISRS billings of $16.4). As is standard practice in Missouri, other parties joined the rate proceeding suggesting alternative rate adjustments, and during the last five months, all parties to the case were involved in evidentiary hearings, filings of briefs and further proceedings related to the impacts of tax reform under the TCJA. On March 7, 2018, the MoPSC issued an Amended Report and Order, approving a base rate revenue requirement increase of $18.0 for Spire Missouri East and $15.2 for Spire Missouri West. The annualized ISRS surcharge amounts of $32.6 for Spire Missouri East and $16.4 for Spire Missouri West were reset to zero, resulting in a net decrease in revenues of $14.6 and $1.2, respectively. These net amounts reflect decreases totaling approximately $33.0 resulting from the TCJA’s federal income tax rate reduction and a related allowance to return excess accumulated deferred income taxes to customers in accordance with Internal Revenue Service normalization requirements. Tariffs reflecting the MoPSC’s Amended Report and Order went into effect on April 19, 2018. Information about changes in the allowed costs for postretirement benefits are described in
Note 3
of the Notes to Financial Statements in Item 1. As also discussed in that
Note 3
, the MoPSC disallowed recovery of certain costs, and Spire Missouri has filed a related notice of appeal to the Missouri Court of Appeals Eastern and Southern Districts.
Spire Alabama
Spire Alabama is subject to regulation by the APSC which established the Rate Stabilization and Equalization (RSE) rate-setting process in 1983. Effective January 1, 2014, Spire Alabama’s allowed range of return on average common equity is 10.5% to 10.95% with an adjusting point of 10.8%. Spire Alabama 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 Spire Alabama’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 September 30, 2017 quarterly point of test was $2.7 to bring the expected rate of return on average common equity at the end of the year to within the allowed range of return, effective December 1, 2017. As part of the annual update for RSE, on November 30, 2017, Spire Alabama filed an increase for rate year 2018 of $8.5, which also became effective December 1, 2017. There was no RSE reduction in 2018 for the January 31 quarterly point of test, and no RSE reduction is currently expected for the April 30 quarterly point of test.
The inflation-based Cost Control Measure (CCM), established by the APSC, allows for annual increases to O&M expense. As of September 30, 2017, Spire Alabama recorded a CCM benefit of $10.7 for rate year 2017, which was reflected in rates effective December 1, 2017.
On June 28, 2010, the APSC approved a reduction in depreciation rates, effective June 1, 2010, and a regulatory liability to be recorded for Spire Alabama. Refunds from such negative salvage liability are being 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 rider. The total amount refundable to customers is subject to adjustments over the remaining period for charges made to the Enhanced Stability Reserve and other APSC-approved charges. The refunds are due to a re-estimation of future removal costs provided for through the prior depreciation rates. As of September 30, 2017, $12.3 remained to be refunded to customers, and through March 31, 2018, $6.4 of that has been refunded.
Effective February 1, 2018, Spire Alabama rates were reduced by $12.8 to reflect the impact of tax reform under the TCJA on current income taxes.
Spire
In addition to those discussed above for Spire Missouri and Spire Alabama, Spire is affected by the following regulatory matters.
Spire Gulf’s rates were reduced $1.9 effective February 1, 2018, to reflect lower income taxes resulting from the TCJA.
On April 10, 2018, the MSPSC approved an agreement between Spire Mississippi and the Mississippi Public Utility Staff settling its Rates Stabilization and Adjustments filing that was made on September 15, 2017, and included adjusting the federal income tax rate for the TCJA resulting in a $0.2 reduction in the annualized revenue requirement. New rates were effective May 1, 2018.
In April 2017, Spire STL Pipeline submitted an amended application with FERC requesting issuance of a certificate of convenience and necessity authorizing it to construct, own, and operate an interstate pipeline interconnecting with the Rockies Express pipeline to deliver natural gas to the St. Louis, Missouri, area. As an interstate project, it is under the jurisdiction of the FERC, which is the lead agency for other federal, state, and local permitting authorities. Several parties have filed interventions and comments regarding the Spire STL Pipeline project. The Company is monitoring these closely and has responded where appropriate. In its Environmental Assessment issued on September 29, 2017, the FERC concluded that approval of the Spire STL Pipeline, with appropriate mitigating measures, would not constitute a major federal action significantly affecting the quality of the human environment. Spire STL Pipeline continues to work through the FERC regulatory process and anticipates receiving a Final Order later this fiscal year.
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, Spire Missouri’s, and Spire Alabama’s Annual Reports on Form 10-K for the fiscal year ended September 30, 2017, and include regulatory accounting, goodwill, and employee benefits and postretirement obligations. As a result of the MoPSC’s Amended Report and Order in March, we revised estimates of future recovery of certain costs, as described in
Note 3
of the Notes to Financial Statements in Item 1 of this Form 10-Q. There were no other significant changes to critical accounting estimates during the
six months ended March 31, 2018
.
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, Spire Missouri’s, and Spire Alabama’s combined Annual Report on Form 10-K for the fiscal year ended September 30, 2017.
ACCOUNTING PRONOUNCEMENTS
The Company, Spire Missouri and Spire Alabama 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 in Item 1.
CASH FLOWS
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 Spire Missouri’s 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.
|
|
|
|
|
|
|
|
|
|
Six Months Ended
March 31,
|
Cash Flow Summary
|
2018
|
|
2017
|
Net cash provided by operating activities
|
$
|
309.6
|
|
|
$
|
226.1
|
|
Net cash used in investing activities
|
(233.3
|
)
|
|
(182.9
|
)
|
Net cash used in financing activities
|
(65.9
|
)
|
|
(28.8
|
)
|
For the
six months ended March 31, 2018
, net cash provided by operating activities increased $83.5 from the corresponding period of fiscal 2017. The change was due to the timing of purchase gas adjustments and fluctuations in working capital items, as discussed above, as well as the increase in net income as adjusted for the non-cash impacts of deferred taxes (discussed in
Note 11
of the Notes to Financial Statements in Item 1) and asset write-offs (discussed in
Note 3
).
For the
six months ended March 31, 2018
, net cash used in investing activities was $50.4 more than for the same period in the prior year, driven by a $28.5 increase in capital expenditures and a $20.9 change in acquisition activity. The higher spending to this point in the fiscal year is consistent with the Company’s capital expenditure expectations and reflects progress on the Spire STL Pipeline project, as well as investment to support customer growth, new business development, and the continued commitment to infrastructure upgrades at the Utilities. Total capital expenditures for the full fiscal year 2018 are expected to be approximately $500, with approximately $425 for the Utilities. Cash paid for the acquisition of a majority interest in a natural gas storage operation in December 2017 was $16.0 (as described in
Note 1
of the Notes to Financial Statements in Item 1) and there were minor acquisition payments in the second quarter of fiscal 2018, while the prior year’s first half included the receipt of a $3.8 cash settlement related to the acquisition of Spire EnergySouth.
Lastly, for the
six months ended March 31, 2018
, net cash used in financing activities was $37.1 higher than for the
six months ended March 31, 2017
. This change primarily reflects a net repayment of debt this year versus a net issuance last year, along with an increase in dividends paid.
LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Equivalents
Cash deposits at the bank were used to support working capital needs of the business
.
Spire had no short-term investments as of or during the
six months ended March 31, 2018
.
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 or through the use of a revolving credit facility.
On December 14, 2016, Spire, Spire Missouri, and Spire Alabama entered into a syndicated revolving credit facility pursuant to a loan agreement with 11 banks, expiring December 14, 2021. The loan agreement has an aggregate credit commitment of $975.0, including sublimits of $300.0 for Spire, $475.0 for Spire Missouri, and $200.0 for Spire Alabama. The agreement 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
March 31, 2018
, total debt was
54%
of total capitalization for the consolidated Company,
48%
for Spire Missouri, and
33%
for Spire Alabama.
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.
Information regarding Spire’s consolidated short-term borrowings is presented in the following table. 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 $5.1 on an annual basis, a portion of which may be offset through the Utilities’ application of PGA and GSA carrying costs.
|
|
|
|
|
|
Commercial
Paper
Borrowings
|
Revolving
Credit Facility
Borrowings
|
Total
Short-term
Borrowings
|
Six Months Ended March 31, 2018
|
|
|
|
Weighted average borrowings outstanding
|
$514.1
|
$0.1
|
$514.2
|
Weighted average interest rate
|
1.8%
|
2.8%
|
1.8%
|
Range of borrowings outstanding
|
$345.4 - $632.9
|
$0.0 - $25.0
|
$345.4 - $632.9
|
As of March 31, 2018
|
|
|
|
Borrowings outstanding
|
$391.7
|
$—
|
$391.7
|
Weighted average interest rate
|
2.2%
|
—%
|
2.2%
|
Of Spire’s $391.7 borrowings outstanding as of
March 31, 2018
, $366.4 was used to provide funding to its subsidiaries, including Spire Missouri ($175.8), Spire Alabama ($82.3), Spire STL Pipeline LLC and natural gas storage ($74.7), Spire EnergySouth and subsidiaries ($4.7), and others ($28.9).
Long-term Debt and Equity
The Company’s, Spire Missouri’s, and Spire Alabama’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, Spire Missouri, and Spire Alabama remain at investment grade, but are subject to review and change by the rating agencies.
It is management’s view that the Company, Spire Missouri, and Spire Alabama 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.
At
March 31, 2018
, including the current portion but excluding unamortized discounts and debt issuance costs, Spire had fixed-rate long-term debt totaling $2,197.0, of which $980.0 was issued by Spire Missouri, $325.0 was issued by Spire Alabama, and $77.0 was issued by other subsidiaries. All long-term debt bears fixed rates and is subject to changes in fair value as market interest rates change. However, increases and 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 typically would be deferred as regulatory assets or regulatory liabilities and amortized over a future period. Including the current portion of long-term debt, and treating the redeemable noncontrolling interest as equity, the Company’s long-term consolidated capitalization at
March 31, 2018
, consisted of
49.8%
equity, compared to
48.7%
equity at September 30, 2017.
Spire has a shelf registration statement on Form S-3 on file with the US Securities and Exchange Commission (SEC) 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 233,127 and 228,400 shares at
March 31, 2018
, and
April 30, 2018
, 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. Spire Missouri 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 on September 23, 2019.
Spire Missouri 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 for financings placed any time before September 30, 2018. Spire Missouri has issued $170.0 in securities under this authorization, so as of December 31, 2017, $130.0 remains available to be issued. On March 14, 2018, Spire Missouri filed a 60-day notice of its intent to file for a new financing authorization from the MoPSC.
On October 3, 2017, Spire Alabama received authorization and approval from the APSC to borrow up to $75.0 for general corporate purposes and to retire short-term debt. On December 1, 2017, Spire Alabama entered into the First Supplement to Master Note Purchase Agreement with certain institutional investors. Pursuant to the terms of
that supplement, on December 1, 2017, Spire Alabama issued and sold $30 million in aggregate principal amount of its 4.02% Series 2017A Senior Notes due January 15, 2058, and on January 12, 2018, issued and sold $45 million aggregate principal amount of its 3.92% Series 2017B Senior Notes due January 15, 2048, to those institutional investors. The notes bear interest from the date of issuance, payable semi-annually on the 15th day of July and January of each year, commencing on July 15, 2018. The notes are senior unsecured obligations of Spire Alabama, rank equal in right to payment with all its other senior unsecured indebtedness, and have make-whole and par call options. Spire Alabama used the proceeds from the sale of the notes to repay short-term debt and for general corporate purposes.
CONTRACTUAL OBLIGATIONS
During the
six months ended March 31, 2018
, 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, 2017. On April 27, 2018, Spire STL Pipeline entered into a construction contract. Construction is subject to project approvals by the FERC and state and local authorities. Though unit pricing generally applies, Spire STL Pipeline currently estimates the total value to be approximately
$95.0
, with the primary construction period currently scheduled for the second half of calendar 2018. Spire STL Pipeline has the right to terminate at any time with payment for the value of work performed plus costs incurred. More information about this contract is provided under
Item 5
of Part II.
MARKET RISK
There were no material changes in the Company’s commodity price risk or counterparty credit risk as of
March 31, 2018
, relative to the corresponding information provided in the Company’s Annual Report on Form 10-K as of
September 30, 2017
. During the second quarter of fiscal 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 $1.0 mark-to-market gain on this swap for the six months ended March 31, 2018. During October 2017, Spire entered into a three-month interest rate swap with a fixed interest rate of 2.591% and a notional amount of $56.0 to protect itself against adverse movements in interest rates on Spire Alabama debt that was issued in December 2017 and January 2018. During the first quarter of fiscal 2018, the Company settled the swap for a gain of $0.4 which will be amortized over the hedged periods. 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
Spire’s subsidiaries 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, Spire Missouri’s, or Spire Alabama’s financial position and results of operations. As environmental laws, regulations, and interpretations change, however, the subsidiaries 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
March 31, 2018
, 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.