(In millions of dollars, except amounts per share and per unit)
This section analyzes the financial condition and results of operations of
Spire Inc.(the "Company"), Spire Missouri Inc., and Spire Alabama Inc.Spire Missouri, Spire Alabama and Spire EnergySouthare wholly owned subsidiaries of the Company. Spire Missouri, Spire Alabama and the subsidiaries of Spire EnergySouthare collectively referred to as the "Utilities." The subsidiaries of Spire EnergySouthare Spire Gulf and Spire Mississippi. This section includes management's view of factors that affect the respective businesses of the Company, Spire Missouri and Spire Alabama, explanations of financial results including changes in earnings and costs from the prior periods, and the effects of such factors on the Company's, Spire Missouri's and Spire Alabama's overall financial condition and liquidity. Unless otherwise indicated, references to years herein are references to the fiscal years ending September 30for the Company and its subsidiaries. Reference is made to "Item 1A. Risk Factors" and "Forward-Looking Statements," which describe important factors that could cause actual results to differ from expectations and non-historical information contained herein. In addition, the following discussion should be read in conjunction with the audited financial statements and accompanying notes thereto of Spire, Spire Missouri and Spire Alabamaincluded in "Item 8. Financial Statements and Supplementary Data."
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 Service – Missouri Spire
Missouriis Missouri'slargest natural gas distribution utility and is regulated by the MoPSC. Spire Missouriserves St. Louis, Kansas City, and other areas throughout the state. Spire Missouripurchases natural gas in the wholesale market from producers and marketers and ships the gas through interstate pipelines into its own distribution facilities for sale to residential, commercial and industrial customers. Spire Missourialso transports gas through its distribution system for certain larger customers who buy their own gas on the wholesale market. Spire Missouridelivers 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 Service – Spire Alabama
Alabamais the largest natural gas distribution utility in the state of Alabamaand is regulated by the APSC. Spire Alabama'sservice territory is located in central and northern Alabama. Among the cities served by Spire Alabamaare Birmingham, the center of the largest metropolitan area in the state, and Montgomery, the state capital. Spire Alabamapurchases natural gas through interstate and intrastate suppliers and distributes the purchased gas through its distribution facilities for sale to residential, commercial, and industrial customers and other end-users of natural gas. Spire Alabamaalso transports gas through its distribution system for certain large commercial and industrial customers for a transportation fee. Effective December 1, 2020, for most of these transportation service customers, Spire Alabama will also purchase gas on the wholesale market for sale to the customer upon delivery to the Spire Alabamadistribution system. All Spire Alabama services are provided to customers at rates and in accordance with tariffs authorized by the APSC. 28 --------------------------------------------------------------------------------
Gas service –
Spire Gulf and Spire Mississippi are utilities engaged in the purchase, retail distribution and sale of natural gas to approximately 100,000 customers in southern
Alabamaand south-central Mississippi. Spire Gulf is regulated by the APSC, and Spire Mississippi is regulated by the MSPSC.
Spire Marketing is engaged in the marketing of natural gas and related activities on a non-regulated basis and is reported in the Gas Marketing segment. Spire Marketing markets natural gas across the central and southern
U.S.It holds firm transportation and storage contracts in order to effectively manage its transactions with counterparties, which primarily include producers, municipalities, electric and gas utility companies, and large commercial and industrial customers. Other
The other elements of the Company’s consolidated information include:
• unallocated business items, including certain debts and associated interest
• Spire STL Pipeline, a subsidiary of Spire supplying interstate natural gas
pipeline transport services;
• Spire Storage, a subsidiary of Spire providing interstate natural gas storage
• The subsidiaries of Spire engaged in the operation of a propane pipeline, the
natural gas compression 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 utilities segment, these are:
• the Utilities' ability to recover from their customers the costs of purchasing and distributing natural gas;
• the impact of weather conditions and other factors, such as customer retention, on
income and expenses;
• changes in the regulatory environment at federal, state and local level
levels, as well as the decisions of regulators, which have an impact on Utilities
ability to achieve the allowable rate of return and to recover prudent costs by
each of the service territories they serve;
• the ability of public services 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
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 warehousing services at a reasonable price
rates; • credit and/or capital market access; • counterparty risks; and • the effect of natural gas price volatility on the business.
Further information on how management seeks to manage these key variables is presented below.
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. Spire
Missouri'stariff rates are approved by the MoPSC, whereas Spire Alabama's tariff rates are approved by the APSC. Spire Gulf and Spire Mississippi have tariff rates that are approved by the APSC and MSPSC, respectively. Spire Missouriand 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 GasAdjustment (PGA) clause of Spire Missouri, Spire Gulf and Spire Mississippi and the Gas Supply Adjustment (GSA) rider of Spire Alabama allow the Utilities to flow through to customers, subject to prudence review by the public service commissions, the cost of purchased gas supplies, including costs, cost reductions and related carrying costs associated with the use of derivative instruments to mitigate volatility in the cost of natural gas. As of September 30, 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 --------------------------------------------------------------------------------
Spire Marketing is engaged in the marketing of natural gas and related services throughout
the 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 with U.S.GAAP, some of its purchase and sale transactions are not recognized in earnings until the natural gas is physically delivered, while other energy-related transactions, including those designated as trading activities, are required to be accounted for as derivatives with the changes in their fair value (representing unrealized gains or losses) recorded in earnings in periods prior to settlement. Because related transactions of a purchase and sale strategy may be accounted for differently, there may be timing differences in the recognition of earnings under GAAP and economic earnings realized upon settlement. The Company reports both GAAP and net economic earnings (non-GAAP), as discussed in the section "Non-GAAP Measures".
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.
Nous avons subi des impacts sur nos résultats d’exploitation de la COVID-19, notamment :
• les frais de retard de paiement perdus en raison d’un moratoire de fin mars à mi-juin
• impact mineur sur la marge nette de la baisse des volumes commerciaux et industriels compensé
by additional residential fixed charges; 31
• les créances irrécouvrables augmentent en raison des pertes de crédit supplémentaires attendues sur
accounts receivable balances; and • net other direct cost reductions due to lower travel, meals and
divertissement et formation compensés par des coûts accrus pour un nettoyage amélioré
et équipements de protection individuelle pour nos installations et le personnel de terrain
par rapport aux niveaux normaux et attendus.
Missourireceived an Accounting Authority Order from the MoPSC to defer certain costs incurred through March 31, 2021, and has recorded a related regulatory asset of $6.2as of September 30, 2021. Even with the cost increases and lost revenues, Spire Alabama exceeded the allowed return and recorded a Rate Stabilization and Equalization giveback in September 2020and in January 2021, so there was no bottom-line impact of these COVID-19 effects. An extended slowdown of the United States'economy, changes in commodity costs and/or significant changes in policy and regulation could result in lower demand for natural gas as well as negatively impact the ability of our customers, contractors, suppliers and other business partners to remain in business or return to operating health. These could have a material adverse effect on our results of operations, financial condition, liquidity and prospects. The Company is participating in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provisions allowing for a payroll tax deferral which 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.
MESURES NON GAAP
Net income, earnings per share and operating income reported by Spire, Spire
Missouriand Spire Alabama are determined in accordance with GAAP. Spire, Spire Missouriand 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.
Bénéfice économique net et bénéfice économique net par action
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. 32 -------------------------------------------------------------------------------- The fair value and timing adjustments are made in instances where the accounting treatment differs from what management considers the economic substance of the underlying transaction, including the following:
• Gains et pertes nets non réalisés sur les dérivés liés à l’énergie qui sont
requis par la comptabilisation à la juste valeur GAAP associée aux changements actuels dans le
juste valeur des transactions financières et physiques avant leur réalisation
et règlement. Ces gains et pertes latents résultent principalement de deux
1) variations des justes valeurs des dérivés physiques et/ou financiers avant
to the period of settlement; and 2) ineffective portions of accounting hedges, required to be recorded in
bénéfices avant règlement, en raison des différences de prix des matières premières
changements entre les emplacements de l’achat ou de la vente physique prévu
les transactions et les emplacements des instruments de couverture sous-jacents ;
• Réduction du coût ou des ajustements du marché à la valeur comptable de la marchandise
stocks résultant de la baisse de la valeur nette de réalisation de la marchandise
below its original cost, to the extent that those commodities are economically hedged; and
• Gains et pertes réalisés résultant du règlement des couvertures économiques
avant la vente de la marchandise physique.
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.
Marge de contribution
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. 33
This section contains discussion and analysis of the results for the year ended
September 30, 2021compared to the results for the year ended September 30, 2020. The discussion and analysis of the results for the year ended September 30, 2020compared to the results of the year ended September 30, 2019can be found in Part II, Item 7 of Spire Inc.'sfiscal 2020 Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission(SEC) on November 18, 2020. Spire
Revenu net (perte) et bénéfice économique net (perte)
Les tableaux suivants rapprochent le bénéfice économique net de la société avec le chiffre GAAP le plus comparable, le bénéfice net.
Per Gas Gas Consol- Diluted Utility Marketing Other idated Share** Year Ended
September 30, 2021Net Income (Loss) [GAAP] $ 237.2 $ 44.8 $ (10.3) $ 271.7 $ 4.96Adjustments, 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$
September 30, 2020Net Income (Loss) [GAAP] $ 213.6 $ 7.0 $ (132.0 ) $ 88.6 $ 1.44Adjustments, 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$
September 30, 2019Net Income (Loss) [GAAP] $ 190.5 $ 18.5 $ (24.4 ) $ 184.6 $ 3.52Adjustments, 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
* The effect of income tax is calculated by applying federal, state and local revenues
tax rates applicable to ordinary income at pre-tax tax amounts
reconcile the elements, then add all the estimated effects of the adopted state or
local tax laws for periods prior to the corresponding effective date.
** The net economic result per share is calculated by replacing the consolidated net result
result with consolidated net economic result in diluted GAAP income
per share calculation, which includes discounts for
dividends and participating shares.
Spire's net income was
$271.7in fiscal 2021, compared with $88.6in fiscal 2020. Basic and diluted earnings per share were $4.97and $4.96, respectively, for fiscal 2021 compared with basic and diluted earnings per share of $1.44for fiscal 2020. 34
-------------------------------------------------------------------------------- The prior year amount reflects the impact of the third quarter 2020 impairment charge of
$148.6( $117.3after tax). Excluding this charge, net income increased $65.8, driven by increases of $37.8and $23.6in Gas Marketing and Gas Utility, respectively, combined with a $4.4improvement in results from Other. Net economic earnings were $266.3( $4.86per diluted share) for the twelve months ended September 30, 2021, compared to $207.8( $3.76per 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 net income increased by
$23.6from the prior year. The Gas Utility segment is higher due principally to a $24.1increase 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 in February 2021and allowed Spire Missourito capitalize on gas flow disruptions resulting in increased off-system sales which also benefited our customers. The current year also benefited from a $15.9increase in Spire Missouri ISRS revenues (including the impact of a prior-year provision of $2.2related to the ISRS ruling settled in the year), $9.8in net favorable rate adjustments under the RSE mechanism at Spire Alabama, the Missouri Supreme Courtruling that partially reversed 2018 rate case pension cost disallowances totaling $9.0( $6.8after tax), and $6.3higher 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 $14.7increase 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 $17.2over 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 the Missouri Supreme Courtruling that partially reversed 2018 rate case pension cost disallowances. These impacts are described in further detail below.
The Gas Marketing segment reported net income totaling
$44.8for the twelve months ended September 30, 2021, versus net income of $7.0during the same period last year. Net economic earnings for the twelve months ended September 30, 2021, was $47.0, an increase of $37.9from 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.
The Company's other non-utility activities generated a net loss of
$10.3for fiscal 2021, compared to a net loss of $132.0for the same period last year. Fiscal 2020 reflects the $117.3after-tax impairment charge previously mentioned. Net economic loss was $11.3for fiscal 2021, an improvement of $3.4compared to fiscal 2020. The improvement was driven primarily by a smaller loss from Spire Storage. 35
Operating income 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, 2021Operating Income $ 374.0 $ 58.5 $ 17.7$ - $ 450.2Operation 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: Tax charge on gross revenue (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 ) $ 2,235.5Gas Gas Utility Marketing Other Eliminations Consolidated Year Ended September 30, 2020Operating Income (Loss) $ 334.3 $ 9.3 $ (137.2 )$ - $ 206.4Operation 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: Tax charge on gross revenue (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 ) $ 1,855.4Gas Gas Utility Marketing Other Eliminations Consolidated Year Ended September 30, 2019Operating Income (Loss) $ 293.4 $ 23.2 $ (14.3 )$ - $ 302.3Operation 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: Tax charge on gross revenue (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 ) $ 1,952.4Consolidated 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). 36 -------------------------------------------------------------------------------- Spire's contribution margin increased $127.4compared 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 $51.2increase from Spire Missouri and the $10.8increase at Spire Alabama. The $55.2increase 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 $0.9higher in the current year, largely due to the Missouri Supreme Courtruling that partially reversed 2018 rate case pension cost disallowances totaling $9.0offset by Nonservice Cost Transfer of $2.1. These fluctuations are described in more detail below.
Operating revenues – Gas utilities operating revenues for fiscal 2021 increased
Missouri- Higher PGA gas cost recoveries $
Spire Alabama - RSE: net adjustments 9.4 Spire EnergySouth growth 5.3 All other factors 8.6 Total Variation
$ 367.3As shown in the table above, the increase in revenues was driven primarily by a $183.2increase in Spire Missouri gas costs (including $195.8of cover charges and OFO penalties to certain wholesale customers), a $113.0increase in off-system sales, and higher weather/volumetric impacts of $31.9. The segment also benefited from a $15.9increase of Spire Missouri ISRS, a $9.4increase due to Spire Alabama's rate adjustments under the RSE mechanism, and $5.3growth from Spire EnergySouth.
Contribution margin – The gas company’s contribution margin was
Spire Missouri – Superior SSRIs (including previous year’s SSRI decisions)
Alabama- RSE: net adjustments
Missouriand Spire Alabama - Volumetric usage 6.3 All other factors 6.9 Total Variation $ 63.0The 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 millioncompared to the prior-year period. This variance reflects the Nonservice Cost Transfer of $2.1and the $9.0decrease attributable to the Missouri Supreme Courtruling that partially reversed 2018 rate case pension cost disallowances. Excluding these impacts, O&M expenses increased by $7.8due primarily to higher employee-related costs and $3.7due to one-time cost adjustments relating to stipulations settled in the current Spire Missouri rate case. Depreciation and amortization expenses for the twelve months ended September 30, 2021increased $14.7from the same period last year, principally the result of continued infrastructure capital spending, with $11.2of the increase attributable to Spire Missouri and $2.8attributable to Spire Alabama. Included in the Spire Missouriincrease is a $3.4charge pertaining to meter cost recovery that was disallowed by the MoPSC. 37
Operating Revenues - Gas Marketing operating revenue for the year ended
September 30, 2021increased $8.6from 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 ended September 30, 2021, increased $55.2from the same period last year, driven principally by strong second quarter results in the current year. During the second quarter, the February 2021cold 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 of March 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 $9.9for the year ended September 30, 2021compared to 2020, driven principally by Spire Storage and Spire STL Pipeline that was placed in service in November of 2019. Other operating expenses were $2.0higher than the prior year reflecting higher activity levels at Spire Storage and Spire STL Pipeline FERC Certificate defense costs.
Consolidated interest charges during the year ended
September 30, 2021increased $1.1versus 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 ended September 30, 2021and 2020, average short-term borrowings were $610.5and $576.2, respectively.
Consolidated income tax expense during the year ended
September 30, 2021was $68.5, compared to $12.4for fiscal 2020. This increase of $56.1is primarily the result of the $31.3tax 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
MissouriSummary Operating Results Year ended September 30, 2021 2020 Operating Income $ 228.6 $ 205.6Operation 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 $ 1,193.6Net Income $ 144.1 $ 130.2Operating revenues during the twelve months ended September 30, 2021, increased $323.0from the same period last year primarily due to a $183.2increase attributable to higher gas costs (including $195.8of cover charges and OFO penalties to certain wholesale customers), a $110.6increase due to higher off-system sales, $15.9higher ISRS, and a $6.7increase in volumetric impacts (net of weather mitigation) relating to colder weather conditions primarily in the second quarter of the current year. Contribution margin increased $51.2versus the same period in the prior year. The variance was attributable to a $22.9increase in off-system sales and $6.5higher volumetric margins (both principally due to the extreme weather in February of the current year), as well as the previously mentioned $15.9increase in ISRS, and $1.3related to customer growth. O&M expenses during the twelve months ended September 30, 2021, increased $10.1from the same period last year. Excluding the Nonservice Cost Transfer of $5.0and the Missouri Supreme Courtruling totaling $9.0discussed above, O&M was higher by $14.1, reflecting higher employee-related expenses and $3.7relating to cost adjustments relating to stipulations settled in the current Spire Missourirate case. Depreciation increased by $11.2as a result of continuing capital investment and a $3.4charge pertaining to disallowed meter cost recovery by the MoPSC. Spire Missouri'sother expense increased $0.2versus 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
compared to the same period of the previous year.
Temperatures in Spire Missouri's service areas during the twelve months ended
September 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 ended September 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 ended September 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 --------------------------------------------------------------------------------
AlabamaSummary Operating Results Year ended September 30, 2021 2020 Operating Income $ 117.0 $ 102.9Operation 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 $ 455.0Net Income $ 73.8 $ 65.7Operating revenues for the twelve months ended September 30, 2021, increased $39.0from the same period last year. The change was principally driven by a $25.2increase in weather and usage impacts (net of weather mitigation) and $9.4higher net rate adjustments under the RSE mechanism. Off-system sales in the current year contributed $2.4to 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 $9.8and $1.2related to higher off-system sales. O&M expenses for the twelve months ended September 30, 2021, decreased $6.6from the same period last year. Excluding the impact of the Nonservice Cost Transfer of $2.4, the decrease of $4.2was 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 ended
September 30, 2021, were 12.0% colder than the same period last year but 6.4% warmer than normal. Spire Alabama'stotal system therms sold and transported were 1,029.6 million for the twelve months September 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
Net cash provided by operating activities
$ 249.8 $ 469.9 $ 450.9Net 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 $220.1from 2020 to 2021 and increased $19.0from 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 the February 2021cold 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 $9.6less cash in investing activities than in fiscal 2020, primarily driven by a $13.6decrease in capital expenditures. The primary driver of the lower capital expenditures was a $53.3decline related to Spire STL Pipeline and Spire Storage, largely offset by a $42.6capital spending increase at Gas Utility, where the focus remained on infrastructure upgrades and new business development. 40
-------------------------------------------------------------------------------- In fiscal 2020, the Company used
$206.7less cash in investing activities than in fiscal 2019. The major driver of the reduction was lower capital expenditures, down $184.9versus the prior year. The Spire STL Pipeline, which was placed into service in the first fiscal quarter of 2020, accounted for $97.4of the reduction, and expenditures at Spire Storage were $59.6below prior year levels. Capital expenditures at the Utilities were down $29.1. Net cash provided by financing activities was up $219.4when comparing fiscal 2021 to fiscal 2020. Current year long-term debt issuances were $629.1, or $119.1higher than in fiscal 2020, and the combination of lower net repayments of both long-term and short-term debt in fiscal 2021 contributed $150.8to the year-over-year increase. Partially offsetting these increases was a $40.1decline in cash generated from common stock issuances and $5.2higher common stock dividend payments. Net cash provided by financing activities declined $211.8in fiscal 2020 versus fiscal 2019, the major driver being the prior year issuance of preferred stock that generated $242.0in proceeds. Year-over-year net debt issuance increased by $32.3, and the issuance of common stock generated $21.6more cash in fiscal 2020 than in fiscal 2019. These increases in cash were only partly offset by a $20.4increase 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.
Speyer’s significant cash flow needs in
As detailed in Note 6 , Long-Term Debt, of the Notes to Financial Statements in Item 8,
$55.8of the total $3,014.6principal amount is due in fiscal 2022. Using each long-term debt instrument's stated maturity and fixed rates or variable rates as of September 30, 2021, interest payments are projected to total $1,645.7, of which $108.3is due in fiscal 2022. Spire's natural gas purchase obligations totaled $1,889.0, including $759.1for 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 of September 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 of September 30, 2021, totaled $39.4, while annualized dividends based on the regular quarterly amounts declared on November 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. 41 -------------------------------------------------------------------------------- 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
Cash and cash equivalents
Bank deposits were used to meet the working capital needs of the business. Spire had no temporary cash investments at
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
September 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 $1,348.0was issued by Spire Missouri, $625.0was issued by Spire Alabama, and $211.6was 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. On December 15, 2020, Spire Alabama issued and sold to certain institutional investors in a private placement $150.0of 2.04% Series 2020 Senior Notes due December 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. Spire Alabamaused the proceeds to repay short-term debt. In February 2021, Spire issued 3.5 million equity units for an aggregate stated amount of $175.0, resulting in net proceeds of $169.3after 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. On May 20, 2021, pursuant to its registration statement on Form S-3 filed with the SEC, Spire Missouri issued $305.0of 3.30% first mortgage bonds due June 1, 2051, secured equally with all its other first mortgage bonds. Interest is payable semi-annually. Spire Missouriused the proceeds to redeem $55.0principal amount of 3.00% first mortgage bonds due March 15, 2023, and to repay short-term debt. Spire Missouriwas 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 $660.0for financings placed any time before September 30, 2023. As of September 30, 2021, $355.0remained available under this authorization. Spire Alabamahas 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 the SECfor 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 at September 30, 2021and November 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 the SECfor the issuance of various equity and debt securities, which expires on May 14, 2022. 42 -------------------------------------------------------------------------------- On February 6, 2019, Spire entered into an "at-the-market" equity distribution agreement, supplemented as of May 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 dated May 14, 2019. Under this program, a total of 626,249 shares were issued in fiscal 2019 and 2020, and as of September 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 at September 30, 2021and 50% equity at September 30, 2020. For more information about equity, see Note 5 of the Notes to Financial Statements in Item 8.
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, Spire
Missouri'sor 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.
In May and
July 2021, the U.S. Department of Homeland Security's Transportation Security Administrationissued 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 accompanying notes to the financial statements in Item 8.
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: 43 -------------------------------------------------------------------------------- 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'stariff 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 Alabamarecognizes 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 Alabamacurrently 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 Missourirecords 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 the 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. 44 -------------------------------------------------------------------------------- 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 post-retirement benefits, of the accompanying notes to the 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 post-retirement benefits, Notes to
Declarations in point 8 for information regarding the regulatory treatment of
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. 45 -------------------------------------------------------------------------------- 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 $140.8related 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 $7.8related 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 more details on significant accounting policies, see Note 1, Summary of significant accounting policies, of the notes to the 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 Spire
Missouri'sPGA 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. Spire Missouriis 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. Spire Missouriis 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 of September 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
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 the
New York Mercantile Exchange(NYMEX) and Intercontinental Exchange (ICE) to lock in margins. At September 30, 2021and 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 ) $ 12.8As 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 $ 0.1Fair 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 opening and closing balances of physical natural gas contracts accounted for as derivatives, none of which will be settled beyond fiscal year 2022:
Net balance of derivative liabilities at
Changes in fair value
(50.8 ) Settlements (3.3 )
Net balance of derivative liabilities at
For more details on Spire Marketing’s derivatives and hedging activities, see note 10, Derivatives and hedging activities, of the notes to the financial statements in section 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
$6.1on an annual basis. Portions of such an increase may be offset through the Utilities' application of PGA and GSA carrying costs. At September 30, 2021, Spire had fixed-rate long-term debt totaling $3,014.6, of which $1,348.0was issued by Spire Missouri, $625.0was issued by Spire Alabama, and $1,041.6was 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, Derivatives and Hedging Activities, of the Notes to Financial Statements in Section 8 for further details on the Company’s interest rate swap transactions.
Article 7A. Quantitative and qualitative information on market risk
For this discussion, see “Market risk” in Section 7, Management’s Discussion and Analysis and Analysis of Financial Condition and Results of Operations.
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