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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The recent acquisitions may not achieve their intended results, including anticipated cost savings;
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Legislative, regulatory and judicial mandates and decisions, some of which may be retroactive, including those affecting:
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▪
allowed rates of return,
▪
incentive regulation,
▪
industry structure,
▪
purchased gas adjustment provisions,
▪
rate design structure and implementation,
▪
regulatory assets,
▪
non-regulated and affiliate transactions,
▪
franchise renewals,
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▪
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environmental or safety matters, including the potential impact of legislative and regulatory actions related to climate change and pipeline safety,
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▪
taxes,
▪
pension and other postretirement benefit liabilities and funding obligations, or
▪
accounting standards;
•
The results of litigation;
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•
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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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Retention of, ability to attract, ability to collect from, and conservation efforts of, customers;
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Our ability to comply with all covenants in our indentures and credit facilities any violations of which, if not cured in a timely manner, could trigger a default of our obligation;
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Capital and energy commodity market conditions, including the ability to obtain funds with reasonable terms for necessary capital expenditures and general operations and the terms and conditions imposed for obtaining sufficient gas supply;
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Discovery of material weakness in internal controls; and
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Employee workforce issues, including but not limited to labor disputes and future wage and employee benefit costs, including changes in discount rates and returns on benefit plan assets.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company’s Condensed Consolidated Financial Statements and Laclede Gas’ and Alagasco’s Condensed Financial Statements and the Notes thereto.
RESULTS OF OPERATIONS
Overview
The Company has two key business 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 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, the Company’s business includes certain other non-utility activities reported as Other. Other includes:
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unallocated corporate costs, including certain debt and associated interest costs;
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Spire STL Pipeline LLC, a subsidiary of Spire planning construction of a 70-mile Federal Energy Regulatory Commission (FERC) regulated pipeline to deliver natural gas into eastern Missouri; 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. 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 measures of net economic earnings, net economic earnings per share and operating margin when internally evaluating and reporting results of operations. These non-GAAP operating metrics should not be considered as an alternative to, or more meaningful than, GAAP measures such as net income.
Non-GAAP Measures – Net Economic Earnings and Net Economic Earnings Per Share
Net economic earnings and net economic earnings per share are non-GAAP measures that exclude from net income the after-tax impacts of fair value accounting and timing adjustments associated with energy-related transactions as well as acquisition, divestiture, and restructuring activities. These fair value and timing adjustments are made in instances where the accounting treatment differs from the economic substance of the underlying transaction, including the following:
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•
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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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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 Spire Marketing, the net effect of adjustments on the Utilities’ earnings are minimal. This is due to gains or losses on Laclede Gas’ natural gas derivative instruments being deferred pursuant to its Purchased Gas Adjustment (PGA) clause, as authorized by the MoPSC.
Management believes that excluding the earnings volatility caused by recognizing changes in fair value prior to settlement and other timing differences associated with related purchase and sale transactions provides a useful representation of the economic effects of only the actual settled transactions and their effects on results of operations. In addition, management excludes the impact related to unique acquisition, divestiture, and restructuring activities when evaluating on-going performance, and therefore excludes these impacts from net economic earnings. Management believes that this presentation provides a useful representation of operating performance by facilitating comparisons of year-over-year results. The definition and measurement of net economic earnings provided above is consistent with that used by management and the Board of Directors in assessing the Company’s, Laclede Gas’ and Alagasco’s performance as well as determining performance under the Company’s, Laclede Gas’ and Alagasco’s incentive compensation plans. Further, the Company believes this better enables an investor to view the Company’s, Laclede Gas’ and Alagasco’s performance in that period on a basis that would be comparable to prior periods.
Reconciliations of net economic earnings and net economic earnings per share to the Company’s most directly comparable GAAP measures are provided on the following pages.
Non-GAAP Measure – Operating Margin
In addition to operating revenues and operating expenses, management also uses the non-GAAP measure of operating margin when evaluating results of operations, as shown in the table below. The Utilities pass to their customers (subject to prudence review by, as applicable, the MoPSC, APSC, or MSPSC) increases and decreases in the wholesale cost of natural gas in accordance with their 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 beginning with operating margins is a useful supplemental measure. In addition, it is management’s belief that operating margins and the remaining operating expenses that calculate operating income are useful 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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Consol-idated
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Per Diluted Share**
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Three Months Ended December 31, 2016
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Net Income (Loss) (GAAP)
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$
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51.7
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$
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(0.8
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)
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$
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(5.7
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)
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$
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45.2
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$
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0.99
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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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3.8
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—
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3.8
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0.08
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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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(0.1
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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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0.1
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—
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—
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0.1
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—
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Income tax effect of adjustments*
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—
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(1.4
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)
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—
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(1.4
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)
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(0.03
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)
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Net Economic Earnings (Loss) (Non-GAAP)**
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$
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51.8
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$
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1.4
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$
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(5.7
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)
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$
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47.5
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$
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1.04
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Three Months Ended December 31, 2015
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Net Income (Loss) (GAAP)
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$
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49.3
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$
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2.3
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$
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(4.7
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)
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$
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46.9
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$
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1.08
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Adjustments, pre-tax:
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Unrealized gain on energy-related derivatives
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(0.1
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)
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(4.8
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)
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—
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(4.9
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)
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(0.11
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)
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Lower of cost or market inventory adjustments
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—
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0.6
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—
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0.6
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0.01
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Realized loss on economic hedges prior
to the sale of the physical commodity
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—
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(0.1
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)
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—
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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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1.2
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—
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0.1
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1.3
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0.03
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Income tax effect of adjustments*
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(0.4
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)
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1.7
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—
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1.3
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0.03
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Net Economic Earnings (Loss) (Non-GAAP)**
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$
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50.0
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$
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(0.3
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)
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$
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(4.6
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)
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$
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45.1
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$
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1.04
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*
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Income taxes are calculated by applying effective 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 EPS calculation.
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Consolidated
Spire’s net income was
$45.2
for the
three months ended December 31, 2016
, compared with
$46.9
for the
three months ended December 31, 2015
. Basic and diluted earnings per share for the
three months ended December 31, 2016
were
$0.99
, compared with basic and diluted earnings per share of
$1.08
for the
three months ended December 31, 2015
. Net income decreased
$1.7
as the $2.4 increase in Utilities earnings were more than offset by lower income in Gas Marketing and higher interest expense in Other. Spire’s net economic earnings were
$47.5
(
$1.04
per diluted share) for the
three months ended December 31, 2016
, equal to an increase of $2.4 from the
$45.1
(
$1.04
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 and Gas Marketing segments, as described below. Net economic earnings per share did not increase due to the 2,185,000 shares issued in May 2016 to help finance the EnergySouth acquisition.
Gas Utility
For the
three months ended December 31, 2016
, Gas Utility net income increased by
$2.4
versus the prior-year quarter. The $3.4 of net income delivered by the EnergySouth acquisition, along with small net income growth from Alagasco were partially offset by $1.4 lower earnings versus the prior year quarter from the Missouri Utilities. Net economic earnings increased by
$1.8
versus the prior-year quarter.
Gas Marketing
The Gas Marketing segment reported a net loss totaling
$0.8
for the
three months ended December 31, 2016
, versus net income of
$2.3
in the prior year quarter. The result was driven by unfavorable fair market value adjustments
relating to increased price volatility at contract expiry, primarily on energy-related derivatives, incurred in the current-year quarter. Net economic earnings for the
three months ended December 31, 2016
increased
$1.7
compared with the
three months ended December 31, 2015
, reflecting higher overall volumes and increased trading and storage optimization.
Operating Revenues and Operating Expenses
Reconciliations of the Company’s operating margin to the most directly comparable GAAP measure are shown below.
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Gas Utility
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Gas Marketing
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Other
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Eliminations
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Consolidated
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Three Months Ended December 31, 2016
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Operating revenues
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$
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476.7
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$
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21.7
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$
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1.8
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$
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(5.1
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)
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$
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495.1
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Natural and propane gas expense
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214.5
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21.5
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—
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(3.9
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)
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232.1
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Gross receipts tax expense
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19.0
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—
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—
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—
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19.0
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Operating margin (non-GAAP)
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243.2
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0.2
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1.8
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(1.2
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)
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244.0
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Depreciation and amortization
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37.7
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—
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0.1
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—
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37.8
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Other operating expenses
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114.9
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1.5
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1.9
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(1.2
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)
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117.1
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Operating income (loss) (GAAP)
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$
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90.6
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$
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(1.3
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)
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$
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(0.2
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)
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$
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—
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$
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89.1
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Three Months Ended December 31, 2015
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Operating revenues
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$
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399.5
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$
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12.8
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$
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0.8
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$
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(13.7
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)
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$
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399.4
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Natural and propane gas expense
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161.9
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|
7.4
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—
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(13.4
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)
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155.9
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Gross receipts tax expense
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17.5
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|
—
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—
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—
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17.5
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Operating margin (non-GAAP)
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220.1
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5.4
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|
0.8
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(0.3
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)
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226.0
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Depreciation and amortization
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33.5
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|
—
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0.2
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—
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33.7
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Other operating expenses
|
102.6
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|
1.6
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|
1.4
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(0.3
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)
|
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105.3
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Operating income (loss) (GAAP)
|
$
|
84.0
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|
$
|
3.8
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$
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(0.8
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)
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$
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—
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$
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87.0
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Consolidated
As shown in the table above, Spire reported an operating revenue increase 0f $95.7 for the
three months ended December 31, 2016
compared with the same period last year, with increases in both Gas Utility and Gas Marketing. Spire’s first quarter operating margin increased
$18.0
compared with last year due primarily to increases in the Gas Utility segment, principally due to the EnergySouth acquisition. The increase in Gas Utility was partly offset by lower results in the Gas Marketing segment. Depreciation and amortization expenses were up in the Gas Utility segment, reflecting the EnergySouth acquisition and capital investment undertaken by the Missouri Utilities and Alagasco. Other operating expenses in the quarter were $11.8 higher than the prior year quarter, due primarily to the $10.4 in additional costs resulting from the EnergySouth acquisition. These fluctuations are described in more detail below.
Gas Utility
Operating Revenues
–
Gas Utility operating revenues for the
three months ended December 31, 2016
were
$476.7
, or
$77.2
higher than the same period last year. The increase in Gas Utility operating revenues was attributable to the following factors:
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EnergySouth acquisition revenues
|
$
|
26.5
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Weather / volumetric usage
|
14.0
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Higher wholesale gas costs passed on to customers
|
21.7
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|
Higher Missouri Utilities off-system sales and capacity release
|
10.8
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Missouri Utilities – Higher Infrastructure System Replacement Surcharge (ISRS)
|
3.3
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|
Alagasco – Lower Rate Stabilization and Equalization (RSE) revenue reduction
|
1.2
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All other variations
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(0.3
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)
|
Total Variation
|
$
|
77.2
|
|
As shown, the increase was primarily attributable to higher revenues reflecting the EnergySouth acquisition, the increase in wholesale gas costs, higher off-system sales, higher ISRS charges within the Missouri Utilities, and the adjustments under the RSE rate-setting process. It should be noted that a significant portion of the off-system sales and weather/volumetric revenue increases were offset by higher regulatory costs and did not impact margin.
Operating Margin
– Gas Utility operating margin was
$243.2
for the
three months ended December 31, 2016
, a
$23.1
increase over the same period last year. The net increase was attributable to the following factors:
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|
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|
EnergySouth acquisition margin
|
$
|
19.4
|
|
Missouri Utilities – Higher Infrastructure System Replacement Surcharge (ISRS)
|
3.3
|
|
Alagasco – Lower Rate Stabilization and Equalization (RSE) revenue reduction
|
1.2
|
|
Other variations, including timing of gas cost recoveries
|
(0.8
|
)
|
Total Variation
|
$
|
23.1
|
|
As shown, the increase in operating margin was primarily attributable to the margin contributed by the EnergySouth acquisition, the higher ISRS charges within the Missouri Utilities for the current quarter, and a lower revenue reduction from Alagasco’s RSE adjustment versus the prior year. The Missouri Utilities experienced mild weather this quarter with degree days 16% warmer than normal, compared to the prior year that was 27% warmer than normal. In the Alagasco territory, weather was 29% warmer than normal this year, compared to 37% warmer than normal in the prior year. Temperatures across the regions were also much more volatile than both the prior year and normal. The combined impact of these weather conditions resulted in the operating margin due to weather being marginally lower than the prior year quarter.
Operating Expenses
– Depreciation and amortization expenses for the
three months ended December 31, 2016
increased
$4.2
from last year, primarily due to $2.7 from the EnergySouth acquisition and higher levels of capital expenditures by the Missouri Utilities and Alagasco. Other operating expenses for the
three months ended December 31, 2016
are
$12.3
higher than the same period in the prior year, largely due to $10.4 resulting from the EnergySouth acquisition. The remaining $1.9 net increase in Gas Utility expenses was driven by higher property tax expense and professional fees, partially offset by a decrease in integration costs and employee-related costs.
Gas Marketing
Operating Revenues
– Operating revenues increased
$8.9
versus the prior-year period. The effect of higher total volume and storage activity, combined with higher general levels of pricing, were only partly offset by the effect of increased trading activities and unfavorable mark-to-market adjustments on derivatives. Under GAAP, revenues associated with trading activities are presented net of related costs. Average pricing for the quarter ended December 31, 2016 was approximately $2.898/MMBtu versus approximately $2.149/MMBtu for the quarter ended December 31, 2015.
Operating Margin
– Gas Marketing operating margin during the
three months ended December 31, 2016
decreased
$5.2
from the same period last year. The decrease in operating margin is primarily due to the favorable impact of higher overall volumes and increased trading and storage activity being more than offset by the negative $7.9 mark-to-market impact of fair value adjustments.
Interest Charges
Consolidated interest charges during the
three months ended December 31, 2016
increased by $3.1 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 floating rate debt. Also, for the
three months ended December 31, 2016
and 2015, average short-term borrowings were $475.0 and $374.2, respectively, and the average interest rates on these borrowings were 1.1% and 0.7%, respectively.
Income Taxes
Consolidated income tax expense during the
three months ended December 31, 2016
was flat versus the prior year quarter. The effective tax rate for the current quarter was 33.0% versus 32.4% in the prior-year period. The effective tax rate for the current-year quarter is slightly higher than the prior year quarter due to a higher estimate of pre-tax book income for the current fiscal year.
LACLEDE GAS
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
2016
|
|
2015
|
Operating revenues
|
$
|
363.6
|
|
|
$
|
317.2
|
|
Natural and propane gas expense
|
191.3
|
|
|
149.8
|
|
Gross receipts tax expense
|
14.1
|
|
|
13.5
|
|
Operating margin (non-GAAP)
|
158.2
|
|
|
153.9
|
|
Depreciation and amortization
|
22.7
|
|
|
21.8
|
|
Other operating expenses
|
71.0
|
|
|
67.0
|
|
Operating income (GAAP)
|
$
|
64.5
|
|
|
$
|
65.1
|
|
Net Income
|
$
|
38.0
|
|
|
$
|
39.4
|
|
Operating revenues for the
three months ended December 31, 2016
increased $46.4 from the same period last year primarily due to $17.6 in higher wholesale gas costs passed on to customers, higher gas usage of $15.3, $10.8 in higher off-system sales and capacity release, and a $3.3 increase in ISRS charges. Operating margin for the
three months ended December 31, 2016
increased $4.3 from the same period last year, largely due to the $3.3 increase in ISRS charges. The revenue increases attributable to the higher gas costs, higher off-system sales and customer usage were mostly offset by corresponding regulatory cost adjustments resulting in only a slightly positive impact on operating margin. Other operating expenses for the
three months ended December 31, 2016
increased $4.0, largely attributable to higher property tax expense, professional fees, and bad debt expense, offset in part by lower integration and employee-related costs. Depreciation and amortization increased $0.9 in the current quarter versus the prior year quarter due to higher capital investments. Interest charges increased $0.4, due primarily to higher interest rates on short term borrowings. Other operating income decreased by $0.7. Resulting net income for the
three months ended December 31, 2016
decreased $1.4 from the same period last year.
Temperatures in Laclede Gas’ service areas during the
three months ended December 31, 2016
were 15% colder than the same period last year, resulting in higher usage on a year-over-year comparative basis. However, temperatures versus normal (the basis of Laclede Gas’ rate design) were 16% higher, which constrained margin growth. The Missouri Utilities’ total system therms sold and transported were 570.2 million for the three months ended December 31, 2016, compared with 494.4 million for the same period last year. Total off-system therms sold and transported were 85.6 million for the three months ended December 31, 2016, compared with 77.6 million for the same period last year.
ALAGASCO
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
2016
|
|
2015
|
Operating revenues
|
$
|
86.7
|
|
|
$
|
82.3
|
|
Natural gas expense
|
16.8
|
|
|
12.1
|
|
Gross receipts tax expense
|
4.2
|
|
|
4.0
|
|
Operating margin (non-GAAP)
|
65.7
|
|
|
66.2
|
|
Depreciation and amortization
|
12.3
|
|
|
11.7
|
|
Other operating expenses
|
33.6
|
|
|
35.6
|
|
Operating income (GAAP)
|
$
|
19.8
|
|
|
$
|
18.9
|
|
Net Income
|
$
|
10.3
|
|
|
$
|
9.9
|
|
Operating revenues for the
three months ended December 31, 2016
increased $4.4 from the same period last year. A $4.1 increase in gas costs passed through to customers, combined with a favorable RSE adjustment of $1.2 were only partly offset by $1.3 weather impact. Operating margin decreased $0.5 due principally to milder weather conditions and the volatility of temperatures during the current year more than offsetting the favorable RSE adjustment. Depreciation and amortization expenses for the
three months ended December 31, 2016
were slightly higher than the same period last year. Other operating expenses were $2.0 lower, primarily due to lower employee-related costs and favorable bad debt experience. Net income during the
three months ended December 31, 2016
increased $0.4 from the same period last year, primarily due to the factors discussed above.
Temperatures in Alagasco’s service area during the
three months ended December 31, 2016
were 14% colder than a year ago, but still 29% above normal. This variability and volatility relative to normal temperatures were the critical factors in Alagasco’s operating margin decrease versus the prior year. Alagasco’s total system therms sold and transported were 221.5 million for the three months ended December 31, 2016, compared with 188.6 million for the same period last year.
For further information on the GSA and RSE mechanisms, please see Note 1, Summary of Significant Accounting Policies, and Note 15, Regulatory Matters, of Alagasco’s Annual Report on Form 10-K for the period ended September 30, 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 November 12, 2015, the MoPSC approved an incremental ISRS amount of $4.4 for Laclede Gas’ eastern Missouri service territory and $1.9 for MGE, effective December 1, 2015. On January 15, 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 September 27, 2016, the Western District affirmed the report and order of the MoPSC. On December 20, 2016, the Missouri Supreme Court declined to hear a further appeal, bringing the matter to a close.
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 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. Laclede Gas believes the MoPSC’s decision was lawful and reasonable, and believes the updating process will again be upheld by the Western District.
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. The MoPSC suspended the tariff until January 28, 2017, and directed the MoPSC Staff (Staff) to file a recommendation. On November 29, 2016, Staff recommended $3.4 for MGE and $4.5 for Laclede Gas’ eastern Missouri service territory based on updates filed by the company. On December 9, 2016, OPC filed a motion to deny the rate
increases and, alternatively, for a hearing on five issues, three of which were withdrawn before the scheduled hearing date. On January 3, 2017, the MoPSC held a hearing to decide the two remaining issues. On January 18, 2017, the MoPSC 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 $13.5 for MGE’s service territory. Rates were effective January 28, 2017.
Laclede Gas previously had 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 $518.0. This authority was scheduled to expire June 30, 2015. On April 15, 2015, Laclede Gas applied to the MoPSC for a new financing authorization in the amount of $550.0, and on June 24, 2015, the MoPSC granted an extension of the current authorization until the pending application was resolved. On February 10, 2016, the MoPSC issued an order, by a 3-2 vote, authorizing Laclede Gas financing authority for $300.0 for financings placed any time before September 30, 2018. Laclede Gas filed an application for rehearing, which was denied on March 9, 2016. On March 31, 2016, Laclede Gas filed an appeal with Missouri’s Western District Court of Appeals concerning this matter. After parties filed their briefs in September and October, oral arguments were heard on November 17, 2016. Laclede Gas has issued no securities under this authorization since the decision and $300.0 remained available for issuance as of January 30, 2017.
On June 16, 2016, the OPC filed a motion to open an investigation of the announced acquisition of EnergySouth and the completed acquisition of Alagasco by Spire, to determine whether or not the proposed or completed transactions are likely to be detrimental to the public interest and the interests of Missouri ratepayers. On June 27, 2016, Spire filed a response opposing OPC’s motion asserting, among other things, that the MoPSC lacked jurisdiction over those transactions. On July 11, 2016, the Staff filed a response asserting that the MoPSC did have jurisdiction and requested that MoPSC open a docket for the investigation of the acquisition of Alagasco and the announced acquisition of EnergySouth by Spire, to determine whether they are, or are likely to be, detrimental to the public interest and the interests of Missouri ratepayers. On July 20, 2016, the MoPSC granted the Staff’s motion and, while making no finding on the MoPSC’s jurisdiction over the transaction, ordered Staff to file a report. On September 1, 2016, the Staff filed its report alleging that Spire was in violation of its holding company stipulation by not seeking MoPSC approval of such transactions. Staff also summarized certain “potential detriments” to ratepayers and noted that it will pursue a complaint for the violation in the holding company case. On September 6, 2016, Spire filed a response to the investigation report noting that the Staff’s summary was incorrect and directly conflicted with the views in the Staff report expressed by its own experts that failed to identify any detriments associated with the transactions. On September 7, 2016, the MoPSC closed the file without sanctioning a complaint or making a determination on jurisdiction. No further formal actions have taken place at this time.
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.
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). The amount passed back for the first quarter of fiscal 2017 was $0.7, leaving $18.0 as of December 31, 2016, of which approximately $8.6 will be reflected in rates effective January through March 2017.
Spire
In addition to the matters described above, the following regulatory matter affects 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. Thereafter, 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.
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 three months ended December 31, 2016.
For discussion of other significant accounting policies, see
Note 1
of the Notes to Financial Statements included in this Form 10-Q as well as Note 1 of the Notes to Financial Statements included in the Company’s, Laclede Gas’, and Alagasco’s Annual Reports on Form 10-K for the fiscal year ended September 30, 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 Pronouncement 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 Laclede Gas’ PGA clause and Alagasco’s GSA rider, the seasonality of accounts receivable balances, and the utilization of storage gas inventories cause short-term cash requirements to vary during the year and from year to year, and may cause significant variations in the Company’s cash provided by or used in operating activities.
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31,
|
Cash Flow Summary
|
2016
|
|
2015
|
Net cash provided by operating activities
|
$
|
10.3
|
|
|
$
|
33.5
|
|
Net cash used in investing activities
|
(85.9
|
)
|
|
(62.8
|
)
|
Net cash provided by financing activities
|
81.0
|
|
|
20.1
|
|
For the
three months ended December 31, 2016
, net cash provided by operating activities declined $23.2 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.
For the
three months ended December 31, 2016
, net cash used in investing activities was $23.1 greater than the same period in the prior year. This increase was driven by capital expenditure activity that was $26.9 higher in the first three months of fiscal 2017 compared to the same period of fiscal 2016. 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.
Lastly, for the
three months ended December 31, 2016
, net cash provided by financing activities was $60.9 higher than for the
three months ended December 31, 2015
. This change primarily reflects a $68.6 increase in seasonal short-term borrowings and the addition of EnergySouth activity, partially offset by slightly higher dividend payments and certain other financing activities.
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
three months ended December 31, 2016
.
Bank deposits were used to support working capital needs of the business
.
Short-term Debt
The Utilities’ short-term borrowing requirements typically peak during the colder months, 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
December 31, 2016
, total debt was 59% of total capitalization for the consolidated Company, 51% 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 will 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. No Notes were outstanding under the Program as of December 31, 2016.
Information regarding consolidated short-term borrowings during the
three months ended December 31, 2016
and as of
December 31, 2016
, is presented below:
|
|
|
|
|
|
|
Spire
Bank Line
Borrowings
|
Laclede Gas
Commercial Paper
Borrowings
|
Alagasco
Bank Line
Borrowings
|
Total
Short-Term
Borrowings
|
Three Months Ended December 31, 2016
|
|
|
|
|
Weighted average borrowings outstanding
|
$86.9
|
$300.3
|
$87.8
|
$475.0
|
Weighted average interest rate
|
1.8%
|
0.8%
|
1.6%
|
1.1%
|
Range of borrowings outstanding
|
$73.0 - $99.0
|
$243.7 - $329.7
|
$74.0 - $102.5
|
$398.7 - $527.7
|
As of December 31, 2016
|
|
|
|
|
Borrowings outstanding at end of period
|
$91.0
|
$312.9
|
$102.5
|
$506.4
|
Weighted average interest rate
|
2.0%
|
1.1%
|
1.8%
|
1.4%
|
|
|
|
|
|
Annual decrease in pre-tax earnings and cash flows resulting from a 100-basis-point average rate change on average short-term borrowings*
|
$0.9
|
$3.0
|
$0.9
|
$4.8
|
*Portions may be offset through the Utilities application of PGA and GSA carrying costs
Long-term Debt and Equity
Spire
At
December 31, 2016
, including the current portion but excluding unamortized discounts, debt issuance costs, and net hedging gains, Spire had fixed-rate long-term debt totaling $1,835.8 and floating rate debt totaling $250.0, of which $810.0 was issued by Laclede Gas and $250.0 was issued by Alagasco. With the exception of the $250.0 floating rate senior notes issued by Spire in August 2014, the long-term debt issues are fixed-rate and are subject to changes in their fair value as market interest rates change. However, increases or decreases in fair value would impact earnings and cash flows only if the Company were to reacquire any of these issues in the open market prior to maturity. Under GAAP applicable to the Utilities’ regulated operations, losses or gains on early redemptions of long-term debt 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, $937.0 has make-whole call options, $725.0 are callable at par one to six months prior to maturity and $255.0 are callable at par currently. The remainder of the Company’s long-term debt is $143.8 of junior subordinated notes associated with the equity units. None of the debt has any put options.
Spire entered into a master note purchase agreement on June 20, 2016 with certain institutional purchasers pursuant to which Spire committed to issue a total of $165.0 unsecured notes in the private placement market. These notes were issued in September 2016 and funded a portion of the purchase price for the EnergySouth acquisition. Tranche A of the notes for $35.0 will mature on September 1, 2021, and bears interest of 2.52%; Tranche B for $130.0 will mature September 1, 2026 and bears interest of 3.13%.
Spire has a shelf registration statement on Form S-3 on file with the SEC for the issuance and sale of up to 168,698 shares of its common stock under its Dividend Reinvestment and Direct Stock Purchase Plan. There were 100,925 and 95,914 shares at
December 31, 2016
and January 30, 2017, respectively, remaining available for issuance under its Form S-3. Spire also has a shelf registration statement on Form S-3 on file with the SEC for the issuance of equity and debt securities, which expires 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
December 31, 2016
consisted of 49.7% of Spire common stock equity and 50.3% 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’ $810.0 in long-term debt, $25.0 has no call option, $435.0 has make-whole call options, and $350.0 are callable at par one to six months prior to maturity.
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,
but is under appeal by Laclede Gas, as discussed under Regulatory and Other Matters above. Laclede Gas issued no securities under this authorization as of January 30, 2017, and $300.0 remains available.
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
December 31, 2016
consisted of 57.6% of common stock equity and 42.4% 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 $250.0 long-term debt issues have make-whole call options.
Alagasco has no standing authority to issue long-term debt and must petition the APSC for planned issuances. On February 3, 2015, Alagasco received authorization and approval from the APSC to borrow $80.0 for the purpose of refinancing $80.0 of existing debt scheduled to mature on December 1, 2015. Pursuant to this authorization and an earlier authorization for a $35.0 debt issuance, Alagasco entered into a master note purchase agreement on June 5, 2015 with certain institutional purchasers pursuant to which Alagasco committed to issue $115.0 unsecured notes in the private placement market: $35.0 at a rate of 3.21% for 10 years issued on September 15, 2015, and $80.0 at a rate of 4.31% for 30 years settling December 1, 2015. Alagasco used the net proceeds of the private placements to refinance existing indebtedness and for general corporate purposes.
Alagasco’s capitalization at
December 31, 2016
consisted of 77.9% of common stock equity and 22.1% of long-term debt compared to 77.8% of common stock equity and 22.2% of long-term debt at September 30, 2016.
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 of long-term debt, scheduled maturities of long-term debt, short-term seasonal needs, and dividends.
CONTRACTUAL OBLIGATIONS
During the three months ended December 31, 2016, there were no material changes outside the ordinary course of business to the estimated contractual obligations from the disclosure provided in the Company’s Form 10-K for the period ended September 30, 2016.
MARKET RISK
There were no material changes in the Company’s commodity price risk or counterparty credit risk as of
December 31, 2016
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 against additional debt expected to be issued in 2017 or early 2018. An $11.2 mark-to-market gain on these swaps was recognized for the three months ended December 31, 2016. 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, regulations, and interpretations. While environmental issues resulting from such operations arise in the ordinary course of business, such issues have not materially affected the Company’s, Laclede Gas’, or Alagasco’s financial position and results of operations. As environmental laws, regulations, and their interpretations change, however, 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
December 31, 2016
, 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.