SPIRE INC (SR) FY 2022 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Dollars in millions, except per share and per unit amounts)

INTRODUCTION

This section analyzes the financial condition and results of operations of Spire Inc. (the “Company”), Spire Missouri Inc., and Spire Alabama Inc. Spire Missouri, Spire Alabama and Spire EnergySouth are wholly owned subsidiaries of the Company. Spire Missouri, Spire Alabama and the subsidiaries of Spire EnergySouth are collectively referred to as the “Utilities.” The subsidiaries of Spire EnergySouth are Spire Gulf and Spire Mississippi. This section includes management’s view of factors that affect the respective businesses of the Company, Spire Missouri and Spire Alabama, explanations of financial results including changes in earnings and costs from the prior periods, and the effects of such factors on the Company’s, Spire Missouri’s and Spire Alabama’s overall financial condition and liquidity. Unless otherwise indicated, references to years herein are references to the fiscal years ending September 30 for the Company and its subsidiaries.

Reference is made to “Item 1A. Risk Factors” and “Forward-Looking Statements,” which describe important factors that could cause actual results to differ from expectations and non-historical information contained herein. In addition, the following discussion should be read in conjunction with the audited financial statements and accompanying notes thereto of Spire, Spire Missouri and Spire Alabama included in “Item 8. Financial Statements and Supplementary Data.”

OVERVIEW

The Company has two reportable segments: Gas Utility and Gas Marketing. Nearly all of Spire’s earnings are derived from its Gas Utility segment, which reflects the regulated activities of the Utilities. Due to the seasonal nature of the Utilities’ business and the volumetric Spire Missouri rate design, earnings of Spire and each of the Utilities are typically concentrated during the heating season of November through April each fiscal year.

Gas Utility - Spire Missouri

Spire Missouri is Missouri’s largest natural gas distribution utility and is regulated by the MoPSC. Spire Missouri serves St. Louis, Kansas City, and other areas throughout the state. Spire Missouri purchases natural gas in the wholesale market from producers and marketers and ships the gas through interstate pipelines into its own distribution facilities for sale to residential, commercial and industrial customers. Spire Missouri also transports gas through its distribution system for certain larger customers who buy their own gas on the wholesale market. Spire Missouri delivers natural gas to customers at rates and in accordance with tariffs authorized by the MoPSC. The earnings of Spire Missouri are primarily generated by the sale of heating energy.

Gas Utility - Spire Alabama

Spire Alabama is the largest natural gas distribution utility in the state of Alabama and is regulated by the APSC. Spire Alabama’s service territory is located in central and northern Alabama. Among the cities served by Spire Alabama are Birmingham, the center of the largest metropolitan area in the state, and Montgomery, the state capital. Spire Alabama purchases natural gas through interstate and intrastate suppliers and distributes the purchased gas through its distribution facilities for sale to residential, commercial, and industrial customers and other end-users of natural gas. Spire Alabama also transports gas through its distribution system for certain large commercial and industrial customers for a transportation fee. Effective December 1, 2020, for most of these transportation service customers, Spire Alabama also purchases gas on the wholesale market for sale to the customer upon delivery to the Spire Alabama distribution system. All Spire Alabama services are provided to customers at rates and in accordance with tariffs authorized by the APSC.

Gas Utility - Spire EnergySouth

Spire Gulf and Spire Mississippi are utilities engaged in the purchase, retail distribution and sale of natural gas to approximately 100,000 customers in southern Alabama and south-central Mississippi. Spire Gulf is regulated by the APSC, and Spire Mississippi is regulated by the MSPSC.

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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 to customers across the U.S. (and into Canada), including customers inside and outside of the Utilities’ service areas. It holds firm transportation and storage contracts in order to effectively manage its transactions with counterparties, which primarily include producers, municipalities, electric and gas utility companies, and large commercial and industrial customers.

Other

Other components of the Company’s consolidated information include:

Business Evaluation Factors

Based on the nature of the business of the Company and its subsidiaries, as well as current economic conditions, management focuses on several key variables in evaluating the financial condition and results of operations and managing the business.

For the Gas Utility segment, these include:

In the Gas Marketing segment, these include:

Further information regarding how management seeks to manage these key variables is discussed below.

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. Spire Missouri’s tariff rates are approved by the MoPSC, whereas Spire Alabama’s tariff rates are approved by the APSC. Spire Gulf and Spire Mississippi have tariff rates that are approved by the APSC and MSPSC, respectively.

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Spire Missouri and Spire Alabama also have off-system sales and capacity release income streams that are regulated by tariff but remain subject to fluctuations in market conditions. Some of the factors impacting the level of off-system sales include the availability and cost of Spire’s natural gas supply, the weather in its service areas and the weather in other markets. When Spire’s service areas experience warmer-than-normal weather while other markets experience colder weather or supply constraints, some of Spire’s natural gas supply is available for sale to third parties not on Spire’s system.

The Utilities work actively to reduce the impact of wholesale natural gas price volatility on their costs by strategically structuring their natural gas supply portfolios to increase their gas supply availability and pricing alternatives. They may also use derivative instruments to hedge against significant changes in the commodity price of natural gas. Nevertheless, the overall cost of purchased gas remains subject to fluctuations in market conditions. The Purchased Gas Adjustment (PGA) clause of Spire Missouri, Spire Gulf and Spire Mississippi and the Gas Supply Adjustment (GSA) rider of Spire Alabama allow the Utilities to flow through to customers, subject to prudence review by the public service commissions, the cost of purchased gas supplies, including costs, cost reductions and related carrying costs associated with the use of derivative instruments to mitigate volatility in the cost of natural gas. As of September 30, 2022, 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.

Gas Marketing

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 own 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.

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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”.

NON-GAAP MEASURES

Net income, earnings per share and operating income reported by Spire, Spire Missouri and Spire Alabama are determined in accordance with GAAP. Spire, Spire Missouri and Spire Alabama also provide the non-GAAP financial measures of net economic earnings, net economic earnings per share and contribution margin. Management and the Board of Directors use non-GAAP financial measures, in addition to GAAP financial measures, to understand and compare operating results across accounting periods, for financial and operational decision making, for planning and forecasting, to determine incentive compensation and to evaluate financial performance. These non-GAAP operating metrics should not be considered as alternatives to, or more meaningful than, the related GAAP measures. Reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are provided on the following pages.

Net Economic Earnings and Net Economic Earnings Per Share

Net economic earnings and net economic earnings per share are non-GAAP measures that exclude from net income the impacts of fair value accounting and timing adjustments associated with energy-related transactions, the impacts of acquisition, divestiture and restructuring activities, and the largely non-cash impacts of impairments and other non-recurring or unusual items such as certain regulatory, legislative or GAAP standard-setting actions. In 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.

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:

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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.

EARNINGS

This section contains discussion and analysis of the results for the year ended September 30, 2022 compared to the results for the year ended September 30, 2021. The discussion and analysis of the results for the year ended September 30, 2021 compared to the results of the year ended September 30, 2020 can be found in Part II, Item 7 of Spire Inc.’s fiscal 2021 Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission (SEC) on November 22, 2021.

Overview

The past two years have offered numerous challenges. During severe winter weather in fiscal 2021, we were successful in providing safe, reliable service for our service areas in addition to driving value from investments in transportation and storage capacity we made at Spire Marketing. With regard to the Spire STL Pipeline, while operating under a temporary certificate, we continue to work with regulators and constituents regarding obtaining a permanent certificate. As discussed in Note 15, Regulatory Matters, of the Notes to Financial Statements in Item 8, we also received an order in our  2021 Missouri rate review which was inconsistent with precedent established by the MoPSC in prior rate cases.

Against this backdrop, the Company continued the important work of upgrading our Utilities’ infrastructure to make our system safer, more reliable and environmentally sustainable. We also further deployed technology, including ultrasonic meters, to improve our service operations and deliver on improved experience for the homes and business we serve.

On the Gas Utility regulatory front, we continue to make progress. Spire Missouri filed a new general rate case on April 1, 2022, seeking full recovery of its updated cost of service, deferred overhead costs, and increased capital investment, as well as a fair and reasonable rate of return. The filing requested a $152 million revenue increase, reflecting a $3.4 billion rate base and a rate of return based on a requested return on equity of 10.5% and a 55% equity capitalization. After local public hearings were completed, the parties reached a Full Unanimous Stipulation and Agreement to resolve all issues in the case which was filed with the MoPSC on November 4, 2022. A hearing regarding this stipulation is currently set for November 18.

This fiscal year also saw progress in Spire's midstream operations. Spire Storage received FERC approval to expand capacity and increase pipeline connectivity at certain of Spire Storage’s natural gas storage facilities in Wyoming. On August 26, 2022, the Company announced that capital expenditures in support of this project will total $195.0 through fiscal years 2023 into 2025.

The following sections present and discuss the financial metrics in total and by registrant and segment.

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Spire

The following tables reconcile the Company’s net economic earnings to the most comparable GAAP number, net income.

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Reconciliations of contribution margin to the most directly comparable GAAP measure are shown below.

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Select changes from the year ended September 30, 2021 to the year ended September 30, 2022 are summarized in the following table and discussed below.

The increase in interest expense was primarily driven by higher levels of short-term borrowings in fiscal 2022, combined with the impact of net long-term debt issuances and higher average short-term interest rates. Short-term rates averaged 1.1% in fiscal 2022 compared to 0.4% for fiscal 2021.

The reduction in income taxes was primarily attributable to the lower pre-tax book income in 2022, partly offset by a $4.1 charge resulting from Tax Cuts and Jobs Act (TCJA) reconciliations from the 2021 Missouri rate order that was issued late in the first quarter of fiscal 2022.

Gas Utility

The $38.6 decrease in Gas Utility net income primarily reflects decreases of $29.2 and $5.3 at Spire Missouri and Spire Alabama, respectively, while the $27.9 decrease in net economic earnings for the segment reflects decreases of $18.5 and $5.3 at Spire Missouri and Spire Alabama, respectively. These results are described in further detail below.

The decrease in Gas Utility operating revenues for fiscal 2022 was attributable to the following factors:

The decrease in revenues was driven primarily by a $199.8 decrease in Spire Missouri gas costs (including $195.8 of cover charges and OFO penalties to certain wholesale customers in the prior year), a $120.1 decrease in Spire Missouri off-system sales, and higher segment weather/volumetric impacts of $9.9. These negative impacts were partly offset by higher PGA/GSA gas cost recoveries of $99.9, an $18.1 increase in revenues as a result of the Spire Missouri 2021 rate order, higher segment gross receipts taxes of $15.7, a $9.8 increase in Spire Alabama off-system sales, and a $4.3 increase in revenues due to Spire Alabama’s rate adjustments under the RSE mechanism.

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The year-over-year decrease in Gas Utility contribution margin was attributable to the following factors:

The contribution margin decrease resulted primarily from lower Missouri off-system sales, Spire Missouri and Spire Alabama volumetric impacts of $9.2, partly offset by an $18.1 increase resulting from the 2021 Missouri rate order, Spire Alabama rate adjustments under the RSE mechanism, and higher volumetric margins. The lower off-system sales and volumetric impacts were primarily the result of the extreme weather conditions from Winter Storm Uri in February 2021.

Reported O&M expenses decreased $8.9. O&M decreased by $9.8 after excluding the impacts of the Non-service Cost Transfer of $4.4, the $9.0 attributable to the Missouri Supreme Court ruling that partially reversed 2018 rate order pension cost disallowances, and $3.7 due to one-time cost adjustments relating to stipulations settled in the 2021 Spire Missouri rate order. This decrease is due primarily to lower employee-related costs and lower bad debt expense. Depreciation and amortization expenses for the year ended September 30, 2022 increased $24.2 from the prior year, principally the result of continued infrastructure capital spending, with $16.1 of the increase attributable to Spire Missouri and $4.7 attributable to Spire Alabama. Included in the Spire Missouri increase is a $3.4 charge pertaining to meter cost recovery that was disallowed by the MoPSC. Taxes, other than income taxes, increased $19.2, and were driven by the higher pass-through gross receipts taxes mentioned earlier, combined with higher property taxes resulting from the continued infrastructure build-out by the utilities.

Gas Marketing

Both net income and net economic earnings reflect the strong operating results in the prior year, driven by storage positions that resulted in optimization of market conditions in the second quarter of fiscal 2021 due to extreme weather as a result of Winter Storm Uri. Current year incremental optimization of storage and transportation assets in the Southeast during the third and fourth quarters of fiscal 2022 and favorable fair value adjustments only partly offset the benefits from the extreme weather in the prior year.

The variance in revenues primarily reflects higher commodity pricing in fiscal 2022.

Gas Marketing contribution margin decreased $14.3 from the same period last year, driven principally by strong second quarter results in fiscal 2021. During the second quarter of fiscal 2021, the February cold weather events drove significantly higher regional basis differentials and volumes, which were only partly offset by favorable year-over-year fair value adjustments of $14.4 and incremental optimization of storage and transportation assets in the Southeast during the third and fourth quarters of fiscal 2022.

Other

The Company’s other non-utility activities generated a $3.1 higher net loss for fiscal 2022. Included in those results were higher interest and corporate costs in the current year. Other operating revenue increased $1.5, driven principally by Spire STL Pipeline and Spire Storage. Other operating expenses were $3.1 lower than the prior year, primarily reflecting lower current year operating expenses at Spire Storage and STL Pipeline.

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Spire Missouri

The $195.6 decrease in operating revenues reflects a $120.1 decrease in 0ff-system sales and lower gas costs of $109.5 (as commodity cost recovery increases in the current year of $86.3 were more than offset by last year's $195.8 of cover charges and OFO penalties to certain wholesale customers). Partly offsetting these negative impacts were an $18.1 increase in operating revenues due to the 2021 Missouri rate order, a $15.3 increase in gross receipts taxes, and a $3.4 increase in volumetric impacts as underlying increases in economic activity more than offset the impact of warmer weather in the current year.

Temperatures in Spire Missouri’s service areas during fiscal 2022 were 5.7% warmer than during fiscal 2021 and 9.5% warmer than normal. The Spire Missouri total system volume sold and transported was 1,602.8 million centum of cubic feet (CCF) for the year ended September 30, 2022, compared with 1,666.9 million CCF last year. Total off-system volume sold and transported was 19.1 million CCF for fiscal 2022, compared with 21.9 million for fiscal 2021.

Contribution margin decreased $11.1 from the prior year. The variance was attributable to a $26.3 decrease in off-system sales and $2.0 lower volumetric margins (both principally due to the extreme weather in February of the prior year), which were only partly offset by the previously mentioned $18.1 increase relating to the 2021 Missouri rate order.

Excluding the Non-service Cost Transfer of $3.5, the Missouri Supreme Court ruling totaling $9.0 and the $3.7 due to one-time cost adjustments relating to stipulations settled in the 2021 Spire Missouri rate order discussed above, O&M expenses during the year ended September 30, 2022, decreased $7.2 from last year. The decrease in O&M was driven by lower employee-related costs. Depreciation increased by $16.1 as a result of continuing capital investment and a $3.4 charge pertaining to disallowed meter cost recovery by the MoPSC. Taxes, other than income taxes, increased $18.1, driven by the higher pass-through gross receipts taxes and higher property taxes resulting from the continued infrastructure build-out.

Spire Missouri’s other expense was $2.0 lower, as the increase of $3.5 due primarily to the Non-service Cost Transfer expense and decreases in the fair value of investments associated with non-qualified employee benefit plans reflecting market conditions were more than offset by miscellaneous income. Interest expense increased $10.6, reflecting higher levels of long-term debt and higher short-term interest rates. Income tax expense for the current year was lower by $4.0, as the impact of lower pre-tax book income was partly offset by a $4.1 charge resulting from TCJA reconciliations from the 2021 Missouri rate order that was completed late in the first quarter of fiscal 2022.

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Spire Alabama

The $15.1 increase in operating revenues reflects a $13.6 increase in gas cost recoveries pursuant to the GSA mechanism, off-system sales in the current year contributing $9.8 to revenue growth, and $4.3 higher net rate adjustments under the RSE mechanism. These favorable impacts were partly offset by a $13.3 reduction attributable to weather/volumetric impacts that were impacted by weather mitigation.

Temperatures in Spire Alabama’s service area during fiscal 2022 were 4.1% warmer than during fiscal 2021 and 9.7% warmer than normal. Spire Alabama’s total system volume sold and transported was 1,010.8 million CCF during the year ended September 30, 2022, compared with 1,009.4 million CCF during the prior year. Off-system sales volume for fiscal 2022 totaled 63.1 million CCF compared with 47.5 million CCF for fiscal 2021.

Contribution margin decreased $1.5, which was principally a result of unfavorable weather/volumetric impacts totaling $7.2. This negative impact was mostly offset by net favorable RSE adjustments of $3.8 and off-system sales contributing $1.5 in growth in fiscal 2022. Excluding the impact of the Non-Service Cost Transfer of $0.9, the decrease in O&M of $1.5 was driven by lower operations and employee-related costs. Depreciation expense was up $4.7 reflecting the continued infrastructure investments being made in the territory.

LIQUIDITY AND CAPITAL RESOURCES

Recent Cash Flows

Net cash provided by operating activities decreased $194.8 from 2021 to 2022 and decreased $220.1 from 2020 to 2021. In addition to the changes in net income between the respective periods (discussed above), the remaining 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 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.

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In fiscal 2022, the Company's net cash used in investing activities was $75.3 less than in fiscal 2021, primarily driven by a $72.6 decrease in capital expenditures. The drivers of the lower capital expenditures were a $61.8 spending decline in the Utilities, a $8.1 decline for Spire Storage, and a slight decline at Spire STL Pipeline.

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.

Net cash provided by financing activities was up $121.5 in fiscal 2022 compared to fiscal 2021. Current year short-term debt, net issuances were $365.5, or $341.5 higher than in fiscal 2021. In addition, the combination of lower net repayments of long-term debt ($59.6) and higher cash generated from the issuance of common stock ($50.9) in fiscal 2022 contributed $110.5 to the year-over-year increase. A significant offset to these increases was a $329.1 decline in cash generated from the issuance of long-term debt, coupled with $8.7 higher common stock dividend payments.

Net cash provided by financing activities was up $219.4 in fiscal 2021 compared to fiscal 2020. In fiscal 2021, 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.

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 September 30, 2022, are related to capital expenditures, principal and interest payments on long-term debt, natural gas purchase obligations, and dividends.

Total Company capital expenditures are planned to be $700 for fiscal 2023, though Spire had purchase commitments for only a small portion of these as of September 30, 2022.

As detailed in Note 6, Long-Term Debt, of the Notes to Financial Statements in Item 8, $281.2 of the total $3,258.9 principal amount is due in fiscal 2023. Using each long-term debt instrument’s stated maturity and fixed rates or variable rates as of September 30, 2022, interest payments are projected to total $1,560.2, of which $116.2 is due in fiscal 2023.

Spire’s natural gas purchase obligations totaled $2,107.1, including $946.8 for fiscal 2023, 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, 2022. 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, 2022, totaled $41.2, while annualized dividends based on the regular quarterly amounts declared on November 10, 2022, are estimated at $165.9.

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, 2022, the debt ratings of the Company, Spire Missouri and Spire Alabama (shown in the following table) remain at investment grade with a stable outlook (other than Moody's negative outlook for Spire Missouri debt).

Cash and Cash Equivalents

Bank deposits were used to support working capital needs of the business. Spire had no temporary cash investments as of September 30, 2022 or 2021.

Short-term Debt

The Company’s 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

At September 30, 2022, including the current portion but excluding unamortized discounts and debt issuance costs, Spire had long-term debt totaling $3,258.9, of which $1,648.0 was issued by Spire Missouri, $575.0 was issued by Spire Alabama, and $205.9 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.

On December 7, 2021, pursuant to its registration statement on Form S-3 filed with the SEC, Spire Missouri issued $300.0 of first mortgage bonds due December 2, 2024, secured equally with all its other first mortgage bonds. Interest is payable quarterly in arrears at a floating rate based on the compounded secured overnight financing rate plus 50 basis points, with a maximum rate of the lesser of 8% or the maximum rate then permitted by applicable law.

Effective March 5, 2022, Spire Missouri was authorized by the MoPSC to issue conventional term loans, first mortgage bonds, unsecured debt, preferred stock and common stock in an aggregate amount of up to $800.0 for financings placed any time before December 31, 2024. As of September 30, 2022, the entire amount remained available under this authorization. Spire Alabama has no standing authority to issue long-term debt and must petition the APSC for each planned issuance.

After fiscal year end, on October 13, 2022, Spire Alabama issued $90.0 of notes due October 15, 2029, bearing interest at 5.32% and $85.0 of notes due October 15, 2032, bearing interest at 5.41%. Interest is payable semi-annually. The notes are senior unsecured obligations and rank equal in right to payment with all other senior unsecured indebtedness of Spire Alabama. Also on October 13, 2022, Spire Gulf issued $30.0 of first mortgage bonds due October 15, 2037, bearing interest at 5.61% payable semi-annually. The bonds rank equal in right to payment with the other first mortgage bonds issued by Spire Gulf. The bonds were issued under a supplemental indenture with collateral fall away provisions whereby, under certain conditions, Spire Gulf may elect to exchange the bonds, which are secured, for unsecured notes.

Spire has a shelf registration statement on Form S-3 on file with the SEC for the issuance and sale of up to 250,000 shares of common stock under its Dividend Reinvestment and Direct Stock Purchase Plan. There were 158,535 and153,190 shares at September 30, 2022 and November 11, 2022, 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 SEC for the issuance of various equity and debt securities, which expires on May 9, 2025.

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On February 6, 2019, Spire entered into an “at-the-market” (ATM) equity distribution agreement pursuant to which the Company may offer and sell, from time to time, shares of its common stock pursuant to Spire’s universal shelf registration statement and a prospectus supplement. Under this program, a total of 626,249 shares with an aggregate offering price of $47.8 were issued in fiscal 2019 and 2020, and 354,000 shares with an aggregate offering price of $23.5 were issued in the second quarter of fiscal 2022. On April 28, 2022, Spire’s Board of Directors approved a new authorization for the sale of additional shares with an aggregate offering price of up to $200.0 before the May 2025 expiration of the new universal shelf registration statement on Form S-3 filed in May 2022, under which a total of 365,625 shares with an aggregate offering price of $27.7 were issued in the third quarter of fiscal 2022.

In February 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.

Including the current portion of long-term debt, the Company’s long-term consolidated capitalization consisted of 46% equity at September 30, 2022 and 47% equity at September 30, 2021. 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, Spire Missouri’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 and July 2021, the U.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 recently issued accounting standards and concluded that none will have a material impact on their financial position or results of operations upon adoption.

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CRITICAL ACCOUNTING ESTIMATES

Our discussion and analysis of our financial condition, results of operations, liquidity and capital resources are based upon our financial statements, which have been prepared in accordance with GAAP, which requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. We believe the following represent the more significant items requiring the use of judgment and estimates in preparing our financial statements:

Regulatory Accounting – The Utilities account for their regulated operations in accordance with FASB Accounting Standards Codification Topic 980, Regulated Operations. The provisions of this accounting guidance require, among other things, that financial statements of a rate-regulated enterprise reflect the actions of regulators, where appropriate. These actions may result in the recognition of revenues and expenses in time periods that are different than non-rate-regulated enterprises. When this occurs, costs are deferred as assets in the balance sheet (regulatory assets) and recorded as expenses when those amounts are reflected in rates. Also, regulators can impose liabilities upon a regulated company for amounts previously collected from customers and for recovery of costs that are expected to be incurred in the future (regulatory liabilities). Management believes that the current regulatory environment supports the continued use of these regulatory accounting principles and that all regulatory assets and regulatory liabilities are recoverable or refundable through the regulatory process. For Spire Missouri and Spire Alabama, management believes the following represent the more significant items recorded through the application of this accounting guidance:

PGA Clause – Spire Missouri’s PGA clauses allows it to flow through to customers, subject to a prudence review by the MoPSC, the cost of purchased gas supplies, including the costs, cost reductions and related carrying costs associated with the use of natural gas derivative instruments to hedge the purchase price of natural gas. The difference between actual costs incurred and costs recovered through the application of the PGA clauses are recorded as regulatory assets and regulatory liabilities that are recovered or refunded in a subsequent period. The PGA clauses also permit the application of carrying costs to all over- or under-recoveries of gas costs, including costs and cost reductions associated with the use of derivative instruments, and also provide for a portion of income from off-system sales and capacity release revenues to be flowed through to customers.

GSA Rider – Spire Alabama’s rate schedules for natural gas distribution charges contain a GSA rider, established in 1993, which permits the pass-through to customers of changes in the cost of gas supply. 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.

Non-operational Overhead Costs – As a result of certain MoPSC orders, Spire Missouri ceased capitalization of non-operational overhead costs but deferred such costs into a regulatory asset for future review by the MoPSC. Management believes it is probable that Spire Missouri will ultimately be allowed to recover these deferred costs.

For more information, see Note 15, Regulatory Matters, of the Notes to Financial Statements in Item 8.

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Employee Benefits and Postretirement Obligations – Pension and postretirement obligations are calculated by actuarial consultants that utilize several statistical factors and other assumptions provided by management related to future events, such as discount rates, returns on plan assets, compensation increases, and mortality rates. For the Utilities, the amount of expense recognized and the amounts reflected in other comprehensive income are dependent upon the regulatory treatment provided for such costs, as discussed further below. Certain liabilities related to group medical benefits and workers’ compensation claims, portions of which are self-insured and/or contain “stop-loss” coverage with third-party insurers to limit exposure, are established based on historical trends.

The amount of net periodic pension and other postretirement benefit costs recognized in the financial statements related to the Utilities’ qualified pension plans and other postretirement benefit plans is based upon allowances, as approved by the MoPSC (for Spire Missouri) and as approved by the APSC (for Spire Alabama). The allowances have been established in the rate-making process for the recovery of these costs from customers. The differences between these amounts and actual pension and other postretirement benefit costs incurred for financial reporting purposes are deferred as regulatory assets or regulatory liabilities. GAAP also requires that changes that affect the funded status of pension and other postretirement benefit plans, but that are not yet required to be recognized as components of pension and other postretirement benefit costs, be reflected in other comprehensive income. For the Utilities’ qualified pension plans and other postretirement benefit plans, amounts that would otherwise be reflected in other comprehensive income are deferred with entries to regulatory assets or regulatory liabilities.

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:

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.

As discussed in Note 15, Regulatory Matters, of the Notes to Financial Statements in Item 8, the Spire STL Pipeline is operating under temporary certificates while the FERC considers approval of a new permanent certificate. While uncertainty exists, management has evaluated the facts in accordance with ASC 360 and concluded that the related assets have not become impaired.

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 Spire Missouri’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. Spire Missouri 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. Spire Missouri is able to mitigate, to some extent, changes in commodity prices through the use of physical storage supplies and regional supply diversity. Spire Alabama is allowed to make monthly changes to the GSA rate, but increases cannot exceed a 5% increase over the prior effective residential billing rate. 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, 2022, 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.

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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 the New York Mercantile Exchange (NYMEX) and Intercontinental Exchange (ICE) to lock in margins. At September 30, 2022 and 2021, 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. At September 30, 2022 and 2021, Spire Marketing had no designated cash flow hedges. Information about the fair values of Spire Marketing’s exchange-traded/cleared natural gas derivative instruments is presented below:

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 2023:

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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 2022, 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 $7.5 on an annual basis. Portions of such an increase may be offset through the Utilities’ application of PGA and GSA carrying costs. At September 30, 2022, Spire had fixed-rate long-term debt totaling $2,958.9, of which $1,348.0 was issued by Spire Missouri, $575.0 was issued by Spire Alabama, and $1,035.9 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.