SPIRE INC. (Dollars in millions, except per share and per unit amounts)
INTRODUCTION
This section analyzes the financial condition and results of operations ofSpire Inc. (the "Company"),Spire Missouri Inc. , andSpire Alabama Inc. SpireMissouri , Spire Alabama andSpire EnergySouth are wholly owned subsidiaries of the Company. SpireMissouri , Spire Alabama and the subsidiaries ofSpire EnergySouth are collectively referred to as the "Utilities." The subsidiaries ofSpire EnergySouth are Spire Gulf and Spire Mississippi. This section includes management's view of factors that affect the respective businesses of the Company, Spire Missouri and Spire Alabama, explanations of financial results including changes in earnings and costs from the prior periods, and the effects of such factors on the Company's, Spire Missouri's and Spire Alabama's overall financial condition and liquidity. Unless otherwise indicated, references to years herein are references to the fiscal years endingSeptember 30 for the Company and its subsidiaries. Reference is made to "Item 1A. Risk Factors" and "Forward-Looking Statements," which describe important factors that could cause actual results to differ from expectations and non-historical information contained herein. In addition, the following discussion should be read in conjunction with the audited financial statements and accompanying notes thereto of Spire, Spire Missouri and SpireAlabama included in "Item 8. Financial Statements and Supplementary Data."
OVERVIEW
The Company has two reportable segments: Gas Utility and Gas Marketing. Nearly all of Spire's earnings are derived from its Gas Utility segment, which reflects the regulated activities of the Utilities. Due to the seasonal nature of the Utilities' business and the Spire Missouri rate design, earnings of Spire and each of the Utilities are typically concentrated during the heating season of November through April each fiscal year.
Gas Utility - Spire Missouri
SpireMissouri isMissouri's largest natural gas distribution utility and is regulated by the MoPSC. SpireMissouri servesSt. Louis ,Kansas City , and other areas throughout the state. SpireMissouri purchases natural gas in the wholesale market from producers and marketers and ships the gas through interstate pipelines into its own distribution facilities for sale to residential, commercial and industrial customers. SpireMissouri also transports gas through its distribution system for certain larger customers who buy their own gas on the wholesale market. SpireMissouri delivers natural gas to customers at rates and in accordance with tariffs authorized by the MoPSC. The earnings of Spire Missouri are primarily generated by the sale of heating energy.
Gas Utility - Spire Alabama
SpireAlabama is the largest natural gas distribution utility in the state ofAlabama and is regulated by the APSC. SpireAlabama's service territory is located in central and northernAlabama . Among the cities served by SpireAlabama areBirmingham , the center of the largest metropolitan area in the state, andMontgomery , the state capital. SpireAlabama purchases natural gas through interstate and intrastate suppliers and distributes the purchased gas through its distribution facilities for sale to residential, commercial, and industrial customers and other end-users of natural gas. SpireAlabama also transports gas through its distribution system for certain large commercial and industrial customers for a transportation fee. EffectiveDecember 1, 2020 , for most of these transportation service customers, Spire Alabama will also purchase gas on the wholesale market for sale to the customer upon delivery to the SpireAlabama distribution system. All Spire Alabama services are provided to customers at rates and in accordance with tariffs authorized by the APSC. 28 --------------------------------------------------------------------------------
Gas Utility -
Spire Gulf and Spire Mississippi are utilities engaged in the purchase, retail distribution and sale of natural gas to approximately 100,000 customers in southernAlabama and south-centralMississippi . Spire Gulf is regulated by the APSC, and Spire Mississippi is regulated by the MSPSC.
Gas Marketing
Spire Marketing is engaged in the marketing of natural gas and related activities on a non-regulated basis and is reported in the Gas Marketing segment. Spire Marketing markets natural gas across the central and southernU.S. It holds firm transportation and storage contracts in order to effectively manage its transactions with counterparties, which primarily include producers, municipalities, electric and gas utility companies, and large commercial and industrial customers. Other
Other components of the Company's consolidated information include:
• unallocated corporate items, including certain debt and associated interest
costs;
• Spire STL Pipeline, a subsidiary of Spire providing interstate natural gas
pipeline transportation services;
• Spire Storage, a subsidiary of Spire providing interstate natural gas storage
services; and
• Spire's subsidiaries engaged in the operation of a propane pipeline, the
compression of natural gas, and risk management, among other activities.
Business Evaluation Factors Based on the nature of the business of the Company and its subsidiaries, as well as current economic conditions, management focuses on several key variables in evaluating the financial condition and results of operations and managing the business.
For the Gas Utility segment, these include:
• the Utilities' ability to recover from their customers the costs of
purchasing and distributing natural gas;
• the impact of weather and other factors, such as customer conservation, on
revenues and expenses;
• changes in the regulatory environment at the federal, state, and local
levels, as well as decisions by regulators, that impact the Utilities'
ability to earn the authorized rate of return and recover prudent costs in
each of the service territories they serve;
• the Utilities' ability to access credit markets and maintain working capital
sufficient to meet operating requirements;
• the effect of natural gas price volatility on the business; and
• the ability to manage costs, integrate and standardize operations, and
upgrade infrastructure.
In the Gas Marketing segment, these include:
• the risks of competition; • fluctuations in natural gas prices; • the changing flow and availability of natural gas; • new national infrastructure projects;
• the ability to procure firm transportation and storage services at reasonable
rates;
• credit and/or capital market access;
• counterparty risks; and
• the effect of natural gas price volatility on the business.
Further information regarding how management seeks to manage these key variables is discussed below.
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--------------------------------------------------------------------------------Gas Utility
The Utilities seek to provide reliable natural gas services at a reasonable cost, while maintaining and building secure and dependable infrastructures. The Utilities' strategies focus on improving both performance and the ability to recover their authorized distribution costs and rates of return. The Utilities' distribution costs are the essential, primarily fixed, expenditures they must incur to operate and maintain more than 60,000 miles of mains and services comprising their natural gas distribution systems and related storage facilities. The Utilities' distribution costs include wages and employee benefit costs, depreciation and maintenance expenses, and other regulated utility operating expenses, excluding natural and propane gas expense. Distribution costs are considered in the rate-making process, and recovery of these types of costs is included in revenues generated through the Utilities' tariff rates. SpireMissouri's tariff rates are approved by the MoPSC, whereas Spire Alabama's tariff rates are approved by the APSC. Spire Gulf and Spire Mississippi have tariff rates that are approved by the APSC and MSPSC, respectively. SpireMissouri and Spire Alabama also have off-system sales and capacity release income streams that are regulated by tariff but remain subject to fluctuations in market conditions. Some of the factors impacting the level of off-system sales include the availability and cost of Spire's natural gas supply, the weather in its service areas and the weather in other markets. When Spire's service areas experience warmer-than-normal weather while other markets experience colder weather or supply constraints, some of Spire's natural gas supply is available for sale to third parties not on Spire's system. The Utilities work actively to reduce the impact of wholesale natural gas price volatility on their costs by strategically structuring their natural gas supply portfolios to increase their gas supply availability and pricing alternatives. They may also use derivative instruments to hedge against significant changes in the commodity price of natural gas. Nevertheless, the overall cost of purchased gas remains subject to fluctuations in market conditions.The Purchased Gas Adjustment (PGA) clause of Spire Missouri, Spire Gulf and Spire Mississippi and the Gas Supply Adjustment (GSA) rider of Spire Alabama allow the Utilities to flow through to customers, subject to prudence review by the public service commissions, the cost of purchased gas supplies, including costs, cost reductions and related carrying costs associated with the use of derivative instruments to mitigate volatility in the cost of natural gas. As ofSeptember 30, 2021 , Spire Missouri had active derivative positions, but Spire Alabama has had no gas supply derivative instrument activity since 2010. Except in certain situations discussed under the caption "-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" under Item 1A, Risk Factors, and in Note 15 , Regulatory Matters, of the Notes to Financial Statements in Item 8, 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. 30 --------------------------------------------------------------------------------
Gas Marketing
Spire Marketing is engaged in the marketing of natural gas and related services throughoutthe United States , which includes customers within and outside of the Utilities' 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. 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. Spire Marketing cannot be certain that all of its wholesale purchase and sale transactions will settle physically. As such, these 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 natural gas expenses. In the course of its business, Spire Marketing enters into commitments associated with the purchase or sale of natural gas. In accordance withU.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 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 suspending disconnections and late payment fees for our utility customers for several months in 2020.
We have experienced impacts on our results of operations from COVID-19, including:
• lost late payment fees due to a moratorium from late March through mid-June
2020;
• minor net margin impact from lower commercial and industrial volumes offset
by additional residential fixed charges;
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• bad debt expense increases due to additional expected credit losses on
accounts receivable balances; and
• net other direct cost reductions due to lower travel, meals andentertainment and training offset by increased costs for enhanced cleaning
and personal protective equipment for our facilities and field personnel
compared to normal and expected levels.
SpireMissouri received an Accounting Authority Order from the MoPSC to defer certain costs incurred throughMarch 31, 2021 , and has recorded a related regulatory asset of$6.2 as ofSeptember 30, 2021 . Even with the cost increases and lost revenues, Spire Alabama exceeded the allowed return and recorded a Rate Stabilization and Equalization giveback inSeptember 2020 and inJanuary 2021 , so there was no bottom-line impact of these COVID-19 effects. An extended slowdown ofthe United States' economy, changes in commodity costs and/or significant changes in policy and regulation could result in lower demand for natural gas as well as negatively impact the ability of our customers, contractors, suppliers and other business partners to remain in business or return to operating health. These could have a material adverse effect on our results of operations, financial condition, liquidity and prospects. The Company is participating in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provisions allowing for a payroll tax deferral which does not have an impact on our results of operations but defers the payment of the Company's portion of certain payroll taxes until later in fiscal 2021 and 2022. Although the Company does not currently expect to seek relief under any other CARES Act provisions, we will continue to monitor all pending and future federal, state and local efforts related to the COVID-19 health crisis and assess our need and, as applicable, eligibility for any such relief.
NON-GAAP MEASURES
Net income, earnings per share and operating income reported by Spire, SpireMissouri and Spire Alabama are determined in accordance with GAAP. Spire, SpireMissouri and Spire Alabama also provide the non-GAAP financial measures of net economic earnings, net economic earnings per share and contribution margin. Management and the Board of Directors use non-GAAP financial measures, in addition to GAAP financial measures, to understand and compare operating results across accounting periods, for financial and operational decision making, for planning and forecasting, to determine incentive compensation and to evaluate financial performance. These non-GAAP operating metrics should not be considered as alternatives to, or more meaningful than, the related GAAP measures. Reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are provided on the following pages.
Net Economic Earnings and Net Economic Earnings Per Share
Net economic earnings and net economic earnings per share are non-GAAP measures
that exclude from net income the impacts of fair value accounting and timing
adjustments associated with energy-related transactions, the impacts of
acquisition, divestiture and restructuring activities, and the largely non-cash
impacts of impairments and other non-recurring or unusual items such as certain
regulatory, legislative or GAAP standard-setting actions. In addition, net
economic earnings per share would exclude the impact, in the fiscal year of
issuance, of any 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:
• Net unrealized gains and losses on energy-related derivatives that are
required by GAAP fair value accounting associated with current changes in the
fair value of financial and physical transactions prior to their completion
and settlement. These unrealized gains and losses result primarily from two
sources:
1) changes in the fair values of physical and/or financial derivatives prior
to the period of settlement; and
2) ineffective portions of accounting hedges, required to be recorded inearnings prior to settlement, due to differences in commodity price
changes between the locations of the forecasted physical purchase or sale
transactions and the locations of the underlying hedge instruments;
• Lower of cost or market adjustments to the carrying value of commodity
inventories resulting when the net realizable value of the commodity falls
below its original cost, to the extent that those commodities are
economically hedged; and
• Realized gains and losses resulting from the settlement of economic hedges
prior to the sale of the physical commodity.
These adjustments eliminate the impact of timing differences and the impact of current changes in the fair value of financial and physical transactions prior to their completion and settlement. Unrealized gains or losses are recorded in each period until being replaced with the actual gains or losses realized when the associated physical transactions occur. Management believes that excluding the earnings volatility caused by recognizing changes in fair value prior to settlement and other timing differences associated with related purchase and sale transactions provides a useful representation of the economic effects of only the actual settled transactions and their effects on results of operations. While management uses these non-GAAP measures to evaluate all of its businesses, the net effect of these fair value and timing adjustments on the Utilities' earnings is minimal because gains or losses on their natural gas derivative instruments are deferred pursuant to state regulation.
Contribution Margin
In addition to operating revenues and operating expenses, management also uses
the non-GAAP measure of contribution margin when evaluating results of
operations. Contribution margin is defined as operating revenues less natural
gas costs and gross receipts tax expense. The Utilities pass to their customers
(subject to prudence review by, as applicable, the MoPSC, APSC or MSPSC)
increases and decreases in the wholesale cost of natural gas in accordance with
their PGA clauses or GSA riders. The volatility of the wholesale natural gas
market results in fluctuations from period to period in the recorded levels of,
among other items, revenues and natural gas cost expense. Nevertheless,
increases and decreases in the cost of gas associated with system gas sales
volumes and gross receipts tax expense (which are calculated as a percentage of
revenues), with the same amount (excluding immaterial timing differences)
included in revenues, have no direct effect on operating income. Therefore,
management believes that contribution margin is a useful supplemental measure,
along with the remaining operating expenses, for assessing the Company's and the
Utilities' performance.
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EARNINGS
This section contains discussion and analysis of the results for the year endedSeptember 30, 2021 compared to the results for the year endedSeptember 30, 2020 . The discussion and analysis of the results for the year endedSeptember 30, 2020 compared to the results of the year endedSeptember 30, 2019 can be found in Part II, Item 7 ofSpire Inc.'s fiscal 2020 Annual Report on Form 10-K, filed with theU.S. Securities and Exchange Commission (SEC) onNovember 18, 2020 . Spire
Net Income (Loss) and Net Economic Earnings (Loss)
The following tables reconcile the Company's net economic earnings to the most comparable GAAP number, net income.
Per
Gas Gas Consol- Diluted
Utility Marketing Other idated Share**
Year Ended September 30, 2021
Net Income (Loss) [GAAP] $ 237.2 $ 44.8 $ (10.3 ) $ 271.7 $ 4.96
Adjustments, pre-tax:
Missouri regulatory adjustments (9.0 ) - - (9.0 ) (0.17 )
Fair value and timing adjustments 0.3 3.0 - 3.3 0.06
Acquisition, divestiture and
restructuring activities - - (1.3 ) (1.3 ) (0.02 )
Income tax effect of adjustments* 2.1 (0.8 ) 0.3 1.6 0.03
Net Economic Earnings (Loss)
[Non-GAAP] $ 230.6 $ 47.0 $
(11.3 )
Year EndedSeptember 30, 2020 Net Income (Loss) [GAAP]$ 213.6 $ 7.0 $ (132.0 ) $ 88.6 $ 1.44 Adjustments, pre-tax: Impairments - - 148.6 148.6 2.89 Fair value and timing adjustments (0.3 ) 2.8 - 2.5 0.05 Income tax effect of adjustments* 0.1 (0.7 ) (31.3 ) (31.9 ) (0.62 ) Net Economic Earnings (Loss) [Non-GAAP]$ 213.4 $ 9.1 $
(14.7 )
Year EndedSeptember 30, 2019 Net Income (Loss) [GAAP]$ 190.5 $ 18.5 $ (24.4 ) $ 184.6 $ 3.52 Adjustments, pre-tax: Provision for ISRS rulings 12.2 - - 12.2 0.23 Fair value and timing adjustments - 1.2 - 1.2 0.03 Acquisition, divestiture and restructuring activities - - 0.4 0.4 0.01 Income tax effect of adjustments* (2.9 ) (0.3 ) (0.1 ) (3.3 ) (0.06 ) Net Economic Earnings (Loss) [Non-GAAP]$ 199.8 $ 19.4 $ (24.1 ) $ 195.1 $ 3.73
* Income tax effect is calculated by applying federal, state and local income
tax rates applicable to ordinary income to the amounts of the pre-tax
reconciling items and then adding any estimated effects of enacted state or
local income tax laws for periods before the related effective date.
** Net economic earnings per share is calculated by replacing consolidated net
income with consolidated net economic earnings in the GAAP diluted earnings
per share calculation, which includes reductions for cumulative preferred
dividends and participating shares.
Consolidated
Spire's net income was$271.7 in fiscal 2021, compared with$88.6 in fiscal 2020. Basic and diluted earnings per share were$4.97 and$4.96 , respectively, for fiscal 2021 compared with basic and diluted earnings per share of$1.44 for fiscal 2020. 34
-------------------------------------------------------------------------------- The prior year amount reflects the impact of the third quarter 2020 impairment charge of$148.6 ($117.3 after tax). Excluding this charge, net income increased$65.8 , driven by increases of$37.8 and$23.6 in Gas Marketing and Gas Utility, respectively, combined with a$4.4 improvement in results from Other. Net economic earnings were$266.3 ($4.86 per diluted share) for the twelve months endedSeptember 30, 2021 , compared to$207.8 ($3.76 per diluted share) for the same period last year, reflecting earnings improvements in both the Gas Marketing and Gas Utility segments, as well as Other. These variances are discussed in greater detail below.
Gas Utility
Gas Utility net income increased by$23.6 from the prior year. The Gas Utility segment is higher due principally to a$24.1 increase in contribution margin resulting from higher off-system sales in the second quarter of the current year. This increase was a result of managing our gas inventory levels to serve our customers during the cold weather events inFebruary 2021 and allowed SpireMissouri to capitalize on gas flow disruptions resulting in increased off-system sales which also benefited our customers. The current year also benefited from a$15.9 increase in Spire Missouri ISRS revenues (including the impact of a prior-year provision of$2.2 related to the ISRS ruling settled in the year),$9.8 in net favorable rate adjustments under the RSE mechanism at Spire Alabama, theMissouri Supreme Court ruling that partially reversed 2018 rate case pension cost disallowances totaling$9.0 ($6.8 after tax), and$6.3 higher contribution margin due to the impacts of colder weather in the second quarter of the current year. These positive impacts were partially offset by higher run-rate operating costs and a$14.7 increase in depreciation and amortization reflecting increased capital investment and a disallowed meter cost recovery in Spire Missouri. Net economic earnings in the current year were$230.6 , an increase of$17.2 over the same period in the prior year. The increase was primarily driven by higher contribution margin that was only partly offset by an increase in depreciation and amortization and higher run-rate operating expenses, after reclassification of certain postretirement benefit costs to other income and expense (no impact on net income) ("Nonservice Cost Transfer") and theMissouri Supreme Court ruling that partially reversed 2018 rate case pension cost disallowances. These impacts are described in further detail below.
Gas Marketing
The Gas Marketing segment reported net income totaling$44.8 for the twelve months endedSeptember 30, 2021 , versus net income of$7.0 during the same period last year. Net economic earnings for the twelve months endedSeptember 30, 2021 , was$47.0 , an increase of$37.9 from the same period last year. Both net income and net economic earnings reflect strong operating results in the current year, driven by storage positions established last year and the resulting optimization of market conditions in the second fiscal quarter due to extreme weather as a result of Winter Storm Uri.
Other
The Company's other non-utility activities generated a net loss of$10.3 for fiscal 2021, compared to a net loss of$132.0 for the same period last year. Fiscal 2020 reflects the$117.3 after-tax impairment charge previously mentioned. Net economic loss was$11.3 for fiscal 2021, an improvement of$3.4 compared to fiscal 2020. The improvement was driven primarily by a smaller loss from Spire Storage. 35
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Operating Revenues and Operating Expenses
Reconciliations of contribution margin to the most directly comparable GAAP
measure are shown below.
Gas Gas
Utility Marketing Other Eliminations Consolidated
Year Ended September 30, 2021
Operating Income $ 374.0 $ 58.5 $ 17.7 $ - $ 450.2
Operation and maintenance expenses 422.2 17.1 40.2 (13.7 ) 465.8
Depreciation and amortization 204.4 1.2 7.5 - 213.1
Taxes, other than income taxes 157.0 0.9 2.2 - 160.1
Less: Gross receipts tax expense (93.9 ) (0.1 ) -
- (94.0 )
Contribution Margin [Non-GAAP] 1,063.7 77.6 67.6 (13.7 ) 1,195.2
Natural gas costs 961.7 18.8 0.1 (34.3 ) 946.3
Gross receipts tax expense 93.9 0.1 - - 94.0
Operating Revenues $ 2,119.3 $ 96.5 $ 67.7 $ (48.0 ) $ 2,235.5
Gas Gas
Utility Marketing Other Eliminations Consolidated
Year Ended September 30, 2020
Operating Income (Loss) $ 334.3 $ 9.3 $ (137.2 ) $ - $ 206.4
Operation and maintenance expenses 421.3 11.8 38.2 (12.7 ) 458.6
Depreciation and amortization 189.7 0.6 7.0 - 197.3
Taxes, other than income taxes 146.5 1.1 0.8 - 148.4
Impairment loss - - 148.6 - 148.6
Less: Gross receipts tax expense (91.1 ) (0.4 ) -
- (91.5 )
Contribution Margin [Non-GAAP] 1,000.7 22.4 57.4 (12.7 ) 1,067.8
Natural gas costs 660.2 65.1 0.4 (29.6 ) 696.1
Gross receipts tax expense 91.1 0.4 - - 91.5
Operating Revenues $ 1,752.0 $ 87.9 $ 57.8 $ (42.3 ) $ 1,855.4
Gas Gas
Utility Marketing Other Eliminations Consolidated
Year Ended September 30, 2019
Operating Income (Loss) $ 293.4 $ 23.2 $ (14.3 ) $ - $ 302.3
Operation and maintenance expenses 441.7 11.7 31.6 (10.9 ) 474.1
Depreciation and amortization 179.4 0.1 2.2 - 181.7
Taxes, other than income taxes 151.7 0.8 1.5 - 154.0
Less: Gross receipts tax expense (99.1 ) (0.2 ) -
- (99.3 )
Contribution Margin [Non-GAAP] 967.1 35.6 21.0 (10.9 ) 1,012.8
Natural gas costs 794.6 47.9 0.5 (2.7 ) 840.3
Gross receipts tax expense 99.1 0.2 - - 99.3
Operating Revenues $ 1,860.8 $ 83.7 $ 21.5 $ (13.6 ) $ 1,952.4
Consolidated
Spire's operating revenues increased by $380.1 , driven by higher revenues across
all segments, net of intercompany eliminations. Both the Gas Utility and Gas
Marketing segments saw their favorable results driven principally by the extreme
weather experienced as a result of Winter Storm Uri in February of the current
year. Specifically, the Gas Utility increase was $367.3 , Spire Marketing
increased $8.6 , while Other (net of intercompany eliminations) increased $4.2 ,
reflecting higher combined revenues from both Spire Storage and Spire STL
Pipeline (which entered service in late calendar 2019).
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Spire's contribution margin increased $127.4 compared with the same twelve-month
period last year, with all segments reporting increases. The Gas Utility
contribution margin increased $63.0 , primarily driven by the $51.2 increase from
Spire Missouri and the $10.8 increase at Spire Alabama. The $55.2 increase in
Gas Marketing reflects very favorable weather and market conditions in the
current year second quarter. Higher contribution margins at Spire STL Pipeline
are consistent with its in-service date early in fiscal 2020, and Spire
Storage's improvement reflects higher utilization of its storage capacity.
Depreciation and amortization expenses were higher in the Gas Utility segment,
due principally to higher capital investments. Gas Utility O&M expenses were
$0.9 higher in the current year, largely due to the Missouri Supreme Court
ruling that partially reversed 2018 rate case pension cost disallowances
totaling $9.0 offset by Nonservice Cost Transfer of $2.1 . These fluctuations are
described in more detail below.
Gas Utility
Operating Revenues - Gas Utility operating revenues for fiscal 2021 increased
SpireMissouri - Higher PGA gas cost recoveries $
183.2
Spire
113.0
Spire
31.9
Spire
15.9
Spire Alabama - RSE: net adjustments 9.4 Spire EnergySouth growth 5.3 All other factors 8.6 Total Variation$ 367.3 As shown in the table above, the increase in revenues was driven primarily by a$183.2 increase in Spire Missouri gas costs (including$195.8 of cover charges and OFO penalties to certain wholesale customers), a$113.0 increase in off-system sales, and higher weather/volumetric impacts of$31.9 . The segment also benefited from a$15.9 increase of Spire Missouri ISRS, a$9.4 increase due to Spire Alabama's rate adjustments under the RSE mechanism, and$5.3 growth fromSpire EnergySouth .
Contribution Margin - Gas Utility contribution margin was
Spire
15.9
SpireAlabama - RSE: net adjustments
9.8
SpireMissouri and Spire Alabama - Volumetric usage 6.3 All other factors 6.9 Total Variation$ 63.0 The contribution margin increase resulted primarily from higher off-system sales, Missouri ISRS (net of ISRS ruling provisions), Spire Alabama rate adjustments under the RSE mechanism, and higher volumetric margins. The higher off-system sales and volumetric impacts were primarily the result of the extreme weather conditions from Winter Storm Uri in February of the current year. Operating Expenses - O&M expenses in fiscal 2021 increased by$0.9 million compared to the prior-year period. This variance reflects the Nonservice Cost Transfer of$2.1 and the$9.0 decrease attributable to theMissouri Supreme Court ruling that partially reversed 2018 rate case pension cost disallowances. Excluding these impacts, O&M expenses increased by$7.8 due primarily to higher employee-related costs and$3.7 due to one-time cost adjustments relating to stipulations settled in the current Spire Missouri rate case. Depreciation and amortization expenses for the twelve months endedSeptember 30, 2021 increased$14.7 from the same period last year, principally the result of continued infrastructure capital spending, with$11.2 of the increase attributable to Spire Missouri and$2.8 attributable to Spire Alabama. Included in the SpireMissouri increase is a$3.4 charge pertaining to meter cost recovery that was disallowed by the MoPSC. 37
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Gas Marketing
Operating Revenues - Gas Marketing operating revenue for the year endedSeptember 30, 2021 increased$8.6 from the prior year. The variance in revenues reflects higher volumes and pricing, combined with the monetizing of incremental storage capacity. Contribution Margin - Gas Marketing contribution margin during the twelve months endedSeptember 30, 2021 , increased$55.2 from the same period last year, driven principally by strong second quarter results in the current year. During the second quarter, theFebruary 2021 cold weather events drove significantly higher regional basis differentials and volumes. Spire Marketing, along with many natural gas industry participants, faced the unprecedented effects of Winter Storm Uri. Numerous natural gas producers and midstream operators were unable to deliver natural gas to market as they experienced wellhead freeze-offs, power outages and equipment failure from the extreme weather. These events resulted in supply curtailments, and related notices of force majeure to excuse performance, from and to certain counterparties. Further, these events have made Spire Marketing subject to various commercial disputes (including regarding force majeure) and a regulatory dispute regarding tariff obligations as a shipper on an interstate pipeline. As such, Spire Marketing recorded an estimate of potential liabilities for damages based on the facts and circumstances surrounding each counterparty transaction as ofMarch 31, 2021 . During the subsequent two quarters, a number of these disputes have been resolved and/or exposures clarified based on further communication with the counterparties. It is expected that the estimate will change as new facts emerge or further settlements are reached, and it is possible that final settlement amounts may materially differ from the current estimate. Other Other operating revenue increased$9.9 for the year endedSeptember 30, 2021 compared to 2020, driven principally by Spire Storage and Spire STL Pipeline that was placed in service in November of 2019. Other operating expenses were$2.0 higher than the prior year reflecting higher activity levels at Spire Storage and Spire STL Pipeline FERC Certificate defense costs.
Interest Charges
Consolidated interest charges during the year endedSeptember 30, 2021 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 Spire STL Pipeline. The current year also benefited from lower interest rates that were only slightly offset by higher levels of average short-term borrowings. Short-term rates averaged 0.4% in the current year versus 1.7% for the prior year and, for the years endedSeptember 30, 2021 and 2020, average short-term borrowings were$610.5 and$576.2 , respectively.
Income Taxes
Consolidated income tax expense during the year endedSeptember 30, 2021 was$68.5 , compared to$12.4 for fiscal 2020. This increase of$56.1 is primarily the result of the$31.3 tax benefit relating to the impairment loss recorded in the third quarter of fiscal 2020, combined with higher pre-tax book income this year and a higher effective rate due to mix of earnings among entities in the current year. 38
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SpireMissouri Summary Operating Results Year ended September 30, 2021 2020 Operating Income$ 228.6 $ 205.6 Operation and maintenance expenses 261.1 251.0 Depreciation and amortization 129.2 118.0 Taxes, other than income taxes 110.9 103.2 Less: Gross receipts tax expense (64.3 ) (63.5 ) Contribution Margin [Non-GAAP] 665.5 614.3 Natural gas costs 786.8 515.8 Gross receipts tax expense 64.3 63.5 Operating Revenues$ 1,516.6 $ 1,193.6 Net Income$ 144.1 $ 130.2 Operating revenues during the twelve months endedSeptember 30, 2021 , increased$323.0 from the same period last year primarily due to a$183.2 increase attributable to higher gas costs (including$195.8 of cover charges and OFO penalties to certain wholesale customers), a$110.6 increase due to higher off-system sales,$15.9 higher ISRS, and a$6.7 increase in volumetric impacts (net of weather mitigation) relating to colder weather conditions primarily in the second quarter of the current year. Contribution margin increased$51.2 versus the same period in the prior year. The variance was attributable to a$22.9 increase in off-system sales and$6.5 higher volumetric margins (both principally due to the extreme weather in February of the current year), as well as the previously mentioned$15.9 increase in ISRS, and$1.3 related to customer growth. O&M expenses during the twelve months endedSeptember 30, 2021 , increased$10.1 from the same period last year. Excluding the Nonservice Cost Transfer of$5.0 and theMissouri Supreme Court ruling totaling$9.0 discussed above, O&M was higher by$14.1 , reflecting higher employee-related expenses and$3.7 relating to cost adjustments relating to stipulations settled in the current SpireMissouri rate case. Depreciation increased by$11.2 as a result of continuing capital investment and a$3.4 charge pertaining to disallowed meter cost recovery by the MoPSC. SpireMissouri's other expense increased$0.2 versus the comparable prior-year period. Removing the impact of the Nonservice Cost Transfer of$5.0 , other expense increased$5.2 , primarily due to higher charitable contributions in the current year only being partly offset by increases in the value of investments associated with non-qualified employee benefit plans reflecting market conditions.
Net income for the twelve months ended
Temperatures in Spire Missouri's service areas during the twelve months endedSeptember 30, 2021 , were 2.1% warmer than the same period last year and 4.0% warmer than normal. Despite the slightly warmer overall period temperatures, the Spire Missouri total system therms sold and transported were 1,700.2 million for the twelve months endedSeptember 30, 2021 , compared with 1,684.0 million for the same period last year. The increase was entirely due to the February cold weather events in the second quarter of the current year. Total off-system therms sold and transported were 22.4 million for the twelve months endedSeptember 30, 2021 , compared with 30.6 million for the same period last year. The 29.7% year-over-year increase in the second quarter of this year resulting from the February cold weather events was more than offset by lower therms transported in all remaining quarters of the current year. 39 --------------------------------------------------------------------------------
SpireAlabama Summary Operating Results Year ended September 30, 2021 2020 Operating Income$ 117.0 $ 102.9 Operation and maintenance expenses 132.5 139.1 Depreciation and amortization 62.1 59.3 Taxes, other than income taxes 37.1 34.8 Less: Gross receipts tax expense (25.1 ) (23.3 ) Contribution Margin [Non-GAAP] 323.6 312.8 Natural gas costs 145.3 118.9 Gross receipts tax expense 25.1 23.3 Operating Revenues$ 494.0 $ 455.0 Net Income$ 73.8 $ 65.7 Operating revenues for the twelve months endedSeptember 30, 2021 , increased$39.0 from the same period last year. The change was principally driven by a$25.2 increase in weather and usage impacts (net of weather mitigation) and$9.4 higher net rate adjustments under the RSE mechanism. Off-system sales in the current year contributed$2.4 to revenue growth, as off-system sales only commenced in the fourth quarter of fiscal 2020. Contribution margin increased$10.8 , which was principally a result of the rate adjustments under the RSE mechanism of$9.8 and$1.2 related to higher off-system sales. O&M expenses for the twelve months endedSeptember 30, 2021 , decreased$6.6 from the same period last year. Excluding the impact of the Nonservice Cost Transfer of$2.4 , the decrease of$4.2 was primarily driven by lower operations and employee-related costs.
Net income for the twelve months ended
Temperatures in Spire Alabama's service area during the twelve months endedSeptember 30, 2021 , were 12.0% colder than the same period last year but 6.4% warmer than normal. SpireAlabama's total system therms sold and transported were 1,029.6 million for the twelve monthsSeptember 30, 2021 , compared with 1,034.8 million for the same period last year. Off-system sales, and related therms sold totaled 48.4 million, versus 54.3 million in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
Recent Cash Flows
2021 2020 2019
Net cash provided by operating activities$ 249.8 $ 469.9 $ 450.9 Net cash used in investing activities (622.0 ) (631.6 ) (838.3 ) Net cash provided by financing activities 379.4 160.0 371.8 Net cash provided by operating activities decreased$220.1 from 2020 to 2021 and increased$19.0 from 2019 to 2020. Principally, these changes were related to regulatory timing and fluctuations in working capital items, as discussed below in the Future Cash Requirements section. More specifically, when looking at the change from 2020 to 2021, the large increase in accounts receivable was due to theFebruary 2021 cold weather event and the related delayed collections. In addition, this significant cold weather event impacted other areas, including increased inventories to ensure supply and increased accounts payable as related gas costs had risen. For more information, see the discussion of Spire Missouri's Operational Flow Order in Note 15 , Regulatory Matters, of the Notes to Financial Statements in Item 8. In fiscal 2021, the Company used$9.6 less cash in investing activities than in fiscal 2020, primarily driven by a$13.6 decrease in capital expenditures. The primary driver of the lower capital expenditures was a$53.3 decline related to Spire STL Pipeline and Spire Storage, largely offset by a$42.6 capital spending increase at Gas Utility, where the focus remained on infrastructure upgrades and new business development. 40
-------------------------------------------------------------------------------- In fiscal 2020, the Company used$206.7 less cash in investing activities than in fiscal 2019. The major driver of the reduction was lower capital expenditures, down$184.9 versus the prior year. The Spire STL Pipeline, which was placed into service in the first fiscal quarter of 2020, accounted for$97.4 of the reduction, and expenditures at Spire Storage were$59.6 below prior year levels. Capital expenditures at the Utilities were down$29.1 . Net cash provided by financing activities was up$219.4 when comparing fiscal 2021 to fiscal 2020. Current year long-term debt issuances were$629.1 , or$119.1 higher than in fiscal 2020, and the combination of lower net repayments of both long-term and short-term debt in fiscal 2021 contributed$150.8 to the year-over-year increase. Partially offsetting these increases was a$40.1 decline in cash generated from common stock issuances and$5.2 higher common stock dividend payments. Net cash provided by financing activities declined$211.8 in fiscal 2020 versus fiscal 2019, the major driver being the prior year issuance of preferred stock that generated$242.0 in proceeds. Year-over-year net debt issuance increased by$32.3 , and the issuance of common stock generated$21.6 more cash in fiscal 2020 than in fiscal 2019. These increases in cash were only partly offset by a$20.4 increase in common and preferred stock dividends in fiscal 2020 versus fiscal 2019. Future Cash Requirements The Company's short-term borrowing requirements typically peak during colder months when the Utilities borrow money to cover the lag between when they purchase natural gas and when their customers pay for that gas. Changes in the wholesale cost of natural gas (including cash payments for margin deposits associated with Spire Missouri's use of natural gas derivative instruments), variations in the timing of collections of gas cost under the Utilities' PGA clauses and GSA riders, the seasonality of accounts receivable balances, and the utilization of storage gas inventories cause short-term cash requirements to vary during the year and from year to year, and may cause significant variations in the Company's cash provided by or used in operating activities.
Spire's material cash requirements as of
As detailed in Note 6 , Long-Term Debt, of the Notes to Financial Statements in Item 8,$55.8 of the total$3,014.6 principal amount is due in fiscal 2022. Using each long-term debt instrument's stated maturity and fixed rates or variable rates as ofSeptember 30, 2021 , interest payments are projected to total$1,645.7 , of which$108.3 is due in fiscal 2022. Spire's natural gas purchase obligations totaled$1,889.0 , including$759.1 for fiscal 2022, representing the minimum payments required under existing natural gas transportation and storage contracts and natural gas supply agreements. The amounts reflect fixed obligations as well as obligations to purchase natural gas at future market prices, calculated using forward market prices as ofSeptember 30, 2021 . Each of the Utilities generally recovers costs related to its purchases, transportation and storage of natural gas through the operation of its PGA clause or GSA rider, subject to prudence review by the appropriate regional public service commission. Additional contractual commitments are generally entered into prior to or during the heating season. Spire dividends declared and payable as ofSeptember 30, 2021 , totaled$39.4 , while annualized dividends based on the regular quarterly amounts declared onNovember 11, 2021 , are estimated at$156 .
Source of Funds
It is management's view that the Company, Spire Missouri and Spire Alabama have
adequate access to capital markets and will have sufficient capital resources,
both internal and external, to meet anticipated requirements.
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The Company's, Spire Missouri's and Spire Alabama's access to capital markets,
including the commercial paper market, and their respective financing costs, may
depend on the credit rating of the entity that is accessing the capital markets.
Their debt is rated by two rating agencies: Standard & Poor's Corporation
("S&P") and Moody's Investors Service ("Moody's"). As of September 30, 2021 , the
debt ratings of the Company, Spire Missouri and Spire Alabama, shown in the
following table, remain at investment grade with a stable outlook.
S&P Moody's
BBB Ba1
Spire Inc. short-term debt A-2 P-2
Spire
Cash and Cash Equivalents
Bank deposits were used to support working capital needs of the business. Spire
had no temporary cash investments as of
Short-term Debt
The Utilities' short-term borrowing requirements typically peak during the colder months, while most of the Company's other needs are less seasonal. These short-term cash requirements can be met through the sale of commercial paper or the use of a revolving credit facility. For information about these resources, see Note 7 , Notes Payable and Credit Agreements, of the Notes to Financial Statements in Item 8 and "Interest Rate Risk" under "Market Risk" below.
Long-term Debt and Equity
AtSeptember 30, 2021 , including the current portion but excluding unamortized discounts and debt issuance costs, Spire had long-term debt totaling$3,014.6 , of which$1,348.0 was issued by Spire Missouri,$625.0 was issued by SpireAlabama , and$211.6 was issued by other subsidiaries. For more information about long-term debt, see Note 6 of the Notes to Financial Statements in Item 8 and "Interest Rate Risk" under "Market Risk" below. OnDecember 15, 2020 , Spire Alabama issued and sold to certain institutional investors in a private placement$150.0 of 2.04% Series 2020 Senior Notes dueDecember 15, 2030 . Interest is payable semi-annually. The notes are senior unsecured obligations of Spire Alabama and rank equal in right to payment with all its other senior unsecured indebtedness. SpireAlabama used the proceeds to repay short-term debt. InFebruary 2021 , Spire issued 3.5 million equity units for an aggregate stated amount of$175.0 , resulting in net proceeds of$169.3 after underwriting fees and other issuance costs. See Note 5 , Shareholders' Equity, of the Notes to Financial Statements in Item 8 for additional discussion of these equity units. OnMay 20, 2021 , pursuant to its registration statement on Form S-3 filed with theSEC , Spire Missouri issued$305.0 of 3.30% first mortgage bonds dueJune 1, 2051 , secured equally with all its other first mortgage bonds. Interest is payable semi-annually. SpireMissouri used the proceeds to redeem$55.0 principal amount of 3.00% first mortgage bonds dueMarch 15, 2023 , and to repay short-term debt. SpireMissouri was authorized by the MoPSC to issue registered securities (first mortgage bonds, unsecured debt and preferred stock), common stock, and private placement debt in an aggregate amount of up to$660.0 for financings placed any time beforeSeptember 30, 2023 . As ofSeptember 30, 2021 ,$355.0 remained available under this authorization. SpireAlabama has no standing authority to issue long-term debt and must petition the APSC for each planned issuance. Spire has a shelf registration statement on Form S-3 on file with theSEC for the issuance and sale of up to 250,000 shares of common stock under its Dividend Reinvestment and Direct Stock Purchase Plan. There were 182,689 and 177,295 shares atSeptember 30, 2021 andNovember 12, 2021 , respectively, remaining available for issuance under this Form S-3. Spire and Spire Missouri also have a universal shelf registration statement on Form S-3 on file with theSEC for the issuance of various equity and debt securities, which expires onMay 14, 2022 . 42 -------------------------------------------------------------------------------- OnFebruary 6, 2019 , Spire entered into an "at-the-market" equity distribution agreement, supplemented as ofMay 14, 2019 , pursuant to which the Company may offer and sell, from time to time, shares of its common stock having an aggregate offering price of up to$150.0 . Those shares are issued pursuant to Spire's universal shelf registration statement referenced above and a prospectus supplement datedMay 14, 2019 . Under this program, a total of 626,249 shares were issued in fiscal 2019 and 2020, and as ofSeptember 30, 2021 , Spire can still issue shares having an aggregate offering price of up to$102.2 . Including the current portion of long-term debt, the Company's long-term consolidated capitalization consisted of 47% equity atSeptember 30, 2021 and 50% equity at September 30, 2020. For more information about equity, see Note 5 of the Notes to Financial Statements in Item 8.
ENVIRONMENTAL MATTERS
The Utilities and other Spire subsidiaries own and operate natural gas distribution, transmission and storage facilities, the operations of which are subject to various environmental laws, regulations and interpretations. While environmental issues resulting from such operations arise in the ordinary course of business, such issues have not materially affected the Company's, SpireMissouri's or Spire Alabama's financial position and results of operations. As environmental laws, regulations and their interpretations change, however, the Company and the Utilities may be required to incur additional costs. For information relative to environmental matters, see Contingencies in Note 16 of the Notes to Financial Statements in Item 8.
REGULATORY MATTERS
In May andJuly 2021 , theU.S. Department of Homeland Security's Transportation Security Administration issued security directives that included several new cybersecurity requirements for critical pipeline owners and operators. Among these requirements is the implementation of specific mitigation measures to protect against ransomware attacks and other known threats to information and operational technology systems; development and implementation of a cybersecurity contingency and recovery plan; and performance of a cybersecurity architecture design review. We are currently implementing several of these directives and evaluating the potential effect of several others on our operations and facilities, as well as the potential cost of implementation, and will continue to monitor for any clarifications or amendments to these directives. We are also engaged in a continuous program of testing and updating our cybersecurity measures.
For discussions of other regulatory matters for Spire, Spire Missouri, and Spire Alabama, see Note 15 , Regulatory Matters, of the Notes to Financial Statements in Item 8.
ACCOUNTING PRONOUNCEMENTS
The Company, Spire Missouri and Spire Alabama have evaluated or are in the process of evaluating the impact that recently issued accounting standards will have on their financial position or results of operations upon adoption. For disclosures related to the adoption of new accounting standards, see the New Accounting Pronouncements section of Note 1 of the Notes to Financial Statements in Item 8.
CRITICAL ACCOUNTING ESTIMATES
Our discussion and analysis of our financial condition, results of operations,
liquidity and capital resources are based upon our financial statements, which
have been prepared in accordance with GAAP, which requires that we make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. We evaluate our estimates on an ongoing basis. We base our
estimates on historical experience and on various other assumptions that we
believe are reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates. We believe the following represent the more significant items
requiring the use of judgment and estimates in preparing our financial
statements:
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Regulatory Accounting - The Utilities account for their regulated operations in
accordance with FASB Accounting Standards Codification Topic 980, Regulated
Operations. The provisions of this accounting guidance require, among other
things, that financial statements of a rate-regulated enterprise reflect the
actions of regulators, where appropriate. These actions may result in the
recognition of revenues and expenses in time periods that are different than
non-rate-regulated enterprises. When this occurs, costs are deferred as assets
in the balance sheet (regulatory assets) and recorded as expenses when those
amounts are reflected in rates. Also, regulators can impose liabilities upon a
regulated company for amounts previously collected from customers and for
recovery of costs that are expected to be incurred in the future (regulatory
liabilities). Management believes that the current regulatory environment
supports the continued use of these regulatory accounting principles and that
all regulatory assets and regulatory liabilities are recoverable or refundable
through the regulatory process. For Spire Missouri and Spire Alabama, management
believes the following represent the more significant items recorded through the
application of this accounting guidance:
PGA Clause - Spire Missouri's PGA clauses allows it to flow through to
customers, subject to a prudence review by the MoPSC, the cost of purchased gas
supplies, including the costs, cost reductions and related carrying costs
associated with the use of natural gas derivative instruments to hedge the
purchase price of natural gas. The difference between actual costs incurred and
costs recovered through the application of the PGA clauses are recorded as
regulatory assets and regulatory liabilities that are recovered or refunded in a
subsequent period. The PGA clauses also permit the application of carrying costs
to all over- or under-recoveries of gas costs, including costs and cost
reductions associated with the use of derivative instruments, and also provide
for a portion of income from off-system sales and capacity release revenues to
be flowed through to customers.
GSA Rider - Spire Alabama's rate schedules for natural gas distribution charges
contain a GSA rider, established in 1993, which permits the pass-through to
customers of changes in the cost of gas supply. Spire Alabama's tariff provides
a temperature adjustment mechanism, also included in the GSA, that is designed
to moderate the impact of departures from normal temperatures on Spire Alabama's
earnings. The temperature adjustment applies primarily to residential, small
commercial and small industrial customers. Other non-temperature weather related
conditions that may affect customer usage are not included in the temperature
adjustment. In prior years, Spire Alabama entered into cash flow derivative
commodity instruments to hedge its exposure to price fluctuations on its gas
supply. Spire Alabama recognizes all derivatives at fair value as either assets
or liabilities on the balance sheet. Any realized gains or losses are passed
through to customers using the mechanisms of the GSA rider in accordance with
Spire Alabama's APSC approved tariff and are recognized as a regulatory asset or
regulatory liability. All derivative commodity instruments in a gain position
are valued on a discounted basis incorporating an estimate of performance risk
specific to each related counterparty. Derivative commodity instruments in a
loss position are valued on a discounted basis incorporating an estimate of
performance risk specific to Spire Alabama. Spire Alabama currently has no
active gas supply derivative positions.
ISRS -The ISRS allows Spire Missouri expedited recovery for its investment to
upgrade its infrastructure and enhance its safety and reliability without the
necessity of a formal rate case. Spire Missouri records ISRS revenues as
authorized by the MoPSC and estimates the probability and amount of any refunds
based on commission precedent, current legal rulings, the opinion of legal
counsel, and other considerations.
For more information, see Note 15 , Regulatory Matters, of the Notes to Financial Statements in Item 8.
Employee Benefits and Postretirement Obligations - Pension and postretirement
obligations are calculated by actuarial consultants that utilize several
statistical factors and other assumptions provided by management related to
future events, such as discount rates, returns on plan assets, compensation
increases, and mortality rates. For the Utilities, the amount of expense
recognized and the amounts reflected in other comprehensive income are dependent
upon the regulatory treatment provided for such costs, as discussed further
below. Certain liabilities related to group medical benefits and workers'
compensation claims, portions of which are self-insured and/or contain
"stop-loss" coverage with third-party insurers to limit exposure, are
established based on historical trends.
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The amount of net periodic pension and other postretirement benefit costs
recognized in the financial statements related to the Utilities' qualified
pension plans and other postretirement benefit plans is based upon allowances,
as approved by the MoPSC (for Spire Missouri) and as approved by the APSC (for
Spire Alabama). The allowances have been established in the rate-making process
for the recovery of these costs from customers. The differences between these
amounts and actual pension and other postretirement benefit costs incurred for
financial reporting purposes are deferred as regulatory assets or regulatory
liabilities. GAAP also requires that changes that affect the funded status of
pension and other postretirement benefit plans, but that are not yet required to
be recognized as components of pension and other postretirement benefit costs,
be reflected in other comprehensive income. For the Utilities' qualified pension
plans and other postretirement benefit plans, amounts that would otherwise be
reflected in other comprehensive income are deferred with entries to regulatory
assets or regulatory liabilities.
For more information, see Note 13 , Pension Plans and Other Postretirement Benefits, of the Notes to Financial Statements in Item 8.
The tables below reflect the sensitivity of Spire's plans to potential changes
in key assumptions:
Pension Plan Benefits: Estimated Increase/ Estimated Increase/
Increase/ (Decrease) to Projected (Decrease) to Annual
Actuarial Assumptions (Decrease) Benefit Obligation Net Pension Cost*
Discount Rate 0.25 % $ (19.5 ) $ 0.4
(0.25 )% 20.6 (0.5 )
Expected Return on Plan
Assets 0.25 % - (1.1 )
(0.25 )% - 1.1
Rate of Future Compensation
Increase 0.25 % 1.3 0.3
(0.25 )% (1.3 ) (0.2 )
Postretirement Benefits: Estimated
Increase/ Estimated Increase/
(Decrease) to Projected (Decrease) to Annual
Increase/ Postretirement Net Postretirement
Actuarial Assumptions (Decrease) Benefit Obligation Benefit Cost*
Discount Rate 0.25 % $ (4.8 ) $ 0.1
(0.25 )% 4.9 (0.1 )
Expected Return on Plan Assets 0.25 % - (0.7 )
(0.25 )% - 0.7
* Excludes the impact of regulatory deferral mechanism. See Note 13 ,Pension Plans and Other Postretirement Benefits, of the Notes to Financial
Statements in Item 8 for information regarding the regulatory treatment of
these costs.
Impairment of Long-lived Assets - Long-lived assets classified as held and used
are evaluated for impairment when events or changes in circumstances indicate
that the carrying value of such assets may not be recoverable. Whether
impairment has occurred is determined by comparing the estimated undiscounted
cash flows attributable to the assets with the carrying value of the assets. If
the carrying value exceeds the undiscounted cash flows, the Company recognizes
an impairment charge equal to the amount of the carrying value that exceeds the
estimated fair value of the assets. In the period in which the Company
determines an asset meets held-for-sale criteria, an impairment charge is
recorded to the extent the book value exceeds its fair value less cost to sell.
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On July 1, 2020 , Spire's Board of Directors, based upon the recommendation of
senior management, revised the development plan for Spire Storage, resulting in
an impairment charge of $140.8 related to Spire Storage assets in the quarter
ended June 30, 2020 . The revision was driven by the realization that a longer
time horizon will be required for optimization and positioning of the storage
facility to serve energy markets in the western United States . Among other
factors, evaluations of the continuing evolution of market dynamics in the
region led management to update models of various development alternatives.
Separately in the quarter ended June 30, 2020 , Spire recorded impairment charges
totaling $7.8 related to two commercial compressed natural gas fueling stations
as a result of revised projections reflecting lower diesel prices and slower
conversions of Class 8 vehicles. The fair values used in measuring the
impairment charges were determined with an expected present value technique
using a discounted cash flow method under an income approach. Our impairment
loss calculations required management to make assumptions and to apply judgment
in order to estimate fair values of the assets. This involved estimating cash
flows, useful lives, and current market value for similar assets and selecting a
discount rate that reflects the risk inherent in future cash flows. Cash flow
projections were based on assumptions about future market demand and achievement
of certain operational capabilities. Assumptions were selected from a range of
reasonably possible amounts and were supported by relevant and reliable data.
However, if actual results are not consistent with our estimates and
assumptions, we may be exposed to additional impairments that could be material.
We do not believe there is a reasonable likelihood that there will be a material
change in the estimates or assumptions we use to calculate asset impairment
losses.
Income Taxes - Income tax calculations require estimates due to book-tax
differences, estimates with respect to regulatory treatment of certain items,
and uncertainty in the interpretation of tax laws and regulations. Critical
assumptions and judgments also include projections of future taxable income to
determine the ability to utilize net operating losses and credit carryforwards
prior to their expiration. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
Management regularly assesses financial statement tax provisions to identify any
change in regulatory treatment or tax related estimates and assumptions that
could have a material impact on cash flows, financial position and/or results of
operations. For more information, see Note 12 , Income Taxes, of the Notes to
Financial Statements in Item 8.
For further discussion of significant accounting policies, see Note 1 , Summary of Significant Accounting Policies, of the Notes to Financial Statements in Item 8.
MARKET RISK Commodity Price Risk Gas Utility The Utilities' commodity price risk, which arises from market fluctuations in the price of natural gas, is primarily managed through the operation of SpireMissouri's PGA clauses and Spire Alabama's GSA rider. The PGA clauses and GSA rider allows the Utilities to flow through to customers, subject to prudence review by the MoPSC and APSC, the cost of purchased gas supplies. SpireMissouri is allowed the flexibility to make up to three discretionary PGA changes during each year, in addition to its mandatory November PGA change, so long as such changes are separated by at least two months. SpireMissouri is able to mitigate, to some extent, changes in commodity prices through the use of physical storage supplies and regional supply diversity. The Utilities also have risk management policies that allow for the purchase of natural gas derivative instruments with the goal of managing its price risk associated with purchasing natural gas on behalf of its customers. These policies prohibit speculation. As ofSeptember 30, 2021 , Spire Missouri had active natural gas derivative positions, but Spire Alabama did not. Costs and cost reduction, including carrying costs, associated with the use of natural gas derivative instruments are allowed to be passed on to customers through the operation of the PGA clauses or GSA rider. Accordingly, the Utilities do not expect any adverse earnings impact as a result of the use of these derivative instruments. However, the timing of recovery for cash payments related to margin requirements may cause short-term cash requirements to vary. For more information about the Utilities' natural gas derivative instruments, see Note 10 , Derivative Instruments and Hedging Activities, of the Notes to Financial Statements in Item 8. 46
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Gas Marketing
In the course of its business, Spire's non-regulated gas marketing subsidiary, Spire Marketing, enters into contracts to purchase and sell natural gas at fixed prices and natural gas index-based prices. Commodity price risk associated with these contracts has the potential to impact earnings and cash flows. To minimize this risk, Spire Marketing has a risk management policy that provides for daily monitoring of a number of business measures, including fixed price commitments. In accordance with the risk management policy, Spire Marketing manages the price risk associated with its fixed price commitments. This risk is currently managed either by closely matching the offsetting physical purchase or sale of natural gas at fixed-prices or through the use of natural gas futures, options and swap contracts traded on or cleared through theNew York Mercantile Exchange (NYMEX) and Intercontinental Exchange (ICE) to lock in margins. AtSeptember 30, 2021 and 2020, Spire Marketing's unmatched fixed-price positions were not material to Spire's financial position or results of operations. As mentioned above, Spire Marketing uses natural gas futures, options and swap contracts traded on or cleared through the NYMEX and ICE to manage the commodity price risk associated with its fixed-price natural gas purchase and sale commitments. These derivative instruments may be designated as cash flow hedges of forecasted purchases or sales. Such accounting treatment, if elected, generally permits a substantial portion of the gain or loss to be deferred from recognition in earnings until the period that the associated forecasted purchase or sale is recognized in earnings. To the extent a hedge is effective, gains or losses on the derivatives will be offset by changes in the value of the hedged forecasted transactions. Information about the fair values of Spire Marketing's exchange-traded/cleared natural gas derivative instruments is presented below: Derivative Derivatives Fair Cash and Cash Values Margin Margin Net balance of derivative assets at September 30, 2020$ 5.7 $ (0.4 ) $ 5.3 Changes in fair value 77.5 - 77.5 Settlements/purchases - net (31.1 ) - (31.1 ) Changes in cash margin - (38.9 ) (38.9 ) Net balance of derivative assets at September 30, 2021$ 52.1 $ (39.3 ) $ 12.8 As of September 30, 2021 Maturity by Fiscal Year Total 2022 2023 2024 2025 Fair values of exchange-traded/cleared natural gas derivatives - net$ 59.3 $ 51.0 $ 7.9 $ 0.3 $ 0.1 Fair values of basis swaps - net 1.7 1.1 0.5 0.1 -
Fair values of puts and calls - net (8.3 ) (8.2 ) (0.1 )
- -
Position volumes:
MMBtu - net (short) long
futures/swap/option positions 61.9 41.5 18.4 1.8 0.2
MMBtu - net (short) long basis swap
positions 0.1 2.4 (1.9 ) (0.4 ) -
MMBtu - net (short) puts and calls
positions (2.4 ) (2.4 ) - - -
Certain of Spire Marketing's physical natural gas derivative contracts are
designated as normal purchases or normal sales, as permitted by GAAP. This
election permits the Company to account for the contract in the period the
natural gas is delivered. Contracts not designated as normal purchases or normal
sales, including those designated as trading activities, are accounted for as
derivatives with changes in fair value recognized in earnings in the periods
prior to settlement.
Below is a reconciliation of the beginning and ending balances for physical natural gas contracts accounted for as derivatives, none of which will settle beyond fiscal 2022:
Net balance of derivative liabilities at
(50.8 )
Settlements (3.3 )
Net balance of derivative liabilities at
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For further details related to Spire Marketing's derivatives and hedging activities, see Note 10 , Derivative Instruments and Hedging Activities, of the Notes to Financial Statements in Item 8.
Counterparty Credit Risk
Spire Marketing has concentrations of counterparty credit risk in that a significant portion of its transactions are with energy producers, utility companies and pipelines. These concentrations of counterparties have the potential to affect the Company's overall exposure to credit risk, either positively or negatively, in that each of these three groups may be affected similarly by changes in economic, industry or other conditions. Spire Marketing also has concentrations of credit risk with certain individually significant counterparties. To the extent possible, Spire Marketing enters into netting arrangements with its counterparties to mitigate exposure to credit risk. It is also exposed to credit risk associated with its derivative contracts designated as normal purchases and normal sales. Spire Marketing closely monitors its credit exposure and, although uncollectible amounts have not been significant, increased counterparty defaults are possible and may result in financial losses and/or capital limitations. For more information on these and other concentrations of credit risk, including how Spire Marketing manages these risks, see Note 11 , Concentrations of Credit Risk, of the Notes to Financial Statements in Item 8. Interest Rate Risk The Company is subject to interest rate risk associated with its short-term debt issuances. Based on average short-term borrowings during fiscal 2021, an increase of 100 basis points in the underlying average interest rate for short-term debt would have caused an increase in interest expense (and a decrease in pre-tax earnings and cash flows) of approximately$6.1 on an annual basis. Portions of such an increase may be offset through the Utilities' application of PGA and GSA carrying costs. AtSeptember 30, 2021 , Spire had fixed-rate long-term debt totaling$3,014.6 , of which$1,348.0 was issued by Spire Missouri,$625.0 was issued by Spire Alabama, and$1,041.6 was issued by Spire and other subsidiaries. While the long-term debt issues are fixed-rate, they are subject to changes in fair value as market interest rates change. However, increases or decreases in fair value would impact earnings and cash flows only if the Company were to reacquire any of these issues in the open market prior to maturity. Under GAAP applicable to the Utilities' regulated operations, losses or gains on early redemptions of long-term debt would typically be deferred as regulatory assets or regulatory liabilities and amortized over a future period.
Refer to Note 10 , Derivative Instruments and Hedging Activities, of the Notes to Financial Statements in Item 8 for additional details on the Company's interest rate swap transactions.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
For this discussion, see " Market Risk " in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations.
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