sr-10k_20200930.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
or
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) (only applicable to Spire Inc.):
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock $1.00 par value SR New York Stock Exchange LLC
Securities registered pursuant to Section 12(g) of the Exchange Act: None
Indicate by check mark whether each registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933, as amended.
Spire Inc. Yes [ X ] No [ ]
Spire Missouri Inc. Yes [ ] No [ X ]
Spire Alabama Inc. Yes [ ] No [ X ]
Indicate by check mark if each registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Spire Inc. Yes [ ] No [ X ]
Spire Missouri Inc. Yes [ ] No [ X ]
Spire Alabama Inc. Yes [ ] No [ X ]
Indicate by check mark whether each registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Spire Inc. Yes [ X ] No [ ]
Spire Missouri Inc. Yes [ X ] No [ ]
Spire Alabama Inc. Yes [ X ] No [ ]
Indicate by check mark whether each registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Spire Inc. Yes [ X ] No [ ]
Spire Missouri Inc. Yes [ X ] No [ ]
Spire Alabama Inc. Yes [ X ] No [ ]
Indicate by check mark whether each registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Spire Inc. X
Spire Missouri Inc. X
Spire Alabama Inc. X
If an emerging growth company, indicate by check mark if each registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Spire Inc. [ ]
Spire Missouri Inc. [ ]
Spire Alabama Inc. [ ]
Indicate by check mark whether each registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Spire Inc. [ X ]
Spire Missouri Inc. [ ]
Spire Alabama Inc. [ ]
Indicate by check mark whether each registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Spire Inc. Yes [ ] No [ X ]
Spire Missouri Inc. Yes [ ] No [ X ]
Spire Alabama Inc. Yes [ ] No [ X ]
The aggregate market value of the common equity held by non-affiliates of Spire Inc. amounted to $3,703,018,742 as of March 31, 2020. All of Spire Missouri Inc.’s and Spire Alabama Inc.’s equity securities are owned by Spire Inc., their parent company and a reporting company under the Exchange Act.
The number of shares outstanding of each registrant’s common stock as of November 13, 2020 was as follows:
Spire Inc. Common Stock, par value $1.00 per share 51,618,125
This combined Form 10-K represents separate filings by Spire Inc., Spire Missouri Inc., and Spire Alabama Inc. Information contained herein relating to an individual registrant is filed by that registrant on its own behalf. Each registrant makes no representation as to information relating to the other registrants, except that information relating to Spire Missouri Inc. and Spire Alabama Inc. is also attributed to Spire Inc.
Spire Missouri Inc. and Spire Alabama Inc. meet the conditions set forth in General Instructions I(1)(a) and (b) of Form 10-K and are therefore filing this Form 10-K with the reduced disclosure format specified in General Instructions I(2) to Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of proxy statement for Spire Inc. to be filed on or about December 16, 2020 — Part III.
Certain exhibits as indicated in Part IV.
TABLE OF CONTENTS
Page
GLOSSARY OF KEY TERMS AND ABBREVIATIONS 2
PART I 3
FORWARD-LOOKING STATEMENTS 3
Item 1 Business 4
Item 1A Risk Factors 10
Item 1B Unresolved Staff Comments 23
Item 2 Properties 23
Item 3 Legal Proceedings 23
Item 4 Mine Safety Disclosures 23
Information about our Executive Officers (Item 401(b) of Regulation S-K) 24
Item 6 Selected Financial Data 27
Item 7A Quantitative and Qualitative Disclosures About Market Risk 54
Item 8 Financial Statements and Supplementary Data 55
Item 9A Controls and Procedures 138
Item 9B Other Information 139
Item 10 Directors, Executive Officers and Corporate Governance 139
Item 11 Executive Compensation 139
Item 14 Principal Accounting Fees and Services 139
Item 15 Exhibits, Financial Statement Schedules 140
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GLOSSARY OF KEY TERMS AND ABBREVIATIONS
APSC Alabama Public Service Commission NYSE New York Stock Exchange
ASC Accounting Standards Codification O&M Operation and maintenance expense
ASU Accounting Standards Update OCI Other comprehensive income or loss
CCM Cost Control Measure PGA Purchased Gas Adjustment
EPS Earnings per share SEC U.S. Securities and Exchange Commission
ESR Enhanced Stability Reserve Spire Alabama Spire Alabama Inc.
FERC Federal Energy Regulatory Commission Spire Gulf Spire Gulf Inc.
ICE Intercontinental Exchange TCJA The Tax Cuts and Jobs Act of 2017
ISRS Infrastructure System Replacement Surcharge U.S. United States
MoPSC Missouri Public Service Commission
MSPSC Mississippi Public Service Commission
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PART I
FORWARD-LOOKING STATEMENTS
Certain matters discussed in this report, excluding historical information, include forward-looking statements. Certain words, such as “may,” “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “seek,” “target,” and similar words and expressions identify forward-looking statements that involve uncertainties and risks. Future developments may not be in accordance with our current expectations or beliefs and the effect of future developments may not be those anticipated. Among the factors that may cause results or outcomes to differ materially from those contemplated in any forward-looking statement are:
• Acquisitions may not achieve their intended results;
• allowed rates of return,
• incentive regulation,
• industry structure,
• purchased gas adjustment provisions,
• rate design structure and implementation,
• capital structures established for rate-setting purposes,
• regulatory assets,
• non-regulated and affiliate transactions,
• franchise renewals,
• taxes,
• accounting standards;
• The results of litigation;
• Energy commodity market conditions;
• Discovery of material weakness in internal controls;
Readers are urged to consider the risks, uncertainties, and other factors that could affect our business as described in this report. All forward-looking statements made in this report rely upon the safe harbor protections provided under the Private Securities Litigation Reform Act of 1995. We do not, by including this statement, assume any obligation to review or revise any particular forward-looking statement in light of future events.
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Item 1. Business
OVERVIEW
Spire Inc. (“Spire” or the “Company”) was formed in 2000 and is the holding company for Spire Missouri Inc. (“Spire Missouri”), Spire Alabama Inc. (“Spire Alabama”), other gas utilities, and gas-related businesses. Spire Missouri was formed in 1857 and Spire Alabama was formed in 1948 by the merger of two gas companies. Spire is committed to transforming its business and pursuing growth through growing organically, investing in infrastructure, and advancing through innovation. The Company has two key business segments: Gas Utility and Gas Marketing.
The Gas Utility segment includes the regulated operations of Spire Missouri, Spire Alabama, Spire Gulf Inc. (“Spire Gulf”) and Spire Mississippi Inc. (“Spire Mississippi”) (collectively, the “Utilities”). The business of the Utilities is subject to seasonal fluctuations with the peak period occurring in the winter heating season, typically November through April of each fiscal year. Spire Missouri is a public utility engaged in the purchase, retail distribution and sale of natural gas, with primary offices located in St. Louis, Missouri. Spire Missouri is the largest natural gas distribution utility system in Missouri, serving approximately 1.2 million residential, commercial and industrial customers in St. Louis, Kansas City, and other areas in Missouri. Spire Alabama is a public utility engaged in the purchase, retail distribution and sale of natural gas principally in central and northern Alabama, serving more than 0.4 million residential, commercial and industrial customers with primary offices located in Birmingham, Alabama. Spire Gulf and Spire Mississippi are utilities engaged in the purchase, retail distribution and sale of natural gas to 0.1 million customers in the Mobile, Alabama area and south-central Mississippi.
The Gas Marketing segment includes Spire Marketing Inc. (“Spire Marketing”), a wholly owned subsidiary providing natural gas marketing services.
As of September 30, 2020, Spire had 3,583 employees, including 2,424 for Spire Missouri and 947 for Spire Alabama. We believe that:
We have implemented processes, procedures and programs that have helped us reduce our employee injury rate for the sixth fiscal year in a row, marking a 17% year-over-year improvement and an overall improvement of 57% since fiscal year 2015. We remain very focused on reducing at-fault motor vehicle accidents, thereby improving safety for our employees and our communities, and this past year, the American Gas Association recognized us for our commitment to safety with the Accident Prevention Certificate. Due to our swift and strategic response to COVID-19, we did not furlough or lay off any employees in fiscal year 2020. We offer incentives for weight management and gym membership, as well as employee assistance programs to provide counseling services and emotional support, and in 2020, we created a formalized comprehensive well-being program that focuses on the physical, emotional, social and financial health of every employee.
All employees have access to developmental assessments, customized training, specialized degree programs, and partnerships with best-in-class organizations related to industry courses, leadership and management workshops and computer application development seminars. In addition, all employees are eligible for up to $6,000 per year in tuition assistance and have access to the Spire Learning Center, our robust internal learning management system. In their first year, each construction and maintenance employee receives 80 hours of safety training, while each service and installation employee receives 200 hours. Field operations employees average 24 hours of technical and procedural training annually.
We regularly review and adjust our affirmative action plans based on placement and utilization rates, and we strive to create an even more diverse and inclusive work environment by committing to and achieving the goals of the CEO Action for Diversity & Inclusion Pledge. In addition, during fiscal year 2020, we adopted a Human Rights Policy, which is our first step in demonstrating that Spire understands its universal responsibility to respect human rights. This policy provides the basis for publicly affirming our values and embedding the responsibility into Spire’s operations and the way we do business.
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Spire uses its website, SpireEnergy.com, as a routine channel for distribution of important information including news releases, analyst presentations and financial information. The information Spire, Spire Missouri and Spire Alabama file or furnish to the United States (U.S.) Securities and Exchange Commission (SEC), including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and their amendments, and proxy statements are available free of charge under “Filings &reports” in the Investors section of Spire’s website, SpireEnergy.com, as soon as reasonably practical after the information is filed with or furnished to the SEC. Information contained on Spire’s website is not incorporated by reference in this report. The SEC also maintains a website that contains Spire’s SEC filings (sec.gov).
GAS UTILITY
Natural Gas Supply
The Utilities’ fundamental gas supply strategy is to meet the two-fold objective of 1) ensuring a dependable gas supply is available for delivery when needed and 2) insofar as is compatible with that dependability, purchasing gas that is economically priced. In structuring their natural gas supply portfolio, the Utilities focus on natural gas assets that are strategically positioned to meet the Utilities’ primary objectives.
Spire Missouri focuses its gas supply portfolio around a number of large natural gas suppliers with equity ownership or control of assets strategically situated to complement its regionally diverse firm transportation arrangements. Spire Missouri utilizes Midcontinent, Gulf Coast, Northeast, and Rocky Mountain gas sources to provide a level of supply diversity that facilitates the optimization of pricing differentials as well as protecting against the potential of regional supply disruptions. Further, Spire STL Pipeline, a wholly owned subsidiary of Spire, is capable of delivering up to 4 million therms per day of natural gas into eastern Missouri, of which Spire Missouri is the foundation shipper with a contractual commitment of 3.5 million therms per day.
In fiscal year 2020, Spire Missouri purchased natural gas from 27 different suppliers to meet its total service area current gas sales and storage injection requirements. Spire Missouri entered into firm agreements with suppliers including major producers and marketers providing flexibility to meet the temperature-sensitive needs of its customers. Natural gas purchased by Spire Missouri for delivery to its service areas included 50.5 billion cubic feet (Bcf) on the Southern Star Central Gas Pipeline, Inc. (Southern Star), 31.3 Bcf through the Enable Mississippi River Transmission LLC (MRT) system, and a combined 39.3 Bcf on the Tallgrass Interstate Gas Transmission, LLC (TIGT), Panhandle Eastern Pipe Line Company, LP (PEPL), Rockies Express Pipeline, LLC (REX), and Spire STL Pipeline systems. Spire Missouri also holds firm transportation arrangements on several other interstate pipeline systems that provide access to gas supplies upstream. Some of Spire Missouri’s commercial and industrial customers purchased their own gas with Spire Missouri transporting 45.9 Bcf to them through its distribution system.
The fiscal year 2020 peak day send out of natural gas to Spire Missouri customers, including transportation customers, occurred on February 13, 2020. The average temperature was 11 degrees Fahrenheit in St. Louis and 13 degrees Fahrenheit in Kansas City. On that day, Spire Missouri’s customers consumed 1.56 Bcf of natural gas. For eastern Missouri, this peak day demand was met with natural gas transported to St. Louis through the MRT, MoGas Pipeline LLC, Spire STL Pipeline, and Southern Star transportation systems, and from Spire Missouri’s on-system storage. For western Missouri, this peak day demand was met with natural gas transported to Kansas City through the Southern Star, PEPL, TIGT, and REX transportation systems.
Spire Alabama’s distribution system is connected to two major interstate natural gas pipeline systems, Southern Natural Gas Company, L.L.C. (Southern Natural Gas) and Transcontinental Gas Pipe Line Company, LLC (Transco). It is also connected to two intrastate natural gas pipeline systems.
Spire Alabama purchases natural gas from various natural gas producers and marketers. Certain volumes are purchased under firm contractual commitments with other volumes purchased on a spot market basis. The purchased volumes are delivered to Spire Alabama’s system using a variety of firm transportation, interruptible transportation and storage capacity arrangements designed to meet the system’s varying levels of demand.
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In fiscal 2020, Spire Alabama purchased natural gas from 23 different suppliers to meet current gas sales, storage injection, and liquefied natural gas (LNG) liquefaction requirements, of which five are under long-term supply agreements. Approximately 64.0 Bcf was purchased for delivery by Southern Natural Gas, 5.2 Bcf by Transco, and 9.4 Bcf through intrastate pipelines to the Spire Alabama delivery points for its residential, commercial, and industrial customers.
The fiscal 2020 peak day send out for Spire Alabama was 0.5 Bcf on November 12, 2019, when the average temperature was 34 degrees Fahrenheit in Birmingham, of which 100% was met with supplies transported through Southern Natural Gas, Transco, intrastate facilities, and one of the four LNG peak shaving facilities.
Spire Gulf’s distribution system is directly connected to interstate pipelines, natural gas processing plants and gas storage facilities. Spire Gulf buys from a variety of producers and marketers, with BP Energy Company being the primary supplier.
Natural Gas Storage
Spire Missouri believes that it has ample storage capacity to meet the demands of its distribution system, particularly to augment its supply during peak demand periods. Spire Missouri has a contractual right to store 21.5 Bcf of gas in MRT’s storage facility located in Unionville, Louisiana, 16.3 Bcf of gas storage in Southern Star’s system storage facilities located in Kansas and Oklahoma, and 1.4 Bcf of firm storage on PEPL’s system storage. MRT’s tariffs allow injections into storage from May 1 through November 1 and require the withdrawal from storage of all but 4.3 Bcf from November 1 through May 1. Southern Star tariffs allow both injections and withdrawals into storage year-round with ratchets that restrict the associated flows dependent upon the underlying inventory level per the contracts.
In addition, Spire Missouri supplements pipeline gas with natural gas withdrawn from its own underground storage field located in St. Louis and St. Charles Counties in Missouri. The field is designed to provide approximately 0.3 Bcf of natural gas withdrawals on a peak day and maximum annual net withdrawals of approximately 4.0 Bcf of natural gas based on the inventory level that Spire Missouri plans to maintain.
Spire Alabama has a contractual right to store 12.5 Bcf of gas with Southern Natural Gas, 0.2 Bcf of gas with Transco and 0.2 Bcf of gas with Tennessee Gas Pipeline. In addition, Spire Alabama has 1.8 Bcf of LNG storage that can provide the system with up to an additional 0.2 Bcf of natural gas daily to meet peak day demand.
Spire Gulf obtains adequate storage capacity through Gulf South Pipeline Company, LP, and Enstor Gas, LLC’s Bay Gas Storage.
Union Agreements
The Company believes labor relations with its employees are good. Should that condition change, the Company could experience labor disputes, work stoppages or other disruptions that could negatively impact the Company’s system operations, customer service, results of operations and cash flows.
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The following table presents the Company’s various labor agreements as of September 30, 2020:
Union Local Employees Covered Contract Start Date Contract End Date
Spire Missouri
Total Spire Missouri 1,557
Spire Alabama
Total Spire Alabama 359
Spire Gulf
Operating Revenues and Customer Information
The following tables present information on Spire’s revenues and therms sold and transported (before intersegment eliminations), and annual average numbers of customers for the three years ended September 30, 2020, 2019 and 2018.
Gas Utility Operating Revenues
Commercial & Industrial 22 % 23 % 24 %
Transportation 6 % 6 % 6 %
Other 4 % 3 % 4 %
Gas Utility Therms Sold and Transported
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Total annual average number of customers for Spire Missouri and Spire Alabama for fiscal 2020 was 1,186,523 and 424,804, respectively.
Regulatory Matters
For details on regulatory matters, see Note 15, Regulatory Matters, of the Notes to Financial Statements in Item 8.
Other Pertinent Matters
Spire Missouri is the only distributor of natural gas within its franchised service areas, while Spire Alabama is the main distributor of natural gas in its service areas. Spire Missouri and Spire Alabama have franchises in nearly all the communities where they provide service with terms varying from five years to an indefinite duration. A franchise is essentially a municipal permit to install pipes and construct other facilities in the community. All of the franchises are free from unduly burdensome restrictions and are adequate for the conduct of Spire Missouri’s and Spire Alabama’s current public utility businesses in their respective states. In recent years, although certain franchise agreements have expired, the Utilities have continued to provide service in those communities without formal franchises.
The principal competition for the Utilities comes from the local electric companies. Other competitors in the service areas include suppliers of fuel oil, coal, and propane, as well as natural gas pipelines that can directly connect to large volume customers. Coal has been price competitive as a fuel source for very large boiler plant loads, but environmental requirements have shifted the economic advantage to natural gas. Oil and propane can be used to fuel boiler loads and certain direct-fired process applications, but these fuels require on-site storage, thus limiting their competitiveness. Competition also comes from district steam systems in the downtown areas of both St. Louis and Kansas City and from municipally or publicly owned natural gas distributors located adjacent to the Alabama service territories.
Residential, commercial, and industrial customers represent approximately 92% and 83% of fiscal 2020 operating revenues for Spire Missouri and Spire Alabama, respectively. Given the current level of natural gas supply and market conditions, the Utilities believe that the relative comparison of natural gas equipment and operating costs with those of competitive fuels will not change significantly in the foreseeable future, and that these markets will continue to be supplied by natural gas. In new multi-family and commercial rental markets, the Utilities’ competitive exposures are presently limited to space and water heating applications.
Spire Missouri and Spire Alabama offer gas transportation service to its large commercial and industrial customers. Transportation customers represent approximately 3% and 16% of fiscal 2020 operating revenues for Spire Missouri and Spire Alabama, respectively. The Spire Missouri tariff approved for that type of service produces a margin similar to that which Spire Missouri would have received under their regular sales rates. Similarly, Spire Alabama’s tariff is based on Spire Alabama’s sales profit margin so that operating margins are unaffected.
The Utilities are subject to various environmental laws and regulations that, to date, have not materially affected the Utilities’ or the Company’s financial position and results of operations. For a detailed discussion of environmental matters, see Note 16, Commitment and Contingencies, of the Notes to Financial Statements in Item 8.
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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’ service areas. The majority of Spire Marketing’s business is derived from the procurement and physical delivery of natural gas to a diverse customer base, primarily in the central and southern U.S. Through its retail operations, Spire Marketing offers natural gas marketing services to large commercial and industrial customers, while its wholesale business consists of producers, pipelines, power generators, municipalities, storage operators, and utility companies. Wholesale activities currently represent a majority of the total Gas Marketing business.
In the course of its business, Spire Marketing enters into agreements to purchase natural gas at a future date in order to lock up supply to cover future sales commitments to its customers. To secure access to the markets it serves, Spire Marketing contracts for transportation capacity on various pipelines from pipeline companies directly and from other parties through the secondary capacity market. Throughout fiscal 2020, Spire Marketing held approximately 1.1 Bcf per day of firm transportation capacity. In addition, to ensure reliability of service and to provide operational flexibility, Spire Marketing enters into firm storage contracts and interruptible park and loan transactions with various companies, where it is able to buy and retain gas to be delivered at a future date, at which time it sells the natural gas to third parties. As of September 30, 2020, Spire Marketing has contracted for approximately 26 Bcf of such storage and park and loan capacity for the 2020-2021 winter season.
The Gas Marketing strategy is to leverage its market expertise and risk management skills to manage and optimize the value of its portfolio of commodity, transportation, park and loan, and storage contracts while controlling costs and acting on new marketplace opportunities. Overall, Gas Marketing saw volume growth in fiscal 2020 primarily as a result of increased business with producers and integrated utilities, retail and wholesale customer growth, and increased optimization opportunities resulting from its overall portfolio of assets. For fiscal 2020, Spire Marketing volumes averaged 2.13 Bcf/day, an improvement from 1.9 Bcf/day in fiscal 2019.
OTHER
Other components of the Company’s consolidated information include:
Spire STL Pipeline is a wholly owned subsidiary of Spire which owns and operates a 65-mile pipeline connecting the Rockies Express Pipeline in Scott County, Illinois, to delivery points in St. Louis County, Missouri, including Spire Missouri’s storage facility. The pipeline is under the jurisdiction of the Federal Energy Regulatory Commission (FERC) and is capable of delivering up to 4 million therms per day of natural gas into eastern Missouri. Spire Missouri is the foundation shipper with a contractual commitment of 3.5 million therms per day. The pipeline was primarily constructed during fiscal 2019 and was placed into service in November 2019.
Spire Storage is engaged in the storage of natural gas in the western region of the United States. The facility consists of two storage fields operating under one FERC market-based rate tariff. On July 1, 2020, the Board of Directors of Spire, based upon the recommendation of senior management, revised the development plan for Spire Storage. As a result of the revised development plan, an asset impairment charge was recorded in the third quarter of fiscal 2020. The revision to the development plan for Spire Storage 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 western United States that continue to evolve. Spire remains committed to serving its customers through the ongoing development and operation of the facility. Such development is expected to include approximately $16 million in capital investment over the next year or so to enhance the capabilities of the facility. Consistent with the revised development plans, a FERC application to expand the working capacity of the facility, pursuant to Section 7(c) of the Natural Gas Act, was filed on October 9, 2020. The application process and receipt of an authorizing certificate does not commit Spire to incremental capital investment in Spire Storage.
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Item 1A. Risk Factors
Spire’s and the Utilities’ business and financial results are subject to a number of risks and uncertainties, including those set forth below. The risks described below are those the Company and the Utilities consider to be material. When considering any investment in Spire or the Utilities’ securities, investors should carefully consider the following information, as well as information contained in the caption “Forward-Looking Statements,” Item 7A, and other documents Spire, Spire Missouri, and Spire Alabama file with the SEC. This list is not exhaustive, and Spire’s and the Utilities’ respective management places no priority or likelihood based on the risk descriptions, order of presentation or grouping by subsidiary. All references to dollar amounts are in millions.
RISKS AND UNCERTAINTIES THAT RELATE TO THE BUSINESS AND FINANCIAL RESULTS OF SPIRE AND ITS SUBSIDIARIES
We face risks related to widespread public health concerns, such as the recent coronavirus outbreak.
The actual or perceived effects of a disease outbreak, epidemic, pandemic or similar widespread public health concern, such as COVID-19, will likely negatively affect our operations, liquidity, financial condition, cash flows and results of operations. The outbreak of the novel coronavirus (COVID-19) has adversely impacted economic activity and conditions worldwide. In particular, efforts to control the spread of COVID-19 have led to shutdowns of customer operations, as well as disrupted financial markets and supply chains. 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, working-from-home for our office-based employees, limiting direct contact with our customers, and, from March through June, suspending disconnections and late payment charges for our utility customers. During fiscal 2020, we experienced impacts on our results of operations as a result of COVID-19 including, but not limited to:
• increased bad debt expenses;
• decreases in expense for travel and medical claims; and
• higher residential customer charges due to the moratorium on disconnections.
We are continuing to assess the developments involving our workforce, customers and suppliers, as well as the ongoing response of federal and state authorities, our regulators and other business and community leaders. An extended slowdown of the United States' economy or demand for commodities and/or material changes in government policy in response to COVID-19 could result in lower demand for natural gas, particularly among our commercial and industrial customers, as well as negatively impact the ability of our customers, contractors, suppliers and other business partners to remain in business or return to reasonable business activity in the near future. While the crisis has not had a material effect on the Company to date, the impacts continue to unfold and the full extent of future developments are not known at this time and may have a material impact on our results of operations, financial condition, liquidity and prospects. We have identified the following potential categories of risks for Spire, Spire Missouri and Spire Alabama outside of those already experienced through September 2020:
• Decreases in non-essential operational functions and/or capital investment;
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To mitigate some of these risks, Spire has implemented additional health and safety precautions while continuing to service utility customers. Spire is an essential business and continues to operate, while adhering to precautionary safety measures, to ensure that critical infrastructure improvements continue and to maintain the safety of the gas distribution network. Further, we have modified certain business and workforce practices (including employee travel, employee work locations, and cancellation of physical participation in meetings, events, and conferences) to conform to government restrictions and best practices encouraged by government and regulatory authorities. We are monitoring impacts on our operations, costs and rate bases of our businesses, and continue to explore alternative approaches to ensure the viability of our businesses and continued service to our customers.
To the extent the COVID-19 health crisis adversely affects our business, it may also have the effect of heightening many of the other risks described in this item.
As a holding company, Spire depends on its operating subsidiaries to meet its financial obligations.
Spire is a holding company with no significant assets other than the stock of its operating subsidiaries and cash investments. Spire, and Spire Missouri prior to the holding company’s formation in 2000, has paid common stock dividends continuously since 1946. Spire’s ability to pay dividends to its shareholders is dependent on the ability of its subsidiaries to generate sufficient net income and cash flows to pay upstream dividends and make loans or loan repayments. In addition, because it is a holding company and the substantial portion of its assets are represented by its holdings in the Utilities, the risks faced by the Utilities as described below under RISKS THAT RELATE TO THE GAS UTILITY SEGMENT may also adversely affect Spire’s cash flows, liquidity, financial condition and results of operations.
A downgrade in Spire’s and/or its subsidiaries’ credit ratings may negatively affect its ability to access capital and its cost of capital.
Currently, Spire, Spire Missouri, and Spire Alabama have investment grade credit ratings. There is no assurance that such credit ratings for any of the Spire companies will remain in effect for any given period of time or that such ratings will not be lowered, suspended or withdrawn entirely by the rating agencies, if, in each rating agency’s judgment, circumstances so warrant. Spire has a working capital line of credit to meet its short-term liquidity needs. Spire’s line of credit may be used to meet the liquidity needs of any of its subsidiaries, subject to sublimits. If the rating agencies lowered the credit rating at any of these entities, particularly below investment grade, it might significantly limit that entity’s ability to secure new or additional credit facilities and would increase its costs of borrowing. Spire’s or the Utilities’ ability to borrow under current or new credit facilities and costs of that borrowing have a direct impact on their ability to execute their operating strategies.
Pipeline integrity programs and repairs may impose significant costs and liabilities on the Company.
The U.S. Pipeline and Hazardous Materials Safety Administration (PHMSA) requires pipeline operators to develop integrity management programs to comprehensively evaluate certain areas along their pipelines and to take additional measures to protect pipeline segments located in “high consequence areas” where a leak or rupture could potentially do the most harm. As the operator of the STL Pipeline, the Company is required to:
• perform ongoing assessments of pipeline integrity;
• improve data collection, integration and analysis;
• repair and remediate the pipeline as necessary; and
• implement preventative and mitigating actions.
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The Company is required to maintain pipeline integrity testing programs that are intended to assess pipeline integrity. Any repair, remediation, preventative or mitigating actions may require significant capital and operating expenditures. Should the Company fail to comply with applicable statutes and the PHMSA Office of Pipeline Safety’s rules and related regulations and orders, it could be subject to significant penalties and fines.
Reductions in capacity of interconnecting, third-party pipelines could cause a reduction in volumes transported by Spire STL Pipeline, which could adversely affect the Company.
Spire STL Pipeline is dependent upon third-party pipelines and other facilities to provide delivery options to and from its pipeline. If any pipeline connection were to become unavailable for volumes of natural gas due to repairs, damage to the facility, lack of capacity or any other reason, Spire STL Pipeline’s ability to continue shipping natural gas to end markets could be restricted, and to the extent not mitigated by contractual indemnification, insurance or tariffs, would thereby reduce its revenues. Any permanent interruption at any key pipeline interconnect that causes a material reduction in volumes transported on its pipeline could result in an impairment loss that could have a material adverse effect on the Company’s financial condition and operating results.
The Company’s natural gas storage business includes inherent geologic and operational risks, as well as risks from competition and changes in market fundamentals.
In 2017 and 2018, the Company acquired two neighboring storage facilities, one of which had been operating in bankruptcy for an extended period. The Company has restructured to integrate these facilities into one, now known as Spire Storage, to increase capacity, improve operating performance, and improve the integrity of its storage fields and associated above-ground facilities. Any damage to the storage facility or pipelines, or lack of integrity to its storage fields, to the extent not covered by insurance, could have a material adverse effect on the Company’s financial condition, operating results and cash flows.
The Company’s storage assets are connected to third-party-owned pipelines. The continuing operation of such third-party pipelines is not within its control. If any of these pipelines become unable to transport, treat or process natural gas or natural gas liquids, or if the volumes it gathers or transports do not meet the quality requirements of such pipelines, the Company’s revenues and cash flows could be adversely affected.
The Company does not own all the land on which its storage facilities were constructed, and it is, therefore, subject to the possibility of more onerous terms or increased costs to retain necessary land use, if and when applicable property rights expire or are renewed. Changes in the terms of such land use could have an adverse impact on the financial condition, results of operations and cash flows for the Company’s storage business.
Spire Storage is subject to competition from similar services provided by pipelines and from competing independent storage providers capable of serving its customers. Natural gas storage is a competitive business, with competitors having the ability to expand storage capacity. Increased competition in the natural gas storage business could reduce the demand and drive rates down for the Company’s natural gas storage services.
Storage businesses are affected by various gas market fundamentals which impact the level of demand for storage services and the rates that can be charged for these services. These market fundamentals include: seasonal price spread; monthly, daily and hourly price volatility; locational basis for pricing points on pipelines connected to a storage facility; seasonal, daily and hourly weather; and operational impacts in supply and market areas served by a storage facility and its connected pipelines. These fundamentals have varying and potentially material adverse impacts on the various services offered by storage facilities and the rates that can be charged for these services in the market. These services include long-term firm storage, short-term park and loan, wheeling, and optimization. Rates below the variable costs to operate a storage facility could result in a decision to not operate all the capacity in the facility or to operate the facility at a loss if required to fulfill firm customer contract obligations. A sustained decline in these rates or a shut-in of all or a portion of one or more facilities’ capacity could have an adverse impact on the Company’s financial condition, results of operations and cash flows.
12
Transporting, distributing, and storing natural gas and propane involves numerous risks that may result in accidents and other operating risks and costs.
Natural gas transportation, distribution and storage activities inherently involve a variety of hazards and operations risks, such as leaks, accidental explosions, damage caused by third parties, and mechanical problems, which could cause substantial financial losses. In addition, these risks could result in serious injury to employees and non-employees, loss of human life, significant damage to property, environmental pollution, impairment of operations, and substantial losses to the Company and its subsidiaries. The location of pipelines and storage facilities near populated areas, including residential areas, commercial business centers, and industrial sites, could increase the level of damages resulting from these risks. Similar risks also exist for Spire Missouri’s propane storage, transmission and minor distribution operations. These activities may subject the Company to litigation or administrative proceedings. Such litigation or proceedings could result in substantial monetary judgments, fines, or penalties against the Company and its subsidiaries or be resolved on unfavorable terms. The Utilities and other Spire businesses are subject to federal and state laws and regulations requiring them to maintain certain safety and system integrity measures by identifying and managing storage and pipeline risks. Compliance with these laws and regulations, or future changes in these laws and regulations, may result in increased capital, operating and other costs which may not be recoverable in a timely manner from customers in rates. In accordance with customary industry practices, the Utilities and other Spire businesses maintain insurance against a significant portion, but not all, of these risks and losses. To the extent that the occurrence of any of these events is not fully covered by insurance, it could adversely affect the financial condition and results of operations of the Company and its subsidiaries.
In connection with acquisitions, Spire and Spire Missouri recorded goodwill and long-lived assets that could become impaired and adversely affect its financial condition and results of operations.
Spire and Spire Missouri assess goodwill for impairment annually or more frequently if events or circumstances occur that would more likely than not reduce the fair value of a reporting unit below its carrying value. The Company and Spire Missouri assess their long-lived assets for impairment whenever events or circumstances indicate that an asset’s carrying amount may not be recoverable. To the extent the value of goodwill or long-lived assets becomes impaired, the Company and Spire Missouri may be required to incur impairment charges that could have a material impact on their results of operations.
Since interest rates are a key component, among other assumptions, in the models used to estimate the fair values of the Company’s reporting units, rises in interest rates would generally decrease the calculated fair values and future impairments may occur. Due to the subjectivity of the assumptions and estimates underlying the impairment analysis, Spire and Spire Missouri cannot provide assurance that future analyses will not result in impairment. These assumptions and estimates include projected cash flows, current and future rates for contracted capacity, growth rates, weighted average cost of capital and market multiples.
Climate change and regulatory and legislative developments in the energy industry related to climate change may in the future adversely affect operations and financial results.
Climate change, and regulatory, public policy, or legislative changes to address the potential for climate change, could adversely affect operations and financial results of the Company. Management believes it is likely that any such resulting impacts would occur over a long period of time and thus would be difficult to quantify with any degree of specificity. To the extent climate change results in warmer temperatures, financial results could be adversely affected through lower gas volumes and revenues and lack of marketing opportunities. Another possible impact of climate change may be more frequent and more severe weather events, such as hurricanes and tornadoes, which could increase costs to repair damaged facilities and restore service to customers, or result in lost revenues if the Company were unable to deliver natural gas to customers. To the extent such impacts are not covered by insurance or recovered in rates, this could have a material adverse effect on the Company’s financial condition, operating results and cash flows.
13
In addition, there have been a number of federal, state and local legislative and regulatory initiatives proposed in recent years in an attempt to control or limit the effects of global warming and overall climate change, including greenhouse gas emissions, such as methane and carbon dioxide. The adoption in the future of this type of legislation by Congress or similar legislation by states or localities, or the adoption of related regulations by federal, state or local governments mandating a substantial reduction in greenhouse gas emissions,restricting the use of fossil fuels, such as natural gas,or restricting the construction of infrastructure necessary to deliver natural gas to customers could have far-reaching and significant impacts on the energy industry. Such new legislation or regulations could result in increased compliance costs or additional operating restrictions, affect the demand for natural gas or impact the prices charged to customers. At this time, we cannot predict the potential impact of such laws or regulations that may be adopted on the Company’s and the Utilities’ future business, financial condition or financial results.
Changes to income tax policy, certain tax elections, tax regulations and future taxable income could adversely impact the Company’s financial condition and results of operations.
The Company has significantly reduced its current federal and state income tax obligations over the past few years through tax planning strategies and the use of bonus depreciation deductions for certain expenditures for property. As a result, the Company has generated large annual taxable losses that have resulted in significant federal and state net operating losses in years prior to the Tax Cuts and Jobs Act. The Company plans to utilize these net operating losses in the future to reduce income tax obligations. The value of these net operating losses could be reduced if the Company cannot generate enough taxable income in the future to utilize all of the net operating losses before they expire due to lower than expected financial performance or regulatory actions.
Changes to income tax policy, laws and regulations, including but not limited to changes in tax rates, the deductibility of certain expenses including interest and state and local income taxes and/or changes in the deductibility of certain expenditures for property, could adversely impact the Company. Those impacts could include reducing the value of its net operating losses and could result in material charges to earnings. Further, the Company’s financial condition and results of operations may be adversely impacted.
Spire’s pension and other postretirement benefit plans are subject to investment and interest rate risk that could negatively impact its financial condition.
The Company and its subsidiaries have pension and other postretirement benefit plans that provide benefits to many of their employees and retirees. Costs of providing benefits and related funding requirements of these plans are subject to changes in the market value of the assets that fund the plans. The funded status of the plans and the related costs reflected in the Company’s financial statements are affected by various factors, which are subject to an inherent degree of uncertainty, including economic conditions, financial market performance, interest rates, life expectancies and demographics. Recessions and volatility in the domestic and international financial markets have negatively affected the asset values of Spire’s pension plans at various times in the past. Poor investment returns or lower interest rates may necessitate accelerated funding of the plans to meet minimum federal government requirements, which could have an adverse impact on the Company’s and its subsidiaries’ financial condition and results of operations. For more information, including regulatory provisions affecting the Utilities’ plans, see Note 13, Pension Plans and Other Postretirement Benefits, of the Notes to Financial Statements in Item 8.
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RISKS THAT RELATE TO THE GAS UTILITY SEGMENT
Regulation of the Utilities’ businesses may impact rates they are able to charge, costs, and profitability.
The Utilities are subject to regulation by federal, state and local authorities. At the state level, the Utilities are regulated in Missouri by the Missouri Public Service Commission (MoPSC), in Alabama by the Alabama Public Service Commission (APSC), and in Mississippi by the Mississippi Public Service Commission (MSPSC). These state public service commissions regulate many aspects of the Utilities’ distribution operations, including construction and maintenance of facilities, operations, safety, the rates the Utilities may charge customers, the terms of service to their customers, transactions with their affiliates, the rate of return they are allowed to realize, and the accounting treatment for certain aspects of their operations. For further discussion of these accounting matters, see Regulatory Accounting under Critical Accounting Estimates in Item 7.
Accounting for the economics of rate regulation affects multiple financial statement line items, including property, plant, and equipment; regulatory assets and liabilities; operating revenues; and depreciation expense, and affects multiple disclosures in the Company’s financial statements. There is a risk that the state public service commissions will not approve full recovery of the costs of providing utility service or recovery of all amounts invested in the utility business and a reasonable return on that investment. A material disallowance of deferred costs could adversely affect the Utilities’ results of operations.
The MoPSC also approves Spire Missouri’s Infrastructure System Replacement Surcharge (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. Such investments are subject to review, and there is risk that any material disallowance of costs under ISRS could adversely affect the timing of revenues.
The Utilities’ ability to obtain and timely implement rate increases and rate supplements to maintain the current rate of return is subject to regulatory review and approval. There can be no assurance that they will be able to obtain rate increases or rate supplements or continue earning the current authorized rates of return. Spire Alabama’s and Spire Gulf’s rate setting process, Rate Stabilization and Equalization (RSE), is subject to regulation by the APSC and is implemented pursuant to APSC orders expiring September 30, 2022 and 2021, respectively. RSE adjustments would continue after those dates unless the APSC enters an order to the contrary in a manner consistent with the law. Spire Mississippi is subject to regulation by the MSPSC and utilizes the Rate Stabilization Adjustment (RSA) Rider. For further details, see Note 15, Regulatory Matters, of the Notes to Financial Statements in Item 8.
The Utilities could incur additional costs if required to adjust to new laws or regulations, revisions to existing laws or regulations or changes in interpretations of existing laws or regulations. In addition, as the regulatory environment for the natural gas industry increases in complexity, the risk of inadvertent noncompliance could also increase. If the Utilities fail to comply with applicable laws and regulations, whether existing or new, they could be subject to fines, penalties or other enforcement action by the authorities that regulate the Utilities’ operations.
The Utilities are involved in legal or administrative proceedings before various courts and governmental bodies that could adversely affect their results of operations, cash flows and financial condition.
The Utilities are involved in legal or administrative proceedings before various courts and governmental bodies with respect to general claims, rates, environmental issues, gas cost prudence reviews and other matters. For further details, see Contingencies in Note 16 to the financial statements in Item 8. Adverse decisions regarding these matters, to the extent they require the Utilities to make payments in excess of amounts provided for in their financial statements, or to the extent they are not covered by insurance, could adversely affect the Utilities’ results of operations, cash flows and financial condition.
15
The Utilities’ liquidity may be adversely affected by delays in recovery of their costs, due to regulation.
In the normal course of business, there is a lag between when the Utilities incur increases in certain of their costs and the time in which those costs are considered for recovery in the ratemaking process. Cash requirements for increased operating costs, increased funding levels of defined benefit pension and postretirement costs, capital expenditures, and other increases in the costs of doing business can require outlays of cash prior to the authorization of increases in rates charged to customers, as approved by the MoPSC, APSC, and MSPSC. Accordingly, the Utilities’ liquidity can be adversely impacted to the extent higher costs are not timely recovered from their customers.
The Utilities’ ability to meet their customers’ natural gas requirements may be impaired if contracted gas supplies, interstate pipeline and/or storage services are not available or delivered in a timely manner.
In order to meet their customers’ annual and seasonal natural gas demands, the Utilities must obtain sufficient supplies, interstate pipeline capacity, and storage capacity. If they are unable to obtain these, either from their suppliers’ inability to deliver the contracted commodity or the inability to secure replacement quantities, to the extent not mitigated by tariffs, contractual indemnification or insurance, the Utilities’ financial condition and results of operations may be adversely impacted. If a substantial disruption in interstate natural gas pipelines’ transmission and storage capacity were to occur during periods of heavy demand, the Utilities’ financial results could be adversely impacted.
The Utilities’ liquidity and, in certain circumstances, the Utilities’ results of operations may be adversely affected by the cost of purchasing natural gas during periods in which natural gas prices are rising significantly.
The tariff rate schedules of Spire Missouri, Spire Gulf and Spire Mississippi contain Purchased Gas Adjustment (PGA) clauses and Spire Alabama’s tariff rate schedule contains a Gas Supply Adjustment (GSA) rider that permit the Utilities to file for rate adjustments to recover the cost of purchased gas. Changes in the cost of purchased gas are flowed through to customers and may affect uncollectible amounts and cash flows and can therefore impact the amount of capital resources.
Currently, Spire Missouri is allowed to adjust the gas cost component of rates up to four times each year while Spire Alabama and Spire Gulf (collectively, the “Alabama Utilities”) and Spire Mississippi may adjust the gas cost component of their rates on a monthly basis. Spire Missouri must make a mandatory gas cost adjustment at the beginning of the winter, in November, and during the next twelve months may make up to three additional discretionary gas cost adjustments, so long as each of these adjustments is separated by at least two months.
The MoPSC typically approves the Spire Missouri PGA changes on an interim basis, subject to refund and the outcome of a subsequent audit and prudence review. Due to such review process, there is a risk of a disallowance of full recovery of these costs. Any material disallowance of purchased gas costs would adversely affect results of operations. The Alabama Utilities’ gas supply charges are submitted for APSC review on a monthly basis, regardless of whether there is a request for a change, so prudence review occurs on an ongoing basis. Spire Mississippi’s PGA is adjusted on a monthly basis for the most recent charges and is filed at the MSPSC on a monthly basis.
Increases in the prices the Utilities charge for gas may also adversely affect revenues because they could lead customers to reduce usage and cause some customers to have trouble paying the resulting higher bills. These higher prices may increase bad debt expenses and ultimately reduce earnings. Rapid increases in the price of purchased gas may result in an increase in short-term debt.
16
To lower financial exposure to commodity price fluctuations, Spire Missouri enters into contracts to hedge the forward commodity price of its natural gas supplies. As part of this strategy, Spire Missouri may use fixed-price forward physical purchase contracts, swaps, futures, and option contracts. However, Spire Missouri does not hedge the entire exposure of energy assets or positions to market price volatility, and the coverage will vary over time. Any costs, gains, or losses experienced through hedging procedures, including carrying costs, generally flow through the PGA clause, thereby limiting Spire Missouri’s exposure to earnings volatility. However, variations in the timing of collections of such gas costs under the PGA clause and the effect of cash payments for margin deposits associated with Spire Missouri’s use of natural gas derivative instruments may cause short-term cash requirements to vary. These procedures remain subject to prudence review by the MoPSC.
Other than fixed-price forward physical purchase contracts, Spire Alabama currently does not utilize risk mitigation strategies that incorporate commodity hedge instruments but has the ability to do so through its GSA. Spire Gulf hedges gas supply for up to 30 months in advance, and Spire Mississippi utilizes hedging for the upcoming heating season.
The Utilities’ business activities are concentrated in three states.
The Utilities provide natural gas distribution services to customers in Alabama, Mississippi, and Missouri. Changes in the regional economies, politics, regulations and weather patterns of these states could negatively impact the Utilities’ growth opportunities and the usage patterns and financial condition of customers and could adversely affect the Utilities’ earnings, cash flows, and financial position.
The Utilities may be adversely affected by economic conditions.
Periods of slowed economic activity generally result in decreased energy consumption, particularly by industrial and large commercial companies, a loss of existing customers, fewer new customers especially in newly constructed buildings. As a consequence, national or regional recessions or other downturns in economic activity could adversely affect the Utilities’ revenues and cash flows or restrict their future growth. Economic conditions in the Utilities’ service territories may also adversely impact the Utilities’ ability to collect accounts receivable, resulting in an increase in bad debt expense.
Environmental laws and regulations may require significant expenditures or increase operating costs.
The Utilities are subject to federal, state and local environmental laws and regulations affecting many aspects of their present and future operations. These laws and regulations require the Utilities to obtain and comply with a wide variety of environmental licenses, permits, inspections, and approvals. Failure to comply with these laws and regulations and failure to obtain any required permits and licenses may result in costs to the Utilities in the form of fines, penalties or business interruptions, which may be material. In addition, existing environmental laws and regulations could be revised or reinterpreted and/or new laws and regulations could be adopted or become applicable to the Utilities or their facilities, thereby impacting the Utilities’ cost of compliance. The discovery of presently unknown environmental conditions, including former manufactured gas plant sites, and claims against the Utilities under environmental laws and regulations may result in expenditures and liabilities, which could be material. To the extent environmental compliance costs are not fully covered by insurance or recovered in rates from customers, those costs may have an adverse effect on the Utilities’ financial condition and results of operations.
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Because of competition, the Utilities may not be able to retain existing customers or acquire new customers, which could have an adverse impact on their business, operating results and financial condition.
The Utilities face the risk that larger commercial or industrial customers may bypass gas distribution services by gaining distribution directly from interstate pipelines or, in the case of Spire Alabama and Spire Gulf, also from municipally or publicly owned gas distributors located adjacent to its service territory. The Utilities cannot provide any assurance that increased competition will not have a material adverse effect on their business, financial condition or results of operations.
The Utilities compete with distributors offering a broad range of services and prices, from full-service distributors to those offering delivery only. The Utilities also compete for retail customers with suppliers of alternative energy products, principally propane and electricity. If they are unable to compete effectively, the Utilities may lose existing customers and/or fail to acquire new customers, which in the aggregate could have a material adverse effect on their business, operating results and financial condition.
Changes in the wholesale costs of purchased natural gas supplies may adversely impact the Utilities’ competitive position compared with alternative energy sources.
Changes in wholesale natural gas prices compared with prices for electricity, fuel oil, coal, propane, or other energy sources may affect the Utilities’ retention of natural gas customers and may adversely impact their financial condition and results of operations.
Significantly warmer-than-normal weather conditions, the effects of climate change, legislative and regulatory initiatives in response to climate change or in support of increased energy efficiency, and other factors that influence customer usage may affect the Utilities’ sale of heating energy and adversely impact their financial position and results of operations.
The Utilities’ earnings are primarily generated by the sale of heating energy. Spire Missouri and Spire Mississippi each have a Weather Normalization Adjustment rider, Spire Alabama has a Temperature Adjustment Rider, and Spire Gulf has a Weather Impact Normalization Factor. These mechanisms, approved by the respective state regulatory body, provide better assurance of the recovery of fixed costs and margins during winter months despite variations in sales volumes due to the impacts of weather, while the annual rate designs of Alabama and Mississippi help adjust for other factors that affect customer usage. However, significantly warmer-than-normal weather conditions in the Utilities’ service areas and other factors, such as climate change, alternative energy sources and increased efficiency of gas furnaces and other appliances, may result in reduced profitability and decreased cash flows attributable to lower gas sales. Furthermore, continuation of these adjustment factors is subject to regulatory discretion.
In addition, legislative and regulatory initiatives by the federal, state and local governments addressing greenhouse gas emissions or restricting the use of natural gas could adversely affect customer demand. The promulgation of regulations of the emissions of greenhouse gases and efficiency for residential gas furnaces and other gas appliances or the potential enactment of congressional legislation addressing global warming and climate change may decrease customer usage, encourage fuel switching from gas to other energy forms, and may result in future additional compliance costs that could impact the Utilities’ financial conditions and results of operations.
18
Regional supply/demand fluctuations and changes in national infrastructure, as well as regulatory discretion, may adversely affect the Utilities’ ability to profit from off-system sales and capacity release.
Spire Missouri’s and Spire Alabama’s income from off-system sales and capacity release is subject to fluctuations in market conditions and changing supply and demand conditions in areas the Utilities hold pipeline capacity rights. Specific factors impacting the Utilities’ income from off-system sales and capacity release include the availability of attractively priced natural gas supply, availability of pipeline capacity, and market demand. Income from off-system sales and capacity release is shared with customers. Spire Missouri and Spire Alabama are allowed to retain 25% of the net margins achieved as a result of such off-system sales and capacity releases. The Utilities’ ability to retain such income in the future is subject to regulatory discretion.
RISKS THAT RELATE TO THE GAS MARKETING SEGMENT
Increased competition, fluctuations in natural gas commodity prices, expiration of supply and transportation arrangements, and infrastructure projects may adversely impact the future profitability of Gas Marketing.
Competition in the marketplace and fluctuations in natural gas commodity prices have a direct impact on the Gas Marketing business. Changing market conditions and prices, the narrowing of regional and seasonal price differentials and limited future price volatility may adversely impact its sales margins or affect its ability to procure gas supplies and/or to serve certain customers, which may reduce sales profitability and/or increase certain credit requirements caused by reductions in netting capability. Also, Gas Marketing profitability may be impacted by the effects of the expiration, in the normal course of business, of certain of its natural gas supply contracts if those contracts cannot be replaced and/or renewed with arrangements with similar terms and pricing. Although the FERC regulates the interstate transportation of natural gas and establishes the general terms and conditions under which Spire Marketing may use interstate gas pipeline capacity to purchase and transport natural gas, Spire Marketing must occasionally renegotiate its transportation agreements with a concentrated group of pipeline companies. Renegotiated terms of new agreements, or increases in FERC-authorized rates of existing agreements, may impact Gas Marketing’s future profitability. Profitability may also be adversely impacted if pipeline capacity or future storage capacity secured is not fully utilized.
Reduced access to credit and/or capital markets may prevent the Gas Marketing business from executing operating strategies.
The Gas Marketing segment relies on its cash flows, ability to effect net settlements with counterparties, parental guaranties, and access to Spire’s liquidity resources to satisfy its credit and working capital requirements. Spire Marketing’s ability to rely on parental guaranties is dependent upon Spire’s financial condition and credit ratings. If Spire’s credit ratings were lowered, particularly below investment grade, counterparty acceptance of parental guaranties may diminish, resulting in decreased availability of credit. Additionally, under such circumstances, certain counterparties may require Spire Marketing to provide prepayments or cash deposits, amounts of which would be dependent upon natural gas market conditions. Reduced access to credit or increased credit requirements, which may also be caused by factors such as higher overall natural gas prices, may limit Spire Marketing’s ability to enter into certain transactions. In addition, Spire Marketing has concentrations of counterparty credit risk in that a significant portion of its transactions are with (or are associated 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 in certain individually significant counterparties. 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.
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Risk management policies, including the use of derivative instruments, may not fully protect Spire Marketing’s sales and results of operations from volatility and may result in financial losses.
In the course of its business, Spire Marketing enters into contracts to purchase and sell natural gas at fixed prices and 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.
Spire Marketing currently manages the commodity price risk associated with fixed-price commitments for the purchase or sale of natural gas by either 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 the New York Mercantile Exchange, Inc. and/or the Intercontinental Exchange to lock in margins. These exchange-traded/cleared contracts may be designated as cash flow hedges of forecasted transactions. However, market conditions and regional price changes may cause ineffective portions of matched positions to result in financial losses. Additionally, to the extent that Spire Marketing’s natural gas contracts are classified as trading activities or do not otherwise qualify for the normal purchases or normal sales designation (or the designation is not elected), the contracts are recorded as derivatives at fair value each period. Accordingly, the associated gains and losses are reported directly in earnings and may cause volatility in results of operations. Gains or losses (realized and unrealized) on certain wholesale purchase and sale contracts, consisting of those classified as trading activities, are required to be presented on a net basis (instead of a gross basis) in the statements of consolidated income. Such presentation could result in volatility in the Company’s operating revenues.
As a natural gas market participant, Spire Marketing is subject to applicable FERC- and Commodity Futures Trading Commission- (CFTC) administered statutes, rules, regulations and orders, including those directed generally to prevent manipulation of or fraud involving natural gas physical transactions and financial instruments, such as futures, options and swaps. Spire Marketing could be subject to substantial penalties and fines by FERC or CFTC, or both, for failure to comply with such rules.
Spire Marketing’s ability to meet its customers’ natural gas requirements may be impaired if contracted gas supplies and interstate pipeline services are not available or delivered in a timely manner.
Spire Marketing’s ability to deliver natural gas to its customers is contingent upon the ability of natural gas producers, other gas marketers, and interstate pipelines to fulfill delivery obligations to Spire Marketing under firm contracts. To the extent that it is unable to obtain the necessary supplies, Spire Marketing’s financial position and results of operations may be adversely impacted.
Regulatory and legislative developments pertaining to the energy industry may adversely impact Gas Marketing’s results of operations, financial condition and cash flows.
The Gas Marketing business is non-regulated, in that the rates it charges its customers are not currently established by or subject to approval by any regulatory body with jurisdiction over its business. However, it is subject to various laws and regulations affecting the energy industry. New regulatory and legislative actions may adversely impact Gas Marketing’s results of operations, financial condition, and cash flows by potentially reducing customer growth opportunities and/or increasing the costs of doing business.
20
Gas Marketing uses bilateral contracts and derivative instruments such as futures contracts, options and swaps to hedge or mitigate ongoing commercial risks. Most standardized swaps, under the Dodd-Frank Act,are required to be cleared through a registered clearing facility and traded on a designated exchange or swap execution facility, subject to certain exceptions. In addition, the CFTC’s rules require companies, including Spire Marketing, to maintain regulatory records of swap transactions, and to report swaps to centralized swap data repositories, among other compliance obligations. Although Spire Marketing may qualify for exceptions to certain of these CFTC rules, its derivatives counterparties are subject to capital, margin, documentation and business conduct requirements imposed as a result of the Dodd-Frank Act. These obligations may increase transaction costs and may make it more difficult for Spire Marketing to enter into hedging transactions on favorable terms or affect the number and/or creditworthiness of available swap counterparties. Spire Marketing’s inability to enter into derivatives instruments or other commercial risk hedging transactions on favorable terms, or at all, could increase operating expenses and expose it to unhedged commercial risks, including potential adverse changes in commodity prices.
The CFTC has also recently finalized its position limits rules that modify and expand the applicability of position limits on the amounts of certain speculative futures contracts, as well as economically equivalent options, futures and swaps for or linked to certain physical commodities that market participants may hold. While Spire Marketing anticipates qualifying for a bona fide hedging exemption to certain requirements of the final rule, the CFTC’s final rule and earlier adopted aggregation rules may cause Spire Marketing’s hedging strategies described above to be limited if Spire Marketing is unable to qualify for an exemption.
GENERAL RISK FACTORS
Unexpected losses may adversely affect Spire’s or its subsidiaries’ financial condition and results of operations.
As with most businesses, there are operations and business risks inherent in the activities of Spire’s subsidiaries. If, in the normal course of business, Spire or any of its subsidiaries becomes a party to litigation, such litigation could result in substantial monetary judgments, fines, or penalties or be resolved on unfavorable terms. In accordance with customary practice, Spire and its subsidiaries maintain insurance against a significant portion of, but not all, risks and losses. In addition, in the normal course of its operations, Spire and its subsidiaries may be exposed to loss from other sources, such as bad debt expense or the failure of a counterparty to meet its financial obligations. Spire and its operating companies employ many strategies to gain assurance that such risks are appropriately managed, mitigated, or insured, as appropriate. To the extent a loss is not fully covered by insurance or other risk mitigation strategies, that loss could adversely affect the Company’s and/or its subsidiaries’ financial condition and results of operations.
Increased dependence on technology may hinder Spire’s and its subsidiaries’ business operations and adversely affect their financial condition and results of operations if such technologies fail.
Spire and its subsidiaries have implemented or acquired a variety of technological tools including both Company-owned information technology and technological services provided by outside parties. These tools and systems support critical functions including Spire and its subsidiaries’ integrated planning, scheduling and dispatching of field resources, its automated meter reading system, customer care and billing, procurement and accounts payable, operational plant logistics, management reporting, and external financial reporting. The failure of these or other similarly important technologies, or the Company’s or its subsidiaries’ inability to have these technologies supported, updated, expanded, or integrated into other technologies, could hinder their business operations and, to the extent not covered by insurance, could adversely impact their financial condition and results of operations.
Although the Company and its subsidiaries have, when possible, developed alternative sources of technology and built redundancy into their computer networks and tools, there can be no assurance that these efforts to date would protect against all potential issues related to the loss of any such technologies or the Utilities’ use of such technologies.
21
A cyberattack may disrupt Spire’s operations or lead to a loss or misuse of confidential and proprietary information or potential liability.
The Company and its subsidiaries are subject to cybersecurity risks primarily related to breaches of security pertaining to sensitive customer, employee, and vendor information maintained by the Company, its subsidiaries, or its third-party vendors in the normal course of business, as well as breaches in the technology that manages natural gas distribution operations and other business processes. A loss of confidential or proprietary data or security breaches of technology for operations or business processes could adversely affect the Company’s and its subsidiaries’ reputation, diminish customer confidence, disrupt operations, and subject the Company and its subsidiaries to possible financial liability, any of which could have a material effect on the Company’s and its subsidiaries’ financial condition and results of operations.
The Company acknowledges that increased dependence on technology increases the Company’s exposure to cyberattack. The Company and its subsidiaries closely monitor both preventive and detective measures to manage these risks and maintain cyber risk insurance to mitigate a significant portion, but not all, of these risks and losses. To the extent that the occurrence of any of these cyber events is not fully covered by insurance, it could adversely affect the Company’s and its subsidiaries’ financial condition and results of operations.
Resources expended to pursue or integrate business acquisitions, investments or other business arrangements may adversely affect Spire’s financial position and results of operations and return on investments made may not meet the Company’s expectations.
From time to time, Spire may seek to grow through strategic acquisitions, investments or other business arrangements. Attractive acquisition and investment opportunities may be difficult to complete on economically acceptable terms. It is possible for Spire to expend considerable resources pursuing acquisitions and investments but, for a variety of reasons, decide not to move forward. Similarly, investment opportunities may be hindered or halted by regulatory or legal actions. To the extent that acquisitions or investments are made, such transactions involve a number of risks, including but not limited to, the assumption of material liabilities, the diversion of management’s attention from daily operations, difficulties in assimilation and retention of employees, securing adequate capital to support the transaction, and regulatory approval. Uncertainties exist in assessing the value, risks, profitability, and liabilities associated with certain businesses or assets and there is a possibility that anticipated operating and financial efficiencies expected to result from an acquisition or investment do not develop. Additionally, there are no assurances that resources expended will achieve their intended result.
The failure to complete an acquisition successfully or to integrate acquisitions or investments it may undertake could have an adverse effect on the Spire’s financial condition and results of operations and the market’s perception of the Company’s execution of its strategy. To the extent Spire engages in any of the above activities together with or through one or more of its subsidiaries, including the Utilities, such subsidiaries may face the same risks.
Workforce risks may affect the Company’s financial results.
The Company and its subsidiaries are subject to various workforce risks, including, but not limited to, the risk that it will be unable to attract and retain qualified personnel; that it will be unable to effectively transfer to new personnel the knowledge and expertise of an aging workforce as those workers retire; and that it will be unable to reach collective bargaining arrangements with the unions that represent certain of its workers, which could result in work stoppages.
Changes in accounting standards may adversely impact the Company’s financial condition and results of operations.
Spire and its subsidiaries are subject to changes in U.S. generally accepted accounting principles (GAAP), SEC regulations and other interpretations of financial reporting requirements for public utilities. Neither the Company nor any of its subsidiaries have any control over the impact these changes may have on their financial condition or results of operations nor the timing of such changes. The potential issues associated with rate-regulated accounting, along with other potential changes to GAAP that the U.S. Financial Accounting Standards Board (FASB) continues to consider may be significant.
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Catastrophic events may adversely affect the Company’s facilities and operations.
Catastrophic events such as fires, earthquakes, explosions, floods, tornadoes, hurricanes, tropical storms, terrorist acts, acts of civil unrest, pandemic illnesses or other similar occurrences could adversely affect the Utilities’ facilities and operations, as well as those of Spire STL Pipeline and Spire Storage. The Utilities have emergency planning and training programs in place to respond to events that could cause business interruptions. However, unanticipated events or a combination of events, failure in resources needed to respond to events, or slow or inadequate response to events may have an adverse impact on the operations, financial condition, and results of operations of the Company and its subsidiaries. The availability of insurance covering catastrophic events may be limited or may result in higher deductibles, higher premiums, and more restrictive policy terms.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Spire
Refer to the information below about the principal properties of Spire Missouri and Spire Alabama. The Spire EnergySouth utilities own approximately 5,500 miles of pipelines. Other properties of Spire and its subsidiaries do not constitute a significant portion of its properties. The current leases for office space in downtown St. Louis commenced in early 2015, with terms ranging from 10 to 20 years, with multiple renewal options. For further information on leases see Note 17, Leases, of the Notes to Financial Statements in Item 8.
Spire Missouri
The principal properties of Spire Missouri consist of its gas distribution system, which includes more than 31,100 miles of main and related service lines, odorization and regulation facilities, and customer meters. The mains and service lines are located in municipal streets or alleys, public streets or highways, or on lands of others for which Spire Missouri has obtained the necessary legal rights to place and operate its facilities on such property. Spire Missouri has an underground natural gas storage facility, several operating centers, and other related properties. Substantially all of Spire Missouri’s utility plant is subject to the liens of its mortgage. All the properties of Spire Missouri are held in fee, by easement, or under lease agreements.
Spire Alabama
The properties of Spire Alabama consist primarily of its gas distribution system, which includes approximately 24,300 miles of main and related service lines, odorization and regulation facilities, and customer meters. The mains and service lines are located in municipal streets or alleys, public streets or highways, or on lands of others for which Spire Alabama has obtained the necessary legal rights to place and operate its facilities on such property. Spire Alabama also has four LNG facilities, several operating centers, and other related properties. All of the properties of Spire Alabama are held in fee, by easement, or under lease agreements.
Item 3. Legal Proceedings
For a description of pending regulatory matters of Spire, see Note 15, Regulatory Matters, of the Notes to Financial Statements in Item 8. For a description of environmental and other legal matters, see Contingencies in Note 16 of the Notes to Financial Statements in Item 8.
Item 4. Mine Safety Disclosures
Not applicable.
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INFORMATION ABOUT OUR EXECUTIVE OFFICERS– Listed below are executive officers as defined by the SEC for Spire. Their ages, at September 30, 2020, and positions are listed below along with their business experience during the past five years.
Name Age Position with Company (1) Appointed (2)
S. Sitherwood 60 President and Chief Executive Officer February 2012
Chairman of the Board, Spire Missouri January 2015
Chairman of the Board, Spire Alabama September 2014
S. L. Lindsey 54 Executive Vice President, Chief Operating Officer January 2020
Chief Executive Officer, Spire Missouri December 2018
President and Chief Executive Officer, Spire Missouri January 2015
Chief Executive Officer, Spire Alabama September 2014
Chief Financial Officer, Spire Missouri (until January 2020) May 2012
Chief Financial Officer, Spire Alabama (until January 2020) September 2014
Senior Vice President, Commercial Operations January 2017
President, Spire Missouri December 2018
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Spire
Spire’s common stock trades on The New York Stock Exchange (NYSE) under the symbol “SR”. The number of holders of record as of November 13, 2020 was 2,888.
Dividends are payable on the Company’s common stock at the discretion of its Board of Directors (the “Board”). Spire, and Spire Missouri prior to the holding company’s formation in 2000, has paid common stock dividends continuously since 1946, with 2020 marking the 17th consecutive year of increasing dividends on an annualized basis. Although the Board expects to continue paying dividends on the common stock for the foreseeable future, the declaration of dividends is not guaranteed. The amount of dividends on the common stock, if any, will depend upon the Company’s financial condition, results of operations, capital requirements, and other factors.
Performance Graph
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN*
The S&P 500 Utilities Index is comprised of 28 utilities heavily weighted to large capitalization (median market cap of $22.5 billion) electric utilities. Stocks of small and mid cap utilities and gas utility companies in general (like Spire) were recently trading lower relative to the large cap electric sector.
For disclosures related to securities authorized for issuance under equity compensation plans, see Note 3, Stock-Based Compensation, of the Notes to Financial Statements in Item 8.
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During the three months ended September 30, 2020, the only repurchases of the Company’s common stock were pursuant to elections by employees to have shares of stock withheld to cover employee tax withholding obligations upon the vesting of performance-based and time-vested restricted stock and stock units. The following table provides information on those repurchases:
Spire Missouri
Spire Missouri common stock is owned by its parent, Spire Inc., and is not traded on any stock exchange.
Spire Missouri’s mortgage contains restrictions on its ability to pay cash dividends on its common stock, as described in further detail in Note 5, Shareholders’ Equity, of the Notes to Financial Statements in Item 8. As of September 30, 2020 and 2019, the amount under the mortgage’s formula that was available to pay dividends was $1,269.4 million and $1,182.4 million, respectively.
Spire Alabama
Spire Alabama common stock is owned by its parent, Spire Inc., and is not traded on any stock exchange.
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Item 6. Selected Financial Data
Spire Fiscal Years Ended September 30
Balance Sheet data at year end (2)
Income data (3)
Impairments 148.6 — — — —
Missouri regulatory adjustments — 12.2 30.6 — —
Fair value and timing adjustments 2.5 1.2 (4.3 ) 5.7 (1.5 )
Acquisition, divestiture and restructuring activities — 0.4 13.6 4.0 9.2
Income tax effect of adjustments (31.9 ) (3.3 ) (10.3 ) (3.7 ) (2.8 )
Effect of the Tax Cuts and Jobs Act — — (60.1 ) — —
Diluted Earnings per Share of Common Stock:
Impairments 2.89 — — — —
Missouri regulatory adjustments — 0.23 0.62 — —
Acquisition, divestiture and restructuring activities — 0.01 0.28 0.09 0.21
Effect of the Tax Cuts and Jobs Act — — (1.21 ) — —
Weighted average shares adjustment — — — — 0.06
Other data
Common Stock Dividends Declared Per Share $ 2.49 $ 2.37 $ 2.25 $ 2.10 $ 1.96
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Dollars in millions, except per share and per unit amounts)
INTRODUCTION
This section analyzes the financial condition and results of operations of Spire Inc. (the “Company”), Spire Missouri Inc., and Spire Alabama Inc. Spire Missouri, Spire Alabama and Spire EnergySouth are wholly owned subsidiaries of the Company. Spire Missouri, Spire Alabama and the subsidiaries of Spire EnergySouth are collectively referred to as the “Utilities.” The subsidiaries of Spire EnergySouth are Spire Gulf 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 ending September 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 Spire Alabama 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
Spire Missouri is Missouri’s largest natural gas distribution utility and is regulated by the MoPSC. Spire Missouri serves St. Louis, Kansas City, and other areas throughout the state. Spire Missouri 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. Spire Missouri also transports gas through its distribution system for certain larger customers who buy their own gas on the wholesale market. Spire Missouri 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
Spire Alabama is the largest natural gas distribution utility in the state of Alabama and is regulated by the APSC. Spire Alabama’s service territory is located in central and northern Alabama. Among the cities served by Spire Alabama are Birmingham, the center of the largest metropolitan area in the state, and Montgomery, the state capital. Spire Alabama purchases natural gas through interstate and intrastate suppliers and distributes the purchased gas through its distribution facilities for sale to residential, commercial, and industrial customers and other end-users of natural gas. Spire Alabama also transports gas through its distribution system for certain large commercial and industrial customers for a transportation fee. Effective December 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 Spire Alabama distribution system. All Spire Alabama services are provided to customers at rates and in accordance with tariffs authorized by the APSC.
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Gas Utility - Spire EnergySouth
Spire Gulf and Spire Mississippi are utilities engaged in the purchase, retail distribution and sale of natural gas to approximately 100,000 customers in southern Alabama and south-central Mississippi. 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 southern U.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:
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 effect of natural gas price volatility on the business; and
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;
• 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. Spire Missouri’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.
Spire Missouri 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 of September 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 September 30, 2020, included:
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Spire Missouri received an Accounting Authority Order from the MoPSC to defer certain costs and has recorded a related regulatory asset of $3.8 as of September 30, 2020. Even with the cost increases and lost revenues, Spire Alabama exceeded the allowed return and recorded a Rate Stabilization and Equalization giveback in September 2020, so there was no bottom-line impact of these COVID-19 effects.
An extended slowdown of the 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, Spire Missouri and Spire Alabama are determined in accordance with GAAP. Spire, Spire Missouri 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 the November 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.
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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:
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 ended September 30, 2020 compared to the results for the year ended September 30, 2019 and discussion and analysis of the results for the year ended September 30, 2019 compared to the results for the year ended September 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.
Gas Utility Gas Marketing Other Consol- idated Per Diluted Share**
Adjustments, pre-tax:
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 )
Adjustments, pre-tax:
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 )
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 )
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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 $7.0, an $11.5 reduction versus the comparable prior-year period, reflecting primarily the cost of storage positions as noted below.
Net economic earnings were $207.8 ($3.76 per diluted share) for the twelve months ended September 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 ended September 30, 2020, versus net income of $18.5 during the same period last year. Net economic earnings for the twelve months ended September 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.
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Operating Revenues and Operating Expenses
Reconciliations of contribution margin to the most directly comparable GAAP measure are shown below.
Gas Utility Gas Marketing Other Eliminations Consolidated
Less: Gross receipts tax expense (91.1 ) (0.4 ) — — (91.5 )
Gross receipts tax expense 91.1 0.4 — — 91.5
Gas Utility Gas Marketing Other Eliminations Consolidated
Less: Gross receipts tax expense (99.1 ) (0.2 ) — — (99.3 )
Gross receipts tax expense 99.1 0.2 — — 99.3
Gas Utility Gas Marketing Other Eliminations Consolidated
Less: Gross receipts tax expense (98.3 ) (0.1 ) — — (98.4 )
Gross receipts tax expense 98.3 0.1 — — 98.4
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 Spire Alabama up $6.5, with remaining growth from the utilities of Spire 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 $108.8 compared to fiscal 2019, and was attributable to the following factors:
Spire Missouri and Spire Alabama – Lower PGA/GSA gas cost recoveries $ (96.8 )
Spire Missouri and Spire Alabama – Volumetric usage (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 Missouri – Smaller ISRS Rulings Provision versus prior year 10.0
Spire Alabama – RSE: net adjustments 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 Spire Alabama’s RSE adjustments, and $3.6 attributable to all other factors.
Contribution Margin – Gas Utility contribution margin was $1,000.7 for fiscal 2020, a $33.6 increase over the same period last year. The increase was attributable to the following factors:
Spire Missouri – Higher ISRS $ 20.2
Spire Missouri – Smaller ISRS Rulings Provision versus prior year 10.0
Spire Alabama – RSE: net adjustments 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 ended September 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 ended September 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 ended September 30, 2020 and 2019, average short-term borrowings were $576.2 and $574.5, respectively.
Income Taxes
Consolidated income tax expense during the year ended September 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.
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Spire Missouri
Summary Operating Results
Year ended September 30,
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
Gross receipts tax expense 63.5 71.1
Operating revenues during the year ended September 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 ended September 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 ended September 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 throughout Missouri. Income taxes were $4.0 higher for the year ended September 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.
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Spire Alabama
Summary Operating Results
Year ended September 30,
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
Gross receipts tax expense 23.3 23.7
Operating revenues for the year ended September 30, 2020 decreased $10.5 versus the comparable period ended September 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 ended September 30, 2020 decreased $3.5 versus the year ended September 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 $1.1. The decrease was primarily driven by net long-term debt issuances with lower rates, and lower rates and levels of short-term borrowings. Income tax expense is $1.5 higher than the prior year, primarily the result of higher pre-tax book income.
Temperatures in Spire Alabama’s service area during the year ended September 30, 2020 were 13% warmer than last year, and approximately 17% warmer than historical norms. Spire Alabama’s total therms sold and transported were 1,034.8 million for the year ended September 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 for Missouri 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.
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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 ended September 30, 2019, up from $183.7 ($3.72 per diluted share) for the twelve months ended September 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 in May 2018, and the dividends earned from the $250.0 in preferred shares issued in May 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 Spire Missouri. Fiscal 2018 net income was negatively impacted by the $23.6 after-tax expense related to Missouri 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 ended September 30, 2019, was $19.4, a decrease of $3.5 from the twelve months ended September 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 ended September 30, 2019 were $12.6 lower than for the twelve months ending September 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 Spire Missouri relating to ISRS rulings, and weather/volumetric impacts (net of volume mitigation) that were only partly offset by Missouri 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.
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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 Spire Alabama up $7.0, with remaining growth from the utilities of Spire 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 the Missouri 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 $27.6 compared to fiscal 2018, and was attributable to the following factors:
Spire Missouri and Spire Alabama – Lower PGA/GSA gas cost recoveries $ (30.2 )
Spire Missouri and Spire Alabama – Rate case TCJA customer giveback (24.3 )
Spire Missouri and Spire Alabama – Volumetric usage (12.4 )
Spire Missouri – Provision for ISRS rulings (12.2 )
Spire Missouri – 2018 rate case resets 32.2
Spire Missouri – Higher ISRS 8.7
Spire Alabama – 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 $967.1 for fiscal 2019, a $19.6 increase over the same period last year. The increase was attributable to the following factors:
Spire Missouri – 2018 rate case resets $ 32.2
Spire Missouri – Higher ISRS 8.7
Spire Missouri and Spire Alabama – Volumetric usage 5.1
Spire Alabama – RSE: net renewal and giveback 4.6
Customer growth 2.7
Spire Missouri and Spire Alabama – Rate case TCJA customer giveback (24.3 )
Spire Missouri – Provision for ISRS rulings (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.
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Operating Expenses – Gas Utility O&M expenses for the twelve months ended September 30, 2019 decreased $8.0 from last year. Removing last year’s $38.4 of Missouri 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 2018 Missouri rate cases. Depreciation and amortization expenses for the twelve months ended September 30, 2019 increased $12.4 from the same period last year principally the result of continued infrastructure capital spending, with $8.7of the increase attributable to Spire Missouri and $3.0 attributable to Spire Alabama.
Gas Marketing
Operating Revenues –Gas Marketing operating revenue for the year ended September 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 ended September 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 ended September 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 ended September 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 ended September 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 ended September 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.
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Spire Missouri
Summary Operating Results
Year ended September 30,
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
Gross receipts tax expense 71.1 68.9
Operating revenues during the year ended September 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 ended September 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 ended September 30, 2019 were $11.0 lower than the prior year. Removing last year’s $38.4 of Missouri 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 throughout Missouri. 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 ended September 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.
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