SPIRE INC. (Dollars in millions, except per share and per unit amounts)
INTRODUCTION
This section analyzes the financial condition and results of operations ofSpire Inc. (the "Company"),Spire Missouri Inc. , andSpire Alabama Inc. SpireMissouri , Spire Alabama andSpire EnergySouth are wholly owned subsidiaries of the Company. SpireMissouri , Spire Alabama and the subsidiaries ofSpire EnergySouth are collectively referred to as the "Utilities." The subsidiaries ofSpire EnergySouth are Spire Gulf and 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. Unless otherwise indicated, references to years herein are references to the fiscal years endingSeptember 30 for the Company and its subsidiaries. Reference is made to "Item 1A. Risk Factors" and "Forward-Looking Statements," which describe important factors that could cause actual results to differ from expectations and non-historical information contained herein. In addition, the following discussion should be read in conjunction with the audited financial statements and accompanying notes thereto of Spire, Spire Missouri and SpireAlabama included in "Item 8. Financial Statements and Supplementary Data."
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. Due to the seasonal nature of the Utilities' business and the Spire Missouri rate design, earnings of Spire and each of the Utilities are typically concentrated during the heating season of November through April each fiscal year.
Gas Utility - Spire Missouri
SpireMissouri isMissouri's largest natural gas distribution utility and is regulated by the MoPSC. SpireMissouri servesSt. Louis ,Kansas City , and other areas throughout the state. SpireMissouri purchases natural gas in the wholesale market from producers and marketers and ships the gas through interstate pipelines into its own distribution facilities for sale to residential, commercial and industrial customers. SpireMissouri also transports gas through its distribution system for certain larger customers who buy their own gas on the wholesale market. SpireMissouri delivers natural gas to 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.
Gas Utility - Spire Alabama
SpireAlabama is the largest natural gas distribution utility in the state ofAlabama and is regulated by the APSC. SpireAlabama's service territory is located in central and northernAlabama . Among the cities served by SpireAlabama areBirmingham , the center of the largest metropolitan area in the state, andMontgomery , the state capital. SpireAlabama 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. SpireAlabama also transports gas through its distribution system for certain large commercial and industrial customers for a transportation fee. EffectiveDecember 1, 2020 , for most of these transportation service customers, Spire Alabama will also purchase gas on the wholesale market for sale to the customer upon delivery to the SpireAlabama distribution system. All Spire Alabama services are provided to customers at rates and in accordance with tariffs authorized by the APSC. 28 --------------------------------------------------------------------------------
Gas Utility -
Spire Gulf and Spire Mississippi are utilities engaged in the purchase, retail distribution and sale of natural gas to approximately 100,000 customers in southernAlabama and south-centralMississippi . Spire Gulf is regulated by the APSC, and Spire Mississippi is regulated by the MSPSC.
Gas Marketing
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 central and southernU.S. It holds firm transportation and storage contracts in order to effectively manage its transactions with counterparties, which primarily include producers, municipalities, electric and gas utility companies, and large commercial and industrial customers. Other
Other components of the Company's consolidated information include:
• unallocated corporate items, including certain debt and associated interest
costs;
• Spire STL Pipeline, a subsidiary of Spire which has constructed and, as of
gas into eastern
• Spire Storage, a subsidiary of Spire providing physical natural gas storage
services; and
• Spire's subsidiaries engaged in the operation of a propane pipeline, the
compression of natural gas, and risk management, among other activities.
Business Evaluation Factors Based on the nature of the business of the Company and its subsidiaries, as well as current economic conditions, management focuses on several key variables in evaluating the financial condition and results of operations and managing the business.
For the Gas Utility segment, these include:
• the Utilities' ability to recover from their customers the costs of
purchasing and distributing natural gas;
• the impact of weather and other factors, such as customer conservation, on
revenues and expenses;
• changes in the regulatory environment at the federal, state, and local
levels, as well as decisions by regulators, that impact the Utilities'
ability to earn the authorized rate of return in each of the service
territories they serve;
• the Utilities' ability to access credit markets and maintain working capital
sufficient to meet operating requirements;
• the effect of natural gas price volatility on the business; and
• the ability to manage costs, integrate and standardize operations, and
upgrade infrastructure.
In the Gas Marketing segment, these include:
• the risks of competition; • fluctuations in natural gas prices; • the changing flow and availability of natural gas; • new national infrastructure projects;
• the ability to procure firm transportation and storage services at reasonable
rates;
• credit and/or capital market access;
• counterparty risks; and
• the effect of natural gas price volatility on the business.
Further information regarding how management seeks to manage these key variables is discussed below.
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--------------------------------------------------------------------------------Gas Utility
The Utilities seek to provide reliable natural gas services at a reasonable cost, while maintaining and building secure and dependable infrastructures. The Utilities' strategies focus on improving both performance and the ability to recover their authorized distribution costs and rates of return. The Utilities' distribution costs are the essential, primarily fixed, expenditures they must incur to operate and maintain more than 60,900 miles of mains and services comprising their natural gas distribution systems and related storage facilities. The Utilities' distribution costs include wages and employee benefit costs, depreciation and maintenance expenses, and other regulated utility operating expenses, excluding natural and propane gas expense. Distribution costs are considered in the rate-making process, and recovery of these types of costs is included in revenues generated through the Utilities' tariff rates. SpireMissouri's tariff rates are approved by the MoPSC, whereas Spire Alabama's tariff rates are approved by the APSC. Spire Gulf and Spire Mississippi have tariff rates that are approved by the APSC and MSPSC, respectively. SpireMissouri and Spire Alabama also have off-system sales and capacity release income streams that are regulated by tariff but remain subject to fluctuations in market conditions. Some of the factors impacting the level of off-system sales include the availability and cost of Spire's natural gas supply, the weather in its service areas and the weather in other markets. When Spire's service areas experience warmer-than-normal weather while other markets experience colder weather or supply constraints, some of Spire's natural gas supply is available for sale to third parties not on Spire's system. The Utilities work actively to reduce the impact of wholesale natural gas price volatility on their costs by strategically structuring their natural gas supply portfolios to increase their gas supply availability and pricing alternatives. They may also use derivative instruments to hedge against significant changes in the commodity price of natural gas. Nevertheless, the overall cost of purchased gas remains subject to fluctuations in market conditions.The Purchased Gas Adjustment (PGA) clause of Spire Missouri, Spire Gulf and Spire Mississippi and the Gas Supply Adjustment (GSA) rider of Spire Alabama allow the Utilities to flow through to customers, subject to prudence review by the public service commissions, the cost of purchased gas supplies, including costs, cost reductions and related carrying costs associated with the use of derivative instruments to mitigate volatility in the cost of natural gas. As ofSeptember 30, 2020 , Spire Missouri had active derivative positions, but Spire Alabama has had no gas supply derivative instrument activity since 2010. The Utilities believe they will continue to be able to obtain sufficient gas supply. The price of natural gas supplies and other economic conditions may affect sales volumes, due to the conservation efforts of customers, and cash flows associated with the timing of collection of gas costs and related accounts receivable from customers. The Utilities rely on short-term credit and long-term capital markets, as well as cash flows from operations, to satisfy their seasonal cash requirements and fund their capital expenditures. The Utilities access the commercial paper market through a program administered by the holding company, which then loans borrowed funds to the Utilities. The Utilities directly access the long-term bond market. Access to debt markets is dependent on current conditions in the credit and capital markets. Management focuses on maintaining a strong balance sheet and believes the Utilities currently have adequate access to credit and capital markets and will have sufficient capital resources to meet their foreseeable obligations. See the "Capital Resources" section for additional information.
Gas Marketing
Spire Marketing is engaged in the marketing of natural gas and providing energy
services to both on-system utility transportation customers and customers
outside of the Utilities' traditional service areas. Spire Marketing utilizes
its natural gas supply agreements, transportation agreements, park and loan
agreements, storage agreements and other executory contracts to support a
variety of services to its customers at competitive prices. It closely monitors
and manages the natural gas commodity price and volatility risks associated with
providing such services to its customers through the use of a variety of risk
management activities, including the use of exchange-traded/cleared derivative
instruments and other contractual arrangements. Spire Marketing is committed to
managing commodity price risk while it seeks to expand the services that it now
provides. Nevertheless, income from the Gas Marketing operations is subject to
more fluctuations in market conditions than the Utilities' operations.
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The Gas Marketing business is directly impacted by the effects of competition in
the marketplace, the impacts of new infrastructure, surplus natural gas
supplies, and the addition of new demand from exports, power generation and
industrial load. Spire Marketing's management expects a growing need for
marketing services across the country as customers manage seasonal variability
and marketplace volatility.
In addition to its operating cash flows, Spire Marketing relies on Spire's
parental guaranties to secure its purchase and sales obligations of natural gas,
and it also has access to Spire's liquidity resources. A large portion of Spire
Marketing's receivables are from customers in the energy industry. It also
enters into netting arrangements with many of its energy counterparties to
reduce overall credit and collateral exposure. On a net dollar exposure basis,
the majority of Spire Marketing's customers are utilities or utility affiliates.
Although Spire Marketing's uncollectible amounts are closely monitored and have
not been significant, increases in uncollectible amounts from customers are
possible and could adversely affect Spire Marketing's liquidity and results of
operations.
Spire Marketing carefully monitors the creditworthiness of counterparties to its
transactions. It performs in-house credit reviews of potential customers and may
require credit assurances such as prepayments, letters of credit or parental
guaranties when appropriate. Credit limits for customers are established and
monitored.
As a result of infrastructure optimization activities and an abundance of
natural gas supply, Spire Marketing cannot be certain that all of its wholesale
purchase and sale transactions will settle physically. As such, certain
transactions are designated as trading activities for financial reporting
purposes, due to their settlement characteristics. Results of operations from
trading activities are reported on a net basis in Spire Marketing operating
revenues (or expenses, if negative), which may cause volatility in the Company's
operating revenues, but have no effect on operating income or net income.
In the course of its business, Spire Marketing enters into commitments
associated with the purchase or sale of natural gas. In accordance with U.S.
GAAP, some of its purchase and sale transactions are not recognized in earnings
until the natural gas is physically delivered, while other energy-related
transactions, including those designated as trading activities, are required to
be accounted for as derivatives with the changes in their fair value
(representing unrealized gains or losses) recorded in earnings in periods prior
to settlement. Because related transactions of a purchase and sale strategy may
be accounted for differently, there may be timing differences in the recognition
of earnings under GAAP and economic earnings realized upon settlement. The
Company reports both GAAP and net economic earnings (non-GAAP), as discussed in
the section "Non-GAAP Measures".
COVID-19
The outbreak of the novel coronavirus (COVID-19) has adversely impacted economic activity and conditions worldwide. We are continuing to assess the developments involving our workforce, customers and suppliers, as well as the response of federal and state authorities, our regulators and other business and community leaders. The Company has implemented what we believe to be appropriate procedures and protocols to ensure the safety of our customers, suppliers and employees. These actions include activating incident management procedures, work-from-home for our office-based employees, limiting direct contact with our customers, and, through June, suspending disconnections and late payment fees for our utility customers.
We have experienced impacts on our results of operations from COVID-19. Based
upon our analysis, the effects through
• lost late payment fees of
through mid-June;
• minor net margin impact from lower commercial and industrial volumes offset
by additional residential fixed charges;
• bad debt expense increases of $4.8 due to the aging of our accounts
receivable balances; and
• net other direct cost reductions totaling less than
travel, meals and entertainment and training offset by increased costs for
enhanced cleaning and personal protective equipment for our facilities and
field personnel compared to normal and expected levels.
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-------------------------------------------------------------------------------- SpireMissouri received an Accounting Authority Order from the MoPSC to defer certain costs and has recorded a related regulatory asset of$3.8 as ofSeptember 30, 2020 . Even with the cost increases and lost revenues, SpireAlabama exceeded the allowed return and recorded a Rate Stabilization and Equalization giveback inSeptember 2020 , so there was no bottom-line impact of these COVID-19 effects. An extended slowdown ofthe United States' economy, changes in commodity costs and/or significant changes in policy and regulation could result in lower demand for natural gas as well as negatively impact the ability of our customers, contractors, suppliers and other business partners to remain in business or return to operating health. These could have a material adverse effect on our results of operations, financial condition, liquidity and prospects. The Company is participating in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provisions allowing for a payroll tax deferral which will not have an impact on our results of operations but will defer the payment of the Company's portion of certain payroll taxes until fiscal 2021 and 2022. Although the Company does not currently expect to seek relief under any other CARES Act provisions, we will continue to monitor all pending and future federal, state and local efforts related to the COVID-19 health crisis and assess our need and, as applicable, eligibility for any such relief.
NON-GAAP MEASURES
Net income, earnings per share and operating income reported by Spire, SpireMissouri and Spire Alabama are determined in accordance with GAAP. Spire, SpireMissouri and Spire Alabama 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 impairments and other non-recurring or unusual items such as certain regulatory, legislative or GAAP standard-setting actions. In fiscal 2018, these other items included 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 Spire Missouri's rate proceedings. In fiscal 2019, other items included a provision for refunds to customers of amounts previously collected under MoPSC approved orders as a result of theNovember 2019 ISRS rulings against Spire Missouri. In fiscal 2020, adjustments for ISRS revenues reflect the regulatory settlement reached in the third quarter, such that the related GAAP provision for customer credit for fiscal 2020 is reflected in net economic earnings. 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. 32 -------------------------------------------------------------------------------- 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:
• 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:
1) changes in the fair values of physical and/or financial derivatives prior
to the period of settlement; and
2) ineffective portions of accounting hedges, required to be recorded inearnings 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;
• Lower of cost or market adjustments to the carrying value of commodity
inventories resulting when the net realizable value of the commodity falls
below its original cost, to the extent that those commodities are
economically hedged; and
• 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 all of its 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 PGA clauses or GSA riders. 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.
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--------------------------------------------------------------------------------EARNINGS
This section contains discussion and analysis of the results for the year endedSeptember 30, 2020 compared to the results for the year endedSeptember 30, 2019 and discussion and analysis of the results for the year endedSeptember 30, 2019 compared to the results for the year endedSeptember 30, 2018 .
Spire
Net Income (Loss) and Net Economic Earnings (Loss)
The following tables reconcile the Company's net economic earnings to the most comparable GAAP number, net income.
Per
Gas Gas Consol- Diluted
Utility Marketing Other idated Share**
Year Ended September 30, 2020
Net Income (Loss) [GAAP] $ 213.6 $ 7.0 $ (132.0 ) $ 88.6 $ 1.44
Adjustments, pre-tax:
Impairments - - 148.6 148.6 2.89
Fair value and timing adjustments (0.3 ) 2.8 - 2.5 0.05
Income tax effect of adjustments* 0.1 (0.7 ) (31.3 ) (31.9 ) (0.62 )
Net Economic Earnings (Loss)
[Non-GAAP] $ 213.4 $ 9.1 $
(14.7 )
Year EndedSeptember 30, 2019 Net Income (Loss) [GAAP]$ 190.5 $ 18.5 $ (24.4 ) $ 184.6 $ 3.52 Adjustments, pre-tax: Provision for ISRS rulings 12.2 - - 12.2 0.23 Fair value and timing adjustments - 1.2 - 1.2 0.03 Acquisition, divestiture and restructuring activities - - 0.4 0.4 0.01 Income tax effect of adjustments* (2.9 ) (0.3 ) (0.1 ) (3.3 ) (0.06 ) Net Economic Earnings (Loss) [Non-GAAP]$ 199.8 $ 19.4 $
(24.1 )
Year EndedSeptember 30, 2018 Net Income [GAAP]$ 144.4 $ 24.9 $ 44.9 $ 214.2 $ 4.33 Adjustments, pre-tax: Missouri regulatory adjustments 30.6 - - 30.6$ 0.62 Fair value and timing adjustments - (4.3 ) - (4.3 ) (0.09 ) Acquisition, divestiture and restructuring activities 0.2 - 13.4 13.6 0.28 Income tax effect of adjustments* (9.1 ) 1.2 (2.4 ) (10.3 ) (0.21 ) Effect of the Tax Cuts and Jobs Act 17.0 1.1 (78.2 ) (60.1 ) (1.21 ) Net Economic Earnings (Loss) [Non-GAAP]$ 183.1 $ 22.9 $ (22.3 ) $ 183.7 $ 3.72
* Income tax effect is calculated by applying federal, state and local income
tax rates applicable to ordinary income to the amounts of the pre-tax
reconciling items and then adding any estimated effects of enacted state or
local income tax laws for periods before the related effective date.
** 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, which includes reductions for cumulative preferred
dividends and participating shares.
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2020 vs. 2019 Consolidated Spire's net income was$88.6 in fiscal 2020, compared with$184.6 in fiscal 2019. Basic and diluted earnings per share were$1.44 for fiscal 2020 compared with basic and diluted earnings per share of$3.53 and$3.52 , respectively, for fiscal 2019. The decrease in net income of$96.0 reflects a$148.6 pre-tax ($117.3 after-tax) reduction in the current year due to impairment charges recorded in the third quarter of this year. The impairment charges are further described under "Impairment of Long-lived Assets" in Note 1 , Summary of Significant Accounting Policies. These impairment charges were only partly offset by the$12.2 pre-tax ($9.3 after-tax) reduction in the prior year results due to ISRS rulings against Spire Missouri. Excluding these amounts, net income growth was$12.0 , driven by higher operating results of the Gas Utility segment primarily attributable to Spire Missouri's higher ISRS charges, and RSE adjustment impacts at Spire Alabama.
The Gas Marketing segment's net income for fiscal 2020 was
Net economic earnings were$207.8 ($3.76 per diluted share) for the twelve months endedSeptember 30, 2020 , up from$195.1 ($3.73 per diluted share) for the same period last year. Earnings reflect a$13.6 increase for Gas Utility, and by a$9.4 lower net economic loss in Other, partly offset by a$10.3 net economic earnings decrease experienced by Gas Marketing. These fluctuations are described in more detail below. Earnings per share and net economic earnings per share reflect the impact of preferred and common stock issued over the last twelve months.
Gas Utility
Gas Utility net income increased by$23.1 , while net economic earnings increased$13.6 in fiscal 2020 compared to fiscal 2019. Both measures benefited from a$20.2 increase in run rate ISRS revenues in the current year, combined with a$1.1 pre-tax increase in all other factors, including modest customer growth. These positive drivers of income growth were only partly offset by a$5.4 contribution margin reduction in the current year relating to lower volumes, and a COVID-19-related$2.3 reduction in late payment charges. Net income was also impacted by the$10.0 year-over-year favorable impact relating to the provision for and settlement of the ISRS Rulings that occurred in late fiscal 2019 and were resolved in fiscal 2020.
Gas Marketing
The Gas Marketing segment reported net income totaling$7.0 for the twelve months endedSeptember 30, 2020 , versus net income of$18.5 during the same period last year. Net economic earnings for the twelve months endedSeptember 30, 2020 , was$9.1 , a decrease of$10.3 from the same period last year. Both net income and net economic earnings reflect the costs incurred in 2020 for incremental storage capacity (whose value will not be realized until 2021), as well as less favorable market conditions.
Other
The Company's other non-utility activities generated a net loss of$132.0 for fiscal 2020, compared to a net loss of$24.4 for the same period last year. Fiscal 2020 reflects the$117.3 after-tax impairment charge previously mentioned. Net economic loss was$14.7 for fiscal 2020, a decrease of$9.4 compared to fiscal 2019. The improvement was driven by a smaller loss from Spire Storage and an increase in earnings from Spire STL Pipeline. 35 --------------------------------------------------------------------------------
Operating Revenues and Operating Expenses
Reconciliations of contribution margin to the most directly comparable GAAP
measure are shown below.
Gas Gas
Utility Marketing Other Eliminations Consolidated
Year Ended September 30, 2020
Operating Income (Loss) $ 334.3 $ 9.3 $ (137.2 ) $ - $ 206.4
Operation and maintenance expenses 421.3 11.8 38.2 (12.7 ) 458.6
Depreciation and amortization 189.7 0.6 7.0 - 197.3
Taxes, other than income taxes 146.5 1.1 0.8 - 148.4
Impairment loss - - 148.6 - 148.6
Less: Gross receipts tax expense (91.1 ) (0.4 ) -
- (91.5 )
Contribution Margin [Non-GAAP] 1,000.7 22.4 57.4 (12.7 ) 1,067.8
Natural gas costs 660.2 65.1 0.4 (29.6 ) 696.1
Gross receipts tax expense 91.1 0.4 - - 91.5
Operating Revenues $ 1,752.0 $ 87.9 $ 57.8 $ (42.3 ) $ 1,855.4
Gas Gas
Utility Marketing Other Eliminations Consolidated
Year Ended September 30, 2019
Operating Income (Loss) $ 293.4 $ 23.2 $ (14.3 ) $ - $ 302.3
Operation and maintenance expenses 441.7 11.7 31.6 (10.9 ) 474.1
Depreciation and amortization 179.4 0.1 2.2 - 181.7
Taxes, other than income taxes 151.7 0.8 1.5 - 154.0
Less: Gross receipts tax expense (99.1 ) (0.2 ) -
- (99.3 )
Contribution Margin [Non-GAAP] 967.1 35.6 21.0 (10.9 ) 1,012.8
Natural gas costs 794.6 47.9 0.5 (2.7 ) 840.3
Gross receipts tax expense 99.1 0.2 - - 99.3
Operating Revenues $ 1,860.8 $ 83.7 $ 21.5 $ (13.6 ) $ 1,952.4
Gas Gas
Utility Marketing Other Eliminations Consolidated
Year Ended September 30, 2018
Operating Income (Loss) $ 276.6 $ 33.8 $ (16.3 ) $ - $ 294.1
Operation and maintenance expenses 449.7 7.4 30.3 (10.1 ) 477.3
Depreciation and amortization 167.0 - 1.4 - 168.4
Taxes, other than income taxes 152.5 0.2 0.8 - 153.5
Less: Gross receipts tax expense (98.3 ) (0.1 ) -
- (98.4 )
Contribution Margin [Non-GAAP] 947.5 41.3 16.2 (10.1 ) 994.9
Natural gas costs 842.6 30.2 0.3 (1.4 ) 871.7
Gross receipts tax expense 98.3 0.1 - - 98.4
Operating Revenues $ 1,888.4 $ 71.6 $ 16.5 $ (11.5 ) $ 1,965.0
Consolidated
Spire's operating revenues for the twelve months ended September 30, 2020 were
$97.0 lower than the same period in the prior year. Operating revenues decreased
by $108.8 at the Gas Utility segment and were $4.2 and $36.3 higher in the Gas
Marketing segment and Other, respectively. Intercompany eliminations increased
$28.7 year-over-year, principally related to STL Pipeline. The Gas Utility
decrease was due principally to lower gas cost recoveries, weather/volumetric
impacts (net of weather mitigation), lower gross-receipts tax, and lower
off-system sales that were only partly offset by higher ISRS, and Spire Alabama
RSE adjustment impacts. The Gas Marketing increase was primarily due to higher
volumes that offset the impact of slightly lower pricing. The increase in
intercompany eliminations was driven by the STL Pipeline transportation services
to Spire Missouri.
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-------------------------------------------------------------------------------- Spire's contribution margin increased$55.0 compared with the same twelve-month period last year. The growth in contribution margin was primarily attributable to the Gas Utility segment, up$33.6 , with Spire Missouri up$23.4 and SpireAlabama up$6.5 , with remaining growth from the utilities ofSpire EnergySouth . Gas Marketing's contribution margin was down$13.2 , reflecting the costs of incremental storage and transportation capacity that will benefit the upcoming winter heating season. Depreciation and amortization expenses were higher in the Gas Utility segment, driven principally by continued infrastructure investment in both Spire Missouri and Spire Alabama. Gas Utility operation and maintenance ("O&M") expenses were lower in the current year driven primarily by lower bad debt expense, operations and employee-related costs. These fluctuations are described in more detail below.
Gas Utility
Operating Revenues - Gas Utility operating revenues for fiscal 2020 decreased
Spire
(35.8 )
Spire Missouri and Spire Alabama - Gross Receipt Taxes (7.8 )
Spire Missouri - Off-system sales and capacity release (7.1 )
Spire Missouri - Higher ISRS 20.2
Spire
4.9 All other factors 3.6 Total Variation$ (108.8 ) As shown in the table above, the decrease in revenues was driven primarily by a$96.8 reduction in gas cost recoveries,$35.8 attributable to volumetric usage, lower gross receipt taxes of$7.8 , and a$7.1 impact due to lower Spire Missouri off-system sales. These impacts were only partly offset by an increase of$30.2 in ISRS ($20.2 of the increase relating to run rate, with the remaining$10.0 increase attributable to the favorable year-over-year impact of the ISRS Rulings provision and subsequent settlement), a$4.9 increase relating to SpireAlabama's RSE adjustments, and$3.6 attributable to all other factors.
Contribution Margin - Gas Utility contribution margin was
SpireMissouri - Higher ISRS$ 20.2
Spire
3.8
Spire Missouri and Spire Alabama - Volumetric usage (5.4 )
Spire Missouri - Late Payments (2.3 )
All other factors 7.3
Total Variation $ 33.6
The increase was primarily attributable to the $30.2 increase in Spire Missouri
ISRS ($20.2 of the increase relating to run rate, with the remaining $10.0
increase attributable to the favorable year-over-year impact of the ISRS Rulings
provision and subsequent settlement). Contribution margin also benefited from a
$3.8 increase relating to Spire Alabama's RSE net adjustments, and $7.3
attributable to multiple smaller factors, including modest customer growth.
These positive impacts were only partly offset by a $5.4 volumetric/weather
reduction (net of weather mitigation) and a $2.3 COVID-19-related reduction in
late payment fee revenue in Spire Missouri.
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Operating Expenses - O&M expenses in fiscal 2020 decreased by $20.4 million
compared to the prior-year period. Current year expenses reflect a $9.1 million
year-over-year reclassification of certain postretirement benefit costs to other
income and expense (no impact on net income). Excluding this adjustment, O&M
expenses decreased by $11.3 million due to lower bad debt expense, operations
and employee-related costs. Depreciation and amortization expenses for the
twelve months ended September 30, 2020 increased $10.3 from the same period last
year, principally the result of continued infrastructure capital spending, with
$6.5 of the increase attributable to Spire Missouri and $3.1 attributable to
Spire Alabama.
Gas Marketing
Operating Revenues - Gas Marketing operating revenue for the year ended
September 30, 2020 increased $4.2 from the prior year. The variance in revenues
reflects higher total volumes, partly offset by the impact of marginally lower
general pricing levels and slightly unfavorable derivative mark-to-market
activity.
Contribution Margin - Gas Marketing contribution margin was $22.4 for fiscal
2020, a $13.2 decrease compared to the same period last year. Excluding the net
impact of fair value adjustments in both periods totaling $1.6 , the net
year-over-year decline was $11.6 . This reflects the costs associated with
storage positions entered into in the second half of 2020 whose value will not
be realized until the upcoming winter heating season in fiscal 2021, as well as
less favorable market conditions.
Other
Other operating revenue increased$36.3 for the year endedSeptember 30, 2020 compared to 2019, driven principally by STL Pipeline that was placed in service in November of 2019. Other operating expenses were$6.6 higher than the prior year reflecting STL Pipeline, combined with higher activity levels at Spire Storage.
Interest Charges
Consolidated interest charges during the year endedSeptember 30, 2020 increased$1.1 versus the prior year. The increase was primarily driven by net long-term debt issuances in the current year and the prior year benefiting from Allowance for Funds Used in Construction (AFUDC) non-cash income at STL Pipeline. The current year also benefited from lower interest rates and stable levels of average short-term borrowings. Short-term rates averaged 1.7% in the current year versus 2.7% for the prior year and, for the years endedSeptember 30, 2020 and 2019, average short-term borrowings were$576.2 and$574.5 , respectively.
Income Taxes
Consolidated income tax expense during the year endedSeptember 30, 2020 was$12.4 , compared to$34.5 for fiscal 2019. This decrease of$22.1 is primarily the result of the$31.3 tax benefit relating to the impairment loss recorded in the third quarter of fiscal 2020. This benefit was only partly offset by the effects of higher pre-tax book income (excluding the restructuring charge) in the current year. 38
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SpireMissouri Summary Operating Results Year ended September 30, 2020 2019 Operating Income$ 205.6 $ 174.8 Operation and maintenance expenses 251.0 268.1 Depreciation and amortization 118.0 111.5 Taxes, other than income taxes 103.2 107.6 Less: Gross receipts tax expense (63.5 ) (71.1 ) Contribution Margin [Non-GAAP] 614.3 590.9 Natural gas costs 515.8 629.8 Gross receipts tax expense 63.5 71.1 Operating Revenues$ 1,193.6 $ 1,291.8 Net Income$ 130.2 $ 115.0 Operating revenues during the year endedSeptember 30, 2020 decreased$98.2 from the same period last year. The decrease in revenues was driven primarily by a$92.6 reduction in gas cost recoveries,$22.0 attributable to lower volumetric usage, lower gross receipt taxes of$7.4 , and a$7.1 impact due to lower off-system sales. These impacts were only partly offset by an increase of$30.2 in ISRS ($20.2 of the increase relating to run rate, with the remaining$10.0 increase attributable to the favorable year-over-year impact of the ISRS Rulings provision and subsequent settlement), and$2.9 attributable to customer growth primarily due to a lower level of disconnections related to COVID-19. Contribution margin for the year endedSeptember 30, 2020 increased$23.4 from the prior year. The increase was primarily attributable to the$32.2 increase in Spire Missouri ISRS, as previously identified above. These positive impacts were only partly offset by a$7.4 volumetric/weather reduction (net of weather mitigation) and a$2.3 COVID-19-related reduction in late payment fee revenue in Spire Missouri. O&M expenses for the year endedSeptember 30, 2020 were$17.1 lower than the prior year. Removing the$8.6 net year-over-year impact due to the transfer of mix of service and non-service postretirement benefits costs to other income and expense, O&M decreased$8.5 due to lower operations and employee-related costs. Depreciation and amortization increased$6.5 , reflecting continued infrastructure investments throughoutMissouri . Income taxes were$4.0 higher for the year endedSeptember 30, 2020 versus the prior year. This increase is primarily the result of higher pre-tax book income, partly offset by a favorable return to provision in the current year. Temperatures experienced in Spire Missouri's service area during fiscal 2020 were 9% warmer than the prior year and 2% warmer than normal. Total system therms sold and transported were 1,684.0 million for fiscal 2020 compared with 1,805.7 million for fiscal 2019, a decrease of 7%. Total off-system therms sold and transported outside of Spire Missouri's service area decreased 21% to 30.6 million for fiscal 2020 compared with 38.5 million for fiscal 2019. 39 --------------------------------------------------------------------------------
SpireAlabama Summary Operating Results Year ended September 30, 2020 2019 Operating Income$ 102.9 $ 95.5 Operation and maintenance expenses 139.1 142.6 Depreciation and amortization 59.3 56.2 Taxes, other than income taxes 34.8 35.7 Less: Gross receipts tax expense (23.3 ) (23.7 ) Contribution Margin [Non-GAAP] 312.8 306.3 Natural gas costs 118.9 135.5 Gross receipts tax expense 23.3 23.7 Operating Revenues$ 455.0 $ 465.5 Net Income$ 65.7 $ 60.3 Operating revenues for the year endedSeptember 30, 2020 decreased$10.5 versus the comparable period endedSeptember 30, 2019 . Of the decrease,$13.8 was the result of weather and usage impacts, and$4.2 related to lower gas cost recoveries. Partly offsetting these negative impacts was a$4.9 increase relating to the impacts of RSE adjustments, and$2.5 relating to off-system sales that commenced in fiscal 2020. Contribution margin increased$6.5 versus the prior year, primarily the result of RSE adjustments of approximately$3.8 , a$2.0 increase due to weather/volumetric impacts (net of weather mitigation), and$0.8 relating to off-system sales. O&M expenses for the year endedSeptember 30, 2020 decreased$3.5 versus the year endedSeptember 30, 2019 . Removing the$0.8 net year-over-year impact due to the transfer of mix of service and non-service postretirement benefits costs to other income and expense, O&M was down$2.7 from the prior year. The O&M decrease was due to due to lower operations and employee-related costs, and a benefit associated with a bad debt charge in fiscal 2019 that did not repeat and was partially recovered. Depreciation and amortization was$3.1 higher versus the same period last year, the result of continued infrastructure investment throughout Spire Alabama's service territory.
Interest expense decreased
Temperatures in Spire Alabama's service area during the year endedSeptember 30, 2020 were 13% warmer than last year, and approximately 17% warmer than historical norms. SpireAlabama's total therms sold and transported were 1,034.8 million for the year endedSeptember 30, 2020 , compared with 1,083.1 million last year, a 4% decrease. In fiscal 2020 Spire Alabama commenced off-system sales and achieved total sales of 54.3 therms in the current year. 2019 vs. 2018 Consolidated Spire's net income was$184.6 in fiscal 2019, compared with$214.2 in fiscal 2018. Basic and diluted earnings per share were$3.53 and$3.52 , respectively, for fiscal 2019 compared with basic and diluted earnings per share of$4.35 and$4.33 , respectively, for fiscal 2018. The decrease in net income of$29.6 reflects a$12.2 pre-tax ($9.3 after-tax) reduction in the current year due to ISRS rulings against Spire Missouri, and a$60.1 prior year income benefit relating to the implementation of the Tax Cuts and Jobs Act (TCJA), partly offset by$38.4 in pre-tax ($23.6 after-tax) expense forMissouri rate case write-offs recorded in the prior year. Excluding these amounts, net income growth was$16.2 , driven by higher operating results of the Gas Utility segment primarily attributable to Spire Missouri's new rate design, higher ISRS charges, higher volumes, and customer growth. 40 --------------------------------------------------------------------------------
The Gas Marketing segment also experienced strong operating results, as the benefits of geographic expansion have mostly offset the return of more normal market conditions and higher operating expenses.
Net economic earnings were$195.1 ($3.73 per diluted share) for the twelve months endedSeptember 30, 2019 , up from$183.7 ($3.72 per diluted share) for the twelve months endedSeptember 30, 2018 . Earnings reflect a$16.7 increase for Gas Utility, partly offset by a$3.5 net economic earnings decrease experienced by Gas Marketing and by a$1.8 higher net economic loss in Other. These fluctuations are described in more detail below. Earnings per share and net economic earnings per share were further impacted by the issuance of 2.3 million common shares inMay 2018 , and the dividends earned from the$250.0 in preferred shares issued inMay 2019 . Dividends earned on cumulative preferred shares are deducted from net income in the calculation of earnings per share.
Gas Utility
Gas Utility net income increased by$46.1 , while net economic earnings increased$16.7 in fiscal 2019 compared to fiscal 2018. Both measures benefited from the 2018 rate case redesign at Spire Missouri, and from weather patterns that were favorable compared to the prior year. Fiscal 2019 net income was negatively impacted by$9.3 in after-tax impacts relating to ISRS rulings against SpireMissouri . Fiscal 2018 net income was negatively impacted by the$23.6 after-tax expense related toMissouri rate case write-offs and by a$17.0 one-time tax expense related to the implementation of the TCJA.
Gas Marketing
The Gas Marketing segment reported net income totaling$18.5 for fiscal 2019, versus net income of$24.9 during fiscal 2018, with 2018 benefitting from favorable fair value mark-to-market valuations and unusually favorable market conditions. Net economic earnings for the twelve months endedSeptember 30, 2019 , was$19.4 , a decrease of$3.5 from the twelve months endedSeptember 30, 2018 as the benefits of geographic expansion were more than offset by a return of more normal market conditions and higher operating expenses.
Other
The Company's other non-utility activities generated a net loss of$24.4 for fiscal 2019, compared to net income of$44.9 for fiscal 2018. Fiscal 2018 reflects a$78.2 tax benefit resulting from the implementation of the TCJA, partly offset by higher acquisition and restructuring activities. Net economic loss was$24.1 for fiscal 2019, an increase of$1.8 compared to fiscal 2018. The increased loss reflects higher corporate interest costs and a$15.4 loss from Spire Storage, partially offset by increased allowance for funds used during construction (AFUDC) income for Spire STL Pipeline.
Operating Revenues and Operating Expenses
Consolidated
Spire's operating revenues for the twelve months endedSeptember 30, 2019 were$12.6 lower than for the twelve months endingSeptember 30, 2018 . Operating revenues decreased by$27.6 at the Gas Utility segment and were$12.1 higher in the Gas Marketing segment. The Gas Utility decrease was due principally to lower gas cost recoveries, rate case TCJA customer givebacks, impacts at SpireMissouri relating to ISRS rulings, and weather/volumetric impacts (net of volume mitigation) that were only partly offset byMissouri rate design changes, higher ISRS, and favorable Spire Alabama Rate Stabilization and Equalization (RSE) renewal and giveback. The Gas Marketing increase was primarily due to higher volumes that offset the impact of slightly lower pricing. 41 -------------------------------------------------------------------------------- Spire's contribution margin increased$17.9 compared with the same twelve-month period last year. The growth in contribution margin was primarily attributable to the Gas Utility segment, up$19.6 , with Spire Missouri up$11.0 and SpireAlabama up$7.0 , with remaining growth from the utilities ofSpire EnergySouth . Gas Marketing's contribution margin was down$5.7 , reflecting a decline in basis differentials that was only partly offset by higher volumes combined with geographic expansion. Depreciation and amortization expenses were higher in the Gas Utility segment, driven principally by continued infrastructure investment in both Spire Missouri and Spire Alabama. Gas Utility operation and maintenance ("O&M") expenses were lower in the current year driven primarily by theMissouri rate case write-offs in the prior year. These fluctuations are described in more detail below. Gas Utility
Operating Revenues - Gas Utility operating revenues for fiscal 2019 decreased
SpireMissouri and Spire Alabama - Lower PGA/GSA gas cost recoveries$ (30.2 ) SpireMissouri and Spire Alabama - Rate case TCJA customer giveback (24.3 ) SpireMissouri and Spire Alabama - Volumetric usage (12.4 ) SpireMissouri - Provision for ISRS rulings (12.2 ) SpireMissouri - 2018 rate case resets
32.2
SpireMissouri - Higher ISRS
8.7
SpireAlabama - RSE: net renewal and giveback 4.6 Customer growth 2.7 All other factors 3.3 Total Variation$ (27.6 ) As shown in the table above, the decrease in revenues was driven primarily by a$30.2 reduction in gas cost recoveries, rate case TCJA customer givebacks totaling$24.3 ,$12.4 attributable to volumetric usage, and a$12.2 impact due to ISRS rulings. These impacts were only partly offset by an increase of$32.2 relating to the rate design changes at Spire Missouri, an increase in ISRS of$8.7 , a$4.6 increase relating to Spire Alabama's RSE renewal and giveback, and$2.7 attributable to customer growth.
Contribution Margin -- Gas Utility contribution margin was
SpireMissouri - 2018 rate case resets $
32.2
SpireMissouri - Higher ISRS
8.7
SpireMissouri and Spire Alabama - Volumetric usage
5.1
SpireAlabama - RSE: net renewal and giveback
4.6
Customer growth
2.7
Spire
(12.2 ) All other factors 2.8 Total Variation$ 19.6 The increase was primarily attributable to the$32.2 increase resulting from the 2018 Missouri rate cases resets. Contribution margin also benefited from$8.7 higher ISRS charges,$5.1 due to volumes and colder weather in the current year (net of weather mitigation), a$4.6 increase relating to Spire Alabama's RSE renewal and giveback, and$2.7 attributable to customer growth. These positive impacts were only partly offset by rate case TCJA customer givebacks totaling$24.3 from both Spire Missouri and Spire Alabama, and$12.2 relating to ISRS rulings against Spire Missouri. 42 -------------------------------------------------------------------------------- Operating Expenses - Gas Utility O&M expenses for the twelve months endedSeptember 30, 2019 decreased$8.0 from last year. Removing last year's$38.4 ofMissouri rate case write-offs, and the$19.6 net year-over-year increase due to the transfer of mix of service and non-service postretirement benefits costs to other income and expense, O&M increased$10.8 . Of this increase,$9.0 relates to higher employee benefits and energy efficiency costs that resulted from the 2018Missouri rate cases. Depreciation and amortization expenses for the twelve months endedSeptember 30, 2019 increased$12.4 from the same period last year principally the result of continued infrastructure capital spending, with$8.7 of the increase attributable to Spire Missouri and$3.0 attributable to SpireAlabama . Gas Marketing Operating Revenues - Gas Marketing operating revenue for the year endedSeptember 30, 2019 increased$12.1 from the prior year. The variance in revenues reflects the effect of a$9.3 favorable mark-to-market adjustment on derivatives combined with higher total volumes, partly offset by the impact of marginally lower general pricing levels. Average commodity pricing for the year endedSeptember 30, 2019 was approximately$2.670 /MMBtu versus approximately$2.681 /MMBtu for fiscal 2018, a decrease of$0.011 /MMBtu. Contribution Margin - Gas Marketing contribution margin was$35.6 for fiscal 2019, a$5.7 decrease compared to the same period last year. This reflects geographic expansion that created additional opportunities to optimize the segment's supply, transportation and storage portfolio that was more than offset by a return to more normal market conditions, reflected in the narrowed basis differentials in the current year.
Other
Other operating revenue increased$5.0 for the year endedSeptember 30, 2019 compared to 2018, driven principally by gas storage revenues and slightly higher reinsurance premiums. Other operating expenses were$1.3 higher than the prior year primarily due to gas storage operations.
Interest Charges
Consolidated interest charges during the year endedSeptember 30, 2019 increased$6.0 versus the prior year. The increase was primarily driven by net long-term debt issuances and higher rates and levels of short-term borrowings. Short-term rates averaged 2.7% in the current year versus 2.0% for the prior year and, for the years endedSeptember 30, 2019 and 2018, average short-term borrowings were$574.5 and$408.6 , respectively. Partly offsetting these factors was an increase in the non-cash AFUDC income for Spire STL Pipeline compared to the prior year.
Income Taxes
Consolidated income tax expense during the year endedSeptember 30, 2019 was$34.5 , compared to a$26.5 tax benefit for fiscal 2018. This increase of$61.0 is primarily the result of the$60.1 fiscal 2018 revaluation benefit of deferred tax assets and liabilities on the balance sheet that were not reflected in net economic earnings. The remaining increase in income tax is primarily the result of the effects of higher pre-tax book income in the current year, partly offset by an increase in amortization of excess deferred income taxes. 43 --------------------------------------------------------------------------------
SpireMissouri Summary Operating Results Year ended September 30, 2019 2018 Operating Income$ 174.8 $ 158.5 Operation and maintenance expenses 268.1 279.1 Depreciation and amortization 111.5 102.8 Taxes, other than income taxes 107.6 108.4 Less: Gross receipts tax expense (71.1 ) (68.9 ) Contribution Margin [Non-GAAP] 590.9 579.9 Natural gas costs 629.8 636.8 Gross receipts tax expense 71.1 68.9 Operating Revenues$ 1,291.8 $ 1,285.6 Net Income$ 115.0 $ 129.3 Operating revenues during the year endedSeptember 30, 2019 increased$6.2 from the same period last year. Revenues were impacted primarily by the$9.4 increase attributable to the new rate design (net of TCJA giveback), combined with higher ISRS charges of$8.7 , and customer growth of$2.7 . These positive impacts on the revenue growth were partly offset by$12.2 in impacts relating to ISRS rulings and volume impacts (net of weather mitigation) of$3.6 . Contribution margin for the year endedSeptember 30, 2019 increased$11.0 from the prior year. Contribution margin benefited from the$9.4 increase attributable to the new rate design (net of TCJA giveback), combined with higher ISRS charges of$8.7 , customer growth of$2.7 , and the$2.8 increase due to the combined impacts of volumetric usage and higher off-system sales. These positive impacts were only partly offset by the$12.2 in adjustments relating to the ISRS rulings. O&M expenses for the year endedSeptember 30, 2019 were$11.0 lower than the prior year. Removing last year's$38.4 ofMissouri rate case write-offs, and the$16.9 net year-over-year increase due to the transfer of mix of service and non-service postretirement benefits costs to other income and expense, O&M increased$10.5 . Of this increase,$9.0 relates to higher employee benefits and energy efficiency costs that resulted from the 2018 Missouri rate cases. Depreciation and amortization increased$8.7 , reflecting continued infrastructure investments throughoutMissouri . Interest expense in the current year was$2.8 greater than prior year, the result of higher short-term borrowings and higher average effective interest rates. Income taxes were$45.9 higher for the year endedSeptember 30, 2019 versus the prior year. This increase is primarily the result of the$45.2 fiscal 2018 revaluation benefit of deferred tax assets and liabilities on the balance sheet. Temperatures experienced in Spire Missouri's service area during fiscal 2019 were 5% colder than the prior year and 8% colder than normal. Total system therms sold and transported were 1,805.7 million for fiscal 2019 compared with 1,759.8 million for fiscal 2018, an increase of 3%. Total off-system therms sold and transported outside of Spire Missouri's service area decreased 44% to 38.5 million for fiscal 2019 compared with 68.6 million for fiscal 2018. The decrease in off-system therms was the direct result of the increase in demand experienced for system therms. 44
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SpireAlabama Summary Operating Results Year ended September 30, 2019 2018 Operating Income$ 95.5 $ 96.6 Operation and maintenance expenses 142.6 138.8 Depreciation and amortization 56.2 53.2 Taxes, other than income taxes 35.7 36.1 Less: Gross receipts tax expense (23.7 ) (25.4 ) Contribution Margin [Non-GAAP] 306.3 299.3 Natural gas costs 135.5 176.0 Gross receipts tax expense 23.7 25.4 Operating Revenues$ 465.5 $ 500.7 Net Income$ 60.3 $ 1.3 Operating revenues for the year endedSeptember 30, 2019 decreased$35.2 versus the comparable period endedSeptember 30, 2018 . Of the decrease,$27.8 related to lower gas cost recoveries,$8.8 was the result of weather and usage impacts,$1.7 was attributable to lower gross receipt taxes, along with approximately$1.5 associated with rate reductions to customers due to tax savings from the TCJA. Partly offsetting these negative impacts was a$4.6 increase relating to favorable RSE renewal and giveback. Contribution margin increased$7.0 versus the prior year, as a favorable RSE adjustment of approximately$4.6 and a$3.9 increase due to weather/volumetric impacts (net of weather mitigation) were only slightly offset by the$1.5 impact of the customer rate reduction resulting from the TCJA. O&M expenses for the year endedSeptember 30, 2019 increased$3.8 versus the year endedSeptember 30, 2018 . Removing the$2.4 net year-over-year increase due to the transfer of mix of service and non-service postretirement benefits costs to other income and expense, O&M increased$1.4 . Depreciation and amortization was$3.0 higher versus the same period last year, the result of continued infrastructure investment throughout Spire Alabama's service territory. Interest expense increased$4.4 . The increase was primarily driven by net long-term debt issuances and higher rates and levels of short-term borrowings. Income tax expense is$61.1 lower than the prior year, primarily the result of 2018 being burdened with the$60.7 deferred tax revaluation impact resulting from the implementation of the TCJA. Temperatures in Spire Alabama's service area during the year endedSeptember 30, 2019 were 6% warmer than last year, and approximately 6% warmer than historical norms. SpireAlabama's total therms sold and transported were 1,083.1 million for the year endedSeptember 30, 2019 , compared with 1,020.8 million last year, a 6% increase. REGULATORY MATTERS
For discussions of regulatory matters for Spire, Spire Missouri, and Spire Alabama, see Note 15 , Regulatory Matters, of the Notes to Financial Statements in Item 8.
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 their financial position or results of operations upon adoption. For
disclosures related to the adoption of new accounting standards, see the New
Accounting Pronouncements section of Note 1 of the Notes to Financial
Statements in Item 8.
45
--------------------------------------------------------------------------------INFLATION
The accompanying financial statements reflect the historical costs of events and transactions, regardless of the purchasing power of the dollar at the time. Due to the capital-intensive nature of the businesses of the Company, Spire Missouri and Spire Alabama, the most significant impact of inflation is on the depreciation of utility plant. Rate regulation, to which the Utilities are subject, allows recovery through its rates of only the historical cost of utility plant as depreciation. The Utilities expect to incur significant capital expenditures in future years, primarily related to the planned increased replacements of distribution plant. The Utilities believe any higher costs experienced upon replacement of existing facilities will be recovered through the normal regulatory process.
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, which 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. We believe the following represent the more significant items requiring the use of judgment and estimates in preparing our financial statements: Regulatory Accounting - The Utilities account for their regulated operations in accordance with FASB Accounting Standards Codification Topic 980, Regulated Operations. The provisions of this accounting guidance require, among other things, that financial statements of a rate-regulated enterprise reflect the actions of regulators, where appropriate. These actions may result in the recognition of revenues and expenses in time periods that are different than non-rate-regulated enterprises. When this occurs, costs are deferred as assets in the balance sheet (regulatory assets) and recorded as expenses when those amounts are reflected in rates. Also, regulators can impose liabilities upon a regulated company for amounts previously collected from customers and for recovery of costs that are expected to be incurred in the future (regulatory liabilities). Management believes that the current regulatory environment supports the continued use of these regulatory accounting principles and that all regulatory assets and regulatory liabilities are recoverable or refundable through the regulatory process. For Spire Missouri and Spire Alabama, management believes the following represent the more significant items recorded through the application of this accounting guidance: PGA Clause - Spire Missouri's PGA clauses allows it to flow through to customers, subject to a prudence review by the MoPSC, the cost of purchased gas supplies, including the costs, cost reductions and related carrying costs associated with the use of natural gas derivative instruments to hedge the purchase price of natural gas. The difference between actual costs incurred and costs recovered through the application of the PGA clauses are recorded as regulatory assets and regulatory liabilities that are recovered or refunded in a subsequent period. The PGA clauses also permit the application of carrying costs to all over- or under-recoveries of gas costs, including costs and cost reductions associated with the use of derivative instruments, and also provide for a portion of income from off-system sales and capacity release revenues to be flowed through to customers. GSA Rider - Spire Alabama's rate schedules for natural gas distribution charges contain a GSA rider, established in 1993, which permits the pass-through to customers of changes in the cost of gas supply. SpireAlabama's tariff provides a temperature adjustment mechanism, also included in the GSA, that is designed to moderate the impact of departures from normal temperatures on Spire Alabama's earnings. The temperature adjustment applies primarily to residential, small commercial and small industrial customers. Other non-temperature weather related conditions that may affect customer usage are not included in the temperature adjustment. In prior years, Spire Alabama entered into cash flow derivative commodity instruments to hedge its exposure to price fluctuations on its gas supply. SpireAlabama recognizes all derivatives at fair value as either assets or liabilities on the balance sheet. Any realized gains or losses are passed through to customers using the mechanisms of the GSA rider in accordance with Spire Alabama's APSC approved tariff and are recognized as a 46 -------------------------------------------------------------------------------- regulatory asset or regulatory liability. All derivative commodity instruments in a gain position are valued on a discounted basis incorporating an estimate of performance risk specific to each related counterparty. Derivative commodity instruments in a loss position are valued on a discounted basis incorporating an estimate of performance risk specific to Spire Alabama. SpireAlabama currently has no active gas supply derivative positions. ISRS -The ISRS allows Spire Missouri expedited recovery for its investment to upgrade its infrastructure and enhance its safety and reliability without the necessity of a formal rate case. SpireMissouri records ISRS revenues as authorized by the MoPSC and estimates the probability and amount of any refunds based on commission precedent, current legal rulings, the opinion of legal counsel, and other considerations. Employee Benefits and Postretirement Obligations - Pension and postretirement obligations are calculated by actuarial consultants that utilize several statistical factors and other assumptions provided by management related to future events, such as discount rates, returns on plan assets, compensation increases, and mortality rates. For the Utilities, the amount of expense recognized and the amounts reflected in other comprehensive income are dependent upon the regulatory treatment provided for such costs, as discussed further below. Certain liabilities related to group medical benefits and workers' compensation claims, portions of which are self-insured and/or contain "stop-loss" coverage with third-party insurers to limit exposure, are established based on historical trends. The amount of net periodic pension and other postretirement benefit costs recognized in the financial statements related to the Utilities' qualified pension plans and other postretirement benefit plans is based upon allowances, as approved by the MoPSC (for Spire Missouri) and as approved by the APSC (for Spire Alabama). The allowances have been established in the rate-making process for the recovery of these costs from customers. The differences between these amounts and actual pension and other postretirement benefit costs incurred for financial reporting purposes are deferred as regulatory assets or regulatory liabilities. GAAP also requires that changes that affect the funded status of pension and other postretirement benefit plans, but that are not yet required to be recognized as components of pension and other postretirement benefit costs, be reflected in other comprehensive income. For the Utilities' qualified pension plans and other postretirement benefit plans, amounts that would otherwise be reflected in other comprehensive income are deferred with entries to regulatory assets or regulatory liabilities. The tables below reflect the sensitivity of Spire's plans to potential changes in key assumptions: Pension Plan Benefits: Estimated Increase/ Estimated Increase/ Increase/ (Decrease) to Projected (Decrease) to Annual Actuarial Assumptions (Decrease) Benefit Obligation Net Pension Cost* Discount Rate 0.25 %$ (21.7 ) $ 0.4 (0.25 )% 23.0 (0.4 ) Expected Return on Plan Assets 0.25 % - (1.2 ) (0.25 )% - 1.2 Rate of Future Compensation Increase 0.25 % 3.4 0.3 (0.25 )% (3.3 ) (0.3 ) Postretirement Benefits: Estimated
Increase/ Estimated Increase/
(Decrease) to Projected (Decrease) to Annual
Increase/ Postretirement Net Postretirement
Actuarial Assumptions (Decrease) Benefit Obligation Benefit Cost*
Discount Rate 0.25 % $ (4.9 ) $ 0.2
(0.25 )% 5.2 (0.1 )
Expected Return on Plan Assets 0.25 % - (0.7 )
(0.25 )% - 0.7
Annual Medical Cost Trend 1.00 % 9.7 0.8
(1.00 )% (8.7 ) (0.7 )
* Excludes the impact of regulatory deferral mechanism. See Note 13 ,Pension Plans and Other Postretirement Benefits, of the Notes to Financial
Statements in Item 8 for information regarding the regulatory treatment of
these costs.
47
-------------------------------------------------------------------------------- Impairment of Long-lived Assets - Long-lived assets classified as held and used are evaluated for impairment when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Whether impairment has occurred is determined by comparing the estimated undiscounted cash flows attributable to the assets with the carrying value of the assets. If the carrying value exceeds the undiscounted cash flows, the Company recognizes an impairment charge equal to the amount of the carrying value that exceeds the estimated fair value of the assets. In the period in which the Company determines an asset meets held-for-sale criteria, an impairment charge is recorded to the extent the book value exceeds its fair value less cost to sell. OnJuly 1, 2020 , Spire's Board of Directors, based upon the recommendation of senior management, revised the development plan for Spire Storage, resulting in an impairment charge of$140.8 related to Spire Storage assets in the quarter endedJune 30, 2020 . The revision was driven by the realization that a longer time horizon will be required for optimization and positioning of the storage facility to serve energy markets in the westernUnited States . Among other factors, evaluations of the continuing evolution of market dynamics in the region led management to update models of various development alternatives. Separately in the quarter endedJune 30, 2020 , Spire recorded impairment charges totaling$7.8 related to two commercial compressed natural gas fueling stations as a result of revised projections reflecting lower diesel prices and slower conversions of Class 8 vehicles. The fair values used in measuring the impairment charges were determined with an expected present value technique using a discounted cash flow method under an income approach. Our impairment loss calculations required management to make assumptions and to apply judgment in order to estimate fair values of the assets. This involved estimating cash flows, useful lives, and current market value for similar assets and selecting a discount rate that reflects the risk inherent in future cash flows. Cash flow projections were based on assumptions about future market demand and achievement of certain operational capabilities. Assumptions were selected from a range of reasonably possible amounts and were supported by relevant and reliable data. However, if actual results are not consistent with our estimates and assumptions, we may be exposed to additional impairments that could be material. We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate asset impairment losses. Income Taxes - Income tax calculations require estimates due to book-tax differences, estimates with respect to regulatory treatment of certain items, and uncertainty in the interpretation of tax laws and regulations. Critical assumptions and judgments also include projections of future taxable income to determine the ability to utilize net operating losses and credit carryforwards prior to their expiration. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Management regularly assesses financial statement tax provisions to identify any change in regulatory treatment or tax related estimates and assumptions that could have a material impact on cash flows, financial position and/or results of operations.
For further discussion of significant accounting policies, see Note 1 , Summary of Significant Accounting Policies, of the Notes to Financial Statements in Item 8.
LIQUIDITY 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. Cash Flow Summary 2020 2019
2018
Net cash provided by operating activities$ 469.9 $ 450.9 $ 456.6 Net cash used in investing activities (631.6 ) (838.3 ) (531.7 ) Net cash provided by financing activities 160.0 371.8 89.1 48
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Net cash provided by operating activities increased
In fiscal 2020, the Company used$206.7 less cash in investing activities than in fiscal 2019. The major driver of the reduction was lower capital expenditures, down$184.9 versus the prior year. Spire STL Pipeline, which was placed into service in the first fiscal quarter of 2020, accounted for$97.4 of the reduction, and expenditures at Spire Storage were$59.6 below prior year levels. Capital expenditures at the Utilities were down$29.1 , while remaining focused on infrastructure upgrades and new business development. Utility capital expenditures resume growth in fiscal 2021 and beyond, while total Company capital expenditures are planned to be$590 .o for fiscal 2021. In fiscal 2019, the Company used$306.6 more cash in investing activities than in 2018. Capital expenditures increased$323.9 from fiscal 2018 to 2019, primarily as a result of$110.5 higher expenditures for the Spire STL Pipeline project and a$118.9 increase in infrastructure upgrades, new business development and investment to support customer growth acrossMissouri andAlabama . A further$89.9 in expenditures related to the development of Spire Storage. Net cash provided by financing activities declined$211.8 in fiscal 2020 versus fiscal 2019, the major driver being the prior year issuance of preferred stock that generated$242.0 in proceeds. Year-over-year net debt issuance increased by$32.3 , and the issuance of common stock generated$21.6 more cash in fiscal 2020 than in fiscal 2019. These increases in cash were only partly offset by a$20.4 increase in common and preferred stock dividends in fiscal 2020 versus fiscal 2019. Net cash provided by financing activities increased$282.7 from 2018 to 2019. The increase in 2019 versus 2018 was primarily due to the issuance of preferred shares for$242.0 and an increase in net debt issuance of$189.2 . These increases were only partly offset by the$135.2 reduction in funds received from common stock issuances in 2019 versus 2018.
CAPITAL RESOURCES
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.
Their debt is rated by two rating agencies: Standard & Poor's Corporation
("S&P") and Moody's Investors Service ("Moody's"). As of September 30, 2020 , the
debt ratings of the Company, Spire Missouri and Spire Alabama, shown in the
following table, remain at investment grade with a stable outlook.
S&P Moody's
BBB Ba1
Spire Inc. short-term debt A-2 P-2
Spire
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. The effects of COVID-19 on theU.S. capital markets may significantly impact Spire. We rely on access to the capital markets to fund our capital requirements. These uncertain economic conditions may also result in the inability of our customers to pay for services and could have an impact on our liquidity. Still, considering our financing as described in Note 7 , Notes Payable and Credit Agreements, of the Notes to Financial Statements in Item 8, we believe we have sufficient access to cash to meet our needs. 49 --------------------------------------------------------------------------------
Cash and Cash Equivalents
Bank deposits were used to support working capital needs of the business. Spire had no temporary cash investments as ofSeptember 30, 2020 or 2019. Due to lower yields available to Spire on short-term investments, the Company elected to provide all of Spire Missouri's and Spire Alabama's short-term funding through intercompany lending during the past fiscal year.
Short-term Debt
The Utilities' short-term borrowing requirements typically peak during the colder months, while most of the Company's other 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. For information about these resources, see Note 7 , Notes Payable and Credit Agreements, of the Notes to Financial Statements in Item 8 and "Interest Rate Risk" under "Market Risk" below.
Long-term Debt and Equity
AtSeptember 30, 2020 , including the current portion but excluding unamortized discounts and debt issuance costs, Spire had long-term debt totaling$2,500.0 , of which$1,098.0 was issued by Spire Missouri,$475.0 was issued by SpireAlabama , and$237.0 was issued by other subsidiaries. For more information about long-term debt, see Note 6 of the Notes to Financial Statements in Item 8 and "Interest Rate Risk" under "Market Risk" below. OnNovember 12, 2019 , Spire Missouri issued and sold to certain institutional purchasers in a private placement$275.0 of 2.84% first mortgage bonds dueNovember 15, 2029 . Interest is payable semi-annually. The bonds are secured by a mortgage and deed of trust and rank equal in right to payment with all SpireMissouri's other first mortgage bonds. SpireMissouri used the proceeds to repay its$100.0 floating-rate note and for other general corporate purposes. OnDecember 2, 2019 , Spire Alabama issued and sold to certain institutional investors in a private placement$100.0 of 2.88% Series 2019B Senior Notes dueDecember 1, 2029 . Interest is payable semi-annually. The notes are senior unsecured obligations of Spire Alabama and rank equal in right to payment with all its other senior unsecured indebtedness. SpireAlabama used the proceeds to repay short-term debt and for general corporate purposes.
On
On
SpireMissouri was authorized by the MoPSC to issue registered securities (first mortgage bonds, unsecured debt and preferred stock), common stock, and private placement debt in an aggregate amount of up to$500.0 for financings placed any time beforeSeptember 30, 2021 . As ofSeptember 30, 2020 ,$125.0 remained available under this authorization. SpireAlabama has no standing authority to issue long-term debt and must petition the APSC for each planned issuance. OnMarch 24, 2020 , the APSC approved an application for up to$150.0 of additional long-term debt financing. Spire has a shelf registration statement on Form S-3 on file with theU.S. Securities and Exchange Commission (SEC) for the issuance and sale of up to 250,000 shares of common stock under its Dividend Reinvestment and Direct Stock Purchase Plan. There were 207,254 and 201,148 shares atSeptember 30, 2020 andNovember 16, 2020 , respectively, remaining available for issuance under this Form S-3. Spire and Spire Missouri also have a universal shelf registration statement on Form S-3 on file with theSEC for the issuance of various equity and debt securities, which expires onMay 14, 2022 . 50 -------------------------------------------------------------------------------- OnFebruary 6, 2019 , Spire entered into an "at-the-market" equity distribution agreement, supplemented as ofMay 14, 2019 , pursuant to which the Company may offer and sell, from time to time, shares of its common stock having an aggregate offering price of up to$150.0 . Those shares are issued pursuant to Spire's universal shelf registration statement referenced above and a prospectus supplement datedMay 14, 2019 . Under this program, in the year endedSeptember 30, 2020 , Spire issued 446,619 shares, generating$32.0 of proceeds net of issuance costs, and in the year endedSeptember 30, 2019 , Spire issued 179,630 shares, generating$14.4 of proceeds net of issuance costs.
On
Including the current portion of long-term debt, the Company's long-term
consolidated capitalization at
CONTRACTUAL OBLIGATIONS
As ofSeptember 30, 2020 , Spire had contractual obligations with payments due as summarized below: Payments due by period Less than 1-3 3-5 More than
Contractual Obligations Total 1 Year Years Years 5 Years
Principal Payments on Long-term Debt $ 2,500.0 $ 60.4 $ 391.9 $ 198.6 $ 1,849.1
Interest Payments on Long-term Debt (a) 1,390.2 99.3 180.5 150.0 960.4
Operating Leases (b) 90.3 6.6 14.4 10.9 58.4
Purchase Obligations - Natural Gas (c) 1,745.4 484.9 512.6 215.9 532.0
Purchase Obligations - Other (d) 53.2 40.6 7.9 3.3 1.4
Asset Retirement Obligations 540.1 29.8 30.7 31.3 448.3
Total (e) $ 6,319.2 $ 721.6 $ 1,138.0 $ 610.0 $ 3,849.6 (a) Includes interest payments over the terms of the debt. Interest is calculated
using the applicable interest rate and outstanding principal for each
instrument with the terms ending at each instrument's stated maturity. See
Note 6 , Long-Term Debt, of the Notes to Financial Statements in Item 8.
(b) Lease obligations are primarily for office space and power operated
equipment. Additional payments will be incurred if renewal options are
exercised under the provisions of certain agreements.
(c) These purchase obligations represent the minimum payments required under
existing natural gas transportation and storage contracts and natural gas
supply agreements in the Gas Utility and Gas Marketing segments. These
amounts reflect fixed obligations as well as obligations to purchase natural
gas at future market prices, calculated using
market prices. Each of the Utilities generally recovers costs related to its
purchases, transportation and storage of natural gas through the operation of
its PGA clause or GSA rider, subject to prudence review by the appropriate
regional public service commission. Variations in the timing of collections
of gas costs from customers may affect short-term cash requirements.
Additional contractual commitments are generally entered into prior to or
during the heating season.
(d) These purchase obligations primarily reflect miscellaneous agreements for the
purchase of materials and the procurement of services necessary for normal
operations.
(e) Long-term liabilities associated with unrecognized tax benefits, totaling
cash outflows, if any, cannot be reasonably estimated. Also, commitments
related to pension and postretirement benefit plans have been excluded from
the table above. The Company expects to contribute
trusteed pension plans and
fiscal 2021. With regard to the postretirement benefits, the Company
anticipates it will contribute
to participants from Spire Missouri funds during fiscal 2021. For further
discussion of the Company's pension and postretirement benefit plans, refer
to Note 13 , Pension Plans and Other Postretirement Benefits, of the Notes
to Financial Statements in Item 8.
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ENVIRONMENTAL MATTERS
The Utilities and other Spire subsidiaries 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, SpireMissouri's or Spire Alabama's financial position and results of operations. As environmental laws, regulations and their interpretations change, however, the Company and the Utilities may be required to incur additional costs. For information relative to environmental matters, see Contingencies in Note 16 of the Notes to Financial Statements in Item 8.
OFF-BALANCE SHEET ARRANGEMENTS
At
MARKET RISK Commodity Price Risk Gas Utility The Utilities' commodity price risk, which arises from market fluctuations in the price of natural gas, is primarily managed through the operation of SpireMissouri's PGA clauses and Spire Alabama's GSA rider. The PGA clauses and GSA rider allows the Utilities to flow through to customers, subject to prudence review by the MoPSC and APSC, the cost of purchased gas supplies. SpireMissouri is allowed the flexibility to make up to three discretionary PGA changes during each year, in addition to its mandatory November PGA change, so long as such changes are separated by at least two months. SpireMissouri is able to mitigate, to some extent, changes in commodity prices through the use of physical storage supplies and regional supply diversity. The Utilities also have risk management policies that allow for the purchase of natural gas derivative instruments with the goal of managing its price risk associated with purchasing natural gas on behalf of its customers. These policies prohibit speculation. As ofSeptember 30, 2020 , Spire Missouri had active natural gas derivative positions, but Spire Alabama did not. Costs and cost reduction, including carrying costs, associated with the use of natural gas derivative instruments are allowed to be passed on to customers through the operation of the PGA clauses or GSA rider. Accordingly, the Utilities do not expect any adverse earnings impact as a result of the use of these derivative instruments. However, the timing of recovery for cash payments related to margin requirements may cause short-term cash requirements to vary. For more information about the Utilities' natural gas derivative instruments, see Note 10 , Derivative Instruments and Hedging Activities, of the Notes to Financial Statements in Item 8. Gas Marketing In the course of its business, Spire's non-regulated gas marketing subsidiary, Spire Marketing, enters into contracts to purchase and sell natural gas at fixed prices and natural gas index-based prices. Commodity price risk associated with these contracts has the potential to impact earnings and cash flows. To minimize this risk, Spire Marketing has a risk management policy that provides for daily monitoring of a number of business measures, including fixed price commitments. In accordance with the risk management policy, Spire Marketing manages the price risk associated with its fixed price commitments. This risk is currently managed either by closely matching the offsetting physical purchase or sale of natural gas at fixed-prices or through the use of natural gas futures, options and swap contracts traded on or cleared through theNew York Mercantile Exchange (NYMEX) and Intercontinental Exchange (ICE) to lock in margins. AtSeptember 30, 2020 and 2019, Spire Marketing's unmatched fixed-price positions were not material to Spire's financial position or results of operations. 52 -------------------------------------------------------------------------------- As mentioned above, Spire Marketing uses natural gas futures, options and swap contracts traded on or cleared through the NYMEX and ICE to manage the commodity price risk associated with its fixed-price natural gas purchase and sale commitments. These derivative instruments may be designated as cash flow hedges of forecasted purchases or sales. Such accounting treatment, if elected, generally permits a substantial portion of the gain or loss to be deferred from recognition in earnings until the period that the associated forecasted purchase or sale is recognized in earnings. To the extent a hedge is effective, gains or losses on the derivatives will be offset by changes in the value of the hedged forecasted transactions. Information about the fair values of Spire Marketing's exchange-traded/cleared natural gas derivative instruments is presented below: Derivative Derivatives Fair Cash and Cash Values Margin Margin Net balance of derivative assets at September 30, 2019$ (1.4 ) $ 4.8 $ 3.4 Changes in fair value 11.8 - 11.8 Settlements/purchases - net (4.7 ) - (4.7 ) Changes in cash margin - (5.2 ) (5.2 ) Net balance of derivative assets at September 30, 2020$ 5.7 $ (0.4 ) $ 5.3 As of September 30, 2020 Maturity by Fiscal Year Total 2021 2022 2023 2024 Fair values of exchange-traded/cleared natural gas derivatives - net$ 7.4 $ 1.0 $ 6.0 $ 0.4 $ - Fair values of basis swaps - net 49.3 (9.2 ) 50.1 8.3 0.1 Fair values of puts and calls - net (0.7 ) (0.8 ) 0.1 - - Position volumes: MMBtu - net (short) long futures/swap/option positions (12.4 ) (11.2 ) (1.1 ) (0.1 ) - MMBtu - net (short) long basis swap positions (1.0 ) (1.0 ) - - - MMBtu - net (short) puts and calls positions (0.8 ) (0.8 ) - - - Certain of Spire Marketing's physical natural gas derivative contracts are designated as normal purchases or normal sales, as permitted by GAAP. This election permits the Company to account for the contract in the period the natural gas is delivered. Contracts not designated as normal purchases or normal sales, including those designated as trading activities, are accounted for as derivatives with changes in fair value recognized in earnings in the periods prior to settlement.
Below is a reconciliation of the beginning and ending balances for physical natural gas contracts accounted for as derivatives, none of which will settle beyond fiscal 2022:
Net balance of derivative liabilities at
(7.6 )
Settlements (2.8 )
Net balance of derivative liabilities at
For further details related to Spire Marketing's derivatives and hedging activities, see Note 10 , Derivative Instruments and Hedging Activities, of the Notes to Financial Statements in Item 8.
53
--------------------------------------------------------------------------------Counterparty Credit Risk
Spire Marketing has concentrations of counterparty credit risk in that a significant portion of its transactions are with energy producers, utility companies and pipelines. These concentrations of counterparties have the potential to affect the Company's overall exposure to credit risk, either positively or negatively, in that each of these three groups may be affected similarly by changes in economic, industry or other conditions. Spire Marketing also has concentrations of credit risk with certain individually significant counterparties. To the extent possible, Spire Marketing enters into netting arrangements with its counterparties to mitigate exposure to credit risk. It is also exposed to credit risk associated with its derivative contracts designated as normal purchases and normal sales. Spire Marketing closely monitors its credit exposure and, although uncollectible amounts have not been significant, increased counterparty defaults are possible and may result in financial losses and/or capital limitations. For more information on these and other concentrations of credit risk, including how Spire Marketing manages these risks, see Note 11 , Concentrations of Credit Risk, of the Notes to Financial Statements in Item 8. Interest Rate Risk The Company is subject to interest rate risk associated with its short-term debt issuances. Based on average short-term borrowings during fiscal 2020, an increase of 100 basis points in the underlying average interest rate for short-term debt would have caused an increase in interest expense (and a decrease in pre-tax earnings and cash flows) of approximately$5.8 on an annual basis. Portions of such an increase may be offset through the Utilities' application of PGA and GSA carrying costs. AtSeptember 30, 2020 , Spire had fixed-rate long-term debt totaling$2,500.0 . SpireMissouri had fixed-rate long-term debt totaling$1,098 and Spire Alabama had fixed-rate long-term debt of$475.0 , all included in Spire's total long-term debt. While the long-term debt issues are fixed-rate, they are subject to changes in 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. During the first quarter of fiscal 2019, the Company entered into a three-year interest rate swap with a fixed interest rate of 3.250% and a notional amount of$100.0 to protect itself against adverse movements in interest rates on future interest rate payments. The Company recorded a$53.7 mark-to-market loss to comprehensive income on this swap for twelve months endedSeptember 30, 2020 . In the second quarter of 2020, the Company entered into multiple interest rate swaps with fixed interest rates ranging from 0.921% to 1.3105% for a total notional amount of$150.0 to protect itself against adverse movements in interest rates on future interest rate payments. The Company recorded a$0.5 mark-to-market loss to comprehensive income for these swaps for the twelve months endedSeptember 30, 2020 .
Refer to Note 10 , Derivative Instruments and Hedging Activities, of the Notes to Financial Statements in Item 8 for additional details on the Company's interest rate swap transactions.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
For this discussion, see " Market Risk " in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations.
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