DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Spire

Spire Missouri has a risk management policy to utilize various derivatives, including futures contracts, exchange-traded options and swaps for the explicit purpose of managing price risk associated with purchasing and delivering natural gas on a regular basis to customers in accordance with its tariffs. The objective of this policy is to limit Spire Missouri’s exposure to natural gas price volatility and to manage, hedge and mitigate substantial price risk. Further discussion of this policy can be found in the Spire Missouri section.

From time to time Spire Missouri and Spire Alabama purchase NYMEX futures and options contracts to help stabilize operating costs associated with forecasted purchases of gasoline and diesel fuels used to power vehicles and equipment. Further information on these derivatives can be found in the Spire Missouri and Spire Alabama sections, respectively.

In the course of its business, Spire’s gas marketing subsidiary, Spire Marketing (including a wholly owned subsidiary), enters into commitments associated with the purchase or sale of natural gas. Certain of Spire Marketing’s derivative natural gas contracts are designated as normal purchases or normal sales and, as such, are excluded from the scope of ASC Topic 815 and are accounted for as executory contracts on an accrual basis. Any of Spire Marketing’s derivative natural gas contracts that are not designated as normal purchases or normal sales are accounted for at fair value. At September 30, 2018, the fair values of 277.7 million MMBtu of non-exchange-traded natural gas commodity contracts were reflected in the Consolidated Balance Sheet. Of these contracts, 196.7 million MMBtu will settle during fiscal 2019, and 43.1 million MMBtu, 30.5 million MMBtu, 7.3 million MMBtu, and 0.1 million MMBtu will settle during fiscal years 2020, 2021, 2022, and 2023, respectively. These contracts have not been designated as hedges; therefore, changes in the fair value of these contracts are reported in earnings each period.

Furthermore, Spire Marketing manages the price risk associated with its fixed-priced commitments by either closely matching the offsetting physical purchase or sale of natural gas at fixed prices or through the use of NYMEX or ICE futures, swap, and option contracts to lock in margins.

At September 30, 2018, Spire Marketing’s unmatched fixed-price positions were not material to Spire’s financial position or results of operations. Spire Marketing’s NYMEX and ICE natural gas futures, swap and option contracts used to lock in margins may be designated as cash flow hedges of forecasted transactions for financial reporting purposes.

During fiscal 2016, Spire entered into interest rate swap agreements, with a notional amount of $85.0, to effectively lock in interest rates on a portion of the long-term debt it anticipated issuing to finance its acquisition of Spire EnergySouth. These derivative instruments were designated as cash flow hedges of forecasted transactions. Termination of the interest rate swap agreements later in fiscal 2016 resulted in a $0.4 loss recorded in accumulated other comprehensive loss to be amortized to interest expense over the life of the related debt issuances.

Also during fiscal 2016, Spire entered into interest rate swap transactions with a notional amount of $225.0 to protect itself against adverse movement in interest rates in anticipation of the issuance of long-term debt in fiscal 2017. These hedge positions were settled during fiscal 2017, resulting in a gain of $14.1 which will be amortized to reduce interest expense over the hedged periods. Also during fiscal 2017, Spire entered into a ten-year interest rate swap with a fixed interest rate of 2.658% and a notional amount of $60.0 to protect itself against adverse movements in interest rates on future interest rate payments. The Company recorded a $2.5 mark-to-market gain on this swap as part of other comprehensive income for the year ended September 30, 2018. In August 2018, Spire entered into a three-year interest rate swap with a fixed interest rate of 2.7675% and a notional amount of $100.0 to protect itself against adverse movements in interest rates on future variable interest rate payments. The Company recorded a $0.5 mark-to-market gain on this swap as part of other comprehensive income for the year ended September 30, 2018.

The Company’s and Spire Missouri’s exchange-traded/cleared derivative instruments consist primarily of NYMEX and ICE positions. The NYMEX is the primary national commodities exchange on which natural gas derivatives are traded. Open NYMEX and ICE natural gas futures and swap positions at September 30, 2018 were as follows:



	Gas Utility			Gas Marketing
	MMBtu (millions)	Avg. Price Per MMBtu		MMBtu (millions)	Avg. Price Per MMBtu
NYMEX/ICE open short futures positions/swap positions
Fiscal 2019	—	$	—	7.87	$	3.04
Fiscal 2020	—	—		2.00	2.93
Fiscal 2021	—	—		0.14	2.94
NYMEX/ICE open long futures/swap positions
Fiscal 2019	24.12	2.80		9.27	2.89
Fiscal 2020	2.68	2.69		2.11	2.85
Fiscal 2021	—	—		0.55	2.87
Fiscal 2022	—	—		0.25	2.98
Fiscal 2023	—	—		0.01	2.86
ICE open short daily swap positions
Fiscal 2019	—	—		2.54	2.95
ICE open long daily swap positions
Fiscal 2019	—	—		0.57	2.92
ICE open short basis swap positions
Fiscal 2019	—	—		52.48	0.23
Fiscal 2020	—	—		3.80	0.25
ICE open long basis swap positions
Fiscal 2019	—	—		49.99	0.64
Fiscal 2020	—	—		3.18	0.68
Fiscal 2022	—	—		0.92	0.52
Fiscal 2023	—	—		0.16	0.52

At September 30, 2018, Spire Missouri also had 38.4 million MMBtu of other price mitigation in place through the use of NYMEX natural gas option-based strategies while Spire Marketing had none.

Derivative instruments designated as cash flow hedges of forecasted transactions are recognized on the balance sheets of the Company at fair value, and the change in fair value of the effective portion of these hedge instruments is recorded, net of income tax, in other comprehensive income or loss (“OCI”). Accumulated other comprehensive income or loss (“AOCI”) is a component of Total Common Stock Equity. Amounts are reclassified from AOCI into earnings when the hedged items affect net income, using the same revenue or expense category that the hedged item impacts. Based on market prices at September 30, 2018, it is expected that an immaterial amount of unrealized gains will be reclassified into the Consolidated Statements of Income of the Company during the next twelve months. Cash flows from hedging transactions are classified in the same category as the cash flows from the items that are being hedged in the Consolidated Statements of Cash Flows.



Effect of Derivative Instruments on the Consolidated Statements of Income and Comprehensive Income
	Location of Gain (Loss)
	Recorded in Income	2018			2017			2016
Derivatives in Cash Flow Hedging Relationships
Effective portion of gain (loss) recognized in OCI on derivatives:
Gas Marketing natural gas contracts		$	—		$	—		$	(0.6	)
Gas Utility gasoline and heating oil contracts		—			0.1			—
Interest rate swaps		3.9			11.4			(3.4		)
Total		$	3.9		$	11.5		$	(4.0	)
Effective portion of gain (loss) reclassified from AOCI to income:
Natural gas contracts	Gas Marketing Operating Revenues	$	—		$	(0.4	)	$	4.3
	Gas Marketing Operating Expenses	—			0.1			(4.9		)
Subtotal		—			(0.3		)	(0.6		)
Gasoline and heating oil contracts	Gas Utility Other Operating Expenses	0.1			0.2			(0.5		)
Interest rate swaps	Interest Expense	1.4			0.1			—
Total		$	1.5		$	—		$	(1.1	)
Ineffective portion of gain (loss) on derivatives recognized in income:
Natural gas contracts	Gas Marketing Operating Revenues	$	—		$	—		$	0.1
	Gas Marketing Operating Expenses	—			—			0.1
Subtotal		—			—			0.2
Gasoline and heating oil contracts	Gas Utility Other Operating Expenses	—			—			0.1
Interest rate swaps	Interest Expense	—			0.5			—
Total		$	—		$	0.5		$	0.3

Derivatives Not Designated as Hedging Instruments*
Gain (loss) recognized in income on derivatives:
Natural gas commodity contracts	Gas Marketing Operating Revenues	$	10.2		$	0.7		$	12.3
	Gas Marketing Operating Expenses	(8.1		)	—			—
NYMEX / ICE natural gas contracts	Gas Marketing Operating Revenues	—			(4.4		)	(1.7		)
Total		$	2.1		$	(3.7	)	$	10.6

Gains and losses on Spire Missouri’s natural gas derivative instruments, which are not designated as hedging instruments for financial reporting purposes, are deferred pursuant to the Missouri Utilities’ PGA clauses and initially recorded as regulatory assets or regulatory liabilities. These gains and losses are excluded from the table above because they have no direct impact on the statements of income. Such amounts are recognized in the statements of income as a component of Regulated Gas Distribution Natural and Propane Gas operating expenses when they are recovered through the PGA clause and reflected in customer billings.



Fair Value of Derivative Instruments in the Consolidated Balance Sheets
	Asset Derivatives*			Liability Derivatives*
September 30, 2018	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments
Other: Interest rate swaps	Derivative Instrument Assets	3.0		Derivative Instrument Assets	—
Subtotal		3.0			—

Derivatives not designated as hedging instruments
Gas Utility:
Natural gas contracts	Accounts Receivable – Other	2.7		Accounts Receivable – Other	1.9
Gas Marketing:
NYMEX / ICE natural gas contracts	Derivative Instrument Assets	3.8		Derivative Instrument Assets	10.7
	Deferred Charges – Other	0.4		Deferred Charges – Other	0.7
Natural gas commodity	Derivative Instrument Assets	10.9		Derivative Instrument Assets	1.0
	Deferred Charges – Other	6.3		Deferred Charges – Other	0.2
	Current Liabilities – Other	0.3		Current Liabilities – Other	6.3
	Deferred Credits – Other	—		Deferred Credits – Other	0.2
Subtotal		24.4			21.0
Total derivatives		$	27.4		$	21.0

September 30, 2017
Derivatives designated as hedging instruments
Gas Utility:
Gasoline and heating oil contracts	Derivative Instrument Assets	$	0.1	Derivative Instrument Assets	$	—
Gas Marketing:
Natural gas contracts	Derivative Instrument Assets	0.3		Derivative Instrument Assets	0.2
	Deferred Charges - Other	0.3		Deferred Charges - Other	—
Other: Interest rate swaps	Derivative Instrument Assets	—		Derivative Instrument Assets	0.9
Subtotal		0.7			1.1
Derivatives not designated as hedging instruments
Gas Utility:
Natural gas contracts	Accounts Receivable – Other	3.4		Accounts Receivable – Other	1.9
Gas Marketing:
NYMEX / ICE natural gas contracts	Derivative Instrument Assets	1.7		Derivative Instrument Assets	1.4
	Deferred Charges – Other	0.3		Deferred Charges – Other	0.5
Natural gas commodity	Derivative Instrument Assets	5.3		Derivative Instrument Assets	0.1
	Deferred Charges – Other	0.4		Deferred Charges – Other	—
	Current Liabilities – Other	0.8		Current Liabilities – Other	5.0
	Deferred Credits – Other	0.4		Deferred Credits – Other	3.3
Subtotal		12.3			12.2
Total derivatives		$	13.0		$	13.3

The fair values of Asset Derivatives and Liability Derivatives exclude the fair value of cash margin receivables or payables with counterparties subject to netting arrangements. Fair value amounts of derivative contracts (including the fair value amounts of cash margin receivables and payables) for which there is a legal right to set off are presented net on the balance sheets. As such, the gross balances presented in the table above are not indicative of the Company’s net economic exposure. Refer to Note 8, Fair Value Measurements, for information on the valuation of derivative instruments.

Following is a reconciliation of the amounts in the tables above to the amounts presented in the Consolidated Balance Sheets:



	2018			2017
Fair value of asset derivatives presented above	$	27.4		$	13.0
Fair value of cash margin (payable) receivable offset with derivatives	6.4			(1.5		)
Netting of assets and liabilities with the same counterparty	(14.8		)	(5.3		)
Total	$	19.0		$	6.2
Derivative Instrument Assets, per Consolidated Balance Sheets:
Derivative instrument assets	$	13.3		$	5.9
Deferred Charges – Other	5.7			0.3
Total	$	19.0		$	6.2

Fair value of liability derivatives presented above	$	21.0		$	13.3
Netting of assets and liabilities with the same counterparty	(14.8		)	(5.3		)
Total	$	6.2		$	8.0
Derivative Instrument Liabilities, per Consolidated Balance Sheets:
Current Liabilities – Other	$	6.0		$	4.9
Deferred Credits – Other	0.2			3.1
Total	$	6.2		$	8.0

Additionally, at September 30, 2018 and 2017, the Company had $4.1 and $4.0, respectively, in cash margin receivables not offset with derivatives, which are presented in Accounts Receivable – Other.

Spire Missouri

Spire Missouri has a risk management policy to utilize various derivatives, including futures contracts, exchange-traded options, swaps and over-the-counter instruments for the explicit purpose of managing price risk associated with purchasing and delivering natural gas on a regular basis to customers in accordance with its tariffs. The objective of this policy is to limit Spire Missouri’s exposure to natural gas price volatility and to manage, hedge and mitigate substantial price risk. This policy strictly prohibits speculation and permits Spire Missouri to hedge current physical natural gas purchase commitments or forecasted or anticipated future peak (maximum) physical need for natural gas delivered. Costs and cost reductions, including carrying costs, associated with Spire Missouri’s use of natural gas derivative instruments are allowed to be passed on to Spire Missouri customers through the operation of its PGA clause, through which the MoPSC allows Spire Missouri to recover gas supply costs, subject to prudence review by the MoPSC. Accordingly, Spire Missouri does not expect any adverse earnings impact as a result of the use of these derivative instruments.

Spire Missouri does not designate these instruments as hedging instruments for financial reporting purposes because gains or losses associated with the use of these derivative instruments are deferred and recorded as regulatory assets or regulatory liabilities pursuant to ASC Topic 980, Regulated Operations, and, as a result, have no direct impact on the statements of income.

The timing of the operation of the PGA clause may cause interim variations in short-term cash flows, because Spire Missouri is subject to cash margin requirements associated with changes in the values of these instruments. Nevertheless, carrying costs associated with such requirements are recovered through the PGA clause.

From time to time, Spire Missouri purchases NYMEX futures and options contracts to help stabilize operating costs associated with forecasted purchases of gasoline and diesel fuels used to power vehicles and equipment used in the course of its business. These contracts are designated as cash flow hedges of forecasted transactions pursuant to ASC Topic 815, Derivatives and Hedging. The gains or losses on these derivative instruments are not subject to Spire Missouri’s PGA clause. At September 30, 2018, Spire Missouri had no gasoline futures contracts outstanding.

Derivative instruments designated as cash flow hedges of forecasted transactions are recognized on the balance sheets at fair value and the change in the fair value of the effective portion of these hedge instruments is recorded, net of income tax, in OCI. AOCI is a component of Total Common Stock Equity. Amounts are reclassified from AOCI into earnings when the hedged items affect net income, using the same revenue or expense category that the hedged item impacts. Based on market prices at September 30, 2018, it is expected that an immaterial amount of pre-tax gains will be reclassified into the statements of income during fiscal 2019. Cash flows from hedging transactions are classified in the same category as the cash flows from the items that are being hedged in the statements of cash flows.

Spire Missouri’s derivative instruments consist primarily of NYMEX positions. The NYMEX is the primary national commodities exchange on which natural gas derivatives are traded. Open NYMEX natural gas futures positions at September 30, 2018 were as follows:

At September 30, 2018, Spire Missouri also had 38.4 million MMBtu of other price mitigation in place through the use of NYMEX natural gas option-based strategies.



Effect of Derivative Instruments on the Statements of Comprehensive Income
	Location of Gain (Loss)
	Recorded in Income	2018		2017		2016
Derivatives in Cash Flow Hedging Relationships
Effective portion of gain (loss) recognized in OCI on derivatives:
Gasoline and heating oil contracts		$	—	$	0.1	$	—
Effective portion of gain (loss) reclassified from AOCI to income:
Gasoline and heating oil contracts	Gas Utility Other Operating Expenses	$	0.1	$	0.2	$	(0.5	)
Ineffective portion of gain (loss) on derivatives recognized in income:
Gasoline and heating oil contracts	Gas Utility Other Operating Expenses	$	—	$	—	$	0.1

Gains and losses on Spire Missouri’s natural gas derivative instruments, which are not designated as hedging instruments for financial reporting purposes, are deferred pursuant to the Spire Missouri’s PGA clauses and initially recorded as regulatory assets or regulatory liabilities. These gains and losses are excluded from the table above because they have no direct impact on the Statements of Income. Such amounts are recognized in the Statements of Income as a component of Regulated Gas Distribution Natural and Propane Gas operating expenses when they are recovered through the PGA clause and reflected in customer billings.



Fair Value of Derivative Instruments in the Balance Sheets
	Asset Derivatives*			Liability Derivatives*
September 30, 2018	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives not designated as hedging instruments
Natural gas contracts	Accounts Receivable – Other	2.7		Accounts Receivable – Other	1.9
Total derivatives		$	2.7		$	1.9

September 30, 2017
Derivatives designated as hedging instruments
Gasoline and heating oil contracts	Derivative Instrument Assets	$	0.1	Derivative Instrument Assets	$	—
Subtotal		0.1			—
Derivatives not designated as hedging instruments
Natural gas contracts	Accounts Receivable – Other	3.4		Accounts Receivable – Other	1.9
Total derivatives		$	3.5		$	1.9

The fair values of Asset Derivatives and Liability Derivatives exclude the fair value of cash margin receivables or payables with counterparties subject to netting arrangements. Fair value amounts of derivative contracts (including the fair value amounts of cash margin receivables and payables) for which there is a legal right to set off are presented net on the Balance Sheets. As such, the gross balances presented in the table above are not indicative of Spire Missouri’s net economic exposure. Refer to Note 8, Fair Value Measurements, for information on the valuation of derivative instruments.

Following is a reconciliation of the amounts in the tables above to the amounts presented in Spire Missouri’s Balance Sheets:



	2018			2017
Fair value of asset derivatives presented above	$	2.7		$	3.5
Fair value of cash margin (payable) receivable offset with derivatives	(0.8		)	(1.5		)
Netting of assets and liabilities with the same counterparty	(1.9		)	(1.9		)
Total	$	—		$	0.1
Derivative Instrument Assets, per Balance Sheets:
Derivative instrument assets	$	—		$	0.1
Total	$	—		$	0.1

Fair value of liability derivatives presented above	$	1.9		$	1.9
Netting of assets and liabilities with the same counterparty	(1.9		)	(1.9		)
Total	$	—		$	—

Additionally, at September 30, 2017 and 2016, Spire Missouri had $3.8 and $4.0, respectively, in cash margin receivables not offset with derivatives, which are presented in Accounts Receivable – Other.

Spire Alabama

During the fiscal second quarter of 2016, Spire Alabama commenced a gasoline derivative program to help stabilize operating costs associated with forecasted purchases of gasoline and diesel fuels used to power vehicles and equipment used in the course of its business. Most of these contracts are designated as cash flow hedges of forecasted transactions pursuant to ASC Topic 815, Derivatives and Hedging. The gains or losses on these derivative instruments are not subject to Spire Alabama’s GSA rider. There were no contracts outstanding as of September 30, 2018, and the fair value of gasoline contracts as of September 30, 2017 was not significant.

MMBtu
(millions)

Avg. Price
Per MMBtu

NYMEX/ICE open long futures/swap positions

Fiscal 2019

Fiscal 2020